When does having too many brands and too many variations of those brands create a perilous situation? The answer is that when you are an American icon, once thought too big to fail, and that never ever thought it should modify, let alone re-consider trimming, its portfolio of offerings. On the verge, General Motors illustrates why building an offering for every market segment may make sense in the boardroom, but not on the balance sheet, where it stanches the flow of cash the corporation desperately needs.
Much has been written about the importance of market focus in recent years, and justifiably so, since global corporate managers have come to realize that how they apply and adhere to this critical strategic and market-planning concept can make or break their companies, to say nothing of their careers. There is no better example of just how important market focus is than the case of General Motors, which has been devastated because of a complete loss of market focus in their corporate portfolio. GM’s unfolding failure and its cascading impact on various stakeholders have been accompanied by a deluge of comments, literature and media reports. As a result, a still-growing mythology has sprung up to explain the fundamental causes of the failure of General Motors.
The major myth is that GM is just one more victim of the current global downturn. It is a myth that has been propagated and, lamely and lamentably, offered as the cause of the company’s troubles by none other than the corporation’s CEO. “What exposes us to failure now is not our product line-up, or our business plan, or our long-term strategy,” said Rick Wagoner last fall, before a Congressional considering whether to offer bailout money. “What exposes us to failure now is the global financial crisis, which has severely restricted credit availability and reduced industry sales to the lowest per-capita level since World War II.”
Such denial withstanding, the reality is that the last five years have been financially devastating for GM. However, the fact is that, during this time, highly market-focused competitors like Toyota and Honda have had solid net cash flows. This points to the purpose of this article, which is to identify and explain the real and central cause of GM’s fall, namely the loss of market focus across the many different portfolio levels in the company. These levels include the portfolio of divisions, brands within divisions, models within brands, the physical and cosmetic variations among models, market segments, dealers and suppliers. The article will argue that the major problem with GM is a deeply imbedded, long-held misconception about the real meaning of market focus and its critical connection to cash flow creation. Historically, GM’s financial metrics have focused on growing market share and revenue, rather than on creating and sustaining positive net cash flow. However, the loss of market focus on the scale and scope of GM’s will, in the long run, inevitably lead to huge cash losses.
It is important to understand that the loss of market focus at any of the above-mentioned portfolio levels has a cascading effect and impacts all the other levels. This corporate, multi-level, cross-portfolio loss of market focus has had a devastating effect on the capacity of GM to generate positive net cash flow. In fact, over several years it has resulted in the once unthinkable: General Motors is running out of cash, desperately seeking government support and considering bankruptcy.
To understand why GM has failed, it is critical to understand what market focus means to market planning and strategy at every portfolio level in GM, and its critical connection to the generation of positive net cash flow. Without clearly understanding and connecting these pieces of the puzzle, it becomes impossible to understand the real reasons for GM’s failure and the few options for turning the corporation around.
What is market focus?
Market focus represents the capacity of managers to constantly — and with clinical detachment — focus the critical cash and human resources of a company and its portfolio only on market opportunities that can create and grow long-term, positive net cash flow. This means that managers and teams must make the tough choices of where to compete and to not compete. It means quickly exiting market segments and opportunities for products, services, and technologies where it just isn’t possible to create positive net cash flow.
There are many examples of companies whose market and strategic planning processes and culture are highly market-focused. General Electric, Wal-Mart, Sony, Toyota, Honda, and Microsoft are a few examples. All of these companies have track records of driving market focus toward opportunities where they can create both wide buyer choice and high cash flows. They also share the clear ability to quickly exit market opportunities that cannot create high, long-run net cash flow.
A critical aspect of market focus for these leading companies is their capacity to deal with market and economic downturns of the kind we are currently experiencing. In growth-market situations, market focus is critical for moving resources to support high cash-flow opportunities. In declining markets, it is even more critical in withdrawing resources away from supporting cash losers. In the case of Toyota for example, even though it is currently suffering a car sales downturn and short-term cash losses, the company’s historically high degree of market focus has left it with high cash reserves to buffer the impact and lower negative cash-flow impact of declining car sales. Not so for General Motors, whose legacy of annual cash losses in high-growth, car-market years has left it with little or no cash to deal with the downturn.
