Executive Summary The United States has been experiencing a weak economy, which has dramatically affected sales within the automotive industry. The industry as a whole has been struggling, but the U. S. companies have had the worst results. Also, the desired product mix has recently changed to more fuel efficient vehicles instead of large SUV’s and trucks (S&P, 2008, p. 1). The following analysis will discuss in detail the external environment of the auto industry and then transition to examining the internal environment of the U. S. firm, General Motors. GM is a large and well known domestic auto manufacturer that was the leader in U.S. auto sales for many years and at one time possessed a 47. 4% market share.
However, GM is now more renown for their financial struggles and decreasing market share that is currently around 22%. GM does have internal strengths such as brand recognition and production efficiency, but their central problem that needs addressed is the negative perception that consumers have about GM. Through this analysis we will look more closely at the source of their problem, develop strategic alternatives, and state our recommendation for GM along with an implementation plan.
Analysis of the Auto Industry’s External Environment All industries throughout the world are affected by the external environment, which is why it is important for firms to understand its effects and be prepared to respond to its fluctuations. Some of the main auto manufacturers are General Motors, Ford, Chrysler, Toyota, Honda, and Nissan. In order for these firms to work towards progress and to stay competitive they need to accurately understand their industry as a whole. The external environment essentially consists of three areas, which are the general, industry, and competitor environments.
The general environment cannot be controlled by the industry but it must be understood because external factors can produce opportunities or threats. There are six influential segments of the general environment which are: Economic, Political/Legal, Ecological, Demographic, Sociocultural, and Technological segments. The industry environment consists of five factors that directly influence the firm, which are the threat of new entrants, power of suppliers, power of buyers, threat of product substitutes, and the rivalry among competitors.
However, in the industry environment the firms are able to influence the factors favorably in order to become more profitable (Hitt, Ireland, & Hoskisson, p. 38-39). Finally, competitors are the last section of the external environment, where firms study their competitors and their responses. The following analysis on the external environment of the automotive industry will be categorized by the six segments of the general environment with details on applying the five-force model within the industry. The first general segment that will be discussed is the economic factors that affect the automotive industry.
More than ever before, the automotive industry as a whole is in trouble. However, the auto industry is not alone. Everything from the War in Iraq to the sub-prime crisis has been blamed on our economy’s current recession. At General Motors, their stock fell below $9 a share and they suspended their dividend for the first time since the Great Depression, which sent tremors through Wall Street. It was also announced that GM planned to increase liquidity by $15 billion through cutbacks, which includes a 20 percent reduction in payroll for salaried workers, along with layoffs and possible closures of many plants (New York Times).
The situation isn’t much better at Ford either, as their stock price has dropped almost 20 percent YTD. In recent second quarter earnings, Ford took an $8. 7 billion loss. Considering how big the automotive industry is in our country, things need to turn around fast in order for our economy to get back on track and out of the recession mode. Therefore, what suggests that the economy as a whole is in a recession? First, the well-known troubles in the housing market have obviously threatened the health of the economy over the past several months.
Until now, it was hoped that the fallout from the declines in home prices would be contained, first to the sub-prime market, then to broader real estate-backed assets, and finally the hope was that the damage could be restricted to just the financial sector. Unfortunately, each of these barriers have been breached and combined with a broader unraveling of credit markets and a credit crunch. So, we have seen continued spillovers into other areas of the economy, including the automobile industry (New York Times). Not too long ago, the auto industry had room for small, independent manufacturers such as Saab, Jaguar and Volvo.
But since the mid to late 1980’s the industry’s big players have been buying up their smaller rivals (Forbes. com). The economic downturn, rising oil prices, and the cost of developing new technologies have made it much harder for new entrants to come into the industry. Therefore, new entrants do not pose a threat to the existing competitors of the automotive industry due to the economy and the large capital requirements needed in order to be successful. For example, at General Motors alone the company must raise an estimated minimum of $15 billion in new capital to stay competitive within the industry (New York Times).
The new capital requirements will mostly be used to perform research and development. This includes research on mechanically sound vehicles that supply both performance and good gas mileage. Now, as we look to the automotive suppliers it is obvious that they are facing many challenges due to the lagging economy and inflation. Billions of dollars are being poured into product differentiation and development however; the industry’s sales, productivity, and volume are still down domestically.
It is forecasted that domestic players will lose significant market share to foreign auto companies in 2008 because foreign cars are providing better quality and gas mileage (New York Times). Also, high gas prices combined with the weak United States’ dollar are making it expensive than ever to export to America. Even though companies such as Toyota and Honda are planning on increasing production and opening U. S. generated plants in the future, this is not helping them short-term. Despite Honda’s sales boom in America, they are still experiencing losses with their stock down 1. 9 percent YTD (Yahoo Finance).
