After twelve years of reliable use, I decided to replace my track car. Safety and sustainability were my primary motives. In taking myself through the process, a past management influence that I think about from time to time came to mind.
Peter W. Schutz was the CEO of Porsche AG between 1981 and 1987. After retiring from Porsche, he became a public speaker, management consultant, and author – speaking and writing about practical management principles and his time at Porsche. I had an opportunity to spend a day with Mr. Schutz in 2014. I was hosting a ‘Vistage’ peer advisory meeting at my company, and knowing my fondness for motorsports, my Vistage Chair asked Mr. Schutz to present to our group. He graciously accepted our invitation, and we had a most enjoyable and informative day. Peter’s book “The Driving Force” was published nine years earlier. His book was the basis of his presentation, and he was kind enough to give me a personalized copy. His inscription: “Never go to any race without the objective of winning.”
Mr. Schutz’s most noteworthy accomplishment as a CEO was his successful turn-around of Porsche AG. Trained as a diesel engineer, Porsche hired him into their organization while they were having branding and directional challenges. They were losing money. By 1984, three years into his tenure, Porsche AG had record profits, clear direction, and had re-established its brand. His most notable achievements within Porsche were re-committing Porsche to racing, setting up distribution for Porsche (independent of Volkswagen) in the United States, and resurrecting the Porsche 911 program – slated for cancellation in 1982. On the racetrack and the street, the automotive world would look very different today had the iconic 911 ceased to exist.
Peter W. Schutz died on October 29th, 2017, at the age of 87. Although thirty years removed from Porsche, the New York Times and the Wall Street Journal, as well as a multitude of local newspapers and industry periodicals, recognized his passing.
Many years before Peter’s visit to my company, I received a cassette tape in the mail as a solicitation to join a CEO peer group. Although I did not join the group, I listened to the recording. It was a presentation from Peter, from early in his post-CEO presentation days – before he had written his book. It was also early in the development of my company. For me, hearing directly from CEOs that had ‘been there and done that’ is especially meaningful. Mr. Schutz’s experiential wisdom proved valuable for me over the many years of building my organization.
I recently re-read “The Driving Force.” I was able to do so in the context of the current business climate, with its shifting culture and contemporary values. Although there is a changed nomenclature in the modern business lexicon, I recognized how truly progressive Peter was. His success at Porsche was affirmation for many positions I hold today – almost forty years later.
Not once in his book did Peter use the term ‘stakeholder,’ but he wrote about the importance of treating people well. Written when businesses were predominantly shareholder-oriented, he repeatedly cited examples of his stakeholder orientation and understanding that shareholders are ‘better served’ over the long-term by being oriented toward stakeholders. Peter cited examples in companies other than Porsche, where his ‘stakeholder’ affinities put him at odds with management’s ‘shareholder’ orientation. He told the story of a lending institution and how when the anticipated consequences of a potential revenue shortfall might have dissuaded disclosure, he reminded his team that the institution was ‘part of their family,’ and full disclosure and transparency were required.
Although he didn’t specifically use the phrases ‘higher purpose’ or ‘reason for existence,’ he frequently wrote about the importance of work being meaningful. Peter told a story about a group of employees whose responsibility was to ‘mount tires on rims’ during a Le Mans race. When asked what they were doing, they were not ‘mounting tires on rims,’ they were ‘helping to win a race.’ In essence, not laying bricks, but helping to build a temple.
Additionally, my re-read of Peter’s book reminded me of two lessons I learned from my first exposure to Peter’s principles – each of which were perspective-changing and proved valuable to me over my many years in business.
The first lesson regarded the pricing of a product – how to price a product when bringing it to market. My perspective had always been that there are two fundamental orientations when going to market. The first orientation is to engineer a variable customer experience to a targeted price point. In this case, the price point is the constant, and the customer experience is the variable. The other orientation is to engineer a targeted customer experience to a viable price point. In doing this, the customer experience is the constant, and the price point is the variable. The customer experience is primarily product quality and service levels. In both cases, the customer experience and the price point must be viable and sustainable – and there is an optimizing of either the customer experience or the price point (depending on the orientation).
Either of these is a viable strategy, and if effectively realized, can position a company for success. The correct orientation would depend on consistency with mission, culture, model, and purpose. Less likely to succeed would be something in between these orientations. An in-between direction may be a confused orientation that lacks clarity. IKEA would be an excellent example of the first orientation, effectively executed. In their case, they engineer the best experience they can (variable) to accommodate a targeted, market-based pre-determined (optimal and fixed) price point. In my company we did the latter. We set the best price we could (variable) for a targeted and optimal customer experience. In the former, the primary added value for the customer, relative to the market, is a lower price. Improving the customer experience relative to the targeted price point adds value. In this regard, IKEA excels, hence their success. In the latter, the primary added-value, relative to the market, is a superior customer experience. Value is added by lowering the price point relative to the targeted and optimized experience.
In my company, we had a mantra of ‘always better before cheaper,’ and we instinctively traded up on quality and service when there was an opportunity to do so – provided such a trade up was economically viable. We would then adjust prices to accommodate the experiential changes. As such, we were oblivious to our competitors’ pricing. Conversely, with the ‘price-targeted’ orientation, awareness of competitors’ current market pricing is essential.