As is the case with most powerful management concepts, market focus and its implications for the corporate portfolio, market planning, corporate strategy and cash flow is a simple concept. Nevertheless, it is a concept that is misunderstood by many of the senior managers with whom I have worked. In reality, market focus is extraordinarily difficult to achieve and sustain. It is, in fact, impossible if the management culture of a company does not understand, embrace, and practice it on a continuous basis. General Motors clearly represents such a company and culture.
Like most other large corporations, General Motors has an enormous and complex multi-level, interconnected corporate portfolio. Nested in the corporate portfolio are portfolios of divisions, of brands within divisions, of models within brands, of cosmetic and mechanical variations within models, of market segments, of manufacturing plants, of supply chains, and of dealers. This corporate portfolio is currently operating out of control, with a crippling loss of market focus that has been occurring at every level of the portfolio, and with high and growing cash losses occurring over several years. Incredibly, GM’s web site currently lists a product portfolio of over 95 cars! To underline the seriousness of GM’s market-focus problem, we need to understand that recent indications are that it plans to launch 19 new vehicles by 2010 (The Automotive Lyceum, March 3, 2009). Recent estimates (The Canadian Press, January 2009) are that GM burned through $6.2 billion of cash in the last three months of 2008, and lost $30.9 billion for the year 2008. In 2007, GM is estimated to have lost $38.7 billion. Market focus demands the existence of two critical conditions if planning and strategy are to be successful – the creation of car market-segment shares, and the creation of car-positive cash flow. Without both of these conditions, market planning and strategy will fail.
Two conditions for market focus
1. Creating car market segment share
Every level of the corporate portfolio must create, support, and sustain customer choice and market share for every car in the portfolio. If any level of the portfolio is not supporting customer car choice, fast action must be taken to quickly turn the strategy around, reallocate resources being used to pursue the strategy, shut the initiative down, or sell or exit the situation. This means that every car in the portfolio of cars that GM markets must create high market share in the market segments in which it competes. GM cannot afford to market cars that sell in small numbers or that compete in very small, specialized market segments. Then again, high market shares of particular segments are not nearly enough to support a market-focused company. Every GM car must also create and grow long-run net cash flow from these market shares.
2. Creating car positive net cash flow
Creating customer choice and market share in leading market segments is useless unless every GM car in the portfolio is creating high and growing net cash flow from that market share. It is very evident that recently, many corporate managers have begun to regard the generation of real cash flow as the only valid and incorruptible financial metric for making money. At the same time, these managers have begun to pay less attention to historical measures of profitability and even less to traditional metrics of financial success, like return on investment (ROI), return on equity (ROE), EBITDA, and the like. Many of these traditional metrics have turned out to be misleading and illusory, primarily because they do not account directly for the negative cash flows required to service debt. In the current global financial collapse, this reality is coming home to roost; all negative cash flows must be accounted for, not just “left in the denominator” of a return calculation.
Market focus in GM means that every existing or new car in the portfolio must produce long-term, net cash flow and high market share in those segments in which it competes. It is very difficult to create these two critical conditions necessary for market focus. Many examples can be found of cars that achieve significant customer choice and market share, but lose cash. One example is GM’s Saturn Division, a major cash flow loser, which will be explored later.
Market focus and cash flow: How cars really make money
Exhibit 1 – Car Cash Flow Dynamics
The most fundamental market focus question is: How do cars make money?
You would think this would not be a problem for GM; after all it has literally thousands of accountants, finance majors and MBA’s from the finest business schools! Yet how do you explain their failure to predict the inexorable slide into huge cash losses? To answer this question, it is critical to understand how individual GM cars and the GM corporate portfolio generate real net cash flow and create the conditions that make this happen. The cash flow dynamic for an individual car is shown in Exhibit 1. As shown, there are only six fundamental drivers of net cash flow for any car in the GM portfolio. These factors are:
- Market segment share (percentage of car units)
- Market segment size (number of cars/year)
- Car unit price (dollars/car)
- Car unit variable cost (dollars/car)
- Fixed cost negative cash flows (dollars/year)
- Investments negative cash flows (dollars /year)
Working in combination, these six factors define and drive the positive and negative cash flow drivers for any car. Together, they combine to determine whether a car will produce positive or negative net cash flow over time.
