Hate apolUge of Agricttlture 3 1924 055 135 689 Cornell University Library The original of this bool< is in the Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31 9240551 35689 MATERIALS FOR THE STUDY OF BUSINESS Materials for the Study of Business Industrial Society. By Leon C. Marshall. xxiv+ 1,082 pages, royal 8vo, cloth. Financial Organization of Society. By H. G. Moulton. xxii+790 pages, crown 8vo, cloth. Principles of Accounting. By Albert C. Hodge and J. O. McKinsey. xiv-|-390 pages, 8vo, cloth. Law and Business. By William H. Spencer. Vol. 1. Introduction, xviii+612 pages, 8vo, cloth. Vol. II. Law and the Market. Law and Finance. xviii+ 670 pages, 8vo, cloth. Vol. 111. Law and Labor. Law and Risk-Bearing. Law and the Form of the Business Unit. xviii-|-654 pages, 8vo, cloth. Business Administration. By Leon C. Marshall, xxiv-1- 920 pages 8vo, cloth. Education for Business. By Leverett S. Lyon. xiv-l-6I8 pages, 8vo, cloth. Social Studies in Secondary Schools. By a Commission of the Association of Collegiate Schools of Business. x+ 1 1 4 pages, 12mo, boards. Forms, Records, and Reports in Personnel Administration. By C. N. Hitchcock. 1 28 pages, 8vo, paper. IN PREPARATION The Technique of Business Com- The IVorker in Modern Economic municalion. Society. Risk and Risk-Bearing. The Manager's Administration of Labor. Managerial Accounting. tl a ■ i r- s i r d , i he oociat {..onirol of ausiness Commercial Banking Policies Activities. Commercial Cost- Accounting. Government and Business. The Manager's Administration The Physical Environment of of Finance. Business. The Place of the Market in Our Traffic and Transportation. Economic Society. -phe Psychology of Business Pro- Market Management cedure. THE UNIVERSITY OF CHICAGO PRESS CHICAGO, ILLINOIS BUSINESS ADMINISTRATION THE UNIVERSITY OP CHICAGO PEBSS CHICAGO. ILLINOIS THE BAKER & TAYLOR COMPANY NEW TOBK THE CAMBRIDGE UNIVERSITY PRESS LONDON THE MARUZEN-KABUSHIKI-KAISHA TOKTO, OSAKA, ETOTO, PUKUOSA, BENbAl THE MISSION BOOK COMPANY BHANOEAI Business Administration BY LEON CARROLL MARSHALL THE UNIVERSITY OF CHICAGO PRESS CHICAGO, ILLINOIS Copyright igai By The University of Chicago All Rights Reserved Published December igai Second Impression January 1922 Third Impression September 1922 Fourth Impression January 1923 Composecl and Printed By The University of Chicago Press ChlcasTo, Illinois, U.S.A. PREFACE Collegiate training for business administration is now so widely attempted that the time has arrived when experiments should be conducted looking toward the organization of the business curriculum into a coherent whole. Training in scattered "business subjects'" was defensible enough in the earlier days of collegiate business training, but such a method cannot be permanent. It must yield to a more comprehensive organization. There can be no doubt that many experiments will be conducted looking toward this goal; they are, indeed, aheady under way. This series, "Materials for the Study of Business," marks one stage in such an experiment in the School of Conmierce and Administration of the University of Chicago. It is appropriate that the hypotheses on which this experiment is being conducted be set forth. In general terms the reasoning back of the experiment runs as follows: The business executive administers his business under conditions imposed by his environment, both physical and social. The student should accordingly have an under- standing of the physical environment. This justifies attention to the earth sciences. He should also have an understanding of the social environment and must accordingly give attention to civics, law, economics, social psychology, and other branches of the social sciences. His knowledge of environment should not be too abstract in character. It should be given practical content, and should be closely related to his knowledge of the internal problems of management. This may be accompUshed through a range of courses dealing with business admin- istration wherein the student may become acquainted with such mat- ters as the measuring aids of control, the communicating aids of control, organization policies and methods; the manager's relation to production, to labor, to finance, to technology, to risk-bearing, to the market, to social control, etc. Business is, after all, a pecuni- arily organized scheme of gratifying human wants, and, properly understood, falls httle short of being as broad, as inclusive, as Hfe itself in its motives, aspirations, and social obhgations. It falls Uttle short of being as broad as all science in its technique. Training for the task of the business administrator must have breadth and depth comparable with those of the task. VIU PREFACE BASIC ELEMENTS OF THE BUSINESS CURRICULUM Of problems of adjustment to physical enviromnent a) The earth sciences b) The manager's relationship to these Of problems of technology a) Physics through mechanics, basic, and other sciences as appropriate b) The manager's administra- tion of production Of problems of finance a) The financial organization of society b) The manager's adminis- tration of finance CONTEOI, 1 . Communicating aids of control, for example a) English b) Foreign language 2. Measuring aids of control, for example a) Mathematics b) Statistics and accounting 3. Standards and practices of con- trol a) Psychology 6) Organization policies and methods Of problems connected with the market a) Market functions and mar- ket structure b) The manager's administra- tion of marketing (including purchasing and traffic) Of problems of risk and risk- bearing a) The risk aspects of modern industrial society b) The manager's administra- tion of risk-bearing Of problems of personnel a) The position of the worker in modem industrial society b) The manager's administra- tion of personnel Of problems of adjustment to social environment a) The historical background 6) The socio-economic insti- tutional life c) Business law and govern- ment PREFACE IX Stating the matter in another way, the modern business admin- istrator is essentially a solver of business problems — problems of busi- ness policy, of organization, and of operation. These problems, great in number and broad in scope, divide themselves into certain t)^e groups, and in each t3rpe group there are certain classes of obstacles to be overcome, as well as certain aids, or materials of solution. If these problems are arranged (i) to show the significance of the organizing and administrative, or control, activities of the modern responsible manager, and (2) to indicate appropriate fields of train- ing, the diagram on the opposite page (which disregards much over- lapping and interacting) results. It sets forth the present hypothesis of the School of Commerce and Administration concerning the basic elements of the business curriculum, covering both secondary school and collegiate work. In this curriculum the present volume is designed to serve as part of a general introduction. It is used as the basic material in a beginner's course in Business Administration. This course parallels another dealing with the physical environment of business and follows still another which considers social environment. The three courses thus constitute a survey of the physical and social environ- ments of business and a general analysis of the outstanding relation- ships of the business administrator. In its scheme of presentation I think of this volume as being made up of four parts. Chapter i, a very brief first part, presents a general view of the field of study and a certain mental attitude toward the field. Because I have no better term for this mental attitude, I call it a functional approach to the study of business administration. Chapter ii, a somewhat longer second part, examines a business problem — that of plant location^ — as a means of giving the student confidence in the analysis of business problems which is sketched rather abstractly in the first chapter and as a means of inducing him to think of the outstanding relationships of the administrator as highly interdependent activites. Chapters iii-ix form a rather bulky third part of the book. Here, one after another of the functions of the business adminis- trator is discussed, with particular reference to the character of the problems involved and to the control policies and devices of the manager. The reader will find that the book is a "what and why" book rather than a "how" book. It is not a manual of technical X PREFACE practices and devices in business. It is an attempt to see the prob- lems of business administration as an interrelated whole and to indicate the lines of study which will presumably lead to solution of those problems. Chapter x, the brief fourth part, presents in moderate detail a "business case" for the student to analyze. It is a sort of an acid test of his earher study. From the pomt of view of teaching technique, this study of business administration is worked out through what is called, again for lack of a better name, the discussion method. Questions, prob- lems, and cases are the tools of the discussion method and all are employed in this book. Some ways of using these tools may be illustrated as follows: If a class were given an ordinary textual reading on plant location and the class meeting were conducted by asking such questions as, "What are the more important factors in cotton mill location?" it would be possible, at least, to get a discussion started among members of the class, although it must be admitted that the meeting might degenerate into formal routine questioning and answering. If, on the other hand, the class were given a full account of the procedure followed by the Spinwell Company in determining an appropriate location for its new plant, we could readily have a discussion par- ticipated in by the students as a result of their analysis of this case material. Case study by students presumes a knowledge at the outset of the main factors to be considered. The questioning on the part of the instructor would almost necessarily go deeper into the matter than routine questioning and answering. The student would be almost certain to carry away a more vivid appreciation of the issues at stake, because in the case method the mind is aroused to activity to piece together related facts in order to find new mean- ing in them. A third possible tool of the discussion method is the problem, and this may be of almost any grade of severity and may of course be combined with case material. If, for example, the Spinwell Company case contained an analysis of several possible locations without reaching a conclusion on more than one, the class discussion might well analyze the correctness of this conclusion or might be directed toward listing in order of preference the three most desirable locations, giving reasons for the order chosen. This would probably be a problem of only moderate severity if the case were well written PREFACE , XI up. A more severe problem could be set by asking the class to deter- mine whether a certain location, not mentioned in the case, would not have been still better than the one chosen. Now the students must presumably secure new data concerning this new location as their first step in solving the problem. This brings in of course a new opportunity for mental disciphne. As the present book is designed for use in an introductory course survejdng the whole field of business administration, it does not include advanced problems. It embodies, none the less, a case and problem approach, and its emphasis is on the case and problem method, although as a transitional collection it has been thought wise to include enough material and questions of the more routine sort to enable the instructor to adapt his teaching method to the stage of maturity and preparation of individual students and classes. The final chapter — in my mind the most interesting bit of teaching method in the book- — ^is a "case" of rather wide reach. It has been my experience that Freshmen can and do handle this case reasonably well at the close of the course: a stimulating hint of the possibiUties for more advanced courses. Perhaps it is worth adding that there is no question that these possibilities can be realized. For more than a decade the group Math which I am so fortunate as to be working has been developing a case-and-problem presentation of economics and business subjects. We find the method particularly well adapted to our intermediate and advanced courses, and much of our instruction in these fields is now on the case-and-problem basis. This of course does not mean that the lecture and the textbook do not have an appropriate place in instruction. It will be noticed that no effort has been made to give exhaustive bibliographies. It has seemed sufficient in an iptroductory survey, to suggest at the end of each chapter a few references for further study. The most modest Ubrary can meet the demand thus made. It is hardly possible for me to give appropriate recognition of the assistance I have received from many sources during the preparation of this material. It has passed through three mimeographed editions, two pamphlet editions, and a "preUminary " edition to its present form. During this rather lengthy period of preparation criticisms and suggestions have flowed in from almost every member of the group with which I am most closely associated as weU as from many other collegiate instructors. My debt to authors and publishers who 301 PREFACE have so kindly consented to the use of their material is equally great. I must mention particularly the assistance of Walter Smith, Ruth Reticker, Mildred Janovsky, May Freedman, and Dorothea Schmidt in gathering material and the kindness of Professor C. O. Hardy in preparing the chapter on "The Administration of Risk-Bearing." A conscientious effort has been made to give credit where credit was due. I am quite certain, however, that many questions have been taken from sources whose origin has been forgotten in the long period of preparation. General acknowledgment of this indebtedness is here given. L. C. Marshall University of Chicago September i, 1921 TABLE OF CONTENTS PAGE Chapter I. The Field of Business ADinNisxRAnoN The Many Forms of Economic Activity (Diagram) ... 2 The Zones of Business Control 3 A Descriptive Classification of Business Activities ... 4 A More Analytical Classification of Business Activities . . 7 A Fimctional Classification of Business Activities ... 10 Administration a Phase of the Co-ordination of Specialists . 16 Problems 20 Chapter II. A Sample Business Problem — Plant Location A. Conditions Determining Location in Terms of Broad Areas — Territorial Specialization Introduction and Problems . . 23 1. A General Survey of Location Forces. E. A. Ross - . 28 2. Transportation Facilities in Relation to Location. A. T. Eadley , 33 3. The Momentum of an Early Start and the Habit of Industrial Imitation. Bureau of the Census .... 35 4. Some Economic Advantages of Specialized Centers. Henry Clay 37 5. The Location of the Cotton Manufacturing Industry. M. T. Copeland 38 6. Local Concentration of Certain Industries. Bureau of the Census 45 7. The Location of the Manufacturing Industries of the United States. Bureau of the Census 48 8. Illustrations of Concentration and Dispersion. Bureau of the Census 49 9. The Seats of Great Commercial Enterprises. J. R. Smith 50 10. The Location of the Wholesale Dry-Goods Trade. P. T. Cherington 56 11. London and New York as Financial Centers. E. L. S. Patterson 58 B. Factors Determining Location in Subareas — Site Location Introduction and Problems . .... ... 62 12. Geographical Specialization by Small Areas and the Sections of Cities. C C. Evers 64 13. The Location of Retail Establishments. P. H. Nystrom 66 idii XIV TABLE OF CONTENTS PAGE 14. Site Location Considerations. C. C. Evers .... 71 15. An Outline of the Relations of Transportation to Site Location. F. M. Simons, Jr 74 16. The Interdependence of Construction and Equipment with Site Location. Charles Day 76 17. City, Suburbs, or Country. D. S. Kimball .... 79 18. Satellite Cities. G. R. Taylor 80 19. The Causes of Congestion of Manufactures in New York City. P. T. Sherman 84 C. Changing Location and Location Planning Introduction and Problems . . 90 20. How to Strike a Balance in Location Factors. H. V. Coes 93 21. An Example of Private Enterprise in Developing Plant Locations. Central Manufacturing District .... 96 22. Another Example — the Bush Terminal 101 23. Still Another Example — the Toledo Factories Buildings. Iron Age ... 105 24. Examples of City Advertising A. Philadelphia Year-Book 106 B. Advertisement in a Business Periodical .... 108 25. What City Planning Means. Niagara Falls Chamber oj Commerce . . . , 109 26. The City- Planning Movement. C. M. Robinson . . in Chapter III. The Administration op Personnel A. Introductory Survey of the Content of the Manager's Relationship to Personnel Introduction and Problems .. 115 1. Orgam'zation of the Personnel Department. Ordway Tead and H. C. Metcalf 118 2. Functions of the Personnel Department. C. H. Fen- stermacher . 124 3. Another Statement of Functions. R. W. Kelly ... 126 B. Personnel Administration in Terms of Incentive and Out- put: Good Physical Conditions and Competent Human Machines Introduction and Problems 127 4. Some Causes of Inefficiency in Modern Industry. F. E. Cardullo 132 5. Physical Conditions of Work and Accident Prevention. L. K. Frankel and Alexander Fleisher 136 6. Prevention of Occupational Disease. L. K. Frankel and Alexander Fleisher 138 TABLE OF CONTENTS xv PAGE 7. The Maintenance of Physical Fitness. United Stales Public Health Service 140 8. Physical Examination of Workers. J. W. Schere- schewsky 144 9. Selection and Placement. N. D. Hubbell 146 10. Education and Training A. The Industrial Information Service 149 B. C. J?. Allen 151 C. Personnel Administration in Terms of Incentive and Out- put: the Will to Do Introduction and Problems 153 11. The Fears of Labor and of Capital. W. L.M.King . 164 12. The Gulf between Labor and Capital. L. P. Alford . 168 13. The Instincts and Motivation. C. H. Parker . . . 168 14. The Release of Human Energy. A. D. Weeks . . . 171 15. Wage Incentive: Forms of Payment. G. D. H. Cole 173 16. Wage Incentive: A Philosophy of Management. C. B. Going .... ... ... 178 17. Wage Incentive: A Wage Formula. G.D.Babcock. . 180 18. Wage Incentive: What Are Fair Wages? A. W. R. Bassett 181 B 183 19. Profit Sharing: Its Forms. U.S. Bureau of Labor Statistics, and Mallory, Mitchell, and Faust .... 183 20. The Three-Position Plan of Promotion. F. B. Gilbreth and L. M. Gilbreth . .... . . 185 21. Employees' Representation A. Definition. Independence Bureau . . . 187 B. An Extreme Case. A Suggested Plan for a Con- ference Committee on Industrial Relationships 188 C. Another Case. National Metal Trades Association 191 D. Measuring Aids of Personnel Administration Introduction and Problems 192 22. Strength Tests in Industry. F. S. Lee . . . 195 23. How Industrial Fatigue May Be Detected. United States Public Health Service ... .... 196 24. Job Analysis. Personnel . . ... . . 197 25. Some Sample Analyses and Descriptions of Occupations A. Curtis Publishing Company 202 B. Emergency Fleet Corporation 203 26. The Field of the Psychological Test. H. D. Kitson . 204 27. Methods in Vocational Testing. H. L. Hollingworth . 206 28. Army Intelligence Tests and Trade Tests. Beardsley Ruml ... . . 209 XVI TABLE OF CONTENTS PAGF 29. What Phrenology and Physiognomy Can Contribute. H. L. Hollingworth 213 30. The Application Blank as a Measuring Device. R. W. Kelly 219 31. The Interview as a Measuring Device. R. W. Kelly . 220 32. Some Aspects of Rating Scales. R. W. Kelly . . . 221 33. The Labor Audit. Ordway Tead 224 E. Organization and Administration of the Personnel Depart- ment Introduction and Problems 226 34. The Case for a Centralized Personnel Department. 5. H. Slichter 231 35. The Place of the Personnel Department in the Business Organization. Ordway Tead and H. C. Metcalf . . . 236 36. Organization Chart of Personnel Work in One Industrial Plant 241 Chapter IV. The Administration of Market Problems A. The Knitting Together of Modern Specialists. L. C. Marshall and L. S. Lyon 243 Problems 250 B. Market Forces, Marketing Functions, and Market Structures Introduction and Problems 250 1. The Forces behind Modern Market Structures ... 236 2. Marketing Functions. L. D. H. Weld 262 3. Methods of Sale and Advertising A. A. W. Shaw 268 B. Johnson, Read 6* Company 271 4. Conditions Which May Result in Organized Markets. Alfred Marshall 272 5. Leading Wholesale Agencies. M. T. Copeland . . . 274 6; Marketing Agencies between Manufacturer and Jobber. L. D. H. Weld 277 7. The Use Made of the Jobber. P. H. Nystrom ... 279 8. Leading Retail Agencies. M. T. Copeland .... 282 9. The Mail-Order Business. R. S. Butler, H. F. De Bower, and J. G. Jones 287 10. The Local Retailer's Answer to MaU-Order Competition. Northwestern Druggist 289 11. Some Characteristics of the Department Store. P. H. Nystrom 291 12. The Manufacturer and the Department Store. R. W. Johnson 295 13. The Origins of the Chain Store. P. H. Nystrom , . 296 TABLE OF CONTENTS xvii PAGE 14. Market Structures by Classes of Commodities. P. T. Cherington . 299 15. The Middleman in Distribution. A. W. Shaw . . 303 16. The Break Up of the Orthodox System of Distribution. P. T. Cherington 306 C. Sales Management for a Manufacturing Business Introduction and Problems 308 17. A Brief Statement of the Marketing Problems of the Manufacturer. M. T. Copeland 313 18. Analysis of Product, Market, and Channels of Distribu- tion. Mac Martin Advertising Agency', Incorporated . 314 19. Some Phases of Market Analysis. M. T. Copeland. . 319 20. Some Phases of Commodity Analysis. C C. Parlin . 323 21. Measuring Aids in Salesmen Control A. Printers' Ink 325 B. D. L. Kinney 328 22. Measuring Aids in Advertising Control. W. S. Zim- merman . 329 23. Measuring Aids Applied to the Social Environment. J. G. Fredericks, and F. M. Faker 331 24. Measuring Aids May Result in Expense Standards. Harvard Bureau of Business Research 333 25. Measuring Aids Reflected in the Profit and Loss State- ment. Harvard Bureau of Business Research ... 335 26. Measuring Aids, Quotas and Budgetary Control. M. W. Mix 337 27. Price Policies: What the Mark-Up Should Cover. A. M. Burroughs 340 28. Price Policies: The Turnover. Wheeler Sammons . . 341 29. Price Policies: The Determination of Market Price. Jacob Viner 343 30. Price Policies of the Distributer. A. W. Shaw . . . 347 31. Price Policies: Price Maintenance. R. E. Ingersoll aiid Brothers 351 32. The Administration of Sales and Advertising. P. T. Cherington 352 33. An Organization of the Sales Department. Bulletin of the Taylor Society 354 D. The Work of the Purchasing Agent Introduction and Problems 362 34. The Functions of the Purchasing Department. H. B. Twyford .... 365 35^ Buying for Retail Hardware Stores. H. P. Sheets . . 367 XVlll TABLE OF CONTENTS PAGE 36. Measuring Aids: Testing in Connection with Purchasing. Waldon Fawcett 370 37. Measuring Aids: A Sample Specification. General Supply Committee, U.S. Government .... 371 38. Purchase and Stores under Unsystematized, Systema- tized, and Scientific Management B. P. Kendall . . 374 39. The Interdependence of Purchasing with Other Func- tions. A. C. Ward 378 40. A Possible Purchase Department Organization. C. S. Rindsfoos 381 41. Organization of General Purchasing Department of Western Electric Company 384 Chapter V. The Administration of Finance A. What It Means to Start and to Finance a Business Introduction and Problems 388 1. Steps Involved in Starting a Business. C. W. Gersten- berg . 389 2. Promotion and the Promoter. W. H. Lough. . . 390 3. Methods of Financing an Enterprise. Francis Cooper . 392 4. Working Capital and Fixed Capital. W. H. Walker . 396 B. The Manager's Relationship to the Financial Organization of Society Introduction and Problems 398 5. A General View of the Manager's Use of Our Financial Organization. H. G. Moulton 400 6. Investment Credit Institutions Used Directly by the Manager A. The Underwriters. W. H. Lough 404 B. Investment Banking and Bond Houses I. Lawrence Chamberlain 407 II. W. H. Lyon 409 7. Commercial Credit Institutions Used Directly by the Manager A. The Commercial Bank. H. G. Moulton 410 B. Note Brokers, Commercial Paper, Coromercial Credit and Discount Companies I. R. P. Ettinger and D. E. Golieb 413 II. H. G. Moulton 414 8. Some Financial Information Gatherers A. The Mercantile Agency. R. G. Dun &" Co. . . 415 B. The National Association of Credit Men. Pamphlet 417 C. Forecasting Services. 5. P. Meech 420 TABLE OF CONTENTS XIX PAGE 9. An Omnibus Financial Institution, the Trust Company F. B. Kirkhride and J. E. Sterrett 423 10. Some Institutions Used Indirectly by the Manager A. Insurance Companies. A. S. Johnson .... 425 B. The Savings Bank. W. H. Kniffin 426 C. Stock Exchanges. F. M. Taylor 427 D. Wall Street. S. S. Pratt 428 C. Financial Policies and Occasionally Used Devices Introduction and Problems 4 29 11. The Meaning of Capital and Capitalization .... 433 12. Corporate Securities Viewed as Instrumentalities A 434 B. W. H. Lyon 438 13. A Classification of Stocks. /. Adams, Jr 440 14. A Sample Stock Certificate 446 15. A Classification of Bonds. F.A.Cleveland .... 448 16. Recitals in Bonds. Andrew Squire 450 17. A Sample Bond . . .... 454 18. Policies concerning the Kind and Amount of Securities. W. H. Lough . . 456 19. Some Policies with Respect to Preferred Stock. W. H. Lough 458 20. Policies with Respect to Open and Closed Mortgages. W. H. Walker .460 21. Amortization Policies and Practices. W. H. Walker . 462 22. Corporate Reorganization Policies. Stuart Daggett 465 D. Financial Policies and Frequently Used Devices Introduction and Problems 469 23. What the Balance Sheet Shows about Financial Matters. Paid Havener .... 475 24. What the Profit and Loss Statement Shows A. Pawl Havener . 482 B. Scovell, Wellington 6" Company ... . 485 25. Financial Policies Reflected in Accounting Records. E. A. Sailers . . 486 26. T}fpes of Commercial Credit Instruments. H. G. Moulton 488 27. Short-Term Loans and Trade Credit. W. H. Lough . 492 28. What a Bank Wishes to Know before Making a Loan 495 29. Borrowing by Assignment of Accounts Receivable. C. W. Gerstenberg. 499 30. The Meaning of Depreciation. F. A. Delano . . . 501 31. The Sources of the Surplus. W. H. Lough . . . 505 XX TABLE OF CONTENTS PAGE 32. Reserves and Other Uses of the Surplus. F. A. Cleve- land and F. W. Powell S°6 33. How ) One Firm Pulled through a Depression. Wall Street Journal Si° E. Organization for Financial Administration Introduction and Problems 512 34. An Order Defining the Jurisdiction of a Treasiirer. Walworth Manufacturing Company 515 35. Two Organization Charts on Financial Administration A. New England Telephone and Telegraph Company . 518 B. General Accounting Department of Western Electric Company 519 36. Financial Standards 520 37. Budgeting for Cash Receipts and Cash Disbursements. Boston Chamber of Commerce 520 Chapter VI. The Administration or Production A. The Background of Modem Production Introduction and Problems 523 1. A Brief Outline of the History of Science. E. S. Dana . 525 2. What Can Science Contribute in the Future ? A. A Hint of the Contribution of Physics. R. A. Mill'.kan S30 B. A Hint of the Contribution of Botany. /. M. Coulter S33 3. Technical Education. Thomas Nelson &* Sons . . . 536 4. The Engineering Profession. F. R. Button .... 539 5. Some Consequences of Technological Industry A. The Transfer of Thought, Skill, and Intelligence I. D. S. Kimball 543 II. American Society of Mechanical Engineers . . 544 B. The Intellectual Effects of Machinery. J.A.Hobson 547 C. Technological Industry Is Complex Industry . 550 D. Technological Industry Is Frequently Large-Scale Industiy. L. C. Marshall and L. S. Lyon . . 55s E. Standardization in Manufacturing. R. F. Hoxie 555 B. Manufactming Functions with Particular Reference to Control Introduction and Problems 556 6. An Illustration of What Is Involved in Modem Manu- facturing. /. V. Woodworth 560 7. The Control Problem Illustrated by Layout and Routing. D. S. Kimball S63 TABLE OF CONTENTS XXI PAGE 8. The Control Problem Varies with Different Types of Industry A. S. E. Thompson 565 B. G. D. Babcock 567 g. Five Organic Functions in Manufacturing Industry. A. H. Church 570 10. A Sample of Problems Arising in Manufacturing' Func- tions. Library of Factory Management 578 11. Measuring and Communicating Aids: Inspection. A.D.WiU,Jr 581 12. Measuring and Communicating Aids: Graphic Produc- tion Control. C. E. Knoeppel 584 13. Measuring and Commmiicating Aids: A Progress Chart. H. L. Gantt .' 586 14. Measuring and Commimicating Aids: Time Study. F. W. Taylor 588 15. Measuring and Communicating Aids: Motion Study. F. W. Taylor 589 16. Measuring and Communicating Aids: Classification and Symbols. H. H. Farquhar 591 17. Measuring and Communicating Aids: Cost- Accounting A. The Distribution of Expense. C. B. Going . . 595 B. The Services of Cost- Accounting. J.R.Wildman . 597 C. The Basis of Maniifacturing Costs. H. L. Gantt. 600 18. The Control of Large- vs. Small-Scale Industries A. A Protest against Too Great Centralization. R. B. Wolf 602 B. The Small-Shop Basis of Production. G.H.Haynes 604 19. Some Organization Charts. S. H. BuUard, L. V. Estes, and Norman Howard 605 C. Scientific Shop Management Introduction and Problems 608 20. The Begimiings of Scientific Management. C. B. Going 610 21. Scientific Management in Production A. H. S. Person 615 B. F. W. Taylor 618 22. Stages in Management. H. P. Kendall 621 23. Control of Manufacture under the Taylor System. H. K. Hathaway 624 24. Steps in Installing the Taylor System. H. K. Hathaway 633 25. Scientific Management and Labor. R. F. Hoxie . . . 637 xni TABLE OF CONTENTS PAGE Chapter VII. The Administration of Risk-Bearing A. The Character of Business Problems and Business Judgments Introduction and Problems 644 1. A Comparison of Problems in Production and Marketing. 5. 0. Martin . . .647 2. The Significance of the Human Equation in Business Problems . . 649 3. The Formation of "Judgments." F. H. Knight ... 651 B. Some of the Leading Forms of Business Risk Introduction and Problems ... 654 4. Some Leading Forms of Risk. John Haynes. . . . 655 5. The Separation of Producer and Consimier Means Risk. A. T. Eadley 657 6. Chance Means Uncertainty and Therefore Risk. G. H. Palmer 659 7. The Interdependence of a SpeciaUzed Society Increases Risk. L. C. Marshall and L. S-. Lyon 661 8. Antagonism of Specialists Increases Risk. A. W. Small 663 C. Ways of Dealing with Risk Introduction and Problems 664 9. Entrepreneurship and Administrative Qualities . . . 667 10. The Prevention of Harmful Events and the Use of Research 669 11. Elimination by Combination of Risks A 671 B. E. A. Ross 672 C. A. C. Pigou 676 12. Some Risks of Investors and How They Are Met . . 678 13. Insurance and Risk-Bearing . 683 14. Risk-Bearing through Speculative Contracts A. The Typical Speculative Contract of Ordinary Business 687 B. The Hedging Operations of an Organized Ex- change. 5. 5. Huebner 688 C. Some Dangers of the Speculative Contract . . 690 15. Guaranty, Suretyship, and Underwriting 692 16. Organized Smretyship. American Surety Company . . 693 17. The Place of Risk-Bearing in a Business Organization. 694 Chapter VIII. The Form of the Business Unit Introduction and Problems 696 I. The Tests of Efficiency of Forms of the Business Unit. L. H. Haney 703 TABLE OF CONTENTS xxiil PAGE 2. Relative Importance of the Main Forms of the Business Unit A. The Position of the Corporation. W. I. King . 705 B. Relative Importance in Manirfacturing Industry. Bureau of the Census 706 3. The Individual Proprietorship. M. H. Robinson . . 708 4. Agency as an Organization Device. W.H.Spencer. . 710 5. Ordinary Partnerships, Special Partnerships, and Mining Partnerships A. Thomas Conyngton 714 B. W. H. Spencer 717 6. An Example of Ordinary Partnership Articles . . . 718 7. Limited Partnerships and Partnership Associations. Scott Rowley 7r8 8. An English View of Their Limited Partnership Act. Solicitor's Journal and Weekly Reporter 720 9. Definition and General Nature of Joint Stock Companies. Scott Rowley 722 10. Some Results of Incorporation. Thomas Thacher . 724 11. Historical Stages in the Corporation. W. F. McCook . 727 12. Forms of Corporation Charter 730 13. A Charter Object Clause. Uniied States Steel Corporation 732 14. The Powers of Stockholders. W. L. Kitchel .... 734 15. Liability of Corporate Directors A. W. P. Rogers 739 B. Frederick Dwight 742 16. The Dissolution of a Corporation. W. L. Clark, Jr. . . 744 17. Some Methods of Concentration of Control. L. H. Haney 745 18. Simple Business Trusts. L. H. Haney 748 19. Co-operative Industry. G. H. Powell 751 Chapter IX. Basic Feattires of Administration Introduction and Problems 756 1. The Mental Aspects of Administration A. Management and Its Two Great Instruments. A. H. Church 764 B. An Analysis of "Business Judgment." F. A. Kingsbury 768 2. There Is No Single Correct Form of Organization A. Russell Robb 778 B. D. S. Kimball 783 C. C. D. Murphy 785 XXIV TABLE OF CONTENTS PAGE 3. Some Statements on the Essentials of Organization A. "Dimensions" of Organization. Russell Robb. . 788 B. "Laws" of Organization. C. E. Knoeppel and Company 791 C. Management "Laws." L. V. Estes .... 792 D. Administration as Leadership. E. D. Jones . . 794 4. Some Types of Organization A. Line and' Staff Organization. C. B. Going . . 8cx) B. The Unit System. C. D. Hine 801 C. The Committee System. D. S. Kimball . . . 806 D. The Human Analogy. C.E. Knoeppel and Company 808 E. The "Two-Plane" Plan of Organization. /. H. Van Deventer 810 5. "Regulative Principles" of the Art of Management. A. H. Churchand L. P. Alford 813 6. Measuring and Communicating Aids of Control A. Statistical Reports for the Chief Executive I. H. S. Person 823 n. M. T. Copeland 826 B. Accounting as an Administrative Aid. A.C.Hodge and J. 0. McKinsey 828 C. Budgetary Control. Boston Chamber of Commerce 831 D. Standardization I. G. C. Harrison 838 II. H. K. Hathaway 840 III. W. D. Fuller 841 E. Economic Selection. /. C. L. Fish 842 F. The Range of Time and Motion Study. R.F.Hoxie 844 7. The New Industrial Leadership. E. D. Jones . . . 850 Chapter X. Analysis of a Business Case Introduction and Problems 854 A. The Engineer's Report 855 B. The Accountant's Report 887 C. The Prospectus 898 D. Stock Subscription Form 903 Index 907 CHAPTER I THE FIELD OF BUSINESS ADMINISTRATION Purposes of this chapter: r. To recall to our minds the main forms of modern economic activity. 2. To secure a bird's-eye view of the tasks of the business administrator. A study of the business executive is a study of a very important agent in the guidance of our economic activity. For better or for worse, this specialist has come to have a leading part in our modern " co-operation of specialists." It is the purpose of this book to give an introductory view of the tasks falling to his lot and of the methods he uses in accomplishing these tasks. Beyond question, these tasks and these methods vary from case to case. Modern industry has many forms and the problems of adminis- tration certainly are present in very diSerent proportions in our diEEer- ent types of industry. In an introductory survey, however, the similarities rather than the differences ma^ well be emphasized. Therefore, beyond presenting below a diagram designed to recall to our minds the many forms of modern economic activity, the material of this book will be presented on the hypothesis that, for educational purposes, the functions of administration are fundamentally the same in all businesses, however greatly the technique may vary. For the sake of having an illustrative case which may be carried through- out the whole discussion, these functions will be considered with particular reference to the work of a manufacturing and selling business. It is a pity to introduce a discussion of terminology into our work, but the terminology used in this field is by no means standard- ized. You will frequently find in your readings that a given word is used, even by the same author, in different senses. This may even occur within the limits of a single sentence. It follows that the context must be watched if one is to be clear how certain terms are used. Since the center of our problem is " control of business activi- ties," such terms as "organization" and "administration" come up 2 BUSINESS ADMINISTRATION very frequently in our discussion. Probably little would be gained by an arbitrary standardization of these terms at this stage of our study. It will suffice for us to bear in mind that "control of business activities" includes three things: (i) the establishment of policies, ,(2) the planning and setting up of the organization which is to be used in carrying out those policies, and (3) the operating or running of the organization. Organization implies a fairly high order of creative work; that of planning mechanisms, means, and devices to accompUsh ends. Operation involves running the mechanisms set up by organization. Administration^ if broadly conceived, would include both of these as well as policy formation. So conceived it might be used as synonymous with " control. " Modem Economic ' Activities THE MANY FORMS OF ECONOMIC ACTIVITY- Hunting Fishing Extractive { Grazing Lumbering [ Mining f Tillage (Agriculture < Plant Breeding Forestry [ Animal Breeding Fish Culture Primary Industries I Manufacturing Transporting Merchandising Personal and Profes- sional Services Healing Teaching Inspiring Governing Amusing, etc. An illustration^ will perhaps serve to make clear this use of terms. The following skeleton organization chart of a manufacturing business (any other business would have served as well for our purposes) is divided into three broad zones according to the character of the administration which obtains in those levels. Zone I is concerned with pohcy formation — with the setting of goals in a large way and in general terms. Zone II is concerned with planning and setting up 'Taken by permission from T. N. Carver, Principles of Political Economy, p. 192. (Ginn and Company, 1919.) 'This illustration is taken, with changes in terminology, from a note by H. S. Person in the Journal of PoUlical Economy, XXVIII (1920), no. THE FIELD OF BUSINESS ADMINISTRATION an organization to carry out these policies — to arrive at the goals. In this zone minor policies or sub-policies for the various departments are worked out by their chiefs in terms of the major policies of the business. It will be noticed that the general manager occupies a border-line position. He operates in both zones. Zone III is con- cerned with routine operations containing the veriest modicum of policy formation and very little work that can be called organizing work. From the point of view of control this zone requires only routine management. The planning room occupies the border-line position between this zone and the one above it. THE ZONES OF BUSINESS CONTROL Control Zone I Concerned with the de- termination of large policies Zone II Concerned with organi- zation, formation of minor policies, and " responsible" man- agement Zone HI Concerned with " rou- tine" management Stockholders Directors Pres dent -Generax Manager - Executive Staff Requirements Control Progress Accounts °^'«° Works Management Personnel Sales —Planning Room Foremen Clerks Workers Clerks Administration, as we are using the term, is concerned with all of these. They are phases of administration. The diagram should not leave, however, an impression that it is possible to draw sharp dividing lines between the various terms we are using. Routine man- agement shades off into responsible management and organization; organization shades off into policy formation; administration includes all of them, its creative work being done in Zones I and II. It was said above that our problem is that of understanding the controlling of modern business activities. This certainly involves studying two sets of issues: (a) what things are to be controlled, and (b) how the control is carried out. In this chapter, we are primarily concerned with getting a bird's-eye view of what matters are to be controlled, and one way of doing this is to formulate a generalized statement of the task of the modern administrator. 4 BUSINESS ADMINISTRATION I. Descriptively speaking, the task of the business executive ex- tends in two directions. Looking in one direction, he must organize, correlate, apportion, proportion, various elements entering into the internal operations of his business. The business world has generalized these operations under such headings as production, distribution, and A CLASSIFICATION OF BUSINESS ACTIVITIES (An Abbreviation of a Chart Issued by thb A. W. Shaw Company) Location A. Administration Plant . Operation B. Production. . Plant. Construction Equipment Material (Paper repre- sentations of activities facilitated) Causal Purchase Requisitions Purchasing Plant and Equipment Materials and Supplies Employment Requisitions. .Employment Labor Shipping Requisitions Credits Finished Stock Resultant Outgoing Invoices Collections Vouchers Finance Records Recording Division Plant and Equipment Accounting Material and Supplies Auditing Labor Costs Department Statistics Department Agencies Office Executives and Employees Organization Office Management Labor Supply . Raw Materials Nearness to Market Transportation Location Power Financial Considerations Legal Limitations Advertising Value Physical Site Environment Construction.... Equipment . OperatioD Material . Labor . Organization . Type of Building Character of Buildinp Financial Considerations Product to Be Manufactured Labor Available Design of Machinery Financial Considerations Kind Quality Control Utilization {Hiring Paying Training Handling (Types in Use Lme or Military Line and Staff Functional THE FIELD OF BUSINESS ADMINISTRATION C. Distribution. .. Demand Creation Plant. Location . Construction. Closeness to Market Contact with Factory Force Supply of Salesmen Supply of Office Men Administrative Expense Superior Service Facilities for Adver- tising Currency of Sales Ideas (Type of Building Character of Building Financial Factors Operation (Operations to Be Performed Labor Machinery Quantity Control (Ideas about j the goods) Middlemen Direct Sales Force Agencies \ Advertising General Direct Organization.. Plant. Physical Supply. Location . Analysis of Market by Physical Areas Social Strata Trades or Industries Local or National Present and Future Demand Selection or Combination of Agencies Price Policies Central Warehouse At Factory At Center of Transportation Railroads Steamship Lines Parcel Post Express Branch Houses At District Markets (Character of Product Facilitation of Packing and Shipping Fireproof Fire Resisting Inside Conveyers Elevators ^Equipment, . . ■ Assorting Tables Outside Switch Tracks Trucks Operation Material Finished Product Agencira. Organization.. Labor Transportation In Warehouses Public Carriers Parcel Post Public Warehousemen Selection or Combination of Agencies Middlemen Wholesalers Retailers Warehousemen Direct Means of Supply Branch Houses Retail Stores Local Agencies 6 BUSINESS ADMINISTRATION administration. Some think of these terms as ahnost mutually exclusive. Others prefer to say that there are two main subdivisions of the internal problems of control, production and distribution, and that administration is a sort of plastic matrix enveloping and determining them both. The relative merits of these two methods of presenting the internal problems of business control are not here under consideration. It is evident that there are such problems. They are so clearly recognized that various schemes of classification can be presented. But this is not the whole story, perhaps not even half of it. Our business executive must, looking in another direction, organize, correlate, apportion, proportion, various elements entering into the external operations of his business. Our individualistic age may not have ready any such comprehensive diagram of these external opera- tions as the business world has drawn of the internal operations, but there can be no question that they exist, and that they are as signifi- cant, as pressing, as ramifying, as the internal problems. Courses training to meet them are as truly "business courses" as are those concerned with the internal problems. A few illustrations may give sharpness to this statement. Sup- pose that our busiaess executive, viewing the internal problems of control, concludes, and his conclusion is approved by his cost account- ant, that it would be profitable for him to use child labor in his factory, or that it would be profitable for him to work all his employees fourteen hours a day. WUl he accordingly order these procedures to be carried out? Not if the law of the state in which he operates forbids it and he has reason to think the law will be enforced. Or sup- pose that his cost accountant demonstrates that it would be profitable to omit certain safety devices. It is clear that the law of the state may be more persuasive than the findings of the cost accountant. Or suppose that his sales manager demonstrates that a certain form of advertising would be profitable. If this form of advertising happens to run counter to the code of ethics of the Associated Advertising Clubs of the World, our business manager may not think it wise to follow the gleam of profits. Examples without number might be cited. It is clear that social control, whether in the form of law, or of a code of ethics, or of public opinion, or of a group of men as repre- sented by an employers' association and perchance by a trade union, may and does largely condition the policies adopted with respect to "utemal problems of business control. tHE FIELD OF BUSINESS ADMINISTRATION ^ But these external problems are by no means exclusively prob- lems of social control in the usual sense of the term. The form and structure of the industrial society in which the business exists are matters of vital significance to the executive. The form, structure, and functions of that society's financial institutions will go far to determine policies with respect to financial measm^es. A relatively narrow range of choices will be vested in the executive. The form, structure, and functions of the commercial organization of that society will practically fix his purchases and sales policies. Tech- nology and the reactions of people under that device known as the wage system will play their part. Thus indefinitely. Over all and through all, environment (external relations), social and physical, will largely determine the range of the activities of the business executive. The scant attention given physical environment in this discussion is in no sense due to any belief that it is unimportant. On the contrary, its importance is so easily recognized that, in the interests of brevity, a more complete treatment of this factor was purposely omitted. I do not know any satisfactory way of reducing this statement to diagrammatic form. Indeed, it is apparent that the classification "external versus internal problems" is itself crude and even mis- leading. It is apparent that the figure of speech to the effect that the business executive must accomplish the impossible task of looking simultaneously in two directions breaks down logically quite as much as it does physically. It is seldom true that he can look at internal problems and at external problems as separable issues. These so-called external problems determine the so-called internal problems and, possibly to a smaller extent, the internal problems determine the external problems. It is probably near the truth to say that the business executive administers an interacting complex which may, for purposes of discussion, arbitrarily be said to be made up of external and internal problems. A very useful classification of business activities, drawn appar- ently primarily from the point of view of the internal problems of control, but with clear recognition of the importance of external problems, is shown on pages 4 and 5. n. The problem of the business executive may be stated somewhat more analytically. Taking for granted the physical environment, the task of the business executive may be said to be conditioned by four overlapping, interacting determinants (possibly they should be 8 BUSINESS ADMINISTRATION called variables): (i) technological matters, (2) value and price, (3) social environment, (4) continuous change. I. The modern business executive has much to do with techno- logical considerations. The development of such sciences as physics, chemistry, psychology, geology, has made available for practical application a great store of knowledge. The Industrial Revolution, the latest and the current chapter in the intervention of capitalism, has placed upon management the responsibility for the 'conduct of the processes of production in large-scale, group-labor, machine industry. It is no longer humanly possible for the manager to know all the technique of all the processes of production under his super- vision. In some cases the doctorate in our modern universities does not give suflScient training to cope with the technological problems even in a small subdivision of a business. But if the manager may not master all the technology involved, he should be intelligent with respect to it, and particularly he must be intelligent with respect to the relationships between processes. We are accordingly justified in regarding technological considerations as one of the main subdivisions of the business manager's problem. The precise form of the tech- nology wiU vary from business to business, and from one aspect to another of a given business. The general statement may be made, however, that the manager of a "manufacturing and selling" business will continually come into contact with technological problems, the proper administration of which will require training in such fields as physics, chemistry, geology, psychology, and the biological sciences, the field varjdng with varying circumstances. As one illustration of the presence of technological considerations, observe the mechanical problem in the producing end of a machine- shop. Let the trustees of some great endowment go to the production manager with this proposal: "We intend to free you from everything except technical problems. Disregard price and financial policy entirely. Take any grade or grades of land, take any grade or grades of labor, take any of the present forms of capital goods, and take any or all of these in any quantity you choose. Work out for us the best technical combinations." The problem would be a formidable, even a staggering, one, able as the production manager would be to sum- mon to his aid the fruits of generations of development in mechani- cal engineering. Years of patient research would be required Similar problems having their bases in technological considerations other than those of mechanics will occur to everyone. Every manu- THE FIELD OF BUSINESS ADMINISTRATION 9 factviring business finds them looming large, and probably no business is free from them. 2. Baffing as are the technological aspects of the business man's problem, they are after all but the beginning of his difficulties. These technological difficulties are all shot through and through with vari- ables of value and price. Our business manager may not take any grade of land in any quantity he chooses; he may not select any grade of labor in any quantity he chooses; he may not utilize any existing form of capital goods in any quantity he chooses. In every case price enters, and he must ask himself such questions as these: Will this grade of land for which I must pay x dollars be better for me than that grade of land for which I must pay y dollars ? Shall I use this grade of labor at this given price, or would it be better for me to use another grade of labor at a different price ? Shall I use this particular machine at this price, or shall I use one of the scores of other machines which will be furnished me at different prices ? And granted he has reached some solution of these questions, he knows that price is again the significant consideration in the disposal of his product. In all of these price intricacies the business man is largely the victim of circumstances. Unless he has monopoly power, he has as an individual very little to say concerning the price at which he may secure any factor of production, and still less to say concerning the price at which he may dispose of his product. In the pecuniar}- aspects of his problem he is grappling with forces which he must understand if possible, but which he can do little to control. 3. Still further complicating the business manager's technological problems, shot through and through as they are with the variables of price, is the factor — ^variable — social environment. The modern business manager is not conducting his business up in thin air, nor is he located on a desert island. He is in the midst of organized society, and his operations are subject — more than he is likely to realize in our individualistic regime- — to what we have come to call social control, both formal and informal, both conscious and uncon- scious. Quite aside from social control in the ordinary sense, the organization of society, with its whole psychological and institutional background, lays down limits to his freedom of operation. But this has already been sufficiently discussed for our present purposes. 4. And there is a fourth factor, or variable or characteristic aspect, of all the foregoing factors^ — continuous change, the influence of progress — and this crisscrosses all the other factors. There are 10 BUSINESS ADMINISTRATION changes in technique, some of which may result from an intensive study of his own business and some of which may be forced upon him, in this pecuniary, gain-organized, competitive business world, by outside inventions. The methods of production or of marketing may be revolutionized within a few years. There are changes in the price factor, some brought about by his own action, some brought about by the action of competitors, some forced upon both him and his competitors by happenings that to the lay mind have no conceivable bearing upon the business concerned. There are changes in the social environment, and these are typically little under his control. Indeed, in general terms, the individual will have little influence in determin- ing any or all of these possible changes. None the less, the slightest misjudgment of the actual course of events often means for the busi- ness but one outcome, failiure. Woe to the business executive whose training gives him a static conception of business problems! One interested in training for business administration may well turn aside, at this point, to reflect that he has a key to the under- standing of much current gossip concerning such training. Some gossips urge as the best business training a good engineering course. It is clear that this is a helpful suggestion, for such a course would assist greatly in solving technological problems. Others urge work in economics, law, and the other social sciences. This suggestion certainly has merit. Following it would result in a knowledge of social control, social environment, and the laws of price. The study of history, presumably, or of some evolutionary science, would aid in preparing the future manager to meet the problems resulting from progress. These suggestions are all valuable, no doubt, but they are piecemeal suggestions. Training for business administration demands more than any (or all) of them provides. III. Perhaps what is involved in training for business adminis- tration may be seen with some sense of proportion if one states the tasks of the business executive in terms of the functions he performs. Summarily stated, the outstanding tasks of the executive are con- cerned with the following: 1. His relationship to the physical enviroimient 2. His relationship to technology 3. His relationship to the market 4. His relationship to personnel 5. His relationship to finance THE FIELD OF BUSINESS ADMINISTRATION 1 1 6. His relationship to risk and risk-bearing 7. His relationship to the social environment 8. His relationship to the coherent control of activities arising from the foregoing relationships. 1. With respect to his relationship to his physical environment little need be said. This relationship is always present but it is of course more obvious in the primary industries (see p. 2) than in the secondary industries or in professional and personal services. In this relationship the manager comes into touch primarily with the problems of the earth sciences. He may or may not be an expert in these fields; the typical manager has only a general acquaintance with them. He relies upon the expert opinion of the geologist and the geographer. These experts are in some cases permanently attached to the business; in other cases they are merely called upon in connection with some specific task. 2. Quite commonly we hear modem industry called "techno- logical" industry. One writer' states it a bit differently by remind- ing us that the economic activity of man has passed through three stages. There was first the appropriative period in which man "appropriated" commodities in their natural state. For example, he picked and ate berries or nuts. Later came the adaptive period which may be illustrated by the assembling of branches or stones to bmld a hut. He is today in the creative period in which science is the handmaiden of industry, and in which startling analyses and metamorphoses of commodities take place. With the development of our society a rich institutional life has sprung up in connection with the technological aspects of industry. The clearest illustration of this may be seen in the development of our schools of technology. The Industrial Revolution, notwithstanding the great increase of productive power which it gave us, ushered in an era during which the expansion of the market occurred even more rapidly. The need of the times was a steadily increasing productive capacity and the response was, in part, our schools of technology which applied the findings of science to agriculture, mechanics, mining, and other fields. The modern executive must operate in terms of this situation. As has been indicated above, he must, at the very least, be intelligent with respect to the technological aspects and implications of his task. ' Cf . Slosson, Creative Chemistry. 12 BUSINESS ADMINISTRATION 3. Ovir whole industrial society is in a sense a market society. A loan at a bank, the hiring of a worker at a factory, the ordering of a meal at a restaurant, the issuance of stocks and bonds of a corporation, the lease or purchase of a piece of land, the payment of tuition at a university- — indeed, the major part of the business happenings of our daily life — are either market transactions or closely allied thereto. In making this statement, however, the term "mark-et" is used in its broadest inclusive sense. The executive thinks of it in a narrower sense. To him it is the institution and procedure through which he secures his equipment and raw materials and through which he dis- poses of his finished product. Here, too, an interesting range of institutional life has developed — again partly in response to the needs of the executive. The whole- saler, the retailer, the jobber, the advertising agency, the mail-order house, the transportation systems, are some of the more common forms. The modern business executive deals with his market problems in terms of this institutional life round about him. If he has sufficient daring, initiative, and power, he will modify it to some extent. He may even start some new form of it. The tj^ical executive, however, operates in terms of the institutional environment as it is. His purchasing agent and his sales agent utilize rather than modify the tools they find ready to use. 4. The influence of social organization is quite as strikingly seen in the case of the executive's relation to the problems of personnel. Indeed, it is not too much to say that his personnel manager, or industrial-relations manager, or employment manager, or whatever he may be called, must operate not only in terms of the existing social organization but in terms of the historical development of that organi- zation. Only as a result of an awareness of the development of industrial relationships — at least during the last two hundred years — can the personnel manager cope satisfactorily with the modern problems connected with incentive and output. His administration of hiring, discharge, promotion, discipline, safety, health, sanitation, welfare, collective bargaining, wage rates, and all the other difficult tasks in personnel administration must be in terms of the laws, habits, social attitudes, and institutional life governing this field. Here also opportunity exists for initiative, exploration, and discovery. But the typical manager is likely to use rather than modify in any significant way the instrmnents already in existence. 5. The case is not difierent with respect to the financial function and the administration of finance. Through several centuries devices THE FIELD OF BUSINESS ADMINISTRATION 13 and institutions have been developing in this field. Stocks, bonds, promissory notes, investment banks, commercial banks, savings banks, insurance companies, the Federal Reserve System, Dun's, Bradstreet's, collection agencies, credit men's associations, the cor- poration itself, form the merest beginning of the list of such devices and institutions. The financial affairs of any business, manufacturing or commercial, large scale or small scale, are administered in terms of the financial orgaiuzation of society. The range of choices open to the manager is relatively limited. 6. Similarly also in the case of risk and risk-bearing. Modern industrial society is in its very nature a speculative society, the term being used with no opprobrium. The modern manager incurs risk in various forms resulting from almost innumerable causes. He meets these risks by means of institutions and devices. Of these the insurance company, of which there are dozens of forms, is the one more generally known. It is not, however, as important as is the speculative contract in its multitudinous forms. Any contractor who lets out, at fixed prices, sub-contracts in subordinate operations is relieving himself from the risk of price changes in these fields and such actions are multitudinous. Then, too, one must not overlook inquiry, research, and the growth of knowledge as factors in risk re- duction. An outstanding fact with respect to the development of knowledge is the removal of business happenings from the realm of the unknown to the realm of the non-speculatively known. Herein, in part, lies the explanation of the recent movement for the estab- lishment of bureaus of research in business houses. Herein, in part, lies the significance of knowledge as an economic function. 7. The manager's relation to social control has already been dis- cussed in part. The institutional life connected with the functions enumerated above are forms or agencies of social control. The very fact that the manager operates in terms of this institutional life shows the extent to which he is subject to social control. If to this institu- tional life we add the forces of competition, private property, habit, custom, group psychology, public opinion, and finally of organized law, both written and unwritten, we have a social environment which envelops the manager's operations in as definite and influential a way as does his physical environment. 8. We come, finally, to his relation to the coherent, balanced, control of the various activities of his business. Here several out- standing matters strike one's attention. In the first place, he will administer the various problems of his business in terms of some 14 BUSINESS ADMINISTRATION established policy. This policy, the manager, influenced by his social surroundings and by his own individual attitudes and experi- ences, and by the owners if he is not himself the owner, must work out. In the second place, even a small business can be well con- ducted only in terms of a well-formulated organization. Various schemes of organization have been developed to meet varying needs in this respect. In the third place, modern business has become so large and so complex that measuring aids have been developed to give the manager more complete grasp of the control of his problems. Some of the best known of these are financial accounting, cost ac- counting, time study, mental testing, material testing, and specifica- tions. Let us return to our discussion of curricula designed to train for business administration. If the foregoing analysis of the tasks of the executive is accepted, the planning of the curriculum would presum- ably proceed along the following lines. The business executive admin- isters his business under conditions imposed by his environment, both physical and social. The student should accordingly have an under- standing of the physical environment. This justifies attention to the earth sciences. He should also have an understanding of the social environment and must accordingly give attention to civics, law, economics, social psychology, and other branches of the social sciences. A knowledge of environment is not sufficient, however. It must be supplemented with a range of courses dealing with business manage- ment wherein the student may become acquainted with such matters as the measuring aids of control; the communicating aids of control; organization policies and methods; the manager's relation to pro- duction, to labor, to finance, to technology, to risk-bearing, to the market, to social control, etc. Business is, after aU, merely an organized scheme of gratifying human wants, and, properly under- stood, falls little short of being as broad, as inclusive, as life itself in its motives, aspirations, and social obligations. It falls little short of being as broad as all science in its technique. Training for the task of the business manager must have breadth and depth com- parable with those of the task. Stating the matter in another way, the modern business adminis- trator is essentially a solver of business problems — ^problems of busi- ness policy, of organization, and of operation. These problems, great in number and broad in scope, divide themselves into certain type groups, and in each type group there are certain classes of obstacles to be overcome, as well as certdn aids, or materials of solution. THE FIELD OF BUSINESS ADMINISTRATION IS If these problems are grouped (i) to show the significance of the organizing and administrative activities of the modern responsible manager, and (2) to indicate appropriate fields of training, the follow- ing diagram results: DIAGRAM OF OUTSTANDING RELATIONSHIPS AND FIELDS OF TRAINING Of Problems of Adjustment to Physical Environment Appropriate Fields of Training a) The Earth Sciences b) The Manager's Relationship to These Of Problems of Technology Appropriate Fields of Training a) Physics through Mechanics, Basic, Other Sciences as Ap- propriate b) The Manager's Administration of Production Of Problems of Finance Appropriate Fields of Training a) The Financial Organization of Society b) The Manager's Administration of Finance Of Problems Connected with the Market Appropriate Fields of Training a) Market Functions and Market Structures b) The Manager's Administration of Marketing (Including Pur- chasing and Traffic) Of Problems of Risk and Risk-Bearing Appropriate Fields of Training a) The Risk Aspects of Modern Industrial Society b) The Manager's Adininistration of Risk-Bearing Of Problems of Personnel Appropriate Fields of Training a) The Position of the Worker in Modern Industrial Society b) The Manager's Administration of Personnel Of Problems of Adjustment to Social Environment Appropriate Fields of Training a) Historical Background b) Socio-economic Institutional Life c) Business Law and Government Control 1. Communicating Aids of Con- trol, for example a) English 6) Foreign Language 2. Measuring Aids of Control, for example o) Mathematics b) Statistics and Accounting c) Psychology 3. Standards and Practices of Control l6 BUSINESS ADMINISTRATION It will help us to understand modern business administration if we think of it as one means or method of co-ordinating modem spe- cialists. That it is such a means may be seen more clearly if we use historical perspective. The manager of the medieval shop may be called the undiffer- entiated or unspecialized manager. In one person, the master craftsman, was vested control of all the relationships of the business. He, practically unaided, not merely supervised but actually con- ducted production, purchasing, selling, risk-taking, and all other managerial functions. Nor was this a diflScult task. Men worked together quite simply in the shop of the medieval craftsman. To begin with, it was tool industry, and the simple technological processes involved were readily mastered. Anyone of average intelligence could, so far as the technology was concerned, become a competent workman and later rise to the direction of industry. Then, too, production was on a very small scale, being conducted by the crafts- man in his own home with, perhaps, two or three helpers, who might well live in the home of the master. The relationships between the craftsman and his helpers were frequently almost as personal as modern relationships between father and son. Thus, both the character of the processes, the scale of operations, and the human relationships made it a simple matter to control production in the medieval shop. If the organization within the shop was simple, so also was the co-ordination of the shop with the rest of society. The market for which the shop produced was typically local and personal. Some- times the customer came to the shop and goods were made according to personal desires; sometimes the craftsman carried his goods to the little town market and sold them to his neighbors; seldom was the relationship between producer and consumer an impersonal one; seldom were there intermediaries who had to be knitted into an economic organization. Simple also was the social supervision of industrial activity. Social attitudes, church requirements, and gov- ernmental regulations were fixed largely by custom. Men absorbed this customary control in the very air they breathed. They did not have to study it. It became a part of them without their being conscious of it. We must not deceive ourselves concerning the implications of this simplicity. Life was meager, narrow, and mean. None of us would wish to return to such a life. We have examined it merely to see how simply and in what a personal way men worked together. Undifferentiated management sufficed in such a situation. THE FIELD OF BUSINESS ADMINISTRATION 17 Into this simple industrial society there gradually crept forces making quietly but radically for change. The compass, gunpowder, the printing-press, explorations and discoveries, colonization, the religious reformation, the new birth of art, literature, and science, the growth of individualism, the rise of strong central governments — these are some of the outstanding forces which freed men's minds from customary control, developed the gain spirit, widened the market, increased specialization, and paved the way for more complex forms of working together. Generation after generation the change con- tinued, and finally there came in the eighteenth century that great explosion which we now call the Industrial Revolution. It blew to fragments the simple, personal co-operation of the past. This state- ment of fact is also one statement of the problem confronting modern management. The simple, direct ways of working together have been blown to fragments. Can any of the fragments be restored? What new ways of getting then to work together can be found which will be more in keeping with our modern complex, specialized, impersonal, interdependent, gain-organized society ? Fimdamentally, the problem of working together today is one of knitting together the speciaUsts and specialized institutions of modern society. In the interests of increased productive capacity, we have specialized our capital, our technological processes, our workers, our knowledge, our management, our producing territories — everything. In the case of the workers, this has meant that the non-specialized worker of earher ages has become the worker in a single trade or occupation, as, for example, the lawyer, the physician, or the all-round mechanic; and these, in their turn, have been spUt up into workers who concern themselves with only one process of a trade or occupation, as, for example, the diagnostician, or the ordinary machinist; and these process speciaUsts have, in their turn (provided the market has been wide enough to make it profitable), been spht up into workers m detailed operations, such as the modern narrow machine specialist. Now, these thousands upon thousands of speciaUsts must be knitted together into a great producing mechanism, if society is to gratify its wants and secure aU those intangibles making for human progress. So also must the specialized capital, knowledge, and management be knitted together. AU this is easily seen in the case of the operations within a plant. A child can see that the specialized workers, capital, and processes within a shoe factory must be organized into a producing mechanism l8 BUSINESS ADMINISTRATION before shoes can be made. A child can visuahze some of the tasks of the manager and his lieutenants in this connection. It is not so easy, however, to visualize the knitting together of the thousands of specialized plants and institutions of our society into a great, pro- ducing machine which takes in all society. As one method of visual- izing this process, notice a few of the specialized plants which must be lined up to provide us with shoes. Beginning with the ranch (and not going back to the specialists who have provided the ranch with equipment), we can mention at once the packing house, the tannery, the leather merchants, the shoe factory, the wholesaler, and the retailer. Here is a range of specialized institutions hned up to accomplish one task. But some of the specialists in this range, for example the packing house and the tannery, are participating simul- taneously in dozens of other ranges designed to accomplish dozens of other tasks. Modern industrial society is therefore a bewildering complex, a hteral maze of crisscrossing, interacting ranges of special- ized plants, filled with specialized workers, machines, and processes, reaching out to accomphsh thousands of purposes. And this is but the beginning. AU these ranges are crisscrossed and served by stUl other ranges of specialized functional middlemen like carriers, bankers, insurance companies, or advertising agencies. AU must, through social control and through the market, be welded into a balanced, want-gratifying machine, and woe is all society if the welding is seriously defective! In this there is nothing new. It is set forth merely to recall to our minds the conditions under which the modern manager and such heutenants as the personnel manager, the sales manager, and the purchasing agent do their work. Whether wisely or unwisely it matters little for the present discussion, society in its desire for product has intrusted the task of organizing for production to the entrepreneur, who may or may not be his own general manager, and the work of any of his lieutenants can be seen in true perspective only when this fact has been realized. Crudely stated, it is as though society had said to modern management: "Modern specialists must be brought to work together. For part of this task, various groups, including that large group called the state, will be responsible. They will work through the agencies of social control and will powerfully affect apportionment of productive energy, controlling indeed your own operations in the tasks assigned to you. For part of the work you will be responsible and your agencies are mainly two, (i) authority and (2) the market. These are not separate and distinct. Your THE FIELD OF BUSINESS ADMINISTRATION ig authority will come to you mainly through the market. Through your control of property rights you may, by market operations, get command of land, labor, and capital, and these you may control hy authority within your business unit. The co-ordination of your unit with the rest of society will be worked out through the market. You will come into contact with the market through your sales and purchases." As time has gone on, it has become clear that management itself must specialize if such burdens are to be carried. An authentic history of the differentiation of management has never been written. We know, however, that as the market widened, there sprang up functional middlemen, such as carriers, insurance companies, and banks, who (for a price) relieved the manager of some of his operations in such fields. We know also that, within his own organization, he began to use deputies or agents, such as the supercargo, the branch house, or the agent proper, in various managerial operations. As time went on, there came about such an increase in size of the business unit that the volume of "control work" reached the stage where men specialized in certain aspects of controlling and, to come down sud- denly to recent times, we find in a modern manufacturing business such functionaries as the production manager, the purchasing agent, the sales manager, the treasurer, the advertising manager, the per- sonnel manager, and the auditor. These are, of course, subordinate to the general manager, who may or may not be the owner of the busi- ness. He, more than any other functionary, holds a position kindred to that of the medieval craftsman — kindred, but very different indeed. POSSIBLE ORGANIZATION CHART OF A MANUFACTURING AND SELLING BUSINESS Stockholders I Board of Directors Executive Committee I President and General Manager Vice-President Purchasing Production Sales Personnel Legal in Charge of Manager Manager Manager Manager Counsel Finance J i I Selling Advertising Treasurer Auditor Force Manager 20 BUSINESS ADMINISTRATION PROBLEMS 1. Notice again the classification of industries on page 2. Why not train for business management by studying the management policies and methods of several firms from each type of industry ? 2. State in a few words the "problem" of business administration. Is it different from the problem of school administration or governmental administration ? 3. Just what is Shaw's classification of business activities (pp. 4, s) designed to accomphsh ? Is it a diagram of the proper organization of a business ? Is it a diagram of the various operations of business ? Is it a diagram showing how to locate the incidence of a given business problem ? To what type of business does it refer ? 4. Are the "external problems" of the manager more difficult today than they were in 1300 ? Go into details in your answer. 5. What do you, as a manager, need to know about public opinion ? about government ? about developing codes of ethics ? 6. What does "business law" include? Show why (or why not) the manager needs to have a knowledge of it. 7. "No intra-organization pohcy can safely be determined without taking into account the attitude of society toward the activities involved." Explain. Cite instances or cases. 8. Show by specific, instances how the government controls the business man in his relations with (a) other organizations; b) his employees; (c) his customers. 9. "The problem of the business manager is to sense public opinion and take steps to foUow it before it is expressed in actual regulation." Is this true ? Should he always follow pubUc opinion ? May he aid in forming pubhc opinion ? 10. How would you convince a modern business man that public opinion affects him quite as much as governmental laws and regulations ? 11. What advantages do you see in classifying the problems of the manager into external and internal problems? What are the disadvantages of such a classification ? 12. "The function of the general manager is to co-ordinate and direct production, distribution, and facilitation." " His function is to organize and administer his business in terms of its relationships to finance, personnel, market, risk, social control, and technology." With which quotation do you agree ? 13. "The business manager's administration of his business is in terms of his physical and social environment and is conditioned by these environ- ments." Does this seem to you to be substantially true ? Give evidence. 14. How should you go about seciuring a knowledge of the manager's physical environment ? the social environment ? THE FIELD OF BUSINESS ADMINISTRATION 21 IS- It is said that one of tlie manager's functions is concerned with his relations to technology. Cite as many instances as you can of the manager's need of understanding technological considerations in a mail-order business; in a retail store; in a bond house; in a bank; in a tannery. 16. The manager of a very complex machine shop, himself a competent mechanical engineer, says that his technological abiUty represents not more than 15 per cent of his necessary eqmpment for management, [f so, how is the other 85 per cent made up ? 17. What is meant by saying that with respect to the price situation the business man is largely the victim of circumstances; that he is grappling with forces which he must understand if possible, but which he can do Uttle to control ? 18. "Woe to the business manager whose training gives him a static con- ception of business problems;" Why or why not ? 19. Why has accounting gained such an important position in the field of business ? Of what value is it to the business executive ? Of what value is economics ? psychology ? 20. "Civilization is passing out of a period of traditional knowledge into one of scientific knowledge." As a means of clarifying your mind on this issue, try to estimate what percentage of business activities of today are ruled by tradition and what percentage by science. Does the percentage vary from industry to industry, from plant to plant, from place to place ? 21. "Business has long been hampered by tradition." Can you cite instances? What advantages flow from the presence of tradition in business ? 22. It is often said that a man will be more successful if he starts working from the bottom of the business, and then gradually advances; in this way knowing every detail of the business he may come to manage. What are the arguments for and against such a method ? 23. "The manager should be able to inform his staff on any problems with which they have to deal." Is this true ? Should a manager know as much of accounting as his accountant and as much of packing methods as his shipping clerks ? Can a manager of a manufacturing department run his department successfully if he is not famiL'ar with the processes or operations that go into his product? If he has to depend on his subordinates for information will he succeed ? What is your tentative conclusion concerning the qualities, training, and experience essential to successftd management ? 24. "An idea which is a great stumbhng-block is the one that one of the fundamental divisions of a business is superior or inferior to another. Unless a logical and true balance is preserved, the development of the business will be one-sided, resulting in a mal-administration. Many 22 BUSINESS ADMINISTRATION businesses are less successful than they might have been because the manager has gained his experience largely in one or two divisions." Can a man get experience in all divisions ? If not, is there any hope ? 25. The earlier "captains of industry" and even many of those of today are certainly not conscious of any such analysis of their problem as is sketched in this chapter. Does this mean that the analysis is useless ? 26. Assume some (different) problem in each of these fields: (i) tech- nology, (2) finance, (3) personnel, (4) marketing. Now show the interdependence of business problems by tracing the consequences of each of these problems in each of the other fields. 27. "The talk of scientific management makes me weary. I have never read any of the stuff and yet my business is managed in scientific way. It is the result of years of study in which careful attention has been given to the best traditions in business. After all, the best proof that it is a scientifically managed business is to be found in the facts that it has grown from small beginnings to its present size; it has consistently paid dividends; it has accumulated a surplus; it has its stock regarded as one of the safest of investments." Reason with the writer. 28. Why should social reformers and persons interested in establishing a new order of industrial society understand the problems of the business manager ? 29. Consider the following facts: a) It is exceptional for a student to know before graduation what line of work or vocation he will enter. b) Most students go into the line of work which seems to present the best opportunities. c) Five years after graduation the student is usually not in the line of work in which he started. On the basis of these facts, tell what you think should be the outstand- ing features of a college course designed to train for business administration. 30. Draw up an outline of the main points in this chapter. REFERENCES FOR FURTHER STUDY Jones, The Administration of Industrial Enterprises, chaps, i, 7. Shaw, An Approach to Business Problems, chaps, i. 2, 19. CHAPTER II A SAMPLE BUSINESS PROBLEM- PLANT LOCATION Purposes of this chapter: 1. To prepare for the later discussion of the tasks of the manager (a) by convincing ourselves that the relationships sketched on page 15 are real and vital. (b) by becoming accustomed to thinking of these relationships as highly interdependent. 2. Quite incidentally, to secure an elementary knowledge of the factors determining an appropriate location for a business unit. In a book committed to the discussion of business administration in terms of the outstanding relationship of the manager, it is some- thing of a digression to study a sample business problem before we have studied those relationships. The digression is, however, justi- fiable. We shall be more willing to undertake a somewhat detailed study of the various relationships of the manager sketched in the preceding chapter if the examination of some business problem dis- closes the fact that those relationships really are present. Then, too, examination of a problem will show that these relationships are quite interdependent. They are not separate, distinct, and individual. Our later detailed study of each of them will be far more profitable if their interdependence is always in the background of our thinking. The classification of economic activities on page 2 shows that there are many types of plants which are to be located. It wiU suffice for our purposes if we consider very briefly the case of the primary industries and then in more detail the location of manufac- turing, marketing, and financial plants. A. Conditions Determining Location in Terms of Broad Areas — Territorial Specialization First of all let us notice, for these industries, the general con- ditions v/hich determine in what broad belts, areas, or zones (as 23 24 BUSINESS ADMINISTRATION contrasted with site location) such business units are likely to be found. Obviously enough, this really becomes a discussion of geo- graphical or territorial specialization. Selections i to 12, together with your general information and with general reasoning will serve as a basis of discussion of the following: PROBLEMS I. With particular reference to primary industries: 1. " The primary industries cannot be separated from the natural resources upon which they depend." Is this true? What Ught does it throw upon the location of primary industries? on the relation of the manager to physical environment ? 2. It has been said that climate determines the broad zone and that geographical and geological conditions determine what shall be the location within the zone of all primary industries dependent upon flora and fauna. Cite illustrations. 3. Cite primary industries not primarily dependent upon flora and fauna. Does the statement of the preceding question apply to such industries ? 4. What is meant by the statement ''extractive and elaborative industries are linked together by technical as well as economic bonds" ? 5. What is the central thought of the preceding questions ? II. With particular reference to manufacturing industries: 1. In what types of manufacturing industries does accessibiUty to raw materials involve projdmity to them ? 2. "An assembhng industry sometimes has as its raw material, the finished products of other plants." What light does this throw on problems of location of assembhng industries ? 3. "In manufacturing paving brick it has been estimated that the relative weights of clay, finished product, and coal required are approximately 40, 30, and 3." Do these facts throw Hght on the question of location ? Do they answer the question ? 4. "As far as materials are concerned, the test of a good location is not the cost of materials laid down, but the material cost of a unit of completed product." Explain, bearing in mind such factors as original purchase price, converting expense, labor expense, overhead, transporta- tion cost, bu)dng expense, rehabihty of supply, and expense of reserve necessary. Do some of these go beyond the range of the quotation ? 5. "If a plant grows so that its supphes and products demand large faciUties for handhng, and its consuming pubhc is national or world- wide, then the question of markets is one of accessibility and not one of proximity." Explain. Are there such cases ? PLANT LOCATION 25 6. In what cases does accessibility to markets typically involveproximity to markets ? 7. Does whirlwind advertising, a trade-mark, and a good product free an industry from other location problems ? 8. "Industries engaged in producing valuable, durable, material objects in wide demand are likely to have their plants concentrated in only a few localities; those engaged in producing bulky, or perishable, or non-material goods, or goods in narrow demand, are likely not to be thus localized." Do you agree? Can you cite instances? 9. "The most important consideration in the selection of manufacturing sites is that of transport facihties." "Transportation which so often comes to a person's mind as a factor in industrial plant location is really of secondary importance. Transportation will develop when and where the goods demand it." Which quotation is correct ? Why ? 10. "The location of a lace factory is not of importance because the trans- portation of raw materials and finished product is so small a proportion of the value of the product as to be neghgible." Do you agree ? 11. Explain how, from the point of lower freight rates and of lessened risk, it may be worth while to scatter the various plants of a concern over the country. Will this always be true or is it true only of certain types of industries ? 12. "Water transportation is advantageous when it connects the plant with important sources of raw material or a good sales market." Would good water transportation be important to an industry which never made use of it ? 13. "The strategic places for industries which involve important assembUng and distributing functions are (a) points on competing waterways, (b) centers at which numerous competing railways converge, (c) loca- tions within influential commonpoint territory adjacent to the pre- viously mentioned centers, and (d) localities so influential in the supply of certain products as to enjoy favorable commodity rates on these articles." Explain. Cite several instances of each case. 14. Are transportation matters primarily connected with physical environ- ment, or with social environment, or with market relationships, or with some other item in the diagram on page 15 ? 15. Are manufacturing industries today as dependent upon proximity to sources of power as they were one hundred years ago ? Explain in detail. 16. What industries need to be located so that they have accessibility to fuel supply ? What industries need to have this accessibiUty involve proximity ? 17. "Capital is scarcely worthy of discussion as a locating factor because of its great mobihty." Is this true? What would be the case if it were a problem of re-location rather than one of location ? 26 ' BUSINESS ADMINISTRATION 18. "Mere numbers of people do not necessarily make a suitable labor environment, and a good labor situation for one industry may be a poor one for another." Explain. 19. What is meant by locating "so as to reap the advantages of being a 'parasitic industry' as regards labor supply?" Do you know of any such cases? Is such a proposition socially desirable? Suppose the term used had been "complementary industry," what answers should you make ? 20. " Speaking generally, satisfactory labor power wiU be found in a dense population." What are the elements of a satisfactory labor power? Is it true that they are generally found in a dense population ? 21. "Concentration of establishments even of a Uke kind and direct com- petitors, improves the labor market, both for employer and employee, in many ways." Explain. 22. "Labor is not sharply localized — ^like fuel and materials it may be transported, its prices in different markets tend to converge." Do you agree ? Why or why not ? 23. What is meant by industrial imitation with respect to plant location ? 24. "A range of special services and special facilities tends to develop around industries which are once established." Name and explain these special services and facilities. Does the quotation mean that it is a matter of indifference where the original settlement is made ? 25. Draw up a list of the reasons why industries mutually attract one another. Is it true of like industries ? of unlike industries ? 26. "The trend of manufacturing, geographically, is, therefore, an impor- tant factor in locating an industry and is worthy of careful consideration in locating a new plant or moving an old one." Why or why not ? 27. "New England furnishes an interesting illustration of how the momentum of an early start may offset other factors cormected with plant location." Explain. Do you agree ? 28. " Governments have sometimes made and unmade industrial locations." State how that is possible. 29. If you wished to locate a manufacturing plant and you had to choose among three places, equal in all respects, except that one had a poor labor market, another, inadequate supply of capital; and the third, poor transportation, which one should you choose ? 30. Arrange in order of importance the following factors: (a) proximity to raw materials, (6) cost of transportation to market, (c) cost of land, (d) presence of cheap power, (e) supply of suitable labor, in each of the following cases: (i) electric smelting, (2) the manufacture of jewelry, (3) the manufacture of tile, (4) the manufacture of cotton cloth, (s) a canning industry. In cases where you are unable to make the ranking requested, wherein does your inability rest ? PLANT LOCATION 27 31. Notice the table showing the concentration of certain industries. What types of industries are centralized in New York ? in Pennsyl- vania? Account for the centralization. 32. The manufacturers of the United States are largely concentrated in the northern and eastern parts of the country. Account for this concentration. 33. I am thinking of starting a cotton-spinning mill in the Chicago district. What factors should I have in mind ? 34. Notice the reading on the location of the cotton-manufacturing industry. Make a list of the lessons which you draw from that reading. Is the diagram on page 15 helpful? 35. Think back over the preceding questions to determine whether there have been raised issues concerning the manager's relation to physical environment; social environment; personnel; markets; finance; risk- bearing. 36. What cases have you seen in the study thus far of the interdependence of these relationships ? For example, were there any market relation- ships which involved financial considerations ? 37. Draw up an outline of the main points in this section. III. With particular reference to marketing and financial industries: 1. Why are distributing centers typically on some transportation route? "The cities that form the best sales markets are those where trade routes rneet or toward which they converge." Why? Give instances. 2. "Another class of cities forming good markets is found in cities which are collecting and distributing points in an exceedingly productive area." Cite instances. 3. What is the entrepot ? Is it a result of historical accident or of eco- nomic causes ? If the latter, what are the causes? Are its days numbered ? 4. What is the distinction between "transaction or bargaining center," and "distributing center" ? Cite instances where a transaction center need not be a distributing center. Convert these instances into gen- eralization. Has the question any bearing on the problem of business location ? S- What forces cause a transaction center to emerge ? 6. "Trade in manufactured goods continues to ch'ng to the older dis- tributing centers and devious routings long after it is possible to make direct shipments.'' Why? 7. You are to engage in a business dealing in ungraded goods. What does this mean with respect to location ? 8. Shaw in his Approach to Business Problems speaks of the distributing problem as being made up of (a) demand creation, and (b) physical supplying of the goods. He says, "There are five simple solutions 28 BUSINESS ADMINISTRATION of the problem of location of the plant for demand creation: (i) The sales plant may be at the factory; (2) at the largest neighboring city; (3) at the largest trade market; (4) at the chief city of the county; (s) a central sales plant at one of these locations with auxiliary or branch organizations." Cite some of the advantages of each solution. 9. Notice the reading on the location of the wholesale dry goods business. What lessons do you draw from that reading ? 10. Answer the same question with reference to the reading on London and New York as financial centers. , 11. What is meant by saying that cheap transportation made the Missis- sippi Valley the greatest homogeneous market the world has ever seen and that this fact goes far to explain how American manufacturers were (later) able to invade even Europe with their products ? 12. In the foregoing questions on the broad location areas of financial and marketing businesses, were there problems of personnel ? of physical environment ? of social environment ? 13. Draw up an outline of the main points in this section. I. A GENERAL SURVEY OF LOCATION FORCES' First in importance in fixing the home of certain industries is the presence of natural deposits or supplies. This determines imperiously the location of mines, quarries, oil or gas wells, fisheries, lumber and fur industries, and the collecting of nitrates, borax, sponges, pearls, buffalo horns. Thus the Chilean desert is the site of nitrate mines, the oyster industry haunts the Chesapeakes, dye-woods are furnished from tropical forests, while the sulphur pits of Sicily supply brimstone to all parts of the world. Besides the simple finding, digging up, breaking off, cutting down, dislodging, capturing, or bringing together of natural substances or growths, we often find these reduced, refined, prepared, preserved, or otherwise worked up before leaving their original locality. Here we may, in thought, distinguish two industries, one working on raw materials supplied by the other. Many elaborative processes are in this way attached to some extractive industry, and located with reference to it. The weaving of basketware estabUshed itself in Franconia, owing to the splendid growth of wUlowtrees in the neighboring valley of the Main. Most of the slate pencils of the world are made in the Thuringian forest, the site of the finest slate quarries. 'Adapted by permission from E. A. Ross, "The Location of Industries," in Quarterly Journal of Economics, X (1895-96), 847-68. PLANT LOCATION 29 Probably next in importance is nearness to the sources of raw or avixiliary materials. This consideration will have most influence, first, when the materials are bulky and heavy relatively to their value; second, when the finished product embodies but a small part of the materials employed or contains much greater value; third, when transportation facilities are backward, or the materials are produced in a mountainous district or in the interior of a coxmtry where the cost of transportation is unusual. These conditions are met with in the metal industries, so that ore is for the most part smelted near the mine, if fuel be forthcoming. The sawnulls in turn invade the wilder- ness or follow up logging streams in quest of their material. While there is no great shrinkage in sawing logs into lumber, the greater ease of handling is sufficient to carry the sawmill to the logs instead of the logs to the sawmill. Here we bring in a new consideration — the fact that extractive and elaborative industries are hnked together by technical as well as economic bonds. The perishability of the materials makes the loca- tion of the dependent industry in many cases something more than a matter of freight bills. Neither cane nor raw juice can be carried far without spoiling, for a similar reason salmon canneries will cling to the banks of the Columbia, while fruit and vegetable canneries will stick close to Maryland orchards and California ranches. This tether that binds one industry to a certain spot, despite the economic attractions of other localities, is weakened by every new device to preserve form and stay decay. So far, the frozen meat cargoes and refrigerator fruit shipments are in the service of the consumer rather than of dependent industries; but we may yet see these industries set free to obey other forces of location. Whenever great heat is needed, it is impossible to ignore the sources of fuel supply. This, therefore, is of great importance in locating the metallurgical, chemical, and refining industries, the smelting, casting, rolling, or forging of iron or steel, the manufacture of brick, hardware, glass, stoneware, pottery, and porcelain. When coal is burned simply to develop steam power, its cost of carriage is not so great as to make nearness to source of fuel a prime desideratiun in location. Its rival, water power, on the other hand, has not been portable in any form, and, if used at all, has to be used in strict connection with the falling water that generates it. Around eligible water power, therefore, settle industries employing heavy machinery, such as flour mills, planing mills, sawmills, and many 30 BUSINESS ADMINISTRATION manufactures of wood and metal. The manufactures that seek cheap power are mainly those that receive the crude natural materials direct from the extractive branches, and impose on them their first and great- est change of form. For the more purely elaborative processes, lying nearer the consumer, labor and light machinery effect the trans- formations. A power site thus becomes the core of an industrial center. Lowell, Lawrence, Fall River, Concord, and other manufacturing towns on the streams tumbling from the granite hills of New England owe their rise to this cause. The South owes part of its growth to the falls in its rivers. Great milUng centers, like Rochester, Niagara, and Minneapolis, are the result of cheap power. It is likely that, with the advent of the economical transmission of electrical energy to a distance from the place of generation, the value of the more eligible power sites will be enormously increased; while, on the other hand, the concentrating tendency being checked, the milling industries will be left free to follow other attractions. Sometimes a trade takes up its home where, as supplement to some other branch it can fill up an industrial chink. In Switzerland hand- carving maintains itself because not only can it be pursued in the winter and in the long evenings, but the occupation is so light as to refresh rather than to weary. The poultry industry is in most coun- tries scattered and conducted in a small way, because it fills a chink in farming, and up to a certain point costs almost nothing. A great deal of stock-raising is merely incidental to farming. The peach industry of Belgimn is likewise a parasite. The clusters of site industries that grow up about packing establishments, refineries, or gas works, en- gaged in turning refuse into by-products, are also parasitic. We note, on a higher plane, the obvious connection between the literary and scientific Ufe of an educational center like Leipzig and its prominence as a book mart. Climate is not only decisive for vegetal products, but appears to play no small r61e in locating manufactures. Partly to the fact that a very moist atmosphere is necessary in order to spin the finer cotton yams is due the steady concentration of the cotton industry in Lancashire, where high hills inland keep off the dry east wind, and precipitate a copious downfall from the sea winds from the west. The residence of the consumer frequently determines the loca- tion of the industry. The whole groups of service industries of course follow the consume'. In fact, the chief economic difference PLANT LOCATION 31 between goods and services lies in the fact that the place of production of the latter is in relation to the consumer. Besides this, certain indus- tries that produce goods, such as tailoring, millinery, photography, and pharmacy, must refer to the person of the consumer. Repair, work settles near him. Confectioneries, bakeries, and market gardens must be near him to avoid deterioration of product. Daily newspapers are published where the readers dwell, in order to secure promptitude. The bulk and waste of artificial ice in transportation, as well as the bulk of coopers' products, compel them to be made where wanted. If raw materials, fuel, and power are necessary to production, no less are labor and specialized capital. The capital required for buildings and machinery is, however, rarely influential in locating an industry, because the buildings are locally supplied, while machinery, if brought from elsewhere, is transported once for all, and cannot therefore compete with material or fuel as a factor in location. Capital, the most mobile and dynamic factor of production, seeks its allies instead of requiring them to come to it. It effaces itself in the location of industries, consulting always the local aifinities of the other productive factors. Labor is not sharply localized, as is natural power, for instance. Like fuel or materials, it can be transported; and, like them, its prices in different markets perpetually tend to converge. But the trans- plantation of the laborer entails the expense of transportation of him- self, family, and belongings, and all the costs in trouble, risks, and sentiment that attend a change of residence. While the elaborative industries performing the first operations on nature's products are the most regardful of nearness to materials, fuel, and power, the higher branches that fabricate finished goods are apt to attend more carefully to labor cost. In the manufacture of clothing, linen, underwear, gloves, boots and shoes, millinery, cigars, patent medicine, and cutlery, the cost of labor enjoys the controlling position. Apart, therefore, from the cost of moving materials or product, industries will tend to congregate in commercial centers, in order to profit by the cheapness of labor that results from a cost' of living kept low by easy resort to a wide supplying area. Many items enter into the articles of union. between labor and capital besides the matter of remuneration. Cash wages, prompt payment, notice of discharge, liability of employer, provision of fire- escapes, fencing of machinery, limited hours for women and children — 32 BUSINESS ADMINISTRATION all these obligations, whether imposed by law or by labor organiza- tions, will, if unattended by heightened efficiency, be unfavorable to capital and may lead to its migration. So, too, industrial dis- turbances, rioting, frequent and prolonged strikes dispose capital to exodus if a more tranquil seat can be found. With more capitaUstic methods of production, outlay for labor and material dLminishes relatively to that for plant and machinery. This necessity for special- izing and sinking vast initial sums makes industry increasingly depend- ent on order, security, and continuity of conditions. Civil disorder, revolutionary changes, sudden alterations in laws, or even a vigorous reform policy, scare away capitalistic industries. On the other hand, docility of laborers, absence of trade unions or restrictive laws, unques- tioning submission to the terms oSered by capital, attract an industry. Easy incorporation, light taxes, severe penalties for offences against property, lavish grants of authority to private watchmen, such as the Coal and Iron Police of Pennsylvania, prompt use of pohce or militia in labor disputes, pliant legislatures, complaisant courts, corrupt officials — all these, so long as they provoke no dangerous reaction, attract outside capital, and make a community the home of vast industrial investments. Occasionally we find industries confined to a certain locality because of dearth elsewhere of adequate technical knowledge and inventive talent. The manufactures of one country get a start, and by a recourse to native technique are able to keep their lead. In the manufacture of dental instruments and supplies Americans have unquestioned leadership, owing to their inventive faculty and to the constant stimulus afforded by a highly developed profession. Similar causes give them pre-eminence in the making of farm machinery, while the ingenuity with which utility and convenience are wrought into their implements and tools gives American hardware a great name abroad. The lead acquired by France in articles of beauty and taste is undoubtedly due to the presence of abundant and well-organized artistic abUity. The high development of the chemical industries in Germany is connected with the ardent cultivation of chemical science in that country. While, of course, experts may be transported as any other factor in production, experience shows that an industry permanently dependent upon imported technical knowledge will pay high salaries and receive service less conscientious, responsible, and well considered than would be rendered by the same rnen at home. PLANT LOCATION 33 The concentration of a scattered industry usually comes about by some locality outstripping the other centers and finally extinguish- ing them. The initial growth is due, of course, to some superiority of this locality over the others. But, as the center leaves its rivals behind, it acquires a momentum from the fact that the economies of concentrated industry now work in its favor as well as its special advantages. With these urging it in the same direction, one might wonder why the rising center does not go on killing out its small rivals over larger and larger areas and appropriating their business. But trees do not grow up into the sky, nor does an industrial center expand tiU it absorbs the custom of the globe. For this there are two chief reasons. One is that, as a place becomes more of a center, its special advantage tends to disappear. If it is water power, the multipUcation of mUls raises the cost of power tUl it is no longer cheaper than elsewhere. If it is accessible coal, the increase of con- sumption compels shafts to be sunk deeper and galleries to be cut farther tUl the local superiority has vanished. The other reason is that, as industry concentrates, the radius of the territory from which its materials and the subsistence of its dependent population are drawn, and of the territory over which the finished product is dis- tributed, increases; the average cost of transportation per unit of industry grows until its growth neutralizes the economics of further concentration. 2. TRANSPORTATION FACILITIES IN RELATION TO LOCATION' [The following selection, by its excellent portrayal of the general consequences of improvements in transportation will serve sufficiently to indicate what must be the consequences of particular rate struc- tures if they greatly favor certain locaUties or commodities. There is a further hint of the part played by rate structures in Selection 5.] The indirect results of these changes [improved transportation] are so far reaching that we can do little more than enumerate them. The most immediate effect of cheapened transportation is to increase the distance at which it is possible for producer and constmier to 'Taken by permission from A. T. Hadley, "Economic Results of Improve- ment in Means of Transportation" in Lalor's Cyclopaedia of Political Science, Political Economy and the Political History of the United States, III, 929-30. (Maynard, Merrill and Company, 1899.) 34 BUSINESS ADMINISTRATION deal with one another. To the producer it offers a wider market, and to the consumer more varied sources of supply. Which party obtains the chief benefit of the change is determined by the special conditions of each particular case. On the whole, its operation is more uniformly beneficial to the consumers, as a class, because its temporary advantage for the producers so often leads to overproduction. But in any event, it results in doing away with a large part of the varia- tions in price between different localities. The price is. made, not in a local market, but in the world's markets. In the case of less bulky manufactured products, these differences almost disappear, except as they are due to artificial obstructions. In agricultural products, they are on a vastly smaller scale than ever before. And not the least important point where this leveling effect is felt is in the rent of agriculturall land in England and similarly organized countries. Nearness to market was not long ago a main advantage of high-priced land; now it has to contend on tolerably equal terms with competing land five thousand miles away. To comprehend the full meaning of this change, we have only to look at books on industrial organization, published in the early part of this century. The limits from which a large city could draw its various supplies were closely defined by distance. Fresh vegetables and fruits could only be produced for it within the narrowest circle; and successive circles of ground were almost necessarily devoted to different products, according to their different availability for trans- portation. Now, any improvement by which products could be profitably transported to a greater distance, led to a redistribution. It was no longer location which determined the business to be carried on in a particular spot, but natural advantages more or less inde- pendent of location. The market garden might be placed at a greater distance from the city, if by so doing a more fertile spot was secured. The factory might be located far away from the raw material, if other business inducements made it desirable. In short, the whole system of division of labor advanced to a new stage. Not only was each man employed for what he could do best, but he was given a chance to work in the place where he could do it best. And this change made itself strongly felt in international relations. Even the barriers raised by high protective tariff today should be less isolated by this than it would have been a few years ago by the mere cost of transportation with no tariff at all. It is the railroad and the steamship that determine where a new business shall be developed, PLANT LOCATION 35 quite as often as the government policy. The grant of special rates and privileges to shippers is nowadays the most efficient kind of protection. It is this quickening and cheapening of transportation that has given such stimulus in the present day to the growth of large cities. It enables them to draw cheap food from a far larger territory, and it causes business to locate where the widest business connection is to be had, rather than where the goods or raw materials are most easily procured. And the perfection of the means of communication, the postoffice and the telegraph, intensifies the same result. 3. THE MOMENTUM OF AN EARLY START AND THE HABIT OF INDUSTRIAL IMITATION' The various advantages which have been described thus far can be expressed in dollars and cents. The places possessing these advan- tages attract manufacturers on account of the comparatively low cost there of producing and marketing goods. But these advantages, in almost all cases, account for localization only in its broader sense. They prescribe an industry's possible area, but they fail to explain the most marked form of localization — that within a single city or town or group of cities and towns. Somewhere within the possible area — made such because of the advantages just described — an enterprising man started the pioneer estabHshment of a certain industry. Why was this place chosen rather than any other within the possible area? Or why was this industry chosen rather than any other for which this place was suited ? This is the first problem, and the second follows naturally. Why, after the first factory had become established, was it to the advantage of competitors to choose the same spot for their establishments, rather than other localities within the possible area? The solution of the first problem in the case of any industry is to be found by reference to its early history in this country. In most cases it wiU be found that the original estabhshment of an industry in a locahty was largely a matter of chance. The shoe industry in Lynn, Massachusetts, is a case in point. In the early colonial days this settlement had its quota of cobblers, who made as well as repaired the shoes for the region thereabout, but did not attempt a broader market. In 1750, however, John Adams Dag3T:, a Welshman and a skilled shoemaker, settled in Lynn, and began to 'Adapted from Twelfth Census of the United States, VII (1900), 210-14. 36 BUSINESS ADMINISTRATION teach his apprentices the art of fine shoemaking. It soon became known that shoes were being made in Lynn nearly as good as the best made abroad, and as early as 1764 Dagyr was spoken of in a Boston newspaper as "the celebrated shoemaker of Essex." Had this man settled in Roxbury, Massachusetts, rather than Lynn, the bias toward shoe manufacturing might have become estabUshed in that quarter, and Roxbury instead of Lynn might today be one of the three great shoe centers of the United States. The nature of many a city's industry has been shaped in just this way, in the early days of its history, by the decision of one man. Instances of this might be cited in connection with the localization of collars and cuffs, hosiery and knit goods, jewehy, gloves, and fur hats. It is only after the first enterprise has succeeded in any locality that the real localizing process begins. The mainspring of this process is the habit of industrial imitation — a habit as powerful as it is uni- versal, and so important in this connection that it warrants a some- what closer analysis. It has been shown above that one of the normal requisites of an industrial locahty is a good supply of local labor and local capital. Suppose the enterprising man establishes himself in such a community and succeeds there. His success proves that the economic conditions are favorable — that he is within the possible area of that industry. But it does more, it creates a local bias toward this particular industry. This bias affects all three classes necessary to its expansion: entre- preneurs, capitalists, and laborers. In the first place, entrepreneurs naturally choose the existing industry rather than establish a new one. On the assumption of a prosperous and growing town, there is continually arising a class of enterprising men who wish to embark in manufacturing for themselves, and they naturally choose an industry with which they are famUiar — one which they have actually seen succeed. It requires courage to be an industrial pioneer ; more courage, in fact, than most men possess. They have read, perhaps, of much larger profits being made in branches of manufacturing not carried on in their neighborhood; they may have visited towns in another part of the country where some such industry has been very successful, and they are tempted to estab- Hsh this industry in their town, rather than to imitate the estabUsh- ment which has been operating there successfully. The chances are great, however, that they will resist the temptation of larger profits, in favor of what they regard as surer profits, and will choose the local PLANT LOCATION 37 industry. The other industry may be just as safe, but the probability of success, if they follow the beaten path, has been emphasized to them each day as they have watched the smoking chimney of the local factory, and have noticed the rise of the proprietor from moderate circumstances to comparative affluence. Their choice of this industry becomes, therefore, almost inevitable. Moreover, it is probable that the men who thus launch out for themselves have been employees or foremen in the local factory. They are relatives, perhaps, of the pro- prietor, and are famiHar with all the details of this industry, while in any other they would have aU to learn. In the second place, the capital needed to finance the new estabhsh- ment — ^in addition to that suppUed by the new entrepreneur himself — is much more easily obtained if the new estabUshment is to produce the same hne of goods as the one akeady in existence. If a loan is desired for the establishment of an outside and less familiar industry, there is naturally a raising of the interest-rate as a means of insurance; or the stock, if offered for sale, will for the same reason sell at a lower figure. In the third place, the best grade of local labor prefers to have employment in an industry which seems to offer a future rather than in one which seems in the nature of an experiment. This influence is comparatively slight, however, for all ordinary labor takes such emplojonent as is offered without much questioning. 4. SOME ECONOMIC ADVANTAGES OF SPECIALIZED CENTERS' Whatever the influences which bring an industry to a district, the chief advantages of locahsed industry are all due to the opportuni- ties for greater specialisation which concentration affords. Where many firms engaged in the same industry are grouped together, the worker has a better market for his specialised skill and is encouraged to specialise still further. The employer has less difficulty in finding the kind of labour he wants. The industry can command a large number of special services which no single firm could afford, and no scattered industry could maintain. Among the most important of such services is the specialised market. Liverpool and Manchester provide the cotton-spinner and manufacturer with facilities for getting their raw materials and disposing of their finished products which ' Taken by permission from Henry Clay, Economics, an Introduction for the General Reader, pp. 30-31. (The Macmillan Company, 1916.) 