General Motors Institutes a Multidivisional Structure Summary

  • Last updated on November 10, 2022

The decentralized, multidivisional organizational structure that Alfred P. Sloan developed for General Motors became a model for large-scale enterprise.

Summary of Event

On December 29, 1920, the board of directors of General Motors (GM) approved the recommendation of Pierre du Pont, the company’s president, that the corporation adopt Alfred P. Sloan’s plan for a decentralized, multidivisional organization. This scheme set up autonomous operating divisions assisted by a corporate advisory staff that provided specialized services. The staff also acted as a liaison between divisions and the central office, which established company policies and coordinated the activities of the various divisions. Du Pont also presided over the installation of financial and statistical controls that enabled the company to monitor the operating divisions, chiefly through short-term and long-term forecasts. These controls enhanced GM’s capacity to respond quickly to market changes. Automobiles;manufacture Manufacturing;automobiles General Motors Business;multidivisional structure Multidivisional business structure [kw]General Motors Institutes a Multidivisional Structure (Dec. 29, 1920) Automobiles;manufacture Manufacturing;automobiles General Motors Business;multidivisional structure Multidivisional business structure [g]United States;Dec. 29, 1920: General Motors Institutes a Multidivisional Structure[05220] [c]Trade and commerce;Dec. 29, 1920: General Motors Institutes a Multidivisional Structure[05220] [c]Business and labor;Dec. 29, 1920: General Motors Institutes a Multidivisional Structure[05220] [c]Manufacturing and industry;Dec. 29, 1920: General Motors Institutes a Multidivisional Structure[05220] Sloan, Alfred P. Durant, William Crapo Du Pont, Pierre Du Pont, Irénée Raskob, John Jakob

The origins of this structure grew out of the policies of GM’s founder, William Crapo Durant. A successful salesman who turned a carriage-making operation into a national business through an effective distribution network, Durant moved into the infant automobile business in 1904, when he purchased the floundering Buick Motor Company. Buick Motor Company Excited by the potential in this market, Durant relied on his distribution network to sell the cars produced by his retooled carriage operation. He also purchased companies necessary for manufacturing parts and accessories. On September 8, 1908, Durant brought these operations together under the legal name General Motors.

Durant’s continued success in this new industry depended on a constantly expanding market to justify his company’s increasingly larger capacity. The flourishing sales of GM cars appeared to sustain Durant’s faith in consumer demand and the absence of any sizable cash reserves at GM. The company faced a sharp economic downturn in 1912 without sufficient resources to meet the immediate financial crisis sparked by the brief recession. To meet the cash demands, Durant agreed to a loan of fifteen million dollars from a combination of Boston and New York bankers in exchange for his effective departure from the operations of GM.

By 1916, Durant had parlayed the financial strength of the Chevrolet Motor Company, Chevrolet Motor Company which he formed with Louis Chevrolet in 1911, to take control of more than half of the GM stock. With the reluctant support of Pierre du Pont, chairman of GM’s board of directors since September, 1915, Durant won overwhelming controlling interest in the automaker and forced out the coalition of bankers.

From 1916 to 1920, Durant engaged in a massive expansion program. In May, 1916, he acquired the Hyatt Roller Bearing Company and New Departure Manufacturing, both of which he placed under the holding company United Motors Corporation United Motors Corporation (UMC). Durant appointed Alfred P. Sloan, the capable head of the Hyatt operation, to the position of president of UMC. Durant then added numerous other companies to UMC. Concerned about this costly expansion, du Pont asked John Jakob Raskob, treasurer of the Du Pont Corporation and also du Pont’s confidant, to serve as financial adviser to Durant, insisting that the finance committee come under the control of the Du Pont Corporation so that Durant’s spending could be monitored. Du Pont soon discovered, however, that the finance committee lacked the statistical capacity to restrain Durant’s excessive spending.

After the end of World War I, Durant renewed his expansion through vertical integration. With Pierre du Pont’s blessing, Durant bought the Fisher Body Corporation, Fisher Body Corporation a longtime supplier without which GM could barely survive. The GM founder also acquired the Dayton Engineering Laboratories Company (Delco), chiefly to secure the services of owner Charles Franklin Kettering, Kettering, Charles Franklin a leading figure in the industry. Durant made these purchases in part through a loan from du Pont of fifty million dollars, but his strategy flew in the face of the caution urged by Pierre du Pont.

In 1920, a sharp drop in the automobile industry brought GM close to bankruptcy. Durant personally owed creditors almost thirty million dollars, for which he had used GM stock as collateral. The stock’s rapidly shrinking value forced Durant to sell his shares to the du Pont organization and J. P. Morgan & Company to meet his financial obligations. In the wake of Durant’s departure, Pierre du Pont assumed the presidency of GM.

