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JMH
19,3
What is good for General Motors:
the contributions and influence
of Alfred P. Sloan, Jr
328
Jeffery D. Houghton
Department of Management and Industrial Relations, West Virginia University,
Morgantown, West Virginia, USA
Abstract
Purpose – This paper seeks to provide a review and analysis of the contributions and influence of
Alfred P. Sloan, Jr, to contemporary business practices and management thought.
Design/methodology/approach – The paper begins with an introduction and brief biographical
sketch followed by an overview of Sloan’s administrative principles as applied at GM. The paper
continues with a review of empirical evidence supporting the efficacy of Sloan’s principles along with
some theoretical explanations for their success. The paper then examines some criticisms surrounding
Sloan’s contributions before concluding with a discussion of the impact that Sloan’s ideas have had on
organizational and managerial thought in the context of today’s rapidly evolving organizational
realities.
Findings – Although he was not a management scholar, Sloan’s applied work at General Motors
resulted in significant and enduring contributions to business practices and management theory. Yet
Sloan’s contributions are somewhat overlooked today and have not been extensively or critically
examined in the current business and managerial contexts.
Originality/value – This paper makes an important contribution to the management history
literature by being among the first to offer a comprehensive critical review of the ways in which Sloan
has influenced contemporary management thought, theory, and practice.
Keywords General Motors, Management history, Business policy, Management philosophy
Paper type Research paper
Journal of Management History
Vol. 19 No. 3, 2013
pp. 328-344
q Emerald Group Publishing Limited
1751-1348
DOI 10.1108/JMH-04-2012-0024
More than three decades ago, business historians Daniel Wren and Robert Hay
accepted a challenge from the Academy of Management to find a way to honor the
most outstanding individuals who had contributed to American business and
management thought and practice over the past 200 years (Wren and Hay, 1977). Wren
and Hay (1977) surveyed members of the Business History Conference, members of the
Academy of Management, and members of the Management History Division, asking
them to identify their top ten list of management “pioneers.” The survey ranked
General Motors (GM) chief executive Alfred P. Sloan, Jr, as the 6th most influential
pioneer in management history (Wren and Hay, 1977). In a recent replication of the
original Wren and Hay study, Sloan maintained his position as one of the leading
figures in the history of management thought, finishing in a tie for ninth place along
with Joseph Schumpeter and Henry Ford (Heames and Breland, 2010). Sloan was not a
management theorist in the purest sense of the term, yet his applied work at GM
resulted in lasting contributions to business practices and management principles.
However, like many second generation managers, Sloan’s contributions have been
largely overlooked and are somewhat forgotten today. Indeed, a literature review of 11
academic business journals from 1976 to 2006 revealed only one article focused on
Sloan compared with 19 articles on Henry Ford, 16 articles on Mary Parker Follett, and
13 articles on Chester Barnard, all fellow members of the most recent top ten list
(Heames and Breland, 2010). The sole article published in these journals on Sloan in the
past three decades (i.e. Marchland, 1991) focused only on one narrow aspect of his
influence, namely his role in building a “family” based corporate image for GM. Only
one academic paper (i.e. Dale, 1956) has heretofore been published focusing exclusively
on Sloan’s broad contributions, and no papers of this nature have been published
within the last half century. Thus, the purpose of this paper is to document and
critically examine the contributions and influence of Alfred P. Sloan, Jr, on modern
management thought and organizational practices. The paper begins with an
introduction and brief biographical sketch followed by an overview of Sloan’s
administrative principles as applied at GM. The paper continues with a review of
empirical evidence supporting the efficacy of Sloan’s principles along with some
theoretical explanations for their success. I then examine some criticisms surrounding
Sloan’s contributions before concluding with a discussion of the impact that Sloan’s
ideas have had on organizational and managerial thought in the context of today’s
rapidly evolving organizational realities.
Introduction and biographical overview
On June 1, 2009, General Motors declared bankruptcy. Little more than century after its
founding, this once proud giant of American industry found itself fighting for its very
existence. Although General Motors has emerged from bankruptcy to continue its role
as a major force in the automobile industry, it is a very different kind of organization
than the one that dominated the landscape of corporate America for decades. The new
GM is a much more streamlined company with less debt, more competitive cost
structures, fewer divisions and product lines, and a simpler organizational structure.
This new entity is markedly different from the company that William C. Durant
established in 1908 as a holding company for his Buick Motor Company and then
rapidly expanded with the acquisition of existing car companies such as Oldsmobile
and Cadillac, and that Alfred P. Sloan, Jr subsequently built into a powerful global
conglomerate with dozens of product offerings and the slogan “A Car for Every Purse
and Purpose.” Ironically, this recent situation marks the second time in its history that
an economic downturn, a plummeting stock market and crippling debt has left General
Motors in serious financial difficulties and in need of a multi-million dollar bailout plan.
The year was 1920 and GM founder, president, and majority owner William Durant,
through his fast and easy approach to running a business and playing the stock
market, had landed himself and his fledgling company in dire financial straits. Durant
was a gambler and a compulsive risk-taker, but he was also a man with a genius for
empire building. Shortly after establishing the GM holding company in the fall of 1908
through speculative stock offerings and the revenues from his profitable Buick Motor
Company, Durant began building, via the acquisition of key manufacturers and parts
suppliers, an automobile empire that would ultimately dominate the American road
with annual sales in excess of half a million vehicles (Farber, 2002). Durant was a
charismatic leader who operated largely on hunch and intuition, amassing and losing
several large fortunes in his lifetime, generally through wildly speculative plans for
manipulating the stock market. By 1920, Durant was freely spending money on his
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ever-expanding domain, investing heavily in new acquisitions, additional product
lines, and the construction of a $20 million office building in suburban Detroit.
