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CEO OF THE YEAR 1989

You have spoken. Chief Executive readers have nominated, and a panel of peers has confirmed, Donald E. Petersen of Ford Motor Company as this year’s Chief Executive of the Year. As Ford celebrates s its third consecutive year of record profits, a 26.5 percent return on stockholders’ equity in 1988 (twice the average for Fortune …

You have spoken. Chief Executive readers have nominated, and a panel of peers has confirmed, Donald E. Petersen of Ford Motor Company as this year’s Chief Executive of the Year. As Ford celebrates s its third consecutive year of record profits, a 26.5 percent return on stockholders’ equity in 1988 (twice the average for Fortune 500 companies), and according to Salomon Brothers, a U.S. auto market share high of 24.2 percent, the selection committee unanimously selects Petersen as its choice.

Committee member Maurice Greenberg, CEO of American International Group, summed  up the decision: “Under Don Petersen’s leadership, Ford has been outstanding in the key measures of business success: financial performance, effective marketing, product innovation, and quality, and customer service.”

For building on predecessor Philip Caldwell’s recovery, improving on Ford’s product quality and emphasizing employee involvement at all levels, Petersen has, in the judges’ eyes, significantly advanced Ford as a world-class competitive company. “He’s taken autocracy and turned it into teamwork,” says last year’s Chief Executive of the Year Bill Marriott, CEO of Marriott Corp. “He’s made us realize that we can compete internationally, and has returned pride to U.S. business,” says First Boston’s Peter Buchanan. “He’s faced what many thought was an insurmountable challenge and done a superior job,” says Public Service of New Mexico’s Jerry Geist. “There are few CEOs who could have done as good a job,” adds Wharton’s Dean Russell Palmer. “We are recognizing him for his sustained success,” says Columbia Business School’s Robert Lear. “In an age in which people continuously whine about competing with the Japanese,” says fellow judge Charles Sanford, CEO of Bankers Trust, “Don Petersen does not.”

Chief Executive magazine salutes Donald E. Petersen, 1989 Chief Executive of the Year

If conflict makes interesting history and peace a poor read, the cataclysm within the automobile industry during the last 10 years offers choice lessons for CEOs and economic historians alike. Not least among them is the role Ford Motor Company’s CEO, Donald E. Petersen – this year’s Chief Executive of the Year – played during what must be viewed as an unfinished drama. The company’s back-to-basics rebirth and emphasis on product quality is well documented. In retrospect the recovery almost seems mundane, if not self-evident, were it not for the fact that Ford is fundamentally a different organization today that when it began its odyssey in 1979.

Much of what is written about corporate restructuring focuses on business strategy and technology. Both are important, but Ford’s comeback illustrates that neither is decisive. Napoleon, a consummate strategist, said that in war, morale is everything. His adversary, the Duke of Wellington, conceded the point allowing that the Emperor’s “hat (on the battlefield) was worth 40,000 men.” Through he cuts more of a scholarly than material figure, Petersen realized early on that Ford would achieve nothing if the troops had no stake in the outcome and were not empowered to act.

Reynolds Metal’s CEO William Bourke, a former career Ford executive and possibl ival for the top spot (he maintains that Henry Ford II promised him the job more than once), says Petersen “introduced to ford ideas it needed badly, such as democracy and more people involvement. He’s very sensitive to people.” Donald Frey, ex-CEO of Bell & Howell and former Ford product planning chief who was once Petersen’s boss, says, “Don understands the product, that’s his real strength.” Unlike the bean counters, “he knows why they’re in business,” Frey adds. “Cooperation and team work are the cornerstone of his company,” says James Stover, CEO of Eaton Corp., a major supplier and close observer of Ford.

Consider the contrast between Ford and GM in meeting the same competitive threat. G spent billions on technology focusing internally on the company; Ford spend billions on training and technology focusing externally on the customer.

Petersen says his leadership style is based on three guiding principles: having concern and respect for workers, focusing on customer desires and striving for continuous improvement. Those who know him describe him as quiet and extremely intelligent (he’s a member of Mensa, the high-IQ organization). Nicknamed “Cobra” earlier in his career due to his habit them of waiting for others to hang themselves on a serious issue verbally before pouncing, Petersen today is said to be a sensitive but confident leader who is quick to credit others.

