What steps are the Detroit automobile makers taking to reduce product development time and tooling costs If they are successful, what are the implications

What steps are the Detroit automobile makers taking to reduce product development time and tooling costs If they are successful, what are the implications

What steps are the Detroit automobile makers taking to reduce product development time and tooling costs If they are successful, what are the implications

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General Management

CASE: 1       THE PHARMACEUTICAL INDUSTRY

Managers in pharmaceutical firms face a dynamic and challenging task environment that creates both opportunities and threats. Demand for pharmaceuticals is strong and has been growing steadily for decades. Between 1990 and 2005 there was a 12.5 percent annual increase in spending on prescription drugs in United States. The strong growth was driven by demographics. As people grow older they tend to consume more prescription medicines, and the population in most advance nations has been growing older as the post – World War II baby boom generation ages.

Moreover, successful new prescription drugs can be extraordinarily profitable. Consider Lipitor, the cholesterol-lowering drug sold by Pfizer. Introduced in 1997, by 2005 this drug generated a staggering $12 billion in annual sales for Pfizer. The costs of manufacturing, packaging, and distributing Lipitor amounted to only about 10 percent of revenues, or around $1.2 billion. Pfizer spent close to $400 million on advertising and promoting Lipitor and perhaps as much again on maintaining a sales force to sell the product. That still leaves Pfizer with a gross profit from Lipitor of perhaps $10 billion.

Lipitor is highly profitable because the drug is protected from direct competition by a 20-year patent. This temporary monopoly allows Pfizer to charge a high price. Once the patent expires, other firms will be able to produce generic versions of Lipitor, and the price will fall—typically by 80 percent within a year—but that is some time away.

Competing firms can produce drugs that are similar (but not identical) to a patent-protected drug. Drug firms patent a specific molecule, and competing firms can patent similar, but not identical, molecules that have a similar pharmacological effect. Thus Lipitor does have competitors in the market for cholesterol-lowering drugs—such as Zocor, sold by Merck, and Crestor, sold by AstraZeneca. But these competing drugs are also patent protected. Moreover, due to Federal Drug Administration regulations and requirements for demonstrating that a drug is safe and effective, the cost and risks associated with developing a new drug and bringing it to market are very high. Out of 5,000 compounds tested in the laboratory by a drug company, only five enter clinical trials, and only one of these will ultimately make it to the market. On average, estimates suggest that it costs some $800 million and takes anywhere from 10 to 15 years to bring a new drug to market. Once on the market, on the market, only 3 out of 10 drugs ever recoup their R&D and marketing costs and turn a profit. Thus the high profitability of the pharmaceutical industry rests on a handful of blockbuster drugs. To produce a blockbuster, a drug company must spend great amounts of money on research, most of which fails to produce a product. Pfizer, for example, spent over $7.4 billion on R&D in 2005 alone, equivalent to 14.6 percent of its total revenues.

In addition to R&D spending, the incumbent firms in the pharmaceutical industry spend much money on advertising and sales promotion. Although the $400 million a year that Pfizer spends promoting Lipitor is small relative to the drug’s revenues, it is a large amount for a new competitor to match, making market entry difficult unless the competitor has a significantly better product.

There are also some big opportunities on the horizon for firms in the industry. new scientific break-throughs in genomics portend that within the next decade pharmaceutical firms might be able to bring new drugs to market that treat some of the most intractable medical conditions, including Alzheimer’s, Parkinson’s disease, cancer, heart disease, stroke, and HIV.

On the other hand, managers in the industry face serious challenges. Many patent-protected medicines are scheduled to come off patent in the next decade, and to maintain profitability, pharmaceutical firms must find new drugs to replace them. In addition, as spending on health care rises, seniors are complaining about the high costs of prescription medicines, and politicians are looking for ways to limit this. One possibility is some form of price controls on prescription drugs. Pharmaceutical price controls are already in effect in most developed nations, and although they have not yet been introduced in the United States, that could happen. Another possibility is to make it easy for U.S. residents to purchase pharmaceuticals from foreign nations where prices are lower.

A further challenge is associated with the growth of large health care providers, who have millions of subscribers and are starting to use their power to reduce the drug prices their subscribers pay. In some cases they are refusing to provide insurance coverage for high-priced pharmaceuticals when lower-priced generic alternatives are available.

Questions

1.                     What are the barriers to entry into the pharmaceutical industry? To what extent do you think these entries barriers protect established pharmaceutical companies from new competitors?

