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. BACKGROUND Managers use standards, benchmarks and metrics to assess organizational performance in a variety of settings. Performance measurement is defined as the extent to which actual outcomes correspond to planned outcomes. Management use performance assessment to improve processes, modify plans.
Motors Corporation, also known as GM, is the world’s largest automaker and has been since 1931. Founded in 1908, GM today employs about 326,999 people around the world. GM manufactures its cars and trucks in 2 countries. In 2005, 17 million GM cars and trucks were sold globally under the following brands: Buick, Cadillac, Chevrolet, GMC, Daewoo, Holden, Hummer, Pontiac, Saab, Saturn and Vauxhall. GM operates a finance company, GMAC Financial Services, which offers automotive, residential and commercial financing and insurance.
General Motors Corporation is primarily engaged in automotive production and marketing, and financing and insurance operations. GM designs, manufactures and markets vehicles worldwide, having its largest operating presence in North America. The Company’s finance and insurance operations are principally those of General Motors Acceptance Corporation, a wholly owned subsidiary, which provides a range of financial services, including automotive finance and mortgage products and services.
GM markets its vehicles and provides financing for those products through a network of independent retail dealers and distributors in the United States, Canada and Mexico, and through distributors and dealers overseas. General Motors North America primarily meets the demands of customers inside North America with vehicles designed, manufactured, and/or marketed under nameplates, such as Chevrolet, Buick, Saab, Pontiac, Cadillac, Hummer, GMC and Saturn. The Company, excluding its financing and insurance operations, has approximately 335 locations operating in approximately 40 states and approximately 200 cities in the United States.
Of these, approximately 20 are engaged in the final assembly of GM cars and trucks; approximately 30 are service parts operations responsible for distribution or warehousing, and the remainder is involved primarily in the testing of vehicles or the manufacturing of automotive components and power products. .
FINANCIAL RESULTS Based on the GM’s consolidate net sales and revenue, it shown that General Motor Corporation revenue has been falling to $ 192. 6 billion in 2005 from 193. 5 billion in 2004. GM incurred a consolidated net loss in 2005 of $ 10. 6 billion, compared to net income of $ 2.
8 billion in 2004. The most significant causes of these results are due to some of the following: •GMNA market share and product mix As shown on the charts, General Motors Corporation has been underperformed compare to DJIA. In the last 1990’s, GM had regained market share up $ 80 a share. In 2000, the interest went up by the Federal Reserve to quell the stock market and a severe stock market decline following the September 11, 2001 attacks. Due to this factor, it affected a pension and benefit crisis at General motors and many other American companies.
The current stock market price of General Motors are falling between $28- $29 per share. It has been falling down gradually in the past six years. General Motors North America market share in 2005 fell to 25. 5% compared to 26. 7 in 2004. Decreased in market share also due to sales declines in segment where GM has high volume such as large sport utilities, mid-sized utilities, and mid-sized cars. The unfavorable results of GM’s consolidate net loss in 2005 were driven primarily by losses at GMNA due largely to unfavorable volume and product mix.
Health Care Health Care in the United States becomes one of the biggest competitive challenges for General Motor Corporation. In 2005, GM was challenged with the compound impact of escalating health-care cost rates and falling discount rates used to determine future health-care liabilities. As a result of these factors, most of the expenses increased to one billion from 2004. Since the legacy cost are primarily related to the cost of benefits provided to retired employees and their dependents, this becomes one of the cause a sharp decline in sales.
According to the article, GM’s health care spending alone is expected to rise to $ 5. 6 billion in 2005, up from $ 5. 2 billion last year. Over 1. 1 million Americans- including current workers, retires and their families are presently covered by GM health care obligations which making the company the largest private health care provider in the country. In addition to its benefits, GM workers have won the right to continue to receive compensation at least 75 percent of their pay after being laid off. GM AND TARGET COSTING
Peter Drucker has identified Cost-Based (he calls it “cost-driven) pricing as a “deadly business sin” most of the American companies think of price by their products adding all the costs and then stating a profit margin on top. When the companies introduce the product in the market, they realize that they are not sold as easy as they thought and then they start cutting down the prices, redesigning the product which is extremely expensive, or stop producing certain type of products because of the wrong price.
