Memo to Wagoner from Sloan

Dear Rick,

Alfred Sloan here. Congratulations. I think Congress will respond positively to the plan you presented today, in part because they have to, but mostly because you present a strong case that General Motors would be a good investment. Furthermore, you’ve done a good job of moving the company closer to a competitive footing. I believe that if this crisis had occurred two years hence, with the Volt in the marketplace, the company could have weathered the storm.

You might have expected me to be appalled at the entire notion of seeking financial support from the government. But I know something of playing the hand you’ve been dealt. At the edge of bankruptcy in 1921, we were fortunate that the DuPont company recognized GM’s enormous potential. When sales collapsed by 71% in the Depression, we again had to act fast and drastically to save the situation.

I must express my concern, however, that you and the Board of Directors believe that this four-year plan – good as it is in fulfilling the assignment given by Congress – equates with a strategy, and as such represents a policy that places the company in a position to thrive in the long term. It is not that, and I frankly don’t see in it a vision of how General Motors will, upon regaining financial viability, distinguish itself in the automobile market and resume a leading role in the industry.

Cutting brands, headcount, corporate travel and your own salary are painful gestures that will indeed reign in spending. A lean structure with good products is a worthwhile objective in the emergency, but it doesn’t suffice as competitive strategy. Beyond your plan, General Motors needs a concept of its industry, an essential principle of enterprise that I define in my book, My Years with General Motors.

A concept of industry is simply a universal market principle that imbues your product with essential qualities that are valuable to buyers. Toyota’s concept of its industry is to produce vehicles which are thoroughly reliable; Honda’s is to produce vehicles engineered for efficiency. Every one of the vehicles they produce expresses their concept, which serves as a foundation upon which competitive features attract buyers based on individual desires. These are not new ideas, and in fact derive directly from the GM concept of its industry that which effectively served the company and our customers for five decades, and which, in turn, derived from the Ford concept, which dominated the industry in the 1910s. Note also that a concept of industry can be based on any salient product quality; in Saturn’s original form, its concept was agreeability.

In My Years, I describe how in the 1920s we conceived General Motors’ concept of its industry, and then activated it to overcome Ford’s commanding 60% share of the market. We began by reviewing our existing strategic assets, the most significant being: Fairly large volume spread across a variety of established brands; dedication to technical innovation among some of the brands; and our innovative organizational idea of coordinated decentralization. We perceived the customer’s expectations to be for improved products and for choice among products. I don’t think our collection of assets was unique, nor was our notion of customer expectations. It was our arrangement and activation of them that yielded a distinct GM concept of its industry, and which was quickly vindicated.

The GM concept of its industry we arrived at was to meld the advantages of volume and variety to offer a continually improving range of products. It superseded Ford’s concept of leveraging volume to continuously lower purchase price on a single, unchanging product. Whereas the Model T concept had since 1908 aligned with the nation’s technical priority of motorization, the GM concept responded to an evolution of that priority – by the 1920s, the nation wanted modernization. GM soon displaced Ford as the top producer, and became the world’s largest industrial enterprise. The principle of constant improvement remains vital, but GM’s failure to consistently adhere to and develop it stands as the essential cause of the current emergency

General Motors’ needs a new concept of its industry to be more than just viable beyond 2012. To thrive for a second century during which the idea of personal transportation will be transformed but no less in demand, GM must present itself as a vehicle for achieving not just America’s, but the entire world’s 21st Century cultural priorities as they relate to transportation.

What are the assets that GM can apply today? Let’s not allow nostalgia to cloud the issue; for example, multiple brands are no longer an asset in themselves (read why I wouldn’t hesitate to dispose of Pontiac). To my mind, GM’s current assets are an excellent technical infrastructure on the verge of a major breakthrough, several still-iconic brands, and a flexible manufacturing system. These, I believe, are adequate to underpin a concept of industry that might be expressed as “freedom from carbon,” and which will be manifested first in The Chevrolet Volt when it launches in 2010.

As you can see, conceiving a concept of industry isn’t all that complicated, but activating it requires a coherent policy of management, which I believe your GM does not have. This is a primary failure of governance, and achieving such will have to be the first order of business by the new Board of Directors; I strongly urge the entire current Board resign as soon as Congress authorizes the emergency funding.

To guide the vital task of developing a new organizational policy that can effectuate GM’s new concept of its industry, management must isolate some of the DNA that in the past made the company great. I’m not suggesting that you revive any specific historical policy such as the coordinated decentralization principles I worked under, but to reinvigorate the general principles of long-range focus, fact-seeking, and flexibility that were once the hallmarks of General Motors management.

The point is that, viability is still only a short-term objective. GM needs to define itself to thrive in its second century. If you have the opportunity to continue as CEO of General Motors, I hope that you will consider these suggestions.

Warm regards,
Alfred P. Sloan, Jr.