{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Case18 - CASE 18 GENERAL MOTORS FROM BIRTH TO BANKRUPTCY IN...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Background image of page 2
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Background image of page 4
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Background image of page 6
Background image of page 7
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: CASE 18 GENERAL MOTORS: FROM BIRTH TO BANKRUPTCY IN 2009 General Motors (GM) was once the largest and most profitable industrial company in the world. But dur- ing the last decades, it became one of the least profit- able; in 2008, after the economic recession caused a 40% plunge in United States car sales, it was losing so much money that it was forced to ask the government for a loan of billions of dollars to keep it afloat. As an indication of how much the company has shrunk, in 1995, GM employed more than 700,000 people globally; by 2005, this had dropped to 325,000, and by the end of 2009, less than 200,000 as GM contin- ued to lay off or offer buyouts to tens of thousands of its managers and employees. GM has reported losses of more than $90 billion since 2005, and its share of the United States vehicle market has dropped to 19% from more than 40% in 1980. To understand why GM has performed so poorly over the last decades to become one of the least-profitable global carmakers—and why it was forced to enter bankruptcy in 2009—it is necessary to examine the history of the company. GM’s ORIGINS The company was founded in 1908 when William C. Durant formed the General Motors Corporation by bringing together 25 independent car companies, including Buick and Cadillac. At the beginning, each company retained its own identity, and GM was simply a holding company—a central administrative office surrounded by its 25 car divisions that produ' will dreds of models of cars targeted at wealthy ,5; ers, the only people who could afford them at . H because the cost of manufacturing cars was so GM’s main competitor was the Ford Mot Company, and in 1908, Henry Ford announc‘ development of the Model T car that was to he“ duced by the revolutionary method of mass ‘ tion. Ford’s new mass production technolo g based on continuously moving conveyor bel brought the car being assembled to unskilled ers who performed each of the individual oper necessary to complete the final vehicle. Before production, small teams of skilled workers ass cars. Ford also pioneered the use of standar parts that could be easily fitted together to n . in assembly process easier and faster. As a res costs of manufacturing cars plummeted, anti-,1; created a mass market for the Model T; it but?” the industry leader. GM found itself in the :s‘: situation of making a wide variety of expensivs bought by a small number of wealthy custom compared to Ford’s single, inexpensive produ; geted at the middle of the United States market... grew rich during the period from 1910 t01920r; GM struggled to keep its head above water. In 1920, Alfred P. Sloan became GM’s T He decided major strategic changes were up sary to compete effectively with Ford. It w i to Sloan that operating 25 different car com that produced hundreds of different models wa Copyright © Gareth R. Jones, 1994, 2005 , 2009. All rights reserved, not to be copied, reproduced, or distributed by any means pin. or mechanical without the permission of the author. For the most recent financial results of the company discussed in this case, go to http://finance.yahoo.com, click on symbol lookupg; of page, input the company’s symbol into the search box, and then follow the appropriate links on the yahoo page for the info- you require (e.g., click profile to find link to company’s Web site for its annual financial reports, or click on Yahoo! links to the (101115}!- SEC filings or Financials). 6252 Case 18 General Motors: From Birth to Bankruptcy in 2009 inefficient compared to Ford’s strategy of producing we model of car in large quantities. Moreover, GM’s i'gh-priced cars were competing against one another companies to increase their competitive advantage. He needed to reduce costs and increase efficiency, but he also saw that Ford’s strategy to produce only one model of car for the whole market meant that it was ignoring the needs of other market segments—such as the luxury segment GM served. He realized that customers in the middle of the market might want a superior product to the standard Ford Model T, and there was a lot of opportunity to produce cars for market segments between those served by the inex- pensive Model T and expensive GM models. To achieve both superior efficiency and customer responsiveness, Sloan chose to group the 25 compa- nies into five major self-contained operating divisions: Chevrolet, Pontiac, Oldsmobile, Buick, and Cadillac. Each of the different divisions was given its own set of support functions, such as sales, manufacturing, engineering, and finance. Each division was given the responsibility to produce a range of cars targeted at aspecific socioeconomic customer