The Growing Supremacy of Managerial Enterprise

In 1917 few American industrial enterprises had as modern a manage- ment as Du Pont. Many of the mergers were, in the manner of United States Rubber, still slowly working out such administrative structures and procedures. A number of those enterprises that had grown by internal expansion rather than merger were still controlled by entrepreneurs who created them or by their descendants. Within a generation, however, the type of management begun at General Electric and perfected at Du Pont had become standard for the administration of modern large-scale enter- prise in American industry.

The methods developed and perfected by these early mergers were widely adopted because they permitted their managers to perform effec- tively the two basic functions of modern business enterprise—the coordi- nation and monitoring of current production and distribution of goods and the allocation of resources for future production and distribution. In carrying out the first, Du Pont, General Electric, and to a lesser extent, Standard Oil and United States Rubber, improved on existing methods of administrative coordination. In devising ways to perform the second func- tion, these firms were innovators.

In the administration of current operations, these firms perfected ways to assure a faster and more efficient flow of materials through the enter- prise. They did so by defining more precisely the duties of the senior executives of the functional departments, those directly responsible for the performance of the middle managers; by instituting sophisticated accounting and other control systems; and by structuring the departments so as to assure clearer and closer communications between central head- quarters and the operating units in the field. These new structures and controls also permitted the top managers to evaluate with more precision the performance of the middle and lower-level managers and to select for top management with more assurance.

In allocating resources for future production and distribution, the new methods extended the time horizon of the top managers. Entrepreneurs who personally managed large industrials tended, like the owners of smaller, traditional enterprises, to make their plans on the basis of current market and business conditions. By setting up budgets and other systematic capital appropriation procedures, the managers at Du Pont and other consolidated firms began to look much farther into the future. The central sales and purchasing offices provided forecasts of future demand and availability of supplies; the treasurer’s office did the same for financial conditions; the development department provided information on changing technology. Such planning became more and more indispensable as both the capital investment and the time needed to build mass production plants grew. Investments involving tens of millions of dollars and requiring two to three years to come into production required careful study of long-term trends if they were to provide satisfactory rates of return.

The creation of a large central office of top managers and their staffs further sharpened the distinction between ownership and control. The men who engineered the merger, their close associates, and their families were unable to provide the large number of managers needed to operate the consolidated enterprise. As the early leaders in the enterprise retired, they were replaced by salaried career managers. By 1917 each of the four companies had become, in differing degrees, managerial enterprises. At Standard Oil the transformation was complete. There the Harknesses, Pratts, Rockefellers, and other large stockholders no longer even sat on the board of directors. As the Jersey’s legal counsel wrote to a colleague in 1913: “Within a very short time, Harkness and Pratt resign and their places will be filled by people who own very little of the stock. As you know, the Rockefellers, who as large holders of the stock controlled the company as directors for more than thirty years, have absolutely retired, and are simply receiving their dividends and voting at the annual meetings.”82 At United States Rubber the separation between ownership and management was not so sharp. Some representative of large investors still sat on the board; but the inside managers dominated it. The six top salaried managers (the president and the five vice presidents) were all board members, and the executive committee included four of these managers and only one other board member. At General Electric financiers and representatives of major investors still made up the majority of the board. Those from Boston had now outnumbered the New York bankers. But by World War I, Coffin, the veteran professional manager, had become the board’s chairman. After the war the number of insiders on General Electric’s board grew larger and the number of financiers declined. By 1925 40 percent of the board were professional managers. In the 1930s senior managers of other large industrial enterprises began to take the place of financiers on the board.

At Du Pont, owners still managed in 1917. Pierre and his brothers maintained control through an intricate network of holding companies. Nevertheless, the only du Ponts to serve on the executive committee were experienced managers. Graduates of M.I.T. or other engineering schools, they had spent years with the company. In fact, Pierre’s insistence that no du Pont serve in middle or top management unless he was fully qualified helped to bring on a bitter family fight. Even so, the seven men on the executive committee from its beginning included three or four non-family members. By the 1930s top managers outnumbered the family on the Du Pont board.

In recent years Du Pont, so long cited as a preeminent family firm, has become managerial. Today literally hundreds of du Ponts and du Ponts- in- law are eligible to serve as managers. Yet only a tiny handful work for the company. Only one du Pont now serves in the ranks of top management. The family continues to enjoy a substantial share of the company’s profits. Five or six members sit on the company’s twenty-five-man board of directors. Still owners, du Ponts no longer manage. They no longer make significant industrial decisions.

