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General Motor's CEO Rick Wagoner Pulls Off Business Model Innovation--Perhaps The Hardest Type of Innovation.

Posted by: Bruce Nussbaum on September 26, 2007

Larry Keeley at Doblin has taught me that there are many kinds of innovation and I think that the truly hardest is innovating the entire business model, which is what GM has just done. There are many reasons why Detroit has fallen so far behind Japan in cars, but one of the most significant is cost.

History and legacy weigh heavily on GM, Ford and Chrysler as they compete and nowhere is this more visible than in providing health care for employees. In Japan and Europe, a form of universal health care takes care of most everyone, not the corporation. It has pluses and minuses but the quality and cost of care is not a direct factor in the prices of products and services (yes, taxes to pay for universal health care do shift into prices indirectly). In the US, health care costs began to fall to companies during WW11 and in Detroit they add up to around $1,500 per car—which US carmakers have to charge above the Japanese competition.

So what to do? We can debate the morality of corporate vs. government obligations to people on health care and indeed, a needed national debate over health care is beginning again. But that will take years to conclude, if it does conclude.

Meanwhile GM’s CEO Wagoner and the UAW’s leaders have agreed on a novel plan to set up a VEBA, a Voluntary Employees’ Beneficiary Ass., a fund that would finance retiree employee health benefit, swith the union running it. Unlike pensions, VEBAs are not government-guaranteed. So it’s risky. GM is contributing $35 billion to the fund, or 70% of the value of the company’s outstanding health liabilities (legal obligations) to retirees. Here’s a text of the union statement.

GM is promising that with the cost savings, it will keep more production, design, engineering and jobs in the US and not ship them to Asia. It has to hold to this promise.

This is a huge paradigm-busting business process innovation that has implications for Detroit and other companies and industries in the US. It may be the last chance to keep manufacturing in the country.

And the shift to VEBAs will either be a successful experiment in innovation or a dramatic failure on the road to universal health care.

Reader Comments

Braden Kelley

September 30, 2007 12:10 AM

I disagree with you contention that this is a business model innovation. This is purely a negotiation outcome and nothing that will give GM any sustainable competitive advantage. Ford and Chrysler will end up doing the same thing and they will end up back right where they are.

GM is not losing in the automobile industry because of health care costs for retirees. They are losing because their operations result in cars that less and less people want to buy.

GM needs to stop complaining about peripheral issues and trying to be like Toyota and instead focus on how they can be better than Toyota.

When workers come back on the job, nothing will have changed in their business, the business of designing, manufacturing and selling cars. If anything the workers are going to come back to work feeling like they have just given away even more away to the corporation just so they can make their balance sheet look better.

One of the big three will go out of business in the next ten years. The real question is which one?

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Want to stop talking about innovation and learn how to make it work for you? Bruce Nussbaum takes you deep into the latest thinking about innovation and design with daily scoops, provocative perspectives and case studies. Nussbaum is at the center of a global conversation on the growing discipline of innovation and the deepening field of design thinking. Read him to discover what social networking works—and what doesn’t. Discover where service innovation is going and how experience design is shaping up. Learn which schools are graduating the most creative talent and which consulting firms are the hottest. And get his take on what the smartest companies are doing in the U.S., Asia and Europe, far ahead of the pack.

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