Journal of Economic Perspectives—Volume 28, Number 1—Winter 2014—Pages 49–72

Management Practices, Relational Contracts, and the Decline of General Motors

Susan Helper and Rebecca Henderson

eeneralneral MotorsMotors waswas onceonce regardedregarded asas thethe best-managedbest-managed andand mostmost successfulsuccessful fi rrmm inin thethe world.world. However,However, betweenbetween 19801980 andand 20092009 GM’sGM’s USUS marketmarket G ssharehare fellfell fromfrom 4646 toto 20 percent,20 percent, andand inin 20092009 thethe fi rmrm wentwent bankrupt.bankrupt. ((Figure 1Figure 1 showsshows thethe changingchanging marketmarket sharesshares ofof GMGM andand itsits mainmain competitorscompetitors overover ttime.)ime.) WeWe argueargue thatthat thethe conventionalconventional explanationexplanation forfor thisthis decline—namelydecline—namely highhigh llegacyegacy laborlabor andand healthcarehealthcare costs—iscosts—is seriouslyseriously incomplete,incomplete, andand thatthat GM’sGM’s shareshare ccollapsedollapsed forfor manymany ofof thethe samesame reasonsreasons thatthat manymany highlyhighly successfulsuccessful AmericanAmerican fi rrmsms ooff thethe 1960s1960s werewere forcedforced fromfrom thethe market,market, includingincluding a failurefailure toto understandunderstand thethe nnatureature ofof thethe competitioncompetition theythey facedfaced andand anan inabilityinability toto respondrespond effectivelyeffectively onceonce ttheyhey did.did. WeWe focusfocus particularlyparticularly onon thethe problemsproblems GMGM encounteredencountered inin developingdeveloping tthehe relationalrelational contractscontracts essentialessential toto modernmodern designdesign andand manufacturing.manufacturing. WeWe discussdiscuss a numbernumber ofof possiblepossible causescauses forfor thesethese diffidiffi cculties:ulties: particularly,particularly, GM’sGM’s historicalhistorical ppracticeractice ofof treatingtreating bothboth itsits supplierssuppliers andand itsits blueblue collarcollar workersworkers asas homogeneous,homogeneous, iinterchangeablenterchangeable entities;entities; itsits viewview thatthat expertiseexpertise couldcould bebe partitionedpartitioned withwith minimalminimal ooverlapverlap ofof knowledgeknowledge amongstamongst functionsfunctions oror levelslevels inin thethe organizationalorganizational hierarchy;hierarchy; aandnd itsits faithfaith thatthat decisionsdecisions shouldshould bebe basedbased largelylargely onon well-defiwell-defi nedned fi nancialnancial ccriteria.riteria. WeWe suggestsuggest thatthat GM’sGM’s experienceexperience maymay havehave importantimportant implicationsimplications forfor ourour uunderstandingnderstanding ofof thethe rolerole ofof managementmanagement inin thethe modern,modern, knowledge-basedknowledge-based fi rmrm aandnd forfor tthehe ppotentialotential rrevivalevival ooff mmanufacturinganufacturing iinn tthehe UUnitednited SStates.tates.

■ Susan Helper is AT&T Professor of Economics, Case Western Reserve University, Cleveland, Ohio. She is currently serving as Chief Economist of the US Department of Commerce. Rebecca Henderson is the John and Natty McArthur University Professor, Harvard University, Cambridge, Massachusetts. Their emails are [email protected] and Rhenderson@hbs .edu. The views expressed are those of the authors alone. http://dx.doi.org/10.1257/jep.28.1.49 doi=10.1257/jep.28.1.49 50 Journal of Economic Perspectives

Figure 1 Market Shares in the US Automotive Industry over Time

60%

50%

40%

30%

20% GM

Ford Toyota

10% Honda

0% 1950 1960 1970 1980 1990 2000 2010 2020

Source: Wards Automotive, http://wardsauto.com/public-data.

WWhathat ledled toto thethe declinedecline ofof GeneralGeneral Motors?Motors? TheThe answeranswer isis worthworth exploring,exploring, notnot oonlynly bbecauseecause GGeneraleneral MMotorsotors wwasas aarguablyrguably tthehe mmostost iimportantmportant fi rmrm ofof iitsts ttime,ime, bbutut aalsolso bbecauseecause ooverver tthehe ssameame pperioderiod ssoo mmanyany ootherther oonce-greatnce-great AAmericanmerican fi rmsrms aalsolso ssawaw ttheirheir ppositionsositions eeroderode ddramatically.ramatically. TThehe UUSS steel,steel, electronics,electronics, andand apparelapparel industriesindustries ccameame vveryery ccloselose ttoo ccollapse.ollapse. OOnlynly 113 percent3 percent ooff tthehe FFortuneortune 550000 iinn 11963963 wwereere sstilltill aamongstmongst tthehe 550000 a hhalf-centuryalf-century llater.ater. IIff wwee aarere ttoo ddevelopevelop aann uunderstandingnderstanding ooff hhowow UUSS mmanufacturinganufacturing mmightight bbee rrevived,evived, iitt iiss importantimportant ttoo understandunderstand wwhathat ledled toto its decline.its decline. IInn tthishis ppaper,aper, wwee iinvestigatenvestigate tthishis iissuessue tthroughhrough aann eexplorationxploration ooff tthehe ddeclineecline ooff GGeneraleneral MMotors.otors. WWee bbeginegin bbyy llayingaying ooutut a numbernumber ofof alternativealternative explanations.explanations. WWee ssuggestuggest tthathat wwhilehile GGMM wwasas iindeedndeed hhandicappedandicapped bbyy hhighigh llegacyegacy ccosts,osts, iitsts ddeclineecline wwasas ddrivenriven llargelyargely bbyy tthehe ppooroor ddesignesign aandnd iinferiornferior qqualityuality ooff iitsts ccarsars aandnd tthehe llowow pproductivityroductivity ooff itsits operations.operations. TThehe pprincipalrincipal ppuzzleuzzle ooff GGM’sM’s ffailureailure iiss wwhyhy tthehe fi rmrm waswas seeminglyseemingly uunablenable toto adoptadopt thethe managerialmanagerial practicespractices thatthat enabledenabled itsits JapaneseJapanese competitors—competitors— pparticularlyarticularly TToyota—tooyota—to iintroducentroduce ccarsars ooff mmuchuch hhigherigher qqualityuality aandnd mmuchuch bbetteretter ddesignesign Susan Helper and Rebecca Henderson 51

aatt signifisignifi ccantlyantly llowerower ccost,ost, eevenven tthoughhough GGMM wwas,as, aatt lleasteast iinitially,nitially, mmuchuch rrichericher tthanhan iitsts rrivals.ivals. TThehe ppuzzleuzzle iiss ddeepenedeepened bbyy tthehe factfact thatthat thethe naturenature ofof thethe practicespractices underlyingunderlying JJapaneseapanese ssuccessuccess wwasas eextensivelyxtensively ddocumentedocumented iinn bbothoth tthehe sscholarlycholarly aandnd bbusinessusiness ppress,ress, aandnd GGMM hhadad fi rsthandrsthand eexperiencexperience wwithith tthesehese ppracticesractices tthroughhrough a jjointoint vventureenture wwithith TToyotaoyota aatt a pproductionroduction ffacilityacility iinn CCaliforniaalifornia sstartingtarting iinn tthehe mmiddleiddle ooff tthehe 11980s.980s.1 WWee iidentifydentify two two principalprincipal answersanswers toto thisthis puzzle.puzzle. First,First, wewe argueargue thatthat thethe hhistoricalistorical successsuccess ofof GeneralGeneral MotorsMotors ledled tthehe fi rm’srm’s seniorsenior managersmanagers toto denydeny and/orand/or mmisperceiveisperceive thethe nnatureature ofof thethe threatthreat presentedpresented byby JapaneseJapanese competitioncompetition forfor muchmuch ooff thethe 1970s1970s andand 1980s.1980s. TheThe secondsecond answeranswer focusesfocuses onon thethe diffidiffi cultiesculties thatthat GMGM eexperiencedxperienced inin thethe 1990s1990s onceonce thethe fi rmrm hadhad mademade thethe decisiondecision toto adoptadopt Toyota’sToyota’s mmanagerialanagerial practices:practices: wewe suggestsuggest thatthat itit tooktook timetime forfor GMGM toto understandunderstand exactlyexactly wwhathat ToyotaToyota waswas doing;doing; andand thenthen problemsproblems inin buildingbuilding newnew relationalrelational contractscontracts ggreatlyreatly slowedslowed GM’sGM’s effortsefforts toto respondrespond effectively,effectively, eithereither throughthrough innovationinnovation oror byby iimitatingmitating TToyota’soyota’s eefforts.fforts.2 WeWe closeclose withwith a discussiondiscussion ofof thethe implicationsimplications ofof thisthis hhistoryistory fforor eeffortsfforts ttoo rreviveevive AAmericanmerican mmanufacturing.anufacturing.

Parsing Alternative Explanations for the Decline of General Motors

PPerhapserhaps tthehe mmostost ppopularopular eexplanationxplanation fforor tthehe ffailureailure ooff GGeneraleneral MMotorsotors iiss tthathat ddecadesecades ofof ooverlyverly generousgenerous unionunion contractscontracts putput iitt aatt aann ooverwhelmingverwhelming ccostost ddisadvan-isadvan- ttageage (Ingrassia(Ingrassia 2010).2010). GMGM ddidid hhaveave hhigherigher llaborabor ccostsosts tthanhan TToyota.oyota. FForor eexample,xample, tthehe AAssociatedssociated PressPress ((2007)2007) rreportedeported tthathat bbecauseecause ooff ““legacy”legacy” hhealthealth ccareare aandnd ppensionsensions oowedwed toto retiredretired workers,workers, laborlabor costscosts atat GeneralGeneral MotorsMotors werewere asas highhigh asas $73/hour$73/hour wwhilehile GM’sGM’s JapaneseJapanese competitors’competitors’ costscosts werewere roughlyroughly $48/hour.$48/hour. AnotherAnother calcula-calcula- ttionion suggestssuggests thatthat legacylegacy costscosts atat GeneralGeneral MotorsMotors werewere aboutabout $1,600$1,600 perper carcar inin 20052005 ((WelchWelch aandnd BBeuckeeucke 2005).2005). HoweverHowever therethere areare severalseveral reasonsreasons forfor believingbelieving thatthat thisthis ccostost ddisadvantageisadvantage wwasas nnotot tthehe oonlynly iissuessue tthathat ccausedaused GM’sGM’s ddiffiiffi culties.culties. FFirst,irst, GM’sGM’s llegacyegacy costscosts werewere highhigh largelylargely because ooff GGM’sM’s ddecliningeclining marketmarket sshare.hare. IfIf GMGM hhadad mmaintainedaintained itsits 19801980 USUS marketmarket shareshare untiluntil 2009,2009, forfor example,example, itsits pper-carer-car llaborabor ccostsosts wwouldould hhaveave fallenfallen byby one-half.one-half. SSecond,econd, poorpoor qualityquality andand poorpoor designdesign werewere atat leastleast asas signifisignifi cantcant a problemproblem asas tthathat ofof legacylegacy costs.costs. ThroughoutThroughout thethe 1980s1980s andand 1990s,1990s, consumersconsumers complainedcomplained thatthat AAmericanmerican carscars sufferedsuffered fromfrom noise,noise, vibration,vibration, andand harshnessharshness andand fromfrom poorpoor rideride qquality.uality. WWhenhen TToyotaoyota aandnd GGeneraleneral MotorsMotors werewere runningrunning a jointjoint ventureventure togethertogether

1 GM also faced a challenge from European automakers during this period (1980–2009). However, the Europeans’ US market share was well under 25 percent of that held by the Japanese, and we do not address it here. 2 It seems unlikely that Toyota’s approach to the market was the “one best way” to compete; it is entirely possible that GM could have responded to Toyota’s challenge by developing its own innovative methods of designing and producing cars. In what follows, we focus on GM’s diffi culties in imitating Toyota because a) GM managers starting in the late 1990s often used Toyota as a benchmark and b) Toyota’s practices provide a clear alternative; had GM been able to adopt them easily, its performance would have improved signifi cantly compared to the decades of stagnation we in fact saw. For more discussion of the issue of alternatives to “Toyotism,” see Freyssenet, Mair, Shimizu, and Volpato (1998). 52 Journal of Economic Perspectives

Table 1 The Productivity of GM’s Framingham Assembly Plant versus the Toyota Takaoka Assembly Plant, 1986

GM Framingham Toyota Takaoka

Gross assembly hours per car 40.7 18.0 Adjusted assembly hours per car 31 16 Assembly defects per 100 cars 130 45 Assembly space per car (square feet/year) 8.1 4.8 Inventories of parts (average) 2 weeks 2 hours

Source: Womack, Jones, and Roos (1990). Notes: “Gross assembly hours per car” measures the total time required to assemble the car model made at each plant. “Adjusted hours” is the time required to do a standard set of assembly activities. “Assembly defects” refers to quality problems related to the assembly process (as opposed to those caused by defective supplier parts, for example). “Inventories” measures how long it would take for the plant to exhaust its parts supply at its current production rate. iinn thethe latelate 1980s1980s andand earlyearly 1990s,1990s, thosethose carscars comingcoming offoff thethe lineline withwith thethe ToyotaToyota nnameplateameplate commandedcommanded moremore tthanhan a 2200 ppercentercent premiumpremium iinn thethe marketplacemarketplace overover ttheirheir nearlynearly identicalidentical GMGM brethrenbrethren (Sullivan(Sullivan 1998).1998). MoreMore generally,generally, inin 20002000 allall GMGM ccarsars ssoldold onon averageaverage forfor $3,000$3,000 lessless thanthan ToyotasToyotas oror HondasHondas ofof comparablecomparable sizesize aandnd eequipmentquipment ((TrainTrain aandnd WWinstoninston 22007),007), iimplyingmplying tthathat GGM’sM’s ppricingricing ddisadvantageisadvantage wwasas ggreaterreater thanthan itsits legacylegacy costcost disadvantage.disadvantage. ItIt waswas notnot untiluntil 20122012 thatthat Chevrolet’sChevrolet’s qqualityuality rrankingsankings bbeganegan ttoo aapproachpproach tthosehose ooff ToyotaToyota and Honda.and Honda. TThird,hird, GeneralGeneral MotorsMotors appearsappears toto havehave beenbeen signifisignifi cantlycantly lessless productiveproductive thanthan iitsts rivalsrivals inin nearlynearly everyevery aspectaspect ofof itsits operations.operations. ForFor example,example, ClarkClark andand FujimotoFujimoto ((1991)1991) foundfound thatthat inin thethe latelate 1980s1980s thethe JapaneseJapanese tooktook 1.7 million1.7 million adjustedadjusted engi-engi- nneeringeering hhoursours ttoo ddevelopevelop a $$14,00014,000 ccar,ar, wwhilehile ttheirheir UUS competitorsS competitors ttookook aann aaverageverage ooff 3.2 million3.2 million hours.hours. GM’sGM’s aassemblyssembly ooperationsperations werewere alsoalso persistentlypersistently lessless productiveproductive tthanhan thosethose ofof itsits rivals.rivals. ForFor example,example, Table 1Table 1 showsshows a comparisoncomparison developeddeveloped byby thethe MMITIT IInternationalnternational MotorMotor VehicleVehicle ProgramProgram betweenbetween thethe GMGM plantplant inin Framingham,Framingham, MMassachusetts,assachusetts, andand thethe ToyotaToyota TakaokaTakaoka plantplant inin Japan.Japan. TheThe fi rstrst rowrow showsshows grossgross hhoursours requiredrequired toto assembleassemble a ccar,ar, wwhilehile tthehe ssecondecond rrowow sshowshows tthat,hat, eevenven aafterfter aadjust-djust- mmentsents ttoo eensurensure ““applesapples ttoo aapples”pples” ccomparisons,omparisons, iitt wwasas ttakingaking GGMM nnearlyearly ddoubleouble tthehe nnumberumber ooff hhoursours ttoo aassemblessemble a ccarar ((Womack,Womack, JJones,ones, aandnd RRoosoos 11990).990). LLastast bbutut nnotot lleast,east, ddirectirect llaborabor ccostsosts ((includingincluding llegacyegacy ccosts)osts) wwereere oonlynly 110 percent0 percent ooff ttotalotal ccostsosts aatt GGeneraleneral MMotors,otors, wwhilehile ppurchasedurchased ppartsarts wwereere 770 percent0 percent ((HelperHelper aandnd MMacDuffiacDuffi e 2008),2008), andand therethere isis a greatgreat dealdeal ofof evidenceevidence thatthat GM’sGM’s managementmanagement ofof iitsts ssupplierupplier networknetwork waswas signifisignifi cantlycantly lessless effectiveeffective thanthan thatthat ofof itsits JapaneseJapanese rivals.rivals. FForor eexample,xample, CClarklark aandnd FujimotoFujimoto ((1991)1991) estimatedestimated thatthat suppliersupplier contributionscontributions aaccountedccounted forfor one-thirdone-third ofof thethe differencedifference inin thethe JJapaneseapanese aautomakers’utomakers’ advantageadvantage ooverver theirtheir USUS counterpartscounterparts inin totaltotal engineeringengineering hourshours requiredrequired toto developdevelop a newnew ccar,ar, wwhilehile defectdefect ratesrates ofof partsparts suppliedsupplied byby JapaneseJapanese companiescompanies werewere onon thethe orderorder ooff oone-tenthne-tenth thethe raterate ofof thosethose suppliedsupplied byby US US fi rmsrms (Cusumano(Cusumano andand TakeishiTakeishi Management Practices, Relational Contracts, and the Decline of General Motors 53

