Renault-Nissan Case Study

Abstract

The global market environment has for the past few decades become increasingly competitive. Under these conditions, companies have applied various strategies meant to strengthen their operation and competitive advantages. Forming alliance among companies in the same industry is one of the various strategies that have been employed. The Nissan Renault alliance in 1991 was formed to help the two organizations gain competitive advantage in the auto industry. At the time of their alliance, Nissan was in financial trouble, while Renault needed to increase its market presence globally. The two companies, therefore, joined to benefit from each other in terms of cost cutting measures and an increase in their market share.

Introduction

Since 1991, Nissan motors were consistently losing money and its market share in the motor industry. Its car production capacity had dropped drastically, by over 600,000 units. Its manufacturing capacity was also 53% lower than its production capability. Renault, on the other hand, had little market reach beyond the European market. Their alliance was, therefore, forged for mutual benefits of the two companies. Nissan was to benefit from additional capital, among other gains, while Renault would gain through expanding of its market reach. By the year1999, Nissan was on the brink of bankruptcy with massive debts and burdensome high operational costs. The company also had been consistently losing its market share since the early 1990s. Nissan’s organizational culture and values were also hindering the company from making the changes, which would ensure its returning back on track. The company‘s bonuses system for management, based on production levels, was among the many cultural values that hindered changes. This meant that it became impossible to cut production costs and return Nissan to profitability. In other words, Nissan had a culture that gave its management incentives to overproduce. Employee promotions in Nissan were based on seniority rather than on their performances. This meant that anyone could be promoted regardless of their performance. The company’s operations in North America and Europe were also headed by presidents whose system did not encourage sharing of information within the corporation. Nissan and its suppliers had a system which was based on the Keiretsu. This Japanese system links companies with their suppliers’ strongly through cross -held stocks. The system, which was hailed in the 1980s as the driving force for the Japanese manufactures, had become the burden that Nissan was facing by 1999. The reason was that their strong links did not foster strong competition among its suppliers, which means that the supply costs were continuously on the increase.

Historical Background

Nissan

Nissan had been consistently losing its market share since the early 1990s. In addition, the company‘s management had been receiving bonuses based on production levels rather than profitability. This meant that managers’ incentive was to overproduce. Employee promotions in Nissan were based on seniority rather than on their performances. The company had regional presidents in North America and Europe. Nissan suppliers system took over the principles of the Keiretsu Japanese system which links companies with their suppliers through cross -held stocks. The system, which was the driving force for the Japanese manufactures in the 1980s, had now become burdensome for Nissan motors. The company’s suppliers cost represented fifty eights percent of Nissan’s total operational costs. Management wanted the company to reduce its supplies by half.

In addition, management wanted the suppliers to cut their costs by twenty percent within a period of two years. Japanese corporations did not give their management and employees stock options to motivate them to optimize their performance. In addition, manager’s compensation packages did not have additional cash incentives. Nissan by 1999 had debts amounting to 19.9 billion dollars and 250 million dollars loss in 1999. Its Japanese car market share had a decline from 34% in 1974 to 19% in 1999, while its global auto market share had reduced to less than five percent from seven percent, by 1999. In 1999, the company formed an alliance with French car manufacturer, Renault, whereby Renault acquired 36.8 % of Nissan stock. The alliance saw the appointment of Ghosn as the new head of Nissan. Ghosn was brought in to help Nissan return to profitability and increase its market share both in the Japanese market and around the globe. Ghosn outlined the company’s revamp plan that would see Nissan return to profitability by 2002. His plan for the Nissan revival was announced in 1999 to the public. It incorporated cost cutting measures, changes in the company’s management structure and innovative auto designs to increase production and claim an additional market share.

