Challenges of Expansion to a Foreign Location

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Research Analysis for Business

ECO 561

Gary Hoskins

June 3, 2019

Dr. Opincar

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Research Analysis for Business

As a business consultant to General Motors, it is my responsibility to analyze, advise, and

create recommendations on how the firm can ensure its future success in its current market. In

order to do this, we will need to take an in depth look at General Motors and their current

operations. We will analyze their market structure, trends in current macroeconomic indicators

over the last three years, trends in demand over the last three years, and pricing and availability

along with elasticity. With the information gathered I will create business strategies based on the

market structure and develop a recommendation for how the firm can manage its future

production by synthesizing the data presented. I will also propose how the firm’s position within

the market and among its competitors will allow it to take the actions recommended. Finally, I

will recommend strategies for General Motors to sustain its success going forward by evaluating

the findings from demand trends, price elasticity, current stage of the business cycle, and

government policies.

Market Structure

General Motors operates in an Oligopoly market structure. This means the market only

has a handful of companies operating in the same structure. Consumers can substitute one

product for another, or one vehicle for another, but only from one of the few companies in the

Oligopoly market structure. In the United States these companies would include Ford, GM, and

Chrysler (Grunert n.d.). In an Oligopoly market there are barriers to entry that are present. One

of the biggest barriers will be the initial investment or start-up costs. If someone were to start a

company that took five billion dollars to start, the bank will want some sort of collateral for that

money. Unless the individual starting the company is already very wealthy, this will prove very

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difficult. Compared to the other market structures Oligopoly has the second highest barrier to

entry, only topped by a pure monopoly.

Trends in Macroeconomic Indicators

Currently the United States is in the first stage of the business cycle, which is expansion.

The U.S. has been in that phase since roughly 2009. The U.S. does not seem to be at its peak

either since we haven’t seen any inflation (Amadeo 2017). Looking at the Gross Domestic

Product-GDP trend, you can see a steady increase since 2009.

This indicates that the overall economic activity of the United States of America has remained

impressive.

The Personal Consumption Expenditure (PCE) of the US for the last 10 years has also

shown significant growth. The figure of the index has constantly increased from 2007 till 2017

indicating that the changes in price of goods consumed and services offered or rendered within a

specific country or region has also increased. (U.S. Bureau of Economic Analysis, Real Gross

Domestic Product).

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If the results of the Gross Domestic Product (GDP) and Personal Consumption

Expenditure (PCE) of the US for the last 10 years are compared, one comes to the conclusion

that the overall GDP has increased more than the PCE and has remained higher than PCE. This

indicates that the overall economic growth of the US has been impressive. The prices of the

goods and services have also increased considerably but have generally remained within the

reach of the consumers. This is because the GDP has remained higher than the PCE indicating

that the people had sufficient money as a result of healthy economic activity to afford the higher

prices of goods consumed and services acquired.

Price Elasticity of Demand

General Motors has shown an increase in demand over the last three years. This is easily

seen by their number of total sales and record profits. Year to date, Chevrolet crossovers were up

24 percent on a retail basis, Buick’s were up 34 percent, GMC’s were up 15 percent, and

Cadillac’s were up 23 percent (GM Crossover Sales Surge 2017). Wholesale vehicle data, which

represents sales directly to dealers and others, including sales to fleet customers, shows the

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increase in product demand over the last three years. In 2015 there was a slight increase in

demand in comparison to 2014, but rebounded nicely in 2016 for an overall increase (General

Motors 10K 2018). The below chart shows total vehicle sales (in millions):

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It’s easy to see that General Motors demand has remained consistend with the increase in

GDP and PCE outlined above. This shows that General Motors is able to capitalize on the

improving economic conditions and remain at the forefront of the economic expansion and

spending. Along with demand the above chart also shows General Motors total revenue

increased along the same rates. These graphs compared to GDP and PCE show promise as

General Motors is tracking within the same lines as GDP and PCE.

Cost Structure

There are two cost categories that every company endures. These are variable and fixed

costs. Variable costs are those that fluctuate with the amouont of product produced. For instance

at General Motors, variable costs go up with each car produced. If the engine costs $5,000, for

each car made General Motors variable cost goes up $5,000. If ten cars were produced the

variable cost for the engines would be $50,000.

Fixed costs do not change in accordance with the amount of product produced. They are

called fixed costs because they are fixed regardless of the amount of production. These costs

would include the payment on the facilities. Each month this payment is the same regardless if

General Motors makes ten cars or ten thousand cars. The cost is fixed.

