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Case study: General Motors
On January 9, 2013, Daniel Akerson, the chief executive of General Motors, pointed out that his firm had shown profits on a consistent basis over the past eight quarters (see Exhibits 1 to 3). He expected GM to show even better performance in the coming year, largely because it was expecting to launch new models of many of the cars in its lineup. At the same time, Akerson acknowledged that the firm still had a long way to go before it completed its turnaround. “Obviously we still have a lot of work to do in some areas and we’re taking the necessary corrective actions to get the ball over the goal line,” he recently told analysts and reporters.1
GM was forced into bankruptcy in 2009 by the U.S. government when it received shares in the firm in return for providing $50 million in emergency funding. GM emerged from bankruptcy as a smaller, leaner competitor with fewer brands, fewer employees, and less production capacity. It revamped most of its management team, which was eventually taken over by Akerson. Soon after he took over, GM offered shares in the new company, in one of the nation’s largest initial stock offerings ever, and the federal government sold most of its 60 percent stake after shepherding the firm through bankruptcy.
There were some signs of progress under Akerson after three years. He had made some headway in dealing with GM’s notorious internal bureaucracy. The firm had also managed to cut costs, particularly in its long-term obligations with health care costs and pensions. GM had successfully introduced new cars in the U.S., such as the Chevrolet Cruze and the Cadillac ATS, and was set to unveil a redesign of its Corvette sports car. Partly as a result of these actions, the firm was also generating profits in most regions with the exception of Europe (see Exhibits 4 and 5).
In spite of these positive developments, there were still many questions about the strength of the firm’s comeback from its bankruptcy. In 2012, GM experienced a sharp decline in its domestic market share, dropping to its lowest level in more than 50 years. It continued to search for answers to its long-standing problems in Europe, where its yearly loss, mostly from its Opel and Vauxhall brands, deepened from $700 million in 2011 to $1.8 billion in 2012. Finally, even as it had persuaded the U.S. government to sell back to the firm a large chunk of shares, GM was still struggling to overcome the lingering, politically charged stigma of being “Government Motors.”
*Case developed by Professor Jamal Shamsie, Michigan State University, with the assistance of Professor Alan B. Eisner, Pace University. Material has been drawn from published sources to be used for purposes of class discussion. Copyright © 2013 Jamal Shamsie and Alan B. Eisner.
EXHIBIT 1 Income Statement
Dec 30, 2012
Dec 30, 2011
Dec 30, 20104
135,592,0005Cost of Revenue141,881,000131,229,000119,038,0006
16,554,0007Selling General and Administrative13,593,00012,105,00011,446,0008Nonrecurring27,145,0001,286,000–9
Operating Income or Loss
5,108,00010Income from Continuing Operations 11Total Other Income/Expenses, Net595,000869,0001,727,00012Earnings before Interest and Taxes(29,518,000)6,507,0006,639,00013Interest Expense489,000540,0001,098,00014Income before Tax(30,007,000)5,967,0005,541,00015Income Tax Expense(34,831,000)(110,000)672,00016Minority Interest52,000(97,000)(331,000)17Net Income from Continuing Ops6,188,0009,190,0006,172,00018
Note: All numbers in thousands.
Source: finance.yahoo.com; GM.
EXHIBIT 2 Balance Sheet
Go to library tab in Connect to access Case Financials.
