(Readers: Please note the blog about the 5th revolution in the US is constructed as a story. While not all chapters are linked, the story might be more meaningful by starting at the beginning.)

(Want a PDF version for Entries #1-10, #11-20, #21-30 formatted for tablets and e-books?  Entries #31-40 available soon.  Click links for download.  America’s 5th Revolution Volume I (Entries 1-10)America’s 5th Revolution Volume II (Entries 11-20)America’s 5th Revolution Volume III (Entries 21-30)

Scene: Jordan’s office with Matt, reporter asked by POTUS to help Jordan write story why GM was so successful and why it failed.  Report will be used as part of effort to rebuild US-based manufacturing.

Jordan:  “Ready for some more GM history under Sloan?”

reporter on typewriter clipartMatt:  “Have my coffee and ready to listen.”

Jordan:  “In addition to the financial discipline, Sloan segmented GM’s car lines.”

Matt:  “Segment in what way?”

Jordan:  “I know the term segmentation seems obvious today but it was not going on 100 years ago.  At the time there were 20 or more car manufacturers with a wide variety of products.

Matt:  “So GM had several brands at the time, didn’t It.?”

Jordan:  “Buick, which was really the cornerstone for GM, Cadillac and Oldsmobile.”

Matt:  “What about Chevrolet and Pontiac?”

Jordan:  “Chevrolet became part of GM in 1918.  Pontiac in the mid-1920’s.”

Matt:  “Saturn was when?”

Jordan:  “Saturn, Hummer, Saab are part of GM post 1980.  We’ll talk about those brands later.  For this paper we’ll skip some other GM brands – Oakland and LaSalle and all the brands sold outside the US – Opel, Vauxhall, Holden’s.  Including them will just confuse the issue.”

APSMatt:  “So under Sloan GM analyzes the car market, segments it and then decides on roles for the different brands.”

Jordan:  “Exactly.  What he…I mean GM…tried to implement was clarity.  Clarity so people outside the company knew what each brand stood for.”

Matt:  “And so people inside the company knew what each brand stood for.”

Jordan:  “You’ve got it.  Remember, at the time Ford was selling only the Model T.  GM models were higher priced so buyers needed to understand what each brand stood for and why it was worth more money.”

Matt:  “What was the segmentation strategy?”

Jordan:  “A car for every price and purpose.  The car market is still emerging.  Most of the segments we have today did not exist.”

Matt:  “Chevrolet covered the lower end.  Oldsmobile, Buick middle to lower upper end.  Cadillac the higher end.  Pontiac filled a gap just above Chevrolet.  Even before Pontiac, GM offered cars for most everyone.”

Jordan:  “Many buyers wanted to move away from the Model T one size fits all.  After owning a couple of Model T’s…that look identical to every other Model T…buyers wanted something different.”

Matt:  “Sloan’s segmentation is another idea that seems so simple.  How successful was it?”

Jordan:  “GM, actually Chevrolet, outsold Ford Motor Company for the first time in 1926 or 1927.  While I think Sloan was a genius, Henry Ford helped GM by sticking with the Model T too long.  During Ford’s changeover to the Model A, GM became the #1 seller.”

Matt:  “Did Ford bounce back and overtake GM?”

Jordan:  “Since then GM has outsold Ford nearly every year, if not every year.  GM was the #1 car company until 2008, when Toyota outsold it worldwide for the first time.  The companies have switched leads several times since.”

Matt:  “When was GM at its peak?”

Jordan:  “In the 1950’s and 1960’s, GM accounted for more 5 of every 10 cars sold in the US.  GM also has the #1 brand refrigerator and the #1 train locomotive.

S052050Matt:  “What?  GM had the #1 selling refrigerator and the #1 selling locomotive?”

Jordan:  “And to help finance cars, GM started a finance company – General Motors Acceptance Corporation.  In fact, GM was so dominant in so many areas the Federal government began an anti-trust investigation.”

