BOOK SUMMARY OF: Alfred Sloan\'s My Years With General Motors

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You have seen the decline of GM. But are you familiar with its rise? General Motors was the company that invented the phrase \'professional management\'. The co on which Peter Drucker wrote his book on Corporations. The one book to be read on management, acc to Bill Gates. Now in a summary by Ravi Raj Sagar.

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BOOK SUMMARY OF: Alfred Sloan\'s My Years With General Motors

  1. 1. Alfred P Sloan, Jr.`s MY YEARS WITH GENERAL MOTORS a study by Ravi Raj Sagar
  2. 2. Coverage- Part I <ul><li>The great opportunity </li></ul><ul><li>Concept of the Organization </li></ul><ul><li>Product Policy </li></ul><ul><li>The air-cooled engine </li></ul><ul><li>Coordination by committee </li></ul><ul><li>Financial Controls </li></ul><ul><li>Transformation of the Automobile Market </li></ul><ul><li>Policy Creation </li></ul><ul><li>Introduction by Peter Drucker </li></ul>
  3. 3. 1908:The saga begins <ul><li>Henry Ford announces Model T. </li></ul><ul><li>William Durant (Buick Motor Co) forms General Motors Company </li></ul><ul><li>1909:Durant buys in Buick, Olds, Oakland and Cadillac </li></ul><ul><li>Also buys in several parts manufacturers </li></ul><ul><li>Lands in a capital crunch : CRISIS 1 </li></ul>
  4. 4. Henry Ford
  5. 5. Ford Model T(car of the century)
  6. 6. William C Durant
  7. 7. The Years 1910-1915 <ul><li>1910: Banker`s trust comes in to finance- </li></ul><ul><li>5 year note issued; takes over management </li></ul><ul><li>Durant forced out; joins up with Mr. Chevrolet </li></ul><ul><li>Nash appointed president of GM </li></ul><ul><li>1915: banker`s trust expires </li></ul><ul><li>Pierre Du Pont takes over as Chairman </li></ul><ul><li>Meanwhile, Chevrolet has quietly been acquiring GM shares in the market </li></ul>
  8. 8. <ul><li>Durant regains control of GM through Chevrolet`s majority ownership of GM stock </li></ul><ul><li>Nash resigns; goes on to form Nash Motor Co </li></ul><ul><li>Durant consolidates GM: Buick, Cadillac made divisions </li></ul><ul><li>1918: buys in Chevrolet, Fisher Body </li></ul><ul><li>Also: Sloan`s Hyatt Roller bearing Co (turned into United Motors with Sloan as President) </li></ul><ul><li>Starts Consumer Financing co, buys Tractor co & Frigidaire </li></ul>Return of the prodigal
  9. 9. Heading for another crisis <ul><li>Thanks to Mr. Durant, GM had the makings of a great enterprise </li></ul><ul><li>But, Physically un-integrated, Management-wise un-coordinated </li></ul><ul><li>Expenditures for new companies, plants and equipment, inventories running very high </li></ul><ul><li>`GM was heading for a crisis from which the modern General Motors Corporation would emerge` </li></ul>
  10. 10. <ul><li>GM expansion 1918-20 without a policy of control </li></ul><ul><li>Durant`s policy of expansion was essentially sound though, given the extensive capital structure of the automobile industry </li></ul><ul><li>Overruns on expansion appropriations and inventories by divisions </li></ul><ul><li>Effort to raise $85M realizes just $11M, </li></ul><ul><li>despite sales increase from $270M in 1918 to $567M in 1920 </li></ul><ul><li>Sloan made chairman of `Committee on Appropriation Request Rules` </li></ul>
  11. 11. Crisis 2 : 1920 <ul><li>Total corporate inventories </li></ul><ul><li>Jan 1920: $137M, Oct 1920: $209M </li></ul><ul><li>exceeding limit by $60m </li></ul><ul><li>In Sept, the bottom drops out of the automobile market </li></ul><ul><li>Mr. Ford cuts his prices 20-30% </li></ul><ul><li>GM having difficulty paying invoices and payroll; borrows $83m </li></ul><ul><li>All GM car divisions, except Buick & Cadillac, virtually shut down </li></ul><ul><li>US economy in a slump </li></ul>
  12. 12. Organization Study <ul><li>`Before these events, I had become increasingly disturbed by affairs in GM` </li></ul><ul><li>Developed a plan of organization in 1919-20 to correct deficiencies </li></ul><ul><li>Presented it to Mr. Durant who accepted it favorably but did nothing about it, </li></ul><ul><li>preoccupied as he was in the financial state of the company </li></ul><ul><li>Closure of plants, break in stock market prices brings an end to an era in GM </li></ul><ul><li>Resignation of William Durant </li></ul>
