strategic management style

GM and the great automation solutionBusiness Strategy Review Autumn 2003 � Volume 14 Issue 318

GM and the great automation solution In the 1980s General Motors sought to regain its supremacy by replacing people with robotics, a strategy that was ill conceived from the start. While the company embraced the automation solution without really understanding its limitations, the story is also one of ineffective organisational learning and failed corporate governance. Sydney Finkelstein suggests that lessons from an analysis of a near $45bn investment strategy hold resonance today as much as they did in the 1980s.

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General Motors (GM) has sat at or near the top of the Fortune 500 for decades. Populated by such legendary management figures as William Durant, who created GM by consolidating dozens of smaller carmakers, and Alfred Sloan, the man responsible for GM’s modern decentralised structure and broad product line, GM dominated the automobile industry.

Over time, in the face of competitive threats by foreign carmakers and changes in industry dynamics, the dominant company struggled. When Roger Smith became CEO, he set out to transform the company, shovelling billions of dollars into factory automation in an attempt to cut labour costs and catch up with the Japanese. When the dust settled, GM’s market share had slid from 48 per cent to 36 per cent during Smith’s tenure, a slide that has continued to the present day when GM’s share comes in at under 30 per cent.

Early days at GM: the seeds of success

“General Motors was the model for industrial organizations of the 20th century: powerful, stubborn, monolithic and authoritarian, its prosperity based on the relentless march of its assembly lines.” Mark Potts and Peter Behr, “Some advice on saving GM from itself”, The Washington Post, November 16, 1986.

In 1892 a man named Olds invested his lifesavings to create the Olds Motor Vehicle Company to build horseless carriages. Olds founded the first US factory in Detroit devoted to automobiles and was soon followed by several other companies making cars in the Detroit area. By 1903 the industry was consolidating and Olds merged with William Durant’s Buick Motor; the new entity was called General Motors. Under Durant’s leadership, a wave of acquisitions followed, including Cadillac and Oakland (renamed Pontiac) in 1909 and Chevrolet in 1918. When the deal making was done two years later, the modern GM had been created – a giant amalgamation of over 30 different companies.

With infrastructure in place, GM took aim at the Ford empire created by Henry Ford and his Model T. Having pioneered the assembly line that enabled mass manufacturing, Ford was the dominant force in the early automotive era and the competitor to beat. It took another giant – GM CEO Sloan – to make that happen.

Considered the most influential CEO in GM’s history as well as a pillar in business history, his slogan – “a car for every purse and purpose” – became GM’s trademark. Sloan recognised that GM could not compete on price alone so his strategy was to sell cars at the top of each price

range, competing in quality against less-expensive cars and in price against higher-quality cars.

With this came his theory of “planned obsolescence”, where the concept of annual models was rolled out. Sloan visualised an emerging market for repeat sales if a car could be perceived as out of date within four to five years. He also introduced a reorganisation philosophy, creating the famous GM management system of decentralised operations and responsibilities with co-ordinated controls.

Each division retained a high degree of autonomy while a central GM board set uniform policies and guidelines. The result: by the end of the 1920s GM was overtaking Ford and by the 1940s a GM nameplate was on almost one out of every two cars sold in the US. GM became the first corporation in the world (in 1955) to

‘General Motors was the model for industrial organizations of the 20th century: powerful, stubborn, monolithic and authoritarian, its prosperity based on the relentless march of its assembly lines’

GM and the great automation solutionBusiness Strategy Review Autumn 2003 � Volume 14 Issue 320

generate $1bn in revenue in a single year. After growing GM into one of the most successful corporations in American history, Sloan retired the following April.

The changing landscape

Few organisations in American industry have had the long-term success that GM enjoyed. It was the industry’s low-cost producer, with powerful economies of scale and market share as high as 60 per cent. For a long time only the threat of Justice Department action to shrink the company’s market dominance clouded the picture.

While GM prospered for years, problems were beginning to brew under the surface. Although US demand for cars increased after the second

world war, European manufacturers were beginning to make an impact. In 1956, for example, Ford and GM lost 15 per cent in sales while imports doubled their market penetration and, even worse, the following year the US actually imported more cars than it exported. By 1956, GM’s market share for new car sales fell to 42 per cent.

