Case: The Big Three Roar Back

Class: FY MBA Section I

Team No: 7
Members:
Pulkit Agrawal I007
Sameer Dhuri I017
Jivesh Kaul I027
Adwait Nadkarni I037
Punit Sethia I046
Siddharth Srivastava I056

Context/Background:
The city of Detroit had seen a stable economic growth due to its booming automobile sector.
The “Big 3” – Ford Motor Company (Ford), General Motors (GM) and Chrysler of the US
automobile industry had presence in Detroit, each offering steady flow of economic and health
benefits to its working population. The industry however saw a decline in the period of 1970
due to the rising oil prices and foreign competition leading to loss of market share of Big 3.
However, 3 years starting from 2008 the Big 3 saw a turnaround reestablishing themselves as
major players in the market.
The challenge for the firms to stay competitive is to obtain competent workforce as the city
had seen a loss of population following the decline in 1970s. The case analysis the studies the
actions that led to the turnaround of the Big 3 and provides suggestion for future growth in the
light of transformation of US Automobile industry.
Problems and Key Issues in the Case:
1. High dependency of the sector on international oil prices
2. Fuel efficient and cheaper alternatives provided by foreign players
3. High wage and health benefits costs compared to the competitors
4. Inability of established players to adjust to the change in Industry (Automaker’s Hubris)
5. Management problems in terms of poor cost control and relationship between labor and
management.
6. Loss of reputation among consumers and inability of the management to counter it
7. Lack of innovation in products of domestic players
Frameworks/Theories used for Analysis:
US Automobile Industry - Porters Five Forces:
1. Threat of New Entrants: (High)
- Entry of cheap and high quality exports were one of the prime reason for losses
faced by automobile sector.

2. Bargaining Power of Suppliers: (Moderate)

- The supplier of the parts are closely tied with the Automakers and hence the
collapse of the key players would result into their significant loss. This limits their
bargaining power.
- The workers are the most affected by the loss of the industry due to their dependence
on the sector as it was the primary employer in Detroit. Further they also form one
 of the major cost component of the industry. However, presence of unions (United
Auto Workers) helps them exercise a moderate power on industry.
- Competitive strength of the industry players depend on the competency of the
available workforce.

3. Threat of Substitutes: (Moderate)

- Availability of cheap and fuel efficient vehicles from Japanese companies like
Toyota.

4. Bargaining power of consumers: (Moderate)

- Buyers bargaining power is restricted due to high switching cost
- Companies have power to differentiate their products by R&D further restricting
buyers influence
- Buyers however has large options to choose from which include trusted domestic
brands as well as cheap and efficient foreign brands

5. Rivalry among competitors: (Moderate)

- High level competition between domestic and foreign players, as foreign players
have lower cost and better technology while domestic players have more
aspirational value.
- High exit barriers, slow market growth and comparable size of the players (Exhibit
1) increases the competition
- Dependence of supply chain infrastructure on the collective health of the industry
limits competition as the failure of one firm could prove fatal for the suppliers.
US Automobile Industry – Trajectories of Industry Change:
1. Industries core activity includes production and selling of 4-wheeler automobiles and
truck-based vehicles, like pickup trucks, sports utilities and minivans. As per the case,
the industry is facing a threat of obsolescence of 4-wheeler vehicles from more fuel-
efficient models of foreign players. Truck based category however is protected due to
exemption of fuel-economy regulations.
2. Industry core assets includes its brand value, technology and competent workforce. The
foreign players provide better technology products leading to threat of obsolescence of
this asset for the domestic players. As per Exhibit 2 in period from 2000-2009, the
population of Detroit has reduced and many of the competent workforce has migrated
leading to shortage of competent workforce
As the US Automobile industry is facing threat on both its core activities and assets, it can be
stated that it is in state of Radical Change
Analysis of issues identified:
1. High dependency of the sector on international oil prices: The oil prices is dependent
on International factors and the domestic players have no control over them. Further
they exhibit equal impact on the players.
2. Foreign Competition: Emergence of low-cost fuel efficient alternatives from the foreign
players acted as a trigger for the Industry transformation. This coupled with rise of oil
prices led to the movement of consumer away from the Big 3.
3. Cost Control: Compared to their foreign competitor the domestic players incurred high
cost in terms of healthcare facility and wages that had to be provided to the workers.
 For example: GM paid $2235 per vehicle on worker benefits while Toyota spent only
$215.
4. Management Hubris: The management’s faith in their brand value coupled with
complex hierarchy slowed the decision making process in the organization. This led to
lack of innovation in products resulting in to loss of consumer faith.

Conclusion and Recommendations:

1. As per the analysis, Automotive Industry is in the stage of Radical change. The reason
for this is increasing price consciousness of the consumer due to global changes in
supply of oil and increasing competitiveness from foreign market. The nature of Radical
changes allows industries with significant time for adjusting to change if measures are
taken early. In case of US Automotive Industry most players including both domestic
and foreign players have comparable market share as evident from Exhibit 1. Therefore
traditional players will survive as each has equal competitive advantage. Following
measures however, will be suggested to stay competitive:
- Reducing the number of variants and focusing on few cost-effective variants
- Explore possible chances of consolidation among existing players
- Increase plant utilization by redesigning to produce multiple models
- Developing R&D measures to develop more fuel efficient technologies
- Start training centers for reskilling the current population of Detroit
- Cultivating better relations with labor unions
- Make a marketing teams to ensure that consumer opinions are taken in developing
product
2. Benefits of Industry clusters:
Benefits from localization include sharing of sector-specific skilled labour, sharing of
tacit and codified knowledge, intra-industry linkages, and opportunities for efficient
subcontracting. Further, the presence of disproportionately high concentration of firms
within the same industry increases the possibilities for reduction of prices of
intermediate products. These location-based externalities imply that firms are likely to
benefit from locating near large concentration of other firms in their own industry. The
presence of local suppliers can reduce transaction costs and therefore increase
productivity. Increase in efficiency due to clustering can be seen from Exhibit 4
 Appendix

Exhibit 1: Company US Market Share 1995-2011 (As % of Total Automotive Market)

Exhibit 2: Total Number of Autoworkers in Michigan (January 2000- January 2010)

Exhibit 3: November 2009 Economic Survey of Detroit Residents

Exhibit 4: Cluster and Efficiency Cycle