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The Company: A Short History of a Revolutionary Idea by John Micklethwait


Rating: (Recommended)


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Company Brief

As a diversion from reading about corporate scandals and treachery, treat yourself to a new short book that celebrates what the revolution of corporate structure has accomplished for society. John Micklethwait’s The Company presents a fast moving story of where the corporate structure came from, and what it has achieved. Here’s an excerpt from Chapter 6, “The Triumph of Managerial Capitalism 1913-1975 (pp. 104-109):



In the first two decades of the twentieth century, a silent takeover began: the gradual separation of ownership from control. The robber barons may have kept the big strategic decisions in their own hands, but they couldn't personally oversee every detail of their gigantic business empires. And they couldn't find the management skills that they needed among their immediate families, who anyway found more amusing things to do: Digby Baltzell writes acidly about "the divorcing John Jacob Astor III (three wives), Cornelius Vanderbilt,Jr. (five wives), Tommy Manville (nine wives) or the Topping brothers (ten wives between them)." So the company founders turned to a new class of professional managers.

The likes of King Gillette, William Wrigley, H.J. Heinz, and John D. Rockefeller hired hordes of black-coated managers to bring order to their chaotic empires. America's great cities were redesigned to provide these managers with a home—the new vertical filing cabinets known as skyscrapers. In 1908, the Singer Company built the world's tallest building in New York to house some of these managers (it was 612 feet high), only to be outbuilt eighteen months later by Metropolitan Life (700 feet), which was then trumped in its turn by the Woolworth Building (792 feet).

The inhabitants of these towers began by doing the boring work of coordinating the flow of materials from suppliers to eventual customers. But soon their organizational skills—Singer's mastery of door-to-door selling—became decisive competitive advantages in themselves. And, gradually, these "Company Men" began to make the big strategic decisions as well. Every merger required the central management staff to rationalize the acquired business. Every robber baron's death freed their hands. Every share issue dispersed ownership: the number of ordinary shareholders rose from 2 million in 1920 to 10 million in 1930.

This was the background to the multidivisional firm that Alfred Sloan (1875-1966) pioneered at General Motors. Like many other young companies, GM was caught out by the recession of 1920. The company's founder, William Durant (1861-1947), whom Sloan later described as "a great man with a great weakness—he could create, but not administer," controlled almost all of the company's activities, supported by a rudimentary staff. GM was saved by Pierre du Pont (1870-1954), who bought 37 percent of the struggling carmaker. He in turn picked Sloan, a young engineer who was then managing GM's parts and accessories units, to redesign the organization from top to bottom.

Sloan, who became GM's president in 1923, was the prototypical organization man, the first manager to be famous for just that. "Management has been my specialization," he wrote flatly in his autobiography. Du Pont and Sloan decided that the company's activities were too disparate to be run by a single central authority. Instead, they decided to treat its various units – its car, truck, parts, and accessory businesses – as autonomous divisions. Each division was defined by the market that it served, which in the case of cars was determined by a "price pyramid": Cadillac for the rich, Oldsmobile for the comfortable but discreet, Buick for the striving, Pontiac for the poor but proud, and Chevrolet for the plebs. By providing a car "for every purse and purpose," the pyramid allowed GM to retain customers for their whole lives. It also ameliorated the economic cycle. In boom times, like the late 1920s, GM could boost profits with high-end products; in busts, like the 1930s, it could rely on Chevys.

Yet, if Sloanism was built on decentralization, it was controlled decentralization. The divisions were marshaled together to use their joint-buying clout to secure cheaper prices for everything from steel to stationery. And Sloan and Du Pont created a powerful general office, packed full of numbers men, to oversee this elaborate structure, making sure, for example, that the divisions treated franchised salesmen correctly. Divisional managers looked after market share; the general executives monitored their performance, allocating more resources to the highest achievers. At the top, a ten-man executive committee, headed by Du Pont and Sloan, set a centralized corporate strategy.

