Overview Of General Motors And Toyota
With the global economic crisis and energy crisis, automotive sales fell to their lowest per-capita levels, putting automakers under enormous financial pressure. All automotive manufacturers have been severely affected, with most reporting significant losses in the last two year. This affects all automotive producers including global automotive giants like General Motors (GM) and TOYOTA.
If we consider GM and TOYOTA alone, both companies lost a great deal of sales and had to adjust themselves according to these unexpected conditions. Especially GM’s liquidity fell rapidly to levels below those needed to operate the company. At the same time, because of TOYOTA’s well defined production processes and their high quality production, TOYOTA could provide healthier competition over General Motors, which facilitate TOYOTA to take over the global industry leadership from GM.
As the main objective of this report is to carry out a detailed analysis in relation to the above mentioned situation and come up with some feasible international strategic movement that can be used to take back the industry leadership from TOYOTA by General Motors.
Overview of General Motors
General Motors, founded in 1908 September by William C. Duran. General Motors Corporation (GM) is more than one century year old Multinational Corporation, which has been maintaining the automobile industry leadership over the last 80 years. GM employs approximately 244,500 people around the world, across all its brands.
General Motors provides a wide range of vehicle priced from US$10,000 to US$100,000+ catering to various customer segments all over the world from middle to luxury class automobiles. Chevrolet, GMC, Pontiac, Cadillac, GM Daewoo, Hummer and Opel brands are some of their best brands. At the turn of the 21st century, it was prevalent that the environment needed to be preserved. General Motors began creating vehicles that were more environmental friendly. GM has innovated itself by creating fuel-efficient vehicles, bio fuels and hybrids.
Since its inception, it has expanded to sell cars and trucks in 140 countries across North America, Europe, Asia-Pacific, Latin America, the Middle East and Africa. In 2008, GM sold 8.35 million vehicles. GM’s largest national market is the United States, followed by China, Brazil, the United Kingdom, Canada, Russia and Germany.
Below table represents GM’s Global Vehicles sales and Market share in 2008:
Overview of TOYOTA
The TOYOTA Motor Corp. (TMC) was established in 1933. The founder of TOYOTA was Kiichiro Toyoda. As the main operational difference, TOYOTA is a process-oriented company whereas most companies are results-oriented, focused on how much they can make or sell or how much money they can make in a quarter. TOYOTA sells its vehicles in more than 170 countries and regions. TOYOTA’s primary markets for its automobiles are Japan, North America, Europe and Asia.
Continued Success of TOYOTA
As you see in the Figure 1, TOYOTA had a continuous growth over the last few years. TOYOTA designed their vehicles with a greater customer satisfaction and sales satisfaction by focusing “quality, price, design, performance, safety, reliability, economy and utility”.
TOYOTA continuously introduced various innovative success models such as environmental friendly ‘Hybrid Luxury Cars’ to expand their vehicle range. TOYOTA’s market growth drastically resulted to decline GM’s sales within the US market as well as in the global market and ultimately TOYOTA could become the global industrial leadership by defeating the global automobile giant, General Motors.
General Motors Faced Problems
General Motors (GM) lost their industry leadership and faced the worst economic downturn during the last two years. Consumers have had to contend with illiquid credit markets, rising unemployment, declining incomes and home values, and volatile fuel prices.
Industry’s competition provided a major contribution towards the GM’s failure. In addition to this immense competition from the other global automobile companies, following two economic and industrial issues provided a radical pressure towards GM’s comedown.
1. Global Economic Decline
The global financial crisis really started to show its effects in the middle of 2007 and into 2009. Around the world stock markets have drastically fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems. New car purchases dropped significantly in U.S. in the final quarter of 2008. The US auto sales for 2008 stood at 13.2 million down 18 percent from 16.1 million in 2007. Because of this General Motors faced significant slump in their revenues.
2. Automotive Industry Crisis
The automotive industry crisis of 2008-2009 was a part of a global financial downturn. The crisis primarily affected the American automobile manufacturing industry other than to the Asian and European markets. Further the automotive industry was weakened by a considerable increase in the prices of automotive fuels because of the energy crisis. By 2008, the situation had turned critical as the credit crunch placed pressure on the prices of raw materials.
