Saturn: A Wealth of Lessons from FailurePublished: October 28, 2009 in Knowledge@Wharton
General Motors' decision earlier this month to scrap its Saturn brand triggered frequent retellings of the many ways in which GM missed an opportunity to recast itself and the auto industry. But other manufacturers did adopt some of Saturn's innovations, according to Wharton faculty. Indeed, they say, the Saturn story provides a roadmap for what to do --- and what not to do -- as the auto industry adjusts to the post-financial crisis world.
Wharton Marketing professor Americus Reed II once cited Saturn's strategy for building a community of customers with an emotional connection to the brand as an example for his students. Wharton operations and information management professor Morris A. Cohen describes its system for distributing replacement parts to its retailers as an industry model. And Lawrence G. Hrebiniak, a management professor at Wharton, says that in its early years, Saturn made "innovation a corporate strategy."
One of those lessons is the importance of persistence. "Saturn started out on the right foot -- as an autonomous division with market focus and an emphasis on quality," says Hrebiniak. But the brand and its parent failed to sustain the effort. "It ended up on the wrong foot -- with internal squabbles, and production- and cost-driven focus."
GM seemed to tire of the Saturn effort after just a few years, notes John Paul MacDuffie, a Wharton management professor and co-director of the International Motor Vehicle Program. "The story of Saturn is not so much the boldness of the ideas, but that GM was unable to follow through. It just never figured out how to take the lessons that could be learned at Saturn and apply them elsewhere."
Though Saturn's early years are widely viewed as golden, it was telling that it took more than six years to bring the first Saturn to market, according to MacDuffie. "I think there was some ground lost right there," he says, as GM raised such high expectations for the company and the car, and then took so long to deliver. When the delays were public, GM attributed them to its effort to get everything right.
But behind the scenes, some GM executives wanted to pull the plug on the Saturn experiment. Indeed, battles over Saturn's future would continue throughout its life. The anti-Saturn executives were later joined by a new leadership team at the United Auto Workers union, which frowned on the flexible work rules adopted by their predecessors. And when Saturn's champion, GM chairman Roger Smith, retired in 1990 just as the first Saturns were being produced, its future was already in jeopardy, especially as deep losses at GM created competition among the divisions for resources.
One result of those fights provides another lesson -- the importance of providing new products that allow existing customers to trade up. From 1990 to 2000, while Americans were snapping up minivans and SUVs, Saturn had just three small models to offer -- a coupe, sedan and wagon, all built on the same platform called the S-Series. "They weren't locking customers in," says Hrebiniak. "If a Toyota dealer can get you into a Corolla, he can get you to trade up to a Camry, to an Avalon and then to a Lexus."
Too Little, Too Late
The new model that arrived in 2000 was a larger sedan, the L-Series, designed to compete with the Honda Accord and Toyota Camry. But by the time the LS arrived, many of Saturn's early adopters had traded up to larger vehicles offered by the competition. Paul Lokey, who says his Clearwater, Fla., Saturn franchise sold the very first Saturn in 1990, laments that "things would have been a lot different if we could have had a new car, especially an SUV, in years three, four, five or six, when Saturn was at its zenith."
The effect of the new model vacuum can be seen in Saturn's sales, which peaked in 1994 at 286,000 units. Sales have been flat or down each year since, except for a 17% gain in 2000 when the LS was introduced; a 7.5% gain in 2002 with the introduction of a small SUV called the Vue; and 6% gains in 2006 and 2007 when Saturn rolled out a bevy of new models, most of them based on platforms from GM's European unit, Opel. GM did not break out profit and loss figures for Saturn, but it was once reported to be losing about $3,000 per car. In all, according to various news reports, GM invested about $5 billion in Saturn.
New UAW leadership pushed to have the LS manufactured not in Spring Hill, Tenn. -- the modern plant where employees had approved work rules with more flexibility than existed in the United Auto Workers' master contract -- but in a Wilmington, Del., plant that would otherwise have been shuttered. And in 2003, as Saturn became more and more like the rest of GM, workers at Spring Hill voted to return to the GM master contract.
Hrebiniak says that "Saturn fell prey to the culture of GM.... It was buried in GM's old culture of inertia. Saturn had made innovation a corporate strategy. But what happened over time? GM diminished Saturn's standing as a separate entity and all the benefits that came from that."
In fact, many observers say it may have been virtually impossible for GM to apply the Saturn template to all its divisions. "Perhaps," says Cohen, "the leadership at GM wisely knew that they just couldn't pull it off." Indeed, there were many hurdles that stood between GM and innovation. Among the most formidable were GM's fiercely competitive dealerships and divisions.
GM dealers have always had to compete not just with other brands like Ford or Toyota, but also with one another. The competition created a boiler-room environment of price-haggling, which turned off many customers but thrilled others. Saturn, on the other hand, had a "no haggling" policy that it backed up with what may have been its most significant innovation: exclusive market areas for dealers. "That was the huge difference," says Lokey. In a Saturn store, the sticker price was the final price. And Saturn retailers could confidently adhere to the policy because they knew the customer wasn't going to find the same new car for $100 less a few blocks or miles away.
