On October 4, 1929, shortly before the stock-market crash, I addressed a general letter to the organization noting the end of expansion and promulgating a new policy of economy for the corporation:
It appears to me that it would be most appropriate at this time to ask the earnest attention of all concerned to what I believe to be a very important problem, and which I will outline herewith.
For quite a number of years past the demands on our schedules have taxed our facilities to the utmost. This applies to practically all operations, both at home and abroad. In addition to this, the characters of our products have materially changed, and such changes necessitated a revision of some of our production facilities and modified, more or less, practically all of them. This has thrown on management, in addition to the ordinary problems, the responsibility of providing plant and facilities for expansion and the organization to effectively operate same.
In connection with the above program, large amounts of capital have been expended. Still more has been invested in creating facilities for doing things that had not been previously done— in other words, developing plant for manufacturing a greater part of the various products we are selling. All this has been constructive and amply justified by the results that have been obtained. I am sure our position in the past and present has been and in the future will be greatly enhanced and strengthened by what we have accomplished in this general direction.
The purpose of the above is to make the point that in my opinion a different type of treatment is now essential, at least for the present and for the more or less immediate future. It seems to me that management should now direct its energies toward INCREASING EARNING POWER through IMPROVED EFFECTIVENESS and REDUCED EXPENSE. In other words, the drive during the past few years has been for more and better cars of constantly increasing value. From now on we should drive just as hard toward still better cars, but we must give more detailed consideration to values in respect to price and as a part of this program the efforts that have been so lavishly expended on expansion and development should now be directed toward economy in operation.
The above does not mean to convey the thought that our trend over a period of years will be other than of such a nature that still further demands on our production facilities will be required. I believe that, given a quality product at the right price, at the same time keeping abreast of the advances in engineering thought, there is no end to what we can accomplish. On the other hand, it is impossible to assume that the percentage increase from year to year will equal what we have enjoyed during the recent past. Further, it is reasonable to suppose that we must follow more closely the general trend of industry as a whole. I do not intend to convey the thought in anything that is said above, that the expense factor has not been watched, for I know it has. What I am trying to convey is the thought that in the future it should be the prime consideration of every division and subsidiary to put the energy previously directed toward expansion and development into the hardest kind of a drive in the direction of economy. In other words, economy in operation must now be the key-note rather than expansion of plant and equipment. By "expense" I mean not only manufacturing expense but every item of expense incident to cost of sales.
The responsibility of carrying through this program rests, of course, on every division and subsidiary. In order that I may be kept in touch with the general trend, I am asking Messrs. Bradley, Grant, Hunt and Wilson to study the situation from the Staff standpoint in collaboration with the corresponding functions in the various divisions and subsidiaries in various ways that will be outlined in due course. In that way we will all work together toward a better general result.
In harmony with the thought behind the above, it follows that new projects should be more carefully scrutinized than ever before and the burden of proof of their propriety should be more evident. According to the present form of organization, C. E. Wilson, Vice President, deals in a preliminary way with new projects as presented. It might be desirable for every division and subsidiary contemplating or feeling the necessity of further expansion, to consult Mr. Wilson before proceeding in the development of the necessary project. Naturally, the above remarks do not in any sense refer to changes definitely approved in which additional or different production facilities are essential for their proper execution.
As it turned out, I was not, of course, pessimistic enough; indeed it would soon be a question whether we were able to cope with the unbelievable course of events. Although the depression did not occur all at once, the downward steps were gigantic. General Motors' sales of $1.5 billion in 1929 fell about one third, to $983 million, in 1930.
After the close of 1930, I said in the annual report—which I used to write myself—the following: "The economic situation of practically all important consuming countries of the world during the year was materially out of adjustment. Involved as the corporation is in an important way in the business activities of nearly every country in the world, its operations were adversely affected by such a situation. There arose, as a result, unusual problems of administration and policy which had to be dealt with effectively and aggressively, if the interests of the stockholders were to be protected. The future position of the institution, not only from the standpoint of the confidence with which it is regarded by the public, which is a measure of its goodwill, but likewise from the standpoint of its future economic development, called for the most searching analysis of all problems . . ."
The analysis began.
As a matter of atmosphere, it may be of some interest to indicate how the management of a corporation like General Motors talks to itself when confronted by catastrophic events. On January 9, 1931, I addressed the following letter to the members of the Operations Committee:
For the benefit of those who were absent from the Operations Committee meeting on Thursday and to remind those who attended the meeting, I want to say that one of the principal points of business at the next meeting will be a contribution from each member as to what in his opinion have constituted weaknesses in procedure, policy or thought in the year just closed that should be eliminated and what new points can be developed that will be helpful in the year 1931.
