General Motors Stratey Report

7/29/2019 General Motors Stratey Report

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Prepared for:Business Cluster Professors

Prepared by:

Team 7Anthony Al l io Joseph Al l io

Lauren SnitcherNicholai Larroque

Gregory Armamdo

June 10, 2005

GENERAL MOTORS



TABLE OF CONTENTS

INTRODUCTION ....................................................................... 3

REGION ANALYSIS .................................................................. 3

NORTH AMERICA- GMNA ..................................................................................................................................3EUROPE- GME .................................................................................................................................................4LATIN AMERICA- GMLAAM .............................................................................................................................4ASIA/PACIFIC- GMAP .......................................................................................................................................5

PORTERS FIVE FORCES ............................................................ 6

R IVALRY............................................................................................................................................................ 6BARRIERS TO E NTRY...........................................................................................................................................6THREAT OF SUBSTITUTES...................................................................................................................................... 8POWER OF SUPPLIERS........................................................................................................................................... 8POWER OF BUYERS.............................................................................................................................................. 9

COMPETITIVE ADVANTAGE .................................................... 10

INTERNAL ANALYSIS ............................................................ 11

I NTERNAL STRENGTHS........................................................................................................................................ 11GMAC’s Continued Earnings Growth .......................................................................................... ...... ....11

Marketing Strategy/Consolidation ..........................................................................................................12

GM LAAM/ GM Asia Pacific ...................................................................................................................12I NTERNAL WEAKNESSES..................................................................................................................................... 13

Rising Health Care Costs ........................................................................................................................13

Weak Product Mix ..................................................................................................................................13

Lack of Flexibility ....................................................................................................................................13

STRATEGY ............................................................................ 14

RETRENCHMENT STRATEGY: PRODUCT REDEVELOPMENT ........ 14

OVERLAPPING MODELS.......................................................................................................................................14R EINVENTION.................................................................................................................................................... 15

APPENDIX ............................................................................ 21

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Introduction

General Motors is a company that has been around for over one centuryand has been an integral member of the automotive industry since itsinception. To understand General Motors one must simply look at theirbusiness philosophy which guides them today, and is embodied in thecompanies’ culture: product excellence and customer focus, act as onecompany, and move with a sense of urgency. Throughout this analysisof General Motors we have provided an in depth look at thesephilosophies, while in the end developing a future strategy for GeneralMotors to implement in restructuring the company.

There are four markets GM operates in with regards to automotivesales: North America, Europe, Latin America, and Asia Pacific. Afteranalyzing these four markets we have decided to focus most of ourattention to the North American automotive segment due to the natureof sales and income in regards to its relative relationship to NorthAmerica and the importance it has to GM’s virtual success or failure.

Region Analysis

North America- GMNA

Recently, GM announced a quarterly loss of $1.1 billion, which in turnreduced its bonds to junk status. There are many factors that arecausing problems in the North American region, including thecompany’s high fixed costs due to health care, pension, labor; and thelessening demand in the SUV market. Sales of GM SUVs decreased24.6% for the first four months of 2005. In order to try and improve thesales of SUV’s, GM has partnered with DaimlerChrysler to create a

hybrid system for pickup trucks, SUVs, and luxury sedans (Talbot).

In an effort to increase the overall condition of GMNA, Mark LaNeve,GM’s new head of North American sales, has created a new marketingstrategy. GMNA intends to cut prices, lessen the number of overlappingmodels, aggressively compete against foreign brands on the west andeast coast markets and in high growth areas such as south Florida,

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revive the overall image of Chevrolet with a new Cobalt compact car,and increase advertising on the coasts and in metropolitan areas(Hawkins).

Europe- GME

The overall condition of GME is less than favourable. From 1992-1997Opel, GM’s main European brand, led sales in Europe. But salesdropped dramatically by 2001 and GME launched its turnaround plan,Project Olympia, led by Carl Peter Forester, president of GME. ProjectOlympia’s goal was to restore profits by 2003 by reducing productioncapacity, adding flexibility to plants, increasing reliance on suppliers,and restructuring Opel’s distribution network (Ostle). Unfortunately, thisgoal was not met, and GME has not made a profit since 1999 (Slavnich).

To change the direction of this struggling region, GME modified itsmanagement structure by appointing Frederich Henderson to chairmanof GME in 2004. Henderson’s goal is to cut overhead costs by $600million in the next two years. In order to accomplish this goal,Henderson has cut jobs by 12,000 in Germany, moved production of SAAB automobiles to Germany (Slanvich, “SAAB”), cut ties with FIAT,and put SAAB’s plant in Sweden in charge of creating the new stereoand navigation systems (Lewin). To increase sales, GME is focusing oncreating a reliable entry-level selection of Chevrolets, increasing thequality of Opel, as well as importing Cadillacs in order to compete in theluxury market with BMW and Mercedes (Welch).

Latin America- GMLAAM

In 1997, it seemed there was no help for General Motor’s Latin America(GMLAAM). Brazil’s economy collapsed, decreasing car sales from $3million to $1.6 million in 2004. To increase profits, GMLAAM introduceda line-up of inexpensive, small cars including the Celta and Meriva. Today these cars are best sellers (Welch).

Currently, Latin America is the region with the largest increase in netincome to $27 million in 2004 from a loss of $104 million in 2003

(Stein). GMLAAM has also just celebrated its fifth consecutive quarter of profit. GMLAAM is expanding due to an increase in demand forCadillacs, the partnership of GM with Korea, and new Chevrolet models.Kepston Darkes, Vice President of GMLAAM has plans to further increaseGMLAAM’s profits in 2005 in numerous ways including increasing brandrecognition of Chevrolet and expanding the luxury division (Stein).

