Steve Blank Why will the future of Tesla depend on what happened to Billy Durant?

A version of this article appeared in the Harvard Business Review

Elon Musk, Alfred Sloan and Entrepreneurship in the Automotive Industry.

The entrepreneur who created and developed the world's biggest start-up with a $ 10 billion turnover and got fired is a person you probably do not have never heard of it. The guy who replaced it invented the idea of ​​modern society. If you want to understand the future of Tesla and the role of Elon Musk – which many wish to do, given the many titles of the company – you should start with some automotive historyth Century.

Alfred P. Sloan and modern society
In the middle of the 20th century, Alfred P. Sloan had become the most famous businessman in the world. Nicknamed "the inventor of the Modern Corporation," Sloan was president of General Motors from 1923 to 1956, when the US auto industry developed to become one of the engines of the US economy.

Today, it is difficult to avoid Sloan in the United States. There is the Alfred P. Sloan Foundation, the MIT Sloan School of Management, the Stanford Sloan Program, and the Sloan / Kettering Memorial Cancer Center in New York. Sloan's book My Years with General Motors, written half a century ago, is still a legible commercial classic.

Peter Drucker wrote that Sloan was "the first to determine how to systematically organize a large company. When Sloan became president of GM in 1923, he put in place planning and strategy, measures and, most importantly, the principles of decentralization. "

When Sloan arrived at GM in 1920, he realized that the traditional centralized management structures organized by function (sales, manufacturing, distribution and marketing) were not well adapted to the management of GM's various product lines. That year, while management was trying to coordinate all the operational details of all divisions, the company went bankrupt, as poor planning led to excessive inventory, unsold cars accumulating at dealerships, and cash flow. insufficient.

Building on organizational experiences initiated at DuPont (under the direction of its president), Sloan organized the company by division rather than by function and transferred the responsibility of the company to each of the operational divisions (Chevrolet, Pontiac, Oldsmobile, Buick and Cadillac). Each of these GM divisions focused on their own day-to-day operations, with each divisional general manager responsible for the division's profits and losses. Sloan has limited the staff of the company and focused on policy development, corporate finance and planning. Sloan has asked each division to begin systematic strategic planning. Today, we take for granted division as a form of organization, but in 1920, with the exception of DuPont, almost all large corporations were organized by function.

Sloan implemented GM's management accounting system (also borrowed from DuPont), which for the first time enabled the company to: 1) Produce an annual operational forecast comparing the forecasts of each division (revenues, costs, requirements for capital and return on investment) financial goals of the company. 2) Provide the company management with sales reports and divisional budgets in near real-time indicating when they deviate from the plan. 3) Authorized management to allocate resources and compensation between divisions based on a standard set of performance criteria for the entire company.

Modern company marketing
When Sloan became president of GM in 1923, Ford was the leading player in the US auto market. Ford's T model cost only $ 260 ($ 3,700 in today's dollars) and Ford owned 60% of the US auto market. General Motors had 20%. Sloan realized that GM could not compete on price, so GM created several car brands, each with its own identity targeting a specific economic slice of US customers. The company has set prices for each of these brands from lowest to highest (Chevrolet, Pontiac, Oldsmobile, Buick and Cadillac). In each brand, there were several models at different prices.

The idea was to keep customers coming back to General Motors with time to move on to a better brand as they would become richer. Finally, GM has created the notion of perpetual demand within brands by constantly making their own products obsolete and offering new models every year. (Think about the iPhone and its new annual models.)

By 1931, with a combination of superior financial management and a smart branding and product line strategy, GM held 43% of the market, compared with 20% for Ford – an advance it never let go.

Sloan has turned business management into a real profession. His stellar example was the continued and unrelenting execution of GM's business model (until its collapse 50 years later).

What does GM have to do with Tesla and Elon Musk?
Well, thanks for the story lesson but why should I care about it?

If you follow Tesla, you may be interested to know that Sloan is not the founder of GM. Sloan was president of a small ball rolling company acquired by GM in 1918. When Sloan became president of General Motors in 1923, it was already a $ 700 million company (approximately $ 10.2 million). billion in today's dollars).

Yet you never know who built GM at this size. Who is the entrepreneur who founded what would become General Motors 16 years earlier, in 1904? Where do charitable foundations, business schools and hospitals bear the name of GM's founder? What happened to him?

The founder of what became General Motors was William (Billy) Durant. At the turn of the 20thth During the last century, Durant was one of the largest manufacturers of carriages, building 150,000 per year. But in 1904, after seeing a car for the first time in Flint, Michigan, he was one of the first to see that the future was going to be in a radically new form of transportation fueled by internal combustion engines.

Durant took his money from his horse-drawn carriage company and bought a struggling automotive startup called Buick. Durant was a great promoter and a visionary. By 1909, he had turned Buick into the best-selling car in the United States. In search of an economic model in a new sector and with the pressing vision that a car company should offer several brands that year he bought three other small auto companies – Cadillac, Oldsmobile and Pontiac – and merged with Buick, renaming the merged company General Motors. He also felt that in order to succeed, the company had to be vertically integrated and had purchased 29 manufacturers and parts suppliers.

The following year, 1910, the problem was touched. Even though Durant was a great entrepreneur, the integration of companies and suppliers was difficult, a recession had just occurred and GM was over-indebted with a debt of $ 20 million ($ 250 million in 2018 dollars) resulting from all acquisitions and was about to run out. cash. The bankers and Durant's council dismissed him from the society he had founded.

For most people, the story could have ended there. But not for Durant. The following year, Durant co-founded another automotive startup, which started with Louis Chevrolet. For the next five years, Durant made Chevrolet a GM competitor. Finally, in 1916, Durant uses Chevrolet to buy control of GM with the support of Pierre duPont. He once again takes over General Motors, merges Chevrolet and GM, acquires Fisher Body and Frigidaire, creates the financial arm of GMAC GM and throws out the bankers who had dismissed him six years earlier.