Matt:  “What a change.  Anti-trust and too large to government bailout.  Hard to imagine what a machine they were.”

Jordan:  “That’s why POTUS wants this series of articles.  What lessons can we take away that can be applied today?”

Matt:  “So GM peaks in the 1960’s or maybe later and then starts to slide.  Did GM management quit following Sloan’s principles?”

Jordan:  “Yes but not all at once.  We’ll talk more about this later but in the early 1980’s the GM CEO declared that profitability was more important than market share.”

Matt:  “Doesn’t a company have to have market share to generate revenue…and profit?”

Jordan:  “Low market share leads to lower total profits.  The percent profit per car might look good but at the end of the day the stack of dollar bills is smaller.”

Matt:  “What was the rationale?”

Jordan:  “GM could ‘optimize’ earnings and shareholder value by focusing on selling only cars and trucks with certain profit.”

Matt:  “What happened to Sloan’s segmentation scheme?”

Jordan:  “Part of the plan to reduce cost was to reduce the differentiation between the brands.  Doing so would allow certain development costs to be spread over more cars…and customers would never know, or so they thought.”

Matt:  “With this plan, some programs that made Chevrolet different from say Pontiac would be reduced or eliminated.”

Jordan:  “Exactly.  The plan was that separation between Buick and Oldsmobile could also be reduced.  Even Cadillac would be affected.”

Matt:  “But some of this narrowing of brand differentiation started before the 1980’s.”

Jordan:  “True.  But if you look at GM market share, the point of inflection is in the 1980’s.

Matt:  “Did the plan work?”

Line Chart FallingJordan:  “In one word, no.  In fact, the plan made an already difficult situation worse.  GM share at the beginning of the 1980’s was about 45%.  By the end of the 1980’s it was about 35%.”

Matt:  “How much loss is that?”

Jordan:  “1.2-1.5 million cars and trucks per year.”

Matt:  “How many assembly plants is that?”

Jordan:  “Equal to all the production of 5-6 assembly plants per year.  5-6 plants two shifts, 60 cars or trucks per hour, all year long.  Not one year but every year.  So you think the planned worked?”

goodbye-1l842i0Matt:  “They waved good bye to 5-6 assembly plants?  How much money did they wave good-bye to?”

Jordan:  “The numbers are staggering.  Every year GM no longer sold 1,500,000 cars and trucks it used to sell.  In today’s dollars GM sales price to dealers averages about say $30-35,000.”

Cash

Matt: “So GM waves good-bye to $50 billion…$50 billion dollars per year…out the door.  Good-bye.  Whose idea was this?”

Jordan:  “Only a bean-counter could think up such a back-asswards strategy.  Show me one company that saved its way into prosperity?  To earn money companies need to generate revenue.  You cannot make up profit on $50 billion in revenue by cutting expense.  The math does not work.”

Matt:  “I am almost speechless.”

Jordan:  “You should be speechless.  It’s a staggering number.  And we’ve not talked about what happened to all the GM customer and GM employees as a result.”

Matt:  “I see now why you insist this story is more than a numbers game.  It is about management and how it influences the culture of the organization.”

Jordan:  “I’ll give you one more arrow in the culture quiver.  In the 1990’s a then GM CEO had the audacity to state that Sloan’s segmentation was no longer relevant.”

Matt:  “Was he right?”

Jordan:  “Segmentation criteria might get tweaked a bit over time but the fundamentals do not.  Segmentation in the 1990’s was as important as in the 1920’s.”

Matt:  “Why do you think he claimed Sloan’s segmentation was no longer relevant?”

Jordan:  “I don’t know for certain.  But given his background, he thought the reason GM lost so much market share was Sloan’s segmentation.  He never considered that by ignoring Sloan’s segmentation, especially in the 1980’s, GM lost market share.”

Matt:  “Another case of back asswards thinking.  May we take a break, please?  My head hurts.”

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