Blunders of General Motors (GM)
Other than to the above 2 global economic and industrial issues, General Motors further made following internal blunders as well:
a). Unstylish Design
GM customers were not satisfy with the last 10 years’ GM car models, basic reason was GM primarily wanted to keep the costs low, they compromised the design.
b). High Cost Production
GM has not utilized their plant capacity for maximum benefit. The other reason was the high labor cost especially because of the high employee salaries and given benefits, GM had to spend a large amount of production cost along with the high maintenance cost of their plants in United States.
c). Wrong Pricing Strategies
After the crisis happened, GM radically cut their prices with bottomless discounts, which resulted to increase their sales around 25 – 27k units per year, but there after the quantity stayed until the cars’ demise.
TOYOTA’s Improved Production Process
TOYOTA’s automobile production process provided an enormous push towards the company success. First they methodically reduced the setup time in the automobile assembly line and trained an efficient assembly line work force. In parallel to this they continuously improved the quality of each completed process independently. Initially this quality improvement mechanism was so challenging but with the proper process designing and employee expertise, error rate began to drop dramatically.
Once the setup time and assembly line was improved, then TOYOTA implemented JIT (Just-In-Time) to reduce the buffer stocks and inventory levels during the production process. This resulted to accelerate and increase the efficiency of production assembly line process without maintaining surplus inventory. In order to do this TOYOTA maintained a better supplier base by entering in to long-term relationship with major suppliers.
From the beginning itself, TOYOTA closely worked with their suppliers, providing them by sharing engineering/management expertise, and even with capital to finance for new investments. As a result of these improvements, TOYOTA could reduce the cost of production along with the high labor productivity and the quality which ultimately gave a greater competitive advantage over the other global automotive competitors.
Next step of TOYOTA was to further increase the customer satisfaction. Therefore, TOYOTA continuously conducted customer surveys by using various techniques; they estimated and identified the exact customer preferences. These finding were directly incorporated with their actual automobile design process.
TOYOTA’s Distribution and Global Expansion
After 1983 TOYOTA’s first successful joint venture with General Motors, by 2006 TOYOTA represented more than 60% of the total North American sales. In parallel to the US market expansion, TOYOTA made their move in European market as well. By now with TOYOTA has overtaken General Motors and become the largest automobile industry leader in the world.
How GM Become the Leader Again?
SWOT Analysis of General Motors
To have a strategic approach first of all we need to understand company’s capabilities clearly. So below I have conducted a SWOT analysis to get a clear picture about the company. According to Capon, (2004:393) SWOT stands for Strengths, Weaknesses, Opportunities and Threats. The strengths and weaknesses of an organization arise from its internal environment, namely resources and their use, structure culture and the tasks carried out by the four functions of business. Which strengths an organization decides to build on and which weaknesses it seeks to minimize depends on the impact of opportunities and threats from the external environment. Below I have categorized the internal and external environment factors for GM.
World-wide Market coverage and Technology potential.
Sols with packagers (for different needs).
Utilization of core competencies to meet the requirements of specific customer needs.
Failure to Make Technology Work
Product Design Problems-public Acceptance.
For every car that GM sells, $2500 of the profit will go towards paying for the benefits of retired Employees.
Still much to Learn about Lean Production-High Cost Production.
Use of knowledge gained from Joint Ventures.
Continue to Build Customer Confidence.
Almost all the automotive firms facing the same Economical challenges.
Changing Consumer Demand for New Model Types and Styles.
Domestic and Foreign Competitors and Other Competitors’ Fuel Efficient Cars
Global Economic Crisis.
Unions are powerful and Drive a Hard Bargaining.
High R & D Cost.
By considering the obtainable strengths and opportunities, still GM has several avenues to take over TOYOTA and become the number one in the automobile industry again. But for that, according to my analysis GM has to carefully perform several internal restructuring activities and adjust them to face to the immense competition.
Below I have listed down some important steps that GM could follow to get back to the right track during the next 5 years.
Products Improvement (Fuel Efficiency Improvement)
General Motors (GM) today offers about 20 models with average 30 miles per gallon or more on the highway more than any other manufacturer. General Motors is also considered as the world leader in flex fuel technologies.
GM should concentrate following areas during the overall products improvements.
Vehicle Quality Improvement
General Motors is focused on delivering high-quality and exciting cars, crossovers and trucks to their consumers. GM has substantially overcome the quality gap compared to many competitors. Further improvements especially in warranty problems per vehicle (relative to competition) are expected and such improvements should be taken in to account during the vehicle development process.
GM should not cut cost on their products design because customers still expect to look good their vehicles. Further GM can systematically conduct their target market surveys so that they can identify the exact design preferences of their customers.
Improve Fuel Efficiency
GM should concentrate more Hybrid Cars production. Because by now, gas-electric hybrid cars have now become a practical choice for consumers and it offers so many efficient, innovative and affordable options.