Durant has had four other great years at the helm of GM. At the time, he not only ran GM, he was also a big speculator on Wall Street (even on GM stock) and played an important role on the social scene in New York. But the problem was on the horizon. Durant was at his best when there was money to indulge in his blind expansion. (He bought two auto companies – Sheridan and Scripps-Booth – that competed with his existing products.) But in 1920, the recession that followed the First World War had hit and car sales had slowed. Durant continued to build for a future assuming the cash flow and customers would continue.

Meanwhile, stocks were accumulating, stocks were running out and the company was running out of money. In the spring of 1920 with the company had to go to banks and he got a loan of $ 80 million (about $ 1 billion in 2018) to finance operations. While everyone around him recognized that he was a world-class visionary and fundraiser, Durant's one-man show was damaging society. He could not prioritize, could not find the time to meet his direct reports, fired them when they complained of chaos, and the company had no financial control other than Durant's ability to raise more money. When the stock collapsed, Durant's personal stocks were under water and could be called by bankers who would then hold a good deal of GM. The board decided that the company had enough vision – they bought out Durant shares and realized that the time had come for someone who could run on a large scale.

Once again, his board (led this time by the DuPont family) threw him out of General Motors (when GM's sales were $ 10 billion in today's dollars.)

Alfred Sloan became GM's president and led it for the next three decades.

William Durant tried to found his third car company, Durant Motors, but he was still speculating on stocks. He was shattered by the depression in 1929. The company closed in 1931. Durant died managing a bowling alley in Flint, Michigan in 1947..

From the day of Durant's firing in 1920, and for half a century, US trade would be led by an army of "Sloan Managers" who managed and applied existing business models.

But the spirit of Billy Durant would resurface in what would become Silicon Valley. And a hundred years later, Elon Musk would understand that the future of transportation was no longer in internal combustion engines and would build the next big car company.

Days of Futures Past for Tesla
In all of his businesses, Elon Musk has used his compelling vision of a transformed future to capture the imagination of clients and, just as importantly, Wall Street, by collecting billions of dollars to materialize his business. vision.

However, as Durant's story goes, one of the challenges of visionary founders is that they often find it hard to stay focused on the present when society has to move to execution and scale relentlessly. Just as Durant had multiple interests, Musk is not only the CEO and product architect of Tesla, he oversees all development, engineering and product design. At SpaceX (his rocket company), he is the CEO and lead designer responsible for the development and manufacture of advanced rockets and spacecraft. He is also the founder of The Boring Company (the tunnel company) and co-founder and president of OpenAI. And a founder of Neuralink, a brain-computer interface startup.

All of these companies make revolutionary innovations but even Musk only has 24 hours a day and 7 days a week. Others have noted that diving into and out of your current passion makes you a dilettante, not a CEO.

One of the common traits of a visionary founder is that once you have proven the contrary to the opponents, you are persuaded that all your statements have the same prescience.

For example, after the success of the Model S sedan, Tesla's next car was an SUV, the Model X. In the opinion of most people, Musk insisted on adding bells and whistles (like the doors Falcon Wing and other accessories) to what should have been simple. The execution of the next product has made the car in volume a nightmare. Executives who disagreed (and contributed to the success of the Model S) eventually left the company. The company later admitted that the lesson learned was pride.

The Tesla Model 3 was designed to be simple to manufacture, but instead of using the existing assembly line, Musk said:The real problem, the real difficulty and the most important potential is to build the machine that makes it. In other words, it is the construction of the factory. I really think that the factory is a product. " Two years later, it turns out that the Model 3 assembly line is an excellent example of over-automation. "Excessive automation at Tesla was a mistake. To be precise, my mistake " Musk recently tweeted,

Sleeping in the factory to solve self-inflicted problems is not a formula for large-scale success, and while it's an excellent PR, it's not management. It's actually a symptom of a visionary founder imposing chaos just when execution is required. Tesla now has a portfolio of recently announced products, a new Roadster (sports car), a semi-trailer truck and a cross under the name Model Y. All will require massive execution on the scale, not just visual.

Unlike Durant, Musk designed his extended mandate and this year his shareholders offered him a new $ 2.6 billion (up to $ 55 billion) compensation plan if he manages to increase the market capitalization of the company by $ 50 billion. 650 billion dollars. The board stated that he "believed that the award would continue to motivate and motivate Elon to run Tesla in the long run, particularly in light of his other commercial interests. "

Elon Musk did what Steve Jobs and Jeff Bezos did – disrupting a series of stagnant businesses controlled by rent seekers, constantly altering the trajectory of multiple industries – while capturing the imaginations of consumers and the financial community. A handful of people with these skills emerge each century. However, few people combine the talent to create an industry with the very different skills needed to evolve. Each of the difficulties encountered by Tesla began to lose the very advantage that Musks' vision had brought to society. And what was once an insurmountable track by having an economic castle surrounded by a defensible ditch (battery technology, compressors, autonomous driving, live updates, etc.) closes quickly.

One might wonder if it would be better to spend $ 2.6 billion in executive compensation to find someone who allows Tesla to become a reliable producer of mass-produced cars without the drama of each. new model.

Maybe Tesla now needs his Alfred P. Sloan.

Lesson learned

  • Founders / visionaries see things differently and extraordinary create new industries
  • When technologies evolve rapidly, you want the founder to continue to lead the business.
  • However, when success depends on large-scale exploitation and execution, their impatience with continued innovation and inventions often hampers daily performance.
  • The best know when it's time to let go

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