Sunday, March 11, 2012

Will there be a General Motors in 5 years? In 10 years?

In an excellent article in The Atlantic which explores "Why Companies Fail," Megan McCardle theorizes that it comes down to inertia. A company going in a certain direction for a long period of time will be unable to change directions, even when that is absolutely necessary for survival.
One possibility is that firms don’t change because inertia is in their DNA—indeed, it’s a gene that once made many of them successful. In their 1989 book, Organizational Ecology, Michael Hannan and John Freeman argue that organizations are actually selected for inertia by their environment, and “rarely change their fundamental structural features.” Change is risky, after all, since it definitionally involves doing something that isn’t already working—and even product lines that have grown lackluster still have some customers. Firms that are prone to frequent large changes will probably have more opportunities to kill themselves off with bad choices than firms that resist big changes.

Moreover, the need for accountability and reliability in the modern economy selects against constant radical experimentation—people like knowing that their bank has cumbersome and invariable procedures for keeping track of deposits, for instance. Think of McDonald’s, where a core premise is that no matter where you go, the food and decor will be reliably, exactly the same. Or consider what happened to Coke after it tried to change the recipe of its iconic product, even though taste tests showed that most people actually liked the new version better. The larger and older the firm is, the heavier the selection for stability.

Her case is built around General Motors, which she suggests still has not given up the corporate and labor culture which has caused it to fumble so often over the last 30 years.

McCardle points out that emerging from bankruptcy in November, 2010, there was strong confidence in the White House and in the markets that GM had turned the corner. On November 17, 2010, it issued a massive IPO, selling its common stock for $33 per share. By January 7, 2011, GM's stock was selling for $38.98. But 11 months later, things were not looking so good. On December 19, 2011, GM's shares sold for $19.05. It had lost 51.1% of its peak value, and 42.3% of its IPO value. Today, GM's stock sells for $25.62 per share. That is still a 22.36% loss in market value, if you bought at the IPO price.

I have to wonder how long GM will survive, if it still has not changed its corporate and labor culture? My guess is that if GM disappears, its two major brands, Chevrolet and Cadillac will survive, much the way Jeep lived on after AMC went out of business.

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