Management Information Systems
This case illustrates how two giant automobile corporations, DaimlerChrysler and General Motors, have tried to use information technology to combat foreign and domestic competitors. The case explores the relationship between each firm's management strategy, organizational characteristics, business processes, and information systems. It poses the following question: How has information technology addressed the problems confronting the U.S. automobile industry?
On October 26, 1992 Robert C. Stempel resigned as chairman and CEO of the General Motors Corporation because he had not moved quickly enough to make the changes required to ensure the automotive giant's survival. To counter massive financial losses and plummeting market share, Stempel had announced 10 months earlier that GM would have to close 21 of its North American plants and cut 74,000 of its 370,000 employees over three years. Stempel was replaced by a more youthful and determined management team headed by Jack Smith.
GM's plight reflected the depths of the decline of the once vigorous American automobile industry in the late 1980s. Year after year, as Americans came to view American-made cars as low in quality or not stylish, car buyers purchased fewer and fewer American cars, replacing them mostly with Japanese models.
Ironically, at about the same time, the Chrysler Corporation announced strong earnings and looked forward to a new period of strength and prosperity. During the 1980s, Chrysler had struggled with rising costs and declining sales of mass-market cars. However, demand was strong for its minivans and the hot Jeep Grand Cherokee. A stringent cost-cutting crusade eliminated $4 billion in operating costs in only three years.
Ten years before, Chrysler had been battling bankruptcy and GM was flush with cash. Had Chrysler finally turned itself around? Was this the beginning of the end for the world's largest automobile maker? What is the role of information systems in this tale of two auto makers and in the future of the U.S. automobile industry?
General Motors is still the world's largest auto maker, with employees in 35 countries. In the early 1990s, GM's U.S. auto business accounted for about 1.5 percent of the U.S. economy, down from 5 percent in the 1950s. Its sheer size has proved to be one of GM's greatest burdens. For 70 years, GM operated along the lines laid down by CEO Alfred Sloan, who rescued the firm from bankruptcy in the 1920s. Sloan separated the firm into five separate operating groups and divisions (Chevrolet, Pontiac, Oldsmobile, Buick, and Cadillac). Each division functioned as a semiautonomous company with its own marketing operations. GM's management was a welter of bureaucracies.
GM covered the market with low-end Chevys and high-end Caddies. At the outset, this amalgam of top-down control and decentralized execution enabled GM to build cars at lower cost than its rivals; but it could also charge more for the quality and popularity of its models. By the 1960s, GM started having trouble building smaller cars to compete with imports and started eliminating differences among divisions. By the mid-1980s, GM had reduced differences among the divisions to the point that customers could not tell a Cadillac from a Chevrolet; the engines in low-end Chevys were also found in high-end Oldsmobiles. Its own brands started to compete with each other. Under Roger Smith, CEO from 1981 to 1990, GM moved boldly, but often in the wrong direction. GM remained a far-flung vertically integrated corporation that at one time manufactured up to 70 percent of its own parts. Its costs were much higher than either its U.S. or Japanese competitors. Like many large manufacturing firms, its organizational culture resisted change. GM has made steady improvements in car quality, but its selection and styling have lagged behind its U.S. and Japanese rivals. GM's market share plunged from a peak of 52 percent in the early 1960s to just 29 percent today. In 1979, GM's market share was 46 percent.
GM created an entirely new Saturn automobile with a totally new division, labor force, and production system based on the Japanese "lean production" model. Saturn workers and managers share information, authority, and decision making. The Saturn car was a market triumph. But Saturn took seven years to roll out the first model and drained $5 billion from other car projects. GM had been selling Saturn at a loss to build up market share.
In auto industry downturns, Chrysler was always the weakest of Detroit's Big Three auto makers (GM, Ford, and Chrysler). Founded in the 1930s by Walter P. Chrysler through a series of mergers with smaller companies such as Dodge and DeSoto, Chrysler prided itself on superior engineering, especially in engines and suspensions. In the 1940s and 1950s, Chrysler grew into a small, highly centralized firm with very little vertical integration. Unlike Ford and GM, Chrysler relied on external suppliers for 70 percent of its major components and subassemblies, becoming more an auto assembler than a huge vertically integrated manufacturer such as GM. Although Chrysler did not develop a global market for its cars to cushion domestic downturns, its centralized and smaller firm could potentially move faster and be more innovative than its larger competitors.
