At the Du Pont Company, the transformation from horizontal com- bination to vertical integration and from a loose agglomeration of plants to a centralized functionally departmentalized structure came with speed and precision.02 Its creators gave careful thought to organizational design. These men were trained engineers who knew firsthand the most advanced administrative practices on the railroads and in the steel, electrical, and machinery industries. Two—Coleman du Pont and Arthur Moxham—had managed the Johnson and Lorain Steel Company that built steel track and electric-powered equipment for street railways. In 1896 Coleman du Pont had hired Frederick W. Taylor to install a new cost and control system at plants in Johnstown, Pennsylvania and Lorain, Ohio.63 A third, Pierre du Pont, came to appreciate these management procedures when he joined his cousin at Lorain in 1899. Pierre and Coleman, like their cousin, Alfred du Pont, had been educated at the Massachusetts Institute of Technology. Other Du Pont executives—the Haskell brothers (J. Amory and Harry), Hamilton Barksdale, and Major William G. Ramsay—had comparable educations at engineering schools. Their training and experience fitted them exceptionally well for organization building.
The opportunity for the three young du Pont cousins—Alfred, Coleman, and Pierre—to reorganize their family firm, and at the same time the American explosives industry, came early in 1902 with the death of the senior partner, Eugene du Pont. At that time, the Du Pont Company was small indeed. It had only six stockholders, all du Ponts, and it worked closely with a number of other small family firms to control the industry through two horizontal combinations.64 The first, the Gunpowder Trade Association, had, since its formation in 1872, set prices and output of the traditional product, black powder. That cartel had remained effective for more than a generation, because the larger firms in the association—Du Pont, Laflin & Rand, and Hazard—had purchased each other’s stock and also that of the smaller members of the association. In the newer dynamite business these same companies maintained control through another hori- zontal combination—the Eastern Dynamite Company, a holding company formed in 1895.
After purchasing control of the family firm in 1902, the three cousins discarded the policy of horizontal combination for one of administrative centralization and vertical integration. They agreed that the attempts to control competition by price cutting and buying up competitors were unnecessarily costly. Such a strategy meant that the leading firms in the industry often had to purchase unplanned and unwanted plant capacity that was rarely located in the place best suited to meet market and supply conditions and rarely equipped with the most modern facilities. By early 1903 the cousins had devised a plan to merge the members of the Gun- powder Trade Association and the constituent companies in the Eastern Dynamite Company into a single consolidated enterprise—the E. I. Du Pont de Nemours Powder Company. Once the legal arrangements had been completed, they planned to consolidate manufacturing and then to build their own sales and purchasing organizations.
Their aim was to dominate the industry by running the most efficient mills as fully and as steadily as possible and so to reduce their unit costs to levels that small competitors could not achieve. In carrying out this plan they listened closely to the advice of one of their number, Arthur Moxham, who urged them not to take on more than 60 percent of the industry’s capacity. His argument was not based on any legal constraint but the judgment that a larger percentage would not permit them to obtain the maximum advantages of vertical integration. Moxham had written Coleman du Pont in June 1903:
a Atlanta, Ga.; Baltimore, Md.; Birmingham, Ala.; Boston, Mass.: Buffalo, N.Y.; Charlotte, N.C.; Hartford, Conn.: Jacksonville, Fla; Newark, N.J.; New York, N.Y.; Philadelphia, Pa.; Pittsburgh, Pa.; Providence, R.I.; Richmond, Va.; Rochester, N.Y.; Savannah, Ga.; Syracuse, N. Y.; Washington, D.C.; Wilkesbarre, Pa.; Worcester, Mass.
b Chicago, III.; Cincinnati, Ohio; Cleveland, Ohio; Columbia, Ohio; Dallas, Texas; Dayton, Ohio; Denver, Col.; Des Moines, Iowa; Detroit, Mich.; Houston, Texas; Indianapolis, Ind.; Kansas City, Mo.; Louisville, Ky.; Milwaukee, Wis.; Minneapolis, Minn.; New Orleans, La.; San Antonio, Texas; St. Louis, Mo.; Toledo, Ohio. c Butte, Mont.; Fresno, Cal.; Los Angeles, Cal.; Portland, Ore.; Sait Lake City, Utah; San Francisco, Cal.; Seattle, Wash, d Morgan & Wright; Hartford Rub. Wks. Co.; G. & J. Tire Co.; Revere Rubber Co., Providence, report to Vice President. e Hartford Rub. Wks. Co.; Morgan & Wright; G. & J. Tire Co.; Peerless Rub. Mfg. Co.; N.Y. Belt & Pack. Co.; Mech. Rub. Co. Cleveland; Mech Rub. Co. Chicago; Sawyer Belting Co.; Stoughton Rubber Co.; Fabric Fire Hose Co.; Mech. Fabric Co.; Can. Cons. Rubber Co.; Eureka Fire Hose Co.; Revere Rubber Co. Chelsea.
