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©2012 by the Kellogg School of Management at Northwestern University. This case was prepared by Matt Bell under the supervision of Professor James B. Shein and was based on research done by Scott Schuenke ’11, Erik Severinghaus ’12, Daniel G. Simmons ’11, Jason Snider ’11, Lisa Taylor ’11, and Matt Taylor ’11. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call 800-545-7685 (or 617-783-7600 outside the United States or Canada) or e-mail [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Kellogg School of Management.

JAMES B. SHEIN

At Ford, Turnaround Is Job One

When Alan Mulally became CEO of Ford Motor Company in September 2006, the company was bleeding red ink. All of its brands were losing money. Ford’s U.S. market share had been in freefall for more than ten years, dropping since 1995 from 25 to 16.8 percent and leaving the company with its smallest market share since 1920. Total losses for 2006 were estimated at $8 billion.

Ford was losing ground domestically and internationally. General Motors’ (GM) Chevrolet brand had overtaken Ford to become the number-one U.S. brand. Toyota had surpassed Ford to become the second-largest automaker in the world behind GM (by early 2007, Toyota would become number one, pushing Ford to third place).

As recently as fall 2000, Ford’s shares paid a quarterly dividend of $0.50, but by the time Mulally accepted the job, it had been reduced four times and stood at $0.05. During the few weeks before he actually started, the dividend was suspended.

In some ways, Mulally was a surprising choice. He was a thirty-seven-year veteran of Boeing, and there was no precedent for bringing an outsider into the insular world of automaking. Still, Mulally’s hiring was widely seen as a good decision. Analysts pointed out numerous similarities between Boeing and Ford. Both were subject to global competition, complex regulations, and fast-changing technologies. Both had a unionized workforce. In both the auto and aviation industries, designing and introducing new models took years (in fact, nearly every new vehicle Ford rolled out in the two years following Mulally’s arrival was approved before he began his Ford career).

Perhaps most importantly, as head of Boeing’s commercial airplane division Mulally had led a successful turnaround effort. The company had been losing market share to archrival Airbus, struggling with inefficiencies, and dealing with diminished public perceptions about the company. An airline industry downturn brought on by the 9/11 terrorist attacks had led to a massive restructuring effort at Boeing in which Mulally cut the workforce from 120,000 to 50,000, reduced the time it took to build an airliner by 50 percent, and introduced the fastest- selling new airplane ever.1 When he left Boeing, the company was an example of what could be accomplished through good leadership and a sharpened focus on product. With Ford in dire need

1 Monica Langley, “Inside CEO Mulally’s Radical Overhaul of Ford,” Pittsburgh Post-Gazette, December 22, 2006, http://www.postgazette.com/pg/06356/748288-185.stm.

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of turning itself around, Mulally’s revitalization of Boeing was especially appealing to Ford CEO William Clay Ford Jr.

But there was also a healthy dose of skepticism as to whether Mulally could keep Ford out of bankruptcy. Some felt he was brought in too late.2

A Brief History of Ford

Henry Ford Sr. was born in 1863 in Detroit. He was an engineer, first by hobby and then, beginning in 1890, by profession. While working for the Detroit Edison Company, he used his free time to build experimental gasoline engines, eventually building a gasoline-powered buggy. By 1899 his superiors thought his hobby was becoming a distraction and they forced him out. Shortly thereafter, Ford founded the Detroit Automobile Company, but left over disputes with colleagues who did not share his vision for faster production of lower-margin vehicles.

In June 1903 he founded Ford Motor Company to pursue his vision. The company quickly became famous for making cars for the masses.

Ford introduced the Model T in 1908 and over the course of eighteen years went on to sell nearly 15.5 million units with help from the moving automobile assembly line he invented in 1913. An important key to the Model T’s success was Ford’s commitment to manufacturing simplicity, exemplified by his famous statement: “A customer can have a car painted any color that he wants, so long as it is black.”

The Model T ran into its first serious competition in 1926 when GM introduced the more powerful and stylish Chevrolet automobile. Ford discontinued the Model T in May 1927.

Henry Ford Sr.’s son, Edsel, became company president in 1918 and led the business until his death from cancer at age forty-nine in 1943. Ford Sr. then resumed his leadership of the company but quickly began grooming Edsel’s son, Henry II, to take over, which he did in 1945.

Over time, Ford acquired partial or full ownership of numerous other brands, including Mazda, Aston Martin, Jaguar, Land Rover, and Volvo.

William Clay Ford Jr. took over as chairman and CEO at the end of 2001. That year, the company lost nearly $5 billion. The company was suffering from poor employee morale, quality issues, sluggish sales, and intense competition.3 It was also reeling from tire problems with its Explorer SUV, which caused numerous accidents and led the company to take a $2.1 billion charge to replace all Explorer tires.