Leadership and the company’s mission and values – summarized on laminated three-by-five cards that every Ford employee is expected to carry around – can go only so far in getting 360,000 people worldwide to change. Don’t discount Ford’s near-death experience. While the public’s attention was riveted on Chrysler’s EKG a decade ago, observers wondered if Congress was bailing out the wrong company. Ford’s working capital dropped alarmingly from $2.3 billion in 1979 to $237 million in 1981 – a tenfold drop in two years. Its 1981 car market share slid to a historic low of 16.6 percent. It was the highest-cost producer with the lowest reputation for quality. To many hapless owners then, Ford meant “Fix or Repair Daily” or “Found on Roadside Dead”. Like the British army after Dunkirk, Ford was demoralized, exhausted and ready to try something different.

The Taurus / Sable project, which made headlines, proved significant not for the car itself – as sexy as it was – but because it represented a “new” car-making process for Ford altogether. Nothing was put to paper before massive customer research had been conducted. The time-honored sequential method of new car development was replaced by a team approach. In working together from the start, designers, engineers, production planners and marketers are forced to abandon turf considerations in favor of product integrity. The basic notion of quality was also overhauled. Petersen invited W. Edwards Deming, whose statistical control techniques the Japanese long ago adapted, to help. Plastic Engineering Corp.’s president D. D. Bergmoser credits Petersen with “doing a lot more in the adoption of Deming’s, Taguchi’s and Juran’s methods, including employee involvement, that any other U.S. CEO.”

Independent surveys show that Detroit product quality has improved enormously. But foreign nameplates have also improved. J. D. Power & Assoc. reckons that a 20-to-30 percent quality gap persists between Detroit and Japan, but by the mid-1990s this will close. The cost gap is already closing. In the early 1, it averaged 1980s, it averaged $1,500 to $2,000 per car. In 1988, with 129 yen / dollar, a Japanese Tempo-sized import had a $300 advantage over a Ford Tempo. Ford assumes that by 1993 and 108 yen / dollar, a U.S. Tempo would have a $1,300 advantage over a Tempo-sized Japanese import. (Transplant factories, which assemble in the U.S., might make this difference moot.)

Last year, the company’s worldwide earnings reached an all-time high of $5.8 billion – Ford’s third consecutive year of record profits and the highest ever for an auto company. The 1990s could be very different for Ford. Overcapacity looms. GM may yet put itself in full combat readiness with its GM10 cars and possibly Saturn. Toyota, Honda and other foreign nameplates that Ford must beat in world markets, also strive for “continuous improvement”.

Furman Selz’s vice president Maryann Keller, who gives Ford high praise for “producing successful cars”, says it “doesn’t have world-class engines. Detroit is three to four years behind Japan in power trains and it remains to be seen whether Ford’s current spending will overcome that.” Merrill Lynch’s Harvey Heinbach agrees. “Ford is going to multiple valve at a time when the Japanese are developing variable valve engines.”

David Cole, director of automotive studies at the university of Michigan, sees four key areas of competitive differentiation in the 1990s:

  • Lead time. The ability to bring product to market quickly. At the end of the next decade, it could be as short as one year.
  • Total selling and service experience. When all makers make quality cars, customers will buy from dealers that satisfy other, subjective needs.
  • Style. Like fashion, style isn’t just how the car looks, but how it feels when “wearing” it.
  • Technology. This may be difficult to quantify. Anti-lock brake systems offer definite competitive advantage. On the other hand, talking dashboards proved a dud. Understanding how customers value technology will be critical.

Petersen’s actions over the next two-and-a-half years before he retires will determine if Ford can meet these challenges and become world champion. Competitors weren’t surprised upon learning of his selection as Chief Executive of the Year. “He has led Ford to new levels of achievement because he is such an able competitor, he has helped to keep us at GM sharp,” said GM chairman Roger Smith. “We wish Don continued – but limited – success.” Chrysler chief Lee Iacocca says, “The fact that he took over a company in much the same shape as Chrysler in the early €˜80s and turned it around into a well-oiled machine is proof of his managerial abilities.” And from Honda North America’s president Tetsuo Chino: “A company’s success or failure reflects the quality of leadership. The success of Ford in an increasingly competitive environment indicates good leadership.” CE editor J. P. Donlon talked with Petersen in his Dearborn office recently about Ford’s challenges.

