The Rise of Big Business in America

As a result, America transformed into a global economic power. From 1870 to 1913, the United States’ distribution of the world’s industrial production rose from 23 percent to 36 percent (Chandler, 4). Comparing this substantial growth to other industrious countries of the time exemplifies America’s dominance. In the same time span Great Britain fell from 32 percent to 14 percent, Germany rose from 13 percent to 16 percent, France dropped from 10 percent to 6 percent, Russia rose from 4 percent to 6 percent, Japan rose from 0 percent to 1 percent, and the rest of the world rose from 17 percent to 21 percent (Chandler, 4).

Capital intensive, mass production industries that rose during the 2nd half of the 19th century distinguished American business from economic institutions in other cultures and set the foundations of what is now known as the American corporation. Standard Oil An industry that was a pioneer in changing the early business landscape was the petroleum sector. In 1859, the first successful commercial drilling of oil occurred at what is known as Drake’s Well in Titusville, Pennsylvania. The drilling of this well is known as the beginning of the modern oil industry.

The aftermath of the Drake’s Well drilling exhibited a high level of entry in the oil industry and increased production. Crude Oil production rose from 2000 barrels in 1859 to 4,800,000 in 1869 and 5,250,000 in 1871 (Giebelhaus, 1). Production costs were low, incentives were high and the competitive environment was close to that of pure competition. The quintessential narrative of the rise of a powerful market-controlling corporation is especially highlighted with the Standard Oil Company. John Rockefeller and his partners formed the Standard Oil Company in 1867.

With increased capital needs, the partnership organization of business became more common. The partnership allowed for economies of scale to be exploited by possessing large refining factories that cut unit costs by almost one-half. With high levels of capital and output, Standard and a pool of other refiners through contractual agreements obtained preferential railroad rates. They then used this advantageous partnership to pressure competing firms to sell out to them. This series of horizontal acquisitions was the beginning of the dominance of Standard.

Rockefeller further expanded his level of market control by forming the National Refiners Association. A board of 15 representatives from major oil refining cities functioned to purchase crude, allocate refining quotas, fix prices, negotiate railroad freight prices, and distribute profits among members (Giebelhaus, 4). The collective effort of refineries, led by Rockefeller, gave refineries price control over petroleum producers. However, due to a lack of internal cohesiveness, Standard opted for a system of more official consolidation.

In a series of mergers, Standard exchanged company stock for control in several large refining companies throughout the country starting in 1874. As a result, by 1878 the company owned 90 percent of the countries of the total refining capacity (Giebelhaus, 4). Standard dominated oil refining by 1880 and had vertically branched out extensively into it’s own transportation and marketing operations. For a period of time Rockefeller made a conscientious decision to not take part in crude oil extraction. He believed it was unnecessary to drill for oil when it could be obtained from independent producers at cheap prices.

However, Standard made its first move into the production of oil in the late 1880’s and by the end of 1892, produced 25 percent of the nation’s crude oil (Chandler, 95). The expansion into oil extraction was acted on because of newly found supplies combined with depleting former sources. Also, Standard developed an exclusive process to remove unwanted sulphur from crude oil. In 1882, the Standard Oil Company became the Standard Oil Trust which was an organization compiled of all the stock of 14 companies and part of the stock of 26 more.

Standard Oil enacted a form of business in which stock is deposited in a trust, trust certificates are obtained, and then the trust makes pricing, output decisions. The trust was formed in order to sidestep certain state laws that prohibited a corporation from holding stock in another and also disallowed a company chartered in one state from owning property in another state. The trust agreement allowed Rockefeller and his partners to personally hold stock in companies as “trustees” rather than corporate managers.

However, after continually being harassed by numerous prosecutions, in 1892 Rockefeller reorganized Standard Oil into a holding company. By the turn of the century, Standard Oil owned majority control of all but 3 of the 40 affiliated companies in the former trust (Giebelhaus, 5). Congress passed a landmark piece of federal legislation called the Sherman Antitrust Act in 1890. It was one of the earliest examples of federal regulation of business. The market dominance of Standard Oil was a main target of the legislation.

A series of antitrust prosecutions was filed against Standard Oil from 1904-1906 accusing the company of violating the Sherman Act. After months of testimony, Standard Oil was found guilty of violating the act. Standard Oil lost the appeal it filed and was finally dissolved in 1911. The company was then split up into multiple separate entities, two of which ended up becoming Exxon and Mobil. The case highlights one of the fundamental issues related to business: industrial efficiency through consolidation as opposed to regulated competition through federal intervention. Aftermath

In oil, like many other industries, the processors not the producers of raw materials have larger potential in exploiting economies of scale. Rockefeller was one of the first businessmen to exploit economies of scale by understanding the potential of investing in production, marketing, and management. The enterprises that achieved market dominance did so by horizontal combination and/or vertical integration. Such expansion created huge cost advantages for companies, such as Standard Oil, and resulted in market dominance. Besides revolutionizing business practice, Standard Oil influenced many alterations in the political environment.

During what is known as the Gilded Age (late 1860’s-late 1890’s), economic, technological, social, and political transformations were rapidly occurring. With the expansion of corporate power, a simultaneous expansion of federal power transpired. In the first century of the United States, there was little federal government intervention in the daily operations of private enterprises. Up until the 1880’s there were no control agencies, no anti-trust laws, no federal income tax, no federally distributed business licenses, and no federally chartered the corporations (Hughes, Cain, 367).