38 BUSINESS ADMINISTRATION they could find nowhere else, and these facilities can be supplied only because the cotton industry is so strongly localised. Bradford is the centre of the woollen and worsted industry, and nine-tenths of the wool that enters the country is bought and sold on the Bradford Exchange. The goods of the locality advertise one another, making access to new markets easy and giving an advantage in old markets; merchants and other distributing facilities grow up ; " to be a Hudders- field worsted manufacturer or a Galashiels or Hawick tweed manu- facturer is enough in itself to raise the individual out of the ruck of some sort of competition and to justify the asking of a certain price." Special transportation facilities and the provision of commercial intelli- gence can be arranged for a localized industry. Scientists, lawyers, accountants, find it worth their while to specialise in the problems peculiar to the local industry. Insurance can be effected cheaper. Probably the use of credit can be obtained cheaper where risks and con- ditions are so well known as they are in a modern specialised locality. An important type of specialised services is the growth of sub- sidiary industries, supplying the staple industry with its machinery and incidental requirements of manufacture, and utilising its by-products. The making of machinery is less localised than other great industries, because the requirements of a modern localised industry are so special that they can best be met by a firm on the spot. The textile districts are the seat also of the dyeing and finishing trades, specialised to suit the particular material manufactured in the district; and these in their turn attract certain chemical and drysalting trades. The complete utilisation of by-products is one of the most important economies of modern industry, and is possible only where a localised industry makes a large bulk available without transport charges. S. THE LOCATION OF THE COTTON MANUFACTUR- ING INDUSTRY' [This selection should be regarded as a bit of case material. It should be read with the mind searching for evidence that in plant location there arise matters connected with the relationships sketched on page 15.] New England. — Till 1880 the cotton-manufacturing supremacy of New England was not threatened. But when mills began to 'Adapted by permission from M. T. Copeland, The Cotton Manufacturing Industry of the United States, pp. 27-53. (Harvard University Press, 1912.) PLANT LOCATION 39 spring up in the South like mushrooms, grave fears were entertained for the future of the industry in the section where it had iirst taken root. These fears have now ahnost entirely disappeared, since by readjustment and economy the New England manufacturers have given evidence of being able to keep their foothold. Within New England the mills are still scattered, but certain localities have grown faster than others. The reasons for the more rapid growth of the industry in these places are the advantages which accrue from centralization in general, and the natural advan- tages possessed by the different localities in particular. In the early growth of the cotton manufacturing industry in New England the factor which determined the location of the mills was water power. Fall River, Lowell, Lawrence, Manchester, Nashua, Saco, Lewiston, and other cities grew up because of the water power which was available at those points. Although water power is still a very important factor in the continued prosperity of several of these cities, during the last half-century steam has become more important in supplying power for cotton mills. The more rapid growth of the industry in southern New England cannot be ascribed to water power. Fall River and New Bedford do not rely upon that to a great extent. Nor is the reason to be found in labor conditions, since the more northern cities possessed as large and as skilled a supply of labor as Fall River and New Bedford, when the latter cities began to forge ahead. Nor is the location of machine and repair shops the reason, since Lowell is well provided for in that respect. One reason, as Mr. Sidney CooUdge has pointed out, is the advan- tage which the tide-water cities gain in transportation rates. This saving, however, is not in the rates on raw cotton, since for that por- tion (about 40 per cent) which is shipped to the North by rail, a blanket rate is given for all New England and the railroads meet the water rates. Neither does the advantage arise in the freight on the cloth, since practically the same rate is paid from all sections of New England to New York or the West. The tide-water mills, how- ever, are able to obtain their coal at lower rates, inasmuch as the charges from Boston to points north are relatively high. The cost of discharging coal is about the same in Fall River and New Bedford as in Boston, and in the former cities it can be sent directly to the miUs without further transportation. Thus, as the use of steam power has become more and more common, cheaper coal has favored the cities of southern New England. 40 BUSINESS ADMINISTRATION Climatic conditions have been another reason for the more rapid increase in the number of spindles in that district. In that particular locality the temperature is less variable and the atmosphere more humid than in the neighboring regions. The cKmate has been par- ticularly adapted to the manufacture of fine yarn and cloth. Although the natural advantage of humidity has been partially equal- ized elsewhere by artificial humidifiers, the greater stabihty of the temperature retains its potency. Middle Atlantic states. — ^The number of spindles reported for the Middle Atlantic states in i860 was 1,042,000; in 1900, 1,647,000; and in 1905, 1,548,000. Thus since i860 the industry has been practically stationary in this section. Cotton factories are located in Pennsylvania, New York, and Maryland, and a few are found in the other states of this group. But Philadelphia is the only point at which there is a concentration. In the Philadelphia district small weaving estabhshments are par- ticularly numerous; three-fourths of the miUs in the United States which weave but do not spin are located in Pennsylvania, chiefly in Philadelphia, and the average number of looms per mill is only loi. Textile manufacturing is a long-estabhshed industry in that city and immigrant labor was probably employed there sooner than in New Eng- land. The immigrants, however, who entered the textile industries of Philadelphia were more or less experienced in textile manufacturing and therefore could be employed in the production of more fancy fabrics. Thus we can account, at least in part, for the existence of these mills and the character of their product. The labor supply has been the chief asset, supplemented by machine-shops and market facilities. The textile industries of Philadelphia, moreover, are urban enterprises dependent on urban conditions and in that respect are more or less analogous to the clothing industries of New York. The South. — ^The cotton-manufacturing industry has grown up in the South within the last thirty years, or since 1880. From 1900 to 1905 the rate of increase was more rapid than ever before, but at the present time a more conservative tendency is apparent. The most extensive construction of mills has been in three states — North Carohna, South Carolina, and Georgia. Alabama has also had an important share in the progress, although not to the same extent as its eastern neighbors. The advantages usually specified as the reasons for the progress of cotton manufacturing in the South are: (i) proximity to the source PLANT LOCATION 41 of supply of raw cotton, whereby the spinner is enabled (a) to save in freight rates on raw material, and (b) to take advantage of favorable market conditions; (2) water power; (3) lower taxation; and (4) cheap labor. To what extent has each of these alleged advantages afiected the development ? How far are they still operative ? And in what degree are they offset by disadvantages? I. a) A saving in freight on raw materials is doubtless realized by some mills, but this economy is not so great as would at first sight appear. Where the mUls have become so numerous that the local supply is insufficient to satisfy their demands, the price paid to the local merchants for cotton grown in the immediate neighborhood is equal to the cost of the cotton in other states plus the freight charges. Economy in freight on raw cotton is realized only by the mills in the more southern part of the cotton-manufacturing district, and prob- ably a majority of the southern spinners pay nearly as much as the New England spinners for their raw material. Furthermore, the cloth is generally shipped to the North. There are practically no bleaching, dyeing, or printing works in the South, as the water is not suitable. Hence if the cloth is to be finished it must go to the North, usually New England. And if it is to be exported in the gray it is generally shipped through New York, sometimes through Seattle. Since the market is in the northern states, it matters little, so far as freight charges are involved, whether the cotton is shipped before or after manufacturing. Until the South is able to obtain pure water for finishing and becomes commercially independent of New York by establishing its own export market, the saving of freight on raw cotton win be counterbalanced by the freight on the cloth. When that goal is reached, if at all, the growth of the industry may have forced all the manufacturers to obtain at least part of their cotton from distant states and thus nullify what slight advantage now accrues from proximity to the cotton fields. b) The proximity of the southern manufacturer to the source of supply of raw cotton does not enable him to gain any advantage of purchasing. The New York price rules and that quotation depends upon the state of the world.'s cotton market. There is not sufficient divergence in any locality to place local manufacturers in a superior position. In the second place, the majority of the southern manu- facturing companies have not as much ready money as the New England mills.* It is available cash rather than geographical location which determines who will be able to buy cotton when the price falls. 42 BUSINESS ADMINISTRATION 2. The saving in cost of power is a more dif&cult point to decide upon. A number of mills are located on streams where they can use water power, and their charges for this element in the cost of manu- facturing are small. But the spot where water power can be secured may be remote from the railway and may involve other sacrifices. Moreover, less than one-fourth of the power for southern cotton mills is furnished by water. For those using steam the cost of coal varies, being cheap in Tennessee where there are local mines and dearer in other states, according to the distance it must be transported. While cheap power has encouraged the inception of some of these cotton- manufacturing enterprises, it has not been general enough to be con- sidered the paramount factor in the whole movement. 3. Southern municipalities have frequently exempted the mills from taxation for a period of years as an inducement to location within their borders, and the rates are generally lower than in the North. But the southern mill owners, in contrast with those of New England, have had to provide sanitary improvements, and to subsidize schools, churches, and other public institutions in their villages. To offset whatever gains may have accrued to the southern manufacturers from the minor advantages already mentioned, the dispersion of the mills must be reckoned with. The factories are scattered throughout the Piedmont district, from Greensboro in the North to Atlanta in the South, and also here and there in the lowlands. Charlotte, North Carolina, is the commercial center for a large part of this district, but there is no considerable localization. The cotton industry, however, like many others, is naturally gregarious, and thrives best where the- labor market is fairly steady and where repair shops are close at hand. This source of economy is realized in New England but not in the South. Yet this inconvenience will prob- ably disappear along with other advantages and disadvantages, as the industry emerges from the period of transition. 4. Although these advantages have aided mill-building in the South the comer stone of the structure has been the supply of cheap and tractable labor. The lower wages, nevertheless, have been partially counter- balanced by the lack of skill and the fickleness of the workers. They had to be taught how to manage the machines, and while they have learned readily, they are even now inferior artisans to those New England operatives who have worked in cotton mills ^r a longer time. PLANT LOCATION 43 The eflSciency of the southern operatives has also been impaired by their inconstant attendance. Although the wages and probably the labor cost have been lower in the South, at present they have risen almost to the level of New England. The growth of the industry has taken away the advantage which was its chief asset. The stratum of cheap labor has been exhausted and in the boom of 1905-7 employers bid against each other so that wages were raised nearly one-fourth. The management of southern mUls has generally been inferior to that of the northern factories. It has been less systematic and less economical. The superintendence has been less careful and the cost- keeping less accurate. The managers have been for the most part trained in southern mills, and the overseers are commonly southem- born and have gained their experience in the irdlls of that section. In the early years a few of the overseers and managers were northern men who had been sent to erect machinery in the South, but not many such are to be found at the present time. Besides their laxity in manage- ment the southern manufacturers have not taken care to keep up the quality of their product with the foresight that is characteristic in New England. Southern goods bring a slightly lower price than northern cloths, not only because of inferior workmanship, but also because they are less trustworthy. Since the southern manufac- turer is more likely to use poorer cotton or economize in some other way rather than incur a temporary loss, the reputation of his cloth suffers. There are numerous exceptions, however, and the general tendency is toward better management and maintenance of quality. The capital for building the earUer mills was obtained in the South itself. They were small establishments and represented the savings of local business men and farmers. Frequently the mUl-building was short-sighted, local pride and the infectious spirit of the moment bUnding the promoters to the inadvisabUity of investment in the manner pursued. Such mills have frequently failed and passed through numerous reorganizations. The speculative mania intro- duced an element of unsteadiness, but this, as in other industries,' was an incident of early growth and on the whole contributed to the estab- Ushment of the new business in the South. Once the profitableness of cotton manufacturing in this section had been proven, capital flowed in from the North, in part from bona fide 44 BUSINESS ADMINISTRATION investors and in part from other sources. Of the latter, the machinery manufacturers were heavy contributors. They took shares in the company's stock in payment for machinery, just as the English machinery firms have done during the recent period of rapid erection NUMBER OF COTTON SPINDLES, BY COUNTIES, 1913 This map shows at a glance the concentration of the cotton-spinning industry in this country. The amount of such spinning done in the western half of the country is negligible. of mills in Lancashire. The machinery companies, in both countries, unloaded the stock at their earliest opportunity. Stock in southern mill companies has also been taken by business firms which have held the stock but with the object not so much of securing interest on the investment as of obtaining remunerative PLANT LOCATION 45 privileges. These firms were New York commission houses which purchased stock on condition that they be granted the agency for the product. These financiers, however, more commonly helped to supply ready money by making advances on the goods with a lien on the cotton as security, instead of accepting shares of stock. Several mills have been built on southern soil by New Englana companies, with a view to profitable investment and because of apprehension that the industry was to shift away from the North. To summarize the present situation: The advantages accruing to the southern manufacturers from proximity to the cotton fields, good water power, light taxes, long hours, and new machinery are counterbalanced in the North by more abundant capital and credit facilities, greater public conveniences, more experienced managers and better disciplined workmen, concentration instead of dispersion, superior climate, and nearness to markets and finishing works. The chief asset of the southern manufacturers has been the supply of cheap labor, but this source is nearly exhausted. Hence a rise in wages has taken place, and it is to be expected that by the competition of employers they will be forced up to the New England level. Few more native whites are to be secured; the negroes are unavailable; and immigrants cannot be attracted by low earnings. 6. LOCAL CONCENTRATION OF CERTAIN INDUSTRIES' The following table brings out the most conspicuous instances of concentration. In each industry named in this table a singlt «tate in 1909 contributed more than two-fifths of the total value of products: Per Cent of Total Industry state yofumt^dluS IQ09 Collars and cufis New York 92 .3 Grindstones Ohio 88.8 Artificial flowers and feathers and plumes New York 88.2 Peanuts, grading, roasting, cleaning, and shelKng Virginia 81 . 5 Plated ware (not including sUversmithing and , silverware) Connecticut 77.4 Fur goods New York. 73 .8 Clothing, women's New York 70 . 8 Hair work New York 70. i Liquors, vinous California 68. i " Adapted from Thirteenth Census 0/ the United States, VIII (1913), 127-28. 46 BUSINESS ADMINISTRATION Pens, fountain, stylographic, and gold New York 67.9 Needles, pins, and hooks and eyes Connecticut ...... 63 . 3 Gloves and mittens, leather New York 60.7 Millinery and lace goods New York 60. 7 Pipes, tobacco New York 60 . 5 Firearms and ammunition Connecticut $8.6 Rice, cleaning and poKshing Louisiana 56.0 Clocks Connecticut 55.7 Coke Pennsylvania 54 . i Iron and steel, steel works and rolling miUs Pennsylvania 50.8 Turpentine and rosin Florida 47 . 2 Furnishing goods, men's (not including collars and cuffs nor suspenders, garters, and elastic woven goods) New York 46 . 9 Clothing, men's, including shirts New York 46 . 8 Boots and shoes, including cut stock and findings . Massachusetts .... 46 . i Ink, printing New York 45-8 Brass and bronze products Connecticut 44 . 6 Iron and steel, blast furnaces Pennsylvania 43 . i It would require very extended discussion to determine for each industry the reason for the concentration in the states or cities ■ named. Moreover, such a discussion would involve a great deal more of mere speculation, as the reasons for local concentration are often exceedingly obscure. It is necessary for the most part to confine the discussion to statements of a general character. There are certain advantages which particular states or cities have with reference to manufacturing industries in general and which tend to give them prominence in manufactures as a whole. Among these advantages may be mentioned: (i) water power, (2) convenient transportation facilities, (3) large amounts of capital available for investment in manufactures, and (4) a large supply of labor adapted to manufacturing enterprises in general. Besides these broad factors which affect the geographic distribution of manufactures in general, there are others which tend to bring about a local concentration of particular classes of manufacturing industries. Among the principal factors of this class may be mentioned: (i) proximity to the source of the required materials, (2) proximity to the market for the specified products, (3) a supply of labor peculiarly adapted to the industry, (4) the momentum of an early start which is usually closely related to the labor supply, (5) the habit of industrial imitation. Moreover, some of the general factors above mentioned set more powerfully in the PLANT LOCATION 47 case of certain industries than in the case of others. For example, water power is obviously more important in the case of those industries which require large quantities of power than in the case of those which require Uttle power, and transportation facilities are more important with reference to heavy products than with reference to those of little weight in proportion to their value. In some cases two or more factors co-operate in rendering a par- ticular locality peculiarly favorable to the development of a given industry. Again, one or two factors may be so strong as to prevail in spite of the lack of favorable conditions in other respects; and part of the establishments in an industry may be concentrated in one local- ity or group of locahties by reason of one set of advantages and part concentrated elsewhere by reason of a quite different set of advantages. For example, proximity to the market and the momentum of an early start may result in the concentration of an industry in a locahty by no means convenient to the source of supply of raw materials. This is conspicuously illustrated by the manufacture of cotton goods. In the case of those industries which are dependent upon materials produced largely throughout the country, the need of proximity to materials may result in a wide distribution rather than a local concen- tration of the industry. For example, the production of lumber is not locally concentrated in any marked degree. The lumber mills are in general situated in or near the forests, and the latter in turn are more or less generally scattered throughout the country. For similar reasons the flour-mill and gristmill industries are widely distributed. It is only where the production of the required materials is confined to more or less limited areas that the need of proximity to materials can bring about local concentration of a manufacturing industry. 48 BUSINESS ADMINISTRATION 7. THE LOCATION OF THE MANUFACTURING INDUSTRIES OF THE UNITED STATES' How do you account for the concentration indicated by this map? Does the outline on page 15 help you ? PLANT LOCATION ILLUSTRATIONS OF CONCENTRATION AND DISPERSION' 49 1. Vaitje or AuiOMOBiLE Products by States, 1909 How do you account for the concentration indicated by this map ? 2. VALtTE or Lumber Products by States, 1909 How do you explain the dispersion shown by this map ? ■ Taken from Thirteenth Census of the United States, X (1913), 405, 492, 810. so BUSINESS ADMINISTRATION 3. Value of Products of Merchant Flour Mills and Grist Mills by States, 1909 How do you explain the dispersion shown by this map ? 9. THE SEATS OF GREAT COMMERCIAL ENTERPRISES' [This selection marks the transition from the discussion of the location of manufacturing industries to that of the location of- com- mercial and financial industries. The student should still keep in mind the outline of relationships sketched on page 15. Is it still applicable ?] The place of transportation in making commercial cities. — Some advantage in transportation is the most fundamental and most important of the causes determining the location of the distributing center. It may almost be said to be the only cause for the formation of such centers. For some reason or reasons, a particular place is more conveniently and cheaply reached by many people than any surrounding point; and as a result, they naturally exchange com- modities there. The country store is located at the crossing of roads. There also is the village. In a mountain pass, or a gap that is a thoroughfare between two valleys is another favorable location. If ■ Adapted by permission from J. R. Smith, Indttstrial and ■ Commercial Geography, pp. 840-75. (Copyrighted by Henry Holt and Company, 1913.) PLANT LOCATION 51 rivers are dfficult to cross, settlements will spring up at the safest ferries or fords. In a level plain, a town will be near its center, and a focus of roads or railroads in such a plain-, fertile and populous, will also surely make a city. The head of navigation on a river is a location far more command- ing than any of those already mentioned. Here all the trade that goes by the river must be changed from one method of conveyance to another. Here goods are collected from the surrounding country for shipment by water. Here people bring the goods and buy their supplies. Here also must be merchants, forwarding agents, and the repairers of wagons and ships. A town or even a city arises. It is interesting to note that towns of this class were relatively much more important in 1800 than in 1900. In the first-named year a river offered a much greater relative advantage for cheap transpor- tation. In 1900 the new means of transportation, namely, the raUroad, had built up prosperous cities where under the old conditions cities were impossible. The railroad train has rushed past the river port to the seaport, and the giant ocean steamer has taken the trade. The most com- manding location for the commercial city is the safe harbor which is, or may become, the natural outlet for a rich and populous territory. The great seaport exists because it is a place for the breaking of cargo of ocean ships, just as the country store exists because the boxes and wagon loads of miscellaneous supplies must there be divided up into numerous small packages for the individual consumer. It must be a point as far inland as possible so that the importer and exporter may have the largest advantage of the cheaper freights possible on large ships. Therefore the greater ports are at the heads of bays and gulfs rather than on peninsulas and headlands. Besides easy access from the sea, the great seaport, the inter- national trade center, must have easy access to the land and to the centers of population that it serves. This access is best supplied by a river valley with the water transportation on the river itself and canals and railroads that can be built most easily along water- courses. Nearly all important seaports are at, or near, the mouths of rivers, navigable or otherwise, and, in regions having navigable rivers, the largest cities are in locations having the best communi- cation with the interior. Ports for raw materials and for manufactured goods. — One of the changes in the world-commerce of the past century has been the 52 BUSINESS ADMINISTRATION pronounced separation of ports into classes. One class is the raw- material port, and another is the manufactured-goods port. The two are steadily growing more distinct at the present time. The filling of the channels of trade with the many bulky, cheap, or perishable articles has produced new trade conditions with less dependence upon great ports and distributing centers. Cheap and bulky goods usually go to the best advantage in full cargo lots; and, as the vessel has to depend upon no other freight, it can load at any small port near the place of . production. It is easy and profitable for a vessel to go to a small port of Florida or Georgia for a full cargo of phosphate or liunber, to a Chilean outport for nitrate of soda, to a West Indian outport for iron or bananas, to Cardiff, Wales, for coke, or to a convenient railway terminus in the Argentine Republic for wheat. These goods may also be imported by a small port for use in local industries that do not require a large population for the manufacture and distribution of the products. A railway, a pier, and a suitable warehouse may enable a small town to export or import raw material in bulk. The raw-material port therefore may be, and often is, a small port. In contrast to this, only a large city can import or export cargoes of highly manufactured goods. These articles are consumed in small quantities. Much choice is exercised in their selection and purchase by the consumer. The retail dealer must exercise similar care and discretion in the selection of his stock. He can do this best in a great wholesale market where he can go from place to place and take advantage of the competition and variety of Stock of many wholesale merchants. This is to be found only in a great city. This gives the city holding the trade conservative force that comes of its being known as a market. The trade in manufactured goods therefore continues to cling to the older distributing centers and devious routings long after it is possible to make direct shipments. The natural trade of an entrepSt. — One commercial center can at times distribute a certain product or products to most of the trading world and, for those products at least, it becomes a world- entrepdt. The commodities that lend themselves to this method of distribution must have special qualifications. The goods must have high value, small bulk, and good keeping quahty. By having high value the freight rate is relatively insignificant and the long and devious journeys are not a serious handicap. Having small bulk there is not the demand for a whole shipload of them in any one PLANT LOCATION S3 place, and so it is really cheaper to let them wend their way to trans- shipments through the common distributing center or entrepdt. A second factor of influence is the question of distance. The more remote the origin and destinations of the traflSc the stronger is the hold upon this trade of the entrep6t with its organization of routes, ready to serve and hard to duplicate. The trade that best answers to this description and is therefore best fitted to be handled through an entrep6t is that from the Orient to the Western world. The shifting of this trade from route to route and from center to center is an interesting study of commerce as affected by war, politics, discovery, invention, geographic control, and the economic conditions that resulted from these forces. Owing to this complexity of shifting forces the profits and glory of being the Western entrep6t of Eastern trade have rested in turn with Venice, Lisbon, Bruges, Antwerp. Amsterdam, and London. Causes of decline of world-entrepdt. — Two reasons will largely explain the passing of the world-entrep6t. First, the tremendous increase in the bulk of world-commerce. The second grows out of the first and is the multiplication of steamship and railway lines which enables many cities to serve as entrep6ts for limited areas. It must be kept in mind that decentralization does not destroy the old trade center. The statements concerning declining impor- tance are relative, appljdng to percentage of rapidly growing wholes, and not in any way to absolute quantities. The buying and selling of distant commodities. — ^A city may be a commercial center in two ways — first, as an actual distributer of goods; second, as a transaction center. The transactions in C often relate to goods in A to be sent directly to B. The transaction center is the lineal descendant of the eighteenth-century distributing center. In the days when the communication of ideas and the carriage of goods depended upon the slow and uncertain sailing vessel, or the equally slow and uncertain means of land conveyance, it was usually necessary to have the goods on the spot before they could be the subject o.f bargain or sale. However, the steamship, the railway train, and the telegraph have made a commercial world, new in its methods of management as well as in its staple commodities. The telegraph gives instant and constant information concerning stocks on hand, the crop prospects, and other conditions that affect the prospective supply. The steamship gives quick delivery; and, what is of equal importance, it far exceeds the sailing vessel in the certainty S4 BUSINESS ADMINISTRATION of reaching port in a stated time. Commercial transactions of today may thus concern commodities in distant places and for future dates; and, although the movement of the goods may be decentralized, it still remains advantageous for the men doing this work to assemble in groups at some convenient center. Centers for management of trade. — ^These transactions are cen- tralized in the commercial metropolis. Decentralization of com- modity traffic has been an accompaniment of the growth of the new commerce; but the telephone, the telegraph, and the fast mail have helped to keep up the transaction center by putting the selhng agent in easy communication with the factories and local centers of the producing and consuming districts in all parts of the world. Sales for the foreign trade or to the distant consumer cannot be easily arranged from cement works located in the Alleghany Mountains of Pennsylvania or Virginia, from the Georgia cotton mills, or from the phosphate mines of Tennessee or Florida. Consequently the selling agencies are in New York. The transactions of the wider iaternational trade are also cen- tralized. London, the last great international distributer, is still a large international seller. With the new conveniences of telegraph and cable the London distributing merchant often found that, upon the founding of direct communications between foreign countries, he could continue to hold the business, although the goods no longer passed through London. ■ He knew the conditions of both Eastern and Western markets, and the direct connections that have sprung up merely enabled him to deliver more quickly by shipping "his goods direct. By this process, London has come to be a dealer in goods which may never at any time be within 5,000 miles of England. . . . For example, London brokers and London merchants recently had a practical monopoly of the international sales of pepper, Manila hemp, Indian jute, and Burma rice (the chief supply for the world-market). The world's supply of each of these four commodities is produced in a comparatively small region and consumed all over the world. The high value and limited supply of the annual crop would .probably lead to disturbing price fluctuations if the central London firms did not act as a sort of regulator. Being in constant communication with their numerous agents in the centers of production and con- sumption, having a world-knowledge of this particular trade, they are able to conduct business more safely than the firm in New York PLANT LOCATION 55 or Marseilles, should it attempt to buy hemp, jute, or pepper directly from the dealer in the point of shipment. The influence of capital. — The international transaction center requires a central location, a line of business that is carried on in widely separated places, and, in addition, an abundance of capital. Capital must be more plentiful in the center than in the commercial outposts, for the central management of distant business operation is only possible by the use of capital from the controlling center. As the trading countries come to possess more adequate supplies of capital for their own use, and when the trade assumes larger proportions, the international transaction center loses, at least pro- portionally. When the buyer and the seller can manage a transaction without mortgaging the goods in transit to a financier in a third country, there is less need of the services of the broker in the inter- national transaction center. There is accordingly a tende^ncy toward decentralization of management as well as a decentralization in the actual handling of goods. But the two decentralizations do not accompany each other. The direct movement of goods preceded in point' of time the direct management of the business. The latter may be indefinitely delayed. The suppUes of capital may remain low, causing dependence upon foreign bankers. Few countries have or promise in decades to have sufficient capital for their own needs. Since the commercial character of the traders in some countries is not reUable, no one dares trade with them who is not fully acquainted with them — which usually means having an agent on the spot. The trade of some countries wUl therefore continue to be largely transacted through the centers in the financial countries, although many products (usually the raw materials) go directly to the ports nearest the points of consumption. The rise of international bargain centers in the United States. — The United States will join Western Europe in capitalizing the world's new enterprises and the financial centers of these countries will be the centers of control of industries in the other continents. As the continent gains relatively on England, Hamburg, Amsterdam, and Paris will continue to rise in importance, while New York promises to take a leading position. This is well shown by the present domi- nance of that city in the industries of America. There is the head- quarters of the United States Steel Corporation, a veritable kingdom of riches in nmnbers of persons dependent upon it, and in the scope 56 BUSINESS ADMINISTRATION of territory owned and covered, for its engines throb and its machinery roars in the states that border Canada and the Gulf, the Pacific and the cold New England Atlantic. In New York are consummated the deals in Montana and Arizona copper, Oklahoma oil, Maine spruce lands, Georgia pine lands, Susquehanna water-power plants, Virginia railways, Florida phosphates. West Virginia coal, Pennsyl- vania cement works, and the chartering of ships for Galveston cotton. Most of the railroads of the country have offices there, and those who supply them must also have offices there. The list might be drawn out indefinitely, for there is not a state or territory in the Union that does not have lands, enterprises, and resources managed from New York, the bargain center of the American people. 10. THE LOCATION OF THE WHOLESALE DRY- GOODS TRADE' [This selection may well be read with the mind reaching back to the commercial location factors sketched in Selection 9 and at the same time reflecting upon factors making for change in location.] An approximate idea of the situation in the trade may be gathered from an analysis of some of the directories of the trade which are accepted as being of sufficient fulness to be useful. As for the general dry-goods jobbing trade, we find that there were in operation in 1912 thirty concerns, only two of which were located in New York City, the former general dry-goods jobbing capital of the country. Chicago in volume of business is now the leader although there are only three concerns in Chicago which belong to this class. St. Louis comes next in order in volume of business, with five houses which clearly belong with this group. In addition to these two chief centers of general dry-goods jobbing, there are such cities as Kansas City and St. Joseph, Cincinnati, Louisville, Indianapolis, and Pittsburg, in which are located practically all of the remaining general dry-goods jobbers. Generally speaking, it may be said that practically all of the general jobbers now left are located in the Mississippi Valley, with only a very few in the Middle Atlantic states, and none at all elsewhere. Of the specialty jobbing houses, selling woolen goods among other lines, the directory gives us a total of 180, 98 of which are located in 'Adapted by permission from P. T. Cherington, The Wool Industry, pp. 142-48. (A. W. Shaw Company, igi6.) PLANT LOCATION 57 New York, and 38 more within a radius of two hundred miles of New York City. The remairang 44 are located mainly in the Upper Mississippi Valley, western New York, western Pennsylvania, and Eastern Ohio. The growth of ready-to-wear lines and the develop- ment of knit underwear have been two of the most important influ- ences bringing about the growth of a specialty jobbing business. The history of one after another of the most successful of the specialty jobbers shows that the start was as an offshoot from an old general dry-goods jobbing house, building up a business with a line of knit underwear as a nucleus for trade. In this way, line after line of the general trade has been split away from the old general dry-goods jobbing type of organization, and the lines which have been left naturally gravitated into the hands of specialized houses. The local generd jobber is the third general arbitrary classification chosen. It is difi&cult to draw a sharp line between the more impor- tant of these and the smaller general dry-goods jobbing in the first group. Taking the general nature of their available market, however, and the approximate geographic extent of their trade as the principal basis for division between these two groups, we find 75 houses which may be classed as local general jobbing houses. Of these, 49 are in the upper Mississippi Valley, at such railway centers as Columbus, Ohio, and in the central South, at such points as New Orleans, Memphis, and Birmingham, and on the Pacific Coast, notably in San Francisco. One curious feature of the distribution of these houses is that in the area easily accessible to New York, this type of house scarcely exists at all, the main exception being in the outer edge of this region in such districts as western New York or northern Virginia. The fourth group, designated as small local jobbing houses, is distinguished from the group of local general jobbers mainly because their market area is smaller, and their total volume of business less. The matter of location has also been a factor in classifying houses in this group — those located at the minor railroad centers generally being placed here rather than in the local general jobbing-house group. The small local jobbers who include woolens among their lines number 205. Of these, 64 are located in the southeast and in the Virginia and North Carolina section, and 65 in the central South and in the South- west, thus making 119 located in the southern district, or about 63 per cent of the total number. The remaining houses of this kind are scattered through every section of the country. While they are not as numerous in the districts easy of access to the large jobbing centers, they figure everywhere as an important feature of the trade. 58 BUSINESS ADMINISTRATION There are a few catalog jobbing houses which have come, within the last few years, to figure conspicuously in the dry-goods trade, although most of them have come into the dry-goods business rather incidentally, and not as a part of their original plan. Butler Brothers, of Chicago, The Baltimore Bargain House, of Baltimore, and Charles B. Rouse of New York all conduct a certain amount of dry-goods business in this way, and perform what many country dealers have come to feel is a valuable service in offering to them at least staple lines on a mail-order basis. Within the last few years there has grown up, in the Middle West particularly, a new type of wholesale house, dealing mainly in fabrics and known as a "drop shipper." This type of house possesses no warehouse facilities, and' is really an order- taker. It works mainly among the medium-sized department stores. The method of opera- tion it employs is to solicit orders from samples and then to have these orders in carload lots sent to some convenient distributing point at the carload net rate, there breaking the car into smaller lots and securing a minimum freight cost from the factory to the store. It also cuts down all storage charges, reduces handling charges; and by offering comparatively full lines is frequently able to give better than regular wholesalers' prices to stores able to buy in case lots. These changes in the organization of the wholesale dry-goods trade clearly cannot be attributed to any one simple cause. Under- lying the whole process of reorganization are such large phenomena as the opening of the West, the drift of population westward, and the betterment of transportation facilities. Neither the changes within the wholesale trade nor those which have been mentioned as supple- mentary to them, such as the growth of large-scale retailers and the development of the ready-to-wear clothing industry, can be adequately explained without a consideration of these larger and perhaps more remote causes. II. LONDON AND NEW YORK AS FINANCIAL CENTERS' In considering the possibility of New York being a successful rival for supremacy as the exchange and financial center of the world, we can do no better than review some of the principal reasons why London has hitherto held that position, and it will be realized that ' Adapted by permission from E. L. S. Patterson, "London and New York as Financial Centers," Annals of the American Academy of Political and Social Science, LXVIII (1916), 264-77. PLANT LOCATION 59 New York must duplicate these conditions in great part if not in entirety before London can be dethroned. These reasons and con- ditions can be tabulated briefly under three headings, physical, psychological, and economic. I. Physical conditions favorable to London.- — London is situated on the threshold of Europe in the heart of the world's commercial activities, directly opposite the estuary of the Scheldt and nearly opposite that of the Rhine and is within a short distance of every important exchange center in the world with the exception of New York. London has the advantage of ice- and fog-free water lanes to every large port in the world with the exception of New York; the climate is equable and liquid, and perishable goods run little or no danger of freezing in winter. The restricted insular area of Great Britain, a little larger than the state of Minnesota, is also an important factor, as it not only affords an immense seaboard compared with its size, but concentrates the population. A frequent and rapid transit service makes Great Britain practically one large city with London as the business center. Every bank in the country has a branch or correspondent in London, carries its reserves there and clears direct with every part of the country through its London agent. The economy of resources effected by this natural concentration of funds is seldom realized and is worthy of study. This insular position of London renders it comparatively free from the danger of invasion and seizure by a hostile power, and this immunity has been a factor in making London a world-depository. The geographical situation of Great Britain, coupled with her wiUingness to invest money in international utilities, has placed her in a unique position as regards mail and cable facilities. Through her immense mercantile navy London has direct communication by fast steamers with every important port in the world and consequently acts as a foreign-mail clearing-house for all other countries. If French, German, or Dutch steamers afford a faster service to any point they can be utilized with little or no loss of time. As Great Britain owns and operates two-thirds of the submarine cable mileage of the world, it is natural that London ■ should be a great cable center with practically direct communication the world over. This service is now supplemented by a far-flung system of wireless stations. Furthermore, under normal conditions, every main 6o BUSINESS ADMINISTRATION railroad on the continent of Europe gives its best service and equip- ment to its London mail train. In dealing in foreign exchange and stocks London is the center of the world as regards time. She knows the conditions in Eastern markets before they close and is open long enough to operate in New York before her own markets close. Her position is therefore pivotal as regards time and distance. 2. Psychological conditions. — Perhaps a better heading than this would have been national characteristics. Great Britain if a land of slowly acquired fortunes, and the banker and merchant there are content with small profits and slow returns. They have long realized the fact that trade follows the loan and have therefore been willing to invest money in foreign countries with no prospect of recovering immediate returns or large profits, and the financing of these loans abroad has been an important factor in making the London money market so supreme. It is doubtful if the American is adapted tem- peramentally for operations of this kind or for the small profits of the exchange operations connected therewith. The United States has still a vast area in proportion to its population, its natural resources are not yet fully developed, and it is a country of large and rapidly acquired fortunes. It will, therefore, be many years before the investors and entrepreneurs are forced to direct their attention to foreign fields. London's supremacy is the cumulative result of numerous forces, political as well as economic, spread over a long series of years during which time the world has learned to think in terms of British money, and the bills of exchange on London have been raised almost to the dignity of an international currency, while the safety of the Bank of England and the value attached to the word "sterling" have become proverbial. Sovereigns and to a great extent Bank of England notes pass current the world over without recourse to money changers. The dollar and the dollar bill must be made equally well known and acceptable. It must not be overlooked that, when an international business is so long established and well centralized as the money market of London, the world will continue to use it as a matter of convenience irrespective of the possibly superior facilities of New York. The financial roads to London are well defined by much travel, and business tradition will favor the old stand; it is human nature the world over to follow the cow track across a pasture no matter how oblique its direction. PLANT LOCATION 6l 3. Economic factors — The principal economic factors which tend to enhance London's position as a financial center may be considered under the following heads: Free Gold Market; Liquid Discount Market; Stability of Money Rates; Immense Mercantile Navy, Great Foreign Export and Import Trade; Tariff; Excellent Banking System at Home and Abroad; the Nxmierous Branches of Foreign and Colonial Banks Estabhshed in London; Freedom from Panics and Financial Disturbances; Free Navigation Laws; Marine Insurance, etc. ; and reliable Ship Registration. Great Britain adopted the gold standard unequivocally in 1816, over one hundred years ago, and has not departed from it since, even to the extent of charging a fractional premium on gold or by restricting its export by legal or sentimental embargoes. The national complement of a free gold market is a liquid money market capable of absorbing biUs of exchange to an almost unlimited amount. This unique feature of the London market makes a first- class bUl of exchange on London as acceptable as gold. The strength and broadness of the London market, apart from the natural resources of the country, lie in the ebb and flow of foreign capital through the machinery of the branches of foreign and colonial banks established there. The absence of a tariff in Great Britain except on a few specific articles is of great importance, as merchants and o.thers import into Great Britain free of duty and export again at their convenience. London and the other important seaports of Great Britain correspond to the freight yards at railway centers. Cargoes consisting of goods of every description pour into these ports from all parts of the world and are there sorted into mixed cargoes to be dispatched to various coun- tries. In other words London also acts as a clearing-house for cargoes. Large amounts of British capital have been invested in the estabhshment of British banks in her colonies and in foreign countries with head offices in London, and these render invaluable assistance in the operation and preservation of British foreign trade and commerce. Great Britain possesses a mercantile navy second to none in the world. This not only means an immense toll on the world's commerce in the way of freight, etc., but also enables Great Britain to govern to a great extent the destination of cargoes. Incidentally, with her large ship-owning, Great Britain is naturally interested in marine in- surance, and owing to the excellent standing of her insurance com- panies does an immense business in foreign marine insurance. 62 BUSINESS ADMINISTRATION British navigation and shipping laws are liberal. A foreign ship is in the same position as a British ship with regard to British trade, and foreign ships engaged in the coasting trade are not subjected to higher port rates than British ships. British law affords equitable protection to both British and foreign seamen, but avoids emasculat- ing the service by undue paternalism. We have now reviewed briefly the principal reasons to which London owes her financial supremacy and though the events of the past few years have brought New York into a position of financial eminence and power, it remains to be seen how much of this power has been thrust upon her temporarily and how much she has acquired permanently at the expense of London. B. Factors Determining Location in Sub-Areas — Site Location The preceding discussion has been directed toward answering the question: Within what broad area, or areas, may a given plant be appropriately located? There still remains the determination of the proper site within such area. It will be found (see Selections 12-13) that there is geographical specialization by small areas and that this may be explained by the same general principles which explain specialization in terms of broader territories. But even within these small areas a specific site must be chosen and we must consider (see Selections 13-16) the factors determining this choice. These matters lead very naturally to a discussion (see Selections 17-19) of the relative merits of city, country, and suburb as locations for industrial plants. PROBLEMS 1. "Eventually, in the largest cities, the subdivision of certain sections is highly developed. The distribution of different sections depends upon (i) topography; (2) prior establishments; (3) transportation; (4) eEEectiveness of the demand of different utilizations; (5) their relation to one another." Explain the significance of each item. 2. "The financial section which is of marked importance only in the largest cities, is generally to be found at or near the starting-point, or the original center of gravity, and is hard to move." Explain. 3. Why does the relative significance of corner lots vary with different industries? Can you lay down any general principles governing the matter ? 4. Enumerate forces tending to group businesses in particular streets; tending to disperse businesses. What businesses in each case ? 5. Do you know a city in which there is an "automobile row," ? Why is it located as it is ? What other industries are grouped near it ? PLANT LOCATION 63 6. "The greater the number of passers-by, the greater is the value of a site for retail establishments." Is the statement strictly true or are there certain exceptions? 7. 'In a general way what classes of stores follow the growth of a city into its suburbs and what ones stay at its business center ? 8. "Wholesale trade is likely to be centralized; retail trade is likely to be decentralized." Why or why not ? 9. "EfiEective competition in retail trade sometimes requires concentration, sometimes dispersion of business." Explain. 10. Draw up a statement of general principles with respect to the location of retail establishments. 11. What is meant by saying that a factory site should be selected in terms of the proper routing of materials in manufacture? in terms of equipment to be used ? in terms of an appropriate t}fpe of building ? 12. "The entire planning should be for an ultimate plant even if a dozen times the size of that to be immediately constructed, and land pur- chases should be made on that basis." Give reasons for and against. 13. How much weight do you give to "salability" in locating a plant ? As much for a factory as for a retail store ? Assume any given business and list as many factors as you can which will affect salability. 14. What is meant by saying that it is desirable so to locate a plant as to secure advertising value ? 15. "The city location has the advantage: first, for the manufacture of specialties depending upon fashion, of goods for immediate consump- tion, or requiring considerable supervision by the selling department over the manufacturing department, where nearness of market is necessitated by the nature of the product; second, when a special advertising and selling advantage will accrue to the sale in the city where the factory is situated; third, when skilled labor is required intermittently or in large quantities; fourth, where the product is shipped in less than carload lots." Explain what the writer has in the background of each of these statements. 16. "If it were left to the selling organization to choose, there is no doubt that in ninety-m'ne cases out of a himdred the factory would be located in a large city." Why, or why not ? 17. "A rigid and inflexible street system in a city handicaps a factory." How? 18. "Adequate provision for schools, libraries, and civic institutions may be of business value to the suburban plant management." How ? 19. "The dty location has always one advantage. The city is the battle- field of business." Is this worth much ? 20. Cite instances where low tax rates or freedom from taxation may result from causes which would put an unendurable burden on a busi- ness in other respects. In general terms when are low taxes a safe attraction ? 64 BUSINESS ADMINISTRATION 21. "Perhaps the greatest single factor in promoting the bad location of producing enterprises is local patriotism." Explain. 22. If X lot will save a manufacturer |i,ooo a year over Y lot because of its better facilities for handling, shipping, or storing goods, 'how much more can the manufacturer afford to pay for it ? 23. "Mechanics of the highest skill or speciah'zed training avoid the isolated plant for definite reasons." Give some of these "definite reasons." 24. "In some cases the facilities for quick and economical construction are the crucial considerations." Why quick ? 25. "A site in the city itself will generally be too costly for all but light manufacturing." Do you agree ? 26. What is the significance of settled and stable political conditions with respect to the location of industries ? 27. Local ordinances need to be considered, particularly in large cities What matters are thus affected ? 28. "The impulse toward cheap land, low taxes, and elbow-room are centrifugal forces throwing industries out from the large centers of population. Centripetal forces bind them as satellites beyond the outer rings of the mother city." What centripetal forces ? Give some examples of satellite cities. 29. Is such an enterprise as Gary worth while as a means of escaping labor problems ? Give detailed reasons in support of your answer, 30. Does the suburban or country location increase the social responsibility of the business manager ? How ? 31. List the factors for and against country location (as opposed to city location) as regards (a) labor, (6) material, (c) markets, (d) social environment. 32. "The smaller an establishment the more significant is the question of location to it. The large concern can be more self-contained." Do you agree ? 33. Could a large bakery wisely be established in a small town? At what general principle is the question directed ? ' 34. Draw up an outUne of the main points in this section. Does your outline show cases of the manager's relationship to the physical environ- ment ? to the social environment ? to risk-bearing ? to personnel ? to finance? to the market? to technology? Are there evidences of interdependence in these relationships ? 12. GEOGRAPHICAL SPECIALIZATION BY SMALL AREAS AND THE SECTIONS OF CITIES' Every city has a definite structure which, expanding more or less regularly along the lines of least resistance, is subject to modifications by external influences. The study of the ground plan of any city ' Adapted by permission from C. C. Evers, The Commercial Problem in Build- ings, pp. 17-22, 83-86. (The Record and Guide Company, 1914.) PLANT LOCATION 65 will enable us to ascertain the lines of communication with the exte- rior, the main arteries of internal traffic, the subordinate streets, the distribution of the different sections, and their relation to one another. As cities grow, they become more complex and their subdivisions more numerous, and at the same time these assume more distinctive characteristics; numerous residential sections spring up, attracting people of different tastes. Business sections of established character tend to attract industries and occupations similar to those already located there and to repulse others. The addition of new territory disturbs the center of gravity and adds its influence to the other ele- ments impelling changes. The following list comprises the most important sections and indicates their uses: residence — (i) highest class residential, (2) general residential sections, (3) tenements or cheapest dwellings; business — (4) financial and office section, (5) high-class shops (general shops and department stores), (6) other and local shopping centers, (7) wholesale and commission, (8) warehousing, (9) factories, etc. The financial section, which is of marked importance only in the largest cities, is generally to be found at or near the starting-point, or the original center of gravity, and is hard to move. The highest class residential sections are established on land of moderate elevation, free from nuisances such as the noisy traffic of street-car lines. They attract high-class shops which endeavor to be as near as possible to their customers; they also attract churches, theatres, clubs, and similar attendant buildings. The medium-class residential sections are also attracted by land of moderate elevation, but depend to a greater extent on good trans- portation, and to a lesser degree on absence of nuisances. They also cause the establishment of local shopping streets and create a demand for chiurches, theatres, clubs, etc., for the use of their occupants. The cheaper dwellings or tenements utUize land in proximity to factories, warehouses, and shops, which are often intermingled with buUdings used as dwellings; others form dense settlements along transportation lines. Every improvement in transportation tends to strengthen these outlying settlements, whose inhabitants are wiUing to spend the extra time necessary to reach their employment and to pay the cost of the daily journey in return for cheaper rents and less crowded conditions. 66 BUSINESS ADMINISTRATION Shops catering to local trade follow and press on the different residential sections, whUst those general shopping sections which serve a larger territory are dependent to a greater extent on transportation which is necessary to bring their customers to them and they tend to concentrate in central locations. The largest shopping sections create a demand for light manufacturing establishments, warehouses, and stables or garages in their immediate vicinity. Commission and wholesale houses, which draw their trade largely from the surrounding country and are only partially supported by local buyers, congregate in sections which are accessible to their cus- tomers and where they have proper transportation facilities for the delivery of their goods. The location of warehouses and factories is governed by the need for cheap land and access to transportation lines. The less desirable lands are frequently used for the storage of articles of large bulk, like coal, stone, brick, and lumber. The location of these different sections and the areas they cover is constantly shifting, some of them offering greater resistance to changes than others. There exists a constant tendency to the dis- placement of one class of utility by others which can pay higher rentals, especially when their presence is detrimental. For instance, the advent of shops in the high-class portions of Fifth Avenue, New York City, has caused the steady northward movement of Fifth Avenue residences, with which all New Yorkers are famiUar. Distribution of diferent sections. — The distribution of different sections depends on: (i) topography; (2) prior establishment; (3) transportation; (4) effectiveness of the demand of different utihza- tions; (5) their relation to one another. 13. THE LOCATION OF RETAIL ESTABLISHMENTS' The possibility of making sales depends upon accessibility to the purchasing pubhc. The greater the number of people, other things being equal, who live near, who come to, or who pass by a certain location, the more valuable that location is. Every retailer who knows his business recognizes this. The president of the Woolworth five- and ten-centystores company expressed this idea exactly when he said, "I set my traps where the mice are thickest." Store managers, particularly the managers of certain chain-store systems, on seeking 'Adapted by permission from P. H. Nystrom, Economics of Retailing, pp. 138-53. (The Ronald Press Company, igrs.) PLANT LOCATION 67 out new locations for stores, first determine the number of people who pass the proposed locations, actually counting them for certain periods of time often for weeks, so as to get accurate data and then give their preference for store location to those places — other things being equal — that show the highest counts. The neighborhood store aims to get as close to the homes of the prospective customers as possible, so that it will be easy for them to come to the store or to send for goods by means of children or servants, and so that dehveries can be made quickly. But neighborhood stores must as a rule content themselves with handling only such Unes of goods as are of daily necessities in the surrounding homes, such as groceries, meats, baked goods, and dairy products. Another limitation on a neighborhood store that is clearly evident is that its area of trade is limited. Hardly ever does trade for such a store come further than four or five blocks. Beyond this radius the influence of competing neighborhood stores or the attraction of the stores in the center of the city overpower the trade possibilities of the neighbor- hood stores. In considering the value of a location for a retail store, however, something more than the number of passers-by must be taken into account. The purchasing power and the probable proportion of customers from the passing crowds are most important considerations. Hence in analyzing a location for a retail store, one must determine what economic classes are represented, to what extent in each, and what their buying habits are. Another classification of passers-by that will prove helpful in determining an estimate of the possibilities of a location is based on the purpose or the reason for their passing by. Some are going to or coming from their place of work or business. Others are out for pleasvu-e. Others are out to buy, while others are out merely to look. Passers-by going to or returning from work or business are, as a rule, not good customers for anything, with the one exception of the higher-salaried and income-receiving classes who patronize news- stands, bootblacks, barber-shops, cigar stores, and, to some extent, haberdasheries on their way to and from business. Large crowds of factory employees, men and women, may pass a store day after day for years on their way to and from work and never patronize it. On their way to work there is usually little time left before the whistle blows; hence there is usually little or no chance to look at goods. On their way from work they are usually tired and hungry and not in 68 BUSINESS ADMINISTRATION the mood for shopping. Many factory workers, particularly of the younger generation, do not care to trade in a store or in a part of town where their occupation is known or where any reference may be made to their daily labor. The "downtown" retail district is much more likely to draw their trade. A very large part of the goods of all kinds needed by the family from which the factory worker comes is purchased by the wife or mother, and thus the trade goes to the locations that are the most convenient or attractive for her. The only classes of retail business that seem to do well on the custom of working people going to or coming from work are, too often, the saloons and the cheaper grade of restaurants and lunch counters. Pleasure seekers are usually better buyers than the army of workers passing to or from work. Refreshments, flowers, sweets, souvenirs, and trinkets are some of the objects that may appeal to their fancies. Such trade is strictly chance custom. It is entirely dependent upon the time of year, the occasion, and the weather. The people who come out for the express purpose of shopping and buying are for the majority of retail businesses by far the most important classes. The places to which these people go are the places that are valuable for retail purposes. Except for such necessities as common foods, meats, and so on, the place to buy, according to the opinion of the shoppers, is nearly always in the heart of the town. This may be the location of' the village comer store, the big stores at the intersection of the principal streets in the city, or the place where the great public markets are located. Here, in the mind of the average customer, are offered the biggest variety, the best qualities, the best facilities for examination, and the biggest bargains. Stores tend to cluster around this best location in the city and to form what is known as the retail district. The stores established are not always competitors. Almost as frequently they arrange themselves into complementary groups co-operating with each other in the attraction of custom and in the making of sales. Thus, stores dealing in men's goods are sometimes found on one side of the street, while stores deahng in women's goods are located on the other side. Dry-goods, millinery, jewelry, shoe, and book stores are likely to be found close together, if not entirely absorbed under one roof, in the form of a department store. Grocery stores, meat markets, and bakeries tend to form another grouping, each co-operating in a way with the other kinds of stores in the group. Confectioneries, soda and ice-cream parlors, florists' shops, and theatres form another natural PLANT LOCATION 69 grouping. The saloon, billiard hall, tobacco and news-stand, and the cheaper grade of restaurants form still another. But stores that sell exactly the same kind of goods and that are clearly competitive do not necessarily merely divide the business that was formerly done by one store. When there is known to be compe- tition, this in itself attracts trade, and people come from farther away. New wants are developed that did not exist before. Thus the result is an increase in the total amount of trade. Stores han- dling the same or similar lines and stores handling different lines of goods, all close together, save the customer's time. This is probably the greatest argument for the department store, which assembles many lines under one and the same roof. Most customers, particularly women, like to compare values in different stores before purchasing. An investigator for a large pub- lishing house has stated that " before she buys, a woman usually visits three stores to compare goods. The man, who is distinctly 'anti- shop' in his inchnations, on the contrary visits but one," Competing stores, located close together and dealing in goods women buy, permit comparisons to be made easily. A location next to a large, old, well- advertised, well-known, and popular store is always valuable for an- other store dealing either in complementary or competitive lines of goods. We have so far considered the possibilities of a retail store location from the standpoint of the number of passers-by, the buying power represented, and the purposes that bring them by. There is another fa or having an influence on the value of a location and that is the buying habits of the possible customers. Not all people within even the same economic classes, or those having the same incomes, expend their money in the same way. In nothing is this more clearly exempli- fied than in lines commonly called luxuries. Some people spend their money freely for such items, while others with the same income do so sparingly. The average consmnption of such commodities varies greatly from one community to another. In this connection it may be noted that tastes and habits are neither stationary nor permanent. Any influence on the course of people's movements affects the value of a retail location. Certain streets are more popular than others, and one side of the street is generally more traveled than the other, with a consequent difference in value for retail purposes. One must assume that there are definite reasons for this, and upon the 70 BUSINESS ADMINISTRATION basis of these reasons the retailer must select his location or make the best use of the one already selected. Sunlight and temperature tend to make one side of the street more crowded than the other. In warm climates and in warm weather people seek the shady side. In colder climates and in the winter-time they walk the sunny sides. Which side of the street is most popular must depend therefore upon what time of the day shoppers come out in greatest numbers. The shady side of the street has an advantage. Because of the reflection of softer lights from the plate glass and show-window back- grounds on this side, the window displays appear to better advantage and therefore draw more attention. Also a greater variety of goods can be shown and much better effects can be obtained on the shady side of the street than on the sunny side because of less danger to the goods themselves from the effects of the sim. Goods of delicate shades generally fade easily and need protection from the sun's direct rays. In order to display such goods on the sunny side awnings are necessary, but awnings interfere with the widest and best use of the front of the building and windows, and hence may be considered in the hght of necessary evils only. In some places there are generally prevailing winds that strike certain locations or one side of certain streets in a more disagreeable way than the other side, causing values to be less on the exposed side. Dusty and windy locations are never desirable if they can be avoided. If a town is built on a sidehUl, the upper side of the street is nearly always preferable to the lower. The reason may be that the upper side gives a better view, or it may be that it is less laborious to go from the upper side to the lower side, if necessary to cross the street. Dust and refuse tend to gather on the lower side of the street, with the result that the upper side is generally cleaner. What- ever the cause, the fact remains that the upper side seems to be favored in most cases. This tendency may be remedied to a certain extent, but not entirely, by having the streets graded so as to put the walks on both sides on the same level. Often the only explanation for the value of a side of street for business purposes is popular habit. People continue to take one side rather than the other because sometime in the past they found it best to do so. After the reason for so doing passed away, the practice continued as a habit. PLANT LOCATION 71 See also p. 64. Geographical Specialization by Small Areas and the Sections of Cities, p. 319. Some Phases of Market Anal)rsis. 14. SITE LOCATION CONSIDERATIONS' The beneficial or detrimental effects of surroundings or external conditions on diffemit classes of buildings may be summarized as follows : Financial and office buildings. — ^Very great excess in value of comer over interior lots on account of permanent light, increased available accommodation, large frontage for advertising, and greater accessi- bility. Beneficial Detrimental Poor or dissimilar surroundings Difficult access from other sections Distance from main financial insti- tutions Noise of elevated railroads Noisy or unpleasant factories or plants Similar surroundings Ease of access from other sections of the city Accessibility to principal financial institutions, banks, exchanges, clearing houses, etc. Compactness Ease of intercommunication Absence of severe grades High-class general retail shops and department stores. — Great excess value of corner over interior lots, especially at the intersection of two or more traf&c streets, mainly on account of the increased oppor- tunities for display and the intensity of passenger traffic on these streets; partly on account of better light; they attract loft buUdings for light manufacturing or for finishing processes, which locate as near them as possible. Beneficial Detrimental Good frontage on traffic streets for display Good transportation facilities Continuity of display windows of other shops Nearness to the best residence sec- tions Frontage on non-traffic streets and too small area for proper display of goods Poor transportation facilities Nuisances, such as irregular build- ing line, schools, vacant unim- proved lots, factories, stables ' Adapted by permission from C. C. Evers, The Commercial Problem in Build- ings, pp. 83-86, 259. (The Record and Guide Company, 1914.) 72 BUSINESS ADMINISTRATION Beneficial Good streets and sidewalks Absence of severe grades Good access from residential sections Sufficient area for proper showing of goods A rear or side street for the delivery of goods (in some cases, especially department stores) Detrimental Lack of continuity of shop fronts Poor access from residential sections Small local retail shops. — Corners more valuable than interior lots on account of increased opportunities for display and light; proportion depends largely on value of traffic on intersecting streets. Beneficial Proximity to customers, who gener- ally are those residing in vicinity Car line on street Good frontage for display more important than large area Maximum depth necessary, about fifty or sixty feet Continuity of shops, but not too long blocks; if blocks are too long they are weak at center and receive a smaller proportion of passenger traffic for a given frontage Good paving and sidewalks and clean streets Detrimental Inaccessibility to customers Frontage on non-traffic streets Lack of continuity Too long blocks, too long street crossings at corners Poor transportation facilities Bad paving and sidewalks and dirty streets Nuisances, such as factories, stables, etc. The best local shopping street is generally found to lie as nearly as possible through the center of the district which it serves; its strongest part will tend to be near the center of gravity of the section. Wholesale or commission buildings. — Comer lots do not greatly exceed interior lots in value. Sufficient floor area for displa3dng and storing goods more important than frontage. Goods generally advertised to a greater extent by commercial travelers than by street display. PLANT LOCATION 73 Beneficial Detrimental Sufficient area for storage and dis- Lack of sufficient area for display play of goods Ease of access Light (in some cases) Proximity to high-class retail stores when custom is with them Proximity to freight transportation facilities Location amidst similar utiUties Good and level streets for hauling and offering of goods Distance from transportation facili- ties Poor street improvements and heavy grades, increasing cost of hauling Warehouses.- — ^Comers of practically the same value as interior lots, except where light is needed for inspection of goods. Frontage on street of small importance compared to required area. Deep lots give cheaper rentals. Beneficial Nearness to steamship or railroad facihties Level and weU-paved streets for hauhng Detrimental Lack of transportation facilities Shallow lots Difficult access, heavy grades, and poorly paved streets Factories. — Comers of same value as inside lots, except for light. Land of cheap value and nearness to transportation facilities chief requisites. For light manufacturing, proximity to large retail stores which they serve. A word should be said concerning the difference between corner lots and inside lots for various purposes. The greatest difference between inside and corner lots occurs in business property at the intersection of two traffic streets, or where property has its long frontage on a business street. The only satisfactory way to estimate the value of such plots is by capitalizing the net rents, less the interest return on the cost of the building. The following table shows, in terms of percentages, the approximate difference in value of corners over inside lots in different classes of property. 74 BUSINESS ADMINISTRATION Cheap Medium Class High Class Detached residence prop- erty Any difference in value offset by the extra cost of street im- provements 10 IS to 20 IS to 20 20 to 25 S to 10 20 to 30 2S to 50 2S to 30 25 to SO 40 to 50 10 to 20 Attached residence prop- erty 10 to so SO to 100 30 to 40 Apartment houses Tenements Small shops and flats Stores and offices SO to ISO ■ s° to 100 IS to 20 Financial buildings Wholesale and commission 10 to IS Little, if any, except in high factories, where it may be 10 to 20 Warehouses and factories 15. AN OUTLINE OF THE RELATIONS OF TRANSPORTA- TION TO SITE LOCATION- [This material is presented not only because of its own subject- matter but also because it indicates a possible method of attack upon other phases of site location.] A. Transportation 1. Railroads (freight problems) a) Quantitative requirements How important a matter is rail transport to you ? b) Qualitative requirements What type of service do you demand ? Is a private siding necessary ? In what directions must your goods travel and -what roads are required for this ? Is your business large enough to make you independent of any one road or would it be best for you to secure a plant site which would give you a choice of Unes ? c) What sections of the city would best meet your needs in this particular ? 2. Railroads (passenger problems) a) Quantitative requirements b) Qualitive requirements What type of service is demanded ? In what direction is the greatest amount of travel ? Where are the passenger terminals which drain this territory located ? » Adapted from an unpublished manuscript by F. M. Simons, Jr., Manager of Industrial Engineering Department, Arthur Andersen and Company. PLANT LOCATION 75 3. Waterways a) Quantitative requirements How important a matter is water transportation to your industry ? What type of transportation is most important and to what degree — lake, river, canal ? b) Qualitative requirements What t3^e of service is demanded ? In what direction must your water traffic flow ? What (and in each case specify, lake, river, canal) water facilities best meet your requirements and where are these facilities to be found ? c) What sections of the city best meet your requirements in this particular ? 4. Electric a) Quantitative requirements How important a matter is this to your plant and why ? b)' Qualitative requirements What type of service do you demand — surface, elevated, inter- urban ? From what parts of the metropolitan district (or surrounding territory) do you recruit your labor ? Is your industry such as to allow a wage sufficient to permit of carfare or must you seek the labor in its home ? What parts of the city best meet these requirements ? c) What sections of the city best meet your requirements in this particular ? B. Street communication I. Cartage and drayage (Study this in connection with your transportation problem. It may be that a wise selection of plant site would wipe out the cartage problem) a) Quantitative requirements How iniportant a matter for your plant and why ? 6) Qualitative requirements What type of service does your business demand ? For example, what weight and bulk of article must be handled and^what is the effect of this on your problem ? How fragile or perishable are your raw materials or products ? What is the resultant effect ? c) Whzt is the resultant of your cartage and drayage problem ? d) What sections of the city best meet your needs in this particular ? Paving and road conditions and street congestion problems confront you here 76 BUSINESS ADMINISTRATION 2. Street conditions affecting movement of persons; pavements — their condition and width. Consider this matter under headings indicated above, remembering that for a large plant this may be an important detail i6. THE INTERDEPENDENCE OF CONSTRUCTION AND EQUIPMENT WITH SITE LOCATION' The following is a classification of the work incident to the planning and building of industrial plants down to the time of definite site location. P= PRELIMINARY SERVICE P a Determination of specific manufacturing requirements and com- pilation of data relating to present and future needs. P 6 Determination of fundamental principles that will be followed in new plant regarding the administration of all manufacturing details. P c Consideration of features exemplified by plants recently built for essentially the same class of work. P d Determination of kind and amount of machinery that should be provided for immediately. P e Determination of geographical location of site and whether plant should be built in business center or suburban section. P / Determination of approximate arrangement of equipment and processes based upon elemental routing and administration requirements. P g Determination of floor areas required for manufacturing depart- ments, storage departments, assembling departments, offiv.:es, etc. Also for likely future requirements. P h Determination of departments which must be accommodated on the ground level and which may go on upper floors. P i Determination of railroad and trucking facilities that should be available for receipt and shipment of materials. P j Determination of total property area needed at once, and amount that shoidd be reserved for the future. A tabulation should now be made of the areas necessary for different classes of work, for storage, and for all other purposes includ- ing yard requirements, the immediate and future needs being segre- gated. The open and enclosed areas should be totaled separately, and a note made of the enclosed floor space that does not necessarily have to be upon the ground floor. With all the foregoing data at hand, a ' Adapted by permission from Charles Day, Industrial Plants, pp. 19-30, 46-48. (The Engineering Magazine Company, igii.) PLANT LOCATION 77 fair opinion can be reached concerning the shape of property that should prove most desirable. The considerations have so far been based upon the assumption that an ideal property can be had; and this is as it should be, for the site should be selected with a view to attaining as nearly as possible to such an arrangement. Of course the procedure is somewhat differ- ent if the location of the new plant is fixed in advance, as actual con- ditions must then be taken into account from the start with a view to minimizing apparent disadvantages. The remaining subdivisions of our preliminary service have to deal with the selection of the property finally determined to be most suited to our circumstances, and the final disjjosition of the building and equipment features. P k Selection of property that most nearly meets the requirements dictated by study of the foregoing factors. If possible, it is prefer- able to defer piurchase until completion of preliminary work. Usually a nmnber of sites are found to possess certain of the essential requisites, although each may fail to comply in some par- ticular with the ascertained requirements. Consequently, several properties are frequently taken under consideration pending the com- pletion of definite layouts, building sketches, and estimates of total cost. In order to make the best selection of property for an industrial plant, all the data bearing directly upon the desirabihty of the loca- tion for the business in question should be separately tabulated, and in this way the work will be greatly simplified through the ready elimination of undesirable sites. The essential data will, in most cases, comprise a knowledge of the character of soU for foundation purposes, expense that wUl be incurred to make the property avail- able, cost of property, availability of water, coal, oU, gas, or other raw materials, sewers, and protection afforded by the locality against destructive fires, etc. It has been assumed that the decision previ- ously reached as to geographical location has been based upon a knowl- edge of the desirability of the labor market, and the point best suited for the economical receipt of the materials or products upon which work is to be done and their final distribution to customers, and, of course, only such properties would be considered as afforded the requisite area. If one property appears to be undoubtedly preferable to all others, the engineer can then proceed accordingly; but, as has been stated, 78 BUSINESS ADMINISTRATION it is possible that he may wish to work up preUminary layouts for several properties before making the final selection. In this case, precise information should be secured concerning each site that is to be taken under serious consideration. First a survey should be made, preferably by engineers in the employ of the municipality or county in which the site is located, for their intimate acquaintance with the status of local surveys, deeds, and records is valuable. The "plat," as a survey is called, should give the property limits and elevations (at the intersection of suitable cross-section lines) which should preferably refer to established datum. The location and character of all buildings or other structures And railroad sidings existing on the property should be carefully recorded, as well as conditions of this character in connection with the abutting prop- erties. All sewers, gas pipes, and water pipes and openings to same, as well as all electric circuits (both overhead and underground) occupy- ing the adjoining streets or crossing the property, should be indicated and their depth or height above the standard datum noted. The same plat should indicate the location of such test pits as are made in order to determine the character of the soil or wells that have been driven to ascertain the available water supply, and a note should be included calling attention to adjoining streams, if any exist, and to the nearest trolley system or railroad, if sidings are not available upon the property. P / Preparation of alternate layouts of departments, segregating them into one or more buildings of assumed types, taking into account all the foregoing factors including the selected property. P m Reconsideration of all work done so far and preparation of a revised layout incorporating as far as possible the best features of the vari- ous preliminary studies. Making outline drawings of buildings. P n Preparation of a classified estimate of cost based upon unit prices. P Determination whether estimated expenditure would result in a "fixed charge" consistent with the probable profits of the business, i.e., can the business carry the necessary investment ? P p Determination whether owner is prepared to make the total justi- fiable expenditure. P q Revision of layouts, if required by financial' limitations (P o or P ^ or both) , and placing data and plans in suitable form to be used as a basis for the preparation of architectural and engineering drawings and specifications. PLANT LOCATION 79 17. CITY, SUBURBS, OR COUNTRY' Consider the relative merits of the three classes of location open to the prospective manufacturer, namely, city, country, or suburban. Cities, being natural centers for trunk lines or water transportation, usually offer superior advantages for obtaining raw materials and shipping finished goods. An abundant labor supply is obtainable as compared to other localities. If the plant is small and dependent on other industries as, for instance, repair shops or some closely articu- lated industry, the city offers superior advantages when these other industries are present, as they usually are. It is often easier to fimance an undertaking in the city, cities offering better fields for obtaining subscriptions to stock or obtaining special inducements to locate, such as exemption from taxes or even large cash bonuses to assist in starting the enterprise. If the plant is small and is supplying the local market alone, the city offers market advantages that would not be so important to a larger plant. A plant located in a city enjoys municipal advantages such as good streets, sewers, gas, police protection, fire protection, etc. As opposed to these advantages the city location has the dis- advantage that land is high priced, and it is very often difficult for large works to secure a site within a city where buildings exactly suited (to the purpose desired can be erected without great expense; and if the city is a growing one the taxes in time make the location too expensive. This is one of the reasons why many factories have, within recent years, been compelled to move to the country or the suburbs. City restrictions regarding smoke and other municipal or- dinances governing industry are questions that must be carefully con- sidered. While labor may be abundant in the city, the cost of living and hence the wages paid are, in general, higher than in the country. The advantages of a location in the country are not so numerous as those of the city, but they are often of paramount importance. Thus, if a water-power is obtainable or if a supply of pure water is necessary, as in paper-making, a country site may be very desirable. Land is cheap in the country and hence the factory can be built to suit the exact needs of the industry and ample provision made for growth. Taxes are low and restrictive ordinances not likely to hamper the activity of the plant. The larger the plant, the less it is dependent 'Adapted by permission from D. S. Kunha.]!, Principles of Industrial Organi- zation, pp. 227-34. (McGraw-Hill Book Company, Inc., 1913.) 8o BUSINESS ADMINISTRATION on other industries and hence the country site, in general, appeals to the large operator more than to a small one. The local market is, likewise, likely to be of less interest to the large plant. Undesirable neighbors can be more easUy avoided in a country location and the danger from fire and other hazards resulting from surrounding indus- tries are also minimized. On the other hand, the labor supply of the country is usually a troublesome problem. The city offers advantages and amusements to the working classes that cannot be had in the country. An effort is made to offset these attractions by building model factory villages where employees may acquire homes on easy terms and enjoy the healthful Ufe of the country. Of course the employer who engages in such an enterprise must expect to feel a greater responsibility toward his employees than he would in a city where the bond is much looser. But such work as this is worth while, and no doubt the near future will see a great amount of decentralizing of industry from the thickly congested centers in favor of country locations. Just as it is difi&cult to induce labor to leave the cities, so it is difl&cult to attract them away from good country industries if the conditions of life are made attractive; and labor troubles are likely to be less in a country location than in a congested city. The suburbs of many cities offer a compromise between the city and country and possess many of the benefits of both. Land can be obtained at a price far below city property, and trolley Unes have made living in the suburbs cheaper than in the city and yet made it possible for the suburban dweller to take advantage of the attreictions of the city. An examination of any of our large cities will show an immense amount of manufacturing in the suburbs, this location being particularly advantageous for fair-sized plants. From the above it will appear that the city location in general offers greatest attractions to the small plant, the suburbs are best adapted to fair-sized plants, and the country offers by far the greatest attraction and fewest disadvantages to the very large plant, provided an adequate supply of labor can be obtained. i8. SATELLITE CITIES' From the middle of Philadelphia, several departments of the Baldwin Locomotive Works have been shunted out into a small 'Adapted by permission from G. R. Taylor, SalelUte Cities, pp. 1-14 (D. Appleton and Company, 1915.) PLANT LOCATION 8i suburb. Flint, Michigan, two hours from Detroit, has been seized as the place for huge automobile factories. While the population was trebling in the first three years, several hundred operatives had to be housed in tents throughout one summer. A big corn-products plant moved from the middle of Chicago to the near-by prairies and a "glucose city," Argo, started up. It occupies part of a tract of ten square miles, which one promoting company is developing as an mS;^ ,«»/BMT CHICAGO mSSKtf HAMMOND SJTEaEB. ClAR/ Chicago and Satellites "industrial district" and into which Chicago has already emptied more than two dozen establishments. Just outside Cincumati a residential suburb, Norwood, is now the home of a score of manu- facturing concerns. Impelled partly by the arbitrary tolls charged on coal carried across the Mississippi River, industrial plants have moved over the bridges from St. Louis and founded a group of new towns in Illinois. The Standard Oil Company, a few years ago, poured out $3,500,000 on the bank of the Missouri a few miles from Kansas City, and the town of Sugar Creek sprang up. Yonkers long 82 BUSINESS ADMINISTRATION since lost its staid old character in a smother of hat and carpet fac- tories. The metropolitan manufacturing district stretches out in belts and flanges from New York into Long Island, Staten Island, and New Jersey, while eastern Massachusetts is a mosaic of mill towns. In some sections of the South scarcely a city of any size lacks one or more satellites thrumming with spindle and shuttle. ^'ELUT'ON ^^w fyj l' GRANITE aiY ilMADUON O DROOKLYN N,aa3j4>X EA/T/T'LOU!/ St. Loms and Satellites Gary, with its population nearing 50,000, where in 1906 there were only rolling sand dimes covered with scrub oak, is thus seen to be but the largest and most spectacular example of the far-reaching industrial exodus. Far-reaching and fast-moving, for Gary had scarcely attained four-year-old dignity when work started on a still newer member of the United States Steel Corporation's brood of steel towns — Fairfield, first known as Corey, on the edge of Birming- PLANT LOCATION 83 ham, Alabama. On the heels of Fairfield came the news that more millions and another plant would found another steel town near Duluth. This industrial exodus from city center to suburb was first seen conspicuously in the estabhshment of PuUman and Homestead in the early eighties. These two places were by no means the only fore- runners. South Omaha, for example, in 1883, sprang up around the stockyards at a railway junction so rapidly as to win the name " Magic City." These exceptional towns, suddenly created at the dictate of pioneer master minds of the newindustrialism, thrilled the popular imagination. Many reasons are readily apparent for the location of these new industrial communities. The impulse toward cheap land, low taxes, and elbow-room throws them out from the large centers of population. These are the centrifugal forces. The centripetal forces are equally powerful and bind them as satellites beyond the outer rings of the mother city. Even the towns which, like Gary, have attained a considerable measure of self-sufficiency and lie perhaps across state boimdaries are bound by strong economic ties. Through switch- yards and belt-lines, practically all the railroad facilities developed during years of growth, which are at the disposal of a downtown establishment, are at the service of the industry in the suburb. It means much to be within easy reach of at least one large market for finished product. Proximity to a big labor market is a more impor- tant factor. The census bulletin simis up the industrial exodus in numbers of manufacturing establishments, in value of products, etc. From the standpoint of the common welfare, it should be reckoned also in terms of citizenship and human values. What of health and housing ? of leisure and income to make it count? of playgrounds and schools? of living costs? of city government, politics, and civic spirit ? There is a pubUc challenge in the very fact that in these localities civic and industrial conditions are being created brand-new, on a wholesale scale, without the handicaps and restrictions which high land values and prior improvements impose on every effort to recon- struct the congested centers. Are we turning these advantages to account? In oiu: general municipal development we pay more and more heed to the counsel of city planner, housing expert, and sanitarian. We struggle to reshape our rigid, old-fashioned 84 BUSINESS ADMINISTRATION conditions to fit newer and more workable molds, just as the manu- facturer has to tear out, rebuild, and build higher if he stays in the midst of congestion while his business expands. But have we set ourselves to inquire whether these made-to- order iudustrial cities, involving living conditions for thousands of people, are so shaped at the outset ? In the planning of the great suburban industrial plant, marvelous skill and foresight are shown in adapting buildings and machinery to the processes through which stufi becomes finished product. Are similar skill and foresight appUed to the development of the -things through which houses may become homes, a construction camp a community, and livelihood, life ? Apparently the answer is often in the negative. See also p. 109. What City-planning Means. p. III. The City-planning Movement. 19. THE CAUSES OF CONGESTION OF MANUFACTURES IN NEW YORK CITY' [The reader should regard this selection as a continuation of the discussion of the relative merits of city, country, or suburbs as loca- tions for industrial plants.] The following are probably the principal forces that have brought manufacturing industries into the city, or have retained them in it. First, immobility, i.e., the inability of certain old establishments, started on the outskirts of the city, to remove after the city's growth has enclosed them. Any disadvantages that each may suffer from congestion are counterbalanced by the dif&culties and loss that would be incurred in transferring plant and employees, both bound to the soil by many ties, to a new locality. Second, the advantages of a transportation center. New York City, as a point of intersection of transportation routes and of trans- shipment from land to water and vice versa, is a most economical place for assembling divers materials for manufacture and for dis- tributing products. In combination with other advantages this force has drawn the following industries, among others, to New York City: ' By P. T. Sherman, former Commissioner of Labor, state of New York. Adapted from D&partmenl of Labor Bulletin, Vol. X (Nos. 36-39), 1908. PLANT LOCATION 85 Industry Number op Persons Engaged* In State In New York City 8,066 7,660 1,872 1,861 1,584 1,286 1,939 1,70s 3,259 2,939 460 429 28,028 20,69s 2,953 2,938 7,963 6,253 3,760 2,63s 2,944 2,119 2,098 1,587 1,880 1,313 4,883 3,077 3,22s 2,348 13,163 10,134 5,466 3,933 Furs and fur goods Lead pencils and crayons Canvas and sporting goods Coffee and spice roasting and grinding . Paints, varnish, etc Articles of cork Cigars Cigarettes Flax, hemp, and jut« Sugar and molasses refining Mineral oil products Dyes, colors, and inks Asbestos, graphite, etc Rubber and gutta percha goods Cabinet work, n.e.s Pianos, organs, etc Boat and shipbuilding ♦Notice the high percentage of the workers in these New York industries who are in the» city. Third, labor advantages. New York City contains an unusually large population of unskilled laborers, which is constantly being re- plenished and augmented by an unequalled immigration. This popu- lation is generally uneducated and poverty-stricken. Its standard of living is of the lowest. And competition for employment among its members is most intense. They are, therefore, peculiarly subject to exploitation, sell their labor at the cheapest rates, and submit to the most unfavorable conditions of employment. And there is always or almost always a surplus of unemployed left over for extraordinary or seasonal operations — a condition seldom found elsewhere. For special reasons peculiar to the predominating races the superabundance of labor is greatest in the industry group "clothing, millinery, etc." Consequently competition for employment therein is most severe, and there result — ^in spite of the higher cost of living in the city — rates or wages and conditions of emplojmient that defy competition elsewhere. There is no such superabundance of skilled labor. In fact, owing to the entire neglect of industrial training in the American system of education, there is probably no part of the United States where there is a surplus or even a sufficiency of skilled labor. The greater part of highly skilled labor comes from abroad; and because it cannot in general be imported by contract, it must be picked up from ordinary 86 BUSINESS ADMINISTRATION immigration. As New York City is the gateway for the bulk of immi- gration and the first resting place of a large part of it, local industries possess some advantage in securing this skilled labor and in the greatest variety. Moreover, merely from its size and from its centrip- etal attraction for the unemployed, the city usually holds the greatest number and variety of unemployed skilled laborers. The influence of these advantages is difficult to trace; but it has been material in bringing about the establishment of and in maintaining at least some industries in the city, among which the following may be cited as examples: pianos and organs, etc.; professional and scientific instru- ments; clocks and time recorders; jewelry and gold pens; lapidary work; plaster casts and ornaments; lithographing and engraving; dyes, colors and inks; beveled glass and mirrors; tobacco pipes. Fourth, the advantages of convenience of delivery where pro- duction is chiefly or largely for local consumption, as against the disadvantages of out-of-town production, i.e., expense and danger of transportation and delay and uncertainty in dehvery. This force is intensified in New York City by peculiar railroad terminal deficien- cies and intra-urban traffic congestion. In estimating this influence, not only the consumption of the resident enumerated population is to be calculated, but also that of the large and extravagant visiting population. This influence is controUing, by itself in some instances, and in others in combination with some of the other forces elsewhere enumerated, in attracting the following industries: steam heat and power; electric light and power; malt liquors; artificial ice; confec- tionery and ice cream; bread and bakery products; crackers and biscuits; macaroni and food pastes; groceries, n.e.s.; mineral and soda water; bottles and jars; pressed, blown, and cut glass; beveled glass and mirrors; mirror and picture frames; paper boxes and tubes. Fifth, the advantage to manufacturing industries closely con- nected with other industries of propinquity to the latter. This force includes the preceding, i.e., convenience of delivery and also something more, i.e., convenience of accessibility during any stage of manu- facture, etc. This is well illustrated by newspapers. Their manu- facture, i.e., preparing and printing the paper, must be carried on in close proximity to the professional work of gathering news, etc., and editing, and at a point convenient for prompt distribution through commercial channels. Another illustration is the jewelry industries, in which many forces tend to unite their manufacturing and com- PLANT LOCATION 87 mercial branches in one establishment and to locate that establish- ment at the commercial center. The following are some different phases of this influence, with examples: a) Convenience for local repair, renewal, alteration, or extension of articles, is illustrated by the following industries: railroad repairs; laundries; telegraph, telephone, and fire-alarm apparatus; boat and shipbuilding; cleaning and dyeing. b) The attraction of dependent or subsidiary manufacturing industries to the same locality as those other industries which they serve, or upon the waste or by-product of which they are dependent, may be sufficiently shown by the few following examples: cUp sorting; sorting waste paper; glue, mucilage, etc.; cigar and fancy wood boxes; cooperage; dyeing, finishing, etc., of textiles; smelting and refining. c) The advantage, convenience, or necessity of having the factory close to the commercial shop or market can be best shown under a commercial classification: In custom work, by tailoring and dressmaking. In job work, by printing and publishing. In retailing, by the finishing, alteration, and repair departments of stores. Originally the practice of maintaining such departments was material in only a few trades; but the ."depart- ment stores" have extended it over a wide field and to include inci- dentally much complete manufacture. In wholesale selling, by the widely prevailing practice in many of the clothing trades of assimi- lating their production to custom or "job work" by manufacturing in lots imder the "hurry orders" and directions of visiting buyers. All the industries included in the industry group, "clothing millinery, etc.," are examples of the efiect of this influence; and also the specific industries enumerated in the following hst: printing and publishing; paper goods, n.e.s.; bookbinding and blank books; Uthographing and engraving; mirror and picture frames; traveling bags and trunks; mattresses, pillows, etc.; cabinet work, n.e.s.; upholstery goods; furniture and upholstery. ^ Turning now to the causes of relatively excessive concentration in the congested districts of the city, we are forced to take New York County to represent the congested urban center, and the other coun- ties to represent its suburbs. It would be more in accordance with actual conditions to take Manhattan borough alone for the congested 88 BUSINESS ADMINISTRATION district, and to class all the other boroughs as suburbs; but the figures, being collated in the bureau report by counties only, are not available for any better plan of comparison than that adopted. We have seen that the principal forces operating against the city are operating particularly against its congested center, i.e.. New York County, but that nevertheless manufacturing is particularly concentrated within that county. Therefore the forces above enumerated which operate in favor of the city must also operate particularly in favor of that county. They may be considered in order in this con- nection. First, immobility is purely negative, acting only to prevent the full operation of the opposite forces. But such as it is, it operates in proportion to the number of establishments, and as there are more establishments in New York County than in all the other counties together, it affects New York County particularly. Second, the advantages of New York City as a transportation center are peculiarly in favor of New York County. It has almost a monopoly of the city's railroad terminals, and it is the terminal of a large majority of the regular water transportation lines. Truckage from their terminals to the' other counties is slow and costly, owing to bridge and ferry congestion. It is only for goods imported by special charter or such as can be advantageously lightered from western railroad terminals and from terminal docks that the other counties are on an equal footing. Third, the advantages of cheap labor are all with New York County. The colonies of recent immigrants are nearly all in that county. The immigrant clings to a home in the colony of his friends for many years, and he cannot be employed most economically at a distance from his home on account of the delay, uncertainty, and expense of transportation. There is, therefore, often an abundance of cheap labor available in New York County when it is scarce in the suburban counties. This attracts many factories to New York County, and their existence there with their opportunities for employ- ment aids in holding the immigrants within that county. In this way an endless chain of congestion is created. Fourth, the advantages in delivery for local consimaption cause manufacturing to concentrate in New York County out of proportion to its population, because its consumption is out of proportion to its enumerated population, for the reason that transients and visitors are concentrated in that county, and that a large proportion of the PLANT LOCATION 89 population of the other counties carry on their business and therefore live and consume during the day in New York County. The conges- tion at the bridges and ferries across the water barriers that separate New York County from the other counties is suf&cient to make it uneconomical to manufacture in the latter for consumption in the former, to any material extent. Fifth, the advantages of propinquity to other industries and businesses are all in favor of New York County, because in it is con- centrated the major part of the city's commerce. It therefore appears a priori that the main forces that operate to draw manufacturing to New York City also act particularly toward its most congested county. Turning to the concrete side of this subject, the most material factor in congestion is the group "clothing, millinery, etc." There are 204,519 persons engaged in the industries included in this group in New York City, 178,094, or over 87 per cent of whom carry on their work in New York County. This group is, therefore, both the most numerous and the most concentrated. The following are the figures for its most congested industries: Indtistey Number op Persons Engaged In New York In New York City County S9,2SI 47.907 78,868 75,046 ggo 990 2,998 2,897 11,302 9,213 2,549 2,293 4,SS9 4,551 2,069 1,756 4,262 4,22s 8,569 7,792 1,614 1,380 1,107 1,106 1,604 1,151 1,696 1,467 Tailoring Dressmaking Suspenders and other furnishings Men's neckwear Women's white goods Infants' wear Ladies' neckwear Corsets and garters, etc Artificial feathers and flowers . . . Millinery Curtains, embroideries, etc Umbrellas and parasols Cleaning and dyeing Clip sorting So much for the extent and causes of the concentration and con- gestion of manufacturing in New York City. New York City is primarily commercial. Its commercial center is the lower end of New York County — the lower half of Manhattan Island. This district is congested with commerce and residences; and in addition 90 BUSINESS ADMINISTRATION there are in the county as a whole — and in large proportion in this congested part — 76 per cent of the manufacturing population of the city, or 41 per cent of such population of the state. C. Changing Location and Location Planning A review of the material thus far covered in this chapter will make it clear that there are many factors making for change in the location of existing business units. Under what circumstances should their managers yield to these factors? How can they determine what new site shall be chosen ? Can they secure assistance in study- ing such problems? The last two questions apply also to the case of a new business venture which may be in contemplation. It is not necessary to present here material upon the factors making for change. Problems i to 9 below will serve to recall certain aspects of this matter either already presented in these readings or lying in our general knowledge. It is worth while, however, to present certain material bearing upon the weighing of evidence which may be available concerning alternative locations (Selections 20 and 15); upon the various enterprises which provide material looking toward the solution of location problems (Selections 21 to 24); and upon the awakening interest of society at large in certain location matters ■ (Selections 25 and 26). No exhaustive treatment of any of these topics will be attempted. Instead, both the selections and the questions below should be regarded as samples of the problems at issue. A surprisingly large number of agencies assemble and distribute data of value to the manager who is studying plant location. To begin with there are various governmental reports, both state and federal, of which the census volumes wiU serve as an illustration. Such material, speaking generally, tells what has happened rather than what will happen and is accordingly of value primarily as back- ground material. The drift of the past may or may not be indicative of the tendency of the future. Again, industrial agents of railways quite commonly collect evidence — often ex parte evidence it is true — concerning opportunities along their lines. Sometimes they make quite comprehensive surveys and try to promote a balanced develop- ment of industries; sometimes their data are little more than summa- ries of local opinion in the communities concerned. Some real estate firms, too, make more or less of a specialty of studying sites, particu- larly of factories, and are in a position to give the interested manager PLANT LOCATION 91 local material of very great value. Closely related to the work of such real estate firms is the development company of the sort mentioned in selection 21, which may be said to charge a price for services rendered in connection with plant location and construction. Naturally, their Uterature is easily secured. Material in which more of the comparative element enters may be secured from some firms of industrial engineers who have built up files of information upon location problems and who undertake to investigate appropriate locations for their clients. One must not overlook, too, the local chambers of commerce, or other similar organizations, who sing the praises, sometimes with helpful analysis added thereto, of the com- munity opportunities and may even stand back of some development project (see Selection 23). A very respectable beginning has been made in the development of professional skill in dealing with location problems. PROBLEMS 1. Name some industries whose location will probably shift in the near future. Give your reasons for believing that such will be the case. 2. "Local skill, traditional practice, personality, import tariffs, which have built up and localized industries must succumb." Why or why not ? 3. Is it likely that municipal legislation, or regulation, will tend more and more to exercise control over location of industries? Will any other regulating agencies ? 4. As time goes on do you expect to see industries more or less dependent upon location in proximity to skilled labor supply ? 5. Can you cite cases where (a) the growth of technical knowledge, (6) movements of population, (c) transportation and commum'cation improvements, (d) social control, have led to changes in location ? 6. Tabulate the reasons why one may expect changes in industrial location in the future. 7. "There is a certain amount of inertia that attaches itself to industry when it has once been successful in a given place." What are the component parts of the inertia ? 8. "As society has become increasingly one of impersonal relations, and firm reputation becomes a less significant asset, scientific analysis of plant location problems becomes more important." Why or why not ? 9. "As any country develops industrially, as transportation becomes more effective and good labor supply more widespread, the intelligent loca- tion of manufacturing enterprises must be governed increasingly by strict economic consideration and less by inherited influences." Do you agree ? What difference does it make to you ? 92 BUSINESS ADMINISTRATION 10. "In these days of indirect costs, small diflferences are great differences. This means that any single question, such as location, affecting over- head profoundly is worthy of most careful study." Will this have a bearing upon re-location? 11. "The location and construction of a large modern industrial plant may require the services of several specialized advisers." Why? Who are they ? 12. What sort of educational training and experience would you consider necessary for a person who is to act as industrial agent or adviser on questions of factory location ? 13. Is there a place in the industrial world today for the professional plant location experts? What wiU be the probable future of the profession ? 14. What should you say of the value of an "industrial survey" made by a board of trade, a commercial club, a municipal commission, an indus- trial engineer, a real estate agent, a railway company? What is an industrial survey ? 15. Tabulate as many sources of information as you can which could be used if you were studying where to locate a plant. 16. Notice the table on page 95. Comment upon the value of any such table for the purpose at issue. Comment upon the value of this particular table. 17. What is a method by which you would go about determining whether, in a centralized bargaining center, there was room enough for another business of the same nature as those already being successfully carried on ? 18. Can accovmting be used to test the merits of a given location ? If so, can it be used prior to the actual location ? 19. What general principles explain the success of such private enterprises as the Central Manufacturing District ? 20. What would be the advantages and disadvantages of locating in such an area? Can you tell whether it would be a better proposition for some businesses than for others ? 21. What do you regard as the underlying principles in case of such enter- prises as the Bush Terminal or the Toledo Factories Buildings ? Some writers call such enterprises industrial incubators. Why? What classes of enterprises should you expect to do well in such buildings ? 22. Free sites and local inducements are often injurious to both the city and the factory. Do you agree or disagree, and why ? 23. What interest, if any, has the business manager in town planning? Is his interest, if any, philanthropic, artistic, or pecuniary ? Answer the same question with respect to garden cities. 24. "For the general comfort of the cities, factories should be confined to their special areas." Why ? Has the manufacturer any gains flowing from this districting? PLANT LOCATION 93 25. "These are days of measuring devices in business." What measur- ing devices can you enumerate as being useful in plant location or re-location ? 26. Draw up an outUne of the main points in this section. 20. HOW TO STRIKE A BALANCE IN LOCATION FACTORS^ [This selection is an interesting illustration of the methods com- monly used by engineers. It is helpful to think of such devices as " measuring aids of administration." Does the classification of factors here given contradict the classification given on page 15 ?] In many parts of the United States, particularly the portion east of the Mississippi River, manufacturers are confronted with the problem of reorganizing and rehabilitating their present plants in order to meet changed or changing conditions. Some of these prob- lems are brought about by tariff influences, others by western compe- tition, and still others are due to changes in the sources of raw materials. The question as to how this rehabilitation is to take place presents itself squarely to the management. This question usually is: Shall we develop our present property and plant by such additional acquisi- tions of property as will take care of the needs of the business- — or shall we consider selling or leasing our present plant and constructing a new one in a more advantageous locality, with perhaps better natural characteristics ? Let us see then if we can strike a balance of the various factors entering the problem that will help us intelligently to decide the question. By drawing up a list of questions that are the result of analyzing the situation and ascertaining the facts, we find that practically four- teen items cover the important factors relating to the present plant location and that seven items suffice for the consideration of a new location. PRESENT LOCATION 1. P.L. — What is the investment in the present plant ? 2. P.L. — How much of it is fixed capital? 3. P.L. — What proportion of (2) P.L. could be recovered by the sale of the property ? • Adapted by permission from H. V. Goes "The Rehabilitation of Existing Plants as a Fictor in Production Costs," in The Engineering Magazine, XLIX (191s), 357-72, 560-73. 94 BUSINESS ADMINISTRATION 4. P.L.— How much additional property would have to be acquired to properly develop the plant ? 5. P.L. — 'What would the investment be ? 6. P.L. — ^Is the labor market satisfactory ? 7. P.L. — Js the raw-material market satisfactory ? 8. P.L. — Are the shipping facilities adequate ? 9. P.L.— Can (8) P.L. be made so ? 10. P.L. — Can the present buildings be suitably altered to adequately serve the business ? 11. P.L.— What will (10) P.L. cost? 12. P.L. — Can the present buildings properly be made a part of a logical comprehensive development of the plant ? 13. P.L. — ^What are the fixed charges of the present plant? 14. P.L. — ^What is the production cost per unit ? NEW LOCATION 1. N.L. — ^What will the land for a new site cost ? 