Why a Turnaround Isn’t Auto-matic

Even if you only tuned in to the Democratic convention this week for 30 seconds, you probably heard a reference to President Barack Obama’s rescue of the American auto industry—and the 1 million-plus jobs that have been saved as a result.

Vice President Joe Biden summed up the last four years with this simple observation: “Osama bin Laden is dead, and General Motors is alive.”

While we certainly wouldn’t argue with that, we also can’t help wondering if the celebration isn’t a little premature. The fact is, some analysts are wondering whether GM may actually be getting sicker again.

Although the U.S. auto industry had a very good August, GM’s most recent earnings were a disappointment, tumbling 41% in the second quarter. Meanwhile, market share fell in all four of the company’s sales regions.

None of this would have surprised Peter Drucker, who began following GM in the 1940s when it was on top of the world, and watched as the company’s own success caused it to become smug, fat and slow and slip into financial distress.

Photo credit: Jimmy Brown

“Around 1960 the automobile industry all of a sudden became a ‘global’ industry,” Drucker noted. “Different companies reacted quite differently. . . The companies that refused to make hard choices, or refused to admit that anything much was happening, fared badly. If they survive, it is only because their respective governments will not let them go under.”

But even with the government’s infusion, will GM survive for the long haul?

Drucker knew all too well how hard it is for any enterprise to revive itself. Companies are always shaking up top management in order “to bring about a ‘turnaround,’” Drucker pointed out. And “for a short time, costs are likely to go down and profits and share price to go up,” he added. “But a year or so later, each company will be no better off than it was before.”

Why? “A company beset by malaise and steady deterioration suffers from something far more serious than inefficiencies,” Drucker explained. Its “theory of the business” (a concept we’ve covered before) becomes obsolete. A company’s theory encompasses its key assumptions regarding the outside (customers, markets, distributive channels, competition) and key assumptions regarding the inside (core competences, technology, products, processes).

In GM’s case, this remains the great question: Has the company truly reconsidered and refashioned its theory of the business? On this, the experts are decidedly mixed.

Without such fundamental change, it’s doubtful that Drucker would have altered his view, expressed nearly 20 years ago: “I am increasingly coming to ask whether anything short of a General Motors breakup…is likely to enable General Motors (or its successors) to make a successful turnaround.”

What do you think: Has GM really fixed itself this time? Why or why not?