The Crisis of Growth: Inventing Formal Organizations
During the nineteenth century, the first large formal organizations were created, and the first social scientific attempts were made to figure out how to create and control them. These developments went forward in three somewhat independent sectors of industrializing societies: the military, business, and government.
The case of the Prussian General Staff
After Napoleon's defeat at Waterloo in 1815, Europe entered a long period of peace. Armies were cut back to small professional corps, and interest in military science waned in most nations. Only in Prussia (later to become Germany) did people study the crises of command that emerged during the last stages of the Napoleonic Wars, when mass armies took to the battlefields. In Prussia they addressed the question head-on: What would happen if war broke out again and huge armies -- made possible by the recent European population explosion and the mass production of arms -- once again engaged in battle? Napoleon's failure had shown that such armies could not be led in the traditional way. The Prussians concluded that military command and organization had to be completely revised (Ropp, 1959).
If Napoleon was the last Great Captain of history, then Helmuth von Moltke was the first Great Manager of the modern military era, Moltke took command of the Prussian army in 1857 and rapidly built up a new system based on the principle of using highly trained and interchangeable staff officers. These elite officers were trained in a war academy Each year 120 young officers were selected from the whole officer corps on the basis of competitive examinations. of these, only about 40 finished the intensive scholastic course of the academy. And of these graduates, Moltke selected only the best 12 to be trained for the General Staff (Howard, 1962).
In peacetime, officers cannot get real experience in their profession, so Moltke arranged for the academy to provide the next best thing: making battle plans for a great variety of hypothetical campaigns and analyses of past battles. By fighting battles on paper, young officers were trained in Prussian strategic and tactical theories. After their academic studies, officers chosen for the General Staff spent several years with Moltke at his headquarters and rode with him through a series of field maneuvers in which real troops participated. Then these officers were assigned a period of duty with a regiment. After that they rotated between assignments on Moltke's staff and regimental duty (Ropp, 1959).
The point of all this training was to overcome the inability of a single commander to direct a war fought with mass armies. Because the supreme commander could not be everywhere at once, the Prussians tried to create many "duplicates" trained to act as he would act. The decision of one leader could then be carried out
"through the reflexes which he had already inculcated in his subordinates through previous training: so that, even when deprived of his guidance they should react to unexpected situations as he would wish, . . . Thus the Prussian General Staff acted as a nervous system animating the lumbering body of the army making possible the articulation and flexibility which alone rendered it an effective military force " [Howard, 1962].
Between wars, the Prussian General Staff spent time looking ahead, planning in minute detail for future wars, and agreeing on proper tactics and strategies for various circumstances, When war came, each military problem was solved according to the overall plan and the approved methods. Thus, Moltke dealt with the overwhelming scale of modern warfare by training corps of subordinate managers he could count on to be not only his eyes and ears on the battlefield but also his brain.
While Moltke was creating an interchangeable set of military managers, he also perfected another military system that gave these managers standardized units to work with: the divisional system. Before the Napoleonic Wars, European armies were organized by armament and function. The cavalry, the infantry, and the artillery were separate branches of service and appeared on the battlefield as separate units under separate commanders. Coordinating these units was the task of the supreme commander of the army who arrayed these forces into a battle formation and then told infantry units where to march, cavalry units where to charge, and artillery units where to fire,
However, as armies grew, this system proved cumbersome, Under Napoleon, the French army began to break up into smaller units, each of which was an independent mini-army consistmg of infantry, cavalry and artillery and capable of doing battle on its own.
These French formations were of varying size, and their makeup was never standardized. However, Napoleon's British archrival, the Duke of Wellington (who in his long career never lost a battle) adopted this idea of mini-armies and created a standardized unit called the division. British divisions, being complete units, could be detached to fight as self-sufficient units, combined to form larger units, and interchanged. For example, a rested reserve division could replace a fatigued division in combat.
Moltke carried the standardization of Prussian divisions to the point that commanders could easily move from unit to unit. Each division was similar to the others in makeup, training, size, and structure. Indeed, Moltke's divisional system was so detailed that each division had a specified number of spoons and cooking pots.
