June 01, 2009

Wasting a Good Crisis

A great American institution has died. Mark June 1, 2009 as the tragic end of the General Motors as a viable entity. Like a grade B movie wending toward its inevitable conclusion, thirty years of management insularity and incompetence at General Motors led to Monday´s bankruptcy filing.

GM will emerge from bankruptcy in some form, but it will never again be the king of the road that once produced one out of every two automobiles on American highways.

Italian philosopher Nicolo Machiavelli once advised his followers, “Never waste the opportunities offered by a good crisis.” For three decades General Motors management refused to face the reality that its autos were not competitive with foreign vehicles. This led to steady loss of market share, triggering a series of crises. The latter were always treated as short-term events to get through, rather than as opportunities to transform the company. Rather than acknowledge its mistakes, management preferred to blame external factors and hope that halfway measures, passage of time, or government protection could solve its problems.

Avoiding reality never works. At the outset of a crisis, leaders have many options they can deploy to address their problems. Like the early spotting of a cancer tumor in one´s body, early action to surgically remove the problem can enable the body to get healthy once again.  Over time, the options narrow or wither away. Then management is forced to ask someone else to save it.
In GM´s case, that “someone” has always been the U.S. government. By failing to take decisive action, GM management saw its options narrow to one: asking the U.S. government to save it. When in trouble, GM executives boarded their company planes to lobby the U.S. government to bail the company out.

Past efforts included imposing import quotas on foreign-made vehicles, fighting against safety improvements such as seat belts and air bags, delaying federally-mandated increases in fuel efficiency, or lobbying the government to take over its health care benefits. GM had powerful allies in these campaigns, including the United Auto Workers and Michigan politicians.

For a poignant example, recall 1981 when GM management convinced the U.S. government to restrict imports of Japanese-made vehicles to prevent them from taking market share. Rather than seizing on this golden opportunity to recapture share and invest in more competitive cars, GM used the reprieve to raise prices and restore flagging profit margins. When import quotas were removed, GM was even less competitive with foreign-made vehicles. Its market share continued to decline from its 1970s peak of 51 percent of the American market to only 19 percent today, as GM ceded share to the Japanese, Germans and other foreign producers.

Six months ago fast action by the GM board could have saved the company.  Last December I proposed a plan to save GM by splitting it into two companies, a dramatically down-sized but healthy GM and one to be liquidated (See wsj.com, 12.15.2009: “Bill George: A Plan to Save GM”). The latter company would have contained fifty years of obligations that GM could no longer fulfill. But management once again wasted this crisis, and the inexorable march to Monday´s bankruptcy continued unabated.

Anyone who ever doubted the importance of leadership in a crisis should compare the fates of General Motors under CEO Rick Waggoner and Ford under CEO Alan Mulally. Mulally was recruited from Boeing by the Ford board in 2006, becoming the first outsider to lead either GM or Ford.

Three months after joining the company, Mulally announced that Ford would mortgage all its assets for $23.6 billion in loans to finance an overhaul of the company.  Mulally claimed the loans would give Ford “a cushion to protect for a recession or other unexpected event.” Mulally´s actions saved the company, avoiding the requirement for government bailouts. Today Ford is operating as an independent company, focusing on upgrading its fleet and endorsing President Obama´s proposed fuel efficiency and emission standards.

Thanks to Stephen Rattner, who became Obama´s auto czar in March, General Motors´ long march to bankruptcy has been relatively orderly. He removed Waggoner and promoted Fritz Henderson to CEO and named Kent Kresa as board chair. Rattner has negotiated evenly handedly with the unions, bondholders, and other claimants to prepare for a quick trip through the bankruptcy courts. However, if GM management had taken control of its destiny last fall by splitting out the healthy parts, it could have avoided bankruptcy altogether.

Now begins the agony of finally breaking GM into pieces, shedding unnecessary employees and entire brands, and salvaging whatever is still viable.  Meanwhile, GM´s loyal customers are likely to switch to Fords or made-in-the-USA foreign brands and find them to their liking.

The lessons from this tragedy are all too evident: leaders are paid to build healthy enterprises by facing reality and using crises to strengthen their competitive position. Three decades of GM leaders failed this basic test, and millions of lives are being negatively impacted.