Running head: lee iacocca and government aid 1 Lee Iacocca and Government Aid: the Chrysler Bailout of 1979

Lee Iacocca and Government Aid: the Chrysler Bailout of 1979

Lee Iacocca and Government Aid: the Chrysler Bailout of 1979

Amongst the titans of the American auto industry, few names outside of the Ford family resonate like that of Lee Anthony Iacocca. His career spanned more than five decades beginning in 1946 at Ford and ending in 1992 after a nearly twenty year stint at the helm of Chrysler. He is connected with many of the most significant auto launches in history, including the Mustang and Pinto (while at Ford) and the K Car and modern minivans while at Chrysler. He was also an innovator in terms of the promotion of purchasing cars on credit. Certainly, though, his legacy will always be tied to the Chrysler bailout of 1979. This was the defining challenge of his career and one which he utilized all of his leadership skills. It was not simply a matter of redesigning a company in crisis. It was indeed that, but it was also doing so within the much broader political and cultural environment of the times (Halpert, 2009).

The ramifications of the Chrysler bailout have been felt throughout the intervening years, and at no point more so than in 2008 during the US government’s even larger bailout of the car industry. It was the 1979 Chrysler bailout that changed the dynamic of the conversation regarding the role of government in business from never to possible when a company was “too large to fail”. Lee Iacocca successfully made this case before the US Congress on behalf of Chrysler. Much larger US government bailouts of companies and industries “too large to fail” have followed (“1979 Chrysler,” 2008; Halpert, 2009).

Iacocca’s central role in the 1979 bailout is worthy of considerable study as it provides a window into the behavior of a true leader. Drath (2001) explains that leaders of organizations must address three tasks which include setting direction, creating commitment, and facing adaptive challenge. It is the third of these tasks that this paper shall address as it is the most interesting and clearly gets at how Iacocca so dramatically impacted the US car industry and the economy more generally. According to Drath an adaptive challenge is one in which “the people in the community or organization cannot agree on the nature of the challenge, the degree of its significance, or sometimes whether a challenge exists or not” (p. 21). Indeed, it was just such an environment that Chrysler found itself in at the end of the 1970s.

It is also instructive to consider how Iacocca, as a leader, approached the issues related to Chrysler’s adaptive challenge. Bolman and Deal (2008) find that there are four frames of leadership, which include the structural, human resource, political, and symbolic. These frames can be understood as mechanisms for leaders to organize their worlds or approaches to leadership. It is important to recognize that leaders may utilize multiple frames when addressing different leadership challenges. Leaders may over time move from one primary frame to another as they are neither rigid nor fixed.

The adaptive challenge at Chrysler in 1978-1983 required an extraordinary response which included the necessary engagement and participation of a number of institutions and actors beyond Chrysler. These included local and national political leaders, the US Congress, and the United Auto Workers (UAW). The hallmark of Lee Iacocca’s tenure at Chrysler Corporation during the bailout was that he principally utilized the political frame to guide his leadership.

Setting a New Direction

Lee Iacocca completed a remarkable set of transitions in 1978-1979. He moved from being fired as president of Ford, to becoming the president of Chrysler, and then to assuming the chairmanship. In large measure, his separation from Ford was precipitated by differences with Henry Ford II over the future of the automobile industry and specifically the kinds of cars that Ford would bring to market. Ford’s loss was Chrysler’s gain as they quickly brought Iacocca and key deputies on-board (“1979 Chrysler,” 2008; Halpert, 2009). These transitions took place against the backdrop of multiple recessions, oil crises, and the emergence of foreign car competition. The situation at Chrysler was compounded by the fact that the company was “struggling with its largest-ever quarterly loss, a fleet of inefficient cars and high gas prices” (“1979 Chrysler,” 2008, para. 8).

The new direction for Chrysler, however, was clear to Iacocca. It would be built upon the smaller more fuel efficient cars and practical minivans that were not accepted as part of the future of Ford. In order to achieve this goal, Iacocca would utilize each of the four political skills that undergird the political frame: agenda setting, mapping the political terrain, networking and forming coalitions, and bargaining and negotiating (Bolman and Deal, 2008).

Securing the Loan and Buy-In

Upon his arrival to Chrysler, Iacocca knew that he needed both time and money in order to save the company and to reposition it for the future. Thus, he sought for and received the largest – at the time – government intervention in private industry. The related legislation became known as the Chrysler Corporation Loan Guarantee Act of 1979. The legislation provided Chrysler with a $1.5 billion guarantee on funds that Iacocca and Chrysler would have to borrow on the open credit market (“1979 Chrysler,” 2008).