f American Rub. Co.; Boston Rub. Shoe Co.; L. Candee & Co.; Goodyear’s M.R.S. Co.; Goodyear’s I.R.G. Co.; Naugatuck Chem. Co.; National Ind. Rub. Co.; N.J. Factory; Woonsocket Rub. Co.; Shoe Hardware Co.; Mishawaka W. Mfg. Co.; Hastings Wool Boot Co.; Can. Cons. Rubber Co.; Lawrence Felting Co.
g Amsterdam RubberCo.; Banigan, Baltimore; Banigan, Boston; Banigan, Buffalo; Banigan, Chicago; Chicago Rubber Co.; Columbus Rubber Co.; Des Moines Pub. Co.; Detroit Rubber Co.; Duck Brand Co.; Enterprise Rubber Co.; G.I.R. Selling Co.; Hubmark, Boston; Hubmark, Detroit; Hubmark,
N.Y. City; Inter-State Rub. Co.; Iroquois Rubber Co.; Maryland Rubber Co.; Maumee Rubber Co.; Merchants RubberCo.; New Eng. Rub. Shoe Co.; Omaha Rubber Co.; George W. Perry; Pittsburgh Rubber Co.; Rochester Rubber Co.; St. Paul Rubber Co.; Springfield Rub. Co.; Stand. Rub. Shoe Co.; Syracuse Rubber Co.; Tremont Rubber Co.
h Departments for Colloids; Textiles; Apparatus; Vulcanization; Construction.
Source: United States Rubber Company Archives:
I have been urging upon our people the following arguments. If we could by any measure buy out all competition and have an absolute monopoly in the field, it would not pay us. The essence of manufacture is steady and full product. The demand for the country for powder is variable. If we owned all therefore when slack times came we would have to curtail product to the extent of diminished demands. If on the other hand we control only 60% of it all and made that 60% cheaper than others, when slack times came we could still keep our capital employed to the full and our product to this maximum by taking from the other 40% what was needed for this purpose. In other words you could count upon always running full if you make cheaply and control only 60%, whereas, if you own it all, when slack times came you could only run a curtailed product.65
To carry out this objective of assuring a full and steady throughput, the three cousins quickly transformed the new consolidation into what might be considered an ideal type of integrated, centralized, functionally depart- mentalized enterprise. Where possible, the constituent companies were legally dissolved. Only in a few cases did minority stockholders or existing contractual arrangements delay or prevent dissolution. The plants of the constituent companies were then placed into one of three “operating departments”—black powder, high explosives (dynamite), and smokeless powder (a product even newer than dynamite). The existing sales agencies were replaced by branch offices, manned by salaried managers and employees. Because the new high explosives were dangerous and because their efficient use required special skill, the salesmen of the du Pont- controlled dynamite companies were usually trained mining or civil en- gineers. Their sales offices and organization served as the nucleus for the branch office network of the consolidation. At first, three assistant sales managers at headquarters supervised three different regional areas, but soon they became, in the General Electric manner, product managers. Assistant sales managers headed the black powder and dynamite divisions. The district offices were also divided along these two major product lines. A third headquarters unit was responsible for the sale of smokeless powder propellants to the army and navy. A fourth supervised the sale of rifle and shotgun smokeless powder, which were sold to ammunition makers.
