Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 2

Ford Motor Co. and GM: How Can They Become More Profitable?

Ford and GM are highly leveraged auto manufacturers. The high fixed costs include high labor-related costs—both current production labor and the costs of retirement benefits for retired workers. During the 1970s and 1980s the firms made decisions that locked in high labor capacity, based on a strategy that sales volume would grow and the labor capacity would be needed. But the desired sales increases have not happened, as foreign auto manufacturers continue to increase their market share.

High operating leverage leads to faster reductions in profits when sales fall, and this is the current experience for these automakers. A recent program by GM to boost sales by offering sales discounts to customers that were equivalent to the discounts given to employees of the auto manufacturers is an example of GM’s strategy to increase sales to cover these fixed costs. The firms are also looking for ways to reduce the fixed costs, and recent plant closings employee buyouts, changes in benefit plans and renewed negotiations with the United Auto Workers’ union are part of that strategy. High operating leverage also means high debt levels, and the Detroit automakers are significantly affected by changes in the credit markets; in particular, the liquidity crisis and recession of 2008–2009 have affected their ability to obtain needed financing. At this writing it is not clear to what extent the federal government will help these firms and whether the help will be effective.

Source: Jeffrey McCracken, “Detroit’s Symbol of Dysfunction: Paying Employees Not to Work,” The Wall Street Journal, March 1, 2006, p.1; Karen Lundegaard and Joseph B. White, “Detroit Finds a Bandwagon in ‘Employee Discounts,’ ” The Wall Street Journal, July 6, 2005, p.1; Joann Muller, “Carmakers in the Credit Coalmine,” Forbes, September 26, 2008; Matthew Dolan, “Michigan Sweats GM-Chrysler Talks,” The Wall Street Journal, October 20, 2008, p. B1.