segment. Sloan’s plan was that GM’s five divisions would make and market five brands of cars to customers in five differ- ent socioeconomic segments. Also, each division was instructed to imitate the mass production method that had been developed by Ford. Chevrolet, for example, would make inexpensive cars for customers at the entry level of the market; Pontiac, Oldsmobile, and Buick would produce cars for progressively more prosperous customer seg- ments, while Cadillac would specialize in making high-price, luxury cars directed at wealthy custom- ers. Sloan’s goal was to be responsive to customers in each segment of the car market by producing cars to meet their specific needs. He hoped that customers would move up to the next most expensive line of GM car as they prospered. GM carefully priced the cars of the different divisions to entice customers to move up: from a Chevrolet to a Buick or a Buick to a Cadillac. So customers would not be confused about the number of GM models they would be choosing from, Sloan insisted that each division should develop a range of cars that had a unique image, thus the cars of the different divisions could be clearly differenti— ated by customers. Thus, Cadillac customers should believe that the Cadillacs they were buying were clearly superior to Buicks—not just more expensive cars with a different name. Sloan also reorganized GM into five different car divisions to allow each division to operate as an inde— pendent profit center that could be evaluated on its profitability; ROI decision-making would be decen- tralized to the managers of each division, who would be in control of its business model and responsible for bottom-line results. Sloan’s goal was that this would create competition between the managers of the five divisions, who would be motivated to improve their division’s efficiency and receive a greater share of GM’s capital to grow their division in the future— and boost their chances of becoming top corporate executives. The results of this change in GM’s busi- ness model and strategies were dramatic. By 1925, demand for the Model T plummeted, because cus- tomers could buy better equipped, more prestigious, or more luxurious GM cars at comparable prices to Ford’s. GM became the dominant United States car company as Sloan’s new business model took away market share from Ford—demand for its Model T plummeted as customers switched to GM’s upscale and affordable cars. Ford was forced to close down his factory for several months to retool the produc— tion line to imitate GM and produce new models of cars targeted at different kinds of customers. He never made up lost ground. With its new strategy and structure in place, GM became the United States car market leader and obtained the largest market share of any global car manufacturer ever since—more than 70% at the highest point. From 1925 to 1975, GM embarked on a continuous program to expand its product range to include all kinds of models of vehicles, from cars to full-size trucks, lightweight trucks, and vari- ous forms of specialized vehicles such as vans and ambulances. As it grew bigger, GM also decided to take over more and more of its suppliers. It became highly vertically integrated; at the highest point, it made more than 65% of the components that went into its vehicles. For example, it took over Fisher Body Company, which had made the car bodies for GM cars. GM also internally developed many of its own car parts manufacturing operations, such as its Section A: Business Level Cases: Domestic and Global Delco division, which supplied GM with most of its electrical/electronic components. From 1925 to 1975, GM dominated the United States car market, controlling, on average, more than 65% of domestic sales. Together, GM, Ford, and Chrysler, the big three carmakers, controlled more than 90% of the United States vehicle market. 19705: BIG CHANGES IN THE GLOBAL CAR INDUSTRY GM’s preeminent position in the United States car market was broken in the 1970s by a combination of two factors that altered competition in the car industry forever: (1) the global oil crisis and (2.) the emergence of low-cost/high-quality Japanese competitors. The oil embargo of 1973 revealed the inefficiency of Amer- ican “gas guzzler” cars that frequently obtained only six to nine miles per gallon. United States customers began to demand smaller, fuel-efficient vehicles that the big three did not have the technology to build—; but the Japanese had developed the competence to make these small, fuel-efficient cars. American cus— tomers began to switch to the Japanese vehicles; when they did, they also discovered that cars such as the Honda Accord and the Toyota Celica were not only inexpensive but also were reliable and much less prone to breaking down. The switch in customer demand to small, reliable cars and the ability of the Japanese to serve the small— car niche precipitated a crisis for GM in the 19705 and 19808. Demand for its large sedans plummeted, and divisions such as Buick and Cadillac began to lay off thousands of employees. GM’s operating phi- losophy had been