Modern Rise Of Enterprise

The Rise of the Modern Business Enterprise: The

Case of Citibank

Thomas F. Huertas

Citibank, N.,4.

A case study examines the singular in order to illuminate the

general. Although the subject of the case may be interesting and

important in its own right, the case's purpose is to test broader

hypotheses, not statistically, but qualitatively. The rich detail of

a case study can suggest nuances to propositions derived from

more sweeping surveys. In this article the propositions to be illuminated

concern the rise of the modern business enterprise, and

the case shedding light is the history of Citibank [4].

THE RISE OF THE MODERN BUSINESS ENTERPRISE

"The modern business enterprise is an economic institution

that owns and operates a multi-unit system and relies on a multilevel

managerial hierarchy to administer it [5, pp. 203-4]." When,

why, and where did this form of business arise, and what were its

consequences for the firms themselves, the industries in which

these firms operated, and the economy at large7 These are the

BUSINESS AND ECONOMIC HISTORY, Second Series, Volume Fourteen, 1985.

Copyright (c) 1985 by the Board of Trustees of the University of Illinois. Library of

Congress Catalog No. 85-072859.

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questions that business historians, notably Alfred Chandler [3],

have posed and answered.

When the modern business enterprise emerged is clear. It arose

during the years 1870 to 1920. Before the earlier date, firms were

simple proprietorships, serving a single market with a single

product from a single location. Markets, not managers, coordinated

the flow of inputs to the firm and of output to the

consumer.

Then came the railroad or, more precisely, the completion of a

national railway system in the 1870s. This was important for two

reasons. First, it created a potential national market for a far

wider range of goods. This broadened the opportunities open to

firms from the county to the country. Second, the railroad

pointed the way to how the enterprising firm might take advantage

of the new opportunities offered by a national market.

Partly in order to keep trains from running into one another,

railroads developed a managerial hierarchy that delegated responsibility

for day-to-day operations to salaried managers. Such organizations

permitted railroads to carry a rapidly growing volume

of traffic at a lower unit cost.

Lower cost is the reason why the modern business enterprise

triumphed. Specifically, managerial hierarchies lowered costs

through routinizing transactions among the different stages of

production and distribution. The integration of production, purchasing,

and marketing permitted firms to reduce the cost of information

about markets and suppliers, to push goods through the

production process faster, and to use resources more intensively.

Further cost reductions came in raising capital. The steadier cash

flow achieved by the modern business enterprise reduced the risk

of securities issued by the corporation, enabling it to float bonds

and equity at lower cost.

The modern business enterprise triumphed in industries where

these cost advantages were greatest, namely where technology

permitted companies to produce goods in large volumes for distribution

to large, geographically dispersed markets. To obtain the

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full competitive advantage that the lower unit cost of production

afforded, the technologically advanced firm integrated forward

into marketing and distribution and backward into the produetion

of intermediate goods or even raw materials. This vertical

integration assured that the factory could always run at close

to full capacity. But vertical integration also required that the

areas of the firm outside the factory be as efficient as the factory

itself, and this required an institutional innovation analogous

to the technological innovations installed in the factory.

That institutional innovation was the managerial hierarchy, or, as

Chandler has termed it, the visible hand.

What were the consequences of the visible hand for the firm

itself? First, there was a shift from owner to managerial control.

Although owners continued to have a critical say in policy decisions

until well into the twentieth century, salaried managers