POWER GAINED AND LOST (CP8)
The words in this case are primarily taken directly from the sources in the bibliography. I make no claim of originality, other than selecting excerpts and weaving them into a case. It would interfere with the use of the case to clutter it with hundreds of footnotes, so they were not included. The case is intended to illustrate two contrasting leadership styles (of Henry Ford and Alfred P. Sloan, Jr.) and some of their effects at pivotal times in the life of two prominent companies (Ford Motor Company and General Motors). Actually, we could speak of three contrasting leadership styles. While Sloan=s style seems quite consistent over his life, Ford operated rather differently in the 1920s and 1930s than he did prior to this - although core elements of his leadership style are present throughout both periods. Please note the questions at the end.
Ford to 1920 Henry Ford was born on a farm near Dearborn, Michigan on 30 July 1863, one of eight children in an undistinguished family. He died at his Detroit home on 7 April 1947. He was educated in the local public school, where he learned mathematics and also a little reading and writing. Barely literate when he finished school in 1879, he was fascinated by machinery and determined to find work as a mechanic. At the age of sixteen he apprenticed at Flower Brothers Machine Shop in Detroit, and later at the Detroit Drydock Company; he also took a part time job as a watch repairman. Returning home in 1882, Ford first set up a small machine shop and later took a job with Westinghouse as a district engineer. In 1888 he married Clara Bryant; they had one son, Edsel Bryant Ford, in 1893 - by which time he was chief engineer for the Chicago area with the Edison Illuminating Company.
By the 1890s invention fever was sweeping the United States. Ford=s simple design for a transmission led to his development of a working automobile in 1896. Ford promptly sold it to raise capital for further experiments, and continued to make and sell experimental prototypes in this fashion for some years.
In 1899, with capital provided by a Detroit lumber dealer, Ford established the Detroit Automobile Company and resigned from Edison to become the new firm=s superintendent in charge of production. This first attempt by Ford at producing motor cars on a commercial basis was a total failure, largely because Ford knew nothing about production and managed to make only a handful of cars. Undeterred, Ford and his backers tried again, setting up the Henry Ford Company in 1900. Again, few cars were actually built, but one of these proved to be a very successful racing car. Ford became suddenly enthusiastic about motor racing and neglected his business, and accordingly was fired from the Henry Ford Company in 1902.
His racing car triumphs under his belt, Ford seems to have gone back to his original plan, which was to build cheap, efficient cars that could be sold widely on an affordable basis. With fresh backing, Ford established the Ford Motor Company in Detroit in June 1903. Ford provided the engineering and production knowledge, and was appointed vice president and general manager. The new company was almost immediately embroiled in a patent suit with the Association of Licensed Automobile Manufacturers (ALAM), backed by rivals such as Packard and Olds Motor Company, which claimed to have sole rights to manufacture gasoline powered automobiles. Ford, who had earlier applied to join ALAM and been turned down, decided to fight the suit. He eventually won his case in 1911; in the meantime, typically, Ford continued on with his own plans as though the problem did not exist. Ford went ahead with the development of the Model N, a cheap runabout that went on sale in 1906 for $600.
To cut costs, Ford began a policy of vertical integration by taking over some of his main suppliers. Ford acquired the services of yet another talented manager, William Knudsen. Together, Knudsen, Charles Sorenson and James Couzens formed one of the greatest management teams the world has yet seen. With Ford, they made the mass production of motor cars happen and propelled Ford into a position of utter dominance in the industry, far outstripping rivals such as the fledgling General Motors.
That dominance was founded on two factors: the Model T, launched in 1908, and the building of the assembly line production plant at Highland Park, Michigan, which began production in 1910. Designed by Ford and Wills, the Model T first went on sale for $825, but Ford constantly sought to drag the price down, trading volume of sales for unit profits. By 1915 the price was down to $400 and in the mid 1920s prices fell as low as $275 for a new Model T. With a twenty two horsepower engine and advanced chassis and steering design, the car was technologically advanced when first launched, yet its design was so simple that interchangeable parts could be easily mass produced and then assembled. Between 1908 and 1927, seventeen million Model Ts were sold, more than the total of all other cars sold during this period.
