Upload
leye02
View
18.056
Download
4
Embed Size (px)
Citation preview
ASSIGNMENT TITLE:
THE COMPETITIVE ADVANTAGE OF GENERAL MOTORS
CORPORATION USING PORTER’S FIVE FORCES MODEL
STUDENT ID: 200885167
MODULE TITLE: INTERNATIONAL BUSINESS
ENVIRONMENT AND STRATEGY
MODULE CODE: 56336
SUBMISSION DATE: 29TH APRIL 2009
MODULE LEADER: DR. ZHEN YE
`2
KEYWORDS AND ABBREVIATIONS
§ Ansoff matrix
§ BCG Growth Share Matrix
§ FF – Porter’s Five Forces
§ GM – General Motors Corporation
§ HEVs – Hybrid Electric Vehicles
§ PESTEL – Political, Economic, Sociocultural, Technological, Environmental and
Legal macroeconomic forces/factors
§ Porter’s Diamond framework
§ SWOT – Strengths, Weaknesses, Opportunities and Threats analysis
§ UAW – United Auto Workers union
`3
It is imperative that it should first be borne in mind that we live in a dynamic world where the
environment is constantly changing. Companies employ data and the services of analyst to
try and understand their environment. Using the deductions from such exercises, managers
draft and implement strategies. This kind of act may suggest that strategy is primarily a
rational, analytical process of deliberate planning (design school of thought). However, with
the realities of the time (e.g. the present financial crisis and fall of many big corporate firms
like Lehman Brothers), it is inevitable to agree with the learning school of thought that
strategies are flexible and the intended strategy would differ from the actual/implemented
strategy (emergent strategy) (Grant, 2008).
In the automobile industry, recent events have brought about an end to General Motors
Corporation’s (GM) 77-year reign as the number one automobile company with the highest
sales as Toyota takes it’s place in 2008 (MSN Money, 2009; CNNa Money, 2009). Aside
from the ubiquitous economic crisis, much blame as been put on the management of GM as
allowing the firm to fall into a trap of slow change by offering customers products with slight
changes (Edmunds, 2009) for a long period of time thereby neglecting earlier signs of
strategic inflection points (Johnson et al., 2008).
However, the pressure that the difficulty of accessing loans is putting on the company
coupled with other external pressures, from the government (to restructure (Financial Timesa,
2009)), labour union (The Economista, 2009), dealers, suppliers, the fuel-crisis (which is
causing a shift from big cars to smaller-more fuel-efficient vehicles) and disruptive
technologies like the electric car, is forcing GM to not only restructure but to also re-
strategize if it will survive in the present day environment.
Different frameworks and models exist for firms to analyse their internal and external
environments and their relative performances. This helps them to have a better understanding
`4
of the factors critical to the success and positioning of their firm. Among such frameworks
are Dunning’s Eclectic Paradigm (Cavusgil et al., 2008), Porter’s Diamond and Five forces,
Directional policy matrix, Value Chain analysis (Johnson et al., 2008), SWOT analysis
(Kotler and Keller, 2009), etc.
The appropriate framework(s) to be used depends on what the firm seeks to address and in
what context it seeks to do so (Johnson et al., 2008). This is because many firms today
operate both on a national, regional and global basis and as such need appropriate strategy for
each individual environment (Schlie and Yip, 2000).
GM, as a multinational enterprise (MNE), operates in approximately 55 countries (excluding
US and Canada) and it’s services and operations ranges from development, production and
marketing (of cars, trucks and automobile parts) to finance and insurance services
(Datamonitor, 2009). In considering a restructuring program to effectively position itself, an
analysis of the firm’s competitive industry and attractiveness at all levels is necessary. The
result of such analysis may need the firm to shed off some of its operations (either by
outsourcing them or shutting them down completely), so as to be able to compete better with
its domestic and foreign rivals. “There would be fewer brands and employees, but also
substantially fewer obligations” (Globeandmail, 2009) if such action is taken.
