Organizational Change of the Chrysler Corporation in the 1978 Bailout and Lee Iacocca
Dustin T. Embler
BA 401 Research Paper/Case Study

Abstract In the year 1978 one of the United States largest corporations was on the brink of financial crisis, the Chrysler Corporation. Hundreds of jobs, billions of taxpayer dollars, and the success of an American company all lay in the balance. Chrysler was overcome in debt due to its subpar decision making, increasing government regulations, and inability to compete with its domestic and foreign competition. Nevertheless, a hero arrived when Lee Iacocca joined as President of Chrysler to aid to its recovery in such adverse times. Fighting his way through the United States legislation for financial assistance to save Chrysler, Iacocca is able to successfully get the necessary legislation passed that will not only help him keep the company afloat but to also change the entire organization into a successful and profitable business in a matter of years.
History of the Chrysler Corporation and Lee Iacocca “The Chrysler Corporation was founded in 1925 by Walter P. Chrysler, a former railroad mechanic who rose through the ranks of GM to lead the highly successful Buick Division. Chrysler did not get along well with William Durant, the founder and head of GM, and eventually left to form his own company (Braun).” “Always short of capital in this capital-intensive business, Chrysler was forced to build its cars largely of purchased parts. Despite this, the Chrysler Corporation became known for producing solid, well-engineered, but conservative cars (Braun).” In its early history as Chrysler’s reputation began to grow the company became very experimental in its design. Many successes came from the company’s new radical approach such as the expanding the company to take ownership of the Dodge Motor Company thus starting a 1920’s winner when it introduced the low-priced Plymouth. However, this experimental attitude declined after the company almost went bankrupt from its 1934 Streamlined Airflow design, in which Chrysler vowed never again to attempt such a radical innovation (Braun). “Chrysler survived both the depression and war years, emerging as one of the three major auto producers in the United States. In the early years after World War II Chrysler actually sold more cars than the Ford Motor Company, but this all changed when Henry Ford II brought in a team of former GM managers to turn Ford around. Soon thereafter, Chrysler fell back to number three, with about a 20 percent s hare of the market (Braun).” “During the 1950’s, the conservative Chrysler designs failed to match rapid changes in consumer tastes, which were driven by the more innovative styling and features of its competitors’ products (Braun). ” This push towards conservatism ultimately lead Chrysler to deteriorate in quality leaving a growing number of consumers to consider Chrysler’s products inferior. “Through the 1960’s and early 1970’s, Chrysler experienced a steady increase in sales, but its earnings growth did not follow the same trend (Braun).” Earnings remained small as the company began accumulating a mass amount of debt throughout the two decades. This rendered the company not only in the bottom three of the big auto manufacturers but also struggling to survive. Financial crisis continually plagued the company and by the end of the 1970’s its continuing existence was left with little hope until the arrival of Lee Iacocca in 1978. “Born in 1924, the son of Italian immigrants, Lido Iacocca grew up in small-town Pennsylvania, where he distinguished himself academically before heading off to Lehigh University and then to Princeton to study engineering. He immediately joined Ford upon completing his schooling in 1946, and soon switched from engineering to sales, where he excelled by the mid-1950’s, then quickly moved up in the company to become general manager of the Ford Division in 1960. By 1964, Iacocca had already cemented a place in automotive history by bringing out the Mustang, which was an immediate and enduring success, Iacocca became Ford President in 1970, until Henry Ford II infamously fired him in 1978. He was hired as president of Chrysler in 1979, tasked with turning around the faltering company (Anastakis).”
Crisis in Chrysler By the middle of 1979, the Chrysler Corporation was on the brink of financial crisis. “Chrysler was the fourteenth largest company in America and a key partner in the powerful automobile industry. The company was the nation’s largest private employer and consumer of steel, glass, and rubber. If immediate substantial assistance of an extraordinary nature was not forthcoming then bankruptcy was inevitable (Harrison, 1999).” Nevertheless, while excluding themselves as the main source of the problem, Chrysler’s management team alleged that the company’s struggles were primarily due to four major environmental threats. First being the increasing intrusions by the federal government into the specifications for the manufacture of trucks and automobiles, secondly was the emerging dependency on the federal government for assistance in the event of a major economic complication, thirdly was the continuing dominance by General Motors and Ford in which Chrysler still had no gaining lead upon, and fourthly was the increasing overseas competition which Chrysler seemed unable to offset to its economic advantage by failing to produce what and how much the American consumers desired in relation to foreign automobile manufacturers. Starting in the early 1960’s to late 1970’s the federal government was putting heavy emphasis on new laws that heavily regulated safety, emissions, and energy conservation throughout the American automobile industry. Although these legislative acts applied to all three major auto makers, Chrysler’s management argued that the cost of compliance was unreasonable and unequal in its effect. Lee Iacocca alleged that a good part of Chrysler’s financial problems resulted from the need to raise massive amounts of new capital to meet these intense federal regulations. Examples of these regulations are, The Clean Air Act of 1963 which mandated the amount of pollutants that cars could emit, The National Traffic and Motor Vehicle Safety Act of 1966 which imposed certain safety standards on all American auto makers, and The Energy