Question

GM's business-level strategy is arguably Low-Cost Leadership (as is Ford's). In most categories of vehicle, GM and Ford are the standard, low cost and usually lower priced, alternatives to comparable premium products from Mercedes, BMW, and others. SAAB's pre-GM business-level strategy was Differentiation as were the other non-American car companies purchased by GM and Ford in the 1980s and 1990s. Why were GM and Ford unable to successfully manage these foreign high-end car companies?

Answer 1

1. Badge-engineering is a common practice in the auto industry where the same vehicle is essentially marketed and sold under different names and brands.

2. The companies failed to fund retiree pension and health benefits on an accrual basis and loaded those costs onto current employee contracts. Workers should not be blamed for the failures of GM’s financial management and accounting systems.

3. Any measure constructed so that the hourly compensation of workers rises as the ratio of retirees to workers increases, even though the wages and benefits of the workers do not increase, is misleading. Attributing the “legacy costs” of 60 years of retired autoworkers to the current workers’ compensation is inflammatory, but not instructive.

4. At the low end of the market, the average transaction price for Ford and GM compact cars in 2008 was about $15,000, while Toyota sold its compacts for $3,000 more.

5. A car with a U.S. nameplate could be perceived to be lower quality even when it was virtually identical to a Japanese nameplate vehicle, as in the case of the Toyota Matrix/Pontiac Vibe. The cars were built in the same joint venture plant in California by the same UAW members, but the Toyota sold for about $1,000 more than the Vibe.

6. The Detroit manufacturers also chose to focus on the very profitable SUV and truck market, ceding the small-car market to the foreign competition.

7. As Helper explains: “A key additional problem is the automakers’ relationships with their suppliers, who account for over 60% of the cost of the vehicle. The automakers have tried to cut costs with suppliers by squeezing suppliers’ margins — the difference between the suppliers’ cost and its selling price. They’ve been successful at this, to the point that many suppliers are in bankruptcy. But this method doesn’t produce good cars — it doesn’t even produce cheap cars, since the price per piece of the component is only a small part of the true cost associated with a part. Also important are the cost of installing that part, of fixing production problems as they arise, and of repairing finished cars should the parts fail while still under warranty. Most automotive components aren’t modular; they don’t simply snap together like Lego pieces. They are part of a tightly integrated machine — they must be designed for a particular car model, and often a problem with one part will mean that several other parts have to be redesigned to make everything fit.
The Detroit Three’s approach to suppliers stands in stark contrast to the approach Honda and Toyota have taken. These automakers make very strenuous performance demands on suppliers. But they do so in ways that reduce defects, improve design features to make products more attractive to consumers, and yield profits that sustain suppliers throughout the business cycle.”

8. Even today, Detroit lags the Japanese and most German companies in supplier relationships.