Current Assets 4Cash and cash equivalents$ 18,422$ 16,0715Marketable securities8,98816,1486Restricted cash and marketable securities6861,0057Accoounts and notes receivable (net of allowance of $311 and $331)10,3959,9648GM Financial finance receivables, net (including gross consumer finance receivables transferred to SPEs of $3,444 and $3,295)4,0443,2519Inventories14,71414,32410Equipment on operating leases, net1,7822,46411Deferred income taxes9,42952712Other current assets1,5361,16913Total current assets69,99664,92314
Non-current Assets 15Restricted cash and marketable securities6821,22816GM Financial finance receivables, net (including gross consumer finance receivables transferred to SPEs of $6,458 and $5,773)6,9545,91117Equity in net assets of nonconsolidated affiliates6,8836,79018Property, net24,19623,00519Goodwill1,97329,01920Intangible assets, net6,80910,01421GM Financial equipment on operating leases, net (including assets transferred to SPEs of $540 and $274)1,64978522Deferred income taxes27,92251223Other assets and deferred income taxes2,3582,41624Total non-current assets79,42679,68025
Total Assets$ 149,422$ 144,60326
LIABILITIES AND EQUITY27
Current Liabilities 28Accounts payable (principally trade)$ 25,166$ 24,55129Short-term debt and current portion of long-term debt 30Automotive (including certain debt at VIEs of $228 and $171)1,7481,68231GM Financial3,7704,11832Accrued liabilities (including derivative liabilities at VIEs of $1 8 and $44)23,30822,87533Total current liabilities53,99253,22634
Non-current Liabilities 35Long-term debt 36Automotive (including certain debt at VIEs of $122 and $7)3,4243,61337GM Financial7,1084,42038Postretirement benefits other than pensions7,3096,83639Pensions27,42025,07540Other liabilities and deferred income taxes13,16912,44241Total non-current liabilities58,43052,38642
Total Liabilities112,422105,61243Commitments and contingencies 44
Equity 45Preferred stock, $0.01 par value, 2,000,000,000 shares authorized: Series A (276,101,695 shares issued and outstanding (each with a $25.00 liquidation preference) at December 31, 2012 and 2011)5,5365,53646Series B (99,988,796 and 100,000,000 shares issued and outstanding (each with a $50.00 liquidation preference) at December 31, 2012 and 2011)4,8554,85547Common stock, $0.01 per value (5,000,000,000 shares authorized and 1,366,373,526 shares and 1,564,727,289 shares issued and outstanding at December 31, 2012 and 2011)141648Capital surplus (principally additional paid-in capital)23,83426,39149Retained earnings10,0577,18350Accumulated other comprehensive loss(8,052)(5,861)60Total Stockholders’ equity36,24438,12066Noncontrolling interests75687167
Total Liabilities and Equity$ 149,422$ 144,603
EXHIBIT 3 Net Income by Operating Regions, 2012
Net IncomeNorth America6,953Europe(1,797)Asia & Australia2,191South America271
Note: All amounts are in $ millions. Year ending December 31.
EXHIBIT 4 Market Share
These lingering problems were reflected in a drop in the price of the firm’s shares, which were trading at around $30, somewhat below the $33 at which they had been sold when they had been refloated on the stock market in 2010. GM had also dropped behind Toyota in worldwide car sales and was being challenged by a more aggressive Volkswagen. Summing up the firm’s position, industry analyst Rebecca Lindland said, “It was a very mediocre year for GM. They are still kind of finding their way post-bankruptcy.”2
Pushed into Bankruptcy
For most of GM’s history, the firm had been run as a collaboration of relatively autonomous geographical divisions that rarely worked with each other. In 1994, there were 27 different units within GM that were developing their own cars, making it difficult to achieve economies of scale. After being named president in 1998 and CEO in 2000, Rick Wagoner worked to tear down the boundaries between the firm’s divisions. Over the course of nearly a decade, he managed to restructure the firm’s four different geographical units in order to get them to collaborate with each other on designing, manufacturing, and marketing cars.
EXHIBIT 5 Vehicle Sales
December 31, 2011
United States Chevrolet1,8511,775GMC 414 398Buick 180 178Cadillac 150 152
Canada/Mexico 423 421
Europe Opel/Vauxhall1,0541,218Chevrolet 550 528
Rest of world Chevrolet1,1861,087Buick 700 646Wuling1,3351,194Holden 124 134GMC 40 39Cadillac 35 35Other 195 147
Note: All figures are in thousands of units.
Wagoner faced an even bigger challenge in dealing with the high costs, which made GM’s cars much more expensive to build than those of its foreign-based competitors. He carried out three major restructurings, eliminating dozens of plants, cutting tens of thousands of jobs, and jettisoning hundreds of dealers. Wagoner even managed to deal with the lavish health and retirement benefits that GM had accorded to its workers in response to a prolonged strike by the United Automobile Workers during 1970. He was finally able to persuade employees and retirees to pay for part of the firm’s escalating health care related costs. In 2007 Wagoner negotiated with the union to create a health-care trust, called a voluntary employees’ beneficiary association, which would take over the responsibility for these costs.
In spite of these efforts, GM announced a loss of $30.9 billion dollars for 2008, amounting to a staggering $50 a share. The firm had not managed to post a profit since
Dess, Gregory, G.T. Lumpkin, Alan Eisner, Gerry McNamara. Strategic Management: Text and Cases, 7th Edition. McGraw-Hill Learning Solutions, 09/2013. VitalBook file.