Intergration by Machinery Makers Requiring Specialized Marketing Services

The other manufacturers to by-pass the wholesalers were the makers of recently invented machines that were produced in volume through the fabrication and assembling of interchangeable parts. The marketing needs of these machinery makers were even greater than those of the meat packers and brewers. They found that the volume sale of their products required more than centralized advertising and coordinated flows. Their new and relatively complex products had to be demonstrated before they could be sold. Mechanical expertise was needed to service and repair them after they had been sold. And because the machines were relatively costly, buyers often could only purchase them on credit. Independent wholesalers were rarely able or willing to provide such demonstrations, maintenance and repair, and consumer credit.

The machines requiring these close and continuing services to the customer were of two sorts. Sewing machines, agriculture equipment, and office machinery were similar to present-day consumer durables, even though they were sold primarily to produce goods and services and not for consumption by the final consumer. They were produced at a high rate, often many thousands a week, and sold to individuals as well as to business firms. The second type—elevators, pumps, boilers, printing presses, and a variety of electrical equipment—were clearly producers’ goods. They were complex, large, standardized machines that required specialized installation as well as sales and repair and long-term credit. In the eighties the makers of both sorts of machines began to expand output by pioneering in or adopting the new ways of systematic factory management. Both sold their products in national and world markets and created or reorganized extensive marketing organization in that same decade.

The first mass producers of machinery to build their own sales organi- zations were the makers of sewing machines.28 These machines could be produced commercially in the early 1850s, but the manufacturers could not begin to make them in quantity until the legal battle over patents was settled in 1854 and a patent pool formed. The winner of the court trials, Elias Howe, insisted that the pooled patents be released to twenty-four manufacturers. Nevertheless, the industry was dominated within a short time by the three firms that first acquired marketing networks—Wheeler & Wilson Co., Grover and Baker, and I. M. Singer Company. These man- ufacturers at first relied on full-time but independent agents who, though receiving a small salary, were paid primarily on a commission basis and were solely responsible for marketing activities within their territories. But these agents had little technical knowledge of the machines and were unable to demonstrate them properly or service and repair them. Nor were the agents able to provide credit, an important consideration if customers were to pay for these relatively expensive goods in installments.

As an alternative, Grover and Baker began to set up a company owned and operated store or branch office to provide such services. By 1856 Grover and Baker had already established such branch offices, as they were called, in ten cities.29 In that year Isaac Merritt Singer decided to follow suit. So, almost immediately, did Wheeler & Wilson. By 1859 Singer had opened fourteen branches, each with a female demonstrator, a mechanic to repair and service, and a salesman or canvasser to sell the machine, as well as a manager who supervised the others and handled collections and credits. Nevertheless, because finding and training personnel took time, these three enterprises continued to rely heavily on commission agents to market their goods. The swift selection of these agents and the building of branch stores permitted these three to dominate the trade. By 1860 they already produced three-fourths of the industry’s output, with Wheeler & Wilson manufacturing 85,000 machines in that year and the other two 55,000 apiece.30

After 1860 Singer moved more aggressively than the other two in re- placing regional distributors with branch stores supervised by full-time, salaried regional agents. Edward Clark, Singer’s partner and the business brains of the partnership, had become even more convinced as time passed of the value of relying on his own sales force. The independent agents had difficulty in supplying the necessary marketing services, and their failed to maintain inventories properly. They waited until their stocks were low and then telegraphed large orders, requesting immediate delivery. They seemed to be always either understocked or overstocked. Moreover, the agents were frustratingly slow in returning payments made on the machines to the central office.

Therefore, Clark was constantly on the outlook for men he could hire as salaried “general agents” or regional managers of geographical districts to supervise existing branch stores and to set up new ones. Where such men could not be found, Clark continued to rely on independent agents; but he insisted that such dealers set up branch offices similar to those in a company managed district.

When Clark became president in 1876, a year after Singer’s death, he decided to eliminate the independent agencies altogether, at home and abroad. Singer’s central offices in New York and London had as yet little control over the branch stores of the independent distributors and, in fact, relatively little control over their own salaried agents. Scarcely any effort had been made to sell in any systematic or standardized way. Uniformity in sales, accounting, credit policies, and procedures was lacking. The techniques of administrative coordination had not yet been perfected. Moreover, in 1877 the last patents of the 1856 pool were to expire. After that year Singer would have to compete at home, as it had long done abroad, without patent protection.

