November 30, 2005
How GM Failed to Meet the Challenge
By Robert Samuelson

WASHINGTON -- In 1927, ``The Jazz Singer'' -- the first 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 nine factory shutdowns and 30,000 job cuts by 2008. Granted, GM is burdened with costly labor contracts and huge numbers of retirees. 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 its 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 ran GM from 1923 to 1946. The second is ``Only the Paranoid Survive'' by Andrew Grove, published in 1996. Grove was chief executive until 1998 of Intel, the giant computer-chip maker.

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. 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. 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. But 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 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) for various products among separate divisions while centralizing policy matters (personnel, finance) at the top. Hence, his focus on what now seems bureaucratic mumbo jumbo.

What occurred at GM became a model for many big U.S. companies. Unfortunately at GM, it also fostered overconfidence and inertia. 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). 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.

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.

© 2005, Washington Post Writers Group

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