General Motors Corporation - Essay Example

Case Study GENERAL MOTORS Introduction The following Case Study is based on the one-hundred year old automobile company General Motors Corporation (GM), which is one of the largest car manufacturers in the world. With its headquarters in Detroit, Michigan, in the United States, the global corporation undertakes automobile sales and services in around 140 countries in all the major regions of the world, employing millions of people. In 2008, General Motors sold several million cars under various brands “Buick, Cadillac, Chevrolet, GMC, GM Daewoo, Holden, Hummer, Opel, Pontiac, Saab, Saturn, Vauxhall, and Wuling” (GM, 2009). The company’s most extensive market is in the United States; with nearly comparable sales in “China, Brazil, the United Kingdom, Canada, Russia and Germany” (GM, 2009). GM’s six main automaking divisions have catered to its manifesto of “a car for every purse and purpose” (Monks & Minow, 2008: 414). Statement of Purpose: This Case Study on the General Motors Corporation is for the purpose of investigating the company’s downward spiral into possible bankruptcy. Using appropriate theories and literature, investigation of the What? Why? and How? of the organization will help to determine the reasons for the auto giant’s decline, and the implications for the future of the company. Investigation of the Case and Discussion of Results The reasons for and the processes by which the United States’ auto giant General Motors Company deteriorated to a position of near-bankruptcy, can be determined by investigating various factors based on relevant theories of corporate collapse (Fig.1). These would include corporate governance, organisational culture, leadership styles, operational risk management and financial risk management pertaining to the functioning of General Motors. The underlying concepts pertaining to risk management, financial markets and products, and global perspectives on risk are important aspects. Figure 1. Causes of Company Bankruptcy (Ooghe & Prijcker, 2008: 225). General Motors’ Maturity, Size, Industry and Flexibility A widely encompassing approach that associates the causes of bankruptcy to the characteristics of the company and to the financial symptoms of distress, is essential, in examining the company’s financial decline (Thornhill & Amit, 2003). Besides the financial situation of the company, other crucial factors include the time dimension of failure, and the influence of key non-financial factors such as managerial error which is found to be one of the main reasons (Balcaen & Ooghe, 2006). Over the decades, from the time of GM’s inception in 1909, the company has suffered numerous set-backs which destroyed its ability to control the cost of its workforce. Roger Smith as CEO started downsizing the manufacturing units from 1985, with a commitment to revolutionizing the organisation. “Before 1990, GM had never recorded back-to-back yearly losses. During 1990-2, GM suffered three” (Monks & Minow, 2008: 442). Downsizing by closure of plants and related lay-offs were carried out often, and with 1990 bringing the worst yearly loss and full-scale crisis in GM’s history, the measures were undertaken again, by the company’s CEO Stempel. Usually this would have brought about strong protest from the union: the United Automobile Workers (UAW). This time the union stayed silent because of a contract agreeing to pay the blue-collar workers almost full wages during the three years of lay-off. Usually automakers reduce costs during times of low production levels, by laying off surplus workers, and re-hiring them during times of high production. Though the contract was meant to bring peace to the company while it down-sized quietly and quickly, by employing 80,000 workers to stay at home, a modest variable cost became a gigantic fixed one, and “it damaged GM’s ability to compete during the recession” (Monks & Minow, 2008: 442). In December 1991, comparatively the most extensive cuts were undertaken, closing twenty-one plants, some of which were renovated and modernized at the cost of billions of dollars. Carried out over a three-year period, while removing 74,000 jobs in the process, this great upheaval helped to “reduce GM’s capacity by one-fifth so that it could operate profitably on a 35 percent market share” (Monks & Minow, 2008: 443). The board of directors at that time, wanted to drive a sense of urgency through every part of GM, initiating a revolution and establishing a thorough cultural change. However, the CEO, Stempel did not corroborate the revolution and believed that the company would pick up with the economy. Confusion and internal rivalry between the various vehicle divisions, infighting between the powerful groups of suppliers, dealers and unions, and low quality of labor relations have been important factors that impacted the company’s functioning. Further, even when it attempted to streamline operations, the company had been identified of being duplicative and wasteful by introducing processes such as metal stamping to standardize the die-production and reduce the number of press-line set-ups. Similar competitive disadvantage of GM is evident in the greater time taken for assembling cars as compared to Toyota, and for getting the production of a new car “up and running at full speed in an assembly line” (Monks & Minow, 2008: 379) in comparison to Honda. Moreover, even in the contemporary domestic market, GM is not better positioned. For example, three of the company’s six divisions continue to make only cars, although the demand for trucks, sports utilities, and mini vans have risen at a great pace, accounting for 50 percent of the total U.S. auto market. Hence, GM continues to be perceived as old-fashioned and not in keeping with the contemporary times, which influences sales. Market shares have shown reduced values, when compared to that of the previous years’ for the same period. Addressing the failures and implementing