Durant Versus Sloan – Part 1

The entrepreneur who built the largest startup in the United States is someone you probably never heard of. The guy who replaced him invented the idea of the modern corporation. Understanding the future of entrepreneurship may depend on understanding the contribution each of them made in the past.

This is the first of several posts on Durant versus Sloan.

Alfred P. Sloan
In the middle of the 20th Century Alfred P. Sloan was one of the most famous businessman in the world. Known as the “Inventor of the Modern Corporation,” Sloan was president of General Motors from 1923 to 1956 when the U.S. automotive industry grew to become one of the drivers of the global economy.

If you look around the United States it’s hard to avoid Sloan. There’s the Alfred P. Sloan Foundation, the Sloan School of Management at MIT, the Sloan program at Stanford, and the Sloan/Kettering Memorial Cancer Center in New York. Sloan’s book My Years with General Motors written 40 years ago is still a business classic.

Alfred Sloan

The Modern Corporation
Sloan is rightly credited with formalizing the idea of the modern U.S. corporation, and by extension Sloan laid the foundation for America’s economic leadership in the 20th century. One guy really did all of this.

Peter Drucker wrote that Sloan was “the first to work out how to systematically organize a big company. When Sloan became president of GM in 1923 he put in place planning and strategy, measurements, and most importantly, the principles of decentralization.”

Sloan realized that the traditional centralized management structures (like General Motors had in 1920) were poor fits for the management of GM’s already diverse product lines.  Top management was trying to coordinate all of the operating details (sales, manufacturing, distribution and marketing,) across all the divisions and the company almost went bankrupt that year when poor planning led to excess inventory (with unsold cars piling up at dealers and the company running out of cash.)

Sloan transferred responsibility down from corporate into each of the operating divisions (Chevrolet, Pontiac, Oldsmobile, Buick and Cadillac). Each of these GM divisions each focused on its own day-to-day operations and with each division general manager responsible for the division’s profit and loss. Sloan kept the corporate staff small and focused on policymaking, corporate finance and planning. Sloan had each of the divisions start systematic strategic planning.

Sloan put in place GM’s management accounting system (borrowed from DuPont) that for the first time allowed the company to: 1) produce an annual operating forecast that compared each division’s forecast (revenue, costs, capital requirements and return on investment) with the company’s financial goals. 2) Provide corporate management with near real-time divisional sales reports and budgets that indicated when they deviated from plan. 3) Allowed management to allocate resources and compensation among divisions based on a standard set of corporate-wide performance criteria.

Finally, Sloan transformed corporate management into a real profession, establishing the standard that the professional manager is duty-bound to put the interests of the enterprise ahead of his own.

Modern Corporation Marketing
At the same time General Motors also revolutionized automotive marketing by creating multiple brands of cars, each with its own identity targeted at a specific economic bracket of American customers. The company set the prices for each of these brands from lowest to highest (Chevrolet, Pontiac, Oldsmobile, Buick and Cadillac.) Within each brand there were several models at different price points.

The idea was to keep customers coming back to General Motors over time to upgrade to a better brand as they became wealthier. Finally, GM created the notion of perpetual demand within brands by continually obsoleting their own products yearly with new models rolled out every year. (Think of the iPod family and its yearly new models.)

When Sloan took over as president of GM in 1923, Ford and its Model T was the dominant player in the U.S. auto market with 60% of the U.S. car market. General Motors had 20%. By 1931, with the combination of superior financial management and a astute brand and product line strategy, GM had 43% market share to Ford’s 20% – a lead it never relinquished.

Thanks for the History Lesson – So What?
Well thanks for the history lesson but why should you care?

If you’re an entrepreneur you might be interested to know that when Sloan took over General Motors in 1923, it was already a $700 million dollar company (about $8.5 billion in sales in today’s dollars.)

Yet you never hear who built that company. Who founded what would become General Motors 16 years earlier in 1904? Where are the charitable foundations, business schools and hospitals named after him?  What happened to him?  Who was he?

The founder of what became General Motors was William (Billy) Durant.  His board (led by the DuPont family) tossed him out of General Motors (for the second time) in 1920 when GM sales were $567 million (about $6 billion in today’s dollars.)

William Durant died managing a bowling alley in Flint Michigan in 1947.

From the day Durant was fired in 1920, and for the next half a century, American commerce would be led by an army of  “Sloan-style managers.”

But the spirit of Billy Durant would rise again.

This time in what would become Silicon Valley.

Billy Durant - Founder General Motors

Billy Durant - Founder General Motors

More in the next posts.

