The Need for Strategic Management at General Motors
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The Need for Strategic Management at General Motors
General Motors (GM) is of the largest automakers in the world having been found way back in 1908. The company’s global headquarters are situated in Detroit and operates across more than 120 countries. It has a large pool of human resources, entailing more than 209,000 individuals in major areas of the world. General Motors and its strategic partners manufacture trucks and cars within over 31 countries. They also sell and service the produced vehicles whose brands include but not limited to: Daewoo, FAW, Chevrolet, Vauxhall, Cadillac, Opel, GMC, Isuzu and Wuling (Shamsie, 1). China is the company’s biggest national market closely followed by USA, Brazil and the United Kingdom. It has been a leader in global sales industry for about 76 years before overtaken by Toyota in 2007. Since then the company has struggled to gain its profitability. As a result, there is a need for new strategic management strategy approach to fully revive it. This paper will therefore present analysis of GM’s strategic management by looking at appropriate alternatives and making relevant recommendations. To do this however, the paper will first look at the company’s SWOT analysis.
On the company’s SWOT analysis, the first strength of the company is that it has a large market share even though its market share in the US has fallen. GM remains to be very competitive with a total percentage of 26%. Within the Chinese market, GM’s share is tremendously increasing and with appropriate steps nothing can hinder it from claiming its top position (Thomas, 1).
Shamsie (3) observes that secondly, GM has a global market experience despite the recent decline in performance. For almost a century, GM has been a worldwide company and for most of these years, they have been the global leader. Consequently, GM still has the experience to continue expanding and reach more parts of the world. If correct planning and appropriate implementation is initiated, then the company will still grow to grater heights.
The company also has a variety of brand names, a fact that has made them stay as the global market leader for many years. Their wide range of quality brand names with high appeal to their target customers gives them an upper hand in the market. Their quality brand names as already looked at above include but not limited to vehicles such as Hummer, Opel, Daewoo, Isuzu, Cadillac, Holden and Saturn (Shamsie, 2).
Their GMAC (General Motors Acceptance Corporation) Customer Financing Program has been the company’s most reliable revenue source from its inception in 1919.
OnStar Satellite Technology is strength that GM boasts of. This technology was developed in 1996 and today it has more than 3 million subscribers. The technology has also been standardized on all company’s vehicle. The function of this technology is to enable the vehicle get tracked in case of theft or an emergency. At the click of the button, the invention allows passengers or the driver to communicate with OnStar personnel.
Upon exhausting the GM’s strengths, its first and biggest weakness is its remaining behind when it comes to Alternative energy Movement. In the wake hybrid cars within automotive industry, the company still remains one step behind other competitors when it comes to alternative energy vehicles. As a result, the company has encountered many setbacks like decreased profitability and loss of market share. For GM to be any other automotive company to achieve from this point onward, they must be fuel efficient and Hybrid friendly (Dess & Lumpkin, 4 (chapter 5)).
Thomas (2) observes that the poor organization structure is another weakness within the company as it appears to be very vertically integrated. This leads to lack of communication among employees from top to bottom. This might have been one of the reasons for the company’s hind position as far as alternative energy movement is concerned.
Stagnant profitability is also a major weakness as looking at the company’s financial records there is an indication that it is struggling considering its size. Their profit margin last year was about 1.5%; their ROE has also significantly dropped over the past few years falling to 10% in 2004. Shareholders are not happy with this condition.
GM excessively depends on the US market hence limiting its ability to take more advantage of expanding globally. The current competition is too strong to only focus on a single country. Relate d to this, excessive dependence on GMAC Financing is another weakness of the company. GM extremely depends on this financing program even though it is a great strength, it could not be solely relied on for financing to turn profit particularly if they want compete with ever growing Toyota and Honda (Dess & Lumpkin, 7 (chapter 6)).
GM’s poor credit status is another weakness. Everything within the company has been declining with their current ratio just beyond 1 and their acid test being even lower. Even though they are not being denied access to other sources of funding due to their credit currently, the issue is very serious.
