General Motors one of the world’s largest manufacturers of vehicles, employs over 200,000 people and does business in more than 120 countries. Its employees work in 396 facilities, they speak more than 50 languages and touch 23 time zones. After operating for over a hundred years, in 2008, GM almost ran out of cash. The company received a loan from the U.S. Treasury and filed for bankruptcy to restructure its operations. On November 18, 2010, GM re-emerged with an initial public offering for 20B US Dollars. With bankruptcy protection, GM restructured and shed unprofitable product lines, manufacturing plants, suppliers and dealers and renegotiated labor agreements. How can it be that a company with such history and economic power went bankrupt in a matter months? Will GM be around for the next hundred years?
Despite its restructuring, General Motors remains an inefficient organization due to the misalignment between its operating and business models. Over the decades, GM moved towards an operating model that is centralized and shared, and highly effective. Operating directors report directly to headquarters and indirectly to business unit presidents. This structure allows best practices and learnings to disseminate throughout the global organization. As a result, processes/goals/incentives from China to the United States are common. Everyone is aligned, all the way from procurement of materials to assembly to quality controls. Additionally, high costs like research & development and intellectual property are shared amongst all business units. Furthermore, the company ensures the operating model is carried throughout the value chain, all the way from its suppliers to its dealers. On the contrary, GM’s business model is fragmented and decentralized. Each business unit continues to operate independently using different business systems and different processes. For example, each unit has its own way of filing expense reports, paying vendors for services, and on boarding employees. Instead of using its buying power and economies of scale, each unit sets up individual contracts for services and indirect materials. In the past, GM ‘attempted’ to implement a shared service concept in limited functions like accounting and most business units refused to adopt the model. Furthermore, the services were outsourced to a third party provider who performed each activity as instructed by the business unit with no incentive to innovate and create efficiencies.
Due to the misalignment, GM continues to lag behind its competitors as the business model fosters slow decision making and additional costs. In 2014, GM had an EBIT margin of 8% compared to Toyota with 15.5%. If the operating and business models are better aligned, this could create an advantage as every dollar saved can be reinvested into developing, manufacturing, and selling the world’s best vehicles. Back in the 90s, General Electric successfully implemented a global business service (GBS) organization which later spun off as an independent company, Genpact. In 2013, GM similarly created a GBS organization, to streamline the back office activities like HR and facility management and expects to reduce administrative costs by 30% over the next few years and improve EBIT margin to 10%. GM placed a manufacturing exec, who played a critical role in transforming the operating model, to lead this initiative. Bringing the back office operations under a common leader will align business units to make decisions in the best interest of the broader company. As, well having common systems/processes will improve communication across business units and allow senior management to make quick decisions. In the ever changing environment, companies like GM need to become more lean and have the ability to make quicker business decisions if they want to be around for the next 100 years. As a former employee, I believe GM is in the right direction but it has a long way to go.