The Struggle for Dominance in the Automobile Market: the Early Years of Ford and General Motors

The Struggle for Dominance in the Automobile Market: The Early Years of Ford and General Motors Richard S. Tedlow Harvard University This paper contrasts the business strategics of Henry Ford and Alfred P. Sloan,Jr. in the automobilemarket of the 1920s.1 The thesisis that HenryFord epitomized the method of competition most familiar to ncoclassical economics. That is to say, his key competitive weapon was price. Alfred P. Sloan, Jr. beat Ford because hc understood that the nature of the market had changed and that new tools wcrc nccdcd for success in the modern world of oligopolistic competition. Henry Ford and the Old Competition In the world of ncoclassical economics, the business landscape is studdcd with anonymous, small producers and merchants and the consumer has perfect information. Buyers do not know other buyers; buyers do not know sellers;scllcrs do not know other sellers. No scllcr can, without collusion, raise price by restricting output. It is a world of commodities. All products arc undiffcrcntiatcd. Prices arc established through the mechanism of an impersonal market, where the "invisible hand" ensures consumer welfare. Producers in an untrammeled market system have no choice but to accept "the lowest [pricc] which can bc taken" [19, p. 61]. In Adam $mith's world, business people do not lose sleep over the issue of whether or not to compete on price. Pricc is compctition's defining characteristic. Conditions approximating this description may have existed in the United States prior to the railroad revolution of the 1840s [6, pp. 13-78]. With thc building of the railroad network, however, the context of businessactivity began to change. First in transportation infrastructure, then in the distribution sector through economics of scope, and finally in production in those industries in which scale economics obtained, a small number of firms grew to dominance. These firms had very high fixed costs. Early railroad managers did not fully comprehend the competitive implications of the unprecedented cost structure of 1Itis based ona book on the history ofthe marketing ofconsumer products inthe United States during the twentieth century to be published by Basic Books in 1989. BUSINESS AND ECONOMIC HISTORY, SecondSeries, Volume Seventeen,1988. Copyright (c) 1988 by the Busine• History Conference. ISSN 0849-6825. 49 5O their companies. Prisoners of the past, they tried to compete in the traditional manner with their revolutionary enterprises. Thus they were always cutting prices; and bankruptcy was the common result, not at all what Adam Smith would have predicted. By the 1870s, many railroad men were coming to believe that "the logic of railroad competition was bankruptcy for everyone N [8, p. 237]. With the development of high concentration in some manufacturing industries during and after the 1880s, businessesbegan to work out new ways to compete. These firms-- and I am referring here to the likes of Standard Oil, DuPont, Singer, International Harvester, Swift, and others [6, pp. 285-376; 21, pp. 134-213]-- experienced greatly reduced operating costswith the increased scale of their works and were thus able to offer quality merchandise at very low prices while enhancing profits. But price as a competitive weapon now had to share the stage with a number of other tools. Competitors in oligopolies, as Alfred D. Chandler, Jr. points out in his forthcoming Scale and Scope, had to make a threefold investment in production, marketing, and an organization of managers to administer their facilities. With these assets and capabilities, these firms competed or negotiated for market share through functional and strategic effectiveness; that is by improving their product, their process of production, their marketing, their purchasing and their labor relations more effectively than did their competitors; or they moved more quickly into new and growing markets, and out of older and declining ones. Such rivalry for market share and profits normally increased the enterprise's functional and strategic capabilities and therefore its organizational capabilities as a whole [4, ch. 1]. Thus was born the new competition of the twentieth century oligopoly. This was the competition that Henry Ford never understood. Chandler has characterized the historical development of highly concentrated industries as Nten years of competition and ninety years of oligopoly." This was surely the case in automobiles. In 1896 Henry Ford could build a quadricycle in a shed and be in the business. But as early as 1913 two firms (Ford and General Motors) had more than half of the business and were manufacturing automobiles in some of the largest plant complexes in the world. Let us take a look at how Ford competed in this new environment, using Chandler's criteria: 1. Production. Ford made a huge investment in production facilities. But these were single-minded,special-purpose works dedicated to an unchangingModel T. When the absolute necessityof bringing out a new vehicle penetrated even Ford's imperviousnessin 1927, the facilities were utterly unprepared for the resulting strain and havoc was the result. 