by Adam Hartung | Oct 5, 2009 | Current Affairs, Defend & Extend, Disruptions, In the Whirlpool, Leadership, Lifecycle, Lock-in
"Saturn Done in Four Months" is the Autoweek.com headline. The next time somebody brings up the short life cycle of tech products, remember Saturn. GM started the company, grew it, and now is shutting it down on a timeline that roughly corresponds with the life of Sun Microsystems. Clearly manufacturing companies can do just as poorly as techs.
When Penske lost itsmanufacturing deal, the purchase of Saturn fell through. And GM leadership can't wait to clear out inventory. Production has already stopped. Soon, the products and dealers will disappear. Along with the brand name. Another experiment that failed. So it is very important our post-mortem teaches us the right lessons from Saturn.
I was appalled when Harvard Business School Publishing posted "Why Saturn Was Destined to Fail." According to the author, Saturn was an anchor that drug down a hurt GM!!!! Reporting that the successful Saturn launch came at the loss of $3,000 per car sold (a new factoid I've never before heard), he claims that GM should have been more focused on fixing its old business. The implication is that GM wasn't trying to fix its old business, instead being diverted by the very successful operations at Saturn! Pretty illogical. GM was doing everything it could to compete, but improving its old Success Formula simply wasn't enough given the market shifts already in place. To meet changing market requirements GM needed to develop a new Success Formula, and that was the purpose of Saturn!
Saturn was the best chance GM had to succeed! The Success Formula at Chevrolet and the other GM divisions had been created in the 1950s when GM dominated the industry. But by 1980 the market had shifted dramatically. Design cycles had dropped, customer tastes had changed, production methods had moved from long assembly lines to just-in-time, quality requirements were redefined and rising, and impressions of auto dealers had tanked. Saturn was established to teach GM how to compete differently.
The reason Saturn lost money had everything to do with accounting. GM forced all kinds of costs onto GM – which were not representative of a normal start-up. Without those costs, Saturn would have been much leaner and profitable. Further, after Saturn proved it could move faster and outsell expectations, GM quickly moved to force Saturn to act like other GM divisions. Forced sharing of components severely hampered the design cycle and flexibility. Union contract consistency pushed Saturn into old employee agreements which the union had previously agreed to wave. And forcing Saturn to allow traditional GM dealers to sell the Saturn brand tarnished the changed customer relationship Saturn worked hard to create.
When Roger Smith created GM he set it up seperately. His scenario of the future demanded GM figure out a new way to compete. Saturn, was a White Space project with permission and resources to figure out that new way. But Chairman Smith did not Disrupt the old GM auto management. He did not replace the Division presidents with leaders from EDS or Hughes (businesses he had acquired) who were willing to move in a new direction. He did not change the resource allocation system to give Saturn more clout over its own decisions and those at other divisions. Thus, when he left the larger divisions moved fast to change Saturn into their mold – rather than vice-versa. Instead of Chevrolet learning from Saturn, Saturn managers were forced to adopt Chevrolet practices.
Saturn proved that even a stodgy, Locked-in company can use White Space to develop new solutions. And it also proved that if you aren't willing to Disrupt the old Success Formula – if you aren't willing to attack old Lock-ins – White Space (regardless of its success) is unlikely to convert the company into a better competitor. The lesson of Saturn is NOT that it diverted GM's attention, but rather that GM was unwilling to Disrupt its Success Formula to learn from Saturn.
As investors, the question is pretty easy. Would you rather own Saturn, Pontiac and Hummer – the divisions of GM that had loyal customers and some reputation for innovation, quality and customer satisfaction – or Cadillac, Buick and Chevrolet? Would you rather have businesses that are looking forward with early plans for hybrids, and exciting cars like the G8, or a high volume business in cars that most people find ho-hum, at best? Do you want designers that take chances and bring out cars quickly, or that move slowly seeking the "lowest common denominator" in design? If you were an entrepreneur, would you rather be given pemission to lead Saturn, or Chevrolet?
Learning the right lessons from Saturn is important, or else our business leaders are doomed to repeat the GM mistakes. If you don't challenge your Success Formula, White Space project will be met with great resistance by the organization. They will be saddled with unnecessary costs and requirements that strip them of permission to do what the market demands. And they will not achieve the goals which they established to accomplish, including acting as a beacon for migrating a business forward.
