Ghosts That Still Haunt GM

By Robert J. Samuelson
Wednesday, November 30, 2005

In 1927, "The Jazz Singer" -- the first successful major movie with sound -- opened. In 1931, Charlie Chaplin, a silent-movie star, said: "I give the talkies six months more." A similar frame of mind now haunts General Motors, which recently announced it would close 12 facilities and cut 30,000 jobs by 2008. Granted, GM is burdened with costly labor contracts and huge numbers of retirees, reflecting an era when it had (in 1962) as much as 51 percent of the U.S. vehicle market. But GM also inherits a self-defeating management style formed during its glory days. It presumed that superior managers could always anticipate and control change. By contrast, many top managers in younger companies accept that they will face disruptive surprises that could, unless successfully countered, destroy them.

The difference has consistently disadvantaged GM. Its latest downsizing is the company's third since the early 1980s. With each, GM has struggled to catch up with changes that it badly misjudged -- the demand for smaller cars in the late 1970s; the superior quality and production techniques of Japanese manufacturers in the 1980s; and now the demand for snazzier cars and (almost certainly) better fuel efficiency. The conceit that GM could "manage change" often served as an excuse to stand pat -- until change was unavoidable.

Two classic business books capture the shift in management assumptions. The first is "My Years With General Motors," by Alfred P. Sloan Jr., originally published in 1963. Sloan was GM's chief executive from 1923 to 1946 and is widely regarded as one of the great business leaders of the 20th century. The second is "Only the Paranoid Survive," by Andrew Grove, published in 1996. Grove was CEO until 1998 of Intel, the giant manufacturer of computer chips.

To Grove, business is chaotic and unforgiving. It is full of what he calls "strategic inflection points" -- transformational changes that, if grasped, can guarantee a firm's growth and, if not, can cause its death. In Grove's industry, many powerful companies have vanished because they didn't adapt: Wang, once the dominant maker of "word processing" machines; Digital Equipment Corp., a longtime leader in mid-size computers; and Compaq Computer, a pioneer in personal computers.

Grove warns that "strategic inflection points are not a phenomenon of [only] the high-tech industry." Witness how Southwest Airlines and its imitators have bankrupted many traditional airlines. "No amount of formal planning can anticipate such changes," he says. People who succeeded under one business model often can't acknowledge its impending collapse. See Charlie Chaplin, above.

Sloan's emphasis is different. Consider some chapter titles: "Concept of the Organization''; "Co-ordination by Committee''; "The Development of Financial Controls." It is not that Grove is a competitor and Sloan a bureaucrat. They simply lived in different times with different demands. Even then there were "strategic inflection points." In 1921 Ford had 60 percent of U.S. car sales. GM overtook Ford because "the old master [Henry Ford] had failed to master change," Sloan wrote. Ford stuck too long with the Model T, conceived as cheap transportation for Everyman, even as the car market shifted. The advent of used-car sales satisfied consumers wanting "basic transportation," while new-car buyers demanded more comfort and performance. GM offered a full line of cars (Chevrolets, Buicks and Cadillacs) at different prices.

Aside from fighting Ford, Sloan had to fashion a huge industrial enterprise that would not collapse under the weight of its own complexity. At the time, it was not obvious how companies would marry the efficiencies of mass production with the potential inefficiencies of distributing and marketing more and more products. Sloan solved this problem by decentralizing operations (production, distribution and marketing) for various products among separate divisions while centralizing policy matters (personnel, finance and investment) at the top. Hence his focus on what now seems bureaucratic mumbo jumbo.

What occurred at GM -- and also DuPont -- became a model for many big U.S. companies. Unfortunately at GM, it also fostered overconfidence and inertia. "Management" became an exercise in ensuring stability. GM's market power made it less sensitive to cost increases, especially labor costs, because these could usually be recovered in higher prices. In 1950 hourly wages in the auto industry were 24 percent higher than average manufacturing wages; by 1990 they were 34 percent higher (where they remain today). With 2.5 retirees -- receiving health and pension benefits -- for every active worker, GM's high costs would challenge even the most brilliant management.

But that is only half the problem. The other half is that GM does not have the vehicles that command good prices. To move in volume, they require steep discounts. This is a management failing that can't be blamed on unions or retirees, and it's now compounded by the impact of high gasoline prices on SUV sales. Within GM, there are pockets of vitality. GM is the market leader in China (indeed, in 2005 its total foreign sales will surpass U.S. sales for the first time). The Cadillac division redesigned its lines and achieved big sales gains. But too often, GM's deliberate management style has produced mediocre vehicles that fare poorly in today's hyper-competitive market. Since its peak, GM's market share has fallen by half.

For all his concern with organizational controls, Sloan shrewdly foresaw that too much success could be fatal. It might dull "the urge for competitive survival," which is "the strongest of all economic incentives." Companies might fail "to recognize advancing technology or altered consumer needs." Avoiding these traps, he said, was GM's challenge. There is now talk that GM could go bankrupt. Although that isn't inevitable, even the talk measures how poorly GM met the challenge.

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