Online Extra: Danke Panke

Helmut Panke became chief executive at BMW in 2001 as the company was recovering from the failed 1994 acquisition of Rover. He has since powered the German automaker through the fastest model expansion in its history. On Aug. 31, Panke turned 60, the mandatory retirement age at BMW, handing over the job as CEO to production chief Norbert Reithofer on Sept. 1. His legacy is a company that churns out top profits but nonetheless continues to question its own success—and innovate at a breakneck pace.

Panke, a PhD-holding physicist who did brief stints as a physics professor and a consultant at McKinsey before joining BMW, epitomized the automaker's bottom-up culture throughout his 24-year career. His easy-going, walk-around management style encouraged staffers to express opinions, challenge the views of associates or superiors, and even engage in debate with Panke himself.

Unlike the Sun King CEOs who dominate many large corporations with their oversize egos, Panke loves to engage in arguments that test his preconceptions and make him see things differently. "I hate to admit it, but you're right," says Panke, when he's won over—according to managers who work closely with him.

PERFORMANCE CLASS. The trim, energetic, detail-obsessed manager constantly set an example for breaking down silos to speed the transfer of knowledge throughout the company—one of the secrets of BMW's success.

Like many archetype BMW chiefs, Panke, who sits on Microsoft's (MSFT) board of directors, gathered his own intelligence about the $60 billion automaker by showing up in factories, sales offices, company cafeterias, research labs, and test tracks to ask a lot of questions. His personal knowledge about everything from new engine technology to electronics software and market trends runs deep. His favorite tactic in the boardroom was throwing out intelligence he gathered from "the machinery room," a German idiom meaning the deepest levels of the company's operations—his own secret sources—and sparking debate.

Even as a member of the Germany's industrial elite, Panke remained a low-key manager who avoided hobnobbing with politicians, preferring to spar with his own employees, test-drive the company's cars, or escape the official routine to do his own market sleuthing in Asia. A top priority for Panke is spending one day a month behind the wheel of new BMW prototypes or rivals' cars, together with the entire management board, scrutinizing everything from handling to interiors to design.

The performance-obsessed CEO—who drives his own 7-Series sedan on weekends—sent the entire management board, including himself, through three days of expert-driving school. At BMW, no one is excluded from the relentless pressure to sharpen skills. Panke spoke with European auto correspondent Gail Edmondson about how BMW's management culture balances creativity and discipline to drive innovation.

How does BMW balance the creativity required for innovation with the discipline needed for building high-performance cars?

Our philosophy is to get recommendations and then take decisions on the level where the competence lies, which by definition is not always at the top of the company. If expertise sits at the level of a department manager, he or she should decide—whether you are an engineer for R&D, or marketing expert, or technical planner—the archetype BMW associate has more freedom and authority to decide what he or she does than in most companies.

Despite our focus on innovation, on technology, and on marketing, we have a culture of strong cost controls, and we are driven by cost targets, even in the early stages of developing a car. Still, the individual has more room to decide how he or she will reach the targets that have been agreed on.

Can you give an example?

The freedom BMW associates have can be exemplified by major capital investment decisions that don't reach the board of management but are decided one or two levels lower in the organization. Projects with a value of up to several hundred million dollars don't need 10 stamps of approval. In other organizations they would go to the board.

So where are the controls?

No individual is in a position to decide alone. We have the four-eye principle. Contracts with binding agreements must be approved and signed by at least two people.

BMW has been a pioneer in implementing new management concepts and organizational models. You were very quick, for example, to jump on the idea of creating a "skunkworks" to spur innovation outside the corporate organization. How did a German-based company decide in the early 1980s to be among the first to test a newfangled approach to innovation?

BMW was among the first companies to create its own skunkworks. We heard that Lockheed took engineers out of the regular organization to work on special projects. We thought the approach interesting and created BMW Technik GmbH—which was designed to bring together engineers with different technological backgrounds.

Their work was not specifically project-based or budget-based. They could play. Out of playing around, they created the Z1 concept car, with downward moving doors. They explored the possibilities of working with different materials and engines. [Today's Aston Martin CEO] Ulrich Bez ran it in the beginning. We set up the company in a different building [in Munich] and created an entirely different HR and compensation system. BMW's contracts and work-time limits didn't apply. To give an example, employees were allowed to work at night if they wanted to.

