Chapter 10
The transformation of the automobile market was essentially complete in 1929. If Mr. Ford, in that pivotal year in the modern economy, still held stubbornly to his old concept in his new Model A, he was counterbalanced by Mr. Chrysler, who had come up from nowhere with tremendous vitality and with a market policy similar to General Motors'. The fact that Mr. Ford built nearly two million of the five million U.S.-produced cars and trucks sold that year was only incidental from the long-term point of view— it was a splurge, not the sign of a trend.
And General Motors itself had been transformed from the formless aggregation of 1920 into an integrated, effective enterprise. Its management philosophy of decentralization with co-ordinated control was working adequately for its time. Its financial method had become a kind of second nature, and a constantly evolving creative process. Its line of cars expressed the variety that Mr. Durant had originated and, in principle, the price classes set forth in the product plan of 1921. And perhaps I should add in passing that, although we had reached an all-time peak in the export of cars, we had started on a new course overseas with our own manufacturing operations in England (1925) and Germany (1929). In all of these matters the corporation reflected the trend of affairs in the economy. Doubtless it influenced some of those trends. Our progress in the automobile industry influenced other large-scale American enterprises to study and adopt our methods, particularly decentralization and financial control.
Not being a historian, I pass over much in this period that is of general interest to continue the story I set out to tell about the progress of General Motors.
The great depression of the early 1930s, despite its contracting effect, did not alter qualitatively the general characteristics of the enterprise except in one particular. Contraction required increasing co-ordination. That is, we had to find ways to react swiftly to this most difficult kind of change and to economize. These needs were to lead to the last basic modifications in the General Motors scheme of organization. In fact, the changes began before the stock-market crash in October 1929 in anticipation of a new situation, but before we had any real idea of what was coming.
For one thing, because of the tremendous success of Chevrolet, I wanted to spread the benefits of its management to the corporation as a whole by placing Chevrolet men in strategic positions. Mr. Grant and Mr. Hunt of Chevrolet were elected vice presidents of the corporation on May 9, 1929, with staff responsibility for sales and engineering, respectively. At the same time, C. E. Wilson, formerly of Delco-Remy, was elected vice president for manufacturing. A few years later Mr. Knudsen, who had been general manager of Chevrolet, was elected an executive vice president and put in charge of all car, truck, and body manufacturing operations. Thus it might be said that in this period a new executive group moved up in rank and into the general corporate area where their influence would affect the entire corporation.
We had at that time, however, only a modest staff organization outside of finance, Mr. Kettering's laboratories, and the work associated with the inter-divisional committees. When we had occasion for an advanced engineering project we created a special "product study group" and placed it in a manufacturing division. The election of these men therefore was a new beginning in staff activity, which would eventually displace the old inter-divisional committees and develop into the great staff organization we have today. The stories of these staffs belong to later chapters in this book. I shall discuss here only how they bear upon certain general developments in co-ordination.
The national economy reached its peak, up to that time, in the late spring and early summer of 1929, after which industrial production decreased sharply, while the stock market continued on and up to its debacle in October. (Note 10-1.) On July 18 I made a statement to the Operations Committee expressing anxiety as to whether the corporation was capable of reacting to change, and declaring myself for new forms of co-ordination to that end as follows:
... I feel that we have been weak in that we have not been in a position or have not perhaps from the standpoint of policy, followed through on the many constructive suggestions involving programs and policies that have been developed. The usual reaction in the minds of all of us is, against any change, and I feel that our administration has been subject to criticism for not insisting upon changes and losing too much time in selling an idea and in not dealing promptly and effectively with weaknesses that are known to exist. It is for that reason that I have felt for some time past that we must have a more effective and definite form of coordination. Expressed otherwise, the resistance against progress has been greater than the man power to effect progress; therefore, progress has been slow. This now I feel has got to be changed if the Corporation is going to maintain its position, let alone improve it. We can not wait so long to do things as we have because competition is becoming keener and the problem is daily becoming harder. The remarks I am making are not directed so much to the ordinary business routine as they are to the recognition of new necessities in the form of better general principles and policies to carry out those principles, also better and more effective forms of detail organizations . . .
On October 4, 1929, shortly before the stock-market crash, I addressed a general letter to the organization noting the end of expansion and promulgating a new policy of economy for the corporation:
It appears to me that it would be most appropriate at this time to ask the earnest attention of all concerned to what I believe to be a very important problem, and which I will outline herewith.