11991).991). Similarly,Similarly, inin a samplesample ofof USUS automotiveautomotive supplierssuppliers sellingselling toto bothboth ToyotaToyota andand UUS automakers,S automakers, DyerDyer andand HatchHatch (2006)(2006) foundfound thatthat fromfrom 19901990 toto 19961996 thethe averageaverage ssupplierupplier reducedreduced defectsdefects byby 50 percent50 percent forfor Toyota,Toyota, butbut onlyonly 26 percent26 percent forfor theirtheir llargestargest UUSS ccustomer.ustomer. TThesehese failuresfailures areare aallll tthehe mmoreore sstrikingtriking iinn tthathat ttheyhey wwereere wwidelyidely ddocumentedocumented aass ttheyhey werewere occurring.occurring. IndustryIndustry observersobservers deploreddeplored GeneralGeneral Motors’Motors’ failurefailure toto intro-intro- dduceuce aattractivettractive ssmallmall ccarsars tthroughouthroughout tthehe 11970s970s aandnd 11980s.980s. IInn addition,addition, fromfrom 19841984 on,on, GeneralGeneral MotorsMotors hadhad privilegedprivileged accessaccess toto Toyota’sToyota’s ttechniquesechniques throughthrough NUMMINUMMI ((NewNew UUnitednited MMotorotor MManufacturing,anufacturing, IInc.),nc.), a jjointoint vventureenture thatthat GMGM formedformed withwith ToyotaToyota preciselyprecisely toto gaingain insightinsight intointo Toyota’sToyota’s capa-capa- bbilities.ilities. NUMMINUMMI waswas locatedlocated inin GM’sGM’s FremontFremont (California)(California) plant,plant, whichwhich hadhad beenbeen cclosedlosed two yearstwo years before.before. TheThe plantplant hadhad beenbeen oneone ofof thethe leastleast productiveproductive inin GM,GM, aandnd hhadad bbeeneen ffamousamous fforor iitsts ttroubledroubled llaborabor rrelations.elations. UUnexcusednexcused aabsenteeismbsenteeism ooftenften eexceededxceeded 20 percent,20 percent, thethe plantplant hadhad accumulatedaccumulated a backlogbacklog ofof overover 1,000 grievances,1,000 grievances, aandnd thethe union–managementunion–management relationshiprelationship waswas describeddescribed byby a toptop unionunion membermember asas aann ““ongoingongoing wwar”ar” ((BrownBrown aandnd RReicheich 11989).989). DDespiteespite tthishis bbackground,ackground, TToyotaoyota aagreedgreed ttoo rehirerehire thethe entireentire unionunion hierarchy,hierarchy, andand whenwhen productionproduction began,began, 99 percent99 percent ofof tthehe aassemblyssembly wworkersorkers andand 75 75 percentpercent ofof thethe skilledskilled tradestrades workersworkers werewere formerformer GGM-FremontM-Fremont employeesemployees andand UAWUAW membersmembers (Adler,(Adler, Kochan,Kochan, MacDuffiMacDuffi e,e, Pil,Pil, andand RRubensteinubenstein 1997;1997; BrownBrown andand ReichReich 1989).1989). NUMMINUMMI wentwent onon toto reachreach levelslevels ofof pproductivityroductivity andand qqualityuality ccomparableomparable ttoo tthosehose ooff TToyota’soyota’s JJapaneseapanese pplantslants ((Womack,Womack, JJones,ones, andand RoosRoos 1990).1990). Similarly,Similarly, inin 1983,1983, GMGM investedinvested moremore thanthan $5 $5 billionbillion inin SSaturn,aturn, a homegrownhomegrown attemptattempt toto reinventreinvent GM’sGM’s productproduct designdesign procedures,procedures, manu-manu- ffacturingacturing techniques,techniques, andand laborlabor relations.relations. TheThe attemptattempt waswas successfulsuccessful fromfrom manymany pperspectives,erspectives, andand yetyet it,it, too,too, seemsseems toto havehave hadhad onlyonly a minimalminimal impactimpact onon thethe func-func- ttioningioning ooff GGMM aass a wwholehole ((RubensteinRubenstein aandnd KKochanochan 22001).001). MMoreover,oreover, dduringuring thethe keykey periodperiod ofof thethe 1980s,1980s, GeneralGeneral MotorsMotors waswas notnot shortshort ooff cash.cash. BetweenBetween 19801980 andand 1985,1985, thethe fi rmrm spentspent overover $45 billion$45 billion onon acquisitionsacquisitions aandnd aautomationutomation (Keller(Keller 1989),1989), a sumsum thatthat atat thethe timetime waswas moremore thanthan thethe combinedcombined mmarketarket vvaluealue ooff TToyotaoyota aandnd HHonda.onda. NNoror ddoesoes iitt sseemeem pplausiblelausible tthathat tthehe fi rm’srm’s disad-disad- vvantageantage waswas a ffunctionunction ooff uuniquenique ffeatureseatures ooff JJapaneseapanese ccultureulture oorr ggovernance,overnance, oorr tthehe uuniquelyniquely recalcitrantrecalcitrant naturenature ofof GM’sGM’s unionunion andand workforce,workforce, sincesince thethe successessuccesses atat bbothoth NNUMMIUMMI aandnd SSaturnaturn mmakesakes tthesehese eexplanationsxplanations iimplausible.mplausible. AAnothernother popularpopular explanationexplanation forfor thethe troublestroubles atat thethe fi rmrm hashas beenbeen thatthat thethe fi rrmm wwasas simplysimply badlybadly managedmanaged (Keller(Keller 1989;1989; TaylorTaylor 2010),2010), butbut contemporaneouscontemporaneous aassessmentsssessments ssuggestuggest thatthat thethe seniorsenior managersmanagers atat GeneralGeneral MotorsMotors werewere atat leastleast asas ccapableapable asas thosethose atat otherother fi rms.rms. WhenWhen RogerRoger SmithSmith waswas chiefchief executiveexecutive offioffi cercer ofof GGMM inin thethe 1980s,1980s, hehe waswas namednamed Automotive Industries ManMan ooff tthehe Year,Year, Advertising Age’s AAdd ManMan ooff tthehe Year,Year, andand Financial World magazine’smagazine’s ChiefChief ExecutiveExecutive OffiOffi cercer ofof tthehe YYear,ear, aandnd hehe waswas alsoalso designateddesignated byby thethe GallagherGallagher ReportReport asas oneone ofof thethe 10 best10 best eexecutivesxecutives inin tthehe UUnitednited SStatestates ((FinkelsteinFinkelstein 22003).003). YYetet aatt tthehe ssameame ttime,ime, SSmithmith ffailedailed ttoo iinvestnvest iinn tthehe ddevelopmentevelopment ooff ssmallmall ccars,ars, sspentpent hhundredsundreds ooff mmillionsillions ooff ddollarsollars oonn ““highhigh technology”technology” acquisitionsacquisitions thatthat diddid littlelittle oror nothingnothing forfor GM,GM, andand (apparently)(apparently) ddidid llittleittle ttoo ddiffuseiffuse tthehe llessonsessons ooff NNUMMIUMMI aacrosscross tthehe ccompany.ompany. 54 Journal of Economic Perspectives

WWhathat ccanan eexplainxplain tthesehese ppatterns?atterns? WWhyhy wwereere tthehe pproductroduct ddevelopmentevelopment pprocessesrocesses aatt GGeneraleneral MMotorsotors ssoo sslowlow aandnd eexpensivexpensive aandnd iitsts ddesignesign ccapabilitiesapabilities ssoo iinferior?nferior? WWhyhy wwereere GM’sGM’s ssupplierupplier networknetwork andand assemblyassembly operationsoperations soso muchmuch lessless productiveproductive thanthan tthosehose ooff iitsts rrivals,ivals, andand whywhy waswas thethe qualityquality ofof theirtheir outputoutput soso muchmuch lower?lower? WhyWhy diddid tthesehese ttrendsrends ppersistersist fforor ssoo llong?ong? OOnene streamstream ooff wworkork aarguesrgues tthathat tthesehese pproblemsroblems aarere ffailuresailures ooff perception aandnd motivation. PProblemsroblems ofof pperception—orerception—or ofof tthehe ffailureailure ttoo rrecognizeecognize tthathat tthehe wworldorld iiss cchanging—flhanging—fl owow fromfrom thethe factfact thatthat seniorsenior managersmanagers tendtend toto becomebecome overlyoverly reliantreliant onon tthehe mentalmental mmodelsodels aandnd bbeliefseliefs tthathat uundergirdedndergirded tthehe fi rm’srm’s ssuccessuccess iinn tthehe fi rrstst pplace.lace. PProblemsroblems ooff mmotivation—orotivation—or ooff aann uunwillingnessnwillingness ttoo aactct eevenven ooncence tthehe nneedeed ttoo cchangehange hhasas beenbeen recognized—canrecognized—can arisearise whenwhen thethe selectionselection eenvironmentnvironment3 inin anan industryindustry isis weakweak aand/ornd/or seniorsenior managersmanagers aarere iinsuffinsuffi cientlyciently motivatedmotivated toto actact iinn tthehe iinterestsnterests ooff tthehe fi rm.rm. IInn tthehe ccasease ooff GGeneraleneral MMotors,otors, iitt iiss hhardard ttoo tteaseease tthesehese ttwo issueswo issues aapartpart wwithoutithout mmoreore ddetailedetailed ddata.ata. BButut bbecauseecause tthehe AAmericanmerican aautomobileutomobile iindustryndustry iinn tthehe 11950s and950s and 11960s960s wwasas a rreasonablyeasonably ccollusiveollusive ooligopoly,ligopoly, iitt sseemseems pplausiblelausible tthathat wwhenhen TToyotaoyota aand thend the ootherther JJapaneseapanese fi rrmsms fi rrstst bbeganegan ttoo mmakeake sseriouserious iinroadsnroads iintonto tthehe UUS market,S market, GGM’sM’s sseniorenior mmanagementanagement hhadad llittleittle eexperiencexperience ooff iintensentense ccompetition.ompetition. PPerhapserhaps aass a rresult,esult, tthroughouthroughout tthehe 11970s970s ttheyhey bblamedlamed tthehe ssuccessuccess ooff ttheirheir JJapaneseapanese rrivalsivals oonn JJapan’sapan’s llowow llaborabor ccostsosts aandnd iinferiornferior wworkingorking cconditions,onditions, aandnd iinsistednsisted tthathat ttheirheir oownwn ssmallmall ccarsars werewere wellwell designeddesigned aandnd ccompetitivelyompetitively vviable,iable, ddespiteespite wwidespreadidespread rridiculeidicule iinn tthehe iindustryndustry ppressress ((BehrBehr 11981).981). QQualitativeualitative aaccountsccounts sstresstress tthehe wwaysays iinn wwhichhich tthehe fi rm’srm’s ppastast ssuccessuccess ((andand tthehe iindustry’sndustry’s iinsularity,nsularity, ddueue ttoo iitsts cconcentrationoncentration iinn DDetroit)etroit) lleded mmanagersanagers ttoo ddismissismiss JJapaneseapanese iinroadsnroads aass rreflefl ectingecting tthehe oodd—evendd—even aaberrant—prefer-berrant—prefer- eencesnces ooff cconsumersonsumers oonn tthehe EEastast aandnd WWestest ccoasts,oasts, aandnd ttoo cclaimlaim tthathat ddataata ddemonstratingemonstrating TToyota’soyota’s ssuperioruperior pproductivityroductivity aandnd qqualityuality wwasas iincorrectncorrect oorr misleadingmisleading ((KellerKeller 11989;989; TTayloraylor 22010;010; YYatesates 11983).983). A hhistoricallyistorically wweakeak sselectionelection eenvironmentnvironment mmayay tthushus hhaveave hhandicappedandicapped tthehe fi rrmm wwhenhen iitt hhadad ttoo rrespondespond ttoo mmuchuch sstronger competition.tronger competition. EEvenven afterafter managersmanagers aatt GGeneraleneral MMotorsotors bbecameecame cconvincedonvinced tthathat TToyotaoyota wwasas iindeedndeed ddoingoing ““somethingsomething ddifferent”ifferent” iinn iitsts ffactories—aactories—a ddevelopmentevelopment mmanyany iindustryndustry oobserversbservers ccreditredit ttoo tthehe aappointmentppointment ooff RRogeroger SSmithmith aass GGM’sM’s cchiefhief eexecutivexecutive ooffiffi cercer inin 11981—981— ttheyhey aappearedppeared ttoo hhaveave bbelievedelieved tthathat tthehe eessencessence ooff TToyota’soyota’s aadvantagedvantage llay inay in ttoolsools llikeike tthehe fi xturesxtures designeddesigned toto changechange stampingstamping diesdies rapidly,rapidly, oror inin thethe useuse ofof “just“just inin time”time” iinventorynventory ssystems,ystems, rratherather tthanhan iinn tthehe mmanagementanagement ppracticesractices tthathat mmadeade iitt ppossibleossible ttoo developdevelop andand deploydeploy thesethese techniques.techniques. ForFor example,example, JeffreyJeffrey Liker,Liker, a professorprofessor andand cconsultantonsultant ttoo GGMM ssinceince tthehe 11980s,980s, rreportedeported ((inin ““ThisThis AAmericanmerican LLife,” 2010):ife,” 2010):

One of the GM managers was ordered, from a very senior level—(it) came from a vice president—to make a GM plant look like NUMMI. And he said, “I want

3 “Selection environment” refers to the socioeconomic environment created by outside actors (such as suppliers and competitors) and external social and legal institutions (such as regulators and industry standards and norms). In weak selection environments, managers may not have had experience in dealing with stiff competition, quality problems, or more stringent environmental regulations. For an overview of this work, see Gibbons and Henderson (2013) and the references there. Susan Helper and Rebecca Henderson 55

you to go there with cameras and take a picture of every square inch. And what- ever you take a picture of; I want it to look like that in our plant. There should be no excuse for why we’re different than NUMMI, why our quality is lower, why our productivity isn’t as high, because you’re going to copy everything you see. . . . Immediately, this guy knew that was crazy. We can’t copy employee motiva- tion; we can’t copy good relationships between the union and management. That’s not something you can copy, and you can’t even take a photograph of it.