In one of his first acts, du Pont adopted Alfred P. Sloan’s plan as the basis of GM’s structure. Sloan had acquired a keen understanding of organizational structure as head of UMC. In that role, he sold to most of GM’s subsidiaries and came to grasp the inherent dangers in the lack of any integrated system of organization in a company of this type. In his scheme, Sloan proposed autonomous divisions independent of executive intrusion but responsible for their financial performance and subject to the general policies of the corporation. Eventually, Sloan created five price brackets in the automobile division, with Cadillac the most expensive and lowest in volume and Chevrolet at the lowest price and highest volume. Through this arrangement, Sloan hoped to end the competition among GM models that had prevailed under Durant. Sloan also brought together the numerous parts and accessory units that had been scattered among GM subsidiaries and placed them in two separate divisions.

Sloan’s general office left untouched the model Pierre du Pont had set up in his effort to build controls at GM before Durant’s departure. The general office consisted of the finance and executive committees, both designed to establish companywide policies and explicitly avoid the routine matters left to the divisions. Sloan expected the members of these committees to be generalists. The finance committee’s jurisdiction included salaries of GM’s top executives, dividend rates, and capital requests of more than $300,000. All corporate financial policies came under this committee’s authority. The executive committee concentrated its energies on evaluating GM divisions, determining the prices for company products, and formulating long-term plans. Sloan invested the company president with the authority to enforce policies created by these committees. In this task, the top executive was assisted by his personal staff as well as by the appropriations committee, which was led by du Pont’s trusted adviser John Lee Pratt. Pratt, John Lee

One of the chief elements of Sloan’s scheme, the advisory staff, played a crucial role in integrating the constituent parts of the giant enterprise. These consisted of engineering, research, manufacturing, and plant layout sections; the legal and patent offices; and plant engineering, personnel, real estate, purchasing, and sales sections. The staff provided data for the central office to use in evaluating the performance of GM’s divisions. The staff also facilitated the tasks of the divisional managers by supplying them with technical information.

Sloan also introduced interdivisional committees, which facilitated contact among GM’s executives. These committees, headed by representatives from the executive committee, relied on their own staffs. The interdivisional committees assumed responsibility for key corporate issues, from developing new products to sales and advertising.

Du Pont realized that GM needed some means of monitoring production and market demand. To accomplish this end, he recruited personnel from the Du Pont Corporation to develop a system of forecasting that depended on three-month projections, estimated monthly by each division. These estimates served as the bases for purchases of everything from raw materials to human resources. Reallocations were made every thirty days, depending on current performance and projections. This scheme gave GM a flexible budget system, then unprecedented among large-scale companies, and allowed it to avert any threat comparable to that of 1920. By 1925, GM had achieved notoriety as one of the most innovative and best-organized companies in American industry.

Significance

The innovations pioneered at GM were implemented throughout American industry from the 1920’s through the 1950’s. The central office, the advisory staff, and the multidivisional structure pioneered at GM slowly acquired a permanence in much of large-scale industry. Word of these changes spread through the business community through the speeches and writings of Sloan and others involved in the GM transition. Companies’ motivations to adopt this scheme varied depending on the markets and products involved as well as the companies’ own internal makeup. Corporations in the chemical and electrical industries provide examples of these variations.

The largest chemical operation, Du Pont, developed its new multidivisional structure at the same time GM was implementing Sloan’s decentralized plan. In 1917, Du Pont embraced a strategy of product diversification. The company expanded from explosives to plastics, paints, dyestuffs, and other products. This decision transformed Du Pont into a multiple-industry company and made obsolete the old centralized structure organized around functions, such as marketing and manufacturing. In 1920, the president of the Du Pont Corporation, Du Pont Corporation[Dupont Corporation] Irénée du Pont, decided that the company’s range of products had far outstripped the technical capacity of its executives and introduced a multidivisional structure. This decision accommodated the new strategy and set up autonomous divisions, each handling one product type. The company also established an executive committee free of the daily routine and dedicated to coordinating the activities of the corporation’s divisions and determining corporate policy. The new organizational scheme also included a service department, which acted in an advisory capacity to both the central office and the divisions.

Unlike Du Pont, which coped with a multiplicity of new products, Union Carbide Union Carbide and Carbon Corporaton confronted the demand for an effective central office, much like the demand facing GM. In 1917, four large companies—Carbide, Prest-o-lite, Linde, and National Carbon—merged to form the Union Carbide and Carbon Corporation, commonly known as Union Carbide. During the 1920’s, the new firm purchased smaller chemical companies and created a range of new products through research and development. The company consciously adopted the multidivisional scheme to meet the organizational strain of the merger and expansion. It grouped its more than twenty divisions into four autonomous sections, each under a vice president. It also established a service department, which acted in an advisory capacity. At the same time, the company created an executive committee that assumed overall direction of the company.

By the 1950’s, the leading corporations in the electrical industry had moved to the multidivisional structure developed at GM and Du Pont. General Electric General Electric Company (GE) shifted into household appliances during the 1920’s, and by the 1950’s the company had put in place seven groups based on product types, which ranged from appliances to lamps. GE had also set up eleven service divisions that replaced the old staff departments (engineering, manufacturing, research, and sales). The earlier departments actually exercised authority, whereas the new service divisions acted only in an advisory capacity. GE also established a central office comparable to GM’s.

