The Coming of the Modern Industrial Corporation: Reasons for Integration

Integration of mass production with mass distribution offered an oppor- tunity for manufacturers to lower costs and increase productivity through more effective administration of the processes of production and distribu- tion and coordination of the flow of goods through them. Yet the first industrialists to integrate these two basic sets of processes did not do so to exploit such economies. They did so because existing marketers were unable to sell and distribute products in the volume they were produced. The new mass producers were keenly aware of the national and inter- national markets opened up by the new transportation and communication infrastructure. The potential of that market had impelled them to adopt the mass production machinery. However, as long as merchandising enterprises were able to sell their goods, they saw little reason to build marketing organizations of their own. Once the inadequacies of existing marketers became clear, manufacturers integrated forward into marketing.

In the 188os two types of mass producers embarked on such a strategy of vertical integration. One set was composed of those who adopted new continuous-process machinery that swiftly expanded the output of their industrial establishments. Such entrepreneurs found that the existing mar- keters were unable to move their goods quickly enough or to advertise them effectively enough to keep their high-volume production facilities operating steadily. Most of these manufacturers continued to distribute through wholesalers, but they assumed responsibility for the coordination of the flow from the factory to the customer.

The second set of pioneers were manufacturers who required specialized distribution and marketing services which wholesalers, mass retailers, manufacturers’ agents, and other middlemen were unable to provide. These manufacturers were, in turn, of two sorts. One included a small number of processors who had adopted refrigerated or temperature- controlled techniques for the distribution of perishable products in the national market. The other included the makers of new complex, high- priced machines that required specialized marketing services—demon- stration, installation, consumer credit, after-sales service and repair—if they were to be sold in volume. The marketing of these latter products demanded a continuing after-sales contact with the customer. Existing middlemen had neither the interest nor the facilities to maintain a continu- ing relationship. Nearly all of the firms in this last group manufactured standardized machines that were or could be mass produced through the fabrication and assembling of interchangeable parts.

Those manufacturers who found existing marketers inadequate to meet these needs created multiunit marketing organizations of their own. They set up branch offices headed by salaried managers in major commercial centers of the country and the world. Next, to assure a high-volume continuing flow of materials into their factories, they built large purchasing establishments and smaller traffic departments and often began to supply and transport their own materials.

Because they integrated production, marketing, and purchasing, the activities of the new firms were far more varied than those of other business enterprises of their day. Whereas the railroad, telegraph, market- ing, financial, or existing manufacturing firms carried on a single basic economic function, the new integrated enterprise carried on several. Because they came to own and operate many factories, many sales offices, many purchasing units, mines, forest lands, and transportation lines, their operation required even more full-time salaried managers than did the railroad and telegraph companies of the late nineteenth century. These managers handled a far wider variety of tasks and faced even greater challenges in coordinating the flow of materials through their enterprises than did those in transportation, communication, or mass marketing. With the rise of the integrated industrial enterprise, the salaried manager became a major figure in the operation of the American economy.

The new administrative hierarchies, extending as they did from the supplier of raw materials to the ultimate consumer, were from their beginning national enterprises; many soon became multinational. The railroads by the 1890s covered large regions, but there was no single nationwide railroad enterprise. The mass marketers concentrated on local urban and larger rural regional markets. Before 1880, Western Union and Montgomery Ward were among the few large firms to operate on a national scale. By the end of the 1880s, however, a number of industrial enterprises were beginning to serve the entire nation. By 1900 the names of many integrated, multifunctional enterprises had become household words. By then they were beginning to play a significant role in the transformation of the nation from what Robert Wiebe had termed a dis- tended society of “island communities” into a far more homogeneous and integrated community.1

As the twentieth century opened, the new integrated multifunctional, often multinational, enterprise was becoming the most influential institu- tion in the American economy. It surpassed the railroad in size and in complexity and diversity of operations. The decisions of its managers affected more businessmen, workers, consumers, and other Americans than did those of railroad executives. It soon replaced the railroad as the focus for political and ideological controversy. In fact, in the first decade of the twentieth century the control of the new industrial corporations became the central domestic political issue of the day. Of more lasting importance, the techniques and procedures perfected in the first years of the century to manage these integrated enterprises have remained the foundation of modern business administration.

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

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