10 Jun 2002  Research & Ideas

Reinventing the Industrial Giant

It's not easy to transform a trusty but ailing old stalwart. In an excerpt from their book, Changing Fortunes: Remaking the Industrial Corporation, HBS professor Nitin Nohria and co-authors Davis Dyer and Frederick Dalzell discuss how General Motors and Kodak are attempting precisely that.

 

In an effort to survive in the new economy, some-industrial giants have tried to chart an evolutionary path that combines their industrial core with new post-industrial businesses. The companies from our study that are most clearly attempting to do so are Ford, General Motors, General Electric, Xerox, IBM, and Kodak. These industrial giants are trying to combine their industrial heritage with products, services, and business practices more closely associated with the new economy. Their basic product does not change—GM is still trying to sell cars; however, they are trying to do so in the manner of Dell and Cisco. Because the majority of these transformations are ongoing, the ultimate success or failure of these undertakings is difficult to evaluate.

General Motors, for example, is attempting to rehaul its business in four major ways. The first is the creation of its e-commerce site GMBuyPower.com, which enables customers to order cars online. The second is the development of its OnStar technology, which, according to the company's 1999 annual report, will enable the first "Web car." 72 The third change is the development of a B2B auto parts exchange that allows GM to bid for auto parts online. Finally, the company is moving its internal processes, such as billing and inventory, online. GM estimates that each of these four undertakings will save an extraordinary amount of money and enable the company to prosper in the new economy.

There are many skeptics who believe that GM will not be able to successfully reinvent itself.
— Nitin Nohria, Davis Dyer and Frederick Dalzell

There are many skeptics who believe that GM will not be able to successfully reinvent itself. Its recent history suggests that GM has had difficulties accomplishing this in the past. 73 In the 1980s, under the leadership of Roger Smith, GM tried to transform itself into the "21st Century Corporation." 74 The plan was to revamp all of the assembly plants and replace workers with robots and other forms of computerization. The company was to spend $40 billion on this project. 75 However, this project was a failure. As one former securities analyst noted, "None of this stuff worked the way it was supposed to." 76 This history seems especially relevant given GM's current attempts to create yet another model of the "21st Century Corporation." Is GM going down this same path again?

GM does not believe that these new changes will repeat the 1980s debacle. Rather, their executives see the Internet as the way of the future. The 1999 annual report states that the company believes "... that the potential of the Internet and other communications technologies is particularly great" for GM. 77

One way GM is attempting to become more like Dell is by selling cars online. 78 Toward the end of 2000, GM began testing its consumer Web site, GMBuyPower.com, to bring customers online to purchase cars. The online system was designed to be much more efficient for consumers and for GM. First, it would reduce the amount of time customers had to wait for their car to arrive. A car ordered online would take only 15 to 20 days to reach the customer compared to the usual 55 to 60. 79 Customers could also go through the inventory at a variety of dealers and create a customized car if they could not find what they were looking for on the Web site.

However, GMBuyPower.com faces significant challenges. First, there are many people who believe that the public may want to buy computers online, but not cars. 80 Another challenge facing the company is that despite their efforts to create a company like Dell for the car industry "cars aren't anything like computers when it comes to manufacturing." 82 The efficiency of Dell cannot easily be achieved with cars, and it may be difficult for GM to follow such a strategy.

OnStar is the second way that GM is trying to transform itself. OnStar is "an onboard-communications service that GM is pushing at customers in a bid to become a much more than the world's largest vehicle maker." GM believes that eventually subscribers to this service will be able to "use voice commands to reach the Internet and request in-car traffic updates, news headlines, weather reports, sports scores, stock quotes, and e-mail." On the face of it, OnStar has huge potential. There is no denying the popularity of cell phones and Internet services. And GM has a huge customer base that spends a great deal of time in the car." Combining these two things may well make OnStar extremely popular.

However, there are several other aspects of OnStar that raise concerns that it might become the 1990s version of Roger Smith's robots. Entering the online communications market translates into significant added competition for GM. The company will no longer just compete with car companies; it will also have to battle cellular phone and other online communication companies. Similarly, there is the question of whether there is a demand for this type of service. As technology continually evolves, it is highly probable that the equipment placed in the car will become obsolete. Also, OnStar can only be used in the car, which may make it cumbersome for customers used to the easy accessibility of cell phones. 83

GM is also attempting to revamp its business structure through the creation of a B2B exchange with auto parts suppliers. This system, initially called TradeXchange, was designed to bring suppliers online so that GM can purchase supplies. For a fee, suppliers were to use TradeXchange to "reduce their costs and pass on some of those savings to GM." 84 GM believed that they could save a great deal of money through this B2B exchange, and Chairman John Smith Jr. claimed that "we think e-business will have an even greater impact on the way we operate than e-commerce." 85 Besides saving money, TradeXchange was also designed to streamline production: "By sharing information electronically with the suppliers . . . auto makers know when to expect the parts needed to assemble a particular car, and they can schedule assembly accordingly. And suppliers can tap into the auto makers' order system to find out what's needed by the manufacturer even before the parts order comes through, so they have the part ready to ship as soon as the order is placed. 86 Here too, GM was attempting to replicate the new business models pioneered by companies like Dell and Cisco.

However, GM was not alone in the creation of a B2B exchange. Ford had created AutoXchange to do basically the same things, which forced the two firms to compete for suppliers. 87 Ford and GM also had disparate styles and software, which made it very difficult for suppliers to streamline their systems. To solve these problems, Ford, GM, and DaimlerChrysler agreed to join together to create one B2B supplier exchange. 88 This new service was named Covisint.

