RISK MANAGEMENT

Vinod perkash (9292)

GENERAL MOTORS CASE 2009
ASSIGNMENT # 1


1. Analysis of Management Qualities and
Corporate Governance
To assess the performance of the management and understand their capacity to respond on market challenges, we run our
analysis through Management Grid.

Categories Attributes ----- Management qualities Degree of
Risk
Degree of risk
preference and
decision making
Leadership depth / breadth Leadership was very weak. They were
not able to negotiate on high labor costs
with United Autoworkers Uniom that
extracted more and more concessions
till GM became ungovernable. This
became the centre of the problem. Their
attempts to break union power was also
not successful
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Decision making records Managerial decision making skills were
also very poor. There was unwillingness
to communicate issues and manage
effectively that resulted in design
compromises and high costs their
decision to create huge deferred tax
asset reserves also had a disastrous
effect of delaying union recognition of
the companys dire position. Those
deferred tax assets should have been
written off as there was little prospect of
their utilization.
Approach Risk averse; played safe but still their
degree of risk was high in such scenario
of poor and ineffective management
Closeness to customer Not at all close with the customers
because the Consumer Reports ranked
all the brands of GM except Buick below
average in reliability. Also there was no
innovation; the designs were
unattractive and not meeting customers
expectations.
Moderate Financial behavior No, risk was very high because of
ineffective policies that were short term
and poor management skills and
effectiveness
Has management run the numbers The case does not provide any
information whether quantitative
analysis was done by company.
However it is mentioned that
management had belatedly recognized
failure after the 2005 results
Strategy & Task
Objectives
Is the corporate proposition a
sensible one
No. Corporate proposition was not a
reasonable one because initially despite
incurring net loss of 10.6bn in 2005,
management did not strategize their activities
to bring down the loss, rather GMs brands
were losing their brand image in the market
due to poor quality, price pressure,
9
increasing costs, labor disruption, conflict
with United Auto Workers Union which
resulted in declining market share of major
brands and broadening of Net loss of 30.9bn
in 2008. In addition to this, GM was too
focused on sports car market which was
already declining

Are they clearly defined and
achievable
No. Objectives and tasks were not clearly
defined and not achievable because of poor
leadership, uncontrolled management, no
innovation, below average reliability of
brands, major strikes had a major impact on
relationship between management and
executives. Poor financial performance in
terms of incurring huge losses, major
restructuring costs, low gross profit margins,
huge costs in other expenses resulted in
extreme negative effect on the competitive
position the company in the market against
other competitors and on the customers as
well.

Delivers customer value Negative equity and working capital
management where current assets were
greater than current liabilities, more than
100% debt to equity ratio, 62bn in healthcare
and pension costs in 2006 sent a negative
signal to shareholders of the company and
resulted in unattractiveness of holding the
stock and eventually shareholders started
selling off their shares. In addition to this,
bailout plans from the government, selling off
51% of GMAC, decreasing market share in
North America and as well as globally left a
negative impression on its shareholders.
Moreover, design compromises, poor
assembly line, failed in terms of innovation
resulted in decline to delivering customer
value

Previous success rate The company not only survived but
prospered during the great depression, but
keeping in view the scenario from 2005, it
can be viewed that the company had not
been aligning its resources with corporate
objectives of the company and not focusing
on key problems of the major business
segments resulted in a heavy toll to the
company which can be viewed in terms of
2005 net loss.

Degree of risk Degree of risk is high in such scenario as
poor management which should have been
removed when losses were reported in 2005
but the Board never took that action.
Earnings are negative, low gross profit
margins, higher expenses and restructuring
costs, lower capacity utilization, job cutting,
inability to generate sufficient cash flows,
heavy borrowing plans, focusing on non-core
businesses, design compromises on the
back of cutting costs signals overall high
degree of risk.

