The more I reflect on the news of
GM’s bankruptcy, the more shocking I find it. My reaction is surprisingly
akin to that when I learned of Eliot Spitzer’s or Bernie Madoff’s flameouts: How
on earth could this happen? What were they thinking? And who in
their right mind could dig themselves that deep a hole?
Some day the definitive book will surely be written about GM’s 40-year descent
into mediocrity, irrelevance, and ultimately failure, just as I’m certain authors
are hard at work as we speak attempting similar explanations for how seemingly
intelligent and successful folks like Spitzer and Madoff could bring their
worlds crashing down around their ears–emphatically so. Since I’m
not a psychiatrist but a purported armchair student of organizational behavior,
that’s all I’ll have to say about Messrs. S and M; let’s go to GM.
Given an event such as GM’s bankruptcy that is, from any objective rational
perspective, nearly inconceivable, my instinct is not to try to explain it
in terms of analytic reasoning or syllogistic logic but to look to the irrational,
cultural, and emotional behaviors and syndromes that must have set in to lead
such a storied firm to such an ignominious end. (Lest you think I slight
syllogisms entirely, one can always deploy them, along the lines of “Poor quality
products alienate customers who then demand ever and ever greater bribes in
the form of rebates and discounts even to think about buying your offerings,
which eviscerates your profits, starves R&D, invites short-sighted corner cutting,
undermines whatever quality was remaining,” etc., etc. It’s a perfectly
valid syllogism but it explains precisely nothing. What begs for explanation
is how GM could sink into such a vicious whirlpool to begin with.)
David Brooks, sensitive and astute observer of human decision-making that
he is, starts off today’s
column (emphasis mine) thus:
On Jan. 21, 1988, a General Motors executive named Elmer Johnson wrote a brave
and prophetic memo. Its main point was contained in this sentence: “We have
vastly underestimated how deeply ingrained are the organizational
and cultural rigidities that hamper our ability to execute.”On Jan. 26, 2009, Rob Kleinbaum, a former G.M. employee and consultant, wrote
his own memo. Kleinbaum’s argument was eerily similar: “It is apparent that
unless G.M.’s culture is fundamentally changed, especially in North America,
its true heart, G.M. will likely be back at the public trough again and again.”These two memos, written by men devoted to the company, get to the heart of
G.M.’s problems. Bureaucratic restructuring won’t fix the company. Clever financing
schemes won’t fix the company. G.M.’s core problem is its corporate and workplace
culture — the unquantifiable but essential attitudes, mind-sets and relationship
patterns that are passed down, year after year.
Gary Hamel, writing in
the WSJ, paints a similar picture of cumulative
and collective denial of reality:
GM’s failure isn’t the result of one spectacularly ill-conceived decision–the
company didn’t jump off a cliff. Instead, it meandered into mediocrity, one
small short-sighted step at a time. Like a two-pack a day smoker, GM committed
suicide in degrees.Dodgy quality, a toxic labor environment, incoherent brand
identities, clunky power-trains, adversarial supplier relations, and subterranean
resale values–these were the chronic symptoms of a management model that
regarded profits as the game rather than the scoreboard, that valued financial
finagling more highly than inspired engineering, and elevated MBA-types to
rule over the car guys.A scant eight months ago, GM’s then-chairman, Rick
Wagoner, boasted that his company was “ready to lead for 100 years to come”
–a comment that only could have been made by someone who was either naively
optimistic or hopelessly delusional.
No less an eminence than Alfred P. Sloan Jr., the firm’s legendary CEO, wrote
45 years ago in My Years Wtih General Motors:
“Success, however, may bring self-satisfaction…. The spirit of venture
is lost in the inertia of the mind against change. When such influences develop,
growth may be arrested or a decline may set in, caused by the failure to
recognize advancing technology or altered consumer needs, or perhaps by competition
that is more virile and aggressive…. This is the greatest challenge to
be met by the leader of an industry. It is a challenge to be met by the General
Motors of the future.”