Over time, other pressures arose. The tumultuous 1960s brought growing urban poverty and riots in Detroit. The nascent environmental movement focused attention on pollution and, by 1974, GM was spending $2.25bn to meet pollution regulations, with that figure doubling by the end of the decade. To top it off, the OPEC oil embargo drastically decreased demand for GM’s luxury, gas-guzzling cars. While GM introduced

Few organisations in American industry have had the long-term success that GM enjoyed

57.7

16.1

11.7

Average number of autos produced per employee

GM Ford Toyota

GM and the great automation solution Autumn 2003 � Volume 14 Issue 3 Business Strategy Review 21

smaller cars, the market dwindled in the late 1970s as the US plunged into recession.

Into this environment – with GM recording only its second year of losses in its long history – Smith became chairman and CEO in 1981, bringing with him a confident vision to carry GM back to its glory days.

The robot revolution

“In those days, the question was ‘how many robots do you have?’” Interview with senior executive, GM, May 1999.

In the early 1980s another foreign competitor, the Japanese, exploded onto the US auto market, offering reliable, small, competitively priced cars. The Japanese approach, which emphasised such unusual (for GM) practices as just-in-time inventory, quality management, painstaking attention to production processes, extensive employee training and involvement, and close co-operation with suppliers, generated productivity rates far in excess of anything Detroit could muster and posed a real threat to the established order in automobiles.

To deal with the growing global assault and re- establish its domestic leadership, GM unleashed a radical business plan to automate and modernise

its factories as well as its car models. It was not a subtle strategy – the centrepiece of the plan was to substitute high-tech robotics for inefficient labour, relying on GM’s huge financial resources to make it all work.

The estimated cost – $40bn-$45bn – was 14 times Ford’s annual pre-tax earnings at the time. According to F Alan Smith, former chief financial officer of GM, because Smith believed robots could “do anything”, the bulk of the capital expenditure was spent on factory automation, including the latest technology in advanced computer services, microelectronics and systems engineering. The brand new, automated factories would, in theory, produce fuel-saving, smaller cars of the highest quality in greater volume and more cheaply than the competition. “In one masterstroke, GM would stop the import invasion cold and leave the competition years behind,” wrote Potts and Behr in their 1986 Washington Post article.

In line with the revolutionary transition to automation, GM also announced the most widespread reorganisation since the consolidation days of the 1920s. Two manufacturing fiefdoms – Fisher Body and the GM Assembly Division – were abolished and control of production was placed under two newly created operating divisions. To break down silos across functional areas, each division would control design, manufacturing and sales.

The changes at GM spearheaded by Smith elevated him to the status of media darling in the first half of the 1980s. With 85 per cent of the reorganisation efforts based in the US, Smith became a champion of US manufacturing, catching the public’s imagination and becoming a media hero. Described as an “innovator”, “visionary” and “21st century futurist”, Smith was named Automotive Industries Man of the Year and Advertising Age’s Ad Man of the Year, honoured with the Financial World Gold Medal (best CEO in America), and designated by the Gallagher Report as one of the 10 best executives in the US. With such acclimation, it seems little wonder that “GM completed the 1980s in a state of arrogance,” according to one senior auto industry executive.

GM’s sting: money for nothing

Though confidence remained high, productivity paybacks from GM’s factory automation spending seemed slower than expected right from the start. Costs were rising at an alarming rate while market share and operating income were starting to decline.

Internal GM reports indicated that by 1985 the Japanese cost advantage had not changed after four years of intensive spending on automation.

The strategy to automate General Motors in the 1980s under Smith was predicated on a false assumption – that replacing people with machines could turn back the Japanese attack and bring GM back to dominance in the global auto industry

GM and the great automation solution

how people and machines could be effectively integrated, GM missed the essence of Toyota’s low-cost production success. Former Ford President Phil Benton put it this way: “Automation would not make the list of major problems facing the auto industry in the 1980s”. Consistency of manufacture must come before automation. Toyota is not as automated as

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The company that was founded on the principle of cost savings and was once the prototype for efficiency had by 1986 become the auto industry’s high-cost producer. The average number of autos produced by each GM employee stood at 11.7, while the same figure at Ford was 16.1 and as high as 57.7 at Toyota. GM also earned 38 per cent less than Ford and 26 per cent less than Toyota on each vehicle it made. Research by Marvin Lieberman and Rajeev Dhawan of UCLA, who studied productivity trends in the auto industry from the mid-1960s to the 1990s, confirm the story. GM’s plant productivity, which had lagged Toyota’s for years, actually declined further from 1984 to 1991, a period that should have reflected the gains from GM’s automation push.

