This is a reprise of a much older post, but since I have limited time for blogging, I thought it might be timely to reprise it:
I had a conversation the other day with a person I can best describe
as a well-meaning technocrat. Though I am not sure he would put it
this baldly, he tends to support a government by smart people imposing
superior solutions on the sub-optimizing masses. He was lamenting that
allowing a company like GM to die is dumb, and that a little bit of
intelligent management would save all those GM jobs and assets. Though
we did not discuss specifics, I presume in his model the government
would have some role in this new intelligent design (I guess like it
had in Amtrak?)
There are lots of sophisticated academic models for the corporation. I have even studied a few. Here is my simple one:
A corporation has physical plant (like factories) and workers of
various skill levels who have productive potential. These physical and
human assets are overlaid with what we generally shortcut as
"management" but which includes not just the actual humans currently
managing the company but the organization approach, the culture, the
management processes, its systems, the traditions, its contracts, its
unions, the intellectual property, etc. etc. In fact, by calling all
this summed together "management", we falsely create the impression
that it can easily be changed out, by firing the overpaid bums and
getting new smarter guys. This is not the case - Just ask Ross Perot.
You could fire the top 20 guys at GM and replace them all with the
consensus all-brilliant team and I still am not sure they could fix
it.
All these management factors, from the managers themselves to
process to history to culture could better be called the corporate
DNA*. And DNA is very hard to change. Walmart may be freaking
brilliant at what they do, but demand that they change tomorrow to an
upscale retailer marketing fashion products to teenage girls, and I
don't think they would ever get there. Its just too much change in the
DNA. Yeah, you could hire some ex Merry-go-round** executives, but you
still have a culture aimed at big box low prices, a logistics system
and infrastructure aimed at doing same, absolutely no history or
knowledge of fashion, etc. etc. I would bet you any amount of money I
could get to the GAP faster starting from scratch than starting from
Walmart. For example, many folks (like me) greatly prefer Target over
Walmart because Target is a slightly nicer, more relaxing place to
shop. And even this small difference may ultimately confound Walmart.
Even this very incremental need to add some aesthetics to their
experience may overtax their DNA.
Corporate DNA acts as a value multiplier. The best corporate DNA
has a multiplier greater than one, meaning that it increases the value
of the people and physical assets in the corporation. When I was at a
company called Emerson Electric (an industrial conglomerate, not the
consumer electronics guys) they were famous in the business world for
having a corporate DNA that added value to certain types of industrial
companies through cost reduction and intelligent investment. Emerson's
management, though, was always aware of the limits of their DNA, and
paid careful attention to where their DNA would have a multiplier
effect and where it would not. Every company that has ever grown
rapidly has had a DNA that provided a multiplier greater than one...
for a while.
But things change. Sometimes that change is slow, like a creeping
climate change, or sometimes it is rapid, like the dinosaur-killing
comet. DNA that was robust no longer matches what the market needs, or
some other entity with better DNA comes along and out-competes you.
When this happens, when a corporation becomes senescent, when its DNA
is out of date, then its multiplier slips below one. The corporation
is killing the value of its assets. Smart people are made stupid by a
bad organization and systems and culture. In the case of GM, hordes of
brilliant engineers teamed with highly-skilled production workers and
modern robotic manufacturing plants are turning out cars no one wants,
at prices no one wants to pay.
Changing your DNA is tough. It is sometimes possible, with the
right managers and a crisis mentality, to evolve DNA over a period of
20-30 years. One could argue that GE did this, avoiding becoming an
old-industry dinosaur. GM has had a 30 year window (dating from the
mid-seventies oil price rise and influx of imported cars) to make a
change, and it has not been enough. GM's DNA was programmed to make
big, ugly (IMO) cars, and that is what it has continued to do. If its
leaders were not able or willing to change its DNA over the last 30
years, no one, no matter how brilliant, is going to do it in the next
2-3.
So what if GM dies? Letting the GM's of the world die is one of the
best possible things we can do for our economy and the wealth of our
nation. Assuming GM's DNA has a less than one multiplier, then
releasing GM's assets from GM's control actually increases value.
Talented engineers, after some admittedly painful personal dislocation,
find jobs designing things people want and value. Their output has
more value, which in the long run helps everyone, including themselves.
The alternative to not letting GM die is, well, Europe (and Japan).
A LOT of Europe's productive assets are locked up in a few very large
corporations with close ties to the state which are not allowed to
fail, which are subsidized, protected from competition, etc. In
conjunction with European laws that limit labor mobility, protecting
corporate dinosaurs has locked all of Europe's most productive human
and physical assets into organizations with DNA multipliers less than
one.
I don't know if GM will fail (but a lot of other people have opinions) but if it does, I am confident that the end result will be positive for America.
* Those who accuse me of being more influenced by Neal Stephenson's Snow Crash than Harvard Business School may be correct.
**
Gratuitous reference aimed at forty-somethings who used to hang out at
the mall. In my town, Merry-go-round was the place teenage girls went
if they wanted to dress like, uh, teenage girls. I am pretty sure the
store went bust a while back.
