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Case Study: The Decline and Fall of General Motors

Failure to innovate is the key reason to the downfall of Old General Motors. Innovation is the process whereby the management team of an organization is charged with the responsibility of introducing something new, which might be a new idea or a methodology or rather, a contrivance to facilitate the operational concerns and production. The Old General Motors failed with innovations in the company. These innovations were needed to ensure that the Old GM able remains competitive, and the company was able to manufacture cars that are in line with the client’s demands. This is related to the Old GM’ field of business to ensure that the organization do continue to produce the respective consumer centered product. The manufacturing industry such as the General Motors, innovation ensure that the output they deliver to the consumer do meet their needs, and expectations in a way that is realistic and makes their product to have a preference by the consumers against other same need satisfying product.

The fall of the Old General motors’ in this context was initially by the lack of personal innovation. The Organizational management was desperate for people who could see things in a different perspective. This would quickly size up the problems and come up with creative solutions to pinch the organization was facing. The failure of the “Old GM” to innovate made the organization less indispensable to consumers of the company products and other key personalities, who preferred the company output. This was both in the organization and outside its walls. The GM did lack the “go to idea personality,” which is essential, to work through intricate challenges and come up with creative solutions such as more performing vehicles. The failure by the Old General Motors to innovate made the company and its technologies obsolete; thus, the company failed to satisfy the needs of evolved human with its obsolete products.

Innovation is essential in an organization for it to be able to thrive in the challenging business world a thing that the Old General Motors did not realize. The company product tends to go through a life cycle. At the initial stage, the product is not well known; and it is costly such as the way General motor’s vehicles were in 1950s hence the sales are restricted. The product does reach growth after some time. At this stage, there is no more growth seen in sales, and at after time, it goes to the decline stage. A better and more satisfying product has replaced the product. It is at this stage that the manufacturer is supposed to come up with realistic ideas towards product development if he has to remain competitive. For example, the Old General Motor’s GMC trucks did reach the declining stage simply because the consumer switched to more efficient ones other than the GMCs that were moving at 50/60kmp speed.

The innovation diffusion is the factor that the organizations tend to take them to be in a better position of running the business. Innovative General Motors is likely to be the first to adopt a new production technology. A company is willing to pay a premium price for the new production processes and unwarranted technology. A later adopter relies on advice from the innovators who are more informed on new techniques. The fall of the “Old GM” seemed to have had been influenced by such factors in that the company never adopted the new technologies not even in the latter stages. Such technologies ensured the organization was able to produce customer more satisfying product, such as the luxurious and comfortable seats that other competitors fitted in personalized cars.

The product life cycle shows very well where innovation is critical for a manufacturing company especially the General motors’ limited. When the “Old GM,” company product did go through the life cycle as shown the company, ran out of ideas, opted out, and watched when other company products replaced its offer to the market, which decreased sales hence making it bankrupt in 2008. At the latter product life cycle stages, the company is supposed to at least make a modification of its marketing strategy a factor on which the Old General Motors failed. For example, when Toyota, was facing an inundated market for its “old face me sedan” based on its conventional usage, the company did opt for innovation to have the private Sedan replace the old one. This innovation did as well come with the fuel efficiency on top of high performance. They extended this to the production of five-seat family cars, which were a relief to the public old Sedans.

It was essential for Old Gm to come up with new products for its consumers, because that is what can make them have a bigger realization of sales. Either these new products can be new to the market in that, no any other manufacturer had made such a product before just like the Chrysler invented the minivan, or the product can be new to the company in that it was an invention done by another organization and the organization is coming up with its own version. For example, The Mercedes Benz Company was not the original manufacturers of the personal cars, but they came in after the market depicted a high potential with very satisfying products. This is innovation at its best, which the old General Motors failed to adopt. A product can be innovated to be new to a certain market segment. For instance, the Mercedes Benz sedans were first aimed at the price insensitive segments, but the manufacturers did in latter stages decide to target the price sensitive segment. This was innovation.

Innovation adoption over time is a critical thing that each of the organizations has to consider enabling it able to thrive in the market. Innovation starts with the innovators who account for about 2.5% of all innovations, then about 13.5% of early adopters and at least 34% of the early majority to take in the innovations. Afterwards, a 34% of the later majorities in innovation adoption do come in then the laggards are at 13.5% as far as innovation adoption and implementation is concerned. The “Old GM” failure could have been caused by his choice of being a laggard in the innovation adoption.

The old General Motors Company limited allowed the force of innovation to work against them. The managers did fear the risk associated with innovation and its adoptions that can either be financially bent or rather socially indented. The Old General Motors did as well fear the chance of trying edging ideas towards product development and growth for the organization to be able to remain in business. The organization might as well have resistance towards erudition on how to use the new technologies and innovation towards consumer satisfying products fabrication and pricing as well as positioning.

The required innovations for an organization to remain in business are adopted and implemented in varying degrees. The innovations might be continuous in that it includes the trivial improvements in due course. For example, the year to another change in vehicle, yet they are driven the same way they were in 1940s. Dynamic continuous innovation is essential in that technology is varied even though the product usage is similar to the older one. As an example, the jet technology came in to replace the propeller aircraft yet they are used for the same purpose. Discontinuous innovation is as well practical in an organization in that it creates a product that completely varies the way things are done. For instance, the introduction of the private and personal family cars did vary the transport sector.

Innovation is hard to embrace; however, in due time, the results are significant, and a failure to innovate in an organization does result to fatal implications. The “Old GM” for instance did not embrace innovation and the organization opted to operate with obsolete technologies a factor that could not let them stay in business. This failure to be creative brought down the organization’s profitability and sustainability in the manufacturing sector. This resulted to General Motors being regarded as a failure with little to offer to the market that was updated.

The Old GM did lack the modernity-desired innovation, and its adoption in that its extent to new production technologies reception was below par, and tainted with fear, and frustrations, which are the practical, proves of failed leadership. Additionally, General Motors might have been devoid of creative leadership ; the management did not value opinion leaders. The chances that the Old General motors’ management never did appreciate the opinion of others did bar innovation in the organization a factor that resulted to no innovation at all. Such a factor coupled by the resistance to change, production techniques, and fear of trying new ideas are some of the factors that resulted to Old General Motors as a manufacturing organization becoming a mere general venture and losing big in its market and standards.

Innovation does create a desirable environment for product positioning; for instance, the efficiency desired by consumers is critical to ensure that a company is able to satisfy the customers’ needs effectively. The resistance and lack of innovation are reasonable and justified factors to conclude that the fall of the Old GM resulted from the company’s lack of innovative ideas. Additionally, the company failed to adopt new technologies when the organization was desperate for innovations.

Innovation is paramount in any organization. The competitive environment is challenging and turbulent. Thus, companies need to be innovative in the achievement of the organizational goals and objectives, and development of products. This is what the old GM failed to realize, and they never embraced innovations when their competitors such as the Chrysler were top at innovations, hence resulting to the company failure and 2008 bankruptcy.

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Why GM Failed

Karen Berman and Joe Knight

Here’s a question from a reader. Rammohanpotturi asks: I have a very specific question for both of you. Why do you think GM collapsed? A company which was started in 1909 went on to stay well ahead in the automobile industry for 100 years collapsed. I understand it is not all of sudden. What happened […]

Here’s a question from a reader.

KB Karen Berman is founder and co-owner of the Business Literacy Institute, with Joe Knight. Joe is CFO at Setpoint Companies. The revised edition of their classic Financial Intelligence will be published in February.

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How general motors lost its focus – and its way.

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When does having too many brands and too many variations of those brands create a perilous situation? The answer is that when you are an American icon, once thought too big to fail, and that never ever thought it should modify, let alone re-consider trimming, its portfolio of offerings. On the verge, General Motors illustrates why building an offering for every market segment may make sense in the boardroom, but not on the balance sheet, where it stanches the flow of cash the corporation desperately needs.

Much has been written about the importance of market focus in recent years, and justifiably so, since global corporate managers have come to realize that how they apply and adhere to this critical strategic and market-planning concept can make or break their companies, to say nothing of their careers. There is no better example of just how important market focus is than the case of General Motors, which has been devastated because of a complete loss of market focus in their corporate portfolio. GM’s unfolding failure and its cascading impact on various stakeholders have been accompanied by a deluge of comments, literature and media reports. As a result, a still-growing mythology has sprung up to explain the fundamental causes of the failure of General Motors.

The major myth is that GM is just one more victim of the current global downturn. It is a myth that has been propagated and, lamely and lamentably, offered as the cause of the company’s troubles by none other than the corporation’s CEO. “What exposes us to failure now is not our product line-up, or our business plan, or our long-term strategy,” said Rick Wagoner last fall, before a Congressional considering whether to offer bailout money. “What exposes us to failure now is the global financial crisis, which has severely restricted credit availability and reduced industry sales to the lowest per-capita level since World War II.”

Such denial withstanding, the reality is that the last five years have been financially devastating for GM. However, the fact is that, during this time, highly market-focused competitors like Toyota and Honda have had solid net cash flows. This points to the purpose of this article, which is to identify and explain the real and central cause of GM’s fall, namely the loss of market focus across the many different portfolio levels in the company. These levels include the portfolio of divisions, brands within divisions, models within brands, the physical and cosmetic variations among models, market segments, dealers and suppliers. The article will argue that the major problem with GM is a deeply imbedded, long-held misconception about the real meaning of market focus and its critical connection to cash flow creation. Historically, GM’s financial metrics have focused on growing market share and revenue, rather than on creating and sustaining positive net cash flow. However, the loss of market focus on the scale and scope of GM’s will, in the long run, inevitably lead to huge cash losses.

It is important to understand that the loss of market focus at any of the above-mentioned portfolio levels has a cascading effect and impacts all the other levels. This corporate, multi-level, cross-portfolio loss of market focus has had a devastating effect on the capacity of GM to generate positive net cash flow. In fact, over several years it has resulted in the once unthinkable: General Motors is running out of cash, desperately seeking government support and considering bankruptcy.

To understand why GM has failed, it is critical to understand what market focus means to market planning and strategy at every portfolio level in GM, and its critical connection to the generation of positive net cash flow. Without clearly understanding and connecting these pieces of the puzzle, it becomes impossible to understand the real reasons for GM’s failure and the few options for turning the corporation around.

What is market focus?

Market focus represents the capacity of managers to constantly — and with clinical detachment — focus the critical cash and human resources of a company and its portfolio only on market opportunities that can create and grow long-term, positive net cash flow. This means that managers and teams must make the tough choices of where to compete and to not compete. It means quickly exiting market segments and opportunities for products, services, and technologies where it just isn’t possible to create positive net cash flow.

There are many examples of companies whose market and strategic planning processes and culture are highly market-focused. General Electric, Wal-Mart, Sony, Toyota, Honda, and Microsoft are a few examples. All of these companies have track records of driving market focus toward opportunities where they can create both wide buyer choice and high cash flows. They also share the clear ability to quickly exit market opportunities that cannot create high, long-run net cash flow.

A critical aspect of market focus for these leading companies is their capacity to deal with market and economic downturns of the kind we are currently experiencing. In growth-market situations, market focus is critical for moving resources to support high cash-flow opportunities. In declining markets, it is even more critical in withdrawing resources away from supporting cash losers. In the case of Toyota for example, even though it is currently suffering a car sales downturn and short-term cash losses, the company’s historically high degree of market focus has left it with high cash reserves to buffer the impact and lower negative cash-flow impact of declining car sales. Not so for General Motors, whose legacy of annual cash losses in high-growth, car-market years has left it with little or no cash to deal with the downturn.

As is the case with most powerful management concepts, market focus and its implications for the corporate portfolio, market planning, corporate strategy and cash flow is a simple concept. Nevertheless, it is a concept that is misunderstood by many of the senior managers with whom I have worked. In reality, market focus is extraordinarily difficult to achieve and sustain. It is, in fact, impossible if the management culture of a company does not understand, embrace, and practice it on a continuous basis. General Motors clearly represents such a company and culture.

General Motors

Like most other large corporations, General Motors has an enormous and complex multi-level, interconnected corporate portfolio. Nested in the corporate portfolio are portfolios of divisions, of brands within divisions, of models within brands, of cosmetic and mechanical variations within models, of market segments, of manufacturing plants, of supply chains, and of dealers. This corporate portfolio is currently operating out of control, with a crippling loss of market focus that has been occurring at every level of the portfolio, and with high and growing cash losses occurring over several years. Incredibly, GM’s web site currently lists a product portfolio of over 95 cars! To underline the seriousness of GM’s market-focus problem, we need to understand that recent indications are that it plans to launch 19 new vehicles by 2010 ( The Automotive Lyceum , March 3, 2009). Recent estimates (The Canadian Press, January 2009) are that GM burned through $6.2 billion of cash in the last three months of 2008, and lost $30.9 billion for the year 2008. In 2007, GM is estimated to have lost $38.7 billion. Market focus demands the existence of two critical conditions if planning and strategy are to be successful – the creation of car market-segment shares, and the creation of car-positive cash flow. Without both of these conditions, market planning and strategy will fail.

Two conditions for market focus

1. Creating car market segment share

Every level of the corporate portfolio must create, support, and sustain customer choice and market share for every car in the portfolio. If any level of the portfolio is not supporting customer car choice, fast action must be taken to quickly turn the strategy around, reallocate resources being used to pursue the strategy, shut the initiative down, or sell or exit the situation. This means that every car in the portfolio of cars that GM markets must create high market share in the market segments in which it competes. GM cannot afford to market cars that sell in small numbers or that compete in very small, specialized market segments. Then again, high market shares of particular segments are not nearly enough to support a market-focused company. Every GM car must also create and grow long-run net cash flow from these market shares.

2. Creating car positive net cash flow

Creating customer choice and market share in leading market segments is useless unless every GM car in the portfolio is creating high and growing net cash flow from that market share. It is very evident that recently, many corporate managers have begun to regard the generation of real cash flow as the only valid and incorruptible financial metric for making money. At the same time, these managers have begun to pay less attention to historical measures of profitability and even less to traditional metrics of financial success, like return on investment (ROI), return on equity (ROE), EBITDA, and the like. Many of these traditional metrics have turned out to be misleading and illusory, primarily because they do not account directly for the negative cash flows required to service debt. In the current global financial collapse, this reality is coming home to roost; all negative cash flows must be accounted for, not just “left in the denominator” of a return calculation.

Market focus in GM means that every existing or new car in the portfolio must produce long-term, net cash flow and high market share in those segments in which it competes. It is very difficult to create these two critical conditions necessary for market focus. Many examples can be found of cars that achieve significant customer choice and market share, but lose cash. One example is GM’s Saturn Division, a major cash flow loser, which will be explored later.

Market focus and cash flow: How cars really make money

Exhibit 1 – Car Cash Flow Dynamics

The most fundamental market focus question is: How do cars make money?

