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Causes of Insolvencies in Large Businesses. A Case Study of General Motors

Master's Thesis 2012 104 Pages

Business economics - Business Management, Corporate Governance

Excerpt

Contents

1.0 Chapter 1 - Introduction
1.1 Study Background
1.2 Rationale
1.3 Aims and Objectives
1.4 Organisational profile:

2.0 Chapter 2 - Literature review
2.1 Introduction
2.2.1 Impact of economic and financial crisis on large organisations
2.2.2 Capitalism and market economy
2.2.3 Strategic management
2.2.4 Financial management
2.2.5 Bankruptcy and Insolvency
2.2.6 Closure and divestment
2.3 Conclusion (summary of the literature review)

3.0 Chapter 3 - Methodology
3.1 Introduction
3.2 Research philosophy
3.3 Data Collection
3.4 Research design
3.5 Study Limitations and conclusion

4.0 Chapter 4 - Findings and Analysis
4.1 Introduction
4.2 Presentation of Data and Analyses
4.3 Comparison between General Motors and Toyota
4.4 Trend analysis
4.5 Questionnaires
4.6 Discussion of results

5.0 Chapter 5: Integrative Analysis and Discussion

6.0 Chapter 6: Conclusion

7.0 References

8.0 Bibliography

9.0 Appendix

Dedication

This dissertation is dedi cated to my beloved parents, Ibrahimbhai and Halimben. Without their emotional support and love it was not p ossible for me to s tudy and re search this valuable prospect of my life. I also remember my maternal uncle Kifaytullah, unfortunately he is not with us in this world and left his remembrance behind. He actually had dreamed for me to study in London for my MBA.

Acknowledgements

This could not be possible without support of my colleagues and family. I would like to express thanks to my lecturers who taught me this subject and guided in the research and writing of this report. I am also grateful to my family especially my wife who provided me with great support during my entire project.

I would also like to m ention the name of my lecturer, Mr. Na zimudeen Saleem whose assistance encouraged me to complete this project successfully. With his assistance I was able to write my dissertation. I also express my sincere gratitude to my participants who responded with their best views and spent ti me for survey. I also express my thanks to m y brother Aslam, Akil and friend Rafaqat who helped me in distribution and collection of my survey.

I would also like to mention that all th e work of this report is solely my own work and in cases where I have taken assistance from other sources of data, it is appropriately referenced in my report.

Finally, I want to show my special gratitude to my children Mohammad and Fahim for instructing me to use some features o f Microsoft word and excel, which were unknown to me.

Abstract

This report has intentionally been written for those large organisations, which run at risk of failure. World one of the biggest car and truck manufacturing company, General Motors has been chosen as a case study. The reason behind selection of GM as a ca se study is its 100 years of long history, business operations in 158 countries across the w orld and filing for bankruptcy petition in year 2009 in an around th e time of financial crisis of US. Therefore, financial data fo r three consecutive years of GM before its applicat ion of chapter 11 bankruptcy petition have been analysed and compared with its global competitor Toyota for comprehensive judgement. Another investigation is made by analysing the various currencies and important commodity trends against US dollar. This is done to know, how fluctuation in exchange rate of various currencies influence the performance of multinationals. Finally for generalisation, a survey has been carried out on the bases of various literature reviews, financial ratios and currency trend analysis.

In addition to previous re searches, which were limited to only financial ratios, this research has been ex panded beyond financial and included external factors such as economic, capitalism and currency fluctuations.

An insight of various disciplines, which ha ve always been n eglected has taken as an empirical and found the diverse conclusion. Whole research prospers through four different segments; from various literature reviews, to financial ratio analysis, examinations of various currencies and commodities and finally questionnaire survey.

Subsequent to research an imperative outcome has been realized. This exploration suggests that for survival of large businesses knowledge of economic is cruc ial besides financial planning and management. Therefore, large organisation should keep self-regulation to exploit available cre dit facility and do not exceeds its debts beyond certain agreed limits. While taking strategic decision, it is crucial to analyse base currency and its long term trends. Finally, multinationals should always implement innovation practices for their existence.

1.0 Chapter 1 - Introduction

1.1 Study Background

Currently world is being challenged by various economic factors. US struggles to come up from the world l argest bankruptcy incidents happened in 2008-09 recession. And European countries are tackling with euro zone debt crisis. According to Giles ( FT, 2011) Europ ean crisis will be worse than that was in 2008-09.

