In 1919, F. Donaldson Brown developed the Sustainable Growth Model (SGM), a financial performance management tool that transformed two industry giants, DuPont and General Motors Corp. More than 90 years later, the model still is widely studied and used.
Brown developed SGM (also known as the DuPont formula) when serving as DuPont’s treasurer, and he brought the concept to General Motors as chief financial officer. Many believe the powerful financial analysis tool Brown pioneered helped these companies ascend to and maintain leadership positions in their respective industries for years.
SGM has demonstrated rare longevity among financial analysis tools. It has served as the basis for a 30-year Harvard Business School case study of Brown Lumber.
|John Lass examines the sustainability of the current CU business model. Watch now.|
The key lesson from the Brown Lumber study was that the company, which appeared to be successful at first analysis, was trying to grow faster than its capital and income would support. In fact, it was on an unsustainable trajectory and would soon require infusions of capital to survive.
The Brown Lumber case was my introduction to SGM as a first-year MBA student. A few years later, when I was a strategy consultant with Boston Consulting Group, I learned to apply the model to industries as diverse as transportation, energy, health care, and electronics.
And, as we will see, the formula also works remarkably well for credit unions.
This model has remained popular for so long because it’s easy to use and understand. It pulls data from both the balance sheet and income statement, and provides a comprehensive view of a firm’s financial strengths and weaknesses.
Next: How SGM works