“How to optimize human potentials in businesses for profit”

Article #53, (Written in October 3, 2006)

            University students learn their future profession theoretically and piece meal, one course at a time… They are not exposed to meaningful courses with the objective of linking all the concepts together or a cross-over knowledge of the problems of the different concepts within the profession.

The best that most universities come up with is a last year project, supposedly to initiate the graduate to a real life problem in one aspect of the business.

For example in industrial engineering, when a student learn how to optimize inventory he has the impression that ultimately some magic inventory formula will generate the most profit to the enterprise; the student fails to comprehend the interactions among inventory, production capacity, marketing, sales, finance, management style, medium and long-term planning for profitability of the whole business.

Most of the time, the student does not understand that maximizing in one department is counter productive in another department and that what he believed is excellent performance might turn to complete disaster for the business in return on investment and profitability.

            What a university student needs to comprehend is that the success of any enterprise is the development of human potentials within it, and the best potential for a graduating student is to joining a serious and comprehensive training program before graduating or after when hired by a company.

The training program must necessarily introduce the new recruits to the interactions among the different departments and their cross-over difficulties. The best example I can offer is the successes of Carlos Ghosn, the “Cost Killer” from Lebanese descent, who revived Nissan from certain death into profitability within three years.

Carlos university background was mostly in abstract higher mathematics and graduated from the prestigious engineering university of Mines in Paris. It is the formation of Carlos at the multinational pneumatic company Michelin that provided him with a wide spectrum in managerial skills and know-how that prepared him for tackling general and particular problems in several faltering enterprises.

It is necessary to dwell on the training program in Michelin.

Carlos was hired in 1978 and in the first 3 months, the new recruits for all types of functions followed the same program consisting of conferences given by the main directors of departments on the different aspects of the business.  These conferences were backed up by small real operational problems that needed simple solutions within a restricted time limit.

The new recruits live together and they learn to go through the transition between a student life and the active one.  This training program also offers management a profile of the new recruits and their potentials in different sectors of the business.

At the end of the training period, Carlos was affected to work for another three months in a factory preparing the rubber that will be turned into tires.  His work consisted of cutting the rubber, rolling it up, inserting it into moulds and then transporting it… The best part is the fraternity that is created among the workers and the future bosses.

Carlos is then promoted foreman for a group of workers in a new factory.  Six months later, he is dispatched to an affiliate company in Germany to get training on quality control, and training in industrial organization at the factory in Tours.  He is promoted group chief of production for a whole year at the factory in Cholet.

In 1981, Carlos is 27 years old and director of the new factory where he worked as foreman and will stay 2 years and three months.

Carlos is summoned to headquarter to meet with the ‘Boss’ Francois Michelin. The Boss assigns him the task of investigating the troubles of the straggling affiliate Kleber-Colombes.  Carlos has to work as adjunct to the director of finance Behrouz Chahid-Nourai and discover the concept of “cross manufacturing” for utilizing the same tools of production for several products under different brands.

After offering his recommendations to revitalize Kleber-Colombes, he is affected to the research department for a year, the job that Michelin initially contemplated that he might fit better in the company when he was in the training program.

In June 1985, Carlos is promoted director of the troubled operations in Brazil.  In February 1989, Carlos takes over the operations in the USA and settles in Greenville South Carolina.

This training formation at Michelin is at the foundation of Carlos concept of forming leaders in any enterprise.  He views the primary task of the ‘Boss’ in any institution is to send everyone with potential to the hot fronts on the terrains where difficulties are observed and then offer them chances to fail sometimes.

It is by providing opportunities to learn and prove leadership that the ‘Boss’ can ensure the survival of his enterprise when he decides to retire. The leaders of tomorrow are formed from the challenges of today and the clever ‘Boss’ should end up with a wide choice of alternative leaders when the time to retire is near.

When a general director is hired he should embrace the responsibilities of the past, present, and future status of the enterprise; he is not allowed to dwell on excuses from past failures as if they were not of his doing.

