One of the subjects I’m currently studying is American business history. It can be fascinating for its insight into how and why modern business practices evolved the way they did.
Henry Ford helped build the U.S. automobile industry by becoming a master of production methods, and using the subsequent economies of scale to progressively offer the public a better Model T at an increasingly lower price. Though he was a brilliant engineer and equitable leader, he detested bureaucracy, org charts, and so called ‘financeering’; as a result, he bought back all of his company’s stock in 1919 and took the firm private. Ford was the proud individualist who understood practical economics, but two conditions slowly brought his firm down. First, his centralized management style couldn’t adapt to the unique needs of a much larger corporation of its operational nature. Secondly, his complete lack of a customer and market-orientation led Ford to make few model updates and new brands, causing a steady drop in market share from 56% in 1921 to 21% by 1937.
Alfred Sloan became President of General Motors in 1923, a firm that was losing money but had various car brands including Buick, Chevrolet, Oldsmobile, and Cadillac. Sloan was a pragmatic leader described by a Fortune magazine writer:
“[He] displays an almost inhuman detachment from personalities, [but] a human and infectious enthusiasm for the facts. Never, in committee or out, does he give an order in the ordinary sense, saying, ‘I want you to do this.’ Rather he reviews the data and sells the idea, pointing out, ‘Here is what can be done.’ Brought to consider the facts in open discussion, all men, he feels, are on an equal footing. Management is no longer a matter of taking orders, but of taking counsel.”
While enabling financing for dealers and customers, and establishing a solid product development and positioning strategy for GM’s brands remain two of Sloan’s notable accomplishments, it was his management design that remains his legacy.
It was common business tradition before the 1920s, that divisions would be organized not according to product, but by function. This meant centralized command over all purchasing, manufacturing, and sales across multiple lines, brands, and regions. Sloan turned this system on its head by creating a multi-divisional structure with dozens of divisions, each operated by a chief executive responsible for the operations, marketing, and finance of their business unit. Secondly, he created a series of cross-divisional committees that forced high-ranking executives to regularly communicate with one another and be greater in touch with the company at large. In his words, decentralization allowed for “initiative, responsibility, development of personnel, decisions close to the facts, flexibility…”
The key question Sloan tried to continually address was: “How could we exercise permanent control over the whole corporation in a way consistent with the decentralized scheme of organization?” The answer lied in combining coordinated control with decentralization.
Coordinated control was exercised through: 1) Continual financial/operational planning, measurement, and reporting, and 2) Capital allocations. GM became an expert in its use of financial ratios and budget targets. Adjustments to production lines were continually made based on what the numbers were telling top management, what innovations were being made within the firm, and what was happening in the external environment. Sloan knew that constant attention to changes in consumer preferences, technologies, government policies, business cycles, competitive activities, and international trade patterns were essential.
This form of organizational management spread to many other American corporations including DuPont and young, but fast-growing companies from the nascent chemical and technology sectors. While Ford may have been the pioneer of mass manufacturing, it was Sloan that made the greatest impact to both the future of the auto industry and large organizational management.
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Are there any business or industry leaders that you feel have made an important contribution to society? Please share! I’ve read some works by Peter Drucker, and will read about Warren Buffett later this year. But I’d love to hear who you’ve found inspiring.