How GM and Ford Failed

General Motors was the inspiration for what may be the two most influential books ever written on management -- Alfred Sloan's "My Years with General Motors" (1964) and Alfred Chandler's "Strategy and Structure" (1962). Sloan, as CEO of General Motors from 1923 - 1956, built the world's first multi-divisional organization, developed strategic planning, decentralized operations and responsibilities, and pioneered by empowering customer-facing product divisions. In his book, Sloan explains why and how he did it. Chandler, Harvard Business School professor of business history, sets out how Sloan's management model was the innovation that enabled the emergence of U.S. multinationals in the decades following World War II.

Curiously, neither book focuses very much on the excellence of General Motors products. After conceding that it was Henry Ford who mastered mass production, both authors put their minds to the challenge of how GM organized to get a good product out to the millions who wanted it.

GM's strategy and organization dominated the world auto market until the 1970's when Japanese car companies -- Toyota, Honda and Datsun -- appeared on the scene. In less than a decade, the Japanese automakers taken enough market share for America to get truly worried. The media jumped in the fray quickly. In a 1980, NBC television brought out a documentary called "If Japan Can, Why Can't We?", featuring Edward Deming, the father of total quality management. For 3 long hours, Deming and colleagues described how after World War II they helped Japan become the world leader in manufacturing though quality management. They told Americans that American manufacturers had not listened to them. They warned of the consequences of not doing so, while insisting that Americans could.

Yes, they could, but they did not listen. The result: in Detroit angry car workers began to burn Japanese cars. As Japanese imports ate up market share, the U.S. and Japan reached in 1981 what they called a "Voluntary Restraint Agreement", limiting Japan to 1,85 million car imports per year. And in 1982, two American McKinsey consultants, Bob Waterman and Tom Peters published "In Search of Excellence" with the upbeat message that the U.S. could learn to compete with Japan. Waterman and Peters' book is a souped up, easy to swallow, compendium of management thinking that borrowed from Chester Barnard, Elton Mayo, Herbert Simon, Karl Weick, etc. It says all the right things, and even though they sold millions of copies and provided consulting services to many of the United States largest firms, they could not put the American manufacturing industry back together again.

During the next 25 years things have only gotten worse for the U.S. car manufacturers. What went wrong? Some would have us believe that the problem for General Motors and Ford is the pension burden. While the pensions are costly, this is not reason GM and Ford don't sell enough cars. We are frequently reminded that GM and Ford sell big gas guzzlers. This is true, but they have a complete line, and American small cars are are not competitive either. We have been told that American workers could not manufacture quality cars. But the Japanese car plants put the lie to that idea.

Of course, we know the real reason: Awful management. Awful management that manufactures mediocre cars. The verdict is in: the American cars that General Motors and Ford make in America are mediocre. In Consumer Reports' list of the best cars for 2005, in all 10 categories the winner is a Japanese car. Not one U.S. car made it. Not one! The bottom line is that Japanese cars are better. To that we can add that European cars are more stylish, and Korean cars are less expensive.

So, let's ask again: What went wrong?

Waterman and Peters had it right. The Japanese focused on excellence, while the U.S. companies focused on financials. Building high quality cars is a long-term commitment that requires first-rate planning, consistency, and focus. It's the kind of focus that Wal-mart has when it insists that it gives customers the lowest prices. Everything the company does is directed towards that goal. You make not like the goal, you may not like Wal-mart, but you have to admire the focus.

Unfortunately, General Motors and Ford lost focus decades ago. General Motors which had carefully segmented its brands, broadened its Chevrolet, Pontiac and Buick lines until it was impossible to figure out what they were selling. Ford floundered with its Lincoln-Mercury brand, unable to decide on who they were selling to and what to manufacture. Both companies changed their minds on strategies and models over and over again.

Desperate, the companies went out to buy other car makers. Ford put together their luxury car PAG group, including Jaguar, Volvo, Land Rover, Austin Martin with some success. They are HQ'd in England, which may be an advantage. Like Ford, GM has had better luck with its purchases than its very own; Swedish car SAAB (100% owned by GM) sales grew by 23% over the last year. But these acquisitions have done nothing to solve the core problem. Ford, now desperate, has fired Bill Ford and announced a "major turnaround". GM mostly moans in pain.

