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STRATEGIC MANAGEMENT
College Of Technology London STRATEGIC MANAGEMENT GM FIAT STRATEGIC ALLIANCE Lecturer: Dr. John W Lang Submitted by Sarath Sivadasan Student ID: 095267-86 (MBA Group 1) UWL ID : 29002387 TABLE OF CONTENTS 1. 3 2. 3 3. 5 !!"#$$6 % &"#7 #'$#&!$!"(8 ) $#"#!&*'10 + #$$,!-.$"13 )$!16 )!16 +((17 /&!24 GM – FIAT STRATEGIC ALLIANCE EXECUTIVE SUMMARY % General motors and Fiat are among the top automotive manufactures in the world. They had started a strategic alliance from 2001 to 2005. The alliance was limited to the world’s largest automotive markets, Latin American and Europe. The strategic alliance of GM and Fiat was truly concentrated on regaining their market share in Europe and North America, also to create some values for their share holders. So the company planned their operations more focused on the areas like • Cost reduction for acquiring cost leadership. • Regulating the activities of power train models. • Cross sharing of automotive technology. • Development of common architecture and platform. GM and Fiat started their partnership in 2000, with all the above objectives, but the alliance was limited only to the purchasing and production activities. Even though the two companies had a strategic alliance, in the marketing, sales and financial activities GM and Fiat are still different companies. That means they continue to be good competitors in the market. This report is concentrated to the strategic alliance of GM and Fiat by explain and analyzing the various relevant factors like , the structure, objectives, strategies, planning, benefits and savings of the strategic alliance with the help of different management analytical tools. INTRODUCTION General Motors is one of the largest automobile manufacture in the world, started their operation in 1908. The head quarter of the company is at Detroit. The business of the GM extended to 157 countries worldwide, with more than 205,000 employees. The main markets of the company are United States, United Kingdom, Brazil, Canada, Germany, China and Italy. General Motors delivers their sales and services through different brand names in different countries they are Chevrolet, Buick, Daewoo, GMC, Cadillac, Opel, Holden, Vauxhall, Jie fang and Wulling. (General Motors, 2010) General Motors founded in the year in 1908, in the first year operation itself company captured 19 % of the US market with the sales of 25,000 cars and trucks. In 1923 company started its first operation outside North America. Following this in 1925 and 1929 GM acquired Vauxhall motors in UK and Adam Opel in Germany respectively. In 1989 general Motors acquired about 50 per cent stake of Saab Automobile Sweden. And latter in 2000 hundred per cent of the Saab was acquired by General Motors. In 2000 General Motors started a Strategic alliance with Fiat. And in 2002 GM Daewoo Auto started operation in Europe. Because of the market penetration of the car manufacturing companies outside US, made a lot of challenges in the market. General Motors market share suddenly declines and resulted in a loss of 81 billion in that 50 billion was on the last four year. At last in 2009, largest American car maker giant, General Motors declared it in bankrupt. (See Appendix 5.6: Revenue and Profitability Comparison of GM) The joint alliance between GM and Fiat is an important partnership decision made by the company in struggling time. Joint ventures mainly concentrated on the cost reduction and purchasing power improvement. This analysis mainly focused to the GM strategic alliance and its impact on GM by framing following objectives. • To evaluate the reason behind the strategic alliance in the perspective of both General Motors and Fiat auto group. • To analyze the strategic planning behind the cost leadership of the strategic alliance. • To analyze the strategic planning of GM- Fiat alliance for the market penetration • To analyze the strategic needs and savings behind GM Fiat alliance. This analysis is done mainly with the secondary data available from text books, internet, journals and articles. The analysis covers constrains like limitations of time and unavailability of primary data. The difficulty in accessing high level strategic information can also be considered as the limitation of this analysis. 3. MAIN BODY ) Joint Venture can be defined affectively as the partnership between two or more organizations to share skills, recourses, Market and knowledge with a new organizational unit. Normally company uses joint venture for stabilizing the market competition, increasing the market share by gaining operational synergies and expanding the market. (efmacfm,2007) One of the main synergy benefits is the cost saving by either through the rationalization of employment or by the sharing of fixed cost between the organizations. Risk sharing, access to technology, expansion of the customer base, entry to new markets and entry in emerging economics are also important points the companies concentrates when they set up a strategic alliance with another company.