Chapter 4

Product Policy And Its Origins

After the two great expansions of 1908 to 1910 and 1918 to 1920 — perhaps one should say because of them — General Motors was in need not only of a concept of management but equally of a concept of the automobile business. Every enterprise needs a concept of its industry. There is a logical way of doing business in accordance with the facts and circumstances of an industry, if you can figure it out. If there are different concepts among the enterprises involved, these concepts are likely to express competitive forces in their most vigorous and most decisive form.

Such was the case in the automobile industry in 1921. Mr. Ford's concept of a static model at the lowest price in the car market, expressed in the Model T, dominated the big-volume market then as it had for more than a decade. Other concepts were present, such as the one implied in about twenty makes of cars calculated to have low volume and very high price, and those behind the various cars in intermediate price brackets. General Motors then had no clear-cut concept of the business. It is true, as I have shown, that Mr. Durant had established the pattern of variety in product expressed in the seven lines: Chevrolet (in two very different models with different engines, the "490" standard, and a higher priced "FB"), Oakland (predecessor of the Pontiac), Olds, Scripps-Booth, Sheridan, Buick, and Cadillac. Of these, only Buick and Cadillac had clear divisional concepts, Buick with its high quality and fairly high volume in the high middle-price bracket, and Cadillac with its permanent endeavor to present the highest quality at a price consistent with a volume that would make a substantial business; and in fact Cadillac and Buick had long been the industry leaders in their price classes.

Nevertheless, there was then in General Motors no established policy for the car lines as a whole. We had no position in the low price area, Chevrolet at that time being competitive with Ford in neither price nor quality. In early 1921, the Chevrolet was priced about $300 above the Model T (when an adjustment is made for comparable equipment), hence, out of sight from the viewpoint of competition. The fact that we were producers of middle and high price cars, so far as I know, was not a deliberate policy. It just happened that no one had figured out how to compete with the Ford, which had then more than half the total market in units. It should be observed, however, that no producer at that time presented a full line of cars, nor did any other producer present a line as broad as General Motors' line.

The spacing of our product line of ten cars in seven lines in early 1921 reveals its irrationality. Our cars and their prices at that time (priced from the roadster to the sedan, F.O.B. Detroit) were as follows:

Chevrolet "490" (four-cylinder)

$795 — $1375

Chevrolet "FB" (four-cylinder)

$1320 — $2075

Oakland (six-cylinder)

$1395 — $2065

Olds (four-cylinder "FB")

$1445 — $2145

  (six-cylinder)

$ 1450 — $2 145

  (eight-cylinder)

$2100 — $3300

Scripps-Booth (six-cylinder)

$1545 — $2295

Sheridan (four-cylinder "FB")

$1685

Buick (six-cylinder)

$1795 — $3295

Cadillac (eight-cylinder)

$3790 — $5690

Superficially this was an imposing car line. In the previous year, 1920, we had sold 331,118 U.S.-produced passenger cars, of which Chevrolet accounted for 129,525 and Buick for 112,208, the remaining 89,385 being distributed among the other cars in the line. In total output of vehicle units and in dollar sales, General Motors in 1920 was second to the Ford Motor Company. In the United States and Canada we sold 393,075 cars and trucks as compared with Ford's production of 1,074,336. The total industry factory sales were about 2,300,000 cars and trucks. Our net sales totaled $567,320,603 as compared with Ford's total of $644,830,550.

From the inside the picture was not quite so good. Not only were we not competitive with Ford in the low-price field—where the big volume and substantial future growth lay—but in the middle, where we were concentrated with duplication, we did not know what we were trying to do except to sell cars which, in a sense, took volume from each other. Some kind of rational policy was called for. That is, it was necessary to know what one was trying to do, apart from the question of what might be imposed upon one by the consumer, the competition, and a combination of technological and economic conditions in the course of evolution. The lack of a rational policy in the car line can be seen especially in the almost identical duplication in price of the Chevrolet "FB," Oakland, and Olds. Each division, in the absence of a corporation policy, operated independently, making its own price and production policies, which landed some cars in identical price positions without relationship to the interest of the enterprise as a whole.

