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Clayton M. Christensen

Clayton M. Christensen

Posted April 8, 2009 | 04:26 PM (EST)

The Past and Future of General Motors


Washington has forced General Motors Chairman Rick Wagoner to resign as a condition of providing the next injection of capital that GM needs to get back on its feet. Finding a "sacrificial lamb" on whom to tag blame for complicated problems is an important instrument in the toolkit of politicians, because it deflects blame for the nation's economic woes away from their own regulatory lapses, economic mismanagement and coddling to labor unions. We've seen it before and we'll see it again. In this case, however, they have cast aside a remarkable executive who already has presided successfully over many of the most difficult elements of the rescue of General Motors in a way that is rare in the history of business.

How did GM, Chrysler, and Ford get in this mess? It is the result of a competitive attack called disruption, which began in the auto industry in the 1960s. When an entrant competitor attacks the low end of any market, the rational reaction of the incumbent firms is to abandon rather than defend it -- because the low end is the least profitable of their possible investments. Rather, the pursuit of profits causes the incumbent leaders to move up-market, towards bigger, better and more profitable products. This is how Cisco up-ended Lucent and Nortel: by introducing a router that was so slow at the outset that it could transmit data, but not voice. Disruption is how Sun Microsystems toppled Digital Equipment; how Dell has been toppling Sun; and how Taiwan's AsusTek has been attacking Dell. Lest the journalists who assembled the newspaper in which you're reading this believe they are immune from this phenomenon, their newspaper's advertising revenues are being disrupted by Google and Craigslist -- and on-line news is disrupting its readership numbers. Disruption is how Canon attacked Xerox; how Wal-Mart and Target bested the department stores; how Southwest drove so many major airlines into bankruptcy; how Sony defeated RCA, and how Apple crippled Sony.

Disruption is continuously afoot in every industry, but especially in autos. It is how Toyota, Nissan and Honda bloodied Detroit: They did not start their attack with Lexus, Infiniti and Acura, but with low-end subcompact models branded Corona, Datsun and CVCC. Toyota then moved up-market by introducing sequentially its Tercel, Corolla, Camry, Avalon and 4-Runner models, and ultimately its Lexus -- with Nissan and Honda in lock step. Disruptive innovation is how Hyundai and Kia already have seized much of the lowest-priced market tier from the Japanese. As did their predecessor American and Japanese competitors, the Koreans will likely in turn cede the low end to the Chinese and Indians without a fight, because stretching towards more profitable mid-size and luxury models is so much more profitable for the Koreans.

Disruption is the causal mechanism behind the "creative destruction" that Schumpeter saw so pervasively at work in capitalist economies.

Disruptive attacks historically spelled the near-inevitable demise of the leading incumbent firms. But now that the theory is becoming better understood, a few of the leaders have begun turning the tables on the entrant attackers, looking at the simple end of their markets as important markets to defend. Indeed, they see in them significant growth opportunities. For example, Cisco acquired Linksys- a wireless small-business router maker, which over the next decade would otherwise have disrupted Cisco from its low-end beachhead. By managing Linksys separately from its high-end routers, Cisco simultaneously pursues further profit in its core business, even as it catches the growth that disruption is creating at the simple end of the market.

General Motors, like Cisco, began several years ago to focus much of its innovation spending on the small-car end of its line-up, so that it now has more models that yield over 30 mpg than any other company in the world. For the last five years the quality of its cars has been comparable to that of its Japanese attackers. The second and third generations of its all-electric Chevrolet Volt, if the company pursues its present plans, are poised to revolutionize the way we get around within our communities. Wagoner and his team have built an enviable position as the largest foreign auto maker in China - which is the world's largest growth market, and the platform from which the next disruptive attack on the world auto industry will be launched.

Pundits and politicians constantly confuse correlation with causality as they compare the management teams of successful vs. troubled companies. While Wagoner is vilified by their calculus, Oracle's Ellison, Microsoft's Ballmer, Intel's Otellini, Google's Schmidt and Starbucks' Schultz are judged to be great managers. They have indeed built remarkable companies -- each by disrupting, incidentally, the prior leaders in their industries.

In reality, the decisions to retreat up-market in the face of disruptive attack were made at General Motors in the 1970s and 80s by CEOs Thomas Murphy and Roger Smith. Wagoner inherited the legacy of their having ignored the disruptive nature of the threats they faced. He and his team have done a remarkable job of working out of it -- though much remains to be done.

Ellison, Ballmer, Otellini, Schmidt and Schultz are today where Murphy and Smith were. Their companies are at the top of their games, at top of their markets. But they are being disrupted, respectively, by Salesforce.com, Linux, Nvidia, local search and McDonalds. Growth makes management easier. In particular, it makes making labor concessions seem easy. It's when growth stops because you're being disrupted that managing becomes really, really hard, and as a result most disrupted companies simply disappear. Very few CEOs have done what Rick Wagoner and his team have done to date. Fortunately Fritz Henderson and the other key members of that team are still in place.

I hope the CEOs of the industry-leading companies I've listed here -- and myriad others in similar positions -- will take note. If you're curious to know what lies in store for Seattle and Silicon Valley, spend a day walking around Detroit with the Ghost of Christmas Future. And to CEO search committees everywhere, in case you missed it, a great manager has just come on the market.