The Modern Business Enterprise: Perfecting the Structure

The sharp recession following World War I had a shattering impact on many of the new industrial and marketing companies. The majority had been established after the depression of the 1890s. Most industrials that began before 1893, such as the meat packers and American Tobacco, were at the time of that depression still developing their operating procedures. The sudden and continuing drop in demand from the summer of 1920 until the spring of 1922 was, therefore, the first period of hard times that the modern business enterprise had to face. The recession dramatically indicated the need to be able to adjust flows readily to changes in demand. It also made clear, though in a less obvious manner, the failure of top managers to plan effectively. Senior executives, still deeply involved in day-to-day operations, had not foreseen or made plans to handle a slackening of demand.

This slow-down in demand caught both mass marketers and large integrated industrials by surprise. Even enterprises like the meat packers, who coordinated supply and demand by constant telegraph and telephone communication, had difficulties. Few adjusted their inventory quickly enough. Armour’s losses in 1920 and 1921 forced J. Ogden Armour, the son of founder Philip D., to lose control of the family firm and to see it transformed from an entrepreneurial to a managerial enterprise.2,The mass retailers, with their dependence on high stock-turn, had comparable problems. Sears Roebuck was saved from defaulting on payments to suppliers only when its president, Julius Rosenwald, drew on his family’s personal fortune to cover these accounts.3 The large integrated manufac- turers and processors in chemical and mechanical industries, where a much longer period of time was required to get costly materials through the processes of production and distribution, had the greatest difficulty of all. Few could, as did Henry Ford, pass the burden of carrying unsold inventory on to their dealers. Ford was able to force his dealers to buy and pay for cars they could not sell by threatening to cancel their valuable franchises if they refused to comply.4 Far more manufacturers had to follow General Motors’ example and drastically write down the value of their overstocked inventory. At General Motors these inventory write-downs in 1921 and 1922 amounted to over $83 million.

General Motors and Sears Roebuck, as well as Du Pont, General Electric, United States Rubber, and other large enterprises, responded to the inventory crisis of 1920-1921 by developing techniques that set and adjusted their flows to carefully forecasted future demand. At General Motors and Du Pont the reorganizers went further. They created what has become known as the multidivisional structure (figure 12). In this type of structure, autonomous divisions continued to integrate production and distribution by coordinating flows from suppliers to consumers in different, clearly defined markets. The divisions, headed by middle managers, administered their functional activities through departments organized along the lines of those at General Electric and Du Pont. A general office of top managers, assisted by large financial and administrative staffs, supervised these multifunctional divisions. The general office monitored the divisions to be sure that their flows were tuned to fluctuations in demand and that they had comparable policies in personnel, research, purchasing, and other functional activities. The top managers also evaluated the financial and market performance of the divisions. Most important of all, they concentrated on planning and allocating resources.

Of the organizational innovations developed at General Motors and Du Pont, those at General Motors are the more illustrative. In automobile production the need to calibrate flows to changing demand was even more pressing and complex than it was in chemicals. At General Motors the general office had to be built from scratch. As many of the reorganizers at General Motors came from Du Pont, the General Motors story also indicates how organizational techniques were transferred from one industry to another and adjusted to meet somewhat differing needs. Moreover, because the executives at General Motors described their achievements in the new management journals, theirs became the standard model on which other enterprises later shaped their organizational structures. For these reasons the history of the post-World War I reorganization at General Motors provides an appropriate final case study in this history of the rise of modern business enterprise in the United States.

Figure 12. The multidivisional structure: manufacturing

Source: First prepared by the author for “The United States: The Evolution of Enterprise,” Cambridge Economic History, vol. 7 (Cambridge, Eng.,1977).

The recession of 1920-1921 transformed General Motors from an en- trepreneurial to a managerial enterprise.5 William C. Durant, an entre- preneur of imperial ambitions who formed the company in 1908, had little interest in the processes and needs of management. A prominent carriage maker in Flint, Michigan, Durant had taken over the Buick Motor Company in 1904. By 1908 its production of over 8,000 vehicles made it the largest automobile company in the country. In this expansion Durant’s greatest contribution was, according to an early historian of General Motors, the building of a nationwide sales organization.6

In carrying out a strategy of growth, Durant preferred buying to building. After the formation of General Motors in 1908 he gained control of a number of enterprises producing and distributing cars, trucks, parts, and accessories. As he enlarged his empire, Durant made little effort to bring these many activities under centralized control. The company’s general office remained staffed by Durant, two or three personal assistants, and their secretaries. Durant had neither the time nor information to evaluate, coordinate, and plan the activities of his subsidiaries or the company as a whole. 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.

