Harvard business blog (Why GM failed) had a post on why GM failed. Here are a few simple but interesting facts. A company which was started in 1909 went on to stay well ahead in the automobile industry for 100 years collapsed. GM stopped making profit in 2005. Since that time GM lost more than $90 billion through the 1st quarter of 2009.
“why did those losses happen?”
The problem for GM was that when the sales slowed down, they had trouble cutting costs because most of their costs were fixed.
In other words, a lot of their costs did not go down as their sales went down. In most manufacturing companies, when sales go down, some of the bigger costs go down as well (if you aren’t selling as much of your product, then you cut back on manufacturing through layoffs, through reductions in material purchases, and so on). GM has tremendous fixed costs related to their union contract. Closing a plant, for example, did not necessarily mean the workers lost their jobs. Company pensions and legacy health care costs were fixed as well. So when sales went down, many costs stayed fairly constant. And that led to losses.
As the losses mounted and the economy struggled, these losses became so significant that GM could not survive as a viable business. In spite of billions of dollars of government support, the only solution for GM is to declare bankruptcy and try to lower those fixed costs through a court process.
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