General motors had been an epitome of brand and quality of rollers, which were seen as ostentatious 4 wheeler in the early 2000’s domiciled in Detroit (United States). GM brand owners of bulky, safe, sluggish, sporty cars with no substitutes among the peers made them stand out of all supreme models.
On April 2009, GM announced that it would chuck Pontiac from its portfolio and will be no more rolling on the roads. This decision was made to save the 4 core brands, Chevrolet, Cadillac, Buick, and GMC that is still in existence and no one would hate Cadillac and some of the Chevy cars are 100% American metal. Appending to the announcement a resolution sale came out for Hummer, Saab, and Saturn brands. Even though no one failed, What made the organisation to surrender those trump cards and concentrate only on the chief brands in the profile.
Starting a business:
Consider, a new business has been established to produce a floating number of 2 wheelers whose demand is yet to be found in the course of doing business. Assume 10 workers are employed to produce the first batch. The business gets a B2B order for 200 pieces of the product from an end user. The employer may need additional workers to produce and a manager to manage the operations which should take place seamlessly from drilling to delivery. This way a company is generating revenue and incurring overhead cost accordingly. At this stage every employee added will add value to the firm and improves the productivity, as time goes the employee recruitment is less to nil.
Orders after orders the company is fully utilising the factory’s infrastructure and sailing on full capacity with a pack of wolves making every operation strategically perfect to make the opportunity cost to zero i.e., positive economical profits. The Law of Diminishing Returns, every employee added after attaining this threshold, the wheel climbs the hill reducing the marginal revenue while cost is increasing.
Economies of scales:
The cost of producing an automobile falls down with high volume of work, employees get to the efficient working level, machines are used to their fullest everything seems to be nice. The scale of production is said to be economic, the economically profiting state. Economic is being frugal.
The Short run Average Total Cost (SATC) is the average cost incurred to produce a unit of the product. These short cycles contribute to the Long Run Average Cost (LRAC) which implies the efficiency of production. The costs decrease as efficiency improved, which makes the slope negative and heading the company to the most efficient scale of production. These are some ways of getting to the point of lesser cost:
- Increasing returns to scale, increase in output with less increase in input.
- Division of labour, makes the employee gain expertise in particular work, ergo increase in efficiency.
- Adapt the latest in technology that increases productivity.
- Efficient use of market information, strategical pricing and managerial planning.
- Discount on bulk orders.
Diseconomies of scales:
Operating to the fullest, adding an employee would be adding cost without adding value to the firm. The scale of production should increase accordingly to the spending on the newer higher scale of production. This tends to increase costs, increasing the scale leading to a positive slope.
The exact situation happened at General Motors, the scale wasn’t too large they had replicative brands clashing with each other at the cost of revenues.
Any manufacturing business facing problem in scale rather than pricing, should return to the mean position, efficient scale of production to economically profit. Inconsideration of scale of production is the root cause for producing returns below average variable cost which makes them exit the business. In certain businesses exiting a business is tough without incurring loss in value in an asset sale.
- Decreasing returns to scale, which is when output is proportionally low for the input.
- Zooming in size induces difficulty in communication and conducting in tandem with organisational orders.
- Overlapping and duplication of business functions and product lines.
- Stuck with high volume – no discount – high price.
Every business to maximize profitability, it has to return to the Efficient Scale of Production.
In 2009, GM decided to discontinue three brands (Saturn, Pontiac, and Hummer), and in 2018 it was considering dropping various low-volume product models that overlapped with other models by 2020. GM had numerous manufacturing plants throughout the world and sold vehicles in more than a hundred countries. Given this geographical dispersion in production and sales, the company had communication and management coordination problems, which resulted in higher costs. In 2017, GM sold its European arm, Opel, to Groupe PSA, the maker of Peugeot and Citroën. GM also had significantly higher labor costs than its competitors. As the largest producer in the market, it had been a target of labor unions for higher compensation and benefits packages relative to other firms.
Keeping up with the discontinued brands that GM held will make them weaker even though with successful branding. GM trimmed the portfolio to reduce duplicates and reduce internal sales competition.
The beefy Hummer is getting back in production with updated specs which is expected to regain the flagship strata again.