Organization
structure & design
Appropriateness to strategy Weak competitive strategy. GMs
organizational structure has not been able to
adapt to or respond to the changing
economic and industry conditions mainly due
labor union pressure.
5
Simple/efficient GM is not efficient. The time and cost it takes
to produce one car is higher than its
competitors.
Customer orientation GM fared poorly in the consumer reports with
consumers unimpressed with its products
and ranking its cars below average in
reliability. The company failed in terms of
innovation and came late into the market with
its environment friendly car.
Staff orientation GM management got into prolonged battles
with the union which extracted heavy
concessions to the extent that the case
states that GM became ungovernable.
Implementation skills GMs management has faced a tough time in
getting its strategies implemented as the
union has been ruthless in negotiations and
the union is distrustful of managements
intentions.
Rationale of growth activity The forecast sales for the auto industry in
Dec 08 were poor for the next year and
chances of growth minimal.
Process,
Information &
Control
Visible control structure No financial or operational control structures
were in place. Consequently GM realized the
failure very late when the 2005 results came
out. Weak controls also led to increase in
union power. Attempts for correction were
only reactive and insufficient and required
bailout.
5
Adequately resourced The scenario from 2005 gives clear
indication that GM had not been aligning its
resources with corporate objectives of the
company. Major cash flow problems arose
due to consistently high costs and persistent
losses.
Quality of financial coverage GMs financials were dismal. In 2005 it had
no gross profit from its core car making
business. The only profits came from its
financial services but it still suffered from a
loss of $ 158.6bn. coupled with lower sales,
higher costs and economic downturn,
earnings collapsed by 2008.
Past risk failure The period under study is from 2005 to 2008
so there are no details of previous failures
but GMs poor quality, pricing pressure,
increasing costs, labor disruption, and
declining market share made failure
inevitable well before GM realized.
Culture GMs management displayed a complacent
culture that stifled growth, innovation and
dynamism required by a competitive market.
It was slow to respond to innovative changes
in automobile products, lacked prudence
required to identify and control failure triggers
and succumbed to pressure from union
instead of making all stakeholders realize
that the situation was dire.
Corporate governance quality The quality of corporate governance was
weak. The board was largely responsible for
retaining current management team despite
having chances to do so; and it became clear
in 2008, Wagoners team had failed to keep
pace and revive the company.
Feedback mechanism GM seemed to have weak communication
that resulted in delayed realization of the
crisis and insufficient efforts to revive the
company due to a collective paralysis that
led to slow and poor recovery.


Key Out Comes

After 2005; the companys financial position had started deteriorating. GM suffered a net loss of
$38.7bn in FY 2007, which increased substantially as compared to the net loss of $2bn in 2006
due to poor product quality, inefficient plant production, lacked market orientation & consumer
appeal. These factors, in aggregate, have affected the growth rate of the company and even let the
company stand at the verge of bankruptcy.

The primary cause of GMs demise was management failure. The operational risks were high,
owing to weak processes and controls. The company had a combined chairman and CEO, which
meant no accountability. The board of directors lacked participation, depth, vision and courage to
take bold decision and the finance function was weak which was using window dressing to elude
UWA and shareholders. GM did not attempt to mitigate the business risk. The market offerings
were not only quality deficient but also fuel inefficient, resulting in decrease in demand for GM
vehicles and increase in demand for foreign fuel efficient vehicles, owing to soaring fuel prices. The
bottom line started shrinking as a result of declining revenues. As a result of disruptions in working
schedules and management inefficiencies, the equity risk specific to the company also increased
many folds. Acquisition of SAAB also proved to be a faulty decision which was subsequently
liquidated. The company was exposed to risks from all directions and hence proved the inefficiency
of the risk management and financial function too.













Management Matrix helps us understand the style of management and their key attributes


























Key Out Comes

Earlier, GM was an aggressive company. It was worlds #2 automobile manufacturers. But during 2005-
2009, GM had been losing its market share and continuously incurring losses especially during 2007 &
2008 mainly due to poor product quality, lack of market focus, management-UAW conflict. During this time
period Toyota took over GM and ranked #1, followed by Ford. Hence, it stands at gambling quantum with
negative earnings growth & high risk preference as the company had been continuously reporting losses
since 2005; while the management were also unable to manage the affairs of the company; striving risk,
even leaded it to the bankruptcy.




Professional
High earning growth and
measured risk preferences

Failing
Negative earnings growth and
measured risk preferences

Speculative
moderate earning growth and
high risk preferences

Administrative
Moderate earning growth risk
preferences


Aggressive
High earning growth and high
risk preferences and measured
risk preferences
Gambling
negative earnings growth and
high risk preferences

Negative earning
growth
Company rate of
earning growth
Administrative Administrative
Traditional
Conservative
Growing
Progressive
Entrepreneurial
Conservative