What are the strategy lessons to be learned? They are ancient. In markets that function properly, focus, planning, and commitment make the difference. The automobile industry may be the most transparent in the world. Everyone knows the prices, it's easy to compare and shop; information on product quality and performance is abundant; buyers spend an enormous amount of effort on purchasing decisions.

The automobile industry is a liberal economist's dreams. The best products actually do win. It does not matter whether your car company is Japanese, German, American, Korean, Swedish, French, etc., etc. Give customers the best value and you win. If only the rest of life were so simple.

Comments

[LTMadison]

For the first time since my late father bought his last Buick in 1978, someone in my American family bought an American car. My forty-something brother, attracted by 0% financing, just got a new Buick Lucerne. He told me, tongue in cheek, that the first thing the salesman said was, "Hey young man, where's your father?" On a related note,I saw an interesting marketing observation recently, that the big American car companies have a huge opportunity with the new generation of car buyers who are not going to want their parents' cars (Toyotas, Hondas, BMWs and Volvos). Stand out from the crowd--buy a Chevy! (So why are they using boomer rock as the backdrop for their commercials?)

[David Clark]

A couple of thoughts from a Ford insider.
There are several games going on in the auto industry.
For the non-luxury brands (Ford, GM, Renault etc), there is massive overcapacity, so a low-cost-producer strategy is demanded. However, if a mass manufacturer can be first into a new niche, monopoly rents can be achieved for a couple of years until the competition smells the $´s and piles in with me-too products. In the US, Ford saved itself at the end of the 80´s by being the first into the SUV (4x4´s), and pickup niches -- we call them trucks. Throughout the 90´s Ford was able to milk the fat margins on 4 US products (2 pickups, and 2 SUV´s)to become one of the most profitable companies in the world. It was the resultant pile of cash that allowed then-CEO, Jacques Nasser, to go on his shopping spree and buy Volvo, Land Rover, and a host of "complementary" businesses at the end of the 90´s.
Unfortunately, the company didn´t use the breathing space it had won to fix the car business. So, when the competition got into the US truck business, and the margins eroded, Ford did not have a healthy car business in the US or elsewhere to take up the slack. Then the rise in oil prices exacerbated the problem by making the trucks more expensive to run, forcing consumers to sell their F150´s and Hummers and buy more fuel efficient (Japanese) cars.
Right now, Ford retains its strength in the truck niche (the F150 is still the best selling vehicle in the US), but the margins have eroded, and the segment is shrinking. GM has almost identical issues, but bigger.
The solution? Downsizing the company is a must, but you can never take out fixed cost as fast as a shrinking top line. So, in addition, you have to be first into profitable new niches. Crossovers (half SUV, half car) look promising in the US, and Sports Activity Vehicles ("sporty" people movers like the Ford S-Max) will be big in Europe, but I think the holy grail is to achieve an affordable clean engine -- hybrid technology is NOT the solution, despite some clever marketing by Toyota.

[David Bruce Allen]

Thanks for your comments. I am an old-fashioned strategy guy. If the other guys products are better, you are likely to lose.

Moreover, when you don't have the right products, marketing can also get screwed up as you try to cover up for your competitive disadvantages. At this point, American cars also suffer from a reputation disadvantage that must be recovered as well. 20 years of damage does not get fixed overnight.

Regards,

David Allen

[Daniel]

I strongly agree that management is the main problem. In your blog you suggest some solutions; but talk to some Ford insiders and you'll see that many people in Ford know the solutions: However, Bureaucracy is the real problem. Now, Bureaucracy is the challenge for every big and mature company; but Fiat’s turnaround is a great Bureaucracy 101 class American management should take.

[David Bruce Allen]

Thanks Daniel for your comment and for the heads up on Fiat. The Fiat case has been driving Italy crazy for more than a decade. Hope had been lost, and Fiat was saved, finally, in part because no one really wanted to buy it and they had no choice but to do it themselves.

Now comes the hard part -- maintaining the change momentum so that Fiat can return to being a big player.