A potent tool and a flexible framework that could assist in describing and assessing
competitive pressures in an industry and industry attractiveness is the Porter’s five forces
(FF) model (Niederhut-Bollmann and Theuvsen, 2008). The model helps a company to
decide how and where to make strategic changes (Rugman and Hodgetts, 2003) for gaining
and sustaining competitive advantages over rival firms and thereby generating above-average
return on investments (Niederhut-Bollmann and Theuvsen, 2008).
`5
In the context of GM’s present situation, figure 1 and 2 shows a FF framework for assessing
the competitive forces in play in the automobile industry in the United States where GM’s
headquarters is and its largest national market (GM, 2009).
Figure 1: Five forces Model (Porter, 2008)
Figure 2: FF model applied to GM’s
The FF model is credited for helping to identify competitive forces that affects prices, costs
and required investment and that thus shape the industry’s structure
Considering the present financial predicament of GM with rumours of possible bankruptcy,
the model is therefore an appropriate analytical tool to assess
consequently decide the best fit between GM (the organization) and its industry (the
environment) i.e. how best to position it in the automobile industry for
(Miller, 1988).
s automobile industry in the US
is credited for helping to identify competitive forces that affects prices, costs
and required investment and that thus shape the industry’s structure (Porter, 2008
Considering the present financial predicament of GM with rumours of possible bankruptcy,
appropriate analytical tool to assess the industry’s attractiveness and
consequently decide the best fit between GM (the organization) and its industry (the
environment) i.e. how best to position it in the automobile industry for optimum performance
is credited for helping to identify competitive forces that affects prices, costs
Porter, 2008).
Considering the present financial predicament of GM with rumours of possible bankruptcy,
the industry’s attractiveness and
consequently decide the best fit between GM (the organization) and its industry (the
optimum performance
`7
Starting with buyer power, in the case of the dealers (buyers) of GM, they have been labelled
as underperforming (The Economista, 2009), but powerful because the laws of the states in
which they operate has made them so and made it impossible for them to be side tracked.
The cost of running with these dealers puts GM in an unattractive position compared with its
foreign rivals who don’t have that many dealers through which they deal. GM has nearly five
times as many dealers as Toyota while selling about a third as many cars per dealership
(Globeandmail, 2009). This is eating into GM’s profit and it is a constraint to its positioning
and a threat to its success.
Economies of scale is said to be important to the automobile industry (Johnson et al., 2008)
and a barrier to potential entrants who until they can reach a certain volume will incur higher
unit costs. Capital requirement into the industry is also high but government and legal
barriers are relatively low due to increasing globalization and free trade policies as witnessed
in recent times (Hill, 2005). However, with borders opening up and reduction in trade
barriers, the possibility of not having to be mandated to set up full-fledged factories in the
host country exists and potential foreign entrants can export their products directly as long as
they can get access to distribution channels such as the car dealers.
The potential solution to the threat of new entrants who may be able to leverage their existing
capabilities and cash flows to shake up competition in the new market is for incumbents
(such as GM) to try and hold down prices or boost investment to deter them (Porter, 2008).
However, with the financial difficulties of GM as of date, this would be impossible.
Therefore, new entrants (especially the emerging giants) may find it easier to come into the
market and take advantage of the incumbents’ financial incapacity to either cut prices or
retaliate and defend their market positions. As the world cuts down on expenses because of
the financial crisis, the emerging giants’ low-cost production models, based on cheap local
labour, provide even more of an advantage (The Economistb, 2008).
`8
GM’s part and raw materials suppliers’ threats are low because they are quite many (ranging
from Tier 1s to Tier 3) (Times, 2008). But alternatively, the strong labour union (United
Auto Workers (UAW) union) which is their major supplier of labour is a potential threat to
GM’s financial viability and survival. The liability of pension and health-care expenses
incurred currently adds an additional $1,400 to the cost of every vehicle coming out of a GM
plant compared with rival products (The Economistf, 2008) and is expected to reach $6
billion by 2013 (The Economista, 2009). This is a tremendous amount and GM needs to find
ways to reduce this liability so that it can have more finance for development and growth of
the company.
