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Table of Contents
Executive Summary ...........................................................................................................................2 The Strategic Issue Facing GM: Avoiding Bankruptcy .................................................................3 Gross Domestic product..................................................................................................................3 Inflation Rate...................................................................................................................................3 Unemployment Rate........................................................................................................................4 The Auto Industry Today...................................................................................................................4 Threat of Rivalry.............................................................................................................................4 Threat of suppliers..........................................................................................................................5 Threat of Substitutes.......................................................................................................................5 Threat of Buyers..............................................................................................................................6 Threat of Entry................................................................................................................................6 Weakness of Internal Cost Structures .............................................................................................6
General Motors (GM) is one of the big three auto makers of the world (GM, Ford, and Chrysler) and has historically been the largest and most successful. They have built some of the most famous and classic vehicles on the road which have portrayed messages of both modesty and display of class for a market of consumers who range from working class to music superstar; as Alfred P. Sloan, CEO of the 1920s put it, GM makes “a car for every purse and purpose.” In recent years however, GM has taken an unexpected turn for the worse due to the changing economic climate that is affecting the world. Many economists argue that the US has been pushed into a recession that had started with the housing crisis of 2008. From this crisis stemmed a major banking crisis that has lead to financial institutions implementing tighter lending guidelines for business and personal consumers. This has greatly affected GM since the company,
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and Oldsmobile. rely so heavily on short term returns to fund such a complicated value chain and large portfolio of brands. rather just the opposite since they focus more on their pick up and SUV products which are extremely wasteful and fuel inefficient. The firm slowly began to take over Buick and bought out other model lines such as Pontiac. Even with initial governmental funding. lending money without this strict restructuring plan is seen as undeserved and wasteful. Company History General Motors was founded in 1908 originally as a holding company for Buick. GM is forced to spread money it does not have around to failing brands which are only driving the company further into debt. GM is losing business to competitors who have extensively explored and who have begun to master the production of fuel efficient vehicles. This lack of versatility and inability to explore long term consumer consumption has created a number of threats with which the company is now faced.along with many other auto making companies. With help from these many different car lines. Of the auto making companies facing the turmoil of falling sales and crashing returns. Although many options and tactical decisions have been discussed. GM managed to dominate the US auto market throughout the 20th century and was unrivaled in market share by any other company (“GM Corporate Information”). by being unable to focus on the core products vital to the company’s success. GM’s market share peaked in the 1960s where they held 48.3% of the Page | 3 . Rising gas prices has shifted the majority of consumer tastes to energy and fuel efficient options which GM has not sufficiently adopted. GM is faced with mass downsizing to more efficiently designate funds which will help bring the company up from what is now a major failure. Cadillac. GM has historically built brands around the assumption that they will be consumed whether or not they are built around consumer tastes. GM has no doubt been hit the hardest and is facing complete bankruptcy. President Obama is unwilling to serve the option of governmental aid to GM without a serious and foreseeable restructuring. GM has until June 1st to present a clearly defined and finite decision for restructuring. GM is still unable to find a remedy for its failing success. The fact that GM has such a large portfolio is working directly against their success because of the fact that they are spread completely too thin. In light of this.
What had changed for GM since its almost half-century ago all-time-high market share was its lack of innovation over the years. producing a hearty lineup of cars. the lowest of the major players traded publically. to name a few (Stoll).09 on May 15. And while the ad continues on to say that GM is changing its ways. (See Graph A for GM-F 3M Stock Prices) GM’s failure has been a long time in the making.” The problem that GM faces is.’ said John Casesa. a veteran industry analyst with the Casesa Shapiro Group. crossovers and hybrids. In an advertisement issued by the company in December of 2008 which was published in AutoNews. 2009. not only is the company slow to pick up on consumer trends. creating unrealistic compensation plans. too late. This total began to decline in the 1970s and continued to present day.’s DNA. and focusing its product lines too heavily on trucks and SUVs. According to Yahoo! Finance. A Snapshot of General Motors Today The General Motors Company today is in a state of complete turmoil. overlooking changing consumer tastes. “’Until the 1960s. These companies provided a new style and design of a car. trailing behind Ford Motor Company’s $5. innovation was part of G.49. With gas Page | 4 . the company most recently traded its stock at an abysmal $1. “surviving on Federal loans” until it either “restructure[s] its debt or face[s] bankruptcy reorganization” come the first of June (Detroit Free Press). it often fails to adapt to these demands all together. mainly coming from the Japanese companies of Toyota and Honda. it’s a matter of trying to play catch-up’ (“GM Corp”). the corporation admitted to its poor choices over the years: neglecting quality. its reaction may be too little.overall US market share. which were bulky and had poor gas mileage. to sleeker designs with better quality and efficiency (“General Motors Corporation” NYT). ‘Now.M. due to greater international competition. They strayed from the traditional American muscle cars.