and Policy Conservation Act of 1975 which mandated that by 1985 all automobile fleets must meet an average gasoline consumption standard of 27.5 miles per gallon (Harrison, 1999). The financial impact from these federal regulations and others like it had put the Chrysler Corporation under substantial economic strain which ultimately lead up to its emerging dependency upon the federal government for patience and assistance. While the battering of all the new federal regulations seemed to be more than the struggling corporation could bear to handle it was also facing smaller battles such as the rise in gasoline prices, higher interest rates, severe inflation, and a weakening consumer confidence. All in which led Chrysler to be highly dependent upon the federal government for financial patience and assistance in the event of any more struggles. Chrysler’s frustrations were building especially in the affect that its major competitors were handling all the rapid environmental changes so well. While Chrysler may have been in the bottom of the “Big Three” automobile manufacturers of the United States the gap from third to second place seemed a lifetime away. However, the battle that came next would not only impact Chrysler but all of the “Big Three” manufacturers. “By the early 1970’s American automakers were facing strong global competition both at home and abroad. Japanese automakers in particular made a significant impact on the industry by introducing smaller, less expensive, and more fuel-efficient automobiles to the American market (Braun).” Gasoline prices spiked and with it shifted the American consumer’s interests toward smaller, and more fuel-efficient automobiles such as the Japanese were offering. By this time Chrysler had still yet to switch any of its major focus away from producing larger, less fuel-efficient, automobiles and was once again caught in a dramatic spiral even closer towards bankruptcy due to its lack of awareness and inability to adapt to the consumer’s needs. Subsequently, while no credit is withdrawn from the fierceness and complexity of the discussed environmental factors that the Chrysler Corporation was facing, Lee Iacocca suggests that these were not the main source of the company’s problems. Joining Chrysler as President in November of 1978 it was clear to Iacocca that the company’s worst enemy was with all assurance its own self. In fact, Chrysler’s internal management was so horrendous that it had gained a well-deserved reputation for being one of the worst managed companies in America (Harrison, 1999). Until the Lee Iacocca the company was on a sure path towards bankruptcy.
Alternatives and Solutions to the Crisis Upon taking up the Chrysler presidency, Lee Iacocca knew that the only way that the company could even have a chance at regaining some of its old glory and once again be a strong and prosperous business was with government assistance. This left Iacocca no other alternative but to immediately call for the federal government’s assistance in aiding to Chrysler’s rescue. With this in mind the choice of alternatives was not left up to President Iacocca but to the United States Congress and the Carter Administration (Anastakis). “The decision makers in Congress and the administration considered several alternatives, but some of them were alternatives in name only (Harrison, 1999).” Such as congress could do nothing and wait to see whether Chrysler would miraculously overcome all of its financial obstacles. An alternative highly considered by Senator Proxmire was bankruptcy however Chrysler’s management proffered numerous arguments against bankruptcy which often depicted many worst case scenarios. For example a statement to Congress from Chrysler’s management, “A Chrysler bankruptcy could cost the Federal Government more than $1.5 billion in 1980 and 1981 alone. We estimate the total cost for those years at a total of at least $2.75 billion, and amount that includes loss of revenues, unemployment claims, welfare costs, and other incidental costs. Furthermore, there would be a substantial cost to the state and local governments (Harrison, 1999).” A more favorable alternative for Chrysler was the issue of tax credits from the federal government. After posting its losses in the second quarter of 1979 Chrysler pressed President Carter for a $1.0 billion advance from the Treasury to be applied against tax credits it would earn in future years nonetheless, that concession would have required special legislation and a rightful justification that Chrysler would have been able to repay the tax credits in the future. Therefore the request was denied because there was no supporting evidence that Chrysler would survive to repay the credits in the future. Another considered alternative was for Congress to delay the federal standards that had been recently passed allowing them more time to gain the necessary capital to come into compliance with those standards. Nevertheless, as Congress debated several viable points were made that doing so would raise difficult policy problems, the regulations were only one of the many elements and costs in Chryslers crisis, there was no persuading evidence that without the regulations Chrysler would not be in the same dilemma, and lastly the company had already shown an inability to manage its internal finances in so that it could raise the capital needed to meet with regulations. The next alternative was loan guarantees and was highly considered by both sides. This was due to the fact that the loan guarantee agreement could be written in a way to protect the federal government from any noncompliance or performance, in the event of a business failure, loan guarantees would constitute a prior claim on assets, the loan guarantees were not directly dependent on the generation of profits for repayment, and lastly the loan guarantees would provide more security than the other discussed alternatives (Harrison, 1999). The last and final alternative was matching loan guarantees which had all of the general advantages of unsecured loan guarantees but had added security by requiring the stakeholders to signify their faith to the survival of Chrysler by matching dollar for dollar the federal loan guarantees (Harrison, 1999). Consequently, this alternative seemed to be the most effective and secured satisficing solution.