This approach to the pricing and design of new products knows as Target Costing has been implemented by Toyota, and other Japanese companies such as Nissan, Canon and Ricoh started using it quickly after Toyota. According to the text book, Target Costing starts with determining what customers are willing to pay for a product or service and then subtracts a desired profit on sales to determine the target cost of the product or service. In Sao Paulo, as of 2007, two General Motors in Brazil will take the first step towards cutting production costs to $1,000.
These two plants are: Sao Caetano do Sul and Sao Jose dos Campos. According to the article found at Noticias Financieras and Investments news, in order to meet the target, the plants will have to cut the costs by$ 300 per car. It also said that finally in 2006 GM does Brazil will post its first profit after being losing money since 1997. Having a target costing approach forces design engineers to consider the manufacturing and servicing costs of the product while it is being designed. This is what the text book named as “Design for Manufacture.
” GM is targeting the market in China. In the last years, China remains as the world’s fastest growing automotive market, with a 13 % growth in 2005 over 2004. GM plans to spend $3 billion in China over the next three years to keep up with the demand. GM also plans: – To double its production capacity -To introduce new models, such as four new models of Cadillac. -The sales of luxury cars have risen 25% in the first eight months of the year. According to the text book, target costing reduces the time required to introduce new products.
To meet the target costing successfully in Europe, GM is implementing a centralized control of the operations of its Opel, Saab and Vauxhall subsidiaries. Also the individual financial, marketing, engineering, purchasing and manufacturing controls have been moved to the headquarters in Zurich. Now the three brands will share a common design team. With this GM is looking to achieve the cost savings by sharing platforms and duplicating efforts. Also the usage of newest technology such as CAD is making GM to spend less money in re-tooling plants to produce its new-generation full-size pickups by putting more time into computer-aided modeling.
As a conclusion, and according to the text book, we can say that target costing makes management to take proactive approach to cost management; orients organization toward customers; because the company starts looking at what the customers would be willing to pay for the product or service to arrive at the right price; breaks down the barriers between departments; enhances employee awareness and empowerment; fosters partnerships with suppliers; minimizes non-value-added activities;
encourages selection of lowest-cost-value-added activities; and reduces the time of the product to be introduced in the market. CAPITAL BUDGETING Capital Budgeting is based on cash flows, and one of GM’s turnaround strategies is to stabilize their most likely cash flows and create additional cash flows in order to effectively budget capital investments. GM generated adjusted operating cash flow of $700 million in the second quarter of 2006. The firm utilizes the rolling or continuous capital budgeting. In a sense, GM executives use the laddering approach to multi-faceted investment expenditure decisions.
In the last several years, the economic shock of higher gas prices directly impacted each new decision, causing the lumbering company to require agile business decisions with the use of managerial accounting reports. Reports to analysts and shareholders alike abound with international-wide niche opportunities that leverage the bulk of the firm’s existing assets. With a backdrop of sagging stock price since the year 2000, how can the world’s largest car maker grasp and implement time-frame appropriate strategies that continue respectable cash flows and increases their profitability?
Executives must prioritize short-term project rather than in previous decades, where, long-term planning was the standard time frame. A graphical depiction using managerial accounting principles illustrates this point. Below is an example of a large scale break even relational analysis of three projects, each requires relatively short, mid and long term planning and small, medium and large scale capital budgeting: For simplicity, the solid line represents the revenue line of the three capital budgeting projects, as we move to the left on the horizontal axis, revenues from sales increase and as we move up the vertical axis, costs increase.
