case report - the general motors and daewoo alliance - jed estanislao

The General Motors and Daewoo Alliance February 22, 2011

BA 236 Global Marketing – Prof. Benjie Sandoval 3rd

Trimester 2010-11

De Leon, Estanislao, Gumabon, Lope, Rojas, Ronquillo

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I. Problem Statement

Given the effects and the lessons learned from the split-up between General Motors and Daewoo,

how should Daewoo spend sufficient resources on marketing to make up for lost sales?

II. Point of View

This case study will take on the perspective of the senior management of Daewoo. Our analysis

and recommendations will primarily deal with the strategic initiatives that the company may

choose to deploy to manage short-term issues as well as long-term plans for growth.

III. Assumptions

This paper assumes that the problem statement is being questioned in the year 1992, right after

the announcement of the break-up between GM and Daewoo. Any actual event that happened

after this point in time will not be considered in this study.

IV. Framework for Analysis

The group will be using comparative analysis as a means of checking and learning from what

happened between the alliance of Daewoo and GM. Afterwards, SWOT Analysis will be used to

assess how Daewoo should move forward in its business given the current condition it is in. The

main source of information about the events that took place will come from the case material

itself.

V. Analysis

COMPARATIVE ANALYSIS: GM and DAEWOO

As mentioned in the problem statement, one of the objectives of this case study is to highlight the

lessons learned from the split-up between General Motors and Daewoo. The main purpose of this

analysis, is to be able to show if the differences or similarities between the two organizations

contributed to its eventual split-up. More importantly, it gives us a basis on how Daewoo can

select a strategic alliance partner in the future based on its experience with General Motors.

This part of the analysis will concentrate and compare the two companies based on the following

criteria:

1. Leadership and Culture – a basic description of the decision-making structure in each company and the company culture

2. The Brand and Competitive Advantage – what are each of the companies known for; in what areas of business are they particularly good at

3. Goals and Strategies – what are the objectives of each company in entering the alliance; what are the strategies they wished to implement under the alliance

For easier reference, listed in the table below are each company’s practices and beliefs based on

the criteria provided earlier.



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CRITERIA DAEWOO GENERAL MOTORS

LEADERSHIP AND

CULTURE

Centralized decision-making through

Chairman Kim Woo Chong that allows

the company to make decisions fast.

Everyone else in the company follows.

Culture is mainly bureaucratic.

Company is known to have a slow

response to the environment

BRAND/

COMPETITIVE

ADVANTAGE

One of Korea's largest conglomerates;

but is mainly known as a textile and

trading company. Daewoo is also one

of the world's largest shipbuilders

Established car-maker known for the

quality of the cars it produces with

equity stakes in Asian car

manufacturers (i.e. Isuzu) and affiliates

in Europe (Opel) and Australia

(Holden). Company has easy access to

technology.

Daewoo planned to solidify its sales

performance in the local market and

then promote exports using GM's

capital and overseas sales network.

GM looked upon Daewoo as a source

for inexpensive cars and as a learning

ground for possible further expansion

into other East Asian markets. GM did

not allow Daewoo to enter the

European market to protect its

European affiliate.

Daewoo expected GM to provide

technology and sales support for

Daewoo.

GM rarely integrated international

affiliates into an overall strategy. GM

had tight control of overseas sale of the

LeMans; there was hesitation to expand

production and marketing activities.

GOALS AND

STRATEGY

As a response to declining or

weakening sales, Daewoo’s response

was to continue to produce automobiles

in spite of a large inventory of unsold

vehicles

GM believed that output expansion

should only come when Daewoo

resolves its quality issues.

As can be seen on the table above, the two companies differ in most, if not all of the criteria listed

above.

