General Motors- death of a dinosaur?
Will General Motors be around for the next hundred years? GM continues to lag behind its competitors as the business model fosters slow decision making and additional costs. As a former employee, I believe GM is in the right direction but it has a long way to go.
General Motors one of the world’s largest manufacturers of vehicles, employs over 200,000 people and does business in more than 120 countries. Its employees work in 396 facilities, they speak more than 50 languages and touch 23 time zones. After operating for over a hundred years, in 2008, GM almost ran out of cash. The company received a loan from the U.S. Treasury and filed for bankruptcy to restructure its operations. On November 18, 2010, GM re-emerged with an initial public offering for 20B US Dollars. With bankruptcy protection, GM restructured and shed unprofitable product lines, manufacturing plants, suppliers and dealers and renegotiated labor agreements. How can it be that a company with such history and economic power went bankrupt in a matter months? Will GM be around for the next hundred years?
Despite its restructuring, General Motors remains an inefficient organization due to the misalignment between its operating and business models. Over the decades, GM moved towards an operating model that is centralized and shared, and highly effective. Operating directors report directly to headquarters and indirectly to business unit presidents. This structure allows best practices and learnings to disseminate throughout the global organization. As a result, processes/goals/incentives from China to the United States are common. Everyone is aligned, all the way from procurement of materials to assembly to quality controls. Additionally, high costs like research & development and intellectual property are shared amongst all business units. Furthermore, the company ensures the operating model is carried throughout the value chain, all the way from its suppliers to its dealers. On the contrary, GM’s business model is fragmented and decentralized. Each business unit continues to operate independently using different business systems and different processes. For example, each unit has its own way of filing expense reports, paying vendors for services, and on boarding employees. Instead of using its buying power and economies of scale, each unit sets up individual contracts for services and indirect materials. In the past, GM ‘attempted’ to implement a shared service concept in limited functions like accounting and most business units refused to adopt the model. Furthermore, the services were outsourced to a third party provider who performed each activity as instructed by the business unit with no incentive to innovate and create efficiencies.
Due to the misalignment, GM continues to lag behind its competitors as the business model fosters slow decision making and additional costs. In 2014, GM had an EBIT margin of 8% compared to Toyota with 15.5%. If the operating and business models are better aligned, this could create an advantage as every dollar saved can be reinvested into developing, manufacturing, and selling the world’s best vehicles. Back in the 90s, General Electric successfully implemented a global business service (GBS) organization which later spun off as an independent company, Genpact. In 2013, GM similarly created a GBS organization, to streamline the back office activities like HR and facility management and expects to reduce administrative costs by 30% over the next few years and improve EBIT margin to 10%. GM placed a manufacturing exec, who played a critical role in transforming the operating model, to lead this initiative. Bringing the back office operations under a common leader will align business units to make decisions in the best interest of the broader company. As, well having common systems/processes will improve communication across business units and allow senior management to make quick decisions. In the ever changing environment, companies like GM need to become more lean and have the ability to make quicker business decisions if they want to be around for the next 100 years. As a former employee, I believe GM is in the right direction but it has a long way to go.
Sources:
http://money.cnn.com/2008/11/07/news/companies/gm/index.htm?iid=EL
http://www.gm.com/company/aboutGM/our_company.html
Firstly, I feel the author mistook the meaning of the term “business model”, hence omitted this part. Secondly, I learned about the operating model of the firm but would like to see benchmarks to make sense of how severe the issues were. Lastly, I believe revitalizing opportunities can only exist on the real “business model” side.
A business model is defined as how the firm creates and captures value. In GM’s case, it is about making cars that suits different markets, and sell them, hence generating value for the customers and capture profits. What the author classified under “business model” is still operating activities. What I believe is GM’s failure in business model is being a laggard in market trends towards more fuel-efficient cars and other product innovations. This leads to the company generating less value over time, hence capturing less through selling the cars.
On the operating side, one would take for granted that a massive, manufacturing company will have complex processes. I wonder how it compares with large companies in somewhat similar, or different industries. How is it worse than, say, GE, Toyota, or Samsung? If they are all the same, the operating model, even with the known inefficiencies, is not the reason for GM’s failure.
