01 October 2009

Why Did GM Fail?

There's a bit of a discussion in the comments to the next post down about why GM failed. Since that's what I'm studying (except not GM, I'm just studying generally why some firms outperform other firms), I probably ought to have an opinion. And I do.

It was management's fault. It's always management's fault. It's in the job description. But that's not a particularly satisfying or interesting answer.

I'm not sure why GM died, but there's one explanation (or rather one set of explanations) that's worth looking at. I think that it's fair to say that most strategic management scholars (and I) think that strategy matters. That organizations can effect their own performance by choosing strategies that fit their environment. The sub-field I'm working in, strategy process, is the study of how organizations monitor their environment, move information to the places in the organization best able to act upon it, and then develop strategies to fit the current environment. This side of strategy assumes strategic choice.

But there is a another side of strategy called, not entirely appropriately, determinism. These theories basically assume that strategy doesn't make a difference; that individual organizations don't really have much control over their own performance. Michael Porter, who some of you have probably heard of, started strategy by more or less teaching that what industry a business is in makes all the difference -- all companies can do to help performance is choose the right industry and then work with their competitors to shape the industry by, for example, getting the government to restrict entry. Other scholars think that organizations are subject to the laws of population ecology; or that corporate routines are like genes, immutable in the organization but mutable as new organizations are created. Other scholars think that young organizations can be entrepreneurial, but then bounded rationality, risk and loss aversion, satisficing, etc., embed the existing strategy which cannot thereafter by changed. My off-the-cuff reaction is that this last description fits GM.

Miles and Snow (1978) -- a great book I recommend to lay business people and Harry -- divides up corporate functions between the entrepreneurial, the engineering and the administrative. Different companies emphasize different functions, and the result is four types of companies: prospectors, analyzers, defenders and reactors. Any of the first three can be fine, depending on the environment. Being a reactor is fatal. GM was founded to concentrate on the administrative function. Toyota and Honda focus on the engineering function, with some attention paid to the entrepreneurial function. GM never could shake its focus on the administrative function; they always thought that they could manage themselves out of the predicament. Over time, they slid from analyzer to defender to reactor, and then they died. This makes it sound as if GM could have saved itself if it had become entrepreneurial, or if its unions had allowed it some engineering slack. But GM was what it was. There's no sense telling the lobster that it could save itself from the pot if it would only sprout wings.

Of course, that suggests that the government bailout was exactly the wrong thing to do.

34 comments:

Harry Eagar said...

I follow John R. Bond, who was editor of Road & Track, which I began reading in '64. He kept telling Detroit that California (where he lived) told the future of auto demand and that 25% of cars sold there were Japanese.

And Detroit kept saying, no, Americans want big cars, it's a fad.

So GM refused to copy the Corolla. As my physics advisor, who worked for TRW around that time, tells me, no US business will accept advances from outside. The 'not invented here' syndrome, he calls it. (Not generally true, though; see Kodak.)

Instead, it made gestures toward the small car market, but they were insincere or outre. I loved my 1967 Corvair Monza Spyder convertible, wish I had it back, but it was too weird for Mr. Average American. The Corolla, front engine, rear drive, was just close enough to the '57 Chevy to be acceptable.

And then there was Deming.

I don't see why, in your scheme, a reactor company has to abandon quality. Detroit was not innovative, but it had achieved a kind of reliability in the mid-'50s that was the envy of the rest of manufacturers. Why did it slip back?

There is an anecdote that I think encapsulates the meaningful differences between US and non-US manufacturers in the crucial era, although Detroit is not involved.

In 1957 and '58, I believe it was, there was an event called the Race of Two Worlds at Monza, pitting Indy cars (Meyer-Drake-Offenhauser 4-cylinder engines) against Formula One cars (V-8s and V-12s).

The Indy cars were like Mack trucks, with no need to turn right, suspensions as flexible as the Great Wall of China. The Formula One cars were lighter and more nimble.

The Monza track was in bad shape, and the race was a long one. The Americans won because their cars were unbreakable, but the Europeans were faster.

The key anecdote, though, was told by a European who looked in the cockpit of an Indy car. Instead of a tachometer, there was a label where the tach would go that just said, 'Faster.'

Bludgeon v. rapier.

Rapier wins if the bludgeon doesn't hit on the first swing.

erp said...

Harry, Have you heard the one about the tortoise and the hare?

joe shropshire said...

Here is a list of the top ten best-selling vehicles all time. We see that there is an American equivalent to the Corolla. It's a pickup truck, of course.

erp said...

