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01/31/2012

Case Study: Fiat Auto and General Motors Alliance


Case Study: Fiat Auto and General Motors

 

Introduction

            The economic crisis and other factors, affect different companies in the global market and automotive industries are not exempted. In order to cope with economic problems within the industry, different companies try to find the most efficient ways to save the company and one of these is through the consideration of merging or going into alliance. In alliance, both companies pursue strategic fit to compliment organisational approaches setting the stage for potential strategic synergy (De Kluyver, 2000). However, it is inopportune that there is no clear evidence that supports the value of strategic fit in mergers Case Study: Fiat Auto and General Motors (Chatterje et al., 1992). In addition, research shows that there is a relatively high risk in having an alliance or joint venture as between 55%-70% mergers and acquisitions are unable to meet the anticipated purpose (Carleton, 1997).

            Primarily, the goal of this paper is to analyse the alliance the happened between Fiat Auto, an Italian car manufacturer and General Motors (GM), a US-based automotive industry.  The analysis will consider the use of marketing analysis tools such as Porters Five Forces Analysis. In addition, this will also analyse the problems and issues facing the alliance of both companies and provide recommendation to solve the problems faced.

Overview of the Case study: Problems and Issues

            The case was about the merging or the strategic and industrial alliance set and established by Fiat Auto and General Motors in order to expand their business in the global market, particularly in North America for Fiat and Italy for General motors and the rest of the world. In this alliance, General Motors have obtained 20% share to expand their business in European market and Latin market, while Fiat obtained 5.1% stake in the General Motors. The strategic and industrial alliance seems to meet the objectives of the company but because of the economic crisis in various parts of the globe and external factors like the terrorist attacks in 9/11, both industries suffered big loss affecting not only their business operations but also the strategic alliance built by the two industries. Fiat auto try to regain their business by proposing to GM in which the latter rejected. One of the problems that can be attributed with this alliance is that, the alliance made was considered to be allies in costs only but will still remain competitors in the market, specifically in Europe and Latin America.  Hence, such aspects affects the entire partnerships since both companies are still trying to compete with each other in spite of their agreement.

            In addition, another problem that can be considered in this alliance is the inability of both companies to provide support for the other. Since the objective of the alliance is to be just partnered in costs, and stay competitors, industries that are being left behind could not ask support for the other company, which happened when Fiat is having financial problems and General Motors did not even bother to take a step of helping them by providing financial supports.  

            Aside from this, it can be noted that the management of both industries, though agreed on a partnership are seen to be not acting as allied or partners. Both companies have different aims and objectives, without knowing that this might affect their partners in some aspects. Both companies are in the middle of economic crisis in each industry, since both are experiencing profit loss. Each company have been able to do what they can to solve the problems like Fiat Auto have tried to reliance and restructure their business to solve the issue. On one hand, General motors are trying to layoff and cost cut to save the industry from total loss.

 In this regard, it is essential that such issues and gap between the two companies should be given consideration and resolved immediately to avoid further problems.

Porter’s Five Force Model

Globalisation and the advent of information technology are at the core of the auto and car industries operation in this generation. Automotive industries like Fiat and General Motors e should embrace efficiency as well as innovativeness to be able to ensure continuous existence as well as maintain competitive advantage. In addition, strategic alliance is also considered with the aim on expanding the business in the global market (Porter, 1996). This part will analyse the alliance with the consideration of the Porter’s Five Forces Model.

New Market Entrants VERY LOW

            In the Five forces model, the first factor to be given consideration is the threat of new entrance of new automotive industries.  With the strategic of globally competitive industries like Toyota, Honda, Ford, General Motors and even Fiat, , the threats of entry in the automotive industry is noted to be very low. Based on the case study provided, the threats of new entrants for a new automotive industry is very low since a new auto industries will need more financial resources as well as capital investment to be able to continue the business. In addition, these new industries also need high proprietary technology to manufacture and offer new and innovative automobile/cars  that will compete in the existing automobile models made by the mentioned industries. Aside from this, the economic crisis and the industrial competition also makes the threat of new entrants to be very low since most of the existing companies have strong brand identification such as the brands of GM and Fiat.

Supplier Power (VERY HIGH)

            The current economic conditions as well as system of the auto industries which General Motors and Fiat Auto belongs, largely determine the level in which strong and effective competition can be attained.  In the automobile market, it can be said that suppliers have very high. The high level of the supplier power is due to the existence of large number of suppliers in the global market with a few numbers of manufacturers. In this regard, suppliers have the power to control the price of the raw materials needed by the car companies. In the case study, it is said that Fiat supplier has very low power of over Fiat, in spite of the financial problems faced by the company.

            Accordingly, the power of suppliers of auto industries is very high as it also has the power to the affect organisational performance of the company like in the case of Fiat or General Motors. The reason for this is that, when the price of the raw materials increases in the global market, it can give additional cost for auto industries.

Power of Buyers HIGH

The buying power of clients in terms of immediate effect is very high in auto industries. Like what happened in Fiat and General Motors, in which both companies are facing problems of declining and decreasing sales of their automobile brands. One of the rationales for this aspect is because of the high brand loyalty of different automotive clients to brands such as Toyota, Honda, Ford and the prestige of other brands like Porsche. Moreover, since there is a strong product differentiation on the car manufactured and produced by the auto and car industries, the buyers or the clients have the power to choose which car or automobiles suit their needs.      

The factors influencing the clients to buy or purchase specific brand of car includes the appearance, quality, price and environmental aspects. In this time of economic crisis and because of the terrorist’s attacks, car companies like Fiat’s and GM’s sales have been affected because of the decline of sales of their cars and automobiles.

Furthermore, since there are many existing auto and car industries, clients have more options to select the most affordable, efficient but with good quality cars.

