Chapter 23
It is not easy to say why one management is successful and another is not. The causes of success or failure are deep and complex, and chance plays a part. Experience has convinced me, however, that for those who are responsible for a business, two important factors are motivation and opportunity. The former is supplied in good part by incentive compensation, the latter by decentralization.
But the matter does not end there. It has been a thesis of this book that good management rests on a reconciliation of centralization and decentralization, or "decentralization with co-ordinated control."
Each of the conflicting elements brought together in this concept has its unique results in the operation of a business. From decentralization we get initiative, responsibility, development of personnel, decisions close to the facts, flexibility—in short, all the qualities necessary for an organization to adapt to new conditions. From coordination we get efficiencies and economies. It must be apparent that co-ordinated decentralization is not an easy concept to apply. There is no hard and fast rule for sorting out the various responsibilities and the best way to assign them. The balance which is struck between corporate and divisional responsibility varies according to what is being decided, the circumstances of the time, past experience, and the temperaments and skills of the executives involved.
The concept of co-ordinated decentralization evolved gradually at General Motors as we responded to tangible problems of management. As I have shown, at the time its development began, some four decades ago, it was clearly advisable to give each division a strong management which would be primarily responsible for the conduct of its business. But our experience in 1920-21 also demonstrated the need for a greater measure of control over the divisions than we had attained. Without adequate control from the central office, the divisions got out of hand, and failed to follow the policies set by corporation management, to the great detriment of the corporation. Meanwhile, the corporation management was in no position to set the best policies, since it was without appropriate and timely data from the divisions. A steady flow of operating data, for which procedures were later set up, finally made real co-ordination possible.
That still left us with the problem of finding the right combination of freedom for the divisions and control over them. The combination could not be set once and for all, of course. It varies with changing circumstances, and the responsibility for determining administrative organization is a continuing one. Thus, at one time, responsibility for the styling of the cars and other products was vested in the divisions. Since then it has been found desirable to place the responsibility for developing the general style characteristics of all our major products in the Styling Staff. This was suggested partly by the physical economies to be gained by coordinated styling. In addition, we learned from experience that work of higher quality could be obtained by utilizing, corporation-wide, the highly developed talents of the specialists. The adoption of any particular style is now a joint responsibility of the division concerned, the Styling Staff, and the central management.
Such continuing adjustments in the relative responsibility assumed by the division management and central management are permitted by the decentralized organization of General Motors whenever experience or changed circumstances present opportunities for improved or more economical performance. In my time as chief executive officer only a modest degree of supervision was actually exercised by general officers over division managers. I believe that basically the same is the case today, although changed circumstances and new and more complex problems have resulted in a somewhat closer degree of co-ordination than existed in my time.
In General Motors we do not follow the textbook definition of line and staff. Our distinction is between the central office (which includes staff) and the divisions. Broadly speaking, the staff officers —being primarily specialists—do not have line authority, yet in certain matters of established policy, they may communicate the application of such policy directly to a division.
The responsibility of the central management is to determine which decisions can be made more effectively and efficiently by the central office and which by the divisions. In order that such determinations be informed and knowledgeable, the central management depends heavily on the staff officers. Indeed, many of the important decisions of central management are first formulated in collaboration with the staff in the policy groups, and then adopted, after discussion, by the governing committees. Consequently, the staff is the real source of many decisions that are formally adopted by the committees. For example, the basic decision to participate in the manufacture of diesel locomotives was largely based on product research by the staff.
Some of the general staff activities, such as legal work, have no counterparts in the divisions. Other general staff activities correspond to activities in each of the divisions, among them engineering, manufacturing, and distribution activities. But there are some important distinctions between these staff and divisional activities: the general staffs are concerned with longer-range problems, and with problems of broader application, than their opposite numbers in the divisions. The corresponding divisional staffs are engaged largely in the application of policies and programs already developed. There have been exceptions to this, however, as when a project has been approved for development in a division. An example is the development of the Corvair, which is referred to in the next chapter.
The economies that flow from central-office activities are considerable and the cost comes on the average to less than 1 per cent of the corporation's net sales. Through the general staff the divisions get their services cheaper than if they provided them or bought them on the outside, and they get better services. The latter feature is, in my opinion, by far the more important. The staff contributions in the fields of styling, finance, technical research, advanced engineering, personnel and labor relations, legal affairs, manufacturing, and distribution are outstanding and certainly worth a large multiple of their cost.
Several kinds of economies are made possible by centralized staff operations. Among the most important are the economies that derive from the co-ordination of the divisions. These arise through the sharing of ideas and developments among general officers and divisional personnel. The divisions contribute ideas and techniques both to each other and to central management. Much of our managerial and engineering talent, and many of our general officers, have come out of the divisions. The development of high-compression engines and automatic transmissions, for example, was the work of both staff and divisions. Our progress in aviation engines and in diesel engines came out of the development work of both.
Under the decentralized operation of the divisions, problems of like kind are met in different ways by different division managers, subject to the advice of the central office of the corporation. Out of this process comes a winnowing of techniques and ideas, and a development of judgments and skills. The quality of General Motors' management as a whole derives in part from this shared experience with common goals and from divisional rivalry within the framework of these common goals.