How can we have a conversation about how the course auto manufacture in the US compares with the rest of world when US auto companies have been in the thrall of the unions for lo these many decades, i.e., management proposes; but union disposes.

Walk and talk around that all you want, but that is the fact.

Harry Eagar said...

Yes, Joe. There was a time, believe it or not, when GM management's principal focus was curbing sales -- it then had 50% of the US market -- so it wouldn't face the prospect of being broken up under the Sherman Act.

Their solution -- brilliant I'm sure we can all agree -- was to build less reliable cars that appealed to a narrower segment of the market.

erp, you and Skipper need to get over this weird delusion about unions. It sure wasn't the unions that forced Chrysler to repeatedly bring in overseas small cars instead of developing local content; and then abandoning buyers -- twice! -- and thus destroying its chance of ever competing in the most vigorous sector of the auto market.

Vive le Simca!

erp said...

Why did Chrsyler bring in small cars from overseas??? Duh????

a. They didn't have to deal with unions overseas or

b. they had a death wish.

Bret said...

Harry Eagar wrote: "GM management's principal focus was curbing sales ... so it wouldn't face the prospect of being broken up under the Sherman Act."

Yet another example of people responding rationally to perverse incentives created by government meddling. It's remarkable how often "market failure" can be traced back to government intervention.

Susan's Husband said...

Mr. Eagar;

"It sure wasn't the unions that forced Chrysler to repeatedly bring in overseas small cars instead of developing local content"

Why not? Is it not quite plausible that the negative effects of unions on production is precisely why Chrysler brought in cars from overseas?

Bret;

Quite.

Harry Eagar said...

Perverse incentive, yes. Rational response, no.

GM management might usefully have divested a brand. Of course, in those days, everybody agreed that bigger was better, so nobody would think of such a thing, no matter how much you paid him.

American business executives don't get paid to think, obviously.

Chrysler went overseas because it felt it did not have the resources to develop its own US small car.

It may have been correct about that, although if you're in a business and you don't have the resources to participate in the only growth segment of your business, you may want to consider whether you may have bigger problems than labor unions.

However, having made the decision to import a foreign car with your nameplate, it takes genuine world-class mismanagement skills to fail to provide parts and service, which leads to low sales, which leads to discontinuing that line.

Le Simca est mort! Vive le Mitsubishi!

Then, they repeated the cycle.

You cannot blame any of that on unions.

Detroit managed itself into the ground from the top down. Unions had nothing to do with it.

erp said...

There's no evidence that Americans want small cars. We have been pressured into tolerating them by the wildly fluctuating cost of gas and by a media-promoted guilt of hogging the earth's resources, blah, blah, blah. Nobody in their right mind wants to drive around in a teeny tiny tinsel toy car powered by the vegetable cocktail de jure or a puny putt putt battery.

Some of the "cars" I've seen around here the past couple of months are scary deathtraps. It's child abuse to strap a kid into one of them.

I'm not giving up my big Chrysler no matter how much it costs me to keep it running.

Oh, and Harry, you may not be able to blame it all on the unions, but I can and so can anyone else who's not in the thrall of all the old time progressive dysfunctional claptrap that has been proved just plain wrong for almost a hundred years now.

Hey Skipper said...

erp, you and Skipper need to get over this weird delusion about unions.

Jobs bank (see also Longshoreman's Union).

Byzantine work rules. (I never get tired of telling the very true story of Ford spending several hundred thousand dollars to lay T5 cable in an existing building instead of several thousand on wireless. Why? No union jobs in wireless)



Mercedes and BMW are very profitably building cars. In non-union plants.

GM management might usefully have divested a brand.

Ever heard of state franchise laws? Heck, GM couldn't even close a dealership.

Harry Eagar said...

Yeah, nobody buys Corollas.

Ever hear about the General Motors Assembly Division?

erp said...

My very first encounter with union mentality was in the 50's when I was told my new washing machine couldn't be installed. After some astute questioning, I finally learned that the problem was that the old one was still plugged in and only a union electrician could unplug it.

I pulled the plug myself and the installer graciously connected it with the aid a fiver.

Harry, Japanese auto makers don't use union workers, so the fact that they sell many cars here kinda makes my point.

Harry Eagar said...

No, it doesn't.

It's the design and reliability of the Japanese cars that makes people buy them.

erp said...

You are making my point again. Design and reliability are not features in any union made product.

David said...

