Analysis of General Motors Throughout All Aspects and Features - Case Study Example

General Motors 1. Using relevant frameworks, conduct an internal and external analysis of General Motors position in 2009 leading up to its decision to withdraw from its European operations. General Motors (GM), one of the largest automobile companies in the world, started its operation in 1908. Company’s global headquarter is in Detroit, US and it has almost 235,000 employees worldwide. GM’s business is spread around 140 countries across the world. In 34 countries GM has its production facilities. As far as sales are concerned GM is the largest automobile company in the US market and second-largest in the world. In the recent global financial turmoil, GM has experienced one of its toughest times in the history of the company. GM has been facing huge loss and it was about to face complete bankruptcy. US President Barack Obama is not willing to provide any government aid to the company as he believes that first there should be serious restructuring plan before providing any financial aid. The company has decided to downsize its workforce as a process of reorganization. Moreover, GM decided to sell its European arm Opel and Vauxhall to Magna International, a Canadian automobile parts manufacturer, and supplier. After a long bidding process, Magna was selected and it was expected that Magna would invest around 700 million dollars into Opel. It was also expected that this huge investment would create over 25,000 jobs in Germany. But in the latter half of this year, GM again decided that it would keep Opel with itself and canceled that entire plan. The company has been going through such a situation over the past few months which it has never been before. Internal Analysis It is been a century that GM is one of the largest automotive companies in the world. It was holding the number one position in terms of sales for 77 long years before Toyota surpassing it in 2008. Today there are 235,000 employees in the company. GM is operating a business in 140 different countries while in 34 countries it has production facilities. Value chain analysis The value chain refers to all the value-creating functions required for creating and delivering the goods and services to the target customers. Michael Porter's value chain model is represented below. [Value chain model, Michael Porter] Primary activities are directly involved in creating and delivering values and support activities are not directly associated in the process of value creation but play important role in enhancing efficiency and effectiveness (Tutor2u, n.d.). General Motors has a strong value chain which enables the company to be at the top for almost a century. GM’s inbound logistics are very strong as the company maintains good relations with its suppliers with whom it gets the inputs from. These inputs are converted into the final product into its large number of production plants. It is already mentioned that the company has its production plants in almost 34 countries. Manufactured cars then reach to the buyers through a strong network of GM dealers. A strong sales and marketing team is responsible for all the activities of branding, promotion, sales and finally after-sales services. GM is currently the second-largest carmaker in terms of sales. All these primary activities are supported by its advanced infrastructure, technology and huge manpower of 235,000 employees. External Analysis The automobile industry is one of the largest industries in the world. The industry is involved in designing, developing, manufacturing, selling and marketing of motor vehicles. The number of automobiles sold in the year of 2007 was 71.9 million. Among this, almost 22.9 million were sold in Europe and 19.4 million were sold in the USA and Canada. In 2008 the automobile industry faced huge challenges in terms of rising prices of oil and global financial meltdown. US is the biggest consumer car market in the world, although China is about to surpass the US. GM, despite huge losses, decided to expand in China. The company has made a deal worth $293 million with Chinese carmaker FAW. In the first half of 2009 GM has sold 818,442 cars in China (BBC News, August 30, 2009). As far as Europe is concerned in 2008 GM sold 2,039,360 vehicles and it holds 9.3% of the European market. In Europe, GM has a workforce of 54,500 (GM, n.d.). Globally GM’s major competitors include Toyota, Honda, Ford, and Daimler Chrysler. Among these Toyota is the biggest competitor in terms of sales. It is already mentioned that in 2008 Toyota surpassed GM in terms of global sales. As far as the US market share is concerned GM is still the market leader with a market share of 19.5%, whereas Toyota has 16.2% market share. Ford is the third largest automotive company with a market share of 15.1%. GM’s external environment could further be analyzed with the help of PEST and Porter’s five forces analysis. Porter’s Five Forces Analysis 1) According to Michael Porter, five different forces need to be analyzed to assess various competitive issues of a particular industry. These five forces are 1) bargaining power of suppliers, 2) bargaining power of buyers, 3) threat of substitutes, 4) rivalry between the existing competitors and 5) threat of new entrants. Porter’s five forces analysis would be an important strategic tool for GM’s strategic analysis. 