Monday, June 15, 2009

The Fall of GM

Seth Roberts:
There is nothing new about large industry leaders, such as General Motors, going bankrupt; in The Innovator’s Dilemma, Clayton Christensen gives many examples and an explanation: complacency, also called smugness. We’re doing well, why shouldn’t we continue to do things our way? They fail to innovate enough and less-complacent companies overtake them, often driving them out of business.

Complacency is human nature, true, but it’s the oldest mistake in the economic world. (I’ve studied a similar effect in rats and pigeons.) In the 1950s, complacency was surely why the big American car companies rejected the advice of quality expert Edward Deming. In less-complacent Japan, however, his ideas were embraced. This doomed the US car industry. Much later, Ford was the first American car company to take Deming seriously, which may be why Ford is now doing better than GM or Chrysler.
Question: What is the economic explanation for the emergence of complacency within a company? Is it some form of cascading principle-agent problems within an organization or something else?

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