When companies compete in the economic market, there will always be threats of risk and uncertainty. Although the two phrases sound like they are similar, they are quite different. The difference between the two is the fact businesses are able to measure risk and control it. Risk is the chances of either gain or loss of something important. Uncertainty on the other hand is quite the opposite. Uncertainty can’t be gauged and business cannot control the outcome. It is suggested that events in the future are unpredictable.
In the December 2018, GM has made an official announcement stating that it will be shutting down five plants in the North American and Canada region for the purpose of restructuring electric driverless vehicles and eliminating various car models like the Chevrolet Impala due to a decline in sales. GM has developed a new vision where the corporation wants to create a world with no crashes, eliminating emissions, and remove congestion. This new plan implemented by CEO Mary Barra, puts several of its employees at risk by either relocating to another location not affected by the shutdown, or the loss of their job and livelihood, cutting about 15% of workers already, in order to reduce expenses and increase revenue, while hiring new workers at the same time that supply specific skills for the future of the company.
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As GM is trying to reallocate its resources to other areas, it is currently under backlash. The closing down of several plants has resulted in many GM employees to go on strike, stating that GM has violated the union’s labor contract. The risk in this situation is that by closing down plants, and laying out thousands of employees, the company have risked cutting expenses with an inevitable strike that resulted in a halt in production that could go on for an unknown amount of time until both parties come to an agreement. The uncertainty in this situation is that after GM was driven to make such a great decision to close its plants to cut costs in order to introduce a new technology and create new partnerships, is not guaranteed to know the outcome of the future.
As General Motors move towards the future in the improvement of its vehicles, and the hiring of people necessary for its vision, the company needs to lessen the impact of the current strike that is currently stopping production. The company needs to first evaluate the union contract and try to identify and solve any violations that it may be unaware of. With thousands of employees out of work, the company needs to make use of employees who are at risk of losing their jobs due to the plant closures by keeping potential employees on board, because they have experience in working for the company already and they have the skills necessary to help with the future production of new vehicles, implementing this type of strategy may decrease the amount of people on strike. GM will save time and money on training its employees now at closing plants rather than hiring new employees where they will have to learn almost everything. Bringing current employees on board may help production to start back again and earning back profit that may have been lost during the strike.
General Motors and Unfavorable Outcomes
First and foremost adverse selection refers to a state of affairs in which market participation is influenced by asymmetric information. This means that between buyers and sellers, each party have different information, whereas one party (seller) have more knowledge than the other (buyer), or the other way around. Typically, the party who is less knowledgeable is at a disadvantage. One example of adverse selection that consumers was the fact that some vehicles like the Chevy or Cadillac, had a defect in the transmissions that triggered the cars to shake aggressively. This one problem resulted in causing other problems like preventing drivers from operating their cars efficiently, which can possibly cause a collision.
Because of this faulty part, GM has been accused of knowing about the faulty car part and faced a class action lawsuit. GM goes on to say that consumers knew about the issue with their cars before purchasing them at the price agreed upon, but this does not at all excuse GM of any wrongdoing. Regardless if the consumer knew about the issue or not, GM should have taken the initiative to further test car parts to make sure that they are up to standards. GM has also been under fire with faulty ignition switches, that caused several deaths. Since then, GM has taken some necessary steps in avoiding risk of defects by espousing many recommendations. GM leaders also encourages employees to report anything that may pose as a problem. Also promoting openness and accountability, it greatly reduces safety problems (Maryann Combs, GM Vice President).
The Moral Hazards of GM
Moral hazard is defined as having a lack of incentive to safeguard against potential risk, in which an individual or company is protected by insurance. GM has experienced moral hazard back in the year 2008, when the company was close to going bankrupt until the government stepped in and approved a bailout plan for the company that lasted until 2014. Back in the year 2007, GM was losing to its competitor Toyota. While Toyota expanded by building more plants and meeting the global demand for smaller cars, GM were shutting down plants and only offering a 0% financing to sell its large vehicles. GM clearly lacked the incentive to meet global demands build smaller cars but instead try to sell off its larger vehicles at an offer that ultimately caused the company to shut down plants, loss of profit, and eventually bankruptcy in 2009, after being bailed out twice. Ultimately taxpayers were the ones who incurred the loss of $10.2 billion.