Ford’s emphasis on product quality, employee involvement, and getting rid of its former autocratic managerial style as contributing factors to its dramatic turnaround are well documented, but in retrospect, how did you ensure that these changes and other things that you had planned would actually take effect?

Perhaps the single most important thing I had to do was get out and around, join in discussion of groups that were trying to figure out what we had to do to pull ourselves back together.  That includes discussions with management groups as well as spending quite a bit of time with non-management groups, both salaried and hourly, to get a sense of what people are thinking about. That led to the development of our values and guiding principles.

I came to the job of president, and later chairman, with the strong opinion that we did not do a good job at Ford of permitting much participation in the management process. I had seen evidence of how you stifle people when you lay down a lot of rules.

How much of Ford’s recovery do you attribute to Ford’s direct actions versus luck, such as the favorable yen-dollar relationship and the fact that GM stumbled more that anyone could have supposed at that time?

We benefited substantially once the yen-dollar relationship finally broke in 1985, but I think the extent to which we could have taken advantage of circumstances would have been severely limited if we had not successfully started to regain our reputation.

I don’t think it makes too much difference how good he environment is it you don’t have the customers who like what you are producing and see it as a real value. We did have severe problems as far as our reputation was concerned and that was reflected by how sharply our share of the market was dropping in the early €˜80s. Put it this way: We would have recovered, and reasonably well, but the fact that we have now been able to come back from 16 percent of the market to roughly 25 percent in a very short number of years is significant. We are trying to spread through our company the idea of being customer driven in everything we do and making quality the number one priority.

If we have something that is really sound and lasting, then the next actions that you see coming from Ford will continue to be successful. If you go through all the segments of Ford production, whether it’s a car or a truck, you will find that we have a very broad base of customer acceptance.

We know we are serving customers well because they are responding. Keeping our minds focused on the customers should continue to serve us well. Maybe the rate of improvement will vary from time to time, depending on whether somebody else is stumbling, but the improvements should be there.

In terms of manufacturing efficiency and labor productivity, how does Ford rank in relation to other global competitors, and how do you measure this?

We tend to use the number of employee hours required to build a product, thereby getting rid of exchange rate problems and things of that nature. We believe that we’re as efficient in the U.S. as we are in Europe, on the continent. We are not as efficient in Britain. We’ve made vast amounts of progress that we never dared to dream about in Britain, but it’s still lagging. We are the most efficient producer of the domestic manufacturers.

Including the transplants?

Transplants are hard to measure because they are essentially assemblers. You have a mixed bag, a manufacturing base that’s all around Asia, and then final assembly here. But if you take it in pieces, we are the most efficient full manufacturer in this country. We are as efficient as the best in Europe and we’re equal to many of the Japanese, but we’re not as good as the best. So we have a couple of rabbits we are chasing.

Which rabbit, specifically, are you chasing?

The one that I think the most important in this efficiency sense is Toyota. Because they are a full line producer – a complex line, high-volume producer. So they have a lot of the same ingredients as us, whereas Honda, a very different efficient company and one of the achievers in the world’s auto industry, is narrow in scope and therefore more controllable.

How much of your improvement and efficiency do you attribute to high-tec new wave automation techniques?

Starting with the Taurus, technology is getting to be a more important factor. We feel ready now to bring more technology into out new programs. One of the worst things you can do is to try to go too fast with technology. In the Taurus case, in assembly, any Taurus plant has the capability of assembling 26 percent more volume than the preceding products they were manufacturing. We have put a lot of new technology in our plants, and it was directly a [part of getting that 26 percent improvement. So with the Taurus programs and the subsequent programs – the Continental, the Probe – technology is now coming there more and more.

And we see an increasing number of pilots in all sorts of places throughout our system. Once a pilot proves effective, then we embed it right into the next logical programs where we can.