2. N.L. — ^What wiU the buildings cost when completed and ready for occupancy ? 3. N.L. — ^What will be the fixed charges on (i) N.L. and (2) N.L. ? 4. N.L. — ^How much will (i) N.L. and (2) N.L. be reduced by (3) P.L. ? 5. N.L. — Will (6), (7), and (8) P.L. and other considerations be sufficiently improved as to afEect production cost, (14) P.L. ? 6. N.L. — WiU the production cost per unit be lowered? 7. N.L.— Will the margin between the selling price and production cost pay (3) N.L. plus a sinking fund and leave a sufficient profit to warrant the undertaking ? If we tabulate the facts brought out in any given case (such, for instance, as the assumed one), the mind can more readily compare them and can intelligently weigh the information with a view to secur- ing the proper balance. If we list the "factors governing the location of an industrial plant," we find that these are divided into twelve groups. The "weight" given in parenthesis at the right is an arbitrary scale of values given to each group and subdivision thereof, according to its relative importance to the total factor valuation. In our assumed case, for example, let us designate "present location factors" as minus (— ), and "competitors' or new location" as plus (+). Accept- ing then the scale of weights, let us balance up the relative advantages of our location with the ideal, and similarly our competitor's location (which we think is better than our own) also with our ideal and set these values down. Suppose we find that our present location meas- PLANT LOCATION 95 >ires up to only ssi per cent of our ideal — our competitor's, on the other hand, 75^ per cent of the ideal. Clearly, much light has been thrown upon our problem. 1. Proximity of raw-material market (weight ij) a) Rail service 6) Water service c) Supply 2. Proximity to consumers' market (weight 15) a) Largie cities 6) Rail service c) Water service d) Advertising value or influence of plant e) Competitors 3. Labor Market (weight 2 J) a) Character of labor and supply b) Percentage of unemployed females (women and girls) c) Percentage of unemployed boys (above legal factory age) d) Price of labor — cost of living e) Specialization of labor f) Influence of climate g) Associations or unions 4. Power (weight i) a) Price and character of fuel (coal, gas, oil) b) Hydro-electric or water power c) Central station 5. Influence of climate (weight |) a) On labor b) On product 6. Utilization of waste products (weight J) a) Disposal of waste products 6) Market value of waste products c) Cost of disposing of same, if unmarketable 7. Perishability (weight j) a) Raw materials 6) Finished product 8. Freight rates (weight j) a) On raw materials b) On finished products 9. Legislation, regulation, or ordinances (weight j) a) State legislation (corporation laws, taxes, employers' liability) 6) Municipal, town, or county regulations or ordinances (taxes, factory building inspection) 96 BUSINESS ADMINISTRATION 10. Banking facilities (weight i) a) Size of — handling pay rolls, etc. b) Credit c) General utility 11. Site of real estate (city, suburb, country) (weight f) o) Price of b) Character of soil c) Cost of preparing site i)' Foundations e) Floods 12. BuUding materials (weight J) a) Local sand, gravel, etc. b) Crushed stone c) Brick d) Timber e) Steel /) Cement It should be borne in mind, however, that the scale of weights must be varied to suit the industry. It might very well happen for a par- ticular industry that (7) would be a very important factor and the other factors scaled accordingly. But this method has the advantage of enabling us to judge the relative importance of the- factors impar- tially and gives the mind definite numerical values to weigh instead of abstruse facts. 21. AN EXAMPLE OF PRIVATE ENTERPRISE IN DEVELOPING PLANT LOCATIONS' [There are many cases in which private enterprise has done much of the preliminary work in plant location and construction and sold its services to businesses seeking locations. The Central Manufac- turing District of Chicago may be taken as typical of such cases. Does the classification of relationships given on page 15 fit in with this selection ?] The reason we recommend the Central Manufacturing District as an ideal location with respect to service is that it offers the highest type of transportation assistance. The Chicago Junction Railway serves the District throughout and moves any kind of freight in any quantities. It is what is known as an inner belt line. Thirty-nine ' Taken from a letter sent out by one of these concerns, the Cential Manu- facturing District of Chicago. PLANT LOCATION 97 railways, twenty-two of which are great systems, terminate in Chi- cago, the world's greatest railroad center. It is easy to see what such tremendous facilities mean to manufacturers situated in this city. The Chicago Junction Railway represents the value of all of these facihties combined, in that it connects with each and every one of them and gives to the manufacturer located on its rails the same service which could be obtained by direct connection with or location upon any one of them. In speaking of Chicago Junction Railway Service any system may be used applicable to either carload or L.C.L. shipments. Carloads made up at the plant of any concern in the District can be sealed at its doors and projected with the utmost possible dispatch via any route specified at the through Chicago rate without the various transfers, inspections, and possible reloading of contents. L.C.L. freight usually is more or less of a bugbear to the manufacturer. Ordinarily it is accepted only at certain stations, and often in the con- gestion at these stations shipments which he particularly desires to have forwarded immediately become misplaced or lost, and he loses the business of a good customer through the ensuing delay. In order to reach these stations it is necessary for the producers to maintain expensive automobile or horse-drawn vehicle transportation. The Chicago Junction L.C.L. freight-handling system circumvents delays, avoids the maintenance of truck fleets, and eliminates endless worries. It is roughly as follows: To the several union freight stations maintained in or near the Central Manufacturing District, L.C.L. shipments may be forwarded by trap cars upon their arrival at the stations. These trap cars are unloaded and contents classified according to destination. Any in- dustry may put in the same car shipments destined to any number of points. The station classification lumps the shipments to any one distributing point and these are loaded together in a car which is dispatched directly to the gateway point. This car is not disturbed in any way from the moment it leaves the union freight station until it arrives at the gateway point, where its contents are broken up for distribution. Outgoing freight is pulled from the union freight station twice daily. Locomotives from the various railroads come to these stations and extract the quotas for their several lines. Freight sent in is dispatched the same day. With the Chicago Junction each day's business is separate unto itself. Each morning sees a clean slate to begin upon. Its service is absolutely dependable. gS BUSINESS ADMINISTRATION Incoming freight destined to the various industries in the Central Manufacturing District is handled with the same dispatch, but in reverse order. It comes to the Chicago Junction Railway from the various railroads and is delivered at once, carloads remaining intact to the doors of the industries, package cars being broken up and their various contents classified according to assignees. Several years ago there was instituted what is known as the Traffic Bureau of the Associated Industries of the Central Manu- facturing District. This bureau draws its members from the various industries in the liistrict and employs a traffic director, who is familiar with all phases of the traffic problem. It is his duty to secure co-operation from the various trunk lines, also to see that the Chicago Junction Railway maintains its standards of service at aU times. The traffic director answers aU complaints, investigates delays, traces shipments, suggests betterments, and generally attends to the shippers' interests. There are^ndustries which have a great interest in water trans- portation. On account of its cheapness it is highly desirable when- ever practicable. One branch of the Chicago River flows through the Central Manufacturing District and is used by a few of the industries which are fortunate enough to have dock property. It is not used to the extent it might be for the very excellent reason that at Twenty- Sixth and River streets the Chicago River and Indiana Railroad, an ally of the Chicago Junction Railway, maintains a large dockhouse on the main river and the drainage canal, which has a capacity suffi- cient to permit loading ten large lake boats at one time. This feature represents considerable value to interests whose important points of delivery are other cities situated on the Lakes. It also facilitates the ingress of many raw materials. Chicago is the world's great central market. It is the distributing center of the United States, the financial center of the West, and lies within easy distance from the sources of innumerable raw materials. Among these might be mentioned iron, copper, lead, zinc, petroleum, lumber, grain, and many others. Bituminous coal in large quantities is produced within a radius of two hundred miles. Just as Chicago is the center for the Middle West, so the Central Manufacturing Dis- trict is the center of Chicago. The advantages claimed for Chicago are more nearly identical with those claimed for the Central Manu- facturing District than they could be with any other industrial dis- trict in the city. PLANT LOCATION 99 The problem of securing labor to carry on the. business of an industry is of paramount importance. There is no judgment shown in locating a manufacturing plant, no matter how splendid the site, nor how excellent the railway facilities, where the manufacturer is unable to draw the necessary help. Many plants have been known to fail simply because in seeking locations, they have neglected this most important prerequisite. Again the Central Manufacturing District proves its superiority over other locations. Within four miles from the corner of Thirty-ninth Street and Ashland Avenue dwell 1,000,000 people. Of this number about 500,000 are male adults and 400,000 female adults. There are a number of nation- alities represented in this population, but the American percentage covers more than half of the number. After the location has been found suitable in point of proximity and adequate labor supplied, the problems of transportation for this labor and its stabilization when once enlisted come into consideration. People must have means of getting back and forth between their homes and their ehiployment. If their employment is easily reached without heavy expenditure of time, working people are much more liable to be satisfied. The Central Manufacturing District is bounded and traversed by several street car hues. North and south Unes on Halsted, Morgan, Ashland, and Western lead directly to it, while Thirty-fifth and Thirty-ninth Street Unes permit crosstown transfer to within three or four minutes' walk from any location. The Central Manufacturing District has developed standard designs which are repeated in its buildings as they are put up. The best possible lighting arrangements, sanitary equipments, and safety appliances, including complete sprinkler installations, are features of this construction. The exteriors in conformity with the standard design adopted are made attractive by towers which in many cases also serve to carry the tanks for sprinkler systems, and the use of terra cotta, which does not add materially to building costs, but at the same time distinctly adds tone to the general appearance. The perception of the dullest worker is awakened to the fresh parkways in front of the buildings and he naturally regards his place of employ- ment with pride in its attractiveness. The attitude in which the laborer enters the place in which his days are spent greatly affects his efficiency and the quality of the service he will perform for his employer. lOO BUSINESS ADMINISTRATION The value of advertising has come to be felt with greater depth and sincerity just within the past few years. There is a great deal to be gained by an alUance with an organization whose progress and ideals are unquestioned. It is a very creditable advertisement for a manu- facturer to say that he is located in the Central Manufacturing Dis- trict. The District has become known as the advocate of industrial right living. For a manufacturer merely to say or to advertise the fact of his location in this District is to promise to his labor ideal working conditions, to the people from whom he buys the assurance of his growth and added requirements of the materials which they have to sell, and to his customers the best product at reasonable prices and reliable service. The District has many advantages which cannot be approximated elsewhere in an industrial and manufacturing center. It is provided with well-paved streets, cement sidewalks, adequate sewer and water lines, grass parkways, and ef&cient Hghting and power systems. Within its boundaries are located the Central Manufacturing District Bank and Club and the Western Union and Postal Telegraph offices. The Wells Fargo Express Company has an office in the District and all other express companies give the District preferred service. The mail service throughout the District is excellent. Tenants are located in the Central Manufacturing District under one of the following forms of contract: a) Sale of ground for cash, purchaser agreeing to make substantial improvements within a reasonable time. b) Contract of purchase. Under this form of contract the trus- tees would agree to erect the building and sell both land and building upon the basis of a payment of 25 per cent of the estimated valuation of land and building in cash upon the signing of the contract, the balance to be spread over a term of ten years, with interest on the deferred payments at 6 per cent per annum. c) Long-term lease. Under this contract the annual rental would be s per cent upon the value of the land as based, plus 8 per cent on the cost of any building and improvements erected by trustees, the tenant to pay in addition taxes and insurance. The term of our lease is twenty-five years. PLANT LOCATION loi 22. ANOTHER EXAMPLE— THE BUSH TERMINAL' Bush Terminal is actually an industrial city. It contains fac- tories, storehouses, restaurants, a trolley line, a hospital, a gymnasium, three clubs, a moving picture show, schools, a post-office, a telegraph office, wireless station, express offices, wharves, piers, railways, stables, power sub-stations, and all the miscellany of a busy city of almost three hu"ndred separate industries. Within the bounds of Bush Terminal there is carried on as much manufacturing and general business as would normally be found in a thriving city of 250,000 inhabitants. The actual working population of the Terminal is over 24,000. In approaching the Thhty-ninth Street section of Brooklyn, one is struck with its resemblance to the shore line of Manhattan, but on a much larger and more spacious scale. Extending out into the water are enormous piers which characterize the water-front of New York City itself. As many as twenty-seven steamships at one time have been docked at these piers, with room for many more, and so modem are the facilities for loading and unload- ing vessels, so spacious the waterways between the piers, so complete the system of railroad tracks which lead from them, that their steamer capacity can be multiplied by three when compared with any other similar piers along the Atlantic seaboard. Behind these piers there stretches a complicated system of railroad tracks which resembles a huge freight yard or the terminal of a great railroad, which, in fact, it is, and, more than this, the terminal of many great railroads. Behind this freight yard again are a series of model warehouses of huge capacity, splendid gray-white structures of most unusual size, so designed that every inch of space may be used to the greatest advan- tage, and designed further to give the very maximum of ease and rapidity in filling them with, and emptying them of, merchandise of whatever kind. Behind these warehouses more railroad tracks commingle in a big humming system, and then is seen a long vista of stiU more warehouses in orderly rows, so compact that one scarcely realizes the enormous territory they cover. Stretching away to the north is row upon row of gigantic model loft buildings — ^mammoth granite-looking structures — larger than New York skyscrapers, something of the same appearance even in height, through their enormous window space and by reason of their outward appearance of being built of gray stone. These, too, are ' Taken from various advertising literature of the concern. I02 BUSINESS ADMINISTRATION of Steel and concrete and, although they are silent outside, they are humming within with the ceaseless activity of thousands of workers. The success of this industrial community is summed up in two words: service and co-operation. In theory the administration of Bush Terminal is extremely simple; in operation it is highly complex and caUs for expert knowledge in many branches. The principle upon which the Bush Industrial City is founded may be stated briefly: to supply the manufacturer with every service that can be secured economically upon a co-operative basis. Of what does such service consist ? First, of course, transporta- tion facilities. No manufacturer can progress very far toward large success without adequate and economical means of receiving his raw materials and shipping his finished product; in fkct, many a promising business which today is struggling along as a semi-failure might be a big success with proper shipping facilities. Next in importance are power and steam for manufacturing. These can be supplied upon a co-operative basis at less final cost than if individually generated. Fire protection is a service which can be secured most economically by a community, and such protection, if provided upon a thorough engineering basis, means substantial saving in insurance. The scientific management of the labor market and the operation of a mutual employment bureau is a service of tremendous importance. Finally, having available space for storage of seasonal stocks and having additional manufacturing space always ready to accommodate a growing business are factors which no far-sighted executive overlooks. There are, of course, many minor forms of service which can be suppUed by a community at a fraction of what they cost the indi- vidual. Night watchmen, porters, emergency hospital with doctors and nurses, local delivery service, express and mail facilities — these merely sugg.est things which a well-managed, concentrated industrial community may enjoy virtually without cost. When, as at Bush Terminal, almost 300 tenants "club" together in the purchase of such items, the individual tax upon the "overhead" is hardly appreciable. According to the system in vogue, incoming freight shipments which arrive at the New Jersey railway yards on one day are placed upon the siding of the Bush tenant's building early the following day. The cartage expense, both in time and money, is reduced to the trans- fening of the freight from car to loading platform and thence to the PLANT LOCATION 103 tenant's floor. A man with a hand truck travels probably fifty feet to accomplish such "cartage." This man, by the way, is an employee of the Bush Terminal. The manufacturer-tenant employs no truck- men, owns no horses or motor cars, requires no porters or roustabouts. Freight consigned to him f.o.b. New York means to the Bush tenant that the freight is laid down inside his own factory. Outgoing shipments are handled with equal facility. The manu- factiurer occupying space in the Bush Industrial City simply notifies us that he has so much freight to be shipped. If it amounts to a carload, the car is placed on the siding at his door; we receipt for the freight at his own floor, put it aboard car and deliver the car to the proper railway at its Jersey terminal yard. Less than carload ship- ments of several tenants are frequently grouped and placed by us in through cars so that they reach destination without transfer. In any event, the tenant has absolutely no worry or expense in freight handling. It is all done upon a community basis. The freight, in and out, of 276 tenants is collected, assorted, billed, and forwarded by a co-operative organization which means the minimizing of delays and the elimination of trouble, waste, and expense. Electric cmrrent for light and power is furnished to Bush tenants at 3.3 cents per kilowatt-hour. This is approximately one-half the rate paid by the average manufacturer in New York City, and is probably less than the generating cost of current in the isolated plant of the average small-town manufacturer. Here again we have an example of co-operation. The Bush Terminal buys current for all its tenants and gives to all the benefit of a wholesale rate. The advantage is strikingly shown in the matter of lighting, for the tenant who uses comparatively little power in his manufacturing process is still enabled to light his premises at the 3.3 cent rate, where the same manufacturer located in New York would probably pay 7 . 5 cents per kflowatt-hour for electricity for lighting. A similar arrangement in regard to steam for manufacturing pur- poses is in vogue. Steam is sold for i cent per horsepower-hour and is fiurnished in any quantity and at any time. Since the steam is all metered, the tenant pays for what he actually uses in his manufac- turing processes. And insurance is important. At Bush Terminal the rate is only 7 cents per hundred in the mutual companies; 15 cents per hundred in the line companies. This rate is due to the elimination of every possible fire hazard and the installation of every possible safeguard. 104 BUSINESS ADMINISTRATION The Terminal maintains an emergency hospital to care for acci- dent cases. It maintains a Bureau of Social Service which develops the efficiency and loyalty of all the working people employed by its tenants. It conducts an employment department which minimizes the labor problem and insures an abundance of both skilled and un- skilled labor. It operates lunch rooms, rest rooms, clubs, and other employees' benefits which in the aggregate make the Terminal a most desirable place of employment and attract the highest class of workers. A post-office, express offices and telegraph offices are on the ground. An elaborate and efficient city delivery system is operated. Traffic experts minimize the cost and speed the handling of all incoming and outgoing goods. In short, the Terminal management accepts as its duty the opera- tion of every service which can be economically performed upon a co-operative basis and thus the tenant-manufacturer is free to con- centrate his time, energy, talents, and capital upon the money- making factors in his own business. Where a manufacturer located alone must give thought and vitality to hundreds of matters which are in themselves profitless side issues, the manufacturer located in the Ideal Industrial City has no such distractons — he simply pays rent, and modest rent. The Bush Terminal International Exhibit Building is the latest extension of Bush Terminal service. It was designed primarily to give our 276 tenants and more than 2,000 customers a sales head- quarters in the very heart of New York's buying district. With this knowledge, we have erected a building unique in commercial history. It contains every resource and convenience desired by the buyer who visits the greatest marketplace in the world. But it contains more: It contains every facihty for the out-of-town manufacturer who wishes to place his wares before these buyers in a favorable manner and at low expense. There are exhibition rooms for the display of merchandise. There are single offices, suites, deskroom, the services of specially trained salesmen, stenographic and clerical help, conference rooms, an auditorium (in which, for example, moving pictures of your factory and manufacturing processes may be shown to prospective customers). There is a bureau of information, a Ubrary of American and foreign commercial data, and a corps of experts to assist in organizing and developing export business. Nothing which will facilitate the selling of goods and building of a permanent market has been overlooked. PLANT LOCATION 105 The Bush Terminal International Exhibit Building (in connection with Bush Terminal service) solves your problem of an eastern and export sales branch. Whether you are ready to put one man here or a hundred, we can provide the location, the opportunity, and the service to insure that such a branch will be undertaken on the basis of absolute efficiency. 23. STILL ANOTHER EXAMPLE— THE TOLEDO FACTORIES BUILDING- Small light manufacturing plants located in rented quarters are often seriously handicapped by being compelled for lack of better accommodations to occupy old, out-of-date buildings with few of the advantages of modem factory buildings. With poorly arranged factory space in fire-trap structures and improper lighting, heating, and ventilating, their overhead charges are high and consequently the cost of production is excessive. Some plants require such a small space that the erection of a factory building is not practical, and owners of other industries do not care to tie up their capital in factory buildings. Toledo, Ohio, is a city that has solved the problem of providing adequate factory facilities for small industrial companies and has solved this problem in an interesting manner. The carrying out of the plan adopted has resulted in the erection of a factory building that, in addition to being thoroughly modern, is unique in a number of particulars, one of the most important of which is the flexibility of the interior arrangement so that a tenant can secure the amount of space he needs and can acquire additional units of space as the growth of his business warrants. The movement to erect the factory building originated with the Toledo Commerce Club, which, after investigating conditions, found that it was difficult to secure suitable space for light manufacturing in that city. This lack of accommodations interfered with the estab- lishment of new industries there. It checked efforts to induce com- panies with plants elsewhere and looking for a new site or a new company looking for a favorable location to locate in that city. The Commerce Club as an organization was unable to undertake the erec- tion of a factory building, but a company known as the Toledo Fac- tories Company was organized within the membership of the club, 'Adapted by permission from "Modern Factory Building for Small Plants," Iron Age, XCV (1915), 188-91. I06 BUSINESS ADMINISTRATION practically all the members being stockholders. To finance the pro- ject a $100,000 5 per cent bond issue was authorized. The bonds were taken by some of the leading local banks, and $194,000 in common stock was sold. While the primary object was to help the city, the details of the project were carried out with the idea of making it a safe financial investment with a fair turn for the stockholders. Earnings have been sufficient to warrant the directors to authorize recently the payment of dividends at the rate of 4 per cent per annum of the stock. [The account of the advantages claimed for the Toledo Factories Building is quite similar to the advantages claimed in Selections 21 and 22, and is therefore omitted.] 24. EXAMPLES OF CITY ADVERTISING A- Why is Philadelphia the best city in the United States for the establishment of manufacturing enterprises? Why have more than 8,000 industrial plants already located in Philadelphia, with new enterprises constantly augmenting their number? There are many reasons, among which may be cited the following: Philadelphia has 267 wharves and docks to accommodate ships. Philadelphia has thirty-seven miles of improved water front. Philadelphia stevedores can load one hundred io,ooo-ton ships simultaneously. Philadelphia's port charges are cheaper than any other port in the country. Philadelphia has three great trunk lines connecting its water front with the entire country. Philadelphia's dockage eliminates the necessity for lighters. Philadelphia's unloading plant can handle 6,000 tons in ten hours. Philadelphia has a grain elevator which can load 15,000 bushels an hour. Philadelphia has the most efiBicient pilot service in the world. Philadelphia manufacturers can ship imported goods inland for sis cents a hundred pounds less than can the manufacturers of New York. PJiiladelphia is the only absolutely fresh-water port on the Atlantic seaboard, and the water is beneficial to iron-hull ships. 'Taken from Philadelphia Year-Book (1917), p. 11. PLANT LOCATION 107 Philadelphia is second only to New York in foreign tonnage. Philadelphia has regular lines sailing through the Panama Canal. Philadelphia has numerous Unes connecting it with Europe. Philadelphia imports more leather than any other city in the world. Philadelphia makes more textiles for export than any other city in the world. Philadelphia has a belt-line railroad along the water frolit specially built to facilitate the loading and unloading of ships. Philadelphia has behind it one of the greatest coal regions in the world. Philadelphia has behind it the greatest iror region in the world. Philadelphia has behind it some of the greatest oil fields in the world. Philadelphia exports nearly a billion gallons of oil aimually. Philadelphia manufactures more locomotives than any other city. Philadelphia has cheaper and faster railway connections with the South and Southwest than Boston or New York. Philadelphia also has substantially cheaper rates for shipments to the Mississippi Valley. Philadelphia has the greatest tobacco humidors in the country. Philadelphia exports 4,000,000 tons of coal annually. Philadelphia refines 500,000 tons of raw sugar annually, or one- sixth of the entire output of the United States. Philadelphia is only 1,946 miles from the Panama Canal. Philadelphia piers have sunken raUroads to facilitate loading from ships. Philadelphia has the most efficient export and import storage houses in the country. Philadelphia has the two biggest shipyards in the country. Philadelphia's harbor was improved in 1915 by the expenditure of more than a million and a half dollars. Philadelphia's banking institutions have prompt communication with Europe, Asia, and Africa. Piuladelphia and New York statistics prove that shippers can save from $600 to $1,000 on the average cargo by receiving and for- warding through Philadelphia rather than New York. Skilled labor is plentiful; land reasonable in price; industries are encouraged by the city government, civic organizations, and by all the citizens of Philadelphia. Io8 BUSINESS ADMINISTRATION B' Here are the reasons given by industrial leaders in the United States — among them Charles M. Schwab, Bethlehem Steel Company; J. E. Alfred, capitaUst; M. M. Upson, secretary of the Raymond Concrete Pile Company; B. W. Dudley, president of the Prudential Oil Company (all of New York) — why they located plants in Balti- more: 1. "Its geographical position making it the best manufacturing and distributing point on the Atlantic Coast." 2. "The nearness of Baltimore to the coal fields; the low price of coal and its good quality." Coal is delivered at Sparrows Point, Baltimore, at 20 cents per gross ton less than at Bethlehem or other cities similarly situated, with a profitable differential over other seaport cities. 3. "The low freight rate to and from Baltimore by rail." Balti- more has a 3 cent per hundred pounds differential under New York and Boston to and from the West; a 2 cent per hundred pounds differential under Philadelphia. 4. "The low cost of power — $0,008 per thousand kilowatts for electricity; 35 cents per thousand feet for gas, the lowest on the Atlantic Seaboard." 5. "The deep-water channel which permits the largest ships to enter port day or night." The channel has a depth of 35 feet from ocean to piers. 6. "The low cost of living in Baltimore and the comforts and con- veniences within reach of laboring classes." The labor is permanent, as Baltimore has a larger number of individual home owners in the laboring classes than any other American city. 7. "The disposition of the authorities to be reasonable about tax assessments and the co-operation of banks and the city officials." Machinery and tools are exempt from all taxation. The Bethlehem Steel Company, by locating in Baltimore, will make a saving on freight rates alone of $800,000 each year. This is equal to 5 per cent profit on an investment of $16,000,000. Let us figure with you how, by locating your factory in Baltimore, you can capitalize its many advantages. If you are interested, a special representative will call on you at your factory and analyze your specific business and tell you what Baltimore has to offer. ■ Taken from an advertisement in a business periodical. for Work Business Home Life , Social Life PLANT LOCATION 109 Write today for book of Baltimore's advantages. Move your plant to Baltimore/ James H. Peeston Mayor Address, Department i City Hall, Baltimore 25. WHAT CITY PLANNING MEANS' I. Definition: City planning is good sense and forethought applied to the building of cities. II. Purpose: City planning aims to make a city Convenient Economical Healthful Pleasant III. Scope: City planning is the science of designing cities a) It is not the organization of administrative departments 6) It is not efficiency in the civil service, or economy in the purchase of supplies c) It is concerned with construction rather than with operation or maintenance dj It teils how to do things which, if done wrongly, either could not be changed, or could be changed only at great expense e) It prevents mistakes which make inevitable other mistakes which cannot be corrected f) It determines the layout of a city, the location of things, and the types and character of permanent structures, so far as these are matters of public interest IV. Methods: a) Spread of ideas; public opim'ons; expert advice b) Constructive public action c) Voluntary co-operation d) Control of private activity, when necessary and helpful, as for example when it I. Limits heights of buildings and the proportion of lot areas to be built on 'Adapted from a pamphlet issued by the Niagara Falls Chamber of Commerce. no BUSINESS ADMINISTRATION 2. Regulates construction of buildings 3. Establishes zones or districts to be developed in different ways 4. Supervises the housing of the people S- Encourages the platting of the suburban areas in harmony with the general plan of the city 6. Controls the development of privately owned public utilities and the location of their works With proper city planning no one owning property is permitted to develop it as he pleases, unless his pleasure respects the general welfare. In )delding a given degree of control to the community, the individual citizen is more than repaid by the benefits that come from the harmonious development of his town and by protection from the possible whims of his neighbors. V. Encouragement of Industry: City planning aims to promote conditions which are favorable to industrial development, and at the same time to prevent the abuses which result from mere material prosperity. a) It provides: 1. An industrial district 2. Reclaimed lowlands convenient to waterways 3. Improved harbors and deeper channels 4. Railroad connections and switching facilities without discrimi- nation b) It reaches out for Cheap water, light and power, and makes the town pleasant for laborers' homes VI. Suburban Development: Cities are growing rapidly. The outlsang districts offer the chief opportunity for city plaiming, other than the costly tearing down and reconstruction of old areas. When the city as a whole is too shortsighted, impecunious, or helpless to apply city planning to the suburbs, the task sometimes is undertaken by private corporations or associations, with or without the sanction or backing of the public authorities. The planning of undeveloped and suburban areas may have one or more of several objects: a) To keep outlying districts in harmony with a central area already well planned, as, for instance, in Washington, D.C. b) To make the new development superior to a wrongly planned central area c) To provide beautiful homes for the rich and well-to-do d) To depopulate the slums and provide healthful environment for the poor e) To house the employees of particular factories or works PLANT LOCATION ill 26, THE CITY-PLANNING MOVEMENT' In securing a removal of factories to the outskirts, town planning has the opportunity — as already indicated — of putting them where they will do least injury to the community. That is to say, in the arbitrary creation of a factory district there must be consideration not only of transportation opportunities — a feature which it is compara- tively easy to control — and of general healthfulness of locality, but also of the proposed position in its relation to the existing city. The factories should not be put where the prevailing wind will carry their smoke into the city, where their location checks the natural growth of high-class residence districts, or where the heavy teaming incident to their operation is compelled to make use of expensively developed avenues. Finally, in large towns more than one industrial district should be planned, lest — even with suburban location — residential congestion result. The present city-planning movement has been preceded, as well as accompanied, by not a little thoughtful platting of limited areas, done in a comprehensive way by the manufacturers themselves, when they have established their plants on the outskirts of cities. Of their own initiative, they have sought by such platting to gain for their employees, as well as for themselves, the advantages which town planning ought to give. For example, Leclaire, Illinois, the town buUt by the N. O. Nelson Manufacturing Company, is characterized by "winding roads, bordered with spreading shade trees." Other examples are Echota, the town of the Niagara Development Com- pany, at Niagara Falls; Coldspring, New York (the Cornell Company) ; Gwinn, Michigan (a mining town of the Cleveland-Cliffs Iron Company); Plymouth, Massachusetts (tract developed by the Plymouth Cordage Company); and Wihnerding and Hopedale. In 1909 Los Angeles created by ordinance distinct residential and industrial districts, decreeing that certain kinds of business should be excluded from the former, even though they had been already established in the designated area. This very radical action was subsequently upheld by the Supreme Court of the state. Three years later the legislature of Maryland passed an act requiring that all buildings in a given section of Baltimore be detached. In that same year, 191 2, Massachusetts amended its general municipal act so as to permit all of its cities and towns except Boston to regulate the 'Adapted by permission from C. M. Robinson, City Planning, pp. 175-79, 279-82. (G. P. Putnam's Sons, 1916.) 112 BUSINESS ADMINISTRATION height, area, location, and use of buildings in any designated part or parts of their corporation limits. And the province of Ontario, Canada, gave to cities that had a population of 100,000 or more authority to control the location of apartment and tenement houses and of public garages. In 1913 there was a wave of districting legislation. New York State authorized the Common Council in the sis cities of the second Map Showing the Existing Downtown Zones in Boston' Black — OfEces and banking. Dotted — Industries and storage. Hatched and dotted — Rail and water transportation. White — Residences and accessories. Compare this with the map of Torrance. Just what significant differences are there ? class, on petition of two-thirds of the owners affected, to estabhsh residence districts in wliich only single or two-family houses may be constructed. Minnesota in that year passed an act empowering Duluth, Minneapolis, and St. Paul to establish residential and industrial districts, on petition of 50 per cent of the property owners in the affected section. Any kind of business, and even tenements, ' Adapted from The North End, a report of the City Planning Board of Boston. PLANT LOCATION 113 apartment houses, and hotels, may be excluded from the residential district. Wisconsin authorized its eight cities of 25,000 or more population to set aside "exclusive" residential districts. Seattle included the possibihty of restricted districts in the building code adopted by it in July, 19 13. In 1914 the legislature of New York amended the Board of Esti- mate and Apportionment to "divide the city into districts of such UNION fRtllGHT TERMIWAL . FlMt'pl Tommce lodoairiarCilj. C°"'"^if Map SnowrNG the Zones Established in Advance for Toril.4nce, Near Los Angeles, Calieornia number, shape, and area as it may deem best suited" for a regulation of " the height and bulk of buildings and the area of yards, courts and other open spaces," and it gave to the board permission to make these regulations different in different districts. The board was given authority also to "regulate and restrict the location of trades and industries and the location of buildings designed for specific purposes," 114 BUSINESS ADMINISTRATION and to "divide the city into districts of such number, shape, and area as it maiy deem best suited to carry out" such purpose. While it is true that new laws are constantly added and new for- ward steps continually taken, it has seemed worth while to run over this legislation because it so clearly shows the trend. It seems to give assurance that in America districting has come to stay, that it will grow in thoroughness, and thus that city planners will have this added authority which may be of such value in facilitating the adapta- tion of towns and cities to their functions. REFERENCES FOR FURTHER STUDY Shaw, An Approach to Business Problems, chap, iii and pp. 115-25. Jones, The Administration of Industrial Enterprises, chaps, iii and iv. CHAPTER III THE ADMINISTRATION OF PERSONNEL Purposes of this chapter: 1. To secure a bird's-eye view of modern methods of persoimel administration. 2. To appraise these methods in terms of their contribution to good output and to right social living. 3. To see the relationship of personnel administration to the other aspects of administration. A. Introductory Survey of the Content of the Manager's Relation- ship to Personnel The manager's administration of his personnel problems is a topic which may rightly lay claim to much space in our treatment of mana- gerial control. Someone has well said that industry is made up of persons working with things and that it is even more important to utilize the persons properly than it is the things, since man is the goal as weU as the chief agency of industrial activity. In this statement, it should be observed, two arguments are present, at least by impli- cation. One is that attention to personnel problems in modern industry is justified as a means of improving human relationships; as a means of producing man. The modern worker, so the argu- ment runs, spends such a considerable proportion of his waking hours in the business plant that as a matter of social upbuilding the plant must assume certain obligations which were in a simpler society dis- charged by the home, the guild, or the market place. No doubt there is merit in this contention. We cannot, how- ever, close our eyes to the fact that modern industry is organized for profit; and we must remember that we are just now engaged in a study of managerial control of modern industry. We turn, therefore, to the second argument which is implied in the statement that it is highly important to utilize properly the persons who work with things in modern business. This second argiunent is that it pays; that it yields gains over and above the costs; and that the manager should therefore engage in personnel activities as a business proposition. "S Ii6 BUSINESS ADMINISTRATION It is our task in this chapter to look into both of these arguments, but especially into the latter. It will facilitate our study if there is before us from the very start a brief statement of the method we shall use. 1. Since modern management is of necessity specialized, let us assume that there exists in the typical business organization a sepa- rate department charged with the administration of personnel. This is by no means true of all concerns and particularly it is not true of small ones. The problems are present, however, even if no separate department has been set up, and it will quicken our discussion if we free ourselves from attention to details of business organization and concentrate upon the problems always at issue, no matter what the form of organization may be. We assume, therefore, as a means of faciUtating discussion, that the manager's administration of per- sonnel is carried out through a personnel department. 2. Since our survey must at the best be a rapid one, it is inexpedi- ent to try to master the multitudinous "practical" technical aspects of personnel administration. Rather let us confine ourselves mainly to an attempt to see the larger problems which are to be solved and the materials which are available for their solution. Such a study will cause us occasionally to look at various phases of personnel practice, but these occasional glimpses wiU be for purposes of illus- tration, or of sampling, rather than for the purpose of mastering technique. Perhaps the statement of purposes at the opening of the chapter might be paraphrased thus: (i) To get an appreciation of the range and character of the problems which confront the personnel mana- ger and of the kind of an organization which may wisely be set up to meet these problems. (2) To see the problems of labor adminis- tration (a) in terms of incentive and output and (i) in terms of the economic order. (3) To get a broad survey of the apparent trends in labor administration and particularly to survey the advances being made in scientific methods in this field. (4) To become suffi- ciently aware of the ramifications of labor administration to show us what fields of study will be useful in this connection in our later training for business management. Section A (pp. 115-26) of our study will be devoted to a general view of the functions performed by the modem personnel department and of the functionaries who do the work. The purpose of tMs section THE ADMINISTRATION OF PERSONNEL 1 17 is that of introducing the student to the subject-matter of the chapter in such a way that he ma}» from the beginning think of it as a whole and not as a series of isolated sections. Sections B (pp. 127-53) ^^^ C (pp. 153-92) view personnel activities in terms of incentive and output, thus recognizing the challenge of "does it pay?" Section D (pp. 192-226) gives us a glimpse of certain materials which are avail- able for the solution of personnel problems. It emphasizes those aids which objectify the issues and faciUtate scientific approach to the problems. Section E (pp. 226-42) discusses the place of the per- sonnel department in the business organization as a whole. Our first task, then, is an introductory survey of the content of the manager's relationship to personnel. PROBLEMS 1. "It is even more necessary carefully to compute the labor require- ments and closely to analyze the status of the working force than it is to check up the physical materials that go into production." Is this an extreme statement of the case? Why or why not? Can one determine which is "more necessary" ? 2. "It very early became evident that exact methods could not be carried out successfully in a factory where the personnel was chosen at hap- hazard or was constantly changing." Why not ? 3. A large steel corporation is reported to have advertised recently for seven hundred common laborers and to have laid off one thousand in another department the same day. How was this possible? How could it be avoided ? 4. One writer has classified "The usual reasons for leaving emplojrment" as follows: I work pay personal reasons ... „ , [business or seasonal fluctuations flaid off ior< ,. . ,. I (discipline Involuntary becausei ,. , , , (unfitness for work Idischarged on account oi< , , (personal character How could a central employment department ehminate or minimize any of these ? 5. "The principal losses to employers from changing employees may be expected to fall imder some one of the following headings." Supply the headings. What ones could a personnel department eliminate? What ones could it minimize ? Il8 BUSINESS ADMINISTRATION 6. "The function of the emplojrment department not only consists of selecting and engaging help but also «)vers the broad field of the eflnciency of the personnel. Of. course there are manifold ways of doing this." What are some of them ? 7. At the Clothcraft Shops about one-fifth of the total number of employees are said to come daily into contact with the employment and service department. Make a list of the ways in which they come into contact. 8. "Many firms have included under labor costs expenditures for wages only. Scientific study has revealed other labor costs in addition to wages." What others ? Do these other costs go far to justify a per- sonnel department ? 9. If a plant is located in a town where recreation, health, education, and home conditions of the people are adequately cared for, and the workers in the plant seem contented and working to their full capacity, is there need for a personnel department ? 10. Which is dealt with in personnel work, the mass or the individual ? 11. Is personnel work designed to reach skilled labor? Unskilled labor? Management ? 12. "It may be argued that a small industry cannot afford an employment department and that even in the larger industry, while it may be needed in times of labor scarcity, it is not warranted in times of business depression or in slack seasons." Do you agree ? 13. "In the coming years — now, in fact — men more than things must engage the most thoughtful interest of employers." Give reasons for and against. 14. "Employers no longer hire men; they buy labor like any other com- modity." What does this mean ? Is it true ? 15. "Machinery plays such an important part in the processes of today that, important as labor is, the manager can well afford to give his main attention to efficiency of machinery." "In these days of indirect costs, it is more than ever necessary to give heed to the labor element." With which quotation do you agree ? Why ? 16. Why do employers engage in welfare work ? Is it to furnish incentive to labor? Is it on humanitarian grounds? Is it because it pays? Are there other possible reasons ? 17. Shoidd a personnel manager be most proficient in (o) the handhng of men, or in (6) technical knowledge and plant organization, or in (c) something else ? I. ORGANIZATION OF THE PERSONNEL DEPARTMENT' The personnel department represents the employment interests of the company and acts for those interests in all aSairs that afiect the people in its employ. Where it is the case that employees them- ' Adapted by permission from Ordway Tead and H. C. Metcalf , an unpublished manuscript, and also Personnel Administration (McGraw-Hill Book Company, Inc., 1920). THE ADMINISTRATION OF PERSONNEL 119 selves are represented either by unions, by shop organizations (e.g., a co-operative association or mutual-benefit association) or by both, it is the duty of the personnel department to represent the employing interests of the company, as distinct from the other interests (produ- cing, selling, and financial) in mutual deliberations. This statement might seem to indicate an anomalous position of dual loyalty and divided interest. This is not the case. A depart- ment head's anxiety for the success of his department does not run coimter to his loyalty to the whole business — -rather the contrary. The organization, powers, and activities involved La carrying out this work are described below. It cannot be too clearly urged that, although the several duties are described as if they devolved upon separate indixdduals, this need not necessarily and often would not be the case. But since the fimctions are different and distinct, they are here so separated for the purpose of complete clearness. The size of the personnel department will natvnally depend entirely upon the size of the concern. Indeed, in a factory- of from one to four hundred employees, one or two people can, at least at the outset, perform the work involved in a right-functioning personnel department. 1. The personnel manager. — This is an of&cer of major managerial rank who is responsible for the work herein described. 2. The organization committee. — The organization committee is composed of those responsible for the handling of all elements in the personnel problem. Its purpose is to draw up and submit plans for the development of the whole organization on its distinctly human side. 3. The personnel committee.— The plans of the organization com- mittee are submitted to a personnel committee, composed of repre- sentatives of the several departments in a concern in order that there may be the broadest knowledge and fullest discussion of proposals looking to new method and practice in the handling of all personnel problems. In this way only is the fullest consent of aU forces in a business seciured for these developments. 4. The board of personnel directors. — ^This consists of: (a) the director of emplojrment, (6) the director of training, (c) the director of research. 5. The employment division (under the director of employment). — ^The work of this division is most effective where its director has entire authority and responsibility in regard to the duties listed. It 120 BUSINESS ADMINISTRATION has sometimes been found wise, however, to begin by giving him in some matters only advisory or recommendatory powers. These are enlarged into complete authority as soon as this separate department devoted to personnel problems proves its capacity to handle them. The director should from the start be given as much authority as the situation will wisely permit. The activities are stated below as they would be when the division has attained its full authority: a) To develop all available sources, both within and without the plant, for possible employees. This involves a thorough knowledge and cordial working relationship with a great variety of people and institutions which come in contact with people available or capable of becoming available for work. The systematic cultivation and extension of these resources is indispensable if the concern is to have capable workers to select from. b) To select employees along lines laid down by the research division in the light of thorough knowledge of the requirements of the job. c) To assist new employees in starting at work so that they will be subjected to the minimum of delay in adjustment and in learning the duties. d) To maintain a steady and competent working force by watch- ing for and seeking to eliminate possible causes of dissatisfaction and friction; and by hearing and seeking to adjust all grievances among employees or between employees and the company, unless there is some other organized way of handling these matters, such as a shop grievance committee. e) To make a periodic study (e.g., every three or six months) of the work or work records of all employees so as. to have all possible facts on which to determine advisability of change in rate of pay or in the position held. /) To have charge of advancing employees on probation and of making promotions and demotions. g) To have charge of such transfer of workers between depart- ments as will lessen labor turnover and facilitate production. h) To lay off and discharge employees when necessary. i) To receive and decide all requests for wage increases unless there are wage boards which handle these matters. In this event, the employment division is represented on the wage boards. THE ADMINISTRATION OF PERSONNEL 121 Thorough knowledge of the pay-roll as a whole and in detail and of the financial situation and policies of the concern is an essential requisite to the making of these decisions. 6. The training division (under the director of training). — ^The activities of this division should be carried out with the realization that anyone who is earning a living is mature, self-reliant, and respon- sible enough to make it unsound to attempt any autocratic methods of training. The aim should rather be to help each employee to a knowledge of his own ability and latent capacity and of the oppor- tunities within the business, and to help him develop himself either for those opportunities or for others outside the business where his talents may have fullest play. If it is clear that a business offers a very limited field for promotion, this attention to outside avenues of advancement may very well become a source of strength to the busi- ness, since it will attract ambitious people. As intimate a knowledge as is possible of the personality and working abihty of each employee is clearly a prerequisite to this work. This division is to outline and administer a comprehensive plan of training: a) To help employees to train themselves to work more efficiently. h) To help them fit themselves for promotion. c) To help them fit themselves for other work to which they may be transferred. d) To direct the training of executives and of all employees who instruct other employees. //., e) To compile and bring to the attention of each employee such information as to the operation of the plant as will lead to its smooth running. /) To co-operate in the prevocational training of school children and in the training of part-time workers. g) To promote and co-operate with efforts to estabUsh public and private schools that design to fit children niore adequately for industry. 7. The research division (under the director of research). — The research division conducts such study as is necessary to give the maximum effectiveness to the work of employment and training. It also makes such studies and keeps such records as will render per- manent and available the facts about the operation of the plant that are vital in their direct or indirect effect upon the people employed. It is the constant aim to study the structure of the business and the 122 BUSINESS ADMINISTRATION facts of human nature in order that the workings of the two shall be as nearly in harmony as possible. This involves the following work: a) Thorough study of the actual work in each job both by itself and in its relation to the whole organization. A comprehensive job analysis includes not only a description of the actual processes but also the effect upon the job and the workers of all the human and material elements which are involved. (See the nineteen heads of The Labor Audit) A final aspect of job analysis is an organiza- tion chart of the concern which it is the duty of the research division to formulate and keep corrected to date. Job analysis is the essential basis for careful selection of employees. h) Selection and statement of standards for new employees (or for old employees at new positions); e.g., standards of health, age, intelligence, working capacity, etc. A thorough statement of the qualifications for each job is a direct outgrowth of the job analysis. c) Development of technique to select employees who will meet the standards set. This would include study of: (i) methods of meeting applicants; (2) form of application blank; (3) additional questions to get indications of the applicant's character and per- sonality. d) The development of clear Unes of promotion. If it is the policy of the company to promote to certain positions from within, the lines of promotion should be made plain to all employees. e) The formulation of adequate record systems to show: (i) the amount and cost of labor turnover (hiring and firing), giving in proper detail the causes by departments; (2) the relation of the number of workers and the character of their work to the volume of production; (3) the achievement of each worker, together with statements of errors, waste, "seconds," breakage, etc. f) Keeping in permanent and accessible form the perpetual labor audit under the following heads: (i) physical working conditions — safety, health; (2) turnover and regularity of employ- ment; (3) work analysis; (4) sources of labor supply; (5) methods of selection; (6) starting at work; (7) training; (8) labor policies, economic beUefs; (9) employers' associations; (10) employees' asso- ciations; (11) unions; (12) organized joint relations; (13) labor legislation; (14) labor decisions by the courts; (15) labor law administration; (16) relation to community interests; (17) form \ \ \ THE ADMINISTRATION OF PERSONNEL 123 and efficiency of management in so far as it constitutes a labor problem; (18) amounts and methods of pay; (19) living plans; (a) savings; (6) provision against loss from illness; (c) provision against loss from accident; (d) provision against loss from unem- ployment; (e) pensions; (/) life insurance; (g) opportunities for purchasing at fair prices; (h) housing; (i) health; (/) recreation; (k) education. g) Where determining boards are in operation, the representative of the research division is on each determining board by virtue of the fact that his division made the initial analysis of the job. h) There should be an exhaustive collection of successful experi- ments and achievements in the whole field of activities under the per- sonnel department. This industry-wide study should look especially toward finding remedies for discrepancies or problems that The Labor Atidit reveals in the plant. 8. Other activities of the personnel manager. — -In aiding the concern to meet the human elements in its problem, the personnel manager has the following duties: a) To keep in touch with the foremost thought and experience of the day in regard especially to headings 8-19 of The Labor Attdit, and to stimulate the management to constant knowledge and advance along those lines. b) To urge the improvement of the existing forms of organization and the adoption of new forms, both in the entire concern and in each of its parts; to make clear that any organization is inefficient in the long run if it suppresses or confficts with the fundamental characteristics of human nature. c) In many concerns questions of safety and health have become recognized as so important that an outline of the duties of the per- sonnel manager is no longer complete without the statement that in addition to the three divisions outlined here some plants will find it necessary to establish a safety division and a health division. The larger the share of the employees in the management of these di- visions, the soimder wiU be their basis and the more permanent their results. See also p. 236. The Place of the Personnel Department in the Business Organization. 2, FUNCTIONS OFTH] PERSONNE] Personne Composed of the Direc Object of Department: To Create an Effi EMPLOYMENT STAFF Manager Interviewer Stenographers Filing Clerk Job Analysis and Grievance Man MEDICAL AND SURGI- CAL STAFF First Aid Chief and Two Assistants Directing Physician Surgeon Specialists SAFETY AND SANITA TION STAFF Safety Engineer Sanitary Inspector Stenographer Proper selection by o) Careful interview h) Study of past record c) Physical examination d) Knowledge of job analysis Instructions to new euployees a) Introduction b) Rules and Policies e) Location and use of First Aid d) Location of main build- ing and shops e) Locate conveniences J) Badges and Locker keys Interview all leaving employees a) To approve discharge b) To check up foreman's reason c) To insure impartial hear- ing Keep detailed turnover records a) To aid turnover control b) To verify inability to pro- mote c) To detect adverse home conditions d) To rectify absenteeism, tardiness or grievances e) To aid detection of sick- ness or accidents Knowledge of Sources Knowledge of Plant needs Knowledge of hours of work Knowledge of wages Elnowledge of work condi- tions Transfers and Promotions Keep adequate individual records Furnish state or federal rec- ords General Health II. Committee Service 1. Sanitation 2. Shop m. Community Co-operate with civic bodies Physical examination of ap- plicants Periodical examination of de- fectives Periodical examination of em- ployees exposed to extra hazards Advise Employment Bureau in placement of defectives Treabnent of accident cases Treatment of medical cases Vaccination and Inociilation as prevention agsunst epi- demics Investigation of absence Furnish Employment Bureau with data on employees leaving on account of ill health Keep adequate examination and treatment records Administer fati^e rules District sanitation Plant sanitation Medical advice and assist- ance to families Health lectures and printed matter to employees Special district control in epidemics Constant educational work in general health Accident reduction by a) Education 6) Safeguarding hazards c) Committees Inspections d) Investigation of all accl dents Regular Plant iNSPEcnot BY a) Safety Engineer 6) Members of Safety Com mittee Supervision of Sapety o) Drinking water supply b) Lighting c) Heating d) Ventilation e) Toilet and Locker rooms /) Janitor service g) General sanitary condi tions Report all accidents to In surance Company Co-operate with Employees and Medical Bureaus it shortening periods of dis ability Facilitate compensation pay' ments Keep adequate records Reduction of occupationa disease hazards. Genera sui>ervision of working con ditions from safety stand point Co-operate with Fire Dept. ' Prepared by C. H. Fenstermacher for Personnel, I (1920), i, 4-5, 8-9. scope of personnel work in a modem industrial plant. PERSONNEL DEPARTMENT* MANAGER Committee tors of Each Bureau dent, Healthy, Stable Body of Employees EDUCATION AND TRAINING Staff Instructor Editor Purpose: Training and de- velopment of the work- RESEARCH STAFF Special Investigators SERVICE STAFF Assistant Personnel Superintendent Recreation Director Supt. of Property Social worker Stenographer Prepare Dept. Manuals BuUetin board messages Follow up on employee serv- ice record [ndividual assistance Specialized health instruc- tions Build Library Selection of current m^a- zine articles, for dbtribu- tioD House Organs Hand Book Literary and Educational Clubs Instruction for Shop control Co-operation with local edu- cational organizations Class work High Schools Colleges Y.M.C.A. Unions in apprenticeship courses Co-operate with others in getting across to men, aims and purposes of each bureau N'oon Day and Evening mass meetings Motion Pictures Special courses for' Refining , Groups, Messengers, Cleri- cal, Mechanical and Tech- nical foremen Musical features Choruses, Orchestras, Bands Kindergarten Conduct Suggestion Bos Job analysis studies Standard wage rate studies Cost of living studies Chart lines of promotion Investigate grievance causes Departmental courses assem- bled for study Housing Frobleus a) Company houses b) Rented houses as to rate and service given c) Rooming houses Community Service a) Advance Legislation 6) Public recreation c) Public health and sanita- tion d) Public education Legal Aid o) Notary Public 6) Investments c) Public Libraries Plant or Company Service o) Develop Women's Clubs and groups 6) Develop Men's Clubs c) Develop Shop Committees d) Assist in directing em- ployees' civic activities, viz: Social Moral Recrea- tional, and Educational Supervise recreation Employees' stores Lunchrooms Garden activities Super\ision of Group Insur- ance Supervision of Thrift Cam- paigns This selection is worthy of careful study. It gives a comprehensive view of the 126 BUSINESS ADMINISTRATION !/3 w*^. - M t- . nJ O ; fHbOOJH "nJOd R-^S <.a d ■^ to ° £* hrJ S S 3 = 3 3SS > „„ «^^-aS3 O O rf gS'-'.a -ssd s-stiS. ^1 S -a-s s o =* a 00 S I S-l g I a B 8 S-B-S -.S.2 a^?e^S£--gogsS-B.2g5 ■S.2§i"-SSSaS| £;§ lis ■§&?§§• a sj« SI oj « ff a^'S^JS iJSurjBjatnJj H ci to 4 vi^o fr» « •■g"3 lis ■§s.s ■3^3 g lis :i-P ■^ »b| ssls " o ^ art rtcfia u a P-3D i3u«S)og a « o a '"'"3 Q M^PlM « to ^ Vi Hi". " " "."- gf « g rt.a .1 M 8° **S (-1 .;D. 2§| riag-Silg'5^1 ShH js^rtSg-^d-g^-a s: H H S^ 2-3 " c S"a S o sis s^-s-Sigap^l-^l "ow^ss|gs^§a -g bq| °S'EMa'ig'g>--SI, Sw "^ ,, ri o a d.H.s o o 5 1 I bo i ■3 s I ,*i tJ as 'S '^►J a B5 <5 =3 "fl-^ d y rt THE ADMINISTRATION OF PERSONNEL 127 B. Personnel Administration in Terms of Incentive and Output: Good Physical Conditions and Competent Human Machines The events of recent years have brought out into clear relief the fact that it is important to have men work together effectively; that output, abundant, well-balanced output, is of vital interest to society. Now this is not a new truth. Output always has been and always will be essential to the onward march of society; output, not solely of material goods like shoes and potatoes, but also of services such as those of the artist or the physician; output directed not alone to the gratification of what we call, loosely enough, our material wants, but directed as well to the development of all the finer qualities of heart and mind. Output is important to the progress of society as a whole. Properly controlled, it is important to the progress of every class of society. It is, furthermore, a sine qua non of business success, barring what we like to think are abnormal and exceptional cases such as predatory or monopolistic businesses. Notwithstanding aU this, no fact is more patent today than the ineffectiveness of businesses in this very realm of output. Who is responsible for this ineffectiveness? Part of the responsibility rests upon labor with its feehngs of enmity toward capital, its suspicions and fears and distrust, its lack of initiative, its mental laziness, its lack of vision concerning the real issues of the case, its limitation of out- put, its occasional surrender to poor leadership. So also part of the responsibility rests upon capital and management with their feeling of enmity toward labor, their suspicions and fears and distrusts, their lack of initiative, their mental laziness, their lack of vision con- cerning the real issues of the case, their Hmitation of output, their occasional surrender to poor leadership. As between the two parties, the greater responsibility rests with capital and management, for after aU, they hold the directing power. It is their function to make researches into the problem; to plan effective organization; to develop appropriate incentives; to serve society as responsible stewards. And, unfortunately, part of the responsibiUty rests with our whole modern organization of society. In our impersonal knitting together of speciaUsts, it is easy for distrust and fear and suspicion to arise; easy for each party to believe that it contributes more to the common weal and receives less return than does the other party; easy for beUefs to solidify into prejudices. We have done little to combat these prejudices. We have done little to instruct the modem 128 BUSINESS ADMINISTRATION specialists concerning their place and duties in society. There is almost no such instruction on how our society is put together in our public-school system, which is our main rehance in such matters. As for instruction within the walls of industry, foreman-training courses are mainly courses in production technique, and other courses which deal with more than production technique are in their infancy. We have hardly made a beginniag of getting men to see how they work together, and surely this vision must precede their working together effectively. Then, too, the organization of our society upon a competitive, gain-spirit basis, valuable in the main, leads to short-sighted policies and to confusion of issues. It is not infrequently true that gains to individuals flow from Umitation of output and from other acts harm- ful to society. It is not infrequently true that short-sighted quest for gain leads to disregard of long-run human values. These seem to be penalties attached to our pecuniary organization of society. True, they are penalties which can be lightened or even aboUshed by effective social control, but we have, not unnaturally, developed a healthy suspicion of the effectiveness of our instruments of social control. Too commonly, social attitudes are manufactured; too commonly, supervision is stupid, negligent, or even harmful; too com- monly, public service is prostituted to private gain. There is always a mournful interest in attempting to decide which is blacker, the pot or the kettle, but that alone is a futile per- formance. Ovur survey of the responsibility for inadequate output was undertaken, not to place blame, but to see, in perspective, the task of the personnel manager who realizes that his fimction is that of aiding in getting men to work together effectively. He must understand the causes of inadequate output. He must set himself to the determination of the conditions of good output and then to the realization of those conditions, so far as in him lies. There are, of course, many possible ways of stating the conditions precedent and prerequisite to good output, and they obviously vary from case to case. Assmning as a type case a manufacturing and selling business, there is submitted the following tentative formula- tion of these conditions. There should be: I. Good physical location and good physical plant and equip- ment, both from the point of view of mechanical processes and from the point of view of their relationship to the workers. THE ADMINISTRATION OF PERSONNEL 129 2. Good " human machines " both physically and mentally. This, of course, includes necessary training, and it applies to management as truly as to workers. 3. Good development of "the will to do" in these human machines — which makes them far more than machines. 4. Good organization and administration, or control, or effective bringing together of persons and the things with which persons work. 5. Good social environment, including in that term, not merely social attitudes and government, but also all economic and social institutions — the church, the school, the place of amusement, the trade union, the banking system, and a legion of others with which the manager must work. It is the point of view of this chapter that the personnel manager, maintaining always his responsibility for broad social values, must justify his position in the business firm by his contribution to output. The five conditions precedent to good output which have just been mentioned are accordingly matters in which he has a vital concern. The first two of these conditions are considered in the present section. The third is taken up in section C under the caption "Personnel .administration in terms of incentive and output: the will to do" (see p. 153). The fourth is treated (with particular reference to the personnel department) in section E "Organization and administra- tion of the personnel department" (see p. 226). The fifth does not receive formal treatment except in respect to its relationship to develop- ing "the will to do" and to the spirit of personnel administration. Space permits only a "sampling" method of treatment of the two (good physical conditions and competent "human machines") conditions precedent to good output which are taken up in this section. The student's mind should range out beyond the samples given. He should also be alert to see in these selections matters which bear upon problems considered in more detail ia later sections. PROBLEMS 1. "The present methods of factory management do not secure a high degree of labor efi&ciency." Why not ? 2. What are some of the factors within an industrial plant which serve to reduce output? Which of these can the manager eliminate or minimize ? How ? 3. It is said that employers supported the safety-first movement because of pecuniary motives. Explain how this would be possible. 130 BUSINESS ADMINISTRATION 4. "It doesn't pay the management to care for physical health of workers and to prevent accidents. It is cheaper to 'scrap' the unfit and get new ones." Draw up a table showing factors of cost for and against this position. 5. "Safety engineering is a misnomer. Propaganda is a better term." What is the point to this statement ? 6. The most remarkable development of safety engineering would not entirely eliminate accidents. Who should bear the cost of these unpreventable accidents ? Why ? 7. "The prevention and cure of illness is essentially a community and not an industrial problem." Grant this. Does it relieve the manager of responsibility ? 8. "The progressive employer will be ahead of both legislation and cur- rent practice in safeguarding workers against disease and accident." Why ? WUl it pay ? If you think so, show precisely how. 9. Draw up a statement of the function of social insurance. Should the manager be. interested in such matters ? If so, why and how ? 10. Show wherein the personnel manager is interested, as a business man, in the issues raised in questions 7, 8, and 9. 11. "Technical skiU and mental ability do not necessarily coincide with perfect health." Does this fact discredit the physical examination? 12. "Output is in direct ratio to the length of the working day." Of' course, this is not true, without limit. What are the limits? Will they vary from industry to industry ? 13. "Talk of losses due to fatigue in modem industry is badly overdone. High specialization and the use of automatic machinery cause output to keep up, no matter if the workers are greatly fatigued." Comment. 14. " Rest periods are a very useful way of reducing accidents in an industry where the strain is great." Why ? 15. What are the principal means used to reduce physical and nervous strain in industry? Are they universally used? Can you suggest any that might be but are not now used ? 16. "The essentials of daylight illumination, as summarized by Dr. Scheres- chewsky, are (i) the amount of light admitted to the interior should be as large as possible. (2) The hght should reach the center of the room. (3) The distribution of the Ught upon the working planes should be as uniform as possible. (4) The light should fall upon working planes from a proper direction. (5) The walls and trim of the room should be of such color and surface as to absorb but little of the Ught, white being the preferable color. (6) Manufacturing and other equipment should be so disposed as to avoid casting extensive local shadows." Wherein is the personnel manager interested in illumination problems ? THE ADMINISTRATION OF PERSONNEL 131 17. "It is at least questionable whether the employer has any right to follow the employee home from the factory and intrude on his domestic and social Ufe, nor should there be any need in a city of size and decent government." Discuss. 18. "Poor housing conditions are factors in impairing the health and morale of the worker, in lowering efficiency, in breeding discontent, in retard- ing production, and in increasing labor turnover.'' Do you agree? Can the personnel manager do anything to help the situation ? 19. "It is inevitable that labor should retard any effort to develop human machinery which is made without its consent and its own tangible reward in view." Do you agree ? What can the manager do about it ? 20. "All this welfare work is nonsense. If the manager would only stop it all and add its former cost to wages, both industry and worker and society would gain." Comment. 21. "Problems involved in securing and holding an efficient working force reveal the futility of leaving their execution to detached foremen. They include: (1) mobilizing the sources of labor supply within and without the plant; (2) analyzing and classifying the requirements of the jobs of the entire plant; (3) selecting and placing applicants for work according to their physical, mental, and temperamental fitness for the specific job; (4) inducting and 'following up' the new employee until adjustment is complete; (s) retaining and developing the old employee." Discuss the relative abilities of the foreman and the per- sonnel manager to deal with these matters. 22. What are some of the difficulties of newspaper advertising for help from the point of view of (a) the worker, (6) the manager ? 23. There has developed among manufacturers considerable opposition to having a United States employment service in the United States Department of Labor. Can this be because such a service could not be made worth while ? 24. Confining your attention to the employment and placement activities of the personnel department, what items of cost can such a depart- ment reduce ? What instrumentalities or technical devices will it use in the process ? 25. Viewing the matter only as related to his costs, what arguments are there for a manager's conducting "general education" classes within his plant ? For co-operating with public schools in continuation- school work ? For conducting classes in sewing, drawing, personal hygiene, and domestic science ? 26. Viewing the matter only as related to his costs, has the manager any interest in the public school system of his community ? If so, is his interest confined to vocational education ? a?. Would it be well (a) for society (b) for the manager, to have all technical training for aU positions cared for in public schools ? 132 BUSINESS ADMINISTRATION 4. SOME CAUSES OF INEFFICIENCY IN MODERN INDUSTRY' The causes of inefi&ciency may be divided into three classes: The first are those causes which are chargeable primarily to the employer, the second those which are chargeable primarily to the workmen, and the third those which are chargeable primarily to our political and industrial system. Those causes of inefficiency which are chargeable primarily to the employer may, in turn, be divided into two classes. Those of the first class arise from a lack of knowledge. They can be remedied by showing the management the possibilities of better methods. Those of the second class arise out of moral defects on the part of the employer, and will require more than a change in the system of management, or full inforination of the conditions of the plant in order to eliminate them. The first and most prolific source of inefficiency is mental laziness. Most of us dislike to think. While a good many of us will devote a spare hour npw and then to the consideration of some interesting sub- ject, no man will, if he can avoid it, devote two hours a day, not to mention eight hours a day, to the task of devising and comparing methods of work. That kind of thing is entirely too strenuous to suit the average officer of administration. In the average plant, each officer places upon the shoulders of his underUngs the burden of detail for which he himself ought to be responsible. A second source of inefficiency is a dislike on the part of most managers to employ a considerable executive staff to direct the efforts of their workmen. The management balks at such a staff, and claims that "non-productive" labor is a necessary evil if you have to employ it, and an unnecessary evil if you can do without it. A third fault of management is timidity. Capital seems to be ruled by fear quite as often as by judgment. Men dislike to risk their money in something which they feel is not absolutely sure to bring adequate returns. This brings us to a fourth fault of management, which is lack of foresight. The management, in performing the work of today, fails to make allowance for the needs of next week, or the growth of next year. Plants grow in haphazard fashion. Equipment is added with- out making plans for the future. No attempt is made to insure that " Taken from F. E. Cardullo, "Industrial Administration and Scientific Man- agement" in Machinery, XVIII (1912), 931-35. THE ADMINISTRATION OF PERSONNEL 133 there will always be a corps of trained workmen and a staff of able foremen. The lack of definite and far-reaching plans for future work is not felt at the time that such plans should be made, but is felt later. A fifth fault of management is one which may best be described as "mental inertia." Managers tend to follow methods which have been satisfactory in the past, but which changing conditions have made unsatisfactory for present requirements. Whenever a new invention of any importance is introduced into a shop, the conditions of work are greatly altered. The introduction of high-speed steel is a case in point. When the time required for machining work is cut down to a third of that formerly required, the amount of crane service for a given number of machines is trebled. The foundry and forge shops must be made very much larger in order to furnish the stock required by the machine-shop. The amount of storage room required for stock and for finished product is greatly increased. The relative importance of different items of cost is radically altered, and the nature of the problems of administration is greatly changed. Notwithstanding these changes, we will find that in most cases the management will attempt to get along with the least possible change in equipment, and in methods of work and administration. Many men resist change simply because it is change, in spite of the fact that the change may be desirable. A sixth, and probably one of the greatest of all causes of ineffi- ciency, is the fact that the management very seldom makes a careful study of the industry. In the few cases where a careful study is made, it is usually done for the purpose of improving the materials used or the quality of the output, or increasing the amount of work tinned out by the use of a given method. It is of equal or even greater importance that the methods them- selves should receive the same careful study. Probably the best example of a scientific study of methods of manufacture is the work of Mr. Taylor on the art of cutting metals. It is probable that a similar study of methods would result in equally important develop- ments in other lines of industry. Such studies are not made for three reasons. In the first place, managers do not realize the need of such studies nor the advances which are possible. In the second place very few men are capable of making such studies. In the third place, inertia opposes the changes which would result from such studies, and timidity hesitates to expend the money necessary to carry them out. 134 BUSINESS ADMINISTRATION A seventh source of inefficiency in many industrial plants is the system of wage payment adopted. It would be hard to devise wage systems better calculated to limit efficiency than the two which are in most common use, namely, the day-wage plan, and the piece- work plan with frequent cuts. Under the day-work plan, the man receives no reward for his efficiency, he is instead punished for ineffi- ciency. This is a method which is fundamentally wrong, and only to be employed when no other method is possible. When a piece-work plan is adopted, the management usually knows very httle about the possibilities of the work. If the manage- ment fixes what the men think to be a reasonable piece rate, the men will soon so increase their output that they will be making exorbitant wages. The management will then cut the piece rate, and after the men have experienced a series of cuts as a result of successive increases in efficiency, they wUl discover that the management does not propose to pay them more than a certain amoimt of money, and will work just hard enough to secure a trifle less than the maximum amount they can secure without experiencing a cut. An eighth cause of inefficiency is one which is happily becoming less frequent. It is a disposition on the part of some employers to regard their workmen as being of a lower order of humanity than themselves. I have talked with such men on more than one occasion. Among their associates they were highly regarded for their kindness of heart, but I have heard them speak of their workmen as "beasts" and "ignorant brutes." No man who regards his employees in that Ught can be persuaded to adopt scientific management nor can he bring the efficiency of his plant to a high standard, because such feelings will unconsciously affect his attitude in dealing with his employees, arouse their antagonism, and destroy that feeling of co-operation which is the essential basis of high efficiency. The last source of inefficiency of which I will speak is avarice on the part of the management. Avarice reduces wages, cuts piece rates, purchases inferior materials and equipment, employs unskilled labor, skimps on supplies, and makes unjust exactions of its employees. A-varice refuses to expend money for the collection of information, for increasing the facilities of work, and for improving the efficiency of administration. Avarice hampers the administrative stafiE at every point. I have not by any means exhausted the list of causes of ineffi- dency which arise from faults of the management. It would be as THE ADMINISTRATION OF PERSONNEL 135 easy to name a hundred as to name nine, but the task is not agree- able. I have endeavored merely to point out the fact that such faults exist, that they can be remedied, and that before scientific management can be applied to an industry they must be remedied. While most of the causes which lead to inefficiency are chargeable to bad management, I would not have it inferred that the work- men are free from blame in the matter. The first source of inefficiency chargeable to the workmen is their disinclination to work at any other than their natural pace. If a man is allowed to work as he pleases, he will soon settle down into a certain pace which suits his temperament and nervous organization, and win keep to that pace without very much variation from day to day. A second source of inefficiency is lack of ambition. While most men will be stimvdated by a proper reward, there are some classes of labor which cannot be reached in this way. Some workmen do not accomplish as much or as good work when well paid as they do when poorly paid. In certain sections of the South contractors find that when negro laborers are paid 75 cents a day they will work a fuU week, when paid $1 a day they wiU lay off one day in the week, and vhen paid $1 . 50 a day they will lay oS half the time. The reason is that these men are not ambitious. It is needless to remark, how- ever, that the average artisan is not of that character. He is ambi- tious and invariably responds to a suitable reward, unless he beheves that in so doing he is acting against the best interests of himself or his fellow-workmen. A third source of inefficiency lies in the fact that the workman does not like to think any more than the superintendent, the foreman, the manager, or the board of directors. He prefers to work without thinking when it is possible. Few men are physically lazy, but nearly all men are mentally lazy. The only way that a man can work without thinking is to do the job the way in which he or some- one else has done it before. A fourth, and possibly the most prolific, source of inefficiency is the belief held by many workmen, and unfortunately taught by many union officials, that in doing efficient work men are displacing other workmen and lowering wages. A fifth source of inefficiency chargeable to workmen is a feeling of enmity against their employers. A great many workmen are imable to see the community of interest between the workman and the employer. Some workmen act as if they believed that the two 136 BUSINESS ADMINISTRATION were at war, and that anything done to injure the employer was a benefit to labor. Until all feeling of enmity between capital and labor is replaced by a knowledge of mutual need and appreciation of mutual interest and a desire for mutual success, not only efficiency but also prosperity must suffer. Those sources of ineflEiciency which arise out of the imperfections of our poUtical and industrial system are just as important as are those due to faults of management or of workmen. Unlike the latter, however, it is impossible for either the management or the workmen to correct the faults we are about to consider.' See also p. 164. The Fears of Labor and of Capital. 5. PHYSICAL CONDITIONS OF WORK AND ACCIDENT PREVENTION^ [It was said in the statement introductory to this section that one condition precedent to good output is good physical location and good physical plant and equipment, both from the point of view of mechanical processes and from the point of view of their relationship to the workers. We shall in our discussion assume, as self-evident without argument, the validity of this statement as far as technology is concerned. An interesting phase of the relation- ship of the technological processes to the worker is shown in this reading on accident prevention and in the following one on preven- tion of occupational diseases. Every reader will realize that both of these selections apply also to that condition precedent to good output which we have called "good human machines, both physically and mentally."] The physical environment of employes is a determining factor of health, happiness and efficiency. Good ventilation, lighting and sanitary conditions contribute directly to the employe's physical well-being and the ease with which he can work. Fire protection and accident prevention make his labor power more secure. Attractive surroundings afford relief from the^rain of monotonous "This part of the discussion is omitted. It deals with the wastes and ineffi- ciencies, the risks and uncertainties connected with our industrial society. — Editor. "Adapted by permission from L. K. Frankel and Alexander Fleisher, The Human Factor in Industry, pp. 135-40. (The Macmillan Company, 1920.) THE ADMINISTRATION OF PERSONNEL 137 or fast work. To this end a button factory in Rochester, New York, provides phonograph music intermittently throughout its various departments. In the machine shops where noise prohibits music, potted plants are arranged in convenient places between the machines. Window boxes, vines, trees, and shrubs decorate the exterior of many factory buildings, which are designed as artistically as private suburban homes. Efforts to beautify the industrial environment of the employe are, it is true, of less importance than the endeavor to prevent accidents, occupational disease and fire, and to provide adequate ventilation, Ughting, and sanitation. Never- theless, since the employe spends at least one third of his day in the workshop, it is desirable that his surroundings should not only make for efficiency, but stimulate his aesthetic and creative faculties. Growth of accident prevention movement. — ^No phase of labor maintenance has grown so rapidly as the movement to prevent industrial accidents. In 1906 the first, exhibit of safety appliances in this country was held under the auspices of the New York Institute for Social Service. This led to the organization of the American Museum of Safety (1907). In 19 12 a small group of engineers met in Milwaukee and launched the National Safety Council, which has taken the lead in the war against accidents. In four years' time it included 15,400 representatives from 3,293 firms, covering 4,500,000 workmen. There are a number of reasons for this remarkable interest. Not until recently have United States statistics of accidents in industry and their sequelae been available. These have formed the basis of active propaganda and legislative action. Notwithstanding this, it is estimated that 35,000 workmen are still killed annually — one every 12 minutes — and probably 400,000 receive injuries sufficiently serious to cause them to lose time from their work. In Pennsylvania alone in 1916 industrial accidents caused lost time equivalent to 3,025,371 working days and $7,535,059 in wages. This loss waE formerly borne entirely by the injured workman, occasionally assisted by fellow-workers and the employer. Work- men's compensation laws enacted in most of the States have divided the loss by charging a percentage to the employer. These laws have not only transferred the cost of accidents from employe to employer, but by requiring systematic reporting of accidents have furnished necessary data as to their extent and seriousness. These in turn have led to the safety campaigns. 138 BUSINESS ADMINISTRATION Possibility of preventing accidents. — ^Experience has shown that at least 50 per cent of the industrial accidents are preventable. Twenty-two of the foremost industrial concerns of the United States report an average reduction of 54 per cent in yearly accidents after the introduction of organized safety work. The International Har- vester Company, the Neenah Paper Company, the Illinois Steel Company, and the Milwaukee Coke and Gas Company each reported a reduction of more than 80 per cent. In eighteen months the Port Huron Engine and Thresher Company, in a plant employing between three and four hundred people, reduced accidents 56 per cent and cut down compensation costs. Safety devices. — To accompUsh these results many ingenious safety devices have been developed to protect workmen. Glass hoods catch the fine steel splinters from the emery wheel; goggles cover the metal grinder's eyes; "congress shoes" with steel plated toes protect the molder from a scalding should he spill the hot metal he is carrying; "safety nets" catch the falling workmen, tools, or materials in construction work; automatically locking doors protect elevator shafts in office building and factory, etc. Importance of personal equation in the reduction of accidents. — Mechanical appliances play an esseptial but comparatively small part in accident prevention. By fdr the larger number of accidents is dependent on the person or persons involved. This has been demonstrated repeatedly by studies of causes of accidents and of methods of preventing them. The experience of the lUinois Steel Company, one of the pioneer companies in safety work, has led them to evaluate the different methods of attacking the accident problem. Only 172 per cent of the total reduction in accidents is attributed to the introduction of mechanical appliances, and another 8 per cent to improved lighting and cleanUness. Educating by means of lectures, or bulletins, or instruction while at work, was held accountable for 30 per cent of the reduction and the organization of Safety Commit- tees for 20 per cent. This experience is typical. 6. PREVENTION OF OCCUPATIONAL DISEASE' Prevalence of industrial health hazards.-fNowhere has there been sufficient appreciation of the extent and variety of occupational disease. Dr. Hayhurst, after an extensive study, states that "from ' Taken by permbsion from L. K. Frankel and Alexander Fleisher, The Human Factor in Industry, pp. 142-44. (The Macmillan Company, 1920.) THE ADMINISTRATION OF PERSONNEL 139 one fourth to one third of the medical afHictions of trades persons are due in the whole or in great part, to industrial health hazards." Processes grouped according to hazards. — In his study of Ohio industries Dr. Hayhurst classifies the hazardous industries as: (i) Those using poisons as a chief hazard. (2) Dusty industries. (3) Those in which fatigue and inactivity are the chief hazards. (4) Those in which heat, cold, moisture, or dampness predominate. (5) Those in which there is more than usual hability to con- tracting communicable diseases. (6) Industries having miscellaneous hazards not included above. The largest class is probably the dusty industries. It has been estimated that approximately 5,600,000, or 17 per cent of American wage earners of both sexes, work under conditions more or less injurious to health because of atmospheric impurities caused by dust, fumes, or gases. Professor Winslow has listed some 54 trades in which fine particles of bone, hair, metal, and mineral vegetable materials form a dust which it is more or less dangerous to breathe. This by no means covers aU the industries, processes, and occupations which give rise to dust; almost every manufacturing process may expose workers to this hazard unless precautions are taken. Preventative measures. — A large amount of the unnecessary sick- nesses and premature deaths may be prevented with comparatively little effort or cost on the part of the employer. Many occupational diseases may be prevented by: (i) Securing the scientific ventilation of workrooms, especially by the installation of efficient local exhausts which remove dust at points of generation. In some industries, such as in smelting and refining, fountain-pen-point manufacturing, jewelry, etc., the dust created is valuable, and it has been found profitable to recover the valuable material from the collected dust by means of a patented electrical precipitation process. (2) Securing cleanUness by providing ample washing or bath- ing facilities. Some plants provide separate lockers for street cloth- ing and working clothing, so arranged that the worker must remove his working clothes, hang them up to dry or place them in the lockers, and must then pass through the shower room before he can get to his locker containing street clothing. (3) Wearing of proper protective clothing, viz., respirators and goggles in dusty processes which cannot be taken care of by exhaust I40 BUSINESS ADMINISTRATION ventilation, as in sand-blasting and emery-wheel grinding; boots and gloves in wet and chemical processes; special shoes for foundry workers; helmets for welders; water-cooled furnace doors for hot- process workers; overalls, aprons, caps, etc. (4) Shortening the working hours (and, therefore, the period of exposure), allowing rest or "spell" periods in fatiguing and exhaust- ing work. (s) Requiring physical examinations at entrance, to weed out those unfit for work and to place others where they are best suited physically; and periodically to ascertain whether workers are suffering from the effects of their occupations so that changes may be made and treatment or necessary advice given. (6) Providing medical care, including first aid and necessary subsequent treatment. (7) Giving health instruction and safety education. (8) Proper layout of plant and good housekeeping so that workers in one process are not unnecessarily exposed to the hazards of another adjacent process. (9) Sanitation of plant to prevent the spreading of communi- cable diseases. This includes adequate and proper toilet facilities, sanitary bubbling fountains, individual towels, spittoons, etc. 7. THE MAINTENANCE OF PHYSICAL FITNESS' Various ways are now known by which fatigue can be reduced without decreasing the output and even in some cases with an increase of it. When fatigue is caused by work inside factories, it is obviously controlled more easily than when caused by the conditions of living of the workers outside. Introducing recess periods. — One of the common methods of reducing fatigue is by introducing recess or resting periods during a working spell. During such periods, which, in order to be effective, must be obligatory and not discretionary on the part of the workers, they should have an opportunity to rest, relax, move about, and engage in other simple recreation. A little food or a cup^f tea or cocoa taken at such a time is often remarkably restorative. A very striking instance of the benefits of resting periods has recently been published. "Two ofl&cers at the front recently, for a friendly wager, competed in making equal lengths of a certain trench, each with an 'Taken from Reprint 482, United States Public Health Service, pp. s~"- (Government Printing Office, 1918.) THE ADMINISTRATION OF PERSONNEL 141 equal squad of men. One let his men work as they pleased, but as hard as possible. The other divided his men into three sets to work in rotation, each set digging their hardest for five minutes and resting for ten, till their spell of labor came again. The latter team won easily." Introducing variety into work. — Much of the modern industrial work consists of a constant and rapid repetition of the same movement. A woman worker in one of our munition factories was recently observed to handle during her day's work 24,000 pieces of a shell fuse and put them through a special process. From seven o'clock in the morning until twelve and from one until six she sat at her machine and fed it with the succession of brass pieces. The occa- sional introduction of a little variety into her work by training her to some alternative process might easily have diminished her fatigue without diminishing the number of finished pieces. Adjusting the speed. — The capacities of different workers vary greatly. In order to secure uniformity in the work of a squad, where a single motor operates a number of machines, the speed of the motor must be adjusted to the average pace. It may be advan- tageous to transfer to another job an especially fast or slow person. It is of the utmost importance that each member of the squad should be able to work with the same rhythm and that the speed of operation should be adjusted to this rhythm. Fatigue is least when the speed is in consonance with the worker's customary rhythm, and the out- put may be twice as great as with a speed a little slower or even faster than this. The worker's speed, however, depends not merely on the adjustment of mechanical appliances, but is also often increased by a well-planned system of incentives, which may consist of piece rates or bonuses, or the making of the work itself more interesting and attractive. Omitting unnecessary motions. — ^The pieces which the worker has to handle should be so placed with reference to height and distance from his hands that he is obliged to make no awkward, unrhythmical,- and unnecessary motions or excessive muscular exertions in handling them. His work can thus be done with the least possible waste of energy and time. Providing adjustable seats. — Where workers are obliged to sit instead of stand at their work, the seats should not be of imiform heights, but should be adjusted to the individual worker, with backs of such shape and position as best to fit and support the worker's 142 BUSINESS ADMINISTRATION back. Where the worker's feet cannot reach the floor, foot rests should be provided. Ventilation of workrooms. — The ventilation of workrooms is an important aid to efficiency and should conform to the principles of ventilation now accepted. The recent investigation of ventilation has demonstrated that excessive heat and humidity should be avoided so far as possible and that air should be kept in motion. When the worker is in a hot room, and especially when heat and humidity are combined, his bodily temperature rises, often several degrees, and he is put into a feverish state. WhUe movement of the air will not cool the air, it will cool the skin and hence wUl keep down the bodily temperature to the healthful level. If possible, windows should be wide open; but where this is not possible and wherever even with open windows the heat of the workrooms rises above 68°, forced drafts or electric fans should be used to keep the air in motion. It is astonishing how easily a comfortable and refreshing bodily condition may be maintained by the use of electric fans. Air currents should not, however, be too strong. Bodily discomfort is caused by exces- sive drafts, and a gentle movement of air is the most effective. Uni- formity in the play of air on the skin is undesirable; an oscillating electric fan or a frequent change in the rate of the forced drafts gives the best results. Sanitary conditions within factories. — As accessory but none the less important means by which fatigue may be lessened and the efficiency of workers increased, there may be mentioned certain general sanitary conditions within factories: 1. Adequate Ughting, with the light properly distributed and yet sufficiently concentrated on the work in hand to prevent eye strain. 2. An exhaust system to remove deleterious fumes and dust. 3. Abundant drinking water, cool but not ice cold, within easy reach of the worker. 4. Attractive, quiet rest rooms, especially for women, in which in times of need tired workers may find reUef. 5. Lunchrooms or canteens, where a hot lunch of nourishing food, selected according to a scientific dietary and well cooked, may be purchased at cost prices and eaten amid attractive surroundings free from the influence of the saloon. 6. Clean, well-ventilated modern toilets. 7. Washing facilities, with abundant soap and dean towels, and especially shower baths, where the hot, sweaty, begrimed worker may become cool and clean before leaving the plant. THE ADMINISTRATION OF PERSONNEL 143 Alternating day and night work. — The industrial urgencies of the war have caused many factories to run both day and night, and have thus increased greatly the total amount of night work performed. Man is not naturally a nocturnal animal, and imder our present social arrangements night work must always be regarded as inadvisable on physiological grounds. Lack of sleep produces fatigue. The day sleep of night workers is likely to be curtailed, and in the long run night work is likely to be detrimental to health. This is probably more true of women than of men. Where night work is unavoid- able, fatigue can to some extent be avoided by allowing the workers to alternate at intervals between day and night, the periods to be not less than one month in duration. Frequent changes of habits may be deleterious to health. Adjusting hours of work. — A very obvious way to reduce fatigue is by adjusting the number of daily hours of labor. The British Health of Munition Workers Committee has found that it is a mis- take to recommend a uniform day for all kinds of work, that the most profitable duration of the working period varies considerably with the nature of the occupation, and that women and boys, even when engaged in moderate and light types of work, are unable to stand as long hours as men. The exact relationship between length of day and quantity of output is not yet fully investigated for all conditions, but the great preponderance of evidence favors a reasonably short working day, even in the interests of the industries themselves. Avoiding overtime. — Arguments that favor the short working day apply directly to the question of overtime. If the usual day's work is such as Just to stop short of undue fatigue, overtime means over- work. It is, of course, sometimes necessary, in order to complete a contract within a required time, to call on the workers to expend the greater effort required. It is, however, a dangerous expedient and a particularly insidious way of diminishing a worker's efficiency. Overtime work is apt to result in an increased amount of spoiled work and in lessened output and- increased absences on subsequent days, and because of this and also in view of the increased rate of wages that must usually be paid, overtime is not as profitable as is often supposed. It should be resorted to only in times of exceptional emergency, and even then not for many days in succession. Omitting Sunday work. — The same principle holds for the duration of weekly labor. It is generally acknowledged by those who have studied the question most carefully that all workers should have 144 BUSINESS ADMINISTRATION one day's rest in seven. At the beginning of the war the amount of Sunday work in the industries of the world was greatly increased. After little more than a year the British Health of Munition Workers Committee reported as follows: .... The evidence before the committee has led them strongly to hold that if the maximum output is to be secured and maintained for any length of time, a weekly period of rest must be allowed. Except for quite short periods, continuous work, in their view, is a pro- found mistake and does not pay— output is not increased. On economic and social grounds alike, this weekly period of rest is best provided on Sunday. Sanitary conditions outside factories. — Fatigue resulting from the work inside the plant will appear sooner and be a more serious hin- drance to output if the worker is not in a sound condition of body and mind when he comes to his task. Anything which an employer can do outside the plant to promote bodily health and vigor and mental contentment is in the long run profitable. It aids in securing a higher class of workers, greater loyalty to the company, a lessened labor turnover, greater skill, and greater general efficiency. Modern housing, attractive home surroimdings, opportunities for healthful recreation, club facilities — ^whatever wiU keep workers away from the saloons and other places deleterious to health — are all safeguards against industrial fatigue. See also p. 196. How Industrial Fatigue May Be Detected. 8. PHYSICAL EXAMINATION OF WORKERS' We are, of course, well aware of the specific reasons for the intro- duction of the physical examination of workers in this country. The enactment of legislation for the compensation of workmen for injuries has rendered such examination advisable for the purpose of determining the physical condition of workmen upon entering employment, so that unjust claims for accidental injuries might be avoided, and the hazard to fellow-employees, arising from physical defects in workers, reduced. 'Taken from Reprint 234 from the Public Health Reports (November 20, 1914). By J. W. Schereschewsky, surgeon, United States Public Health Service. fGovemment Printing Office, 1914.) THE ADMINISTRATION OF PERSONNEL 145 Begun on this basis, we are rapidly coming to the realization of the great value of such medical supervision in a larger sense. As a general proposition such medical supervision should have for its objects the following points: 1. The control of communicable diseases. — It would seem a matter of simple justice that the worker should be protected from exposure to infection from co-workers suffering from communicable diseases. [Patrons also should be protected.] 2. The detection of incipient defects and diseases. — Many indi- viduals have their eflSciency much impaired because they are suffer- ing from some easilj' correctible defect, the existence of which was unsuspected by them. Others are suffering from diseases, such as pulmonary tuberculosis, in an incipient condition which, if neglected, would make such advances as to preclude subsequent recovery. Medical supervision creates an opportunity for detecting such defects and diseases before the damage wrought is irreparable and of advising the worker of the steps which should be taken for their improvement or correction. 3. Adaptation of the work to the physical condition of the worker. — It is evident that some classes of work require certain physical quali- fications or the absence of certain physical defects or diseases. It is obvious that persons suffering from hernia should not work at occu- pations which require the lifting of heavy objects, persons suffering from nephritis should not engage in occupations involving great fluctuations in temperature or exposure to cold and dampness, nor should persons suffering from cardiac disease be placed in situations where physical exertion is required, or where a sudden vertigo may endanger the individual or his co-workers. 4. Advice to the worker. — ^The great opportimity which medical supervision affords to advise workers concerning their physical con- dition is an advantage which cannot be overestimated. The helpful interest thus displayed on the part of the employer toward the physical condition of workers awakens that spirit of co-operation on their part which is necessary to the maintenance of "safe" industrial conditions. Such, at least, has been the experience of plants in which medical supervision has been put in operation. 5. Record of the physical condition. — For proper medical super- vision it is essential that careful records of the physical condition of workers be kept. In the first place, a record of the physical exami- nation serves, on the one hand, to safeguard against unjust claims 146 BUSINESS ADMINISTRATION for compensation in the case of injuries, while, on the other, a record of physical fitness will help to substantiate just claims for such injiuries. In the second, such records constitute most valuable data for studying the average physique and the condition of the health of workers in any industry. 6. Edttcation of the workers. — We are familiar with the excellent work already accomplished in the prevention of accidents by means of the education of workers. - A similar campaign in teaching them how to keep well should have like effects in reducing the number of cases of illness. 7. TJie prevention of occupational diseases. — Systematic medical supervision is a most excellent agent to prevent the occurrence of occupational diseases among workers. When such diseases are found in a plant, the first cases will be detected by the medical supervision, so that the sanitary defects responsible for them may be readily corrected. The supervision would serve also as a constant check upon the efficiency of the methods introduced to prevent the occurrence of occupational diseases. It is evident from the foregoing that the scheme of medical supervision contemplated in this paper is extensive and would entail considerable expense to put in operation. The question which inevitably arises is, "Will it pay?" The answer must be unhesi- tatingly in the afl&rmative. The experience of all plants in which such systems have been put in operation is so satisfactory that no doubt has arisen in the minds of their officers that medical supervision does pay in increased efficiency of the working force, greater content of the workers, greater co-operation between employers and employed, and in greatly diminished loss of time and suffering from preventable disease. See also p. 195. Strength Tests in Industry. 9. SELECTION AND PLACEMENT' The abihty and knowledge to select competently come only after considerable preliminary work has been gone through. They involve — (a) Information in advance as to vacancies: This is one of the worst features of modern conditions. Workmen must be educated 'Taken by permission from N. D. Hubbell, "The Organization and Scope of the Employment Department" in Bulletin Z2J (U.S. Department of Labor, 191 7). THE ADMINISTRATION OF PERSONNEL 147 to give sufficient notice of leaving and foremen must notify the employment department immediately when such notice is given, thus allowing as much time as possible for securing people to fill the positions. This education of the workman involves, in addition to making him realize the fairness of it — (i) a system for paying off in full, when they leave, those who give sufficient notice; (2) having an understanding that leaving without notice must be counted against his record should he ever want a reference from the com- pany; (3) checking up a previous record of employment to see if he has quit without notice; and (4) it also involves, on the part of the employer, giving notice when letting a man out, except in case of dis- charge for insubordination, mahcious conduct, and the like. (b) A thorough knowledge of what material is available: This includes, in addition to applications on the shelf, a knowledge of con- ditions of the labor market in the locaUty, and any strikes, lay-offs, and other conditions affecting it. (c) A close personal contact with foremen: This is part of the missionary work. It is simply getting around the shop as often as time permits and keeping in touch with the foremen regarding their wants and what is available. , (d) A general working knowledge of all operations performed: From personal observation and talks with the foremen a general knowledge of the work can be acquired. (e) Standard spedfications for all classes of help used: Standard specifications would be an outgrowth of contact with the foreman and would involve a knowledge of the operations and the correspond- ing kinds of help preferred. These should be reduced to writing and approved by the foreman and emplo3mient manager. (f) Knowledge of rates and earnings: It is necessary for the employment manager to have a thorough knowledge of rates paid for all classes of work done. This should include day rates and a general knowledge of average earnings on piecework in the plant and as much of this information as can be gained pertaining to other plants in the locality. (g) Investigation of apphcant's record: Proper co-operation on the part of employment managers on the matter of references wiU enable them to weed out many of the undesirables. It is largely a matter of the employment department having sufficient data to give an intelligent and comprehensive record of the man. 148 BUSINESS ADMINISTRATION (h) Physical examination of applicants: Many of the larger and more progressive concerns are now insisting upon a physical exami- nation of new employees before starting work. In many cases it is the outcome of rigid accident compensation laws, but from the purely business standpoint doctors' examinations are a good propo- sition. They are so common now that very few applicants object to them. A comprehensive employment department is not complete without them. (i) Character analysis: Opinions of employment men vary as to the value of scientific selection and character analysis, but there is without doubt something in the science which would be of value to most employment men. It is for each to use as much of the science as his experience justifies. (j) Testing out applicant for certain work: Many concerns are finding it advantageous in some cases to take the applicant to the department and give him a superficial try-out. This is of special value in the case of operators for special and automatic machines where a minute or two at the machine will prove whether or not the applicant is famiUar with it. However, this should be discouraged rather than encouraged. This will also include taking the appHcant into the factory to see working conditions in certain special cases. Introdicce new employees. — At the present time there is not enough attention paid to introducing new employees into the organization properly. If an applicant has been accepted it is worth while to start at once to make him feel at home. The impressions gained during the first few days stay with him and a little personal interest at the start helps him over the critical period. Some one from the employment office should take him to his department when he starts, and the introduction should include: (a) Introduction to foreman and fellow employees: If he is not aheady acquainted with the foreman he should be introduced to him and arrangements should be made for him to be made acquainted with fellow employees. (b) Explain rules and poUcies of the company: The most satis- factory way of explaining rules and policies is to give the new man a brief, concise booklet, and supplement it with a verbal emphasis on important points. This gives him an opportunity to study them over at leisure, and not rely on memory to carry all the details. (c) Explain location and use of hospital: The new employee should be shown the location of the factory medical department and THE ADMINISTRATION OF PERSONNEL 149 impressed with the necessity of going at once to the hospital in case of any injury, no matter how slight. (d) Point out physical surroundings: General layout of build- ings, offices, stock and tool rooms, lunch room, exits, etc., should be pointed out. (e) Point out location of conveniences: This should include wash room, lockers or coat rooms, and toilets to be used in the department to which he is assigned. Follow up performance of employees.- — By taking up this func- tion the employment manager is taking up employment work in the broader sense. This phase of the work is, nevertheless, important, because by following up the performance of all employees, especially new ones, attention is called to "deadwood," round pegs in square holes, and real live material within the organization. It also acts as a check on the judgment of the man doing the hiring and he should benefit by the experience. This follow up should cover — (a) General conduct. (b) Average earnings. (c) Lateness and accidents. (d) Health and accidents. (e) Efficiency rating or periodic certifications by foreman cover- ing at least — 1. Workmanship. 2. Reliability. 3. Willingness. 4. Attitude. 