General Motors: A Case Study

Joey George (s3159555)

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Introduction:

General Motors Company, commonly known as GM is a popular hundred year old US-based
automobile manufacturer. GM was once the pride of the US automobile industry and a
symbol of the American dream of freedom and economic power. More recently, GM was
seen very often in the news, filing for bankruptcy protection (Blackburn 2006) and selling
one of its most world-renowned brands, the Hummer.

Physical Structure:

1) Organizational Geography:

GM has its headquarters in Detroit, Michigan. GM also owns WOSs (Wholly Owned
Subsidiaries) in some major countries around the world like Canada, Brazil, Switzerland,
India, South Africa, China and Australia. (Pelfrey 2006) Some of the subsidary brands of GM
include Buick, Cadillac, Chevrolet, GM Daewoo, GMC, Holden, Pontiac and Saturn. (General
Motors 2009) In the North American continent, which is where GM has its headquarters and
a WOS in Canada, are the headquarters of some of the most popular subsidiary brands of
GM. The state of Michigan is home to the headquarters of Buick, the only brand before GM
was born; (Dunhim & Gustin 1980) and Cadillac, acquired in 1909, (Hendry 1983) both of
which produce vehicles in the luxury segment.The 'Rapid Motor Vehicle Company'
established in 1901 by Max Grabowsky was one of the first automobile manufacturers that
came up with the concept of trucks. It was purchased by GM in 1909 (Smith 1991) and is
now known as the General Motors Truck Company or GMC and the brand manufactures
trucks, vans and SUVs for North America and the Middle East. Chevrolet, also known as
Chevy, is a brand dealing with cars, trucks, CUVs and SUVs. It was acquired by GM in 1917.
(Kimes & Ackerson 1987) Both GMC (General Motors Truck Company) and Chevrolet have
their headquarters in Michigan. Michigan is one of the strategic places of interest for GM
because it was the profits from the Buick Motor Company that empowered David Dunbar in
the early 1990s to go on an aquisition rampage and thus form GM. (Smith, 1991) In South
America, GM has been successfully running its Brazil WOS for the past 80 years. In the
continent of Africa, GM owns a subsidiary, with one of its most important clients being the
South African railways. GM also has a division in Europe located in Zurich, Switzerland. In
Asia, GM has WOSs in two of the business capitals of Asia, Gujarat, India and Shanghai,
China. It also manufactures the GM Daewoo brand in South Korea. (Yoshino & Rangan
1995)

Conclusion: GM has therefore strategically planned their geographical layout of subsidiaries

in order to target some of the business capitals of every continent. Bordenave (2000) states
that GM operated as a multi-regional company which means that in this the inequalities
between countries and regions along with segmentation of markets could increase
homogeneous management. Although this seems like a major advantage for business, it
also comes with its setbacks such as difficulty in communication and cultural differences.
The communication gap seems to be disappearing by the day with the blessings that
technology has brought with it like mobile phones, VOIP, e-mails, video-conferencing that
have all taken the place of telephones, telegraph and what is now commonly known as 'snail
mail'

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 2) Organizational Structure:

Due to the coordination and control problem that surfaced during the 1920s, most large
American corporations that include GM had adopted the Multi-divisional organizational
structures better known as the M-form structure to respond to the crisis (Hanson et al,
2008). M-form consists of operating divisions, each representing a separate business or
profit centre in which the top corporate officer delegates responsibilities for day-to-day
operations and business-unit strategy to division managers. Each division represents a
distinct, self-contained business with its own functionality hierarchy. In simpler terms, the
multi-division form or M-Form is a corporate federation of semi-independent product or
geographic groups plus a headquarters that oversees the corporate strategy and
coordinates inter-dependencies. The historian, Alfred Chandler, derived his 'Structure
follows Strategy' thesis based on four case studies of four American corporations that
dominated their industry from the 1920's onward. (McKaw 1997) One of these was GM.
Chandler goes on to explain a four-step process in which these corporations acted in, finally
making themselves M-form corporations. These steps involve firstly, acquisition of
resources. It has been discussed that GM came into existence after the acquisition of many
major competitors and some smaller entrepreneurial corporations. The second step is to
establish functional structures to increase efficiency. GM acquired other companies and
improved them in order to get the supply to meet future demand. It improved these
companies establishing itself as an assembler driven global commodity chain where
employees were de-skilled and the tall organizational structure meant that employees could
be closely supervised. (Hatch & Cunliffe 2006) The third step is of specific importance. It
consists of two parts. The first is the adoption of growth and diversification strategy and the
second is the diversification into new markets and products. The fourth and final step is the
creation of the then revolutionary diversionary form to manage large corporations.

