Project Group Composed of the members of the Steering Committee, the Review Panel, the Board of Trustees, and the Staff of the Foundation. Frank M. Brettholle, Vice President and Controller H. J. Heinz Company David W. Chappuis, Controller Celanese Corporation of America L. Russell Feakes, General Controller and Assistant Treasurer Johnson & Johnson L. Keith Goodrich, Executive Vice President McGraw-Hill, Inc. Donald P. Jones, Comptroller Sun Oil Company Frank L. Linton, Vice President and Comptroller Allied Chemical Corporation Frederick J. Muth, Vice President and Controller Armstrong Cork Company Robert E. Pfenning, Comptroller General Electric Company John E. Rhodes, Controller Thornton R. Smith, Controller C. Roger Stegmaier, Comptroller STAFF: W. Joseph Littlefield, Research Director Introduction The purpose of this study is to investigate the financial relations existing between the central management of a divisionalized company and the management of its several divisions; and, as a result of such investigation, to arrive at recommendations which would make for the more effective coordination and control of divisional operations in accordance with the objectives of the corporation. The study was sponsored by Financial Executives Research Foundation. Twenty-five companies, whose names are listed on page xiii, participated in it. All of them were visited, a number of them both at head office and at divisional level, and I was able to talk freely with their financial executives. It was not my objective simply to make a survey of existing practices, for which purpose a much broader coverage by questionnaire would have been more suitable. Rather, I wanted to uncover the pros and cons of different practices, and then to form my own judgment about their relative merits. The result is no mere neutral description of current methods. Though I cannot hope to have my judgments endorsed by all who read this book, I can and do hope that those who do not agree with me will find something to think about in my reasoning and, as a result, see their own judgments in a clearer light. At many points, it has been difficult to prevent the study from turning into a general examination of management accounting. The fact is, of course, that many of the problems which beset divisionalized companies plague other companies also. I have tried to concentrate on those aspects of financial control which are peculiar to the divisional form of organization but, as is obvious from the space given to such matters as depreciation, direct costing, and LIFO, I cannot claim to have kept clear of more general issues. I can only ix plead that the discussion of divisionalization would have been woefully incomplete had I done so. Though the needs of tax accounting and management accounting are widely recognized to be different, it is perhaps not so widely recognized that many companies are paying a substantial, though concealed, price for tax savings when, in the pursuit of these savings, they adopt accounting methods which do not serve the needs of management and may even positively mislead it. This point, which is not peculiar to divisionalized companies, kept on obtruding itself as the study proceeded. It is not what is generally meant when people talk about the impact of taxation on business. Perhaps the point deserves more attention from financial executives than it has heretofore received. It is a pleasure as well as a duty to acknowledge the help which I have received from so many quarters. W. Joseph Littlefield, the research director of Financial Executives Research Foundation, has given me his support and advice at every turn. The members of the project steering committee-Donald P. Jones, chairman, L. Russell Feakes, John E. Rhodes, Thornton R. Smith and C. Roger Stegmaier -made numerous valuable suggestions both as the study proceeded and in their review of my manuscript. Dr. Samuel R. Sapienza gave me the benefit of his comments on a large portion of the manuscript which he read, and I enjoyed several discussions with Dr. Tibor Fabian on Chapter VI. James K. Schiller provided much assistance in the early stages of the project, and contributed especially to Chapter VI. John Negrey and Jonathan Harris assisted me ably at later stages of the work. Mrs. Ruth Rich and Mrs. Ceil Smith Thayer, formerly of Financial Executives Research Foundation, Mrs. Muriel Schock, Miss Roberta Webster, and especially Mrs. Jane Semple, all of the Wharton School, and my wife, Miriam, helped, between them, to turn a frequently baffling manuscript into a book. Last, though perhaps most importantly even though they must remain nameless, I must thank the executives of the participating companies who gave so generously of their time to discuss their problems with me. If, as a result of what I learned from them, there is in this book any illumination of those problems, I shall indeed be gratified. David Solomons Wharton School of Finance and Commerce University of Pennsylvania November 1965 COMPANIES PARTICIPATING IN THE STUDY American Can Company American Radiator and Standard Sanitary Corporation Armstrong Cork Company Atlantic Refining Company, The Chilton Company Crane Co. E. I. du Pont de Nemours & Co., Inc. Du Pont of Canada Limited Electric Storage Battery Company, The Frick Company General Electric Company Johns-Manville Corporation Johnson and Johnson Merck and Co., Inc. Olin Mathieson Chemical Corporation Raytheon Company Scott Paper Company Shell Oil Company Smith Kline & French Laboratories Sperry Rand Corporation Stanley Works, The Sun Oil Company Sylvania Electric Products Inc. United Aircraft Corporation United Gas Improvement Company, The NOTE. The following excerpts include the "Conclusion" section of chapter I and the whole of chapters II and III. Omitted portions of the book, preceding and following the excerpts, are indicated by the headings of chapters, sections and subsections, and the captions of figures and exhibits. Page references are to the paperback edition published by Richard D. Irwin, Inc., the title and copyright pages of which are reproduced, supra.-Committee editor. Chapter I. The Organization of Divisionalized Business--- Figure 1. Organization of a Mining and Manufacturing Company- Why do companies divisionalize?. Prerequisites for success_ Divisionalization is not always the right answer_ Division of Responsibilities Between Head Office Staff and Operating Figure 3. Profits and the Pyramid of Power___ The chief executive officer and his lieutenants____ The Division of Authority Between Staff Departments and Divisions__ Figure 4. Organization of a Division of a Manufacturing Com- Divisions or Subsidiaries?____. |