Ford and GM A Comparison of 2 Fortune 500 Companies

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This paper compares and contrasts two top ten Fortune 500 automotive companies: Ford Motor Company (Ford) and General Motors Corporation (GM). Through a series of strategic decisions and initiatives, Ford was able to survive the 2008-2009 global economic crisis. General Motors had similar opportunities to make strategic changes but remained entrenched in their approaches and strategy. The result was General Motors filed for bankruptcy, and had to ask the US and Canadian governments for loans in order to restart business.

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Ford and GM A Comparison of 2 Fortune 500 Companies

  1. 1. IST 614 – Ford and GM Final Project Leo de Sousa Comparison Study of Two Fortune 500 Companies Ford Motor Company and General Motors Corporation Leo de Sousa – IST 614 December 9, 2011 1
  2. 2. IST 614 – Ford and GM Final Project Leo de SousaAbstractThis paper compares and contrasts two top ten Fortune 500 automotive companies: FordMotor Company (Ford) and General Motors Corporation (GM). Through a series of strategicdecisions and initiatives, Ford was able to survive the 2008-2009 global economic crisis.General Motors had similar opportunities to make strategic changes but remained entrenchedin their approaches and strategy. The result was General Motors filed for bankruptcy, and hadto ask the US and Canadian governments for loans in order to restart business. The “new” GMis now owned mostly by the governments of the United States and Canada and the United AutoWorkers Pension Trust; essentially GM is a division of the US Department of the Treasury andbeing run by a government appointee. Ford remained independent, survived the crisis and is incontrol of its own destiny with profitable plan for the future. Ford is led by a forward thinkingleaders in Bill Ford Jr and Alan Mulally. This paper explores the differences between thecompanies and draws some conclusions about why Ford survived and why GM failed.The paper begins by introducing each company, providing basic corporate information, somedetails about the industry they operate in, their customers and what resources they rely andcompete for. The subsequent chapters describe each company’s approach to StrategicPlanning, Organizational Design, Finance, Social Responsibility and Innovation.The conclusion summarizes the key points in each chapter and presents some differences thatmay have contributed to the very different outcomes as each company worked through theglobal economic crisis of 2008-2009 and looks towards the future. 2
  3. 3. IST 614 – Ford and GM Final Project Leo de SousaChapter 1 – An Introduction to Ford and General MotorsFord was founded by Henry Ford in 1903 and became the number one US automaker with theproduction of the Ford Model T car in 1908. General Motors was founded by William “Billy”Durant in 1908. GM added many other auto brands over time and became the largestautomotive company in the world. Ford began public trading in 1956 on the New York StockExchange and ranked third on the Fortune 500 in the same year. In 1956, General Motors wasthe number one ranked company on the Fortune 500 and traded on the New York StockExchange. (CNN Money, 2011) In the most recent publication of the Fortune 500 for 2011, Fordranked tenth and General Motors ranked eighth.Below are descriptions of each company from their respective 2010 Annual Reports. “FordMotor Company, a global automotive industry leader bases in Dearborn, Michigan,manufactures or distributes automobiles across six continents. With about 164,000 employeesand about 70 plants worldwide, the company’s automotive brands include Ford and Lincoln.The company provides financial services through Ford Motor Credit Company.” (Ford MotorCorporation, 2010, p. 1)“The new General Motors has one clear vision: to design, build and sell the world’s bestvehicles. Our new business model revolves around this vision, focusing on fewer brands,compelling vehicle design, innovative technology, improved manufacturing productivity andstreamlined, more efficient inventory processes. The end result is products that delightcustomers and generate higher volumes and margins – and ultimately deliver more cash toinvest in our future vehicles.” (General Motors Corporation, 2010, p. 6) 3
  4. 4. IST 614 – Ford and GM Final Project Leo de SousaComparison Table: Ford Motor Company and General Motors CorporationCorporate Information Ford Motor Company General Motors CorporationFounder Henry Ford William “Billy” DurantYear Founded June 16, 1903 Sept 16, 1908Headquarters Dearborn, Michigan, USA Detroit, Michigan, USACEO Allan Mulally Daniel F. AkersonDivisions Automotive and Financial Automotive and Financial Services ServicesGlobal Reach North America, South North America, South America, Europe, Asia Pacific, America, Europe, Asia Pacific, Africa AfricaBrands Ford and Lincoln (minor Cadillac, Chevrolet, Buick and ownership in Mazda) GMC, Opel, Vauxhall, Daewoo, Izuzu, Holden, FAW, GMC, Jiefang, Wuling, BaojunNumber of Employees 164,000 202,000Worldwide Wholesale Unit 5,524 8,390Volume (thousands)Sales and Revenues (millions) $128,954 $135,592Net Income/(Loss) (millions) $6,561 $4,668Diluted Net Income/Share $1.66 $2.89Debt (millions) $19,100 $17,018Publicly Traded On New York Stock Exchange: F New York Stock Exchange: GM Toronto Stock Exchange: GMMPublicly Traded Date June 1, 1955 June 10, 2009*Outstanding Shares (millions) 3,707 1,600Fortune 500 Rank 10 8* General Motors Corporation declared bankruptcy and was reformed as a division of the US Department of theTreasuryBoth Ford’s and General Motors’ main business is building automobiles for a globalmarketplace. Both companies forecast over 70% of sales coming from global markets versusNorth America. Their product mix includes electric cars, hybrid vehicles, automobiles, light and 4
