American Business History

When examining American business history, it is important to pay special attention to those elements that contributed to the overarching success of the U.S. economy and to look at some of the trends in transaction cost emergence, plummeting transportation costs, and the various coordination mechanisms used by business people throughout U.S. history. It is also important to look at American Business History as a viable discipline, reviewing those who contributed to the early days of exploration in the new and rapidly changing field of study. This article will provide an overview of both.

Keywords: Branding; Chandlerian Business Theory; Chandlerian Firms; Chicago Board of Trade; Department Stores; Durable Goods; Five and Dime Stores; Industrial Districts; Long Distance Exchanges; N. S. B. Gras; Oliver Williamson; Ronald Coase; Trademarking; Transaction; Unions; Wholesalers; Wholesaling; Alfred D. Chandler, Jr.

Management > American Business History

Overview

The United States experienced its Industrial Revolution in the early part of the 19th Century, bringing with it less expensive methods of travel and transportation, an increase in factory production, and improved agricultural machinery. These changes allowed for greater production of goods and aided in the expansion of the population across America. Because communities were rural and typically comprised of small towns and farms, households previously functioned as small businesses, and due to the rudimentary and close-knit nature of business, the transactions were often handled in trade and paid down over time (Lamoreaux, Raff, & Temin, 2003).

As the population grew and spread out, the need for goods not readily and locally available increased. Business transactions began to take place over long distances and not just within small towns. To keep the cost of doing business--transportation and communication--down, transactions were often handled through arrangements built and maintained by businessmen in ports or larger cities and with family members or members of familial groups, such as religious communities, where letters of introduction were used (Lamoreaux et al., 2003).

Peddling

As business transactions multiplied, local shop owners were finding it difficult to store expensive and infrequently used durable goods such as clothing and home furnishings; keeping an inventory became a real challenge. This predicament opened towns to the peddling trade--one of the earliest forms of mass marketing in America. Peddlers would travel from town to town, selling their products. However there were certain setbacks to peddling as consumers were not accustomed to buying from strangers and it was difficult for business owners to control how their product was sold, as well as the profits gained. Also, if there were issues with the products such as defects, the peddlers would be long gone and the business owner's distance would make exchange or credit nearly impossible (Lamoreaux et al., 2003).

Wholesaling

When innovations in transport began to occur, (the steamboat, canal, railroad, and telegraph), peddlers started to disappear and the national distribution of goods improved, though that gave rise to other complications, especially as it concerned the distribution and sale of wheat from the Midwest. Farmers who once sacked wheat and paid to have it delivered from their door to the buyers' found it easier and less expensive to start pouring the wheat into railroad cars and grain elevators. While convenient, the combining of crops from different farmers allowed for some farmers to mix inferior grain, or even non-grain items, along with their crops in order to bulk up the weight of the grain and raise their profits. The grain degradation resulted in a lack of consumer trust and the need for a neutral third party. In 1859, the state of Illinois appointed the Chicago Board of Trade to intervene and ensure quality was consistently maintained and that prices were controlled. The Board of Trade implemented a grading process for wheat crops, and while this concept worked well in theory, the board, having power over farmers, allowed for undo influence to occur in wheat grading processes and oversight shifted from the Board of Trade to the Railroad and Warehouse Commission. While this new system worked well with commodities such as wheat, it didn't with all goods. This disparity gave rise to wholesalers, who, not tied to personal business relationships, established a network of national, regional, and satellite offices for the sale and distribution of various products (Lamoreaux et al., 2003).

As wholesaling grew and larger cities began developing during the late 19th Century so, too, did a variety of new business processes, like trademarking and branding, which added protection and familiarity to new business ideas and products. Wholesaling also gave birth to the five and dime and department stores where a variety of goods were sold and often purchased through wholesalers (though some of the larger stores had no need for wholesalers after establishing their own methods of purchasing goods).

Mail Order Businesses

As businesses gained more control of their sales, retailers, largely through buyers, were able to collect information on consumer shopping habits which were then used in the development of catalog mail businesses, such as Montgomery Ward and Sears, Roebuck & Company. With information on what consumers were buying, these larger companies were better equipped to tailor the shopping experience to its shoppers. These larger companies were also better able to utilize the railroad to distribute mail order products and large warehouses to maintain inventory (Lamoreaux et al., 2003).