The company has quite a number of opportunities within its disposal the first one being alternative energy movement. As already seen, GM is behind in this technology and this makes it lose the competitive advantage in hybrid vehicles. Nevertheless, hybrid technology is just in its early stages giving GM an opportunity to explore it (Thomas, 4).
Persistent global expansion is also another opportunity for the company. The recent past has seen GM increase its presence in the Chinese market, a good proof for them to increase emphasis in foreign markets. GM can still strive and infiltrate other foreign markets other than concentrating on the US market. Low interest rates have the greatest potential of generating an instant increase in sales; this hence serves as the company’s other opportunity.
Lastly, as another GM’s opportunity is developing new vehicle models and styles. This opportunity though will never be satisfied hence the company should always endeavor to come up with the most popular designs in the automotive world.
Shamsie (4) points out that having looked at the opportunities of the company, there area also a number of threats that GM should be wary of starting from escalating fuel prices, more so as it a large producer of both SUV’s and trucks. The sales have radically reduced as a result of lack of fuel efficiency. Rising fuel prices has played a major role in developing of new both more fuel efficient and hybrid vehicles.
Secondly, growth of competitors such as Honda and Toyota is a very big threat to GM. Currently; the company lacks the prestige of known as the leader in automotive industry and the reality they face is that they are in serious problem. As already looked at above, Toyota was in the frontline of embracing hybrid technology and has from then radically grown into the questionable leader to begin the 21st century.
Their high pension payout is another threat that is out of their own making. GM is know to offer its employees hefty pension benefits that looked like a great deal at some point but later developed into a threat as presently the company has many people collecting the pension hence growing into a problem (Shamsie,3).
Increased health care costs pose another threat to the company as just like nay other big company, GM has quality employee health care scheme hence spending a lot of money to finance it. The problem persists as time goes by due to increasing number of employees.
The last threat that GM faces is the increasing cost of supplies like steel. This threat is not unique to GM alone but to the whole automotive industry. This has forced all the players within the industry to down production and manufacturing costs to the minimum without compromising the product’s quality.
Porter’s Five-Force Analysis
The industry’s competitive structure is another essential element of identifying factors that serve as a threat to reduce profitability. Michael Porter’s five-force analysis is one of the effective ways to evaluate competitive issues. According toThomas (3) there are five such factors including: 1). rivalry among existing competitors, 2). Threat of entry by new firms, 3). Price pressure originating from complimentary or substitute products, 4). Buyers’ bargaining power and 5) Suppliers’ bargaining power.
Rivalry among the competitors in American automotive industry has become more intense and been felt especially due to the rising in foreign companies such as Nissan, Honda and Toyota in the 1970’s and 1980’s. Firms battle on both profit and non-profit aspects. “Competition in prices lowers profits through bringing down price-cost margins whereas non-price competition on the other hand, for instance interest free loans and new car rebates increases fixed cost as a result of new product development and marginal cost such as addition of product features. Another reason for the high rivalry is absence of differentiation opportunities. Al the companies in the industry manufacture trucks, SUV’s and cars. Continually, all the competitors are compared to each other. Over the recent years, the industry has experienced momentous market share variation, an additional sign of rivalry together with its tough threat to profits.
Threat of new competitors’ entry has also to be careful considered as the new firms could force prices to lower and increase pressure on profits. However, there are obstacles to entry likely to protect established companies (Thomas, 6). Expectations are that production of automobiles call for major economies of scale, a significant barrier to entry. The new entrant might have to gain considerable market share to get to minimum efficient scale, or else, it might at a substantial cost disadvantage. Even though there is evidence that economies of scale with the auto industry are significant, there are also signs that big size might not be as essential as commonly assumed. Nonetheless, new entry would signify a big capital investment to any new company and research still show that economies of scale signify a substantial obstacle to entry. Therefore, entry is presently a fragile threat to profitability.