For quite a number of years past the demands on our schedules have taxed our facilities to the utmost. This applies to practically all operations, both at home and abroad. In addition to this, the characters of our products have materially changed, and such changes necessitated a revision of some of our production facilities and modified, more or less, practically all of them. This has thrown on management, in addition to the ordinary problems, the responsibility of providing plant and facilities for expansion and the organization to effectively operate same.
In connection with the above program, large amounts of capital have been expended. Still more has been invested in creating facilities for doing things that had not been previously done— in other words, developing plant for manufacturing a greater part of the various products we are selling. All this has been constructive and amply justified by the results that have been obtained. I am sure our position in the past and present has been and in the future will be greatly enhanced and strengthened by what we have accomplished in this general direction.
The purpose of the above is to make the point that in my opinion a different type of treatment is now essential, at least for the present and for the more or less immediate future. It seems to me that management should now direct its energies toward INCREASING EARNING POWER through IMPROVED EFFECTIVENESS and REDUCED EXPENSE. In other words, the drive during the past few years has been for more and better cars of constantly increasing value. From now on we should drive just as hard toward still better cars, but we must give more detailed consideration to values in respect to price and as a part of this program the efforts that have been so lavishly expended on expansion and development should now be directed toward economy in operation.
The above does not mean to convey the thought that our trend over a period of years will be other than of such a nature that still further demands on our production facilities will be required. I believe that, given a quality product at the right price, at the same time keeping abreast of the advances in engineering thought, there is no end to what we can accomplish. On the other hand, it is impossible to assume that the percentage increase from year to year will equal what we have enjoyed during the recent past. Further, it is reasonable to suppose that we must follow more closely the general trend of industry as a whole. I do not intend to convey the thought in anything that is said above, that the expense factor has not been watched, for I know it has. What I am trying to convey is the thought that in the future it should be the prime consideration of every division and subsidiary to put the energy previously directed toward expansion and development into the hardest kind of a drive in the direction of economy. In other words, economy in operation must now be the key-note rather than expansion of plant and equipment. By "expense" I mean not only manufacturing expense but every item of expense incident to cost of sales.
The responsibility of carrying through this program rests, of course, on every division and subsidiary. In order that I may be kept in touch with the general trend, I am asking Messrs. Bradley, Grant, Hunt and Wilson to study the situation from the Staff standpoint in collaboration with the corresponding functions in the various divisions and subsidiaries in various ways that will be outlined in due course. In that way we will all work together toward a better general result.
In harmony with the thought behind the above, it follows that new projects should be more carefully scrutinized than ever before and the burden of proof of their propriety should be more evident. According to the present form of organization, C. E. Wilson, Vice President, deals in a preliminary way with new projects as presented. It might be desirable for every division and subsidiary contemplating or feeling the necessity of further expansion, to consult Mr. Wilson before proceeding in the development of the necessary project. Naturally, the above remarks do not in any sense refer to changes definitely approved in which additional or different production facilities are essential for their proper execution.
As it turned out, I was not, of course, pessimistic enough; indeed it would soon be a question whether we were able to cope with the unbelievable course of events. Although the depression did not occur all at once, the downward steps were gigantic. General Motors' sales of $1.5 billion in 1929 fell about one third, to $983 million, in 1930.
After the close of 1930, I said in the annual report—which I used to write myself—the following: "The economic situation of practically all important consuming countries of the world during the year was materially out of adjustment. Involved as the corporation is in an important way in the business activities of nearly every country in the world, its operations were adversely affected by such a situation. There arose, as a result, unusual problems of administration and policy which had to be dealt with effectively and aggressively, if the interests of the stockholders were to be protected. The future position of the institution, not only from the standpoint of the confidence with which it is regarded by the public, which is a measure of its goodwill, but likewise from the standpoint of its future economic development, called for the most searching analysis of all problems . . ."
The analysis began.
As a matter of atmosphere, it may be of some interest to indicate how the management of a corporation like General Motors talks to itself when confronted by catastrophic events. On January 9, 1931, I addressed the following letter to the members of the Operations Committee:
For the benefit of those who were absent from the Operations Committee meeting on Thursday and to remind those who attended the meeting, I want to say that one of the principal points of business at the next meeting will be a contribution from each member as to what in his opinion have constituted weaknesses in procedure, policy or thought in the year just closed that should be eliminated and what new points can be developed that will be helpful in the year 1931.