  5. 5. IST 614 – Ford and GM Final Project Leo de Sousaheavy duty trucks. Both companies also have financial services that provide loans forpurchasing automobiles as well as extensive lease services for corporate automobile fleets.On June 1, 2009, General Motors Corporation filed for bankruptcy. A “new” General MotorsCorporation was formed with the US Treasury, the Canadian Federal Government and the UAWRetiree Medical Benefit Trust as the major shareholders. The “new” GM founding date wasJune 10, 2009. Ford Motor Company was able to weather the economic crisis and did not haveto ask for government bailouts to continue their over 100 years of business.The contrasting outcomes are a result of how each company positioned themselves in the yearsleading up to the significant environmental change caused by the 2008-2009 global economiccrisis. Both companies compete for customers, employees, suppliers, financing and resourcesfor manufacturing. Ford specifically cites the following competition factors: excess capacity,pricing pressure, commodity and energy price increases, consumer spending and credit,increasing sales of smaller vehicles, currency exchange rate volatility and other factors likegovernment debt and interest rates. (Ford Motor Corporation, 2010, p. 24) Similarly, the “new”GM notes the following competition factors: instability in the global economic environment,automotive price competition, relatively high cost structure, unfavorable commodity prices,unfavorable regulatory and tax environments and a challenging foreign currency exchangeenvironment. (General Motors Corporation, 2010, p. 241)Ford made four key strategic decisions leading up to the 2008-2009 economic crisis. FormerCEO and Chairman Bill Ford Jr. brought in an outsider to lead the company with no experiencein the automotive industry. Ford mortgaged all its assets to secure a large cash cushion to fund 5
  6. 6. IST 614 – Ford and GM Final Project Leo de Sousathe redesign of the company while interest rates were low. Ford renegotiated its contractswith its union workers reducing labor costs significantly. Finally, Ford took a consolidationapproach by selling off non-core brands. “In recent years, we have eliminated a number ofbrands from our portfolio in order to devote fully our financial, product development,production and marketing, and sales and services resources toward further growing our coreFord brand and enhancing Lincoln. We have sold Aston Martin, Jaguar and Land Rover andmost recently Volvo.” (Ford Motor Corporation, 2010, p. 25)General Motors had similar opportunities to get advice from outside of their entrenchedautomotive industry, executive culture. GM chose not to accept or follow the advice. GMinsisted that their large number of automotive brands was the correct mix for the companywhile every other automotive maker was consolidating brands. Finally, GM relied on zeropercent financing and cash incentives to boost sales levels due to stagnant wages since 2001.The result for automakers is to “sell vehicles only by luring individuals into their showroomswith near suicidal incentives.” (Bloomberg, 2009) All the above practices were done away withwhen GM moved into bankruptcy. General Motors was forced to make the changes that Forddid in order to gain government loans to restructure and restart their business.Ford continues to capitalize on its success by incorporating their ability to survive with nogovernment help into their marketing campaigns. They appeal to American patriotism.General Motors will continue to have the stigma of failing as a corporation and causingsignificant damage to the US economy, people’s lives and requiring tax payers to bail them out. 6
  7. 7. IST 614 – Ford and GM Final Project Leo de SousaChapter 2 – Strategic PlanningStrategic Plans are “overall company plans that clarify how the company will serve customersand position itself against competitors over the next two to five years.” (Williams, 2011, p. 86)Both Ford and GM have strategic plans that arose from the challenges of the 2008-2009economic crisis. Strategic plans incorporate vision, mission, tactical plans, and management byobjectives, operational plans, standing plans and single use plans. (Williams, 2011, p. 86)Ford’s strategic plan is branded “One Ford – One Team, One Plan, One Goal. One Ford expandson the company’s four-point business plan for achieving success globally. It encourages focus,teamwork and a single global approach, aligning employee efforts toward a common definitionof success and optimizing their collective strengths worldwide.” (Ford Motor Corporation, 2010)“One Team – people working together as a lean, global enterprise for automotive leadership, asmeasured by: Customer, Employee, Dealer, Investor, Supplier, Union/Council and CommunitySatisfaction. One Plan – aggressively restructure to operate profitably at the current demandand changing model mix, accelerate development of new products our customers want andvalue, finance our plan and improve our balance sheet, work together effectively as one team.One Goal – an exciting viable Ford delivering profitable growth for all.” (Ford Motor Company,2011) The key observation is that Ford is the maker of their own destiny and that they continueto focus on people first in their strategic thinking. Ford’s approach matches Drucker’s conceptof Management by Objectives guidance of “each manager, from the “big boss” down to theproduction foreman or the chief clerk, needs clearly spelled-out objectives.” (Drucker, 2001, p.115) Ford’s message is clear that there is one team that will execute one plan to achieve one 7