Dess & Lumpkin, 4 (chapter 6)) asserts that price pressure from complementary or substitute products are two factors that influence demand and considered by the five-forces although they don’t directly consider demand. Even though new cars are normally somewhat price elastic, indicating few other substitutes such as rapid transit and bus, a particular model’s demand is highly responsive to price due to the a given model’s close substitute’s availability. An alteration within the price of a complimentary product (for instance tires, batteries and gasoline) could have a considerable effect on the automobiles’ demand. The escalating prices for gas, a vital significant complimentary product could possibly affect some firms more than others relative to the vehicle composition. The recent increase in fuel prices will probably affect the big three, that is, GM, Ford Motor and Daimler-Chrysler who have energy inefficient sports utility and pick-up trucks vehicles as their most profitable models. In general, the general impact of compliments and substitutes on industry profitability is weak to regulate.
Bargaining and buyers’ power is another force. The term buyer power means the individual customer’s ability to negotiate prices that will lower profits for the seller. In a given dealership, individual consumers have some levels of influence on price; however they have little power on the manufacturers. Customers can easily move to another auto dealer with ease and little cost. Additionally, customers are now more exposed to market information (costs and prices) from the internet hence promoting their negotiating power. However in the event of many customers with each signifying a small portion of total sales, their bargaining power dwindles with manufactures hence posing a weak threat to profit of the industry (Thomas, 5).
Lastly the supplier’s bargaining power has to be put into consideration as auto manufactures need input such as raw materials, labour, parts and services. These inputs’ cost can have considerable impacts on the profitability. The strength of supplier, whether strong, weak or moderate, relies on how much they can exert bargaining power. The auto manufacturers have big networks of supplier that tend to wield little bargaining power. However, the United Auto Works (UAW), the sole labour supplier, has traditionally exerted a big deal of leverage over the wages and the benefits offered by the big three. Due to this historical authority by the UAW and the tentative outcome of their present negotiations together with the big three, there is need to typify supplier power, in any case of this fragment of the American market, as a profits’ strong threat (Dess & Lumpkin, 2 (chapter 5))
Business Level Strategies
For GM to find its way back the top position that it held for more than 70 years, it has to initiate a numbers of business strategies to help it increase sales and make more profits. There are a number of business level strategies that could effectively work for GM. First of all the company must make use of competitive advantage so that the customers are created value for their money. These are the non-prices qualities of the company that will stimulate customers to more gladly (Dess & Lumpkin, 4(Chapter 5)).
Cost leadership is a good generic strategy that can solve most of GMs problems is appropriately employed. These calls for a tight set of related approaches entailing: entailing overhead and cost control that will help GM reduce spending on supplies especially in the wake of rising cost of inputs like steel. It works hand in hand with enthusiastic hunt of cost reduction (Dess & Lumpkin, 4(Chapter, 5)). The company has also to employ a tactic of prevention of subsidiary customer accounts. GM will perform if minimizes the costs incurred in all operations within the company’s value chain like service, advertising, sales force. The hefty employee welfare benefits have to be cut down also.
Differentiation is another good strategy for any company to get back to its feet especially of a magnitude such as GM. Differentiation strategy, just like the name suggests, entails producing differences within a firm’s service or products. In this case GM must incorporate all important aspects like brand image/prestige, important features user friendliness among others. Most importantly, innovation must be initiated as for crying out loud, the hybrid cars and fuel efficient cars must be produced for any company due to environmental concerns. The product have to be unique as other companies such as Toyota and Honda are determined to so. This highly improves the competitive advantage of any company.
Dess & Lumpkin (3, Chapter 5) assert that focus strategy has also to be reconsidered by GM. This strategy bases its application on a constricted competitive scope’s choice within a firm. Therefore GM could make use of this strategy by selecting a fragment or groups of fragments and them customizing an approach that will best suit them. Studies reveal that most of GMs products are meant for the US market hence most regions of the world have been sidelined. GM could make great use of by designing products for this particular niche and many others. It is a very important strategy that could see the company’s sales improved.
Automated and flexible manufacturing systems is another business level strategy that could a long way in ensuring that GM cuts down on its operating costs to a great extent. This is due to the fact that the use of automated strategy will the size of manpower needed to perform many operations within the company. This is a very important strategy especially with GM is big in terms of employees. The cash that is used to pay this big staff together with the hefty retirement and health benefits they draw could be saved and used to finance other sectors within the company (Dess & Lumpkin, 6(Chapter 5)).