The Highland Park plant was designed specifically to produce the Model T and covered sixty two acres. It featured the largest assembly line yet seen in the world, and had been carefully engineered to increase car production to speeds beyond anything yet attempted. Instead of the previous 12-14 hours to assemble a finished car, Model Ts could now be assembled from stocks of finished parts in an hour and a half. The opening of Highland Park sent a shock through the US business world. Ford won plaudits not only for his mechanical engineering, but for his attention to detail and carefully engineered production system, which was based in large part on the methods of scientific management advocated by Frederick W. Taylor, but also owed much to earlier mass production systems such as that developed by Cyrus Hall McCormack.
In terms of worker relations, too, Ford was seen as a visionary. In 1914 he cut the working day to eight hours, believing this to be the optimum working day for worker efficiency, and also initiated the famous $5 daily wage, nearly double the going rate in the industry. The increased velocity of throughput permitted Ford to reduce the price of his product until it was half that of his nearest competitor, to pay the highest wages in the country for non-skilled work, and still to acquire a personal fortune that was larger than that of John D. Rockefeller or Andrew Carnegie.
The period 1910B20 was Ford=s heyday. He was feted as a hero in the United States, where his goal of bringing cheap motoring to the masses had brought about a transport revolution in society, in which even clerks and manual workers could afford a car. Overseas he became an almost mythical figure.
However, cracks in his success had already begun to appear during the First World War. Ford was a convinced pacifist, and in 1915 chartered a >Peace Ship= to sail to Europe to try to resolve the war by negotiation; he also attempted to hand out pacifist literature with each car he sold. This led to a break with James Couzens, the talented administrator and salesman in charge of Ford=s marketing effort, who left in 1915 to take up a career in politics. Knudsen was the next to go, resigning in 1921 over Ford=s refusal to countenance a replacement for the aging Model T; he joined Ford=s rival General Motors, now being capably run by Pierre du Pont and Alfred Sloan, and played a key role in developing the Chevrolet, the low priced competitor that ultimately drove the Model T out of the market. Sorenson and Edsel Ford, who had succeeded Couzens, were unable to make much headway against Ford=s growing autocracy.
In 1921, Ford still concentrated wholly on the low price market and completely dominated it. Ford accounted for 56% of the passenger cars produced in the United States; General Motors, with only 12% of the market, was Ford's major competitor.
Sloan to 1920 Alfred P. Sloan, Jr., long time president and chairman of General Motors, was born May 23, 1875 in New Haven, Connecticut into an undistinguished family. He studied electrical engineering and graduated from the Massachusetts Institute of Technology in 1892. He became president of a machine shop making ball bearings in 1899. In 1916 and 1918, the two companies in which he was a principal were acquired by General Motors Corporation (GM). He became Vice President, then President (1923), and finally Chairman of the Board (1937), when he relinquished the presidency, remaining as Chairman until 1956. He wrote a biography, My Years at General Motors, and died in 1966.
General Motors was formed in 1908 by William C. Durant, the creator of the Buick Motor Company (which in that year was the largest producer of cars in the country), General Motors was the industry's first successful merger. For Durant, the purpose of merger was to consolidate facilities in order to achieve greater output. His overly optimistic attitude and his failure to integrate his properties rationally, create a corporate office, and develop corporate capabilities brought General Motors into financial difficulties as soon as demand fell off, as it did first in 1910. In that year GM had to obtain more financing. GM received significant additional financing again in 1917 and in 1920, both times from the Du Pont Company.
