Notes on a Scandal – Leadership Lessons from Detroit

As the mess in Detroit continues to get worse, and the Big Three automakers continue to lobby the government for a bailout, it's looking ever more likely that we could be talking about a Big Two before long.  Burning through $2 billion a month in cash, GM seems to be in the most trouble at this point, but there don't appear to be too many people willing to back any of the firms -- witness billionaire investor Kirk Kerkorian's recent fire sale of Ford stock as evidence of his outlook on the industry.

Despite the ongoing financial and liquidity crises, the situation the companies find themselves in isn't one that has sprung up overnight, and it doesn't seem like there's a quick fix on the horizon either.  Given that, and the fact that some estimates point to around 2.5 million jobs being in jeopardy nationwide should just one of the companies go out of business, it can be tempting to shake one's head and dismiss the whole thing as the product of too many missteps and misfortunes all along the line -- at both corporate and governmental levels.  That, however, would be to miss a couple of glaring realities that executives in almost any industry can learn from.

If you're not moving forward, you're falling behind.

Merely giving the market more of the same is a large part of what pushed the Big Three to where they are today.  While the rest of the world moved towards smaller, more fuel-efficient vehicles, Detroit kept pushing trucks and SUVs.  Not that there was anything wrong with that per se: they sold, after all, just not in enough numbers to keep the firms afloat as foreign competitors stole market share there and cornered the fuel-efficient one altogether.  The lesson?  When you run any business -- and especially one that depends on your customers burning a finite resource that your country doesn't produce enough of in the first place -- failing to look into the future and innovate with that reality in mind is inexcusable.

As Google CEO Eric Schmidt put it in an interview with the New York Times last weekend when discussing his own company's spending on innovation, "The problem here is that if you tighten up too much, you eliminate future innovation and then you set yourself up for a really bad outcome five or 10 years from now."  No prizes for guessing which end of that cycle the Big Three are at as they take up semi-permanent residence in Washington.

Even the steps they're taking towards preparing for the future now are a day late and a couple of billion dollars short -- hence the $25 billion bailout announced in September to aid them with refitting plants to manufacture greener vehicles.  In contrast, Toyota and Honda manufacture the majority of vehicles they sell in the U.S. domestically, have been on the hybrid/electric/smaller vehicle bandwagon for a long time, and continue to do quite nicely.

No company is too big to fail

Need we trot this bromide out yet again?  If Lehman wasn't too big, there's no reason to assume that GM, Ford or Chrysler will be, despite their perceived importance to the economy and the nation's manufacturing base.  In fact, as committed free marketeers (until now, anyway), Messrs Wagoner, Mulally and Nardelli should be painfully aware of the "what goes up has every likelihood of going down" maxim that's essential to the free market philosophy they're all but abandoning now.

The converse, however, may well turn out to be true -- some companies may just be too big to save.  While there are obvious limitations in the auto industry with staying flexible and asset-light, every growing company has some element of choice over how big it wishes to become.  Although the choices for the Big Three now appear limited to how to scale back their operations and still survive, leaders in other companies should look closely at any expansion plans and consider if they're really the best way forward, especially if they're not linked to innovation or diversification of products or services.  Sometimes, being mid-sized and profitable just makes more sense than gambling on growth.

Whether or not one or more of the Big Three can be saved at this point now seems to be up to the government, a statement that perhaps serves as the ultimate indictment of a failure of not only leadership, but vision.  While there are plenty of excuses that can rightly or wrongly be thrown around (medical expenses, unions, foreign subsidies for manufacturers), none of them covers for the fact that the Big Three are essentially doing today exactly what they were doing five and even 10 years ago.  Here's hoping that the leaders of tomorrow (in Detroit and elsewhere) think more like Google does even in a downturn, than Detroit ever did in the fat years.