In 2002 Bill Ford launched a major effort to revitalize the company, divesting several noncore companies, lowering costs, and launching “the biggest wave of new products in our

2 David Kiley, “An Interview with Bill Ford and Alan Mulally,” Bloomberg Businessweek, September 7, 2006, http://www.businessweek.com/autos/content/sep2006/bw20060907_376309.htm. 3 Funding Universe, “Ford Motor Company: Company History,” http://www.fundinguniverse.com/company-histories/Ford-Motor- Company-Company-History.html.

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history.”4 He noted the challenges of full-scale global competition and acknowledged that the days of unlimited, inexpensive gasoline were gone forever.

In January 2006, when the company was still losing market share, it launched a new turnaround effort dubbed “The Way Forward,” which was the first fundamental restructuring of the company. But before this effort was even a year old, he realized new leadership was needed and he persuaded Mulally to take the job.

The Decline of a Once-Great Brand

Despite its long-used motto, “Quality Is Job One,” by the time Mulally came on board, Ford had dug itself into a rut of churning out poor-quality, uninteresting vehicles. One such example was the Ford Focus, a subcompact introduced in 2000 as a car for the thirty-five-and-under set and heavily promoted for its driving pleasure. It was recalled no less than nine times to fix a host of safety and quality issues.5 Ford’s attempt at succeeding in the minivan market failed miserably with its Windstar and Freestar, which suffered from self-inflicted wounds of poor quality and low safety ratings.

In terms of design aesthetics, for a painfully honest critique one had to look no further than Ford’s own Mark Fields, head of the North America division. In 2006 he told one interviewer that some of the company’s products had been so bland that “the only way you’d recognize them is if they ran over you.”6

Despite its founding on the principles of simplicity, Ford had become extremely complex, with numerous vehicle platforms and countless vehicle configurations; each region, division, and brand running independently; and a corporate culture in which people hesitated to deliver bad news. That last shortcoming went a long way toward explaining why overly aggressive sales forecasts had become the norm, which resulted in consistent excess capacity at Ford’s manufacturing plants through the 2000s.

Ford’s market share continued to erode under intense competition, especially from Toyota and Honda. Its financials also deteriorated through 2006. (See Exhibit 1 through Exhibit 3.)

Ford, like its domestic competitors, had become heavily dependent on sales of its high- margin trucks and SUVs. Such vehicles had been generating $6,000 to $10,000 of profit per unit, while passenger car sales had been a mostly break-even proposition, and small cars were sold at a loss.7

That dependence on high-margin, big vehicles left each of Detroit’s automakers woefully unprepared for rising fuel prices, which hit $4 per gallon in 2008, and the resulting change in consumer preferences toward smaller, more fuel-efficient vehicles.

4 Ford 2005 Annual Report, p. 2. 5 SafetyForum, “Ford Focus,” http://www.safetyforum.com/fordfocus. 6 Maria Godoy, “Q&A: Ford’s ‘Way Forward,’” National Public Radio, January 23, 2006, http://www.npr.org/templates/story/ story.php?storyId=5168799&ps=rs. 7 Jon Gertner, “From 0 to 60 to World Domination,” New York Times Magazine, February 18, 2007.

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That same year also marked the start of a multiyear recession. With tighter credit, consumers had a harder time financing new car purchases. A rising level of unemployment along with feelings of insecurity among those who had jobs brought a wave of frugality to the country, with people hanging onto their cars longer. A 2009 survey by Consumer Reports found that half of respondents had delayed the purchase of a new vehicle, with 30 percent citing concerns about the weak economy.8 (See Exhibit 4.)

Previous Turnaround Attempts

When Mulally took over, Bill Ford was in the midst of his second turnaround effort. His 2002 restructuring included a major downsizing, with 20,000 job cuts and numerous plant closings. Asked why another, much larger restructuring effort was needed just four years later, Ford president and chief operating officer Jim Padilla said the mistake with the 2002 restructuring was that Ford thought it was in the midst of a normal cycle of industry ups and downs, when what was really happening was a fundamental shift in the very nature of the market.9 The company needed to figure out how to profitably manufacture and sell smaller vehicles. There was no attempt to change strategy before downsizing.

Ford’s 2006 restructuring, “The Way Forward,” included cutting another 30,000 jobs and idling fourteen plants worldwide by 2012.10 Analysts felt that Ford was beginning to recognize the need to change every aspect of the company. But before long Bill Ford realized that its corporate culture was blocking changes throughout the company, and therefore new leadership was required.