It has been argued that economic crisis is a natural phenomenon which takes place on certain period and it is part of the capitalist systems. According to Gamble (1989) capitalism as world system has suffered twenty such general crisis of over production since 1825. They have become progressively more s evere, because the scales of produ ction and degree o f interdependence have grown during every period of expansion (p.7). Consequently, various recessions take place at certain times and th ey left their shockin g effects thereafter. Researchers do investigations from those incidents and come up with new models thereafter.

In 2008, the recession has exposed various corporate weaknesses. During this financial crisis lot of companies were risked by the government. Amongst them world’s fifth largest chapterll bankruptcy filing came out from the world’s dominant car and truck manufacturing company General Motors, which had 100 years of long history. At the time of GM’s bankruptcy filing its assets remained only $82.3billion while liability reached at $172.8billion, which was more than double of its assets.

Despite numerous researches have been carried out in this area, there are still companies going bankrupt. Just last year Dexia has to be rescued by Franco-Belgium government and later on 31 st, October, 2011 MF Global Holdings filed its petition for protection under

Chapter 11 bankruptcy in the US. This in cident became the 8th largest bankruptcy in US history (Edwards, City A.M., 2011).

The mystery is still puzzling because some companies are survived in recession while some have been collapsed. It is obvious that, businesses have their challenges and they go through various stages: growing, maturity and declining. These stages are varied in length of time for organisations. Business survival depends upon the interna l and ex ternal factors of organisation. Some orga nisation fails before reaching their m aturity while some survives even in its declining stage.

However, it is argued that organisations face major challenges in their declining stage. Large organisations acquire expertises while growing and to compete with their rivals on the bases of their capabilities and core te chnologies. Organisations generally have to implement changes at every stage for their sustenance. But at saturation or ganisations are being challenged by lower percentage growth. Thus it needs to implement major chan ges to immerge from complexity of uncertainty either by choice of innovation or reorganisation. Some organisations adopt innovations in their products/services or operations and choose to diversify to maintain the percentage growth. However Innovation and diversification require huge investments. So me organisations go for second option; reorganisation. But reorganisation brings shaking effect of redundancy. Those organisations which do not involve in any change and stick to their old strategy will go towards their demise.

However there is a debate amongst the researchers regarding causes of failure. Some give blame to exter nal environmental factors while others to in ternal factors. In this report researcher will try to solve this mystery with exploring number of issues and accomplished to offer his decision. Finally, the paramount probable causes of insolvencies in large businesses will be recommended.

1.2 Rationale

Justification of this study:

This study is imperative in current scenario because incidents of corpor ate collapses still continue and myth is still puzzling despite technological development and advancement in information communication technology (ICT). Various questions provoke in the mind of researcher regarding frequent insolvency incidents of multinationals, hence he seeks to find answers through this research project. Therefore, researcher is projected to analyze this complexity with strategic, financial, and economic point of view.

Reason behind selection of General Motors as a case study is its bankruptcy petition after 100 years of its succ essful history. GM has its business operations in 158 countries and manufacturing units in 3 1 countries across the world. The questions crop up in the mind of researcher: why expertise, capability and knowledge of General Motors remained inefficient to manage the adverse situation.

Research problems:

It has been argued that every organisation has to taste of its own demise, sooner or later. The question is how far an organisation can survive. Is there any technique available to extend life cycle of organisation.

According to Alan Gre enspan, large financial institutions should be deliberately broken up: “If they’re too big to fail, because they’re too big”. He believed that “Failure is an integral part, a necessary part of a market system,” (Bloomberg, 2009). While, Vestergaard (2009) believes failure due to too big phenomenon has been replaced by too reliance of finan cial institution. He says if more counter-cyclical mode of international financial regulation is introduced in the nea r future, it may reduce large-scale financial institution collapses, but it will hardly eliminate any and all need for future government bail outs.

Above two different views indicate that to reduce the failure of large institutions either it should be broken up bec ause author believes that it is easy to manage individual rather than whole organisation while other view blemish to too much inter-depend ency of Financial institutions and sug gest that it should be regularised and controlle d to minimi se such incidents.

Thus, Researcher wants to identif y the limi tations of capitalist s ystems, nature of contemporary economic structure and their func tional character to scrutinize the causes of failure for large organisations. Researcher realizes that business man agement for large organisation should neither be limited in few disciplines nor be ignored to consider changing environmental factors.

