Strategy

by Lawrence Freedman

  The original role of managers was to manage the workforce. Their understanding of what this required was shaped by the social theories of the time, many of which encouraged unflattering views of ordinary people as essentially simple-minded, suggestible, and manipulable. At best, they could be encouraged to be efficient cogs in the machine by more pay, tempered by threats of dismissal. At worst they could be swayed by agitators, drawing on the psychology of crowds. As the century progressed, the possibilities of maintaining a docile, regimented workforce receded with the growing strength of labor unions and the increasingly demanding and specialist nature of much work. Moreover, while the original inspiration for the human relations school might have been to draw workers away from socialism and unions, it encouraged managers to recognize that their organizations were complex social structures rather than simple hierarchies and that their workers might respond positively to being treated as rounded human beings. The approach risked replacing autocracy with paternalism as it struggled to work out what these developing views of organizational life meant in terms of structures of power. The more these structures had to be addressed, and the more they had to be related to the wider social and economic changes underway, the more managers would need a strategy.

  CHAPTER 29 The Business of Business

  The business of business is business.

  —Alfred P. Sloan

  BEFORE WE CONSIDER how the next generation of management theorists discovered strategy, we need first to explore the issues of power being faced by business over this period. The important developments in theorizing about business strategy after the Second World War reflected the forms taken by large industrial corporations in the United States, at a point when the tensions between capital and labor were subdued if not eliminated. The origins of these corporations, however, were to be found in a much more turbulent period in the country’s industrial development, marked by labor unrest and arguments over the excessive power of the large trusts.

  Against the expectations of Marx, capitalism transformed itself as the nineteenth century turned into the twentieth. Capitalists found means of coping with the volatility of the system that produced cycles of growth followed by recession. One of the most important coping mechanisms appeared to be size. Very large companies were capable of surviving sudden changes in economic conditions. In this effort they were increasingly supported by layers of management. The process which led to those changes began at about the same time as Marx was arguing with Bakunin over how to prepare for revolution and then what to make of the Paris Commune.

  John D. Rockefeller

  The story of John D. Rockefeller and Standard Oil is well known.1 In 1865 as an ambitious 26-year-old in Cleveland, Ohio, Rockefeller bought out his partner in the town’s largest oil refinery. Taking advantage of the economic expansion that began with the end of the Civil War, he added to his refineries and the profits rolled in. Unfortunately, others had the same idea and soon refinery capacity far outstripped demand for kerosene and other oil products. To survive, Rockefeller determined to be the most efficient producer, improving quality while keeping costs down and then, more imaginatively, by integrating the business, controlling both supply and distribution. In addition, he made sure that he had enough cash so he would not be caught short by sudden market fluctuations. He then strengthened his position by controversial links with the railroads, gaining discounted rates in return for shipping a guaranteed number of carloads a day.

  Rockefeller did not accept for one second that it was improper to tamper with market forces. He was convinced that it was too easy to open a refinery resulting in an overcrowded industry and a chaotic, chronically unstable market. Instead of living by the market’s capricious disciplines, Rockefeller decided to exert control. “The oil business was in confusion and daily growing worse.” As each refiner “struggled hard to get all of the business … he brought to himself and the competitors nothing but disasters.”2 Supply and demand might never reach equilibrium. Rockefeller’s strategy was one which in other circumstances would have seemed wholly appropriate: he sought cooperation as a sensible alternative to a wasteful and disruptive competition.

  Given the state of the oil industry, Rockefeller may well have been correct in his assumption.3 This was nonetheless a challenge to the prevailing ideology of free markets. In the case of Rockefeller, the challenge was aggravated by his methods. He normally offered prospective partners reasonable terms and at times helped his erstwhile competitors out of a desperate position. Those who did not wish to combine, however, would often be harried into submission, their position worsened by means of aggressive price cuts by Standard Oil. In 1870, when it incorporated, Standard Oil controlled a tenth of America’s refining capacity; by the end of the decade, the figure was 90 percent.

  When independent companies made a last daring move by building a long-distance pipeline, even managing to catch Standard Oil by surprise, there was no real threat to the company’s position. There was time and the financial muscle to respond. Standard Oil built its own pipelines and soon controlled the whole network connecting the Pennsylvanian oil regions with the rest of America. The only exception was the original line, and even here Standard Oil acquired a minority stake. When the remaining independent refiners demanded legal remedies to restrain Standard Oil, the court cases lifted the veil on the sort of techniques the company employed in its drive to a near monopoly. In 1882, Rockefeller found a way to bring the veil down again, using a legal device that was normally used for people who could not look after their own finances. The companies in which Rockefeller held stock came together by means of a secret agreement. The stockholders conveyed their shares “in trust” to nine trustees, including John and his brother, William. That meant that, strictly speaking and whatever the appearances, Standard Oil did not own other companies. It was only the trust, owned by the company’s stockholders, which could appoint directors and officers and set up administrative offices in individual states.

