The collapse of the overhyped dot-coms and the Enron shell game sounded the death knell for a number of so-called new-economy ideas. We now know that optimistic projections can be radically wrong, that profits do matter, and that conflicts of interest are worth watching. But in the move to restore traditional controls, companies can go too far.
A case in point is the relationship between the operating divisions of a company and its corporate headquarters. In the old economy, many big companies maintained a strict separation between the two: The divisions carried out the day-to-day activities while headquarters developed strategy, allocated resources, and monitored performance. But in the fast-paced Internet economy, companies increasingly pushed strategy down to the operating level, so the managers who understood where markets were going could react quickly. All that entrepreneurial activity was hard to coordinate and oversee, but the opportunities were just too rich to resist.
Companies may now be tempted to restore many of the old control structures. But they would do well to keep in mind the experiences of General Motors and its CEO from the 1920s to the 1950s, Alfred Sloan.
The orderly Mr. Sloan is surely the poster boy for rational, hierarchical organization. His much-read memoir, My Years with General Motors, details how the company carefully separated the day-to-day operations of its car divisions from the strategic planning at headquarters. Divisional heads, Sloan argued, couldn’t be trusted to formulate strategy because they faced a clear conflict of interest: Instead of looking out for the company’s welfare as a whole, they would inevitably favor their own turf. Nor could high-level executives be well-enough informed to properly manage ground-level activities. Through “federal decentralization,” each level of the organization would specialize in what it did best. The precise delineation of those responsibilities might evolve with the marketplace, but the overall division of labor was clear.
It’s a compelling story—if only it were true. A thorough study of internal GM records from the period paints a different picture. Instead of the separation of duties, Sloan tolerated a loose organization in which division heads had a prominent place in the overall direction of the company. It wasn’t until the 1950s, when GM was at the height of its profitability, that the company reorganized around a clean break between divisional and corporate responsibilities. And GM’s decline began shortly thereafter, as a climate of distrust arose between headquarters and the field.
To prevent that kind of distrust was exactly why Sloan allowed such a diffuse structure in the first place. Internal memos, as well as his own memoir, suggest that he truly believed in the virtues of federal decentralization. And the controlling shareholders of GM in those decades, the du Pont family, insisted on it as the best way to oversee their investment. But Sloan’s early attempts to impose the structure in the 1920s were met with stiff resistance from the division heads. They demanded to be involved in strategic planning. Sloan could be a tough leader, but he knew he needed their cooperation. So in most cases, he learned to accommodate them and their particular requests, often informally, over the du Ponts’ protests.
Despite the messy organizational logic and the dangers posed by self-interested managers, General Motors thrived for decades. Involving the division heads seems to have brought a twofold benefit: Headquarters got better information about business realities, and the divisions were more likely to accept strategic initiatives from the top. And for all their worries, the du Ponts and other stockholders benefited handsomely from the arrangement.
When Sloan retired as chairman in 1956 and his successors installed the neatly divided structure, division heads resisted implementing a variety of programs initiated from headquarters in reaction to being cut out of the loop. And without the involvement of division heads, however biased they may have been, headquarters became increasingly isolated from emerging problems. When foreign imports and rising oil prices threatened GM’s market share, the company was slow to react.