As a follow-up to my post yesterday on why CFOs know the least about your business, here is the book review I mentioned.
Bob Lutz has written an important diagnostic book on the demise of General Motors: Car Guys vs. Bean Counters: The Battle for the Soul of American Business.
Spanning a forty-seven-year career with the Big Three (and BMW), and after retiring from Chrysler in 1998, he was asked back into GM, serving as Vice Chairman from 2001 to 2010, during which time it had filed for bankruptcy.
Lutz is a “car guy,” who has the instincts to know what turns the customer on (see Chrysler’s Dodge Viper and PT Cruiser). This worldview would repeatedly clash with that of the “bean counters,” who were so mired in metric mania they substituted the perceived precision of numbers for common sense.
He certainly understands that marketing and quality is all about the customer, and he points out many of the ways in which GM lost its way and for decades produced a stream of mediocre, uninspiring cars.
He is, however, a lousy economist, and there’s much that is wrong when he discusses various economic issues, such as value, fuel prices, imports, etc., which I’ll discuss later.
First, let’s look at what he found upon returning to GM in 2001.
Process Over Results
There are countless examples in the book of how GM lost its way, and many lessons apply to Professional Knowledge Firms (PKFs) as well. Here are some of the highlights.
- The bean counters decided in the 1980s that Cadillac needed to greatly expand its sales volume to become the nation’s number one luxury brand—sort of like aspiring to be the “World’s Tallest Midget,” according to Lutz. The over-production created a glut of Cadillacs on the market, lowering resale values, increasing the lifetime cost of ownership, and destroying the “aspirational and exclusive” image of the iconic brand.
- There were fourteen VLEs—Vehicle line executives—modeled after Toyota “shusas,” usually engineers responsible for the entire production of an automobile. They were held accountable for various Key Performance Indicators: cost, investment, quality, warranty cost, assembly hours per vehicle, percentage of parts reused from prior vehicle (thought to be Toyota’s key to success), and time to program execution (duration, in Ed Kless’s project management parlance).
Yet any measurement system will be gamed by us humans. Rick Wagoner, the CEO, in exasperation over one car program once blurted out:
I’m tired of seeing financial analyses telling us it’s better to do a lousy car earlier rather than a good one later. We are going to delay this program and get it right!
Worse still, the “world’s most appealing car in the segment” was conspicuously left out of all the measurements, since that’s too subjective—not quantifiable in wonk-speak.
Also, according to Lutz, there’s not a car company in the world that has fourteen people qualified to produce aesthetically pleasing vehicle designs. Most are lucky to have two or three. Lutz is full of contempt:
Having nondesigners pass judgment on design is a bit like sending a sports bar full of beer drinkers to a wine tasting.
- Another ritualistic time-waster Lutz would have done away with if he had been CEO was the Performance Management Process, or PMP. This was to make sure that goals would be aligned, and individual objectives were consistent across functions and geographies. There’s no customer value in this process, for two reasons:
First, the “objectives” are all based on a series of dubious projections on market size, economic activity, competitor actions—none of which ever come true.
Two, a senior executive who needs a quantified list of objectives to know what he or she should be working on should not be a senior executive in the first place. [Amen!].
The “value” is only to the small army of human resources personnel who keep track of the whole mess.
- Lutz would continually point out that it was better to build high net-margin vehicles that took many more hours, than being the best in the world building low-hour vehicles that GM would take a loss on. Timesheet devotees take note!
Lutz also understood that GM was an “interdependent” system:
We need to recognize that everything is a trade-off, that we can’t maximize the performance of any one function to the detriment of overall profit maximization [another huge problem with the timesheet mentality in PKFs—the idea that you can optimize every six minutes and maximize the whole firm].
Suboptimizing profitability by geographic entity makes about as much sense as declaring every U.S. state a “profit center” for GM North America.
Another error of the PMP process is that it crowds out art, creativity, and spontaneous invention, not to mention doesn’t take into account human being’s irrational side:
It assumes that automotive consumers are highly rational people who will perform analyses and elaborate feature comparisons before making their purchase. As we all know, they don’t. The customer buys brands, and some are cool, and some aren’t. The customer is highly design-sensitive, and some cars are attractive, and some aren’t.
