The strategic problem discussed in the case of Fiat & General Motors Corporation refers to the considerations of the corporate-level strategy. The problem is such concerns the controversy surrounding the fulfillment of contractual obligations and rights of both sides to a large corporate alliance between Fiat and General Motors Corporation. Experiencing business problems connected with the sales rates, both Fiat and General Motors Corporation became interested in a strategic alliance that would allow them to save their market shares, exchange experience, and technology, and assist each other in case of necessity. However, when Fiat faced the crisis and the need for recapitalization, General Motors Corporation rejected the so-called “put option”, according to which in an emergency case Fiat might sell 80% of Fiat Auto shares to General Motors Corporation, and left Fiat to deal with saving its market share and reducing losses on its own.
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Facing the emergency when no outside help was possible, Fiat developed several options of dealing with the sales decrease of 2001 – 2003. These options included cutting the staff, reducing the production capacities, closing factories, and obtaining the cost of the 20% of Fiat Auto shares from General Motors Corporation in the form of compensation for refusal to participate in Fiat’s recapitalization. The strategic decision that, as specialists forecasted, Fiat would make was to sell Fiat Auto to a foreign company, possibly even General Motors Corporation. However, staff cuttings and production capacity reduction were chosen as the most adequate strategic decisions to the problem stipulated above. Fiat senior management stood against selling the symbol of the Italian automotive industry to the foreign owners and found another potential way out of the situation.
In the case of Fiat & General Motors Corporation, the very rules of the competition were undermined by the actions of the latter party to the strategic alliance of the two. On the whole, one of the disadvantages of forming a strategic alliance as a means of corporate-level strategy development is the need to cooperate with a potential competitor in the industry (Hill, Jones, Galvin and Haidar, 2007, p. 178). In case of any misunderstandings or alliance terms violations, the alliance parties might use the secret information of their former alliance partners for developing their competitive advantage. As well, alliance parties might be reluctant to financially help each other in case if only one party demands help (Hill, Jones, Galvin and Haidar, 2007, p. 178). General Motors Corporation illustrated this point by refusing to participate in the recapitalization of Fiat. As well, General Motors Corporation rejected Fiat’s “put option” and by this placed the Italian company into a disadvantaged position in the market.
Thus, the formation of a strategic alliance as a tool in developing the corporate-level strategy of a company can be assessed as a rather dangerous step. Cooperation with a potential competitor in the industry, revealing the company’s a trade and technology secrets to this competitor, possibility of alliance terms’ violations, and inability to legally protect the alliance members’ rights in such a case are all the drawbacks of strategic alliances (Hill, Jones, Galvin and Haidar, 2007, p. 178). Accordingly, vertical integration that includes the deep and focused consideration of all its working aspects by the company can be a good alternative for Fiat in this case. The steps that Fiat defined as its strategic decision for the discussed problem can be considered as initial stages of vertical integration implementation.
Hill, C, Jones, G, Galvin, P,and Haidar, A. (2007) Strategic management: An integrated approach. 2nd Australasian Ed. Wiley, Milton.