The new heat on Ford

By David Kiley

updated 7:29 p.m. ET May 29, 2007

On a chilly morning in February, the new chief executive of Ford Motor Co., Alan R. Mulally, boarded one of the company's Falcon twin-turbo jets and flew to Consumer Reports magazine's automobile testing facility in East Haddam, Conn. He was joined by two senior engineers. Their mission: to spend half a day with the publication's staff getting detailed evaluations of every model made by Ford, Lincoln, and Mercury.

It wasn't a fun trip, according to a source close to the company. At one point, the Consumer Reports team criticized the new Ford Edge crossover SUV for lacking an electric opener triggered by the key fob — or at least a handle on the rear hatch. Both are standard equipment on many of its rivals. A woman on the magazine's staff demonstrated how she, at five feet tall, struggled to open the rear of the SUV as she carried two bags of groceries. Had it been a rainy day, she would have had to set her purchases down on the wet pavement and then muscle up the hatch. Once she'd done that, she'd face another hurdle: She was too short to shut it.

After a couple of hours on the firing line, Ford's engineers got defensive. Interrupting the testers, they started airing their side of the story in front of the new boss. Sensing that the meeting was deteriorating, Mulally says he handed each one a pad and pen. "You know what? Let's just listen and take notes," he said. The episode was a perfect illustration of what Mulally considers one of Ford's major problems: the tendency of employees to rationalize mistakes instead of fixing them. "We seek to be understood more than we seek to understand," he observes.

It's no secret Ford is fighting for its life. After losing $12.7 billion last year, it had to endure the indignity of pledging its factories, headquarters, and the rights to the iconic blue oval logo to the banks and bondholders just to get enough money to finance its turnaround plan. Those were all tough steps. But these are tough times for the U.S. auto industry. With Cerberus Capital Management taking over at Chrysler, the status quo is no longer an option in Detroit, a town infamous for incremental change.

For Mulally to have any chance of making Ford profitable by 2009, he'll have to strike a tough deal with the United Auto Workers this summer. He will also likely ditch a struggling brand such as Jaguar or Mercury. But fixing Ford will require more than simply whacking expenses. One way or another, the company will also have to figure out how to produce more vehicles that consumers actually want. And doing that will require addressing the most fundamental problem of all: Ford's dysfunctional, often defeatist culture.

Although Ford once exemplified corporate efficiency — it is the birthplace of the assembly line and home of the celebrated Whiz Kids, who pioneered many modern management techniques in the 1960s — it has degenerated into a symbol of inefficiency. Weary corporate lifers have become all too comfortable with the idea of losing money. Mediocrity is acceptable. The company's complacency shows up in the very language it uses internally to rate its own models. It uses the designations "L" for Leader, "AL" for Among Leaders, and "C" for Competitive. Too many executives simply strive for Cs, says William C. "Bill" Ford Jr., executive chairman of the board. When asked about the grading system, the great-grandson of Henry Ford mimes putting a gun to his head and pulling the trigger. "We still do that?" he asks in disbelief. "I don't know where that came from."

Feet to the fire
Last September, THE 50-year-old family scion, who had served as chief executive for nearly five years, threw up his arms in frustration and concluded that an insider could no longer fix Ford. The job required the emotional detachment of an outsider. While Mulally was not his first choice, the former chief of Boeing Co.'s commercial airlines division had impressive turnaround credentials. He helped the aerospace giant bounce back from the September 11 terrorist attacks by axing 27,000 workers, cutting jet production in half, repairing the company's antiquated production lines, and making a courageous bet on the 787 Dreamliner. That remarkable performance earned the 61-year-old ex-engineer recognition as one of BusinessWeek's top managers of the year in 2005. The hard-nosed Mulally is somebody, Ford promises, "who knows how to shake the company to its foundations."

Just eight months into the job, Mulally is working hard to change institutional work habits that took years to develop. He wants managers to think more about customers than their own careers. He has made it a top priority to encourage his team to admit mistakes, to share more information, and to cooperate across divisions. He's holding everybody's feet to the fire with tough operational oversight and harsh warnings about Ford's predicament. "We have been going out of business for 40 years," Mulally told a group of 100 information technology staffers at a "town meeting" in February. He has repeated the message to every employee group that he has addressed.

It is far from guaranteed, of course, that any of his cultural reforms will be enough to rescue Ford. Far-reaching as they are, they may not go far enough to do the job. And now that Cerberus is in the process of buying Chrysler, Mulally can no longer claim the title of most feared outsider in town. He may very well have to develop an even more radical rebuilding plan to stay ahead of his crosstown rival.

Mulally has yet to convince Wall Street that he can reach his goal of profitability by 2009. Of 15 analysts surveyed by Bloomberg.com: News recently, only two rate the stock a buy. "They're in a precarious situation," says John Novak, an analyst with Morningstar Investment Service Inc. in Chicago. "Mulally's honeymoon period isn't going to last."

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