Abstract
The research project will take a look at some of the reasons that led to the bankruptcy of General Motors (GM). Some of the questions that will be looked at include: What really happened to General Motors? What factors led to its bankruptcy? How did they cope with this bankruptcy? Those are some of the questions that this research seeks to answer. The research method that will be used is observation and analysis of data from books. It was found that the main problem that led to bankruptcy in GM was poor management and decisions that were made by the managers of the company. The reason for doing the research was to find out what happened to GM so as to help other companies not to go down the same lane. This will be a wakeup call in future for those managers who just rush into making decisions as such actions will lead to failure.
General Motors Bankruptcy
General Motors is one of the leading car manufacturing industries in the world. As usual, in any organization, there are ups and downs. General Motors is not an exception and thus, it has had its own challenges. Some of these challenges led to its bankruptcy. The question being asked by many is what actually brought General Motors down. The problems that led to the near-collapse of General Motors could have easily been avoided or fixed. This company was once a major distributor of a majority of the cars within the United States’ market. Its bankruptcy made it to be in control of few markets as compared to what was their initial market. Its fall was due to the poor decisions that were made by the top management and other stakeholders. Economically, this is a blow to the company and the society at large.
Statement of purpose
The main objective of doing this research is to find out exactly what transpired that led to the bankruptcy of General Motors. The other reason would be to educate the public and other players so that they do not repeat the mistakes that GM did.
Research method statement
The method of research used was literature review from academic sources such as books. This is because they contained adequate and accurate information of what really happened at General Motors.
Statement of findings
The main reason of doing this research was to find out what happened at General Motors so that it might guide me, managers and other individuals, businesses, organizations and other industries to run their daily business appropriately and avoid repeating the same mistakes that were done by General Motors. Thus, the research is meant to act as lesson to other people.
Top management
At the moment, General Motors is running its operations on approximately twenty billion in aid from the government and is in dire need of billions in capital to reorganize and restructure itself. The top management at General Motors has come up with a plan and decision to cut down on its debts by reducing the labor costs and selling part of its branches in other parts of the world such as European Opel to makers of parts in Canada [ CITATION Ste10 \l 1033 ]. The other thing the top management decided to do is to cut half of its bond holders who agreed to cut down on its debts. Some people argue that the fact that GM got to this level is attributable to the fact that there was a time when the sales were low (during the time of its turnaround). This recession of sales in the market was not associated with managers but was due to the general market conditions. This is because the management cannot control the market.
Filing for bankruptcy
The company did not file for bankruptcy soon enough. The momentum towards bankruptcy filing was accelerated as soon as the market for autos went down during the last fall. In the year 2005, the serving CEO at the time faced several questions as to whether G M would be well off if it filed for bankruptcy so as to enable it to reorganize and cope with the labor costs, debts and overwhelming number of dealers who existed within the market. He completely refused and was highly opposed to any move to file for bankruptcy [ CITATION Dou10 \l 1033 ]. He argued that by accepting and filing for bankruptcy, buyers would be driven away and in addition, it would permanently harm its workers, shareholders and stakeholders, all at the same time. He strongly believed that General Motors would turn around and regain its original stability as had happened earlier. Filing for bankruptcy in the year 2005 was a wrong move since the company and the economy were doing well during this time. It is therefore wrong for a company to file for bankruptcy when it knows that it is still in a stable position to run. Filing for bankruptcy should be left to the experts and not just the managers.