  8. 8. IST 614 – Ford and GM Final Project Leo de Sousaoverall company goal. Ford’s ability to fund their way through the economic crisis places it in astrong strategic position in the market place.General Motors articulates its strategic plan as “the strength of the new GM: a new businessmodel centered on our vision of designing, building and selling the world’s best vehicles; aleader’s leverage to economic growth in key mature and emerging markets worldwide; and anew balance sheet with a significantly improved risk profile.” (General Motors Corporation,2010, p. 3) One other key document from the “new” GM is the General Motors Corporation2009-2014 Restructuring Plan from Feb 17, 2009. The plan articulates how GM will manage itspath out of bankruptcy. Some of the key requirements are: “product mix and cost structurecompetitiveness, competitive labor cost agreement, compliance with federal fuel efficiency andemission regulations, domestic manufacture of Advanced Technology Vehicles, rationalizationof cost, capitalization and capacity, financial viability (positive NPV) and repayment of federalloans.” (General Motors Corporation, 2009, p. 6) In comparison to Ford, GM’s strategic planapproach resembles what Drucker calls “Management by Drives”. GM is mandated to focus onimproving its bottom-line as a condition of being able to restructure with federal loans.General Motors was forced to adopt the strategies outlined above due to its failure to remainprofitable. Until all conditions of the restructuring agreement are complete in 2014, GM will beforced to struggle with “all emphasis on one phase of the job to the inevitable detriment ofeverything else.” (Drucker, 2001, p. 117) 8
  9. 9. IST 614 – Ford and GM Final Project Leo de SousaOverall the automotive industry continues to face significant threats and risks to profitability.The table below contains both threats and opportunities from both company’s 2010 AnnualReports. (Ford Motor Corporation, 2010, p. 24) (General Motors Corporation, 2010, p. 241)Threats Opportunities CommentaryExcess Capacity Increasing Sales of Smaller Cars Both Ford and GM were caught over producing trucksAutomotive Pricing Pressure Concentrate on Fewer Brands Ford did this sooner and GM was forced to do thisCommodity and Energy Prices Energy Diversity and Efficiency GM killed its electric car program in mid 2000’s and is playing catch upConsumer Spending and Credit Manufacture and Sell Vehicles Both companies recognize Globally growth of 70% in global salesCurrency Exchange Rates Review of business practices Ford is focusing on this for business planningGlobal Economic Instability – Use of facts and data to make Ford explicitly references thisDebt and Interest Rates decisions capabilityHigh Cost Structures Partnership and People Focus Ford specifically mentions engagement with customersUnfavorable Regulatory/Tax Bottom-line focus GM is specifically tasked toEnvironments accomplish thisIntroduction of Cheap Cars from Both companies are watchingChina this closely for impactsWhile both automotive manufacturer’s describe optimism for the coming few years, there aresignificant challenges. Based on a Bloomberg Businessweek report, the automotive industry isfacing two opposing factors. There are approximately 250 million cars on the road in NorthAmerica today and they will need replacing at some point. This suggests that there will be anupturn in new automobile purchases. High unemployment, stagnant and falling wages andpoor consumer credit continue to plague the economy and automobile sales. “When incomedisappears as quickly as it has in the last eight years, one of the first purchases to be deferred isa new automobile.” (Bloomberg, 2009) 9
  10. 10. IST 614 – Ford and GM Final Project Leo de SousaChapter 3 – Organizational DesignOrganizational Structure defined as “the vertical and horizontal configuration of departments,authority and jobs within a company”. (Williams, 2011, p. 159) Geographicdepartmentalization structures a company into separate work units who do business inparticular geographic areas. (Williams, 2011, p. 163) Functional departmentalization organizeswork into units that are responsible of business functions. (Williams, 2011, p. 161) Productdepartmentalization organizes work into units responsible for producing a particular product orservice. (Williams, 2011, p. 162)Ford Motor Company is organized in a combination of geographic, functional and productdepartmentalization. Ford’s two operating sectors are Automotive and Financial Services. TheAutomotive sector is divided into the following segments: Ford North America, Ford SouthAmerica, Ford Europe and Ford Asia Pacific Africa. Each segment contains all functions ofdevelopment, manufacturing, distribution, service and parts. Until recently (when Forddivested these segments), Ford also had product departments for Mazda, Volvo and JaguarLand Rover. The Financial Services sector has two segments: Ford Credit and Other FinancialServices. These two segments demonstrate functional departmentalization. William Ford Jr isthe Chairman of the Board and Alan Mulally is the President, CEO and Director. Each segment(geographic, functional and product) has a Vice President who reports up to the President andCEO. There are 19 people in the Ford Executive Officer Group. (Ford Motor Corporation, 2010,p. 5) 10