For a deeper treatment of this topic please download the free ebook "The Fall of GM: What Went Wrong and How To Avoid Its Mistakes."
by Adam Hartung | Jun 6, 2009 | Uncategorized
"GM reaches deal to sell Saturn to Penske" is the latest GM headline. Although the management at GM could not figure out how to run a profitable Saturn, it has very quickly sold the business. And within a week of selling Hummer to a Chinese company. Sounds like a combination of low pricing, and better skills at hiring investment bankers than running a business.
The biggest lesson we can learn from this is that GM was so Locked-in to its old Success Formula that it was frozen in place, unable to take actions that would allow GM's revenue and profit to grow. After years of doing nothing more than layoffs, GM was able to find buyers for 2 of its 3 semi-autonomous divisions almost immediately. In other words, if GM management had to change to fix GM the team would rather fail — wiping out the shareholders, most of the bondholder value, and eliminating thousands of jobs – and sell assets (at a significant loss) than change. Rather than Disrupt and use White Space to create a new GM, management preferred to declare bankruptcy, beg for billions in aid (like some impoverished third world starving nation such as Bangladesh), and give away assets in an effort to preserve the Success Formula they believe in – but which failed in the market. These leaders have shown they don't care about anyone or anything more than they care about trying to Defend & Extend the GM legacy – Cadillac, Chevrolet, Buick and GMC. This management doesn't want GM to succeed, they want to wind back the clock, and they'll try anything possible to see if they can make it happen.
They can't. The clock won't rewind. And GM's management is demonstrating why they should not be allowed to run any company – much less a major auto company. Nor should you trust them to watch your dog – much less trust them with $60billion in financing. Trying to preserve the past will only prolong dismal results. They will not repay this money.
So what about Saturn? Some think this acquisition, coupled potentially with the new ownership of Hummer, marks another shift in the auto industry. In "Putting GM's Saturn on a different orbit" the Marketwatch commentator indicates that we may be seeing a shift away from an industrial model of manufacturers pushing cars onto dealers. Since Penske owns many dealerships, he thinks these new independent labels may let the dealerships take the lead. Manufacturing will have to respond, through a network of manufacturers something like Nike uses, to the retailers – who will be much more in touch with the market.
From the pixels displaying these articles to God's ear, paraphrasing an old maxim. It would be wonderful if both Saturn and Hummer, and the soon to be independent Saab, were driven by market requirements rather than internally entrenched management trying to Defend & Extend old practices. If they are, the odds are good that they'll push the losses at the remaining GM much higher, much faster than the management team (and probably the government overseers handing them money) expect.
But it does beg the question, if it's so easy to sell these divisions why doesn't the government simply dismantle GM and sell everything? These are supposedly the smallest, least viable parts of GM. And they are selling incredibly fast. Instead of these "one-off" sales, happening at distressed prices to buyers with little competition, why not create an open market to sell everything? Obviously the only way to get rid of the terrible GM leaders is to sell the business out from under them, leaving them with nothing to do. So, instead of handing these incompetent GM leaders another $40B, why doesn't the government turn over assets to the investment bankers and tell them to maximize the value of a sale? Create a bunch of bidders for the various assets (less toxic than nothing-down mortgage securities), ala the intent of bankruptcy law, so that people with new ideas (like Penske) can acquire these assets and use those ideas and innovations to convert the brands, product lines, supply chains and manufacturing plants into something more valuable?
In a sale, a new buyer could purchase plants to redeploy for windmill production, for example. A GMC buyer could attempt to converting the brand into a competitor of Caterpillar Tractor or Komatsu. Chevrolet might have better life as a U.S. motorcycle company. Someone might want to turn Cadillac into an airplane company. As crazy as these ideas sound, don't forget that Honda has entered airplane production and shows every sign of succeeding. We know that running any part of GM like it used to be run will not work. So why not give the innovators a shot at these tangible and intangible assets on the open market? Wouldn't you rather see someone new, like the team at Penske Enterprises, try to do something with the rest of GM – rather than leave it in the hands of the people who say they need another $40billion to keep it alive. Ever heard of the term "cut your losses"?
Those who listen to markets survive – even thrive. That's what creates optimism about the future of Hummer, Saturn and Saab. The concept that new owners will utilize new market-based scenarios with clear understanding of competitors to Disrupt these companies, then attack old Lock-ins in order to implement new behaviors, excites people. We can imagine these new leaders using White Space to convert the design, production and distribution processes into methods that give customers what they want when they want it – achieving profits as a result. After 3 decades of ongoing failure, we can't imagine the people running GM doing it.
