One reason for the continuing spread of the modern enterprise was that the new professional associations, journals, training courses, and con- sultants made possible a rapid diffusion of the new managerial and administrative procedures. More important, of course, were the advancing technologies and expanding markets that gave the multiunit firm a com- petitive advantage in an increasingly larger part of the American economy. Where the firm already dominated, it continued to grow by adding new units and by internalizing their activities and the market transactions in- volved. In other industries and sectors where the multiunit enterprise had not yet become strong, it appeared, grew, and flourished when processes of production and the needs of distribution made administrative coordination more efficient than market coordination.
In transportation and communication, the operations and organization of the railroad, telephone, and telegraph systems remained much the same well into the twentieth century. The boundaries of the large regional railroad systems changed little even though some mergers occurred and some interior lines continued to try, usually unsuccessfully, to obtain their own outlets to the seaboard. Only after World War II, when railroads began to become technologically obsolete in the carrying of passenger and some freight traffic, did the maps of American railroad systems begin to change significantly. In communication, the telephone steadily replaced the telegraph in long-distance service. American Telephone & Telegraph continued to operate much the same way after World War I as it had at the beginning of the century, with its nationwide “long-lines” organization responsible for long distance and twenty or so regional subsidiaries for local operations. The latter were still managed through centralized functionally departmentalized structures.22
In the two decades following World War I, the internal combustion engine began to break the railroads’ hold, first on the nation’s passenger traffic and then in the carrying of freight. By the outbreak of World War II, the place of the large enterprise in the new forms of transportation was becoming clear. In air transport, where precise operational coordination was as essential for safe and efficient operations as it was on the railroads eighty years before, a few carefully structured enterprises were beginning to dominate, with the consent and even assistance of the Civil Aeronautics Board. Truck, bus, and taxi lines, however, required much less precision in operational scheduling, less complex equipment, and a smaller capital investment. Here small firms competed effectively with large ones, even on the long hauls. So, as air transport was becoming oligopolistic, ground transportation was becoming more competitive.
In mass marketing and distribution, retailers continued to expand at the expense of wholesalers. Retail enterprises grew by adding new lines and, even more, by adding new outlets or stores. The chain store became the fastest growing channel of distribution. The existing chain stores expanded more rapidly than other types of retailers. And new chains appeared more often than did new department stores or mail-order houses. Chains moved into the drug, grocery, and other trades that had hitherto been the domain of the wholesaler and the small retailer.23 Department stores began, albeit most hesitantly, to enlarge their business by building branches in the suburbs.
Mail-order houses did so much more precipitately when their basic rural market ceased to grow. Farm income fell from $14.6 billion in 1919 to $8.6 in 1921; it came back to only $10.5 billion in 1926. As a result, mailorder firms, large and small, began to build chains of retail department stores to provide outlets in urban and, particularly, the fast-growing suburban markets. Between 1925 and the onslaught of the great depression at the end of 1929, Sears and Montgomery Ward both created a large nationwide chain. By the end of 1929, Sears had opened 324 retail stores and Montgomery Ward nearly 500.24
This expansion, by internalizing more market transactions, permitted the enterprises to make fuller use of their buying, traffic, and operating organizations. Sears, Montgomery Ward, and some chains integrated backward, obtaining factories to assure themselves of a constant supply of goods in certain lines. But, as was true before World War I, manufacturing remained only a small part of their total operations. They always preferred to buy when they could and to manufacture only when it was absolutely necessary in order to obtain stocks of desired specifications. In one area they did develop new facilities—when they began to sell, in volume, appliances, sewing machines, and other “big tickets,” as they were called, which required specialized marketing services. The chains soon found that if they were to compete with the producers of such machinery, they too would have to have their own organizations to service and repair the machines as well as to provide credit and to make collections.25
Because the mass retailers did not need to invest in large amounts of costly capital equipment, they continued to rely on the high-volume, internally generated cash flow to provide for most of their working and fixed capital. Sears, Roebuck and Montgomery Ward did obtain some outside funds to build new mail-order plants before World War I and to get through the inventory crisis of 1920-1921. On the other hand, the great expansion of retail stores after 1925 was, despite the costs of buying land and building stores, entirely self-financed.26 So the Rosenwalds of Sears and the Thornes of Wards remained in control of their enterprises. So, too, did the families of the builders of many department stores and those that created the Atlantic & Pacific, Woolworth’s, Penney’s, and other chains. They began to relinquish control only when they wished to lessen their business responsibilities or to diversify their holdings.27 The nature of the chains’ financial needs permitted the mass retailers to remain entrepreneurial enterprises much longer than did the integrated industrials.
