Recently there have been doubts concerning the survival of General Motors.

These doubts stem in part from the firm’s unawareness of the automotive industry’s external business environment. This includes the consumer’s view of current events and economic trends. There are also key issues such as the emergence of technology that are related to the automobile industry that are covered by trade publications. [i] Doubts also stem from problems associated with G. M.

s internal business environment. These problems likely arose from the firm following the wrong generic strategy. For many years G.

M. ’s position of dominance was built by designing cars for different customers by separate divisions. This gave them an extensive brand lineup which it used as its primary weapon in beating back both foreign and domestic rivals. [ii] However, in the 1980s Japanese & Korean automobile manufacturers posed a significant problem to G. M. by their successful entry into the industry which eroded their profits. It was at this time that consumers threatened G.

M. ’s market share by forcing down prices when these foreign automakers successfully introduced their brands into the U. S.

market. [iii] Automobile manufacturing has not been an attractive industry for G. M. in recent years. For a long time G. M.

executives had decided to carry many different brands which required them to offer over 60 different models of cars and trucks. There were high productions costs associated with manufacturing and testing these automobiles & these costs were passed onto the consumer. One analyst has suggested that G.

M. hould have begun planning cutting back on its car divisions in the 1980s, but instead it actually added more brands. When G. M. ’s market share began to decline, it became difficult to continue to design and market cars under several brands. [iv] This left G.

M. open to the threat of new entrants in the automobile industry. Another way automobile manufacturing has not been an attractive industry for G. M. in recent years is its loss in profitability. In 2005 it announced a $10. 6 billion loss, the first in 12 years.

In 2006 its net losses decreased to $1. 978 million. In 2007 they increased to $38.

32 million & in 2008 they decreased to $30. 86 million. [v] These fluctuations may be due to Wagoner trying to deal with G. M. ’s problems as production capacity is balanced with profitability. There are emerging trends that are changing the entire automobile industry such as globalization;[vi] however, G. M. has been late in jumping on this bandwagon.

Another trend is shorter product development cycles which give automobile manufacturers a shorter time to market. [vii] This gave Japanese automobile manufacturers a low entry barrier into the automobile industry in the 1980s.There are also shifting roles & responsibilities away from original equipment manufacturers to integrators/suppliers. [viii] This may have been another trend that G. M. was not sufficiently aware of causing it to lose market share. By looking at product line positions on strategic group maps, G.

M. offers the same breadth of product line at an equivalent price as some of its closest rivals including Toyota, Honda, & Nissan. All of these firms compete at both the lower and higher ends of the market along with G. M. [ix] Yet production costs per unit were significantly higher at G.

M. ompared to these other automobile manufacturing firms that didn’t carry as many different brands. It was difficult for G.

M. to achieve economies of scale because it had to spread these high costs of production over the number of automobiles it produced. [x] Consequently, this left G. M. open to the threat of new entrants in the automobile industry.

Since Wagoner took over the firm in 2000, he has tried to implement and carry out a series of restructuring plans. The firm has undertaken its most serious efforts of restructuring but it has been very difficult to successfully complete them.Apparently problems grew as a result of mistakes made by G. M. ’s management over the last 30 years and it has taken time for Wagoner to deal with them. One way he has attempted to do this is by cutting back G. M. ’s production capacity[xi] which may have been prevalent in the auto industry at the time.

[xii] Moreover, excess capacity often leads to escalating price cutting further eroding the automobile industry’s profits. [xiii] Wagoner’s restructuring plans provided for the four different geographic units to collaborate on designing, manufacturing, and marketing.Key decisions about product development began to be shifted to G. M. ’s headquarters. Efficiencies have been created which are likely to reduce its overall cost structure in the next few years. Through greater integration, G. M.

has been able to reorganize product development making it speedier, cheaper, and more effective. Moreover, it has adopted practices perfected by the Japanese to improve the process. There has also been an increase in percentage of parts reused from one generation of G. M. cars to the next. xiv] There are conditions in the internal environment of G. M. that have contributed to its problems.