What about BMW CarIT, another research satellite that orbits your huge R&D operation in Munich but is not integrated into the mother ship?

In 2001 we created BMW CarIT on the same principle—an outside R&D satellite to spur innovation in automotive information technology. It has a totally different culture and environment than BMW's. We wanted to tap the potential of top software engineers for the future IT architecture of the car. They look at a car as a moving shell for a kind of holistic or integrated software architecture. As the amount of electronics in cars soared in the 1990s, we needed this kind of expertise to design standards for the next-generation cars. Without a separate IT company, we would not have been able to attract and motivate this top talent.

The design of your main R&D center in Munich is itself a product of experimentation, spurred by MIT research that concluded that communication among workers dropped dramatically after 30 meters. Where did the impulse come from to transform MIT theory into practice?

We have always tried earlier than others to be part of the innovation and high-tech community. The Research and Innovation Center in Munich evolved step-by-step. It's a kind of building-based lab environment. MIT Professor Allen said if people have to walk more than 30 meters to talk to each other, communication is nearly nil.

So we experimented with a building design that is basically a beehive network structure, like a honeycomb. At that time, BMW's different divisions were very powerful and autonomous. The new R&D center was part of CEO [from 1970 to 1993 Eberhard] Von Kuenheim's drive to get those divisions working more closely together and more strategically.

The overriding strategy was to think and act as a whole company, not in isolated divisions, and thus end the dominance of the "towers of power" in the organization. Von Kuenheim believed BMW would become a more efficient organization if you could bring together specialists and get them to work across divisional boundaries.

Then in 2004 you applied the same elbow-to-elbow principle to the "Project House" to develop new models, not just new technologies. There you forced teams of designers, development engineers, production experts, finance managers, and marketing executives to move in together for three years and work together in open office spaces hammering out conflicts over new models. It seems BMW has been evolving a theory and practice over 25 years to enhance the flow of knowledge throughout the company.

Yes, we saw information as a tool and weapon to create a competitive edge and designed a culture with a management approach that was different than in the 1980s. We had the living lab experience of the FIZ in the first phase. We had learned that we could be faster and better if we didn't focus on silos. The important next step was how to be more innovative, more open, and have parallel processes instead of sequential processes.

How would you describe BMW's management culture?

It is a much more informal, open, nonhierarchical way to work. I get e-mails from associates deep down in the organization with creative proposals or simple comments. My door is open. It's not uncommon to have managers below my immediate reports to call me [directly]. There is no structured hierarchical process communication. We have become more open. In 1982, it was a no-no to call another division. You wrote memos that went up and down the chain of command.

BMW encourages employees to speak out and defend their ideas—even to the point of prompting open conflicts. How do you manage that process effectively?

It's a positive handling of different opinions and judgments. One good example is the process of tangible discussions, step-by-step, in designing a new model. Design starts at the beginning of the concept phase. You start by defining proportions, such as the front overhang, the rear overhang, the height, the width, the length. We look at proportions independent from what an engineer might say about whether it can or can't be done.

The participants in the discussions can't just say they don't like it. They have to argue and explain. We debate and express differences. Maybe the amount of metal compared to glass is too much. Maybe the design is too round, too smooth, or has too many lines. You express, argue, and explain as you go from six to seven versions to two to three models. The differences in opinion are expressed and backed up by clear argumentation. We don't move forward until it's clear there is mutual agreement. Yet, we have a culture of conflict. But if something is easy, it becomes routine. It's part of BMW's culture to push the limits. The challenge is to make a best seller even better.

BMW is big on encouraging informal networks of employees to work across divisions, spurring innovative ideas and solving problems. And you spend a fair amount of time soliciting ideas and input from all ranks at the company. Do you have your own personal network that you use in managing BMW?

Yes, I like to go into the belly of the organization. One interest of mine is to stay informed through my network of former colleagues. Two weeks ago I met someone I knew in my first job at BMW as product planner and chatted with him. I still have a network, and I get information from it. I don't just talk to board members. It's fun to talk with department managers. The information is much less filtered, cleansed, or politicized.

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