Looking Backward

Sept. 21, 1998
Caesar and railroads influenced company structures.

The industrial corporation rode into modern capitalism -- and profits -- on a rail. Unlike most enterprises of the late 19th century that preceded it, the Iron Horse required massive infusions of cash to support construction of trains and track. Different time zones, simultaneous tasks in multiple places, and technological advances for rail beds and steam engines couldn't be contained by the period's simple business structure. To succeed, the railroads created the modern functional-style corporation structure.

The functional-style structure was copied rapidly by other industries struggling with changes in communications, transportation, and technology. Industries benefiting from economies of scale, such as steel, energy, and tobacco, quickly tapped into the growing professional class of accountants, engineers, and -- by the turn of the century -- management experts.

The development of the consumer society after World War I precipitated other changes in the corporate model, resulting in the multidivisional firm. Perceptive manufacturers recognized that growing market opportunities required a different structure -- one that supported multiple products.

Among the first to change was Du Pont & Co., exclusively an explosives manufacturer until the war, but which worried about the profits of peace when the guns were silenced. Du Pont smartly diversified into making chemicals for commercial purposes, which were mainly offshoots of its explosives technology. The company recognized the need for a new division when its explosives salespeople attempted -- with little success -- to sell paint.

As firms grew bigger, they also gained hierarchy and bureaucracy. An axiom of organization is that bigness begets specialization, which many corporate leaders assumed required rigid control. Indeed, the command-and-control structure exercised by many modern companies resembled Caesar's legions, long considered the birthplace of successful hierarchy. Modern wars reinforced Roman military structure, as millions of future company men donned uniforms and experienced the complex, layered fighting organizations of World Wars I and II.

Additionally, the principles of scientific management popularized early in the 20th century by Frederick Taylor gave bureaucracy a shot in the arm. Originally conceived by German sociologist Max Weber as a constructive mechanism for helping government agencies respond more effectively, Taylor's encouragement of middle management for decades helped companies trying to reduce waste and improve operational processes.

Although it took time and leadership -- along with a strong economy -- by the 1950s many companies finally had caught up with a generation of change. Multidivisional corporations selling American-manufactured products were dominating world markets. Moreover, with the vision of Harold Geneen, the conglomerate was perfected in the complicated structure called ITT Industries Inc., a business enterprise of unparalleled breadth and reach of its products and services.

As Geneen and his disciples discovered, however, the lure of being all things to all customers, almost regardless of their fit, was of limited value. Growth was often flat and profits poor for the firms they acquired. "Business learned lessons the hard way in the late 1960s and 1970s," says David B. Sicilia, assistant professor of business history at the University of Maryland, College Park. "Unrelated diversification doesn't work very well. The notion of automatic advantages and countercyclical balancing was outweighed by the disadvantages of mismanagement and misunderstanding."

The rise of "Japan Inc." during the 1970s and 1980s challenged many manufacturers to confront competition. They responded by imitating Japanese companies, improving shop-floor operations, focusing on quality, and cutting costs. In a painful acknowledgment that the previous conglomerate age was ill-suited to current business conditions, companies jettisoned unproductive assets and streamlined their bloated bureaucracies. Those companies that survived recognized that an increasingly worldwide competitive environment required additional adaptations of the corporate structure.

Today, companies are evaluating and remaking their corporate structures as never before. In recent years, these changes have helped companies, beset by Asian and European competition, to couple and decouple more astutely than they had during the conglomerate age. Large manufacturers are buying technology firms to graft what they do not grow, and medium-sized companies are combining with their competitors to gain market share and economies of scale.

"The traditional 19th century monolithic organization is being complemented -- though not yet replaced -- increasingly by . . . alliances and partnerships, which serve different functions for the different owners or partners," explains Peter F. Drucker.

In fact, the world's best companies often no longer operate based on an imitative structure -- or even a single organizational model. With speed and agility as the hallmarks of global competition, some corporations now utilize composite or hybrid organizational structures that integrate multiple approaches to achieve a variety of strategic objectives.

The organizational rule for the future is that there is no rule.

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