Cash Flow Problems: SAAB - Case Study Example

Cash Flow Problems – SAAB Cash Flow Problems - SAAB Saab Automobile Company is a Swedish car making company that is presently under the status of receivership. The previous possessor of this company was a Dutch based firm known as Swedish Automobile NV. Managing the cash flows of a company is one of the most, if not the most important factor that determines its survival. It is the reason behind the fact that more than 70% of businesses fail in their first year.1 It is the view of many analysts that the reason for Saab’s downfall was GM’s involvement or lack thereof, whereas others are of the opinion that Saab would have died much earlier had GM not decided to buy it two decades earlier2. By December 2009, GM had decided that it would wind up the business if it could not find a suitable buyer3. However, most of the analysts have a consensus that by the time GM sold Saab, the fate of Saab had already been sealed and the news of its bankruptcy was all too inevitable. It was on February 23, 2010 that Spyker Cars bought Saab from GM4. In December 2011, the firm filed for bankruptcy5. Saab attempted to bring about a revival by unveiling its Phoenix6. However, its sales literally needed to fly in order for Saab to come the comeback that was necessary for survival. Sales did not materialize and that resulted in severe cash flow problems for Saab, resulting in the stopping of production from April and ending with bankruptcy 7(Saab heads for scrapyard as long rescue quest fails). Saab management needed to realize that the models that Saab was offering to its market were too few in number and were at the end of their lifecycles. Saab’s competitors were launching newer models every year; however, Saab did not react much and kept its innovation to a minimum. Sales therefore, sank lower each year, pulling the company in a quagmire. Saab kept up its policy of extending the product life cycles of its models instead of launching newer ones and ended up paying the ultimate price. Saab’s low sales are the primary reason for its cash flow problems. In 2010, Saab sold 31,696 cars after revising its full year target from 35,000 to 30,0008. The firm was operating in a cut throat competitive environment where other car makers such as BMW and Mercedes-Benz were making more than one million cars a year, whereas Saab never sold more than 140,000 cars in a year. In this case, low production is tantamount to business suicide because the auto industry has huge expenses of innovation, and safety and emissions technology requirements which need economies of scale that can only be achieved with substantial sales. This was not happening at Saab. Another major issue prevailing was that Saab catered to a very minor segment, an idiosyncratic group that did not result in huge sales. Saab needed to appeal to a wider audience by developing newer models but it was unable to do so, resulting in dwindling sales. In order to steady itself, Saab had taken a 400 million euro loan from the European Investment Bank, but it was to no avail. This loan has been repaid to the EIB by Sweden’s Debt office to simplify the approvals process for any buyer9. However, loans taken by Saab took their toll in the financial statements as the company’s finance expenses for 2010 exceeded 50 million Euros, whereas its net loss was greater than 200 million Euros. A major problem for Saab after it was bought by Spyker was that Spyker, and specifically its CEO Victor Muller did not have the experience or expertise to bring a turnaround in the company. The purchase is seen as an impulse purchase, designed to bring further credibility to Spyker. A fresh approach was required to figure out the reasons for poor sales and immediate action should have been taken to resolve the issue. This was clearly not on the agenda of Victor Muller and Saab eventually suffered. The severe cash flow problems of the company rendered it incapable of paying wages and salaries to its employees10. The company had suspended production after failing to negotiate with suppliers. As was expected, the suppliers could not extend any more credit to Saab and their supply of raw materials was cut off from then on11 Recommendations In order to solve the problem of Saab’s poor cash flows, Saab needed to improve its dwindling product line so that it could compete in the fiercely competitive environment. This would be the long term solution that would ensure that the company would not run into similar problems for the foreseeable future and not have to constantly worry about finances. In order to actualize this scenario, fresh investment is a necessity. A viable solution would be partnering with a firm or business tycoon who is willing not only to give money to Saab to solve its short run cash flow problems but also be willing to give money for the long term so that Saab could invest in diversifying its brands to cater to the needs of multiple market segments. Obviously, when it comes to taking on the big players of the industry, a company must be able to come up with the finances to challenge the big player. This type of investment unfortunately did not materialize for Saab and it ended up in bankruptcy12. It has been noted that Saab was operating in an environment where it had to compete with many other brands which were