1) Bargaining power of suppliers: In the case of automotive industry bargaining power of suppliers are always high irrespective of the region, because the supply of various inputs like labour, raw materials, parts and services are essential for automobile manufacturing. Automotive companies’ profitability hugely depends on the cost of these inputs. In US there is United Auto Workers (UAW) who supply labour and quite expectedly exerts pressure on the manufacturers like GM. Similarly in Europe, there are European auto unions who have great control over the auto workers in the region. Recently GM has cancelled its plan to sell Opel, the European arm of the company and as a result of this decision European auto unions have asked workers to walk out and protest against the decision (CCTV.com, November 05 2009). This type of actions would certainly affect the company’s profitability. So, it is quite clear that suppliers have great bargaining power in all the regions. 2) Bargaining power of buyers: Bargaining power of buyer refers to the bargaining power of individual customers. Generally, individual customers do not have much power over the manufacturer but they certainly have significant bargaining power over the auto dealers. Moreover today’s customers have all the information regarding cost and price, as a result, they can easily switch from one dealer to another. When instead of a particular customer, a group of individual customers is concerned they represent a significant portion of the company’s total sales, as a result, they might have some bargaining power over the manufacturer. But overall buyers have little bargaining power over the manufacturer in case of the automotive industry. 3) Threat of substitutes: The threat of substitutes is very prominent in the automotive industry. The demand for any new model is highly-priced sensitive as there are close substitutes available in the market. Almost all the new models have close substitutes in the global market and this poses a potential threat for that particular model. 4) Rivalry between existing competitors: The intensity of the competition in the global auto industry has significantly increased in the last few years. Today there is a large number of the auto manufacturer which is making the competition more intense. With the arrival of Toyota, Nissan and Honda, the existing big three (GM, Daimler-Chrysler, Ford) are facing a lot of challenges in all the big markets of car. One of the main reasons for this high intensity of competition is that there is very little space for differentiation as all the companies are producing trucks, cars or SUVs. Generally, competition is either price competition or non-price competition. The price competition results in loss in profit as the margin between the cost and price is reduced. Whereas non-price competition is centred on the various car rebates and car loans. Competition could even be based on additional product features. 5) Threat of new entrants: Generally, the presence of new entrants is a potential threat for the existing companies as they might be forced to reduce the price to retain their position. This, in turn, would reduce the profit of the existing firm. However, if there are entry barriers for the new entrants then the existing firms would be safe. In the case of the automobile industry, there is a strong barrier to entry in the form of economies of scale. A large amount of capital is needed to be invested to make an entry in the automotive industry. As a result of these barriers, new entrants is a weak threat to existing firms. PEST Analysis Political: Since 1960 the automobile industry has been affected by various government regulations. Most of these regulations are the result of increasing concern regarding the environment and safer automobiles. Economic: The automobile industry and the economy of a particular country are interdependent with each other. It has been found that a country’s economy is hugely influenced by the automobile industry. Different studies have shown that the automobile industry is the main user of textiles, computer chips, aluminum, steel, copper, iron, lead, vinyl, plastics, and rubber. It has also been found that every auto worker is responsible for creating seven other jobs in different other industries. On the other hand, automobile companies also target those nations where the economy is booming and demand is significantly high so that they can increase their market share and earn more profit. Socio cultural: Today car is considered as the identity of an individual. Everybody wants to drive an attractive car. Carmakers are also aware of this fact and therefore they always try to make cars which would attract their target customers. If a particular society considers cars as their status symbol then that society would be the target market of the manufacturer. Technology: The technological environment is an important factor for the automotive industry and the internet has redefined this environment. Today buyers can have all the information regarding the price, cost, and features of a car and its manufacturer from the internet. In 2002 J.D Power and Associates did a study on over 27,000 buyers who bought a new vehicle. It has been found that 60% of buyers took the help of the internet before making a purchase; moreover, 88% among that 60 % visited the websites of the manufacturers before taking a test drive. As a result, it is quite clear that technology plays an important role in the decision-making process regarding purchasing a car. 2. Conclude your analysis by identifying the main strengths, weaknesses, opportunities and threats that GM faced at the time. What were the key strategic issues that GM faced? Strengths Large Market Share: General Motor’s main strength is its large market share. Recently its US market share has dramatically reduced from 22.3% to 19.5%, but still, the company is number one in the US market followed by Toyota which is having a market share of 16.2%. As a result GM still has the advantage