27 Nov 2000  Research & Ideas

The Dynamics of Standing Still:
Firestone Tire & Rubber and the Radial Revolution

In the late 1960s, Firestone was perhaps the best managed company in its industry. But when Michelin introduced the radial tire and shook up the U.S. market, writes HBS professor Donald Sull, Firestone's historical success proved its own worst enemy.

 

Editor's Note— In the decades prior to the advent of radial tires," writes Donald Sull in Business History Review, "Firestone Tire & Rubber was viewed by some observers as the best managed U.S. tire company."

But in the face of French tire maker Michelin's introduction of radial tires to the U.S. market in the late 1960s, Firestone, along with most of the major American tire manufacturers, suffered costly setbacks and lost significant market share. By 1988, Firestone had been acquired by Japanese competitor Bridgestone, and only Goodyear, of the five biggest U.S. tire firms, remained independent.

"Firestone's historical excellence and disastrous response to global competition and technological innovation," writes Sull, "posed a paradox for industry observers: Why had the industry's best managed company turned in the worst performance in a weak field?

"Closer analysis," he continues, "reveals that Firestone failed not despite, but because of its historical success."

In this excerpt Sull shows how, from the start, Firestone's reliance on managers' existing strategic frames and values and the company's processes proved counterproductive in a changing competitive environment.

By the mid-1960s, however, U.S. tire companies began to feel the first tremors of the competitive earthquake that would ultimately reshape the industry. In 1966, Michelin struck a deal with Sears to manufacture radial tires for sale under the "Allstate" label and within four years Sears was selling one million units per year.1 In the mid-1960s, B.F. Goodrich embraced radial technology as a means to win market share from its larger rivals, and the company introduced the first American-made radial in the mid-1960s and supported the launch with the "Radial Age" advertising campaign in 1968. 2 The August 1968 Consumer Reports awarded its top two spots to radials and documented the new technology's longer life, increased safety, handling and economy relative to even top-of-the-line bias tires.3

While radials produced a boon to consumers, this widespread acceptance would prove a bane for incumbent U.S. tire makers. Radials' longer life would decrease unit demand in the profitable replacement market, providing an opening for foreign producers and smaller players like B.F. Goodrich to seize market share. Shifting to the new technology would also require an enormous investment by incumbent players to upgrade their existing production capacity.4 Industry leader Goodyear acted quickly to deflate radials' progress, and in 1967 introduced the belted bias tire, an extension of the existing bias technology.5 Goodyear aggressively promoted the bias belted tire, claiming that it conferred significant performance improvements and launched an advertising campaign questioning the benefits of radials. Firestone, Uniroyal and General Tire quickly followed Goodyear's lead and introduced their own belted bias tires, and the new tire design rapidly gained share in the U.S. market.

Although radials represented a sharp break with existing tire technology, tire industry managers interpreted the new technology in terms of their pre-existing strategic world-view. Many Firestone managers saw the thrust and parry between Goodrich and Goodyear as the latest battle between two traditional foes in which the smaller player tried to win market share through innovation, while the industry leader continued by marketing an upgraded version of the existing technology.6 Firestone executives expected the new tire to fuel the next spurt of industry growth, much as earlier product extensions had in previous years.7

Just as Firestone's managers could easily interpret Goodyear's introduction of belted bias technology using their traditional strategic framework, the existing processes enabled the company to respond rapidly to the new product. After Goodyear introduced its first belted-bias tire in 1967, Firestone's Research and Development group responded with a matching product in a matter of months and provided a second generation belted bias tire within a year.8 Belted bias tires could be manufactured with minor modifications of existing production equipment, and Firestone increased its capital spending in tires in 1968 and 1969, retooling its factories to accommodate belted bias production.9 The records of Firestone's board meetings demonstrate no systematic evaluation of the decision to invest in the belted bias transition, but rather reveal a pattern of incremental investments approved individually. Although Firestone encountered some production glitches in refining the new process, overall the transition from bias to belted bias tires proceeded smoothly.10 Former Firestone President Lee Brodeur recalls that the transition to belted bias entailed "a certain amount of development and improvement, but nothing major. It was pretty much business as usual."11

Firestone's investment in radials, it appears, also followed the pattern of business as usual. When the automakers switched to radials in the fall of 1972, Firestone's bottom-up capital budgeting process functioned flawlessly, quickly converting Ford and General Motors' demands into concrete commitments to radial production capacity. In a November 1972 Executive Committee meeting, Manufacturing Vice President Mario DiFederico informed his colleagues that marketing managers had already made commitments to supply Ford and General Motors with 433,000 radial tires per month by the following summer and wanted to promise additional tires if capacity was on stream.12 DiFederico argued that the quickest way to ramp up the additional capacity would be to convert existing factories, but that this "quick fix" would prove insufficient in the long term and that Firestone would need to build a dedicated radial factory. The Committee, according to the minutes, "instructed Mr. DiFederico to proceed immediately to place orders for the long lead time equipment and bring the formal request to the Committee as soon as possible," thus pre-approving the required capital spending without benefit of formal review or even in-depth discussion.