Working closely with George Ross McKenzie, a Scotsman who helped to build Singer’s overseas sales organization and succeeded him as president, Clark gradually reorganized and rationalized Singer’s marketing and distribution network. First he completed the replacement of the inde- pendent distributors with regional offices manned by salaried executives. Then he installed everywhere similar branch offices with teams of can- vassers as well as repairmen and accountants. Such offices had proved particularly successful in Great Britain, an area where Singer had never enjoyed patent protection.31 The network made possible aggressive mar- keting, reliable service and repair, and careful supervision of credits and collections; it also assured a steady cash flow from the field to the head- quarters in London, Hamburg, and New York.

In the period immediately after 1878, Clark and McKenzie perfected the procedures and methods needed to supervise and evaluate this branch office network.32 In the United States twenty-five different regional “general agencies” reported to the central office in New York. In the United Kingdom, twenty-six regional sales offices reported to a London office. In northern and central Europe the managers of fifty-three more reported to headquarters in Hamburg. Nine others in the rest of Europe, Africa, and the Near East reported to London, while those in Latin America, Canada, and the Far East were supervised by the central New York office.33

The expansion and then reformation of the marketing organization resulted in a constant increase in Singer’s sales and, therefore, the daily output of its factories, and the overall size of the enterprise. In 1874 the company built by far the largest sewing machine factory in the world at Elizabethport, New Jersey. During the 1880s it grew in size; but its capacity was surpassed when the company constructed a plant in 1885 in Kilbowie, Scotland (a suburb of Glasgow). That plant, with a rated capacity of 10,000 machines a week, was constructed to replace a smaller Scottish plant built in 1867. Both plants were constructed to improve coordination between production and distribution. The filling of hundreds and then thousands of orders in Europe from the American factory became more and more difficult. Delays became the major cause for losing orders. In 1866, for example, the head of Singer’s London office complained that the inability to deliver machines had “utterly ruined” the company’s business in Britain.34 All Singer’s capital facilities—its two great factories, a small cabinetmaking plant in South Bend, Indiana, and a foundry in Austria— were financed out of current earnings.

Increased demand in these years caused Singer to expand and system- atize its purchasing operations. By the 1890s the company had obtained its own timberlands, an iron mill, and some transportation facilities. These purchases were also paid for from the ample cash flow provided by sale of the machines. Indeed, the company often had a surplus which it invested in railroad and government bonds, and even in other manufacturing firms. Both insiders and outsiders credited Singer’s business success to its marketing organization and abilities.35

Organization also appears to have been a critical element in the success of a leading manufacturer of the most complex agricultural machine, the mechanical reaper. According to Cyrus H. McCormick III, who wrote a detailed history of the family firm, the McCormick Harvesting Machine Company was able by the end of the century to lead the field because his grandfather “had at his back the best business organization.”36 During the 1850s, the rapid expansion of the railroads and the telegraph permitted the inventors of reapers, harvesters, and other agricultural machinery to build sizable factories for the first time. In marketing their products, Cyrus H. McCormick and his competitors, Obed Hussey, John H. Manny, and Lewis Miller, at first relied, like the sewing machine makers, on territorial agents or distributors. The agents received a small salary, usually $2.00 a week, plus a 5-10 percent commission. Fully responsible for all sales activities in their districts, they hired subagents or dealers who made the actual sales, handled service and repair, granted credit, and supervised collections. McCormick differed from his competitors in that he kept a closer surveillance over his distributors through “traveling agents” and constant correspondence.

Two factors caused McCormick to centralize his sales organization in the late 1870s. First the prolonged depression brought home the need for more effective control over inventories, payments, and sales personnel. Second the development of the binder, a more complex and expensive machine than the harvester, required a stronger sales service force. There- fore at about the same time as Clark and McKenzie began to phase out their independent distributors, McCormick decided to replace his regional agents with salaried managers. By that date the company had about fifty agencies concentrated in the midwest and plains states.

In the reorganization the subagents who had been hired and supervised by the distributors now became franchised dealers. These dealers, usually local livery men, storekeepers, and the like, signed a contract with the company directly. The contract stipulated a dealer’s duties in the selling of machines, spare parts, wire, and later, twine for binding. It normally pledged the dealer to handle only McCormick reapers and harvesters, but permitted him to market other types of implements made by other manufacturers.