Sloan’s remarks, of course, invite us–well, me at least!– to broaden
the perspective beyond the bloody and pummeled basket case that is GM today
and to ask if there may not be some intrinsic risk that tends to afflict highly
successful organizations. After all, even Jim Collins’ new book, How
the Mighty Fall, has to deal with the awkward fact that two of the
firms he admiringly profiled in Good to Great, Fannie Mae and Circuit
City, turned out to be anything but.
Back to Gary Hamel, who reminds us that GM is by no means alone:
Motorola, Citi, NASCAR, Starbucks, Sony, United Airlines, EMI, Kodak, Alitalia,
Sprint Nextel, the New York Times, Unilever, AOL and Chrysler–these are just
a few of the businesses that seem to have lost their mojo. Truth is, every
organization is successful until it’s not–and today, there are a lot that are
not.How does this happen? How do yesterday’s icons become today’s also-rans?
How does excellence degrade? What are the causes of corporate dysphoria?
Hamel nominates three causes (emphasis in what follows mine), but then I’d
like to turn to a fourth which I think is even more telling–and potentially
more germane for law firms. Hamel:
First, gravity wins. There are three physical laws that
tend to flatten the arc of success. The first is the law of large numbers.
We all know that it’s a lot harder to grow a big company than a small one.
…Then there’s the law of averages. No company can outperform the mean indefinitely.
…As you lengthen the relevant
timeframe from one year to five and then to ten, the probability of out-performing
the average rapidly approaches zero. In the long-run
there are no growth companies.Second, strategies die. Like human beings, strategies start
[1] Clever strategies get replicated. Hewlett-Packard ultimately learned
to die the moment they’re born. While death can be delayed, it can’t be avoided.
Autopsies reveal three primary causes of death.
how to make computers as cheaply as Dell. JetBlue took a chapter out of Southwest
Airlines’ playbook. … [2] Venerable strategies get supplanted. Digital cameras made film obsolete.
Downloadable music deflated the market for CDs. … Sometimes
newcomers improve on an existing strategy, but occasionally they shoot it
out of the sky. [3] Profitable strategies get eviscerated. …In life, death can come as a shock. In business, it never should. …Companies
die when they can’t escape the grasp of a dying strategy.Third, change happens. Think of the number of things that
have been changing at an exponential pace: … the
production of knowledge itself. In the past, there were many things that
protected incumbents from the gale-force winds of creative destruction, including
regulatory barriers, technology hurdles, distribution monopolies, and capital
constraints. But in most industries these bulwarks have been crumbling. …Fact is, most businesses were never built to change–they
were built to do one thing exceedingly well and highly efficiently—forever. That’s
why entire industries can get caught out by change–industries like big pharma,
publishing, recorded music and the major U.S. airlines. In a world where change
is shaken rather than stirred, the only way a company can renew its lease on
success is by reinventing itself root and branch, before it has to–a feat that
even the smartest companies have trouble pulling off.
Hamel is presumably no longer addressing GM
specifically, but to say that even the smartest companies have trouble turning
away from their traditional customers and abandoning the processes that made
them great is, when you state it that way, not surprising. What’s shocking
about GM is how deep the pathology ran. Consider this vignette, from
early summer 2008:
Around [June 2008], Bob Lutz [former Chrysler CEO and pre-eminent “car guy”] sat down for lunch with [CEO Rick] Wagoner. Spiking gas prices and the global
meltdown of mortgage-backed securities were creating visions of empty dealerships
loaded with unsold inventory. Over sandwiches in the Ren Center, as GM’s
headquarters is known, Mr. Lutz told his boss, “Rick,
I don’t like the way this smells. My gut tells me the economy is set up for
a real collapse.”Years of massive losses had left GM ill-prepared for a major economic shock.
At the time it had about $21 billion in cash, but it was burning a billion
or more each month.On Wall Street, speculation about GM’s fate intensified. Merrill Lynch issued
a report in early July headlined, “GM Bankruptcy Not Impossible.”The cost-cutting effort remained incomplete as the Fourth of July approached.