Industrial Districts

Similar to America's present-day technological industry in Silicon Valley, California and the financial district in Manhattan, industrial districts (business areas containing similar industries with a variety of specialties) emerged. By offering a variety of similar items and services, these districts introduced the beginning of healthy business competition practices. Likewise, joint ventures were commonplace within industries. For instance, in the late 1800s, Philadelphia's textile industry was booming, comprising more than 600 companies, with many concentrating on just one step in the textile manufacturing processes. Companies found that they could each handle one aspect of the process--designing, dying, packaging, etc.--while collaborating on the finished, often unique and specialty, product (Lamoreaux et al., 2003).

Large-Scale Production/Chandlerian Enterprises

While small firms depended on the market for the sale of their product and the purchase of raw materials, larger firms were able to handle all of that internally. Noted business historian Alfred D. Chandler, Jr. wrote that this transfer of market power was a vast improvement to American business, in that the larger companies were now easily able to dominate in their business sectors as well as to diversify and dominate in other areas. Large-scale production machinery was introduced and, with it, mass production and distribution. These changes also led to the exploitation of certain worker groups and as a result, during the early part of the 20th Century, the federal government forced large companies to start recognizing and working with unions. At the same time, Chandlerian Firms (large, management-heavy companies with tiered structures so named for business historian Chandler) began to emerge. Because of their tiered management structures, these companies were able to operate at lower costs, allowing for lower pricing. But these companies, in order to maintain the lower costs and high output, offered only very standardized products, eliminating any product flexibility. Instead of meeting consumer needs and adapting to consumer habits, firms were then shaping buyers' tastes through their limited inventories (Lamoreaux et al., 2003).

In an attempt to inject some diversity into the mechanized, standardized development and delivery of goods that mass production brought to large business, more changes followed. By acquiring or merging with different companies, firms found that they could introduce a wider variety of products and services and a period of mergers and acquisitions began, dominating much of the next century. Much of the activity involved businesses eager to diversify and enter other lucrative markets which led to acquiring other businesses not related to their core products. This resulted in a merger frenzy that grew exponentially during the 1960s and 1970s. It was also at this time that Chandlerian enterprises amassed control over the U.S. economy.

A review of the business environment in the late 1990s indicated that the once strong Chandlerian-style enterprises had deteriorated. Of the 54 U.S. firms ranked in the top 100 globally, less than 20 remained and only 26 had greater capitalizations than at the beginning of that century. In addition to the unexpected chaos that resulted from acquiring too much too soon, international competition spiked during the 1970's. Also, rising incomes caused a shift in consumer habits from the lower priced, standardized products being offered by big business to more unique goods that were of a higher quality. Concurrently, transportation and communication costs dropped and markets became dense; the issues that caused vertical integration were all but eliminated. It now became cost effective for companies to buy rather than produce, making domestic high production business an outmoded form of business. And while company size increased in the 1990s, growth was apparent not in industry giants, but in moderate sized firms (Lamoreaux et al., 2003).

Chandlerian firms failed because the executives did not have intimate knowledge of the businesses they acquired and they were unable to properly conduct performance evaluations, interpret financial data, and measure any successes or failures. Managers turned to frequent short-term evaluations, eroding focus on long-term goals and successes. Further, outdated accounting and processing systems were kept in place, eliciting misleading or inappropriate information. The focus appeared to be not on quality--which was what the consumer wanted--but on quantity. All this purchasing of diverse businesses--the expansion of vertical integration--dragged companies down instead of adding to what a company could offer, causing them to lose significant ground in the 1970s. U.S. firms, overwhelmed with the issues presented during the period of mergers and acquisitions felt little incentive to stay current with emerging, global technologies and technologically advanced rivals dominated. Also, the development and use of large bulk-capacity ships caused transportation costs to fall even further, increasing foreign imports and competition into the U.S. (Lamoreaux et al., 2003).

Firm Specialization

Capital markets ignored the value of back-office coordination and when they were either unable or unwilling to change, hostile takeovers and leveraged buyouts became the norm, freeing the core firms from its acquired companies. Diversification was all but obsolete and more than half of those acquisitions made outside of the core firms' interests had been divested. The U.S. finally began to gain ground back in the 1980s when the huge monolithic enterprises of the 1970s dwindled and allowed the emergence of many smaller, more specialized firms that were able to focus their energies on either one of a small few stages of a process or a small number of offerings. By the 1990s, the hostile methods of conducting business declined and high-level executive compensation began to be tied to a company's performance via its stock performance (Lamoreaux et al., 2003).

