Rick Wagoner’s resignation and the failure of a management model

On Monday, Rick Wagoner of GM finally stepped down. Many have already written about the failure of his leadership, which oversaw the rapid decline of market share from 33% to 18%, and the drop of stock price from $70 to meager $4. He is blamed for the demise of the GM’s early electric car, EV1. He was also blamed, rightly or wrongly, for not being able to restructure GM, which apparently was the reason that he was dismissed.

I hope that the resignation of Rick WagoWagonerner is a sign of a bigger change. That is, a change of management model from the one that is based on narrow quantitative and financial calculations of shareholders’ value to the one that focuses on creating real values by making extraordinary products and services (in this case, cars). I believe such a change requires more than simple personnel change. It requires a much deeper change in the way we train our managers and the way they think.

Like many other American companies, GM’s top leadership has been recently dominated by executives with deep financial background and experiences. Rick Wagoner was CFO before he became CEO. His predecessor, John Smith, grew up in GM’s financial group. The new CEO also came through a similar path. He was CFO before he became COO, which was the job he had before Monday. So, what is the problem of having people with a strong finance background leading manufacturing firms? It can be summarized by a quote by Thomas Murphy, another former CEO of GM who also was CFO before he took the top job at GM. He once said, “General Motors is not in the business of making cars. It is in the business of making money.” Apparently, Rick Wagoner repeated the same quote during one of his interviews in 60 minutes, although I could not verify it. This mentality of business-of-making-money sounds harmless on the surface, until one starts looking at how that idea was actually implemented. That mentality led to a strategy that GM would do whatever it could to make money, in this case easy money.

GM tasted such easy money through its financing arm, GMAC. Originally founded in 1917 in order to finance dealers and buyers, GMAC rapidly expanded its operation in the real estate financing market since 1985. In 1999, GMAC bought Ditech, which was a major player in the sub-prime mortgage market. In fact, it was Ditech who invented 125% loan. From 1999 to 2005, GMAC enjoyed record-breaking years. In 2004 alone, it made $2.9 billion of net income. (Or, at least they thought so.) GM executives must have been intoxicated by the easy money that they were making. No hard work. Just run the money and let it do its job. During that same period, however, GM’s auto manufacturing business was experiencing record-breaking loss. In a three-year stretch in early 2000, GM lost $30 billion. From this analysis, it is clear that GM’s problem did not start all of sudden last September. GM’s big and fundamental problem was simply disguised and subsidized by the “profit” from the its sub-prime business (which in fact never made money) during the boom years. In a way, GM’s executives were running a large-scale Ponzi scheme. When sub-prime market blew up, all the covers were gone. There was no more place to hide.

What does this have to do with the background of the executives? Well, everything I think. Executives with finance background think and act like bankers. They do what they learned from their MBA programs. In so doing, in the case of GM, they turned a manufacturing company into a large sub-prime mortgage player. They knew little about cars. Cars and customers are reduced to single numbers. They never knew about car in the same way that Steve Jobs can talk about iPhone and Mac. They were never in the business of making cars.

This points to an even bigger problem that we face. That is, our current business education in most MBA programs are dominated by the hegemonic control by an intellectual tradition that emphasizes quantitative skills, economic reasoning, and unshakable commitment to the shareholder value as the singular objective of companies. Since 1960’s, American MBA programs have produced managers who are deeply influenced by this one-dimensional thinking. In almost every MBA program, finance is the largest major, attracting brightest students. Finance elective courses are often overbooked. Many programs require a series of finance courses as part of their “core” curriculum.

At the same time, topics like innovation, new product development and design are often pushed aside as elective courses for small fraction of students. Non-quantitative courses are often marginalized as being “soft”, while quantitative courses are marketed as scientific and rigorous. It is precisely in this intellectual context that the current crisis was born. The problems of Wall Street and the problems of GM are two different sides of the same coin. They both are rooted in the same management philosophy.

What I hope to see happens out of this current crisis is a deep reflection on how we teach and train our MBA students and corporate clients. It is time for MBA programs to look into a mirror and ask ourselves “what have we done?” I hope this will change our curriculum in a way that emphasize real stuff — material, labor, customer, products and services — as opposed to derivatives and abstract values. I hope we begin to teach our students that we cannot simply reduce everything into numbers. We must teach them that they will never be in the business of making money, but they will be in the business of making cars, computers, new energy technology, and the stuffs that the world has yet to see. They need to learn how to think and act like designers, not like a banker. We must remind them that they are makers of the world in which we live. And, we must remind them of their responsibility that comes along with that role. (I wrote on this before.) It is time for a new management model to replace the old, broken one. But, I worry whether our schools have enough guts to do it.

