November 24, 2017

 North American car industry, Billy Durant founded General Motors. He shaped the NA
industry. He did not have a smooth progress in doing that but a lot of the basic ideas of
the car industry were initiated by Durant but it took other people to make them work
properly.
o Durant was a business man in the horse drawn carriage industry.
o He was given a ride in a gasoline car and it caught his attention. This was well
before Henry Ford’s model T. We are talking primitive versions of a car.
o When he was offered a chance to run Buick, he took the opportunity. Buick had
left behind a car and his name. Durant was brought in to run Buick and was
successful. But he did not stop there.
o Durant recognized early on that the automobile was a consumer product
 Ford thought cars were very utilitarian – an appliance of some sort or
other. Once he had established what he thought was the ideal appliance in
the Model T, there was no need to do anything else in the automotive
sector.
 Ford created the ideal mass market car and then stopped.
o Durant recognized that consumers weren’t just buying cars or appliances but
consumers were attracted to new features which came at an accelerating pace in
this period. New ideas were coming along very rapidly.
 He recognized consumers were attracted to these new ideas and even
though a consumer bought one of your cars last time doesn’t mean they
are going to buy one this time around as there was no sort of brand loyalty.
They would look at all of the cars.
 Getting into the early 1920’s, you are in the roaring 20’s with everyone’s income rising.
Ford showed that if you optimized the production process, you could make the car
accessible to the average working class guy. You could not assume that you had a lock on
any sort of consumer. Durant realized that if your car company was going to survive,
which a lot of them didn’t, a lot of them had to exit and many entered because a small
scale company came up with a new feature. You had a small sales basis. It did not take
losing many customers for the outfit to go bust and Durant realized that if you were going
to survive, you need a portfolio of cars so when their taste changes or income changes,
you have something there to buy. Durant realized you could not get by with just one car.
o Durant implemented this notion my creating GM which was basically a
conglomerate. He went out and bought other companies, starting with Buick. He
looked to see what was out there and bought any car company that had a product
that had something consumers were GOING to want, not just something they
would want now. He was anticipating change. Sometimes it worked, sometimes it
didn’t. However, he didn’t know when to stop buying companies and GM would
up being a hodge-podge as what he bought depended on what caught Durant’s
fancy in an engineering advance. He wasn’t waiting to see if the advance paid off
– he would buy the entire company before. He would up with a bunch of
companies with no sort of coordination, it was not a multidivisional firm. The
 result was GM finances got really dicey as there was no one who told Durant to
stop as he was in complete control. However the board did realize that GM was in
an unstable financial state and it would not take much to put GM in bankruptcy.
The board demotes Durant and they bring in his bankers who had been lending
him all of the money that had been allowing him to buy all of the companies.
Durant wasn’t actually fired, he was demoted and then he left in around 1919 or
so.
o He goes off and starts another car company with Louis Chevrolet who was a well-
known race car driver. Durant is running Chevrolet as a direct competitor with
Ford and the Model T. It quickly becomes the second largest company in the US
as no one else is penetrating the mass market like them which is another reason
Ford did not want to change the Model T.
o Until Durant came along, not changing worked for Ford. Chevrolet was better
made and more appealing to the mass market even though it cost a little more that
Model T. Durant takes some of the retained earnings and invests in GM
eventually becoming the majority shareholder at GM. For a brief period, GM was
a division of Chevrolet so he was back running GM.
o He went back and the bankers were still there and he went back to run it the way
he had before which means that everything was controlled from the top by Durant
and there was no central overall organization to GM as each of the car companies
that Durant bought while they were technically under GM, the owners of the car
places that were there prior to Durant buying them kept running as an independent
business. The overall goal was missing; they were not after increasing profits for
GM.
 For example, if one of the divisions had an excess supply of a part and one
division needs that part, the guys in the surplus division would simply
hang onto that part as they wanted to make sure they had that part when
they needed it for future production runs. They were still behaving this
way not recognizing that there could be more money made if they were to
share products. This kind of behaviour was hurting GM overall and there
was no attempt to run GM as a unified corporation. GM was the first large
scale multidivisional firm so there wasn’t anything guiding the way as an
example.
