Sloan, Durant built GM on firm foundation of dealer base
After Durant's departure from GM in 1920, legendary CEO Alfred Sloan carried the value of the dealer network to a new level, using his dealers as a way to measure and forecast the market itself. Unlike many of his peers, Sloan also saw his dealers as a pulse of the customer's satisfaction and changing tastes, as well as a reliable gauge of whether his own management team was in tune with the customer.
This excerpt from William Pelfrey's new book Billy, Alfred, and General Motors picks up in 1904, just after Durant assumed management control of the struggling Buick Motor Co.
Part of Durant's sales pitch to new investors was that the Buick car was, as he described it, a self-seller. To demonstrate it, he exhibited a Model B at the 1905 New York Automobile Show. He even manned the exhibit himself. While all exhibitors and attendees took note of the new valve-in-head engine's unique technical advantages, Billy also no doubt regaled them with tales of his own exploits in testing the car under the worst weather and road conditions imaginable.
After the show closed, he returned to Flint, Mich., with a total of 1,108 orders. No other exhibitor at any auto show had ever taken so many orders for a new product - a feat all the more remarkable because Buick itself was a new and unknown brand.
That was the good news. The bad news was that Billy once again had no idea how to fill the orders, just as he'd had no idea where or how he would build his road cart in volume after stunning his fellow carriage exhibitors with the orders he brought home from the Wisconsin Tri-State Fair in 1886. As of the day he wrote up the last of his 1,108 orders, fewer than 40 Buick cars had actually been built.
The immediate short-term solution was found in a Durant-Dort plant in Jackson, Mich., 80 miles southwest of Flint, which happened to be vacant at the time. For the first year, the engines were still built at a plant in Flint and shipped to Jackson for final vehicle assembly.
At the same time production began in Jackson, however, Billy began plans for a new facility in Flint that he envisioned as the largest automotive production complex yet built anyplace in the world. He bought a 220-acre parcel of farmland just north of Flint's city limits with that dream in mind.
In the spring of 1905, three Flint banks agreed to purchase a new issue of shares in Buick Motor for a total price of $100,000, in exchange for Billy's firm commitment to proceed with the new plant in Flint and phase out production in Jackson. Construction of the new plant commenced almost immediately, and Billy soon leveraged the groundbreaking to issue even more stock.
In papers Durant kept for his never-completed autobiography, he boasted: "In the small town of Flint, where I started Buick, in forty-eight hours I raised $500,000, and I am certain that few of the subscribers had ever ridden in an automobile."
Building a sales network
At the same time he was looking for investors, Billy was looking for new salespeople. Initially, he used the Durant-Dort Carriage network of sales agencies to sell Buicks as well as buggies. But he knew he needed a nationwide, stand-alone sales and distribution network for the kind of growth he had in mind.
Again, his own personality and reputation as a salesman were the only pedigree needed to attract some of the most astute promoters in the country. His 1,108 orders at the New York Automobile Show did not go unnoticed. He soon had people who wanted to sell the Buick calling on him.
One of these was Charles Howard, the future owner of the legendary racehorse Seabiscuit. Howard had fought with Teddy Roosevelt's Rough Riders and, according to his own account, ended up in San Francisco with 21 cents in his pocket at the end of the Spanish-American War.
When Billy took over Buick, Howard was making his way selling bicycles in San Francisco but saw his own future, and the country's, in the automobile. Upon hearing about what Billy was up to - and with the kind of chutzpah that he undoubtedly knew Durant would admire - Howard took a train to Michigan and called on Billy unannounced, like so many other would-be partners and vendors.
Although Howard had no experience selling automobiles, he left the meeting with rights to become the sole distributor of Buicks in eight Western states, including California. By 1910, Buick's annual production had risen to more than 30,000 units. And one out of every 10 Buicks sold in the country was through a Charles Howard distributorship, soon making him one of the wealthiest men on the West Coast.
By the end of 1905, Billy had a national network of 13 Buick distributorships (including Howard's), in addition to the Durant-Dort sales network. He chose each man not only for his sales skills but also for his potential to train other salesmen and, more important, recruit businessmen with the capital and zeal required to open new dealerships within the distributor's territory.