You would think this would not be a problem for GM; after all it has literally thousands of accountants, finance majors and MBA’s from the finest business schools! Yet how do you explain their failure to predict the inexorable slide into huge cash losses? To answer this question, it is critical to understand how individual GM cars and the GM corporate portfolio generate real net cash flow and create the conditions that make this happen. The cash flow dynamic for an individual car is shown in Exhibit 1. As shown, there are only six fundamental drivers of net cash flow for any car in the GM portfolio. These factors are:

Market segment share (percentage of car units)
Market segment size (number of cars/year)
Car unit price (dollars/car)
Car unit variable cost (dollars/car)
Fixed cost negative cash flows (dollars/year)
Investments negative cash flows (dollars /year)

Working in combination, these six factors define and drive the positive and negative cash flow drivers for any car. Together, they combine to determine whether a car will produce positive or negative net cash flow over time.

Car-positive cash flow

As shown in Exhibit 1, CAR POSITIVE CASH FLOW = CAR UNIT SALES x UNIT MARGINS for a particular car . It is critical to note that positive cash flow has nothing to do with annual revenue for a particular car. Conceptually, it is easy to see what a high, positive-cash flow car must do, namely sell a lot of cars at high unit margins. For example, Toyota Camry sells around 400,000 cars per year at solid unit margins. It is a high positive net-cash-flow producer in the mid-price sedan market segment. This segment will be explored later.

How are high unit sales created? As shown in Exhibit 1, CAR UNIT SALES = MARKET SEGMENT SHARE x MARKET SEGMENT SIZE . In order to sell a lot of units, a car must have a significant market share of the large market segments. One example is the Toyota Camry, which has a high market share of the mid-priced sedan market, one of the largest market segments. To create high unit sales for a particular car, a car maker has to be concerned about the unit size of market segments, and what share of the segment will be critical for making some positive cash flow.

Car unit margins

Exhibit 2 – Major Car Market Segments

Creating cars with high unit margins is a difficult factor to manage in the cash flow dynamic. These unit margins represent the dollar difference between car prices at the factory level and the unit variable costs of manufacturing the car. CAR UNIT MARGIN = CAR PRICE – UNIT VARIABLE COSTS . Setting factory and dealer retail prices for a particular car can be controlled to some degree, but managing unit variable costs is much more difficult, since most car companies, including GM, make extensive use of outsourcing and supply chains for the thousands of parts that go into a car. Creating and sustaining high unit margins for each GM car is very difficult to control, especially with a large portfolio of cars.

Looking at these positive cash flow factors in total, we can see that a high, positive-cash-flow car is one that produces a high level of car unit sales with high unit margins. Needless to say, it is difficult for every car in the portfolio to generate high positive cash flow. But it is absolutely critical from a market focus perspective.

From such a perspective, a “winner profile” car is one that has:

High market segment share
In a large market segment
With attractive competitive car prices
And low variable costs
And high car unit margins
And low fixed costs per car
And low investments negative cash flows per car

A good example of this type of car is the Toyota Camry. By contrast, a” loser profile” car looks like this:

Low market segment share
In a small market segment
With unattractive buyer prices
And high variable costs
And low unit margins
And high fixed costs per car
And high investment negative cash flows per car

Looking into the future, we can see that the much-touted Chevrolet Volt electric/gas hybrid car, for example, is likely to exemplify this loser profile. I predict that it will lose a lot of cash for GM. Estimated variable costs of producing the Volt are rising. A recent estimate of the car’s unit manufacturing costs is $48,000 ( FuturePundit , April 7, 2008). As a result, the Volt’s estimated retail prices are rising. The likely outcome is slim unit margins, low unit sales and low market share, mainly because of the high prices.

In the case of the Volt, the market segment for a high-priced, limited-range, electric/gas hybrid is tiny. Moreover, Volt’s real dollar per-year operating cost savings for lower-mileage car drivers over alternative, much cheaper gas, diesel, and gas/electric hybrid cars are marginal at best. GM’s investments in the exotic battery and manufacturing technologies involved will be very high, as will be the fixed manufacturing costs per car, given the likely low unit volumes. As a result, Chevrolet Volt will likely be a cash flow disaster for GM. Volt is similar in some ways to the Saturn fiasco, another example of the failure of GM market focus.

In the case of Saturn, which was launched in the 1990’s, the original concept was to create a new GM Division to prove that GM could compete with Toyota and Honda in the low-priced market. (Cars in segments 13 and 14 in Exhibit 2). At the time, GM had a long and dismal history of losing cash flow in the low-price market segment, a legacy of marketing a long series of cars of frequently poor quality and reliability (Chevrolet Corvair, Chevette, and Vega for example). The following market-focus profile emerged for Saturn:

Relatively high market segment share, driven by low price, and a “made in the USA” market position
In relatively large market segments (Segments 13 and 14)
Fairly high unit sales ( About 200,000 cars per year)
Relatively low prices compared to Toyota and Honda
Very high variable manufacturing costs, driven by an exotic metal and plastic composite body, exotic new manufacturing and process technologies in a brand new plant in Tennessee, and the choice to manufacture most of the major Saturn basic drive train components in the new plant, rather than outsourcing them, or accessing GM “parts bins.”
Very high investments due to the above, meaning very high negative cash flows per car to fund these investments

As a result of these cash flow dynamics, Saturn had lost about $15 billion by 2004. (Fortune, December 13, 2004). From a market-focus perspective, the likelihood of losing this amount became evident very early in the Saturn development process. In a market-focused company, the project would have been stopped, but not in GM. Recently, GM has finally acknowledged that the Saturn has failed. GM is now deciding what to do with the Saturn division.

Car-negative cash flows

As shown in Exhibit 1, negative cash flows for car manufacturing include the entire set of manufacturing fixed costs and the negative cash flows to finance the investments to produce the cars. These fixed costs and investment negative cash flows can be dramatically different between cars, manufacturing and outsourcing plants, process and product technologies, countries, and market segments. From a manufacturing point of view it is critical to minimize these fixed costs and investment-negative cash flows per car produced. In other words, it doesn’t help to have low variable costs per car if the fixed costs and investment-negative cash flows per car at a particular manufacturing facility are very high. The ultimate objective of car manufacturing is to minimize the total dollar-delivered cost to manufacture each car.

As an example of how market focus and its connections to manufacturing costs can be wrongly perceived, a recent UAW report ( Solidarity , January/February 2009) proudly boasted of the high “productivity” of some “union” auto plants based on lower labor hours per car. This conveys a very misleading concept of productivity, and it is largely irrelevant. To a market-focused automaker, the highest “productivity” point of car manufacture is where the total delivered dollar cost per car is minimized. In other words, if labor is cheap, the total number of labor hours per car becomes less important to minimizing car manufacturing costs.

Competitive car market segments: Choosing market focus

The most critical market focus choice for any automaker is to decide in which car market segments it wants to compete. A simplified map of the competitive car market segments is shown in Exhibit 2. As shown, there are at least 18 basic market segments in which to compete. This has huge significance for any car maker. Even if an auto maker positions and markets just one car in each market segment, it means that they require a minimum portfolio of 18 cars. This raises the question of why any auto maker would want to market more than one car in each segment. Indeed, there are many car companies that only compete in a few of the 18 market segments.

From a market-focus perspective, more successful car companies (Toyota and Honda) have positioned themselves to compete with highly market-focused cars in segments where they can create and sustain high and growing net cash flow. Examples abound when exploring this segment map. For example, Ferrari competes only in segment 6 and Rolls-Royce only in segments 1 and 2. Mercedes-Benz competes in segments 1, 2,5,6,7,8,10, and 12. It is evident from Exhibit 2 that any company with a product portfolio that has two cars in every segment would have 36 cars in their portfolio; three cars in each segment would result in 54 cars.GM has over 95 cars in its product portfolio! Quite clearly, the company’s car portfolio has grown out of control.

By examining this segment map, it is clear that for GM, having multiple vehicles in many different segments has the potential to destroy market focus by fragmenting segments. There are many other dangerous effects of such strategies!

Critical market focus choices: The GM multi-level corporate portfolio

General Motors’ portfolio exists at several different levels: portfolio of divisions; portfolio of brands within divisions; portfolio of models within brands; brands, models and price ranges, and mechanical and cosmetic variations. Let us examine each.

Portfolio of divisions

Unlike many other automakers, GM has five major car divisions: Chevrolet, Pontiac, Buick, Cadillac and Saturn (not counting Saab, and the recently shut down Oldsmobile Division). When you consider these divisions and the competitive market segments outlined, it appears that several possible market focus choices are possible. One obvious one is for the five different GM divisions to focus on different market segments. In the history of GM, this was essentially true for many years.

However, over the years, this market focus at the divisional level has completely unraveled. Over time, and for a variety of reasons, each GM division has offered an expanding array of brands, physical platforms and models across many of the 18 market segments. As a result, a huge divisional and cross-divisional replication of cars in many of the market segments outlined now occurs. For many of these market segments, GM now competes with itself for market share and cash flow.

Brands within divisions

Within each division, GM has always been able to choose which cars to have in the portfolio. Over the past years, GM divisions have begun positioning more and more cars in different segments across this potential market The examples of mid-price sedans will be used later to demonstrate the loss of market focus and its impact on cash flows.

Models within brands

Within each of the major divisions, GM markets a number of brands and models. Not only is there a significant number of different brands and platforms within each division, but the platforms are often used to create “rebadged” replicate cars within and across divisions that are essentially the same physical car, replicated at the same price point across other divisions. This rebadging merely magnifies the absence of market focus.

Brands, models and price ranges

Another indication of GM’s loss of market focus is its habit of having wide price-band overlaps within a division and across divisions. Within divisions, there are many different GM car brands and models whose prices at retail (with different cosmetic and mechanical options) cut across each other, so that the top-end, fully-equipped car of one brand is higher-priced than a “stripped” version of another car brand. This has the potential to create huge price confusion among buyers.

Moreover, price band crossing occurs not only within a division, but also across divisions, mainly because of the replication across divisions. In Toyota, if you have about $25,000 (Canadian) to spend, you can only buy two or three different vehicles. Across GM’s divisions, you can buy many different cars and variations of them for $25,000. The car buyer with $25,000 to spend is definitely confused as he or she tries to cope with the huge GM brand, model, and dealer portfolio. This is not true of many of GM’s major competitors, particularly Toyota and Honda.

Mechanical and cosmetic variations

Even within a particular brand and model, GM often offers a great number of variations and options, mechanical and cosmetic. For most of its cars, Toyota offers two basic engine choices, a V6 or an inline four cylinder engine. In some GM divisions there are many more different engine choices, some manufactured in GM and others from different outsource suppliers. There are also many more mechanical options and model variations. This means that the GM portfolio is even larger than 95+ cars, , when you look at the total number of cars, variations, price ranges, brands, replicates, and dealers within five major divisions and between them.

Market focus failure in GM: Portfolio, proliferation and replication

GM’s portfolio proliferation has now been detailed, from the number of portfolio divisions to the number of portfolio brands, models and “rebadged” replicates within and across divisions, to the brand and model price ranges and overlap to the huge number of brand and model cosmetic and mechanical variations. This amounts to out-of-control portfolio proliferation, a fragmentation of market segments and car product positions, and a complete breakdown of market focus. Such a proliferation has huge impacts on a large number of factors that affect GM‘s cash flow and competitive performance.

GM versus Toyota: The example of mid-priced sedans

Looking at the overall GM portfolio, we see that GM currently competes in most of the 18 segments described in this article. However, the company has multiple competing vehicles in many market segments, and many of these are cross-divisional “rebadged replicates.” For example, let us explore mid-priced sedans, which are segment 8 (Exhibit 2). Here, GM’s loss of market focus stands in stark contrast to Toyota’s very high market focus. In the case of Toyota, the Camry brand is their market-focused basic entry in this market segment. Further, the Camry has only two engine options, and a very limited number of choices of cosmetic and mechanical options, which are organized into very clear packages. By contrast, virtually every one of the five divisions of GM has car offerings in segment 8 (not to mention SAAB). The following GM cars are positioned in segment 8 by division.

Chevrolet Malibu
Chevrolet Impala
Buick Allure
Buick Lucerne
Cadillac CTS
Saturn Aura

This loss of market focus in GM is replicated in many other market segments. The difference in market focus is not just slightly different than Toyota’s, but dramatically different. The impact of this huge portfolio proliferation, replication and loss of market focus has a large, complex, and interrelated set of negative effects on cash flow, which will now be outlined in detail.

Market focus loss: Impact on GM cash flows

The ultimate objective of market-focused strategies is to create and sustain high and growing cash flow over the long term. Over the last few years, GM has clearly been moving to a devastating cash position, the result of years of negative net cash flow. As a result, GM’s cash needs have now grown to the point where the company needs government money to survive. While it is true that Toyota and Honda are also currently having short-term cash flow difficulties, they do not have GM’s history of cumulative cash flow losses. Their high degree of market focus has paid off, not only in producing reasonable cash flow, but in minimizing their cash losses when global markets turned down.

Making reference to the cash flow dynamics (Exhibit 1), we can explore how the loss of market focus and multi-level corporate portfolio proliferation in GM hurts every major driver of the cash flow dynamics, including their impact on unit sales, unit margins, unit market share, unit prices, market segments sizes, and unit variable costs, fixed costs, and investments. These will now be outlined in detail.

Impact on GM market segment share and segment size

GM’s portfolio proliferation, as exemplified by the proliferation in segment 8, has a dramatic impact on the drivers of GM cash flow.

Segment 8 is a large-market segment, but only if you attack it with one market-focused car. When GM fragments the segment by offering seven different cars, they effectively reduce the size of the segment open to each GM car. The impact of this is to dramatically increase the market segment shares that each GM car in segment 8 must have to create positive cash flow.
Given the number of GM mid-priced sedans in this segment, most cannot sustain high-enough market share to drive positive cash flow. This tends to reduce unit sales of many of the GM cars. But, worse than that, the fragmentation will dramatically affect other costs, as will be discussed later.
This proliferation dramatically increases the number of market segments that GM effectively competes in by fragmenting the segments.
GM vehicle proliferation and replication cause many price-range crossovers between many GM cars, which can confuse many potential buyers A potential car buyer with $25,000 to spend on a mid-priced sedan is faced with one clear offering from Toyota and one clear one from Honda, but a huge offering of at least seven cars from GM. In addition, there are many price range crossovers between cars that GM offers in segment 8, and cars it has in segments 2 and 14.This means that car buyers with $25,000 to spend could be faced with the task of choosing a “top of the line” model of one GM car in segment 14 and the entry level of another GM car in segment 2.
The end result is that many GM cars are attacking the same car buyers and market segments, which increases the size of the market share needed before a particular vehicle can create good unit sales and positive cash flow.

Impact on GM Unit Margins, Unit Prices and Unit Variable Costs

The segment fragmentation described above has huge potential effects on unit margins, unit prices and unit variable costs.