  13. 13. Immediate task-reorganization <ul><li>Collision of GM expansion and business cycle, with Durant`s method`s letting things go out of control </li></ul><ul><li>Co faced slump outside, management crisis inside </li></ul><ul><li>Task 1921: reorganization </li></ul><ul><li>Confidence, caution, flexibility </li></ul><ul><li>Pierre du Pont new President </li></ul>
  14. 14. A new beginning <ul><li>Pierre du Pont`s Executive Committee: </li></ul><ul><li>du Pont, Raskob, Haskell, Sloan </li></ul><ul><li>Adopts Sloan`s `Organization Study` </li></ul><ul><li>which becomes foundation of policy in modern GM: </li></ul><ul><li>expression of basic principles of `decentralization` </li></ul>
  15. 15. The basics <ul><li>No knowledge of contribution of individual divisions </li></ul><ul><li>Hence, no way of determining where efficiencies or inefficiencies lay </li></ul><ul><li>No objective basis for allocation of new investment </li></ul><ul><li>Aim of business to earn a return on capital; in case not happening, deficiency to be corrected or activity abandoned for a more favorable one </li></ul>
  16. 16. Price determination <ul><li>Divisions selling to external customers: market-determined price- desirable return –expansion justified </li></ul><ul><li>For inter-divisional sales: cost plus a pre-determined rate of return; but with competitive comparison </li></ul>
  17. 17. Principles of Organization <ul><li>Responsibility of CEO of each division will in no way be limited; each organization complete in every function to exercise full initiative and development </li></ul><ul><li>Certain central organization functions essential to development and control of corporation’s activities </li></ul><ul><li>Contradictory language in the two points above </li></ul>
  18. 18. Elements of the plan <ul><li>Plan adopted 1920 </li></ul><ul><li>Provision for advisory and financial staffs without line authority </li></ul><ul><li>Distinguishing policy from administration of policy, specifying location of each in the structure </li></ul><ul><li>Concept formulated as decentralized operations with coordinated control </li></ul>
  19. 19. Beginning to get control <ul><li>‘In six months, I became EVP in charge of all operations’ </li></ul><ul><li>‘We were getting control of runaway elements of the business particularly the inventory’ </li></ul><ul><li>Next order of business – policy on the line of cars to be produced </li></ul>
  20. 20. Product Policy <ul><li>Pattern of variety established by Durant as expressed in seven lines </li></ul><ul><li>Spacing of ten cars in seven lines expressed its irrationality </li></ul><ul><li>No position in the low price area, Chevrolet priced $300 above Model T </li></ul><ul><li>Only Cadillac and Buick leaders in their price class </li></ul>
  21. 21. Price spectrum <ul><li>Chevrolet “490” $795 - $1375 </li></ul><ul><li>Chevrolet “FB” $1320 - $2075 </li></ul><ul><li>Oakland $1395 - $2065 </li></ul><ul><li>Olds $1445 - $2145 </li></ul><ul><li>Scripps-Booth $1545 - $2295 </li></ul><ul><li>Sheridan $1685 </li></ul><ul><li>Buick $1795 - $3295 </li></ul><ul><li>Cadillac $3790 - $5690 </li></ul>
  22. 22. Chevrolet
  23. 23. Buick
  24. 24. Situation Analysis <ul><li>GM 1920 sales: 330,000 cars </li></ul><ul><li>Chevrolet : 130,000; Buick : 112,000 </li></ul><ul><li>Rest : 88,000 </li></ul><ul><li>GM sales $567M; Ford $644M </li></ul><ul><li>No competition to Ford in low price </li></ul><ul><li>Duplication in middle class: identical price of Chevrolet FB, Oakland & Olds </li></ul><ul><li>No justification for Sheridan & Scripps-Booth </li></ul>
  25. 25. Rationalization of product line <ul><li>All cars except Buick & Cadillac were losing money </li></ul><ul><li>GM share down 17 to 12% in 1921 </li></ul><ul><li>Ford up from 45 to 60% </li></ul><ul><li>Chevrolet 4% vs Ford 60% - strategy: to take a bite from the top of his position </li></ul><ul><li>Sheridan, Scripps-Booth dropped </li></ul><ul><li>Line-up: Chevrolet, Oakland, Buick, Olds, Cadillac </li></ul>
  26. 26. Air-cooled engine <ul><li>Conflict between Research orgn and producing Divisions </li></ul><ul><li>Parallel conflict between Top mngt and Divisional mngt </li></ul><ul><li>Subject: a revolutionary car with an air-cooled engine of Mr Kettering`s design </li></ul>
  27. 27. Mr. Charles Kettering, Inventor at GM
