General Motor's Strategic Risk Management - Case Study Example

General Motors strategic risk management Just like General Motors (GM), organizations are aware and know they mustmanage risk so that they are able to create value for their shareholders (Dess). This form of risk management is critical to improve the resilience of companies given that it is seen as a discrete function of a dedicated department of the financial services in the organization. One of the lessons many organizations learned from the global financial crisis is that they need to clearly link strategy and risk management so that they are able to identify and manage risk in a highly uncertain environment. Another is that they must focus risk management on creating value as well as protecting value created. In an organization’s efforts to lay strategy, concerning risk for an organization there has to be a clear distinction between strategic risk management and enterprise risk management (Horngren). This is because the two are normally likely to conflict hence may cause a loop that may not be favorable for the firm. Strategic risk objectives are high-level risk goals and they are the core of General Motors risk management strategies. If there is anything that is able to inhibit whether internal or external the organization’s ability to arrive at its strategic objectives then we call these the strategic risks. On the other hand, Enterprise risk management (ERM) is a process, effected by an entity’s board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives. It is therefore right to deduce that SRM is an important part of an organization’s ERM process because it is not separate from ERM but a critical element of it (Dess). Due to the massive expectations by major stakeholders’ right from directors and executives to regulators, shareholders and rating agencies, they understand that they need to manage the organization’s risks and their risk management processes including strategic risks. They also have the obligation of ensuring there is transparency in the processes of managing risks. GM is fueled to undertake strategic risk management due to the reemergence of risk management as a strategy, the fact that it has undergone catastrophic risks in the past some even prompting it to sell part of its ownership in the past (Horngren). The strategic risks that the management of GM is focusing on are those that are most consequential and have the impact of affecting the shareholder’s value. This is an area, which directly deserves the attention of both the executive management and the directors. Strategic risk management strategy employed by GM incorporates the following six-step process:- a) First GM engages in a process of identifying, assessing, and managing both internal and external events and risks could impede the achievement of strategy and strategic objectives of the overall company (Hill). b) They do this with the ultimate goal of creating and protecting shareholders interest and stakeholder value in GM (Hill). c) The ones endowed with the responsibility of SRM consider the aspect the primary component and necessary foundation of the organization’s overall enterprise risk management (ERM) process (Dess). d) As a key component of ERM, it is by definition effected by boards of directors, management, and mainly the finance department effects others like in the case with GM SRM (Horngren). e) It requires a strategic view of all risks and considerations of how external and internal events or scenarios will affect the ability of the organization to achieve its objectives (Hill). f) SRM in GM is considered a continuous process that should be embedded in strategy setting, strategy execution, and strategy management (Dess). This is the mode adopted by GM in trying to formulate an action plan to strengthen their ERM and lay a focus on their strategic risk objectives ("Transformation: Changing Ahead Of the Curve.(management of Nokia Corp. and Toyota Motor Corp.)(Company overview)."). The foreseeable risks by GM One of the foreseeable risks that GM undertook was the transfer of ownership through sale of part of their ownership. The control was handed over to turnaround executive known as Al Koch. This was advantageously attributed to the $19.4 billion of loans and a more of debt of over $30 billion (Horngren). This handing over of the control was despite the efforts against the same by both the US government and the GM’s management through the accumulated support of the unions, dealers, suppliers and bondholders. The resultant effect of this was an unforeseen failure through a terrible catastrophic impact. In this arrangement, the US was left with custody of 60% ownership of the new GM, which included Chevy, Buick, GMC and Cadillac. Canada on the other hand was given 12% a stake it attained after lending GM $9.5 billion. Other companies which were incorporated into the structure for decision making included UAW with a stake of 17.5% a percentage derived out of its payment of $9.4 out of its health obligations of $20 billion. The bondholders were accorded 10% to a high of 25% which were to be through warrants and the old GM common shareholdings. As a result of this foreseen risk of shared decision making and control, GM experienced a loss in terms of closure of its 12 out of 20 factories, the union workers to a tune of over 21,000 got fired with a number on suspension and ultimately, the factory experienced a shutdown of over 2,400 dealers (Cohan). The auto dealer had also foreseen a 2-year risk of being bankrupt, which called for a two-year reorganization plan, which included asset sales and a cleaned up balance sheet, which would cost the government to a tune of $88 billion in its financing (Cohan). This is despite the fact that both the US and the lenders being wary that they may not be paid given that the collateral base of GM was fast eroding informing their fear of not being able to be repaid. The risk of being bankrupt as foreseen placed the firm in a difficult situation as partners who were willing to lend them money for their operations became limited (Hill). Taking care of their operation costs became harder and they reached a verge of collapse prompting their decision to undertake the earlier risk, the risk of losing control to foreign firms. These risks were fueled by the fact that the strategic risk management machinery of the firm having loops hence not agreeing with the ERM of the firm. This lead the firm into a situation where they could not manage the risks they faced well and furthermore, they were not able to even formulate risk mitigation strategies ("Transformation: Changing Ahead Of the Curve.(management of Nokia Corp. and Toyota Motor Corp.)