One of Durant’s best acquisitions was the Hyatt Roller Bearing Company, which
GM purchased in 1916. The company came with the services of its president, Alfred
P. Sloan, Jr. Born in 1875 in New Haven, CT, Sloan entered the Massachusetts Institute
of Technology (MIT) at the age of 17, graduating in just three years with a degree in
electrical engineering from perhaps the finest technology program in the country at
that time. Later in his life, Sloan would donate $5 million to his alma mater to establish
the MIT School of Industrial Management, later renamed the Sloan School of
Management in his honor. Through his father’s connections, Sloan attained a position
as a draftsman in a small fledgling company, the Hyatt Roller Bearing Company. Hyatt
manufactured a roller bearing that, due to a unique design, was able to outperform the
products of the company’s competitors. The company, however, was poorly managed
and unprofitable. Sloan was frustrated by the company’s squandered potential and
would often strategize the ways and means by which Hyatt could be made profitable
over lunch with the company’s young bookkeeper, Peter Streenstrup. When the
company was subsequently put up for sale, Sloan convinced his father to purchase the
company and invest operating capital for six months under the condition that Sloan
would turn the business around and make it a profitable operation. Working closely
with Streenstrup to implement their lunchtime dreams, Sloan was able to bring Hyatt
into the black within the six month timeframe his father had given him. Sloan would
run Hyatt for the next 18 years and under his guidance the company would enjoy
fantastic success, due in large part to Sloan’s decision to focus on supplying bearings to
a new and exciting market segment, the emerging automobile industry.
Soon after GM’s acquisition of Hyatt, Sloan became a GM vice-president with an
office next to Durant’s at GM headquarters in New York. Sloan and Durant employed
starkly contrasting management styles. Sloan and his fellow executives at General
Motors, including close friend Walter P. Chrysler, admired Durant’s remarkable vision
and willingness to take risks but they didn’t appreciate the way Durant managed the
company. Durant was a demanding but genial and occasionally detached autocrat, at
one moment meddling in the day to day operations of one of his divisions and at the
next entirely missing from action. Moreover, Durant ran the company as a one-man
show with major strategic decisions and resource allocations made largely on the basis
of cronyism. As GM executive John Lee Pratt explained:
No one knew how much money was being appropriated. There was no control on how much
money was spent. Durant’s executive committee consisted of the plant managers and when
one of them had a project, he would get the vote of his fellow members; if they would vote for
his project, he would vote for theirs. It was sort of horse-trading. In addition, if they didn’t get
enough money, when Durant visited the plant, he would tell them to go on and spend what
they needed without any record being made (Dale, 1956, pp. 33-34).
Similarly, Walter Chrysler included the following anecdote in his autobiography:
I remember I went to see him [Durant] once and said, “Billy [. . .] please, now, say what your
policies are for General Motors. I’ll work on them; whatever they are, I’ll work to make them
effective. Leave the operations alone; the building, the buying, the selling and the men – leave
them alone, but say what your policies are.” Billy laughed at me. “Walt, I believe in changing
the policies just as often my office door opens and closes.” I wagged my head and said, “You
and I can never get along” (Chrysler and Sparkes, 1950, p. 148).
Sloan shared the concern of his colleagues on the GM executive committee. In fact, in
1919 Sloan went so far as to prepare an elaborate report detailing how GM should be
organized that focused on incorporating systematic managerial control processes and
general principles of administration. According to John Lee Pratt who presented the
document to the GM chief in May 1920, Durant briefly glanced at the plan, commented
that it would take some time, and set it aside to be forgotten (Dale, 1956).
Durant had more pressing issues on his mind. By mid-year in 1920, the automobile
market, which had boomed in the years following the First World War thus
encouraging an optimistic expansion of productive capacity at GM, followed the US
economy into a deep slump, resulting in a GM inventory glut of $210 million in parts
and unsold vehicles (Farber, 2002). As the GM share price fell, Durant developed a bold
plan to corner the market on GM stock. Durant’s manipulations, which would be illegal
today, succeeded in causing the GM stock price to rise, but most of Durant’s purchases
were made on margin, with as little as 10 percent of the purchase cost actually paid up
front. Throughout 1920, Durant and his investment syndicate leveraged themselves
deeper and deeper into debt while GM’s revenue and financing streams dried up almost
completely. By November, Durant’s position became untenable. In order to meet
margin calls, Durant’s only recourse was to sell his large quantities of GM stock, which
would have had a devastating effect on the company’s share price and
creditworthiness, leading to possible bankruptcy (Farber, 2002). A detailed
investigation subsequently revealed that Durant and his investors owed
approximately $38 million (over $400 million in current dollars). Finally, the Du
Pont Company, which held a minority ownership stake in GM, agreed to inject cash
and broker a bail-out plan, offering Durant a relatively attractive buyout package in
return for all of his GM holdings and his resignation as president of the company.
Pierre du Pont, a seasoned leader who had built his family’s business into an
industrial superpower, assumed the presidency of General Motors. However, Du Pont
had no interest in maintaining a direct long-term role in the management of GM. His
primary interest was in turning the company around and making it profitable again to
protect his family’s sizeable investment. From the beginning, Sloan and the
administrative principles outlined in his “Organization Study” were central to du
Pont’s reorganization efforts and over the next few years, Sloan would systematically
apply his administrative principles to transform GM into an entirely new entity. With
the company back on solid footing, Pierre du Pont stepped down and Sloan was named
GM’s president in 1923 and chairman of the board in 1936, a position he would hold
until his retirement in 1956.
As Dale (1956) has observed, the creative geniuses who start companies are rarely
responsible for building them into a viable, ongoing concern capable of long-term
success. There is usually a second generation of managers, the “great organizers” of
American business, who develop systematic approaches for carrying forward the
dreams of the founders in a more rational and grounded manner. There is perhaps no
better example of this phenomenon than that of Alfred P. Sloan, Jr at General Motors.
