Top Management: General Electric Company

For several reasons the merger that created the General Electric Com- pany was more important to the development of modern industrial man- agement in the United States than were the early trusts. General Electric was the first major consolidation of machinery-making companies and so the first between already integrated enterprises. Its products and processes were as technologically advanced and complex as any of that day. And at General Electric outside financiers played as large a role as they did in any American industrial merger. For this reason the railroad influence was particularly strong. The financiers were important because the electrical manufacturers were the first American industrialists not intimately connected with railroads who found it necessary to go to the capital mar- kets for funds in order to build their initial enterprise.

In the new electrical equipment industry, technological development was much more complex, much more costly, and took more time to achieve than in other industries. Unlike Duke, Crowther, Heinz, Eastman, Singer, or Rockefeller, these manufacturers were unable to exploit the enormous output of a new continuous-process method which provided almost immediately a high cash flow. Instead, Thomas A. Edison, Elihu Thomson, and George Westinghouse had first to fashion an integrated system of power-generating machinery, power stations, lamps, and powerusing machines before they could begin to sell their products in volume.

Moreover, once their systems were developed, these enterprises had to help finance the construction of the central power stations that used their products. This they did by taking stock in small, local power companies. Such financing, in turn, forced them to go to Wall Street and State Street. As early as 1878 Thomas Edison was getting help from Drexel, Morgan & Company, then on its way to becoming the foremost investment house in the nation; while Elihu Thomson soon had the backing of Frederick L. Ames, Henry L. Higginson, and T. Jefferson Coolidge, Boston capitalists who were involved in the financing of railroads, the telegraph, and soon the telephone.20 George Westinghouse, who entered the field somewhat later, in 1886, by developing an alternating current system, grew at a smaller scale than his rivals. At first he attempted to sell his equipment only for cash. By 1889, however, he had to obtain the support of Pittsburgh financiers. And in 1891 he asked August Belmont & Company and Lee, Higginson to refinance his company.27 The houses of Morgan, Belmont, and Lee, Higginson were, of course, intimately informed about the administrative structures of railroad, telegraph, and telephone companies.

The General Electric Company, incorporated in November 1892, was a merger of two of these three large electrical equipment manufacturers. Both the Edison General Electric Company and the Thomson-Houston Electric Company were themselves the result of mergers. Edison Electric, formed in 1889, was a consolidation of the three manufacturing companies, a patent company owned by the Edison interests, and the Sprague Electric Railway and Motor Company. The latter was a pioneer in the manufacture of electric street railway equipment. Henry Villard, an eminent railroad financier who had helped to finance some of Edison’s early developmental work, engineered the merger.28 Villard had recently returned to the United States after a three-year stay in Germany where he had become closely associated with the powerful Deutsche Bank of Berlin and with Siemens & Halske, the leading German electrical manufacturers who were already beginning to sell in the American market. He planned, according to Edison’s biographer, Matthew Josephson, to create a “world cartel.”29

After the merger, however, Villard concentrated on the new American enterprise. He began to centralize the administration of its manufacturing facilities and to build a nationwide sales organization. He had the new company concentrate its machinery production at the large works at Schenectady and the making of the lamps or light bulbs at Harrison, New Jersey.30 The working force of these two large factories soon totaled close to 6,000. Young Samuel Insull, a Villard protégé, as second vice president, created a sales force with seven regional offices, each headed by a district manager who supervised and coordinated the work of the salesmen and engineers responsible for sales, contracts, installation, and continuing service and repair. Each reported to Insull, who had on his staff a small “intelligence department.” Then two years later Villard began negotiations for a merger with Thomson-Houston.

At that time Thomson-Houston, the largest company in the arc light business and second only to Edison General Electric in assets and output, had the most effective sales force in the industry.31 The company’s presi- dent, Charles A. Coffin, had by 1886, four years after its founding, com- pleted a national network of sales offices. In that year Coffin began to move into the production of other electrical products besides arc lights, including a complete incandescent system, a line of direct current motors, railway motors, and alternating current generators and transformers. He did so both by internal expansion and by the acquisition, largely through exchange of stock, of four small companies.32 The sales department estab- lished by Coffin to market these lines differed from Insull’s at General Electric in that it had at its Boston headquarters a sales manager for each major product. As Harold C. Passer has pointed out: “These sales managers were charged with the coordination of production and marketing and the development of new markets for the products under their supervision.”33 Soon, too, there were product managers in the branch offices.

Coffin’s desire to broaden the company’s product line caused him to listen attentively to Villard’s proposal for a merger. Both had much the same aim. “Each company desired to expand the lines in which it was weak and to begin the manufacture of those products which showed promise.”34 Patents created a major difficulty. In street railways, Edison General Electric held one set of patents and Thomson-Houston another. This was also true in lamp and arc light equipment.