Advertisements

key chain exercise

IMG_0092.JPGIMG_0088.JPG

1. Form a group of 5 or 6.

2. Everyone should put his or her key chain on the table.

3. Each person should explain what he or she has on the key chain and why.

4. Other group member should write down words on given Post-It notes (one word per note). The words can be noun, adjective or verb.

5. Once everyone tells his or her story, the group will post all the Post-It notes on the wall, pulling everyone’s notes together.

6. Create clusters of Post-It notes by grouping similar or related words together.

7. Begin to organize clusters by noting relationship among clusters. For example, try to establish X- and Y-axis. Or try to establish timeline.

8. Complete the sentence, “A keychain is …”

IMG_0086.JPGIMG_0085.JPG

Paper folding exercise

IMG_0102.JPG IMG_0098.JPG

1. Do something with paper to make it stand. 

2. Make four more of them, doing different. 
3. Choose the "best" one from the five that you just made. 
4. Make it better. 
5. Look at your last model and think of ways to improve it further. 

Here are some additional pictures taken from my class. This exercise allows students to think about the entire design process — problem definition, generation alternatives, evaluation, and refinement — in a very short period of time. After this exercise, everyone becomes a designer. This exercise is not only effective but also fun. You can see students smiling. 

IMG_0101.JPGIMG_0100.JPG

IMG_0097.JPGIMG_0099.JPG

IMG_0095.JPGIMG_0094.JPG

another video clip from the students

This is the second video clip from the students who went to the design study tour.

And, here’s a comment from one of the students:
It was the most worthwhile course I’ve taken as a student, not only in the MBA program, but also in all my years in academia. The Design Tour was a once-in-a-lifetime opportunity that many of us may never have again: to tour innovative companies and learn from internationally-recognized business thinkers and leaders. Thank you for going above and beyond what is expected of a teacher. While other professors are content to teach from a text, you took us out of the classroom and into the real world. Thank you again for taking us along for the ride—it was an amazing experience and one I will not soon forget.”
I am very grateful to those who helped me to make it happen and students who took the risk and paid their own way to learn something called “design”.

Design Study Tour – Day 4

Today was the last day of the trip. We had two visits in one location.

It starts with a presentation by Luke Ogrydziak, an architect in SF area. He talked about the impact of digital tools on the way he approaches to the design problem using two projects, about 10 years apart. He mentioned how the material differences between different media influences the way he thinks and designs. He also talks about the importance of resisting the temptation to fall in love with the very first idea that you come up with.

DSC_0431.JPGDSC_0430.JPG

Marco Broccardo from DeSimone engineering firm who specialized high-rise and building with complex geometry told our students the way complex buildings are designed and constructed. Using Gehry's Disney Concert Hall in LA by Gehry and the Art Gallery in Alberta by Rendall Stout as examples, Marco explained the role of engineering design firms in such a project. Overall, it was a very powerful learning experience for me personally. I hope it was the case for all the students who travelled.

DSC_0428.JPGDSC_0433.JPG

Design Study Tour – Day 3

The day began with a long line at Starbucks. I don't know why there were so many people there this morning.

DSC_0331.JPG

The first stop was Stanford d.school. Charlotte Burgess-Auburn gave us a tour. I was most interested in how their teaching model works with the projects and the way these projects were funded. It was very interesting to see how different courses are organized around particular projects that they brought in. We were able to see students in "Extreme Mobility" class making studio presentations. Some pictures here.

DSC_0332.JPGDSC_0339.JPGDSC_0340.JPGDSC_0342.JPGDSC_0341.JPGDSC_0343.JPGDSC_0347.JPGDSC_0351.JPGDSC_0353.JPG

After that, we moved to IDEO Palo Alto Office. There Peter Coughlan, partner and the transformation practice lead, hosted us for three hours, giving us tour and a lecture. Students saw the open and playful space, lots of stories of prior projects, post-it notes boards, and many prototypes. Peter gave a presentation on 5 principles for organization change for innovations.

  1. Find out what people care about and start there.
  2. Design the offer first, then organize yourself to deliver it.
  3. Engage everyone you can in envisioning the future.
  4. Start now, start small.
  5. Make change tangible.