In summary, the FF analysis shows that threat of substitutes is low, of new entrants is high, of
suppliers is high, of buyers is high because of laws that make it impossible to switch or by-
pass them and thus in turn make rivalry with foreign competitors operating in the same
market high. The automobile industry in the US in lieu of the above stated threats is therefore
currently not attractive on the surface though until other factors which the model ignores can
be considered, its attractiveness relative to GM cannot be ascertained.
The challenge here therefore before one can choose a strategy (cost, differentiation, focus or
combinations) is to identify GM’s competitive advantage as a firm, it’s wider economic,
ecological, technological, political, legal and socio-demographic environment’s influence on
market conditions and developments (Niederhut-Bollmann and Theuvsen, 2008) and how
they constitute or expose a strength, weakness, opportunity or threat to the firm. Any
conclusion or strategy deduced from using FF tool alone without fathoming in the just listed
factors would be futile or misaligned.
For example, choosing a cost leadership strategy without considering if GM has the financial
capability to back up such a strategy (which it currently doesn’t have) or a focus or
`9
differentiation strategy without considering which product it should promote or focus on and
the implication of PESTEL factors on the chosen product would lead to a wrong positioning.
The government’s commitment to reduce carbon emissions, dependence on fossil-fuels, and
funding of technologies to develop hybrid electric vehicles (HEVs) (see table 2) would mean
that GM will have to scrap unattractive brands irrespective of whether customers still like
them or not. Research shows currently that sales of electric vehicles had the greatest slump,
43.9% decline in March of 2008 compared to 36.5% for other types of passenger vehicles
(Edmunds, 2009). Nonetheless, GM has no choice other than to position itself in line with
government’s policies, initiatives and intentions.
Other government initiatives whose implications needs to be considered include; negotiation
for universal healthcare (an attempt to extend health insurance to employees not previously
covered) (The Economistc, 2009); a cap on carbon emissions (Financial Timesb, 2009); a
new act called “Employee Free Choice bill” (The Economistd, 2009) which could raise wages
for union members and drive up employment costs for firms; “buy American clause”, which
means GM may have to source its steel from US where its relatively more expensive than that
in the newly emerging economies; and the intention to invest in substitutes industries such as
airports and high-speed trains (The Economiste, 2009).
Therefore, since the FF framework doesn’t take into cognizance the implication of
government’s fiscal policies and makes it difficult to assess the internal strengths and
capabilities of the firm (i.e. GM), other frameworks that allow for such critical analysis such
as PESTEL, SWOT, Porter’s Diamond must be consulted (see table 1 & 2 for SWOT and
PESTEL analysis relevant to GM). As an example, to rectify the model’s exclusion of
complementary products which are seen as potential forces in the industry (Johnson et al.,
2008), Porter’s Diamond can be applied (the “related and supporting industry” determinant)
to do so (see figure 3). The implication of complementary products, for example price of fuel,
`10
is that it would make GM’s car brands (sports utility vehicles and pickup trucks) that
consume a lot of fuel unattractive. This means GM has to either pull them off or invest in
technologies to improve their fuel-consumption rate.
When a thorough analysis of the significant macro and micro environmental factors of GM’s
industry has been done, it is imperative to carry out a value chain analysis to reveal the
pressure points that exists in its value chain and spot areas where there is a misallocation of
resources to wasteful or non-value adding activities (Taylor, 2005 cited in Bonney, et al.,
2007).
Value chain helps the firm to identify activities where it can best apply its existing
capabilities (Diez-Vial, 2009) and to identify which activities to outsource in order to reduce
cost by taking advantage of country-specific advantages. Outsourcing most of the component
manufacture and assembly aspect of GM’s operations which needs a lot of labour to other
countries where labour is cheaper could relieve GM from employment liabilities that it is
currently facing in the US till it can resolve issues with the UAW.
Alongside the value chain, a BCG Growth Share Matrix (Lancaster and Reynolds, 2004;
Dibbs et al., 2006) would help determine which of the company’s brands are presently viable
or not (see figure 4). As earlier stated concerning fuel-efficiency and carbon emissions, gas-
guzzling brands such as the Hummer and Pontiac should be pulled off and more investment
put into building smaller fuel-efficient vehicles and HEVs.