 The way Durant was running it was not financially sound and GM shares
started to get a little shaky. He used his own shares in GM to buy more
GM shares on the stock market to boost them up – similar to John Law.
He did this big time until the board discovered what he was doing. He was
borrowing money to prop up the price of shares with the share price still
dropping. The collateral he used to borrow the money was his shares in
GM. The board realized that if Durant had to sell his shares to repay the
money, the company would collapse. The board bought Durant out and
fired him. As they had bought his shares from him, he left a very wealthy
man and started another car company but his ‘touch’ had failed him so he
was unsuccessful. He then tried to start chain of bowling alleys and then a
manager of a supermarket to later die in poverty. A lot of his former
 associates at GM slipped him money on the side so he did not die in
absolute poverty.
 Walter Chrysler was one of the people who slipped him money.
 They promote a VP who had been running one of the divisions in GM.
Sloan came in and saved GM. He took Durant’s idea and turned it into a
success. Alfred Sloan was a good business man although we aren’t sure if
he had entrepreneurial skills whereas Durant had entrepreneurial skills but
he was not a business man.
 Business skills can be taught whereas entrepreneurial skills are in
limited supply – they are not the same thing.
 There are many examples of entrepreneurs not having business skills like Steve Jobs who
had a brilliant idea but could not run the company. Apple was on the verge of bankruptcy
when Jobs was fired and the only thing that saved it was a loan from Bill Gates.
o Jobs went off and started Next Computer. It sold for about $10,000. He thought it
was revolutionary. He did not sell many machines. He and his engineers were
never able to bring it to fruition even though he thought it was the next big thing.
o Jobs was a lousy businessman because he thought that everyone should evaluate
his technology the same way he saw it. In the early Apple Mac, the graphics were
amazing for the time period. It was the only machine where you could do other
things other than draw straight lines. You needed a way to print things which is
where the post-grip printer comes into play and cost as least as much as the
machine, doubling the cost. Jobs reckoned that everyone should be willing to buy
the apple machine and the printer because technologically it was bloody
marvelous but most people wanted it for word processing – type writing and using
a spreadsheet. There was no way people were going to pay that much for an apple
machine when the IBM machine could do what they wanted for much cheaper
even though it didn’t have the same graphics. Jobs did not recognize that the
amount someone was willing to pay is equal to the amount that they deem they
would get out of it (utility).
o The next machine was a cube that was supposed to be revolutionary. Jobs and the
engineers did not manage to build the insides of the machine to live up to what
Jobs thought it could do. Not many people bought it so Next Machine goes bust.
o He goes on to work with Pixar where he learned to be a businessman to go along
with his entrepreneurial skills. After he comes back to Apple after Pixar, you get
the iPhone, iPad, iPod. He didn’t think it was going to be the next big thing but he
adapted. When he came back he was a rare combination of being an entrepreneur
and a businessman – something Durant never came to be.
 Sloan wrote an autobiography in his later years “My Years at General Motors” which
became the definitive business biography. This book came out after Sloan retired and the
board of GM blocked publication for a while thinking the US anti-trust vision would be
after GM.
o He talks about the whole process of saving GM. It was obvious that it needed to
be say as there was no rationality as to how the business was being run. There was
no accounting for the firm.
o Sloan was the guy that invented management practices for a multidivisional firm
with accounting practices.
o Sloan thought in terms of a ladder of incomes so they had a car for each level. The
idea was while these cars used a lot of the same parts, they weren’t in direct
competition with each other. They thought, first car to be bought was a Chevrolet,
and when he has a higher income he would move up to a Pontiac. He figured that
as they moved up in life, there would be a car there for them.
 Division managers were effectively running their own division but there
was oversight from the top so their aim was to maximize GM’s overall
profitability. Divisions could not go out of their way to harm each other.
