An analysis and explanation of the failure of General Motors on the basis of the theoretical framework of path dependency in the field of Crisis Management


Essay, 2010

32 Pages, Grade: 1,3


Excerpt

Table of Contents

List of Figures

List of Abbreviations

Abstract

1 Introduction
1.1 Problem outline and objective
1.2 Course of work

2 Theoretical Background
2.1 Crisis Management
2.2 The strategic process as aperiodicity: induced vs. autonomous strategic action
2.3 Path dependency and the basic concept of strategic paths

3 Strategic Consequences of co-evolutionary Lock-In
3.1 The application of Burgelman’s insights on the example of General Motors
3.2 Recommended Procedures for GM

4 Critical Reflection
4.1 Critical reflection of the path dependence theory
4.2 Limitations of Burgelman and recommendations

5 Conclusion

Appendix
1 Development of the oil-price
2 Development of the petrol price
3 Development of the Share Price of General Motors during the crisis
4 Number of Insolvencies from 1999 until 2009
5 More detailed explanation of path dependency
6 Reasons of GM´s failure

References

List of Figures

Figure 1: Different phases of crises

Figure 2: An Evolutionary Framework of the Strategy-Making Process in Established Companies

List of Abbreviations

illustration not visible in this excerpt

Abstract

The difficulty lies, not with the new ideas, but in escaping the old ones.

John Maynard Keynes

This essay explores with the theory of path dependence why some organizations stick to in the long run loss-generating strategies and why do some companies miss to develop new strategies to adapt to changing market conditions. Path dependence can be defined as a dynamic theory assuming that initial events can increasingly restrain present and future choices. Due to the current market situation this essay will connect the theoretical considera- tions of path dependency with the crisis management. On the basis of the main literature and with applying the theoretical model of Burgelman it will be examined in how far does the model of path dependency explain the failure of the insolvent automobile manufacturer Gen- eral Motors. In this regard some limitations of the Burgelman-model were discovered.

1 Introduction

1.1 Problem outline and objective

In the current financial and economic crisis, caused by the enormous turbulences on the in- ternational financial market in the year 2008, a lot of companies are struggling for life.

Economists were predicting a boom and the end of the recession. However, instead of a re- rising economy a permanent crisis followed.1 Due to this the situation for many companies got worse and the real crisis began.2 The consolidation and market adjustment process is still going on in a lot of industries3 and the number of insolvencies is increasing enormously.4 In order to achieve the main goal – the avoidance of insolvency – well considered crisis and short-term turnaround management is necessary. The consistent process of restructuring - the turnaround management - includes counter-measures in order to save a company from insolvency, such as eliminating loss-generating structures in the cooperation, reconstituting the liquidity and developing new strategies which help generating more return on invest- ment.5

One of the industries that got hit by the crisis very strongly is the automobile industry. The automobile industry is going through enormous change due to the weak US and global economy as well as rising fuel prices. In addition to that, the rising environmental concern of society is leading to new environmental laws and changes in consumers’ habits which make the situation for the automobile industry even more difficult.

In 2008 the oil prices rose rapidly6 and therefore, the automobile industry was facing a com- bination of cost pressure from raw material costs on the one hand and the decreased de- mand on the other hand. The rivalry in the American automobile industry has become much more intense. Firms compete on both, price and non-price dimensions. The industry is also facing increasing external competition from the public transport sector, as consumers re- evaluate their private vehicle usage. As the housing market got out of control, people had no choice but to re-evaluate their spending habits. Although purchasing a new car was attractive for many Americans, they were forced to use their income for basic necessities first. With General Motors, being a large producer in both, trucks and SUV's, sales have drastically de- creased due to the lack of fuel efficiency. The rise in fuel prices played a significant role in creating the opportunity for development of hybrid and more fuel efficient vehicles. The core competence of General Motors was innovation. General Motors has been utilizing innovation in service and technology to secure itself a dominant position in the automobile industry since 1908.7 However, in the case of hybrid vehicles General Motors was unable to keep up with the pace of the market demand. GM is behind on the alternative energy movement.8 This is GM's biggest weakness. The alternative energy trend has begun to take place in the automotive industry and GM has been one step behind the competition in terms of research and development of hybrid vehicles and alternative energy ever since. This led to many prob- lems including loss of market share and decreasing company profits.

