How did Carnegie help transform the organizational structure of manufacturing?

The theories of supermodular optimization and games provide a framework for the analysis of systems marked by complementarity. We summarize the principal results of these theories and indicate their usefulness by applying them to study the shift to ‘modern manufacturing’. We also use them to analyze the characteristic features of the Lincoln Electric Company's strategy and structure.

• Navigate LeftPrevious article in issue
• Next article in issueNavigate Right

Keywords

Methodology

Supermodularity

Organizational strategy

Lincoln Electric Co

JEL classification

D20

C60

L23

Recommended articles

☆

This paper was begun while the authors were Fellows of the Center for Advanced Study in the Behavioral Sciences at Stanford. The hospitality of the Center, the research assistance of Susan Athey, Joshua Gans, and Scott Schaefer, the financial support of Booz, Allen, and Hamilton, Inc. and the National Science Foundation, the comments of Lorne Carmichael, Michael Gibbs, and Edward Lazear, and the suggestions of the referees and Glenn M. MacDonald (the editor) are gratefully acknowledged.

When Andrew Carnegie was 33 years old, in 1868, he wrote himself a letter: "To continue much longer overwhelmed by business cares and with most of my thoughts wholly upon the way to make money in the shortest time, must degrade me beyond hope of permanent recovery." He promised himself that he would resign within two years. He didn't. For the next thirty years, the Scottish-born industrialist and entrepreneur would go on to make unheard-of amounts of money. But he was unlike many Gilded Age capitalists, who believed that accumulating wealth was a sign of progress. Carnegie's relationship to making money was complicated by the competing influences of his childhood. He was torn throughout his life between the democratic principles of his father, who spoke strongly for the rights of ordinary people, and the materialism of his mother, who was determined her son get to the top.

The man who would one day be the richest in the world grew up in dire poverty. The son of a handloom weaver, Carnegie was born in Dunfermline, the medieval capital of Scotland, in 1835. When the Industrial Revolution reached the town, it had devastating consequences for the Carnegie family. The introduction of steam-powered looms threw thousands of weavers out of work, including Carnegie's father. "I began to learn what poverty meant." Andrew would later write. "It was burnt into my heart then that my father had to beg for work. And then and there came the resolve that I would cure that when I got to be a man."

Under pressure from Carnegie's mother, Margaret, the family left Scotland to join her sisters in Pittsburgh. But the Carnegies had simply traded one life of penury for another. Andrew Carnegie's father, Will, took a job in a cotton factory, while Carnegie stoked boilers in a textile factory for 12 hours a day, a job that gave him nightmares. Within months he found himself a better position, one that would put him into contact with some of the most influential men in the city. He became a messenger boy in a telegraph office. In later years, Carnegie claimed the job turned his life around:

"My 'Good Fairy' found me in a cellar firing a boiler and a little steam engine and carried me into the bright and sunny office surrounded with newspapers, pencils, pens and paper, and ringing in the ears the miraculous tick, tick, tick, of the tamed lightning [telegraph] and doing the work of a man. I was the happiest boy alive, carried from darkness to light."

One of the men Carnegie met at the telegraph office was Thomas A. Scott of the Pennsylvania Railroad. In 1853 Scott hired Carnegie as his private secretary and personal telegrapher for $35 a month. It was just the beginning of Carnegie's meteoric rise. In 1859 he succeeded Scott as superintendent of the railroad's Pittsburgh division and began investing in a number of enterprises. By the time Carnegie was thirty, he was making more than $50,000 a year.

In 1865 Carnegie left the Pennsylvania Railroad Company. Still a bachelor, he moved with his mother to a fashionable hotel in New York and began managing the affairs of the Keystone Bridge Company. It was in running Keystone that he crossed paths with James Eads. When Carnegie first heard of Eads' plans to build a bridge over the Mississippi River at St. Louis, he wanted Keystone to win the construction contract. Building the spectacular bridge would have tremendous promotional value for Keystone, helping the company win other large contracts. Keystone would also be in a position to make a tidy profit selling the bonds that would pay for construction.

The relationship between Carnegie and Eads wasn't easy. After many increasingly antagonistic encounters between Eads and Keystone, Carnegie wrote: "Of all men, your man of real, decided genius is the most difficult to deal with practically." His chief complaint was Eads' demand for steel of unprecedented quality. "The St. Louis Bridge is one out of a hundred to Keystone while to Captain Eads it is the grand work of a distinguished life. With all the pride of a Mother for her first born, he would bedeck the darling without much regard to his own or others' cost."

During the seven years of construction, there were times when Carnegie doubted it would ever be completed. In 1871, six months after the bridge was supposed to be finished, but before construction on the superstructure had even really gotten underway, Carnegie sold his stock in the St. Louis Bridge. "I am disgusted with the affair, throughout, & may have sold at panic prices…" he wrote.

Eads didn't like Carnegie much either. He was convinced that Carnegie, as a major stockholder in the St. Louis Bridge Company, and as the chief spokesman for both Keystone and the subcontractor that supplied the iron for the bridge, was trying to milk the deal for all he could. But despite the difficulties between the two sides, and the many delays and cost overruns, Carnegie marveled at the bridge when it was finally completed. In December 1873, he wrote to a financier in Europe that "the entire work -- bridge, tunnel & approaches, are magnificent."

The Eads bridge was Carnegie's first involvement in a major structural steel project. The rest of his career would revolve around producing the metal. In 1875 Carnegie opened the J. Edgar Thomson Steel Works in Braddock, Pennsylvania, using the Bessemer steel-making process he had first seen at work during trips to England. Efficiency became Carnegie's motto. He introduced every cost-cutting innovation available. By 1900 his plants were producing more steel than the whole of Great Britain.

His success came at a high cost. Though he had spoken out for the rights of workers to unionize in other industries, his own laborers worked twelve-hour days, seven days a week. When industrial unrest stopped work at his plants, Carnegie supported his plant manager, who locked out the workers and hired armed Pinkerton detectives to help end the strike. In the conflict that ensued, at least twelve people were killed. Although Carnegie won the battle, he emerged with his reputation as a liberal reformer severely tarnished. One congressman called him "the arch-sneak of this age."

In 1900 the financier J. P. Morgan mounted a major challenge to Carnegie's steel empire. Anxious to spend more time with his wife of thirteen years, the 64-year-old Carnegie sold his entire steel-making operation to Morgan for $480 million. Morgan shook on the deal saying, "Congratulations, Mr. Carnegie, you are now the richest man in the world."

Carnegie spent the rest of his life giving his vast fortune away. In 1889 he had written an essay entitled "Wealth," in which he argued the duties of a wealthy man were to live modestly and to use his surplus money for the public good. "The man who dies rich," he was fond of saying, "dies disgraced." Carnegie spent a large portion of his wealth setting up more than 2,500 public libraries and supporting universities and colleges, his main philanthropic priorities. By the time of his death in 1919, the handloom weaver's son had given away $350 million.

How did Carnegie influence industrialization?

What was unique about Andrew Carnegie's manufacturing?

How did Andrew Carnegie change the steel industry?

What was Carnegie's main contribution to the steel industry?