Case Analysis

General Motors - 2005

Course Instructor: Prof Dr Ali Askari

Date: October 29th, 2010

Group # 5

Niveen Qadri (29)

Muzna Ahmed (28)

Maryam Khan (21)

Sidra-Tun-Nisa (37)
General Motors

I. EXECUTIVE SUMMARY

• Mission: General Motors is committed to be a leader in providing transportation products and

services of such quality that its customers will receive superior value, its employees and business
partners will share their success and their shareholders will receive a sustained return on their
investment.

• From 1908 to 1976, it had grown rapidly. But today its market share has fallen and together with
challenges posed by economic conditions, in the form of rising healthcare costs and fuel costs and
stiff completion GM is facing a tough time in sustaining its profits. GM is deriving its 100% profits
from financing cars and not from the sales of vehicles. Internal reasons that account for this decline
are the failure of the company to adapt to the changes in the environment such as the consumer
preferences and technology, lack of differentiation applied to products and lack of effective cost
leadership strategies to efficiently manage costs.

• What should GM do about its junk-bond status?

Because of the high risk of the bonds issued and low credibility of the company, this strategy is not
sustainable and is a weak method of covering pension costs. I suggest the company increase the
employees’ participation in covering the plan in the form of selling bonds directly to employees in the
form of employee-stock-ownership-programs.

• Why has GM lost much of its competitiveness?

GM has failed to adapt to the fast changes in the automotive industry relating to technological
advancements and consumer preferences. As a result, its product and positioning strategies have led
its products to become obsolete. Also, its strategy has been more reactive in terms of tapping
opportunities in new markets and differentiating its products.

• To what degree is GM positioned to take advantage of new technologies (e.g. hybrid vehicles)?

GM will find it hard to take advantage of launching hybrid cars as it would not be able to recover the
heavy costs of productions through charging high costs, as previously it has positioned itself as a
supplier of cheaper cars through consistent discount offerings, such as employee discounts.
• How do GM and its U.S. competitors compare to their foreign competitors in terms of sales and
profits in the automotive and credit sectors?

GM and ford seem to be benefiting more from their credit/financing divisions rather than from their
automotive divisions in contrast with Honda, Toyota and Hyundai, whose vehicle divisions account
more towards their overall profitability. For Honda 80% of its revenues come from automotive
division, for Toyota, the situation is the same. The three foreign companies are benefiting from high
sales in China and other Asian markets and also through investing heavily in new technologies such
as fuel efficient cars.

• What generic strategy should GM emphasize (e.g. differentiation versus low cost)?

I would suggest both. Short term strategy could be cost reductions, in the form of demolishing the
long term generous pension plans and replacing them with average level plans that other companies
are offering. In the long term, the strategy has to be towards differentiation of the products and more
investment in R&D to enhance the product performance and attributes and to not allow any cars in
future to become obsolete.

• What should GM do about its pension and healthcare obligations?

GM would have to negotiate with the employee unions to go conservative with the pension and
healthcare obligations. GM would have to be clearer with them regarding its financial position. It
would have to suggest employee stock ownership scheme and the alternative option of downsizing of
employees if the pension plans are kept intact. Restricted plans would allow retention of employees
for a long term and it could also be suggested that the pension plans would be revived once the
financial position of the company is restored.
II. CURRENT SITUATION

a. Current Performance

From 1908 to 1976, it had grown rapidly. But today its market share has fallen from 47 percent to 26
percent and together with challenges posed by economic conditions and stiff completion GM is facing
a tough time in sustaining its profits. GM is deriving its 100% profits from its financing division and
not from the sales of vehicles.

b. Strategic Posture

i. Mission

General Motors is committed to be a leader in providing transportation products and services of such
quality that its customers will receive superior value, its employees and business partners will share
their success and their shareholders will receive a sustained return on their investment.

Vision:

GM’s vision is to be the world leader in transportation products and related services. It will earn its
customers’ enthusiasm through continuous improvement driven by the integrity, teamwork and
innovation of GM people. Becoming the best is an unending journey, a constantly changing
destination. But that’s where we’re determined to drive – one car, one truck, one customer at a time.

ii. Strategies

• Bond offering to cover pension costs

• Market Development

Sustaining growth of 37 per cent in China market

• Product Development

Launch of hybrid cars

III. STRATEGIC MANAGERS

a. Board of Directors
 GM’s current organizational structure includes the CEO, G. Ricard Wagoner Jr., who is the chairman
of the board of directors. He is joined at the top by two key executives, Vice Chairman and Chief
Financial officer John M. Devine and Vice Chairman and Head of Global Product Development
Robert A. Lutz. In addition, Thomas A. Gottschalk serves as executive vice president and general
counsel.

IV. EXTERNAL ENVIORNMENT

a. Societal Environment (PEST)

i. Economic

Fuel prices, together with healthcare costs have risen up which have increased the prices of the
products of the company as well as its annual pension plans for employees.

ii. Technological

Competitors are investing heavily in more fuel efficient cars, such as hybrid and electric cars that
poses a serious concern for GM which is losing out on innovation and differentiation.

iii. Political-Legal

EU has imposed taxes on carbon emission from cars to be paid by manufacturers which pushes
further the need to produce fuel efficient cars and low carbon emitting cars.

b. Task Environment – Porter’s Five Forces Analysis

i. Industry Rivalry

• Threat of substitutes is moderate in the automobile industry but is always present nonetheless.
The prices of the vehicles have been strongly influenced by the recent increase in prices of the
complementary products, such as petrol and gas.

