GM will file bankruptcy next week ("GM reaches swap deal, but bankruptcy still lies ahead" Marketwatch). It's likely historians will look back on this event as a major turning point in the change away from an industrial world (away from making money on "hard" assets like factories). GM was considered invincible. As were all the auto companies. The reorganizing of Ford, and bankruptcy of Chrysler will be remembered, but not likely with the impact of GM filing bankruptcy. Pick up any book on America post WWII and you'll find a discussion of General Motors. The quintessential industrial company. Destined to live forever due to its massive revenues and assets. After next week, history books will change. Altered by the previously unimaginable bankruptcy of GM. If "What's good for GM is good for America" is no longer true, what does it mean for America when GM declares Bankruptcy?
None of America's car companies will ever again be strong, vibrant auto companies. They are in the Whirlpook and can't get out. It's simply impossible. GM is now worth about $450million (at current prices of about $.80/share). It already owes the federal government $20billion – which is supposed to be converted to equity, with more equity owned by employees and converted bondholders. For most of the time since the 1970s, the average value of GM has been only $15billion (split adjusted average price $25). To again become viable GM wants the government to increase its investment to $60billion ("GM bondholders may recoup $14Billion" Marketwatch.com. That means for GM to ever be worth just the amount being supplied by the government bailout it would have to be worth $116/share – which is $20/share more than it was worth at its peak in the market blowout of 2000! (Chart here).
That means it is impossible to conceive of any way GM could ever be successful enough to achieve enough value as a car company to repay the government – and thus it has no future ability to provide dividends to private investors. Even though GM says it will be repositioned to be healthy, that simply is not true. It's no more healthy or attractive than Quasimodo, the hunchback of Notre Dame, could have ever hoped to be – or the elephant man. Helping them is charity, not a business proposition. When a company has no conceivable hope of making enough money to repay its investors it cannot attract management talent, or additional capital as assets wear out, and it eventually fails. It won't be long before the people running GM realize their future are as bureaucrats in a non-profit – but with far less psychic value than working at, for example, the Red Cross.
Meanwhile, Chrysler is downsizing dramatically as it looks for its way out of bankruptcy. As it tries to give the company to Italians to run, the company is dropping obligations it has carried for years. Even the venerable Lee Iacocca, who literally saved the company 20some years ago, will lose his pension and even his company car ("Iacocca losing pension, car in Chrysler bankruptcy" Reuters).
Ford, which restructured before this latest market shift, has not asked for bailout money. But its market share is dropping fast. Its vendors (including Visteon) are going bankrupt and Ford is guaranteeing their debt to keep them in business – with an open-ended cost not yet reflected in Ford's P&L. Even though it restructured, Ford's balance sheet is shot ("What About Ford?" 24/7 Wall Street). It has no money to design a new line of competitive vehicles.
None of these 3 companies have the wherewithal as operating businesses to replace assets. And they are competing with Japanese, Korean and Indian companies that have lower operating costs, lower fixed asset investments, higher quality and newer product lines, better customer satisfaction rates, higher profits and stronger balance sheets. Without competition it's hard to expect America's car companies to do well. When you look at competitors you realize this game can still have several more moves (especially with market intervention by government players with public policy objectives) – but the end is predicatable. Only for reasons of public policy, rather than business investment, would you continue to fund any of these American competitors.
Even though the switch from an industrial economy to an information economy began in the 1990s, historians will likely link the switch to June, 2009. (I guess that's fair, since the shift from an agrarian economy to an industrial economy began in the 1920s but wasn't recognized until the late 1940s.) Just as GM was the company that epitomized the success of industial business models, it will be the company that becomes the icon for the end of industrial models. It failed much faster, and worse, than anyone expected.
If "What's good for GM" (as in the government bailout) isn't good for America any longer – what is? For many people, this is shift is conceptually easy to understand – but hard to do anything about. They don't know what to do next; what to do differently. They fully expect to continue focusing on balance sheets and assets and the tools we used to analyze industrial companies. And those people will see their money drift away. Just like you can't make decent returns farming in a post-agrarian economy, you won't be able to make money on assets in a post-industrial economy. From here on, it's all about the information value and learning how to maximize it. It's not about old-style execution, its about adaptability to rapidly shifting markets built on information.
Let's consider CDW – a 1990s marvel of growth shipping computers to businsesses around America. CDW has pushed hardware and software onto its customers for 2 decades in its chase with Dell. But every year, making money as a push distributor gets harder and harder. And that's because buyers have so many different sources for products that the value of the salesperson/distributor keeps declining. Finding the product, the product info, inventory, low shipping and low price is now very easily accomplished with a PC on the web. Every year you need CDW less and less. Just like we've seen distributors squeezed out of travel we're seeing them squeezed out of industry after industry – including computer componentry. If CDW keeps thinking of itself as a "
;push" company selling products – a very industrial view of its business – it's future profitability is highly jeapardized.
The market has shifted. For CDW to have high value it must find value in the value of the information in its business. Perhaps like the Chicago Mercantile Exchange they could create and trade futures contracts on the value of storage, computing capacity or some other business commodity. The information about their products – production, inventory and consumption – being more profitable than the products themselves (everyone knows more profit is made by Merc commodity traders than all the farmers in America combined). Or CDW needs to develop extensive databases on their customers' behaviors so they can supply them with new things (services or products) before they even realize they need them — sort of like how Google has all those searches stored on computers so they can predict the behavior of you, or a group your identified with, before you even type an internet command. CDW's value as a box pusher is dropping fast. In the future CDW will have to be a lot smarter about the information surrounding products, services and customers if it wants to make money.
A lot of people are very uncomfortable these days. Since the 1990s, markets keep shifting fast – and hard. Nothing seems to stay the same very long. Those trying to follow 1980s business strategy keep trying to find some rock to cling to – some way to build an industrial-era entry barrier to protect themselves from competition. They try using financial statements, which are geared around assets, to run the business. Their uncomfortableness will not diminish, because their approach is hopelessly out of date. GM knew those tools better than anyone – and we can see how that worked out for them.
To regain control of your future you have to recognize that the base of the pyramid has shifted. How we once made money won't work any more. Value doesn't grow from just owning, holding and operating assets. Maximizing utility of assets will not produce high rates of return. We are now in a new economy. One where outdated distribution systems (like the auto dealer structure) simply get in the way of success. One where a focus on the product, rather than its use or customer, won't make high rates of return. With the bankruptcy of GM reliance on the old business model must now be declared over. We've entered the Google age (for lack of a better icon) – and it affects every business and manager in the world.
The future requires companies focus on markets, shifts and adaptable organizations. Successful businesses must have good market sensing systems, rather than rely on powerful six sigma internal quality programs. They have to know their competitors even better than they know customers to deal with rapid changes in market moves. They have to be willing to become what the market needs – not what they want to define as a core competency. They have to accept Disruptions as normal – not something to avoid. And they have to use White Space to learn how to be what they are not, so they remain vital as markets shift. So they can quickly evolve to the next source of value creation.