Improve Engine Reliability
GM had to face number of complaints (especially electrical problems) about recent unreliability vehicle designs. So they must make sure to design their vehicles’ safety features at least above the average level.
Most importantly, especially due to oil crisis and continuous oil prices increments, there is a very good potential market for Extended-Range Electric Vehicles. So if GM could further focus on development of advanced batteries, power electronics, systems integration and manufacturing methods, there would be high chance to dominate these types of new customer segments all over the world.
At present, GM competes with 8 brands in the United States and out of them ‘Chevrolet’, ‘Cadillac’, ‘Buick’, and ‘GMC’ represent the company’s core brands, accounting for approximately 83% of current sales. So GM should focus considerably all of its product development and marketing resources in support of these core brands. This will result in improvements in awareness, sales, and customer satisfaction for these 4 core brands.
Retail Operations (Locations)
The other important consideration is GM should take necessary steps to strengthen and further consolidation of GM’s dealer network, which will result to get to a more profitable and stronger dealer network.
As a distribution issue GM has approximately 6450 dealer locations right now, but the problem is most of their positioning is limited to serve in metropolitan and suburban areas. So GM should reinforce rural areas’ distribution network as well, which is a significant competitive advantage. Further GM should intend to have the right number of brands, sold by the right number of dealers, in the right locations to obtain maximum profitability for GM and the retailer network.
When we closely monitor GM’s manufacturing cost, we can see a dramatic declining from $18.4 billion in 2003 to $8.1 billion in 2008. According to the following diagram (Figure 2) you can see the US hourly manufacturing cost reduction over the last few years.
Further, this reduction reflects significant productivity improvements. And also, due to post-employment healthcare expense plan reductions, GM’s new hires would be as low as $30 – $35. This rate would be significantly below the average fully-loaded labor cost for TOYOTA, which public sources indicate is between $45 and $50 per hour.
Below chart depicts GM’s significant reduction of U.S. salaried employee count over the last few years.
So definitely because of these types of operational cost reductions, GM’s wages and benefits for both current workers and new hires will be fully competitive with TOYOTA in near future.
Further Cost Reductions
General Motors’ various restructuring initiatives over the past few years have been designed to improve its competitive position and ultimately the company’s profitability, liquidity and capital structure.
However over the past 15 years alone, General Motors (GM) spent over $103 billion on post-employment healthcare and pension expenses. Therefore, GM should plan to reduce the company’s structural costs at least by $5 billion annually, or 16%, during the next two years. This would be a significant and important restructuring step to the company’s long-term viability.
Strategic Alliances and Collaborations
In the present business context collaboration is the best option rather than the competition. Therefore going forward, GM should consider and plan to create possible and contributing collaborations such as an IJV (international joint venture) or alliances for the company.
According to Daft, (2006) medium and large companies have couple of ways to become involved in international business. One is to seek cheaper sources of supply offshore, which is called outsourcing. Another is to develop markets for finish products outside their home countries, which may include exporting, licensing, and direct investing. These are called market entry strategies because they represent alternative ways to sell products and services in foreign markets. Most firms begin with exporting and work up to direct investment. Exhibit 1.1 shows the strategies companies can use to enter foreign markets.
International journal of business management, (2010) commented that newly established, 3 technology-based firms entering international markets often have limited resources in terms of capabilities, time, and capital. As a consequence, these firms often use entry modes characterized by low resource commitment, including partnership agreements (strategic alliances).
What is the Best Marketing Strategy for GM?
In this section I have investigate how the partner selection criteria is important for GM when they select a marketing entry strategy. Trust, Relatedness of Business, Access to Networks, Access to Market Knowledge, Reputation Factors should be considered as the five primary concerns when a company selects a partner company to proceed with a collaborative approach.
Based on number studies, and according to my own analysis, to regain the market, I suggest GM should proceed with strategic alliances market entry mode.
Forging Strategic Alliances and Collaborative Strategies
Jeannet and Hennessy, (2004) have clearly justified that the more recent phenomenon is the development of range of Strategic Alliances. Alliances are different from traditional joint ventures, in which two partners contribute a fixed amount of resources and the venture develops on its own. In an alliance, two entire firms pool their resources directly in a collaboration that goes beyond the limits of joint ventures, although a new entity may be formed, it is not a requirement. Sometimes the alliance is supported by some equity acquisition of one or both of the partners. In an alliance, each partner brings a particular skill or resource-usually, they are complementary-and by joining forces, each expects to profit from the other’s experience. Typically alliances involved distribution access, technology transfers, or production technology, with each partner contributing a different element to the alliance.