of being the market leader at least in the US which is the largest car market in the world (Isidore, June 4, 2009). Global experience: GM has its business in 140 different countries. There are 34 countries where GM has its manufacturing facilities. The company has been the market leader in terms of global sales for 77 long years, although in 2008 it has lost its title to Japanese auto giant Toyota. It has been a century that GM is a worldwide company. As a result, GM has vast global experience and using this enormous experience it can again become the global market leader. Variety of brand names: It is already mentioned that GM was the market leader for almost 77 years. One of the main reasons for this huge success is the wide variety of brand names which are associated with GM for a long time. Some of the most popular brands of GM are Chevrolet, Cadillac, GMC, Buick, Saturn, Pontiac, Hummer, Daewoo, Saab, Holden, and Opel. All these brands are hugely popular in their respective target markets. OnStar Satellite Technology: OnStar satellite technology was developed in 1996. Today there are over two million subscribers of this technology. This OnStar technology is considered as a major strength for GM because most of the GM vehicles are equipped with this technology. OnStar technology-enabled vehicles could be tracked at the time of any kind of theft or another emergency. In an OnStar technology-enabled vehicle the driver, as well as the passengers, can communicate to the OnStar personnel with just a click of a button. OnStar technology is based on Global Positioning System (GPS) cellular and satellite technology (OnStar, n.d.). GMAC Customer Financing Program: GMAC was established in 1919 and since then it is one of the most dependable sources of revenue. GMAC financial services are available to consumers via GM dealers (GM, n.d.). Weaknesses Late in adoption of alternative energy: Using alternative energy as fuel is the new trend in the automotive industry. Today most successful automotive companies are using alternative energy in the process of focusing on fuel efficiency and environmental friendliness. But GM has fallen behind in the competition in the context of alternative energy vehicles and this is the biggest weakness of the company. GM has lost a significant amount of market share due to the late adoption of alternative energy. Stagnant Profitability: In the last few years growth of GM’s profitability has dramatically reduced. In 2004 their profit margin was around 1.5%. Return on equity has also decreased to 10% and this is not a cheerful situation for the company’s shareholders. Poor organizational structure: It has been found that the organizational structure of GM is too vertically integrated. This has resulted in communication problem between the employees and the top management which might be a reason behind the company’s recent poor performance. Too much dependence on US market: One of the major weaknesses of GM is its over-dependence on the US market. The US is indeed the largest car market in the world, but focusing only on this market is not an effective strategy for the long term. GM also needs to focus on developing countries' market to be the global automotive leader for a long time. Poor credit status: GM’s credit status is quite disappointing as it has been continuously declining. GM’s current ratio is barely above one and its acid-test ratio is also poor. Opportunities Alternative energy movement: It is a fact that GM has lagged behind the competition in the context of alternative technology, but it is still a new technology. As a result GM still has enough opportunity to become the market leader in terms of technology and innovation. The company can pay all its attention to the research and development of alternative technology. Low interest rates: If GM adopts proper marketing strategy there is a lot of opportunities to boost sales as the interest rate is quite low. Continuous global expansion: Recently GM has identified China as the second-largest car market in the world. There are other Asian countries where demand is significantly improving. The company always has the opportunity to focus on these developing markets to increase its global reach. GM, with these developing markets along with the US market, can again become the largest automotive company in the world. Develop new styles and models: GM would always have the opportunity of developing new designs and models. The most important fact is that this opportunity would stay there forever as people always look for better styles and models. Threats Rising fuel prices: Rising fuel price is a threat for any automotive company as it results in to decrease in sales. Rising fuel prices have created the demand for alternative energy. Global Financial Crisis: This is perhaps the biggest threat to GM in recent days. The company is finding ways to overcome the tough situation that is created because of global financial turmoil. GM is even trying to avoid bankruptcy. Growth of Competitors: There is intense competition in the global automobile industry. One of the biggest threats for GM is its competitors. Toyota is giving the toughest competition to GM. It is already mentioned that Toyota has recently surpassed GM to become the market leader in terms of global automotive sales. Rising supply cost: Supply cost, especially for steel, is rising day by day and it is not only a cause of worry for GM but it is a problem for the entire automobile industry. 