In recent years GM has endured significant financial turmoil, including massive losses. Even the government's intervention and billions in bailout funds couldn't save GM. Unfortunately, GM wasn’t able to make a turnaround on its own. Therefore GM ended up in bankruptcy in the year 2009.9 How was it possible for GM to get into such a position? How did that happen? In contrast to that, Toyota took the first step in the direction of hybrid technology and has significantly grown since then. By doing so, Toyota became the automotive frontrunner of the 21st century.10

Why does an organization stick to - in the long run - loss-generating strategies? Why does an organization not develop new strategies and adapt to changing market conditions? How can these companies manage to get themselves out of the crisis? How can they break out of the Lock-In-Situation?

How could it happen that GM overslept such an important trend such as alternative engines? Why did they stick to the petrol consuming SUV´s (e.g. Hummer) and Trucks in their product portfolio, although the petrol and oil prices were rising and the consumer behaviour was changing perceptible?

On the basis of which model is it possible to explain the behaviour of General Motors? One way to analyse the behaviour of GM is the theory of path dependency and the model of the development of crises. Latter is imbedded in crisis management and confirms the insights of Burgelman according to his path dependency theory. This is the aim of this essay.

1.2 Course of work

The outline of the paper is as follows. The first section will define the present issue and prob- lem and core idea with the objective of the essay. This is followed by a description and dis- cussion of crisis management, Burgelman’s model and insights according to the co- evolutionary lock-in and at last path dependency. After that theoretical background the paper continues with the strategic consequences of co-evolutionary lock-in and explores the causes and reasons for failure of an example from the automobile industry by applying the model ad insight of Burgelman. On the basis of these results the essay will give some rec- ommendations. It then gives a critical reflection and will end with a conclusion.

2 Theoretical Background

2.1 Crisis Management

A crisis of a company can be understood as an unplanned and unintentional process which threats the company in its existence if no counteractive measures occur. Crises of firms very rarely seem to appear from the nowhere. In most cases they are the result of a long-term often unrecognised development which takes place over several levels of escalation. Figure 1 pictures the typical process of a company crisis.

illustration not visible in this excerpt

Figure 1: Different phases of crises 11

Starting point is the strategic crisis.12 This phase is characterised by a wrong strategic and position and wrong managerial decisions. These could be for instance decisions of non mar- ketable products or failed acquisitions. When working against a strategic crisis the company usually still has enough time as well as financial resources. But the problem is that in most cases strategic crises are not identified at an early stage, because they are not reflected in the income and financial statement of a company.

Therefore proper reactions are not taken and the crisis develops further to the profitability crisis, which can be seen in the income statement. At the beginning of the second phase only the company’s return is decreasing, but at the end of this state of the crisis the company is already operating losses. Consequently the company’s situation is characterised by an in- creasing need for action and simultaneously decreasing scope of action due to missing reve- nue streams. The decreasing scope of action equates to the system of path dependency. The third phase is already a financial crisis of the company, which is characterised by a sub- stantial melting of liquidity. In this last state does the company stand with its back to the wall and the risk of insolvency is present. In 2009 the number of declared insolvencies increased noticeably due to difficult economical conditions. With the abolition of bankruptcy and com- position proceedings into one insolvency proceeding the possibilities of recommencement for remediable companies have been considerably simplified, so that the crisis can be seen even as a chance. Therefore a strategic examination and analysis of the reasons of the crisis is necessary.13

2.2 The strategic process as aperiodicity: induced vs. autonomous stra- tegic action

Burgelman’s evolution-theoretically research of the strategy process regards the strategy innovation process in the field of conflict of autonomous and induced strategic developments. 14 The conceptual considerations of Burgelman15 are build on three different theoretical key components, which describe and help to analyse the strategy building and strategy imple- mentation process of a company on different levels of abstraction. This includes the model of dynamic forces, which do cause and accordingly guide the evolution of a company.

Burgelman traces back that dynamic process to five interacting distinctive categories and back to their interaction: (1) Distinct competencies, (2) official corporate strategy, (3) strategic actions, (4) foundation of competitive advantage as well as (5) the internal environment of selection. The second key component of this strategy making process research is aimed at an evolution-theoretical framework. This setting distinguishes between induced and autono- mous building of strategy and between structural and strategic context. The third module tends to reconceptionalize the so called ´internal corporate venturing´ as a process between different management levels on the one hand and differing arenas of decision taking on the other hand. At this point it would go too far to describe the whole conceptual framework from Burgelman in detail. For the next considerations the concepts which are developed on the basis of the second key component are essential.