reforms take several years, that few people, whether investors, analysts, or company executives (Monks & Minow, 2008: 379) could have perceived. Moreover, according to Lang & Stulz (1992), there exists a contagion effect between firms in the same industry, particularly for highly leveraged firms. Leadership and Role of GM’s Now-Replaced Chief Executive Officer General Motors’ CEO Rick Wagoner, had been at the helm during the company’s rapid decline during the past five years, and had been part of the company since 2000. He was compelled to leave General Motors by President Obama’s auto task force. The Chief Executive Officer’s (CEO) motivation, qualities, skills, leadership style and personal characteristics have contributed to a large extent to the company’s decline to bankruptcy, by intensifying pre-existing adverse corporate conditions. According to D’ Aveni & MacMillan (1990) and Greening and Johnson (1996), management of a company is one of the major causes of bankruptcy. The survival of the company is threatened by inadequate, inappropriate managerial qualities and skills. For example, inertia is a potentially adverse quality, since it leads to ignorance of opportunities as well as threats. The manager who needs to explore changes in strategy and the decision making processes, remains inactive due to lack of sufficient knowledge and skills (Gilbert, 2005). This may also manifest as optimism and risk-seeking behavior, which invariably lead to distress due to potentially detrimental decisions. Unlike entrepreneurs who risk their own money, managers ignore stakeholders’ interests by favoring risky projects (Parrino et al, 2005). The development of corporate policy is part of the functions of corporate managers. “The management sets up corporate policy” (Ooghe & Prijcker, 2008: 225) which takes numerous aspects into consideration, including strategy and financial management. Lack of appropriate skills and personal characteristics pertaining to managerial work may result in problems in corporate policy. The company may be classified as an “apathetic established company” according to the categorization specified by researchers Ooghe & Prijcker (2008: 223). In cases of financial deterioration, management have the ability to manage a profitable organization, but lack commitment and motivation. The management is oblivious to the gradual decrease in sales; and they react only after a significant depletion of internal finance. Restructuring plans lack awareness of changing reality, and errors in the company’s policy may decrease the operational efficiency of the newly developed plans. The severity of the situation becomes obvious to the management only when liquidity problems occur. However, the delay decreases chances of survival, with stakeholders losing faith in the company, and with wastage of all financial means. Impact of the Immediate Environment of the Company The company’s downward decline to bankruptcy is often caused by its immediate environment composed of its customers and the competition. Through a domino effect, they are the factors contributing to the immediate environment of the company can dwindle its chances for survival. “Constant interaction with the immediate environment” (Ooghe & Prijcker, 2008: 236) is crucial for survival. Customers and competition are two of the important immediate environmental factors. The lack of a unique selling proposition or low level of customer satisfaction combined with overestimated demand prove detrimental. In the final stages of the path to failure and bankruptcy, the competition assumes an advantageous position, since the company is unable to adapt to the changing environment unlike its competitors. The loss of competitive advantage and liquidity weighs heavily against the company, causing loss of customers and inability to retain them. Customers’ mistrust is based on the operational cycle as well as the specificities of the failure process. The greatest difficulties are faced by those firms that work on “long-term agreements or advances, or those in which after-sales service is very important” (Ooghe & Prijcker, 2008: 237). The other factors that are part of the company’s immediate environment: stockholders, banks, credit institutions, suppliers, employees, trade unions and misadventure do not cause deterioration. Some outcomes of failure on the immediate environment are that, suppliers, stockholders and credit institutions may refuse further cooperation, which accelerates the failure process. The impact of misadventure is similar to that of stakeholders, they do not affect competing companies in the same industry, ‘but extremely damaging for distressed firms” (Ooghe & Prijcker, 2008: 237). General Environment of the Company and its Contribution to the Decline The general environment of the Company: including politics, tie-ups with foreign countries, economics, technology and social factors play a part in company’s operations. However, decline occurs when established companies such as General Motors are too rigid to adapt, though they have the capability to adapt to changes in the general environment such as political changes or changes in foreign countries (Ooghe & Prijcker, 2008: 238). The status of a competitor within the same industry can cause similar changes to occur in a company (Ooghe & Prijcker, 2008). For example, Chrysler has now declined to bankruptcy, and if General Motors follows Chrysler to total financial loss, as many are now expecting, it is possible to be far more painful for boh the manufacturer and the United States economy “than its smaller rival’s bankruptcy filing a of a few weeks ago” (Lynn, 2009). The global economic conditions and their uncertainty are the basic cause for compelling the auto industry to a breaking point. “The combined impact of oil prices, economic slump and product obsolescence” (Castells, 1991: 320) compelled Chrysler to the edge of bankruptcy, also adversely affected Ford’s profitability, and even put the giant