Wednesday, April 24, 2013

Where did General Motors go wrong?


‘What is good for GM, is good for America’. This slightly out-of-context comment made by the CEO of GM in the 1950’s proves how intertwined with the country’s fortunes. So why did such a colossus have to file for bankruptcy in 2009.
There was a time when almost half the cars in the USA were GM made, 1 in every 200 Americans worked at GM. GM’s growth into a colossus of the American car industry is attributed to Alfred Sloan, a quintessential engineer who had it all figures out. A figure who has divided opinion in recent times, nevertheless made GM the biggest car maker in the country.

While Henry Ford revolutionized the way cars were made, Sloan and GM revolutionized the way they were marketed to the customers. The market was segmented into the different types of users and GM had cars for each segment. They were the first company to annually change the styling of its cars and created a culture of replacing cars in the American public. Innovations like power-steering, automatic transmission, power breaks and independent suspension also revolutionized the automobile industry.

Operations in GM were decentralized. This worked for GM when it was doing well, but also created competition within the different groups. One division often cannibalized the sale of its other cars and this led to the creation of fiefdoms among the company. When Japanese companies like Toyota entered the fray, 
GM could not adapt. Also, worker’s unions gave them a lot of trouble. GM was forced to pay their workers lavish pay and benefits due to which they were unable to cut costs, in a time when low-cost but high quality Japanese cars were flooding the market. Also, the higher management got isolated from the other employees in the company, thereby having little interaction with customers and dealers.

This isolation impacted their ability to read the changing markets. Japanese car makers took advantage of the oil crisis by flooding the market with smaller, more fuel efficient cars in the 1970s while GM was still making big gas-guzzlers.

GM did try to adapt, but their first move like many other big companies was to cut costs. That failed as the unions were not ready to renegotiate their pay and benefits. But cutting costs would not have helped. They should have focused on their core strength – Cars for every customer segment. They should have again tried to adapt to the customers’ needs in a changing market. They eventually did manufacture smaller cars but they were not well-designed. They also had disasters like the Chevorlet Nova which in Spanish means ‘it doesn’t go’. It did not do well in the Latin markets, of course.

We have seen companies like GE and IBM survive the test of time. They reinvented themselves but built on what they already had. Also they did not simply reorganize their management or cut costs. Operational efficiency will only take you so far. They adapted to the changing needs of the customers. That is what GM failed to do.

After bankruptcy, GM’s product line is being overhauled as we speak, a lot of brands have been sold and margins are improving. But GM does need to focus on its product. It is the only way it can change customer perception about its brand and be successful again.

Sources
1.       TheWeekStaff. "The Rise and Fall of General Motors - The Week." The Week. The Week, 11 June 2009. Web. 24 Apr. 2013.
2.       Rosevear, John. "3 Reasons to Buy General Motors Today." (GM). N.p., 16 Apr. 2013. Web. 24 Apr. 2013.

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