The Homa Files

Lots has been reported, and everybody has their point-of-view re: why GM slid from arguably the best run company in the world to bankruptcy.

Ken’s Take: the situation boils down to 3 critical mistakes: (1) making fatal concessions to the UAW in the 1970s (2) cost-cutting brands via shared models  (3) failure to leverage the Saturn brand. 

Each in turn …

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(1) Making fatal concessions to the UAW in the 1970s

The issue: GM signed generous labor deals during the 1970s, including the right to retire after 30 years with full pension and benefits, partly because it believed the contracts would cripple its smaller competitors, Ford and Chrysler. Then along came Honda, Nissan and Toyota, which didn’t have to deal with labor contracts at all. That was the beginning of the agonizing decline.
http://online.wsj.com/article/SB124389995447074461.html

Ken’s Take: It’s popular to castigate the GM management as insular and weak-kneed.  But, in the early 1970s, GM had a commanding market share and the Japanese brands were starting to gain traction with serious cars (i.e. stepped up from the early, cheap compact models).  The UAW picked GM as its target company in negotiations, got militant and threatened to strike.  A strike at that time would’ve given the Japanese brands a clear shot at accelerating their market development efforts.  And, at the time, healthcare was relatively inexpensive and pensions were seemingly a long way off.  So, management caved – making a largely unretractable and unsustainable deal with the union.

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(2) Cost-cutting brands via shared models 

The Issue:

While Henry Ford invented mass manufacturing, GM’s long-time president and chairman of the board, Alfred P. Sloan Jr., developed mass marketing: a “car for every purse and purpose,” as he put it in the company’s 1924 annual report. This meant a hierarchy of brands ranging from practical Chevrolets to prestigious Cadillacs.  GM’s strategy of offering a multiplicity of brands started to fray in the 1980s. To cut costs, GM began stocking its makes with nearly identical cars. That blurred the differences between brands and made it hard for consumers to tell a Chevy from a Pontiac or a Buick.
http://online.wsj.com/article/SB124390025302374483.html

Ken’s Take: Using multiple brands to niche a market is a common strategy – and one that was very successful for GM over decades.  The problem: each brand needs critical mass – enough “scale” to justify the separate overhead structures (think brand-specific plants, separate R&D centers) and to support cost-effective production.  As GM lost share to the foreign brands, their scale economies deteriorated – lower sales in aggregate and by brand.  Rather than dropping brands, GM tried to cost reduce itself out of the problem – taking product quality risks and marketing tweaked models (with shared components) under different brand names.  The result: a blurring of brand images that undermined the niche strategies.

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(3) Failure to leverage the Saturn brand

The issue: To confront the rising threat from foreign auto makers, GM in 1985 created an entirely new brand, Saturn, at a cost of several billion dollars. It was set up as a separate car company whose mission was to win back customers who had defected to foreign makes.
http://online.wsj.com/article/SB124390025302374483.html

Ken’s Take: I differ with most pundits on this one.  They generally say that introducing Saturn was a blunder and good riddance to the brand.  I think Saturn was a brilliant concept that was simply underleveraged.  Again, think back in history.  GM was trying to develop a radically new brand –- produced in Japanese-like factories (i.e. quality oriented with fewer union constraints), sold through a separate “no haggle” dealer network that promoted product not price,  and supported with cult-like marketing (think Harley Davidson).  Initially, Saturn was a huge success – remember the much ballyhooed customer picnics at the Tennessee manufacturing plant.  But, there wasn’t a second wave of product to sustain momentum. Rather GM started dumping tweaked models into the Saturn line too. 

I think Saturn was  the platform for GM’s future, but they blew it – homogenizing it back into the GM operations and mindset. 

In fact, I’m surprised that the Saturn brand isn’t being retained to market eco-friendly Obamamobiles.  I bet the brand name still has some cachet, and a standalone dealer network – experienced in selling product not price — could be route for selling electric cars.

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That’s my take …

KEH

This entry was posted on June 3, 2009 at 7:59 am and is filed under Autos - Travel, Obama Administration. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.