There was independence at the divisional level but there was now
oversight from the top saying you are all part of GM.
o Sloan is either credited or blamed with annual model changes. Durant and Sloan
recognized that the car was a consumer product, unlike Ford who refused to
change model T. Ford started to lose its dominant position in the car industry. GM
was a little more expensive but had more features that were engineering advances.
Ford lost its place because he did not recognize that the car was a consumer
product and almost drove them into bankruptcy. He was forced to add the Model
A – the second version (1927). It was very well built but there were problems as it
could not be built on the same assembly lines as the Model T which means he had
to re-tool all of his factories. It wasn’t a matter of shifting them over, he had to
shut down production of his factories for a few months – some blame him for the
minor recession. Just like the model T, once the model A was built, he built it and
stopped whereas GM was continuously improving.
o Consumers wanted new features. Sloan realized that if you did not keep up with
what consumers wanted, they would shift. Think about Blackberry – they had a
lock on the market but they too slow to change once Apple came in. It was the
same as cars in the 1920’s. If you weren’t producing what consumers wanted,
they would shift. Therefore, you had to keep improving your cars. Cars were
being sold through dealers who would buy a number and then resell them. So
dealers needed a sense of how many cars they should have in inventory each year
which means they needed to know when the model changes were going to come
in as if a new model came in two months after they purchased a bunch of cars
they would take a loss on the old cars as people would buy the new cars. Dealers
were running into competition with themselves as the used car dealerships were
coming into existence. A guy who was thinking about moving up could buy a new
model or an upscale model on the used car model. Inventory really mattered –
how many cars should you have? You don’t want to carry too much or too little as
you are going to lose money either way. Sloan’s resolution to this problem was to
bring out the new changes at the beginning of each year which kept the dealers
happy which was beneficial as you are doing all of your selling through dealers.
Sloan did not like the idea of having to change his cars every year but he realized
he had to as there were a whole lot of competitors out there. Which means that if
someone comes out with a new car and you don’t have one, they would take some
of your customers. There wasn’t a lot of brand loyalty. If the brand was not worth
being loyal to, you were going to shift.
o In order to keep the dealerships solvent and happy, Sloan had to bring the new
models out at the same time each year so the dealers could do their planning.
 o All of these things were developed by Alfred Sloan and Donaldson Brown who
came up with most of the financing around this. Brown figured that you had to
collect data and make rational projections. He essential came up with the time
series. He told GM to equate MR=MC, not in those term but close. You have to
look at the intersection between MC and MR. You had to figure out how much
you would need to increase your overall costs if you had to increase your output
to increase revenue.
 The two created the modern multidivisional corporation.
 You come to the great depression where everyone is doing badly, especially Ford. Model
A was 1927 and Depression was 1929. GM got through the depression better. The only
thing that saved Ford from Bankruptcy was the onset of WWII.
 You have a period of the automotive industry being marked by productive
entrepreneurship until 1970’s when OPEC comes along and jacks up the price of oil
which was a major downward productivity shock towards anything that uses oil. The auto
sector was very vulnerable. The advances weren’t aimed at fuel efficiency. There were a
couple like the VW Beetle and Japanese cars but they were viewed as a joke or a status
symbol – mainly used for a second car.
o When OPEC jacked up oil prices, the industry went from being productive
entrepreneurs to being unproductive as they went to the US government to try and
block Germans and Japanese. The US government slapped on tariffs and limits on
the number of cars foreign countries could export to the US. This is when the
industry began devoting a lot of time to lobbying.
o This wasn’t something new, as the steel industry had done the same thing by
going to the government and blocking the Germans by slapping tariffs on them.
Give the domestic industry room that allows them to compete with the rest of the
world. “Think about the number of people that would be out of jobs if we went
bankrupt” reason for the government to protect them.
o These two industries did not try and change their response to these changes as
they stuck with their old technology rather than changing. The 1960’s is when a
lot of industries switched to being unproductive entrepreneurs as it is so much
easier to get the government to help rather than doing the costly method of
updating technology.
 Does the government have the guts to say no? Think about Bombardier.
 Industrial policy is seen as a quick economic fix.
 This term marks the beginning of unproductive entrepreneurship
and stagnation in economic growth.