5. Industry. See also p. 197. Job Analysis. p. 144. Physical Examination of Workers. p. 209. Army Intelligence Tests and Trade Tests. 10. EDUCATION AND TRAINING A' Among the tendencies that merit special attention is that of establishing schools throughout the country to maintain direct con- tact with the actual workers in their places of employment. An example of this kind is furnished by the part-time and evening classes in the Southern textile industry. The Bradford-Durfee Textile » Taken by permission from The Industrial Information Service (Septem- ber 30, 1920). 150 BUSINESS ADMINISTRATION School at Fall River, Mass., which is rearranging its quarters and increasing its staff to accommodate 600 boys, represents the same tendency. .Since the passage of the Smith-Hughes Act, which gives federal aid to industrial education on a part-time basis and other- wise, the whole movement has received a distinct impetus. But employers have not waited for public assistance to promote the training of their employees. They have gone at the job indi- vidually through the estabhshment of apprentice systems and the like: the school maintained by the General Electric Company is a case in point. Or they have acted collectively, for instance through the National Association of Corporation Schools which has recently announced an enlargement of its activities. The war greatly quickened the movement. The experience with vestibule schools demonstrated in many establishments the economy of systematic training for new employees. Practically every branch of industry has multipUed training departments; from shipyards, mills, factories and mercantile estabhshments comes the same story of educational efiort. In the retail field alone there are three schools whose object is to train teachers for educational work. Here and there private industry is actively promoting education of an advanced character. Thus the Goodyear Tire and Rubber Company has founded a university, housed in an expensive building and conducted by a teaching stafi of 200 instructors. Another example is the technical institute of the Ford Motor Company, to which students from all over the coimtry will be admitted. Another phase of the movement is the increasing endeavor to provide adequate training for foremen — the technical and "himiane" education of these key men in industry. In the same breath may be mentioned the courses for industrial nurses and physicians offered at some of the colleges and imiversities, and the many opportunities, both public and private, for instruction to potential and actual employment managers and higher executives. Indeed, the training of higher executives may be said to have become a new department in teaching. Public school departments in several states are more and more linking up their work with industrial needs. Finally there is the establishment by labor unions of colleges and schools designed to help those of their members who feel the lack of secondary and university training. In all these efforts lies the hope not alone of greater efficiency but of a spirit of understanding and co-operation. THE ADMINISTRATION OF PERSONNEL 151 Methods of training. — As, has already been pointed out, training has to go on somehow in practically all shops. It always has gone on — in some form it always wiU. At different times and in different con- cerns training has been carried on in a great many different ways, but all of these ways, or methods of securing training, can be put into one of two classes, which we can for convenience call training by absorption and training by intention. Training by absorption. — Where this method is used there are no definite arrangements made for training. New men "pick up" their work as they can. They get what information they can from others who are on the same sort of jobs. Perhaps they find a "good fellow" at the next machine and " get next ' ' to him at the noon hour. "They use their eyes and their mouths." In this way they gradually get so that they can do some sort of a job or else get fired. If they are able to stay on the job they are finally absorbed into the working force — whence the name. A common modification of this method is where a shop allows piece workers to take on learners as "helpers." As an example, suppose a weaver in a cotton miU is running a certain number of looms, say, for illustration, eight. His wife's cousin makes a deal with him to come in as a "helper." Perhaps the "helper" pays for the privilege. With the aid of this "helper" the weaver can run, say, ten looms instead of the eight, so he makes more money. After a while the "helper" thinks that he can run a few looms himself, and when the mill is short on weavers he gets a chance to try it on his own hook. In this way he gradually becomes some sort of a weaver. What training he got, good or bad, he did not get through any training plan operated by the miU. ^^ Officially" the mill had nothing to do with it. It did not even know "officially" that the man was in training. Another illustration of how this method works in practice is when a man "steals his trade." For example, he goes to a machine shop where they work on a lathe job. In a few hours or half a day the foreman finds out that the man knows nothing about his job and fires him. However, he has found out something about the job. He goes to another concern, represents himself as a lathe hand and gets a job on the strength of it. This time he may last a few days. ' Taken by permission from C. R. Allen, The Instructor, the Man, and the Job, pp. 11-16. Q. B. Lippincott Company, 1919.) 1 52 BUSINESS ADMINISTRATION He works the same game again with another shop. Because he knows a Uttle more he may last a little longer. By keeping this game up he may finally become able to do some sort of a lathe job. As in the other cases, what he got he got by himself, with what help he could get from other men whom he "pumped" as he could, and who were not supposed to help him, but were supposed to work on their own jobs. Training by intention. — This method differs from training by absorption in that there is some recognized plan for training new men. Somebody is expected to train them either as all of his job or as a part of his job. Some illustrations of how training by "inten- tion" is carried out in practice would be an apprenticeship scheme; a definite recognition of helpers as a part of the working force; a definite responsibility placed upon foremen to train new men as well as to get out production. Definite training departments, whose sole responsibility is to train, and trade schools, would illustrate training by intention carried to the extreme point of development. In aU of these cases somebody is paid to train the new man. It is intended that he shall be trained — hence the name. Some ways by which intentional training is carried out in practice. — Of course intentional training is carried out in all sorts of ways in practice, and the methods of "breaking-in help" that are usually followed in such schemes for intentional training are well known to shop men, but for purposes of discussion some of the more common methods are given here. (i) The foreman, in addition to his responsibility for getting out the product, is made responsible for the training of new men. He personally instructs them, keeps track of them, checks them up. Many foremen have been very successftil in training men themselves and, in some cases, have developed most excellent methods. (2) A competent workman (an "old hand") is put in charge of one or more learners (helpers, apprentices, green men). In the old days, under the apprenticeship method, this was the standard plan. Training is, of course, carried on in the regular shop as in the first case. (3) Certain men are given the exclusive job of training. These men are paid to do nothing else. Men are broken in by them — it is their job and nobody else is supposed to have anything to do with the man until he is trained. Such men are sometimes called instruct- THE ADMINISTRATION OF PERSONNEL 153 ing foremen to distinguish their job from that of production foremen. Under this plan training is also carried on in thd shop. (4) Training is not carried on in the regular shop but in special " training shops," so that men do not get into the regular work until they have been thoroughly trained. Under good conditions the training is given with the same equipment as that of the production shops, and the same sort of work is carried on. A modification of this plan is the trade school shop as it has been developed in some parts of the country. (5) Distinct training departments are established with distinct heads and instructing staffs. So long as men are in training they are under the authority of the training department and not under the production foremen. When properly trained in the training department they are turned over to the production department as competent men. Training may be given in special shops or in the regular production shops. Of course, there are many modifications of these five forms. For example, a foreman will often start a distinct training shop for ele- mentary training. This separate training shop may be in some corner of the production shop. After a little preliminary breaking-in in the special "shop," the man's training will be completed in the regular shop. The five examples given will, however, serve as a basis for discussion. C. Personnel Administration in Terms of Incentive and Output: the Will to Do In this section, the emphasis is upon incentives, upon the develop- ment of the will to do. In giving this emphasis, it would be simple, and as futile as simple, to make lists of the various kinds of incen- tives available for modern industry — ^financial, non-financial, direct, indirect, present, deferred, and all the rest of them — and then make corresponding lists of the technical devices, which could be utilized in calling these incentives into operation. With the technique we are not greatly concerned in such a rapid survey as the one in which we are engaged. We seek to get a sense of perspective concerning the use of technique rather than skill in its manipulations. It will aid in getting this perspective to see the stages through which "incentive and output" have passed in the history of Western industrialism. For convenience in discussion let us speak of three 154 BUSINESS ADMINISTRATION stages: first, the stage of simple industry, beginning in the medieval period and extending to the time of the industrial revolution, that is to say, to the latter part of the eighteenth century; second, the transitional stage, comprising the first hundred years or first phase of the uidustrial revolution; and third, the current stage, covering the last generation or two of our history which is sometimes called the second phase of the Industrial Revolution. Our earlier picture of the stage of simple industry, where two or three apprentices worked for the master and where an established procedure, drawn on the basis of time spent and achievement, pro- vided for promotion from apprentice to journeyman and from jour- neyman to master, provides a setting for an appreciation of the application of incentives in that simple society. It was easy and natural for the worker of that time to develop a pride in workmanship — easy for him to gratify his "creative instinct." He owned and cared for the tools with which he worked and had an owning craftsman's pride in those tools. He owned the product, or at the very least had intimate personal relationships with the owner, and there was accordingly both pride of ownership and a direct visible connection between the amount of output and the amount of reward. He worked through various stages of production in an intimate way so that he saw his work actually developing under his hands and could feel that he was expressing his personality through his product. The product was typically disposed of to friends and acquaintances so that reputation and standing in the community attached to his workmanship. He saw an almost automatic method of rising to the direction of industry so that hope and expectation and realization were closely connected, if indeed they were not one. His position in society was certain and readily understood. And finally custom's firm grip upon his mind kept him free from soul- torturing questionings concerning his status. The picture had its darker side as well. Mental horizons were narrow; mental furniture was meager and bare. The brighter side is here presented not to portray a state to which we could tolerate return, but to give us a comparative basis for the study of present-day incentives. What we have called the transitional stage (running, say, from 1750 to i860 or 1880) began with the Industrial Revolution, a term that connotes modem specialized, impersonal, large-scale, technological industry. For generations prior to the opening of this transitional stage the market had been widening, the demand for out- THE ADMINISTRATION OF PERSONNEL 155 put had been growing. Partly as a result of this enlarging market there came forth the power-driven machine and a tremendous increase of productive capacity. But this increased productive capacity did not sate the market. Oddly enough the market expanded still more rapidly, so rapidly indeed that it outran pro- duction. In part, this was due to the influence of machine industry itself, as expressed in the steamship, the railroad, and later the telegraph and the telephone in enlarging the area of the market. In part, it was due to the fact that this transitional period marked the opening up of great stretches of the world to the use of man — South Am.erica, Africa, Australia, and our own Middle West, the greatest consuming market the world has ever known. In part it was due to the most rapid increase of population the world has known, a population, too, with an ever-rising standard of consumption. For all these reasons the transitional period (1750-1880) is marked by an ever-increasing hunger for output, for output at almost any cost, and, as always, our industrial structure was adjusted to the situation. It so happened that the deliberate and conscious part of that adjustment was worked out largely on the technological side as contrasted with the personnel side of industry. The reasons for this are easy to see. The results of an improvement in processing were visible and tangible and the manager could measure the gain at once in dollars, whereas attention to personnel meant results far less tangible and measurable. Moreover, the sciences basic to improvement in technology had had considerable development, whereas the social sciences basic to personnel work are of a later time. Again, except for the period culminating in the ephemeral organizations of 1835 and 1836, labor was docile and not inclined to force attention to the terms and conditions attached to its contribu- tion- to productivity. It is not surprising therefore that in this transitional period the hunger for output led to the development of schools of technology, such as schools of engineering, mining, agri- culture, and to the establishment of the so-called private business colleges concerned with the clerical techniques of administration such as boolckeeping, penmanship and stenography, rather than to the study of intelligent handling of personnel. But this does not mean that industrial and social forces affecting personnel had been inoperative. Without management being aware of it, tremendous. changes had occurred, changes whose consequences were to be felt most seriously in the later period. In general terms, IS6 BUSINESS ADMINISTRATION through default of real attention to the problem, wage had been allowed to become the chief, almost the sole, incentive for the worker. Pride in workmanship and ability to gratify the creative instinct had waned. No longer owning the instruments of work, he no longer had a craftsman's pride in them, and shortsighted management provided no substitutes. No longer owning the product, he no longer had a pride of ownership and except for the piece work (and we know how the piece worker fared in rate cutting) the connection between out- put and reward was not close. Working now maiflly in detailed specialized operations and no longer working with simple tools, he could not see the work developing under his hands and could not feel that he was expressing his personality through his product. No longer disposing of his product in a personal way to a local group, his community standing became that of an impersonal factory hand. No longer in a simple society where his status was largely fixed by custom and where he saw without reflection his contribution to social weal, his pride of responsible position was weakened, and neit-her management nor society saw the wisdom of restoring it. Of all the incentives of the earlier period, wage and wage alone grew in impor- tance, and it is, speaking accurately, a technical device rather than an incentive. And, unfortunately (unfortunately because the experience gives a false sense of accomplishment and security to many present-day managers) wage, as the prime incentive, seemed to secure satisfac- tory results. This was only in the seeming. The truth is that the mental attitudes of masses of people changed but slowly under the conditions of that time. The traditions of simple industry still ruled. Men still had pride in work. There still clung to men's minds the individualistic theory of abundant opportunity to rise, a theory nourished by the existence of the frontier and by rapidly expanding industry. Furthermore, although the grip of custom on men's minds had been loosened, its place had been taken by a natural- rights or natural-order philosophy which induced an optimistic outlook upon the workings of competitive industrialism. The transitional period was one of increased output, not because wage was an entirely satisfactory incentive, but. because the loss of conditions which provided other incentives had not been fully realized. Social attitudes had not kept pace with rapidly changing industry. And now we come to the current phase of the. history of output and incentive — the period of the last .two generations. Gradually THE ADMINISTRATION OF PERSONNEL 157 the relationship between productive capacity and the absorbing capacity of the market shifted. Partly because of the great produc- tive gains flowing from improved technology in an industrial regime in which incentive, though greatly changed, had not yet materially weakened; partly because of a checking of the rate of increase of population; partly because the new regions of the world were becom- ing fairly well exploited, the rate of increase of productive capacity began to outrun the rate of increase of the market. The time is not difficult to locate historically. It was heralded by a series of events. Since markets must be eagerly searched for, the "orthodox" system of distribution — manufacturers to wholesaler to retailer to consumer — which was so satisfactory when the market was seeking the pro- ducer, had its hold challenged by devices aimed at enabling the pro- ducer to strengthen his grip upon the consumer, and the "commercial revolution," with its mail-order houses, its national advertising, its chain stores, and its direct selling, is now upon us. The trust move- ment, aimed partly at economies of production but primarily at con- trol of distribution, came into being. The scientific management movement sought lower costs of production through increased and better application of technology to industry, through increased specialization in management, through better location of individual responsibility and through better methods of wage payment (notice the implication that all was not well with the wage incentive). Nations drifted into imperialism and finally into war in the struggle for markets. In this hurly-burly of changing industrial conditions one thing stands out clearly for our purposes. The tightening of markets did not mean that the producer could reduce his output. On the con- trary, because of large-scale production and the presence of enormous overhead costs, he sought means of increasing his output, but it was now imperative that this output should be at decreased cost. The developments in the field of incentives paralleling this new attention to output have been striking. As much as forty years ago there had clearly emerged, for those who cared to see, a strong suspi- cion, shared by both workers and management, that all was not well with wage as a sole incentive. Towne and Taylor, who sensed many things ahead of their time, saw the situation. It is no accident that one of Taylor's early contributions concerned itself with methods of wage payment and that he sought, at least, a wage which was "psycho- logically correct." Others in the management group saw it also, but IS8 BUSINESS. ADMINISTRATION few so clearly. In a bewildered, trial-and-error way they tinkered with other devices — with profit sharing, with welfare work, with this and that miscellaneous practice — and their tinkering was a confes- sion of the inadequacy of the wage incentive acting alone or largely alone. The "will to do" that meant increased output at lowered cost of production was not present among the workers. And this might have been expected. The spectacular events, for example, the trust movement and the passing of the frontier, which marked the coming in of our current stage of industrialism sank into the minds of the workers as a warning that the day of automatic and easy rise to responsible positions had really passed. There came to them a realization of what the forces of the Industrial Revolution had, unguided, wrought. And they were not minded to acquiesce, for belief in a beneficent "natural order" of things had yielded, thanks to the influence of Darwin, to an evolutionary philosophy which demanded improvement and it )delded the more readily because many happenings had, as we have seen, engendered distrust, suspicion, and fear. In default of intelligent action by either management or society, the workers turned naturally and properly to a device of their own with which they had long experimented — the union. That their earlier, and indeed their present, demands were formulated in terms of the gain spirit which seemed to them the characteristic thing in industry, that they sought and still do seek more wages, and more and more, deceives no one who watches other than surface indica- tions. Wage alone will not bring contentment in such an impersonal specialized society as ours. Wage alone cannot bring men to work together effectively. It, unaided, will not remove sourness, suspicion, and hostility. Powerful as it is, valuable as it is when wisely used, it must be linked with forces making for pride of workmanship, interest in work, knowledge of worth-whileness to society, security of economic and social position, and sense of responsibility, before we shall unlock those vast resources of human energy which now lie dormant because we have not given thought to the fashioning of keys which will free " the will to do." Let us not deceive ourselves concerning the significance of this "will to do." It involves no mere unthinking performance of "an honest day's werk," whatever that may mean. It implies the call- ing forth of those latent powers which emerge in the joy of doing, and doing understandingly — in the joy of intelligent service. The magnitude of those latent powers we cannot even guess, though hints THE ADMINISTRATION OF PERSONNEL 159 have been given each of us in our own experiences, and the sense of waste is appalling when we reflect that such powers grow by utiliza- tion. Perhaps, both inside and outside the factory, we are not now realizing on one-quarter of the human resources which would be called into being if men worked together understandingly with a real "will to do" — ^perhaps not one-tenth, perhaps not one-twentieth. Who knows ? We merely know that the waste is enormous. Let us not deceive ourselves, either, concerning the difliculties involved in calling forth this will to do. Generations of sour distrust must be lived down and that cannot happen until the sources of dis- trust have been removed. Even after the sources of distrust have been removed, there must yet come understanding, and this involves both knowledge and appreciation of the place of industry and of specialists in social progress. Not only are the difficulties great, but co-operation in solving them will come grudgingly. The prevailing attitude of hard-headed management is doubtful, if not frankly antagonistic, toward such an enterprise. The prevailing indifference of society at large (witness the lack, in our elementary and secondary- school systems, of studies leading to an understanding of our social relationships) bodes ill for effective co-operation by society, notwith- standing the present hectic interest in "Americanization." The prevailing attitude of the worker, one of indifference tempered with distrust and hostility, means much cultivation before even seeds can be sown. Nevertheless, the game is worth the candle. Even if he can make but a few halting steps toward the ultimate goal, the per- sonnel manager must keep it before him. Men must be brought to work together effectively, and full effectiveness can come only with the will to do. Administration of incentives must be in terms of that outstanding fact. PROBLEMS 1. "In other words, restricted effort in production arises from fears respect- ing the contribution each of the parties makes, or cocceming the share which each of the parties takes. Both are based in the fear that rewards wiU not be adequate or proportionate to the effort put forth." How can these fears be minimized or eliminated ? 2. "Frequently a greater output is the result of, or involves, changes and readjustments which are positively painful and disadvantageous to the workman directly concerned." Cite such a case. Is there anything the manager can do about it ? Has the worker no redress ? l6o BUSINESS ADMINISTRATION 3. The following are listed by one writer as causes of distrust and suspicion: 1. Dissociation of workers from industrial management and respon- sibility. 2. Mutual ignorance of each other's points of view. 3. The suspicion of profiteering by the management and of unjust demands for increased wages on the part of the laborers. 4. Fear of unemployment and its consequences. 5. Reluctance of some employers to recognize trade unionism and to organize themselves in federations. Suggest concrete ways in which these causes can be eliminated or minimized. Are you certain that output would be increased by the removal of the fear of unemployment ? 4. What effect has the transfer of thought, skill, and intelligence from the worker to the machine and to management had upon the security of the worker's position ? Upon incentive ? 5. The insecurity of labor has been ascribed to one or more of the follow- ing: (a) the machine system; (6) production on a large scale; (c) pecu- niary competition; (d) the sensitiveness of modem industry; (e) the scheme of prices; (/) the rhythm of the business cycle; (g) the rapid development of technique; (h) dependence upon distant and future markets; (j) specialization; (f) weaker position in the bargaining relation. Are these points well taken? What bearing do they have on incentive ? 6. "It wiU be observed that the elimination of fear has been at the root of aU regvJation Industry has thus far undergone." Consider the governmental regulations you know of and cite the fears each was designed to remove. 7. Some people think one of the great difficulties in connection with labor problems is that the incentives which labor had in former days have been taken away by the consequences of the Industrial Revolution. Make out a list of the incentives labor had in the days of medieval industry in England. What ones of these have been taken away by the Industrial Revolution ? Have any new incentives sprung up to take the place of the old ones ? Is the wage the only incentivi today ? 8. Gilbreth outlines his treatment of incentives as follows: I Direct Indirect Explain and illustrate. Incentives J ^ ^^^^^^ | Promotion - J Negative Punishment <, t, .^. 1 Positive THE ADMINISTRATION OF PERSONNEL i6l 9. "But it is not unlikely that we shall find, upon candid examination that even under self-direction there is still much machine work which oflEers no outlet for creative energy." What can be done about this work ? 10. The modern great automatic factory has probably more chances for interesting work for more people than ever did the medieval and romantic small shop." Do you think so? If so, can these chances be utilized ? 11. "Yet it would be foolish to suggest any one panacea for uninteresting work. How to make work interesting is just as much a field of experi- ment and investigation as how to invent a machine or lay out a plant. And business men, engineers and educators can be just as ingenious and successful doing it." Have any plans been worked out? If so what are some of them ? 12. "As a rule, men habitually use only a small part of the powers which they actually possess and which they might use under appropriate con- ditions." What are appropriate conditions ? Can they be created in the modern factory ? If so, how ? If not, why not ? 13. "In fact the current industrial unrest is due in great part to the enor- mous accumulation of suppression which the instincts of workers have undergone in the grim effort to get a living." Discuss. 14. "In remuneration of employees, no hard and fast rules of universal application exist and moreover a system that would produce excellent results under one man might prove wholly unsuccessfiil under another." Could several systems of payment be used in one shop ? 15. In what cases is day work desirable? In what cases piecework? 16. "The contract system exists where foremen in charge of work are given a certain price for the work to be done. They hire and direct the men, usually paying them on a day basis." What are the advantages ? The disadvantages ? 17. How can the day wage be administered so as to promote efiiciency ? 18. "As the influences of aggregation and specialization began to make themselves felt and as personal relations vanished, the day-work method became less and less applicable." Explain. 19. What are the advantages of the ordinary piece-rate system to employer and worker? Its disadvantages? How do you account for the fact that piece-rate wages have nearly always been attended by rate-cutting ? 20. "After all, one argument in favor of the piece rate is decisive. When pay is so much per piece it is a matter of indifference to the manager how long the laborer takes to finish the piece. Supervision may thus be largely dispensed with and of course this means a saving." Is this true? 21. "Task setting furnishes a good example of the interdependence of busi- ness problems. The task for an individual workman cannot wisely be i62 BUSINESS ADMINISTRATION set until routing, scheduling, and standardization, etc., has occurred." Explain. Can you put content into the "etc."? What is meant by task setting ? 22. "The Taylor plan establishes by study a standard time. The worker gets a high piece rate when the standard is attained and a low piece rate when it is not attained." What is presupposed in the Taylor plan ? What are its advantages ? Its disadvantages ? 23. "Henry R. Towne adopted this scheme. He found out average labor cost per unit in the best year before introducing his scheme. If now a saving occurs in this cost the saving is distributed at the end of the year or at the end of some considerable time as follows: 50 per cent to the firm, 10 per cent to foremen, 40 per cent to gang bosses and workmen on the basis of the annual wages." What are the advan- tages ? The disadvantages ? 24. "Under the Gantt plan the worker receives only a day rate in case he does not accomplish the task set. The task is set on the basis of a scientific investigation. If the worker accomplishes the task he gets his day rate plus a bonus in the form of an extra time allowance, usually from 25 to 50 per cent of the time allowed for the task." What are its advantages ? Its disadvantages ? 25. "Like the Halsey and Gantt systems, Emerson assures the workman his day wage. Like Taylor and Gantt he sets a standard performance based on careful study. For the attainment of the standard a large bonus is offered as in the Gantt method, but smaller bonuses may be earned before reaching this standard. In the practical operation of the method by Mr. Emerson the bonus is calculated monthly and not for individual jobs." What are the advantages of the Emerson plan ? The disadvantages ? 26. "Rewards under scientific management are (o) positive, (6) predeter- mined, (c) personal, {d) fixed, (e) assured, (/) prompt." What is the significance of each statement ? 27. "The accurate measurement of effort does not in itseK either raise or depress wages." Is this equivalent to saying that it has no bearing on wage determination ? 28. "Some of the wage systems are merely modes of payment. Others are philosophies of management." Explain. 29. A manager started a new department. He could not fix wages at the market rate of that vicinity for there was none. He began by setting the wage in accord with the neighborhood cost of living and the standard of the men he would take on for the new work. What would you have done ? 30. "I have solved the labor problem so far as my own factory is con- cerned. I pay my men a rate of wages somewhat higher than they can get elsewhere. For them I have provided recreation facilities. THE ADMINISTRATION OF PERSONNEL 163 sanitary conditions of employment, etc. Every employer will solve the labor problem if he does as I have done." If aU employers should foUow this employer's example, would the problem be solved ? 31. Why do imions attempt to establish the principle of uniformity with respect to wage rates, hours of work, and conditions of employment generally in a trade ? 32. "A wage system that wiU stimulate output is desirable in that it reduces unit labor costs. However, a wage system that wiU stimulate output is desirable even though it does not materially reduce the unit labor cost." Explain. 33. "There may be cases where it is wise policy to stimulate production by an increase of wages more than proportionate to the increase in output." What cases ? 34. If the worker produces three times more output under scientific management than he does under the traditional plan, why does he not get three times as much wages ? 35. Can an individual firm safely enter into an iron-clad agreement with its men never to cut a piece rate ? Can it safely refrain from such an agree- ment? 36. "A thoroughly effective method of remuneration includes both prin- ciples, (1) the differential incentive, which acts on the individual as such; and (2) profit-sharing, which acts on him in his collective capacity, as a member of a body bound together by common interests and work- ing for a common end." Is this the solution ? Is it always possible ? 37. As a stimulus to production, under what circumstances would profit- sharing be of most value ? Of least value ? 38. "On the side of the employees we find several reasons, the most com- pelling of which is the unalterable hostility of the trade imions to any form of profit sharing or labor co-partnership." Do you see any good reason for this hostility ? Are not these plans of benefit to labor ? 39. What are the prerequisites to the successful operation of a policy of promotion in accordance with merit ? 40. Define "voice in management." 41- Suppose that you should become convinced that, everything considered and in the long run, it would be profitable financially and worth while socially for labor to "be taken into partnership" with capital in a spirit of "industrial democracy." (a) What do these terms mean to you? (J) How could such a thing be wise financially? (c) What obstacles are in the way of its attainment ? 42. "The inequity of labor exercising an important voice in the direction of industry (to which, of course, it is entitled) without at the same time accepting responsibilities for the service rendered by industry to society is obvious. Here as elsewhere the rule must apply that power and responsibility should be co-ordinate." How can he be made to assume responsibility ? l64 BUSINESS ADMINISTRATION 43. "The shop committee has been installed and may be installed by employers as a mere subterfuge, designed to ward o£E a real shop organization by controlling the election of its committees, by mixing unorganized with organized workers, by preventing the employment of trade unionists." Is this possible? What do you think of such a policy? 44. "The blighting character of industry is due to its motivation, which is wealth exploitation and not wealth creation." Do you agree ? What can we do about it ? 45. It is fairly easy to see why and how the employer is interested in increased incentive. Is the worker interested ? Is society ? 46. "The workman needs to know more about the actual problems of management. He needs to know something about overhead, about marketing difficulties, about the dependence of production and pro- duction conditions upon marketing, and the dependence of marketing upon economical production, about the numberless hazards and chances of loss which his employer must face. He needs, in short, more of the manager's point of view." Can the manager give him this point of view ? If so, how ? If not, how can the worker get it ? II. THE FEARS OF LABOR AND OF CAPITAL' In the processes of Industry, the unwillingness of individual parties to put forth their utmost effort may arise from defects of character, inadequacy of training, or lack of opportunity. Where opportunity, training, and capacity are present, failure to realize the best in effort arises mostly from the fear that one or other of the parties wiU put forth a less than proportionate share of effort, or claim a more than proportionate share of reward. The fears which circumscribe the freedom of effort of Capital, Management, and the Community are by no means so real or con- siderable as those which surround Labor. They differ, also, in that they represent consequences much less serious to human life. Espe- cially is this true of fears concerning employment. Under conditions in Industry which make the several parts of industrial processes dependent on many others, and which demand intense specialization of effort, it is impossible to exaggerate the imminence of fear in the lives of workers wholly dependent upon continuous employment for the immediate necessaries of life. Capital can wait for its reward. Capital, moreover, is free to move about. If not required in a particular locality or business, it readily finds investment in some other place or enterprise. Labor • Adapted by permission from W. L. M. King, Industry and Humanity, pp. 234-43. (Houghton Mifflin Company, 1918.) THE ADMINISTRATION OF PERSONNEL 165 is not so mobile. It is confined in a thousand and one ways. It is necessarily largely restricted to occupations to which it has been trained. It is more or less rooted to localities which speak of home and its associations. It is largely ignorant of the world without. Capital is a citizen of the world, with no definite occupation or home. It suffers little from fears of isolated position, substitution, dismissal, arbitrary and unjust treatment. Such risks as it runs are very largely its own. How vastly different is life to its possessor under such circumstances! It is the fear of unemployment which lies at the root of most of the minor fears which Labor entertains. The fear of unemployment is in reality the fear on the part of Labor that capital will not be provided to carry on industry continuously, and under conditions which wiU afford adequate remuneration to effort. It is an out- growth of the fallacy that quantity of work is necessarily limited. This fear gives rise to the fear that the introduction of new machinery, or the increased use of machinery already installed, will displace labor; the fear that speeding-up processes will diminish work; the fear that female, child, vmskilled, or imported labor will be substi- tuted for skilled; the fear that men of one trade will encroach upon the work for which men of other trades have been specially trained; the fear that the number of apprentices will be so increased as to lessen the requirement for skilled hands; and the fear that long hours and continuous overtime will exhaust employment. Allied to the fear of unemplojonent is a class of fears which, as seen, have a special bearing on industrial peace: the fear of discharge and of unfair treatment through the utter helplessness of the isolated workman in relation to the capitalist employer, and, still more, in relation to a powerful corporation; the fear of lockouts or arbitrary exactions, and the many fears incident to tyrannical and capricious behavior on the part of those in authority, and especially of subor- dinate ofiScials toward workers under their direction. This fear extends to the power of wealth to defeat the ends of justice, by cor- rupting officials and influencing or controlling the judiciary and legislatures, and to the influence also of a class interest and sentiment on the part of the monied classes as distinguished from the working classes. With it are allied the many fears which have a special bearing on health in Industry: fears, for example, of physical injury and ill-health, and of inadequacy of compensation or redress when injury is done. l66 BUSINESS ADMINISTRATION Arising from the worker's sense of utter helplessness is also the fear, apart from combination, of the absence of any voice in deter- mining the contract on which services are given, and the fear, in consequence, of unfair terms in bargaining and in determining the rate of remuneration, the hours of labor, and working conditions. This extends to the fear of reductions in standards already gained; the fear of individual or general reductions in wages, of increase in hours, of change in customary practices; the fear of resistance on the part of employers to combination; and the fear of methods intended to destroy or weaken organization. Whatever begets fear of opposition to organization helps to intensify other fears. Beset by fears at once so mmierous and constant, it must be apparent that Labor is in no way capable of putting forth effort to the utmost of its capacity. Where the mind is in a state of unrest, the arm is divested of some of its power, and the hand of some of its skill. Time which otherwise might be freely employed in furthering production, with benefit in opportunity and reward to all the parties to Industry, is consumed in effecting organization against ills that are feared, or in agitation concerning their existence. Whilst less serious in their immediate personal consequences than the fears which Labor endures at the instance of Capital, the fears which Capital experiences at the instance of Labor are by no means inconsiderable or unreal. What these fears are is well known; they have received heightened emphasis under the stress of war. The source of all is the fear that Labor will not be provided in quantity and quality sufficient to carry on Industry continuously, and under conditions which wUl afford adequate remuneration to investment. Foremost is the fear of strikes, and their consequences. If Labor refuses to work, Capital and Management likewise become idle, unless transferred to other industries. Transfer, however, is not always possible. Capital invested in Industry is partly "fixed" in plant and equipment; and markets, as well as Labor, have to be found for the output of new enterprises. Management, too, becomes identified with particular classes of business, and new openings are not always at hand. The fear of strikes would be minimized were actual or threatened resort to strikes postponed until other available means of securing redress were exhausted. Unfortunately, strikes are sometimes brought on where no grievances whatever exist. The cause of the THE ADMINISTRATION OF PERSONNEL 167 so-called "sympathetic strike" may lie wholly beyond the control of the trade or industry affected. Because of uncertainty on so many grounds, the possibility of strikes has become an ever-present fear. Allied to the fear of strikes is the fear of labor combination, and its attempts to control the labor market, and to restrict output. This fear has greatly increased with the augmentation of Labor's power consequent upon extensive organization and the growth of class consciousness. The obnoxious restrictions are all in the nature of hmitations upon the freedom of initiative and power of direction, usually of the employer, but sometimes also of the workman. Briefly classified, restrictions of the kind include such practices as hampering the installation of the best machinery, or the speed at which it is worked; preventing the introduction of new processes; limiting the freedom to engage, or to promote, or to put at any kind of work, any workman, irrespective of training, age, or sex. Among such restric- tions are also to be included the limitation in numbers of apprentices; the insistence on trade unionism and employment of union labor to the exclusion of any other; the demarcation of employment; the requirement of a minimum wage; the objection to systems of remuneration by piece work or bonus systems; and restrictions in hours of work, and the prohibition of overtime. Analogous to the class of fears begotten of labor control and restricted output, are the fears that "discipline," as it is termed, will be interfered with; that employers will not be free to dispense with the services of undesirable, incompetent, or unnecessary workmen without risking a cessation of work; and that disputes cannot be adjusted except in accordance with methods prescribed by organiza- tions to which workmen belong. The fear that Labor can be secured, so to speak, only on its own terms, which may involve exorbitant demands as respects hours, wages, and working conditions, is supplemented by the fear that even where a contract is entered into, with precise stipulations, its pro- visions may not be lived up to. There is the fear also that one concession may be used to force another, and that arbitrary exactions of many kinds may be attempted. Finally, there is the class of fears associated with extreme measures, with revolutionary movements, and with violence, as, for example, the boycott, sabotage, revolutionary socialism, revolutionary syndicalism, the I.W.W.'s, and all forms of anarchy. l68 BUSINESS ADMINISTRATION 12. THE GULF BETWEEN LABOR AND CAPITAL' It is frequently stated that the necessity for establishing industrial relations today is the growth, of the factory system wherein all per- sonal contact is lost between owner or manager and the worker. While this is true, it does not sum up the entire loss. In the system of absentee directorate there are other evils as well, and these taken together have set up situations where there have been clashes over the rights, needs, and aspirations of those who belong to the class of employers and those who form the great group of employees. These losses in fitness for control may be stated in this wise: a) The loss of personal contact and relationship that formerly existed between the master and his skilled workmen and apprentices. b) The loss due to the lack of personal knowledge of the work being done on the part of present-day directors and managers. c) The loss due to the lack of personal knowledge of the tools and equipment used in production of the part of present-day managers. d) The loss of the direct oversight of saving and conserving materials and human effort on the part of present-day managers. e) The withdrawal from productive work of the families of the directors and managers. /) The loss of equality of living conditions between the families of the directors and managers and the workers. The effect of these losses in creating a situation where there may be a clash of interests, and failure on each side to vmderstand and appreciate the other, is brought home when we contrast the hxmian relationships in the days of craftsmanship with those of the factory system. See also p. 543. Some Consequences of Technological Industry. 13. THE INSTINCTS AND MOTIVATION' The importance to me of the description of the innate tendencies or instincts to be here given lies in their relation to my main explana- tion of economic behavior, which is: I. That these instinct tendencies are persistent, are far less warped or modified by the environment than we believe; that they ' Taken by permission from L. P. Alford, "Status of Industrial Relations," American Society of Mechanical Engineers, No. 1693 (1919) pp. 166-67. ' Adapted by permission from C. H. Parker, "Motives in Economic Life," American Economic Rssf'w, VIII (1918), 212-31. THE ADMINISTRATION OF PERSONNEL 169 function quite as they have for a hundred thousand years; that they, as motives in their various normal or perverted habit form, can at times dominate singly the entire behavior and act as if they were a clear character dominant. 2. That if the environment through any of the conventional instruments of repression — such as extreme religious orthodoxy, economic inferiority, imprisonment — or physical disfigurement — such as short stature or a crippled body — repress the full psychological expression in the field of the instinct tendencies, then a psychic revolt, a sHpping into abnormal mental functioning,^ takes place, with the usual result that society accuses this revolutionist of being either wilfuUy ineflSicient, alcoholic, a syndicalist, supersensitive, an agnostic, or insane. The followiag catalogue of instincts includes those motives to conduct which, under observation, are found to be unlearned, are miiversal ia the species, and which must be used to explain the innumerable similarities in behavior, detached in space and time from each other. [Only the catalogue has been retained. The original has much excellent explanatory material.] 1. Instinct of gregariousness. 2. Instinct of parental bent: motherly behavior: kindliness. 3. Instinct of curiosity: manipulation: workmanship. 4. Instinct of acquisition: collecting: ownership, 5. Instinct of fear and flight. 6. Instinct of mental activity: thought. 7. The housing or settling instinct. 8. Instinct of migration: homing. 9. Instinct of hunting. 10. Instinct of anger: pugnacity. 11. Instinct of revolt at confinement: at being limited in liberty of action and choice. 12. Instinct of revulsion. 13. Instinct of leadership and mastery. 14. Instinct of subordination: submission. 15. Instinct of display: vanity: ostentation. 16. Instinct of sex. The instincts and their emotions, coupled with the obedient body, lay down in scientific and exact description the motives which must and will determine human conduct. If a physical environment sets itself against the expression of these instinct motives, the human 170 BUSINESS ABMINISTRATION organism is fully and efficiently prepared for a tenacious and destruc- tive revolt against this enviromnent; and if the antagonism persists, the organism is ready to destroy itself and disappear as a species if it fails of a psychical mutation which would make the perverted order endurable. Even if the labor-class children evade those repressive deport- ment traditions that characterize the life of the middle-class young, at a later date in the life of these working-class members certain powerful forces in their environment, though they work on the less susceptible atid less plastic natures of mature individuals, produce obsessions and thwartings which function at times, exclusively almost, in determining the behavior of great classes of the industrial population. The powerful forces of the working-class environment which thwart and balk instinct expression are suggested in the phrases "monotonous work," "dirty work," "simplified work," "mechanical work," the "servile place of labor," "insecure tenure of the job," "hire and fire," "winter unemployment," "the ever-found imion of the poor district with the crime district," and the "restricted district of prostitution," the "open shop," the "labor tiurnover," "poverty," the "bread lines," the "scrap heap," "destitution." If we postulate some sixteen instinct unit characters which are present under the laborer's blouse and insistently demand the same gratification that is, with painful care, planned for the college student, in just what kind of perverted compensations must a laborer indulge to make endurable his existence? A western hobo tries in a more or less frenzied way to compensate for a general all-embracing thwarting of his nature by a wonderful concentration of sublimation activities on the wander instinct. The monotony, indignity, dirt, and sexual apologies of, for instance, the unskilled worker's life bring their definite fixations, their definite irrational, inferiority obsessions. The balked laborer here follows one of the two described lines of conduct: (i) he either weakens, becomes inefficient, drifts away, loses interest in the quality of his work, drinks, deserts his family; or (2) he indulges in a true type inferiority compensation, and in order to dignify himself, to eliminate for himself his inferiority in his own eyes, he strikes or brings on a strike; he commits violence, or he stays on the job and injures machinery, or mutilates the materials. He is fit food for dynamite conspiracies. He is ready to make sabotage a part of his regular habit scheme. His condition is one of mental stress and unfocused psychic uiurest, and could in all THE ADMINISTRATION OF PERSONNEL 171 accuracy be called a definite industrial psychosis. He is neither willful nor responsible; he is suffering from a stereotyped mental disease. 14. THE RELEASE OF HUMAN ENERGY' A large fund of human energy is usually latent, a fact shown when people engage in sports. Even the lazy youth, so called, will surprise his elders by the head of steam developed when a fishing trip is under consideration; and if spading for angleworms could be appropriated for purposes of tilling the garden, a family supply of vegetables would be a imiversal luxury. The tale is told of a design- ing person who suggested to a group of boys that a ditch was on fire and that the stones in a nearby pile were buckets of water. The boys put out the "fire," incidentally moving the stone heap, with great enjoyment and actual refreshment. In the world at large here and there are individuals who work in the spirit of play; they do much with far less fatigue than was experienced by the negro who sat on the plow handles "hurrying up sundown." But in a multitude of situations today the spirit of joyful accompHshment is absent. Freight cars are slammed together — they belong to "the company." The plumber is dehberate. Workmen loiter and the comings and goings of the boss are noted with an interest which does not appear in putting in window casings. The ticket agent who "damns" the railroad upon opening his envelope, containing in fact a slight advance in wages, reveals a state of mind. The spiritless and sodden tread of millions headed for factorks cannot but be impressive. Enthusiasm is guarded against by system, lest the employee produce more than the rules of his fellows allow; and this is not to criticize a method of warfare, for warfare it is. How many are joyful over the day's work? How often is the clock not stared out of countenance? What of the inner strain and depression of employees in factories when they "look upon their employer as an aristocrat, their foreman as a slave driver, their machine as a treadmUl, and the world at large as against them," and when "their faces are frozen in a perpetual grouch?" The forced production represented by slave-labor and the diffi- culty of getting people to work with spirit suggest that there has been historically and is today an almost complete neglect of the " Adapted by permission from A. D. Weeks, "The Mind of the Citizen," in American Journal of Sociology , XXI (1916), 642-48. 172 BUSINESS ADMINISTRATION organization of industry with reference to natural incentives. People cannot be kept from working, provided employment corresponds to nervous organization. Need there be so complete a divorce between spontaneity, preference, and play, and the job? Must work be drudgery ? Cannot the distinction between work and play be greatly lessened if not abolished? Nothing is more unsuited to human nature than the steady grind imposed by the division of labor and the factory system, which tend to make man a machine. Especially odious is the antithesis of routine and initiative and of physical and mental activities represented by the workroom and the office; one performs, the other manages; one is hands, the other head. In spHt- ting up work we spht up people. One has to be trimmed down to fit into a-niche. It might seem difficult to introduce into a system of production a distinct recognition of the individual tendencies related to travel, experimentation, curiosity, sociability, sympathy, hunting, leader- sliip, and the like, but only by more fully conforming to natural interests may the time-honored curse of drudging labor be trans- formed into joyful effort. There should be proper and sufficient motivation in industry. To work because one fears to lose a position is a low condition, and the dread of the displeasure of the boss reduces one to the status of dumb driven cattle. Even to spend a Ufetime in labor for the sake of anticipating funeral expenses does not strike one as adequate motivation. There must be sizable returns or explicit approval; there must be the feeling that one is getting somewhere, that he is getting something out of his work for himself, and that every stroke tells for an objective point. To exhort one to love his work when he gets nothing out of it is unseemly. Our systemless compensation leaves the great bulk of population without effective incentive. It is a question of much importance whether real pleasure is taken in work. The actual mental attitudes prevailing among people working for wages and salaries are, if among the more elusive, yet among the most important conditions of society. If there is chronic discord between the man and his job, something is fundamentally wrong. Even in cases where irritation does not take the shape of open complaint, a seated sense of injustice deeply influences happi- ness on earth. Young men set out in high hopes, to become soured and careless upon being inoculated with the suspicion that a square deal in the economic system is out of the question. They see great THE ADMINISTRATION OF PERSONNEL 173 rewards going to questionable beneficiaries; they see the industrious exploited; they come to fear that everything worth going after has been gobbled up by the representatives of privilege and corporate influence. They ask if it is worth while to try to get ahead; they beheve the cards are stacked against them. The rewards which society should place before the individual should in one respect be like the penalties for crime — they should be certain. The loosened moral fiber of great numbers, the flabby attack on difficulties, the disposition to go with the current, and the apparent passing away of a certain Spartan quality of perseverance are asso- ciated with a growing skepticism in regard to certainty of reward. See also p. 663. Antagonism of Specialists Increases Risk. 15. WAGE INCENTIVE: FORMS OF PAYMENT' Broadly speaking, there are two possible bases of payment within the wage-system — ^payment for time worked and pa3Tiient for output. There are indeed all kinds of modifications and minghng's of these two principles; but they are none the less fundamentally distinct. A worker may be paid in strict accordance with the time spent on the employer's work at so much per hour, per day, per week, per month, or per year; or he or she may be paid in accordance with the work done at so much per piece, or per unit of effort. Again, the method of payment may be either individual or collective: the employer may deal separately with, and pay wages by time or output to, every worker individually, or a lump sum may be paid over to a single worker on behalf of a group, or to the group itseK. These two systems are, I have said, in principle distinct, however they may mingle in practice. But, to a very great extent, they do possess a common basis. A time-work system is never wholly without relation to output; for the employer inevitably expects a certain amount of work from the worker whom he employs, and if this amount is not forthcoming, he finds his remedy in discharging the worker. Payment by output, again, is never wholly without relation to a time standard; for piece-prices are invariably deter- mined to a great extent by the income which constitutes the normal standard of Ufe for the workmen concerned. ' Adapted by perrtiission from G. D. H. Cole, The Payment of Wages, pp. 1-19. (Labour Publishing Company, 1918.) 174 BUSINESS ADMINISTRATION This common basis of time payment and payment by output, however, does not remove their essential difference. Under a pure time-work system the employer no doubt expects and exacts a mini- mum standard of output; but the worker who produces less than this, as long as he continues to be employed, and the worker who produces more, both receive the same remuneration as the worker who produces exactly the minimum demanded. On a system of payment by output, on the other hand, the reference to a standard weekly wage may determine the general level of remuneration {e.g., the piece-work prices, bonuses, etc.); but the actual remuneration of the individual worker will vary with his or her output from day to day, or from week to week. Payment by time means equal pay- ment to all workers who are classified together by the employer or by trade union regulation; payment by output means xmequal remuneration for members of the same grade. We have 'seen that time-work has, in practically all cases, some reference to output, in that the employer can and does dismiss a man who is not doing what he regards as a fair, or an average, day's work. This principle, however, is very elastically appUed, and under an ordinary time-work system it is seldom possible to say exactly what is the minimum amount of work required by the employer. Where the minimum becomes fixed, time-work passes over into task- work. The task-work system, in its complete form, is a system under which the worker is set a definite output which must be attained per day, or per week, or per month. If the fixed output is not attained, a proportionate deduction is made from the wages paid to the worker; if it is exceeded, nothing extra is paid. Needless to say, this system is strenuously opposed by the workers, nor does it exist in any organ- ised trade; but many of the features of the task- work system exist in those cases in which a certain output is rigidly exacted, and the worker who fails to reach that output is at once dismissed. Not a few of the "efl&ciency" systems which are cormected with the name of "Scientific Management" reproduce some of the con- ditions of task-work in that they penahse by a specially low rate of payment the worker who faUs to reach a certain standard of output, and reward the worker who reaches or exceeds this output. Systems of payment by output are far more various and com- pUcated than time-work systems. In some cases payment by output is the natural and almost inevitable remuneration for certain kinds of service which cannot easily be paid by time: in others it is a con- THE ADMINISTRATION OF PERSONNEL 175 scious device for the acceleration of production. In the first case the system tends to be simple; in the second the employer, in a continual search for new stimuh, tends to adopt more and more complicated devices, and very often a job passes through successive stages of time- payment, piece-payment, and bonus or "reward" payment. The principle of ordinary piece-work is essentially simple. Instead of receiving so much per hour, the worker receives so much for every operation, or group of operations, performed, at a flat rate per opera- tion, the wages received being strictly proportionate to output. There are, however, many modifications of this system in practice. Where trade unions are strong, they generally attempt to secure a guarantee that the earnipgs of the piece-worker wiU not fall below the hourly rate of wages. Not only do the unions seek to establish piece-prices on such a basis that actual earnings under piece-work conditions shall be above the standard time-rate; they also demand an absolute guarantee that every worker shall receive at least the standard time-rate, without reference to output. In some few cases they have gone further, and have provided that, since piece-work is openly advocated on the ground that it secures greater output and therefore greater effort from the worker, more than the standard time-rate (e.g., time and a quarter) shall be guaranteed to every individual who is working on piece-work. Naturally, piece-work is most easily adaptable to those occupa- tions in which the work done is "repetition" work, i.e., in which an identical job is repeated an indefinite number of times. This is the position in all manufacturing industries which are highly stand- ardised, and especially in the textile industries. It does not matter in such cases whether the number of distinct jobs is large or small; for proAdded that they are repetitive in character, a standard price can be fixed for each job. Where the number of jobs is small and their nature simple, piece-work conditions are easily adjusted: when jobs are numerous and compUcated, the most elaborate systems are sometimes adopted for the fixing and maintenance of piece-work prices. So far we have been speaking of piece-work as a uniform system of pa3anent strictly in proportion to output. It now remains to mention some of the variations of this general principle. Cases exist, though they are not frequent, in which, under a straight piece- work system, the piece-price diminishes as output increases, the price per article diminishing after the output has reached a certain 176 BUSINESS ADMINISTRATION point. On the other hand, in some cases the piece-price increases with increased output, in order that production may be stimulated to the full. This motive, however, more generally expresses itself in the granting of a bonus after output has passed a given point. Thus, at this stage, the piece-work system develops into the bonus system. Bonuses, as an incentive to output, take several forms. The simplest is that which we have just described, the bonus being merely superimposed upon the piece-work system without any essential change in the method of remuneration. In other cases a bonus of the same type is superimposed upon a time-work system. Only in the premium bonus system and in some American "eflSciency" systems does a really distinct form of payment arise. In the various forms of the premium bonus system the basis is no longer a piece- price per article, but a standard time allowance in which the job is supposed to be done. If time is saved by the worker, that is, if the job is done at greater speed and in a time less than the standard allowance, payment is made for a portion of the time saved in addition to the hours actually worked. There is one other method of remuneration which deserves a mention side by side with those described above. This is profit- sharing in its various forms. We have seen that the employer often desires to adopt a system of payment by results as an incentive to output. This end he may strive to attain in another way by giving his employees an "interest in the business." Instead of affording them a chance of earning time and a quarter or even time and "a half on piece-work or the premium bonus system, he may pay them a percentage on wages varying with the profits of the concern. This is, of course, quite different in principle, though those employers who advocate it have the same end in view — and perhaps other ends as well. It is, however, a distinct method of payment, and one which has been, and may yet be, advocated as an alternative to piece-work or the premiimi bonus system; and the fact that it may be put forward as an alternative entitles it to a place in our consideration. [The author sums up his discussion of points of view concerning forms of payment as follows.] We have seen that a system of payment by results is easiest to establish and operate where the following conditions are present: THE ADMINISTRATION OF PERSONNEL 177 (i) Where a given amount of effort and skill can be relied upon to result in a given product. (2) Where the product is easily measurable in simple quantita- tive terms (e.g., by the ton). (3) Where increased productivity means a considerable saving in standing charges, and thereby a reduction in the cost of production per unit. (4) Where a highly developed system of collective bargaining exists, or where such a system can be created. We have seen further what are the main inducements for the employer to press for pa}mient by results: (i) The desire for increased output as a means of reducing the cost of production (this is the same as [3] above). (2) The feeling that individualist justice will be done if each worker is rewarded according to his productive efficiency. (3) In some cases, the possibility of ascertaining the amount the worker is capable of producing, and then of cutting prices to the lowest possible limit. Next we saw the worker's reasons for preferring payment by results in certain cases: (i) The possibility of greater freedom in respect of time-keeping and attention to work. (2) The chance of higher earnings, and the greater interest given to the work by the monetary iuducement. (3) In some cases, the same individualist feeUng as we ascribed to the employers. We then turned to the arguments on the other side, and first we dealt with these from the employer's point of view: (i) The possibility of cheapening cost by supervision and drive, and of securing piece-work intensity for time-rates of wages. (2) In some cases, the feeling that it is immoral for the workman to earn more than his standard rate. (3) In some cases, the desire to preserve a high quality of workmanship. Lastly, we saw the working-class objections : (i) The fear of speeding-up. (2) The fear of price-cutting following on speeding-up. (3) The desire to preserve a high standard of craftsmanship. 178 BUSINESS ADMINISTRATION (4) The fear of unemployment due to a higher productivity per man in an inelastic market. (5) The fear that payment by results will break up solidarity by setting man against man and breeding mutual jealousy and suspicion. 16. WAGE INCENTIVE: A PHILOSOPHY OF MANAGEMENT' [It has been well said that some wage systems are merely modes of payment while others are aspects or applications of a philosophy of management. One illustration, the differential piece rate, must suffice for our discussion of this second form of wage system. Frederick W. Taylor, looking at the results of the industrial revolution as they were visible in the eighties, saw evidences of tremendous waste. Rejecting piece- meal solution, he developed a certain system or philosophy of man- agement which is now ordinarily called the Taylor System. Briefly stated, he stood for the following: 1. An increased application of science to industry. Through time study, mainly, he planned to develop a great "code of natural law" which would be binding upon all industry — upon manage- ment as truly as upon worker. Preliminary to and concurrent with actual time study, of course, was to come a vast deal of standardiza- tion, careful planning, and responsible administration. His appli- cation of science to industry was not to be confined to the technological side of industry. He was as much concerned in getting the "right" wage, from the point of view of incentive, as he was in getting correct feeds and speeds. 2. An increased specialization and an increased responsibility for management. Management, primarily, was to be responsible for developing the great code of natural law and for appl3dng the code within the plant. 3. The restoration of individual responsibility which had been too largely lost in a regime of mass production. Such a view, incomplete as it is, will explain why Taylor's system of wage payment took the form shown in the following reading.] " Adapted by permission from C. B. Going, Principles of Industrial Engineer- ^«g> PP- i33~35' (McGraw-Hill Bopk Company, Inc. 191 1.) THE ADMINISTRATION OF PERSONNEL 179 More than thirty years ago, at the Bethlehem Steel Works, Frederick W. Taylor began a development of the conception that labor of all kinds, operations of all kinds, could be scientifically studied and analyzed and reduced to elementary processes; that these ele- mentary processes could be performed in some one best way, discov- erable by an expert investigator; that there was a miuimum of time in which each could be continuously performed by a good workman; that the workman could be taught to do each elementary operation, and hence the entire job, in the best way and the minimum time; and that the pajrment of a considerably larger price for work done accord- ing to the standard than for work that failed to reach the standard would secure the co-operation of the employee and induce him to put forth his best effort. Taylor begins by an ultimate analysis of the job into its elements. Each of these elements is then subjected to thorough expert study to determine the methods and apphances by which a man working steadily at a pace he can maintain without injury can reach maximum performance and minimum time. The workman is then provided with everything necessary to accomphsh, in the standard time, the results determined by this study, and he is thoroughly instructed in every step of the operation by minutely detailed written schedules and by expert advisers. Finally, he is paid at piece rates which are set at two different levels — a low price per piece if the workman fails to do the job in the standard time, and a high price per piece if he does it in the standard time. This is the so-called differential rate. The successful worker is paid not only for the more pieces he turns out, but he is also paid more for each piece. The unsuccessful worker not only makes less pieces to be paid for, but is paid less for each piece of the smaller number he makes. The money gain to the man who attains standard performance thus becomes very large. For example, suppose a standard performance for a certain repeti- tive job is set at ten pieces completed per day. The piece rate may then be fixed at 30 cents each if standard time is attained and only 25 cents a piece if it is not. The workman who finishes only nine pieces in a day receives but 25 cents each, or a total of $2 . 25. The workman who finishes the ten pieces as a standard receives 30 cents each or a total of $3. For an increase of only 11 per cent in production he gains an increase of 33 per cent in wages. This large incentive is provided to enlist the co-operation of the workman— to make him l8o BUSINESS ADMINISTRATION contribute his part to the effort which was begun by the manage- ment in their study of conditions and their provision of the equipment and the instruction. See also p. 588. Measuring and Communicating Aids: Time Study. p. 844. The Range of Time and Motion Study. 17. WAGE INCENTIVE: A WAGE FORMULA' [This is an interesting attempt to fix wage rates in terms of all factors bearing upon the economic good of the plant. The particular equation shown was one which is regarded as applicable when the premium method of payment was used. Do not try to master the details; merely notice the range of factors which are taken into account and compare such a method with the ordinary time or piece rate system.] The equation is and for the determination of labor and indirect cost (not including materials) is: X={r (i+e) +R] t The definitions of terms follow. They are common in both equations:^ r =Base hourly rate man is to receive K =A constant, when V is 100 per cent, to bring worker under standard conditions to standard rate B = Fundamental base rate, temporarily that of 1905 » = Percentage of increase in living since 1905, taken on the 15th of Janu- ary, April, July, and October m = Percentage allowed for each extra process known or learned n = Percentage allowed for years of connected service y = Years of such service R = Fixed charges rate per hour which man has chance to modify e = Percentage of premium earned on time allowance F = 100, which is the standard accomplishment per cent E = Standard premium task time set " Adapted by permission from G. D. Babcock, "The Taylor System in the Franklin Shops," Industrial Management, LII (igr;), 534-54. THE ADMINISTRATION OF PERSONNEL l8i Pa = Percentage of time absent or late 5 = Value of spoiled work per producing hours worked Pt = Percentage of time under task Pi = Percentage of time spent on non-task or straight time work C = Co-operation arid conduct X = Labor and fixed charge cost ( =Time taken to do work i8. WAGE INCENTIVE: WHAT ARE FAIR WAGES? Nowhere in business is blank stupidity so rigidly standardized as in wages. Take some of the controlling dogmas of wage payment : "I pay the market rate of wages; what more can I do ?" The "market rate" is now only a cant phrase in merchandising. There is no market rate in commodities in spite of market quotations. You find prices quoted for the staples such as cotton, wheat, and the like, but when you go to buy for particular uses you discover that by paying more than the quoted rate you will get an especially good quality or brand which will save money in the end by being suited to your exact needs. The best purchasing agents seldom buy goods at the market; they buy that which will give the best service — the largest return for the money without regard to the initial outlay. Price is neither a purchasing nor a sales argument among long-headed business men. The whole trend of modern business is away from making a product which will merely join the herd of similar products, and is toward making something that will stand out — something that wiU be different and better than the others. But wage methods have not caught up with merchandising and they will not until the old ideas of master and servant are abandoned and business is considered as a democratic, mutual enterprise. Another current dogma is that any given product can afford to have only a certain amount of wage included in its cost and that the wage must always be a fixed percentage of the sales price. Hence, if wages go up, so do the sales prices. This dogma is common to " Taken by permission from Have We Reached the Limit of Wages ? A pamphlet by W. R. Basset, pp. 3-14 (The Knickerbocker Press, 1919). Later appearing in book form under the title When the Workmen Help You Manage. (The Century Company.) 1 82 BUSINESS ADMI>fISTRATION both employer and employee; it finds expression in many ways. It does not take into account the service of a man; it holds that his service value is fixed and inviolate and that there is something sacred about pre-war or pre-any other period wages and that we should revert to them with all speed. The first step in any wage consideration and the first step toward the new idea in business is to get the real values on wages. We all know that cheap labor is not cheap; paid cotton pickers have proven cheaper than slaves — although it took a long time so to convince the South because they never reckoned the expense of idle slaves. In any operation in which the material costs are high as compared with the labor costs, the highest possible pay is the cheapest if it results in savings of material or in a fine product, or in both. In the grades of production where labor is the big factor, high wages are economical if the wastes of human power can be cut to a minimum. Wages are measured solely in terms of production. It is the part of the employer to see that facihties for production are given and then it is his right to demand that they be taken advantage of. I have taken the employer's usual approach to wages in an effort to show that wages are seldom what they seem to be and that it takes a very thorough and scientific knowledge of a business before one can say that wages are high or low. The fact that they have repeatedly been raised does not mean that they are high, nor that they have been lowered mean that they are low. They are high if they do not return value; they are low, regardless of their total expres- sion in dollars, if they do return value. There is no reason in the world that a common worker should not make $150 a week- — if he does that much work. And it is the combined fault of the employer and the employee if he does not do that much work. But the fault of neither is chronic. If both regard a wage increase as something to add cost and not as a step toward cheapening the product, then the raise is wrong. Raising human costs to save eventual costs sounds paradoxical, but that is the trend of scientific industry and marks the passage of the worker from slave to fellow artisan and of the owner from blind to enlightened manufacturing. It is really almost impossible to survey even the commonest opera- tion without discovering that it is not only costing too much but that no one is benefiting from the increased cost. The workers are not being paid as much as they should earn, the owner is paying too much, and the pubhc is being mulcted in the final cost. THE ADMINISTRATION OF PERSONNEL 183 B Wage is generally regarded as the main motivating device in modern industry, but what do we really know about methods of wage payment ? We know that the various methods are worked out in terms of a basic rate, but what is the right basic rate — ^right in terms of calling forth the wUl to do? Is it the current rate in the community? Suppose the current rate is not sufficient to shelter, clothe, and nourish the worker to the point where he is a good physi- cal machine; will it not pay both society and the manager to lift that current rate to a physical efficiency basis? And what is a physical efficiency basis? When it is attained, may it not pay society and the manager to go beyond it if that calls forth the will to do ? What is the current rate of wages, anyhow, but a resultant of social forces, some of which are woefuUy inefficient, not to say positively harmful? But perhaps the right wage is a function of the manager's costs. What does the average manager know about his costs and especially about the causes and conditions lying back of those costs? Even when he does know, does what he can now afford to pay give any conclusive finding with respect to what he ought to pay to call forth the will to do ? But perhaps the right wage is a function of a good standard of living. At the best, would this do more than guide to the right minimum wage ? And what is a good standard of living ? Does it mean a good standard for a single worker, or for a family of three, or of five, or of fifteen ? And what does "good standard" mean anyway? We shall do well to admit that we are in the stage of elementary thinking concerning wage payment as a constructive force in industry. Neither our economists, nor our psychologists, nor our uplifters, nor our hard-headed business men have solved the problem. Barely have they stated it. 19. PROFIT SHARING: ITS FORMS' Broadly speaking, the profit-sharing principle divides itself into five major groups: I. Profit sharing in the real sense of the word, with these essential features: a) Amount to be distributed varies with and depends upon the net profits of the concern or upon the amoimt of dividends paid the stockholders. 'Taken from Bulletin 208, U.S. Bureau of Labor Statistics, and Mallory, Mitchell, and Faust, Profit Sharing as an Aid to Contented, Efficient Labor. 184 BUSINESS ADMINISTRATION b) Proportion of profits for distribution is definitely determined in advance. c) Benefits of plan extended to at least one-third of the total employed, and including employees in occupations other than executive or clerical. d) Method of determining individual shares is known, at least in a general way, to the participating employees. 2. Limited profit sharing, with these essential features: a) Same as (a) in profit-sharing plan above. b) Same as (6) in profit-sharing plan above. c) Benefits of the plan limited to less than one-third of the total employed, and excluding employees other than executive or clerical. 3. Bonus plans, under which the divisible fund does not depend upon or vary with the net profits of the enterprise, but upon any one of the following factors: a) Price for which commodity manufactured is disposed of— the so-caUed sliding-scale wage. b) Gross receipts or gross profits — a variant of the sliding scale. c) Estimated probable profits on business. d) Wages or salaries earned and length of service. e) Length of service and thrift, as shown by the participant's ownership of stock of the employing company or maintenance of a savings account. f) Savings of the prospective participants as shown by subscrip- tion or ownership of a specified amount of stock of the employ- ing company, or savings accounts. g) Amount of savings collectively effected in production or operation. 4. Benefit associations which are affected by the following factors in distributing their funds: a) Where the industry concerned contributes materially toward the maintenance of such fund. b) Where the industry concerned makes a merely nominal contri- bution toward this fund. c) Necessities in each individual case. d) Length of service or period of membership in association. 5. Pension funds, with these determining factors: a) The fund maintained wholly by the company itself. THE ADMINISTRATION OF PERSONNEL 185 b) Contributions or assessments made on the employees by the company for aid in maintaining this fund. c) Amount allowed each year by the company definitely deter- mined upon in advance. d) Amount set aside to be a percentage of the annual pay-roU. e) Method of arriving at amounts of pensions awarded each person is governed by: (i) Length of service. (2) Wages earned. (3) Individual necessity. 20. THE THREE-POSITION PLAN OF PROMOTION' [Promotion is, of course, one device which is used in developing incentive. This reading should be regarded as a sample of promotion schemes.] We wish to emphasize, then, three points: (i) the necessity of attracting desirable apphcants; (2) the necessity of holding, fitting, and promoting those aheady employed; (3) the interdependence of these two. The three-position plan of promotion considers each man as occupying three positions in the organization, and considers these three positions as constantly changing in an upward spiral, as the man is promoted from the lowest position that he occupies and into the position next higher than the highest position that he occupies. The three positions are as follows: first and lowest, the position that the man has last occupied in the organization; second, the position that the man is occupying at present in the organization; third, and highest, the position that the man wiU next occupy. In the first position the worker occupies the place of the teacher, this position being at the same time occupied by two other men, that is, by the worker doing the work, who receives Uttle or no instruction in the duties of that position except in an emergency, and by the worker below who is learning the work. In the second position the worker is actually in charge of the work, and is constantly also the teacher of the man next below him, who will next occupy the position. He is also, in emergencies, a learner of duties from the man above him. ' Taken by permission from F. B. Gilbreth and L. M. Gilbreth. Reprinted from The Annals of the American Academy of Political and Social Science, LXV (1916), 289-96. 1 86 BUSINESS ADMINISTRATION In the third position the worker occupies the place of learner, and is being constantly instructed by the man in the duties of the position immediately above. Naturally a plan like this demands a close co-ordination of all positions. This is provided for through the master promotion chart. This chart is in the hands of the man in charge of promotion. It is slightly different for each organization. It consists of a schematic arrangement of all positions in the organization, so arranged as to provide for lines of most rapid advancement along the various func- tions and subfunctions under which the measiu-ed functional manage- ment by which we operate works. The interests of the individual worker and his education as to importance of promotion are carried on through the individual promotion charts. Upon these the records of each and every member of the organization are separately kept. These sheets are often called "fortune sheets," and it is this aspect of them that is of peculiar interest to the psychologist. When a worker becomes a member of the organization, he is called into the department in charge of advance- ment or promotion, and given one of these fortune sheets. Upon it is shown his present position, and he and the man in charge outline together his possible and probable line of advancement. The sheet then becomes his fortune map, or fortune schedule. The projected line of promotion is outlined in green, and upon it are placed the dates at which it is hoped he may reach the various stages of advance- ment. At set times the worker and the promotion chief, or one of his helpers, meet, and the Hne of actual progress of advancement of the worker is traced upon the map in red, with the dates of achieving the various positions. The two then consult as to existing conditions, the special reading and studying necessary for fitting for the new positions, possible changes or betterments. The direct product of this is that the worker understands what he is doing, gets expert advice for greater progress, and realizes that there is and must be co-operation between him and the promotion department for the good of aU concerned. The by-products are equally, or more, important. One is that the worker is glad to impart all information that would be of help to the organization as to his history and antecedents, his home and other social conditions outside the plant, that help or hinder his plans of preparing, ambitions, etc. THE ADMINISTRATION OF PERSONNEL 187 The second by-product of these fortune sheets is directly connected with the solution of the problem of getting constantly a group of desirable applicants from which to select more wisely. Thus, when the worker looks at his fortune sheet and understands the three- position plan of employment, he recognizes that he must train some- one to take his position before he can hope to be most rapidly advanced. Naturally he first looks around in the organization to see who is available, for it is always desired that those within the organi- zation be advanced first. However, if no such person is available, he reviews his entire acquaintance and all possible sources for new workers, in order that he may obtain the most desirable person easy to train into that position. It is not necessary to dwell long upon the advantages of this system. 21. EMPLOYEES' REPRESENTATION A. DEFINITION' 1. The term "employees' representation" is being used in this read- ing to include an established arrangement whereby the employees of a business concern are represented by persons recognized by the manage- ment as spokesmen for them in conferences on matters of mutual interest. The term "industrial representation" is often used as the equivalent of "employees' representation." Neither of these terms is to be regarded as synonymous with "industrial democracy," which implies a measure of popular control that is not guaranteed in any plan of representation we have investigated. 2. Forms and names assumed. — Employees' representation may take the form of "works and shop committees," "joint industrial councils," as established in England under the Whitley plan, "shop stewards' committees," union "business agents," or some combination of these, and under a variety of names. It may exist in non- union, "open shop," "preferential shop," or "closed shop" estabhsh- ments. The form of organization may embrace simply one concern, a chain of plants under common management, a group of works under separate managements located in a common district, or a number of estabUshments under separate managements, but representative of one or several allied industries. Examples of aU of these forms are to be found in the United States and in England, some of them having been in operation for many years. ' Taken by permission from a report of the Independence Bureau. 1 88 BUSINESS ADMINISTRATION The simplest and perhaps the most characteristic form of em- ployees' representation in the United States is the "works committee" composed of delegates elected by the workers to represent the various departments, groups of related departments, or, in some cases, crafts. This body usually meets at stated intervals, weekly or monthly, either alone or jointly with an equal, or at least not greater, number of persons representing the management, and exercises a degree of authority, advisory or final, with reference to complaints and suggestions coming from the employees regarding wages, hours, working conditions, welfare, and other matters of special interest. 3. What employees' representation provides. — ^Employees' repre- sentation may provide simply an orderly method for the adjustment of grievances; it may include machinery for collective bargaining with reference to wages, hours, and working conditions; it may be the means of eliciting from workers their hearty co-operation and valu- able suggestions regarding processes, organization, and poUcies; or it may involve all of these or any combination of them. Its structural features may be very simple and the procedure altogether informal, or these may be highly elaborate. The power possessed by employees through their industrial representation may be that of "public opinion " — the authority of the representatives being merely advisory to the management— or the management may delegate to the em- ployees final authority in regard to certain specified matters. B. AN EXTREME CASE' I. In order to safeguard and promote the enduring interests and wel- fare of both the employees and the management of the X Manu- facturing Company, and to enable that company to play more fully and adequately its part as a unit in the economic Ufe of the nation, a Conference Committee of twelve shall be constituted, whose duty it shall be: A. To determine the principles and policies which should govern industrial relationships in this plant, and B. To set up machinery or processes for carrying these principles and poUcies into effect. Six of the members of this Conference Committee shall be selected by the employees of the plant from among their number by any ' Taken from "A Suggested Plan for a Conference Committee on Industrial Relationships" for a certain manufacturing company. THE ADMINISTRATION OF PERSONNEL 189 method which these employees in caucus assembled may deter- mine. These six shall designate one of their number as a joint chairman. The other six members of the committee shall be selected by the management of the plant from among the of&cials or the employees of the company by any method of selection the management may determine. These six shall designate one of their number as a joint chairman. The Conference Committee shall be selected within two weeks of the time this plan is received by the parties interested, and shall proceed at once to the accompUshment of its task. II. The Conference Commitlee shall approach its task with an entirely unrestricted attitude. Solely by Way of suggestion and not at aU as an indication that all the points mentioned below shall be considered by the committee, or as an indication that the committee's discussion is to be limited to these points, the following are mentioned as matters upon which the committee may well determine principles and poHcies to guide industrial relationships in the plant and set up machinery for carrying these principles and poUcies into effect. A. Matters generally considered to affect primarily the employees, but which actually affect employees, management, and com- munity alike: 1. Methods of fixing, paying, and readjusting wages, whether day rate, piece rate, or other form of compensation. 2. Methods of safeguarding and improving working conditions by such means as better methods of sanitation, provision of safety devices, medical examination and advice, etc. 3. Methods of increasing the economic security of the work- men, such as mutual aid, insurance, savings, investments, longer term wage contract, regularization of employment and production, etc. 4. Relationship of employees to outside organizations. 5. Opportunities for self-expression and initiative on the part of the employees, both inside and outside the plant. B. Matters generally considered to affect primarily the manage- ment, but which actually affect management, employees, and community alike. I. Employment methods, including classification, advance- ment, discharge, discipline, absenteeism, labor turnover, etc. 190 BUSINESS ADMINISTRATION 2. Production problems and increase of output, including meth- ods of interesting employees in their work, such as the posting or distribution of information concerning the character and uses of the product) the various phases of production, the achievements of other plants, results of new methods or processes, the relationship of shop organization to labor efficiency, etc. 3. Trade conditions, trade competition, and the reduction of costs, including methods of eliminating waste of materials, better utilization of the practical knowledge and experience of the employees, etc. 4. Relationship of management to outside organizations. 5. Labor supplj' and labor administration. C. Matters generally considered to affect both the employees and the management, but which certainly affect the commvmity also, such as: 1. Machinery for the prevention of differences and the settle- ment of such differences as may arise. 2. Education, adaptation, and training, both in the shop and in the schools. 3. Legislation, both state and national, on matters pertaining to the industry. 4. Lectures, conferences, and research on subjects of general interest to the industry, including readjustment of condi- tions in industry from war to peace basis. 5. Utilization of inventions and improvements in machinery or methods, securing for each party an equitable share of the benefits. D. Matters generally considered to affect primarily the com- munity, but which also affect both employees and manage- ment, such as: 1. Standards of living and Uving conditions of the workers, including adequate housing, rental charges, economy in purchasing, education, recreation, etc. 2. The relationship of the plant to the social and economic life of the community. 3. The relationship of the industry to the economic and social hfe of the state and the nation. 4. The contribution of the plant to the problems of industrial relationship in the industry as a whole and in the nation at large. THE ADMINISTRATION OF PERSONNEL 191 C. ANOTHER CASE' Declaration of principles. — We, the members of the National Metal Trades Association, declare the following to be our principles, which shall govern us in our relation with our employees: Concerning employees. — (i) Since we, as employers, are responsible for the work turned out by our workmen, we must have full discretion to designate the men we consider competent to perform the work and to determine the conditions under which that work shall be prosecuted, the question of competency of the men being determined solely by us. While disavowing any intention to interfere with the proper functions of labor organizations, we wiU not admit of any interference with the management of our business. Strikes and lockouts. — (2) This Association disapproves of strikes and lockouts in the settlement of industrial disputes. This Associa- tion wiU not countenance a lockout, imless aU reasonable means of adjustment have failed; neither will the members of this Association deal with striking employees as a body. Relations of employees. — (3) Every workman who elects to work in a shop wiU be required to work peaceably and harmoniously with aU his fellow employees, and to work loyally for the interests of his employer. Apprentices, etc. — (4) The number of apprentices, helpers, and handymen to be employed wiU be determined solely by the employer. Methods and wages. — (5) We will not permit employees to place any restriction on the management, methods, or production of our shops, and will require a fair day's work for a fair day's pay. Employees will be paid by the hourly rate, by premium system, piece work, or contract, as the employers may elect. Freedom of employment. — (6) It is the privilege of the employee to leave our employ whenever he sees fit, and it is the privilege of the employer to discharge any workman when he sees fit. Concerning disagreements. — (7) The above principles being abso- lutely essential to the successful conduct of our business, we cannot permit the operation of our business thereunder to be interfered with. In case of disagreement concerning matters not covered by the fore- going declaration and not affecting the economic integrity of the industry, we advise our members to meet such of their employees who may be affected by such disagreement and endeavor to adjust the difficulty on a fair and equitable basis. ' Platform of National Metal Tiades Association, 1920. 192 BUSINESS ADMINISTRATION (8) In the payment of hourly wages or in the operation of piece work, premium plan, or contract system, this Association wiU not countenance any conditions of wages which are not just, or which will not allow a workman a fair wage in proportion to his efficiency. D. Measuring Aids of Personnel Administration Modern management is keen to take advantage of any devices which will enable it to see its problems in measurable, objective terms. Naturally, such devices are older, better developed, and more widely used ia other fields of management than they are in personnel adminis- tration, for personnel administration is, after all, quite new. So also are the social sciences basic to personnel administration new as com- pared with the physical sciences used in production. Being new, their measiuring methods are not well developed. Precisely because it is probably the one field in management in which "measuring aids" are least adequate, let us see something of what the manager has at his disposal in this respect. If "measuring aids of management" are found to be already helpful in this new field, it will certainly give us increased respect for their helpfulness in older and better established functions. There are, of course, three matters which need to be measured in personnel administration. The job, the worker, and the success with which these two are co-ordinated must all be measured. The problems below deal with these issues. PROBLEMS 1. What do you think of the argument that "measiu'ement discriminates against the weaker brother who should have a right to obtain the same pay as the stronger" ? 2. "A change in attitude toward the medical examination is irmninent. The medical examination at entrance will gradually assimie its real function as a means of proper placing. It wiU result in benefit to both employer and applicant. The largely justifiable hostiUty of labor leaders that has accompanied its introduction, will tend to disappear." Comment on each statement. 3. Make a list of ways of detecting fatigue. Ways of reducing it. ■ What information would you look for on a job analysis card if you were hiring (i) a crippled soldier? (2) an old man? (3) a woman? (4) a boy or girl ? S- What is the value of job analysis in transfer or promotion? In case of rush in certain departments ? THE ADMINTSTRATION OF PERSONNEL 193 6. Would a job analysis be of value in setting wage rates ? Why or why not? 7. Is there one correct kind of job analysis? Might a job analysis for hiring purposes be diflferent from that for training purposes? Just what is job analysis ? What does it include ? 8. Can job analysis be advantageously used in fields involving more personal elements than does niachine work ? 9. "Making the most of the labor supply at hand by making the labor specifications include what the worker need not be, may prove cheaper in the long run than the elaborate advertising and scouting schemes to which some employers have resorted to secure their employees." Show how this could happen. 10. "In a small organization it is frequently possible for the person in charge of employing to know the details of each tjrpe of position." Would a job analysis be of any value in such a business ? Is it worth the cost and effort involved in making it ? 11. "The employment man soon comes to know the type of man he desires for the jobs most frequently in need of filling. For these jobs the recorded analysis becomes superfluous. Employment men who have made job analyses have told the writer they do not use them as much as they had expected." Is this an argument against job analysis ? 12. Make a list of the ways in which job analysis cards could be used in labor administration. 13. "The fact that the tendency is for factory work to become more and more simplified and to be reduced more and more to automatic routine by the subdivision of labor and by the development of semi-automatic machinery renders psychological tests unimportant because the work is made so simple that anyone can do it." Do you agree ? 14. Quite a vogue is on for use of psychologists as (a) personnel managers, (fi) advisers to personnel managers. What elements or parts of the personnel manager's job require the training of the psychologist ? Do these constitute the major part of personnel work? How do you account for the way in which the business world has turned to the psychologists in this matter ? 15. "There is every indication that vocational and industrial psychology win tend to exterminate the old try-out methods of selecting employees." Do you agree ? 16. "The problem of selection can never be entirely solved by even the most cleverly devised psychological examination." Why or why not ? What wiU solve the problem ? Do you think it will ever be solved ? 17. What seem to you to be the matters which can be well handled in the vocational guidance of one individual by another ? 18. Which is more important in employment work, (1) a correct test of general mental abUity, (2) a correct test of special mental ability ? 194 BUSINESS ADMINISTRATION 19. What limitations do you see in the psychological test even when applied by experts ? What limitations would be added if employed by laymen ? 20. What are trade tests ? What forms are there ? 21. As a means of estimating the significance of the rating scale as a meas- uring device, rate a group of your teachers as to (a) teaching ability, (J) knowledge of subject. Why not rate them without the subdivisions mentioned ? 22. The emplojrment manager of a manufacturer of office furniture and filing apparatus has devised a plan whereby employees wiU be graded at the end of the first month and third months and of the first year according to dependability, intelligence, industriousness, neatness, cheerfulness, and activity. What do you think of such a plan ? 23. "There are at least four views of a worker's capacity: 1. Wba.t he thinks his capacity is 2. What his associates think his capacity is 3. What those above him think his capacity is 4. What accurate measurement determines his actual capacity to be." Could a manager make use of all these ? 24. Assuming that phrenology were well foimded, scientifically speaking, what sort of service could it render in the administration of labor ? What are the scientific objections to phrenology ? 25. Answer the same question in the case of physiognomy. 26. As a matter of fact, are we influenced by matters of physiognomy ? If so, why? What difference does this make to you personally ? If you become a manager will you be so influenced? Should you be so influenced ? 27. Write out your estimate of the application blank as a measuring device. 28. "In the prevailing undeveloped state of scientific tests of fitness the main reliance of the employment man must be on empirical device for sizing up men. The most important of these and by far the most important of all the means of sizing up men is the interview." Do you' agree? List other devices used and evaluate them. 29. "The employment manager should in conversation note whether the applicant is mental or manual, directive or dependent, original or imitative, social or self-centered, an indoor man or an outdoor man, a man of large or small scope, settled or roving in disposition, accurate or inaccurate, rapid or slow to co-ordinate facts, dynamic or static." Do you think this is a good method ? What advantages or disadvan- tages does it possess? Of what value are the results obtained ? 30. Two kinds of references are ordinarily required: (a) character refer- ences, and (b) references from former employers. Are these of any value? If you were 'hiring a man would you ask for references? Why or why not ? How would you use them ? THE ADMINISTRATION OF PERSONNEL 195 31. What is time study? Is it the same thing as motion study? Is time study something applicable only to labor? 32. "The day is coming when the world will demand that the quantity of the day's work shall be measured as accurately where one sells labor, as when one sells sugar or flour." Do you agree ? 33. "No measurements, whether they be psychic or physical, are exact beyond a certain point." Why then is their value? How can they be checked ? 22. STRENGTH TESTS IN INDUSTRY' [The Spring-balance test here described consisted of measuring by the balance the resistance the subject offered to pulls applied to cer- tain muscle-grjoups. There are claimed for the test certain diagnostic values in such fields as physical classification of workers, criteria of fatigue, strain of night work, influence of enviroimient upon strength and endurance, etc.] Lovett and Martin's spring-balance muscle test, originally designed for the determination of the degree of recovery in muscles paralyzed in poUomyelitis, has been used with excellent results in" our munition factories. This consists in measuring, by a very simple and quickly appHed method, the strength of certain selected groups of muscles and computing from the figures thus obtained the total strength of the individual. Individuals are then classified into four groups: the exceptionally strong, the strong, the moderately strong, and the weak. The use of this test by Professor Martin under the Public Health Service has disclosed the fact that different specific industrial operations have different specific standards of strength, as is illus- trated by the following table: Operation Avwage Strength in Founds Men: Rivet dipping 4870 Rivet trucking 4830 Hot forging 4370 Rivet shoveling _ 4260 Coal passing 4230 Capstan lathe (day shift) 4180 Planish seat 3930 Foremen 3770 Powder loading . 3700 » Taken by permission from F. S. Lee, The Human Machine, pp. 6-9. (Long- mans, Green and Company, 1918.) 196 BUSINESS ADMINISTRATION Women: Average Strength Operation in Pounds Drilling flash holes 2370 Mill percussion flash ... 1780 Welsbach foot press 1640 Drilling diagonal holes .... ... 1630 It is obvious that if the strength of any worker falls much below the standard for the task to which he has been assigned, he is under- taking work for which he is not physically fitted; and if his strength is markedly greater than that of his task, he is not economically placed. These disadvantages in assigning the worker to the task that is unsuited to his strength could be avoided if the spring-balance test should come into general industrial use. See also p. 144. Physical Examination of Workers. 23. HOW INDUSTRIAL FATIGUE MAY BE DETECTED' Given adequate equipment, adequate administration of the plant, and a proper spirit among the employees, fatigue is the greatest single obstacle to a maximum output. Fatigue diminishes output, not only indirectly, but directly by iacreasing accidents and the proportion of spoiled work and by causing sickness and absences of employees. Itwill, therefore, be profitable to employers, to employees, and to the nation itself, to inquire into the ways by which fatigue may be reduced. Everyone knows that a certain degree of fatigue is the normal result of bodily activity and is harmless. But it is not so generally recognized that the onset of over-fatigue may be greatly hastened, and that through it deleterious effects on both the worker and the plant may be caused by the conditions of work inside the factories, or by the occupation, habits, and conditions of living of the workers outside the factories, or by both. In order to be suire that an individual is really fatigued, objective methods of measurement must be used — one often feels tired without actually being so, and likewise fatigue is often present before it is recognized by the individual.. Fatigue may be detected by various tests, some of which have been studied so carefully and so unproved that they can now be considered as fairly accurate and useful for prac- tical purposes. Different methods are applicable to different cases. 'Taken from Reprint 482, United States Public Health Service, pp. S""- (Government Printing Office, 1918.) THE ADMINISTRATION OF PERSONNEL 197 Amount of output. — One of the readiest means of detecting fatigue is by keeping a record of tiie output of the individual employee by the hour, the day, or the week and observing its course. A falling ofif in the output, when not explicable by other changes in the conditions of the work, indicates fatigue. Where the duration of the working period has been changed, fatigue can also be tested by comparing the average output per hour under the earHer and the later schedules. Amount of power used. — ^A fall in the amount of electrical or other power consumed in a factory, or one of its departments, is often an excellent index of decreased output and thus of the fatigue of the workers. Lessened consumption of power must of course be dis- counted where it results from temporary shut-downs or other obvious causes. Other indicators of fatigue. — Fatigue is also often indicated by the amount of spoiled work turned out by the workers, by the number of accidents to the workers occurring during a working period, by the number of absences from work, and in extreme cases by records of sickness. Laboratory tests of fatigue. — There are various tests of the presence of fatigue that have been supplied by the laboratories, some of which are applicable to industrial workers. These concern the muscles, the nervous system, sight, and hearing, and certain chemical changes within the body. See also p. 140. The Maintenance of Physical Fitness. 24. JOB ANALYSIS' The committee found that there existed a misunderstanding as to just what job analysis is. In some cases it was found that mem- bers would assert they were using job analysis when they were merely making a mental analysis of the various jobs and occupations in their estabhshments, and it was also found that there was a lack of standardization, different people using different names for the same job or giving the same name to entirely different jobs. The investigation showed the subject had three distinct phases: (i) job classification; (2) job analysis; (3) hiring specifications, also known as job specifications. ' Report of the committee appointed by Chicago Council, National Association of Employment Managers. Taken from Personnel, II (1919), 10. igS BUSINESS ADMINISTRATION Job classification is the segregation into groups, under common designation, of all positions requiring similar skill, training, or ability, and having approximately the same relative value to the industry. Job analysis is the systematic survey, examination, evaluation, and recording of the various components of a job as relating to, and reacting upon, the worker. Hiring specification is a record showing the essential requirements of each job, which are solely necessary for the proper selection and placement of an efficient worker. REASONS FOR MAKING AND RESULTS ACCOMPLISHED 1. Job classification, job analysis, and hiring specifications will assist the employment department in the selection of employees. 2. They furnish more accurate data than are usually available to explain the job to the new employee. 3. They give information about training methods, and help to develop new and better methods. 4. They furnish basic data for the development of systematic promotion schemes. 5. They furnish data for the standardization of occupation and job names. 6. They furnish some of the data upon which to base rate and wage schedules, and especially assist in the standardization of rates between departments for the same jobs. 7. They will point out disagreeable features of a job as a basis for the improvement of working conditions. 8. They will give a good picture of the job to those not directly in contact with it, but still in need of an understanding of the job or occupation, as nurses, doctors, compensation departments. 9. It will bring the employment department and foremen or department heads together on a basis of mutual understanding through the close co-operation and contact necessary when making job classification and analysis. 10. They will give the foreman a better understanding of the jobs, as he wiU be forced to think about them in a comprehensive way and not only from the viewpoint of production. Consequently the relationship between foremen and workmen wiU be closer and dis- agreements fewer. 11. They will give a permanent record of the requirements for a job, making turnover in the employment department a less serious matter. THE ADMINISTRATION OF PERSONNEL 199 12. They will, when more generally developed, give valuable data for the agencies of vocational guidance. 13. Made on a comparable basis, they will give data to stabilize rates in similar industries. 14. They may be used in the movement for the elimination of unnecessary fatigue. 15. They will give data which wiU assist the movement for acci- dent prevention and sanitation. 16. They will suggest improvements in equipment and manu- facturing methods. 17. They wiU furnish data useful in the placement of industrially disabled men. 18. They are the first steps necessary in determining the basic requirements in. introducing any mental tests and trade tests in the process of proper selection and placement and careful follow-up and adjustment. JOB CLASSiriCATION There appears to be agreement in the various sources consulted that some form of classification of the jobs coming within the juris- diction of the employment department should precede the actual making of a job analysis and specification. The extent toward which this classification is carried differs, however, in different tjrpes of business. The following steps describe the general procedure for a prelimi- nary classification: 1. Take one department at a time and list aU jobs for which some- body is usually hired. 2. Decide upon a distinct title for each job, using, wherever they are clear, titles now in use. 3. Group jobs which are identical or very similar together under one title, especially those performed by the same type of employee, or if the job is one of several jobs of similar nature which the same employee performs by changing around from job to job. This will simplify the work of analysis, especially the specifications, as for all practical purposes the employment department is interested in the job, as it represents a type of worker for this job. 4. Group together jobs which are of the same general occupational nature, such as assembling jobs, machine-operating jobs, maintenance jobs, etc., keeping each job distinct, however. This will facilitate analysis, as certain factors will affect all jobs of the same general type 200 BUSINESS ADMINISTRATION 5- The preliminary classification is done for the purpose of facili- tating the making of job analyses and hiring specifications, and should be general, details left to be worked out by them. JOB ANALYSIS Job analysis of all jobs listed in the classification is made on the basis of a definite outline, including a standard set of points to cover all jobs. The method of making this analysis and the various steps will, of course, differ in various types of organizations, due to local conditions, but the following points were taken from the instructions of one employment department investigated, to the ones making a job analysis: 1. Begin with one department in your factory which is best known to you, and where you are sure of the co-operation of the foreman, assistant foreman, and other employees who may have to be consulted. 2. Observe the jobs to be written up, notice what is done and how it is done, type of employee doing the job, working conditions, and any other factors shown in the outline below. 3. Write up all you know about the job or have learned from your own observation, following the outline shown below. 4. Get together with the foreman and sell to him the idea of job analysis, pointing out to him the value to his department in having you secure full knowledge of the requirements, the value it is to the company as a whole in furnishing information as a basis for the standardization of names and rates, the value to the factory, the safety department, and nurses in having detailed information about each job as to the working conditions, hazards, and any other argu- ments which you may feel will assist in selling the idea. 5. Secure from your foreman as complete a statement as possible on all the points to be covered. Be sure to evaluate his statements and discriminate between facts, opinions, and bias or prejudice. 6. If advisable, talk to the assistant foreman, die setters, linemen, and experienced employees about the job. 7. Consult the master mechanic on questions of equipment, the efficiency man, spoilage clerk, and superintendent, getting the require- ments of the job from their particvdar angle and viewpoint. 8. Consult the safety man as to the hazards of the job. 9. Consult the nurse or doctor as to the health and physical requirements and strains they may have observed. THE ADMINISTRATION OF PERSONNEL 201 10. Check at all times by observation of the actual conditions, and give statements of facts instead of opinions wherever possible. 11. Write your analysis up from the above information. Give in as few words as possible an accurate, reliable, simple, and adequate description and definition. 12. Submit to the foreman for criticisms and suggestions, and if finally agreed upon by the foreman and employment department, submit to the superintendent for final approval. 13. The information should be written up on plain sheets of paper and arranged in paragraphs under the headings given below to facilitate easy reference to any particular points. The following is a list of points which are suggestive of what such a job analysis should include: 1. Department and foreman. 2. Job name. 3. Definition oj name. — By this is meant a short, concise explana- tion of the job name. This is often termed the duties. 4. Description aj duties. 5. Wage scale. — a) Starting or basic wage. This should be stated in form* used as a basis for computation, as, for example: 40 cents per hour, or $18.00 per week. b) Advancement, showing schedule of increase, where such is in effect, and limits, where such have been estabUshed. c) Piece-work bonus, or premium. Where these forms of incen- tive plans are in effect, take average earnings the employee can make, and the limits. d) Overtime rate, Sunday, and holiday rate. 6. Hours per day. Per week. 7. Continuity of employment. 8. Promotions. Here should be stated the line of promotion, as well as the factors on which it is dependent. 9. Standards of production or output, where such are available. 10. Working conditions, as to: o) Ventilation h) Accident hazard b) Temperature i) Health hazard c) Illumination j) Posture d) Cleanliness k) Fatigue e) Physical layout Strain f) General surroimdings m) Distractions g) Fire hazard ») Monotony 202 BUSINESS ADMINISTRATION 11. The effects of the job on the character of the worker. 