The lowest dashed line represents GM’s redesigned of the Chevrolet Silverado. Breakeven occurs at the lowest level of sales volume due to the relatively little fixed costs capital investment required to continue to produce GM’s long term successful light duty truck. The middle dashed line illustrates GM’s new technological advance that deactivates half of Chevy’s 5. 3-liter V-8 engine’s cylinders when full power is unneeded. The inventive fuel-saving mechanism 21% boosts mileage by 21%, up to 17 MPG.
Breakeven occurs at a relatively small increase in sales as compared to GM’s mainstay product, the truck. The application of this engine has wide open possibilities for many of GM’s existing lines, which leads management to believe that profitability is relatively close at hand. The highest dashed line in the graph definitely represents the pie in the sky future oriented revenues anticipated from a completely new hybrid model. The hybrid segment is still small, it is growing: J. D. Power & Associates expects hybrid vehicles to go from 1.
6% of US auto sales this year to 5% in six years. The market share is relatively small, leading management to believe profitability is far into the future years. In summary, if you’ve wondered why GM sticks to their old stand-by models, this comparison chart illustrates why GM’s sees these as advantages and continues, for the most part, to stay the course. The company turns to individual executives for ideas. Financial performance measures are composed, compiled and read and understood by executives.
Executives rely on these reports to make executive decisions to improve GM’s performance. So executive are cued into the type of project most likely to help with GM’s turnaround. Here is an example of one of the menagerie of tactics implemented by GM in the recent past and its performance assessment as represented by the revenue variance report here in this table. The report summarizes the results of one of GM’s campaign in JUNE 2005 ‘You Pay What We Pay’, for their Silverado truck at a discounted price from $28,417 to $24,225.
PERFORMANCE REPORT FOR TRUCK REVENUE CENTER Total Revenue Variance = ( Actual Vol. X Actual Price ) – ( Budgeted Vol. X Budgeted Price ) $165,226,050 = (33, 763 trucks X $24, 225 ) – ( 22,968 trucks X $28,417 ) Sales Price Variance = ( Actual Selling Price – Budgeted Selling Price ) X ( Actual Sales Vol. ) ($ 141,534,328 ) = ( $24,225 – $28,417 ) X 33,763 trucks Sales Volume Variance = ( Actual Sales Vol. – Budgeted Sales Price ) X Budgeted Selling Price $306,760,378 = ( 33,763 trucks – 22,968 trucks ) X $28,417
The tactic focused on increased sales volume and subsequent increase in revenue for June 2005. The top left amount of $165 million is the total revenue variance increase, where the actual volume of 33,763 trucks increases by 47% from the previous month. The sales price variance of – $141 million represents the favorable component of the project, but is overcome by the larger increase in sales volume variance of $306 million. Trucks represented 60% of the company’s sales last year — a year in which it lost $10. 6 billion and saw its domestic market share wither to 25.
9%, just more than half of 1962’s peak. Such a revenue variance report, provides insight to management for other time-frame appropriate project ideas. CUSTOMER SATISFACTION One of the accounting principles to measure performance is customer satisfaction. Customer satisfaction is a business term which is used to capture the idea of measuring how satisfied an enterprise’s customers are with the organization’s efforts in a marketplace. The usual measures of customer satisfaction involve a survey instrument with a set of questionnaires.
The customer is asked to evaluate each statement and in terms of their perception and expectation of the performance of the organization being measured. As global competition increases, maintaining customer loyalty is more important than ever. Dissatisfied customers now have many options, with dozens of companies from around the world competing for their business. It is crucial for every organization to retain loyal customers by maintaining a high level of customer satisfaction. General Motors and its dealers are making significant strides in customer satisfaction, according to The J.
D. Power and Associates Customer Service Index (CSI) Study. GMs’ impressive 19 point improvement over 2002 is largely a result of very strong performance in service quality and in-service experience. In 2003, with a score of 858 points out of a maximum 1,000 points, it follows BMW in the ranking and posts the largest year-over-year improvement among all nameplates. In 2004, all of GM’s brands scored above industry average and GM’s overall score went from 858 to 869, an improvement of 11 index points. In 2006, GM’s score came in at 897.