(Company overview)."). Mistakes committed by GM There are varieties of mistakes that were committed by GM that lead it into the situation they faced. First, they had bad financial policies; despite the fact that GM may have been bankrupt since 2006, they had avoided filing their returns for all these years and insight that is given only by banks and bondholders. This is after it has used cars as razors all along an act in which they sold consumers a monthly package of razor blades in the form of highly profitable car loans. It is sad to realize that such a grave mistake takes place from the finance department of the company. Secondly, GM made another mistake of selling to their consumers’ uncompetitive vehicles and this is as opposed to its fiercest competitors who instead sell quality and competitive vehicles (Cohan). The cars brought into the market by GM proved to be poorly designed and built. This is despite the fact that they took the company too long to manufacture hence accumulating to very high production costs. Due to their low quality, there were no people to buy them or if in case there were then such people were very few. This left GM in a state where they experienced an excess production capacity. The bother critical factor is the ignorance of GM of competition. This it has been doing with only a limited interruption for a period of more than 50 years. Competition if taken as a platform to learn becomes very healthy as it has the effect of ensuring quality for the sake of the consumer (Keller). The consumer also benefits of the variety created because of differentiation due to competition. The company that is able to sustain such forms of competition is also able to take a bigger part of the market most so if the consumer desires their products. The impact of ignoring this lead to a reduction of the market share controlled by GM from 54% in the years 1954 to a paltry 19% currently, this is specific to the North American market. The Toyota and its peers posing cutthroat competition to GM hence a reduction in preference of their automobile and sales took over this market instead. Fourth, he GM all along in its operations refused to undertake some form of invention and innovation of their products. This was fueled due to greed that GM had hence wanting to make enormous profits from its finance making it care much less of building better vehicles (Cohan). The management in formulating its management plans refused to take care of the changing needs of consumers. They did not as well bother to find out what was new in the market most so by their competitors. Furthermore, the company did not bother integrating new technology in their operation procedures. these did not only lead to a reduction in their revenues as the products of their competitors were most preferred by the consumers but it also lead to less preference and a further reduction by their customers (Kerzner). Lastly, management of the firm in the bubble became hard GM. This is because of the promotion that the managers got while ignoring the external dynamics. This looked stupid from the perspective of the consumers and the competitors. The aspect remained smart though from those backing for promotions. The general management in America, a procedure that ignored the appropriate strategy became the major cause of the failure. This shows that it is detrimental for any organization to neglect the aspect of strategic risk management in the process of its economic management; this is derived from what happened to GM when it refused to embrace change in the manner of its management of its affairs (Cohan). How these mistakes could be prevented. GM would have formulated and put in place good financial policies. The policies could have been in the position of disclosing any relevant financial information concerning the company and its financial operations. They avoided critical aspects of financial operations like filing of returns allowing for the availing of these to be done by external parties like the banks and the bondholders (Keller). The financial policies like the sales of highly profitable loans is also not a good policy in place and must be changed and scrapped. The sale of uncompetitive vehicles has also cost GM much, from research of the comparison of GM motor vehicles and Toyota motors revealed that individuals were willing to pay more for Toyota vehicles than they were willing to for GM vehicles. GM must therefore embrace customer demand and it is high time they designed and build high quality vehicles, which cost less to own and are durable. For quality, individuals will be willing to pay no matter the cost given that they would meet consumer requirements and last longer making consumers get value of their money. The net impact of this change will realize GM to start operating at full capacity and this would enable the company increase its market share (General Motors: the first 75 years of transportation products. Princeton, N.J.: Automobile Quarterly Publications). Quality and durability can also be realized when the company invests in research which will ensure that the company is able to invent and innovate. The management must ensure that they provide up to date products to their customers, vehicles that meet all the customer requirements and are up to the current technology. The strategy of the company to provide what the customer requires will already lead to profitability of the firm as opposed to forced profitability at the expense of innovation. The other thing that is detrimental to GM was the ignorance of competition whose instant impact was the reduction of its market share to a paltry 19%. To curb this problem, GM can resort back to a strategy by former CEO Roger Smith of developing outstanding motor vehicle brand, which offers a vehicle ownership experience, based on the description of the owner and the satisfaction of the dealer. If the Saturn culture by Smith of giving the consumer a better car buying and ownership experience than that offered by its competitors, GM probably would not be on the verge of bankruptcy today (Kerzner). If GM has to prevent the mistakes, GM has to stop the aspect of managing in the bubble. This was a practice where the company rewarded their employees who followed its old ideologies of doing things while throwing out those opposed to the same. The sycophancy of the leader must be stopped and leadership has to embrace diversity of opinion given the uniqueness of every individual. The managers therefore have to stop the tendency of filtering out information that does not match up with their pre-conceived notions. This is because confirmation bias would lead to a scenario where the firm will ignore the threat presented by their competitors. These strategies plus others not mentioned will help GM through its management to prevent the occurrence of the same mistakes again. They will also improve on what they offer to their consumers while enhancing their competitiveness (Boone). Why the mistakes were not prevented These mistakes were not prevented in time because of the reluctance by the management and the board of GM. The reluctance on the other