Why Smart Executives Fail Close
Case Study: GM and the Great Automation Solution

"Automation came along just in time to save us." —Roger Smith, 1980
Summary
General Motors 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 decentralized 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, shoveling billions of dollars into factory automation in an attempt to cut labor costs and catch up to the Japanese. When the dust settled, GM's market share had slid from 48% to 36% during Smith's tenure, a slide that has continued to the present day when GM's share comes in under 30%.

This is the story of GM's quest for supremacy by replacing people with robotics, what gave rise to this strategy, and why it was ill conceived from the very start. While Roger Smith deserves criticism for embracing the automation solution without really understanding its limitations, the story is also one of ineffective organizational learning and failed corporate governance. The lessons that emerge from an analysis of a near-$45 billion investment strategy hold resonance today as much as they did in the 1980s.

"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."
Early Days at GM: The Seeds of Success
In 1892 a man named R. Olds invested his lifesavings to create the Olds Motor Vehicle Company to build horseless carriages, known as automobiles. Olds founded the first American 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—legendary GM CEO Alfred 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 recognized 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 visualized 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 reorganization philosophy, creating the famous GM Management System of decentralized operations and responsibilities with coordinated 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 America. GM became the first corporation in the world by 1955 to generate $1 billion 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 organizations 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%. 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 U.S. demand for cars increased after WWII, European manufacturers were beginning to make an impact. In 1956, for example, Ford and GM lost 15% in sales while imports doubled their market penetration, and even worse, the following year the U.S. actually imported more cars than it exported. By 1956, GM's market share for new car sales fell to 42%.

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 $2.25 billion 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 smaller cars, the market dwindled in the late 1970s as the U.S. plunged into recession. Into this environment—with GM recording only its second year of losses in its long history—Roger Smith became Chairman and CEO in 1981, bringing with him a confident vision to carry GM back to its glory days.

"In those days, the question was 'how many robots do you have?'"
The Robot Revolution
In the early 1980s another foreign competitor, the Japanese, exploded onto the U.S. auto market, offering reliable, small, competitively priced cars. The Japanese approach, which emphasized such unusual (for GM) practices as just-in-time inventory, quality management, painstaking attention to production processes, extensive employee training and involvement, and close cooperation 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 reestablish its domestic leadership, GM unleashed a radical business plan to automate and modernize its factories as well as its car models. It was not a subtle strategy—the centerpiece of the plan was to substitute high-tech robotics for inefficient labor, relying on GM's huge financial resources to make it all work. The estimated cost—$40-45 billion—was 14 times Ford's annual pretax earnings at the time. 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."

In line with the revolutionary transition to automation, GM also announced the most widespread reorganization 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 Roger Smith elevated him to the status of press darling in the first half of the 1980s. With 85% of the reorganization efforts based in the U.S., Smith became a champion of U.S. 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, honored with the Financial World Gold Medal (best CEO in America), and designated by The Gallagher Report as one of the ten best executives in America. With such acclimation, it seems little wonder that "GM completed the 1980s in a state of arrogance."

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, a combination that might trigger warning bells in some organizations. Internal GM reports indicated that by 1985 the Japanese cost advantage had not changed after four years of intensive spending on automation. 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 metric at Ford was 16.1 and as high as 57.7 at Toyota. GM also earned 38% less than Ford and 26% less than Toyota on each vehicle they 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% capacity because of glitches in computer-integrated systems, while two major strikes in the U.S. and Canada in mid 1980s spoke to the state of labor relations during these changes. GM's share of U.S. auto sales fell to 41% in 1986 , while the company's stock price increased 35% from 1981 to 1987, a duration when Ford's market value increased seven-fold.

Former GM CFO F. Alan Smith summed up GM's situation in 1986:
"Since 1980 GM has spent $45 billion 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 $34.7 billion over the period from 1986 through 1989. For $34.7 billion, 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% of the entire free world. Can we expect to double our worldwide market share from our spending program?"

Automating GM—The Key Lessons
The strategy to automate General Motors in the 1980s under Roger 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 make the whole thing work. That was certainly the case with GM and automation in the 1980s. By not understanding 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 Nissan, for example, but they are more successful. "Everything goes back to management. What you need to do is engineer the product to the skills of your work force."

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," explained Charles McElyea, a factory automation engineer. By simply using the technology without the prepared workforce, "all you can do is to automate confusion." 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 labor, 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 labor, your costs goes down. But what they forgot was they were getting rid of direct labor but replacing it with indirect labor 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 laborer. 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 maximize 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 Roger 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 labor costs. To his credit, Smith also understood that GM's slow, bureaucratic culture was a hindrance to change, and his push for new organizational 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 labor cost problem underlined his belief that costs could be cut by replacing people with machines. He browbeat the UAW with statements like, "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 do they deserve some of the responsibility for the automation debacle? Roger 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 labor 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 labor 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 materialize, and traditional metrics like stock price and market share reflected these problems. Further, when a company spends some $45 billion on automated factories, it does not write a single check for that amount and wait for delivery. Expenditures of this magnitude involve thousands of checks written to vendors over a long time period, with an opportunity to assess progress along the way. For example, in 1983 GM spent $6 billion for new technology and automation, increasing to $9 billion in 1984 and $10 billion in 1985. 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 Roger Smith's plans and expenditures. Why?

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% by 1986. Outsiders did not have much of a personal stake in the company, with three out of five owning less than 1000 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 (8 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 8 such commitments for each board member during this period), the odds were stacked against the GM board taking an activist stance in monitoring Roger Smith and his automation program.

In addition to these traditional indicators of board independence, there is some evidence and inference that Roger 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 his 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 organization—in common with a colleague on the GM board. In 1982, for example, (whose composition was not only representative of, but almost unchanged from, the GM board in subsequent years), 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 organization.

In sum, the robotics strategy that Roger Smith and General Motors 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, they could look back on an incredible waste of resources. Roger 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.