Today, Sloan’s name lives on largely through his philanthropic endeavors. However,
few people, even those in academia, fully understand and appreciate Sloan’s
contributions to organizational and managerial theory and practice. The remainder of
this paper will provide an overview and critical examination of Sloan’s influence within
the field of management.
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Sloan’s administrative principles
In the winter of 1921, Sloan faced the daunting task of reshaping a huge company that
had been loosely run by William Durant on the basis of charisma and cronyism. As
Pierre du Pont later explained, “Durant had operated as a one-man concern. He was
really the head of the company and attended to everything. The other men were subject
to his direction; there was very little incentive for the men themselves to operate
independently” (du Pont, 1953). “You might say,” Sloan would later reflect, “that
beginning with January 1, 1921 we commenced to make an organization out of General
Motors [. . .]” (Sloan, 1952). The principles that Sloan began implementing at GM more
than 90 years ago seem commonplace today (this is one of the reasons Sloan’s influence
is underappreciated) until one recalls that the modern corporate system of governance
simply did not exist when Sloan took control of the company (Freeman, 2005). Business
organizations of the complexity and scale of GM were a fairly new phenomenon at this
point in history. Up to this time, business organizations were generally small enough
and simplistic enough to be run in an autocratic fashion by a single individual making
decisions by intuition and hunches, much the way Durant had run GM and Henry Ford
had run his company. However, as Peter Drucker later observed, “General Motors
could not function as a centralized organization in which all decisions are made at the
top, and in which the divisional managers are but little more than plant
superintendents” (Drucker, 1993/1946, p. 45). Sloan summed it up rather simply:
“General Motors had become too big to be a one-man show” (Sloan and Sparkes, 1941,
p. 106). By the 1920s, increasingly complex companies like GM demanded new
organizational structures and new administrative principles, and Sloan was in the
perfect position to apply the knowledge he had gained from his 25 years of
administrative experience to create what would become the organizational prototype of
the twentieth century business corporation.
A system of controlled autonomy
To a large degree, Sloan’s principles were laid out in his succinct and persuasive
28-page “Organization Study,” which was accepted by GM’s board of directors in
December of 1920. Sloan’s document began as follows: “The object of this study is to
suggest an organization for the General Motors Corporation, which will definitely place
the line of authority throughout its extensive operation as well as coordinate each
branch of its service” (Sloan, 1964, p. 52). The plan contained two overarching
principles that would guide all future GM operations and that were stated as follows:
The responsibility attached to the chief executive of each operation shall in no way be limited.
Each such organization headed by its chief executive shall be complete in every necessary
function and enabled to exercise its full initiative and logical development. Certain central
organization functions are absolutely essential to the logical development and proper control
of the Corporation’s activities (Sloan, 1964, p. 53).
The genius of Sloan’s plan was in creating a decentralized organizational structure that
would encourage initiative, innovation, and entrepreneurial behavior in the leaders of
GM’s various divisions while still making them accountable to a centralized planning
and control process. Sloan fully understood that he had created a linguistic paradox. He
first maximized decentralized authority by stating that the head of each operation
“shall in no way be limited,” and then goes on immediately to limit the authority of
these executives to “proper control.” Sloan would later write: “Looking back on the text
of the two basic principles, after all these years, I am amused to see that the language is
contradictory, and that its very contradiction is the crux of the matter” (Sloan, 1964,
p. 53).
Sloan’s plan elaborated on this basic concept of controlled autonomy with five
additional objectives:
(1) To definitely determine the functioning of the various divisions constituting the
Corporation’s activities, not only in relation to one another, but in relation to the
centralized organization.
(2) To determine the status of the central organization and to coordinate the
operation of the central organization with the Corporation as a whole to the end
that it will perform its necessary and logical place.
(3) To centralize control of all the executive functions of the Corporation in the
President as its chief executive officer.
(4) To limit as far as practical the number of executives reporting directly to the
President, the object being to enable the President to better guide the broad
policies of the Corporation without coming in contact with problems that may
safely be entrusted to executives of less importance.
(5) To provide means within each executive branch whereby all other executive
branches are represented in an advisory way to the end that the development of
each branch will be along lines constructive to the Corporation as a whole
(Sloan, 1964, pp. 53-54).
Sloan called the first objective a “big chew” – and it certainly was in the complex and
disorganized GM of 1920- but he also correctly suggested that if the functioning of the
parts can be described in relationship to the whole, then the entire workings of an
organization can be established because key responsibilities at each organizational
level will be contained within the description (Sloan, 1964). Sloan suggested that the
second objective was simply a restatement of the first, but from a top-down rather than
bottom-up perspective (Sloan, 1964). In reference to the third objective, Sloan
unapologetically contended that he never minimized the power of the chief executive
during his time as GM’s president. He did, however, choose to exercise his executive
power with some discretion and he observed that he got better results by selling his
ideas rather than by merely giving orders (Sloan, 1964). Implicit in Sloan’s fourth
objective is the modern conceptualization of a chief executive as a representative of the
company to various constituencies and as an innovator and visionary figure
responsible for setting overall strategic course of the company – a vision in direct
contrast to the heavy-handed, micromanaging of Durant, Ford, and other chief
executives of that era. The final objective serves as a warning against becoming too
siloed as a result of the decentralized divisional structure. Communication and
coordination across the various the divisions would become essential.