It was a model that would create dozens of multimillionaires and would become the pattern in the auto industry until the mid-1920s, when the manufacturers began buying out the distributors and selling their franchises directly to local dealers of their choosing.
Changes in the 1920s
By 1923, most people buying a new car had already owned one and were looking for more convenience, comfort and performance in the purchase. For those people looking for the bare-bones basic transportation that was the essence of the Ford Model T, there was a new alternative: the used-car market.
Dealers were also now accepting trade-ins of used cars toward the purchase of new ones, which added to the used-car pool and put more price pressure on the Model T, at the same time it made all types of new cars easier to buy.
On top of this, more and more buyers were choosing to purchase new cars through the retail financing plan that GM had pioneered with General Motors Acceptance Corp. in 1919. Before then, only a few small manufacturers and regional dealer groups had offered automobile financing.
Yet Henry Ford still refused to assist his dealers with a financing arm, the way General Motors did. Ford buyers either had to pay cash or get a bank loan, which meant more red tape as well as a higher interest rate than GMAC offered.
By 1926, thanks largely to GMAC, three out of every four cars in the United States were bought through financing rather than hard cash. That year, only 13 of the more than 130,000 banks in the country had more money available to lend than GMAC.
One of the key lessons of GM's 1920 crisis, when the automaker faced the threat of bankruptcy and Billy Durant was ousted for the last time from the company he founded, was that the company needed clearer and more accurate data on actual and projected retail sales, to manage its production and inventories and avoid a similar crisis in the future.
Before 1921, all U.S. car manufacturers had relied on their own wholesale sales to dealers and the dealers' own less-than-rigorous retail sales forecasts to determine production volume. That year, at the suggestion of Donaldson Brown, GM's vice president of finance, the company began instituting a system of 10-day sales reports from the field.
Brown and his staff also devised their own system of sales forecasts based on the data as well as the staff's own analysis of a myriad of other indicators, including the federal government's economic reports and the company's own consumer research. Rather than rely on vehicle division sales executives or the dealers, who had a vested interest in making things look better than an objective researcher might, Brown approached the highly respected independent research firm R.L. Polk & Co. to compile the data.
In an unprecedented show of magnanimity, GM agreed to pay R.L. Polk to gather all the data on its own sales and issue 10-day reports that were then made available at no charge to the rest of the industry. Over time, the same 10-day reporting system was adopted by all other manufacturers and was incorporated into the federal government's index of key economic indicators.
The General's 10-day sales reports were also distributed to division management and dealers, to let them know how they were doing compared to each other and the rest of the corporation. More important, Brown and his staff used the 10-day sales data in compiling detailed forecasts. These forecasts, in turn, were used to determine production levels at each plant under the standard-volume production formula.
Little black book
To put even more fire in the bellies of his field leadership, CEO Alfred Sloan Jr. always carried what he called his "little black book," which listed each unit's latest forecast as well as its historical performance and its competitive position vis-à-vis other units of the corporation. Whenever he visited the units, he would refer to the little black book at least once during his conversation with local management.
In the case of the dealers, Alfred did not flash the little black book, but he loved to grill them about their business. He also used the dealers as another gauge not only of the market but also the competence of his executive team and its decisions. As Sloan put it in his best-selling My Years with General Motors:
"I made it a practice throughout the 1920s and early '30s 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 10 dealers a day. I would meet them in their own places of business, talk with them across their own desks in their 'closing rooms' and ask them for suggestions and criticism concerning their relations 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."
In the end, Billy Durant's Buick distributor network, going back to 1905, laid the foundation for the entire GM franchise system. His establishment of GMAC in 1919 remains the industry's most important and lasting change in the way cars and trucks are sold. Alfred Sloan's use of the dealer network as a sounding board and source of new ideas, in turn, remains the ideal model for factory-dealer relations. c
© 2006 William Pelfrey. All rights reserved. Published by AMACOM Books.