Business March 2012

Why Companies Fail

GM’s stock price has sunk by a third since its IPO. Why is corporate turnaround so difficult and rare? The answer is often culture—the hardest thing of all to change.
Wesley Bedrosian

The American auto industry—an industry that’s been the proud symbol of America’s manufacturing might for a century, an industry that helped to build our middle class—is once again on the rise.” That’s what President Barack Obama told assembled reporters and officials on November 18, 2010, the day after the new General Motors went public, with the largest IPO in American history.

GM sold 478 million common shares at $33 each, as well as a sizable chunk of preferred stock, raising $20.1 billion. While the IPO itself didn’t fully recover the federal government’s post-crash investment in GM (some $50 billion), a complete payoff seemed possible if the stock price rose enough, allowing the government to sell off its remaining stake at a better price. More important, said sober analysts, the stripped-down cost structure, looser union contracts, and management shake-up that preceded the IPO would allow GM to finally shed its decades-old legacy of divisive labor battles and mediocre, gas-­guzzling cars. (As I reported in these pages in 2010, I, too, saw inklings of hope.)

In November 2011, roughly a year later, Treasury revised its estimate of the government’s likely loss upward from $14.3 billion to $23.6 billion. As of this writing, GM’s stock was hovering around $20 a share. The company was beset by reports that the batteries in its splashy new hybrid-electric car had an unfortunate tendency to catch fire. Meanwhile, sales of the Chevy Cruze, which was supposed to be the Corolla-killer, were slipping after a strong initial showing.

This despite the fact that the company’s major Japanese competitors had been crippled by a tsunami and a nuclear meltdown. Business journalists often joke that some struggling firm could be saved only by “an act of God,” but in the case of GM’s stock price, even that hasn’t been enough.

Which has to raise the question: Was the company really saved? Did it finally have its “Come to Jesus” moment? Or was this just one more temporary detour in the company’s erratic amble toward perdition?

Historical precedent offers strong reasons to worry that GM might continue to backslide. Though casual glosses usually present the company’s history as a steady decline from the mighty 1960s to the debacle of 2008, in fact, there were quite a few moments when GM—and Detroit more generally—­appeared to have mended its ways. In 1994, during one of those moments, the reporter Paul Ingrassia published a book called Comeback: The Fall and Rise of the American Automobile Industry. In his 2010 book, Crash Course, he sounds older and wiser:

Throughout the 1980s and 1990s, every time the Big Three and the UAW returned to prosperity, they would succumb to hubris and lapse back into their old bad habits. It was like a Biblical cycle of repentance, reform, and going astray, again and again, as Detroit was repeatedly lured by the golden calves of corporate excess and union overreach.

The cycle reached its peak at the beginning of the new millennium, when the Big Three plunged from record profits to breathtaking losses in just five years.

Over the past few decades, GM’s ability to resist change has proved almost uncanny. Why did the company wait so long and do so little—not once, but time and again—before finally falling into bankruptcy? And what, if anything, does that portend for its future? The questions go beyond GM, a company that’s hardly unique. Why did Blockbuster idly watch Netflix destroy its business? Why did Kodak let digital cameras drive a once-mighty industrial giant into penny-stock territory?

Ask Jeff Stibel, and he’ll tell you: because that’s what troubled companies do. Stibel, once an aspiring cognitive scientist in Brown’s graduate program, is now a serial entrepreneur who has led turnarounds at and Dun & Bradstreet Credibility Corp. “Once the human mind has set out to do something, or has gotten in the habit of doing something,” he told me, changing it is “very hard.” When you add group dynamics, it’s even harder. You don’t need to be a brain scientist, of course, to know that people resist change … and yet, even knowing that, you’d be surprised at how many firms keep driving toward inevitable disaster at top speed. GM’s record is very much the norm, not the exception.

Years ago, I listened to an earnings call with the head of a biotech firm that had sold off the income streams from all its patents, had nothing in its pipeline, and was rapidly burning through its cash. Nonetheless, the CEO kept talking about “our future” as if the company had one, other than liquidation. The equity analysts on the call didn’t seem fazed; apparently, that’s how companies in these situations usually behave. Management and workers seem oblivious to their failures. They wait too long before they act, and even when they do take action, it’s often inadequate.

This dynamic has given rise to a booming industry of turnaround specialists. They range from serial CEOs, like Stibel, who may walk in with an entire senior management team, to more-traditional management consultants. The industry is big enough to support considerable specialization—by company size, by industry, even by technique (cost cutter, brand builder). All seem to agree on one thing: most companies wait far too long to even recognize that they have a problem.

“Typically, a company doesn’t pull someone in until they’re on the brink of disaster,” says Thomas Kim, a Denver-­based turnaround specialist and an officer of the Turnaround Management Association. “They can’t make payroll, can’t make a loan payment, or can’t pay off their loan that’s coming due.” Obviously, if everyone waits until the checks get rubbery, the chances of avoiding the onrushing debacle are slim. But the flip side of the problem, says Michael Buenzow, a senior managing director in the corporate finance and restructuring practice at FTI Consulting, is that unless the crisis is acute, it’s hard to make anything happen. “If you’re brought in too early,” he says, “the employees in the organization won’t have that same sense of urgency.”

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Megan McArdle is an Atlantic senior editor.

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