Terrorist’s attacks
Another contributing factor that led to General Motors’ bankruptcy was the 9/11 attacks by terrorists, which GM responded to resolutely and fast enough. Some of the incentives it presented to its customers and consumers included offering them with zero percent funding on all loans for not less than two years. The deal went sour and GM had to repay each case thus running at a loss. These deals kept on coming and General Motors stuck to its cash back and low rate financing policy for years, which led to an increase in rebate that is approximated to be at around eight thousand dollars in most of these cases. In order to be in a position to repay rebate, the company kept the prices of stickers high as compared to its competitors. Keeping the prices of stickers high made its customers to look for alternatives thus leading to a low demand due to high prices. Usually, high prices will chase away customers who want to save money on the products that they buy and unless it is a basic need that one cannot do without, then there is no need to keep the prices high. Till 2006, GM had not yet recognized that they were losing both their original and potential customers due to the high sticker prices and other products. When GM started to offer high incentives for its products, it had to stick to them since its competitors were not easing on their rebates [ CITATION Dou10 \l 1033 ]. This was a major characteristic of the market during those days. The refunds destroyed the reserve value which implied that the worth of new GM cars was depreciating more rapidly compared to exotic brands. General Motors had heavy incentives that distorted the marketing promotions thus enhancing the appeal for the deals instead of their automotives. Analysts say that regularly promoting the deal without placing much emphasis on the automobile is not a feasible strategy at all costs.
Killing EV1
During his time, Wagoner said that the worst blunder GM could ever have done was to terminate the EV1 project i.e. the company’s miniature electric cars that were used utilized in test fleets (Allen, 2010). General Motors terminated the production of electric cars and it was left to the Toyota Company to design and develop electric cars. Currently, General Motors is struggling to regain its earlier position in electric car production. The electric Volt plug-in will be sold out [ CITATION Dou10 \l 1033 ]. EV1’s termination meant that GM, being the main manufacturing giant in this greener era, had squandered a golden opportunity. The management says that it had the skills and people who are able to do this and there is no reason as to why General Motors should not be manufacturing electric cars. This deviation led to many losses as the company had invested a lot in this specific unit of manufacturing electric cars thus a general loss to the company.
The bank
For several years, there was a humorous joke that General Motors was, in essence, a bank that was making cars. Year in, year out, the financing department of General Motors generated a lot of revenue as compared to the departments that actually dealt with cars. Since GM had a deficit of cash, it decided to sell about a half of GMACC at a total cost of about 14 billion dollars to Cerberus. Selling off of this branch meant that its main source of money was no longer in existence and it needed finance in order to run its other activities. This was a big blunder made by General Motors (Allen, 2010). This is because GMAC was the pillar of GM and acted as the main source of their returns [ CITATION Dou10 \l 1033 ]. Despite the fact that GMAC had problems with the mortgage unit of the housing department, retaining GMAC would have helped General Motors to withstand the downfall of sales of motor vehicles. During the time of credit crisis at General Motors, most of the car dealers could not get car loans and their financing of inventories was completely denied. Initially, GMAC offered loans with nodes and winks, which helped in keeping dealers with a good stock of cars. As soon as General Motors lost the power to control GMAC, it completely lost its flexibility of offering loans to customers and dealers.
Market demand
It may be defined as the total amount of people who purchase specific products in a given market within a specified period of time. In addition, it is the ultimate factor of price determination within a given market. In competitive markets, prices will act as a regulator of the demand of consumers and the supplies made by producers. In this case, GM saw that the demand for trucks had increased and thus produced more trucks while forgetting the cars which were their main pillar of production. This increase in market demand led to an increase in production of many trucks as compared to cars. This market demand of trucks did not last long, thus the demand for cars went up. This shows that the market’s demand shifts from time to time and the producers should be on the high alert. This concentration on producing trucks was not a successful venture because they did not make adequate profits thus leading to bankruptcy. For an industry to be effective, it has to ensure that it understands the needs of the market and strives to satisfy those needs.
Change in price
This refers to the adjustments in the quantity demanded that may occur due to alterations in the order price of a good that eventually affects the real income. The purchasing power of a consumer is normally determined by the price in relation to his/her income though the actual income remains the same. For instance, General Motors increased the prices of its stickers thus chasing away its existing market and the possible potential market. This fact affects the law of demand and the slope of the entire market command curve. When the prices hike, the purchasing power of the customers goes down and when the prices come down the purchasing power increases. Purchasing power simply refers to the quantity of commodities and services available for purchase given certain amounts of income. When GM increased the sticker prices, several customers ran away because they could not afford to buy at that price. Higher prices may result in a decline in the purchasing power hence restricting the capability to purchase goods leading to reduction in quantity demanded. A fall in price leads to an increase in the purchasing power of the customer’s income giving him/her the capacity to purchase more goods at a relatively higher quantity.
