Systems Theory the Auto Industry

Systems Theory

The Auto Industry

Systems theory: The auto industry

Systems theory: The auto industry

The bankruptcy of General Motors and Chrysler, and the flagging fortunes of the formerly 'big three' dominant American automakers cannot be entirely blamed upon the recent economic downturn and credit crisis. There are profound structural problems all three companies are still trying to resolve to become competitive in the global economy. Although car companies worldwide have been hard-hit by the recession, not every company has suffered GM-sized losses. General Motors has proven uniquely inflexible in its organizational model regarding the demands of the global economy. GM has consistently failed to make critical strategic choices in its pattern of expansion, failed to show innovation and a forward-thinking strategy in its research and development, and has also failed to maximize the value and innovation of its supply chain.

Too big: this has been one of the primary criticisms of American cars' size over the years, particularly in light of rising fuel costs and concerns about global warming. Yet it is also true of the American car industry model. Systems theory emphasizes that "there is an optimum size for a system," and GM and the other major American car companies have over-extended themselves, over the years, producing too many brands, too many models, and allowed dealerships to proliferate to such a degree, profits have become diluted (McNamara 1998).

As a contrary example, the publicly traded, family-controlled company Porsche has shown impressive growth until the recent economic downturn, by remaining relatively small. Porsche has concentrated on a few high-end models, and has used a global strategy of licensing, out-sourcing, and in-sourcing to reduce its costs. As a result of its strategy, Porsche has enjoyed an industry-leading return on invested capital (ROIC) (Pearson Slide 1-2). What it cannot produce profitably itself, it outsources, and it has closely controlled a small number of high-quality brands, rather than sought growth at all costs. Porsche has focused on stakeholder (owner, employee, and customer) satisfaction, rather than shareholder profitability. Some say it would still be profitable, despite its focus on luxury cars, had it not over-extended itself through its involvement with the Volkswagen brand, one of the least-profitable automakers with an entirely different price point and family-focused image.

In an effort to pare down, in 2009 GM announced a plan to cut 10,000 jobs in its European car unit Opel and to eliminate its Saturn and Pontiac brands (Buckley & Vlasic 2009; BBC 2009). It is selling its Saab line to a company in Sweden and the Hummer brand to a Chinese manufacturer (Buckley & Vlasic 2009). This 'think smaller' campaign is part of a general strategy for a 'new GM,' which will also include a focus on more environmentally-friendly vehicles.

This shift to showing greater concern for the environment could be 'too little, too late.' GM has exhibited a profound lack of creativity in dealing the question of sustainability, forestalling rather than anticipating the future. Using litigation rather than research and development has been its fallback position regarding climate change. Systems theory counsels: "the structure determines the various behaviors, which determine the various events. Too often, we only see and respond to the events. That's why, especially in the early parts of our lives, we can be so short-sighted and reactionary in our lives and in our work. We miss the broader scheme of things" (McNamara 1997). GM's structure has been inflexible in refusing to integrate new technology into its existing brands and product development.

For example, GM lobbied the state of California 1998 to overturn an emissions-reduction mandate that would have prohibited many of GM's passenger vehicles from being sold in the large, car-hungry state. When it was successful in the short run, GM discontinued its work on its prototype of a battery-powered car, the EV1 that ran 100 miles on a single charge. Toyota, in contrast, continued to work on its hybrid line, and the resulting Prius shows the fruitfulness of the Toyota approach (Lifton 2008). Discontinuing research on battery-powered technology was not simply bad business sense on GM's part, but also showed how one part of the company (management) could thwart the efforts of another part of the company (R&D). The focus of systems theory is synergy rather than such discordant behavior. Systems theory stresses that "the system's overall behavior depends on its entire structure (not the sum of its various parts)" (McNamara 1997). It also stresses the need to take input from forces outside the system, including the global pressures to minimize the effects of climate change.