  11. 11. IST 614 – Ford and GM Final Project Leo de SousaGeneral Motors has a very similar organizational structure as Ford. GM is also organized in acombination of geographic, functional and product departmentalization. Unlike Ford, GMreports all 5 of its segments together, mixing automotive and financial segments of thecompany. The four automotive segments are: GM North America, GM Europe, GMInternational Operations, and GM South Americas. Each automotive segment is responsible forall operations in their geography. General Motors Financial Company handles the financialbusiness for GM. GM has one product segment focusing on GM Daewoo. This segmentreports up through GM International Operations. GM is led by Daniel Akerson who holds thejoint roles of Chairman and CEO. This differs from the split leadership at Ford between Bill Fordand Alan Mulally. There are 18 people on General Motors’ Management team.With each company having very similar organizational structures, we can infer that this was nota contributing factor to explain why GM went bankrupt and Ford did not. One significantdifference between the companies is at the senior leadership level. In 2006, Bill Ford decidedto break from conventional automotive industry practice and hired Alan Mulally from Boeing.Mulally is an engineer by training and had a long and successful career at Boeing. (US News,2010) He left Boeing as the Executive Vice President of The Boeing Company and the Presidentand CEO of Boeing Commercial Airplanes where he is credited for BCA’s turnaround. (FordMotor Company, 2011) Bill Ford commented on the collaborative relationship he has withMulally. “I talk to Alan many times a day, every day. The way we like to work, our styles arevery similar, we don’t have formal meetings, we bounce back and forth between each other’s’offices … The other thing is that it gives each of us someone to talk to.“ (The Urban WallStreet,2011) In November, 2006 Mulally is credited with the bold move of mortgaging all of the 11
  12. 12. IST 614 – Ford and GM Final Project Leo de Sousacompany’s assets to give Ford “a cushion to protect for a recession or other unexpected event.”(Vlasic, 2009) This cushion proved to be the saving grace for Ford when GM had to declarebankruptcy. This action fits with Collins and Porras’ view of Ford as a “visionary” company andtheir definition of a “Big Hairy Audacious Goal – BHAG” (Collins & Porras, 2002, p. 94)Meanwhile, GM needed the Federal government to fire the “old guard” GM Executivesincluding then CEO Rick Wagoner. (US News, 2010) At the time of the GM restructure, DanielAkerson was appointed to the board of directors representing the US Treasury department. InSeptember 2009, Akerson was named CEO and became Chairman of the Board in January 2011.Akerson has an expertise in finance with a diverse background in telecommunications,government and consulting but no experience in the automotive industry. Interestingly, GMhad a similar opportunity to take advantage of an outsider’s view in 2005, when Jerry York wasappointed to the GM Board. In 2006, York detailed a list of fixes that he felt were necessary forGM to remain competitive. He called it a “clean sheet approach to the business”. (Carty, 2009)York was ignored and ironically, the bankruptcy proceedings implemented the changes herecommended three years earlier. Perhaps this would have saved GM from bankruptcy.Peter Drucker provides some insight into GM’s failure to heed Jerry York’s advice. “Basicassumptions about reality are the paradigms of social science, such as management.” and “Thediscipline’s basic assumptions about reality determine what it focuses on.” (Drucker, 2001, p.69) These quotes describe the mindset of GM executives who stuck to their assumptionsabout their industry and in the economy they worked, in spite of evidence that their business 12
  13. 13. IST 614 – Ford and GM Final Project Leo de Sousamodels were not sustainable. “The assumptions also largely determine what is beingdisregarded or is being pushed aside as an “annoying exception”.” (Drucker, 2001, p. 69)In GM’s case, they focused on sales volumes without realizing that each sale was at a loss dueto the zero percent financing and cash incentive schemes used. They insisted their largenumber of brands was appropriate. This quote is an example of GM’s entrenched mindset “Thesymbol of GMs swing too far toward trucks is the high-end Hummer. GM launched the big SUVin 2003, the compact H3 in 2005. As buyers edged away from trucks, then fled as fuel prices hitrecords in 2008, GM wound up with pricey models that not only didnt sell, but also gave it anenvironmental black eye. Some of the heftiest Hummer H2s barely managed 10 miles pergallon.” (Carty, 2009) 13
  14. 14. IST 614 – Ford and GM Final Project Leo de SousaChapter 4 – FinanceThis section analyzes Ford and General Motors’ 2010 consolidated balance sheets based on fourtypes of key ratios: liquidity, debt, profitability and investment. This report does not make anyrecommendations about whether Ford or General Motors is a better investment. Investing incompanies is a personal decision based on the investor’s personal risk and investment profile.The financial ratios listed in the table have commentaries that explain the differences betweenFord and General Motors.Table of Values from Ford and GM 2010 Financial Statements (Ford Motor Company, 2010)(General Motors Corporation, 2010) Ford Financial = 76%, GM 135,555 63,985 Ford General Motors Commentary Financial = 17% GM has higher current liabilities Current Assets 40,935 54,516 than Ford Ford Financial = 78%, GM Current Liabilities 113,028 45,842 Financial = 20% 35,771 26,616 Ford has more cash than GMCash + Receivables Ford Financial = 83%, GM Cash 102,140 4,630 Financial = 65% *GMs debt was forgiven in bankruptcy Total Debt 165,793 138,898 Ford has more assets than GM 166,435 101,739 Ford has more liabilities than GM Total Assets (642) 36,180 Ford Liab>Assets, GM Assets>Liab Total Liabilities 6,561 4,668 Ford more profitableShareholder Equity 3,449 1,500 Ford has 2x as many shares Net Income 1.90 3.11 GM has fewer shared = higher EPS Number of SharesEarnings per Share 1.57 21.96 GM has less debt than Ford Book Value per 11.74 25.39 GM has higher share price Share 200 Day Moving Ford has larger Market 40,491 38,085 Average Price Capitalization Market Cap 14