The presence of Sheridan and Scripps-Booth in the line was, to my mind, without any justification. Neither car had its own motor. The Sheridan, assembled in a single plant in Muncie, Indiana, had the four-cylinder "FB" motor. The Scripps-Booth, made in Detroit, had an Oakland six-cylinder motor, which, I might add, was then no attraction. Both had only modest dealer organizations. Singly or together they added nothing but excess baggage to the General Motors car line. Why then were they there? Scripps-Booth stock had come into the corporation with the acquisition of Chevrolet's assets in 1918. But the car had not developed important volume (about 8000 in 1919 and the same in 1920) and had no reasonable place in General Motors' fine. The presence of the Sheridan is a mystery to me. Mr. Durant caused General Motors to acquire it in 1920, doubtless with something special in mind. I am uncertain what. It did not have a strong organization or demand or recognizable purpose in our fine.

As for Oakland and Olds, not only were they competing at nearly identical prices, but both of them were growing rapidly obsolescent in design. Take the Oakland. At a meeting in my office on February 10, 1921, Mr. Pratt described the problem of this car as follows: "Oakland is spending [its] efforts in trying to improve [its] product. Some days they produce ten cars and some days they produce 50 cars. The situation is this—they turn out a lot of cars that are not what they should be and then they have to fix them up . . . The power plant has been the great trouble . . ." At the same meeting I said: "There is a lot that enters into this problem. At the present time we are getting 35 to 40 H.P. out of the Oakland motor and the crankshaft is too light for this rate of speed [power], and we have had a lot of poor workmanship together with other things, and the Oakland Motor Car Company over a year ago decided that they would put in a new motor. A new motor plant was authorized a year ago but we had to hold it up when we curtailed our development program ... It is really a question of management to get this motor in the Oakland so it will pass inspection and be right . . ."

Oakland had sold its high of 52,124 cars in the boom year, 1919; it sold 34,839 in 1920, and, as it turned out, was to sell only 11,852 cars in 1921.

So much for Oakland.

Olds was only a little better off. It had sold 41,127 vehicles in 1919, 33,949 in 1920, and would sell 18,978 in 1921. It would take a new design just to save it.

Cadillac made 19,790 unit sales in 1920. In 1921 it would sell 11,130, and with the big price deflation that had taken place in the United States it would have to find a new optimum of cost, price, and volume.

The hard fact was that all the cars in the General Motors line, except Buick and Cadillac, were losing money in 1921. The Chevrolet Division that year lost about half of its 1920 volume. Its dollar losses at one point in 1921 reached approximately $1 million a month, and for the year as a whole it lost nearly $5 million. So strongly did I feel about the situation that, when someone proposed making changes in Buick's management, where Harry Bassett was successfully carrying on Walter Chrysler's old policy, I wrote to Mr. du Pont: "It is far better that the rest of General Motors be scrapped than any chances taken with Buick's earning power." If that seems like an overextended argument, consider Buick's position. Its sales dropped only moderately from 115,401 in the 1919 boom to 80,122 in the 1921 slump, and what's more, it continued to produce an income. It was Buick that made any kind of General Motors car line worth talking about.

This situation reflected in good part the poor quality and unreliability of the other cars in the line, as compared with the high quality and reliability of Buick and Cadillac; the effect of these factors was intensified by the stress of the general economic slump. Given the fact of the slump and the unavoidability of a general decline in sales, the relative decline of one division as compared with another was a question of management.

The slump had the effect of showing up all kinds of weaknesses, as slumps usually do. General Motors in 1920 had enjoyed 17 per cent of the U.S. car and truck market; in 1921 we were on our way down to 12 per cent. Ford, on the other hand, was in the course of rising from 45 per cent of the market in units in 1920 to 60 per cent in 1921. In other words, Mr. Ford, whom no one had dared seriously to challenge in the low-price field since 1908, was tightening his grip while we were losing in unit volume as well as in the profitability of most of our divisions. All in all, with no position in the big-volume low-price field and no concept to guide our actions, we were in a bad situation. It was clear that we needed an idea for penetrating the low-price field, and for the deployment of the cars through the line as a whole; and we needed a research-and development policy, a sales policy, and the like, to support whatever we did.