Not all companies immediately moved in the direction of GM and Du Pont. Henry Ford, Ford, Henry for example, rejected any notion of decentralization and clung to the old centralized system, with its managerial hierarchy and vertical integration. In the early 1920’s, the Ford Motor Company Ford Motor Company ranked as one of the ten largest corporations in the world, and its Model T remained unchallenged. By 1927, Ford had lost out in competition with GM and other auto manufacturers, and its forced retrenchment led to the design and production of the Model A. During that period, competitors made serious inroads into Ford’s 55 percent share of the market.

The Ford Motor Company continued to lose ground in the market. Badly managed and poorly organized, it simply lacked the capacity to dominate the auto industry. Only the departure of Henry Ford and the arrival of his grandson, Henry Ford II, Ford, Henry, II brought change to the company. Henry Ford II recognized the problems inherited from his grandfather and set about repairing them. Although he lacked any technical education, he knew the automobile business. He fired ineffective top managers and recruited personnel from GM to introduce the multidivisional structure and uniform accounting system to Ford. By the 1960’s, the company had recovered from near collapse.

From 1920 through the 1950’s, much of large-scale American industry underwent a massive reorganization that produced companies with greater flexibility and enhanced capacity to respond to market changes and demands. The motivation for this reorganization varied: Multiple-industry companies needed to use a multidivisional scheme for more effective autonomous production; loosely federated enterprises such as GM demanded better coordination. Flexibility and coordination became the hallmarks of American industry by the 1950’s. Automobiles;manufacture Manufacturing;automobiles General Motors Business;multidivisional structure Multidivisional business structure

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Chandler, Alfred D., Jr. “Management Decentralization: An Historical Analysis.” Business History Review 30 (June, 1956): 111-174. A good starting point for understanding the key issues in the process of corporate restructuring. Provides an overview of the spread of the decentralized model of corporate structure throughout key industries and explains variations in the adoption of this scheme.
  • citation-type="booksimple"

    xlink:type="simple">_______. Strategy and Structure: Chapters in the History of the American Industrial Enterprise. 1962. Reprint. Frederick, Md.: Beard Books, 1996. A key work on the organization of the American corporation. Includes a discussion of centralized structure, product diversification, and decentralization. Chapters include extensive analyses of Du Pont, General Motors, Standard Oil, and Sears, Roebuck and Company. Chapter 7 reviews the spread of the multidivisional structure throughout American industry.
  • citation-type="booksimple"

    xlink:type="simple">_______. The Visible Hand: The Managerial Revolution in American Business. Cambridge, Mass.: Belknap Press, 1977. Excellent discussion of the evolution of the corporate enterprise and management in the United States from the 1840’s through the early twentieth century. Chapter 14, “The Maturing of the Modern Business Enterprise,” deals with the spread of the multidivisional organization throughout American industry. Includes a discussion of the professionalization of management after 1900.
  • citation-type="booksimple"

    xlink:type="simple">Chandler, Alfred D., Jr., and Stephen Salsbury. Pierre S. du Pont and the Making of the Modern Corporation. 1971. Reprint. Frederick, Md.: Beard Books, 2001. Section 4 includes careful analysis of the role Pierre du Pont played in the adaptation of financial methods from the Du Pont Corporation to General Motors and in the creation of a central office comparable to that developed at Du Pont. Explains Pierre du Pont’s role in adopting Sloan’s decentralized structure at General Motors.
  • citation-type="booksimple"

    xlink:type="simple">Johnson, H. Thomas. “Management Accounting in an Early Multidivisional Organization: General Motors in the 1920s.” In Managing Big Business: Essays from the Business History Review, edited by Richard S. Tedlow and Richard R. John, Jr. Boston: Harvard Business School Press, 1986. Provides an excellent description of the accounting techniques developed for GM. Analyzes the price study, the yearly company forecast, and the standard volume, an estimate of capacity that played a key role in forecasting and in evaluation of division performance. Also reviews Sloan’s ten-day sales report and the flexible budgets used at GM.
  • citation-type="booksimple"

    xlink:type="simple">Kaysen, Carl, ed. The American Corporation Today. New York: Oxford University Press, 1996. Collection of essays on all aspects of the American corporation at the end of the twentieth century, including its history and variations in structure.
  • citation-type="booksimple"

    xlink:type="simple">Livesay, Harold C. “Entrepreneurial Persistenc Through the Bureaucratic Age.” In Managing Big Business: Essays from the Business History Review, edited by Richard S. Tedlow and Richard R. John, Jr. Boston: Harvard Business School Press, 1986. Includes an insightful discussion of Henry Ford II and his direction of Ford Motor Company from near bankruptcy at the end of World War II to recovery and prosperity by 1960. Also examines the extensive overseas activities of Ford under Henry Ford II.
  • citation-type="booksimple"

    xlink:type="simple">Sloan, Alfred P., Jr. My Years with General Motors. 1963. Reprint. New York: Currency, 1990. Clearly expresses Sloan’s ideas on structuring General Motors and the motivation for this move. Describes the many issues involved in operating the central office and instituting financial controls. Indispensable for understanding the changes at General Motors. Also includes good background information on Sloan.

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