There are also the economies of specialization possible under our decentralized system. It is an axiom of economics that costs are reduced and trade created by specialization and the division of labor. Applied to General Motors, this has meant that our internal supplying divisions which specialize in the production of components must be fully competitive in price, quality, and service; if they are not, the purchasing divisions are free to buy from outside sources. Even when we have decided to make an item rather than to buy it, and have established production of the item, it is by no means a closed decision that we will stay in that line of production. We try, wherever possible, to test our internal supplying divisions against external competitors and to make a continuing judgment on whether it is better to make or to buy.
The popular misconception that it always pays to make an item yourself rather than to buy it is based on the assumption of a cost saving. The argument runs that by making instead of buying, you can save the extra cost of your supplier's profit. But the fact is that if the supplier's profit is a normal, competitive one, you must expect to make it on your own investment, or else there is no net saving. General Motors does not engage in the production of raw materials, as do some of its competitors, and we purchase a large proportion of the items that go into our end products, because there is no reason to believe that by producing them we could obtain better products or service, or a lower price.
Of the total cost of sales of our products, purchases of parts, materials, and services from outside sources account for 55 to 60 per cent.
The role of the division managers is an important one in our continuing efforts to maintain both efficiency and adaptability. These managers make almost all of the divisional operating decisions, subject, however, to some important qualifications. Their decisions must be consistent with the corporation's general policies; the results of the division's operations must be reported to the central management; and the division officers must "sell" central management on any substantial changes in operating policies and be open to suggestions from the general officers.
The practice of selling major proposals is an important feature of General Motors' management. Any proposal must be sold to central management and if it affects other divisions it must be sold to them as well. Sound management also requires that the central office should in most cases sell its proposals to the divisions, which it does through the policy groups and group executives. The selling approach provides an important extra safeguard in General Motors against ill-considered decisions, over and above the safeguards normally implied in the responsibility of corporate officers to shareholders. It assures that any basic decision is made only after thorough consideration by all parties concerned.
Our decentralized organization and our tradition of selling ideas, rather than simply giving orders, impose the need upon all levels of management to make a good case for what they propose. The manager who would like to operate on a hunch will usually find it hard to sell his ideas to others on this basis. But, in general, whatever sacrifice might be entailed in ruling out a possibly brilliant hunch is compensated for by the better-than-average results which can be expected from a policy that can be strongly defended against well-informed and sympathetic criticism. In short, General Motors is not the appropriate organization for purely intuitive executives, but it provides a favorable environment for capable and rational men. In some organizations, in order to tap the potentialities of a genius, it is necessary to build around him and tailor the organization to his temperament. General Motors on the whole is not such an organization although Mr. Kettering was an obvious exception.
Our management policy decisions are arrived at by discussions in the governing committees and policy groups. These were not the creation of a single inspired moment, but the result of a long process of development in dealing with a fundamental problem of management, that of placing responsibility for policy in the hands of those best able both to make the decisions and to assume the responsibility. To a certain extent this involves a contradiction. On the one hand, those best able to assume responsibility must have broad business perspective oriented toward the interest of the shareholder. On the other hand, those best qualified to make specific decisions must be close to the actual operation of the business. We have attempted to resolve this contradiction principally by dividing the policy-making responsibilities within central management between the Finance Committee and the Executive Committee, as I have shown.
Another source of policy recommendation is the Administration Committee, which is charged with the responsibility of making recommendations to the president with respect to the manufacturing and selling activities of the corporation, and on any other matters affecting the business and affairs of the corporation that may be referred to it by the president or the Executive Committee. The president is the chairman of the committee and, at the present time, its membership includes the members of the Executive Committee, two group executives who are not members of the Executive Committee, the general managers of the car and truck divisions, the general manager of Fisher Body Division, and the general manager of the Overseas Operations Division.
Under this separation of responsibility, policy development and recommendation are mainly the duty of the groups in central management made up of the men closest to operations. They work very closely, of course, with men from the divisions, and divisional men are on some policy groups. The Executive Committee, which views the corporation as a whole and at the same time is closely familiar with operating problems, has a somewhat judicial function. It makes the fundamental decisions on the basis of the work of the policy groups and the Administration Committee, plus the committee members' close knowledge of operating conditions. The Finance Committee, which includes non-employee directors in its membership, exercises its responsibility and authority in the area of broader corporate policy.
Much of my life in General Motors was devoted to the development, organization, and periodic reorganization of these governing groups in central management. This was required because of the paramount importance, in an organization like General Motors, of providing the right framework for decisions. There is a natural tendency to erode that framework unless it is consciously maintained. Group decisions do not always come easily. There is a strong temptation for the leading officers to make decisions themselves without the sometimes onerous process of discussion, which involves selling your ideas to others. The group will not always make a better decision than any particular member would make; there is even the possibility of some averaging down. But in General Motors I think the record shows that we have averaged up. Essentially this means that, through our form of organization, we have been able to adapt to the great changes that have taken place in the automobile market in each of the decades since 1920.