In this „evolutionary framework of the strategy making process“ Burgelman distinguishes – as already mentioned – not only between autonomous and induced strategic intention, but also shows two very different environmental relations, which play in every company a central role. The following figure no. 2 pictures the basic structure of the model.

illustration not visible in this excerpt

Figure 2: An Evolutionary Framework of the Strategy-Making Process in Established Companies 16

As the illustration points out two different factors influence the strategy being established in a company. On the one hand new emergent developments (autonomous strategic action) have to be regarded and on the other hand it concerns picking up an induced strategic intention. In this context the strategic and structural context of a company plays a decisive role.

Burgelman associates that in this strategic development process a certain variation, which is important for innovation, will be engendered by autonomous strategic actions.

Induced strategic action can be seen as a reduction of variation. That theoretical framework makes clear that Burgelman regards the long-lasting success as well as the permanent inno- vative replacement of a company in the sense of a position of equilibrium. This balanced state results in understanding both movements as running in opposite directions. So the in- duced strategy process provokes a reduction in complexity and variations, whereas the autonomous strategy development is presumed as an enlargement in variation and intricacy. Fundamental is that none of these two processes can realize permanent strategic innovation of a company on its own.

„Strategic intent (induced strategy) and internal entrepreneurship (autonomous strategy), by themselves, are not sufficient for continuous adaption. Strategy- making as adaptive organizational capability involves keeping both processes in play simultaneously at all the times, even though one process or the other may be more prominent at different times in a company´s evolution.“17

In this context parallels to the theory of Tushman and O´Reilly can be found. They state that organizations have to be ambidextrous to handle changing environmental conditions.

[...]


1 Cp. Müller, H. / Rickens, Ch. (2009).

2 Cp. Wimmer, R. (2009), p. 217.

3 For instance the European airlines or in the automobile industry.

4 See appendix no. 4.

5 Cp. http://www.4managerp.de/management/themen/turnaround-management/#c637.

6 See appendix no. 1 and 2.

7 1911: the self-starter engine for the first time, 1926: Cadillac was the pioneer in devising a nationwide service strategy, 1996: OnStar satellite, and other new car concepts include minicarp. Source: http://www.gm.com/corporate/about/history/.

8 Cp. www.alternativ-fahren.de.

9 See appendix no. 3.

10 This example and as well the following decision and analysis of GM acknowledges the proposition of Unruh in “Escaping carbon lock-in” that the companies and countries are for numerous reasons unlikely to leapfrog carbon intensive energy development. He says that industrial countries have be- come locked-into fossil fuel-based energy systems through path dependent processes driven by in- creasing returns to scale. The whole automobile industry, and so also GM, is only concentrating on reducing pollutant emission and reducing petrol consumption, but not focussing on generally changing into totally new transportation systems.

11 Own figure on the basis of Hauschildt, J. (2008).

12 Cp. Waschbusch, G. / Sendel-Müller, M. (2009), P. 17.

13 Cp. Waschbusch, G. / Sendel-Müller, M. (2009), P. 18.

14 Cp. Koch, J. (2009), p. 189 - 208.

15 Cp. zum Überblick Burgelman, R.A. (2002).

16 Cp. Burgelman, R.A. (2002), p. 9.

17 Cp. At a glance Burgelman, R.A. (2002), p. 14.

Excerpt out of 32 pages

Details

Title
An analysis and explanation of the failure of General Motors on the basis of the theoretical framework of path dependency in the field of Crisis Management
College
Leuphana Universität Lüneburg  (Institute for Business Development and Innovation Management)
Course
Management of Change
Grade
1,3
Author
Year
2010
Pages
32
Catalog Number
V151790
ISBN (eBook)
9783640655373
ISBN (Book)
9783640656233
File size
871 KB
Language
English
Tags
Change Management, Path Dependency, Strategic Paths, Crisis Management, General Motors, Lock-In
Quote paper
Susann Carmohn (Author), 2010, An analysis and explanation of the failure of General Motors on the basis of the theoretical framework of path dependency in the field of Crisis Management, Munich, GRIN Verlag, https://www.grin.com/document/151790

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