Why is GM still in business?

Following up on my last post, there’s an interesting question to be asked about General Motors — why is it still in business? If that sounds heartless, it’s not meant to be — it’s because I much of the past week’s commentary sounds awfully familiar. For those who can remember the very early nineties, many were asking whether GM could survive — at one point it had filed the biggest quarterly loss in the history of American business. GM may not be in great shape now — but it’s been 15 years and they’re still the largest single producer of automobiles purchased in the United States. The Economist has a story that touches on this question:

To both its admirers and its enemies, the most awe-inspiring feature of capitalism is its ruthless efficiency. In theory, poorly performing firms are shown no mercy. They are crushed and cast aside as fitter rivals come up with superior goods and services or cheaper methods of production. In fact, the system is nothing like as ruthless as it is cracked up to be. Plenty of suppliers fail to deliver goods on time. Lots of firms are slow to adopt new technology. Many managers are hopeless at motivating their staff. And badly run firms can survive for years, even in the same industry as state-of-the-art companies. All of this has long had economists pondering two questions. First, why are there such wide differences in the productivity of competing companies? Second, why do these differences persist, rather than being squeezed to nothing by the remorseless market? They ascribe some of the gaps to differences in the quality of capital equipment, or in workers’ skills, or in the development and installation of new technology. But there has long been a suspicion that quite a lot of the discrepancy between fit and flabby firms has to do with the quality of management. The difficulty lies in putting a number on it. If economists are to explain company performance in terms of management practices, these must somehow be quantified. But how do you measure the ?quality? of the layout of a shop floor, communication with workers or incentives for employees? An intriguing new study by Nick Bloom and John Van Reenen, of the London School of Economics, and Stephen Dorgan, John Dowdy and Tom Rippin, all consultants at McKinsey, attempts to do just that, and goes on to examine why badly run firms survive. The study is based on interviews with managers at more than 730 manufacturing companies (none of them McKinsey clients), ranging from 50 employees to 10,000, in America, Britain, France and Germany. The interviewees knew only that they were taking part in a ?research? project, not that their management practices were being appraised.

You can see the paper and the executive summary by clicking here. The takeaway points from the paper:

1. Product market competition, at the national sector level, plays a key role in determining the level of management practice, with higher competition likely to increase the exit rate of badly managed firms so improving average management practices. We find little evidence for any additional ?effort? effect of competition in getting managers to work ?harder? 2. Older firms, controlling for selection effects, have poorer management practices. This is consistent with the idea that new entrants find it easier to adopt the better management practices of the era they were founded than their older counterparts. 3. Stronger labour-market regulation significantly impedes good management practice, particularly in firms with longer tenured employees. This suggests that regulation impedes the adoption of new management practices.

Reason #1 would explain GM’s persistence — global competition has increased in the auto sector, but it’s still not a model of perfect competition. [Hey, wasn’t this done by management consultants?–ed. In part, yes, but their methodology seems sound.]