The close of one year and the advent of a new forms a psychological and practical opportunity of dealing with a matter of this kind. Naturally, we must deal with broad principles of policy and type of thinking more than detailed problems of administration.
To illustrate what I have in mind I will give the following thoughts from some notes which I have already made on the subject: —
First:— I think we have lacked and perhaps still lack courage in dealing with weaknesses in personnel. We know weaknesses exist, we tolerate them and finally after tolerating them an abnormal length of time we make the change and then regret that we have not acted before.
Second. I think, notwithstanding that we have the reputation of a fact-finding organization, that we do not get the facts, even now, as completely as we should. We sit around and discuss things without the facts. I think we should break ourselves of that and not permit any member of the Committee to have an important problem determined upon without all members of the Committee have the facts before them and are placed in a position to exercise their own individual judgment, otherwise the Committee is not fair to itself and to the Corporation because it is not discharging its full responsibility to same.
Third. I think that we become too superficial and that we should correct this tendency. Problems are crowding in on us; time is limited; the meetings are some times long and we naturally get tired. These circumstances and many others lead us to make mistakes without adequate consideration and mistakes are bound to occur. It is easier not to do it at all than to do it haphazardly or without due consideration and even if we lose an opportunity it will come up again sooner or later and in the long run we will gain by more thoroughly dealing with our problems.
The above are just some thoughts that occur to me in order to give you the type of matters that I would appreciate your thinking over. Each member of the Committee will be expected to make a real contribution.
A pretty mild statement in the circumstances. But every business, profession, and group of people has its own way and often its own jargon. The top management understood that the above letter was a call to them to think everything over. For six months a deluge of memoranda came over my desk dealing with the broadest kinds of questions; and there was a divergence of opinion. Mr. Pratt, Mr. Mooney, and Mr. Knudsen felt we had become over-centralized.
Mr. Pratt wrote on January 12, 1931, as follows:
In my judgment the greatest weakness in the procedure and policy of General Motors Corporation is the tendency of the Operations Committee to originate and discuss detailed problems of the Divisions, instead of insisting that the Divisions initiate their respective policies and problems and refer their solutions to the Operations Committee for check and approval.
Consciously or unconsciously, the way in which we have operated General Motors in the past year there has been an alarming tendency towards centralization of all initiative and action in the Operations Committee. I think the reverse is necessary. The initiative must be in the Divisions and our job is to see that we have General Managers who will take the initiative rather than attempt to supply all of the initiative from the central organization.
I would also like to suggest where weaknesses are thought to be that they be placed on the table and frankly discussed, regardless of personalities.
There can be no doubt that, under the impact of severe contraction, some over-centralization took place, and it was wrong.
On the other side, however, Messrs. Wilson, Grant, Hunt, and Bradley, all staff men, thought the contrary. Each of them recommended some specific form of increased co-ordination. Mr. Wilson wanted to bring all the divisions up to the standard of the most progressive divisions in manufacturing organization, equipment, and processing method. Mr. Grant made a similar proposition for sales and general management. But he confessed he was unsure how to do it in a way consistent with decentralization. "For the time being, at least," he said, "I know only one answer to this problem and it is to have lots of will power, patience, and selling ability in making our divisional contacts . . ." Mr. Hunt, with the concreteness of the engineer, proposed to extend the interchangeable body program as far as possible through the car lines, and to make a new application of engineering research to car features that had immediate possibilities. Mr. Bradley, noting inadequate preparation for discussions in the Operations Committee, proposed the appointment of subcommittees to expedite the routine work of the top committee.
The truth is, I believe, that both sides were right. The horns of the old dilemma had reappeared. We had to have more coordination to meet the new conditions, and at the same time we had to keep the top management from falling into the hopeless position of trying to administer the affairs of the decentralized divisions.
On June 19, 1931, I took the first step toward a new setup, with the appointment of a number of advisory groups. I stated this proposal as follows: "That Advisory Groups be formed as advisory to the Group Executive for the purpose of establishing the broadest possible foundation of fact and opinion in order that the recommendations submitted to the [Operations] Committee and the decisions of operating policy, even when not submitted to the Committee, be as constructive as the best thought in the Corporation permits."
