Business Strategy of General Motors - Essay Example

Strategic Issues and Recommendations: The Case of General Motors 2007 I. Executive Summary General Motors (GM) is the oldest of the "Big Three" automobile manufacturers in North America, having been formed in 1904 with the merging of 25 independent companies. Over the years, it has grown phenomenally in size and in its product range. Till 1975, GM was a dominant player not only in North America, by far the largest automobile market, but also globally. But from then on, spiraling oil prices resulted in a customer shift away from the big GM cars to more fuel-efficient small Japanese cars. Even though GM has successfully adopted Japanese lean manufacturing technology, thereby reducing defects per car, inventory holdings and costs, its competitors - the American, Japanese and European - have fared better. As a result, the market share of GM has been slipping over the years. Like all North American and European car manufacturers, GM has also been outsourcing production facilities to low cost destinations in Latin America and Asia since the 1990s. This has enabled it to capture new markets as well as reduce costs to some extent. But, in North America, it remains straddled with high costs because of its legacy of high employee costs and strong trade unions that prevent shut down of loss-making plants. Besides, GM has invested little in research and product development. Hence, its numerous brands are ageing and less competitive in comparison to the sleek models manufactured by Japanese and Korean manufacturers. Hence, it is recommended that GM urgently takes a re-look at its brand portfolio and streamlines its product range and be more aggressive in its cost reduction practices. II. Critical Strategic Issues II. A. External Environment The automobile industry is one of the largest industries in the United States and contributes 5 percent of the private Gross Domestic Product (BERA, 2004). The country is also the largest manufacturer of automobiles in the world, having produced 12.2 million units in 2002. The "Big Three" US automobile manufacturers - General Motors (GM), Ford and Daimler-Chrysler - producers 76 percent of the vehicles sold in the US while 18 percent is contributed by Japanese manufacturers - Toyota, Honda, Nissan, Mitsubishi, Subaru, Isuzu - and 2 percent by European manufacturers - BMW and Mercedes (division of Daimler-Chrysler). While the Asian and European manufacturers rely on exports, the US is the principal global market of automobiles hence the demand for US manufacturers is generated mostly domestically and to a small extent from Canada. II.A.1. Industry trends, conditions and key strategic factors Historically, North American manufacturers have been major players in the global automobile industry and GM, since its formation by William C Durant in 1908, has been a name to reckon with (Jones, 2005). However, over the period of a hundred years, much has changed in the structure and pattern of the industry, forcing GM to diversify from high-end passenger cars alone to catering to different segments of customer demand as well as engage in strategic partnerships with global players and extend production facilities in foreign lands (BERA, 2004). Particularly since the last half of the 1990s, globalization of automobile manufacturing, primarily aimed to cut product costs, have resulted in multiple production facilities down the value chain in a number of countries across continents. All the major players have invested heavily in outsourced destinations in Latin America, China, Malaysia and other countries in south east Asia. The "big Three" of North American automobile manufacturers, GM, Ford and Chrysler have also engaged in strategic partnerships with European counterparts. The industry has seen consolidation along the three tiers, with the first tier being composed of GM, Ford, Toyota, Honda and Volkswagen while the lower two tiers initiating mergers among themselves in order to remain competitive. II. A.2. Analysis of competitors In the early years of the 20th century, the US companies, GM and Ford, controlled the automobile industry in North America. GM was in fact formed with merging 25 independent car manufacturers including Buick and Cadillac, which were all considered expensive vehicles at the time. The first serious competition that GM faced was when Ford introduced assembly line mass production in 1908, thus offering automobiles at much cheaper price than GM. Alfred P Loan turned around GM in 1920 by reorganizing the 25 independent divisions into five, that is Chevrolet, Pontiac, Oldsmobile, Buick and Cadillac, that catered to different segments of customers. From 1925 to 1975, GM's business model was largely successful in the North American market. However, following the oil shock of 1973, US cars were seen to be "oil guzzlers" and faced severe competition from Japanese small cars that were far more energy efficient. In addition, Toyota's just-in-time lean manufacturing process gave stiff competition to GM's stronghold by the mid-1980s. Besides Toyota, other Japanese companies like Honda, Nissan, Mitsubishi and Suzuki had also begun posing competition to GM's dominance in North America. Through the 1980s, GM went through another reorganization process, adapting Japanese lean manufacturing through its collaboration with Toyota in the New United Motor Manufacturing Inc. that manufactured Cadillacs (Jones, 2005). In the 1990s, GM faced another round of problems as most car manufacturers began to globalize operations and shifting parts of the production process to low cost destinations in Latin America and Asia. At the same time, European automobile manufacturers like BMW, Mercedes-Benz and Daimler Chrysler began to set up production