GM’s Fall From Grace: Lessons For Big Business

GM had been in business for 101 years before resorting to the court to supervise its restructuring, the last option for its continuance in business. Kenneth O. Eze looks at management errors that led the once market leader to near collapse, drawing out lessons for other businesses.

General Motors (GM) took the business world aback, filing for bankruptcy on June 1, 2009. The company admitted failure to sustain its business profitably, 101 years after coming on stream as a going concern.

Capitalist America has moved in swiftly with the powerful machinery of government to salvage the corporation. The American government will now hold 60 percent of the shares of GM and has appointed Al Koch as CEO with a mandate to turn it around.

The interesting lesson is that management experts saw the calamity coming as there are pointers that the company lived on past glory, failing to embrace change.

Interestingly, it has been observed that the company filing for bankruptcy came barely a month after the company announced a 54 percent sweetened debt-for-equity deal for bondholders in a deal aimed at paving way for smoother reorganization. This move, analysts say, would have been of much more value to the American brand if made earlier, say sometime in 2005.

M2 presents some of the salient reasons for the failure of what was once a worldwide leader in its industry, as there is reason to believe that some thriving enterprises are threading the dangerous path that led GM to the point where a DNA change is necessary to keep its flag as a going concern. This is with the hope that a stitch in time will save nine.

 

 

Loss of Focus

GM thought it was doing the American nation well by offering the populace a zero percent finance for 60 months following the calamity of 9/11. What the world did not quickly notice was that the company was responding quickly to competition by financing itself. There were a whole lot of financial charges and costs being accrued, on behalf the customer. This was a definite loss of focus by the management of the company.

 

 Management experts opine that reengineering their processes and production lines to make their products more affordable would have won them more market share both at home and abroad.

 At a point, GM went about its business in a manner that could best be described as losing focus. This gave it a tag that it was a finance company that happened to sell cars. There was conflict of interest, as the company was not sure which area of interest to pursue. The misadventure has driven the company to bankruptcy so shortly after. A situation returning the company to focus on its core business would have saved it, in the opinion of management experts.

 

Bad Financial Policies

The company’s focus on the wrong financial policies manifested in the books as early as 2005. There is evidence that the company had struggled financially for years, becoming bankrupt since 2006 – that was the year liabilities leaped over assets. It hung on the threads and avoided a formal declaration with the support of financiers. A major irony being that the two Harvard MBAs who drove the company to the brink – Rick Wagoner and Fritz Henderson – rose from the finance division, not its vehicle design operation. Could it be said that their background permitted their being myopic? They had a responsibility of managing an auto brand, not a financial institution.

 

It would have been expected that their financial expertise would have come to play in saving the company entrusted to their care, but the rest is now history. Sadly, GM chased the shadows in the years leading up to its going bankrupt.

 

Very stunning is the fact that in 2005, the company lost close to $4 billion, mostly due to its vehicle financing adventure. The conditions got worse yearly, skyrocketing from a negative worth of $5.4 billion in 2006, to $91 billion in the first quarter of 2009! Without this financial misadventure, maybe GM would still have been thriving, but the global meltdown meant that the financiers came under pressure and had to remind the company to face its core calling. The result is staring all in the face now!

 

Abandoning Opportunities

In the 90s GM had perfected the electric vehicle. GM’s EVI electric programme that saw it test-run the portable electric car was withdrawn for some inexplicable reasons. Today, the competition, particularly Toyota is leading on driving green, making the supposed originators green with envy! The lesson here is that every business must be run with the future in view. Had the management of GM kept the future in mind, the company would have pioneered the electric automobile, giving it the edge worldwide. Now it is condemned to play catch-up on an idea it perfected and test-ran over ten years ago. This is one abandoned opportunity that is hunting the company.

 

Another chance thrown away that would have helped preserve the DNA of GM was allowing investor Kirk Kerkorian more stake in the company, after he bought in, in 2005. Reports has it that he asked GM to allow his aide, Jerome York, to join the board, a move the management rebuffed. He also proposed close business with Nissan and Renault. Kerkorian, who had 10 percent shares in GM was candid in pointing the way forward for the company, insisting as early as 2006 that a business audit was necessary to return the business to profitability. He warned that time was not waiting, yet the management would not hear.

 

GM moved to dominate Europe by taking up 20 percent of Italy’s Fiat.. Opel/Vauxhall would have made this happen, but shortly after that deal, Gianni Agneli, Fiat’s CEO, died, throwing spanners into the deal. GM had the opportunity of increasing its stake in the new company, but opted to forfeit a whooping $2 billion to Fiat to get out of the deal. By opting to get out of the deal GM only multiplied its losses. Ironically, that amount that GM paid to get out of the deal served Fiat the purpose of turning itself around, keeping fit and strong.