On the other hand, the power of consumers’ is currently very high. Trucks are practically rejected at auto lots, and it seems like every company has created more customer-friendly deals than ever. At Chrysler and Dodge, they are offering a guaranteed price of $2. 99 per gallon of gas for three years. It is the company’s hope that customers will buy into this offer, and by the time the deal is over, Chrysler and Dodge will be able to produce more fuel efficient vehicles to compete with the international players. Another example is at Hyundai where they are offering a 10 year/ 100,000 miles warranty on all of their vehicles.
Saturn is offering that same 100,000 mile deal for 6 years. If a potential buyer has good credit, a low-to-nothing interest rate is easier than ever to get as companies are willing to do almost anything to sell their lagging vehicles. As Warren Buffet might say, “everywhere where there is a weakness, there is an opportunity (Forbes. com). ” The next force to analyze in the industry are product substitutes As gas prices have increased in excess of $4 per gallon, customers are looking for ways to save money and still get to where they need to go.
In many areas of the country, motorcycle dealerships are reporting sales increases of as much as 20 percent to 30 percent now than over a year ago. Along with sales, availability is also increasing. “The number of new motorcycle endorsements in Washington has more than doubled since 2002, from 1,411 in May 2002, to 3,090 in May 2008”, according to Steve Stewart, motorcycle safety manager for the Washington State Department of Licensing (Kitapsun). Scooters are another substitute.
Americans are scooting more and more according to SmartMoney. “These days’ scooter engines are powerful enough to approach those of small Harleys… Annual sales have jumped past 130,000. While that may be the average number of SUVs sold in any given month, it’s triple the number of scooter sales in 2000. This increase is due to the great gas mileage of the vehicles, which average around 70 miles per gallon. Honda, which is a big player in both the automotive and the motorcycle industry, offers their Silver Wing model for about $8000.
Other companies that offer cheaper scooter alternatives are Buddy Italia, Vespa, and Yamaha, with most models having engines that are powerful enough to cruise down any highway. As the auto industry continues to struggle, the competition for market share is becoming more intense than ever, because most companies are merely looking to survive. “The rivalry is so intense that both General Motors and Ford have experienced significantly lower earnings due to price cuts, which in turn, have led to their debt ratings being lowered below investment grade or to ‘junk’ levels” (Hitt, Ireland, & Hoskisson).
The Automotive Index Fund is on the Dow Jones’ Top 10 worst performing indexes, down 22. 37 percent YTD. As of July, every major automotive manufacturer is down from their 52-week high (Yahoo Finance):
- Honda -1%
- Porsche -6%
- Nissan -7%
- BMW -9%
- General Motors -17%
- Ford -20%
- Volkswagen -22%
- Toyota -26%
Next, the Demographic segment of the external environment will be discussed. Demographic Factors Demographics in the automobile industry are very essential in determining what cars to make and who to sell them to. Before a car is put onto the market there are many studies that are taken to see what market the car will sell to, whether it is based on income, age, ethnicity, or gender. All of the studies are very important in determining whether the car is worth making and putting onto the market. The buying power of a certain demographic may be a key factor in determining whether to pursue that part of the market or not (Ezine Articles, 2008).
For example, the baby boomers demographic are older American consumers that make up a large part of the U. S. population, who are still buying products into their old age. A product that may be specifically marketed to the boomers would be the full sized sedan vehicle, which is a very popular choice of the baby boomers within the automotive market (Ford Motor Co. , 2008). A product marketed more towards the younger unmarried consumer with a lower to mid income level, would be a foreign sports car or a domestic light pickup truck. Essentially, every car on the market was initially meant to target certain consumers. Competition for Demographics The pursuit to corner certain demographics of the market can be very competitive.
There has always been a battle in the full sized truck market to acquire a majority market share. Within the luxury automobile industry, companies such as BMW, Mercedes, and Lexus pursue the business of higher income consumers. There will always be competition for any market within the automotive industry that is sought after. It is very valuable to understand the demographics of the industry in order to be appealing for the consumer you are targeting. Now we will discuss the sociocultural segment of the general environment which, looks at how the beliefs, values, opinions, and lifestyles of people affect an industry (Hitt, Ireland, & Hoskisson, p. 47).
Sociocultural Factors Consumers obviously have a powerful impact on what types of vehicles will be demanded for the firms in the auto industry to produce. Several sociocultural trends that we see affecting the automotive industry are consumers concerns over their individual status and image, fuel-efficient vehicles, and environmental concerns. Each of these trends will be explained in more detail and how certain factors are linked to the industry and competitor environments.
