1. What is this case about
The case is about finding the most efficient method that General Motors (GM) can use to finance for a second assembly point known as Module II for one of its newest division called Saturn Corporation. This was to increase Saturn’s production capacity so that the Corporation could achieve its long-term objective of selling 400,000 to 500,000 cars per year in the United States and selected international markets. There were four options available for carrying out the expansion process; expand at Spring Hill, convert an existing GM factory, Source models from another GM plant, and Delay expansion.
General Motors created Saturn specifically to produce small cars, and make the company competitive with cars imported from Japan in the small car markets.
2b. How was Saturn able to Perform as of 1993
As of 1993, Saturn had increased sales every year and had sold over 239,000 of its models. Saturn was also setting sales records of attracting over 25,000 new buyers every month. By the end of the year, Saturn had made its first operations profit of approximately $100 million on sales of $3 billion (Harvard Business School, 1994). The brand had gained popularity with most car buyers and had built positive relationships with customers through a no haggle pricing system and extensive training of sales people. This resulted in Saturn earning a spot alongside luxury brands in product quality, customer and dealership satisfaction.
2c. Should Saturn be spun off from General Motors and established as a separate car company
Saturn should be spun off from GM and establishes as a separate car company. This is because Saturn is popular with customers and was attracting new audience every day. Research also showed that Saturn owners had a median age of just over 40 years and were more likely to buy about four or five more cars in their lifetime. With the reputation that Saturn had built and its expected production of updated models, it is likely that the owners brand of choice when buying another car would be Saturn once again. This together with the long term projected capability of selling over 500,000 cars both in the United States and overseas means the brand would be able to remain profitable on its own (Harvard Business School, 1994).
2d. How urgent was the need for General Motors to become "Saturnized”
General Motors was in dire need of being “Saturnized” as soon as possible. This is because the company. This is because other GM factories could adopt some of Saturn’s programs and help the company get more customers. Also, Saturn had gained a lot of popularity from advertising its plan to change how cars were manufactured and sold. “Saturnizing” GM would add an intriguing dimension to GM thereby attracting potential customers’ attention.
3a. What are the critical issues which must be taken into account in making decisions regarding the Saturn Module II expansion?
The most critical issues that have to be considered while making decisions regarding Saturn’s expansion process include; the initial investment cost and long run operating expenses, and the potential risks to Saturn. Other factors that should also be put into consideration are the preferred method by United Auto Workers leadership and Saturn’s relationship with other GM North American Operations.
3b. What decision criteria should the GM/Saturn management define in order to decide on the Module II expansion options outlined in the case?
The decision criteria that GM/Saturn management should define to decide on the Module II expansion are the effort-to-performance and performance-to-outcome expectancies. The effort-to-performance expectancy is the managers’ perception of the probability that their efforts will lead to accomplishment of the organization’s goal. Performance-to-outcome expectancy is the managers’ perception that will result in intrinsic and extrinsic rewards. Intrinsic rewards are not tangible and are feeling of accomplishment such as customer satisfaction and job creation. Extrinsic rewards are tangibles like increased profits.
3c. How would you assign the weights reflecting the relative importance of these criteria?
The effort-to-performance expectancy should have more weight than performance-to-outcome expectancy. This is because the effort-to-performance expectancy is what will be mainly considered in making the decision.
3d. Evaluate available options and calculate weighted scores.
Option 1: Expand at Spring Hill
Spring Hill is where the current production complex is located and Module two would be located alongside it. The increased volume would lower the production costs of units. Trained assembly workers and managers would be present to conduct and reinforce lessons at the factory. However, UAW did not support this option because it would mean moving workers from locations where other factories had closed to Spring Hill. Investing $900 million in the expansion could reduce variable manufacturing cost per car from $7,600 to $7,200. The facility could increase annual manufacturing capacity by 178,000 cars.
Option 2: Convert an Existing GM Factory
The second option was to invest in an existing GM site thereby reducing the initial cost of the expansion project. This process could provide critical information about Saturn’s programs and practices that could be replicated in other GM factories. This option would also create 1500 new jobs and enhance interest in the company. Investing $850 million to convert Willow Run would allow manufacturing of 178,000 cars annually. The variable cost per car would be $7,400.
Option 3: Source Models from another GM Plant
This option would mean that the Saturn model would be manufactured by other GM plants. The option would leverage Saturn’s brand equity and sales network because the brand had a good reputation with the customers that they would be willing to pay a premium for any car the company sold. However, this option could affect the no haggle pricing approach and also transfer engineers to the centralized NAO design center. Investment of $200 million would be required, the option would increase manufacturing capacity by 50,000 cars every year and the manufacturing variable cost would be $7,100.
Option 4: Delay Expansion
The proposal for Module II had been around for a long time but still no decisions had been reached. Some of the key company officials cited the reason for holding the expansion process was because the company was still profitable and the expansion could be carried out at a later date.
3e. Elaborate the Results
Souring models from another GM plant is the cheapest and fastest means of expansion but the capacity increment provided by this option could not meet the requirements of the company. Converting Willow Run would increase the manufacturing capacity by 178,000 cars that is the number that expanding at Sprill Hill would enable. Converting Willow Run would also cost $50 million dollars less than expansion at Spring Hill. However, manufacturing cost per car at Willow Run would be $200 more than at Spring Hill. Therefore, the most viable option would be to expand at Willow Run.
4. What are the lessons learned from this case
Expansion of a company’s operations is a challenging task that takes time and requires thorough analysis. Apart from the cost and profitability of expansion, various factors have to be considered too including the effect on the employees and customers of the company. It is also very difficult to find the perfect option that has no flaws since different options have different advantages and disadvantages.
References
Harvard Business School. (1994). Saturn Corporation’s Module II DecisionHarvard Business School.