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12 Responses

  1. [...] Durant Versus Sloan – Part 1 « Steve Blank steveblank.com/2009/10/01/durant-versus-sloan-part-1 – view page – cached + Customer Development Manifesto: The Path of Warriors and Winners (part 5) + Can You Trust Any VC’s Under 40? + Customer Development Manifesto: Market Type (part 4) + The Customer Development… (Read more)+ Customer Development Manifesto: The Path of Warriors and Winners (part 5) + Can You Trust Any VC’s Under 40? + Customer Development Manifesto: Market Type (part 4) + The Customer Development Manifesto: The Startup Death Spiral (part 3) + The Customer Development Manifesto: Reasons for the Revolution (part 2) + The Customer Development Manifesto: Reasons for the Revolution (part 1) + The Leading Cause of Startup Death – Part 1: The Product Development Diagram + The End of Innocence * Archives + October 2009 + September 2009 + August 2009 + July 2009 + June 2009 + May 2009 + April 2009 + March 2009 + February 2009 * Other Stuff + Steve Blank + Entrepreneurship o Books/Blogs for Startups + Secret History (Read less) — From the page [...]

  2. I am not convinced Durant vs. Sloan contrast has to be dramatized to such extent. Sure one guy got kicked out – which could have been avoided if he ran company well enough to keep financial control – and the other hung in there and got institutions named after him. So what?

    Ford family did a pretty good job of managing founder-to-manager transition in car business and are still playing a big role in their enterprise 100 years since. Larry Ellison is the modern day example of a guy who hung in there and built a real powerhouse. Sloan is not the only guy who got foundations named after him – if you have money to donate universities will be all too happy to create chairs and schools in your name.

    Pitting founders and managers against each other is a convenient way for investors to increase control. Yet, some of the biggest tech industry successes have original founders staying in the driver seat all the way.

  3. Interesting piece … I look forward to the follow-on story.

    I grew up in a GM factory town and my curiosity led me to read Sloan’s book when it came out in the 1960s. My lifelong interest in Sloan, Durant, and others led me to create what became Hoover’s, the business information website.

    I have the first (1909) annual report of GM, a copy that was owned by later President and Chairman Pierre DuPont.

    Sloan was the greatest manager of all time, as indicated above. Durant was an amazing entrepreneur. But he continually overextended himself and thereby lost control of his companies. It has happened to many entrepreneurs.

    Durant’s disorganized management style drove others crazy, including the great Walter Chrysler, who worked for him.

    By the end of their lives, Sloan and Durant had respect for each other.

    To this day, in my opinion, there is not a decent bio of Sloan — it is hard to find good material on him. But there are two or three biographies of Durant, who is somewhat more romantic to authors. I find both intriguing.

    My favorite businesspeople and entrepreneurs are those who dream up a new concept, make it real, and build it into a great business. To me that is the ultimate achievement.

    Such men as Ford, Eastman, and among today’s active leaders Fred Smith (Fedex) top that list.

    However, contrary to what a prior commentator said, Ford did not make a very good transition from founder to manager. Henry Ford would not listen to anyone else — a common problem among the successful — and about ruined his company by sticking around too long. Some (perhaps including his wife) blame his son’s premature death on Henry’s obstinacy. The company was lucky to survive his later stage leadership, and would be gone today had Bill Ford not brought in the ex-Boeing fellow who turned it around and runs it today.

    Falling shy of creating AND building a great company, I have to give points to those who did either one, and on that score Durant and Sloan remain high in my pantheon.

    Gary Hoover

  4. I am curious to hear the rest of what Steve will have to say about Durant and Sloan. It is interesting to note that some advocates of lean management and accounting (including Waddell and Bodek in *The Rebirth of American Industry*) have a strong dislike of Sloan/Brown management cost accounting. It may be that in the early 20th century, when demand for automobiles was growing faster than anybody could keep up, that cost accounting was a better way to manage an auto company. But Ford, with his emphasis on cash-flow, sort of had the last laugh earlier this year when GM and Chrysler declared bankruptcy while his company — under Alan Mullaly’s exceptional leadership — managed to avoid it.

  5. Yes, the Durant meme moved to Silicon Valley, as did the tradition of boards ousting founders. Yes, founders should have an exit strategy like taking the money and buying an income stream that runs itself. Or, founders should realize that being a serial founder means serial oustings.

  6. [...] is the Durant School of Entrepreneurship (DSE)? I suggest you take a look at Steve’s posts on Billy Durant and on entrepreneurial finishing school but here is the basic [...]

  7. [...] Segmentation General Motors had turned the independent car companies acquired by its founder Billy Durant into product divisions. But in a stroke of genius GM transformed these divisions into a weapon that [...]

  8. [...] Motors had incited a eccentric vehicle companies acquired by its founder Billy Durant into product divisions. But in a cadence of talent GM remade these divisions into a arms that Ford [...]

  9. [...] Segmentation: General Motors had turned the independent car companies acquired by its founder Billy Durant into product divisions. But in a stroke of genius GM transformed these divisions into a weapon [...]

  10. [...] Segmentation: General Motors had turned the independent car companies acquired by its founder Billy Durant into product divisions. But in a stroke of genius GM transformed these divisions into a weapon [...]

  11. [...] Durant, man die General Motors oprichtte, kent niemand meer, aldus Blank. Het legendarische autobedrijf werd grootgemaakt door een boekhouder Alfred P. Sloan. [...]

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