12. Requirements, physical and mental. 13. Method of selection. 14. Sources of supply. 15. Method of training. — Here should be stated length of time necessary to learn the job, who gives the training, and the various steps of the training period. HIRING SPECEFICATIONS While the job analysis gives comprehensive information regarding the job to its minutest detail, it is not practicable to the busy employ- ment man or interviewer, who may have to memorize the information regarding a large nvmiber of jobs, and wishes to use the results of the analysis at the time of selecting and hiring a man, both for the pur- pose of recalling the qualifications as well as having such definite information as should be told the new man before he starts to work. It therefore was foimd preferable to make up a record which will permit tabulation of a resume of the information secured through the job analysis. See also p. 588. Measuring and Communicating Aids' Time Study, p. 591. Measuring and Communicating Aids: Classifi- cation and Symbols. 25. SOME SAMPLE ANALYSES AND DESCRIPTIONS OF OCCUPATIONS A' Dept Job Name Div Job Symbol Working Conditions: Permanent Night Clerical Standing Heavy Temporary Day Mechanical Sitting Medium Overtime Part time Labor Stooping Light Variety Quick Clean Office Routine Slow Dirty Shop Exacting Dangerous Hot Outside Personal Qualification (Qualify only those which are essential) : Male Age Appearance Grade school Years Female Height Nationality High school Years Weight Eyesight. College Years ' Curtis Publishing Company. THE ADMINISTRATION OF PERSONNEL * 203 Experience: Special knowledge and training either with methods or machine Can inexperienced man be trained If so, how long will it take Wage and Hotms: Time rate Starting wage fin lln Piece rate Next advance J Hours \ Sat. \ Prod, bonus Time or merit \ [Out J Out General: Next opportunity Related jobs What is most common reason of exit. What are the duties on this job ? Necessary qualifications ? BLACKSMITH Other names by which occupation is known: Occupations most nearly allied: — -Anglesmith, hammersmith, toolsmith, shipsmith, horseshoer, forger (liner). Trade requirements: — A blacksmith must be capable of doing welding and able to make all kinds of medium or light machine and hand for- gings from drawings, templates, or samples; should be familiar with coal, coke, gas, and oil furnaces; have some experience on steam or power hammers; have a good knowledge of heat treatment of steel, including oil and water tempering and hardening. Education: — Common school. Physical requirements: — Strength and endurance; good eyesight, as a blacksmith's duties require him to be looking into forges or furnaces constantly. Mental requirements: — ^Higher than average intelligence. Experience: — Should have served as an apprentice in general black- smith shop. Entrance requirements for training school:- — Common or high-school education; shouls have good health, strength, and be of robust stature. Rate established. 'Taken from Aids to Employment Managers and Interviewers on Shipyard Occupations, Special Bulletin, Series on "Employment Management in the Ship- yard." (United States Shipping Soard Emergency Fleet Corporation, 1918.) 204 * BUSINESS ADMINISTRATION 26. THE FIELD OF THE PSYCHOLOGICAL TEST' The popular conception involves a process of "pigeonholing" — fitting an individual into an occupation which is supposed to be the one for which he was "cut out.'' This doctrine may be proved fallacious on several grounds. The objections may be couched in ethical, sociological, philosophical, or psychological terms. This dis- cussion will take the standpoint of experimental psychology, and from this aspect the objections appear especially vivid. A prime consideration that is neglected by the popular calcula- tions concerns allowances for probabihty of error. Errors of obser- vation are inevitable in all measurements. A single observation is less reUable than a series of observations. For this reason it is possible that vocational tests may require to be given several times in order to reduce this error to a minimum. A further objection to a single-test system is that it makes no provision for the amount of improvement which an individual is capable of making in a given activity. If experimental psychology has shown anything, it has demonstrated that capacity for improve- ment varies greatly with different individuals, and the initial standing in a test does not indicate what the standing will be in successive performances. This brings up the question as to how far the indi- vidual may be trained in an activity, and when one observes the astoimding increases in capacity displayed in everyday life, one hesitates to limit the individual to any single vocational possibility. The current doctrine is further befogged by its neglect of the volitional factor in human endeavor. Behind all specific capacities Ues something that is loosely called wUl, character, volition, etc. It has to do with the exercise of mental traits which are not directly measurable, at least not readily isolated. Psychological tests appear to be limited when one undertakes to measure such traits as industry, persistence, honesty, etc., and the Umitations make it impossible to predict what reaction will take place in future situations. Some attempts at vocational guidance are based upon interest as the ultimate criterion of aptitude. In evaluating this factor one should keep in mind several points. First, some people have no inter- est of vocational significance. Here interest as a criterion obviously fails. Other indi-dduals have but one absorbing" interest. Into this 'Taken from H. D. Kitson, "Psychological Tests and Vocational Guidance," in the School Review, XXIV (1916), 207-14. (The University of Chicago Press, 1916.) THE ADMINISTRATION OF PERSONNEL 205 class fall the geniuses, and here interest is very properly regarded as an indication. In the majority of cases, however, a number of inter- ests are present. They may be of equal strength. They may be in related fields and reinforce each other, or they may be in unrelated fields and antagonize each other. The perplexing thing about these cases of multiple interests is that the individual himself is unable to tell which is his strongest interest. How unstable it is, then, as a criterion of vocational aptitude. Finally, it should be pointed out that interests are not always fixed things. They are extremely volatile. The psychological methods of studying interests fall under two heads — objective and subjective. The first involves the presentation of interesting stimuli to the individual and the measurement of his reactions. Objective methods are so sUghtly developed that little can be said on experimental grounds either for or against them. Their utihty is questionable, however, inasmuch as the stimuli must neces- sarily be so simple in laboratory procedure as to have little vocational significance. The subjective method is largely used in the practice of vocational guidance, usually taking the form of a questionnaire modeled after the pattern set by Professor Parsons. This method has value when used under laboratory conditions, but experimental psychology has shown that the introspections of an untrained person are usually not very illuminating, at least in revealing deep motives and hidden desires. The, conclusion to be drawn from the foregoing considerations is that any scheme of vocational guidance that uses interest as the chief arbiter in determining vocational fitness is on the wrong psychological basis. Vocational guidance will have to be regarded, not as a process whereby one is designated as fitted by birth for one occupation and not fitted for another, with psychological tests as the chief instruments of selection; a more fruitful conception of the entire process is to regard it as monitory in nature. The individual should be. measured from every standpoint — ^physiological, psychological, sociological, and economic. Each of these views of the individual is only partial and shows his standing in relation to the world in a specific mode. All these views must be taken in order to ascertain his true relation. This view immediately disposes of the demand that the technique of vocational guidance be developed exclusively by the psychologist. 2o6 BUSINESS ABMINISTRATION He is not more responsible for its advancement than is the sociologist, the physiologist, or the economist. The mental process constitutes only one phase of the occupational activity. In making positive suggestions as to the probable utility of psycho- logical tests in vocational guidance, it is difficult to speak with assur- ance because of the embryonic condition of mental tests. Most persons will agree that it is possible by means of psychological tests to distinguish between an individual who is characteristically slow and one who is characteristically fast; between one characteristically accurate and one characteristically inaccurate, as these characteristics are in extremest form. It is also possible to grade people with respect to the presence of certain qualities of ingeniousness, abiUty to adjust to new situations, etc. The methods for accompUshing these ends, however, are stiU far from standardized, and vast areas of technical ground must be covered before the tests wiU have vocational signifi- cance. 27. METHODS IN VOCATIONAL TESTING' The vocational miniaiure. — ^There is first what may be called the method of the vocational miniature. Here the entire work, or some selected and important part of it, is reproduced on a small scale by using toy apparatus or in some such way duplicating the actual situa- tion which the worker faces when engaged at his task. Thus McComas, in testing telephone operators, constructed a miniature switchboard and put the operators through actual calls and responses, meanwhile measuring their speed and accuracy by means of chrono- metric attachments. The vocational sampling. — Closely related to this method of minia- ture performance is that of taking an actual piece of the work to be performed and sampling the candidate's ability by his success in this trial. Thus, in connection with the recommendation of clerks and assistants from among boys in commercial high schools it is common to test their ability from time to time by assigning them small pieces of work such as that which they might later be required to perform in business offices and stores. Finding addresses and numbers in a telephone directory, carrying out involved verbal instructions and direc- tions from memory, computing calculations, making out a trial bal- ' Adapted by permission from H. L. Hollingworth, " Specialized Vocational Tests and Methods," in School and Society, I (1915), 918-22. (The Science Press, 19x5.) THE ADMINISTRATION OF PERSONNEL 207 ance, a trial chemical analysis, etc., are common forms of this type of test. The vocational analogy. — ^A third method has been that of analogy. Some test is devised which bears a fancied resemblance to the sort of situation met by the worker in the given occupational activity. The material is new, but the attitude and endeavor of the worker seem to be much the same. There is, indeed, usually a tacit or expressed beUef that the same simple or complex mental processes or psycho- logical functions are involved in the two cases, although seldom has the precise nature of these functions been clearly stated. Thus girls employed in sorting ball bearings, and also typesetters, have been selected on the basis of their speed of reaction to a sound stimulus. Miinsterberg has suggested that marine officers who can quickly per- ceive a situation and choose an appropriate mode of reaction to it may be selected by letting candidates sort a deck of cards, bearing diSerent combinations of letters, into their appropriate piles. The same investigator has described a test for motormen which, while being neither a miniature of their required work nor yet a sample of it, is said to produce in them much the same mental attitude. In another case telephone operators were tested for speed in cancelUng certain letters from a newspaper page, in the belief that this work involved an ability that is required also at the switchboard, although there directed toward different materials. McComas has described a dot- striking test for measuring accuracy of aim and co-ordination, essential factors in manipulating a switchboard. Miscellaneous empirical tests. — Finally there are cases in which tests having vocational significance have been sought by purely hap- hazard and empirical ways. Thus Lough, having devised a form of substitution test in which certain characters had always to be replaced by certain others, according to a prescribed key, proceeded to apply it to groups of commercial students. Speed of improvement was chosen as the thing of interest in this test. Measures of this capacity, as shown by repeated trials with the same test day after day, were then compared with measures of ability in diSerent types of work in which the students were engaged. It was found that the test records agreed very closely with the abilities in typewriting and fairly closely with abihties in stenography and business correspondence, whereas there was not such definite relation found between the test records and abihty in learning the German language or in mathematics. The test is consequently recommended as a useful means of detecting 2o8 BUSINESS ADMINISTRATION l3^ewriting and stenographic ability. It is not pretended that the test is either a miniature of the work of such caUing, nor that it is a fair sample of such work, nor even that it involves precisely the same mental functions that come into play in such work. The test records and ability in the particular type of work show high positive correla- tion, so that an individual who is good or medium or poor in the one is, as a mere matter of fact, also found to be good, medium, or poor in the other. Hence, without further analysis, the one may be used as the sign of the other. The miniature model has the advantage of concreteness and appar- ent relevance, but, as Miinsterberg points out, a reduced copy of an external apparatus may arouse ideas, feelings, and volitions which have httle in common with the processes of actual hfe. The second method we have described, viz., that of using as the test a real sample of the work done, has certain very obvious advan- tages. On the other hand, for the vocational test of this tj^ae to be at all significant, either the sort of work involved in the occupation must be fairly uniform and homogeneous in all its different circum- stances (as in the case of typewriting at dictation, or in the work of filing clerks, accountants, etc.), or else there must be included a large number of samples, representing all the various unrelated sorts of work. Moreover, in neither case is the test in any peculiar sense psychological. Such tests could perhaps be best conducted by the employer himself. In fact, employment on trial, which is a common method of selecting operatives and assistants, is a time-honored form of this test, which is not necessarily improved on either by calling it psychological, or by putting it in charge of a general expert, or by removing it to the laboratory. The third form of procedure, that of analogy (duplicating the inner mental attitude), is full of all sorts of difficulties and sources or error, many of which are, at the present stage of our knowledge, irremediable. In selecting a new test which shall involve the same mental attitude and call for the exercise of the same psychological functions as are needed in the work itself, we are handicapped by the unrehabUity of the introspection of the examinee and also by our inadequate ability to recognize, identify, and classify psychological functions even when we are in their immediate presence. The state- ment of motormen that the manipulation of a crank in connection with a strip of checkered paper makes them feel quite as they do when guiding their cars through a crowded thoroughfare is far from a guar- THE ADMINISTRATION OF PERSONNEL 209 anty " that the mental function which they were going through had the greatest possible similarity with their experiences on the front plat- form of the electric car." It is much more conceivable that the "mental attitude" referred to was merely the vague feeling that "Something is happening now," "This keeps me busy," or "What a nuisance this thing is." And even if we knew the mental functions involved, as would be demanded by the method of the vocational psychograph, we are still a long way from the time when we can exhibit even a single psychological test and state just what fimction or functions its performance does or does not, may or may not, involve. Indeed, we do not even know what the various distinct mental func- tions are, or whether, as a matter of fact, there are such distinct functions. After all, the miscellaneous, random, and purely empirical method of Lough, Lahy, and WooUey seems to be the most promising experi- mental procedure for the immediate present and perhaps for some time to come. This method is, to be sure, but a rough, provisional, and unanalyzed expedient. It calls for long and patient co-operative labor. It does not at once afford us the systematic scientific insight which we may wish we possessed. But it will at least save us from the delusion that we already possess such insight, and it should serve to check the fervent and quasi-religious zeal that leads us to mistake prophecy for service. 28. ARMY INTELLIGENCE TESTS AND TRADE TESTS' [The reader should keep in mind the fact that the intelligence tests here discussed were given to ascertain the general level of abiUty. They did not seek to measure specific abilities.] In determining the qualifications of men coming into service, the army used the physical examination, the interview, the intelligence test, and the trade test. The interview and the physical examination are familiar devices to the employment manager, and so, although there are many points of interest connected with the use of these methods in the army, little more wUl be said about them here. The intelligence test and the trade test are probably more novel; certainly they have not come into general use as yet in industry. 'Taken by permission from Beardsley Ruml, "The Extension of Selective Tests to Industrj'," The Annals of the American Academy of Political and Social Science, LXXXI (1919), 39-46. 2IO BUSINESS ADMINISTRATION The army intelligence tests were devised and used by the army so that information concerning each man's mental alertness might be at hand to aid in assigning him to duty. The actual form which the tests took was determined to a large extent by several aspects of the army situation. In the first place, the tests had to be given with great speed. It was not uncommon to test and to report on 2,000 men within a space of twenty-four hours in a single camp. In the second place, the tests were scored by a staff that was of necessity continually changing. And finally, the method of testing had to be so adapted that men who could not speak or read English might be satisfactorily rated. As a result of these tests each man received a rating: A for the very superior; B for those decidedly better than the average; C+, C, and C— for those of average ability; D and D— for the inferior; and E for those who did so poorly ia the test that arrested mental development was suspected. The ratings of mental alertness were useful in three ways. In the first place, they indicated those individuals of such inferior mental ability that their presence in a unit would retard training, to a prohibi- tive degree, men who might even become a menace to the imit in critical situations. Such men were either assigned to routine tasks which they were competent to perform or they were discharged from the army. In the second place, the ratings showed men of superior grade who might be considered for advancement. They pointed out to a commanding officer certain individuals for his special observa- tion, sometimes with startUng results. In the third place, the rat- ings were used to equalize the alert and the sluggish in the companies of a regiment. It was found that if men were assigned to companies in a hit-or-miss fashion so far as mental ability was concerned, some companies of the regiment could be trained with great speed, while the training of others seemed impossible. It was found that these differences were paralleled by differences in the average ratings of the companies, and after shifts in personnel were made which equalized the average intelligence ratings, the training of the regiment as a whole proceeded in a decidedly more satisfactory way. The uses made of intelligence tests in the army suggest that similar tests might be of considerable value to industry. The first use that at once suggests itself is in relation to hiring. Mental alert-, ness is clearly an attribute that brings about success or failure al different kinds of work, and the employment manager who will THE ADMINISTRATION OF PERSONNEL 211 inform himself of the amount of intelligence that various jobs require can assure himself that each applicant is at least intelligent enough so that he wiU suffer no handicap in becoming a satisfactory employee because of a slow or retarded mentality. The converse is also true, that applicants of superior intelligence need not be hired for positions in which high mental ability may be either unnecessary or misdirected. The usefulness of intelligence ratings only begins with the hiring of the applicant; they may be of considerable importance in readjust- ments in the working force itself. Clearly, in slack times when the laying off of groups of men becomes imperative, care might be taken that mental ability in its relation to productivity be given its proper weight in deciding which individuals shall stay and which shall go. In conditions where the manufacture of a new product involving new processes and technical operations is begun, those men on the present force whose mental alertness gives indication of quick adapta- bUity to new work and unfamiliar situations might be selected. When it is desired to select or to encourage certain of the less skilled operators to study in the company's technical schools, better results would be obtained by choosing those whose intelligence rating gives promise of quick learning and an appreciation of the advantages of special training. The practical appHcations of intelhgence tests so far mentioned are perhaps fairly obvious. A further use, somewhat less certain of immediate value, is suggested from the value of army intelligence tests in balancing the companies of a regiment. It is conceivable that such balancing would not only be profitable from the point of view of immediate production, but that a major cause for industrial unrest and discontent would be attacked. Great care must be taken to make sure that any intelligence test proposed for use in industry is really able to do the work expected of it. There is danger that inexperienced enthusiasts, wholly uncon- scious of test technique and test Umitations, will offer broadest panaceas for all the difficulties of mental measurement. It should be remembered that the army intelligence tests measure general mental ability, not specific mental traits. It should also be borne in mind that the success of the army tests was due to the great range of mental abiHty received by the army. Parallel results have never been achieved where tests have been used as a selective agency, on a group of relatively small intellectual range. Further, the army tests, determined as they were by the fixed conditions of mihtary 212 BUSINESS ADMINISTRATION affairs, are probably not the most satisfactory kind of tests for indus- trial use. The army trade tests are quite a different story. Among the various items which were recorded on each soldier's qualification card were the very important ones concerning his occupation in civil life and his proficiency in these occupations. The information on these points was at first extracted by means of an interview. It was soon discovered that the interview was unrehable, not hope- lessly so, by any means, but just unreliable enough to give cause for trying to improve the system. The reason for the inaccuracy was not lack of training on the part of the interviewer; it was rather the weakness that inheres in the best conducted of interviews. Soldiers, like all men, are unable to judge accurately of their own ability; sheer mendacity was fairly prevalent, especially when there was a tip that this trade or that was required in France; and honest mis- understandings were frequent. Trade tests seemed to be a way of bettering the situation, tests that would check up a man's statement of what his occupations were in civil life and of what he claimed his skill to be. As in the case of the intelligence tests, trade tests had to fit into the army scheme of things. This meant that they had to be given in a short time, not to average more than ten minutes per test, that they be given by examiners who might have no knowledge of the trade whatever, and that they require none of the expensive machinery and equipment that is the complement of most trades. [The tests were of three kinds, (a) oral, made up of certain "key" or diagnostic questions (b) picture, where questions were based on picture shown, and (c) per- formance tests when the person being tested made some object requiring skill in the basic operations of the trade.] Several applications of the trade-test method to industry are suggested from its uses in the army. The three phases of employment work that seem most inmiediately concerned are hiring, transfer, and training. Trade tests have an immediate and obvious use in industry in aiding in the selection of new employees. They are the natural method of securing very essential occupational information, of ascertaining whether this particular appKcant really has the skill that his age, experience record, and last wage seem to indicate. Certainly a direct method of measuring trade abiUty is to be pre- ferred to an indirect method of inferring it. Since trade tests can be constructed which will measure profi- ciency in the various activities that are commonly impUed by the THE ADMINISTRATION OF PERSONNEL 213 name of an occupation, they would be valuable in all matters involv- ing shifts in the working force. A knowledge of each man's strengths and weaknesses within the broad range covered by his trade would make more intelligent and less uncertain the transfer of particular men to different work. The trade-test rating should also be one factor in determining which workers should be retained in dull periods, for the nucleus that is left in the industry after the cut is made is the cornerstone of the new operative unit. It is important to know that, from the technical side, the stronger elements of the old unit are included in this foundation. The information that would be given in the trade-test record is intimately connected with the educational program of an industry. Isolated weaknesses in the chain of an individual's technical strength may be removed. Furthermore, a systematic program directed to prevent stagnation on the job would give to industry an increasingly flexible and effective working force and would give to the worker the pride in his skill which comes from watching its continuous growth. Again the warning against the amateur must be sounded. Not even the trade tests used so successfully in the army are capable of yielding the results pictured above. Only through experimentation wiU. the ultimate goal be reached. Army trade tests have done their part in pointing out the way which may be followed. The intelligence tests and the trade tests are part of one tech- nique. Both have for their function the measurement of phases of human qualifications that are vitally important in the selection of employees, in their assignment to work, in their transfer from department to department, and in further education and training. The intelligence test gives a rating of general mental ability; the trade test gives a rating of specific technical skill. The two together picture an individual's status in those traits which most definitely condition his effectiveness in industry. 29. WHAT PHRENOLOGY AND PHYSIOGNOMY CAN CONTRIBUTE' Underlying aU of the various phrenological systems were four common assumptions which, briefly stated, were: I. That such cerebral localization as exists is of fundamental and specific traits of character or types of ability, such as secretiveness, ' Adapted by permission from H. L. Hollingworth, Vocational Psychology. (D. ^pleton and Company, 191 7.) 214 BUSINESS ADMINISTRATION circumspection, love of babies, generosity, veneration, constructive- ness, etc. 2. That the more developed any one of these given traits is, the larger will be the supposed area of the brain which contains its supposed organ. 3. That, since the skull fits fairly closely to the brain surface, the relative development of a given portion of the brain will be indicated by the relative prominence or size of the different parts of the craniimi, so that the degree of possession of the trait may be judged from an examination of the exterior of the skull. 4. That the occasional casual observation of coincidence between particularly marked mental qualities and particular cranial character- istics is a suflacient basis for inferring imivefsal and necessary con- nection between these two featiires. Each of these assumptions involves obvious error and misappre- hension in the light of what is now known concerning the nature of the human mind and the structure and functions of the brain. In order that these fallacies may be clearly disclosed the four main assumptions wiU be examined independently in the order in which we have here presented them. I. In the first place, the only sort of localization of functions that has been authentically established is the orojection, upon the brain structure, of the other parts of the organism, and the localization of sensory-motor centers which function in the connection of these various organs. Thus it is known that each of the principal groups of muscles of the body has its so-called center in the brain. The same thing is true of the sense-organs, as the eye, ear, etc. Each incoming sensory nerve tract runs to or through some portion of the brain. The cortex, or outer surface of the brain, may thus be con- ceived as a sort of terminal station for nerves from other portions of the organism, a sort of projection-center which enables them all to take part in a functional unity of action. The functions which can be said in this sense to be localized in the brain are such sensory-motor capacities as the ability to raise the right arm, the abiHty to balance the body when standing erect with eyes closed, the ability to see, the ability to move the eyeball, the ability to feel pain in a certain area of the skin, the abiUty to articulate words, to imderstand spoken or written language, to call up a visual memory of a particular thing previously seen, etc. THE ADMINISTRATION OF PERSONNEL 215 The integrity of various parts of the brain is essential to the proper co-ordination of all the sensibilities and responses of the individual. Traits of character and types of abiUty, however, depend on the characteristic modes of reaction of the organism as a whole to the factors of its environment. Thus generosity as a human trait does not depend on the massiveness of any set of muscles, nor on the keen- ness of any sense-organ, but upon the characteristic type of reaction and motivation which the individual as a whole displays. Jealousy, love of children, destructiveness, etc., are characteristic modes of behavior of the whole organism, and depend upon reactions which the given situation evokes, and not upon some special organ. 2. As to the supposed correspondence between size and func- tional capacity, no evidence has been presented which demonstrates that even the strength of a muscle or the keenness of a sense-organ depends in any way on the absolute size of the brain-area concerned with it. Nor has evidence been presented to prove the existence, within any given species, of correlation between volume, shape, or weight of the brain-tissues and even the more general traits of character or abihty. In the absence of such evidence we are led to believe that fimctional capacity depends on complexity of structure, chemical, molecular, and functional, rather than on the factors of mass or shape. But even the nature of these correlations is as yet largely unknown. The important point in the present connection is that, for the purposes of vocational psychology, the practices of phrenology are based on evidence no more relevant to its pretensions than were the "proofs" pointed to by palmistry, horoscopy, and prenatal magic. Through cranial measurements alone it is impossi- ble to determine with certainty the race, age, sex of an individual, or even, indeed, whether he was a prehistoric savage, an idiot, or a gorilla. 3. As for the third assumption of phrenology, namely, that brain development is reflected in the cranial size or protuberances, it should be sufficient to point out that even if this were so it would be mean- ingless for our purpose, since we are compelled to abandon the belief in a relation between mass of tissue and even the simplest sensory or motor capacity. But such further disproof as may be required is readily furnished by an actual attempt to remove from their cranial boxes the brains of various animals, and by noting that the shape and thickness of the bones gives little indication as to whether brain tissue. 2l6 BUSINESS ADMINISTRATION cerebrospinal fluid, or supporting tissues are to be found underneath a given protuberance or depression. 4. The fourth assumption of phrenology, that sparse and casual observation of striking cases is sufficient ground for generalization, we should be able to dismiss at once as utterly inadequate and mis- calculated. It is impossible to find consistent recorded instances in which groups of individuals, selected at random, with definitely determined and measured mental or moral characteristics, have been shown to confirm, by their cranial geography, even the most elemen- tary doctrines of that phrenology which still oSers to diagnose the individual's psychic constitution and to commend to his future con- sideration the vocation of engineering, publishing, or preaching, as the case may be. Very often practicing phrenologists and phre- nological vocational experts seek to justify their operations and pretensions by pointing out that they do not rely solely on the cranial geography, but more often on other characteristics of the individual's body, such as the concavity or convexity of his profile, the shape of his jaw, the texture of his skin, the shape of his hands, the color of his hair and eyes, the proportions of his trunk, etc. There is a very widespread beUef that many mental and moral characteristics betray themselves in special facial items. The shift- ing eye, lofty brow, massive jaw, thin lips, large ear, protruding or receding chin, dimple, wrinkle, tilted nose, thin skin, prominent veins, and many other characteristics have come, in fiction and in table- talk, to symbolize specific characteristics. The same thing is true of the shuffling gait, the erect body, the protruding paunch, the curved shoulders, enlarged knuckles, stubby or elongated fingers, the short neck, the long arm, and the manner and rate of stride. It is but a step from these to the signs afforded by clothing, its selection, care, and mode of wearing. I. It is first of aU true that many of these marks are the result of habitual activity, and in so far as they originate in the expression of a trait, they may be said to be signs of it. That the studious come to be round-shouldered, the cheerful have smooth countenances, the guilty to have furtive eye-movements, may well be expected. But it is quite another thing to reverse the proposition and to take stooped shoulders as a universal sign of academic interests,- dimples as a sign of guilelessness, and nystagmus as the symptom of a criminal past. It is, however, often safe to use these traits as reliable signs of the estab- THE ADMINISTRATION OF PERSONNEL 217 lished general habits and attitude which they express. We have all done this since earliest childhood; yet any attempt to classify for- mally the signs and effects of habit and constant expression would be pedantic. Somewhat more hopeful is the rehance on expressive movements as indicative of passing and transient emotional states and attitudes. Prolonged intimate acquaintance with an iadividual's emotional experiences and expressions may in time reveal to such an observer the deeper lying and more permanent affective trends, the moods and sentiments which indicate what we are accustomed to call the temperament of the individual. Insight into the nature of these expressive movements is one of the useful things to be derived from long and patient study of human nature, both at first hand and through the classical descriptions of emotional expression. The more one observes and the more individuals he observes, the more he is impressed with the final variety and informal complexity of these expressive movements, and their dependence on a vast detail of circumstance, which again forbid rule-of-thumb formulation. 2. Another apparent source of these beliefs is in analogy. The clammy hand, the fishy eye, the buU neck, the "blotting paper" voice, the asinine ear, the willowy figure, the feline tread, and scores of such phrases indicate that these characteristics remind us definitely of various species or objects other than the human being, and that we expect to find back of them the characteristic traits, habits, and instinctive tendencies of those species. We seldom proceed so far as to check up our expectations with facts, under controlled conditions. 3. The affective value of these analogies and their incorporation in poetry, song, and fiction as adequate figures of speech lead us to react to these traits in ways determined largely by the traditional usage. We are humble before the "high-brow," merry in the pres- ence of the dimpled, cautious and prudent before him of the shift- ing eye. 4. Another source of these notions is mainly responsible for such of them as refer to definitely undesirable traits. This is the belief, so weU played upon by the school of Lombroso in criminology, that many of these characteristics, along with the so-called physical stigmata, are indicative of a degenerative or atavistic trend in the constitution of the individual. Suffice it to say that we now under- stand that the underlying truth of the matter is only that these 2l8 BUSINESS ADMINISTRATION Stigmata are somewhat more frequent among the vicious, degenerate, and defective groups than they are among people selected on the basis of their moraUty and intelligence. The criminally inclined individual may possess no stigmata, while an Abraham Lincoln may possess several of them, and in marked degree. 5. A further source of these physiognomic beliefs may be dis- cerned: namely, the fact that the features of a stranger are very likely to call more or less clearly to our memory some other acquaint- ance whose traits we know, to our sorrow perhaps, and whose features or manner or voice or apparel chance to be very similar to that of the stranger. At once we are inclined to endow the stranger with the character of the individual he resembles. We seldom accurately check up these impressions on the basis of subsequent discovery. Indeed we are much more likely to evoke the suspected traits by our own attitude and by our treatment of the stranger, and we are eager to pounce upon any act that may be construed as a confirmation of our snap judgment. It is obvious that these impressions will vary from individual to individual and that any attempt to formulate them would expose their fallaciousness. Finally, in this analysis of the origin of our beUef in the signs of physiognomy, is the mere insistence that as a matter of fact there are definite relationships discoverable and formulable between typical features and typical characteristics o. personality. Beliefs of this dogmatic kind are most likely to be exploited by the professional coimsellor, since they appear to the examinee to be unknown, mysteri- ous, esoteric facts. We must content ourselves on this point by insisting that the formulated facts of physiognomy are so unsupported, contradictory, and extravagant that the vocational psychologist carmot afiord to trifle with them. General impression on the basis of the totahty of an individual's appearance, bearing, and behavior we shall always tend to receive. Whether one judges more accurately by an analytic recording of each detail or by ignoring these in favor of his own more or less imanalyzed total impression has never been demonstrated. Under any circumstances one is likely to look about for such details as may lend support to the total impression. But it is quite un- justifiable — though perhaps commercially expedient — to pretend that the judgment is really based on the details selected. THE ADMINISTRATION OF PERSONNEL 219 30. THE APPLICATION BLANK AS A MEASURING DEVICE' In order to arrive at some definite conclusions as to the questions asked on such blanks, the appUcation blanks of twenty-five firms, each employing 1,000 or more people and representing a wide variety of industries, were analyzed as indicated in the following table. In addition to the questions appearing in the table, two of the blanks contained numerous "self-analysis questions" and portions to be filled out by the employment supervisor, patterned after the forms advocated by a certain widely advertised system of selecting employees. Questions in the table are arranged in order according to the number of times used. Group I. Questions appearing on eleven or more of the twenty-five blanks: 1. Give your full name and address. 2. What is your age ? (Or give the date of your birth.) 3. Date of this application. 4. Are you married ? 5. Give the names and addresses of your former employers. 6. How long were you employed in each of your former positions ? 7. What has been the nature and extent of your education ? 8. What is your nationality ? 9. For what position are you an applicant ? 10. Why did you leave each of your former places of employment ? 11. What persons (or how many persons) are dependent upon you for support ? I 12. What wages did you earn in each of your former positions ? 13. What is your height and weight ? 14. Give the names of references other than your former employers. 15. Have you been employed by this company before? 16. How many children have you? Group II. Questions appearing on five to eleven of the blanks: [Omitted]. Group III. Questions appearing on two to five of the blanks: [Omitted]. Where the blanks could be checked up with the practice of the firms in hiring, there was ample evidence that answers to many of the questions on the more complicated blanks were not considered of much value. It is plain that a considerable number of the ques- tions in the above table could be of no possible significance to most 'Adapted by permission from R. W. Kelly, "Hiring the Worker," in Industrial Management, LHI (1917), 1-16. 220 BUSINESS ADMINISTRATION firms. One employment executive states that the following points are the only ones deemed essential in his department: Name and address Date of application Date and place of birth Date of immigration, if foreign born Parentage Languages spoken Education Whether married or single Number in^ family Wage contribution to family support Record of previous employment On the whole, the practice of the most successful employment departments would seem to indicate that such a thing as a "standard application blank" is not desirable. Very little has been accom- phshed, even by firms engaged in similar lines of work, b^ way of standardizing their record forms. Several large companies employ two or more difiEerent application blanks for employees engaged for entirely dissimilar occupations, as for office and factory help. 31. THE INTERVIEW AS A MEASURING DEVICE' In a small concern it will be necessary for the employment man- ager to interview the majority of the applicants, and even in large establishments he may be called upon to select employ'ees for certain positions or departments. There appears to be a tendency in the direction of selecting for employment managers men who have had extensive shop experience but very little education. The success of concerns that have tried the opposite method of choosing persons who have had a few years' contact with industry and a considerable amount of technical or professional education proves that the latter type of qualification gives much better results. An examination of the work done by an interviewer in any large, well-organized service department reveals the need for a similar kind of preparation. Too much emphasis cannot be placed upon the necessity for having some practical experience in shop or factory work. This ought, if possible, to have been done under the urge of economic necessity; otherwise the point of view of the worker is ' Adapted by permission from R. W. Kelly, Training Industrial Workers, pp. 221, 224-25, 238-39. (The Ronald Press Company, 1920.) THE ADMINISTRATION OF PERSONNEL 221 never completely grasped. The interviewer who has spent a good many years at his trade comes by a kind of intuition to recognize those who are well qualified in his line. Like the prosperous business man without special training who makes no use of modem methods of accounting and investigation, he succeeds in spite of his limitations and may in the long run make very few serious blunders. It is a mistake, however, to suppose that a knowledge of the job alone will enable the tradesman to select others for it. There are so many other factors which enter into his work as an interviewer and which help him to become proficient that general educational quali- fications ought not to be neglected. He can acquire a sufficiently thorough knowledge of the positions to be filled in a relatively short time if he has the intelligence and training which fit him to collect and organize new information. The ideal qualifications for an interviewer may be summarized as follows: 1. Personal characteristics: patience; sympathetic attitude to- ward employees' personal problems; tact in dealing with others; accuracy in making records; alertness in following clues and drawing conclusions; originality in questioning difficult cases. 2. Experience in several different kinds and grades of work. 3. High-school preparation or the equivalent. 4. Intimate knowledge of the various tasks and working condi- tions in the firm or firms for which he hires. May be gained by: a) Working in various departments. b) Writing job specifications, making time studies, or doing other work on a jmrt-time basis. c) Frequent visits to the plant during slack hours. 5. Intimate acquaintance with foremen, department heads, and min or executives. 32. SOME ASPECTS OF RATING SCALES' Discrepancies are to be foxmd in the marks of school teachers everywhere, the widest differences appearing in the judgments of any group of instructors who are asked to mark the papers of stucjents in any subject. It may therefore be expected that much greater differences wiU appear in judging persons in such abstract or complex matters as "personahty," "initiative," "co-operation," or "general value to the concern." 'Adapted by permission from R. W. Kelly, Training Industrial Workers, pp 282-84, (THe Ronald Press Company, 1920.) 222 BUSINESS ADMINISTRATION Several methods suggest themselves by which this tendency can be overcome. The United States Army has made use of a method for rating officers which offers a fairly successful solution. Each rating officer makes out his own scale in the following manner. Five general headings have been selected under which the ratings are given. Under each of these heads the rating officer places the names of five officers of his acquaintance, arranging their names in order as shown in the accompanying scale. In rating subordinates, the officer then compares any given case with the men whom he has selected as his standards. Those who have used this scale claim that, because it calls attention separately and consecutively to each of several essential qualifications for an officer, it lessens the danger that judgments may be based on minor defects, with a corresponding dis- regard of important characteristics. Officers are especially asked to avoid the error of rating low in all characteristics a subordinate whom they hold in disapproval for any reason, or rating high in all characteristics a subordinate whom they admire for any special cause. To obtain the total rating for a subordinate, his ratings in the five separate qualities are added up. Anyone who equals the "highest" officer in the rating scale in aU of the five characteristics thus receives a total of loo points, and one who equals the "lowest" receives only 20 points. The few experiments made by psychologists which can throw light on the qualities which ought to be hsted in such a scale seem to indicate that there is some divergence in the abihty to judge a trait in others according to whether or not one possesses it himself. Thus one's judgment of neatness, intelligence, humor, or refinement in others is likely to be reliable if one possesses these traits. Similarly, vulgarity, snobbishness, and conceit in the rating officer render his judgments of these characteristics in others quite unsatisfactory. In the same way it appears that there is a fairly close agreement as to judgments of efficiency, originahty, or quickness, while there is likely to be little or no agreement among observers as to such traits of character as unselfishness, integrity, co-operativeness, cheerfulness, or kindliness. The experience of educators has quite clearly demonstrated the futiUty of attempting to mark on a scale of more than ten divisions. Five divisions probably answer all practical purposes and are more certainly within attainable limits of accuracy. THE ADMINISTRATION OF PERSONNEL 223 THE EATING SCALE CARD USED BY THE UNITED STATES ARMY I. Physical Qualities: Physique, bearing, neatness, Highest: Capt. John Doe 15 voice, energy, endurance. High: Capt. H. Black 12 Consider how he impresses Middle: Capt. R. White 9 his command in these Low: Capt. W. Smith 6 respects. Lowest: Capt. E. Jones 3 II. Intelligence: Accuracy, ease in learning; Highest: Capt. R. White 15 ability to grasp quickly the High: Capt. B. Gray... 12 poiat of view of commanding Middle: Capt. W. Smith 9 ofi&cer, to issue clear and Low: Capt. J. Brown 6 intelligent orders, to estimate Lowest: Capt. E. Jones 3 a new situation, and to arrive at a sensible decision in a crisis. III. Leadership: Initiative, force, self-reliance, Highest: Capt. B. Gray 15 decisiveness, tact, ability to High: Capt. John Doe 12 inspire men and to command Middle: Capt. R. White 9 their obedience, loyalty, and Low: Capt. W. Green 6 co-operation. Lowest: Capt. R. Blue 3 IV. Personal Qualities: Industry, dependability, loy- Highest: Capt. H. Black 15 alty; readiness to shoulder High: Capt. W. Smith 12 responsibility for his own acts; Middle: Capt. R. White 9 freedom from conceit and Low: Capt. A. Old 6 selfishness; readiness and abil- Lowest: Capt. J. Young 3 ity to co-operate. V. General Value to the Service: Professional knowledge, skill. Highest: Capt. R. Day 40 and experience; success as ad- High: Capt. H. Night 32 ministlrator and instructor; abU- • Middle: Capt. R. Roe 24 ity to get results. Low: Capt. A. Old 16 Lowest: Capt. R. Blue 8 RATING SCALE FOR FOREMEN I. Trade Ability: Compare nature and extent of trade experience; skill in using tools or machines; technical information; knowledge of related trades or processes. II. ProdiKtion: Compare ability to plan and get work out on schedule time; production costs; maintenance of department; quality and quantity of output. 224 BUSINESS ADMINISTRATION III. Administration: Compare tact and fairness in deaKng with employees; success in making occupational adjustments; discipline, esprit de corps of employees, special efforts to build up a stable working force; sanitary condition of department; accident record. IV. Training: Compare willingness and ability to teach beginners; efforts to improve employees through instruction; co-operation with train- ing department. V. Special Executive Qualifications: Compare years of service; loyalty; knowledge of company's poUcies; co-operation with other departments and with higher executives; promptness and accuracy in making out reports; initiative; resourcefulness; self-control. 33. THE LABOR AUDIT' The labor audit is a reasonably exhaustive and systematic state - ment and analysis of the facts and forces in an industrial organization which affect the relations between employees and management, and between employees and their work; followed by recommendations as to ways of making the organization more socially and humanly productive and solvent. Managers are familiar today with various types of accurate cur- rent reports regarding different phases of factory activity. There are elaborate balance-of-stores records, elaborate production records, and analyses of selling conditions. But as yet most managements have not developed well-organized methods for recording or under- standing the elements which go to make up what is in many businesses one of the largest classes of expense, namely, the labor costs. [The subject-matter to be covered in the labor audit is indicated in section (/) of Selection i. This material should be carefully reviewed with the query "What would be dealt with or audited on this topic" continually in mind.] It wiU be helpful if the practical uses of the labor audit are sum- marily considered from four points of view — the uses to the general management, to the personnel manager, to the workers, and to the community. [The last two are omitted here.] A. Uses to the management. — ^The audit is obviously useful to the management as a method of standard record and careful analysis; but other uses at once suggest themselves. The material incorporated into individual sections, together with the recommendations, can profitably be made the topic for discussion ' Adapted by permission from Ordway Tead, The Labor Audit, pp. 7, 8, 42-45 (Federal Board of Vocational Education, 1920). THE ADMINISTRATION OF PERSONNEL 225 and for educational work in executives', foremen's, and workers' con- ferences. In a plant already well f unctionalized- the different sections of the report would naturally be turned over for action to the execu- tive charged with the responsibility for the function under considera- tion. But more than this is necessary. The audit has been made from the point of view of assessing the all-around human and social solvency of the organization or institution. And to the extent that this all-around point of view can be imparted to members of the executive staff by reading and discussing certain portions, if not all, of the audit, to that extent the broadest educational purposes will be served. It will also be true, where a personnel department is in operation, that the audit can to a certain extent give the management a good estimate of its working efficiency. It can, in other words, be an audit of the personnel department. But it should be more than simply a statement. It should be definitely a working manual which, in the hands of all the personnel executives, can be used as suggestive of a point of view and of new methods. Where new executives are being introduced, both into general executive work and into the personnel department, it is very con- venient to have in fairly compact compass a statement that makes clear how the company's labor policy is operating. If a labor audit is turned over to such new executives to read they can be more quickly instructed in the policy and methods under which the com- pany operates. As a document for the instruction for new executives the audit can have peculiarly significant values. Again, the conscientious and enlightened employer, who is appre- ciative of his social responsibility, should be able to find in the audit an estimate of the human solvency of his business. He should be able to get a clear picture of the problems that remain for the plant to solve, of the immediate steps that he should take toward their solution, and of the larger problems he should have in mind to work ' on over a period of years. B. Uses to the personnel managei . — From the point of view of the personnel manager, the labor audit has certain values which are to be obtained in no other way: (i) It enables him to know all the ele- ments of his problem. This knowledge of the all-around aspects of the situation with which he is dealing is indispensable for the forming of a right and adequate policy. (2) It enables him to frame and suggest a policy which is calculated to meet his problem in a 226 BUSINESS ADMINISTRATION fundamental way. (3) It enables him to sell his policy to the organi- zation with the maximimi effectiveness. (4) It enables him to carry on his own administrative work with greater success because of his greater knowledge. And (5) it enables him to improve his policy and practice because of the estimate of its effectiveness he has secured in the audit. And further use of a different sort should be mentioned. The personnel manager may, if he is casting about for a method of filing the flood of pamphlets and clippings on employment work which pour upon him, find that the topical arrangement of the audit with its subtopics affords a convenient method of filing. See also p. 126. Another Statement of Functions. £. Organization and Administration of the Personnel Department We have reached the stage in our study where we may profitably canvass again the organization of the personnel department. What is the appropriate organization of this department ? How should it be related to the rest of the business organization ? What spirit should animate its director and his staff ? To these questions certain general answers may be made. I. Administration of personnel in a given plant should be in terms of the conditions and problems facing that particular plant. A successful personnel administration in one line of activity might well be only moderately successful or even a complete failure in another line. An organization scheme admirably adapted to the administration of labor in the British Ministry of Munitions might well be qvdte unsuccessful if applied to an engineering firm or to a university. An administrative organization well fitted to the needs of a street-cleaning department might well make terrible failure if transplanted to a watch factory. There doubtless are certain general or common considerations applicable to all personnel work in the fields of individual and social psychology and in the economic analysis of the functioning structure of our industrial society, but the per- sonnel manager who faces the task of organizing a personnel admin- istration for a particular business unit must do so in terms of the special problems of that unit, recognizing of course the setting of these problemis in our social structure as a whole. THE ADMINISTRATION OF PERSONNEL 227 2. Administration of personnel should be vastly more than a congeries of unco-ordinated, miscellaneous labor practices. It should be founded on principles; should be aimed at some definite goal. True, the personnel manager is such a recent arrival in the mana- gerial family that his guiding principles are as yet none too well formulated. We have seen in another connection that the first hundred years following the industrial revolution was a period in -which technology was emphasized. The human factor in industry, while by no means completely neglected, was certainly not carefully studied. Its careful study is, indeed, a matter of the present genera- tion. Such a situation makes it all the more important that the manager of personnel visualize his goal as vividly as may be. He wiU administer his task as a coherent whole only as he sees it directed toward some such goal as "good output" and this in terms of the conditions precedent and prerequisite (see p. 128). Such a point of view gives personnel work a unifying thread — indeed it is the sadly needed backbone. The gain is not confined to the mere articulation of persoimel work. This articulated agency has before it a straight road to travel; it no longer flounders about the fields. This means that the progress of personnel work in a business becomes measur- able; achievements can be set over against expenditures in a somewhat definite way. Furthermore, since there is a road to travel, it becomes possible to tell when personnel work is "off the road." In other words, a sense of balance and proportion is attained. One can even picture a personnel manager who is not frantically absorbed in calcu- lations of the waxing and waning of the American Federation of Labor; who is not gulled by the latest fad in employee representation, profit-sharing, or other mere mechanisms and devices; who has a vision reaching beyond the ephemeral happenings of today to solid, long-run achievements. But these things will not take place until miscellaneous labor practices have yielded to definite labor policies. 3. Administration of personnel must be in terms of the whole reach of business administration. The idea that a personnel manager can be fully successful when equipped with only a knowledge and appreciation of the worker's psychology has at present considerable vogue, but it will in the long run be rejected. The administration of personnel is of course the administration of human beings who reason, have prejudices, hear rumors, reflect on their circumstances, and are moved by their instincts and emotions. An expert knowledge of both individual and social psychology, and an able practitioner's 228 BUSINESS ADMINISTRATION skill in both fields, would certainly be very helpful in the administra- tion of personnel. But while all this is true, the personnel manager must be much more than "a glad hand artist"; much more than one who "has a sympathetic understanding of the laborer's attitude"; much more, even, than one well versed in the technique of modern "welfare work." More and more it will come to be realized that the administration of labor means the administration of labor in produc- tion, and that the thoroughly competent personnel manager must be . conversant with at least the broad principles underlying the adminis- tration of the other phases of the business in which he is engaged. This is, after all, only another way of saying that business problems are highly interdependent. Because of this interdependence, the personnel manager cannot administer his own field of activity satis- factorily unless he can meet on approximately equal terms the pro- duction manager, the sales manager, the purchasing agent, the advertising manager, the treasurer, the cost accountant, and other business functionaries in any discussion or any plan of action looking toward the growth and prosperity of the business as a whole. 4. Administration of personnel must be in terms of the function- ing structure of all industrial society and of its evolution as well. This seems a large statement to make of the work of a personnel manager in a given business plant. It is none the less true. The workers of his plant come to their tasks with certain mental outlooks both upon the task itself and upon their position in industrial society. These outlooks are of course derived from their immediate social environment in part, and they are derived in part from the environ- ments of preceding periods. It would be a foolish personnel manager who would attempt to administer labor activities without recognizing this situation. What is true of the psychology of the worker is also true of that of the personnel manager. His attitude, and the instru- mentalities which he will use are the results of environment, both present and past. It will be conducive to sanity of judgment on his part if he realizes this fact. Social attitudes, furthermore, are reflected in institutions and give point to practices. It would be a strange personnel manager who could be indifferent to the problems of collective bargaining, industrial peace, social insurance or unionism. Of course, such matters cannot be understood except in terms of the evolution of our economic organization. THE ADMINISTRATION OF PERSONNEL 229 Perhaps the foregoing may be reduced to a brief statement of the chronological steps which might wisely be taken by a person called upon to take charge of personnel administration of an industrial plant. Such a statement might well run as follows: 1. He must first visualize his objective — that of getting men to work together effectively. 2. He must formulate the conditions precedent to arriving at that objective, as for example, the five conditions mentioned on page 128. 3. He must decide upon the technical devices, ranging from ven- tilation to methods of wage payment, which will assist in bringing these conditions into being. 4. He must (a) formulate and (6) set up his organizations, doing so, not merely in terms of his own work, but also in terms of the work of the other lieutenants of the business. 5. He must administer his organization with vision, with under- standing of the character of his contribution to the great social task of getting men to work together efifectively. PROBLEMS T. Even in the larger industries which have now decided that employment requires the special direction of an employment department, its develop- ment is of recent growth. Why ? 2. "Industry does not affect wage-earners merely as persons possessing labor which they dispose of on a basis of time, skill, and energy. For most men and women, the conditions which surround Industry, and the output of Industry, represent all that is possible for them in the way of health, happiness, and life itself. Both as consumers and pro- ducers they are affected by all that affects production." Has this always been true ? If so, why is it particularly emphasized now ? 3. "In the first place, an employment office alone can deal with the task of scientifically organizing the source of supply of help.'' Why? What methods and devices could it use in accomplishing this task ? 4. "Employment is essentially a plant and not a departmental problem." Is this always true ? Why, or why not ? 5. "Unquestionably the foreman must be relieved of the duty of hiring and firing men if the human factor of industry is to receive due atten- tion." Why? 6. "In some instances employment managers report that they send men to the foremen for the final judgment as to their fitness." Is this desirable ? 230 BUSINESS ADMINISTRATION 7. "Every employee is given to understand that he may come freely to the employment department and state his grievances, if he has any, and that every case of inefficiency, discontent, disharmony, and mis- understanding wUl be decided only upon the evidence and always with a desire to be just." "It is likely to be demoralizing to the discipline of the factory to remove the power of immediate and summary discharge from the department heads." With which quotation do you agree? 8. The personnel manager should have before him as an employment aid a complete organization chart of the business he would serve supple- mented by data concerning each division of the work." Why ? What Supplementary data are desirable? List the uses which might be made of such a chart by the personnel manager. 9. "Where, moreover, enough people are employed to make employment a real problem, it is a problem as important as operating itself, and requiring as much, if not more, ability." Do you agree ? 10. "In the first place when a man is made an employment manager for a corporation he should have a distinct understanding with his superior officers as to just what his responsibilities are to be and just how far he is expected to be held responsible for the character of the people he employs." Is this any more important in his case than in that of any other manager ? Why or why not ? 11. "Complete power to determine the rates of pay is not often granted, but the employment manager is frequently given the right to determine beginning wage and rate of increase." Should complete power be granted ? Why or why not ? Who should have this power ? 12. "Before it is possible to estimate what wages can be paid it is neces- sary to know costs in every department of a business and in detail." What does this imply concerning the position and qualifications of ths man who is to determine the wages ? Do you agree with the quotation ? 13. It is generally said that class consciousness has developed quite slowly in the United States. Can you give any reasons why this would be true ? If true, is it of interest to the personnel manager ? 14. It is well for the director of industrial relations to have an intimate knowledge of the manufacturing processes of his plant and of the sys- tem of control used in those processes. Why is this important ? 15. It is important for the director of industrial relations to know the sequence of operations in his plant; to be able to judge how efficiently the manufacturing processes are being conducted. Why ? 16. The director of industrial relations wiU be wise if he keeps in close touch with the sales organization and is thoroughly conversant with its problems. Why ? 17. The director of industrial relations should have a thorough knowledge of accountiag as an instnmient of control. Why ? THE ADMINISTRATION OF PERSONNEL 231 18. The director of industrial relations ought to have a good appreciation of the general principles of business finance and ought to be conversant with the financial policy of his particular firm. Why ? 19. It is highly important that the director of industrial relations should be well grounded in the general principles of business law. Why ? 20. Other things being equal, the director of industrial relations who has a good knowledge of organization policies and methods is the one who is likely to succeed. Why ? 21. Which is the better organization for a large manufacturing and seUing business: (a) a vice-president in charge of all personnel, or (6) several personnel managers, one operating under the works manager, another under the sales manager, and another under the office manager ? 34. THE CASE FOR A CENTRALIZED PERSONNEL DEPARTMENT' The failure of managements to perceive the conflict between their methods of handling men and their self-interest was due to their failure to give careful attention to the subject of labor admin- istration, which in turn was due to the concentration of responsibility for formulating and executing labor policies in executives who also were in charge of manufacturing operations and responsible for out- put and costs. The remedy, therefore, would appear to be the addition of a general officer of high rank whose sole responsibility is the formulation and the supervision of the execution of the labor policies of the enterprise. The principal reasons for the addition of such a specialist are: I. Adequate attention is not likely to be given to problems of labor management when their administration is in charge of the factory manager or production manager because the problems of labor administration cannot ordinarily compete with the problems of production for the attention and interest of the executive. In the first place, it is a peculiarity of the problems of production that they are problems of immediate importance which cannot be post- poned. Production schedules must be arranged and maintained. Unforeseen impediments, delays, and problems constantly develop which require immediate attention. The problems of handling men, on the other hand, do not press for such immediate consideration. They can be postponed or neglected without usually producing serious 'Adapted by permission from S. H. Slichter, "The Management of Labor," Journal of Political Economy, XXVII (1919), 816-32. 232 BUSINESS ADMINISTRATION results — immediately. In the second place, defective production arrangements cannot escape notice. They advertise themselves most effectively by a falling-oflE in output, failure to maintain schedules, and a rise in costs. Defects in the administration of labor, however, have no such effective means of advertising themselves, for as a rule they produce no immediate, sharp, clearly defined effects. Unless some- one is carefully scrutinizing methods of labor administration, impor- tant defects may exist indefinitely without their presence being suspected. Finally, executives prefer to concentrate their attention upon the improvement of manufacturing processes because such improvements produce more direct, immediate, certain, and definitely recognizable increases in output or reduction in costs for which the executives receive credit. Improvements in methods of handling men produce no such direct, certain, immediate, and easily dis- tinguishable effects. 2. The preoccupation in the problems of manufacturing proc- esses, technology, and production schedules to the exclusion of adequate attention to labor administration, which occurs when responsi- bility for the conduct of manufacturing and of labor administration is concentrated in the same of&cial, severely hampers the manage- ment in obtaining the good will and loyalty of the workers. 3. A specialist labor administrator is desirable to give stronger representation to the long-run point of view in handling labor. The factory manager and the divisional and departmental heads who are responsible for maintaining production schedules each day and for costs from week to week or month to month are interested prirnarily in more ef&ciency immediately, rather than a year or two hence. They are therefore under a strong temptation to sacrifice eflSciency in the long run for immediate efficiency. The labor administrator is better able to see the long-run connec- tion between the methods of handling labor and the efficiency of the force than is the executive who is struggling each day to get out the production scheduled for that day or to beat his last week's or last month's cost record. More especially is the labor administrator able to do this since these short-sighted policies all hamper him in the maintenance of cordial industrial relations. By representing the long-rim as opposed to the short-run point of view the labor admin- istrator tends to be a protector of a valuable capital asset — the good will of the workers — against tendencies to dissipate it for immediate but temporary benefits. THE ADMINISTRATION OF PERSONNEL 233 4. Specialization of the manajjement of labor is needed to obtain in the formulation of policies more adequate representation of the interest of the enterprise in good industrial relations. The interest of an enterprise is not a simple thing. It is a com- plex thing, a balance and compromise of particular and partially conflicting interests. The judgment of each executive in regard to the interests of an enterprise is affected by the particular interest of the enterprise which it is his function to promote. Sales manager, purchasing agent, auditor, advertising manager, comptroller, factory manager, production manager, chief engineer, each tends to have a more or less exaggerated idea of the importance of the par- ticular interests of the enterprise which are intrusted to him. The creation of a specialist labor administrator imposes a wholesome check upon the undue sacrifice of the interest of the enterprise in good in- dustrial relations to its interest in lower costs and more output. The labor administrator is, of course, as likely to overestimate the impor- tance of good relations with labor as the factory manager and the pro- duction manager are to overestimate the importance of output and costs. He will be counteracted in his extremity by the counsel of the factory and production managers, just as he counteracts the extremi- ties of the factory and the production managers. 5. The maintenance of high standards of practice in handling men requires that the practices of foremen and other minor execu- tives in handling men be under the scrutiny of a high executive who gives these matters his careful attention. This is simply a specific application of a weU-accepted principle of management. By no miracle will high standards of practice in labor administration create themselves. They will be created only by being taught and their observance insisted upon. The minor execu- tives who handle labor, the employment manager, safety engineer, plant physician, welfare manager, head of the instruction depart- ment, foremen and gang bosses, will be assiduous, zealous, and pains- taking in their work in the degree that they are inspired and stimulated to observe high standards and held strictly accountable for the methods they use and the results they produce. 6. Specialization of the administration of labor is needed to enable the management of labor to be conducted with a keen realiza- tion of the workmen's point of view and an accurate understanding of their psychology. Not only are non-specialist executives, with their minds concentrated on manufacturing processes, output, and 234 BUSINESS ADMINISTRATION costs rather than on the men, and coming into close contact with the men but little, woefully ignorant of the minds of the men, their psychology, and their point of view, and also often Uttle interested in informing themselves of these matters, but the nature of their work builds up in their minds a point of view so different from and even opposed to that of the workmen that even when they seek to understand the point of view of their men they are frequently unable to do so. 7. Specialization of the management of labor is needed to reduce the prejudices on the part of the management in dealing with ques- tions of labor policy. Employers have been severely handicapped in handling labor by fixed ideas which have blinded them to their interests and caused them to take stands which gained them nothing but the ill will of their men. Numerous examples of such prejudices can be cited. The philosophy of the drive policy, that the only way to get much out of labor was to "treat it rough," is an example. A corollary of this, that attempts to obtain the good will and co- operation of labor by liberal treatment are futile, since labor will simply take advantage of liberal treatment rather than respond to it, is another example. The well-nigh universal rule that in a dispute between a workman and foreman the foreman must be upheld, right or wrong, in order to maintain discipline has caused much friction and discontent. Specialization of the management of labor is of course no guar- anty that the administration of labor will be controlled by calrefully determined self-interest, but the specialist administrator is less likely than a non-specialist to be guided by traditional attitudes. Non- specialists lacking time and inclination to investigate problems of labor policy naturally fall back on traditional points of view. The specialist has both the time and the interest to investigate, and being charged with the specific function of maintaining high standards of labor administration, feels a peculiar sense of responsibility for the methods he uses and the policies he pursues. Study of the problems of labor administration constantly reveals to him their complexity and the danger of being guided by dogmat^ic conclusions. 8. Success in getting problems solved depends largely upon the energy and persistence with which they are attacked. Solutions of extremely difficult problems are obtained as a rule only by someone's demanding that a solution be found in spite of the apparent impossi- bility, insisting in the face of seemingly insurmountable obstacles THE ADMINISTRATION OF PERSONNEL 235 that there must be a way of overcoming the dfficulties, and causing the problem to be studied until a solution is found. There can be no reliance that the exceptionally difficult problems of labor adminis- tration will be attacked in this manner as long as the executive responsible for labor administration is a non-specialist whose interest in labor administration is quite secondary. The preoccupation of the non-specialist with other problems causes him readily to accept the exceptionally difficult problems of labor administration as unsolv- able, instead of insisting more emphatically than ever that they must be solved. 9. EfB.cient administration of labor requires possession of special- ized knowledge and command of a specialized technique. The handling of men is not, as is sometimes supposed, simply a matter of personality and of ability to understand human nature. Many problems in labor administration require, not merely sound intuition or instinct in dealing with men, but ability to solve problems of a more or less technical nature. This renders desirable a knowledge of practices and policies which have been successful in solving the same problems elsewhere. The fund of experience on the various phases of labor kdministration is so large and growing so rapidly that only a specialist can hope to be familiar with it. The subordinate specialists in charge of specific phases of labor administration carmot all be expected to be of strictly first-class executive ability. Though suitable for executing policies, they may not be suitable for determining fundamental labor policies. They are likely to lack the reqviisite shrewdness of judgment and boldness and originality of imagination, to be too timid in their conceptions of what the labor administration can hope to accomphsh and therefore of what it should endeavor to accomplish, and to be dominated by tradition and prejudices. In the field of labor administration par- ticularly, where traditional prejudices are strong and firmly estab- lished, is someone with bold and original imagination and willingness to break with the past needed to formulate policies. ID. Although the essential thing in winning the confidence and co-operation of a force is a liberal labor policy, the personality and character of the executive who handles labor is an important factor. The handling of grievances, one of the most important and most deUcate tasks of the labor administrator, illustrates the need in the labor administrator for highly specialized qualities of personality. Among these are insight into other men's points of view, ability to 236 BUSINESS ADMINISTRATION put one's self in anotiier's place, even in an opponent's place, ability to win the confidence of other men, particularly the complainant, who is likely to regard all representatives of the management as prejudiced against him and hostile to him and as intending to deceive him rather than to give him fair treatment, ability to draw frank statements from timid or hostUe witnesses, and, most difficult of all, ability to convey to the complainant the point of view of the manage- ment, to make him see the management's side, and to convince a complainant who is in the wrong that he is wrong and that his com- plaint is not being arbitrarily decided when it is decided against him. 11. Specialization of labor administration is needed to bring into the highest councils of the management more thorough knowledge of and stronger interest in the more fundamental though less immedi- ately practical aspects of the labor problem. The typical manager of a non-union enterprise is inadequately informed in regard to the labor movement, its practices, policies, ambitions, philosophies, strength, prospects, tendencies of change within it, and the reasons lying behind these specific phases of the movement. He is hampered in obtaining information by publications of employers' and manu- facturers' associations and speeches of their officers and attorneys, which too often foster intolerance and prejudice rather than spread information. 12. Specialization of management of labor means in time the creation of a body of professional labor administrators. This means the creation of a professional spirit, professional ideals,, and profes- sional standards of conduct. This professional spirit and these professional standards may be expected to exert a liberalizing influ- ence upon the standards of labor administration. See also p. 118. Organization of the Personnel Department, p. 124. Functions of the Personnel Department, p. 126. Another Statement of Functions. 35. THE PLACE OF THE PERSONNEL DEPARTMENT IN THE BUSINESS ORGANIZATION' It is the purpose of this reading to consider how policy is best adopted, transmitted, and put into effect. Especially are we con- ' Adapted by pennission from Ordway Tead and H. C. Metcalf, Personnel Administration, pp. 374-92. (McGraw-Hill Book Company, Inc. 1920.) THE ADMINISTRATION OF PERSONNEL 237 cerned to see how personnel policy or the policies of other depart- ments where they are afiected with a human interest, are "put across." The problem is to find effective ways of interdepartmental co-ordination; to see how the ideas of staff experts can be made to function in the line departments; to see how the several staff experts can work in harmony and not at cross purposes — can work with prior understanding of a common aim. FUNCTIONAL CHART SHOWING CO-ORDINATION OF PERSONNEL AND PRODUCTION ADMINISTRATION BOAPD OFOIRECrOfiS BPl/lATm COMffrTTEE Pradutfian Manager- Sales Managa- Treasurer fvrmeni Fspresrr'tatiyr Empfayees 'RmrestntaHyes nmresfi 1.1 r-i — \-^~^-=\ > -T^-^" . — L^ [/p/T/«CTJf^>«)y|->-+ — \Phnpi'rgOtrari'wn\ The principle underlying sound co-ordination. — Every special interest directly affected by decisions concerning the operation of any enterprise or function should he a party to the making of those decisions. The principle is immensely relevant to this discussion because it seems to us fundamentally true that any policy which is adopted is more likely to be a reasonable and wise one if those whom it affects help to shape it; that the transmission of policy to the affected parties takes place most naturally when those parties or their dele- gates are present when the policy is adopted, know its imphca- tions and the reasons for its adoption, and hence can interpret it to their fellows; that the policy when so adopted, so transmitted and 238 BUSINESS ADMINISTRATION interpreted, has a better chance of intelligent, willing and thorough execution, than if it is handed down as a fiat from the management. The determination of general policy.— V^e shall assume that the president of the corporation is at the same time a member ex- ofl&cio of the board of directors and the executive of the factory organization. Immediately associated with him there will be four major, staff executives — the personnel manager, production manager, sales manager and financial executive. For the determination of general operating poUcy, this group of five would constitute the nucleus to which others would be added, of an Operating Committee. This operating committee would meet at least weekly; indeed in some plants it has a daily morning conference. And its membership, if it conforms to our suggestions, will be as follows: The Chief Executive, the Production Manager, the Personnel Manager, the Sales Manager, the Treasurer, the Foremen's Repre- sentative, the Workers' Representatives. The personnel committee. — If it is understood that beyond the determination of broad policies the work of the operating committee does not go, there is need for a body in each of the staff branches of management which will decide how their policy shall be carried out and will acquaint the affected groups with proposed new methods. Policies which relate to personnel should, we propose, go for de- cision about methods of execution and delegation of duties to a Personnel Committee. The personnel committee is primarily advis- ory to the personnel manager. The executive responsibility lies clearly with this functionary. The composition of such a personnel committee might well be as follows: The Personnel Manager (chairman), the Production Manager, the Assistant Personnel Manager, the Foreman's Representative, the Workers' Representatives. Board of personnel directors. — Within each staff department Ues a further field for common understanding and agreement upon policy and procedure; and in the personnel department the need for a united stand and a human point of view are obvious. For this reason, it has been found useful in most personnel departments comprising more than two or three workers to have a definite organi- zation within the department. This assures regular conference between the personnel chief and his executives on employment, health, safety, training, research, service and joint relations, and secures the benefit of the interchange of technical ideas and of the THE ADMINISTRATION OF PERSONNEL 239 wholesome expert criticism of department colleagues. We shall refer to this group as the Board of Personnel Directors. Determination of production policies. — Because production policies so often affect the working force directly, there are sound reasons for organizing their adoption and transmission in a manner similar to that just considered in relation to the personnel department. This would mean the creation of a committee, called perhaps the Production Committee, composed as follows: The Production Manager (chairman), the Personnel Manager, the Assistant Production Manager, the Foremen's Representative, the Workers' Representatives. And where special problems were up, such other executives as the head of the planning department, the chief engineer, thee hief chemist, etc., would be called in. It is the function of this committee to advise with the production manager about methods of putting new production policies into effect — the executive power remaining, of course, with the production head. Determination of sales policy. — In the form of plant organization which this chapter assumes, general sales policies would be decided in the operating committee. How drastic a proposal this is, may not be at first appreciated; for many firms are still unconscious of the extent to which they allow the sales organization to dictate to the rest of the management. If the salesman can get the orders, it has formerly been true that the shop will be turned on end if necessary to fill them; if he cannot get them, the rest of the organization sits by paralyzed. The point of view about the selling policy which is increasingly recognized as sound is at almost the other extreme from this. The sales force is being called upon to sell what the production force can make. And this certainly comes nearer to a sensible relationship of sales to production than the arrangement now so frequently met. It is probably true, at least for the present, that all the person- nel manager can do to oppose a sales policy which spells irregular work, rush orders, overtime work, small-lot orders, etc., is to use his influence and knowledge in the operating committee. But this will be a valuable educational service and he will soon find support for his advocacy of regularized production from the production manager, foremen, and workers. For it will soon be obvious to these groups that on all such matters as changes in styles and specifications, decisions about amounts of finished goods to be kept on hand, quality and amount of goods that can be dehvered on certain dates, these groups should be consulted. The adoption of improved sales 240 BUSINESS ADMINISTRATION methods will then devolve upon the selling staff; and they will find, as our next chapter indicates, an appreciable body of suggestive experience already at hand to help in devising a sales policy which regularizes orders and demand. Determination of financial policies. — Obviously pohcies which affect the balance sheet are likely to work back and influence the pay-roll — and perhaps other elements in the personnel procedure. Companies should realize how intimately connected with per- sonnel matters their financial problems are. And even beyond that, managements shoidd now consider the benefits in increased knowl- edge, confidence and sense of security, which a consideration of financial pohcy with employees is tending to bring. Each day the newspapers carry financial stories and advertise- ments of the profit-making ability of this or that stock. The workers, or the workers' representatives, see these stories. And having no other knowledge on which to base any more exact opinion, they necessarily take them at their face value, draw their own conclusions and act accordingly. Illustrations are plentifully at hand to show that where managements have taken workers fuUy, freely and sin- cerely into their confidence on financial matters the results have been mutually satisfactory. Charts of co-ordination. — Organization charts can serve a useful purpose in keeping everyone's thinking straight about the correla- tion of functions. But confusion will be avoided if it is recognized that charts are of three distinct types to convey three different kinds of information. And until aU three are understood, the whole story of the distribution of executive work and authority is not apparent. There is, first, the atUhority chart, which shows the Une of author- ity, of pohcy determination and execution. There is, second, the chart of functions, which shows what func- tions each department is supposed to perform. And, third, there is the personnel chart, which shows how the several functions are distributed among the executives. Usually, the first chart can be combined with the third to show the line of authority in terms of those who exercise it. To help make graphic the proposals of this chapter, we have included in a chart our general conception of the interrelation of the different functional groups of the personnel and production depart- ments. To keep the -chart as simple as possible we have not shown how these two departments might be co-ordinated with sales and finance; nor have we included any relationship to outside bodies such as would be entailed if a collective bargain existed with a labor union. THE ADMINISTRATION OF PERSONNEL 241 36. ORGANIZATION CHART OF PERSONNEL WORK IN ONE INDUSTRIAL PLANT 242 • BUSINESS ADMINISTRATION REFERENCES FOR FURTHER STUDY Jones, The Administration of Industrial Enterprises, chaps, x-xv. Shaw, An Approach to Business Problems, chaps, vi, xii. Tead and Metcalf , Personnel Administration. Kelly, Hiring the Worker. Allen, The Instructor, the Man and the Job. Webb, The Works Manager Today. MarshaD, Readings in Industrial Society, chap. ix. CHAPTER IV THE ADMINISTRATION OF MARKET PROBLEMS Purposes of this chapter: 1. To see the work of marketing functionaries as one phase of the modern co-operation of specialists. 2. To secure an elementary knowledge of present-day market functions and market structures. 3. To get some appreciation of the administrative problems and control devices in purchasing and in selling. A. The E^nitting Together of Modern Specialists' Let us begin by getting a view of the part played by the purchasing agent and the sales manager in our modem economic society. Briefly stated, their function is that of aiding in knitting together our modern specialists. Let us see what this means. " Specialization is fundamental in economic organization, because it is the means by which man increases the return to a given amoimt of work," says the English economist Clay. This is the nub of the whole matter. Man in his active adaptation struggle is always eager for devices which will increase productivity, and probably none has been more fruitful than specialization. We know already the prime reasons why it increases productivity. They are well stated by Clay: "It brings about this result in two ways, by subdivision of tasks and by repetition of tasks. Subdivision results in operations easier in themselves, repetition enables operations to be performed with greater ease." We know also from our historical study that there must be a market wide enough to absorb the increased produc- tivity before it is worth while to specialize. I. Ours is a society of specialists. — ^Historically speaking, one of the earliest forms or manifestations of specialization was the differen- tiation of occupations. Even in the mediaeval manor, where nearly everyone engaged at one time o^ another in practically all of the manorial tasks, there was some specialization of this kind. There was pretty certain to be a priest and a miller, and quite likely a ' Adapted by permission from L. C. Marshall and L. S. Lyon, Our Economic Organization. (The Macmillan Company, 1921.) 243 244 BUSINESS ADMINISTRATION blacksmith or a carpenter. With the rise of towns there developed clothmakers, barbers, millers, innkeepers, merchants, shipwrights, pinmakers, tanners, and coopers, to mention only a few of them. Occupations grow or wane, rise or disappear, in keeping with men's wants and with changing economic organization. As time went on, occupations becarne more and more numerous, more and more specialized. With the coming in of the factory system some of them rose to the position of great industries. For example, the mediaeval shoemaker has been almost supplanted by the modern shoe-manufacturing industry; the mediaeval cooper by the great cooperage plants. Today we see our social resources, land, labor, capital, and acquired knowledge, divided up or apportioned among great industries, which are so numerous that a mere Ust of them would cover pages. It would be tiresome to enumerate them. In- stead, let us look at the diagrammatic classification of the specialized productive enterprises of a modem community, as set forth in the early pages of this book (see p. 2). It could be subdivided much further, but as it stands it is very useful in giving us a bird's-eye view of the specialized enterprises of today. The story of the differentiation or specialization which has occurred since the days of the manor can be told in another way, this time emphasizing, not our groupings into Hues of industry, but the differentiation of the tasks of the worker. Put in the form of a diagram it would run this way: UNSPECIALIZED LABOR divides into TRADES which divide into PROCESSES which divide into DETAILED OPERATIONS Let us begin again with the unspecialized inhabitant of the manor — unspecialized, that is, except for the priest, the miller, the blacksmith, and the carpenter. The next stage is the differentiation into trades or crafts, some of which have been mentioned above. In some cases the market is not wide enough and the demand for the product not great enough to justify any further differentiation; for example, we have even today in rural districts the all-around carpenter; in the country town or the suburb we have the physician with a general practice, or the lawyer who handles all kinds of cases. In other cases, however, a wide market existed and trades became differentiated into processes. We know how the expanding market THE ADMINISTRATION OF MARKET PROBLEMS 24s led under the domestic system to the differentiation of the old cloth- maker into the spinner, the weaver, the dyer, the fuller, the shearer, and others. The smith became differentiated into the goldsmith, the silversmith, and the blacksmith. Abundant examples of the same process exist in our society today. In our larger cities general medical practice has frequently been broken up into the work of the eye specialist, the ear specialist, the heart speciahst, and others. The lawyer has become the corporation lawyer, the patent lawyer, and the claims attorney; the all-round machinist has differentiated into quite a range of "specialists." The case of the machinist is on the very border of the fourth stage of development, when processes become split up into their small constituent operations. This stage is not often reached in the realm of professional services, but it is the typical state of affairs in machine industry under the factory system. In the large plants of the meat-packing industries, for instance, where more than 1,000 cattle a day are killed, each of several hundred butchers, helpers, and laborers performs some one specialized detailed operation in the course of turning the live animal into dressed meat. The differentiation into enterprises and the differentiation of trades, processes, and operations have been discussed separately, but they are not separated in our actual want-gratifying activities. Some idea of how they are interwoven and intertangled in ordinary business life may be secured if you wUl think back over the preliminary steps involved in your making such a simple thing as a wooden footstool in a manual-training class. Take, first of all, the wood which you work up. Let us go no further back than the cutting down of a tree in a forest. This is done by one specialist. Later the tree is sawed into rough boards at a sawmUl by another group of specialists. It is then bought by a wholesale lumber dealer; transported by another group of speciahsts; sold to a retail dealer who has a mill for planing it and working it up into more appropriate shapes; sold by the retail dealer to your school; transported through the streets by a draying concern. The material has thus passed sticcessively through the hands of a range or series of specialists who can be classified from one point of view in terms of the producing industries of society, such as lumbering, transporting, and merchandising, and can be classified from another point of view in terms of trades or processes (such as teamster, brakeman, telegrapher), all of whom were engaged 246 BUSINESS ADMINISTRATION in preparing wood for your use. A similar series, of course, exists for each tool you use, for nails, glue, or other material. But this is only the beginning. Every one of the specialists in yoiu: original series or Succession reaches back into one or more other series. Take, for example, the sawmill which sawed out your board. It is the end or culmination of the work of several series of specialists reaching back into the forest, the ore mine, and the cattle industry. It might well happen that the specialist in the ore mine or in the cattle industry who took part in the series culminating in the saw- mill also took part in the series culminating in your hammer, or the leather you used in upholstering the stool. This illustration is typical. It shows how our specialization runs in great ranges or series which criss-cross one another in bewildering complexity. We must try to find out how order can exist in such a seeming chaos; how it can be that a hammer is at hand when you need it; that nails are procurable when you need them; that every specialist in every series is, speaking generally, able to proceed in his work without interruption or delay. In these ranges or series we find certain speciaUsts who are called functional middlemen. What this means can be better seen if we use historical perspective. When we think of the mediaeval merchant who sold either in England or abroad, there comes to our minds an unspecialized merchant who fared forth with his pack, his boatload, or his shipload of goods, seeking the people to whom he could sell at a profit. He performed a wide range of tasks. He displayed and advertised the goods to the buyers, he furnished the funds for financing his business, he collected the payments, he acted as pohceman or soldier to protect himself and his goods, he bore the risks of fire, theft, accident, and loss. The variety of his functions was certainly great. As new markets were opened up, both at home and abroad, and tlie volume of EngUsh trade grew, dnterprising men began to see that a profit could be made by carr3dng on certain hues of business which would be an aid to the merchants by relieving them, of course for a payment, of some of their many tasks. These enterprising men specialized in certain functions. The specialization of function which began then has continued down to our own times. The man- ner in which the functions performed in trade by the mediaeval merchant have split up among a group of specialists can be shown by a diagram. THE ADMINISTRATION OF MARKET PROBLEMS 247 The mediaeval merchant had to perform the functions of Transporting Protecting Insuring Storing Advertising Selling Gathering information .Financing, etc. These functions are now per- formed by specialized middlemen Railroads, ship lines, etc. The state police, Army, Navy, etc. Insurance companies, etc. Warehousemen Advertising agencies, newspapers, and other media Special salesmen Trade papers, govern- ment agencies, etc. Financial institutions, etc. We specialize, not only by industries, by processes and operations, and in series; we specialize also by localities. As everyone knows, in the United States oranges, lemons, and other citrus fruits are grown mainly in Florida and California. Minnesota specializes in wheat. Iowa and Illinois specialize in corn-raising. Cotton is raised on the fertile land and in the warm climate of the South. Northern Michigan and northern Minnesota have localities which specialize in the production of copper ore. The states of the West and Southwest are specialists in producing livestock. Cotton manufacturing is almost confined to three districts, New England, the Middle States, and the South. Since the modern consumer, himself a specialist, actually does succeed in gratifying wants and since the modern producing specialists actually are able to carry on their productive activities, it is clear that the specialists of modern society, whether they be individuals, trades, business units, or localities, are correlated into a working system; that they co-operate with one another in production and in want-gratification. 2. Modern specialists are knitted together "by authority" and "through eocchange." — Fcr purposes of this study there are two main kinds of co-operation: co-operation by authority, and co-operation through exchange, both of which play important parts in our economic organization. The members of a football team have their specialized 248 . BUSINESS ADMINISTRATION tasks which they perform, when practicing, under the authoritative direction of the coach. During their games, they are under the authority of their captain. A commimistic society, where a central committee apportioned us to various tasks and directed the gratifica- tion of our wants, would be another illustration of the co-operation of specialists by authority. We must not suppose that such an illustration is purely hypothetical. In our own country there have been dozens of commimistic colonies or societies, such as the Shakers, the Oneida Community, the Harmonists, the Amana Society, Brook Farm, and Icaria, which have been operated on this basis. Some have been short-lived, others long-lived; many have been abandoned, some are still in existence. One thing is noticeable in all cases of co-operation by authority. It is likely to be a quite definite process, with everyone aware of the scheme of organization. Co-operation through exchange, on the other hand, is not Ukely to seem so highly organized; the parties concerned are not always fully aware of what is going on. In our discussion of the localization of industries we saw a case of co-operation through exchange. It was very effective co-operation which was sometimes world-wide in scope, but probably very few of the specialists con- cerned realized that they were co-operating. They probably thought, if they concerned themselves about it at all, that they were simply selling their goods. So they were; but though they were simply selling goods in the market, these goods moved to poitits of need (some consumer or some producing unit) as truly as if the process had been ordered by some- one in authority. Those participating in the market transactions were as truly agencies of co-operation as was the central committee of our hypothetical communistic society. The essence of the whole matter is this: Specialists can produce more than non-specialists; through exchange or by authority (and it is mainly through exchange in our society) the enlarged product becomes available for all. It is mainly exchange which bridges the gap created by specialization between producer and consumer- between trade and trade; between firm and firm. Its goal is the making of the product of each avaU- able for all. The co-operation — the correlation of speciaUsts — which occurs within a business unit may fairly be described as co-operation by authority. We have seen that the central figure in this process is the business manager. We have also seen that he and his sub- THE ADMINISTRATION OF MARKET PROBLEMS 249 ordinates are responsible for the relations of that unit with the rest of the world, but it has perhaps not been made entirely dear through what channels its co-operation with the rest of the world is carried on. In the main, it is through channels of exchange. The rest of the world furnishes (sells) it the materials and equipment for produc- tion. It furnishes to the world (sells) its product — shoes, let us say. It is quite clear that the specialization of men and processes which we have been studying is a complete antithesis of self-suflSiciency in want gratification. It can occur only in a group or society; only when specialists can be "organized" so that the results of the special- ized efforts of each can be made available for all. Our study would not be complete without a recognition of the part played by social control in this process. We have given credit, as was due them, to the manager of the business unit, to the middleman, and to the functional middleman, but we must keep in mind that all of them performed their tasks according to "rules of the game." Habit, custom, tradition, public opinion, codes of business ethics, all play their part. The state, not only by direct participation as in the case of the post-office, but also by such regulative activities as the formula- tion of rules of business law, the provision of a monetary system, the control of transportation facilities in the interests of all, the super- vision of conditions of labor even to the extent of fixing minimum wages, to mention only a few of literally hundreds of cases, furnishes an essential part of the business environment. 3. The term market here used in a narrow sense.- — No one should be misled by the predominance in the foregoing paragraphs of illustra- tions drawn from the marketing of ordinary goods. "The market" is as truly a means of the co-ordination of specialists when laborers are hired, land is rented, money is borrowed, corporation stock is issued, or hotel lodgings secured as it is when shoes are sold by the manufacturer. "The market" is a complex social institution, based in our society on the right of private property, which is used in mul- titudinous forms to aid in bringing about the co-operation of specialists through exchange. .In strict logic, the manager who hires labor or who borrows capital, is in relationship to "the market" as truly as is one who sells books. It is accordingly a concession to popular usage of terms when, in this chapter, we limit our discussion to the buying and selling of ordinary goods. Such limitation contains no untruth; it merely fails to tell the whole truth. No harm has been done, how- ever, if we realize the limitation under which our discussion proceeds. 2SO BUSINESS ADMINISTRATION PROBLEMS 1. What preceded "specialization? Was there always specialization of industry into primary and secondary industries ? 2. In what ways is specialization able to increase productivity? 3. "In production by specialists there are two leading considerations. One is differentiation, the other is unification." Explain. What determines the limits to which differentiation may be carried ? What factors make for effective unification ? 4. "Those participating in market transactions are agencies of co- operation." Explain. 5. Was there co-operation in the family economy? Would there be co-operation in communistic society? Would co-operation in these cases be effected through exchange ? 6. "Exchange does not really help. Indeed, it hinders. Time and energy are spent in merely passing goods on." Do you agree ? Sum- marize the social benefits of exchange co-operation. 7. When people congregate at a certain place and exchange goods by barter, do they constitute a market ? 8. Is the retail grocery a market ? Is the wholesale grocery store a market ? Is the place the market ? Suppose the wholesale store has no stock on hand but consists merely of an office, and office force, and means of communication with producers and retailers. Is it a market ? 9. Draw up a definition of market. ID. Our society is often spoken of as a market society or a society of market structures. Show why these terms are appropriate. Would they have been equally appropriate if applied to English society in the manorial period ? 11. What is meant by the expression "functional middlemen" ? Name as many different functional middlemen as you can. What functions - originally performed by merchants are still performed by merchants today ? 12. "The social function of the business manager." What do you con- ceive it to be ? 13. "The social function of the sales manager, or of the purchasing agent." What do you conceive it to be ? 14. Explain how an understanding of his social function enables a purchasing agent or a sales manager to be a more competent business man. Be specific. B. Market Forces, Marketing Functions, and Market Structures If we have any one basic purpose in this chapter, it is that of getting^aji appreciation of the administrative problems and control devices found in modern purchasing and selling. It may accordingly THE ADMINISTRATION OF MARKET PROBLEMS 251 seem that we should at once pass to such topics as "Sales Manage- ment for a Manufacturing Business" and "The Work of the Purchasing Agent" instead of deferring their treatment, as we do, to pages 308 to 362 and 362 to 384 respectively. If, however, we should pass at once to specific discussion of these topics it would be a case of more hurry and less haste. We are studying business administration, which includes poUcy formation and is not confined to control of routine operations. Policy formation involves business judgment, and business judgment can be sound only when it is formed with as much awareness of background considerations as of immediate issues. It is worth while, accordingly, to make a survey of the forces which have molded and are molding "the market world" in which the modern manager operates and which largely determine his judgments and largely condition his activities. It is worth while, also, to see marketing activities in terms of the functions which are being per- formed so that we may have a basis for judging the relative worth of various activities by measuring their contribution to some basic function. Finally, in the marketing field, as in other fields of human endeavor, ranges of structures (mail-order houses, jobbers, depart- ment stores, etc.) have come into being which are available for the use of the manager. Before he can select wisely among them, how- ever, he must see them not as isolated facts but as devices (frequently alternative devices) which have been shaped by forces to accomplish ends. If he views the structures merely as structures they seem to be a miscellaneous, overlapping, self -contradictory, confused mass. Viewed in terms of forces and functions, however, order comes out of the seeming chaos. In this present section on " Market Forces, Marketing Functions, and Market Structures" an attempt is made to give this background necessary for inteUigent discussion of specific issues in purchasing and selhng. There is a single selection (Selection i) dealing with market forces and another selection (Selection 2) dealing with market func- tions. All the rest of the section is devoted to market structures. What are these structures ? We begin by noticing (Selection 3) the methods of sale available and the relation of advertising to these methods. A hasty look is taken (Selection 4) at organized markets. We then pass to a study (Selections 5-13) of the oatstanding structiures which are utilized in the marketing of ordinary goods designed for individual consumption, the main attention being given to manu- factured, rather than agricultural, commodities. Selections 5, 6, 7 252 BUSINESS ADMINISTRATION deal with the structures used in "wholesaling." Selections 8-13 are concerned with retailing and here the most space is given to " massive ' ' retail trade — to the mail-order house, the department store, and the chain store. We omit, except for passing notice, the co-operative movement, both in wholesaling and in retaiHng. The omission is not intended to imply that the subject is unimportant. On the contrary, associative activities of business men are very important and their importance is growing rapidly. The discussion closes with a selection (Selection 14) showing that different structures are found useful in marketing different classes of commodities and with two selections (Selections 15 and 16) dealing with the breaking away, by marketing functionaries, from the orthodox system of distribution under the strain of the events con- nected with the second phase of the industrial revolution. Perhaps there should be emphasized again the fact that in this chapter we are using the word maitet in a narrow sense (see p. 249). In accord with this use of the word market, we use the words "market structures" in a correspondingly narrow sense and exclude from discussion such structures and institutions as are, in highly specialized ways, dealing with transportation, financing, risk bearing, information gathering, etc. This narrowing of our attention to brokers, jobbers, wholesalers, retailers, etc., and this exclusion of banks, insurance companies, railroads, trade journals, etc., will do no harm if we can only keep it clearly in mind that the narrowing has taken place. We must remember that we are dealing with only one set of samples (a very important set, it is true) of our market structures. Perhaps, too, it should again be emphasized that the matters in this section are background material for the later sections on "Sales Management for a Manufacturing Business" and "The Work of the Purchasing Agent." The student should keep his mind pointed toward these sections. PROBLEMS 1. "The presence of highly specialized capital in modem industry makes it difficult to transfer from one industry to another and consequently makes it necessary for the manufacturer to study control of his market." Is this true ? Is it the whole truth ? 2. In 1800 the number of days of total formal schooling of the average American citizen was 82. In 1840 it was 208. In 1916 it was 1,180. What bearing have these facts upon the evolution of marketing methods ? THE ADMINISTRATION OF MARKET PROBLEMS 253 3. Cite illustrations where developing technology has influenced marketing methods. Is the refrigerator car a case in point ? 4. Tabulate definite reasons why a knowledge of the economic develop- ment of the last two hundred years will color the thinking and shape the acting of a sales manager. 5. "The trust movement, scientific management, schools of commerce, and imperialism are merely different phases of a single movement." Do you agree ? 6. "Integration of industry and interlocking directorates have arisen in part out of marketing problems." Explain. Consult Selection 15. 7. "Large-scale operations in marketing have their roots down in the finan- cial organization of society which has come into being." Explain. Be specific. Are their roots down in other soils also ? 8. The following have been listed as advantages of large-scale produc- tion: (a) handling a large mass of goods; (6) purchasing over a wider market; (c) securing more competent and experienced buyers; {d) greater probability of regular demand; (e) greater ability to bear the risk of goods left on hand; (/) more effective advertising of goods; (g) more competent and experienced commercial travelers; (h) greater ease of securing high firm reputation; (j) greater variety of goods for individual taste; (j) better utilization of the principle of division of labor; (ife) better mechanical equipment; (/) cheaper power; («j) better utilization of waste; (n) lower charges for transportation; (0) better financial arrangements; (p) better managerial ability; (q) ability to maintain research departments; (r) the saving of cross freights. What ones of these apply to factory production? What ones apply to marketing ? < 9. Be sure you know in considerable detail what is meant by these market- ing functions: (i) assembling; (2) storing; (3) assumption of -risks; (4) financing; (5) rearrangement; (6) selling; (7) transportation; (8) pricing; (9) information; (10) title transferring. 10. From what you know of early community life could there have been an assembling function then? What do the services of assembling include ? Mention some of the middlemen who assist in carrying out these activities. 11. Producers have to perform the storage function to a certain extent, but they shift it as much as possible to middlemen. Why so ? Under what conditions does a producer perform the storage function himself ? 12. What are the reasons for the growth of specialized warehouses? Has developing technology had anything to do with it ? 13. "The consumer when he buys in large quantities, performs part of the marketing function of storage." "The tendency has been for the consumer to shift this function back more and more to middlemen." What reasons could there be for the second situation ? 254 BUSINESS ADMINISTRATION 14. Enumerate the kinds of merchandising risks. Who are the middlemen taking care of them ? Do they care for them ftilly ? 15. "The brunt of the financing burden is borne by the wholesale trades." Why or why not ? 16. "Selling is the most important of the marketing functions and the most difficult one to perform." Is this true ? What are the elements of selling ? 17. You are about to engage in manufacturing commodity x. Do questions I to 16 raise issues which you need to understand ? 18. Under what circumstances or in what types of cases are we likely to have organized markets ? 19. Ascertain the meaning of such terms as jobber, selling agent, mUl agent, factor, wholesaler, commission men, brokers, manufacturing jobbers, semi-jobbers, buying syndicates, co-operative jobbing, orthodox method of distribution. Why are there so many different tj^es of middlemen ? Can terms be sharply differentiated in this field ? 20. What advantages are there in selling direct to jobbers ? 21. What economic forces have brought about the development of the manufacturing jobber ? What motives underlie co-operative jobbing ? 22. "The retailer outside of the larger city department stores could not survive withbut the aid of the jobber." Explain what is meant. Of what importance is it to jobbers that the retailer be a good merchant ? 23.- "Buying associations have been organized by the 'regular' retailers of many cities and districts to meet the new condition." Whom are they fighting ? 24. What advantages does the use of a branch house for distribution to retailers possess over the use of jobbers ? What disadvantages ? 25. What reasons can you give for the growth of mail-order selling ? 26. ".The mail-order house has used the right kind of publicity. The retail dealer, generally speaking, has not. This is why the catalogue house many times has the better of the argument. It has been repeatedly demonstrated that the retail store using proper advertising backed up by values, prices, and service, can simply walk away with the busi- ness, leaving the mail-order house far behind." Explain. 27. "The modem department store differs, as day differs from night, from the old-time general merchandise store." Explain. 28. If the department store divides itself into sections, each having its own selling and buying staffs, what economies can be effected ? 29. What advantages has the department store compared with small retail one-line estabhshments ? What disadvantages ? 30. What tjrpes of chain stores are there ? Why has each typ^ developed ? 31. What are the advantages and disadvantages of the chain store? 