This study is sought to determine following problems:

1) Why management of General Motors would remain unsuccessful to access adverse economic environment of 2008-09 financial crises?
2) Why the capabilities, expertise and lon g experience of this big organisation would remain inefficient?
3) Which factors management should being observed which may influence the performance of company?

According to researcher, this research is important because, sudden failures of large companies surge catastrophe in the society, in the nation and around the globe. In addition the failures of large companies generate huge unemployment, loss of investors’ equity; affect country’s GDP, economy and much more.

Significance or Importance:

The case of GM aroused interest to the stake holders as well as others, because sequence of filing bankruptcy petitions by corporate is still continue. Researcher is also interested to investigate the reasons behind corporate failure as a part of his study of MBA and his personnel curiosity to know the truth.

This research is imperative for researcher and large businesses because this research will be helpful to those large bu sinesses which are at their declining stage or run at risk of failure. This research will also be usef ul for decision making for large businesses. Researcher believes that the outco mes of this re search will be utilised to identif y the risk for organisations and offer solutions accordingly.

Researcher has selected following instruments for this study.

1.3 Aims and Objectives

The purpose of th e study is to find a solution of insolvency incidents happening in contemporary globalised and c apitalist world. Constantly changing environment produces newest principles which need to be identified by synthesising various literature, theories and researches related to subject. Therefore, this research is intended to come up with a model to give advance warning sign if a company runs at risk of failure. The whole exercised is also intended to find out the big mistakes of regarding corporate failure so businesses can b e cautious to avoid such exercises. In short, researcher is aimed to draw a conclusion for various causes of insolvencies in large businesses.

To achieve the purpose following path of objectives will be carried out;

1) To critically analyse the key factors challenging the survival of organisation
2) To assess organisational effectiveness & survival using financial ratios
3) Examine effect of USD (exchange) fluctuation on performance of multinationals

1.4 Organisational profile

General Motors Corporation was established by William Billy Durant in 1908 in USA. It’s headquarter is in Detroit, USA. General Motors is also known as GM , which is among the biggest manufacturer of the world automobile in dustry. GM produces cars and trucks in 31 countries and operates its business in 158 countries around the world. GM owns various brands like Buick, Opel, Chevrolet, GMC, Holden, Vauxhall, Hummer etc. GM h as discontinued number of brands, sold few and focuses mainly on Chevrolet, Buick, Cadillac and GMC. It has played dominant role in world automobile market share and remained no.1 for eight decades in auto-vehicle production. According to OICA 2010 GM has achi eved no.2 rank in automobile vehicle produ ction after Toyota with 10.9% market share and 8,476,192 units of productions. GM employs more than 202,000 employees (General Motors website, GM.com).

According to GM press release on 12 J anuary 2012, it has achieve d its previous rank of world no.1 vehicle prod ucer by selling 9,025,942 vehicles in 2011 b y increasing its sale to 7.6%. The major sales went up in its Chevrolet division (Green Car Congress, 2012).

It is renowned that General Motors Corporation has filed for its bankruptcy petition on 1st June 2009 for its American unit. New General Motors Company has been allowed to carry its operation by bankruptcy court on 10th July 2009. New GM has been immer ged with major shares of US treasury, Canadian government and UAW retiree medical benefit trust (General Motors website, GM.com).

In bankruptcy petition for reorganisation GM’s liability ($172.8billion) was exceeded double than its assets ($82.3billion).

GM produces 61 t ypes of vehicles such as Sedans, Sport/C onvertible, Coup,

Hatchback/Wagons, Crossovers, SUVs, Pick-up trucks, Vans and Hybrid & Electric with seating capacity ranging from 2 to 8+ and Cargo 5 to 41 cu ft. It produces with 100 to 400+ horse power and towing 3000 to 20,000 lbs (General Motors website, GM.com).

Past performance:

According to annu al report 2007, GM g lobal market share for its veh icle sales in North America was 48.2%, 23.8% in Europe, 15.3% in Asia Pacific and 13.2% in Latin America, Africa and Middle East. It means more than half of its business wa s in rest of the wo rld except North America. Annual report of 2007 suggests that GM has d one its automotive business of $178 billion in year 2007, which is only $7 billion better than 2006, while total revenue generated was $181 billion. This is ve ry low as compare to $206 bill ion in year 2006. The report states that the adjusted earnin g of automotive section excluding special items are $533 million in 2007. Report exerts that they made huge improvement of $900million in 2007 co mpared to 2006 in di fficult economic situation where commodity prices were booming and consumers were losing their confidence. Report presumes the effect of this trend on their future. GM incurred net loss of $38,732million in 2007 as comp are to profit $1978million made in 2006 (GM, annual report, 2007:5-7).