(Hewitt, 2005,p.8 ) GM – FIAT STRATEGIC ALLIANCE: AN OVER VIEW In the current high competitive automobile industry the companies are always looking forward to create potential partners through which they can build joint ventures in order to satisfy their goals and needs. In this way GM and Fiat formed a strategic alliance in 2000 to create values and opportunities for both GM and Fiat. The alliances are limited to Europe and Latin America, which is considered as words largest automobile market. GM signed the joint venture agreement in 2000 March 13 by acquiring 20 per cent capital stock of Fiat. Similarly Fiat purchased about 6 per cent of General Motors. In July 24, 2000 that partnership formed joint venture of companies, they are • GM- Fiat worldwide purchasing BV. • GM-fiat power train BV. The main expectation about the operation of this venture is that, it was estimated if the joint venture is a successes and in its full phase it will make a savings of about 2 billion in 2005. (Camutto, Volpato, 2002, p.336) (See appendix 5.1 for the internal business environment – SWOT) 3.1, REASONS BEHIND THE STRATEGIC ALLIANCE + 1,GM – PERSPECTIVE • GM had the resources for the acquisition and strategic alliance at that time. • To get good management around globe since the GM presence has limited because of the World War II. • In the period 2000 the competitors forced gm to secure the European Market share. • Over capacity of production in GM motor. Example Chevrolet, Opel and Saab. • As a result of the high level competition the profit of the company reduced 25.8 % in the UK market. The market share of GM in the home country was also reducing. So company need to recapture the market share. • In 1999 there was an attempt by the Chrysler for acquisition. In spite of this the various acquisitions and joint venture of the competitors like ford, Benz etc, at that time forced GM to start a strategic alliance. 2, FIAT – PERSPECTIVE • For strengthening the competitive opportunities with low investment risk. • The market share of Fiat was falling highly in the UK market and become 9.5 % from 35.4 %. In South America also Fiat was struggling from the economic crisis. • Unsuccessful launch of new models of Fiat took them to huge losses. For overcome this financial crisis company need a strong alliance with other company. • The market share of the company is declining in the home market (Italy). • Rapid revenue fall of Fiat due to the over capacity of production, just like GM. • Increased competition and problems of marketing in Europe and North America.(Hoppe, et al ,2007) (See Appendix 5.2 for External Business Environment analysis - PESTL) 3.2, STRUCTURE OF THE AGREEMENT Time scale of the Agreement: in March 13 2000 the agreement and the negotiation of the strategy become public. This happened 2 months of confidential negotiation. The juridical formals of the partnership agreement was took place on 2000 July 24. Thus the European commission release the information that, General Motors and Fiat had made agreement to coordinate in areas like production of power train and purchasing of parts and / components. This together constitutes the 80 % of the manufacturing cost. In Sept 31, 2000 the two 50/50 joint venture company came into existence. The equality in the purchasing cost made the joint venture of the two companies more effective. 3.3, STRATEGIC PLANNING FOR COST LEADERSHIP -GENERIC STRATEGY 0 COST LEADERSHIP (1), Analyzing the Need for Achieving Cost Leadership American car manufacturing companies had a huge economic scale of production in the period of 1950s. But at the end of 1964 Japanese car manufactures started producing more economic cars with advanced low cost production techniques. This enabled them to penetrate the global auto motive market and acquire cost leadership from the US car manufactures like GM, Ford etc. The following table shows the cost reduction of Japanese car companies over US companies, (Bodevin, et al,n.d.) (See Appendix 5.3: Market share comparison of GM with Competitors) 1 In addition to the entry threat of the Japanese car manufacture the market share of both fiat and GM was reducing in Europe and Latin America. The main reason behind this is the cost leadership of external car makers. Fiat faced a declining market share in Italy (home country), Europe, and South Africa etc. So in that business environment acquiring cost leadership was really important for the existence of both GM and Fiat. 1997 2000 Italy 42.6 % 35.4% Europe 11.7% 9.5 % (Market share decrement of Fiat 1997- 2000)(Hoppe, 2007) 2, Strategic planning for achieving Cost Leadership One of the main objectives behind the strategic alliance was achieving cost leadership. The recourses commitment and combined effort was planned so that it can allow greater flexibility in the operations. The combinations of technological and physical capabilities of the companies are expected to deliver cost benefits to both GM and Fiat. Even though there was some cost and risk associated with the alliance, the successful alliance was planned to deliver competitive advantage to the companies through sharing and distribution of knowledge.GM was more focused on their falling brand image. The brands like Opel, Saab and Vauxall had already established as small car manufactures in Europe.(culpan, 2002,p.130) The alliance primarily focuses to strength their products in European and Latin American Market. After the capture good market share, they planned to bring this model to other markets. Since GM and Fiat are facing the problems regarding the limited domestic growth opportunities, both companies were looking for cross border strategic alliance to enhance the competitive strength. The cost reduction of the alliance is truly based on the synergy savings in the production and purchasing. 