As the negotiations progressed, J. Pierpont Morgan, whose firm was to be responsible for financing the merger, decided that the Thomson-Hous- ton personnel should manage the new consolidation. Although smaller in capitalization and plant capacity, its executives had the greater adminis- trative and marketing abilities.35 Almost immediately after the formation of General Electric, Morgan asked Villard to resign and supported Coffin for the presidency. With Villard’s departure, Insull left the company and Edison dropped his interest in the electrical business. While three Boston financiers on the Thomson-Houston board continued as directors of the new General Electric Company, the New York financiers, including Morgan, Charles H. Coster (a Morgan partner and long treasurer of the Edison Company), Darius O. Mills, and others, dominated its board.

Coffin amalgamated the organizations of the two companies into a single centralized structure. Nearly all of the twenty subsidiaries or “sub- companies” as Coffin called them, were then liquidated.36 In its broad out- line the new structure followed the railroad model. A first vice president was placed in charge of sales, a second vice president headed the financial department, that is, the treasurer’s office and the accounting, collections, and credit departments.37 In a short time a third vice president took charge of the manufacturing and engineering department. By 1900 engineering, or more precisely, product design, had become a separate department also headed by a vice president of its own.

With the formation of the manufacturing and engineering department, Coffin concentrated production at the three major works. Lamp production continued to be carried on in Harrison, New Jersey. Schenectady manufactured heavy specialized machinery such as large generators, motors, and turbines. The plant at Lynn turned out smaller mass-produced products including arc lights, small motors, and meters. Because each works handled different lines, each took care of its own purchasing and its own scheduling of flows into the plants. For the same reason each of two larger works had its own engineering offices and soon also its own technical laboratories. The one at Schenectady was headed by a master mathematician, Charles P, Steinmetz, and that of Lynn by Elihu Thomson.38

The Thomson-Houston sales organization became the core of the new sales department.39 The branch offices of the two companies were com- bined. The central office, now at Schenectady, as well as the branch offices continued to have managers for each product line. In 1892 the product departments included: railway, lighting, power equipment, and supplies (such as fuse boxes, switches, sockets, which were sold to electricians and contractors as well as utilities and manufacturers). A mining division was added in 1895 and the railway one was divided into the traction and the railway division in 1908. In 1895 the company set up an international de- partment to supervise foreign sales carried out by subsidiaries in Britain, France, Germany, and Canada.40

Product managers at the district offices and foreign subsidiaries reported to their superiors at headquarters. The heads of the product divisions at Schenectady all had the same function of coordinating production with distribution. For the heavy equipment and large motor departments, this meant close coordination between the sales force and the engineers design- ing and the plant managers processing the customers’ orders. For the small motors unit, it also meant close attention to coordination of product flow. The volume was large at General Electric. By 1895 the company had over 10,000 customers and processed 104,000 separate orders.41

At General Electric there were, as at Standard Oil, formal committees, but they played a very different role.42 In both companies they were used to improve communications between managers carrying out the same functional activities. But at Standard Oil the committees were made up of equals meeting to work out mutually beneficial policies and procedures for their respective subsidiary companies, and those at General Electric con- sisted of subordinates meeting with their bosses. The manufacturing com- mittee, chaired by its own vice president, included the plant managers, heads of engineering departments at Lynn and Schenectady, and chiefs of the laboratories. The sales committee, also chaired by its vice president, consisted of the product managers, the manager for foreign sales, and the director of advertising. In 1903, after the formation of the central research laboratory, a comparable research advisory council was formed.43

At their monthly meetings these committees covered a wide variety of topics. At sales the members considered pricing, competitors’ activities, market conditions, customers’ needs and concerns, and the processing of major orders. In addition, the committee gave final approval to all sales contracts over $5,000 but under $25,000. The manufacturing committee reviewed the regular factory reports on costs, inventory, and output. Its members discussed product standardization, standardization of machinery, selection of plants for processing new products, and procedures for de- termining factory costs. In developing the last, the committee probably paid close attention to the work of Frederick W. Taylor and other prac- titioners of scientific management who were then developing new cost and control procedures based largely on predetermined or “standard” costing.

In addition to the monthly committee meetings, the manufacturing and sales departments also had annual and later semiannual meetings in New York or Schenectady of all the departmental managers, from the field as well as from the central office. These two- or three-day conferences, with their carefully planned agendas, provided a more personal way to maintain communication between the growing ranks of the firm’s middle managers who specialized in a single function. Such channels were, in turn, supplemented by a flow of circular letters and bulletins emanating from headquarters and an even greater torrent of statistics, reports, and letters moving from the field to Schenectady.

In this way, then, the new top managers at General Electric structured the organization of the functional departments so as to assure effective communication and control throughout the organization. In the entre- preneurial firms, the departments had been built by the middle managers in an ad hoc fashion to meet current needs. At General Electric order was imposed from the top. Much of this order General Electric clearly borrowed from the railroads. The lines of authority and responsibility were defined in the same way. Railroads used departmental meetings and occasionally committees as means to improve communication between middle managers in the central office and lower-level managers in the field.

