Failure Part 3

If you read my first two accounts about failure, you will know that I view failure as a gift as long as we recognize our failure and keep trying to get it right. Getting it right leads me into Part 3 of this series.

An expression about not taking the advantage of failure reads something like this – “Doomed to repeat the same mistake”.

Case in point – General Motors went broke – not because they were a bad company, but because they made bad decisions in a time when foreign competition was very low. It is very hard to unspill the milk, but that is what they needed. Retiree benefit obligations had put them in a non-competitive position. Because they had to overprice their vehicles to meet their obligations, GM was not able to sustain their customer base.

Bankruptcy and complete reorganization would have cured a lot of their problems, but not all of them. The problem that hung in the air was a humane one. GM’s chief obligation was to the thousands of retirees. Pensions and medical care for the retirees put an exceptional burden on GM. The retirees were not at fault - they believed in, and trusted GM to keep their word concerning their retirement benefits.

It was obvious that GM could not afford to keep their agreements, so they went to the American People (The Government) and asked for loans. But what they asked for was loans to continue business as usual until somehow the market would turn around and they (GM) would make a miraculous rebound and be able to repay the loans.

Well, all lenders have to decide the question of whether or not a prospective borrower has the ability to pay back their loan. Since the Government is the lender of last resort, GM must have exhausted all other avenues for loans before approaching the Government. Can you imagine having a failed business and asking for a loan to extend that failure? Sure, a loan would have given GM a little breathing room, but without a cure, the patient would still die.

What GM and the Government settled on was not a good solution either. The company lost its autonomy and is still burdened with the retiree and union problem. GM still might not survive unless they can compete on a cost basis with other manufacturers. Even fixing quality problems may not be enough to attract buyers of the cheaper but equal in quality cars from other manufacturers.

Recognizing failure would have been helpful to GM. What if, when they went to Washington to get help, instead of asking for a loan to just prolong the agony, they confessed to having a bad business model? Instead of borrowing to continue with a failed model, they came with a plan for the borrowed money to retire all obligations to their retirees and the Union. Upon the success of retiring their long term debt to the retirees, they could then go through a normal bankruptcy for reorganization. A GM with a clean slate would have emerged as a tough competitor for anybody. The company would still have maintained its autonomy. A reconstituted GM would have been able to repay the Government and start making a profit. Of course that did not happen, but my-oh-my, what an opportunity.

When something isn’t working, it is time to rethink the situation. Until the core comes out of a boil, it just keeps on festering and hurting. All the band-aids in the world do nothing until that core either comes out on its own or is lanced.

GM isn’t the only company that needs to recognize their shortcomings. We have lost many manufacturing jobs because of stubborn bad management. Those companies that seek to improve their balance sheet by moving to a different country do all Americans a disservice. Real wealth creation is taking something of little value and making something of value out of it. “Made in America” used to be the trademark of quality and dependability. But we have lost the privilege of putting that on most of our products anymore because so much of our manufacturing and brands have been farmed out to China. “Made in China” is on most of the consumer goods we purchase. I lament that outcome because it could been so much different with a little effort.

Yes, as I have stated, failure is a gift. But what we do with that gift can mean success or just more failure. Just because what you are doing or manufacturing is no longer profitable, it is time to make the necessary changes to get it right. Taking your facility to another country is a band-aid that will still find the deficiencies in your business model. There are too many businesses that have sought for and found solutions other than moving their companies to other countries. These successful businesses should be a model for those thinking about jumping ship for cheap labor.

Our institutions like Harvard and other business colleges should instill into their students the importance of finding solutions and good management instead so much focus on profit. Profit is important, but how we make profit is also important. It is more than a shame for any business to need a Governmental agency breathing down their backs because today’s businesses put profit above ethics. Have we as a people lost sight of right and wrong and are no longer trustworthy? If so, then we have lost our value system and need to restore it.

Cheers,

-Robert-

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