I often start my seminars on business transformation by discussing why innovation is not an option, but rather an imperative for any company, - no matter how big, powerful and successful. Failure to innovate will invariably get a company into serious trouble, perhaps even impacting its ability to survive into the future, especially in times of rapid change and fierce competition. To bring the innovation imperative to life with a concrete example, I use the IBM near-death experience that I lived through in the early 1990s.
I illustrate IBM’s rapid decline by first showing a Fortune cover from 1985 about America’s most admired corporation based on Fortune’s yearly survey of company reputations. IBM was then at the very top. But, by the early 1990s, the picture had drastically changed. This is graphically shown in a Fortune cover and article from May 3, 1993: “Dinosaurs? They were a trio of the biggest, most fearsome companies on earth. Here's how earnest executives managed them into historic decline.” The hapless dinosaurs were IBM, Sears and . . . General Motors.
I was reminded of this 1993 article when reading about GM’s declaration of bankruptcy on June 1. Luckily for IBM, after hitting bottom the company took the necessary actions and was able to successfully reinvent itself. Not only was IBM able to survive, but it once more attained a leadership position in the IT industry. The experience was very painful, even humiliating for those of us who went through it. But at least it was relatively short and was followed a few years later by a very sweet redemption, including this 1999 Fortune article IBM: From Big Blue Dinosaur To E-Business Animal.
GM has had no such luck. Many of the points made in the recent articles about GM’s bankruptcy are remarkably similar to points made in the 1993 Fortune article.
“The demise of GM had been expected for so long that when it finally died there was barely a whimper,” wrote The Economist on June 4 in their lead article on the bankruptcy. It then added,
“Yet the indifference with which the news was received should not obscure its importance. A company which once sold half the cars in America, employed in its various guises as many people as the combined populations of Nevada and Delaware and was regarded as a model for managers all over the world has just gone under; and its collapse holds important lessons about management, about government and about the future of the car industry.”
Given the similarly precarious situation that both IBM and GM faced around twenty years ago, what caused their destinies to follow such different paths in subsequent years? Are there lessons in IBM’s transformation and recovery that could be helpful in thinking about the future of GM and other major companies facing similar serious crises? Let me offer some thoughts.
I think that survival involves a three step process. First comes the stop the bleeding phase. It is difficult to talk about the future while hemorrhaging in the emergency room. Before you do anything else, the bleeding must stop. The company must somehow be stabilized, and the necessary restructuring actions must be taken.
“On average, our competitors were spending 31 cents to produce $1 of revenue, while we were spending 42 cents for the same end. . . . So we made the decision to launch a massive programs of expense reduction - $8.9 billion in total . . . That meant additional pain for everyone, but this was a matter of survival, not choice.”
GM ultimately declared bankruptcy so it is able to do what it needs to do to save the company. It will be very painful for individuals and communities. Many are losing their jobs. Plants and dealerships are being closed, and major parts of the company are being sold. GM is being radically restructured, so that a new, leaner, healthier GM can emerge.
Once the company is stabilized, comes the next step, which I think of as the cultural transformation phase. As White House chief of staff Rahm Emanuel famously said, “Never allow a crisis to go to waste. They are opportunities to do big things.”
Until now, GM has not gone through the gut wrenching near death experience that IBM went through, and consequently it has been able to keep postponing the massive cultural changes it needs to make to ensure its survival into the future.
GM’s share of the US market was over 50% at its height in the early 1960, and has been steadily but slowly declining over the subsequent decades. Its market share is now under 20%. In comparison, IBM’s decline was precipitous. One year it was the most admired, as well as the most profitable corporation. A few years later, dark clouds started to appear in the horizon, and a few years after that the wheels were coming off and the company was in danger of running out of cash and disappearing altogether.
Given the magnitude of the problem and the rapidity of the decline, it quickly became clear that incremental changes would not work. In 1994, after roughly twelve to eighteen months, the bleeding was stopped, and the company was stabilized and able to leave the intensive care unit. While the issue was no longer the immediate demise of IBM, it was by no means clear that the company would be able to matter at all, let alone regain the leadership position it once enjoyed. Doing that would require embracing a totally different culture from the one that had gotten IBM into such deep trouble in the past. IBM needed to go through a massive cultural transformation. Its crisis and near-death experience made such drastic changes possible given the right leadership.
GM’s decline has been slow, spread over almost fifty years. Different CEOs introduced a variety of incremental, stop-gap strategies over that span that essentially preserved the status quo. In the 1980s, having already lost about ten points in market share, GM focused on efficiency to better compete with the Japanese companies, whose share of the US market was rapidly growing, since they were selling less expensive and higher quality cars than GM, Ford and Chrysler. GM embraced the lean production techniques pioneered by the Japanese car companies, and introduced new families of cars that shared the chassis and other components across the different GM brands.
But, the Japanese companies continued to gain share. In the 1990s, GM and the other US companies pretty much ceded the car market to foreign-based companies and concentrated on the much more profitable SUVs and light trucks. This strategy worked well as long as gas prices were low and low-interest loans were plentiful. But the strategy collapsed once gas prices went up and the economy deteriorated in the next decade, which ultimately led to GM’s bankruptcy.
Will GM’s crisis now lead to the cultural transformation it has long postponed but must go through in order to have a chance to once more become a leader in the auto industry. It’s too early to tell. The timing is right, given the crisis and pain the company is going through. But it remains to be seen whether GM’s current leadership will be able to take the necessary steps to significantly transform the company and its culture.
The final step in a successful survival process is the compelling vision phase. You need a vision and strategy around which to unify the whole company and propel it into the future. For IBM, the rise of the Internet at just the right time in the mid-1990s was a lucky break. It was the basis for the exciting e-business vision around which we rallied and transformed the whole company. Writing in his book, Lou Gertner said,
“For IBM the lesson was about rediscovering something we’d lost. We found our voice, our confidence and our ability once again to drive the industry agenda. Our messaging allowed our customers to see benefits and value that were not being articulated by our competitors. The concept of e-business galvanized our workforce and created a coherent context for our hundreds of products and services.”
“. . . We infused it into everything. It provided a powerful context for all of our businesses. It gave us both a marketplace-based mission and a new ground for our own behaviors and operating practices – in other words, culture. Most important, it was outward-facing. We were no longer focused on turning ourselves around. We were focused on setting the industry agenda again.”
Over the next decades, the auto industry will undergo profound transformations. There is plenty of opportunity for a healthier, leaner and rejuvenated GM to emerge as the leader they once were.
GM has been a pioneer in hybrid and electric cars. The company introduced the EV1 in 1996 in limited production, the first all electric vehicle from a major manufacturer, but withdrew it from the market a few years later. GM has also been a pioneer in the use of electronics, software and communications in cars. OnStar, introduced in the mid 1990s is one of the most comprehensive and widely used in-vehicle security, communications, and diagnostics system. The underpinnings for a successful transformation are there.
In a way, GM reminds me of IBM in the 1970s and 80s. In those days, IBM kept inventing great technologies in its labs, - including RISC architectures and relational data bases, - only to see its competitors take advantage of these innovations by getting them to market years before IBM and thus reaping the financial rewards. A major part of the cultural reinvention IBM had to go through was an appreciation that the game was played in the marketplace, not inside the company, and therefore being an industry leader meant having great, successful products, services and solutions in the marketplace, not just in the lab.
GM has now hit bottom. It has nowhere to go but up or out. The company has launched a major reinvention program. We will see how it all plays out in future years. I truly wish them the very best.