OOutsideutside GeneralGeneral Motors,Motors, thethe ideaidea thatthat oneone couldcould copycopy NUMMI—orNUMMI—or indeedindeed aanyny ofof Toyota’sToyota’s advantages—byadvantages—by simplysimply copyingcopying thethe physicalphysical plantplant waswas seenseen toto bebe mmistakenistaken quitequite early.early. ““TheThe MMachineachine tthathat CChangedhanged tthehe World”World” (Womack,(Womack, Jones,Jones, andand RRoosoos 1990)—a1990)—a reportreport fromfrom thethe MITMIT automobileautomobile projectproject thatthat incorporatedincorporated detaileddetailed pproductivityroductivity datadata fromfrom acrossacross thethe worldworld andand inin whichwhich GMGM hadhad activelyactively participated,participated, pprovidingroviding detaileddetailed datadata onon GMGM pplantslants aandnd aattendingttending mmeetingseetings ffromrom 11985985 oon—wasn—was ppublishedublished inin 1990,1990, whilewhile ClarkClark andand Fujimoto’sFujimoto’s (1991)(1991) detaileddetailed studystudy ofof productproduct ddevelopmentevelopment acrossacross thethe worldworld automobileautomobile industryindustry camecame outout thethe followingfollowing year.year. TThesehese studiesstudies (along(along withwith manymany others)others) documenteddocumented thethe veryvery differentdifferent waysways inin wwhichhich TToyotaoyota mmanagedanaged pproductroduct ddesign,esign, aassembly,ssembly, aandnd iitsts ssupplierupplier nnetwork.etwork. DDespiteespite thisthis fl oodood ofof research,research, itit tooktook GeneralGeneral MotorsMotors moremore thanthan two decadestwo decades ttoo imitateimitate Toyota’sToyota’s practicespractices consistently.consistently. WhileWhile problemsproblems inin perceptionperception andand motiva-motiva- ttionion aarere ccertainlyertainly pplausiblelausible eexplanationsxplanations ooff wwhyhy GGMM ttookook ssoo llongong ttoo iinternalizenternalize ffullyully tthehe ideaidea thatthat ToyotaToyota waswas indeedindeed doingdoing somethingsomething differently,differently, theythey areare muchmuch lessless ssatisfactoryatisfactory explanationsexplanations forfor whywhy itit tooktook soso longlong forfor thethe fi rrmm ttoo respondrespond effectivelyeffectively ooncence itit diddid havehave thisthis realization.realization. HereHere wewe makemake thethe casecase thatthat GMGM struggledstruggled forfor soso llongong bbecauseecause Toyota’sToyota’s practicespractices werewere rootedrooted inin thethe widespreadwidespread deploymentdeployment ofof effec-effec- ttiveive relational contracts—aagreementsgreements basedbased oonn ssubjectiveubjective measuresmeasures ooff pperformanceerformance tthathat ccouldould nneithereither bbee ffullyully sspecifipecifi eded beforehandbeforehand nornor verifiverifi eded afterafter thethe factfact andand werewere tthushus enforcedenforced byby thethe shadowshadow ofof thethe future—andfuture—and thatthat GM’sGM’s history,history, organizationalorganizational sstructure,tructure, andand mmanagerialanagerial ppracticesractices mmadeade iitt vveryery ddiffiiffi cultcult toto maintainmaintain thesethese kindskinds ofof aagreementsgreements eeitherither wwithinithin tthehe fi rmrm oror betweenbetween thethe fi rmrm andand itsits suppliers.suppliers. WWee beginbegin byby describingdescribing thethe veryvery differentdifferent managementmanagement practicespractices GeneralGeneral MotorsMotors aandnd ToyotaToyota employedemployed ttoo ddesignesign aandnd mmanufactureanufacture aautomobilesutomobiles iinn tthehe 11970s970s aandnd eearlyarly 11980s,980s, payingpaying pparticulararticular aattentionttention ttoo tthehe wwaysays iinn wwhichhich GGM’sM’s wwereere ppredicatedredicated oonn a vviewiew ooff wworkers,orkers, ssuppliers,uppliers, aandnd eevenven wwhitehite ccollarollar eemployeesmployees aass ccommoditiesommodities wwhosehose wworkork ccouldould bbee ffullyully ccontrolledontrolled bbyy eexpertsxperts tthroughhrough tthehe uusese ooff ccarefulareful sspecifipecifi ccationsations aandnd tthehe sspotpot market,market, wwhilehile TToyota’soyota’s ppracticesractices wwereere ccriticallyritically ddependentependent oonn jjointoint pproblemroblem ssolvingolving aacrosscross boundariesboundaries ofof allall kinds,kinds, andand thusthus onon thethe existenceexistence ofof strongstrong relationalrelational contracts.contracts.

Comparing Managerial Practices at Toyota and General Motors

Automotive Assembly IInn tthehe 1960s1960s andand 1970s,1970s, jobsjobs onon thethe GeneralGeneral MotorsMotors assemblyassembly lineline werewere veryvery nnarrowlyarrowly defidefi ned;ned; a workerworker wouldwould performperform thethe samesame setset ofof tasks—fortasks—for example,example, 56 Journal of Economic Perspectives

sscrewingcrewing inin severalseveral bolts—everybolts—every 60 seconds60 seconds forfor eighteight toto ten hoursten hours perper day.day. WorkersWorkers wwereere notnot expectedexpected oror encouragedencouraged toto dodo anythinganything beyondbeyond thisthis singlesingle task.task. Respon-Respon- ssibilityibility forfor thethe designdesign andand improvementimprovement ofof thethe assemblyassembly systemsystem waswas vestedvested fi rmlyrmly iinn thethe handshands ofof supervisorssupervisors andand manufacturingmanufacturing engineers,engineers, whilewhile vehiclevehicle qualityquality wwas theas the responsibilityresponsibility ofof thethe qualityquality department,department, whichwhich inspectedinspected vehiclesvehicles asas ttheyhey ccameame offoff thethe assemblyassembly line.line. GM’sGM’s managersmanagers werewere notoriousnotorious forfor believingbelieving thatthat blueblue ccollarollar workersworkers hadhad little—iflittle—if anything—toanything—to contributecontribute toto thethe improvementimprovement ofof thethe pproductionroduction processprocess (Womack,(Womack, Jones,Jones, andand RoosRoos 1990;1990; AdlerAdler andand BorysBorys 1992).1992). Rela-Rela- ttionshipsionships betweenbetween blueblue collarcollar workersworkers andand locallocal managementmanagement werewere activelyactively hostile.hostile. FForor exampleexample JoelJoel Smith,Smith, a NUMMINUMMI workerworker interviewedinterviewed byby AdlerAdler (1993)(1993) describeddescribed llifeife ““inin tthehe ooldld ddays”:ays”:

In the old days, we fought for job security in various ways: “Slow down, don’t work so fast.” “Don’t show that guy next door how to do your job—manage- ment will get one of you to do both of your jobs.” “Every now and then, throw a monkey wrench into the whole thing so the equipment breaks down—the repair people will have to come in and we’ll be able to sit around and drink coffee. They may even have to hire another guy and that’ll put me further up on the seniority list.

Management would respond in kind: “Kick ass and take names. The dumb bas- tards don’t know what they’re doing.” . . . Management was looking for employ- ees who they could bully into doing the job the way they wanted it done. The message was simply: “If you don’t do it my way I’ll fi re you and put somebody in who will. There are ten more guys at the door looking for your job.”

JJobsobs onon Toyota’sToyota’s productionproduction lineline werewere eveneven moremore preciselyprecisely specifispecifi ed:ed: forfor eexample,xample, standardizedstandardized workwork instructionsinstructions specifispecifi eded whichwhich handhand shouldshould bebe usedused ttoo pickpick upup eacheach bolt.bolt. However,However, Toyota’sToyota’s employeesemployees hadhad a muchmuch broaderbroader rangerange ofof rresponsibilities.esponsibilities.4 EEachach workerworker waswas extensivelyextensively cross-trainedcross-trained andand waswas expectedexpected toto bebe aableble ttoo hhandleandle ssixix ttoo eeight differentight different jjobsobs oonn tthehe lline.ine. TTheyhey wwereere aalsolso rresponsibleesponsible fforor bbothoth tthehe qqualityuality ooff tthehe vvehicleehicle aandnd fforor tthehe ccontinualontinual iimprovementmprovement ooff tthehe pproduc-roduc- ttionion processprocess itself.itself. EachEach workerworker waswas expectedexpected toto identifyidentify qualityquality problemsproblems asas theythey ooccurred,ccurred, toto pullpull thethe “andon”“andon” cordcord thatthat waswas locatedlocated atat eacheach assemblyassembly stationstation toto

4 The workforce management techniques employed by Toyota have been extensively studied by labor economists and specialists in industrial relations. Together they are often called “high performance work systems.” There is no single defi nition of “high-performance work system,” but three overarching elements have been identifi ed in the literature. In general, fi rms with high-performance work systems 1) implement effective incentive systems, 2) pay a great deal of attention to skills development, and 3) use teams and create widespread opportunities for distributed communication and problem solving. For examples, see Kochan, Katz, and McKersie (1986); MacDuffi e (1995); Huselid (1995); Ichniowski, Shaw, and Prennushi (1997); Pfeffer (1998); Appelbaum, Bailey, Berg, and Kalleberg (2000); and Black and Lynch (2001). Despite Toyota’s general adherence to the principles above, many workers on Toyota’s lines were temporary employees with little job security, and in some cases the pace of work was punishingly fast (see for example, Parker and Slaughter 1994). Management Practices, Relational Contracts, and the Decline of General Motors 57

ssummonummon helphelp toto solvesolve themthem inin realreal time,time, andand ifif necessarynecessary toto pullpull thethe andonandon cordcord aagaingain toto stopstop thethe entireentire productionproduction line.line. WorkersWorkers werewere alsoalso expectedexpected toto playplay anan aactivective rolerole inin teamsteams thatthat hadhad responsibilityresponsibility forfor “continuous“continuous improvement”improvement” oror forfor iidentifyingdentifying improvementsimprovements toto tthehe pprocessrocess tthathat mmightight iincreasencrease tthehe sspeedpeed oorr eeffiffi ciencyciency ooff tthehe lline.ine. AAss ppartart ooff tthishis pprocess,rocess, wworkersorkers wwereere ttrainedrained iinn sstatisticaltatistical pprocessrocess ccontrolontrol aandnd iinn eexperimentalxperimental ddesign.esign. GGeneraleneral MotorsMotors facedfaced two problemstwo problems inin imitatingimitating thesethese practices.practices. TheThe fi rrstst waswas iinn understandingunderstanding exactlyexactly howhow theythey werewere constructed.constructed. MilgromMilgrom andand RobertsRoberts (1990,(1990, 11995)995) argue,argue, forfor example,example, tthathat ddiffusioniffusion ooff tthesehese ttechniquesechniques wwasas hhamperedampered bbyy tthehe ffactact thatthat theythey displaydisplay strongstrong complementarities,complementarities, andand inin two two papers,papers, BloomBloom andand hhisis ccollaboratorsollaborators (Bloom,(Bloom, EEifert,ifert, McKenzie,McKenzie, Mahajan,Mahajan, andand RRobertsoberts 2013;2013; BBloom,loom, SSadun,adun, andand VanVan ReenenReenen 2013)2013) makemake thethe casecase forfor thinkingthinking aboutabout thesethese practicespractices aass ““managementmanagement ttechnologies”echnologies” thatthat faceface similarsimilar barriersbarriers toto diffusiondiffusion asas dodo moremore cconventionalonventional ttechnologies.echnologies. TThehe secondsecond problemproblem waswas thatthat thesethese practicespractices werewere necessarilynecessarily rootedrooted inin rela-rela- ttionalional contracts.contracts. ItIt was,was, forfor example,example, veryvery ddiffiiffi cultcult toto specifyspecify thethe exactexact circumstancescircumstances uundernder whichwhich a workerworker shouldshould pullpull thethe andonandon cord,cord, oror whatwhat behaviorsbehaviors constitutedconstituted bbeingeing aann eeffectiveffective teamteam mmember.ember. SShuttinghutting ddownown tthehe llineine fforor a ppopularopular mmodelodel ccouldould ccostost $10,000$10,000 inin lostlost profiprofi tsts perper minuteminute (Helper(Helper 2011),2011), soso managementmanagement settingsetting upup tthishis systemsystem neededneeded toto bebe conficonfi dentdent thatthat a workerworker decidingdeciding toto pullpull thethe andonandon cordcord wwouldould havehave bbothoth tthehe kknowledgenowledge andand tthehe iincentivencentive toto eexercisexercise ssophisticatedophisticated judg-judg- mment.ent. Conversely,Conversely, workersworkers wouldwould onlyonly pullpull thethe cordcord ifif theythey werewere conficonfi dentdent thatthat anan aappropriateppropriate relationalrelational contractcontract waswas inin placeplace (Gibbons(Gibbons andand HendersonHenderson 2013).2013). Simi-Simi- llarlyarly MMacDuffiacDuffi e’se’s (1997)(1997) detaileddetailed descriptiondescription ofof thethe practicespractices underlyingunderlying shop-flshop-fl ooroor pproblemroblem solvingsolving inin thethe industryindustry suggestssuggests thatthat successfulsuccessful processprocess qualityquality improve-improve- mmentent ddependedepended oonn pprocessesrocesses tthathat aallowedllowed fforor tthehe iinclusionnclusion ooff mmultipleultiple pperspectiveserspectives oonn aanyny ssingleingle problem,problem, tthehe uusese ooff pproblemroblem ccategoriesategories thatthat werewere “fuzzy,”“fuzzy,” aandnd tthehe ddevelopmentevelopment ofof a commoncommon languagelanguage forfor discussingdiscussing problems.problems. ItIt seemsseems implausibleimplausible tthathat eemployeesmployees ccouldould bbee mmotivatedotivated ttoo pparticipatearticipate iinn tthesehese kkindsinds ooff aactivitiesctivities tthroughhrough tthehe useuse ofof formalformal contractscontracts thatthat specifispecifi eded inin advanceadvance everyevery kindkind ofof qualityquality problemproblem aandnd itsits aappropriateppropriate response,response, especiallyespecially givengiven thethe manymany potentialpotential problemsproblems thatthat ccouldould arisearise inin anan autoauto assemblyassembly plant,plant, whichwhich typicallytypically hashas overover 500500 differentdifferent workwork sstationstations eeachach pperformingerforming a ddifferentifferent ssetet ooff ttasks.asks.

Supply Chain Management UUSS aautomakers’utomakers’ rrelationshipselationships wwithith ooutsideutside ssuppliersuppliers ffromrom tthehe 11950s950s ttoo tthehe eearlyarly 11990s990s werewere alsoalso veryvery differentdifferent fromfrom thosethose ofof theirtheir JapaneseJapanese competitors.competitors. TheyThey werewere ccharacterizedharacterized byby sshort-term—usuallyhort-term—usually oone-year—contracts,ne-year—contracts, aarm’s-rm’s- llengthength rrelation-elation- sships,hips, aandnd a rrelianceeliance oonn aass mmanyany aass ssixix ttoo eeight suppliersight suppliers pperer ppart.art. PPurchaseurchase ddecisionsecisions wwereere drivendriven overwhelminglyoverwhelmingly byby priceprice andand werewere governedgoverned byby writtenwritten contractscontracts thatthat iinvolvednvolved preciseprecise specifispecifi cationcation ofof thethe purchasedpurchased part.part. ThereThere waswas littlelittle communica-communica- ttionion bbetweenetween ssuppliersuppliers aandnd eeitherither tthehe ccentralentral eengineeringngineering ggroupsroups wwhoho ddesignedesigned tthehe ppartsarts oror tthehe aassemblyssembly pplantslants rresponsibleesponsible forfor usingusing them—athem—a rreflefl ectionection ofof a deeplydeeply hheldeld bbeliefelief aatt GGeneraleneral MotorsMotors thatthat expertsexperts shouldshould dodo thethe planningplanning andand designingdesigning 58 Journal of Economic Perspectives

