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  • Business lesson from Detroit.

    By: treasurexm

    Forbes updated its annual “Most Miserable Cities” list. It looks at employment/unemployment, inflation, incomes and cost of living, crime, weather, commute times – a pretty good overview of things tied to living somewhere.

    Detroit ranked first, as the most miserable city.

    There is an important lesson here for every Industry, city – and country

    Detroit was a thriving city during the industrial revolution. Innovation in all things mechanical led to the modern automobile; a marvelous innovation which, literally, everyone wanted. As demand skyrocketed, Henry Ford’s management team developed the modern assembly line which allowed production volumes to skyrocket as well. Detroit was a hotbed of industrial innovation.

    This fueled growth in jobs, which led to massive immigration to Detroit. With growth the tax base expanded, and quickly Detroit was a leading city with all the best things people could want. In the 1950s and 1960s Detroit reaped the benefits of the local auto companies, and their suppliers, as ongoing innovations created better cars, more sales, more revenue taxes, higher property values and higher property taxes. It was a glorious virtuous circle.

    But things changed.

    Offshore competitors came into the market creating different kinds of autos appealing to different customers. Initially they had lower costs, and lower less expensive designs. Their cars weren’t as good as GM, Ford or Chrysler – but they were cheap. And when gasoline prices skyrocketed in the 1970s people suddenly realized these cars were also more fuel efficient and cheaper to maintain. As these offshore competitors gained more sales they invested in making better cars, until they had quality as good as the Detroit companies, plus better fuel efficiency.

    But the Detroit companies had become stuck in their processes that worked in earlier days. Even though the market shifted, they didn’t. What passed for innovation were increasingly simple appearance changes as bottom-line focus reduced willingness to do new things, and offered fewer new things to do. GM and its brethren didn’t shift with the market, and by the 1980s the seeds of big problems already were showing. By the 1990s profits were increasingly variable and elusive.

    The formerly weak and small competitors now were more competitive in a changed market favouring smaller cars with more, and better, technology. The market had changed, but the big American auto companies had not. They kept doing more of the same – hopefully better, faster and striving for cheaper. But they were falling further behind. By the 2000s decade failure had become the viable option, with both Chrysler and GM going bankrupt.

    As this cycle played out, the impact on Detroit was clear. Less success in the business base meant fewer revenue tax dollars from less profitable companies. Cost reductions meant employment stagnated, and then started falling. Incomes stagnated, and people left Detroit to find better paying jobs. Property values began to fall. Income and property taxes declined. Governments had to borrow more, and cut costs, leading to declines in services. What had been a virtuous circle became a violently destructive whirlpool.
    The economic shift – the market shift – was unaddressed, and now Detroit is bankrupt.

    So think about it!

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