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Asia/Pacific- GMAP

GM anticipates that the global automotive market will increase by 16million units before the year 2012, and believes that “half of that growth

will be in Asian countries such as China, India, South Korea, and Thailand.” (Webster) For this reason, GM AP made this region animportant part of their business plan. In order to enter the marketsuccessfully, GM made many investments in brands, plants, andproduction in Asia Pacific countries. Not only does GM AP hold a 21%stake in Fuji Heavy Industries and a 20% stake in Suzuki Motors, butalso 12% in Isuzu Motors (“Global”). Currently, the Asia Pacific regioncreates $60 million in profit and has a market share of 10.4%. In thewords of Chairman and Chief Executive Rick Wagoner, there are“unprecedented new opportunities” in the Asia Pacific region (Jones).

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Porters Five Forces

Rivalry

The rivalry within the automotive industry can be described as bothhealthy and destructive at times. Factors that affect the industryinclude: a competitive pricing environment and market share erosion.Intense competition has forced a dangerous pricing environment for allautomakers. “When one manufacturer offers incentives (such asrebated or discounted financing), the others generally follow suit or risklosing market share.”

One major factor in understanding the rivalry in the automobile industryis the competitive environment that lies within it. This rivalry can be

seen in the declining market share of numerous companies throughoutthe world, but mainly in North America. Market share losses across theworld, most recently in the US, suggest that the competitiveenvironment is not getting easier. In fact, from 2004-2005 GeneralMotors has lost almost 2 percentage points of market share in theautomobile industry. This is occurring, while companies such as Toyotaand Nissan are increasing their market share by 1-2 points. SeeAppendix (F).

One main factor to consider when evaluating the threat of rivalry is theexit barriers, which exists in the automobile industry. All of the

companies have invested heavily in the production of their respectiveproducts, which make it difficult to close down their manufacturingplants. Also, many regulations and contracts with unionized labor forcesmake it extremely difficult to lay off sizeable amounts of the laborworkforce. Therefore, due to the increasing competitive nature of theautomobile industry and decreasing threat of market share, along withthe high exit barriers we have labeled the threat of rivalry as High.

Barriers to Entry

Within the automotive industry lie many barriers to entry, which can be

difficult to overcome for smaller, less established companies. Some of these barriers to entry include: high capital costs, economies of scale,government regulation, and brand recognition. The largest entry barrierwithin the automotive sector is economies of scale. Also, high capitalcosts act as another considerable barrier to entry due to the sizeableamount of capital needed to run the day to day operations of thecompany.

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One of the overwhelming statistics a company must consider whenentering this market is the amount of capital needed to start thecompany and also the enormous costs needed to run the operation. In

fact, General Motors over the previous ten years has had R&D costsannually over $400 million. However, even though this one factor is adistinct barrier to entry we still feel that overall the barriers to entry canbe characterized as a low threat.

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Threat of Substitutes

In the past couple of years the threat of substitution of automobiles has

increased significantly due to the increasing price of gasoline.Customers are beginning to consider fuel efficiency when selecting avehicle. This can cause problems for the less fuel efficient automobilessuch as Hummer. Many of these automobiles will soon be substituted byfuel efficient cars. This is exemplified by the decline in sales of SUVs byFord and General Motors, and the increase in interest for hybrid vehiclessuch as the Toyota Prius.1 Other substitutes to the automobile includebus, metro, motorcycle, and train. In Europe and the US, the increase ingasoline prices has increased the use of these other forms of transportation. In Appendix (I) there is a breakdown of the problemsoccurring with oil and the rising gasoline prices.

The threat of alternative automobiles is mostly being seen in thedevelopment of hybrid-electric vehicles. Since their entrance into themarket, this type of vehicle has given way to new innovation andalternative forms of driving transportation. The need for this type of automobile was due to the overwhelming outcry over pollution fromnatural gas/diesel emissions. As a result, hybrid technology helpsautomakers meet stricter environmental standards in Europe and inNorth America.2 Currently, this threat can be characterized as moderatedue to the in adequate choices that are available and small amount of demand for alternative automotive vehicles.

Power of Suppliers

The relationship between the suppliers and the automobilemanufacturing industry has changed dramatically in the recent past.Manufacturers have begun to outsource the majority of parts used inthe production process. In addition, they have also decreased thenumber of suppliers significantly. They have accomplished this byrequiring the suppliers to produce major components of the automobile.For example, Lear and Johnson Controls have expanded to producecomplete interiors.3 By reducing the number of suppliers, the

automobile manufacturers have not only reduced costs, but have alsocreated closer relationships with their suppliers. This change has also

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Ward’s Dealer Business. “What Could Happen If Fuel Hits $3 a Gallon.”http://search.epnet.com/login.aspx?direct=true&db=buh&an=16958878

2 Mergent Online3 Levy, Efraim. “Industry Surveys: Autos & Auto Parts.” Standard & Poor’s, 12.

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had a significant affect on the suppliers. They are now expected tomanage units requiring greater production expertise, manufacturemore, and coordinate with the automobile manufacturers.4

It may seem that with a reduced number of suppliers the automobilemanufacturers would lose all power, but they have not. In order to meetthe demand of the manufacturers, the suppliers also reduced thenumber of automobile manufacturers they supply. Delphi Corp, thenation’s largest supplier to automobiles manufacturers, generates half of its sales from General Motors.5 This exemplifies the fact thatautomobile manufacturers still have power over the suppliers.

