Saturday, June 6, 2009

Lessons from the General Motors Bankruptcy

Written by Steve Marr
Thursday, 04 June 2009

The bankruptcy of General Motors contains lessons for us all as GM has gone from being the dominant corporation in the world to the bottom of the heap. King Solomon taught, “Take my instruction, and not silver, and knowledge rather than the choicest gold” (Proverbs 8:10 NASB).

All bankruptcies are painful, and this has and will hit many people hard, but we can learn much from this tragic situation.

#1—Most change happens over a long period of time.
Absalom led a revolt against his father and forced King David to flee Jerusalem. To the casual observer, the revolt sprang up suddenly, but in reality Absalom had been working for a very long time to turn people against his father (See 2 Samuel 15:1-12). The hearts of many people were turned, one at a time, over several years.

The point is, when we see changes in our business environment, we need to take action. David could have restrained Absalom easily if he had taken action earlier, but he waited and ended up fighting a major battle later.

Over time, GM’s market share steadily declined. No single year or event shaped this trend. It was just a gradual decline, and relatively small changes were made: Saturn was introduced, foreign car makers were bought and sold, and a plunge into technology with the purchase of Hughes Electronics and EDS created excitement but never stemmed the decline in market share and sales.

Giles Bookstore had been in the same location for 30 years and earned a stable profit. However, over the past five years other businesses started moving away, which resulted in a steady decline in foot traffic and a corresponding decline in sales and profits. Joe Giles didn’t want to move. He tried more advertising, a store remodel, sale promotions, and sharper displays … but sales continued to decline. The fact was that the bookstore relied on foot traffic and foot traffic was just not there. Joe needed to invest in a new location that would gain an increase in traffic rather than continuing to invest in a location that was on its way down.

#2—We can easily be in denial.
Over the years as market share eroded little by little GM gave a lot of reasons, but denied the reality the continued market share loss needed to be fixed, not explained away each year. Late last year General Motors announced bankruptcy was not an option and would not happen, more denial.

Likewise, Giles Bookstore failed to grasp the reality that customers were moving away and that traffic was slowing down. The extra efforts helped a little bit, but it
was not enough to offset the customer decline. King Solomon asked, “How long will you fools fight the facts?” (Proverbs 1:22 NLT).

Both General Motors and Giles Bookstore failed to understand that far more radical change was needed. If either business truly grasped the facts of the declining business model over many years, far more radical action would have been taken.

#3—Deferring costs may hurt more than help.
General Motors agreed over the past half century to pay very generous retirement benefits to employees. In the early years this seemed like an easy way for the company to settle contract negotiations. The labor unions claimed the great benefits won and GM avoided paying out the money until a future date. However, the massive pension and healthcare costs became a legacy cost that would be a millstone around the company’s neck.

Giles Bookstore also started deferring expenses by not doing building maintenance, cutting back on inventory, and not upgrading their computer system. This created additional problems that made the bookstore even less efficient. Roof maintenance was ignored, causing major leak resulting in $75,000 worth of damages. All costs, whether paid today or in the future, are real and should be carefully considered.

The current challenging economy helped push GM and Giles Bookstore over the edge and into bankruptcy, but the events that forced bankruptcy could have been altered if management had acted earlier.

As a native Detroiter and recent GM vehicle purchaser, I take no delight in the misfortune of General Motors or its employees, retirees, shareholders, bondholders, and others who have lost a great deal. While management, government, the United Auto Workers and others share the responsibility for this failure we can learn key lessons from the tragic situation that apply to our businesses.

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