Synopsis: General Motors (hereafter GM) Company, one of the world’s largest automakers, traces its roots back to 1908 and its annual revenue in 2000 of $185 billion. The company sells 8 million vehicles per years, 3.2 million of which are produced and market outside of its North America. GM caught 27 percent share of the North America and 9 percent share of the market in the rest of the world as well as GM captured 12 percent share in the Western Europe in 2000 which is second only to that of ford.
With its global headquarters in Detroit, GM employs 235,000 people in every major region of the world and does business in some 140 countries. GM and its strategic partners produce cars and trucks in 34 countries, and sell and service these vehicles through the following brands: Buick, Cadillac, Chevrolet, GMC, GM Daewoo, Holden, Opel, Vauxhall and Wuling. GM’s largest national market is the United States, followed by China, Brazil, the United Kingdom, Canada, Russia and Germany.
GM’s OnStar subsidiary is the industry leader in vehicle safety, security and information services. General Motors Company acquired operations from General Motors Corporation on July 10, 2009, and references to prior periods in this and other press materials refer operations of the old General Motors Corporation. Though GM had a long presence in developing countries, until recently sales there accounted for only a little fraction of the company’s total international business. Traditionally GM used the developing countries as a dumping ground for the obsolete technology and outdated models and earned huge money from this aging investment. This strategy has seen as lack of commitment from top management and GM offered very low quality, made of old product.
All decision, plan and marketing decision were centralized by Detroit headquarter and they acted as a market context. GM kept in its mind about the poverty, crime, geographical situation and politics and communism in the developing countries. On the other hand, GM Detroit headquarters kept away GM European operation from other part of the world. And because of this arm’s-length-basis, company had failure to share all the valuable technology, skill and practice among the subsidiaries.
But it had appealing market, and high profit opportunities in the Europe. So, GM did tailor the specific market needs because it had worried about blowing off from market if it didn’t tailor the specific market. So, while the GM tight controlled over its operation in the developing country but in the some time GM was too lax in Europe and felt lack of overall strategic coherence. Since 1997, GM has been trying to switch a philosophy that centre of excellence may reside any where in the global operation. An embodiment of this is to set up new four plants in the developing countries with investing $2.2 billion.
And the four plants are identical and they can able to imitate Toyota. At the Eisenach plant, GM leant lean production from Toyota and implemented this. So the plant which productivity rate is at least twice that of most North American assembly operations is most efficient in Europe operation and the best in GM.
Although they reach the more scale economics, more efficiency, more synergy, and ability to match local preference, but this strategy are not working because GM still suffers from high costs, low perceive quality. Finally, GM thinks that the push toward global cars is misconceived. At the Opel’s Russelsheim design facility, the German based engineering has uttered concerns that distinctively European engineering features may be left by the wayside in the drive to devise what they see as blander “global” cars.
Question 1: How would you characterize the strategy pursued by GM in the (a) developing world and (b) Europe before 1997?
Answer: The question asked to characterize the strategy pursued by GM in the developing world and in Europe before 1997. So, first of all it is very important to notice that in this question we have two important information for discussion: First information: there are two main market areas for GM’s international operations: Europe and the developing world which is made up of Latin America, Asia and eastern Europe and the strategy pursued in these two markets are totally different. Second information is that there’s a key date in GM’s history which is 1997. This date is an important turnaround for GM. Strategy in developing countries before 1997
- Outdated low cost products were selected for developing countries.
- All the strategic decision, marketing and manufacturing plans were centralized by Detroit headquarter
- Low commitment policy was there since GM select developing countries as a dumping ground for obsolete technology and outdated models
- The main context in the developing countries is the political and economical instability.
- Low expanse capability of the developing countries as they are poor.
- Low growth perspectives.
- Decision to produce and sell low cost models that were considered outdated developed world. Added benefit of extending the return on investment of previous decade’s investments.
- This allowed generating a continuous cash flow to be invested in more appealing markets like Europe.
- Probably willingness is not to share valuable technologies and skills in countries with low patent protection. The Result: market share less than 8.9%
The strategy pursued in the developing markets before 1997 was a very low commitment from the top management towards the developing markets. This means that the product offer was very low quality, made of old products that would have not been sellable in a competitive, developed market like the US or western Europe. From the case we also noticed that all the strategic, planning and marketing decisions were centralized in the Detroit headquarter. So, this means that the top management didn’t consider important to have a direct contact with those markets and didn’t want “trust” local subsidiaries to manage on their own.
They thought they could manage the developing market from their desks in Detroit. Lack of initiative or just plain Yankee arrogance weren’t the main reasons. We think the GM management acted accordingly to the market context. In fact to understand their strategy, we must keep in mind that the geopolitical situation before the nineties in South America had instability both in politics and economy, poverty, crime and sometimes civil wars.
In Eastern Europe and Asia: communism was also known as not favorable to American capitalists. The choice of a low profile strategy was the only chance at these conditions and there were low risk, low investment, low commitment but also low return. The market share of GM’s vehicles in these markets was very little but, considering the amount of resources invested, it’s not bad at all.