grabbing up more than half of the US auto market in the 1960s. however. a credit crisis that has not been Page | 5 . begging for financing and hoping to avoid filing for bankruptcy (“GM Corp”). Their analysis was based on a number of factors. The Strategic Issue Facing GM: Avoiding Bankruptcy With GM’s recent talks of restructuring. As it stands now. The Economy Today History of the recession The current economic crisis in the United States has been debated time and again. the days of being on top in the auto world are beginning to sound like a myth of the past. The National Bureau of Economic Research declared that the current 2008 – 2009 recession officially began December 2007. While some economists argue that the US recently entered into a recession. how many jobs to cut. to now hanging on by the mercy of the US and Canadian governments. In GM’s 100 year history. downsizing. which includes the dramatic decline in layoffs. The company is facing questions like how many plants to close. GM’s dismal future outlook is deeply embedded in the current economy. The question that remains to be seen. other economists state that the US has been in a recession and that it initially started with the housing crisis of 2008.guzzlers like the Hummer and 12 MPG Cadillac Escalade in its lineup. GM’s path of poor choices has led the company to where it stands today: overhauling the entire company and praying for survival. neglecting the production of hybrids and fuel efficient cars leaves GM hard pressed to see increases in its market share (Sanger). GM’s main concern is simply staying afloat. a sharp decline in consumer spending. the company has gone from being an automotive powerhouse. is whether or not the company can pull itself out of the mess in time to satisfy President Obama’s June 1st restructuring deadline and dodge a Chapter 11 filing. and the possibility of bankruptcy looming around the corner. and what brands to do away with from the portfolio (Sanger).
to expand markets and profits. a seven year interest only ARM). In fact. 34). irresponsible lending produced the subprime mortgage crisis. The problem with this contract was that many borrowers’ incomes did not increase in proportion with the increase in their mortgage payment. 2008. particularly among minorities and the less affluent (Liebowitz. This crisis was initiated by the Federal Reserves’ decision to lower interest rates following the bursting of the dot-com bubble and the government’s decision to relax regulations on underwriting standards in an attempt to increase home ownership. Agreed by most economists.alleviated by the massive government rescue plan. 2008. Some borrowers were given the option of interest-only ARMs for a stated period of time (i. 31). massive foreclosures have occurred in the United Stated and serve as the chief Page | 6 . Financial institutions were offering borrowers an adjustable rate mortgage (ARM) instead of a traditional 30-years conventional mortgage. and increasing foreclosures that continue to put downward pressure on home values in communities. p. borrowers had to pay the principle and interest on the loan. Due to these foreseeable conditions and the loan default of so many borrowers. After the seven years. financial institutions jumped at the chance to give mortgage loans to borrowers without an appropriate background check to verify that the borrowers could financially afford the mortgage payments. the prominent reason for the 2008 . p. financial institutions aggressively marketed a host of mortgage and consumer credit products to non-traditional homeowners (Beitel. This meant that unfortunately some borrowers were forced to default on their loans.2009 recession stems from the United States housing bubble and the subprime mortgage crisis which led to the banking crisis. To profit from the lowering of underwriting standards. Subprime loans are loans that are given by financial institutions to borrowers who do not meet the standard financial requirements to qualify for and obtain mortgage loans under normal underwriting standards. Unfortunately this large scale.e.
