"What was good for the country was good for General Motors and vice versa." the famous remark made by GM Chief Executive Charles Wilson illustrated the might of GM in the American economy. Set up in the 1908 by William Durant, GM went on to become the largest auto manufacturer in the world and pioneer of World Auto Industry.
General Motors (GM) was set up as a holding company for Buick, and in the next 18 months Durant set up to acquire 30 other carmakers including Oldsmobile , Pontiac and Cadillac. GM also produced many of the innovations that would come to define the modern automobile, including power steering and power brakes, independent suspension, and automatic transmission. And significantly, GM was the first auto company to change its cars' features and styling almost annually-instilling in Americans the habit of replacing their cars every few years.Â (The Week, 2009).
GM has also been a pioneer of expanding their international base through acquisitions and partnerships. It acquired British Automaker Vauxhall in 1925, followed by Opel in 1929 giving it a strong European base. Later on Saab was added in 1989. More recently, GM and its partner Shanghai Automotive Industrial Corporation (SAIC) have established a strong position in the rapidly expanding China market (GLG News, 2009). At one point of time, General Motors became the largest employer in the world. By the late 1970's, GM's US employment peaked at 618,365, making it the biggest employer in the whole of America, with the bulk of its employees in the Mid-West. Around the world, it employed a further 235,000 people (Quinn, 2009).In 1953, about one in every 200 working people in America worked for GM, and the company's revenues equalled about 3 percent of the country's gross domestic product-an enormous share for a single company (The Week, 2009).
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The downfall of GM, did not happen overnight, According to analyst's GM's problem have been 50 years in the making. The hindsight of the management, shouldering the burden of its huge legacy, rigid company culture and the failure to understand the needs of the market and consumers led GM to its untimely demise. On June 21st, 2009, General Motors filed for Chapter 11 bankruptcy in the U.S.
The purpose of this report is to identify the risk management issues that led to collapse of General Motors, the steps that were taken to manage the crisis and the lessons that can be learnt from the case.
This report will overall look at the risk issues faced by General Motors over the years and the major pitfalls that could have been avoided, if identified before. At the beginning of this report, I will give a general meaning of as to what is "Risk" and "Risk Management" and how they arise from different business processes. Then, the report will mainly focus on the identifying and analyzing the risks that were faced by GM as reported in the news publications and the media. We identify three types of risks in this case study: Strategic, Operational and Environmental Risk. Next step is to analyze actions taken by the company to manage the crisis as well as the consequences. Then, the case study goes on to provide the lessons that can be learnt from GM and how to better manage risks in an organization.
2.1 What is RISK?
Risk is an uncertain event that can cause future harm to a person or organization if not managed correctly. By definition, Risk Management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events (Hubbard, 2009). Risk Management is a process that needs to managed on ongoing basis as preventing or treating a risk might give rise to a different and a new kind of risk, as Risk is about uncertainty of the future.
But, where most organizations falter is that they see "Risk" as threat rather than opportunity because without risk there is a limited growth of the organisation, but the failure to identify these risks properly may lead to eventual problems in the future. Management of risk is an integral part of good business practices and quality management. Learning how to manage risk effectively enables managers to improve outcomes by identifying and analysing the wider range of issues and provide a systematic way to make informed decisions (AS/NZS 4360:2004).
2.2 Risk Identification
Always on Time
Marked to Standard
The aim of risk identification is to develop a comprehensive list of sources of risk and events that might have an impact on the achievement of a company's objective (AS/NZS 4360:2004). The risks in a organisation evolve due to its exposure to its values. Organisations mobilise resources to create value ,by capitalising on their competencies (Birkett, 2000). The realisation of these values ,if not managed with the changing enviroment or strategy of an organisation gives rise to risks.
