“Running Head: GENERAL MOTORS BANKRUPTCY” 2
“GENERAL MOTORS BANKRUTCY” 2
“General Motors Bankruptcy
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“General Motors Bankruptcy”
Introduction
“General Motors is known as one of the biggest companies in the automotive industry. General Motors was founded by William Durand” and so we can say that its stay in the market is over a century (General Motors, 2012a). The head quarters of the company is in Michigan, at Detroit.
In the year 2009, the company did announce its bankruptcy as stipulated in the chapter and therefore thee process of reorganizing started, now resulting to a new official name, the “General Motors Company. At this point in time, the portfolio was not as wide as the history”, well after the bankruptcy was declared. At this time, there were six brands; the GMC, the Opel and Vauxhall, Chevrolet, the Buick and Cadillac. There were some brands that had been sold like the Swedish Saab and some discontinued like the Hummer, Pontiac and the Oldsmobile as the process of cutting off and restructuring took off.
Literature Review
There were many reasons that led to the declaration of the bankruptcy for General Motors. As we will in this peer reviews, some were caused by the bad corporate policies set by “General Motors but there were external influences” as well that could not be avoided.
“Canis et al. (2010) and Monks & Minow (2008) both argue that the company was then managed like an institution”. The company was chronically slow to reforms, largely bureaucratic, highly risk averse and was contemptuous of the competition in the market. The General Motors then was reported to have produced cars that were not efficient in that they could not meet the demands of the customers then.
The New York Times (2009), the top management had over self confidence and so it was believed that the company will hold that position for a long time. The assumption was late confirmed to untrue. The over confidence in the top management was not wrongly based but on the dominance it had it in many countries. There were however reports that the company had started struggling globally.
Lucas & Furdek (2011) gives a second thought on what contributed immensely to the bankruptcy. there were elements of connected expenses and labour costs, as the pension funds and health care insurance, the motivation programs and other benefits given to the employees. The General Motors employees had joined the UAW, the United Auto Workers, which was a strong labour union, that used to negotiate for the benefits of the employees. The employee benefits that were being given to the employees were too costly for the company and this contributed greatly.
From (msn.com, 2011), there were other reasons of external character. One of the external reasons had a connection with the prices of oil. The price for the gasoline had nearly tippled as compared to that prices in 2000. The cars made by General Motors were traditionally not those with the low-priced gasoline consumption. This was another example of the General Motors rigidity in terms of accepting new trends and responding to the demands of the market. In addition, the macroeconomic financial crisis in 2008 had squeezed the demand for the cars globally and so it was just not about the low sales but also other factors coming in to affect its performance.
After this dramatic come down, the company did not have an option but rather to declare its bankruptcy. The General Motors had not been profitable since the year 2004. This prolonged period of losses caused that the company will run out of cash by 2008.
Background
In 1973, rise in price of gasoline had crisis to car industries that forced the general motors and other company to start making small and economical cars. At that time General Motors made its first loss because of its poor management decision and competition from other companies. In order to learned new business practices, company decided to send senior managers to japan but that did not helped them a lot. In 1991, huge decline in sales had pushed the company into the loss of about $4 billion. At that time President Robert Stempel took a decision to lay off the workforce of 24,000 employees and closing of 21 factories. Later Jack Smith, who succeeded the Robert Stempel, tries to reduce the loss by deep cost-cutting and improving the management in order to rebuild the profitability of the company. In 2000, companies new CEO, Rick Wagoner, decided to layoff the 10% staff of white collar. In 2005, company had made a loss of approximately $8.6 billion which results in new cost cutting activities and closing of factory. Company tried to seek help from U.S. government to setup alliance with Nissan and Renault, and also for financial support to their pension obligations. In 2007, its losses raised to $38.7 billion and its sale declined by 45%.