 

The lessons here are that companies wishing to thrive long must pursue innovative ideas to profitable ends, seek strategic alliances and welcome influential investors at every given opportunity.

 

Uncompetitive Vehicles

GM’s vehicle designs could not match competition. The company financed sale of its vehicles desperately, because the vehicles had only one competitive edge – the cheap finance. Compared to its competitors, like Toyota, GM’s cars were poorly designed and built. Industrial experts observe that the company’s autos took too long to manufacture, rolling off the production lines at prohibitive costs, resulting in fewer people willingly patronizing them.

 

Today’s auto market had become highly competitive and transparent. GM’s competitors capitalized on open markets to place its product qualities before GM’s core markets forcing discerning people to change loyalty and patronage. Toyota rode on the back of modern day technology to make its vehicles more acceptable to the people, so much so that higher prices did not deter people from buying Toyota brands.

 

As far back as 2005, Toyota cars, notably Lexus, topped the initial yearly quality surveys. The world was willing to pay for that quality. For instance, Toyota sold their vehicles at 14 percent higher than GM, their average vehicles ($24,500) as against GM’s ($21,000).

The lesson here is that companies wishing to remain in business must fear competition and respect the consumer, bearing both in mind in developing; and deploying new products. All new products must offer the consumer something better than the competition, delivering value for money in the process.

 

Ignoring the Competition

The management of GM seemed to run the enterprise with its eyes closed. The company ignored competition. Its only notable response to competition was in the 80s – the Saturn. At its glory in 1954, the company had 54 percent of the North American auto market. By 2008, it had 19 percent; the rest had gone to Toyota and others.

 

Dating back to the 80s under former CEO Roger Smith, the company made the right moves, developing its Saturn line which for a few years offered a vehicle ownership experience that beat Toyota’s on measures of owner and dealer satisfaction. Unfortunately for GM, when Smith left the CEO role, his successors failed to build on this strategy of keeping the competition in mind.

 

In retrospect, if 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, probably, the story would have been different today, very different.

With GM’s DNA being altered on bankruptcy reasons, it is a lesson to other businesses to move on with an eye on the competition. Who says that Toyota’s innovativeness was not as a study of GM and other competitors?

 

Failure to Innovate

GM failed to turn its sight and strength in the right direction, opting rather to focus on and build on finances instead of the auto lines. The production lines were not updated to compete; rather, financing products was placed before the populace in manner that made those with little choice resort to its brand. Analysts had, as far back as 2006, warned that GM was not likely to transform its lines within America to compete, advising that production lines be set up in Asia, in the event that the company does not want to outsource. But the management would have none of that.

 

Strategic repositioning would have put the company in pole position to at least match the competition in areas of value creation, capture and renewal. These terms are explained briefly:

 

a) Value Creation is offering products or services that satisfy specific customer needs like quality and value in a way that beats the competition.

 

b) Value Capture means setting prices and costs so that a company can earn a profit on such competition-beating products, and

c) Value Renewal refers to how a firm that had achieved success forces itself to change so it can adapt to evolving customer needs, upstart competitors, and new technologies.

Knowledge available to companies here is that in the context of the value cycle, experts view GM’s failure as a slow motion process of refusing to participate in value renewal which is what led to the utter irrelevance of its value creation and value capture processes. Do not wait to be caught napping!

 

Managing the Bubble

The managers of GM rode on the patriotic plane to failure. Flying the American flag and responding to the 9/11 calamity in a proudly American manner looked sufficient to earn GM control of the American market, but these seem to be luck driven too far. What looked stupid from the perspective of customer and competitors was smart for GM’s staff itching to climb up.

 

The current disaster in which GM finds itself makes the world wonder. A look at GM’s internal processes and staff reward systems makes it evident that customers’ views meant nothing to the company. GM rewarded people for towing the old path, than for evolving radical ideas that boost the company’s business!

 

The smart thing for those seeking promotion within GM was to praise the CEO’s wisdom and carry out his orders; a very sure way to kill an enterprise, management experts say.

Knowledge that can be taken from this is that businesses must place priorities right. When men like York saw the future and proffered solutions, the management was adamant. The staff followed gullibly because each needed reward. Courage is necessary, as demonstrated by York in leaving a sinking ship, before it was completely taken over by water.