• For the close distances price sensitive people weigh the cost of public transportation and that of
private. With higher prices of vehicles consumers who travel short distances prefer public
 transportation. Also, they lean towards second hand cars which offer them the same brands in
cheap prices.

ii. Threat of New Entrants

• There is less threat of new entrants in the automobile market owing to the many barriers to entry.
The existing automobile companies have acquired efficient economies of scale with massive
production to cater to a larger market share.

• This is something that cannot be achieved over night and acts as an important barrier to entry
apart from legal, political and environmental pressures.

iii. Bargaining Power of Buyers

• With regard to automobiles, customers have little bargaining power, which refers to having the
power to influence the price.

• Although, having little bargaining power, the customers are increasingly becoming aware of the
products, through immense information availability via media or the internet. They have become
less brand-loyal and more price sensitive. And customers now look for more fuel efficient and
low carbon emitting cars.

iv. Bargaining Power of Suppliers

• The prices charged by the suppliers have a direct and a rather large impact upon the overall
profitability of the vehicle manufacturers.

V. INTERNAL ENVIRONMENT

a. Corporate Structure

• The organizational structure is flat but is centralized.

b. Corporate Resources
 i. Marketing

• The company’s marketing efforts have previously been focused towards sales expansion through
offering discount packages.

ii. Finance

• The company heavily relies on debt equity and as a result is heavily geared.

iii. R&D

• Low research and development activities and investments exist

iv. Operations

• General Motors’ operations are heavily focused in North America and spread across Europe,
Latin America and China.

v. Human Resources

• GM follows a very generous human resource strategy where the influence of employee unions is
immense. The company covers pension or retirement plans, and healthcare plans for its
employees.

VI. ANALYSIS OF STRATEGIC FACTORS

a. Situational Analysis (SWOT)

i. Strengths

• Strong presence in the U.S, previously a global automobile leader.

• Success of employee-discount-for-everyone strategy; increased market share from 25.5

percent to 32 per cent.

ii. Weaknesses
 • Overly dependent on the U.S. automobile market; more than two-thirds of its sales ae made
in the U.S.

• Overly dependent on its financing division for profits

• Some of GM’s brands have become obsolete

• Generous healthcare and pension plans for employees affects costs tremendously

• The company is highly geared with heavy reliance on debt financing for its operations and
assets, and a very meager share of equity.

• low r&d investments due to shortage of cash inflow.

iii. Opportunities

• Enter Asian markets: China and India

• Hybrid cars

iv. Threats

• Rising fuel costs and healthcare costs in the U.S. and other countries

• stiff competition
VII. RECOMMENDATIONS

i. What should GM do about its junk-bond status?

• Because of the high risk of the bonds issued and low credibility of the company, this strategy
is not sustainable and is a weak method of covering pension costs. I suggest the company
increase the employees’ participation in covering the plan in the form of selling bonds
directly to employees in the form of employee-stock-ownership-programs.

ii. Why has GM lost much of its competitiveness?

• GM has failed to adapt to the fast changes in the automotive industry relating to
technological advancements and consumer preferences. As a result, its product and
positioning strategies have led its products to become obsolete.

• GM failed to seek the new market opportunities, such as in China and other Asian
countries, which the competitors, such as Toyota and Honda tapped fairly early.

• GM has more of a reactive approach towards assessing market opportunities and threats,
which has caused it to lag behind its competition.

iii. To what degree is GM positioned to take advantage of new technologies (e.g. hybrid
vehicles)?

• GM will find it hard to take advantage of launching hybrid cars as it would not be able to
recover the heavy costs of productions through charging high costs, as previously it has
positioned itself as a supplier of cheaper cars through consistent discount offerings, such as
employee discounts.

iv. How do GM and its U.S. competitors compare to their foreign competitors in terms of sales
and profits in the automotive and credit sectors?
 • GM and Ford seem to be benefiting more from their credit/financing divisions rather than
from their automotive divisions in contrast with Honda, Toyota and Hyundai, whose vehicle
divisions account more towards their overall profitability. For Honda 80% of its revenues
come from automotive division, for Toyota, the situation is the same. The three foreign
companies are benefiting from high sales in China and other Asian markets and also through
investing heavily in new technologies such as fuel efficient and low carbon emitting cars.
GM has limited r&d activities which causes lack of differentiation and market leadership in
terms of new product development for the company.

v. What generic strategy should GM emphasize (e.g. differentiation versus low cost)?

• I would suggest both. Short term strategy could be cost reductions, in the form of
demolishing the long term generous pension plans and replacing them with average level
plans that other companies are offering. In the long term, the strategy has to be towards
differentiation of the products and more investment in R&D to enhance the product
performance and attributes and to not allow any cars in future to become obsolete.

vi. What should GM do about its pension and healthcare obligations?

• GM would have to negotiate with the employee unions to go conservative with the pension
and healthcare obligations. GM would have to be clearer with them regarding its financial
position. It would have to suggest employee stock ownership scheme and the alternative
option of downsizing of employees if the pension plans are kept intact. Restricted plans
would allow retention of employees for a long term and it could also be suggested that the
pension plans would be revived once the financial position of the company is restored.