Even before the 2002 restructuring, Ford had tried to make sweeping operational changes, such as cutting vehicle development costs, by engineering a car once to serve multiple markets worldwide and trying to operate as one company rather than as a collection of regional companies. But these prior efforts failed, in large part because the company’s executives and managers resisted the pressure to give up their turf.

The Turnaround Tripod

Strategy

Shortly after becoming CEO, Mulally reengineered the turnaround effort he inherited and rebranded it as “One Ford.” That stood for One Team, One Plan, One Goal. The new plan was built on the themes of focus and simplification.

Before slashing costs, Mulally considered what Ford’s strategy should be. He put a laser focus on the Ford and Lincoln brands, divested its other brands, and launched a full family of

8 “Average Age of Cars Is Increasing,” Consumer Reports Car Blog, March 5, 2009, http://blogs.consumerreports.org/cars/2009/03/ average-car-age-increasing-older-cars-on-the-road.html. 9 Godoy, “Q&A: Ford’s ‘Way Forward.’” 10 “Ford Overhauls Way Forward Plan,” AutoWeek, September 15, 2006.

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Ford vehicles aimed at moving the company away from its dependence on trucks and SUVs. His goal was to make each model the best in its class in terms of quality, fuel efficiency, safety, smart design, and value.

The company’s focus on fuel efficiency led it to develop the EcoBoost engine that generated up to 20 percent better fuel efficiency. The company also began producing hybrid vehicles and made plans to introduce electric vehicles in the near future.

To help make money from smaller vehicles, Ford created packages of high-margin, must- have options, such as high-tech “infotainment” features. Its Sync infotainment suite, which enabled drivers to control stereos, smart phones, seat controls, and more with a voice command– operated system,11 added $400 to a vehicle’s sticker price while costing the company less than $30.12 Not only did Sync help grow Ford’s margins, but it helped enhance the company’s image as well. In a 2010 survey, 80 percent of potential customers said Sync improved their overall image of Ford and 70 percent said it made them more likely to buy a Ford.

Operations

An important aspect of Mulally’s turnaround plan was improved manufacturing productivity, which brought manufacturing capacity in line with consumer demand. That required paring its workforce from 122,400 in 2006 to 72,600 at the end of 2009 and closing twelve North American manufacturing plants. The company planned to close four more plants by 2011.

Another key aspect of manufacturing productivity was a greatly simplified product lineup. Under Mulally’s leadership, Ford reduced the number of platforms (chassis) it used to build vehicles from twenty to eight, and the number of vehicle models it produced from ninety-seven in 2006 to forty-five in 2010. The company’s intention was to eventually offer as few as twenty to twenty-five vehicle models. Mulally had done something similar at Boeing, where he reduced the number of aircraft models from fourteen to four.13

The number of configurations available for each model was reduced as well. When Ford introduced its newest Explorer in July 2010, it was offered in 1,500 different configurations— down from a whopping 76,000 configurations just two years earlier.

Ford’s simplified product line-up resulted in far greater “parts commonality,” meaning that the same or similar vehicles built in different countries used the same parts. In late 2010, for example, Mulally said 80 percent of the 2011 Ford Focus’s parts would be the same no matter where it was built.14 Greater parts commonality also enabled the company to reduce its global suppliers from 3,300 in 2004 to 1,600 at the end of 2009. Ultimately, the company had a goal of reducing that number to 750.15

11 John Rosevear, “Ford Just Keeps Rolling,” The Motley Fool, July 23, 2010, http://www.fool.com/investing/general/2010/07/23 /ford-just-keeps-rolling.aspx. 12 Ed Oswald, “Microsoft’s Sync Parts Cost Ford About $30,” Betanews, February 22, 2008, http://www.betanews.com/ article/Microsofts-Sync-parts-cost-Ford-about-30/1203717682. 13 Langley, “Inside CEO Mulally’s Radical Overhaul of Ford.” 14 Ibid. 15 Ford Motor Company, “Working With Suppliers: Sustainability Report 2009/10,” http://corporate.ford.com/microsites/ sustainability-report-2009-10/economy-recovery-restructuring-suppliers.

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Financials

Within ninety days of becoming Ford’s CEO, Mulally appeared before a room full of bankers and raised $23.6 billion—enough money to stave off bankruptcy, fund the company’s turnaround, and protect against an economic downturn that he sensed was looming. He mortgaged all of the company’s assets to raise the money, including the company’s iconic brand logo.16

Still, two years later, in November 2008, Mulally joined his Detroit counterparts in Washington, D.C., to lobby the federal government for a bailout. They were rebuffed—even scolded—for showing up in private jets. A month later the three leaders returned, each driving a fuel-efficient company car, and this time the reception was warmer.