Although this study has not examined the continuing growth and internal organization of financial enterprises, it is worthwhile to point out that they too expanded by becoming multiunit. The insurance companies were the first financial firms to become modern business enterprises. In their early years, the life insurance firms had specialized marketing needs that were similar to those of the mass producers of machinery.28 For actuarial reasons they had difficulty in becoming viable business enter- prises until they had enough policyholders to spread the risks widely. Then the large volume of their business permitted them to lower the unit cost of writing insurance by internalizing and routinizing the transactions involved. The maintenance of the volume of business, in turn, depended on direct canvassing by salesmen and on maintaining a close continuing relationship with the customer. Like the early machinery companies, most insurance firms began in the 1880s and 1890s to replace large sales agencies with branch offices operated and administered by salaried employees. Nearly all came to be managed through three basic functional depart- ments: sales, operations, and investment.
Well before 1900 the structure of the American insurance industry showed similarities to the agricultural implement and meat-packing trades. The Big Three—Mutual, Equitable, and New York Life—dominated the industry, and the smaller, though still large, enterprises—Metropolitan, John Hancock, Aetna, Connecticut Mutual, Northwestern Mutual, and Pennsylvania Mutual—followed their lead. The Big Three immediately built extensive marketing organizations overseas. By the beginning of the twentieth century they were among the largest insurance companies operating in many European countries. The smaller enterprises tended to stay closer to home. Again, as in the case of the marketing companies and those industrials which were financed by high cash flow, these enterprises were controlled by the founders and their families.
In the twentieth century the structure of the enterprise and the struc- ture of the life insurance business remained relatively unchanged. As state regulation increased and as companies adopted a mutual form of corporate organization by which policyholders became share owners, these firms became managerial. Even before World War I, the Big Three had begun to contract their overseas business as European states passed regulations against foreign and particularly American insurance companies doing business in their territories. While concentrating on the home market, the insurance firms did come to carry a full line of policies. However, they made no attempt to diversify into other fields. They remained, as did most transportation and communication companies, large bureaucratic enterprises carrying out a single major activity through a centralized functionally departmentalized organizational structure.29
Commercial banks, unlike insurance companies, did not build national organizations. This was because banks could normally do business only in the state in which they were chartered. Moreover, the National Banking Act of 1864 and laws in many states forbade the banks within their jurisdictions to have branches. During the nineteenth century, commercial banks, except those of New York and Chicago, looked on themselves as local institutions serving a single community. After 1900, however, as the economy, particularly the cities, grew, the demand for banking services became more acute. In 1913, for example, the Federal Reserve permitted national banks to open branches abroad.30 When state and national laws were modified, American banks then began to grow by building branches. And where local laws continued to limit branches, banks created multiunit enterprises by merging and forming chains. Like the marketing firms, they found that they could make more intensive use of their central office facilities and reach more customers by setting up geographically dispersed outlets. In 1900 fewer than 100 American banks operated in more than one office. By 1919, 464 banks operated 1,082 branches, and by 1929, 816 had 3,603 branches. The share of bank resources held by the multiunit enterprises rose from 16 percent in 1919 to 46 percent in 1929. By then, many banks had also set up branches overseas. While remaining solely banking enterprises, American banks did, like the insurance companies, soon offer a full line of services and so had departments for checking and savings accounts, foreign exchange, and fiduciary trusts, as well as for commercial banking.