At this same moment Durant was himself having personal financial dif- ficulties. By attempting to hold up the price of General Motors stock, the company’s president, by November 1920, owed close to $30 million in brokers’ loans. These were secured by General Motors stock, whose value was plummeting. The Du Pont Company and J. P. Morgan and Company, the two largest single investors in General Motors, arranged to take over Durant’s debts, and much of the stock he controlled. Pierre du Pont then became president. He did so because the Du Pont Company had, on his recommendation, invested over $25 million of its wartime profits in General Motors in 1917. He now hoped to make the investment once again profitable.

In rehabilitating General Motors, Pierre du Pont worked closely with Alfred P. Sloan, Jr., a talented engineer and administrator who was at that time managing the company’s parts and accessory units. At the outset, Sloan and du Pont decided against creating a single centralized functionally departmentalized organization. The company’s activities were too large, too numerous, too varied, and too scattered to be so controlled. They agreed to retain the company’s integrated car, truck, parts, and accessory enterprises as autonomous operating divisions. They then defined a division’s activities according to the market it served. For the five automobile divisions, the market was set by price. Each division sold in a single price class within what Sloan called the price pyramid. Cadillac was the top of the pyramid with the highest prices and lowest volume, and Chevrolet was at the bottom with the lowest prices and highest volume. Once the divisions’ markets had been defined, du Pont and Sloan began to replace Durant’s tiny personal headquarters with a general office consisting of a number of powerful general executives and large advisory and financial staffs.

At the same time, du Pont and Sloan had executives from the general office devise procedures to coordinate current output with existing demand and to allocate resources in terms of long-term demand. The techniques for improved coordination evolved out of the pressing need in late 1920 to regain control over inventories, especially purchases. The small team of executives given this task first required the divisions to submit for each coming month and the following three months forecasts of material, equipment, and labor needed for each month’s production. Only after the general office approved these estimates were the divisions permitted to make their purchases. These forecasts quickly came to include all the inputs required for the anticipated output. By 1924 they were tied to annual forecasts of demand provided by the new financial staff headed by Don- aldson Brown from Du Pont. Annual forecasts were prepared for each division by a collaborative effort between divisions and the general staff. These “divisional indices,” as they were called, included not only purchases and delivery schedules for materials and capital equipment required and labor to be hired, but also estimated rates of return on investment and prices to be charged for each product. Prices, unit costs, and rates of return were all closely related to the volume permitted by demand. In drawing up these divisional indices, the staff computed the size of the national income, the state of the business cycle, normal seasonal variations in demand, and the division’s anticipated share of the total market for each of its lines.

The forecasts on which output and purchases of materials were based were constantly adjusted to actual sales. The data on sales came from re- ports submitted every ten days by the dealers and from monthly figures on new car registrations collected by the R. L. Polk Company. The latter also provided excellent information on General Motors’ market share and on that of its competitors. Besides permitting immediate adjustments of flows to even small changes in demand, this information had other uses. The comparison of actual to estimated results of sales, market share, and rate of return was used to sharpen forecasting techniques. Of more importance, such comparison provided another source of information for the monitoring of divisional performance and the planning and allocating of resources for the future. Similar, though often less complete, techniques were adopted for controlling inventory and coordinating flows and for the evaluation of managerial performance at General Electric, Westinghouse, and Sears Roebuck. Eventually such methods were adopted by nearly all large modern business enterprises in the United States.

As the new financial and advisory staffs were devising statistical infor- mation to control, coordinate, and evaluate day-to-day operations, Sloan, du Pont, and their associates were working out ways to further improve long-term planning and the allocation of capital and managerial resources. Here the most significant move was to relieve top managers in the general office of all day-to-day operating responsibilities. Pierre du Pont remem- bered all too well the difficulties he and his cousin Coleman had had in keeping the attention of senior operating executives on long-term planning and policy making.7 Sloan recalled even more painfully how the divisions’ managers had negotiated with themselves and with Durant over capital expenditures.