The new automated factories, which made over two-thirds of the parts used in GM cars, had become a high-cost problem, hardly more efficient than the old ones. Some plants were running at 50 per cent capacity because of glitches in computer-integrated systems while two major strikes in the US and Canada in the mid- 1980s spoke to the state of labour relations during these changes.

GM’s share of US auto sales fell to 41 per cent in 1986, while the company’s stock price increased 35 per cent from 1981 to 1987, a period when Ford’s market value increased seven-fold. Former GM CFO Smith summed up GM’s situation in 1986: “Since 1980 GM has spent $45bn on the automotive business. Capital spending appears to be almost inversely related to our levels of operating profit. And GM’s forward capital spending plans are projected to be $34.7bn over the period from 1986 through 1989. For $34.7bn, given recent market valuations, GM could have purchased Toyota and Nissan. This would almost double GM’s world market share, increasing our penetration to over 40 per cent of the entire free world. Can we expect to double our worldwide market share from our spending programme?”

Automating GM: the key lessons

The strategy to automate General Motors in the 1980s under Smith was predicated on a false assumption – that replacing people with machines could turn back the Japanese attack and bring GM back to dominance in the global auto industry.

Rather than adopt the lean manufacturing techniques that still define the Toyota production system today, a virtual obsession with robotics took over. In some ways this was no different than the companies today that jump on the latest fad without really understanding the underlying processes and inter-relationships.

That was certainly the case with GM and automation in the 1980s. By not understanding

’Everything goes back to management. What you need to do is engineer the product to the skills of your work force‘

1983 1984 1985

$10 bn

$9 bn

$6 bn

GM expenditure on new technology and automation

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Nissan, for example, but it is more successful. “Everything goes back to management. What you need to do is engineer the product to the skills of your work force,” says Phil Benton, retired president of Ford.

The Japanese also excelled at the other fundamental components of lean manufacturing, including just-in-time inventory, supply chain integration and quality management.

“[Automation] didn’t save the company very much because GM still needed people,” explains Charles McElyea, a factory automation engineer. By simply using the technology without the prepared workforce, “all you can do is to automate confusion,” says one senior GM executive.

Robert Lutz, someone who has witnessed first- hand many of the changes in the auto industry over the years as a senior executive at GM, Chrysler and most recently Ford, gave this assessment.

“The thought was if we can do a fully automated factory and get rid of all the labour, we would have plants that run day and night fully automatically. But with these totally automated facilities you lose all flexibility and they are extremely capital intensive. The only way you can hope to make a return is to run pedal to the metal at all times. They were prisoners of the great North American manufacturing cost accounting system that says as you eliminate labour your cost goes down. But what they forgot was they were getting rid of direct labour but replacing it with indirect labour and huge capital costs. These costs were high because the technicians and other people needed in an automated plant were much more expensive than the hourly labourer. You need to look at every worker. You look at his value added time versus his wait time and you arrange the production flow in such a way that you maximise the value added time of each worker and reduce the waiting time. You concentrate on the worker not on the machinery. Use automation only where necessary”.

At its core, the automation strategy drew its genesis from Smith’s business and personal beliefs. Despite internal opposition, it was Smith – described by many as autocratic – who defined

GM’s problems in the 1980s in terms of labour costs. To his credit, Smith also understood that GM’s slow, bureaucratic culture was a hindrance to change and his push for new organisational structures, the attempted infusion of EDS entrepreneurialism to GM, and investments in NUMMI (the joint venture with Toyota) and Saturn were all attempts to shake up that culture.

But his focus on high-technology solutions to the labour cost problem underlined his belief that costs could be cut by replacing people with machines. He browbeat the labour union UAW with statements like, to quote Albert Lee’s book Call Me Roger, “every time you ask for another dollar in wages, a thousand more robots start looking more practical” and was described by one insider as “fascinated with anything new and high-tech; he really doesn’t understand, or want to hear about, the limitations of technology”. To his critics, he was an “unusual man who just doesn’t understand people”.

The GM board of directors

Where was the GM board during this time and does it deserve some of the responsibility for the automation debacle? Smith became infatuated with robotics and began to see it as GM’s salvation right from the start. While there was internal opposition, particularly among people who understood that productivity is not just based on labour costs but on the entire production system, the board of directors appears to have had little problem with the strategy.