  Standard Oil had a virtual monopoly. All that was missing was any actual production of oil. Potentially that was a great vulnerability, especially if the oil ran out. But by the end of the 1880s, new oil fields were being found around the country and U.S. production was no longer dependent on the Pennsylvania fields. Rockefeller saw the opportunity for further integration and reduced dependency on suppliers. Energetic acquisition began. Soon Standard Oil was pumping a third of America’s crude oil as well as marketing 84 percent of all petroleum products sold. As both producer and consumer, Standard Oil could set the prices. Without quite squeezing out all the competition, it was in effective control of the U.S. oil industry and was developing substantial interests overseas. Things also turned out well for Rockefeller on the demand side: kerosene was replaced by electricity as the major source of illumination, but the arrival of automobiles and gasoline-powered engines transformed the market again. Gasoline suddenly moved from a minor product to the major output of refineries.

  By the turn of the century, Standard Oil had reached the peak of its influence. The size of the international market, which already included significant competitors, meant that its relative position was bound to decline. The process was accelerated, however, as a result of the trust’s substantial political liabilities. Rockefeller was blamed for using dubious practices to gain vast wealth. Grudges were held by the small independent producers who had been gobbled up, broken, or marginalized during Rockefeller’s inexorable rise. They could appeal to American values and the image of the virtuous little man struggling against concentrated, corrupt power and great wealth. Rockefeller was by no means the only “Robber Baron”—Andrew Carnegie, Cornelius Vanderbilt, and J. P. Morgan were similarly denounced. Nor was Standard Oil the only entity using the trust as a way of controlling markets and rebuffing competition. It was, however, the largest and most notorious. While Rockefeller believed combination to be a better way of guaranteeing efficiency and stability, the practice tended toward monopoly. The 1890 Sherman Antitrust
Act gave the federal government power to investigate and pursue the trusts. Rockefeller acquired the best lawyers to take on the courts and develop elaborate arrangements to beat legislation. He used donations to buy political support and plant friendly stories in newspapers. New companies were established, proclaiming their independence, though they were in practice controlled by the trust. Meanwhile, with remarkable attention to detail, using superior intelligence and communications, and keeping track of markets and competitors on an increasingly global scale, Standard Oil kept its prices down and its hold on the market secure. Through all this it “treated the federal government as a meddlesome, inferior power.”4

  In the end, Rockefeller’s nemesis proved to be a writer called Ida Tarbell, whom we met in the previous chapter as a champion of Frederick Taylor. As it happened, her father had struggled in the early oil business against Standard Oil and suffered as a result. This gave an edge to her reporting. The opportunity came because she was on the staff of McClure’s Magazine, a progressive “muckraking” journal, which had decided to make the trusts its main target.5 Tarbell got a break with an introduction to one of Rockefeller’s lieutenants, who became a key source of information. In 1902, a monthly serial began which lasted for two years, telling the Standard Oil story in compelling detail, arousing great indignation as it exposed underhanded business methods. Tarbell insisted that she did not object to the company’s size and wealth but rather its methods. “But they had never played fair, and that ruined their greatness for me.”6

  The exposure was timely. The antitrust cause had been taken up by the progressive president, Theodore Roosevelt. He argued that corporate power had to be brought under control, using legislation where the abuse was greatest. He launched investigations into Standard Oil, and in 1906 a suit was brought accusing it of restraint of trade under the Sherman Act. Standard Oil’s legal defense was strong, but the evidence was damning. After an initial verdict ordering the trust’s dissolution in 1909, it was confirmed by the Supreme Court in 1911. The “very genius for commercial development and organization,” the chief justice concluded, “soon begat an intent and purpose to exclude others.”7 Standard Oil was dismantled, giving birth to thirty-four new entities, including what became Exxon.

  At the time it seemed like a defeat, but Roosevelt had done Rockefeller a favor. It was increasingly beyond the capacity of a single company to control a developing market of such size and complexity. The ability of smaller units to respond flexibly to new conditions eventually made for a stronger and more profitable industry. Rockefeller, now retired, held stock in the new and largely successful companies. He lived until he was almost 100. A great philanthropic trust bore his name and soon came to affect the way that economics and management was studied in the United States. His descendents continued to have a major influence on business and politics. So this story hardly counts as a tragedy.