In the fierce competition between five GM divisions in segment 8, pricing, price cutting, rebates, cash backs, and a variety of other dealer pricing and discount deals become more extreme as GM divisions fight each other for market share in the segment. This competition between different GM brands tends to drive GM’s prices down and have a devastating effect on car unit margins.
When you combine the above effects of lowering GM car unit margins with the market share fragmentation outlined, it becomes clear why so many GM vehicles struggle to make any real money (net cash flow).
The effects of brand proliferation on car unit variable costs are equally devastating. Using the example above, producing and marketing the seven cars in segment 8 means complex and fragmented manufacturing, huge increases in the number of different parts, platforms, engines, and transmissions, both of which drive up the unit variable costs of producing each car and dramatically reduce unit margins.
The combination of pressure on prices plus the escalation of variable costs caused by segment and manufacturing fragmentation is potentially devastating. By contrast, Toyota competes with only one car in segment 8 (Camry), and it sells about 400,000 cars a year. Its high degree of market focus yields lower car unit variable costs, and therefore higher unit margins for the reasons outlined above. It also results in high positive net cash flow for Camry.

Impact on suppliers and supply chains

Exhibit 3 – Car Market: GM Supply Chains

Exhibit 3 shows a simplified outline of GM’s supply chains, in which there are many different parts suppliers, component and module suppliers, vehicle assembly plants, car dealers, and car buyers. GM’s loss of market focus has not only affected GM directly; it also has potentially devastating effects on some GM assembly plants and outsourced parts, components, and modules outsourced suppliers.

For every company in the GM supply chain, the cash flow dynamics are structurally the same as for GM itself, as shown in Exhibit 1. Each supply-chain company wants high-unit volume, high-margin parts to drive their positive cash flows.

GM’s fragmentation of car market segments, manufacturing, and supply chains leads to lower volumes per part, which is very tough on the parts suppliers involved. The loss of market focus has some of the following impacts on design, manufacturing and supply-chain choices:

Loss of market focus extends new GM car design, redesign, manufacturing and market entry cycle times. With too many new-vehicle market entries (19 new cars planned by 2010) and car upgrades and redesigns, the amount of corporate resources allocated per vehicle becomes very limited, with potentially serious impacts on car quality.
Proliferation dramatically increases the number of car parts, which increases the number of parts plants and suppliers. This increase in the number of car parts makes quality control much more difficult, especially given the many suppliers that have to be managed.
Proliferation dramatically increases the number of car assembly plants, which reduces the car volume per plant, which drives costs up, making plant capacity utilization difficult to manage.
Proliferation also increases the need for greater supplier capacity and variety, and increases the cost and complexity of managing suppliers. Portfolio proliferation increases the difficulty of designing, manufacturing and managing vehicle quality.
It also increases the human resource and management headcount, and creates huge task and role redundancies in the overall corporate and divisional management, facility, equipment, and staff support infrastructure, which all leads to huge inefficiencies and increases in fixed costs. Some evidence of this can be found in GM’s recent announcement that it will cut 47,000 people from its world-wide workforce. This reduction speaks volumes about the redundancies in the overall corporate management infrastructure caused by the loss of market focus.

GM distribution and dealers

Proliferation has led to the presence of many more dealers than necessary, and certainly many more than most other car companies. Other impacts on dealers include:

An increase in inventory (“floor plan”) and display costs
A reduction in dealers’ net car margins, due to longer inventory holding times
Difficulty for dealers in having the right GM car in stock for a particular potential buyer to inspect and test drive
An increase in the costs of dealers’ parts inventory and handling, which reduces dealers’ net parts margins
Greater complexity in dealer-vehicle service costs
A significant increase in the likelihood of errors in dealers’ parts stores, which can affect service quality and vehicle quality

What GM must do now: Re-gain market focus

It is unclear whether GM can rebuild market focus in time to avoid being washed away by a sea of negative cash flow. Current escalating requirements for cash indicate that GM is operating in high negative net cash flow, and that despite laying off 47,000 more employees and getting cash infusions from the government, it may all be too late. If GM is to turn the situation around, there will have to be, first and foremost, a dramatic change in leadership, a re-conceptualization of GM’s place in the industry and its position in the eyes of its customers, significant corporate and divisional restructuring, and a rebuilding of market focus. This will not be fast or easy, nor perhaps, will it be possible. Some of the major steps that must take place include:

Leadership must become very clear what their new market focus objectives and performance metrics must be and must not be.
GM’s objectives must not be to :
Maximize car revenue (dollars per year)
Maximize car market share (share of units)
Maximize unit car sales
Develop and apply new technologies, product and process innovations for their own sake (unless it clearly drives the cash flow dynamics outlined. Witness the high-tech Saturn disaster!)
Develop and market extreme environmental cars (unless they can create net cash flow. Chevrolet Volt is likely to lose heavily!)
None of the above dangerous and misleading corporate objectives will support market focus; some objectives can actually improve market focus, while reducing long-run net cash flow (for example, maximizing unit car sales)
GM should downsize the number of divisional portfolios to two from five, to have any real hope of rebuilding market focus. Toyota has two divisions (Toyota and Lexus), as does Honda (Honda and Acura). The clear rationale for these market-focused strategies is to be able to compete in one division for low and medium-priced cars, and in another for high-priced cars.
The autonomy and power of divisional managers to plan their own car portfolios has to be dramatically reduced, and coordinated by GM corporate portfolio management. One of the major factors driving GM’s loss of market focus and runaway portfolio has been the unmonitored behavior of each GM division, which has acted as though it were a stand-alone carmaker, offering a full portfolio of cars across many different market segments, seemingly without regard for the strategies of other GM divisions.
The first division of GM (Chevrolet/Buick Division) could be designated/re-positioned for low to medium priced cars, which would compete in segments 7 to 18.
The second division of GM (Cadillac Division) could compete in the high priced segments of 1 to 6.
Both the number of GM car brands and models should be dramatically reduced. In any market segment in Exhibit 2, there should be no more than two GM cars, and preferably only one.
Cross-brand and cross-divisional vehicle rebadging and replication must stop. (Witness the Pontiac Solstice and Saturn Sky sports cars in Segment 12, and many other GM examples)
There should be no price-band crossovers between the two divisions, or major brands within divisions. For example, the highest-priced Chevrolet must be cheaper than the lowest priced Buick. The highest-priced Buick must be cheaper than the lowest-priced Cadillac.
The number of car dealers has to be dramatically reduced and clearly defined as Chevrolet /Buick dealers or Cadillac dealers.
The number of vehicle assembly plants should be reduced and reorganized around the two divisions
The number of mechanical option and the choices and variations in brand and model engines and transmissions have to be dramatically reduced. For example, one automatic transmission design should be enough to service all of Chevrolet/ Buick division and maybe even Cadillac. Chevrolet/ Buick division does not need more than two or three engine choices
The number of outsourced parts suppliers has to be dramatically reduced to bring costs and quality under control.
What GM needs in every segment they focus on are some high unit volume “bread and butter” cars that sell in good volume and at solid unit margins (hopefully, the new Chevrolet Malibu is a harbinger of such cars across the GM portfolio!).

In the case of General Motors, a dramatic shift to a market-focused planning process and strategy will require major and wrenching corporate rethinking and change. Can GM pull it off with the existing leadership? Only time will tell.

GM: What Went Wrong and What’s Next

Is there a light at the end of the tunnel for General Motors? Or are those just headlights from an oncoming train? Among Harvard Business School faculty, it depends on whom you ask.

The carmaker—home to such storied brands as Cadillac, Buick, and Chevrolet—enjoyed a 46 percent share of the American auto market in the 1950s. The industry leader, unbothered by competition and looming threats, began to coast on its former glory, however, and bypass such areas as consumer preferences and industry innovation. By February 2009, GM's market share sputtered and stalled at less than 19 percent. GM declared bankruptcy on June 1, 2009.

“All stakeholders must work together to make GM's bankruptcy filing a comma rather than a period in the storied history of this American corporate icon." -Daniel Heller

Its future appears uncertain at best—yet expensive nonetheless. The government has pledged $50 billion to the company, with no assurances American taxpayers will recoup any of that investment.

How should business leaders learn from this latest turning point? HBS faculty weigh in.

Daniel Snow, Assistant Professor Of Business Administration:

GM will emerge from this crisis with a dramatically weakened portfolio of both current and future products. Although much attention has been focused on electric cars, hybrids, and fuel cells, I believe that the key player in the carbon-conscious automobile market of the next ten years is the compact car, especially one powered by a diesel engine. With very clean emissions, 60 and 70 MPG fuel consumption, and lots of power, diesel compacts would provide stiff competition to hybrids. But GM has just lost its ability to develop small cars with the sale of its Opel subsidiary to Canadian auto parts maker Magna International and the German government. This is a great deal for Magna, but terrible for Chevrolet. GM's best small cars are engineered (and some are manufactured) by Opel in Europe.

But it's not just about design and engineering. The supply chains and factory networks that provide these cars will need to be divided. GM's explicit strategy of the last decade has been to foster areas of specialization within its subsidiaries around the world—small cars in Europe, subcompacts in Asia, trucks and SUVs in North America—and this has started to yield great results. Now GM (of North America?) will be left with engineering competencies almost exclusively in those same large vehicles likely to be made obsolete by a new 35.5 MPG standard the Administration has promised to implement by 2016.

Daniel Heller, Visiting Scholar:

All stakeholders must work together to make GM's bankruptcy filing a comma rather than a period in the storied history of this American corporate icon. The U.S. cannot afford to lose the thousands of middle-class jobs of GM workers and management, nor the cutting edge R&D that GM does with its suppliers and partner universities. GM faces a unique opportunity to transform its assembly plants and R&D centers into more nimble operations that can sustain its renewed brands far into the 21st Century.

Nancy F. Koehn, James E. Robison Professor Of Business Administration:

General Motors was formed in 1908, the same year Henry Ford brought out the first Model T, a car that launched the U.S. industry and revolutionized millions of Americans' lives. Riding the wave of the Model T's success, Ford Motor Company became the undisputed leader of this young market and by the early 1920s, it was producing 60 percent of all the motor vehicles manufactured in the United States and half of those made worldwide. All of these automobiles were Model Ts, offered in one color: black.

“Although there are many factors that contributed to the company's long, slow bleed, the three fundamental issues are management's consistent failure to do the very things that made the business so successful initially." -Nancy F. Koehn

What happened next was both pivotal in shaping the auto industry for much of the 20th century, and in the face of GM's bankruptcy announced recently, terribly ironic. Beginning in the mid 1920s, GM staged an astounding victory against Ford Motor Company. Alfred Sloan, Pierre Du Pont, and other GM executives placed a series of important bets on what American consumers wanted (different makes, models and prices; cars that were status symbols and identity holders as well as transportation sources) and they did so with careful, consistent attention to what the competition was—and was not—doing. As company leaders rolled out this daring strategy, they also created an organizational structure and culture developed to support a multi-product, vertically integrated enterprise. By the mid 1930s, GM's market share had risen to 42 percent while Ford's had fallen to 21 percent. And General Motors had laid the groundwork for decades of industry dominance, offering "a car for every purse and purpose" and pioneering the multidivisional structure that became one of the signal achievements of the modern corporation.

In this context, it is interesting to consider the root causes of General Motor's decline, which has been under way for 30 years. Although there are many factors that contributed to the company's long, slow bleed, the three fundamental issues are management's consistent failure to do the very things that made the business so successful initially.

First, pay close attention to what is happening to consumers' lives in the context of the larger environment—not only their stated preferences, but their hopes, dreams, wallets, lifestyles, and values.
Second, keep an equally close eye on the competition.
And third, understand how a company's structure and culture relate to its strategy. Use all this understanding to place innovative bets. This is what the early leaders of GM did. And this is what several generations of executives—beginning in the 1970s with the first oil shocks and the entrance of Japanese imports—have consistently failed to do.

It has been a failure of leadership as astounding and momentous (and ironic) as the company's early achievement.

Robert D. Austin, Associate Professor:

When I worked in a U.S. auto company in the mid 1990s, we were doing many of the right things. But often, when we ran up against the really tough problems, when we started to feel the real pain associated with real change, we pulled back. We were so profitable then, it was hard to muster the will to make the hard choices. Today, the range of choices has narrowed considerably. Obviously, June 1, 2009 was a momentous day in U.S. business history. Much of the substance of 20th century management was worked out at GM. Let's hope that crisis will summon the will to make the changes that are needed. If not, the next Detroit may be in China, and sooner than we think.

Joseph L. Bower, Baker Foundation Professor Of Business Administration:

The GM bankruptcy poses several questions. How did the board and management of a great company ever allow this extraordinary situation to develop? It is easy to point to the labor agreements from the 1950's, and the slow response to the superior engineering and manufacturing of Japanese competitors, and a reluctance to take environmental issues seriously. But these were not overnight developments. Beyond that, did GM's financial controls become too powerful a force for the product engineers to overcome? Did the marketers not see what Toyota was doing with the Camry and Lexus? On another front, what does it mean for the U.S. government to be supporting one competitor against a group of healthy rivals? Is that what our bankruptcy laws were designed to accomplish? Doesn't a healthy industry require less capacity, so that the winning companies can actually prosper? The administration is embarking on an interesting experiment in political economy.

Malcolm S. Salter, James J. Hill Professor Of Business Administration, Emeritus:

Last December the U.S. Treasury had no choice but to become GM's "lender of last resort." To have done otherwise would have been devastating for the U.S. and global economy. With the June 1st bankruptcy deal, the U.S. government's role essentially changes from "reluctant" creditor to "reluctant" owner. And the UAW's role shifts to being an owner as well. Since no other private capital has been willing to step forward, these role changes are not necessarily a bad thing—as long as the Administration lives up to its pledge to keep partisan politics out of inter-firm competition by refraining to exercise the legitimate decision rights of equity holders. Ditto for the UAW.

“The June 1st bankruptcy deal and presidential statement open a new chapter on the conduct of industrial governance and American capitalism." - Malcolm S. Salter

But the President left the door slightly open for selective intervention when he pledged non-interference "in all but the most important decisions." What could those decisions be for the government? For the UAW? The June 1st bankruptcy deal and presidential statement open a new chapter on the conduct of industrial governance and American capitalism. This chapter is being written more or less "on the fly." It is now up to Congress and the rest of us to monitor this highly incremental governance strategy before it is either unduly celebrated or castigated by the public and, more importantly, integrated without critique into the nation's industrial policy "playbook."

Dennis Yao, Lawrence E. Fouraker Professor Of Business Administration:

The threat of bankruptcy, by allowing the government and General Motors to negotiate important deals with GM's unions and a majority of creditors, went a fair distance toward achieving a restructuring that would make it possible for GM to emerge as a viable long-term player in the automobile industry. Unfortunately, the threat was not enough; hence the actual bankruptcy.

In addition to the usual strategy, resource, and implementation concerns faced by a company emerging from Chapter 11, the "new GM" has an additional set of worries that arise while the primary owners are the U.S. and Canadian governments. While attention to business environment issues is important for all automakers, GM is more likely than most of its rivals to feel strong pressure to pursue public policy goals such as domestic employment that are not normally pursued by the private sector. Domestic employment, of course, is an important justification for the government bail-outs, but inflexibility with respect to employment and compensation has also been part of the original problem. Hopefully, the new GM will soon offer the type of products that will make employment a lesser concern.