Also although it may seem that the manufacturers are dependent on thesuppliers, this is not especially true with the ever-growing globalmarket. The choices of suppliers are endless. Considering the

reduction in the number of suppliers, one would imagine that the powerof the suppliers has increased, but unfortunately they are still at themercy of the manufacturers, making the power of suppliers low.

Power of Buyers

The majority of automobiles are sold directly to franchised dealerships.And recently there has been an increasing trend of industryconsolidation. This trend gives more power to the dealerships, becauseof their overall hold on the cars. However, in the end the manufacturershave the upper hand, because of their ability to set the prices for each

automobile the dealership has. Other buyers of automobiles include thegovernment and large companies. These companies usually orderautomobiles in large quantities. They commonly have more say overthe price and production of the vehicle. Overall, after weighing all theaspects that are incorporated into the power of buyers we have rated itas low.

Firms Placement Relative to Competitors

General Motors placement atop the automotive industry since the1900’s

has begun to falter in recent years. Market share losses across theworld, most recently in the US, suggest that the competitiveenvironment is not getting easier. The Japanese automakers, especially Toyota, have taken away close to 3% of GM’s previous market share.

4 Levy, Efraim. “Industry Surveys: Autos & Auto Parts.” Standard & Poor’s, 12.5 McCraken, Jeffery. “Delphi announces larger-than-expected loss.” Knight Rider Tribune Business

News.

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Also, increased incentives offered by the Japanese automakers havedrastically impacted GM and Ford’s sales. However, General Motorscontinues to maintain their hold on the industry. This is evident in thechart in Appendix (E) showing that GM’s Chevy brand is second in unit

sales for 2004.

Compared with the rest of the industry, Toyota stands out amongst thecrowd as the company to watch in future years. The boldness andmagnitude of Toyota’s vision has shocked the industry. “Unlike its UScompetitors, which depend on financial operations to beef upprofitability, Toyota derives its success from its core auto operations. Thus in 2003/04 Toyota’s operating income margin from its caroperations alone stood at 9.5%, compared with a feeble 0.5% for GM in2004 and an even worse –0.1% for sickly Ford.” (Economic)

Daimler Chrysler and Ford are GM’s other key competitors. They, likeGeneral Motors, are much too dependent on the US market and haveexperienced a decrease in sales in the recent past. In order to deal withthese decreases, Ford aims at producing better and more fuel efficientcars, where as GM reduces the cost of its vehicles. Also, DaimlerChrysler dedicates a large part of its income to research anddevelopment in order to make safe and ecologic cars, while GM isinefficient in this department which has caused the suffering of their oldfashioned brand. In Appendix (K) there is an outline of General Motorsthree main competitors: Toyota, Ford, and Daimler Chrysler.

Even with decreasing market share and lowered profits, GM is slowlybeginning to turn around their problems by improving their product mix,and growing their automotive segments within Latin America, Europe,and the Asia Pacific. Undoubtedly though, GM has a long road ahead if it wants to regain its market share and position within the automotiveindustry.

Competitive Advantage

A competitive advantage is a tool that every company strives for toincrease market share and maintain industry dominance, however it can

be one of the most difficult tasks for a company to hold. Unlike mostcompanies General Motors strives to have that competitive advantagein the automotive market, however recently they have found that tokeep this advantage they need to be creative in their company. Thesuperior quality of their SUVs previously held the top positioncompetitively for General Motors, but due to the recent decrease in

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demand for SUVs, GM is looking elsewhere for its competitiveadvantage. GM is currently relying on its strong brand recognition,vehicle safety recognition from OnStar, and financing services (GMAC)to carry the company’s competitive advantage.

GM has some of the most powerful range of brands in the automotiveindustry. GM’s brands include: Chevrolet, Saturn, Saab, Buick, andPontiac to name a few. This year Hummer won the JD Power andAssociates award for most improved brand. With their strong brandrecognition, GM maintains a loyal customer base and valuablereputation (‘General Motors’).

Safety is also important to General Motors. GM surpasses mostautomotive manufacturers whose focus on safety including seat belts,air bags, and crash tests, by offering OnStar exclusively in its vehicles.

OnStar’s features include tracking stolen vehicles and automaticallyalerting the authorities after a crash. This option is the source forcompetitive advantage due to consumer’s interest in safety. KeithLang, vice president of Tennyson Chevrolet, says "We have customerswho come in and specifically buy vehicles because of OnStar. It's ahuge safety feature" (LaReau).

GMAC Financial Services offers automotive and commercial financing. This arm of General Motors provided close to 80% of GM’s total earningsin 2004. GMAC is vital to the success of General Motors due to theirfinancing capabilities in regards to the leasing arrangements provided

by the local dealerships. GMAC is among the largest non-bank financecompanies in the world, and their experience within the field of autofinancing easily gives GM a competitive edge over their rivals.

Internal Analysis

Internal Strengths

GMAC’s Continued Earnings Growth

“General Motors Acceptance Corporation’s (GMAC) performance is quite

extraordinary, given the more difficult environment in which it operates”(Eavis). GMAC is the largest sub-investment grade finance companywith $315 billion in assets as of the first quarter 2005. Over the last fewyears GM’s total earnings have come to rely on their financial subsidiary(GMAC) in order to provide a significant source of cash flow. In 2004alone GMAC made up 79.6% of the total earnings for General Motors.See Appendix (C) GM’s auto sales were also dependent on GMAC

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financing. “In the first quarter, 54% of retail sales were funded byGMAC, compared with 41% in the year-earlier period” (Eavis).

Much of the success of GMAC comes in the form of borrowing, lending,

and managing risk. GMAC’s financing operations were significantlydown compared to the year before due to rising interest rates andstronger used car prices. The shining star within GMAC over the lastyear was their mortgage operations. This operation earned $385 millionin the first quarter of 2005 due to the fact that US mortgage prices weredown.