wwhilehile implementationimplementation shouldshould bebe aaccomplishedccomplished throughthrough a ddetailedetailed ddivisionivision ooff llaborabor ((MacDuffiMacDuffi e andand HelperHelper 1997).1997). WhileWhile thisthis beliefbelief diddid notnot promotepromote quality,quality, itit diddid facili-facili- ttateate tthehe mmaintenanceaintenance ooff ““spot”spot” rrelationshipselationships wwithith ssuppliers.uppliers. IInn thethe JapaneseJapanese automobileautomobile industry,industry, inin contrast,contrast, fi rmsrms werewere muchmuch moremore likelylikely ttoo eenternter intointo long-termlong-term relationshipsrelationships withwith supplierssuppliers andand werewere muchmuch lessless likelylikely toto sswitchwitch ssuppliersuppliers bbecauseecause ooff ssmallmall ddifferencesifferences iinn qquoteduoted pprice.rice. BBecauseecause ooff ttheirheir bbeliefelief iinn genchi gembutsu (that(that detaileddetailed knowledgeknowledge ofof contextcontext isis valuable),valuable), ToyotaToyota andand itsits ccompetitorsompetitors typicallytypically diddid notnot developdevelop a detaileddetailed designdesign forfor manymany partsparts inin a newnew mmodel.odel. Instead,Instead, theythey wouldwould specifyspecify thethe part’spart’s exteriorexterior dimensionsdimensions andand itsits perfor-perfor- mmanceance ccharacteristics,haracteristics, andand allowallow a specialistspecialist suppliersupplier toto designdesign thethe partpart insteadinstead ttoo bestbest matchmatch thethe supplier’ssupplier’s productionproduction processprocess (Cusumano(Cusumano 1985;1985; SmitkaSmitka 1991;1991; NNishiguchiishiguchi 1994).1994). Toyota’sToyota’s useuse ofof “knowledge“knowledge overlap”overlap” (Takeishi(Takeishi 2002)2002) betweenbetween itsits eengineersngineers andand itsits suppliers’suppliers’ engineersengineers notnot onlyonly allowedallowed forfor betterbetter problem-solving,problem-solving, bbutut alsoalso helpedhelped ToyotaToyota ensureensure thatthat itsits supplierssuppliers remainedremained nearnear thethe productionproduction ffrontier.rontier. InIn contrast,contrast, a toptop purchasingpurchasing managermanager atat GeneralGeneral MotorsMotors explainedexplained inin 11993:993: “GM“GM ddoesn’toesn’t nneedeed ttoo uunderstandnderstand tthehe ttechnologiesechnologies tthathat oourur ssuppliersuppliers uuse—wese—we lletet tthehe mmarketarket ttellell uus”s” ((SusanSusan HHelper,elper, uunpublishednpublished iinterview).nterview). SSuppliersuppliers ttoo tthehe JJapaneseapanese ccarar fi rmsrms werewere signifisignifi cantlycantly moremore likelylikely toto investinvest iinn oorganizationalrganizational capabilitiescapabilities suchsuch asas qualityquality trainingtraining andand maintainingmaintaining a product-product- ddesignesign sstaff,taff, aallowingllowing tthemhem ttoo eengagengage iinn aactivitiesctivities ssuchuch aass ““valuevalue aanalysis”nalysis” aandnd ““valuevalue eengineering,”ngineering,” whichwhich areare ttechniquesechniques tthathat iinvolvenvolve eexaminingxamining tthehe ccontributionontribution ttoo ccostost aandnd ffunctionalityunctionality ofof eacheach aspectaspect ofof a component’scomponent’s design.design. TheThe JapaneseJapanese automobileautomobile fi rrmsms aandnd theirtheir supplierssuppliers alsoalso investedinvested inin organizationalorganizational mechanismsmechanisms designeddesigned toto iincreasencrease iinformationnformation fl ow,ow, whichwhich meantmeant thatthat thethe partiesparties camecame toto deeplydeeply under-under- sstandtand eacheach other’sother’s productsproducts andand processes.processes. TheseThese practicespractices promotedpromoted continuouscontinuous iimprovement,mprovement, allowingallowing JapaneseJapanese supplierssuppliers toto reducereduce pricesprices everyevery yearyear forfor decadesdecades wwhilehile remainingremaining pprofirofi table,table, andand enabledenabled thethe JapaneseJapanese automotiveautomotive companiescompanies ttoo bebe conficonfi dentdent inin producingproducing “just-in-time”“just-in-time” ratherrather thanthan holdingholding costlycostly inventoryinventory ((LiebermanLieberman andand DemeesterDemeester 1999;1999; LLiebermanieberman andand AAsabasaba 1997;1997; LLieberman,ieberman, Helper,Helper, aandnd DDemeesteremeester 11999).999). UUSS aandnd JJapaneseapanese automobileautomobile fi rmsrms alsoalso developeddeveloped veryvery differentdifferent waysways ofof hhandlingandling tthehe ddesignesign cchangeshanges tthathat wwereere ffrequentlyrequently mmadeade aass rresponsesesponses ttoo uunforeseennforeseen iinteractionnteraction problems.problems. SoderbergSoderberg (1989),(1989), forfor example,example, estimatesestimates thatthat onon average,average, eeachach partpart wwasas cchangedhanged aatt lleasteast ooncence iinn tthehe iindustryndustry dduringuring tthehe 11980s.980s. TThushus ssuppliersuppliers wwereere ooftenften nnotot mmakingaking ppreciselyrecisely thethe partpart theythey werewere originallyoriginally contractedcontracted toto make.make. IInn US practice,US practice, changingchanging specifispecifi cationscations meantmeant legallylegally changingchanging thethe contract,contract, andand ssuppliersuppliers wwereere ooftenften aableble ttoo eextractxtract hhighigh ppricesrices forfor makingmaking tthesehese cchanges.hanges. IInn ccontrast,ontrast, JapaneseJapanese manufacturersmanufacturers simplysimply askedasked supplierssuppliers toto makemake thethe change;change; bothboth ppartiesarties trustedtrusted eacheach otherother toto “sort“sort thingsthings out”out” later.later. AsAs oneone suppliersupplier toto severalseveral auto-auto- mmakersakers ssaid,aid, ““HondaHonda ccaresares aaboutbout mmakingaking tthehe ppartart fi t thethe car,car, whilewhile FordFord carescares aboutabout mmakingaking tthehe ppartart fi t thethe blueprint”blueprint” (MacDuffi(MacDuffi e andand HelperHelper 1997).1997). IInn cconsequence,onsequence, thethe relationshipsrelationships betweenbetween JapaneseJapanese fi rrmsms aandnd theirtheir supplierssuppliers wwereere deeplydeeply rootedrooted inin relationalrelational contracts.contracts. SuppliersSuppliers “know“know thatthat asas longlong asas theythey mmakeake a good-faithgood-faith efforteffort toto performperform asas theythey should,should, thethe assemblerassembler willwill ensureensure thatthat Susan Helper and Rebecca Henderson 59

ttheyhey receivereceive a reasonablereasonable returnreturn onon theirtheir investment”investment” (Womack,(Womack, Jones,Jones, andand RoosRoos 11990),990), aandnd aass llongong aass tthehe ssupplierupplier ccontinuedontinued ttoo mmeeteet tthehe aautomaker’sutomaker’s eexpectations,xpectations, tthehe ssupplierupplier ccouldould ccountount oonn tthehe rrelationshipelationship ccontinuingontinuing indefiindefi nitely.nitely. SmitkaSmitka (1991)(1991) ddescribesescribes thesethese arrangementsarrangements asas “governance“governance byby trust.”trust.” ThisThis reliancereliance diddid notnot meanmean tthathat tthehe JJapaneseapanese paidpaid lessless attentionattention toto performanceperformance managementmanagement thanthan thethe Amer-Amer- iicancan fi rms.rms. TToyota’soyota’s rrelationalelational ccontractontract withwith ssuppliersuppliers waswas nnotot ““aa ccozyozy rrelationship,”elationship,” aass oneone managermanager ofof a suppliersupplier companycompany pointedpointed outout (Helper(Helper andand SakoSako 1995).1995). TheThe fi rmrm ppushedushed itsits supplierssuppliers veryvery hardhard toto reducereduce costscosts andand avoidavoid defects;defects; itit reducedreduced thethe mmarketarket ssharehare ooff ssuppliersuppliers wwhoho ddidid nnotot mmeeteet tthesehese sstricttrict ggoalsoals aandnd eexitedxited tthehe rrelation-elation- sshiphip completelycompletely ifif improvementimprovement waswas notnot forthcoming.forthcoming. InIn fact,fact, HondaHonda andand ToyotaToyota ccollectedollected moremore datadata aboutabout suppliersupplier performanceperformance thanthan GMGM diddid duringduring thisthis period.period. HHowever,owever, iinn ccontrastontrast ttoo a ““makemake thethe numbers”numbers” cultureculture (Repenning(Repenning andand HendersonHenderson 22010),010), ToyotaToyota diddid notnot awardaward high-poweredhigh-powered incentivesincentives toto fi rmsrms oror individualsindividuals thatthat pperformederformed wellwell onon oneone oror moremore ofof thesethese targets.targets. Instead,Instead, thethe objectiveobjective datadata waswas uusedsed aass aann aaidid ttoo uunderstandingnderstanding tthehe ““rootroot ccauses”auses” ooff pproblems,roblems, iinn cconjunctiononjunction wwithith ssubjectiveubjective ddataata aandnd intuitionintuition (MacDuffi(MacDuffi e andand HelperHelper 1997).1997).

Product Design and Development BBeforeefore 1984,1984, pproductroduct ddevelopmentevelopment wwithinithin GGeneraleneral MMotorsotors wwasas mmanagedanaged bbyy tthree separatehree separate organizations:organizations: a carcar division,division, suchsuch asas Buick,Buick, thatthat waswas responsibleresponsible forfor tthehe car’scar’s design;design; FisherFisher Body,Body, whichwhich waswas responsibleresponsible forfor thethe detaileddetailed engineering;engineering; aandnd GGMADMAD ((thethe GGeneraleneral MMotorsotors AAssemblyssembly DDivision),ivision), wwhichhich wwouldould mmodifyodify pplantslants aandnd eequipmentquipment ttoo ppreparerepare forfor tthehe nnewew mmodelodel aandnd uultimatelyltimately aassemblessemble tthehe ccar.ar. TTherehere waswas onlyonly veryvery limitedlimited interactioninteraction betweenbetween thethe three.three. AllAll divisionsdivisions reportedreported uultimatelyltimately toto tthehe ppresident,resident, wwhoho wwasas rresponsibleesponsible fforor aarbitratingrbitrating ddisputes.isputes. AAccordingccording ttoo KKellereller (1989,(1989, pp. 100,pp. 100, 101,101, 106),106), “Each“Each ofof thethe three (organizations)three (organizations) viewedviewed itselfitself aass a sseparateeparate entityentity withwith thethe necessitynecessity ofof protectingprotecting itsits ownown autonomy.”autonomy.” ConsultantsConsultants hhiredired toto evaluateevaluate thethe processprocess foundfound thatthat “the“the bureaucracybureaucracy waswas a virtualvirtual quicksandquicksand bbogog ofof procedures”procedures” inin whichwhich “individuals“individuals werewere notnot heldheld accountableaccountable forfor thethe deci-deci- ssionsions tthey made.”hey made.” TThenhen iinn 11984,984, GGeneraleneral MMotorsotors wwasas rreorganizedeorganized iintonto ttwo divisions:wo divisions: ““BOC”,BOC”, wwhichhich wwasas composedcomposed ofof thethe Buick,Buick, Oldsmobile,Oldsmobile, andand CadillacCadillac carcar divisions,divisions, andand “CPC”,“CPC”, wwhichhich waswas composedcomposed ofof Chevrolet,Chevrolet, Pontiac,Pontiac, andand GMGM Canada.Canada. FisherFisher BodyBody andand GGMADMAD wwereere bbrokenroken uupp aandnd ccombinedombined wwithith BBOCOC aandnd CCPC.PC. TThehe aapparentpparent iintentionntention wwasas ttoo sstreamlinetreamline aandnd integrateintegrate newnew productproduct development,development, butbut thethe reorganizationreorganization ccreatedreated considerableconsiderable confusionconfusion andand diddid notnot nnoticeablyoticeably improveimprove performance.performance. TheThe iinformalnformal aagreements—orgreements—or iinn oourur tterms,erms, tthehe rrelationalelational ccontracts—thatontracts—that lower-levellower-level GGMM mmanagersanagers hhadad establishedestablished withwith eacheach otherother werewere purposelypurposely brokenbroken up,up, eithereither bbecauseecause ttheyhey wwereere nnotot vvaluedalued oorr bbecauseecause ttheyhey wwereere aassumedssumed ttoo bbee aann aactivective iimpedi-mpedi- mmentent ttoo iimprovement.mprovement. HHoweverowever GM’sGM’s fformalormal oorganizationrganization waswas soso cumbersomecumbersome thatthat wworkork proceededproceeded eveneven moremore slowly,slowly, asas managersmanagers diddid notnot knowknow ifif theythey couldcould trusttrust ttheirheir ccounterpartsounterparts toto ignoreignore somesome ofof thethe redred tapetape (Keller(Keller 1989),1989), anan observationobservation cconsistentonsistent withwith KaplanKaplan andand Henderson’sHenderson’s (2005)(2005) suggestionsuggestion thatthat thethe needneed toto remakeremake rrelationalelational contractscontracts maymay bebe a signifisignifi cantcant barrierbarrier toto thethe abilityability toto developdevelop newnew ones.ones. 60 Journal of Economic Perspectives

BBothoth divisionsdivisions reliedrelied onon “light-weight“light-weight projectproject teams”—coordinatingteams”—coordinating mechanismsmechanisms inin wwhichhich thethe projectproject managermanager attemptedattempted toto coordinatecoordinate thethe workwork ofof thethe multiplemultiple func-func- ttionsions whosewhose workwork waswas criticalcritical toto productproduct designdesign butbut withoutwithout thethe benefibenefi t ofof anyany realreal aauthorityuthority overover thethe team’steam’s membersmembers (Clark(Clark andand FujimotoFujimoto 1991).1991). WithinWithin thisthis struc-struc- tture,ure, keykey decisionsdecisions aboutabout productproduct designdesign appearappear toto havehave beenbeen drivendriven asas muchmuch byby tthehe fi nancenance functionfunction asas byby thethe projectproject leader,leader, andand engineersengineers andand processprocess designersdesigners aappearppear ttoo hhaveave ffocusedocused aass mmuchuch oonn tthehe hhealthealth ooff ttheirheir oownwn llocalocal oorganizationsrganizations aass oonn tthehe sstrengthtrength ooff tthehe ddesignesign pprocessrocess iitself.tself. FForor example,example, inin thethe mid-1990s,mid-1990s, GeneralGeneral MotorsMotors previewedpreviewed a widely-heraldedwidely-heralded cconceptoncept vvehicleehicle ccalledalled tthehe AAztek.ztek. AAss tthehe Washington Post ppointedointed oout:ut: ““TheThe cconceptoncept ccarar actuallyactually ddidid ssomethingomething ffewew GGMM ddesignsesigns ddo:o: aarriverrive bbeforeefore a ttrend—thisrend—this ttime,ime, tthehe crossovercrossover SSUVUV tthathat ccombinesombines tthehe aattributesttributes ooff a ttruckruck aandnd a ppassengerassenger ccar”ar” ((WeissmanWeissman 22005).005). HHowever,owever, tthehe pproductionroduction ccarar ““representedrepresented aallll tthathat iiss wwrongrong wwithith GM’sGM’s designdesign process,”process,” accordingaccording toto a GMGM executive.executive. “The“The penny-pincherspenny-pinchers ddemandedemanded tthathat ccostsosts bbee kkeptept llowow bbyy pputtingutting tthehe cconceptoncept ccarar oonn aann eexistingxisting mminivaninivan pplatform.latform. TThathat ddestroyedestroyed tthehe ooriginalriginal pproportionsroportions aandnd pproducedroduced tthehe vvehicle’sehicle’s bbizarre,izarre, ppushed-upushed-up bbackack eend.”nd.” AAccordingccording ttoo Motoramic mmagazine,agazine, “Tight“Tight bbudgetsudgets aandnd bboardroomoardroom ddominanceominance ooff mmanufacturinganufacturing ooverver ddesignesign mmeanteant tthehe uunderlyingnderlying bbitsits ooff tthehe AAztekztek wwereere ssetet iinn sstonetone bbeforeefore sstyliststylists eeverver lliftedifted a ppencil;encil; a wwheezyheezy 33.4-liter.4-liter V-6,V-6, a fframerame tthathat wwasas aaboutbout 115 percent5 percent ttoooo bbig,ig, aandnd nnoo ffreedomreedom fforor designersdesigners toto alteralter anyany majormajor componentscomponents kkilledilled wwhateverhatever vvisualisual aappealppeal aandnd ssportyporty ppretentionsretentions tthehe ooriginalriginal sshapehape hheld”eld” ((HydeHyde 22013).013). TThehe ccarar wwonon sseveraleveral aawardswards forfor ugliness,ugliness, nneverever rreachedeached iitsts mmodestodest ssalesales ttargets,argets, aandnd wwasas ssoonoon ttakenaken ooutut oof production.f production. IInn contrast,contrast, productproduct designdesign andand developmentdevelopment atat ToyotaToyota waswas managedmanaged throughthrough ttightlyightly kknit,nit, ddedicatededicated ““heavyweight”heavyweight” pprojectroject ddevelopmentevelopment tteams.eams. TTeameam lleaderseaders wwereere mmanagersanagers ooff llongong eexperiencexperience wwhoho hhadad ffullull aauthorityuthority ooverver a tteameam ccomposedomposed nnotot oonlynly ooff rrepresentativesepresentatives fromfrom eengineeringngineering andand ddesign,esign, bbutut aalsolso ffromrom mmanufacturing,anufacturing, ssales,ales, aandnd mmarketing.arketing. TTheyhey hhadad rresponsibilityesponsibility fforor tthehe eentirentire llifecycleifecycle ooff tthehe pproduct:roduct: ffromrom cconceptoncept throughthrough detaileddetailed engineeringengineering toto manufacturingmanufacturing andand commercialcommercial launch.launch. FForor example,example, oneone teamteam ddefiefi nedned itsits goalgoal asas designingdesigning a carcar thatthat feltfelt likelike “a“a rugbyrugby pplayerlayer inin a businessbusiness suit,”suit,” a conceptconcept thatthat informedinformed everyevery aspectaspect ofof thethe subsequentsubsequent pprocessrocess ((ClarkClark aandnd FFujimotoujimoto 11991).991). WWhilehile pperformanceerformance aatt GGeneraleneral MMotors,otors, wwhenhen iitt wwasas jjudgedudged aatt aall,ll, sseemseems ttoo hhaveave bbeeneen judgedjudged onon thethe basisbasis ofof well-defiwell-defi nneded rrulesules oorr eeasilyasily oobservablebservable metricsmetrics suchsuch asas wwhetherhether iindividualsndividuals mmetet ppre-specifire-specifi eded deadlines,deadlines, performanceperformance atat ToyotaToyota waswas judgedjudged oonn tthehe bbasisasis ooff tthehe pperformanceerformance ofof tthehe tteameam aass a wwhole.hole.5 MoreMore broadly,broadly, thethe ToyotaToyota PProductionroduction SystemSystem waswas embeddedembedded inin thethe ToyotaToyota ManagementManagement SystemSystem viavia a setset ofof ggoalsoals thatthat linkedlinked shopshop fl ooroor activitiesactivities andand targetstargets toto thethe objectivesobjectives ofof bothboth thethe seniorsenior