The sales department and the three operating departments at Du Pont were organized in much the same way as those at General Electric. They had their vice presidents in charge, their staffs, and their department committees. Each of the operating departments had its own engineering, research, control, personnel, and accounting staffs. The sales department staff included an advertising bureau and an information bureau.66 The latter provided a constant flow of information on sales of the company and of its competitors. That office, which became the trade record division, also supplied district managers with detailed forms and procedures to record and analyze changing demand. Besides their regular committee meetings, these departments (again following the General Electric pattern) held semiannual meetings of all headquarters and field managers in Wilmington, where papers devoted to a wide range of departmental policies, problems, and concerns were read and discussed.67
Because its manufacturing processes were similar to those at United States Rubber and the entrepreneurial firms processing agricultural prod- ucts, the Du Pont Company purchased relatively few items in massive volume. So, like these other enterprises, it immediately set up an “essential materials department” to do its purchasing. In a short time that department owned and operated mines and other sources of raw material.08 By 1908, for example, the company was consuming one-third of the glycerine sold in the United States or one-sixth of the world’s supply, as well as 30 percent of the Chilean nitrates sold in this country or 5 percent of the total world’s supply. By 1911 the company owned its own glycerine and acid-making facilities and had purchased large nitrate fields in Chile. As was true at American Tobacco and the meat packers, it had a smaller purchasing department to buy in volume the supplies and stock other than its basic raw materials. In 1904 it enlarged the traffic department, placing it under an experienced industrialist, Frank G. Tallman.69 Tallman was soon chartering ships to carry nitrates and purchasing special railroad cars to move acids, nitrates, and finished explosives. Tallman, working closely with the directors of the operating and sales departments, took the major responsibility for coordinating the flow of materials from the nitrate fields of Chile through the processes of production to the customers— building contractors, mining and transportation companies, military buyers, and makers of rifle and shotgun shells.
As in the case of the other mergers, the executive committee of the board ran the company. The consolidation had been financed from within, so, as was the case at Standard Oil, no outsiders sat on the board. That board included the three cousins, members of the older generation of du Ponts who had sold out, and able powder men from other of the merged companies, including J. Amory Haskell from Laflin & Rand, Frank Connable from Chattanooga Powder, and Colonel Edmund G. Buckner from International Smokeless. The committee met weekly rather than monthly as it did at General Electric. It consisted of the president, Coleman du Pont, and the vice presidents in charge of the three operating departments, the sales department, and the smaller departments for development and finance.70
The committee members, except for the president, therefore, had two sets of responsibilities. As vice presidents they were accountable for the performance of their respective functional departments. As members of the executive committee, they were charged with managing the company as a whole. Under the original plan of organization outlined by Moxham in 1903, the second task was to have precedence. By this plan each vice president was given a departmental director who was specifically charged with handling the day-to-day departmental operations. The vice president was then to concentrate on overall policy making, planning, and evaluation. Thus the executive committee at Du Pont differed from that at General Electric in that it consisted entirely of full-time, experienced salaried managers. It differed from that at Standard Oil in that its members appreciated the distinction between day-to-day administration and long- term policy making and explicitly expected to devote their attention to the latter.
In carrying out its tasks the executive committee relied not only on the regular detailed monthly reports from the operating and sales departments, and many special departmental reports, but also on a wide variety of data supplied by the development department and increasingly sophisticated information on costs and capital accounts generated by the financial offices.71 The development department at Du Pont, headed by Arthur Moxham, the most imaginative of the new consolidation’s founders, was carrying out by 1904 what United States Rubber was only beginning to achieve in 1917. The Du Pont development department had three divisions. The experimental division supervised the company’s control research laboratories set up near Wilmington, and the raw materials division kept a careful eye on the company’s basic supplies. In the years after 1903 it provided information for and helped to plan and carry out the strategy of backward integration. A third unit, the competitive division, supplemented and provided a check on the sales department information on markets and competitors. All three of these divisions of the development department provided the executive committee with a source of information that was independent of the marketing and production departments. Finally, the development department was charged with reviewing and suggesting improvements in the company’s organizational arrangements.
The new financial offices at Du Pont, similar to those at General Electric, included treasurer’s, accounting, auditing, and credit and collection departments, and two smaller units—salary and the real estate depart- ments.72 Under the command of young Pierre du Pont the financial staff grew rapidly as the consolidation was completed. An office force of twelve in the summer of 1903 had grown to over two hundred a year later. The first tasks that Pierre and his staff faced involved consolidation of the accounts of the firms coming into the merger, development of uniform accounting procedures for all the company’s plants and offices, and obtaining firm control of a steady supply of working capital.
In carrying out this work, Pierre du Pont and his division heads pioneered in the ways of modern industrial accounting. They were among the first industrialists to end the long separation between cost, capital, and financial accounting. They did so, in part at least, by replacing renewal accounting with modern industrial asset accounting. By 1910 they had developed accounting methods and controls that were to become standard procedure for twentieth-century industrial enterprises.
