Continuing each Monday another except from my book, which is now available at www.scribd.com. See my post last Thursday. This week’s excerpt moves into the part of the book where I tell some great stories from business history. This is very timely, as this Wednesday I also give the second in my free public lecture series on business history: Flying High — the story of the US airline industry. If you are anywhere near Austin, I would love to see you Wednesday evening at the AT&T Conference Center at 5:30PM for this colorful talk.
Although we don’t always think about it, we are connected to our past. When I was growing up in the 60s, my father traveled on business every week. Mom would pick him up and drop him off at the Indianapolis airport, and we kids got to tag along. I developed a fascination with the airline business that continues to this day. Last year, I was flying into the same Indianapolis airport. As we made our approach, I could see below me a spectacular view of that giant of sporting facilities, the Indianapolis 500 track. My heart leapt. Then, out of the blue, it struck me that my late Dad had probably seen this view many times, and reacted exactly as I had. It’s something we never talked about, but suddenly I was sure that we shared this connection – a new and unexpected link between me and my past.
I’m of German descent, although I rarely think about it. But when someone sneezes and most people say, “God bless you,” I say instead, “Gesundheit!” This comes so naturally that I was at least forty years old before I noticed the connection to my heritage. (Maybe it also explains my addiction to coleslaw.)
As we’ve seen, looking backward can help us to understand the present and forecast the future. But looking at history also has a value in itself. It can strengthen our understanding of our human nature and help us tackle the challenges we face today with greater insight and wisdom. Unfortunately, most people in the world of business have little or no appreciation of the heritage of business history. We are totally focused on the present and the future, to the neglect of the past. Students in law school have to study legal precedents and understand the heritage of Roman jurisprudence and English common law. Musicians in training study the works of Bach and Beethoven and listen to CDs of the greatest performers of the past. But very few business schools require any study of business history. It’s a serious omission, in my view.
At Hoover’s, we have a staff of editors who research companies around the world. Sometimes when they call a company headquarters with a basic question about the firm’s history – the name of the founder, for example – no one at the company knows the answer. When I mentioned to our writers that we should point out that telecommunications giant Sprint derived the SP in its name from the formerly great Southern Pacific Railroad, they were hesitant to do so because even the canned company history at Sprint’s website said no such thing. It’s true, though—whether Sprint knows it or not!
Many people writing about business history get lazy. Unfortunately, few people seem to care about it enough to get it right. When GE bought out RCA in 1986, the press coverage was extensive. But almost no one picked up on the fact that GE had been one of the original founding parent companies when RCA was first launched many years earlier.
The widespread ignorance of business history is a real shame, because those who study business history have a heightened appreciation of the importance of what today’s business leaders are doing and can accomplish. While millions read with fascination about the exploits of our famous explorers and great generals or the breakthroughs of our leading scientists and thinkers, we give short shrift to the role played by entrepreneurs, industrialists, and managerial geniuses in our history.
Furthermore, business history can also be a fountain of great ideas and insights for enterprises of the present and future. Let me make my point by telling a few stories from the treasure trove that is business history.
The Art of Branch Management
Take a look at an interesting enterprise I studied. Two men owned a successful business. They decided to open a branch in another city. They gave the manager of that office “sweat equity” – ownership of 25% of the branch. After a period of time, it turned out that the manager was “cooking the books,” falsifying the profits, and stealing money. The owners went to court to get back the money the manager had stolen, but they did not get much. However, they did not give up. They got rid of the first manager and brought in a new fellow, who did a great job and increased the profits of the branch. The branch did so well that it became, according to one source, “a nursery of future branch managers.”
The owners were the Medici family of Florence, the branch office (of their trading and banking company) was Venice, and the time period was A.D. 1402-1440. The story has a few other interesting details I haven’t yet mentioned. For example, the Venice branch had a female slave to help around the office. Thirteen employees of another branch were killed by pirates. If you look back at these stories and say, “What has changed?” you realize that many of the challenges of business have remained the same – finding and keeping dedicated employees, developing accounting systems that are reliable and accurate, dealing with risks and new challenges. In fact, the 25% “sweat equity” figure chosen by the Medicis is amazingly close to recommended numbers in a consultant’s study I recently reviewed in my position on the board of an Internet company, six centuries later.
In 1916, US railroads were among the most important, powerful, and massive enterprises in world history. They had accumulated investments exceeding $21 billion. Their employment rolls totaled 1,700,000 workers. The entire system had been built and managed without the kind of resources modern enterprises take for granted, such as Federal Express, the Internet, NASDAQ, or Excel.
Industry leader Pennsylvania Railroad called itself “the standard railroad of the world.” It was to turn-of-the-century America what IBM was to the business world in the 60s and 70s, or what Microsoft is today – in fact, relatively speaking, the Pennsylvania was probably much more important in its day than either of those great computing companies.
From its founding in 1846, the Pennsylvania had competed with railroads from other coastal cities for the lucrative trade to the west. Industry pioneer Baltimore and Ohio reached out from its namesake city, while Vanderbilt’s New York Central empire had the best lines directly into New York, which was emerging as the most important port on the east coast. The Pennsylvania’s New York passengers and freight had to be ferried across the Hudson River from New Jersey in order to reach Manhattan, a severe competitive disadvantage in comparison with the Vanderbilt line.
After years of study, the Pennsylvania under President Alexander Cassatt in 1900 boldly decided to build tunnels under the Hudson and a giant new terminal in Manhattan. The project took until 1917 to complete. It cost the Pennsylvania $160 million, at the time the largest private investment in history. The Pennsylvania remained a blue chip until after World War II, and even after the late 60s demise of successor Penn Central, its New York real estate holdings remained valuable. Today the Norfolk Southern Railroad profitably operates much of its original route.
Despite the enormous importance of his leadership role as the head of one of America’s greatest enterprises, Cassatt today is far less famous than his impressionist painter sister, Mary Cassatt. And his grand neo-classic Pennsylvania Station was thoughtlessly demolished in 1963, perhaps our nation’s single greatest architectural loss.
If you were Alexander Cassatt, would you have had the nerve to bet the company on the Hudson tunnels and Penn station?