“General Motors has no bad years, only good years and better years” (Sloan, 1972). This mantra established in 1950 by former GM president Harlow H. Curtice may have been true at one point, but is called into question today by many, including Wall Street.
By many standards, General Motors is an extremely successful company, though an analysis of the corporation today uncovers many troubling issues.
GM is and has been the world’s leader in automotive sales since 1931. (GM Website, 2004) By any corporate measurements, the company is a behemoth, operating across the globe with a 15% share of the world’s automobile market. The company also houses one of the world’s leading financial services companies, GMAC (GM Website, 2004). Though this giant company reports as a single entity, its two businesses are well separated. Our analysis will focus primarily on the automotive division.
The history of the automotive division is a novel one, spanning almost a hundred years with the incorporation of GM in 1908. William Durant, an innovative genius, founded the company by quickly joining together several leading car companies including Buick, Cadillac, and Oldsmobile. Durant’s vision, however, was plagued by details and the legacy he passed on to future CEO’s was far from perfect.
Alfred Sloan stated it best when he said, “General Motorshad then the makings of a great enterprise. But it was… unintegrated… uncoordinated; the expenditures… were terrific –some of them not to bring a return for a long time, if ever– and they went up, and the cash went down. General Motors was heading for a crisis.”(Sloan, p18) Durant’s actions over 90 years ago set GM on its path, and led to both its huge success and current heartache.
General Motors has always been a banding of “autonomous brands” leading to great invention, yet large duplication. As a former GM executive described, the advent of global competition after the 1970s dealt a crushing blow to this automotive giant. Its sheer size was a disadvantage as it competed with the more efficient Japanese firms. Today one of GM’s primary goals is to bring its brands together to act as a single global company (Interview, 2004).
LEADERSHIPIn order to align 325,000 employees with a single corporate vision, GM has required outstanding leadership. The list of GM’s eleven CEOs since the 1920s reveals a number of America’s best businessmen. (Please see Exhibit A for a full timeline of GM’s leadership.) GM’s first CEO was the famous Alfred Sloan who led the company for over twenty years. Described upon his retirement by the Board, “[Sloan’s] analysis and grasp of the problems of corporate management, his great vision and rare good judgment, laid the solid foundation which has made possible the growth and progress of General Motors over the years” (Sloan Foundation Website, 2004).
Identifying credibility as the foundation of leadership, Sloan believed simply that “[leaders] do what they say they will do” (Sloan, 1972). One of his fundamental teachings was that leadership is not charisma and showmanship, but rather performance, consistency, and trustworthiness. Sloan was always a practitioner, leading by example.
Today, GM’s youngest CEO in history, Richard Wagoner is at the helm. Wagoner has turned GM around in the four short years he has held the CEO position, putting GM in the lead of the U.S. Big Three car companies (Welch & Kerwin, 2003). Though he has had little time to establish himself, it appears that Wagoner could be on his way to the fifth level in the Level 5 Leadership hierarchy: Executive (Collins, 2001). Wagoner’s combination of personal humility and professional will are quite apparent. He is also first to leave his ego at the door, “the first to tell you that his own future is up in the air. It all depends on whether he can save GM from its past” (Welch & Kerwin, 2003).
Saving GM from its past is an interesting dilemma. As mentioned earlier, GM had great financial success until the 1970s. Furthermore, its leaders were some of America’s best. Yet now, some say that the past is what troubles the automotive giant. In an interview with a former General Motors executive, GM’s sheer size as well as the sense of complacency developed after years of success was cited as the chief challenges GM would have to overcome (Interview, 2004).
In a sense GM has been derailed, the strengths that once made it successful are the same forces that have led to its current flaws. (McCall, 1998) Thus, Wagoner is proposing to go against GM’s years of tradition and “Challenge the process.” This is not the only step in the CIEME model that Wagoner has acted on. (Kouzes & Posner, 1995) He has already “Modeled the way” by cutting GM inefficiencies so that the company now competes directly against the streamlined Japanese automotives.
Part of this streamlining includes Enabling the correct management to act. Furthermore, our interviewee attested to the fact that all GM employees were Inspired to share a number of Wagoner’s visions for the company. The remaining question is whether or not Wagoner will be able to Encourage the heart of General Motors.
7-S MODELBy applying the 7-S Model we will ascertain whether GM is internally aligned enough to move effectively toward accomplishing its objectives and meet these staggering challenges (Bradach, 1996).