The primary task of the regional office manager was to keep a close watch on the dealers. He also supervised customer credit and collection and handled local advertising. That office had a number of salesmen who assisted the dealers and often made sales on their own account. Finally, the regional office included trained mechanics who assembled the machines when they arrived from the factory, demonstrated their operations, and serviced them when needed. In the mid-1880s the company employed 140 such “field experts.” During the harvest season the factory normally curtailed production and sent out skilled men to the branches to assist in the servicing.

By creating a regional office network, McCormick pioneered in forming a sales organization to back up franchise dealers who did the retailing, much as Singer had innovated in developing its network of company owned and operated branch retail stores. McCormick continued to use independent distributors as his company began to sell beyond the midwest and plains states. By 1885, however, even these jobbers had been replaced by salaried managers and staffs. In the 1880s and 1890s McCormick began to extend its sales overseas to the wheat-growing regions of Europe, Australia, and New Zealand.37 For foreign marketing, however, the com- pany relied until the late 1890s primarily on local independent distributors.

As at Singer, the expansion of the marketing network increased factory output. Between 1879 and 1886, machines produced annually increased from 13,404 to 25,652. By 1891 it had reached 76,8yo.38 To assure a con- tinuing flow of goods into the factory the company systematized pur-chasing. To meet its requirements of 10 million feet a year of ash, hickory, oak, and poplar, it began in 1885 to buy timber tracts and sawmills in Mis- souri and Alabama.

In the late 1870s and 1880s other manufacturers of harvesters and other relatively costly agricultural machinery began to build or expand marketing organizations similar to those of the McCormick Company.30 Walter A. Wood & Co., D. M. Osborne & Co., William Deering & Co., producing the new Appleby Twine Binder, and Warder, Bushnell & Glessner Co., makers of the Champion line, all created national branch office networks. So did the J. I. Case Threshing Company, Inc., and the three leading makers of modern steel plows—John Deere & Company, the Moline Plow Company, both of Moline, Illinois, and the Emerson Brantingham Company of Rockford, Illinois. The three plow makers quickly moved to marketing other less complex implements, including drills, wagons, mowers, and spreaders, in order to use their sales organizations more fully. All of these firms, like McCormick, began in the 1890s to integrate backward by obtaining timberlands and even mines, and in the case of the harvester companies twine factories and hemp plantations.

The integration of mass production and mass distribution of newly invented office machines followed much the same pattern as sewing and agricultural machinery. Scales, letter presses, typewriters, cash registers, adding machines, mimeograph machines, calculators—all required the building of a large marketing organization if the product was to be man- ufactured in volume. And so the first firms in the field continued long to be the dominant ones.

The experience of the first mass producer of the earliest business machines, E. & T. Fairbanks of St. Johnsbury, Vermont, paralleled McCormick’s. Fairbanks, a manufacturer of weighing scales essential to the shipment and sales of goods, began in the 1850s to sell through regional agencies.40 Like McCormick, “itinerant agents” supervised closely their activities. After the Civil War the firm built a network of regional branch offices with salaried managers, “scales experts,” and canvassers to sell ma- chines, provide consumer credit and continuing service, and also to assure steady flow of goods to and cash from the customers. To make full use of its marketing organization the company developed a broad line of products its marketing organization could sell, including letter and waybill presses, warehouse trucks, and “money drawers,” the predecessors of the cash register.

The pioneering firms in the manufacturing of typewriters and cash registers which set up their sales forces in the 1880s relied more heavily on canvassers and small Singer-like branch offices than did Fairbanks. John H.Patterson of National Cash Register attributed the swift growth of his innovative enterprise after 1884—and with it the expansion of the industry as a whole—to the strength of his canvassing force, the training and competence of his salesmen, and the ability of his marketing organization to provide credit and service.41

The Remington experience underlines in a dramatic fashion the neces- sity of creating an extensive marketing organization to sell a new office machine in volume.42 As the Civil War came to a close, E. Remington and Sons of Illion, New York, one of the first firms to mass produce the modern breechloading rifle, began to look for products besides military firearms that required their specialized metal-working manufacturing facilities and skills. In 1865 they set up the Remington Brothers Agricultural Works to make mowing machines and cultivators. As they did not attempt to develop the marketing organization, the enterprise failed. Next they were approached by a former Singer executive to produce an improved sewing machine. Again they failed. The machine was excellent, but, in the words of Remington’s historian, “To sell it was another matter.” They had little success in quickly creating an effective sales organization, and without it, Remington had little chance of competing successfully with Singer and the other established firms.

