STRATEGIC MANAGEMENT

STRATEGIC MANAGEMENT

College Of Technology London STRATEGIC MANAGEMENT GM FIAT STRATEGIC ALLIANCE Lecturer: Dr John W Lang

Submitted by

Sarath Sivadasan

UWL ID : 29002387

TABLE OF CONTENTS 1. Executive Summary……… 3

2. Introduction ……… 3

3. Main Body………5

3.1, Reasons Behind Strategic Alliance………6

3.2, Structure of the Agreement……… 7

3.3, Strategic Planning for Cost leadership……… 8

3.4, long Term and Short Term Strategies for Market Penetration……….10

3.5, Strategic Alliance Need and Benefits- Value Chain………13

4 Conclusion……… 16

4.1 Recommendations………16

5 Appendix ……….17

6 References ………24

GM – FIAT STRATEGIC ALLIANCE

EXECUTIVE SUMMARY

General motors and Fiat are among the top automotive manufactures in the world They hadstarted a strategic alliance from 2001 to 2005 The alliance was limited to the world’s largestautomotive markets, Latin American and Europe.

The strategic alliance of GM and Fiat was truly concentrated on regaining their market share inEurope and North America, also to create some values for their share holders So the companyplanned 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 waslimited only to the purchasing and production activities Even though the two companies had astrategic alliance, in the marketing, sales and financial activities GM and Fiat are still differentcompanies 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 thevarious 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 157countries worldwide, with more than 205,000 employees The main markets of the company areUnited States, United Kingdom, Brazil, Canada, Germany, China and Italy General Motorsdelivers their sales and services through different brand names in different countries they areChevrolet, 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

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 Saabwas 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 GeneralMotors 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 thecompany in struggling time Joint ventures mainly concentrated on the cost reduction andpurchasing power improvement This analysis mainly focused to the GM strategic alliance andits impact on GM by framing following objectives

• To evaluate the reason behind the strategic alliance in the perspective of both GeneralMotors 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, journalsand articles The analysis covers constrains like limitations of time and unavailability of primarydata The difficulty in accessing high level strategic information can also be considered as thelimitation of this analysis

3 MAIN BODY

Joint Venture can be defined affectively as the partnership between two or more organizations toshare skills, recourses, Market and knowledge with a new organizational unit Normallycompany 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 ofemployment or by the sharing of fixed cost between the organizations Risk sharing, access totechnology, expansion of the customer base, entry to new markets and entry in emergingeconomics are also important points the companies concentrates when they set up a strategicalliance 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 tocreate potential partners through which they can build joint ventures in order to satisfy theirgoals and needs In this way GM and Fiat formed a strategic alliance in 2000 to create values andopportunities 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 thatpartnership 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 jointventure 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)

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 theWorld 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 Socompany need to recapture the market share

• In 1999 there was an attempt by the Chrysler for acquisition In spite of this the variousacquisitions 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 % from35.4 % 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 thisfinancial 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 thestrategy become public This happened 2 months of confidential negotiation The juridicalformals of the partnership agreement was took place on 2000 July 24

Thus the European commission release the information that, General Motors and Fiat had madeagreement 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 thetwo 50/50 joint venture company came into existence The equality in the purchasing cost madethe joint venture of the two companies more effective.

3.3, STRATEGIC PLANNING FOR COST LEADERSHIP -GENERIC

STRATEGY

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 economiccars with advanced low cost production techniques This enabled them to penetrate the globalauto 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)

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 costleadership 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 wasreally important for the existence of both GM and Fiat

1997 2000Italy 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 Therecourses commitment and combined effort was planned so that it can allow greater flexibility inthe operations The combinations of technological and physical capabilities of the companies areexpected to deliver cost benefits to both GM and Fiat

Even though there was some cost and risk associated with the alliance, the successful alliancewas 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, Saaband 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 AmericanMarket 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 competitivestrength The cost reduction of the alliance is truly based on the synergy savings in theproduction and purchasing

(inderscience ,2002) The total expected savings at the fifth year of the alliance was 2 billion The figure shows thecost impact on the purchasing and power train The 60 % and 20 % of the cost contributes thepurchasing and power train respectively; together constitute the 80 % of the total manufacturingcost If the alliance could make a good saving in this 80 % of the manufacturing cost, The GMand Fiat could able to achieve the cost leadership in the market, that was the strategic planningbehind the alliance.(Camuffo,Giueseppro,2002, p.347)

3.4, LONG TERM AND SHORT TERM STRATEGIES FOR MARKET

PENETRATION

(mrdashboard, n.d.)

SHORT TERM STRATEGIES

Since the market share of both GM and Fiat had been reducing due to the high marketpenetration of new car makers and increased bargaining power of the buyers it was veryimportant for both the companies to do something to resist that Other forcing factors are the newmarket trends forward on the fuel efficiency, prices of gas, switch of customers to bus and trains

In that business environment it was very vital that the agreement rapidly delivers some positiveresults (Hoppe, et al ,2007)

The strategic alliance agreement is truly based on cost reduction and product qualityenhancement The company (GM- Fiat) planned to achieve these results rapidly by combinedpurchasing activities and centralized re organization of parts

The purchasing of joint venture was rationalized with the common design of different modelsand usage of common parts and systems in different models in the power train project

Ability to acquire some economics in purchasing raw materials increased, because of the greaterbargaining power in the market That was due to the fact that purchasing volume doubled

For example the re launch of the Italian Alfa Romeo in North America The New businessenvironment due to the agreement may enhance the opportunities and internal values of thisbrand and this Fiat can easily make use of a number of local production facilities.(Camuffo,Volpato,2000)

MEDIUM AND LONG TERM STRATEGIES

According to both GM and Fiat the long term objectives are more potentially important andstimulating of the joint activities The main reason behind this was, the companies will get achance to adjust the commercial and marketing traits on their individual brands For example, inthe case of GM models from Pontaic to Chevrolet, similarly for Fiat the brand under Alfa Romeoand Lanica This helps the companies to built models according to the local specifications

Since the cost leadership was one of the main objective under the alliance the scope ofeconomics are

• Commonality of components and materials for different models

• Integrated development of new technologies

• Study for the development of common parts and architecture

The long-term scope of technological advancement was also unavoidable like

• Information Communication Technology (ICT): This is an integrated system of bothmechanical and electronic technology for the efficient co-design activities and thedevelopment of common activities In spite of this ICT also helps in the data transfer andtesting of experimentations

The other strategic objective behind the alliance was the standardization of road handling andperformance for the developing of common platform The highest level of possible unificationbetween GM and Fiat may limit the brand characteristic of the individual brands For this thealliance focused on the development of common architecture strategic to obtain thedifferentiation on vehicles for satisfaction of customers Some important benefits of the commonarchitecture are

• Future vehicle design: knowledge base can be used to develop complex parts of futuremodels

• Advanced technology application in production process to achieve cost benefits