The significance of this proposal lay in its effort to achieve broader, more active, and more regularized contact between the general officers, the staff, and the divisions, without giving the staff any authority over the divisions. Some men feared that this move would encourage the staff executives to give orders to the division managers, but that was not a necessary consequence, as I shall indicate presently.
The advisory groups were adopted in 1931, but by the end of that year further discussions of broad problems of organization gave way to drastic emergency measures aimed at sheer survival as the nation and the world went to the bottom of the great depression. The automobile industry in the United States and Canada dropped from a production of about 5.6 million cars and trucks, worth about $5.1 billion at retail, in 1929, to about 1.4 million units, worth about $1.1 billion, in 1932. That was lower than any year since the war year 1918.
Thanks to the financial and operating controls, the development of which I have described in earlier chapters, General Motors did not approach disaster as it had in the 1920-21 slump. We made an orderly step-by-step retreat in all matters, including wage and salary reductions. Sales by our United States and Canadian plants dropped to 526,000 cars and trucks in 1932 as compared with about 1.9 million in 1929, a tremendous drop (72 per cent) when you consider the many expenses that are fixed. That we fared relatively better than the industry is shown by the fact that our share of the market increased from 34 per cent in 1929 to 38 per cent in 1932, the trough year of the depression. Our profits dropped from about $248 million in 1929 to $165,000 in 1932, still in the black, thanks mainly to our financial-control procedures. In 1932 we were operating at less than 30 per cent of capacity.
To economize we co-ordinated to a greater extent our work in purchasing, design, production, and selling, and some of these changes were of lasting value. In purchasing and production, for example, we achieved a finer classification of parts and increased interchangeability of parts among the divisions, the most important single interchangeability being in a reduction of bodies to three basic standard types. The most difficult economies to get were in commercial or selling expense and here we took the most drastic measures of reorganization. In March 1932 the Operations Committee, after a three-day session, adopted a radical revision of the product policy of 1921. The decision was taken to consolidate the manufacturing of Chevrolet and Pontiac, both thereby coming under Mr. Knudsen's jurisdiction. A similar consolidation was ordered between Buick and Oldsmobile. On the sales end the activities of Buick, Oldsmobile, and Pontiac were consolidated in a single new sales company, B.O.P., and dealers were given more than one car to sell. In effect, from a management point of view, General Motors for a year and a half was reduced from five to three car divisions.
The severity of the contraction and the pressure of events attending it in and around the corporation caused me to reflect on whether our scheme of management could respond properly to such an era. Were we set up to contract and expand at will? To co-ordinate and still keep clear the distinction between policy and administration? If we restored the traditional five car divisions, how would we relate the cars in the new situation? Inevitably when an industrial enterprise is shaken with such a force as we met at the onset of the great depression, there has to be confusion. In November 1933 I began to write again on the subject of new policies, beginning at the beginning, on the subject of policy itself. I said:
I feel that this phase of the general organization problem is of particular importance to General Motors, not because of its size particularly, but on account of the nature of its business, subject, as it is, to what I might term "rapid changes". In other words, I contend a unit of the automotive industry has far less "coasting ability", I might term it, than units in most any other industry that might be selected for comparison.
As I analyze our picture, looking forward into the future, our success or, let me say, the maintenance of our position, absolutely depends upon the ability of our organization to lay down a strategy as will enable us to forecast the rapid changes that are taking place and will continue to take place in the various activities in which we are interested, involving all the functional divisions within such activities, and to provide for those changes with sufficient rapidity.
In making this statement I am not minimizing in any sense, the importance of effectively and economically carrying out such policies as may be adopted— I am simply trying to emphasize the point that the policy phase is of vital concern because, unless we can, with reasonable intelligence, meet this issue—no matter how able an administrative set-up we may have, it is limited in its opportunity to function. I might add further, that looking forward I feel that we have got to more aggressively deal with that phase of our problems than we have in the past. It is going to be harder to maintain both our competitive position and our profit position. We can not afford to take the time in the future that we have in the past, to make up our minds what we should do with respect to changes in trends which are having an influence on our position . . .
My main purpose in the memorandum from which the above passages are taken was to reassert the purely policy-making role of the Executive Committee. I also said that the committee should be "in a position to deal frankly and aggressively with any division, or the relationship of one division with another." To do this best I thought the committee should contain only general executives, not divisional executives. How then would the policy-making executives get and use their information? I wrote, ". . . we must develop ways and means to keep the members of the Executive Committee in contact with the problem so that they can exercise not only intelligent judgment on the question, but intelligent independent judgment . . ."