Marketing Strategy/Consolidation

GM has decided to limit its product portfolio and focus on (Chevrolet,Cadillac) as its “full-line marquis.” “Saturn, Hummer and Saab would bepositioned as smaller niche brands, and Pontiac, GMC and Buick would

be combined into a complementary distribution channel that couldaccount for at least 1.2 million cars and trucks annually” (Howes). Thismove is a drastic shift from their previous marketing strategy whichincluded offering an assortment of vehicles for every brand. Thisstrategy was formulated in order to prevent the opportunity foroverlapping products.

Instead of producing too many average vehicles, GM will be able tofocus on a line of great vehicles which will make the brand stand out. The Detroit News also stated that all three brands (Pontiac, Buick, andGMC) will be offered under a single dealership. This change was

instituted to increase productivity and branding within each dealership.

GM LAAM/ GM Asia Pacific

“GM's Latin America, Africa and Middle East region is surging. NewChevrolet models from GM Daewoo Auto & Technology Co., GM's Koreanpartnership, as well as an increase in demand for Cadillac, are leadingGM's charge in the region.”(Stein) Improving economic conditionswithin Latin America have resulted in improved growth for 2004.GMLAAM recorded their 5th consecutive quarter of profit and continueto gain market share within the regions of Argentina and South Africa.GMLAAM also had a 26% increase in vehicle unit sales for 2004 (GM

Annual Report for 2004).

GM Asia Pacific is slowly evolving into a region where increased marketshare and profits will begin to impact GM’s total bottom line. “The Asia-Pacific automotive market has been the primary driver of global growthbetween 1999 and 2003, expanding by 9.7% since 1999, with increasinggrowth rates throughout the 1999-2003

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period.”(http://search.epnet.com/login.aspx?direct=true&db=buh&an=14752151) In 2004 GMAsia Pacific recorded a record net income of $729 million. See Appendix(D)

Internal Weaknesses

Rising Health Care Costs

In a recent SEC filing, General Motors said it remains burdened by a highfixed cost structure due to its large retiree base. Currently, for every GMemployee there are 2.6 retirees. Along with this, GM spent 5.2 billiondollars on health care in 2004 for 1.1 million employees, retirees, anddependents throughout the U.S. (GM Annual Report 2004). For eachbenefit provided to employees in health care it adds about $1,400-1,500 to the sticker price of each car and truck built in the U.S.Accordingly, GM is paying more per vehicle in health care costs than in

steel. One major concern is the amount of financing that is leveraged ontheir balance sheet due to high fixed costs associated with health care. This concern could affect the condition of the company in the future.

Weak Product Mix

The bedrock principle, which GM built upon-offering a car to feed everymarket segment- has developed into a series of contrived brands, mostwith little identity, and overlapping products (Business Week). A majorconcern with their product mix is their inability to get a product outthere that people want. They have focused a large majority of theirproduct structure on trucks and sports utility vehicles, when gasoline

prices have increased and consumer demand for these products hasweakened.

GM will spend 8 billion on new products this year, up from 7 billion lastyear. This seems like a good sign, but compared to Toyota who spent15.3 billion they are far behind. GM officials said they will not eliminateany brands but will look at reducing the number of similar productsoffered by divisions. However, there are two major brands that havebeen pinpointed for elimination: Pontiac and Buick these are due to slowsales and weak consumer demand. See Appendix (E).

Lack of Flexibility A key concern for the health of General Motors relies heavily on theamount of flexibility it can recoup in North America and Europe, mainlythrough Opel. GM has a high dependence on the North American marketfor sales, namely, they account for 60% of unit sales in 2004. Also, GMdepends heavily on its financial subsidiary GMAC, which accounted for79.6% of the companies profit in 2004. With these two segments

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accounting for a large portion of profit and sales within America it isreducing the capability of GM to branch out of its current structure.

Opel is one of five automotive companies tied into GM’s annual sales. In

the European automotive market, Opel accounts for 80% of GM’sEuropean automotive sales. This reliance means that if Opel happens toexperience any problems GM’s overall sales and profits will be greatlyaffected. See Appendix (A) for a detailed list of GM’s Strengths &Weaknesses.

Strategy

The automotive sector of General Motors is currently experiencing anextended period of decreased profitability and sales. In order to turnaround the company as well as ensure future growth, we have proposed

three strategies. The first strategy, a retrenchment strategy, focuses onproduct redevelopment, more specifically brand reinvention. The secondapproach to GM’s redevelopment is a growth strategy, which overviewsthe option of expanding GM into emerging countries. Finally, the laststrategy, a restructuring strategy, explains a way to increase profits inthe long term by revising the current health care and pension plans. The main strategy we will focus on is the Retrenchment strategy,because it provides the greatest amount of near term and sustainableprofitability; however the other two strategies are also analyzed inAppendix (J).

Retrenchment Strategy: Product Redevelopment

In order to turn around their current situation, General Motors mustmake significant changes to their current product mix. First, they mustbegin by reducing the number of overlapping vehicles across brands.Different brands should not take away customers from one another;rather they should take business away from the competition. Becausethis happens often in GM’s case, it is time to cut and consolidate.

Overlapping models

Currently, General Motors has over 89 models. We suggest that theyremove a number of these models. By doing this, GM will not onlyreduce the number of overlapping models, but will also concentratetheir product mix to allow for future redevelopment. The chart inAppendix (M) shows their current collection as well as our suggestedportfolio. Because it would take time to justify the reasons behind

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removing each model, we will concentrate on explaining a couple of ourdecisions.

