Business-Level Strategies of General Motors and AvtoVaz of Russia - Essay Example

? Case Analysis - General Motors and AvtoVaz of Russia The case context clearly reveals that the Russian consumers were extremely sensitive to car prices since the average income level of Russians was very low as compared to other industrially developed countries. An average Russian’s salary was $100 per month during this time. The 1998 financial crisis further worsened this situation, and as a result, car prices significantly dropped (Exhibit 6). In 2001, market analysts estimated that “almost the entire market in Russia was for cars priced below $10,000”. However, GM could not market their automobiles at this price even though the company had employed different tactics on manufacturing and distribution. Similarly, AvtoVAZ, the largest automobile producer in Russia, had been struggling with sales declines due to product quality issues and tax evasion allegations. In addition, the firm had no sufficient capital to rebuild their business although it had innovative product designs including Niva. Hence, either GM or AvtoVAZ was not in a position to develop and market the Niva without an external assistance. At this juncture, they jointly decided to integrate AvtoVAZ’s domestic market dominance with GM’s technical expertise and market repute. Evidently, the proposed Joint venture (JV) is potential for both organizations. This JV strategy will certainly add value to GM’ global expansion vision since Russia is a potential emerging market. From the case study, it is clear that GM failed to operate successfully in Russian market even though it had practiced the traditional emerging market approach of manufacturing complete cars in its own plants and reassembling the deassembled parts in Russia with local labor. The main cause of failure of GM in Russian market was low income levels of Russians that forced the company to fix extremely cheaper prices for its products. If GM operates its plants in Russia, it can avoid shipping charges and import duties and ultimately use the economies of domestic production to set affordable prices for Russian customers. Furthermore, AvtoVAZ is the most leading player in Russian automobile industry although it currently struggles with some quality issues. Therefore, the JV will assist GM to take advantages of widespread business territories as well as deep Russian market experience of AvtoVAZ. In addition, the national distribution network established by the AvtoVAZ dealers will be beneficial for the GM to skip from the difficulty of developing a dealer network from scratch. Hence, the proposed integration would promote value creation, a process of identifying competitive alternatives to trim down costs and thereby to provide maximum benefits to customers. Many of the economists hold the view that business integration would contribute to value creation due to operational efficiencies from an internal market and selection of distributors and suppliers (Means of corporate strategy, slide 6). Likewise, the case background clearly points out that it would be very difficult for the firm to compete in Russian automobile market. The Russian automobile sector noticeably lagged behind other huge players in the industry even though the Russian government had specifically focused on the industry’ modernization and development. The case report reflects that the Russian automobile industry’s “inadequate capital, poor infrastructure, and deep-seated mismanagement and corruption resulted in outdated, unreliable, and unsafe automobiles” (“General Motors and…:, 2). In addition, the instability of Russian economy often causes problems to automobile manufactures as a result of unexpected tax impositions and changes in regulations. Intense political issues in Russia adversely affected the sustainable growth of the country’s automobile industry. Increased rate of defects in new cars was another issue, which persuaded the people to boycott Russian made automobiles. Finally, higher crime rates in the country forced the foreign marketers and entrepreneurs to abstain from the mainstream of Russian automobile industry. The JV deal must be structured in a way that would provide operational advantages to GM while keeping the domestic market interests of AvtoVAZ. Although the JV deal seems to be potential for GM, the company must be careful while structuring the terms and conditions of the agreement. Since the GM management has agreed to invest a huge amount for the JV deal in the risky Russian market, it must have the power to take final decision on day to day managerial activities. While allocating managerial responsibilities among personnel, the GM must ensure that excessive involvement of AvtoVAZ managers does not hurt the smooth flow of the business. In addition, the GM should have the final authority to formulate decisions regarding financing project because thoughtless use of capital would adversely affect the smooth flow of the business. Finally, the production department has to be entirely under the control of GM since the AvtoVAZ is already struggling with product quality issues. In total, the GM must get a dominant position in the JV as it bears higher levels of risk. Most probably, the proposed JV would bring synergies of combined marketing operations in Russian market. GM is the world’s largest automobile manufacturer and it operates in more than 50 countries with stable profitability; whereas the AvtoVAZ is the automobile giant in Russia. As GM is a well established firm in the automobile industry, it possesses a market stature and greater technical as well as market knowledge. The technical expertise of GM in automobile manufacture would assist AvtoVAZ to survive the current difficulties associated with quality problems. In addition, Russians are more likely to pay extra for GM’s Chevrolet branded products; this competitive advantage would add value to the sales returns and ultimately to the profitability of the JV. In turn, AvtoVAZ has stronger customer base and a national distribution channel in Russia, and this strength may aid GM to easily market its products across the country. This JV may aid the company to take advantages of operational, financial, and anticompetitive economic scope. To illustrate, this project would enable the firms to spread core competencies and to share different business risks. Formation of an internal capital market and tax reductions are some of the ‘financial economies of scope’. Finally, the proposed JV strategy would assist both GM and AvtoVAZ to avoid unhealthy market competition and to achieve tremendous market power (Corporate level strategies, slides 13-18). While analyzing the case study, it seems that the economic, cultural, and political environments of Russia do not offer much opportunity for GM. The 1998 financial crisis had dreadful impact on the economic development of the country and hence Russians’ average annual income dramatically dropped. As a result, car prices remained unaffordable to an average Russian. In contrast, the cultural elements of the country provide a little scope for the JV. The case study points out that Russian customers were highly interested in foreign automobiles, especially those made in the US. However, an average Russian customer was not willing to pay more than $10,000 for a car. Hence, it would be very difficult for an automobile manufacture to meet both financial interests and quality expectations of Russian customers. Finally, the case context reflects that Russian political spectrum was not stable and hence the government could not effectively prevent the rampantly increasing crime rates in the country. Such a situation is not favorable for any business venture as it may often affect the operational efficiency. For instance, the case study reports that buyer and distributors of AvtoVAZ were charged higher prices at factory gates for protection (“General Motors and…” p, 7). It is recommendable for Herman to adopt a multicountry approach in this case. As we discussed earlier, the price factor was paramount in Russia as the 1998 financial crisis had negatively affected the average income of a Russian. As a result, an average Russian customer was not ready to acquire a car by paying more than $10,000 even though it was a cheaper price as compared to that in European and North American automobile industries. If GM adopts a global strategy in this case, it cannot take advantages of growing Russian automobile market because the Russian customer would probably switch their demand to other marketers. However, the company may fix a relatively higher price for their products in the Russian market as the GM’s Chevrolet brand has strongly influenced the Russian customers. I recommend the proposed JV project as it would enable GM to practice a best cost provider strategy, which is specifically advisable to target price sensitive customers. Under this strategy, both the companies can incorporate upscale attributes at a lower cost as compared to their rivals (Business level strategies, slide, 20). The JV would be capable of providing sustainable competitive advantages to them as both the partiers are major players in the automobile industry. It is recommendable for Herman to implement the JV project at the earliest, because the late launch of the project may negatively affect its scope. Finally, the proposed JV offers GM the benefits of lower operational costs, sustainable domestic growth, and increased competitiveness (text book concepts). Works Cited “General Motors and AvtoVAZ of Russia.” Thunderbird. (2001): 1-17. 1. Means of corporate strategy, mergers and acquisitions, slides 1-22 2. Corporate level strategies, slides 1-20 3. Business level strategies (or generic strategies), slides 1-20 Read More