According to annual report 2010, company has retained its no.1 position for six consecutive years in BRIC nations. Besides its leading market share in North America in 2010, GM has captured 12.8% market share in China in last decade and increased its 60% sales volume year over year with gaining 0.6 point market shar e in India. GM has attained its one of the top position with 19% market share in Brazil and 15.6% in Canada (GM Annual Report 2010).

Future strategy of General Motors:

According to annual report (GM, 2007: 47 -61) future strategy of GM was to achieve sustainable profitability and g rowth with maintaining liquidity. This report stressed on growth of the market and expansion of its products by implementing innovation in the products. It is stated that GM’s future strategy in US is to offer 17 models in the US market and introduce 25 new models with ethanol en abled flex fuel cars and trucks ar ound the world. In between 2007 and 2010 th ey are planning to introduce 16 new hybrid vehicles. Report exerts the willingness of boost in cas h flow for positive business. The re port has forecasted solid growth in 2008 which will be driven by their global operation in the world except North America. GM also planned to reduce structural cost in Am erica by $ 5 billion by 2011. GM forecasts that by 2017 they will achieve the target of more than half market participation of total industrial sales and so they plan for major role in this growth.

In annual report 2010 the mission of compa ny is clearly asserted with realisation of past mistakes. New GM is intended to max imize its resources and talent with limiting its brands from eight to four for its North American port folio. They realised the drawback of over capacity and hence wished for elimination of overcapacity in manufacturing operations. The strategy of new GM is to invest for high quality product through dropping sales incentives (GM annual report 2010:6).

Risk factors and Management:

It is important to mak e strategy in exposure to volatility of currency exchange value, commodity prices and intere st rates for multinationals. New and Old b oth GM have risk management policy. Both entered in foreig n currency exchange, interest rate, commodity forward contracts and options in exposure to fluctuation in prices of currencies, commodities and interest rates. However both did not enter into derivative transac tions. Regarding commodity risk old and new GM h ave different strategy. Old GM entered into swaps an d options while new GM entered into commodity options. Old GM had and new GM has Risk Management Committee to assess the risk regarding market shift through sensitivity analysis model (Annual report 2007:77, 2010:109).

2.0 Chapter 2 - Literature review

2.1 Introduction

Researcher is intended to refine his research questions and objectives to generate various ideas about different reasons of organisational failures. Hence, in this chapter, researcher will critically review various literatures to identify different theories and ideas. Then, broad investigation will be car ried out in accordan ce to find re search possibility to identify what have been overlooked in previous researches and what have been already done. This will help researcher to avoid repeating task and motivate researcher to identify what researcher really wants. Finally it will be helpful to discover ex plicit recommendations for further research (Saunders et al 2009:61).

This, Literature review is important for researcher to re cognize lacking in theories and previous researches as well as it will be helpful to identify the gap between theory and practice.

Rousseau (2006) has drawn an attention on r esearch-practice gap. She found that the managers and organisation practices on the base s of evidence rather than research made in that field. She ex tols the virtue of evidence based management, which derives principles from research outcomes and transform them into practices that solve org anisational problems. Her argument is that research finding do not appear to have transferred well to the workplace. She argues that managers and organisation depends on their ex perience rather than systematic knowledge gained by research. (Saunders et al. 2009:7)

Similar thing might be happened with selected organisation (GM) to discuss the f ailure of strategy. General Motors has enjoyed dominant role in automotive industr y, from last century. The incident of bankruptcy petition filing via Chapter 11 on June 8, 2009 was unexpected for stakeholders of GM and re st of the business commun ity. This incident suggests that GM might not be acknowledged the contemporary latest research and relied in its practices based on previous experience.

Whilst this research is on fa ilure of business this literature review will offer a number of insights into various th eories relating to the basic principle of businesses, fundamental theories and concepts. This literature review has been specifically carried out particularly for established and large corporate, which fear crisis and its implications.

In following liter ature reviews the impact of economic and financial crisis on large organisations has been discussed to identif y the risk for large organisations. Then, profit economy has been discussed to understand th e role of profit in failure of businesses. Literature on capitalism has been conversed to identify the characteristics and limitations of capitalism to identify the strategic choices for corporate. Other literature on strategy and finance are discussed to understand the mistakes related to strategic and financial decision making.