In 1871, Moltke tested his new military managers and his divisional structure in the Franco-Prussian War During a lightning campaign, the Prussians utterly routed the much more experienced French army. The Prussians did not win because they were better armed, had more soldiers or were braver in battle. The French army was their equal in all these ways. But the French General Staff was only a group of messengers and clerks serving the commander, and the French commander could not control his far-flung armies.
Noting Moltke's success over the French, all major nations soon copied his methods. Later with the advent of telephones and radios, commanders could better guide their subordinates in the field. But the principle of delegating command to officers on the spot, who are highly trained in a common military theory and in the command of standardized military units, has remained the only workable solution to the problem that overwhelmed Napoleon.
The cases of Daniel McCallum and Gustavus Swift
It seems fitting that while the key to managing huge military organizations was first found in Prussia, the key to managing large business organizations was first discovered in the United States. For business, the rapid growth of railroads in the 1850s was the equivalent of Napoleon's Grand Army -- the railroads revealed the inability of traditional organizational principles to cope with large-scale enterprises. The crisis appeared in dramatic fashion: Small railroads made profits while the big railroads lost money.
In 1855 Daniel C. McCallum, general superintendent of the Eric Railroad, pointed out that the reason his line and other large lines such as the New York Central, the Pennsylvania, and the Baltimore & Ohio were in financial distress was a problem of management. He wrote:
"A superintendent of a road fifty miles in length can give its business his professional attention and may be constant]y on the line engaged in die direction of its details; each person is personally known to him, and all questions in relation to its business are at once presented and acted upon; and any system however imperfect may under such circumstances prove comparatively successful." (Chandler, 1962)
These comments recall the spectacular ease with which Napoleon dealt with grave military disadvantages when he had only seventy to eighty thousand troops to maneuver on a single, cormpact battlefield. But, McCallum continued, when one attempts to manage a railroad "five hundred miles in length a very different state exists. Any system which might be applicable to the business and extent of a short road would be found entirely inadequate to the wants of a long one." For want of an adequate organizational system, McCallum argued, the large railroads faced financial failure.
McCallum quickly moved to install a management system to replace the overloaded manager. He broke his railroad into geographical divisions of manageable size. Each was headed by a superintendent responsible for the operations within his division, Each divisional superintendent was required to submit detailed reports to central headquarters, from where McCallum and his aides coordinated and gave general direction to the operations of the separate divisions. Lines of authority between each superintendent and his subordinates and between each superintendent and headquarters were clearly laid out. In sketching these lines of authority on paper, McCallum created what might have been the first organizational chart for an American business (Chandler 1962). Soon the other great railroads copied the Erie's system, enabling the big railroads to function as effectively as small ones. As a result, railroads rapidly became the largest industrial companies of that time,
The railroads had two direct effects on other industrial firms. First, they made it possible for other firms to grow by using rail shipments to reach national rather than just local markets. Rail shipments could carry goods across the nation and bring needed supplies from far away. Second, the railroads provided a first crude organizational model for operating large firms. As other kinds of firms grew, they adopted the idea of divisions, but as we shall see, these were based on functions rather than geography. As they grew, new industrial firms created functional divisions that controlled each step in production through a process called vertical integration. These two features of industrial firms came to dominate organizational theory for many decades.
The story of Gustavus Swift, who built a huge meat-packing firm in the 1870s and 1880s, reveals how the new industrial organizations came into being.
Swift was a wholesale butcher in New England who moved west to Chicago in the 1870s. The population was concentrated in the East, while the herds of livestock were concentrated on the Great Plains, and getting the meat to market was a cumbersome and inefficient process that depended on the uncoordinated services of small, specialized local firms. Swift was determined to bring order and efficiency to the process by controlling each step from ranch to retail store. In 1878 he made an experimental shipment of meat from Chicago to the East, using the newly invented refrigerator car. The success of this experiment encouraged Swift and his brother Edwin to found Swift & Co. But they still faced vast problems. Shipping refrigerated meat east required refrigerated storage facilities at the other end; so Swift built them. Then the meat had to be sold; so Swift hired a sales crew and set up a distribution system in each major city. Local butchers tried to prevent the sale of his western meat in eastern markets, even claiming that it was unhealthy to eat "meat killed more than a thousand miles away and many weeks earlier (Chandler 1962). Massive advertising was required to convince consumers that Swift meat was safe. Soon Swift built additional packing plants in St. Louis, Omaha, St. Joseph, St. Paul, and Fort Worth.