Coming back to the four corporations that the case studies were carried out on and the third
step in Chandlers four-step process, the reasons for the current situation of GM can be
easily understood. The four corporations that a case study was carried out on were GM, Du
Pont, Standard Oil and Sears. Du Pont has a revenue of 31 billion USD as of 2008. In 2005,
the company ranked 66th among the Fortune 500. (Chandler & Salsbury 2000) The U.S.
Supreme Court ruled in 1911 that antitrust law required Standard Oil to be broken into
smaller, independent companies. If not for that court ruling, Standard Oil would be worth
more than $1 trillion today. (Tarbell & Chalmers 2003) Finally, the retail corporation Sears
boasts of a revenue of 23.6 billion USD, substantially high for a retail chain especially during
the time of recession. (Monks & Minow 2008) GM, however, had their sales drop by a
staggering 22% in the US itself, filed for bankruptcy and was compelled to sell more than
half its subsidiary brands in order to make up for losses and start fresh. Du Pont started off
as a manufacturer of gunpowder and is now popularly known as a chemical manufacturer.
During the journey of the corporation from 1802 until today, Du Pont has invested in many
different fields including petroleum and shares of GM, keeping a major focus on the
production of chemicals. Sears, the corporation popular as a retailer merged with KMart and
has more than twenty different department stores dealing with different types of products in
a variety of sectors. GM started out as an automobile manufacturer and is still one.
Schwartz (1991) blames this on the 'totalitarian management of GM.

Conclusion: One of the reasons for the downfall of GM could be pinpointed at the lack of
diversification and innovation. Changing with the times is necessary in order to stay afloat
and be above the competition. Today, in the twenty first century, technology makes life-
changing advances every second.

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External Analysis:

1) Factors affecting the Automotive Industry (PEST Analysis)

1. Political

Laws and government regulations have affected this industry since the 1960s. Almost all of the
regulations come from consumers increasing concerns for the environment and the concern for
safer automobiles.

2. Economic

The automobile industry has a huge impact on every country’s economy. According to various
studies this industry is the major user of computer chips, textiles, aluminum, copper, steel, iron,
lead, plastics, vinyl, and rubber. The study also showed that for every autoworker there are seven
other jobs created in other industries. These industries include anything from the aluminums to
lead to vinyl.

3. Sociocultural

Today’s society judges people on the type of car you drive. Society does not like to admit to this
but it is very true. Manufactures know this happens and targets their markets by these thoughts.
Anyone who drives a nice vehicle is thought to be wealthy. No one wants to be seen driving an
unattractive piece of junk because of what other people will think of him or her. Consumers also
just feel better when they are driving a nice or new car, if makes them feel better about
themselves.

4. Technology

The internet has affected just about every industry in the world and has also had a huge impact
on the automobile industry. A study was conducted by J.D. Power and Associates in 2002 and
involved more 27,000 new vehicle buyers. The study showed that 60% of the buyers referred to
the internet before making their purchases and out of that 60%, 88% went to the auto websites
before going and taking a test drive. Business-to-business marketplaces have given the industry
many opportunities because of the internet, such as more efficiency and lower cost.

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5. Demographics

For many years now, the baby boomers generation has been the main target market for just
about every product. As their generation is getting ready to retire and spend less money, the
automakers are looking at the younger generations. Right now, the focus is starting to turn
towards the baby boomers children (Generation X) who are in their mid 20’s and 30’s.
According to Analysts, five years from now Gen X will account for at least 30% of vehicle sales.