General Motors on the defensive. Because of these reasons, the General Motors’ vast scale and complex network of partners make the complicated conditions of a possible bankruptcy extremely unpredictable. The main difference is the scale, with GM being a much larger company (Lynn, 2009). The automobile industry responded with one of the boldest restructuring processes in recent economic history; at the same time with a focus on new products and new processes. New technologies were extensively introduced in the factories and in the cars themselves. “In the factory, robotization, CAD/ CAM, and flexible manufacturing systems rapidly transformed the assembly lines, while computers were introduced in all processes of design and testing” (Castells, 1991: 321). New materials changed the fundamental characteristics of cars, and new electronic systems their operations. Concern has been growing over the increasing costs and outcomes of competition on pension and health care benefits paid by the United States manufacturer of motor vehicles, the Big Three of General Motors, Ford, and the Chrysler group of DaimlerChrysler. These costs have contributed to a large global 2005 financial loss for GM, and a net annual loss for Ford. In the early years of the 21st century, a number of automotive parts manufacturing companies have entered Chapter 11 bankruptcy, including union-organized plants. Many of these companies have been in a tight situation between between rising prices for raw materials especially steel and plastic resins, continuing pressure from customers on product price, and declining demand as Ford and GM have lost market shares and cut back production (Loefton, 2008). Adverse Impacts of GM’s Policies Related to Theories of Corporate Functioning The adverse impacts of corporate policies related to corporate governance, operational risk management, financial risk management, organisational culture, finance and administration, strategy and investments, and policies related to personnel and commercial operations are essential. Among the top corporate governance issues of the early 21st century, General Motors continued to be an example (Monks & Minow, 2008: 447). The link between corporate governance and risk taking is supported by evidence. By defining risk in terms of standard deviation in operating cash flow over time, as a percent of total assets, and relating this number to measures in corporate governance, reveal the link between risk taking and corporate governance. Firms that have less insider control in markets where investors were better protected, tend to take more risks in operations. The appropriate corporate governance for the risk-taking firm would require decision makers to be interested in the equity of the firm, but also to be diversified, which is a difficult balance to maintain. The venture capital and private equity investors who provide equity for high-growth firms are the closest to this ideal balance. They invest extensively in high-growth, high-risk businesses, but they spread their bets across multiple investments, thus creating diversification benefits (Damodaran, 2007). It is clear that with companies flocking to financial markets to raise debt and equity and become increasingly expert in the use of the derivatives markets, they have also made themselves more vulnerable to these markets. A company with healthy operations may be placed on the defensive because of unanticipated turbulence in financial markets. Risk often comes from financial rather than product markets. Because risks have become more international, and have covered both financial as well as product markets, it is evident that companies are finding fewer safe havens. In the past decade, the balance of power between businesses and consumers has shifted in favour of the consumer. With the help of better information and more choices, consumers are availing of better terms, and in the process lowering profits and increasing risks for businesses (Damodaran, 2007). Risk has both the upside and the downside, and good risk management is not based on avoiding the downside, but on striking the right balance between the two. Investors in General Motors Company are now considering the possibility of the company’s bankruptcy. The price of GM’s credit-default swaps which is a form of insurance in case the manufacturer is not able to pay back his loans, have risen this month, to four times what they cost in January. Investors, suppliers, and employees are now taking steps to defend themselves if the company’s bankruptcy should become a reality. For instance, some suppliers are attempting to get shorter payments from GM in return for lower prices. Operational risks are the most difficult to quantify. Among the operational risks, are the risk of fraud, the risk of nondeliberate incorrect information, disaster risk and personnel risk. The main reasons for developing quantitative measures of operational risk are to develop a methodology for operational risk capital to complement the measures of capital allocated for market risk and credit risk. Unlike market risk and credit risk, where quantification plays an important role in designing methods to reduce risk, the quantification of operational risk is almost completely limited to capital allocation. The bankruptcy of an investment fund would not threaten the stability of the financial system the way the bankruptcy of a firm that makes markets or is a critical part of the payments system would. The value of investment in a corporation can suddenly collapse as a company approaches the bankruptcy point. The principal on a five-year bond is not the same in bankruptcy as the claim for the same amount of principal on a two-year bond. The common rule for bankruptcy is that the holder of a bond or loan can make a claim on a principal, but not on any coupon interest. To counter “the loss of interest that can be claimed is the ability to call for immediate payment of principal, regardless of maturity” (Allen, 