that large cars mean large profits; this was now revealed as false by Japanese car— makers that had been developing efficient, quality- enhancing “lean production” techniques to reduce manufacturing costs. Japanese companies began to make enormous profits selling their economy cars to United States customers who flocked to the rap- idly expanding network of Japanese car dealerships that were spreading across the United States during the 19705. By the end of the 19708, the big three were revealed as high—cost, low-quality carmakers; their large, luxurious, boxy cars were now compared unfavorably either to inexpensive (ugly) Japanese cars or to the sleek European luxury cars mi Mercedes and BMW that also began to make ' into the United States luxury car market d 19705 and 19803. As GM lost market shat in the inexpensive and luxury segments of t market, its profits plummeted as the sales of 3 cars slowed to a trickle. It has never recove 7, explains why GM finally went bankrupt in 200( GM “FIGHTS BACK" In 1980, GM still earned $3.3 billion on it than $60 billion in sales. Its huge cash flo' cash reserves still allowed it to act like a doui competitor—despite the fact that its business was clearly inferior to the new model Japane : makers had developed. A new CEO, Roget took control of GM in 1980 to rebuild its co‘ tive advantage. Under his control, GM began major programs to reduce costs and improve. ity that by 1990 had cost the company $100 billion—enough money, analysts points to have purchased Toyota and Honda giver ‘ market value at that time! Did Smith’s new 3 gies work? No, but they allowed GM’s top ma II!“ to avoid confronting the harsh competitive r ’ it was facing. Also, GM’s managers did not confront its central problems—solving the u issues that stemmed from its high—cost intern’nl' pliers and its high-cost labor agreements 'u' United Auto Workers (UAW) union that had its high (unprofitable) cost structure. I. Focusing only on the differentiation side i: equation, to enhance its competitive position and trucks, GM invested more than $50 b' improve and update its technology to gain from Japanese lean manufacturing techniques ning in the early 1980s, Roger Smith started to 3‘ pion the development of automated factori robots as a way of raising quality and producti ’” in Japanese factories, GM used automated eq and robots to mold parts, assemble car compn; and pick up and distribute parts along the line. These automated factories proved very e to operate; however, vehicle axles made in its tories cost twice as much as ones produced cor; tionally. GM seemed to lack the Japanese kno'i’I‘ to efficiently operate automated factories. I Case 18 General Motors: From Birth to Bankruptcy in 2009 A major experiment that GM began in 1982 to develop low-cost manufacturing skills and produce quality cars was to create a new division it called Saturn. The Saturn division was charged to imitate Japanese manufacturing techniques and produce small cars at the same low cost as Japanese mak- ers. The division was deliberately kept separate from GM’s other divisions so its managers and employees could learn new production skills from scratch. Sat- urn’s new $2 billion car plant was the biggest con- struction undertaking in GM’s history. It went into full production in 1990. Saturn cars were priced to compete with the Honda Civic and Toyota Corolla. By 1991, Saturn had built just 50,000 cars, far short of its 240,000 yearly capacity and lost $800 million in 1991. By 1992, Saturn car sales had picked up; its cars were ranked in the top 10 of customer satisfac- tion, but it still lost $700 million. Eventually, GM realized Saturn would never be able to match the low costs of Japanese manufacturers—one major reason because Saturn did not have Toyota’s or Honda’s efficient low-cost supply chain, something essential to the success of “lean” manufacturing. And, it was burdened with high labor costs due to its previous agreements with the UAW. Another way GM attempted to learn Japanese techniques in lean manufacturing was by creating a joint venture with Toyota in 1983 called New United Motor Manufacturing, Inc. (NUMMI) to produce Chevrolet Novas in GM’s Freemont, Cali- fornia, plant. This plant had closed in 1982 because of poor quality and bad labor-management rela- tions. In 1984, NUMMI reopened under the control of Japanese management. By 1986, its productivity was higher than that of any other GM factory, and it was operating at twice the old level under GM man— agement. One of the primary reasons for its success was the use of flexible work teams. At the NUMMI factory, Toyota divided the workforce into 350 flex- ible work teams consisting of 5—7 people plus a team leader. Each worker was trained to perform the jobs of other workers and regularly rotated jobs. In addi- tion, all workers were taught the procedures for analyzing jobs to improve work procedures. Team members designed all the team’s jobs, timing each other using Stopwatches and continually attempting to find better ways to perform tasks. Before GM had employed 8O managers to perform this