Of course the Executive Committee had always been legally, and in fact, the top operating committee, but because it met jointly with the Operations Committee, and because decisions were made with the participation of both policy and operating people, the line between policy and administration was not sharply enough drawn. The first thing was to limit the Executive Committee to policy decisions made independently of the administrative, operating people.
It was particularly important that independent policy-making be re-established because of the new conditions in the car market and the management problem that would arise if we restored the traditional five divisions, a move which I proposed.
The situation was this: In the automobile market of 1933 the low price group grew relatively to encompass 73 per cent of the industry's unit car sales, as compared with 52 per cent in 1926. This meant, for the old car line, that we would have four lines in 27 per cent of the market and one line in 73 per cent of the market. Mr. Brown, for reasons of economy, preferred three divisions. I preferred five despite the extra cost, which I thought we could recover through increased volume. I stated, and in part restated, my longstanding views on commercial policy in a report to the Finance Committee on January 4, 1934, and, since they became the corporation's policy, I quote them here:
THE FUNDAMENTAL CONCEPTION OF GENERAL MOTORS CAR PRODUCT PROGRAM
Certain members of the Committee may recall that at the time Mr. P. S. du Pont became President of the Corporation, one of his first acts was to appoint a group to study the very important problem of car products. Up to that time there had been no fundamental conception or plan —there was no definite relationship between the products of one car division and another, or, in other words, no coordination. It was generally recognized that there should be a definite relationship and a certain amount of coordination, and the purpose of the study was to establish what that should be. This study was authorized by a resolution of the then Executive Committee, under date of April 6, 1921—now approaching thirteen years ago . . . [The study referred to here was that concerning product policy discussed earlier.]
I took note of the general evolution of the automobile in those thirteen years under the pressure of intensified competition, and observed that the value of a car had come to be centered around certain considerations—appearance or style, technical qualities, price, and reputation. It was my impression at that time that differences in these matters were narrower than they had been in earlier years, and that because the state of the art was available to all, automobile technology would not in the future result in effective differences from a selling point of view. I was mistaken about that, although my general point, I believe, was valid, namely that selling had begun to focus on personal preferences of the consumer, especially in matters of style. I said:
People like different things. Many people do not want to have exactly the same thing that the neighborhood has. The design of any car is an artistic and engineering compromise. No car can embrace all the desirable features. Relatively inconsequential features will often influence a sale[,] adversely to the customer's interests with respect to other far more consequential features. No prospect is intelligent enough to definitely determine the weighted value of all the elements that enter into any particular car. The consumer is also greatly influenced by the personal relationship with the dealer and some times rightly, other times, wrongly, becomes antagonistic to one particular dealer. General Motors in selling 45% of all the units in the industry, which is practically one out of every two, assumes a tremendous responsibility with respect to all these questions. Under those circumstances, new customers are hard to get and an old customer lost is hard to replace. It is quite different selling 45% than in selling 5%.
It is perfectly possible, from the engineering and manufacturing standpoints, to make two cars at not a great difference in price and weight, but considerably different in appearance and, to some extent, different in technical features, both, in degree, built with the same fundamental tool equipment.
In view of the concentration of volume within a narrow price range, is it desirable for the Corporation to place all its eggs in one basket in view of the above and many other considerations, or is it better to capitalize the recognized fact that different things appeal to different people; that not all the sound engineering ideas can be incorporated in one unit; that the influence of the dealer is an important consideration? . . .
I answered these questions with a statement of my commercial policy as follows:
... I believe that in the low price field where from 80% to 90% plus of the volume is concentrating, we should have more than one appeal, and that our representation, whatever it may be, should contemplate the incorporation of sufficient differences in essential elements of design, as to make the broadest possible appeal to the largest number of people. I accept, as a corollary of this principle, the fact that manufacture and distribution is complicated. I regret that we can not make one thing that everybody will buy, but I do not think, under present circumstances, that is possible.
In communities of high potential where there must necessarily be many dealers competing against each other, with the same product in the same market, I believe that it is better policy to limit the number of dealers competing for one line and obtain the increased number of contacts through a different appeal than it is to go the other route.
