It is easier to increase sales than it is to cut expenses.
In the words of Adrian Van Zelfden, “You cannot shrink your way to profit.”
Cost-cutting CEO’s are hailed as geniuses by Wall Street and lauded as saviors by private equity firms because cost-cutting always works in the short-term.
But that’s not how you build a business.
When Roger Smith rose from his position of accounting clerk to become CEO of General Motors in 1981, Wall Street saw him as a brilliant businessman who was “optimizing operations” and “maximizing profits.” But anyone who loved cars could see that he was destroying one of America’s great companies.
When I complained to one of my brothers-in-law that the GM brands were rapidly losing their distinct identities to become a bland blend of nothingness, he said, “You don’t understand business. It costs a lot to engineer and tool a new model of car for each GM brand,” (Chevrolet, Pontiac, Oldsmobile, Buick and Cadillac,) “so Roger Smith is building all the cars on a single platform. But each brand will get its own grill and headlights and interior and taillights.”
I said, “Perhaps I don’t understand business, but I understand marketing and reputation-building from the hair of my head to the soles of my feet and I’m telling you that Roger Smith is destroying General Motors.”
Every time I point out the dangers of an unsustainable plan to cash in on the 90-day attention span of the American investor, I am told, “You don’t understand business.”
Always those same four words.
Prior to the arrival of “optimizing, maximizing” Roger Smith in 1981, GM held 46% of the U.S. car market. By the time he left 9 years later, market share had slipped to 35.4% and was rapidly falling. When asked about the plummeting market share, he defended the bottom line: “You don’t pay dividends on market share.”
Oldsmobile died. Pontiac died. Buick is not far behind. GM’s market share in 2021 was only 15.2% of the U.S. car market.
This did not have to happen.
“Critics say Smith’s greatest flaw was overemphasizing that bottom-line mentality rather than working on improving product quality. ‘He was a bean counter,’ says Owen Bieber, who was president of the United Auto Workers during much of Smith’s tenure. ‘Suddenly, GM started making a lot of cars that looked alike. I used to tell him that you can’t have a Cadillac that looks like a Chevrolet and expect to sell them both.’”
– Los Angeles Times, Dec 1, 2007
By 1989 GM was losing $2000 on every GM10 it built. Asked by Fortune magazine why the program had failed, Roger Smith answered: “I don’t know. It’s a mysterious thing.”
In June, 2009, when GM dropped to its knees and begged the bankruptcy courts for mercy, Motor Trend magazine had this to say,
“Less than a year after celebrating its centenary, the company we knew as General Motors is dead. Once the richest and most powerful automaker in the world; the symbol of American industrial might; the engine room of the American economy, General Motors is now officially bankrupt.”*
You cannot shrink your way to profit.
Roy H. Williams
* June 1, 2009 – A series of bad decisions based on grievously flawed assumptions led to GM having just $82 billion in assets and $173 billion in liabilities on June 1, 2009. This is a scenario that routinely repeats itself, but no one seems to be paying attention. – RHW