The close of one year and the advent of a new forms a psychological and practical opportunity of dealing with a matter of this kind. Naturally, we must deal with broad principles of policy and type of thinking more than detailed problems of administration.
To illustrate what I have in mind I will give the following thoughts from some notes which I have already made on the subject: —
First:— I think we have lacked and perhaps still lack courage in dealing with weaknesses in personnel. We know weaknesses exist, we tolerate them and finally after tolerating them an abnormal length of time we make the change and then regret that we have not acted before.
Second. I think, notwithstanding that we have the reputation of a fact-finding organization, that we do not get the facts, even now, as completely as we should. We sit around and discuss things without the facts. I think we should break ourselves of that and not permit any member of the Committee to have an important problem determined upon without all members of the Committee have the facts before them and are placed in a position to exercise their own individual judgment, otherwise the Committee is not fair to itself and to the Corporation because it is not discharging its full responsibility to same.
Third. I think that we become too superficial and that we should correct this tendency. Problems are crowding in on us; time is limited; the meetings are some times long and we naturally get tired. These circumstances and many others lead us to make mistakes without adequate consideration and mistakes are bound to occur. It is easier not to do it at all than to do it haphazardly or without due consideration and even if we lose an opportunity it will come up again sooner or later and in the long run we will gain by more thoroughly dealing with our problems.
The above are just some thoughts that occur to me in order to give you the type of matters that
I would appreciate your thinking over. Each member of the Committee will be expected to make a real contribution.
A pretty mild statement in the circumstances. But every business, profession, and group of people has its own way and often its own jargon. The top management understood that the above letter was a call to them to think everything over. For six months a deluge of memoranda came over my desk dealing with the broadest kinds of questions; and there was a divergence of opinion. Mr. Pratt, Mr. Mooney, and Mr. Knudsen felt we had become over-centralized.
Mr. Pratt wrote on January 12, 1931, as follows:
In my judgment the greatest weakness in the procedure and policy of General Motors Corporation is the tendency of the Operations Committee to originate and discuss detailed problems of the Divisions, instead of insisting that the Divisions initiate their respective policies and problems and refer their solutions to the Operations Committee for check and approval.
Consciously or unconsciously, the way in which we have operated General Motors in the past year there has been an alarming tendency towards centralization of all initiative and action in the Operations Committee. I think the reverse is necessary. The initiative must be in the Divisions and our job is to see that we have General Managers who will take the initiative rather than attempt to supply all of the initiative from the central organization.
I would also like to suggest where weaknesses are thought to be that they be placed on the table and frankly discussed, regardless of personalities.
There can be no doubt that, under the impact of severe contraction, some over-centralization took place, and it was wrong.
On the other side, however, Messrs. Wilson, Grant, Hunt, and Bradley, all staff men, thought the contrary. Each of them recommended some specific form of increased co-ordination. Mr. Wilson wanted to bring all the divisions up to the standard of the most progressive divisions in manufacturing organization, equipment, and processing method. Mr. Grant made a similar proposition for sales and general management. But he confessed he was unsure how to do it in a way consistent with decentralization. "For the time being, at least," he said, "I know only one answer to this problem and it is to have lots of will power, patience, and selling ability in making our divisional contacts . . ." Mr. Hunt, with the concreteness of the engineer, proposed to extend the interchangeable body program as far as possible through the car lines, and to make a new application of engineering research to car features that had immediate possibilities. Mr. Bradley, noting inadequate preparation for discussions in the Operations Committee, proposed the appointment of subcommittees to expedite the routine work of the top committee.
The truth is, I believe, that both sides were right. The horns of the old dilemma had reappeared. We had to have more coordination to meet the new conditions, and at the same time we had to keep the top management from falling into the hopeless position of trying to administer the affairs of the decentralized divisions.
On June 19, 1931, I took the first step toward a new setup, with the appointment of a number of advisory groups. I stated this proposal as follows: "That Advisory Groups be formed as advisory to the Group Executive for the purpose of establishing the broadest possible foundation of fact and opinion in order that the recommendations submitted to the [Operations] Committee and the decisions of operating policy, even when not submitted to the Committee, be as constructive as the best thought in the Corporation permits."