Nissan had extensive assets in Japan that was capable of turning the company into the second largest vehicle manufacture in Japan, after Toyota. In the late 1950s, Nisan successfully marketed its Datsun models in the U.S market. The Datsun 240z model was especially successful in the USA market for its raw power horse, low prices and sporty design. However, in the early 1980s Nissan changed its Datsun brand to Nissan. This change saw the company’s market share in the USA auto market decline, due to the obscurity of a new brand name. In addition, the company’s culture and relationships with its suppliers saw its operation costs increases and became uncompetitive in comparison to the cost of the other vehicle manufacturers in the USA market, such as Honda. This lowered the company’s sales, while the costs remained high. Additionally, the Japanese have a culture of not laying off their workers; therefore, Nissan would practice massive layoffs to cut its operational costs.

Nissan and Ghosn‘s Changes

Ghosn was chosen as the chief operations officer, after Nissan and Renault announced their alliance. Born in France with work experience for Michelin and Renault, he was an outsider chosen to head a Japanese company. Japanese corporations are rarely headed by outsiders, so Ghosn had to overcome the outsiders tag to win the trust of the company employees (Donnelly, Morris & Donnell, 2005). Ghosn outlined the Nissan revival plan (NRP), setting targets that the company’s managers and employee had to meet in a given period. In his previous roles, in Michelin and Renault, Ghosn had acquired a reputation for his cost cutting measures. However, when he outlined his revival plan, the actions covered more than just cost cutting measures. In addition to cutting costs, the revival plan also included changes in the organizational structure that would require the company employees change their values. These values were pertaining to employee promotion system. The Company’s employee promotions system changed from seniority based system to a performance based system (Donnelly, Morris, & Donnell, 2005).

Ghosn had implemented a new compensation structure, whereby the bonuses system would be linked to cost cutting measures. Mangers would earn bonuses in the new system based on their performances. He also established an advisory committee with the task to review promotions and advise the management on employee promotions based on their performances. The company managers had long established relationships with company’s suppliers. Additionally, managers heading the different departments within the corporation ran their departments like fiefdoms. Ghosn introduced a structural change that would require the employees from the various departments to work closely with each other. This change improved information sharing and decision making process, as well as promoted the input of all the employees (Cacciaguide-Fahy & Cunningham, 2007). Nissan’s, Northern American and Europe branches were run like independent branches. A new structure was pertaining to the company’s management structure for its Northern American and Europe branches. Ghosn appointed a management team to run the two branches eliminating regional presidencies. Within a year, Nissan had returned into profitability and reduced its debts to less than seven billion dollars.

Renault

Since the early 1990s, Renault sought to expand its market share in the auto industry. The company’s marketing reach was confined to the European market, where it sold over eighty five percent of its cars. The company sought partnerships unsuccessfully with other auto makers that would see it market reach drastically increase. Its first alliance with Volvo was a disaster that saw Nissan selling the AMC to Chrysler. The company needed an organization that had a large global presence, to expand its market reach. In addition, Renault needed to gain a larger market share in the smaller vehicle market (Donnelly, Morris & Donnell, 2005).

Cultural Differences between the Two Corporations

Japanese companies have a culture of promoting their executives based on their seniority rather than on performances. There is also a distance relationship between the management and employees. Since the culture of respect for the elders is heavily emphasized, Ghosn faced the challenge of promoting employees based on their performances (Donnelly, Morris & Donnell, 2005). Additionally, the company suppliers had stronger links with Nissan, making the cost cutting measures difficult. This included reducing their costs by more than twenty percent and cutting their numbers by have. Nissan also had presidents running their Northern American and Europe branches in a manner detached from their head corporation. To overcome problems arising from lack of sharing information, Ghosn had to change the corporation’s organizational structure. He appointed management teams to learn the two branches that had closer links to their headquarters than the previous presidents.  The corporation executives, who were based in their headquarters in Japan, travelled outside Japan to the other branches rarely. The new culture implemented the requirement that the executives familiarize with operations in the North America and Europe. Nissan employees had also organization values that leaned heavily on consensus (Donnelly, Morris & Donnell, 2005). In other words, the employees did not have a strong culture of individualism. Emphases were made on individual contribution, as well as team work, aimed at increased productivity.