The Chosen Alternative On December 21, 1979 the choice had been made and the Chrysler Corporation Loan Guarantee Act was passed and on January 7, 1980 President Jimmy Carter signed the bill into law. Iacocca could now breathe a sigh of relief but how did one man accomplish such a major feat by not only saving a failing company but effectively transforming an entire organization into a successful and profitable business? To do so Iacocca took four key steps in the period between 1979 and 1982 to help Chrysler recover. First, Iacocca used Chrysler’s dire situation to create a sense of urgency to everyone involved, employees, investors, and politicians. Everywhere Iacocca went he walked the tightrope by emphasizing the trouble that the corporation was in dramatizing on the number of jobs that would be lost and how it would impact the finances of the surrounding local and state governments to prove that Chrysler was worth saving. In the end, Iacocca’s dramatic calls got his message heard across the nation as he raised a sense of urgency to save the corporation. “Secondly, Iacocca challenged the historical relationship of the “big three” auto companies to the government by asking for aid. Convincing Americans and their politicians that Chrysler needed help was only part of the battle. Iacocca also had to persuade them that the notion of government aid through loan guarantees was not only necessary, but also not un-American (Anastakis).” Iacocca received much criticism from both politicians and the other automobile manufacturers for his untraditional request but still travelled countless miles all over the Midwest and even north to Toronto and Ottawa to get his message across. “Third, Iacocca successfully managed and negotiated the myriad networks of management, unions, suppliers, and banks within the Chrysler constellation to position the company to take advantage of the government loan package. Among Chrysler employees, Iacocca had to fire thousands of managers and salaried staff. On the union side, the United Automobile Workers (UAW) leadership was mostly onside and agreed to concessions, though not without acrimony (Anastakis).” Perhaps the most difficult to come to agreement were the UAW and all 442 of lending institutions that were required before the law could be passed. The UAW fought back and forth with Chrysler and the public media to find an equal balance with the employees in mind but finally negotiated upon giving the firm $622 million in wage and benefit concessions, and its salaried personnel had conceded $161 million to help minimize job losses (Glasberg, 1989). Finally, Iacocca made a conscious decision to become the public face of the company and utilized his skills in sales to create a marketing and communication strategy that made him the central actor in Chrysler’s turnaround. Iacocca not only leveled with politicians about Chrysler and its problems; he leveled with all of Chrysler’s employees and stakeholders about what they needed to do to save the company. By communicating his vision to not only the employees but also to all interested parties, Iacocca was able to successfully get the entire nation on track to accomplish the same goal of saving Chrysler. In conclusion, Iacocca took one major goal of rescuing the Chrysler Corporation and broke it down to four separate goals in order to successful change the entire internal and external organization of a company.
Conclusion
In conclusion, Chrysler like many other companies had made its fair share of mistakes. From the decision of it’s off trend radical design of the Streamlined Airflow design in its early days, to not being innovative enough in the 1950’s, and failing to use the foreign automobile competition to its economic advantage in the 1970’s. However, Lee Iacocca proved that through all of the adversities and mountains of debt that the Chrysler Corporation faced it was worth saving. Changing the organizational structure of the entire company was no easy task but proved successfully by the 1990’s when Chrysler was named one of the most profitable and well managed businesses in America.
My Recommendations Throughout the transformation process I found Lee Iacocca to use many of the same steps as John P. Kotter suggests in his book “Leading Change”. Like Kotter’s book recommends my research signified that Iacocca did a great job by establishing a strong sense of urgency among his employees, the politicians, and the American people. Also he was great at developing and communicating his vision and strategy with all interested parties. Nonetheless, I can’t help but feel that Iacocca may have benefited from Kotter’s advice in spending a little more time on creating a guiding coalition and empowering others to assist him (Kotter, 1996). While I’m assured that Iacocca had to have had some help in the organizational change of the Chrysler giant it seems as though he may have benefited from allowing a few more individuals to share the face of the company with him to help bear the load of all the stress and scrutiny he faced. It is evident now that Iacocca is viewed as a hero and as “the man who saved Chrysler” but the story could have easily have gone the other way with the addition of any more adversities for the Chrysler President. Gladly however, Lee Iacocca’s efforts were not in vain and instead of being labeled as the man that tried to save Chrysler, he is known as the star of the company.
References
Anastakis, D. (n.d.). Retrieved from http://www.thebhc.org/publications/BEHonline/2007/anastakis.pdf. (Anastakis)
Braun, J., Guthrie, M., McCampbell, E., & Sit, V. (n.d.). Retrieved from http://www-personal.umich.edu/~afuah/cases/case3.html. (Braun)
Glasberg, Davita Silfen. The Power of Collective Purse Strings: The Effect of Bank Hegemony on Corporations and the State. Berkeley: (pp. 61-102) University of California Press, c1989 1989. http://ark.cdlib.org/ark:/13030/ft4x0nb2jj/. (Glasberg, 1989)
Harrison, F. (1999). The managerial decision-making process. (5th ed., pp. 408-424). Boston, New York: Houghton Mifflin Company. (Harrison, 1999)
Kotter, J. (1996). Leading change. (pp. 33-145). Boston, Massachusetts: Harvard Business School Press. (Kotter, 1996)