The package contains provisions for short term and long term goals. first time home buyers will be eligible to obtain a nonrefundable $8.7 billion home buyer credit funds set an aside to help generate home purchase. these tightened guidelines have negatively affected the auto industry. The stimulus money is broken down as various sectors. creating and saving jobs. To help stimulate the auto industry. rejuvenating the healthcare. falling GPD. the purpose of this physical stimulus package is an attempt to revive the United States 2008 – 2009 recessional economy from the exponential increase in job loss. an above the line deduction (USA TODAY 2009). This has led to financial institutions implementing tighter lending guidelines for business and personal consumers. new car buyers will be able to deduct sales or excise taxes. Under the home buyer credit plan. The long term implications include creating innovative approaches to the infrastructure. Economic Climate Stimulus Package The $787 billion American Recovery and Reinvestment Act was approved by Congress and signed by the President in February of 2009.000 tax credit as long as they stay in their home for more than three years. and to make a positive impact on the economy as a whole (PWC. 2009). education and energy sectors. and unstable capital market.5 billion will be used to make sales tax paid on new car purchases tax deductible. The million dollar question for Page | 7 . reducing taxes and spending money on programs and projects. $2. Since certain industries such as the auto industry rely heavily on short term and long term borrowing. The package covers numerous other spending credits to help stimulate the environment.contributor to the current 2008 – 2009 recession. The stimulus package provides tax benefits for individuals as well as the business sector. there is a $3. Some of the short term goals include standardizing the economy.
45).7 million. Opinion varies to this question. it increased to 3. Consumer spending was up 2. private inventory investments. lower than the forecasted GDP of 4. a slight decrease from previous year. According to the Bureau of Economic Analysis the decrease in GPD was due to the decline in exports. The private inventories investment declined in the first quarter over $137 billion. Unemployment Rate The US unemployment rate has been dramatically increasing since December of 2007. some analysts predicts fourth quarter of 2009. In 2007 the inflation rate was 2.7% (Financial Forecast Center 2009). in April of 2009 there were (-539. Inflation Rate According to the Bureau of Labor Statistics. which decreased the purchasing power of the US dollar.8%.9 percent. 2009). this deflation rate indicates a dramatic decrease in the prices of goods and services due to our current domestic as well as global recession. Gross Domestic product The United States current Gross Domestic Product (GDP) growth rate is (6.most is when we will begin to see the results of the $787 billion package.29). bringing the unemployment total to 13. less than what was forecasted.8%. but in 2008. Since the beginning of the recession the US economy has lost 5. equipment and software.5 to 8.2% as consumer responded to the lower prices of goods and services (Wachovia Economic Group. The unemployment rate has risen from 8. nonresidential structures and residential fixed investments. As of March of 2009 the US inflation rate is (-0.000) jobs lost. According to the Bureau of Labor Statistics. other say 2010. America’s inflation rate has had relatively steady changes until 2009.7 million jobs. The Auto Industry Today Page | 8 .
9%. Consumer Report listed the top 3 most reliable cars in these 6 separate categories which include. more specifically the companies of Honda and Toyota (Honda .Wall Street Journal) Page | 9 . which includes GM. These importers are gaining market share because they seem to produce more dependable and more efficient cars. Small SUVs and Midsized SUVs. 12 were made by: Toyota. Ford’s are down 31. auto sales as a whole have been declining rapidly. Minivans. causing a dramatic decrease in sales from the year before. Overall Japanese firms account for 78% of the most reliable automobiles while the US automakers account for only 22%. and of those 14 cars.3%. As shown in the chart listed to the left (Chart 1). in the past few years with the housing bubble bursting and the economic contraction that followed. and Chrysler (GM – Blue / Ford – Yellow / Chrysler – Black) have been losing the fight to keep a dominant hold over the domestic auto market.1%.1% from April 2008. Prior to 1985.Green / Toyota . but since then they have seen their share decline to below 43%.Red). Family cars. (Sales figures . the Big 3 controlled a vast majority of the US market share.The US auto industry as a whole is an extremely competitive market place. or Nissan. Honda. and Honda is down 25. Each automotive company is fighting for the largest market share of the world’s number one automotive market. the main competitors come from Japan and Europe. This tightening up of American money has greatly impacted the major players in the US automotive market. However. approximately around 80%. The US’s own Big 3. Of the 18 cars listed. due heavily to credit markets freezing and the steep drop in consumer spending. Ford. Small cars.3%. Chrysler 48. Large cars. GM sales are down 33. 14 were Japanese engineered. Toyota 41. and it is having a more devastating effect on the American car companies than the international firms. This drop in overall sales is staggering for the 5 largest market share leaders in the US.