analysis; now not only did flexible work teams do it, but they were also responsible for monitoring product quality. The role of managers in the new factory was to provide shop-floor workers with support, not to monitor or supervise their activities. From this venture, GM finally learned how Toyota’s lean production system worked and that work relationships are at least as important as automated factories in increasing pro- ductivity and reducing costs. From this point on, GM began to implement the new system across all its hundreds of manufacturing plants. Although this was a slow process, by 2005, GM could claim it was the most efficient United States carmaker, although it still trailed the Japanese, because the Japanese never ceased to work to continuously lower costs and increase quality. In sum, although by the 2000s, GM reduced operating costs and increased vehicle quality, its Japanese and European competitors were always one step ahead. Moreover, during the 19905, the United States had become an inexpensive country in which to make cars compared to Japan and Europe. Global carmakers were anxious to avoid the United States government imposing tariffs on their grow- ing imports of cars or limiting the number of cars that could be imported, something that had occurred during the 1970s and 19805. So, Toyota, Honda, Nissan, BMW, and Mercedes began to open their own plants in the United States. When it became clear that car plants operated by Japanese manag- ers could attain quality levels close to those achieved in Japan, they began to rapidly expand the number of these plants. Toyota and Honda led the quality ranking of American—made cars, and, by 1995, they made more than 1.5 million cars a year in the United States. Their market share was rapidly growing. A New Management Team Takes Over Even though GM’s market share had declined rap~ idly from 50% in 1978 to 35% by 1992, it had not reduced the number of its manufacturing plants or downsized its workforce in any significant way—its managers still chose to believe it was experiencing only a temporary setback and that its sales and rev— enues would soon turn around. Smith had even said that GM would reach a 50% market share again! Everyone except GM’s top executives recognized that the company had at least 100,000 excess white— collar employees and an even greater number of pro- duction employees who were draining the company’s resources and profitability. Section A: Business Level Cases: Domestic and Global In 1990, Roger Smith’s hand-picked successor, Robert Stempel, became CEO. Like Smith, Stempel did not want to downsize the corporation and make the huge cuts in its workforce that analysts thought imperative to turn the company around. Luck— ily for GM in 1991, an activist GM director, John Smale, insisted that to stop GM’s losses, a new CEO must be found. In 1992, he convinced the board to appoint Jack Smith, the former head of GM’s Euro— pean operations, as president, and Smale became CEO. Together, they forced through a new policy of downsizing: GM announced it would lay off 80,000 workers and close 10 United States assem- bly plants, 4 engine factories, and 1 1 parts plants by 2005. Also, GM’s corporate staff was to be reduced from 13,500 to approximately 2,300 managers. Eventually, Jack Smith replaced Smale as CEO. Smith soon defined GM’s future strategies: to become profitable, an aggressive focus on reducing costs and improving quality, an aggressive marketing of redesigned vehicles that better satisfy customers needs, and a new more—flexible decentralized organi- zational structure had to be implemented. All these strategies seemed appropriate, yet Smith could not find the right way to implement them. Why didn’t Jack Smith’s business model and strategies improve GM’s performance? Indeed, why did its performance continue to decline? New Production Manufacturing Initiatives Smith had been in charge of GM’s European opera- tions and successfully implemented new lean pro- duction techniques to raise quality; he had a clear vision of what GM needed to do to reduce its cost structure. First, he understood the importance of dropping unsuccessful products and reducing the number of models to reduce costs. By 1993, GM had reduced the number of models in production from 85 to 65—but it had introduced more than 20 new cars and trucks. GM had also imitated other carmakers in lowering costs by reducing the num— ber of its vehicle-making platforms from 14 to 8; by 2000, it was focusing on small, medium, and large cars and trucks. But its Japanese competitors only made 8 to 12 different models, using only 4 to 5 different vehicle platforms. This difference lowered Japan’s cost structures, giving them a major competi- tive advantage over GM. One continuing part of GM’s new effic gram was to build new state-of—the-art 1 plants and close down old inefficient ones. .1 ‘ GM started to build a $1 billion manufac in Lansing, lVIichigan, to advanced flexible 11 turing technologies and help raise quality its Japanese competitors. The new plant b .g ations ...
View Full Document

{[ snackBarMessage ]}