Car-positive cash flow
As shown in Exhibit 1, CAR POSITIVE CASH FLOW = CAR UNIT SALES x UNIT MARGINS for a particular car. It is critical to note that positive cash flow has nothing to do with annual revenue for a particular car. Conceptually, it is easy to see what a high, positive-cash flow car must do, namely sell a lot of cars at high unit margins. For example, Toyota Camry sells around 400,000 cars per year at solid unit margins. It is a high positive net-cash-flow producer in the mid-price sedan market segment. This segment will be explored later.
How are high unit sales created? As shown in Exhibit 1, CAR UNIT SALES = MARKET SEGMENT SHARE x MARKET SEGMENT SIZE. In order to sell a lot of units, a car must have a significant market share of the large market segments. One example is the Toyota Camry, which has a high market share of the mid-priced sedan market, one of the largest market segments. To create high unit sales for a particular car, a car maker has to be concerned about the unit size of market segments, and what share of the segment will be critical for making some positive cash flow.
Car unit margins
Exhibit 2 – Major Car Market Segments
Creating cars with high unit margins is a difficult factor to manage in the cash flow dynamic. These unit margins represent the dollar difference between car prices at the factory level and the unit variable costs of manufacturing the car. CAR UNIT MARGIN = CAR PRICE – UNIT VARIABLE COSTS. Setting factory and dealer retail prices for a particular car can be controlled to some degree, but managing unit variable costs is much more difficult, since most car companies, including GM, make extensive use of outsourcing and supply chains for the thousands of parts that go into a car. Creating and sustaining high unit margins for each GM car is very difficult to control, especially with a large portfolio of cars.
Looking at these positive cash flow factors in total, we can see that a high, positive-cash-flow car is one that produces a high level of car unit sales with high unit margins. Needless to say, it is difficult for every car in the portfolio to generate high positive cash flow. But it is absolutely critical from a market focus perspective.
From such a perspective, a “winner profile” car is one that has:
- High market segment share
- In a large market segment
- With attractive competitive car prices
- And low variable costs
- And high car unit margins
- And low fixed costs per car
- And low investments negative cash flows per car
A good example of this type of car is the Toyota Camry. By contrast, a” loser profile” car looks like this:
- Low market segment share
- In a small market segment
- With unattractive buyer prices
- And high variable costs
- And low unit margins
- And high fixed costs per car
- And high investment negative cash flows per car
Looking into the future, we can see that the much-touted Chevrolet Volt electric/gas hybrid car, for example, is likely to exemplify this loser profile. I predict that it will lose a lot of cash for GM. Estimated variable costs of producing the Volt are rising. A recent estimate of the car’s unit manufacturing costs is $48,000 (FuturePundit, April 7, 2008). As a result, the Volt’s estimated retail prices are rising. The likely outcome is slim unit margins, low unit sales and low market share, mainly because of the high prices.
In the case of the Volt, the market segment for a high-priced, limited-range, electric/gas hybrid is tiny. Moreover, Volt’s real dollar per-year operating cost savings for lower-mileage car drivers over alternative, much cheaper gas, diesel, and gas/electric hybrid cars are marginal at best. GM’s investments in the exotic battery and manufacturing technologies involved will be very high, as will be the fixed manufacturing costs per car, given the likely low unit volumes. As a result, Chevrolet Volt will likely be a cash flow disaster for GM. Volt is similar in some ways to the Saturn fiasco, another example of the failure of GM market focus.
In the case of Saturn, which was launched in the 1990’s, the original concept was to create a new GM Division to prove that GM could compete with Toyota and Honda in the low-priced market. (Cars in segments 13 and 14 in Exhibit 2). At the time, GM had a long and dismal history of losing cash flow in the low-price market segment, a legacy of marketing a long series of cars of frequently poor quality and reliability (Chevrolet Corvair, Chevette, and Vega for example). The following market-focus profile emerged for Saturn:
- Relatively high market segment share, driven by low price, and a “made in the USA” market position
- In relatively large market segments (Segments 13 and 14)
- Fairly high unit sales ( About 200,000 cars per year)
- Relatively low prices compared to Toyota and Honda
- Very high variable manufacturing costs, driven by an exotic metal and plastic composite body, exotic new manufacturing and process technologies in a brand new plant in Tennessee, and the choice to manufacture most of the major Saturn basic drive train components in the new plant, rather than outsourcing them, or accessing GM “parts bins.”