bases in north America (Upham, 2000). Although GM has been attempting to restructure its operations, its market share has been slipping since the 1980s, reaching 25 percent in both cars and trucks from 50 percent earlier (Business Week, 2005). Not only is it losing to Toyota and Honda, which has been giving it stiff competition since the 1980s, it is also losing market to Korean automobile manufacturers like Hyundai (Kustra, 2004). II. A.3. Analysis of customers Ever since the 1920s and 1930s, GM has focused on offering differentiated products to its customers. In contrast to Ford's strategy of offering a homogenous product at low costs, with its model T Ford, GM's strategy has always been to offer a number of models targeted at different segments of customers who had widely varying tastes and incomes (Kustra). This strategy was successful in the 1950s and 1960s but in the process the company built up a huge infrastructure with a large number of plants and a huge workforce. As a result, when the US automobile market was invaded with low cost Japanese and Korean products, GM failed to compete. GM's phenomenal growth through the decades till 1975 meant that it turned lackadaisical towards quality. Besides, the big car image that GM has had came in the way to customer satisfaction as demand was shifting towards small Japanese and Korean cars. Even while the new entrants into the North American market, like Toyota, Volkswagen, Datsun and Honda were focusing on the small car, GM found it tough to change its product range (Kustra, 2004). Even though GM's market share in North America has stagnated, it began international expansion in the 1990s. Starting with joint ventures with Toyota and Isuzu in Japan, the company set up production facilities in China and south east Asia to capture the emerging markets while also competing in Europe (Jones, 2005). II.A.4. Technology Since the 1980s, GM adopted Japanese lean manufacturing practices, trying to remain competitive in the industry. It began the Saturn project that was kept deliberately distinct from the other GM divisions in order to implement lean manufacturing processes. Subsequently, it entered into joint venture with Toyota in NUMMI to invigorate the process. As a result, GM has been able to greatly reduce defects per car, reduce costs and streamline the inventory management process. However, the other two competitors in the North American market, namely Ford and Chrysler, had also adopted lean manufacturing practices and were more successful than GM. II.A.5. Resources - suppliers and complementors From the beginning, GM focused on vertical integration and took over a large number of its suppliers. As a result, GM became a behemoth with huge capital investments and a labor force that it found difficult to tackle besides incurring huge costs. Trade unions continue to demand high pay and incentives. Since the 1990s, a spectacular factor in the global automobile industry is the investment that manufacturers from the developed world have been making in developing countries in order to take advantage of lower costs of labor and resources. Besides the rapidly growing markets in the developing countries, these also provide opportunities to spread the value chain of the production process. At the beginning of the 1990s, ten large light automobile manufacturers had 28 assembly plants spread in Latin America and Asia. This number increased to 62 by the end of the 1990s. North American and European manufacturers set up assembly plants in Latin America and east Europe while Japanese manufacturers went to south east Asia. More and more manufacturers began to enter China and India, the new and growing car markets that also provided opportunities for cheap component production facilities (UNIDO). II.A.6. Political and legal factors North America has for long been the major automobile market and the free market provides enough opportunities for large companies like GM. Further, liberalization of the erstwhile protected markets like East Europe, India, China, Brazil and Mexico have opened up opportunities for expansion of markets and production facilities for companies like GM. Since the 1990s, in particular, Mexico has been integrated into the North American automobile industry value chain with the institution of the North America Free Trade Agreement (NAFTA). II.A.7. Economic Issues Free trade between countries allows companies to sell in multiple countries as well as set up production facilities in accordance to the location's comparative advantage. Typically, multinational companies today set up production facilities in different countries not simply to take advantage of natural endowments but of a variety of factors like cheap labor, low taxes, lax environmental regulations, subsidies and lower labor standards, As a result, free trade translates to intra-firm trade between countries, which is the case for 50-70% of trade between Mexico and the United States (McGaughey, 1993). Since the North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico came into force in 1994, there has been an increasing trend of outsourcing of component sub-assembly manufacturing to Mexico. Hence, the erstwhile "multi-domestic" production structure by multinational automakers has given way to a tierization of the value chain in which the lower tiers supply to the upper tiers parts manufacturers (Martin, 2006). The 'maquiladora' type of mechanism has developed in the export processing zones along the US-Mexico border by which the component manufacturers import raw materials, tools, intermediary products and machinery from any part of the world, and assemble parts for the export market (Solgado, 2004). II.B. Internal assessment Since the 1990s, the Big Three US car manufacturers, including