Financial Problems at GM

Introduction

General Motors Company commonly referred to as GM is one of the largest automakers in the world. It started its operations back in the year 1908. It’s global headquarters is in Detroit. GM employs close to 210,000 people in every major region of the world and its operations are spread in more than 120 countries.

GM produces cars and trucks in 31 countries and the company sells and provides service to these vehicles through well known brands like Buick, Cadillac, Chevrolet, GMC, Daewoo, Holden and Isuzu among others. China is the GM’s largest market.

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General Motors has continuously enjoyed a welcome to the market and that is the reason why it was able to grow very fast. The market attention that General Motors got was not like the one its founders anticipated. Soon GM made a lot of profits and eventually became one of the top 200 companies that were accepted in motor car market (General Motors, 2011).

During the 1900’s, a lot of motor companies found themselves in financial problems. This posed a market opportunity for GM. It bought companies that built car parts as well as accessories. In the year 1908, the wide range of companies started operations under the umbrella of GM. This made GM to control a significant number of market share in automobile.

This as well made GM to experience high rate of growth than experienced before.GM continues to make world class cars and trucks but of late it has been faced by a number of financial problems. The financial problems have been caused by various factors but key among these include resisting change, health care for retirees, too many dealership and pensions among others.

It is clear now that General Motors has awakened to financial problems and worries. Of late it has grown desperate for a federal bailout. The question which financial analysts and interested parties are asking is whether the bailout will postpone the inevitable given the internal and external factors at play or not (General Motors, 2011; Burtonshaw-Gunn & Salameh, 2009).

About The Video

The video is about the financial problems facing GM. GM is facing many financial problems which have been brought about by many factors. The video highlights some of the financial problems of GM. The video starts by showing the audience small part of a graduation party. The party took place in the last spring at Colombia University.

The graduates are MBA students. The GM manager poses a series of questions to the students and they give responses. One of the questions which the manager asks the students is the numbers of students who will go to Wall Street and to New York. There is also a question about the number of students who are going to California High Tech. Then there is a question about the number of students going to Detroit Industry.

The reason behind this was to show what was good for GM and what direction GM should proceed in. One of the students brings the issue of GM bankruptcy when he is asked about working for GM. The General Motors had lost $4 billion the previous year and had recently announced a layoff of 30,000 employees.

Looking at the GM’s fall, it is cleat that this was a long term fault that was committed by GM. There is the issue of the health insurance costs which the workers pay nothing out of their money and with retirees paying just a small amount.

Some people have called this generous coverage costs which totals to $5.6 billion per year. These health care costs have put a lot of pressure on the finances of GM and it has finally found itself in a tight position

It’s clear that GM is going through a cost disadvantage. The first of these cost disadvantages was mentioned by the vice president of the GM Global Community. He said that “GM has 145,000 active employees and GM spent $5.2 billion on health care coverage for all its employees in the United States” (General Motors, 2011, p.1).

In comparison, this cost is equal to $15,000 a car which forms more than the cost of steel in an average car. These costs are too high as compared to costs incurred by companies like Toyota operating in the same status (Cummings & Worley, 2008).

One of the GM managers asked some of the employees how they feel about the company in general. Most of them were positive with some putting it clear that they were happy. Some expressed need to go to school on fulltime basis as opposed to sacrificing a lot of time and effort in GM.

This is because GM will help by paying for their tuition and still give them paychecks. It’s mentioned that when a job bank is added to the insurance GM has a total cost disadvantage of $125,000 more than its non-US rivals. It implies that the non-U.S rivals can take advantage of this and pose a major competition stress to GM.

This is a loss of $125,000 per car before it even begins to make it. This means that even before GM starts manufacturing a car, it starts with a loss of $125,000 per car. One man who designed 55 car models is willing to become the GM president and the son is the industry’s top analyst. Is there a possibility that GM negotiated a too generous union deal?