[Will Hawley]

You state that GM builds mediocre cars. Your proof point? "In Consumer Reports' list of the best cars for 2005, in all 10 categories the winner is a Japanese car. Not one U.S. car made it. Not one! The bottom line is that Japanese cars are better. To that we can add that European cars are more stylish, and Korean cars are less expensive." So, from this are we to conclude that BMW builds mediocre cars?

[Will Hawley]

You state that GM builds mediocre cars. Your proof point? "In Consumer Reports' list of the best cars for 2005, in all 10 categories the winner is a Japanese car. Not one U.S. car made it. Not one! The bottom line is that Japanese cars are better. To that we can add that European cars are more stylish, and Korean cars are less expensive." So, from this are we to conclude that BMW builds mediocre cars?

[David Bruce Allen]

Will Hawley's comment is worthy of a serious response.

Does BMW also build mediocre cars? I wish this were the issue. It is not. The problem, for me, is the failure of the U.S. automobile industry.

Like most Americans, I am disappointed with (and annoyed at) our automobile executives who have not developed and maintained winning strategies. With our fantastic home market, we ought to be as successful in automobiles as we are in the film business. Just consider the following: Toyota's market cap at $197 billion. Compare with Ford $40 billion; GM $20 billion.

Toyota is worth 5 times Ford and 6.5 times GM. What else can I say?

I used the Consumer Reports example for a simple reason. Consumer Reports is a U.S. magazine that one would expect that U.S. firms would score reasonably high. I am hoping and waiting that this changes quickly.

[Priyavrat thareja]

Ford could not afFord to loose cite of their responsibility to customers, but they did. And they had to pay for the follies. When the leadership at Ford could afFord to exhort the world to improve their "Work, (and their/My) Life", how could their (my/ Ford's) own people afFord to loose sight? The price of losing this site was heavy is evidenced from history.
Dr Deming had said " In God we trust, Rest brings us Data" Henry Ford was not God, so people did not put trust in his him, and he was not a common man either that he would be approached for giving his people requisite data.
But Japan did make use of his book " My work my life" which transformed the Japanes.

Priyavrat Thareja in India

[Priyavrat thareja]

Ford could not afFord to loose sight of their responsibility to customers, but they did. And they had to pay for the follies. When the leadership at Ford could afFord to exhort the world to improve their "Work, (and their/ My) Life", how could their (my/ Ford's) own people afFord to overlook the essentialities? That the price of losing this sigt was heavy, is evidenced from history.
Dr Deming had said " In God we trust, Rest bring us Data" Henry Ford was not God, so people did not put trust in his him, and he was not a common man either; that he would be approached for giving his people requisite data.
But Japan did make use of his book ver well: "My work my life" which went along to transform the Japanese.

Priyavrat Thareja in India

[Greg Popove]

All the symptoms are correct but the disease is mainly the inability of Ford management to make good decisions. Not that they are incapable, they simply have their hands tied time after time by a board of directors that reveres short-term profits over long-term sustainability. W.Edwards Deming spelled it out very clearly in the 1980's, and it seemed for awhile as though they listened. Ford's cars of the early 90's were really quite good. But just as these good decisions were bearing fruit, the shareholders with a mindless profit motive took over decisionmaking again, "You hired who? Deming? That old hack? We threw him out of Detroit in the 60's." Yes they chased him away and he decided to give Japanese carmakers the benefits of his genius. The old man is getting his revenge on Detroit every day nowadays.

[Mr Carman]

I just read a great new book on Ford - Ford and the American Dream - Founded on Right Decisions by Clifton Lambreth. Mr. Lambreth discusses Ford's million dollar mistakes and billion dollar blunders.He does the best job ever of giving the average person an inside look at Corporate America and Ford. This is a must read for every business person around the world!checkout www.thefordbook.com

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[bhattathiri]

Dear friend
Excellent article

Why Americam management failed and resulted into great economic recession.?