More Hbs Faculty Opinions In Other Publications:

GM and the World We Have Lost June 3, 2009 - Boston Globe Richard Tedlow and David Ruben comment on the profound American loss that is the collapse of General Motors.

How GM Wasted 'a Good Crisis' June 2, 2009 - Wall Street Journal Bill George discusses the demise of General Motors and the opportunities missed.

Why I Don't Want to Own General Motors June 1, 2009 - Harvard Business Publishing Rosabeth Moss Kanter comments on the bankruptcy of GM, calling it a "dangerous precedent."

The Past and Future of General Motors April 9, 2009 - Huffington Post Clay Christensen writes on how foreign auto companies disrupted the U.S. auto industry back in the 1960's, and the undeserved removal of Rick Wagoner as CEO.

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Timeline: A History Of GM's Ignition Switch Defect

Consulting materials engineer Mark Hood shows the ignition assembly that has a faulty ignition switch (black piece at left), in the mechanical testing laboratory at McSwain Engineering Inc. in Pensacola, Fla. The firm helped to conduct the engineering investigations and failure analysis that resulted in the GM recall. Michael Spooneybarger/Reuters/Landov hide caption

In February, General Motors issued sweeping recalls for several models suspected of having a faulty switch that automatically turns the car's engine off and prevents air bags from deploying — while the car is in motion. More than 2.6 million cars have been recalled so far.

At the core of the problem is a part in the vehicle's ignition switch that is 1.6 millimeters less "springy" than it should be. Because this part produces weaker tension, ignition keys in the cars may turn off the engine if shaken just the right way.

NPR looked into the timeline of events that led to the recall. It's long and winding, and it presents many questions about how GM handled the situation: How long did the company know of the problem? Why did the company not inform federal safety officials of the problem sooner? Why weren't recalls done sooner? And did GM continue to manufacture models knowing of the defect?

2001: GM detects the defect during pre-production testing of the Saturn Ion.

2003: A service technician closes an inquiry into a stalling Saturn Ion after changing the key ring and noticing the problem was fixed.

2004: GM recognizes the defect again as the Chevrolet Cobalt replaces the Cavalier.

The Chevrolet Cobalt was among more than 2 million GM cars recalled for a faulty ignition switch. General Motors/AP hide caption

March 2005: GM rejects a proposal to fix the problem because it would be too costly and take too long.

May 2005: A GM engineer advises the company to redesign its key head, but the proposal is ultimately rejected.

May 24, 2005: GM posts a $1.1 billion first-quarter loss, blaming it on union overhead and high gas prices harming SUV sales.

December 2005: GM sends dealers a bulletin stating the defect can occur when "the driver is short and has a large and/or heavy key chain ... the customer should be advised of this potential and should ... [remove] unessential items from their key chain."

July 29, 2005: Maryland resident Amber Marie Rose, 16, dies when her 2005 Chevrolet Cobalt crashes into a tree after the ignition switch shuts down the car's electrical system and the air bags fail to deploy.

December 2005: GM issues a service bulletin announcing the problem, but does not issue a recall.

July 26, 2006: GM loses $3.2 billion in the second quarter, absorbing costs of early retirement buyout packages to 30,000 blue collar workers.

March 2007: Safety regulators inform GM of the issues involved in Amber Rose's death; neither GM nor the safety regulators open a formal investigation.

April 2007: An investigation links the fatal crash of a 2005 Chevrolet Cobalt in Wisconsin to the ignition defect, but regulators do not conduct an investigation.

September 2007: A NHTSA official emails the agency's Office of Defects Investigation recommending a probe looking into the failure of air bags to deploy in crashes involving Chevrolet Cobalts and Saturn Ions, prompted by 29 complaints, four fatal crashes and 14 field reports.

Nov. 17, 2007: The Office of Defects Investigation at NHTSA concludes that there is no correlation between the crashes and the failure of air bags to deploy, ending the proposed probe.

Dec. 12, 2008: The U.S. Senate votes to oppose a government bailout for GM, despite support from outgoing President George W. Bush and President-elect Barack Obama and GM's announcement that it's nearly out of cash and may not survive beyond 2009.

Dec. 18, 2008: President Bush announces bankruptcy is an option, if it's "orderly" and involves unions and other stakeholders.

Dec. 19, 2008: Bush approves a bailout plan, giving GM and Chrysler $13.4 billion in initial financing from the Troubled Asset Relief Program.

April 22, 2009: GM says it will not be able to make a June 1, 2009, debt payment.

April 24, 2009: GM says that it will scrap the Pontiac brand to invest more in Buick, Cadillac, Chevrolet and GMC.

Fritz Henderson, General Motors president and CEO, during a June 1, 2009, press conference to announce that GM will seek bankruptcy protection. Stan Honda/AFP/Getty Images hide caption

Fritz Henderson, General Motors president and CEO, during a June 1, 2009, press conference to announce that GM will seek bankruptcy protection.

June 1, 2009: GM files for Chapter 11 bankruptcy.

July 10, 2009: The U.S. Treasury purchases GM assets, giving the government primary ownership of the company.

February 2010: NHTSA again recommends a probe looking into problems with air bags in Cobalts; ODI again decides that there is no correlation and drops the matter.

Oct. 26, 2010: Consumer Reports says GM is considered "reliable" based on scores from road tests and performance on crash tests.

2012: GM identifies four crashes and four corresponding fatalities (all involving 2004 Saturn Ions) along with six other injuries from four other crashes attributable to the defect.

Sept. 4, 2012: GM reports August 2012 sales were up 10 percent from the previous year, with Chevrolet passenger car sales up 25 percent.

June 2013: A deposition by a Cobalt program engineer says the company made a "business decision not to fix this problem," raising questions of whether GM consciously decided to launch the Cobalt despite knowing of a defect.

Dec. 9, 2013: Treasury Secretary Jacob Lew announces the government had sold the last of what was previously a 60 percent stake in GM, ending the bailout. The bailout had cost taxpayers $10 billion on a $49.5 billion investment.

End of 2013: GM determines that the faulty ignition switch is to blame for at least 31 crashes and 13 deaths.

Mary Barra, who became the CEO of General Motors in January 2014, is facing questions over how the company handled the ignition switch problem. Carlos Osorio/AP hide caption

Mary Barra, who became the CEO of General Motors in January 2014, is facing questions over how the company handled the ignition switch problem.

Jan. 15, 2014: Mary Barra becomes CEO of GM and the first woman to run a major automaker.

Jan. 31, 2014: Barra learns of the ignition switch defect, according to GM.

Feb. 7, 2014: GM notifies NHTSA "that it determined that a defect, which relates to motor vehicle safety, exists in 619,122 cars."

Feb. 13, 2014: GM officially recalls 2005-2007 Chevrolet Cobalts and 2007 Pontiac G5s.

Feb. 25, 2014: GM adds 748,024 more vehicles to the recall.

March 10, 2014: GM hires two law firms to look into the recall, with Anton "Tony" Valukas, who investigated Lehman Brothers after the firm's 2008 collapse, leading the internal probe.

March 17, 2014: GM recalls 1.55 million vans, sedans and sport utility vehicles.

Key Documents About The GM Recall

March 17, 2014: Barra states in a video apology that "something went very wrong" in GM's mishandling of the crisis. She says the company expected about $300 million in expenses in the current quarter to cover the cost of repairing 3 million vehicles.

March 18, 2014: GM appoints a new safety chief.

March 19, 2014 : Attorney General Eric Holder announces that Toyota is being fined a record $1.2 billion, a criminal penalty, for not providing adequate information in 2009 to customers who complained about safety issues involving sudden acceleration of vehicles.

March 20, 2014: The House Energy and Commerce Committee's Subcommittee on Oversight and Investigations schedules a hearing for April 1, titled "The GM Ignition Switch Recall: Why Did It Take So Long?"

March 28, 2014: GM recalls an additional 824,000 vehicles (including all model years of the Chevrolet Cobalt and HHR, the Pontiac G5 and Solstice, and the Saturn Ion and Sky), stating ignition switches could be faulty; the new total number of recalled vehicles in the U.S. is 2,191,146.

April 1, 2014: GM hires Kenneth Feinberg, an attorney specializing in corporate payouts, as a consultant "to explore and evaluate options" in the automaker's response to families of the victims involved in the recall.

April 1-2, 2014: Barra and NHTSA Acting Administrator David Friedman testify at House and Senate hearings on the handling of the recall. Barra apologizes to family members whose loved ones have died from the defect.

April 3, 2014: Deadline for GM to respond to 107 questions from NHTSA.

April 10, 2014 : GM starts a Speak Up for Safety campaign, aimed at encouraging employees to say something when they see a potential safety issue for customers.

April 10, 2014 : Barra confirms that two GM engineers have been put on paid leave as part of the ignition switch investigation.

April 10, 2014 : GM adds ignition lock cylinders to its safety recall of 2.2 million older model cars in the U.S.

May 15, 2014 : GM adds five more recalls of about 2.7 million vehicles in the U.S. They include malfunctioning tail lamps, head lamps and brakes.

May 16, 2014 : The government announces GM will pay a record $35 million civil penalty after NHTSA determined the automaker delayed reporting the ignition switch defect.

June 5, 2014: An internal inquiry by Anton Valukas, a former U.S. attorney, into the ignition switch recall finds an 11-year "history of failures" and "a pattern of incompetence and neglect," Barra says.

June 16, 2014: GM announced the recall of 3.2 million more cars, including Chevrolet Impalas and the Cadillac DTS, for faulty ignition switches.

Sources: General Motors, National Highway Traffic Safety Administration, House Energy and Commerce Committee, The New York Times, Automotive News , Bloomberg, NPR research

A business journal from the Wharton School of the University of Pennsylvania

Saturn: A Wealth of Lessons from Failure

October 28, 2009 • 11 min read.

General Motors' decision earlier this month to scrap its Saturn brand triggered frequent retellings of the many ways in which GM missed an opportunity to recast itself and the auto industry. But other manufacturers did adopt some of Saturn's innovations, according to Wharton faculty. Indeed, they say, the Saturn story provides a roadmap for what to do --- and what not to do -- as the auto industry adjusts to the post-financial crisis world.

General Motors’ decision earlier this month to scrap its Saturn brand triggered frequent retellings of the many ways in which GM missed an opportunity to recast itself and the auto industry. But other manufacturers did adopt some of Saturn’s innovations, according to Wharton faculty. Indeed, they say, the Saturn story provides a roadmap for what to do — and what not to do — as the auto industry adjusts to the post-financial crisis world.

Wharton Marketing professor Americus Reed II once cited Saturn’s strategy for building a community of customers with an emotional connection to the brand as an example for his students. Wharton operations and information management professor Morris A. Cohen describes its system for distributing replacement parts to its retailers as an industry model. And Lawrence G. Hrebiniak , a management professor at Wharton, says that in its early years, Saturn made “innovation a corporate strategy.”

One of those lessons is the importance of persistence. “Saturn started out on the right foot — as an autonomous division with market focus and an emphasis on quality,” says Hrebiniak. But the brand and its parent failed to sustain the effort. “It ended up on the wrong foot — with internal squabbles, and production- and cost-driven focus.”

GM seemed to tire of the Saturn effort after just a few years, notes John Paul MacDuffie , a Wharton management professor and co-director of the International Motor Vehicle Program. “The story of Saturn is not so much the boldness of the ideas, but that GM was unable to follow through. It just never figured out how to take the lessons that could be learned at Saturn and apply them elsewhere.”

Though Saturn’s early years are widely viewed as golden, it was telling that it took more than six years to bring the first Saturn to market, according to MacDuffie. “I think there was some ground lost right there,” he says, as GM raised such high expectations for the company and the car, and then took so long to deliver. When the delays were public, GM attributed them to its effort to get everything right.

But behind the scenes, some GM executives wanted to pull the plug on the Saturn experiment. Indeed, battles over Saturn’s future would continue throughout its life. The anti-Saturn executives were later joined by a new leadership team at the United Auto Workers union, which frowned on the flexible work rules adopted by their predecessors. And when Saturn’s champion, GM chairman Roger Smith, retired in 1990 just as the first Saturns were being produced, its future was already in jeopardy, especially as deep losses at GM created competition among the divisions for resources.

One result of those fights provides another lesson — the importance of providing new products that allow existing customers to trade up. From 1990 to 2000, while Americans were snapping up minivans and SUVs, Saturn had just three small models to offer — a coupe, sedan and wagon, all built on the same platform called the S-Series. “They weren’t locking customers in,” says Hrebiniak. “If a Toyota dealer can get you into a Corolla, he can get you to trade up to a Camry, to an Avalon and then to a Lexus.”

Too Little, Too Late

The new model that arrived in 2000 was a larger sedan, the L-Series, designed to compete with the Honda Accord and Toyota Camry. But by the time the LS arrived, many of Saturn’s early adopters had traded up to larger vehicles offered by the competition. Paul Lokey, who says his Clearwater, Fla., Saturn franchise sold the very first Saturn in 1990, laments that “things would have been a lot different if we could have had a new car, especially an SUV, in years three, four, five or six, when Saturn was at its zenith.”

The effect of the new model vacuum can be seen in Saturn’s sales, which peaked in 1994 at 286,000 units. Sales have been flat or down each year since, except for a 17% gain in 2000 when the LS was introduced; a 7.5% gain in 2002 with the introduction of a small SUV called the Vue; and 6% gains in 2006 and 2007 when Saturn rolled out a bevy of new models, most of them based on platforms from GM’s European unit, Opel. GM did not break out profit and loss figures for Saturn, but it was once reported to be losing about $3,000 per car. In all, according to various news reports, GM invested about $5 billion in Saturn.

New UAW leadership pushed to have the LS manufactured not in Spring Hill, Tenn. — the modern plant where employees had approved work rules with more flexibility than existed in the United Auto Workers’ master contract — but in a Wilmington, Del., plant that would otherwise have been shuttered. And in 2003, as Saturn became more and more like the rest of GM, workers at Spring Hill voted to return to the GM master contract.

Hrebiniak says that “Saturn fell prey to the culture of GM…. It was buried in GM’s old culture of inertia. Saturn had made innovation a corporate strategy. But what happened over time? GM diminished Saturn’s standing as a separate entity and all the benefits that came from that.”

In fact, many observers say it may have been virtually impossible for GM to apply the Saturn template to all its divisions. “Perhaps,” says Cohen, “the leadership at GM wisely knew that they just couldn’t pull it off.” Indeed, there were many hurdles that stood between GM and innovation. Among the most formidable were GM’s fiercely competitive dealerships and divisions.

GM dealers have always had to compete not just with other brands like Ford or Toyota, but also with one another. The competition created a boiler-room environment of price-haggling, which turned off many customers but thrilled others. Saturn, on the other hand, had a “no haggling” policy that it backed up with what may have been its most significant innovation: exclusive market areas for dealers. “That was the huge difference,” says Lokey. In a Saturn store, the sticker price was the final price. And Saturn retailers could confidently adhere to the policy because they knew the customer wasn’t going to find the same new car for $100 less a few blocks or miles away.