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As you can see from the pie graph above, General Motors operates at a very high variable

cost. Materials makes up 47% of the cost paid by General Motors (Kallstrom 2015). This means

with each additional vehicle General Motors makes, it takes additional materials to produce that

car. The second largest cost is direct labor at 21% (Kallstrom 2015). This can typically be a fixed

cost, however, in the Auto Industry it is a variable cost due to overtime, and production levels.

Typically there is no such thing as a fixed work schedule. This means that employees are asked

to work overtime daily and weekends. In order for General Motors to meet their production

requirements, there are numerous weekends throughout the year that are worked. This means that

direct labor costs are variable due to increasing output, meaning increased hours worked, along

with overtime pay, means increased direct labor costs.

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Conclusion

Since General Motors operates in an Oligopoly market structure with other organizations

with the same industry make up, my recommendations not only apply to General Motors, but all

auto manufacturers in the auto industry. With an increasing GDP and PCE General Motors

should not have any issues increasing their sales and revenues. This has been shown already this

year with a record first quarter profit. The biggest factor in General Motors revenue is their cost

structure. Being a highly variable cost structure means that every unit produced by General

Motors costs them more money. To combat this, I would recommend looking directly at the

variable costs per vehicle.

The recommendation I would make would be to manpower work hours, ultimately

overtime. To reduce the variable cost of labor hours per vehicle, General Motors should structure

their shifts working hours accordingly, so they do not have to pay any overtime money. By

reducing overtime, General Motors can reduce their direct labor costs per vehicle. If you have

workers making $15/hr on normal time, they are making $22.50/hr at time and a half during

weekly overtime and Saturdays and $30/hr at double time which is Sundays and Holidays. This

number drastically matters when you have the multiplication of hundreds and thousands of

employees. If General Motors were to hire a dedicated work force for weekend overtime, they

would cut their direct cost almost in half in just manpower on the weekends.

In order to reduce direct labor costs, I would introduce a flexible work schedule, better

known as a weekend shift. This shift could work Friday, Saturday, and Sunday. Three days at

twelve hours a day, for thirty-six hours a week. Paying the employees, a full forty hours for their

thirty-six would provide some incentive and make sure they are full time employees. This would

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not only produce jobs for the economy by hiring more employees, it would reduce direct labor

costs at General Motors by as much as 40%.

The final item I would emphasize on to reduce the direct labor cost would be cross-

training. When a minute number of employees can perform certain tasks the overtime numbers

could be skewed due to this. Cross-Training the employees so a vast number of employees can

perform a vast number of job functions the outcome would be a reduction in overtime. It could

also decrease the number of employees needed to “cover” other employees. Reducing the high

percentage variable cost of manpower results in less cost per vehicle and a better bottom line for

General Motors.

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References

Grunert, J. (n.d.). What Is Market Structure? Retrieved from

http://business.lovetoknow.com/wiki/Define_Market_Structure

Amadeo, K. (2017). Where Are We in the Current Business Cycle? Why You Should Care.

Retrieved from https://www.thebalance.com/where-are-we-in-the-current-business-cycle-

3305593

U.S. Bureau of Economic Analysis. Real Gross Domestic Product [GDPC1]. Retrieved from

FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GDPC1

U. S. Bureau of Economic Analysis, Personal Consumption Expenditures [PCE], retrieved from

FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/PCE

GM Crossover Sales Surge Driving Retail Share Higher (2017). Retrieved from

https://www.gm.com/investors/sales/us-sales-production.html

General Motors Company 10K Report (2017). Retrieved from

https://www.gm.com/content/dam/gm/en_us/english/Group4/InvestorsPDFDocuments/10

-K.pdf

Kallstrom, H. (2015). Why growth shifted in the global automotive industry. Retrieved from

http://marketrealist.com/shift-growth-global-automotive-industry/

Comment Summary Page 1

1. Please note my commentary located within the assignment, including the appended grading rubric. Please feel free to leave me a private message if you have any questions or concerns.

Page 2 2. This sentence should begin a new paragraph. Paragraphs should contain three to five sentences. 3. This is an effective introduction. Nicely done. 4. The United States auto industry consists of a market type that it most closely resembles monopolistic

competition, where firms compete fiercely on price and through product differentiation. Page 7

5. This sentence should begin a new paragraph. Paragraphs should contain three to five sentences.