2.                    The pharmaceutical industry has long been one of the most profitable in the United States. Why do you think this is the case?

3.                    What forces in the general environment influence the nature of competition in the task environment facing pharmaceutical firms?

4. Are there reasons for believing that the profitability of the industry might come under threat over the next decade? What do you think managers in the industry should do to counter this threat?

CASE: 2: IMPROVING PRODUCTIVITY IN THE AUTO INDUSTRY

In 2004 Detroit’s big three care makers—GM, Ford, and Daimler Chrysler—accounted for only 58.6 percent of vehicles sold in the United States, the lowest level ever, down from 76.7 percent in 1984. For most of the last decade strong sales of sports utility vehicles, in which Detroit dominates, have held overall market share losses in check; but now foreign producers such as Toyota, Honda, and Kia are going after that segment too, creating huge potential problems for Detroit.

The American automobile makers have responded by trying to reinvigorate their passenger car business, coming out with a host of new designs and cutting the costs of developing and producing those cars. The old rule of thumb in the industry was that it took four years and cost $1 billion to design a new car and tool a factory to produce it. To recoup these costs, Detroit would typically sell a car for seven years before developing a new design. Unfortunately for the American producers, the Japanese have shortened the life cycle of a typical vehicle to five years; and by lowering development and tooling costs, they have been able to make good money on their car models.

Now the American producers are trying to strike back. Typical is Ford, which has reduced its product development time by a quarter since the late 1990s and continues to reduce development time by 10 percent per year. Ford now designs almost a third of its models in less than 30 months. One reason for this progress has been the increase in communication among designers at Ford. Ford designers used to work in different teams and did not share enough knowledge about parts and platform design. Now teams get together to see they can share the design work.

Moreover, design teams are trying to use the same parts in a wider variety of car models, and where appropriate use parts from old models in new cars. Detroit auto designers used to boast that new models were completely redesigned from the floor up with all new parts. Now that is seen as costly and time-consuming. At General Motors, for example, the goal is now to reuse 40–60 percent of parts from one car generation to the next, thereby reducing design time and tooling costs. At Ford the number of parts has been slashed. For example, Ford engineers now choose from just 4 steering wheels instead of contemplating 14 different designs.

Another important trend has been to reduce the number of platforms used for car models. This is something Japanese producers have long done.  Honda, for example, builds its Odyssey minivan and Pilot and Acura MDX SUVs on the same platform and has added a pickup truck to the mix. Currently Chrysler bases its vehicle fleet on 13 distinct platforms. The company is trying to bring this down to just four platforms, reducing the product development budget from $42 billion to $30 billion in the process Ford and General Motors have similar aims. The platform for GM’s new small car offering, the Pontiac Solstice, will also be used for its new Saturn coupe and perhaps one more GM car. As GM develops its next generation Chevy Silverado and GMC Sierra pickups, it plans to reuse much of the existing platform, cutting development costs in half to nearly $3 billion. Over the next eight years Ford plans to use its Mazda 6 sedan platform (Ford owns Mazda) as the basis for 10 new vehicles. The idea, according to Ford’s head of operations, is to engineer it once and use it often.

Along with these changes in design philosophy, the Detroit companies are retooling their factories to reduce costs and make them capable of producing several car models from the same line. By doing so they hope to reduce the breakeven point for a new car model. GM’s Solstice, for example, is forecast to sell around 25,000 units a year—too few to recoup fixed costs under the old design and build philosophy. But GM has cut design costs (by using a common platform and parts) and tooling costs (by investing in flexible manufacturing technologies that can produce multiple designs based on the Solstice platform from the same basic line). GM has also worked hard to get unions to agree to changes in inflexible work rules. Assembly-line workers now perform several different jobs, which reduces waste and boosts productivity. Similarly, Ford hopes to have 75 percent of its production built on flexible assembly lines by 2010; if successful, its investments in flexible factories could reduce annual costs by some $2 billion a year.

The big problem with the new vision coming out of Detroit, as critics see it, is that not much is new about it. The techniques being talked about will reduce development time and tooling costs; but Japanese automakers have been pursuing the same techniques for years. The critics fear that Detroit is chasing a moving target, and when they arrive in the promised land it will be too late because their global competitors will already have taken competition to the next level.

Questions

1.                   How have lower development and tooling costs given Japanese auto manufacturers an advantage in the marketplace?

