The Managerial Enterprise

The practices and procedures of modern top management had their beginnings in the industrial enterprises formed by merger rather than those that built extended marketing and purchasing organizations. The process of merger brought more persons, with more varied backgrounds, into top management. In the new consolidations a family or single group of associates rarely held all the voting stock. It was scattered among the owners of the constituent companies and the financiers and promoters who had assisted in the merger. It became even more widely held after the company sold stock to finance the reorganization and consolidation of facilities. After merger the initial administrative problems were more complex than those in the companies that grew by internal expansion. The facilities of the constituent companies had to be reshaped and their administration centralized. Moreover, a merger, the reorganization that followed it, and then the carrying out of the process of vertical integration all required continued planning.

The shift in strategy from horizontal combination to vertical integration first brought the managerial enterprise to American industry. In the terminology of this study a managerial firm differs from an entrepreneurial one in that full-time salaried executives dominate top as well as middle management. The owners no longer administer the enterprise. The experienced manufacturers, who helped to carry the merger and who, normally with the advice of one or two financiers, rationalized the facilities of a new consolidation, became the core of its top management. Although they were still large stockholders, they rarely controlled the company as did the owners of entrepreneurial firms. Moreover, they hired and promoted managers with little or no stock ownership in the company to head the new functional departments and the central staff offices.

In carrying out the reorganization after the merger, these top managers began to define their specific tasks. The centralizing of administration caused them to institute uniform accounting and statistical controls. In hiring and allocating managerial personnel they began to think more systematically about evaluating managerial performance. And because the reorganization of production and the building of a sales and buying net- work created numerous and often conflicting claims for capital expendi- tures, these senior executives were increasingly forced to pay close attention to the systematic long-term allocation of capital and personnel. The methods fashioned during the process of consolidation and integra- tion—and sometimes the process took years—were further refined as the company began to grow and to compete oligopolistically with other large integrated enterprises.

Once administrative centralization and vertical integration had been achieved, the separation of management and ownership widened. The scattered owners of the widely held stock had little opportunity to take part in management decisions at any level; and only a few managers continued to be holders of large blocks of voting stock. Top management in these enterprises, therefore, was more like that of the railroads than that of the industrials that grew by internal expansion.

There were, however, significant differences between the top manage- ment of the new industrial consolidations, and that of the large railroad systems. Although investment bankers and other financiers were active in the merger movement, they played a less influential role in the affairs of the new industrials than they did on the railroads. For one thing, many experienced manufacturers who had owned and operated the firms enter- ing the merger often stayed on the board and continued to have an influence on top management decisions. For another, the capital require- ments of the industrials were smaller than those of the railroads. In most cases, too, the consolidations were able to generate a higher return than railroads. Because they had less continuing need for outside funds, fewer financiers came on their boards, and those that did rarely had the power— albeit a veto power—that they had on the railroads. In only a few cases where particularly heavy outside financing was required did financiers outnumber managers on the boards of industrials, and such cases became less and less frequent.

Four important consolidations—Standard Oil, General Electric, United States Rubber, and Du Pont—provide detailed case studies of the largest companies in oil, heavy machinery, rubber, and chemicals, four of the nation’s most significant industrial groups. They represent differing ways in which the mergers and the shifts in strategy from horizontal combina-tion to vertical integration were carried out and the differing types of offices and practices that resulted.

At Standard Oil the creation of a central headquarters came in an evolutionary, ad hoc manner. Its managers paid little attention to organi- zational problems. For this reason, possibly, their plan of operating through subsidiaries that were coordinated by committees had only a few imitators. This was true even though theirs was the first and the best known of the modem consolidations. At General Electric, on the other hand, both managers and financiers paid close attention to administrative needs. The managers were aware of the advantages of organizational precision. And the financiers, who there played as important a role as they did in any major industrial merger, advocated the adoption of many administrative methods that had been developed on the railroads. The resulting centralized, functionally departmentalized structure became the basic organizational form used by modern American industrial enterprises.

United States Rubber and the E. I. Du Pont de Nemours Powder Company provide comparable contrasts in an evolutionary and revolu- tionary restructuring of a consolidated enterprise and with it a major American industry. In neither merger did outside financiers play an important role. The rubber company was even slower than Standard Oil in moving from horizontal combination to vertical integration and paid even less attention to organizational matters, taking over twenty years to build its central administration. Nevertheless, this evolutionary process had by 1917 brought the United States Rubber Company organizational structure close to that of the modern, multidivisional form of administration.

The Du Pont Company completed the administrative organization of its merger in as many months as it took the United States Rubber Company years. In 1903 three du Pont cousins consolidated their small enterprise with many other small, single-unit family firms. They then completely reorganized the American explosives industry and installed an organizational structure that incorporated “the best practice” of the day. The highly rational managers at Du Pont continued to perfect these techniques, so that by 1910 that company was employing nearly all the basic methods that are currently used in managing big business.

The history of these four mergers closely parallels that of most mergers that occurred in American industry before World War I. For some the process was evolutionary; for others the new organization was built with the same speed and care as at General Electric and Du Pont. By 1917, however, the majority of mergers used an organizational structure similar to that devised at those two innovating enterprises. A much smaller num- ber of leading consolidations adopted structures similar to those of Stan- dard Oil and United States Rubber. These four cases therefore can be used as  examples  of  many  of  the  firms  that  became  modern  multiunit enterprises by way of merger. They illustrate the merger process in the late nineteenth and early twentieth centuries. They reveal how and why the operating procedures of modern top management came into being.

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

Leave a Reply

Your email address will not be published. Required fields are marked *