mittee is also responsible for the legal affairs of the corporation. Testimony before the Subcommittee of top company officials concerning this committee and the existing financial controls was illuminating.

The operation of the financial policy comimttee historically has always been an extremely important function of the General Motors management. The committee determines financial policies and accounting procedures. The various financial officers such as the vice president in charge of finance, the treasurer, comptroller, divisional comptrollers, and other financial officers, all report to the chairman of the financial policy committee. The committee approves all appropriations, but delegates to the operations policy committee all appropriations not over a million dollars. The financial and insurance subsidiaries also report to the financial policy committee (VII, 3564). Mr. Bradley, as chairman of the financial policy committee, and Mr. Frederick G. Donner, vice president in charge of the financial staff, are on the board of directors of the General Motors Acceptance Corp. When the Du Ponts agreed with Durant to share in the management of the corporation, it was in the finance committee that direct participation occurred. By August 1917, Pierre du Pont and John Raskob were members of this committee. With formal participation in General Motors the financial management of the company fell largely to Du Pont interests. The finance committee, as reported in the 1917 annual report (VIII, appendix B, I), consisted of John J. Raskob, chairman, who simultaneously was a director of both the Du Pont Corp. and Christiana Securities, and a member of the finance committee of Du Pont, together with the following: H. F. du Pont, Iréneé du Pont, Pierre S. du Pont, W. C. Durant, J. A. Haskell, and J. H. McClement. Mr. Haskell was a director and vice president of Du Pont at that time. By the end of 1918 McClement was dropped and the finance committee consisted of four Du Ponts, Raskob, Haskell, and Durant.

Mr. Raskob was chairman of the finance committee from 1917 until 1929, at which time he was succeeded by Donaldson Brown, also a director and member of the finance committee of Du Pont.

In 1937 the finance committee and the executive committee were combined into a single committee, the policy committee, under the chairmanship of Alfred P. Sloan, Jr. In 1946, the finance committee was reestablished and Albert Bradley became chairman.

Today the financial policy committee in addition to Mr. Bradley includes: Henry C. Alexander, Donaldson Brown, Walter S. Carpenter, Lucius D. Clay, Lammot duP. Copeland, Harlow H. Curtice, Frederick G. Donner, Alfred P. Sloan, Jr., and George Whitney. Mr. Alexander and Mr. Whitney are respectively president and chairman of J. P. Morgan, long associated with the Du Ponts in General Motors. Of the remainder, all but Lucius D. Clay are either members of the Du Pont family or employees of General Motors-the firm in which the Du Ponts long held the controlling interest.

General Motors has been an extremely profitable corporation consistently enjoying a higher return on investment than leading firms in other major American industries. It was, therefore, one of the purposes of the Subcommittee to study General Motors' pricing practices and financial policies.

In the early twenties, Mr. Bradley, together with Mr. Donaldson Brown, then vice president of the finance staff, prepared a system of pricing procedures which has been used by the corporation since that time.

The essential feature of the General Motors financial policy is the desire to maintain a planned rate of return on capital.

An acceptable theory of pricing must be to gain, over a protracted period of time, a margin of profit which represents the highest attainable return commensurate with capital turnover and the enjoyment of wholesome expansion, with adequate regard to the economic consequences of fluctuations in volume. Thus, the profit margin translated into its salient characteristic rate of return on capital employed is the logical yardstick with which to gage the price of a commodity with regard to collateral circumstances affecting supply and demand (VII, 3583).

Mr. Curtice, when asked if the test of efficiency would be the ability of management to learn and perform the skills necessary to operate large-scale industry in order to make a satisfactory return on investment, answered:

That is certainly it, but we have to do better than that because each year we must have something, either greater value or lower price, for the customer (VIII, 4052).

When asked what attainable return has been used in pricing policy, Mr. Bradley indicated that there was a standard which has not been changed in a period of over 20 years, a yield between 15 and 20 percent on the net capital employed over the years (VII, 3585). A yield of 20 percent was also expected by Mr. Curtice on new invest

ment.

In planning this return, the corporation has a long-term view. The capital on which this return is expected always is assumed to be in excess of immediate requirements. It is expected that facilities will be utilized to the extent of 80 percent of capacity, so that the return on investment is translated into a markup on costs computed at 80 percent of capacity operations. This planned level of operations for cost accounting purposes is called standard volume. This planned level, or standard volume, has been constant over the years (VII, 3584).

