An analysis into the successful turnaround of FIAT S.p.A by Giuseppe Gazzana
The following paper deals with the successful turnaround that Fiat has experienced since Sergio Marchionne became chief executive of Fiat in 2004 and analyses to which extend this turnaround strategy corresponds to previous literature written on this subject.
1.2 Historical facts about Fiat
The “Fabrica Italiana di Automobile Torino” (Fiat) was founded on the 11th July 1899 among the members of the Board of Directors, Giovanni Agnelli stood out in the group of investors. In 1902 he became the Managing Director of the company, the name Agnelli will be associated with Fiat ever since. In 1945 Giovanni Agnelli dies three days before a court clears him of collaboration with Mussolini during World War II. 1957 Fiat rolls out the Cinquecento (500), the car that puts Italy on wheels. More than three million are eventually sold. In 1966 “l'Avvocato” (the lawyer) Gianni Agnelli, a grandson of the founder, becomes Fiat's president. 1969 Fiat buys controlling stakes in Ferrari, maker of premier racing cars and Lancia. 1986 The company acquires sporty Alfa Romeo and two years later becomes Europe's largest carmaker. In 1992 Fiat adds Maserati to its portfolio, by 2002 its market share slipping, Fiat, then 20 percent owned by General Motors (GM), is in trouble. After Gianni Agnelli's death in 2003, John Elkann, grandson of Gianni, becomes vice chairman of the Fiat Group in 2000 and Sergio Marchionne is named chief executive. (Adapted from fiat.com & Faris, 2007)
2. Aims & Objectives
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* Investigate if the Marchionne's turnaround strategy corresponds with previous literature written on turnaround strategies.
* Examine if Marchionne as a person was a key success factor for the turnaround.
* Compare Fiat's share price to rest of the industry to measure performance of the turnaround
* Carry out a methodical literature review preventing a prejudice conclusion.
3. Research methodology
The research design for this report is based on qualitative data collected in previous researches and reports, since it is very difficult to do primary research on this subject; companies are not very cooperative when it comes to share inside strategies, so the report is based on secondary research. Past reports and articles have already outlined a successful turnaround at Fiat; to measure the performance Fiat's share price compared to its competitors will be viewed at. The author's aim is to identify if Mr. Marchionne turnaround strategy draws any parallels to past theories on turnaround strategies or if he has used a different approach. Useful data was collected from journals, books, newspapers, websites and company reports.
4. Literature Review
A good definition for a turnaround situation is given by Wyckoff and Hart (1986, cited in ST371 Lecture Notes, Turnaround) they state that a “turnaround situations involves a failure that has led to a climax that requires near-term action to avert the collapse of a company or a division within a company”. According to Harker (2001) company turnaround has been described as a two-stage process since the very early studies of Schendelet al., (1976, cited in Harker, 2001), furthermore turnaround research has increasingly being viewed from a “change management” perspective (Pettigrew and Whipp, 1991, cited in Harker, 2001). Johnson, Scholes and Whittington (2008) describe turnaround strategies as circumstances where the emphasis has to be on rapid reconstruction, in the absence of which a business could face closure, enters terminal decline or be taken over. They state that the emphasis is on speed of change and rapid cost reduction and/ or revenue generation. Another theory that supports fast acting comes from Hofer & Schendel (1978,) p. 103), they suggest to reverse the declining fortune of the business involved as rapidly as possible. Furthermore they add that sometimes these strategies are self-financing, and sometimes they require infusions of capital and other resources" Nevertheless, Harker (2001) argues that past literature has suggested that the choice of turnaround strategy will be strongly influenced by the factors that caused the corporate decline in the first place (Bibeault, 1982; Slatter, 1984; Grinyeret al., 1988, cited in Harker, 2001). According to Slatter (75 per cent) and Bibeault (66 per cent) of turnaround attempts fail, they suggest that the “quick-fix” solutions may be addressing the wrong problems. Furthermore Harker quotes Robbins and Pearce (1992 cited in Harker, 2001) they suggest that “retrenchment” has a favourable impact on company performance during a turnaround, irrespective of the cause of the firm's problems in decline. Arogyaswamy et al (1995 cited in Harker, 2001) writes that firms in addition to retrenchment must also manage external stakeholders, internal climate and decision processed on order to stem corporate decline. These elements coincide with some of the main elements described by Johnson, Scholes and Whittington (2008) for successful turnaround strategies. These main elements are described as follows:
Always on Time
Marked to Standard
The aim is to regain control over the deteriorating position. This requires a short-term focus on cost reduction and/ or revenue increase. The speed in which these steps are carried out and the focus of managerial attention is crucial, furthermore successful turnaround strategies also focus on reducing direct operational cost and on productivity gain, less effective approaches pay less attention to these and more on reduction of overheads.
Includes the introduction of a new chairman and/ or chief executive, as well as changes in the board, in marketing, sales and finance, main reasons are:
* Old management might be seen as the cause of the problems by stakeholders.
* Might be necessary to bring in managers with experience of turnarounds.