In the research of the General Motors, following are the main risk management issues,which in my opinion, lead to its downfall :
2.2.1 Strategic Risk:
Strategic Risk is the risk that arises from adverse business decisions created by improper implemetation of decisions or not being able to adapt to changing industry and market standards. This risk is embedded in the organisations visions and goal and and arises from the interaction of these goals and the measures deployed to implement them.
Alfred Sloan, the man who turned GM into a leading market brand , understood the demands of the consumers and knew that consumers viewed cars as more than transport means but as a way to reflect their status and wealth. Through this Sloan marketed the idea , "A car for every purse and purpose." According to a GM executive, "Chervolet was for the hoi polloi, Pontiac for the poor but proud, Oldsmobile for the comfortable but discreet, Buick for the striving, and Cadillac for the rich" (The Week, 2009).
Alfred Sloan , reorganised the GM structure into "decentralised sturcuture with coordinated control" (The Week, 2009). The idea behind the structure was that every division would serve different segments of the market and not compete with eachother ,thus understanding and satisfying the consumer demand better. This model worked very well for the company as the company's share went from 17% in 1923 upto 54% in 1954 (Reid, 2009). But,this was only successful until GM was dominating the market, as soon as other competitiors entered the market ,GM found itself displaced and the side effects of a decentralised structure began to show.
Decentralization led to the creation of inefficiencies, duplication of data, lack of learning and control and creating of internal fiefdoms. In today's world of innovative growth and multi-layered products, the one product, hierarchical structure promoted by Decentralisation does no longer work. GM's strengths like the rigid structure that provided discipline early on, became weaknesses, and it lost its feel for reading the American car market (The New York Times).
During the 1960's, the failure to innovate plagued GM and it started to lose its market share with the entering of foreign competing brands such as Toyota, Honda etc, changing of customer preferences and technological developments. In order to compete with the new entrants, GM launched too many different brands - in total 8(Cadillac, Buick, Pontiac, Chevrolet, Saturn, GMC, Hummer, and Saab) -smudging the uniqueness among its products. Concentration of so many brands led to lacklustre products dividing focus and attention. But forced to feed so many brands, GM often resorted to a practice called "launch and leave" - spending billions upfront to bring vehicles to market, but then failing to keep supporting them with sustained advertising (The New York Times, 2010).
According to Deutsche Bank, if GM was to reduce its brands from 8 to 3, it would bring down the company's cost base $5 billion annually (Sorkin, 2008).Even if GM were to consider cutting their brands, another huge problem that exists, is the control of dealerships. GM has a lot of small and big sized dealership spread across its eight brands that makes very difficult for it to close them down as dealerships are protected by State laws, and therefore it gets very expensive to close them down, adding a liquidity strain on its balance sheets. In 2001, Closing down Oldsmobile cost the company around $2 billion (Kiley, 2008).
To save money, GM started sharing more parts among its brands, blurring their distinctiveness. A shortage of V-8 engines caused GM to install Chevrolet engines in mid-priced Pontiacs, Oldsmobile's, and Buicks. Complaints surged in 1981 with the arrival of the Cadillac Cimarron, which customers quickly discovered was little more than a Chevy Citation wearing the Cadillac crest. (Taylor A. , 2008).
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After that, GM went on to continuously burn cash, rather than spending money on R&D, it just started guzzling one model after another never comprehending what the consumers sought. The brand that could have been a well counted success for the company was EV1- the electric car - had they only spent more on its research but to make a short term profit they terminated the project thinking it was too expensive to produce, and would never capture a market, but were proved wrong when came along "Toyota Prius" -a hybrid electric car- which proved to be a hit in the American Market. This decision proved very costly to GM in a long list of bad decisions and their implementation and showed the management's inclination towards profit production rather than value creation and sustainability of the company.