The modern (Western) management concepts of vision, leadership, motivation, excellence in work, achieving goals, giving work meaning, decision making and planning, are all well discussed and implemented but failed miserably.
The greed is a more fundamental and better explanation than the principles of economics and the impact of government policy on economic decisions. Misses the point that most people and businesses are motivated to improve their condition and that this force is always at work. Why did greed suddenly cause this meltdown? What allowed it to get out of control. There is one major difference. While Western management thought too often deals with problems at material, external and peripheral levels, the Bhagavad-Gita tackles the issues from the grass roots level of human thinking. Once the basic thinking of man is improved, it will automatically enhance the quality of his actions and their results. If businessmen wanted to rape and pillage, I mean maximize profit, you wouldn’t have to force them to loan money. Their profit motive gives them an incentive to “serve” the community. If certain communities aren’t being served that signals the presence of other forces dissuading businessmen from selling their product or service. Implicit in this argument is the belief that customers have a right to demand the services and goods provided by businesses. Of course, this idea underlies arguments for universal health care and whatever other service or good deemed to be too valuable to trust to the market.
The management philosophy emanating from the West is based on the lure of materialism and on a perennial thirst for profit, irrespective of the quality of the means adopted to achieve that goal. This phenomenon has its source in the abundant wealth of the West and so 'management by materialism' has caught the fancy of all the countries the world over, India being no exception to this trend. My country, India, has been in the forefront in importing these ideas mainly because of its centuries old indoctrination by colonial rulers, which has inculcated in us a feeling that anything Western is good and anything Indian, is inferior. Gita does not prohibit seeking money, power, comforts, health. It advocates active pursuit of one's goals without getting attached to the process and the results.
The result is that, while huge funds have been invested in building temples of modem management education, no perceptible changes are visible in the improvement of the general quality of life - although the standards of living of a few has gone up. The same old struggles in almost all sectors of the economy, criminalization of institutions, social violence, exploitation and other vices are seen deep in the body politic.
The source of the problem
The reasons for this sorry state of affairs are not far to seek. The Western idea of management centers on making the worker (and the manager) more efficient and more productive. Companies offer workers more to work more, produce more, sell more and to stick to the organization without looking for alternatives. The sole aim of extracting better and more work from the worker is to improve the bottom-line of the enterprise. The worker has become a hirable commodity, which can be used, replaced and discarded at will.
Thus, workers have been reduced to the state of a mercantile product. In such a state, it should come as no surprise to us that workers start using strikes ( gheraos) sit-ins, (dharnas) go-slows, work-to-rule etc. to get maximum benefit for themselves from the organizations. Society-at-large is damaged. Thus we reach a situation in which management and workers become separate and contradictory entities with conflicting interests. There is no common goal or understanding. This, predictably, leads to suspicion, friction, disillusion and mistrust, with managers and workers at cross purposes. The absence of human values and erosion of human touch in the organizational structure has resulted in a crisis of confidence.
Western management philosophy may have created prosperity – for some people some of the time at least - but it has failed in the aim of ensuring betterment of individual life and social welfare. It has remained by and large a soulless edifice and an oasis of plenty for a few in the midst of poor quality of life for many.
Hence, there is an urgent need to re-examine prevailing management disciplines - their objectives, scope and content. Management should be redefined to underline the development of the worker as a person, as a human being, and not as a mere wage-earner. With this changed perspective, management can become an instrument in the process of social, and indeed national, development.
Now let us re-examine some of the modern management concepts in the light of the Bhagavad-Gita which is a primer of management-by-values.

Mulavana Bhattathiri

[john]

It all comes down to these decisions for an average car:

1)price
2)reliablity
3)look

for average car shoppers, do you want a car that is reliable, good looking yet afforable? Japanese car may not look as trendy as European cars but they are damn reliable, most of them (there are some lemons but % is low). I was driving my 11 years old Honda with no major problems. I sold it because we have a baby now. If they are reliable, the resell price is higher. I am happy to get a couple of thousands dollars when selling my 11 years old honda. Consequently, I buy another japanese brand cars. GM, Ford has to rebuild car buyers confidence, work on the reliablity issues and the look of their cars. personally, I don't like any of the american design cars, the way they look. yes, I could be biased but if millions of car shoppers think the same way. They got a real problem. Also, Japanese has the technology now of manufacturing hybrid cars that has the highest MPG. Yes, they look ugly but it has the highest MPG in the current market. So, design, engineering and QA have to all work together. IT's a long, difficult process.