Shared VisionEveryone who works at GM shares a common vision of GM’s priorities (Interview, 2004). Moving into the 21st Century, GM is committed to:Acting as one companyEnhancing productsRestoring a customer focusEmbracing stretch targetsMoving with urgencyBecoming a global leaderHowever, in order to understand GM’s current shared vision, it is essential to understand the past thirty years and the shake-up that occurred in the American auto industry when Japan entered the market. Until the 1970s GM was used to success; its market share in America exceeded 50%. Because the status quo suited it fine, the company stayed an inefficient conglomeration of different brands without a unified sense of purpose or vision of growth.
Quality was not really a dimension in the American auto industry, and predictability was valued over innovation and risk (Interview, 2004). In order to compete with Japan, the American companies needed to focus on quality and efficiency.
Because of its size, GM had particular trouble adapting, and flailed for a couple of decades, developing cars of poor styles and quality and damaging its customer perceptions tremendously (Interview, 2004). It is only under the last two CEOs that GM embraced the above shared values and began acting as a single, global company, continuously challenging itself to stretch and act with speed, while enhancing its products to recapture the American market.
SystemsThe shared vision plays a part in some of the systems GM has put into place. Now, instead of different brands being manufactured at different factories in different countries with virtual independence from each other, GM aligns its products with centralized platform designs, subbing out components to regional design centers (Interview, 2004). The global attitude is reinforced with employee bonuses tied to global success (Interview, 2004). Likewise, the top executives vary their meeting locations between Detroit, Germany, Korea and Brazil (Interview, 2004).
To ensure that ideas flow both up and down, GM empowers regional offices to weigh in heavily on the design features most noticeable to consumers with regional tastes (Interview, 2004). GM follows the same principle in its corporate offices, where all employees do “skip levels” and meet one-on-one with their boss’s boss and some employees are randomly selected to attend informal round table discussions with very senior management (Interview, 2004).
In reference to its vision of moving with urgency, GM’s GoFast meeting system assures that out of meetings come an assignation of responsibility and tangible results (Interview, 2004).
StaffingIn order to have an empowered staff, GM must hire employees who share its cultural priorities, and it must invest in them. Because GM is so large, in addition to an alignment with GM’s culture, good communication skills are an essential staff competency (Interview, 2004). GM is very generous in the realm of staff development. Internally GM develops training curricula at GM University. Externally GM sponsors classes, conferences, and executive MBAs (Interview, 2004).
Because an understanding of the global economy is so fundamental to GM’s future success, an important component of management development is the 2-5 year stint that employees tracked for leadership roles do in GM’s offices abroad (Interview, 2004). Described as a “paternal company,” GM also invests in its ground-level employees, assuring them fair benefit packages, and so far honoring its commitment to pensions and health care coverage, despite the financial hardship these expenses have wrought (Interview, 2004).
StyleLeadership style at GM is often commended for being outcome-oriented, aligning with the shared vision of moving with urgency. The current GoFast meeting system is a modern incarnation of the way Alfred Sloan ran meetings in the 1950s. In the Harvard Business Review’s 2004 cover story, “What Makes an Effective Executive,” Sloan’s meeting style is described: “At the beginning of a formal meeting, Sloan announced the meeting’s purpose. He then listened. He never took notes and he rarely spoke except to clarify a confusing point.
At the end he summed up, thanked the participants, and left. Then he immediately wrote a short memo addressed to one attendee of the meeting. In that note, he summarized the discussion and its conclusions and spelled out any work assignment decided upon in the meeting He specified the deadline and the executive who was to be accountable for the assignment.” (Drucker, 2004)
These meetings are legendary for their productivity, and GM is run in the same style today.
SkillsIn “The Growth Crisis and How to Escape It,” GM has been credited by Harvard Business Review for its skill in networking. Specifically, GM has used the new OnStar technology, which it installed upfront in many of its vehicles, as a way of maintaining an ongoing relationship with its customer base. Not only is the service beneficial for the customers and a cost savings over similar services that do not come pre-installed, customers who subscribe to OnStar become directly linked to GM, rather than indirectly through the dealer, and this link lasts throughout their subscription period.
Because GM has such a large customer base, OnStar services are becoming the “de facto standard,” ensuring much business into the future, and helping GM towards its visions of enhancing products and restoring a customer focus. (Slywotzky & Wise, 2002)
StructureIn keeping with its vision of acting as a single company, GM has moved away from the divisional structure of its early years, as epitomized by autonomous brands, and into a functional structure split between the automotive and financial services arms. Within the automotive arm are the different geographical regions, but as mentioned above, design is done centrally with regional feedback, ensuring that all GM brands of cars are standardized at the basic level. (Please see Exhibit B for a chart of the organizational structure.) This structure allows GM to maintain brand loyalty while competing as a single global company.