In cost accounting the financial office concentrated on obtaining more accurate information on overhead costs.73 Russell Dunham, Pierre’s senior accounting executive, had worked with Frederick W. Taylor at Bethlehem before coming to Du Pont. Pierre and Coleman had become intimately acquainted with Taylor’s costing and control methods at Lorain Steel. Using these methods Pierre’s subordinates improved their analysis of overhead costs, including such indirect labor costs as those of foremen, managers, and inspectors and such indirect material costs as those of maintenance, depreciation, taxes, power, and light. They also included costs of accident insurance, interest charges on raw materials, stocks, and other inventories, and depreciation on facilities other than plant and equipment. They did not, however, at this time set up a full standard cost system based on a standard volume as a percentage of total capacity. In addition to determining these “mill costs” (the total of direct and indirect costs), the financial staff worked out the administrative costs of maintaining the development, legal, purchasing, and real estate departments and the allocation of these costs to each of the company’s products. Next, close attention was paid to determination of actual selling and purchasing costs. The treasurer’s office was soon preparing for the executive committee monthly cost sheets that allocated mill, administrative, selling, and transportation (freight and delivery costs) for each of the thirteen products the company manufactured. They used this continuous flow of data on unit costs to monitor the performance of the individual operating units, of the functional departments, and of the company as a whole.
After defining costs carefully, Pierre du Pont and his financial managers turned to a more precise definition of profit and with it a more precise criterion for evaluating financial performance. They considered as inad- equate the standard definition of profits developed by General Electric and other new industrials—that is, earnings (revenue from sales minus costs) as a percentage either of sales or costs. (This was, in turn, a modification of the railroads’ operating ratio.) Such a criterion was incomplete, they argued, because it failed to indicate the rate of return on capital invested. “The true test of whether the profit is too great or too small,” Dunham once wrote, “is the rate of return on the money invested in the business and not the per cent of profit on the cost.”74 For, as Dunham further pointed out, “A commodity requiring an inexpensive plant might, when sold only ten per cent above its cost, show a higher rate of return on the investment than another commodity sold at double its cost, but manufactured in an expensive plant.”
To obtain such a rate of return, the basic problem was to develop accurate data on investment in fixed capital. This could not be done by using the renewal accounting procedures employed by the railroads and copied by other new large industrials, for by this practice many capital expenditures were charged to operating expenses. To obtain an accurate picture of capital invested, Pierre carefully reviewed the valuation made of all properties coming into the merger in 1903. He then had these entered into a new general ledger account for “permanent investment.” Next, his department devised capital appropriation procedures so that all new construction was charged (any dismantled assets were credited) to this account at cost. At the same time the financial department obtained increasingly accurate data on inventories, accounts receivable, securities, and cash, which made up the working capital account. On the basis of this information on fixed and working capital, Pierre’s department was by 1904 presenting the executive committee with monthly figures on costs, income, and rate of return on total capital investment for each of the company’s thirteen products. From almost the beginning of the modern Du Pont Company its executive committee was using rate of return on capital invested as a basic management tool for both evaluation and planning.
Before World War I the financial office had further refined this tool so that it reflected more accurately the speed and volume of the flow of materials through the company’s facilities. Donaldson Brown, one of Pierre’s subordinates, was the first to point out that if prices remained the same, the rate of return on invested capital increased as volume rose and decreased as it fell.75 The higher the throughput and stock-turn, the greater the rate of return. Brown termed this rate of flow “turnover.” He defined it as value of sales divided by total investment. Brown then related turnover to earnings as a percentage of sales (still the standard definition of profit in American industry). He did this by multiplying turnover by profit so defined, which gave a rate of return that reflected the intensity with which the enterprise’s resources were being used. This formula devised by Brown (figure 11) is still the method employed by the Du Pont Company and most other American business enterprises to define rate of return.
Source: T. C. Davis, “How the du Pont Organization Appraises Its Performance,” in American Management Association, Financial Management Series, no. 94:7 (1950).
These accounting innovations at Du Pont were significant achievements. They helped to lay the base for modern asset accounting by effectively combining and consolidating for the first time the three basic types of accounting—financial, capital, and cost. By devising the concept of turnover, the Du Pont managers were able to account specifically, and again for the first time, for that part of the basic contribution made by- modern management to profitability and productivity—the savings achieved through administrative coordination of flows of materials through the processes of production and distribution. With these innovations, modern managers had completed the essential tools by which the visible hand of management was able to replace the invisible hand of market forces in coordinating and monitoring economic activities.