A useful framework for gaining insight into any organization is to view it as a sequential process of value-creating activities. This is useful for understanding the building blocks of competitive advantage. The value of G. M.

’s automobiles is the amount that consumers are willing to pay for them and is measured by its total revenue. Its total revenue is a reflection of the price its automobiles command & the quantity it can sell. xv] The firm has not been profitable because its costs of creating and manufacturing automobiles have exceeded its total revenue. One measure that is helpful in understanding a firm’s profitability is its profit margin.

It is intended to measure how efficiently it uses its assets and manages its operations. G. M.

’s profit margin from 2006 to 2008 was -0. 95%, -21. 4%, & -20. 7% respectively. This tells us that, in an accounting sense, in 2006 it lost about $0.

01 in profit for every dollar in sales it generated. In 2007 & 2008 it lost about $0. 1 in profit for every dollar in sales it generated.

Return on assets from 2006 to 2008 was -3. 07%, -64. 1%, & -74. 7% respectively. [xvi] These figures all show that G. M. has been an unhealthy firm. To further show G.

M. ’s unhealthiness, its competitive position is strong if it can create value for consumers that exceed the costs of production. One way it can do this is to improve its inbound logistics. This is one of the primary activities of an organization that uses value-creating activities and it contributes to the physical creation of G. M.

’s automobiles.There is an efficient inbound logistics value-creating activity known as just-in-time inventory systems. However, this activity has been epitomized by Toyota—one of G. M. ’s major competitors. This is a system in which parts deliveries arrive at the assembly plant only hours before they are needed. It plays a vital role in fulfilling Toyota’s commitment to fill a buyer’s new car order in just five days. This is in sharp contrast to most competitors in the automobile industry.

It is even three times faster than Honda Motors which is considered to be the industry’s most efficient in order follow-through.Toyota achieves such a fast turnaround because all of its suppliers are linked to the company by way of a computer on a virtual assembly line, parts are loaded on trucks in the order in which they will be installed, parts are stacked on trucks in the same place each time to help workers unload them quickly, and deliveries are required to meet a rigid schedule. [xvii] In evaluating how G. M. is performing it is important to take into account its performance from a historical perspective and how it compares with industry norms and key competitors. Short-term solvency, or liquidity, measures provide information about G.M. ’s liquidity.

The primary concern is its ability to pay its bills over the short-run without undue stress. The book values and market values of current assets & current liabilities are likely to be similar; however, sometimes they can change fairly rapidly, so they may not be a reliable guide to the future. The current ratio for G. M.

for 2006, 2007, & 2008 is 0. 93, 0. 86, &0. 56 respectively. Since current assets & current liabilities are converted to cash over the following 12 months in any given period, the current ratio is a measure of short-term liquidity. From 2006 to 2008, G. M.

had $0. 93, $0. 6, & $0. 56 in current assets for every $1 in current liabilities respectively. A current ratio less than one would mean that net working capital is negative. This is one indication that G.

M. is an unhealthy firm. An apparent low current ratio normally may not be a bad sign for a firm if it had large reserve of untapped borrowing power;[xviii] however, G. M. needed to borrow money from the government because it didn’t this reserve.

Inventory is often the least liquid current asset. Moreover, book values are also the least reliable as measures of market value of inventory because quality isn’t considered.Some inventory may later turn out to be damaged, obsolete, or lost. To further evaluate liquidity, the quick ratio is computed just like the current ratio, except inventory is omitted.

G. M. ’s quick ratio for 2006 to 2008 was 0. 64, 0. 57, & 0. 34 respectively.

As these years have progressed, inventory has accounted for more and more of G. M. ’s current assets which is often a sign of short-term trouble. The firm may have overestimated sales and overbought or overproduced as a result. This would mean that it may have a substantial portion of its liquidity tied up in slow-moving inventory. [xix] G. M. s long-term solvency ratios are intended to address its long-run ability to meet its obligations.

