Process_of_Improvement

Process Improvement Plan The Infinity Consulting Firm will provide a Financial Analysis Proposal for the General Motors Corporation (GMC). The analysis will consist of an overview of the company from 2004 to 2007 as compared to other companies within the automotive industry. A SWOT analysis will be conducted to identify the strengths, weaknesses, opportunities and threats of GMC, Ford, Chrysler and Toyota. Graphical representations will be displayed to outline benchmarking results found between the four companies. The analysis will conclude with a recommendation that the Infinity Consultant Firm has created that would assist the GMC to regain their status as one of the most profitable companies in the automobile industry. Problem Statement Based on the current economy, could General Motors regain its previous market position' Overview The auto industry started to take flight in the early 20th century. During this period the “big” three were born: GM, Ford and Chrysler. These companies vied to produce the most innovative technology before the competition could beat each other to the market. During the mid 1913’s, Ford was able to mass produce vehicles with their invention of the assembly line. This threw all competition into over drive in the attempt to also produce the numbers Ford was capable of producing. GM by the 1930’s after World War II, made a commitment to service and innovation placing the company ahead of the competition. The corporation’s structure and production continued to work into the 21st century; however, the company did befall financial difficulties. The difficulties can be attributed to several factors; price of gasoline, vehicles sold that used incredible amounts of fuel, and a stagnant economy. The corporation continued to see decreases in their stocks and shareholders were very disappointed with the returns. The difficulties with the economy forced many GM manufacturing operations to close, forcing the company to fire many long term employees. GM faced many complicated decisions, ultimately leading to a chapter 11 bankruptcy. In early 2009, GM was given a government loan to assist with the bankruptcy the company was forced to enter into. The company was then able to re-evaluate its priorities and redesign the company based upon current trends and financial standing that would bring future stability. GM received loans from many sources. The benefit of receiving money to assist with the companies return, allowed them to now have new stakeholders including the US Treasury, UAW Retiree Medical Benefit Trust, Canada and Ontario Governments, and the old GM. With the change in stakeholders of the organization, GM has also announced a new innovative way of decision making as well as vehicle design and sales. With the changes implemented and a strong cash position, GM will be able to realize its goals of being a top performer in the US market again. SWOT Analysis SWOT analysis is the planning tool used to evaluate the strengths, weaknesses, opportunities, and threats involved in a project. It involves specifying the objectives of the business venture or project identifying the internal and external factors that are favorable and unfavorable to achieving the objectives. Strength Weakness GM-Multiple Brands- such as Buicks known in China as the American Product that is superior. Large Vehicles-has large vehicles, for both personal and commercial use. This is a product where GM, has a good reputation in than German and Japanese’s competitors. Big distribution company- Gm needs to advance in technology, better market structure, customer satisfaction, reorganize and restructure and larger expansion in the foreign markets. Hybrid Vehicle SUV-safety and security system that is able to protect consumers on the road, with connection to emergency assistance and access to on star hands-free calling (on star by GM, 2009). On star Satellite System- GM was developed in 1996, the first automobile company to come out with the onstar satellite system. Production Capacity-Toyota produces most of its cars in U.S. and Japan whereas competitors may be more statically located worldwide to take advantage of global efficiency gains. (Business teacher, 2007). Global Organization-Toyota global organization with a strong international position in over 170 different countries worldwide. (Business Teacher 2007). Brand Image-Toyota has strong brand image based on quality, environmental friendly. Excellence- Toyota, have strong penetration in key markets such as U.S., China, and was very successful succeeding Ford in quality and sales. Chrysler-the smart brand car, which is a leader in Europe and the U.K., this is a leader in the mini car segment. Chrysler-has merged with Fiat, this is desperately needed for the company to bounce back. GM-Slow to change, always had a problem with adapting to changing markets. This can be seen clearly in the SUV market here in the U.S. Chinese Government- Since GM is not an inherently Chinese firm; it may be left out in the cold from certain government provisions, such as special promotions and tax breaks. (General motors, 2009) GM- Poor management, too many dealerships, health care for retirees, in addition to the pensions plan payouts. GM- Unprepared for gas and energy spikes and demands for smaller and more efficient cars. Quality-GM, focusing on profits over production, paying less attention to the quality of their vehicles. Toyota- Toyota- Large-scale recall made in 2005, relating to a quality issue. The