A Paradigm Shift To Profitability

Is the “Automotive Industry On the Rebound” or just the companies that make them?  Our local paper, The Toronto Star, reported some very encouraging news today regarding the state of General Motors.  The headline that caught my eye was “A slimmer GM prospers”.  What is more encouraging though is that GM’s recovery is based on a fundamentally new paradigm shift:  Profit Driven rather than Volume Driven thinking.  I could only smile as I recall stating in yesterday’s post, “Sustainability Through Integration“, that some companies are now pursuing a “back to basics” strategy.  Nothing could be more “back to basics” or fundamental to a business than making a profit.

Why the change?  Although profitability is the most fundamental aspiration and measure for success of every business, it is not unreasonable to think that profitability was a given.  After all, what company would launch a product that was designed to lose money?  Becoming the largest producer of automobiles in the world somehow seems to a reasonable objective if all vehicles are indeed profitable.  It is clear that GM became blinded in its pursuit to be the largest automaker on the globe.  Pardigms are certain to have an effect on the culture and policy of the company, however, the lesson learned by GM is that they cannot be pursued in isolation.

To summarize the content of the article, GM has shifted it’s focus from volume to profitability and as such has changed it’s way of thinking.  Having shed almost half of it’s (and losing) brands and focusing on profitability across the fleet of vehicles, GM is now in a position to post its first full-year profit since 2004.  A mere 6% increase in sales between 2010 and 2011 suggests that future profitability will jump 46%.

As we also discussed briefly yesterday’s post, sustainability is a concern for anyone looking to invest in a company’s future.  The article suggests that GM’s profitability is sustainable as the plan is based on significantly reduced volume projections.  In the same article, Ford Motor Company is also expected report a profit of $8 Billion for 2010.

Secondly, GM also intends to use the Chevrolet Volt hybrid drive-train technology across several models.  I can certainly appreciate that sharing the costs of developing this technology across a much larger vehicle / sales base is a smart business decision.

Finally, GM also managed to increase it’s overall global footprint, exceeding that of Toyota.  The article states that “China has overtaken the U.S. as the world’s largest market.  And GM has led all other world automakers in Chinese sales for the  past six years.”  The article further states that GM has outsold Toyota more than three to one in China.  Certainly this is positive news for the investment community and GM employees alike.

The change in GM’s leadership is also evident in the final few paragraphs of the article.  GM’s business model is obsolete and as Roger Enrico was quoted saying, when he was CEO of PepsiCo, “Managing market share without profit is like breathing air without oxygen.”  David Cole, chairman emeritus of the Center for Auto Research in Ann Arbor, Michigan, also had these words of reflection for GM’s CEO, Daniel Ackerman, “If he accelerates things without the right level of execution – well, you’ve got to be careful not to drive into things too quickly.”  I am reminded of our post Lean Execution:  Competing with Giants – It’s all about Speed, featuring Dominic Orr, CEO of Aruba Networks and the videos we posted where he speaks to this topic.

In an unrelated article, I also learned that Magna’s Don Walker also announced that a new plant will be launched in Mexico.  It is interesting to note that Magna Mexico employs 16,000 people versus Canada where the number is approximately 17,000.

Although the Automotive Industry may not be recovering as quickly as we would all like to see, it sounds like the companies themselves are.  It certainly seems that GM has acknowledged past ill’s and has discovered a cure that seems to be working.  For now I am content that this time we may actually have learned a few lessons, did something about, and, best of all, it seems to be working.

Until Next Time – STAY lean!

Vergence Analytics

Twitter:  @Versalytics