  28. 28. Rough ride for AC engine <ul><li>Plans to make the air-cooled engine operational on Oakland and Chevrolet do not succeed </li></ul><ul><li>Sloan`s ability to ride in two boats </li></ul><ul><li>Supporting du Pont and Kettering`s hopes for an air-cooled engine </li></ul><ul><li>Supporting Divisions` production of conventional water-cooled engines </li></ul><ul><li>Change of DM at Chevrolet </li></ul>
  29. 29. <ul><li>Again, Sloan`s ability to work out a solution: </li></ul><ul><li>exclusive air-cooled at Olds </li></ul><ul><li>dual production at Chev </li></ul><ul><li>exemption to Oakland </li></ul><ul><li>Production problems continue to dog the air-cooled </li></ul>
  30. 30. The turning point <ul><li>Two decisive events make 1923 another turning point </li></ul><ul><li>One: greatest boom year- industry`s first 4 million vehicles year </li></ul><ul><li>Two: air-cooled Chevrolet field problems </li></ul><ul><li>Solution obvious: make the conventional Chev to meet demand </li></ul><ul><li>Du Pont recommends Sloan to succeed him </li></ul>
  31. 31. Alfred P Sloan, Jr.
  32. 32. Sloan, President, GM <ul><li>Sloan goes along with Divisions to produce conventional water-cooled engine cars </li></ul><ul><li>Kettering (Research chief who had been pushing for the air-cooled engine) offers to resign </li></ul><ul><li>….?? </li></ul>
  33. 33. The artful manager <ul><li>Sloan sets up a separate divn for air-cooled prodn & sales under Kettering </li></ul><ul><li>The great boom was on; the air-cooled died a natural death </li></ul><ul><li>Kettering and staff went on to develop tetraethyl lead, hi-compression engines, non-toxic refrigerants, 2-cycle diesel engine.. </li></ul>
  34. 34. The Sloan vision <ul><li>Sloan era begins 1923: power of great demand acts as a disciplinary force </li></ul><ul><li>`Time to gather ourselves, to coordinate` </li></ul><ul><li>Role of Executive Committee: confine itself to principles rather than become a group management </li></ul><ul><li>`A group can make policy, but only individuals can administer policy` </li></ul><ul><li>Add Operating Mngrs to EC </li></ul>
  35. 35. Co-ordination by committee <ul><li>General Purchasing Committee: meets with limited success </li></ul><ul><li>Advertising committee: to publicise parent orgn (by BDO) </li></ul><ul><li>General Technical Committee: brings Research and Divisions together – builds Proving Ground; study group- papers on control of cylinder-wall temp, cylinder heads, sleeve valve engines, transmissions, ..fuel and metallurgy </li></ul>
  36. 36. The Proving Ground
  37. 37. <ul><li>General Sales Committee: made up of divnl sales mngrs </li></ul><ul><li>Works Managers Committee </li></ul><ul><li>Power and Maintenance staff committee </li></ul><ul><li>Operations committee </li></ul><ul><li>Study in 1924 confirms this format of committees best form of co-ordination </li></ul>
  38. 38. Financial Controls <ul><li>Legacy of overruns on appropriations, inventory runaway, resulting in cash shortage </li></ul><ul><li>Project evaluation principles laid down- technical feasibility, return on investment, desirability for the corporation </li></ul><ul><li>New cash control system set up: moving cash from divns to a 100 banks nationwide </li></ul><ul><li>Now, to handle runaway inventories…?? </li></ul>
  39. 39. Inventory Control <ul><li>Declaration of emergency: buy nothing, stop all incoming purchases </li></ul><ul><li>Review of all purchases in person with GMs </li></ul><ul><li>System of controls: 4 months forecast of sales, production, materials and payroll </li></ul><ul><li>Inventory reduced from $215M in 1920 to $94M and its turnover doubled </li></ul><ul><li>With passage of emergency, control reverted to divisions </li></ul>
  40. 40. Key to co-ordinated control of decentralized operations <ul><li>`If we had the means to review and judge the effectiveness of operations, we could safely leave the prosecution of those operations to the men in charge of them.` </li></ul><ul><li>Financial control- cost, price, volume and rate of return on investment </li></ul><ul><li>Brown`s famous paper on economic cost of capital - `Pricing policy in relation to financial control` </li></ul><ul><li>Depression year 1932- co remains in black </li></ul>