To illustrate, let us take a community in which we might maintain "x" dealers. Rather than have those "x" dealers competing with each other on the basis of exactly the same merchandise, which is very demoralizing competition, I believe it is better to have a part of same, and a major part of course, competing against each other with the Chevrolet line and additional dealers competing with lines diversified from Chevrolet.
For all the above reasons, I personally feel that the policy as outlined many years ago [1921] by the Executive Committee, should be modified substantially as follows:—
THAT giving recognition to the concentration of volume in the low price field, it shall be the policy of the Corporation to increase its representation within that field, but in doing so the utmost consideration must be given to the importance of the greatest possible diversity in all elements of consumer appeal in such additional offerings so as to build the strongest foundation of acceptability to the consumer.
This proposal to maintain diversity in cars and separate divisional selling efforts in a crowded price class required new forms of co-ordination. And the more you co-ordinate, the more questions you draw up into the policy area, and therefore the finer must be the distinctions between policy and administration. For example, when two or more divisions use common components, the independence of each division is limited to the extent that there must be a common program between them. Someone therefore must coordinate such a program. As this process is elaborated, more questions come into the policy area which were formerly in the administrative area. I have always believed it is imperative to maintain the distinction between policy and administration. Without that distinction a decentralized organization would be in constant confusion as to what was decentralized and what was not. So the big question was the policy one. And it demanded a general solution. The solution we worked out at that time remains today the basic decision-making process in General Motors. It was contained in the following recommendation which I made to the Executive Committee in October 1934:
It has already been developed that the creation of a policy might emanate either from the Central Authority or from within the Operating Division or Subsidiary. The finalization or authorization of a policy is exclusively within the province of the Central Authority as presented by a Governing Committee. From whatever source the policy may originate, it is essential that those involved in authorization should be qualified to pass on the proposal with a full knowledge of its implications as affecting the present and future position of the business. Where a policy involves important consequences, as in the case of the operations of General Motors Corporation, it is essential that the broadest possible foundation of thought and fact and the approach of the proposal from as many different angles as possible, be established. To the degree that authorization becomes superficial, to that degree does the position of the business become jeopardized, or its progress adversely affected.
The above more or less philosophical discussion is for the purpose of establishing the reasons for and the desirability of formulating a broader conception of the policy creation phase of administration than has heretofore existed in the General Motors scheme of things.
This Procedure establishes, for the first time, the following principle:—
l—that the development, or creation of constructive and advanced policies, as defined, is of vital influence in the progress and stability of the business.
2—that in the organization of General Motors Corporation, the fact just recited, should be recognized through a specialization of policy creation, independent of policy execution, so far as that is reasonably practical.
The concept of policy creation described above was embodied in a set of new organs in General Motors, called policy groups. These groups, generally speaking, had functional titles, such as Engineering Policy Group, Distribution Policy Group, and the like, with later some line groups such as the Overseas Policy Group. They combined the top executive officers, including the president, with functional staff men, and each group was charged with making policy recommendations in its functional area to the top operating policy committee of the corporation. The divisional managers, being charged with administration, were specifically excluded from these groups. The groups themselves, as groups, were not given authority over the divisions, or any authority to finalize policies, but since the groups contained the principal officers of the corporation, policy group recommendations were normally adopted by the governing committee in the area of operations. We tried out policy groups in the engineering and distribution areas between 1934 and 1937, and in the latter year expanded their use to other functions and some operations and adopted them officially for the corporation. (Note 10-2.) They express in more sophisticated form the management policy I first formulated in the "Organization Study" of 1919-20, that is, of decentralized operations with co-ordinated control.
There are now nine policy groups in the corporation, divided into two categories. First, there are those that deal with functions —namely, Engineering, Distribution, Research, Personnel, and Public Relations—all largely related, though not exclusively, to the car operations. And then there are those that deal with certain group operations—namely, Overseas, Canadian, General Engine, and Household Appliance. In the case of each functional activity, these policy groups work under the auspices of the section of the general staff to which they are related; the Engineering Policy Group, for example, is related to the Engineering Staff through the Engineering Staff vice president. In the case of operations, each group is under the auspices of the group executive for that set of operations. Members of these various groups carry great influence at the highest level in the corporation. The chairman of the board and chief executive officer, for example, is a member of all but three of the policy groups, and the president a member of all but two. In the case of the Distribution, Engineering, Research, Personnel, and Public Relations policy groups, the members of the Executive Committee as well as others of the operating management are members. Their full membership comprises a cross-section of the whole of the corporation's executive talent. Hence their great weight in uniting staff and line operations, preparing policy recommendations, and developing the basis for executive decisions.