Innovations providing consumers with wide selections in a variety of product categories began in earnest at the end of the 20th and beginning of the 21st centuries. The advent of the Internet, coupled with emergent communications technology, brought business back to much of what was offered in the days of early mail-order marketing--seemingly limitless choices in the privacy of one's home. Unlike their predecessors, companies of all sizes use the Internet to brand and advertise. In many cases, books, informational packages, online educational offerings, movies and music were offered through Internet downloads, totally eliminating any transportation and production needs. The Internet allows companies to amass critical information on consumer preferences, allowing for fewer surpluses and better-directed inventory and marketing of products. All of this is eerily similar to how business was conducted by the craftsmen of the early 19th Century, but without the physical challenges. Sellers will only produce and offer items for which there is demand, eliminating the stock of underused inventory (Lamoreaux et al., 2003).

Application

Harvard School of Business Administration

Management  

Early American business history concentrated on the internal workings of individual American businesses and not on the rise of industries. There was also an obvious focus on management--the heart of American business--that was first explained in the academic as opposed to the business arena. Specifically, Harvard University's Graduate School of Business Administration, which was founded in 1908, focused its teachings on the administrative, decision-making aspects prevalent in business at the time. Teachings were case-study driven and did not necessarily focus on the larger business picture. Lessons were neither meant to be teachings in theory nor vocational instruction. Rather, business education was discussion-driven, based on actual cases and facts, and presented for the purpose of reaching reasonable conclusions on policy and to further the development of business administrators (Supple, 1959).

Linking Economic & Business History  

The topic of business saturated academia, allowing for the break of business history from both economic history and business enterprise. Harvard Business School furthered the field of business history with the implementation of the Business Historical Society in 1925 under the direction of Wallace B. Donham, then Dean of the school. The Society's aim was to further the study of business from a historical perspective. Within two years, the study had grown and a professorship title was endowed in 1927 to N. S. B. Gras--a leading economic historian of that time--who both taught business history at Harvard and was largely responsible for the evolution of the study until his retirement in 1950. Gras, in collaboration with other economic historians, began to study the links and disparities between economic history and business history, thus allowing for the emergence of a series of growing publications which were very much in league with those developed and presented by Harvard (Supple, 1959).

The studies of society and economics certainly have their impact on the history of business and Harvard and other business historians continue to review these important relationships; however, through Gras, the development of business policies and results of business management were most closely explored from the standpoint of individual companies and not from general trending information. The overarching feeling was that the administration of business--which it was felt was best explored at the individual business level--was the core of all business and business study (Supple, 1959).

Historical Documentation

A wide array of documentation on American business was being developed, including Harvard's Bulletin of the Business Historical Society. This business publication originated in the 1920s and later expanded--in the mid 1950s--to the current Business History Review. Although the field of business history was widely accepted as a discipline by the late 1930s, there were still no established links to the other social sciences, resulting in some skepticism. Added to this was the remaining distrust of the business community--especially following the stock market crash. There were also issues with missing records, and there was a decided lack of the combined skills needed to both understand business and document history. Regardless, by the 1950s, documentation had begun to be maintained and the beginnings of business history and scholars who were able to guide the new discipline were emerging (Supple, 1959).

Chandler  

Arthur D. Chandler, Jr. documented much of his business theories in his three seminal works: Scale and Scope, Strategy and Structure, and The Visible Hand (Pulitzer and Bancroft awards winner). All three books and their related theories added significantly to the documented contributions of Harvard's N. S. B. Gras--considered the founding father of American business history. Where Gras provided narrative descriptions, Chandler built on Gras's writings by providing analytical theories which he based on reviews and comparisons of business case studies. This allowed for his theories to better resonate with current business practices and economic concerns. Further, rather than theorizing on how one firm handled all business situations, Chandler reviewed and discussed a given business situation through a variety of firms. For example, in his book Strategy and Structure, Chandler reviewed four leaders in American business: du Pont; General Motors; Standard Oil of New Jersey; and Sears & Roebuck and included additional information on at least 80 other companies (Supple, 1991). By the mid-1970s, Chandler had developed his Chandlerian Business Theory, which says American economic success in the 20th Century was due to the emergence of large firms that dominated important industries with more efficient internal structures in place than the smaller family-owned businesses (Lamoreaux et al., 2003).