The Executive Committee reconvened one month later to review the formal request for $90 million to build a new radial factory, and an additional $56 million to convert existing plants to radial production and build radial inventories.13 Following the informal authorization granted a month earlier, the Committee treated the request's approval as a fait accompli, and the discussion focussed on implementation details, such as optimal plant location, rather than the fundamental soundness of investing so heavily in radials.14 The strategic question as to "whether Management wants to invest the substantial capital to provide the additional capacity that will be required" was buried in a footnote on the ninth page of a 49-page presentation. This investment in radial tires for Firestone's North American business was the first of many, and in the subsequent seven years Firestone invested an average of $60 million of capital expenditure in excess of depreciation per year.15

In this December meeting, Firestone managers also decided to manufacture radials using modified bias tire equipment.16 This decision allowed Firestone to rapidly ramp up its radial production capacity to narrow the gap with Michelin and meet automakers' requirements. Within two years of its introduction, the company's flagship Firestone 500 Steel Belt was the most recognized brand in the industry.17 While the decision to leverage existing manufacturing processes allowed rapid market penetration, it also contributed to quality problems with the tire's steel cords, which failed to adhere properly to the rest of the tire.18 Although other companies also experienced quality problems with their radials, Firestones' were the most severe, and the company came under heavy pressure from consumer groups and the National Highway Safety Administration. In 1978, the company agreed to a voluntary recall of 8.7 million Firestone 500 tires at a cost of $150 million after taxes–an action that constituted the largest consumer recall in U.S. history.19

Firestone's move into radials was not only consistent with the company's standard operating procedures for developing products and allocating capital, but also enhanced its relationships with established customers and employees. Ford and General Motors provided the initial impetus for radials when they demanded the new tires, and Firestone marketing managers responded by giving their core customers exactly what they wanted. It is important to note that no attempt was made to justify the investment for automakers on economic grounds. The projected return on the investment to serve Detroit was 6.5 percent, which fell below the investment hurdle rate of 8 to 10 percent used to evaluate other investments at the time, and was well below the 28 percent average return on investments the company enjoyed outside its North American Tire business.20 Even this low return was optimistic, moreover, since Firestone had actually lost money on its sales to automakers (even before deducting any corporate overheads) in three of the preceding four years, for a cumulative loss of $12.7 million.21 While the radial investment served the interests of long-standing customers, it could hardly be expected to earn an acceptable return.

The investment in radials also supported Firestone's relationships with employees and host communities. In his 1976 annual address to shareholders, Firestone Chairman and CEO Richard Riley justified his company's heavy investment in terms of creating jobs instead of creating value for owners:

The replacement and building of plants is what enables companies to continue to provide jobs ... jobs that will eventually dry up unless companies invest ... and when this happens, it will not be something abstract that we may call "The World of Business" or "The Corporation" that will be harmed. It will be companies, and people, and families.22

The desire to protect current employees' interests also helps explain why managers chose to build most of their radial capacity by converting existing factories rather than building greenfield facilities, despite the economic advantages that the latter offered over the former.23

Why Good Companies Go Bad

Donald Sull's article on Firestone in Business History Review is part of his wider research on successful companies that fail to respond effectively to major changes in their environment.

In "Why Good Companies Go Bad" (Harvard Business Review, July-August 1999), Sull described what he calls "active inertia": the tendency of an organization to follow established patterns of behavior — even in response to dramatic environmental shifts.

"Stuck in the modes of thinking and working that brought success in the past," he wrote, "market leaders simply accelerate all their tried-and-true activities. In trying to dig themselves out of a hole, they just deepen it."

Citing examples from past actions of Firestone, Laura Ashley, Xerox, Apple, Polaroid, and other companies, Sull identifies four hallmarks of active inertia:

  • Strategic frames become blinders
  • Relationships become shackles
  • Processes harden into routines
  • Values harden into dogmas

"Because active inertia is so common, it's important to understand its sources and symptoms," wrote Sull. "After all, if executives assume that the enemy is paralysis, they will automatically conclude that the best defense is action.

"But if they see that action itself can be the enemy, they will look more deeply into all their assumptions before acting. They will, as a result, gain a clearer view of what really needs to be done and, equally important, what may prevent them from doing it. And they will significantly reduce the odds of joining the ranks of fallen leaders."

Footnotes:

1. Michael van der Poel, "Michelin III: The United States," unnumbered INSEAD case (1982).

2. Blackford and Kerr, B.F. Goodrich, 276.

3. Consumer Reports, "Tires," Consumer Reports, (August 1968): 404-409.

4. Sull et al., "Managerial Commitments."

5. Maurice O'Reilly, The Goodyear Story (Elmsford, NY, 1981): 156-159. French, The U.S. Tire Industry, 94.

6. Millis interview; Brodeur interview.

7. Firestone Tire & Rubber Company Annual Report, (1969): 3-5.

8. Love and Giffels, Wheels of Fortune, 146; Firestone Tire & Rubber Company Annual Report, (1969): 17.

9. D. Daryl Wyckoff, "Firestone Tire and Rubber Company," Harvard Business School, Case 9-684-044 (1984); French, The U.S. Tire Industry, 101; Jeszeck, "Plant Dispersion," 64-65.

10. Value Line, Tire & Rubber Industry, (17 October 1969).

11. Brodeur interview.

12. Minutes of the Executive Committee Meeting (3 November 1972).

13. Minutes of the Executive Committee Meeting (6 December 1972).

14. DiFederico interview.

15. Sull, "Organizational Adaptation and Inertia," 111, table 4.

16. Wyckoff, "Firestone," 3; Davidson, "Managing Product Safety," 4.

17. Love and Giffels, Wheels of Fortune, 150.

18. Ibid., 150-151.

19. Ibid., 152.

20. Sull, "Organizational Adaptation and Inertia," 111.

21. Internal Financial Reports (1968-1972).

22. Remarks of CEO to Annual Stockholders' Meeting (1972).

23. Minutes of the Executive Committee Meeting (6 December 1972).

Excerpted from the article "The Dynamics of Standing Still: Firestone Tire & Rubber and the Radial Revolution" in the Business History Review, Autumn 1999.