The activity of the policy groups varies with the changing needs for policy determination. The Engineering Policy Group, for example, meets regularly to work on new product programs. (Note 10-3.) In this activity the general managers individually and collectively, in person and through their functional departments, are in intimate contact with the work of the policy groups. They are not members of the policy groups, as I have said, because those groups are charged with policy development and the general managers are charged with administration.
The function of the Engineering Policy Group in the development of a new model in General Motors is a good example of the work of a policy group. The initiation of a product program in any division lies within the responsibility of the general manager of that division in collaboration with its engineering department, influenced of course by the market as reflected by its sales department and importantly co-ordinated with the needs of the other operating divisions. If we were to go back twenty-five or thirty years, we would find little co-ordination between a program proposed by one division and one that might be put forward by any of the other car divisions. But over the course of time a very great amount of co-ordination has become necessary. In other words, a divisional product program, instead of being integral in itself, is deeply involved with the product programs of many of the other divisions; therefore it must be developed from the corporate point of view. The time between the conception of any new program and its final execution is presently about two years. In the case of an advanced engineering concept, it is very likely to be more than two years. And during that time it is subject to an untold amount of change. Therefore, during the development period, detailed contact must be continually maintained between the engineering departments of all the car divisions, the Styling Staff, the Fisher Body Division, and more or less the accessory divisions—because they are all commonly concerned with and working together on a single problem. Here the corporation's Engineering Staff comes into the picture and collaborates with the other divisions in order to effect the necessary co-ordination. The co-ordination agency— if I may call it such—that passes on the problems involved in this process is the Engineering Policy Group. Its decisions are normally adopted by the Executive Committee, whose members are present through the whole process.
It was the depression, and the economies it forced in co-ordination of the product, as I have shown, that led to this new type of co-ordination in management. With the establishment of policy groups in 1937, the scheme of management which originated in the Organization Study of 1919-20 was complete.
Long reflection on the distinction to be made between policy and administration led me in 1937 also to consider the application of this concept more precisely to the organization of the governing committees of the corporation. Early that year I proposed that in place of the Finance and Executive committees we should have a single policy committee to concentrate on making over-all policy for the corporation and an administration committee to concentrate on the carrying out of policy. After considerable discussion we adopted this change in May of that year. The Finance Committee and the Executive Committee were discontinued. A new Policy Committee was formed. It was composed, of course, entirely of members of the board, and brought operating officers, financial officers, and outside directors into one senior group. The new Administration Committee was composed entirely of operating officers.
The Policy Committee took over all the responsibilities of the former Finance Committee and additional responsibilities for operating policy. From 1937 through 1941 the Policy Committee made policy for operations in a number of important areas. For example, it established the broad outlines of labor policies and programs and also decided a number of distribution policies, particularly those concerning dealer relations. As international conditions became increasingly unsettled, more and more of its time was given to determining policies for the overseas subsidiaries. As war approached, the Policy Committee had to deal with increasing shortages of raw materials, relations with the government, and the impact on our civilian operations of government requests for the production of airplane engines, tanks, and other military items.
The entrance of the United States into the war in December 1941 required a special change in our committee organization. To make the rapid shift to all-out war production, we set up on January 5, 1942, a War Emergency Committee composed of six top executives, mostly from the Policy Committee. This committee met once a week and sometimes more often. From January through April 1942 it ran General Motors. Temporarily the Policy and Administration committees did little more than ratify the War Emergency Committee's work. But in May 1942, as we settled into war production, we abolished the War Emergency Committee. We then transformed the Administration Committee, consisting of all the general executives and group vice presidents, into the War Administration Committee. For the next two to three years the War Administration Committee practically ran the organization. This was because our wartime policy was set and nearly all the corporation's work was war production. Aside from the technical problems of production, our policy decisions were concerned primarily with our relationships with various government departments.
By 1945 the Policy Committee once more had come into its own as we were developing our broad postwar planning. Since the problems of reconversion and postwar business were so enormously important, nearly all major questions, even some concerned with the running of the business, came to the Policy Committee. As a result of this overburdening of the Policy Committee, we began to reconsider the structure and function of the committees of the board.
