Harvard Business: Why GM Failed

By Karen Berman and Joe Knight

Here's a question from a reader.

Rammohanpotturi asks:
I have a very specific question for both of you. Why do you think GM collapsed? A company which was started in 1909 went on to stay well ahead in the automobile industry for 100 years collapsed. I understand it is not all of sudden. What happened to their financial management?

GM is a very interesting case. Yes, it is certainly one of the great titans of U.S. industry and it's not any fun to see them go into bankruptcy.

There have been several opinions put forward at to why this all happened:
GM makes cars people don't want
GM is too slow to innovate because of its size
GM is too bureaucratic and unable to adjust to changing markets
GM's dealer network is too large
GM sold off its formerly profitable financing business GMAC

To us the problem with GM is very simple. GM stopped making a profit. The reason any company exists is to make a profit. When companies stop making a profit they fail. We measure profit using the income statement. The income statement simply takes what you sold in a period and subtracts the costs in the business during the same period. If sales are greater than costs or expenses then there is profit. If sales are less than costs then there is a loss. (more)