Past vice chairman of product development Bob Lutz diagnoses the sickness at the heart of American business: data-driven cost optimization
Steve Jobs' Apple has become the premier consumer technology company in the world by making products that people love. Sure, Apple runs a tight ship and hires smart people and all that, but what really sets the company apart is Jobs' intense focus on making good products. Competitors like Nokia were shocked when the iPhone came out, not because of its touch screen or tech specs, but because it just ... worked so well.
General Motors is symbolic for roughly the opposite reasons. A once-great American company, it had to be bailed out by the government and now has a market value of roughly one-sixth Apple's.
All of which makes the new book, Car Guys Versus Bean Counters: The Battle for the Soul of American Business, by Bob Lutz, the former vice chairman of global product development for GM, a fascinating indictment of our country's corporations. In it, Lutz charges that American business has become entranced by planning and forecasting. MBAs and planners -- people who know all business generally but no business specifically -- receive special scorn. In the drive to narrowly optimize for the bottom line, American businesses forget about the real world necessity of pleasing their customers.
Product planners, Lutz told me, approach a new car design as if it was a Harvard Business School case study, creating beautiful, profitable spreadsheets that don't translate well to the real world. Lutz told the following story about how it works in practice:
In the planning process for a new car, you're got a design that's kind of ready. It's going to be a new Chevy Malibu and everybody has agreed that we'll plan for 220,000 units. So you come up with an average selling price to dealers of $22,500 and you deduct the costs and have your gross margin times 220,000 vehicles. You end up with a huge blob of money.
Everybody signs off on that and the bean counters start going to work. They work with the product planners and say, "We don't have to put in 12oz carpeting, we'll put in 8oz carpeting. Why do we need this expensive protein vinyl? Let's go with regular vinyl. Why are we painting the plastic parts? Just grain the plastic. It's not going to be that much of a difference. Why do we have so many chrome moldings?"
And they all think they are heroes. They'll say, "I was on such and such a program and I was able to boost the returns by two full points." And you'll say, "But how did the car do?" And they'll say, "Not well, I think the marketing guys blew it. But man, it was a great program" because it was one that looked wonderful on paper when they got done with it.
In pinching those pennies, the car companies end up ruining the consumer experience. That, in turn, Lutz contends, forces the American automakers to offer thousands of dollars of incentives -- more than their foreign competitors -- to get people to buy the cars, which erodes the margins on the cars. But that last step, the incentives, isn't included in the spreadsheets created by the bean counters.
But, of course, the destruction of the cars' finish is never projected to impact the sales of the cars because the look and feel of the car aren't quantifiable. Lutz said that also meant that the predictions made by product planners tend to be terribly off. "They don't know anything about cars, but they are very good at macroeconomics. They generate tons of paper, but it's all useless," Lutz said. "You're far better off is to have four or five senior people who have a good feel for the market, who can look at the car, know where it's going to be priced, look at the competition, and then come up with a [sales] number." He pointed to the Pontiac Solstice, which GM's planners thought might sell 6,000 units, but which sold 45,000 in its first year, and to the PT Cruiser, which was projected to sell 5,000 units as a "retro" vehicle but which sold more than 120,000 units in 2001.