ECONOMICS 3SGThe Economic History of Entrepreneurship

Spring 2009 Ford and Sloan (Ecentr05) Rogers GM and other Porter Elements

I. Plan this set of notes

A. GM Internal Organization

B. Rest of Porter elements

II. Reminder - Porter Taxonomy or Model

A. Particular Models - Porter’s Model

B. Elements of the taxonomy of the Firm

C. Ford and Sloan - Porter Taxonomy and the Model

1. Power of the Customers

2. Substitutes

3. Internal Configuration of the Firm

4. Suppliers –

5. Competitors

a. Entrants

6. Government

III. Internal Organization of Firm – GM and Sloan

A. Narrative

1. Start with William Crapo Durant

2. Du Pont and Sloan

3. Aftermath

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B. Durant and the Start of GM

1. Durant starts with a carriage company

2. Goes in on Buick

3. Merges Buick with a collection of companies including Buick, Oldsmobile Cadillac, Elmore, Oakland, Reliance Motor Truck Company and the Rapid Motor Vehicle Company

4. Over-expands Lee Higginson bankers takes over and Durant is out

5. Durant starts Little Motor Company – brings in racer Louis Chevrolet and starts Chevrolet brand

6. Durant takes over GM from money made on Little

a. Brings in DuPonts

b. Buys bunch of suppliers including Hyatt and Delco – brings in

(1) Sloan

(2) Kettering, Charles – starter lighting system, gasoline

(3) United Motors – Sloan President

7. 1920-1921 – recession after WWI –GM is trouble

8. Du Ponts toss out Durant and bring in Pierre DuPont

9. Under DuPont, Sloan begins to set up his system.

C. Sloan’s Internal Reforms

1. Two components

a. Divisions –

(1) Car and Truck Chevrolet, Pontiac, Olds, Buick, Cadillac, GM Truck

(2) Parts Division Dayton Engineering – Kettering- Harrison Radiator – Remy Electric, AC Spark Plug, Hyatt , etc

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(3) Division Head – essentially independent businessman under supervision of Head Office

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(4) It reports financial data to Headquarters and it is judged by the criterion set by them

(5) It gets information from headquarters specialty groups from which they can make decisions

b. Head Office

(1) Executive Committee – overall decisions

(2) President’s Office

(a) Technical

(b) Appropriations

(c) Statistical

(d) Organizations – Administrative Staff

(e) Special Assignments

(3) General Functions

(a) Finance Staff

(b) Publicity Committee

(c) Legal Staff

(4) Operations Staff – information on technology and sales for operating division

(a) General Sales

(b) Works

(c) Purchasing

(d) Technical

(e) Power and Maintenance

(5) General Staff – services from corporation to the divisions

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c. In general – head office has capability of

(1) General direction of divisions

(2) Control large financing

(3) second guessing the divisions

2. Now think about what the headquarters provides -Compare it to independent company

a. Independent – makes it own plans –say Buick Company - Who is it accountability to -

(1) Customers

(a) If product good, they buy

(b) If not they don’t

(2) Suppliers –

(a) If company can pay they supply

(b) If not, they don’t

(3) Capital Market – financing

(a) Criterion

i If company can pay they supply

ii If not, they don’t

(b) Particular

i Stockholders – they can

a. Vote

b. Sell

ii Banks and other lenders – like the Higginson and DuPonts – venture bankers for big financing

a. To get big loans

b. Convince bankers or others

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that the plans will work

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iii If it works

a. Stocks go up – dividends get paid

b. Company can get money from banks

b. GM or other multidivisional company

(1) Divisions more or less independents companies – Manager responsible for major decision and day to day

(a) Reports and answers to headquarters

(b) Headquarters makes major decisions

i Who is in charge

ii Big Capital expenditures

(2) Headquarters –

(a) Advise division on dealing with customers and suppliers and others

(b) Advise divisions on operations

(c) Sets a tone – people are often run through lots of assignment –

i GE – you can almost id them – John Brandon

ii Sometimes leads to efficiency by standardizing thought patterns

(d) intermediary between Division and

capital market

i It is specialist in the general product of the company

ii It supposedly better at judging the

business then the capital market

iii If so, it will be successful

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iv GE is champion of this type of company – some Japanese firms

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(3) Idea is that the head office can just division performance better than capital markets like stockholders, banks, and big operators