The company’s slew of brands was no accident. such as the fuel-efficient hybrid models. The Big 3 are working on refining their products. Single-company and industry growth have been slowing. Over the past few years.” The company’s strategy proved to be successful for most of the 20th century. Sloan put it. For years the consensus has been that Japanese automakers build quality cars while the US automakers build unreliable cars that will break down quickly. as it was Page | 10 . due to the economic contraction as well as the lack of large new markets. The combination of low pricing and fuel efficiency began to drive US automotive buyers toward the international companies and away from the old tradition of owning and driving large SUVs. GM makes “a car ‘for every purse and purpose’. which was the perfect time for this new technology to be unveiled. Gas prices across the US were spiking and the cost of fuel became a major concern for the American consumer (Chart 2). The Big 3 lagged behind the international companies when creating fuel-efficient cars and did not release one until 2004. The hybrid model cars were introduced in 2001. These new international competitors have eaten away at the dominant market share that the Big 3 once held. and with the Detroit based company (until recent restructuring) spread over 13 brands worldwide. GM’s Strategy General Motors’ strategy from the beginning was to be a product differentiator. International competition has been growing since the 1970s and the international firms have become major players in the industry. however they are still lagging behind the international firms. for.The US automotive market as a whole can be considered a mature industry structure. Toyota and Honda have been taking advantage of this mature industry structure and have been creating new lines. GM has a highly diversified product mix (GM Vehicles). which is shown by higher rankings from Consumer Reports Magazine. the Big 3 have begun to increase the dependability of their cars. as GM’s CEO of the 1920s Alfred P.
build up Cadillac and Buick. Historically. And with 13 brands. “GM’s strategy of just a year ago” Bill Vlasic of The New York Times explains. To compete with foreign entrants Toyota and Honda in the 90s.the largest car maker in the world from 1931 up until 2008 (“GM Corp. GM started focusing on its other lines instead. which brought the company great success for a major part of its existence. With increased foreign competition. upon building its Saturn brand. it’s no wonder the giant reigned supreme for so long (“About GM”)(Bensinger). Its game of favorites lasted for years: invest in Oldsmobile. plants in 34 countries and sales to 140 countries. GM had used its brands as a competitive advantage over Ford.” This strategy. the disregard for changing consumer trends. forget about Pontiac and Saab (Welch). Andrew Shapiro. GM couldn’t give each brand the attention it needed. and a portfolio spread too thinly. “every brand suffers. “No particular brand or brands can achieve the share of voice that they need” (Maynard). a managing partner with the Casesa Shapiro Group. countless car models. a decision which cost them $5 billion. As a result. GM’s vision to be the world’s largest car producer is no longer a viable goal. this was GM’s solution to a lot of its competitor’s advances. Page | 11 . And in part. GM introduced Saturn. GM consequently put Oldsmobile on the back burner (Welch). Rather than fix what wasn’t working. rather than nurture its new Saturn brand which may have had a fighting chance. GM simply added more brands. the company whose opening lineup featured a monochromatic mix of all black vehicles.”). disregard Saturn. And as priorities shifted again. the more it must spread money around to develop vehicles and market them. The main problem in GM’s decisions over the years was its overly extensive lineup. waiting five years before adding new cars to Saturn’s mix (Maynard). is no longer working for the Detroit automaker. But according to BusinessWeek.” said A. “was waging a spirited battle with Toyota for the title of world’s largest automaker (Vlasic). With such a large and diverse portfolio. As New York Times writer Micheline Maynard explains: The more brands a carmaker has.
