Several years ago in his automotive history, Richard Wright wrote, "In the economic structure which Detroit built, the laws of supply and demand have been modified. Largely because of GM’s financial system, devised in the ’20s by Sloan and his chief economic lieutenants Donaldson Brown and Albert Bradley, when sales dropped prices did not drop – the use of labor did. The financial risks inherent in the automotive sales cycle were shifted from stockholder to worker."
He was right on the mark. The Big Three have always been quick to layoff when times were tough, but very unwilling to cut prices. Lately, of course, that theory has not worked well for labor or stockholders.
GM has reported that their Employee Discount pricing program over the last month has generated sales up 41% over the same period last year. Today, Ford came out with their own price cuts, and Chrysler is expected to do the same tomorrow.
Taichi Ohno described Toyota’s "factory first" philosophy as the use of pricing to assure a steady flow through the factories. Contrary to Sloan’s thinking, profits can come from continuous improvement in costs – not just from pricing margins. Lean companies rely on employee participation and contribution to the continuous improvement effort. Using pricing to assure job security is a cornerstone of lean thinking. Detroit’s philosophy of cutting people to preserve pricing margins practically kills any chance of getting people to contribute.
Henry Ford proved that reducing prices to drive up volume and market share, then looking to the factory to create profit works very, very well. Toyota re-proves that proposition every day. Sloan thought the only source of profit was the price mark up. Sloan was wrong.
Maybe the results of the last month will signal a shift in Detroit’s thinking. Now all GM has to do is keep prices down enough to get their plants rolling again, start treating the employees as assets, and we may be looking at the dawn of a new age.
In any event, let’s give GM credit for breaking out of their 80 year old business model and trying something different from the Sloan creed they have followed steadily since 1924.