For future strategic development, GM needs to first clearly define a viable segment to serve
and apply a combination of focus (niche strategy (Kotler and Keller, 2009)) and
differentiation strategy (since both are not mutually exclusive (Song et al., 2002)). A focus
strategy would help GM to be able to cut down on cost as it moves away from a broad-line
producer (Grant, 2008) to one with fewer ranges. It will then make it possible for it to
`11
differentiate its product from that of the competition since it focuses on a particular niche
market which it can serve best with its core competencies.
In conclusion, a basic factor missing in most of the frameworks is the element of “chance”.
The reality of this as experienced in recent times with the financial crisis means GM as a firm
has to be agile i.e. [able] to cope with unexpected challenges [so as] to survive unprecedented
threats of [the] business environment, and to take advantage of [such] changes as
opportunities (Sharifi and Zhang, 1999 cited in Swafford et al., 2006). GM needs to be
sensitive enough to avoid competency traps and pick strategic inceptions early to re-align
their strategic intent to their actions (Johnson et al., 2008).
`12
REFERENCES
1. Bloomberga, (2009), ‘Honda May Develop Plug-In as Obama Alters U.S. Policy
(Update2)’, www.bloomberg.com, accessed 28/04/09
2. Bloombergb, (2009), ‘Chu, Jackson Say Clean Energy Can Boost U.S. Economy
(Update2)’, www.bloomberg.com, accessed 28/04/09
3. Bonney, L., Clark, R., Collins, R. & Fearne, A., (2007), “From serendipity to
sustainable competitive advantage: insights from Houston’s Farm and their journey of
co-innovation” Supply Chain Management: An International Journal, 12/6: 395–399
4. Cavusgil, S., Knight, G., & Riesenberger, R., (2008), International Business, Strategy,
Management, and the New Realities, New Jersey, Pearson Prentice Hall.
5. CNN Moneya, (2009), ‘GM loses sales title to Toyota’, www.money.cnn.com,
accessed 27/04/09
6. CNN Moneyb, (2009), ‘SPECIAL REPORT, Road to Rescue , 2 million jobs lost so far
in '09’, www.money.cnn.com, accessed 28/04/09
7. Datamonitor, (2009), ‘General Motors Corporation, Company Profile’,
www.datamonitor.com, accessed 27/04/09
8. Dibbs, S., Simkin, L., Pride, W. M., & Ferrell, O. C., (2006), Marketing: Concepts and
Strategies, 5th edn, Boston, Houghton Mifflin.
9. Diez-Vial, S., (2009), “Firm size effects on vertical boundaries”, Journal of Small
Business Management, 47 (2): 137 – 153
10. Edmunds, (2009), ‘Hybrid Sales Sputtered in 1st Quarter, But Segment's Not Out of
Gas’, www.edmunds.com, accessed 2/04/2009
11. Financial Timesa, (2009), ‘Obama gets tough on US car industry’, www.ft.com,
accessed 02/04/09
`13
12. Financial Timesb, (2009), ‘A fine balance for Obama to strike’, www.ft.com, accessed
20/04/09
13. Globeandmail, (2009), ‘Chopping block: GM looks to ditch weaker units,
reportonbusiness.com’, www.globeandmail.com, accessed 02/04/09
14. GM, (2009), www.gm.com, accessed 02/04/09
15. Grant, M., (2008), Contemporary Strategy Analysis, 6th edn., United Kingdom,
Blackwell Publishing
16. Hill, S. (2005), World Business,: Globalization, Analysis and Strategy, 1st edn, United
States, Thomson South-Western.
17. Johnson, G., Scholes, K., & Whittington, R., (2008), Exploring Corporate Strategy, 8th
edn, England, FT Prentice Hall
18. Kotler, P. and Keller, K. L., (2009), Marketing Management, 13th edn, New Jersey,
Pearson Education.
19. Lancaster, G., & Reynolds, P., (2004), Marketing, New York, Palgrave Macmillan.
20. Miller, D., (1988), ‘Relating Porter's Business Strategies to Environment and Structure:
Analysis and Performance Implications’, The Academy of Management Journal, Vol.