In 1873 the inventor of the typewriter, Christopher L. Sholes, came to the Remingtons and asked them to manufacture his typewriter at their Illion plant. This time they moved more slowly, selling the product at first though E. & T. Fairbanks. When in 1881 the typewriter proved a commercial success, the Remingtons hired a small team to build a sales force. Because these men concentrated on the home market, they asked Singer to sell their products abroad. When the Singer Company refused they began to set up their own marketing organization overseas. In 1886 difficulties in the gun business as well as other activities brought the Remington Arms Company into bankruptcy. Those men who were developing the typewriter sales organization then bought out the company’s typewriter interests and set up a new firm, Remington Typewriter Company.43 Soon their enterprise was as successful as Singer or National Cash Register. A number of rivals appeared, but only the Underwood Company and the Wagner Typewriter Company, which built similar sales organizations, succeeded in becoming major competitors.

As the experience of all the new mass-produced machinery companies emphasizes, they could sell in volume only if they created a massive, multiunit marketing organization. All their products were new, all were relatively complicated to operate and maintain, and all relatively costly. No existing marketer knew the product as well as the manufacturer. None had the facilities to provide after-sales service and repair. Few were willing to take the risk of selling on installment, a marketing device which these machinery makers had to invent. Nor were outsiders able to maintain close control over collections, essential to assure a continued cash flow on which the financial health of the enterprise rested. Finally, by using uniform sales techniques, bringing together regularly members of a nationwide sales force, and comparing the activities and performances of the many different sales offices, the single, centrally controlled sales department was able to develop more effective marketing techniques. It was also able to obtain a constant flow of information on the changing shifts in demands and customer requirements.                                                                                                                      ‘

Close and constant communication between the branch sales offices, the factory, and its purchasing organization made it possible to schedule a high-volume flow of goods from the suppliers of raw materials to the ultimate consumer, and so to keep the manufacturing facilities relatively full and running steadily. It also assured a steady flow of cash to the central office. Such coordination would have been exceedingly difficult if inde- pendent enterprises handled each stage of the processes of supplying, manufacturing, and marketing. The regular and increasing demand made possible in part by an aggressive sales force in turn created pressures to speed up the processes of production through improved machinery, plant design, and management. Increased speed of production in its turn re- duced unit costs. The economies of speed and scale, and their national, often global, marketing organizations gave the pioneering firms an im- pressive competitive advantage and so made it easy for them to continue to dominate their industries.

All this was also true for the makers of new, technologically advanced, relatively standardized machinery that was sold to other manufacturers to be used in their production processes. Because these goods were even more complex and more costly, they required specialized installation as well as closer attention to after-sales service and repair. The sales force for such manufacturers required more professional training than persons selling light machines in mass markets. Salesmen often had degrees in me- chancal engineering. Again, it was the decade of the 1880s when enterprises in these industries began to build or rationalize their national and global sales forces.

An excellent example of enterprises producing and marketing in volume for global markets were the makers of recently invented machinery to generate, transmit, and use electricity for power and light. The salesmen at Westinghouse, Thompson-Houston, and Edison General Electric (the last two combined into General Electric in 1892) all knew more about the technical nature of their equipment than did most of their eus- tomers.44 Moreover, few independent distributors could obtain a firm grasp of the rapidly changing new technology. Because of the dangers of electrocution and fire, trained, salaried employees of these companies had to install and service and repair their products. Financing involved large sums, often requiring extensive credit, which independent distributors were unable to supply. Thompson-Houston and Edison Electric, and, to a lesser extent, Westinghouse, began to finance new local central power stations in order to build the market for their machinery.

In these pioneering years of the electrical equipment business, tech- nology was developing fast. Coordination between the sales, production, and purchasing departments thus involved more than scheduling flows of material. It meant that salesmen, equipment designers, and the manufac- turing executives had to be in constant touch to coordinate technological improvements with market needs so that the product could be produced at the lowest possible unit cost. It also lessened even more the opportunities for independent sales agencies to acquire the necessary skills to market the product.