The first sociocultural trend that strongly affects the auto industry is that consumers attach individual status to the type of vehicle someone owns. People tend to make judgments about an individual’s success or personality through observing the type of vehicle they drive. For example, someone’s coworkers will probably never see the type of house they live in or where they do their shopping, but everyone will see the style and brand of car that they drive. Therefore, owning a certain type of vehicle can provide a sense of higher status, power, and self-esteem (Barth, 2007).
Besides coming across as financially successful, a recent trend shows that many consumers are seeking to make a statement by driving a certain type of vehicle. The popular Toyota Prius is a full hybrid vehicle that has been a successful model with consumers. In 2007, a survey was performed by CNW Marketing Research that asked customers their top reasons for purchasing a Toyota Prius. Most would expect that the number one reason would be fuel cost savings however, 57% of the customers surveyed said they enjoyed that the ownership of a full hybrid Prius “made a statement about me” (Jacobs, 2007).
The customers said they desired to make the statement loud and clear that they were driving a hybrid and they felt this desired image was instantly recognized by owning a Prius versus a converted model. The sociocultural trend of status and image being tied to the type of vehicle someone drives can also be linked to the fifth force of the industry environment, which is the intensity of rivalry among competitors. Toyota took a competitive action in creating and producing the Prius much sooner than most of the automotive manufacturers.
The Prius is also reasonably
affordable at a base price of roughly $23,500 with an estimated payback period of 4 years (“Which Hybrids Make Financial Sense? ” 2007). Also, Toyota claims that 48 and 45 miles per gallon can be achieved respectively in the city and on the highway. Therefore, the ratings that Toyota has been able to achieve are considered a weapon that they’ve used against their competitors within the automotive industry. This leads to the second and third sociocultural trends that have arose in the automotive industry, which is people’s desire to save money on gasoline and preserve the environment through driving fuel efficient vehicles.
The image and status that is perceived by an individual owning a certain brand of vehicle is still a very strong factor, which was just discussed. However, with the ever increasing fuel prices many consumers are beginning to see a need for small fuel efficient vehicles and the increased awareness about environmental protection has caused some people to reconsider what they drive. But, the demand over the last several years has been significantly different than what we currently see.
Sport Utility Vehicles, trucks, and minivans have typically had higher sales than cars, but now we see a dramatic shift in the industry towards smaller fuel-efficient vehicles (S&P, 2008, p. 1). Firms within the auto industry are required to comply with the corporate average fuel economy (CAFE), which was established by the U. S. Congress in 1975. CAFE essentially requires American auto manufacturers to produce a fleet of vehicles which will achieve the determined average miles per gallon. The regulation is designed to save Americans money and to reduce global warming pollution.
However, for thirty years the CAFE standards did not change at all. Auto manufacturers were determined to keep the standards low, but in 2007 the Congress passed the energy bill to increase the standard to 35 mpg by year 2020 (Union of Concerned Scientists, 2008). As we look at some of the problems with the domestic auto manufacturers such as General Motors, Ford, and Chrysler, we can see that they are overstocked with trucks and SUV’s. Additionally, most of them are only prepared to produce these types of vehicles.
Again, the current sociocultural trend is a strong demand for fuel efficient vehicles not heavy vehicles with low gas mileage. Therefore, we have concluded that the American auto manufacturers did not successfully examine their external environment. They were too focused on the short-term profits of selling trucks and SUV’s and missed out on the time they could have utilized to research and develop fuel efficient vehicles that would satisfy the current demand and quickly approaching higher CAFE standards. Overall, these trends reveal that consumers have the ability to influence the automotive industry and firms must pay close attention to trends and always look to the future.
The next general environment segments are the political, legal, and ecological factors that will have an impact on the automotive industry. Political/Legal Factors The United States automotive industry is affected by political factors, which includes a variety of issues such as national policy, currency exchange rates, automaker objectives, and local preferences. The energy bill, which was discussed earlier, was passed by Congress in order to make a way for a brighter and more secure energy future. Their hope is to have more reliable, affordable, and clean sources of energy that will power America forward.
It will help put the U. S. in a position to reduce their dependence on foreign sources of energy and reliance on imported energy. The Bill established a new Renewable Fuel Standard that requires the annual use of 7. 5 billion gallons of ethanol and biodiesel in the nation's fuel supply by 2012. It extends the existing tax credit for production of electricity from renewable resources, such as wind, biomass, and landfill gas, and creates for the first time a tax credit for residential solar energy systems. It will also authorize full funding for the President's Hydrogen Fuel Initiative.