2.2.1 Impact of economic and financial crisis on large organisations

Saleem (2011) in his book raises the question, about large organisations, which have their high debt-equity ratios in ex cess of national debt ratios. He write s ‘whether these organisations can survive and continue to exist in the long run’? He further argues ‘can we afford to let them fail? While they enjoy such dominance in the wo rld economy, because when they fail, the tricking effects and the consequences are not just in one nation but many’. In his wr iting, it appears that the g lobal system is desig ned such a wa y that large organisations are running without proper contro l of g overnment or in other word these organisations have such influence on global system where no regulation be applicable to them. In this run the y incur high debt ratio sometime this ratio ex ceeds to national debts. These debts create shortage of finance, ultimately results in failure (p. 11).

Author sees problems in institutional and organisational issues of global business and politics and the consequences of advance technology rather than economic cycle (p.20).

Vestergaard (2009) states that ‘inter dependence in the international financial system is today so profound that the previous too big to fa il doctrine has in effect been replaced with a too interdependent to fail doctrine. The past decade has witnessed a de facto institutionalization of government bail-outs of financial institutions. In his view if more counter-cyclical mode of international financial regulation is introduced in the near future, it may reduce large-scale financial institution collapses. Further he argues that it will hardl y eliminate any and all needs for future government bail outs’ (p.246-247).

From Vestergaard writing it appears that financial regulation will work as buffer but will not provide permanent solution for future government bail outs.

Saleem (2011) sees the root cause of problems in accumulation of surpluses b y transnational corporations. He explains, ‘besides secure to shareholders interest, transnational corporations accumulate enormous surpluses’ and ‘such giant corporations find it difficult to spend or invest the money that they accumulate due to the prolonging economic crisis.’ He argues that ‘some organisation give away dividend to its shareholders, while some diversified into banks and financial institution s and sold their surpl uses as cre dit, other face the problems of saturation in terms of company growth’. He argues that this credit becomes as a popular commodity of capitalist economy. Author argues that one of the maj or pillars of economy is capital but today it comes as a credit instead of real money to aid investment (p. 11).

Thus, in the name of free market we have overused of this credit. Every country in the word is became debtor nation with an overall debt of over $25 trillions. Some Ve teran countries enjoys a debt ra tios of over 70% and even 100% and poor nations or newcomers are not allowed by market system if they exceed the limits (Saleem, 2011:11), which creates economics imbalance in the market and disturbs the economic cycle (p.11).

Therefore, Alan Greenspan (2009) suggests that the financial institutions should be broke up because it is difficult to grip on large organisations due to their complexity and it will be easy to manage smaller. His argument is on his strong belief of ‘failure is integral part o f market system’.

In interpretation of the recent crisis, Meeusen (2011) believes that excess of liquidity and low interest rate brought changes in stock market and house hold sector. (p.108). Thus, author’s view indicates that too much liquidity and low interest rate may results in bust.

But according to Mattick (1981) Crisis is an outcome of capitalist development system and acts as a regulator for the capital accumulation process. Thus he b elieves that corporate should keep being observed crisis c ycle how it asserted and how it has been ex plained in economic theory (p.4).

While explaining the reasons of B ritish crisis, Hodgson (1981) identifies the following causes of the British crisis: 1.Policy mistakes of government and civil servants; 2. Excessive taxation; 3. Excessive government spending; 4. High degree of penetration by multinational firms; 5. A decline in corporate profits; 6. Insufficient investment; 7. The streng th and resistance of the trade unions (p.142).

Hodgson (1981) writes that the inescapable conclusion is that the capital has been transferred because of unfavourable conditions for production and profit within the British economy.

From, above literature r eview it is summaris ed that performance of large businesses and national economy have strong inter-relations and both influence e ach other. Accumulated surpluses by large businesses endanger the national economy and in return national economy tries to influence the global economy.

Regarding economic crisis authors make following arguments,

Mattick writes this crisis takes a position outsi de the field of economic a nd create crisis all over the world for years (p.40). He argues that even this crisis asserted economically through social relations of production it cannot be considered purely economic (Mattick 1981:p.76).