The “Organization Study” went on to elaborate in greater detail the two basic
principles and the five supporting objectives and their application at GM, ultimately
culminating with an organizational chart consisting of more than 100 separate boxes
that would serve to clarify the complicated relationships between GM’s various
divisions and levels. As indicated by the chart, the new GM would have two primary
segments of organization: major control and executive control (Dale, 1956). Major
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control involved a direct line of authority running from stockholders to the directors to
two major committees, a finance committee that would determine the company’s
financial policies and an executive committee headed by the president and including
representatives of the various operational areas. Executive control resided with the
president, acting within the frameworks established by major control. The president
directed the various operational units of the company through two vice-presidents in
charge of operations (this was the position held by Sloan when the plan was originally
implemented, with du Pont still serving as president). Coordination of GM’s 14
operating divisions was facilitated by an operations committee consisting of the
division heads and by a general advisory staff responsible for providing specialized
assistance (e.g. purchasing, real estate, engineering, legal, insurance, advertising, etc)
to the autonomous divisions. Sloan made it clear, however, that the advisory staff was
to serve exclusively as consultants to the operating divisions, which remained free to
accept or reject any advice received- subject, of course, to the purview of the president.
Sloan’s organizational chart clearly showed the autonomy of each division, from the
Chevrolet Division to the GM Truck Division to the Accessory Division (Sloan’s old
unit), but it also reflected the clear line of authority running from each division directly
to the president as well as the concept that any one division, no matter how important,
was just another part of the larger entity of General Motors (Freeman, 2005).
Sloan would later conclude that “the principles of organization in the study thus
initiated for the modern General Motors the trend toward a happy medium in industrial
organizations between the extremes of pure centralization and pure decentralization”
(Sloan, 1964, p. 55). In short, Sloan had called for an end of the dictatorial and
domineering oversight of executives in the mold of Durant and Ford, to be replaced
with a much more democratic process of authority checks and balances (Freeman,
2005), as reflected upon by Peter Drucker:
Hence General Motors has become an essay in federalism – on the whole, an exceedingly
successful one. It attempts to combine the greatest corporate unity with the greatest
divisional autonomy and responsibility; it aims at realizing unity through local
self-government (Drucker, 1993/1946, p. 46).
If Sloan’s plan of decentralized authority, centralized accountability, and supporting
ancillary principles seems somewhat unremarkable today, it is only because these
concepts have become standard operating procedures in most large contemporary
business organizations. However, Sloan’s ideas were revolutionary in 1920 and they set
GM on a course toward creating the basic model of corporate governance that is
generally taken for granted today.
Fact-based planning and decision making
When Sloan began implementing his organizational plan at GM in the winter of 1921,
he quickly realized that he would need to develop administrative control and planning
tools to support his rational approach to structuring GM’s operations. Using facts,
figures, and carefully conceived plans in business was nearly unheard of in the early
twentieth century, especially in the nascent automobile industry where decisions were
made largely on the basis of intuition without much accountability and with even less
regard for financial data. The situation of 1920 illustrates the point very effectively.
The US economy had boomed after the First World War, with government wartime
spending and overseas orders for food and other goods serving as a strong economic
stimulus. GM had enjoyed a record year in 1919, selling nearly 20 percent of the cars in
the US market and encouraging Durant to spend around $79 million on property and
plant expansions, increasing production to unprecedented levels. Then in mid-1920, the
US car market collapsed in the postwar economic contraction. GM’s sales plummeted
75 percent from June to November. With production running at full capacity and with
no means of forecasting sales or consumer demand, the company found itself
overwhelmed by unsold inventory and vanishing profit margins (Farber, 2002). Later,
when making public speeches, Sloan was fond of using a ship analogy to describe this
situation and GM’s response (e.g. Sloan, 1927). He likened the GM of 1920 to a great big
ship crossing the ocean, running full speed ahead with the sun shining and no thought
to the possibility of fog, shoals, or bad weather. The storm came suddenly, Sloan would
say, and GM found itself in a position of increasing inventories, decreasing sales, and
plant shut-downs. The experience, Sloan would continue, caused him to feel that GM
needed to develop some signals to better understand the current situation and some
forecasting techniques to look as far ahead as possible. Sloan would conclude by
saying that little by little the company was able to develop techniques to better control
the ship and to anticipate bad weather.
Beginning in 1921, Sloan began to cultivate a culture of rational fact-based
decision-making at GM. Sloan invested a tremendous amount of time in those early
years in trying to determine the exact types of reports and the particular facts that
would allow him and other GM executives to make the best decisions (Farber, 2002). “I
think it would surprise business, in general, if they appreciated how we see the facts
before we make an executive decision,” Sloan once commented in a radio interview,
“No amount of trouble, no amount of time is spared in getting the facts to put
constructively and dramatically before the executive or the group that has to make the
decision” (Stanley, 1969). The purpose of fact-based decision making, Sloan made clear,
was to make GM a profitable enterprise. Where Durant often focused on simply
making as many cars as possible with the idea that this supply would generate
sufficient demand to create revenues and profitability, Sloan focused almost
exclusively on corporate profitability (Freeman, 2005). Sloan would later write: “The
primary object of the corporation, therefore, we declared was to make money, not just
to make motor cars” (Sloan, 1964, p. 64).