First, GM should remove its GMC Cargo Van and Passenger Van because

the Chevrolet brand has the same two vans with only minor differencesin the model. Secondly, due to the decrease in SUV sales, GMC shouldreduce the number of Envoy models from 5 to 3 and Yukon models from4 to 2. Finally, Pontiac should remove their Montana Vans from theirproduct line. Both of these vans have an out of date design and are notas profitable as the other vans in GMs product mix.

In the past, GM’s strategy included offering an assortment of vehiclesfor every brand. Recently, General Motors has decided to change theirstrategy by limiting its product portfolio by focusing on Chevrolet andCadillac as its marquis brands, repositioning Saturn, Hummer, and Saab

to niche brands, and combining Pontiac, Buick, and GMC into acomplementary distribution channel (Howes). By making thesechanges, it seems that GM has taken a step in the right direction.

Reinvention

After reducing the number of overlapping automobiles, General Motorsmust focus their attention on their brands. Each brand should hold anidentifiable position in the market; if it does not, there are two options:eliminate or reinvent it. Although many critics believe General Motorsshould eliminate a division, namely Pontiac or Buick, this does not seem

to be the best option. Eliminating a brand is costly, for example, thecost for closing Oldsmobile totaled at $1 billion (Welch). Instead,General Motors should focus on reinventing its struggling brand names.

Reinventing a brand is difficult and can be very risky. Fortunately,General Motors has already successfully reinvented its Cadillac division,giving them experience with this difficult procedure. To begin theprocess, GM must first ask itself the question, “What does each brandstand for?” By answering this question, GM can use the information theyhave gathered to associate an overall feeling to each brand. Then GMmust conduct research to create a design that fits each brand. Cadillac

invested $4 billion in research to develop a “stark new design thatreveled in its edges and sharp angles.” (Greenberg) Once the productline is completed, GM must focus its attention on marketing the newlyrevamped product to its consumers. GM spent $220 million in 2002 and$100 million in 2001 on advertising the new Cadillac design(Greenberg).

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Chevrolet We suggest that GM begin its brand reinvention with Chevrolet andBuick. We chose Chevrolet because it is their number one brand andhas an out of date design. They must begin by creating a good entry

level vehicle that is comparable to Toyota’s Corolla or Honda’s Civic.Although GM has recently introduced the Cobalt, it is not doing the job. The Cobalt was supposed to replace the Cavalier and “even with GMsprojections, the Cobalt won’t come close to matching the Cavalier’ssales of 195,275 in 2004.” (Welsh) For this reason, GM must head backto the drawing board and reinvent the Cobalt. In order to do this, GMmust increase their costs in the Research and Developmentdepartment.

It is also important to focus on Chevrolet’s SUV line. GM must firstreduce the number models. We suggest that Chevrolet halt production

of the Trailblazer and Blazer. We chose these two models because theywere the least profitable. Also GM should focus on the emerginginterest in sport wagons. They recently introduced the Equinox, a sportwagon, with a sleek new design. Using this design, we suggest that GMreinvent their SUV line to resemble the Equinox.

Buick In the past, GM has tried to decrease the median age of its Buickcustomers from its current 70 years of age. In the recent past, they feltas though they may have achieved this when they introduced their newLaCrosse in 2005. Unfortunately, the public did not agree. Even dealers

were complaining, “We needed a halo car to relaunch Buick, LaCrossedoes not have breakthrough styling.” (Halliday) Fortunately, they havecreated a car that may appeal to the younger audience that is due tocome out in 2006, the Lucerne. In order to verify this, we polled 32students. See Appendix (L). We were surprised by the unanimous votefor the Lucerne design. We suggest that Buick remove Century,LeSabre, Park Avenue, and Rainier from their product line. Then GMmust, using the design of the Lucerne, improve the LaCrosse and createa new model. By doing this, Buick will start to attract a youngeraudience.

Many critics refer to GMs automobiles as, “outdated, poorly constructed,and wrapped in dull cookie-cutter styling.” (Yates) As General Motorsreinvented Cadillac, it is now time to reinvent their other brands. Asstated above, this can be very risky as well as costly. Although GM wassuccessful in reinventing Cadillac, there is a chance that they may notbe as successful with other brands. Unfortunately, this is a risk GM

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must take in order to turn around its struggling company and beginfuture growth.

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Webster, Sarah. “GM alters strategy in Asia Pacific.” The Detroit News. June 12, 2003.http://www.detnews.com/2003.autoinsider/0306/12/b01-190819.htm. (May 24, 2005).

Welch, David. “Toughest Job Yet for This Mr. Fixit.” Business Week .Issue 3908, p72. November 15, 2004.http://search.epnet.com/login.aspx?direct=true&db=bug&an=14962494. (May 23, 2005).

Welsh, Jonathan. “Drive Buys/ Trying Not to Be Cavalier.” The WallStreet Journal. March 11, 2005. http://proquest.umi.com/pqdweb?did=806399881&sid=1&Fmt=3&clientId=3960&RQT=309&VName=PQD. (June 6, 2005).

“Why GM’s plans won’t work.” Business Week .http://www.businessweek.com. (May 23, 2005).

Yates, Brock. “What’s Good for General Motors?” The Wall Street Journal. May 24, 2005. http://proquest.umi.com/pqdweb?did=843811411&sid=1&Fmt=3&clientId=3960&RQT=309&VName

=PQD. (June 6, 2005).

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Appendix

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Appendix A

Internal Strengths & Weaknesses

Strengths

GMAC’s Continued Earnings Growth:

GMAC has delivered growth in earnings for 10 straight years.Generating much needed cash flow and net income GeneralMotors.

