Porter 's Theory, Cost Leadership & Differentiation (General Motor)

GM (General Motors)

When defining a firm’s strategic intent we should focus on how the firm defines wining and the way it sustains this objective over time. In the case of GM the company has been going through a lot of changes in the past years, and the critical situation requires the redefinition (re: invention) of its winning strategy. The firm has to provide new operational objectives in order to change its current situation and provide some guidance and consistency over a period of time.

Here we offer a critique of Porter’s cost leadership and differentiation strategies, and a synthesis of the relevant literature. Porter suggests a low-cost position often requires high market share.  But how does a business get there first?  

Answer: market share leaders do it via a strategy of differentiation.

            Porter lists GM as a successful practitioner of cost leadership strategy.  However, the 1976-1982 quality-data shows that higher quality (differentiation) also played a key role in this success.

Mintzburg argues that Porter’s low-cost strategy is actually a differentiation strategy based on low price.

Porter Identifies High Market Share with Cost Leadership Strategy:

            Porter has employed the U-shaped curve in describing the link between profitability and market share.  According to this curve, the most profitable firms are the low-market share differentiated (e.g., Mercedes) or focused firms at one end, and the largest high-market share practitioners of cost leadership strategy at the other (e.g., General Motors).  Porter (1980: 41-42) says this curve is applicable to two important industries: the global automobile industry, and the U.S. fractional horsepower electric motor industry.  For lack of space we will focus here only on the auto industry.

            Porter cites General Motors—GM--(low cost) and Mercedes (differentiation) as the profit leaders in this industry.  But, GM’s success raises two important questions.  First, it is not quite clear, how GM achieved low cost?  Was it because of a persistent pursuit of cost leadership strategy, as suggested by Porter, or was low cost mainly the result of the high market share GM enjoyed, or both?

            It was GM’s CEO Alfred Sloan who came out with the pioneering strategy of “a car for every purse and purpose.”  He rationalized GM’s cars into five price-quality segments––from a Chevrolet, to a Pontiac, to an Oldsmobile, to a Buick, to a Cadillac.  In order to differentiate GM brands from their competition, he positioned each car line at the top of the price scale in its price-quality segment (Datta, 1996; Sloan, 1972: 63, chap. 4).

            For more than half a century GM dominated the U.S. auto industry like a colossus with a market share as high as 50% which made it a low-cost leader.  It was GM’s differentiation strategy that spelled the doom of Henry Ford’s Model T--and his cost leadership strategy--an event Porter (1980: 45) himself has acknowledged.  So, it is ironic that even the most prestigious handiwork--Cadillac—of the man wrote the book on market segmentation and differentiation failed the threshold of a differentiated product in Porter’s scheme of things.

            We would like to point out here that while multiple brands might have been a good strategy for GM in the past it is not so in today’s global competition in which the successful firms like Toyota and others concentrate only on a limited number of car lines (Womack, 2006).

DIFFERENTIATION STRATEGY FOR GM

            Differentiation strategies are not about pursuing uniqueness for the sake of being different. Differentiation is about understanding customers and how GM’s product can meet their needs. To this extent, the quest for differentiation advantage takes us to the heart of business strategy. The fundamental issues of business strategy:

            Who are GM’s customers? How does GM create value of them? And how does GM do it more efficiently than anyone else?

Because differentiation is about uniqueness, establishing differentiation advantage requires creativity- it cannot be achieved simply through applying standardized frameworks and techniques. This is not to say that differentiation advantage is not amenable to systematic analysis. As have observed, there are two requirements for creating profitable differentiation.

            On the supplyside, GM must be aware of the resources and capabilities through which
it can create uniqueness (and do it better than competitors). On the demand
side, the key is insight into customers and their needs and preferences. These
two sides form the major components of our analysis of differentiation.

            In analyzing differentiation opportunities, GM can distinguish tangible and intangible
dimensions of differentiation. Tangible differentiation is concerned with the observable
characteristics of a product or service that are relevant to customers’ preferences
and choice processes. These include size, shape, color, weight, design, material, and
technology. Tangible differentiation also includes the performance of the product
or service in terms of reliability, consistency, taste, speed, durability, and safety.

General Motors Leadership Doesn't Get It," Says Leadership Expert

"The automaker is paying the price for neglecting a key strategic driver: a leadership strategy."

Williamstown, MA December 1, 2005 -- Leadership expert, Brent Filson, says that the recent job cuts and reorganization of General Motors is not so much the result of marketplace dynamics but of the company's relentless leadership failings.