The story has been similar for the successful integrated enterprise that became large through internal growth rather than through merger. As their markets and output expanded and as they began to compete with better organized managerial enterprises, the entrepreneurial firms began to enlarge their central financial and advisory staff, to restructure their finance departments, and to add new staff offices for development, personnel, and public relations. Members of the families of the founder and builders normally remained active in top management only if they were tested managers with years of experience within the administrative ranks.

In these companies and in the earlier managerial enterprises where families or investment banks or other financial intermediaries held large blocks of stock, the owners and their representatives kept a watch over their investment as members of the board’s finance committee. That committee regularly reviewed major capital investments and the general financial condition of the company. But, as in the case of the executive committee on railroads and utilities, its power was essentially negative.

Its members could say no, but they were rarely in the position to propose alternative policies and programs. If the career managers performed poorly, they had little choice but to hire another set of managers. They could not manage the enterprise themselves. Because there were fewer outsiders and more insiders on the boards of industrials than on the boards of railroads, financiers and large investors rarely had even the limited influence representatives of investment banking houses had on the large railroad systems.

By 1917 modern industrial enterprise was flourishing in industries where administrative coordination had proved more efficient than market coordination. By that time the managers of these enterprises had created the organization and devised and improved the procedures required to coordinate and monitor day-to-day production and distribution and to allocate capital for future economic activity. By then these enterprises were becoming managerial. The career managers who were beginning to make decisions at the top as well as middle and lower levels were beginning to look on themselves as professionals.

Nevertheless, in 1917 modern industrial enterprise still had structural weaknesses, and the managerial class was only beginning to become professionalized. The centralized, functionally departmentalized form developed at Du Pont and other early managerial enterprises had two serious faults. Both affected the ability of their managers to carry on the two basic functions of the modern industrial enterprise—coordinating of flows and allocating of resources.

First, administrative coordination of flows was only crudely calibrated to short-term fluctuations in demand. Sudden changes in demand threatened inventory surpluses or shortages at each stage in the flow through the enterprise.

Second, in the centralized, functionally departmentalized organizations, top managers responsible for long-term allocations continued to concentrate on day-to-day operations. This was true even at Du Pont, where the functional vice presidents on the executive committee were specifically responsible for overall company affairs and their directors for those of their functional departments. Despite repeated admonitions from Coleman and then Pierre du Pont, these top managers preferred to give priority to the more immediate problems and issues of departmental operations than to what seemed vague and less pressing concerns—longterm planning and appraisal.83 As specialists, these top executives nearly always continued to judge company policy from the point of view of their specialties and their departments. In the new industrial enterprises, policy making and planning were thus often the result of negotiations between interested parties rather than responses to overall company needs.

Top managers too often did not have the time, interest, or information required to make effective top management decisions.

Moreover, top executives in some of the nation’s leading industrial enterprises did not yet believe that the centralized functionally departmentalized form met their operating needs. Others, who had adopted that structure, felt that they were outgrowing it. The largest American industrials, United States Steel and Standard Oil, had never attempted to place all their operating units under the administrative control of a single set of functional departments, nor had more recent mergers, such as Union Carbide and General Motors. Other companies, including Armour, Swift, and United States Rubber, which had expanded by adding new products for new markets, were becoming constrained by the centralized structure. They had begun to set up semiautonomous, integrated divisions to coordinate the flow of goods to the different markets. In none of these companies, however, had the relationships between the divisions or the subsidiaries and the general office—that is, between top and middle management— been clearly defined. In many cases the top managers were either so intimately involved in supervising and coordinating day-to-day operations that they had only a limited picture of the operations of the company as a whole, or they were so removed from current operations that they had only a vague understanding of activities and performance of the operating units. In neither situation were the senior executives in a position to carry out effectively their top management functions.

In the years after World War I the managers of these large industrials devised and perfected a new form of overall organizational structure to remedy these weaknesses. It permitted the middle managers to focus on managing and coordinating the processes of production and distribution and the top managers to concentrate on evaluating, planning, and allocating resources for the enterprise as a whole. At the same time the training and outlook of these industrial managers was becoming increasingly professional. Both developments further enhanced the economic power of the large industrial enterprises and of the men who managed them.

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

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