company had to recall 880,000 sports utilities vehicles and pick up trucks due to the suspension system. Production Capacity-Toyota produces most of its cars in the U.S. and Japan whereas competitors may be more strategically located worldwide to take advantage of global efficiency gains. Chrysler- Financial Trouble, the company is on the verge of filing bankruptcy. Chrysler- one of Chrysler’s biggest problems is its weak market penetration in Asia. They are not fulfilling the high expectations expected by their leaders in this market. Chrysler- is desperate to secure cuts in employees pay and benefits to make the company more competitive with Japanese heavyweights Nissan, Honda and Toyota verge of filing bankruptcy. Opportunity Threats GM-SUV’S-Can leverages its known, high valued vehicles to market luxury SUV’S to rich Chinese consumers. Chinese Market-GM has a great opportunity to take advantage of this growth based on its reputation for quality and trustworthiness. Trucks- the Chinese government is currently in the process of upgrading china’s roads. This coupled with the fact that the Chinese economy is growing rapidly; mean there will be a high demand for construction vehicles, such as trucks, which GM can provide. Hybrid Vehicle- GM needs to devlope the hybrid vehicle that will maintain the pace of the competitors, one that will stand out in the crowd to make the product new and exciting. (General motors, 2009) To develop the commercial mass-produces hybrid gas- electric vehicles. Expanding- To expand more aggressive Into new segments of the market. The launch of the Aygo model is intended to Take the youth market share. New Makes- Toyota needs to develop cars, which respond to social and institutional needs and wants. Technology-Toyota Eco-Vehicle Assessment system (Eco-VAS) has helped in production, usage and disposal. Global Expansion- Toyota needs to continue global expansion especially in China and India, which are two of the emerging markets. (Business teacher 2007) Chrysler-brought the ECO-Efficient car to the U.S.market with the smart forfour, which emphases safety. The ForFour is slightly, more compatible with the U.S. consumer taste and driving habits. Chrysler- Chrysler and Fiat restructure and development, they have potential cost savings from products and technology sharing as well as distribution potential and joint negotiations could enrich both automakers in the end. Chrysler- need to focus on revitalizing their car line up, broaden their market share exposure, and focus on long-term growth. GM-Domestic manufacturer- The government will favor local firms over international ones in its economic plans a d thus domestic manufactures will have an advantage. Price War-GM is competing with Chinese and Korean companies in a price war, its unstable financial situation and lack of experience in low pricing will prevent GM for succeeding. German Manufacturers- companies such as BMW and VW compete directly with GM in the luxury market. In anything GM does, it will have to consider the reactions from these other companies. (General motors, 2009). Toyota- Saturation and increase competition, intense marketing campaigns increase competitive pressures. Demographics- the changing of demographics, the number of large families is declining. Undermining the demand for large families. Changing Usage for Toyota- families Using the cars less for taking the children to school. Having more home deliveries, businesses restricting business travel, instead more teleconferencing. (Business teacher 2007). Chrysler- is facing tremendous competition in the market, which is increasing daily, with new entrants from China Benchmarking The following information is based on financial statements obtained from General Motors, Ford, Chrysler and Toyota for 2004 through 2007. The company’s data was calculated by using the following formulas (Business Tools, 2005): Net Profit Margin – Net Income ÷ Total Revenue Price to Earnings Ratio – Marketing Price per Share ÷ Earnings per Share Return on Asset (ROA) – Net Income ÷ Assets DuPont Model (ROE) – Net Income ÷ Shareholder’s Equity Asset Utilization – Total Revenue ÷ Assets Financial Leverage – Total Debt ÷ Total Equity Quick Test Ratio – Current Assets – Inventory ÷ Current Liabilities Current Liquidity Ratio – Current Asset ÷ Current Liabilities The data obtained from these formulas will be used to compare the profitability and losses that each of the companies experienced. The key to financial analysis is the availability of data. Companies can accumulate, categorize, and summarize basic financial data in many ways. In the past, investors and analysts had access only to the published summary data in quarterly and annual financial statements. By making more data available on a more timely basis and making mathematical analysis easier and faster, technology is enabling investors and analysts to obtain and analyze more information about a company than ever before before (Hongren, C.T., Sunden, G.L., Strattion, W.O., Burstahler, D. & Schateberg, J. (2008). Exhibit 1 Net Profit Margin 2004 2005 2006 2007 GMC 0.01 -0.06 -0.01 -0.21 Ford 0.02 0.01 -0.08 -0.02 Chrysler 0.22 0.38 0.26 0.3 Toyota 0.07 0.07 0.07 0.07 Exhibit 1 shows that Chrysler’s profit margin has been higher than its competitors for the past four years. According to Joshua Kennon (2001), a company that boosts a higher profit margin than its competitors and industry are more efficient. Exhibit 2 Price to Earnings Ratio 2004 2005 2006 2007 GMC 0 0 -0.48 0.02 Ford 0 0 0 0 Chrysler 0 0 0 0 Toyota 0 0 0 0 Exhibit 2 shows that each of the companies price to earnings ratio was low. Based on this data, it is safe to say that investors for these companies were not pleased with the data and that they would not have been willing to pay for anticipated growth. Exhibit 3 Return on Asset (ROA) 2004 2005 2006 2007 GMC 0.01 -0.02 -0.01 -0.26 Ford 0.01 0.01 0.05 0.01 Chrysler 0.01 0.02 0.02 0.03 Toyota 0.05 0.05 0.05 0.05 Exhibit 3 shows that Toyota maintained a steady 5% return on assets from 2004 to 2007, Chrysler and Ford’s ROA fluctuated between 1% and 5%. GMC’s ROA dropped from a positive ROA of 1% in 2004 to negatives for 2005 to 2007 that ranged from -1% to -26%. Exhibit 4 DuPont Ratio (ROE) 2004 2005 2006 2007 GMC 0.1 -0.72 0.35 1.04 Ford 0.22 0.16 3.64 0.48 Chrysler 0.07 0.12 0.1 0.1 Toyota 0.14 0.13 0.13 0.14 Exhibit 4 shows that Ford maintained the highest return on equity from 2004 to 2006, although Ford’s 2007 ROE was lower than GMC. Ford’s ROE was 0.48 compared to GMC at 1.04. In 2005 GMC had a negative ROE, Toyota’s ROE maintained 13% to 14% from 2004 to 2007, and Chrysler had a steady ROE between 7% and 12%. Exhibit 5 Asset Utilization 2004 2005 2006 2007 GMC 0.4 0.41 1.1 1.22 Ford 0.59 0.66 0.58 0.62 Chrysler 0.06 0.05 0.07 0.1 Toyota 1.87 1.88 1.87 1.92 Exhibit 5 shows that Toyota’s asset turnover ratio remained higher than 1.5 from 2004 to 2007. GMC’s ratio was lower than 0.5 in 2004 and 2005, but increased more than 1.0 in 2006 and 2007. Ford’s ratio remained between 0.58 and 0.66 and Chrysler’s ratio never increased to more than 0.1. Exhibit 6 Financial Leverage 2004 2005 2006 2007 GMC 1.11 2.13 7.52 -1.03 Ford 1.97 2.11 -10.27 5.92 Chrysler 0 3.97 3.71 2.47 Toyota 0.41 0.39 0.45 0.5 Exhibit 6 shows that each of the company’s debt to equity ratio remained higher than 40 to 50% for at least three years between 2004 and 2007. Any company that has a debt to equity ratio of over 40% to 50% should be looked at more carefully to make sure there are no liquidity problems (Kennon, 2001). Exhibit 7 Quick Test Ratio 2004 2005 2006 2007 GMC 0.61 0.48 0.77 0.64 Ford 0.34 0.46 0.55 0.54 Chrysler 0 0.18 0.2 0.38 Toyota 1.02 0.99 0.91 0.85 Exhibit 7 shows that none of the companies showed a 1:1 ratio. According to 12Manage Executive Fast Track, a 1:1 ratio is good and indicates a company does not have to rely on the sale of inventory to pay the bills. Exhibit 8 Current Liquidity Ratio 2004 2005 2006 2007 GMC 0.77 0.67 0.98 0.86 Ford 0.43 0.55 6.52 0.63 Chrysler 0 0.28 0.3 0.67 Toyota 1.16 1.15 1.07 1 Exhibit 8 shows that GMC, Ford, Chrysler and Toyota maintained current ratios that fell below 1.5. Therefore, each company would need to have inventory that could be immediately converted into cash. Recommendation Based on the Infinity Consulting Group’s analysis of General Motors, it will be possible to regain its previous market position. However, with its new management team and mission, the company is still very much a viable organization and will prove to be a very profitable company. “GM is dedicated to getting back to the business of designing, building, and selling great cars and trucks and serving the needs of our customers,” said Fritz Henderson, president and CEO”. "GMC is still a well positioned company that will continue to compete in the auto industry and is successfully selling its brands of vehicles in China (GLG, 2009, ¶ 11)". This in itself gives GMC an excellent opportunity to increase sales in foreign markets. As a result of the bankruptcy GMC has reduced its size of dealerships and the various brands of automobiles (8 to 4); lower its debt burden, reduction of labor force, bring the organizations overall market capital in line with the current market structure. Infinity Consulting Group concludes with the following recommendations to GM Corporation: • Through a reinvention plan, the stakeholders will need to focus on increasing sales with innovative marketing techniques such as the Cash Allowance Rebate System which allows major rebates with all GM vehicles. • Provide bumper to bumper extended warranty that covers all electrical and manual components. This would allow General Motors to increase sales by additional financing with their customers. • Dropping Unsuccessful Product Lines • Standardize Component Parts across models • Reducing the number of parts required to repair its vehicles • Reduce cost by streamlining operations (consolidate where necessary) • Implement better use of its financial reports • Balance needs of employees and unions with the needs of the company (is it profitable to have an association with the United Auto Workers Union (UAW) • Implement advanced technology and product development • Personalize GM's customer service References 12Manage-The Executive Fast Track. (2009). Measuring the liquidity of a company. Explanation of a Quick Ratio. Retrieved July 25, 2009 from http://www.12manage.com/methods_quick_Ratio.html. Automotive Industry Analysis. Retrieved July 23, 2009 from http://www.academicmind.com. Business Teacher. Learning about Swot Analysis. 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Introduction to Management Accounting (14th ed). Available from the University of Phoenix eBook Collection database. Kennon, J. (2001). Financial Ratios. Retrieved July 24, 2009 from http://beginnersinvest.about.com/od/financialratio/Financial_Ratios.htm. Onstar by GM, (2009). Retrieved July 27, 2009 from http://www.onstar.com/us_english/jsp/explore/index.jsp