What Entrepreneurs Can Learn from the GM Bankruptcy
Being a lifelong resident of the Midwest, it was particularly painful for me to watch General Motors CEO, Fritz Henderson, go through the machinations of the agonizing press conference that took place on June 1, where he formally announced the bankruptcy of GM. The wealth collectively generated by GM, Ford, Chrysler, as well as the other OEM automakers (both transplant and foreign), including their supply chain, had been enormous and unprecedented in our country. Then, in a relatively fast process (a decade), the common shareholder equity of GM was suddenly worthless, triggering the shutdown of countless supply companies, and the loss of thousands of jobs for people relying on the automotive sector for their businesses.
While a variety of factors contributed to the billions of dollars of cumulative losses over the past decade at GM (some out of the control of the company) most were certainly within the control of management. After a decade of layoffs, plant closings, poor labor agreements, some painful labor concessions, the cannibalization of its supply chain, and the unforeseen credit and housing bubbles coupled with a crude oil price spike, the accelerated demise of General Motors was almost a certainty. Clearly, the automotive-based regional economy of the Midwest was being changed permanently.
While it was agonizing to watch, we all wanted to know how the board and management of GM seemingly allowed their company to collapse. More important, what could they, or should they, have done to prevent this bankruptcy? And, what questions should the CEO’s of other small, middle-market and large companies be thinking about, right now, in the wake of this bankruptcy, so as to avoid GM’s fate?
What can be done in the C-suite when a sluggish and shrinking economy, decreased liquidity limits, as well as access to cash and credit, applies enormous pressure on your company? If your product line is going down the wrong path, is it too late to adapt to consumer demand? Is your cost structure competitive and sustainable, as was not the case at GM?
During that press conference, we heard Henderson allude to several factors that would be addressed in conjunction with the creation of the “new GM”, but if one listened closely, he seemed to be addressing elements that are simple, basic “Business 101” concepts, all applicable to any company in any sector. These business elements are, however, essential to the success of any company operating in today’s environment, and include the following key themes:
• A company must be cost competitive relative to its competition;
• It must possess the best brands in its space;
• It must also offer the finest products or services available in the marketplace (value creation);
• The company must have a low debt load;
• The company must have the ability to generate sustained, bottom-line performance (GM hasn’t been able to do this for many years);
• The company must build a healthy balance sheet in order to fully support its brands and products; and
• A successful company must continually increase its investment in new technology, which will drive earnings power and help any company get through difficult times.
In other words, the task at hand in today’s business climate is get to the point where your company is consistently being analyzed, evaluated, and restructured, and get there fast. We saw for well over a decade the inability of GM to get its labor cost structure in line with its competition. This cost differential was crippling to the company, but they never were able to fix this flaw in their operating structure. The notion of being able to “grow out of a problem”, which worked well in the 1950’s and 60’s, no longer applies today.
So, how do you get there?
• Close inefficient, duplicitous locations and operations;
• Aggressively reduce excessive expense, converting as much to variable costs as possible. This is an ongoing process versus a one-time exercise;
• Generate cash, invest in your business, and grow your business.
Most of us saw this GM situation developing for many years, and most executives likely had opinions as to what they should have been doing to repair their once-great company. Yet, most also believed GM wasn’t quite in touch with their customer’s needs and desires, and, as result, they literally wasted billions of dollars designing, engineering, building, marketing and selling products without a solid market. That loss of capital, whether in the form of cash, lost earnings, human, shareholder value, etc., is all gone. What is the lesson for other companies? No company wants to end up to the position of GM today, as it is a near certainty the federal government will not be there to bail it out.
Successful companies in today’s business environment must be able to generate cash, and then invest that cash in their business. GM also learned the likely fatal lesson of never taking your customer for granted. If you lose your customer, how do you get them back? It is better to stay focused on not losing them in the first place. At the end of the day, businesses succeed or fail by not being able to identify the potential cost savings in everything they buy and everything they do. The difference between success and failure can be minute, and can often quantified at the margin in one small piece of the cost structure.
Glenn Watson, Principal
Free Vector Advisors
