Renault Got It. GM Didn’t. Business Philosophy Matters.

What is the primary purpose of a business?  Is it to make profits for shareholders?  Ensure employment for a nation?  Or to serve a customer need profitably?  I have argued for the marketing orientation and against the shareholder or the employee orientation in the past with respect to Southwest Airlines, but rarely have a seen such a clear contrast between philosophies and outcomes as what can be found in the European auto industry right now.

Renault’s small car segment is led by Arnaud Deboeuf, a person with a clear marketing orientation and better yet, clear profitable results from taking this orientation.  In a market where GM loses $630 on every car sold, Mr. Deboeuf is earning above 6% profit margins on €7,700 cars.  How does he do this?  Philosophically simple, practically difficult.  Start with the customer need and work yourself back to the product.

Customers >> Value >> Price >> Cost >> Product

You don’t have to take my word for it either.  In a strategy Mr. Deboeuf describes as “design-to-cost”, he tasks designers and engineers with delivering products at a cost that can profitably be sold to customers.  Or, in his words, “We start by asking ourselves how much clients are prepared to pay, for example for air conditioning, and then ask the supplier to propose a solution within a set price, including our margins.”

Here, Renault’s Mr. Deboeuf clearly takes the marketing orientation, and as a result, is profiting.

What about discounting and promotional pricing?  He doesn’t need to do it and so doesn’t.  In fact, the product that meets customer needs is in such demand that customers are willing to add optional extras which further boost Renault’s margins.

Can this approach be copied?  Yes, with difficulty.  Refocusing an entire organization and system on serving customer needs, rather than shareholders or its equally misguided counterpoint of employees, isn’t an easy proposition.  Perhaps it is this challenge which prompts Carlos Ghosn, CEO of Renault, to state in the company’s 2011 performance presentation that “There has been some copying of the product … but the success isn’t coming only from the product – it is coming from the system.”  In other words, it isn’t just the product, it is the relatively inimitable competitive advantage delivered by taking a superior approach to business that is propelling Renault forward in this market.

In stark contrast is GM’s Opel unit.  As Stephen Girsky takes over GM’s European operations, his mandate appears to be focused on managing overcapacity.  Labor unions and government policies have spurred a reduction in production capacity, leaving plants operating at 65% of capacity.  His plainspoken and direct approach might lead to a rational resolution to these challenges by shrinking the firm.

But what about the alternative?  Creating products that customers would want and therefore filling capacity with demand?  This appears to be unlikely.  Opel’s new product for Europe:  a mini-SUV.  In other words, this misguided 19^th century-esque battle between shareholders and employees has left Opel offering more of the same types of products which customers have to be convinced to purchase.  This is the production and sales orientation that can be described as starting with the product, squeezing costs, adding a margin, telling customers that the product has value, and then, luring in customers with discounts that kill margins.

Product >> Cost >> Price >> Value >> Customers

How is this working for Opel?  Even they acknowledge they have branding issues in Europe.  And they have profit issues as well.

While I agree Opel needs to address its cost structure in short order, I also submit to you that this challenge is the result of doing the wrong thing for too long leading to a crisis that could have been avoided.

(As a point of clarification, the point isn’t that Girsky’s mandate given the current condition of the business unit and its performance prospects is incorrect, but rather that the historic requirements laid upon Opel and the management decisions of Opel have led to a dire situation.  At this point, reduction in production capacity is strongly needed to ensure resources are properly allocated toward uncovering and serving new customer needs.)

So, here we have two firms.  Opel focused on production and sales.  Renault focused on customer needs.  Opel taking the production and sales philosophy.  Renault taking the marketing orientation.  Opel losing money.  Renault making money.  It seems that philosophy does make a difference.