For leadership and culture, it is expected for Daewoo to be the more aggressive one in terms of

leadership, since it is a company on the rapid growth stage. Decisions need to be made fast to

keep up with more established competitors. Centralized decision-making from top management

also helped facilitate the speed of making decisions. While the company culture, wherein

employees are receptive to management’s moves, contributed in the carrying out of management

initiatives down to the production lines. On the other hand, General Motors was more complacent

being the established automobile company. There was no rush in responding to market changes

and as such, there seemed to be no need in changing the company’s bureaucratic culture. As a

result, conflict between the two companies can already be sensed from the leadership and culture

criterion. In Daewoo’s perspective, it seemed as if GM did not care about its relationship with

Daewoo or even the success of the venture. All that mattered to it was its own business success,

regardless whether the venture will do good or not.

For brand and competitive advantage, it was obvious that although Daewoo has had some

experience and some expertise in manufacturing (such as in textile and in ship-building); the

processes and competencies of which, can be applied to automobile building, it still lacked the



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technology available to General Motors, which Daewoo needed to produce quality automobiles.

Because of this, even though Daewoo had an efficient workforce, it was not able to maximize the

capacity of its production operations. In Daewoo’s perspective, GM could have been able to help

them in this weakness. Using GM’s expertise and technology in the automobile industry, Daewoo

could have been more successful in producing cars with considerable quality.

For goals and strategy, it can be seen from the information listed on the table above, that there is

an issue with goal congruence between the two companies. Both Daewoo and GM had their own

agenda in terms of their participation in venture. Daewoo was determined to be a major player in

the automobile industry. Unfortunately, for GM, the venture is treated as a mere learning ground

for possible future expansion in the East Asian market. The technology and sales support that

Daewoo expected from GM was non-existent. To Daewoo, GM’s non-integration or minimal

integration of GM-Daewoo’s operation in GM’s overall strategy, is a confirmation that the role it

envisioned for GM to play in the venture, will not be fulfilled. Thus, there is a need for the two

companies to split-up.

Based on the above analysis, it can be inferred that the roles of both companies in the joint

venture was not communicated clearly or were not clear to both companies. For a venture to

succeed, it must be clear to the participating parties that there are compromises and adjustments

that need to be made in order to maximize the combined strength of the alliance, and minimize on

its weaknesses. More importantly, the goal or goals of the venture must be clear and agreed upon

by the parties involved. Unfortunately, this was not the case between Daewoo and GM.

For leadership and culture, none of the two companies adjusted to the leadership style and

culture of the other company which is very important in achieving the goals of international

business. For example, GM did not adjust to the pace that Daewoo was expanding its operations.

There was disregard on the part of GM in terms of supporting the operations of Daewoo,

considering that Daewoo is just a new firm in the automobile industry. For brand and competitive

advantage, it was also shown that Daewoo benefited very minimally from the expertise of GM.

GM extended technology and sales support, based on what it deemed was necessary, according

to its own goals (not of the venture’s). And probably, this is not even GM’s fault. As mentioned in

the goals and strategies portion, the venture was seen by GM as a mere learning ground, instead

of a real profitable business. The two companies did not share a common goal, causing goal

congruence issues which eventually led to conflict and the falling apart of the venture.

SWOT ANALYSIS: DAEWOO AFTER THE SPLIT WITH GM

For the second part of the analysis, SWOT will be used to determine how Daewoo can use its

remaining resources to salvage the company from losing sales, in consideration of the current

(1992) conditions of the automobile industry in South Korea. Listed below are the various,

strengths, weaknesses, opportunities and threats, identified in the case material.



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STRENGTHS WEAKNESSES

LEADERSHIP:

Daewoo Chairman Mr. Kim Woo Chong and Daewoo

management's centralized decision-making style is perceived to

be good for Daewoo. Decision-making is fast and aggressive -

exactly what a company on its growth stages needs. Chairman

Kim is also seen to be a competent leader, for making other

Daewoo businesses grow and prosper.

BUSINESS EXPERIENCE: Daewoo's business experience is

mainly as a textile and trading company. It is considered as one of

the world's largest shipbuilders but it does not have brand equity in

the automobile industry.