Despite great strides in product quality, there continues to be a 20 to 30 percent gap between Detroit product quality and the best of foreign car manufacturers. When will Ford be able to close this gap and how will it do it?

It’s hard to put a year on it. We are closing the gap. They typical automobile being make available to world customers is on a rapidly improving quality trends so that a 30 percent difference today, in terms of the customers’ view of quality, is a much smaller factor that a 30 percent difference of, say, ten years ago.

There is also a conviction that the continuous improvement from this point will have to be more heavily process driven. Meaning, we’ve done as well as we know how to do with our existing approaches, and so we spending a lot of time breaking down the whole thought process of how we do things and identifying some of the vital things that we have to change and simplify if we are going to make meaningful continues progress in the future.

Can you share any insights on this?

You must do a much better job in the early work that you do, such as design and conceptual thinking. You can’t be sloppy about what your customers are going to want. Generalities don’t help the technical person a whole lot. So there is a whole concept called “quality functional deployment”.

This is a highly disciplined way of identifying what you want to put into the design of a particular part of the product and determining if it is going to function and behave the way you want it to function for the customer once it is all put together.

How does that balance against speed-based competition – the need to get the new concepts and the manufactured products in less time?

You need up-front work to do the speed-based implementation. Much of the up-front work can be advanced work; it doesn’t have to be identified with the end product. The Japanese have always done a much more complete job of research and advanced work than we have. I can remember when seeing their engine prototypes, they apologized, saying, “This is only a prototype.”

Let’s talk about the future. Presuming Ford closes the quality gap with foreign producers, what will be the primary areas of competitive differentiation among global carmakers? How is Ford gearing itself today to be on the top when that time comes?

The primary difference in my mind is the degree of customer appeal that you succeed in getting into your product and the perceived value that you are offering the customer in that product. It is critically important with consumer products to grab the emotions of the individual, to have the customer say, “I love that product, I love everything about it, the way it looks, the way it feels, the way it operates and drives, I’ve had it for a year and nothing has gone wrong, and it was just a remarkable value for what I paid.” Now how do you get that? You’ve got to be customer driven. You must be the best there is at knowing what the customer wants. We think one of our competitive advantages is that we have fond ways of tuning into what customers want. We are discovering that our early judgments are proving to be accurate.

Are you satisfied that you are better in this one area than Honda or Toyota?

No. I think we are every bit as good in that respect. One of the most meaningful advantages we have in competing with the very best is that we are an American company. By that I mean that we have the opportunity to put to work the ingenuity, creativity and initiative that our free generates in each of us as Americans. That’s part of the way we function and we take it for granted. We can build that into all the pluses that exist in the teamwork concept and have a far more dynamic, far more creative process to work with toward that end result.

Surely this “Americanness” can only be a competitive advantage if you also succeed in reducing lead times.

Yes, I agree.

Where are you now, and where do you think you ought to be in the mid- 1990s?

We have a substantial chunk of time we have to take out of our total process and we have been hard at work coming up with the best ways to do that now for several years. I have mentioned that the up-front work is a key element in that.

Another thing that we are working to improve substantially is the quality of each decision from the beginning all the way through the process. In the past, if there were a checkpoint, let’s say, where a series of things was to have been accomplished, things in fact were often not completed so that as the process continued from that point forward people were still scrambling to do those things at the same time that they try to do what’s on the plate now.

What are the other key points of competitive differentiation?

Quality is one and another is efficiency, which feeds into value, and feeds into working. Our goal is to build the best quality products in the world and have the world acknowledge that we do We are not there yet.

Why are the Japanese still ahead?

We think process improvement is the key to quality They have some processes that are ahead of us in terms of quality. And then quality and efficiency go together. It’s hard to peel them apart.

Which overseas markets offer the most opportunity for Ford during the 1990s and how will Ford create a local competitive advantage in each?

Ford-Europe must continue to work hard to sustain its strong position in Britain That’s a must. It’s an anchor for Ford Motor Company of Europe. However, in terms of 1992, it is going to be increasingly important to have a broad base of strength. That means we need to strengthen our position in Southern Europe.

Spain, Greece?

I would even include France.