  41. 41. Transformation of the Automobile market <ul><li>Before 1908- class market </li></ul><ul><li>1908-mid 20s – mass market </li></ul><ul><li>Then mass-class market </li></ul><ul><li>Four elements that transformed the automobile market: </li></ul><ul><li>installment selling </li></ul><ul><li>used-car trade in </li></ul><ul><li>closed body </li></ul><ul><li>annual model </li></ul>
  42. 42. Product improvement strategy <ul><li>1925: K Model- improved Chevrolet, with longer body, more leg room, Duco finish, </li></ul><ul><li>1-piece windshield with automatic wipers,.. </li></ul><ul><li>Recovers Chevrolet position with 64% rise in sales </li></ul><ul><li>Ford`s sales declined relatively from 54% to 45% - a danger sign if Mr. Ford had chosen to read it </li></ul><ul><li>(Who had brought in Chevrolet? And the profitable Buick & Cadillac as well?) </li></ul>
  43. 43. Fortifying the line-up <ul><li>Ford $290 </li></ul><ul><li>Price advantage still to Ford at low-end </li></ul><ul><li>(What led to the ultimate downfall of Model T?) </li></ul><ul><li>GM Line-up: </li></ul><ul><li>Chevrolet $510, Olds $750, Oakland $945, Buick 4 $965, Buick 6 $1295, Cadillac $2985 </li></ul><ul><li>Gap in GM line-up at the top end </li></ul><ul><li>Filled with family car La Salle $2000 </li></ul><ul><li>Another danger spot between Chevrolet and Olds </li></ul><ul><li>New 6-cylinder car to share economies with Chev on body and chassis parts: Pontiac </li></ul>
  44. 44. Cadillac La Salle
  45. 45. Pontiac
  46. 46. The fall begins for Ford <ul><li>Essex coach with closed body in 1925 </li></ul><ul><li>Has a good run </li></ul><ul><li>Chevrolet`s closed body volume up to 82% in 1927 </li></ul><ul><li>Model T with its light chassis was pre-eminently an open-body design- became obsolescent </li></ul><ul><li>Ford closes River rogue plant for retooling, leaving field to Chev and Chrysler`s Plymouth </li></ul>
  47. 47. The light chassis on which Model T was built
  48. 48. Car no longer seen as fulfilling just `transportation` need <ul><li>Basic transportation being met by used-car trade in </li></ul><ul><li>Again, Ford`s low-cost static model did not fit in with the new reality </li></ul><ul><li>Customers wanted more power, comfort, styling in cars aided by trade-in and installment financing </li></ul><ul><li>Leading to Annual model offering `more car per car` </li></ul>
  49. 49. Introduction by Peter Drucker <ul><li>Sloan was first to work out systematic organization in a big company </li></ul><ul><li>Planning and strategy, measurements, decentralization- ie basic concepts of the discipline of management </li></ul><ul><li>His work as designer and architect of management was a major element in America`s performance in WW II </li></ul><ul><li>Leading to its dominant economic position </li></ul>
  50. 50. The professional manager <ul><li>Still, to Sloan, the discipline of management came a distant second to the `profession of the manager` </li></ul><ul><li>Two classic approaches in management: </li></ul><ul><li>Constitutionalist approach </li></ul><ul><li>`Education of the prince` tradition </li></ul><ul><li>To Sloan, the core was the latter, the manager as a leader, examplar </li></ul>
  51. 51. Sloan, the manager <ul><li>Comes across as cold and impersonal </li></ul><ul><li>Believed that a CEO must not have friends on the job </li></ul><ul><li>`Be impartial and judge by performance` </li></ul><ul><li>He had tremendous personal warmth and generosity </li></ul><ul><li>Built GM as much through inspiring personal admiration and integrity </li></ul>
  52. 52. <ul><li>Heads of Chevrolet, Buick, Cadillac became Sloan-admirers and team members </li></ul><ul><li>People-focused and respectful of them </li></ul>
  53. 53. Main lessons from the book <ul><li>A. Management is a profession and a manager should be a professional. </li></ul><ul><li>B. Like any other professional, a physician or a lawyer, for instance, the professional manager has a client: the enterprise. </li></ul><ul><li>C. Professionals do not make decisions according to opinions or preferences; but, by facts. </li></ul>
  54. 54. <ul><li>D. Job of a manager not to like people, but to put their strengths to work. Performance alone counts. </li></ul><ul><li>E. Performance more than bottom-line; it is also setting an example, which requires integrity </li></ul><ul><li>F. Dissent, even conflict, are desirable. </li></ul><ul><li>G. Professional manager is a servant. </li></ul>

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