According to Saleem (2011) the variables that determine the laws of economics changing fast and there are many more to identified now on a dail y basis. And he writes ‘trans- national corporations are so powerful than the nations or states in global market, which have revenue and GDP and market capitalisation much more than almost tw o-third of all the nation states in the world. Some of organisation are so bi g in generating their r evenue, like Ge neral electric corporations, had a market value of over $340 billion US and the Microsoft corporation nearing $3 billion US in August 2004 (WSJ market data group). He states the total value of market capitalisation of just the 15 largest corporations listed in the market data group of the wa ll street Journal in August 31, 2004, was over $3 trilli on US. He further writes the sales of the largest 200 corporation in year 2000 exceeded the total GDP of 182 countries of the world except the largest nine’ (p. 10).

In a view of Mattick (1981) in capitalist system, crisis cannot be ignored because it is the part of market system as it is the characteristic of capitalist system.

Thus, it is summarised that economi c crisis is a product of accumul ation of capit al and manipulations of credit facilities by transnational organisations. Thus, it is confirmed that the root cause of current economic crisis is associated with accumulations of capitals, increased freedom to ex ploit the global market and m anipulations of cre dit system by large organisations.

2.2.2 Capitalism and market economy

Mattick (1981) explains that according to classical theory accumulation of capital have certain limits, whereby it manifests itself in declining of profit (p.15). According to Recardo (1962) the rate of profit is the driving force of production in capitalist system but same time this basic principle is en dangered with increasing production and thereb y accumulation of capital (Mattick 1981:P.254).

Mattick (1981) in his book explains reasons for profit fall; first, due to incr easing competition and rents. And second, due to increa sing wage. He argues that there should be balance between marginal productivity and wages of labour. If marginal productivity increased beyond the wages of labour, the demand of labour is increas ed. But if wages of labour exceed than ma rginal productivity, the demand of labour d ecreased. Marginal productivity is the wage paid to the labour at the time. In conclusion, he writes ‘all production is only for the sake of consumption’ (p. 15).

Thus, it indicates that the profit decreases with increase of competition as well as increase in wages and re nts. Simultaneously it suggests that there should be proper balance b etween marginal productivity and wages given to labour. Author sees in broad perspective in view of crisis, he thinks that the buying power of people should be maintain by giving proper wages to labour, because labours ultimately forms the society, where products have to consume. His finding suggests that if wages will not be given according to productivity, the buying power of people will be re duced and products produced will not be consumed in the market. This once again will effect to the producer.

He argues that increased profit accumulates the capital. And the search of profit serve the society because profit is g enerated by people therefore it need to impro vement in living condition of communit y. This pursue s the rule of economics; suppl y and demand. This exchange is considered as general competition, which regulates the economic framework and enhance the social development (Mattick 1981:p.23).

The self equilibrium principle of classical theory is confronted with intractable reality. Where the accumulation process does not go easily but passes through intermittent path. According to Ricardo market economy is balanced by law of self equilibrium process and every supply gets it equivalent demand. Increased production disturbs the market equilibrium temporary and balanced with pric e fall, but there w ould be no over production or over suppl y in the market. Because every product is produced for the consumption and therefore it will find it s demand. In short according to Ricardo there is no over production and no crisis but there is interruption of partial disequilibrium (Mattick 1981:p.25-26).

Thus, it is summarised that there is no economic crisis in classical theory given by Ricardo.

Mattick argues that Profit is the difference between market prices and cost prices and. The value of business or firm is estimated b y its future profit ra ther than actually earned. Therefore firm’s so called capital value is differed from its actual value. As a result firm incurs its borr owing or determine it c redit worthiness accordingly. Competitions force to increase production and expansion of business, therefore estimated future profitability will be distressed and firm will be endangered until it has enough money to be borrowed. Therefore the value of an organisation is estimated b y its expected future profit rather than it actually earns. If major deviation will realised between exaggerated capital value and actual profit of firm, then it will lead to liquidation (Mattick 1981:p.36)

Thus prosperity and growth of firm uproar until productivity and profit i ncrease. This leads to increase in its cr edit until the contraction of profits. B ut meanwhile, if there is rise in interest rate or inflation the loan capital become scarce, which causes to sink in profit either due to rising in labour wag es or de creasing productivity. This is the additional re asons of dropping profitability resulting from production itself, due to excited character of the boom (Mattick 1981:37)

Therefore it is summarised that if overall production is increased beyond capacity of market consumption, it will bring dreadful impact on producers. Thus it seeks a ppropriate balance between production and consumption. And it is somehow beyond the power of organisations.

Capitalist system:

To analyse the business success and failure it is vital to have knowledge of capitalist system, its basic principles and its limitations.

