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After 101 years, why GM failed

by Peter Cohan May 31st 2009 9:50AM

General Motors (GM) was founded in September of 1908. On June 1, 2009, at 8 a.m. -- almost 101 years later -- 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 effects of that failure will be terrible, but not catastrophic.

The U.S. will own 60 percent of the new GM, which will include Chevy, Buick, GMC and Cadillac. Canada will take 12 percent after lending GM $9.5 billion, the UAW 17.5 percent (as payment for $9.4 billion of its $20 billion in health care obligations) with warrants to buy 2.5 percent more, the bondholders 10 percent to as high as 25 percent through warrants, and old GM common shareholders roughly zero. Twelve to 20 more GM factories will close, 21,000 union workers will be fired, and 2,400 GM dealers will shut down.

To help other companies avoid GM's fate, it's worth exploring the five reasons that GM failed:

1. Bad financial policies. You might be surprised to learn that GM has been bankrupt since 2006 and has avoided a filing for years thanks to the graces of the banks and bondholders. But for years it has used cars as razors to sell consumers a monthly package of razor blades -- in the form of highly profitable car loans.

And the two Harvard MBAs who drove GM to bankruptcy -- Rick Wagoner and Fritz Henderson -- both rose up from GM's finance division, rather than its vehicle design operation. (Read more about GM's bad financial policies here.)

2. Uncompetitive vehicles. Compared to its toughest competitors -- like Toyota Motor Co. (TM) -- GM's cars were poorly designed and built, took too long to manufacture at costs that were too high, and as a result, fewer people bought them, leaving GM with excess production capacity. (Read more about GM's uncompetitive vehicles here.)

3. Ignoring competition. GM has been ignoring competition -- with a brief interruption (Saturn in the 1980s) -- for about 50 years. At its peak, in 1954, GM controlled 54 percent of the North American vehicle market. Last year, that figure had tumbled to 19 percent. Toyota and its peers took over that market share. (Read more about GM ignoring the competition here.)

4. Failure to innovate. Since GM was focused on profiting from finance, it did not really care that much about building better vehicles. GM's management failed to adapt GM to changes in customer needs, upstart competitors, and new technologies. (Read more about GM's failure to innovate here.)

5. Managing in the bubble. GM managers got promoted by toeing the CEO's line and ignoring external changes. What looked stupid from the perspective of customer and competitors was smart for those bucking for promotions. (Read more about GM's managing in the bubble here.)

GM's failure after 101 years is an indictment of American management in general. It highlights the damage to our economy that results when finance becomes the tail that wags the economic dog. And it shows what happens to any company that rests on its laurels and fails to adapt to change.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.

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THUNDER BOLT

a

June 10 2012 at 12:35 AM Report abuse rate up rate down Reply
THUNDER BOLT

Damn It

June 09 2012 at 12:02 PM Report abuse +1 rate up rate down Reply
Seratsuki

Thank you for making this nice article virtually unusable for my class. Is it really necessary for you to have "Read more about GM's failure" CLICK HERE? You couldn't just have all the information in one article? If it's so we have to reload the crappy ads, well, I have ad blocker. What a pain.

January 26 2012 at 10:25 PM Report abuse rate up rate down Reply
analysisjim

unions are not entirely to blame. paying premium salaries although quite lucrative for skills that require minimum knowledge to sustain an industrial commons is somewhat justifiable. (see harvard business review "restoring american competitiveness")

1. GM's strategic approach was based too much on a structuralism meaning they analyzed competitors, current conditions, and now create products that fit-in to their target environment (toyota achieved success because they sold a basic line of cars, worldwide. toyota changed the consumer environment, they didn't change their cars). why is GM wrong? they have lost the ability to innovate and change the environment. they did not stick to systematic vehicle construction, ones they have done for years and become exceptionally good at. instead, GM copied competitors in hope to capture foreign and domestic market share.
2. Outsourcing of the car making industry has caused GM to lose valuable knowledge they once learned from their basic manufacturing process. even if they did not want to outsource, they had to, to keep up with competitor prices. with the loss of skilled workers, GM can no longer find ways to make basic components more efficiently and of higher quality. this causes a loss of suppliers. as they lose suppliers, it shifts the supply and demand curve causing GM higher supply costs where foreign vehicles gain suppliers to create components even cheaper.
3. Management was wrapped up in short-term financial gains to please shareholders. they should have been focusing on long-term goals of innovation and strategic alignment of value, profit, and people propositions. it's obvious they can no longer offer vehicles at low-cost, so cost should not have focus. instead, GM should look to create differentiation. how can GM differentiate in the car industry? rewarding innovation, and pushing engineers to create a product that changes our environment. this all goes back to point 1. GM needs to think long-term and stay away from "this is what our competitors are doing and this is what we think people want" instead, work on shifting the organization toward the mind-set of "what are we capable of creating and how will this change the environment to offer us large market potential and growth". GM can no longer create compact cars and expect them to sell in other countries. They are already far behind in that industry. instead, invest the money in R&D and figure out a way to create a product that will change environments, moreover the world.

I do not have a solution and I do not work for GM i just wanted to express some of my personal thoughts on this article. i am sure some of the brightest and most talented minds in the world are working hard for GM, and i hope they find a way through this mess.

February 16 2011 at 10:53 PM Report abuse -1 rate up rate down Reply