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Strategic Management

Notes GM’s Market Share Strategy – Reduce Prices
In 2004, GM spent US$6.5 billions on developing new car and truck designs with the aim
of changing its reputation for poor quality and indifferent design. It sold its vehicles at an
average price in the US of $18,891 – exactly $1 less than the price in 2003. In other words,
GM was investing more in R&D at the same time as reducing its prices. It was offering cash
buyers rebates up to US$1,400 per vehicle. The company actually sold 50,000 fewer vehicles
in 2004 than in 2003. In other words, GM was following a strategy of holding its market
share by selling at lower prices.
GM’s Problem of ‘Legacy Costs’
At the same time, GM – along with Ford – faced another major problem that did not apply
to Toyota. It was paying contributions to its employee health insurance and pension
scheme that amounted to US$6 billions per year and these were growing at an additional
US$500 millions per year. Two-thirds of the payments were not even to present employees
but to GM’s former employees who outnumbered current staff by two-and-a-half to one.
These were the so-called ‘legacy costs’ associated with the American method of paying its
employees, including those who had retired or otherwise left the business. No chief
executive would wish to deny former employees their rights. But GM was in danger of
putting its current employees and its shareholders at risk by such a strategy.

Ford Strategy
Global Strategy
For many years, Ford has been both a leading company in North America and in Europe.
Its strategy during much of the 1990s was to gain the benefits of a global strategy. It made
substantial attempts to integrate its operations on a global scale in the period 1995-98.
Core engineering and production operations were simplified and combined with common
parts, common vehicle platforms and common sourcing from outside suppliers. The
purpose was to achieve annual cost savings of around US$42 billions through economies
of scale and through the spread of the development costs of a specific model across the
sales in more countries. Substantial savings were achieved and Ford’s profits then rose.
Acquisitions Strategy
Following this success, the company then embarked on what it called a ‘global niche’
strategy. The company judged that world market demand was moving towards niche car
markets – like off-road vehicles, people carriers – and this meant that the company should
invest in these areas. The company therefore invested heavily by acquiring companies in
its specialist brands in these areas – Jaguar cars, Lincoln luxury cars, Volvo cars, Land-
Rover vehicles, Aston Martin sports cars. The strategy of acquiring rival companies in
some cases carries the major risk that it becomes difficult to gain sufficient economic
benefits from the acquisition premium paid to buy such companies.
An additional danger with the acquisition strategy was that the company was distracted
by the need to integrate its acquisitions. Ford failed to invest sufficiently in its basic car
ranges – like the Mondeo and the Fiesta in Europe – during the period 1999-2001. This
allowed other companies to move ahead in these areas. The outcome was a profit disaster
in 2001.
Back to Basics Strategy
With the benefit of hindsight, Ford’s global niche acquisition strategy was considered to
be wrong and the Ford chief executive of that period, Jac Nasser, was sacked. A new
Contd...

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