After the frenetic Durant era, Sloan brought order from chaos

In 1920, Alfred Sloan wrote a long report about the best way to organize General Motors. He showed the report, titled "Organization Study," to GM President Pierre DuPont and CEO Billy Durant. DuPont was very impressed. Durant never reacted to it.

Fast forward to 1923: Durant is out, and Sloan's Organization Study is in. Sloan was GM's president from 1923 to 1946 and chairman from 1937 to 1956. His management techniques not only would govern GM but eventually would become the model for modern corporate America.

To understand Sloan and his ideas, one must look first at his predecessor, Durant, the founder of General Motors. Durant, who had collected companies for himself as well as GM, acquired Sloan's Hyatt Roller Bearing Co., of Newark, N.J., in 1916.

That same year, Durant combined Hyatt with three other acquisitions in a new company called United Motors and made Sloan its president. Two years later, Durant brought United Motors into GM and made Sloan a GM vice president.

Durant was a talented collector of businesses but a poor manager. He was an outgoing dreamer who operated on gut instincts, said William Pelfrey, author of Billy, Alfred, and General Motors. Durant was spontaneous and took risks, but financial and organization controls were foreign to him.

Sloan was Durant's opposite, soft-spoken and prudent. He believed in getting all the facts before making a decision. He never acted on emotion.

Today, many view Sloan as the inventor of the modern corporation because he transformed Durant's hodgepodge of mismanaged car companies into the world's largest industrial colossus.

The premise of Sloan's organizational plan was decentralized operations with coordinated financial controls.

For example, Durant often had made decisions for GM's divisions without telling the people running those divisions, Pelfrey said.

"In fact, that's what ticked off a key GM executive, Walter Chrysler, and led him to quit GM in a huff," Pelfrey said.

Sloan also contemplated leaving GM because of Durant's management style. Instead, he took some time off. In his book Adventures of a White Collar Man, Sloan said he returned from a sabbatical in Europe in 1920 with the intention of resigning, but he sensed change was on the horizon.

"I decided to postpone resignation," Sloan wrote. "I was a manufacturer, and this could be made the grandest manufacturing enterprise the world had ever seen. I did not want to leave. So I said to myself, 'I'll ride along awhile and see what happens.' "

What happened was the 1920 boardroom coup that thrust Sloan into the mainstream of General Motors.

GM's board of directors ousted Durant after he had gone into personal debt buying thousands of GM shares without telling board members. Durant had done it in an effort to prop up a falling stock price, but it proved to be his undoing.

With Durant out, Sloan took on the task of bringing order to GM's chaotic structure. He immediately began taking on more responsibility in day-to-day management, and the board elected Sloan president on May 10, 1923. By then Sloan had put his organization chart into place.

It was clear to Sloan that corporate governance had to be established at GM. In his 1964 autobiography, My Years with General Motors, Sloan wrote that he was "struck by the disparity between substance and form" within the corporate structure.

He was convinced that the corporation could not grow or survive "unless it was better organized, and it was apparent that no one was giving that subject the attention it needed," he wrote.

Sloan set out to create a system of management with accountability. GM's board adopted Sloan's Organization Study in January 1921.

The central idea was for GM to have strong central financial controls, while giving management in the field maximum leeway to run the daily business. The field people had to achieve performance goals.

Sloan also established a set of policy committees to help the central office determine the allocation of capital to GM's many business units. The committees agreed on the goals and monitored the results of the various units. Thus was born the committee system that governed GM for 60-plus years and still is important today.

GM's operations outside the United States were left to run virtually independently.

GM's chairman, Pierre DuPont, owned 36 percent of GM's common stock. He also was chairman of his family-dominated firm, E.I. du Pont de Nemours & Co., where he eventually would adopt parts of Sloan's business model.

Sloan talked about his plan's origin in his 1964 autobiography: "It has been supposed by some students that General Motors took its decentralized type of organization from DuPont Co. ... But they proceeded from opposite poles. DuPont then was evolving from a centralized type of organization, common in the early days of American industry, while General Motors was emerging from almost total decentralization."

Sloan said that the different corporate backgrounds, along with very different types of products the two companies produced and marketed, made it impractical for the same model of organization to serve both companies.

"DuPont executives had been working on their own reorganization problem for a couple of years," Sloan wrote. "But it was not until nine months after General Motors adopted its plan of organization that the DuPont Company also adopted a decentralized scheme. The two plans did not share their particulars, but only the management philosophy of decentralization."

In his book Concept of the Corporation, Peter Drucker called Sloan the father of the modern corporation's organizational structure. But Drucker noted that Sloan's model paralleled two similar organizational models: the Catholic Church and the Prussian army under Otto von Bismarck. Both had central controls.

Despite GM's success under his organization and leadership, Sloan knew the danger of complacency. So the GM boss hired Drucker in 1946 to study GM and see whether the corporation's structure should be changed further, Pelfrey said. Drucker wrote a report, but Sloan did not make any changes.

GM's success under Sloan's leadership was intriguing to other businesses. Competitor Edsel Ford, for example, longed to duplicate the organizational structure. But his efforts to modernize Ford Motor Co. encountered powerful resistance from his father, Henry Ford.

In The Fords: An American Epic, Peter Collier and David Horowitz wrote that Edsel thought that "if he could create a similar (organization) at Ford, it would be a sort of Magna Carta for him and his loyalists.

Hearing what Edsel intended, Henry became more set against the formal structure than ever."

Despite GM's size, Sloan was able to run it so efficiently that it dominated the auto world as "the grandest manufacturing enterprise the world had ever seen," as he had predicted in 1920. Many historians say Sloan's organizational structure of decentralization with central controls remains a hallmark of modern corporations.

"Even though Sloan never would take personal credit for anything — he'd always talk about General Motors, never about himself — he knew what a god he was," Pelfrey said. "He had an ego and he relished it. Any individual would be proud, given how things turned out."