Management Lessons to be Learned from the Failure of General Motors

In 1986, Pulitzer Prize-winning journalist David Halberstam published a book titled, “The Reckoning.” While the book was positioned as a parallel history of the Japanese and American auto industries, its real message was a warning to the management of the American auto makers that, unless they upgraded their approach to change,  they were on the path to failure. We can now see just how prophetic the late Mr. Halberstam was.

At about the same time, Peter Drucker, the prolific and respected business consultant and writer, suggested that societies and businesses face two types of change. One type of change is evolutionary and can be easily adjusted to. But he also argued that sometimes change is so fundamental in nature that the very rules of the game change. When that happens, typical approaches to change fail to keep pace with the pace of change. In fact, if management is not attuned to recognize this type of seminal upheaval in established beliefs, then the traditional management cry to “get back to the basics,” not only does not work, it actually makes things worse, because the basics have so dramatically changed.

When change negatively impacts the performance of business, the conventional approach of management is to reorganize, restructure and cut costs. The actions of General Motors management for the past 25 years makes the company a poster-child for this type of approach to change and for the impotence of this approach in the face of real change.

As auto production globalized and international competition emerged, the fundamental business model for the development, manufacturing and marketing of autos followed by General Motors and the other domestic auto manufactures became obsolete. The near death experience of Chrysler Motors in the 1980s was an ignored precursor and warning for GM and Ford as to what was coming for them.

As changes for the industry emerged, the American auto makers continued to blithely barrel down the same highway they had been following for years and all that the management of GM did to respond was to seek round after round of cost cutting, restructuring and reorganization. Thousands of employees were laid off and management itself experienced more turnover than a pancake house. All to no avail. What the management of GM failed to recognize was that the change was not about costs and structure, but more fundamentally about product.

Management Lessons to Learn from Auto Industry

The inability of the auto industry – especially General Motors – to effectively respond to a business environmental change is filled with lessons for anyone who seeks to be successful in leadership and management roles.

There are a number of reasons for the failure of GM, but as with most situations, there is one central issue that goes to the very heart of the problem. It is the inability or unwillingness of management to recognize and respond to the core drivers of systemic change and that  dooms those who apply the traditional actions taken to conquer change. GM is not the only company to fall into this trap, but it is the best example. The trip-wire for General Motors was the very size and success that the company had achieved. This success lulled the management of GM into a dream world of “entitlement.”

For most of the 20th century General Motors was the most dominant industrial company in the United States, if not the world. At one point, no other single company contributed more to America’s GDP than did GM. For several decades GM was the largest private employer in the world. The company was so ingrained into the success of the American economy that in 1955 none other than the Secretary of Defense in the Eisenhower administration was quoted as saying, “What’s good for General Motors is good for the country.” (In fairness, this individual – Charles Wilson – was a former president of GM and his actual quote was, “…for years I thought what was good for the country was good for General Motors and vice versa.” But, the point is made.) In this type of heady environment, is it any wonder that the management of GM was ill-equipped to recognize, respond or adjust to change?

General Motors management acted as if the company was preordained and entitled to continued success. Imbued with this philosophy of entitlement, the management of GM committed the mortal sin for any company – they lost touch with their customer. The management acted as if the most important point was who built the cars, not who drove the cars. With this self-serving prerogative holding sway, the quality of the product lost importance, innovation was resisted and, most important, attention to changing customer wants and needs were ignored. The management of the company operated as if the normal rules of the free market were suspended and it was the company that set the standard for the market, not the customer. Pure and simple, General Motors is now paying the price for ignoring the most fundamental philosophies of a free market – the customer is king.

General Motors is not the first and it won’t be the last company to make this mistake, but it is a mistake that those in management should never make. The most important point for anyone in management to learn and remember is just who is the customer. I am not just talking about huge companies; the concept of knowing and responding to the customer is critical all the way down to the lowest levels of business and management and the tiniest of businesses.

Recognize that in any business process there may be many levels of “customers.” In effect, customer focus is a chain of events and actions that leads directly to the end buyer and user of the product. If you are a department head in a large company, your customer may not be the ultimate buyer of the product, but may be those who work in your department to “build” the product. For example, at LifeUSA we identified our primary customer as the agent selling the product. (The ultimate policyholder was viewed as the customer of the agent.) All the efforts of the company were centered on recognizing, understanding and meeting the needs of our customer – the agent. The management of LifeUSA viewed the employee as its customer and sought to provide the tools and environment that informed, equipped and motivated the employee to meet the needs of the company’s customer.

Because the management of General Motors lost the urgency for this type of customer responsiveness, they lost touch with the customer and the customer drove on leaving General Motors in their exhaust.

And the moral of the story …

Never forget how success was attained and never take it for granted. Just because a company have been successful in the past, don’t fall prey to the belief that the company is entitled to always be successful. Success is something that cannot be taken for granted and must be earned each day. In reality, success is more about what happened in the past, not what will happen in the future. A company that views its past as precursor to the future exposes itself to failure when the future becomes different than the past – which is always the case.

When a company faces change in its business environment, that change almost always comes from external events. Be it technology, government action, new competition or changes in consumer needs and wants, very few companies have the ability to initiate change and so instead must be sensitive to the winds of change and how to react to it. While a company may not be able to predict specific changes, it can be structured to anticipate and react to them. This starts by never losing sight of who the customer is, what type of product they want and how best to get it to them.

General Motors is not in trouble because people stopped buying cars, but because people stopped wanting to buy General Motors cars. Even though the current recession has caused total car sales to decline across the board, the number of cars being sold in America has steadily increased over the past three decades. Yet, as the total number of cars being sold in the US – including those of General Motors – was increasing, the market share of General Motors cars being purchased was in steady decline. That should have been a clear message to the management of General Motors that it was not the cost of manufacturing, the structure or organization of the company that was at fault, but the reality that due to the arrogance of entitlement GM was making cars it wanted to sell, not offering cars people wanted to buy.

All of the rounds of cost-cutting, layoffs, reorganizations and restructuring are never successful tactics when faced with fundamental change in a market. The simple reality is that if General Motors had the same market share today that it enjoyed in 1985, we would be hearing nothing about cost cutting, layoffs and bailouts, but instead marveling and the continued power and success of the company.

Lose sight of the customer and you lose sight of the future.

(Stay tuned for the next installment of this discussion when the current, serious problems of the insurance industry are put in parallel with those of the auto industry and solutions will be offered as to what needs to be done to regain the respect for and success of the industry.)

One response to “Management Lessons to be Learned from the Failure of General Motors

  1. The Toyota way principle 1 says „Base your management decisions on a long-term philosophy, even at the expense of short-term financial goals.“ IMHO GM had and have a lack of long-term philosophy.

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