StrategyGM’s strategy has been consistent since it began its period of recovery. In Wagoner’s words: “Our 2003 plan is the same as 2002. We’re getting better, year by year. More new products than ever and the most exciting lineup in our history. Working more as one global company than ever. More solid financially. And more determined than ever to be the best. Our drive remains strong. We are never satisfied, never complacent; always moving, always forward.” (GM Annual Report, 2003).
The only way for GM to recapture the American market is to invest in innovation and produce the “gotta-have” car year after year until GM is able to break free of its 20-year-old legacy of poor design and quality (Interview, 2004). Until this happens, GM is relying upon GMAC, its financial services wing, to buoy up the North American numbers and it has been looking to new global markets, like China, to balance out its losses elsewhere (Interview, 2004).
CURRENT STRATEGIC THREATS AND OPPORTUNITIES
General Motors is facing several major challenges and numerous opportunities as it enters the 21st Century. GM is challenged by its declining market share in and the near saturation of the domestic automobile market, yet it simultaneously is facing an opportunity of unprecedented growth rates in the newly-opened Chinese market. The constantly changing technology and the advent of hybrid cars is a further challenge to staying competitive. Finally, GM is weighted down financially by its commitments to the pensions and health care plans of its employees.
Domestic Saturation and Opportunities in ChinaAmerica is the largest automobile market in the world, estimated at around 150 million cars. Traditionally, the market has been dominated by GM and Ford. However, their dominance has been challenged by well-known Japanese brands like Toyota, Nissan and Honda. Increasing gasoline prices and a sluggish economy have resulted in a slower turnover cycle for automobile consumers. Increased competition coupled with the recent economic downturn has led many to speculate that the domestic automobile market is near saturation. (Wagoner Lecture, 2004)
To boost sales of domestic vehicles after the terrorist attacks of September 11th, GM instituted a series of rebates and price cuts intended to boost sales in the short-term. What happened, however, was a full out price war with GM’s chief competitors that has dragged on for close to three years. (Welch, 2004)
The results of this price war have been decreasing profit margins and market share for General Motors, and there is no end in sight for this self-created problem. With its core businesses in America losing money and overhead expenses rising due to escalating health care costs and pension issues, GM had to take drastic action.
Needing a fresh market for expansion, GM looked to China, the largest growing automobile market in the world. In 2003, more than 4.5 million vehicles were sold in China, replacing Germany as the third-largest auto market behind the United States and Japan. The Chinese automobile market is expected it to grow at a rate 30% a year and surpass Japan as the second-largest auto market by 2007 (Butters, 2004).
Although GM has had business relationships in China for over eight decades and has produced automobiles under the Buick, Chevrolet and Wuling nameplates, the production numbers have never been comparable to its North American or European operations. Seeing an incredible opportunity, CEO Rick Wagoner announced plans to expand GM’s presence and maintain its strong growth in China by investing more than $3 billion and by doubling production capacity between 2004 and 2007 (GM China Website, 2004). GM’s aggressive investments and partnerships drove its market share in China from 1% in 1998 to 11% in 2004.
Success in China is crucial to GM’s global strategy of cost reduction through economies of scale. The price of steel has risen over 25% from 2003 to 2004, and GM is using the huge purchases of steel for the growing Chinese market to negotiate discounts from steel manufacturers (Wagoner Lecture, 2004). GM also hopes to bring more than automobiles to China. Shanghai GM has also applied for an official business license to establish China’s first foreign automotive financing joint venture (GM Website, 2004).
GM, however, will not find itself without competition in the Chinese market. GM’s competitors have invested over $30 billion in China since the 1980s (Butters, 2004). And although vehicle sales are increasing at tremendous rates, a regional analyst has calculated that there are as few as 8 cars for every 1,000 driving-age residents of the country (Regan, 2004). However, the think tank Global Insight predicts that as capitalistic ventures take hold in China and the population of 1.3 billion people becomes more affluent, by 2014 the country will require about 51 cars per 1,000 people (Butters, 2004).
Challenges in Keeping Up with TechnologyAdvances in technology over the past two decades have dramatically changed the automotive industry. Technology has changed the way automobiles are manufactured and marketed. Consumer expectations have increased. They expect vehicles that support the environment, have improved safety, greater digitization, and make their lives more comfortable and earth-friendly.
