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Saving the Business Without Losing the Company - Breaking with Tradition in a Foreign Land

 
3/18/2002
Faced with debt of more than $11 billion, excess plant capacity, and "notoriously low" margins, Nissan was a company in trouble. In this excerpt from the Harvard Business Review, newly appointed president and CEO Carlos Ghosn tells how he hit the ground running at the company's Tokyo headquarters. His first order of business: dissolving Nissan's all-powerful keiretsu investments.

Breaking with Tradition in a Foreign Land

When I arrived at Nissan at the close of the 1990s, established business practices were wreaking huge damage on the company. Nissan was strapped for cash, which prevented it from making badly needed investments in its aging product line. Its Japanese and European entry-level car, the March (or the Micra in Europe), for example, was nearly nine years old. The competition, by contrast, debuted new products every five years; Toyota's entry-level car at the time was less than two years old. The March had had a few facelifts over the years, but essentially we were competing for 25% of the Japanese market and a similar chunk of the European market with an old—some would say out-of-date—product. Similar problems plagued the rest of our car lines.

The reason Nissan had cut back on product development was quite simple: to save money. Faced with persistent operating losses and a growing debt burden, the company was in a permanent cash crunch. But it didn't have to be that way. Nissan actually had plenty of capital—the problem was it was locked up in noncore financial and real-estate investments, particularly in keiretsu partnerships. The keiretsu system is one of the enduring features of the Japanese business landscape. Under the system, manufacturing companies maintain equity stakes in partner companies. This, it's believed, promotes loyalty and cooperation. When the company is large, the portfolio can run to billions of dollars. When I arrived at Nissan, I found that the company had more than $4 billion invested in hundreds of different companies.

Faced with persistent operating losses and a growing debt burden, the company was in a permanent cash crunch.
— Carlos Ghosn

The problem was that the majority of these shareholdings were far too small for Nissan to have any managerial leverage on the companies, even though the sums involved were often quite large. For instance, one of Nissan's investments was a $216 million stake in Fuji Heavy Industries, a company that, as the manufacturer of Subaru cars and trucks, competes with Nissan. What sense did it make for Nissan to tie up such a large sum of money in just 4% of a competitor when it could not afford to update its own products?

That was why, soon after I arrived, we started dismantling our keiretsu investments. Despite widespread fears that the sell-offs would damage our relationships with suppliers, those relationships are stronger than ever. It turns out that our partners make a clear distinction between Nissan as customer and Nissan as shareholder. They don't care what we do with the shares as long as we're still a customer. In fact, they seem to have benefited from our divestments. They have not only delivered the price reductions that Nissan has demanded but also have improved their profitability. Indeed, all Nissan's suppliers posted increased profits in 2000. Although breaking up the Nissan keiretsu seemed a radical move at the time, many other Japanese companies are now following our lead.

Nissan's problems weren't just financial, however. Far from it. Our most fundamental challenge was cultural. Like other Japanese companies, Nissan paid and promoted its employees based on their tenure and age. The longer employees stuck around, the more power and money they received, regardless of their actual performance. Inevitably, that practice bred a certain degree of complacency, which undermined Nissan's competitiveness. What car buyers want, after all, is performance, performance, performance. They want well-designed, high-quality products at attractive prices, delivered on time. They don't care how the company does that or who in the company does it. It's only logical, then, to build a company's reward and incentive systems around performance, irrespective of age, gender, or nationality.

So we decided to ditch the seniority rule. Of course, that didn't mean we systematically started selecting the youngest candidates for promotion. In fact, the senior vice presidents that I've nominated over the past two years all have had long records of service, though they were usually not the most senior candidates. We looked at people's performance records, and if the highest performer was also the most senior, fine. But if the second or third or even the fifth most senior had the best track record, we did not hesitate to pass over those with longer service. As expected when changing long-standing practices, we've had some problems. When you nominate a younger person to a job in Japan, for example, he sometimes suffers for being younger—in some cases, older people may not be willing to cooperate with him as fully as they might. Of course, it's also true that an experience like that can be a good test of the quality of leadership a manager brings to the job.

We also revamped our compensation system to put the focus on performance. In the traditional Japanese compensation system, managers receive no share options, and hardly any incentives are built into the manager's pay packet. If a company's average pay raise is, say, 4%, then good performers can expect a 5% or 6% raise, and poor performers get 2% or 2.5%. The system extends to the upper reaches of management, which means that the people whose decisions have the greatest impact on the company have little incentive to get them right. We changed all that. High performers today can expect cash incentives that amount to more than a third of their annual pay packages, on top of which employees receive company stock options. Here, too, other Japanese companies are making similar changes.

Another deep-seated cultural problem we had to address was the organization's inability to accept responsibility. We had a culture of blame. If the company did poorly, it was always someone else's fault. Sales blamed product planning, product planning blamed engineering, and engineering blamed finance. Tokyo blamed Europe, and Europe blamed Tokyo. One of the root causes of this problem was the fact that managers usually did not have well-defined areas of responsibility.

Indeed, a whole cadre of senior managers, the Japanese "advisers" or "coordinators," had no operating responsibilities at all. The adviser, a familiar figure in foreign subsidiaries of Japanese companies, originally served as a consultant helping in the application of innovative Japanese management practices. That role, however, became redundant as familiarity with Japanese practices spread. Yet the advisers remained, doing little except undermining the authority of line managers. So at Nissan, we eliminated the position and put all our advisers into positions with direct operational responsibilities. I also redefined the roles of the other Nissan managers, as well as those of the Renault people I had brought with me. All of them now have line responsibilities, and everyone can see exactly what their contributions to Nissan are. When something goes wrong, people now take responsibility for fixing it.

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Excerpted with permission from "Saving the Business Without Losing the Company," Harvard Business Review, January, 2002, Vol. 80, No. 1.

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Carlos Ghosn is the president and CEO of Nissan, headquartered in Tokyo.

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