Detroit's 6 Mistakes and How Not to Make Them

On the day that General Motors filed Bankruptcy, I thought it'd be a good time to revisit the reasons why GM got to this point, courtesy of the Harvard Business School.

Randy Shiner

Detroit's 6 Mistakes and How Not to Make Them

4:06 PM Tuesday November 18, 2008

Tags:Strategy

The end of Wall St. as we know it? Scary - but just the beginning of a larger tsunami of economic reinvention, as our forecasts at the Lab have predicted for the last several years. Now that Wall St.'s been eviscerated, it's Detroit's turn to play the meltdown and bailout game.

So what should we demand from a bailout of Detroit? There's a bigger point raised by the serial destruction of Wall St. and Detroit. The roiling, seething 21^st century demands nothing less than a new economic roadmap: new rules for new kinds of institutions.

To begin making that roadmap concrete, let's highlight the six critical mistakes Detroit made by following yesterday's rules, to draw out some of the new rules of 21^st century business - new rules that you can use to start reconceiving, reinventing, and revolutionizing your own organizations.

1. Old rule: Choose evil. Industrial era business is unrepentantly and almost sociopathically evil: shifting costs onto others, while striving to internalize benefits. Detroit chose lobbying, marketing wars, and low-cost hardball - to always and everywhere try to socialize costs and privatize benefits. Never was this truer than Detroit's lobbying against public transport throughout the 20^th century. Why does public transport in the States suck? Because Detroit's lobbying machine doesn't.

New rule? Choose good. In the 21^st century, every moral imperative is also a strategic imperative: doing good - for customers, employees, suppliers, or society - is a radical strategic choice that unlocks new pathways to innovation and growth. The opportunity cost of defending evil for Detroit was never learning how to choose good - and that's a crucial mistake other auto players didn't make. Tata chose to make a car that was accessible to the world's poor. Porsche and BMW chose to invest in talent, people, and imagination. Honda and Toyota chose to invest in renewables and partnerships with the public sector. All opened new avenues to growth for an industry at the brink of extinction.

2. Old rule: Selfishness is self-interest. What's strategic is supposed to be what's in the firm's self-interest. But how do we define self-interest? Consider for a second the fact that as recently as this year, Detroit's lobbyists were hard at work, opposing stricter fuel efficiency standards. That's 20^th century self-interest at its finest - not authentic interest for one's own long-run outcomes, but simply a childlike selfishness, both myopic and narrow, where cutting off the nose to spite the face is as rational as mutual nuclear annihilation.

New rule? Purpose is self-interest. The 21^st century demands a more enlightened self-interest: one factoring in a longer timescale, fuller contingencies, and an honest and broad consideration of hidden and unintended consequences to people, society and the environment. When we understand all that, have begun to develop a purpose - a way in which we will change the world radically for the better. By confusing selfishness with self-interest, Detroit vaporized it's own purpose - and will stay trapped in a wilderness of economic meaninglessess until it rediscovers it.

3. Old rule: Maximize destructiveness. The goal of orthodox strategy is to destroy the ability of others' to imitate or commoditize you. And Detroit was a master of the art of destructive strategy: patenting, trademarking, and litigating; playing hardball to control distribution channels, defending brands with disproportionately steep marketing investment, and building entire new marques to gain share in key markets and segments. The point of all these tired, stale 20^thcentury strategic moves was the same: strategy as an exercise in exclusion, isolation, and barrier-building.

New rule? Get constructive. True 21^st century businesses can be judged in the blink of an eye: how intensely do they put the "co" in constructive? Can they let demand spark and fuel co-creation, can they co-produce from a pool of shared resources, are they capable of letting value activities be co-managed, are they tuned tocooperate? Detroit can't get constructive because it's spent the better part of a century playing the games of destructive strategy.

4. Old rule: Seek differentiation. When is a Jaguar really just a Ford? When it's an S-Type. Under Alfred Sloan, GM famously organized itself divisionally - Pontiac, Buick, Cadillac... - for the sole purpose of differentiation. But industrial era differentiation is too often just skin-deep: the same lemons with slightly different marketing, distribution, and branding. So why pay a steep premium for a Buick if it's just a Chevy with slightly nicer trim? Detroit discovered the hard way that in the 21^st century, the concept of differentiation is increasingly stale.

New rule? Seek difference. Ultimately, the problem is simple: differentiation is about perception. Difference is about reality. People in the 21^st century aren't the zombified, braindead consumers of the 20^th century. And so the 21^st century demands not mere differentiation - a bean counters' eye view of the world if ever there was one - but true difference. True difference is built by making different choices from the ground up - different in the very essence of the value activities that make the wheels of production and consumption spin. Porsche and BMW strove for difference - not mere differentiation - and it is that choice that is at the heart of their global leadership of the automotive sector.

5. Old rule: Seek agility. Strategy is in many ways simply the avoidance of crisis - the evasion of threat, weakness, and vulnerability. The goal of strategy as the avoidance of crisis is simple: agility. Industrial-era corporations seek agility, in other words, by insulating themselves from real-world economic pressures - that's what Detroit did bar none, by always seeking to game the system: lobbying, marketing, and wheeling-and-dealing it's way straight into oblivion.

New rule? Seek crisis. By insulating themselves from real-world economic pressures, boardrooms also dilute and sap incentives for innovation and renewal. Detroit wasn't innovating because the opportunity cost of strategy as gamesmanship was, ultimately, foregoing innovation itself. In the 21^st century, gamesmanship - and its attendant dilution of incentives - is a sure path to near terminal strategy decay. Forget Detroit - just ask big music, big pharma, or big food.

6. Old rule: Advantage happens against. Orthodox econ holds that it is through the pursuit of competitive advantage that corporations create the most value most quickly and reliably. And that's a mistake Detroit made to the hilt. It sought a nakedly competitive advantage - against suppliers, dealers, consumers, and society alike. The result is an industry crippled by structurally antagonistic relationships with labour, buyers, suppliers, consumers, and society alike.

New rule? Advantage happens for. Competitive advantage against bears a striking resemblance to simply bullying. Bullying is easy: just as in the sandbox, any boardroom with market power can jack up margins by forcing others - buyers, suppliers, consumers, society - to bear costs. But if every corporation across the economy is playing that game, the economy's just a game of musical chairs.

In the 21^st century, what's far more radical, potent, and disruptive is corporations who can use market power to create an authentic advantage for buyers, suppliers, customers, consumers, and society, not against them - one where everyone is made durably better off. That's a sea change in the nature of advantage: from advantage against all, to advantage forall.

Here's the immediate point. No bailout should go forward if we're simply rebuilding a Detroit that will play by the same old rules - because even if it invests in new technology, it will end up inevitably in the same state of terminal decay a few decades from now. The goal of bailing out Detroit should be to reconstruct an auto industry that can play by the new rules of 21^st century business.

• What are some new rules that you think we can learn from Detroit's mistakes?
• Can you see these old rules leading to value destruction in your own industry?
• Can you see how revolutionaries like Google, Apple, American Apparel, and Threadless are following the new rules Detroit didn't - and how following those new rules is letting them redraw the boundaries of value creation?

Fire away in the comments and let's discuss.