In view of these circumstances, it is hardly surprising that on April 6, 1921, the Executive Committee set up a special committee of the Advisory Staff, made up of experienced automobile men in management, to look into our product policy. This task was to be one of the most significant in the evolution of the corporation. The members of the committee were C. S. Mott, then group executive for car, truck, and parts operations; Norval A. Hawkins, who had been chief of Ford sales before joining General Motors; C. F. Kettering of General Motors research; H. H. Bassett, general manager of Buick; K. W. Zimmerschied, newly appointed general manager of Chevrolet, and myself from the Executive Committee. Since I was in charge of the Advisory Staff when the special committee was formed and the senior member of the committee, its work came under my jurisdiction. About a month later we had completed our study, and on June 9 I presented our recommendations to the Executive Committee, where they were approved and became the adopted policy of the corporation. The recommendations outlined the basic product policy of the corporation, a market strategy, and some first principles; all together they expressed the concept of the business.

The general historical circumstances described above had much to do with the nature of the recommendations. And there were other circumstances in the internal situation in General Motors which influenced what we had to say. In the first place the Executive Committee had instructed the special committee that the corporation intended to enter the low-price field—that is, that it intended to make a competitive challenge to the dominance of Ford. The Executive Committee asked the special committee for advice on this question, and suggested that cars be designed and built in two low price ranges, the lower of which would compete with Ford. They also asked for a discussion at some later time of other price areas. They excluded, however, any changes in the successfully established positions of Buick and Cadillac.

The seeds of a great controversy in the corporation had been sown a few weeks earlier when the Executive Committee, led by Pierre S. du Pont, decided that the corporation should make its entrance into the low-price field with a new and revolutionary kind of car, discussed in detail in the next chapter. This car appeared to have exciting new potentialities, but I had some reservations about our ability to solve all the engineering problems it raised. Indeed a paramount reason for making a product policy explicit, from my point of view, was to bring the automobile men into the discussion. Other immediate circumstances also had a bearing on that discussion, among them an impending shakeout of the divisions forming the old car line, and a need we all felt for ground rules, that is, for first principles that would be acceptable to all in debate. And in order that the new product policy should be considered not just alone but in its essential relations to the over-all objectives of the corporation, we undertook to draw the whole picture and put all the known pieces into it.

Thus the new management took the opportunity that comes rarely in the initial stage of a business, to stand back and review aims and deal with the matters at hand both in particular and with a considerable degree of generalization. It was not going to be easy to get willing agreement on specific and immediate issues. For example, the idea of the revolutionary car was very much entrenched in the Executive Committee, and I wanted to broaden the concept of the product to the concept of the business. I believe it was for this reason that we on the special committee first idealized the problem. We started not with the actual corporation but with a model of a corporation, for which we said we would state policy standards.

Our aim we said was to chart the true best course for the future operations of this model corporation, recognizing that present actual conditions necessitated sailing off the recommended course temporarily until it became practicable to put any adopted policy standard into full effect. To this end we made the assumptions of the business process itself explicit. We presumed that the first purpose in making a capital investment is the establishment of a business that will both pay satisfactory dividends and preserve and increase its capital value. The primary object of the corporation, therefore, we declared was to make money, not just to make motor cars. Positive statements like this have a flavor that has gone out of fashion; but I still think that the ABC's of business have merit for reaching policy conclusions. General Motors had collected a number of profitless motor cars since 1908, and a few were still being produced. The problem was to design a product line that would make money. The future of the corporation and its earning power, we asserted, depended upon its ability to design and produce cars of maximum utility value in quantity at minimum cost. You can't really simultaneously maximize utility and minimize cost, but it was a manner of speaking for what nowadays we refer to more precisely as the optimizing of conflicting functions. To raise the utility and lower the cost of our cars, one of our first conclusions was that the number of models and the duplication that then existed within the corporation should be limited. By such economizing, which has taken various forms through the years, the corporation, I believe, has rendered the service to the public that all must give in the long run to succeed in business.

The prevailing concept in the Executive Committee was to meet Ford more or less head on with a revolutionary car design. Certainly Ford looked unbeatable by any ordinary means. There may also have been opinion among some in the corporation that to enter the low-price precincts on any basis would waste the resources we had gained elsewhere. In any case, we had given to us in our directive a volume product policy, namely, to sell cars in the low-price area, where there were buyers. The real question for the special committee was how to do it. Our answer was to accept the concept of a new car design but to place it in the perspective of a broad product policy.

The product policy we proposed is the one for which General Motors has now long been known. We said first that the corporation should produce a line of cars in each price area, from the lowest price up to one for a strictly high-grade quantity-production car, but we would not get into the fancy-price field with small production; second, that the price steps should not be such as to leave wide gaps in the line, and yet should be great enough to keep their number within reason, so that the greatest advantage of quantity production could be secured; and third, that there should be no duplication by the corporation in the price fields or steps.