A single policy committee was an ideal solution to the problem of separating policy from administration. But two factors promised to make it impractical in the new circumstances that were developing. First, it was apparent that the growth in the volume and complexity of the corporation's activities would require a greatly enlarged responsibility both in finance and operations at the board level. Second, it was going to be difficult to obtain the services of experienced outside directors with adequate time to serve on a committee dealing with operations as well as financial policy. Therefore, in 1946, we dissolved the Policy Committee and replaced it with the two traditional committees representing the primary functions of finance and operations, now renamed the Financial Policy Committee and the Operations Policy Committee. In 1958 we restored their old names, Finance Committee and Executive Committee, and in a further refinement, expanded their membership to obtain more overlapping of the individuals on the two committees.
So much for the evolution of the forms of policy making in General Motors. I want to say something now on my philosophy of the role of the board of directors, the supreme body of the corporation. The board, of course, functions as boards of large corporations usually do, in good part through its committees. There are four such committees in General Motors, each of which is composed exclusively of directors, authorized to exercise the powers of the board in the management of the business and affairs of the corporation. These are the Finance, Executive, Bonus and Salary, and Audit committees. I shall comment here only on the two that are the central authority for policy determination—the Finance Committee and the Executive Committee. The majority of the members of the Finance Committee are "outside" directors, that is, directors who are not active in the management of the business. They include former operations officers, like myself, and directors who have never been associated with the corporation except on its board. All of the members of the Executive Committee are directors who are active in management. Both committees deal with problems of policy as distinct from administration. The actions of both committees are subject to revision by the board.
The central responsibility of the Finance Committee is the corporation's purse. This committee has authority under the by-laws to determine the financial policies of the corporation and direct its financial affairs. It has authority over all capital appropriations and over entrance into any new fine of business. It reviews and approves pricing policies and procedures as formulated by the Executive Committee. It has the responsibility to see that the corporation has adequate capital for its needs, and that it earns a satisfactory return on its investment. And this committee makes the dividend recommendation to the board.
The Executive Committee is responsible for operating policy. I have described earlier how policies have been developed in the policy groups, whose function is to channel the work of the operating staffs and other authorities in the corporation. However, the actual adoption of operating policy is the responsibility of the Executive Committee. Appropriation requests for capital expenditures are prepared under the supervision of this committee, for submission to the Finance Committee. In practice the Finance Committee has delegated to the Executive Committee the authority to approve capital expenditures up to $1 million.
The General Motors board as a whole meets regularly once a month and at times on special occasions. From time to time it elects from its members those who are to serve on the committees I have described. It also elects those who are to administer the business —that is, the officers of the corporation—and acts on legal and general corporate matters requiring board action, such as the declaration of dividends or the issuance of additional securities.
Furthermore, to my way of thinking, based on my experience, the General Motors board of directors has still another and, I believe, unique function of great significance. That is what I call an "audit" function. I do not mean audit in the usual financial sense but one that contemplates a continuous review and appraisal of what is going on throughout the enterprise. General Motors is, of course, both large and highly technical in all its ramifications. It is therefore impossible to conceive of every member of the corporation's board of directors having intimate knowledge of and business experience in every one of the technical matters which require top-level consideration or action. Also, those of its members with outside responsibilities would not have the time to examine and decide upon all such matters. The problems are too many, too diversified, and too complex. Nevertheless, although the board may not be equipped to deal with technical operating problems, it can and should be responsible for the end result. The General Motors board deals with the corporation's affairs before the fact through projections of what we hope to accomplish and after the fact through evaluation of reports and other data; and it is prepared to take proper action where needed.
For this purpose the General Motors board receives a comprehensive picture of the enterprise and its operations. Reports from its Executive and Finance committees are presented monthly, and those from other standing committees periodically, covering their actions. A visual presentation on a screen sets forth for examination every material aspect of the corporation's position, financial, statistical, and competitive, and a forecast of the immediate future. This is supported by explanatory comments and also by a summary of the general business outlook. In addition, operating officers make oral reports on the corporation's business in various areas. Also, formal presentations are made to the board regularly by various staff vice presidents and top operating executives covering developments in their fields of responsibility. Board members then ask questions and seek explanations. This audit function, as the General Motors board exercises it, is of the highest value to the enterprise and its shareholders. I cannot conceive of any board of directors being better informed and thus able to act intelligently on all the changing facts and circumstances than is the board of General Motors.