The exclusive market areas combined with the efficient parts supply chain also allowed Saturn dealers to pay the same price for repair parts. Other GM dealers had to compete with one another to keep their supply bins full, and they often had to buy parts from their rivals. At Saturn, the bins were almost always stocked thanks to a computerized system that automatically sent orders to a distribution center.
Wharton's Cohen assisted in the development of Saturn's supply chain. As consultants for GM in the early 1980s, Cohen and colleague Hau L. Lee, a professor of management science and engineering operations at Stanford University, devised a list of suggestions for improving the efficiency of the company's parts supply chain. "Basically, GM rejected all of the recommendations," Cohen recalls. But a GM executive who had seen the recommendations later became part of the Saturn startup team, where he was responsible for developing customer support programs. He adopted many of Cohen's and Lee's ideas.
The reemergence of their plan "was a surprise to us," Cohen recalls. It turned out to be a pleasant one. By the end of the 1990s, Saturn dealerships were rated first in parts availability by an industry trade magazine. In a 1999 J.D. Power consumer survey that measured customer satisfaction with parts availability, individual Saturn models were ranked fourth and tenth. The eight others in the top 10 were luxury models made by Cadillac, Infinity, Lexus and Volvo. In an article for the Sloan Management Review's summer 2000 issue, Cohen, Lee and two executives at Saturn and GM wrote that the company's success in the "after-sales service business ... is a wake-up call; its approach should serve as a model for any industry trying to forge the critical link between after-sales service and customer loyalty."
Despite that "wake-up call," GM never fully adopted the Saturn model. "There were things to learn from Saturn that GM didn't absorb," says Cohen. "This was just one case where I saw GM's resistance to replicating what was working at Saturn."
But others did learn from the Saturn experiment. "The concepts that are embodied in the Saturn strategy have been widely adopted," says Cohen. The supply chain strategy, called Vendor Managed Inventory (VMI), includes features such as buyback incentives, which lower risks for dealers, and information sharing between all of the points on the supply chain. However, Cohen adds, learning from one of Saturn's successes is not a guarantee of success.
"One company I worked with closely as they tried to emulate Saturn was Caterpillar," Cohen recalls. Indeed, they called their strategy "Jointly Managed Inventory (JMI)" to highlight that it was to be a cooperative venture involving the company and their independent dealers. But "their success with it was not as dramatic as Saturn's. One of the lessons I learned from that episode is that it matters how information and risk is shared when implementing a supply chain strategy based on coordination and cooperation. The Saturn strategy worked because it contained multiple elements that supported that notion. Caterpillar was less successful because at the end, they did not get the same level of trust or conformance out of their dealers."
The no-haggle policy, the absence of a high-pressure sales environment and the high level of customer satisfaction contributed to a sense of brand loyalty among Saturn's customers, according to Reed. "They were one of the first car companies that tried to create a brand community, to develop the idea of a Saturn owner and personality type. They created a deeper connection between the company and the consumer with things like inviting customers out to the plant to meet the people who build the cars."
An early Saturn television ad was typical of the effort. It showed Saturn owners traveling through pastoral settings to the company's Spring Hill, Tenn., plant, meeting assembly workers and enjoying a folksy picnic. When a rainstorm turned the scene outside the plant into a Woodstock-like muddy mess, the announcer intoned, "Of course, not everything went exactly as we planned. But we were all in it together, the way we always have been."
Lokey recalls being a bit skeptical when he first heard about Roger Smith's audacious plan for Saturn. "My thinking was, 'My goodness gracious, GM's going to try to build a car that's as good as Honda, Toyota or Nissan? Give me a break.'"
But his skepticism faded as he learned more about the Saturn way. "The investment [to buy the franchise] was minimal," he says. "It turned out to be the best decision I ever made." That he would reach such a conclusion, days after Saturn's last hope for survival fell short, says a lot about just how different a car company Saturn really was.
That last hope, of course, was the Penske Automotive Group's plan to buy the brand and have another manufacturer produce new vehicles under the Saturn name. Though never officially announced, Renault-Nissan was widely reported to be the potential partner. But Penske, whose network of auto dealerships is widely admired in the auto business, was unable to strike a deal and said on October 1 that it had abandoned the effort. That same day, GM announced it will wind down Saturn's operations and turn out the lights within a year.
After a bankruptcy and takeover by taxpayers of the United States and Canada and by the UAW, GM finally seems to be fixing some of the problems that were made obvious by the Saturn experience. It is reducing the number of divisions -- in addition to Saturn, Pontiac is being eliminated -- and selling its European business, Opel.
Lokey, who also owns Kia, Volkswagen and Mercedes dealerships, is now selling used cars from his two Saturn stores, where even before the last new Saturn was manufactured, he was getting less than 20% of his revenues from new cars. "Really, the car was never that great," says Lokey. "It was the way Saturn presented itself to customers. It was a special feeling we had being associated with the whole adventure."