In 1980, Harvard professors Robert Hayes and Bob Abernathy published an ominous-sounding but award-winning article in the Harvard Business Review eitled, “Managing our way to economic decline.”
This seminal article described then-recent trends in U.S. industry as a “marked deterioration of competitive vigor” owing principally to so many more senior executives arriving with major backgrounds in finance vs. engineering, production or marketing.
We should keep this important article in mind as we now review the problematic recall of vehicles produced by General Motors and its emergence from government takeover and bankruptcy. On the surface it may seem that the company is simply defective in its managerial approach. But let’s look at the matter historically.
In the 1970s, General Motors produced almost half the cars sold in the United States. An important tradition existed: The chairman of the board of GM would stay in New York and have lunch with the bankers. The president of GM would stay in Detroit and build cars.
Indeed, until 1980, only two people had ever moved from GM president to CEO. The first was Alfred B. Sloan, who initiated the system. The second was James Roche, who was asked to take over for a short time when GM Chairman Frederic Donner was asked to step down during a public debacle surrounding criticism of the Chevrolet Corvair.
The separation of power principle worked well at GM. Sales were good. Finances were strong. Products were distinctive, and technology was first-rate. In addition to its prowess in vehicle manufacturing, General Motors built heavy-duty trucks, refrigerators, military equipment, aircraft engines and dominated in the production of railroad engines. GM products were backed by first-rate research and innovation.
On the heels of the Arab oil embargo and radical increases in oil prices, automotive manufacturers struggled to update their products to accommodate a stranger environment. GM was one of the first leaders in downsizing with its 1976 models — large by today’s standards, but much more efficiently designed and more compact than earlier models. Engines, transmissions and other components got updated. By 1985, GM still had 40 percent of the U.S. market.
In 1980, an ex-accounting clerk, Roger Smith, became CEO of GM for 10 years. Without a full appreciation of the wisdom of GM’s separation of power principle, Smith attempted to do both jobs. He started Saturn, acquired several new companies, merged product divisions, spent $40 billion on factory automation before robots were ready, and formed the General Motors Assembly Division, which had the effect of having all GM cars, regardless of price class, look very much alike. The bureaucratic influence at GM meant long meetings of senior managers in intense discussions of what kind of cars to build.
Meanwhile, things were approached differently at archrival Ford. Laboratory prototypes replaced abstract meetings. Development teams included autoworkers, lawyers handling product liability cases, more women, and less emphasis on how to build cars efficiently and more emphasis on making cars easier to build. The Ford Taurus was started a year later than the Chevrolet Lumina, but finished a year earlier with many labor-saving design improvements that carried over to other Ford models. By 1992, Ford had a $4 billion annual cost advantage over GM.
Meanwhile, the separation of power policy was largely lost at GM. Most of GM’s leaders in recent years have been financial people or people from other industries. Ed Whitacre came from AT&T. Rick Waggoner and Fritz Henderson were from the financial sections of GM. Dan Akerson was from the communications industry. Only Jack Smith was a GM car guy who presided for a few years when GM did improve.
During GM’s era of financial domination, finances got much worse. GM’s peak real value profits were in 1965. Earlier acquisitions were later sold at a loss. Product strategies were ambivalent. More than a million Oldsmobiles were sold in 1985, but the make was discontinued later, as were Pontiac and Saturn. Detroit Diesel, Allison Transmission, EDS, Delphi and Hughes Electronics were divested. GM’s shares in Daewoo, Isuzu, Suzuki and the German company Opel were sold or greatly reduced. Losses mounted. Confusion reigned. Bankruptcy followed.
The problems that GM faces today may not be the problems of GM alone. It is how we run so many of our precious companies today, with the detached shallow and superficial pseudo-analysis lamented by Hayes and Abernathy 34 years ago. Many of our most important corporations are now headed by people with backgrounds similar to those who participated in GM’s dramatic decline.
But there is hope. GM’s current leader is Mary Barra — a 34-year veteran of GM who started work in the Detroit Hamtramck Assembly Plant as an electrical engineering co-op student at General Motors Institute. She has had a plethora of real car experiences since. It is nice to have a GM chief executive who is familiar with what it takes to put good products together and how to keep them attractive to customers. We can only wish both her and the company the best.