GM and Chrysler were in danger of going out of business by the end of the year. Ford’s position was much stronger thanks to the private funding raised by Mulally, and he said he never intended to use government money. He appeared before Congress, he explained, mostly to support the other automakers but also to appeal to government leaders just in case the economy worsened and Ford needed the money in the future. A week after that meeting he declared that Ford would forgo government funds.17

Both GM and Chrysler ended up receiving billions in government loans. Ford’s ability to survive without the government’s assistance helped Ford distinguish itself from its cross-town rivals, improving its reputation and increasing its brand equity.

Ford’s turnaround also required concessions from the UAW, which it won, including a reduction in salaried benefits.18 Concessions from the UAW in 2007 and 2009 were estimated to save the company $500 million per year.

Ford’s revitalized cost structure helped it hold down incentives, which raised its profit margins. (See Exhibit 5.)

The Leadership Factor

Ford’s success was about more than a revitalized product line, better manufacturing efficiency, and fundraising. There was a distinct leadership difference, starting at the board level.

The company’s board deserved credit for bringing in fresh leadership. While GM’s board stuck with Rick Wagoner, Ford recognized the need for a new perspective and brought in Mulally. Even Bill Ford admitted that the company’s leaders, himself included, had become cautious. He had confidence that Mulally would put a business framework in place that would liberate people to pull off bolder designs.19

16 Kimberly S. Johnson and Tom Krisher, “Ford Bailout Money Unecessary, Company Says,” Huffington Post, December 10, 2008, http://www.huffingtonpost.com/2008/12/10/ford-bailout-money-unnece_n_149824.html. 17 Johnson and Krisher, “Ford Bailout Money Unecessary, Company Says.” 18 Fred Meier, “Ford Turnaround Plan Turns Around $2.08 Billion Profit,” USAToday, April 27, 2010, http://content.usatoday.com/ communities/driveon/post/2010/04/ford-turnaround-plan-turns-around-208-billion-profit/1. 19 Kiley, “An Interview with Bill Ford and Alan Mulally.”

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Mulally’s teambuilding and communication skills went a long way toward reconnecting employees with the pride of the once-great company, which resulted in a much-needed boost in morale.

Recognizing that it takes time to bring about sweeping changes in the auto industry, one of Mulally’s first moves was to line up enough financing to bring his vision to fruition. The New York Times declared, “Ford’s decision to borrow billions in 2006 when the capital markets were thriving will go down as one of the most significant moves in the company’s 105-year history.”20

In 2007 he sold Jaguar, Land Rover, Volvo, and Aston Martin, and reduced the company’s stake in Mazda.

One of his other top priorities was to stop inflated sales forecasts. In an early interview, he said, “Turnarounds of this magnitude succeed when capacity and costs are aligned with a realistic expectation of demand.”21

But he recognized that the company’s survival depended on much more than the cost structure. Ford needed to revitalize its product offerings and public perceptions.

Mulally fostered a culture of transparency, demanding that the company deal with the reality of the situation. For instance, every Thursday at 7:00 a.m. (a tradition he had started at Boeing), Mulally conducted a two-and-a-half-hour business plan review (BPR) with his eighteen direct reports. Everyone gave a status update on his or her function’s contribution to the turnaround and its performance against corporate profit targets. Some three hundred PowerPoint slides containing key performance metrics were reviewed. The purpose was not to highlight successes but to provide accurate reports. There had been a strong history of resistance against bad news.22

At these meetings, participants were required to pay attention—no cell phones, Blackberrys, or side conversations. Candor was expected as data and then more data were reviewed. No one was punished for bringing bad news to the table.23 In fact, when one manager detailed the poor performance of his unit, some Ford executives were stunned by Mulally’s applause and his encouragement, telling the bearer of bad news, “Great visibility.”24

The fact that Mulally was not a “car guy” allowed him to ask innocent questions. In one early meeting in his office, he laid out twelve different metal rods that Ford used to hold up a vehicle’s hood. He wanted to demonstrate to managers that this kind of variation was costly and did not matter to consumers.

In order to familiarize himself with the Ford product, Mulally began driving a different Ford vehicle to and from work each day. In the predawn darkness one morning, he got into a Mercury Milan and reached for the light switch, but it was not where he expected it to be. He had to get out of the car and turn on the lights in his garage to find it. Another time, in a Ford Escape, he hit

20 Bill Vlasic, “Choosing Its Own Path, Ford Stayed Independent,” New York Times, April 8, 2009, http://www.nytimes.com/ 2009/04/09/business/09ford.html?_r=1&scp=5&sq=vlasic%20mullally%20debt%20ford&st=cse. 21 Business Management, “Management Issues: Is This The Toughest Job in America?” http://www.busmanagement.com/article/Is- this-the-toughest-job-in-America/. 22 Stephanie Overby, “How a Global IT Revamp Is Fueling Ford’s Turnaround,” CIO, August 30, 2010, http://www.cio.com/article/ 607564/How_a_Global_IT_Revamp_Is_Fueling_Ford_x2019_s_Turnaround. 23 Langley, “Inside CEO Mulally’s Radical Overhaul of Ford.” 24 Ibid.