Other manufacturers whose products were based on electricity devel- oped in these same years similar marketing organizations with worldwide networks of branch offices. Such enterprises included Western Electric, the subsidiary of American Bell Telephone, which produced telephones and equipment necessary to relay calls, the Johnson Company, which built electric streetcar rails and switches, and the Otis Elevator Company.45 Otis, established in 1854, began to expand after 1878 when it built its first high- speed hydraulic elevator for commercial buildings. The coming of electricity, a flexible source of power, helped the company expand its market. The branch office network created at Otis in the 1880s permitted it to dominate the business completely abroad as well as at home until well into the twentieth century, when Westinghouse became a major com- petitor.

Other makers of standardized machinery built comparable organiza- tions in the 1880s.46 One was Babcock & Wilcox, makers of steam boilers and steam machinery, incorporated in 1881 and financed in part by Singer Sewing Machine Company profits. Another was the Henry R. Worthington Company, maker of pumps and hydraulic equipment for urban water and sewage systems in all parts of the world. In this same decade Link-Belt Machinery Company, makers of conveying and transmission machinery, and the Norton Company, makers of grinding wheels and grind wheel machinery, set up their widespread sales and buying networks. And there were undoubtedly others.

The makers of the new machinery so central to the mechanization of American agriculture, business, and industry created similar integrated enterprises at about the same time and in about the same way. The organization, operation, and financing of these enterprises manufacturing durable goods were comparable to the procedures in the firms that pioneered in the mass production and mass distribution of semiperishable and perishable products. Nearly all of these machinery makers either built or perfected their marketing and then purchasing organizations in the decade of the 1880s. In nearly all cases production remained concentrated in a small number of large plants. To manage their multifunctional enterprises they built similar centralized, functionally departmentalized organizational structures. They differed from the manufacturers of perishable and semiperishable goods in that the purchasing organizations were smaller. The makers of the new sewing machine and agricultural and office machinery integrated backward to control supplies of raw and semifinished materials, but this was less common among the makers of electrical equipment and other heavy machinery. Like the producers of perishables and semiperishables, these machine companies were financed from within. Cash flow supplemented by short-term loans from local commercial banks provided the funds for working and fixed capital. In building this national and often global network they had no need to go to the capital markets for long-term credit. The one exception was the electrical equipment manufacturers who began to finance the construction of central power stations. As a result, all but these large electrical firms remained fully controlled by the entrepreneurs who founded them, their families, or a small group of associates.

All of the pioneering machinery firms continued to dominate their industries for decades. Administrative coordination brought lower costs and permitted manufacturers to have a more direct contact with markets. The technological complexities of their products, particularly those selling producers’ goods, made their marketing organizations of trained engineers and other technical specialists even more powerful competitive weapons than were the sales departments of makers of consumer goods purchased for immediate consumption. The nature of their processes as well as products, led to the assigning of technicians to concentrate on improving both product and process and so to the formation of the first formal industrial research departments.47 As in the case of the first inte- grated manufacturers of perishable and semiperishable products, the machinery firms soon had competitors. But to compete with the established enterprise demanded the creation of a comparable national and often international marketing network. And in competing, the new enterprise had to win customers before its organization could generate the volume necessary to provide low prices and high cash flow or develop its staffs of expert marketing and research technicians. Rarely did more than a handful of competitors succeed in obtaining a significant share of the national and international markets. These  industries  quickly  became  and  remained  oligopolistic  or monopolistic.

Makers of volume-produced standardized machinery, processors of perishable products, and those that mass produced low-priced packaged goods, internalized the activities of the wholesaler or other middlemen when these distributors were unable to provide the marketing services needed if the goods were to be manufactured in the unprecedented volume permitted by the new technologies of production and distribution. The resulting enterprises, clustered in the food and machinery industries, were then the first industrial corporations to coordinate administratively the flow of goods on a national, indeed a global, scale. They were among the world’s first modern multinationals. Their products were usually new. This was true not only for sewing, agricultural, and office machinery but also for cigarettes, matches, breakfast cereals, canned milk and soup, roll film and Kodak cameras, and even fresh meat that had been butchered a thousand miles away. In all these new industries the pioneers remained dominant enterprises. Because they were the first big businesses in American industry, they defined many of its administrative practices and procedures. Their formation, organization, and growth, therefore, have significant implications for the operation and structure of American industry and the economy as a whole.

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

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