* New managers from outside the organisation might bring different approaches to the way the organisation has operated in the past.
Gaining stakeholder support
Poor quality of information may have been provided to key stakeholders. In a turnaround situation it is vital that key stakeholders, like banks or key shareholder groups, and employees are kept clearly informed of the situation and improvements as they are being made.
Clarifying the target market(s)
Central to turnaround success is ensuring clarity on the target market or market segments most likely to generate cash and grow profits. A successful turnaround strategy involves getting closer to customers and improving the flow of marketing information.
Clarifying the target market also provides the opportunity to discontinue or outsource products and services that are not targeted on those markets, eating up management time for little return or not making sufficient financial contribution.
The financial structure of the organisation may need to be changed This typically involves changing the existing capital structure, raising additional finance or renegotiating agreements with creditors, especially banks.
Prioritisation of improvement areas
All of this requires the ability of management to prioritise things that gibe quick and significant improvements.
5. The Case of FIAT
When Sergio Marchionne in 2004, at the urging of the Agnelli family, Fiat's dominant shareholder, who controls Fiat via IFIL, an investment firm based in Turin, which holds a 30 percent stake in Fiat. (Adapted from The Economist, Apr. & May 2008) became CEO of Fiat, Fiat was a “laughing stock” as Marchionne wrote in the 2008 December issue of the Harvard Business Review; since 2001 Fiat had not less than five different CEOs and were losing €2m a day. (Moya, 2009) The loss of €2 billion in cars dragged the whole Fiat group into a 1.6 billion loss in 2004. (The Economist, Dec. 2005) Since 2001 Fiat had generated €8 billion in pre-tax losses (The Economist, Oct. 2005) and was nearly pushed into bankruptcy in 2002 (Edmondson, Business Week2004). When Marchionne took over, Fiat was an ailing patient, with a net debt of €4.4 billion and cash was flowing out on a frightening rate, also a €3 billion convertible bond would fall due in September 2005 which would entitle the banks to convert their loan into Fiat shares if not paid back in cash. (The Economist, Oct. 2005 & Apr. 2008)
5.1 Management Changes
Marchionne, who was born in Italy but grew up in Canada and spend his whole grown up life outside of Italy, has an unquestionably Anglo-Saxon approach to business, as is his frequent use of expletives, demanding complete openness, fast communication, and accountability (he abhors corporate politics and hierarchy) (The Economist, Apr. 2008), first had to solve organisational problems within Fiat's car making business before he could deal with the issues mentioned above. Marchionne immediately realised that Fiat had a leadership problem which had to be changed, the state of the company was so bad that Marchionne felt he had no other chance but to act instantaneously, he removed the Great Man model of leadership that long had characterised Fiat and created a culture where everyone was expected to lead (Marchionne, Harvard Business Review, 2008), in an interview Marchionne said:
“The single most important thing was to dismantle the organisational structure of Fiat. We tore it apart in 60 days, removing a large number of leaders who had been there for a long time and who represented an operating style that lay outside any proper understanding of market dynamics. We flattened out the structure and gave some relatively young people, in terms of both age and experience, a huge amount of scope.” (The Economist, Apr. 2008).
5.2 Raising Cash
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In December 2004 Marchionne went to Detroit to negotiate the put option, which entitled the Fiat Group to sell its car business to GM, this contract dated from the two firms' ill-fated” alliance in 2000 (The Economist, Dec. 2005), he said that they had a contract, an exchange of a promise for a promise and that he was ready to uphold his side of the promise. (The Economist, Apr. 2008). He used the commercial argument that the option represented value to Fiat group shareholders and so had its price, since GM knew the depth of its own financial difficulties, it was just too expensive for GM to buy and fix Fiat (Golding, Financial Times, 2006) and rather than entering a extended battle in American courts, GM stepped out of the deal by paying $2 billion. After the deal Marchionne said:
“When I signed the divorce, I had the sense that we had got our independence back, but there was also the knowledge that we'd lost our only parachute, which was alarming for some people given how much money we were losing. But I now had the chance to run this business and run it properly. If I had walked away without monetising theGMput, I would not have had the credibility for the next phase. But more importantly, with $2 billion you can make a lot of small cars.”
With a positive sign from the GM divorce and analyst expecting Fiat to make a pre-tax profit of over €1 billion Fiat could pay back the banks in late 2005 with help of a rights issue. Besides, since 2003 Fiat had sold businesses worth €10 billion, including finance operations and the big insurer Toro Assiccurazioni (Mackintosh, Financial Times2006).
5.3 Improvement Areas & Refocusing
After stabilising the crisis, changing the management, restructuring the finance and having regained stakeholders support, Marchionne's next task was to revive the brand, once he mentioned:
“We used to make too many ugly cars... We thought we had the right to do whatever we wanted. It was arrogance.”
