Chrysler and the Innovation Basement

What Robert Nardelli needs to do in order to change the Big Three automaker into an innovator

Few would deny that Chrysler—and indeed, the whole Detroit auto industry—needs a shake-up. Business as usual isn't working and hasn't been for some time. And real innovation, as opposed to lip service, hasn't been seen within the city limits for years.

So the takeover of Chrysler by the private equity firm Cerberus Capital Management represented a rare opportunity for real change, unhampered by the expectations of Wall Street analysts and shareholders. And indeed, in hiring Robert Nardelli, the General Electric-trained (GE) former Home Depot (HD) chief executive officer, to the top spot, the new owners have sent a message to the company and the industry that change is coming.

Nardelli is an outsider who promises to bring fresh thinking as well as management discipline to the ailing automaker (see BusinessWeek.com, 8/7/07, "Chrysler's New 'Tough-as-Nails' CEO"). But as a command-and-control executive, weaned on Six Sigma, Nardelli isn't the obvious leader for a company whose future depends on innovation. And his appointment raised the eyebrows of innovation experts such as Larry Keeley, co-founder and president of Doblin, the innovation strategy firm that is now part of the Monitor Group. Senior writer Jessie Scanlon spoke with Keeley about what Chrysler—and Detroit—really need, and whether tough-cop Nardelli is the man to deliver. An edited transcript of their conversation follows:

Before we get to the choice of Nardelli as CEO, let's talk broadly about the automotive industry and its innovation problems.

I don't want to come off as overly critical. These are huge companies with large installed bases. Invariably this makes management focus on that installed base, rather than searching the periphery to expand the core. That said, the degree to which Detroit wants the future to be like the past, and its failure to grasp both the scale of the industry's transformation and the inevitability of that transformation is stunning. If you want to be mean you call it delusional. If you want to recognize the human dimension, you call it wishful thinking. But it is a crisis.

What do you see as Detroit's biggest problem?

At the heart of it is a failure to meet the real-world needs of people who want to buy cars. And that is amazing.

Addressing the problems has been made more difficult by the fact that the Big Three are all focused on next quarter's numbers. Long-term innovation can hardly survive in that context. You could see the Cerberus purchase as a takeover by money-men impatient to see a return on their investment. Or you could see it as a chance to escape the short-term expectations of the Street and invest in longer-term innovation initiatives. Where do you fall?

You have to see your behavior in a long-term performance context. That's what makes the difference. And it completely wipes out what we call orthodoxies. Going through the private equity hurdle could make powerfully different thinking thinkable. That's what makes having one of the Big Three automakers privately owned an exciting thing. Chrysler will be forced to do some things in new and unprecedented ways and that, in and of itself, has the potential to be a change agent.

So the Cerberus purchase creates new possibilities for innovation in Detroit. But what of the Nardelli appointment? Can a former GE (GE) executive, weaned on Six Sigma, bring innovation to Chrysler? His Home Depot (HD) record certainly doesn't inspire confidence.

You know what you get when you get ex-GE people—they believe that if they put the right management team in place with the right metrics and the right performance incentives, that you can change the world. In general, GE transplants don't have a good track record. Part of the reason that [their approach] doesn't succeed elsewhere is that there isn't the same culture of performance, and there isn't the same talent.

That's the downside. But there are positive things. First, he's too smart not to have learned from his management failures at Home Depot. Second, the world of retail is a very different environment from the auto industry. The cliché is that retail is detail. You manage a thousand different details that you have to improve in little ways. GE is not that kind of company, so that's not what Nardelli was trained to do. And neither is Chrysler.

On the face of it, GE and Chrysler seem like quite different companies. How does Nardelli's training prepare him for the auto job?

When people think about automotive companies, they think of them as a consumer-focused. They would be healthier if they were B to C companies, but they aren't. They are B to B—like GE. The whole deal is to focus on a few big initiatives. For a GE-trained, GE-style leader, this is a much better fit.

What big initiatives do you think Nardelli should focus on?

There needs to be a revolution centered around the dealership model. And the way that cars are assembled, ordered, sold, and maintained. There also needs to be a revolution in the business model. As it is, everybody buys a car. They either drive it until it turns to dust, or they lease it for a few years. That has to change. You see that happening with the i-Gos and other car-sharing companies. The sooner that the Detroit leadership moves in that direction, the better off they'll be.