For most of the last decade, the problem with American cars has been interior finish. At any given price point, Honda and Toyota can spend at least a $1000 more on improving the interior than American car companies can spend on competitive cars. So American cars tend to have hard plastic, cloth and ugly controls where Japanese cars have leather, faux leather and attractive controls.

David said...

Actually, union work rules are a good example of why fundamental corporate-cultural change is so hard. Of course, to change union rules requires agreement between the corporation and the union, both of which are trapped in a system that assumes that they are opponents in a zero-sum game, so it is an extreme example.

But regular corporate routines, like union rules, are set up with the tacit assumption that the corporate environment is not going to change. Employees come to work for years with the expectation that their role/duties/surroundings/team mates/expectations won't change. These conditions, which are adopted with greater or lesser forethought, come to define the job. Changing those expectations -- even being able to think about needing to change those expectations -- comes to be almost impossible as time canalizes the employee's expectations.

The environment is something that is happening "out there" and very few employees interact with it directly. On the other hand, the day-to-day characteristics of their job affects every employee every day. It is the water in which they swim.

The great advantage of markets is that they minimize risk aversion and loss aversion. Individuals are both risk averse and loss averse, and that leads to individuals making irrational (in the sense of non-utility maximizing) decisions. Everyone immediately sees the downside of change; the upside is discounted and is much less tangible so change requires either immediate, risk-free improvement (which is rare) or it must be the last clear chance to avoid disaster, which rarely works.

Harry Eagar said...

'The great advantage of markets is that they minimize risk aversion'

To zero, even, according to recent experience.

I don't consider that a great advantage myself.

erp, do you purchase gasoline for your Chrysler? You do realize that it is made by the highest-paid union (the Oil, Gas and Atomic Workers) in the most highly unionized industry, with the highest profits?

Or did that slip by you?

erp said...

No.

jim hamlen said...

I thought the longshoremen made more than anyone else.

The sheer stupidity of management in the US auto business is just the flip side of the sheer stupidity of the UAW. Every once in a while, GM, Ford, or Chrysler would offer a really good product that people wanted to buy - the Corvette, the Camaro, the Mustang, the F150, the Escalade, the minivan, etc. But, for the most part, the constrictions on how they did business would rot that product. Even the Corvette had its very bad years. And who wanted to buy a 1975 Mustang?

But the fact that management could even allow the Mustang to decline from "Bullitt" to the wuss-mobile of 1974 (in just 6 years!) is directly related to the octopus-like grip of the unions, and their impact on how business was run. Ditto for the steel industry. They weren't called dinosaurs for nothing.

David is right about the interior look of the cars - I hated even renting GM (Pontiac, Oldsmobile) in the late 80s and early 90s because they were never as distinct as my Dodge or Nissan at home, and even when they improved the reliability, the interiors still looked cheap.

But the issue of the unions isn't so easily dismissed. The Japanese factories in the US have always done well (into 2008, at least). Toyota is apparently facing some of the 'bigness' problems that hampered GM for so long, but will they go the way of the dinosaur? Probably not.

Hey Skipper said...

Harry:

You do realize that it is made by the highest-paid union (the Oil, Gas and Atomic Workers) in the most highly unionized industry, with the highest profits?

Reference, please.


Jim:

And who wanted to buy a 1975 Mustang?

Who would want to buy a mid-70s car of any stripe? They all sucked, no matter the management. We can thank microprocessors and competition for the fact that cars have improved so much over the last 30 years.

Unions had nothing to do with it.

Harry Eagar said...

Longshoremen checkers are probably the highest-paid single union work category (unless it's crane operators), but averaged over all bargaining unit members, oil and gas workers do as well or better.

David said...

Not having done any research, I suspect that it's either quarterbacks or top-of-the-rotation pitchers.

Hey Skipper said...

Harry:

The reason I asked for a reference was because there is no such union as the Oil, Gas and Atomic Workers. A similarly named union, Oil, Gas and Chemical Workers, disappeared ten years ago.

Which might be why that point slipped by erp.

Among highly unionized industries (excluding unions in the entertainment sector, although that exclusion is arbitrary), pilots are probably the highest paid.

However, that has nothing to do with the point at hand.

It is a fact that competition has created cars immeasurably better today than 30 years ago. That goes for GM, as well. However, it doesn't go far enough, just as it hasn't for Chrysler. Ford is a close call.

The question, of course, is why American car makers didn't improve quite as much as the rest.

Unions are a big part of the answer.