At some point, Kirk Kerkorian purchased roughly ten percent shares in General Motors, which made him one of the most important share holders. He requested the management of GM to acquire his colleague, Jerome York, who was willing to buy shares, but they refused. Despite being rejected, he decided to help GM rise to its feet again (Allen, 2010). He also advised and pressured them to combine forces and work hand in hand with production firms such as Renault and Nissan, which failed massively. He advised them to be realistic and warned them to be aware of the market share and the expectation they had on revenue; they should cut down on the surplus products and other products, and lastly, GM should sell or alternatively close down those branches that did not make much profit for the company. Last but not least, he advised them to look at everything within the company in a different perspective and come up with new ideas of running the company, which had to be acted on as soon as possible so as to salvage the name of General Motors as time was not on their side (Allen, 2010). The list and plans that General Motors had towards restructuring itself were almost similar to those made by the task force that President Obama came up with. It could not accept the plan that General Motors had in mind and thus rejected it by saying that the automaker was not realistic about its revenue projection and market share. With all these problems, there was too much pressure on General Motors to sell the Saturn, Hummer, Saab and Opel (Allen, 2010). Henderson, who was the CEO proclaimed that the car maker was actually going through the company’s production and was questioning every department, employee move and the products at large (Allen, 2010). This is to say that there were evaluation processes that were on going at GM. All this came at a time when GM was already falling down; it was now running on aid from the government that was running into billions of shillings. He later on resigned and wrote a letter to the directors criticizing them for not taking things seriously at General Motors and their inability to compete with other industry players.
Buying of Fiat
General Motors bought about a fifth of Fiat for a massive $2.4 of their own shares. This seemed to be a good move at that time. With cars such as Opel and Vauxhall, it would have made General Motors a key player within the markets that were found in Europe, thus making it a very strong player in the automotive sector. Problems at Fiat Company were noticed as soon as, Agnelli, who was the CEO at the time, was announced dead. Since it was a stakeholder in the deal, Fiat had all the power to compel General Motors to purchase all the shares and assume full control of the Company but instead offered Fiat about two billion dollars so that it would no longer be associated to this arrangement. This money was utilized wisely by Fiat, which managed to revamp itself and is now the owner of Chrysler – a very posh car.
Economic principle may be defined as a statement of inter relationships between economic factors that give an explanation of what may cause what under given circumstances. It is at times called the economic law. The division of labor is very important in any organization. This is because it plays a major role in improving the production quality of a product. In the case of General Motors, they wanted everything yet they could not allocate appropriate labor to the new emerging branches. Opportunity cost is a rule that states that anything that you must give up so as to carry out and effect a specific decision is in essence a decision cost [ CITATION Bil11 \l 1033 ]. General Motors did not look at the cost effectiveness of buying shares from Fiat Company that led to them losing everything at the end of the day. More often than not, people tend to want more than they can have and thus go for alternative productive resources. A company like General Motors wanted to expand its branches, thus went ahead to buy companies such as Fiat that led to its eventual bankruptcy.
Executive compensation
This is one of the principles that handle matters involving compensation and performance management in a firm. Its major purpose was to retain and reward its personnel who had achieved much for the firm while working. This type of corporate culture was not realistic as it only focuses on short-term results and strives to maximize on the bonuses. This resulted in employees within GM to opt for high volume deals, without having sense for quality of cash flows and the profits realized by firms such as General Motors. They only targeted the rating of their performances that in the long run led to fall in the firm’s stock price [ CITATION Alf23 \l 1033 ]. The program mainly aimed at benefiting the top management as most of the deal-makers were on the top management. The executives received large sums of bonuses and stock options, leaving the lower employees getting no portion of the success attained through them. The act of using stock options in the compensation process led to expectations of speedy growth that was the major goal of most firms. The management of GM had a culture of assuming that employees needed to be constantly cost-centered that reduced their original thinking capacity. However, this led to extravagant spending as it was rampant in most of the firms, especially the top management. In the long run, the companies started experiencing large expense accounts as the executives were paid on a regular basis [ CITATION Fra27 \l 1033 ].
