Integration Completed – An Overview: 1900-1917

As the new century opened, patterns of success and failure were only just beginning to appear. Manufacturers, financiers, investors, and other businessmen were entranced by the promise of large-scale industrial enter- prise. They had differing reasons for creating these new empires and dif- fering plans for keeping them profitable. Some still looked for profit through control of competition, others sought profit through the manipu- lation of securities. More were becoming aware of the profitability of rationalizing the processes of production and distribution. Few, however, considered the technology of production and the nature of markets to be the primary influences on the long-term success of their ventures. They saw much the same potential in textiles, leather, and bicycles as they did in biscuits, corn products, oil, chemicals, and automobiles. Contemporary economists and business analysts were no more perceptive.

By World War I, however, the broad patterns of growth of the large industrial enterprise were clear. The constraints of technology and markets on the growth of a firm were apparent. By the second decade of the century, the shakedown period following the merger movement was over. The successful mergers were established and the unsuccessful ones had failed. Modern business enterprises dominated major American industries, and most of these same firms continued to dominate their industries for decades.

Understanding the evolution of modern industrial enterprise during the critical years after the merger movement requires more than a review of the experience of individual companies. For the 1880s and 1890s, when the multiunit industrial corporation was new, the few individual pioneering enterprises provide the information necessary for an analysis of insti- tutional developments. But after 1900 the modern multiunit industrial en- terprise became a standard instrument for managing the production and distribution of goods in America. Hundreds of such companies came into existence. Only a collective history of large industrial enterprises can re-veal the outlines of institutional change in American industry after the merger movement.

The companies that provide the base for this collective history are listed in Appendix A. They include nearly every enterprise involved in the pro- duction of goods in the United States in 1917 that had assets of $20 million or more. This list of 278 companies was taken from a compilation of the 500 largest industrials in the United States made by Thomas R. Navin and published in the Autumn 1970 issue of Business History Review.1 In compiling his list, Navin defined industrial enterprises as all those involved in agriculture, forestry, fishing, mining, construction, and manufacturing. He did not include those providing transportation, communication, and light and power. Nor did he consider financial or marketing firms. In Appendix A these industrial enterprises are grouped under the two-digit Standard Industrial Classification industrial group in which they operated. In each group they are listed by size, with the place among the top 500 in- dicated in the left column. The table also shows whether the firm became an integrated, multifunctional firm or remained a single-function enter- prise. An integrated firm is one that, in addition to operating its manufac- turing facilities, had its own branch sales offices and purchasing organiza- tion or its own sources of raw and semifinished materials as well. Finally, Appendix A indicates whether the integrated firms were managed through departments or subsidiaries.

It is immediately apparent from Appendix A that the largest American enterprises in 191 7 involved in the production of goods were concentrated in manufacturing and processing. There were none in construction. Only 5 were agricultural enterprises—1 in ranching, 1 in the growing of sugar cane, and 1 in the growing and harvesting of crude rubber. A fourth was United Fruit, a vast, integrated business empire that had adopted the new techniques of the meat packers to transport, distribute, and market ba- nanas. The fifth was one of its much smaller competitors, the Atlantic Fruit and Sugar Company. A larger number, 30, were mining firms; 7 others produced only crude oil. But of the 278 largest industrials in the United States in 1917 , 23 6 manufactured or processed raw or semifinished materials into finished products.

Further, of these 236 manufacturing firms, 171 (72.5 percent) clustered in six two-digit SIC groups: 39 in primary metals, 34 in food, 29 in trans- portation equipment, 24 in machinery, 24 in petroleum, and 21 in chemi- cals. Twenty-three (9.7 percent) were scattered in seven groups: 7 in textiles, 5 in lumber, 4 in leather, 3 in printing and publishing, 3 in apparel, 1 in instruments, and o in furniture. The remaining 42 were in continuous- process and large-batch four-digit industries within the seven remaining groups. In the paper group, the large firms were clustered in the production of newsprint and kraft paper; in the stone, glass, and clay group, in cement and plate glass; in the rubber group, in tires and foot- wear; in tobacco, cigarettes; in fabricated metals, cans; in electrical ma- chinery, standardized machines and in miscellaneous, matches.

Thus the largest manufacturing firms in 1 917 , whether they grew large through merger or internal expansion, were clustered in industries with characteristics similar to those in which the integrated enterprise first ap- peared in the 1880s and 1890s, and those in which the turn-of-the-century mergers were most successful. The large industrial enterprise continued to flourish when it used capital-intensive, energy-consuming, continuous or large-batch production technology to produce for mass markets. It flourished when its markets were large enough and its consumers numer- ous enough and varied enough to require complex scheduling of high- volume flows and specialized storage and shipping facilities, or when the marketing of its products in volume required the specialized services of demonstration, installation, after-sales service and repair, and consumer credit. It remained successful because administrative coordination con- tinued to reduce costs and to maintain barriers to entry.

The profile of American big business makes this point in another way. Modern industrial enterprise came more slowly and failed to thrive in in- dustries where the processes of production used labor-intensive methods which required little heat, energy, or complex machinery. It was also slow to appear where the existing middlemen had little difficulty in distributing and selling the product. Few large firms can be found in the older, more traditional industries that produced and processed cloth, wood, and leather. Nor were they numerous in publishing and printing and in in- dustries making highly specialized instruments or machinery. Most of the 2 3 firms listed in the seven groups whose processes of production were the most labor-intensive were at the lower end of the list of 236 . Only 3 were in the top 100, and 2 of these firms—American Woolen and Central Leather—were weak, unprofitable companies.2 In these industries the volume was rarely high enough or the marketing complex enough to en- courage manufacturers to integrate the processes of production with those of distribution. In these industrial groups the mass marketers continued to distribute and sell consumer goods, and manufacturer’s agents, usually selling on commission, arranged for the distribution of producer’s goods.

Appendix A further emphasizes that by 19 17 most large enterprises, by whatever route they took to size, had become integrated operating com- panies. Single-function firms (that is, those that had not integrated) were primarily in extractive industries. Information on the extent of integration is available on 269 of the 278 companies listed. Of these, 7 singlefunction, nonintegrated firms were in crude oil extraction, 16 in mining, and 2 in agriculture. Only 16 of the 236 manufacturing firms were not integrated. Of these, 4 were in textiles, 2 in book and publishing (neither of these 2 appear to have yet had branch sales offices of their own), 1 in primary metals, 2 in metal fabrication, and 7 others in production of transportation vehicles. So at least 85 percent of all industrials with assets of $20 million or over had by 1917 integrated production with distribution.

Finally, a review of the 236 manufacturing companies listed in Appendix A reveals that over 80 percent of the integrated enterprises managed their properties through functional departments (sales, production, and the like) rather than through autonomous operating subsidaries. By 1917 , few large American industrials still administered their businesses by means of the holding company, although it remained an important device for maintaining legal control over far-flung activities.

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

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