The exclusive market areas combined with the efficient parts supply chain also allowed Saturn dealers to pay the same price for repair parts. Other GM dealers had to compete with one another to keep their supply bins full, and they often had to buy parts from their rivals. At Saturn, the bins were almost always stocked thanks to a computerized system that automatically sent orders to a distribution center.

Wharton’s Cohen assisted in the development of Saturn’s supply chain. As consultants for GM in the early 1980s, Cohen and colleague Hau L. Lee, a professor of management science and engineering operations at Stanford University, devised a list of suggestions for improving the efficiency of the company’s parts supply chain. “Basically, GM rejected all of the recommendations,” Cohen recalls. But a GM executive who had seen the recommendations later became part of the Saturn startup team, where he was responsible for developing customer support programs. He adopted many of Cohen’s and Lee’s ideas.

The reemergence of their plan “was a surprise to us,” Cohen recalls. It turned out to be a pleasant one. By the end of the 1990s, Saturn dealerships were rated first in parts availability by an industry trade magazine. In a 1999 J.D. Power consumer survey that measured customer satisfaction with parts availability, individual Saturn models were ranked fourth and tenth. The eight others in the top 10 were luxury models made by Cadillac, Infinity, Lexus and Volvo. In an article for the Sloan Management Review’s summer 2000 issue, Cohen, Lee and two executives at Saturn and GM wrote that the company’s success in the “after-sales service business … is a wake-up call; its approach should serve as a model for any industry trying to forge the critical link between after-sales service and customer loyalty.”

Despite that “wake-up call,” GM never fully adopted the Saturn model. “There were things to learn from Saturn that GM didn’t absorb,” says Cohen. “This was just one case where I saw GM’s resistance to replicating what was working at Saturn.”

What Worked

But others did learn from the Saturn experiment. “The concepts that are embodied in the Saturn strategy have been widely adopted,” says Cohen. The supply chain strategy, called Vendor Managed Inventory (VMI), includes features such as buyback incentives, which lower risks for dealers, and information sharing between all of the points on the supply chain. However, Cohen adds, learning from one of Saturn’s successes is not a guarantee of success.

“One company I worked with closely as they tried to emulate Saturn was Caterpillar,” Cohen recalls. Indeed, they called their strategy “Jointly Managed Inventory (JMI)” to highlight that it was to be a cooperative venture involving the company and their independent dealers. But “their success with it was not as dramatic as Saturn’s. One of the lessons I learned from that episode is that it matters how information and risk is shared when implementing a supply chain strategy based on coordination and cooperation. The Saturn strategy worked because it contained multiple elements that supported that notion. Caterpillar was less successful because at the end, they did not get the same level of trust or conformance out of their dealers.”

The no-haggle policy, the absence of a high-pressure sales environment and the high level of customer satisfaction contributed to a sense of brand loyalty among Saturn’s customers, according to Reed. “They were one of the first car companies that tried to create a brand community, to develop the idea of a Saturn owner and personality type. They created a deeper connection between the company and the consumer with things like inviting customers out to the plant to meet the people who build the cars.”

An early Saturn television ad was typical of the effort. It showed Saturn owners traveling through pastoral settings to the company’s Spring Hill, Tenn., plant, meeting assembly workers and enjoying a folksy picnic. When a rainstorm turned the scene outside the plant into a Woodstock-like muddy mess, the announcer intoned, “Of course, not everything went exactly as we planned. But we were all in it together, the way we always have been.”

Lokey recalls being a bit skeptical when he first heard about Roger Smith’s audacious plan for Saturn. “My thinking was, ‘My goodness gracious, GM’s going to try to build a car that’s as good as Honda, Toyota or Nissan? Give me a break.'”

But his skepticism faded as he learned more about the Saturn way. “The investment [to buy the franchise] was minimal,” he says. “It turned out to be the best decision I ever made.” That he would reach such a conclusion, days after Saturn’s last hope for survival fell short, says a lot about just how different a car company Saturn really was.

That last hope, of course, was the Penske Automotive Group’s plan to buy the brand and have another manufacturer produce new vehicles under the Saturn name. Though never officially announced, Renault-Nissan was widely reported to be the potential partner. But Penske, whose network of auto dealerships is widely admired in the auto business, was unable to strike a deal and said on October 1 that it had abandoned the effort. That same day, GM announced it will wind down Saturn’s operations and turn out the lights within a year.

After a bankruptcy and takeover by taxpayers of the United States and Canada and by the UAW, GM finally seems to be fixing some of the problems that were made obvious by the Saturn experience. It is reducing the number of divisions — in addition to Saturn, Pontiac is being eliminated — and selling its European business, Opel.

Lokey, who also owns Kia, Volkswagen and Mercedes dealerships, is now selling used cars from his two Saturn stores, where even before the last new Saturn was manufactured, he was getting less than 20% of his revenues from new cars. “Really, the car was never that great,” says Lokey. “It was the way Saturn presented itself to customers. It was a special feeling we had being associated with the whole adventure.”

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This is the story of GM's quest for supremacy by replacing people with robotics, what gave rise to this strategy, and why it was ill conceived from the very start. While Roger Smith deserves criticism for embracing the automation solution without really understanding its limitations, the story is also one of ineffective organizational learning and failed corporate governance. The lessons that emerge from an analysis of a near-$45 billion investment strategy hold resonance today as much as they did in the 1980s.

With infrastructure in place, GM took aim at the Ford empire created by Henry Ford and his Model T. Having pioneered the assembly line that enabled mass manufacturing, Ford was the dominant force in the early automotive era and the competitor to beat. It took another giant—legendary GM CEO Alfred Sloan—to make that happen. Considered the most influential CEO in GM's history as well as a pillar in business history, his slogan, "A car for every purse and purpose," became GM's trademark. Sloan recognized that GM could not compete on price alone, so his strategy was to sell cars at the top of each price range, competing in quality against less-expensive cars and in price against higher-quality cars. With this came his theory of "planned obsolescence," where the concept of annual models was rolled out. Sloan visualized an emerging market for repeat sales if a car could be perceived as out-of-date within four to five years. He also introduced a reorganization philosophy, creating the famous GM Management System of decentralized operations and responsibilities with coordinated controls. Each division retained a high degree of autonomy while a central GM board set uniform policies and guidelines. The result: by the end of the 1920s, GM was overtaking Ford, and by the 1940s, a GM nameplate was on almost one out of every two cars sold in America. GM became the first corporation in the world by 1955 to generate $1 billion in revenue in a single year. After growing GM into one of the most successful corporations in American history, Sloan retired the following April.

The Changing Landscape Few organizations in American industry have had the long-term success that GM enjoyed. It was the industry's low-cost producer, with powerful economies of scale and market share as high as 60%. For a long time only the threat of Justice Department action to shrink the company's market dominance clouded the picture.

While GM prospered for years, problems were beginning to brew under the surface. Although U.S. demand for cars increased after WWII, European manufacturers were beginning to make an impact. In 1956, for example, Ford and GM lost 15% in sales while imports doubled their market penetration, and even worse, the following year the U.S. actually imported more cars than it exported. By 1956, GM's market share for new car sales fell to 42%.

Over time, other pressures arose. The tumultuous 1960s brought growing urban poverty and riots in Detroit. The nascent environmental movement focused attention on pollution and, by 1974, GM was spending $2.25 billion to meet pollution regulations, with that figure doubling by the end of the decade. To top it off, the OPEC oil embargo drastically decreased demand for GM's luxury, gas-guzzling cars. While GM introduced smaller cars, the market dwindled in the late 1970s as the U.S. plunged into recession. Into this environment—with GM recording only its second year of losses in its long history—Roger Smith became Chairman and CEO in 1981, bringing with him a confident vision to carry GM back to its glory days.

In line with the revolutionary transition to automation, GM also announced the most widespread reorganization since the consolidation days of the 1920s. Two manufacturing fiefdoms—Fisher Body and the GM Assembly Division—were abolished and control of production was placed under two newly created operating divisions. To break down silos across functional areas, each division would control design, manufacturing, and sales.

The changes at GM spearheaded by Roger Smith elevated him to the status of press darling in the first half of the 1980s. With 85% of the reorganization efforts based in the U.S., Smith became a champion of U.S. manufacturing, catching the public's imagination, and becoming a media hero. Described as an "innovator," "visionary," and "21st century futurist," Smith was named Automotive Industries Man of the Year and Advertising Age's Ad Man of the Year, honored with the Financial World Gold Medal (best CEO in America), and designated by The Gallagher Report as one of the ten best executives in America. With such acclimation, it seems little wonder that "GM completed the 1980s in a state of arrogance."

GM's Sting: Money for Nothing Though confidence remained high, productivity paybacks from GM's factory automation spending seemed slower-than-expected right from the start. Costs were rising at an alarming rate while market share and operating income were starting to decline, a combination that might trigger warning bells in some organizations. Internal GM reports indicated that by 1985 the Japanese cost advantage had not changed after four years of intensive spending on automation. The company that was founded on the principle of cost savings and was once the prototype for efficiency had by 1986 become the auto industry's high cost producer. The average number of autos produced by each GM employee stood at 11.7, while the same metric at Ford was 16.1 and as high as 57.7 at Toyota. GM also earned 38% less than Ford and 26% less than Toyota on each vehicle they made. Research by Marvin Lieberman and Rajeev Dhawan of UCLA, who studied productivity trends in the auto industry from the mid-1960s to the 1990s, confirm the story: GM's plant productivity, which had lagged Toyota's for years, actually declined further from 1984 to 1991, a period that should have reflected the gains from GM's automation push.

The new automated factories, which made over two-thirds of the parts used in GM cars, had become a high-cost problem, hardly more efficient than the old ones. Some plants were running at 50% capacity because of glitches in computer-integrated systems, while two major strikes in the U.S. and Canada in mid 1980s spoke to the state of labor relations during these changes. GM's share of U.S. auto sales fell to 41% in 1986 , while the company's stock price increased 35% from 1981 to 1987, a duration when Ford's market value increased seven-fold.

Former GM CFO F. Alan Smith summed up GM's situation in 1986: "Since 1980 GM has spent $45 billion on the automotive business. Capital spending appears to be almost inversely related to our levels of operating profit. And GM's forward capital spending plans are projected to be $34.7 billion over the period from 1986 through 1989. For $34.7 billion, given recent market valuations, GM could have purchased Toyota and Nissan. This would almost double GM's world market share, increasing our penetration to over 40% of the entire free world. Can we expect to double our worldwide market share from our spending program?"

Automating GM—The Key Lessons The strategy to automate General Motors in the 1980s under Roger Smith was predicated on a false assumption—that replacing people with machines could turn back the Japanese attack and bring GM back to dominance in the global auto industry. Rather than adopt the lean manufacturing techniques that still define the Toyota production system today, a virtual obsession with robotics took over. In some ways this was no different than the companies today that jump on the latest fad without really understanding the underlying processes and inter-relationships that make the whole thing work. That was certainly the case with GM and automation in the 1980s. By not understanding how people and machines could be effectively integrated, GM missed the essence of Toyota's low-cost production success. Former Ford President Phil Benton put it this way: "Automation would not make the list of major problems facing the auto industry in the 1980s." Consistency of manufacture must come before automation. Toyota is not as automated as Nissan, for example, but they are more successful. "Everything goes back to management. What you need to do is engineer the product to the skills of your work force."

The Japanese also excelled at the other fundamental components of lean manufacturing, including just-in-time inventory, supply chain integration, and quality management. "[Automation] didn't save the company very much because GM still needed people," explained Charles McElyea, a factory automation engineer. By simply using the technology without the prepared workforce, "all you can do is to automate confusion." Robert Lutz, someone who has witnessed first-hand many of the changes in the auto industry over the years as a senior executive at GM, Chrysler, and most recently Ford, gave this assessment: "The thought was if we can do a fully automated factory and get rid of all the labor, we would have plants that run day and night fully automatically. But with these totally automated facilities you lose all flexibility and they are extremely capital intensive. The only way you can hope to make a return is to run pedal to the metal at all times. They were prisoners of the great North American manufacturing cost accounting system that says, as you eliminate labor, your costs goes down. But what they forgot was they were getting rid of direct labor but replacing it with indirect labor and huge capital costs. These costs were high because the technicians and other people needed in an automated plant were much more expensive than the hourly laborer. You need to look at every worker. You look at his value added time versus his wait time and you arrange the production flow in such a way that you maximize the value added time of each worker and reduce the waiting time. You concentrate on the worker not on the machinery. Use automation only where necessary".

At its core, the automation strategy drew its genesis from Roger Smith's business and personal beliefs. Despite internal opposition, it was Smith—described by many as autocratic �who defined GM's problems in the 1980s in terms of labor costs. To his credit, Smith also understood that GM's slow, bureaucratic culture was a hindrance to change, and his push for new organizational structures, the attempted infusion of EDS entrepreneurialism to GM, and investments in NUMMI (the joint venture with Toyota) and Saturn were all attempts to shake up that culture. But his focus on high-technology solutions to the labor cost problem underlined his belief that costs could be cut by replacing people with machines. He browbeat the UAW with statements like, "Every time you ask for another dollar in wages, a thousand more robots start looking more practical", and was described by one insider as "fascinated with anything new and high-tech; he really doesn't understand, or want to hear about, the limitations of technology." To his critics, he was an "unusual man who just doesn't understand people"

The GM Board of Directors Where was the GM board during this time, and do they deserve some of the responsibility for the automation debacle? Roger Smith became infatuated with robotics and began to see it as GM's salvation right from the start. While there was internal opposition, particularly among people who understood that productivity is not just based on labor costs but on the entire production system, the board of directors appears to have had little problem with the strategy. Indeed, given the deteriorating state of GM labor relations and productivity at the beginning of the 1980s, turning to the automation solution may well have been considered reasonable. It didn't take long, however, for problems to develop. Plant efficiency was down in many factories, productivity improvements relative to the Japanese did not materialize, and traditional metrics like stock price and market share reflected these problems. Further, when a company spends some $45 billion on automated factories, it does not write a single check for that amount and wait for delivery. Expenditures of this magnitude involve thousands of checks written to vendors over a long time period, with an opportunity to assess progress along the way. For example, in 1983 GM spent $6 billion for new technology and automation, increasing to $9 billion in 1984 and $10 billion in 1985. Even by 1985, when internal studies were indicating little change in the productivity gap between GM and Toyota, GM was still poised to spend more. Nevertheless, throughout this time the board of directors continued to approve Roger Smith's plans and expenditures. Why?

Much has been written about the classic warning signs in corporate governance, and all are in evidence here. Almost one-quarter of the board consisted of GM insiders in 1982, rising to as much as 41% by 1986. Outsiders did not have much of a personal stake in the company, with three out of five owning less than 1000 shares of GM stock. Along with the undoubted prestige that comes with being a GM director, the generally advanced age of outsiders on the board (8 outsiders were actually retired from their former corporate jobs), and the heavy time commitments of virtually all the outsiders on other corporate and non-profit affiliations (averaging around 8 such commitments for each board member during this period), the odds were stacked against the GM board taking an activist stance in monitoring Roger Smith and his automation program.