In the boom times immediately following the Armistice of November 1918, the operating divisions quickly expanded production and stocked quantities of inventory, in order to have the supplies to meet what they expected to be an ever increasing demand. This was why, when the automobile market collapsed in September of 1920, the company had such a costly write down of inventory values and why it came so close to bankruptcy. GM had to write off $100 million in losses, and Durant was personally in debt to his brokers for nearly $40 million.
After this third financial crisis, and with Ford enjoying a market share nearly five times that of GM, Pierre S. du Pont was appointed to take Durant's place as president in December 1920. Pierre and his newly found protege, Alfred P. Sloan, Jr., began to reorganize Durant's hodgepodge of operating units into a carefully coordinated multi-divisional enterprise consisting of autonomous divisions that made cars, trucks, other commercial vehicles, and parts and accessories, each with its own production and distribution organization.
Ford=s Leadership Style He was a brilliant engineer, one who was probably at his happiest when designing. To the end of his days, Ford possessed an almost intuitive understanding of production engineering and process flows. That Ford himself gave much thought to both what he was doing and his purpose in doing it is clear from his writings. The following is interesting on a number of levels:
Through all the years that I have been in business I have never yet found our business bad as a result of any outside force. It has always been due to some defect in our own company, and whenever we located and repaired that defect our business became good again B regardless of what anyone else might be doing. And it will always be found that this country has nationally bad business when business men are drifting, and that business is good when men take hold of their own affairs, put leadership into them, and push forward in spite of obstacles. Only disaster can result when the fundamental principles of business are disregarded and what looks like the easiest way is taken. These fundamentals, as I see them, are:
(1) To make an ever increasingly large quantity of goods of the best possible quality, to make them in the best and most economical fashion, and to force them out onto the market.
(2) To strive always for higher quality and lower prices as well as lower costs.
(3) To raise wages gradually but continuously B and never to cut them.
(4) To get the goods to the consumer in the most economical manner so that the benefits of low cost production may reach him.
These fundamentals are all summed up in the single word >service= ... The service starts with discovering what people need and then supplying that need according to the principles that have just been given. (Ford and Crowther, 1931, p.2B3).
As a statement of philosophy, this shows both the strengths and weaknesses of Henry Ford=s approach to management. On the one hand there is the attention to quality, to the product and, despite his critics, to the needs of the market. On the other hand, there is the ignoring of competition and the centering of responsibility on the manager himself. Here is a portrait of the executive as superman, capable of solving all problems through authority and control. It is a philosophy which, like the man himself, is full of contrary aspects and is not capable of being sustained for long.
Certainly by the time these words were written (1931), Ford had abandoned large parts of this philosophy in practice. He became increasingly autocratic in manner, driving away most members of his brilliant management team and losing access to the talent pool that had made the early company successful. His bullying and humiliation of his son scandalized all around him; the normally loyal Sorenson was highly critical of Ford on this point and called Ford=s handling of his son his greatest failure. His paranoia and suspicion of all around him changed his relationship with his work force from one of happy cooperation to one of fear. There are two faces to Fordism, just as there were two faces to Ford himself. Sorenson commented that Ford feared and shunned ostentation, and never seemed at home in the luxurious mansion he had built for himself at Fair Lane, yet that paradoxically he craved the limelight and did all he could to stimulate the growth of the Ford myth. By 1920, if not earlier, he had begun to believe his own mythologizing. Like Napoleon, he went on too long.
Sloan=s Leadership Style Sloan, disturbed by the serious problems at GM, had written in 1919 a plan to reorganize and revitalize General Motors. It was not accepted by Durant. However, within days after Pierre du Pont became president of GM in 1920 (he already was Chairman), he reviewed and approved the plan, almost without change. The opening sentence of Sloan's study said: "The object of this study is to suggest an organization for General Motors Corporation which will definitely place the line of authority throughout its extensive operations as well as to coordinate each branch of its service, at the same time destroying none of the effectiveness with which its work has heretofore been conducted." The structure would then be based on "two principles":
1. 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.
