Europe: MANAGEMENT - When the failure is at the top.

Europe: MANAGEMENT - When the failure is at the top. - The trend of corporate heads to stick to vertical integration is dangerous.

by Robert Heller.
Last Updated: 31 Aug 2010

The trend of corporate heads to stick to vertical integration is dangerous.

The awesome event at General Motors - the removal of the senior tier of management at one sweep of the boardroom axe - has no parallel in the history of great corporations. Wholesale decapitation has been known, of course, after takeovers, but boards of directors (like that of BP removing Bob Horton) usually settle for a single head - and even then with reluctance.

GM's directors, too, were reluctant to move. After all, as the supine backers, for a whole decade, of the disastrous Roger B Smith (still on the board, amazingly), most are accomplices in the crime. Yet the offence, the rundown of a once-dominant business into near-bankruptcy, is not isolated. The events at GM are symptoms of a disease that, curiously enough, has infected only large US corporations.

In 1991, four of the world's 10 largest industrial giants made losses. GM, IBM and Ford were American, the fourth was Italian State holding company IRI - now being disbanded. In the top 50, six made losses: five were American. In the top 100, nine out of the 13 loss-makers were based in the US. It is true, the American economy was in recession, but these were mostly great multinationals, whose global spread is supposed to insulate them against local calamities.

Over half of IBM's sales, for example, come from outside the US. The British recession is no beach-party either, nevertheless British Aerospace was the UK's sole top 100 company to make a loss last year.

What's been going on? The malaise is especially odd because it seems to illustrate the old boxing maxim - the bigger they are, the harder they fall. Yet other western companies with sales above $55 billion (GE and Daimler-Benz) have stayed thoroughly afloat as IBM and GM have foundered.

There is some significance in the fact that the axed Detroit quarter were truly the old guard: the new team, led by former GM Europe star John F Smith, are in their fifties rather than sixties. Geriatric management has long been the curse of GM. But that cannot be said of IBM: John F Akers was appointed CEO at 50 and is due to leave at 60 in two years. You could argue that his relative youth contributed to the IBM disaster: if you have appointed the wrong man, the longer he reigns, the worse for the company.

The rulers of Europe's business empires, however, are seldom striplings and generally sit long (usually too long) on the throne. The explanation has to lie outside the personalities, though they bear their share of the blame - not for being incompetent, but for inadequacy in the face of overwhelming trends.

What do GM, IBM and Ford have in common? The answer is a high degree of vertical integration, which old Henry Ford practically invented, which Alfred Sloan elevated into a high art form at GM, and which is now dangerously obsolete.

At IBM, until the advent of the PC, virtually everything was made in-house, and nothing made was supplied to any other manufacturer. For decades, the strategy was a smashing success. In the 1990s, it has tremendous drawbacks.

First of all, tied suppliers with captive markets have no great incentive to increase efficiency. Secondly, the corporate business system becomes a game of pass the parcel, in which profit margins are added along with value - until the final product is uncompetitively priced. The impact of price competition (as in cars and computers) is thus, perversely, harshest on the cost-bloated volume leader.

The process is analogous to the fault that Procter and Gamble (alma mater of the new GM non-executive chairman) discovered in its supply chain. Only 55% of its deliveries were on time, even though all departments were achieving no less than 95% on-time delivery. But there were 12 departments, and 95 multiplied by 95 11 times ends up as 54%.

The job of co-ordinating a vertically integrated manufacturer to ensure that inefficiencies aren't compounded is almost beyond the wit of man - or rather men, for great numbers are needed to run the necessary (or unnecessary, as the case may be) bureaucracy.

On the whole, European companies have not taken vertical integration to such extremes (fatally, that wasn't true of the old British motor industry). In theory, they should be better placed to exploit the new philosophy of giving genuine independence to free-standing units which can carry the corporation forward to its own destiny by pursuing their own. That can never be achieved when ageing and remote executives lay down laws to protect every stone of an edifice built to serve a different marketplace in a different economy.

The formidable task faced by the new Smith at General Motors, and by whoever succeeds Akers, is to tear down the structures erected by Sloan and the two Tom Watsons and rebuild from the bottom up.

That is made doubly difficult when the business has simultaneously to struggle through tough market conditions - and to wrestle with middle managers and workers who have known only a top-down world.

However, without a radical change in the entire system, it will resist change and (as at IBM and GM) destroy the reputations of those who take it on.

Still, knocking the tops off the top-downers is a good start. Companies will never get good management while bad performance is regarded, to use the dulcet phrase of the Governor of the Bank of England, as "not a resigning matter". If it is not, everybody will have to be resigned to a future of failure.

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