Just before the holiday, GM’s top 20 or so executives gathered at Mr. Wagoner’s
estate in Birmingham, Mich., for a barbecue. It was an annual event for the
CEO and meant as a social gathering where no formal business was to be discussed.
Even though GM’s fortunes were worsening, the usual rules held, people familiar
with the matter said.
This is the tale of a company profoundly and fatally committed to a totally
delusional world-view. I
guess we can only hope the hotdogs and hamburgers were first rate, but Emperor
Nero had nothing on these guys.
I promised you a fourth perspective, and it comes from my friend (disclosure)
Don Sull, professor of management practice in strategic and international
management, and faculty director of executive education at London
Business School. Don has a new blog at
the FT, where he wrote yesterday:
Many people tell a simple story of corporate failure. Success breeds hubris
which leads to overreach and triggers decline. After studying the causes of
corporate failure and helping companies avoid it for two decades I have discovered
a more profound dynamic that drives corporate decline. The commitments required
to succeed harden over time and prevent companies from adapting effectively
when circumstances shift. Organisastions often succumb to active inertia –
they respond to disruptive changes in the environment by accelerating activities
that worked in the past. […]Several factors harden commitments. Time and repetition enhance familiarity.
Managers avoid reversing commitments to maintain their credibility. New commitments
often reinforce the status quo. Interconnections among commitments hinder make
it hard to unpick one without disrupting the rest.When stable commitments meet turbulent markets, active inertia often ensues.
[…]Companies caught in active inertia resemble cars with their back wheels in
a rut. Managers press on the gas – respond with a flurry of activity to market
shifts. Instead of pulling out of the hole, they just dig themselves in deeper.
Hardened commitments constitute the ruts that lock them into accelerating activities
that worked in the past.Looking in from the outside with the benefit of hindsight, it is easy to deride
managers who spin their wheels as stupid, lazy, arrogant or complacent. All
these vices play a role, no doubt, but the root cause goes much deeper. Corporate
failure is rarely a morality play where the virtues of humility and hard work
degenerate into the vices of arrogance and complacency. Rather it is a tragedy
where two goods – commitment and flexibility – collide.
Don is perhaps more kind to the managers of doomed firms than I would be. I would be tempted to tell them to snap out of it or face the inevitable consequences
of their dereliction.
But the key insight he brings is the vivid one of commitments. Commitments
are indeed what make it hard for us–myself included–to abandon:
- Processes that are familiar, although no longer optimal (summer associate
programs?); - Values that were once inspiring but become sclerotic (the Athenian democratic
wisdom of the partnership as a whole when it comes to management of the firm?);
or - Relationships that become burdens (becoming or remaining overly dependent
on a handful of clients; hitching your wagon to Wall Street investment banks,
for instance, or to structured finance as a practice area).
I must wonder, as you, I imagine, should be doing at this point, which of
these lessons might apply to the great law firms that bestride the globe today. Lest
we hastily forget, GM was once the paragon of 20th Century management. John
Kay wrote in the FT:
General Motors is stumbling towards oblivion. The failing giant was the iconic
corporation of the 20th century. It implemented mass production, created the
idea of professional management and defined a structure for the diversified
industrial corporation. These features of our industrial landscape, today obvious
and inevitable, were novelties a century ago.At one Financial Times breakfast, we debated which were the most important
business books ever published. I nominated three. Peter Drucker’s Concept
of the Corporation pioneered the intellectually rigorous analysis of management
issues. Alfred Sloan’s My Years at General Motors is the most thoughtful
business autobiography. Alfred Chandler’s Strategy and Structure turned
business history and corporate strategy into academic disciplines. Only then
did I notice that all were about GM. The history of modern business is the
history of GM, and vice versa.
Kay concludes that the moral of GM’s demise is “the challenge of how to reconcile
professional management with a culture of innovation.”
Translating that to law firm land, I would say that the challenge facing 21st
Century law firm leaders is how to reconcile sophisticated business-side management
with a culture of professional excellence and innovation in legal
practice and client service.
To firms that figure that out will go the mantle of 21st Century leadership. And
to those who don’t? Perhaps a senior leadership 4th of July barbecue
would be in order.