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what he had learned to be the light switch, but the windshield wipers came on. He found that the wipers and lights were in still different positions in a Mustang.

After complaining to Americas product head Derrick Kuzak, Mulally learned that Ford had a longstanding practice of each product line operating independently, which resulted in differentiation in a bid to produce a “unique car.” Mulally’s response: “World-class companies do not operate this way.”

Kuzak soon began creating a “Ford feel” for all its vehicles. “When you get into a Ford vehicle blindfolded, you should know immediately it’s a Ford by the feel,” Kuzak said.25

Leadership at the Competition

G M

While Ford recognized the need for new leadership, it took the U.S. government to help GM see the need for a new CEO, pushing out Rick Wagoner in early 2009. Steven Rattner, who led the government’s efforts to restructure GM and Chrysler, branded Wagoner as “aloof and in denial” and “living in a fantasy that [GM] was still the greatest carmaker on earth.”26

Wagoner was replaced by fellow GM insider Fritz Henderson, who lasted only until the end of 2009, when former AT&T CEO Ed Whitacre replaced him. Named to lead the company after it emerged from bankruptcy, Whitacre was seen as a good choice, having taken regional phone company Southwestern Bell through more than a dozen mergers and acquisitions and turning it into the AT&T of today. But Whitacre made it clear he was taking the GM position only until the company was on the road to profitability.

In August 2010, with GM poised for an initial public offering designed to help pay back the billions borrowed from the government, Whitacre declared his mission complete and stepped down. Dan Akerson, a managing director at buyout shop Carlyle Group and a GM board member since 2009, replaced him.

It is difficult to compare Mulally’s leadership style with that of GM’s leader, because GM had four CEOs in a span of just eighteen months. But it is safe to say that GM was slower to respond to changing market conditions than Ford. While Ford became focused on the Ford brand, GM steadfastly held onto its eight brands and its various corporate fiefdoms. It took the company’s bankruptcy filing to motivate it to shed Saturn, Hummer, Pontiac, and Saab.

T O Y O T A

While Ford, GM, and Chrysler were all losing sales even before the recession took hold in 2008, Toyota’s sales were rising. A relentless focus on quality led to rapid growth, but before long Toyota put sales growth ahead of quality. Senior management became intent on becoming the global sales leader.27

25 Ibid. 26 Micheline Maynard, “Bailing Out the Big Guys, Posthaste,” New York Times, September 19, 2010, http://www.nytimes.com/ 2010/09/20/books/20book.html?ref=chrysler_llc. 27 Steven Spear, “Learning from Toyota's Stumble,” Harvard Business Review, January 28, 2010, http://blogs.hbr.org/cs/2010/01/ learning_from_toyotas_stumble.html.

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The company’s rapid growth “sparked tremendous internal concerns about quality-control problems,”28 and in late 2009 those fears were realized. Just after Toyota surpassed GM to become the world’s largest automaker, its hard-earned reputation for quality crumbled when previously denied problems with sticking gas pedals emerged, leading to numerous recalls. In late January 2010, the company suspended sales of eight recalled vehicles to address the accelerator pedal problem. By the end of 2010, the company had recalled 8.5 million cars and trucks for a host of safety, quality, and reliability problems, including a brake malfunction in its much- heralded Prius hybrid.

In the wake of its problems, the company lengthened product development lead times by several months to allow more time for testing and reduced the number of engine and key feature variations to simplify engineering.

While Toyota ended 2010 with a global sales increase of 8 percent, it was the only automaker to report lower sales in the United States, Toyota’s largest market. The company’s share of the U.S. market fell to 15.2 percent from 17 percent in 2009.29 Toyota’s U.S. deliveries slipped 0.4 percent compared with overall industry growth of 11.1 percent.30

Toyota’s problems could not have come at a better time for Ford.

C H R Y S L E R

Chrysler had a revolving door not only to its CEO’s office, but to its owner’s office as well.

German-based Daimler-Benz purchased the company in 1998, creating the combined entity DaimlerChrysler AG. But in 2007 DaimlerChrysler sold Chrysler to the U.S. private equity firm Cerberus Capital Management. In that same year, as part of Chrysler’s bankruptcy process, Fiat acquired a stake in the company.

