July 29, 2008

Will Your Company Predict the Future Like GM or Like Toyota?

I don't mean to pile onto a disaster in the making, but the demise of the "Big Three" automakers is hard to turn away from (like, yes, a car wreck). It also perfectly demonstrates the dangers, and opportunities, stemming from the green wave sweeping the business world. While Japanese companies prepared for a resource-constrained future, Detroit automakers did not...and they're running on fumes. As the Wall Street Journal declared a few days ago, "Wagoner Says GM Won't File For Bankruptcy." If your CEO has to say you're not bankrupt, it usually means you're darn close.

First, a quick tour of how bad it's gotten. In May, U.S. auto sales were down 11% year over year. GM, Ford, and Chrysler were down 28%, 16%, and 25% respectively while Toyota was down 4% and Honda and Nissan were up 16% and 8%. April was just as bad. More specifically, sales of large vehicles are plummeting - Ford's SUV sales dropped 55% in June - while small, energy-efficient (dare I say "green"?) vehicles are rising in a down market. July numbers are out in a few days, and it looks like Honda may pass Ford for the #3 spot after a tied-for-first GM and Toyota. GM's stock recently hit a 53-year low and its market cap is down below $7 billion, less than one-third of tiny First Solar's market value. Of course Toyota's market cap is down from its peaks as well...to $140 billion.

This mess is hardly just a case of bad luck for Detroit. True, the rise in the price of oil has been unprecedented and it was hard to predict perfectly. But some companies saw the future coming. In the early 90s, Toyota set out to build the "21st century car" and chose "environment" as a core principle (keep in mind that oil was less than $20 per barrel then). The result was the blockbuster Prius. Toyota looked at its strategy through an environmental lens and redesigned the car from the ground up.

In contrast, as late as 2005, GM's CEO re-committed the company to the then- profitable large vehicles. While the speed of the rise in oil prices has been surprising, it wasn't impossible to foresee - in 2005, oil company execs were already talking quietly about peak oil.

There's one interesting side note to this seismic change in the auto industry. In June, Toyota's sales actually dropped more than 20% versus the previous year. The company's sales have been hit hard for two diametrically opposed reasons: 1) unlike Honda, which is the big winner lately, Toyota emulated U.S. automakers by pushing its big vehicles as well; 2) the Prius and other small vehicles are so successful that Toyota can't keep up with demand - sales of the Prius actually dropped in June as Toyota sold out its inventory and fell behind on production (the company is retooling a Mississippi SUV plant to make Priuses instead).

So even Toyota makes mistakes. Its leaders fell prey to some of the short-termism that killed GM, and they didn't perfectly foresee the speed and scale of the shift toward smaller cars. But Toyota did look forward years ago, asked what an environmental version of its product should look like, and made it a reality. Very few companies or industries have made this switch yet, but things are moving fast now.

Where is your industry headed? What will your products need to look like in a resource-constrained world? Are you ready?

This post first appeared at Harvard Business Online.

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