Peter’s guidance for pricing strategy is more applicable to the second orientation – the one we adopted. This orientation made sense for a brand like Porsche, where the customer experience would transcend price sensitivity. His view was that merely marking up from cost to achieve a target margin is insufficient. Doing so is an ‘inside-out’ strategy that disregards the customer as a stakeholder. Peter also believed that regardless of market research, there is a limit to what we can know about how the marketplace will receive a product relative to its price point. We can only know this after the product is launched and over a sufficient length of time. For these reasons, Peter believed that it is best to under-price a product at launch, with a relinquishing of margin – and then to gradually raise pricing over time to determine an optimal price point – a delta of margin and volume. Launching at a lower price to trigger consumption and then progressively raising prices to achieve necessary margins is favorable for a product’s brand perception and well suited to a healthy branding initiative. Conversely, launching at a higher price and diminishing reception, and then lowering the price to trigger consumption will damage the brand perception. As a result, it will force a continued cycle of brand erosion and price declines to a level of unsustainability.
When I read this in Peter’s book, it was affirmation – as this principle of pricing is what we had ‘intuitively’ done in building my company. We took it one step further. We believed that as we raised our pricing to the marketplace, we could not dilute our product’s value to the customer. The customer had to be protected. So, we continually looked for new opportunities to improve our products and services as we raised prices. In doing so, we achieved sufficient margins by diluting fixed rather than variable costs. In this case, price increases had an associated and proportionate increase in variable costs. However, we would dilute fixed costs by the higher pricing – provided the added value for the customer was real and intuitive – and that this added value was endemic to the brand. If these conditions were present, we effectively retained sales volumes as we increased prices.
The second lesson from Peter was more obscure than the first, but we found it vitally important to grow the company. In its simplest terms, ‘the making of decisions should be democratic, and implementation of decisions should be autocratic.’ A company was not likely to be competitive or to move fast enough in a changing marketplace if implementations had to be democratic and by consensus. Once an organization has democratically made a decision, there should be an autocratic implementation of that decision. The efficiency of autocratic implementation is a necessity in a fast-moving landscape – and the more participatory and democratic the decision-making process is, the more license there is for autocratic implementation. Peter recognized a proportionality between the decision-making process’s democratization and the amount of authority tolerated in its implementation. When viewing a decision considered to be democratically made and having consensus, the implementation can be authoritarian. When the perception of a decision is as authoritative, and without consensus, the implementation would have to be democratic. In this view, decision-making and implementation have a yin and yang quality of coexistence and complementarity.
Peter explained that most companies get this wrong. They do it backward. Because building consensus and utilizing a democratic process is slow, cumbersome, and laborious – and because the decision making is at the front end of the process, there is a tendency to make decisions autocratically. This process then defaults to a democratic implementation, which is not likely to be successful – it would be too slow and unresponsive to provide a competitive advantage. Worse would be a dictatorial decision with a dictatorial implementation. In this manner, a process would be disengaging and disenfranchising to employees, making an effective implementation almost impossible. A democratic decision with a democratic implementation would be cumbersome and inefficient to the point of having little or no value.
Peter viewed the implementation as being more valuable than the decision. In his book, he states that “a bad decision well implemented is better than a brilliant decision not well implemented.”
Revisiting Peter’s principles from his stewardship at Porsche AG and as presented in “Driving Force,” I was reminded of my belief in the value of individuality checked against a strong embracing of values. Individuality lends itself to a blossoming of dynamism and creativity. This blossoming helps safeguard against a tendency toward autocratic decision making. A more prolific emergence of ‘fresh ideas’ for consideration accelerates a trend toward participatory decision-making, including more ‘good ideas’ around which an effective leader can build consensus. The collective ‘buy-in’ or agreement for the idea or the team members’ decision provides the conditions for a conflict-free, efficient, and effective autocratic implementation.
In my re-read of ‘Driving Force,’ I was struck by a third lesson that I had not recalled from the first reading. This lesson was that ‘rules’ should primarily be ‘prohibitions’ rather than mandates or instruction. At the same time, values are paramount. Peter specifically connects the limiting of rules to predominantly prohibitions, with fostering individuality. The reasoning is that if you have clear rules about what team members may ‘not’ do, then you also have the luxury of providing a more liberal culture where employees can make more of their own decisions about how to do things.
As I read this, I thought about my positions regarding rules and values. I advocate in prior articles for emerging individuality through a culture of ‘rules only where necessary’ and ‘values wherever possible.’ I had not considered that if rules are mostly limited to prohibitions, we virtually recognize the same principle. ‘Prohibitions’ in this context serve the same purpose for rules as ‘only where necessary.’ Rules only where necessary are the prohibitions, and values wherever possible are the preclusion of mandates and rules-based instruction. The use of rules as prohibitions to accomplish the same is smart and effective.
Closing
For the 2020 model year, Consumer Reports rated Porsche the best car brand, with an overall score of 86 out of a possible 100 – the highest of any brand tested. Porsche has become a pioneer of sustainable mobility and a notable player in the movement toward electrification with its electric Taycan model – and more battery-electric models on the way. They have introduced body panels made from a natural fiber mix consisting of flax and hemp fibers for some of their cars’ racing variants. In the 2019 financial year, Porsche AG saw deliveries, sales revenue, and operating results (before special items) at record levels.
Mr. Schutz’s time at Porsche AG ended thirty-three years before the writing of this article – and Porsche AG, with strong leadership, has done a lot right over those thirty-three years. However, his era at Porsche AG marked a turning point that set the company on this trajectory. His principles and management philosophy are all the more relevant and worthy of a contemporary framing and consideration in the current business landscape.