The design of top management at General Electric was even closer to that of the railroads than was its middle management. The top managers — the president and the vice presidents in charge of the major functional departments (sales, manufacturing, and finance)—were housed in ad- joining offices at the company’s headquarters at Schenectady. Each was ssisted by a sizable staff, and each reported to a board of directors domi- ated by outside financiers.44 As at Standard Oil, the executive committee of the board was the top policy-making body. But as was true on the rail- roads, but not at Standard Oil, that committee was completely dominated by outsiders. Only two of the salaried managers—Coffin and Eugene Griffin, the vice president in charge of sales—were board and executive committee members.

At the monthly meetings of General Electric’s executive committee, it reviewed salaries, approved of organizational changes, and voted on all contracts over $2 5,ooo.45 Although it had to approve salary increases, the selection of all but the most senior executives was left to the department managers. Because of the highly technical nature of the electrical business, only they could fully judge the qualifications of their subordinates. The committee must also have approved capital appropriations. The factories did have budgets. But neither Passer’s history nor any of the other literature on that company describes the procedures used for approving budgets or allocating capital funds. The existing evidence does indicate that the executive committee at General Electric functioned much as an executive committee of a late nineteenth-century railroad or as a finance committee of a mid-twentieth-century industrial. Since it met only monthly and relied almost wholly on inside management for information, it must have been more of a policy-approving than a policy-making or planning body. Its members included busy men like J. P. Morgan and Charles H. Coster, who were in the 1890s reorganizing several of the na- tion’s leading railroad systems. From almost its very beginning the key policy makers at General Electric were not the outside directors, not even those who served on the executive committee, but rather its full-time salaried managers, Charles Coffin and his departmental vice presidents.

In carrying out their tasks, the top salaried managers and the members of the executive committee had the assistance of fairly large financial and advisory staffs.46 As on the railroads, the financial departments included a treasurer’s office to handle external financial affairs and a comptroller’s office to take care of internal ones. Because of the nature of General Elec- tric’s business, its collection and credit departments were larger than those on the railroads. Again, as in the case of the railroads, cost accounting, capital accounting, and financial accounting remained separated. Costing continued to be the province of the manufacturing department and the maufacturing committee and financial accounting that of a central ac- counting office.47 In determining its assets and liabilities, as well as its costs, the accounting department continued to rely on the railroad type of renewal accounting. In the words of General Electric’s 1896 report: “All expenditures for their [the company’s plants] maintenance and repair are charged to operating expenses.”48 The company did, however, refine these accounts so that on the annual balance sheet, book value repre- sented replacement value rather than original costs. After obtaining the evaluation of capital equipment, made at the time of the merger, the company began, after a couple of years, to write-down regularly, using carefully worked out, though arbitrary, depreciation rates. At the same time it added current expenditures that increased the value of plant and equipment. There is no indication that the financial department at General Electric used these figures to compute a rate of return on total investment. At General Electric earnings continued to be considered as margins of sales over costs. And the basic criterion for financial performance continued to be earnings as a percentage of sales, a figure comparable to a railroad’s operating ratio. Rate of return was given only as rate of earnings to total stock outstanding.

General Electric’s central office staff had a larger number of functions than did the staffs on railroads and other industrial enterprises of that day. In addition to a sizable patent and law department, the company added in 1897 a publicity bureau whose task was to publicize broader developments within the industry as well as within the company. Of more importance, General Electric, like American Cotton Oil and National Lead, came to have its own independent research department.49 Although Thomson at Lynn and Steinmetz at Schenectady were able to concentrate on broader problems, the laboratories they headed were located at the plant sites. So their technicians were primarily involved in quality control and inspection. In 1895 Coffin set up in Schenectady a standardizing laboratory for the company as a whole. Then in 1901 he and his associates created the research laboratory. The impetus for creating this laboratory came wholly from the top salaried managers and not from financiers on the executive committee, nor from middle managers in the functional departments.50 Under Willis R. Whitney, a German-trained chemical engineer who was recruited from the faculty of the Massachusetts Institute of Technology, the laboratory was soon doing innovative research in lighting, vacuum tubes, x-rays, and alloys. Its work was to improve products and processes, and its contributions eventually led to the expansion of the company’s product line.

At General Electric, therefore, the practices of middle management first developed in the entrepreneurial firms of the 1880s were married to the methods of top management developed by the railroads. Unlike the organizers of the Standard Oil trust, those at General Electric eliminated the existing subsidiaries as units of management, replacing them with a highly centralized administrative structure. Subsidiaries were retained only as legal forms to meet specific legal requirements. The senior executives at General Electric defined the authority and responsibility of the middle managers and the channels of communication between them far more carefully than did the top executives at the entrepreneurial firms. They also built much larger central office financial and advisory staffs. Full-time salaried managers carried out the top management functions at General Electric, but the board, still, dominated by outside financiers, continued to have a powerful veto power similar to that of comparable boards on the large railroad systems. Except for this continuing relation- ship with outside financiers, the structure built at General Electric became and still remains today a standard way of organizing a modern integrated industrial enterprise.

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

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