THE FALL OF A CORPORATE GIANT
The corporate giant General Motors (GM) was founded in September of 1908. For many years, it remained #1 in the vehicle market—with its peak in 1954 with 54% of the market. Almost 101 years later on June 1, 2009, it ceased to exist, and control was handed over to turnaround executive Al Koch thanks to $19.4 billion in loans and $30.1 billion more in debtor-in-possession financing—a huge amount of effort by the U.S. government and GM's management, unions, dealers, suppliers and bondholders.
The U.S. will own 60 percent of the new GM, Canada will take 12 percent after lending GM $9.5 billion, the UAW 17.5 percent, the bondholders 10 percent to as high as 25 percent through warrants, and old GM common shareholders almost nothing.
Twelve or more GM factories will close, 21,000 union workers will be fired, and 2,400 GM dealers will shut down, along with four brands that will become extinct if buyers are not found: Pontiac, Saturn, Saab, and Hummer.
There are 5 major reasons that contributed to the fall of GM
1. Bad Financial Policies. Financial engineering ended up driving GM into bankruptcy years ago--a look at their balance sheet over the last decade reveals that GM has been bankrupt since 2006. Meaning, their liabilities heavily out-weighed their assets. They have avoided a filing for years thanks to the mercy of the banks and bondholders. However, the condition has gotten worse every year from a negative net worth of $5.4 billion in 2006 to a negative $91 billion net worth in the first quarter of 2009.
For years GM has used cars as razors to sell consumers a monthly package of razor blades -- in the form of highly profitable car loans. In 2005, GM limited its $6 billion in vehicle operating losses due to the $2.2 billion it made financing those vehicles. The policies weren’t covering their costs.
2. Uncompetitive Vehicles. In the comparison of GM vehicles to those of its toughest competitors, such as Toyota Motors, revealed that people were willing to pay more for Toyota vehicles than for GM's because Toyota’s were better designed and built—they had higher quality, cost less to own, and lasted longer. GM resorted to cutting price on its inferior vehicles, which had higher costs and decreased their profit margin substantially.
Back in 2005, Toyota cars – particularly Lexus -- topped the initial quality surveys. The survey found that people were willing to pay for the quality that Toyota offered. For example, Toyota charged 14 percent more for their average vehicles ($24,500) than GM ($21,000). Toyota also built cars faster and at lower cost. They could build a car 7% faster than GM. Moreover, Toyota enjoyed a $300 to $500 per vehicle cost advantage over GM. Part of this advantage was in health care costs. While GM complained about its $1,500 per vehicle health care charge, Toyota made most of its cars in countries where government picked up much of the health care bill.
3. Ignoring competition. GM has been ignoring competition -- with a brief interruption -- for about 50 years. In the 1960s, GM controlled half of the North American vehicle market. Last year, that figure had tumbled to 19%. Toyota and its peers took over the market share that GM lost.
The brief interruption? In the 1980s under former CEO Roger Smith, GM developed its Saturn line, which for a few years offered a vehicle ownership experience that beat Toyota Motors'. Unfortunately for GM, when Roger Smith left the CEO role, his successors failed to sustain what Smith had started.
It is possible that if Roger Smith's successors had infused the rest of GM with the Saturn culture of giving the consumer a better car buying and ownership experience than that offered by its competitors, GM probably would not be on the verge of bankruptcy today.
4. Failure to innovate. Since GM was focused on profiting from finance, it didn’t really care that much about building better vehicles. The demands and interests of the market are always changing. GM neglected to listen to what the customers wanted, so they fell behind the competition.
Most companies can only survive if they continually push themselves forward in three management processes in which GM failed to do:
Value Creation-offering products or services that satisfy specific customer needs, such as quality and value, in a way that outdoes the competition.
Value Capture-setting prices and costs so that a company can earn a profit on every product.
Value Renewal-refers to how a firm forces itself to change so it can adapt to evolving customer needs, upstart competitors, and new technologies no matter how successful it is.
In the context of the Value Cycle, GM's failure of not participating in Value Renewal is what led to the breakdown of its Value Creation and Value Capture processes.
5. Managing in the bubble. The current disaster in which GM finds itself makes one wonder, how could they have been so ill-advised? If you know about how people get to the top of a company like GM, it becomes clear that what looked stupid from the perspective of customers and competitors was in fact quite smart from the perspective of executives striving to be at the top.
GM rewarded people who followed the old way of doing things. Those who challenged that thinking found themselves on the outs, so the smart thing for those seeking promotion was to praise the CEO's wisdom and carry out his orders.
At the core of this managing in the bubble is a syndrome called Confirmation Bias –the tendency of managers to filter out information that does not match up with their pre-conceived notions. Confirmation Bias kept GM from viewing Toyota as significant threat. This contributed to its decision to pull its electric car off the market, and led it to ignore the impact of higher gas prices and a collapse in credit markets on consumers' willingness to buy profitable gas guzzlers like the Hummer or tricked-out Escalades.
GM's failure after 101 years is a reflection of American management in general. It highlights the damage to our economy that results when a company rests on its glory and fails to adapt to change.
*Information taken from an article posted by Peter Cohan in the Daily Finance.