5 Wright (1979) reports one extreme example of rule following. He reports that at General Motors in the 1970s it was considered a great honor for a junior executive to be chosen to run the slide presentation at board meetings but that the executive’s career could be ended if he put a slide in the projector incorrectly. Management Practices, Relational Contracts, and the Decline of General Motors 61

tteameam aandnd ffunctionalunctional managers.managers. TheseThese goalsgoals werewere jointlyjointly determineddetermined throughthrough livelylively ccommunicationommunication aacrosscross multiplemultiple levelslevels ofof thethe organization,organization, againagain suggestingsuggesting thatthat tthehe wwhitehite ccollarollar wworkforceorkforce waswas sshothot tthroughhrough wwithith rrelationalelational ccontractsontracts ((LikerLiker 22004;004; SSako 2006).ako 2006).

Why Did General Motors Struggle to Adopt Toyota’s Management Practices?

TThehe GGeneraleneral MotorsMotors shareshare ofof thethe USUS marketmarket beganbegan toto plummetplummet aroundaround 1980,1980, bbutut itit tooktook thethe fi rmrm moremore thanthan 20 years20 years toto adoptadopt Toyota’sToyota’s techniques.techniques. ForFor example,example, MMacDuffiacDuffi e (1995)(1995) andand MacDuffiMacDuffi e,e, Sethuranman,Sethuranman, andand FisherFisher (1996)(1996) surveyedsurveyed autoauto pplantslants aroundaround thethe world,world, andand theythey foundfound onlyonly slowslow progressprogress towardtoward usingusing a Toyota-Toyota- sstyletyle productionproduction systemsystem fromfrom 19861986 toto 1993.1993. Similarly,Similarly, GMGM supplierssuppliers respondingresponding toto SSusanusan Helper’sHelper’s ssurveysurveys ooff autoauto supplierssuppliers reportedreported thatthat inin 19841984 theythey diddid notnot expectexpect ttheirheir rrelationshipelationship toto lastlast intointo thethe future,future, andand thatthat theythey diddid notnot expectexpect toto provideprovide oror rreceiveeceive “help“help notnot requiredrequired byby thethe contract.”contract.” ByBy 1989,1989, GMGM hadhad thethe highesthighest scoresscores aamongmong tthehe DDetroitetroit tthreehree oonn iitemstems ssuchuch aass eexpectingxpecting tthathat ttheirheir ccustomerustomer wwouldould hhelpelp tthemhem ratherrather thanthan switchswitch immediatelyimmediately toto a rivalrival offeringoffering a betterbetter deal;deal; butbut byby 1993,1993, ssuppliersuppliers ((again)again) ffeltelt tthathat GGMM ccouldould nnotot bbee ttrustedrusted ((HelperHelper 11994;994; HHelperelper aandnd SSakoako 11995).995). WWhyhy wwasas tthis?his? FFirst,irst, itit tooktook GeneralGeneral MotorsMotors somesome timetime toto understandunderstand exactlyexactly whatwhat ToyotaToyota wwasas ddoingoing andand toto attemptattempt ttoo iimplementmplement tthehe ffullull bbundleundle ooff ppracticesractices necessarynecessary ttoo ssuccessfullyuccessfully imitateimitate itsits JapaneseJapanese rivals.rivals. ForFor example,example, managersmanagers atat GM’sGM’s VanVan NuysNuys pplantlant iintroducedntroduced eelementslements ooff tthehe ppracticesractices tthathat hhadad bbeeneen iimplementedmplemented aatt NNUMMI,UMMI, bbutut ttheyhey rresultedesulted iinn ssignifiignifi cantlycantly lessless improvement,improvement, andand VanVan NuysNuys waswas soonsoon closedclosed ((“This“This AAmericanmerican LLife”ife” 22010).010). SSecond,econd, GGeneraleneral MMotorsotors hhadad greatgreat diffidiffi cultyculty buildingbuilding thethe relationalrelational contractscontracts onon wwhichhich thesethese practicespractices relied.relied. TheThe researchresearch literatureliterature hashas typicallytypically assumedassumed thatthat ifif a rrelationalelational ccontractontract iiss mmutuallyutually bbenefienefi ccial,ial, iitt wwillill nnaturallyaturally eemergemerge ((LevinLevin 2003),2003), butbut aa body body ofof workwork hashas begunbegun toto exploreexplore thethe conditionsconditions underunder whichwhich relationalrelational contractscontracts mmayay bebe hardhard toto build.build. WeWe drawdraw onon GibbonsGibbons andand Henderson’sHenderson’s (2013)(2013) summarysummary ofof thisthis rresearchesearch aandnd eexplorexplore tthehe ddegreeegree ttoo wwhichhich iitt yyieldsields iinsightnsight iintonto GGM’s decline.M’s decline. GGibbonsibbons aandnd HendersonHenderson (2013)(2013) outlineoutline threethree broadbroad classesclasses ofof explanationexplanation fforor whywhy relationalrelational contractscontracts maymay bebe diffidiffi cultcult toto build.build. First,First, therethere maymay bebe unobserved heterogeneity iinn tthehe ccostsosts ooff uusingsing rrelationalelational ccontracts.ontracts. FForor eexample,xample, iiff tthehe ccontractingontracting ppartiesarties hhaveave hheterogeneouseterogeneous ddiscountiscount rrates,ates, tthenhen aann eequilibriumquilibrium mmayay eemergemerge iinn wwhichhich mmoreore ppatientatient pplayerslayers fformorm rrelationalelational ccontractsontracts wwhilehile llessess ppatientatient pplayerslayers ddoo nnot.ot. FForor eexample,xample, iinn a mmodelodel ooff ssupplyupply rrelationships,elationships, BBoardoard ((2011)2011) fi ndsnds tthathat tthehe ooptimalptimal rrelationalelational ccontractontract hhasas aann iinsider-outsidernsider-outsider fformorm wwherehere ssomeome ssuppliersuppliers aarere ““insiders”insiders” wwhoho aarere uusedsed rroutinelyoutinely aandnd tthehe rrestest aarere ““outsiders”outsiders” wwhoho aarere nneverever uused,sed, eevenven iinn pperiodseriods wwherehere ttheyhey aarere mmoreore eeffiffi cient.cient. HHee sshowshows tthathat iiff tthehe ppartiesarties bbecomeecome mmoreore ppatient,atient, tthehe ssetet ooff iinsidersnsiders ggrowsrows aandnd eeffiffi ciencyciency iimproves.mproves. SSimilarly,imilarly, iiff tthehe pprincipalrincipal hhasas pprivaterivate iinformationnformation aaboutbout hhisis oorr hherer ttemptationsemptations ttoo rrenege,enege, tthenhen iincentivesncentives fforor 62 Journal of Economic Perspectives

a rrelationalelational ccontractontract wwillill oonlynly sstrengthentrengthen ggradually,radually, aass tthehe aagentgent bbecomesecomes cconvincedonvinced tthathat tthehe pprincipalrincipal iiss uunlikelynlikely ttoo ddefectefect ((HalacHalac 22012).012). SSecond,econd, pproblemsroblems ooff credibility mmayay aariserise wwhenhen iitt iiss hhardard ttoo ttellell wwhetherhether a ppartyarty iiss ttakingaking a hhardard llineine iinn a rrelationalelational ssituationituation bbecauseecause iitt wwishesishes ttoo ttakeake aadvantagedvantage ooff tthehe ootherther ppartyarty oorr bbecauseecause a ppooroor sstatetate ooff tthehe wworldorld iiss ggenuinelyenuinely fforcingorcing tthemhem ttoo ttakeake a hhardard llineine ((ChassangChassang 22010;010; LLii aandnd MMatouschekatouschek 22013).013). TThird,hird, pproblemsroblems ooff clarity, oorr tthehe ssimpleimple iinabilitynability ooff pprincipalrincipal aandnd aagentgent ttoo ccommunicateommunicate wwithith eeachach oother,ther, mmayay aalsolso ccreatereate pproblems.roblems. EExploringxploring thethe historyhistory ofof GeneralGeneral MotorsMotors suggestssuggests allall threethree ofof thesethese explana-explana- ttionsions maymay havehave playedplayed a rolerole inin shapingshaping thethe fi rrm’sm’s hhistory.istory. UUpp uuntilntil thethe 1990s,1990s, GMGM wwasas receivingreceiving oligopolyoligopoly rents.rents. InIn thisthis situation,situation, arm’s-lengtharm’s-length rrelationselations maximizedmaximized pprofirofi tsts comparedcompared toto relationalrelational contractscontracts becausebecause theythey mademade supplierssuppliers easilyeasily replace-replace- aable,ble, thusthus reducingreducing suppliers’suppliers’ abilityability toto bargainbargain forfor a shareshare ofof thesethese rentsrents (Helper(Helper aandnd LevineLevine 1992).1992). Thus,Thus, historicallyhistorically itit maymay havehave beenbeen thethe casecase thatthat GM’sGM’s returnsreturns toto aadoptingdopting relationalrelational contractscontracts werewere lowerlower thanthan thosethose ofof itsits rivals.rivals. AsAs thesethese oligopolyoligopoly rrentsents shrunk,shrunk, however,however, GGM’sM’s llong-termong-term ppayoffsayoffs ffromrom aadversarialdversarial bbehaviorehavior ffell,ell, aandnd iitt sseemseems pplausiblelausible tthathat tthehe rreturnseturns ttoo aadoptingdopting rrelationalelational ccontractsontracts bbecameecame qquiteuite hhigh.igh. AAtt tthishis sstage,tage, GGeneraleneral MotorsMotors facedfaced problemsproblems ofof credibilitycredibility andand clarity.clarity. TheThe ccredibilityredibility issueissue arosearose becausebecause itit appearsappears toto havehave beenbeen hardhard forfor GMGM toto alteralter pastpast ppatternsatterns ofof behaviorbehavior andand hardhard forfor GM’sGM’s workersworkers andand supplierssuppliers toto believebelieve thatthat tthese patternshese patterns wwereere iindeedndeed cchanging.hanging. RResearchersesearchers hhaveave llongong ssuggesteduggested tthathat iitt ttakesakes ttimeime ttoo buildbuild trust,trust, andand thatthat whenwhen oneone oror bothboth ofof thethe partiesparties toto a relationshiprelationship havehave a hhistoryistory ofof “bad“bad behavior,”behavior,” buildingbuilding trust-basedtrust-based relationshipsrelationships maymay bebe eveneven harderharder ((BachmannBachmann andand ZaheerZaheer 2006).2006). GM’sGM’s stancestance towardstowards bothboth itsits blueblue collarcollar employeesemployees aandnd itsits ssuppliersuppliers hadhad beenbeen deeplydeeply adversarial.adversarial. InIn 1984,1984, forfor example,example, thethe companycompany aannouncednnounced thatthat itit waswas interestedinterested inin modifyingmodifying thethe unionunion contractcontract toto supportsupport thethe uusese ofof “teams”“teams” andand ofof “joint“joint problemproblem solving”—butsolving”—but thenthen a leakedleaked internalinternal memomemo ssuggesteduggested thatthat GMGM waswas planningplanning toto useuse thethe newnew contractcontract toto reducereduce headcountheadcount ((RussoRusso 11984).984). TThroughouthroughout tthehe 11980s,980s, mmanyany wworkersorkers bbecameecame cconvincedonvinced tthathat GGMM wwasas iimplementingmplementing lleanean pproductionroduction onlyonly asas partpart ofof anan attemptattempt ttoo sspeedpeed upup productionproduction aandnd toto putput employeesemployees underunder eveneven greatergreater pressurepressure (Parker(Parker andand SlaughterSlaughter 1994).1994). GGMM tthushus ffacedaced ssignifiignifi cantcant problemsproblems inin buildingbuilding credibility.credibility. GGeneraleneral Motors’Motors’ practicepractice ofof focusingfocusing almostalmost entirelyentirely onon short-termshort-term fi nancialnancial rresults,esults, alongalong withwith itsits multiplemultiple levelslevels ofof controlcontrol andand itsits largelarge numbernumber ofof employeesemployees aandnd suppliers,suppliers, alsoalso mademade buildingbuilding credibilitycredibility diffidiffi cult.cult. SeniorSenior managementmanagement couldcould aannouncennounce a commitmentcommitment ttoo llong-termong-term rrelationshipselationships aandnd ttoo bbuildinguilding ttrust,rust, bbutut uuntilntil tthesehese announcementsannouncements werewere coupledcoupled withwith similarsimilar commitmentscommitments andand alteredaltered incen-incen- ttivesives atat thethe locallocal level,level, neitherneither blueblue collarcollar employeesemployees nornor supplierssuppliers appearappear toto havehave bbelievedelieved thatthat thethe locallocal managersmanagers withwith whomwhom theythey hadhad toto dealdeal wouldwould adhereadhere toto a rrelationalelational contract.contract. AtAt thethe locallocal level,level, thisthis maymay havehave beenbeen partlypartly a functionfunction ofof thethe llackack ooff aaccountabilityccountability oorr ffollow-throughollow-through thatthat seemsseems ttoo hhaveave ccharacterizedharacterized GM.GM. FForor eexample,xample, aaccordingccording toto “This“This AmericanAmerican Life”Life” (2010),(2010), “Weller“Weller [a[a GGMM mmanageranager ssentent ttoo sspreadpread tthehe NNUMMIUMMI ggospel]ospel] ssaidaid ssomeome mmanagersanagers wwereere rresponsive.esponsive. OOthersthers wweren’t—eren’t— llikeike thethe oneone whowho askedasked himhim toto leaveleave hishis factoryfactory afterafter WellerWeller mademade hishis presentationpresentation aaboutbout thethe NNUMMIUMMI ssystem.ystem. WWhenhen aaskedsked wwhyhy tthehe CCEOEO wwouldn’touldn’t fi rere a plantplant managermanager Susan Helper and Rebecca Henderson 63

