11/1/2005 | 2 MINUTE READ

Marginal: Institutionalized

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What's important isn't the number of cars you sell but the profit you make from them.


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What's important isn't the number of cars you sell but the profit you make from them. Profitability can be independent of volume, though of course volume, when it's well managed, has a tendency to increase profits." That's Carlos Ghosn, from his book SHIFT. It's a point that is often absent as people look at the month-to-month and year-to-year sales numbers for OEMs. The obsession with size-or the diminution thereof-seems to lead some people to lose sight of what really matters, which is profitability. To be sure, as Ghosn notes, there are things to be said for volume. Given the costs of engineering vehicles, making more of a given platform is potentially more profitable than making fewer. However, if that platform isn't selling, if it is necessary to push product at the customers, then where's the value in that? Another aspect of the importance of volume is predicated on the way that most manufacturing operations have been established over the past 100 years or so, which is, once again, predicated on making lots of the same thing. Sure, we're a long way from when it was Henry Ford's black after black after black, ad infinitum, but fundamentally, assembly plants are sized with a number on the order of 250,000 units per year, with those units being pretty much the same. Once again, the question is: What happens when you can't find 250,000 customers for a given product each year? The answer seems to be that you resort to all manner of marketing programs-which are not in the least bit inexpensive (the auto industry is a leader in advertising spending)-that will lead people to be persuaded to purchase the car or truck in question.

To be sure, there are contractual obligations in place that make making changes a difficult thing in the auto industry. There are structural impediments-as in giant factories-as well. But I'm not so sure that the real stumbling block that exists in the auto industry is something far more intangible: The thought processes of the people who run the businesses. That is, what is the extent to which these people do what they do because that's what they've always done? I submit that it is undoubtedly the norm. This repetitive behavior wears away into a rut. And the rut has gotten so deep that it is difficult for these people to see what's going on outside of it. So they keep right on in the rut, going deeper and deeper, then wondering why there isn't substantive improvement in their fortunes.

A problem with many companies is that what made them successful is what they continue to do long after the initial conditions that facilitated that success are gone. There is a fundamental fear of change. Risk is something that's better avoided, they think, than embraced, despite the fact that the people who were responsible for the original success were nothing if not risk-takers. Consider Henry Ford, Walter P. Chrysler or Alfred Sloan. Had any of them done what everyone else was doing at the time they created the companies they are associated with, they wouldn't even be footnotes in history books. These mavericks-for that's what they were-didn't establish institutions. They created innovative, aggressive companies that profitably served the needs of customers. Nowadays, people who think like them undoubtedly find that entirely different industries-younger ones-are more conducive to their modus operandi. Many of the people who have positions of power and authority seem to believe that their mission is to continue to support their volume-based organizations. Where's the profit in that?