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November 18, 2008

Bail Out GM? No Way

Rita McGrath
Associate Professor, Management
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We’ve been down this road before, and seldom has the ending been pretty. General Motors and the other American carmakers are textbook cases of what one of my colleagues famously called “permanently failing” organizations. The syndrome of permanent failure afflicts supposedly for-profit organizations that create no economic value or that even destroy economic value. This syndrome often persists because a coalition of stakeholders comes to value the organization as an organization — as an institution — and its survival becomes an end in itself. The webs connecting the entities that benefit from the company’s ongoing existence are so strong that they dominate all decision making. GM, depending on whose analysis you read, is widely recognized as having destroyed billions of dollars in economic value, and it has been unsuccessful in its half-hearted efforts at transformation since at least the 1970s.

What seems to be killing the company is a giant-sized version of the same self-inflicted wounds that get in the way of innovation and change at many large organizations: coalitions of value-chain partners; legacy agreements that lock in decisions that made sense in another era but no longer do; and leaders who are so embedded in a given thought world that they find it hard to move to a new model. These issues are frequent topics in our executive course Leading Strategic Growth and Change, in which a key theme is determining how to get your organization to not end up like GM by making necessary innovations and continuously changing as your world evolves.

This is not to say that GM hasn’t had its better moments. Its OnStar system is a textbook example of how to get innovation right, and the popularity of GM’s products internationally speaks well to its ability to produce cars and trucks that significant numbers of people want to buy. The problem is that the bulk of the organization remains unchanged, largely because those who would suffer from any such change conspire to keep things as they are.

So what is to be done? Clearly, a bailout is only going to prolong the death agonies. A bailout will do nothing to unwind the web of dependency relationships that are a huge part of GM’s trouble. Indeed, read any proponent of the bailout’s justification and you’ll hear all about the harm a GM bankruptcy would do to workers, suppliers, counterparties and other interested parties. I’ve yet to read one, however, that refers to the irredeemable loss to GM’s loyal customers, save those that argue that customers will have difficulty finding replacement parts in the future.

Somehow, the road to redemption is for the company to start unwinding the coalitions that trap it in its current situation. A bankruptcy could be a start. So could a slash-and-burn acquisition, though that hasn’t seemed to help Chrysler much. I’m not wild about the idea — who could be, considering the economic carnage it would likely create? The problem is that unless GM feels a compelling need to change, things are highly likely to stay pretty much the same, as they have done for decades, in spite of clear evidence that things are not working well from an economic perspective. As Peter Drucker once said, “The purpose of a business is to create a customer.” GM has not fulfilled that purpose very well.

Where public money could usefully go is toward lessening the pain for stakeholders, ameliorating the damage to innocent bystanders and helping with social adjustment costs. Without a fundamental transformation, the endgame can only be delayed, not avoided entirely.

Photo credit: MacQ

Comments

by Philip Kallerman | November 19, 2008 at 9:24 AM

Dear Rita, What you say may be true -- but you need to look at this business much more holistically and the evidence of what you are talking about is not yet in, given the cyclicality of this business. I don't think you can have enough perspective to know the things your article suggests you do. The facts are that the demographic peak of GM's workforce was around 1955. That means it is just now passing its peak for deaths of their current and former workforce. What you don't seem to appreciate is the extremely long-cycle nature of this business (e.g. 25+ years). Remember the average car is on the road for 13 years so we're really only 2 cars away from 1980 and 5 generations from 1955! When it comes to these companies. Their turnaround is pretty speedy in that context. At this point this country has a choice either (1) take on the liability and fund it on the Federal balance sheet and shut the company down or (2) keep the company alive, let them finish the restructuring they've started even if it takes another few years and have the company (and the US auto buyer) cover the cost of those pensions. It's too early to say these companies are failing -- they've generated tremendous amounts of cash over the last 20 years that have gone to support the US government by way of not having to fund all those pensions so as a taxpayer you should be so happy that it't taken this long and that they are asking for so little. The Net Operating Losses alone are worth more than the bail-out -- do you really want to give that to vulture investors?

by dickson | November 19, 2008 at 9:27 AM

Very well put. I really like the point about making it an organization instead of a business for profit.

by Partha Mohanram | November 19, 2008 at 12:09 PM

I cannot disagree more with this article. Why were none of these arguments used in the bailouts of the financial sector? Because of their fraudulent accounting, over-leveraging and off balance sheet shenanigans, many of them appeared to be much more "innovative" than they really were. Much of their innovation had to with how to beat the regulations, how to fool the markets with the most complex financial engineering. Case in point is the whole CDS market as well as the securitizations that occured. Creating, or should I say, conjuring AAA securities out of what should have been junk bonds. Back to the Big 3. I am no apologist for GM and the rest of them. If GM, Ford and Chrysler get any bailout money, there should be string attached. First - top management has to go. Second - equity has to get wiped off - this is about protecting the economy and the workers, not shareholders. Third - the unions as well as retirees have to accept cutbacks even on previously agreed commitments, as absent the bailout, the companies would go to Chapter 11 and renege on these anyway. Maybe they can create a chapter 10.5 just for this case - with specific powers of renegotiation with respect to pensions and retiree healthcare benefits. There is some merit in the arguments of the Big 3 that they deserve the bailout money. Their quality has rebounded considerably. They have made innovative new products recently - the Ford Freestyle is one example. They are at the forefront of many technologies - the Chevy volt has the potential to be a game changer. It fits in very well with Obama's green initiative. I agree that Big Auto needs to change its ways, but no more so than Wall Street does or did. If we dont bailout the auto industry, what signal are we sending? Rich people losing yachts in tony north eastern states will be bailed out. Middle class workers in rust belt states do not matter.

by jason | November 19, 2008 at 3:09 PM

Bailing out the auto industry will not be a good message to the American public. Congress will send a message that irresponbility and lack of effort should be rewarded. If we can afford to bailout these automakers, we should do the same with the citizens. So to prevent this precendent from occuring, let just let the automakers fail to prove that accountability must be taken

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