You don’t have to look far to find stories of legacy companies that have been damaged or bankrupted by disruption emerging from the Internet economy. Borders and Blockbusters are already the stuff of M.B.A. courses, while daily headlines announce the woes of companies like Sears and JCPenney.
Harder to find—and in many ways more interesting—are legacy companies that are mounting systematic and potentially successful efforts to survive disruption as transformed entities.
Ford is a dramatic example of a legacy company waging an all-out battle against high-tech, innovative disruption. It’s too early to know whether these efforts will succeed, but the strategy being used represents clear thinking and firm actions that are worth study and emulation.
The Ford Situation
It’s hard to imagine a company more steeped in legacy than Ford. At a time when the average lifespan of an American company is less than 20 years, Ford is 115 years old. The name Ford is linked with the dawn of the automobile era, and with some of the nation’s most iconic vehicles, from the Model T to the F-150 pickup.
However, Ford has struggled as consumer tastes have changed, its costs have risen, and new competition has offered more contemporary products. Recently, Ford’s struggles have become existential as new technologies like electric and self-driving cars, and new usage like ride sharing, show that, in the words of current Ford CEO Jim Hackett, “the model of the past is no longer tenable.”
Ford’s previous CEO, Mark Fields, held that position from 2014 to 2017. He articulated a new vision of Ford as a “mobility company” rather than a vehicle manufacturer. He initiated significant technology investments and innovative partnerships. However, the pains of transformation proved too great for investors, who watched Ford’s stock price decline 40 percent as sales weakened, costs remained too high, and Ford fell behind other companies in innovation. In January 2018, Moody’s downgraded its outlook on Ford from stable to negative.
Jim Hackett, who took over from Fields as CEO, faces three enormous challenges:
First, the company must improve its current financial performance and stock price.
Second, it must accelerate its pivot away from the internal combustion engine toward electric and self-driving cars.
Third, it must keep from being commoditized as more of the value of new cars is contained in the tech component rather than in the car component.
The Ford Game Plan
Under Hackett, Ford is embarking on a broad, evolving game plan that could serve as a model for other legacy companies facing disruption. Following are that plan’s fundamental components.
Rethink purpose. With its broader purpose as a mobility company, Ford would focus on adapting to new technological, economic, and social models in which the traditional car with an internal combustion engine would inevitably diminish in relevance. Today, Hackett has somewhat narrowed that new purpose to creating “smart vehicles in a smart world.” Hackett will be challenged to view every strategic decision through the lens of this role.
Place bets. Companies in a rapidly disruptive environment can’t be certain about the future, so they need to place bets or be left behind. Ford’s bets are that 1) electrification will become the most common source of vehicle propulsion by 2030, including hybrid vehicles, battery-electric, and plug-in hybrid vehicles, and 2) vehicles of the future will be smart—that is, have self-driving components—and connected—that is, integrated within a new transportation operating system. It will also ensure that electric models will be those customers most demand—SUVs and trucks.
Think of the company in terms of value. Hackett wants to get all of the value-killers out of Ford—lines of business and types of operations that are sapping resources and not delivering returns. Hackett calls this a “profound refocus” of Ford’s operations. “We’ll restructure as necessary, and we’ll be decisive… We’re going to feed the healthy part of our business.”
Ford plans to cut a massive $25 billion in costs by 2022. The most obvious change was to announce the company was dropping production of all but two traditional sedan models in North America. As difficult as such a decision may have been culturally, demand simply was no longer present for these models. Ford says it may exit other unprofitable lines of business. In addition, Ford is also attacking product engineering and material costs, targeting cuts of $4 billion and $10 billion respectively within five years.
Evolve the portfolio to the future. Ford has done a rigorous evaluation of its business lines. Along with eliminating most sedans in North America, it is doubling down on SUVs and the F-150 pickup—models where demand and margins are healthy. In line with its bets on the future, most of Ford’s SUVs and trucks will be hybrid electric.
Reallocate capital. Shortly after he assumed the CEO role, Hackett pledged that Ford would shift $7 billion toward development of hybrid trucks and SUVs, along with $4.5 billion over five years already dedicated to electric vehicles. Elimination of sedans will free billions more in capital that will be reallocated to electric car investments.
Reduce complexity. Ford is trying to redesign the customer experience and internal operations to reflect the state of the art. For example, in 2017, customers could order 35,000 different configurations of the Ford Fusion. That number will drop to 96, reducing complexity for customers and operations alike. Ford also will reduce its variety of parts by moving toward more parts that are common among different types of vehicles. And Ford will develop factories that have much smaller footprints and faster logistics.
Reorient culture. For a company with as long a history as Ford, this sort of transformation puts huge pressure on culture. The board, management, and employees will need to accept a new organizational role that will change many, if not most, parts of the company. Longstanding activities will come to an end and unfamiliar ones will take their place. Leaders will need to have a willingness to invest in new areas, despite a lack of certainty about outcomes. They will need to accept the possibility of failure. Leaders will need a sense of urgency and a highly sophisticated sense of the right pace and mix of activities for what Hackett calls “now, near, and far.” The stakes for this cultural transformation are high: Mark Fields lost his job because of the perception he was investing too much in the future without attending to the turnaround plan for today.
The levers that Ford is pulling appear to be the right ones, allowing the company to enhance both future innovation and near-term performance. We see other companies facing disruption—from Tyson Foods to The Washington Post—using similar strategies.
The applications to healthcare are powerful. Traditional hospital-centric organizations need to determine a new role in an increasingly digital age. They need to rigorously address low-performing activities. They need to shift resources toward areas for future investment, particularly digital strategy. They need to radically improve the consumer experience and reduce operational complexities. And perhaps most of all, they need a culture that will support this degree of change.
The Ford game plan invites several observations that apply to boards and executives in companies trying to achieve transformational change.
- The balance of these actions is highly complex—hard to gauge and always changing. Striking the right balance requires the support of a first-class strategic and financial plan to test scenarios and assess their effects on the organization’s overall health.
- Financial strength cannot be underestimated. Organizations need room to make this kind of pivot—room to invest in technology and people, room to experiment, room to fail, and room to build. Only organizations with superior financial performance have this kind of room. For many organizations, scale is a key ingredient to maneuverability.
- This dimension of change requires courageous and visionary leadership—a leader willing to risk the comfort of today’s habits and traditions for the potential to make a much larger difference for the organization and the people it serves. Having the vision to articulate that future, the discipline to pursue it, and the courage to stake one’s reputation on it—those are the qualities of true leadership required for organizations trying to survive in the Internet economy.