These new policies never materialized precisely in this form—for example, we always have had in fact duplication and competition between the divisions—yet essentially the new product policy differentiated the new General Motors from the old, and the new General Motors from the Ford organization of the time and from other car manufacturers. Naturally we thought that this policy was superior to competing policies in the industry and would win over them. Again let me say that companies compete in broad policies as well as in specific products. In the perspective of so many years gone by, the idea of this policy seems pretty simple, like a shoe manufacturer proposing to sell shoes in more than one size. But it certainly did not seem simple at the time, when Ford had more than half the market with two grades (the high-volume, low-priced Model T, and the low-volume, high-priced Lincoln), and Dodge, Willys, Maxwell (Chrysler), Hudson, Studebaker, Nash, and others had substantial positions in the industry and were making or preparing powerful bids with other product policies. For all we knew then, our policy might not have worked best. If the industry had thought it would work, the others would have adopted it at the time. The same policy was available to all, but for a number of years General Motors alone was to pursue it and prove its worthiness.

In drawing the whole picture of the policy we integrated into it other possible valid criteria—possible, that is, in the sense that they might be used as individual criteria. For example, the policy we said was valid if our cars were at least equal in design to the best of our competitors in a grade, so that it was not necessary to lead in design or run the risk of untried experiments. Certainly I preferred this concept to an irrevocable commitment to replace the then standard Chevrolet with a revolutionary car. Such a car would be fine if it worked, but I preferred to rest first on a broad business strategy; and, as the policy was adopted, it is evident that Pierre S. du Pont also subscribed to the general concept at least in principle. We of the special committee of course acknowledged that General Motors automobiles could reasonably be expected to be made pre-eminent in all grades. We argued that the breadth of the car line would give us this capability, though of course our then 12 per cent of the market gave us no particular advantage in this respect. We figured that in product line and in quality standards we were, or could become, as good as anybody in whatever they were good at and better at what they were not good at.

The same idea held for production, where of course we had to have Ford in mind. We pointed out that it was not essential that, for any particular car, production be more efficient than that of its best competitor, or for that matter that the advertising, selling, and servicing methods in any particular product be better than its competitors. The fundamental conception of the advantage to be secured in this business, we said, was expressed by co-operation and co-ordination of our various policies and divisions. It was natural to expect that co-ordinated operation of our plants should result in greater efficiency than was the case when the divisions were working at cross purposes, and the same could be said for engineering and other functions. By raising our own standards in this way, we could reasonably expect to equal the best, in any respect, that our competition in any grade had to offer, and to exceed it in some respects. Under a plan of co-operation, the teamwork could thus attain increased volume at reduced cost. And so, at a time when we sold only a small proportion of all U.S. cars and trucks, we nonetheless believed that, with a federated policy in a business of wide scope, General Motors cars in the future would be made pre-eminent in engineering in all grades, and could similarly achieve unquestioned leadership in production, advertising, selling, and other functions.

Having set forth these concepts, we then approved the resolution of the Executive Committee, which had been passed on to us to study, to the effect that a car should be designed and built to sell for not more than $600; and that another car should be designed and built to sell for not more than $900. The special committee further recommended four additional models, each to be kept strictly within the price range specified. It also recommended that the policy of the corporation should be to produce and market only six standard models, and that as soon as practicable the following grades should constitute the entire line of cars.

(a) $450 — $600

(b) $600 $900

(c) $900 — $1200

(d) $1200 — $1700

(e) $1700 — $2500

(f) $2500 — $3500

This brand-new, hypothetical price structure, when compared with General Motors' actual price brackets listed earlier in this chapter, will be seen to reduce the car lines from seven to six (or ten to six cars if the Chevrolet "FB" and the Olds "6" and "8" are considered separate cars, as they pretty much were) . It opened up one new classification on the low end of the list where we had none. And where we had eight cars in the middle, above the lowest price and below the highest, we now had only four classifications. The new set of price classes meant that the General Motors car line should be integral, that each car in the line should properly be conceived in its relationship to the fine as a whole.

