It is an old joke among management consultants and bankers. We often refer to GM as a “bank.” In fact it is fair to say that but for GMAC, GM wouldn’t be around today. In addition to providing financing for automobiles, GMAC also finances home mortgages and engages in other activities totally unrelated to the auto industry.
As I had discussed before that GM’s problem are so big that cost-cutting measures like layoffs and plant shutdowns are unlikely to do much, now comes the news that as GM’s financial situation worsens, it is having a more difficult time operating GMAC as a “bank.” In other words, at its current credit rating, it just cannot operate profitably due to what the company calls as “funding pressures.” GMAC is responding by transforming its business model – from being in the “storage” business to a “moving” business. To put it simply, the company will originate and service auto-financing contracts but move these assets to Bank of America. Excellent change in strategy. I believe that a company cannot be good at too many things.
But the crisis is not over yet. As I said in a previous articles that business model transformations are long and painful, GM should eventually get rid of GMAC. Greater shareholder value will be created by a spinoff of GMAC then letting it sink with the parent company. And in the statement issued by GMAC today, it says, “…General Motors is now exploring strategic alternatives…” and that generally means that the two businesses are unlikely to stay together for too long.
What does it mean for you?
- Focus on your core business. Resist the temptation to enter into unrelated businesses. If you see new growth opportunities that make sense, it is OK to invest in them but a better model is to take a venture capital approach.
- If a business unit starts to become a drag on the whole enterprise, using the portfolio management approach, act fast.
- If you sense trouble, do not wait to be told that by external agents. In fact, you should sense trouble before the outsiders do; otherwise, you have no right to be in that job. GM waited till its credit rating was downgraded and now it is acting in desperation. It could have executed a similar strategy long time ago on its own terms.
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