Crafting & Executing Strategy: Part 2
This article continues with the GM example illustrating the rise of General Motors in the 1920s via the development by Alfred P Sloan, Jr; a total strategic marketing plan which had as its goal to reinvent the automobile market.
Sloan first redesigned General Motors according to his strategic plan and then, as CEO almost 30 years, built GM into the world's largest automobile company and the world's largest manufacturing enterprise.
As Part 1 of this article suggests, Sloan did not try to dislodge Ford in the low-price segment of the automobile industry with GM's Chevrolet by doing better what Ford had already done.
But rather Sloan wanted to design the ideal business approach that would produce maximum results from the available markets and the core competencies of the GM organization.
The Key Elements Of Sloan's Strategic Plan
Sloan, in his book, My Years With General Motors and Drucker in Managing For Results described what would now be called GM's total marketing approach to strategic planning:
1. The market would be segmented into six different price ranges. Starting from the bottom:
The first class ranged from $450-$600; the second, from $600-$900; the third from $900-$1200; the fourth from $1200-$1700; the fifth from $1700-$2500; the sixth from $2500-$3500.
2. GM would have five models which covered the market – Chevrolet, Pontiac, Oldsmobile, Buick and Cadillac.
3. Only two of GM's existing models – the Buick and Cadillac, both at the upper end of the price line – fit into Sloan's strategic plan.
Three existing brands would be completely abandoned; three others, Chevrolet, Pontiac and Oldsmobile would be replaced by what amounted to a brand-new car even though they retained their original nameplate.
4. All GM cars would be "reengineered" or completely redesigned to fit into Sloan's six price segments. GM would be a market-driven rather than technology-driven company.
5. The model T was being sold for $450 – the Chevrolet would be sold for $600. Chevrolet would not compete "head on"with Ford. But rather draw demand from Ford among those who were willing to pay $150 more for the significant "extras" offered by Chevrolet.
6. Similarly, the next class, from $600-$900, would place Chevrolet at the low-end and Pontiac at the higher end of that price class.
GM's key competitors in the $600 – $900 price class were priced at about $750 (smack in the middle). The demand for Pontiac would come from buyers who were willing to spend an additional $150 for more quality.
Similarly, Chevrolet would receive demand from people who wanted to spend $150 less than the average competitive price of $750.
7. Each of GM's proposed five models would be placed in a price and performance class in which it was both the most expensive and best-performing car of a lower price range, and the least expensive, yet the most dependable car in the next higher price range.
8. Chevrolet would compete with Pontiac; Pontiac with Oldsmobile; Oldsmobile with Buick; and Buick with Cadillac.
To reiterate: Each of GM's cars would be a distinct market entry and designed to be a leader in its class. Yet each would compete with the GM car at the other end of the price range.
Six Lessons Learned From This Illustration
For starters, the greatly improved Chevrolet was a sub-strategy element embodied in the overall plan.
If the new Chevrolet took away customers from Ford, so much the better. If Chevrolet failed to compete effectively with the Model T, the total strategy could still proceed without gaining market position from Ford.
And, as noted Part I, GM's strategy could have failed if Ford dropped its price of the Model T to $350 and launched his much talked about Model A to directly compete against the Chevrolet.
To be sure, Chevrolet's ability to meet the volume requirements would have been seriously changed. Today, we call this strategic concept "a brand extension coupled with simultaneous price reductions strategy."
Lesson #2: GM's strategic marketing plan spelled an end to the rigid separations between R&D and marketing. Stated differently, Sloan's strategic plan showed why the best kind of R&D is business-driven.
In Sloan's mind the best way to price was to start out with what the market is willing to pay – and thus, it must be assumed, what the competition will charge – and design high-margin GM cars to the price specifications contained in the plan.
R&D''s job was to convert Sloan's marketing plan into operating reality. It was business-driven.
Today, what Sloan did is called price-led costing as opposed to cost-driven pricing which adds up all the costs and then puts a profit margin on top.
If the customer does not respond (as is often the case) to the price charged, the manufacturer has to start cutting the price or redesign the product at enormous expense, and take enormous write-offs or abandon the product altogether.
Sloan, in essence, determined what the customer wanted, needed, expected, valued, and most importantly, willing to pay for. He then focused GM's energies on fulfilling the needs of the customer.
Lesson #3: GM's strategic marketing plan (and in its generic form has been imitated the world over) showed the necessity of product line pricing strategies or the need for a rational product line.
Lesson #4: GM's plan took a great many years to execute. Pontiac, notes Drucker, did not really become what Sloan had specified until 15 years later.
Lesson #5: Sloan's plan did not try to "unseat" Ford by doing just as well, nor even by doing better.
Said Drucker: "Sloan did not try to dislodge Ford by doing just as well, nor even by doing better… He never considered doing again what Ford had done before; that is, building the cheapest, standardized, changeless car…
…Instead, he made Model T obsolete through something which neither Ford (or anyone else) could possibly produce: the one-year-old, secondhand car… It had been the new car only one year earlier…
…Till then the used-car market had been considered a nuisance by the carmakers… Sloan saw that it was the real volume market; and the manufacturer had to design, sell, and service his new car for both the greatest sales this year and for easiest resale a year or two hence..."
Simply put, in Sloan's mind, people could, for the first time ever, buy a better, initially more expensive car than they could afford at an equal or lower price than the model T. In other words, quality GM used cars became a major competitor to Ford's Model T.
Lesson #6: it is interesting to note that prior to Sloan's strategic plan, GM was built by financial acquisition and was essentially a conglomerate even though its businesses were all primarily automotive.
What made GM effective is Sloan "built unity out of diversity" on the basis of a coherent strategic plan.
In Management: Tasks, Responsibilities, Practices, Drucker states:
"In contrast to Sloan, the men who merged the bulk of British-old automobile companies into British Leyland Motors in the 60s kept a miscellany of nameplates, some with a clear market of their own, some without main identity your personality…"
Drucker's main point is: to obtain the results of diversification, there has to be a unified strategy, an overall design, a common mission for the entire business.