How GM’s Reorganization Could Do More Harm Than Good

After releasing disappointing second-quarter results earlier this month, General Motors is revamping. Among its planned strategy changes, the company intends to shift power from so-called regional “fiefdoms” to global functional heads. Such a move will break silos, but could backfire if improperly executed, says Wharton emeritus management professor Lawrence Hrebiniak.

Since emerging from its 2009 Chapter 11 bankruptcy and its November 2010 initial public offering, GM has seen its stock lose 36%, falling to about $21 last Friday. That reflects the firm’s lower revenues, profits and market share of late. In the latest quarter ending June, GM’s revenues fell to $37.6 billion from $39.4 billion a year ago, and its net income fell 40% from $2.5 billion to $1.5 billion during the same period. The world’s largest automaker also saw its U.S. market share last quarter fall two percentage points to 18% — a far cry from its 1962 peak of more than 51%.

As part of a broad restructuring, Dan Akerson, GM’s chairman and CEO, wants to vest authority in global functional heads, replacing regional power centers. That process has begun with manufacturing and information technology, and will soon include marketing and product development, says a Bloomberg report. “We’re a global company that operates as small, little fiefdoms,” the Detroit News quoted Akerson as saying at a June presentation in Chicago. “That’s got to stop.” During a recent interview with Wharton management professor John Paul MacDuffie, GM’s vice chairman Steven Girsky also noted that his company has “a lot of work to do” in changing its culture.

Hrebiniak says he is baffled by GM’s proposed structural changes, which are aimed at making the company more nimble, efficient and effective. “Efficient? Perhaps; with centralized purchasing and the scale and scope, economies are possible,” he notes. “But more effective? Centralization is usually associated with less nimble and slower responses to diverse global markets and customer needs. Centralized controls also demand better coordination and information-sharing — tasks that if not done well can increase inefficiency and slow [down] responses to geographically dispersed markets.”

In contrast, decentralization is usually associated with better local market focus and quicker response to particular customer needs, says Hrebiniak. A regional focus can aid product and service development that deals effectively with competitors and their strategies, he adds, citing recent decentralization exercises at Procter & Gamble, GE, Halliburton, Rolls-Royce and Johnson & Johnson.

In an op-ed article on Monday in the Detroit Free Press, Akerson wrote that despite the fact that the company is doing well in particular regions of the world, GM “will not settle for average” performance, and he is looking for ways “to trim expenses, reduce portfolio churn and eliminate complexity, all of which erode margins.”

“If fiefdoms are a problem at GM — they probably are — it seems to me that other causes or factors are at work and are not being considered sufficiently,” says Hrebiniak. “Poor incentives and controls likely exist. Decentralized units have likely done their thing over the years, hiding behind a wall-like ‘committee culture’ that negates or kills clear responsibility and accountability.” Dismantling silos alone cannot effectively attack such an ingrained culture, he adds.

For regional units to work and culture to change, Hrebiniak recommends that GM take particular steps. “Provide incentives for desired and clearly stated performance goals; hold people responsible and accountable for performance outcomes; change or move people who don’t perform; and promote managers who meet the revised performance parameters and who value cooperation and knowledge sharing for the common good.” Without doing so, in the future GM “will be looking [back] at the ineffectiveness of yet another structural change and wonder what happened.”

Knowledge@Wharton