Can't Let Go

Can't Let Go

Why companies stick with losing strategies.

By Megan McArdle

Can't Let Go

 

Megan McArdle is a Bloomberg View columnist, who writes on economics, business, and public policy. Adapted from The Up Side of Down: Why Failing Well Is the Key to Success. Reprinted by arrangement with Viking, a member of Penguin Group (USA) LLC. ©2014 by Megan McArdle.

For those of us who are not yet 40, it’s hard to remember that GM was not always the bumbling butt of late-night-television jokes. For most of its existence, it was the Apple Computer of its day: technologically advanced, a master of consumer marketing, and probably America’s best-known company.

In 1953, GM CEO Charlie Wilson famously testified to Congress that “what was good for the country was good for General Motors and vice versa.” This may sound to modern ears like the self-serving justifications of a greedy kleptocrat (and he took some ribbing even then), but if you look at the company’s record in 1953, it seems more like a simple statement of fact. For one thing, GM had played a significant role in producing armaments for World War II. And that year, in record peacetime prosperity, it was the country’s largest private employer. When America prospered, GM sold more cars. And because GM employed more than half a million people, when it sold more cars, America prospered.

Back then, GM was a radical innovator. Most people know that Henry Ford essentially midwifed the modern auto industry when he started to build his cars on an assembly line, which allowed them to be produced cheaper, faster, and with more consistent quality. Far fewer people are aware of the fact that GM, not Ford, invented the way that consumers experience the auto industry.

Ford wanted his customers to wait obediently at the end of his production line to hop in and drive off in whatever he chose to make. He wrote in his memoir, “Any customer can have a car painted any colour he wants so long as it is black.” (Black was the fastest-drying paint and therefore the cheapest to use.) His company produced one car, the Model T, from 1908 to 1927; when sales finally started to flag, it rolled out another car, the Model A, as its lone successor. Ford thought his customers shouldn’t go into debt and until the late 1920s refused to provide financing.

By contrast, GM pioneered annual model changes and attractive styling, was an early leader in auto financing, and developed multiple brands to suit different demographics and personalities—“a car for every purse and purpose,” as the longtime GM CEO Alfred P. Sloan put it. By 1960, GM held around half of the domestic market, employing more than 400,000 hourly workers who averaged more than $100 a week, at a time when the average annual wage was closer to $3,000.

GM workers were making twice as much as most of the American labor force not because their union was too powerful (that came later), but because the company was running its production facilities flat out, trying to keep up with seemingly insatiable demand. Americans loved GM cars the way they have never loved another company’s product.

“Ford at the time was a classic innovator who changed the world and then refused to change himself,” says my old professor James Schrager, a turnaround consultant who also teaches strategy at the University of Chicago’s Booth Business School. “GM came in and said, ‘We’ll make many cars, many colors.’ They were a brilliant technology company. First electric starter. First automatic transmission. First car with overhead valves. They came out of World War II in a cannon, and that cannon just shot them all the way to 1965.”

“How Could They Let This Happen?”

It took the world’s most successful company more than forty years to finally acknowledge that the magic was gone. As GM entered its death throes, every business journalist in America tried to answer the same question: How do you let your company lose market share for forty years running without, y’know, doing something about it?

I once listened in on an earnings call with a biotech-firm CEO who had covered some holes in his cash flow by selling off the rights to all his firm’s patents. Nothing in the company’s drug pipeline was even remotely close to being approved by the FDA. It had, in other words, absolutely no means of generating any income, and management was burning through the company’s remaining pile of cash at a brisk clip. Yet the CEO was cheerfully talking about “the firm’s future” as if it had one, other than receivership.

“This man is obviously crazy,” I thought. “This must be why his firm is doing so badly.”

But the other analysts on the call took it in stride. They weren’t insane—they were just used to it. They knew what I eventually learned, writing about business for the next decade: This is how companies act when things go badly wrong. Turnaround experts will tell you that they usually get called in when a company is about to miss payroll or a big loan payment. This is not because they didn’t realize that something was wrong long before that—accounting knows that the bank balances are dropping; sales knows that customers are unenthusiastic; production knows that the line has slowed down. “Everyone kind of knows when things aren’t going well,” one turnaround expert told me. He paused for emphasis: “Everyone.”

So why do they go on pretending that everything will be fine when that patently isn’t the case? Why don’t they change course when they have plenty of time—or make only cosmetic changes, rearranging the deck chairs on the Titanic while the ship is sinking? Well, why does everyone pretend that Great-Grandma hasn’t launched into a racist tirade in the middle of Thanksgiving dinner? Pretending everything is fine even when it’s not is so common that cognitive scientists have given it a name: the normalcy bias. When management seems oblivious, we tend to look for explanations in the specifics of the company: The management is stupid; the unions are greedy; the regulators weren’t doing their job. But in fact, this is a general problem, and it’s not special to corporations.

The long answer to “How could they let this happen?” is that when it comes to responding to change, unfortunately corporations are all too human.

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