2.2.2 Operational Risk :
Organisations are made up of a series of systems and subsystems, each part of the system is inter-dependant on eachother. Operational risk is defined as the risk that arises from the operation of these systems such as efficiency, capacity ,human resources ,financial, labour relations disputes etc. According to BASEL II,operational risk is defined as, "the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events." (Basel Committee, 2001)
Firstly, the main setback to GM's financial position are the legacy costs. Investopedia defines legacy costs as , "The costs involved with a company payingÂ increased healthcare fees and otherÂ benefit-related costsÂ for its current employees and retired pensioners.Â It is believed that escalating legacy costsÂ can beÂ a very large contributing factor towards limiting a company's competitiveness" (Investopedia). GM in the 1950's through to 1980's struck a deal with the United Auto Workers (UAW) to lower the salaries of the employees and adding to the fringe benefits such as pension and healthcare obligations. By doing this, GM could show higher profit margins on their balance sheets because the accounting rules at that times did not require the benfits to be shown on the balance sheets,therefore, making it more attractive for shareholders and Management.
But in the years to come this became a huge problem for GM because as the average life expectancy rose so did the retirement and pension benefits. GM's balance sheet at the end of March 2009 showed it had $172bn of debts and just $82bn of assets. Those debts include $24bn of pensions, $22bn of union-related long-term healthcare costs, not to mention $28bn of long-term debt. It even owed its suppliers $18bn (Quinn, 2009).
To further their problems, GM is obligated to pay 85% to 95% union wages and benefits to the UAW members who aren't working even if the plants are being closed down. These contracts say that GM agreed to allocate $2.1 billion in Jobs Bank payments over four years (Gabbay, 2008). According to Peter Morici, a professor at the University of Maryland testified that the Jobs Bank was one of the biggest problems that the Big Three face, saying "Right now if a plant closes in St. Louis and a new one opens in Kansas City, the workers don't have to move from St. Louis to Kansas City; they can opt to get a $105,000 payout or go on Jobs Bank where they can collect 95 percent of pay for the rest of their lives" (Gabbay, 2008).
These legacy costs and the job bank costs caused a huge strain on the balance sheet of GM. In 2008, S&P, the credit ratings agency, cut GM's credit rating to CCC+, seven steps below the investment grade from B- , thus grading it junk. The Agency Stated that, "We expect cash outflows to quickly reduce the company's liquidity during the next few quarters, perhaps to levels that would force GM to consider a financial restructuring, even if it does not file for bankruptcy" (Reuters, 2008).The company, that was worth as much $56bn at its all-time high of $94.62 a share in 2000, saw its value fall below $700m as its soon-to-be worthless shares sank below $1 in 2009 (Quinn, 2009).
2.2.3 Environmental Risk
Environmental risk is, perhaps, the most important type of risk within an organisation because though they are externally exposed they are felt inside an organisation and responding to these risks gives rise to other kinds of risks. Environmental risks arise from the factors such as competitor actions, shareholder relations, external culture, climate and natural resources impact etc.
In the 1990's, the US economy was on the rise and GM produced one of the most successful products to date - the big-sized Sports Utility Vehicles (SUV's). The sales of SUV's returned almost $10,000 to $15,000 per vehicle and made up 50% of the U.S. car market (Webster, 2008). Seeing the huge surge in profits, GM was reluctant to move away from the big cars, to smaller cars which gave relatively very less profit. According to Tim Reid, "GM focused too heavily on expensive, gas-guzzling pick-up trucks and sports utility vehicles, which gained a reputation for being unreliable and prone to rust, and it failed to produce smaller, cheaper "entry-level" cars that would attract young drivers" (Reid, 2009).
Though, GM was already suffering from a string of bad decisions from as early as 1960's but the management's complete ignorance to fathom their environment and respond accordingly again showed when the energy crisis hit the Auto Industry in 2004. From the mid-1980 to September 2003, the inflation-adjusted price of aÂ barrelÂ ofÂ crude oilÂ onÂ NYMEXÂ was generally under $25/barrel. During 2003, the price rose above $30, reached $60 by August 11, 2005, and peaked at $147.30 in July 2008 (cite). Such, a hike in fuel prices resulted in a dramatic shift in consumers preferences towards smaller and more fuel efficient cars and GM not anticipating this found itself caught once again wrong footed.