Chandler felt that technological advancements allowed some enterprises to reap enormous benefits; however, to maintain economies of scale, firms would also need to ensure operations were maintained at very high outputs, regardless of supply. Chandler felt that the best way to ensure companies did not experience supply shortages was to maintain full control of material production and all activities from inception to sale. No easy task, especially given Chandler's expectation that this type of production output and schedule be maintained for no less than two decades while maintaining profits and ensuring no material overflows. Chandler felt firms able to maintain these activities would experience high productivity and efficiency and would emerge as the competitive leaders in their fields. Further, only firms of equal breadth and depth--other vertically structured, managerially tiered, and capital heavy companies--would be capable of maintaining both healthy competition and economic environments (Lamoreaux et al., 2003).

Emerging Scholars  

Although he had built on Gras's information, Chandler's theory was just that, a theory. And, although important, his theory was based on experience. While Chandler's work provided much needed alternatives to earlier businesses models, it was--in essence--also a narrative theory with little or no way to explain the downfall of those very large firms later in the last century. Other scholars--such as Oliver Williamson--emerged and had tackled some of what was lacking in Chandler's theory and allowed for a more expanded view of the corporation. Williamson began his theory with information gleaned from a 1937 essay written by Ronald Coase. The essay explained that business people could lower their transaction costs by having economic activity occur within the firm rather than in the market. Williamson built on Coase's writing and added that transaction costs rise partly because the principals involved have faulty information. In other words, decision makers are subjective, knowing best their capabilities, not those of the businesses with which they transact. Williamson felt that the larger firms dominated the economic scope because they were able to utilize their vast resources to resolve issues and challenges that would otherwise cripple smaller companies (Lamoreaux et al., 2003).

Learning from History  

Historical review of business indicates that the size of a business matters. For instance, face-to-face market--or brick and mortar--transactions, while allowing for potentially lower costs, do not necessarily encourage repeat transactions in the same way in which tiered, large businesses rely. Larger firms can utilize strong branding techniques and rely on long-standing reputations for repeat sales. It is important to note, though, that for those larger, hierarchical entities to be successful, managerial directives must be followed for the larger good of the company. This is not always possible when dealing with employees who disagree with management directives (Lamoreaux et al., 2003).

History proves that long-term business relationships have some advantage over market and hierarchical relationships. Customers may prefer what is tried and true over having to research and seek out a relationship with a different business. Long-term relationships are also beneficial when dealing with situations where the pooling of information--as is common in industry and business districts--is beneficial to all parties, for instance when dealing with emerging technologies, or in changing economic environments where established contracts make renegotiation problematic or prohibitive (Lamoreaux et al., 2003).

Historical review also indicates that regardless of business type--market or long-term relationship--the transactional nature of a business relationship may be improved when all involved parties are members of the same cultural, ethnic, religious, or gender group, hailing back to earlier business practices when letters of credit and introduction were provided in clan and familial groups. Likewise, this familial group dynamic may also affect manager-subordinate relationships within organizations (Lamoreaux et al., 2003).

Viewpoints

There are a variety of ways to write business history that avoid both the narrative nature of reporting history and the practice of viewing one's current environment as the final environment. Attention can be focused on the broader and varied range of business techniques that have evolved historically and in response to a constantly changing economic climate. Given the diverse elements at play--transaction vs. quality, cost vs. location--there remains unpredictability of outcomes, thus business success requires ongoing enhancements to allow for changes in economic conditions, geography, and technology--to name a few--and to withstand uncertainty in future outcomes. Because of the changing nature of business, one method may work well and be the prevailing practice for a period of time--such as the practice of merging and acquiring--to only be replaced by a different method, such as the divesting of unlike businesses that followed the merger and acquisition frenzy. It would be a failure on the part of any business historian to present any one historical viewpoint and theory as a generalization of all possible variables. Alternate theories allow students and researchers of business history to understand that situations at the time of any writing do not remain static; ongoing review and modification are always called for (Lamoreaux et al., 2003). While some historians will focus on the administrative aspect of business, others will separate and report on that which connects business and society, and still others will continue to look at the role of business and economics (Supple, 1959).

Terms & Concepts

Alfred D. Chandler, Jr.: Creator of the Chandlerian Business Theory and business historian.

Branding: Identifying a product/product line or service/service line with a unique trademark or name.

Chandlerian Business Theory: A business theory developed in the mid-1970s by Alfred D. Chandler, Jr. that says American economic success in the 20th Century was due to the emergence of large firms that dominated important industries and had more efficient internal structures in place than family-owned businesses.

Chandlerian Firms: Large, management-heavy companies with tiered structures which had emerged and dominated business within the United States' most important industries in the early part of the 20th century.