Former Home Depot CEO Robert Nardelli was brought in to run Chrysler in 2007, the same person who did so much damage to Home Depot and got more than $100 million in severence. Then came Robert Kidder, who was hired to take the reins after the company came out of bankruptcy. He was succeeded by Fiat’s CEO, the Italian lawyer-accountant Sergio Marchionne.

The newly configured company planned to sell Fiats through Chrysler’s dealer network, while using its fuel-efficient engine technology to help Chrysler gain market share.

S U P P L I E R S

Mulally realized that many of the industry’s suppliers were struggling to stay in business; a number of them were approaching bankruptcy. Without parts, Ford was out of business as well.

Under the direction of Tony Brown, Ford vice president of global purchasing, cross- functional teams were set up to monitor parts manufacturers. Human relations could assign Ford operating employees to suppliers, Ford treasury could help with loans, and the legal department

28 Gertner, “From 0 to 60 to World Domination.” 29 Yoshio Takahashi, “Toyota Global Sales Up 8%,” Wall Street Journal, January 25, 2011, http://online.wsj.com/article/ SB10001424052748703398504576101190281234486.html. 30 John Crawley and David Lawder, “Factbox: Throttle Finding Latest Ttwist in Toyota Saga,” Reuters, February 9, 2011, http://www.reuters.com/article/2011/02/09/us-toyota-usa-fb-idUSTRE7180BK20110209.

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could help with contract issues.31 Much of the work had to be secret, especially if a supplier was to be abandoned after a model run ended. That supplier had to survive until Ford no longer needed parts from it.

Some Steps Backward and Then Some Bold Steps Forward

Between 2006 and 2008 Ford lost more than $30 billion, just as the skeptics had argued when Mulally was hired. It took a while for an automaker’s changes, such as the design and launch of new models, to impact the company’s performance.

The light at the end of the tunnel started to appear in June 2007 when Ford made its way into the top ten of J. D. Power & Associates’ annual Initial Quality Study, a measure of customer complaints in the first ninety days of vehicle ownership. In summer 2009 Ford earned its highest quality rankings ever, beating Toyota and Honda for the first time.32 And in June 2010 Ford broke into the top five.

Meanwhile, Toyota fell all the way to twenty-first place in 2010, its lowest ranking since the survey was launched in 1987; its rapid fall resulted from its numerous safety-related recalls.

Ford also won Motor Trend magazine’s 2010 Car of the Year and Truck of the Year awards for its Fusion Hybrid and Transit Connect, respectively. Ford’s quality, style, and fuel-economy improvements caught the eye of more than just industry watchers. They translated into strong sales, with Ford’s market share gaining 1.9 percentage points from the end of 2008 to summer 2010, climbing to a respectable 17.3 percent.

Automobile Magazine named Mulally its 2010 Man of the Year, describing him as “living proof that a single, extraordinary leader with vision and determination really can make all the difference in an organization.”33

31 Bryce G. Hoffman, “Inside Ford’s Fight to Avoid Disaster,” Wall Street Journal, March 9, 2012. 32 David Kiley, “Ford Tops Quality Survey,” Bloomberg Businessweek, July 21, 2009, http://www.businessweek.com/autos/autobeat/ archives/2009/07/ford_tops_quali_2.html. 33 Joe DeMatio, “2010 Man of the Year: Alan Mulally, CEO Ford Motor Company,” Automobile Magazine, November 2009.

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Exhibit 1: Total Ford Financial Statements ($ in millions) 2010 2009 2008 2007 2006 2005

INCOME STATEMENT

Sales 128,954 118,308 145,114 170,572 160,065 176,835

Cost of sales 104,451 100,016 127,102 142,587 148,866 144,920

Selling, administration, and other expenses 14,562 14,288 23,304 21,837 19,389 25,071

