(EN) The Evolution of Strategic Management—Managing Large Corporations Before World War II

In this series of posts I will talk about how strategic management developed (i.e., how to have a big-picture view of where your company is and where it should be, and especially how to get there). In my last post, I looked at the situation before there was any strategic management. This posts looks at the time between roughly 1900 and World War II. It will be mostly about managing money and operational efficiency, but there are already a few big-picture view companies popping up.

Taylorism

The first to mention is Frederick Winslow Taylor (1856–1915) and his scientific management approach to running a business. He was probably the first modern management consultant. While he did not quite look at the big-picture strategy, he went into unprecedented detail in measuring and improving work (or what we would nowadays call “elimination of waste”).

His most famous example is the Bethlehem Steel plant, where he optimized the loading of pig iron onto railroad cars. Bethlehem Steel had tens of thousands of tons of pig iron in a yard that needed to be loaded onto railroad cards. The task was as simple as one could imagine. The worker picked up a 40-kilo piece of iron from the pile, walked to the railroad car and up a ramp, and dropped the iron before returning to the pile. This was, for Taylor, the perfect setting to demonstrate his scientific management approach. Over time he optimized the process, experimented with different intervals of rest and work, and looked into great detail in the process.

He calculated that a man should be able to load 48 tons per day, while currently they were loading only 12.5 tons per day. He focused his efforts on a single „mentally sluggish“ worker, Mr. Schmidt (his real name was actually Henry Noll). Given detailed instructions combined with salary incentives, Mr. Schmidt was soon loading 47 tons per day. Later researchers, however, found many statistical and historical loopholes in the story, and it seems that Taylor may have polished his results. In any case, his efforts saved the company around $6.05 per day, much less than the cost of Mr. Taylor. (On a side note, Henry Ford would have just installed a conveyor belt.)

However, to my knowledge, Taylor did not really work on the big-picture vision, but preferred to stay with the tiny details (which is also worthwhile, but not strategic management). He also fought a lot with anybody who disagreed with him, and generally seemed to be a person that irked others. Hence, despite his fame, he never really achieved many actual results, even in scientific management.

Faolism

Faolism is named after Henri Fayol (1841–1925), a French mining engineer and executive, and a leader in the field of management theory. He can be seen as a father of the modern operational management theory, and he developed quite a few concepts of modern management.

Fayol read Taylor, but while Taylor looked at the nitty-gritty details of operations and the resulting cost, Fayol looked at leadership, organization, and communication within a company. He also respected the common worker much more than Taylor did. You could say that Talyor was a bottoms-up thinker, and Fayol liked to work top-down.

He developed fourteen principles of management to help managers. While not going through them all (check Wikipedia for details), it included, for example, delegation of authority, unity of commands (an employee should have only one boss each), unity of direction (this we will see again as the overarching vision in later structures like Hoshin Kanri), a structure for centralization and decentralization, authority and responsibility, subordination of individual interest to general interest, the scalar chain (a clear hierarchy) and more.

Multidivisional Structure of GM by Alfred P. Sloan

Henry Ford wanted to be fully in control of all aspects of his Ford Motor Company, being the final decision maker for everything. However, the complexity of a huge company like Ford was too much for any man, and performance suffered immensely. His famous Model T lost sales, and the succeeding Model A struggled compared to the rising star of General Motors.

There were numerous reasons for that—for example, that Ford wanted one single car model for eternity (leading to outdated cars after a few years), whereas GM celebrated the annual new models, selling the customers more modern, more stylish, and generally newer models. He also greated a pricing structure, segmenting the market according to the wealth of the buyer.

On corporate strategy, GM under the leadership of CEO Alfred Sloan (1875–1966) also was groundbreaking. He was (to my knowledge) the first to create what is nowadays called the multi-divisional form (also known as M-form or MDF). A large corporation (like GM) is not managed fully from the top, but instead is divided into several semi-autonomous units that are guided and controlled by (financial) targets from headquarters.

Each unit was responsible for a certain aspect of the company (e.g., a region or a product group). Rather than merely following orders from above, each unit had a lot of freedom on what to do and how to do it, within the guidelines of the headquarter. This significantly improved their flexibility, with them having a better understanding of their segment that headquarter making better decisions, and also being able to react faster.

This multi-divisional form is still widely used, and is often seen as the best approach for larger corporations. GM was the first, followed by chemical giant DuPont, and eventually the rest of the large enterprises.

Overall, with the appearance of larger and larger corporations, structuring and organizing them became necessary. Companies that did this well excelled in industry. In my next post I will look in more detail at different strategic management tools, starting with the famous management by objectives by Peter Drucker. But now, go out, structure your company, and organize your industry!