Sloan was not alone in his efforts to restructure the company while implementing
financial and operational controls. He surrounded himself with a team of like-minded
individuals who were instrumental in facilitating the changes he had envisioned. First
of course, was Pierre du Pont, a fellow MIT graduate and the first to recognize the
value in Sloan’s plan. Du Pont was savvy enough to stay out of the details while giving
Sloan and his younger colleagues the support and encouragement they needed to move
forward. Sloan’s team also included John J. Raskob, former treasurer at Du Pont, whose
innate sense of risk-taking was somewhat tempered by his financial instincts, as well
as John Lee Pratt, another former Du Pont man who had come over to GM in 1919 in an
effort to rationalize some of Durant’s haphazard approaches to capital investments
(Farber, 2002). Pratt, who had earned a degree in civil engineering from the University
of Virginia, complimented Sloan’s way of thinking perfectly and Sloan referred to him
as the best businessman he had ever known (Farber, 2002). Perhaps the most
interesting GM executive of that era, Donaldson Brown, was another Du Pont import
who came over to GM to work under Raskob in 1921. A mathematically prodigy,
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Brown enrolled in the Virginia Polytechnic Institute at the age of 13 and earned a
degree in electrical engineering at the age of 17. Brown was an eccentric and an
intellectual elitist who often spoke in unintelligible mathematical equations and
scientific jargon, but his contributions to GM in creating the policies, controls, and
systems that would help reshape the company were invaluable. On Raskob’s
recommendation, Sloan appointed Brown to be GM’s vice-president of finance, later
saying, “He and I shared similar views on the value of detailed, disciplined controls in
the operation of a business. From the time of his arrival in the corporation, we
recognized this affinity and began a long and congenial relationship” (Sloan, 1964,
p. 118).
Sloan and his team implemented financial controls and planning systems at GM
over the next several years, establishing procedures for capital spending
appropriations, cash control, inventory control, and production control (for a
detailed discussion of the development and implementation of financial controls at GM,
see Sloan, 1964, pp. 116-148). Many of the policies implemented involved
groundbreaking approaches that later became standard business practice. For
example, Brown created a novel method for calculating return on investment that
allowed GM to determine overall profitability across the company’s diverse divisions
(Freeman, 2005). Sloan and his colleagues also placed a special emphasis on developing
forecasting techniques. Beginning in 1922, Sloan requested that his division managers
provide an estimate of sales, earnings, and capital requirements for the coming year
given three contingencies: pessimistic, conservative (most likely), and optimistic
(Sloan, 1964, p. 129). This approach, however, did not entirely solve the problems of
1920. The resulting forecasts were quite good for 1922 and 1923, but proved much too
high (even the pessimistic estimates) in 1924. High sales volumes relative to short
supply in 1923 had resulted in lost business and caused division managers to resolve
not to miss out on any more potential sales due to undersupply (Sloan, 1964). The basic
problem was that GM executives, despite these estimates from division managers,
were largely in the dark concerning dealer inventory levels and final sales to
consumers. As Brown explained, “We did not know the rate [at] which our product was
actually passing into the hands of the ultimate consumers, nor did we know what the
stocks were in the hands of our dealers” (Brown, 1929, p. 236). Sloan would later
summarize: “We knew nothing about the most recent five or six weeks of our car sales,
and this gap therefore was filled with the speculations of the protagonists – the
statisticians with their trend lines on the one hand, and the salesmen with their
optimistic intuitions on the other” (Sloan, 1964, p. 135). Consequently, in 1924 and 1925
GM implemented a more sophisticated forecasting approach that involved each car
division receiving a report from its dealers every ten days summarizing the number of
new orders taken, total orders on hand, and the number of new and use cars on hand
(Norton, 2004; O’Brien, 1997; Sloan, 1964). “With this information in hand each ten
days, the divisions thereafter had an up-to-date, comprehensive picture of the situation
in the field,” Sloan explained, “The divisions and headquarter staff were then able to
take corrective action and make new forecasts with greater accuracy” (Sloan, 1964,
p. 136).
Throughout the 1920s a new information and fact-based culture developed at GM.
Indeed, after Donaldson Brown began using charts in his presentations, statistical
charts became a standard tool at GM for presenting and analyzing facts (Freeman,
2005). This new culture allowed the company and its executives to become more
rational in their policy-making. For example, early in the reorganization process, Sloan
observed that the company had no rational car pricing policy in place:
Not only were we not competitive with Ford in the low-price field – where the big volume and
substantial future growth lay – but in the middle, where we were concentrated with
duplication, we did not know what we were trying to do except sell cars which, in a sense,
took volume from each other. Some kind of rational policy was called for. That is, it was
necessary to know what one was trying to do (Sloan, 1964, p. 60).
Sloan’s new pricing policy, launched in 1923, was summed up by the famous slogan “A
Car for Every Purse and Purpose.” Sloan eliminated unprofitable models and created a
distinctive pricing structure that bracketed the market based on increasing levels of
quality, amenities, and status. By the mid-1920s, GM’s model line-up ranged from the
entry-level Chevrolet (priced in the $500 range), to the more middle class-focused
Oakland (later Pontiac), Oldsmobile, and Buick models, to the luxury class Cadillac
(priced in the $3,000 range). Although the Chevrolet cost more than Ford’s Model T,
Sloan explained that GM’s objective was “to get a reputation for giving more for the
dollar than Ford [. . .] we proposed to demonstrate to the buyer that, though our car cost
X dollars more, it was X plus Y dollars better” (Sloan, 1964, p. 154). The new pricing
strategy worked very well for GM in the emerging consumer society of the 1920s and it
is often credited, along with GM’s innovations in both installment selling (through its
credit arm GMAC) and the used car trade-in, for helping the company to surpass Ford
in the sale of cars in the US market for the first time in 1927.
