One of the most important concepts in business and sales is the Return On Investment. When we entertain a business proposition or perform financial analysis on a deal or a business segment, it is critical to understand our profit from each investment. In other words, we want to know what the profit return is for any financial investment.
As an example, we may want to invest in building a relationship with a new client or to develop a new market. The new client may require we invest in advertising or promotion to gain distribution. We must determine if the client can provide an order with sufficient sales volume to make this deal attractive. The measure of profitability is our return on investment. This watershed concept is expressed in a simple but elegant ratio with our profit as the nominator divisible by the investment as the denominator. If we have a profit of $100,000 on an investment of $50,000, our Return On Investment is 200%.
The history of how this elegant and ingenuous financial ratio, the Return on Investment, popularly expressed by its acronym ROI, relates to the fascinating history of E. I. DuPont de Nemours & Company (DuPont). DuPont is one of the largest chemical conglomerates in the United States of America and in 2017 merged with Dow Chemical with combined revenues of $79.5 billion before being split into 3 different chemical companies. After being spun off, today DuPont is a $12 billion company with 24,000 employees.
DuPont was established in 1802 in Eleutherin Mills, Delaware as a gunpower mill and emerged as one of the largest chemical companies in the world. The company was founded by chemist and industrialist Eluthere Irene du Pont de Nemours Jr. (1771-1834), a minority Huguenot Protestant fleeing religious persecution and political uncertainty in revolutionary France. Eluthere Irene (E.I.) du Pont’s descended from an influential French noble family and his father Pierre Samuel (P.S.) du Pont de Nemours (1739-1817) was a writer, publisher, political economist and advisor to King Louis XVI (1754-1793). The distinguished French chemist and nobleman Antoine Lavoisier (1743-1794), discussed earlier as naming the element oxygen and the first to understand its role in combustion, became the mentor and teacher of E. I. du Pont in chemistry and in particular explosives. Lavoisier served on France’s elite Gunpowder Commission and had a residence and laboratory at the Royal Arsenal. The king strategically placed Lavoisier’s residence at the arsenal to assure safety as a top priority.
The first significant client for E.I du Pont and earliest supporter was President Thomas Jefferson (1743-1826) and the United States government. Jefferson was friends with E.I’s father, P.S. and worked with the father in France when Jefferson served as Minister to France (1785-1789). P.S. du Pont assisted Jefferson in the negotiation of the Louisiana Purchase for $15 million ($420 million in today’s dollars) from France in 1803, and Jefferson who served as President from 1801-1809 mandated orders be placed with the DuPont for gunpowder to be used in the Barbary Wars (1801-1805). By the middle of the 19th century and the American Civil War (1861-1865), DuPont supplied nearly half of the gunpowder to the Union Army. At the turn of the 20th century, the company experienced rapid growth in World War I (1914-1918) as the principal munitions supplier to the federal government receiving advanced payments for its strategic war materials.
John Jakob Raskob (1879-1950) was hired in 1901 as a personal secretary to Pierre Samuel du Pont (1870-1954), president of E.I. du Pont de Nemours and Company and great-grandson of the company founder. Raskob rose to become assistant treasurer in 1911 and treasurer and vice president in 1914 (equivalent to today’s Chief Financial Officer or CFO) of Dupont. With its wartime profits, Raskob engineering a deal whereby DuPont became a key investor in General Motors (GM) and owned 43% of the stock. From 1917 to 1919, DuPont invested $50 million (approximately $850,000,000 inflation adjusted in today’s dollars) in the financially troubled GM. Pierre S. du Pont, who was a graduate of Massachusetts Institute of Technology (MIT), replaced William C. Durant and served as president of General Motors from 1920 until 1923 where he was succeeded by Alfred P. Sloan, Jr, also a graduate of MIT.
Pierre S. du Pont also served as chairman of the board of GM until resigning in 1928. Pierre S. du Pont was president of DuPont from 1915 to 1919 and on the board of directors through 1940. Remarkably, Raskob served as the vice president of finance (CFO) of both GM and DuPont simultaneously. Raskob resigned in 1928 after a dispute with Alfred P. Sloan regarding Raskob’s role as chairman of the Democratic National Committee and support of democratic candidate Al Smith for president.
DuPont still the largest shareholder in GM in 1957 with 23% stock was compelled to divest due to a United States Supreme Court Ruling citing the Clayton Anti-Trust Act. The conflict of interest related to DuPont being one of the principal suppliers to GM with paints, lacquers, and fabrics, and maintaining ownership of its customer. After wrangling in courts, DuPont after 47 years divested of GM in 1964. Raskob introduced the General Motors Acceptance Corporation (GMAC) in 1919 to provide financing to dealers inventory and installment financing for consumers. A boon for GM’s sales growth, installment financing made cars affordable to the masses.
Frank Donaldson Brown (1885-1965) was hired in 1909 as an explosives salesman at Dupont by his first-cousin Hamilton Barksdale, a general manager at DuPont and married to Ethel du Pont. Brown was an electrical engineer and graduate of Virginia Tech and attended Cornell for graduate work with no formal education in finance. Brown become an administrative analyst studying a range of business segments. Raskob identified Brown’s talent and mentored him as a protégé appointing him treasurer of Dupont in 1912.
DuPont diversified its business and participated in industries ranging from dyes to lacquers to explosives and needed universal financial measurements to determine its business unit’s performance and profitability. Brown in 1914 invented the now famous and ubiquitous statistical financial ratios to achieve this objective, the Return on Investment or “ROI” and Return on Equity or “ROE.” These financial ratio formulas were originally known as the “DuPont Method” or the “DuPont Model.”
Brown married his cousin Hamilton Barksdale’s daughter, Greta du Pont Barksdale, in 1916 further catapulting him in the company’s inner circle of influence. To look after the family interests, Brown was installed as the GM vice president of finance (today’s equivalent of Chief Financial Officer) in 1921 and remained in this position until 1946 and rose to serve as vice chairman of the board of GM from 1937 to 1946 and remained on the board until 1959. At GM, Brown made other innovative financial management and control contributions including the “10- Day Dealer Reporting.” This required dealers to provide sales figures to management every 10 days, instead of once a year, thereby enabling GM to better plan for future production and inventory optimization.
DuPont during World War II (1939-1945) further diversified its business, and the principal supplier to the federal government for explosives, gunpowder and nylon used in tire cords and tires, entered the nuclear energy business at the behest of the United States government. When Italian American physicist Enrico Fermi (1901-1954) of the University of Chicago proved a controlled nuclear chain reaction could be made splitting uranium in December 1942 at the Chicago Pile-1 in old racquet courts under Stagg football field, the government asked DuPont to build the world’s first industrial nuclear reactor facility. DuPont accepted the assignment for the Manhattan Project charging the United States $1 above costs. In 1943 DuPont’s team of chemical engineers and over 50,000 employees built the Oak Ridge, Tennessee nuclear X-10 Graphite Reactor, followed by two facilities in Hanford, Washington B Reactor and T-Plant, both operational in 1944. The enriched uranium used in the “Little Boy” atomic bomb dropped on Hiroshima, Japan on August 6, 1945 was manufactured at Oak Ridge.
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