History Lesson I

The other day someone was commenting on the “new” General Motors doing all of the same old things – specifically, building one basic vehicle and then modifying the body to make a Chevrolet version, and Buick version, a Cadillac version, and so on. I remarked that the company hadn’t started out that way, and was a bit surprised when no one at the table knew the story of how GM wound up with 20-plus brand names in the first place. If you already know that story you may want to skip ahead to the next Grad School Diary post, which is a good bit and has airplanes in it. But if you can’t remember, you may want to stick around; there’s a lesson here that goes well beyond the automotive industry…

General Motors didn’t invent the concept of multiple brands (or “name plates” as they’re sometimes called in the industry), any more than Henry Ford invented the automobile, but for sixty or seventy years they were the most successful users of the strategy. Put simply, Ford’s early products were optimized for mass fabrication – Henry Ford himself remarked that the customer could have his Model T in any color he liked – as long as that color was black. But while low-cost provider is a powerful strategic position, it’s not the only position, and General Motors hit upon the idea of differentiated products relatively early in the industry’s development. The idea behind the original five divisions was that the customer would start out with the low-cost, high-value product from Chevrolet, then gradually (when his or her income level rose) develop a desire for more luxury in their transportation and opt for a Pontiac, then graduate to an Oldsmobile, move on to a Buick, and finally purchase a Cadillac to let everyone know they’d arrived. All they needed was five vehicles with relatively similar shapes, sizes and capabilities, and an increasing amount of both accessories and mark-up…

It may seem obvious to us today, but it’s important to remember that the early days of the automotive industry were also relatively early in the Industrial Revolution in the United States, and the car companies were, in fact, some of the very first national brands. It wasn’t until decades later than the company began using essentially the same design, and then even the same components and parts, to build cars for different brands within the company. And even then, it was years before people began to realize that if the cars were mechanically identical, then you were paying two or three times as much for such meaningless extras as leather seats and improved clocks without actually receiving any additional value for your money. Things probably came to a peak with the Cadillac Cimarron of the 1980’s, which was essentially the same vehicle as a Chevy Cavalier, except for a chromed luggage rack, different floor mats, and twice the price tag…

Eventually the customer complaints got back to headquarters, and GM started working to give its different vehicles different capabilities as well as more unique body styles, but by then the damage was done. Once people stop finding added value in the features you are charging extra for, your product is no longer going to be seen as worth the price. General Motors didn’t help matters by sacrificing mechanical reliability as they tried to find more differentiation for their products; the predictable result was higher-end models that were not only perceived as dolled-up Chevrolets, but were in fact less reliable (and less fuel efficient) than the lower-priced versions. Nor did the introduction and/or acquisition of over a dozen additional brands do any good; the extra products complicated supply and logistics and sucked up huge amounts of additional advertising and marketing budgets, but did nothing to convince people that the products were worth the money…

The lesson here seems obvious: if your customers don’t see any added value in your product, you can’t charge more for it – and your differentiation strategy can only end in failure. But before we start ragging on GM for failing to figure that out, we should probably remember that they didn’t start out that way – and before they started making those mistakes they did manage to become the world’s largest and most profitable automaker. If your business makes use of a differentiation strategy, or even if you just have different product lines at different price levels, you may want to check on whether your customers still believe they’re getting their money’s worth…