Mortgage operation recorded record profit in Q1 of 2005

GMAC made up 79.6% of GM’s total earnings

Marketing Strategy/ Consolidation:

GM has decided to limit its product portfolio and focus on

(Chevrolet, Cadillac) as its “full-line marquis” while the othersix are going to be “focus brands” with limited product line-up.

This will be done to phase out overlapping products. Consolidation of distribution channels:

Pontiac, Buick, and GMC will be offered in one dealership. This change was instituted to increase productivity andbranding within each dealership.

GM LAAM/ GM Asia Pacific:

Fifth consecutive quarter of profit.

Increased market share for Argentina and South Africa. Expanding growth in the Asia Pacific region especially China

Product Pipeline:

25% of volume in ’05 will come from new productdevelopments

“Cadillac is red hot; it is the leading edge in product turnaroundand had the largest sales year since 1990.” Richard Wagoner-CEO of GM

Product innovation in regards to fuel cell cars such as thehydrogen ski.

Weaknesses

Rising Healthcare Costs:

GM spent 5.2 billion dollars on heath care in 2004 for 1.1.million employees, retirees, and dependents throughout theU.S.

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Older workforce within the company in need for heath carecoverage.

Heath care costs an estimated $1,400-$1,500 per vehicle

Weak Product Mix: Should focus on a set number of brands and not waste capital

on ailing/non profit operations.

GM will spend 8 billion on new products this year, up from 7billion last year. Toyota spent approximately 15 billion on newproducts.

Two major brands that have been pinpointed for elimination:Pontiac and Buick these are due to slow sales and weakconsumer demand.

Lack of Flexibility:

GM has a dependence on the North American market for sales,namely, they account for 60% of unit sales in 2004.

GM depends heavily on its financial subsidiary GMAC, whichaccounts for 79.6% of the companies profit in 2004.

In the European automotive market, Opel accounts for 80% of GM’s European automotive sales.

GMAC credit rating downgraded to Junk Status:

This affects the future of GMAC as far as its lending capabilities

are concerned. A bond such as GMAC’s, which obtained JunkStatus results in the yield being higher and an increased risk of default. Also, it makes auto loans more expensive and raisesborrowing costs to customers.

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Appendix B

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Appendix C

25



Appendix D

26



Appendix E

27



Appendix F

28



Appendix G

29

2 0 0 4 V e h ic le U n it S a le s b

6 02 2

8 %

1 0

G M N A

G M E

G M LA A

G M LA P

GGMLA



Appendix H

Profitability Analysis

0

10

20

30

40

50

60

Operating Margin 9 5,7 5,2 6,7 6,8

Gross Profit

Margin

28 26 24,8 26,4 25,4

EBITDAMargin 16 13 12 15 14

2000 2001 2002 2003 2004

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Appendix I

- Steel: Steel typically accounts for about 5% of the manufacturerstotal vehicle production costs. The future trend is for steel prices to

lower by the end of 2005. According to several analysts, AK steel, alarge supplier to the automotive industry, said that it obtained doubledigit price hikes on two-thirds of its contracts. The primary result of high steel prices are due to shortages of raw materials due to heavyglobal demand in China. China is still the number one consumer of steel and with many manufacturing companies and GDP growth of about 7.0% it will continue to keep the steel prices at high levels.Another major factor are freight costs, import levels decreasing, andconsolidation within the industry.

- Oil/Gasoline: Oil prices are expected to rise in the short-run due

to risks of supply disruptions caused by Iraqi elections and OPECholding back production. After this rise, which we are currently inprices are projected to fall to the mid 30 levels according to severalanalysts. OPEC reduced its forecast for world oil demand growth in2005 by 80,000 barrels per day. This estimate shows that OPEC isconfident that the levels they currently have for the year aresufficient and appropriate for the coming year. Due to the increase inthe price per barrel of oil, gasoline prices have risen 2.6% in the pastyear. The price of oil is an important barometer in measuringconsumer confidence in the automotive industry- high price/oilmeans consumers are more likely to hold back on buying cars.

- Currency: European automakers share prices have continued toslide in the 4th quarter of 2004 due to the Euro’s appreciation in valueagainst the dollar, which eroded the value of export revenues. As thedollar continues to decline against most major currencies in 2005,one can expect multinational firms to benefit from increasingdemand. This means that U. S. manufacturing mainly automotivecompanies who have sales globally can expect to see an increase inmarket share as products become more competitive.

European exporters have suffered huge losses as the euro has

continuously strengthened against the dollar in the previous 3 years.As this is occurring, the Yen is also weakening which is giving Japan’sautomakers an unfair advantage over the field. From May 12, 2002,through December 2, 2004 the euro appreciated more than 45%from about .91 to nearly $1.33. As of June 7, 2005, 2005, the Eurowas up against the dollar closing at $1.22. Thus showing a recovering

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dollar, this will in turn result in pressure being put on commodities tolessen their current high price levels.

Appendix JGrowth Strategy: Expansion

One of the biggest issues for GM is that sales are either decreasing orstagnated. To cope with this, GM should find new markets in order toincrease its sales and ensure future growth. Today, emerging countriesrepresent an important opportunity for growth because of the

population increases and their ability to purchase more. That is why GMshould change their direction of strategy: instead of investing in Europe,GM must specialize in a different market, that of the emergingcountries.

The graph in Appendix B shows the fact that in 2030 the number of vehicles in the developed countries will increase by two times. At thesame time, the number of vehicles of the emerging countries willincrease by 4 times more. As a consequence, there is an increasedopportunity in entering the emerging countries. This evolution isconfirmed by the fact that the population of these countries are asking

for more and more consumption. Therefore, in China, a car culture isappearing replacing the bicycle. In this country, it is obvious that carswill become the dominant way of transportation.