2 (inderscience ,2002) The total expected savings at the fifth year of the alliance was 2 billion. The figure shows the cost impact on the purchasing and power train. The 60 % and 20 % of the cost contributes the purchasing and power train respectively; together constitute the 80 % of the total manufacturing cost. If the alliance could make a good saving in this 80 % of the manufacturing cost, The GM and Fiat could able to achieve the cost leadership in the market, that was the strategic planning behind the alliance.(Camuffo,Giueseppro,2002, p.347) 3.4, LONG TERM AND SHORT TERM STRATEGIES FOR MARKET PENETRATION (mrdashboard, n.d.) 3 [...]... COMPARISON OF GM (Krmmailk, 2010) 21 STRATEGIC MANAGEMENT (Krmmalik, 2010) 5.7, INDUSTRY ANALYSIS OF THE ALLIANCE – PORTERS FIVE FORCE 22 STRATEGIC MANAGEMENT 23 STRATEGIC MANAGEMENT 6, REFERENCES • Dobson, P Starkey, K & Richards, John 2004, Strategic Management: issues and cases, • Black well publishing Ltd Hitt, M Ireland, D & Hoskisson , R 2009, Strategic Management Competitiveness and • • Globalization:... Global Auto Industry: The Fiat – GM • Strategic Alliance P 335-350 Ionic, O 2008 Applying Real Option Analysis to Value the GM Fiat Strategic joint • Venture P 17- 20 Camuffo , A Geril, F n.d Synergy Saving in the GM – Fiat Strategic Alliance P 72- • • 80 Cammarates , V Kuruez, V 2006 The fiat Case: A Therapeutial Crisis P 9 – 27 Hill , C Jone , G , 2004 Strategic Management – An Integrated Approach,... cent of this is regarding the auto industry 19 STRATEGIC MANAGEMENT 5.3, MARKET SHARE COMPARISON OF GM WITH COMPETITORS (thenumberguru, 2008) The figure indicates the decline of GM market share from the period 1998 to 2008 The market share of GM reduced from 30 to 21 % while for Toyota it increased from 9 to 18 % 5.4, SYNERGY SAVINGS STRUCTURE 20 STRATEGIC MANAGEMENT 5.5 GENERAL MOTORS STOCK PRICE DETAILS... was from the GM side and 800 employees from the Rationalized purchasing activities are 13 STRATEGIC MANAGEMENT organized for acquiring the needs and strategic relevance of the automobile industry The • cumulative purchasing turn over in the first year 2000 is 1, GM - 17 (bn euro) 2, Fiat - 16 (bn euro) In the strategic alliance 70 per cent of suppliers are common This gives benefits to both GM Fiat... Appendix 5.6: Revenue and Profitability Comparison of GM) Since heavy investment is required for the international strategic alliance, the risk factor should be analyzed to prevent the alliance from financial failure 16 STRATEGIC MANAGEMENT General Motors has been aggressive to diversification and strategic alliance, form early 80s Company entered into its first alliance in 1982 with Isuzu motors limited... production of small cars Recognition of GM and fiat in the • in SUV vehicles Financial instability of Fiat in the North • European market Bureaucratic management delays and market American and European low reputation in Green technology of GM 17 STRATEGIC MANAGEMENT Opportunities • Threats Both GM and Fiat can effectively • Declining profit of both GM and Fiat face the global tight competition due to... involves Engines (gasoline, diesel and alternative propulsion) Transmission (automatic, manual and AWD) • The strategic mission behind this joint production is to achieve the leadership in • performance cost, quality and product innovation The main aims are 1, Reduction in development cost 14 STRATEGIC MANAGEMENT 2, Reduction in time to market 3, Optimization manufacturing capacity 4, Product differentiation... architecture are • Future vehicle design: knowledge base can be used to develop complex parts of future • models Advanced technology application in production process to achieve cost benefits 12 STRATEGIC MANAGEMENT 3.5, STRATEGIC ALLIANCE NEED AND BENEFITS -VALUE CHAIN ANALYSIS RAW MATERIALS PURCHASING AND IN BOUND LOGISTICS Fiat was following an out sourcing policy in which the manufacture becomes overly... in the performance graph of GM, both positively and negatively The strategic alliance with Fiat was proved out to be a mistake, which increased the instability of the company To conclude, this report tried to focus different faces of the strategic alliance to analyze the advantages, expectations and planning of the alliance in the strategic level 5, APPENDIX 5.1, SOWT ANALYSIS OF THE JOINT VENTURE... testing of experimentations The other strategic objective behind the alliance was the standardization of road handling and performance for the developing of common platform The highest level of possible unification between GM and Fiat may limit the brand characteristic of the individual brands For this the alliance focused on the development of common architecture strategic to obtain the differentiation . analyze the strategic planning behind the cost leadership of the strategic alliance. • To analyze the strategic planning of GM- Fiat alliance for the market penetration • To analyze the strategic. College Of Technology London STRATEGIC MANAGEMENT GM FIAT STRATEGIC ALLIANCE Lecturer: Dr. John W Lang Submitted by Sarath Sivadasan Student. REASONS BEHIND THE STRATEGIC ALLIANCE + 1,GM – PERSPECTIVE • GM had the resources for the acquisition and strategic alliance at that time. • To get good management around