During the end of 2008, General motors had declared that they will be out of cash by mid of 2009. After few days, their representative along with representatives of Ford and Chrysler pleaded for emergency government aid at congressional hearing. They were refused to get $25 billion from Treasury Departments economic rescue fund. According to them, these crises was not because of poor management, weak economy and customers not able to get credit to buy new cars was the main cause of these crises. Senates believed that the $25 billion will not promote long term success to these companies hence refused it. General Motors had submitted the restructuring plan which can provide long term success but was declined by congress. A bridge loan was provided by bush administration in December 2008 to General motors for their revised business plan. Company told that they needed $4.6 billion in few weeks as a loan from their requested loan of $18 billion and to prevent the bankruptcy they needed additional financial support of $12 billion. General Motors had reported that their cash reserves declined by $14 billion and lost about $31 billion or $53.32 a share. Executives of General Motors had a meeting with new elected president Barak Obama and mention that the company could not survive with government help. They got the $17 billion bailout on the condition that they have to present the feasible restructuring plans by March 2019.
In 2009, car sales had hits three decade low and union leaders in Germany trying to break away the GM Europe from parent company before it collapsed. In the end of March 2009, President Obama had removed the Wagoner and declared that General Motors may go bankrupt. In april, Fiat showed their interest to buy Opel and Vauxhall (part of GM Europe) but that was not enough to clear their loan. General Motor’s bondholder refused for the conversion of $27 billion of debt into shares. Deal of selling Opel to Fait also broke down without agreement. Shifting of Vauxhall’s operation to Opel had leaded the layoff of 5,500 workers. General Motors publically announced itself bankrupt on 1st June, 2009.
Statement of Problems at General Motors (GM)
Failure to innovate is the main reason to the downfall of General Motors. Innovation is the process whereby the management team of an organization is charged with the responsibility of introducing something new, which might be a new idea or a methodology or rather, a contrivance to facilitate the operational concerns and production. The General Motors failed with innovations in the company. These innovations were needed to ensure that the GM able remains competitive, and the company was able to manufacture cars that are in line with the client’s demands. This is related to the GM’ field of business to ensure that the organization do continue to produce the respective consumer centered product. The manufacturing industry such as the General Motors, innovation ensure that the output they deliver to the consumer do meet their needs, and expectations in a way that is realistic and makes their product to have a preference by the consumers against other same need satisfying product (Whitney, J. F.2016).
These are several causes put forward at to why this is happened (Kachman, N., & Dowling, E. B. 2015):
· GM is too slow to innovate because of its size: As a result of serious financial problems in the early 1990s, GM’s product portfolio had slipped to a point where, by the company’s own measures, only about 5% of the products in the portfolio were considered truly innovative. That was a dramatic decline, especially considering GM’s heritage, which includes a steady stream of innovations dating back to the formation of the R&D Center.
· GM makes cars people don’t want: some royalty customer of GM has been a disappointment, because their favorite style has been changed but what about the GM products. For example, many clients ended up not buying a Cadillac CTS-V, it drives pretty well but the interior is incredibly uncomfortable and incredibly small.
· GM is too bureaucratic and unable to adjust to changing markets: General Motors (GM) serves as a kingdom for bureaucracy gone bad with a never-ending stream of issues, most recently including its failure to act on ignition. Don’t think this just happens in big companies. Bureaucracy can rear its ugly head anywhere people create red tape, policies and procedures more focused on protecting their turf than on serving customers. These organizations are marked by passive-aggressive behavior where people hide their fear of the new behind any excuse, they can find to delay any and every action and decision that poses any risk to the status.
· GM’s dealer network is too large: While there were concerns about the dealers and a steady and steep decline in General Motors’ market share during those years, the auto maker kept renewing its agreements with the dealers, and they kept selling cars. Though General Motors Corp. was losing tens of billions of dollars, there appeared to be little urgency among management or the board of directors to make the severe structural changes necessary to restore the company to health. The company and its dealers had “long recognized” the need to reduce the number of dealers, it says, but “the revised viability plan recognized that GM needed to do so more aggressively than through attrition and consolidation.”
