Modern Business Enterprise Since 1941

In many sectors of the American economy, but above all in the central sectors of production and distribution, World War II put the capstone on the institutional developments of the interwar years and set the stage for the impressive growth of the modern business enterprise and of the econ- omy itself in the postwar years.36

In the first place, wartime demands for new, technologically complex products such as synthetic rubber, high octane gasoline, radar, electronic antisubmarine devices, and a wide variety of weapons brought a pooling of scientific and technological knowledge and led to a major expansion in the systematic application of science in American industry. As a result, petroleum, rubber, metals, and a number of food companies developed new capacities for producing a variety of chemicals and synthetic materials. Electrical and radio companies, small as well as large, old as well as new, acquired the facilities for producing a wide range of electronic products.

Second, the requirements of mobilizing the economy led to the pooling and expansion of managerial procedures and controls whose use was still largely concentrated in the large, departmentalized and divisionalized integrated enterprises. During the war, small firms (usually as subcontrac- tors for the larger concerns) learned about the modern methods of fore- casting, accounting, and inventory control.

In addition, the war brought full employment for the first time since 1929. The continuance of a vast national mass market was further assured when, early in 1946, Congress passed the Employment Act, which com- mitted the federal government to maintain maximum employment and with it a high-level aggregate demand. This commitment to support the mass market, together with the spread of industrial technology and the increased knowledge of administrative techniques, all promised a postwar economic expansion which the large integrated and diversified industrial enterprise was in the best position to exploit.

Indeed, the years after World War II mark the triumph of modern business enterprise. Aided by the new federal commitment, aggregate demand grew steadily at a healthy rate for twenty years after the war, with the gross national product (in constant dollars) rising from $309.9 billion in 1947 to $727.1 billion in 1969.37 This growth provided a mass market far greater than any previously known in history; regional markets became as massive as the national market had been in the late nineteenth century. In technology, the electronics revolution (including automation) , the high- speed computer, the development of new plastics, artificial fibers, and metal alloys, and the continuing systematic application of science to industry all increased the speed and volume of production and distribution and so expanded the needs and opportunities for applying the visible hand of management.

In finance and distribution, as well as in many consumer services, the great postwar market was probably more important than technological change in stimulating the spread of modern business enterprise. New electronic machinery did allow greatly increased speed and volume of work performed. As important was the increasing internalization of market transactions by the building or buying of branches. In banking, the enterprise grew by adding branches and by consolidating many small units within major urban, suburban, and state areas into large administrative networks. In food retailing, chain stores had a continuing boom, with new grocery stores and supermarkets enjoying immense popularity. Hotels, restaurants, even rent-a-car services spread their networks across the land. The older mass retailers—merchandise chains, mail-order houses, and department stores—became large enough to adopt the multidivisional structure. This was done largely by defining the divisions along regional rather than product lines (see figure 13). As a result of this massive growth of chains, the number of small, single-unit jobbers and retailers, and also of hotels and restaurants, has declined more rapidly since the Second World War than before it.

In manufacturing and communications, technology had the greatest impact. Automation, the computer, and the new materials (such as plas- tics) increased output of existing large-batch and continuous-process plants and factories and permitted the introduction of these mass produc-tion techniques in many of the older industries where they had not yet been adopted. Thus, the technological advances in production encouraged the continuing spread of the integrated enterprise, and with it, oligopoly in man-made fibers, paper, glass, and some metal-fabricating industries. Technology also changed the mass communications and entertainment industry as television replaced both motion pictures and radio as the most popular mass medium. Because of the huge capital requirements and the complex scheduling needed, a few large television broadcasting chains (usually an outgrowth of radio chains) quickly dominated the industry. In transportation, the pre-World War II trends initiated by earlier tech- nological innovations accelerated. Airline companies grew in size and complexity but not in number. More large firms appeared in the movement of goods by trucks, but large and small companies continued to compete side by side.

Figure 13. The multidivisional structure: retailing

Source: First prepared by the author for “The United States: The Evolution of Enterprise,” Cambridge Economic History, vol. 7 (Cambridge, Eng., 1977 ).

Technology was all-important in the rapid postwar growth and spread of the diversified multi-industry firms. The obvious rewards of research and development turned more and more integrated enterprises to a strategy of expansion through diversification. It also encouraged firms which had already diversified to move into still other product lines. By the 1960s, nearly all of the leading companies in chemicals, rubber, glass, paper, electrical machinery, transportation vehicles, and many food companies were making products in ten or more different SIC four-digit industries.38 Most of the large metal, oil, and machinery firms operated in from three to ten such industries. In order to obtain the maximum return from their new investments, nearly all of these enterprises had by the 1960s adopted the multidivisional structure with its autonomous operating divisions and its evaluating and planning general office.

During the 1950s, the divisionalized firms further refined their strategy of diversification by exploiting what became known as the product cycle.39 Strategies became designed to obtain the maximum return from a new product as it moved through the cycle from its initial commercialization to full maturity. An effectively diversified enterprise attempted to have a number of product lines, each at a different stage of the product cycle.

The multidivisional structure which helped to institutionalize product innovation also made it easier for the large integrated enterprise to meet the demands of the federal government for military and advance scientific hardware and to reach the rapidly growing overseas markets. During the years of the cold war, the government required a wide variety of weapons —ranging from aircraft carriers, missiles, and submarines, to conventional guns and tanks, as well as nuclear reactors for the Atomic Energy Commission and spaceships, with all their accoutrements, for the National Aeronautics and Space Administration. To handle these markets com- panies merely added a separate division or group of divisions for atomic energy, weapons, or government business in general.