The Revival Plan

The revival plan set targets for the company managers to achieve within a given period. The revival plan target was to return to profitability by the year 2001; reduce debt to 6.3 billion dollars from 12.6 billion dollars by 2003.  The plan also targeted to reduce the workforce to one hundred and forty eight thousand, that is by 14% by 2003 (Donnelly, Morris & Donnell, 2005). Nissan was also set to sell some of the stock held in noncore organizations, thus reducing the debt.  In addition, the plan outlined a new organizational structure that saw many operations managed through cross-organization team work. This was a direct contrast to their earlier structure that saw most of the company’s departments run as fiefdoms (Donnelly, Morris & Donnell, 2005). The company was able to introduced trucks in the northern American market by applying the Renaults designing techniques in their heavy trucks division.

Effects of Revival Plan

When Ghosn announced the changes that would be implement to revive Nissan, the company stock prices declined significantly. The challenges that he was facing, were the cost cutting measures, as well as changes in organizational structure and culture.  To encourage the company employees’ increase their productivity, Nissan implemented an employee reward system. The new system included giving cash incentives and stock options to employees. In addition, promotions were to be based on performances rather than on a seniority basis.  By the end of the 2000 financial year, Nissan had returned to profitability (Donnelly, Morris & Donnell, 2005). The company’s operational costs were also significantly reduced from closing some of its Japanese plants and reducing its suppliers. Ghosn was also able to steer the company in changing organizational structure, which Nissan had struggled to implement, for years.

Advantages of the Two Companies’ Merger

The Nissan and Renault alliance helped infuse capital to Nissan. The Company also had to benefit from additional market share. In that, they would gain additional geographical presence in new markets. Among the major benefits that accrued from the Nissan- Renault coming together was the cost cutting measures realized from their joint operations. Renault had an established operation structure in Brazil.  Nissan entered into the Brazil market using the Renault’s already established structure. The company spent only 300 million dollars as opposed to double the amount that the company would have required to make for an entry on its own. In addition, the two companies were able to use their differing designing processes to improve both of their products. This saw Nissan introduce twenty six new models into the market by the year 2004. The two companies also gained from their merged procurement processes that saw their supply costs decline by a significant margin.

Conclusion

The last few decades, business organizations have employed various strategies to survive and stay ahead of their competition. Among the various strategies employed were strategic alliances meant to increase competitiveness. However, strategic alliances can fail due to various reasons that include overpaying, companies’ integration, planning employee motivation and resistance to changes. The Nissan –Renault alliance was a mutually beneficial strategy that was meant to help Nissan overcome its financial troubles, while at the same time benefit Renault by increasing the company’s market presence globally. This was through the operations that Nissan already had in place in the Asian, Northern American and European markets. The new Nissan CEO Ghosn, however, had to face several challenges before successfully implementing reforms in the company. The challenges that Ghosn had to overcome were cultural values, resistance to change and an organizational structure that encouraged dormancy among the workers. Ghosn implemented a revival plan that saw Nissan successfully recover from its financial troubles well ahead of the targeted period. The revival plan had set targets for the company managers to achieve within three year period. The revival plan target was to return to profitability by the year 2001; reduce debt to 6.3 billion dollars from 12.6 billion dollars by 2003.  The plan also targeted to reduce the workforce to one hundred and forty eight thousand, or by 14%, by 2003. The company achieved its targets within the set period.

The revival plan saw Nissan get a capital infusion from Renault. The two Companies also mutually benefitted from additional market share. In that, they gained additional geographical presence in new markets. The Nissan- Renault alliance also benefitted the two companies from cost cutting measures realized from their joint operations. Renault had an established operation structure in Brazil which helped Nissan break into the Brazilian market using the Renault’s already established operations. This saw Nissan spending only 300 million dollars, as opposed to over 600 million dollars they would spend to enter into the Brazilian market.

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