It is essential to point out that the demand is still quite poor, and theability to purchase products is still less than in developed countries. So,GM must produce inexpensive cars for these countries in order to besuccessful. For example, Renault produced a specific car, the Logane,in Eastern Europe. This car is very cheap, 5,000€, and did not have anyoptions making it have the lowest price possible. This strategy shouldbe followed by GM. These cars have targeted a huge part of the

demand and allow a standardized production which reduces costs.Moreover, the cost of the production, facilities, and workforce is lowerthan in the developed countries. As a consequence, GM is bound toincrease its sales.

To manage this strategy, GM should be concentrated in the countrieswhich have the biggest potential. They begin at first in Asia, (China,

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Taiwan, India), which is 53 % of the total of emerging countries; thenLatin America (Brazil, Argentina) which make up 28%; and finallyEastern Europe which makes the majority of the rest of these emergingcountries.

AsiaBecause GM already has some firms in China, GM should extend its baseinto India. Not only is the cost of the workforce very low, but also thepopulation is growing as well as demand and it is physically close toChina. Toyota is the only other automaker that has taken a position inIndia. The others car brands in this country are held by national firms. That is why GM has the potential to grow in India. In order to open afirm in India, GM will have to invest $150 million –as Toyota did. Wemust also point out that a substantial amount of money must be spenton communication, because GM is not very developed in India.

Latin AmericaIn the region of Latin America, GM should open one factory in Mexico. Infact, we have not only chosen this country because its car production isvery high, but due to the cost of the workforce being low and knowledgefor car production. Brazil would not be a good choice because somefirms as Renault, Fiat, and Peugeot have already created manyfactories. Also, the economy in Argentina is not stable enough. Tobegin production in this country, one factory will be sufficient at firstbecause it is hard to evaluate the consumption and the demand in thiscountry. The costs will total close to $700 million in this particular

venture. These costs will allow GM to have a higher structure thanPeugeot (which have invested $600 million) in this area and to followRenault (which invested $1.2 billion).

Eastern EuropeIn Eastern Europe GM will profit from the knowledge and the price of theworkforce. In the same time, the demand is huge and firms alreadyknow a huge success. Two industries should be created: one inRomania, another in Slovakia. The cost of building a factory in each of these countries is close to $1.5 billion. To compare, PSA invested morethan $1.4 billion in Czech Republic and Romania. It is necessary to

invest more because GM is late to join this market, and it is necessary toreduce the gap in a market where the brand value of the cars isimportant.

Nevertheless, following this strategy has its set backs. Indeed, it isimportant to be one of the first to enter into these countries. Forinstance, Renault and Fiat have taken an increased position in Brazil. To

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compete, the others brands have to make an important effort oncommunication –to increase the brand value- and organization. Also,many brands are going to follow this strategy, so there is a risk of aprice war.

Also, these countries lack the necessary infrastructures needed todevelop the numbers of the cars. That is why; some governments havetaken measures to limit the number of cars into big cities like Beijing. Itis important to underline that the policy and economic situation in somecountries is not stable. That represents a risk for a firm which will investa lot of money. Finally, it is necessary to put forward the fact that thisstrategy will not give profit in the short term because the demand is notdeveloped enough and the purchasing power is still low.

Despite the numerous setbacks involved in extending production to

emerging countries, we feel that by using this strategy, GM will be ableto compensate for the decrease of its sales in North America andEurope.

Restructuring Strategy: Health Care and Pension Plan

In September of 2003, General Motors embarked on labor negotiationswith the UAW involving their latest contract. What resulted wereconcessions which have to this date, single handedly assured GeneralMotors of annual profit losses, at least until the next round of negotiations begin. According to Business News Bank, General Motors

spends more on Health care and pension plans per vehicle than onsteel. Analysts’ estimate that combined these two non value addedcosts accumulate to $2,200/vehicle. Comparatively, Honda and Toyotaspend approximately $100/vehicle.

Recently, GM and the union have met to discuss their previous contract.Although the union was noncommittal in reopening its contract with theBIG Three, their willingness to discuss the industry’s deepening financialdistress was encouraging. In order for GM to improve for the future, theUAW must come back to the negotiation table and reevaluate theirprevious contract.

General Motors has three major alternatives it can pursue in therestructuring of its Health Care and Pension plans:

1. Have UAW members covered under same H/C plan as non-unionsalaried workers.

2. Have Employees pay for a portion of their Health Care costs.

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3. Separate the 2 units and file Chapter 11 Bankruptcy, which willforce the UAW to renegotiate their contracts.

Tactic 1

At last months New York auto show Bob Lutz, GM’s vice chairman forglobal product development, suggested union-represented hourlyemployees should share the same, less generous, health care benefitsas salaried employees. Last year GM’s 119,000 hourly workers paid 7%of their health care costs, while its 38,000 U.S. salaried workers footedabout 27% of their costs (Garsten). When you compare this to theaverage employee in the U.S., you find that they pay 37%. SeanMcAlinden, an economist and labor expert with the Center forAutomotive Research, estimates GM would save as much as $1.4 billionannually if this occurred (Garsten).

Tactic 2 The second restructuring tactic is for UAW members to pay a portion of their Health Care costs. This can be done by having a single, salariedworker pay $100 a month toward health costs, while hourly unionworkers pay no premium and only $5 co-pay on medical expenses. Thisparticular tactic will save an estimated $1.2 billion a year. However, theconcessions that need to be made can only be approved by the UAWthrough a renegotiation of its current contract. Otherwise, GM will haveto wait for the next round of contract negotiations to resolve the risinghealth care crisis and pension problems.