Earlier, GM was said to make car models for everyone’s purpose but it later started making other products .These include weapons, aircraft engines and tanks. People thought that GM was lucky because it was doing so well in the market. Some even said that what was good for GM was also good for the country.

This was said by the chairman in 1952 because the first corporation that made a profit of $ 18 billion was forced to share it with the workers. Between world war two and Vietnam War, the real income for GM doubled. At the same time, GM benefited from its great productivity.

Earlier, GM controlled about half of the U.S. market. Today it has one quarter, a situation he blames on GM’s lack of listening to its customers. In Colombia University, Professor Michael Feiner agrees that it is bureaucracy, slow to change and moving large hooks that take forever to go from one step to another.

They therefore can not sell cars and afford to meet their costs. This is because customers can not pay more than normal for poor quality products of GM. This is not solely the fault of GM because foreign marketers and the U.S. plan to retain much of the $25,000 per car cost. According to the vice president and the GM global community Tom Kowaleski, the amount is a lot of money and the competitors can take the advantage and reduce the prices of the cars without the need to increase the price of the cars with that amount.

According to General Motors (2011), “the big news according to GM is that it is cutting costs, closing costs, closing on profitable plans and negotiating a good health deal with unions”(p.2). The company is becoming the leader in the Chinese market.

This means that there are some signs of hope. GM will try to strategize to take advantage of the opportunities in the market. As it does this, it’s major competitors will also position themselves strategically not to be pushed to the wall by GM. GM continue to decline in the overall performance and this could cost all of GM operations and partners.

According to economist Peter Merisi, we should look at it from another perspective like what is good for GM is terrible to America instead of what is good for GM is good for America.GM is finally cutting costs. This is because GM is closing on profitable plans. GM is also negotiating cheaper health deals with unions. GM has endeavored to make brands on the GD power, quality. GM has become number one producer in China so there seen to be some signs of optima

Analysis of the Video

From the video it’s clear that GM performance has declined over the years. There are several reasons behind this dismal performance. One of the main reasons is the organizational culture.GM organizational culture is strong and rigid and this can explain the reason why GM has not been dynamic in the market.

This is the reason why it has not been able to make changes necessary for it to remain relevant in the market. There is pressure on people to do exactly what the management wants without a consideration of what the market and customers in specific wants.

This translates to a hostile working environment that prevents innovation and worker participation in responding to the market. Still on organizational culture, the management thinks that they can use the same policies they used to succeed many years ago. The truth is that despite the fact that these policies are good, a lot has changed and those policies will deliver the same results they delivered in the past (Kaufman, 2003).

GM’s organizational culture made them not to update their style of management and policies to fit into contemporary requirements, current market and competition. This is what was called by Cohan as confirmation bias. This is the scenario in which managers select information and omit the information that does not relate to their pre-conceived philosophies.

The company is also faced by extensive bureaucratization. It’s impossible for low-level employees to reach top management and the result of this is that valuable opinions and suggestions from this category of workers don’t reach top management (Gomez-Mejia, Balkin & Cardy, 2005).

The second cause of poor performance and financial troubles is failure by GM to take advantage of the competitive advantage. GM for instance, failed to sustain competitive advantage when the Asian automobile industry was growing. Their vehicles lacked competitive edge set by other companies like Toyota Motors Company. Their cars were very costly to manufacture and they also took too long to have them out in the market.

This combined with the fact that they were also poorly designed posed financial problems to GM. It’s also important that the GM designs were also easy to duplicate and competitors took advantage of this and their duplicated them and added few features.GM continued to use their initial strategies without restructuring them thus they lost competitive advantage. GM cars were also expensive as compared to competitors because of high after sales costs and poor performance.

The social responsibility aspect of GM is also a factor in its financial problems. For long, it has acted as finance company giving customers highly profitable car loans. These loans made GM to incur heavy loses ands it’s strongly linked to its cause of bankruptcy. This act of giving car loans to customers though is a very good gesture of social responsibility since it helps customers but in needs accountants not marketers.GM has been led by marketers not accountants.