- Very high investments due to the above, meaning very high negative cash flows per car to fund these investments
As a result of these cash flow dynamics, Saturn had lost about $15 billion by 2004. (Fortune, December 13, 2004). From a market-focus perspective, the likelihood of losing this amount became evident very early in the Saturn development process. In a market-focused company, the project would have been stopped, but not in GM. Recently, GM has finally acknowledged that the Saturn has failed. GM is now deciding what to do with the Saturn division.
Car-negative cash flows
As shown in Exhibit 1, negative cash flows for car manufacturing include the entire set of manufacturing fixed costs and the negative cash flows to finance the investments to produce the cars. These fixed costs and investment negative cash flows can be dramatically different between cars, manufacturing and outsourcing plants, process and product technologies, countries, and market segments. From a manufacturing point of view it is critical to minimize these fixed costs and investment-negative cash flows per car produced. In other words, it doesn’t help to have low variable costs per car if the fixed costs and investment-negative cash flows per car at a particular manufacturing facility are very high. The ultimate objective of car manufacturing is to minimize the total dollar-delivered cost to manufacture each car.
As an example of how market focus and its connections to manufacturing costs can be wrongly perceived, a recent UAW report (Solidarity, January/February 2009) proudly boasted of the high “productivity” of some “union” auto plants based on lower labor hours per car. This conveys a very misleading concept of productivity, and it is largely irrelevant. To a market-focused automaker, the highest “productivity” point of car manufacture is where the total delivered dollar cost per car is minimized. In other words, if labor is cheap, the total number of labor hours per car becomes less important to minimizing car manufacturing costs.
Competitive car market segments: Choosing market focus
The most critical market focus choice for any automaker is to decide in which car market segments it wants to compete. A simplified map of the competitive car market segments is shown in Exhibit 2. As shown, there are at least 18 basic market segments in which to compete. This has huge significance for any car maker. Even if an auto maker positions and markets just one car in each market segment, it means that they require a minimum portfolio of 18 cars. This raises the question of why any auto maker would want to market more than one car in each segment. Indeed, there are many car companies that only compete in a few of the 18 market segments.
From a market-focus perspective, more successful car companies (Toyota and Honda) have positioned themselves to compete with highly market-focused cars in segments where they can create and sustain high and growing net cash flow. Examples abound when exploring this segment map. For example, Ferrari competes only in segment 6 and Rolls-Royce only in segments 1 and 2. Mercedes-Benz competes in segments 1, 2,5,6,7,8,10, and 12. It is evident from Exhibit 2 that any company with a product portfolio that has two cars in every segment would have 36 cars in their portfolio; three cars in each segment would result in 54 cars.GM has over 95 cars in its product portfolio! Quite clearly, the company’s car portfolio has grown out of control.
By examining this segment map, it is clear that for GM, having multiple vehicles in many different segments has the potential to destroy market focus by fragmenting segments. There are many other dangerous effects of such strategies!
Critical market focus choices: The GM multi-level corporate portfolio
General Motors’ portfolio exists at several different levels: portfolio of divisions; portfolio of brands within divisions; portfolio of models within brands; brands, models and price ranges, and mechanical and cosmetic variations. Let us examine each.
Portfolio of divisions
Unlike many other automakers, GM has five major car divisions: Chevrolet, Pontiac, Buick, Cadillac and Saturn (not counting Saab, and the recently shut down Oldsmobile Division). When you consider these divisions and the competitive market segments outlined, it appears that several possible market focus choices are possible. One obvious one is for the five different GM divisions to focus on different market segments. In the history of GM, this was essentially true for many years.
However, over the years, this market focus at the divisional level has completely unraveled. Over time, and for a variety of reasons, each GM division has offered an expanding array of brands, physical platforms and models across many of the 18 market segments. As a result, a huge divisional and cross-divisional replication of cars in many of the market segments outlined now occurs. For many of these market segments, GM now competes with itself for market share and cash flow.
Brands within divisions
Within each division, GM has always been able to choose which cars to have in the portfolio. Over the past years, GM divisions have begun positioning more and more cars in different segments across this potential market The examples of mid-price sedans will be used later to demonstrate the loss of market focus and its impact on cash flows.
Models within brands
Within each of the major divisions, GM markets a number of brands and models. Not only is there a significant number of different brands and platforms within each division, but the platforms are often used to create “rebadged” replicate cars within and across divisions that are essentially the same physical car, replicated at the same price point across other divisions. This rebadging merely magnifies the absence of market focus.
