GM: What Went Wrong and What’s Next

For decades, General Motors reigned as the king of automakers. What went wrong? We asked HBS faculty to reflect on the wrong turns and missed opportunities of the former industry leader, and to suggest ideas for recovery.
by Staff

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.