Corporate- level strategy tackles two interrelated issues within a particular business or organization. First of all, it attempts to address the kind business which an organization should compete and secondly the manner in which these businesses have to be managed so that they generate synergy, or achieve great value by working as a group as opposed to working single handedly.
Consequently, the first corporate strategy that should be employed GM is leveraging core competencies. These are characterized by the root system that offers stability, sustenance and nourishment in an organization. This is a major strategy that will help GM stick together basing on their long term performance that was only stumbled just the other day. This is because core competencies within a firm reflects the combined learning and could revive the company if all the experts within it pull together with a common goal (Dess & Lumpkin, 6(Chapter 6)).
Dess & Lumpkin (2, chapter 6) asserts that sharing activities is an additional corporate strategy that is being used to and if employed to the maximum the company will get to its feet. Sharing activities is one of the corporate to strengthen their operations and maximize profits. If GM partners with any firms within the same production line they could share various aspects such as channels of distribution, common facilities for manufacturing and sales forces. These are described as value-creating ventures that could cut down the costs of running a business as a single entity.
Pooled negotiating power is an approach that similar firms working together or a business affiliate with a strong foundation could use promote the bargaining power in relation to customers and suppliers. This will also improve the company’s positions among the competitors. GM could emulate this pool its negotiating powers with other firms (Dess & Lumpkin, 4 (chapter 6)).
Finally vertical integration is an approach that occurs when an organization becomes its own distributor or supplier. This represents an extension or expansion of the firm through integrating successive or preceding process of production. Consequently the organization puts great processes at the original raw materials source (backward integration) or to the final consumer (forward integration). GM could make use of this strengthen its position by supplying its own engine or parts to secure supply sources.
General Motors has to initiate its come back by starting with product development hence the company has to make hybrid cars in a way that will it gain a competitive environment with other players in the field. It should be a quality product that will attract the attention of consumers (Thomas, 5). Secondly GM has to re-evaluate the market they are attempting to penetrate because they have for a very long period continued with a traditional viewpoint for automobile, however due to changing times and the preferences; there initial target market is not concerned with how they once looked like.
They have to go back to the drawing board and observe the manner in which they want to position themselves and in which direction because what they have engaged in does not favor the company’s growth. For instance GM should try producing futuristic cars as planned by Toyota in their next action plan. If GM produces these cars before Toyota does, it would be positively work for them competitively. Liquidation is also very vital for GM due to their assets being far much higher as compared to their revenues. If most of these assets are turned into cash, then the company will have readily availability of cash hence reducing their overdependence on U.S. sales that only entails two thirds of their market. This will make their financing strategy not to be more of a risk venture. Liquidation will be a good way of solving most of the company’s financial parts (Thomas, 10).
Finally, restructuring is desperately needed by GM for the purposes of reviewing the possibilities. The company has taken a big step backward over the past few years and surely, their must be a way of helping it reclaim its top position. This can only be achieved by considerable drastic changes within the company. Restructuring the pace of product development should be the beginning point. Additionally, the number of employees has to be reducing because instead of the company growing in profit, it is only growing in the size.
Dess, Gregory and Lumpkin, Tony. Business-Level Strategy: Creating and Sustaining a Competitive Advantage (Chapter 5) in Strategic Management. New York: McGraw-Hill/Irwin, 2004. Pp. 1-4
Dess, Gregory and Lumpkin, Tony. Corporate-Level Strategy: Creating Value through Diversion (Chapter 6) in Strategic Management. New York: McGraw-Hill/Irwin, 2004. Pp. 1-16
Shamsie, Jamal. Case 34: General Motors. Michigan: Michigan university press, 2009. Pp. 1-4
Thomas, Cyriac. General Motors Strategic Analysis. 27 Nov. 2010. Web. 2 Oct. 2009. http://www.scribd.com/doc/7456626/General-Motors-Strategic-Analysis