General Motors - Case Study Example

Strategic Management General Motors in 2005: A Case Study YOUR FULL YOUR INSTITUION OR SCHOOL     Executive Summary General Motors (GM) is a large company with a rich history of market dominance. That dominance has waned in the past decades and profitability has declined to a level significantly below that of key competitors. In terms of external critical issues; GM is threatened by its own inability to respond to rapid changes in the market, its competitors’ higher efficiency and profitability margins, as well as poor cost control. It has opportunities to increase its international strategic relationships and pursue the alternative fuel market. Internal critical issues focus on GM’s weakness in the area of profitability, production inefficiency, and top-heavy organizational structure. The key strategic issues for GM are its organizational efficiency, its production processes, and market responsiveness. GM can improve its situation by altering its organizational structure to promote a lean management process. It should change its production processes to reflect higher efficiencies in supply chain and platform distribution, and increase its market responsiveness by shortening its time from design development to rollout. General Motors in 2005: A Case Study General Motors (GM) is one of the world’s largest companies, with manufacturing operations in over 30 countries and product sales of nine million units in more than 200 nations over the world.1 In spite of its rich history of rising from humble beginnings in 1908 to its apex of controlling 65% of domestic car sales in the mid-1970’s, GM today is one of the least profitable vehicle manufacturers in the world. In fact, as of the date of this case study, GM’s return on invested capital is only 1/6th that of one of its major competitors. This represents a significant dilemma that must be addressed and resolved if the company is to maintain its viability. The purpose of this paper is to examine the critical strategic issues facing GM and offer recommendations on specific steps that can be taken to address the deficiencies. CRITICAL STRATEGIC ISSUES The analysis of critical strategic issues is comprised of three elements, all distilled from a thorough SWOT analysis. First, the external environment is reviewed to identify those opportunities and threats which may be present. These include industry issue, competitor actions, and customer trends. Further external considerations may include supplier and supply chain management as well as environmental factors. Second, the internal environment is analyzed to determine both strengths and weaknesses so that the former can be maximized and the latter attenuated. Finally, the results of the SWOT analysis are synthesized into identifiable, key strategic issues that can be prioritized for management’s focus. Once identified in terms of their urgency, the issues can be addressed in such a manner as to bring about the most positive result in the most efficient and timely way. External. In terms of industry-wide strategic management considerations over the past 25 years, GM has not done a good job responding to the changes facing the industry. Like most American car manufacturers, the company was unprepared for the 1973 energy crisis and the subsequent revelation of its product’s fuel inefficiency. As the market demand changed to smaller, more fuel-efficient vehicles, GM was not positioned to make the necessary adjustments and thus lost market share to the new competition; the Japanese. The foothold gained by the competition in that era has been expanded in recent years and although GM has restructured several times, it has never regained the market share necessary for profitability. From a competitor standpoint, the Japanese automakers were particularly well situated to threaten GM’s market share. They were already proficient at manufacturing smaller vehicles, had a tighter management structure, a better cost efficiency, and out-performed GM and other domestic manufacturers on quality. Taken in sum, this legacy presents a major competitive threat as GM was (and is) unable to justify higher prices for a lower-quality product; particularly when customers are changing their preferences. Compounding the strategic issues faced by GM, consumer preferences are constantly changing. Whether the market demand is based on fuel efficiency, safety, quality, or simply style, keeping pace with consumer trends and demands requires a nimble organization that can adjust its products to meet the new consumer preferences and get those products to market in a timely and cost-effective way. As discussed in the internal analysis, efficiency is an issue for GM and one of the key strategic issues management will have to address. Beyond industry, competitor, and customer analysis, external review also includes the examination of resource and supply chain impact as well as environmental factors. Here, the news is not all bad. While there are some distinct threats to productivity and increased competitive pressure for GM, there are also some important opportunities. If management will use its key alliances, particularly those in international markets, it should be able to make its supply chain more efficient. A major opportunity lies within the area of environmentally-friendly vehicle design and engineering. Although its first foray into alternative energy vehicles was a false start, GM now has the opportunity to use its partnerships with the Japanese leaders in this technology to obtain a competitive edge. With its powerful marketing department, GM could position itself as an industry leader and focus on a niche that is becoming increasingly important to modern consumers. Having considered some of the external strategic areas of both threat and opportunity, it is now time to turn toward the internal strengths and weaknesses found at GM. Internal. While an external analysis focuses upon opportunities and threats from outside the organization, the scope of an internal review is to identify both strengths and weaknesses present so that management can take immediate steps to increase the strong areas and address the weak ones. This type of analysis focuses upon key ratios or quantifiable performance when compared to competitors or the industry at large, as well as an organization’s core competencies, functionalities, products, and performance. In the case of GM, the most significant quantifiable concern is the company’s profitability as reflected in its return on invested capital. GM’s 1.5% ROIC perhaps compares favorably to other American manufacturers like Ford (.6%), but its primary competition, Toyota, weighs in at a hefty 6.8%. Toyota’s net earnings are 60% higher, which