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The Company He Keeps

My Years with General Motors

by Alfred P. Sloan Jr.
Doubleday, 504 pp., $7.95

Much has been written about the early entrepreneurs and “robber barons” of American economic history; much, too, has been written on the “faceless” managers of modern industry (how many persons today can name the president and board chairman of General Motors?). But we know very little about an intermediate breed of men, the corporate organizers—Theodore N. Vail who created A. T. & T., Walter Teagle of Standard Oil, Alfred P. Sloan of General Motors, who gave the modern corporation its distinctive form. Together with the Church and the Army, the business corporation is one of the unique forms of modern organizational life. And its origin and growth have not been studied systematically.

General Motors is the most awesome and, because of its direct consumer relationship (about 90 per cent of its business is in autos), the best known of the corporate behemoths. In 1962 it had one million stockholders, 600,000 employees, $14.6 billion in sales (about three times the total national income of Greece!), $9.2 billion in assets, and $1.46 billion in profits. Alfred P. Sloan, more than any other person, was responsible for the shape of the corporation and the strategies it pursued. He was president and chief executive officer of the company from 1923 to 1937, and chairman of the board from 1937 to 1956. This is his account of his stewardship.

The book is in two parts, or one might really say there are two books. The first is a sober, engrossing personal account of the evolution of the corporate form, the second is a tedious bit of institutional advertising in which the various G.M. staff departments (research, styling, personnel, overseas) are described in boring detail, and all the various hands given their due mention.* Thus it is both the history of one man’s policy decisions (which, as the saying goes, is worth the price of the entire book), and some corporation puffery, which can be ignored.

Few auto companies, before World War I, made a complete auto. The manufacturer was usually an assembler who bought parts and accessories and put them together. As the industry grew a shakedown was inevitable. General Motors was put together as a company between 1908 and 1910 from about twenty-five smaller firms by an ebullient stock promoter named William C. Durant. From time to time, other companies were brought in. This, in fact, is how Sloan entered General Motors. He had been the general manager of the Hyatt Roller Bearing Company, which in 1918 was absorbed by G.M., and for five years he was the head of United Motors Company, a G.M. subsidiary consisting of companies that manufactured accessories for G.M. This early feature of General Motors, its own organization sprawl so to speak, posed the great problem, later, for Sloan, of creating an efficient and coordinated structure.

Sloan’s complaint against Durant, which comes through the courteous tone that marks his treatment of all persons in the book, was Durant’s informal way of doing business, of his acting “impulsively.” It was management by crony, with each division operating on a horse-trading basis. There was no rationale for the allocation of capital funds, no inventory control, no standardized accounting. Buick, the largest earner, would keep large cash sums of its own hidden in order to finance its own divisional expansion. (And if this sounds like some of the problems of the early Soviet economy, there are more resemblances than differences in the evolution of both.)

When Durant was caught up in some market speculations that involved the credit of G.M. to an indebtedness of $20 million (he had no systematic personal books or accounts), he was bailed out by the DuPonts, who were the single largest investors in G.M. As the price of rescue, they forced him out of the company and put Sloan in as president in his stead.

One of the fascinating elements in the book is its language. Its key terms, surprising only to those who associate such language with the academy and not with the analytical necessities of any organization, are concept, methodology, rationality. Throughout the book (that is, part one), Sloan uses these terms to explain his innovations. “Durant had no systematic financial methodology. It was not his way of doing business.” “The spacing of our product line of ten cars in seven lines in early 1921 reveals its irrationality.” “In product variety only Buick and Cadillac had clear divisional concepts of their place in the market.”

This language is not an accident or an affectation. It derives directly from the revolution in organization Sloan made: the introduction of detailed planning, of statistical information, of financial controls. At one point, he explains why he relieo on market research and forecasting, as against salesmen’s intuitions: “…in the automobile industry you cannot operate without programming and planning. It is a matter of respecting figures on the future as a guide.” (All of which raises a question that we can postpone for the moment, of why what is good for General Motors is not good for the U.S. economy.)

The reasons for the success of General Motors can be attributed, in simplified fashion, to two elements: a market strategy based on a “clear concept” of product lines; and an organizational form which combined decentralization of operations with coordination of policy. There is a third element which goes unmentioned, or rather which is completely disguised, a policy of “administered prices” based on the concept of “standard volume.” This has allowed the corporation to amass extraordinary profits and to expand its plant out of earnings, without going to the capital market. Let us follow the three elements in order.

In 1921, Ford had 60 per cent of the car and truck market. He had complete control of the low-price field. His strategy was to sell a single model in a single color (black), with a high utility (the Model T almost never wore out) and at a low price, then about $290 for the Ford. By mass production he had achieved enormous economies; by a low price, mass sales. Chevrolet, G.M.’s entry in the low-price field, had only 4 per cent of the market. To meet Ford head-on in price competition would have been suicidal.