What will Ford be doing to ensure that when 1992 rolls around, and presuming the Japanese are inside that market as they hope to be, it will still be top dog?

The fundamental actions that Ford-Europe must take are precisely the ones we have already discussed. We are introducing a new Fiesta, which is a B class size car, and the Escort is on the horizon Across all the markets of our products, including the smaller-sized products, we have taken a leading role. That gives us the opportunity to have strong products to work with to strengthen our position in Southern Europe.

There is an expected decline in car and truck sales in Europe in the next several years. Do you expect Europe to become a far more difficult market for Ford over the next few years?

Europe is a much less volatile market than America, perhaps because of the number of countries involved. There has been remarkable growth. In the last several years people predicted a falloff but it went up again. So our people don’t see a substantla1 falloff in the near term.

How about Latin America and Asia Pacific?

Latin America depends on whether its major economies can get governments to function with some degree of efficiency. I think we’re in the best possible position to take advantage of any improvement that occurs. Autolatina will undoubtedly make us the low-cost producer.

We haw proved to everyone’s satisfaction that Ford and Volkswagen can indeed work compatibly. We have excellent opportunities for rationalizing the product lines and the manufacturing so we’ll do better than anybody else does.

Now in Asia, there are the island countries, and then there is the mainland. By far the most rapidly growing Island country is Taiwan and fortunately, we are in the number one position there. We are doing just fine in Southeast Asia. That is almost a market all its own: it doesn’t link particularly well with the rest of Asia.

The biggest question is, “When will meaningful markets begin to be there?” If you take a long-term view, the potential is extraordinary.

When do you think there will be a meaningful market there?

I think at this stage it’s still a long way out there before it is going to be meaningful, but at the same time, I think it’s desirable to find new ways to become active.

Environmental considerations will almost certainly prod the government to raise mandatory fuel economy and emissions standards. Wow is Ford going to deal with this rising concern?

We would love to put more emphasis on alternate fuels and what we call flexible fuel vehicles. We know how to build an automobile that will run on methanol or ethanol. We can run cars on natural gas too, but that is relatively inefficient.

The Japanese are already testing turbine car engines with ceramic matrix composite parts. Isuzu is projecting the production of one next year. Toyota plans an all-ceramic diesel by the early 1990s. What technological breakthroughs can we expect from Ford and when?

Ford is also developing a ceramic diesel engine, but in my view, electronics in many different forms is going to be the prime driver of change in the nature of the automobile. This will happen in manufacturing, of course. The consumer will see it only in terms of the inherent quality of the products you can build, the improvements in efficiency and cheaper prices.

People are going to find they are more delighted with the product and they won’t even need to know why. Cars are going to be so quiet and smooth running. They will have wonderful acceleration, ride and handling, and the steering will be as if somehow the car knew what you wanted it to do.

What advice would you give CEOs of other U.S. firms which, like Ford, have had to face stiff global competition, but may not have had Ford’s resources to overcome the challenge?

First, recognize that most of the improvement is up to you to achieve. You can be diverted in unfortunate ways if you permit yourself to blame government or other external factors. The motivation of the people involved is by far the single most important element of being successful and getting a job done.

Our company has been international in one way or another throughout its history. Over its first 80 years, Ford developed into one of the most successful multinationals in the business, forming discrete, often self-contained companies in various centers of economic activity. In its time, this arrangement worked well for us.

The new globalism, however, has brought Ford into competition at home and around the world with as many as 40 automotive manufacturers, turning out vehicles, parts and components in as many as 40 countires and territories. New manufacturers, seemingly with ever-lower cost bases, are sprouting up every day. It’s a whole new ball game.

To serve all of our markets cornpetitively, we’ve had to adopt a more global way of doing business. That’s not easy for a big, successful multinational. For one thing, we’ve had to stop thinking like a group of isolated units and start thinking like one company with a wealth of international capability.

Here’s an illustration. In the past, it was our practice, generally, to develop products separately for different markets. Now, we apply the “centers of responsibility” concept. If we plan, say, a new Tempo-sized car for the U.S. market and a similar-sized car for the European market, we’ll design and engineer it once. The U.S. car and the European car may ultimately look different and have different features.

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