Monday, September 15, 2014

Billy Durant, Alfred P. Sloan and the Early History of General Motors

Flint Journal file photoAt a celebration marking the 25 millionth car, Alfred P. Sloan Jr. greets William C. "Billy" Durant in January 1940.

Although General Motors has experienced a remarkable decline in market share and stock value, it still is one of the most powerful corporations in the world.1 Hampered by health care costs and prior union agreements, the maxim remains true, however, that “what is good for General Motors is good for America.” Indeed, GM’s financial resources are greater than all but a handful of countries. And while in many respects it has been characterized as a faceless corporation where decisions are made by committee and individualism is frowned upon, it is ironic that the firm was forged by a few strong individuals, among them William C. “Billy” Durant, Alfred P. Sloan, Charles Franklin Kettering, William S. Knudsen, Richard H. Grant, and Harley Earl. Perhaps its future will again be fashioned more by individuals than the organization itself, at least if current GM vice-chairman Bob Lutz has any say.2
“Billy” Durant and “Silent” Sloan
Chapters from Alfred Chandler’s classic Strategy and Structure remain perhaps the most concise recounting of General Motors early history.3 General Motors’ beginnings are intimately tied to the career and fortunes of the “dealmaker,” Billy Durant.4 In 1885 Durant, a twenty-four year old insurance salesman living in Flint, Michigan, purchased a patent for $50 to make two-wheeled carts. Durant’s partner in this venture was J. Dallas Dort, a young hardware salesman. The two began marketing their product nationwide, and as their efforts were successful, they first erected a manufacturing plant in Flint, and set up specialized plants to make bodies, wheels, upholstery, paint, varnish, axles, and springs. Durant’s efforts to develop a high volume, integrated business made him a millionaire before he was 40, yet he was never interested in the operational details of the business. Accordingly, he moved his personal headquarters to New York, where in imitation of business titans J. P. Morgan and others, he began to look for new industrial empires to conquer.
            By 1900 the automobile was clearly emerging as an entrepreneurial opportunity for many, and Durant recognized that it posed a threat to his existing carriage business. In 1904 one of the smaller firms in the America automobile industry was that of the Buick Motor Company, located in Flint, Michigan and headed by Scotsman David Buick. Then in bankruptcy, the Buick firm was taken over by Durant, and it became the foundation for an auto empire. Durant redesigned the car, built large assembly plants, and set up a nationwide distribution network and dealer organization.
            As sales volume increased, Durant encouraged the production of parts and accessories in Flint or purchased suppliers and moved them to Flint. Thus, he bought the Weston-Mott Axle and Wheel Company and moved it from Utica, New York to Flint in 1905; in 1908 he bought Alfred Champion’s spark plug company and moved it to Flint from Boston. Durant was following a strategy of backwards integration and in doing so he was eliminating uncertainties associated with outside parts suppliers.
            As a result of Durant’s leadership, Buick’s output rose from only 16 cars in 1903 to nearly 8,500 units in 1908. This initial success with Buick convinced Durant that the automobile had a huge potential market in the U.S. Rather than expanding Buick internally and adding to capacity, Durant began to think of merging a number of existing companies into a conglomerate. To that end, on September 8, 1908, Durant formed the General Motors Company, which by the end of the year owned stock in Buick, Oldsmobile, and the W. F. Stewart Co., bodymakers located in Flint. Durant then followed a strategy of exchanging stocks to control Cadillac, Oakland, six other car companies, three truck companies, and ten parts and accessory companies.
            While following an expansion strategy using both vertical and horizontal combination, Durant never prepared for a temporary decline in demand in the form of a business recession. He never considered building up cash reserves to weather an economic downturn. Ever-expanding through acquisitions, Durant made no attempt to collect information about output and demand in order to make adjustments in production that might compensate for temporary fluctuations in the economy. Further, Durant was not interested in management principles related to organization; he never focused on maximizing the economies of scale in purchasing or production that were possible due to his empire building.