According to Younkins (2002) the survival an d flourishing of busines s as an institutio n depends upon concepts and moral values that provide the foundation upon which c apitalist society is constructed. He further writes Capitalism is hasted on freedom of choice, it allows for morality and character development- a key aspect of human flourishing. In addition, by permitting free market transactions, capitalism allows commerce to develop business in a free society not onl y requires, but also rewa rds, virtuous behaviour b y participants in the market (p.1).

While, Westra (2010) argues; ‘after all, Marx’s very notion of successive historical modes of production captures the fact that, as a historically constituted social order, capitalism comes into being at a given level of development of human material wants an productive techniques and, like other modes o f economics, passes from history as its abilit y to manage human material reproductive affairs is exhausted. What this volume demonstrates is the fact that the historical limitations of capitalism have already been reached’ (p.4).

The defining of capital in its most fundamental incarnation and expounding on its constant; and an analysis of the world historic transfigurations of capitalism which establish how through significantly different type of accumulation capital is nevertheles s able to continue reproductive human economic life - it is possible to demonstrate con clusively that current world economic tendencies euphemised as g lobalisation constitute a mov ement away from capitalism (Westra 2010:6).

Finally, Westra (2010) concludes the economic force created by multinationals are so powerful that governments seem to act as me re mediator of globalisation, where global market has created a borderless world (p.98).

According to Gamble (1989) capitalism as world s ystem has suffered twenty such general crisis of over production since 1825. They have become progressively more severe, because the scales of production and degree of interdependence have grown during every period of expansion (p.7).

Coates et al (1986) write that, as a world system, capitalism necessarily develops in a combined but uneven way, and is subject to process of capital accumulation (and geographical relocation) which move r esources away from some e conomies and towards others; such that industri al production is someth ing which has to be capt ured and retained, and can be so onl y by the provision of suit able kind of social, economic and political environments.

From above analysis it appears that political power becomes ineffective to control the overproduction of multinationals and to provide healthy business environment.

2.2.3 Strategic management

Today’s environment is becoming more and more competitive, due to advancement of technology and globalisation. In this globalised world companies are facing challenges from internal factors due to increased completion, organised labour unions, financial problems and continuous change in external factors such as political, economical, social and technological.

To cope with this threat, leadership and management of companies should keep long-term, flexible, proactive and visionary strategic approach.

According to Johnson et al. (2008 ) strategy is long-term path of an organisation to sustain competitive advantage in changing environment according to market demand and stakeholder expectations (p.3).

According to this definition, three factors interplay; external environment, internal resources and organisation objectives. In this process operation management involves to org anise internal resources to meet external environment to achieve organisation mission. Success for organisation depends upon the abilit y of operation management, because it is the important part of organisation strategy.

It is considered that strategy involves three levels in organisation; corporate level, business level and functional level.

There are four diffe rent characteristics of strategy; long term, flexible, proactive and visionary. In view of Chandler (1962) strategy is long term planning of organisation on the base of organisation mission. He argues that it involves strong coordination of organisation mission, aim and organisational structure.

The strategy of General Motors befor e bankruptcy can be identified b y its annual re port (2007). In this report it appears that GM is g iven more priority to improve its business in North America. GM also emphases on achieving global competitiveness, positioning for profitability and long-term growth while maintaining liquidity. To bring back to profitability of General Motors North America, this annual report suggests that they are working towards return to pro fitability and increase in posit ive cash flow by various action targeting improving product and innovating marketing strategy. They also p lan to g ive more importance on quality reduction of cost and solve the issue of h ealth care. (GM, annual report: 2007).

While Lamb (1984) argues that strategic planning requires pro-activeness of controlling and evaluation of business in accordance with market challenges and competitions, therefore it requires amendments on regular bases either quarterly or yearly. His approach is flexible and suggests implementation of new strategy by replacing old one to meet ongoing economic, political, social, financial and technological challenges.

The assessment of GM s trategy can be done by analysing its financial data. The successful outcomes of strategy can be realised, when better financial returns would gain according to company’s mission and goal.

According to Selznick (1957) organisational strategy should be matched its internal factors with external environmental conditions.

There are various factors which may influence on the or ganisation. They are known as external factors, which are identified b y macro analysis and interna l factors which ar e identified by five forces framework. External environment factors are known as PESTEL. PESTEL is known for political, economical, social, technological, environmental and legal. (Thomas, S. 2007:pp9-21)

According to Johnsons et al. (2008) many of them are interlinked and it is vital to investigate the key drivers to change. It is necessary to evaluate the current and future trend of external factors and its implication on org anisation. These environmental factors cannot be changed by the organisation but on the contrary organisation must adopt the path according to external environment for its existence (p.55-56).