32. What general considerations are appUcable to the development of mail- order houses, department stores, and chain stores ? What special con- uderations are particularly appUcable in each case ? THE ADMINISTRATION OF MARKET PROBLEMS 255 33 Does the department store eliminate the jobber? Does it eliminate the jobber's functions? Answer the same questions for the chain store and the mail-order house. 34. Does the chain store eliminate the retail store? In case of a manu- facturers chain is jobbing eliminated ? 35. Does the co-operative scheme eliminate the retail store? Jobbing? 36. What are the advantages and disadvantages of massive retail trade as compared with small scale retail trade in the task of lowering costs of distribution ? 37. "As a distributing device the public market looks simple — almost ideal — ^but the conditions of village and country life, of simple family wants, and of home industry, have largely passed away, and with them has gone the need for the public market." Do you agree ? If so, why are there still public markets ? 38. Can the middleman be eliminated ? Answer fully. 39. You are about to engage in manufacturing commodity x. Do questions 18 to 38 raise issues which you need to understand? 40. Let us assume that costs of distribution are, speaking generally, very great in comparison with costs of manufacture. Can you construct a practical program for lowering these costs for the country as a whole ? 41. "It is a mistake to try to discuss market structures in general. They vary from case to case and according to the work to be done." Defend or attack. 42. "The reason why manufacturers have middlemen market their goods at all is that they, the middlemen, can perform the' marketing functions more cheaply than can the manufacturers themselves." How is this possible? Is the case for a large manufacturer any different from that of a small manufacturer ? 43. Other considerations than mere cheapness or economy in marketing are often controlling motives for a manufacturer to assume the marketing functions." What are these "other considerations" ? 44. "Well may a manufacturer hesitate before he undertakes to develop the organization and assume the expense of performing the marketing functions." What considerations enter into his decision ? 45. "The tendency in modem merchandising seems to be for the manu- facturer to assume more and more of the marketing functions." What grounds has the writer for making this statement ? 46. "The great initiatives in distribution during the last 30 years have all been breaks with merchandising traditions." Illustrate by specific example what the author has in mind. 47. What is the jobber mix-up ? "The whole mix-up has been caused by the attempt of some manufacturers or wholesalers to cut out one or more steps in the old-time distributive process, which was from manufacturer to jobber to retailer to consumer." Why are such attempts being made ? 48. Draw up an outline of the main points in this section. 2S6 BUSINESS ADMINISTRATION I. THE FORCES BEHIND MODERN MARKET STRUCTURES The outlines of modern marketing structures will be more clearly defined in our minds if we have some appreciation of the forces which have shaped and are now shaping these structures, for, here as always, institutions have emerged and are emerging in terms of needs and of shaping forces. We have already taken (see pp. i6 and 153) quick surveys of the forces that have been responsible for the break-up of the medieval economy and the emergence of our present economic organization. It is desirable, for our present purposes, to sketch in more detail some of the outstanding happenings of the last one hundred and seventy- five years. We know that by 1750 EngUsh economic development had reached a stage which made possible that sudden change which we now call the Industrial Revolution. Governmental stability had created an environment in which political uncertainties, with their attendant hampering of economic development, were at a minimum; the beginnings of modern experimental science had laid the founda- tions for the development of modem technological industry; the expansion of the market (which had been reaUy quite considerable in the period frorn 1300-17 50) had developed and had tested com- mercial devices and structures; financial institutions had reached the stage where they could make significant contributions to the capital formation necessary under a regime of machine industry; risk-bearing institutions, notably the exchanges -and insurance com- panies, were ready to play their part; in brief, the stage had been set for the entrance of the new economic order. The outer habiliments of the new order were machine industry and indirect costs; the inner spirit was a complex of private property, laissez faire competition, the gain spirit, and customary survivals. It quickly demonstrated its powers for increased productivity of economic goods ; so quickly, indeed, that industry after industry and nation after nation welcomed it and gave it dominance. It is our present purpose to see what this new order meant so far as marketing structures are concerned. We shall be able to see this more clearly if we divide the period since 1750 into two periods. The first, running from 1750 to 1880, may be called the period of the emphasis upon production and the all but universal acceptance of the orthodox system of distribution, or THE ADMINISTRATION OF MARKET PROBLEMS 257 "marketing through the producer to the wholesaler to the retailer to the consumer." This was the first phase of the revolution. The second phase (1880- ?) is still with us. It is marked by increased emphasis upon production al lower cost and by the development of many other systems of distribution (such as direct selling, chain stores, mail-order houses, etc.) alongside the orthodox system. Of course, the dates used in this statement are arbitrary. The actual dates varied from industry to industry and from nation to nation and were in no case single years; they were always transition periods. So also the characterization of the periods is arbitrary, being designed to suit our present needs. These commercial and industrial changes are in fact only a part of the fuU story. To tell the full story would be to tell of no inconsiderable portion of human endeavor and aspirations of the last two centuries. Speaking broadly, the outstanding feature of the first period for our purposes is the fact that the market was expanding more rapidly than productive power was increasing. This statement is at first thought a bit surprising, for we think, properly enough, of this period as the one of the coming in of machine industry; as one of a tre- mendous increase in producing capacity. This is entirely true, but it is also true that the market increased even more. This rapid increase of the market was in part due to technological industry itself. In the form of the canal, the raUroad, the telegraph, and the telephone, technology opened markets in an astounding fashion. Of course, the way had been prepared. The preceding period had been one of colonization by the European nations. This colonization had opened the edges of the continents of North America, South America, Africa, and Austraha and had made possible the poUtical organizations under whose auspices modem economic com- munities could arise and technological industry could develop the markets for its own products. Then, too, the spread of printing and of formal education contributed to a reaching for a higher stand- ard of living at the very time when increased production made measurably possible the attainment of the higher standard. Not even the most rapid increase of population the world has known served to check the rise of this standard. It served mainly to expand still more the market for goods. In such a situation the typical producer of goods for individual consumption found himself in a position which called for less worry over marketing problems than over production problems. The 2S8 BUSINESS ADMINISTRATION market seemed ready to absorb output at almost any reasonable cost, and if perchance one market was lost another rose to take its place. Under such circumstances it was natural for two very inter- esting sets of institutions to be emphasized. Upon the one hand the producer, not greatly disturbed over any possible loss of control of his market, was willing to delegate marketing functions to the jobber or wholesaler. Presumably the jobber, eager to get goods which he could market, would "play fair"; if he did not, there were other jobbers eager for the goods. The producer, reasonably sure of a market in either event, and stUl somewhat under the influence of the traditions of simpler industry when overhead costs were not such a burden as they are today, did not trouble himself much over the possibility that he might have to change "his line" because of lack of market, and accordingly acquiesced and indeed co-operated in establishing the orthodox system of distribution. Of course, few if any producers reasoned it out in such terms. They simply drifted with the tide. We today can sense the direction of that drift. The other interesting set of institutions — the schools of tech- nology^ — arose out of the demand for ever increasing producing capacity and out of the background of the physical sciences. We can now see that it was no accidental matter that such schools arose in this period. They were an answer to society's demand, voiced through prices established in the mechanism of the market, for more and more products. With the opening of the commercial revolution, as the second phase of the Industrial Revolution is sometimes called, there was a shifting of forces. Again speaking broadly, the outstanding feature of this second period is the fact that productive power is expanding more rapidly than the market. This reversal of currents is partly the result of the developments of technology in the earlier period. It is partly the result of the fact that the more responsive markets have been fairly well exploited. It is partly due to a checking of the rate of increase of population. Doubtless there are other causes. Interestingly enough, this checking of the rate of increase of the market has not meant any diminution in the emphasis upon pro- duction. Quite the contrary. The presence of indirect costs in modem industry makes any falling oS in output a thing to be dreaded; any increase in output is a thing to be coveted. The producer is therefore in a strange situation. He wishes to increase output at the very time when the market is not expanding rapidly. In a THE ADMINISTRATION OF MARKET PROBLEMS 259 sense he is forced to fight against the drift of events and he uses any weapons upon which he can lay his hands. For one thing, he seeks to get and to hold his market by national advertising, by monopoly, by price maintenance, by estabhshing his own branches, by mail selling direct to consumer — ^by hook and by crook. Here we have the outstanding reason for the building up of many systems of distribution parallel to the orthodox system — and sometimes sup- planting it. For another thing, he strives to reduce his costs, often as a means of coaxing the market to respond. Here we catch a glimpse of the forces behind cost accounting, scientific management, and the increased emphasis upon schools of technology. For another thing, he wheedles society into establishing schools of commerce, and through them, through government bureaus, and through private researches he studies ways to expand the market. For still another thing, he helps to influence nations to embark upon an "imperiahstic" policy which has meant a new emphasis upon colonies and has contributed not a httle to the causes of our Great War. Doubtless, we are still too near the events for us to have a well- balanced conception of the forces which have shaped and are shaping preseut-day marketing structures. We can, however, enumerate some of the major forces and can see, in the rough, how they are working. 1. The increase which has taken place in market area should be enumerated as a background condition — if not a force — which helps to explain modern market operations and structures. Upon the one hand the space area of the market has been greatly increased by improvements in such fields as transportation, communication, and administrative control; upon the other hand the time area has been increased by various devices ranging from refrigeration to the hedging operations of an organized exchange. These increases in area, taken with what might be called an increase in the depth of the market (greater deniand and cons'uning power) have made necessary changes in market structures to meet the new conditions. 2. Next, we should list the change in the balance of many forces as a consequence of which "production is now outrunning the market." This has been sufficiently discussed in the preceding pages. It helps to explain the origin of many devices for getting and keeping "a grip upon the consumer." 3. The increasing rehance upon the principle of speciaUzation is another factor worthy of mention. In part, this reliance is a rational 26o BUSINESS ADMINISTRATION one. Specialization does make possible better quality and greater quantity of economic goods and is usually to be encouraged where the market is sufficient to justify it. It is quite possible that we carry our specialization beyond limits justified by reason. It matters little for purposes of our present discussion. The growing reliance upon specialization makes the environment a favorable one in which to launch new specialized devices in marketing. The diagram on page 247 shows how true it is that the history of the development of market structures is in part a story of developing specialization. The increasing specialization in producers' instruments (for this is also a feature of modem specialization), coupled with the tendency to large-scale production, plays its part in determining market structures. It is increasingly difficult to transfer specialized capital from one "line" to another without great loss. It is accordingly increasingly important to keep a grip upon the consumer so that this transfer may not be necessary. Marketing devices are therefore built up which will aid in holding the consumer. 4. Closely related to all this is the growing importance of indirect or overhead costs in industry. We have already seen that these costs make increased output a thing to be coveted.. In a business where the major part of the total cost is overhead, a 10 per cent change in the volume of the business may very well speU the difference between bankruptcy and very large profits. A steady volume of business is, furthermore, almost as important as an increasing volume. Small wonder that market devices to hold the consumer are emphasized in modern industry ! 5. The growing dependence upon large-scale production should also be hsted as a force which is shaping market structures. Goods are made to be marketed. Modern large-scale factory production, in and of itself, accordingly leads to increased attention to marketing, both in order to secure the large demand which will enable the increase of output and in order to secure the steady demand so essential to regular, economical production. Large-scale marketing is therefore quite likely to develop parallel to large-scale factory production. This tendency is accentuated by certain economies which are possible in large-scale marketing, such as those connected with the more economical handling of the material, with better prices in large- scale operations, with better freight rates for large lots, with better research or investigating facilities, with economy of both routine and administrative labor, and with economy of capital. Possibly "the THE ADMINISTRATION OF MARKET PROBLEMS 261 economy of large-scale production " is becoming something of a fetish. No matter. Our increasing faith in it, justified or not, helps to explain the scale of many of our marketing structures. 6. We should not faU to list the expansion of popular education. In 1800 the total number of days of formal schooling of the average American citizen was 82; in 1840 it was 208; in 1916 it was 1,180. If these data are taken as samples of what has been occurring in popular education it is readily seen how "selling by description" (see p. 269) has come to be so widely used. As one example of a resultant market structure notice that the mail-order house owes much to the spread of ability to read and write. 7. This leads naturally to our hsting the rising standard of living as a force which is shaping market structures. We say that " service marketing" is frequently more profitable than "price marketing." Why ? It gets its appeal through the rising standard of living. Not a few of our market structures are shaped in recognition of this appeal. 8. The steady development of facilitating agencies, such as insurance, transport, advertising, finance and administrative-control devices, should not escape notice. Of course, they are results as well as causes, but they are causes. For example, modern massive retaU trade is much indebted to the development of modern sound large-scale financial institutions. 9. Not least in importance is the growing tendency toward associative effort. Whereas the period prior to 1880 was one that put stress upon the competition of specialists, the present period is increasingly one of association of speciahsts, whether competing or non-competing. Sometimes this association results from a desire to reap the advantage of large-scale operations as ordinarily conceived; sometimes it results from the desire to reduce risks by combining them or by increasing information (see chap, vii); sometimes it is only a vague "setting up of an impersonal device to cope with the impersonality of modern society"; sometimes it is a combining against a common foe, real or imaginary; sometimes other causes are operative. Whatever the causes, there is in men's minds today a strong current setting in the direction of associative effort and its importance should not be minimized when one is searching for the causes of present-day marketing structures. 10. Developing codes of business ethics and developing standards of other aspects of social control of business activities have played their part. Selling by description may again be cited in illustration. 262 BUSINESS ADMINISTRATION It is highly dependent both upon formal social control as reflected in law and upon informal social control as reflected in codes of business ethics. By this time it has probably occurred to the reader that this catalogue of "market forces" is nothing but a citation of some quite "general forces" which are operating in our economic organization, with particular reference to the way they affect marketing con- siderations. So it is. But that is enough. Look back over the catalogue asking whether it helps to explain the emergence of the department store, or the chain store, or the mail-order house, or direct selling, or any other of the newer market structures. If it does, it has answered its purpose. 2. MARKETING FUNCTIONS' [The function of the market in modern economic society is that of assisting in the co-operation of specialists (see pp. 242-47). This selection on marketing functions is an analysis, in functional terms, of the operations carried on in the market.] The services that must be performed in getting commodities from producer to consumer are usually called the "functions of middlemen"; in the title of this paper they are referred to as "marketing functions" because they are not always performed by ■ middlemen, but often to a greater or less extent by the pro- ducers themselves, and often even by the final consumer. The services performed in the marketing process, including practically every item in the detailed expense account of a mer- chant or of the selling organization of a inanufacturer, can be classified under one of the following heads: (i) assembling; (2) storing; (3) assumption of risks; (4) financing; (5) rearrange- ment; (6) selling; and (7) transportation. [Others have made different lists of marketing functions. One such list is as follows: (i) information giving; (2) transporting; (3) pricing; (4) title transferring and affirming; (5) storing; (6) financing; and (7) risk bearing.] I. Assembling. — When communities were self-sufi5cing, there was no need of collecting or gathering commodities from distant places. But with the development of territorial specialization both in agri- culture and manufacturing, the assembling of commodities from • Adapted by permission from L. D. H. Weld, "Marketing Functions and Mer- cantile Organization," in American Economic Review, VII (1917), 306-18. THE ADMINISTRATION OF MARKET PROBLEMS 263 various places became a more or less difl&cult function to perform. The term "assembling," as used here, does not mean the actual physi- cal transportation of commodities from one place to another, but rather the seeking out of sources, the making of business connections whereby commodities may be bought, and the study of market con- ditions so that they may be bought at the lowest price possible. Assembhng therefore involves all the services connected with buying. Many wholesale houses assemble goods from different parts of the country — even from all corners of the earth. They have their specialized buyers, who not only go to trade and manufacturing centers to buy goods, but who have to make a con- stant and continuous study of market conditions, sources of prod- ucts, qualities, grades, styles, etc. Many large houses maintain permanent buying offices in market centers, as, for example, the dry-goods wholesalers of Chicago, who maintain buying offices in New York. It is a common practice for wholesalers and even large retailers to send buyers abroad, and some, as Marshall Field & Company, even maintain permanent buying offices in several foreign cities. But the assembling from foreign countries is largely performed by a specialized group of merchants known as importers. Sometimes the buying function is so difficult and expensive to perform that jobbers employ independent purchasing agents in distant markets, who buy in larger lots than individual jobbers can handle, who have a more expert knowledge of market con- ditions and prices, and who keep their cUents informed from week to week on these matters. This is common in the hardware trade. Department stores do not rely on jobbers to assemble goods for them. They buy largely from manufacturers, which involves send- ing buyers to eastern markets; and some of the largest stores, especially in the East, maintain permanent buying headquarters in New York. But the majority of department stores cannot afford such expensive buying organizations, and although they send their buyers to New York, they eciploy either "resident buyers" or their own co-operative buying syndicates to keep them in touch with market conditions, to tell them where they can buy to best advantage, to execute "fill-in" orders, and to provide desk space for their buyers when they are visiting New York. Not many years ago, it was the practice of country merchants to visit large cities perhaps twice a year to order a sufficient supply of goods for the season. This was a cumbersome and costly method 264 BUSINESS ADMINISTRATION of assembling; it involved loss of time, poor selection of goods, purchasing too large a stock at a time, and unsatisfactory credit conditions. The assembling function for country merchants is now taken over very largely by jobbers. Many other examples might be given of the importance and difficiolties connected with assembling. It is one of the principal functions of wholesale produce dealers and commission merchants, who send solicitors into the producing regions to make business connections, who assemble first from one part of the country and then from another as crops mature in different cUmates, and who make a continuous study of crop and weather conditions. Brokers often help in the assembling function, in connection with both agricultural and manufactured products, although "they more com- monly represent the seller than the buyer. 2. Storing. — Storing, in its broad sense, means the holding of stocks of goods at convenient points. It involves expense for ware- house or storage fees, store space, and interest on capital employed. Producers have to perform the storage function to a certain extent, but they shift it as much as possible to middlemen. Manufacturers prefer to manufacture "on order," so that they may deliver the finished goods as fast as they are turned out; but many have to manufacture "for stock," thereby keeping capital tied up in finished goods on hand. Retailers perform this function by keeping the shelves of their stores filled with goods. The tendency is for middlemen to reduce it as much as possible by purchasing goods in small quantities and very frequently; because small stock in proportion to sales means faster turnover and larger net profits. This tendency is especially noticeable among retailers, who shift the storing expense as much as possible to jobbers. Jobbers in turn always have warehouses with complete stocks, and the fact that retailers are buying in smaller and smaller quantities, but niore frequently, accounts largely for the development, of small jobbing centers, as in the grocery trade, and for the establishment of branch houses by large jobbers, as in the hardware trade. About the only middlemen "7ho perform practically no storage function are brokers, manufacturers' agents, and purchasing agents. The storing function is so difficult and expensive to perform in some cases that it is taken over by a specializing set of ware- housemen General warehouses are found in all large cities, and THE ADMINISTRATION OF MARKET PROBLEMS 265 in them all conceivable commodities are held. A sugar refiner on the Atlantic Coast, for example, needs to keep supplies of sugar on hand at large distributing centers throughout the country, and he has the choice of building and maintaining his own warehouses or renting space in pubHc warehouses. He finds it cheaper to pursue the latter course. The large meat-packers, on the other hand, find it to their advantage to maintain their own warehouses, partly because they require a specialized service and equipment not furnished by ordinary warehouses, and partly because they do business in large volume. Agricultural products, which are seasonal in character, demand special forms of storage facilities, usually furnished by independent warehousemen. Cases in point are grain elevators, cotton warehouses, and tobacco warehouses. And when the element of preservation enters in, cold-storage houses are required. The storage function has to be performed all along the line, from producer to consumer. Even the consumer, when he buys goods in large quantities, performs part of the marketing function of storage; but the tendency has been for the consumer to shift this function back more and more to middlemen. 3. The assumption of risks. — Inasmuch as commission merchants, brokers, and agents do not take title to goods, they assume very few of the merchandising risks; but practically every other middle- man, as well as the manufacturer, especially when he produces for stock, has to consider the element of risk. The principal kinds of merchandising risks may be enumerated as follows: (i) price fluc- tuation, (2) destruction by fire, (3) deterioration in quality, (4) style changes, and (5) financial risks. [See also chap, vii.] Perhaps the most important risk is that of price fluctuation; but its importance varies for different commodities. Branded and advertised articles are relatively stable in price though during war times they too suffer somewhat from price changes. The risk of price fluctuation is greater to wholesalers than to retailers because of the smaller margins on which the former carry on business. Many articles handled by wholesale grocers, such as flour and sugar, fluctuate in price very frequently and are handled on extremely small margins, and the merchandising risk accordingly becomes great. When one buys or sells with the idea of making a profit from mere price fluctuations, he becomes a speculator. In this sense wholesale grocers often speculate in flour and sugar and some other commodities, and oftentimes a large part of their net 266 BUSINESS ADMINISTRATION profits (or losses) is due to this feature of their activities. In the case of a few raw products^ — wheat, corn, oats, flaxseed, cotton, sugar, and coffee — price changes are frequent, merchandising risks are great, and speculation becomes an important factor. Much of the merchandising risk is shifted through the hedging process to professional speculators, a specialized class of risk-assumers. The risk of destruction by fire is largely shifted to insurance companies. Deterioration in quality is a danger affecting prin- cipally perishable articles, but to some extent is also a risk factor for general merchandise, which may become shopworn. Many articles need special facilities for their handling — warm rooms, dry rooms, refrigerated rooms, etc.; and the storage houses, as well as the railroads, help in the prevention of deterioration. Style changes in manufactured goods are analogous to perishability of farm products. They constitute an important risk factor in men's and women's wear, especially the latter; and the frequency of style changes appears to be increasing, as exemplified recently in eye glasses and women's footwear. Financial risk appears in loss from uncollectible accounts, but may be largely overcome by the main- tenance of credit departments. Financial risk is also involved in the other forms of financing described below. 4. Financing. — Middlemen were formerly merchandise bankers. This function has been largely taken over by banks, which in this sense are middlemen of a specialized kind. And yet we should not lose sight of the fact that middlemen still perform extremely important financing functions, and in a variety of ways. Perhaps the most important is the granting of credit — retailers to consumers, jobbers to retailers, and sometimes manufacturers to jobbers. In many cases, however, the manufacturer has to be financed: as in the cotton trade, where commission houses make advances or endorse the mUl's paper; or in the silk trade, where raw-silk dealers furnish the raw material on six months' time. Furthermore, manufacturers are commonly financed by being allowed to draw drafts on day of ship- ment, a method also common in financing shippers of farm products. The financing function involves the tying up of capital, with resulting interest charges, also a line of credit with banks and the expenses connected with accounts and collections. On the whole, the brunt of the financing burden is borne by the wholesale trades, or sometimes by commission merchants. Retailers and consumers are generally weak so far as accumulation of capital is concerned. THE ADMINISTRATION OF MARKET PROBLEMS 267 and, on the other end of the marketing chain, manufacturers gen- erally find it difficult to finance their own imdertakings; so that the finajicing function of the wholesale intermediaries commonly extends in both directions. This is especially true in the marketing of farm products. Furthermore, the wholesalers, because they are located in trade centers and have quick assets, are the ones who are in the best position to obtain credit from banks. 5. Rearrangement. — Rearrangement of commodities involves sort- ing, grading, breaking up large quantities into small units, packing, etc. This is one of the principal functions performed by many merchants in raw materials. Wool dealers, for example, in addition to their assembling and financing functions, are practically indis- pensable to manufacturers on account of the fact that they are im- portant as graders and classifiers, and stand ready to furnish the particular quahty of wool desired at any time. In the farm-products trade, sorting and grading are of supreme importance; further- more, these commodities reach large cities in carloads, and have to be split up into small quantities, according to the demands of individual retailers. This function is important even in the mar- keting of standard and non-perishable commodities; wholesalers often receive goods in bulk, and have to weigh them out and package them. Goods that are already packaged when they reach wholesalers are usually put up in cases or cartons, but owing to the tendency among retailers to buy in smaller quantities, cases have to be broken open, goods in one-third or one-sixth of a dozen lots collected from the different cases, and repacked for shipment. Even retailers have the function of rearrangement to perform to a certain extent. They have to weigh out sugar, coffee, nails, wire, etc., and measure and cut cloth; then they have to wrap for presentation to customers. 6. Selling. — Selling is the most important of the marketing functions, as well as the most costly one to perform. Salaries of sales- men (plus traveling expenses in many cases) constitute generally the most important single item iii a merchant's expense account. Sell- ing involves both creating a demand for the goods and getting the goods into the hands of the purchaser. Though both of these phases of selling are performed largely by personal salesmen, de- mand creation is being accomplished more and more by means of advertising. Advertising is used either because it is the only possible way of creating a large consumer demand, or because it is the cheapest 268 BUSINESS ADMINISTRATION way of arousing such a demand. When a manufacturer adver- tises, he turns over the actual work of preparing copy, selecting mediums, etc., to another functional specialist- — the advertising agency. It is still necessary for most manufacturers, jobbers, and re- tailers to employ personal salesmen, but, because of the great ex- pense attached to this method, it is only natural that many of the important recent attempts to reduce merchandising costs should have been along the line of eliminating salesmen's salaries as much as possible. The mail-order houses, both wholesale and retail, do away with salesmen altogether; local buying syndicates among retail druggists effect their principal saving by substituting the telephone for salesmen; the slot-machine does away with salesmen, and the slot-machine type of retail store, like the Horn and Hard- art restaurants and the "all-package" grocery stores, seems to be gaining groimd. 7. Transportation. — Merchandise middlemen formerly attended to the actual carriage of goods from one place to another more than they do now; but this function has been largely taken over by railroads and other transportation agencies that are specialized middlemen in this field. Transportation, however, is still an im- portant function of merchants. Wholesalers and retailers frequently use their own trucks for hauling goods from freight stations to their stores, though more commonly drayage companies are employed. The principal transportation function still performed by merchandise middlemen is that of delivering goods from store to customer. As already stated, a clear conception of the marketing func- tions is fundamental to a proper understanding of the mercantile structure. The splitting up of the marketing process among suc- cessive middlemen is merely a case of specialization in marketing functions. 3. METHODS OF SALE AND ADVERTISING In the early stages of our industrial history, sales were made in bulk. At all stages in distribution, the purchaser saw the actual goods before the sale was made. Adapted by permission from A. W. Shaw, "Some Problems in Market Dis- tribution," in the Quarterly Journal of Economics, XXVI (1912), 721-23, 743-46. Later published in An Approach to Business Problems. (A. W. Shaw Company, i.916.) THE ADMINISTRATION OF MARKET PROBLEMS 269 Later sale by sample appeared. The purchaser bought goods represented to be identical with the sample he was shown. The introduction of this method of sale was necessitated by the widening of the market and was made possible by improvement in com- mercial ethics and by increasing standardization of the product. The purchaser must have confidence, not only in the honest inten- tion of the producer to furnish goods identical with the sample, but also in his ability to produce identical goods. Hence, increasing uniformity in product through machine methods of manufacture was a factor in the increase of sale by sample. Sale by description is the most modern development in distribu- tion. An even higher ethical standard is required than for sale by sample. Moreover, sale by description requires a higher level of general intelligence than sale in bulk or sale by sample. Sale by description in its modem development is, in a sense, a by-product of the printing press. The root idea in sale by description is the communication of ideas about the goods to the prospective purchaser by spoken, written, or printed symbols. This takes the place of the sight of the goods themselves or a sample of them. It is obvious that this requires grasp ideas either through spoken, written, or printed symbols. The use of the term "s3rmbols" rather than "words" is necessi- tated by the fact that photographs and sketches are today an impor- tant feature of sale by description. A photograph of the commodity often serves the purpose of pages of verbal description. Advertising, in the sense here used, is to be defined as the com- munication to possible purchasers, by written or printed symbols, of ideas about the goods, designed to create a demand for the goods. In this broad sense it includes, not only selling letters and circulars, but newspaper and periodical advertising, bill-boards and window cards, electric signs, street-car advertising, catalogs, and all the varied forms of modern commercial publicity. A rough classification is made between general and direct advertising. General advertising includes newspaper and magazine advertising, bill-boards, electric signs, street-car advertising and the like, aimed at the general public or some section of it. Direct advertising is used in reference to the sending of selling letters, circulars, or catalogs to the persons whose names appear on a mailing list and to reach whom the material sent is specially adapted. This classification is of some importance in dis- cussing advertising as an agency in distribution. 270 BUSINESS ADMINISTRATION We cannot here attempt an adequate discussion of modern advertising in its varied phases. And it is perhaps not necessary, so much is it today forced upon the attention of each of us. To realize the machinery now provided for the direct communication of ideas about goods, one has but to consider that a single publishing company today reaches through two magazines about three and three- quarters million famOies; that there were in this country in 191 1, according to the Statistical Abstract, 22,806 newspapers and periodicals. A fair measure of the development of advertising in recent years is found irt the rapid progress of invention to facilitate advertising — photography, the half-tone process of reproducing photographs and drawings, the three-color process for such reproduction, the cheapen- ing and perfecting of papers, inks, and printing, and better reprodu- cing machinery. It is necessary to include in this hasty and incomplete analysis of advertising as an agency in distribution a reference to the character of the demand aroused by advertising. Advertising may be said to build up three general classes of demand: (i) expressed conscious demand, (2) unexpressed conscious demand, and (3) subconscious demand. The three classes may be illustrated by supposing a product for sale by grocers to be advertised in a periodical of large circulation by a double page costing for one insertion $8,000. If as a result of the advertisement 30,000 people go to the grocery and buy the product, 60,000 plan to purchase the product at some future time when such an article is needed, and 100,000 more become open to a further exciting force, such as seeing the product at the grocery and recogniz- ing it as one advertised, then we should call the 30,000 the expressed conscious demand, the 60,000 the unexpressed conscious demand, and the 100,000 the subconscious demand resulting from the advertise- ment. Expressed conscious demand means present sales; unex- pressed conscious demand means future sales; subconscious demand means that the field has been fertilized so that future selling efforts will be more fruitful. Unexpressed conscious demand and subcon- scious demand are difficult of measure but must always be taken into account in any consideration of the efficiency of advertising as a selling agency. THE ADMINISTRATION OF MARKET PROBLEMS 27 1 B' ORGANIZATION CHART OF AN ADVERTISING AGENCY [This statement of the constituent elements of the organization of an adver- tising agency serves to indicate the functions of this specialized agency in the marketing field.] 1. Research Plan and Business Counsel Department a) Conferences with clients 6) Market and trade investigations c) Analysis and reports 2. Intelligence Department a) Publicity for clients b) Statistics and news to clients, from newspapers, magazines, trade papers, statistical bulletins, etc. 3. Copy Department a) Advertisements, booklets and folders, circulars, letters, campaign portfolios, catalogues, house organs b) Trade marks, labels, packages, slogans c) Window and counter displays, car cards, posters, theater slides, novelties, samples, demonstrations 4. Art Department a) Within the organization b) Outside art service 5. Rate and Space-buying Department, estimating, scheduling, and ordering space in a) Newspapers, magazines, farm papers, trade papers, class papers and miscellaneous publications 6) Posters and painted signs, street car cards, electric signs and motion pictures 6. Mechanical Production Department a) Halftones, zincs b) Electrotjrpes, stereotypes c) Typesetting d) Printing e) Shipping 7. Service Department a) Job orders to all departments b) Following orders to completion c) On time forwarding of copy and cuts d) Job reports to chents ■ Adapted by permission from the organization chart of Johnson, Read & Company, Chicago. 272 BUSINESS ADMINISTRATION 8. Filing and Checking Departments a) Filing publications b) Filing data, proofs, etc. c) Checking insertion 9. Financial Department a) Credit b) Accounting c) Auditing d) Billing e) Collections 10. Extension Department a) Organization or House Advertising b) Organization or House Salesmen c) Organization or House Conferences 4. CONDITIONS WHICH MAY RESULT IN ORGANIZED MARKETS' "An organized market" is one the proceedings of which are formally regulated. As a rule tiiose who deal on it are in effect a a corporation: they elect new members and also the executive of their body and appoint the committee by which their own regula- tions are enforced. In some countries their status is fixed and their actions are superintended by Government. Their regulations generally provide, implicitly or explicitly, for the completion of a contract to buy or sell a quantity of a definite commodity at a cer- tain price, by the utterance of a few words on the one side, and by a brief response, sometimes a mere nod, on the other. They gen- erally prescribe a rather large unit as that to which the contract refers, at all events in the absence of any specific statement to the contrary. The chief conditions needed for rendering any class of products suitable to be handled in an organized market are, (i) that it be not quickly perishable; (2) that the quantity of each thing can be expressed by number, weight or measure; (3) that its quality can be determined by tests that yield almost identical results when applied by different officials, assumed to be expert and honest; and (4) that the class is important enough to occupy large bodies of buyers and sellers. ' Adapted by permission from Alfred Marshall, Industry and Trade, pp. 256-58. (The Macmillan Company, 1919.) THE ADMINISTRATION OF MARKET PROBLEMS 273 These conditions are sufficient to render organized marketing practicable. But a fifth condition is required to make it attractive: it is that the class of things dealt in should be generally liable to con- siderable fluctuations in price. For otherwise the dealings would be confined almost exclusively to producers, consumers, and mer- chants: there would be little scope for those professional dealers who make a living by speculative purchases and sales; and who in some cases render great public services by carrying risks that would other-" wise need to be borne by people whose special aptitudes lie in other directions. It is true that this beneficent work is often marred, and sometimes over-borne, by evil practices which intensify fluctuations and mislead honest dealers: but, for the present at least, that evil has to be taken with the good. An organized market generally gives scope for purchases and sales for immediate delivery; and for deal- ings in "futures," that is in goods to be delivered at specified future times. This fifth condition implies that the things in question are not of such a nature, that their supply can be varied by rapid and extensive changes in the rate of production; so that their price is prevented from fluctuating rapidly, and remains always close to normal cost of production. There are few material things which satisfy all these conditions in very high degree: the chief among them are various grains, especially wheat; and raw cotton. The authorities of each organized produce market define the standard, or standards, in which dealings may be made; and all produce, which comes for delivery in these dealings, is inspected and certified as being truly up to the standard which it claims. Comparatively few transactions in futures lead to the actual delivery of the produce. In most cases the buyer pays to the seller any amount, by which the official price of the quantity sold may have fallen below that at which the sale was made; or receives from him any amount, by which it may have risen. Either side may insist on completion: but that is generally effected through the organiza- tion of the exchange, by bringing together those who wish actually to deliver with those who wish actually to receive; the rest being "rung out." The practical effect of this is that anyone can as a rule buy a future, without being called upon to pay its price either at the time of making the contract, or afterwards. Each party is required to put in a "margin," which will cover a small movement of the price against him: and, as soon as the price moves considerably 274 BUSINESS ADMINISTRATION against him, he is likely to be required to make a corresponding addition to his margin. See also p. 688. The Hedging Operations of an Organi7;ed Exchange. 5. LEADING WHOLESALE AGENCIES' Wholesale merchants are business men who buy and sell mer- chandise on their own account for distribution to retailers in lots smaller than those in which the wholesaler buys. The wholesale merchant is a large factor in the distribution of many products to unit stores. Although there are some manufacturers who sell their merchandise direct to retail grocers, for example, nevertheless they constitute but a small minority. Such manufacturers, furthermore, find it necessary practically to duplicate the organization and to assume the functions of- the wholesale grocer, usually incurring at least as much expense as the wholesale grocer incurs in operating his business. The specialty wholesaler represents a differentiation from the ordinary wholesale merchants, such as are referred to above. In New York, for example, there are a number of wholesalers who handle only hosiery and knit goods. The tea and coffee whole- saler is another specialty merchant. These specialty wholesalers generally cover a wide territory in the sale of their products and develop a demand through especial care in the selection and quality of the merchandise that they handle. There are a few catalogue wholesalers in the United States. One of the most notable examples of these is Butler Brothers of Chicago. The catalogue wholesaler does not employ a force of traveling sales- men but sells on mail orders. Merchants' co-operative wholesale associations, or buying ex- changes as they are sometimes called, have been developing more rapidly during the last ten years than prior to that time. The oldest of them have been in existence for twenty-five years or more. These co-operative buying associations have had their greatest development in those trades in which the wholesale merchant is also a large factor. They are direct competitors of the wholesale mer- chant, but in the grocery trade at least the co-operative buying associations deal chiefly in staple merchandise. ■Adapted by permission from M. T. Copeland, "Scope and Content of a Course in Marketing," in Journal of Politkal Economy, XXVIII (1920), 375-98. THE ADMINISTRATION OF MARKET PROBLEMS 275 The fruit-and-produce trade presents a series of particularly complex marketing problems. They are concerned primarily with the large urban markets. The inhabitants of the large cities and the industrial districts of the United States are supplied with fresh fruits and vegetables from a wide area. The trade is one of especial difl&culties because of the fact that a constant, regular flow of mer- chandise is essential and also because of the perishable nature of the merchandise, which involves danger of loss through spoilage or through glutted markets. . The commission merchant is one of the chief agencies for the handling of fruit and produce in large cities. Ordinarily the com- mission merchant receives shipments on consignments from farmers or from country dealers. These shipments are sold at the prices that are current when the shipments arrive. After deducting his commission fee and any incidental expense that he may have incurred, the commission merchant remits the balance to the shipper. This system enables the shipper to ship his merchandise whenever it is ready without awaiting specific orders from the commission mer- chant. It also enables the shipper to obtain the benefit of the prices that are current at the time that the shipments arrive at the market. Many commission merchants, furthermore, buy and sell on their own account, thus acting as jobbers. This combination of a com- mission merchant and a jobbing business, while it has some advan- tages occasionally even to the shipper, has not ordinarily worked out well in any industry in the long run. The conflicts of interest tend to create distrust and dissatisfaction. In the large urban markets there are several other agencies through which produce may be sold. There are car-lot receivers who buy outright on their own account. Some of these receivers, and also some of the other types of middlemen, send out buyers to purchase produce or to contract for it in the growing districts. The broker, who handles a portion of the trade in produce, sells for a brokerage fee shipments consigned to him. Ordinarily the broker, however, sells only upon confirmation of the price by the shipper. The broker as a rule deals only in car lots. The jobber in the fruit-and-produce trade buys from car-lot receivers, brokers, or commission merchants, and sells to retailers. He performs the regular wholesale merchants' functions. 276 BUSINESS ADMINISTRATION The trade in citrus fruits and occasionally in other products in several large cities is carried on through auctions. These auctions are ordinarily held daily, and sales are made directly at the freight terminal to jobbers and large retailers. The auction system can be used advantageously only where there are large shipments of carefully graded produce. A notable development in the field of marketing during recent years has been the growth of the Cahfomia Fruit Growers' Exchange, probably the most successful example of a co-operative association of producers. The success of this organization has undoubtedly been due in part to special circumstances, such as the specialized, capital- istic nature of the industry, an all-the-year-round production, and previous experience in co-operative efforts for other purposes. Not least, among other reasons, is the distance from the market, which has placed a premium upon the effective control of shipments, with diversion in transit in order to have the fruit delivered at the markets paying the best prices and to avoid gluts. There are numerous instances of manufacturers who have estab- lished wholesale branches for the distribution of their products directly to retailers. They have thus assumed completely the func- tions and the expenses of the wholesale merchant. In few cases does it appear that there has been a substantial saving in expense by the adoption of this policy. The objects have generally been to facilitate more aggressive selling or to meet some special conditions in the industry. Frequently a manufacturer feels that his product does not receive enough individual attention from the wholesalers and their salesmen. He believes that by coming directly in contact with retailers, he will be able to push his goods more effectively against the products of his competitors. He values the good will of the retail merchants and believes that he can secure it more certainly by dealing with them directly. In other instances, the manufacturer estabhshes a system of wholesale branches in order to maintain a more steady production load for his factory. With a system of wholesale branches the seasonal fluctuations in the volume of sales may be lessened. Among the industries in which the operation of manufacturers' wholesale branches is conspicuous is the meat- packing industry. See also p. 56. The Location of the Wholesale Dry-Goods Trade. THE ADMINISTRATION OF MARKET PROBLEMS 277 6. MARKETING AGENCIES BETWEEN MANUFACTURER AND JOBBER' This class of middlemen comprises commission houses (some- times known as selling houses), manufacturers' agents, brokers, and purchasing agents. Commission houses are common in the cotton, woolen, and silk goods trades, and are found to a certain extent in the hosiery and knit goods and "notions" trades. Manufacturers' agents are common in the grocery and hardware trades, and brokers are very important in the grocery trade. An interesting form of the purchasing agent is found in the hardware trade. Similar middlemen appear to a certain extent in other trades, but the reason for their existence and their methods of doing business may be understood by studying them in connection with the three trades enumerated above, viz., textiles, hardware, and groceries. It appears that intermediaries between manufacturers and jobbers perform but few of the marketing functions mentioned in Selec- tion 2. They rarely store any commodities for their principals; they assume but little risk because they do not take title to the goods; they have practically no sorting and grading because they sell in large quantities and rarely handle the goods at all; and they do none of the transporting. This leaves the actual selling of the goods, which is their most important function; financing, which is important in the textile trades but not in the hardware and grocery trades; assembling, which they perform by represent- ing manufacturers who are often located in different parts of the coimtry. The purchasing agent is fairly distinct from the other three forms of middlemen described here because he represents buyers rather than sellers, but it is rather difficult to draw clearly the lines of demarcation between commission houses, manufacturers' agents, and brokers, especially as they merge into each other in certain cases. The distinguishing features of commission houses, which are found primarily in the textile trades, appear to be as follows: They generally market the whole output of each mill that they represent or the whole output of at least one of the mill's products, such as its cotton yarn, or its woven fabrics; their financing function is much more important than in the case of brokers and manufacturers' agents; they handle goods of the same kind for different mills; ' Adapted by permission from L. D. H. Weld, "MaAeting Agencies between Manufacturer and Jobber," Quarterly Journal of Economics, XXXI (1917), S7^~99- 278 BUSINESS ADMINISTRATION they usually have more power in determining the price at which goods shall be sold than do the other two kinds of middlemen; they handle goods which are not usually branded and advertised; they receive their compensation in the form of a percentage commission on sales; they often perform the additional service (which may be con- sidered a part of the selling functions) of furnishing designs for the mUls, and telling them what fabrics and designs to run through the looms. The distinguishing features of the manufacturers' agent, who is found in the hardware and grocery trades, appear to be as follows: They more commonly sell for their clients in a restricted, though fairly extensive, territory, so that a manufacturer may have two or more agents in different sections of the coimtry — though there are exceptions to this, especially in the hardware trade; their financing function is unimportant as compared with commission houses, inasmuch as they rarely make advances to or otherwise finance manufacturers; they handle a variety of goods of the same general class, such as various kinds of hardware, but they sell each particular article for only one manufacturer; sometimes, especially in the grocery trade, they handle branded and advertised goods; similar to commission merchants, they usually receive their compensation in the form of a percentage commission, but sometimes they receive salaries or lump-sum annual payments, and not infrequently flat rates per package of goods sold; they usually have to follow the prices set by the mills, rather than enjoy the privileges of setting prices themselves. The distinguishing features of brokers, at least as they appear in the grocery trade, are as follows: Their field of activity is more limited than in the case of commission houses and manufacturers' agents, since they frequently sell to jobbers only in the city where they are located; the "pure" broker does not represent any particular manufacturer, but places his orders from purchasers with any manu- facturer whom he may select at the time (there is a tendency for so-called brokers to represent definite manufacturers in restricted markets); they usually have no financing function; they sell the same kind of goods for different manufacturers; they handle princi- pally unadvertised goods; they usually receive flat rates per package or per carload, rather than a percentage compensation; they have very little leeway in determining prices, usually having to get them "confirmed" by manufacturers. See also p. 367. Bujdng for Retail Hardware Stores. THE ADMINISTRATION OF MARKET PROBLEMS 279 7. THE USE MADE OF THE JOBBER- What is a jobber ? To the man on the street the jobber is a large, important commercial house, ranking in stability with the best institutions in the community. Its working capital is relatively large. Its credit rating is excellent. It is an institution whose whole business is to buy goods and re-sell them to retailers. It is a specialized organization for marketing — a sales organization first, last, and always. That is about as far as the average man's notion of a jobbing house goes. But much more is involved in the work of the jobber that becomes apparent only with a closer view than most people are permitted. The jobber studies the consumer's needs of his trade territory, deter- mines what the people will want, and then sets out months in advance of the actual demand to assemble the goods to satisfy the needs, drawing upon all parts of the world. Assembling the merchandise that people will want next season is an enormous social responsibility when you stop to think about it. A grocery jobber must secure from two thousand to five thousand items. He must buy from hundreds of producers, thousands in some cases. A superficial count of the countries of origin of the merchandise of a single jobbing concern showed that there were over thirty countries represented. To care for these incoming goods, storage must be provided, warehouses that will keep the goods safely and free from deterioration of any kind, whether from weather, temperature, fire, dust, vermin, or what not. The jobber's warehouse is the source of supply of most retailers for most goods. It should be kept in mind that the jobber of today is generally and essentially a local institution. Not many grocery jobbers can sell large volumes of goods more than a hundred miles away. The jobber's strong points of service are that he carries a large open stock, from which the retailers within a certain radius can order through salesmen, by mail and wire, and secure the goods in a few hours, that orders can be made up, for practically everything the retailer wants, and in such quantity as desired. The advantages of the jobber to the manufacturer or producer are obvious. Months in advance of consumption and in advance of the retailers' orders the jobber places his orders and thus relieves the manufacturer of watching the market and making his own studies ' Adapted by permission from P. H. Nystrom,"The Jobber's Indispensable Place in' the Economic World," in the Journal of Commerce {July g, 1917), 13-15. 28o BUSINESS ADMINISTRATION of consumers' demand. A great many manufactxirers are saved practically all selling expenses by selling their entire product to one or a few jobbers by contract for the season, year, or in large quantities at a stated time. A POSSIBLE WHOLESALE ORGANIZATION' 1 .,oo,«,.„=,s 1 1 BOARD OF OIRECrORS [ 1 aeNERALMANAOEROR CXECimVE COMMITTEE 1 _ . 1 1 FINANCIAL MANAOEFI 1 1 MERCKANDJSfcMaR. 1 (■CCMTAKV] / , i ^ , , 4 , , t '"**'■ 1 i BUVW. 1 I ***^- 1 1 «■'• 1 1 "'="'■ 1 [■TOMUnl j '"' "■ 1 juett, HOK.] 1 OmCE ] [ialeiiicii| 1 ADV. 1 nous 1 1 HDUIE j 1 UNEIUI. | 1 MUPLE 1 HAHAanj |wU«UEn[ JulUHIn] JULEIHCMJ | RIMU [ HOUSE MANAGE A I "His; I OfFlCE MANAOCn Check this diafgram with the marketing functions listed on page 262. Do the two agree ? Do they coincide in plan ? it is easy to underestimate the value of and the necessity for salesmen. The mail-order exceptions merely prove the rule; Even government bonds cannot be sold withput salesmen and sales organi- zation. The jobber's salesman represents a large line of goods co-operatively handled. I have never heard of any manufacturer claiming that he could sell his product at a lower selling expense than the jobber. ' Taken from J. B. Swinney, Merchandising, p. 40. (Alexander Hamilton Institute, IQ17.) THE ADMLNISTRATION OF MARKET PROBLEMS 281 The credit man of a jobbing house performs a service in stabiUz- ing business that is highly creditable. His knowledge of his customers extends to matters purely personal and of character in detail, as well as of business matters. He is able to judge with great precision how far the retailer may extend his business. If jobbers were to eliminate all of the trade with retailers who are classed as bad credit risks by some manufacturers, great hardship would ensue in many parts of the country. The line between success and failure is often finely drawn, but the skillful local jobber's credit man stands in much better position to discern it than the distant manufacturer's credit department. Manufacturers who sell direct are merely developing complete jobbing organizations of their own, duplicating in detail what already exists. I do not say this is unnecessary. There are some lines of merchandise that require special organizations, but for the majority of lines and their manufacturers the jobbing system appears to serve very adequately. That the wholesaler performs an economic service to the retailer is clearly evidenced by the fact that more than 80 per cent of the retail merchandise of the country is bought through jobbers. The jobber maintains a constant, open supply close at hand. Orders may be sent in at any time and for smaller quantities than manufacturers care to handle for the retailer. Orders can be made out for a large variety of goods and all will be filled from source of supply. One order for twenty-five items, instead of twenty-five orders, to as many manufacturers means a saving of time, postage, stationery, and accounting. Transportation charges are reduced to a minimum. Both time and money are saved. Most jobbers fill practically all orders on the day they are received. Buying in small quantities of each item makes rapid turnover possible and consequent pro rata reduction of over- head expenses, resulting in higher profit per sale and each profit multiplied by the turnover. Manufacturers, as a rule, while maJdng price concessions require the retailer to buy in larger amounts than the jobber. But what the retailer gains in price he sacrifices in higher overhead, shrinkage, and waste. The small retailer must, of physical necessity, patronize a jobbing institution. If he were to buy all his goods from individual manu- facturers he wouldn't have any time left in which to sell his goods. In dealing with manufacturers the retailer is required to pay out large sums of money, sometimes at inconvenient times, whereas 282 BUSINESS ADMINISTRATION the jobber's times and terms of settlement are regular and may be easily provided for in advance. There is another important function of the jobber, and that is the educational help given to the retailer. The jobber's salesman is frequently the teacher of the retailer, showing what the demand will be, how to prepare for it, what sales methods to use, and so on. This, without doubt, has been an important factor in the success of many retailers. We may summarize the functions of the jobber to manufacturers, retailers, and to the public by stating that he is the specialist in dis- tribution on a large scale. We need specialists in manufacturing. We need specialists in professions. We need specialists in every work. And we need speciaUsts in marketing. It should be obvious to anyone, with the facts concerning the work that jobbers actually do before him, to see clearly that the jobbing system, or some system very much like it, is absolutely neces- sary and is here to stay. His precise functions will vary from time to time as they do now from community to community and from line to line. But the study of market demand in a broad way, the assembling of merchandise in large quantities from the widest sources, months, and even seasons in advance of the actual demand, the redistribution of these products in such quantities as desired at the precise times when needed are functions that must be carried on some way and by someone. 8. LEADING RETAIL AGENCIES' A large majority of the retail stores in the United States are what I prefer to call unit stores. Sometimes they are called "inde- pendent" stores or "regular" stores. A unit store is a store without an elaborate departmental organization that is owned and managed as an independent unit for the sale of goods through personal sales- manship. Unit stores are used most extensively for the distribution of merchandise such as groceries, hardware, agricultural imple- ments, shoes, men's clothing and furnishings, jewelry, cigars and tobacco, and drugs. Unit stores furnish the most numerous outlets for many kinds of merchandise. They provide the only means whereby large num- bers of consumers can be reached regularly. They are adaptable to 'Adapted by permission from M. T. Copeland, "Scope and Content of a Course in Marketing," in Journal of Political Economy, XXVIII (1920), 375-98. THE ADMINISTRATION OF MARKET PROBLEMS 283 the service requirements of their patrons. Frequently the proprietor of a unit store has built up a strong personal clientele. The market for merchandise distributed through unit stores is not dominated by a few large powerful buyers. A manufacturer who elects to distribute his product through unit stores, however, encounters difficulty in inducing a large num- ber of individual retailers to handle his product effectively. While there are many notable exceptions, nevertheless a considerable pro- portion of unit stores are not operated efl&ciently. The selection of this type of store as the marketing agency, therefore, presents a series of difficult, complex problems. For some commodities a manufacturer finds it advantageous to select unit stores to act as exclusive agents. This poUcy is exemplified by several large clothing manufacturers. Other clothing manufac- turers, whose product is probably of equal merit, follow the opposite pohcy of not building up a system of exclusive agencies. This is one of the large problems of sales policy, because there are substantial reasons for and against this system. Another t3rpe of store that is generally operated on the unit priaciple is the company store. This has come into especial promi- nence during the last few years of rising prices. The American Woolen Company, for example, has recently established a store at its plant in Lawrence, Massachusetts, for the sale of merchandise to its employees. Similar stores have been organized by several other large employers of labor. To the manufacturer or wholesaler seeking distribution for his product, the company store presents a problem because of the doubt as to its permanency and the friction that it causes with many of the unit stores with which it competes. The retail-wholesale store is another institution that compUcates the sales problem for many a manufacturer. Such a store is one that carries on a retail business and also operates a wholesale depart- ment. A store of this type ordinarily demands wholesalers' discounts. It is, therefore, in a position to buy goods for its retail department at manufacturers' wholesale prices. It oftentimes becomes a trouble- some competitor of the unit btores, to which the manxJacturer can- not afford to sell at wholesale and which are forced to buy from wholesalers at prices higher than the wholesale-retail store purchases its merchandise. The metropoUtan specialty store, especially for articles such as women's wearing apparel, has become an important factor in the sale 284 BUSINESS ADMINISTRATION of some kinds of merchandise. This t}^e of store has operating expenses quite similar to those of the other types of stores with which it competes. Its main advantages appear to be those that accrue from speciaUzation. A department store, according to the customary usage of the term, is a retail store organized on a departmental system in which one of the large departments is dry goods. Wherein does the depart- ment store have its chief advantages ? Its size frequently gives it a buying advantage. Oftentimes it is able to obtain wholesale prices or high discounts because of the large quantities that it purchases. Its size, however, does not give it any advantage apparently in operating expenses. From such scanty information as is now avail- able it appears that the ratio of operating expenses to sales is as high in department stores as in unit stores. Frequently the expenses are higher in department stores in proportion to sales. Some of the failures of department stores during the last ten years have been due, I beUeve, to a mistaken theory that a large volume of business necessarily meant economy in operation. The chief advantage of a department store, it seems to me, is the facilities that it offers for shopping. A department store is essentially a shopping institution. It is a strong factor in the trade in women's wearing apparel, for instance; but as a rule the department store has not been able to make a success of a grocery department. It cannot operate a grocery department ordinarily as cheaply as a unit store is operated. The buying habits of the consumers, furthermore, lead them to patronize unit stores for the bulk of their purchases of groceries. A chain-store system is a group of scattered stores with single ownership and centralized management. Ordinarily a central ware- house is operated from which merchandise is distributed to the retail branches. The chain-store system has the advantages of large-scale buying and wide dispersal of the individual retail branches. It has faciUtated the development of standardization of equipment and of methods of operation and management. Chain stores have been most successful in marketing those products that ordinarily are sold through unit stores. Chain stores are located at points where it is most convenient for their patrons to visit them. While the chain store undoubtedly has definite advantages such as have been mentioned, it also is at a disadvantage in some respects in competition with unit stores. The chain-store system is less THE ADMINISTRATION OF MARKET PROBLEMS 285 flexible. It cannot readily adjust its services, such as delivery and credit, to meet the needs of the individual patrons. Moreover, the advantages that the chain-store system gains through centralized buying and standardization of management methods are offset, in part at least, by the necessity of operating a central warehouse and especially by the diflFiculty in securing managers who will take a keen personal interest in the conduct of these stores. Expenses must also be incurred for policing the branches: a system of frequent, close inspection is necessary in a chain-store system. Inasmuch as many of the chain-store systems have cut prices, they are looked at askance by numerous manufacturers who beheve that their main reUance must be placed upon unit stores. The friction between chain stores and unit stores has been a matter of grave concern to many a manufacturer during the last ten or fifteen years. Occasionally a manufacturer decides that a system of manu- facturer's retail branches is the logical outlet for at least a part of his merchandise. The establishment of retail branches by a manu- facturer is not ordinarily, however, for the purpose of economy in expense of operation. It seems to have been the general experience of manufacturers who have estabUshed retail branches that they are not able to operate their stores more economically than the average unit store or department store is operated. Such branches generally have been estabUshed for other reasons. One of these reasons is to insure a steady, sure outlet for at least a portion of the manufacturer's product. There are also several instances in which manufac- turers have estabUshed a smaU number of retail branches for educa- tional and promotional work. Whenever a manufacturer decides to open up a retail store, he finds immediately that his action is capital- ized by his competitors, who seek to develop a spirit of antagonism among retailers on the ground that the manufacturer is entering into direct competition with his own customers. A mail-order house ordinarily is a business that sells at retail from catalogues and not over the counter. The orders are received by mail at a central warehouse whence the goods are shipped to con- sumers. The chief field for the development of maU-order sales has been in the rural districts and small towns. The catalogue of a mail-order house gives an opportunity for shopping somewhat akin to the visit to a department store. The large mail-order houses, to be sure, have utilized their buying power and their estabUshed 286 BUSINESS ADMINISTRATION clientele to sell many products outside the range of shopping goods. Whether a mail-order house is able to operate at substantially lower expense than unit stores is a question that has not yet been definitely settled. At all events, concentration of buying power and the tendency to cut prices frequently have caused manufacturers to hesi- tate to seek distribution of their products through mail-order houses. Co-operative stores have not been sufficiently successful in the United States, up to the present time, to present a substantial market- ing problem. A co-operative store, properly speaking, is one that is owned and managed by consumers. The typical co-operative store is organized on the Rochdale plan, whereby each member of the society piu-chases one or more shares of stock at a small amount per share. The number of shares that one member may hold usually is limited, and ordinarily each member has one vote irrespective of the number of shares of stock that he holds. Dividends are commonly paid upon the stock at the ordinary local rate of interest and the remainder of the earnings, aside from such as may be set aside for reserves or surplus, are distributed to the members annually in pro- portion to their purchases. This system has had a tremendous development in European countries, but in the United States the number of co-operative stores is small and many of those in existence have led a precarious life. During the last eighteen months [in 191 9 and 1920], the co-operative movement has received a new impetus in this country through the influence of labor-union men; this may prove to be a new marketing factor of large significance. Retail pubUc markets present problems of quite a different character from those encountered in other types of retail stores. Municipal markets in which booths are leased to dealers, to be sure, are not far different from other classes of retail stores. Public markets in which producers sell to consumers, however, bring in a new set of problems. Widespread efforts have been put forth, specially during recent years, in numerous locaUties to stimulate the development of pubUc markets of this type. Their success depends upon the buying habits of the consumers and their readiness to go to those markets. Their success also depends upon the readiness of the farmers to spend the time necessary to haul their produce to market and to carry on its sale. Wagon retailers include those merchants who do not operate a retail store, except perhaps as an incidental adjunct to their business, THE ADMINISTRATION OF MARKET PROBLEMS 287 but who retail merchandise from wagons that deliver the merchan- dise at the homes of the consumers. The milk trade is one of the notable examples of business that is carried on by wagon retailers. Suggestions, such as have been made from time to time, that a co-operative system should be used for milk delivery, run afoul of this fact, that the only place of business for the ordinary milk dealer is his deUvery wagon. K he gives up his independent delivery system, he practically gives up the independence of his business. The ice business is another trade carried on by wagon retailers. In this trade the heavy loss through shrinkage tends to discourage duphcation of routes and therefore to result in the development of local monopolies in the ice trade. The final class of retaU merchants includes what I have termed bulk retailers. Examples of this class are coal merchants and lumber retailers. In these trades a merchant must necessarily carry a larger stock requiring a heavy investment of capital. The trade is seasonal and sales are usually made in bulk lots on specification. The indi- vidual consumer seldom visits the place of business of the retailer. Each of these types of retail merchants presents special problems in store management and also special problems from the standpoint of the manufacturer or producer who undertakes to determine the logical channels for the distribution of his product. The selection of the retail channels to be used, moreover, influences the producer's decision as to the method of wholesale distribution to be utilized. 9. THE MAIL-ORDER BUSINESS' The extent of mail sales. To perhaps the majority of people the mention of mail-order selling brings up the thought of enormous establishments, such as Sears, Roebuck and Company, Montgomery Ward and Company, and other strong houses doing a large business on a national scale. It is not strange that mail-order business now stands for big business in the popular mind. The success of some of the best known mail-order establishments has been so phenomenal that it has overshadowed in public thought the success of thousands of small houses. It is a mistake, however to think that mail-order selling is confined to a few great, well-known houses, or that the problem of mail-order competition for retail stores is one involving merely the activities of great corporations. There are many ' Adapted by permission from R. S. Butler, H. F. DeBower, and J. G. Jones, Marketing Methods and Salesmanship, pp. 63-66. (Alexander Hamilton Insti- tute, 1914.) 288 BUSINESS ADMINISTRATION thousands of prosperous houses doing business wholly or partly by mail. In the aggregate their business is tremendous. They are not spectacular in their methods, but their business is solid, steady, and growing, and they must be taken into consideration in any discussion of the problems and methods of mail-order selling. Mail- order selling is not centered in Chicago or New York; it is centered ever3nsrhere. There is scarcely a town in the country that does not make sales by mail. ORGANIZATION CHART OF A MAIL-ORDER HOUSE' Why goods are sold by mail. The causes of the development of mail- order marketing are many. One of them, and the greatest, is the growth in realization of the possibilities of advertising. Another is the rising standards of living, which result in a demand among country dwellers for many things that they cannot always buy in local stores. Still another cause is the great increase in the number of manufactured goods that crowd the shelves of retail stores. Hereto- fore almost any manufacturer could obtain dealer co-operation for his " Taken by permission from J. B. Swinney, ander Hamilton Institute, 191 7.) p. 322. (Alex- THE ADMINISTIiATION OF MARKET PROBLEMS 289 products; nowadays the dealer is often averse to pushing new goods, and accordingly the manufacturer finds it necessary or expedient to seek his own market. His decision to do this is frequently induced, also, by the prospect of complicated problems likely to arise as a result of distribution through "regular" channels. Added to these causes are all the facts of strength inherent in the mail-order business. Mail-order selling, therefore, is partly the result of consumer demand, partly the result of the manufacturer's necessity, and partly the result of a marketing policy dictated by expediency. 10. THE LOCAL RETAILER'S ANSWER TO MAIL-ORDER COMPETITION- [This selection is written from the point of view of the local druggist but it may be widely applied. The student would do well to prepare lists of the advantages of {a) the mail-order house and (b) the local retailer in this struggle. Which agency should a manu- facturer use ?] Let us analyze this mail-order competition and discuss methods of meeting it. While mail-order competition is a menace to the retail trade, it does not succeed in taking away a great deal of business from the merchant who is energetic and aggressive. Mail-order competition should be an added incentive to work harder and to give customers more efficient service. While mail-order competition can be successfully met, it must not be underestimated. These concerns are competitors worthy of any merchant's best efforts. It takes the "cold steel" to make them give ground. People are induced to purchase from catalog houses through the influence of catalogs, special price lists, and other advertising matter sent to them at frequent intervals. In a word, maU-order houses create business. They introduce goods in such a convincing manner that people are made to want them. Prices are a strong point. They are quoted in such a manner that the prospective customer feels they are very low. Illustrations in the catalog and other advertising material are, as a rule, good and the descriptions are written by men who know how to appeal to people. Many are made to believe that they can purchase better goods and save money by ordering from the catalog house. ' Adapted by permission from the Northwestern Druggist (February, 1918). 290 BUSINESS ADMINISTRATION The catalogs of the large houses list many items that local mer- chants do not carry in stock. And last, but not least, is the constant and persistent sales effort, which counts. The local druggist has many advantages over the catalog house: 1. He is acquainted with his customers; people do not know, however, with whom they are dealing when they purchase through the mail-order house. 2. The local merchant meets his customers face to face and can appeal to them personally; mail-order houses must put their appeal in cold type. 3. The customer hias an opportunity to exawiwe before purchasing; the mail-order houses can only show pictures. 4. The local druggist can make immediate deUvery; he can also immediately make good his guaranty to refimd money or exchange for other goods; the mail-order goods are subject to annoying delays and there are carriage charges to be paid; to exchange mail-order goods adds considerably to their cost. 5. The local druggist knows his customers and can extend credit when it is advisable to do so; mail-order houses necessarily require cash with the order, or the goods are shipped C.O.D. I am firmly of the opinion that the average retailer in the average community can secure for himself a very large proportion of the business going to the mail-order houses from his town and the sur- rounding country by using mail-order methods, modified, of course, to suit local conditions, and going after the business aggressively. 1. Make your advertising effective. The mere insertion of a business card in a newspaper is not advertising. Advertise per- sistently and endeavor to have something of interest. to say. Use modern merchandising methods. Display your merchandise attrac- tively. Keep the stock orderly. Change your window displays frequently — and keep smiling. It is said that the large catalog houses find the towns, where merchants are indifferent advertisers not up to date in their methods, the most fruitful field. 2. Examine your own store. Keep your stock as complete as possible. Examine your service critically. If these are not all they should be — clean house. The average retailer can meet the mail- order competition at every point if he only thinks hard enough and tries hard enough. Read your pharmacy journals. They contain many ideas which will prove helpful in your fight against this compe- THE ADMINISTRATION OF MARKET PROBLEMS 291 tition. Be wide awake and on the lookout for new things and new selling ideas. 3. Arrange to get a copy of the catalogs issued by the mail-order houses. Study the goods and prices. They are like open books to one who desires to know how they secure their business. 4. Try to secure the co-operation of every merchant in your town, who all feel, more or less, the effect of this competition. Interest the publishers of your local papers. 5. Whenever necessary, sell from the catalogs of your wholesalers and manufacturers. 6. FUl mail orders promptly and treat the customer right- — and always courteously. 7. Send circulars to the farmers telling them of special offers. 8. Offer to meet the catalog price of any article listed when the carriage charges are added to the price quoted. This may mean a loss in some cases but it is good advertising, and in most instances can be done at a profit. g. Publish advertisements comparing mail-order prices with your own. Call attention to the annoyances and delays caused by the mail-order houses in sending wrong size, underweight packages, or seconds. 10. Telephone customers of special items which you think they may be interested in. Send out personal letters — and make them personal. 11. Lastly, keep hammering away month after month. This will get results. . II. SOME CHARACTERISTICS OF THE DEPARTMENT STORE' According to the United States Census of 1910, there were 8,970 department-store merchants and 88,059 general store dealers in this country. C. C. Parlin stated in 1913 that there were 1,140 depart- ment stores in the country, each of whose sales averaged over $200,000 annually, and he estimated that fully 40 per cent of the dry-goods and ready-to-wear goods of the country were marketed through these 1,140 stores. * Adapted by permission from P. H. Nystrom, The Economics of Retailing, pp. 197-206. (The Ronald Press Company, 1915.) 292 BUSINESS ADMINISTRATION The characteristic things about department-store merchandis- ing are: First. — Many departments or sections under one roof. Stores are not usually classed as department stores unless they have at least a score of departments and from this number to a hundred or more. One of the largest is said to have over 250 sections or departments. Second. — Special conveniences offered to all shoppers whether they buy or not. Under the guise of "service" the modern depart- ment store has come to be a sort of club house and amusement place for women. One ordinarily finds in these stores rest rooms, silence rooms for nerve-tired shoppers, reading and writing rooms, restau- rants, information bureaus, post offices, telephone booths, and tele- graph stations for the unrestricted use of all. In some stores lectures, demonstrations, musical programs, moving picture shows, and even operas and plays are given frequently. In a few cases, the department store has served as an employment agency for. domestic help, as a house and estate agency, and even, recently, as a market for corpora- tion securities. Some department stores conduct banking depart- ments accepting the deposits of their customers and employees and paying interest on these deposits, although this form of service is now somewhat under a cloud because of the recent failures of large eastern department stores having banking departments. Hair dressing and manicure parlors, and children's barber shops are regular adjuncts of the largest stores in all cities. Play rooms for children, lost and found departments, and dental parlors are also common. None of these services have any direct connection with the sale of goods in the store. Several special forms of service in direct connection with the sale of goods are also common. Free delivery, sales on credit, C.O.D. sales, goods sent to the homes of customers on approval, guarantee of "money back if not satisfied" and "goods freely exchanged," are so common now as to merit no more than a remark. While many of these services are extended to their customers by specialty or one-line stores, none have gone farther than the big department stores, and none could profitably do so. Third. — The employment of specialists in the advertising depart- ment. The great volume of advertising run by the larger stores is intended to draw people to the store and to facilitate the sale of goods. It is intended to take the place of much of the expert salesmanship THE ADMINISTRATION OF MARKET PROBLEMS 293 that might otherwise be necessary to effect sales. Department stores are the greatest users of newspaper advertising space. Fourth. — The main factor of department store eflS.ciency apart from its buying and advertising powers, already referred to, is its specialized form of organization. In this respect the modern depart- ment store differs as day differs from night from the old time general merchandise store. In the latter, there was no specialized organiza- tion. Clerks sold goods in all or nearly all departments, and accounts or records were not separately kept. For the most part, when the store made a profit, the owner could only guess what lines of goods produced it, and his guess was as likely to be wrong as right. Possibly department store system would be impracticable in the general merchandise store, but the lack of it was the weakness of the latter, and the presence of it the basis of the peculiar strength of the former. In a department store, each department or section is considered as a separate specialty store or shop. Its accounts are kept separate, and under normal conditions it must stand on its own feet; that is to say, it must pay its own expenses, and its prorated share of the general expenditure for^ rent, light, heat, power, insurance, oflSce up-keep, and so on. In addition to this it must seek to make a net profit. Each department has its own organization for buying and selling goods, consisting in the former case of its manager or buyer and necessary assistants such as assistant, buyer, head of stock, and sales people. In these respects the department is exactly like a specialty store, but the accounting, advertising, stockroom work, credits and collections, handling of the cash paid out and received, and the delivery of the goods is done for the individual department by special departments organized to serve all of the merchandise departments in the store. The specialty store, selling one line, has its own accounting, advertising, credit cash and delivery departments, but in a department store of forty sections, for example, there is but one of each of these departments to serve all of the forty sections. 294 BUSINESS ADMINISTRATION flH O r-3« ■i.S o a hfil 1-^ •g '" -si si a! Bi a !> ■11 < P« s "1 ■c — i; i i/JiS s s Le la ^i 8 -*j .2 J, -c -* 8. 2 O. LI -3 o _, 00 s « o -s- E 1- -l [I c s J e II » III 0-1:2 -S 3 -o O il 1^ 3 g 3 Ul g y O n ^ S 1 > o-S t rt n qU -1 H mi tn 1 ■a lO g g O. ■§ u r\ ES 11^ THE ADMINISTRATION OF MARKET PROBLEMS 295 12. THE MANUFACTURER AND THE DEPARTMENT STORE' [It is rather widely claimed that a manufacturer prefers to sell to a department store because of the greater commercial stability of such a store and greater certainty concerning the amount of output which wUl be taken. This selection shows that the manufacturer has other things to think over.] Right at the start of any discussion of the relations of manufac- turers of branded goods and the big stores, it is necessary to point out a very real conflict of interests. It is all very well, and very true, to tell the small dealer in groceries or drugs or notions that his interests and the manufacturers' interests coincide, because he can sell nationally advertised goods so much more easily and more cheaply. The good will inherent in the manufacturer's brand is an asset to the small dealer, and he can afford to cultivate it. But in the case of the large store, it doesn't work that way. To sum it up briefly, there is a real conflict between the interests of the manufacturer and the interests of the big store. Manufacturers' good wUl injures the big store more than it helps, because it draws possible purchasers away from the store brands, while the big stores' good will hurts the manufacturer in ways which are perfectly obvious. As a matter of fact, department stores do carr}' most advertised lines, but do not make any effort to sell them. In fact, the effort is usually the other way especially where the goods are of such a nature that the element of personal service enters into the sale of them. A woman going into a corset department and asking for a nationally advertised brand of corset at a doUar and a half would probably get exactly what she asked for. But if she asked for a five- or ten- dollar corset — the purchase of which usually involves fitting^ — the saleswoman would lay out a specimen of the brand called for, and also of the store's private brand. The brand asked for would be tried on first, but the private-brand corset is likely to be so comfortable under the skUled fingers of the fitter that the customer changes her mind. Some of the corset manufacturers have gotten around this dif&culty by having representatives do the fitting in the store, hired and paid for by the manufacturer, but acting under the direction of • Adapted by permission from R. W. Johnson, "The Big Store and Advertised Goods," in Printers' Ink (October 31, 1912), S9-62- 296 BUSINESS ADMINISTRATION the store as extra saleswomen. In some cases this practice has gotten almost to the point where the manufacturers are hiring all the. help in the store corset department, and they point to this as another phase of the department-store problem. A demonstrator for a month or so is all right, they say, but when it comes to hiring permanent saleswomen for somebody else it ceases to be a joke. A great many manufacturers would be interested in hearing from some of the stores on this subject. It is a subject upon which the manufacturers themselves do not care to speak out, because they do not want to risk offending some of their largest customers. Investi- gations among the large stores show that from 60 to 80 per cent of them express themselves as "friendly to" or "in favor of" nationally advertised goods. The manufacturers do not deny that. They say that the stores are friendly enough, and most of them are willing to carry a small stock of the goods, but they don't seem anxious to hand them out unless they are demanded. Can anybody suggest a scheme whereby the manufacturer and the big store can line up their interests together, instead of playing at cross-purposes ? 13. THE ORIGINS OF THE CHAIN STORE- Chain-store systems may be classified according to ownership as follows: Retailers' chains, jobbers' chains, manufacturers' chains. Retailers' chains have in many cases been formed simply by gradual expansion, the owner beginning with one store and adding others as circumstances permitted. Many retailers have been so successful with their first store that they have established branches, sometimes conducted in co-operation with the parent store and sometimes independently. In a few noteworthy instances retailers' chains have been formed by the estabhshment of a corporation with the purpose of acquiring and conducting a number of retail stores imder a definite chain-store plan of organization. In still other cases chains have been formed by the union of several retailers into an organization, usually of corporate form, each retailer taking stock in the company, and in return permitting his store to pass into the new organization. Some of these retailers' co-operative chains have enormous memberships. The object in view in the organization of retailers' chain-store systems has been largely to reap the profits of increased buying ' Mapted by permission from P. H. Nystrom, The Economics of Retailing, pp. 21 -223. (The Ronald Press Company, 191s.) THE ADMINISTRATION OF MARKET PROBLEMS 297 power, of heightened efficiency in advertising, in better handling of credits and collecting, and in more profitable methods in handling and selling merchandise. For many merchants who have acquired or established branch stores, the additional store units have served as a means of investment for surplus funds and as a field for the exercise of exclusive ability not fully taken up in the single institution. Some of the chain-store systems carry on their jobbing functions much the same as an ordinary jobbing house. Jobbers' chains have come into existence in various ways. In some cases, jobbers have been forced to buy out retail stores from certain of their retail' debtors to save themselves from loss such as would occur if the store were to go on in the hands of the former owners and managers. A good many jobbing houses have a number of retail stores that they virtually own and which they are nursing along in the hope of building up the business or until a competent manager can be found who will buy the store. Management of these stores calls for the same methods and practices as -are required in other chain systems. In some cases when breaking into new territory, jobbers are forced to acquire stores of their own in order to find local outlets for their goods. Stores already in such localities may not willingly take on new lines, and a jobbers' own store system may be the only means of reaching the consumer. In stUl other cases, the jobber may find his trade slipping from him either because of cut-throat competition with other jobbers, or because manufacturers are seUing directly to retailers. In the ordinary course of events either of these processes might eliminafe the jobber. To save himself and to insure a constant market, his only recourse may be to establish a chain of retail stores to handle his goods. This adaptation of the jobber to new conditions is going still farther in a few instances. Not only are chains of stores acquired but also manufacturing plants, so as to assure both a market and a product to place on the market. Jobbers thus have become both retailers and manufacturers, as well as wholesalers. It seems likely that this integration of distributive processes is likely to go on in several lines, those, particularly, in which the jobbing functions are diminishing in importance. There are a number of manufacturers' chain-store systems, nearly all of which had their origin in an inability to find a satisfactory market through the regular channels of trade. Among the lines of goods represented in manufacturers chains, one finds several brands of shoes, confectionery, baked goods, hats, gasoline, and kerosene. 298 BUSINESS ADMINISTRATION sewing machines, cash registers, adding machines, typewriters, office furniture, automobile suppUes, corsets, gloves, sporting goods, phonographs, paper novelties, etc. Some of these goods probably could not be marketed through regular retail stores. Others are not so marketed because of dissatisfaction due to any one of several causes, such as competition with other goods on dealers' shelves; price-cutting among dealers on the manufacturer's standardized lines; inability of the average retailer and retail salesman to give intelligent salesmanship to the line; unwillingness of the average retailer to put in a complete line such as the manufacturer considers necessary to give the consumer a fair idea of his goods;' and unwilhngness or inability of the average retaUer to give the additional service sometimes found necessary to make sales stick. ORGANIZATION CHART OF THE LIGGETT-RIKER-HEGEMAN DRUG STORES' THE PRESIDENT & GENERAL MANAtSER OFFICE ORGANIZATION VICE-PRESIDENT hNANC^ AUDIT IN Q EMPLOYMENT OEPT. CONSTRUCTlOr EXPENSE CONTROL ETHICAL STOCK CONTROL OF SUPERVISION TURN' CENTRAL OVER WAREHOUSES MANAGER SUPPLY DEPARTMENT 1 MANAGER MERCHANDISING ADVERTISING ITMENT DEPARTMENT SELECTION OF CONTROL NEW LOCATIONS OF AND PURCHASING MANAGEMENT SELECTION OF NEW MERCHANDlSEj PLANNING SPECIAL SALES PRICE REGULATION FIELD ORGANIZATION TERRITORY MANAGERS DEPARTMENT MANAQERS GENERAL VOLUME OF BUSINESS SERVICE Compare this diagram with the one showing a possible organization of a mail-order house (p. 288). Are there fundamental differences? Does this dia- gram fit in with the one on page 15 ? There is another type of chain-store organization that might properly be discussed under this heading. This is the consumers' co-operative chains. Such concerns have not as yet made much progress in this country, but in Europe they are numerous and, according to most reports, very successful. ^ Taken by permission from J. B. Swinney, Merchandising , p. 305. (Alex- ander Hamilton Institute, 191 7.) THE ADMINISTRATION OF MARKET PROBLEMS 299 14. MARKET STRUCTURES BY CLASSES OF COMMODITIES' [We are so prone to seek the one "right" way to do things in this world that this selection which points out that market structures are likely to vary with varying conditions will help us to keep a sense of perspective in the marketing field.] One class of merchandise which seems to have common charac- teristics is raw material, or, more strictly, material whose disap- pearance from commerce takes the form of sale to a manufacturer for change into some other form of goods. (Class A.) A second class of merchandise, which has some points in common with this, but enough points of difference to justify separate classi- fication, is found in the case of such materials as still remain in existence and use as part of productive equipment after they disap- pear from commerce. (Class B.) The class of merchandise which offers the most compUcated marketing problems, however, is that type of goods which disappears from commerce to go into individual consumption, or into household use. (Class C.) Class A — Having recognized such a classification of merchandise, it becomes necessary to examine the prevailing tj^es of marketing functions in various industries and trades to determine their general nature and contrasting features in the Kght of this classification. A marketing transaction in the case of merchandise sold to be remanu- factured is ordinarily conducted on a relatively large scale. More- over, it is necessarily only one of a number of kindred transactions by which the supply of material is kept up. For example, if a blast furnace company buys iron ore, it presumably will buy it in quan- tities which under modern blast furnace practice will be relatively large, and it is also a safe assumption that it will buy iron ore more or less continuously as long as the blast furnace remains in operation. The large scale and the continuity of this sort of transaction is a common characteristic of purchase of merchandise for manufacture or remanufacture. The most common device to be found in this field of marketing is the contract (frequently of a renewable charac- ter) which has practically all of the terms and conditions standard- ized, leaving only the price and the conditions of delivery to be determined. In the case of mineral products not yet mined, it is not ' Adapted by penbission from P. T. Cherington, The Elements of Marketing, pp. 20-55. (The .Macmillan Company, 1920.) 300 BUSINESS ADMINISTRATION uncommon for this type of contract to take the form of an agreement on a lease and royalty basis under which frequently the purchaser of the' ore becomes either virtually or actually the operator of the mine. In this class of marketing transaction, the relation between the producer and consumer is intimate as well as continuous, and the connections thus formed may become an important part of the resources of the concern doing the purchasing. The ore contracts of the United States Steel Corporation are a case in point. If one were seeking for the underlying cause of a substantial part of the move- ment toward the integration or common ownership of successive steps in manufacturing industries in this country in recent years, he could find it in many cases in some of these typical contract relations. The inherent properties of the commodities sold determine in a large measure the nature of the mechanism set up for permitting the influences of supply and demand to have free play. For example, the physical properties of wheat make it particularly favorable for handling through a highly organized system of storage and trading, which results in the entire supply being virtually in sight at all times, and which also causes most of the transactions taking place in it to be conducted on contract. Cotton, on the other hand, because of the lack of ease, from a physical point of view, with which it may be put into storage and taken from it, has developed an entirely differ- ent group of relations between the speculative trading, and spot trading. Similarly, such commodities as tobacco, sugar beets, and, to a certain extent, wool are incapable of accurate grading for future contract trading on a basis similar to that employed in the case of either wheat or cotton. They are, therefore, more often bought in either specific lots or by type. Cotton yarn furnishes an example of another commodity for manufacture which is bought and sold on conformity to type rather than either by the sort of contract prevail- ing in the sale of wheat and cotton or even by specific lots. Coal and, iron ore, on the other hand, when bought at the mine, or more specifically in the mine, call for an entirely difierent method of recon- ciUng the inequalities between production and consumption. The typical form of sale in the case of these is by the lease and royalty contract. The characteristic features of the commercial mechanism for conducting such transactions in merchandise of Class A are com- paratively simple. They are in most cases devices whose underlying task it is to guarantee as far as possible the free play of the price- THE ADMINISTRATION OF MARKET PROBLEMS 301 making influences of supply and demand. A mere listing of the type of marketing device commonly employed in this t3rpe of sale serves to make clear the comparative simplicity of this underl3dng task. Some of the more conspicuous devices are as follows: 1. Brokers 2. Commission houses 3. Merchants 4. Elevators, warehouses, and other storage equipment 5. Bankers 6. Underwriters 7. Auctions 8. Future trading facilities 9. Lease and royalty contracts Class B — There is a very different general kind of marketing transaction in the sale of merchandise for the equipment of various enterprises both large and small. In the case of the larger types, such as the sale of railroad material and equipment, many kinds of machinery, and other kindred commodities, the transactions are on such a large scale as to affect materially relations of a financial nature between buyer and seller. A common solution in the case of market- ing enterprises of this kind, as well as in the case of many articles for remanufacture, is the use of a contract by means of which all adjustments of the problems of quantity, quality, time, and place are stipulated in the agreement. This form of sale and the resulting relations between the buyer and the seller, based as they are upon a divergence between the nature of the business of one party to the transaction and that of the other, has caused frequently the setting up of what are known as "interlocking directorates" as distinct from the actual integration of ownership of both the buying and selling concerns. In this way a continuance of friendly relations is assured while organic separation is maintained. Aside from the large volimie of direct sale for merchandise of this class, there is a substantial volume of business conducted through a conomercial mechanism. Jobbing contractors, such as are to be found in the sale of many lines of railway equipment, both steam and electric, are perhaps on a dividing line between direct sale and sale through mechanism. Supply houses, such as exist in many parts of the electric trade, or in the trades of building materials, and more completely standardized forms of machinery are dearly middlemen and therefore of the nature of a commercial device. In the case of 302 BUSINESS ADMINISTRATION the manufacturers of equipment highly protected by patents, and particularly when the equipment calls for expert knowledge for keeping it up and special facilities for repairs, the providing of spare parts, and of supplies, the tendency has been to set up special selhng organizations which are either actually or nominally operated inde- pendently of the actual producing process. Cases in point are the Western Electric Company, engaged in the distribution of telephone equipment, the sales departments of certain of the typewriter com- panies, and the distributing organization of various makers of ma- chinery, such as printing or textile machinery. Class C — ^Marketing of the remaining and most conspicuous class covers merchandise for individual or household use, and there- fore includes the greater part of business terminating in a retail sale. In this class of marketing, in addition to the elementary problems common to both of the other classes, the process of distribution necessarily involves a large amount of emphasis on what have been referred to as the sales functions. The most conspicuous feature of the sales undertakings of this type is the comparatively small size of the sales unit in which the merchandise is disposed of in the final transaction. If there is a series of wholesale deaHngs leading up to this final transaction, each of these in a large measure takes its character from the fact that eventually the goods are to be offered to the consuming pubHc in finely divided units. For merchandise of this kind there is inevitably some point in the course of the progress of the goods from producer to consumer up to which it is desirable to handle the goods in large quantities and beyond which it becomes advisable constantly to decrease the quantities in which the mer- chandise is moved through succeeding marketing steps. In the case of this class of merchandise another factor of great importance is the individual nature of the final sale. In such a sale there is an element of special selection or choice; hence, the physical conditions under which the sale is made become a conspicuous feature of this final transaction. It is in this class that there are to be found most of the generally discussed efforts to change the organization of the distributing mechanism. Suf&ce it to say here that with the elaboration of activi- ties in this class the devices for effecting distribution have become heavily incrusted with features which, while not economically justi- fiable for all types of customers, have real value to some of them. THE ADMINISTRATION OF MARKET PROBLEMS 30 j It is only in very recent years that the efforts to free the distributing system in this class of some of its costly superfluities has taken really constructive form. The blind efforts to "eliminate" some "middle- man" seldom have yielded the good results hoped for. The better selection and adaptation of the supplementary services rendered to the needs of various types of customers have accomplished real savings. New forms of mechanism are emerging. The old t}rpes of organization are being materially modified. The old terms "whole- saler" and "retailer" now find themselves qualified and subdivided; and the changes in the main, reflect a closer adaptation of forms of functionary to functions performed. 15. THE MIDDLEMAN IN DISTRIBUTION' The middleman is a by-product of a complex industrial organiza- tion. Chart I shows in rough outline the evolution of the middleman from the early period, when producer dealt directly with consumer, to the appearance of the orthodox type of distribution (late in the eighteenth century and in the first quarter of the nineteenth century), when a complicated series of middlemen existed. It should be noted that this chart represents the typical case of the domestic product rather than that of imported commodities. Just as the long period of development from a system of barter economy to the early decades of the factory system showed a con- tinuous tendency for increase in the number of middlemen inter- vening between the producer and the consumer, so recent years have shown a growing tendency to decrease the number of successive steps in distribution. The tendency is apparent in nearly every industry and has been clearly marked in recent years. Under the orthodox type of distribution, with numerous middle- men intervening between the producer and the consumer, the pro- ducer is in a position of disadvantage. The fixed charges under which he operates render it necessary that he operate continuously. The outlet for his goods, however, is controlled by the middlemen. Hence the middleman is able to exert pressure upon the producer and force a narrowing of his margin of profit. To free themselves from this pressure, the stronger merchant-producers seek to go around the immediate middlemen, thus decreasing the number of steps in the system of distribution. ' Adapted by permission from A. W. Shaw, "Some Problems in Market Dis- tribution," in the Quarterly Journal of Economics, XXVI (1912), 725-31. Later published in An Approach to Business Problems (A. W. Shaw Company, 1916). 304 BUSINESS ADMINISTRATION II i I 1 = 1= Mil Cons Nil 1 1 =iE il= 5 1 1 1 eIe ili r 8 11 =|i =1= as II =1= nil Conn nil THE ADMINISTRATION OF MARKET PROBLEMS 30s I II /■ a I u Bo. E3= ^1 si II i 1 ilE eJe e Is 1 1 ESE -1- ,.-•*• } 1 1 =1= ElE 1 11 J 1 EaE ..--•* .-•• 3o6 BUSINESS ADMINISTRATION Chart II is an attempt to show diagrammatically the development of this tendency to decrease the number of successive middlemen. By the use of salesmen going directly to the wholesaler and by adver- tising directed to the retailer the producer has displaced the selling agent in many cases. Sometimes the advertising is directed not only to the retailers but also to the wholesalers. To strengthen still farther his position the producer wiU often use advertising directed to the consumer to buUd up a demand for his product. This involves the necessity for a product differentiated by trade mark, brand, or trade name. When the producer thus directly builds up a demand among consumers, he often takes the further step of sending his salesmen to the retailer, thus omitting the wholesaler entirely from his system of distribution. The most extreme step in the process is the complete elimination of middlemen, and the sale direct from the merchant-producer to the consumer, either by advertising alone or by salesmen supplemented by advertising. Manufacturers of specialties have largely adopted this scheme of distribution and the enormous growth of the mail- order business in recent years gives evidence that in some lines of distribution there are economies in this system. i6. THE BREAK UP OF THE ORTHODOX SYSTEM OF DISTRIBUTION' [The so-called "chaos" in modern distribution is well illustrated by this selection. It shows how " the second phase of the industrial revolution" is a "commercial revolution" in which the battle cry seems to be "Keep a grip on the consumer."] What is the trouble ? Ask this question of the manufacturer, the jobber, and the retailer successively and you ascertain that the "other fellow is to blame." "If," says the manufacturer, "Jones, the jobber, hadn't put out his private brand in competition with mine, I wouldn't have had any fault to find. He's pushing his own goods and at the same time handling mine. He won't let me know where my own goods are for sale, for fear I'll go over his head to the retailers. Conse- quently, between inability to stimulate and help my dealers, and the ■ Adapted by permission from P. T. Cherington, Advertising as a Business Force, pp. 30-35, 157-204. (Doubleday, Page and Company, 1913. Copyright by Associated Advertising Clubs of America.) THE ADMINISTRATION OF MARKET PROBLEMS 307 jobber naturally pushing his own brand in preference, I'm up a tree, and I'll go direct to the retailer, if he doesn't come to time." "If," says the jobber, "Martin, the manufacturer, hadn't cut me out and gone over my head direct to the retailer, I wouldn't have put out my private brand." "If," says the retailer, "Jones, the~jobber, hadn't gone also into the retailing business, I'd not have accepted the direct prices of the manufacturer and wouldn't have gone into the field of wholesaUng, too." The jobber, the manufacturer, and the retailer are interchanging functions. Park & Tilford are retailers, with a chain of stores, as well as jobbers. Francis H. Leggett & Co., of New York, are becom- ing advertising manufacturers of Premier products, as well as jobbers. Here are two jobbers reaching both ways, causing dissatisfaction to the manufacturer and the retailer alike. The manufacturer, in order to have a finger in the messing up of the situation, has been known, not only to go over the jobber to the retailer, but also to jump at once to the consmner. An example is Browning, King & Co., clothing manufacturers and retailers, in fifteen cities. Of course, the retailer couldn't stand all of this meekly. So we see in the James Butler string of grocery stores a retailer who demands jobbers' prices of the manufacturer and who is even doing some of his own manufacturing. Marshall Field 81 Co., of Chicago, do a large jobbing business. Wanamaker's, of New York, has just organ- ized a wholesale department. All these were at first retailers. If James Butler can buy groceries direct from the manufacturer at jobber's discounts, how can the httle retailer on the corner, who is strictly minding his own business as retailer, possibly compete? Butler can sell his goods at prices that are "cost" to the little fellow. And the little fellow must Uve. He, therefore, is doing his part in stirring up the dust, and by association with other httle feUows, putting himself on even buying terms with Butler. Those depart- ment stores that get jobbers' discounts are also regarded as just as fulj of threat to the retailers' business. For their part «uch enterprises as those of Butler grit their teeth, and mutter something about "competition of jobbers" and "survival of the fittest." Indeed, the department stores, Butler, et al., insist that they must have the jobbers' discount or they can't do business in competition with the retailing jobber. Macy's, or Saks's, or 3o8 BUSINESS ADMINISTRATION Marshall Field's, or the May department stores seem to have some justification in their explanation in view of the invasion of the retail field by the powerful H. B. Claflin interests. The whole mix-up has been caused by the attempt of some manu- facturer or wholesaler to cut out one or more steps in the old-time distributive process, which was from manufacturer to jobber, to retailer, to consumer. The consumer holds the key— he will buy where he can get the best goods cheapest. While this tendency is one of the most natural in the world, it has developed strife and ill-feeling to a remarkable degree. Caught in the swirl of changing trade cur- rents, every factor concerned has at times turned upon another, accusing it of being at the bottom of the whole trouble. C. Sales Management for a Manufacturing Business Now that we have at least a working hypothesis of what the marketing functions are and have seen something of the institutional life which can be used in the marketing process, let us examine in broad outline the control problem of the sales manager of a manu- facturing business. Since we are more interested in similarities than in diEFerences of marketing problems, it wiU faciHtate our study if we do not designate what kind of a manufacturing business it is, beyond saying that it makes some commodity for individual, and not factory, consumption. We make this specification because the study we made of market structures dealt mainly with those concerned with the marketing of such commodities. The problem may be put before us thus: a sales manager is considering how (and whether) to increase his sales in a certain territory which he is already "covering." What are the materials for the solution of this problem ? It must be admitted that the materials are none too abundant. We do not know as much about marketing as we do about the pro- duction activities of business. The reason is simple and plain. We have behind us more than one hundred years of study of production problems during a time when the market was ever yawning for more output. This study, too, was on a reasonably firm foundation of science, for the physical sciences which are apphed in technology got their start on a modem basis as early as the seventeenth century. Marketing problems, in the contrary, have become, pressing only in the last generation or two and the basic sciences of psychology and economics are even yet not well developed. THE ADMINISTRATION OF MARKET PROBLEMS 309 This does not mean, however, that our sales manager is limited to pure trial-and-error experimentation or, worse still, that he is committed to stagnation. A beginning has at least been made in blocking out the main aspects of the problem. One such attempt is sketched on page 6 of this book and is explained at length in Shaw, An Approach to Business Problems. To Shaw, the work of the sales manager may be summed up in two expressions, (i) demand creation and (2) physical supply of the goods. The manager's activities are all in terms of those goals. This formulation is at least definite and tangible. Another formulation, that of Professor Copeland, is given in Selection 17 below. And we are able to go farther than merely making a sketch of the outUnes of the problem. Certain helps, some of them empirical rather than scientific, it is true, are available in the actual conduct of operations. There are certain "check hsts" of forms or methods of analysis of the product, the market, and chaimels of distribution, such as the sample shown in Selection 18, and such as the more extended statements of market analysis and commodity analysis given in Selections 19 and 20. Furthermore, certain helps in actual control of operations have become fairly well standardized. We shall notice particularly certain measuring aids of market administration. Some specimens of a rather volimiinous literature in this field are given in Selections 21 to 26, inclusive. They give hints of the uses which can be made of account- ing, statistics, and other measuring devices as instrxmients of control. Of course, sales management is not all technique and routine administration. PoHcies must be formed; an organization must be worked out. As samples (they are only samples) of the activities in these two fields we shall look at certain price policies in Selections 27-33; ^iiy the manufacturer (Rexall stores) d) Through sale to mail-order houses and other consign- ment agencies 3l8 BUSINESS ADMINISTRATION 3. From producer to wholesaler to retailer to consumer a) Through any wholesaler and any retailer (most used channel) b) Through producer's own territorial agents to any retailer c) Through producer's own territorial agents to exclusive retailers 4. From producer to selling agent,- importer, broker, or com- mission agent, to wholesaler, to retailer, to consumer C. Conditions relating to the product 1. Salable by description, sample, or bulk 2. Is there an element of "shopping" in the product 3. Does selling require especially educated salesmen 4. Will the product require special attention after it is sold in order to keep the customer satisfied S- Can a retailer profitably carry a full line of more than one competing brand or such a product D. Conditions relating to the market 1. EstabUsh satisfactory available depots 2. Is the possible demand in the territory sufi&cient to support profitably a separate selling organization 3. Are distributors in the territory accustomed to extend long and short terms of credit 4. The functions of middlemen: (a) Sharing risk (6) Trans- porting goods (c) Selling (d) Financing (e) Assembling, assorting, and reshipping 5. Is the period of time between one demand and the next from the same consumer shorter or longer than the period of time required for the most rapid transportation between producer and consumer 6. Is the territory near enough to producer so that transporta- tion charges on the smallest unit demanded wiU not materially affect the price in competition E. Conditions relating to classes of distributors I. Class of dealers through whom it is most profitable to distribute a) The one most closely in contact with consumers pur- chasing competing or associated classes of goods b) The one which can distribute most rapidly See also p. 354. An Organization of the Sales Department. THE ADMINISTRATION OF MARKET PROBLEMS- 319 19. SOME PHASES OF MARKET ANALYSIS' [It will be helpful for the student to think of this selection as a more extended statement of Part II of the preceding selection. It would be a useful exercise to work out a similarly extended state- ment for Parts I and III.] In order to determine to what particular class of customers his sales campaign should be directed, a manufacturer finds it necessary to study his market carefully under present conditions of keen com- petition. Blunderbuss methods are wasteful; hence they are becom- ing antiquated. The demand for any article varies according to purchasing power, living conditions, occupations, racial character- istics, climatic conditions, and numerous other influences affecting the different classes of consumers. The object of market analysis is to determine which class or classes of consumers constitute the potential market for the product, to ascertain where that class is located, and to find out what, channels of distribution are most readily available for reaching them. There are few, if any, commodities for which equal per capita sales may be expected in all sections of the market, provided the market is more than local in its scope. In each district there are numerous classes of consumers with widely different tastes and desires, and the relative proportions of these classes in different districts always vary. In New York City, for example, the population of the metropolitan district in 1910 was 6,475,000. In the same year the population of the Cleveland metropolitan district was 613,000. From these figures it cannot be assumed that the New York market for any particular article is potentially ten times as great as that of Cleveland. New York represents the extremes of wealth and poverty. Fifth Avenue and the Lower East Side are at opposite ends of the economic scale. Their wants and their purchasing power are wholly unlike and each differs from the large middle-class strata. In Cleve- land the relative proportions of these several classes, with their numer- ous gradations of purchasing power and of wants, are not the same as in New York. The population of Cleveland, furthermore, differs in its composite parts from that of Cincinnati or other cities, and these differences in the make-up of the population affect potential demand. Another line of demarcation is between urban and rural districts. ■ Adapted by permission from M. T. Copeland, Business Statistics, pp. 178-83. (Harvard University Press, 19 17.) 