Market Leaders can Also Fail

Once the largest corporation in the U.S. and the clear market leader in the automotive market; General Motors lowered 2001 earnings by $300-$400 million and lost $6 Billion in the first 10 moths of the year. Bank of America analyst Ron Tadross said the likelihood that GM will file for Chapter 11 bankruptcy protection in the next 2 years has increased to 40% according to an article in USA Today.

What happened to the overwhelming strategic power of being #1 or #2 in the market your serve? How many business gurus from Tom Peters to Jack Welch have extolled the virtue of being #1 in the market you serve. The strategic power of #1 is derived from economies of scale and typically lets them enjoy higher margins and potentially offer lower prices than smaller competitors. A winning strategy if you manufacture a large volume of a few products that meet most customer needs.

Alfred P. Sloan, the genius behind the early growth of GM recognized how customer needs are different and change over time. He organized GM’s product lines from low cost Chevy’s to luxurious Cadillac’s to cover those diverse needs. In the 70’s and 80’s these product line differences blurred as management focused on maximizing financial returns on each product line - cheapening the Cadillac and overpricing Chevrolets. By cutting costs at every opportunity they degraded their product quality relative to foreign competitors while maximizing union employee compensation and benefits and executive bonuses.

Now they are one of the higher cost manufacturers and losing share to more flexible suppliers that are adapting to changing customer needs as the number of models available in the industry has grown by 30 percent in the last six years and the unit sales per model has dropped by 24 percent. More product models undermine the economies of scale the largest competitor derives from its market position.

How do you bring down #1 - Keep your costs flexible and expand product options to destroy their economy of scale.