2.                  What steps are the Detroit automobile makers taking to reduce product development time and tooling costs? If they are successful, what are the implications of these initiatives for the number of car models they can sell and breakeven volumes for individual models? Will these initiatives benefit Detroit’s customers? How?

3.                  The Japanese producers have for years used many of the methodologies now being introduced in Detroit. Why do you think it has taken the Detroit automakers so long to respond to their foreign competitors?

CASE: 3       LINCOLN ELECTRIC

Lincoln Electric is one of the leading companies in the global market for arc welding equipment. This is a cost-competitive business in which consumers are price sensitive. Lincoln’s success has been based on extremely high levels of employee productivity. The company attributes its productivity to a strong organizational culture and an incentive scheme based on piecework. Lincoln’s organizational culture dates back to James Lincoln, who in 1907 joined the company his brother had established a few years earlier. Lincoln had a strong respect for the ability of the individual and believed that, correctly motivated, ordinary people could achieve extraordinary performance. He emphasized that the company should be a meritocracy where people were rewarded for their individual effort. Strongly egalitarian, Lincoln removed barriers to communication between workers and managers, practicing an open-door policy. He made sure that all who worked for the company were treated equally; for example, everyone ate in the same cafeteria, there were no reserved parking places for managers, and so on. Lincoln also believed that any productivity gains should be shared with consumers in the form of lower prices, with employees in the form of higher pay, and with shareholders in the form of higher dividends.

The organizational culture that grew out of James Lincoln’s beliefs was reinforced by the company’s incentive system. Production workers receive no base salary but are paid according to the number of pieces they produce. The piecework rates at the company enable an employee working at a normal pace to earn an income equivalent to the average wage for manufacturing workers in the area where a factory is based. Workers are responsible for the quality of their output and must repair any defects spotted by quality inspectors before the pieces are included in the piecework calculation. Since 1934 production workers have been awarded semiannual bonuses based on merit ratings. These ratings are based on objective criteria (such as an employee’s level and output) and subjective criteria (such as an employee’s attitude toward cooperation and his or her dependability). These systems give Lincoln’s employees an incentive to work hard and to generate innovations that boost productivity—doing so influences their level of pay. Lincoln’s factory workers have been able to earn a base pay that often exceeds the average manufacturing wage in the area by more than 50 percent, and they also receive bonuses that in good years can double their base pay. Despite high employee compensation, the workers are so productive that Lincoln has a lower cost structure than its competitors.

What steps are the Detroit automobile makers taking to reduce product development time and tooling costs If they are successful, what are the implications

What steps are the Detroit automobile makers taking to reduce product development time and tooling costs If they are successful, what are the implications

Question

1.                   What kind of control system does Lincoln Electric rely on to generate high employee productivity?

2.                  Can you think of any possible unintended consequences of an incentive pay system based on piecework? How does Lincoln guard against these unintended consequences?

3.                  Do Lincoln’s control systems match the strategy of the enterprise? How?

CASE: 4       THE RISE AND FALL OF MIKE SEARS

Mike Sears was a prodigy of Harry Stonecipher, the blunt-talking, hard-driving aerospace executive who became CEO first of McDonnell Douglas and then Boeing. Picked by Stonecipher to lead the F-18 Hornet fighter program at McDonnell Douglas in the early 1990s, Sears earned a reputation as a skilled manager who restlessly cut costs and boosted productivity, building a program that was below costs and ahead of schedule. Stonecipher admired Sear’s effectiveness at assembling and managing cross-functional product development teams, establishing closer ties with suppliers and improving controls within his organization. When McDonnell Douglas was acquired by Boeing in 1996, Sears went with Stonecipher to the acquiring company, where Stonecipher became president until his retirement in 2002. Sears was appointed as chief financial officer.

It was soon clear, however, that Sears was after the top spot. As CFO he was one of the obvious candidates in line to succeed Boeing CEO Phil Condit. Other contenders included Alan Mulally, head of Boeing’s commercial aerospace group, and James Albaugh, who ran Boeing’s defense systems business. According to company insiders, Sears began to take steps to amass a power base at his rivals’ expense.