We believed in Lee Iacocca primarily because he had been fired at Ford. He knew Chrysler was not well enough connected to customers – and that he was. This was a guy who would cut off the top of a production car with a skill saw in order to drive it around the block as a way to test relaunching convertibles. He wasn't afraid to develop cars people had never seen, like mini-vans, because he saw changes in customer needs. He wasn't afraid to Disrupt the status quo and he wasn't afraid of testing new technologies, new production processes and new markets. That's why he turned around Chrysler. And that's what it will take to turn around Cadillac, Chevrolet, Buick and GMC.
It's too early to really know if new owners will do the right things to make these fire-sale divisions into successful businesses. We have to look for the scenarios, Disruptions and White Space. But we know we won't see such behavior out of GM. If the government folks who are considering giving more money to GM really want to save jobs, grow the economy and keep the profit motive alive they need to pull back fast from funding this GM management team. Instead, use this immediate market input (from the dividion sales) to force the courts to bust up the rest of GM and sell it to someone who just might have a truly better idea.
by Adam Hartung | Apr 28, 2009 | Defend & Extend, In the Whirlpool, Innovation, Leadership
"Chrysler Avoids Bankruptcy as GM steps toward it" is the Marketwatch.com headline. According to the article, Chrysler has a deal to manage its debt while Ford has never been as close to the edge as its two brethren. But GM is trying to get bondholders to take a 60% value reduction AND exchange the bond value for equity value – which of course has no assurance and could easily go to zero. The bondholders are squawking, and it's unclear they will agree. Which would plunge GM into bankruptcy. Are the bondholders just greedy? Or do they see the chance of getting some of their money back better via liquidation?
Ford has some of the most popular and fuel efficient vehicles in the world. They just aren't sold in the USA. But they've long had high share in Europe, where Ford has built smaller cars with both diesel and gasoline engines that have met market needs. Now Ford is preparing to build and sell those cars in the USA, which would move them a lot closer to recent market shifts than the worn out Lincoln line and the renamed 500 (rebadged as Taurus under the guise of the name making all the difference.) These European cars offer an opportunity for Ford to Disrupt the U.S. market and regain a positive footing.
Meanwhile, Chrysler has some of the most innovative cars on the market. Its 300, Charger and Challenger cars use technology that allows V8 engines to shut off 4 when not needed – allowing them to achieve over 30 MPG in a "large" and "performance" format. Further, for those seeking safety and control, the 300 and selected other models are available in all wheel drive, which has been proven to be the #1 safety enhancer possible. And of great value in northern climates where foul weather (rain and especially snow or ice) makes driving treacherous. All included in dramatic styling that appeals to American consumer tastes.
But GM? "GM to focus on four keeper brands" is the MediaPost.com headline. Most GM innovation is concentrated in Pontiac, Hummer, Saturn and Saab. The first of these is to be closed down for sure, and the latter 3 either sold or closed. As the CEO says "the company will focus on four brands it defines as core: Chevrolet, Buick, Cadillac and GMC." Anytime the CEO of a failing company says he plans to save the place by "focusing on the core" and thereby cutting back to some aged part of the company RUN, RUN, RUN. The past is the past, and you NEVER regain it. Making these brands exciting is about as likely as making Holiday Inn a high-end hotel chain.
Think about it. Remember Izod with those alligators on the breast plate? Would you consider buying those shirts in Macy's? Or how about resurrecting Howard Johnson's as the place to stay and eat while traveling? Or shopping at KMart? Or taking instant photos on a Polaroid? When the market moves on, it's moved on. No business can recapture past profit levels by "focusing" on old brands and products that were once great. The clock never runs backward. T he market has shifted, and companies have to shift with it – not try to pretend "focusing on the core" will create profits simply because they are dedicated and focused.
It's Ford's offshore innovation that may save the company. It's Chrysler's engine, drive train and styling innovations that may save it. But GM is getting rid of anything that looks like innovation – and anything that might look like a Disruption or White Space. It has no hope of ever regaining market strength. It's plan is faulty, and won't work. Even if bondholders accept the swap of debt for equity, in short order GM sales will continue declining (as will profits), and there's no way bondholders can sell all that equity in order to recover their invested value in the bonds.