A general director has to first gather all the current facts and information on the institution and base his theory on these pieces of intelligence. The boss has to feel the enterprise and the clients, suppliers, concessionaires, stockholders, and customers, by frequent visit to the different sections of the business and proffer the same message everywhere.

The boss does not have to comprehend in-depth every facet of the business, which is the job of the specialists whose task is to adequately summarize the topic so that the boss is in a position to take decisions.

The boss should not forget for a moment that the crux of the matter is to produce quality products and be able to sell at profit.  Otherwise, if diversification into other businesses is undertaken without close supervision to the core business then the enterprise will suffer ultimately.

I might generalize the term “boss’ to include any employee who was assigned a position of responsibilities, even a foreman job and he has to follow all the above prerequisites in order to achieve quantified results.

This section will focus on the professional aspects of Carlos after the strategic alliance of Renault and Nissan, whereof Renault bought 36% of Nissan shares for $ 5 billion.  Carlos was selected to head the operations of reviving Nissan from certain death in 1999 because Japan did not yet transform its economy and financial institutions to absorb and rely on foreign investments in the deflation period of the 90’s.  Carlos brought with him a total of 30 French specialists in Renault in a period of three months to support his job; the understanding was that they are not in Japan to change the culture of the Japanese employees but with the objective of turning Nissan around to profitability.

For three months Carlos set up nine “transversal or cross-functional teams or CFT”, constituted of ten members and each headed by two members of the executive committee which was reduced to ten, with the task of understanding each other departmental problems.  For example, the Executive Vice President (EVP) for procurement was teamed with the EVP for research and development.  Each main CFT team relied on other CFT cells with tasks to investigate deeper special problems.

In total, 500 persons were mobilized in the CFT organizations between July and September 1999.  Carlos visited all the factories and suppliers to get a feel of the major problems and to get to the bottom of the illnesses of Nissan.

For example, Carlos discovered that six suppliers of tires for a factory producing 200,000 cars did not know the vision of Nissan, its strategy, or its priorities; the peculiar standards of Nissan were changed and imposed every three months, instead of the standards in the business and their suggestions were not heard or acted upon. During these months Carlos encouraged and was open to interviews by the Medias in order to promote the concept of transparency that will be adopted in reviving Nissan and also to encourage communications inside the institution and disseminate the steps to be taken and the expected changes that will follow.

In October 18, 1999 Carlos divulged his plan of rebirth NRP to an assembly of journalists; it was a surprise announcement and no one outside the members of the executive committee new about the announcement; even the Japanese government got wind an hour prior to the announcement.

Nissan dropped from 6.6% to 4.9 % of the world market in 8 years or a reduction in production of 600,000 cars; it was heavily indebted of $19.4 billion. Carlos promised that Nissan will introduce 22 new models within three years and that the objective is to reduce the cost of procurement to 20% since it represented 60% of the total cost, the number of suppliers of pieces; materials, equipment and services to almost half from a total of more than 8000 suppliers by 2002.

Nissan had the capacity of producing 2.4 million cars but actually produced 1.3 million; thus five factories would be closed by 2002 so that the rate of utilization of the remaining factories would be up to 82% taking into account a growth of 5.5% by 2002.  Thus, Nissan will end up with 4 factories utilizing only 12 plate-forms. Nissan will have to reduce by 20% the number in its network of distribution subsidiaries and close 10% in its points of sales.

Most important, Nissan will sell its shares in almost 1400 societies that do not strategically contribute to car manufacturing business.  The number of employees would be reduced 14% to 127,000 with the exception of the department of research and development which will gain 500 additional jobs and the engineering department another two thousands.

Three targets were set to be accomplished by 2002, otherwise, Carlos and all his executive committee will quit even if one of these targets is not attained; these targets are the return to profitability, a rate of operational margin exceeding 4.5%, and the reduction of the total debt to 50%.

