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Under pressure from the Obama administration, General Motors’ Board of Directors fired current CEO Rick Wagoner (who has been working for $1 a year) and appointed Fritz Henderson, a finance expert who made his career mainly at GM’s bank, General Motors Acceptance Corp. (GMAC), and who specialized in restructuring and job cuts. Henderson’s pay will be $1.2 m. a year. Previously he was GM’s CFO and COO.  

His first statement was to say that GM might actually welcome bankruptcy proceedings.

For 65 years, GM was the world’s greatest, largest industrial corporation. Founded by management genius Alfred P. Sloan, who put together a random collection of car makers (Cadillac, Chevrolet, Pontiac, Buick, Oldsmobile) in the 1920’s, GM took on and defeated the incumbent, Ford, with beautiful cars, powerful engines, closed bodies and colors other than black. 

For years GM was run by managers who loved, lived, ate and slept automobiles. Then it fell into the hands of the bean-counters. Its fate was inevitable. When companies are run by those who manage by P&L, rather than by design, quality, speed, horsepower and engines — in fact, when any company is run by those focused on numbers rather than on product — it deserves bankruptcy.  

What is especially infuriating is that GM could have enjoyed a far better fate*. Some 24 years ago, on Jan. 8, 1985, then-GM head Roger Smith announced the founding of GM’s Saturn division. The goal? “Saturn is the key to GM’s long-term competitiveness, survival and success,” Smith said. Its mission: “to develop and produce an American-made small car that will be fully competitive with the best of the imports … [and] affirm that American ingenuity, American technology and American productivity can once again be the model and the inspiration for the rest of the world.” It was the same Roger Smith who “diversified” GM into robotics, space satellites, and data processing, buying Ross Perot’s EDS and Hughes Aircraft. Roger loved cars so much he shifted GM away from them. He and his predecessors turned GM from a visionary car company into a bank. They invested in everything but cars.

For years, GM made no money on making and selling cars, because its cars were in fact dowdy and terrible, in looks, performance and repair records, relative to Japanese imports. Instead, GM made all its money by lending money at 11 % to impatient car buyers, who wanted to drive home with their new car and yielded to “just sign here on the dotted line” to GM car loan peddlers. GMAC borrowed money at low interest, and lent it at high interest. This was GM’s real business. When the global financial crisis, rising interest rates and unfunded pension debt and health care debt lowered GMAC’s credit rating, boosting its interest costs, GM’s fate was sealed. 

saturnSaturn was to emulate Japanese quality, excellence and productivity. And it succeeded. GM’s Saturn division made great, dependable cars that rarely needed repair. It was GM’s first new brand in 70 years. People loved them. Tens of thousands of Saturn owners used their vacation days and flocked to Saturn’s plant in Spring Hill, Tennessee, 45 miles south of Nashville, to celebrate Saturn Homecoming. Ever hear of Chevrolet owners doing that? Paul Ingrasia reports:

In June 1994 more than 40,000 Saturn owners and their families trekked to Spring Hill for the first Saturn Homecoming. It was the sort of “cult car” gathering usually attended by owners of 385-horsepower Corvettes, not by people who had purchased 85-horsepower econocars. The Saturn owners were feted with factory tours, country-music concerts and barbecues with the people who actually designed and built their cars. After selling fewer than 75,000 cars in 1991, its first full year, Saturn sold more than 286,000 in 1995, and topped the respected J.D. Power Customer Satisfaction Survey.

In order to make Saturn innovative and different, GM built a fireproof impenetrable Chinese Wall between it and the other divisions. The reason? GM’s bean-counting anti-innovation dull-design bureaucracy would otherwise kill Saturn. Its cost-reduction standardization made Buicks look like Chevies, or Pontiacs, and its premium Cadillac began to look like a Hyundai.  Of course Saturn had to be insulated.

Problem was, if GM could not infect Saturn, neither could Saturn teach GM to make beautiful durable cars.  That Chinese Wall vaccinated Saturn from bean-counting infection, but also vaccinated GM from Saturn’s love of quality cars. Saturn is now being treated like the same toxic sub-prime mortgage assets GMAC bought.  

“This is a real tragedy,” says Prof. Saul Rubinstein of the School of Management and Labor Relations at Rutgers University, who coauthored a book on Saturn. The lesson for GM and its American rivals now struggling to stay in business, he says, is that when they launch daring innovations, they need the will and a way to ensure that those ideas don’t get drowned by the corporate mainstream.

General Motors deserves bankruptcy. The CEO’s who led it there — Roger Smith, Rick Wagoner, and now Fritz Henderson — deserve infamy. They earned tens of millions of dollars, in return for ruining a great company. They betrayed the memory of Alfred P. Sloan. They betrayed the trust of many thousands of hard-working car workers, who worked with pride and honor.  They do not deserve a cent of American taxpayers’ bailout money. They taught the world, and generations of MBA students, a key lesson. 

If you do not love your product, if you do not innovate, if you do not manage your product and instead manage your short-term bottom line, if you cut costs instead of creating value, you may pretend you are maximizing shareholder value, but what you are doing in fact is destroying long-term shareholder value and destroying jobs. Your behavior is not only bad management, it is morally wrong. You give management everywhere a bad name, a bad taste and a bad smell.  

There is no room for Saturn in GM’s future — because GM has no future at all, thanks to those who ruined a great company.  