Having thus separated out a set of related price classes, we set forth an intricate strategy which can be summarized as follows : We proposed in general that General Motors should place its cars at the top of each price range and make them of such a quality that they would attract sales from below that price, selling to those customers who might be willing to pay a little more for the additional quality, and attract sales also from above that price, selling to those customers who would see the price advantage in a car of close to the quality of higher-priced competition. This amounted to quality competition against cars below a given price tag, and price competition against cars above that price tag. Of course, a competitor could respond in kind, but where we had little volume we could thereby chip away an increase from above and below, and where we had volume it was up to us to maintain it. Unless the number of models was limited, we said, and unless it were planned that each model should cover its own grade and also overlap into the grades above and below its price, a large volume could not be secured for each car. This large volume, we observed, was necessary to gain the advantages of quantity production, counted on as a most important factor in earning a position of pre-eminence in all the grades.

The product policy also took up specifically the problem of penetrating the low-price field, a special case of the general concept. The field for cars of the first grade, we noted, was then practically monopolized by the Ford, and we were trying to invade it. We recommended that General Motors should not attempt to build and sell a car of the precise Ford level, as the Ford sold at the lowest price within the first grade. Instead the corporation should market a car much better than the Ford, with a view to selling it at or near the top price in the first grade. We did not propose to compete head on with the Ford grade, but to produce a car that would be superior to the Ford, yet so near the Ford price that demand would be drawn from the Ford grade and lifted to the slightly higher price in preference to Ford's then utility design.

We observed that the converse of this effect would be produced when the new General Motors low-price car, selling at the top of the lowest price range in the table ($600) , was compared with cars of competitors in the next higher grade, selling at $750 or slightly below. Even though the new General Motors low-price car might not have quite the quality of competing cars selling at approximately $750, it should be so near the grade of competing cars selling at the middle of the second price range that prospective buyers would prefer to save $150 and to yield the comparatively slight preference they might have for the competing car if the prices were nearly equal.

The specific competitive aim of the new product policy at that time is evident in the lowest price classification set up for the model corporation. In this classification General Motors did not have a car to offer in April 1921. The only car available in this area was the Ford. Furthermore, in the second-lowest classification only Chevrolet and Willys-Overland offered a car. Thus the policy was directed at supplying a car to be put into competition solely with the chief product of the then leading car manufacturer in the United States and the world.

As it happened, actual car prices in all categories fell rapidly in 1921, collapsing the whole price structure that existed in the market in April, when we formulated the policy. But, while actual levels became different, the aim of the policy remained the same, namely to move into the relatively lower price areas. Indeed, by September 1921 the price of the Chevrolet "490" touring car was down from $820 (January 1921 price) to $525, while the Ford Model T was down from $440 to $355. But the Ford price did not include demountable rims and self-starter, as Chevrolet did, so that on a comparable-equipment basis there was in September only about $90 difference between Ford and Chevrolet. This difference was still relatively considerable, but the Chevrolet was beginning to move in the direction indicated in the product policy. Thus, this policy, by opening up new low-price areas, foreshadowed the challenge that General Motors was actually to make to the dominance of Ford.

The placement of actual products in these price ranges was made by the committee, from bottom to top as follows: Chevrolet, Oakland, a new Buick 4, Buick 6, Olds, and Cadillac. In 1921 we sold Sheridan and took steps to dissolve Scripps-Booth, and in 1922 we dropped the Chevrolet "FB." Only the price-class positions of Chevrolet and Cadillac, as it turned out, were to be permanent.

The core of the product policy lies in its concept of mass-producing a full line of cars graded upward in quality and price. This principle supplied the first element in differentiating the General Motors concept of the market from that of the old, Ford Model T concept. Concretely, the General Motors concept provided the strategy for putting Chevrolet into competition with the Model T. Without this policy of ours, Mr. Ford would not have had any competition in his chosen field at that time.

In 1921 Ford had about 60 per cent of the total car and truck market in units, and Chevrolet had about 4 per cent. With Ford in almost complete possession of the low-price field, it would have been suicidal to compete with him head on. No conceivable amount of capital short of the United States Treasury could have sustained the losses required to take volume away from him at his own game. The strategy we devised was to take a bite from the top of his position, conceived as a price class, and in this way build up Chevrolet volume on a profitable basis. In later years, as the consumer upgraded his preference, the new General Motors policy was to become critically attuned to the course of American history.

But although this concept gave us direction, it was, as it turned out, formulated before its time. It took a number of events in the automobile market to give full substance to its principles. Also, a number of events in General Motors, particularly with respect to research and development—that is, the revolutionary car-were to hold up the application of the concept and keep General Motors in suspense for the next couple of years.

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