Risk management
It is a principle that all firms need to put into consideration before operation. It is a crucial fact on the management as it is required to set up a financial management tool that oversees the entire firm’s processes. It involves the regulation of the business environment and the entire business plan of the firm. A firm is recommended to set long-term fixed options that will ensure all the inevitable fluctuations of future changes in prices are taken care of [ CITATION Jul10 \l 1033 ]. The firm also sets up policies that can be used to avoid the use of reckless derivatives that lack special intentions like those of Enron’s – an energy firm.
The re-election of President George W. Bush saw fierce revivals going on and emergence of conservative economic ideas. Principles such as free market and ideas that emphasize the complete removal of government regulation carry with it a considerable influence in the political circles. They end up translating into concrete and solid policies (Zizek, 2009).
The free-market principle and ideologies were majorly aimed at eliminating the excessive involvement of government in regulating the firm’s activities as its involvement encourages influence by politicians on the policies as they are directly involved in the making of such policies. President Bush’s shaped a bill of central initiative on domestic economies that was termed “The Ownership Society” by majority of the people, though it remains unclear whether the proposed shift to economic conservation has matured among the general public (Zizek, 2009). The ideas highlighted in the policy seemed to attract more interest and attention from both policy analysts and opinion markers all over the globe.
The famous principle of capital structure irrelevance forms the basis for the modern thoughts of dealing with the capital structure [ CITATION Wes04 \l 1033 ]. Modigliani explains clearly in his book the basic theories that involve certain market price process, the effects of absence of taxes, agency costs, asymmetric information and the presence of an efficient and free market in an economy. The performance of the company is not affected by how the firm is being financed as capital is mainly raised through the issuing of stock and selling of debts [ CITATION Fra27 \l 1033 ]. The policy does not consider the dividend policy observed by the firm as this has no effect on the firm’s dividend policy to its investors. In order for a business organization or manufacturing industry to thrive well, the top management should always ensure it makes the correct decisions and planning adequately before doing anything. The choices we make usually end up affecting the whole company at the end of the day. The case of General Motors is no exception; when it decided to stop producing cars and invested heavily on production of trucks, the decision was a bad choice and it was made by the top management.
It goes without saying that General Motors was at one time one of the leading car manufacturers until it went bankrupt. Some of the major reasons for its bankruptcy are poor management and bad decisions that were made by the top decision making organs. Thus, as a manager of a company, an individual must ensure that he or she comes up with the correct decisions bearing in mind that the outcome will affect the company in general. Other companies should learn from the mistakes made by General Motors and never repeat the same as this is a total guarantee of failure.
References
Allen, D. W. (2010). Economic Principles: Seven Ideas for Thinking about almost Anything. Boston, BO: Pearson Custom Publishing.
Birkinshaw, J. (2010). Reinventing Management: Smarter choices for getting work done. San Francisco,SF: John Wiley and Sons.
Bonte, M. L., Net, T., & Purcell, P. (2010). Recession, Depression, Insolvency, Bankruptcy, and Federal Bailouts. United States, U.S.: The Capitol Net Inc.
Canis, B. (2011). U.S. Motor Vehicle Industry: Confronting a New Dynamic in the Global Economy. United States, U.S.: DIANE Publishing.
Company, W. P. (2004). West's bankruptcy reporter. United States, U.S.: West Publishing Company.
Fetter, F. A. (1927). Economic principles. New York, NY: Ludwig von Mises Institute.
Flux, A. W. (1923). Economic Principles: an introductory study. New York, NY: Methuen & co. ltd.
Koch, A. R. (1986). Economic principles: growth and environment. West Port, WP: AVI Pub Co.
Rattner, S. (2010). Overhaul: An Insiders Account of the Obama Administration's Emergency Rescue of the Auto Industry. Boston, BO: Houghton Mifflin Harcourt.
Zizek, S. (2009). First as tragedy, then as farce. London, LO: Verso