_______________

*What follows is based in part on: Saturn was Supposed To Save GM, by Paul Ingrassia, NEWSWEEK, April 13, 2009.

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Last Wednesday, India’s Tata Motors delivered its revolutionary Nano car to journalists for a test drive, in Pune, India. According to Reuters journalist Nick Kurczewski, “the tiny Indian-built four-door manages to combine thrift, functionality and, shockingly, even a measure of driving enjoyment.” All this, for $2,000, or less than the cost of a stereo system on a Cadillac. 

But how? What is the formula for an innovation revolution?

First, vision. Tata Chairman Ratan N. Tata dreamed of a car affordable by Indian families, with a $2,000 price tag.  Second, a great team of engineers began to work, to make it happen. And third — subtraction. Take away unnecessary features that do not contribute value, but only add to cost.

The Nano has tiny dimensions. It is two feet shorter than a Mini Cooper. Its body and chassis are steel, while the bumpers are plastic. The round little car looks conventional, a bit like a turtle. Its aluminum engine has 32 horsepower, 624 cc’s, and two cylinders and is rear mounted. It goes from zero to 80 km. per hour in 16.4 seconds — not a Lamborghini, but not bad either. The Nano has a turning radius of 13 feet (4 meters) and can turn 360 degrees in its own shadow. You can fit four people into it, and even five in a pinch. The Nano weighs only 600 kgs. (about 1,300 pounds). 

Exactly a century ago, Henry Ford began building Model T’s. After making 15 million of them, the price fell to (in 1927 dollars) $500. I wonder if Tata is aware that the market launch of the Nano came 100 years after Henry Ford launched the Second Industrial Revolution. I wonder if the short-sighted credit raters at Standard & Poor — the same folks who, with Moody’s, brought you the subprime mortgage crisis — who downgraded Tata to B+ (below investment grade) know what pistons or distributors or engines are. I wonder if the overpaid folks who run Ford, GM and Chrysler are just a tad envious of the visionary Mr. Tata.

An article in the Times of London On-Line website by Emily Ford provides ten key rules for fostering innovation in the workplace — not just in high-tech startups. In these difficult times, challenging workers at all levels to come up with great new ideas can boost morale and boost revenues too.

1. Make innovation a top priority. Ford points out that “companies that generate 80% of their revenue from new products typically double their market capitalization over a five-year period.” In the global downturn, a common reaction is to hide in the basement and wait for the storm to pass. A pro-active approach — for instance, asking, “what will be our new hit products when the upturn begins and consumers resume spending?” — is far better.

2. Take risks and embrace failure. The global downturn has made everyone — managers, investors, savers, ordinary people — far more risk averse. To innovate, it must be recognized that failure is possible, or even likely. Celebrate failure, as a worthy attempt to succeed, in the same way you celebrate success. Ford cites an expert: “You have to give people the freedom to fail and to fail fast… that’s a real challenge in a risk-averse culture.”

3. Keep your people’s eyes on the future. Many organizations face a bleak future, as revenues collapse and layoffs mount. An innovation focus can fight this doom-loop spiral. Ford cites the following finding: “A study of internet banking in the United States looked at chief executives’ letters to shareholders between 1991 and 1995. Those with the highest percentage of sentences about the future introduced new technology the fastest.”

4. Foster creativity at all levels. Not all great ideas occur only to senior managers. Often, those who work at the ‘coal face’ (directly serving, facing or selling to customers) are best aware of changing market conditions and hence know how best to react to them. Challenge everyone in the organization to think hard about what they do and how they do it, and how it might be done better and differently.

5. Break the rules. Innovation is breaking the rules. Challenge your workers to first state what the ‘rules of the game’ are, for your industry (nearly all of these are unwritten and unspoken assumptions), and then, second, find ways to break them, to create value for customers. This does not imply, of course, breaking laws or ethical principles. We have had enough examples of that kind of behavior to last us several centuries.
 
6. Collaborate across boundaries. Innovation often involves cross-boundary thinking — linking a variety of disciplines. Get your accountants, marketers, salesmen, secretaries, everyone to talk to engineers, technicians — break company boundaries, in order to build new ideas.

7. Think global. Global geopolitics are rapidly changing in this time of crisis. Innovation may involve rethinking the geographies of your business. Where can we do business, profitably, that at present we do not? 
 
8. Act fast and keep refining. “Launch things early then get feedback,” the head of Google UK says. Or, as Guy Kawasaki has said, controversially, “ship, then test!”. You never know if an innovation will work, until you try it on a customer. Find clients willing to suffer a bit in order to try something really new. 

9. Cannibalise your own products. Use innovation to destroy your own products. If you don’t, your competitors will. Intel, for instance, perfected this strategy, introducing the 286 and 386 microprocessors to replace previous versions well before competitors could do so. Sony failed at this. They delayed introducing MP3 players, in order not to hurt Walkman sales, and lost a huge market.

10. Be ambitious. Even in a massive downturn, set high goals. “When this crisis ends, our new ideas and new thinking will enable us to emerge as market leaders.” Innovation has always sought not to gain a point or two of market share, but to make competitors and their business models irrelevant, as Gary Hamel taught us. Use your innovative vision to scoop up great people laid off by companies who can see no future and therefore will not have one.

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
April 2009
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