Brands, models and price ranges
Another indication of GM’s loss of market focus is its habit of having wide price-band overlaps within a division and across divisions. Within divisions, there are many different GM car brands and models whose prices at retail (with different cosmetic and mechanical options) cut across each other, so that the top-end, fully-equipped car of one brand is higher-priced than a “stripped” version of another car brand. This has the potential to create huge price confusion among buyers.
Moreover, price band crossing occurs not only within a division, but also across divisions, mainly because of the replication across divisions. In Toyota, if you have about $25,000 (Canadian) to spend, you can only buy two or three different vehicles. Across GM’s divisions, you can buy many different cars and variations of them for $25,000. The car buyer with $25,000 to spend is definitely confused as he or she tries to cope with the huge GM brand, model, and dealer portfolio. This is not true of many of GM’s major competitors, particularly Toyota and Honda.
Mechanical and cosmetic variations
Even within a particular brand and model, GM often offers a great number of variations and options, mechanical and cosmetic. For most of its cars, Toyota offers two basic engine choices, a V6 or an inline four cylinder engine. In some GM divisions there are many more different engine choices, some manufactured in GM and others from different outsource suppliers. There are also many more mechanical options and model variations. This means that the GM portfolio is even larger than 95+ cars, , when you look at the total number of cars, variations, price ranges, brands, replicates, and dealers within five major divisions and between them.
Market focus failure in GM: Portfolio, proliferation and replication
GM’s portfolio proliferation has now been detailed, from the number of portfolio divisions to the number of portfolio brands, models and “rebadged” replicates within and across divisions, to the brand and model price ranges and overlap to the huge number of brand and model cosmetic and mechanical variations. This amounts to out-of-control portfolio proliferation, a fragmentation of market segments and car product positions, and a complete breakdown of market focus. Such a proliferation has huge impacts on a large number of factors that affect GM‘s cash flow and competitive performance.
GM versus Toyota: The example of mid-priced sedans
Looking at the overall GM portfolio, we see that GM currently competes in most of the 18 segments described in this article. However, the company has multiple competing vehicles in many market segments, and many of these are cross-divisional “rebadged replicates.” For example, let us explore mid-priced sedans, which are segment 8 (Exhibit 2). Here, GM’s loss of market focus stands in stark contrast to Toyota’s very high market focus. In the case of Toyota, the Camry brand is their market-focused basic entry in this market segment. Further, the Camry has only two engine options, and a very limited number of choices of cosmetic and mechanical options, which are organized into very clear packages. By contrast, virtually every one of the five divisions of GM has car offerings in segment 8 (not to mention SAAB). The following GM cars are positioned in segment 8 by division.
- Chevrolet Malibu
- Chevrolet Impala
- Pontiac G8
- Buick Allure
- Buick Lucerne
- Cadillac CTS
- Saturn Aura
This loss of market focus in GM is replicated in many other market segments. The difference in market focus is not just slightly different than Toyota’s, but dramatically different. The impact of this huge portfolio proliferation, replication and loss of market focus has a large, complex, and interrelated set of negative effects on cash flow, which will now be outlined in detail.
Market focus loss: Impact on GM cash flows
The ultimate objective of market-focused strategies is to create and sustain high and growing cash flow over the long term. Over the last few years, GM has clearly been moving to a devastating cash position, the result of years of negative net cash flow. As a result, GM’s cash needs have now grown to the point where the company needs government money to survive. While it is true that Toyota and Honda are also currently having short-term cash flow difficulties, they do not have GM’s history of cumulative cash flow losses. Their high degree of market focus has paid off, not only in producing reasonable cash flow, but in minimizing their cash losses when global markets turned down.
Making reference to the cash flow dynamics (Exhibit 1), we can explore how the loss of market focus and multi-level corporate portfolio proliferation in GM hurts every major driver of the cash flow dynamics, including their impact on unit sales, unit margins, unit market share, unit prices, market segments sizes, and unit variable costs, fixed costs, and investments. These will now be outlined in detail.
Impact on GM market segment share and segment size
GM’s portfolio proliferation, as exemplified by the proliferation in segment 8, has a dramatic impact on the drivers of GM cash flow.
- Segment 8 is a large-market segment, but only if you attack it with one market-focused car. When GM fragments the segment by offering seven different cars, they effectively reduce the size of the segment open to each GM car. The impact of this is to dramatically increase the market segment shares that each GM car in segment 8 must have to create positive cash flow.
