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

28 Pages Posted: 19 Jan 2014

See all articles by Susan Helper

Susan Helper

Case Western Reserve University - Department of Economics

Rebecca M. Henderson

Harvard Business School; NBER

Multiple version iconThere are 2 versions of this paper

Date Written: January 18, 2014

Abstract

General Motors was once regarded as one of the best managed and most successful firms in the world, but between 1980 and 2009 its share of the US market fell from 62.6 to 19.8 percent, and in 2009 the firm went bankrupt. In this paper we argue that the conventional explanation for this decline – namely high legacy labor and health care costs – is seriously incomplete, and that GM’s share collapsed for many of the same reasons that many of the other highly successful American firms of the 50s, 60s and 70s were forced from the market, including a failure to understand the nature of the competition they faced and an inability to respond effectively once they did. We focus particularly on the problems GM encountered in developing the relational contracts essential to modern design and manufacturing. We discuss a number of possible causes for these difficulties: including GM’s historical practice of treating both its suppliers and its blue collar workforce as homogeneous, interchangeable entities, and its view that expertise could be partitioned so that there was minimal overlap of knowledge amongst functions or levels in the organizational hierarchy and decisions could be made using well-defined financial criteria. We suggest that this dynamic may have important implications for our understanding of the role of management in the modern, knowledge based firm, and for the potential revival of manufacturing in the United States.

Keywords: Relational Contracts, Managerial Capabilities, General Motors

JEL Classification: J30, L1, L2

Suggested Citation

Helper, Susan and Henderson, Rebecca M., Management Practices, Relational Contracts, and the Decline of General Motors (January 18, 2014). Available at SSRN: https://ssrn.com/abstract=2381272 or http://dx.doi.org/10.2139/ssrn.2381272

Susan Helper

Case Western Reserve University - Department of Economics ( email )

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United States
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Rebecca M. Henderson (Contact Author)

Harvard Business School ( email )

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United States

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