far more powerful in terms of brand diversity as well as finances. In this sort of situation, it would not be a wise plan to challenge the market leaders directly. In this state of affairs, it is a much better strategy to employ a guerilla strategy, a hide and attack ploy13. Adapted from Sun Tzu’s Art of War, the book by Gagliardi applies the same concept to marketing and explains that when a firm is cornered and has significantly less resources than the market leader, it is necessary to play to one’s strengths rather than go on an all-out attack to challenge the leader. The hide and attack strategy results in the competitor moving on to some other market. Another strategy that could have been employed is the flanking marketing strategy in which those areas could be targeted that had been neglected by the competitors. This gives a strategic advantage to the company which can be the base for more growth. Thus, by targeting a niche, Saab could have not only increased its profits, but also reduced its costs resulting from lower marketing costs. Another strategy that Saab could have used is based on the positioning of the brand itself, which is how the buyers of Saab perceive the brand. It is observed that the owners of Saab have a much greater emotional attachment to their cars than that observed for owners of other car brands. This comes from an assessment by Rudiger Hossiep, a psychologist at Ruhr University Bochum who says that Saab owners are about ten times as passionate about their cars as an average Volkswagen driver14. Keeping this in mind, Saab could focus on this group of true loyal customers, targeting them to create a marketing campaign to spread a positive word-of-mouth about the brand. Similarly, these loyal buyers could be interviewed so that some idea can be obtained about their views of any deficiencies in the Saab brand and how it could improve itself to bring more value to its customers. The solution to Saab’s chronic cash flow difficulties lies in the improvement of its sales, as identified earlier. Without an increase in sales, the car manufacturer cannot generate sufficient revenue and cash to cover its costs in the form of payment to suppliers and employees, along with other expenses. In order to do that, it needed to bring out newer models to maintain its market share. Instead of a proactive management approach, Saab remained reactive to market conditions while its competitors gradually chipped into its market share. The natural result was bankruptcy. Under the control of GM which was itself suffering from financial difficulties and had to be bailed out by the US government, Saab lost its competitive edge. With the change in ownership, drastic changes in management and thinking were required but they did not materialize and the company finally succumbed. The Saab brand still has an appeal to it, and many companies are interested in buying its assets and reinvigorating it with their own line of thinking. However, their success depends on whether they have learnt from the failures of Saab.15. References ‘A Phoenix Struggles To Fly’ The Economist (7 April 2011) accessed 30 March 2012 Alex Taylor, ‘Saab Without Tears’ CNN Money (20 December 2011) accessed 30 March 2012 ‘‘Annual Report 2011’ (Saab, 2012) accessed 30 March 2012 Gary Gagliardi, Sun Tzus the Art of War Plus Warrior Marketing: Strategy for Market Positioning (first published 1999, Clearbridge Publishing 2006) Greg Fountain, ‘Saab: 8 Reasons Why It’s Not All GM’s Fault’ (CarMagazine, 17 January 2012) < http://www.carmagazine.co.uk/Community/Car-Magazines-Blogs/Greg-Fountain-Blog/Saab-8-reasons-why-its-not-all-GMs-fault/> accessed 30 March 2012 John Reed and Andrew Ward, ‘Dutch Sports Car Maker in Saab Talks’ (Financial Times, 3 December 2009) < http://www.ft.com/intl/cms/s/ef4cd388-df2f-11de-be8e-00144feab49a,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2Fef4cd388-df2f-11de-be8e-00144feab49a.html&_i_referer=#axzz1qgjK8DyR> accessed 30 March 2012 ‘Near-bankrupt Saab says it cant pay staff’ (RTE News, 23 June 2011) accessed 30 March 2012 News Release, ‘Spiker Cars Finalizes The Purchase of Saab’ (SPYKER, 23 February 2010) accessed 30 March 2012 Reuters, ‘TIMELINE: Saab owner files for bankruptcy’’ (Auto News, 26 January 2010) accessed 30 March 2012 Richard Anderson, ‘Saab teeters on brink as cash runs dry’ BBC News (23 June 2011) ‘Saab Automobile Files For Bankruptcy’ (Saab Newsroom, 19 December 2011) accessed 30 March 2012 Sven Grundberg, ‘Saab Bankruptcy: What does it really mean?’ (WallStreet Journal Blogs, 19 December 2011) < http://blogs.wsj.com/drivers-seat/2011/12/19/saab-bankruptcy-what-does-it-really-mean/> accessed 30 March 2012 ‘Sweden repays bankrupt Saab’s EIB loan, bidders circle’ (Reuters, 27 January 2012) < http://uk.reuters.com/article/2012/01/27/uk-sweden-saab-idUKTRE80Q25L20120127> accessed 30 March 2012 ‘Tata Motors places bid for Saab Automobile: Report’ (The Times of India, 6 March 2012) < http://timesofindia.indiatimes.com/business/international-business/Tata-Motors-places-bid-for-Saab-Automobile-Report/articleshow/12159611.cms> accessed 30 March 2012 Wire Reports, ‘Saab heads for scrapyard as long rescue quest fails’ (Auto News, 19 December 2011) < http://www.autonews.com/apps/pbcs.dll/article?AID=/20111219/OEM/111219876> accessed 30 March 2012 Read More