As they were sharpening their procedures for the administration of current processes of production and distribution, the Du Pont managers were also devising and perfecting those required to allocate resources for future production and distribution. As early as November 1904, the executive committee’s members decided that they were not appropriating capital systematically enough.70 They were having increasing difficulty in deciding how best to meet the many and varied calls for funds. By the end of 1904 capital was needed to increase the plant capacity (particularly to meet the growing demand for explosives in the western states), to purchase Chilean nitrate properties, to obtain facilities to produce glycerine and other supplies, and to expand the research laboratories. At that moment an opportunity appeared to obtain subsidiaries in Europe. Capital expenditures in turn had to be carefully related to dividend policy and the continuing availability of working capital. As a result of prolonged discussion and disagreement on how much to allocate to these different alternatives, the executive committee asked the treasurer to formulate detailed capital appropriation procedures. Because Pierre du Pont was out of the country investigating investment opportunities in Europe and Chile during most of 1905, these procedures were not fully defined or acted upon until early 1906. They were not fully applied until the company’s financial program recovered from a temporary disarray caused by the panic of 1907.77
Under the new procedures, the committee agreed to devote a minimum of one full meeting a month to capital appropriations. Agendas were to be carefully prepared and reports to be as precise as possible. Routine invest- ment decisions, like routine operating ones, were to be turned over to a new operative committee made up of departmental directors. Limits on investment requiring executive committee approval were raised from $5,000 to $10,000. All requests were to have, in addition to detailed information as to estimated rate of return, elaborate blueprints and cost figures. Plant sites required the approval of the sales, purchasing, and traffic departments to assure that the greatest comparative advantage had been obtained in determining the location and design of new facilities. Most important of all, Pierre set up an office in his department under his younger brother, Irenee, with the full-time task of reviewing and coordinating expenditures; reporting regularly to the executive committee and the treasurer on amounts actually expended; and keeping the “permanent investment” account up to date. Irenee’s staff was also to make a preliminary review of departmental proposals and budgets before they were presented to the executive committee. Such controls permitted the company to carry out a policy that there “be no expenditures for additions to the earning equipment if the same amount of money could be applied to some better purpose in another branch of the company’s business.”78
After 1906 Pierre and the executive committee continued to systematize the making and approval of both operating and capital budgets. The treasurer’s office also began to make long- and short-term financial fore- casts. The most important of these, the forecast of the net earnings, determined the maximum amount available for new capital expenditures from retained earnings.79 Such forecasts were computed by multiplying sales department monthly estimates of sales by the accounting depart- ment’s estimates of net profit per unit for each product. By combining these data on net earnings with information provided by the office responsible for capital appropriations, the financial office was soon sending to the executive committee monthly forecasts of the company’s cash position for each of the next twelve months. These forecasts were, of course, checked regularly against actual results. Such information increased the possibilities for rational choice between alternative investments and alternative methods of financing them.
In 1911, during a minor reorganization of the company’s organization structure, Pierre and Coleman du Pont enlarged the central office staff.80 They set up a central office engineering department to design, build, or contract for major maintenance, repair, and construction of new plants, offices, and other facilities for the company as a whole. Chemical research was taken from the development department and became an independent unit of its own. So, too, did the office handling real estate, which had been in Pierre du Pont’s treasurer’s office. With the great expansion of produc- tion at the beginning of World War I, the executive committee set up a central personnel department to set policies for recruitment, training, and promotion of workers and to administer the company’s pension program.81 Soon a publicity department, the forerunner of the public relations depart- ment, was reporting to the president.
With the rounding out of the staff and the perfection of capital appropriations procedures, the Du Pont Company employed nearly all of the basic offices and methods used today in the general management of modern industrial enterprise. Top management at the majority of large industrial firms became, as it had at Du Pont, collegial or group manage- ment. It became professional in that it consisted of full-time, salaried managers who spent their careers in the industry in which their company operated. These managers soon came to have the assistance of large central office staffs similar to those at Du Pont. They relied on their central laboratories for innovation in product and process and on their financial offices for the same kind of cost and capital accounting that had been developed at Du Pont. Asset accounting quickly took the place of renewal accounting as the standard form in large industrial enterprises. Rate of return on capital investment became a widely used criterion of perform- ance; and the use of capital budgets and financial forecasts became standard procedure in the allocation of resources. Well before World War I executives at the Du Pont Company had drawn together and perfected methods of business management that had their beginnings on the railroads and were further developed by the mass marketers, by the practitioners of scientific factory management, by the managers of the early entrepreneurial enterprises, and by consolidators of the first mergers.
Source: Chandler Alfred D. Jr. (1977), The Visible Hand: The Managerial Revolution in American Business, Harvard University Press.