The limited government authority in business included control of public domain, subsidized business configurations, tariff legislation, reorganization of nation’s banking system, determination of the monetary standard, and federal immigration policies (Hughes, Cain, 367). However, beginning in the 1880’s, the status quo began to change. Economies of scale seen in the rising enterprises, such as Standard, created a power potentially above any law and so an equally powerful political force broadened. Analysis In analyzing Standard Oil’s extremely fast rise to market dominance; certain strategies can be attributed to the company’s success.

The base of the company’s initial success was their ability to exploit economies of scale of petroleum refinement through low cost, mass production. The low-production costs resulted in high volume output, which reduced transportation costs. At Standard Oil’s peak, a quarter of the world’s production of kerosene, a highly sought after petroleum product before electricity, was concentrated in three refineries (Chandler 25). These factories produced 6,500 barrels a day, which was tremendous output. This advantageous facility organization greatly reduced production costs and resulted in an increased profit margin.

A profit margin that allowed one of the greatest fortunes in U. S. history to be achieved. A company operating on a global scale is accompanied by increases in transactions and a complex flow of materials. To monitor the large enterprise, an extensive managerial hierarchy was developed by Standard Oil. The discourse of business management was fairly new and untested at the time of the companies’ existence. Standard Oil provides a pioneering example of a highly organized and centralized form of business management.

The management aspect of the company could reorganize the processes of production by closing some refineries, reshaping others, and build new ones if necessary. Also, it could efficiently coordinate the flow of materials from the oil fields to the consumers. Advancements in distribution, not refining, elevated Standard even further. The company realized the potential cost advantages of building newly innovated long-distance piping systems and therefore made a sizable investment of 30 million dollars in connecting its refineries to petroleum sources (Chandler, 94).

Not only did the pipes provide efficient transportation but also provided storage to ensure a steady flow of oil. A steady flow of crude oil to factories was essential to Standard’s operation in order to avoid diseconomies of scale. Standard Oil understood that different markets had different demands. Displaying this understanding, the companies major market was Europe rather than the US. In the mid-1880’s, 69 percent of the kerosene refined was exported to Europe and Asia (Chandler, 92). At this time, refined petroleum was the nation’s top non-agricultural export (Chandler 25).

By marketing in lucrative foreign markets, Standard was able to earn huge capital gains. As mentioned earlier, The Sherman Antitrust Act of 1890 was a landmark piece of legislation mainly because it was one of the first efforts of the federal government to regulate competition. Americans were skeptical of giant business enterprises yet experienced the advantages of large-scale production. The debate over how much federal government should be involved with economic affairs has become an age-old discussion. Nonetheless, in the late 19th century federal power significantly increased and continued to grow throughout the 20th century.

Many economists theorize on how big businesses rapidly rose into power during the late 19th century. Three of the most influential scholars who address the topic are Joseph Schumpter, Alfred Chandler, and Alfred Marshall. Chandler Opined: “In order to benefit from the cost advantages of these new, high-volume technologies of production, entrepreneurs had to make three sets of interrelated investments. The first was an investment in production facilities large enough to exploit a technology’s potential economies of scale or scope.

The second was an investment in a national and international marketing and distribution network, so that the volume of sales might keep pace with the new volume of production. Finally, to benefit fully from these two kinds of investment the entrepreneurs also had to invest in management: they had to recruit and train managers not only to administer the enlarged facilities and increased personnel in both production and distribution, but also to monitor and coordinate those two basic function activities and to plan and allocate resources for future production and distribution. (Chandler 1990)

Chandler’s argument insists that successful corporations made investments in production, distribution, and management. He believes big businesses play an important role in economic growth, as they take advantage of new innovations. Joseph Schumpter’s argument is similar but differs in that he believes big business drives innovation instead of responding to it. Connecting Scumpter’s and Chandler’s comparable views, they generally conclude that big business surfaced from decentralized markets in an act of innovation that created economic opportunities for the firm internally.

Marshall’s argument focuses on the interactions between competing and cooperating firms to examine the existence of external economies. He draws a distinction between external and internal economies of scale. When a company reduces costs and increases production, internal economies of scale has been achieved, while external economies of scale happen outside of a firm. For example, a better transportation network, an external factor, that leads to decreases in costs. While he did not deny the significance of internal capabilities, he believed external economies to be a more significant factor in the rise of big business.

Applying these arguments to the Standard Oil case, it seems the company succeeded due to it’s internal capabilities rather than external. Standard Oil was able to rise to market dominance through it’s basis of exploiting economies of scale, an internal factor. While external elements were certainly prevalent, it was more important how the company responded to its external environment via internal capabilities. For example, Standard was able to obtain low transportation costs, transportation being an external factor, due its low cost, large-scale production of refining oil.

Conclusion The period during the late 19th century forever changed the business world. The era is highlighted by the transition to capital intensive, mass production industries, which are still prevalent in today’s economy. John Rockefeller was able to achieve one of the greatest fortunes in U. S. history by revolutionizing business practice. His focus on low-cost, large-scale production to exploit economies of scale is still the focal point of many modern big businesses.