Damn the Profits, Full Speed Ahead!

GM continues to be insanely focused on "being number one"... number one in sales that is.  We've written before about how this is a meaningless metric, and finally the business press is starting to see it the same way.

The January 29th issue of Business Week has a commentary by David Welch titled Sacrificing Size for Success at GM.  It is right on the money, and as he summarizes,

Maintaining the crown as the world's largest automaker doesn't matter.  If you can't keep it while boosting profits, let Toyota have it.  Let Toyota face the scrutiny of being number one.  Then you can focus on increasing profits.

Welch goes on to describe how GM is looking at taking a stake in Proton Holdings, a Malaysian carmaker that is not exactly profitable, just to augment reportable sales to stay ahead of Toyota.  Yes, really.  A company that can't even turn around their own operations wants to buy another unprofitable automaker just to maintain a sales lead... while falling further behind in profitability.  Of course they are claiming "strategic reasons"... the great subcompact war with Toyota-controlled Daihatsu.  But when you're in danger of completely folding, do you focus on a competitive growth strategy?  No.  Focus inward for a change, fix your current operations just to stay in business, then go on the attack.

Marek Fuchs at TheStreet.com has also picked up on this craziness, and applauds a business journalist that finally gets it right.  He's even a little more eloquent than I am,

The auto company has been guided to the lip of a cliff in part by following the flawed line of thought that it needs to be No. 1 in market share -- as if there were some eternal prize for the car company that sells the most cars or being the girl with the most cake. And the business media generally play along, reporting sales rankings as if they were the end-all and be-all.

Valuing such a showy if meaningless sign of strength might seem important if you're working in the traditionally macho world of the newsroom, and it also resonates in the equally testosterone-filled boardroom, particularly for boardrooms in Detroit.

But being No. 1 doesn't matter one whit.

Those of us that have started small companies soon realize a very important fact: you can sell yourself right out of business.  Too much sales too fast usually results in a cash flow problem that prevents you from fulfilling orders; a problem that will often find bankers and investors willing to help out.  And sales mean squat if they have negative margin.

Perhaps GM needs to look in the classifieds in the back pages of Entrepreneur magazine to find an executive staff with some fundamental business sense.

Comments

[Dale Griffin]

While I agree with the criticism of pursuing the elusive goal of “#1” I will take issue with Marek Fuchs tatement “being No. 1 doesn't matter one whit.”

There is a segment of the market that will buy from #1 as they feel a need to align themselves with “the winner.” Whoever wins the Super Bowl will sell many hats and shirts to those people. They will become Colts (or Bears) fans and seek to be identified as part of that success.

There is also a market segment that buys from #1 as (in their mind) it simplifies the purchasing selection and negates the need to do research, “if they are #1 there must be a reason, so I will just go with them.” I believe this is especially true in the domestic consumer markets, i.e. automotive.

[Mark Graban]

"Ford Chief Sees Small as Virtue and Necessity"

http://www.nytimes.com/2007/01/26/automobiles/26ford.html?pagewanted=2&ei=5089&en=daa2713f3879e60e&ex=1327467600&partner=rssyahoo&emc=rss

[Sean]

If there were enough people that automatically bought from #1, then GM could charge higher prices and make money.

Since GM is unable to make money, then this logic seems flawed. If the #1 effect is so small that it can't overcome the rest of GM's problems, then it makes sense to address those other causes first, and ignore the slight bonus in sales from the #1 effect.

Being #1 is just an ego boost for the GM leadership. As a shareholder would you want them to spend your money to soothe their egos, when it will drive the company into bankruptcy? Would you do the same if you owned the business?

If you disagree with my logic, then what percentage of car buyers only buy from #1? I suspect the number is <5%.

A better argument for being #1 is economies of scale and all that anti-Lean, Fat manufacturing cost-accounting mumbo-jumbo.

[david foster]

There probably is too much ego in the #1 fetish, but in GM's case it's not *all* ego--remember, they have union contracts and benefits plans that must be honored, so a massive reduction in scale is not as feasible as it would be for a company without these constraints.