Colin Barry

Railroads and the Beginnings of Modern Management (CMC, Friday, Week 3)


First huge-scale corporations in America: railroads. First railroads borrowed org structure heavily from the Napoleanic General Staff.

Massively larger than textile mills.
Erie Railroad = $2.5M in OpEx/year and 4,000 employees
Pepperell Manufacturing (textile giant) = $300K in OpEx/year and 800 employees

Large enterprise and geographic distance require:
-- Data management and analysis
-- Understanding of costs (and drivers of cost)
-- Division of responsibilities
-- Organizational learning mechanisms
In early years, railroads experienced DIS-economies of scale --- management practice (and, to a lesser degree, technology) had not caught up with the complexity of the enterprise.

New questions about relationship between business and government
-- Should railroads be public institutions? Massive scale...
-- Land grants => builders get checkerboard-style parcels of the land adjacent to the road IOT incentivize construction.
-- Free use of railroads by federal government (Lincoln implemented initial grant policy to help Union in Civil War)
-- Tariffs (Interstate Commerce Act) => railroads are the first truly national-level businesses.

Mind-boggling complex businesses require specialized managers: continued divorce of ownership from management/enterprise control (from whence "The Coming of Managerial Capitalism").

Early roads (1855)
Centralized control: one General Supervisor with 13 direct reports
BUT continued problems with maintaining adequate supervision AND direct-reports are interdependent --- not independent --- entities.

Later roads (1890)
Matrix organizations: President, several Vice Presidents, etc.
Need to grow? Just add a layer... => homogenize and scale
Maximum span of control for one general supervisor = 500 mi.
Direct and indirect reports (supervisors get their own engineers, supply agents, etc.).

Accounting innovation:
-- Fixed vs. variable costs => some costs vary with length of road; some costs vary with number of trains
-- Understanding profitability => variable pricing
-- Direct connection between accounting and everyday business tactics/strategic decision-making

Capitalism and exploitation: Chinese immigrants did most construction on railroads; U.S. deported them at close of 19th century when roads were complete.