General Motor’s Relationship Issues of Principal and Agent
The principal-agent problem happens when a person, who is known as the agent, is authorized to make assessments on behalf of another person, known as the principal. In GM’s case, shareholders are known as the agents and the managers and CEO’s are known as the principal. With CEO Mary Barra attempting to increase profit for shareholders, but the stock has since been decreased by 22%.
Some shareholders had commented that GM could be confronted with a third major action by activist shareholders if its share price does not get better. There was a decrease in the Chinese market recently, and the pressure is getting higher for the company to push for a better market price. Also with the recent strikes in closing down plants as well as strikers are fighting for better wages and healthcare, GM is frown upon and is being tugged back and forth. By trying to save on money and resources, GM has resorted to laying off over 14,000 employees and shutting down plants in order to make room for new technology, hire new employees and promote a world where they are no emissions, no crashes, or congestion.
Organizational Structure
GM has a structure that is a regional divisional, where it deals with gathering business activities depending on the area of operations. The company’s structure is set up first as the Regional Segment. Also known as the primary, this segment differs across global markets for automobiles. The second structure is a business type division, also known to be secondary, and this authorizes the company to manage each business smoothly. The third type is the Corporate Functional Group. It is known as a secondary, and is used to integrate all business operations. Despite its advantages, some disadvantages of GM’s structure is at the international level, it has limited support for branding consistency. A solution to enhance the organization structure is to cultivate in developing a proper marketing campaign that builds the brand’s strength and attract consmers from around the world.
Reference
- 1. CNN Library. (September 16, 2019). General Motors Fast Facts. Retrieved from https://www.cnn.com/2014/04/08/us/general-motors-fast-facts/index.html
- Welch, David. (September 11, 2019). GM Strike Risk at 12-Year High Approaching Weekend Deadline. Retrieved from https://www.bloomberg.com/news/articles/2019-09-11/gm-strike-risk-at-12-year-high-with-weekend-deadline-approaching
- Wayland, Michael. (December 03, 2018). Unlike 2008, GM cutting jobs, plants proactively. Retrieved from https://www.autonews.com/article/20181203/OEM/181209962/unlike-2008-gm-cutting-jobs-plants-proactively
- Howes, Daniel. (October 23, 2019). Howes: After inevitable UAW-GM battle, uncertainty looms. Retrieved from https://www.detroitnews.com/story/business/columnists/daniel-howes/2019/10/24/uncertainty-looms-after-inevitable-uaw-gm-battle/4063219002/
- Sortor, Emily. (August 14, 2019). GM Class Action Says Chevy, Cadillac Transmissions Are Defective. Retrieve from https://topclassactions.com/lawsuit-settlements/consumer-products/auto-news/914195-gm-class-action-says-chevy-cadillac-transmissions-defective/
- LaReau. Jamie L. (September 6, 2019). GM: We encourage employees, dealers to tattle after ignition switch crisis. Retrieved from https://www.freep.com/story/money/cars/general-motors/2019/09/06/gm-ignition-switch-nhtsa-recalls-safety-defects/2099289001/
- Amadeo, Kimberly. (November 06, 2019). Auto Industry Bailout: Was the Big 3 Worth it?. Retrieved from https://www.thebalance.com/auto-industry-bailout-gm-ford-chrysler-3305670
- Klayman. Ben (October 19,2018). Frustrated GM Investors ask what more CEO Barra can do. Retrieved from https://www.reuters.com/article/us-gm-barra/frustrated-gm-investors-ask-what-more-ceo-barra-can-do-idUSKCN1MT2QM
- Kissinger, Daniel. (September 8,2018). General Motors’ Organizational Structure for Flexibility in Regional Markets.
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