John D. Rockefeller and Business Integration Models

ASU HST 200 (Historical Themes) Industrialization and the Rise of Big Business, 1870-1900 John D. Rockefeller and Business Integration Models Like Carnegie, John D. Rockefeller came from low beginnings in 1839. His father was a traveling salesman who sold goods like medical elixirs, and he was often away. In addition to helping his mother with household tasks, young Rockefeller made additional money for the family by selling goods from the family farm. He got the chance to attend accounting and bookkeeping classes in high school after the family relocated to a Cleveland suburb in 1853, which sparked his interest in a business career. In 1859, while residing in Cleveland, he became aware of Colonel Edwin Drake's discovery of "black gold," or oil, close to Titusville, Pennsylvania. This discovery sparked an even bigger boom than the previous decade's California Gold Rush. In an attempt to hit it rich, many engaged in dangerous and chaotic "wildcatting," or drilling exploratory oil wells, in the hopes of striking it wealthy. However, Rockefeller went with a more secure venture: turning crude oil into kerosene, which was useful for lighting and warmth. Kerosene swiftly took the place of whale oil in many houses and businesses because it was a safer and more efficient energy source. In the beginning, Rockefeller worked in the Cleveland area refining industry with friends and family. However, in 1870, Rockefeller struck out on his own, pooling his resources to found the Standard Oil Company of Ohio, which was initially valued at $1 million. In his relentless quest for complete control over the oil refining industry, Rockefeller was merciless. While other businesspeople flocked to the region in search of an easy profit, Rockefeller devised a scheme to destroy his rivals and establish a real monopoly in the refining sector. He made deals with many major railroad firms starting in 1872 in order to get lower freight costs for delivering his goods. He also obtained intelligence on his rivals by using the railroad corporations. He pushed his competitors out of business by driving up the price at which he could now provide his kerosene, sometimes offering to buy them out for cents on the dollar. Those who refused to sell out to him were harassed by him until they were forced out of business. By means of his horizontal integration strategy, which involved acquiring and merging comparable businesses, Standard Oil expanded to encompass nearly all refineries within the region. By 1879, the Standard Oil Company owned 90 percent of all refining companies worldwide and about 95 percent of all oil refining companies in the United States. In 1880, editors of the New York World bemoaned Standard Oil, writing, "The unbiased reviewers' eyes will be astounded to discover that the United States of America remains a major player in the nineteenth century." ....accepted the existence of the biggest, cruelest, pretentious, ruthless, and most encroaching monopoly that had ever set up shop in a nation. Seeking even more power, Rockefeller saw the benefits of managing the product's delivery. He then started expanding his business through vertical integration, a strategy in which a business manages every stage of a product's lifetime, from the development of raw materials to the manufacturing process and delivery of the finished good. In Rockefeller's instance, this plan called for investments in and acquisitions of businesses engaged in everything from railroads to tanker cars to pipelines to barrel manufacturing. He eventually acquired practically every kind of company, and he made advantage of his enormous influence to force rivals out of the market by waging fierce pricing wars. Despite being demonized by rivals who were hurt by his acquisitions and thought he was no more than a robber baron, a number of commentators praised Rockefeller for his creativity in uniting the oil refining sector, which led to a reduction in kerosene prices of up to 80% by century's end. Gustavus Swift, one of the industrialists who employed vertical integration to dominate the U.S. meatpacking sector in the late nineteenth century, was soon followed by other successful businessmen. To govern the range of business interests he now had, Rockefeller established a new legal body called a trust. Under this arrangement, a firm that is run for the benefit of other investors is legally owned by a limited number of trustees. Nine trustees were given ownership of all thirty-seven investors' shares in the numerous Standard Oil businesses in 1882, with the responsibility of overseeing and guiding all commercial endeavors for the corporation. Challenges from the state and federal levels emerged since it was evident that there was a monopoly, implying exclusive ownership of all businesses that made up an industry. Rockefeller moved to yet another legal organization, known as a holding company model, when the Ohio Supreme Court decided that the Standard Oil Company had to dissolve due to its exclusive control over all refining activities in the United States, which was against state and federal regulations. By retaining the bulk of each firm's equity, the holding company concept produced a single corporate body that oversaw the activities of several other businesses. This concentration of wealth and power into a single organization was comparable to a monopoly, even though holding companies were not technically "trusts" and were therefore exempt from anti-monopoly laws. As a result, progressive reformers of the late nineteenth century saw holding companies as the perfect example of the perils of capitalistic big business, as seen in the political cartoon below (Figure 18.9). Despite the doubts of reformers, other businessmen adopted Rockefeller's strategy. More than three hundred corporate mergers had taken place in the US by 1905, impacting more than 80 percent of all businesses. By then, 1 percent of the nation's firms controlled more than 40 percent of the country's economy, even in spite of the enactment of government laws like the Sherman Antitrust Act in 1890.