2. Certain central organization functions are absolutely essential to the logical development and proper control of the Corporation's activities.
Sloan proposed to achieve these aims by replacing personal controls with institutional ones. He did this first by explicitly defining "the functions of the various divisions constituting the corporation's activities, not only in relation with one another, but in relation to the central organization," so that "it will perform its necessary and logical place." He then assigned each of the many divisions into one of four "groups"CCar, Accessories, Parts, Miscellaneous. The first included the divisions that manufactured and sold "complete motor carsCpurchasing part of their component parts from outside sources, part from the divisions of the Corporation, and manufacturing part with their own facilities."
From one perspectiveCone might call it a Ford perspectiveCa man like Sloan has an easy job. He has authority. He presides over a board of directors and prevails in most instances. Under individuals such as Durant, such a setup could easily become autocratic. And indeed, one of the first actions that Sloan took following his ascendancy to the presidency was to increase greatly the power of the chief operating officer of the corporation.
Yet Sloan conceived of his position in a very differentCand, perhaps, more modernCway. In his view, browbeating was not a desirable mode of operation. As he later recalled: "I never minimized the administrative power of the chief executive officer in principle when I occupied that position. I simply exercised that power with discretion; I got better results by selling my ideas than by telling people what to do." Sloan hired the most competent senior group he could assemble, placed them in responsible positions, treated them fairly and paid them well, and organized them into committees where they discussed issues and options in depth and attempted to reach agreement. "Our management policy decisions are arrived at by discussion in the governing committees and policy groups," Sloan noted. Thus, GM operated largely through administration by committee and decision by consensus.
Of course, nothing can more readily cripple an organization than a reliance on countless desultory, nondecisive committees that meet endlessly. Indeed, in the early 1920s Henry Ford viciously ridiculed GM's mode of operation: "The Ford factories and enterprises have no organization, no specific duties attaching to any position, no line of succession or of authority, very few titles, and no conferences." Sloan avoided such paralysis, constituting the committees' goals and membership carefully, giving them specific assignments, monitoring their progress, and, at a certain moment, guiding them toward decisions. "Much of my life in GM," he noted, "was devoted to the development, organization, and periodic reorganization of these governing groups." In a manner reminiscent of Margaret Mead's approach to the study of contemporary cultures, committees at GM intentionally were staffed with individuals from different divisions and spheresCbalancing the sales manager's enthusiasm with the statistician's objectivityCso that these colleagues could educate one another and come to understand their problems, perspectives, and individual and collective opportunities. Sloan monitored these procedures carefully, intervening when necessary. He spoke often of the central enigma: "How could we exercise permanent control over the whole corporation in a way consistent with the decentralized scheme of organization? We never ceased to attack this paradox."
Leadership has crucial and indispensable human dimensions. Sloan may have been a pioneer ofCperhaps even a genius inCthe creation of organizational charts, but that "domain expertise" was not the principal component in his success. Sloan embodied the virtues that he sought in his associates. A tireless worker, he was invariably on top of all of the available information. He called for studies of key issues, mastered their data and details, and used their conclusions explicitly in making decisions. His participation in groups modeled the kinds of considerations that he deemed important and the mode of converging on a decision that he favored. For years, he wrote GM's annual report himself.
He also devoted time to getting to know his associatesCnot only the chief executives but also less highly placed individuals from other spheres of the company. He invited them in to talk, he wrote and responded to countless memos, and he visited them at their work sites:
I made it a practice throughout the 1920s and early thirties to make personal visits to dealers. I fitted up a private railroad car as an office and in the company of several associates went into almost every city in the United States, visiting from five to ten dealers a day. I would meet them in their own places of business and ask them for suggestions and criticisms concerning their relation with the corporation, the character of the product, the corporation's policies, the trend of consumer demand, their view of the future, and many other things of interest in the business. I made careful notes of all the points that came up, and when I got back home I studied them.
