CEO of the Year Alan Mulally: The Road Ahead

When the Chief Executive of the Year selection committee met in March of this year to sift through the finalists nominated by CEOs, presidents and chairmen, there was a general recognition that one candidate stood out. While there were many contenders to respect and admire, Alan Mulally appeared on virtually every member’s mental short list. Having successfully managed a turnaround for an iconic American company like Ford—and without the TARP bailouts given GM and Chrysler—tends to get one noticed. But there were others who had impressive, if less visible, performance records. What set the former Boeing executive apart was, in the minds of his peers, a special blend of behaviors and accomplishments that matched up fairly closely with the selection criteria.

When Ford overtook GM as North America’s top selling carmaker for the second time in a little more than a year, it underscored the headline-grabbing turnaround achieved by the Kansas-born aeronautical engineer who answered Bill Ford’s call to replace himself as CEO at the Dearborn-based company. Last year, the company made $6.6 billion, a $59 million increase compared with a loss of $639 million in 2009. Five years ago, Ford was in serious difficulty. The fact that it had not only avoided bankruptcy and a federal bailout but turned itself into the most profitable automaker has been well documented, including in Chief Executive (November/December 2010).

Going forward, the biggest threat to Alan Mulally and his team is not failure, but success. Ford has seen turnarounds before (although none as grave) only to have the organization drift back to former habits. It’s not due to hubris so much as a reversion to the mean (1989 Chief Executive of the Year Donald Petersen of Ford was honored in no small measure for having faced down the quality threat from Japan’s automakers). Having secured Normandy beach, Mulally’s forces must now regroup to press on to Berlin. Challenges currently on the front burner include:

Ford’s weakness in Asia

With just 2.7 percent of the market in China (and less than 2 percent in Asia-Pacific), the company is barely competitive in the world’s largest and fastest growing auto market. Although advancements in the U.S. and South American markets are deservedly noteworthy, last year, Ford’s global market share drifted down to 6.9 percent from 7.8 percent two years earlier owing to weakness in Asia, particularly India. By putting a tough-minded executive like Joe Hinrichs in charge of Asia, Mulally recognizes the importance of this region. Its $1.5 billion investment in assembly and engine plants in the Chongqing region of southern China is expected to produce SUVs and other vehicles that Chinese consumers crave.

Lincoln needs CPR or a quick death and replacement

Once at the top in 1999, the brand has fallen to eighth place among luxury brands in the U.S. When Mulally killed Mercury last year, Lincoln dealers became nervous. Since 1980, its sales have fallen 63 percent. In 2012, Lincoln will launch a small car that is based on the Focus platform. Other variations such as a luxury SUV will also debut. But Lexus (Mulally drove a LS430 before coming to Ford) still outsells Lincoln three to one. A bright spot: Lincoln ranked highest in annual vehicle dependability, the first time in four years an American nameplate took the top spot, in a J.D. Powers survey released last March.

Clean up the balance sheet

At the end of 2010, Ford reported debt of $19.1 billion after reducing it by $14.5 billion, a reduction of more than 40 percent that will reduce annualized interest expense by $1 billion. Ratings agencies dropped Ford below investment-grade status in 2005, when its future looked grim. The following year, the company took out $23.5 billion in loans for a major restructuring allowed it to return to health. However, its fourth-quarter profit fell sharply, hurt by a $960 million charge for debt repayment. Still, the company reported having $20.5 billion in gross case, securing Mulally’s aim of having more cash than debt. S&P raised the credit rating to BB-with an inside chance it could be upgraded later this year. So far, CFO Lewis Booth has kept the pedal to the metal in dealing with this. He must be allowed to continue.

Extend innovation throughout the enterprise

Ford embraced social media as a way to leverage its brand and get the word out about its new products to key demographic groups. Rather than the usual push-marketing approach, it deployed the Ford Fiesta movement to open an interactive dialogue with real customers about the launch of the car itself. Later, it switched focus from buzz and exposure toward pre-orders and sales having earned the right to close the sale because of the early dialogue.

In this way, Ford took social media to a new level as a marketing vehicle. This and related technologies suggest that, for example, traditional auto distribution is, pardon the pun, an Edsel and needs rethinking.

Don’t innovate like a car company

At the 2011 Consumer Electronics Show, Mulally said, “We could’ve acted like a car company, introduced an outstanding new electric vehicle, and called it a day. But we’re more than a car company, we’re a technology company.” He expects that a fourth of all vehicles sold by 2020 could be electric or hybrid and is peppering Ford’s lineup to offer a variety of EVs. Don’t stop there. What’s needed is a new energy ecosystem where advances in battery technology need to go hand in hand with new thinking about electricity distribution, natural gas powered systems and possibly even nuclear. It’s been 56 years since Admiral Hyman Rickover, father of the nation’s nuclear submarine fleet, launched the Nautilus and revolutionized nuclear as a safe transportation power source. A Nobel Prize is waiting for the (Ford?) engineer who does a Rickover for everyman’s transport vehicle.

Beware Toyota

Toyota has its woes. Sales have Toyota in the skids due to its recall problems associated with unintended acceleration. Quarterly profit fell by 75 percent mostly because of productions problems from the March 11 quake in Japan. In the U.S. it’s losing market share, falling to 14 percent from 17 percent in little more than a year, when it should be reaping the benefits of consumer’s interest in fuel-efficient cars. Edmunds.com estimates that Toyota boosted average discounts and other incentives by almost a third last year. CEO Akio Toyoda allowed recently that executives were “gritting our teeth” to keep everything intact. But Mulally & Co. can’t expect their chief competitor to suffer misfortune indefinitely. There’s little room for complacency. The last time fuel prices spiked in the U.S. Toyota was crowned the world’s No. 1 automaker. Despite its current problems, Toyota’s Asia-Pacific market share is over five times Ford’s. Now is the time to prepare.