  15. 15. IST 614 – Ford and GM Final Project Leo de SousaTable of Financial Ratios Calculated from Ford and GM 2010 Financial Statements (FordMotor Company, 2010) (General Motors Corporation, 2010) Ford General Motors Commentary Ford has more cash to pay down Liquidity 3.311 1.174 debtCurrent Ratio =Current Assets/ Ford has more cash to pay downCurrent Liabilities 2.761 0.841 debtQuick Ratio = Cash+ Receivables / Ford has more cash to pay downCurrent Liabilities 0.874 0.488 debtCash Ratio = Cash /Current Liabilities Ford is more financially leveraged Debt Ratios 1.004 0.732 than GMDebt Ratio = Total Liabilities / Total Ford is more financially leveraged Assets 0.616 0.033 than GMLong Term DebtRatio = Total Debt/ Total Assets Ford is more financially leveraged -259.245 2.812Debt to Equity than GMRatio = TotalLiabilities /Shareholder Equity Ford earned more income per Profitability 0.040 0.034 assetReturn on Assets =Net Income / TotalAssets GM has a positive ROE, Ford had -10.220 0.129 negative Shareholder EquityReturn on Equity =Net Income /Shareholder Equity Investment Investors are willing to pay more 6.172 8.159 for $1 of GM earnings than they are Price Earnings of $1 of Ford earnings Ratio = Market Value Per Share /Earnings per Share Ford and GM do not offer 0 0 dividends Dividend Yield = Dividends /Earnings per Share Indicates that the market considersPrice to Book Ratio 7.478 1.156 Ford overpriced compared to its= Market Value Per book value compared to GM Share / Balance Sheet Value Per Share 15
  16. 16. IST 614 – Ford and GM Final Project Leo de SousaIn the liquidity category, Ford has more debt than GM because Ford chose to mortgage theirassets to create a cash cushion which helped them survive the 2008-2009 economic crisis. Thefinancial ratios show that Ford has more liquidity than GM and is better able to pay down itsdebt. In the debt category, General Motors has very little debt as they were forgiven their debtwhen during the bankruptcy. There will be tight restrictions on GM in the next few years asthey must meet their restructuring plan with the federal governments of the United States andCanada. In the profitability category, Ford has more income than GM but GM had a higherpositive return on equity. Ford’s return on equity is negative as they have more liabilities thanassets. This fits with Ford working to pay down its “mortgage the company” strategic plan. Inthe Investment category, investors are willing to pay more per dollar of GM earnings over Ford.Neither company currently offers dividends to investors. The price to book ratio indicates thatthe market believes Ford to be over priced per share compared to GM. Conservative investorsmay see General Motors as the safer investment (lack of debt) and perhaps that is why they arewilling to pay more for their shares. Value investors may choose Ford as they have a strongcash flow, have significantly reduced costs and are actively paying down their debt which willfree up more capital to invest in the company.Finally, if the analysis done by Jim Collins and Jerry Porras holds true then visionary companieslike Ford Motor Company will continue to outperform comparison companies like GeneralMotors over the long term by six times. (Collins & Porras, 2002, pp. 5-6) 16
  17. 17. IST 614 – Ford and GM Final Project Leo de SousaChapter 5 – Social ResponsibilitySocial responsibility is “a business’s obligation to pursue policies, make decisions, and takeactions that benefit society”. (Williams, 2011, p. 72) Social responsibility may arise from socialimpacts of the institution and “deals with what an institution does to society”. (Drucker, 2001,p. 51) Or they may arise from existing societal problems and “is concerned with what aninstitution can do for society”. (Drucker, 2001, p. 51) Another way to look at this involves twoperspectives of social responsibility. The first is the Shareholder model where “theorganization’s overriding goal should be to maximize profit for the benefit of shareholders”.(Williams, 2011, p. 73) The second model is the Stakeholder model where “management’smost important responsibility, long-term survival, is achieved by satisfying the interests ofmultiple corporate stakeholders.” (Williams, 2011, p. 74) Most successful companies blendthese two approaches as they conduct business.Ford creates an annual Sustainability report and has Susan M. Chischke, Ford’s Group VicePresident, Sustainability, Environment and Safety Engineering appointed to oversee thesefunctions. Ford focuses on three areas: Economy, Environment and Society. (Ford MotorCompany, 2011) Bill Ford Jr. states “Creating a strong business and building a better world arenot conflicting goals – they are both essential ingredients for long-term success.” (Ford MotorCorporation, 2010, p. 19) Ford Volunteer Corps is a permanent part of the Ford Fund andCommunity Services. The Corps is made up of employees and retirees and in 2010, theyvolunteers over 112,000 hours. Ford has been a national sponsor for breast cancer preventionand research for 16 years and raised over $100M of the cause. Ford tried to live up to its 17