- Given the number of GM mid-priced sedans in this segment, most cannot sustain high-enough market share to drive positive cash flow. This tends to reduce unit sales of many of the GM cars. But, worse than that, the fragmentation will dramatically affect other costs, as will be discussed later.
- This proliferation dramatically increases the number of market segments that GM effectively competes in by fragmenting the segments.
- GM vehicle proliferation and replication cause many price-range crossovers between many GM cars, which can confuse many potential buyers A potential car buyer with $25,000 to spend on a mid-priced sedan is faced with one clear offering from Toyota and one clear one from Honda, but a huge offering of at least seven cars from GM. In addition, there are many price range crossovers between cars that GM offers in segment 8, and cars it has in segments 2 and 14.This means that car buyers with $25,000 to spend could be faced with the task of choosing a “top of the line” model of one GM car in segment 14 and the entry level of another GM car in segment 2.
- The end result is that many GM cars are attacking the same car buyers and market segments, which increases the size of the market share needed before a particular vehicle can create good unit sales and positive cash flow.
Impact on GM Unit Margins, Unit Prices and Unit Variable Costs
The segment fragmentation described above has huge potential effects on unit margins, unit prices and unit variable costs.
- In the fierce competition between five GM divisions in segment 8, pricing, price cutting, rebates, cash backs, and a variety of other dealer pricing and discount deals become more extreme as GM divisions fight each other for market share in the segment. This competition between different GM brands tends to drive GM’s prices down and have a devastating effect on car unit margins.
- When you combine the above effects of lowering GM car unit margins with the market share fragmentation outlined, it becomes clear why so many GM vehicles struggle to make any real money (net cash flow).
- The effects of brand proliferation on car unit variable costs are equally devastating. Using the example above, producing and marketing the seven cars in segment 8 means complex and fragmented manufacturing, huge increases in the number of different parts, platforms, engines, and transmissions, both of which drive up the unit variable costs of producing each car and dramatically reduce unit margins.
- The combination of pressure on prices plus the escalation of variable costs caused by segment and manufacturing fragmentation is potentially devastating. By contrast, Toyota competes with only one car in segment 8 (Camry), and it sells about 400,000 cars a year. Its high degree of market focus yields lower car unit variable costs, and therefore higher unit margins for the reasons outlined above. It also results in high positive net cash flow for Camry.
Impact on suppliers and supply chains
Exhibit 3 – Car Market: GM Supply Chains
Exhibit 3 shows a simplified outline of GM’s supply chains, in which there are many different parts suppliers, component and module suppliers, vehicle assembly plants, car dealers, and car buyers. GM’s loss of market focus has not only affected GM directly; it also has potentially devastating effects on some GM assembly plants and outsourced parts, components, and modules outsourced suppliers.
For every company in the GM supply chain, the cash flow dynamics are structurally the same as for GM itself, as shown in Exhibit 1. Each supply-chain company wants high-unit volume, high-margin parts to drive their positive cash flows.
GM’s fragmentation of car market segments, manufacturing, and supply chains leads to lower volumes per part, which is very tough on the parts suppliers involved. The loss of market focus has some of the following impacts on design, manufacturing and supply-chain choices:
- Loss of market focus extends new GM car design, redesign, manufacturing and market entry cycle times. With too many new-vehicle market entries (19 new cars planned by 2010) and car upgrades and redesigns, the amount of corporate resources allocated per vehicle becomes very limited, with potentially serious impacts on car quality.
- Proliferation dramatically increases the number of car parts, which increases the number of parts plants and suppliers. This increase in the number of car parts makes quality control much more difficult, especially given the many suppliers that have to be managed.
- Proliferation dramatically increases the number of car assembly plants, which reduces the car volume per plant, which drives costs up, making plant capacity utilization difficult to manage.
- Proliferation also increases the need for greater supplier capacity and variety, and increases the cost and complexity of managing suppliers. Portfolio proliferation increases the difficulty of designing, manufacturing and managing vehicle quality.
- It also increases the human resource and management headcount, and creates huge task and role redundancies in the overall corporate and divisional management, facility, equipment, and staff support infrastructure, which all leads to huge inefficiencies and increases in fixed costs. Some evidence of this can be found in GM’s recent announcement that it will cut 47,000 people from its world-wide workforce. This reduction speaks volumes about the redundancies in the overall corporate management infrastructure caused by the loss of market focus.