After World War I the most important developments in the history of modern business enterprises in the United States did not come from enterprises involved in carrying out a single basic activity such as trans- portation, communication, marketing, or finance. Nor did they come from firms that only manufactured. They appeared rather in large industrials that integrated production with distribution. In the years after 1917 these enterprises continued to grow in size and number. As regional and national markets expanded and as technological advances permitted an increase in the speed and volume of throughput and stock-turn, the integrated enterprises moved into industries where they had played a smaller role before World War I. These industries, however, were nearly all in those larger industrial groups where the integrated enterprises had clustered from the start. As the firms became integrated, the industries in which they operated became more concentrated.31
In the years after the First World War, large integrated firms began to expand by moving into new products for new markets. This strategy of diversification evolved from the concept of the “full line,” which many early integrated enterprises had adopted well before 1917. Many American companies, following the example of pioneering big businesses in tobacco, grain, soap, meat packing, cotton oil, rubber, and lead processing, added lines that permitted them to make more effective use of their marketing and purchasing organizations and to exploit the by-products of their manufacturing or processing operations. As in the case of the meat packers and others, the intensified use of their marketing organization led to the addition of new production facilities, and expansion in the output of by-products led to the addition of new marketing facilities and personnel.
It was not until the 1920s, however, that diversification became an explicit strategy of growth. Before the war, acquisitions of new products had been ad hoc responses of middle managers to fairly obvious oppor- tunities. After the war, top managers began to search consciously for new products and new markets to make use of existing facilities and managerial talent. The Du Pont Company, one of the very first to diversify in this manner, did so in order to employ the managerial staff and facilities which had been so greatly enlarged by the demands of World War I. Others soon followed. Their goal was, like that of the Du Pont executive committee and the managers at the meat-packing firms, to use more intensively all or part of the existing organization. The leveling off of the national income in the mid-192os and its drastic decline in the 1930s intensified the search for new products.
The new strategy was aimed at assuring the long-term health of an enterprise by using more profitably its managers and facilities. In nearly all cases, the plans were formulated and carried out by salaried and pro- fessional managers. And in nearly all cases they were financed from re-tained earnings. Without such expansion, current dividends would certainly have been higher.
The strategy of diversification of the industrial managers, therefore, raised the possibility of internal controversy much as system-building did in railroading. The conflicting goals of maintaining current profits and assuring long-term organizational stability may have led to arguments within boards of directors of industrials, as they did earlier on railroads.
Much more research is needed before reliable information exists on this point. Nevertheless, it seems unlikely that such conflicts became as overt as they did on the railroads. The large industrials, unlike the railroads, were able to maintain dividends while carrying out their strategy of growth. Their oligopolistic position helped them to make profits and to absorb losses even during the great depression of the 1930s. Moreover, such expansion required smaller amounts of capital expended over longer periods of time than did railroad system-building. As long as the managers of these enterprises continued to pay modest dividends regularly, the bankers or representatives of the founder’s family or of the large stock- holders who sat on the finance committee of their boards could view such growth with equanimity and even enthusiasm. Expansion financed by retained earnings, and not by large issues of stocks and bonds, promised to increase substantially the value of their holdings.
In undertaking the new strategy of diversification, managers occasion- ally purchased or merged with a company that provided a new or com- plementary line. Much more often such expansion resulted from internal growth. The managers looked to their research organizations, originally set up to improve product and process, to develop the new products that might be particularly suitable to their production processes or marketing skills.
