My Years With General Motors

by Alfred P. Sloan Jr.

  The economies that flow from central-office activities are considerable and the cost comes on the average to less than 1 per cent of the corporation's net sales. Through the general staff the divisions get their services cheaper than if they provided them or bought them on the outside, and they get better services. The latter feature is, in my opinion, by far the more important. The staff contributions in the fields of styling, finance, technical research, advanced engineering, personnel and labor relations, legal affairs, manufacturing, and distribution are outstanding and certainly worth a large multiple of their cost.

  Several kinds of economies are made possible by centralized staff operations. Among the most important are the economies that derive from the co-ordination of the divisions. These arise through the sharing of ideas and developments among general officers and divisional personnel. The divisions contribute ideas and techniques both to each other and to central management. Much of our managerial and engineering talent, and many of our general officers, have come out of the divisions. The development of high-compression engines and automatic transmissions, for example, was the work of both staff and divisions. Our progress in aviation engines and in diesel engines came out of the development work of both.

  Under the decentralized operation of the divisions, problems of like kind are met in different ways by different division managers, subject to the advice of the central office of the corporation. Out of this process comes a winnowing of techniques and ideas, and a development of judgments and skills. The quality of General Motors' management as a whole derives in part from this shared experience with common goals and from divisional rivalry within the framework of these common goals.

  There are also the economies of specialization possible under our decentralized system. It is an axiom of economics that costs are reduced and trade created by specialization and the division of labor. Applied to General Motors, this has meant that our internal supplying divisions which specialize in the production of components must be fully competitive in price, quality, and service; if they are not, the purchasing divisions are free to buy from outside sources. Even when we have decided to make an item rather than to buy it, and have established production of the item, it is by no means a closed decision that we will stay in that line of production. We try, wherever possible, to test our internal supplying divisions against external competitors and to make a continuing judgment on whether it is better to make or to buy.

  The popular misconception that it always pays to make an item yourself rather than to buy it is based on the assumption of a cost saving. The argument runs that by making instead of buying, you can save the extra cost of your supplier's profit. But the fact is that if the supplier's profit is a normal, competitive one, you must expect to make it on your own investment, or else there is no net saving. General Motors does not engage in the production of raw materials, as do some of its competitors, and we purchase a large proportion of the items that go into our end products, because there is no reason to believe that by producing them we could obtain better products or service, or a lower price.

  Of the total cost of sales of our products, purchases of parts, materials, and services from outside sources account for 55 to 60 per cent.

  The role of the division managers is an important one in our continuing efforts to maintain both efficiency and adaptability. These managers make almost all of the divisional operating decisions, subject, however, to some important qualifications. Their decisions must be consistent with the corporation's general policies; the results of the division's operations must be reported to the central management; and the division officers must "sell" central management on any substantial changes in operating policies and be open to suggestions from the general officers.

  The practice of selling major proposals is an important feature of General Motors' management. Any proposal must be sold to central management and if it affects other divisions it must be sold to them as well. Sound management also requires that the central office should in most cases sell its proposals to the divisions, which it does through the policy groups and group executives. The selling approach provides an important extra safeguard in General Motors against ill-considered decisions, over and above the safeguards normally implied in the responsibility of corporate officers to shareholders. It assures that any basic decision is made only after thorough consideration by all parties concerned.

  Our decentralized organization and our tradition of selling ideas, rather than simply giving orders, impose the need upon all levels of management to make a good case for what they propose. The manager who would like to operate on a hunch will usually find it hard to sell his ideas to others on this basis. But, in general, whatever sacrifice might be entailed in ruling out a possibly brilliant hunch is compensated for by the better-than-average results which can be expected from a policy that can be strongly defended against well-informed and sympathetic criticism. In short, General Motors is not the appropriate organization for purely intuitive executives, but it provides a favorable environment for capable and rational men. In some organizations, in order to tap the potentialities of a genius, it is necessary to build around him and tailor the organization to his temperament. General Motors on the whole is not such an organization although Mr. Kettering was an obvious exception.

  Our management policy decisions are arrived at by discussions in the governing committees and policy groups. These were not the creation of a single inspired moment, but the result of a long process of development in dealing with a fundamental problem of management, that of placing responsibility for policy in the hands of those best able both to make the decisions and to assume the responsibility. To a certain extent this involves a contradiction. On the one hand, those best able to assume responsibility must have broad business perspective oriented toward the interest of the shareholder. On the other hand, those best qualified to make specific decisions must be close to the actual operation of the business. We have attempted to resolve this contradiction principally by dividing the policy-making responsibilities within central management between the Finance Committee and the Executive Committee, as I have shown.