During the late 1980s, Chrysler lost several hundred thousand units of sales annually because it did not make improvements in engine development and in its mass-market cars—the small subcompacts and large rear-wheel drive vehicles. There was no new family of mid-priced, mid-sized cars to rival Ford's Taurus or Honda's Accord. Customers could not distinguish Chrysler's key car models and brands from each other, and thus migrated to other brands. By the early 1990s, fierce price cutting had upped Chrysler's breakeven point (the number of cars the firm had to sell to start making a profit) to 1.9 million units, up from 1.4 million.
Despite heavy investment in information technology, GM's information systems were virtually archaic. It had more than 100 mainframes and 34 computer centers but had no centralized system to link computer operations or to coordinate operations from one department to another. Each division and group had its own hardware and software so that the design group could not interact with production engineers via computer. GM adopted a "shotgun" approach, pursuing several high-technology paths simultaneously in the hope that one or all of them would pay off. GM also believed it could overwhelm competitors by outspending them. GM also tried to use information technology to totally overhaul the way it ran its business.
Recognizing the continuing power of the divisions and the vast differences among them, Roger Smith, CEO of GM from 1981 to 1990, sought to integrate the manufacturing and administrative information systems by purchasing Electronic Data Systems (EDS) of Dallas for $2.5 billion. EDS has supplied GM's data processing and communications services. EDS and its talented system designers were charged with conquering the administrative chaos in the divisions: more than 16 different electronic mail systems, 28 different word processing systems, and a jumble of factory floor systems that could not communicate with management. Even worse, most of these systems were running on completely incompatible equipment.
EDS consolidated its 5 computing centers and GM's 34 computing centers into 21 uniform information-processing centers for GM and EDS work. EDS replaced the hundred different networks that served GM with the world's largest private digital telecommunications network. In 1993, EDS launched the Consistent Office Environment project to replace its hodgepodge of desktop models, network operating systems, and application development tools with standard hardware and software for its office technology.
GM started to replace 30 different materials and scheduling systems with one integrated system to handle inventory, manufacturing, and financial data. Factory managers can receive orders from the car divisions for the number and type of vehicles to build and then can create an estimated 20-week manufacturing schedule for GM and its suppliers. The system also sends suppliers schedules each morning on what materials need to be delivered to what docks at what hour during that manufacturing day.
Smith earmarked $40 billion for new plants and automation, but not all investments were fruitful. He spent heavily on robots to paint cars and install windshields, hoping to reduce GM's unionized work force. At first, however, the robots accidentally painted themselves and dropped windshields onto the front seats. Although a number of these problems were corrected, some robots stand unused today. The highly automated equipment never did what was promised because GM did not train workers properly to use it and did not design its car models for easy robot assembly. Instead of reducing its work force, GM had workers stay on the line because of frequent robotic breakdowns.
In 1980, with $2.8 billion in debt, Chrysler seemed headed for bankruptcy. Its financial crisis galvanized its management to find new ways to cut costs, increase inventory turnover, and improve quality. Its new management team led by Lee Iacocca instituted an aggressive policy to bring its computer-based systems under management control. Chrysler didn't have the money to invest in several high-technology paths at once. It adopted a "rifle" approach to systems: Build what was absolutely essential, and build what would produce the biggest returns. Chrysler focused on building common systems—systems that would work in 6000 dealer showrooms, 25 zone offices, 22 parts depots, and all of its manufacturing plants.
Chrysler built integrated systems. When an order is captured electronically at the dealer, the same order is tied to production, schedules, invoices, parts forecasts, projections, parts and inventory management, and so forth. Chrysler's low degree of vertical integration put the company in a better position to concentrate on only a few technologies. Because it was more of an auto assembler and distributor than a manufacturer, it had less need for expensive manufacturing technologies such as vision systems, programmable controllers, and robotics, all of which are far more important to GM and Ford.
Chrysler directed most of its information systems budget to corporate-wide communications systems and just-in-time inventory management. Just-in-time (JIT) inventory management is obviously critical to a company that has 70 percent of its parts made by outside suppliers. (JIT supplies needed parts to the production line on a last-minute basis. This keeps factory inventory levels as low as possible and holds down production costs.) During the 1980s, Chrysler achieved a 9 percent reduction in inventory and an increase in average quarterly inventory turnover from 6.38 times to 13.9 times. A single corporation-wide network connects Chrysler's large and mid-sized computers from various vendors and gives engineering workstations access to the large computers. This makes it easier to move data from one system, stage of production, or plant to another and facilitates just-in-time inventory management.
