Memo From Alfred Sloan: Heartbreak

Part I: Abrogation of the Enterprise’s Principles

Dear General Motors; this means everyone: Executives, workers, board members, retirees, investors, dealers, suppliers, buyers of our brands.

The golden goose is dead. It shouldn’t have come to this, since the General Motors enterprise was built deliberately to be adaptable to any circumstances – to seize opportunities when times were good, and to retrench effectively when times were bad. When did you all decide that this strategic policy was no longer your responsibility?

I’m not going to say that GM should avoid bankruptcy. File today rather than Monday. It is the only avenue that makes sense, and in fact is simply the now-unavoidable admission that the company has been effectively bankrupt for years, but has merely been shifting the evidence from one pocket to another: One year product would be uncompetitive; another year there would be a financial loss. The proliferation of brands and markets added more shells to the game, but eventually it came down to pulling sales ahead from the next quarter by looting GMAC to offer free credit.

There is plenty of blame to go around. It falls upon every constituency over the course of generations. The union and the dealer body are guilty of sins of commission, in seeking and instituting unfair advantages. The others are guilty of sins of omission, by angling ever for their “piece” of General Motors, even the crumbs.

But the primary failure has been lack of leadership by those who held responsibility – the management and governance bodies. Many men have held the CEO position since I relinquished it; few have led the company. Many notable executives have filled seats on the board, but none has made the corporation’s long-term survival their cause. These groups were properly in possession of the “culture” of General Motors, and they carelessly allowed it to fall from their hands.

There is no mystery to the failure, and so there is no hiding from it by those who were responsible. But perhaps even more shameful is that there was also no mystery to the great success of General Motors over the course of nearly five decades. It’s all in my memoir, My Years with General Motors. I wrote it at the height of General Motors’s success, but not so long after the Depression that I imagined our success to be perpetual. How many managers and directors have ever read it? How many of you who did read it actually studied it? It’s not without flaws, and it betrays its age as well as my own obsessions. But it maps the soul of a great enterprise. In the Introduction, I wrote:

Obstacles … and new horizons arise to stir the imagination and continue the progress of industry. Success, however, may bring self-satisfaction … When such influences develop, growth may be arrested or a decline may set in, caused by the failure to recognize advancing technology or altered consumer needs, or perhaps by competition that is more virile and aggressive.

That’s not visionary, simply in touch with the constant reality that challenges will arise whether you can identify them or not. In the 1920s, we were that more virile and aggressive competitor when we overcame Ford’s domination in the 1920s and established our industry leadership. Our success rested on a handful of core principles: That our managers understood their customers and were capable to answer their demands; that our customers made good automobile choices when given good choices to make; that each business must be competitive in its own right, that long-term growth was more valuable than short-term gain; that industry leadership meant embracing change; and that policy was formulated by consensus, while its administration was carried out by individuals.

And the one overriding principle that served as the foundation for the rest was that we would endeavor to get the facts and act upon them. I state my pride throughout My Years at the corporation’s commitment to being a fact-based organization, which I believe it truly had been in my time as CEO (1923 – 1946). Yet I must also admit that, by the time of my retirement as Chairman in 1956, our culture of facts was already being subverted by a culture of fear among the new generation of leaders. Government trust-busters became an imagined enemy. So to did a more activist union and antagonists like Ralph Nader. Leadership imagined itself surrounded – General Motors, surrounded! – and instead of confronting these facts and devising solutions to the issues based on them, they retreated behind a comfortable market share based on old technology and the greatest self-delusion that an enterprise can hold – an unchanging market. Within the walls, the old facts still obtained, and new ones were not allowed to breach.

Facts were still ascertained, but only within the accepted context, and with a patina of fear overlaying every thought and move. Thus, the utility of facts in general was degraded, and initiative to act on them dissipated. The abrogation of our fact-oriented principle has eroded the foundation that underlay all the other principles. First to be subverted, in the 1970s, was our system of decentralized management. Independent divisions, which had been free to address their market segment as they saw fit, were turned against one another in the same segments by the centralized assignment of invented product distinctions. This led in the 1980s to the perversion of our long-successful multi-brand strategy, wherein brands that had actually been meaningfully distinct, were now almost comically identical, only with different badges.

Coming in Part II: Dissolution of the Enterprise’s Characteristics

How Do You Say “Pumpkin” in Italian?

What do we get if Fiat steps in to save Chrysler (for a zero lira investment)?
More weak brands in an overcrowded market.
Continuing resistance to the imperative need to VASTLY reduce US production capacity.
Another tragicomic chapter in three to four years.