demonstrates that GM has a significant efficiency problem. The only reason GM has positive numbers at all is because of its financial services arm, GMAC Finance. If the organization was judged strictly on its core product offering, it would be losing money. This weakness demands immediate attention from management. In terms of its capabilities and distinctive competencies, GM has been placed in the position of having a strength turned into a weakness. At one time, GM’s variety of product lines worked well. Its concept of marketing Chevrolet to the lower market segments, Cadillac to the high-end market, and its other brands to various parts of the mid-level markets allowed it to use diversity for market penetration. The structure of division hierarchies and strong management/labor relations functioned well under the old model. The burden of carrying the production of so many different platforms, however, became unbearable in the new market environment, i.e., high-efficiency and high-quality cars which were able to undergo design adjustments in a relatively short amount of time. In this new environment, its top-heavy management structure, when combined with restrictive labor contracts, resulted in the inability to adjust to changing conditions within the market. In terms of product offerings, a major weakness for GM emerged from its efforts at gaining an efficient organizational structure. As it altered its production processes to accommodate fewer platforms, allowing it to concentrate on profitable and efficient manufacturing, the design elements floundered. GM began losing customers because the vehicles began to all look the same. While the company was looking for legacy buyers (repeat customers), its customer base was objecting to paying higher prices for a Cadillac that looked very similar to the lesser-expensive Buick. GM might have begun to establish core production efficiency, but it did so at the expense of design; something that is unacceptable in the auto industry. Hence the product offerings themselves require adjustment, a fact recognized by management and evidenced by recent decisions to close the Oldsmobile division down and cut various models out of other product lines. It is in the overall efficiency analysis that GM shows the greatest weakness. With a top-heavy management structure—a result of a strong traditional corporate culture—and an expensive labor force, GM simply has difficulty competing with its rivals. As previously stated, only the finance division shows acceptable profit levels and the organization is not going to be able to take a loss on the sale of its primary products and remain viable. Thus, while various parts of the internal structure have strength, e.g., the marketing division and some of the product lines, that strength is overcome by an institutional-level weakness. Critical Issues. In reviewing the available information on GM, several critical issues emerge; more than can be addressed in a paper of this length. Accordingly, the focus here will be on identifying the top three critical issues and corresponding recommendations for addressing them. The first and most crucial strategic issue for GM is its own organizational inefficiency. Profits will continue to go missing as long as there are too many managerial and supervisory layers. This organizational flaw contributes to all areas of efficiency which, as shown by competitors such as Toyota, is the key to profitability. The second critical issue is that of production efficiency. Simply stated, GM’s vehicles are costing too much to produce, and the competitive environment is forcing discounted sales where almost every unit is sold at a loss. For a vehicle manufacturer to be losing money on all of its core products, the production efficiency has to be completely out of balance. The final critical issue is that of market responsiveness. The days of an automaker taking five years to go from the design stage to the showroom floor are over. With its competition able to bring a new model to market in 18 months or so, GM must alter its processes to accommodate consumer demand. RECOMMENDATIONS The following recommendations simply follow along the lines of the critical issues previously identified. Implementing these concepts would assist GM in a return to profitability. GM can greatly improve its current situation by altering its overall organizational structure. There are currently too many levels of management and a bureaucracy of significant proportion so as to impede the rapid market responses so desperately needed by the company. Although adopting a lean management process might violate the corporate culture of the organization, it would also greatly enhance efficiency across the board. An early 20th century management structure is not viable in the modern auto manufacturing industry. Lean managerial processes would not only reduce personnel costs significantly, it would also remove territorial barriers to design changes and new production concepts. GM should alter its current production processes to reflect the design and manufacturing models of its competition. The enemy of GM’s production line is cost. Due to the competitive pressure of the market, GM is being forced to discount its vehicles to the point of taking a loss on each sale. If a production process is resulting in losses, it must be changed. New and better economies and efficiencies could be found in the supply chain as well as in the distribution processes. The company cannot afford to rely upon its finance division forever. As an auto manufacturer, it must make its core operations profitable. Finally, GM needs to focus on market responsiveness. Its success in improving the quality ratings is a good first step, but the competition is able to bring new designs to market in less than half the time it takes GM. This means that the company is always late to fulfill the public’s preferences. It would be fair to say that by the time GM gets its product to market, either public interest has shifted or the competition has taken the lion’s share of the market. Both of these scenarios place GM in a disadvantaged position. CONCLUSION GM has a profitability problem; and that must be solved immediately. Through adjusting its organizational structure, maximizing the efficiency of its production processes, and improving its market responsiveness, the company can turn itself around and return to an acceptable return on investment. Failure to address these strategic issues, however, may put GM in the untenable position of no longer being able to maintain corporate viability. References Hill, Charles W.L. & Jones, Gareth L. (2007). Strategic Management: An Integrated Approach, Seventh Edition. Boston: Houghton Mifflin Company Read More