Operating income 9,941 4,004 -5,292 6,148 -8,190 6,844

Goodwill impairment 0 0 0 2,400 0 0

Non-operating income -11 5,840 423 3,030 1,478 2,342

Interest expense 6,152 6,828 9,805 11,038 8,783 8,417

Minority interests 538 10 176 403 421 285

Pretax income 4,316 3,026 -14,498 -3,857 -15,074 1,054

Corporate income -4 240 205 271 194 469

Taxes (corporate level) 592 69 63 -1,333 -2,655 -855

Net income 3,728 2,717 -14,766 -2,795 -12,613 1,440

Depreciation 5,900 8,018 12,826 13,052

EBITDA 15,841 12,022 7,534 19,200

BALANCE SHEET

Cash and marketable securities 35,771 43,474 39,952 50,798 55,624 0

Auto receivables 3,992 3,708 3,065 4,530 3,163 0

Finance receivables 73,265 80,885 96,101 112,733 110,767 0

Inventories 5,917 5,450 6,988 10,121 10,017 0

Other current assets 5,924 5,924 5,787 6,555 9,185 0

Net investment in operating leases 10,393 15,062 23,120 30,309 26,606 0

Property, plant, and equipment 23,027 24,596 23,930 35,979 35,786 0

Goodwill 102 209 246 2,069 3,611 0

Deferred income taxes 2,468 5,663 7,204 9,268 14,85 0

Other assets 5,585 12,919 16,554 23,365 21,248 0

Total assets 166,444 197,890 222,947 285,727 290,858 0

Payables 16,362 14,594 13,145 20,832 21,214 0

Other current liabilities 17,457 21,584 32,374 30,343 30,139 0

Current maturities of debt 2,049 2,095 1,191 920 1,924 0

Long-term debt 102,140 130,992 151,878 167,610 170,548 0

Other liabilities 27,286 35,140 38,886 60,394 70,498 0

Total liabilities 165,294 204,405 237,474 280,099 294,323 0

Shareholders equity -642 -6,515 -14,527 5,628 -3,465 0

Total liabilities and shareholders equity 164,652 197,890 222,947 285,727 290,858 0

AT FORD, TURNAROUND IS JOB ONE KEL663

12 KELLOGG SCHOOL OF MANAGEMENT

Exhibit 2: Automotive Financial Statements ($ in millions) 2010 2009 2008 2007 2006 2005

INCOME STATEMENT

Sales 119,280 105,893 129,165 154,379 143,249 153,413

Cost of sales 104,451 100,016 127,102 142,587 148,866 144,920

Selling, administration, and other expenses 11,909 8,583 11,356 13,660 12,327 12,704

Operating income 2,920 -2,706 -9,293 -1,868 -17,944 -4,211

Goodwill impairment 0 0 0 2,400 0 0

Non-operating income -326 5,288 -726 1,161 1,478 1,247

Interest expense 1,807 1,515 2,061 2,363 995 1,220

Minority interests 526 145 163 389 421 285

Pretax income 1,313 1,212 -11,917 -5,081 -17,040 -3,899

Corporate income 0 0 0 0 0 0

Taxes (corporate level) 0 0 0 0 0 0

Net income 1,313 1,212 -11,917 -5,081 -17,040 -3,899

Depreciation 3,876 4,094 5,803 6,763

EBITDA 6,796 1,388 -3,490 4,895

BALANCE SHEET

Cash and marketable securities 20,508 25,478 15,673 33,037 32,588

Auto receivables 3,992 3,708 3,065 4,530 3,163

Finance receivables 0 0 0 0 0

Inventories 5,917 5,450 6,988 10,121 10,017

Other current assets 5,924 5,924 5,787 6,555 9,185

Net investment in operating leases 0 0 0 0 0

Property, plant, and equipment 23,027 24,596 23,930 35,979 35,786

Goodwill 102 200 237 2,051 3,594

Deferred income taxes 2,468 5,663 7,204 9,268 14,851

Other assets 4,460 10,983 10,931 16,948 13,450

Total assets 66,398 82,002 73,815 118,489 122,634

Payables 15,010 13,358 11,175 18,955 19,627

Other current liabilities 17,457 21,584 32,374 30,343 30,139

Current maturities of debt 2,049 2,095 1,191 920 1,924

Long-term debt 17,028 32,321 23,036 25,777 28,512

Other liabilities 23,360 29,177 29,867 47,540 55,213

Total liabilities 74,904 98,535 97,643 123,535 135,415

Shareholders equity -8,506 -16,533 -23,828 -5,046 -12,781

Total liabilities and shareholders equity 66,398 82,002 73,815 118,489 122,634

KEL663 AT FORD, TURNAROUND IS JOB ONE

KELLOGG SCHOOL OF MANAGEMENT 13

Exhibit 3: Financial Services Financial Statements ($ in millions) 2010 2009 2008 2007 2006 2005

INCOME STATEMENT

Sales 9,674 12,415 15,949 16,193 16,816 23,422

Cost of sales 0 0 0 0 0 0

Selling, administration, and other expenses 2,653 5,705 11,948 8,177 7,062 12,367