It is observed that General Motors was facing challenges of external environment in US such as weak economic environment, higher gas prices, big alteration in housing policy, and continuously decreasing purchasing power of consumers. In this report they say that they are dedicated to build their future with keep continuing necessary actions, at the same time, they will take action regarding difficult U.S. market conditions” (Annual report 2007 p.11).

Johnson et al. (2008) argue that strategy need involvement of people f or decision and its implementation. They further state th at strategic management is likely to appl y at any complex situation in org anisation. They believe strategic management is not limited to operation (p. 11).

Johnson et al. (2008) write strate gic management involves at three different levels of organisation; to understand strategic position, selection of strategic choices and managing strategy in action (p.12).

While thinking about strategic choices it is crucial to identify the opportunity and threats for the organisation from the environmental analysis. SWOT can be utilised for organisation’s strategic formulation. SWOT analysis involves the ex ploration of str ength, weakness, opportunity and threat for organisation (Johnsons et al. 1980:p.81).

According to Ansoff (1965) strategic management can be utilise d for up-coming opportunities and challenges of organisation. He developed ‘gap reducing action’ technique by which we can analyse where organisations are currently and where it should like to be. This is also called gap analysis technique.

To attain best performance in ever changing environment management of organisation should shape the organisation strategically by planning and implementing firm’s asset for its establishment and development. It involves well-known economic principal for strategic management decision to allocate the firm’s resources (Teece 1998:3). Thus, the notion that a firm can choose from a finite set of strategies implies that firm’s resources and capabilities are not completely fungible and generalizable, certainly in the short run , if not the long run (p.4).

He further argues that organisation should be held its resource based approach not to compete the new entry or increase in p rices but to provide good quality products with better performance to the customers. Thus, organisation needs to invest in superior system and set a structure accordingly for profitability. (Teece,1998:201).

While explaining importance of econo mic in strategic management Teece (1998) writes; economic knowledge is embedded with strat egic management especially in research program. This is required to understand the performance of organisation or its products and operation systems. Economic knowledge is also useful to anal yse experience curve, the changing characteristic of economic, determination of profit and the changing climate within business schools. To ex amine current organisation position and foresee future prospect it is vital to combine s trategic management with knowledge of economic. It seems necessity to alliance of economic a nd strategic management to succ eed practical and intellectual challenges that will shape future dev elopment. Therefore it necessitates the acknowledgement of micro economic theory of organisation as well as market in the mind of business managers.

According to Rutherford (1995) ‘Economic theory defines an industry as a group of firms producing the same principal product’ while, Porter (1980 ) argues that ‘a group of firms producing products that are close substitutes for each other’ (p.5).

Johnsons et al. (1998) believe that to understand t he attractiveness of industry or competitive forces in sector from strategic perspective is imperative and on it dep ends the success or failure of organisation.

Porter’s essential message is that where the five forces in the industry are high, then industry are not attractive to compete in: the threat of entry into an industry; the threats of substitutes to the industry’s products or services; the power of suppliers into the industry; and the extent of rivalry between competitors (Johnson et al. 1998:p.61)

To understand the failure of an organisation, study of strategic drift in organisation is helpful to understand why organisation runs out of stream, the reasons and consequences. (Johnsons et al. 2008: p.179).

According to Miller et al (1980) there is a propensity for strategies to develop on the basis of what the organisation has done in the past - especially if that has been successful (p.591­614).

Thus, large organisation which h as long experience makes incremental changes on its cultural influences. At certain time th e gap between amount of change between environmental change and organisational change widens.

According to D anny Miller pursuing strategy on its past succ ess with rigidity will upset businesses and this happens in the cases of most successful companies. He further states that these companies may drift in this way. Miller (1990) has called this t endency as Icarus Paradox, where businesses become captured by the formula that has delivered that success.

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Details

Pages
104
Year
2012
ISBN (eBook)
9783668065215
ISBN (Book)
9783668065222
File size
1.9 MB
Language
English
Catalog Number
v305268
Institution / College
Prifysgol Cymru University of Wales
Grade
Tags
causes insolvencies large businesses case study general motors

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Title: Causes of Insolvencies in Large Businesses. A Case Study of General Motors