!DOCTYPE html PUBLIC "-//W3C//DTD XHTML 1.0 Strict//EN" "http://www.w3.org/TR/xhtml1/DTD/xhtml1-strict.dtd"> Streamline Training & Documentation: Alfred Sloan's Memoir I: Using ROI for Investment Decisions

Thursday, February 18, 2010

Alfred Sloan's Memoir I: Using ROI for Investment Decisions

In 1964, when he was 88 years old, Alfred P. Sloan, Jr. published My Years with General Motors (written with John McDonald), a book renowned for its account of Sloan's role in disseminating modern management practices.

Portrait of Alfred P. Sloan, Jr. (1875-1966)
Sloan Building (E52)
MIT Sloan School of Management

(MIT Sloan Japan Club)

For instance, in Chapter 3, "Concept of the Organization," Sloan writes about his frustration in 1918, when General Motors acquired United Motors, a group of parts and accessory companies of which Sloan was president:

... I found that if I followed the prevailing practice of intercorporate relations I would no longer be able to determine the rate of return on investment for these accessory divisions individually or as a group. This would necessarily mean that I would lose some degree of managerial control over my area of operations. At that time, material within General Motors was passing from one operating division to another at cost, or at cost plus some predetermined percentage. My divisions in the United Motors Corporation had sold both to outside customers and to their allied divisions at the market price. I knew that I operated a profit-making group, and I wished to continue to be able to demonstrate this performance to the general management, rather than to have my operating results on interdivisional business swallowed up in the extra bookkeeping profits of some other division. It was a case of keeping the information clear.

It was not, however, a matter of interest to me only with respect to my divisions, since as a member of the Executive Committee, I was a kind of general executive and so had begun to think from the corporate viewpoint. The important thing was that no one knew how much was being contributed — plus or minus — by each division to the common good of the corporation. And since, therefore, no one knew, or could prove, where the efficiencies and inefficiencies lay, there was no objective basis for the allocation of new investment. This was one of the difficulties with the expansion program of that time. It was natural for the divisions to compete for investment funds, but it was irrational for the general officers of the corporation not to know where to place the money to best advantage. In the absence of objectivity it was not surprising that there was a lack of real agreement among the general officers. Furthermore, some of them had no broad outlook, and used their membership on the Executive Committee mainly to advance the interests of their respective divisions.

I had taken up the question of interdivisional relations with Mr. Durant [president of GM at the time] before I entered General Motors and my views on it were well enough known for me to be appointed chairman of a committee "to formulate rules and regulations pertaining to interdivisional business" on December 31, 1918. I completed the report by the following summer and presented it to the Executive Committee on December 6, 1919. I select here a few of its first principles which, though they are an accepted part of management doctrine today, were not so well known then. I think they are still worth attention.

I stated the basic argument as follows:
The profit resulting from any business considered abstractly, is no real measure of the merits of that particular business. An operation making $100,000.00 per year may be a very profitable business justifying expansion and the use of all the additional capital that it can profitably employ. On the other hand, a business making $10,000,000 a year may be a very unprofitable one, not only not justifying further expansion but even justifying liquidation unless more profitable returns can be obtained. It is not, therefore, a matter of the amount of profit but of the relation of that profit to the real worth of invested capital within the business. Unless that principle is fully recognized in any plan that may be adopted, illogical and unsound results and statistics are unavoidable ...
[pp. 48-49, 1990 edition]


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