In addition to these traditional indicators of board independence, there is some evidence and inference that Roger Smith had significant control over the board. Board meetings were known as formal, with little open and honest discussion. Inside board members would not speak unless specifically charged with giving an informational report to the board. As one retired board member said, "unanimity on this board is assumed". When Ross Perot was on the GM board for a few years in the mid-1980s following the acquisition of his EDS, he referred to Smith's optimistic predictions as "gorilla dust", designed to throw off criticism as much as anything else.

Contributing to the unquestioning environment was the remarkable extent to which board members' formal positions were intertwined. Whether by design or circumstance, virtually every single outside board member at GM had another formal appointment—whether on another corporate board or non-profit organization—in common with a colleague on the GM board. In 1982, for example, (whose composition was not only representative of, but almost unchanged from, the GM board in subsequent years), two different GM directors also sat on the boards of US Steel, Dart & Kraft, Merck, and International Paper. Three different GM board members were also directors of AT&T, Nabisco Brands, Citicorp, and Kodak, and four GM directors were present or former board members of JP Morgan. Ten GM directors were on the Business Council, six on the Business Roundtable, four were directors of the United Negro College Fund (the Chairman of the Board was a GM insider), and two different GM board members were affiliated with governance of the Mayo Foundation, New York Hospital, and the Sloan-Kettering Cancer Center. Overall, the extent of overlapping affiliations and directorships is nothing short of spectacular, and may well have been a contributor to the non-critical culture in place at the GM board. Under this arrangement, in the event a member of the GM board chose to speak out or break the norm of "unanimity", any potential retribution could not be easily contained within this one organization.

In sum, the robotics strategy that Roger Smith and General Motors adopted in the 1980s stands as a classic story of misreading the competitive landscape. For Smith, robotics represented the Holy Grail, the perfect strategy that could solve all of GM's problems at once. When GM finally discovered that the Holy Grail didn't exist, they could look back on an incredible waste of resources. Roger Smith was a very smart executive who failed, because of his own badly mistaken perception of the auto industry, a culture (that he helped engender) at GM that was afraid to ask questions, and a board of directors that watched billions of dollars go out the door with apparently little concern.

The GM recall scandal of 2014

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What was the gm recall scandal of 2014.

General Motors faced an uproar in 2014 over its handling of a defective ignition switch in some of the cars it manufactured — a problem that led to at least 13 deaths.

In the first three months of 2014, GM ordered the recall of 2.6 million small cars because of faulty ignition switches that have been linked to at least 97 deaths since 2005 . The faulty switches could inadvertently shut off car engines and airbags during driving. Recalled models included Chevrolet Cobalts and Saturn Ions.

Worse still, evidence has emerged that GM knew about the faulty switches since at least 2003 — but had been slow to fix the problem, possibly because it would have cost too much. Both Congress and the federal government investigated GM on precisely this question.

Sen. Edward Markey (D-MA) holds up a faulty GM ignition switch during a press conference April 1, 2014. (JIM WATSON/AFP/GETTY IMAGES)

After taking charge of GM on January 14, 2014, CEO Mary Barra found herself under public scrutiny for the recalls. In early April, she testified before Congress and apologized for the company's actions before her tenure. "In the past," she said, "we had more of a cost culture, and now we have a customer culture that focuses on safety and quality." Even so, plenty of questions remain about why GM didn't fix the switches or recall its vehicles earlier.

After facing a backlash for not fixing the ignition-switch problem earlier, GM recalled millions more vehicles — some for similar ignition-switch problems and others for unrelated problems. As of June 30, GM had recalled 28 million vehicles in 2014.

General Motors is based in Detroit and is the third-largest automaker in the world, making vehicles under a variety of brands, including Chevrolet, Buick, GMC, and (until recently) Saturn. The company was bailed out and partly owned by the US government between 2009 and 2013 after falling into financial trouble during the recession.

How many vehicles did GM recall in 2014?

In 2014, GM recalled some 30.1 million vehicles in North America. A portion of the recalls were definitely due to the faulty ignition switch, some were possibly related, and others seemed to be unrelated. A breakdown:

Ignition-switch recalls: In early 2014, GM recalled 2.6 million small cars because of a defective ignition switch that could shut off the engine and airbags while the car was in motion. This was the big, controversial recall — the ignition-switch problem has been linked to at least 97 deaths .

That recall included Chevrolet Cobalts, Chevrolet HHRs, Saturn Ions, Saturn Skys, Pontiac G5s, and Pontiac Solstices that were produced between 2003 and 2011. GM will replace their switches for no charge and is offering affected drivers free loaner vehicles in the meantime.

The models before 2008 all had the defective ignition switch. GM reportedly redesigned the switch for cars built in 2008 and later, but some of those later models may have inadvertently received faulty replacement switches when they went in for repairs. So those cars got recalled, too.

(David McNew/Getty Images)

Possibly related recalls: On June 30, 2014, GM recalled an additional 8.4 million vehicles in the United States and Canada — most of them for a defective ignition switch. The automaker says these models have been involved in seven crashes resulting in eight injuries and three deaths in which the airbags had failed to deploy.

However, GM added: "There is no conclusive evidence that the defect condition caused those crashes."

Possibly unrelated recalls: GM has recalled millions more cars for a variety of other problems over the course of the year, as well — nearly 30.1 million in all as of November 2014.

Some of these were for seemingly unrelated problems. For instance, in March, GM recalled 1.5 million cars because the electronic power steering could suddenly stop working, making it harder to steer. This appears to be a different problem, although one that also involves Chevrolet Cobalts and Saturn Ions. (There's evidence that GM knew about this power steering problem in Saturn Ions for years before the recall.)

What's so bad about a faulty ignition switch?

The faulty ignition switches were a huge problem — drivers could inadvertently knock them to "off" or "accessory" mode while driving, if, say, they were using a heavy keychain. Once that happened, the engine would shut off and cars would lose their power steering and power braking capabilities. The airbags also wouldn't inflate in the event of a crash.

In its initial count in the spring of 2014, GM linked 13 deaths and 32 crashes to the faulty switches. As of May 2015, that number had risen to 97 deaths .

GM said the cars could still be safe to drive if people removed everything from their keychains except the key itself. Others, such as Sen. Richard Blumenthal (D-CT), alleged that the cars could still inadvertently switch off — if, say, they hit a bump in the road while driving. Regardless, GM recalled 2.6 million vehicles to replace the ignition switches in the spring of 2014.

Young people appear to have been disproportionately involved in the crashes. That's because the vehicles affected, like the Chevrolet Cobalt and Saturn Ion, were the sort of cheaper cars that younger drivers are more likely to buy. What's more, experts say, inexperienced drivers were more likely to panic and lacked the focus necessary to wrestle the stalled car safely to the side of the road.

What did GM do about the ignition switch?

It looks like GM engineers knew about the faulty switch at least as far back as 2004, but failed to address it until 2006 — possibly because it would have been too expensive to fix. And the defective vehicles themselves didn't get recalled until 2014.

That was the version of events laid out in an investigation by the House Energy and Commerce Committee. Here's a breakdown:

Noticing the problem (2001–2004): GM engineers noticed a defect in the ignition switch for Saturn Ions in 2001 and for Chevrolet Cobalts in 2004 — the ignition could inadvertently switch off while driving if, say, hit by a driver's knee. (There's some evidence that GM had considered a more resilient ignition switch in 2001 but rejected it for cost reasons.)

Failing to fix it (2005): GM investigated the issue several times. One inquiry was closed off in March 2005 because, according to a project engineering manager, the ignition switch was too costly to fix. (Emails unearthed by Reuters suggested the fix would have cost GM 90 cents per car.) Another design change was approved in May 2005 but never implemented for unclear reasons.

Possible fix (2006): Finally, in April 2006, a GM engineer approved a new ignition-switch design to increase torque performance. Delphi, a parts maker, later told Congress that the new switch for 2008 models was harder to move out of position but "still below GM's original specifications."

So it's not clear that this redesign actually fixed the problem. What's more, the new design was never given a new parts number — which means that the earlier, faulty switch might have been inadvertently been installed in later models when those cars went in for repairs.

Signs of crashes (2007–2013): In March 2007, safety regulators informed GM of the death of Amber Rose, who crashed her Chevrolet Cobalt in 2005 after the ignition switch shut down the car's electrical system and the airbags failed to deploy. The company didn't appear to launch a formal investigation at that time.

In 2011, a Georgia lawyer named Lance Cooper began investigating the 2010 death of Brooke Melton, whose Chevrolet Cobalt lost power while driving and veered into oncoming traffic. Over the next two years, Cooper's law firm begins unearthing evidence related to the defective ignition switch.

Finally taking action (2012–2014): By 2012, GM had identified eight crashes and four deaths involving 2004 Saturn Ions that were attributable to the ignition-switch defect. By the end of 2013, they had determined that the faulty ignition switch was to blame for at least 31 crashes and 13 deaths in a variety of car models. A formal recall began in January 2014.

Investigation (2014): In June 2014, GM released an internal review of the events leading up to the recall. The probe, led by Anton Valukas, confirmed that GM employees had neglected to take action for many years — although he concluded that it wasn't due to a cover-up but rather a "failure to understand, quite simply, how the car was built."

Why didn't GM fix the ignition-switch problem earlier?

That's not entirely clear — though there are plenty of theories. On March 31, 2014, GM CEO Mary Barra appeared before Congress and couldn't explain why it took a decade for the company to recall its vehicles after identifying the problem as far back as 2001 and 2004.

Mary Barra, CEO of General Motors, testifies before a House Energy and Commerce Committee hearing in Rayburn Building on April 1, 2014. (Tom Williams/CQ Roll Call/Getty)

The switch appears relatively easy to fix. As the Washington Post put it : "The part costs less than $10 wholesale. The fix takes less than an hour. A mechanic removes a few screws and connectors, takes off a plastic shroud, pops in the new switch, and the customer is back on the road."

One theory for inaction is that GM's management simply thought the replacement was too expensive. According to an email chain from 2005 unearthed by investigators, GM's managers estimated that replacing the key ignition-switch component would cost 90 cents per car but only save 10 to 15 cents on warranty costs.

When presented with those documents, Barra told Congress that decision was not acceptable. "In the past," she added, "we had more of a cost culture, and now we have a customer culture that focuses on safety and quality."

There are other questions, too. In 2006, GM reportedly redesigned the ignition switch for 2008 models and later. But then why didn't GM recall its earlier cars? And did this redesign really fix the problem? (Delphi, a parts maker, told congressional investigators that even the new design was "below GM's original specifications.")

How common are car recalls?

They're fairly common. In 2013, car companies recalled roughly 22 million vehicles in the United States for dangerous defects or problems, promising to repair them free of charge. Toyota had the most recalls that year, with 5.3 million recalls.

In 2014, automakers recalled a record 52 million vehicles in the United States — and GM had the most recalls, with 26 million.

Between 1990 and 2013, car companies in the United States have issued 3,497 recalls that affected some 398 million vehicles in all:

Vehicles are typically recalled when they have a problem that could jeopardize public safety — and are fixed for no charge. Toyota recalled 803,000 vehicles in October 2013 because of a problem that could inadvertently set off the airbags or shut down power steering.

The automakers with the most recalls aren't necessarily the companies with the most problems, says the federal agency that tracks the data. Different companies have different decision-making processes in deciding how to deal with vehicle problems. One investigation by the New York Times, for instance, found that GM has often relied on sending discreet "service bulletins" to car dealerships in order to avoid full-blown recalls.

Overall, the number of car recall campaigns appears to be increasing over time for a variety of reasons. Toyota has suggested that recalls are often bigger because companies are using the same parts across several model lines — so if the part fails, more models are affected. Other experts point to a growing crackdown by US regulators.

What did regulators do about GM's ignition-switch problem?

It looks like regulators were slow to respond, although the agency in charge has blamed GM for not being forthcoming with information.

Slow to respond: Back in March 2007, the National Highway Traffic Safety Administration (NHTSA) first informed GM of the death of Amber Rose, who crashed her Chevrolet Cobalt in 2005 after the ignition switch shut down the car's electrical system and the airbags failed to deploy. Neither GM nor NHTSA opened an investigation.

Then, in September 2007, NHTSA investigators looked into four fatal crashes and a variety of reports of defective ignition and disabled airbags in Chevrolet Cobalts. But the agency couldn't identify a discernible trend and closed the investigation. Something similar happened in 2010.

Blaming GM: David Friedman, the acting chief of NHTSA, told Congress in April 2014 that regulators would have acted earlier if GM had been more forthcoming. "GM had critical information that would have helped identify this defect," he said . "Had this information been available, it's likely NHTSA would have changed its approach to the issue."

Among other things, Friedman said that his agency did not know that GM was talking with suppliers about concerns over airbag failures. Regulators also did not know that GM had redesigned the ignition switch in 2006 without giving it a new part number.

Fining GM: On May 16, 2014, NHTSA fined GM $35 million — the maximum allowed under the law — for delays in recalling the faulty ignitions. In the consent decree, GM admitted that it broke federal law by not recalling the vehicles in a timely fashion.

(For more on this, see this New York Times piece by Jackie Calmes. )

How did GM respond to the scandal?

The company announced it would replace the faulty ignition switches for 2.6 million recalled vehicles. Replacements for Chevrolet Cobalts, Saturn Ions, and other models began April 7, 2014. Repairing all of those cars could take months , so the company offered free rental vehicles to affected drivers in the meantime.

GM also conducted an internal investigation into why the part wasn't fixed earlier, which was released in June 2014. That report confirmed that GM had neglected to address the ignition-switch problem for many years — although it said this wasn't due to a cover-up but rather a misunderstanding in "how the car was built." The company dismissed 15 employees and disciplined five others after the investigation was published.

GM has also tapped Kenneth Feinberg as a consultant to help them decide how to compensate families who were injured by the recalled cars. As of May 2015, the company has set aside $550 million to compensate victims. The fund has reviewed more than 4,000 claims and determined that at least 97 deaths could be linked to the faulty ignition switches.

People walk near the front entrance of the General Motors headquarters on April 1, 2014, in Detroit, Michigan. (Joshua Lott/Getty)

On April 1, 2014, GM CEO Mary Barra appeared before Congress and said that the company had once been too focused on cutting costs — but has since changed. "In the past," she said, "we had more of a cost culture, and now we have a customer culture that focuses on safety and quality."

What consequences did GM face?

Here's what the company has faced as of June 2014:

A $35 million fine: On May 16, 2014, the US Department of Transportation hit GM with $35 million in fines — the maximum allowed under the law — for delays in recalling the faulty ignitions. In the consent decree, GM admitted that it broke federal law by not recalling the vehicles in a timely fashion.

The cost of recalls: GM already has to pay the cost of the recalls, which ran to at least $1.7 billion in the first half of 2014 .