  18. 18. IST 614 – Ford and GM Final Project Leo de SousaStakeholder Model in the late 1940’s and early 1950’s by introducing seatbelts in their cars.Unfortunately, sales dropped and they reverted to the Shareholder Model and pulled the carsfrom production. (Drucker, 2001, p. 52) Another Ford example, demonstrates that focusing onthe Stakeholder Model actually provided Stakeholder benefits. In 1913, Ford announced thatthey would pay $5 per day wage for skilled workers. This tripled their salary costs overnight.After implementing this program, Ford actually saw labor costs go down as they were able toretain skilled workers (they used to have to hire 6 workers for every 1 job annually due toturnover). This established Ford as the dominant automaker and allowed them to deliver moreprofit per car sold. (Drucker, 2001, pp. 56-57)General Motors created the GM Foundation as the source of their social responsibility work.GM focuses on Education, Health and Human Services, Environmental and Energy andCommunity Development. (General Motors Corporation, 2011) The GM Foundation hasdonated more than $350M to their programs. Unlike Ford, GM does not appear to put as muchfocus on social responsibility. There is no Vice President position and unlike Ford they do notlink the economy into their plan for corporate responsibility. (General Motors Corporation,2011) With the new restructuring of General Motors, it will be interesting to observe if there ismore emphasis on the Shareholder model (short term) over the Stakeholder model (long term).The company is being run by a political appointee and is essentially a division of the USDepartment of the Treasury. This puts significant oversight and focus on repaying thegovernment loans given to General Motors over planning the company’s future. 18
  19. 19. IST 614 – Ford and GM Final Project Leo de SousaDrucker wrote that management’s social responsibility was to “not knowingly to do harm.”(Drucker, 2001, p. 65) In the years leading up to the 2008-2009 economic crisis, Ford and GMbehaved in two very different ways in responding to the expectations of their stakeholders.Social responsiveness strategies can be placed on a continuum from doing nothing to doingmuch. There are four main strategies – reactive, defensive, accommodative and proactive.(Williams, 2011, pp. 77-78)Ford, under Mulally’s leadership, put itself in a position to weather the economic crisis byensuring it had secured funds in advance. They took a proactive strategy by looking at theirbusiness, identifying which areas were harming long-term success and came up with proactiveapproaches like reducing the number of automotive brands, selling off ownership in non-coreassets and making good deals with their unions. (Bloomberg, 2007) Ford is a clear example oftaking a proactive social responsiveness strategy and succeeding.General Motors, on the other hand, continued to insist its business model was sound includingkeeping all its automobile brands while other manufacturers were rapidly downsizing. (Vlasic,2009) GM killed its electric car program and sold off its financial unit GMAC (which brought inmore profit than the automotive segment). (Carty, 2009) These actions cause significant harmto GM stockholders, employees and the US and Canadian taxpayers. The actions of the GMexecutive team demonstrate a reactive social responsiveness strategy which ultimately endedin bankruptcy. 19
  20. 20. IST 614 – Ford and GM Final Project Leo de SousaChapter 6 – InnovationOrganizational innovation is defined as “the successful implementation of creative ideas inorganizations.” (Williams, 2011, p. 119) Both Ford and General Motors have a history ofinnovation. Henry Ford’s integration of the assembly line, interchangeable parts to create a lowcost automobile, the Model T was the first in a long history of innovations. Unfortunately forFord, the success of the Model T led to complacency within the company and by Henry Ford.General Motors was able to capitalize on Ford resting on their success. GM introducedinstallment selling, used car trade-ins, closed car models and annual model changes – andcolors other than black! (Harvard Business Review, 2011) Throughout their shared histories,each company followed S-curve patterns of innovation. The S-curve pattern of innovation is apattern of technological innovation characterized by slow initial progress, then rapid progressand then slow progress again as a technology matures and reaches its limits.” (Williams, 2011,p. 120)Research and Development Spending (millions of USD)Company 2008 2009 2010Ford $7,100 $4,700 $5,000General Motors $8,012 $6,051 $6,962Both companies also struggled with introducing innovation into their products. Ford tried, inthe late 1940’s and early 1950’s, to introduce seatbelts in their cars. Unfortunately, salesdropped and they pulled the cars with seatbelts from production. (Drucker, 2001, p. 52) 20
