General Motors (GM) - Business in United States of America

Identification: Dominant American manufacturer of automobiles and trucks and a pioneer in many aspects of business techniques
Date: Founded on September 16, 1908
Significance: Throughout the twentieth century, General Motors was the epitome of American big business. As the world’s largest automobile manufacturer, General Motors was looked to as a gauge of the health of both the American economy and the automotive industry in general. The company’s leaders were viewed as spokespeople for that industry as a whole.
General Motors (GM) was established by William Crapo Durant in 1908 to manufacture Buick automobiles. During its first year in operation, the company sold over twenty-five thousand vehicles. In 1910, Durant merged several other companies into GM, including Oldsmobile, Pontiac, Cadillac, and AC Spark Plugs. Sales increased by 60 percent in 1910, but Durant was ousted by bankers because of the company’s heavy debt load. The company was incorporated as General Motors Corporation in 1916 when it merged with Chevrolet—a company that Durant had founded after his earlier ouster. Durant regained control.
Fisher Body was acquired in 1919, the same year that General Motors Acceptance Corporation (GMAC) was established to finance sales of cars. By 1921, General Motors accounted for 12 percent of the U.S. automotive market, thanks in part to a product scheme that aimed five main car lines at five different groups of buyers. In 1925, the company went international with its acquisition of Vauxhall Motors of Great Britain. Another international acquisition came in 1929, when Germany’s Adam Opel was acquired. Plants were opened in China and India before 1930. In 1914, the DuPont company began purchasing GM shares, because the company’s management saw a market for DuPont’s products. By 1920, DuPont owned one-third of GM’s stock. Eventually, the relationship attracted the attention of the Federal Trade Commission, which in 1949 sued DuPont and forced an end to the affiliation.

The Sloan Years

In 1923, Alfred P. Sloan became GM’s president and chief executive officer—a position he was to hold until 1956. Much of the company’s growth occurred during the Sloan era. Sloan, however, did not act alone; credit can also be accorded to the company’s chief financial officer during this period, Donaldson Brown, who developed and applied his return-on-investment formula to every department within General Motors. A knowledge of the rate of return on investment was particularly important at General Motors, because the company was among the first to use discounted cash- flow analysis to evaluate investment alternatives. Brown’s return-on-investment reporting compared all of GM’s operations with alternative capital investments. The result was a system that significantly decreased the cost of managing complex firms.
Brown also developed the concept of flexible budgeting, which in addition to being a financial tool was a way of communicating top management’s expectations. The entire concept of business budgeting was unknown before the 1920’s. Brown introduced a budgeting system at GM shortly after his move from DuPont in 1921. Year in and year out, despite radical fluctuations in the demand for automobiles, General Motors recorded a positive return on investment. During the Great Depression of the 1930’s, GM was one of the few corporations not to register a loss.
One cause of GM’s success in dealing with the problem of fluctuating demand was its accounting system. Before 1921, inventories had gotten out of control at many divisions—the result being heavy borrowing to finance unneeded inventories. Brown’s 1924 requirement that dealers report inventories every ten days was a step toward eliminating inaccurate forecasts of future sales. That policy was a lasting one, eventually adopted by all automobile manufacturers. Using these periodic reports (initially from twenty thousand dealers), management was able to base production schedules and material commitments on the trend of retail sales. The result was that GM was able to use a centralized budgeting system to control decentralized operations. Every division made its own production decisions, but the budget and accounting system were policy tools that guaranteed goal congruence throughout the decentralized structure.
A violent strike at the Flint, Michigan, plant in 1937 led to General Motors workers gaining collective bargaining representation by the United Auto Workers union. By the start of World War II, General Motors had 41 percent of the U.S. automotive market, but civilian auto production dropped to zero in 1942, when factories turned their efforts to the war. Following the war, GM’s market quickly grew; the newly designed cars of the late 1940’s and early 1950’s led the company to a 54 percent market share in 1954.

U.S. Market Share of Top Seven Automakers (%)

The Post-Sloan Era

In 1960, General Motors introduced its first small car—the Chevrolet Corvair—in response to similar offerings from European manufacturers. The Corvair was later criticized by Ralph Nader in his book Unsafe at Any Speed: The Designed-In Dangers of the American Automobile, which led to a congressional investigation of automobile safety.
During the 1970’s, GM was the largest private employer in the country, but sales declined during the decade because of a recession, an Arab oil embargo that led to higher gas prices, and competitive gains by Japanese automakers. During the 1980’s, General Motors overhauled its North American operations, acquired Electronic Data Systems Corporation (EDS) from H. Ross Perot, formed a subsidiary company called Saturn, and bought Hughes Aircraft. EDS was subsequently spun off as a separate company in 1996, as was Delphi Automotive Systems, a parts-manufacturing subsidiary, in 1999. In 1997, Hughes Electronics was sold.
In 2002, General Motors acquired a controlling interest in South Korea’s bankrupt Daewoo Motors. The GM product line was reduced in 2004, when the last Oldsmobile came off the line. The company suffered a loss of $38.7 billion in 2007, and sales declined even more in 2008. In October, 2008, General Motors joined Chrysler and Ford in appealing to the federal government for financial aid, as it and Chrysler faced possible bankruptcies. OnDecember19, President George W. Bush announced that $13.4 billion in emergency loans would be made available to keep the automakers afloat. However, the automakers were given the loans on condition that they make major concessions and organizational changes by March 31, 2009, to demonstrate that they could return to profitability. On February 18, 2009, General Motors and Chrysler asked for an additional $14 billion in aid.