Empirical results and theoretical explanations
Facts and figures were of paramount importance at GM in the 1920s, and there is
perhaps no better way to analyze the results of Sloan’s efforts than by looking at the
relevant facts and figures. Insomuch as most of Sloan’s reforms were in place by 1926,
one good way to examine the impact of Sloan’s efforts is to compare the averages for
key performance indicators for the years 1922-1925 and the years 1926-1929,
respectively (Norton, 2004). For example, average annual unit sales increased from
629,801 during the 1922-1925 period to 1,540,226 during the 1926-1929 timeframe
(Norton, 2004). Similarly, sales revenues shot up from an average of $616 million before
full implementation to $1.3 billion afterwards, while average market share more than
doubled from 17.3 percent to nearly 36 percent and the company’s average rate of
return jumped from 11.9 percent to 20.7 percent (Norton, 2004). Beyond these basic
operational and performance measures, a number studies have attempted to
empirically test the effects of Sloan’s reforms on GM’s performance outcomes. For
example, Kashyap and Wilcox (1993) demonstrated that GM successfully smoothed its
production in the 1920s by arranging its production to maintain a reasonable short-run
relationship between levels of inventories and expected sales. In addition, Norton
(1997) reported finding empirical evidence of improved synchronization of production
with final consumer demand after the implementation of Sloan’s policies. Finally,
Norton (2004) also found significant synchronization between GM’s sales to dealers
and dealer’s sales to customers and evidence of a relationship between this
synchronization and company performance and profitability.
At least two theoretical explanations have been offered to explain GM’s remarkable
performance during this period. The contractual theory of the firm (e.g. Coase, 1937)
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suggests that firms are established in order to avoid transaction costs, particularly
those related to bargaining, negotiation, policing and enforcing (Norton, 2004). Using
this theoretical framework, some scholars have argued that GM’s success in the 1920s
can be attributed to a high degree of vertical integration through acquisition, such as
the purchase of Fisher Body in 1926, in order to generate operational efficiencies and
eliminate opportunistic behaviors by suppliers (e.g. Casadesus-Masanell and Spulber,
2000; Klein, 2000). On the other hand, the information theory of the firm (e.g. Knight,
1971/1921), also based on Coase’s (1937) transaction cost framework, focuses on the
cost of obtaining price information. This view suggests that firms may gain a
remarkable competitive advantage by successfully forecasting consumer tastes and
accompanying market demand and prices in order to synchronize the flow of
production using this market information (Knight, 1971/1921). Building on this
theoretical foundation, Spulber (1999) has recently suggested that firms serve as
market intermediaries specializing in gathering information about buyers and thereby
gaining a competitive advantage from information processing leading to quick
adjustments in inventories to meet customer needs and clear the market. It is
interesting to note that Alfred Chandler (1977, 1990), in harmony with the information
theory of the firm, identifies the forecasting of consumer demand and the
synchronization of production with these forecasts as a central theme in American
business history. The information theory of the firm has been used as a theoretical
framework to support the proposition that GM’s success in the 1920s and 1930s may be
attributed directly to Sloan’s reforms, especially those focused on improved forecasting
and information processing, which created a substantial competitive advantage for the
company (e.g. Norton, 1997, 2004).
Criticisms and responses
Despite Sloan’s prominent place in management history (e.g. Heames and Breland,
2010; Wren and Hay, 1977), his contributions to business practice and management
thought have not been universally lauded. Indeed, Sloan and his contributions have
been criticized by some who feel that his role as a management pioneer has been
overinflated. These criticisms fall into two general categories:
(1) the story of Sloan’s contributions to GM and to the field of management was
constructed post hoc by journalist James McDonald, who was the ghost writer
for Sloan’s 1964 memoir, and by business historian Alfred Chandler, and is at
best exaggerated and at worst entirely inaccurate, and
(2) Sloan’s principles of organization and financial controls as applied at GM and
subsequently adopted by many other major US corporations ultimately put
these organizations at a competitive disadvantage in the adoption of lean
management techniques relative to Japanese companies, such as Toyota, that
operated with an entirely different system of organization and control.
In this section, I examine each of the criticisms in turn, providing a brief response in
each case.
Much of Sloan’s reputation as a management pioneer developed as the result of the
publication of his 1964 memoir, My Years with General Motors. The book was met with
extremely favorable reviews, spent six months on the New York Times bestseller list,
was translated into several languages, and is often described as one of the best
business biographies ever written (McKenna, 2006). For years, everyone assumed that
Sloan had written the book himself, perhaps with some editorial assistance, but in
2002, James McDonald, a well-known business writer for Fortune magazine in the
1950s and 1960s, revealed in his own book, A Ghost’s Memoir: The Making of Alfred
P. Sloan’s My Years with General Motors (McDonald, 2002), that he had served as the
ghost writer for Sloan’s classic text. In addition, Sloan and McDonald had hired a
young business historian named Alfred Chandler to serve as their research associate
(McKenna, 2006). Although My Years with General Motors was completed in 1959, its
publication was blocked until 1964 by GM executives and their corporate lawyers who
felt that the book, coupled with additional evidence from the GM archives, could result
in an anti-trust lawsuit by the federal government (McKenna, 2006). In the meantime,
Chandler published his own book, Strategy and Structure: Chapters in the History of
American Industrial Enterprise (Chandler, 1962), based in part on his extensive
research of GM corporate history conducted as part of the Sloan project.
The revelation of these events has caused some to suggest that Sloan’s
contributions to the principles of business organization and management theory are
more the result of a complex social and historical construction reflecting the 1950s
viewpoint of McDonald and Chandler than a factual narrative of what actually
happened as a result of Sloan’s actions during the 1920s at General Motors
(e.g. McKenna, 2006). Taking this criticism to another level, insomuch as My Years
with General Motors has long served as the primary description of Sloan’s famous
“Organization Study” document (GM corporate archives have never been open to
public scrutiny), one could suggest that the “Organization Study” and its principles as
revealed in Sloan’s memoir were not crafted by Sloan himself but rather that these
concepts and principles originated with McDonald and Chandler as they interpreted
and reconstructed the events at GM in the 1920s. In addition, critics might suggest that
if the “Organization Study” was in fact written in the 1920s and not constructed on a
post-hoc basis in the 1950s, that it too was ghost written, perhaps by James D. Mooney,
who had been with Sloan at the Hyatt Roller Bearing Company and who in 1922 was
named a Vice-President of GM and President of General Motors Overseas. In 1931,
Mooney published his own management treatise based on his experiences at GM,
Onward Industry: The Principles of Organization and Their Significance to Modern
Industry (Mooney and Reiley, 1931), lending some degree of credibility to the theory
that GM’s organizational principles originated with Mooney and not with Sloan.