  Another source of policy recommendation is the Administration Committee, which is charged with the responsibility of making recommendations to the president with respect to the manufacturing and selling activities of the corporation, and on any other matters affecting the business and affairs of the corporation that may be referred to it by the president or the Executive Committee. The president is the chairman of the committee and, at the present time, its membership includes the members of the Executive Committee, two group executives who are not members of the Executive Committee, the general managers of the car and truck divisions, the general manager of Fisher Body Division, and the general manager of the Overseas Operations Division.

  Under this separation of responsibility, policy development and recommendation are mainly the duty of the groups in central management made up of the men closest to operations. They work very closely, of course, with men from the divisions, and divisional men are on some policy groups. The Executive Committee, which views the corporation as a whole and at the same time is closely familiar with operating problems, has a somewhat judicial function. It makes the fundamental decisions on the basis of the work of the policy groups and the Administration Committee, plus the committee members' close knowledge of operating conditions. The Finance Committee, which includes non-employee directors in its membership, exercises its responsibility and authority in the area of broader corporate policy.

  Much of my life in General Motors was devoted to the development, organization, and periodic reorganization of these governing groups in central management. This was required because of the paramount importance, in an organization like General Motors, of providing the right framework for decisions. There is a natural tendency to erode that framework unless it is consciously maintained. Group decisions do not always come easily. There is a strong temptation for the leading officers to make d
ecisions themselves without the sometimes onerous process of discussion, which involves selling your ideas to others. The group will not always make a better decision than any particular member would make; there is even the possibility of some averaging down. But in General Motors I think the record shows that we have averaged up. Essentially this means that, through our form of organization, we have been able to adapt to the great changes that have taken place in the automobile market in each of the decades since 1920.

  Chapter 24 - Change And Progress

  It is clear from the events and ideas I have described that my generation had an opportunity unique in the history of American industry. When we started in business, the automobile was a new product, and the large-scale corporation was a new type of business organization. We knew that the product had a great potential, but I can hardly say that any of us, at the beginning, realized the extent to which the automobile would transform the United States and the world, reshape the entire economy, call new industries into being, and alter the pace and style of everyday life. It was our satisfaction to assist in the development of the industry which in this century made individual units of transportation available to almost everyone. It was my personal satisfaction to be associated in a business way, as a supplier or a competitor, with a large number of the able citizens who created and contributed to the development of this industry. The names of a few of them, by their association with cars and companies, stand for a new American legend. For me, because of my age and past associations, it is natural to think as well as speak in terms of Mr. Ford, Mr. Buick, Mr. Chevrolet, Mr. Olds, Mr. Chrysler, Mr. Nash, Mr. Willys, and so on. Involved with thousands of others in the destiny of this industry, they conducted the prosaic operations of running a business without being aware of the revolution they were making.

  Most successful enterprises in American industry have tended to grow. General Motors obviously is a successful enterprise. It is successful because it is efficient, and it has grown accordingly. It is not surprising that the large corporation should have become a feature of an economy with as much vitality as ours. Yet it has its critics, of course. To rational critics, let me say this. General Motors has become what it is because of its people and the way they work together, and because of the opportunity afforded those people to participate in an enterprise which combined their activities efficiently. The field was open to all; technical knowledge flows from a common storehouse of scientific progress; the techniques of production are an open book, and the related instruments of production are available to all. The market is world-wide, and there are no favorites except those chosen by the customers.

  I should like to point out that today's large successful enterprises have not always been large. This book has shown that when we started on this great adventure in the early 1900s the whole automotive industry was searching for ways and means to find itself. In those early days we along with the industry lacked the techniques that today are taken for granted. Things just seemed to happen—to us, and to the industry. The number of sales by dealers was unknown. The number of cars held by dealers was unknown. Trends in consumer demand were unknown. There was no awareness of the importance of the used-car market. There were no statistics on the different cars' market penetration; no one kept track of registrations. Production schedules, therefore, were set with no real relationship to final demand. Our products had no planned relation to one another or to the market. The concept of a line of products to meet the full challenge of the market place had not been thought of. The annual model change as we know it today was still far in the future. The quality of the products was sometimes good, sometimes bad.