With GM parenting eight unique US companies—of which only four will survive the new restructuring of the company —the firm faces eight different sets of competitors: one set for each brand (Roy). the fight for market share is fierce. Direct competition for each brand from rival products aimed at the same target market poses a greater threat than indirect competition from products aimed at a different target market. 9)." Understanding the threats that affect General Motors provides a clearer picture of the company’s failed strategy. Threats Affecting GM Threat of Rivalry The threat of rivalry on the industry level is intense and highly competitive. page 24 Competition is also high amongst GM’s diverse portfolio of brands. Therefore Page | 12 . Ford and Chrysler) and is one of the top four automakers when including Toyota. These four industry leaders are estimated to make up 62. GM’s North American Vice President Mark LaNeve explains that “‘over time. the strategy is to focus [GM’s] resources on the core brands…It's clear that we can't afford the kind of product and marketing investment that eight brands need.’ (Welch). The degree of competitiveness varies for each brand and depends on the type of product being offered. pg.4% of the market in 2009 (IBIS World. Regardless. Whether the company would have changed its ways if it weren’t for the insistence of the Obama administration is hard to say.The company’s strategy to juggle its brands clearly proved to be an unsuccessful means of portfolio management. *IBIS World Car & Automobile Manufacturing in the US. the company appears to be moving in the right direction. General Motors is a member of the Big Three (GM. And being that the market shares of these leading automakers are nearly equal (as shown below).
GM’s product differentiation strategy does offer some protection from the threat of rivals in that it develops specialized market niches. Furthermore. Competing firms attack from every angle and will take every opportunity that arises in hopes of becoming the market share leader. Additionally. When compared to Japanese automakers. GM has higher costs of production. This strategy is only successful when enough resources are devoted to each brand. The threat of rivals presents the greatest challenge that the GM brands have to face. GM’s lack of innovation in employing new technologies. 25). such as hybrid technology.focusing on direct competitors can allow General Motors to better protect against the threat of rivals. The companies under the GM umbrella need not only worry about domestic competition but also about foreign competitors in the home market in addition to the rivals of their foreign interests. Page | 13 . This can definitely sway consumers to purchase from rival firms. The confidence in the brand is also fading as the danger of potential bankruptcy looms in GM’s future. or adapting to market trends can make rivals seem more appealing. for that matter) is not one that embodies the highest quality products on the market. High costs of production threaten GM because it becomes more difficult to offer competitive prices. However. For this reason. partially due to greater labor costs (IBISWorld Car & Auto. it is clear that one of the biggest threats to General Motors is the threat of rivalry. the brand image associated with the GM family (and the other American brands. as well. pg. This helps to mitigate the threats from rivals because GM aims to offer brands that are significantly different from competitive products so that no other company competes directly. only some of which are listed above. There are a number of reasons behind this fact.
All three tiers of suppliers suffered a severe blow when Chrysler recently filed for Chapter 11 Bankruptcy and GM announced that it would be halting production at 13 plants in the U. Although the Page | 14 . These relationships often lead to smoother operations. During times of economic struggles like those being faced today. distribute products straight to GM. as goods travel up the value chain to reach the final production facilities to be made into finished products. With so few orders being received. these already struggling auto supply firms are being forced into bankruptcy. or first-tier suppliers. With this extreme drop in the production of new vehicles. however. but this lowered demand for auto parts has proven to be too much to handle as many firms began working below their break-even point. The stressful conditions within the economy already caused automotive suppliers’ revenues and bottom-lines to decrease. this interdependency can spell disaster for a number of firms in the supply chain. between May and July (Krisher). These first-tier suppliers rely on the second-tier suppliers for their parts for production and the second-tier. A noteworthy reason that suppliers are so hurt by the decrease in orders from auto companies is because this increases their cost of capital. relies on supplies from the third tier for necessary parts for production (Beene). the direct suppliers. many suppliers have lost a major source of sales and now face bankruptcy themselves. in turn.Threat of suppliers The supply chain in the automotive industry weaves a tangled web of intricate relationships among suppliers and producers. In the three-tiered supply system used by General Motors and many other automotive companies. This complex relationship among the different suppliers and the automotive firms indicates a heavy reliance on each link of the value chain.S. Suppliers use the projected orders from automotive companies as collateral to receive the necessary capital to continue production (Gopwani).
