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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