Global Talk @ Sasin : "The Secret to a Successful Recovery"

30 Jun 2010
Nissan Motor’s President and CEO Mr. Carlos Ghosn spokes at the event: “Global Talk @ Sasin” on June 30, 2010. Nissan provides his speech for academic benefits. ——————– The term crisis comes from Greek. And this term means “the necessity of decision”. Crisis is a very short period where you have to make a decision. Today crisis is not very well used because they talk about it in the sense of something over five years. In the world there are many different kinds of crises. Today I will talk about crises that can be internal or external. And I will talk about what I have been through, so this is not rhetorical but very practical, because I’ve been living through them. INTERNAL AND EXTERNAL CRISES An internal crisis is a situation in which you are the only company, country, or organization in crisis. An external crisis is one in which everybody is in the same situation. In 1999, Nissan found itself with an internal crisis. Where did this come from? It came from the fact that for ten years, from 1989 to 1999, the company did not grow. It had an average operating margin of 1%, ROI was about 1%, versus that of its peers, which was 10%. It had overcapacity. It had a debt of $20 billion, and was the most indebted automaker in the world in 1999. So far no crisis because you can continue to be in this situation. Where does the crisis come? The crisis came when at the end of 1998 the banks that were lending to Nissan said no more loans. Then the crisis came because all of a sudden, you don’t have cash, the banks won’t lend you more, and you have a negative free cash flow. You have to make a decision about what you’re going to do. Because if you don’t, you will collapse. You’ll go bankrupt. You’re in a crisis because you have to make a decision. This was November/December 1998. And you had to make a decision before March 1999. Here is the first situational crisis. The second situational crisis is the Lehman Brothers crisis. Everybody surfing very well, expecting some kind of recession – maybe mild, maybe more pronounced. But what hit the world was something completely different that no one expected.  In Sept. 2008, one major financial institution went bankrupt and what it meant for car manufacturers was no more additional lending. The existing contracts between the carmakers and the banks were honored, but as we faced the situation, we needed more cash to restructure and organize themselves. But the banks said ‘Sorry, no more cash’. Which means that all of a sudden you have to make a decision about where to find the additional cash, in order to face your responsibility and your income capability. Here again, you have to take a very good decision. In this case, as you know, most of the decisions were with governments because governments substituted the banking system for a period of time, to ensure that no car manufacturer would go bankrupt. These are two situations. Crisis is a situation in which you find yourself having to make a decision, and play the future of your company or organization. No matter if the reason of the crisis comes from inside or from outside. MANAGEMENT AND LEADERSHIP REVEALED THROUGH CRISIS Let me tell you something special about crisis that is very direct to management. Obviously , we have a lot of managers and leaders in this room. At least, people aspiring to be so. Mangers and leaders do not count when things are going well. They don’t. When you have growth and peace, when everything is going well, you don’t care. A lot of us take airplanes. When the flight is on time, it takes off on time, it lands on time, you don’t care who is the captain. If you see there is an accident on the plane, or you have a bump or an alert, you worry about who is making the decisions. Because you are at risk and you feel that you are in danger. When things start to turn sour, you really want to make sure that you have the best people making decisions. This is extremely important that management and leadership count in terms of crisis. You can be playing your future depending on who is managing your company, your organization, your country, your department through a situational crisis. That’s where management and leadership are revealed. That’s when you look around you and ask who can you count on? Who are the people standing up taking a decision and motivating people around certain objectives? FUNDAMENTAL RESPONSES TO CRISIS When you are in crisis, there are some clear fundamentals. This comes from experience and you have to do them intensively, with obsession. FIRST…. The first and most important element when a crisis hits is: Make sure that you are very lucid, and very objective in assessing the situation. The diagnosis of the situation you are facing is extremely important. Many solutions to crisis are not very effective because people are complacent with the way they see things – or political. When you make the diagnosis of the situation, share it. Diagnosis is not only for you. You have to make sure the whole organization knows exactly what you think in your diagnosis. Why? Because the diagnosis will prepare for the solution. And the solutions will not be easy. In a situational crisis, you’re going to have to impose or take decisions that were not taken before and some can be very painful. So to make this decision acceptable, you tell the background and the basis on which you built your convictions. SECOND…. Second, from this diagnosis you need to build a vision. Vision is something relatively simple, what I’m going to do for the next year, the next three years and the long term. Three paragraphs, very simple. For the first year, I’m going to see numbers. For the first three years, some numbers and some qualitative objectives. And for the long term, qualitative objectives. It has to be very sharp and understood by everybody in the organization. It’s very important to establish the vision and share it and explain it to the people who have to carry it. This is important because in a situational crisis in the first year, most of the decisions are painful. And that’s what management is about. Management is about asking people to do things they don’t want to do…and they will do with enthusiasm. That’s why you don’t need management when things are going well. They don’t need to be convinced then. But real management is how you’re going to ask people to restructure the organization when they don’t want to restructure. Or to cut capacity or head count where they don’t want to. And to do it in a way which is convincing and in a way in which they are enthusiastic and motivated about doing it. That’s great management. And the great leaders are not people who are going to bring you from 7% growth rate to 8%. Great leaders are those who manage