A positive sign though is that the negotiation talks that occurred withChrysler Corp and their contract with the UAW recently. Theynegotiated a new Health Care agreement that requires around 35,000Chrysler employees and retirees to start paying deductibles of between$100 and $1,000 for Health Care. Our best recommendation is forGeneral Motors to follow the plan used by Chrysler in eliminating theirHealth Care cost structure already in affect.

Tactic 3 The final option calls for General Motors to separate their Automotiveand Financing segments, or even sell the entire financial subsidiary.

However, we believe that selling GMAC in its entirety will be toochallenging a task based on the complexity of GM and GMAC’srelationship. In addition, GMAC generates much needed earnings andcash flow for GM.

Therefore, the only alternative left for General Motors would be toengage in further negotiations with the UAW members and ask for

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concessions. Unless something is done GM’s healthcare bill is expectedto climb from $5.3 billion to $5.6 billion this year, making it the US’sbiggest single healthcare provider (Simensen). GM’s Chief FinancialOfficer, John Devine, said: “Health care is a real drain on our

profitability, and cash, and a big dent on the balance sheet. The issueis making us increasingly non-competitive.” (Simensen)

One way General Motors can force the UAW members back to the tableis by threatening their workers with a refusal to pay for retireehealthcare and the elimination of its pension plan. This possibility,along with the rumors of filing for bankruptcy, has many of GM’s160,000 US workers and 440,000 pensioners worried about their future.Fred Spearing, a GM worker, said: “Everybody is walking on eggshellsright now out of fear they will be laid off or even lose their retirementbenefits.” (O’Dewell) If the company did decide to seek out bankruptcy

protection, contracts with unionized members and their existinghealthcare agreements could be renegotiated (O’Dewell). GM couldthen pass on their pension obligations to the federal government, whichwould reduce a large portion of GM’s fixed costs.

This major strategy involving the restructuring of GM’s pension plancalls on General Motors to follow the same path the U.S. Steel Industrytook in their latest bankruptcy filings. The current pension planstandards in that industry are:

1. Elimination of pension plans for current workers.

2. Elimination of pension liabilities for retired workers.3. Scale back Health Care plans for retired workers.

Currently, the Steel Industry is seeing continued signs of profitability asa result of their recent bankruptcy filings, renegotiation of unioncontracts, and funding from the federal government. We feel that if thistactic can be duplicated in the event that the other two fail, then therewill be a great opportunity for re-emergence in the automotive sectorfor General Motors.

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Appendix K

Key CompetitorsDaimler Chrysler:

Strength:- Research and development :

Indeed, more than 25000 salaried workers in this department.What is more, 6,2 billion USD were concentrated in 2003 forthe research of new products. That is why, the R&D is one of the best way for Daimler to be more competitive.

- Commercial policy :Mercedes has got a famous image thanks to the reliability of their car. For the consumer, the brand is linked to luxury and

standing cars. With the Smart car, Mercedes tries to diversifyits range of offerings. Now, Daimler-Chrysler aims at coveringall the segments of the market

- Anticipation and reactivity: This firm did a partnership with Mitsubishi to penetrate theAsian market. Moreover, the company succeeds in anticipatingthe use of diesel in the French market, thanks to that itachieves to earn market shares.

Weakness:

- The brand image :Chrysler has got difficulties to make the ends meet because of its image. Indeed, this brand has got a high American image, soit can not export its brands in all over the world.

- The quality :Mercedes had to cope in 2004 due to a problem with quality:some of the cars did not succeed the crash tests performed onthe car; that brought a decrease in their sales.

Ford:

Strength:- The brand image :

Thanks to over 100 years of experience, this brand is wellknown in all over the world. What is more, the organisation of the work created by Ford is also famous. That allowsunderlining that Ford gets the leadership in the world with thesales of the Ford-Focus.

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- The offer : The range of Ford is very large. This firm is present in all thesegments, that is why it is able to compete with other brands.

- Activity of credit : This activity represents a part increased in the activity of the

firm.

Weakness:- The brand image :

Like Chrysler, Ford has got difficulties to make the ends meetbecause of its image. Indeed, this brand has got a highAmerican image, so it can not export its brands in all over theworld. Also, like GM, they are dependent of the US market.

- The costs :Compare to GM, Ford has got high costs. Actually, its R&Ddepartment is not as good as the Daimler one.

- Lack of anticipation :Compare to its competitors, Ford is not able to be reactive.Indeed, this firm is late in Asia and adapts to slowly its range.

Toyota :

Strength:- Innovation :

The R&D department is very successful. Toyota is the brand topof the pile for the technology. This firm gets indeed all theknowledge of the Japanese companies in this way. What ismore, Toyota innovates for the organisation of the production(JIT) in order to reduce the costs.

- The offer : The range of Toyota is very large. This firms is present in all thesegments, that is why it is able to compete all the others

brands. In USA, Toyota earns market shares thanks to its pickup. The offer is valued by the capacity of the brand to adaptthe product to the market and by the brand image (reliable).

Weakness:- The range :

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Even if Toyota is present in all segments, this firm is not able todevelop the top of the range product.

- The position :

The firm is based in Japan. This market is too narrow. That iswhy, Toyota is obliged to compete is foreign countries werenational brands are praised.

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Appendix L

Using the pictures below, we polled 32 students by asking them whichpicture they preferred. We received an unanimous vote of 32-0 for the

Lucerne model (the bottom).

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41

Documents

General Motors Stratey Report