320 BUSINESS ADMINISTRATION Because of these diversities a reliable estimate of potential demand can seldom be made upon a gross per capita basis. In analyzing the market for some products, conditions other than those of a strictly personal nature must be taken into account. A manufacturer of electric flat-irons, for example, in analyzing his market found that in one city of 300,000 population 25,000 families were supplied with central station electric current. Thus there were 25,000 possible customers in that city. In another city of approxi- mately the same size only 3,000 families were supplied with electric current; hence the potential market in this second city was much smaller. For some products the market is clearly defined; in such cases the market is easily analyzed by the manufacturer. The manu- facturer of machine tools, for example, knows that his product can be sold only to machine shops and engineering works and his task is to learn all the establishments existing and planned for in the territory that he wishes to cover with his sales organization. A similar situation confronts other producers of equipment and materials that are sold to manufacturers. Certain manufacturers of specialties sold to other classes of customers can encompass their market in a list that does not assume excessive proportions; a manufacturer of surgical appliances, for example, can readily obtain and utilize a practically complete list of possible customers. For the great mass of goods sold at retail, however, and for general suppUes sold to manu- facturers, the market is of a different type and potential demand is much less easily estimated. In undertaking an analysis of the market for an article which is sold over a wide territory and for which a market index can be selected only with difficvilty, too much attention may be given to wealth statistics, which are assumed to indicate incomes received by con- sumers. Wealth statistics, as a rule, have little significance in market analysis. In the first place, there are no reHable wealth statistics, and, in the second place, even if such statistics were available, they would give slight clue to the probable demand for any particular article. Wealth statistics are published, to be sure, by the United States government, but they are rough approximations. Wealth statistics are commonly reduced to a per capita basis, but a per capita wealth figure is of Uttle worth for any purpose, for it does not show the distribution of the wealth. It makes a vast THE ADMINISTRATION OF MARKET PROBLEMS 321 difference to manufacturers looking for prospective markets whether the wealth in any district is fairly evenly distributed among the consumers or concentrated largely in the hands of a few very rich persons; the quantity of any commodity purchased by an individual consumer seldom varies in direct proportion to his wealth or income. Finally, even if the wealth figures were available in such form that they could be relied upon and the distribution of the wealth among the population ascertained, the figures would not accurately indicate market potentialities. Not only are wealth statistics inadequate indices of incomes, but different classes of people engaged in different occupations and Uving under different conditions do not expend their incomes in the same way, even if those incomes are approximately equal. Average wages are another set of statistics occasionally referred to as furnishing an index of potential demand. The United States Bureau of the Census publishes average wage statistics, and similar figures may be obtained from other sources. An average wage, however, for all the persons engaged in manufacturing in Massa- chusetts, for example, includes the wages of niunerous highly skilled workmen and also the wages of unskilled men, women, and children. The average is not representative and does not indicate that Massa- chusetts is necessarily a poorer potential market for any manufacturer than some other .states where the average wages may be higher. Per capita consumption figures for large groups of commodities, such as clothing or foodstuffs, are finding their way into some adver- tising publications, as affording a guide to potential markets. The only per capita consxmiption figures which are worthy of consideration are those for such articles as coffee or sugar, where fairly accurate records of importation and domestic production are maintained. The census figures for the value of the product of the various manu- factiuing industries are too inaccurate, in the form in which they are presented, to be acceptable as a basis for estimates of per capita con- sumption, and there is loo great uncertainty as to the amounts added to the manufacturers' selHng prices in the course of the market- ing processes to warrant placing any reliance upon estimates of total retail selling value or total amounts paid by consumers for these products. These per capita consumption figures, moreover, are gross figures including many grades and qualities, some of which are virtually non-competing. Such statistics are of little aid in making a careful market analysis. 322 BUSINESS ADMINISTRATION Instead of attempting to use statistics for wealth, income, or per capita consumption, the first task in undertaking a statistical analysis of a market is properly to determine just what class or classes of con- sumers constitute the potential market and, if there are varying degrees of demand, what demand may be expected from each class. For this, personal investigation or inquiry may be necessary. The next step is to ascertain the number of consumers of each class in each sales district. From these two sets of statistics the total potential demand for each district under normal conditions can be estimated. These figures for estimated potential demand, when compared with past sales records, show in which districts the best opportunities exist for sales development and serve as a basis for establishing quotas for salesmen. Ordinarily the comparison of sales records with estimated potential demand shows that the degree of saturation is not uniform in all markets. It is usually found upon investigation that a higher percentage of potential demand has been realized in some markets than in others, thus indicating the direction in which expansion may most readily take place. Another factor to which attention may be given in analyzing a market for some products is the percentage of distribution — that is, the percentage of the total number of possible retail outlets in which the goods in question are sold. A manufacturer of a food product sold in retail grocery stores generally wishes to induce as large a number of grocers as possible in each district to carry his product. If 75 per cent of the retail grocery stores are selling the article, he considers that he has 75 per cent distribution, without reference, of cotirse, to the relative volume of trade of the retailers. In establishing sales quotas, allowances must be made not only for differences in degree of saturation and percentages of distribution but also for differences in general business conditions. From season to season general business conditions fluctuate in each district. A poor cotton crop may cut down the normal demand in the cotton states while a good grain crop in the same year may cause business to be exceptionally brisk in the wheat district. Hence the statistical indices of business conditions in each district must be taken into accoimt in comparing salesmen's records with established quotas. See also p. 66. The Location of Retail Establishments. p. 74. An Outline of the Relations of Transportation to Site Location. THE ADMINISTRATION OF MARKET PROBLEMS 323 20. SOME PHASES OF COMMODITY ANALYSIS' In general, industries may be divided into two classes: those making utilities and those making style goods. Utilities comprise those articles which are bought by the consumer solely on the basis of quality or eflSciency for the price and without thought of their pleasing his taste or fancy: e.g., agricultural implements are utilities. Style lines are those in which the consumer's preference is deter- mined by qualities other than utility^ — all those lines which appeal to individual tastes and fancies. In general they are the lines that involve the element of adornment and display, such as clothing of all kinds, jewelry, dress accessories, household furnishings and decoration. Many lines are at the same time utilities and style goods. For example, clothing and furniture in certain grades are bought primarily for serviceable qualities, but in other grades must meet the most exacting requirements of style. In automobiles, the truck is a utility; i.e., is judged on its ability to produce wealth. The pleasure car, on the contrary, is both a utility and a style carriage. In utility lines, theoretically, a single concern, if it excelled, would secure an entire monopoly; for if a manufacturer so perfected his manufacturing process that he was universally acknowledged to have the most eflScient article at the price, theoretically everyone would buy his product. Practically, if one manufacturer can attain a very high degree of efficiency in manufacture, another can develop near enough to his standard to be a competitor; and practically, there is a value in a name, and there is a difference in public opinion. Hence it seldom happens that in any line where there is no protection by control of raw material or patents, anyone does attain an absolute monopoly. However, in these lines there tends to be concentration down to a very small number of manufacturers, unless freight con- ditions affecting raw materials or finished product necessitate a sectional distribution of plants. In the manufacture of utilities, as concentration progresses, it becomes increasingly difficult for a new firm to gain a foothold; for ordinarily the new manufacturer has to pass through an unprofitable period before he attains efficiency enough in manufacture to hold his own in competition with monopoly. In these lines where the eco- nomic tendency is toward concentration, there is no place for the smaU manufacturer unless he can adapt his product to meet some peculiar local need, and no place at all for the middle-sized producer. ' Adapted by permission from C. C. Parlin, "Why and How a Manufacturer Should Make Trade Investigations," Printers' Ink (October 22, 1914), 12, 74-76. 324 BUSINESS ADMINISTRATION The manufacturer is likely to face the alternative of growing great or being crowded to the wall. In style lines, on the other hand, people buy not only quahty and efficiency but also an intangible something which by its display represents the owner's individuality. Since there are many types of individuaUties there must be a considerable number of manufac- tiurers to supply the individual wishes. In the manufacture of a style line, whenever a manufacturer gets a majority of the market a style reaction sets in against him. Thus it comes about that no one can gain and permanently hold any large per cent of the total market. Hence there are boxmd to be a considerable nvunber of producers, and their relative rank is likely to vary from season to season as a fickle public smiles first on one, then on another. In these fines the oppor- tunity for the small and medium-sized manufacturer continues. If the mamrfacturer produces an article sold to the consumer, it is important to know to what extent it is bought by men and to what extent bought by women, for men and women piurchase through dif- ferent motives. A man ordinarily buys either at (i) the most convenient place, (2) by impulse, (3) in an accustomed place, or (4) by brand. He does not compare values and there is little tendency for his trade to be concentrated in shopping centers or in large stores. In general, men's trade is held back in the suburban places and remains scattered in a multitude of small establishments. Women's trade, on the contrary, is of two distinct kinds: (i) con- venience goods and (2) shopping lines. Convenience goods comprise notions, cheap cottons, and, in general, the lower end of women's purchases. Shopping lines, in general, comprise the upper end of women's purchases, such as cloaks and suits, draperies, carpets, millLaery. In the purchase of convenience goods the woman ordinarily buys on the same motives as the man: that is, at the most convenient place, or on impulse, or sends the children to an accustomed store, or orders by brand. These lines, like the men's, find their sale in a multitude of suburban shops or crossroad stores and the manufacturer who would seU these lines must have the assistance of the jobber. In the purchase of shopping lines, on the other hand, the woman does definitely want to compare values (apparently in three stores) and the department store, which is organized to furnish facilities for THE ADMINISTRATION OF MARKET PROBLEMS 325 women's shopping, tends to get the great bulk of this trade. Hence the trade in shopping hnes is sharply concentrated in a comparatively small number of shopping centers and in a few stores within those centers. It is of prime importance to a manufacturer to determine in which classification his goods fall and to what extent either shopping or convenience buying is the prevailing motive. Upon this depends his method of sale. If he has a men's line or a convenience line, his distribution is widely scattered and the multitude of small merchants handling his wares prefer to buy of the jobber. Such a manufacturer therefore should not push his direct sales methods farther than is consistent with a jobbing policy. In some lines he wUl find it advan- tageous to supplement his jobber program by selling direct to those large stores to which he may sell without jeopardizing his jobber connections. If, on the contrary, he has a shopping line of any considerable volume, the direct sales method will be found best adapted to his needs; for the sale opportunities are confined to large stores, and, in general, large merchants prefer to buy direct. A clear understanding of such conditions is often necessary to determine the foundation principles of a selling system. 21. MEASURING AIDS IN SALESMEN CONTROL A' One of the first things that the new sales manager did was to study the individual territory of each salesman — estimate what it should pro- duce in sales for his house, and compare this result with what was being produced. In order to do this intelligently he procured a map cabinet and a set of state maps. Now most concerns whose policy it is to desig- nate a route for their salesmen use a map system for that purpose but many concerns depend largely on the initiative of their salesmen in this and many other respects, and judge their efficiency on aggre- gate results. But this sales manager found other uses for a map record — ^first he carefully drew the boimdary lines of each salesman's territory on the maps wherever more than one salesman worked in the same state. Then he prepared a list of every town of five hundred popula- tion and over in each territory. That was the range of towns in which the goods coxild be sold profitably. ' Taken by permission from "Close-formation Tactics in Sales Development," Printers' Ink (April i, 19x5), 3-6. 326 BUSINESS ADMINISTRATION These lists were then compared with the sales records, and each town checked to indicate whether the house sold any goods there. When the lists were completed they told an amazing and very inter- esting story. The average salesman was selling goods in only about half the towns in his territory. At one stroke the new sales manager had uncovered a vast field for sales development. He analyzed it more closely. First he transferred the informa- tion given in the lists to the territorial maps by using a greenheaded tack to designate every town where the company sold goods. Red- headed tacks were used to indicate the no-sale or opportunity towns. The maps then presented a comprehensive picture of each salesman's territory. The weak spots stood out in the limelight — a, surprising number of them. Why ? How can they be eliminated ? ^ These were the next questions. The lists were revised to show a more complete story, which included the population of each town, the names of all well-rated dealers in each town, and the exact amount of sales to each customer during the preceding year. These facts, when assembled, disclosed other valuable information. They brought to light special weaknesses of various kinds in individual salesmen. One salesman's record, for example, showed no sales whatever in towns of less than 5,000 popu- lation. Evidently he passed up smaller towns entirely. Another salesman seemed to take the opposite course. His small towns were nearly all well developed, but he secured very little business in the large cities. It was noticeable that some men almost invariably secured their orders from concerns whose commercial ratings indi- cated them to be the smaller stores in a town. In fact the lists and the maps together provided an excellent bird's-eye view of what each salesman was doing in his territory. A copy of the list pertaining to his territory was sent to each salesman, together with a letter directing his attention to obvious conclusions. The letter was not in the form of a reprimand, nor did it contain any definite instructions that would be construed as a positive order. It pointed out the opportunities of the salesman to increase his sales by more thorough application along certain definite lines. Furthermore, each salesman was told that the house was going to conduct a special direct mail campaign to interest every well-rated dealer in every town where he was not selling goods. THE ADMINISTRATION OF MARKET PROBLEMS 327 The inference of course was that he was expected to call on those dealers. This had a distinct moral effect on most of the men, as they realized for the first time that their work was being closely watched in the house. Many of them took the cue and succeeded in opening some nice new accounts. Also, the mail campaign stimulated a good many inquiries which forced them to call on dealers they had never solicited before. As a matter of fact, however, it developed that most of the sales- men had too much territory — more than they could work thoroughly. Naturally they had hit only the high spots at first, and gradually settled down to devoting most of their time to regular customers. The sales manager arrived at this conclusion as the first season drew to an end, because the red-headed tacks were still very much in evidence on the maps. Here was a problem that required some thought. It meant putting on more men. The only way to make room for new men was to take territory from old ones — and the average salesman is jealous. A closer study of the maps and the red tacks helped to solve this problem. One example will illustrate what was discovered and what occurred in most cases: The territory of one salesman consisted of the whole state of Georgia. He lived in Atlanta and made that city his head- quarters. If you should draw a horizontal line through the center of the state you would find that Atlanta is located nearly in the center of the upper half. The tacks on the map of Georgia showed that this salesman got most of his business in the upper half of the state. In other words, he spent most of his time near home, and even in that section there were more red tacks than there were green ones in the lower part of the state. It so happened in this case that another salesman, who was a prodigious worker, had found the state of Florida too small to occupy all of his time. Consequently a slice of southern Georgia was taken from the Georgia man and given to the Florida man. The Georgia man kicked like a steer, at first, but gave up when he was shown that tlie business he really lost by the transaction was hardly enough to justify the time and expense of getting it. He was also shown a lot of red-headed tacks in the remaining part of his territory. During the next season both men increased their sales — the original Georgia man about $10,000 with less territory, and the Florida man got about $20,000 out of his new Georgia territory. 328 BUSINESS ADMINISTRATION B- A star salesman for a wholesale crockery house came into the sales manager's office. "Mr. Stewart," he said, "I must have more money next year. My sales have been $20,000 more this year than last, and my expenses have increased only one-half of one per cent." He got the raise. Then came another. "Mr. Stewart," this salesman ventured, " I think I ought to have more money next year. Of course, I know that I haven't sold much more this season than last, but I have been with you fifteen years. I went out to that territory when you didn't have an account in the state. I have built up such a good wiU for the house that I believe the mail-order sales from my territory wUl exceed those from the territory of anyone else on the force." But Stewart did not know this, or if he did, he probably believed that the house was as largely responsible for the good will as the salesman. Stewart had a rather firmly rooted idea that a salesman's value to the house is determined by a single problem in division- total selling expenses divided into total sales gives percentage of selling cost. By this process Stewart found that this salesman's percentage was a trifle higher, and his total sales considerably lower than those of the star. Result — this salesman did not get his raise. Now Burke, a competitor of Stewart located two blocks away, had the same requests under similar conditions from two of his sales- men. But in this case, the star was refused the raise, while the apparently poorer salesman secured a substantial increase. And in spite of this seeming reward of mediocrity at the expense of ability, Burke is the keener sales manager. The card index in his desk showed that although the star salesman had sold more goods than any other man in the house, and his expenses were as low as the rest, his net profit to the house was considerably below the standard. He had concentrated his efforts on the staples which ran into big figures but yielded small profits. The other salesman had devoted his time to the more profitable specialties, which held down his gross sales, but increased his net value to the house. Burke's cards showed this fact and this salesman got the raise. Two factors determine the salesman's value: his net profit to the house, as shown by actual figures; and his trade-building ability as reflected by mail orders, a continued patronage and good will. See also p. 192. Measuring Aids of Personnel Administration. 'Taken by permission from D. L. Kinney, "Determining the Value of Sales- men," System, XVII (1910), 402. THE ADMINISTRATION OF MARKET PROBLEMS 329 22. MEASURING AIDS IN ADVERTISING CONTROL' The shrewd advertiser of today before beginning a campaign makes three important tests. The public passes judgment: (i) on his copy, (2) on the mediums in which the copy is placed, and (3) on the field in which the medium circulates. After copy has been approved as a puller by the head of the firm, it ought to be put on trial. It should be keyed and the results care- fully checked. Other copy should be placed in rival publications or handled in the same routine of distribution and each month the advertisements should be interchanged among the mediums selected.- A method generally used by big advertisers is to try copy for a general campaign in a daily newspaper in a large city, a daUy news- paper in a small city, a trade or class publication, a national monthly of limited circulation, and a woman's magazine. The copy is crossed from publication to publication, and if there is any doubt about the fairness of the test the copy is inserted several times in the same magazine. By keeping count of replies and sales, it is easy to find which advertisement consistently brings the best orders. Some firms have kept records of this sort for years. Before they start a campaign they know accurately what pieces of copy "take" and what mediums bring the best returns on their offer. The adver- tising manager also has before him at the beginning of each test theoretical figures which indicate the number of returns he should receive from mediums or circularizing schemes with which he has had experience. If his best copy in his best mediums falls below this standard, he knows that he is in error and that he must locate copy trouble before the campaign may be launched. Testing frequently shows the advertiser the amount of space to use to get the best percentage of returns. In Cincinnati a test showed a manufacturer that single-column space secured as good results as a page advertisement in the same medium. Having buUt publicly approved copy, the general or local adver- tiser must still determine what classes of mediums and what indi- vidual periodicals or other distribution he will adopt, whether trade magazines, literary magazines, weeklies, monthlies, or any one of the many other mediums which offer to sell his product. The experienced general advertiser has a list of publications with low rates but limited circulation which pull in constant ratios to the national medium. Advertisements are placed in these mediums 'Adapted from W. S. Zinunerman, "Proving the Pull of Advertising," System, XXI (1912), 156-61. 330 BUSINESS ABMINISTRATION during the copy test and as results of such tests advertising contracts are let with a keen forecast of the results. Care must be taken to insure, as nearly as possible, identical conditions for test and campaign. In national campaigns business conditions in the nation must be considered. A backward, cold summer or a warm winter must be considered in reckoning results. The length of time an advertisement runs, the space and position which it occupies in the medium used, the strength of competitors in the same field, must all be considered. When campaigns are .conducted in newspapers, local conditions must be investigated. The hovu: and the day of the week when the advertisement appears have distiact effects on results. Local season, celebrations, and disasters make differences. The chief asset of the effective advertiser is his record of past results. The man who believes that he can keep such results in his head or who guesses in selecting mediums for his campaigns is delib- erately draining profits into losses. One Chicago man, finding that the ordinary scrapbooks were not large enough for his purpose, secured the largest-sized loose-leaf invoice books. The advertisements are placed on manila sheets and kept until out of date. Then they are removed from the covers, tied up, and stored in a confidential file in the vault. With each advertisement is a printed slip showing the amount of sales and inquiries traced to the copy, the mediums in which it appeared, and the number of times it ran. Another sheet shows in detail the cost of the advertisement proportioned among the various departments. Advertising cost is accounted as sales cost. Another advertiser keeps careful watch of competitors' copy and the store shoppers keep him informed of results of the competitors' sales. The rival copy is filed in an invoice book kept for the purpose and notes are attached carrying the information secured. In this way he checks up selling methods of worth and, when occasion arises, improves upon them. The same book contains specimens of maga- zine advertising and copy in other lines of business which is written with a suggestive or distinctly original appeal. The success of one of the largest advertising agencies in the United States is admittedly based on the vast amount of evidence accumu- lated as to copy, seasons, prospects, fields, and publications. THE ADMINISTRATION OF MARKET PROBLEMS 331 23. MEASURING AIDS APPLIED TO THE SOCIAL ENVIRONMENT' How. conditions may be analyzed and the facts thus sifted be utilized is illustrated by the recent experience of one great industry. By reason of its size and unquestioned leadership, perhaps, it had developed a blind side in its outlook on the selling field. Finally, the president brought matters to a focus. "It's time," he said, "to stop traveUng around in circles." The work began next day. First a conference of all the manu- facturing executives was called. In company with the president, they sized up the production situation from every angle. They examined the goods from the point of view of salability, value, efficiency, safety in use. But a searching analysis of trade reports, salesmen's complaints, the results of technical investigation, and comparative tests estabUshed nothing except that the goods were sound. Interest centered next on the sales organization and the funda- mental selling situation. A study of the whole industry was first made. Graphic charts presented the volume of business of the six leading companies. They pointed back forty years. Getting the sales figures of two of these companies was easy; the other three guarded their statistics jealously, but sufficient data were secured to make the final estimate one very close to the actual figures. This sales chart showed conclusively that there had been no decrease in output which other firms had not felt more keenly; while the ratio of increase was always greater for the company than for the other concerns. In a word, not one firm, but the whole industry, was suffering the same sickness, whatever that might be. In a nutshell, the peculiar situation in the trade hinged on three separate developments: The first and by far the most important was the movement of population to the cities and the decrease of wild and uncultivated land. When a man moved in from the country to take a job in a store or factory, his use of the company's products virtually ceased. The second development was the passing of control of distribu- tion from the hands of the jobbers in the central markets and the multiplication of smaller wholesale houses to which the carrying and pushing of the company's line might be a matter of only casual 'Taken by permission from J. G. Fredericks and F. M. Faker, "Finding the Facts that Count," System, XXII (1912), 121-24. 332 BUSINESS ADMINISTRATION interest. If the goods were called for, they would be supplied; but a consumer's demand was the only reason for stocking and handling them which these jiew houses recognized as imperative. The third transformation which had taken place in the distribu- tion field was the entry of the department store and the mail-order house into a field which had always been controlled exclusively by dominant specialty dealers in every town of any size throughout the country. To arrive at these conclusions thirty or forty graphic charts were compiled. This conclusion indicated as plainly as a "graph" itself what would have to be done to restore sales vigor and efficiency. Con- structive educational work was necessary to revive the interest of the urban consumer. His changed situation had to be taken into con- sideration in framing the new appeal. New uses had to be discovered and pointed out. Many of the products would need adapting to this changed physical situation. The advertising manager, in touch for the first time with the environment and needs of consumers, was able to plan a campaign which would turn the attention of these forgetful buyers again to the company's products. Knowing where the various classes were grouped, he was able to choose mediums and vary appeals so that each dollar spent earned its right proportion of inquiries and orders. His campaign directed at retail dealers had the same virtue of shooting at a mark made visible by the light of exact knowledge. The sales manager, in his turn, found the board of directors a unit in backing up the vigorous program he laid out for handling the jobbers and coaxing his dealers into line with the new program of co-operation. Even on the negative side, the investigation was not without result. The works superintendent, who had been urging an addition for two years, after studying the "graphs," acquiesced in the board's decision that for three years every surplus dollar was worth double its factory value if expended in the selling field. THE ADMINISTRATION OF MARKET PROBLEMS 333 24. MEASURING AIDS MAY RESULT IN EXPENSE STANDARDS' [One of the most useful administrative devices the manager can have is that of expense standards. If he knows what is current prac- tice in various fields of expenditure he has a sort of norm against which to measure his own performances and with which to check his own figures in preparing sales budgets. Generalized statements of current practice by other firms are of course no final guide for the manager. He must always keep in mind his own peculiar circumstances. The tables of operating expense given below may be called expense standards. They show in percentages of net sales (net sales =100 per cent) the various elements of expense in the businesses indicated in the captions. Wherein are you, a manufacturer of commodity x interested in the following tabulations ?] OPERATING EXPENSES IN RETAIL GROCERY STORES Item Lowest Percentage Highest Percentage Common Percentage Wages of salesforce Advertising Wrappings and other selling expenses Total selling expense Wages of delivery force Other delivery expense Total delivery expense Buying, management, and office salaries Office supplies, postage, other buying, and management expense Total buying and management expense Total interest Rent Heat, light, and power Taxes (except income and buildings) . . Insurance (except on buildings) Repairs of store equipment Depreciation of store equipment Total fixed charges and upkeep expense Miscellaneous expense Losses from bad debts Total expense Gross profit Net profit (or loss) o 01 II 41 26 04 66 S8 o.oi 0.78 o-iS 033 0,07 0.01 0.02 0.01 0.07 I-3S 0.19 0.04 8.7 2.82 2.26 9-94 2.84 2-37 4-36 S-97 1. 18 6.38 2.28 3 -45 0.98 0.49 0.62 043 2.17 6.82 1.97 331 22.8 4-7 0.2 o-SS 5-8 1-4 i.o 2.4 1.6 1 .1 0.25 0.13 0.14 0.08 0.25 lO-S 6.05 Loss 26.04 9 . 29 Profit 16.9 2 . 3 Profit 'Taken from Bulletins 10 and 13, Bureau of Business Research, Harvar Graduate School of Business Administration. (Harvard University Press.) 334 BUSINESS ADMINISTRATION OPERATING EXPENSES In General Merchandise Stores Item Lowest Percentage Highest Percentage Common Percentage Wages of salesf orce Advertising Wrappings and other selling expenses. . Total selling expense Wages of delivery force Other delivery expense Total delivery expense Buying, management, and office salaries Office supplies, postage, and other management expense Total buying and management expense Total interest Rent..' Heat, light, and power Taxes (except income and buildings) Insurance (except on buildings) Repairs of store equipment Depreciation of store equipment .... Total fixed charges and upkeep expense Miscellaneous expense Losses from bad debts Total expense , . 2.1 0.03 0.12 2.37 0.26 0.14 0.47 1.08 0.12 1.27 O.S4 0.49 0.06 0.09 0.07 O.OI COS 2. II 0.07 0.02 10.03 13 08 1.79 U.68 14.16 1-47 1. 41 2.22 S-4 0.7 S-4 4.9s 2.9 0.74 0.99 1.76 0.38 0.77 8. S3 0.98 2.64 29s S.6 0-3 0-3 6.4 i.o 0.67 1-7 2.4 0.2 2.8 2.2 0.9 0-3 0.4 0-37 0.09 ~o-3 S-o °-3 0.4 iS-S Gross profit Net profit (or loss) . 9.8 10.18 Loss 3I-S 17.7 Profit 19.0 3-4 Profit In Shoe Departments of Department Stores Gross profit on merchandise Salaries and wages of buying force . . Other buying expense Total buying expense Salaries and wages of salesf orce PM's... Advertising Wrappings and miscellaneous selling expense Total selling expense Delivery expense Management and office salaries Office supplies and expense Total management expense Rent Heat, light, and power insurance on stock and equipment . . Repairs and renewals of equipment . Depreciation of equipment Total fixed charges and upkeep expense Miscellaneous expense Losses from bad debts. , Total expense Net profit from merchandise operations Total interest Stock-turn . 12.6 0-39 O.OI 0.67 4.92 0.07 0.49 0.02 7.2 0.2s 0.8 0.03 1.0 IS 0.2 0.18 0.17 0.2 0.2 3-S 0.0s O.OI ig.o 16.6 Loss 0.69 0.89 39-1 3-44 1.92 367 13s 2.S 7.3 IS 18.9 2.32 4.0 1.98 4.78 10. o 2 I I 2 o 33 3S o 17 7 o 26 4 9.82 II-3 3.1 28.1 IIS 0.2s 1-4 8.4 0.6s 1.9 0-3S II-3 0.6 2.1 0.1 2.2 3-4 0.7 o.SS •^■35 0.4 0.4 S-8 2.0 0.1 23s 4.6 2.3 i-S THE ADMINISTRATION OF MARKET PROBLEMS OPERATING EXPENSES IN CHAIN SHOE STORES 335 Item Gross profit on merchandise Total buying expense Salaries and wages of salesforce PM's... Advertising Wrappings and miscellaneous selling expense Total selling expense Delivery expense Management and oflSce salaries OflSce supplies and expense Total management expense. Rent Heat, light, and power Insurance Taxes Repairs and renewals of equipment . . . Depreciation of equipment Total fixed charges and upkeep expense Miscellaneous expense Total emense Net profit from merchandise operations Total interest Stock-turn Lowest Percentage Highest Percentage Common Percentage 12. S 0.2 2.S 0.03 0.0 0.02 4-7 0.0 0.08 o.oi O.II 1-33 0.12 0.08 0.01 0.01 0.1 ^■SS 0.1 9-8S 319 OS3 Loss 45-5 2 -95 16. s 2.1 16.3 1 .0 33-0 S-S 5° 1.2 6.0 27.8 3S 1.88 2.04 4-4 8.9 335 , 8.8 S7-6 20.3 7-4 28.4 0-9S 6.9 °S 2-3 0-I5 9.8s 0-37 1.6 0.1 1-7 8.6 0.9 0-3 o.iS o-iS i.O II. I 0.6 24.6 3-8 2.S 4.6 1-7 25. MEASURING AIDS REFLECTED IN THE PROFIT AND LOSS STATEMENT' [The student should take this opportunity to examine with some care one of the most important reports which the manager secures from his accounting system. It may be said to represent in figures the life history of the concern for the period it covers. If such a report is taken in connection with the kind of material presented in Selection 25, the manager may secure at least a preliminary notion of the spots at which expenditures may wisely be increased or decreased. If profit and loss statements are drawn at regular intervals, they may again be used as the first check on efficiency of operations in the various parts of the business. We shall have occasion to use the profit and loss statement again in a later chapter when we take up the manager's administration of finance.] ' Supplement to Publication of Graduate School of Business Administration, Harvard University, Vol. Ill, No. 3 (1917). Bulletin No. 2, Bureau of Business Research. 336 BUSINESS ADMINISTRATION PROFIT AND LOSS STATEMENT FOR SHOE DEALER for period extending from ig. . . .to Merchandise Statement: I. GROSS SALES . i. RETURNS . 3. ALLOWANCES 8, Total Merchandise Cost . . . Inventory of Merchandise at End of Period 10. Discount on Inven- tory of Mdse 11. Depreciation of Mer- chandise IS. NET INVENTORY OF MDSE. AT END OF PERIOD 13. NET COST OF MERCHANDISE SOLD 14. Profit on Merchandise IS. CASH DISCOUNTS TAKEN ON PURCHASES OF MERCHANDISE 16. Gross Profit on Merchandise .... Expense Statement: Buying Expense 17. SALARIES OF BUYING FORCE . 18. OTHER BUYING EXPENSE . . 19. Total Buying Expense .... Selling Expense 20. WAGES OF SALESFORCE . . . Ji. PREMIUM MERCHANDISE ("PM's") 2j. ADVERTISING 23- WRAPPINGS AND OTHER SEL- LING EXPENSE 34. Total Selling Expense .... 25. DELIVERY EXPENSE .... Management Expense 26. MANAGEMENT AND OFFICE SALARIES 27. OFFICE SUPPLIES AND EXPENSE 28. Total Management Expense Per- centage NET SALES 100% 5. NET INVENTORY OF MDSE. AT BEGINNING OF PERIOD 6. PURCHASES OF MERCHANDISE AT BILLED COST 7. FREIGHT, EXPRESS. AND CART- AGE ON PURCHASES OF MER- CHANDISE THE ADMINISTRATION OF MARKET PROBLEMS Fixed Charges and Upkeep Expense 2g. RENT 30. HEAT, LIGHT, AND POWER . 31. INSURANCE (Except on buildings) 32. TAXES (Except on buildings) . . 33. REPAIRS OF ECJUIPMENT . . 34. DEPRECIATION OF EQUIPMENT 337 Per- centage 35- Total Fixed Charges and Upkeep Expense ... ... 36. MISCELLANEOUS EXPENSE . . 37. LOSSES FROM BAD DEBTS . . 38. Total of Expense Statement . . . 3g. Net Profit (or Loss) from Mdse. Opera- tions ... .... Other Business Profits (or Losses) 40. REPAIRING 41. MISCELLANEOUS PROFITS AND LOSSES 4J. Total Other Net Profits (or Losses) . . 43. Total Operating Net Profit (or Loss) of the Period . . .... Application of Total Operating Net Profit: 44- INTEREST ON C^APITAI^ BORROWED . ... 43- INTEREST ON CAPITAL— OWNED 46. DIVIDENDS ON CAPITAL STOCK 47. Total Interest and Dividends 48. Final Surplus (or Deficit) for the Period See also p. 482. What the Profit and Loss Statement Shows. 26. MEASURING AIDS, QUOTAS AND BUDGETARY CONTROL' That an accurate look-ahead is possible — that next year's sales can be determined in detail and prepared for, that the factory's work can be laid out and scheduled — I have proved to myself time and again. Planning ahead for the coming year cannot start the last month of this year. It must be begun years before — ^a quarter of a century in our case. For a planning-for-next-year system must have the most accurate basis: figures — cold, hard, mathematical figures; and facts — proved, recorded facts. 'Takenby permission from M. W. Mix, "Planning Next Year's Business," System, XVI (1909). 253-57- 338 BUSINESS ADMINISTRATION Our records of business run back for twenty-s'jven years; definitely tabulated as to sales by territories and lines of goods; as to produc- tion by costs and stocks on hand. That is the. basis of our prophetic powers. Like the source of most things that look hke genius, it is just — ^knowledge. Planning ahead means first determining probable sales. For selling the goods is the last step in the process of manufacture, but the first is determining the amount to manufacture. No wisdom lies in preparing to make what can't be profitably sold. The figures of last year's sales are the basis for judgment of next season's business. These figures are so tabulated that 1 know the exact sales made in each territory and through each agency, by lines of goods and by periods. Our goods are sold through two hundred and forty agents covering the whole country, through salesmen in our branch houses in the large industrial centers, and through sales- men working direct from the home ofiice. Our sales are classified into thirty-eight different fines and are recorded under thirty-eight corresponding sales accounts. A record of our sales is kept for each one of these various sales units classified according to these thirty-eight accounts. The first source of our records is the orders as they come in from the various agents and salesmen. These orders are classified and tabulated until they finally reach me in a concentrated form. One sheet is given to the record of each sales unit for one month, classified accordiag to the thirty-eight sales accounts and tabulated so as to show compari- sons with the previous month, with the same month the previous year, and with the total of the current and the previous year. The sheets for each sales unit are bound together in a pamphlet so as to bring together a complete record for a year. But the figures alone do not tell the "why"; they show what is going on but they do not show the reason. So another source of information is necessary — information concerning business conditions, concerning developments in our trade and among our customers, con- cerning the circxmistances and methods of our selling agents, concern- ing the circumstances that surround each transaction and eacli development in our business. This nebula of facts and of human interest which envelops the selling end must be taken into consideration in judging the possi- bilities of business for next year. This information I glean from sales reports which come in every day from our salesmen and less frequently THE ADMINISTRATION OF MARKET PROBLEMS 339 from our agents, from various mediums of trade news, from personal observation and letters, and from special reports. With these sources of information then — the figures of previous years' sales and the knowledge of trade conditions — the next year's sales quota is determined. Each unit of the organization is taken up in turn. With the comparative figures of previous years' sales before me, I call to mind the conditions in this territory and in this sales unit, determine what pressure for additional sales can be brought to bear, estimate what the conditions the coming year wiU probably be; then determine what increase all these factors are likely to bring and set a sales quota for this unit. After all, 1 regard the most important point in planning next year's work to be, not the determination of the sale's quota, but the laying out of the actual methods we will pursue to help the agent sell his quota. Because much of our business is handled through agents, the agency is the first source of next year's business to be studied. One of our special sources of information on the agent is an agency record, kept apart from the general sales records, where the facts regarding each agent are recorded. This card indicates at a glance what the agent's quota of sales has been for several years, how close he came to selling this amoimt, what the conditions in his territory have been, and any further general facts regarding him. The record also shows the definite aid in selling given him by the house — such as local advertising, circular letters, advertising literature — and what the cost of this advertising amounted to. Now suppose we find from our records that we have sold a par- ticularly large amoimt of some line in a territory. We find out the reasons, the methods by which these sales were made; if these can be dupUcated we teU our other agents about them and we estimate how big an increase in their sales they should bring. If a certain line of local advertising or circular-letter work that we have done for one agent has proved successful, we duplicate it among other agents. If certain goods have proved particularly profitable, we give agents special methods for pushing them. And all these cases affect the quota finally determined. Local conditions, of course, often govern big sales; they must be considered in the agent's quota. Certain local changes during the past year may have raised sales to a point which cannot be maintained; new conditions about to materialize may greatly increase the possi- bilities of sales. 340 BUSINESS ADMINISTRATION With the sales quota determined in detail, the manxifacturing quota for the year is easily fixed: it is simply the sum of the thirty- eight Unes of stock, totaled from the sales-unit sheets. Manufactured stocks are carried in the records of the manager of manufacture under the same general groupings as in the sales accounts. Subtracting stock on hand from the sales quota of each line, therefore, tells the quantity of each product to be manufactured during the coming year. This quota is, of course, not followed blindly by the factory; it serves rather to point the direction that next year's production will take. Its greater value lies in the basis it affords the manager of manufacture for systematizing his factory practice and reducing his costs. His sole object is to manufacture enough stock to keep suflSciently ahead of the sales demand that he will not be caught understocked, and yet not build on estimates so far ahead that there is liability of overstocking. See also p. 354. An Organization of the Sales Department, p. 831. Budgetary Control. 27. PRICE POLICIES: WHAT THE MARK-UP SHOULD COVER' These rules for figuring costs and profits are recommended (i and 2 regarded "debatable") by the National Association of Credit Men: 1. Charge interest on the net amount of your total investment at the beginning of your business year, exclusive of real estate. 2. Charge rental on all real estate or buildings owned by you and used in your business at a rate equal to that which you would receive if renting or leasing it to others. 3. Charge in addition to what you pay for hired help an amount equal to what your services would be worth to others; also treat in like manner the services of any member of your family employed in the business not on the regular pay roll. 4. Charge depreciation on all goods carried over on which you may have to make a less price because of change in style, damage, or any other cause. 5. Charge depreciation on buildings, tools, fixtures, or anything else suffering from age or wear and tear. 6. Charge amounts donated or subscriptions paid. ' Taken from A. M. Burroughs, A Better Day's Profits, p. 44. (Burroughs Adding Machine Company, 1915.) THE ADMINISTRATION OF MARKET PROBLEMS 341 7. Charge all fixed expenses, such as taxes, insurance, water, lights, fuel, etc. 8. Charge all incidental expenses, such as drayage, postage, office supplies, livery or expenses of horses and wagons, telegrams and telephones, advertising, canvassing, etc. 9. Charge losses of every character, including goods stolen of sent out and not charged, allowance made customers, bad debts, etc. 10. Charge collection expense. 11. Charge any other expense not enumerated above. 12. When you have ascertained what the sum of all foregoing items amovmts to, prove it by your books, and you will have your total expense for the year; then divide this figure by the total of your sales, and it wUl show you the per cent which it has cost you to do business. 13. T'ake this per cent and deduct it from the price of any article you have sold, then subtract from the remainder what it cost you (invoice price and freight), and the result will show your net profit or loss on the article. 14. Go over the selling prices of the various articles you handle and see where you stand as to profits, then get busy in putting your selling figures on a profitable basis and talk it over with your com- petitor as well. See also p. 335. Measuring Aids Reflected in the Profit and Loss Statement. 28. PRICE POLICIES: THE TURNOVER' Turns are easily figured by dividing the sales for any period, at cost, by the cost of the average stock on hand during the period. Once he has secured turnover and cost figures for his store, it is not difficult for the retailer to demonstrate the added profit which an extra tiurn will bring. The net gains climb when the expenses are cut, the turnovers increased, the totals owing from customers reduced, or the gross profits lengthened. Investigation of the merchandising plans successfully used by merchants in five states shows that they are getting more turns in four ways: locating Hnes which move rapidly: weeding out the slow lines; setting stock limits; concentrating purchases with a few ' Adapted by permission from Wheeler Sammons, "More Turnovers" in System, XXV (1914), 236-39- 342 BUSINESS ADMINISTRATION manufacturers or wholesalers. Some of these merchants are using only one or two of these methods, others all of them, but not one has discovered and tested a fifth plan. Once the fast-turning, profitable lines are kaown, they are pushed and the stock on the shelves cut to the lowest Umit. The quicker the stocks in these lines change, the more possible it is definitely to satisfy customers and operate on a small investment. Manufacturers frequently maintain in-stock departments for their fast-turning lines, and thereby enable retailers to buy day-to-day supplies. The second plan for increasing turnovers is to weed out the Unes which move slowly. Once the fast-turning stocks are tabulated, the less profitable lines immediately become evident. If these slow goods will not stand heavier mark-ups than the rapid lines, they are usually unworthy of shelf room. There are many lines which do not turn fast enough to warrant the retailer's investment, for depreciation gradually eats up the slender profit margins they offer. A huge sales volume might be built around these lines, and not a penny of net profit result. The stores which frequently go under when all is apparently prosperous are making this type of sales — their owners have not weeded out the slow lines. Third among the tested methods used by the merchants working in four states for rapid turns are definite stock limits and plans. The best way to prevent over-buying, in the opinion of these merchants, is to fix the lowest stock which will satisfy demand and then place orders accordingly. This, again, is a stockkeeping problem. There is one danger in buying too close, however. An Iowa variety store owner, who averages eight turnovers a year, men- tioned it specifically, although the majority of the merchants seen by System's investigators referred to it. "Your profits are in buying close," he said, "but you are tempted to cut down your assortments, and that costs trade." The fourth method for securing more turnovers is to concen- trate the buying with a few wholesalers or manufacturers. To do so is helpful in two specific ways. First, there is less danger to the retailer of over-buying through duplication, and bookkeeping troubles are reduced. Second, the manufacturer or wholesaler is naturally unusually interested in the retailers who buy heavily from him. Especially in lines where style changes are important, co-operation between the retailer and the manufacturer is valuable to both Furthermore, the best "snaps" and the most favorable service go to the retailer who has concentrated his buying. THE ADMINISTRATION OF MARKET PROBLEMS 343 29. PRICE POLICIES: THE DETERMINATION OF MARKET PRICE' One of the most important problems which confronts every Dusiness man is the question of what price he can obtain for his product. Many factors co-operate to determine the market price, and many of these factors are beyond the power of the producer to control. The mechanism of price determination varies with the degree of power of price control possessed by the producer and with the character of the market. Economic theory has confined itself very largely to the exposition of the method of determination of market price in what economists call a perfect market, namely, a market in which there are many alert and experienced buyers and sellers; in which there is an effective organization for the purpose of mediating purchases and sales, record- ing prices, and diffusing important information with respect to present and prospective production and consumption and other factors bear- ing upon price; and in which there is no agreement among buyers or sellers, formal or informal, with respect to the prices to be bid or asked. Very few commodities have markets which possess all of these characteristics. It is not far from the truth to say that a few basic foodstuffs and raw materials produced under small-scale condi- tions and important securities widely held and traded on the stock exchanges in large amounts are the only commodities having perfect markets. Market price, regardless of the character of the market, is always determined by demand and supply, i.e., by the willingness of buyers to buy and sellers to sell. In the perfect market, the buyers will stand ready to buy but in amounts varying inversely with variations in the price, and the sellers will stand ready to sell, but in amounts varying directly with variations in the price. If the price settles temporarily at a point at which the offers to sell are greater in volume than the bids to buy, price-cutting competition between sellers in their eagerness to make sales will force the price down. If, on the other hand, the price settles temporarily at a price ar which the offers to sell are smaller in volume than the bids to buy, price-raising compe- tition between buyers in their eagerness to buy wiU force the price up. The market price tends to settle at that point at which aU buyers will be able to buy aU they are willing to buy at that price, and aU sellers are able to sell all they are willing to sell at that price, ' By J. Viner. 344 BUSINESS ADMINISTRATION Any change in the demand or the supply, however, will change the location of this point of equilibrium. In a typical perfect market, such as the wheat market, the point of equilibrium is rarely constant even for an hour. News about the growing crops, of an impending war, of govermnent plans to change the scheme of taxation, of heavy shipments of grain to market by farmers, affect demand and supply or the willingness of traders to buy or sell. Since, in a wholesale market, most of the purchasers are either made by middlemen who expect to resell to the actual consumer, or, if made by the consumers themselves, are in anticipation of future needs, any factor which affects the prospects of future prices wUl be reflected in a change in their present willingness to buy. Traders in the perfect market are constantly on the alert to get wind of prospective changes and any scrap of news, very often any rumor, wUl affect their willingness to buy or sell, and will, therefore, affect the market price. Since valu- able information may reach some traders before others, they con- stantly watch each other's bids and offers. If a group of traders bid prices up and make large purchases at the higher prices, other traders, confident that there must be some good reason as yet unknown to them for this anxiety to buy, will also buy and thus force prices up stni further. Similarly, a disposition to sell on the part of some traders wiU spread to others and lead to a fall in price. A commodity is not suitable for large-scale and smoothly organized competitive trading unless it is by its nature homogeneous or is artificially standardized by careful and authoritative grading, so that it can be traded in by name without necessity of samples or bulk inspection. Price policy for the producer of a commodity which has a perfect market is a comparatively simple matter. He can seU only at the current market price, which is determined by the concurrence of a great many buyers and sellers. In the short run he has only two alternatives, to sell at the current price or to hold for a rise. In the long run, he must make guesses as to what the average future prices wiU be and adjust his production to the scale which would be most profitable at that average price. The outstanding characteristics of the perfect market price are, therefore, its quick responsiveness to changing conditions, its freedom from control by individual producers or buyers, and its uniformity at any one moment over the entire area of the market, if allowance is made for transportation costs. The most complete contrast to the perfect market is presented by the monopoly market. In the strict sense of the term monopoly, a THE ADMINISTRATION OF MARKET PROBLEMS 345 commodity has a monopoly market when supply is controlled by a single producer or combination of producers. The monopoly pro- ducer has much greater control over price than does the producer for a perfect market. Within a wide range of prices, the monopoly producer will continue to make sales, although in varying amounts, if he varies his prices, whereas the producer for the perfect market will see his sales drop to zero if he demands a price higher only by a small fraction than that demanded by his competitors. It is not accu- rate to say, however, that the monopoHst has complete control over price. As he raises his price, sales will fall somewhat. As he lowers his price, sales will increase somewhat, the degree of change in the volume of sales, as price changes, varying with the character of the demand for the commodity and the availability of substitutes. The monopohst is able to determine the price at which his product will sell, but if he is an efficient business man, he wiU endeavor to find the price at which profit per unit times total sales will jdeld him Mie greatest amount of total profit. He will also give consideration to the possibility that a price yielding a high profit will attract com- petitors into the industry or will lead to a demand for government interference with his industry. Monopoly price normally wUl remain constant for comparatively long periods and will be adjusted to changing conditions of costs of production or of demand by sharp changes at infrequent intervals. The outstanding characteristics of monopoly price are, therefore, its slowness of response to changing conditions and the great degree of control over price exercised by the producer. Between the perfect market and the monopoly market there is for wholesale markets, a gradation from those which closely resemble but not fully approach free and energetic price competition to those which closely but not fully approach complete monopoly control over price. Producers always desire as full a measure as possible of control over the prices of their products. They fear price competition, because with the importance in modern industry of direct or over- head costs, price-competition always threatens to become cut-throat competition. Moreover, they dislike frequent fluctuations in price. They seek every possible means, therefore, of withdrawmg their products from the field of keen price competition, and in pursuit of this end they use a variety of devices such as special brands, trade marks, patents, style differentiation, even different methods of wrap- ping or different containers, to differentiate their products from those 346 BUSINESS ADMINISTRATION of their competitors. If they succeed in developing a special demand for their products, such producers find that to some extent they can determine their prices independently of the pnces of their competitors and still maintain their sales. The importance of advertising to producers of commodities only slightly differentiated from competing articles is obvious. Competition between such producers tends more and more to become competition in sales efforts, such as special displays, number of salesmen, volume of advertising, and tends to refrain from price-cutting as a means of stimulating sales. Special- ized commodities of this kind tend to be less responsive in their price to changing conditions of production or consumption than perfect market conunodities, more responsive than monopoly products; their producers can exercise more control over their prices than producers of commodities for a perfect market, less control than producers for a monopoly market; the products are not standardized as between producers as compared with perfect market commodities; they are not as much differentiated from rival commodities as are monopoly commodities. The methods of differentiation — or speciaUzation — of products discussed in the preceding paragraph generally can be applied suc- cessfully only to consumers' goods, where the purchasers are not sufficiently skilled or sufficiently interested purchasers to discover the substantial identity between rival products. Industries pro- ducing fairly standardized raw materials or intermediate products often avoid keen price competition by another method which may be called the follow-the-leader method of price determination. This method is most likely to occur in industries where one producer controls a large fraction of the total production and enjoys strong financial backing. The leading producer will determine the prices for his own products, and will issue a price list several times a year. The smaller producers, without any formal or informal agreement, will adopt this price list as their own. If they should not do so but should charge higher prices, they wiU make no sales so long as the leading producer and other producers adopting its scale of prices are able to accept additional orders. If they charge lower prices, they face the danger that the leading producer will under-cut their prices, and with his greater financial resources, will be able to force them into bankruptcy. The smaller concerns will often welcome the leadership of a strong producer in setting prices, as they are glad to escape price competition and feel that they can rely on the superior faciUties THE ADMINISTRATION OF MARKET PROBLEMS 347 of the leading producer for gathering information to make the prices fixed upon those most profitable for the industry as a whole. The leading producer by this method gains most of the advantages of monopoly control while avoiding the expense of eliminating competi- tors and the danger of goverimiental interference and of public resent- ment. The retail market differs from all of these markets in that owing to its lack of organization and to the lack of skill, alertness, and infor- mation on the part of both buyers and sellers, prices differ from store to store on the same day for absolutely identical articles, and reflect only slowly and imperfectly changing conditions of production and consumption. 30. PRICE POLICIES OF THE DISTRIBUTER' The producer who today enters the market to manufacture and sell a commodity in competition with other producers of substantially identical products has open to him three general price policies. He may adopt one of these to the exclusion of the others, or may use them in combination. These three policies may be termed: (i) selling at the market minus, (2) selling at the market, and (3) selling at the market plus. I. Selling at the market minus is that policy which aims to increase sales by reducing price. The distributer who markets his product at a price range below that established for the identical cormnodity as sold by other producers not only attracts consumers from other dis- tributers but also brings into the market as consumers certain of those whose demand was before unexpressed because the price level estab- lished for the commodity was above that warranted by their subjective valuation on the commodity. This policy does not ordinarily involve a differentiation of the product from the stock product of like nature, nor the use of trade marks, brands, or trade names. The producer depends upon increased sales to give a reduced proportion of overhead expense and reduced costs of large-scale production, thus increasing his area of profit. The producer appeals to the consumer mainly through the difference in price level. Hence, the successful pursuit of this policy in a com- petitive market over a long period involves a continuing ability to sell the commodity for less than the price at which other producers of substantially identical products are willing or able to market them. 'Taken by permission from A. W.. Shaw, "Some Problems in Market Distri- bution," Quarterly Journal of Economics, XXVI (1912), 712-18. Later published in An Approach to Business Problems (A. W. Shaw Company, 1916). 348 BUSINESS ADMINISTRATION [It is obvious that this policy secures its best results when (a) the demand is elastic, which means that with selatively slight change. in the price there is a relatively large increase in the amount demanded and (fi) when the increased output can be made at a lower cost per imit. Notice the influence of indirect cost in this latter considera- tion.] The working of this poUcy, especially as to bringing new consumers into the market, is shown graphically in Chart I. Chast I Selling at the Market Minus This chart attempts to show graphically the operation on the demand side of the market of the price policy termed "selling at the market minus." On the ordinate OX is laid off a scale of prices for the commodity. On the abscissa OY are laid off the number of purchasers. The arc LM shows the number of pur- chasers at a given price, growing fewer as the price increases and greater as the price decreases. Now if OA represents the prevailing market price for the commodity, and OC the number of purchasers at that price, it is apparent that if ]the price is reduced from OA to OA', the new consumers wiU be brought into the market and the number of piirchasers at the price OA' wUl be OC, a number greater than OC. It is somewhat in this fashion that the policy of selling at the market minus operates but the chart does not indicate the important element that other pro- ducers are selling at a higher level, and hence customers are attracted from them, as well as new customers brought into the market. 2. Selling at the market has been the pohcy perhaps most char- acteristic of our scheme of distribution during the period when the stress was on production. It is still a common policy in the market- ing of staple goods. This pohcy consists briefly in the acceptance of the market price existing for the commodity as a fixed condition. The producer does not seek to attract purchasers by maintaining a price level somewhat lower than that at which other producers of the same commodity are willing to sell, nor does he attempt to establish his commodity upon a new and higher price level as a distinct commodity. He THE ADMINISTRATION OF MARKET PROBLEMS 349 recognizes the market price for such a commodity as something objective, and sells his commodity at the established level. The acceptance of this price policy leaves open to the merchant- producer two general methods of increasing his area of profit. He may devote himself to a reduction in his cost of production by a better organization of his plant, or he may seek to increase his sales, thus giving economies of large-scale production and a reduced propor- tion of overhead expenses. Chart II SELLmO AT THE MaEKEX This is an attempt to show graphically the effect of a stimulation of increased demand for a commodity without any increase in the price at which it is marketed. The ordinate OX is a scale of increasing price. The abscissa OY shows the number of purchasers. The arc LM indicates the number of purchasers at any given price, growing less as the price is increased and greater as the price decreased. If the established market price is represented by OA, the number of purchasers at that price will be represented by OC. If then by stimulating an increased demand for his product, the merchant-producer is able to increase proportionally the number of purchasers at each price level, the demand curve LM will be replaced by L'M', and at the price, OA, a greater number of purchasers, OC, will purchase. This chart does not, of course, show how customers already in the market are drawn from other merchant-producers to the purchase of a differentiated product for which a demand is stimulated at the same price level as the products of the other merchant-producers. If the merchant-producer adopts this second method, he must, in general, differentiate his product from that of his competitors and buUd up a demand for his particular product. To do this he must depend upon the same means that would be used to establish his product as a distinct commodity upon a higher price level. Trade marks, brands, and trade names, coupled with niceties of finish, evenness in quaUty, or more convenient packages, serve as the basis for an increased demand for the commodity upon the same price level as substantially identical products. When selling at the market, superior promptness in delivery may become a factor of great impor- tance in increasing sales. 350 BUSINESS ADMINISTRATION 3. Selling at the market plus is perhaps the most characteristic price policy of modern distribution. The exceptionally able dis- tributers have in recent years turned more and rdore to this policy. They refuse to accept as a fixed condition the market price for the conmiodities similar to those which they produce. They isolate their product, and establish it, practically as a new commodity, on a different price level. The whole basis of the policy is the differentiation of a product from other goods of substantially like nature by improvements, minor or substantial, and the identification of the product by trade marks, brands, and trade names. This done, the producer stimulates a demand for his product by calling attention to stability of quaUty, niceties of finish, improvements in package, or like modifications. He appeals to that portion of the consuming public whose subjective valuation upon the stock commodity has left them a so-called "con- sumer's surplus" over the market price. The differentiated com- modity is estabUshed on a new and higher price level, and is, to all intents and purposes, a new commodity. Chart III Selling at the Makket Plus This chart illustrates the effect of the price policy termed "selling at the market plus." On the ordinate is laid off a scale of prices for a staple commodity. The abscissa shows the niunber of purchasers. The demand curve LM indicates the number of purchasers at a given price, growing less as the price increases and greater as the price decreases. Then if OA represents the market price of the staple commodity, OC will represent the number of purchasers. Now if the merchant-producer dffierentiates his product from the staple commodity and stimidates a demand for it, the effect is to increase the number of possible purchasers at each price level. Thus the demand curve LM is replaced by the demand curve L'M'. Obviously the merchant-producer may dispose of the differentiated product at a price OA', higher than the price OA, without reducing the number of purchasers, OC. In other words, he can profit by the increased demand through raising his price rather than by increasing his sales. Chart III shows graphically the operation of the price policy termed "selling at the market plus." THE ADMINISTRATION OF MARKET PROBLEMS 351 31. PRICE POLICIES: PRICE MAINTENANCE' ["Price maintehance, " says Cherington, "is the arrangement by which manufacturers of identified merchandise, made and sold under competitive conditions, agree with some or all of the distributors of this merchandise concerning the price at which it is to be re-sold." Obviously enough this is one of the devices that modem business men have adopted as a means of securing greater stability in their market relations. Considerable question has arisen concerning the legaHty of such agreements. The following selection shows the form of notice and agreement which Robert H. IngersoU and Brothers print upon the boxes in which the IngersoU watches are sold. It is particularly iateresting in that the attempt to phrase the agreement so that it will be legal stands out in a very obvious fashion.] In seUing this watch to the dealer we withhold from him the right to use or refer to our name, trade mark, guarantee, reputation or seUing helps in connection with selling, offering, advertising or display- ing for sale this watch, unless and until the dealer (i) shaU have agreed that he shall not so sell, offer, advertise or display this watch with our name, trade mark or guarantee attached, nor so use or refer to our name, trade mark, guarantee, reputation or selhng helps as to injure us imlawfuUy in our good wUl or other property, and (2) shall have admitted for all purposes that seUing, offering, advertising or displaying for sale this watch (if our name, trade mark, or guarantee be attached, or our name, trade mark, reputation, guarantee or sell- ing helps be used or referred to) at any other retaU price than $2.50 (including Revenue Tax), or with or as any donation, discount, rebate, premium or bonus, depreciates our good wUl and other property, and (3) shaU have agreed that we shaU have the right, upon our written request (unless the dealer shaU have previously sold this watch), to repurchase from him this watch, if then merchantable, at our ruling trade price therefor, or if this watch shaU then be damaged, at such prices as shaU then be agreed upon. Upon written request of any dealer we agree [a) to sell to him, at our ruHng trade price for this watch, a duplicate of this watch (withholding from him, however, the right to use or refer to our name, trade mark, guarantee, reputa- tion or seUing helps), which dupUcate watch shaU not bear our name, trade mark, or guarantee, but which dupUcate watch the dealer may ' Taken from the Notice and Agreement used by R. H. IngersoU and Brothers. 352 BUSINESS ADMINISTRATION sell or otherwise dispose of as he pleases, provided that in so doing he refrains from using or referring to our name, trade mark, guarantee, reputation or selling helps, and (5) to repurchase from the dealer this watch, if then merchantable, at our ruhng trade price therefor, or if then damaged, at such price as shall then be agreed upon. By selecting to purchase, sell, offer, advertise or display for sale this watch with our name, trade mark or guarantee attached, instead of a duplicate watch without our name, trade mark and guarantee, the dealer agrees that he may use or refer to our name, trade mark, guarantee, reputation or selling helps only upon agreeing to the terms and conditions stated in (i) and (3) above and admitting for all purposes the facts and conclusions stated in (2) above, and then only for the purpose of selling, offering, advertising or displaying for sale this watch, and the dealer expressly agrees to be bound by said terms, conditions, and admissions. The dealer may sell or otherwise dispose of this watch as he pleases, after first removing this Notice and Agree- ment, and our name, trade mark, and guarantee, and returning to us our selling helps, and refraining from using or referring to our name, trade mark, guarantee, reputation and selling helps, but he has no right to use or refer to any of them in violation of said terms and conditions, nor to injure us unlawfully in our good wiU or other property. 32. THE ADMINISTRATION OF SALES AND ADVERTISING' The feature of the problem of sales-force organization which par- ticularly appeals to us in this discussion is the question: How is the sales force, either good or bad, to be co-ordinated with the advertising activities ? Consideration of this question soon shows us that it has two distinct parts: (i) How is this co-ordination to be brought about in the actual operations of selling and advertising? and (2) How are these two separate departments to be organized so as to be admin- istered without conflict? One part deals with co-ordination "on the road," where the sales are made, and the other deals with co-ordination "in the office," where the sales are planned. ' Adapted by permission from P. T. Cherington, Advertising as a Business Force, pp. 295-323- (Doubleday, Page and Company, 1913.) THE ADMINISTRATION OF MARKET PROBLEMS 353 The American Multigraph Sales Company, makers of the " Multi- graph" light printing device, has had particular success in its efforts to secure co-ordination between the advertising and selling departments. Some time ago change was made in the sales management of the American Multigraph Sales Company. For eighteen months before that time there had been no advertising manager. The sales manager and advertising manager could not pull in double harness. The advertising manager quit. A successor was not appointed during the remainder of that sales manager's connection with the company. The new sales manager looked at things in a different light. He believed that the business required an advertising executive as well as a sales executive; that perfect team work between the two was essential and possible; that the sales manager should be, in a .sense, assistant advertising manager and the advertising manager assistant sales manager; that with the work of each clearly defined there should be no confusion, and that with this kind of a working arrangement the business would develop as never before. With the beginning of the new regime a series of sales contests was started. The origination, as well as the details of carrying out these contests, was left to the advertising manager. Each month he submitted his suggestions to the sales manager and a conference was held on them. In order that the advertising manager might be kept fully informed on the progress of sales, he was given the same weekly sales reports that the general sales manager received and made acquainted with all conditions in the field. It was realized at the outset that unless he was fully informed on all sales conditions he could not thoroughly analyze them. F. Manning, the general sales and advertising manager of the Grape Products Company, of Northeast, Pennsylvania (makers of Walker's Grape Juice), contends that the sales and advertising managerships should be one. "Selling" and "advertising," while seemingly considered as two separate branches of business endeavor and expense, are, in fact, inseparable units of the same thing, "sales- manship." And while the actual taking of orders may be directed by one head, and the advertising of the article covered by these orders may be directed by another to good efiect, the fact that these two great selling forces, directed at the same objective and being each dependent upon the other, so similar in character and results, should 354 BUSINESS ADMINISTRATION certainly indicate consolidated management, just as do the various branches of manufacture. One rarely encounters a factory in which all the various divisions of production are not directed by a single head — imder supervision, perhaps, but with one center of manage- ment and responsibility. This being the case in manufacture, why should the combined selling effort be handled as two separate branches of the business organization ? Advertising is as dependent upon the selling for results as the salesman is dependent upon advertising for consumer demand with which to interest the retaUer and secure prestige with the jobber. No dealer, whether retailer or wholesaler, buys an article simply upon its merit — ^he buys upon salability first, price and profit next, and then he may be interested in quaUty. But a ready sale, a steady consimier demand, is always the first thing he considers in the purchase of goods for sale. This premise granted, why should not the same head direct both the element needed to secure signed orders — the ultimate result? This neces- sitates a close interlocking of the sales and advertising details — call for team work of a high order — ^and the success of its execution deter- mines the exact generalship exercised in the carrying out of the composite "sales" and "advertising" campaign. And generalship means profit, efficiency, distribution, and lasting results. Therefore, in selecting the sales advertising head, the question of choice should be determined by the qualifications of the individual, rather than by whether he be a salesman or an advertising man. But the direction of these features of the business shotild certainly be centered in one man. 33. AN ORGANIZATION OF THE SALES DEPARTMENT' [The following material is taken from the preliminary reports of two committees of the Taylor Society. It is interesting not only as a sketch of an appropriate organization of a sales department but also in its position "that planning and performance are the two major functions ia distribution as well as in fabrication."] Selling seems to break down into two major functions, distinct in their nature and in the types of personnel required for their per- formance: I. The making of larger plans for the marketing of a products involving analysis of the market and the product, the preparation, ' Adapted by permission from Bulletin of the Taylor Society, V (1920), 236-43. THE ADMINISTRATION OF MARKET PROBLEMS 355 of master schedules, and the co-ordination of production, financial and selling resources called Sales Engineering, Sales Planning, Mer- chandising, Merchandise Control, etc., and in many instances cared for by advertising or selling agencies. II. The actual conduct of the selling operations, involving the detaU planning of selling operations, the selection, training, and direction of the sales force, the detail planning and conduct of selling operations when salesmen are not used, and all contacts with the customer; called in this report Sales Operating. -. The sales engineering function presents at least three distinct phases: (a) field research; (6) technical assistance; (c) master planning and scheduling. a) Field-research activities. — ^As a field research function, sales engineering should make its services available for all parts of the plant organization. Some specific things it can usually include in its research activities are: 1. Products: to be added; to be eliminated; changes; stand- ardization; present uses; new uses; seasonal factors; territorial factors; trade reactions; competitive products. 2. Marketing poUcies and methods: present trade channels; potential trade channels; trade customs; trade reactions; competi- tors' activities; standardization; containers and packing; quotas and statistics; prices and margins; present markets and volmnes; potential markets and volumes; assistance to customers; salesmen's training; warehouse and branch locations; trade organizations. 3. General research: administrative and management problems; research for all operating departments. h) Technical activities.- — The personnel of sales engineering should be such that it can be of technical assistance to the entire business organization. While sales engineering utilizes and con- tributes to the entire resources of the business organization, it is essential that no duplication of effort be brought about by the segre- gation of this major function; in fact, this segregation of sales engineering should invariably tend to diminish duplication of work. The range of research and other activities involved in sales engineering is indicated by the following synopsis; it is possible that in a large organization some of them may assume such impor- tance as to be recognized as separate functions: I. Products: study selection and standardization of t3^es and sizes, materials, finishes, markings, packing. 3S6 BUSINESS ADMINISTRATION 2. Advertising: furnish data on new products, product changes, new uses, new markets, trade reactions, competitors' activities, prices, trade customs, seasonal factors, territorial factors. 3. Selling: furnish data on prices and margins, salesmen's compensation, selling equipment, seasonal factors, territorial factors, trade resistance, economics factors or trends. 4. Sales service: ascertain deficiencies, suggest remedies, suggest other service activities. 5. Markets or sales fields: report changes, discover new markets, suggest new policies or methods. 6. Competitors' activities: watch and report and suggest methods of combating. 7. Trade organizations: report activities, report probable effect on sales poHcies, determine possibilities of co-operation. 8. Legislation: watch and report and suggest necessary action. 9. Merchandise stocks: regularly check and report and suggest necessary action. 10. Patents and copyrights: watch and report and suggest necessary actions. 11. Statistics: suggest necessary compilations, analyze and report changes or trends, and interpret and suggest necessary action. 12. Complaints: analyze, compile records, and suggest necessary action. c) Master planning and schediding. — Sales engineering should become the co-ordinating function of the entire business. In this field it can relieve the administrative and managerial executives of many of their most troublesome and time-consuming problems. In this activity sales engineering should strive to be months ahead of any of the operating divisions. Only thus can the purchasing, financial, personnel, and production divisions have adequate time to plan for their respective activities. (See p. 831. Budgetary Control.) The sjmopsis below is only to suggest some of the steps in a master plan and schedule. The variations necessary to meet the problems of specific industries are almost infinite. 1. New products: plan types, sizes, materials, finishes, markings, and packings. 2. New and old products: plan and schedule initial requirements; plan and schedule yearly and monthly requurements; plan and schedule general marketing policies and methods; plan and schedule THE ADMINISTRATION OF MARKET PROBLEMS 357 sales service activities; plan and schedule general advertising policy; state seasonal and territorial limitations; plan and schedule general activities of each division affected by project to establish order of work and definite responsibilities; plan and schedule warehouse distribution; plan dealers' selling equipment; plan salesmen's selling equipment. II. Sales Operating seems to break down into two principal func- tions: a) The detail planning for, the preparation of materials for, and the supervision and control of, all elementary selling processes. (This function breaks down into elementary functions or processes.) b) The actual conduct of sales operations in accordance with the planning and control established in (a) above. (This function also breaks down into elementary functions and processes.) This report is concerned with (o) only; investigation of (6) is to come later. The accompanying chart sets forth briefly the general scheme. 1. General Administration determines or approves all general policies and plans, including general sales, production, personnel and financial pohcies and plans. 2. Sales Engineering studies markets and products and recom- mends to General Administration general or specific, continuous or limited, sales campaigns. Its recommendations, as adopted by General Administration, take the form of general schedules which co-ordinate selling, production, personnel and financial operations. These general schedules pass to the various operating departments for execution, and constitute the master task for their co-ordinated execution. 3. Sales Operating receives these general schedules, or master task, and proceeds to execution. The first step is planning details of execution and establishing controls for execution; breaking the task up into elementary tasks for performance by functionalized branches or individuals. The elements of plaiming and control are emphasized on the chart. After detail operating schedules, orders and instructions are prepared; these pass to those respectively responsible for their execution in detail: advertising, selling, training, warehousing, trafiSc, etc. It is interesting to compare production functions with selling functiom. 3S8 BUSINESS ADMINISTRATION THE ADMINISTRATION OF MARKET PROBLEMS 359 I. PRELIMINARY Befose the first step of actual selling is taken, a sales plan, general or specific, continuous or limited, is approved by the administrative authorities. This plan should have been worked out by some part of the organization, based on a detailed research into market condi- tions, study of the product, financial and production resources, etc. The part of the organization which has prepared this plan may have been certain delegated executives or a Sales Engineering Department termed as such or perhaps as a "Sales Planning Department," a "Merchandising Department," or a "Merchandising Control Depart- ment." This approved plan takes the form of what may be termed "Master Schedules," which instruct and co-ordinate production, finance, and seUing. In the Taylor System of production the Engineering Depart- ment first prepares drawings for the product and for special machinery, tools, dies, etc.; and prepares lists of materials, specifications, etc. n. SALES OPERATING Having been provided with the approved general sales poUcy (master sales schedules) which it may have had a share in formulat- ing, the Sales Operating Department plans its work of execution, first providing for control of execution in order to assure precision in its work. The first major function of sales operation is, therefore, planning the operations and their control. This planning and control function divides naturally into (i) analysis, (2) making sales schedules, (3) carrying out the detail schedules, (4) checking results, (5) improving methods. In the Taylor System of production the production order, accom- panied by the drawings, lists of materials, etc., goes first to the Planning Room. I. Analysis. — (a) Analysis of the information gathered by the preliminary survey concerning the market, the product, competitive products, service that the product and the organization may render to customers, etc. From this analysis results: b) The laying out of a definite procedure for the sale and dis- tribution of the product. This includes the plan for the extent and composition of the elements that are to constitute the selling organiza- tion including its field executives and salesmen. 360 BUSINESS ADMINISTRATION c) Information is classified and a list prepared of the supplies, equipment, and samples or stock required by the several units which are to carry on the selling and distribution of the product. d) ResponsibiHty and method is determined upon for the selection of supervisors and salesmen, their traioing and assignment to ter- ritories and duties, also for the education of dealers, and distribution of the product to branches, to customers direct or through general distribution centers or warehouses. e) Analysis for the purpose of such preparation is followed by continuous analysis of performance based on summaries of branch office and Home Office records, from the angles of sales volume, dis- tribution as to territory and as to commodities, and facts and figures presented by the financial, production, and sales engineering depart- ments. These may result in: /) Periodical recommendations concerning changes in the method of selling, distribution, or of remimeration of various elements of the sales force; possible changes ia the general sales policy or at least in its application, also possible changes or improvements in the product itself. In the Taylor System of production the first process in the Plan- ning Room is analysis of the production order and the specifications by the Production Clerk, who lays out a general plan of production, and is responsible for subsequent processes in the planning room, and for modification of plans to meet emergency situations. 2. Making detail schedules. — (a) To execute the sales plan laid out as a result of the analysis outlined, detail schedules are prepared. The various processes referred to are timed so as to properly co-ordinate, and are possibly charted graphically. Thus it is decided, based materially as to the time when necessary product and finances are to be available, when advertising begins; its volume and character; when the training of field executives and salesmen is to begin; the extent of such training; when shipments to warehouse or agency are to begin if the plan provides other than direct shipment to customers on actual sale orders, etc. In this way a detail schedule is laid out for each operation which forms part of the general marketing plan. b) Instructions in detail, and the supplies of all kinds that they require, are prepared and assembled "for the carrying out of every planned step. These include instructions for each unit, such as the THE ADMINISTRATION OF MARKET PROBLEMS 361 field instructors, supervisors, agency managers and salesmen. Also material for the instruction of salesmen and of dealers; advertising material; material for service to dealers or customers; arrangement of selling territories and salesmen's routes; provision for samples and expense funds, etc. In the Taylor System of production a corresponding function is performed by the Route Clerk, who makes route charts, route sheets, prepares purchase orders, instruction cards, move-material and work- order sUps, but does not issue them or start work on the production order. 3. Carrying out the detail schedule. — ^The detail work of planning having been completed, the actual work of marketing the product is started, under the supervision and control of the General Sales Manager. a) Field executives, if required, are selected. b) With their assistance, otherwise by the sales operating depart- ment heads delegated for the duty, salesmen are selected. c) Instructions and suppUes are issued to the training section and training begins. d) Assignment to territories is made at time of selection, or as the results of the training course develop. e) Samples, advertising matter to be carried, order and report forms and other suppUes needed are issued to salesmen and they begin work. Expense funds are established at the same time. /) As provided by the time schedule determined upon, instructions are sent at the proper time to the traflSc and shipping department or warehouses, advising them what initial stock shipments to make or advising them to be in readiness to execute any certain predetermined plan of executing orders for stock or delivery on sales. g) In like manner activity is started among all operating units. In the Taylor System of production a corresponding function is that of the Order of Work Clerk, who takes the move-material and work-order shps previously prepared by the Route Clerk and issues them; i.e., starts work. He arranges the order of work and keeps a balance of work record; he arranges who shall do what, and when, in accordance with the plans. 4. Checking results. — Results are assured only by constantly check- ing performance against plans — actual sales against estimated sales or quotas, costs of selling against estimated costs, etc., not only as to totals but as to each operating unit or section of territory. 362 BUSINESS ADMINISTRATION a) The reports of the work of the various operating units, and particularly of each branch, dealer and salesman are secured for reason- ably short periods that can be compared with corresponding periods. These are tabulated and summarized and compared, performance against plan, and performance against previous performances, and supplied to both, administrative executives and executives in charge of units concerned. b) Costs as shown by reports from field executives, branches and even salesmen, and figures suppUed by the auditing and accounting departments are tabulated, summarized, set over against budget estimates and previous costs, worked out in actual amoimts and in percentage as to sales. These and similar reports and statistics are supplied to the administrative heads of the business and to the heads of the field activities concerned. In the Taylor Sj^tem of production the corresponding functions are performed by the Progress Record Clerks, and the Cost Clerks, who check progress and costs as work is performed; and by the inspec- tors in the shop, who inspect for quality and quantity. 5. Improving methods. — ^Aside from the analysis first referred to, and the checking of results, there are in many organizations provisions for the improvement of methods, such as: a) Investigations for improving selling technique — ^methods of personal salesmanship, demonstrations, preparations of selling port- folios by salesmen themselves from material and testimony secured from the consumer or dealer; methods of service to customers, etc. Even time studies of sales operations are being made. h) Investigations for determining rates and also methods of remuneration, especially if a commission plan, or salary and bonus, or any other form of compensation is in use or under consideration whereby the amoimt earned is affected by the sales performance of the individual. In the Taylor System of production this function is performed by specialized investigators — ^methods, time study and rate setting specialists. See also p. 624. Control of Manufacture under the Taylor System. D. The Work of the Purchasing Agent It is a quite general error to regard the work of the sales manager as the relationship of the manager to the market. Such an error is easily committed in a period when the manager is eagerly seeking THE ADMINISTRATION OF MARKET PROBLEMS 363 markets in which to dispose of his goods. Perhaps it is even more easily committed in view of the fact that sales are the great source of income for the ordinary business and accordingly sales assume great significance in managerial eyes. In point of fact, however, purchasing activities are as truly manifestations of the manager's relationship to the market as are sales activities. They ought not, furthermore, be so frequently crowded from the center of the stage of managerial thinking by the somewhat overweening sales function. They are as truly one of the key activities as is sales. In a way, this fact is recognized by a famihar sajdng ia commercial businesses: "Well bought is half sold." That the fact is coming to be recognized in manufacturing and indeed in other businesses, is shown by such symptoms as an increasing interest in the function, by a developing literature, and by the estabUshing of associations of purchasing agents' In these days of search for lower costs of production and of emphasis upon stand- ardized equipment the purchasing agent may make great contribution to business profits by getting the "right goods to the right place in the right quantities at the right time." It is not necessary for us to review market functions and market structures in connection with our survey of the work of the purchasing agent. It will be sufficient to get a general view of his functions (see Selections 34, 35); to see the use of experimental and scientific methods as opposed to old "rule of thumb " and unfounded "opinion, " or opinion based on custom and tradition (see Selections 36-38); and to secure an appreciation of the role of the purchasing agent in the business organization as a whole (Selections 34, 39-41). PROBLEMS 1. "The principal elements of a piurchase are: (i) specification of what is wanted; (2) requisition for a specific quantity; (3) official sanction for the purchase; (4) obtaining bids, with or without samples; (s) accept- ing bid and ordering; (6) receipt of purchase, with or without examina- tion or test; (7) checking, passing, and paying invoice; (8) entry of purchase invoice in appropriate journal form." Who handles each of these in a bxisiness organization ? 2. "Close buying is less important than intelligent buying and handling." Explain. 3. "Time is sometimes of greater moment than either price or quality." ^Explain, and enumerate some such occasions. 4. "Not only must the cost of the supply itself be taken into account; the cost of placing the supply in operation is also a factor in the situa- tion." What would the latter cost involve ? 364 BUSINESS ADMINISTRATION 5. "Successful purchasing is not a question of picking the lowest bidder, but of carefuUy comparing values." What does this involve ? 6. "The modern tendency to replace rule of thumb in management by foresight and exact measurement has developed the use of specifica- tions." What is a specification ? How is it made ? By whom ? Should the purchasing agent take part in the preparation of specifications ? 7. Enimaerate the advantages (a) to the buyer, (6) to the seller, of buy- ing by specifications. Can specifications be used for all purchases ? 8. "A rational specification crystallizes bu3dng policy at many points. It states, for instance, the method of sampling, tells how much material one sample shall represent, prescribes methods of testing, either in whole or in part, the size of the test samples, and how to forward samples." Can you think of anything else that should be included ? 9. "The use of standard specifications is comparatively common; the proper following up of these specifications is comparatively common; comparatively rare." What is the inevitable result of such conditions ? How should proper inspection be made ? 10. "In the placing of a large order, the credit rating of the seller is as important as that of the buyer." Why ? 11. What are the advantages to buyer and seller of the following terms of purchase: (a) single contract for one lot; (6) periodic deliveries of at agreed prices; (c) periodic deliveries at prices current at time of con- tract; (d) deliveries at the then prices between fixed Umits; (e) de- liveries at cost plus an agreed per centum. 12. What determines the choice of piu'chasing policies (a) as between dealing primarily with a few houses in each line, or shopping the entire market; (b) as between purchasing regulaily from certain suppliers or changing about; (c) as between placing an order entire, or splitting it into small parts; (d) as between buying from jobbers or from manu- facturers ? 13. "The shrewd buyer must look beyond the mere price and must reach into the causes which have made the price, and those that are material to its remaining at that point, or in causing its fluctuation up or down." Where will he get this information ? 14. How far is it a part of the purchaser's problem to have access to the following records of stores and production departments: (i) materials disbursed; (2) balance of each kind of material on hand; (3) materials required for present and future production orders; (4) condition of stock on hand; (5) performance records of various materials? 15. Is it just as possible to err in setting quality standards too high as it is in setting them too low ? If so, is it as serious an error ? 16. In what specific ways is the purchasing department connected with the following departments: accounting and cost, sales, stores, designing and engineering, production, financial, legal ? THE ADMINISTRATION OF MARKET PROBLEMS 365 17. Distinguish stock and stores. 18. "The stores problem is in essence a problem of stores control." Explain. What do you understand by control of stores ? Is it paper control, safe-keeping, or something else ? 19. What are the consequences of excess of stores beyond reasonable pro- vision? What of a deficit of stores? How can over-investment in stores be prevented ? 20. What items enter into a decision concerning how much stock to keep on hand ? What variables may upset the calculation of stock limits ? 21. "Stocks and stores are reserves for contingencies. They provide elasticity in manufacturing operations and this elasticity is frequently better carried by them than by some other phase of manufacturing operations." Explain. 22. "In deciding almost any problem of whether to buy or to make, cer- tain advantages wiU suggest buying and others home manufacture." What considerations are at stake ? 23. As you think back over the preceding questions, what are the requisite natural qualities and the desirable training and experience of a pur- chasing officer ? 24. What do you think of the organization plan of a large manufacturing and selling business which provides for a vice-president in charge of marketing and places under his charge purchases, traffic, sales and advertising ? Wherein is the plan good ? Wherein defective ? 25. Draw up an outUne of the main points in this section. 34. THE FUNCTIONS OF THE PURCHASING DEPARTMENT' There are really three main divisions of the work connected with purchasing, these being: 1. Information, which includes: a) Obtaining information as to sources of supply b) Recording data of past purchases c) Recording prices and quotations d) Keeping results of inspections and tests e) Maximum and minimum quantities and future needs 2. Purchases, which is subdivided into: a) Work connected with requisition b) Obtaining quotations c) Placing orders and following up "Adapted by permission from H. B. Twyford, Purchasing Its Economic Aspects and Proper Methods, pp. 41 £E. (New York: D. Van Nostrand Cortr pany, 1919.) 366 BUSINESS ADMINISTRATION 3. Invoices, which is subdivided into: a) Recording and checking with order b) Checking prices, classifying, etc. c) Approving and passing to accountants There is other work which is in some cases included in purchasing department, and in others is entirely separate. Tliis work is con- nected with: 4. Traffic, which is subdivided into: a) Seeing that shipments are properly classified b) Seeing that correct freight rates are obtained c) Seeing that no delays occur in transit d) Getting quick adjustment of claims 5. Inspection, which includes: o) Inspection of material before or on arrival b) Making physical and chemical tests c) Reports on material in shop and in the finished products 6. Stores, which is subdivided into: o) Receiving material and supplies b) Storing in seciure and proper places c) Delivering for consumption as needed d) Keeping proper and rehable accounts THE ADMINISTRATION OF MARKET PROBLEMS 367 fe •n ctf V5 W W .-3 Pi S g (S r/1 ri a W .2 I Q PS H "S P^ ^ P^ V « (^ a CD C a a xrt V K J2 •^ I §!§ ag a^ I § =3 5 |.£-a o a ij o '-^■ti'3 a S tJ *-* P^-c^ I5"ii >-^ en M <» -> 5 C S-^ d d^ «.S'rj a a M 2; 368 BUSINESS ADMINISTRATION f -a ti M T.V. r-; " U •c-a a.! tn ■^^M ■n" s •a-s! ■a,T M Sf^ aa £• Si &■§ .5- II 1 is T3 n 9.2 ^1 11 Is |g 3 -S 3 a-S s "rt & m Sk 3 S'O t»,±!'S 2 ^ u □ =«-e.ii|| THE ADMINISTRATION OF MARKET PROBLEMS 369 370 BUSINESS ADMINISTIIATION 36. MEASURING AIDS: TESTING IN CONNECTION WITH PURCHASING' [This selection should be read not to understand the work of the National Bureau of Standards but to get an appreciation of what is possible in the way of testing materials, and to see an agency which makes for ever greater standardization. It is not easy to over- estimate the importance of "setting standards."] Any purchasing agent can have for the asking, as one might say, the benefit of the tests and try-outs made by the world's largest single purchaser of equipment and supplies. Probably there is not a pur- chasing agent who lacks such facilities but has sighed now and then for a testing laboratory of his own wherein to make practical and scientific demonstrations of the quality of this commodity or that before contracting for a year's supply. The testing of materials was a newly-created governmental func- tion which was assigned to the Bureau of Standards by Congress when the institution was established in 1901. Naturally, the first duty of the Bureau is to make tests of materials for the benefit of the various governmental purchasing agents who may call upon it for advice, but the Bureau also conducts each year thousands of tests for purchasing agents and other interests outside the government service. Merely a nominal fee is charged in each instance for private tests, but the purchasing agent who is loath to go to any expense whatever on this score can, by keeping in touch with Bureau activities, garner no end of information that will aid him in his buying. Uncle Sam buys pretty nearly every commodity under the sun, and thus, sooner or later, the government is likely to make on its own hook a scientific try-out of everything on the average purchasing agent's shopping list. The policy whereby the National Bureau of Standards continually takes stock of the best the market affords works to the advantage now and then of the average purchasing agent in the commercial field, even though he may not have asked for advice or assistance — even if he is ignorant of the very existence of the Bureau of Standards. To see how this works out let us take a concrete case. The United States government purchases each year a total of not less than one million incandescent electric lamps. In order to ascertain exactly what the Federal purchasing agents were getting for their money there was fitted up at the National Bureau of Standards a "light test » Adapted by permission from Waldon Fawcett, "The National Bureau of Standards," in the Purchasing Agent, I (1915)1 101-5. THE ADMINISTRATION OF MARKET PROBLEMS 371 room" in which every year more than 5,000 bulbs are burned out in "life tests" that show conclusively whether lamps, as they come from the factory, are actually giving the proper amount of light, that they do not require too much current to yield this illumination, and that they have ia each instance the requisite life of practically 1,000 hours. And how does this benefit the purchasing agent who does not get his electric lamps imder a government contract? Simply by keying up the manufacturers to higher standards of excellence. Latterly the whole policy of the National Bureau of Standards has been to seek to induce manufacturers and producers to give quality because quality pays, and not merely through fear of a rejec- tion of the goods. It may interest purchasing agents in general to know that the director of the Standards Bureau is not at all a believer in the practice of purchasing "by sample." He declares that it is "a makeshift of the poorest sort" and should be resorted to only "in the absence of definite and reliable specifications ia terms of measurable properties." Standards of quality are not, however, the only exactions that loom large before the purchasing agent. Standards of performance are in their way just as important, and consequently we find the Bureau of Standards performing missionary work of distinct value to the whole purchasing fraternity in its effort to have the performance of every instrument, device, or machine guaranteed in terms which are correct and susceptible of measurement. The Bureau experts take the ground that any specification is useless unless it be not only based upon correct mechanical and scientific principles but also embodies a statement of the precise method to be used in ascertaining whether the specifications or guarantees have been complied with. The Bureau officials feel that they will have accomplished something well worth while if they can bring about such understanding, by all parties, of the quantities to be measured and the method to be used that there will be no room for disputes between contractors or manu- facturers on the one hand and purchasers on the other. 37. MEASURING AIDS: A SAMPLE SPECIFICATION' GENERAL SPECIFICATIONS FOR SECTIONAL FILE CASES, BOOKCASES, TRAYS, AND CABINETS Workmanship and material. — ^AU workmanship must be the best known to the trade; all material must be the best of the kind specified. 'Taken from one of the pamphlets issued by the General Supply Committee, United States Government. 372 BUSINESS ADMINISTRATION Lumber. — Lumber must be bright and harmonious in color, thoroughly air-seasoned, properly kiln-dried, and free from knots, shakes, sap, discolorations, or other defects. Quartered white oak must be strictly white oak, no part of any piece to have the medullary ray at a greater angle than 45° to the quartered face, and all pieces in any one article must be well matched in color, figure, and grain. All exterior surfaces on articles specified as quartered oak must show strictly white oak, edges of stiles on face of case to be veneered, and legs of sanitary bases to be built up with interlocking joint to show quartered face on four sides. Poplar, ash, chestnut, beech, or birch may be used for all interior framing. Constrtiction. — ^Framing to be by mortise and tenon or dovetail, as may be most suitable. Mortises must be as deep as possible, tenons full depth, and not less than one-third the thickness of the material. Dovetail must extend full width of the joint and must be finished flush and show no openings. Joints must be true and perfect, well glued throughout, and held under pressure until glue has set. Best Irish glue must be used and must not be used after reheating has affected its strength. All moldings to be worked on soUd wood; no moldings, except glass beads, to be nailed on. All ends to be paneled. All base sections must have glue blocks at angle of rail and leg, to run full width of rail and of ample thickness, to be of hardwood and well glued. Each section to have frame at top and bottom of interior, with at least three rails in frame, grooved to accept three-ply panel inclos- ing top and bottom of sections. Exteriors and partitions to be secured to the frames by dado or dovetail construction, well glued and nailed. ■; Backs to be three-ply, exterior ply to be beech, birch, or quarter- sawed red gum, except when finished backs are ordered, when exterior ply shall match the wood used in sides of section, finish veneer to be not less than iV inch thick when laid. Ends to be rabbeted to back, and back to be securely glued and nailed to ends and interior frames with cement-coated nails. All partitions to be solid, face edge to be lipped to match the rest of the unit; partitions and rails to finish flush on front of section. THE ADMINISTRATION OF MARKET PROBLEMS 373 FINISH Preparation. — All surfaces must be smooth, and those to be varnished, except unexposed surfaces, must be made perfectly smooth by scraping and sandpapering. Any article which shows dark spots due to filler sticking to surfaces not properly smoothed may be rejected. The use of putty is prohibited except in nail holes. Materials. — Stain and filler must not cloud the grain and must leave the flake in quartered oak as clear as possible. Shellac must be white shellac cut in grain alcohol. Varnish must be an approved brand of standard manufacture and free from rosin; samples of varnish to be submitted. Colors.- — Samples of standard oak and mahogany colors and finish may be seen at the ofl&ce of the General Supply Committee. Standard finish. — ^Hardwood exteriors to be stained, thoroughly filled to an even color, the filler thoroughly cleaned up, allowed to set, given one coat of shellac, sandpapered smooth, and three coats of varnish, each allowed to dry hard and be sandpapered smooth before the next coat is applied, the last coat to be rubbed with pumice and oil to a semidead gloss. No gum runs will be allowed. Interiors of all articles, including drawers and pigeonholes, except surfaces to be lubricated, must have one coat of shellac and one coat of varnish. The front edges of shelves and division pieces imder J inch thick must match the exterior in color and receive the same finish as exterior. Drawer- sides and runs to be lubricated with paraflSn oil. Panels must be stained and filled before setting. Interior of doors to be rubbed, same as exterior, after last coat. Unexposed parts. — Tops, bottoms, backs, and all unexposed parts, except drawer sides and runs, which can be reached after assembling, to have one coat of shellac and one coat of varnish. Interior of bookcase sections to be stained, and to receive one coat of sheUac and one coat of varnish. Sides, backs, and bottoms of drawers when made of metal to be finished with baked enamel, guaranteed against rust. Hardware. — Pulls, label holders, rod fronts, handles, etc, are to be solid cast bronze, brush finish, to match hardware on cases in the office of the General Supply Committee. 374 BUSINESS ADMINISTRATION 38. PURCHASE AND STORES UNDER UNSYSTEMATIZED, SYSTEMATIZED, AND SCIENTIFIC MANAGEMENT' [This selection should be read not only to get information con- cerning purchasing and storing but also to get a flavor of the meaning of the term scientific management.] I. The purchasing of materials, stock, and miscellaneous supplies under unsystematized management may be done by one man or by a purchasing department; but more likely this duty is not very well defined and the purchasing is done by a number of persons, especially those needing the material. Little study is put on the standardiza- tion of materials, and different kinds of stock for the same use are often bought. This tends to remnants on some kinds, overstock and understock on others. The buying is seldom done on exact specifica- tions, is not always even by written order, nor is there a predeter- mined maximum and minimum estabUshed of each article that should be carried in stock. The head of the business or the buyer may be an exceedingly shrewd trader and may buy very close at times; but he will not always buy the materials best suited to the work, often overbuys or underbuys for lack of definite information, and is fre- quently tempted by bargain lots that seem cheap but may cost more to use in the shop. The lack of well-organized purchasing results in work progressing to a certain extent through the shop until it is stopped and occupies space waiting for some material which has been overlooked, or which is not suited for the purpose. A fairly successful pubUshing house in one of our large cities does its buying by the unsystematized fashion. Last year in making up its statement of profit and loss, the inventory of paper amounted to $20,000. Three-fourths of this paper exists as overruns, or odds and ends of lots which are stored in various printing offices and cannot be used on an average-sized job. They are so scattered they cannot be combined, and the make, color, finish, and size are different in nearly all the lots. When this house realizes what this stock is, it wiU be forced to write off nearly $15,000 from its books on what it now considers good assets. The storage of materials and purchasing are very closely related to each othgr, Loss of time hunting for material is the same, whether 'Taken fronl H. P. Kendall, "Unsystematized, Systematized, and Scientific Management," in Proceedings of the Tuck School Conference (1912). THE ADMINISTRATION OF MARKET PROBLEMS 37^ the material is lost in the storeroom or has not been purchased, and a lack of system in one department will undo attempts at system ia the others. The effect of badly organized stores is: (i) Loss of time; work which should go through the manufacturing department rapidly is held up at different places waiting for materials of the proper kind or amount, and this is a direct loss. (2) Loss of ^ace; more space is required to hold stores in an unsystematized way, and for lack of standardization more stores will be kept on hand than are required. Space is also lost in the workroom because work in process does not pass promptly through the workrooms if delayed for material. (3) Loss of capital, because more money is tied up in stores which are not systematized and properly regulated, and more money is tied up in the jobs which represent labor and material sidetracked throughout the plant. 