How to Evaluate a Firm

“Evaluating Your Company's Future,” an unpublished paper presented at the Fourth Annual Management Conference, UCLA Executive Program Association, Los Angeles, October 20, 1960, p. 2.

Data from the National Science Foundation, cited in: Research Management, Autumn, 1960, Volume III, No. 3, p. 129.

Lee Dake explains in detail a case in which a financial analyst and a management consultant arrived at opposite conclusions about a firm's prospects in “Are Analysts' Techniques Adequate for Growth Stocks?” The Financial Analysts Journal, Volume 16, No. 6, Nov.-Dec., 1960, pp. 45–49. Dake's thesis can be confirmed many times over in the present author's experience. Particularly distressing was the case where a persuasive but incompetent chief executive persuaded three investment firms to recommend his stock less than six months before declaration of losses exceeding the firm's tangible net worth!.

The factors are: (a) Economic Function; (b) Corporate Structure; (c) Health of Earnings; (d) Services to Stockholders; (e) Research and Development; (f) Directorate Analysis; (g) Fiscal Policies; (h) Production Efficiency; (i) Sales Vigor; (j) Executive Evaluation. The factors and their use are explained in detail in a series of ten reports: The Management Audit Series (New York: The American Institute of Management, starting in 1953).

Most dramatic was the case of the Douglas Aircraft Company whose “excellently managed” rating for 1957-8-9 was followed by staggering losses in late '59 and '60. Among numerous other examples that can be cited are the 1957 ratings of Olin Mathiesen Chemical Co. and Allis-Chalmers Manufacturing Company, both of whom, soon after receiving “excellently managed” ratings, suffered serious declines that have been openly discussed in business magazines. For the ratings, see: Manual of Excellent Managements (New York: The American Institute of Management, 1957). For accounts of the travails of these firms see Business Week, April 15, 1961, pp. 147–149 and April 9, 1960, p. 79.

“Industrial Administration Through the Eyes of an Investment Company,” Appraising Managerial Assets—Policies, Practices and Organization,” General Management Series #151 (New York: American Management Association, 1950). The new emphasis is suggested in a postscript to a reprint published in 1960 by the Keystone Custodian Funds, Inc. (Boston, Mass.: 1960, p. 13). Professor Schell suggested increased emphasis on tax administration, too. The original factors were: (a) Breadth and variety of viewpoint in administration; (b) Vigor and versatility in operating management; (c) Clarity and definiteness of long-term objectives; (d) Vigilance in matters of organization; (e) Dependence upon far-reaching plans; (f) Maintenance of integrated controls; (g) Upkeep in harmony with an advancing art; (h) Improvement as a normal expectancy; (i) Creativeness through high morale; (j) Effectiveness of managerial attitudes; (k) Resources for consistently distinguished leadership in a specific industry.

For an illustration and discussion of use of life-cycle curves, see Randle C. Wilson , “Selecting the Research Program. A Top Management Function,” California Management Review, Volume II, No. 2 (Winter, 1960), pp. 10–11.

The Bell and Howell methods are described in two articles: “How to Coordinate Executives,” Business Week, September 12, 1953, p. 130 ff., and “How to Plan Profits Five Years Ahead,” Nation's Business, October 1955, p. 38.

An invaluable review of this literature up to early 1957 is given in: Rubenstein Albert H. , “Looking Around: Guide to R & D,” Harvard Business Review, Volume 35, No. 3, May-June, 1957, p. 133 ff. Among the most pertinent articles since Rubenstein's review are: Roehl Ora C. , “The Investment Analyst's Evaluation of Industrial Research Capabilities,” Research Management, Volume III, No. 3, Autumn, 1960, p. 127 ff.; Nelles Maurice , “Changing the World Changers,” a paper presented at the Ninth Annual Management Conference, The Graduate School of Business Administration, University of Chicago, March 1, 1961; Randle C. Wilson , “Problems of R & D Management,” Harvard Business Review, Volume 37, No. 1, January—February 1959, p. 128 ff.; Quinn James B. , “How to Evaluate Research Output,” Harvard Business Review, Volume 38, No. 2, March-April 1960, pp. 69 ff.; and “Long-Range Planning of Industrial Research,” Harvard Business Review, Volume 39, No. 4, July-August 1961, pp. 88 ff.

Ansoff H. Igor , “Strategies for Diversification,” Harvard Business Review, September-October, 1957.

For an exposition of this thought as applied to large firms, see: “The New Power of the Financial Executive,” Fortune, Volume LXV, No. 1, January 1962, p. 81 ff. See also the new text by Weston J. Fred , Managerial Finance (New York: Holt, Rhinehart & Winston, 1962).

Likert Rensis , reporting on a decade of social science research into patterns of management makes a case for participative management in New Patterns of Management (New York: McGraw-Hill Publishing Company, 1961). George Odiorne, reporting on studies of successful managements, warns strongly against the views of social scientists and makes a case for the more traditional, somewhat autocratic, business leader in How Managers Make Things Happen (New York: Prentice-Hall, Inc., 1961). Both authors are professors at the University of Michigan.

Environmental Change and Corporate Strategy. (Menlo Park, California; Stanford Research Institute, 1960), p. 8. A more recent report on this continuing research project is given by Young Robert B. , “Keys to Corporate Growth,” Harvard Business Review, Volume 39, No. 6, Nov.-Dec., 1961, pp. 51–62. Young concludes: “In short, the odds for corporate growth are highest when the top executives of a firm treat their future planning as a practical decision making challenge requiring personal participation, and direct their planning efforts toward the origins of opportunity itself. Such an approach can make the difference between having constantly to adapt to day to day crises and enjoying profitable future growth.”

For one such checklist, see: Sproul Robert G. Jr. “Sizing Up New Acquisitions,” Management Review, XLIX, No. 1, Feb. 1960, pp. 80–82.

A new textbook brings together for the first time the few and scattered writings on the subject of “company character.” See Wolf's William B. The Management of Personnel (San Francisco: Wadsworth Publishing Company, Inc., 1961), pp. 8–43.