(a) Often works – GE, Emerson Electric, Procter & Gable etc

(b) Sometimes not –

i conglomerates - not specialists

ii Sometimes specialists mess up RCA

c. Summary

(1) Sloan other successes

(a) Car Niches

(b) GMAC

(c) Dealers relations

(2) Arises from ability of the organization to get information to the chief

(3) Sloan filled lines of authority that Ford

failed to

(4) Hank the Deuce starts by imitating him

IV. Suppliers - Two philosophies A. Ford – complete integration

1. River Rouge

a. Ideal - All parts made there

b. Even steel mill

c. Ford owned lumber mills and rubber plantation

d. Started rationally

(1) Originally – Dodge

(2) Made engines and other parts to make a check

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on Dodge

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e. Later desire to completely control everything

f. Never was complete - Close alliance - Firestone

B. GM

1. Durant had bought a bunch of parts makers

2. In some ways it was more integrated than Ford

3. Sloan – decided to not go either way completely

a. 33 per cent of most parts – GM made

b. But the rest they outsourced

c. Used the internal suppliers to check outsiders

(1) Technically – see how good they are

(2) Strategically let them know GM could go internal

4. Later GM became more integrated than either Ford or

Chrysler

5. GM in 1950s – illustrate Sloan

a. After WWII and Korea needed steel

b. Financed McLouth - 1st BOF steel furnace in USA

c. Did two things

(1) Got GM steel

(2) Showed other steel firms GM’s ability to get finance

(3) Strengthened bargaining power

6. Recently – lean manufacturing

a. Disintegration

b. Suppliers – held almost hostage

c. Dauch – worried – China has given him a chance

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V. Competitors and Entrants A. Ford and GM each other

B. 1900-1920- many many

C. 1920-1930

1. Chrysler – Maxwell

2. Hudson – Chapin

3. Nash

4. Willys

5. Studebaker

6. Packard

7. Durant

D. 1930s –

1. a lot died Duesenberg Paige

2. these survived

a. Chrysler – Maxwell

b. Hudson – Chapin

c. Nash

d. Willys

e. Studebaker

f. Packard

E. Immediate Post War - Growth

1. Entry

a. Tucker – not serious

b. Kaiser-Fraser-

(1) tried and failed

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(2) Ended by buying Willys

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2. Smaller survivors

a. Chrysler –Big Three but loses out to Ford as no. 2

b. Studebaker

c. Hudson

d. Nash

e. Willys - Jeep

f. Packard F. Apres 1950

a. Studebaker falls

(1) Merges with Packard

(2) Gone in the 1960s

b. Hudson –Nash become American Motors

(1) 1955- 1970 Rambler not a bad car

(2) 1970s mess up - Gremlin

(3) Merges with Willys - Jeep

(4) Chrysler for Jeep

c. Foreigners – two waves

(1) Europeans

(a) Small cars Beetle and clones

(b) Sports cars

(c) Rich cars

i Mercedes

ii Swedes

iii BMW

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(2) Japanese and other Asians

(a) Small cars

(b) Medium and large cars

G. Unlike oil companies – American companies all gone except Chrysler and that is ???

1. Most people think economies of scale – which may have some truth

2. Why do Japanese do so well - home demand

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P and LRAC

Q

LRAC

MES

Demand

3. Results of studies – other hypothesis

a. Different companies take different technologies

b. GM dominant Firm

(1) GM lower costs

(2) Quality

(a) Used Car market

(b) higher prices for GM cars

(c) Frank and old cars

(3) Economies of scale explanation

(a) Friedlander et al

(b) Firms on different cost curves

(c) Ford believed that GM at its level of Q would have lower costs

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c. 1990's - Diseconomies of Scale

(1) GM no longer dominant - Ford now low cost firms

(a) GM lower costs

(b) Quality -

i low pricing

ii Geo - Sears of cars

(2) Diseconomies of scale explanation - Really ????

(a) Firms on different cost curves

(b) Ford did better job adopting technology in 1980's that GM lower costs

(3) Hank the Deuce’s reforms had longer effect than Sloan’s

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VI. Government

A. Usual suspects not important in Ford-Sloan era

1. Modern fuel, quality, and safety Regulation – starts in

1970s

2. Antitrust

a. DuPont connection broken in 1950s interpretation wrong

b. FTC Concentration investigation in 1970s – called

off when car market tanked in late 1970

B. Claims that government sabotaged mass transit

1. most of that seems to have been contrived

2. What happened

a. Cars rise

b. Mass transit systems start to go broke

c. Local government take them over

3. trains similar problem

C. Major government contribution – roads

1. companies pushed states and feds to build roads

2. Local

3. Turnpikes almost followed Hitler’s examples – PA pike in late 1930s

4. becomes a major contribution to Car growth

D. World War II – helped Ford toss out Bennett VII. VIII. IX. X. XI.

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