G.M.’s strategy was not to undercut the Ford price, but to top it somewhat, seeking to skim off that layer of buyers who would be willing to go to a slightly higher price on the assumption that they were getting a better car. (“In later years as the consumer upgraded his preference, the new General Motors policy was to become critically attuned to the course of American history,” Sloan writes.)

In effect, Ford and Sloan read the American temper differently. Ford, expressing his own artisan mentality, placed his bet on utility; Sloan, drawing on consumer research, understood the desire for status. G.M.’s product policy emphasized variety, style, and different price levels of cars for different classes. (“The core of the product policy lies in its concept of mass-producing a full line or cars graded upward in quality and price,” Sloan writes somewhat portentously.) But not only were cars produced in each price line, but quite ingeniously each line (Chevrolet, Pontiac, Oldsmobile, Buick, Cadillac) overlapped into grades above and below its median price in order to pull buyers from each direction.

Out of this strategy evolved the annual model change as a means of enticing buyers into the market each year (the phrase “planned obsolescence” does not occur in the book). Ford had bet on a static model at a low price; G.M. introduced change. The used car became the cheap car—and G.M.’s answer to Ford. Thus, in the evolution of the auto, what began as a class market, changed, in the Ford revolution, to a mass market, and, in the G.M. innovation, to a mass-class market. (The auxiliary role of installment selling, the most fearsome social invention since the introduction of gunpowder, is itself a complex story that lies outside this account.) In its manipulation, General Motors passed the empirical test and proved itself the greatest sociologist in America: in its annual model change it has had to balance its innovations so as not entirely to outmode the resale value of the earlier car (or be too radical in its appeal as with Chrysler’s early streamlining), and yet these had to be sufficiently different to lead people to assume they were getting a better value in the new car.

But none of this would have been possible without revolution in organization as well. Sloan is quite candid on this score:

We pointed out that it was not essential that, for any particular car, production be more efficient than that of its best competitor or for that matter than the advertising, selling or servicing methods be better than its competitor’s. The fundamental conception of the advantage to be secured in this business, we said, was expressed by cooperation and coordination of our various policies and divisions.

The changes in the organization of General Motors are commonplace now, and have been widely adopted by most large corporations. At the time of their innovation they were a novelty. Stated most simply, the principle of organization is to have a complete breakdown of the costs of each unit, and to exercise control of operating divisions through stringent budgets. Before the system was instituted, divisions in G.M. sold their parts to other divisions (e.g., a battery division to a car division) on the basis of cost plus a pre-determined percentage. But the corporation at the top did not know which units were profitable and which not. “It was natural for the divisions to compete for investment funds” but “it was irrational for the general officers of the corporation not to know where to place the money to best advantage.”

What Sloan did was to treat each division as a separate company, with the corporation on top acting as a holding company, and measure the performance of each division by rate of return on Investment consistent with attainable volume. The rate of return is thus a measure of performance and a means of ranking each division on the basis, not of its profit volume, but on investment of capital. The measure, in short is the margin of profit multiplied by the rate of turnover of invested capital.

One way of increasing the rate of return is, of course, increased efficiency of operation. And here the standard battery of statistical controls—production scheduling, inventory checks, market research to measure anticipated demand—all come into play. But G.M.’s chief means has been a pricing policy which seeks to guarantee G.M., usually, a 20 per cent return annually on its capital. Prices are set to provide a fixed rate-of-return, at a given volume, which covers both costs (fixed and variable) and the desired profit.

The key to this is the concept of volume, or, as it is called by General Motors, “standard volume.” Although Mr. Sloan spends some five pages on this concept, he omits the actual figures which would make it meaningful. No wonder, since such figures, more than any other, would reveal the degree of power that General Motors possesses. The hearings conducted by the Kefauver committee four years ago on “administered prices,” however, allow us to fill in the details.

In figuring standard volume—i.e., the percentage of production capacity it will actively utilize—General Motors wants to avoid adjusting prices to a year-by-year variation in demand; it wants to find a long-run average. Now the company estimates that in its best year, because of seasonal fluctuation and the like, its plants would operate at only 80 per cent of capacity. It figures, further, that in an average year, it would operate only at 80 per cent of the capacity of its best year (80 per cent of 80); in other words, it estimates that on a long-run basis, standard volume is 64 per cent of capacity. Being prudent, and because it wants to hold up a price umbrella for its less efficient competitors—for if it drove them out of business it might face a government monopoly action—the standard volume, in practice, is set at 55 per cent of capacity. Thus, General Motors so sets its prices as to receive a 20 per cent return on invested capital on the theoretical assumption that it will operate only 180 days a year.