  21. 21. IST 614 – Ford and GM Final Project Leo de SousaGeneral Motors started a small electric car program in the late 1990’s called the EV1. “It was apublic relations debacle when the test cars had to be reclaimed and GM then scrapped them.”(Carty, 2009) GM CEO Wagoner killed the program and set GM back almost 10 years. Finally inDecember 2010, GM launched the Chevy Volt electric car. “Al Benchich, a retired unionpresident, says with the failure of the EV1, GM squandered the opportunity to keep the U.S. adominant manufacturing force in a green era.” (Carty, 2009)Ford specifically mentions innovation as part of their “improved safety and quality” focus. Fordintroduced inflatable seat belts and curve control as new innovations in the Explorer. Ford alsouses simulation technology to simulate employees on the assembly line to provide data topredict and eliminate issues. (Ford Motor Corporation, 2010, p. 11)General Motors mentions innovation in their description of “The Road Ahead”. Theyspecifically mention the Volt, electric car, and the innovations in the automotive battery,electric power control as well as in “processes to accelerate the pace of innovation across thecompany.” (General Motors Corporation, 2010, p. 4)Drucker details four entrepreneurial strategies. The first “Being fustest with the mostest”describes how GM took the lead in introducing information technology into their vehicles over15 years ago. (Drucker, 2001, p. 161) This strategy is also known as “first to the market”.OnStar provides “in-vehicle safety, security, communication and convenience services … to oversix million subscribers” globally. OnStar is an added cost, bolt-on feature available for GMvehicles. (General Motors Corporation, 2011) GM pioneered this technology and is the industryleader. 21
  22. 22. IST 614 – Ford and GM Final Project Leo de SousaFord used a different strategy that Drucker calls “Hit them where they ain’t”. (Drucker, 2001, p.165) Ford is demonstrating being a “conservative innovator” and a “creative imitator” with itspartnership with Microsoft Corporation to create “Sync” and MyFord Touch SmartTechnologies. A “conservative innovator” is conservative and “they are not risk-focused; theyare opportunity-focused”. (Drucker, 2001, p. 279) Creative imitation “describes a strategy thatis “imitation” in substance. What the entrepreneur does is something somebody else hasalready done. But it is “creative” because the entrepreneur applying the strategy …understands what the innovation represents better than the people who made it and whoinnovated”. (Drucker, 2001, pp. 165-166) Ford took the features of OnStar, enhanced themwith newer technology from Microsoft and made changes to their vehicle design to make thetechnology a “part of the car” instead of a bolt-on. (Ford Motor Company, 2010, p. 12) Fordhas been successful in imitating and improving on GM OnStar’s leadership position. 22
  23. 23. IST 614 – Ford and GM Final Project Leo de SousaConclusionFord Motor Company and the “new” General Motors Corporation will continue to be largedrivers of the economy especially in North America. Both companies employ large numbers ofpeople, conduct business globally and are looking at alternative sources of fuel to power thecars of the future. Ford made four key decisions that contributed to helping them survive theeconomic crisis in 2008-2009. They first brought in an outsider to lead the company as CEO.Alan Mulally came from Boeing and was able to make changes that Chairman Bill Ford Jr couldnot. Mulally implemented a BHAG by mortgaging the assets of the company to build a $23Bcash cushion to restructure and help the company survive the downturn. This proved to be astroke of genius even when industry analysts saw it as a sign of desperation. Mulally alsorenegotiated the union labor agreements and was able to significantly reduce labor costs.Finally, Ford implemented a consolidation program of their brands by selling non-core brandsso that they could focus on the Ford and Lincoln brands leading to cost savings and positioningthe company to more agilely respond to changing markets and economies. Ford’s Stakeholder,long term approach makes them a visionary company that determines its own future.General Motors was not nearly as foresighted in their approach. They chose to ignore advicefrom a member of their board, who was not part of the automotive industry, to consolidatetheir brands. GM stayed entrenched in their belief that keeping many brands would be the wayto succeed. They failed to consider the high cost of labor in their factories and did not work torenegotiate labor contracts. Finally, the implemented zero percent loans and huge cashincentives that resulted in selling vehicles for a loss. These failures led to GM declaring 23
  24. 24. IST 614 – Ford and GM Final Project Leo de Sousabankruptcy in June 2009. The “new” GM is a division of the US Department of Treasury andalso answers to the Government of Canada and a UAW Pension trust. GM’s new CEO is apolitical appointee from the Department of the Treasury. General Motors was forced tosignificantly downsize and to implement the changes Ford had started over 3 years earlier. Itwill be difficult for GM to take full control of their strategy and future direction as long as theyare beholden to the parties that rescued the company from bankruptcy. General Motors willcontinue to take a Shareholder, short term approach for the future as they pay down theirdebt. Ford on the other hand, actively manages its debt burden with a strong cash flow anddoes not have the constraints of being a pseudo-government company.Ford has the edge from a customer perspective particularly in the United States. They canrightly point to their ability to survive and now thrive as a company without taking one centfrom the tax paying public. Ford’s focus on quality and innovation is showing in the newvehicles and features they bring to the market. The leadership of Ford blends a long history ofautomotive industry experience in Bill Ford Jr with the innovative leadership of Alan Mulally.Looking over the long history of the company should give customers and investors confidencethat Ford will continue to be a visionary company. The “new” General Motors is not the samecompany that went bankrupt. Going through bankruptcy, badly damaged GM’s reputation andcreated internal turmoil that will take years to recover from. Daniel Akerson, GM’s CEO is apolitical appointee from the Department of the Treasury. He has a mandate to lead thecompany out of bankruptcy and ensure the government loans are paid back. This focus putsGM years behind Ford. The focus on consolidating brands and cutting costs will hamper theirability to innovate. 24