Issues have plagued Covisint since its inception. First, the Federal Trade Commission worried that the joint venture may lead to "...unlawful price signaling or coordination among buyers or sellers." 89 This issue has since been resolved and Covisint has been approved. Another potential problem that may hinder Covisint is that it requires the three companies to share a great deal of company knowledge, which might be difficult for three rivals. 90

The third way that GM is transforming its business is by placing its internal processes online. Originally GM had different Web sites for its different types of cars; however, in 1999 the company decided to put all their Web sites under one organization. To streamline its relationships with dealers, GM created an agreement in May 2000 with Reynolds and Reynolds to move its dealers onto the network used by the GM Corporation. The goal of this restructuring was to "help simplify the mess of incompatible and redundant computer and communications systems at many dealerships, reducing costs overall. `I've got a discombobulated monster here and it keeps growing' said . . . [one] dealer . . . `I've got to get everything in one spot and on the Internet.'" 91 To handle other types of internal processes such as billing and expenses, GM used EDS, a systems integration company that it had once owned and subsequently divested. In November 2000, EDS launched an Internet system to handle billing and related services. Also in November, GM signed an agreement with EDS to manage its B2B and business-to-employee projects.92

The revenue growth and savings that GM executives predict have until now proved elusive, even in change adept companies like GE, 93 which may make it difficult for GM to meet its expectations.

Kodak is another company that is attempting to reinvent itself by shifting its products and services to the new economy. Through an emphasis on digital cameras and digital printing, Kodak is trying to transform itself from a "film dinosaur to digital powerhouse." Kodak's big dilemma is that while 80 percent of the company's revenue comes from traditional film products, that segment is growing at just 2 percent per year. One observer calls this "perhaps the most precarious moment in its 120-year history." To address this problem, Kodak has turned to digital cameras. In fact, Kodak CEO, Daniel Carp, "is betting the company on a digital strategy." Carp believes that digital cameras will increase sales by 8 percent to 12 percent a year. 94

However, Kodak faces some serious challenges to its digital strategy. Like GM, Kodak has had a history of failure in adopting new technology. Former CEO George Fisher claimed that in 1997 digital cameras would break even; however, the company could not follow through on this. Also, by pushing digital cameras, Kodak will in effect be hurting parts of its traditional business, as digital cameras eliminate the need for photographic paper. 95 Although the company is developing a way to counteract this problem, Kodak's entry into the digital world will definitely be difficult.

The examples of General Motors and Kodak illustrate how industrial companies are attempting to evolve to survive and hopefully thrive in the new economy. Some people are optimistic about what these companies can do with the Internet. They believe that "the true force of the Internet revolution will be felt only when large companies embrace it." 96 By contrast others see this as merely a replay of the past, specifically for companies like Kodak, Xerox, and GM that have failed before at transforming themselves. These companies are in a precarious position. They must find ways, as only GE has successfully done, to build new businesses faster than the decline in their traditional business. The problem is that the success they might have in growing new businesses is uncertain, whereas the decline of the traditional business is inevitable.

To succeed in becoming a hybrid company, business leaders must pay attention to the following principles:

  1. This is a difficult path to follow if the core business is losing money. The distractions of managing a failing business complicate the challenges of succeeding in a new one. Therefore, pursue the hybrid alternative before the core business deteriorates to crisis proportions.
  2. Start by introducing services that complement existing products and combine them into solutions.
  3. As services grow to sizeable proportions, treat them as an independent business rather than as an adjunct to the industrial core.
  4. While it is important to have internally differentiated management practices to respond to differences among the industrial and post-industrial businesses, provide linking mechanisms to integrate them.

Footnotes:

72. General Motors, Annual Report, 1999.

73. Dale Buss, "Wishing on an OnStar," Context, October-November 2000, p. 54.

74. Sandy E. Green and Nitin Nohria, "General Motors: Smith's Dilemma," Harvard Business School case study, 1993, p. 2.

75. Green and Nohria, "Smith's Dilemma," and Buss, "Wishing on an OnStar," p. 54.

76. MaryAnn Keller as quoted in Buss, "Wishing on an OnStar," p. 54.

77. General Motors, Annual Report, 1999.

78. Wall Street Journal, February 22, 2000, p. B23.

79. Wall Street Journal, November, 17, 2000, p. A4.

80. Wall Street Journal, November, 17, 2000, p. A4.

81. Wall Street Journal, February 22, 2000, p. B23.

82. Buss, "Wishing on an OnStar," p. 52.

83. Buss, "Wishing on an OnStar," p. 53.1.

84. Wall Street Journal, January 20, 2000, p. B18.

85. Wall Street Journal, January 18, 2000, p. B14.

86. Wall Street Journal, July 12, 1999.

87. Wall Street Journal, January 20, 2000.

88. Wall Street Journal, December 12, 2000.

89. Wall Street Journal, April 17, 2000.

90. Wall Street Journal, April 17, 2000.

91. Wall Street Journal, May 17, 2000.

92. "EDS Lands $1 Billion in New Business; IT Services Leader on Course for Another Record Contract Signings," PR Newswire, November 14, 2000.

93. Mark Roberti, "GE's Spin Machine," The Industry Standard, January 22, 2001.

94. Forbes, August 21, 2000, p. 106.

95. Forbes, August 21, 2000, p. 106.

96. "The House that Jack Built," Economist, September 18, 1999, p. 25.

Excerpted with permission from "Changing Fortunes: Remaking the Industrial Corporation," John Wiley & Sons, Inc., 2002.

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