Then Swift turned his attention to making supplies of meat dependable. He organized stockyards to purchase large numbers of animals on a regular and orderly basis. Finally he branched out to make use of animal byproducts by entering the leather glue, fertilizer, and soap businesses.
Swift & Co. became a vertically integrated company: It controlled each step in the process of bringing meat products to the consumer. Although Swift did not raise cattle, the company took over at the point of sale and conducted each step thereafter: buying, packing, shipping, and marketing. Furthermore, each of these steps was the province of a different division of the company. That is, rather than creating geographic divisions, as the giant railroads had done, Swift based its divisions on different functions. In fact, Swift broke up its organizational divisions in the same way that the Industrial Revolution had divided the labor of workers into a few specific production steps. Just as each worker on an assembly line performed only one or a few specialized functions, each division of large industrial firms handled only one aspect of the industry.
Swift had a marketing division, a meat-packing division, a purchasing or stockyards division, a shipping division, a sales division, and an advertising division. Each of these divisions was headed by a manager to whom subordinate managers reported; each manager reported to and received directions from corporate headquarters. As Moltke's General Staff mastered large armies, vertical integration and functional divisions under centralized command made it possible to create and operate huge business firms.
The Case of Civil Service
Armies and corporations were not the only organizations that grew to immense size in the modern world. Governments also became very large because of the rapid expansion in size and complexity of the societies they governed. As governments got big, they, too, found that they could no longer function with outdated practices. In traditional agrarian societies, the government was nothing more than the king's household and court. Such needed functionaries as clerks, accountants, and tax collectors were servants of the king equal in status to his cooks, grooms, and butlers. When the king needed a general, an advisor, a chief justice, or an administrator of the treasury, he asked one of the noblemen in his court to do the job. These noblemen did not regard a government post as an occupation or even as a full-time activity. Often they had no special training and little aptitude for their government duties beyond their noble birth and their social graces.
Such a system worked because governments did little governing. Beyond extracting taxes from the populace, maintaining some semblance of public order, and defending the realm against invaders, there was little for governments to do. After all, more than 90 percent of the population were peasants leading quiet lives of rural toil. No complex laws, no large regulatory agencies, and no swarms of government experts were needed. Indeed if the central government had disappeared, people in outlying districts would not have noticed for a long while.
With the growth of population and of cities, the complex divisions of labor, and the development of technology, agrarian governments found it increasingly difficult to control their societies. Indeed, modern societies require more control than agrarian societies do.
Governments adopted much the same solutions as did armies and industries. Organizations were created specifically to perform government functions in an orderly and efficient manner, and these organizations were staffed by persons specially trained to carry out their duties. In fact, staffing governmental positions caused the greatest conflict. Kings were accustomed to rewarding their loyal and valued friends with government positions. Early democratic governments continued this practice -- the party or political faction in control of the government appointed its favorites to office. When the government changed hands, government officeholders were also changed. Thus, when Thomas Jefferson became President of the United States in 1801, he dismissed hundreds of Federalists appointed by Presidents Washington and Adams and replaced them with his supporters. This practice is known as the spoils system -- the spoils, or benefits, of public office go to the supporters of winning politicians The spoils system probably reached its height in the United States during the presidency of Andrew Jackson in 1829, when thousands of officeholders were replaced.
When government is based on the spoils system, disorganization arises from so much turnover and people are prevented from making a career of government service. The administration of government organizations is forever left in the hands of untrained novices. To combat this problem, governments adopted merit systems for government employment -- a practice often referred to as civil service. Civil service systems base government hiring and promotion practices on merit. People are recruited on the basis of their educational and occupational qualifications and by successfully competing with others on a written examination. When a government wants accountants, it hires trained accountants with the highest scores on the civil service examination rather than the brother-in-law of some politician. What Moltke learned was needed for modern war and what Gustavus Swift had discovered about business, modern government also put into practice a carefully designed organizational system operated by specially selected and trained people.