Since 1948, actual return after taxes and after provision for employee bonuses has been in excess of the standard described by Mr. Bradley.

In the past 8 years, General Motors return has exceeded the standard it has established for itself. The question was therefore raised why are not the prices of its products lowered. Mr. Curtice indicated this would not benefit dealers, and argued that General Motors' pricing was fair. He stated that the lowering of prices now would not be beneficial in the long run, since the company would have to raise prices if volume declined in order to maintain its planned return (VII, 3609).

Returns in excess of the standard would normally occur when production exceeds standard volume, either because of underestimation of the demand for products and subsequent underinvestment, or be

cause of a change in the planned attainable return used in pricing. This study of General Motors' standards of return on investment shows that General Motors both possesses and exercises market power. In this light, the return earned by General Motors can be likened to a public-utility return. A utility's prices are determined so that an agreed-upon rate of return on capital is secured. Public authority determines the standard used and usually the price charged.

The pricing procedure outlined previously could be called a formula pricing method for the establishment of a base price. Actual prices probably differ from formula prices for individual products, the necessity of meeting competition being the major cause of such differences. The mechanics of pricing in the corporation provide for individual divisions to recommend prices for their products to a price review committee. The committee reviews the suggested price and makes its recommendations to the operations policy committee. If approved by the latter committee, the price is final. The price suggested by the producing division must be in conformity with the basic pricing policy outlined previously, since a person in charge of a division is judged by the top management by his ability to earn the rate of return on capital held attainable by the corporation. His ability to accomplish this includes proper forecasting of demand at the suggested price, his ability to keep costs at projected levels or below such levels, and accurate forecasting of capital requirements. Thus, while the individual division manager may have independence of action, such action is limited by the knowledge that his tenure requires achievement of company earning goals.

The price review committee consists of the president of the corporation, Mr. Bradley and Lewis C. Goad, executive vice presidents, and Mr. Donner, vice president in charge of the financial staff. The operations policy committee in addition to these 4 also includes the vice presidents in charge of the major operating groups and the 2 largest car divisions. It seems unlikely that a recommendation of the price review committee would not be approved by the operations policy committee. The price review committee appears to be strategically located to coordinate operating division policies and financial policy controls of the company.

5. DIESEL LOCOMOTIVES

The Electro-Motive division of General Motors Corp. presents a unique opportunity for the study of product innovation and entry into an established industry-locomotives. General Motors entered an industry which had utilized steam as its primary motive power for over a hundred years. Within 9 years after General Motors sold its first diesel locomotive, orders for locomotives powered by diesel engines exceeded steam locomotive orders, and, within 17 years, production of steam engines ceased entirely. The diesel locomotive revolutionized the railroad industry. General Motors can point to its entry into this field as an example of the operation of a progressive company at its best-entry into a new field, with a new product satisfying an economic need, and offering progressive reduction in the pricing of its product.

The testimony before the Subcommittee of officials of General Motors and of competing locomotive producers disclosed that General Motors'

entry into this industry was greatly facilitated by purchase. It also became evident that General Motors' financial power, in the form of resources available for product development and a finance affiliate, were essential elements contributing to its success in this field.

The major companies engaged in the production of steam locomotives when General Motors entered the industry, were Lima Locomotive Works, Baldwin Locomotive Works, and the American Locomotive Co. Railroad shops owned by individual railroads and a few smaller producers also made locomotives. In 1941 the 3 major firms produced about 90 percent of all steam locomotives. Baldwin and Lima merged in 1950, to form Baldwin-Lima-Hamilton Corp. American Locomotive changed its name to Alco Products in 1955. A newcomer to the industry, Fairbanks Morse & Co., now produces diesel locomotives. By 1954, the only type of locomotives produced were diesels and three-fourths of them were made by the ElectroMotive division of General Motors.

The entry by General Motors into this industry was apparently part of a major expansion into alternative forms of transportation. In 1929 General Motors entered the aviation industry. Simultaneously, it was negotiating to purchase Winton Engine Co. which produced, in addition to gasoline engines, diesel engines primarily for marine and stationary uses. Shortly thereafter it entered the railroad field by the purchase of the Electro-Motive Co., which designed, serviced, and sold rail cars. Electro-Motive had purchased its engines from the Winton Co.