3. Use relevant frameworks to identify and evaluate potentially suitable options that were available to GM, including the option that it chose. Which option would you have chosen and why? When GM decided to sell its European operation, Opel, the company had four options. These were retaining the business, selling it to Magna, letting it glide into bankruptcy protection and accepting an offer from RHJ international which was a private equity house. Among these four options, GM decided to sell Opel to Magna international. There were clear hints from GM that it would like to choose RHJ international, but it changed its decision. The most probable reason behind this decision was the intense lobbying of the German government (Macalister, September 10, 2009). German authorities wanted GM to sell Opel to Magna because Magna was supposed to create 25,000 jobs in the country. Since the economic situation is challenging in Germany due to the global recession, the country decided to support the offer from Magna. The opportunity of the creation of 25,000 jobs at the time of recession is too good to neglect for any country. Among the other option that was available to GM was retaining the European operation with itself and try to reorganize the entire organizational structure and operation to make it profitable once again. But in the process of making Opel profitable GM might be forced to reduce its workforce. Finally, in November 2009 GM canceled its previous decision of selling Opel and decided to keep it with itself (The New York Times, November 6, 2009). The company now have to make an effective restructuring plan to justify its decision. It might seem that GM’s decision to not selling Opel is not good for Europe as the company might be reducing its workforce which would not be a good scenario for Europe. But if this decision is analyzed deeply it could be found that it is the correct decision for GM as well as Europe in the long run. Magna which was supposed to purchase Opel does not have any experience in manufacturing automobiles, although it produces auto parts. But producing parts is different from producing cars which is a larger scale operation than the former one. Moreover, there was no certainty that Magna would create 25,000 jobs, it was just an assurance. GM which has experience of a century would find ways to resolve the problem. The only thing it requires is time, moreover, once the recession would over GM’s confidence will automatically be boosted. 4. Taking account of GM’s key stakeholders, outline the implementation issues GMs faces following its decision to withdraw its operations in Europe and its subsequent reversal of that decision. GM board of directors which is a thirteen-member team, met on 9th September 2009 to analyze the decision of selling its European arm, Opel. There were two major organizations, Magna and RHJ international was offering bids to purchase Opel. These two bids were properly analyzed considering their effects on GM’s share price, stakeholders, creditors, and customers. GM must have taken opinion from its stakeholders, creditors. Since the company was facing huge losses, it had to take huge amount of debt. Moreover, the US government has recently involved itself with GM to save the company from bankruptcy. So, before taking any decision all these factors were considered by the company’s board. After all the analysis and consideration the company board decided to accept Magna bid, although it was clear that there was an invisible hand of German authority behind this decision. Once it was decided, it was declared to all the stakeholders of GM. References BBC News, August 30, 2009, General Motors expands in China, [online] Available at: http://news.bbc.co.uk/2/hi/8229353.stm [Accessed on November 14, 2009]. CCTV.com, November 05 2009, Reaction from workers, Europe auto union, [online] Available at: http://english.cctv.com/program/worldwidewatch/20091105/101139.shtml [Accessed on November 14, 2009]. General Motors Company, July 22 2009, GM Announces Q2 Global Sales Up Nearly 20 Percent Compared to Q1, selling 1.94M Vehicles, NEWS, [online] Available at: http://www.gm.com/corporate/investor_information/docs/sales_prod/09_08/q2_pressrelease_0908.pdf [Accessed on November 14, 2009]. GM, No Date, Europe, About GM, [online] Available at: http://www.gm.com/europe/corporate/ [Accessed on November 14, 2009]. GM, No Date, GM financial services, GM finance, [online] Available at: http://www.gm.com/vehicles/services/gmac.jsp [Accessed on November 14, 2009]. Isidore, C. June 4, 2009, GM's No. 1 sales title at risk, CNNMoney.com, [online] Available at: http://money.cnn.com/2009/06/04/news/companies/gm_share/index.htm [Accessed on November 14, 2009]. Macalister, T. September 10 2009, Fears for UK jobs as General Motors sells European arm to Canada's Magna, Guardian.co.uk, [online] Available at: http://www.guardian.co.uk/business/2009/sep/10/vauxhall-general-motors-job-fears [Accessed on November 14, 2009]. OnStar, No Date, OnStar technology, [online] Available at: http://www.onstar.com/us_english/jsp/explore/onstar_basics/technology.jsp [Accessed on November 14, 2009]. The New York Times, November 6, 2009, G.M. Executive Quits Over Opel Decision, Global Business, [online] Available at: http://www.nytimes.com/2009/11/07/business/global/07gm.html?_r=2 [Accessed on November 14, 2009]. Tutor2u, No Date, strategy - value chain analysis, [online] Available at: http://tutor2u.net/business/strategy/value_chain_analysis.htm [Accessed on December 01, 2009]. Bibliography Berman, K. Knight, J. June 5, 2009, Why GM Failed, Harvard Business Publishing, [online] Available at: http://blogs.harvardbusiness.org/financial-intelligence/2009/06/why-gm-failed.html [Accessed on November 14, 2009]. GM, No Date, At a glance, [online] Available at http://www.gm.com/europe/corporate/download/GM_factandfigures_2009_low.pdf [Accessed on November 14, 2009]. Read More