Sloan also could take a strong position and maintain it even in contention with powerful individuals. For example, when Pierre du Pont unexpectedly resigned as Chairman of GM in the summer of 1928, the nature of this departure reveals much about the men involved. For Pierre the venture at GM had always been a partnership with John Raskob (they had been close associates and friends since 1900, before being at du Pont and GM). When Raskob, who liked the public limelight, made a move into politics in 1928, Sloan insisted that such activities required Raskob to retire from the chairmanship of the Finance Committee. Sloan deeply regretted having to take the strong stand on Raskob=s resignation, but he did so, even when Pierre threatened to resign if Raskob left. Sloan maintained his position and both Pierre and Raskob left. Years later, he recalled it as the only real conflict he had ever had with Pierre or the du Pont family. Sloan was the only member of the board, except possibly Fred Fisher, who could stand up to Pierre. In fact, he was the only person in Pierre=s long business career who opposed him on major issues and won.
Sloan should be seen in two contexts. On the one hand, he was an expert in a domainCthe domain of organizing and then directing a complex industrial organization, perhaps the most complex business the world had known to that time. His expertise here grew out of his formal university training, on the one hand, and his experiences at Hyatt, United Motors, and the GM Corporation, on the other. In carrying out this part of his work, Sloan was functioning as an expert: it was crucial only that other members of the domain could appreciate and apprehend his messageChis "story."In this variety of indirect leadership, it did not matter what Sloan was like as an individualChe could have exercised his influence completely behind the scenes.
As GM's president, Sloan was also a direct leader of his institution. From this platform, Sloan conveyed a definite identity story to the thousands of employees. Part of the story was a general one: Every GM employee is part of the most important and dynamic business in America, perhaps in the world. But part of the story was a specific one: GM is not just another company; workers and managers alike are members of the world's most progressive and most powerful organization. The company invited participation by all of its members, no matter how humble their position, so that they could ensure the continued unequaled quality of their product. GM was a family, with Sloan as the benign patriarch. He embodied its virtues in his unstinting work for the company, and he expected his corporate offspring to do the same.
After 1920 By 1920, the pace of innovation at Ford was slowing. Convinced that his original recipe for success was the correct one, Ford failed to see that times had moved on; indeed, he himself had been responsible for much of the change. The novelty of car travel was wearing off; now people wanted more features from their cars and, indeed, were developing different sets of needs and motivations for buying cars. GM was willing to cater to these different needs; Ford was not. His famous remark, Aa customer can have a car of any color he wants, so long as it is black,@ may be apocryphal but is indicative of a mindset. When Chevrolet began cutting into Ford=s market, Ford=s only method of fighting back was to cut prices still further, which meant that Charlie Sorenson, now in sole charge of production, had to find new ways of cutting costs. The atmosphere in Ford factories changed, too. Wages were cut by nearly half; worker education and many other benefits were done away with; Ford=s famous sociological department which had studied worker motivation was closed down; strict discipline was enforced which prevented workers from whistling or even talking during shifts.
In the meantime Henry Ford was dissipating his first mover advantages by destroying the capabilities of his managerial hierarchy. After 1919, when he bought out his partners, the Dodge brothers, he began to fire his most competent managers. Both his production chief, William Knudsen, and his sales head, Norval Hawkins, immediately took over the same posts at General Motors and were important contributors to GM=s growth. In the recession of 1921, Ford demoralized his dealers by forcing cars on them after a temporary collapse in demand. From 1921 on, Ford attempted to administer his empire personally.
The result was disastrous. He continued to make and produce much the same car in much the same manner. By 1925, Ford's share of the total number of passenger vehicles sold had dropped to 40%, and that of General Motors had risen to 20%. In 1927 Ford finally replaced the Model T with the Model A, a change that took a year to carry out. By 1929 Ford's share had fallen farther to 31%, and that of General Motors had risen to 32%. The Chrysler Corporation had 8% and was the main challenge to the Big-Two.