On taking over at General Motors, du Pont concentrated top manage- ment decisions in the hands of a four-man executive committee. It included himself, Sloan, and two of his most trusted associates at Du Pont, John J. Raskob and J. Amory Haskell. In one of his first directives after taking office, Pierre emphasized: “It is my belief that 90 percent of all questions arising will be settled without reference to the Executive Committee and that the time of the Executive Committee members may be fully employed to study general routine and lay down general policies for the Corporation, leaving the burden of management and the carrying out of instructions to the Line, Staff and Financial Divisions.”8

Once the crisis was surmounted and the new policies, procedures, and rules for the more routine operations had been laid down, Pierre du Pont enlarged the executive committee. By 1924 it had ten members, including Sloan who had become president, du Pont who was then chairman of the board, the head of the financial and the head of the advisory staffs, one of the two group vice presidents—general executives—who had overall supervision of specific groups of divisions, and four executives without any specific positions. The tenth member was the only manager with operating responsibilities. He was the chief executive of Buick, the company’s most profitable automotive division.0 Although such exceptions were made, the committee continued to consist almost completely of executives who had no day-to-day operating responsibilities. Its tasks were explicitly to approve the divisional indices, to evaluate divisional performance, to set pricing and other general corporate policies on the basis of its evaluations, and most important of all, to plan long-term strategy and the allocation of resources to carry it out. For such planning the committee relied on long-term financial and economic forecasts prepared by trained economists on Brown’s financial staff.

In performing its work, the committee used the advisory and financial staff to check on information received from the operating divisions. The functional specialists on the advisory staff were, for example, expected to “audit” divisional activities and policies for their specific functions. Thus staff sales executives reviewed marketing policies, controls, and procedures with the sales managers of the many divisions; those on the manufacturing staff did the same with the divisional production managers; and so with automobile design, advertising, and other comparable activities. At the same time, the staff executives were expected to give specialized expert advice to the operating managers as well as to top executives in the general office.

Sloan soon realized that communication between staff, line, and general executives left much to be desired.10 Friction between line and staff executives often had serious consequences. It proved most critical in product development, where line managers considered the staff men too theoretical, and staff executives complained that the line managers never looked beyond current production schedules. To bring together the three types of executives—staff, line, and general—Sloan formed interdivisional relations committees for major functional activities: product development, works management, power and maintenance, sales, and institutional ad- vertising. These committees, which had their own salaried staffs, were normally chaired by a member of the executive committee. They had as their secretary the advisory staff’s senior executive for that functional ac- tivity, and they included functional executives from major divisions.

By these several techniques top management was able to free itself of operating biases and responsibilities, and at the same time keep in touch with the corporation’s widespread operations. Policy and planning were no longer made through negotiations between the senior managers of powerful operating departments or divisions. Policy was formulated by general executives who had the time, information, and psychological commitment to the enterprise as a whole, rather than to one of its parts.

This type of structure, with its general office and its autonomous, inte- grated divisions, began to be adopted, though rather slowly, by other large industrial enterprises in the 1920s and 1930s. It provided a more flexible and effective organizational alternative for mergers than either the holding company or the consolidation of the operations of constituent companies into a single centralized functionally departmentalized structure; Such holding companies as Allied Chemical and Union Carbide adopted the multidivisional structure in the 1920s as did United States Steel in the 1930s. It became even more widely used to manage enterprises which grew, as Armour and United States Rubber were beginning to before World War I, by moving into new product and new regional markets. With the creation of a general office consisting of general executives and a large financial and advisory staff and with the calibration of product flow and day-to-day operating activities to forecasted demand, the basic organizational structure and administrative procedures of the modern industrial enterprise were virtually completed.

These methods would be, of course, constantly polished and adjusted. The most important developments came in the coordination of activities between and within departments.11 As a company’s sales rose from S50 million to $500 million and even $1 billion, product development, co- ordination of product flow, and marketing became increasingly complex. To assist in such short-term integration of production and distribution and short-term allocation of materials, managers specializing in coordination appeared. “Project program managers,” “market program managers,” “in- terface managers,” and “scheduling managers” all helped to facilitate flows of materials, funds, and ideas through the enterprise.

Although they developed many variations and although in very recent years they have been occasionally mixed into a matrix form, only two basic organizational structures have been used for the management of large industrial enterprises. One is the centralized, functional departmentalized type perfected by General Electric and Du Pont before World War I. The other is the multidivisional, decentralized structure initially developed at General Motors and also at Du Pont in the 1920s. The first has been used primarily by companies producing a single line of goods for one major product or regional market, the second by those manufacturing several lines for a number of product and regional markets.

Source: Chandler Alfred D. Jr. (1977), The Visible Hand: The Managerial Revolution in American Business, Harvard University Press.

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