hand was caused by existence of just a few competitors in the automobile industry creating a kind of a monopoly environment. The management of such forms of risk requires that the management get the right information at the right time and act on it promptly. Asymmetric information being one of the causes of the occurrence of such mistakes, GM must therefore devise ways of ensuring that accurate information is arrived at in time and acted upon without bias. There are three different major categories of sources of mistakes operational risk, acts of God, fraud and processing deficiencies. Each category requires significantly different actions and thus relies on unique information, timing and availability of the information (Cray). Another reason that the mistakes could not be prevented in time was the lack of procedures of embedding risk management policies and controls across the business. The risk managers were also not empowered enough to enable them handle the risks appropriately in their respective manner (Dodge). The risks were also not prevented because the management refused to conduct a strategic risk assessment, SRM demands that a separate risk assessment to understand and make prioritization of the organizations strategic risks which include the above causes that lead to the bankruptcy of GM. This procedure will also help in the consideration of both internal and external risks or events, which would lead to committing of such mistakes in the past (Lorean and Patrick). General Motors also did not make a consideration of how mature the efforts of the ERM efforts as compared to strategic risks facing the organization. As a result of this, the management of the board was not able to have an understanding of the risks that faced the organization as well as the inability to of instituting an appropriate risk management process and develop action plans to move a high level ERM maturity. The company culture ranging from their recruitment and how they promote also played a bigger role. This is because most of the other employees specifically the junior ones were not allowed a voice to express themselves and anything they would wish to raise for the benefit of the organization. The junior employees may have pointed out some aspect of looming danger yet afraid to bring them out because the CEO was always right and final (Cray). The mistakes also happened because there was no constant review and updates of the risk strategy setting that integrates the identification, review of the processes that lead to the setting and updating of such strategies (Dodge). If it were ensured that the processes integrated the measuring and monitoring of risks, such mistakes would not have happened to impact on the organization’s performance. GM’s methods of monitoring the Key Performance Indicators must also be enhanced which enable the organization would participate in risk monitoring and reporting into the organization’s core processes for the sake of budgeting, monitoring of the business performance and the performance measurement systems (Boone). The cause that revolved around the development of an ongoing process of risk management and development of strategies as well as updating and reporting requires involvement of technocrats (Lorean and Patrick). Internal and external errors If there is anything that is steadfast and unchanging then it is change itself as it is inevitable and hence those organizations, which do not keep up with change, will be faced out and become unstable. As observed with the case of GM, both a misguided decision on how to integrate both external and internal factors that are responsible for how the organization runs to achieve its objectives lead to the mistakes caused due to both the internal and external errors committed by the major corporate stakeholders of the company. If the internal forces such as the machinery and equipment, technological capacity, organizational culture, management systems, financial management and employee morale are used effectively then success is realized of the firm (Beauchamp and Norman). First and error occurred when GM could not engage its equipment and machines effectively to produce required products by the customers. This was partly because the machinery in place for production still embraced the older technological makeup hence not able to produce with the requires speed and requirements (Dodge). Another internal error that occurred at GM was the organizational culture of sycophancy and bootlicking, this is where for any favors to be done or any form of promotion depended on how close one is with the CEO (Cray). This mistake has and must be changed so that any form of act of the manners suggested goes with merit. The systems also ought to be moderated to encompass the SRM procedures and principles; such programs should also be placed in all the departments of the organization as opposed to the past where it was only placed in the finance department (Lorean and Patrick). External errors on the other hand are committed when the external driving forces are not used correctly. Such forces are those outside the company hence beyond the control of the company management. Because such factors are also likely to cause, a change in the company they have to be directed to cause a positive change. The errors that are external and were committed by GM include ignorance of competition, the ignorance of competition made GM lag behind and the stiff competitors went ahead to grab their market share drastically reducing their impact in the market. The other contributory factor towards this is the ignorance of the customer behavior in terms of what they need, their wants and desires. If not well articulated, negative provision towards the customer needs would drastically reduce demand for a company’s products as with the case of reduced demand for the GM motor vehicles and raised demand for those of their competitors Toyota irrespective of their price. The company must therefore remain vigilant towards any environmental changes for them to remain relevant (Beauchamp and Norman). Works Cited Beauchamp, Tom L., and Norman E. Bowie. Ethical theory and business. 4th ed. Englewood Cliffs, NJ: Prentice Hall, 1993. Print. Boone, Audra. Corporate financial policy. 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Rude awakening: the rise, fall, and struggle for recovery of General Motors. New York: Morrow, 1989. Print. Kerzner, Harold. Advanced project management: best practices on implementation. 2nd ed. Hoboken (NJ): J. Wiley, 2004. Print. Lorean, John Z., and J. Patrick Wright. On a clear day, you can see General Motors: John Z. de Loreans look inside the automotive giant. Grosse Pointe, Mich.: Wright Enterprises, 1979. Print. "Transformation: Changing Ahead Of the Curve.(management of Nokia Corp. and Toyota Motor Corp.)(Company overview)." Mondaq Business Briefing [New York] 12 July 2007: 1-23. Print. Read More