  We had to start from that beginning. It was our task to find out what forms of organization were suitable to our company. This meant, above all, an organization that could adapt to great changes in the market. Any rigidity by an automobile manufacturer, no matter how large or how well established, is severely penalized in the market—as we have seen was the case with Mr. Ford in the 1920s, when he stayed too long with his old and once dominantly successful concept of the business. We had a different concept of the business, which we put into competition with his. It could have happened that he was right, but for that to have occurred, one would have to postulate the continuation of the kind of national economy that supported his concept of the automobile. As it happened, our concept was more in accord with the economy, the progress of the automobile art, and the changing interests and tastes of consumers. But after our first success, we too might have failed. There have been and always will be many opportunities to fail in the automobile industry. The circumstances of the ever-changing market and ever-changing product are capable of breaking any business organization if that organization is unprepared for change —indeed, in my opinion, if it has not provided procedures for anticipating change.

  In General Motors these procedures are provided by the central management, which is in a position to appraise the broad long-term trends of the market. This is well illustrated by the changes in our product over the years. The gradual evolution of our product line during the 1920s started with a passive adaptation to the problems of the market and proceeded to the policy which we defined simply as "a car for every purse and purpose." As the industry has grown and evolved, we have adhered to this policy and have demonstrated an ability to meet competition and the shifts of customer demand. I want, in this connection, to sketch the evolution of our products.

  Four million cars and trucks were sold in 1923, and the market remained more or less at this level throughout the 1920s. During this time our product was improved continuously in many ways, the most important being the development of the closed body. The sale of higher-priced cars rose with national prosperity. In the early thirties, during the depression, the demand reversed itself and became concentrated in the low-price area. In 1933 and 1934 almost three quarters of the cars sold in the United States were in the low-price group. We adjusted to that demand. With the recovery of the economy, consumers again sought a higher proportion of higher-priced lines, and in the years 1939-41, immediately before the U.S. entry into the war, the low-price group was accounting for only 57 per cent of the over-all market, or about the same proportion as in the year 1929. We responded accordingly.

  With the resumption of production after World War II, it was necessary because of shortages, particularly of steel, for the industry to operate under material controls. These allocations favored the smaller manufacturers (Kaiser-Frazer, Nash, Hudson, Studebaker, and Packard) whose product representation at that time was concentrated in the medium-price ranges, with the result that the proportion of the market accounted for by their cars increased sharply. Competition, in this period, was largely confined to production—that is, whatever a manufacturer could make, customers were waiting to purchase. By 1948, when registrations of new cars approached the prewar peaks established in 1929 and 1941, the medium-price group was accounting for 45.6 per cent of the over-all market, and nearly equaled the share (46.6 per cent) accounted for by the low-price group.

  In the years after 1948, normal competitive influences began to reassert themselves in some areas of the market and the sales of the smaller manufacturers in the medium-price group declined. On the surface, it appeared that customer demand was returning to the prewar pattern; by 1954 the traditional low-price group seemingly again accounted for about 60 per cent of all sales. Actually, however, a significant change was taking place in the industry's product offerings in the low-price group. The producers in this group along with others were offering more and more optional equipment to attract the increased consumer purchasing power of the fifties. The character of the market at that time was well expressed in Fortune in September 1953 ("A New Kind of Car Market"), as follows: "In the postwar sellers market, it [the car industry] has found itself selling more car per car—more accessories, luxuries, improvements and innovations. Now it has to plan it that way . . . The widening spread between unit demand and purchasing power will create a power
ful drive to sell still more car per unit." With the "new look" the 1955 cars grew larger and more powerful and many accessories became standard equipment. The whole automobile market became further variegated with the increasing popularity of such relatively expensive models as hardtops, convertibles, and station wagons. Sales were strong in what had been known as the medium-price area and Ford, for example, in efforts to broaden its representation there, expanded its Mercury line and in 1957 brought out an entirely new car, the Edsel. But cars in the former low-price group meanwhile were being upgraded both in size and quality; Ford, Chevrolet, and Plymouth all added to the top grade of their respective lines new, more expensive series of cars which were, in effect, part of the medium-price group in everything but name. (Note 24-1.) In principle this was simply a recognition by the industry of the consumer's new purse and a catering to his new desires.

  It is interesting to note that, in the middle fifties, so-called "stripped" models, that is, the cars in the low-price group with a minimum of equipment, did not attract many customers. In view of this fact, the upsurge of demand for the so-called compact or economy car, which gathered momentum in the years after 1957, at first sight may seem confusing. On looking closer, however, it is evident that this demand was essentially a further expression of the customer's desire for greater variety. Throughout its history, the industry has been faced with the problem of trying to anticipate changes in customer preference. Even though it takes years to develop a new product, it is our job to be ready with it when there is an effective demand. Mr. Donner, chairman and chief executive officer of General Motors, recently put it this way: