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ASSIGNMENT TITLE:

THE COMPETITIVE ADVANTAGE OF GENERAL MOTORS

CORPORATION USING PORTER’S FIVE FORCES MODEL

STUDENT ID: 200885167

MODULE TITLE: INTERNATIONAL BUSINESS

ENVIRONMENT AND STRATEGY

MODULE CODE: 56336

SUBMISSION DATE: 29TH APRIL 2009

MODULE LEADER: DR. ZHEN YE


KEYWORDS AND ABBREVIATIONS

§ Ansoff matrix

§ BCG Growth Share Matrix

§ FF – Porter’s Five Forces

§ GM – General Motors Corporation

§ HEVs – Hybrid Electric Vehicles

§ PESTEL – Political, Economic, Sociocultural, Technological, Environmental and

Legal macroeconomic forces/factors

§ Porter’s Diamond framework

§ SWOT – Strengths, Weaknesses, Opportunities and Threats analysis

§ UAW – United Auto Workers union

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It is imperative that it should first be borne in mind that we live in a dynamic world where the

environment is constantly changing. Companies employ data and the services of analyst to

try and understand their environment. Using the deductions from such exercises, managers

draft and implement strategies. This kind of act may suggest that strategy is primarily a

rational, analytical process of deliberate planning (design school of thought). However, with

the realities of the time (e.g. the present financial crisis and fall of many big corporate firms

like Lehman Brothers), it is inevitable to agree with the learning school of thought that

strategies are flexible and the intended strategy would differ from the actual/implemented

strategy (emergent strategy) (Grant, 2008).

In the automobile industry, recent events have brought about an end to General Motors

Corporation’s (GM) 77-year reign as the number one automobile company with the highest

sales as Toyota takes it’s place in 2008 (MSN Money, 2009; CNNa Money, 2009). Aside

from the ubiquitous economic crisis, much blame as been put on the management of GM as

allowing the firm to fall into a trap of slow change by offering customers products with slight

changes (Edmunds, 2009) for a long period of time thereby neglecting earlier signs of

strategic inflection points (Johnson et al., 2008).

However, the pressure that the difficulty of accessing loans is putting on the company

coupled with other external pressures, from the government (to restructure (Financial Timesa,

2009)), labour union (The Economista, 2009), dealers, suppliers, the fuel-crisis (which is

causing a shift from big cars to smaller-more fuel-efficient vehicles) and disruptive

technologies like the electric car, is forcing GM to not only restructure but to also re-

strategize if it will survive in the present day environment.

Different frameworks and models exist for firms to analyse their internal and external

environments and their relative performances. This helps them to have a better understanding

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of the factors critical to the success and positioning of their firm. Among such frameworks

are Dunning’s Eclectic Paradigm (Cavusgil et al., 2008), Porter’s Diamond and Five forces,

Directional policy matrix, Value Chain analysis (Johnson et al., 2008), SWOT analysis

(Kotler and Keller, 2009), etc.

The appropriate framework(s) to be used depends on what the firm seeks to address and in

what context it seeks to do so (Johnson et al., 2008). This is because many firms today

operate both on a national, regional and global basis and as such need appropriate strategy for

each individual environment (Schlie and Yip, 2000).

GM, as a multinational enterprise (MNE), operates in approximately 55 countries (excluding

US and Canada) and it’s services and operations ranges from development, production and

marketing (of cars, trucks and automobile parts) to finance and insurance services

(Datamonitor, 2009). In considering a restructuring program to effectively position itself, an

analysis of the firm’s competitive industry and attractiveness at all levels is necessary. The

result of such analysis may need the firm to shed off some of its operations (either by

outsourcing them or shutting them down completely), so as to be able to compete better with

its domestic and foreign rivals. “There would be fewer brands and employees, but also

substantially fewer obligations” (Globeandmail, 2009) if such action is taken.

A potent tool and a flexible framework that could assist in describing and assessing

competitive pressures in an industry and industry attractiveness is the Porter’s five forces

(FF) model (Niederhut-Bollmann and Theuvsen, 2008). The model helps a company to

decide how and where to make strategic changes (Rugman and Hodgetts, 2003) for gaining

and sustaining competitive advantages over rival firms and thereby generating above-average

return on investments (Niederhut-Bollmann and Theuvsen, 2008).

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In the context of GM’s present situation, figure 1 and 2 shows a FF framework for assessing

the competitive forces in play in the automobile industry in the United States where GM’s

headquarters is and its largest national market (GM, 2009).

Figure 1: Five forces Model (Porter, 2008)

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Figure 2: FF model applied to GM’ss automobile industry in the US

The FF model is credited for helping to identify competitive forces that affects prices, costs

and required investment and that thus shape the industry’s structure (Porter,
Porter, 2008
2008).

Considering the present financial predicament of GM with rumours of possible bankruptcy,

the model is therefore an appropriate analytical tool to assess the industry’s attractiveness and

consequently decide the best fit between GM (the organization) and its industry (the

environment) i.e. how best to position it in the automobile industry for optimum performance

(Miller, 1988).
Starting with buyer power, in the case of the dealers (buyers) of GM, they have been labelled

as underperforming (The Economista, 2009), but powerful because the laws of the states in

which they operate has made them so and made it impossible for them to be side tracked.

The cost of running with these dealers puts GM in an unattractive position compared with its

foreign rivals who don’t have that many dealers through which they deal. GM has nearly five

times as many dealers as Toyota while selling about a third as many cars per dealership

(Globeandmail, 2009). This is eating into GM’s profit and it is a constraint to its positioning

and a threat to its success.

Economies of scale is said to be important to the automobile industry (Johnson et al., 2008)

and a barrier to potential entrants who until they can reach a certain volume will incur higher

unit costs. Capital requirement into the industry is also high but government and legal

barriers are relatively low due to increasing globalization and free trade policies as witnessed

in recent times (Hill, 2005). However, with borders opening up and reduction in trade

barriers, the possibility of not having to be mandated to set up full-fledged factories in the

host country exists and potential foreign entrants can export their products directly as long as

they can get access to distribution channels such as the car dealers.

The potential solution to the threat of new entrants who may be able to leverage their existing

capabilities and cash flows to shake up competition in the new market is for incumbents

(such as GM) to try and hold down prices or boost investment to deter them (Porter, 2008).

However, with the financial difficulties of GM as of date, this would be impossible.

Therefore, new entrants (especially the emerging giants) may find it easier to come into the

market and take advantage of the incumbents’ financial incapacity to either cut prices or

retaliate and defend their market positions. As the world cuts down on expenses because of

the financial crisis, the emerging giants’ low-cost production models, based on cheap local

labour, provide even more of an advantage (The Economistb, 2008).

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GM’s part and raw materials suppliers’ threats are low because they are quite many (ranging

from Tier 1s to Tier 3) (Times, 2008). But alternatively, the strong labour union (United

Auto Workers (UAW) union) which is their major supplier of labour is a potential threat to

GM’s financial viability and survival. The liability of pension and health-care expenses

incurred currently adds an additional $1,400 to the cost of every vehicle coming out of a GM

plant compared with rival products (The Economistf, 2008) and is expected to reach $6

billion by 2013 (The Economista, 2009). This is a tremendous amount and GM needs to find

ways to reduce this liability so that it can have more finance for development and growth of

the company.

In summary, the FF analysis shows that threat of substitutes is low, of new entrants is high, of

suppliers is high, of buyers is high because of laws that make it impossible to switch or by-

pass them and thus in turn make rivalry with foreign competitors operating in the same

market high. The automobile industry in the US in lieu of the above stated threats is therefore

currently not attractive on the surface though until other factors which the model ignores can

be considered, its attractiveness relative to GM cannot be ascertained.

The challenge here therefore before one can choose a strategy (cost, differentiation, focus or

combinations) is to identify GM’s competitive advantage as a firm, it’s wider economic,

ecological, technological, political, legal and socio-demographic environment’s influence on

market conditions and developments (Niederhut-Bollmann and Theuvsen, 2008) and how

they constitute or expose a strength, weakness, opportunity or threat to the firm. Any

conclusion or strategy deduced from using FF tool alone without fathoming in the just listed

factors would be futile or misaligned.

For example, choosing a cost leadership strategy without considering if GM has the financial

capability to back up such a strategy (which it currently doesn’t have) or a focus or

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differentiation strategy without considering which product it should promote or focus on and

the implication of PESTEL factors on the chosen product would lead to a wrong positioning.

The government’s commitment to reduce carbon emissions, dependence on fossil-fuels, and

funding of technologies to develop hybrid electric vehicles (HEVs) (see table 2) would mean

that GM will have to scrap unattractive brands irrespective of whether customers still like

them or not. Research shows currently that sales of electric vehicles had the greatest slump,

43.9% decline in March of 2008 compared to 36.5% for other types of passenger vehicles

(Edmunds, 2009). Nonetheless, GM has no choice other than to position itself in line with

government’s policies, initiatives and intentions.

