01 Oct 1996
Tedlow on Tires and the Meaning of LifeTopics:
edited by Ted A. Adams
"When you study the tire industry," HBS professor Richard S. Tedlow told a Class Day audience of graduating MBAs last June, "you are confronting the meaning of life." A distinguished authority on business history, Tedlow then went on to put that observation in context. An edited and abridged version of his remarks follows.
The Model T was invented in 1908. Since you had to change your tires every nine months in those days, the tire industry was a good one to be in. By 1970, however, you only had to replace the bias tires that came as original equipment on your car every 12,000 miles; just a few years later it was up to every 20,000 miles -- unless you had a set of new Michelin or Bridgestone radial tires, imported from France or Japan, respectively, which lasted for 40,000 miles. And these days there are "infinitreads" that last forever.
For years American automakers tried to avoid investing in radials. This country was not like Europe where they have "little doodlebugs scooting around on cobblestones," they said. According to a top Ford executive at the time, "This is a big country with big people and big dogs. The American buyer wants Gary Cooper on wheels, not a baby carriage." But by 1972 Ford was putting Michelins on its Lincolns, and every domestic tire company was finally investing in radials.
Radials constituted a technological advance that the five major American tire manufacturers -- Goodyear, Goodrich, Firestone, GenCorp, and Uniroyal -- did not want to confront, because these tires greatly diminished the need for replacements. And since the replacement market was the only place they could make money, this meant the end of profitability unless there was a fundamental change in tire pricing policies. When automakers switched to radials as original equipment, therefore, that was the signal for tire companies either to insist on higher prices to original equipment manufacturers (OEMs) -- prices that would not be easy to obtain, or to sell their assets and get out of the industry. But people who make products don't like to do that.
The late Ross Graham Walker, a very famous professor at this institution four decades ago, used to say, "Every morning when you get up, ask yourself, is this the day to sell the company?" This is a sentence those tire executives should have had inscribed on their walls. When Sears started using Michelin private label tires for its replacement business in 1965, that should have been the time to exit. In 1969, when Goodrich realized it couldn't make money and had a chance to sell to Michelin, it should have but it didn't. And Firestone kept putting more capital into an operation it knew couldn't possibly make a profit. If American companies couldn't raise their prices to OEMs, exit was the only option. Moreover, this was obvious to anyone who could do arithmetic.
So why did these things happen this way? If the tire companies couldn't raise OEM prices, why didn't they exit? Let's turn for an answer to that indefatigable voyager into the unconscious, Sigmund Freud. In 1923 Freud, an inveterate cigar smoker, was diagnosed with cancer of the jaw. But for the next sixteen years, up until his death, he did not give up smoking, although he and everyone else knew that each cigar was "a little step" toward death. As Peter Gay, Freud's biographer observed, "Freud's inability to give up smoking underscores the truth in his observation of an all-too-human disposition he called 'knowing-and-not-knowing,' a state of rational apprehension that does not result in appropriate action." I see this concept of "knowing-and-not-knowing" in business histories all the time. People, both in business and in life, often find themselves in states of "rational apprehension" that do not result in "appropriate action." It's one thing to know something; it's another to do something about it.
So make sure in your business career that you have the courage to build a bridge between knowledge and action. Tire industry executives knew at least in 1972, probably before, that they had to change their business radically or leave it. But, in Freud's words, they knew-and-didn't-know. What the tire industry has taught me about life is that knowledge without action won't do you much good in any endeavor.