SALES/MARKETING STRATEGY: Daewoo is creative and

aggressive in its sales strategies. It Introduced the

concessionary finance program - car loans

QUALITY: Lack on emphasis on quality of Daewoo cars. Ex. first

LeMans cars experienced electrical systems crashed, braking

systems had tendency to fail after only a few thousand miles

BRAND NAME: Internationally, the brand Daewoo sufferred a bad

reputation and is usually associated with poor quality

OPERATIONS: Daewoo on the average was experiencing

sluggish sales and production. There was a large inventories of

unsold cars Overtime costs spiraled out of control

DEBT RATIO: Debt & receivables grew exponentially

OPPORTUNITIES THREATS

GOVERNMENT POLICY:

South Korea is a foreign-investor-friendly government

GOVERNMENT POLICY: Korean government thinking of allowing

only Hyundai to make automobiles - promote a merger between

Daewoo and Hyundai. Change in government leadership may

cause change in regulations that can influence the industry

LABOR: South Korea is a good base of reasonably-skilled yet

inexpensive labor

LABOR: Korean democracy caused rising costs of manufacturing.

Workers started to demand higher wages (threat of strikes can

cause paralysis of operations). Ex. Daewoo doubled wages -->

more cost efficient to make cars in Germany than in Korea

MARKET: South Korea is a moderate-sized local market which

has significant potential for growth; car ownership levels in

Korea remained much lower than Japan

COMPETITION: There is stiff competition with local carmakers.

Ex. Hyundai's highly successful launch of Pony in 1987 and the

stiff competition from Kia Motors; the 2nd largest automobile

producer in South Korea (GM's rival Ford had 10% stake in Kia)

OIL PRICES: Health of the Korean economy is susecptible to oil

shocks (1979)

POLITICAL STABILITY: Health of the Korean economy and the

automobile industry is susceptible to political upheavals (1980)

INTEREST RATES: South Korea economy experiencing a liquidity

squeeze and prevailing interest rates were extremely high



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S-O Strategy

• Daewoo’s competent leaders should work closely with the South Korean government to

communicate policies that are needed by the company to grow its operations. This may

include the creation of certain statutes that will govern the movement of wage levels as well

as tax incentives that will be favourable for the expansion of the automobile industry. On

Daewoo’s part, since decision-making is centralized, certain conditions required by the

government in exchange for the policies it is requesting can be implemented quickly and

without question.

• Daewoo’s leaders can also work with the South Korean government to look for investors who

are fit to the needs of the company. This has already been a common practice in South

Korea. Daewoo’s leaders can use the investor-friendliness of the Korean Government to

entice foreign investors to help them achieve their business goals.

S-T Strategy

• Daewoo’s leaders should develop relationships not only with the current leaders of

government, but also with the opposition to ensure that government policy and influence will

be favourable to the goals of the company and the industry, regardless of who is in seated in

government.

• Daewoo’s leaders should work with government to develop ways that will increase employee

satisfaction, without the need for increasing wages. Incentives and benefits can be used as a

reward mechanism for meeting company targets. At the same time, tax incentives can also be

given to Daewoo for improved performance.

• If strikes continue and cause wages to increase, Daewoo must consider looking at

manufacturing locations in other countries where this is not an issue.

W-O Strategy

• The Daewoo brand has been significantly damaged as it connotes poor quality. Thus, the

company should focus on improving the quality of its automobiles by working with government

and foreign investors to improve production processes and technology. Also, since the South

Korean government is a very influential entity that concerns itself about the welfare of its

country’s conglomerates, it can include Daewoo in a special program that will help the

company survive its current losing phase.

• Now is not the time for Daewoo to incur additional risks by producing more cars while

inventory of unsold cars is still high. Daewoo needs to be conservative in making decisions

that involve additional credit. It must consider first if it can sell the cars that they produce,

before plans for more production are implemented. On the other hand, it can treat itself as an

outsource facility for foreign automobile makers in East Asia. Instead of selling Daewoo cars,

they can make cars for other car makers since they still have an efficient workforce with them.