These rapid changes become extremely challenging in the highly competitive automobile market. GM’s strategy of obtaining market leadership by “running fast” relies heavily on new technologies. (Wagoner Lecture, 2004). OnStar technology is one example of GM’s success with technology. Through this service consumers are equipped with GPS navigation devices, emergency services, roadside assistance, stolen vehicle tracking, and even an online concierge (OnStar Website, 2004).
One of the most pressing issues for the automobile industry is decreasing the reliance on non-renewable energy sources and in so doing, limiting long-term effects on the environment. In the early 1990s the Big Three US automakers partnered with the Department of Energy, and received hundreds of millions of taxpayer dollars to develop super-efficient, low-emission cars. Toyota and Honda were the first automakers to enter the market with hybrid cars, and the US automakers have had to buy hybrid technology from Japan in a game of catch up (Hybrid Cars Website, 2004).
GM has focused a majority of its research efforts on fuel cell technology, believing renewable hydrogen to be the most effective way to improve energy efficiency and reduce gas emissions (GM Website, 2004). GM has produced Hy-wire, a visionary concept car, which has no internal combustion engine, but rather implements the potential of fuel cell technology. However the expense of manufacturing and engineering, not to mention the modifications required at gas stations, makes the reality of this breakthrough several years away.
The choice to focus on hydrogen fuel cells is not without opposition. “If you really care about a national solution to our energy security and global warming problems, focusing on hydrogen fuel cells in the near term is a distraction, not a solution,” says Roland Wang, senior policy analyst for the Natural Resources Defense Council. GM believes that its billion dollars are being wisely applied to create a radically better car. Wang disagrees with this approach, stating, “It is clearly being used as a way to undermine political momentum to raise fuel economy standards.” (Hybrid Cars Website, 2004)
In an effort to meet the current demand for alternate energy use GM had moved painstakingly slowly in entering the Hybrid market. Robert Lutz, GM’s vice-chairman of product development, affirms, “It just doesn’t make environmental or economic sense to try to put an expensive dual-power train system into less expensive cars which already get good mileage” (Isidore, 2004).
He believes the only way GM can shoulder the extra cost of a hybrid vehicle is by putting the technology in a higher priced SUV or pickup truck. This would also have a more significant positive impact on the environment because it would save more fuel. GM has just started selling hybrid versions of the Chevrolet Silverado and GMC Sierra pickups in their 2005 models.
Pensions and the Rising Costs of Health CareOne of the most pressing problems faced by GM is the soaring retirement and health care costs the company is facing in today’s highly competitive environment. Today, GM has America’s largest private pension fund with $39 billion in assets at the end of 2002 (UAW Website, 2004) and underfunding of almost $18 billion (GM Website, 2004).
The huge pension and health care costs alone add $1,360 to the price of each vehicle, a tremendous competitive disadvantage on the global market (Welch & Kerwin, 2003). There are a number of reasons for the current pension and health care problem. The average age of the GM workforce is one of the industry’s oldest (Interview, 2004), resulting in increased pension liabilities and health care utilization.
Also some agreements GM made with the United Auto Workers, like the deal it struck in 1990 “to pay furloughed workers 70% of their salary for years after they are laid off,” are proving burdensome (Welch & Kerwin, 2003). GM has closed several unproductive plants in the past decades, and such agreements have resulted in onerous liabilities, as the company has fewer vehicles over which it has to spread the huge pension and health care costs (Welch & Kerwin, 2003).
GM is also the world’s biggest spender on health care benefits, spending close to $5 billion in 2004 (up from $3 billion in 1996), and supporting almost 600,000 employees and retirees (Tierney, 2004). US health care costs have skyrocketed beyond anyone’s expectations over the past two decades. Although this affects all American companies that offer health care, GM has historically been very generous in these benefits. Unlike pension plans, health care benefits are almost impossible to renegotiate more favorably, and doing so would contradict GM’s commitment to its employees. Instead GMis swallowing the added costs at great financial hardship.
RECOMMENDATIONSNotwithstanding a century of great leaders, a distant past of consistent success, and a current alignment of its 7-Ss, there are deficiencies in GM’s strategy that have become apparent in light of the above-described threats. The following recommendations will address these threats as well discuss future strategy for GM to adopt to regain competitive advantage and financial well-being.
Structure and the Global EconomyDespite GM’s recently-articulated vision of becoming a global leader, GM remains an American company with an American management style in a global marketplace.