Not surprisingly, therefore, this new use for industrial research was first developed in the same industrial groups where the large enterprise had come to cluster by World War I. In 1929 over two-thirds of the personnel employed in industrial research were concentrated in five groups: electrical with 31.6 percent; chemical with 18.1 percent; nonelectrical machinery with 6.6 percent; metals, also with 6.6 percent; and rubber with 5.9 percent.32 Although food and oil companies employed somewhat fewer researchers, they still had many more than did firms in labor-intensive, small-unit, competitive industries. As Michael Gort has pointed out in a detailed study of product diversification, chemical companies were the major diversifiers during the 1930s—that is, they added more new product lines than did enterprises in any other industrial group. They were followed by those in electrical machinery, transportation equipment, primary metals, and rubber.33 Moreover, the industries into which these diversifying enterprises moved were, in order, chemicals, machinery, fabricated metals, electric machinery, food, and stone/glass/ clay. This pattern of interweaving diversification continued well beyond World War II.
The histories of individual firms emphasize Gort’s more general points.34 In the 1920s, chemical firms like Du Pont, Union Carbide, Allied Chemical, Hercules, and Monsanto all entered new industries. Each did so from its own specific technological base (for example, the Du Pont base was nitrocellulose chemistry, and Union Carbide’s was carbon chemistry). In the same decade, the great electrical manufacturers—General Electric and Westinghouse—which up to that time had concentrated on manufacturing light and power equipment, diversified into the production of a wide variety of household appliances, as well as radio and x-ray equipment. During the depression decade of the thirties, General Motors (and to a lesser extent, other automobile companies) began to make and sell diesel locomotives, appliances, tractors, and airplanes. By using organi- zational and operating techniques developed in the automobile industry for the production and distribution of diesels, General Motors helped to make the steam locomotive a historical relic within a single decade. Metal makers, particularly copper and brass companies, followed the example of the Aluminum Company of America by producing kitchenware and household fittings. Some rubber companies started to develop the poten- tialities of rubber chemistry. Others used their distribution networks to sell a wide variety of products often made by other manufacturers. In the 1930s, too, food companies began to use their marketing facilities to handle new lines of goods which they then processed themselves.
These firms found that the new multidivisional structure met the administrative needs of the new strategy. In fact, the managers at Du Pont had first fashioned such a structure during the recession of 1920-1921 as an answer to the new administrative challenges created by their diversification program.35 Their move into paints, dyes, film, fibers, and chemicals overloaded the company’s existing centralized, functionally depart- mentalized organization. That structure broke down under the strain of attempting to coordinate the flow of goods of several lines of products sold in a variety of markets and to allocate resources among these dissimilar kinds of businesses. As a result, Du Pont’s performance in the new ventures had been so poor that in 1921 only the long-established explosives business showed a profit. The creation of separate integrated autonomous divisions to handle the production and distribution of explosives, dyestuffs, celluloid products, fabrics and film, paints and chemicals, and rayon made these major lines profitable. Since Du Pont had long had large and efficient top management, its organizational effort was not concentrated, as was General Motors’, on building the general office, but rather on setting up and defining the functions and structure of the new product divisions.
The multidivisional structure adopted by General Motors, Du Pont, and later by United States Rubber, General Electric, Standard Oil, and other enterprises in technologically advanced industries institutionalized the strategy of diversification. In so doing, it helped to systematize the processes of technological innovation in the American economy. The research department in such enterprises tested the commercial viability of new products generated either by the central research staff or by the operating divisions or even developed outside the company. The executives in the general office, freed from day-to-day operational decisions, determined whether the company’s managers could profitably process and distribute these new products. If they decided that the managers could not, then they normally licensed the new product to some other firm. If they agreed that they could, and that the potential market was similar to one in which the firm currently sold, then its production and sale were given to an existing division. If the market was quite different, a new division was formed. By the outbreak of World War II, the diversified industrial enterprises using the divisional organization structure were still few, but they had become the most dynamic form of American business enterprise.
Source: Chandler Alfred D. Jr. (1977), The Visible Hand: The Managerial Revolution in American Business, Harvard University Press.