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• Daewoo’s high debt ratio should be considered as a sign to be frugal in its operational

activities. Resources are already on critical levels and unfortunately, their company is not

doing well in the market. The company should consider seeking assistance from government

and foreign investors who are willing to help them. They need to consider changing their

capital structure to balance their debts with equity.

W-T Strategy

• Given its current financial condition, it might be good for Daewoo to consider government

plans of merging with Hyundai. Alternatively, Daewoo can also consider selling part of its

operations to Hyundai to minimize on risks.

• To help the company cope with the poor financial conditions, the company can lay-off some

employees or use this as a reason why wages cannot be increased for the meantime.

• Daewoo should focus on competing in areas wherein it has better than average chance of

winning. For example, instead of selling Daewoo cars in the international market, it must

focus its business within South Korea where the Daewoo brand is not as damaged. For the

international market, it may choose to produce cars for other automobile brands. Alternatively,

Daewoo can always go back to its textile and trade business. It can also consider focusing

efforts on ship-building, wherein the company is relatively competitive.

VI. Recommendations

The most important lesson learned in Daewoo’s experience with its alliance with General Motors,

is the need for venturing companies to have congruent goals. As discussed in the analysis, the

success of a venture depends on the cooperation between the participating groups. Therefore, it

can be said that it was the non-cooperation between Daewoo and GM that caused the venture to

fall off. Differences between the two company’s objectives and style of management, contributed

to the split-up.

In choosing future alliances, it is recommended for Daewoo to first, be able to communicate what

it needs and what it can offer to its proposed venturing partner. From this step, Daewoo and the

proposed partner, must be able to negotiate, compromise and agree on goals that will benefit

both companies. Aside from this, both parties must be able to place commitment on the agreed

partnership before they do actual business. Otherwise, the partnership or alliance, will be filled

with conflict and may eventually lead to its dissolution.

Moving forward, the SWOT analysis shows us that the role of Daewoo’s management and the

South Korean government is very crucial in weathering the downturns of the automobile industry

after the split-up. The economic condition during the split-up between GM and Daewoo is

temporary and will only be in the short-term. Collaboration between Daewoo and the government

is crucial for Daewoo to survive.

As recommended by General Motors, it may be a good idea for Daewoo to focus on improving

their quality while waiting for economic conditions to normalise. Pooling resources to increase

production is obviously not a good idea due to weak sales. Competition with local car

manufacturers is also stiff and it will be hard for Daewoo to compete with them due to the poor

quality of its vehicles. However, instead of looking at the worsening economic condition as a

threat, it can be seen as an opportunity for Daewoo to focus efforts on working on their brand



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image as a producer of quality affordable vehicles. Since sales are particularly down during this

period, there is no point in exerting great effort in sales activities. The present market condition

can be used by Daewoo as a chance to use its marketing ability to better position the business

and underpin its image with consumers. For example, it might be beneficial for Daewoo to take

note that “cheap cars do not have to be of low quality” in its marketing strategies. This will give it

the upper hand over the competition especially when economic conditions are starting to

normalise.

In the international market, established automobile makers will always have the upper-hand. It is

therefore recommended for Daewoo to seek strategic alliances with these companies. However,

instead thinking about the expansion of its vehicle sales internationally as the main goal of this

endeavour (which was what Daewoo intended with GM), Daewoo must look at this instead as an

opportunity to learn expertise and technology from these international automobile makers.

Investments from foreign investors can improve technology in Daewoo’s plants. Training provided

by them can improve the labor capital.

Internationally, it will be in the best interests of the company, not to sell products under its brand

for now. It might be more helpful for the company to seek contracts to manufacture or assemble

cars for other automobile companies for the meantime. By doing this, Daewoo can increase its

own expertise and later on, be able to apply this expertise and technology in manufacturing

Daewoo branded vehicles, a more competitive brand.

case report - the general motors and daewoo alliance - jed estanislao

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