6. Global

General Motors, Ford Motor Company, Daimler Chrysler, BMW, Volkswagen, Volvo, Toyota,
Mazda, and Nissan Motor Company come together to create a new trade association created the
Alliance of Automobile Manufacturers. The organization was to replace the American
Automobile Manufactures Association that only consisted of American manufacturers, the goals
of the associations were to work together on public policy matters of common interest to provide
credible industry information and data, and seek consistent global regulatory standards

2) Porter’s Five-Forces Analysis

The competitive structure of an industry is another important component of identifying factors

that are a threat to diminish profitability. One of the most efficient ways to assess competitive
issues is to consider Michael Porter's five-force analysis. Porter (1980, 1985) has highlighted five
such factors: (1) rivalry between existing competitors, (2) threat of entry by new competitors, (3)
price pressure from substitute or complementary products, (4) bargaining power of buyers, and
(5) bargaining power of suppliers.

1. Rivalry between existing competitors

With the rise of foreign competitors like Toyota, Honda and Nissan in the 1970's and 80's,
rivalry in the American auto industry has become much more intense. Firms compete on both
price and non-price dimensions. The price competition erodes profits by drawing down price-
cost margins while non-price competition (e.g., new car rebates and interest free loans) drives up
fixed cost (new product development) and marginal cost (adding product features). One of the
other reasons there is such high rivalry is that there is a lack of differentiation opportunities. All
the companies make cars, trucks or SUVs. The competitors are compared to one another
constantly. In recent years there has been significant market share variation, another indication of
rivalry and its very strong threat to profits.

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2. Threat of entry by new competitors

The presence of new firms in an industry may force prices down and put pressure on profits.
There are, however, barriers to entry that tend to protect established firms. One would expect the
production of automobiles to require significant economies of scale, an important barrier to
entry. The new entrant would have to achieve substantial market share to reach minimum
efficient scale, and if it does not, it may be at a significant cost disadvantage. While the evidence
suggests that economies of scale in the auto industry are substantial, there are also indications
that large size may not be as important as commonly assumed. Nevertheless, entry would
represent a large capital investment to any new firm and the body of research still indicates that
economies of scale represent a substantial barrier to entry. Consequently, entry is currently a
weak threat to profitability.

3. Price pressure from substitute or complementary products

While five-forces do not directly consider demand, it does consider two factors that influences
demand ― substitutes and complements. Although new cars generally are slightly price elastic,
suggesting few real substitutes (e.g., bus and rapid transit), the demand for a particular model is
highly sensitive to price because of the availability of close substitutes for a given model. A
change in the price of a complementary product (e.g., gasoline, batteries, and tires) could have a
significant impact on the demand for automobiles. The rising price of gas, an important
complementary product, is likely to affect some firms more than others depending upon the
vehicle composition. Recent rising fuel prices are likely to have a greater impact on the big three
(GM, Ford Motor and Daimler-Chrysler) whose most profitable models are energy inefficient
pick-up trucks and sports utility vehicles. On balance, the overall impact on "industry"
profitability from substitutes and complements is weak to moderate.

4. Bargaining Power of Buyers

Buyer power refers to the ability of individual customers to negotiate prices that extract profit
from the seller. Individual consumers have some influence over price within a given dealership,
but little power over manufacturers. Customers can easily, and with little cost, switch to other
auto dealers. Furthermore, customers now have access to market information (prices and costs)
from the Internet that enhances their negotiating power. But when you have many individual
customers, each representing a small proportion of total sales, they will have little bargaining
power with manufacturers and therefore pose a weak threat to industry profit.

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5. Bargaining Power of Suppliers

Auto manufacturers require inputs-labor, parts, raw materials and services. The cost of these
inputs can have a significant effect on profitability. Whether the strength of suppliers is weak,
moderate or strong depends on how much bargaining power they can exert. The auto
manufacturers have large supplier networks that appear to exert little bargaining power.
Nevertheless, the United Auto Workers (UAW), the only supplier of labor, has historically
exerted a great deal of leverage over the benefits and wages provided by the big three. Because
of this historical dominance by the UAW and the uncertain results of their current negotiations
with the big three, one has to characterize supplier power, at least in this segment of the
American market, as a strong threat to profits.

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