            In 1910 a slight recession took place, and Durant lacked the money to pay his employees and suppliers. He was financially rescued by bankers who took control of his company, and consequently, Durant was forced into a position where he had little to say about company matters. James J. Storrow was the leader of a group of bankers involved in saving General Motors. Storrow desired more organization and more control over what had been autonomous company operations. To that end, centralization took place at General Motors, and as a first step in that process Storrow moved headquarters from New York to Detroit. He set up three permanent offices at the main office, with the idea that the firm would be administered more effectively. A new purchasing office was established, so that economies would be achieved in volume buying for the various subsidiaries. An accounting office was also created, and accounting procedures were standardized throughout the company. Accurate information on costs, profits, and losses were now tallied. Finally, a new production office was set up. With Charles Nash as president and Walter Chrysler in charge of production at Buick, GM’s sales rose from $85 million in 1912 to $157 million in 1915.5
            Storrow’s measures were all steps in the right direction, but in 1915, when he left General Motors, company operations were far from efficient. Storrow left because Durant returned through a complex financial arrangement. In that transition, the DuPont family was now in an important financial position at General Motors. With the support of the DuPont family, Durant encountered little restraint in expanding the firm in the years immediately after 1915. Increased volume was the focus of Durant’s maneuvers, and he paid no attention to the different needs or the demands of the market. Concurrently, he paid little attention to organization and strategies and policies where control and coordination would be exerted. Durant’s expansion was exhibited in a number of different ways. First, he acquired several leading parts and accessory companies, including Hyatt Roller Bearing Co., Remy Electrical Co., Delco, and Pullman Rim Co. New products, including tractors and refrigerators, were also introduced. After World War I, this drive to expand accelerated, as Durant bought the Fisher Body Company; gear manufacturer T. W. Warner Company; and Buffalo Metal Goods, a producer of braking systems. Stock investments were also made in Alcoa, Goodyear, and General Leather, all major automobile suppliers.
            The DuPont family – flush with money due to the profits made during World War I but conservative in their business strategies – was troubled by Durant’s aggressive behavior and speculation in the stock market, but little was done until the economic downturn of 1920. By October, the automobile market had collapsed and General Motors stock took a nosedive. As a result, Pierre DuPont became president of General Motors and he acted decisively. One of his first acts was to approve Alfred Sloan’s organizational structure for General Motors, a structure that remains to this day the company’s basic organization. The multidivisional structure that was proposed and approved by Pierre and Irenee DuPont featured a central office that planned, coordinated, and appraised the work of a number of operating divisions and allocated to them the necessary personnel, facilities, funds and other resources. The executives in charge of these divisions had under their command most of the functions necessary for handling one major line of products or a set of services over a wide area, and these men were responsible for the financial results of their respective divisions. This new structure was designed to mobilize resources effectively, so that both short- and long-term demands were met.
            Sloan’s organization plan was implemented in 1921, and only slightly modified during the next four years. Up to 1921, competition existed between divisions. Boundaries between divisions were established based on market strategy. Furthermore, the company did not have a low-priced car to compete with the Ford Model T, but by 1923 GM product lines were redefined and readjusted. Cadillac sold in the highest price position, followed by Buick, Oakland, Oldsmobile, and finally Chevrolet. Chevrolet had the highest volume and the lowest price. In 1925 Pontiac was created, thereby filling a gap and enabling Sloan to achieve his goal of “a car for every purse and purpose.”

            The difference between the approaches of Durant and Sloan to the problems of administration reflected contrasting personalities, education, and experience.6 Durant was a small man, energetic and personable. Almost everyone who knew him, called him “Billy.” Sloan, on the other hand, was tall, quiet and cool, and his increasing deafness heightened his reserve. Nearly everyone called him “Mr. Sloan,” and when in company whom he did not know, he turned into “Silent Sloan.” Durant had gone from high school into business, but Sloan was an electrical engineer with a degree from the Massachusetts Institute of Technology. Durant was a salesman and stock speculator, but Sloan was a very deliberate thinker and a production man. In 1899, with the assistance of his father, Sloan purchased the Hyatt Roller Bearing Company. It grew so rapidly that the company was sold to Durant for $13.5 million in 1916, at which time Sloan joined GM as a president of its parts subsidiary. Charles Franklin Kettering would join GM in a similar way as a result of the purchase of Delco.

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