Although this line of criticism is somewhat plausible at first glance, at least two key
aspects of the historical record work against these possible explanations. First,
McDonald and Chandler had access to the GM archives and were working closely with
Sloan himself on the project. In this context, it seems unlikely that McDonald and
Chandler would have blatantly misrepresented Sloan’s contributions at GM in order to
advance their own post-hoc interpretations of the GM organizational system and it
seems even less likely that Sloan would have tolerated such an inaccurate portrayal,
even to his benefit. Indeed, Chandler states in the preface to Strategy and Structure:
“The General Motors story ultimately came to be based on information and material
which had been in the public domain before the summer of 1956. Yet I am confident
that should information not yet in the public domain become available, it would not
substantially alter the history presented here” (Chandler, 1962, p. ii). In other words,
Chandler had spent substantial time researching the confidential GM archives and
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knew that his version of GM’s history would not conflict with either the information
contained in the GM archives or with the accounts contained in My Years with General
Motors if it were ever released (McKenna, 2006).
Second, Cornell University business professor Ernest Dale’s comprehensive review of
Sloan’s contributions to administrative principles was published in Administrative
Science Quarterly in 1956, three years before My Years with General Motors was
completed and eight years before it was published. Nevertheless, Dale’s (1956)
independent description of Sloan’s “Organization Study” is nearly identical to the
version that would later appear in Sloan and McDonald’s My Years with General Motors.
Dale unequivocally attributes the plan’s authorship to Sloan and describes it as a
“remarkable document [. . .] almost entirely original [. . .] succinctly and clearly written
[. . .] with no unnecessary language [. . .] that must be read and carefully studied to
appreciate its manifold implications [. . .] it is a landmark in the history of administrative
thought” (Dale, 1956, p. 40). Although there is no indication that Dale was ever given
access to GM’s archives, he certainly writes as though he had an opportunity to “read
and carefully study” a copy of Sloan’s plan. A close scrutiny of Dale’s citation list reveals
the following as the most likely source supporting his detailed assessment of Sloan’s
plan: “Sloan, Alfred P., The General Motors Reorganization Plan, Defendants’ Exhibit
No. 500, in Civil Action, No. 49 C-1071, United States of America v. I.E./du Pont de
Nemours and Company, General Motors Corporation et al., US District Court for the
Northern District of Illinois, Eastern Division, Chicago, 1953.” Although critics could go
so far as to contend that this version of Sloan’s plan was also fictitious, it seems unlikely
that GM would run the risk of submitting a fraudulent document in a federal anti-trust
lawsuit merely to bolster the reputation of its chairman.
A second line of criticism questions the long-run validity and effectiveness of the
organizational systems Sloan developed at GM. More specifically, some critics suggest
that the operational and financial system implemented by Sloan and his executive team
at GM in the 1920s focused too much on outcome indicators of success, including
various measures of profitability and return on investment (Waddell and Bodek, 2005).
In addition, these critics point out that the Sloan team devised a cost accounting system
that valued inventory as an asset with the same value as cash, which could lead to
bloated inventories and other negative ramifications from a manufacturing standpoint
(Waddell and Bodek, 2005). Furthermore, according to these critics, the decentralized
multi-divisional structure that Sloan implemented was also counterproductive in that it
allowed divisions to pad their return on investment figures by selling to internal
customers in the other divisions while encouraging additional excess inventories of
parts waiting to be transferred to other divisions (Waddell and Bodek, 2005). Moreover,
these critics argue that, “not only has this [Sloan’s system] become the model for all big,
publicly traded manufacturers, it is embedded in academia and in the law of the land.
The logic and the systems that support it form the backbone of MBA programs. One
who thoroughly masters it can become a CPA. A publicly traded company that fails to
keep its books this way is likely to have to answer to the SEC and the IRS” (Waddell
and Bodek, 2005, p. 68). The Sloan system, the critics continue, has made it difficult or
impossible for American manufacturers to adopt lean management techniques
practiced by companies like Toyota, which have placed more emphasis on
manufacturing issues such as quality, efficiency, just-in-time inventory processes,
and a general long-term orientation to running a business as opposed to a short-run
viewpoint driven by quarterly profitability and return on investment measures
(Waddell and Bodek, 2005). Finally, this line of criticism concludes that GM and other
similar American corporations were successful not because of, but rather in spite of,
the implementation of Sloan’s system of management, largely because American
manufacturing had little global competition in the mid-twentieth century, particularly
in the years following the Second World War, and would have likely succeed
regardless of the management techniques employed (Waddell and Bodek, 2005).
This line of criticism raises some legitimate points regarding the long-run efficacy
of some aspects of Sloan’s organizational system. One need look no further than GM’s
recent struggles and subsequent reorganization to find evidence that some aspects of
this system have become outdated and a hindrance to global competitiveness.
However, this line of criticism seems to stretch the point a little too far in a number of
places. For example, the argument that GM’s multi-divisional structure and inventory
valuation methods could lead to excessive inventories, seems to ignore the extensive
attention given by Sloan to inventory control processes in My Years with General
Motors (Sloan, 1964). Indeed, Sloan concluded a detailed discussion of inventory
control procedures by saying that “division managers still bought the materials, but
they were permitted to buy only enough at a time to make the number of cars and
trucks specified in their approved production schedule” (Sloan, 1964, p. 127). In
addition, the conclusion that GM succeeded in the 1920s and the following decades in
spite of and not because of Sloan’s principles ignores some of the comparative analyses
outlined above (e.g. Kashyap and Wilcox, 1993; Norton, 1997, 2004) contrasting GM’s
sales, revenues, market share, and production and inventory smoothing before and
after Sloan implemented his plan. GM faced much the same competitive forces in the
late teens when it struggled mightily under the management of Durant, as it did in the
1920s when it experienced so much success after the implementation of Sloan’s system.
