Downsizing at General Motors Essay Sample
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Downsizing at General Motors Essay Sample
This paper explores the change that General Motors faced after the economic recession and credit crisis that began in 2007. This pushed GM to request assistance from the U.S. Treasury which resulted in the restructuring of their US operations. The start of this restructuring change involved downsizing GM’s operations in the US. Along with the mandate imposed from the US government GM engaged in downsizing to reduce costs, and to cope with the external pressures. The pressures that propelled GM to change included market decline pressure, fashion pressures, and mandated pressures. In its restructuring, GM closed plants, cut its workforce, shed three brands, reduced debt, introduced popular new vehicles, and implemented changes to reduce retiree legacy costs, which had been a major financial drain (Canis & Webel, 2013). Although this downsize had a lot of negative results, including employee morale and retention, the overall effects of this change on GM’s operations were positive as their share price and finances grew since they filed for bankruptcy. Therefore, the change that GM executed was done effectively and helped the company keep their company standing.
Given the speed and depth of the economic crisis that began in 2007 many companies engaged in downsizing as a way to cut costs and adapt to changing market demands. Many automotive companies experienced significant declines in sales and revenue due to the precipitous drops in demand for automobiles and the growing switch to smaller, more fuel efficient, vehicles. The recession and global credit crisis not only affected smaller auto retailers but also the larger ‘big three’ auto manufacturers Ford, General Motors (GM) and Chrysler. As a result of this “GM, critically short of operating cash, received a bridge loan from the U.S. Treasury, under the conditions that the company further accelerate a tough restructuring of its US operations that had been underway for several years” (General Motors, n.d.). This report identifies the changes and the results that GM faced as a result of this restructuring and downsizing due to the economic crisis. Company Overview
As stated above, General Motors Corporation is one of the World’s largest ‘big three’ automobile manufacturing companies. It was founded on September 16, 1908 by William Durant and has placed a critical role in the global auto industry for more than 100 years (General Motors, n.d). The design and quality of GM’s new cars improved significantly in these 100 years, but GM found it difficult to regain share from oversees manufacturers, and legacy cost from GM’s decades as a larger, less efficient company continued to weigh on financial results (General Motors, n.d.). This decline in financial results, combined with the global economic crisis, pushed GM to request assistance from the U.S. Treasury which resulted in the restructuring of their US operations. As a result of this restructuring, in 2009 General Motors changed their name to General Motors Company (General Motors, n.d.). Along with this name change, “old GM and its successor General Motors Company together received over $50 billion in federal assistance through the U.S. government’s Troubled Asset Relief Program (TARP)” (Canis & Webel, 2013). “As ranked by total assets, GM’s bankruptcy marks one of the largest corporate Chapter 11 bankruptcies in U.S. history” (Canis & Webel, 2013). The start of this restructuring change involved downsizing GM’s operations in the US. Restructuring Change
Downsizing is “the intentional process of permanently reducing staff numbers in an organization” (Palmer, Dunford & Akin, 2009). GM engaged in downsizing due to their restructuring agreement with the US Government, to reduce costs, and to cope with the external pressures. There a variety of approaches to downsizing, including retrenchment, downscaling, and down scoping (Palmer et al., 2009). GM’s structural change is an example of retrenchment, which is “done by centralizing/specializing a firm’s operations to sustain or improve productivity” (Palmer et al., 2009). Downsizing is generally regarded as “midrange or second-order change”. A second-order change “is transformational, radical, and fundamentally alters the organization at its core. Second-order change entails not developing but transforming the nature of the organization” (Palmer et al., 2009). Furthermore, GM’s downsizing can be seen as a type 2 transformation, which involves the “revitalization of already-established companies… where the organization remains in the same market but focuses on how to rebuild itself in order to operate more effectively” (Palmer et al., 2009).
GM remained in the automotive industry but needed to restructure and downsize in order to mitigate the effects of the economic recession. In its restructuring, GM closed plants, cut its workforce, shed three brands, reduced debt, introduced popular new vehicles, and implemented changes to reduce retiree legacy costs, which had been a major financial drain (Canis & Webel, 2013). Cuts were made based on whether a person’s position was deemed redundant, the level of their subject-matter expertise, and performance reviews (Smerd, 2009). As outlined in Table 1 more than 2,000 dealerships were closed, as GM shed its Pontiac, Saturn, Hummer, and Saab brands and more than 20,000 U. S. workers lost their jobs. In addition, investors in $27 billion worth of GM bonds ended up with new stock in the new GM Company worth a fraction of their original investment and owners of the GM Corporation shares had their investments essentially wiped out (Isidore, 2009).
Downsizing can be a financially costly change process and can have significant social and psychological effects on employees – both those who remain those who leave. Where companies do go down the downsizing route, there are a number of challenges that confront them in the process of carrying out this change (Palmer, 2009). Change Challenges of Downsizing
Smerd (2009) interviewed current and recently laid-off GM workers about the effects that GM’s downsizing had on them. They spoke about the last few weeks at GM and described it as an atmosphere of uncertainty. “We were on pins and needles forever” (Smerd, 2009). When a big company, like GM, files bankruptcy it would stimulate a lot of employees to start looking for employment elsewhere as they would be uncertain if they would be let go or not. It would be assumed that those employees who would be ‘good candidates’ to let go of would start looking for jobs elsewhere because they knew that they might be let go of.
