Centralized Control…Continued

G

enerally speaking, where the product of a given plant enters into the product of two or more of our divisions, it is deemed desirable to place the investment in such plant and the full responsibility for its operation under the jurisdiction of a separately organized division.

The question of pricing product from one division to another is of great importance. Unless a true competitive situation is preserved, as to prices, there is no basis upon which the performance of the divisions can be measured. No division is required absolutely to purchase product from another division. In their interrelation they are encouraged to deal just as they would with outsiders. The independent purchaser buying product from any of our divisions is assured that prices to it are exactly in line with prices charged our own car divisions. Where there are no substantial sales outside, such as would establish a competitive basis, the buying division determines the competitive picture—at times partial requirements are actually purchased from outside sources so as to perfect the competitive situation.

The general test of efficiency of management of any business is the rate of return on capital employed. Capital in industry is entitled to a varying rate of return largely dependent upon competitive conditions in the broad sense and the hazard that is involved. Needless to say good-will, that intangible and illusive but none the less valuable asset which every business seeks to enjoy, is of great importance.

Apart from this however, profit from industry is dependent upon the character of product supplied and the degree of protection afforded by patents or specialized knowledge and skill in processes and methods of manufacture and distribution. At the same time the rate of return on capital is affected directly by the control of investment in working capital items and fixed assets in relation to the volume of business.

Capital employed in the production and sale of a product that is brought on the basis of exact specifications, in the manufacture and distribution of which no highly specialized knowledge is required, contents itself with a relatively low rate of return. The production of an article that is exclusive in design, possessing superior engineering qualities and carrying with it a peculiar appeal to fashion or the taste of the public, affords to capital the opportunity of enjoying a high rate of return. [emphasis added]

Over-All Effectiveness of Management

Business enterprise involves the welfare of four interdependent groups: the public, labor, management, and capital.

There are about eighty executives owning stock of Managers Securities Company. The directors of General Motors Corporation have expressed their belief that there has been no one influence contributing as much to the success of General Motors during the past four years as the keen interest evidenced in the Corporation's affairs by these eighty men occupying the most important managerial positions.

For ten or twelve years the duPont Company has been a large holder of the common stock of General Motors Corporation. The 843,750 shares of General Motors common stock acquired by the Managers Securities Company in 1923 were purchased from the duPont Company. The enhancement in its market value in the mean item has been something like ninety-three million dollars.

The Chairman of the board of duPont Company recently referred jokingly to a remark of someone to the effect that that Company would be ninety odd million dollars better off if it had not sold that stock in 1923. His reply was that his company has enjoyed an enhancement in value of considerably over two hundred million dollars [in 1927 dollars! ed.] as applied to the General Motors stock which it holds as a permanent investment, and he saw no cause for complaint. The duPonts were far-seeing enough to make a part of their holdings in General Motors available for the constructive purposes of the Managers Securities Company, having confidence in the belief that in the long run they would gain handsomely in consequence.

Article Continues…   More Food for Thought from the Kitchens of the Rock Eel Café