Other government initiatives whose implications needs to be considered include; negotiation

for universal healthcare (an attempt to extend health insurance to employees not previously

covered) (The Economistc, 2009); a cap on carbon emissions (Financial Timesb, 2009); a

new act called “Employee Free Choice bill” (The Economistd, 2009) which could raise wages

for union members and drive up employment costs for firms; “buy American clause”, which

means GM may have to source its steel from US where its relatively more expensive than that

in the newly emerging economies; and the intention to invest in substitutes industries such as

airports and high-speed trains (The Economiste, 2009).

Therefore, since the FF framework doesn’t take into cognizance the implication of

government’s fiscal policies and makes it difficult to assess the internal strengths and

capabilities of the firm (i.e. GM), other frameworks that allow for such critical analysis such

as PESTEL, SWOT, Porter’s Diamond must be consulted (see table 1 & 2 for SWOT and

PESTEL analysis relevant to GM). As an example, to rectify the model’s exclusion of

complementary products which are seen as potential forces in the industry (Johnson et al.,

2008), Porter’s Diamond can be applied (the “related and supporting industry” determinant)

to do so (see figure 3). The implication of complementary products, for example price of fuel,

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is that it would make GM’s car brands (sports utility vehicles and pickup trucks) that

consume a lot of fuel unattractive. This means GM has to either pull them off or invest in

technologies to improve their fuel-consumption rate.

When a thorough analysis of the significant macro and micro environmental factors of GM’s

industry has been done, it is imperative to carry out a value chain analysis to reveal the

pressure points that exists in its value chain and spot areas where there is a misallocation of

resources to wasteful or non-value adding activities (Taylor, 2005 cited in Bonney, et al.,

2007).

Value chain helps the firm to identify activities where it can best apply its existing

capabilities (Diez-Vial, 2009) and to identify which activities to outsource in order to reduce

cost by taking advantage of country-specific advantages. Outsourcing most of the component

manufacture and assembly aspect of GM’s operations which needs a lot of labour to other

countries where labour is cheaper could relieve GM from employment liabilities that it is

currently facing in the US till it can resolve issues with the UAW.

Alongside the value chain, a BCG Growth Share Matrix (Lancaster and Reynolds, 2004;

Dibbs et al., 2006) would help determine which of the company’s brands are presently viable

or not (see figure 4). As earlier stated concerning fuel-efficiency and carbon emissions, gas-

guzzling brands such as the Hummer and Pontiac should be pulled off and more investment

put into building smaller fuel-efficient vehicles and HEVs.

For future strategic development, GM needs to first clearly define a viable segment to serve

and apply a combination of focus (niche strategy (Kotler and Keller, 2009)) and

differentiation strategy (since both are not mutually exclusive (Song et al., 2002)). A focus

strategy would help GM to be able to cut down on cost as it moves away from a broad-line

producer (Grant, 2008) to one with fewer ranges. It will then make it possible for it to

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differentiate its product from that of the competition since it focuses on a particular niche

market which it can serve best with its core competencies.

In conclusion, a basic factor missing in most of the frameworks is the element of “chance”.

The reality of this as experienced in recent times with the financial crisis means GM as a firm

has to be agile i.e. [able] to cope with unexpected challenges [so as] to survive unprecedented

threats of [the] business environment, and to take advantage of [such] changes as

opportunities (Sharifi and Zhang, 1999 cited in Swafford et al., 2006). GM needs to be

sensitive enough to avoid competency traps and pick strategic inceptions early to re-align

their strategic intent to their actions (Johnson et al., 2008).

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REFERENCES

1. Bloomberga, (2009), ‘Honda May Develop Plug-In as Obama Alters U.S. Policy

(Update2)’, www.bloomberg.com, accessed 28/04/09

2. Bloombergb, (2009), ‘Chu, Jackson Say Clean Energy Can Boost U.S. Economy

(Update2)’, www.bloomberg.com, accessed 28/04/09

3. Bonney, L., Clark, R., Collins, R. & Fearne, A., (2007), “From serendipity to

sustainable competitive advantage: insights from Houston’s Farm and their journey of

co-innovation” Supply Chain Management: An International Journal, 12/6: 395–399

4. Cavusgil, S., Knight, G., & Riesenberger, R., (2008), International Business, Strategy,

Management, and the New Realities, New Jersey, Pearson Prentice Hall.