However, since GM’s bankruptcy happened during the economic recession they would not quit their jobs until they were let go as it would be very hard for them to find work elsewhere with their general skills. On the other hand, those employees with a lot of skills and expertise would be in a better position to look for jobs elsewhere as their skills may be sought out for in other companies. This is an example of employee retention. This is where downsizing leads to the loss of important and skilled employees (Palmer et al., 2009). Another challenge with this type of change is managing those that the company keeps who suffer from “survivor syndrome”. Where remaining employees may “question why the change occurred, feel guilty that they remain while some of their valued work colleagues are unemployed, and may suffer from low morale wondering whether they are likely to lose their job in future downsizings” (Palmer et al., 2009).
Images of Change
For General Motor, the image of change that the executives held is that of a navigator. This “image of management is still one of control, although the ability to exercise control is severely constrained by a variety of forces, both internally and externally driven, that propel change relatively independent of managers’ intentions” (Palmer et al., 2009). More specifically, the theory that is used to describe this image is the Institutional Theory where the “change managers take similar actions across whole populations of organizations… [that] occurs through pressures associated with the interconnectedness of organizations within an industry or environment” (text). These pressures, described below, are inevitable and executives have a limited ability to implement change outcomes because of these forces. Pressures to Change
Environmental pressures often occur when an “organization’s resource base decreases as a result of reduced demand for products and sales, decreases in market share, to turn around negative cash flow… avoid bankruptcy and organizational death” (Palmer et al., 2009). In GM’s case their change came in response to all of these said reasons, except for bankruptcy as this was a result of their organizational change. The pressures that propelled GM to change came from outside of the company and include the following: market decline pressure, fashion pressures, and mandated pressures. Market Decline Pressure
The decline in the automotive demand in 2008 was mainly due to the economic recession and credit crisis. During this time many consumers were out of work so were not looking to buy new vehicles, especially those that were not fuel efficient. This was the main contributor that pushed GM to receive assistance from the U.S. Treasury which resulted in the restructuring and downsizing of their US operations. Fashion Pressures
The downsizing in GM is an example of mimetic isomorphism, which occurs “when organizations imitate the structures and practices of other organizations in their field or industry, usually ones that they consider as legitimate or successful” (Palmer et al., 2009). Many of the top automotive companies also turned to the US government for assistance during the economic crisis. The criteria that the US imposed on GM in exchange were the root of the restructuring change, which were out of GM’s control. Mandated Pressures
This type of pressure is referred to as “coercive isomorphism, where organizations are forced to take on activities similar to those of other organizations because of outside demands placed on them to do so” (text, page 52). For GM it was a formal coercive pressure because it included a government mandate. Although they were not forced to change to meet new legal or other legislative requirements, they were forced to change due to the government conditions’ on their structuring plan, similar to the fashion pressure. Result of Change
There are opportunities, resulting from downsizing, which can have a huge negative impact on the fortunes of an organization. Beyond missed opportunities, large layoffs tend to result in a substantial decline in employee morale and commitment and a significant increase in stress, as stated above. However, aside from the negative effect on employees, the investors in General Motors actually liked the restructuring plan, sending GM stock up 21% to $2.04 when it was announced to the public (Puzzanghera, & Bensinger, 2009). The strength of GM’s stock price and the related recoupment of government assistance to the company have helped with the success of GM’s restructuring change (Canis & Webel, 2013). GM’s finances have also improved since its emergence from bankruptcy, and the company is once again consistently profitable (Canis & Webel, 2013). Conclusion
After the credit crisis and recession began in 2007 auto sales reduced substantially. As a result, General Motors Corporation restructured through bankruptcy and began operation as a new company in July 2009 as General Motors Company. Without the U.S. government assistance, GM would not have been able to pay creditors, suppliers, or workers and would most likely have entered bankruptcy earlier with a less certain outcome (Canis & Webel, 2013). This restructuring resulted in the company downsizing. Many workers lost their jobs as GM closed many plants and discontinued a few of their brands. Although downsizing has a lot of negative results, including employee morale and retention, the overall effects of this change on GM’s operations were positive as their share price and finances grew since they filed for bankruptcy. Therefore, GM’s execution of this change was very effective and a lot of companies looking to downsize, or restructure, could learn from their successes and failures along the way.
Canis, B., & Webel, B. (2013, January 3). The role of TARP assistance in the restructuring of General Motors. Federation of American Scientists. Retrieved February 6, 2013, from http://www.fas.org/sgp/crs/misc/R41978.pdf General Motors. (n.d.) Retrieved February 01, 2013, from http://www.gm.com/company/aboutGM/our_company.html Isidore, C. (2009, June). GM bankruptcy: End of an era. CNN Money. Retrieved February 3, 2013, from http://money.cnn.com/2009/06/01/news/companies/gm_bankruptcy/index.htm Palmer, I., Dunford, R., Akin, G. (2009). Managing organizational change. (2nd ed). McGraw-Hill Irwin Puzzanghera, J., & Bensinger, K. (2009, April 28). GM proposes painful downsizing in bid for survival. Los Angeles Times. Retrieved February 1, 2013, from http://articles.latimes.com/2009/apr/28/business/fi-gm28 Smerd, J. (2009, May). GM’s Downsizing Strategy Moving With Great Efficiency. Workforce. Retrieved February 4, 2013, from http://www.workforce.com/article/20090504/NEWS01/305049993/gm-s-downsizing-strategy-moving-with-great-efficiency