In 2002 Sears heard that Darleen Druyun, the top Air Force procurement officer, was looking to move into the private sector. Druyun was quite possibly the most sought-after executive-to-be in the entire aerospace industry. Because of her knowledge of the Pentagon procurement process and her contacts, Boeing and other aerospace companies tried hard to land her. James Albaugh had talked to her at least once but came up dry. Sears, however, somehow managed to persuade her to join the company. The coup gave Sears a huge advantage over Albaugh and Mulally. It also had the potential to expand his power base by making Druyun an ally. Unknown to others at the time, Sears had clinched the deal by promising Druyun a top job at Boeing while she was still in the middle of negotiating a $22 billion military contract with Boeing for a fleet of jet tankers, which Boeing was ultimately awarded.

In 2003 Sears pushed things further. He reportedly waged an all-out war with CEO Phil Condit, taking over all public relations responsibilities and controlling access to the media and investors—roles that were normally the prerogative of the CEO. Sears also took control of Boeing’s in-house leadership center at St. Louis. Banished from the sessions were Albaugh and Mulally. With almost any important executive passing through the center, control gave Sears unprecedented exposure within Boeing’s far-flung organization.

Sears’s stock rose further in mid-2003 when leaks to the media implied that Albaugh had withheld information from Sears about a $1.2 billion charge against earnings that Boeing was forced to take due to write-downs in its defense business. Sears was in charge of public relations at the time, and many suspected that the leak was part of a deliberate smear campaign. In an internal Boeing memo later leaked to the press, Albaugh said that “the efforts to cast the write-down as the result of me withholding information—surprising world headquarters—is not supported by the facts…..If Mike (Sears) is intent on discrediting me, he does a disservice not only to me, but also to the company.” By this time it was becoming apparent to many that Sears was anxious to succeed Phil Condit, “to the extent that it got pretty disgusting” according to a Boeing board member.

The summer of 2003 turned out to be the high point in Mike Sears’s career. In November 2003 the government accused Sears of “communicating directly and indirectly with Darleen Druyun about future employment when she had not disqualified herself from acting in her official government capacity on matters involving Boeing.” The government went on to state that the pair had attempted to conceal this infraction from company lawyers investigating the matter. It was also alleged that Druyun broke the law by telling Boeing employees confidential information about how Airbus had priced its bid for the tanker contract. Boeing fired Mike Sears immediately, and ultimately both he and Druyun pleaded guilty to criminal wrongdoing and faced jail time.

Ironically the firing of Sears raised questions about the ethics of management at Boeing under Phil Condit, the man Sears had wanted to replace as CEO. Within a month Condit had resigned from the CEO position, a victim of the fallout from the scandal, which resulted in the loss of the military tanker contract. Condit was replaced by Harry Stonecipher, who came out of retirement to take the CEO position. However, in another disturbing power play at Boeing, Stonecipher was himself forced to step down after a leaked e-mail message revealed that he had initiated an extramarital affair with an employee at Boeing. Fearing that Boeing was becoming mired in scandal after scandal, the board of directors asked for Stonecipher’s resignation. He was replaced by Jim McNeary, the CEO of 3M.

Questions

1.                   From a power perspective, what do you think explains the rise of Mike Sears to the CEO position at Boeing? What were the sources of his power?

2.                  Once he became CFO, what did Mike Sears do to consolidate his power base at Boeing? What sources of power was he trying to accumulate? What was he trying to do with this power?

3.                  What do you think about the ethics of Sear’s actions? Does the fall of Mike Sears prove that power tends to corrupt?

4.                  What does the case tell you about the nature of internal organizational politics at Boeing during this period? As incoming CEO, would you see this as a problem? If so, how would you deal with it?

5.                  Do you think that power is more important in an organization like Boeing than in one that has less politics? Why?

CASE: 5       ROUGH SEAS ON THE LINK650

Professor Suzanne Baxter was preparing for her first class of the semester when Shaun O’Neill knocked lightly on the open door and announced himself: “Hi, Professor, I don’t suppose you remember me?” Professor Baxter had large classes, but she did remember that Shaun was a student in her organizational behavior class two years earlier. Shaun had decided to work in the oil industry for a couple of years before returning to school to complete his diploma.

“Welcome back!” Baxter said as she beckoned him into the office. “I heard you were working on an oil rig up in Canada. How was it?”

“Well, Professor,” Shaun began, “I had worked two summers in the oil fields and my family’s from Canada, so I hoped to get a job on the LINK650. It’s that new WestOil drilling rig that arrived with so much fanfare in Newfoundland on Canada’s east coast two years ago. The LINK650 was built by LINK Inc. in Texas. A standard practice in this industry is for the rig manufacturer to manage its day-to-day operations, so employees on the LINK650 are managed by LINK managers with no involvement from WestOil. We all know that drilling rig jobs are dangerous, but they pay well and offer generous time off. A local newspaper said that nearly a thousand people lined up to complete job applications for the 50 nontechnical positions. I was lucky enough to get one of those jobs.