2003: 329). Initiatives and Restructuring Undertaken by GM’s New Chief Executive It is essential to examine whether there is a possibility that General Motors’ new chief executive, Fritz Henderson’s initiatives to successfully establish concession agreements with bondholders and the United Auto Workers (UAW), and measures to restructure the Company, will help to turn around the downward spiral to bankruptcy. The outcomes will determine the company’s likely future solvency. According to the Associated Press (2009), re-inventing every dimension of business, including its organisational size and structure to create a “lean and agile company” (AP, April 20th, 2009), GM has started firing 1,600 white-collar workers in the last few days, in order to lower its expenditure and qualify for more government loans. The competitor company Fiat’s CEO is to enter critical talks towards an alliance with Chrysler LLC, since deadlines are drawing closer for the restructuring of GM and Chrysler to be completed. Both automobile companies require additional governmental loans to survive. If General Motors can swap much of its debt for stock and get concessions from the UAW and Canadian Auto Workers by June 1st, 2009, the company will be able to receive more loans to keep it going. “Bankruptcy financing is also possible if the company determines Chapter 11 is its best bet to achieve the cuts it needs” (AP, April 20th, 2009). GM’s cost of lobbying the government fell 15 percent in the first quarter as compared to the fourth quarter of 2008, whereas that of Chrysler and its parent company Cerberus Capital Management LP together, fell by over 75 percent as compared to the last quarter of 2008. Further, GM will cut “47,000 jobs worldwide by the end of 2009, but the cuts may go even deeper as the company moves towards its deadline” (AP, 2009). The CEO of GM, Fritz Henderson has announced that the automobile company will close numerous factories. Proceeding at an accelerated pace in the process of operational restructuring, there will be further reduction of manpower, which will have outcomes on communities, plants and people. For GM to qualify for further aid from the government, the UAW must agree to take stock for part of the approximately $20 billion that GM owes to a union-run trust that will help in retiree health care costs. The UAW (The United Automobile Workers) and the CAW (Canadian Auto Workers) should also agree to reduce labor costs. Further, General Motors should also convince “the holders of $28 billion in GM bonds to take stock in exchange for part of the debt” (AP, 2009). The situation seems to be changing greatly, and the outcome of negotiations between Chrysler and the UAW are considered to be potentially important. The UAW is taking action to ensure that workers and retirees are treated in a fair and equitable manner in any restructuring plans (April 20th, 2009). Based on Evidence, Conclusions on GM’s Potential Bankruptcy This Case Study on the General Motors Corporation has highlighted the company’s downward spiral into possible bankruptcy. Investigation of the What? Why? and How? of the organization, its management and functioning was supported by appropriate theories and literature, in order to develop the Case Study, examine the reasons for the decline and whether General Motors can regain its solvency in the near future. On the basis of results and insights gained from examining the corporate’s decline to near-bankruptcy, and taking into account the new Chief Executive Officer’s initiatives, it is possible to predict whether the company faces impending bankruptcy, or may recover its solvency. It may be stated that in view of the facts behind the progressive decline to near-bankruptcy of the company, the attempts at restructuring may provide only temporary and inadequate relief to the company’s financial situation. Inevitably, total bankruptcy can be predicted as the only outcome for GM in the near future. The company had a gradual decrease in financial performance and decrease in profitability long before bankruptcy. Also, the decline has taken place as a direct result of the failure process of the company with specific causes of bankruptcy such as management errors, errors in company policy, and the influence of the immediate and general environments of the company. Further, the impact of particular management errors on the financial situation mainly depend on the company’s characteristics, of which maturity and financial strength are the most crucial, besides the operational cycle and other functions. Also, the immediate and general environment of the company play a subordinate role in the decline. If the “management does not anticipate and respond” (Ooghe & Prijcker, 2008: 240) to the changing environment, or lack the financial means to avoid previous errors through reforms, the outcome is invariably bankruptcy. A General Motors bankruptcy would probably be the largest Chapter 11 filing ever to occur, with deep consequences for all the stakeholders of the company. While the direct impact on the national economy would be modest, the Midwest would be impacted the most, with several job losses at GM and its suppliers and cuts in the retirement benefits for its retirees. “To stem eroding market share, GM could eventually use the lower costs achieved through bankruptcy to drop prices and lure more buyers, But cutting prices further could just exacerbate GM's already severe revenue problems” (BW, 2005). Thus, both financial and non-financial characteristics of the company and its management have been analysed towards understanding the company’s decline to expected bankruptcy. References AP (Associated Press). (2009). GM begins round of white-collar lay-offs. MSNBC. Retrieved on 21st May, 2009 from: http://www.msnbc.msn.com/id/30305317/ Allen, S. (2003). Financial risk management. The United States of America: John Wiley & Sons. Balcaen, S. & Ooghe, H. 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