Availability of Substitutes (VERY HIGH)

In line with the substitute products, the auto and car industries are facing very high substitutes due to the existence of different transportation means including trains, buses and other land transportation vehicles. Hence, this force is very relative and this force highly depends on the price as well as performance of different automobile. If availability of substitute is being considered, it is essential that total cost of ownership should be given consideration as well. Hence, this indicates that considering purchase price is not enough and auto and car industries should also consider the operating costs for their manufactured cars. In case of GM and Fiat, the alliance of the company is said to not helping both the industries from the start, since they still remain competitive (Rindova & Fombrun, 1999) in spite of their alliance. This means that the product of Fiat can be considered as a substitute and threat for the cars of General Motors.

Competitive Rivalry (VERY HIGH)

The market environment in the auto and car industries is considered to be very high. It can be said that there are various factors which keep auto industries to be the most competitive industries in the global operations. One of these is due to the price competition. It can be noted that there is an oligopoly in both national and global level. Companies like Fiat and General Motors, do not compete on price but they compete in brands and in customer loyalty.  All car industries have established high quality as well as strong brands which makes the competition more intense, specifically in terms of their loyal clients. IN the case of Fiat and General Motors, the company still competes in the European and Latin market where each has strong position. The two companies compete on features, as they realize that the price based competition would not benefit either.  With the development of foreign trade, the rivalry has also increased. Moreover, the competition is high because of the large number of customers.

SWOT Analysis

            Based on the given case, the Fiat Auto and General Motors will be analysed through SWOT Analysis. For this, the analysis was based on the case study provided, hence, both general motors and Fiat auto are analysed as one.

Table 1

General Motors and Fiat Auto SWOT Analysis

Strengths

Weaknesses

Ø  One of the strengths of General Motors and Fiat Auto are their size and the market share which have been possible because of their global strategies.

Ø  The company has also technological potentials to provide new models for automotive and meet changing needs of the consumers.

Ø  The company takes into consideration of quality improvement to stay competitive in the market place.

 

Ø  General Motors and Fiat lacks the ability to make their technology work at its best to benefit the auto industries.

Ø  The vertical integration and their bureaucratic culture and approach of the company can also be attributed as one of their weaknesses

Ø  Inability of the management to give efficient value to their global partners and alliances.

 

Opportunities

Threats

Ø  The use of knowledge which can be gained from the experiences of other competitive rivals.

Ø  Expansion on the global market presence with their European models and consideration of other global partners.

Ø  Continuous establishment of the newfound customer confidence

Ø  Changing customer needs and demands for new models of cars,

 

Ø  Global competition and the existence of competitors that can easily manage the global crisis.

Ø  Economic crisis that is felt in the global market.

Ø  Changing federal and government legislation and regulation.

Ø  Inability to consider strategic decision making when it comes to having global partnerships and alliance.

 

 

Recommendation

            It can be said that the automobile sector is the considered as one of the major industrial employer in the world today (Williams 2003, p. 52). However, it should be noted also that the global environment, specifically the economic crisis and other factors like terrorist attacks appears to be the most visible challenge for these industries (Smith 2001, p.1). Companies like General Motors and Fiat Auto seems to face huge problems and have seen their stock market and investment valuations fell and dropped by nearly 65% in the past five years. In addition, the case also noted that both companies’ profits have been similarly shrinking when these industries were badly hit by the economic crisis. To make the problem worsen, continuing uncertainty about the global economy has seen customer and client confidence badly affected (Williams 2003, p. 52). In this regard, both Fiat and General Motors call for a more sustainable model in market success (Smith 2001, p.1). 

            In this regard, in order to solve the issue for both companies, General Motors and Fiat should consider strategic change and reconsider their alliance to make strong impact in the market.  Herein, the management of both companies should be able to continue the alliance and have common objective to stay competitive in the global market. Herein, the management should have an agreement of having combined business operation, to ensure global sales volume. Such will enable both companies to provide much wider and innovative product lines throughout Europe and North America and other parts of the globe. In addition, creating strong brands under the names of both GM and Fiat will also compensate for the lack of competitive automotives in the market.  To avoid being the object of unfriendly takeover strikes, General Motors and Fiat Author can also make their bonds and their alliances tighter to make the company become more competitive worldwide.  

            Furthermore, both companies can also considered strategic changes by restructuring the management and their business approach by considering different aspects.  First, the business decisions in having strategic and industrial alliance must complement the business strategy in other functional areas of the industries. Second, the management of GM and Fiat should follow the same aims and be mutually supportive with each other as part of the agreement. In addition, the steps taken must also be comprehensive as well as thorough to generate a substantial impact which includes the improvement of the cost situation over the long term. Lastly, the actions and alliance of Fiat and General Motors must be stringently applied and constantly monitored to ensure success.

Reference

Carleton, R.J. (1997), “Cultural due diligence’’, Training, Vol. 34, pp. 67-80.

Chatterje, S., Lubatkin, M.H., Schweiger, D.M. and Weber, Y. (1992), “Cultural differences and shareholder value in related mergers: linking equity and human capital’’, Strategic Management Journal, Vol. 13, pp. 319-34.

De Kluyver, C.A. (2000). Strategic Thinking. Upper Saddle River, NJ: Prentice Hall.

Porter, M.E. (1996). What is Strategy? Harvard Business Review, 74(6), 61-78.

Rindova, P. & Fombrun, J. (1999). Constructing competitive advantage: The role of firm-constitute interaction. Strategic Management Journal, 20, 691-710.

Smith, B 2001, ‘On Sustainable Mobility - automotive industry on the brink of a change’, Automotive Manufacturing & ProductionJuly, p. 1.  Retrieve October 9, 2009.

Williams, S 2003, ‘A World Industry’, The Middle East, December, p. 52.

 

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