  Rockefeller was undoubtedly a master strategist. He could take a view of the system as a whole and assess the position of the individual parts. Yergin describes Rockefeller as “both strategist and supreme commander, directing his lieutenants to move with stealth and speed and with expert execution.” He was not averse to military metaphors, for example, justifying his secretive methods by wondering “what general of the Allies ever sends out a brass band in advance with orders to notify the enemy that on a certain day he will begin an attack.”8 Chernow describes him brooding over problems. Plans were “quietly matured plans over extended periods. Once he had made up his mind, however, he was no longer troubled by doubts and pursued his vision was undeviating faith.”9 But because his strategic success was the result of objectionable methods and in pursuit of retrograde aims, he could hardly be presented as the model for an aspiring businessman.

  Henry Ford

  By contrast, at least for a time, Henry Ford was presented as an exemplary and forward-looking businessman. Ford’s vision for the automobile industry was developed while he tinkered with machinery as a young man on his father’s farm in Michigan. He wondered about horseless carriages and how they could take some of the worst drudgery out of rural life. Steam engines were too big, heavy, and dangerous. Perhaps gas-powered internal combustion engines might be a way forward. In the mid-1880s, he got a chance to work with one of these engines, understand its principles, and then experiment on his own.

  There was at the time no mass market for cars. They were considered expensive toys for racers, with speed more important than reliability. As good money could be made by selling individual cars to order at high prices, there was no incentive to go for a volume. Ford’s genius was to see how to develop an affordable car for a mass market, anticipating both a public demand and a means of production that did not yet exist. He got no support from independent investors and banks. This left him with an enduring disdain for those who put money ahead of work, feared competition, and were uninterested in consumers. He sought to liberate himself from dependence on creditors and shareholders. Although when he founded the Ford Motor Company he did not at first have the controlling share, by 1906 he owned more than half the stock.

  He also had to take on a cartel. The Association of Licensed Automobile Manufacturers (ALAM) used a dubious patent to control the entry into the industry of new manufacturers. In 1903, they refused entry to Ford. In the context of the antitrust campaigns of the time, Ford realized that ALAM could readily be castigated for its greed and the use of specious claims to exclude proper competition. He was in the opposite position to Rockefeller, on the side of the people versus the trusts, the underdog, “an industrial David standing alone against a powerful, monopolistic Goliath.” He was, he claimed, infused with “that instinct of American freedom to cause us to rebel against oppression or unfair competition.” It went against the grain to be “coerced, or bluffed, or sandbagged.”10 In 1909, after a long legal battle, Ford won—to general acclaim.

  In the company’s first advert, he explained the wish to “construct and market an automobile specially designed for everyday wear and tear,” a machine to be admired for its “compactness, its simplicity, its safety, its all-around convenience, and—last but not least—its exceedingly reasonable price.” To get the price down he needed the volume of a mass market, and that required new forms of assembly. The prevailing model was the bicycle industry, which offered customers a range of models, a new one coming out each year. To Ford this was the wrong philosophy, based on the “same idea that women submit to in their clothing and hats.” He wanted to build to last, like the watches that had first kindled his fascination with machinery. His view was that price was the key. That meant fewer models and more focus on simplicity and reliability.

  Out of this came the idea of the “universal car,” built with high quality materials and simple to operate. He settled on a design that became famous as the Model T and then concentrated on manufacturing this one model in large numbers. When his salesmen worried about the lack of different models to appeal to distinctive customers, he remarked that: “Any customer can have a car painted any color that he wants so long as it is black.” This car was not to be a luxury item for a few but one for “the great multitude.” The assembly line, first introduced in 1913, had tools and men placed in sequence as each component moved along until the car was finished. This reduced “the necessity for thought on the part of the worker and … his movements to a minimum.” When in 1914 Ford started to have difficulty maintaining a stable workforce because of the dreary and routine nature of assembly-line work, he announced that his workers would be paid five dollars a day. This he described as one of the “finest cost-cutting moves we ever made.”

  Ford understood better than any other manufacturer at the time what might happen if ordinary people were treated as consumers and how their growing aspirations might be met. He worked single-mindedly to realize his vision, exploring better materials and methods. At this stage he also had the advantage of no real competition, as the other manufacturers were tardy in appreciating that Ford represen
ted the future. This was a new and rapidly expanding market without obvious bounds. Once Ford hit upon his successful formula he was made.

  Ford claimed a breakthrough not only in car manufacturing but in the development of industrial society, offering an alternative course between socialism and crude capitalism. He had given a decisive impetus to two critical and related developments: the techniques of mass production which in turn fed the desires of mass consumption. The five-dollar pay offer bought stability in the workforce and turned the workers into consumers. He sought to show how his own ordinariness and simple tastes, his readiness to bridge the gap between rich and poor, and the civic action programs around his factory all made him close to ordinary people. This was part marketing, part genuine. It soon became wrapped up in populist rhetoric, turning Ford into a special sort of businessman. Not only had he not forgotten his roots but he understood that looking after people was good business, a source of loyalty, productivity, and customers.