This paper explores the alterations that General Motors faced after the economic recession and recognition crisis that began in 2007. This pushed GM to seek aid from the U.S. Treasury, which resulted in the restructuring of its U.S. operations. The start of this reconstituting alteration involved retrenching GM’s operations in the U.S. Along with the authorization imposed by the U.S. authorities, GM engaged in downsizing to cut down costs and cope with the external pressures.
The pressures that propelled GM to change included market diminution pressure, manner pressures, and mandated pressures. In its restructuring, GM closed plants, cut its workforce, shed three brands, decreased debt, introduced popular new vehicles, and enforced changes to reduce retiree legacy costs, which had been a major financial drain (Canis & Webel, 2013).
Although this downsizing had many negative consequences, including reduced employee morale and retention, the overall effects of this change on GM’s operations were positive, as their share price and funds grew since they filed for bankruptcy. Therefore, the change that GM executed was done effectively and helped the company maintain its standing.
Introduction
Given the velocity 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 hasty drops in demand for cars and the growing shift to smaller, more fuel-efficient vehicles.
The recession and global credit crisis not only affected smaller car retailers but also the larger “Big Three” car makers: 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 U.S. operations that had been underway for several years” (General Motors, n.d.). This report identifies the changes and consequences 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 played a critical role in the global car 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 recover market share from overseas manufacturers, and legacy costs 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 aid from the U.S. Treasury, which resulted in the restructuring of their US operations. As a consequence of this restructuring, in 2009, General Motors changed its name to General Motors Company (General Motors, n.d.). Along with this name change, “old GM and its replacement General Motors Company together received over $50 billion in federal aid 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 retrenchment of GM’s operations in the US. Retrenchment is “the intentional process of permanently reducing staff numbers in an organization” (Palmer, Dunford & Akin, 2009). GM engaged in downsizing due to its restructuring understanding with the US government, to reduce costs and to cope with external pressures. There are 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). Retrenchment 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 retrenchment 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 reconstruct 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, reduced its workforce, discontinued three brands, reduced debt, introduced popular new vehicles, and implemented changes to reduce retiree benefits costs, which had been a major financial drain (Canis & Webel, 2013). Cuts were made based on whether a person’s position was deemed excess, the level of their subject-matter expertise, and performance evaluations (Smerd, 2009).
As outlined in Table 1, more than 2,000 franchises were closed as GM discontinued its Pontiac, Saturn, Hummer, and Saab brands, and over 20,000 US 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 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 and those who leave. When companies do decide to downsize, there are a number of challenges that they must confront in the process of carrying out this change (Palmer, 2009).
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 all the time” (Smerd, 2009). When a large company like GM files for bankruptcy, it can prompt many employees to start looking for employment elsewhere because they are unsure if they will be let go or not. It would be assumed that those employees who would be “good candidates” to be let go would start looking for jobs elsewhere because they knew that they might be laid off.
However, since GM’s bankruptcy happened during the economic recession, employees would not quit their jobs until they were let go as it would be very difficult for them to find work elsewhere with their general skills. On the other hand, 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 by 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, questioning whether they are likely to lose their job in future downsizings” (Palmer et al., 2009).
Images of Change For General Motors, the image of change that the executives held is that of a sailing master. This “image of management is still one of control, although the ability to exert 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 “change managers take similar actions across whole populations of organizations…[that] occurs through pressures associated with the interconnection of organizations within an industry or environment” (text). These pressures, described below, are inevitable, and executives have 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 decreased 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 automotive demand in 2008 was mainly due to the economic recession and credit crisis. During this time, many consumers were out of work and were not looking to purchase new vehicles, particularly those that were not fuel efficient. This was the main factor that pushed GM to seek aid from the U.S. Treasury, which resulted in the restructuring and downsizing of their U.S. operations.
Mimetic 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 U.S. government for aid during the economic crisis. The criteria that the U.S. 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’s conditions on their restructuring plan, similar to the mimetic pressure.
Consequences of change
There are opportunities resulting from downsizing that can have a huge negative impact on the fortunes of an organization. Beyond missed opportunities, large layoffs tend to result in a significant 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 really 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 aid 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 onset of the economic recession and credit crisis in 2007, car sales significantly decreased. As a result, General Motors Corporation filed for bankruptcy and began operations as a new company called General Motors Company in July 2009. Without the aid of the US government, GM would not have been able to pay its creditors, suppliers, or workers, and most likely would have filed for bankruptcy earlier with a less certain outcome (Canis & Webel, 2013).
This restructuring led to downsizing, with GM closing many of its plants and discontinuing some of its brands. Although downsizing has many negative consequences, such as employee morale and retention, the overall effect of this change on GM’s operations was positive, as their share price and finances grew since they filed for bankruptcy. Therefore, GM’s execution of this change was very effective, and many companies looking to downsize or restructure could learn from their successes and failures along the way.
References:
- Canis, B., & Webel, B. (2013, January 3). The role of TARP aid 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