This was not the first time that GM had been hit by an oil crisis, in late 1970's, in a similar instance the fuel prices had rocketed , though it was not by GM's fault , the company found itself in a crisis. GM lost $750m in 1980 after its car and truck sales fell 26% that year due to high fuel prices (Quinn, 2009). GM then made a compact car, Saturn, But due to underinvestment and low fuel prices, the sales fell through and then came the era of SUV's in 1990's and management then again did not prepare for the future to be able to face a similar situation if it showed up again.
GM had made one too many bet on SUV's and since 1990's almost completely stopped production of compact cars. The sales had been declining since 2004 but when in 2008 the sales fell by 30%, GM could no longer ignore the writing on the wall. All of the Big Three (GM, Chrysler and Ford) had to close plants, lay off thousands of workers and take substantial charges to cover the declining value of S.U.V.'s coming back to dealers from expired leases (Vlasic & Bunkley, 2008). And what could have been worse for the already ailing sales was that it ran up into the Global Financial crisis.
Consumers were short of cash and did not want to buy cars and GM reported losses of $18.8 billion in the first half of financial year 2008. Bloomberg News reported that in February 2009, the company sales were 53% down from 2008, and its market share was now only 19% (Taylor R. , 2009).
3. Analysing the Actions taken by GM
It was not like GM was completely unaware of the crisis around them, they did take steps to combat the ongoing crisis, but it was rather a reactive risk rather than a strategic one or tactical one , which did not give management the idea as to how it would affect the organisation in the future. Firstly, we will look at how the management handled each type of risk presented above and then compare it with the competitor like Toyota, Honda to see where it went wrong.
As discussed above, in the strategic risk section, one of the biggest failure to plague GM was its corporate model, though in the early 1920's it proved to be a lot of success when the industry was just developing and the companies were still catching on the management styles and concepts, but the failure to adapt to changing conditions and increasingly competitive market proved to be fatal for General Motors. The complacent attitude of the management showed when they disregarded their competitors like Toyota, Honda in the 1970's when they were entering the market and their management techniques and failed to see how quickly they were capturing the market share.
Toyota has been applauded worldwide for its production method called "Just in Time (JIT)", which helped it become the world's largest automaker surpassing GM in 2008. J.D. Power (etc.) consistently rate Toyota, Lexus, and Scion among the top in quality (Larman & Vodde, 2009). In 2006 Toyota posted a profit of $13.7 USD billion, while by 2007; GM lost $38.7 billion, the largest loss in the history of the US car industry (Quinn, 2009).
Another big factor is the large portfolio of brands that GM has - 8 in total- compared to just three for Toyota and at the most 2 for BMW. By having such a small number of brands these companies are better able to understand the need of the consumer and able to shift the features and technology according to the requirements of the market. Rather than feeding eight different brands with expenditures for designing, marketing, distribution. Toyota manages a 14.9% market share with three brands and is amazingly efficient by putting so many efficiently produced vehicles under its flagship brand. Also, Honda, which has a 9.8% share with just two brand in the U.S. market (Kiley, 2008). Also, launching newer models with advanced specifications under the same brand gives the consumer an ability to relate with the brand and what it specifies.
The failure to innovate and resting on short term profits has also plagued GM to an extreme. The late entry into the electric car market when the gas prices rocketed and GM lost billions shows how short sighted the management were when they scraped the EV1 project thinking it would not capture the market and instead started investing in SUV's. GM Executives have often been blamed on being too stuck in the past and not realising that it's never sure what has worked in the past will work in the future. At one point of time, GM was known for inventing stylish, state of the art cars but somewhere along the way they lost the vision that their main goal was to satisfy the consumers and build cars that could take then ahead in the industry.
The next factor that strained GM's balance sheet was the huge legacy cost burden that ate away at their profit faster than any other liability.