This is the 7th blog post in the Organising for Outcomes series. It is helpful to understand where we’ve come from, how today’s ways of working have evolved, and the context that those ways of working evolved in. This helps us to understand why we’re working the way we’re working and what we might want to change in today’s context, which is significantly different compared to previous technology-led revolutions.
In the previous post we looked at the rise of the 3rd Industrial Revolution, the Age of Steel and Heavy Engineering, with a particular focus on Andrew Carnegie and the management innovations introduced at Carnegie Steel.
In this post, we zoom out to look more broadly at the introduction of Systematic Management during the same time period, between 1870 to 1900. This is to understand why we work the way we do today and to see what lessons we can (re)learn from the past.
Introducing Systematic Management
Did you know that the Project Management Office (PMO) and ways of working in your organisation today are directly linked to the U.S. federal government investing heavily in railroad construction between 1862 to 1900?
The growth of the railroads in the U.S., along with immigration and import tariffs led to rapid economic expansion, which resulted in larger organisations producing more goods, with increasing specialisation. In manufacturing firms, managing by Rule of Thumb was no longer commercially feasible. It was not optimal to manage by walking around, with details of all orders in the heads of the foremen or the workers, no real idea of the cost of producing an order and inventory going missing. As companies grew larger, they needed to get organised. Companies needed to go from being dis-organisations to becoming organisations.
With economic necessity, to coordinate the activities of larger groups of people, with increased specialisation and complexity, we see the rise of Systematic Management between 1870 to 1900, a precursor to, and enabler, of Scientific Management that was to follow. One aspect of Systematic Management was the introduction of Planning Departments, the forerunners of today's Project Management Offices (PMOs). While the industrial context of the 1870s differed dramatically from our current business environment, many of the organisational practices developed during this period remain fundamental to how we work today.
Understanding this historical evolution helps explain how we got here, why we work the way we do today in a different context, and what we might want to keep, rediscover or change.
Context
Railroad boom
As of 1870, the United States of America, not yet 100 years old, was in the process of reconstruction after the Civil War, which had ended just five years earlier. The U.S. consisted of 37 states out of today’s 50 states with large tracts of land to the West claimed as territories but not yet formally part of the Union.
The U.S. federal government was keen to unify the country, to continue the expansion westwards connecting the Atlantic to the Pacific as part of a ‘Manifest Destiny’ ideology and to fuel national growth enabling global independence.
To enable these goals the government funded a frenzy of railroad construction, providing generous land grants and subsidies. At the same time import tariffs were introduced to protect domestic production.
Almost 130 million acres of public land was granted to railroads between 1862 and 1871. To put this in perspective this is land almost the size of France. Under the Pacific Railway Acts (1862 and 1864), the government granted companies 10 square miles of land for every mile of track laid, later increased to 20 square miles, which the railroad companies could sell to further fund construction. Unfortunately the current owners of the land had little say in this, especially Native Americans, with the government removing many groups, via treaties, coercion or through force.
It was these land grants and also low-interest loans of between $16k to $48k per mile of track that enabled the construction of the First Transcontinental Railroad, linking San Francisco to the Eastern railroad network at Omaha, Nebraska, opening in 1869.
As an example of incentives at play, two of the railroad companies involved in building the line kept on building past each other, with parallel competing tracks, often hastily built, in order to capture the per-mile incentives. Congress intervened early in 1869, setting the meeting point for the two railroads, thus completing the end-to-end route.
Between 1865 and 1900, the U.S. rail network grew seven-fold, from 35,000 miles of tracks to over 250,000 miles. The time taken to travel overland from the East coast to the West coast became approximately 12x faster, dropping from several months in a Wagon Train to one week in a considerably more comfortable train carriage.
Growth of markets
The growth of the railroads in turn drove up demand for timber, coal, iron and steel, fueling growth in these sectors. With an economic boom, there was plentiful work. Between 1865 and 1900, approximately 13.5 million immigrants arrived in the United States, the majority coming from across Europe, with smaller numbers coming from China and Russia. This was one of the largest waves of immigration in U.S. history. The population of urban areas exploded, with cities like New York, Chicago, and Philadelphia becoming industrial hubs. The industrial workforce expanded by 300% from 6m in 1870 to 18m by 1900. After 1880, agriculture ceased to be the major source of employment in the US.
Railroad expansion along with import tariffs and large-scale immigration led to significantly larger domestic markets. As well as the broader reach, the cost of transportation was cheaper, making it commercially attractive to increase production to sell more goods into the larger market. In addition raw materials could now be purchased from a wider area at a lower cost. Due to the speed, reach and lower transport costs of the railroads, there was a reduction in localised production, where firms previously made many products and served small local markets, and there was an increase in larger, more specialised companies producing a considerably higher quantity of fewer products serving larger geographic markets.
Growth in production in the 1870s and 1880s in the US was at the highest rate in the 70 year period from 1850 to 1920. The Net Value Added in manufacturing grew almost seven-fold from $825m in 1859 to $5.6bn by 1900 (in 1913 dollars) and the number of manufacturing firms doubled from 252,000 to 512,000. It wasn’t only the domestic market that was booming, the export market also more than quadrupled from $76m (1871) to $332m (1900).
The expansion of factories led to growth in mass production and with a fast-growing population, there was a corresponding growth in mass consumption. The U.S. transitioned from an agrarian economy to become the world’s leading industrial power, overtaking Great Britain.