All car companies have managements. Only a few have the UAW.

erp said...

Skipper, excellent point.

I remember in some problem solving class long ago, one of the exercises was to cancel out all the similarities and what was left would be the culprit. Don't remember any details, but I've used the technique all my life.

In auto manufacturing, all other things being equal, only unions can account for the decline in quality and innovation in American cars.

Of course, the UAW isn't unique. The steel workers, the teamsters, the longshoremen, the newspaper unions, the railroad unions ... all played a part in destroying US industry.

Harry Eagar said...

I bet Mercedes workers are unionized, so erp's exclusionary principal cannot work here.

I can think of some other big, mismanaged businesses that have failed even more spectacularly than automakers. Banks, for example.

Anybody want to blame unions for that?

It's one thing to make your business fail in a contracting sector, like newspapers. It's quite another to make it fail in a sector that has been steadily expanding, like autos.

Why even have management?

erp said...

I don't think the UAW is involved with Mercedes.

I like to buy American, but was over-ruled so we had no less than three VW's, two Accords and one MG. I didn't drive any of them if I didn't have to.

As we all know, banks failed because of the CRA and its enforcement arm, ACORN, products of the same mentality that rules unions.

Susan's Husband said...

I think it's a false dichotomy.

Hey Skipper said...

I bet Mercedes workers are unionized, so erp's exclusionary principal cannot work here.

Yes they are, and yes it does.

Germany, like China, has ordered its economy on the modern version of mercantilism.

German unions have moderated their wage and anti-productivity demands so as to beat their competitor -- the UAW -- in the world's largest market.

AOG:

It isn't a false dichotomy. The UAW is a monopoly provider of labor to all American auto manufacturers. Who, in turn are decidedly not monopoly providers of autos to consumers.

++++

FWIW, all the leading auto manufacturers are heavily involved in top level racing.

Except the US automakers, whose participation is limited to NASCAR, the racing world's answer to Conestoga wagons.

erp said...

SH, I don't understand what you mean by a false dichotomy?

Harry, the period I referred to when the unions destroyed newspapers was long ago when NYC had six or eight newspapers which were struck over and over until most of them folded and BTW, I forgot to list the merchant marine unions which destroyed American shipping.

Susan's Husband said...

erp;

I mean that the views seem to be that such problems are management OR unions. Why not both?

I agree with you and Skipper on the deleterious effects of unions on American car manufacturers, but I find it very easy to find, beyond that, examples of the management being gob smackingly stupid.

erp said...

SH, I agree that mgt can be stupid, but I don't think the smartest manager can make brilliant decisions in design and manufacture when the unions are just waiting to sabotage them with strikes and ridiculous demands, so they stick with the tried and true while non-union shops come up with great new features and attractive packages and sell their cars cheaper. Can't beat that combo.

Harry, speaking of Mercedes, my daughter just got a new one yesterday and was telling me what it can do. It's quite amazing. So far as I know, the only thing the driver has to do is steer. The last one had a feature that adjusted the seat so one didn't tilt over when the car turned. The first time it happened to me, I got a bit of a shock, but then I got used to it and was quite bereft that it was lacking in our own ancient vehicles.

Harry Eagar said...

Back when Ford was not unionized, dominated the world market and paid the highest wages not just in American manufacturing but in any manufacturing, its turnover in labor was 1300%/yr.

It went broke around 1921 and only survived by forcing its dealers to swallow inventory not wanted.

The history of American auto manufacturing is a curious tale. Not edifying.

There is not, so far as I know, a good one-stop history of it, though.

Hey Skipper said...

It went broke around 1921 and only survived by forcing its dealers to swallow inventory not wanted.

Huh? Following is the most detailed Ford Motor timeline I could find:

1910 — Highland Park plant opens, assembly of Model T transferred from Piquette, which closes

1911 — First overseas assembly plant in Manchester, England; Ford wins Selden patent suit

1913 — Moving assembly line inaugurated at Highland Park

1914 — Announcement of $5 workday at Ford

1915 — Purchase of land for Rouge plant in Dearborn; 1-millionth Ford built

1918 — Henry Ford loses Senate race as Democrat

1919 — Henry Ford buys out minority stockholders

1921 — 5-millionth Ford built

1922 — Ford Motor Co. acquires Lincoln Motor Co.

1925 — First pickup introduced; Ford of Germany established

1927 — Model T production ends with 15-millionth built; Model A introduced after 6-month shutdown for retooling

I missed the part about bankruptcy.