Lastly, it will create Federal risk insurance and extend the Price-Anderson Act to mitigate the potential cost of unforeseen delays and encourage investment in a new generation of safer, more reliable, and more proliferation-resistant nuclear power plants (whitehouse. gov, Bush). Ecological Factors Relationships among human beings and other living things like air, soil, and water have become huge factors. The government has many regulations on the automotive industry which requires them to comply with certain standards.
Automakers tend to dislike the government’s regulations because they typically have repercussions on the vehicles performance. For example in order to improve the fuel economy, you have to make the vehicle lighter, which could lower the safety level of some models. In order to reduce pollution it requires emission equipment which makes the care heavier and in turn hurts the amount of miles per gallon a vehicle can achieve (S&P, 2008 p. 1-19). Evidence of global warming grows due to record global temperatures.
Global warming occurs due to the pollution created by vehicles that is directly related to the amount of fuel they burn. The average U. S. vehicle is heavier and less fuel-efficient than it was 20 years ago. Last month an association of 10 major U. S. companies including General Electric, Dupont and Alcoa formed a high-profile coalition with environmental groups to make cuts in carbon dioxide emissions. The automakers were not present and in the past decade they have fought off nearly every government attempt to reduce the fuel consumption of cars and trucks (S&P, 2008 p. 1-19).
The chief executives of America’s four largest car companies Ford, DaimlerChrysler, Toyota North America, and General Motors (GM) acknowledged they intend to change their ways. In an attempt to find alternative fuel, the automotive industry has researched and developed hybrid vehicles.
The benefit of the hybrid vehicles would be cleaner emission and lower operating costs. The final segment of the external environment relates to the impact of technology on the automotive industry, which is explained next. Technology and the Industry Environment New technology is a powerful factor of the external environment that significantly affects the automotive industry.
The market is currently flooded and new entrants would require billions of dollars in order to design and produce vehicles, which we explained earlier in our analysis. However, improvements in technology for safety features have also been a factor in causing the entry into the industry to become more challenging. For example, Honda vehicles come with over twenty standard safety features, which poses a threat for new entrants because they have to produce vehicles that can hold up to many proven years of esteemed safety test results (Honda. com, 2008).
A recent trend reveals that Americans and Europeans are demanding increased safety technology to be implemented into vehicles (S&P, 2008, p. 16). Established companies are adding features such as side-curtain airbags and anti-lock brakes without charging the consumer, which makes entry by new companies nearly impossible. A similar example outside of the auto industry is Wal*mart, which offers their products for lower prices thus, making it very difficult for other retailers to compete or even survive. Growing technology has also added to the threat of substitute products found in different industries.
Earlier, we discussed the increased sales of motorcycles and scooters as a substitute for traditional cars and trucks. But, there are also more efficient mass transit vehicles being created which will lower consumer costs and make their use easier. Colorado for example, is greatly expanding their rail systems, and is in the works of a proposal that will create a 24-hour urban hub for buses, light rail, and passenger rails will converge.
Projects like these can greatly decrease the need for personal vehicles. The value and ease of switching are great since most public transit is low cost and provides for similar use as a personal vehicle.
Even in other cities, mass transit has become more popular with rising gas prices and insurance rates. Technology has also set up strong rivalries among the companies in the automotive industry. A current rivalry is that with hybrid vehicles. The largest market share is currently held by the Toyota Prius, which based on information from www. electricdrive. org, leads hybrid sales by almost three times. These vehicles are very efficient, using a gas engine only when the pedal is pressed hard or at higher speeds, then charging the batteries of the electric engine by the energy of stopping.
Fuel-cell vehicles such as the Honda FCX clarity are beginning to hit the market as lease vehicles, using hydrogen fuel, which uses no gas and gives off no harmful emissions. Other variations of non-gas vehicles include the Saturn Vue, Chevrolet Tahoe, Honda Civic, Nissan Altima, and Lexus 400h. There are also all-electric vehicles, such as the highly anticipated Chevrolet Volt, which is powered by Lithium Ion batteries which can run the vehicle for 40 miles on one 12-volt charge. With all these variations in a similar product, competition has become more fierce and concentrated.
Additionally, as consumers and governments push for more safety features, automakers have to stay ahead of the competition. Companies such as Honda and Nissan add more features standard, while offering a plethora of additional safety features. Globally, other countries such as China and Europe are finding more and more value in safety, pushing each company to top the other with safety (S&P, 2008, p. 16-18 ). Overall, technology innovations need to be closely scanned and monitored in order to stay competitive within the automotive industry.