Many of these initiatives require collaboration between Chrysler and its suppliers and dealers, as well as between management and employees. Yet Detroit is an industry rotten with acrimony. For decades, the carmakers have squeezed their suppliers, and relations between management and unions have been fraught. There isn't a lot of the goodwill needed to support such collaborations.

You have put your finger on something. To a large extent, every time the automakers didn't get the performance they wanted they put the squeeze on the suppliers. And [in so doing] they've stripped those companies of their value, and their talent. Now the entire industry and all of its players live in the bottom third of the Innovation Intensity Index [a tool developed at Doblin to measure innovation within industries]. There is no other industry we've studied in which the entire industry has been shoved into the basement of innovation. Can Chrysler change that dynamic? No way. It's too small and too weak.

Can any one of the Big Three really change that dynamic on its own?

It may get solved only if we see massive-scale dislocations such as bankruptcies. That said, in terms of innovation more broadly, I think you see something more exciting at Ford (F), where the new CEO was the guy behind Boeing's (BA) revolutionary Dreamliner. That's the kind of revolution that the industry needs. An airplane that offers great new amenities to consumers—that is easier to manufacture and less expensive to operate—has stunningly superior economics. It is such a superior offering. It's the most successful plane in history, and the first one hasn't even flown yet. The automakers need those kind of great innovations. They won't be saved by some new piece of styling. To think that Bob Lutz is the answer is just goofy. It is about coming up with new ways to think about your product offering.

And starting to think more about what really matters to your customers?

Yes.

I mean how many times do you see ads and commercials touting a car's horsepower. Do you know your car's horsepower? Do you care? No—nobody knows unless they've lived in Detroit or worked in the auto industry. We spend most of our lives stuck in traffic jams going nowhere near the maximum speed of our vehicle. The innovations have to happen inside the car, in changes that improve our busy lives, make them more manageable, more comfortable. That's where the frontier is.

The minivan—a Chrysler invention—is a great example of a company responding to unmet customer needs. The company seems to have forgotten that lesson.

These guys are trying to focus on the same old market segments. It is just so tired. Every single company at every brand offers every single variant. I can get an SUV from Porsche, from BMW (BMW), from Cadillac (GM), from Mercury, from Ford, from Chevy, from Buick, I mean come on, guys. That only makes sense if you look at the industry from the vantage of a manufacturer. It only works if you think about the world in terms of factory efficiency. The industry knows nothing about the frontier needs of the consumers. Every time a team does work in that area, the managers say, "Yes well that is an interesting vehicle, but we wouldn't be able to produce it at a mass scale and so my manufacturing wouldn't be efficient."

The places the industry is being reinvented are in India and China where you can buy kit cars that you assemble yourself. They are more modular, more customizable, and easier to maintain. If I wanted to create a big winner for Chrysler, I would help them to devise an approach that is so different from the way the rest of the mainstream industry is behaving. Every industry and every company needs to learn from the periphery rather than the core. Change always happens at the periphery.

Which brings me back to Nardelli. He's a Six Sigma type, trained in command and control. Can he be the change agent that Chrysler needs?

Six Sigma fights innovation every time. It's about performance of known attributes in a known market. That's a very different approach than learning from the periphery. That would require getting some teams to travel to different parts of the world and getting them to see and understand people who don't own cars, who don't know how to drive a car. It also means recognizing that if all of those people started to own cars and adopt American driving habits, the planet is history. He has to take a Henry Ford approach of revolutionizing transportation. And again, I don't know how he can do that in a company on such a small leash to show improvement. This is at least an eight-quarter project.

So what should he do?

He should tell his team, "Guys—if you want to keep your jobs, here's what you have to tell me in three months. How can we produce vehicles that everywhere in the world people would be excited to own, that are relevant to the lives they are living rather than the nostalgic idea of American car ownership, that responds to their busy lives, their terrible traffic jams, etc. Tell me about cars that are so compelling that people everywhere would want them and be able to afford them."

Manufacturing cars that those consumers can afford will be no simple task for Chrysler.

That's the second thing his team needs to focus on—coming up with a radical new approach. So I would take him to see the Aryvund Eye and Ear hospital in India, where you can get Lasik surgery for $10 an eye. In the U.S., in contrast, the cost might be $1,500 an eye. Those are the kind of [business] models he should look at.

Can a team of insiders deliver on that challenge?

He should probably bring in talent from outside, just to get some fresh blood. But the biggest thing he can do is just get into the weeds with people who haven't ever owned a car.