Memo to Wagoner from Alfred Sloan

To:       Rick Wagoner

 

From:   Alfred Sloan

 

Allow me to express my admiration for your congressional appearance, as only the latest example of three years of strenuous effort on your part to put the company on a more competitive footing, with considerable success. You are executing the CEO’s role as I conceived it, and if I could affect the matter today, you would have my support. I believe you have the vision and confidence to complete GM’s turnaround.

 

GM has been on the brink before

I know something about playing the hand you’ve been dealt. At the edge of bankruptcy in 1921, we were fortunate that the DuPont company recognized GM’s enormous potential. I can only hope that the American people come to recognize the same thing today, and instruct their representatives to make an appropriate investment. I also had to contend with a 71% sales collapse in the Depression, which required painful changes to save the situation.

 

These are new times, and I won’t impose my era’s ideas upon your actual circumstances or try and influence your generalship of the current battle. But I must urge you to focus beyond the plan you recently presented, and conceive a vision of how General Motors will, upon regaining financial viability, distinguish itself in the automobile market and resume a leading role in the industry.

 

Every successful enterprise needs a Concept of its Industry

Cutting brands, headcount, and your own salary are painful gestures that will indeed reign in spending. A lean structure with good products is a worthwhile emergency objective in the, but it doesn’t suffice as competitive strategy. Beyond your plan, General Motors needs a concept of its industry, an essential principle of enterprise that I define in my book, My Years with General Motors.

 

A concept of industry is simply a universal market principle that imbues your product with essential qualities that are valuable to buyers. Toyota’s concept of its industry is to produce vehicles which are thoroughly reliable, and thus minimize the costs of ownership; Honda’s is to produce vehicles engineered for efficiency, which accomplishes the same end. Every one of the vehicles they produce expresses their particular concept, which serves as a foundation upon which competitive features attract buyers based on individual desires.

 

GM’s Concept of its Industry 1921 – 1970s

In My Years, I describe how in the 1920s we conceived General Motors’ concept of its industry, and then activated it to overcome Ford’s commanding 60% share of the market. We began by reviewing our existing strategic assets, the most significant being: Fairly large volume spread across a variety of established brands; capability for technical innovation among some of the brands; and our new organizational idea of coordinated decentralization. We perceived the customer’s expectations to be for improved products and for choice among products. Our collection of assets was not unique, nor was our notion of customer expectations. It was our arrangement and activation of them that yielded a distinct GM concept of its industry, and which was quickly vindicated.

 

The GM concept of its industry we arrived at was to combine the advantages of volume, variety and innovation to offer a continually improving range of products. It superseded Ford’s concept of leveraging volume to continuously lower purchase price on a single, unchanging product. Whereas the Model T concept had since 1908 aligned with the nation’s technical priority of motorization, the GM concept responded to an evolution of that priority – by the 1920s, the nation wanted modernization. GM soon displaced Ford as the top producer, and became the world’s largest industrial enterprise. The principle of constant improvement remains vital, but GM’s failure to consistently adhere to and develop it stands as the essential cause of the current emergency

 

GM needs to seek out a new Concept

General Motors’ needs a new concept of its industry to be more than just viable beyond 2012. To thrive for a second century during which the idea of personal transportation will be transformed but no less in demand, GM must present itself as a vehicle for achieving not just America’s, but the entire world’s 21^st Century cultural priorities as they relate to transportation.

 

What are the assets that GM can apply today? Let’s not allow nostalgia to cloud the issue; for example, multiple brands are no longer an asset in themselves (read why I wouldn’t hesitate to dispose of Pontiac). To my mind, GM’s current assets are an excellent technical infrastructure on the verge of a major breakthrough, several still-iconic brands, and a flexible manufacturing system. These, I believe, are adequate to underpin a concept of industry that might be expressed as “freedom from carbon,” and which will be manifested first in The Chevrolet Volt when it launches in 2010.

 

As you can see, conceiving a concept of industry isn’t all that complicated, but activating it requires a coherent policy of management, which I believe your GM does not have. This is a primary failure of governance, and achieving such will have to be the first order of business by the new Board of Directors; I strongly urge the entire current Board resign as soon as Congress authorizes the emergency funding.

 

A resource you should utilize

To guide the vital task of developing a new organizational policy that can effectuate GM’s new concept of its industry, management must isolate some of the DNA that in the past made the company great. I’m not suggesting that you revive any specific historical policy such as the coordinated decentralization principles I worked under, but to reinvigorate the general principles of long-range focus, fact-seeking, and flexibility that were once the hallmarks of General Motors management. I suggest you revisit my book.

 

The point is that, viability is still only a short-term objective. GM needs to define itself to thrive in its second century. If you have the opportunity to continue as CEO of General Motors, I hope that you will consider these suggestions.

 

Warm regards,

Alfred P. Sloan, Jr.