I continue with the automotive industry to illustrate how the management thinking of US business schools, from the elite schools to the humblest community college, practically destroyed US manufacturing, including high tech manufacturing.
In another post I will discuss how US schools of public administration undermine, and are unable, or unwilling to fix US democracy.
What happened to cars, happened to most of US manufacturers. It happened to low-tech, mid-tech and high-tech companies across all industries, and continues to happen because most American management has fallen behind. It has happened because American business training, from executives to the most junior worker, has fallen behind in most industrial sectors.
The US still has some exceptional companies, even in the high-tech industry, but they are an exception. Most Americans know and suffer the problem, many lost their jobs and earn now lower wages, therefore the country is now in and ever worsening political and economic crisis.
American car companies lost market share because they fell behind in the design and manufacture of components and in the design and manufacture of the vehicles themselves.
It happened because the business schools preached “profit is the primary goal”. To motivate the managers to produce higher profits, the boards of companies tied the pay of the managers to the profits.
Managers soon figured out that the best way to increase their pay was to maximise short-term profits. Profits 5, 10, 20 or more years down the road lost importance. After all, most managers stayed in the same company for just a few years.
To maintain profits down the road, you need to reduce profits and invest in research, in development and in training. But American managers were and still are, motivated to generate profits right away.
Slowly at first, the “results” of the approach came in.
American cars fell behind in technology, in performance, in quality and in sales.
At first, Mercedes Benz took away market share from GM´s Cadillac, Fords’s Lincoln and Chrysler’s New Yorker. The American owners of Mercedes Benz experienced more advanced features, better handling, better quality of materials, and finish. Soon the “luxury car to have” became Mercedes Benz. BMW did the same; it placed itself as an alternative to Mercedes. To many people, a Cadillac became “a Chevrolet with leather seats and a few gimmicks, not real luxury.”
This is how Cadillac manages destroyed Cadillac; in 1980 Cadillac sold 33% of luxury cars sold in the US, today its share is 7%. In 40 years, American managers were unable, still are, to match their competition. But it was not only the Germans. In 1989 Toyota launched its luxury brand Lexus. This made things even worse for the Americans.
But even more important economically for America was what happened to the American popular car brands.
When oil crisis hit in the 70s, the price of gas forced many Americans to consider compact cars. They bought imported Toyotas, Hondas, Nissans (then called Datsun) and Volkswagens.
The new owners were surprised, not only the imported cars consumed less gas, they were put together better and were more reliable. They noticed that in particular in the Japanese brands.
The owners raved about their Toyotas, etc. Soon the car magazines made everybody aware of what was happening; the sales of the Japanese brands grew even faster at the expense of US brands.
American managers and the American business schools never considered that perhaps the Germans, particularly the luxury brands, and the Japanese had better managers, it never crossed their minds.
To them it would be impossible that Toyota or Mercedes-Benz would have better managers. How could it be?; the Harvard Business school, and the rest of the World’s “top” business schools were all in the US. Nobody ever heard of German or Japanese business schools“comparable” to Harvard, etc., they had none then, they have none now. The Germans and the Japanese do not believe in the MBA, etc.
American managers “reasoned”; “if they trained us in the best business schools it is obvious we are the best managers.”
Because American business schools and American managers thought they were the best, they looked at other factors to explain the success of the Japanese. The Germans bothered them less because Volkswagen was not as successful, and the luxury market was much smaller than the mass market.
The Americans “assumed” the Japanese advantage was due the much lower wages (at the time) of the Japanese auto worker, the “docile” Japanese unions and the diligent Japanese worker.
The American “experts” convinced themselves, and convinced the politicians and the unions, that if the Japanese had to make cars in the US their competitive advantages of lower wages, docile unions and diligent workers would evaporate and, given the “superior” business skills of American managers, the Japanese would be toast in no time.
The American government told the Japanese; “look fellows, you have to manufacture cars in the US if you want to sell cars here. If you don’t, we will slap huge tariffs on the cars and you will have no market.”
What happened next is fascinating I will discuss in my next post. Movies should have been made about the abject failure, then and now, of the American business schools and the managers they “trained”, ans still “train”.