Even though General Motors survived for a century with good leadership, they failed to take timely right decision before they fall under bankruptcy. There were many reasons why they failed based on different articles, out of which, the main focal problem is they failed to innovate during 1990s. Below Ishikawa diagram (cause-and-effect diagram) helps to find the root cause analysis of above-mentioned focal problem.
| Not thinking Long Term
Unable to adjust to changing markets Hike in gasoline price Policy & Process Money Management Market Failure to Innovate Largely Bureaucratic Higher expense on employee benefit programs Minimum R&D budget to 95% of product portfolio Improper handling of Cashflow Slow to reform Lack of Innovation structure and processes Fear of Failing Failed to respond quickly to customer needs Fuel efficient cars not offered Customer demand not met |
Management:
Since GM is a huge company, they become more bureaucratic to manage large number of people under common policy. Because of the fact that, administration groups of these firms accept a sense of privilege that eventually distances them from their loyal customers. This gap breaks the communication with the customers which lead to misunderstood the actual customer needs. At the same time, GM management dropped the EV1 electric program on late 1990s, the agenda of EV1 program was to introduce very small size electric car into their fleet to step into greener era. But, Toyota used this opportunity and made the Prius which is a hybrid version car and it was a great success. From this, we could clearly see that GM administration did not thought about the long-term people needs or fear of failure could be the driving factor to drop the EV1 electric program.
Market:
GM’s marketing team didn’t understand exactly or failed to forecast what customer expects during last decade of nineteenth century. Due to gasoline price hike, many customers wanted to switch to more fuel-efficient small cars. But, unfortunately not many small cars are available in their portfolio for customer choice. GM’s focus was on the Mid segment and large segment vehicles. Due to this, some royalty customer of GM has been a disappointment, because their favorite style has been changed. For example, many clients ended up not buying a Cadillac CTS-V, it drives pretty well but the interior is incredibly uncomfortable and incredibly small.
Money:
On the other hand, accounting department did not properly handle the Cashflow. As a result of serious financial problems in the early 1990s, GM’s product portfolio had slipped to a point where, by the company’s own measures, only about 5% of the products in the portfolio were considered truly innovative. It means that their cashflow towards research and development was very limited that leads to 95% of their product portfolio were not considered as truly innovative. Apart from this, there are some cashflow went towards the pension funds and health care insurance, the motivation programs and other benefits given to the employees which was kind of fixed cost to the company that can not be considered for cost reduction measures.
Policy & Processes:
As a multinational company, GM had their footprint at many geographical locations around the world. Here the problem was GM’s higher officials from the different countries took the US version of their process and tried to apply non-US countries which lead to less efficient operations. Also, company processes were not updated periodically causes lagging in the market compared with the competition. Throughout the entire 11-year crisis period, there was no demonstrated sense of urgency, right to the very end. For example, there was an ignition switch issue was touched by numerous parties at GM’s engineers, investigators, lawyers but nobody raised the problem to the highest levels of the company. From this example, it shows that not all problems communicated to the top-level management. Thus, there was a need for cultural change as well as rewrite the policies and procedures.
Recommendations to General Motors that can solve its innovation failure problem
Innovation is an essential element for the growth of an organization. To successfully implement innovation, you need to know what exactly makes your organization innovative as well as how it helps in its growth. But that requires an innovative culture where everyone is able to think freely and independently.
The major drawback for General Motors is their failure to innovation and coming up with new ideas that lead them to bankruptcy. Unfortunately, the majority of the companies still lack strategies to create an innovative culture.
here are some recommendations:
Giving employees freedom of thinking
The spirit of any organization lies in their employees’ potential to contribute in the creative programmes of the organization. First, should eliminate the factors that limits the creativity of employee. It gives a sense of freedom that enables your workers to focus on modern ideas to execute in their day-to-day tasks and timely decision making for General Motors.
Use the customer feedback
How satisfied are you with our new product or service concepts really? That’s a permissible question every company must ask their customers.
General Motors should verify strength and penetration of their new concepts, products and prototypes among valuable and designated customers and use those customers feedback internally and externally to motivate your employees that you’re on the right track and encourage them to be more creative and address them to approach with a new concept if it’s the negative feedback. This can solve the visibility and reporting issues in GM.
