Growth by Vertical Integration: Primary Metals

The firms of this last industrial group differed from those in the other groups in which large enterprises clustered. Their manufac- turing establishments were the most costly in American industry. (Indeed, because the criterion for size in Appendix A was assets, the sample is biased in favor of such heavy industry. If sales or value added had been used, fewer primary metal and more food and machinery firms would have appeared as the largest American enterprises.) The firms in the primary metal group also differed in that they made a much heavier investment in backward rather than in forward integration. Of the 26 iron and steel makers with assets of $20 million or over, 12 owned a full range of mines, transportation facilities, blast furnaces, open-hearth and Bessemer furnaces, and rolling mills (see table 8). Only 4 of these had integrated forward into fabricated finished products. As late as 1948 only 5.7 percent of the hot-rolled sheet steel produced in the United States was used by fabricating companies controlled by steel makers.23 As table 8 indicates, the remaining 14 were even less integrated, with 5 making only pig iron and steel billets. Those that did integrate had done so, much as Carnegie had done in the 1890s, to assure themselves of an adequate supply of raw materials for their costly production works.

Source: Appendix A, Moody’s Manuals of Industrial Securities, and company reports.

Numbers indicate rank among the largest 278 industrials in 1917. The letter (f) indicates integration beyond rolling mills. Name in brackets is the company into which the firm merged.

Because the iron and steel companies purchased from so few sources and sold to a relatively small number of customers, their purchasing and sales departments were much smaller than those of most large American industrial enterprises. Nevertheless, all but 1 of the companies listed in the table had its own branch sales offices by 19 17 . Administrative coordination between production and distribution was a significant factor in reducing costs. Close cooperation between production and sales managers made possible tighter scheduling of the flow of materials through the furnaces and mills and also helped to assure the shipment of large and varied lots made to precise specifications and delivered on an exact schedule. The marketing of semifinished iron and steel products, however, did not require specialized installation, after-sales service and repair, or complex credit arrangements. A small sales force working out of a few regional offices was able to obtain orders, schedule them, and assure delivery.

The advantages of integrating production with distribution meant that the major mergers in iron and steel—Bethlehem, Crucible, United Alloy, Republic, and American Rolling Mill—consolidated their operations and administered them through functionally defined organizations. The last 2 had by 1917 gone one step further and set up integrated divisions to serve separate geographical markets.

The one major exception to administrative consolidation was the United States Steel Corporation. That huge consolidation formed by J. P. Morgan to control close to 60 percent of the industry’s output resulted from the financier’s concern for increased competition. His investment banking house arranged the merger in 1901 after Carnegie began to move forward into the making of finished products in response to backward integration by new combinations such as American Steel & Wire.24 For many years after its formation the United States Steel Corporation continued to be a holding company that administered its many subsidiaries through a very small general office. Except for the Carnegie Company and, after 1907, the Tennessee Coal and Iron Company, these subsidiaries were single-function companies in mining, transportation, coke, metal production, and fabrication. The general office did little to coordinate, plan, and evaluate for the activities of the subsidiaries. Only in foreign purchases and sales was there any clear central direction. Until Myron C. Taylor began a massive administrative reorganization of the corporation in the 1930s, the Steel Corporation remained little more than a legal consolidation.

By 1917 the American iron and steel industry had acquired its modern look. Its major branches had become concentrated, and the same firms would long continue to be its leaders.25 Of the 13 largest iron and steel companies in 1967, all but 1 was in operation in 1917 . Of those 12, 8 were already among the 10 largest in the industry in 1917 . The other 2 of the top 10 in that year—Midvale and Lackawanna—became part of Bethlehem in 1922 . The only new company to appear by the 1970s was National —a merger of 3 firms, 2 of which already existed in 1917 . As the table indicates, after 1917 the large steel firms grew by merger, and such mergers increased the extent of integration within the industry. By the 1930s nearly all the large firms came to coordinate the flow of materials from the mines through the rolling mill, but not further into fabrication.

In 191 7 the copper enterprises were even less integrated than those in iron or steel. Anaconda had extended forward from mining to refining and fabricating of wire and sheet. American Smelting and Refining, a merger formed in 1899 of copper refiners and smelters, had reached backward into mining and soon had worldwide investments in copper mines. Kennecott and Phelps Dodge remained primarily mining companies, doing only a small amount of smelting and refining. And in 1917 Calumet & Hecla, Chile Copper, Utah Copper, Greene Cananea, and 6 other copper companies on the list of the 278 top companies were still only mining enterprises. On the other hand, one large copper-selling company, American Metal Company, was beginning to move backward into fabricating and smelting. So, by the coming of World War I the copper industry was just beginning to be dominated by a few large integrated firms. After World War I, integration of mining, smelting and fabricating of semifinished materials came quickly. By 1950 the big four—Anaconda, American Smelting and Refining, Kennecott, and Phelps Dodge—produced 90 percent of the nation’s copper, and their subsidiaries processed 65 percent of the copper they produced.26 Well after 1917 the sales organizations of the large copper companies were even smaller than those in iron and steel. Some continued to use manufacturers’ agents to sell their products.

The producers of nickel, lead, and zinc who began as mining firms had by 1917 moved little beyond smelting and refining their ores. International Nickel, St. Joseph Lead, American Zinc, Lead, and Smelting, and United States Smelting and Refining had large refining facilities but did not fabricate standard shapes. As they sold to only a few customers, their sales forces remained tiny.

On the other hand, the first enterprise to commercialize the newly invented methods for the mass production of aluminum quickly created a large, global sales force to sell the output produced.27 For when the Aluminum Company of America began operations, the market for alu- minum products was small and specialized. The company found new uses for its goods in the older trades and still larger markets in the newer automobile and airplane industries. By developing a kitchenware line, it became the only large metal company to sell consumer goods in volume.

The rapidly growing and varied demand engendered by its sales force quickly brought integration backward into bauxite mines and ore ships. By 1917 the Aluminum Company of America was coordinating the flow of goods from the sources of raw materials to the ultimate consumer much as the oil companies did. This powerful international organization with its high-volume, capital-intensive production and massive distribution gave the pioneering enterprise in the industry an enormous competitive advantage.

In the primary metals industry the motives for integration were largely defensive. Where a small number of mining firms controlled sources of supply, the processing companies wanted to have their own assured sources; and where mining firms sold to a small number of processors, they wanted to be sure of their outlets. The pattern in iron and steel was for manufacturing firms to move backward into mining and in the nonferrous industries for mining firms to reach forward into manufacturing. Before World War I, however, few primary metal enterprises had integrated forward into the fabrication of finished products. When they did, the motive again tended to be largely defensive. Their aim was to have a more certain outlet for their products.

The relatively small size of the buying and selling organizations of primary metals companies and the fact that they did not coordinate the flow of materials from the supplier of raw materials to the final consumer meant that their managerial organizations were smaller than those in other industries. And possibly because they were smaller, the top companies in primary metals in the years after World War I made less effort than the leading firms in food, machinery, oil, rubber, and chemicals to diversify their product lines or to extend their activities overseas.

Source: Chandler Alfred D. Jr. (1977), The Visible Hand: The Managerial Revolution in American Business, Harvard University Press.

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