Some of the strategic problems effect a company’s operations, for examples, too much debt and too much variety of brands. Debt can be a loan, line of credit, bond, or even an IOU – any promise to repay borrowed amounts over a certain time with a specified interest rate and other terms. Debt financing has both advantages and disadvantages. On the advantage side, debt can be relatively simple to secure through a bank or other financial institution and is available with a broad range of terms, allowing company to customize the debt to meet their specific needs. On the minus side, financing with debt can be more expensive, and the company will have to meet scheduled interest and principal payments regardless of the cash flow. In addition, too much debt can make a company vulnerable to rising interest rates. Too much variety also might be considered as one of the strategic problems. That’s because offering too many choices prompts the confused consumer to defer a purchase or run to the arms of a competitor with a less cluttered product line.
General Motors is a good example of too much debt can be a strategic problem for a company. Some have estimated that GM will have to pay out over $70 billion in pensions and health care benefits to its current and future retirees. For a company that has consistently lost a few billion dollars per year over the last few years, this is a problem. In addition to its debt, GM has too many brands, too much production capacity, and unfavorable union contract, and shrinking sales. Without such a substantial debt, GM might have a chance of restructuring and saving it stockholders. However, at this point, it has no room to maneuver. If this situation continues, GM will go bankrupt soon.
3 comments:
Yes, too much Debt can be a problem to any firm. Unlike issuing stock, the cost of debt is much higher and there is legal obligation to pay back the creditors. If a firm raises most of the capital by debt, and the firm is not in a good year, it is very likely that they do NOT have the ability to pay back all their liablities, which may lead to bankrupcy in serious cases.
Every time I hear GM I think of what you said about the pensions and the costs it has on its books. It seems like GM has been struggling for a good 4 years. GM has dig themselves deep into a hole with various costs and lack of sales. Increasing costs as well as declining or negative profits will definitely drive GM to the brink.
highly leveraged companies do face difficulties. but company like GM, if it loses a couple of millions on minor stuff, it doesn't get hurt much because they are generating a lot more to cover these costs.
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