31, No. 2: 280-308
21. Niederhut-Bollmann, C. & Theuvsen, L., (2008), “Strategic management in turbulent
markets: The case of the German and Croatia brewing industries”, Journal for East
European Management Studies, 13, 1: 63 – 88
22. Porter, Michael E., (2008), “The five competitive forces that shape strategy”, Harvard
Business Review, Vol. 86, Issue 1: 78-93
23. Schlie, E., & Yip, G., (2000), “Regional follows global: Strategy mixes in the world
automotive industry”, European Management Journal, Vol. 18, No. 4, pp. 343–354
`14
24. Song, M., Calantone, J. & Di Benedetto, C., (2002), “Competitive Forces and Strategic
Choice Decisions: An Experimental Investigation in the United States and Japan”,
Strategic Management Journal, Vol. 23, No. 10: 969-978
25. Swafford, M., Ghosh, S., & Murthy, N., (2006), “A framework for assessing value
chain agility”, International Journal of Operations & Production Management, 26, 1/2:
118 - 140
26. The Economista, (2009), ‘America's car industry, Time for a new driver’,
www.economist.com), accessed 04/04/09
27. The Economistb, (2008), ‘Emerging-market multinationals, Not so nano’,
www.economist.com, accessed 04/04/09
28. The Economistc, (2009), ‘Forecast, Mar 13th 2009, From the Economist Intelligence
Unit’, www.economist.com, accessed 04/04/09
29. The Economistd, (2009), ‘Unions, In from the cold?’, www.economist.com, accessed
04/04/09
30. The Economiste, (2009), ‘Spanish companies, Big in America?’, www.economist.com,
accessed 14/04/09
31. The Economistf, (2008), ‘Face value, Mr Detroit’, www.economist.com, accessed
04/04/09
32. Times, (2008), ‘Is General Motors Worth Saving?’, www.time.com, accessed 02/04/09
33. United States Department of Labour, (2009), www.bls.gov, accessed 27/04/09
34. Vernon-Wortzel, H., & Wortzel, H., (1997), Strategic Management in a Global
Economy, United States of America, John Wiley & Sons, Inc.
`15
APPENDIX
Table 1: SWOT analysis for GM
STRENGTH WEAKNESS
• Strong brand portfolio
• Growing business in Asia Pacific and
Latin
• America region
• Large scale operations
• Declining market share
• Product recalls
• Declining financial performance
OPPORTUNITIES THREATS
• Increasing demand for hybrid electric
vehicles
• Opportunities in emerging markets
• New models Stringent emission standards
• Declining demand for light vehicles in US
• Rising raw material prices
• ELV Directive
• Recession and tight credit
NOTE: End-of-life vehicles (ELV) Directive is a law that makes vehicle manufacturers
responsible for taking back end-of-life vehicles offered for sale after July 2002 for
dismantling and recycling (Datamonitor, 2009).
`16
Table 2: PESTEL analysis for GM
POLITICAL
Free trade policies, employee free choice bill, universal healthcare plans,
buy “American” clause, investment in airports and high speed trains, tax
credits (as much as $7,500) for buyers of plug-in cars, $25 billion in low-
cost federal loans for production of advanced technology vehicles (to
build plug-ins or the batteries and components needed to power them)
(Bloomberga, 2009), bill for new energy efficiency requirements, clean
transportation fuel (Bloombergb, 2009)
ECONOMIC
Financial crisis, increasing unemployment (8.5% as at march, 2009
(United States Department of Labour, 2009 about 2 million jobs lost this
year (CNN Moneyb, 2009)), reduced disposable income, CPI is 1.8%
(excluding food and energy (CNN Money, 2009)), fuel prices
SOCIOCULTURAL Changes to smaller fuel-efficient vehicles
TECHNOLOGICAL Hybrid-Electric Vehicles, propulsion technology,
teleconferencing/IT/telecommunications development
ENVIRONMENTAL End-of-Life Vehicles Directive, a cap-and-trade system for carbon
emissions (Financial Timesb, 2009)
LEGAL Employment law (health and pension expenses), Laws prohibiting sales
of vehicles directly without a dealer (Globeandmail, 2009)