GM has been losing market share. Although the company's sales rose 2.4 percent in 2007, GM's market share slumped to the all-time low in 2007, at 22.17 percent. In June 2007, 1,455,236 vehicles were sold in North America, of which GM sold 322,048 vehicles (Auto Observer, 2007). II.B.1. Ratio analysis Despite the high costs that GM incurs, it has a comfortable liquidity position, with $32 billion in debt, $3 billion in present value of leases and $9 billion in un-funded pension liabilities (Associated Content). The debt matures in 19 years and only about $3 billion matures in the next 5 years. The current ratio of GM's balance sheet is 29.656; return on sales 9.885, debt ratio of 0.236. II.B.2. Resources, capabilities and distinctive competencies Despite its weakness in the North American market, GM has been fairly successful in China and Mexico. In China, it entered the small car market with Buick Sail. General Motors de Mexico, which began operations as early as 1935, is one of the leaders in auto sales in the country. It has production plants in Toluca, State of Mexico; Silao, Guanajuato; Ramos Arizpe, Coahuila; and in Mexico City. Not only does it produce for sales in the local market, it also serves as an export base for the multinational company. As a result, General Motors is the largest single employer in Mexico. In the country, General Motors also sells products of Chevrolet, Pontiac, Cadillac and Saab brands, and Fiat (gm.com). II.B.3. Functional issues and value chain analysis The most serious functional issue with GM is its large size and high labor costs. It cannot shut down factories that are running in losses because of pressures from trade union. GM produces too many models and brands, many of which are ageing, at high cost as a result. In contrast to the global leaders like Toyota, Honda and Nissan, GM spends far less on research and development, which shows up in the shoddy quality of its products. Even the "performance division" of the company, Pontiac churns out cars that have shabby interiors in comparison to the same-range cars like Toyota Camry, Honda Accord or Nissan Altima (Business Week, 2005). II.B.4. Product offerings GM has five broad divisions - Pontiac, Cadillac, Chevrolet, Buick and Mercedes-Benz. II.B.5. Overall issues with current performance The critical issue with GM's current operations is its excessive breadth of its product profile, with too many ageing brands and insufficient customer focus. Even though the company has been trying to streamline its production process, reducing the number of plants in North America and transferring production facilities to cheap labor destinations in Latin America and Asia, it has not yet been very successful because of its legacy of being a large employer, strong trade unions resisting shut-down of plants and reduction of incentives to employees and dealers. II.C. Summary of critical strategic Issues The critical strategic issues for GM are to improve the brand image of large cars in a environment where customers are shifting to fuel-efficient small cars; structural changes in value chain of the production process taking advantage of globalization and transfer of production processes to cheap destinations and finding new markets. III. Recommendations It is recommended that GM streamlines its product brands to a maximum of four to five, catering to the growing customer segments. For the purpose, the company needs to invest more on research and product development. Since quality is a major issue with GM products, there needs to be more rigid quality control and concentration on design aspects. At the operational level, GM urgently needs to reduce costs, particularly those incurred on labor and dealer incentives. This may be done either through more aggressive outsourcing of assembly plants and by offering voluntary retirement schemes to employees. Works Cited Business and Economic Research Advisor (BERA), Modern Global Automobile Industry, Issue 2, Fall 2004, http://www.loc.gov/rr/business/BERA/issue2/industry.html Jones, Gary, General Motors in 2005: Case No 5. Upham, Scott D., New Supply Base: Coming Soon - the globalization of the automotive industry - Brief Article, Automotive Manufacturing & Production, http://findarticles.com/p/articles/mi_m0FWH/is_12_112/ai_68707062 Kustra, Mark E, Winning in the Domestic Automotive Industry: The General Motors Market Share Study, March 2004, http://markkustra.com/pdf/marketshare.pdf Humphrey, John and Olga Memedovic, The Global Automotive Industry Value Chain: What Prospects for Upgrading Developing Countries, United Nations Industrial Development Organization (UNIDO), 2003 General Motors de Mexico, retrieved from http://www.gm.com/company/corp_info/global_operations/north_america/mexi.html McGaughey, William, A Labor and Environmentally Oriented Trading System, Synthesis/Regeneration, Spring 1993, http://www.greens.org/s-r/06/06-30.html Martin, Scott B., Global Sourcing Dynamics, Inequality and "Decent Work" in Auto Parts: Mexico Through the Brazilian Looking Glass, International Affairs at the New School Working Papers, April 2006, retrieved from http://www.generalstudies.newschool.edu/internationalaffairs/docs/wkg_papers/Martin_2006-08.pdf Solgado, Omar, Assessing the process of localization of parts in a Mexican car manufacturer and its effects on region's growth, Institute for Manufacturing, University of Cambridge, retrieved from http://www.ifm.eng.cam.ac.uk/people/os242/documents/localization.pdf Auto Observer, June Sales: GM Hits All-Time Low Market Share July 06, 2007, http://www.autoobserver.com/2007/07/june-sales-gm-h.html Associated Content, Ratio Analysis of Ford and General Motor http://www.associatedcontent.com/article/181217/ratio_analysis_and_statement_of_cash.html Read More