YEAR20022003200420052006 SCORE844858869860897 The 2006 Customer Service Index Study, based on responses from more than 79,580 new vehicle owners and lessees, measures customer satisfaction among new-vehicle owners with the dealer service department during the first three years of vehicle ownership, which typically represents the majority of the vehicle warranty period. Satisfaction is measured by six service categories: ?Initiating service ?Service advisor ?In-dealership experience ?Service delivery ?Service quality ?User-friendly service.
GM believes results like these show the company’s ongoing improvements in vehicle quality, modifications to the pre-delivery inspection and delivery processes, and enhanced training for dealership sales consultants, service consultants and technicians are contributing to an overall satisfying customer experience. On September 6, General Motors Corp. has increased the power train warranty on all of its 2007 passenger vehicles to five years and 100,000 miles. The warranties cover the engines and transmissions and are retroactive to any 2007 models that already have been purchased, Ford said.
The automaker also offers similar guarantees on 2006 models still on the lots. In my opinion, that will help GMs move up in consumer satisfaction and quality studies more. SALES/VOLUME In terms of sales, General Motors dealers in the United States sold 296,003 new cars and trucks in January, up 6 percent compared to the same month a year ago. Car sales were up 15 percent and truck sales were comparable to year-ago levels. GM’s U. S. market share, or percent of sales in the domestic automobile market, has been dwindling. During the early 1980s, GM held 40
percent of the domestic market, but its share has since steadily eroded and currently stands at only 26. 4 percent. The revenue of GM has been flats for at least four years due high competition from other reliable car companies, increase in fuel prices and the September 11 attack. In order to increase sales, in 2004 GM redirected its resources from the development of new sedans to an accelerated refurbishment of their light trucks and SUVs and after this decision, fuel prices went up by 50% and that affected the sales of the company. The table shows how the revenue has been flat for the past four years.
Total Net Income 12/05-10,458. 0 12/042,804. 0 12/032,899. 0 12/021,813. 0 12/011,222. 0 BRAND GM sells globally under the flowing brand name such as Buick, Opel, Saturn, Saab, Holden, Cadillac, Daweoo Motors, Chevrolet, GMC, Hummer, Pontiac, and Vauxhall. We will concentrate our discussion both Cadillac and Saturn. To increase sales volume GM bought and introduced this luxurious car called Cadillac. Cadillac is a brand of luxury automobile, part of General Motors, produced and mostly sold in the United States and Canada; outside of North America. In the United States, the name became a synonym for “high quality”.
Cadillac was purchased by the General Motors conglomerate in 1909. Cadillac became General Motors’ prestige division, devoted to the production of large luxury vehicles. Saturn is a division of the General Motors automobile manufacturer and a brand of automobiles. GM began manufacturing Saturn automobiles in 1990, largely in response to the success of Japanese small-car imports in the United States. Saturn vehicles are marketed in the United States, Canada, and Puerto Rico. General Motors has given Saturn a wealth of new products including the Sky roadster, Aura sedan, redesigned ION, redesigned Relay,
concept PREVUE, and Outlook large SUV built off of the GM Lambda platform. To save money, GM decided that Saturn and Opel will share numerous models that differ only slightly. For example, the Saturn Vue will be the same as the Opel Antara, the Saturn Sky is the same as the new Opel GT, Saturn Astra will replace the current ION as the entry-level car. CONCLUSION General Motors Corporation must identify their shortcomings and find realistic solutions to them. They need to build dependable cars that will compete well with the cars produced by Honda and Toyota.
General Motors must deliver quality, reliability and durability in every car, they build. Management must prioritize business activities and do structural cost reductions that will turn the company around. It is also recommended that GM must benchmark and learn from their competitors in order to stay ahead of the competition and continue to be the market leader in the car industry. REFERENCES Roger Vincent. GM Extends Employee Discount; Ford joins Chrysler in matching the program, which offers all buyers the in-house price Los Angeles Times. Los Angeles, CA, Jul 6 2005, pg.
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