In summary, the external environment can have huge implications on the success of an industry. Therefore, firms should strive to gather information and understand the external environment in order to respond to changes that are outside of their own direct control, favorably influence industry forces to improve profitability, and understand their competitors. Scanning the external environment for trends and permanent changes is vital for the long-term success of a firm, especially within a volatile and competitive industry like automotives.
Now, we will look to analyze the internal environment of General Motors, which is a specific organization within the auto industry. Internal SWOT Analysis – General Motors Now, we will look to analyze the internal environment of General Motors, which is a specific organization within the auto industry. Understanding the internal environment of a firm involves performing a SWOT analysis and determining what a firm can do by defining their unique resources, capabilities, and core competencies that enable them to achieve a sustainable competitive advantage (Hitt, Ireland, & Hoskisson p. 74-75).
General Motors (GM) is a United States corporation and the largest auto manufacturer in the world. GM was founded in 1908 and has been a global leader in sales for many years (gm. com, 2008). However, GM has recently had more of a reputation for struggling financially due to reasons such as the economic condition of the U. S. , the cost of paying their retirees, and difficulties in sustaining any competitive advantages. Therefore, it is important to accurately perform a SWOT analysis and understand which resources and capabilities will lead to developing core competencies for GM (Hitt, Ireland, & Hoskisson p.74-75).
First we will discuss in detail the internal strengths of General Motors. General Motor’s Internal Strengths One of GM’s prominent strengths is found in the use of their technological resources. For example, OnStar allows for immediate assistance if a driver is lost or needs emergency assistance after an accident. OnStar is only offered on 17 GM vehicles, and is currently included for one year with a new car purchase (OnStar. com, 2008). By marketing this product for their vehicles in various magazines, websites, and over television broadcasts, GM has been able to turn this resource into a capability.
Considering the growing importance of vehicle safety, the OnStar system gives consumers the peace of mind that they will have immediate assistance in an emergency. Due to successful marketing, many consumers are beginning to associate OnStar with GM vehicles. Through this, GM has established a core competency in terms of state-of-the-art safety technology. No company has been able to replicate this feature, and the cost to create a substitute would be very high.
Considering OnStar has had 27 million interactions with customers since inception, consumers already look to this organization when considering safety for a new vehicle. GM has been using the feature for many years and already has suppliers established. A new company would have to overcome many barriers to even begin to compete with the rapport that OnStar has created. Another strength that GM has developed is their brand name. With a company that has been around for a century, it is uncommon for consumers to not recognize their name.
This intangible resource provides for many sales, due to brand loyalty and recognition. With strong brand names such as Buick, Cadillac, Chevrolet, GMC, Pontiac, and Saab, General Motors is known in many spectrums from high-end luxury, sports cars, trucks, affordable cars, and SUV’s. GM has been the most dominant car manufacturer for 70 years, and is now only second to Toyota (NyTimes. com, 2008). By using their brand as a core competency, GM is able to grow in new markets with more ease than other firms.
GM has been growing immensely in the Asian market, where sales have climbed over four percent in just two years (S&P, 2008). If GM uses their pre-established personality as a powerhouse, they could continue to establish their brand name globally, which could lead to a competitive advantage in new markets, such as Asia. Innovation is another strength that GM possesses. For the past decade, GM has been at the forefront of innovation and design (GM. com, 2008). One such innovation is the Opel Flextreme concept, which uses a combination of an electric and diesel engine, which emits very little emissions.
GM is a large company that has used innovation in order to progress them into the future. They are constantly looking into new innovations such as cutting emissions, decreasing costs, and increasing safety, which distinguishes them competitively. Their innovation in Information Technologies enables them to work with their suppliers better (Eweek. com, 2008). GM chose in 2006 to outsource its entire IT department. They have used multiple outsourced companies, which has allowed for lower costs and increased productivity.
As stated by the CIO, Ralph Szygenda, the suppliers work so well with GM that many Fortune 20 companies have come to GM in order to learn how to establish such a strong and efficient relationship with their own suppliers. In summary, as we have already discussed, GM has been in operation for almost 100 years, which provides them with the intangible resource of reputation and the tangible resource of capital. GM’s reputation will be difficult for new competitors to imitate because consumers tend to place more trust in an organization that has been in existence for a long time.
Also, despite GM’s tragic losses, they still possess a significant amount of capital that allows them to pursue innovation, which we determined to be one of their strengths. However, to the contrary, their brand name could easily become permanently marred to some consumers if GM does not begin to turn around some of their weaknesses’, which will be overviewed next. General Motor’s Internal Weaknesses’ The external environmental analysis revealed that the auto industry as a whole has been struggling.