Again, we can see the power of tangible prototype-driven approach here. One thing that is quite evident here is how Peter and his group sees that the organization design (internally) needs to reflect what they offer (externally). This is the point that I have been emphasizing in my teaching and writing and Peter had a very nice framework to codify it. He also mentioned about 13 or so infrastructure elements that will make the change stick in organizations.

DSC_0386.JPG

DSC_0390.JPGDSC_0391.JPGDSC_0374.JPG

One particularly interesting story was the use of actual bottles to show how companies can contribute the sustainability by simply considering different bottling options. In order to make that point clear, an IDEO designer put together a package with several different bottles as shown below.

DSC_0375.JPG

Our last stop was the first architectural firm of our tour. We visited the studio of Stanley Saitowitz. Instead of Mr. Saitowitz, a young architect Allen gave us a very frank and revealing presentation. He talked about how his studio approach to a design problem, the tools they use and the way they interact with clients, contractors and community. He showed several examples from their recent projects. It was interesting to note that they stopped building 3D physical models and almost exclusively rely on 2D CAD drawing for their design. They initial design process is very quick — often around half a day. He talked about how they struggle with different ideas about design concepts, materials, and cost. One really interesting example (shown below) is a restaurant called, "Conduit", and the place was literally designed with conduit pipes. They saw conduit pipes exposed and decided to add even more pipes and completed their design. It was an interesting way of getting inspired for a design concept.

DSC_0396.JPGDSC_0418.JPG

Design Study Tour – Day 2

Today, we visited SAP Design Services Team. We start the day by me giving a talk on my work on organization designing. The talk was a bit rough as I had to deal with audience in Germany and the session started about 30 minutes later than scheduled. At any rate, I hope I conveyed the gist of what I wanted to say. My talk focused on how the radical digitization and emergence of knowledge economy creates the demand for continuing innovations in organizations and how this creates an identity problem in organizations. I further talked about how seeing organization design as a verb, as opposed a noun, helps organizations address this challenge. The presentation slides are here.

DSC_0273.JPGDSC_0279.JPG

After my talk, student made presentations at SAP design center, in front of the Design Services Team. The first team focused on people's lunch behaviors. They studied professionals and students in terms of how they choose they lunch selections everyday.

DSC_0283.JPG

The second team focused on the students use of money. They interviewed several students, which are available on their blog. They identified sources, modes of payment, control methods, spending, and experiences. Then they grouped people based on the level of involvements in money management and the spending (overspending vs. no-overspending). This led to many interesting questions and discussions about financial matters for the students.

DSC_0286.JPG

The last team focused on the daily decisions on the mode transportation. They also have their own blog which is used to document the stories from the interviews. The interviews were based on daily everyday life experiences. They also have a Flickr site with the pictures that they took. They actually reconstructed their analysis process live in front of the audience.

DSC_0293.JPG

The members of SAP Design Service Team reacted to the presentations. They provided extremely valuable comments and feedback.

DSC_0287.JPGDSC_0280.JPGDSC_0277.JPG

The last item on our morning agenda was the talk by Matthew Holloway, VP of Design Service Team at SAP. He talked about how Design Service Team was set up and what it is doing within SAP applying design thinking principles. It was such a great presentation. He talked about how their team is trying to treat many of their problems through prototypes and visualization to change the way the company approach to the problems. He calls it "tangible strategy", which he defines as the articulation of strategy with prototypes. One of the idea that he mentioned was the important role that design plays in organization is to bring predictability.

DSC_0302.JPG

Below is a video clip of his talk at IIT's Design Conference in 2007.

http://video.google.com/googleplayer.swf?docid=3781576816077810671&hl=en
We had a wonderful lunch at their cafeteria. The ice cream was very nice. Before we left the building, we also had a brief tour of their working environments.
DSC_0275.JPGDSC_0294.JPGDSC_0296.JPGDSC_0297.JPGDSC_0307.JPGDSC_0311.JPG

In the afternoon, we visited Neutron — a brand design and strategy firm. They are known for their books — Brand Gap and ZaG.

They emphasize the notion that the brand needs to be built from inside-out. So, they argue that brand building is culture change. They emphasize the importance of destabilizing the established business vocabularies. Design thinking is, according to them, a gut level reactions, which triggered a long conversation about the nature of design thinking and the meaning of rigor. Overall, it was a good visit.