Daniels, Radebaugh, and Sullivan, (2007) suggest an alliance is a collaborative arrangement in which at least one of the collaborating companies takes an ownership position. In some cases, each party takes an ownership, such as by buying part of each other’s shares or by swapping some shares with each other. The purpose of the equity ownership is to solidify a collaborating contract, such as a supplier-buyer contract, so that it is more difficult to break-particularly if the ownership is large enough to secure a board membership for the investing company.
Production Bases Alliances
According to my analysis, GM should proceed with Production Bases Alliances. Jeannet and Hennessy, (2004) pointed out these alliances fall into two groups.
First there is the search for efficiency through component linkages, which may include engines or other key components of a car.
Second, companies have begun to share entire car models, either by producing jointly or by developing them together. U.S. automobile manufacturers have been very active in creating global alliances with partners, primarily in Japan. Many of these alliances are production based.
As a good example, to compete more effectively in the super-small car segment in Europe, Peugeot of France and Toyota of Japan collaborated on the building of a new production plants located in Kolin, Czech Republic by investing about $ 1.5 billion in this facility. The two partners shared the same body design but used exterior modifications to differentiate their models. Both companies carried out their marketing strategies separately, and thus are likely to compete against each other through their own sales and distribution networks.
By joining forces, broth manufactures will gain economies in a very price sensitive market segment. If GM collaborates with a leading automobile partner such as TOYOTA or any other, they would also be able to win the competitive advantage through strategic production bases alliances.
Problems of Collaborative Arrangements
None of these arrangements are not problem-free or perfect approaches. Daniels, Radebaugh, and Sullivan, (2007) shows that although collaborative arrangements have many advantages, some companies avoid them; many arrangements develop problems that lead partners to renegotiate their relationships. Partners might renegotiate responsibilities, ownership, or management structure. In spite of new relationships, many agreements break down or are not renewed at the end of an initial contract period.
Collaboration’s Importance to Partners
One partner may give more management attention to a collaborative arrangement than the other does. If things go wrong the active partner blames the less active partner for making lack of attention, and the less active partner blames the more active partner for making poor decisions.
Although companies enter into collaborative arrangements because they have complementary capabilities, their objectives may evolve differently over time. For instance, one partner may want to reinvent earnings for growth and the other may want to receive dividends. One partner may want to expand the product line and sales territory, and the other may see this as competition with its wholly owned operations. A partner may wish to sell or buy from the venture, and the other partner may disagree with the prices. For example, GM has joint venture in Thailand with Fuji Heavy Industries to make and export vehicles to Opel in Germany and Subaru in Japan. Because of disagreements over quality, both companies perform inspections, which is time consuming and expansive, they have even argued over standards of paint jobs.
By sharing the assets with another, one company may lose some control on the extent or quality of the assets’ use. Some companies have well known trademarked names that they licence abroad for the production of some products that they have never produced or had expertises.
When no single company has control of a collaborative arrangement, the operation may lack direction. At the same time, if one dominates, it must still consider the other company interests.
Companies differ by nationality in how they evaluate the success of their operations. Japanese companies tend to evaluate primarily on how an operation help build its strategic position, particularly by improving its skills. European companies rely more on a balance between profitability and achieving social objectives. This difference can mean that one partner is satisfied while the other is not. In spite of these potential problems, joint ventures from culturally distant countries survive at least as well as those between partners from similar cultures. However as is the marriage, a positive prior relationship between two companies does not guarantee that partners will be well matched in a strategic alliance. Compatibility of corporate cultures also is important in cementing relationship.
Due to the global economic recession and enormous industry competition, GM lost their industrial leadership to TOYOTA. The secret of its success was their well defined production processes and their high quality customer focused production. By analyzing the GM’s presents strengths and opportunities, still GM has the potentiality and own competitive advantage to take over the industry leadership through a strategic approach.
I have thoroughly evaluated the situation, especially the best practices and strategic movements of TOYOTA as well as the blunders made by GM during the past few years separately. Then under the ‘How GM becomes the Leader Again’ topic, clearly I have described all the possible improvements and rearrangements, which need to be applied with a systematic restructuring process to GM. Importantly, this restructuring process requires considerable sacrifices from all stakeholders, dealers, suppliers, employees and executives.
During these financial crisis and economic uncertainty challenges, with a proper analysis and understanding GM would be able to open significant number of opportunities with the new strategic restructuring process and innovative products developments in the near future. Then in the final part of the report, I have explained and justified possible strategic market entry approaches that GM can follow to regain the industry leadership again.