General Motors has gone bankrupt. Who could have imagined it? A company that was once the pride of American manufacturing; a company whose CEO, Charles Wilson, once said, “What’s good for GM is good for America.”

How did it happen?

First, let us clarify that the credit crisis did not cause the bankruptcy. It was only the last straw. GM has been aging (dying) for some time.

My consulting experience, from which I developed the Adizes theory and practice, has shown that aging is caused by the loss of the (E)ntrepreneurial spirit. Without (E)ntrepreneurial spirit, organizations turn inward and become more concerned with internal issues than with the external market. If this goes on, uncorrected, for a prolonged period of time, the company starts losing sales, and if expenses are not or cannot be cut to reflect the decline in revenues, over time the company becomes so weak that any abrupt change, such as a credit crisis, sends it into bankruptcy.

How did GM lose its (E)ntreprenurial spirit?

In my book Managing Corporate Lifecycles, I identified four causes for the loss of the (E)ntreprenurial spirit:

1. Perceived relative market share;

2. Functionality of the organizational structure;

3. Functionality of the leadership style; and

4. Mental age of the leadership.

Let us examine each of these factors in relation to GM.

1. Perceived relative market share: First, let us discuss the meaning of the word “perceived.”

Often, market share is accepted at face value because it is a mathematically generated percentage based on data, so it must be a “fact.” Yet in my work, I have found that two companies, in the same industry, with the same sales revenues, can have drastically different perceptions of their market share.

I often joke that I can teach anyone how to get 100 percent market share in one minute … Interested? Simply redefine your market as exclusively those clients whom you are currently serving. Your market share depends entirely on how you define your market.

Why “relative” market share?

As a consultant, I am always wary of an organization that boasts about its market share. If there is a significant difference between your market share and your competitors’ – if you are way, way bigger – that can make you arrogant and complacent. What would happen if an Olympic runner competed only against weak competitors? Obviously, he isn’t going to run faster and make new world records. He will only run faster, the best he can, if he is faced with stiff competition.

GM, twenty or thirty years ago, was big – very big, with a majority of the market share. Because it dominated the market, it was slow to accept new ideas and take risks. That is when it stopped “running” (competing effectively). The (E)ntrepreneurial spirit was driven out of the organization – one example was John Zachary DeLorean, a rising star who left in frustration to start his own car company.

2. Functionality of the organizational structure: The functionality of the organization’s structure refers to how responsibility – and even more importantly, authority – is assigned throughout the organization.

In growing organizations, a centralized organizational structure is common, because the systems and controls required for decentralization are not sufficiently developed to allow for decentralization without loss of control. If the organization continues to grow, then at some point it will have to decentralize; if it does not, management will be too far removed from the market – from where added value is created – and thus it will lose touch with the operations of the business. When a separation like this occurs, a loss of (E)ntrepreneurial spirit naturally follows.

The larger the organization, the more important it is that the organization decentralize authority and responsibility, allowing the burden of management to spread throughout the organization, and in doing so, increasing the leadership capabilities of additional managerial ranks. Decentralization increases organizational flexibility, which is essential in changing markets.

What happened at GM on this score?

About twenty years ago, while I was lecturing at the Columbia University Executive Program, I had the opportunity to meet GM’s strategic planner, who was a visiting lecturer. He told me something very interesting that I would like to share with you: When the United States Department of Justice initiated its antitrust suit against AT&T (which resulted in the mandated splitting of AT&T into seven separate, independently operating companies), GM became concerned that it would be next. As it was one of the largest car manufacturers in the United States, its worries were not unfounded. GM decided to take defensive action to make sure that it could not be split apart. The company proceeded to restructure itself, becoming so integrated that it was impossible to split the whole into separate pieces.

However, the organizational structure that resulted was top-heavy and overly centralized. This increased the need for top-down control systems, which further bureaucratized the organization.

When an organization the size of GM gets heavily centralized, it will (no surprise here) be managed by numbers. It is not strange, then, that the people who climbed to the CEO position in the company advanced from the financial sector.

This brings us to the third factor that causes aging.

3. Functionality of leadership style: A quick review of the last five CEOs at GM shows that all but Robert C. Stempel came from backgrounds in accounting and finance.

Managers coming from this field are typically not creative visionaries, but rather, number-crunching (A)dministrators. They watch the dials rather than the road ahead.

The style of an organization’s top leadership plays a part in defining that organization’s culture. In order to maintain a culture of (E)ntrepreneurial spirit, it is important to have leaders who are creative and visionary and who drive the organization to push its boundaries and reinvent itself. That is not what happened at GM.

4.Mental age of leadership: The mental age of an organization’s leadership is defined as the disparity between the desired and the expected. If you desire more than you expect, then you will work hard, take risks and find ways to get what you desire: You are mentally young.

If what you expect is what you desire, you will be satisfied with your lot, and you are more likely to relax on the job and avoid risks. You will be more conservative, because you will be afraid to lose what you have. You will be mentally aging.

When I examine an organization, I try to assess the mental age of its leadership. Is it still ambitious? Is it stretching the organization, pushing it to take risks and try new things in order to get the results it wants – which exceed what the leadership expects? If the leadership does not do that, I know I am dealing with an aging organization.

A few years ago I was consulting for an organization in the computerized die-casting business. Die-casting is one of the oldest technologies in the world and has not changed significantly for generations. This company had licensed a patented technology from MIT that drastically reduced the amount of time it takes to create a die cast. This new technology would allow a car manufacturer, such as GM, to design a new engine more quickly – by months, possibly even by years. Clearly, this would have been a no-brainer: of tremendous benefit to GM. Yet GM has yet to adopt this new technology. In the culture of GM, apparently, what was desired was what was already expected. So why make waves? Why change?

As we can see, GM has been impacted by all four causes of aging and for many years. As a (predictable) result, there was a loss of (E)ntrepreneurial spirit. Instead of trying to develop (E) internally, GM, like most aging companies, dealt with the problem by trying to buy (E) through acquisitions, such as Hughes Aircraft and EDS.

But mergers and acquisitions do not rejuvenate a company. At best, they make the numbers look better (which is a typical strategy of financial people). Thus, the company looks as if it is growing, but in the meantime, top management’s focus has been diverted from its core business. Instead of organic growth through innovation and following market preferences, these acquisitions make the numbers only look good enough.

When a company starts to age and die, what can be done about it? What should be done with GM?

A gardener might say: “Don’t treat the leaves. Treat the roots.” In Adizes language, this translates to: “Don’t treat the manifestations. Treat the causes.”

What is the manifestation of the problem? The losses. Thus, covering the losses with loans and investments will not solve the problem. GM needs to rejuvenate itself. It needs to renew the (E)ntrepreneurial spirit that it lost so long ago.

Changing the culture of an organization takes a “bit” longer than the projected time frame of President Obama has had for GM to return to profitability .

In order to deal with the causes, we have to deal with the culture of the organization and its loss of (E)ntreprenuerial spirit.

GM has to reorganize itself and decentralize. Only that will create the necessary conditions for (E)ntrepreneurial management to re-emerge. GM will have to get organized around markets, split marketing from sales, and split engineering from production. It will need to bring new blood into the organization and free itself from domination by its financial division. This might be very difficult – maybe even impossible – to do, given the financial crisis GM is in. But if marketing (not sales, marketing) and engineering (not production, engineering) do not take control of the company’s power centers, the future will not be much different from the past.

Sincerely,
Dr. Ichak Kalderon Adizes