Indeed, given the deteriorating state of GM labour relations and productivity at the beginning of the 1980s, turning to the automation solution may well have been considered reasonable. It didn’t take long, however, for problems to develop.

Plant efficiency was down in many factories, productivity improvements relative to the Japanese did not materialise and traditional metrics like stock price and market share reflected these problems. Further, when a company spends some $45bn on automated factories, it does not write a single cheque for that amount and wait for delivery. Expenditures of this magnitude involve thousands of cheques written to vendors

Smith became infatuated with robotics and began to see it as GM’s salvation

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over a long time period, with an opportunity to assess progress along the way.

For example, in 1983 GM spent $6bn for new technology and automation, increasing to $9bn in 1984 and $10bn in 1985.1 Even by 1985, when internal studies were indicating little change in the productivity gap between GM and Toyota, GM was still poised to spend more. Nevertheless, throughout this time the board of directors continued to approve Smith’s plans.

Much has been written about the classic warning signs in corporate governance, and all are in evidence here. Almost one-quarter of the board consisted of GM insiders in 1982, rising to as much as 41 per cent by 1986. Outsiders did not have much of a personal stake in the company, with three out of five owning less than 1,000 shares of GM stock. Along with the undoubted prestige that comes with being a GM director, the generally advanced age of outsiders on the board (eight outsiders were actually retired from their former corporate jobs) and the heavy time commitments of virtually all the outsiders on other corporate and non-profit affiliations (averaging around eight such commitments for each board member during this period), the odds were stacked against the GM board taking an activist stance in monitoring Smith.

In addition to these traditional indicators of board independence, there is some evidence and inference that Smith had significant control over the board. Board meetings were known as formal, with little open and honest discussion. Inside board members would not speak unless specifically charged with giving an informational report to the board. As one retired board member said, “unanimity on this board is assumed”. When Ross Perot was on the GM board for a few years in the mid-1980s following the acquisition of EDS, he referred to Smith’s optimistic predictions as “gorilla dust”, designed to throw off criticism as much as anything else.

Contributing to the unquestioning environment was the remarkable extent to which board members’ formal positions were intertwined. Whether by design or circumstance, virtually every single outside board member at GM had another formal appointment – whether on another corporate board or non-profit organisation – in common with a colleague on the GM board.

In 1982, for example, two different GM directors also sat on the boards of US Steel, Dart & Kraft, Merck and International Paper. Three different GM board members were also directors of

AT&T, Nabisco Brands, Citicorp and Kodak. And four GM directors were present or former board members of JP Morgan. Ten GM directors were on the Business Council, six on the Business Roundtable, four were directors of the United Negro College Fund (the chairman of the board was a GM insider) and two different GM board members were affiliated with governance of the Mayo Foundation, New York Hospital and the Sloan-Kettering Cancer Center.

Overall, the extent of overlapping affiliations and directorships is nothing short of spectacular and may well have been a contributor to the non- critical culture in place at the GM board. Under this arrangement, in the event a member of the GM board chose to speak out or break the norm of “unanimity” any potential retribution could not be easily contained within this one organisation.

In sum, the robotics strategy that Smith and GM adopted in the 1980s stands as a classic story of misreading the competitive landscape. For Smith, robotics represented the Holy Grail, the perfect strategy that could solve all of GM’s problems at once. When GM finally discovered that the Holy Grail didn’t exist, it could look back on an incredible waste of resources.

Smith was a very smart executive who failed because of his own badly mistaken perception of the auto industry, a culture (that he helped engender) at GM that was afraid to ask questions, and a board of directors that watched billions of dollars go out the door with apparently little concern. �

Resources

Potts, Mark and Behr, Peter. “Some advice on saving GM from itself”, The Washington Post, November 16, 1986.

Moore, Thomas. “Make or break time at General Motors,” Fortune, February 15, 1988, p. 35.

Lieberman, Marvin B, and Dhawan, Rajeev. “Assessing the resource base of U.S. and Japanese auto producers: a stochastic frontier production function approach,” Working Paper, UCLA, August 1999.

Hampton, William and Norman, James. “GM: What Went Wrong,” Business Week, March 16, 1987.

Lee, Albert. 1988. Call Me Roger. Chicago: Contemporary Books.

Sydney Finkelstein is a professor of strategy and leadership at the Tuck School of Business at Dartmouth and the author of Why Smart Executives Fail (Portfolio).

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