  25. 25. IST 614 – Ford and GM Final Project Leo de SousaFrom a CEO perspective, Ford seems to be doing all the right things. They proactivelyrecognized the problems with their business model and secured funding in a low interestenvironment to allow them to restructure early and more importantly survive. The company’sfocus on people comes through in their strategy and their product delivery. Ford leadershipmust continue to focus on paying down its debt especially as they continue to benefit frombeing profitable. Building strategic partnerships with industry leaders like Microsoft will allowFord to share the costs of innovation and continue to deliver features customers demand formany years to come. Ford cannot rest on their success and they need to keep a Shareholdermodel focus to remain a visionary company.General Motors needs to find a way to look past their restructuring plan that ends in 2014.Some key areas to focus on are managing the organizational impacts of consolidating theirbrands. It is not clear today what damage was done to the culture of the organization from thebankruptcy and forced restructuring process. GM needs to look at their strategy and find a wayto focus on people. The current strategy is very much focused on loan repayment andrestructuring. A serious marketing effort should be implemented to communicate to the public(particularly in the US and Canada) that their ability to pay back all the government loans is ontrack. Now that GM has launched their Chevy Volt electric car, they need to invest more inresearch to gain back a leadership position in that area of sustainability. Current CEO Akersonshould begin to look for a successor with the right blend of automotive experience andinnovative leadership style. This is not a simple task and may require several years to cultivate.If a group of leaders can be cultivated then GM will be in a position to move the companyforward after the restructuring period is over. 25
  26. 26. IST 614 – Ford and GM Final Project Leo de SousaReferencesBloomberg. (2007, Jun 4). The New Heat on Ford. Retrieved Dec 2, 2011, from Bloomberg Businessweek: http://www.businessweek.com/magazine/content/07_23/b4037036.htmBloomberg. (2009, Jun 23). The U.S. Auto Industry in 2012. Retrieved Dec 2, 2011, from Bloomberg Businessweek: http://www.businessweek.com/lifestyle/content/jun2009/bw20090623_802671.htmCarty, S. S. (2009, Jun 2). Seven reasons GM is headed to bankruptcy. Retrieved Dec 2, 2001, from USA Today: http://www.usatoday.com/money/autos/2009-05-31-gm-mistakes-bankruptcy_N.htmCNN Money. (2011). Fortune 500. Retrieved Nov 21, 2011, from CNN Money: http://money.cnn.com/magazines/fortune/fortune500/2011/index.htmlCollins, J., & Porras, J. I. (2002). Built to Last. New York: HarperCollins Publishers.Drucker, P. F. (2001). The Essential Drucker. New York: HarperColins Publishers.Ford Motor Company. (2010). 2010 Annual Report. Dearborn: Ford Motor Company.Ford Motor Company. (2011). Alan Mulally. Retrieved Dec 2, 2011, from Ford Motor Company: http://corporate.ford.com/careers/careers-news/careers-news-detail/careers-alan-mulally- videosFord Motor Company. (2011). One Ford. Retrieved Dec 2, 2011, from Ford Motor Company: http://corporate.ford.com/our-company/our-company-news/our-company-news-detail/one- fordFord Motor Company. (2011, Jun). Sustainability Report 2010/11. Retrieved Dec 2, 2011, from Ford Motor Company: http://corporate.ford.com/microsites/sustainability-report-2010-11/overviewFord Motor Corporation. (2010). 2010 Annual Report. Dearborn: Ford Motor Corporation.General Motors Corporation. (2009). 2009-2014 Restructuring Plan. Detroit: General Motors Comapny.General Motors Corporation. (2010). 2010 Annual Report. Detroit: General Motors Corporation.General Motors Corporation. (2011). About GM: Corporate Responsibility. Retrieved Dec 2, 2011, from General Motors Corporation: http://www.gm.com/company/aboutGM/corporate_responsiblity.htmlGeneral Motors Corporation. (2011). About GM: The GM Foundation. Retrieved Dec 2, 2011, from General Motors Corporation: http://www.gm.com/company/aboutGM/gm_foundation.htmlGeneral Motors Corporation. (2011). OnStar Company Information. Retrieved Dec 2, 2011, from General Motors Corporation: http://media.gm.com/media/us/en/onstar/company.html 26
  27. 27. IST 614 – Ford and GM Final Project Leo de SousaHarvard Business Review. (2011, Aug 29). Henry Ford, Innovation, and That "Faster Horse" Quote. Retrieved Dec 2, 2011, from Harvard Business Review: http://blogs.hbr.org/cs/2011/08/henry_ford_never_said_the_fast.htmlThe Urban WallStreet. (2011, Jan 5). How Ford Survived the Economy. Retrieved Nov 21, 2011, from The Urban WallStreet: http://theurbanwallstreet.wordpress.com/2011/01/15/how-ford-survived- the-economy/US News. (2010, Jul 30). How Ford and GM Turned a Corner. Retrieved Dec 2, 2011, from US News Money: http://money.usnews.com/money/blogs/flowchart/2010/07/30/how-ford-and-gm- turned-a-cornerVlasic, B. (2009, Apr 8). Choosing Its Own Path, Ford Stayed Independent. Retrieved Dec 2, 2011, from New York Times: http://www.nytimes.com/2009/04/09/business/09ford.html?scp=5&sq=vlasic%20mullally%20d ebt%20ford&st=cseWilliams, C. (2011). MGMT4 Student Edition. Mason: South Western, Cengage Learning. 27

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