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GM and the great automation solution Business Strategy Review Autumn 2003 G Volume 14 Issue 3 18

GM and the
great automation
solution
In the 1980s General Motors sought to regain its supremacy by replacing
people with robotics, a strategy that was ill conceived from the start. While
the company embraced the automation solution without really understanding
its limitations, the story is also one of ineffective organisational learning and
failed corporate governance. Sydney Finkelstein suggests that lessons from an
analysis of a near $45bn investment strategy hold resonance today as much as
they did in the 1980s.
GM and the great automation solution Autumn 2003 G Volume 14 Issue 3 Business Strategy Review 19
General Motors (GM) 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 GMs modern decentralised
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, shovelling billions of
dollars into factory automation in an attempt
to cut labour costs and catch up with the
Japanese. When the dust settled, GMs market
share had slid from 48 per cent to 36 per cent
during Smiths tenure, a slide that has continued
to the present day when GMs share comes in at
under 30 per cent.
Early days at GM: the seeds of
success
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.
Mark Potts and Peter Behr, Some advice on
saving GM from itself, The Washington Post,
November 16, 1986.
In 1892 a man named Olds invested his
lifesavings to create the Olds Motor Vehicle
Company to build horseless carriages. Olds
founded the first US 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 Durants Buick Motor; the
new entity was called General Motors. Under
Durants 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
GM CEO Sloan to make that happen.
Considered the most influential CEO in GMs
history as well as a pillar in business history, his
slogan a car for every purse and purpose
became GMs trademark. Sloan recognised 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 visualised 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 reorganisation philosophy,
creating the famous GM management system of
decentralised operations and responsibilities with
co-ordinated 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 the US. GM became the
first corporation in the world (in 1955) to
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
GM and the great automation solution Business Strategy Review Autumn 2003 G Volume 14 Issue 3 20
generate $1bn 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 organisations in American industry have had
the long-term success that GM enjoyed. It was the
industrys low-cost producer, with powerful
economies of scale and market share as high as 60
per cent. For a long time only the threat of Justice
Department action to shrink the companys
market dominance clouded the picture.
While GM prospered for years, problems were
beginning to brew under the surface. Although
US demand for cars increased after the second
world war, European manufacturers were
beginning to make an impact. In 1956, for
example, Ford and GM lost 15 per cent in sales
while imports doubled their market penetration
and, even worse, the following year the US
actually imported more cars than it exported. By
1956, GMs market share for new car sales fell to
42 per cent.
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 $2.25bn 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 GMs
luxury, gas-guzzling cars. While GM introduced
Few organisations in American industry have
had the long-term success that GM enjoyed
57.7
16.1
11.7
Average number of autos produced per employee
GM Ford Toyota
GM and the great automation solution Autumn 2003 G Volume 14 Issue 3 Business Strategy Review 21
smaller cars, the market dwindled in the late
1970s as the US plunged into recession.
Into this environment with GM recording only
its second year of losses in its long history Smith
became chairman and CEO in 1981, bringing
with him a confident vision to carry GM back to
its glory days.
The robot revolution
In those days, the question was how many
robots do you have?
Interview with senior executive, GM, May 1999.
In the early 1980s another foreign competitor, the
Japanese, exploded onto the US auto market,
offering reliable, small, competitively priced cars.
The Japanese approach, which emphasised such
unusual (for GM) practices as just-in-time inventory,
quality management, painstaking attention to
production processes, extensive employee training
and involvement, and close co-operation 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 re-
establish its domestic leadership, GM unleashed a
radical business plan to automate and modernise
its factories as well as its car models. It was not a
subtle strategy the centrepiece of the plan was
to substitute high-tech robotics for inefficient
labour, relying on GMs huge financial resources
to make it all work.
The estimated cost $40bn-$45bn was 14
times Fords annual pre-tax earnings at the time.
According to F Alan Smith, former chief financial
officer of GM, 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, wrote Potts and Behr in their 1986
Washington Post article.
In line with the revolutionary transition to
automation, GM also announced the most
widespread reorganisation 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 Smith
elevated him to the status of media darling in the
first half of the 1980s. With 85 per cent of the
reorganisation efforts based in the US, Smith
became a champion of US manufacturing,
catching the publics 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 Ages Ad Man of the Year,
honoured with the Financial World Gold Medal
(best CEO in America), and designated by the
Gallagher Report as one of the 10 best executives
in the US. With such acclimation, it seems little
wonder that GM completed the 1980s in a state
of arrogance, according to one senior auto
industry executive.
GMs sting: money for nothing
Though confidence remained high, productivity
paybacks from GMs 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.
Internal GM reports indicated that by 1985 the
Japanese cost advantage had not changed after
four years of intensive spending on automation.
The strategy to automate
General Motors in the 1980s
under 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
GM and the great automation solution
how people and machines could be effectively
integrated, GM missed the essence of Toyotas
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
Business Strategy Review Autumn 2003 G Volume 14 Issue 3 22
The company that was founded on the principle
of cost savings and was once the prototype for
efficiency had by 1986 become the auto industrys
high-cost producer. The average number of autos
produced by each GM employee stood at 11.7,
while the same figure at Ford was 16.1 and as
high as 57.7 at Toyota. GM also earned 38 per
cent less than Ford and 26 per cent less than
Toyota on each vehicle it 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. GMs plant productivity, which had
lagged Toyotas for years, actually declined further
from 1984 to 1991, a period that should have
reflected the gains from GMs 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 per cent capacity because of
glitches in computer-integrated systems while two
major strikes in the US and Canada in the mid-
1980s spoke to the state of labour relations
during these changes.