Finally, even if these critics are correct in part and some of Sloan’s concepts are less
relevant in today’s globally competitive manufacturing environments, that in no way
diminishes the far reaching influence, past and present, of Sloan’s contributions to
business practice and management principles.
Conclusions
By the time Sloan had finished implementing organization structure, financial control,
and planning processes at GM, he had succeeded in transforming not only his own
company but also the world of business. Sloan’s techniques and processes, born of
necessity, would soon become, for better or worse, standard procedures at GM and many
other similar organizations. “The need for financial controls grew out of crises,” Sloan
later admitted, “Controls were brought in to ensure that crises did not recur [. . .]
central-office management was able to know whether the decentralized management
was operating well or poorly and had a factual basis for judgment regarding the future of
any part of the business” (Sloan, 1964, p. 148). Sloan would sum up the transformation in
his company and industry as follows: “The great difference in managerial technique
between the industry of today as compared with that of yesterday is what might be
referred to as the necessity of scientific approach, the elimination of operation by
hunches; this affects men, tools, and method” (Sloan and Sparkes, 1941, p. 140).
Sloan’s mention of the “scientific approach” is particularly noteworthy. Although
Frederick W. Taylor, along with his associates and followers, has been given much of
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the credit in developing and advancing scientific management, Sloan also made
significant contributions in this arena. As Dale (1956) has noted, Taylor and his
colleagues succeeded in raising worker productivity by applying the scientific method
in order to find the “one best way” to perform a job or task, but these effects often
stopped at the level of the worker or perhaps the foreman. Sloan, in contrast, applied
his administrative ideology and scientific approach at the very top of the organization
in profound and far reaching ways (Dale, 1956). As detailed above, Sloan’s ideology
was one of decentralized administration coupled with centralized control. The power of
this ideology in the context of an American culture based largely on rugged
individualism, self-reliance, free enterprise, and the entrepreneurial spirit should not be
underestimated. It was an inspirational approach because it gave power and
opportunity to the individual while simultaneously providing a solution for the
problem of diseconomies of scale encountered by the increasingly large and complex
organizations of the day (Dale, 1956). However, an impressive ideology would not have
been enough to save GM in 1921. Sloan had to operationalize his ideas in the form of an
administrative framework and the supporting principles of fact-based forecasting and
rational decision-making, applied with scientific precision and rigor.
To summarize, Sloan’s contributions to management theory and thought were made
in two primary areas. First, he conceptualized an administrative structure in which
freedom and control must be carefully balanced. Central management determines the
overall strategy for the organization, along with related short- and long-term plans.
Central management also creates the organizational structure, specifies each division’s
role within the overall organizational strategy, and provides staff assistance as
necessary to help the divisions carry out their objectives. The division managers, in turn,
are empowered to independently handle all aspects of managing their operations and
personnel, subject to a centralized review process. Second, he created a system of
rational planning and control processes to facilitate the implementation and the
functionality of his organizational structure. Some of the specific contributions made by
Sloan and his colleagues in this area include the concept of fact-based decision-making,
the forecasting of sales and consumer demand, bracketed product pricing plans based on
demographics and market segments, and the use of financial controls for cash, capital
expenditures and inventories. Many of Sloan’s “firsts” have become standard procedure
in much of the corporate world today and his principles are taught in business schools
around the globe (Freeman, 2005). So basic and common are his ideas in the context of the
contemporary business world that it would be easy to take them as basic organizational
realities that have always existed. Indeed, Dr. Edgar Schein of MIT’s Sloan School of
Management recently said, “His ideas were so clearly correct that we have forgotten that
they were an invention” (Waddell and Bodeck, p. 13).
If imitation is the sincerest form of flattery, it is important to note the extent to
which Sloan’s administrative principles have been adopted in other business,
non-profit, and government organizations. Although Henry Ford derided Sloan’s
“great big chart” by saying that it would take about six weeks for the message of a man
living in a “berry” in the lower left hand corner of the “family tree” to reach the
president at the top of its complex system of branches, his grandson later hired several
top executives from GM to implement a substantially similar form of organization at
Ford (Dale, 1956). Today, large and complex organizations ranging from General
Electric (GE) to the Smithsonian Institution make use of the concepts pioneered by
Sloan at GM. For example, GE’s organizational structure, consisting of four
autonomous divisions including Energy Infrastructure, Technology Infrastructure, GE
Capital, and Home and Business Solutions joined together through centralized control
and accountability processes, is remarkably similar to Sloan’s creation at GM.
Likewise, the Smithsonian’s discrete divisions, consisting of 18 different museums or
galleries, seven research centers, and a number of ancillary businesses, operate
autonomously and largely independently, although they are accountable to a central
administration that monitors performance in terms of visitation figures, visitor
feedback, and survey data (Freeman, 2005). GE, the Smithsonian Institution, and
thousands of other similar organizations across the country and around the world go
about their daily business routines without a second thought to the man whose ideas
helped to shape the modern business organization, Alfred P. Sloan, Jr.
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About the author
Jeffery D. Houghton is an Associate Professor of Management and Director of the Master of
Science in Human Resources and Industrial Relations (MSIR) program at West Virginia
University. He has presented his research at various professional meetings and has published
more than 30 articles in a variety of respected journals. He holds a PhD in Organizational Studies
from Virginia Polytechnic Institute and State University. Jeffery D. Houghton can be contacted
at: jeff.houghton@mail.wvu.edu
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