The beauty of Sloanism was that the structure of a company could be expanded easily: if research came up with a new product, a new division could be set up. "I do not regard size as a barrier," Sloan wrote. "To me it is only a problem of management." Above all, the multidivisional firm was designed, in Sloan's words, "as an objective organization, as distinguished from the type that get lost in the subjectivity of personalities." In other words, it was not Henry Ford.

Ford's determination to administer his huge empire himself pushed it toward disaster. He ignored both the new science of market segmentation and the wider discipline of management theory. (He let it be known that anyone found with an organization chart, however sketchily drawn, would be sacked on the spot.) He deliberately engineered a destructive conflict between his son and one of his most powerful lieutenants, drove many of his most talented managers out of the company, and refused to put even the most elementary management controls in place. One department calculated its costs by weighing a pile of invoices; the firm was hit with a $50 million tax surcharge for excess profits during the Second World War because no one had filed the necessary forms for war contractors.' By 1929, Ford's share of the market had fallen to 31 percent while General Motors's had risen from 17 percent to 32.3 percent.

There was an irony in the inventor of the assembly line being himself outorganized. As one historian, Thomas McCraw, puts it, "What Ford did for physical machines, Sloan did for human beings." The multidivisional structure, which was progressively adopted by many of America's marquee names, including General Electric, United States Rubber, Standard Oil, and U.S. Steel, was an ideal tool for managing growth. The Du Pont Company, for instance, initially diversified haphazardly into a succession of promising new products, including paints, dyes, film, and chemicals. But it overloaded its centralized management system—so much so that the only bit to make money was its old explosives business. Once it copied GM's example, and began to create separate divisions to manage its various businesses, the new entities began to make money too. By 1939, explosives accounted for less than 10 percent of its income.

Du Pont also illustrated another advantage of Sloan's system: it institutionalized innovation by making it the responsibility of specific people. Du Pont poured money into research, supporting not just specialized laboratories in its various divisions but also a central laboratory, known as "Purity Hall," which concentrated on fundamental research. By 1947, 58 percent of Du Pont's sales came from products that had been introduced during the previous twenty years.

Even companies that were less directly influenced by Sloan embraced his creed of professional management In 1927, Coca-Cola's researchers began a three-year study of fifteen thousand places where the drink was sold in order to work out things like the exact ratio between sales volume and the flow of people past their product. Similar scientific studies, under the research-obsessed Robert Woodruff (1889-1985), led not just to bottled Coke being sold in garages, but to strict rules about the color of trucks (red) and the sort of girls to put in ads (a brunette if there was only one girl in the picture). Sales duly soared.

Over at Procter & Gamble, the company also plowed a fortune into ever more professional marketing, inadvertently ruining modern culture by creating the soap opera (as the radio dramas sponsored by the firm came to be called). On May 13, 1931, an uppity P&G recruit named Neil McElroy broke the in-house prohibition on memos of more than one page, producing a three-page suggestion for the company to appoint a specific team to manage each particular brand. "Brand management" provided a way for consumer-goods firms to mimic Sloan's multidivisional structure.

Such discipline became even more essential during the 1930s. By July 1932, the Dow Index, which had stood at 386.10 on September 3, 1929, had fallen to 40.56. Industrial output fell by a third. In the Depression, consumers were only willing to part with their surplus cash for genuine novelties (or apparent ones: by the late 1930s, Procter alone was spending $15 million a year on advertising). Yet, throughout this turmoil, the big Sloanist firms held on to their positions. With the barriers to entry in most businesses still high, they were rarely threatened by young upstarts; the main danger was of a neighboring giant diversifying systematically into their territory. The only way a multidivisional firm could get beaten was by another multidivisional firm.


Professional managers can be proud of this heritage. Reading The Company can make executives more aware of the foundation upon which today’s organizations were formed.

Steve Hopkins, May 27, 2003


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The recommendation rating for this book appeared in the June 2003 issue of Executive Times

URL for this review: Company.htm


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