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.
"Look at the past record. Our volume estimates are always wildly off. There are almost none that come close to what happened," Lutz said. "And yet [the product planners] say, 'That might be true but that's no reason that we shouldn't try to take a rational approach.'"
Lutz referenced Apple under Steve Jobs as a shining example of the kind of product development companies should be doing rather than the quantitatively driven kind that they are.
"In all of these industries where you are playing with the psyche of the consumer and her perceptual capability, you must have people who understand that industry, understand those consumers, who can put new things in front of the consumer and come up with the next big idea the way that Steve Jobs does with the iPhone, iPod, iPad, iPad 2, and who knows what next," Lutz said. "Just pick up an iPhone. It's an object of beauty. And so is an iPad You want to own it even if you don't have a clue what it does. It's much the same way with cars."
Unfortunately, American businesses have become obsessed with the kind of narrow, data-driven analysis that consultants and MBA-toting quants can do. And those guys want to hear hard numbers. They want the cars to have good stats. That would have been like counting the megapixels or processor speed on the original iPhone, which would would have missed the whole point. It's the "If you can measure it, you can manage it," ideology gone wild. Ever wonder why cars now seem to have an ever-increasing amount of cupholders? It's because they can count them. "And now, we're having an airbag race. What do you mean, you've got 10! We've got 12!" Lutz cried. "None of those things have an impact on the consumer."
It turns out that there are actually two sets of consumers for a new product design in a huge organization like GM. There are the real people who will purchase the car, but there are also the "bean counters" who have to approve the design before it gets to the real people. And those two groups actually want different things. While any sociologist of technology probably could have pointed that out, it's fascinating to hear someone who spent so much time inside the machine like Lutz express this kind of exasperated alarm bell. "The focus is never on, 'Hey, maybe the product isn't good enough,'" Lutz said. "It's always cost optimization."
Image: General Motors.
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