5. CNN Moneya, (2009), ‘GM loses sales title to Toyota’, www.money.cnn.com,

accessed 27/04/09

6. CNN Moneyb, (2009), ‘SPECIAL REPORT, Road to Rescue , 2 million jobs lost so far

in '09’, www.money.cnn.com, accessed 28/04/09

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Strategies, 5th edn, Boston, Houghton Mifflin.

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Business Management, 47 (2): 137 – 153

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Gas’, www.edmunds.com, accessed 2/04/2009

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accessed 02/04/09

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12. Financial Timesb, (2009), ‘A fine balance for Obama to strike’, www.ft.com, accessed

20/04/09

13. Globeandmail, (2009), ‘Chopping block: GM looks to ditch weaker units,

reportonbusiness.com’, www.globeandmail.com, accessed 02/04/09

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15. Grant, M., (2008), Contemporary Strategy Analysis, 6th edn., United Kingdom,

Blackwell Publishing

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States, Thomson South-Western.

17. Johnson, G., Scholes, K., & Whittington, R., (2008), Exploring Corporate Strategy, 8th

edn, England, FT Prentice Hall

18. Kotler, P. and Keller, K. L., (2009), Marketing Management, 13th edn, New Jersey,

Pearson Education.

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31, No. 2: 280-308

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markets: The case of the German and Croatia brewing industries”, Journal for East

European Management Studies, 13, 1: 63 – 88

22. Porter, Michael E., (2008), “The five competitive forces that shape strategy”, Harvard

Business Review, Vol. 86, Issue 1: 78-93

23. Schlie, E., & Yip, G., (2000), “Regional follows global: Strategy mixes in the world

automotive industry”, European Management Journal, Vol. 18, No. 4, pp. 343–354

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24. Song, M., Calantone, J. & Di Benedetto, C., (2002), “Competitive Forces and Strategic

Choice Decisions: An Experimental Investigation in the United States and Japan”,

Strategic Management Journal, Vol. 23, No. 10: 969-978

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118 - 140

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27. The Economistb, (2008), ‘Emerging-market multinationals, Not so nano’,

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Unit’, www.economist.com, accessed 04/04/09

29. The Economistd, (2009), ‘Unions, In from the cold?’, www.economist.com, accessed

04/04/09

30. The Economiste, (2009), ‘Spanish companies, Big in America?’, www.economist.com,

accessed 14/04/09

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04/04/09

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APPENDIX
Table 1: SWOT analysis for GM

STRENGTH WEAKNESS

• Strong brand portfolio

• Growing business in Asia Pacific and • Declining market share

Latin • Product recalls

• America region • Declining financial performance

• Large scale operations

OPPORTUNITIES THREATS

• Increasing demand for hybrid electric • Declining demand for light vehicles in US

vehicles • Rising raw material prices

• Opportunities in emerging markets • ELV Directive

• New models Stringent emission standards • Recession and tight credit

NOTE: End-of-life vehicles (ELV) Directive is a law that makes vehicle manufacturers

responsible for taking back end-of-life vehicles offered for sale after July 2002 for

dismantling and recycling (Datamonitor, 2009).

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Table 2: PESTEL analysis for GM

Free trade policies, employee free choice bill, universal healthcare plans,

buy “American” clause, investment in airports and high speed trains, tax

credits (as much as $7,500) for buyers of plug-in cars, $25 billion in low-

POLITICAL cost federal loans for production of advanced technology vehicles (to

build plug-ins or the batteries and components needed to power them)

(Bloomberga, 2009), bill for new energy efficiency requirements, clean

transportation fuel (Bloombergb, 2009)

Financial crisis, increasing unemployment (8.5% as at march, 2009

(United States Department of Labour, 2009 about 2 million jobs lost this
ECONOMIC
year (CNN Moneyb, 2009)), reduced disposable income, CPI is 1.8%

(excluding food and energy (CNN Money, 2009)), fuel prices

SOCIOCULTURAL Changes to smaller fuel-efficient vehicles

Hybrid-Electric Vehicles, propulsion technology,


TECHNOLOGICAL
teleconferencing/IT/telecommunications development

End-of-Life Vehicles Directive, a cap-and-trade system for carbon


ENVIRONMENTAL
emissions (Financial Timesb, 2009)

Employment law (health and pension expenses), Laws prohibiting sales


LEGAL
of vehicles directly without a dealer (Globeandmail, 2009)

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