After all, this low-cost strategy allowed GM to extend the life of obsolete products without risking to loose valuable resources in risky states. And most important, generating some cash to be invested in more appealing markets like Europe. Strategy in Europe before 1997
- Strong local competitors
- Strong cultural identity
- Differences in preferences compared to US
- Tight urban space
The pursued strategy:
- Need to totally design, produce and sell different models( compared to US)
- Huge investment. Allowed to produce state of the art vehicles featuring the ultimate technology and design tailored to the local customers.
- Loose control by Detroit headquarter and wide freedom to regional and national subsidiaries( strategy planning, designing of cars and facilities were managed on their own)
- 11.3% market share second only to Ford
- Lack of an overall strategic coherence. Inability to leverage synergies
And here we go with the second part of the question: strategy in Europe before 1997. Here everything is different. We have an appealing market, high profit opportunities, demanding customers and strong competitors. In Europe you can’t even imagine to sell the same cars you sell in America.
First of all because there’s not enough space: streets are smaller, plain and simple. Second, because people have very different preferences compared to US and third because if you don’t tailor the cars to the specific market needs, local competitors will blow you off in a minute. And you’ll be out of the game. So here’s how GM managed the European operations: They gave local subsidiaries freedom to design, produce and sell new models. Impact of pre 1997 strategy
In developing countries:
- Inability to respond to market needs
- Mediocre from a competitive point of view but decent from a financial point of view
- Good response to market needs
- High costs
- Good from a competitive point of view but very expensive and not much efficient
To summarize Pressure for cost reduction was high in developing countries not because of competitors but mainly because of poverty. In Europe, compared to developing countries, customers have a high expenditure capability so if a pressure for cost reduction exists, it’s due to competition but still it’s not comparable to that in the developing world. That’s why we’ve put it in the lower end of the axis.
Question-3: How would you characterize the strategy that GM has been pursuing since 1997? How should this strategy affect GM’s ability to create value in the global automobile market?
Answer: Characterize the Strategy since 1997
- Attempt to hit new market opportunities by investing more money and efforts.
- Abandon of the Detroit centered view of the world in favor of a network like organization.
- Coordination of the designing activity: one global common platform to be customized according to local needs
- Four new identical plants built in developing countries were meant to replicate the Japanese lean production system learned from Toyota JV.
- Expected result: more scale economics, more efficiency, more synergy, and ability to match local preference. Characterize the activity of General Motors and Nummi
- 1982 equity joint venture Toyota- GM to assemble small cars in the US
- GM’s plant based in California
- Main targets: Toyota wanted rapidly enter in US market to counter Honda and Nissan and it was also interested in learning to work with an American workforce
- Primary goal for GM was to learn the learn production from TPS( Toyota Production System) that allowed to reduce inventory and other cost to minimal level
- Eisenach plant (1992) first Greenfield plant to institute TPS
- Argentina (1997), china (1998), Poland (1998) and Thailand (2000) new plants: production of state the arty vehicles.
- To reach scale economics, GM was also trying to design and build vehicles that share a common global platform Learning through Nummi
- By working closely together, partner firms can gain access to the best practice of their partner and then transfer the practice back to the parent organization.
- Over the past few decades, GM has significantly improved its quality and productivity. Characterize the activities in Europe
- Engineering R&D, production/manufacturing and brand head quarter mostly located in western Europe ( heritage from 20’s acquisitions)
- Marketing and sales department in every country to match local culture (communication) oMarketing and sales is almost the only activity in Eastern Europe countries low – involving portfolio.
- Communism as entry barrier
- Potential internal competition which very dangerous
Effect of GM’s ability to create value Although GM has taken many steps to be successful and it spent lot of many in establishing four new manufacturing product in Argentina, Poland, China, and Thailand with a spending of $2.2 billion dollar. But the new strategy is not working in the post 1997. GM still suffers from high costs than other company’s product and low perceive quality. Other companies gave the relatively low cost and high perceive quality.
- Great strategy change take time to be effective. It is only just a few years to set the strategy by GM. While the year will leave behind then some of part of strategies will be amended. So, for time being the strategy will be well established and it will be more suited.
- Low quality image in developing countries still exists. So it needs to change people’s perception. And GM can do these things by reorganization of the marketing strategy. GM should concern about the quality of its advertisement
- Inability to leverage the low cost of lobar in developing countries. Production concentrated in Western Europe. But GM should be more concentrated in the developing countries because in developing countries, GM could enable to take leveraging low cost of labor.
- Competition in the developing market is increasing. And wider offer may lead to price wars.
- In Europe, high risk is associated with the producing of too standardized cars without regard to local preferences.
- Other car manufacturers are leveraging low cost of labor. So, it can be said that GM has been suffering the tough job in the automobile business. So it should follow some steps to be successful. These are
- Leveraging its capabilities as a single GM global automotive unit
- Driving for stretch results
- Pursuing goals with a sense of urgency •Product success around the globe