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Management Report

Management reports, briefs and video-clips issued by Samsung Economic Research Institute

Causes and Lessons of General Motors' Collapse

Causes and Lessons of General Motors' Collapse

BOK Deuk-Kyu

July 27, 2009


Welcome to our video program. I’m Deuk-Kyu Bok from the Technology & Industry Department.

As you may know, on June 1, 2009, GM filed for bankruptcy protection. Since its inception in 1908, GM was acclaimed one of the world’s best companies of the 20th century in both quantitative and qualitative terms. GM kept the top spot in global car sales for 77 years and introduced many high-level management practices such as the divisionalization, performance-based evaluation, multi-brand strategy and annual model change strategy. Management guru Tom Peters even used GM as a role model for his book “In Search for Excellence.”

Then why did such a successful business fail? Today, we’ll take a close look at what caused the collapse of GM and what can be learnt from its failures.

First, GM established a product portfolio that was very susceptible to an economic crisis. GM was hit the hardest among major carmakers during the recent sharp decline in global car sales, suffering a 46.9% plunge in sales in the first quarter of this year, much higher than the 20%-range of Volkswagen, Fiat, and BMW.

GM’s product portfolio consisted mainly of mid- and large-sized SUVs and pickup trucks, all featuring heavy oil consumption and high prices. Given that automobile consumers tend to be more sensitive to product prices and oil consumption during a recession, GM’s product portfolio failed to meet the consumers’ needs.

Second, GM failed to achieve product and quality innovation. Since failing to enter the US market in the 1950s, Toyota has gone all-out to further improve its quality and productivity, aimed at establishing a presence in the US car market. Thus was borne the famous Toyota production system. In contrast, GM stuck to its old-fashioned, incompetent mass production system. As a result, GM’s productivity fell far behind that of Toyota with GM’s per-car assembly time estimated at 26.8 hours in 2000, 5.2 hours longer than Toyota’s 21.6 hours.

However, the bigger problem facing GM was quality control. The number of defects found in GM cars within three months after purchasing was higher than the industrial average, indicating that the quality of GM cars lagged behind those of its Japanese rivals. Under this backdrop, consumers turned their backs on GM as its cars were higher in price but lower in quality compared to imported cars, particularly from Japan.

Third, GM was burdened with massive legacy costs. GM’s hourly wage and benefit costs stood at US$74, much higher than Toyota’s US$48 and Hyundai’s US$40. This gap stemmed mainly from the difference in medical insurance costs. Unlike Toyota and Hyundai, GM offered medical insurance benefits not only to incumbent employees but also retired employees and their families. The amount of medical insurance benefits paid by GM per car stood at a whopping US$1,904, which, eventually, led to the increase in production costs.

Last, GM relied too much on past successful business models. GM was egotistical and habitually reliant on the belief that past success formulas would continue to work in the future. Even in sales promotion events, GM ignored changes in consumer preference and appealed only to the past when they were at their peak. For example, at the Dream Cruise event, which is held annually in Detroit, GM focused on displaying famous 20th century cars such as the Cadillac, Studebaker, and Corvette, aiming to revive its past glory which allowed young future consumers to reaffirm the fact that GM was an old brand for the older generation.

In summary, everyone, including management, labor, financial institution and the government, was responsible for GM’s collapse. The executives, for example, pursued an easygoing management structure, neglecting to strengthen core competitiveness. The employees were engrossed only in gaining more benefits despite the tough market situation. And the financial industry and government delayed their decisions on restructuring GM due to concerns over the economic ripple effect.

What should businesses do to avoid GM’s fate? They should make self-innovation the No.1 priority. Without resting on past glories, they should try not to have a laid back attitude and make more effort to adapt themselves to the fast-changing market environment.

They have to further strengthen core competitiveness. They must identify the core capabilities that need to be strengthened and develop them as planned. One step back in core areas provides competitors with an ideal opportunity to attack.

They also should develop a long-term growth strategy to simultaneously pursue growth and profit. In this sense, they should pursue win-win restructuring and expansion of the social safety net.

Despite having many point out its problems in the past, GM had to eventually file for bankruptcy protection since it lacked the power to execute. The last lesson we need to learn from GM’s failure is that businesses should develop the power to execute. When a problem occurs, businesses should take instant action to address it.

Thank you for watching. I’m Deuk-Kyu Bok.

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