I’m starting this post without an opinion about bankruptcy vs. bailout for GM et al. In all honesty, I’m prepared for the worst either way — though I’m somewhat less inclined to oppose letting them fail (keeping in mind that bankruptcy doesn’t necessarily mean going out of business).
GM hasn’t exactly exemplified itself as a great business in recent decades, and some companies (if not most — if not all companies eventually) must fail for the whole economy to be sustainable and vital. It’s kind of counterintuitive, but in a sense, failure drives success (or at least risk drives growth, while risk also leads to some inevitable failures, and then the few areas of growth lead to eventual success).
(I’m simply repeating much of the recent commentary, citing the need for creative destruction in our economy. If this notion is new to you, start reading Virginia Postrel. I touched on it last month when I wrote about the importance of small business.)
A close analogy here is with design. A designer must take chances to develop something original and compelling, and then there’ll be a lot of prototyping and testing and feedback gathering and reiteration of the process (a lot of failures at every phase) before a really great design emerges — not in isolation, but within a whole community (or environment) of experimenting and risk-taking. Bigger and more dynamic communities tend to generate more sustainable successes and more failures at the same time.
I’m reading things like, “US automakers failed to adapt with the market, while foreign automakers changed with the times and developed more fuel efficient vehicles.” But it isn’t entirely accurate to depict foriegn automakers as anticipating this shift while US companies ignored it.
I get the sense that no car company truly anticipated the shift in consumer attitude (or at least nobody anticipated the profoundness of the shift) we saw in the summer with high fuel prices. What made Toyota more prepared for that than GM is their whole culture of innovation and continuous improvement.
The influential strategy guru Gary Hamel described the culture of ”management innovation” in his book, The Future of Innovation. The New Yorker’s James Surowiecki wrote about it in May:
According to Matthew E. May, the author of a book about the company called “The Elegant Solution,” Toyota implements a million new ideas a year, and most of them come from ordinary workers. (Japanese companies get a hundred times as many suggestions from their workers as U.S. companies do.) Most of these ideas are small—making parts on a shelf easier to reach, say—and not all of them work. But cumulatively, every day, Toyota knows a little more, and does things a little better, than it did the day before.
Of course many of those ideas are bad and the process is “not without missteps” according to Surowiecki. But the way to overcome the hazards of bad ideas is to generate even more ideas. The more ideas, suggestions, insights, and innovations you have to deal with, the better you become at managing to recognize and capitalize on the good ones.
Probably the best authorities on this notion are Robert Sutton and Jeffrey Pfeffer. [Update: The following quote is old, but here is Sutton's insightful commentary on GM specifically. Be sure to read the comment by Matthew E. May, author of The Elegent Solution, which was referred to above.] Sutton put it like this on his blog:
We emphasize that is impossible to run an organization without making a lot of mistakes. Innovation always entails failure. Most new products and companies don’t survive. And if you want creativity without failure, you are living in a fool’s paradise. It is also impossible to learn something new without making mistakes.
Which is why I’ve been skeptical of the Chevy Volt project, noting it seems to have been undertaken in desperation — a kind of “all eggs in one basket” effort to produce a saviour. That project can’t afford to fail, whereas great innovations tend to emerge accidentally, through some degree of playful experimentation, or are adapted for an unintended use, or through the incremental accumulation of smaller developments.
Consider the automobile itself. It was “invented” through a series of enabling innovations, largely through tinkering. Then the auto industry as we know it emerged after thousands of car companies failed. (And take a look at Time’s entertaining list of the 50 Worst Cars of All Time.)
A bailout would largely undermine the process of creative destruction that’s so essential for a sustainable and vital economy.
Now the reason I’m kind of ambivalent about it — even though I believe strongly that GM and Chrysler (and any other company) should be allowed to fail — is that we need the same kind of political and intellectual diversity among specific economic regimes around the world in order for to learn which are the most sustainable and vital.
In other words, the bailout approach might eventually lead to failure of the US economy in general, but we need economies to fail before finding which are most worthy of success.
Sort of a cold way to look at it, but reality isn’t any warmer. I truly don’t know what the right answer is — maybe the forgoing analysis is too econo-centric and we’re underestimating the importance of social welfare and personal empathy. Maybe the most successful regime a century from now will be the one that places individual needs ahead of economic viability.
Then again, I’m more inclined to believe that most of the responsibility goes the other way: it is the corporation, its management, and its employees (who in this case cannot claim to lack power, as they are sufficiently represented by the UAW to affect the outcome) that has a responsibility to society.
This was one of the main points of Peter Drucker’s Concept of the Corporation, his greatly influential study of GM in the 1940′s, at the height of its potency. By 1983, Drucker identified the root cause of GM’s decline in a newly added epilogue:
What has hurt GM the most is that its fundamental tenets made it smug. Alfred Sloan and Charles Wilson had been highly innovative people who always asked, “What is the right question?” Their successors knew all the right answers.
In that spirit, we must admit that we don’t know the answers to questions faced by the auto industry and our deepening economic crisis in general. But one thing I can be fairly sure of is that the best answers tend to emerge from closer to ground-level — the way Toyota’s innovations emerge from feedback of thousands of employees day-to-day — rather than being delivered fully-formed from atop the mountain.
We all know this is a big test for Barack Obama. We’ll know within a few months whether he is truly a “socialist,” or a “pragmatist” as his advisors claim. His recent YouTube fireside chat (my thoughts on that method are here) indicates he’s talking a fairly socialist game at least for now. We’ll see… this is a fantastic cliffhanger.
[Edit March 30, 2009: I removed a couple of superfluous sentences and corrected the spelling of James Surowiecki's name.]