Iacocca was an astute observer of the prevailing political terrain. Upon his assumption of the chairmanship of Chrysler in 1979, he agreed to a $1 salary until the company was profitable. He always flew commercial between Detroit and Washington for his regular meetings with Congress (“1979 Chrysler,” 2008). He would not be seen as out of step with what he would be asking for from Congress. Iacocca went to Washington frequently and personally worked to persuade members of Congress of the need for the US government to intervene in Chrysler. He did similar outreach efforts to local and state representatives in Michigan. The “Chrysler bailout” involved more than 250,000 Chrysler employees. They were a key leverage point in the bailout negotiations and required Iacocca’s personal intervention to bring them (as represented by the UAW) as well as white collar staff to accept $2 billion in cuts that were required by Congress (“1979 Chrysler,” 2008).

Ultimately, it was Iacocca’s masterful networking and negotiating work that created the political space for the loan agreement to be secured for his company. He strategically used actors and institutions to act in a coordinated way to influence members of Congress. Iacocca saw the adaptive challenge that Chrysler faced as one that he could best address through the political frame.

With loan guarantees secured from Washington, Iacocca turned the attention of the company to building cars that would sell in the changed US car market. The first step in this process was Chrysler’s launch of the front-wheel drive and fuel-efficient K-cars in 1981. Halpert (2009) notes that this launch was followed in 1983 by the “even more dramatic breakthrough, the first minivans, the Dodge Caravan and Plymouth Voyager, which drew hordes of families to showrooms and set the standard for family-friendly transportation” (para. 1). With a trimmed Chrysler and money from the loans in hand, Iacocca was able to reshape the auto industry and set the agenda for the immediate future.

In 1983, Chrysler and by extension its chairmen, Lee Iacocca, announced with great fanfare that they had repaid the loans guaranteed by the US government – seven years early. This was a significant outcome for both Chrysler and Iacocca’s argument for the positive benefits of government intervention into private business. Indeed, for Chrysler they now had a new lease on life. For Iacocca, the success was validation of not just his success in securing a government bailout for Chrysler, but more generally for his use of the political frame to address the critical adaptive challenge facing the company.

Conclusion

It is clear that Iacocca had a unique sense of the car market in the United States in the late 1970s and 1980s. He also understood where he could effectively exert influence in Washington, how to cajole labor unions to relent on prior agreements, and to reposition Chrysler for the future. He understood that Chrysler would have to adapt its design process more quickly to adapt to meet global market pressures.

While Iacocca did utilize all four frames described by Bolman and Deal (2008) in addressing the adaptive challenge at Chrysler, it was his adept use of the political frame as manifest in his careful efforts to reshape the political agenda, his clear understanding of the political terrain, his effective efforts to create the winning coalition for the bailout, and his skills at bargaining and negotiating that allowed for a deal to emerge that gave Chrysler both the time and money that it needed to successfully address its adaptive challenge.

The structural frame was evidenced by Iacocca’s efforts to reorganize the company after 1978. The human resource frame was likewise in evidence as he worked with the UAW to renegotiate their labor agreement with Chrysler. And, of course, the symbolic frame was regularly in evidence in Iacocca’s now famous efforts to re-brand Chrysler as the “New Chrysler”. All of this was peripheral, however to Iacocca’s methodical and seemingly natural use of the political frame to overcome Chrysler’s adaptive challenge.

As a leader, Iacocca brought unique skills to Chrysler in 1978. He was prepared to lead where others had failed to bring necessary change to Chrysler. He was innovative in his approach to securing financing to realize this change. His success in securing loan guarantees from Congress was a landmark outcome that provided the foundation from which the “New Chrysler” triumphantly emerged. His utilization of the political frame was the key to realizing these outcomes. The ramifications of Iacocca’s success are subject to considerable debate, but their importance to allowing his business to rise from the adaptive challenge that it faced are indisputable.

References

Retrieved from https://washingtontimes.com

Bolman, L.G. & Deal, T.E. (2008). Reframing organizations: Artistry, choice and leadership (4^th

ed.). San Francisco, CA: Jossey-Bass.

Drath, W. (2001). The deep blue sea: Rethinking the source of leadership. San Francisco, CA:

Jossey-Bass.