also leading to higher costs for supplies. Overall. many of the tight-knit relationships between General Motors and its suppliers will be harmed in the process which could lead to higher supply costs. in April of last year. But automakers said gas prices are accelerating the trend (Durban). GM may not be able to finally resume production in the future because of the devastating effects that decreased production will have on its supply chain. GM was greatly affected by money conscious consumers moving towards smaller. more fuel-efficient cars. compared to only one in eight when SUVs were in high Page | 15 . GM’s poor performance has manifested as a result of a global economic downturn. second. Additionally. With fewer suppliers available after the shakeout. So what does this mean for GM? It means that despite its efforts to reduce costs and inventory by temporarily halting production. Economic Threats Within the last few years. As a Washington Post article reiterates from just one year ago: Pickup sales have been falling for months because of the slowdown in housing construction. the biggest threat of suppliers comes from the interconnectedness of not only General Motors and the three tiers of suppliers.and thirdtier suppliers are still struggling to survive while hoping for the payments to trickle down the line (Beene). suppliers will have more bargaining power over the auto companies.government recently provided direct automotive suppliers with $5 billion in aid. According to The New York Times. The trend away from SUVs began several years ago as baby boomers aged and roomy but more fuel-efficient crossover vehicles gave consumers more choice. but also among other automotive firms in the industry. one out of every five cars purchased was either a compact or subcompact car. In light of high gas prices and the recession heard around the world.
the threat of substitutes is increasing due to the current economic environment (California Green Solutions). Substitutes for standard automobiles include bicycles. Page | 16 . With companies like Toyota producing smaller.demand ten years ago (Vlasic). with a sales drop of 27% in the summer of 2008 when gas prices were largely inflated (Bensinger). and even energy-efficient vehicles including hybrid and electric automobiles. walking. The company’s new plan for success needs to keep up with the changing times and its competitors’ abilities to satisfy changing demand. GM needs to be doing the same to remain an active player (Marr). more fuel efficient vehicles. Increased fuel prices and insufficient fuel-mileage are a major source of consumer discontent with automobiles as they have led to higher operating costs associated with the vehicles. A number of conditions have contributed to a higher threat of substitutes for the automotive industry and General Motors. Threat of Substitutes Rising fuel prices and decreasing purchasing power causes commuters to reconsider their transportation options. Even with the gas prices falling in 2008 and 2009. in particular. the fall in sales of SUVs and pickups severely impacted the company’s bottom line. In the following year.000 fewer GM vehicles on the road (Marr). the trend of lost sales continued with 379. especially. Although automobiles still tend to be the preferred method of transportation in many areas. public transportation such as bus and train services. And for a company like GM whose lineup is dominated by larger vehicles. have continued to decrease whereas public transportation usage is at 5 year high high (IBISWorld Public Transportation). car and truck purchases. The Green Movement is another reason behind the recent shift towards substitutes for cars and trucks.
people are more hesitant to drop large sums of money on automobiles when there are so many other transportation options available including public transportation. General Motors can reduce the threat of substitutes from hybrid and electric cars by further penetrating this market while it is still relatively young. The threat of substitutes can be seen as both a challenge and an opportunity for General Motors. More and more people are doing their part to reduce their carbon footprint and this includes decreasing the amount of emissions contributed from automobiles. they become less likely to make discretionary purchases. While automakers are unlikely to begin competing in these markets. cycling and walking provide a growing threat of substitutes. carpooling. Fuel-inefficient cars and trucks seem particularly unattractive to modern consumers who are now exploring new technological options like hybrids or the tried-and-true means of transport such as cycling and walking. With less money and wavering confidence in the market. Public transportation. Page | 17 . as consumers’ disposable income decreases. cycling and walking. in today’s world of increased awareness of global warming and its causes. the Green Movement is not just a hippy philosophy anymore. Additionally. Earth-conscious and budget-savvy consumers are looking to hybrid and electric vehicles and other ‘greener’ transportation methods. the hybrid market is primed for growth. For this reason.Public Transportation Revenue Rate Public Transportation Revenue Growth Furthermore.
GM has high standards for their dealers. The threat from buyers is not a significant one for GM. the company has found this venture be extremely costly. Because of such high switching costs. dealers are forced to accept the prices that the GM brands decide are appropriate (Neill). Because there are so many dealers. the GM family of brands will not suffer severe threat from their buyers. Only those with sufficient profitability and customer satisfaction. particularly when compared to other threats the automaker faces.600 of them under the new business plan (Neill). With the restructured goals of decreasing cost and increasing profitability. For the most part. This drastically decreases any buyer power the dealers may have had because significant switching costs associated with selling for another company exist. but GM is aiming to close 2. One of the only reasons buyers could pose a threat to GM is that the dealers are often part of a bigger group or association of dealers. Page | 18 . as well as proper location and up-to-date facilities will continue to operate (Neill). As pertaining to the planned closing of GM’s dealerships. which could offer the buyers strength in numbers. The total number of dealers in the U. most dealers become specialized in selling only one firm’s vehicles. the buyer power appears to be rather low.200. Although there is a high quantity of automobile suppliers in the industry. is 6. however.S. The problem occurs when GM has to put itself in further debt to make payments to the State Legislature to protect its dealers prior to closings. especially now while GM is downsizing.Threat of Buyers General Motors operates with a large number of domestic dealers.