Lutz spares no contempt for “Total Quality Excellence” consultants [are you listening to this Six-Sigma belts?]:
…then the concept of “process and standardized work” were expanded beyond manufacturing. If it’s good for the factories, some reasoned, why wouldn’t it be good for every other part of the company, even the creative ones?
Here is where the profound intellectual error was made: the rest of the company isn’t a factory. Almost nothing is done repeatedly, exactly the same way, a thousand times per day. Whether it’s Design (the least amenable to standardized work), Sales, Marketing, Purchasing, Engineering…new situations, vendor products, competitive actions, legal changes, and software upgrades occur daily and weekly.
The attempt to reduce these activities, which require flexibility, adaptability, initiative, and “Hey, let’s try this shortcut” thinking, to a “process” merely results in an unthinking, robotic organization where everyone is on autopilot.
The best part is that if you follow process and the results stinks, you’re safe: you did what you were told. A lot of money was misspent in the last couple of decades of the last century on process apostles.
One VLE came to Lutz, his PMP scorecard showing all green, hitting every target. He was asked, “How is it selling?” “Well, really not that well. But, I can’t be held accountable for that.”
As TV’s House, M.D., said: “We must not let results get in the way of process.”
- When Lutz complained that GM’s exterior body paint was dull and grainy, he was told by the bean counters he was wrong. J.D. Power reports the lowest number of paint defects per car of any company, including Toyota.
Once again, the usual confusion: a restaurant that advertises “the lowest incidence of food poisoning of any restaurant in the state” does not necessarily serve the best food. “Absence of complaints” does not equal excellence.
General Motors is testament to the failure of applying Six-Sigma thinking to knowledge work—whether it’s design, innovation, creativity, or other processes of the mind. It’s illustrative of the Seven Moral Hazards of Measurement.
It’s also proof that companies need to measure what matters to customers, not just measure for the sake of measurement. The idea that a PMP would show all green but the car wasn’t selling is all you need to know about how far GM moved away from holding people accountable for creating results that mattered.
Lutz is a Lousy Economist
Even though Lutz’s diagnoses of GM’s problems are right on, when he ventures beyond microeconomics to macroeconomics, he’s much less of an expert. About the only area I agreed with him on is his skepticism regarding global warming.
He didn’t think Japanese imports were “fair,” but life isn’t fair. He believes the Volt is an example of GM’s vision and risk-taking capacity, but only if you believe government subsidies and risking taxpayer’s money equates to vision.
He’s a big believer in European-level fuel prices, to subsidize mass transit, which would also make us a poorer nation, with a larger government.
He thought the government was right to bail out Chrysler in the 1970s, since they paid it back, even making money. Well, you can win at Russian Roulette every once in a while, but in the long run the odds suck—see Chrysler’s bankruptcy thirty years later.
Lutz believes that the US has lost its manufacturing prowess, since we don’t make anything anymore. And those jobs are gone forever, which is why Obama’s trillion dollar stimulus isn’t working.
But this is nonsense, a form of manufacturilism [ok, I made that up]—like mercantilism—that Adam Smith refuted back in 1776.
In any event, the purpose of an economy is not to create jobs, but to create wealth. Otherwise, we could simply employ a guard for every mailbox, or indeed create the TSA—Thousands Standing Around.
But the most illiterate of Lutz’s views comes from this:
We need to remember that economic value is basically created only one of
- Mining the material from the bowels of the earth
- Growing food and wood on the surface of the earth
- Manufacturing and distributing the products of the first two
Everything else is simply trading “value” that has already been created.
Wow, that would come as a shock to pharmaceutical companies, insurance companies, software companies, Google, Apple, and a myriad of other knowledge companies that don’t produce tangible things.
Lutz should stick with what he knows—how to make cool cars that people want to buy. Leave the economics to people who understand that wealth is far more than producing automobiles.