Investing time and money in the creative development of employees
Don’t just teach or force your team saying about the importance of creativity. Preferably, GM should exhibit several ways to find creativity in order to implement innovation in their work.
For example, they can allot a day from the regular schedule to motivate your employees to come up with new ideas. Likewise, they can perform weekly and monthly workshops to encourage your employees to brainstorm ideas for an existing and future project.
Innovation develops from trial and error and it also needs a huge investment of time and patience. But when your employees are in shortage of time, it means you’re resisting your employees to learn different perspectives to their work.
Google was among the first companies to create a business model based on innovation. The company allocates 20% of its time to nurture the innovative side of their employees. (Park, 2016).
Provide resources to implement ground-breaking ideas
Lack of right supplies, the ideas of GM fell apart. GM must make it possible for their employees to transform their ideas into reality. The most innovative companies in the world invest in their R & D to allow their creative team to show up with concepts for future product development. Likewise, General Motors should focus on one of their drawbacks, the R & D. It is also important for a company to know where to invest.
Give employees a chance to fail and acknowledge their contribution
As failure is the stepping stone to success, stop punishing or degrading employees for making mistakes, this will create a fear of failure in them. This approach affects their ability to come up with new ideas dramatically. Fear can never pursue creativity which leads ultimately to failure. That’s what happened in the case of General Motors.
When you allow your employees to make a mistake, you’re giving them a space to think independently without worrying about fear. So, they can be able to think out of the box.
Similarly, if they want to promote the culture of innovation, GM needs to come up with an incentive that rewards workers on the degree of innovation in their work. Because, employees feel valued when you recognize their efforts.
Such a strategy makes your employees feel motivated and it will pave the way to an innovative culture. And make your organization grow in every possible corner.
Adaptable leadership style (Adhocracy structure)
It is leader’s responsibility to stimulate and bring-up their employees’ point of view. They should adopt the Adhocracy type of management which is a flexible and adaptable for the employees. In which decisions are made and coordination must rely on good communication.
Expecting more from the employees in less time is one such way to kill the aspiration of workers to do something remarkable. Rather than following a ‘do more’ approach, you must give your employees their space to experiment and learn so that they can improve and innovate. This could be a huge asset for the General Motors
Arrogance and feeling of being intelligent are the biggest opponents of innovation into any organization. When you disregard and degrade the ideas of your employees just because of a feeling of superiority, it obstructs the process of creative thinking in them. Such an organization cannot possibly move forward in the innovation aspect.
Use a team approach
To get the innovative outcomes, General Motors can invite both employees and also outsiders as outside-the-box thinkers. Let the vice-president and other important influencers be a part in the innovation team. Use a structured process and come up with innovative concepts, which fit the inside reality of your organization, or else nothing will change.
This team approach helps you to connect the dots. This helps increasing their sales and profitability. Also, it will create a common language among the people and the organization and helps in understanding public demands and serving them.
Conclusion
To conclude this in the sense of organizational decision making, leadership team needs to motivate their employees to share their opinions and be a part of every creative thinking process in the company. Measures such as Adhocracy culture, cost management and attention to client demands, increasing the visibility and providing fuel efficient cars in to the market these innovative things were lacking in the administration of General motors so, by employing the above-mentioned measures GM could be able to cope up with the current market changes and become productive by overcoming their failure to innovation and which can also save them from falling bankruptcy.
References
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Kerr, J.E., 2011. The Financial Meltdown of 2008 and the Government’s Intervention: Much Needed Relief or Major Erosion of American Corporate Law? The Continuing Story of Bank of America, Citigroup, and General Motors. St. John’s L. Rev., 85, s.49–355.
Lucas, J.J. & Furdek, J.M., 2011. The Labor Agreements Between UAW And The Big Three Automakers-Good Economics Or Bad Economics? Journal of Business & Economics Research (JBER), 7(1).
Monks, R.A.G. & Minow N., 2008. Corporate Governance. John Wiley and Sons, 2008.
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