A specific need for nonsteam locomotives arose prior to the depression, primarily by reason of local laws barring the use of steam locomotives from certain urban areas, New York for example (VI, 2426-28). The major need in this respect was for switch engines. There was also a market for lightweight rail cars.

According to General Motors, its research laboratories commenced diesel-engine development in 1928, and by 1930 had progressed enough "to feel the need for a medium for translating these results into a product." Winton, in the face of the depression, according to General Motors, was in no position to undertake the major expenditures required for long-term research and expansion (VIII, 3949).

Memoranda of General Motors during this period create a somewhat different impression. Negotiations for the purchase of a diesel engine company were begun prior to the depression. The minutes of the operations committee, dated May 14, 1929, contain a report by J. L. Pratt, vice president of General Motors:

DIESEL ENGINES, MAY 14, 1929

Mr. Pratt told the committee that Mr. Kettering has for some time past urged that we give consideration to the diesel-engine development. The Cummings [Cummins] Engine Co. is a small concern that has been making considerable progress in the development of diesel engines, that we might acquire. It also developed in the meeting that Mr. Triber has a small company which is making a good deal of progress in developing the smaller types of diesel engines and we also understand that the Winton Co. has been making very satisfactory progress lately in developing the larger types of diesel engines and is now on a good earning basis.

It was the consensus of opinion of the committee that it would be desirable to have Mr. Triber on our staff anyway and it was understood that an effort would be made to buy his company, involving an investment in the neighborhood of $200,000 (VIII, App. B, V).

Negotiations for the purchase of Winton continued through 1929. No implication that Winton was facing a depression appears in General Motors minutes of September 26, 1929, and memorandum of October 21, 1929.

Extract of finance committee minutes, September 26, 1929:

The Winton Engine Co., in pursuance of the recommendations of the operations committee concerning diesel-engine manufacture, some negotiations have been had with the Winton Engine Co. which is looked upon as the leading manufacturer of diesel engines in the United States. The committee was told that we have just recently had an offer from the Winton Engine Co. to sell their assets to General Motors Corp. on the basis of 1 share of Winton Stock for 1 share of General Motors stock; on which basis it would require 95,000 shares of our stock which, at the present market price of approximately $70 per share would represent an investment of $6,650,000. The finance committee was not asked to take any action on this matter at the time, it being understood that the matter will be further considered and a later report made to the operations and finance committees (VIII, App. B, V (2)).

General Motors Corp. memorandum, October 21, 1929:

Subject: Winton Engine Co., Cleveland, Ohio.

The Winton Co. is well established and has been in successful operation for a number of years. The average earnings during the period 1925-28 were substantially $310,000 per year after all deductions and Federal income taxes. These earnings represent an average net profit on sales of approximately 131⁄2 percent. The Winton Co. has a capable management and would not require any additional personnel immediately. If the business continues to expand, as we believe it will, we may think it desirable to add to its personnel another good executive, perhaps as assistant general manager or sales manager.

The diesel engine business has been increasing especially during the last year and the Winton Co. has an excellent reputation for quality of its products. The purchase of this company will give us a vehicle for capitalizing the developments of our research organization along engine lines and will assist materially in keeping us abreast of diesel engine developments. The business should also be reasonably profitable, and if expansion continues, as most of our engineers believe it will, we should ultimately make a good return on the investment required to purchase the Winton Co. (VIII, App. B, V (4)).

The plans for acquisition of the Winton Co., judging from the minutes kept at that time, did not even contemplate that General Motors add any personnel. In effect, General Motors, seeking entry into a new industry, purchased what it regarded as the leading manufacturer of diesel engines in the United States. It must be remembered that diesel engine development at General Motors began in 1928, only 1 year before the negotiations for the purchase of Winton.

With the purchase of the Electro-Motive Co. in November 1930, General Motors committed itself to a program of development of products for the railroad industry. At the time of the purchase Electro-Motive was apparently planning a small locomotive to fulfill railroad needs for light passenger trains and for switching purposes. It then had no manufacturing facilities, but designed, serviced, and sold rail cars powered by gasoline engines, and maintained parts depots at various locations. Electro-Motive had entered the industry in the early 1920's, and had established its principle of electrical rather than mechanical transmission of motive power. The major problem was the power unit. Electro-Motive used gasoline engines which had limitations for locomotive use. The diesel was considered the most promising form of engine and Charles F. Kettering, of General Motors, being convinced of this, pressed for General Motors entry into the field. The combination of Winton and Electro-Motive, together