In the mid-1920s, Ford attempted to diversify for the first time, including unsuccessful ventures into tractors and airplanes. The problems were of distribution, not design. For example, Henry Ford insisted that his tractors be sold through his existing automobile dealer network. These dealers were unable to provide either effective after sales maintenance and repair or consumer credit. They did not have the intimate knowledge of the farmer's specialized needs and were not able to provide information concerning customer needs to the company's design and production departments.
The depression years of the 1930s brought another transformation in the industry. The sharp drop in demand severely hurt the smaller, medium price producers; for, as volume dropped, unit costs rose and profits disappeared. In the 1930s only two of the three producers of low priced cars, General Motors and Chrysler, had been able to maintain a throughput large enough to remain profitable. Ford's drop in market share and profits was striking. By 1940 its market share had fallen to 19%, well below Chrysler=s 24% and far below General Motors= 48%. In the decade from 1927 to 1937, Ford had a net loss of $15.9 million and a reduction in the surplus balance of another $85.6 million. In that same decade General Motors' net profits after taxes were just under $2 billion. This difference of more than $2 billion in after tax profits emphasizes the value of strong management and carefully thought out administrative procedures in competing for market share and profits. For in these years Henry Ford, assisted by his son and a tiny handful of executives, continued to manage personally his huge industrial empire.
The 1930s saw continued decline internal to Ford. Edsel Ford, bullied by his father and increasingly ill, had lost all influence. Even Sorenson could do little to reason with the old man. Ford=s new confidante was Harry Bennett, a former prize fighter who was connected to the Mafia in Chicago, and who now ran the Ford Service Department, a group of informers and thugs who enforced discipline among the work force with an iron hand. The workers, tired beyond any reasonable limits of loyalty, finally rebelled and tried to unionize; when Bennett=s men beat up several union organizers, the workers struck in 1941 and compelled recognition of the United Auto Workers. Ford suffered a stroke in 1938, and from then on was both physically and mentally ill, paranoid and, in the words of the normally loyal Sorenson, suffering from hallucinations. Harry Bennett was now virtually in control of both the company and Ford himself.
Edsel Ford=s death in 1943 brought about a crisis, as Ford insisted on resuming the presidency of the firm. Clara Ford and her widowed daughter in law now staged a rebellion of their own, threatening to sell their shares to outsiders unless the octogenarian leader stood down. He finally gave way; intervention at the top levels of government secured the release of Edsel=s son, Henry Ford II, from military service and he returned home to take up the presidency. Despite no management training or background whatever, Ford proved adept at his job, and in the immediate postwar years assembled a team which included future senior Ford executives Ernest R. Breech, Lee Iacocca and Robert McNamara, and began turning the beleaguered company around.
Sloan, who had relinquished the GM presidency to become Chairman of the Board in 1937, remained a very active Chairman until 1956. Sloan was also a public figure, a direct leader for millions of Americans involved in the world of commerce. He was not only the visible executive of GM, a public corporation with hundreds of thousands of employees and over one million stockholders; he was also a paragon of American industry, looked to during critical times (such as the Second World War), applauded by many of his fellow industrialists, but also subjected to criticism from other businesspeople, writers, political figures, and segments of the general public. His successor, Charlie Wilson, is often misquoted as saying, "What is good for General Motors is good for the country@ (he actually said AWhat is good for the country is good for General Motors.@). And while Sloan might have avoided such grandiloquent wording, he was aware (and proud) of the unique place that "his" corporation had come to assume in American life.
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Questions 1. What are the major strengths and weaknesses of Ford and Sloan as leaders? For Ford, do this both pre-1920 and post-1920.
2. What similarities and differences are there in their leadership styles?
3. What were the major factors leading to the declines in performance and power of Ford Motor Company and Henry Ford?
4. What learnings can you take away from this case that might help in your personal leadership development plan?