companies, countries, and organizations through very tough situations where they ask people to do things that they don’t want to do and people feel that they have grown through the process. So, that’s extremely important: vision, preparing the vision, outlining the vision and sharing the vision. THIRD….. The third element is to make sure you don’t have a laundry list of priorities. Priorities are a very small number of things that need to be done. As an example, when we put together the Nissan Revival Plan in 1999 there were few objectives – very clear, shared by everyone, and they were priorities above everything else. One, return to profitability, since the company was not profitable for the past nine years. Second, cut the debt by half. Third, boost profitability to 4.5% operating margin, which was the industry average. Very simple objectives. Nothing else mattered if these three objectives were not met. During the crisis of the Lehman Brothers collapse, we had one objective: free cash flow. Positive. Period. Everything else was suspended. We have a cash crisis, we have a banking system problem, we need to generate positive free cash flow, which means no more debt. We need to make sure that we are self-sufficient in terms of cash. The very limited number of clear priorities has a very simple consequence. It comes from a physical principle: if you want to make a breakthrough, you need to have a limited surface area of contact. In physics, if you want to make a hole in something extremely tough, you need to sharpen what you make the hole with so that a small force can make the breakthrough. A very limited number of priorities, very limited number of objectives, so you can make a breakthrough and really make a transformation in the company. And the more objectives you put, the less impact you’re going to have. FOURTH…. Always keep your eyes on people motivation. Nothing gets done without having the maximum number of people with you. And that’s difficult, obviously, because you’re asking them to do things that they don’t want to do. How are you going to ask people to do what they don’t want to do and keep them motivated? Let me give you an example, Nissan in 1999. After the diagnosis of the situation, I was told arriving in Japan, you don’t understand the situation. In Japan, we have a seniority system, if you promote somebody, you have to give age a priority. You cannot unfold cross-shareholding, you cannot shut down plants, you cannot reduce headcount, there are a lot of things that you cannot do in Japan. They said, ‘If you don’t touch this, you can do whatever it is you want to revive the company.’ I came to the conclusion that not only would I have to break some of the taboos, I would have to do everything if I had any chance of reviving the company. NO PLAN B…. The main challenge for me was very simple. We went out and announced the Nissan revival plan, in which we had headcount reduction, plant capacity closing in Japan, we unfolded the keiretsu, we cut cross-shareholdings, and challenged the seniority system. And all of a sudden it was a shock. And people were a little stunned that we would dare to do all of this stuff. But we were committed to results. I said, ‘Okay, guys, in the last ten years we haven’t gotten results, and we’re going to get results. And there is no plan B.’ There is no plan B. If this fails, we’re out. In management this is very important. No matter what you do, even in the banking system, people always say that you have to have a Plan B. Wrong! Wrong! Because if people know you have a Plan B and they think that Plan A is tough, they say ‘Give me Plan B. Give me Plan B.’ And you say, ‘No, no. There is no Plan B.’ We’re going to be out if we have to go to Plan B. Don’t try to play games, we’re going to have to implement everything. And, in fact, all the people who were against the plan said we’d never be successful. Fortunately, the story delivered positive results. And those people said these are not positive results, they’re cooking the books. And the second year it was better, and the company started to grow. And we were able to implement changes. There was a lot of skepticism at the beginning, but because of this top management engagement, and accountability on the results, we were able to pull through. This is a very important rule. People have to feel that the top is engaged – that the top is accountable. And, in particular, no Plan B. There is only this plan and this plan has to be successful, because there is no turning around and trying to do something else. If you do these five things, things will change. You have to do them with a lot of intensity, a lot of obsession, and people need to feel that you’re being honest, truthful and whole-heartedly into what you’re doing. Nobody likes crisis. You have a lot of management books that say ‘crisis is an opportunity’. ‘Long live the crisis’. ‘It’s a great exercise’. Not at all. It’s true. There are a lot of loony things about crisis going on. If you like crisis, you have a problem. Crisis is about instability, it’s stress, it’s risk, it’s unfair, it’s awful. Nobody likes crisis. But from time to time we don’t have a choice, crisis is imposed on us. And because it’s imposed on us, this is a great opportunity to transform your organization. We don’t like it, we hate it. But, you know, you can’t avoid it. It’s a unique opportunity to transform your organization. And to learn a lot of lessons. And finally, there are a few things I want to tell you about crisis and even though we forget, it’s true. Every crisis has an end. And usually, when you are in the middle of the crisis a lot of people behave as though there is no end. Last year, Nissan shares went to 280 yen. That means people are selling at 280 yen. When you sell a share at 280 yen while the share has been as high as 1500 yen, you feel that the crisis has no end. It’s still there in their mind that there’s no end. But we know that every crisis has an end, and we need to keep it in mind that no matter what, no matter how dark or deep it is, there is an end to the crisis and we need to be prepared for it. After this crisis is finished, there is always going to be another one. And you don’t know what is coming, if it is internal, external, financial – you don’t know. So you want to make sure that the end of the crisis and you need to learn how you’re going to prepare your organization for the next crisis, no matter where the crisis is coming from or when, to make your company more resilient. And when you go through a crisis, it is the worst time. But it is when you learn the most. A famous German  philosopher said what doesn’t kill you makes you stronger. And this is true in terms of crisis. If you don’t die, it makes you a better person.
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