GMs share of US auto sales fell to 41 per cent in
1986, while the companys stock price increased
35 per cent from 1981 to 1987, a period when
Fords market value increased seven-fold.
Former GM CFO Smith summed up GMs
situation in 1986: Since 1980 GM has spent
$45bn on the automotive business. Capital
spending appears to be almost inversely related to
our levels of operating profit. And GMs forward
capital spending plans are projected to be
$34.7bn over the period from 1986 through
1989. For $34.7bn, given recent market
valuations, GM could have purchased Toyota and
Nissan. This would almost double GMs world
market share, increasing our penetration to over
40 per cent of the entire free world. Can we
expect to double our worldwide market share
from our spending programme?
Automating GM: the key lessons
The strategy to automate General Motors in the
1980s under 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 was certainly the case with GM and
automation in the 1980s. By not understanding
Everything goes
back to management.
What you need to do
is engineer the
product to the skills
of your work force
1983 1984 1985
$10 bn
$9 bn
$6 bn
GM expenditure on new technology and automation
GM and the great automation solution Autumn 2003 G Volume 14 Issue 3 Business Strategy Review 23
Nissan, for example, but it is more successful.
Everything goes back to management. What you
need to do is engineer the product to the skills of
your work force, says Phil Benton, retired
president of Ford.
The Japanese also excelled at the other
fundamental components of lean manufacturing,
including just-in-time inventory, supply chain
integration and quality management.
[Automation] didnt save the company very much
because GM still needed people, explains Charles
McElyea, a factory automation engineer. By simply
using the technology without the prepared
workforce, all you can do is to automate
confusion, says one senior GM executive.
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 labour, 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 labour your cost
goes down. But what they forgot was they were
getting rid of direct labour but replacing it with
indirect labour 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 labourer. 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 maximise 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 Smiths business and personal
beliefs. Despite internal opposition, it was Smith
described by many as autocratic who defined
GMs problems in the 1980s in terms of labour
costs. To his credit, Smith also understood that
GMs slow, bureaucratic culture was a hindrance
to change and his push for new organisational
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
labour cost problem underlined his belief that
costs could be cut by replacing people with
machines. He browbeat the labour union UAW
with statements like, to quote Albert Lees book
Call Me Roger, 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 doesnt understand, or want
to hear about, the limitations of technology. To
his critics, he was an unusual man who just
doesnt understand people.
The GM board of directors
Where was the GM board during this time and
does it deserve some of the responsibility for the
automation debacle? Smith became infatuated
with robotics and began to see it as GMs
salvation right from the start. While there was
internal opposition, particularly among people
who understood that productivity is not just
based on labour 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
labour relations and productivity at the
beginning of the 1980s, turning to the
automation solution may well have been
considered reasonable. It didnt take long,
however, for problems to develop.
Plant efficiency was down in many factories,
productivity improvements relative to the
Japanese did not materialise and traditional
metrics like stock price and market share reflected
these problems. Further, when a company spends
some $45bn on automated factories, it does not
write a single cheque for that amount and wait
for delivery. Expenditures of this magnitude
involve thousands of cheques written to vendors
Smith became infatuated with robotics and
began to see it as GMs salvation
Business Strategy Review Autumn 2003 G Volume 14 Issue 3 GM and the great automation solution 24
over a long time period, with an opportunity to
assess progress along the way.
For example, in 1983 GM spent $6bn for new
technology and automation, increasing to $9bn in
1984 and $10bn in 1985.1 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 Smiths plans.
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 per cent by 1986. Outsiders did not
have much of a personal stake in the company,
with three out of five owning less than 1,000
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
(eight 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 eight such commitments for
each board member during this period), the odds
were stacked against the GM board taking an
activist stance in monitoring Smith.
In addition to these traditional indicators of
board independence, there is some evidence and
inference that 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 EDS, he referred to Smiths 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
organisation in common with a colleague on the
GM board.
In 1982, for example, 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
organisation.
In sum, the robotics strategy that Smith and GM
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 GMs problems at
once. When GM finally discovered that the Holy
Grail didnt exist, it could look back on an
incredible waste of resources.
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. I
Resources
Potts, Mark and Behr, Peter. Some advice on
saving GM from itself, The Washington Post,
November 16, 1986.
Moore, Thomas. Make or break time at General
Motors, Fortune, February 15, 1988, p. 35.
Lieberman, Marvin B, and Dhawan, Rajeev.
Assessing the resource base of U.S. and Japanese
auto producers: a stochastic frontier production
function approach, Working Paper, UCLA,
August 1999.
Hampton, William and Norman, James.
GM: What Went Wrong, Business Week,
March 16, 1987.
Lee, Albert. 1988. Call Me Roger. Chicago:
Contemporary Books.
Sydney Finkelstein
is a professor of
strategy and
leadership at the
Tuck School of
Business at
Dartmouth and
the author of Why
Smart Executives
Fail (Portfolio).