business

Perspectives: The Making Of The Modern Company

How did we get from clicks to bricks, Carnegie to Koogle? The path is marked by five signposts

"I want to congratulate you on being the richest man in the world." -- John Pierpont Morgan to Andrew Carnegie, 1901, after he bought Carnegie Steel and formed U.S. Steel Corp.

By most accounts, Carnegie and Morgan did not like one another. Carnegie resented high freight rates caused by Morgan's control of the railroads. He disapproved of anything that smacked of "flesh and the devil," a colleague observed, and Morgan was a sensual man. For his part, Morgan viewed Carnegie as a loose cannon capable of destabilizing steel and railroads, and perhaps the whole economy. For a brief moment in 1901, though, Carnegie and Morgan were one--high nobility in the kingdom of capital. Their joint creation, the U.S. Steel Corp., heralded a new age. The first American corporation with assets worth $1 billion, it owned 149 steelworks.

Yet, by the end of the century, Yahoo! Inc., run by guitar-playing CEO Timothy Koogle, would boast a greater capitalization than the entire steel industry--even though in 1999 it had a mere 2,000 employees (1% of U.S. Steel's workforce in 1901) and $58 million in property, plants, and equipment. How did we arrive at such a shift in fortunes? The rise of the modern corporation, thriving more on ideas and electrons than machines and sweat, owes its existence to five building blocks.

-- Management: The 20th century witnessed the rise of the professional business manager. Prior to the growth of the railroads in the late 19th century and the huge industrial firms that followed, owners managed and managers owned. But with the railroads, an elaborate hierarchy of individuals was needed to coordinate the fast-growing corporation--setting goals, allocating resources, monitoring performance, and awarding compensation. Managerial power grew at the expense of the owners until the 1980s. Large corporations became staggeringly complex, populated not only by laborers but by layers of white-collar workers. As ownership became more diffuse, it became less possible for a shareholder to have a clear idea of what was going on, never mind influencing policy.

The masters of management became captains of the corporation. Exhibit A, of course, is Alfred P. Sloan Jr., CEO of General Motors Corp. An engineer by training, Sloan's career illustrated how vital it is for an executive to be able to deal with all parts of the job, even those that didn't play to his original strengths. Sloan enabled GM to become the world auto leader not only because he mastered manufacturing but also because he made both marketing and management more scientific. Henry Ford's inability to stretch himself in this way made him vulnerable to Sloan's comprehensive approach to the business.

Today, the corporate hierarchy is being shaken by young hotshots who idolize Jeffrey P. Bezos and William H. Gates III and have little time for climbing the traditional management ladder. The challenge for the 21st century will be to balance entrepreneurial zeal with time-tested concepts of financial and managerial discipline.

-- Labor: With the rise of Big Business came the rise of big labor, but only after decades of struggle. Industries like steel and automobiles were virulently anti-union. As one of Carnegie's ironmasters put it: "I have always had one rule. If a workman sticks up his head, hit it."

Factory workers seized power in many businesses during the Great Depression. Workers won sometimes-bloody strikes, and unions grew fat on the dues of swelling membership in the following 25 years. There are many reasons for the ebb in union power over the past two decades. Manufacturing is less important to the economy today. And globalization lets companies locate their manufacturing anywhere in the world, diminishing the power of the domestic union movement.

Just because union power has waned, however, doesn't mean the trend must be permanent. The white-collarization of our economy has boosted the pay and power of knowledge workers. But where does that leave the rest of the workforce? Will there be a widening digital divide leading to economic and social instability? Recent street protests aimed at such bodies as the World Trade Organization may presage issues that could serve as labor rallying points.

-- Government: Since the days of the railroads, government has subsidized private businesses more than most executives today realize. This practice has persisted to the present day. Aeronautics, electronics, and computer science have all benefited from the largesse of the Defense Dept. Indeed, the Internet was developed in the mid-1960s for the Pentagon as a cold-war communications measure. Even today, the Net still receives government tax breaks.

But the government has also increased its powers to prohibit. Nowhere is that more evident than in antitrust enforcement. The right to terminate a company because of monopoly power has existed since the Sherman Antitrust Act of 1890. Not surprisingly, U.S. Steel was prosecuted for violating antitrust laws. It escaped dissolution by only one vote in the U.S. Supreme Court. Standard Oil and American Tobacco were broken up in 1911. Antitrust ended the AT&T telephone monopoly, unleashing a torrent of entrepreneurial activity.

Recently, the government announced that antitrust applies to New Economy industries as well. Microsoft Corp.'s loss to the Justice Dept., if upheld, may see the company broken into two parts. But more broadly, the notion that government has a shrinking role in business is only partly true. It is federal officials who forge agreements to open trade and set public standards in rapidly shifting technologies like biotech and telecommunications. The hand of government will still be necessary--and for many corporations, welcome (whether they like to admit it or not).

-- Finance: The relationship between professional businesspeople and shareholders began to change in the 1970s. American businesses lost market share and profitability in the face of a revitalized global economy. In selected industries--steel, consumer electronics, autos--Japan and Europe posed a challenge. Along with the huge oil-price hikes of 1973 and 1979, that shook the confidence of big U.S. corporations.

As the swinging '60s turned into the sobering '70s, shareholders were no longer able to depend upon rising values to increase their holdings. But neither were they powerless. Pension funds accumulated large blocks of stock and could speak with one voice. That set the scene in the '80s for a new set of players--private firms and wealthy individuals backed by the likes of Michael R. Milken--to make runs at companies that had been fixtures in the corporate landscape.

Unquestionably, a company's stock price had become far more important to the professional manager by 2000 than it had been in 1975. Add to that the rise of venture capital and the startup-company mentality, and investors and managers alike are much more willing today to take risks. The result is a vibrance that should remain a competitive advantage to the U.S.

-- Technology: The 20th century was the most technology-intensive era in history. The list of new products and services is endless. Start with the letter "A": Air conditioners, airplanes, antibiotics, automobilesThe computer, and especially the Web, generated fortunes and changed the way businesses operate.

Anything that speeds communication or transportation--makes them more efficient, more productive, less expensive--changes how people do business. The railroad and the telegraph proved this in the 19th century. Computer-mediated data movement is proving it today. The pace of change is increasing, and business and science have become even more intertwined.

The 20th century came to a close in an atmosphere of acute uncertainty. Which of the new companies, popping up like mushrooms after a spring rain, are built to last? Which of the great corporations of the Old Economy will exploit the new technologies? Managers who harness the lessons of the past and develop mission-driven organizations will excel. Those that are merely borne along by the ebb and flow of events will be washed out.

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