Wednesday, February 27, 2008

What is Detroit's Strategy?

One of the world's leading automotive journalists just wrote a piece titled,
"Shooting For Last Place" at Forbes
that talks about strategy.

It's an excellent discussion of the tactics pursued by the Bid 3 in early 2008, but I argue below that "tactics" are not "strategy."

Jerry, very courageous in tackling one of the most important yet misunderstood business concepts that plagues the auto industry today: strategy.

In simple terms, the strategic problem is how to get from analogue to digital.

Kodak struggled with this from film to digital cameras. Hollywood and New York struggled with this from Napster to iTunes while Apple became one of the most powerful in the world. All the computer manufacturers struggled with this from IBM all the way to Dell. Even your industry Jerry, media, has struggled with the print news to YouTube's dominance. What's the common theme???

Cost cutting tactics such as laying off the most expense part of running a business or lowering the cost of sales channels like Dell did with the highly doubted in the computer maker shakeout are simply tactics.

Strategy is almost always confused with tactics. Detroit is focused on tactics while strategies ebb in and out with various technologies, such as hydrogen hype, hybrid phenomenon to plug-in doubts. Employees and technology comes and goes, strategy is like a ship's keel.

The bottom line is that tactics are worthless without a solid strategy.

Did Dell pursue laying off or cost cutting as a strategy? No, Dell pursued the toughest strategy, a combination of two of Porter's generics: 1) cost leadership (the ONE automaker that can make cars cheapest not cheaper) 2) differentiation (something special customers pay more for) to sell directly to the customer and 3) focus or niche (dominating a small piece of the market).

Dell's goal from Michael's (from dorm room to #9 richest American in 2007) autobiography, was to lower customer costs and increase service. This is sometimes referred to as, "best cost," and often misunderstood. Toyota just about has it, but any loss of service of cost of building any car will hurt. Dell succeeded even though the service subsided over the years.

The key is that you've got to build cars as cheap or cheaper than anyone else. Dell was able to get days inventory down from weeks to eight days in his book, and it's probably lower today. This is often misunderstood as the lowest prices. An example would be Wal-Mart vs. K-Mart. Wal-Mart can move and track a pallet of anything cheaper and BETTER than any other supply chain in the world! That's cost leadership, just like Toyota executives that eat ramen instead of sushi on international business trips!

What are average days inventory for the auto industry?

Most businessmen know that a day's inventory can
translate into millions of dollars of cost savings.

Compared to Dell at 8 days, I've heard 20 to 40 is good
and during the rise of the Prius, it went negative as people
placed orders, just like shopping at and waited
for their hybrids to be delivered to the local dealership.

The lock is that your quality is also above industry standards because you are delivering 2) and/or 3). For Dell, that was not only the products, but the 24/7 real-time advantage of linked to a supply chain that ran just in time and cost accounting that only purchased things when they were already sold. In short, "build to order" or "direct."

Could you imagine if an automaker pursued the impossible "best cost" strategy with the goal of lowering the cost for the customer while delivering the BEST quality and service.

The Big 3 did this once. After Ford invented the assembly line just as Dell invented direct, Ford held costs down to help the masses open up American roads. The goal was social change and not just hiring more people or creating more dealerships. Those were tactics behind the philosophy distilled into a very clear strategy: "best cost."

Jerry, you are absolutely right in that any automaker "caught in the middle" of strategies is doomed for last place. Porter confirms this happening in industry after industry shakeout. Especially when technology matures and a new curve comes along. Firing people or closing dealership WILL NOT get an automaker to a strategy.

Stuck in the middle strategy is pursuing tactics with no strategy. For example, thinking you can be the ONLY automaker with the LOWEST (NOT LOWER OR LOW) costs and NOT LOWEST PRICES!!! Word of advice to Detroit, forget about COST LEADERSHIP and 1), leave that up to Toyota, India, China, Korea, etc.

What about strategy 2) and 3). This is a different story! We know that American quality is higher than expected; this is a business ace! You can build a strategy around "something special" such as high quality large trucks, BUT EVERYTHING has to be special, not just the truck. The employees need to feel special, the factory has to ooze special, the suppliers top of the heap, and in the end the price, yes it's high, but customers are happy with special products backed by special service. So the dealership in this case, would only service trucks, and do it better than Toyota, Nissan and anyone else.

What about 3) focus or niche. Porsche is a good example of differentiation strategy, very clear culture, goal and DNA, and guess what, tactics like human resources and dealerships becomes a no-brainer tactic. Small market, proud world-class employees and R&D, high prices, and lots and lots of profits. Enough to try and buy out the 5th largest company in the biggest business in the world. This would be like Tesla buying Chrysler and not the other way around. How can this be??? A clear strategy setup by Porsche decades ago.

1) chopping heads

This tactic only supports low costs if you can replace those heads with people that can build cars cheaper than ANY OTHER automaker in the world. Otherwise, the new employees better know how to make something special or have specialized knowledge of a market niche, let's say electric vehicles.

2) closing dealerships

This tactic only supports low costs ONLY if you can run dealerships CHEAPER THAN EVERY OTHER AUTOMAKER. As far as differentiation, maybe if you're the first to be able to develop the direct model for cars, but are customers ready? Toyota did sell half a million Prius without a test drive sight unseen... How about niche? Closing dealerships MIGHT WORK if they are consolidated and moved into specialized markets. For example, shut 80% of the dealerships leaving only those in electric vehicle markets open to become the industry's top service provider for maintenance and repair of ALL electric vehicles from Golf Carts to Teslas to Volts.

When Detroit finally gives up its quest for revenues and is forced to focus on profits, there is only ONE WAY TO SURVIVE = A VERY CLEAR AND SIMPLE STRATEGY that everyone from the line worker to the greeter at the dealership can understand and take to heart everyday!

Making cars cheaper than everyone else, making special cars and making cars for a specific market are the only generic strategies available according to Porter. Only the brave can dream of mixing these into best costs and those stuck in the middle will die in the digitization of the world's largest business!

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