Marchionne isn't shy to say that he orientates at Toyota since in his point of view they have the best solution when it comes to car making, he once said that “any attempt at reinventing outside of the Toyota pattern is idiotic.” His first change was to bring the entire group's styling divisions together; the new credo was based on extrovert and innovative styling, the same problem existed with the engineering, each brand was run independently, similar sized cars with similar performance shared no components, an example was that only two of 19 independently developed platforms shared the same heating, ventilation, and air-conditioning systems, the head of engineering's statement on this was that “the customer is only interested that those systems work, whether it's the same between different cars he doesn't matter, so electronic and other to the customer invisible parts will be shared by two-thirds on same sized cars and 85% of Fiat Automobiles' cars will share just four platforms in the future. The company's urgent need for fresh products and the limited resources forced them to take risks, so they developed their new cars solely on computers and not in the conventional way by making a series of prototypes. The result was that they could reduce the time from the “design freeze” to production on the new cars to 18 month compared to 26 on past ones. Additionally, Fiat focused on its advantage of having a relatively fuel efficient car fleet, expecting to have a lower average emission than any other competitor this puts them in a very strong position when the new European Union rules on carbon-dioxide emissions come into force. To manifest sustainability, Marchionne created new partnerships in emerging countries like China, India, Russia and Turkey, Fiat branded cars would be produced in those countries and sold through local dealers. At home in Italy Marchionne eschewed conflicts with the unions by promising not to close plants, boost domestic production and signed the company's first contract with the metalworkers' in ten years''. (Adapted from Faris, 2007)
Another step that is on Marchionne's plan is to re-launch Alfa Romeo in America as he mentioned in an interview (Reed, 2008), Alfa was last sold in the U.S. market in 1995 (McCrank, 2010) and at Fiat they strongly believe that it could be a successful return. In addition they are refocusing on the British market, Baravalle, head of Alfa Romeo says that Britain is a place where in theory they have an incredible potential, at the moment they are just selling about 6.000 cars there but could sell 50.000. He adds that Marchionne's challenge was,
“Tell me how to be No. 1; we can no longer have an incremental philosophy. It has to be a policy of breakthroughs”.
As much as Marchionne orientates at the way how Toyota builds cars, he doesn't follow their marketing strategies, when it comes to marketing Marchionne admires Apple, “How much care [CEO Steve] Jobs takes in nurturing their place in the market is just phenomenal. We need to learn that.” To create this young fashionable brand Fiat has forged an agreement with IKEA to redesign Fiat's showrooms, furthermore since 2008 they sponsor the Yamaha racing team in the MotoGP , the reason behind this is the team's star driver, Valentino Rossi, he represents, the smiling, winning, simpatico, simple, young Italy; exactly the Image that Fiat wants. In addition they also signed a three year deal with Juventus Turin, the football club with the largest fan base in Italy (BORDIGNON & CECCARINI, 2008). “We are trying to transform Fiat from a popular brand to a pop brand.” says former head of Fiat and Alfa Romeo Luca de Meo.  As part of this new plan Fiat has re-launched the Cinquecento, 50 years to the day after the original was introduced in 2007, with 500.000 produced cars by March 2010 it has been a huge success for Fiat. (Diehlman, 2010) (Adapted from Faris, 2007)
5.4 The Result
As a result the Fiat Group reported a trading profit for the first quarter of 2008 of €766m, 29% more than a year earlier, furthermore the Fiat share price has outperformed its competitors since 2005 (see chart 1), in 2007 the Fiat Group made a record trading profit of €3.2 billion, 66% more than in 2006, while eliminating its net industrial debt.
(Chart 1, Adapted from The Economist, Apr. 2008)
Fiat has gone through a huge development in the past years, from almost being bankrupt in 2002, losing the their leaders the Agnelli brothers within one year and then Marchionne stepping in as new chief executive in 2004, who transformed a desolate industrial group to a highly recognised and profit making group. Marchionne's turnaround strategy draws many parallels to past theories, he describes that he had to act rapidly and dismantle the organisational structure, change the management and flatten the hierarchical structures. These actions correlate with theories of Pettigrew and Whipp, 1991 (change management) and Hofer & Schendel 1978 (as rapid as possible). In addition Marchionne regained stakeholder support by reorganising the financial situation at Fiat, what has parallels with Arogyaswamy theory; furthermore Marchionne adapted all elements described by Johnson, Scholes and Whittington (2008) for successful turnaround strategies, to some extent. Also he refocused on Fiat's old strengths and demanded high quality in addition to brilliant design, with good quality products to an achievable price combined with good marketing Marchionne brought Fiat back on the market. In the author's point of view one crucial aspect of the turnaround was Marchionne's Anglo-Saxon management approach combined with his Italian background, Fiat had been run hierarchically for decades with the one big man leader model, which stopped working for Fiat years ago. Marchionne despite living outside of Italy for the main part of his life was still seen as one of them an Italian, but he doesn't run the company like an Italian, he runs the group the Anglo-Saxon way but with Italian charisma, and this combination has worked out just fine for Fiat and Marchionne.
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 [he was seen as a key figure in Fiat's turnaround but has left Fiat in 2009 to pursue other interests, Boland, 2008]