Chrysler had decided it needed a centralized pool of computerized CAD specifications that was accessible to all stages of production. In 1981, it installed a system to provide managers in all work areas and in all nine Chrysler plants with the same current design specifications. Tooling and design can access these data concurrently, so that a last-minute change in design can be immediately conveyed to tooling and manufacturing engineers. Chrysler created centralized business files for inventory, shipping, marketing, and a host of other related activities.
All this centralized management information makes scheduling and inventory control much easier to coordinate. Chrysler's cars and trucks share many of the same parts. Chrysler set up electronic links between its computers and those of its suppliers, such as the Budd Company of Rochester, Michigan, which supplies U.S. auto companies with sheet metal parts, wheel products, and frames. Budd can extract manufacturing releases electronically through terminals installed in all work areas and can deliver the parts exactly when Chrysler needs them. A new enhancement verifies the accuracy of advanced shipping notices electronically transmitted by suppliers and helps Chrysler track inventory levels and payment schedules more closely.
On May 8, 1998, Chrysler and Daimler-Benz announced a merger of the two automobile companies, a merger that was completed during the autumn of that year. Together the two companies recorded $131 billion in sales in 1997. The new company, DaimlerChrysler AG, will maintain two headquarters, one in Michigan, and one in Stutgart, Germany. The two companies have complementary strengths, making the rationale for the merger rather clear. Chrysler's presence in the United States is strong but in Europe is very limited, whereas Daimler's sales are focused heavily in Europe. By combining, both will have access to established, successful marketing organizations in the two largest automobile markets in the world. Moreover, the two companies offer very different, complementary lines of automobiles. Chrysler focuses on automobiles priced from $11,000 to $40,000. Daimler's luxury automobiles are much higher priced, starting about $30,000 and ranging up to $135,000. The merger also gives both greater access to each other's manufacturing facilities in various parts of the world, increasing their flexibility to move production to the best location depending upon cost and other key factors. Chrysler's ability to design and bring new automobiles to market rapidly should also be a great help to the Daimler portion of the new company.
Observers believe the biggest challenge in the merger is the culture clash. Germans and Americans tend to view business differently, and those differences will have to be overcome. For example, one company thinks in terms of luxury cars, the other in terms of mass sales—Daimler sold 726,000 vehicles in 1997 whereas Chrysler sold 2.3 million. Information systems problems seem to be limited. Years of integration effort have been avoided by the serendipitous fact that both companies use the same computer-aided design (CAD) system, and both also use SAP AG financial applications. The immediate challenges seem to be the need to build an integrated, robust communications infrastructure that will serve to unite the two organizations and to include suppliers and dealers. The newly formed company is also looking to cut $1.4 billion in IS costs during the first year and $3 billion more over the following three to five years. Most of the savings will come from personnel reductions and from canceling previously planned application development.
As Detroit's auto makers approach the twenty-first century, they face major changes in economic conditions and in the way cars are bought and sold. Today, at least one-fourth of all new car buyers use the Internet to research car purchases and shop for the best price, and that number is expected to reach 50 percent in a few years. A growing percentage are turning to on-line auto buying services where they can select a car and even take delivery at home without ever setting foot in a dealership. To compete with the on-line car buying services, DaimlerChrysler, GM, and Ford all have established Web sites where shoppers can select options, obtain price quotes, and even order their cars online. GM further enhanced its site to offer proprietary information such as special incentives on cars and dealers' actual inventory and to provide offers from other GM services such as home mortgages. The car buying sites are fighting back by offering financing and insurance on-line and by providing additional services to their users, such as e-mail notification of service reminders or manufacturers' recall announcements. In the hope of custting costs, DaimlerChrysler, GM, and Ford have also teamed up to create an online purchasing system where they would obtain nearly $250 billion of the parts and other goods they need each year. All of these changes bring new challenges to U.S. auto companies as they look toward the future.
CASE STUDY QUESTIONS (Answer any four questions)
1. Compare the roles played by information systems at Chrysler and GM. How did they affect the structure of the automobile industry itself?
2. How much did information systems contribute to GM’s and Chrysler’s success or failure?
3. What management, organization, and technology issues explain the differences in the way Chrysler and GM used information systems?
4. What management, organization, and technology factors were responsible for Chrysler’s and GM’s problems
5. How did GM and Chrysler redesign their business processes to compete more effectively?
6. How important are information systems in solving the problems of the American automobile industry? What are some of the problems that technology cannot address?