Saving General Motors

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OK, it seems like a stretch to compare General Motors to contracting. But, bear with me. General Motor's current problems contain some lessons for all of us.

Controlling Costs
GM has cost burdens that put it at a severe competitive disadvantage. One of the worst is health care. An A.T. Kearney study found that GM has health-care costs of $1,500 per vehicle. That's compared to $201 for Toyota. This is a competitive disadvantage that GM cannot overcome through design improvements or manufacturing efficiencies.

What can be done? In the future, I predict most companies will move away from "defined benefit" health-care plans to "defined contribution" plans just like they have done with pensions, moving from classic pensions to 401k plans. Employers, like GM, will benefit from predictable health-care costs. Employees will benefit from greater flexibility and more control over their own health care.

With wide adoption, society as a whole would benefit as well. Defined contribution health-care plans put the market to work to improve quality and reduce costs. There's proof that this can work. Laser eye correction is not covered by most health insurance plans. As a result, we have become expert comparison shoppers for this service, and costs have come down while quality has gone up.

Costs like health care sneak up on us because they grow a little at a time and we just accept them. Then, one day, we wake up and find a monster eating away at our profits. Fuel could be next. Contractors need to plan ahead and look for new ideas like defined contribution health care. It may be too late for GM.

Embracing Commoditization
Most vehicle categories have become commodities. If you want a mid-sized sedan, there's really very little difference between a GM and any other make. The result? We make buying decisions on price more than features or reputation.

GM needs to embrace the commoditization of its product (see my column, "Commoditization, Part III," in the March issue of SCN). That means two things. First, they have to sell a high-quality product at the lowest possible price-the commodity. Second, they have to launch profit-making innovations from this commodity platform.

What kind of innovations? How about factory-sponsored, pre-paid maintenance contracts. Pre-pay when you buy the car and get a significant discount on required maintenance plus an extended warranty. Add the pre-paid maintenance into a GM financing plan and get a break on the finance charge. Result? GM would get its customer back to the dealer regularly and create profit out of a razor-thin margin commodity sale. Not bad.

Contractors, are you still trying to sell video projectors at a profit? How about conventional fire alarm? Is it working? I didn't think so. Try this instead. Sell the projector or fire alarm at a commodity price (i.e., internet discount). Then, use the commodity as a platform to launch innovative and profitable services. That's "embracing commoditization." GM needs to do this right now. So do contractors.

Listening To Your Market
GM has been late to nearly every market opportunity in memory. They were late to small cars after the "Energy Crisis" of the 1970s. They were late to minivans. They bought Hummer after SUVs hit their peak. They introduced electric cars (remember the EV1?) then took them back. They announced a high-tech hydrogen car that no one can buy but completely missed the hybrids that fly out of showrooms. What's wrong here?

What's wrong is GM's ability to understand and react to the automotive market. Either they're doing very poor market studies (unlikely), or they've chosen to ignore the results (more likely).

A good market study looks at customers, competition, technology, and the economic climate. If GM had done a decent job of analyzing any one of these elements they would be in a much better position than they are today.
I hate to say it but contractors are a lot like GM. Our customers tell us what they want, but we don't listen. Our competitors win jobs, but we don't know why. We ignore new technology and then try to catch up in a hurry. We complain about the economy, but we don't do anything to adapt to its reality.

Creating A Culture Of Change
Can't you just hear a GM executive say, "The way we've done things for years has been good enough, why should we change now?"

In contrast, look at GE. When Jeffrey Immelt took over General Electric from Jack Welch, Welch allegedly told him to "blow it up." Even though Welch had been incredibly successful in leading GE, he knew the future would require change, so he gave Immelt full authority to change everything. Immelt is making those changes, and GE is thriving. GM is holding back, and it's in trouble.

The lesson for contractors is this-don't be like GM, be like GE. Create a culture of change. Reinvent yourself regularly. Beat your competitors to the best ideas (hint, the best ideas come from your customers).

Related

The Commoditization of Contracting -- Part II

Every few years, I get crazy enough to venture out into the "black Friday" shopping frenzy. This was one of those years. Things have changed. I expect bargains. But, this year, there was a lot of stuff offered "free after mail-in rebate." Excuse me but, free? Do they expect to make money at these prices? Maybe it's the old joke, "yeah, we're losing money on this but we'll make it up in volume!"