Lastly, efforts in streamlining the operating model does not give me any confidence in the firm’s future. A large organization should do this as a constant effort, a baseline for survival. Meanwhile, the actual value creation (business model) needs to be re-invented. They need to find another competitive strategy for GM’s products, for it to revitalize itself.
Hello Hao! Thanks for pointing out my confusion 😉
To clarify, the business model of GM is to build and sell the world’s best vehicles. In the past, GM’s strategy was to build vehicles to fit local markets. The strategy has changed to using common platforms of vehicles for global markets in an effort to share research & development and thus capture value by offering the most innovative technology world-wide. The manufacturing side of the operating model aligns to this strategy. However, the admin side (like financial reporting systems, support services and indirect materials) never aligned. As a result, GM made one side of its operating model very efficient but since they did not align the admin side thus they are still inefficient. The inefficiency creates waste, millions of dollars, that could be used to re-invest in new innovative products to create value for the customers.
Unfortunately, fuel efficient cars are not the game changer for the automotive industry. Companies like GM and Tesla have invested tons for electric vehicles but the demand is just not there. Tesla only captures a small fraction of the market (~30K units per year) and is not profitable. I think the future is more aligned with being able to offer the customer more value through technology. Like wifi enable cars, autonomous parking features, better utilization with phone applications etc.
Melissa – great post. I am curious how labor costs impact the difference between GM’s EBIT and that of Toyota’s. Given a unionized labor force, does this help or hinder GM? You mentioned how GM renegotiated labor contracts. What did GM do and were these negotiations massively substantial to improving GM’s finances? Are these union employees more loyal to UAW or GM? Are there ways to take a large union workforce and make it a competitive advantage in some way?
I feel that a firm’s workforce drives a massive part of its competitive advantage. I am somewhat skeptical to the longterm vitality of the union concept in the U.S., but I may be quite wrong. Perhaps there are ways to transform the current system at GM by engaging the labor force/human capital to improve the firm’s vehicle quality and brand equity.
I do not have the numbers but GM was able to get significant gains with the union. So remember Nummi was so successful because GM shut down the plant and the workforce realized they needed to change and improve their work for the plant to survive when it re-opened with Toyota? GM was not successful implementing this in other plants because the other plants workers were not scared of loosing their job. Well with bankruptcy everyone realized they had to change. So for example, instead of giving yearly bonuses to plant workers when the company did not perform well, now they are rewarded based off company performance. Seems like an obvious change but prior GM had no negotiating power for even the smallest improvements. I have mixed feelings about the labor unions but it is something we have to work with even outside the U.S.
From my understanding, after transforming the manufacturing side of the business and shedding historic problems with pension plans, union agreements, dealers, etc we became pretty competitive. However, we still had lower EBIT and this lead the company to realize we were not competitive in our SG&A. For example, we have 30 versions of SAP so we spend so much time just trying to compare data among different platforms.
But I do agree labor force and human capital is key to the future of the company and GM could do a better job in this aspect as well.
Great peace! I believe that GM’s problem have resided in the fact that its business model became short sighted and reactive to the automotive industry, instead of the leader that it once was. The introductions of lean and efficient Japanese automotive companies to the US market have made it difficult to survive in economic downturn, as the one we had in 2008. To give you a prospective of a GM family owned dealership that I once worked in was the impression that GM is pushing as much inventory to the dealership, as possible. This made the family owned dealership that has great pride of the family heritage, very skeptical about their long term relationship with GM. Thus, the dealership’s management sensed that GM was using their power and other GM dealerships competing in in the area, as means of doing so. Thus, GM’s business model seemed to focus on short-term gains rather than the long-term value added partnership. On the other hand, the dealership next door was a Toyota family owned dealership that was the only dealership in the area and had a great relationship with the Toyota. Yet, I believe that the 2008 bankruptcy have provided GM with the opportunity to be lean and focus on the long term, which we will remain to see weather the succeed in becoming the leader of the US automotive industry.