Poor planning can never be ignored in this discussion. Its planning that helps management to focus on what is happening in the external environment and act appropriately. GM decided to ignore the competition in the Asian automobile industry and eventually lost the competitive advantage they previously had.

Planning entails scanning the market to observe all factors affecting the firm both directly and indirectly .In the scanning process, GM should have discovered the rapid growth of Asian automobile market .But GM failed to monitor the market wisely to change its policies to appeal to the market. The planning mistake also made GM to place primary importance on the employees as opposed to its market and customers in the mission statement.

This has made Toyota to take advantage of pleasing the customers with quality products and services. GM has included unnecessary details in the mission statement which is a reflection of disorganized way they do business. This is poor planning. The objectives of GM also are a factor. The objectives are inaccurate and have made GM to allocate resources in areas where there are no priorities. The resources allocation and implementation guidelines are also inaccurate because of the inaccurate objectives.

Suggestions

GM needs to formulate a number of strategies in order to change the situation that it is facing. First, GM needs to reduce the bureaucracy. It needs to make it possible for low-level employee to raise opinion to the top management. Employees need to be empowered and motivated to make innovative and workable decisions. Unless employees take part in shaping the company, the GM will continue to lose important ideas which can make it more competitive and customer focused.

The power of top managers needs to be reduced so that middle and lower level management class is given more powers to play a role in policy formulation of the company. The existing culture of conservatism and closed environment needs to be changed and replaced with an open and dynamic environment. This is a situation where GM can readily adapt to change and take advantage of dynamic market.

This is also a situation which will make the company to respond to customer demands and market needs in a faster and competitive manner. GM should embrace risk taking in its culture which encourages competition. There is need to take risk particularly with profitable options in order to stay at per with the competitor. There is also the need to encourage individual contribution. This will enhance idea generation which will propel the company in a new level.

There is need for GM to focus more on what is going on in the market. This is through market analysis and coming up with some market intelligence reports. GM needs to change focus from employees to customers. Customer should be treated as the most important party without whom business can not proceed.

Customer feedback should be treated as an important strategic asset. It will be important for GM to pursue a customer driven techniques in doing business. Customer’s preferences, lifestyles and values need to be strongly considered during design, marketing and general customer delivery efforts (Kaufman, 2003).

Another suggestion that can help GM to turn round the situation it is currently facing is by taking full advantage of its competitive advantage. It can do this by offering after-sale services, customer services and improving on the quality of the products.GM needs to take advantage of the fact that it has been shown that Toyota is losing competitive edge in terms of reliability.

It can take this advantage by improving the quality of the products. To beat its competitor, GM needs to focus on its core competence and on its unique skills and knowledge. It needs to abolish its belief of quantity and focus on a narrow product line that satisfies customers.

It needs to have few brands like Toyota. GM can for instance, abolish Hammer and focus on hybrid cars and abolish non-profit brands like Saturn, Pontiac and SAAB. GM needs to borrow a leaf from Toyota in manufacturing small cars that meet customer needs. There is need to develop high-efficiency car. These types of cars have a very high appeal to customers because they are cost friendly, perform well and are reliable as well as being highly durable.

They are cost effective in that the after-sale costs are low. Since there has been an increase in environmental awareness because of campaigns about global warming, there is the need for GM to manufacture car brands that are environmentally friendly. This will bring a lot of appeal to the customer because they will be able to associate themselves with the brands since they appeal to their needs and the desire to have a clean safe environment (Cummings & Worley, 2008).

On social responsibility GM needs to improve performance by developing a new focus in the area of social responsibility.GM has a high sense for social responsibility towards employees. Looking keenly at they way they carry out social corporate responsibility, this social responsibility aspect has not gone well with company’s overall financial performance.

