Llewellyn

King

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November 24, 2008

The Decline and Fall of General Motors

The seeds of decline are sewn when great corporations are at their zenith. It is then that they become bureaucratic and wasteful, and start promoting management based on committee approval rather than creative dynamics. At their peak, corporations are dismissive of creativity. Team players are valued over inventive mavericks. Consultants and systems are revered because they absolve managers of making hard decisions. The conditions for failure are thus assured.

Sometimes corporations disappear like the once dominant Pan American Airways, or they struggle on in diminished state like Western Union. Creative people leave companies when they suspect that the arteries are hardening, that management is more interested in its perks than in new products and services.

General Motors is in sorry shape because it was once in an invincible position: the most profitable and highly managed corporation in the world. At its apex, GM was regarded not only as a model of profitability but, under its legendary chairman Alfred P. Sloan, it also became known for its management and reporting structure. It was the first huge corporation to introduce complex reporting that measured everything from labor productivity to return on equity. These administrative controls were the work of a GM executive, Donaldson Brown, but they were often credited to Sloan himself.

The company was so proud of its rigid but effective control system that Brown invited the management philosopher Peter Drucker to observe the system at work from the inside. It became a passion for Drucker, whose writings had propelled him into the highest ranks of New York intellectual and journalistic society. About that time, Henry Luce invited Drucker to be the first editor of Life magazine – a high honor for an Austrian-born economist who had fled the Nazis.

Drucker had fallen in love with management as a subject, and with Sloan and GM as the great exemplars of  good management. GM opened its doors and its heart to Drucker. He interviewed everyone, walked in and out of management meetings and attended board meetings. He marveled that there was a system and a procedure for everything. Clearly, GM thought that Drucker would produce a seminal endorsement of the GM way of doing things. After all, it was Sloan who memorably said “the business of America is business,” and he is often credited with saying “what's good for General Motors is good for America.”

When Drucker published the results of his exhaustive analysis in 1945 as a book titled Concepts of a Corporation, Sloan and GM were shocked. Although it found much good in GM, it also found much wrong. Drucker believed that management had to have a human face; that people had to be integrated into systems. He said that management was a “liberal art.”

If GM had listened to Drucker, many of the problems that have plagued the corporation might have been avoided. If GM had not set its systems above common sense, it might have rationalized its product lines, diversified more effectively into defense contracting and might have been able to control quality on the shop floor.

Although Drucker's work might not have saved GM from itself, it set Drucker up as the father of modern management philosophy. He wrote 39 books on the subject and thousands of articles and speeches. I was lucky enough to have met him over cocktails in California. Drucker admired GM and he admired Sloan (particularly his modesty and personal frugality), but he saw the problems incubating.

One cannot say what Drucker would make of today's GM with its pampered executives flying to Washington on a corporate jet to beg for money. He was against executives who treated themselves as medieval barons, and often said that chief executives should not be paid more than 20 times the salaries of their average workers. I think he would have favored the bankruptcy route.

© 2008 North Star Writers Group. May not be republished without permission.

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