wwhoho resistedresisted a systemsystem thatthat waswas producingproducing betterbetter carscars atat lowerlower costs,costs, WellerWeller said:said: ‘It’s‘It’s a bbigig ccompanyompany . . . aandnd iitt ddoesn’toesn’t wworkork tthathat wway.’”ay.’” SSimilarlyimilarly iinn 11982,982, DDarraharrah CC.. PPorter,orter, tthehe eexecutivexecutive ddirectorirector fforor ppurchasingurchasing aactivi-ctivi- ttiesies aatt GGeneraleneral Motors,Motors, toldtold a reporterreporter forfor Iron Age: ““WeWe nneedeed ttoo tthrowhrow offoff thethe oldold sshackleshackles ofof adversarialadversarial confrontationconfrontation andand workwork togethertogether inin anan enlightenedenlightened eraera ofof mmutualutual trusttrust andand conficonfi dence.”dence.” However,However, oneone purchasingpurchasing agentagent waswas quotedquoted inin thethe ssameame aarticlerticle aass ssayingaying ““II fi ndnd itit hardhard toto stopstop thinkingthinking thatthat effieffi cientcient purchasingpurchasing meansmeans hhavingaving a lotlot ofof vendorsvendors fi ghtingghting overover a job”job” (requoted(requoted inin HelperHelper 1987).1987). InIn anotheranother eexamplexample ooff cchangeshanges iinn ddesiredesired bbehaviorehavior nnotot bbeingeing aaccompaniedccompanied bbyy cchangedhanged iincen-ncen- ttives,ives, tthehe Wall Street Journal iinn 11984984 reportedreported thatthat GMGM wantedwanted supplierssuppliers toto locatelocate wwithinithin GM’sGM’s BuickBuick CityCity complex,complex, toto promotepromote betterbetter communication.communication. However,However, GMGM pprovidedrovided nnoo aassurancessurance ofof ffutureuture businessbusiness toto ssuppliersuppliers wwhoho iincurredncurred tthehe ssignifiignifi cantcant ccostsosts ooff mmoving,oving, mmakingaking ssuppliersuppliers rreluctanteluctant ttoo rrelocateelocate ((HelperHelper 11987).987). MMoreore bbroadly,roadly, GGeneraleneral Motors’Motors’ historyhistory ofof marketmarket dominancedominance appearsappears toto havehave mmadeade tthehe fi rmrm veryvery riskrisk averse,averse, perhapsperhaps becausebecause thethe fi rm’srm’s extraordinaryextraordinary successsuccess mmadeade rriskisk aavoidancevoidance a pprofirofi t-maximizingt-maximizing strategystrategy forfor manymany years.years. OneOne long-agolong-ago inci-inci- ddentent tthathat mmightight hhaveave hhelpedelped ttoo ssetet tthehe sstagetage fforor ssuchuch a ppolicyolicy wwasas tthehe ffailureailure ooff GGM’sM’s aattemptttempt ttoo iintroducentroduce tthehe ccopper-cooledopper-cooled eenginengine inin 11922.922. TThehe aattemptttempt ffailedailed llargelyargely bbecauseecause tthehe pproductroduct wwasas fforcedorced oonn tthehe CChevrolethevrolet ddivisionivision iinn vviolationiolation ooff GGM’sM’s ppolicyolicy ooff divisionaldivisional autonomy.autonomy. However,However, AlfredAlfred SloanSloan (1963,(1963, p. 69)p. 69) drewdrew a broaderbroader lesson:lesson: hhee claimedclaimed thatthat “it“it waswas notnot necessarynecessary toto leadlead inin designdesign oror runrun thethe riskrisk ofof untrieduntried eexperiment.”xperiment.” ThisThis incidentincident apparentlyapparently hadhad a searingsearing stayingstaying power;power; itit waswas citedcited asas llateate aass 11987987 bbyy GGMM eengineersngineers aass a rreasoneason ttoo aavoidvoid ttechnologicalechnological rrisksisks ((HelperHelper 11991).991). WWee suspectsuspect thatthat problemsproblems ofof clarity,clarity, oror inin communicatingcommunicating thethe termsterms ofof thethe vvariousarious relationalrelational contractscontracts thatthat GeneralGeneral MotorsMotors waswas seekingseeking toto putput inin place,place, werewere aalsolso centralcentral toto thethe fi rm’srm’s diffidiffi culties.culties. Tables 2,Tables 2, 3,3, andand 4 summarizesummarize bothboth thethe decisiondecision pproblemroblem andand thethe choiceschoices forfor participantsparticipants inin relationalrelational contractscontracts a) underlyinga) underlying thethe uusese ofof thethe andonandon cord,cord, b) inb) in suppliersupplier relationships,relationships, andand c) inc) in heavyweightheavyweight productproduct ddevelopmentevelopment teams,teams, respectively.respectively. AsAs youyou cancan see,see, successfulsuccessful relationalrelational contractscontracts iinn eacheach areaarea areare predicatedpredicated onon a complicatedcomplicated setset ofof mutualmutual understandingsunderstandings tthathat wouldwould bebe diffidiffi cultcult forfor anan outsideroutsider toto understandunderstand (or(or enforce).enforce). TheseThese tablestables ssuggestuggest thethe immenseimmense amountamount ofof ambiguousambiguous informationinformation thatthat hadhad toto bebe success-success- ffullyully communicatedcommunicated beforebefore a Toyota-styleToyota-style relationalrelational contractcontract couldcould bebe putput inin place.place. NNotot onlyonly diddid everyoneeveryone concernedconcerned havehave toto learnlearn aboutabout thethe actionsactions thatthat constitutedconstituted ““cooperation”—andcooperation”—and toto comecome toto believebelieve thatthat thesethese actionsactions werewere inin theirtheir ownown bestbest iinterests—butnterests—but theythey alsoalso hadhad toto learnlearn aboutabout eacheach other’sother’s defectiondefection temptationstemptations inin a wworldorld inin whichwhich theythey mightmight notnot eveneven knowknow theirtheir own.own. TToyotaoyota (and(and Honda)Honda) werewere ableable toto establishestablish relationalrelational contractscontracts throughthrough signifisignifi - ccantant investmentsinvestments inin “gift“gift exchange”exchange” (Akerlof(Akerlof 1984),1984), whichwhich inin effecteffect meantmeant givinggiving toto ttheirheir supplierssuppliers andand workersworkers withoutwithout formalformal assuranceassurance ofof anyany returns.returns. ForFor exampleexample mmanyany wworkersorkers initiallyinitially doubteddoubted thethe credibilitycredibility ofof NUMMI’sNUMMI’s no-layoffno-layoff commitment,commitment, bbutut inin 11987987 aandnd 11988988 wwhenhen NNUMMIUMMI wwasas rrunningunning uundernder 65 65 percentpercent ofof capacity,capacity, TToyotaoyota diddid notnot laylay offoff shop-flshop-fl ooroor workers.workers. Instead,Instead, itit sentsent thethe entireentire workforceworkforce toto ttrainingraining cclasses,lasses, ttookook bbackack iin-housen-house ccertainertain ppreviouslyreviously ccontractedontracted maintenancemaintenance 64 Journal of Economic Perspectives

Table 2 Cooperation, Defection, and Punishment in the Use of the Andon Cord

Action

Agent Cooperate Defect Punish

Worker 1. Pull the andon cord 1a. Never pull the andon 1. Sabotage the when worker sees a cord (out of fear of manufacturing line. problem. being punished). 2. Pull andon cord 2. Offer suggestions 1b. Pull the andon cord to frequently. on improvements stop the line and avoid 3. Engage in absenteeism. to the production work when there is no process (that might true problem. make workers’ job 2. Keep improvements redundant). hidden from co-workers and managers.

Supervisor 1. Recognize potential 1. Punish workers for 1. Penalize workers problem when andon pulling andon cord (fi nancially or socially) cord pulled and aid in (even appropriately). for pulling andon cord. problem-solving. 2. Cut workforce once 2. Remove the andon cord. 2. Implement improve- they discover potential ments without innovations. necessarily cutting jobs. 3. Interfere in work teams 3. Accept authority of and override their work teams to make decisions. some shop-fl oor decisions.

Source: Gibbons and Henderson (2013). ttasksasks ssuchuch aass ppainting,ainting, andand placedplaced surplussurplus workersworkers intointo teamsteams thatthat designeddesigned thethe pproductionroduction processprocess forfor thethe nextnext modelmodel carcar (Adler,(Adler, Goldoftas,Goldoftas, andand LevineLevine 1997).1997). TThishis stepstep builtbuilt a cyclecycle ofof cooperationcooperation inin whichwhich thethe unionunion offioffi cialscials startedstarted suggestingsuggesting ssomeome waysways ofof cuttingcutting costs,costs, andand inin turnturn ToyotaToyota setset upup accountsaccounts soso thatthat thethe unionunion lleaderseaders couldcould orderorder ssuppliesupplies fforor ttheirheir tteameam mmembersembers wwithoutithout hhavingaving ttoo fi lele requestsrequests tthroughhrough mmanagementanagement ((asas ddetailedetailed iinn AAdlerdler 11993,993, ppp. 68–69).p. 68–69). GGeneraleneral MotorsMotors sseemseems ttoo hhaveave sstruggledtruggled ttoo ddevelopevelop tthishis ddynamic.ynamic. FForor eexample,xample, SSteventeven Bera,Bera, a GMGM eexecutivexecutive whowho waswas fi rstrst sentsent toto NUMMINUMMI andand thenthen sentsent toto a numbernumber ooff ootherther GGMM pplants,lants, ssaidaid ( iinn ““ThisThis AAmericanmerican LLife,”ife,” 22010)010) thatthat eveneven afterafter GMGM plantsplants bbeganegan toto installinstall somesome ofof thethe physicalphysical featuresfeatures ofof JapaneseJapanese autoauto plants,plants, “there“there waswas nnoo changechange inin thethe culture.culture. WorkersWorkers andand managersmanagers continuedcontinued theirtheir oldold antagonisticantagonistic wways.ays. IInn ssomeome ooff tthehe ffactoriesactories wwherehere ttheyhey iinstallednstalled tthehe aandonndon ccord,ord, wworkersorkers ggotot yyelledelled aatt wwhenhen ttheyhey ppulledulled iit.”t.” SSomeome pplantlant mmanagersanagers ccontinuedontinued ttoo bbelieveelieve tthathat bbluelue ccollarollar workersworkers werewere fundamentallyfundamentally lazylazy andand wouldwould pullpull thethe andonandon cordcord anyany timetime ttheyhey wantedwanted a breakbreak andand thatthat thethe blueblue collarcollar workersworkers lackedlacked thethe capacitycapacity toto engageengage iinn pproblemroblem ssolvingolving oorr ccontinuousontinuous improvement.improvement. BByy aandnd llarge,arge, tthehe bbluelue ccollarollar wwork-ork- fforceorce aappearsppears toto havehave doubteddoubted thatthat thethe announcedannounced reformsreforms wouldwould work,work, albeitalbeit forfor Management Practices, Relational Contracts, and the Decline of General Motors 65

Table 3 Cooperation, Defection, and Punishment in Supplier Relationships at Toyota

Action

Agent Cooperate Defect Punish

Supplier 1. Invest in engineer- 1. Fail to invest suffi cient 1. Deliver parts late, or not to ing and process time or attention in spec. development skills that responding to Toyota’s 2. Fail to cooperate in the will enable the fi rm to requests. redesign of critical parts. translate approximate 2. Attempt to extract specifi cations into a monopoly rents once fi nal part. the relationship is 2. When problems emerge, established. work rapidly and effectively to fi x them.

Toyota 1. Allow the supplier to 1. Fail to invest suffi cient 1. Cease working with the make a “reasonable time or attention in supplier. return” on their responding to supplier’s investments. requests. 2. When things go wrong, 2. Attempt to extract provide resources to the monopoly rents once supplier to help to fi x the relationship is them. established.

Source: Derived from Helper and Levine (1992) and MacDuffi e and Helper (1997). ddifferentifferent rreasons.easons. FForor eexample,xample, SSusanusan HHelperelper mmadeade sseveraleveral vvisitsisits ttoo a GGMM ppartsarts pplantlant ((nownow closed)closed) inin TrentonTrenton (New(New Jersey)Jersey) inin 1990.1990. WorkersWorkers hadhad beenbeen toldtold thatthat theirtheir ssuggestionsuggestions wwouldould bebe wwelcomedelcomed aandnd rreceivedeceived ttrainingraining iinn SStatisticaltatistical PProcessrocess CControl.ontrol. TThehe wworkersorkers respondedresponded byby providingproviding a fl oodood ofof suggestionssuggestions andand byby fi llinglling outout chartscharts ttrackingracking keykey qualityquality metrics.metrics. However,However, managementmanagement hadhad notnot assignedassigned anyoneanyone toto rrespondespond ttoo tthehe ssuggestions,uggestions, oorr eexaminexamine tthehe ddataata tthehe wworkersorkers hhadad ccarefullyarefully ccollected.ollected. TThehe workersworkers soonsoon revertedreverted toto pastpast patterns,patterns, feelingfeeling betrayedbetrayed andand muchmuch lessless inter-inter- eestedsted iinn pparticipatingarticipating iinn futurefuture experiments.experiments. OOff ccourse,ourse, iitt iiss ddiffiiffi cultcult ttoo ddisentangleisentangle tthehe rrelativeelative rrolesoles tthathat ccredibilityredibility aandnd cclaritylarity pplayedlayed inin derailingderailing GeneralGeneral Motors.Motors. ForFor instance,instance, GGMM CCEOEO RobertRobert SStempeltempel hhadad bbeeneen instrumentalinstrumental iinn ttryingrying ttoo rrolloll ooutut tthehe nnewew ppracticesractices aacrosscross tthehe ccompany,ompany, bbutut iinn 1991,1991, iinn tthehe ddepthsepths ooff rrecession,ecession, GGMM NNorthorth AAmericanmerican ooperatingperating llossesosses rreachedeached nnearlyearly $$5 billion,5 billion, aandnd SStempeltempel wwasas aapparentlypparently uunablenable ttoo ppersuadeersuade eeitherither hhisis bboardoard oorr WWallall SStreettreet tthathat tthesehese llossesosses wwereere nnotot a signsign ofof managerialmanagerial “complacency”;“complacency”; ssoo hhee sswitchedwitched ggears,ears, aannouncingnnouncing pplanslans ttoo ccloselose 221 plants1 plants aandnd eeliminateliminate 774,000 jobs.4,000 jobs. GGM’sM’s ccredibilityredibility wwithith iitsts bbluelue ccollarollar wworkforceorkforce wwasas aalmostlmost ccertainlyertainly sseverelyeverely ddamagedamaged aass a rresult.esult. AAndnd iitt wwasas ffurtherurther sshakenhaken wwhenhen SStempeltempel wwasas fi rreded aandnd rreplacedeplaced bbyy JJackack SSmith,mith, fformerlyormerly ofof GMGM Europe.Europe. SmithSmith waswas oneone ofof thethe originaloriginal negotiatorsnegotiators ofof thethe NUMMINUMMI aagreementgreement bbutut IIgnaciognacio LLopez,opez, hhisis nnewew hheadead ooff ppurchasing,urchasing, bbehavedehaved aass iiff hhee pplacedlaced nnoo vvaluealue aatt aallll oonn bbuildinguilding rrelationalelational ccontractsontracts wwithith GGM’sM’s ssupplyupply bbase,ase, ddemandingemanding tthathat 66 Journal of Economic Perspectives

Table 4 Cooperation, Defection, and Punishment within Heavyweight Product Development Teams at Toyota

Action

Agent Cooperate Defect Punish

Team 1. Support team members 1. Fail to collect resources 1. Give negative reviews of leader in working together— for the team, or to team members to the rest ensure maximum protect the team when of the organization, or possible support for the threatened by the rest of refuse to work with them. project. the organization. 2. When problems emerge, 2. Play favorites with team work rapidly and members, and fail to effectively to fi x them. reward them for their 3. Recognize each team contributions. member’s contribution appropriately.

Team 1. Bring all possible skills 1. Fail to invest suffi cient 1. Disengage at work, or quit. member and capabilities to the time or attention in the team. team’s work. 2. Invest in understanding 2. Drag one’s heals in the point of view and working with other expertise of other team members of the team. members. Be open to Put the interests of the continuously learning. home function fi rst. 3. “Go the extra mile” to ensure the success of the team, even when it fails to benefi t oneself or one’s home function.