“Everyone hired on the LINK650 was enthusiastic and proud. We were one of the chosen few and were really pumped up about working on a new rig that had received so much media attention. I was quite impressed with the recruiters—so were several other hires—because they really seemed to be concerned about our welfare out on the platform. I later discovered that the recruiters came from a consulting firm that specializes in hiring people. Come to think of it, we didn’t meet a single LINK manager during that process. Maybe things would have been different if some of those LINK supervisors had interviewed us.

“Working on the LINK650 was a real shock even though most of us had some experience working in the oil fields. I’d say that none of the 50 nontechnical people hired was quite prepared for the brutal jobs on the oil rig. We did the dirtiest jobs in the biting cold winds of the North Atlantic. Still, during the first few months most of us wanted to show the company that we were dedicated to getting the job done. A couple of the new hires quit within a few weeks, but most of the people hired with me really got along well—you know, just like the ideas you mentioned in class. We formed a special bond that helped us through the bad weather and grueling work.

“The LINK650 supervisors were another matter. They were tough SOBs who had worked for many years on oil rigs in the Gulf of Mexico or North Sea. They seemed to relish the idea of treating their employees the same way they had been treated before becoming managers. We put up their abuse for the first few months, but things got worse when the LINK650 was brought into portfolio twice to correct mechanical problems. These setbacks embarrassed LINK’s managers, and they put more pressure on the supervisors to get us back on schedule.

“The supervisors started to ignore equipment problems and pushed us to get jobs done more quickly without regard to safety procedures. They routinely shouted obscenities at employees in front of others. A couple of my work mates were fired, a couple of others quit their jobs. I almost lost my job one day just because my boss thought I was deliberately working slowly. He didn’t realize—or care—that the fittings I was connecting were damaged. Several people started finding ways to avoid the supervisors and get as little work done as possible. Many of my coworkers developed back problems. We jokingly called it the ‘rigger’s backache’ because some employees faked their ailment to leave the rig with paid sick leave.

“On top of the lousy supervisors, we were always kept in the dark about the problems on the rig. Supervisors said that they didn’t know anything, which was partly true; but they said we shouldn’t be so interested in things that didn’t concern us. But the rig’s problems, as well as its future contract work, were a major concern to crew members who weren't ready to quit. Their job security depended on the rig’s production levels and whether WestOil would sign contracts to drill new holes. Given the rig’s problems, most of us were concerned that we would be laid off at any time.

“Everything came to a head when Bob MacKenzie was killed because someone secured a hoist improperly. Not sure if it was mentioned in the papers here, but it was big news around this time last year. The Canadian government inquiry concluded that the person responsible wasn’t properly trained and that employees were being pushed to finish jobs without safety precautions. Anyway, while the inquiry was going on, several employees decided to call the Seafarers International Union to unionize the rig. It wasn’t long before most employees on LINK650 had signed union cards. That really shocked LINK’s management and the entire oil industry because it was, I think, just the second time that a rig had ever been unionized in Canada.

“Since then, management has been doing everything in its power to get rid of the union. It sent a ‘safety officer’ to the rig, although we eventually realized that he was a consultant the company hired to undermine union support. One safety meeting with compulsory attendance of all crew members involved watching a video describing the international union president’s association with organized crime. Several managers were sent to special seminars on how to manage a union workforce, although one of the topics was how to break the union. The guys who initiated the organizing drive were either fired or given undesirable jobs. LINK even paid one employee to challenge the union certification vote. The labor board rejected the decertification request because it discovered the company’s union-busting tactics. Last month the labor board ordered LINK to negotiate a first contract in good faith.

“So you see, Professor, I joined LINK as an enthusiastic employee and quit last month with no desire to lift a finger for them. It really bothers me because I was always told to do your best, no matter how tough the situation. It’s been quite an experience.”

Questions

1.                   Use your knowledge of emotions and attitudes to explain why the LINK650 employees were dissatisfied with their work.

2.                  Identify the various ways in which employees expressed their job dissatisfaction on the LINK650.

3.                  Shaun O’Neill commitment to the LINK organization dwindled over his two years of employment. Discuss the factors that affected his organizational commitment.

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