More significant in the recent evolution of modern enterprise than the postwar governmental demand were foreign markets. The large integrated food and machinery companies that built their overseas domains before 1914 continued to maintain and often to expand them after the First World War. During the 1920s, a relatively small number of oil, chemical, rubber, and automobile companies followed the pioneering firms overseas. The depression of the 1930s slowed, and the Second World War almost stopped, expansion abroad. Then in the 1950s and early 1960s, particularly after the opening of the European Common Market, came a massive drive for foreign markets. Direct American investment in Europe alone rose from $1.7 billion in 1950 to $24.5 billion in 1970.40 This second “American challenge” in Europe was spearheaded by the two hundred firms that accounted for more than half of the direct investment made by United States companies abroad. These two hundred were clustered in the capital- intensive, technologically advanced industries that had integrated, diversified, and then adopted the multidivisional form of organization.41

Overseas investment, in turn, had an impact on the structure of the diversified enterprise.42 When a company first began to move abroad, it usually created an international division to supervise and coordinate over- seas activities and to recommend investment decisions to the corporation’s senior executives. However, as the operations and investment decisions grew larger and more complex, the international division began to dis- appear. Where the product divisions were strong, they took over the international business of the lines they were already handling domestically. For those companies which still concentrated on one dominant line of business, such as oil, copper, some food, and drink (for example, Coca- Cola), the operating divisions became geographical, each covering a major area of the globe. A few multinationals developed a matrix form of structure in which overseas managers reported to regional divisions on some matters and to product divisions on others. In all cases, the multi- divisional form was extended from a national to a worldwide basis, with long-term allocation decisions continuing to be made at the general office, and day-to-day coordination of throughput continuing to be handled by the divisions.

During the 1960s a major variation of the diversified, multidivisional enterprise appeared on the American business scene. This was the con- glomerate. The conglomerate differed from the older, multi-industrial, multinational enterprise in its strategy (and, therefore, in the nature of its capital investments) and in its organizational structure. The large, diversified enterprise had grown primarily by internal expansion—that is, by direct investment of plant and personnel in industries related to its original line of products. It moved into markets where the managerial, technological, and marketing skills and resources of its organization gave it a competitive advantage. The conglomerate, on the other hand, expanded entirely by the acquisition of existing enterprises, and not by direct investment into its own plant and personnel, and it often did so in totally unrelated fields. With the exception of a few large relatively undiversified oil companies looking for profitable investments, the acquiring firms were not usually in the capital-intensive, mass production, mass distribution industries. They were, rather, in industries such as textiles and ocean shipping, where small enterprises remained competitive, or they were in those industries producing specialized products for individual orders, such as the machine tool and defense and space industries.43 The creators of the first conglomerates embarked on strategies of unrelated acquisition when they realized that their own industries had little potential for continued growth, and when they became aware of the value of a diversified product line and a strategy based on the product cycle. Tax considerations played a part in the making of specific acquisitions but were rarely the basic reason for embarking on the new strategy. The acquiring firm tended to purchase relatively small enterprises in industries that were not yet oligopolies. Because many of these small enterprises had not become wholly managerial, the acquiring firms were in some cases able to provide them with new administrative and operational techniques.

The structure of the new conglomerates reflected their strategies of growth.44

Their general offices were small and the acquired operating units were permitted more autonomy than the divisions of the large diversified firm. The difference in the general office of a conglomerate was not in the size of its financial or legal staff or in the number of general executives. Indeed, many conglomerates had even more general executives than did the older, diversified majors. The difference came in the size and functions of its advisory staff. The conglomerate had no staff offices for purchasing, traffic, research and development, sales, advertising, or production. The only staff not devoted to purely legal and financial matters was for corporate planning (that is, for the formulation of the strategy to be used in investment decisions). As a result, the conglomerates could concentrate more single-mindedly on making investments in new industries and new markets and withdraw more easily from existing ones than could the older, large, diversified companies. On the other hand, the conglomerates were far less effective in monitoring and evaluating their divisions and in taking action to improve divisional operating performance.

They had neither the manpower nor the skills to nurse sick divisions back to health. Moreover, because conglomerates did not possess centralized research and development facilities or staff expertise concerning complex technology, they were unable to introduce new processes and products regularly and systematically into the economy. The managers of con- glomerates became almost pure specialists in the long-term allocation of resources. They differed, however, from the managers of banks and mutual funds in that they made direct investments, for whose management they were fully responsible, rather than indirect portfolio investments, which rarely carried responsibility for operating performance.

As the history of the conglomerate suggests, changes in the operation and organization of the large business enterprise since World War I have had more of an effect on the formulation of long-term strategy and re- source allocation than on short-term, day-to-day operations. The tech- niques for managing the functional departments within an integrated business organization (either a division or firm) continued to be improved, but not basically changed. Methods to coordinate product flow and information have become increasingly sophisticated. But neither interde- partmental nor intradepartmental activities have been fundamentally changed. On the other hand, as the diversified enterprises that adopted the multidivisional form expanded their activities, they enlarged these top management offices by appointing group executives who became respon- sible for a number of operating divisions. The new conglomerates set up comparable general offices, though assisted by smaller staffs. Even those few industrials that did not diversify and the large, single-function, mass marketing and service enterprises enlarged their top management. In the second half of the twentieth century top management had become collec- tive. It concentrated increasingly on long-term resource allocation.

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

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