GM distribution and dealers
Proliferation has led to the presence of many more dealers than necessary, and certainly many more than most other car companies. Other impacts on dealers include:
- An increase in inventory (“floor plan”) and display costs
- A reduction in dealers’ net car margins, due to longer inventory holding times
- Difficulty for dealers in having the right GM car in stock for a particular potential buyer to inspect and test drive
- An increase in the costs of dealers’ parts inventory and handling, which reduces dealers’ net parts margins
- Greater complexity in dealer-vehicle service costs
- A significant increase in the likelihood of errors in dealers’ parts stores, which can affect service quality and vehicle quality
What GM must do now: Re-gain market focus
It is unclear whether GM can rebuild market focus in time to avoid being washed away by a sea of negative cash flow. Current escalating requirements for cash indicate that GM is operating in high negative net cash flow, and that despite laying off 47,000 more employees and getting cash infusions from the government, it may all be too late. If GM is to turn the situation around, there will have to be, first and foremost, a dramatic change in leadership, a re-conceptualization of GM’s place in the industry and its position in the eyes of its customers, significant corporate and divisional restructuring, and a rebuilding of market focus. This will not be fast or easy, nor perhaps, will it be possible. Some of the major steps that must take place include:
- Leadership must become very clear what their new market focus objectives and performance metrics must be and must not be.
- GM’s objectives must not be to:
- Maximize car revenue (dollars per year)
- Maximize car market share (share of units)
- Maximize unit car sales
- Develop and apply new technologies, product and process innovations for their own sake (unless it clearly drives the cash flow dynamics outlined. Witness the high-tech Saturn disaster!)
- Develop and market extreme environmental cars (unless they can create net cash flow. Chevrolet Volt is likely to lose heavily!)
- None of the above dangerous and misleading corporate objectives will support market focus; some objectives can actually improve market focus, while reducing long-run net cash flow (for example, maximizing unit car sales)
- GM should downsize the number of divisional portfolios to two from five, to have any real hope of rebuilding market focus. Toyota has two divisions (Toyota and Lexus), as does Honda (Honda and Acura). The clear rationale for these market-focused strategies is to be able to compete in one division for low and medium-priced cars, and in another for high-priced cars.
- The autonomy and power of divisional managers to plan their own car portfolios has to be dramatically reduced, and coordinated by GM corporate portfolio management. One of the major factors driving GM’s loss of market focus and runaway portfolio has been the unmonitored behavior of each GM division, which has acted as though it were a stand-alone carmaker, offering a full portfolio of cars across many different market segments, seemingly without regard for the strategies of other GM divisions.
- The first division of GM (Chevrolet/Buick Division) could be designated/re-positioned for low to medium priced cars, which would compete in segments 7 to 18.
- The second division of GM (Cadillac Division) could compete in the high priced segments of 1 to 6.
- Both the number of GM car brands and models should be dramatically reduced. In any market segment in Exhibit 2, there should be no more than two GM cars, and preferably only one.
- Cross-brand and cross-divisional vehicle rebadging and replication must stop. (Witness the Pontiac Solstice and Saturn Sky sports cars in Segment 12, and many other GM examples)
- There should be no price-band crossovers between the two divisions, or major brands within divisions. For example, the highest-priced Chevrolet must be cheaper than the lowest priced Buick. The highest-priced Buick must be cheaper than the lowest-priced Cadillac.
- The number of car dealers has to be dramatically reduced and clearly defined as Chevrolet /Buick dealers or Cadillac dealers.
- The number of vehicle assembly plants should be reduced and reorganized around the two divisions
- The number of mechanical option and the choices and variations in brand and model engines and transmissions have to be dramatically reduced. For example, one automatic transmission design should be enough to service all of Chevrolet/ Buick division and maybe even Cadillac. Chevrolet/ Buick division does not need more than two or three engine choices
- The number of outsourced parts suppliers has to be dramatically reduced to bring costs and quality under control.
- What GM needs in every segment they focus on are some high unit volume “bread and butter” cars that sell in good volume and at solid unit margins (hopefully, the new Chevrolet Malibu is a harbinger of such cars across the GM portfolio!).
In the case of General Motors, a dramatic shift to a market-focused planning process and strategy will require major and wrenching corporate rethinking and change. Can GM pull it off with the existing leadership? Only time will tell.