Operating income 7,021 6,710 4,001 8,016 9,754 11,055

Goodwill impairment 0 0 0 0 0 0

Non-operating income 315 552 1,149 1,869 0 1,095

Interest expense 4,345 5,313 7,744 8,675 7,788 7,197

Minority interests 12 -135 13 14 0 0

Pretax income 3,003 1,814 -2,581 1,224 1,966 4,953

Corporate Income 0 0 0 0 0 0

Taxes (corporate level) 0 0 0 0 0 0

Net income 3,003 1,814 -2,581 1,224 1,966 4,953

Depreciation 2,024 3,924 7,023 6,289

EBITDA 9,045 10,634 11,024 14,305

BALANCE SHEET

Cash and marketable securities 15,263 17,996 24,279 17,761 23,036

Auto receivables 0 0 0 0 0

Finance receivables 73,265 80,885 96,101 112,733 110,767

Inventories 0 0 0 0 0

Other current assets 0 0 0 0 0

Net investment in operating leases 10,393 15,062 23,120 30,309 26,606

Property, plant, and equipment 0 0 0 0 0

Goodwill 0 9 9 18 17

Deferred income taxes 0 0 0 0 0

Other assets 4,349 5,160 8,158 8,440 9,265

Total assets 103,270 119,112 151,667 169,261 169,691

Payables 1,352 1,236 1,970 1,877 1,587

Other current liabilities 0 0 0 0 0

Current maturities of debt 0 0 0 0 0

Long-term debt 85,112 98,671 128,842 141,833 142,036

Other liabilities 7,150 9,187 11,554 13,456 15,593

Total liabilities 93,614 109,094 142,366 157,166 159,216

Shareholders equity 9,656 10,018 9,301 12,095 10,475

Total liabilities and shareholders equity 103,270 119,112 151,667 169,261 169,691

AT FORD, TURNAROUND IS JOB ONE KEL663

14 KELLOGG SCHOOL OF MANAGEMENT

Exhibit 4: Average Age of Passenger Cars and Light Trucks

Year Passenger Cars Light Trucks Total Light Vehicles

1995 8.4 8.3 8.4

1996 8.5 8.3 8.5

1997 8.7 8.5 8.6

1998 8.9 8.5 8.8

1999 9.1 8.5 8.8

2000 9.1 8.4 8.9

2001 9.3 8.4 8.9

2002 9.4 8.4 9.0

2003 9.6 8.5 9.1

2004 9.8 8.6 9.4

2005 10.1 8.7 9.5

2006 10.3 8.9 9.7

2007 10.4 9.0 9.8

2008 10.6 9.3 10.0

2009 10.8 9.8 10.3

2010 11.0 10.1 10.6

2011 11.1 10.4 10.8

KEL663 AT FORD, TURNAROUND IS JOB ONE

KELLOGG SCHOOL OF MANAGEMENT 15

Exhibit 5: Operating Cash Flows (in millions) 2010 2009 2008 2007 2006 2005

Net income/(loss) attributable to Ford 6,561 2,717 (14,766) (2,795) (12,613) 1,440

(Income)/loss of discontinued operations NA (5) (9) (41) (2) (47)

Cumulative effects of changes in accounting principles

NA NA NA NA – 251

Depreciation and special tools amortization

5,900 7,667 12,536 13,052 16,453 14,011

Other amortization (316) (1,087) (369) 795 66 55

Goodwill impairment NA NA NA 2,400 NA NA

Impairment charges (depreciation and amortization)

NA 311 7,404 NA NA NA

Held-for-sale impairment NA 650 421 NA NA NA

U.S. consol dealerships goodwill impair NA NA 88 NA NA NA

Provision for credit and insurance losses (216) 1,030 1,874 668 241 483

Net (gain)/loss on extinguishment of debt 983 (4,737) (170) 512 NA NA

Net (gain)/loss on investment securities (83) (410) 1,376 20 NA NA

Net (gain)/loss on pension & OPEB curtail

(29) (4) (2,714) (1,164) NA NA

Net (gain)/loss on settlement of U.S. hourly

Retiree health care obligation NA 248 NA NA NA NA

Net losses/(earnings) from eq investments

In excess of dividends received (198) (45) 38 (175) (253) (135)

Foreign currency adjustments (348) 92 (503) 219 112 36

Net (gain)/loss on sale of businesses 18 33 522 (179) (33) (1,099)

Stock option expense 34 29 35 75 77 116

Cash changes in operating assets and liab were as follows:

Provision for deferred income taxes 34 (746) 1,880 (5,477) (2,500) 704

Decrease/(increase) in accounts rec and other assets

765 2,612 973 45 2,221 (2,813)

Decrease/(increase) in inventory (903) 2,201 (137) 371 (695) (94)

Increase/(decrease) in accounts payable and accrued and other liabilities

(704) (2,832) (12,299) 1,348 6,553 (66)

Net sales/(purchases) of trading securities

NA NA NA 4,539 (6,771) (629)

Other (1,337) 881 542 914 275 132

Net cash (used in)/provided by operating activities

10,161 8,679 (3,417) 15,127 3,131 12,345