The Financial Collapse of General Motors - Essay Example

Real World Event Case Study: The Financial Collapse of General Motors Table of Contents Question 1 2 Question 2 3 Question 3 4 Question 5 4 Reference 7 Question 1 Please describe your event and how this ties into applied managerial finance? The event that is to be discussed is about the financial collapse of General Motors. General Motors which was the market leader in the automotive industry and the most recognized company across the world. GM success was built upon its unique strategy which was supplying of motor vehicles at a wide variety of price, thus creating a competitive advantage. But with the fall of financial industry in 2007, things got worst across all the financial industries in America, including the automobile industry. GM declined in the late 20th century as it failed to adapt to the changing business environment and respond to an increasingly competition from abroad. Gm which has funded approximately $103billion towards employee related obligations proved to be disadvantage for the company. Not only legacy cost but also due to its poor business strategy. It relied on its old mode of thinking which resisted the offering, and manufacturing capacity. The business suffered decline where its market share fell from 45% to 22%. In addition the deteriorating strength of the economy and the loss of purchasing power of its consumers resulted in bankruptcy for GM (Estrada, 2011). In 2009, GM announced that the cash reserves amounted to $14billion after losing $30.9billion in 2008. Thus GM was filed bankrupt and its assets were sold off to the new government owned organization (The New York Times, 2010). It can be said that managerial finance was not applied by GM because if the financial manager would have made proper decisions with respect to cash flows and how much and the type of equity and debt to be used in order to finance the firm. Lack of proper managerial finance leaded GM to a debt of about $172.8billion as compare to it’s assess which was $82.3 at the time of bankruptcy petition (The New York Times, 2010). Question 2 How has this event impacted the economy as a whole? The economic impact with respect to the collapse of the auto industry has resulted to be dramatic. As per a survey conducted by Planning Perspectives Inc, reported that about 68% of the participants revealed that companies would downsize if GM declared bankruptcy, 12% of the respondent said that the business would likely to shut down. It was aid that if GM goes into bankruptcy business across the globe would be affected severely. As per the economic downturn, the American, during the financial crises bought few new cars. The collapse of any of the key players in the auto motive industry had predicted a troubled economy. Almost about one third of the suppliers of the automobile industry were deemed at the risk of bankruptcy (Gray, 2008). The auto industry is an important employer and there are many related industries attached to it. The effect would not result in the collapse of the single company, not just America but all of Europe and Japan also. By the end of 2004, GM has lost nearly $4.2billion and almost $73billion by the end of the year and thus the US government with respect to GM had adopted policies and took actions in order to prevent worst economic scenario. Collapse of GM had cost the US government as much as about $200 million with respect to unemployment cost of reviving the economy and other factors (Ujikane and Yamamura, 2008). Question 3 How does this event tie into the chapters that have been assigned so far? Please give at least three examples. The financial collapse of the giant company, general Motors can be well tied up with the concept of managerial finance. Managerial finance is concerned about the duties of manger in the organization or business. The breakdown of GM was also mainly due to lack of managerial output. GM did not confront the financial problems that the company encountered; the executives did ignore the signals of future financial crises which ultimately led to bankruptcy. It was the duty as well as the work of the financial manger to keep a track of the ongoing activities into the business and also the external environment. GM has spent about $103 billion on funding legacy related to its employee in the 15 years which resulted as a disadvantage for the company. This should have been avoided by the finance manager to keep the asses in place and if the company had well planned for contingency it the assets would have surely helped it to overcome from the financial crises. Question 5 Please give at least three lessons that can be learned from this significant event in the applied business world? The financial collapse of General Motors illustrates that how one of the most biggest and successful company with its long history of excellence market position had collapsed because of fundamental problems were hugely neglected. Therefore lessons that can be learned from such a significant event are as follows: Adapt to the changing economic environment With a change in the customers taste and preference, companies needs to adapt to the changes and should not assume that what has worked for the company in the past will work in the future also. This was what happened with General Motors, its complacency in the market was one of the big reasons for its failure. It arises when organization fails to understand the reality along with the required needs of the customers. Therefore understand and implementing of risk management would enhance not only analyzing through numbers but also focusing on the long term views and just not focusing on short term strategies which General Motors has done. In addition, innovations play a major role in enhancing ones competitive advantage, and adapt to the changing market environment. This helps companies to attune themselves according to the lives of the customers and stay aware of the competition. Implement at the right time When changes need to be taken care of it is suggested that decisions regarding the new change should be implemented at earliest. The faster the management response it is better for the company. GM was confronting many problems but because of the lack of actions and ignored the signals for which GM faced bankruptcy. Contingency plan It is important for organization to effective plan out for unseen and uncertain crisis that may pop up in the future. Effective crises management is crucial for the survival of the firms during adverse economic downturn. If GM would have planned for a crisis management in order to deal with the risk during the economic downturn, the company would have survived even today. Thus it is advisable that it is necessary to prepare and mange for any kinds of risk in association with the company so to be able to survive during the worst conditions and prepare solutions for the predicted problems. Reference Estrada, E. J. (2011). The Immediate and Lasting Impacts of the 2008 Economic Collapse—Lehman Brothers, General Motors, and the Secured Credit Markets. Retrieved from Gray, S., 2008. The Ripple Effect of a Potential GM Bankruptcy. Retrieved from < http://www.time.com/time/business/article/0,8599,1862737,00.html> The New York Times. (2010). General Motors. Retrieved from Ujikane, K. and Yamamura, K. (2008). News. 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