This is also known as its financial leverage. The total debt ratio takes into account all debts of all maturities to all creditors. G. M.

’s total debt ratio for 2006 to 2008 was 1. 03, 1. 25, &1. 95 respectively. This means that it had $1.

03, $1. 25, &$1. 95 in debt for every $1 in assets for 2006, 2007, & 2008 respectively. Therefore, from 2006 to 2008 for every $1 in debt G. M. was short $0.

03, $0. 25, & $0. 95 in equity respectively. G. M.

’s debt-equity ratio from 2006 to 2008 was -4. 45, -5. 00, & -2.

05 respectively.Its equity multiplier for these years was -3. 45, -4. 00, & -1. 05 respectively. Another measure shows how well G. M. has interest obligations covered.

In 2006, for every $1 G. M. owed in interest it could only pay $0. 71. In 2007, for every $1 it owed in interest it was short $2.

15. In 2008 there was no interest reported as paid by G. M. [xx] Asset management, or turnover, measures show the efficiency with which G. M. uses its assets. They describe how efficiently of intensively G.

M. uses its assets to generate sales. Its inventory turnover from 2006 to 2008 was 8. 23, 8. 36, & 9.

10 respectively.This means that it sold off, or turned over, the entire inventory this many times during each of these years. Moreover, on average, inventory sat 44 days in each of 2006 & 2007 and 40 days in 2008. [xxi] Part of G. M. ’s restructuring plan is to get its four different geographic units to collaborate with one another on designing, manufacturing, and marketing. Key decisions concerning product development gradually began being made at G.

M. ’s headquarters rather that at the various divisions. These changes have created efficiencies which are likely to reduce its overall cost structure in the future.

These efforts at greater integration have enabled G. M. to reorganize the product development process and make it speedier, cheaper, and more effective. [xxii] Moreover, as G.

M. began to share designs and parts across divisions in order to cut costs, it led to a loss of distinctiveness between the different brands. Moreover, since it offered so many different brands, it was limited in the number of new models it offered in any given year. G. M. ’s image was tarnished because many of its cars looked older.

It was also difficult for the firm to make adequate investments to build any of its brands. xxiii] A framework for analyzing G. M. ’s internal and external environment is a SWOT (Strengths, Weaknesses, Opportunities, & Threats) analysis. This approach considers both external and internal factors simultaneously. G.

M. ’s Strengths and Weaknesses refer to the internal conditions of the firm—where it excels and where it may be lacking relative to competitors. Its Opportunities and Threats are environmental conditions external to the firm. [xxiv] A strength of G. M. is its early shift in emphasis to bigger sports utility vehicles (SUVs) in the 1980s.This was caused by a change in the automobile industry in which the firm lost smaller-car customers to more nimble and inventive Japanese competitors.

The bigger SUVs provided G. M. with ample profits in spite of its inflated cost structure. By the mid-1990s it became the biggest producer of full-size SUVs. It was at this time that G. M. ’s North American operations were very profitable only because of these big vehicles.

However, the firm lost a great deal of money on most of its passenger cars. [xxv] One of G. M. ’s weaknesses has been its loss of profitability.This is probably due to the problems that arose over the last 30 years.

During this time G. M. was using its resources and capabilities to design cars for different customers by separate divisions. The firms operations had been partnerships of somewhat independent geographic divisions that rarely worked with one another.

This focus on an extensive brand lineup prevented G. M. from being more aware of globalization in a timely manner. Consequently, its overseas operations have failed to generate sufficient profits because it has had to respond to stronger competitors that have competed on a more global basis. xxvi] This correlates with its failure to adequately survey it external environment to predict environmental changes and detect changes underway. If G. M. had done this it would have been made aware of critical trends and events before changes developed a discernable pattern.

Armed with this knowledge it would have been able to act proactively rather than being forced into reactive mode when Japanese automobile manufacturers stole its market share. There have also been product and manufacturing innovations & the availability of substitute products. G. M. has been struggling with its response to emerging alternate technologies.It was the first to introduce an electric car in 1998 but it ended up scrapping the model a year later. Then the firm shifted its efforts to developing a new fuel-cell car. In 2008, G.