The significance of this proposal lay in its effort to achieve broader, more active, and more regularized contact between the general officers, the staff, and the divisions, without giving the staff any authority over the divisions. Some men feared that this move would encourage the staff executives to give orders to the division managers, but that was not a necessary consequence, as I shall indicate presently.
The advisory groups were adopted in 1931, but by the end of that year further discussions of broad problems of organization gave way to drastic emergency measures aimed at sheer survival as the nation and the world went to the bottom of the great depression. The automobile industry in the United States and Canada dropped from a production of about 5.6 million cars and trucks, worth about $5.1 billion at retail, in 1929, to about 1.4 million units, worth about $1.1 billion, in 1932. That was lower than any year since the war year 1918.
Thanks to the financial and operating controls, the development of which I have described in earlier chapters, General Motors did not approach disaster as it had in the 1920-21 slump. We made an orderly step-by-step retreat in all matters, including wage and salary reductions. Sales by our United States and Canadian plants dropped to 526,000 cars and trucks in 1932 as compared with about 1.9 million in 1929, a tremendous drop (72 per cent) when you consider the many expenses that are fixed. That we fared relatively better than the industry is shown by the fact that our share of the market increased from 34 per cent in 1929 to 38 per cent in 1932, the trough year of the depression. Our profits dropped from about $248 million in 1929 to $165,000 in 1932, still in the black, thanks mainly to our financial-control procedures. In 1932 we were operating at less than 30 per cent of capacity.
To economize we co-ordinated to a greater extent our work in purchasing, design, production, and selling, and some of these changes were of lasting value. In purchasing and production, for example, we achieved a finer classification of parts and increased interchangeability of parts among the divisions, the most important single interchangeability being in a reduction of bodies to three basic standard types. The most difficult economies to get were in commercial or selling expense and here we took the most drastic measures of reorganization. In March 1932 the Operations Committee, after a three-day session, adopted a radical revision of the product policy of 1921. The decision was taken to consolidate the manufacturing of Chevrolet and Pontiac, both thereby coming under Mr. Knudsen's jurisdiction. A similar consolidation was ordered between Buick and Oldsmobile. On the sales end the activities of Buick, Oldsmobile, and Pontiac were consolidated in a single new sales company, B.O.P., and dealers were given more than one car to sell. In effect, from a management point of view, General Motors for a year and a half was reduced from five to three car divisions.
The severity of the contraction and the pressure of events attending it in and around the corporation caused me to reflect on whether our scheme of management could respond properly to such an era. Were we set up to contract and expand at will? To co-ordinate and still keep clear the distinction between policy and administration? If we restored the traditional five car divisions, how would we relate the cars in the new situation? Inevitably when an industrial enterprise is shaken with such a force as we met at the onset of the great depression, there has to be confusion. In November 1933 I began to write again on the subject of new policies, beginning at the beginning, on the subject of policy itself. I said:
I feel that this phase of the general organization problem is of particular importance to General Motors, not because of its size particularly, but on account of the nature of its business, subject, as it is, to what I might term "rapid changes". In other words, I contend a unit of the automotive industry has far less "coasting ability", I might term it, than units in most any other industry that might be selected for comparison.
As I analyze our picture, looking forward into the future, our success or, let me say, the maintenance of our position, absolutely depends upon the ability of our organization to lay down a strategy as will enable us to forecast the rapid changes that are taking place and will continue to take place in the various activities in which we are interested, involving all the functional divisions within such activities, and to provide for those changes with sufficient rapidity.
In making this statement I am not minimizing in any sense, the importance of effectively and economically carrying out such policies as may be adopted— I am simply trying to emphasize the point that the policy phase is of vital concern because, unless we can, with reasonable intelligence, meet this issue—no matter how able an administrative set
-up we may have, it is limited in its opportunity to function. I might add further, that looking forward I feel that we have got to more aggressively deal with that phase of our problems than we have in the past. It is going to be harder to maintain both our competitive position and our profit position. We can not afford to take the time in the future that we have in the past, to make up our minds what we should do with respect to changes in trends which are having an influence on our position . . .
My main purpose in the memorandum from which the above passages are taken was to reassert the purely policy-making role of the Executive Committee. I also said that the committee should be "in a position to deal frankly and aggressively with any division, or the relationship of one division with another." To do this best I thought the committee should contain only general executives, not divisional executives. How then would the policy-making executives get and use their information? I wrote, ". . . we must develop ways and means to keep the members of the Executive Committee in contact with the problem so that they can exercise not only intelligent judgment on the question, but intelligent independent judgment . . ."
My Years With General Motors Page 22