which is a section added by Senator Chris Romer. “Proper motor vehicle service is important to highway safety and (1) the manufacturers and distributors of motor vehicles have an obligation to the public (a) not to terminate or refuse to continue their franchise agreements with retail dealers (b) unless the manufacturer or distributor has first established (i) good cause for termination or noncontinuance of any such agreement. Additionally. the automotive industry Page | 19 . which is relatively low for several key reasons. the role of the dealer is explained as: “The sale and distribution of motor vehicles affects the public interest and confidence of the purchaser in the retail dealer from whom the purchase is made and the expectancy that such dealer will remain in business to provide service for the motor vehicle purchased.Colorado was one of the first states to protect the auto dealer in its relationship with the manufacturer. Incumbent firms like General Motors have a definite advantage over potential firms hoping to enter the industry. 16). which makes it difficult for new firms to start-up. For one. Thirty days is often too short a period to prove that the reason for closure has “good cause.” Threat of Entry The automotive industry is lucky when it comes to the level of threat faced from new entrants. auto manufacturing is a highly capital-intensive undertaking. Found in an article recently written by Jerry Kopel . pg. let alone compete.” The term “good cause” in this article has been the cause for much debate and in most cases where GM has closed its dealerships. it has been easier and more cost intelligent to just pay “out of pocket for payments to the bad franchiser” (Kopel) unless the good cause can be proven within thirty days. The efficient production capacity gained from economies of scale is also large and therefore costly to establish (IBISWorld Car & Auto. The major causes are the high barriers to entry associated with the automotive industry. (ii) to the end that there shall be no diminution of locally available service.
16). The threat from new entrants does not impose a significant threat to an incumbent firm like General Motors. These laws must be adhered to if a firm wishes to avoid heavy fines or penalties. pg. there are extremely strict regulations imposed on the automotive industry by the government.is fairly saturated. New entrants rarely have the necessary capital to fund such extensive R&D operations. and the costs of developing the network and knowledge needed to become successful offer the greatest safety belt to protect GM from new entrants. firms need continual innovation to provide products that appeal to the desires and demands of choosy consumers. and complying can increase the cost of production significantly enough that it often drives away potential new entrants to the industry (IBISWorld Car & Auto. new entrants most likely lack both. Weakness of Internal Cost Structures Page | 20 . The ability to afford the costs of imposed regulations also comes into play when firms look to go global. Additionally. This can prove to be a less than feasible venture for entering firms. and therefore in order to be successful a new entrant would need to ensure its ability to capture a large enough market share to be profitable. Existing firms have access to the capital and the managerial experience and know-how necessary to expand into international markets whereas. suppliers and consumers built over time will add yet another deterrent for new entrants. In order to stay afloat in such a competitive industry. being a mature industry. The technology costs needed to partake in vital research and development processes adds still another barrier to entry. The costs of capital needed for production. the costs of R&D needed to remain competitive. Its long history in the market and the strong relationships with buyers.