Investigations: In March 2014, Manhattan US Attorney Preet Bharara opened a federal probe into whether GM could be criminally liable for failing to disclose information. (This wouldn't be unprecedented: back in March, the Justice Department levied a $1.2 billion fine against Toyota for allegedly lying to the public over an unintended-acceleration problem in its vehicles.)

Possible payments to victims: As of May 2015, the company had set aside $550 million for the GM Ignition Compensation Fund to compensate victims of the faulty switch. As of January 31, 2015, the company has received more than 4,000 claims and linked at least 97 deaths to the switch.

Wasn't GM owned by the government during the scandal?

Yes. GM declared bankruptcy in 2009 and was owned by the government between 2009 and 2013.

GM was owned by the US government during a critical part of the scandal

That's after the company supposedly redesigned the faulty ignition switch. But the government ownership came during a period when GM failed to recall millions of defective vehicles that were out on the road.

S ome observers have wondered whether GM officials were too focused on pulling the company out of bankruptcy to worry about the faulty ignition switches. Others have asked whether federal regulators may have turned a blind eye toward GM's problems during this period.

The backstory: In 2009, GM was burdened by declining sales, high pension costs, and escalating losses. To forestall a total collapse, the US federal government invested some $50 billion into GM in exchange for a 60 percent stake in the company (which it sold off over time). As part of the deal, GM filed for Chapter 11 reorganization on June 1, 2009.

The General Motors world headquarters complex November 18, 2010, in Detroit, Michigan. (Bill Pugliano/Getty Images)

During the restructuring, GM closed brands like Saturn and Hummer, cut thousands of jobs, reduced its labor costs, and went public again in July 2009. The company has been profitable since 2010.

The Obama administration sold its last remaining shares in the company in December 2013 — ultimately taking a $10.5 billion loss on the taxpayer-funded bailout. (Supporters of the bailout argue that letting GM fail would have had a ruinous economic impact during the nadir of the recession.)

Why it matters: That bankruptcy was an issue during the scandal. As part of the government restructuring, GM technically isn't liable for injuries that happened before it went bankrupt in the summer of 2009. That potentially includes some of the victims of the ignition-switch defect. In 2014, some members of Congress urged GM to pay up anyway — and suggested potentially revising the terms of the company's deal.

Is driving getting more dangerous?

Driving in the United States is an inherently dangerous activity — 33,561 people died in car crashes in 2012.

But driving's not getting more dangerous. The number of traffic fatalities in the United States has fallen dramatically since the 1970s:

That's partly due to the fact that people are becoming safer drivers (less drunk driving, less driving in general). And it's partly due to the fact that cars are getting safer — airbags save lives, and the combination of antilock brakes and electronic stability control have cut crashes 30 percent.

Still, some critics argue that driving could be much safer. In Slate , Nicholas Freudenberg argues that the rate of auto deaths in the United States is three times as high as it is in, say, Sweden . And, he argues, auto companies have often resisted regulations that could make driving even safer.

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GM’s risk management failures provide lessons for other firms

Strategic fails afford valuable lessons. There is something to be learned from the spectacular recent failure of General Motors’ once highly-touted enterprise risk management program.

In 2012, G. Mustafa Mohatarem, the Chief Economist at General Motors, in praise of his firm’s implementation of a new Enterprise Risk Management (ERM) program, commented on lessons learned by his company. He said: “There is a tendency to underestimate the risk…It is relatively easy to say, ‘Well, it’s a low probability risk, let’s go on.’ It may be a very low probability event, but those low probability events have a way of materializing, and we’ve got to understand what happens if we do it.”

General Motors is now caught in the grip of a strategic failure that materialized from a seemingly “low probability” event. A recall of 3.1 million vehicles is expected to result in a charge of $300 million . The US Justice Department has launched a criminal investigation to determine if GM knowingly withheld information from consumers on defective vehicles. Just this week, Toyota was fined a record $1.2 billion by the US Government in another case. GM is facing similar penalties .

Whenever a company or organization finds itself in the throes of failure, large or small, it is useful to return to fundamentals and ask what happened in terms of basic analysis. At the heart of most any corporate strategic failure lies a misunderstanding of simple concepts such as Porter’s Five Forces, the SWOT analysis or competitive advantage.

GM did not take its own risk management process seriously. In 2012, GM’s then-Chairman and CEO, Dan Akerson gave the impression GM was in control, saying, “The best risk management function…is one that you never hear about publicly…You are always trying to anticipate, trying to move before you have to, and if you do, try to look across the entire enterprise and get an integrated view of risk… Decisions you make today will ultimately have an impact on you many years out. Large, complex, global organizations…don’t fail with one dumb decision. There has to be many, cascading decisions that accumulate to erode your competitive position.”

Those were the days when a proud GM trumpeted the value-added benefits of its ERM program. The company was touted as a risk management model for others to emulate by risk professionals, trade journals and academics. “If any company can be said to have put the ‘enterprise’ in risk management, it’s GM,” CFO magazine announced in 2013.

Source: GM Presentation at RMS 2012 ERM Conference

Alain Genouw, CFO at GM Global Connected Consumer, OnStar LLC, characterized the risk management attitude at GM this way: “In the past, risk management was not on the forefront of everybody’s thinking or tasks. It was more of a check-the-box type of activity. Today at GM (2012), risk management is front and center for everybody…It is more of a collaborative effort to make sure we understand those risks and be proactive about managing those risks.”

A Global Risk Insights post three months ago questioned whether GM’s ERM had evolved beyond the “check-the-box” stage sufficiently to focus on effective execution. The piece ended pessimistically, stating that “It might be a while before GM can quantify its ERM program’s impact.” It seems this pessimism was unwarranted. GM can now quantify its impact; the ERM program could cost well over a billion dollars.

There is some hopeful news. The new CEO at General Motors, Mary T. Barra, knows where to begin in the wake of the recall disaster: “These are serious developments that shouldn’t surprise anyone. After all, something went wrong with our process in this instance, and terrible things happened…We are conducting an intense review of our internal processes.”

Developing a strategy to turn GM’s ERM process into an effective program for risk management analysis and execution would be a good start. Brian Thelen, GM’s Chief Risk Officer, told CFO magazine that ERM helps GM make better decisions and is part of the global automaker’s competitive advantage. This is probably true to some extent, but ERM is not the strategic strength GM management believes it to be.

In retrospect, the company’s confidence in its process seems misplaced. The graphic above is a slide from a presentation given by CRO Thelen in 2012. It can be argued GM violated most if not all the components of its Risk Management Process.

GM’s risk management culture was not as developed as it should have been. Exposing individuals at various levels of management to the goals and objectives of the ERM program are not the same as promoting and embedding risk awareness. The company was not as adept at spotting, assessing and mitigating risks as it imagined. No one in the firm seems to have owned this particular risk, so no plans appear to have been developed to manage it.

A feedback loop appears not to exist. The communication and evaluation of existing internal risks – in this case, faulty ignition switches – did not take place for 10 years . It appears GM underestimated the probability of the risks associated with the faulty engineering, and failed to recalculate risks in a Bayesian fashion. It looks as though GM performed an inadequate cost-benefit analysis, if any.

GM manufactured long-standing weaknesses in an important strategic activity – the identification, communication, analysis, and mitigation of risks. An “accumulation of cascading decisions,” the weaknesses contributed to a significant failure. These problems were entirely internal to company operations; GM was in complete control of these factors. Further, these weaknesses thrived despite a “model” company-wide ERM process in place under the direct and active supervision of the company’s top management and board.

Instead of being part of General Motors’ competitive advantage, as CRO Thelen asserts, the company’s enterprise risk management system created for GM a distinct competitive disadvantage. When companies mistake process for execution, “terrible things” can happen. CEO Barra is correct, this should surprise no one.

About Author

Steven Slezak

Steven is on the faculty at Cal Poly in San Luis Obispo, California, where he teaches finance and strategy. He taught financial management and financial mathematics at the Johns Hopkins University MBA program. He holds a degree in Foreign Service from Georgetown University and an MBA in Finance from JHU.

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What happened to General Motors?

General Motors (GM) is an American multinational company founded in 1908. By the 1931 to early 2000s, GE was among the most successful companies in America, and yet as the financial crisis hit in 2008, General Motors filed for Chapter 11 bankruptcy reorganization on June 8, 2009, after losing more than $90 billion in the previous four years. General Motors was effectively split in two during Chapter 11 bankruptcy proceedings. The new company took GM’s best brands and operations, while the old company kept its massive liabilities.

Table of Contents

General Motors (GM) is an American multinational company with a core focus on the design and manufacture of vehicles, vehicle parts, and the selling of financial services.

It was founded in 1908 by William C. Durant, Charles Stewart Mott, and Frederic L. Smith.

GM enjoyed a 60% market share in the United States at its peak and was the worst’s largest automobile manufacturer from 1931 until 2007.

Thanks also to one of the most prominent CEOs of America’s history, Jack Welch:

However, by the 2000s, and as the financial crisis of 2008 hit the automaker industry very badly, General Motors filed for Chapter 11 bankruptcy reorganization on June 8, 2009, after losing more than $90 billion in the previous four years.

The Government-backed deal saw the original company sell its assets and some subsidiaries to form a new company using the General Motors trademark.

Today, General Motors remains a significant global presence producing 6.829 million vehicles in 2020 with revenue of $122.48 billion .

Following is a look at the fall and subsequent rebirth of the American giant.

Fixed operating costs

When General Motors experienced a decline in sales, it could not cut costs because many of its expenses were fixed.

This made the company somewhat unique as a manufacturer. In most cases, operating costs fall as sales fall because fewer units are being produced.

That is, the business can employ fewer staff and spend less money on raw materials.

However, GM employees were on union contracts.

The company could have closed a manufacturing facility to reduce costs, but this did not guarantee employees would lose their jobs.

Union employees also received company pensions and health care coverage which were also fixed costs.

As a result, GM posted enormous losses as sales declined with expenditure remaining largely the same.

Automotive industry crisis

The so-called automotive industry crisis lasted from 2008 to 2010 and was the result of the Global Financial Crisis (GFC) and subsequent recession.

In the years before the GFC, General Motors invested heavily in SUVs and pick-up trucks with poor fuel economy.

As the recession pushed gasoline prices up, the company experienced a decline in sales as consumers looked to other makers for fuel-efficient cars.

This situation was made worse by a rise in the cost of raw materials.

Saddled with high levels of debt, GM predicted it would run out of cash by mid-2009 without government funding, a merger, or the sale of assets.

Government loans were then handed out to GM on the condition that it produced a plan for future financial viability.

The Obama administration then endorsed the sale of General Motors’ operational assets to a new company called NGMCO Inc. (or “New GM”).

The latter would take on GM’s most profitable brands and operations, leaving the former with most of the liabilities.

The restructuring then took place before the bankruptcy filing to make the new company profitable.

This enabled proceedings to conclude in a matter of days and not be dragged out for years as creditors scrambled to recoup their costs.

Nevertheless, it became the largest industrial bankruptcy in history with General Motors $173 billion in debt .

Normal operations continued throughout the proceedings with operations outside the U.S. unaffected. The “new” General Motors then emerged just 40 days later.

General Motors then undertook a restructuring program. The company discontinued the Pontiac and Saturn brands and sold Saab to Dutch automaker Spyker.

It was left with four divisions: Buick, Cadillac, Chevrolet, and GMC.

In 2010, GM held a momentous IPO and regained its title as the largest automaker in the world the following year.

Key takeaways:

General Motors is an American multinational automobile designer and manufacturer. It was the world’s largest automaker for 76 years before filing for bankruptcy in 2009.
General Motors was exposed in the wake of the GFC as rising gas prices saw consumers look elsewhere for fuel-efficient cars. GM also had several employee-related fixed costs which it had to meet as sales revenue declined.
General Motors was effectively split in two during Chapter 11 bankruptcy proceedings. The new company took GM’s best brands and operations, while the old company kept its massive liabilities. Pro-manufacturing U.S. governments helped underwrite the transition with the new GM holding an IPO in 2010.

Key Highlights

General Motors (GM) is an American multinational company founded in 1908 with a core focus on designing and manufacturing vehicles, vehicle parts, and selling financial services.
At its peak, GM enjoyed a 60% market share in the United States and was the world’s largest automobile manufacturer from 1931 until 2007.
However, by the 2000s and as the financial crisis of 2008 hit, GM faced significant challenges and filed for Chapter 11 bankruptcy reorganization on June 8, 2009, after losing over $90 billion in the previous four years.
Fixed operating costs, particularly union contracts, made it difficult for GM to cut costs as sales declined, leading to substantial losses.
The automotive industry crisis, resulting from the Global Financial Crisis and recession, further impacted GM’s sales as consumers sought more fuel-efficient cars from other manufacturers.
With high levels of debt and the possibility of running out of cash , GM received government loans on the condition of developing a viable plan for the future.
The Obama administration endorsed the sale of GM’s operational assets to a new company called NGMCO Inc. (or “New GM”), leaving the old company with most of the liabilities.
After a swift restructuring, the “new” General Motors emerged just 40 days later and discontinued some brands while retaining Buick, Cadillac, Chevrolet, and GMC divisions.
Pro-manufacturing U.S. government support played a crucial role in underwriting the transition during the bankruptcy proceedings.

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A CASE STUDY OF GENERAL MOTORS

A CASE STUDY OF GENERAL MOTORS; Advice for Detroit's Humbled Giant

By John Holusha

Dec. 7, 1986

The case study method of teaching business requires students to study a corporation and suggest ways to solve its problems. This article takes the same approach, but with a twist: The subject is General Motors, and the ''students'' are auto analysts, dealers, consumer activists and former industry insiders with ideas on how the troubled carmaker can regain its luster.

The interviews were conducted by Robert A. Bennett and Mr. Holusha.

The General Motors Corporation silenced its most bitter internal critic last week when it paid H. Ross Perot more than $700 million for his G.M. stock and a promise that he would not try to take over the company or criticize its actions.

But G.M.'s underlying problems will not disappear so easily. The company's chairman, Roger B. Smith, who engineered Mr. Perot's departure, is facing big troubles at the nation's No. 1 auto maker.

G.M.'s market share has slipped: last month it accounted for 32.4 percent of combined car and light-truck sales, down from 38.4 percent a year ago and 50 percent 20 years earlier. Industrywide, sales of domestically built cars rose in November over year-earlier figures, but G.M. sales fell. In the third quarter, the company had operating losses of $338 million.

These results are clearly a crushing disappointment to a company that until recently behaved as if it thought it could shake off the blues of the early 1980's and regain its old dominance. Indeed, G.M. managment last week was still saying that the basic strategy, laid out by Mr. Smith a few years back, is still sound.

But industry-watchers are increasingly convinced that the departure of Mr. Perot last week is just the beginning of wrenching changes ahead, as G.M. struggle to lower its horizons and make profits again, with a smaller market share.

General Motors' fortunes have been on a roller coaster ride since Mr. Smith took over as chairman in early 1981, just as G.M. was about to announce a $763 million annual loss, its first since the 1920's.