DSC_0314.JPG

DSC_0316.JPGDSC_0328.JPGDSC_0315.JPGDSC_0327.JPGDSC_0312.JPGDSC_0323.JPGDSC_0317.JPGDSC_0320.JPGDSC_0324.JPG

Design Study Tour – Day 1

Today was the first day of the study tour. First, I had to solve some logistical problem. The good staff members at Hotel Diva made sure all the needs were taken care of.

DSC_0219.JPGDSC_0149.JPG

We started with students making brief summary statements on the project that they've been working on. They are making their presentation tomorrow at SAP. Each group picked their own design problem based on the broad guideline that was given by the SAP design team. I will write more about their work and presentation tomorrow.

DSC_0220.JPG DSC_0221.JPG

At 11AM, we had a session with Matt Mullenweb, the founding programmer of WordPress and the founder of Automattic. Matt talked about his view on a wide range of topics including innovation, design, competition, and vision. He talked about how WordPress started as a software, slowly moved to become a platform. It was a beautiful example of how radical change does happen over time in a series of small incremental changes. He explained how the conflicting design requirements led to the invention of the idea of "plug-in". There have been over 8.2 million downloads of WordPress, and there are over 20 million downloads of various plug-ins. This magnitude of market response to the plug-ins led Matt and his team to slowly realize that they are in a platform business. Often, innovation in the products changes the character of the company. Yet, unfortunately, often the company themselves are the last one to recognize it and end up being the victim of their innovations — think about what happened to the original AT&T which created much of the underlying technologies that enables today's Internet, yet disappeared behind the curtain as they did not fully recognize what was going within the Net. He is a truly impressive young man. This is the second time I met him and both times, I've been deeply impressed by him. He is only 24 and students were quite inspired to see someone at his age with formal management education speaking so eloquently about complex issues in management ever so clearly and confidently. I wish we had a bit more time with him. But, we had to rush to our next stop at Yahoo! All students had to run to grab their lunch (I got a sushi lunch box) and had to finish their lunch in the bus.

DSC_0227.JPG

After about an hour drive, we arrived at Yahoo! main campus. We were greeted by Paula Brown and Larry Tesler. I only realized that Larry Tesler that we met was the one who worked at Apple only he left the room. But, it was good to meet a hero of our time.

DSC_0257.JPGDSC_0232.JPG

DSC_0233.JPGDSC_0246.JPG

There were three excellent presentations. The first presentation was by Marc Davis. Marc focused his talk how we can re-conceptualize what computing means in the wake of Web 2.0 and mobile tools. He focused on the importance of 4W (Where, When, Who & What) and how reframing a familiar problem through the digitization of those dimensions can unlock the wealth of new innovation ideas for companies. He demonstrated several Yahoo! products, some of which I was familiar with. As a part of his demo, he took a picture of me, using his mobile phone, which showed up on his Flickr web site (see it here).

DSC_0234.JPG DSC_0235.JPG

Next was a presentation by Klaus Kaasgaard. His talk mostly focused on the role of customer insight research within Yahoo!. Customer insight research is a combination of traditional market research and user experience research. He discussed some of the challenges of running research group to figure out where the market is going and how challenging it is to pick the most appropriate research method. The best part of his lecture was his point that one cannot use focus group with eight strangers frankly talking about sex. To that point, I responded, one cannot easily use observation method to study it either. So, we left with no proper research method for that. At any rate, Klaus is originally from Denmark and it turned out we have several mutual friends.

DSC_0243.JPG DSC_0239.JPG

The last speaker was Luke Wroblewski. Luke gave a very enlightening talking on why design is becoming so important in contemporary organizations. He mentioned product maturity, rapid pace of change and complexity as three forces behind the recent surge in the interests in design. He included globalization as a part of complexity, although I would have made it as a separate force on its own. But, that's just my own opinion. He argued that for product maturity, design as an outcome is the response; for the rapid pace of change, design process; and for the complexity, the design principle. And he summed up design thinking — although there are many different definitions of it — with three key words: empathy, vision, and iterative. That was pretty good keywords.

DSC_0244.JPG DSC_0245.JPG

We finished our day at a local restaurant, called Le Colonial. It was a beautiful and delicious French-Vietnamese place. We all enjoyed good food, wine and conversations. At the end, we were pulling out our credit cards to pay the bill. Here are some photos from the dinner.

DSC_0258.JPGDSC_0260.JPGDSC_0261.JPGDSC_0262.JPGDSC_0263.JPGDSC_0264.JPGDSC_0267.JPGDSC_0268.JPGDSC_0271.JPG