Shared Learning
During this period, there was also a dramatic rise in shared learning. Innovations in ways of working were shared via books, journals, presentations and societies such as the Engineering Magazine and the American Society of Mechanical Engineering (ASME) on a scale not seen before. From very little writing on ways of working, all of a sudden there was a plethora of writing. There was a shared incentive in the U.S., as articulated in the writings, to compete globally, to be independent and to not be at the mercy of European markets. Meanwhile in Great Britain, with exceptions, there was more secrecy, less sharing and less innovating on ways of working with less perceived need to improve. The old Rule of Thumb ways of working continued. This lack of continuously improving on the How, ultimately led to the US overtaking the UK as the workshop of the world.
The period from 1870 to 1900 is known as the Gilded Age. There was rapid industrialisation, economic growth, urbanisation, and profound social change. Industrial tycoons such as Carnegie, Rockefeller, Vanderbilt and J.P. Morgan accumulated significant wealth, whilst many people lived in poverty, working long hours in unsafe conditions or were forced off their land. This period of time is named after the novel ‘The Gilded Age: A Tale of Today’ (1873) by Mark Twain and Charles Warner, which explores the inequality of the time.
Low and falling prices, high and rising wages
With increasing supply and organisations competing on price to get market share, this was a period of almost continuously falling prices. The price index of metals more than halved, from 250 in 1870 to 115 by 1900.
At the same time it was a period of rising wages, with the average hourly wage rate in manufacturing doubling between 1860 to 1900. Additionally workers in the US were paid 2x to 3x the amount that European workers were being paid. There was a concern expressed by William Evart, the then Secretary of State, that as shipping costs came down, overseas competition with its cheap labour would be able to flood the US market. He advised a reduction in wages. However, as was reported in The American Machinist in 1879, the exact opposite was happening. American products were invading a number of European markets, despite higher wages and the current shipping costs.
The pinch of falling prices and rising wages led people to compare American and European production methods and in doing so developed an appreciation that ways of working, how you do what you do, management innovation, was the key differentiator.
Internal Management: How you do, what you do
The idea of internal management, ways of working, as a vital factor in a successful business emerged as a concept.
“Thus the difference in management
will alter results in the same place,
at the same time,
in the use of similar machines” (5)
In Europe, in manufacturing, workers would make anything that fell within the general province of their craft. For example, a plough, a locomotive and any metal implement in between.
Conversely, in the US after the Civil War, there developed a division of labour based on skill, in addition to the division of labour according to the task. The most skilled workers did the most exacting work, while the less demanding work was done by the less skilled. Skilled machinists might be paid more in the US, however they were only used on the work that needed their skill.
To accomplish this division of labour it was necessary to further analyse and subdivide the work to be done, which was considerable work for management. Only a few people could see the whole value delivery end to end, there was a considerable increase in the task of management to tie things together and make sure that value was delivered.
Additionally, the US was ahead of Europe in the use of machinery. The approach in America was to use machines to remove as much manual labour as possible and to machine parts to the finest tolerance possible. The European approach was to use machines to get material in rough form so that it could be worked on by hand. In America there was interchangeability of parts, in Europe there was not. One nut would fit one bolt.
The result was that it might cost twice as much to have a part made in a French factory, for example, than in an American one, despite higher wages in America.
The skill and knowledge across the Atlantic was equivalent. The difference was in how the skill was used. The European manufacturer used it to make a product. The American manufacturer used it to make a process for making a product. The skilled worker in America would make a semi-automatic machine for a less skilled worker to make a product.
There was a growing awareness that how people at all levels in the organisation worked, not just what was made, had an important effect on success.
The lack of continuously improving the How, perhaps with a perceived comfort of not needing to improve, is a factor in the UK going from leading in the first two Industrial Revolutions to the US leading in the third.
During this time period, from 1870 to 1900, firms went from managing by Rule of Thumb to Systematic Management (a precursor to Scientific Management).
This was firms going from being dis-organisations to becoming organisations.
Rule of Thumb (pre-1870): knowledge in the heads of workers, chaotic, low data insights
Systematic Management (growth phase: 1870 to 1900): organising the organisation, coordinating groups of people & work, detailed data insights
Scientific Management (growth phase: 1900 to 1915 ): getting the most output out of an individual
There are parallels here with your organisation. Standing still is not standing still, it is going backwards. With equivalent skills, it is the how and continuously improving the how, that makes all the difference.
In the next post we will take a closer look at Systematic Management, the introduction of 'systems' (1) for work, (2) for cost transparency and (3) for incentivising workers. Many of the management innovations introduced in this time period are still in use today, sub-optimally, in a very different context.
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Also see:
Previous: (6) From Steam to Steel
Next: (8) To come!
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Learning resources:
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References:
Joseph Litterer, The Emergence of Systematic Management as Shown by the Literature of Management from 1870-1900 (Routledge, 1986).
Chester Wright, Economic History of the United States (McGraw-Hill, 1941).
Litterer, The Emergence of Systematic Management as Shown by the Literature of Management from 1870-1900.
National Industrial Conference Board, Studies in Enterprise & Social Progress (New York: National Industrial Conference Board, 1939).
Edward Atkinson, The Distribution of Products (New York: G.P.Putnam’s Sons, 1885).