Suffering was Optional

Suffering was Optional: Did performance have to be so bad?, by Mark Chussil

“Decades ago, GM controlled half of the U.S. market… Last month,… GM’s share of the U.S. vehicle market sank to 19.4%, according to Autodata Corp.” (WSJ, 6/24/08)

We note in passing the “controlled” language, and wonder: If GM really controlled the market, would it have let its share decline so much? Language reveals attitudes, and although in this case it is the Journal’s language, managers often speak the same way.

Language isn’t the important point, though. The important point is what’s behind GM’s malaise and the similar suffering at Ford and Chrysler. Although change was inevitable, suffering was optional.

The diagnosis du jour is that GM et al. are feeling the effects of their reliance on large, inefficient vehicles. It’s seen as a bet gone bad due to increases in fuel costs. Meanwhile, other economic factors, such as the credit crunch and rising supply costs (e.g., steel suppliers are assessing surcharges), further sour the bet.

Those effects may be real and true, but the explanation isn’t satisfying. Why did GM et al. make themselves so vulnerable to energy prices? It’s been clear for years that the world’s use of fuel is rising faster than the supply, and we know what happens to prices when demand approaches or exceeds supply.

Go back a few years. Detroit’s woes then were blamed on healthcare costs. They’ve been blamed on unions and work rules. They’ve been blamed on government regulation. (We note in passing the language — blame — although we’ll pass over it again.)

Go back a few decades, to the 1970s, when Detroit ruled the world and Japanese cars had a reputation for being tinny, cheap, and dull; “econoboxes,” they were called. Detroit might not have controlled the market but they held most of the cards since they were far ahead of the competition and had vast resources they could deploy as they saw fit. And then they proceeded, over decades, to lose ground and eventually to reach a state where their very solvency is in doubt.

GM’s (and Ford’s and Chrysler’s) quandary is not the result of any single external event, or even several. Their quandary did not suddenly spring up. It is the accumulated result of some thirty years of decision-making.

I’ve met some of Detroit’s finest. They are smart, experienced, and motivated. They work hard and they do their best. They want to keep their jobs and help their companies prosper. However, being human they are susceptible to the same decision-making traps as the rest of us: groupthink, overconfidence, denial, and more. Being strategists their tools are susceptible to the same decision-making distortions we see elsewhere: discounting competitors, relying excessively on history, starting from an accounting paradigm, and more. That’s far more than we can cover here. I’ll focus on just one issue, while reminding my gracious readers that it is only one of several. That issue is expectations.

Pretend for a moment that your business has long enjoyed 50% market share. Next, pretend that outsiders invade your turf with what you perceive as substandard products. Due to an economic crunch their low prices attract, oh, 10% of the market, equally from you and the other incumbents. Now you have 45% share. What do you think will happen to your share in the future?

Here are reasons why you may believe that your share will rise:

  • You’ve always had a big share.
  • The economic crunch will go away.
  • Your historical data show 45% is an aberration.
  • Customers will discover how substandard the competition is, and come back home.
  • You put together convincing plans that say so.
  • The senior, experienced people say so.
  • It’s your job to make it so.
  • The stock market thinks you can do it.
  • A little competition is good; it reminds you to work hard.
  • Your salesforce is out there and they’re making the numbers.
  • You have new leadership, new vision, and new urgency.
  • You’ll drive out the usurpers just as you drove out their predecessors. After all, you weren’t born with 50% share; you earned it.

Here are reasons why you may believe that your share will continue to fall:

  • There are none. You plan to succeed, and you want to remain employed.

If you expect to gain share you will make different decisions about capacity, budgets, labor contracts, supply contracts, and so on, than you would make if you expect to lose share. Many of those decisions involve fixed costs and future obligations, and they put reputations on the line.

Alas, that substandard competitor is getting better and people seem to like it, and you don’t gain share. Now your costs are higher, your revenue isn’t, and your reputation is fraying. You feel more pressure than before to return to your normal share.

You take decisive action. You spend more on marketing and incentives, you cut your price, you light a fire under the salesforce, you dismiss the managers who are falling short of their goals and bring in new people who can get the job done.

But your competitor continues to improve. Worse, their progress is emboldening others to come in and nip at the lion’s heels. Your inventories are bulging and aging. You begin to feel the elevator is going down.

(I have not consulted with or worked for any automobile company, and the scenario I have painted is not exhaustively complete. On the other hand, I know something about competitive strategy and I have watched thousands of managers in dozens of industries make decisions. You can judge for yourself whether or not the scenario rings true. By the way, I believe that the ending need not necessarily be a death spiral.)

The key point in that scenario is the role of expectations. The expectation of “recovery” can induce decisions that make matters worse. It interferes with thinking through the problem, perhaps because it denies that there is a problem or contends that the problem is already solved. It launches a vicious cycle of desperation. It saps morale and drives talent away.

So, the trillion dollar question — “trillion” because that’s the order of magnitude of Detroit’s lost sales over the years — is how we can develop realistic expectations. That’s a big subject, some highlights of which I will summarize here.

  • The past predicts the future only in uninteresting situations. By definition, significant change makes history irrelevant. Think not about trend lines; people don’t buy because of trend lines. Think about cause and effect. How can we build a [fill in your product] that people really want to buy?
  • Much thinking and many analyses invisibly assume that our strategy will work. Few spreadsheets, for instance, account for competitors’ responses. Use business war games or other forms of simulation to explore what they might do and how it could affect you. Your business looks different when you see it through your competitors’ glasses.
  • Much other thinking and many other analyses invisibly assume that our industry is at an equilibrium; that is, we will neither gain nor lose share unless we or they do something new. That assumption is false. (See next bullet.)
  • If you look (to customers) just like your competitors, expect (over time) to perform just like your competitors. Why would it be any different? That statement, by the way, is what we at ACS call a principle of competition, and that principle is a major reason why GM et al. should have expected to lose share when Toyota et al. entered the USA.
  • Don’t fret about precision. Few, if any, strategy decisions depend on decimal points. Instead, focus on realism. You may be able to model trend lines precisely, but it is more realistic and useful to model customer purchase decisions and competitive dynamics.

By the way, GM CEO Rick Wagoner said on July 10 that “GM has no plans to close or sell any of its brands.” (WSJ, 7/11/08)

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