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Friday, April 03, 2009

Why GM Needs To Reorganize

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General Motors has seven current American brands, plus SAAB and Opel in Europe. The question is ... why?

One of the "legacy costs" that doesn't get talked about much is "branding." In order to understand why GM has so many brands, you have to understand a little about automotive history.

In the first half of the 20th century, when the boom of auto manufacturers was occurring, a Buick was a Buick... a car that had a few options and a few colors. Manufacturers created "new" cars by having a different nameplate... like Pontiac or Oldsmobile... which were either brands that had been absorbed into the corporation or identities given to an existing car that had somewhat differentiating sheetmetal and options... like the Edsel.

It wasn't until after World War II that corporations like GM began to create different cars within individual brand... Chevy 210 and Bel Air... models.


This changed the game for marketing. Now the "low priced" brand could sell a "loaded" version that competed with the "higher price" brand... while still have a standard or "stripped" version that retained the low price image of the brand.

Then came the brilliant idea to not only differentiate versions of the cars... models..., but to introduce whole new cars into the brand... like the Chevy Corvair.

Why not a different type of vehicle under the model nameplate... all under the same brand?

Now that there were different model nameplates under the brand, each representing a different type of vehicle, why not add new vehicles under the model? Why not have a Corvair car and truck?

So, in this example, the Chevrolet brand had the Chevrolet and Corvair vehicles, both of which included cars and trucks, and then the models became the different trim levels or configurations. What had originally differentiated brands now differentiated models within the brand. One brand was taking on the purpose of multiple brands within the corporation.

The logical consequence of this was that there was an explosion of models and configurations and options within each brand... and confusion about what a brand really was. Was it the Chevy Cimmaron and the Cadillac Cavalier?

Marketing took over. Engineering was a function of making minor changes to make one vehicle look like 5 brands and 15 models. It became a jumble. And the brand focus was hidden by the fog of models and configurations and trim levels.

This was not without consequence.
  1. Overhead grew within the corporation. Each brand had to have its own staffs and sales organizations and dealership network.
  2. Engineering resources were diffused. As much effort was placed on brand and model differentiation as basic quality and innovation... maybe more. It was better to do 20 things so-so than 3 things superlatively.
  3. Real outside competition was ignored. Those pesky foreign manufacturers were an annoyance more than a wake-up call. The in-house brands were too busy competing for each others' customers to worry about some "Toy-autos."
  4. Finance staffs focused on "leveraging" and "commonality." All the company had to do was re-badge and profits would come rolling in.
  5. Accountants convinced CEOs that by extending models for five years or seven years instead of three or four years that tooling costs per vehicle would be much less and... logically... profits per vehicle would be much higher.
So engineering and innovation were stifled behind the smokescreen of Marketing and Finance. Product got old and stale and dull. Foreign manufacturers focused on long-term strategies of quality and innovation... and stuck to their stories... and prospered.
Now General Motors has a half a dozen brands with dozens of models and more dozens of configurations and options for a market share of 1/3 what they had when they had 5 brands... each with a car and one with a truck. Does anyone see the problem?
If you go back and read yesterdays post, The Reorganized General Motors, perhaps you will understand not only why GM needs to reorganize, but the manner in which they need to do so.
The credit crisis has only served to force their hand in an undisciplined and politically-laden manner, but it was inevitable that GM would have gradually reorganized anyway... given their continued eroding share of the U.S. automotive market.
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There is always an easy solution to every human problem—neat, plausible, and wrong.
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“The Divine Afflatus,” A Mencken Chrestomathy, chapter 25, p. 443 (1949)
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FEDERAL RESERVE & HOUSING

SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006
Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
November 28, 2007 FED VICE CHAIRMAN DONALD KOHN
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."
http://www.reuters.com/

December 11, 2007 Somehow the Fed misses the obvious.
fed_rate_moves_425_small.gif
[Image from: CNNMoney.com]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's Economy.com. "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)