General Motors is a motor vehicle company in the United States that started manufacturing in 1915. The purpose of this report is to examine the decisions that were made within the company, in the lead up to their financial crisis in 1991. In the years preceding this downfall, the CEO Robert Smith made several decisions that contributed to the declining financial status of General Motors. Consequently, when Smith retired, the Black Swan Event of America’s recession left the next leader unable to rectify the situation.
Following the analysis of the decisions and issues, the author will make recommendations for changes to the decision making process at General Motors, with the intention to avoid a similar situation reoccurring. 2. ANALYSIS The first decision that influenced General Motors to fall into financial crisis was the merger of the companies General Motors and Electronic Data Systems. This decision caused many problems as Smith (CEO of General Motors) and Perrot (CEO of Electronic Data Systems) both wanted to maintain their leadership and power over their companies.
The deal combined them but Electronic Data Systems continued to run as a separate company within General Motors. In the merger, Smith and Perrot had incongruent values around how to appropriately compensate their employees. Smith valued reliable, committed workers who were rewarded with yearly pay raises and a predictable career ladder climb. Perrot however, believed in a different motivation strategy, which entailed great monetary benefits for hard work and success (Monks & Minow, 2011; Robbins & Judge, 2011a).
This argument surrounding the distributive justice of compensation continued to cause conflict between the two CEO’s (McShane, Olekalns, & Travaglione, 2013). The guarantee that General Motors gave to Electronic Data Systems that stock would reach one hundred and twenty five dollars in seven years, (otherwise they would make up the difference), was an example of the decisions Smith made that promised large sums of money. Smith was bounded in the rationality of his decision as he could not predict the success or failure of another company that he had little knowledge of its processes and day-to-day functioning (Kalantari, 2010).
Because the decision was made with a lack of knowledge and involved a large risk of a money guarantee, Smith was acting with an overconfidence bias (Robbins & Judge, 2011b). In the years that Rodger Smith was CEO of General Motors, the financial status of the company declined (Monks & Minow, 2011). Despite receiving negative information of the decreasing finances, Smith continued to act under the bounded rationality of his cognition. He continued to escalate his commitment by making decisions that involved spending more of the company’s money (Kalantari, 2010; Robbins & Judge, 2011b).
These decisions included expanding the company’s assets by buying an aircraft and agreeing to a lucrative payoff scheme for retrenched workers in the recession (Monks & Minow, 2011). Another example of Smith’s ‘cash cow’ strategy was in the split of the two companies General Motors and Electronic Data Systems. General Motors offered Electronic Data Systems almost double what his shares were worth to leave General Motors, leaving questions around the ethics of this decision. Smith was bounded by his ego in this decision, because the split from Electronic Data Systems would enable him to maintain leadership and power.
Smith was willing to overpay Electronic Data Systems to leave his company, even though it was not the best financial decision for General Motors (Fisher & Lovell, 2009; Woiceshyn, 2011). Similar ethical questions were raised when Electronic Data Systems changed the prices of the computers and processors it wanted General Motors to buy after the merger, and when Perrot talked publically about problems with the business processes at General Motors before the two companies split. Further, the decision to raise executive pensions also displayed aspects of ethical egoism.
Smith decided to increase the pension from $700,000 to $1,250,000 the year before he retired. This was an example of ethical egoism because increasing the pension meant that Smith was assured his “own happiness through a productive, independent life” (Fisher & Lovell, 2009, p. 122). The introduction of the executive pension scheme demonstrated how one’s personality can influence them in the decision making process. The personality trait of narcissism was displayed in this decision. Smith raised the pension due to his grand sense of entitlement.
This demonstrated his belief that he deserved a large sum on retirement, even though the company’s finances were declining (Robbins & Judge, 2011a). As well as characteristics of narcissism, Smith often acted with a high self-concept in his decisions. He believed that he was extremely competent in his decisions and that following them would bring success to the company (McShane et al. , 2013). Acting with a high self-concept, meant Smith did not acknowledge the external environment of the business or the company’s competitors; “…was less efficient than its rivals and losing market share as a result…” (Monks & Minow, 2011, p.
28). Failure to change with the new technologies that other car manufacturers had introduced, saw General Motors products unable to compete against rivals, Ford and Chrysler. As a result, the company lost its market share, which contributed to the eventual financial downfall of General Motors (Monks & Minow, 2011). Examining the ‘14th floor’ at General Motors provides further insight into why the company failed to succeed. Using Hofstede’s framework, the ‘14th floor’ created a culture shaped around a high power distance and centralization (Robbins & Judge, 2011a).
The board and the senior executives at General Motors kept themselves separate from the other workers to display their status and authority. This small group held all the decision making authority and ordered those decisions down the workplace hierarchy (Khatri, 2009). The culture also extended through to the employees at General Motors. The employees were encouraged not to voice their concerns or suggestions. Instead, problems were solved on the ‘14th floor’ through formal procedures involving working parties (Monks & Minow, 2011). This extensive process meant decisions took longer to be made and implemented (McShane et al.
, 2013); “business matters that should be decided in minutes took days or weeks shuttling up the hierarchy in a series of unproductive meetings” (Monks & Minow, p. 27). Due to this decision making process, the company failed to make changes as rapidly as the external environment required and General Motors couldn’t maintain its position against its competitors (Monks & Minow, 2011). The lengthy decision making process meant that problems within the company were not addressed. The declining quality of the cars was not seen because the ‘14th floor’ were not involved with the rest of the workers.
Therefore the people with the decision making authority could not see what needed to be changed (Khatri, 2009). Further, the high power distance culture meant communication could only travel down rather than both up and down the workplace hierarchy. This left the ‘14th floor’ unaware of issues that contributed to the decline of General Motors (Khatri, 2009). The rationality of the decisions made by the select group on the ‘14th floor’ were bounded because the constricting culture provided an atmosphere that encouraged ‘group thinking’.
The members of the board where encouraged to support all the decisions Smith made because General Motors valued compliance and avoidance of disagreements (Johnson & Johnson, 2009). In doing this however, alternatives were not explored and the decisions were never questioned. Failure to engage in effective discussion around decisions meant that risks weren’t considered, there were biases in the selection process and the morality of decisions was overlooked (Johnson & Johnson, 2009).
A final significant challenge for General Motors was the black swan event, which occurred when America went into recession. The recession was a black swan event because it had not been anticipated, General Motors was unprepared for its occurrence and it had an extreme impact on the company (Taleb, 2008). Due to the large amounts of money used for expansions and compensation schemes prior to the black swan event, the company failed to create a buffer of finances.
This meant that coming into the recession, there was no money available to counteract the financial losses (Monks & Minow, 2011). Further, the culture and decision making processes meant that General Motors failed to respond quickly to the crisis, leading to a rapid decline in the company’s finances (Monks & Minow, 2011). 3. CONCLUSION The black swan event, along with the complications of Electronic Data Systems and General Motors combining and separating, were major contributors to the financial downfall at General Motors.
These events, along with the culture of the workplace and the personality traits, values, ethics and perceptions of Robert Smith, all influenced the financial state of the company and how effective General Motors decisions were when unpredictable changes in the external environment occurred. 4. RECOMMENDATIONS The central crux of the problems at General Motors extends from the culture that has been created over several years. Changes to this culture will allow more effective decisions to be made. Firstly, the high power distance existing at General Motors should be addressed.
The CEO, executives and board members need to be involved in the general day to day functioning of the business and less segregated from the rest of the workers. This will allow the senior personnel to recognize the problems needing to be addressed and therefore, a greater workplace efficiency whilst maintaining the quality of General Motor’s products can be achieved (Khatri, 2009). Secondly, changes need to be made to reduce the lengthy decision making process that currently exists. This can be achieved by giving the workers beyond the ‘14th floor’ authority to make decisions.
In this way, problems will be fixed quickly allowing General Motors to focus on their product rather than being constantly involved in workplace bureaucracy (Khatri, 2009). If the employees are involved in the decision making process, they need to be encouraged to voice their concerns and suggestions in a supportive environment. Communication should be able to freely travel up and down the workplace hierarchy (Khatri, 2009). With a more diverse perspective, the company will become more creative and innovative in their decisions, allowing General Motors to have a more competitive product and market share (McShane et al.
, 2013). Involving employees, will have the added benefit of increasing accountability and responsibility for the products that General Motors create (Akdere & Altman, 2009). Changing to a culture that encourages discussion and differing points of view is also required in board meetings with the CEO for major company decisions. With a team effort in the decision making process, the existence of ‘group thinking’ would be greatly reduced (Johnson & Johnson, 2009). The decisions would therefore be less bounded in rationality, as compared to the CEO making all the decisions independently.
A greater diversity of perspectives enables more alternatives and their consequences to be considered and a greater pool of knowledge and experiences can be drawn upon (Kalantari, 2010). The constructive conflict created allows the motivations behind decisions to be questioned and biases are less likely to influence the action chosen (Johnson & Johnson, 2009). Ultimately, a team effort contributes to more effective decisions at General Motors. Although the black swan event of America going into recession could not have been predicted, changes to the decision making processes would enable General Motors to better react to another catastrophe.
Decisions that are made quickly will allow General Motors to respond to changes in the external environment in a shorter time period (McShane et al. , 2013). This reactivity is vital to minimize the company’s losses after a black swan event (Taleb, 2008). Further, an extensive reform of the culture at General Motors will enhance the quality of decisions, to eventually bring the company into surplus funds, helping to counteract the financial losses if another black swan event was to occur. Word count: 1960 REFERENCE LIST Akdere, M. , & Altman, B. (2009). An Organization Development Framework in Decision Making: Implications for Practice.
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