In the post-war years, in fact, General Motors has consistently operated at the level of its “best” years. From 1950 to 1957, for example, according to Kefauver Committee evidence, G.M.’s actual sales were, on the average, 30 per cent higher than the standard volume on which the company set its prices. In 1955, when car production hit a record year, G.M.’s net earnings, after interest and income taxes, gave it a 50 per cent return on invested capital in a single year. In sum, over the decade, G.M. could have reduced the prices of its cars by more than a fourth, and still made an annual 20 per cent return on capital.

Sloan does not offer figures on the rate of return that General Motors receives on invested capital. But one can gain a sense of the fantastic profits that have been generated by the corporation from some figures he does offer. From 1946 to 1963, General Motors increased the value of its plant seven times over the start of this period. About 90 per cent of this increase (or about $8.8 billion) came from profits (depreciation accounts plus retained earnings). About 10 per cent, $846.5 million, came from the capital market—the first time since the 1920s that G.M. went to the capital market for money; but of this only $325 million was equity capital, gained from the sale of shares; the rest was borrowed from banks and insurance companies. During this same period 60 per cent of net earnings were paid out as usual in dividends to stockholders. In short, because of the remarkable ability of G.M. to maintain prices, the consumers were making an “involuntary investment” in General Motors.

A book review is not the place to argue questions of social policy and social utilities. But if General Motors is the exemplar of American capitalism one significant fact must be noted. Under the “pure” theory of market capitalism, a firm risks a stockholder’s capital by its investment, and then pays back any profits to its legal owners, the shareholders. If it seeks to risk that money again, it goes back into the capital market and seeks more money. In this way the “price” of capital is as free as the price of labor and the price of commodities. Resources are thus allocated according to free choices. But General Motors—like most of American capitalism—has expanded by self-financing in which judgments about the use of capital are made not by the investor but by the manager. When one combines this social power with a market power to control prices and thus generate huge profits, then an enormous distortion of resource allocation has been introduced into the society.

The over-riding question is: what is “rational” to whom? The curious aspect of Mr. Sloan’s account is how completely unreflective he is about any social issues. Only in one place, towards the beginning of the book, does he specify the corporation’s philosophy.

To this end [he writes] we made the assumptions of the business process explicit. We presumed that the first purpose in making a capital investment is the establishment of a business that will pay satisfactory dividends and preserve and increase its capital value. The primary object of the corporation, therefore, we declared, was to make money not just to make motor cars. Positive statements like this have a flavor that has gone out of fashion; but I still think that the ABC’s of business have merit for reaching policy conclusions.

But if this is G.M.’s philosophy, the question of government policy arises. By a protected price policy G.M. has been able to make, on the average, about 35 per cent a year on its investment. Even if it were only to make its stipulated target of 20 per cent, prices could have been reduced substantially on its cars so that consumers would have been able to spend the surplus, rather than have it go into unneeded plant investment; or the money could have gone easily into higher wages; or by stiffer taxes, the capital could have been used for other social purposes.

What is the test of “unneeded” investment? The standard G.M. argument is that such investment increases the quality of a car and therefore gives more value to the consumer. Yet, as an unpublished study on “The Costs of Automobile Model Changes since 1949” by Fisher, Griliches, and Kaysen has shown, the costs of annual model changes in the latter half of the 1950s was running about five billion dollars a year, adding about $700 to the costs of purchasing a car, or more than 25 per cent of its price. Are such costs understood by the car buyers? And could one argue that each new model is worth the cost? To anticipate the obvious riposte: no, I do not want to “freeze” the automobile at the point of the Model T, but the question is still worth repeating: Is the annual model change worth $5 billion a year in this tax-strained economy? What General Motors has in fact done—through model change and, even more, through its price policy and retained earnings—is to impose its own hidden tax on the consumer in the society.

The tone of Mr. Sloan’s book is completely neutral and impersonal. Neither his own personality or style intrude, except for the implication that he is a man who has been completely fused with his preoccupations with method, concept, and rationality, and little else in life has interested him. If so, all this becomes a mirthless footnote to the theories of Thorstein Veblen. For Veblen, there was a basic distinction between industry (or production) and business (or the dictates of finance). The engineer exemplified for him the values of industry. The interesting point is that Alfred Sloan was by training an engineer, having taken a degree at M.I.T. in 1895. What he did do, and what Veblen did not foresee, was that the engineering mind, with its emphasis on “factuality” and “rationality” would be put to the service of business; and in this respect General Motors is its proudest example.

Letters

General Motors April 30, 1964

General Motors April 30, 1964

General Motors April 30, 1964

  1. *

    One does not have space to deal with all the striking omissions in this section, but the most fantastic of all is the omission of any mention of Walter Reuther in the discussions of the company’s labor policy—a company decision which indicates its stilted mentality.

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