Source: Derived from Clark and Fujimoto (1991). ssuppliersuppliers ddramaticallyramatically rreduceeduce ttheirheir ppricesrices aandnd ssharingharing wwithith rrivalsivals aaspectsspects ooff ssuppliers’uppliers’ ddesignsesigns tthathat ssuppliersuppliers hhadad tthoughthought wwouldould bbee kkeptept cconfionfi dentialdential (Babson(Babson 1998).1998). Thus,Thus, GGM’sM’s eearlyarly eeffortsfforts ttoo eestablishstablish rrelationalelational ccontractsontracts ((especiallyespecially wwhilehile ffailingailing ttoo ddevelopevelop a ccoherentoherent sstorytory aaboutbout hhowow llong-termong-term iinvestmentsnvestments iinn ssuchuch rrelationshipselationships wwouldould ppayay ooff)ff) aappearedppeared uunconvincingnconvincing ttoo ooutsiders.utsiders. AAndnd uunfortunately,nfortunately, tthehe ssameame fi nancialnancial losseslosses inin 11991991 tthathat fi nallynally convincedconvinced mmostost ooff GGMM tthathat iitt ddidid nneedeed ttoo cchangehange aalsolso rremovedemoved ssomeome ooff tthehe rresourcesesources nneededeeded ttoo mmakeake ssuchuch a cchangehange ppossible.ossible. IItt hhasas oonlynly bbeeneen wwithinithin tthehe llastast ffewew yyearsears tthathat GGeneraleneral MMotorsotors hhasas fi nallynally begunbegun ttoo rivalrival Toyota’sToyota’s performance.performance. TheThe newnew “General“General MotorsMotors productionproduction system”—system”— aa GM-specifi GM-specifi c systemsystem thatthat embodiesembodies manymany ofof Toyota’sToyota’s practicespractices andand includesincludes strongerstronger aandnd moremore eeffectiveffective relationalrelational contracts—hascontracts—has beenbeen graduallygradually diffuseddiffused acrossacross thethe fi rrm,m, llargelyargely asas a resultresult ofof thethe gradualgradual diffusiondiffusion acrossacross thethe fi rmrm ofof managersmanagers whowho hhadad bbeeneen ttrainedrained aatt NNUMMIUMMI aandnd SSaturn.aturn. TThehe cchangehange ccameame ttoooo llateate ttoo ssaveave GGeneraleneral MMotorsotors ffromrom bbankruptcy.ankruptcy. Susan Helper and Rebecca Henderson 67

Conclusions and Implications

WWee hhaveave ssuggesteduggested thatthat GeneralGeneral MotorsMotors fi rstrst sharplysharply declineddeclined andand thenthen failedfailed fforor three reasons.three reasons. First,First, itit appearsappears thatthat GM’sGM’s enormousenormous successsuccess ledled itit toto denydeny thethe tthreathreat posedposed byby foreignforeign competitioncompetition forfor overover a decade.decade. ItIt isis hardhard toto bebe defidefi nitivenitive asas ttoo wwhetherhether thisthis denialdenial waswas duedue toto thethe ossifyingossifying effecteffect ofof decadesdecades ofof marketmarket power,power, ooff wweakeak iinternalnternal iincentives,ncentives, oorr ooff ccognitiveognitive bbiasesiases iinn tthehe sseniorenior tteam,eam, pparticularlyarticularly ssinceince tthesehese ffactorsactors ssurelyurely interacted.interacted. OneOne cannotcannot eveneven bebe suresure thatthat thisthis denialdenial waswas iirrational,rrational, givengiven thethe factfact thatthat mmanyany ppotentialotential tthreatshreats ddoo nnotot aactuallyctually mmaterializeaterialize aandnd tthathat tthehe ccostsosts ooff ssignifiignifi cantcant changechange cancan bebe veryvery substantial.substantial. SSecond,econd, eveneven aafterfter GGeneraleneral MMotorsotors rrecognizedecognized tthathat iitsts oonce-securence-secure ppositionosition wwasas underunder threat,threat, itit tooktook somesome timetime forfor thethe fi rmrm toto understandunderstand thethe naturenature ofof thethe cclusterluster ofof techniquestechniques thatthat drovedrove JapaneseJapanese success.success. ItIt hadhad takentaken ToyotaToyota manymany yyearsears ttoo ddevelopevelop whatwhat wwee nnowow ccallall ““highhigh pperformanceerformance wworkork ssystems”—patternsystems”—patterns ooff mmanagerialanagerial ppracticeractice thatthat centercenter aroundaround densedense networksnetworks ofof communicationcommunication andand jointjoint problemproblem ssolving.olving. ProblemsProblems ofof complementaritycomplementarity andand informationinformation localizationlocalization maymay meanmean thatthat tthehe implementationimplementation ofof thesethese techniquestechniques isis subjectsubject toto thethe informationalinformational constraintsconstraints tthathat llimitimit tthehe rrateate ooff ddiffusioniffusion ooff aanyny ccomplexomplex nnewew ttechnology.echnology. TThird,hird, thesethese ttechniquesechniques ccouldould nnotot bbee iimplementedmplemented wwithoutithout tthehe ssimultaneousimultaneous ddevelopmentevelopment ooff eeffectiveffective rrelationalelational ccontracts,ontracts, aandnd GGeneraleneral MMotorsotors hhadad cconsider-onsider- aableble diffidiffi cultyculty buildingbuilding suchsuch contracts.contracts. GM’sGM’s historyhistory ofof adversarialadversarial relationsrelations withwith iitsts bbluelue ccollarollar wworkersorkers aandnd ssuppliers,uppliers, iitsts rrelianceeliance oonn aann ooperatingperating mmodelodel tthathat aassumedssumed therethere waswas veryvery littlelittle nneedeed ttoo eexchangexchange kknowledgenowledge aacrosscross eeitherither fi rmrm oror ffunctionalunctional bboundaries,oundaries, aandnd iitsts mmuddleduddled aandnd uunaccountablenaccountable iinternalnternal pprocessesrocesses mmadeade iitt ddiffiiffi ccultult ttoo bbuilduild thethe credibilitycredibility fundamentalfundamental ttoo effectiveeffective long-termlong-term rrelationships.elationships. MMoreoveroreover eveneven afterafter thethe fi rrmm hhadad recognizedrecognized thethe importanceimportance ofof aadoptingdopting techniquestechniques llikeike ccontinuousontinuous iimprovementmprovement aandnd ccross-functionalross-functional ccommu-ommu- nnication,ication, iitt ttookook ssomeome yyearsears ttoo uunderstandnderstand tthehe nnatureature ooff tthehe rrelationalelational ccontractsontracts tthathat wouldwould bebe neededneeded ttoo ddiffuseiffuse tthemhem wwithinithin tthehe oorganization.rganization. MManagersanagers aaccus-ccus- ttomedomed ttoo ggoverningoverning bbyy fi atat appearappear ttoo hhaveave ffoundound iitt ddiffiiffi cultcult toto uunderstandnderstand tthehe ppotentialotential benefibenefi tsts ofof discussiondiscussion andand collaboration.collaboration. EvenEven afterafter thethe techniquestechniques hadhad bbeeneen widelywidely ddiffusediffused aandnd pproblemsroblems ooff cclaritylarity sseemedeemed ttoo hhaveave bbeeneen oovercome,vercome, pproblemsroblems ofof credibilitycredibility continuedcontinued toto arise,arise, asas thethe collapsecollapse inin suppliersupplier relation-relation- sshipships followingfollowing GM’sGM’s apparentapparent “defection”“defection” afterafter itsits largelarge fi nancialnancial losseslosses inin 11991 suggests.991 suggests. IIff tthishis cclusterluster ooff eexplanationsxplanations fforor tthehe ddeclineecline ooff GGeneraleneral MotorsMotors isis eessentiallyssentially ccorrect,orrect, itit raisesraises somesome intriguingintriguing questions.questions. ToTo whatwhat degreedegree areare thesethese explanationsexplanations mmoreore bbroadlyroadly descriptivedescriptive ofof thethe declinedecline ofof soso manymany ofof GM’sGM’s contemporariescontemporaries inin tthehe UUSS mmanufacturinganufacturing sector?sector? WhatWhat implicationsimplications mightmight theythey havehave forfor ourour under-under- sstandingtanding ofof managementmanagement today?today? WhatWhat areare somesome ppotentiallyotentially fruitfulfruitful avenuesavenues forfor ffurther research?urther research? TThehe ddeclineecline ofof GeneralGeneral MotorsMotors isis exceptionalexceptional inin itsits scale,scale, butbut manymany fi rmsrms thatthat ddominatedominated thethe USUS economyeconomy inin thethe 1950s1950s andand 1960s1960s echoedechoed GMGM inin respondingresponding sslowlylowly andand iineffectivelyneffectively toto thethe changingchanging competitivecompetitive landscapelandscape ofof thethe 1980s1980s andand 68 Journal of Economic Perspectives

11990s.990s. GlobalGlobal competitioncompetition rootedrooted inin low-wagelow-wage laborlabor upendedupended thethe apparelapparel industry.industry. NNewew technologytechnology displaceddisplaced KodakKodak andand AT&T.AT&T. InnovativeInnovative domesticdomestic entrantsentrants replacedreplaced SSearsears andand K-Mart.K-Mart. ButBut atat leastleast two aspectstwo aspects ofof GM’sGM’s experienceexperience seemseem commoncommon toto a wwideide rangerange ofof fi rms.rms. First,First, pastpast successsuccess oftenoften ledled toto extendedextended periodsperiods ofof denial.denial. ForFor eexample,xample, thethe leadersleaders ofof thethe AmericanAmerican steelsteel industryindustry werewere extraordinarilyextraordinarily slowslow toto aadoptdopt ccompetitiveompetitive ttechniquesechniques (Christensen(Christensen 1997),1997), andand mostmost ooff tthehe mmajorajor ssemicon-emicon- dductoructor producersproducers refusedrefused toto believebelieve thatthat ttheirheir JJapaneseapanese ccompetitorsompetitors wwereere ooutflutfl ankinganking tthemhem ((FergusonFerguson 11989).989). IIndeedndeed tthishis ppatternattern ooff ddenialenial ffollowingollowing eextendedxtended ssuccessuccess aappearsppears ttoo bbee a wworldwideorldwide pphenomenon.henomenon. NNokia’sokia’s rrecentecent ccollapseollapse aandnd SSony’sony’s ddeclineecline ssuggestuggest thatthat itit mmayay bbee a ddangeranger fforor aallll llarge,arge, ssuccessfuluccessful fi rms.rms. EvenEven ToyotaToyota stumbledstumbled iinn 22010,010, iinn ssignifiignifi cantcant partpart duedue toto itsits delayeddelayed reactionreaction toto customercustomer qualityquality concerns,concerns, aalthoughlthough thethe aautomakerutomaker aappearsppears ttoo hhaveave wweatheredeathered tthehe sstorm,torm, rregainingegaining pprofirofi tsts andand mmarketarket ssharehare ssinceince tthen.hen. SSecond,econd, manymany largelarge AmericanAmerican manufacturersmanufacturers hadhad diffidiffi - ccultyulty aadoptingdopting thethe bundlebundle ofof practicespractices pioneeredpioneered byby fi rmsrms likelike Toyota.Toyota. OneOne carefulcareful sstudytudy ofof eeffectsffects ooff hhumanuman rresourceesource mmanagementanagement ppracticesractices oonn tthehe pproductivityroductivity ooff iintegratedntegrated steelsteel fi nishingnishing lines,lines, forfor example,example, suggestedsuggested thatthat “better”“better” practicespractices werewere ssurprisinglyurprisingly slowslow toto diffuse:diffuse: 36 percent36 percent ofof thethe monthlymonthly observationsobservations inin thethe samplesample uusedsed tthehe ttraditional,raditional, “command“command aandnd ccontrol”ontrol” bbundleundle ooff ppracticesractices fforor aallll fi ve yearsve years ofof tthehe sstudy,tudy, aandnd 558 percent8 percent stillstill hadhad nono teamsteams byby thethe endend ofof thethe periodperiod (Ichniowski,(Ichniowski, SShaw,haw, aandnd PPrennushirennushi 11997).997). SSomeome oobserversbservers hhaveave ssuggesteduggested tthathat tthesehese pproblemsroblems aarere eevidencevidence ooff ““short-ism”short-ism” iinn tthehe AAmericanmerican eeconomy,conomy, oorr ooff aann oobsessionbsession wwithith qquantitativeuantitative mmetrics,etrics, bbutut tthehe eexpe-xpe- rrienceience ooff GGeneraleneral MMotorsotors ssuggestsuggests tthathat tthishis ddiagnosisiagnosis iiss ttoooo ssimple.imple. GGM,M, pparticularlyarticularly uundernder RRogeroger SSmithmith iinn tthehe eearlyarly 11980s,980s, mmadeade sseveraleveral vveryery llargearge iinvestments—largelynvestments—largely iinn ttechnology—thatechnology—that wwereere nnotot eexpectedxpected ttoo ppayay ooffff fforor a llongong ttime.ime. IInstead,nstead, iitt aappearsppears tthathat GGM’sM’s mmanagementanagement ddidid nnotot iinitiallynitially uunderstand—ornderstand—or hhadad ddiffiiffi ccultyulty ccommuni-ommuni- ccating—theating—the llong-termong-term vvaluealue ooff rrelationalelational ccontracts.ontracts. SSimilarlyimilarly TToyotaoyota aappearsppears ttoo hhaveave ccollectedollected mmoreore qquantitativeuantitative mmetricsetrics tthanhan GGM,M, aandnd ttoo hhaveave ddoneone ssoo mmoreore ffrequently.requently. IItt wwasas GGM’sM’s ffailureailure ttoo uusese mmetricsetrics aass a gguideuide ttoo pproblemroblem ssolving,olving, rratherather tthanhan aass a mmeasureeasure fforor iinternalnternal ccontrol,ontrol, tthathat ccreatedreated ddiffiiffi cculty.ulty. AAnothernother streamstream ofof workwork suggestssuggests thatthat thethe corecore problemproblem isis thethe naturenature ofof Amer-Amer- iicancan laborlabor andand capitalcapital markets.markets. ForFor example,example, HallHall andand SoskiceSoskice (2001)(2001) andand othersothers hhaveave arguedargued thatthat tthehe iinstitutionalnstitutional structurestructure ofof tthehe JJapaneseapanese aandnd GGermanerman eeconomiesconomies mmakesakes iitt rrelativelyelatively eeasierasier fforor fi rmsrms inin thosethose countriescountries toto buildbuild long-termlong-term relationshipsrelationships wwithith ttheirheir wworkforceorkforce andand theirtheir suppliersupplier base.base. HoweverHowever thethe successsuccess ofof thethe JapaneseJapanese aandnd GGermanerman aautomotiveutomotive fi rmsrms inin thethe UnitedUnited States—andStates—and GM’sGM’s eventualeventual adoptionadoption ofof TToyota’soyota’s techniques—suggesttechniques—suggest thatthat differencesdifferences inin institutionalinstitutional contextcontext alonealone cannotcannot bbee determinative,determinative, althoughalthough wewe cannotcannot rulerule outout thethe hypothesishypothesis thatthat fi rrmsms thatthat havehave a historyhistory ofof relyingrelying onon relationalrelational contractscontracts inin oneone marketmarket maymay havehave anan advantageadvantage iinn buildingbuilding themthem inin newnew geographies.geographies. ItIt remainsremains anan openopen questionquestion howhow thethe kindskinds ooff iinstitutionsnstitutions thatthat appearappear toto havehave contributedcontributed toto JapaneseJapanese andand GermanGerman manu-manu- ffacturingacturing excellenceexcellence mightmight bebe adaptedadapted toto helphelp a US-ownedUS-owned fi rmrm remakeremake itselfitself byby rrewritingewriting relationalrelational contractscontracts andand establishingestablishing newnew onesones wwithith wworkersorkers aandnd ssuppliersuppliers wwithith wwhomhom iitt hhasas a hhistoryistory ooff ddefection.efection. Management Practices, Relational Contracts, and the Decline of General Motors 69