M. began once again to further develop an electric car which it plans to introduce this year. [xxvii] G. M. had been facing threats from the external environment because of the low entry barrier it unwittingly gave to Japanese automobile manufacturers. If the firm had become better knowledgeable about the external business environment it would have been more responsive to it.This would have allowed it to predict environmental changes and detect changes already underway.

One way it could have done this is to ask its customers questions about its products and services. This would have given G. M. knowledge of what consumers were looking for next. It would also have alerted G. M. to critical trends and events. Moreover, if executives at G.

M. had read trade publications related to the auto industry it would have help them identify key issues. [xxviii] For example, it may have been aware of Japan’s shorter product development cycle giving their manufacturers a shorter time to market.By offering its extensive brand lineup, G. M. had been following a differentiation strategy which does not fit with this SWOT analysis. It is not appropriate because it needed to concentrate its efforts in developing a low-cost strategy. A competitive advantage based on low cost would have appealed to the industry-wide market.

This would have included the construction of efficient scale facilities, cost reductions & overhead control, avoidance of marginal customer accounts, and cost minimization in the value chain such as R & D. [xxix] There are three plausible strategic alternatives that G.M.

’s Board of Directors may consider. The first is to further restructure the four different geographic regions in order to get them to collaborate more closely with one another on designing, manufacturing, and marketing. The firm would become more globalized yet essentially continue to offer an extensive brand lineup. This alternative suggests that more product development decisions be made at G.

M. ’s headquarters rather than at the various subsidiaries. An advantage of this alternative is that it is somewhat of a low-cost strategy.Moreover, moving the product development process to the firm’s headquarters may help to continue to make it more efficient, affordable, and effective.

A disadvantage of this strategy is that G. M. won’t have the costs savings associated with focusing on a narrower segment of consumers. The second alternative is similar to the first, but the brand lineup would be significantly reduced. An advantage of this strategy is the costs savings associated with focusing on a narrower segment. A disadvantage of this strategy is G.

M. would lose some of its customers to other competitors who focus on different segments. The third alternative is for G.M. to move toward greater globalization yet limit the amount of collaboration the various divisions have with one another. The advantage of this strategy is the various divisions can remain somewhat autonomous allowing them to provide for the wants of consumers in its particular region or within its shipping jurisdiction. A disadvantage of this strategy is it will be once again difficult for G. M.

to achieve economies of scale. The advantage of all three strategies is the move toward greater globalization. Whatever strategy G. M. decides to implement, it must work toward greater globalization since it has been caught unaware of this trend. By concentrating on globalization it should be able to distribute automobiles to more and more consumers.

Beyond that, I believe that the best strategic alternative for G. M. based on its circumstances is the second one. I am recommending this strategy because, in order to compete successfully in the automobile industry, it is important that G. M. reduce its brand lineup.

By focusing on a narrower segment of consumers, the firm should be able to eventually experience cost savings. Although it may lose customers to other competitors in the industry, it may eventually make up lost profits by making an effort to develop a focus strategy.In order to implement this strategic alternative, G. M. ’s four different geographic regions must have better access to collaboration. This may include videoconferencing and other forms of electronic communication.

This would enable the sharing of ideas concerning, among other things, which brands and models need to be reduced or eliminated and which ones need to be retained. Moreover, all areas of product development would have to be moved to G. M. ’s headquarters. This may also require that the firm expand its capacity in Detroit, MI to accommodate designing, manufacturing, and marketing. This would have to occur after G.

M. ’s extensive brand lineup is reduced to those brands believed to be the most profitable. The firm must understand that the plausibility of this recommendation is based on the viability of the brands it decides to retain. It is also based on G. M. ’s continued surveillance of the both the external and internal business environments. Problems may occur if there are significant changes in the industry that it has not been made aware of such as economic instability in a nation that imports G.

M. automobiles.


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