These three targets were reached and in 2002.  By 2003, Nisan stocks jumped from 360 to 1200 yens, the syndicate at Nissan obtained all their demands which were reasonable while the number one Toyota froze salaries. Many in Nissan are now exercising their rights for stock options and the minimal number of stocks was reduced to 100 instead of one thousand. The team of Carlos Ghosn then elaborated a three years plan called Nissan 180, where 1 represent an additional one million cars produced, 8 for an operational margin of eight percent growth, and 0 for zero debt by the end of the triennial.

As Carlos explained: “If an enterprise does not develop middle and long-term plans then the financial analysts will have nothing to rely on but the near term results and the employees will feel totally disoriented and discouraged if the results were not satisfactory“.

By the year 2003, 80% of Nissan’s cars would emit only 25% on the regulatory limit on pollutants.  An agreement with its archenemy Toyota was signed in September 2002; Toyota would provide Nissan 100,000 hybrid engines vehicles to be marketed in the USA by the year 2006. A hybrid engine works in the classical manner on highways and electrically within city routes.

In November 2000, six months after the announcement of the NRP plan, Carlos decided to invest $ one billion in the USA for the construction of a new plant in Canton in the State of Mississippi; this new plant will target the segment of large pick-ups and SUV in the Middle West market where the American companies have it locked. This investment secures a stronger implantation in the most profitable market in the world because it has the best mix and a homogeneous market for advertisement and distribution and selling 16 million vehicles a year; it will also save on the tax barriers and monetary exchanges.

Another development is the investment in China, a new emergent market with the biggest potential given the saturation of the matured developed nations.  Nissan concluded a deal to invest more than $ one billion to acquire 50% of Dongfeng, a Chinese state-owned enterprise that manufactures buses and heavy trucks. By the year 2010, this joint venture is projecting to produce 450,000 Nissan cars and 450,000 heavy vehicles.

The Chinese government gave priority to Nissan because of the bold steps it has taken to get back to profitability and of its experience with multicultural and global management practices.

Although the initial intention was to revive Nissan into profitability some cultural changes within Japanese business behavior had to occur. For example, Nissan had an organization of assigning counselors to each field teams with no definite operational functions and not responsible to results; these counselors were originally dispatched to foreign countries to disseminate the Japanese practices but were of no use anymore; these counselors ended up diluting the responsibilities of the field directors; they  had to go.

Another Japanese practice was to promote employees according to seniority as well as increase in salaries without any regard to productivity or innovation; Carlos instituted the notion of result instead of effort in judging what is fair.  The consequences for that notion of result did away with the practice of working overtime and spending unduly longer time at the offices, even showing to work on holidays in order to please management and prove that they were investing lots of efforts.

The doing away with the seniority criterion for automatic promotion meant that new recruits could be hired at higher and competitive salaries. The cost of incentives represented the variable portion in the total cost which was 40% at Nissan. Employees will thus be judged according to their contributions and incentives given to those who satisfy quantitative criteria.

The third practice was hiring for life. During the recession in the 90’s, many Japanese companies concocted many gimmicks to in reality fire employees while providing the image of still belonging to the firm; for examples, many were assigned to concessionaires and suppliers who paid their salaries. Fourteen percent of employees will lose their jobs and many of these fictitious employees distributed to suppliers were repatriated to Nissan.

In the automotive business the question for the future is: can it afford a competitive offer and the capacity to maintain it? The end game reduces to maintaining innovation in a complex market, where emotions of clients for a stylistic car play a critical part along with quality and at a competitive price.

The team detached from Renault to Nissan played the role of catalyst because the real resource of Japan as the second economy in the world is its professional and skilled people.  Japan has no natural resources, a relatively tiny island, ravaged by earthquakes and typhoons and facing strong adversaries. Japan has the third of the world monetary reserves although it has now a public debt up to 150% of its PIB.

It is apparent that the Japanese companies have not assimilated the Nissan experience because they are still suffering from indecision and indebtedness; the “Cost Killer” Carlos believes that the problem is a lack of know-how and experience to treating their own managerial problems that did not change for over 40 years.