Concessions wrung from the United Automobile Workers union in 1982 and improving car sales turned the company profitable again, and by 1984 G.M. earnings hit a record $4.5 billion.

Emboldened by the financial turnaround, Mr. Smith began to transform the corporation. To react more quickly to the market, he continued an internal restructuring under which Chevrolet, Pontiac, Oldsmobile, Buick and Cadillac were not run as separate car companies but combined into two ''supergroups'' - one for large cars, one for small.

He also paid $2.5 billion to acquire the Electronic Data Systems Corporation from Mr. Perot, in part to buy computer expertise for G.M. And in 1985, he announced that $5 billion would be spent to establish a separate internal corporation, Saturn, intended to build small cars with the same quality and cost as the Japanese using some of their innovative management techniques.

Later that year, he paid $5 billion for the Hughes Aircraft Company and its technological skills. He also invested billions in high-tech, robot-heavy ''factories of the future.''

Mr. Smith was widely hailed for the innovative spirit behind these moves, until the results started coming in. For the last two years, G.M. has consistently produced more cars than the American public wanted to buy. Each time that dealers' lots became clogged with unsold cars, G.M. came out with sweeping financing-incentive campaigns that other carmakers grudgingly adopted.

The climax came this fall, when G.M. offered loans with interest rates as low as 2.9 percent, about one-third the commercial car-loan rate. The campaign sold cars, but it was so costly that it caused G.M. to post its third-quarter loss.

The losses and the reduction in market share have caused a reassessment of Mr. Smith's management and strategies.

Analysts point out that despite the expensive new factories that bristle with robots and that promised low-cost production, it still costs G.M. more to build a car than it costs either Ford or Chrysler. And despite the new supergroups and the billions that have gone into design, look-alike styling has made it difficult for buyers to differentiate between Oldsmobiles and Cadillacs - and sales of both have declined.

When it lowered G.M.'s credit rating recently, Standard & Poor's, the rating agency, noted that the company ''no longer dominates the market, having lost both styling and quality leadership.'' Indeed, sales of a new line of luxury cars - the Oldsmobile Toronado, Buick Riviera and Cadillac Eldorado and Seville - have been so poor that one analyst has estimated that G.M. will earn $750 million less on those models than it did on the cars they replace.

The line at G.M. is that the costly investments in new factories, acquisitions and reorganization had to be ''frontloaded'' and that the payoff -in both reduced costs and diverse styling - will be visible soon.

''There's no question in my mind that we've turned around from the bottom,'' said F. James McDonald, the president of G.M. in an interview last week. ''We know that internally, and we'll prove it to the public.''

In a shift in strategy, company officials now say they will cut production to match sales, rather than resort to costly incentives.

A round of recent layoffs appears to underscore that determination. Last week, G.M. announced that 4,500 workers would be indefinitely laid off from its luxury-car plants. Two weeks ago, it announced layoffs in some smaller-car plants. And the company is also beginning an effort to cut its white-collar work force by 25 percent.

Mr. McDonald also said that G.M. is evaluating its components operations - the company is more vertically integrated than any of its domestic rivals - and is prepared to get rid of those that cannot match outside suppliers on cost or quality. ''Whatever penalty we suffered in the past for our high integration will fall off,'' he said.

But as Mr. Perot is fond of pointing out, even movement in the right direction is not enough if the pace is too slow. Below, some advice from outsiders familiar with the industry: MARYANN N. KELLER Auto analyst, Furman Selz Mager Dietz & Birney Inc.

TODAY, G.M.'s biggest problem isn't costs or acquisitions or over-reliance on gee-whiz technology. It's in the dealer showrooms.

G.M. has a product problem. Their cars aren't selling, and they are losing market share. They forgot they are in the consumer products business and got overly concerned with the details of how to put a car together. People don't care if it is manufactured by robots or if the dealer can order it directly from a factory computer.

I know financial analysts are supposed to be concerned with costs and numbers, but I see the revenue line. If they were selling more cars, their revenues would increase and that would help with costs.

What Roger Smith needs to do is get some people together who have good market know-how and have them figure out how to make the cars in the showrooms today more attractive. He can't wait until 1990 or 1991 for new designs to come out of the G.M. Technical Center. The problem is now.

Other companies have done it. Ford's Mustang is an old car. But Ford has kept it fresh by putting in a bigger engine and offering a convertible version and doing a lot of smaller things. Chrysler showed you can build a whole product line from one platform with a little imagination. You have to pay attention to what the customer wants and give it an an affordable price.

Where is the Lee Iacocca of G.M.? PHILIP CALDWELL Former chairman of Ford, now managing director, Shearson Lehman Brothers

DEALING with the fundamentals is most important - offer what the customers need and want, produce the highest possible quality product, produce at low cost. If you follow the fundamentals, you can have your cake and eat it too.

I don't want to give unsolicited advice; I can only talk about my experience at Ford. You don't need to be a hotshot engineer or salesman to be an effective leader. You need somebody who can bring together a team, create the vision, know where he would like to take the company and explain to people why it is important.

You also need the capacity that fits the market share that you're likely to get, and you shouldn't delude yourself about it. And you have to involve the entire work force, or you squander the most important resource you have. Get initiative and ideas flowing freely, and instill a genuine feeling of ownership throughout the work force.

This formula has been in use at the Ford Motor Company since 1979 and it brought about one of the most successful turnarounds in American industry. I know of no better formula for G.M. or any other business, and I presume G.M. is undertaking that sort of program.

The most important thing is to get the products right. Ford developed a product line where the shape of the cars was developed out of the quest for significant improvement in fuel economy. Attractiveness came second. The concept was not to have a gimmicky new shape.

Next, you have to be able to sell your product based on low costs. Any business must decide whether it can make a profit based on how small it believes the market might be. If the market turns out to be larger, all the factors will be working in your favor. You may not be able to take advantage of the last inch of potential, but you will have less exposure on the downside.

And you have to be patient. At Ford, our turnaround effort started in 1980, we saw no change for two years. We kept asking why, and nobody could see what we were doing wrong. Then it was almost like the tides of the Bay of Fundy when the break came in 1982. It was like a flood. DOUGLAS FRASER Retired president of the United Automobile Workers

GENERAL MOTORS' main problem is that its cars are not attractive to the American public. Look at what they've done, or haven't done, to the Cadillac. Cadillac used to be part of the American vocabulary, the American standard of the best. They downsized it; it's not distinctive enough. All the cars look alike. I hope they're on the way to designing cars that are distinctive and have greater appeal.

They have also tried to do too much at one time. They thought they could put up new assembly plants with state-of-the-art technology and that all their problems would disappear. They miscalculated how quickly they could bring new technology on line.

The buyout of Ross Perot was very bad for their image. But I hold no brief for Ross Perot. He says we should listen to the workers and let them express themselves. Yet E.D.S. is run like a Marine boot camp. There's a dress code, women can't wear slacks, men can't have beards. When the U.A.W. tried to organize E.D.S., they came at us like savages.

About the recent layoffs, there were no surprises there, at least not for anyone who knows the industry. I resent how they did it, because they sent shock waves and raised the level of insecurity among workers. In making the announcement that way, they placated Wall Street, which thinks they really stepped up to cutting costs.

The huge inventory they now have is the result of a strategy that didn't work: Those guys are bean counters, and they know every car sold every day. They built up that inventory hoping to capture a larger share of the market by offering financing incentives. But Ford and Chrysler didn't just sit there; they were angry that G.M. cut the interest rates and they met the competition.

Now G.M. is saying, we won't do that again, we'll cut production instead. The 4,500 laid off are just at the assembly plants; it will spread to other G.M. plants.

G.M.'s got problems, but they have a lot of strengths too. Everyone likes to jump on a giant when he's down, that's the price of being big. But there's a lot of talent there. I'm not concerned about G.M.; I'm worried about G.M. workers. RALPH NADER Consumer advocate and founder of Center for Study of Responsive Law

THE first thing G.M. should do is retire Roger Smith. He's a finance man who doesn't know how to focus on improving the quality of the product.

G.M.'s cars must be safer, more durable, more fuel-efficient and more quality assured. Instead, the company has been going the other way. They think if they automate their factories, that will pull them ahead. But if people don't perceive the cars to be good, they won't buy them.

G.M. should work on product defects and stop being insensitive in dealing with complaints. They give customers the runaround, and their customers have been forming G.M. lemon groups.

The company is also behind in technology. Why should they be behind Ford in anti-lock braking devices? G.M. is going toward electronic gadgetry - it's the modern-day substitute for the styling mania of some years ago. The Japanese broke into the U.S. market because they had quality and fuel efficiency instead.

What G.M. needs is a more diverse board of directors instead of a bunch of industrial reactionaries and yes-men. They couldn't even stand Ross Perot.

As long as Roger Smith is there, they will not change. His great frontier is robotics. The guy who can turn G.M. around, guaranteed, is John Nevin, chairman of Firestone. He was at Ford; he was head of Zenith, a real quality-control company. Then he took on a crumbling company known as Firestone. He has the right attitude toward consumer complaints. He knows how to improve labor productivity. And he would know how to improve the product. He has said he's never heard of a product recall that was labor's fault, it was all management. He's a believer in air bags. There's the guy. JOHN J. NEVIN Chairman, Firestone Tire, and a former Ford executive

THE company's problems are similar in both nature and degree to the problems that have characterized many of the nation's smokestack industries.

To be successful in the future, G.M. will have to define its strengths and focus its resources on those parts of its business. It's going to involve some very painful restructuring. I'm sure there are a lot of people at G.M. who are making critical judgments as to whether its long-term interest is served by doing a lot of things by itself, as it has, or by tapping resources of suppliers.

There have been many instances in the auto industry where companies decided that a supplier that specializes in a particular technology or a particular component can do it more efficiently than the end-user company can do it itself. Throughout the auto industry, decisions are being made to buy engines or radios or even the design of products from outside companies.

Chief executives anywhere, even at G.M., tend to get more of the credit than they deserve when things go well - and more of the blame when things go wrong. Right now, Roger Smith is on the down side of that equation. IRWIN KATZ President, Kayson Chevrolet, Croton-on-Hudson and past president, Greater New York Automobile Dealers Association

GENERAL MOTORS' main problem is its immense size. It takes an inordinate amount of time to get things turned around, even though eventually they do get on target as to what consumers want. It takes longer than with smaller companies and entrepreneurs. Ross Perot, whom I admire tremendously - the last time I admired someone so much was when Winston Churchill was alive - ran an entrepreneurial company, even though E.D.S. was big.

An example of this problem is G.M.'s sluggishness in making somewhat bigger cars now that gasoline has dropped below $1 a gallon and people want slightly larger vehicles.

Another problem is pricing. The consumer has become accustomed to periodic price rebates and interest subsidies. Sales are being adversely affected because G.M. does not now have a price-war, interest-subsidy program, except for the Cavalier model. As much as the G.M. finance committee does not want to get back into interest subsidies or price rebating, I am afraid the consumers will have their way. If no automobile manufacturers had the rebate programs, I'd be against them; they confuse the consumer, make aberrations in the market, causing prices to go up and down. But if the others offer them, G.M. had better get into the fight and produce an equal or superior program. DAVID E. DAVIS JR. Editor, Automobile Magazine

MORE than anything else right now, General Motors needs a home-run product. It needs to bring out a car like the 1955 Chevrolet or the Honda Civic, one that changes the game and makes other manufacturers play by the new rules.

The 1955 Chevrolet was light and fast and good-looking by the standards of the time. It forced Ford and Chrysler to change their approach to car design, just as the Civic did in a later era.

Roger Smith should identify the most creative minds in the company and turn them loose to develop a product that will blow everyone else out of the water. They have the capacity to do it if they want.

He should also realize that the market is becoming more and more fragmented. The companies making money today are those finding the niches in the market and satisfying them. Economies of scale don't count for as much as they once did; you have to be lighter on your feet to take advantage of shifts in the market -the way the Japanese do.

G.M. also needs to balance the lessons of the Poletown and Fremont assembly plants. The Fremont plant, which is managed by Toyota, is a demonstration of what can be done with highly motivated human beings and an indication that robots and computers aren't the answer to everything. At Poletown, which is a G.M. plant, the robots were more flawed than the humans they were supposed to replace. It shows that the old axiom is true: If the original idea isn't very good, all the computers in the world won't save it. JOHN Z. DELOREAN Former vice president, G.M., founder of DeLorean Motor; currently on trial on Federal racketeering charges.

IT'S not Roger's fault or anyone else's - it's that the American automobile industry has essentially had a monopoly for 70 years. It was really a Detroit monopoly, where G.M. took half, and Ford and Chrysler fought over the other half. That monopoly led to lavish overhead, including lavish union contracts and lavish salaries for management.

The biggest need is a dramatic reduction in the overhead of the companies . . . and the biggest part of that is there is too much management. On that, Roger's on the proper track, although I think you could eliminate 50 percent of the salaried workers.

They also have to have much less vertical integration. They make too much of what they sell. They've got to buy more of it on the outside. Foreign manufacturers, especially in Japan, get much more from independent suppliers than U.S. companies do.

To compete at first, the U.S. companies may need to buy from Brazil or Mexico or Korea. Then they could come back to the U.S. later. For our country, in the short term that would probably reduce employment, but in the long term it would stabilize the industry and improve employment.

They also have to build the right products. For example, my brother is a Cadillac dealer. He told me the new Seville and Eldorado are not nearly as salable as the previous ones. I assume it was the look, but whatever the reason, they just aren't selling. Now that's not Roger Smith's fault, but somebody there didn't do the proper market research. There's no way that some guy making $600,000 or $700,000 or $2 million a year can have the proper perspective about what kind of cars to build for a guy who makes $20,000.

G.M. also should remember that its biggest asset isn't anything inside of G.M. It's the dealer organization. G.M. should try to maximize its profits through that structure. Those dealers have the best locations and the best salespeople, and if you give them the right product at the right price, there's no Toyota dealer or Honda dealer or any foreign dealer who can come close to them.

As for Perot's suggestion that G.M. needs to re-establish contact with its workers - to have them work together with management - that's easier to do in a young, growing company, as G.M. was years back. For G.M., that's going to take a dramatic change in management attitudes. AT A GLANCE: General Motors All dollar amounts in thousands, except per share data Three months ended Sept. 30 1986 1985 Revenues $22,800,000 $22,500,000 Net income 264,000 517,000 Earnings per share $0.56 $1.53 Year ended Dec. 31 1985 1984 Revenues $96,372,000 $83,890,000 Net income 3,999,000 4,516,000 Earnings per share $12.28 $14.22 Total assets, Dec. 31, 1985 $63,833,000 Current assets 24,256,000 Current liabilities 22,299,000 Long-term debt 2,867,000 Book value per share, Dec. 31, 1985 $73.78 Stock price, Dec. 5, 1986 N.Y.S.E. consolidated close 71 Stock price, 52-week range 88 5/8-65 7/8 Employees, Dec. 31, 1985 811,000 Headquarters Detroit

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Case Study: The Decline and Fall of General Motors

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