Painted into a corner by success

I caught a bit of Thomas Friedman on the TV this morning, opining about what's wrong with General Motors and whether/how the government should respond. For those who haven't been following the story, the "heartbeat of America" is one thump away from bankruptcy and, as Mark Potts points out, worth less than half as much as the Washington Post Company.

While indulging in the predictable executive-bashing, Friedman neglected to mention what I think is the real problem with GM: It's painted itself into a corner by following its own success. By concentrating its development and marketing on highly profitable behemoth gas-guzzling SUVs and abandoning the relatively unprofitable low end to foreign imports, it set itself up for failure. This is the standard pattern of incumbent vs. disruptive innovator, and not hard to see. It's also something that's been going on for 30 years or so and should come as a surprise to no one.

GM defenders may argue that GM does produce cheap vehicles. I rent a lot of cars. I no longer will drive a GM small rental unless forced to do so. The SUVs and luxury cars are still fine, if you ignore the fuel consumption. The rest are charitably described as crap. Once GM had a brilliant brand strategy of starting out customers with inexpensive Chevys and moving them up the ladder to Buicks, Oldsmobiles and Cadillacs, but modern cheap GM cars just burn the relationship and send people into the arms of Hyundai. (I've been renting Hyundai lately.)

I generally write about media, not cars, but this does have something to do with media.

Last week I spoke at a conference of the International Classified Media Association. Some newspapers are members, but most produce alternative classified products.

Newspapers generally sneered as these low-end, low-quality classified publications -- many of them free -- picked away the marketplace, starting with attic junk, yard sales and advertising from small businesses with bad credit.

For decades, classified departments neglected private-party advertising and lived off big accounts such as car dealers and big real estate agencies. But over time those competitors evolved into powerful specialty publications like Auto Trader, then the Internet emerged to drive a spike into the business.

Newspapers followed the easy path to obvious profit, and wound up painting themselves into a corner.


Don't forget union labor with really high legacy wages and benefits. Cars can successfully be made in America at decent wages, but it only seems to be happening in the south in Japanese-run auto plants. I'm sure GM would love to have Toyota's billion dollar war chest to ride out the recession.

"Newspapers followed the easy path to obvious profit, and wound up painting themselves into a corner." Right. Newspapers have focused on the "short tail." Like finance, the more diverse your stock portfolio is, the less beta[risk] you have. If you put all your revenue in a few baskets, your risk is greater. The long tail reduces your beta[risk] and newspapers missed the boat. It's all about volume and diversification.

GM's problems are only somewhat the economy. Their biggest problem has been Lock-in to old concepts of their market, and a horribly locked in maanagement, leaving them vulnerable to market shifts that started in the 1980s and are now driving all the profit out of their old business model. Read more at

What does that remind you of?

GM needed (needs) the SUV market because they're higher margin models. It's not all because they believe that's what consumers want. To some extent they've had to use marketing to create demand. The high margins are needed because of the high fixed cost associated with their labor contracts.