"The GM leaders who are driving the cuts are missing the point," says Filson, founder and president of The Filson Leadership Group, Inc., a corporate consultancy. "Sure, they have a cost cutting strategy. All manufacturers must be continuously reducing costs -- at least three to five percent a year. But what the GM leaders are neglecting is a strategy that works in tandem with cost cutting: That's a Leadership Strategy."

Filson says that General Motors like so many organizations lacking Leadership Strategies know how to develop and implement cost cutting strategies. "Cost cutting is not complicated. But you can't cost-cut your way to success. And that's where the Leadership Strategy comes in. A Leadership Strategy can help the company get great results, both in the bottom and top lines. Companies that don't have a Leadership Strategy, if not in name at least in effect, are missing out on colossal streams of revenue."

PEST Analysis of GM

POLITICAL

The economic downturn has caused governments to increase regulations and tighter policies. Most of these regulations are the result of increasing concerns for the environment and safety standards. Also the US Government recently bailed out General Motors by purchasing a 60% stake. Although the Government will not take any part in the management, GM would still have to report back to its largest shareholder.

ECONOMICAL

Due to the recent economic recession the value of money has decreased, consequently reducing the spending power of consumers. Therefore a decrease in demand for high value products such as vehicles can be seen. Also due to the credit crisis the American financial system was frozen (CNN), resulting in banks freezing all money lending facilities regardless of the credit ratings. Therefore potential customers will find it hard to get loans to purchase vehicles.

SOCIO-CULTURAL

 The modern society judges people by the vehicle they drive. Driving an expensive new car is an indication of wealth and social status. Therefore manufacturers tend to make use of this social perception and take advantage by catering and marketing to different social classes or different income level groups. Also, since recently more consumers are concerned about the environment and the concept ³going green´. This has paved way to a new emerging market, where manufacturers concentrate on producing environmental friendly vehicles such as hybrid vehicles.

TECHNOLOGICAL

The introduction of internet has affected the industry in a positive way. More consumers prefer looking for vehicles over the internet before purchasing. Also the internet proves to be a very effective marketing scheme. A sharp increase in demand for hybrid vehicles can be seen. These technologically advanced vehicles which run on electricity of other forms of eco-friendly gases are preferred by more consumers.

SWOT Analysis

In order to assess the strengths, weaknesses, threats and opportunities GM faces a SWOT analysis has been conducted.³A SWOT analysis summarizes   the key issues from the business environment and the strategic capability.

STRENGTH

 Although GM has lost most of its market share recently, it remains to be one of their main strengths. They are still very competitive with about 20% market share in the USA. Also GM has a growing market in China, making it the second biggest automaker in China (NY times).The On Star satellite technology which comes standard in all GM vehicles is another advantage GM has. This technology enables easy tracking of the vehicle in case it is stolen. In production GM has economies of scale, making it possible to produce at a lower cost than competitors. Their global network of suppliers is another added advantage over their competitors.

WEAKNESSES

The bureaucratic organizational structure is GMs main weakness. The structure is vertically integrated causing lack of communication and slow feedback between the top management and employees.GM has always been a step behind competitors when it comes to alternative fuel vehicles. With the trend now moving towards hybrid and eco-friendly vehicles, GM is yet to come up with a competitive vehicle. Furthermore in a time of high prices of Oil most consumers prefer Japanese and Korean fuel efficient vehicles to GMs gas guzzling trucks and SUVs. Also the constant labour union problems and high healthcare expenditure proves to be another weakness of GM (healthcare).

OPPURTUNITIES

 As mentioned earlier, there is an increased demand for low cost, fuel efficient vehicles which are eco-friendly. This creates an opportunity for GM to enter a new and growing segment of the market. GM has already made plans to unveil its first hybrid vehicle, Chevy Volt, and have unveiled the US version of the fuel efficient sedan, the 2011 Chevrolet Cruze (GM website).Recently GM was able to increase their market share in China, enabling them to become the second biggest automaker (NY times). This shows the potential for investing in growing markets. At present, many potential consumers are more interested in the attractiveness and features on the vehicle. This taste in vehicles tends to change very frequently. By knowing what consumers want and producing accordingly, GM has a chance of regaining most of its lost glory.

THREATS

 A major threat facing GM is the rising fuel prices. Since most of GMs vehicles are not fuel efficient, they tend to lose demand at times like these. The increasing healthcare expenditure can also be categorized as a threat. GM is responsible for providing healthcare insurance for more people than any other company in the USA .Therefore this raising expense is a burden to compete with other rivals (Washington Post).The past decade saw Toyota claim the title of the largest automaker overtaking GM. This growth of competitors is also a major threat to GM. They also face stiff competition from Ford, and other Japanese and Korean companies.