51 The Ford retooling of 1927-1928 was the most elaborate thing of its kind yet undertaken by anyone in so short a space of time. Nearly every piece of the company's monolithic equipment, laid out on the assumption that the Model T would linger on forever, had to be torn down and rebuilt. The staggering changeover necessitated the replacement of some 15,000 machine tools, the total rebuilding of another 25,000, as well as the redesigning and rearrangement of $5,000,000 worth of dies and fixtures [20, p. 199]. This rctooling and plant closure idled tens of thousands of workers and cost an estimated $100,000,000. Ford's market share collapsed to under 10% in 1927, and though it rebounded when the Model A came on linc, Ford's market dominance was gone forever [3, p. 3]. Perversely enough, Ford proceeded to handle the Model A as hc had the Model T. The Model A was to bc another unchanging standard. So the same system of special purpose production was instituted with the concomitant difficulties. 2. Marketing. At one time in his life, in the carly 1900s, Henry Ford understood the needs of consumers for a cheap, reliable transportation vehicle. By the 1920s those needs wcrc changing. By then, however, Ford had come to believe that hc was in the business of building Model Ts. In fact, like every other business executive, hc was in the business of satisfying consumers. Hc mistook the product for the service it performed. Hcrc is how Alfred P. Sloan, Jr. analyzed the situation: The old master had failed to master change. Don't ask mc why. There is a legend cultivated by sentimentalists that Mr. Ford left behind a great car expressive of the pure concept of cheap, basic transportation. The fact is that hc !eft behind a car that no longer [by 1927] offered the best buy, cvcn as raw, basic transportation .... Mr. Ford, who had had so many brilliant insights in earlier years, sccmcd never to understand how completely his market had changed from the one in which hc had made his name and to which hc was accustomed [18, pp. 186-87]. The marketing function offers a variety of competitive tools to the firm. These can bc considered under four headings. a. Product Policy. One product only-- the Model T. Changes in the product wcrc made only grudgingly. What was worse, Ford developed no concept of a product linc which hc might bc able, so to speak, to grow a customer through. Because hc felt so strongly that there should not bca nccd for anything more than basic transportation, hc became convinced that there wa• no such need. The automobile market, hc felt sure, was not subject to any life cycle. Thus hc felt no nccd for new products. 52 b. Distribution. Ford treated his dealers as if they were men without memories. He exploited them when he had the power to do so, creating a powerful incentive to get out from under him when that was possible. He left behinda trail of rebelliousand embitteredpeople? c. Communication. Ford left it largely to the dealers. He had no consistent advertising strategy [14]. d. Price. This was the sum and substanceof Ford's strategy and it was Ford's single-minded reliance on price which is the reason for our labeling him an •old # competitor. The demise of the Model T and the downfall of the company are a clear indication of what happens in an oligopolistic consumer product industry when a major firm acts the way neoclassicaleconomics suggest it should act. Unfortunately, there was a limit to what price, unconnected to the other strategic variables, could do. By the mid-1920s Ford's profit per Model T was already very low. And the meaning of price to the consumer was being changed by General Motors' use of credit. 3. Or•anization. Ford eliminated his management team and the systems they had tried to put into place becausehe saw their intrusion into his world as, in some sense, an attempt to steal his company from his personal control and oversight. He thought he could run a company which numbered its dealers in five figures, its employees in six, its customersin eight, its assetsin nine, and its sales (at their peak) in ten as if it were a mom and pop shop. For him, managers, like partners and stock-holders,stood between him and his company. As he did with his stock-holders and partners, he got rid of his managers. The result was cataclysmic. By the late 1930sthe Ford Motor Company was probably the least efficient and certainly among the (for lack of a better word) meanest large organizations in the free world-- the brontosaurus of big business, living off its fat, governed by a tiny brain, blubbering its way through the tar pit of life.

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