The leadership has begun to recognize the global reality and has acted with investments in China, but this is not enough. With losses piling up in both North America and Europe, General Motors needs to focus outside of its traditional boundaries and invest even more money and resources in China. Expansion and retention of market share in this rapidly emerging market will provide GM the financial leverage it needs to get its other operations in order.
Additionally, General Motors has several costly, non-profitable operations in underperforming regions that have been weighing down its financial performance for years. GM needs to change its strategy to scale down its presence in Europe and cut its losses with its Fiat Auto investment. This reduction in the European market will decrease losses and free up capital and resources which can be more wisely invested elsewhere.
GM has also continued to produce several brands that return little profit and continue to add to GM’s image quality problems. GM needs to change its strategy. The Pontiac line has contributed very little to GM’s financial well-being and serves as a constant reminder of GM’s mediocrity during the 1970s. The Pontiac brand should be retired to help repair brand image quality issues with the company.
General Motors has always strove to expand its automotive business internationally, but not its incredibly profitable financing business. GM needs to strategically expand its GMAC financing into as many markets as possible. The initial investments and subsequent expenses are minimal compared to the automotive arm, and the profits that can be obtained for it can potentially surpass the automotive arm.
Technology and the EnvironmentGM’s strength in innovation is becoming a liability with fuel-cell technology. By focusing most of its efforts on developing a radically different car, GM is diverting time and money away from the more practical and realistic solution of hybrid technology. While keeping the fuel-cell pipeline in progress, GM needs to be more realistic in meeting current market demands in order to remain competitive.
GM needs to evaluate whether their current research efforts are continuing to improve the company and create value. First, their goals for enhancing products should focus specifically on the products that equal 80% of their sales. Additionally, to improve performance they need to measure the development time for the next generation of car and assess whether it is aligned with their vision of moving with urgency. Lastly, in order to speed up the time to market they need to compare the timing of their new product introduction to that of the best-in-class competitor.
Staffing and the Health Care and Pension QuagmireGM should consider using its considerable size and political clout to advocate for change in US health care policy. A national policy of universal health care, like Medicare for All, while it would increase corporate income taxes, would eliminate the need for GM’s annual health care expenditures of $5 billion.
Wagoner has called upon the industry to put up a united front to bring about health care reforms (Washington Times, 2004) but GM spent only $710,415 on total lobbying efforts in 2004 election cycle, considerably less than necessary for effecting change. Added impetuses for change should be the facts that GM’s workforce is one of the industry’s oldest and GM is currently paying the most for health care: if GM is able to solve the health care problems, it will be in a position of competitive advantage in a couple years when its competitors age.
General Motors needs to exercise more caution in the future when negotiating pension plans, especially in anticipation of plant closures. Any readjusting that can be done on friendly terms with unions, especially if GM is able to point to work it has accomplished on the heath care front, is good. But, absent of friendly readjustment, GM does right to honor these pensions; doing so not only rewards a productive and loyal workforce but is also good publicity for the company in the domestic market ANALYSIS OF PERFORMANCE
If we use Michael Mische’s definition that a high-performing organization “consistently [sets] the performance standard in creating and sustaining competitive advantage, exemplary financial performance, and stakeholder value over a long period of time,” we must conclude that GM is not currently a high-performing organization. Several of GM’s largest weaknesses are in areas that most greatly impact its performance.
First of all, General Motors has had difficulty maintaining its competitive advantage. Increased competition and market saturation have eaten away at GM’s market share in North America. Also, a string of questionable mergers and non-profitable investments show that GM has lost sight of its historical competitive advantages and has looked unsuccessfully to generate fresh competitive advantages in new markets and products.
Secondly, General Motors has not maintained exemplary financial performance in recent years. GM used the 2002 fiscal year to write off more than $13 billion dollars in bad investments and losses from its health and pension programs. These expenses coupled with decreasing market share all hint at serious financial difficulties that GM will face in the future.
Thirdly, General Motors is struggling to create a strong organizational culture for their entire company. Despite strong leadership, GM’s sheer size, new partners, and recent acquisitions make it incredibly difficult to instill and maintain a single, unified culture. As GM continues to expand and increase partnerships, which it must do to regain its competitive advantage, it will become increasingly difficult to attain this goal.
In conclusion, General Motors is no longer the high-performing organization it was in the 1950s. Only when it rediscovers its competitive advantage, stabilizes its financial performance and finds a way to develop a unified corporate culture will it meet this definition. GM, however, is on the road to recovery and through continual hard work, and the implementation of our recommendations, General Motors has the potential to evolve into such an organization again.
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