GENERAL MOTORS-2005

Presented To: Mr. Mohammad Asim

Presented By

Muhammad Atif 092148

Tanvir Ahmed
Summary:

The year 2005 is not good for General Motors. The company face loss $286 million in the second quarter
and over $1billion in the first quarter. GM losses are largely tied to be North American operation and
rising supply, fuel, healthcare, and pension costs. GM makes money not on auto sales auto financing.GM
is overly dependent on the U.S automobile market; more than two thirds of its sales are made in the
United States. In addition it is overly dependent on its financing division. GM facing economic threats at
home and abroad and stiff competition from more differentiated and lower priced products, GM manager
must decide how it will produce and market its vehicles in the future.

EXECUTIVE SUMMARY:

This paper will explain GM’s most pressing challenges. Overcapacity is negatively impacted their
financial results, brutal international competition is causing GM to react with target costing strategies,
rising fuel prices directly impacts their cash flows and complicates capital budgeting strategies and tactics
and their ongoing health care and pension costs continue to color their future earning potential.
These challenges will be addressed by using performance assessment measures. The financial assessment
measures include net income and their market share value, liabilities of health care and pension benefits,
revenues, target costing and capital budgeting. Non-financial measures include customer satisfaction and
branding effects on sales volume. General motors corporation need to reduce the amount of health care
expenditures for retired employees and significantly reduce the number of current employees. General
motors also introduce to new products to the market, allowing for increase in profit. In order to maintain
its position as the leading producer in the automotive industry general motors.
PEST:

ECONOMIC FACTORS:
 An increase in gas prices.
 An increase in a health care trend rate.

SOCIAL FACTORS:
 A change in life style to concern more about environment.
 Global warming.

TECHNOLOGICAL FACTORS:
 Alternative vehicles for alternative energies(hybrid and hydrogen car)
 Economic efficient.

SWOT ANALYSIS:
Strengths:
 wide cash reserves
 Global network of suppliers and distributors
 Economies of scale and scope
 Quality improvements
 Low cost suppliers through competitive bidding process
 Technological know-how for SUVs
 Only company to have invested in all 5 alternative fuel technologies
 Developed internet distribution channels

Weaknesses:
 Legacy costs/unionized labor force

 Brands require large investments to maintain equity and are a barrier to innovative thinking

 Poor corporate reputation for green technology

 Customer perception of low quality

 Poor experience in smaller vehicle production

Opportunities:
 Increasing demand for smaller cars and CUVs

 Emerging world markets

 Reduce costs through JIT

 Demand for environmentally friendly cars

 Government subsidies

 Increasing public awareness of green technology

Threats:
 Economy fluctuations affect sales

 Devaluation of the American dollar

 Increasing regulations on CO2 emissions and recyclable parts

 Decreasing demand for SUVs

 Increasing oil prices

 Rise in commodity prices

PROBLEMS:

High health care and retirement expenses:

 By the end of 2005, $5.6 billion to be paid out of the expenses.
 Holding the legacy cost.

Decline in global and U.S market share:

 Continue declines in global and U.S market share

Chinese market expansion:

 Due to increase in market share of china

Competitive advantage revival:

 Due to intensive of competitive rivalry and threat from potential competitors.
 To regain competitive advantages.

Environmental friendliness
 Due to a trend of customer environmental concern.
 A long term challenge to create another source of competitive advantage.
PROBLEM STATEMENT:
What organizational changes must GM implement in the North American market to earn above average
returns and improve its ability to compete in future, developing markets?

 Case analysis focus on North American market

 Must first develop a successful domestic strategy to be able to compete
internationally

Alternative 1
Keep all brands but differentiate effectively
 Decrease model portfolios of each brand
 Engineer an organization change to make the company more flexible and able to select the right
brand for the right market
 Increases product differentiation amongst brands and reduces inter- brand competition
 Marketing for each brand will be more efficient and customer loyalty can be captured
 Each brand will have a more specific market trend to address thus will be more competent in
predicting demand Lower inventory costs

Pros.
 Uses 8 brands to capture customer loyalty

 Enables brands to focus on specific market niches

 Allows for reaching economies of scale and scope throughout the whole organization

 No extensive organizational restructuring is needed

Cons.
 Slow process, would take long before we see if the differentiation efforts have succeeded

 As the market demand changes and market niches are exploited or eliminated, brands
might start competing with each other once again

 Very difficult for GM to control all these brands consistently

 Organization structure is could result to be less flexible*

Alternative 2
Divest some brands but keep rich model portfolios for remaining brands and reform the company’s
structure to provide each brand division with more autonomy

 Divest 4 brands: Buick, Saab, Hummer, Pontiac

  Restructuring in to a decentralized organization in order to put more emphasis on
individual brands rather than regional divisions
 Market research, internal and external analysis required in order to make this alternative
successful.

Pros.

 Focused resources on less brands

 Distinct target markets which define brand equity
 More capital to invest in R&D for each specific brand
 More autonomy to brands which decrease decision making time

Cons.
 Shut down plants and lay off workers
 Loss of brand loyal customers
 Large amount of resources required to settle distribution contracts
 initial decrease in sales and profits will affect shareholder value in the short term.

Alternative 3

Organization Changes to Support the Initiative

 Start with decentralization but aim for an overall more coherent organization through the
pursue of a related constrained strategy

Key processes such as R&D, Marketing, Human Resources will need to be better centralized
to achieve consistency

 Brand Management needs additional power

 Regional SBUs more control and better coordination with the others
 Follow a related constrained strategy with increased coordination amongst divisions
 Increased brand autonomy on marketing/product development will ensure differentiation.

BEST ALTERNATIVE:

Alternative 1 is the best alternative keep all brand but differentiate. It will be good company is more
flexible and able to select right product for the right market. Marketing of each brand more efficient and
customer loyalty capture which will be good for the company success. Try to give the product in the
market which fulfills the customer needs.
CONCLUSION:

FINANCIAL ANALYSIS:

Liquidity ratio: ability to pay short term loan is liquidity ratio.

Current ratio Quick ratio Result

2003: 0.81 2003: 0.65 GM is losing its ability to cover liability

2004: 0.74 2004: 0.54 compared to prior years.

LEVERAGE RATIO: percentage of fund provided by debt and equity.

Debt to Asset Debt to equity Result

2003:0.94 2003:1.17 GM can reduce risk from

2004:0.94 2004:1.09 creditors and stockholders

ACTIVITY RATIO: How much revenue is being generated of every $1 of capital employed?

Asset Turnover
2003: 0.41

2004: 0.40

PROFITABILITY RATIO:

ROS ROI RESULT

2003:0.015 2003:0.006 GM can better utilizes assets to
2004:0.010 2004:0.005 generate revenue

Profit margin
2003:0.2060

2004:0.0144

Recommendation:
 Introducing self managed creative work teams to improve and speed- up product development of
new technologies in emerging markets such as China and Europe.
 Reduce dependence on GMC and focus resources on core products i.e. cars and SUVs to generate
revenues.
 Cut costs by dropping unsuccessful product lines and introducing cars that accommodate the
needs of the car-buying public. 

 Shift major operations to lucrative European and Asian markets in order to avoid high operating
costs, including the high healthcare costs imposed by UAW.
 Reduce threat of lower priced products by introducing a flexible product line and trimming the
inefficient ones.
 Reduce overhead cost of over production.
 Better utilization of R&D budget
 Maximize R&D, technologies and experience seeks differentiation.
 Capture profit from a faster growth market.
 Add on differentiation on existing product.
 Identify new target market.