Some people claim that in cutting the deal GM has been over generous. For GM to be financially outstanding, it needs to cut down on the wages it pays to its management team. The cutting of the wages should be done considering the wage rates in the companies related to GM and those operating in the same industry like Toyota. It should be done in a way that it does not result in discouragement of employees.

GM should avoid a scenario where a manager in GM is paid more than double his counterpart in Toyota. The benefits it advances to other employees, fired staff and retirees need to be reduced. It good to be socially responsible but in business it does not make sense to be over generous to a level that it puts strain on profits. GM should look into ways of trimming the powers of its unions which are very influential and seem to negotiate way too ambitious packs for the employees.

These over ambitious plans then latter prove to be a hindrance to company’s overall growth and development. GM needs to undergo a massive restructuring campaign. In doing so, GM needs to exercise the right to modify or terminate its retirees’ health care and life insurance benefits. These are among the factors that are causing the company to undergo financial problems.

The company needs to focus on planning in order to change the situation it is currently facing. President Obama has insisted that GM must undergo planning so that it reduces outstanding debt and existing liabilities to a level where they are consistent with its cash flow.

The GM planning must also achieve full competence with foreign transplants and introduce new brands. GM can make use of outsourcing in order to cut down the costs. Instead of producing everything, the company can look at whether it can outsource in order to cut down the operational costs.

It’s important that GM focus on working with qualified but cheap labor as this will go a long way to reduce operational cost and in return increase profitability. It’s important that GM considers where it has come from and what it has gone through. They must learn from their successful past and learn from the mistakes that it has done throughout its operational period.

GM will benefit from learning about the success stories of Toyota. They need to consider what has worked well for Toyota an implement those strategies it considers successful.GM needs to carry out S.W.O.T. analysis. This will help GM to understand its core strengths opportunities threats and weaknesses.

After it has done that, GM will need to take advantage of the strengths and weaknesses in the internal environment. It will then be aware of the opportunities and threats in the external environment and device a way of dealing with them. It’s important that GM analyze the external environment very well. The external environment holds success to GM in that the other firms have succeeded by capitalizing on the opportunities in the external environment and a good example in this case is Toyota (Kaufman, 2003).

Generally, the financial problems in GM were occasioned by failure to understand the general environment well. The company should thus scan the industry, understand competition in the industry, understand the macro-environment and conduct its SWOT analysis. This will help the company in planning and formulating strategies which will help it to succeed in the highly competitive global arena.

The company should also embrace technological innovations in order to produce high quality products and stay ahead of competition. The company should review its value chain and ensure that all non-value adding activities are eliminated. This would enhance production of top quality products.

Conclusion

GM continues to face financial crises that can be resolved by restructuring the operations of GM. Most of the causes of these problems come from the policies that GM follows. For instance, despite the market being highly dynamic GM continues to operate using the same policies it used 101 years ago. Although these policies and strategies worked those years, for now they might not be practical. There is need for GM to continue regaining its competitive edge by coming up with customer focused service delivery.

Customer needs to take central stage in GM’s mission statement and finally GM product line should respond to the customer needs in the market. It needs to drop its older non-profit generating cars and manufacture new cars which are both convenient and also cheaper. In redesigning their products, they should not forget about the need to have a safe and clean environment so the cars produced should be environment friendly.

References

Burtonshaw-Gunn, S. & Salameh, M. (2009). Essential tools for organizational performance: tools, models and approaches for managers and consultants. London: John Wiley and Sons.

Cummings, T. & Worley, C. (2008). Organization development & change. New Jersey, NJ: Cengage Learning.

General Motors. (2011). General Motors. Retrieved on July 15, 2011 from www.gm.co.ke.

Gomez-Mejia, L., Balkin, D. & Cardy, R. (2005). Management: People, performance, change. New York, NY: McGraw-Hill/Irwin.

Kaufman, R. (2003). Strategic planning for success: aligning people, performance, and payoffs. London: John Wiley and Sons.

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