TThehe potentialpotential advantagesadvantages ofof relationalrelational contractscontracts maymay havehave moremore widespreadwidespread aapplications.pplications. PublicPublic supportsupport forfor eeconomicconomic ggrowthrowth hhasas llongong ffocusedocused oonn tthehe ddiffusioniffusion ooff ttechnology-basedechnology-based insights,insights, butbut oourur wworkork ssuggestsuggests tthathat llearningearning mmoreore aaboutbout wwhenhen ((andand wwhathat ttypeype oof)f) rrelationalelational ccontractsontracts aarere llikelyikely ttoo bbee vvaluablealuable mmayay bbee jjustust aass iimpor-mpor- ttant.ant. ForFor example,example, mmanyany UUSS fi rmsrms appearappear toto bebe managingmanaging theirtheir globalglobal supplysupply chainschains oonn a spotspot basis,basis, despitedespite thethe factfact thatthat somesome intriguingintriguing researchresearch hashas suggestedsuggested thatthat thisthis mmayay bbee ssuboptimaluboptimal oonn a nnumberumber ooff ddimensionsimensions ((forfor eexample,xample, LLockeocke 22013).013). FFurtherurther rresearchesearch exploringexploring thethe conditionsconditions underunder whichwhich relationalrelational contractscontracts maymay provideprovide ssuperioruperior performance,performance, andand howhow suchsuch contractscontracts cancan bebe built,built, maymay bebe particularlyparticularly vvaluablealuable iinn tthishis ccontext.ontext. VViewingiewing tthehe fi rmrm throughthrough thethe lenslens ofof relationalrelational contractscontracts maymay alsoalso havehave broaderbroader iimplicationsmplications forfor thethe theorytheory ofof thethe fi rrm.m. IInn mmanyany eeconomicconomic mmodels,odels, tthehe rolerole ofof thethe mmanageranager iiss ttoo mmakeake sstrategictrategic cchoices—tohoices—to ddecideecide whichwhich marketsmarkets toto enterenter andand whichwhich iinputsnputs toto combine—andcombine—and toto mmonitoronitor ssubordinates.ubordinates. ThisThis viewview ooff tthehe mmanageranager aass a sstrategictrategic architectarchitect oror asas anan entrepreneurentrepreneur implementingimplementing a visionvision fromfrom thethe toptop downdown hhasas ddeeplyeeply ppervadedervaded bbothoth tthehe mmanagerialanagerial lliteratureiterature aandnd mmanagementanagement ppractice.ractice. BButut althoughalthough thisthis perspectiveperspective hashas provedproved illuminatingilluminating andand successfulsuccessful inin manymany ccontexts,ontexts, itit oomitsmits tthehe rrealityeality ooff bbuildinguilding llong-termong-term relationshipsrelationships withwith peoplepeople whowho ooftenften havehave veryvery differentdifferent interestsinterests andand veryvery differentdifferent understandingsunderstandings ofof thethe world.world. SSomeome ssuggestiveuggestive eempiricalmpirical wwork,ork, fforor eexample,xample, iindicatesndicates tthathat ““highhigh ccommitment”ommitment” oorr ““purposepurpose driven”driven” fi rmsrms6 aarere particularlyparticularly successfulsuccessful inin motivatingmotivating theirtheir workforceworkforce ((PfefferPfeffer 1998),1998), perhapsperhaps becausebecause theythey areare betterbetter positionedpositioned toto communicatecommunicate clearlyclearly aandnd ccrediblyredibly bothboth withinwithin andand acrossacross fi rmrm boundariesboundaries andand cancan thusthus buildbuild relationalrelational ccontractsontracts moremore easily.easily. SimilarlySimilarly somesome intriguingintriguing qualitativequalitative studiesstudies havehave suggestedsuggested tthathat bbeingeing aableble ttoo ccombineombine tthehe aabilitybility ttoo fformorm rrelationalelational ccontractsontracts wwithith tthehe aabilitybility ttoo hholdold eeveryoneveryone cconcernedoncerned toto veryvery highhigh standardsstandards ofof accountabilityaccountability maymay bebe a particu-particu- llarlyarly powerfulpowerful skillskill (Beer(Beer 2009).2009). IfIf thesethese fi ndingsndings areare strengthenedstrengthened byby ongoingongoing rresearch,esearch, thethe storystory ofof GM’sGM’s declinedecline hashas thethe potentialpotential toto openopen somesome importantimportant doorsdoors fforor hhowow rresearchersesearchers vviewiew tthehe fi rm.rm.

■ The authors would like to thank the editors of this journal for their comments and suggestions, and would also like to thank Robert Gibbons, Casey Ichniowski, Mari Sako, Jeff Liker, Michael Wasser, Paul Adler, Brad Markell, and Jeffrey Morrow.

6 There is no precise defi nition of what it means to be either “high commitment” or a “purpose driven” fi rm, but in general these are fi rms in which the chief executive offi cer and his or her senior managers have made some kind of costly, public commitment to goals beyond short-term profi t maximization. 70 Journal of Economic Perspectives

References

Adler, Paul S. 1993. “The ‘Learning Bureaucracy’: Board, Simon. 2011. “Relational Contracts and New United Motor Manufacturing, Inc.” In Research the Value of Loyalty.” American Economic Review in Organizational Behavior, edited by Barry M. Staw 101(7): 3349 – 67. and Larry L. Cummings. Greenwich, CT: JAI Press. Brown, Clair, and Michael Reich. 1989. “When Adler, Paul S. and Bryan Borys. 1992. “Two Does Union-Management Cooperation Work? Types of Bureaucracy: Enabling and Coercive.” A Look at NUMMI and GM-Van Nuys.” California Administrative Science Quarterly 41(1): 61– 89. Management Review, vol. 31, no. 4, p. 26. Adler, Paul S., Barbara Goldoftas, and David I. Chassang, Sylvain. 2010 “Building Routines: Levine. 1997. “Ergonomics, Employee Involve- Learning, Cooperation, and the Dynamics of ment, and the Toyota Production System: A Case Incomplete Relational Contracts.” American Study of NUMMI’s 1993 Model Introduction.” Economic Review 100(1): 448 – 65. Industrial and Labor Relations Review 50(3): 416 –37. Christensen, Clayton. 1997. The Innova- Adler, Paul S., Thomas A. Kochan, John Paul tor’s Dilemma. Harvard Business School Press. MacDuffi e, Frits K. Pil, and Saul Rubenstein. 1997. Boston, MA. “United States: Variations on a Theme.” In After Lean Clark, Kim, and Takahiro Fujimoto. 1991. Production: Evolving Employment Practices in the World Product Development Performance: Strategy, Organiza- Auto Industry, edited by T. A. Kochan, R. D. Landsbury, tion, and Management in the World Auto Industry. and J. P. MacDuffi e, 61– 84. Ithaca: ILR Press. Boston: Harvard Business School Press. Akerlof, George. 1984. “Gift Exchange and Cusumano, Michael A. 1985. The Japanese Effi ciency-Wage Theory: Four Views.” American Automobile Industry. Cambridge, MA: Harvard Economic Review 72(2): 79– 83. University Press. Appelbaum, Eileen, Thomas Bailey, Peter Cusumano, Michael A., and Akira Takeishi. Berg, and Arne Kalleberg. 2000. Manufacturing 1991. “Supplier Relations and Management: A Advantage: Why High-Performance Work Systems Pay Survey of Japanese, Japanese-transplant, and Off. Ithaca, NY: Cornell University Press. U.S. Auto Plants.” Strategic Management Journal Associated Press. 2007. “GM-UAW Back at 12(8): 563– 88. Bargaining Table; Auto Stocks Rise.” USA Today, Dyer, Jeffrey H., and Nile W. Hatch. 2006. September 17. http://usatoday30.usatoday.com “Relation-specifi c Capabilities and Barriers to /money/autos/2007-09-17-gm-uaw_N.htm?csp=34. Knowledge Transfers: Creating Advantage through Babson, Steve. 1998. “Ambiguous Mandate: Network Relationships.” Strategic Management Lean Production and Labor Relations in the Journal 27(8): 701–19. United States.” In Confronting Change: Auto Labor Ferguson, Charles. 1989. “America’s High-Tech and Lean Production in North America, edited by Decline.” Foreign Policy no. 74, pp. 123 – 44. Huberto Juárez Núñez and Steve Babson, 23 –50. Finkelstein, Sydney. 2003. “GM and the Great Wayne State University Press. Automation Solution.” Business Strategy Review Bachmann, Reinhard, and Akbar Zaheer, eds. 14(3): 18 –24. 2006. Handbook of Trust Research. Northampton Freyssenet, Michel, Andrew Mair, Koichi MA: Edward Elgar. Shimizu, and Giuseppe Volpato. 1998. One Best Beer, Michael. 2009. High Commitment, High Way? Trajectories and Industrial Models of the World’s Performance: How to Build A Resilient Organization Automobile Producers. Oxford University Press. for Sustained Advantage. Jossey Bass. Gibbons, Robert, and Rebecca Henderson. Behr, Peter. 1981. “A Search for Quality: Detroit 2013. “What Do Managers Do? Exploring Persis- Tries It All.” Washington Post, August 23, p. G1. tent Performance Differences amongst Seemingly Black, Sandra, and Lisa Lynch. 2001. “How to Similar Enterprises.” Chap. 17 in The Handbook of Compete: The Impact of Workplace Practices and Organizational Economics, edited by Robert Gibbons Information Technology on Productivity.” Review of and John Roberts. Princeton University Press. Economics and Statistics 83(3): 434 – 45. Halac, Marina. 2012. “Relational Contracts and Bloom, Nicholas, Benn Eifert, Aprajit Mahajan, the Value of Relationships.” American Economic David McKenzie, and John Roberts. 2013. “Does Review 102(2): 750 –79. Management Matter: Evidence from India.” Hall, Peter A., and David Soskice, ed. 2001. Quarterly Journal of Economics 128(1): 1– 51. Varieties of Capitalism: The Institutional Foundations Bloom, Nicholas, Raffaella Sadun, and John of Comparative Advantage. Oxford University Press. Van Reenen. 2013.“Management as a Technology.” Helper, Susan. 1987. “Supplier Relations and Unpublished paper. Technical Change: Theory and Application to the Susan Helper and Rebecca Henderson 71

US Automobile Industry.” Doctoral Dissertation, 1997. “Inventory Reduction and Productivity Department of Economics, Harvard University. Growth: A Comparison of the Japanese and US Helper, Susan. 1991. “Strategy and Irreversi- Automotive Sectors.” Managerial and Decision bility in Supplier Relations: The Case of the US Economics 18(2): 73 – 85. Automobile Industry.” Business History Review Lieberman, Marvin B., and Lieven Demeester. 65(4): 781– 824. 1999. “Inventory Reduction and Productivity Helper, Susan R. 1994. “Three Steps Forward, Growth: Linkages in the Japanese Automotive Two Steps Back in Automotive Supplier Relations.” Industry.” Management Science 45(4): 466–85. Technovation 14(10): 633 – 40. Lieberman, Marvin B., Susan Helper, and Lieven Helper, Susan. 2011. “Challenge and Oppor- Demeester. 1999. “The Empirical Determinants of tunity in the U.S. Auto Industry: The Key Role Inventory Levels in High-Volume Manufacturing.” of Suppliers.” Economia e Politica Industriale Production and Operations Management 8(1): 44 –55. 38(2): 51– 67. Liker, Jeffrey K. 2004. The Toyota Way: 14 Helper, Susan, and David I. Levine. 1992. Management Principles from the World’s Greatest “Long-term Supplier Relations and Product Manufacturer. New York: McGraw-Hill. Market Structure.” Journal of Law, Economics, and Liker, Jeffrey K., and James Franz. 2011. The Organization 8(3): 561– 81. Toyota Way to Continuous Improvement: Linking Helper, Susan, and John Paul MacDuffi e. 2008. Strategy and Operational Excellence to Achieve Superior “Better than a Bailout.” New Republic, December 2. Performance. New York: McGraw-Hill. http://www.newrepublic.com/article/politics Locke, Richard M. 2013. The Promise and Limits /better-bailout. of Private Power Promoting Labor Standards in a Helper, Susan R., and Mari Sako. 1995. Global Economy. Cambridge University Press. “Supplier Relations in Japan and the United States: MacDuffi e, John Paul. 1995. “Human Resource Are They Converging?” Sloan Management Review, Bundles and Manufacturing Performance: Spring, pp. 77–84. Organizational Logic and Flexible Production Huselid, Mark A. 1995. “The Impact of Systems in the World Auto Industry.” Industrial and Human Resource Management Practices on Labor Relations Review 48(2): 197–221. Turnover, Productivity, and Corporate Financial MacDuffi e, John Paul. 1997. “The Road to Performance.” Academy of Management Journal ‘Root Cause’: Shop-Floor Problem-Solving at 38(2): 635 –72. Three Auto Assembly Plants.” Management Science Hyde, Justin. 2013. “First Pontiac Aztek’s Sale 43(4): 479 –502. Highlights the Long Half-life of Ugly.” Motoramic, MacDuffi e, John Paul, and Susan Helper. August 1. 1997. “Creating Lean Suppliers: The Honda Way.” Ichniowski, Casey, Kathryn Shaw, and Giovanni California Management Review 39(4): 118 –51. Prennushi. 1997. “The Effects of Human Resource MacDuffi e, John Paul, Kannan Sethuranman, Management Practices on Productivity: A Study of and Marshall Fisher. 1996. “Product Variety and Steel Finishing Lines.” American Economic Review Manufacturing Performance: Evidence from the 87(3): 291– 313. International Automotive Assembly Plant Study.” Ingrassia, Paul. 2010. Crash Course: The American Management Science 42(3): 350– 69. Automobile Industry’s Road to Bankruptcy and Milgrom, Paul, and John Roberts. 1990. “The Bailout—and Beyond. New York: Random House. Economics of Modern Manufacturing: Tech- Kaplan, Sarah, and Rebecca Henderson. 2005. nology, Strategy, and Organizations.” American “Inertia and Incentives: Bridging Organizational Economic Review 80(3): 511–28. Economics and Organizational Theory.” Organiza- Milgrom, Paul, and John Roberts. 1995. tion Science 16(5): 509 – 521. “Complementarities and Fit: Strategy, Structure, and Keller, Maryann. 1989. Rude Awakening: The Organizational Change in Manufacturing.” Journal Rise, Fall, and Struggle for Recovery of General Motors. of Accounting and Economics 19(2–3): 179–208. New York: Harper Perennial. Nishiguchi, Toshihiro. 1994. Strategic Industrial Kochan, Thomas A., Harry C. Katz, and Sourcing: The Japanese Advantage. New York: Oxford Robert B. McKersie. 1986. The Transformation of University Press. American Industrial Relations. New York: Basic Books. Parker, Mike, and Jane Slaughter. 1994. Levin, Jonathan. 2003. “Relational Incentive “Working Smart: A Union Guide to Participation Contracts.” American Economic Review 93(3): 835 – 57. Programs and Reengineering.” Detroit: Labor Li, Jin, and Niko Matouschek. 2013. “Managing Notes Press. Confl icts in Relational Contracts.” American Pfeffer, Jeffrey. 1998. The Human Equation: Economic Review 103(6): 2328 –51. Building Profi ts by Putting People First. Boston: Lieberman, Marvin B., and Shigeru Asaba. Harvard Business School Press. 72 Journal of Economic Perspectives

Repenning, Nelson P., and Rebecca M. Taylor, Alex, III. 2010. Sixty to Zero: An Inside Henderson. 2010. “Making the Numbers? ‘Short Look at the Collapse of General Motors—and the Detroit Termism’ & the Puzzle of Only Occasional Auto Industry. Yale University Press. Disaster.” NBER Working paper 16367. “This American Life,” National Public Rubenstein, Saul A., and Thomas A. Kochan. Radio. 2010. “NUMMI”. Episode 403, March 26. 2001. Learning from Saturn. Ithaca, NY: Cornell http://www.thisamericanlife.org/radio-archives University Press. /episode/403/nummi. Russo, John. 1984. “Killing Jobs with ‘Coop- Train, Kenneth E., and Clifford Winston. 2007. eration’: The GM Memo.” Labor Research Review “Vehicle Choice Behavior and the Declining 1(5): Article 10. Market Share of U.S. Automakers.” International Sako, Mari. 2006. Shifting Boundaries of the Economic Review 48(4): 1469 – 96. Firm—Japanese Company, Japanese Labor. Oxford Weisman, Jonathan. 2005. “Biggest Automaker University Press. Needs Big Changes.” Washington Post, June 11. Sloan, Alfred P. 1963, 1990. My Years with Welch, David, and Dan Beucke. 2005. “Why General Motors. Crown Books. GM’s Plan Won’t Work.” Business Week, May 8. Smitka, Michael J. 1991. Competitive Ties: Subcon- http://www.businessweek.com/stories/2005 tracting in the Japanese Automotive Industry. New -05-08/why-gms-plan-wont-work. York: Columbia University Press. Womack, James, P. Daniel T. Jones, and Daniel Soderberg, Leif G. 1989. “Facing Up to the Engi- Roos. 1990. The Machine that Changed the World. neering Gap.” McKinsey Quarterly, Spring, p. 3–23. New York, NY: The Free Press. Sullivan, Mary W. 1998. “How Brand Names Wright, J. Patrick. 1979. On a Clear Day You Affect the Demand for Twin Automobiles.” Journal Can See General Motors: John Z. DeLorean’s Look of Marketing Research 35(2): 154 – 65. Inside the Automotive Giant. New York: Wright Takeishi, Akira. 2002. “Knowledge Partitioning Enterprises. in the Interfi rm Division of Labor: The Case of Yates, Brock. 1983. The Decline and Fall of the Automotive Product Development.” Organization American Automobile Industry. New York: Empire Science 13(3): 321–38. Books.