the company’s total liability was $184.000 retirees’ healthcare insurance (USNEWS). the largest of any US company. GM was given until June 1.000 in 2008 to 40.363 billion. however the company plans to reduce this number to $1 billion by 2011(GM Annual Report). Government Intervention and the Restructuring of GM As a result of the current economy. reducing U.“GM is a benefit-paying organization masking itself as an auto dealer”. For the past 15 years. the state of the auto industry. the company’s failed strategy and the threats facing it. If GM files for bankruptcy. 2009 to cut costs and start producing a plan which will aim GM for the green (Ruggeri). Page | 21 . they will have a greater chance of survival. The Company plan to drastically reduce some of these liabilities by eliminating over 100.000 in 2010.S. If GM is able to alleviate majority of their pension and retiree healthcare liabilities. As of the December 31. hourly employment from about 61.375 billion and pension liability was $11. more feasible restructuring program. GM postretirement benefits other than pensions were $47. 2007 balance sheet. One of the major issues facing GM is their large liability consisting of pension.5 billion dollars of unfunded pension. The Federal Government decided to partake in the company’s restructuring in the winter of 2008 when the Bush administration okayed a $17. the US government will be dumped with $13. Obama recently required a stricter. cutting off all funding unless serious results were produced. and leveling off at about 38. Donald Coxe chairman of Coxe Advisors LLC. GM is in need of major restructuring to turn itself into a viable company for future success. However. retiree health care and other liabilities.381 billion. GM’s annual average of pension and retiree healthcare cost has been $7 billion. in the changeover to the Obama administration.com).000 starting in 2011(GM.4 billion loan to both GM and Chrysler in hopes of buying time for a restructuring plan slated to fall into place in March (McKinnon).
at $26 billion. the government will pardon the company’s $10 billion outstanding federal loan (Saner). and the fact that he “is considered responsible for increasing GM's focus on trucks and SUVs—at the expense of the hybrids and fuel efficient cars that have become more popular in the last couple of years (Allen). General Motors’ ownership is also in the lineup for an overhaul. GM will be left with 34 plants. and will scale back on Pontiac (Maynard). while it will eliminate Saturn.” All said and done.600 dealerships (Saner). eliminating four brands and shuttering 2.As it stands now. Its latest plan “calls for trimming 47. Cadillac. the Obama administration requested that CEO Rick Wagoner step down from the company. was replaced on March 30th by Fritz Henderson (Bury). Unfortunately bondholders Page | 22 . Fiat. The US Government plans to take a 55% majority stake in the company. the overall structure of GM will see a drastic change in both its leadership and ownership. In March of this year. stock for every $1.” Wagoner. Grounds for his dismissal included the fact that his company had requested the highest amount of aid in government bailout plans. who had been CEO for eight years and apart of GM for 30.” However. Chevrolet. Saab and Hummer. with the remainder left for the United Automobile Workers Union (Vlasic). this exchange gives bondholders only 10% share in the company. closing more than a dozen plants in the United States. is contemplating taking over the company’s European brands Opel and Vauxhall ((2) Bunkley) and (Matlack).000 jobs worldwide. Buick and GMC. General Motors also plans to offer its “holders of $27 billion in unsecured debt 225 shares in G. While General Motors is finalizing bids for its Hummer brand. the Italian automaker. Its lineup will focus on its strongest brands. In addition to making General Motors a much smaller company.000 in debt (Vlasic). in return for which. restructuring is the company’s highest priority. a fifth of what it boasted almost 40 years ago (Vlasic).M.
General Motors faces a number of strategic issues that demand the firm’s full attention and immediate action. is no longer practical in the current global marketplace in which it operates. more successful. but with the correct measures put into play.wanted nothing to do with the offer. led to the firm's present state of unpaid debts and financial failures. Page | 23 . and the world that it can in fact succeed. GM’s lack of innovation and resistance to change. General Motors must continue with its new strategy. in addition to the recent economic recession. As the threat of bankruptcy is perhaps imminent. the company is downsizing. “a car for every purse and purpose”. regarding the proposal inadequate and politically favored. And while the company has until June 1st to prove it is headed in the right direction. keeping up-to-date with the latest technologies. GM’s Outlook/Recommendations As shown throughout this report. Whether the Detroit-born automaker will ever reign again as the largest car manufacturer in the world is hard to predict. If GM doesn’t come up with a solution by June 1st. planning to focus on its four core brands. its shareholders. The American public is eagerly counting down along side GM as it awaits the results of its most recent restructuring plan. As it stands now. The strategy that had gained the automaker a wealth of success in the 20th century. GM is scrambling to restructure its company to prove to the Obama Administration. and certainly more sustainable future. and is eliminating unneeded costs at all possible steps. and producing cars which meet the needs of today’s driver. it will be faced with bankruptcy. General Motors has a chance of saving its company with the hopes of a brighter. listening to consumer demands.
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