The 20th-Century Organization

The corporation is an institution so familiar that we take its existence for granted. Yet large firms of the sort we have today simply did not exist as recently as the first half of the nineteenth century. Even in the industrializing nations of Europe and North American, localized agriculture and craft production remained the core of the economy. The most advanced enterprises of the age—textile factories operating water or steam-powered looms, New England shipping firms plying the East Asian trade routes—were organized as small partnerships, whose legal structure and financial practices would have been familiar to the Italian merchants of the Renaissance. Commerce proceeded across well-established networks; manufactured goods and imports from overseas moved from cities into the hinterland via complex webs of wholesalers and local merchants (Chandler 1977).

In the second half of the nineteenth century, the building of railroad and telegraph systems in the United States led to the creation of organizations with unprecedented financial and administrative scale. These were the first modern corporations. After the Civil War, the United States rail and telegraph network was completed, providing for the first time ready access to a market that was national in scope, plus a mode of communication to manage far-flung operations. This enabled, by the end of the nineteenth century, the development of large-scale mass production in the U.S. and the rise of the first giant, vertically integrated industrial enterprises (Chandler 1977). The completion of rail and telegraph networks in Europe and Japan led to the rise of national markets and large mass-production firms in those regions as well (Chandler 1990).

These early corporations began as single-product firms. Over the last quarter of the nineteenth century, through a combination of economic adaptation and emulation of leading firms, a rough consensus emerged about how the large corporation should be organized. They typically featured a handful of major departments with specific functional expertise—purchasing, engineering, manufacturing, logistics, finance—with the employees inside each unit organized in hierarchical bureaucracies. The whole was overseen by a small senior management group, which set overall direction and coordinated interactions between the functional units. This structure came to be known by later students of organization as the unitary form, or sometimes, more simply, as a functional hierarchy (Williamson 1975, chapter 8).

Over the first decades of the twentieth century, many such single-business firms began to migrate into new product areas. This greater level of complexity required new organizational principles. Fitfully, over the first quarter of the new century, another structure emerged—the multidivisional form. The multidivisional corporation featured a series of separate business units, each producing a portfolio of related products and having the requisite set of functional hierarchies. A headquarters group oversaw the lines of businesses and assumed responsibility for a series of central corporate activities, the most important being allocation of capital among the divisions (Chandler 1962).

A key feature of the modern corporation was the separation of the firm's owners—the shareholders—from its managers—the cadre of experts responsible for overseeing day-to-day operations. Over the course of the late nineteenth and early twentieth centuries, management gradually established itself as a profession, with the rise of separate schools, specialized publications, and recognized sub-fields with their own distinct career paths.

The rise of the corporation triggered a period of wrenching social change as the railroad timetable and demands of the assembly line supplanted the rhythms of field and workshop. Millions streamed from the countryside to take jobs in city factories (Handlin 1951), which were the site of bitter, often violent, labor strife. The violence ranged from local clashes between workers and police to revolutionary upheaval that toppled national governments in Europe on several occasions, most notably with the Russian Revolution in 1917. While not the proximate cause, the social and economic upheaval spurred by the rise of mass production greatly contributed to the tensions that ignited war in 1914. The direst crisis of the modern corporate system, the Great Depression of the 1930s, led directly to the outbreak of the Second World War.

Over the first half of the twentieth century, as this upheaval was churning, groups of social reformers, labor activists, personnel managers inside firms, academics, and government officials across the industrial world worked out a series of arrangements to reconcile the existence of the large mass-production firm with the needs of workers and society. The details differed from nation to nation, but the common elements of this accommodation included union recognition, the national government assuming a referee role in labor-management relations, and forms of social insurances to mitigate the risks faced by individual workers (Jacoby 1985, Brody 1993, Jacoby 1993). After World War II, these reforms brought an end to virulent labor unrest and solidified the place of the large corporation in modern industrial society. A relatively stable corporate system held sway in North America, Western Europe, and Japan for the next quarter-century.

This system featured several key characteristics. In major industries, there was oligopolistic competition among a handful of large firms operating primarily in national markets, many of which were heavily regulated. Shareholders were for the most part wealthy individuals or large financial institutions, content to leave management alone as long as they delivered stability and modest returns. At most large firms, an implicit contract existed between workers and their employers; employees offered loyal service in return for job security and opportunities for advancement. Collective bargaining agreements were either in place or were emulated across broad sectors of the economy, and ensured that workers shared in the broad productivity gains enjoyed by the industrial economies during this period (Cappelli 1999, chapter 2; Osterman 1999, pp. 21–32). Senior management's energies were devoted to positioning their business units in their respective product markets, deciding which were "cash cows" to be milked, "stars" to be fed, or "dogs" to be sold off (Ghemawat 2002).

This consensus left some out, most notably women and minorities. But for a good part of the population in the industrial world, it worked well, leading to a widespread diffusion of prosperity throughout the 1950s and 1960s and into the 1970s. A version of this corporate form also spread to the newly industrializing countries of the Far East—Korea, Taiwan, Singapore and its cousins in Southeast Asia—bringing a promise of broad-based prosperity there.

Perhaps the high-water mark of this arrangement came in 1976. In December of that year, a New York Magazine article speculated that by century's end, the editors of Fortune would be unable to compile their annual list of the 500 largest American firms, because with the anticipated progress of mergers and conglomeration, there would be only 479 independent companies left (Tobias 1976, Useem 1996a).