Chicago Board of Trade: A major U.S. futures exchange established in 1848. Early on it traded only agricultural commodities such as corn, wheat and oats but it has now grown to include non-storable agricultural commodities and non-agricultural products. In 1859 it was chartered by the state of Illinois to oversee the distribution and price of wheat.

Department Stores: Larger versions of the five and dime store, offering a large selection and variety of goods at reduced prices and in one location.

Durable Goods: Manufactured goods which are neither consumed nor destroyed during use and which can be used for a period of time.

Five and Dime Stores: Small one-stop shops offering a wide variety of goods at lower cost.

Industrial Districts: Business areas containing similar industries with a variety of specialties, similar to today's Silicon Valley in California and Manhattan's Financial, Fashion, and Art districts.

Long Distance Exchanges: Business transactions occurring by boat or post, over time, and usually involving a third-party agent.

N. S. B. Gras: An economic historian who taught business history at Harvard and was largely responsible for the evolution of the study until his retirement in 1950.

Oliver Williamson: Followed up on Chandler's Business Theory, using Ronald Coase's essay as a starting point. Introduced the theory that subjective--thus imperfect--information allows for exploitation in business transactions (1963-1964).

Ronald Coase: Won the 1991 Nobel Prize in Economics and wrote an influential piece on economic theory that was later used to enhance the Chandlerian Business Theory.

Trademarking: A unique distinguishing mark, logo, or device used by manufacturers or merchants to create exclusivity for their goods or service.

Transaction: A record of business; the occurrence of a business event.

Unions (trade or labor): A group of salaried workers formed for the purpose of mutual aid and protection and for dealing collectively with employers for bargaining purposes.

Wholesaling: The selling of goods in large quantities for the purpose of retail sale to consumers.

Wholesalers: Firms that engage in the selling of wholesale goods.

Bibliography

Biswas, M., & Suar, D. (2013). Which Employees' Values Matter Most in the Creation of Employer Branding?. Journal Of Marketing Development & Competitiveness, 7, 93-102. Retrieved November 24, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=89904024&site=ehost-live

Jones, C., & Bonevac, D. (2013). An evolved definition of the term 'brand': Why branding has a branding problem. Journal Of Brand Strategy , 2, 112-120. Retrieved November 24, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=90583052&site=ehost-live

Lamoreaux, N. R., Raff, D. M. G., & Temin, P. (2003). Beyond markets and hierarchies: Toward a new synthesis of American business history. American Historical Review, 108, 404-433. Retrieved January 22, 2007, from EBSCO Online Database Education Research Complete. http://search.ebscohost.com/login.aspx?direct=true&db=ehh&AN=9628254&site=ehost-live

Robertson, A., & Khatibi, A. (2013). The Influence of Employer Branding on Productivity-Related Outcomes of an Organization. IUP Journal Of Brand Management, 10, 17-32. Retrieved November 24, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=91675188&site=ehost-live

Supple, B. E. (1959). American business history-a survey. Business History, 1, 63-76. Retrieved January 22, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=11990839&site=ehost-live

Supple, B. (1991). Scale and scope: Alfred Chandler and the dynamics of industrial capitalism. Economic History Review, 44, 500-514. Retrieved January 22, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=10146993&site=ehost-live

Suggested Reading

Chandler, A. D. Jr., (1990). Scale and Scope: The Dynamics of Industrial Capitalism. Cambridge.

Chandler, A. D. Jr., (1977). The Visible Hand: The Managerial Revolution in American Business. Cambridge.

Coase, R. (1937). The nature of the firm, Economica, 4, 386-405.

Larson, H. M. (1934). A China trader turns investor-a biographical chapter in American business history. Harvard Business Review, 12, 345-359. Retrieved January 22, 2007 from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=6766125&site=ehost-live

Morton, A. L. (1974). How to revive the railroads. Challenge, 17, 32-37. Retrieved January 22, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=6147253&site=ehost-live

McGormick, B. & Folsom B. W. Jr. (2003). A survey of business historians on America's greatest entrepreneurs. Business History Review, 77, 703-716. Retrieved January 22, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=12447818&site=ehost-live

Sabel, C. F (1997). Stories, strategies, structures: Rethinking historical alternatives to mass production. In Charles F. Sabel and Jonathan Zeitlin, (eds.), World of possibilities: Flexibility and mass production in Western industrialization (pp. 1-33). Cambridge: Cambridge University Press, 1997.