2. In a systematized plant, materials and suppHes are purchased through one man or department, a maximum and minimum generally estabhshed, and a decided effort made to purchase the materials best suited to the workrooms. Some analytic methods are used in deter- mining the proper materials, and standardizing is done on the more important kinds. This purchasing department aims to have a stock of everything required, but buys largely what it is asked to. It does not always make purchases on complete specifications, and a lack of complete standardization increases the detail of that department. So far as the clerical system is developed, however, it is generally quite good. A marked contrast to the storage methods of the unsystematized plant wiU be seen at once. Here is an adequate room in charge of a storekeeper who issues stores only on requisitions, and is expected to keep his place neat and orderly and deliver his stores on call. A perpetual list is kept in the office and balanced with the stores, and the balance is proved by an actual count of the stores once a year or oftener. Stores are partially classified and standardized to some extent. It is only the most-used stores that are assigned to orders before actually called for. The physical handhng of the stores, mov- ing them in and out of the storeroom, is done by the assistants of the storekeeper, and the eflEiciency of this work and the orderliness of the department depend wholly upon the kind of man in charge. The central office can exercise very Uttle real control in this depart- ment. 376 BUSINESS ADMINISTRATION Not all systematized plants control work from a central planning station by writing the operations for each process before the work is started; therefore materials are not exactly pre-determined and work is still likely to be started before it is discovered that some material is lacking. Neither are the quantities always kept up automatically through the purchasing department by a predeter- mined maximum and minimum of each kind. Also, it is general practice to have storage space for different departments, some of which are not under control of the office; for instance the miscel- laneous supplies used for the power department for repairs, piping and plumbing, electrical maintenance, etc., may be scattered about with little idea of order, while the actual materials for use in manu- factxire may be in good order. 3. Scientific management is not satisfied merely to have plenty of materials on hand when wanted, to roughly standardize the principal items of stock used, and to buy at the market rate, but demands that all materials be carefully studied with reference to: (i) the greatest adaptability to the work; (2) quality and uniformity; (3) price; (4) determination of the proper maximum and minimum that shall be carried, so that the stores department may automatically govern materials and supplies which should always be on hand. When this has been done, care is taken to make all purchases on detailed specifications. The importance of using materials best suited to the work, and which are uniform in quality and by stand- ardization reduced to the smallest variety, is not sufficiently appre- ciated by the buyer in even the systematized plant. For example, a manufacturer of razors using a thin blade could not secure a steel which would always act alike and produce a uniform result with uniform treatment. He employed a steel expert of reputa- tion to assist him. This expert purchased the best razors that dif- ferent barbers had, analyzed them chemically and microscopically and, as every man who uses a razor might guess, found very great variation even in the same makes. In fact, he satisfied himself that no razor manufacturer, however well systematized his plant was, had ever scientifically determined the best steel, or had purchased it on a formula that would standardize this material. As a result, all these years the buying of a razor had been a lottery. After many tests this expert secured from various steel manu- facturers samples of steel on their formulae and his own, and he THE ADMESrrSTRATION OF MARKET PROBLEMS 377 finally developed a formula that would give the best razor steel known and maintain it uniform. As a result of this method of buying, this manufactmrer stood alone among the razor producers of the country in ability to produce razor blades of standard quality. Another illustration of the standardizing of materials. In study- ing the supplies of a business it was found that there were twelve kinds of wrapping paper regularly used, and an investment of $2,500 was needed to carry a sufficient amount. This was standardized and now the twelve kinds of paper have been reduced to four, with a saving of $1,000 in the stock, 60 per cent in the storage space occupied, and the available worth of this paper for the demands that may be made on it is 20 per cent more than what it was formerly. This illustrates the saving made on but one class of material used in a factory where standardization is being worked out. Such methods of purchasing compel the purchasing department to be intimately associated with the working of the materials through manufacture, and result in the following: (i) uniform material best adapted to the work saves labor and delay in workrooms; (2) mini- mum of kinds and sizes necessary to be carried; (3) storage space saved; (4) lower costs through buying in larger lots. The physical aspects of a storeroom under scientific management do not differ greatly from those in the systematized. A proper means of holding or piling the stores, laid out in an orderly fashion, is pro- vided. To avoid confusion in a varied terminology, nmemonic S3rnibols are used to designate the different kinds of stores. The maximum and minimum mentioned above are determined for each kind, and kept on the ledger sheets in the central planning room. The bookkeeping for the stores is not carried on in the storeroom, the storeroom force simply acting on orders. The location of the materials is also indicated on the ledger sheets, or, as they are known, the balance of stores sheets. Under scientific management it is not sufficient, when materials are required, to send a requisition to the stores department, but all orders or work which require material have the items looked up and assigned to the specific orders by the balance of stores clerks, and this material when assigned to a given order is not available for another order which may follow. This is done before the materials are required for use, and this method serves as advance warning to the stores clerks if an unexpected demand for a particular material is likely to occur. Quick action is then possible in purchasing more. 378 BUSINESS ADMINISTRATION The work of moving materials into the stores department and moving them from the stores department to the particular place where they are to be used becomes a function of the planning of the work, and of the routing of the work, and the workman who is to use them should not be delayed or have to give a thought to the materials which he needs for his next job. They are moved in the right condition for his use to the point where he can use them to the best advantage. The time which the workman spends looking for or waiting for his materials can be better spent in effective work. 39. THE INTERDEPENDENCE OF PURCHASING WITH OTHER FUNCTIONS' - [This selection is particularly helpful in showing the inter- dependence of business problems. Do "Unes of authority" and "lines of communication" need to coincide in a business organiza- tion ?] Let us consider separately, but briefly, and mainly in outline and in a suggestive way, the relation of the purchasing department to the other departments and functions of the business. Management. — Most authorities on factory organization make the purchasing department responsible and accountable directly to the general manager. Certainly it is important that the purchasing department report direct and keep the management fully informed as to conditions affecting costs and the operation of the plant. The connection of the purchasing department to the management should be so close and so intimate that this department can be the first to respond to any changes of plans or poUcy affecting rate of production or changes in types or classes of the product of the factory. Failure here is almost fatal, and yet how often do we find the manufacturing departments putting forth their best efforts to increase output by means of an increased force or longer working hours while, as yet, little or no effort has been made to prepare for the increased demand on the supply of raw material ? Or again, how often do we find the normal supply of material continues to come in after men have been laid off or hours shortened in an effort to reduce the rate of production in keeping with a falling-off in demand for finished product ? " Adapted by permission from A. C. Ward, "The Furcbasing Department of a Manufacturing Organization," in The Engineering Magazine, XL VI (1913), 349-54. THE ADMINISTRATION OF MARKET PROBLEMS 379 Accounting and cost. — It is important that the work of the pxir- chasing department should be so planned that invoices may be checked as to prices, quality, and quantity of the goods covered, and then passed promptly to the accountiag department. AU essential informa- tion regarding discounts, rebates, transportation, and claims of various kinds should also be promptly and clearly furnished in connection with the invoices. The purchasing department, on the other hand, should be kept fully informed as to any disputes or misimderstandings arising in settlements of accounts, or anything of that nature which might affect the relationship or attitude of those furnishing material and supplies. Sales and order departments. — It is advisable that the purchasing department keep in close touch with new business and with the general trend of Laquiries and prospects, both as to the effect on the volume of business and as to the relative demand for different sizes and types of product. To provide this information, some provision should be made for the purchasing department to have a summary or classified survey of sales orders as they are entered, together with a statement of inquiries and prospects so far as they are special in quantity or t)T)es. The method of accomplishing this will depend upon the nature of the business and the peculiarities of the local organization. Receiving and stores department. — ^The relation between purchasing on the one hand and storing material and delivering it where and when needed, on the other, is so intimate that it is usually thought advisable that stores be directly under the authority and management of the purchasing department, or, at least, that the purchasing department audit all requisitions and have final jurisdiction as to quantities, etc., carried. The storekeeper should have complete copies of all purchase orders, except that portion of the order pertaining to prices, terms, etc., and should be kept fully informed as to prospective deliveries, delays, cancellations, changes, etc. There should be the closest co-operation and the best possible understanding between the purchasing department and the store- keepers as to quantities to be carried, policies of retrenchment or advancement, disposition of obsolete and surplus stock, etc. Store- keepers should also be taught to study and classify the needs and demands for the different classes of material carried, so as to combine requisitions and anticipate needs and thus facUitate placing all pur- chase orders to the best possible advantage. 380 BUSINESS ADMINISTRATION Designing and engineering. — ^Perhaps there is no phase of this subj.ect presenting greater possibilities or providing more food for thought or more opportunities for profitable action than this of the relation of those who specify and those who provide the material entering into the complete product of the organization. The knowl- edge, experience, and facilities of the purchasing department as to quality, cost, availability, etc., of different materials should always be at the command of the designing and engineering departments, and should be freely used in designing new product or re-designing old lines. The relations of these departments should be so cordial and intimate that the purchasing department will be freely consulted on all such matters and be assured a voice in the final approval of aU such designs and changes. Certainly, the specifications, when issued, should leave as wide a margin or latitude as possible to the discretion and judgment of the purchasing department in regard to the particular grade, quaUty, form, and source of supply of the material used. To this end, the purchasing department should possess a practical knowl- edge of the equipment, processes, methods, and requirements of the manufacturing departments, and be guided by this as well as a knowl- edge of the comparative availability, prices, etc., of material offered by different sources of supply. Production order and manufacturing. — ^The purchasing depart- ment, either directly or through the stores department, should be the first notified of new work being contemplated or actually placed in the shop. Such notification should include or be accompanied by a complete fist of material and parts required. So far as possible, time should be given to procure all needed material and supplies before work is actually begun. The manufacturing of&cials and departments interested should be kept fully advised by the purchasing department in regard to any failure or delays in getting necessary material or parts, or any other conditions arising within the jurisdiction of the purchasing depart- ment which may in any way afiect the progress of work in these departments. I believe it is desirable that the purchasing department be in position to follow the progress of the material through the various stages and operations in the factory and to know at first hand of its suitableness for the conditions and work required. This knowledge is one of the essential requisites to successful and satisfactory pur- chasing of material for a manufacturing institution. THE ADMINISTRATION OF MARKET PROBLEMS 381 40. A POSSIBLE PURCHASE DEPARTMENT ORGANIZATION' The organization of the purchasing department will depend not only on the amount of yearly purchases but on the nature of the business as well. One man can purchase a tremendous quantity if the purchases be made in large lots, or if the variety of articles pur- chased be small. One man can purchase more from the dollar and cents standpoint if he deals, say, in coal only than the man who buys for a chain of five- and ten-cent stores. Not only can he buy more, but he will need less assistance in following up the orders after they are placed to see that they are shipped in time and come up to specifica- tions. Detail takes time, and where there is detail there are required more hands to take care of it properly. The buyer for a contracting company which maintains practically no storage facilities will require a purchasing department differing from that required by a corporation with a warehouse and which uses the same variety of articles year in and year out, since the latter can judge its needs suf&ciently in advance to stock them. The detail involved in one case may be the same as in the other, but the con- tractor usually wants deliveries promptly, and rush orders require more attention than routine orders. Some businesses have very marked rush and duU seasons, the buying for the entire year being done during one season. Obviously such a concern could not maintain an elaborate purchasing depart- ment during the dull season even though it were highly efi&cient during the busy period. In fact, any department of any business should be so designed that it can be expanded or contracted in con- formity with the volume of business to be transacted. Some businesses are so highly specialized that no one purchasing department can be organized to do all of the buying. Each purchase may require the skill and judgment of an expert. Knowledge of the salability of an article may be paramount. It may be impossible to impart to a central purchasing agent, on paper, full information. In such cases each department of the business should do its own buying and there wiU be no need of a central purchasing department. From the foregoing it is not hard to understand that it is impossible to lay out a purchasing department that will fit any business unless the nature and size of that business be known in advance, any more ' Adapted by permission from C. S. Rindsfoos, Purchasing, pp. 80-84. (McGraw-Hill Book Company, 1915.) 382 BUSINESS ADMINISTRATION than one could design a light and power plant for a municipality without first knowing the size and nature of the municipality. How- ever, it is possible to set down the lines of good standard practice and this may serve as the suggestive basis on which to work in any specific case. It wiU be the duty of the general purchasing agent to take care of the general management and supervision of his department. A large part of his time wiU be taken in the negotiation of large orders or contracts, particularly when they reach the closing stages. He will formulate the poUcies which his department is to pursue, seeing that Incoming General Purchasing Agent Assistant Purchasing Agent Outgoine Requisitions Orders Unapproved Invoices Approved Invoices 1 1 Transportation Clerk Chief Clerk Branch Purchasing Agents 1 1 Stenographers Telephone Operator Office Boys Price Qerk Bookkeepers 1 1 Clerks f ot Tabulating and Filing Quotations Miscellaneous Clerks for FUing Catalogs, Correspond- ence, etc. it accords with the general policy of the corporation which he repre- sents. He win represent his department in consultations with the executive heads of the other departments, such as the accounting department, auditing department, construction department, contract department, etc. All differences which arise between his depart- ment and another will be for his consideration. He will often indicate to his chief clerk the sellers from whom he wishes bids on a given requisition, and he will keep a general oversight of the progress of orders of special importance, even after they are placed. In short, he will be the responsible head, mainspring and inspiration of his department. The assistant purchasing agent will assist the general purchasing agent in whatever way he may be instructed. It is usual for the THE ADMINISTRATION OF MARKET PROBLEMS 383 assistant purchasing agent to take as much of the detail o£E the shoulders of the general agent as practicable. He will usually examine all correspondence intended for his superior, bringing to his attention only such as is most important. In fact he will ordinarily handle all the routine matters so that his superior will have a large part of his time free for consultation. The chief clerk will report to the general or assistant purchasing agent, and be responsible for all the clerical work of the purchasing department. In many cases he will determine who shall bid and send out the requests for tenders. Much of the routine correspondence relating to bids, prices, etc., wiU be handled by him either direct or in the general purchasing agent's name. He will be responsible for the discipline of the department. In the absence of both the general and assistant purchasing agents he will act as the executive of the department. The duties of the price clerk will consist primarily in maintaining accurate and up-to-date price records, checking invoices for material deUvered to see that same are correct as to price (although this is often done in the accounting department), examining tabulated bids to see that the prices are in line with the market, and in general super- vising the filing of all papers. It will be the duty of the transportation clerk to keep posted on freight rates, to examine freight charges, and to prepare claims for overcharges. He will also watch orders after they are placed to see that they are shipped promptly and not delayed in transit. This is frequently a very important service. The inspection and testing of materials either during manufacture or after delivery wiU usually be imder the engineering department, and not the purchasing department. The purchasing agent, however, will furnish the engineering department with a copy of the order and specifications in order that the engineering department may know what it is entitled to demand of the manufacturer or seller. If, however, the business does not include an engineering department, the inspecting and testing should be under the purchasing depart- ment, in which case the inspector should report to the general or assistant purchasing agent direct. 384 BUSINESS ADMINISTRATION 41. ORGANIZATION OF GENERAL PURCHASING DEPART- MENT OF WESTERN ELECTRIC COMPANY ntrnsmutt MDURGE OTfVKHUU 1 1 1 HMVTHOiDlEHtMKH FUBCHUIflGttEra WROWSIKG EHCIHEER ruuiiMn HEW YORK BRMIOI GENEmLFURCHASnG KIHI WF.Budif (UlilltCH'GCIUIIUmE WFBuKkw CJLIhiHI FGJtaM HAObHUiAr PJI.ll«(iiB.J(irT II imp. tClEMP I 1 1 a£idcu.4 SUYKX DIVISION HJ.IMm OBOWOWISKIN amNGOrnaoM BT-PWDUCIS SU£S einwGomsKM VBiDdir EUaRKUSumjES BUYING DWBIOH HADbnUMlu CtlRKUtSOKC omam MSSrMTGEKUU. PURCKUINCUUT CXURril 1 I r" I ! __ t sirma-rtra ntmmtxrs MJCMMtt BUVEB aiEHIUlS,GUIIS. OILS,nUNTS tJGul Wins ■i[HU,it«xiNEirr iwHiJiEroou R-H.H«vb eUYER IBilliilid BUrER PAPEfl I PHIHTING ofrict&FmoBTSUPPUEi BCLlSYSIEUSTAADlUtOS llWGnr>,RrfER 1 . r 1 j 1 OMERnLIlVOWWB P.I.O«fltei CH*niUIOOM wnEfmuNHnpous CLVviNlKl vm F.6.lil(lB ■ EDlMi vtm ! ____ 1 KM TOM Kkona KKTW R.H.IUnMpll J.. _ 1 PWUDEUMI fMSnpt KIWH WP.Unmoa 1 1 UMBER PRODUOS SUILOINGIiUrEitlU. VEWOES BV-PftODUCIS SHIES PJIUinWI 1 G.E.Wri^ USSTMT REFERENCES FOR FURTHER STUDY Jones, The Administration of Industrial Enterprises, chaps, xvii- Shaw, An Approach to Business Problems, chaps, viii-xvii. Cherington. The Elements of Marketing. Ivey, Principles of Marketing. Nystrom, Economics of Retailing. Twyford, Purchasing. CHAPTER V THE ADMINISTRATION OF FINANCE Purposes of this chapter: 1. To see the outstanding tasks confronting the administrator in his relationship to finance. 2. To understand the institutions, devices, and policies which he uses in meeting these tasks. 3. To visualize the organization which may be set up to administer these financial relationships. The financial problems of the modern manager are both nmnerous and difficult to solve. Our minds are prepared to accept the first part of this statement quite readily. Our whole economic organiza- tion is on a pecuniary basis; business is a pecuniarily organized method of gratif)dng wants; it is quite natural, accordingly, that financial problems should arise at every turn of the manager's path. But business has been on this pecuniary basis a long time and we might well suppose that standard solutions had long since been secured for most financial problems. This is far from the case. A striking bit of evidence that much remains to be done in the financial aspects of management is shown by the following list of questions in business finance which (1920) require investigation according to the finance committee of the Boston Chamber of Commerce. The student should read this list carefully as a means of surveying, through the eyes of business men, the unsettled problems in this field. 1. Business barometers: what they show and what they faU to show. 2. The relation of successful industrial finance to the business cycle. How can financial methods be put on a more scientific basis ? 3. Can "financial standards" be established for operating the different types of industries? (This would involve a comparative analytic study of the various "ratios" to be derived from the financial statements, income and expense accounts, etc., over a period of years.) 4. Is there a "standard" investment for the different t3rpes of manufacturing business? What size conduces to the greatest financial success, and what is the minimum safe investment? 385 386 BUSINESS ADMINISTRATION 5. What are the best methods of financing a small business? In what ways should the banks help such concerns ? 6. How shall working capital be provided ? What should be its relation to fixed capital in different types of industry ? 7. The seasonal element in different types of industries. What can be done to level the peaks and fill the valleys ? 8. The possibilities of budget-making for business concerns. 9. Financial co-operation between business concerns. 10. When shall a business borrow from the bank and when through note brokers and commercial-paper houses ? 11. What improvements can be suggested in the methods of arriving at the amount of the line of credit extended by banks to the different types of industries ? 12. What proportion of the earnings shall be distributed and what proportion put back into the business ? 13. Is there "over-competition" in the marketing of securities? If so, to what extent has it affected the cost of capital, and what measxrres can be taken to improve the situation ? 14. The turnover of stock (or "working assets") in its relation to the financing and financial success of different t)T)es of manufac- turing concerns. 15. How shall the periods of depression be financed? What rules should be followed (o) by the banks, (J) by the business concerns ? 16. The abuses of commercial credit. 17. To what extent can improved financial methods decrease business failures ? 18. The theory and practice of the cash discount. 19. The uses and limitations of the trade acceptance in different t)rpes of industry. 20. The pros and cons of "no par value" stock. 21. The proper relations between bonds and stock in industrial corporations. 22. Rules for financial success in the foreign trade game. 23. Profit-sharing from the point of view of industrial finance. Does it increase profits ? 24. Will wider distribution of ownership of business concerns lead in the long run to greater profits ? To what extent is it desirable that employees and the public have a "vested right" in industry? 25. What relations should exist between the ciedit and the sales department in various types of industry ? 26. The financial aspects and results of advertising. THE ADMINISTRATION OF FINANCE 387 27. Financial aspects of purcliasing — ^particularly the financing of excess purchases of raw material at a low price through temporary borrowing. How far is it safe to go ? 28. Better financial co-ordination between the sales and pro- duction departments. 29. Possible financial advantages of more direct distribution of the product to consumers in certain types of industry. 30. What are the greatest financial wastes in certain types of industry ? 31. The effects of "blue sky" legislation on legitimate industrial finance. 32. How can our bankruptcy law and procedure be improved? 33. What changes in the federal tax laws will lead to greater business prosperity ? 34. What effect would greater publicity of accounts have on business profits ? This list was not introduced into our discussion with any idea that it could wisely be used as the basis of our study. Its usefulness for our purpose is in the light it sheds on the attitude of practical business men toward financial problems. These men realize clearly enough that finanical problems are numerous, unsettled, and much interwoven with problems of marketing, production, social control, and all the other outstanding relationships of the manager. In our general survey of financial management we shall seek an understanding of the following matters: (i) the financial institutions which the manager can utilize; (2) the technical devices, such as corporate seciurities, accounting systems, and commercial credit instruments, which he finds convenient; and (3) the financial policies in terms of which he actually does utilize these institutions and devices. These items make up the subject-matter of the chapter, which will be presented in five sections. A. What It Means to Start and to Finance a Business, pages 388-97. B. The Manager's Relationship to the Financial Organization of Society, pages 398-429. C. Financial Policies and Occasionally Used Devices, pages 429-69. D. Financial Policies and Frequently Used Devices, pages 469-512. E. Organization for Financial Administration, pages 512-22. 388 BUSINESS ADMINISTRATION A. What It Means to Start and to Finance a Business From the veriest beginnings to the final disappearance of a busi- ness there is a continuous procession of financial problems. Of course there is. Business is engaged in, under our economic organization, with the hope of securing profits. Profits, the prime test of the suc- cess of an enterprise, are computed in financial terms as are also all costs and all incomes. Technology, labor, markets, risks, and all the other outstanding relationships of the manager are, consciously or unconsciously, translated by him into financial terms. Perhaps this is only another way of saying that financial issues are so pervasive in business administration that it is exceedingly difficult to find the beginning, end, or middle of the matter when one tries to arrange it for discussion purposes. Any arrangement is pretty certain to be arbitrary. One method of opening our dis- cussion is that of making a general survey of what it means to start a business; what the chief financial matters are which must be cared for at the outset; and what leading methods there are of providing finances thereafter. We shall make such a general survey in this present section which we are calling "What It Means to Start and Finance a Business." In later sections we shall try to go a httle more deeply into the subject. PROBLEMS 1. Notice the list of costs mentioned in Selection i as being connected with starting a business. Are they present when an individual pro- prietorship is formed ? All of them ? When a corporation is formed ? Always ? Will the fimds of the business (whatever this may mean) need to be large enough to cover such items ? 2. If I look over the situation and decide to open a grocery in a certain district, have I engaged in the promoter's function ? 3. What classes of persons are likely to serve as promoters in our modern society ? 4. Who would do the promoter's work in a socialist society? Would there be any need of such work ? 5. What is the promoter's social function? Does he play any part in the guidance of economic activity ? 6. Compare as methods of financing a business, (o) borrowings, (6) gradual growth from reinvestment of earnings. What are the advantages and disadvantages of each method ? 7. What should be the attitude of the financial manager toward invest- ments in side-hnes ? Why ? THE ADMINISTRATION OF FINANCE 389 8. "A manager who ' doesn't owe a dollar in the world' is not regarded as conducting his business upon approved lines." Explain. 9. AVhat are the chief forms of fixed capital ? 10. What factors must be considered in figuring the 'fixed capital require- ments ? 11. "The chief forms of working capital are: (a) cash; (6) accounts and bills receivable; (c) finished stock; (d) raw stock and supplies; (e) se- curities of other companies held for investment, not for purposes of control." Are there deductions which should be made ? 12. "The volume of working capital depends upon the nature of the business, and it should be determined with reference to: (a) volume of business; (6) distribution of purchases throughout the year; (c) the credit terms upon which purchases are made; (d) the credit terms upon which sales are made; (e) the period of production during which capital is tied up in work in process." Show the bearing of each item. Should other items be included ? 13. "A dealer may have too much capital in his business for his own good, just as he may have too little." What is the reason for this statement? Which would you regard as the better credit risk, the man with too much capital or the man with too little capital ? 14. How can you tell whether a business man has too much or too little capital? What are the disadvantages of having too little capital? 15. Work back over the preceding questions, considering in the case of each whether it is appUcable to (a) an individual proprietorship, or (b) a partnership, or (c) a corporation. I. STEPS INVOLVED IN STARTING A BUSINESS' [The following selection has specific reference to the steps involved in starting a (corporate) gas plant business. It should be read, however, with the mind searching for the application of each point to other types of business. Most of the matters mentioned apply to the case of an individual proprietorship or a partnership as truly as they do to a corporation. And they are by no means peculiar to the gas business.] The cost of a gas plant and of acquiring its business may be subdi- vided as follows: 1. Preliminary development, which includes: a) Investigation of the project b) Assembling of parties who may be willing to participate ' Adapted by permission from C. v\ . Gerstenberg, Materials of Corporation Finance, pp. 455-56. (Prentice-Hall, 1915.) 390 BUSINESS ADMINISTRATION c) Preliminary engineering and legal advice on the proposition d) Canvass of territory to ascertain if sufficient business can be obtained e) Estimate of cost of plant and probable income f) Incorporation of the company; and g) Securing the franchise 2. Real estate 3. Labor, materials, and sub-contracts 4. General contractor's profit 5. Engineering 6. Expense of company organization during construction 7. Interest during construction 8. Taxes and insurance duriug construction 9. Stores, supplies, and working capital 10. Acquiring or establishing the business, which includes: a) Expenses of canvassing for business b) Advertising c) Setting meters free of charge d) Interest on cost of plant in excess of income until business becomes self-supporting; and e) Taxes and insurance during that time 11. Legal expenses 12. Finincing, including banker's commission, discount on bonds, and promoter's profits Many of these items are overlooked by those who have had no experience in the actual establishment of such a business, and that, no doubt, is the reason why the cost of such a plant and establishing such a business almost always largely exceeds the anticipated outiay. 2. PROMOTION AND THE PROMOTER' The function of a promoter. — A promoter is a man who organizes a new business and sets it going. The business need not necessarily take the form of a corporation. It may be handled as a partnership or a joint-stock company. "Discovery" of a proposition. — ^A promoter in handUng an enter- prise has three separate tasks before him. First, he must "discover" his proposition; second, he must "assemble" it; third, he must "finance" it. The discovery of^ proposition does not meatt simply to find it, but includes a thorough investigation into all the surrounding con- " Adapted by pennission from W. H. Lough, Corporation Finance, pp. 194-98, 2oy-io. (Alezandei Hamilton Institute, igi6.) THE ADMINISTRATION OF FINANCE 391 ditions, and the solution in advance of all the difficult problems that are likely to arise in its development. Let us suppose, for instance, that a new invention which looks good on the surface is brought to the attention of a promoter. If he understands his business he will first of all examine critically every point that points toward the invention's success or failure. He will find out whether it is patented and just what features the patent covers. Next, he will consider whether other devices are in use which perhaps accomplish the same purpose as well or nearly as well as the invention. After making sure that the invention is what it purports to be, he will consider the possible markets for the article. Next, the promoter takes up the cost of manufacturing. He finds out whether new and specially constructed machinery is necessary in manufacturing the invention, and whether any especial skill on the part of laborers is required. He considers the amoimt of experi- ment that will be necessary in order to perfect the invention and in addition figures a large amount of extra cost for unforeseen contingencies. These are only a few of the factors that the promoter would investi- gate before taking any further action. Their number is sufficient to indicate, however, that any promoter who has a reputation to make or preserve cannot afford to jump hastUy at whatever proposition is presented to him. The process of discovery may take a long time, perhaps months or even years. "Assembling" a proposition. — ^By assembling a proposition is meant the process of getting temporary control into the hands of the promoter. If he is dealing with an invention, he assembles the proposition by getting an option on the invention or by making an agreement with the inventor on a royalty basis. In the case of a consolidation of plants or railroads into a new corporation, assem- bling is frequently much more complicated and difficult. In such a case the promoter may have to get options or arrange the terms of purchase with every plant and perhaps with all the different classes of security-holders involved. Financing a proposition. — ^Now we come to the most difficult part of the promoter's work, his financing of the new corporation. No hard and fast rules can be laid down to cover the promoter's procedure. We may classify the men who spend a considerable amount of their time and energy in promotion into four groups. Let it be clearly 3g2 BUSINESS ADMINISTRATION understood, however, that this classification does not pretend to be complete. First come the professional promoters, the men who really do make it their main, and almost their sole, business to himt for enterprises that promise profits and to finance those enterprises. This type is common in fiction, but rare in real life. So far as the writer recalls, he has met only one man who could be put in this class, a taU, lank, fervent individual with a persuasive air. The second class consists of lawyers and bankers in small com- mimities. Such men have exceptional opportunities to inform them- selves as to local conditions; they frequently take hold of some local enterprise, such as a steam or street railway, secure the assistance" of experts for investigation, and carry through the proposition to success. Still more frequently, however, so far as the writer has observed, such men underestimate the difficulties of the problem; they take it up with enthusiasm but are forced either to drop it or to call in men of wider experience. The men to whom they generally turn constitute the third class of promoters, namely the larger bankers and brokers. The amount of promotion work performed by such men is hmited and they usually confine their active participation — except for advice — to the financing of such enterprises as they take up. The fourth class — ^and this is a recent important development — consists of engineering firms engaged in construction work of various kinds. Certain large engineering concerns have established a wide reputation for success in operating street railroads, water works, electric lighting plants, and so on. These firms naturally have built up a large and well-equipped staff of experts in those fields. As the staff is expensive, it becomes a pressing problem to keep them profitably employed all the time. In the effort to solve this problem such firms have drifted into the custom of taking up new enterprises of merit and performing the work of promotion themselves. 3. METHODS OF FINANCING AN ENTERPRISE' The usual method of financing an enterprise is that of interesting moneyed men. Other methods are, however, followed on occasion. The simplest of these is found when the owner or promoter has the ' Adapted by permission from Francis Cooper, Financing an Enterprise, pp. 16-18, 21-27. (The Ronald Press Company, 1909.) Later published in three volumes under the author's real name, H. R. Consmgton. THE ADMINISTRATION OF FINANCE 393 means, and himself invests the money needed for his enterprise. Much difficulty is avoided by the adoption of this plan, but unfortu- nately it is not generally practicable. Next to this method comes the good old plan of gradual develop- ment — the actual building up of the enterprise from the financial materials at hand, these materials being at first perhaps the accumu- lated means of the parties, then returns from the operations of the enterprise itself, or fxmds secured from some other occupation or business while the enterprise is in course of building, or a combination of any two or all of these. This method is absolutely inapplicable to the development of those very numerous enterprises where large purchases, investments, or installations are an essential preliminary. There are other cases in which it is entirely inadvisable because of the slowness of the process, as in the development of a patent with but a limited period to run, the building up of a business where competition may only be overcome or prevented by quick and brilliant success, and the many other cases where time is the "essence" of the undertaking. Where this development plan is applicable and advisable, it is ideal. It avoids the risks, the mistakes, the expensive experiments, and the premature development more or less characteristic of all "financed" enterprises in which the managers are inexperienced or the lines of business new. It is the step-by-step method. A man developing an enterprise in this way is, at the start, working on a small scale, his expenditures are necessarily limited and his progress is unavoidably slow. His experiments are, as a matter of necessity, cautious, carefully watched, small in cost, and quick in results, be they good or bad. If good, the particular line of eSort is pushed; if bad, abandoned without serious loss of either time or money. In either case the facts of the particular experiment are determined in the course, perhaps, of a few weeks and at the cost of a few dollars, while in a more pretentious venture the same resvdt would be demonstrated no more satisfactorily at a cost of hundreds or even thousands of dollars and months of time. During this period the proprietor is going through a course of business training from which he secures a grasp of the business, and an imderstanding and control of its every feature that nothing else could give so thoroughly and satisfactorily. As a result of this he frequently attains a degree of success which would hardly be possible under any other system of development. 394 BUSINESS ADMINISTRATION A modification of the personal development method sometimes followed with excellent results, is the gradttal upbuilding of a new enterprise as a side line. That is, the owner, abeady occupied, con- tinues in the business or employment in which he is engaged and from which he derives at least a support, and gives the new venture such time, attention, and money as it needs or as he can spare from his main work. The advantages of this "side line" financing, when it is practi- cable, are obvious. In a new enterprise of limited capital there is almost invariably a period of harassing uncertainty, sometimes quite prolonged, when the income is exceeded by the outgo and the future of the whole venture trembles in the balance. If then the owner is meanwhile profitably employed and able to supply additional funds as they are needed, the danger of failure is largely removed and the very knowledge that the "base of supplies" is not in danger is in itself an element of strength and of success. On the other hand, the development of a new enterprise by this method is slow, the business itself is almost certain to suffer and per- haps fail from lack of attention, and, finally, it may be said that in practice most of these side line attempts are failures. Another method of financing enterprises sometimes employed is to borrow the money required. This is only possible where the personal standing or the collateral security of the borrower is such in itself as to justify the loan, as it is seldom that the enterprise itself would be considered security for the money needed for its development. If the enterprise itself is good, the owner or the party in charge a good manager, and a loan can be made on fair terms, the plan has advantages, mainly in the fact that the control and ownership of the new undertaking are left in the hands of the original parties. It is true that a bonus must often be paid to secure the money; that interest must be paid on the loan, and that the borrowed money must, sooner or later, be returned. If the enterprise is successful, however, the indebtedness and interest payments are easily carried and paid off in due time, and the whole amount given for the use of the money should be small compared with the profits of the enterprise that must have been given to secure the needed money as an investment. If, on the other hand, an enterprise ends in failure, the loaning plan is disastrous — far more so than if the money were secured as an investment in the enterprise. For this reason many people, well able to borrow, prefer to get part or all of the necessary money as an invest- THE ADMINISTRATION QF FINANCE 395 ment in the enterprise rather than as a loan. In this case they divide up the risk. They do not look for failure, but they recognize its possibihty in any undertaking, no matter how good. Therefore they prefer to diminish their own interest in the enterprise and in the profits to be made, rather than to take chances of a total and perhaps disastrous loss in case of failure. Also while the interest on the money borrowed is, in the case of a good enterprise negligible, there are other dangers connected with the method. Loans and interest pa3mients have a tendency to become due at inconvenient times, or if left to run after they become due, may be called unexpectedly. Then if not met, they may be used to the serious embarrassment of the enterprise. As a matter of fact loans are not infrequently made to parties having promising enterprises, with the definite hope or expectation that they wUl not be able to pay the amount when due. In such case the parties making the loan promptly foreclose and buy in the enterprise at a tithe of its real value. Another method of financing, frequently practiced, is that of taking in moneyed partners. It must be borne in mind that a partner has aU the rights in the business that the original owner has himself. He can interfere in the management of the enterprise, run it into debt, if he sees fit, or make trouble in the many other ways possible under the partnership arrangement. All this is of no impor- tance if the partner is known to be the right kind of a man, who wiU shovdderhis part of any burdens to be borne, and who can be depended upon to co-operate when needed and to do nothing when not needed. If, however, there is any doubt as to the character or disposition of the prospective partner, this close aUiance should be avoided — ^pref- erably, and as is commonly done, by the use of the corporate form. Another point to be considered when a financing partner is taken into an enterprise, is the fact that should the enterprise not reach the point of profit paying before its funds are exhausted — a con- tingency that frequently occurs — the conditions are not favorable for securing further money. In a corporation, stock may be reserved for 'just such emergencies, or a special issue of preferred stock or perhaps bonds can be arranged. In a partnership, on the contrary, there is usually no reserve of any kind that can be offered for addi- tional money. If more money is needed each partner should, of course, contribute pro rata of his interest for the purpose, but in practice it not uncommonly happens that the "financing" partner refuses to do this. 396 BUSINESS ADMINISTRATION In any such case, the working partner must do the best he can. He may be able to borrow, or he may have to make very material sacrifices of his own interests to obtain the needed funds. In such case, if the enterprise is successful, he will probably be able to recoup himself. It is, however, far better that the possible need of more funds should be anticipated and provided for in advance by some provision of the partnership agreement. It is better still to avoid the contingency by the incorporation of the undertaking. The usual, and, speaking generally, the best plan of financing, is by the sale of stock in the incorporated enterprise. It offers ad- vantages both for the owner of the enterprise and the investor found in no other system of business organization. See also chap. viii. The Form of the Business Unit. 4. WORKING CAPITAL AND FIXED CAPITAL' Working capital consists of that portion of the net assets which is not tied up in any fixed or permanent form. The chief forms of working capital are: (i) cash; (2) accounts and biUs receivable; (3) finished stock; (4) raw stock and supplies; (5) securities of other' companies held for investment, not for purposes of control. Working capital consists essentially of quick assets, such as are convertible into cash within a reasonable time in the ordinary course of business. Such quick assets, like fixed assets, are subject to great shrinkage in value in event of failure, and should always exceed by safe margin the short-time Uabilities. The working capital is only the difiference between the quick assets and the short time-liabilities. Some companies 'operate on a very narrow margin of working capital; a few, in fact, possess none at all. But many of the larger producing corporations retain as much as half their entire capital in this form. The volume of working capital depends upon the nature of the business, and it should be determined with reference to: (i) volume of the business; (2) distribution of purchases throughout the year; (3) the credit terms upon which purchases are made; (4) the credit terms upon which sales are made; (5) the period of production during which capital is tied up in work in process. Most of these factors speak for themselves. A large business obviously requires more working capital than a small one. The ' Adapted by pennission from W. H. Walker, Corporation Finance, pp. 209-10. (Alexander Hamiltoii Institute, 1917.) THE ADMINISTRATION OF FINANCE 397 regularity of purchases is an important factor. In the grape juice business, for instance, the entire stock of grape juice for the year must be piurch^sed in September and October. The bridge-builder may at one time have no stock on hand and at another have large simis tied up in materials, pending the completion of a large contract. It is plain, therefore, that lines of business which purchase seasonally or irregularly, or sell likewise, require a large working capital because of the heavy stocks which they carry at times. The credit terms of both purchase and sale have great influence upon working capital. If the company pays for its materials, say thirty days net, and sells upon sixty days' time, it wUl require a much larger working capital than a company which buys on sixty days' time and sells o'n thirty. The writer knows of several companies which have no working capital of their own but deal entirely upon the trade credit which is extended to them, by buying on long terms and selling on short. During the period of production, or pending resale of goods, capital is tied up by work in process. Some companies turn their capital several times each year and require only a small percentage of profit on each transaction, while others — for instance, builders of ships and office buUdings^ — turn it less frequently, and consequently require a larger percentage of profit on each sale and a correspondingly larger working capital. In this connection, the extreme importance of perpetual inventory, careful stockkeeping, avoidance of wasteful methods, and the main- tenance of minimum stocks need to be emphasized. It is better for the company to carry a somewhat smaller stock and a larger cash balance, under normal conditions, than to carry heavy stocks. The large bank balance improves the credit of the company, while the large stock often increases manufacturing cost and frequently encourages wasteful and careless methods. The larger the stock, other things being equal, the slower will be the turnover and the greater the working capital required. [From the foregoing statement of the chief forms of working capital, the student can readily arrive at a statement of the chief forms of fixed capital.] See also p. 520. Financial Standards. 398 BUSINESS ADMINISTRATION B. The Manager's Relationship to the Financial Organization of Society We found that our study of the administration of market prob- lems was facilitated by an introductory survey of the market forces and market structures in terms of which and through which the market manager worked out his policies. (See pp. 250-308.) Precisely the same situation confronts us in our study of the administration of finance. The financial manager, in working out his problems, makes use of a great range of institutions and devices which have been developing through several centuries. These institutions are so interrelated that we have come to call the whole complex "the financial organization of society." This financial organization of society very largely conditions the administration of finances. Upon the one hand, it is made up of institutions which the manager uses in manipulating such technical devices as stocks, bonds, and commercial paper (see pp. 434-88), in carrying out his financial policies. Upon the other hand, this financial organization has come to provide the standard orthodox ways of carrying out policies and thus it operates as a sort of social control system which largely dictates what policies the manager shall attempt. Clearly enough, we shall not understand either the technical devices or the policies of financial administration unless we have an appreciation of this institutional background. We begin with Selection 5 which gives a general view of the manager's use of our financial organization. Selections 6 to 9 show us some investment credit institutions, some commercial credit institutions and some information gathering institutions of which the manager makes immediate and direct use. Selection 10 deals with a secondary range of institutions which serve the manager indirectly by serving the institutions with which he comes into direct contact. PROBLEMS 1. "The financial organization of society." Just what does this mean to you? 2. "The manager's use of the financial organization of society." Just what does this mean to you ? 3. What financial institutions are available for the financial manager who wishes to issue corporate secinities ? 4. What is the practical necessity for underwriting ? THE ADMINISTRATION OF FINANCE 399 5. Wherein is underwriting advantageous to the corporation concerned? to the buyer of securities? to the underwriter? to the consumer of ordinary commodities? 6. Why did the development of investment banking institutions wait upon the growth of the corporate form of industry ? Did the absence of investment banking houses in an earlier period handicap private enterprise ? 7. "The primary function of the bond house is to obtain capital for the creation of new enterprises or the enlargement of old." Just how does it "obtain" this capital? 8. "The investment banker does not require a large capital tied up in the plant like a manufacturing organization." Why not ? 9. What other financial institutions does the investment banker use when he engages in underwriting on a large scale ? 10. Write a svunmary of the social benefits of the investment banking business. 11. "The commercial bank acts as an intermediary between lenders and borrowers. It collects funds from certain people and lends them to others." Do you agree ? 12. Do you see any ways in which the ordinary commercial bank facilitates, getting "fixed capital" ? 13. How does the work of commercial-paper houses differ from that of pure brokerage ? How does it differ from pure banking ? 14. What is meant by referring to the banker as a responsible agent in the guidance of economic activity ? As an agent in the apportionment of our productive resources among the various enterprises of the com- munity ? Wherein do these questions concern the financial manager of an ordinary business ? 15. What is meant by blue sky laws ? Wherein do they affect the manager in his relationship to finance ? 16. "Certain concerns carry on together the work of engineering and operating concerns and also the work of financing houses." Who? Why? 17. How do you account for the fact that concerns make money by secur- ing and selling financial information ? Do they fill a real need ? 18. Make a list of the services that are rendered by trust companies (a) to ■ individuals (6) to corporations. Why is the rapid growth of trust companies a matter of the last half-century ? 19. Precisely how does the trust company aid in the marketing of securities ? 20. Should the manager of a corporation employ a trust company to act as fiscal agent or should he care for the problems concerned himself and "save the fees" ? 21. Just how do life insurance companies aid the financial managers of other businesses? 400 BUSINESS ADMINISTRATION 22. Just how do savings banks aid the financial managers of other busi- nesses ? 23. What tjT)es of investment should you expect a savings bank to make ? Should you expect to find state laws regulating this matter ? 24. "The Stock Exchange is a market for capital." Do you agree? If you disagree, what is the function of the stock exchange ? 25. Show how the stock market is of service to each of the financial institu- tions with which it is connected in the chart on page 403. 26. Sometimes the "money market" is "tight" and interest rates rise and it is not easy to get funds for corporate expansion. Be sure you know what this means. 27. This section of our work sketches a rather impressive financial structure. Is it used only by large concerns? How do small corporations get their capital ? 28. "As a matter of fact, persons contribute to the capital of corporations of which they have never heard; of which they would disapprove if they had heard of them." How can this be true ? 29. "The manager's decisions on financial problems are largely prescribed for him by the financial organization of society. His range of choice is a narrow one." Is it ? Is it narrower than it was before there had emerged so many financial institutions ? 30. Make as long a list as you can of financial institutions which are not discussed in this section. 31. Consult question 14 on page 250. Wherein does an awareness of his social function make a financial manager a more competent business man ? What is his social function ? S. A GENERAL VIEW OF THE MANAGER'S USE OF OUR FINANCIAL ORGANIZATION' The great number of financial instruments, agencies, and institu- tions that are utilized in connection with the borrowing operations of producing, manufacturing, and mercantile businesses is indicated in the diagrams on the accompanying pages. The diagrams, however, require a few words of explanation and qualification. In general, the purpose is to show the financial insti,- tutions and agencies that are employed in the assembling of the capital required by modem business enterprise. It is of note, first, that the financial structure involved in the raising of fitted capital for individual firms and partnerships, as shown on the first diagram, is relatively simple, since it is largely contributed by the owner, or ' Adapted by permission from H. G. Moulton, The Financial Organization 0} Society, pp. 132-3S. (The University of Chicago Press, 1921.) THE ADMINISTRATION OF FINANCE 401 owners, of the business. The greater complexity of the second diagram, moreover, is an indication that the development of the very intricate and extensive financial organization of the present day is largely attributable to the enormous growth of the corporate form of business organization. With reference to the corporation diagram, particularly, the arrows pointing downward from fixed capital indicate the movement of the securities that are issued by corporations through the financial institutions that assist in marketing them to the ultimate purchasers, who in the last analysis furnish the funds to the corporation. In some cases the securities do not find lodgment with individual inves- tors but are purchased by financial institutions, as is indicated by the arrows which point to savings banks, insurance companies, etc. In these cases, however, the funds are stUl furnished by individual savers, namely, the shareholders, depositors, etc. These financial institutions thus serve as intermediaries in the process of rendering individual savings available for the uses of corporate industry. The stock market has been placed at one side of the diagram in order to indicate that it is not a direct intermediary in the marketing of securities. It is rather a great central market place which is made use of by nearly all of the various types of financial institu- tions in connection with their operations, as well as by the ultimate investors in securities. The Unes connecting the stock exchange with the different institutions are designed to indicate in a general way the interrelations that exist. Finally, it will be seen that the commercial banks are directly concerned with the raising of working capital, and indirectly asso- ciated with investment banking institutions in the raising of fixed capital. Note the transverse line connecting commercial and invest- ment banks. A line might also be drawn from the commercial banks to the fiixed capital side of the corporation; for to a considerable extent they purchase securities directly and make loans to corpora- tions for fixed capital purposes. To safeguard against misconception it is necessary to state that the diagrams could not be made to reveal all the phases of the modern financial structure without complicating them to the point of obscurity, it will be well, therefore, to point out here certain things which they do not indicate. First, although a line is drawn from the corporation direct to the purchaser of secujjties, the corporation chart fails to convey an 402 BUSINESS ADMINISTRATION adequate idea of the vast amount of capital that is raised without the assistance of financial intermediaries. A very great number of our corporations have raised their capital by direct subscription; indeed, I think it may safely be said that a large percentage of our present-day corporations secured their start by converting individual firms or partnerships into corporations and issuing shares of stock to the ovmers. There are many "close" corporations — those which have never raised any funds from general subscription. Among some of the more important of such corporations are: most of the New I. INSTITUTIONS UTILIZED IN FINANCING NON-CORPORATE ENTERPRISE THE INDIVIDUAL FIRM OR PARTNERSHIP FKE D CAPITAL 1 WORKINGCAPITAL Evid«.c«lby: , , + \ -1- 1 MOKTGACE COMPANIES COMMERCUl PAUK HOUSES COMHERCIAI. CREDIT AND OISCOUKT OOKPANIES INDIVIDUAL'S OR PARTNER'S CONTRIBUTION EvktoMd br Aitide. of AModBifaw, Bo..Eii^ , 1 \ . SAVINGS BANKS, (NKJRANCE COMPANIES, ETC COMMERCIAL BANKS AND FEDERAL RESERVE BANKS 1 SbtnhMtn. o^-^l England cotton nulls; several of the larger chemical companies; the Du Pont Powder Company; many of the great department stores in all the large cities of the country; the large corporations in the aluminum, brass, zinc, asbestos, and sulphur industries; and the great majority of financial institutions. Second, the charts do not reveal the raising of capital by the conmion process of creating a surplus through setting aside a portion of the earnings for an expansion of the business. A tremendous amount of capital is thus raised, especially by corporations. It will be noted that this method merely involves a decision of the directors of the corporation with reference to the disposition of earnings. Third, the charts reveal only those credit operations which involve the borrowing of funds, as distinguished from actual goods. Working capital in part takes the form of materials bought on credit. THE ADMINISTRATION OF FINANCE 403 A retailer, for instance, may do most of his borrowing by buying goods from -wholesalers on time. But since the wholesalers who sell these goods on credit to the retailer, usually borrow from the commercial banks during the interval while awaiting payment, it all comes to much the same thing in the end — working capital is largely borrowed from the commercial banks. The corporation chart does indicate, however, that a portion of the working capital is usually derived from the sale of securities. Indeed, if a business is to have a good credit standing with its bank, 11. INSTITUTIONS UTILIZED IN FINANCING CORPORATE ENTERPRISE it must, in fact, provide a considerable part of its working capital by stock subscriptions. Fourth, one might conclude from the corporation diagram that savings banks are associated only with the problem of raising fixed capital. As a matter of fact, many savings-bank loans are also made for working capital purposes. Fifth, the position of the trust company in the financial structure of society is not adequately revealed. As the chart stands, the trust company is related only to the raising of fixed capital and is placed in a parallel position with savings banks and insurance companies. In fact the trust company performs so wide a variety of functions that it is impossible in the present diagram to indicate its relation- ship to the entire financial structure. The commercial banking 404 BUSINESS ADMINISTRATION department of the trust company would go with the commercial banks, the bond department with the bond houses, the savings department with the savings banks, the insurance department with the insurance companies. But, in addition, the trust company per- forms a great variety of services for the holders of corporate securities in connection with the safekeeping of valuables, the holding of mort- gages in trust, the transfer of ownership of stocks and bonds, the financial reorganization of companies, etc. Finally, the diagrams tend to give a false impression of specializa- tion by financial institutions. The truth is that more and more there is being conducted under one roof and by a single administra- tive organization a great variety of financial activities. Just as the trust company has many departrnents, the commercial bank nowa- days usually has associated with it savings and bond depsartments, and, in the last two or three years, trust departments as well. The designations given on the diagram must, therefore, be considered as representing types of financial functions rather than (in every case) distinct and specialized financial institutions. 6. INVESTMENT CREDIT INSTITUTIONS USED DIRECTLY BY THE MANAGER A. THE UNDERWRITERS' One means of floating an issue of securities is to dispose of them through the agency of banking and brokerage houses. In such cases the financial houses may not merely undertake to sell the securities, but may make themselves responsible for the success of the sale. Advantages of underwriting to the corporation. — ^There are several reasons why banking and brokerage houses may properly carry on this' business of financial underwriting and why the business is usually profitable both to themselves and to the corporation which issues the underwritten securities. In the first place, the bankers are presumably experts in the valuation of securities. Their judgment as to the price which should be set on a new security or as to the terms of exchange, if the new security results from a conversion of an old security, is a valuable, authoritative judgment. In the second place, the bankers are also experts in selling securities and each house Involved in the underwriting usually has an established cUentele to ' Adapted by permission from W. H. Lough, Corporation Finance, pp. 294-304. (Alexander Hamilton Institute, 1916.) THE ADMINISTRATION OF FINANCE 405 whom it may readily dispose of almost any securities that it recom- mends. The corporation, on the other hand, has no facilities what- ever for selling stocks and bonds; its activities are in the field of transportation, or industry, or trade, not in finance. Two further reasons are even more potent in inducing corporation managers to have new security issues underwritten. First, even though the corporation can obtain expert financial advice and is reasonably sure to make a success ultimately of the sale of any securities it puts out, yet the time that wUl elapse before the sale is completed and the money received is always uncertain. Now the cor- poration ordinarily would not be trying to sell new securities if it did not need money at once or in the near future. It is disastrous to the success of many industrial or commercial operations to hold them in abeyance until the tedious process of selling a large block of bonds or stocks is completed; yet it is dangerous to go ahead so long as the sale is incomplete. The second reason is that the credit of a corpora- tion is seriously affected by any apparent inability to market its seciuities. One failure — or even a success that is too hard-won— would hamper the corporation greatly both in getting loans and in making future sales of stock. Advantage to the buyers of securities. — ^There are telling advantages to the buyers of securities also in having them underwritten. Repu- table banking houses never sell securities until after they have been satisfied by a searching investigation that the securities are all that they are represented to be. Another advantage to the buyer is that he may be sure that the whole security issue has been sold by the corporation. A half-sold issue is a sign of weakness and a hindrance to the completion of the corporation's plans so serious as to reduce the value usually of the portion that has been sold. A third advantage to the buyer is that any reputable banking house will watch closely any security that it has underwritten, and wiU come to the assistance of the security-holders in case the corpora- tion later gets into diflSculties. When is underwriting advisable? — It must not be inferred that every new stock or bond issue ought to be underwritten. Small issues, say $500,000 or less, can usually be sold to a comparatively small number of investors by direct sohcitation on the part of the corporation. Then again, well-established, successful corporations frequently sell new stock or bond issues to their stockholders at 4o6 BUSINESS ADMINISTRATION bargain prices. . Ordinarily there is no risk in such a sale and conse- quently no necessity for underwriting. Why underwriting syndicates are formed. — It would naturally be expected that each of the large financial houses engaged in the under- writing business would handle on its own responsibility whatever business comes its way, and that rivalry would prevent their co- operating to any considerable extent. The fact is, however, that these houses have long since learned that it is inadvisable for any one of them, no matter how powerful, to guarantee the success of a large security issue. It is true that the banker's judgment and experience should enable him to avoid heavy risks; yet a certain amount of risk is inevitable. It is not considered conservative bank- ing, therefore, for any one house or even any two or three houses to underwrite a large issue. Another reason for co-operation among bankers is that each house desires to ofier a variety of securities to its cUentele. If it specializes too much or ofEers only a few securities, it cannot expect to attract and hold regular customers. A third reason for co-operation is in order that a broad geo- graphical distribution may be obtained and the sale of the security issue be made correspondingly easy. Five types of syndicates. — Originally the normal arrangement was to have the syndicate as a whole guarantee the price of the issue and let the corporation attend to the selling. This is underwriting in the original sense of the word; it is a species of insurance. Under such a plan the syndicate would have two sources of profit: first, a commission on the portion sold to the public, or a fixed bonus; and, second, the difference between the wholesale price to them and the retail price at which they would ultimately dispose of the bonds. A second type, also rather unusual, is a syndicate formed to take an "underwriter's option." Under this plan the sjoidicate takes the block of bonds or stock at a fixed price, payable only as resold. As fast as the syndicate disposes of the bonds it turns over the proceeds to the corporation, after deducting whatever it receives above the fixed price. The corporation pays somewhat less for this service than for other kinds of underwriting, because the syndicate takes no risk; on the other hand, as the corporation cannot be certain when it will get its money, the type is not much favored by conservative corporation managers. THE ADMINISTRATION OF FINANCE 407 The third type of syndicate comes into existence when a large banking house has bought for itself a big security issue and wishes to distribute the risk. In such a case the original underwriter fre- quently calls upon other banking houses and upon individuals to take portions of the issue at prices low enough to be attractive. The fourth type of syndicate acts as a unit in making a contract for the purchase of an issue and pools the sale of the stock or bonds. The chief difference between the third and fourth types lies simply in the fact that the syndicate members deal directly with the corpora- tion, not with a banking house. They thus secure for themselves all the profits of the underwriters. Such a syndicate is always man- aged by some one house or individual having complete authority. The pooling arrangement above described, although it secures centralized and efficient management, is apt to prove unsatisfactory in that it does not bring into play the whole selling machinery of the various syndicate members. For this reason it has become more and more customary of late years to distribute the security issue among the members of the syndicate. This is the fifth tj^e of an under- writing syndicate. Strictly speaking, of course, the distribution of securities is not an underwriting in any sense, but a sale. It is a sale at a special price, however, 'made under certain restrictions and designed to serve exactly the same purpose as true underwriting; the term therefore is freely applied to it in the Street. B. mVESTMENT BANKING AND BOND HOUSES That part of the public which does not buy bonds has little idea of the importance and value to the community of the bond business. It is not necessary to resort to many figures. In round numbers, $1,500,000,000 of American bonds are marketed every year and almost all of them pass through the hands of American bond houses. Even those issues of which the ultimate nominal market is the New York Stock Exchange are first offered and sponsored by dealers in bonds. In volume and number the transactions on the exchange are only a mere fraction of those in direct merchandising. Of this $1 ,500,000,000 of bonds one-third is absorbed by insurance companies, savings banks, trust companies and other banks (in approximately equal ' Adapted by permission from Lawrence Chamberlain, The Principles of Bond Investment, pp. 513-15. (Copyrighted by Henry Holt and Company, 1911.) 408 BUSINESS ADMINISTRATION amounts) and the remaining two-thirds by corporations (for reserve, etc.) and by private investors in this country and abroad. The leading banking houses were not always primarily bond houses. Two generations ago financial business was transacted by "bankers and brokers." Bond selling was an incident to the general banking, exchange, and brokerage routine. It was all done "over the counter." There was comparatively little implied responsibihty on the part of the vendor. In the age of Commodore Vanderbilt, the elder Gould, Fisk, and Drew the "caveat emptor" principle of exchange was accepted and the devil took many beside the hindmost. But now the speculative business in New York, so far as it is reputable and consequential, is done by "members of the New York Stock Exchange" and the investment business is done by "bankers, dealers in investment bonds." The primary function of the bond house is to obtain capital for the creation of new enterprises or the enlargement of old. So far as concerns these houses in their proper capacity the capital obtained is in the form of loans. The houses purchase the loans outright for their own account and resell to their clients. As in any sort of merchandising, there are few wholesalers and many retailers. The prominent "wholesale" bond dealers, numbering less than a dozen, confine themselves for the most part (as far as American corporation loans are concerned) to the great railroad systems. They have few, if any, traveling representatives. Their sales, in this country, are eflfected by public subscription, stimulated through extensive adver- tising, and by distribution to large institutions, such as the insurance companies, and to the smaller bond houses. "Retail" is not a term properly descriptive of the firms in mind, although it suggests the relative size of the issues handled and the relative volume of business. It misleads if it suggests that the main business of such houses is to distribute among small investors issues that originally were investigated and purchased by "wholesale" houses. This is not the case. For the most part each of the American bond houses buys its issues independently, in accordance with its policy regarding investments, or it buys them in "joint account" with other houses having similar policies. These houses are autonomous; their prosperity is built on their ability to find and obtain, on the one hand, fundeci obUgations that merit investment, and on the other, a cUentele that has faith in them and their business judgment and probity. THE ADMINISTRATION OF FINANCE 409 [This reading should not leave in the student's mind an impression that such houses deal only in bonds. They handle stocks as well.] IP These banking houses vary a great deal in the range of work they imdertake. Some occupy themselves exclusively, or almost exclu- sively, with municipal finance. Though they may get into other fields, they are likely to do so as brokers, or as a result of trading, or to carry some other kinds of securities to satisfy the needs of their cUents. Such houses do not especially concern us. Other houses make the financing of public-service corporations, other than steam railroads, their principal interest. Even in the field of public utilities houses may specialize, as in the securities of gas, or of electric light and power corporations, or in the securities of street railway corporations. While speaking of houses chiefly interested in the financing of public service corporations, we should especially mention certain organizations which carry on together the work of engineering and operating concerns and financing houses. They both operate and supply the funds for the corporations they are interested in. Some- times they originally did the engineering work for the construction of the corporations. Though such organizations are not numerous, they are important. Other banking houses concern themselves especially with fimancing the steam railroads. Only two or three have the necessary capital and financial connections to handle the largest issues of railroad securities. Railroads, however, often have smaller issues, as for the construction of branch lines or for the purchase of equipment, within the financial ability of ten or a dozen other houses, and commonly these other houses get the financing of such issues. Many houses which do not act directly as bankers for raUroads, or seldom do so, stUl make railroad financing their principal interest by par- ticipating in underwriting transactions and acting as distributors of the securities. A good many banking houses have refused to go outside of these fields. There is no reason why a banking house, recognizing the liability of industrial corporations to greater fluctuations in earnings, and in other ways the greater business risks involved, should not undertake the financing of industrial enterprises, and many do. ' Adapted by permission from W. H. Lyon, Corporation Finance, II, 39-48. (Houghton Mifflin Company, 1916.) 4IO BUSINESS ADMINISTRATION The total number of banking houses of this kind in the United States is not great. Of about 4,000 ofl&ces, at the time of writing, in some way dealing in securities, practically all are brokerage offices of one kind or another. At the time of writing, the membership of the Investment Bankers' Association comprises 340 main offices and 176 branch offices of these houses. Practically the entire organized business of financing the capital account of our corporations centers in these houses. The total number of branch offices is undoubtedly much greater. The branch offices listed as members have, most of them, considerable autonomy in managing their affairs. People are likely to assume from the magnitude of the transac- tions undertaken that the business must require the banking house to have a large capital. But the business does not require a large capital tied up in plant like a manufacturing organization. The investment banker is engaged in dealing in credit and requires capital only as an assistance in commandipg credit. When the banker supplies the corporation with capital, he receives the corporation's securities at the same time. How much of the capital the banking house must advance itself and how much it can borrow on the transaction depend on the nature of the securities, the position, senior or junior, that they occupy in the corporation's plan of capitalization, and, especially, whether they are of a kind to command a relatively quick and close market. Depending on these conditions the banker can borrow from 50 to 90 per cent of the money necessary to complete the transaction of purchasing the securities from the corporation. Though the loan will rarely be so small, in actual practice, as 50 per cent, the lender produces the same effect by insisting on mixed collateral and by accepting only a percentage of slow and wide market securities as collateral for a loan. A reader entirely unfamiliar with financial transactions may wonder where the investment banker borrows the money. He borrows at any national bank, state bank, or trust company ready to undertake the business. 7. COMMERCIAL CREDIT INSTITUTIONS USED DIRECTLY BY THE MANAGER A. THE COMMERCIAL BANK' Commercial banks perform a great variety of services, some of them being in the nature of incidental conveniences to individuals ' Adapted by permission from H. G. Moulton, The Financial Organization of Society, pp. 361-75. (The University of Chicago Press, 1921.) THE ADMINISTRATION OF FINANCE 41 1 and businesses, and others of fundamental importance from the standpoint of the general economic system. First, commercial banks serve as places of security for the keeping of funds that are temporarily not needed by their owners. Having well-equipped vaults, and being managed (with rare exceptions) by men of integrity, the risk of loss to the owner from fire, theft, or other contingencies is very greatly minimized. Second, commercial banks serve as money changers. In accom- modating each individual customer with the kinds and denominations of money desired, they supply the community as a whole with the forms of currency best adapted to its commercial needs. Third, through the system of checks, or deposit currency, the commercial banks make possible the use of a form of currency which is a particularly convenient means of payment. Fourth, the use of checks greatly reduces the risks of monetary transactions. Unless indorsed in blank, checks are good only in the hands of the person to whose order they are drawn ; and accordingly the risks from possible loss or theft are virtually negligible. Fifth, the check system greatly facilitates the keeping of accounts by individuals. Indeed, the banker may virtually take over the indi- vidual's bookkeeping; for if a person deposits with his bank all the money he receives in a year and makes all his payments by check, he always has an accurate record of his financial status. Sixth, the commercial banks perform important services for individuals in transmitting money from one part of the country to another. Upon receipt of the necessary funds, the bank draws a draft upon a correspondent bank in the city where the payment is to be made, asking it to pay the designated party a specified amount of money. Settlements between the two banks may be made in various ways. Seventh, bankers act as collection agents for their customers, for promissory notes, drafts, coupons, etc. At or before maturity, the individual turns his credit instrument or claim over to the bank for collection. Upon receiving the funds, through its messenger service or by way of correspondent banks, the bank credits the individual's account with the amount received. If the obligations are not paid, the individual is notified and the bank ofl&cials are in a position to serve as witnesses in proof that the claim has been duly presented. These various services are only the simpler ones performed by the commercial banks. Their functions in connection with the issue 412 BUSINESS ADMINISTRATION of bank notes and the creation of bank credit or deposit currency are the functions which constitute the distinguishing characteristics of commercial banking; they are what give it its paramount importance in the general economic organization of the modern world. In the making of bank loans there are two main problems. First, there must be assurance that the borrowers are all in sound financial position — that the loans will surely be safe. Second, the maturities of loans must be arranged so as to facilitate meeting the varying demands for cash at dififerent times and at different seasons. The ordinary commercial bank has the option of loaning funds (extending credit) in the following ways: (i) on single-name promis- sory notes of individuals and corporations; (2) on two-name paper — indorsed notes and accepted drafts (trade acceptances); (3) on the security of real estate mortgages; (4) on promissory notes secured by other notes as collateral; (5) on promissory notes secured by stocks and bonds; (6) on drafts secured by bills of lading; (7) on promissory notes and drafts secured by warehouse receipts; (8) by investments in stocks, bonds, short-term notes, mortgages, etc. Loans may also be classified according to whether they are time loans (thirty, sixty, ninety days, or more) or demand loans. Demand loans are of two tj^jes: (i) the so-called "call" loans, where the loan is of indefinite duration but terminable at a moment's notice at the option of either the bank or borrower; these are found only in New York City, and are used in connection with stock-market speculation ; (2) demand loans, where it is understood that the bank will allow the loan to run indefinitely, in the absence of any untoward development which might imperil its ultimate safety. Such a loan is in eSect ordinarily terminable only at the option of the borrower. Another classification of bank loans — one which rims in terms of the use to which the funds borrowed are to be devoted — ^is that of commercial and investment loans. It may be recalled that com- mercial loans are used for working capital purposes. Whether with producer of raw materials, manufacturer, commission merchant, wholesaler, or retailer, the funds borrowed are employed in meeting pay-roll requirements or in buying the materials or goods required in the operation of the business. They usually run for short periods by virtue of the fact that the time required to carry to fruition the pro- ductive process in which they are assisting is ordinarily of relatively short duration. With investment loans, on the other hand, the funds are devoted to fixed capital purposes; hence such loans are usually of relatively THE ADMINISTRATION OF FINANCE 413 long duration. In the course of our analysis we shall have occasion to show that the commercial banks furnish funds for fixed capital purposes in various ways — some of them direct, others indirect. B. NOTE BROKERS, COMMERCIAL PAPER, COMMERCIAL CREDIT AND DISCOUNT COMPANIES I' The reader may question the economic justification for the exist- ence of the note broker. In anticipation of such a question we may say that both the merchant and the banker derive many advantages from the note broker's work. The merchant, even though his local bank has loaned to its full capacity, is able to raise sufficient cash through his notebroker, provided, of course, that the merchant is in good credit standing. Thus, the note broker saves the merchant time, worry, and sometimes embarrassment in obtaining loans. Moreover the merchant, by borrowing through the note broker from banks in different parts of the country, is frequently able to obtain cheaper rates of interest than could be obtained at the home banks. Then, there is some advantage to the merchant in having his paper in many hands. The chief among these is that he becomes known as a good credit risk and wUl have a wide range of people with money to lend at any time he enters into a large transaction. The advantages to the bank may be summarized as follows: first, a bank may not be able to loan sufficient funds in its own com- mimity, the market is too narrow. Through the note broker, how- ever, the market is extended to absorb all the bank's available funds. Second, the bank is frequently enabled to obtain better interest rates in other parts of the country than home conditions warrant. Third, the bank likes a certain amount of this kind of paper, because there is no obligation to renew it at maturity. A bank which loans to the merchant direct is practically obliged to support him by renewing his note if necessary. On the other hand, the transaction between the broker and the bank is a purely personal one and if the bank refuses to buy the notes or renew them, the merchant knows nothing about it, nor does he care, just so the notes are sold. The note broker, on his part, wants all the paper put out through him to be good, for if one of his clients defaults, the broker's business ' Adapted by permission from R. P. Ettinger and D. E. Golieb, Credits and Collections, pp. 50-52. (Prentice-Hall, 1917. 414 BUSINESS ADMINISTRATION may be seriously injured. Moreover, the broker is well equipped, because of his specialized interests, to pass judgment upon the quality of paper he handles, and he wiU see to it that the merchant does not over-extend. For these reasons the banker feels secure in accepting paper recommended by the reputable note broker. Indeed, it is seldom that such paper is not honored. IP The commercial -paper house is an outgrowth of the note brokerage business that existed in this country in the early years of the nine- teenth century. It was not until well after the Civil War, however, that the modern phase of the business developed — the phase, that is, that distinguishes the work of the commercial paper house from pure brokerage; and its greatest growth has come only during the last fifteen or twenty years. The discount companies are of even more recent development. While some of them purchase accounts receiv- able from many different types of business, these companies owe their most significant development to the automobile industry and the exigencies with which its financing has been confronted. The commercial paper house acts as a broker in that it brings buyer and seller — that is, lending bank and borrowing customer — together, and receives a conltnission, regularly one-eighth of i per cent of the face value of the note; but it is more than a broker, in that it advances the funds to the borrower and runs the risk of having to hold the paper until maturity. It should be understood that the commercial paper house never desires to hold the paper to maturity, that it seeks to make its profits out of the commissions which it receives as middleman. And since its chance of large profits Ues in obtaining commissions on a very large volume of sales, it will be seen that carrying paper serves to reduce the profits that can be made. In fact, moreover, the cases where the commercial paper house does hold the paper until maturity are relatively few. It should be observed, however, that in all cases the commercial paper house may have to make a temporary advance of funds, during the interval of time between the purchase of the paper from the borrower and the sale of it to a commercial bank. In recent years there have developed a number of other financial institutions, whose work, like that of the commercial paper houses, " Adapted by permission from H. G. Moulton, The Financial Organization oj Society, pp. 427-29, 437-38, 444. (The University of Chicago Press, 1921.) THE ADMINISTRATION OF FINANCE 415 is mainly that of intermediary between borrowing business and lending banks. The institutions in question are variously designated as discount hottses, finance companies, commercial credit companies, commercial acceptance trusts, automobile banks, etc. It is some- what difficult to describe the work of these companies, for the reason that the terminology commonly employed in describing their opera- tions is far from uniform — and the principles of operation themselves not highly standardized. Moreover, since certain houses specialize in a particular type of operation, while others engage in more than one form of financial enterprise, it is impossible to state that the financial institutions in question are always conducted on principles thus and so. There are, however, at least two distinct types of financial enterprise which may be differentiated: (i) the purchase of accounts receivable from business concerns — in various lines- — ^which are in need of additional working capital; and (2) the financing of the distribution of automobiles and other products that are commonly sold on the instalment plan. There are two principal reasons why business concerns on occasion sell or assign accounts receivable: (i) to secure the necessary funds with which to postpone or forestall financial insolvency; and (2) to secure additional working capital with which to expand the voliune of business. The first practice is usually regarded as "illegitimate" financing, something to be frowned upon by aU conservative and constructive business men. The second — a development of the last ten years — is in a very different category. The work of the automobile bank is similar to that of the com- mercial paper houses and discoimt companies described above. See also p. 499. Borrowing by Assignment of Accounts Re- ceivable. 8. SOME FINANCIAL INFORMATION GATHERERS A. THE MERCANTILE AGENCY' The first mercantile agency in the world was established in the city of New York in 184 1. At that period [around 1830-60] it was customary for western and southern traders to visit the eastern wholesale merchants and manu- facturers twice a year to make their purchases in person. The terms ' Adapted by permission from Seventy-Five Years of the Mercantile Agency, 1841-IQ16, pp. 4-7, 12-20, 80-85. (R. G. Dun and Company, 1916.) 4l6 BUSINESS ADMINISTRATION of sale were very simple. The buyer agreed to pay for the goods purchased when he came again. In other words, the prevailing system was six months' credit on all transactions. If a firm had just started in business its buying partner brought with him — on his first visit to the eastern jobbers — ^letters of recommendation from other merchants in his vicinity, these letters being addressed to the houses from which the merchants were themselves purchasing and to whom they were well known. This was the system that had existed from colonial times, but as the coimtry expanded it showed an increas- ing tendency to break down. Means of travel and communication were slow and uncertain, and if the letter of introduction failed to convey sufl&cient information upon which to extend credit with safety, weeks might elapse before it could be supplemented. Meanwhile, of course, the buyer would go elsewhere for his goods, and a valuable accoimt might be lost. Moreover, after once having established trade relations on a credit basis, the jobber had little or no means of judging whether the affairs of his customer were prospering or the reverse. Periods of depression occurred with great frequency in which the eastern sellers lost heavily, owing to the inability of western and southern buyers to meet their obUgations. Some of these retail failures were caused by crop shortages, others by money stringency, but the greater proportion were due to the fact that credit had been injudiciously extended to traders who were not entitled to it through lack of reliable information. The prevailing system of long-term credits, based upon very insulficient information as to the buyer's responsibility in most instances, was one of the chief causes of the great panic of 1837, and contributed especially to the extraordinarily high number of failures that occurred among strictly mercantile houses during that crisis and the periods of severe depression that succeeded it in 1839 and 1840. Among the more notable failures was that of Arthur Tappan & Co. The failure of A. Tappan & Co. left Lewis, its credit manager, free to engage in some new occupation. His wide experience in appraising the credit responsibility of traders, and the high regard in which his opinions on credits were held by other wholesale merchants, suggested the idea of organizing a credit reporting bureau devoted to collecting and disseminating such information for the benefit of the mercantile community as a whole. Encouraged by the result of the inquiries he had made among his fellow-merchants as to the favor with which they would regard his THE ADMINISTRATION OF FINANCE 417 novel enterprise, Lewis Tappan determined to establish what he called "The Mercantile Agency" in the year 1841. When the new Agency was opened for business, Mr. Tappan's first step was to issue a circular to lawyers and others inviting them to become his correspondents. In this way he hoped to be able to secure in advance, sufficient data regarding the standing of traders to enable merchants to whom they might subsequently apply for credit to determine what amoimt of credit, if any, could safely be accorded to them. The responses to the preliminary circular proved satisfactory, and The Mercantile Agency rapidly accumulated a valuable mass of reports. These were written in longhand — the invention of the typewriter was still many years in the future — in huge ledgers bound in sheepskin. Mr. Dun in 1859 became the sole proprietor of The Mercantile Agency. The great event of the year in which the change in owner- ship took place was the publication of The Mercantile Agency's first Reference Book. This was issued February i, 1859, and was a quaint, old-fashioned affair compared with those issued at present. It was bound in dark brown sheepskin covers (nearly red), extra strong and thick, and with a lock, so that the proprietor of the sub- scribing firm might retain a key and thus keep its precious contents from the prying eyes of his subordinates or visitors. The volume contained 519 pages, lof inches high by 8J wide, with a maximum of 42 names to a page; an index to cities and towns of two pages, and one of firm names, arranged alphabetically, of 43 pages. Altogether, this first reference book contained 20,268 names. The publication of the Reference Book, then begun, is still con- tinued, the work at present being issued quarterly and containing the names of all traders and manufacturers in the United States and Canada, the January, 1916, book comprising no less than 1,882,226 names altogether. B. THE NATIONAL ASSOCIATION OF CREDIT MEN" [This selection should be read as a sample indicating associative action in dealing with financial problems. A manufacturers asso- ciation, a cost accountants association, and an association of depart- ment stores to study financial problems are other samples. Can you cite others ?] ' Adapted by permission from the pamphlet, A Builder of Conscience and Com- merce. (Issued by the Association, 1913.) 4l8 BUSINESS ADMINISTRATION The work of the Association is directed by annual conventions and carried on by standing committees whose names indicate their duties. They are: Legislative; Membership; Bankruptcy Law; Adjust- ment Bvureau; Credit Department Methods; Mercantile Agency; Credit Co-operation; Investigation and Prosecution; Fire Insurance; Business Literature; Banking and Cvurency; Credit Education; Commercial Arbitration; Commercial Ethics. No practical business man anywhere should willingly withhold his approval of the purposes and objects which gave rise to the National Association of Credit Men. The object of this Association shall be the organization of individual credit men and associations of credit men throughout the United States, in one central body for the purpose of rendering more uniform and establish- ing more firmly the basis upon which credits in every branch of commercial enterprise may be founded, which shall include a demand for the reform of laws unfavorable to honest debtors and creditors, and the enactment of laws beneficial to commerce throughout the several states; the improve- ment of existing methods for the diffusion of information, the gathering and dissemination of data in relation to the subject of credits; the amend- ment of business customs, whereby aU commercial interests may be benefited and the welfare of all may be advanced; the provision of a fund for the protection of members against injustice and fraud, and such other objects as the members of this Association may determine. Membership in general is confined to bankers, manufacturers, wholesalers, and jobbers. Today [1913] over 17,000 of the largest concerns located in every state of the United States are united to carry out the purposes of this organization which means that member- ship therein imphes working with a vast body of representative business houses along the same lines and toward the same important ends. The Association has been instrumental in having enacted laws making more hazardous dishonest practices among both debtors and creditors. In all legislation which it has recommended, the impelling motive has been greater simpUcity, uniformity, safety, and stability in the extension of credits. Briefly this legislative efiort covers: I. The bulk sales law, now on the statute books of all states but one. (It regulates the transfer with proper protection to creditors, of stocks of goods in bulk thus safeguarding honest retailers.) THE ADMINISTRATION OF FINANCE 419 2. A law penalizing the giving of a false written statement in order to secure credit. (In this matter is co-operating with the American Bankers' Association.) 3. Laws to place greater responsibility upon collection agencies. 4. A law to punish the vicious practice of issuing checks without sufficient fimds to cover them for the purpose of securing credit. 5. Amendments to the over liberal exemption laws of the several states, to regulate the doing of business imder a fictitious name, and to give greater clearness and uniformity to the lien and conditional sales laws of the various states. 6. A law calling for the recording of chattel mortgages with county recorders as well as town clerks. 7. Measures providing for more prompt and business-like adminis- tration of our lower courts. Credit departments as they are known today have come into being during the hfe of this Association. They came because specialization meant efficiency and efficiency security, for credit granting can no longer be a matter of guess-work; haphazard methods mean failure more certain than forriierly. Modern business has grown to such a size and complexity as to require scientific methods in its administration and as a consequence the demands upon the credit man have become such as to call for a training more and more exacting. Also the steadying influence which the developing of the credit department has exerted upon general business cannot be exaggerated. Through it (i) inquiries into the credit standing of customers have become more searching; (2) the property statement as a basis for credit granting has been developed and put into common use; (3) mer- cantile agencies have been induced to provide prompter, fuller and more exact information; (4) better bookkeeping systems throughout the trade are being insisted upon; (5) earnest campaigns have been inaugurated looking to the elimination of abuses such as unearned discounts, unfair claims, cancellations, etc., which are eating close to the heart of profits; (6) dangerous tendencies such as over-selling have been discouraged; (7) the retailer is being educated to the necessity of protecting his credit standing, to the essentials of suc- cessful merchandising and to the fact that his interests and those of his creditors are not hostile. Recognizing the advantage of exact, uncolored facts in determin- ing the degree of hazard accompanying each risk, over 60 per cent of the local associations of credit men have established "bureaus for 420 BUSINESS ADMINISTRATION exchange of credit information" by means of which the strength and weakness in the standing of a customer can be determined with an exactness not possible through any other means. The aim of the Association for the elimination of waste in com- mercial transactions has led it into the field of arbitration, and its committee on this subject is at work determining what changes in the laws of the states must be brought about to make effective the decisions of arbitration courts, has formed what it hopes will become a model statute which it will endeavor to pass in the leading states, and is arousing a general interest among business men on this subject. Already in several centers arbitration facilities have been set up and are doing highly satisfactory work. C. FORECASTING SERVICES' How can the business manager foretell approximately when prices and costs are going to change and accordingly adjust his financial policies? In the case of short-run price fluctuations (say daily or weekly or monthly) contracting out, hedging on speculative exchanges, etc., are available devices in some cases. Customary prices and rela- tively stable demand may assist in others. In still other cases experi- ence and intuition count for much. When it comes to forecasting price changes concomitant with the business cycle, however, the manager may do one of three things: {a) Select, compile, and organize significant data after a study of many scattered sources of material, e.g., crop reports, financial periodicals, trade journals, etc., and on this basis attempt to reach conclusions concerning future price trends. {b) Subscribe to one or more "financial services" sold by organizations which select, compile, and organize the data for him. Much of this material comes from sources listed above, (c) Combine methods (a) and (6). To suggest the utility of the "financial services" is the purpose of this paper. First, let us indicate some points common to nearly aU of the services: (a) Certain "indexes" of business conditions are selected, e.g., unfilled steel orders, bank clearings, etc., after a study of past cycles has seemed to indicate their value in anticipating or reflecting business trends, (b) Next, a period is selected which represents, at least in the mind of the compiler, "normal" business conditions. The indexes for this period are combined and assigned an index number, say loo. Consequent changes, as reflected by the ' By S. P. Meecfa. THE ADMINISTRATION OF FINANCE 421 indexes thus combined, are considered as representing a period of prosperity in case the index average rises above 100, liquidation and depression in case the index number is declining or falls below the 100 "norm." (c) This composite index is typically visualized by means of a statistical graph, (d) Charts of the individual indexes usually accompany the composite chart. These charts show the value and weight changes (in dollars, pounds, etc.) of the individual indexes. (e) Frequent bulletins furnish iUuminating discussions of the charts. The cause-and-effect phase of trends is given detailed attention and conservative poHcies are suggested. (/) Special investigations con- fined to particular lines of business or to particular problems are obtainable for an extra fee. If we examine these various services we find that from one of the best of them, for the price of |ioo a year, the manager receives: (a) a monthly business review and index chart; (jb) advance letters notifying of important changes in business conditions; (c) supple- ments containing special investigations in fields of general importance, e.g., railroads, steel industry, etc. This service makes use of three graphs: (i) the speculative graph — security prices and New York bank clearings — anticipating by from two to four months the change? in; (2) the industrial graph — ^wholesale prices, pig-iron production and bank clearings exclusive of New York — anticipating by from four to six months the changes in; (3) the banking graph — ^interest rates and loans and deposits of New York banks. Now let us take a case to illustrate the utility of these services to the manager. The executive who consulted them in late 1919 observed that business was approaching a period of liquidation. The charts indicated that the individual indexes which vary directly with prosperity were reaching new high levels and that those which vary inversely with prosperity were reaching new low levels. He found that bank reserves were dangerously low, interest rate going up, loans and deposits reaching enormous heights. He saw that stock prices and speculative trading in securities were cut short by the rise of call rates as money conditions tightened. He noted the decline of exports and the unfavorable condition of exchange rates. He observed that iron and steel production and prices were very high, that commodity prices were going up, but at decreased speed. The composite charts indicated a general trend in harmony with that shown in the individual indexes. Speculative graphs showing a tendency to decline, produc- tion graphs easing up, and banking graphs indicating enormous credit 422 BUSINESS ADMINISTRATION expansion — all this raised the question as to how much longer the orgy of speculation and spending would continue. The bulletins sounded warnings by pointing out that retail demand was slackening, due to the inability of wages, salaries, and interest incomes to keep pace with the cost of hving. The decline of foreign demand was empha- sized and the long-run effects of the world's economic recovery and unfavorable exchange rates on export markets for our agricultural and manufactured products stressed. The relation of foreign demand and farming prosperity, now that bumper crops were assured, indi- cated that prices of farm products were due for a fall. The increased supply of raw materials in various lines was said to indicate the return of somewhere near pre-war conditions of supply and demand and hence of price. The dangerous conditions of bank reserves were pointed out, and the warnings and pleas of the Federal Reserve Board that expansion must stop and that loans must be curtailed brought prophecies of tight money and deflation as a necessary consequence. Purchasing agents in particular lines were warned to go slowly in buying and to work off inventories on their shelves as steadily as possible. Weekly reports of demand for goods and supplies of materials indicated that an adjustment of the two forces at a lower price level was a matter inevitable sooner or later. In the hght of these facts and predictions several steps might well have been taken: (i) Expansion policies might well have been cur- tailed, for fixed capital costs were too high, due to high building costs, high interest rates, and approaching liquidation. Furthermore, large and high-priced inventories become unliquid very quickly once demand goes on a "buyers' strike." The need was for a reduction of inventories to avoid depreciation. (2) Cash should have been conserved and strengthened and bank loans paid off. (3) Long-time financing at high rates should have been postponed, if possible, and the issue of short-term notes avoided lest they come due at a time when sales are at a low ebb and collections slow. The foregoing are merely suggestive of some of the poUcies that might have been profitably pursued in the face of conditions which the data furnished by the services indicated. It goes without saying that the facts of each case and the conditions prevalent in each industry should determine any pohcies adopted. The services may be regarded as labor-saving devices Ughtening the job of keeping up with changes in price trends. Information THE ADMINISTRATION OF FINANCE 423 Otherwise impossible to secure may, through the specialization which has occurred, be placed in the executive's hands in time and in such a shape as to be immediately useful. g. AN OMNIBUS FINANCIAL INSTITUTION, THE TRUST COMPANY' The usual functions of a trust company are: banking in a more or less limited form, execution of corporate trusts, execution of individual trusts, care of securities and valuables. In addition, other functions are sometimes exercised, such as life, title, and fideUty insurance, and the business of becoming surety. The earlier com- panies in the United States were chartered to manage individual estates only and to act in certain fiduciary capacities; the recent development of the trust company has been in the direction of banking functions and corporate trust business. Banking. — ^The banking functions of trust companies may include any or all of the following: The receipt of money deposits payable on demand and subject to check, or payable at a fixed date, or according to special agreement. Interest is usually allowed on all deposits above a fixed maximum amount or on the total sum. Money advances secured by the hypothecation of stocks, bonds, life insurance policies, bonds and mortgages, or other personal property. Real estate loans, secured by bond and mortgage. It is customary to loan not over two-thirds of the value of improved property; when the property is unimproved, not more than half. Discounting paper is engaged in principally by companies trans- acting a commercial banking business. The purchase of unsecured paper is permitted in some states where discounting is not allowed. The purchase and sale of securities. Trust companies sometimes guarantee issues of bonds, or at least set their stamp of approval upon them. The issue or guarantee of letters of credit, and the transaction of a foreign exchange business. The care of savings deposits. For this purpose a separate depart- ment is usually maintained. ' Adapted by permission from F. B. Kirkbride and J. E. Sterrett, The Modern Trust Company, passim, pp. 5-6. (The Macmillan Company, 1905.) 424 BUSINESS ADMINISTRATION Corporate trusts. — ^Among the most important functions of a trust company are those relative to the business of other corpo- rations. As trustee under corporate mortgages and trust deeds, the trust company acts for the bondholders. It is customary for it to authenti- cate each bond issued subject to the provisions of the mortgage, to represent the bondholders in case of default, and to exercise such other functions as may be provided in the mortgage. As trustee under mortgages securing bond issues, the title to the mortgaged property is vested in the trust company for the benefit of the security holders. The corporation owning the mortgaged property retains physical possession of it so long as the terms of the obligation are complied with, except in the case of securities pledged, which are usually lodged with the trustee. In case of default, how- ever, it devolves upon the trustee to protect the interests of the bond- holders, and this may necessitate the foreclosure of the mortgage and sale of the property. As fiscal agent it dispenses coupon and interest payments on bond issues, and dividends on stock. It receives sums set aside as sinking fvmds to provide for the retirement of obligations at maturity, or when bonds are subject to redemption, draws the specified amoimt by lot and pays the principal. As registrar the trust company authenticates certificates of stock and bonds in order to prevent an over-issue, and to reduce the chance of loss or theft. As transfer agent, the company attends to perfecting transfers of ownership for stock and bond issues or parts thereof. As manager of underwriting syndicates, the trust company issues the prospectus and markets the securities of corporations which are being launched, or of established companies which are putting out new securities. In railroad and other reorganizations, the trust company takes a prominent part, acting both as a depository for, and as a representative of, the committees which formulate and execute the plans of reorgani- zation. Its officers often have a large share in the preparation of such plans. As assignee and receiver, the trust company acts in the same capacity for corporations as for individuals and firms or partnerships, assisting in wiijding up insolvent businesses and in conducting embar- rassed ones. THE ADMINISTRATION OF FINANCE 425 Individual trusts. — The execution of individual trusts is the func- tion originally assumed by trust companies. The various other forms of business which are now engaged in, have, with the exception of life insurance, been later developments of the trust company idea. The earliest power granted these companies was to receive moneys or other property, real or personal, in trust. The trust company now also acts as executor and administrator of the estates of decedents. The trustee's duty in investing the funds is a double one; namely, to invest them securely so that the principal shall be preserved intact, and to invest them as productively as possible under his powers, so that they shall yield the best rate of interest obtainable for the benefit of the person or persons entitled to the income. He must hold the scales evenly, regarding scrupulously his duties to all beneficiaries. The popular idea that security is the only consideration is erroneous, as the trustee is equally bound to invest the fimds as profitably as possible and cannot neglect one duty more than the other. Other functions. — ^The trust company acts as guardian, curator, or committee of the estates, and, in sortie states, of the persons of minors, those who are insane or mentally incompetent, spendthrifts, drunkards, and any other persons not legally qualified to take charge of their own afiairs. In the case of a minor, the trust terminates on the ward's becoming of age; in other cases, when the disabiUty is removed, or in accordance with a decree of court. These appoint- ments are frequently made by order of court, and to it accounting must be made. In some states the company is styled "conservator" when caring for the estates of persons of unsound mind. 10. SOME INSTITUTIONS USED INDIRECTLY BY THE MANAGER A. INSURANCE COMPANIES' [The life insurance company is here taken as typical of all such institutions.] From a financial point of view the life insurance company is a device for accumulating savings which shall be returned, not to the man who saves, but to his heirs at his demise. Some of the insured, it is true, die long before the sum of the premiums they have paid equals the sum that the insurance company has agreed to pay at their "Adapted by permission from A. S. Johnson, Introduction to Economics, pp. 320-21. (D. C. Heath and Company, 1909.) 426 BUSINESS ADMINISTRATION death. On the average, however, the insured live long enough so that their premiums, together with the earnings of the capital which those premiums form, are at least equal to the sums which the insur- ance company pays out in death claims. It is obvious that in a country like the United States, where life insurance is exceedingly common, immense sums of money must be collected by the companies every year to be held as a reserve against death claims. As the business of life insurance is steadily growing, the funds accumulated by these companies are also increasing. The annual receipts of practically every important life insurance com- pany exceed the annual disbursements. Accordingly, a life insurance company may invest its funds without much regard to the possibility of turning its investments into cash at short notice. It is important, however, .that the business should be conducted in a conservative manner, since the failure of an insurance companj' would be a more widely felt calamity than the failure of almost any other business enterprise of equal magnitude. The loss would be borne in the end largely by the dependents of propertyless men. The reserves of life insurance companies are largely invested in real-estate mortgages, in state and mimicipal bonds, and in the bonds of railway, commercial, and industrial corporations. Stock invest- ments have often been made by insurance companies, but the practice is now generally regarded with disfavor, since the values of stocks are likely to show a wide range of fluctuation. B. THE SAVINGS BANK' The chief business of a savings bank is to receive deposits, invest them in certain classes of securities specified in the statute, and pay to the depositors the amount due them, either in whole or in part, as they may from time to time demand. We can distinguish a savings bank very clearly by this "haU mark": If it receives money not subject to check but payable on presentation of pass book and due notice, which pass book by its terms constitutes the contracts of deposit, and invests the funds in mortgage loans and certain legalized bonds, collateral and personal loans, it is a savings bank; if, on the other hand, it discoimts com- mercial paper, handles checking accounts, loans on notes of hand — ■ in short, does a "commercial" business, it is not a savings bank. ' Adapted bj' permission from W. H. Kniffiu, The Savings Bank and Its Practical Work, pp. 1-83. (The Bankers' Magazine, 1912.) THE ADMINISTRATION OF FINANCE 427 The services rendered by the savings bank are many and varied; but as a broad statement it may be said that it acts first, as a vast collector of wealth, a storehouse, as it were; and, second, as a great distributor of wealth. Like a sponge, it must first gather in before it can give out. In its ingathering it serves the individual, and in its distribution it serves the individual, the community, and the state. It is, perhaps, the greatest assembler of money the world knows, and is one of the chief sources of available capital for municipal and cor- porate enterprises. The investments of the savings banks of this country may roughly be classified into: first, government bonds; second, state bonds (usually with a provision that default shall not have occurred within a certain time); third, mortgage loans (which are quite universal); fourth, city, county, town, and school district bonds (particularly of the state in which the bank is located, and frequently in other states, with stipulations as to the population and the debt); fifth, railroad bonds; sixth, street railway bonds; seventh, corporation bonds; eighth, bank stock; ninth, corporation bonds and stocks; tenth, collateral loans; eleventh, personal loans; twelfth, commercial paper; and thirteenth, miscellaneous investments. C. STOCK EXCHANGES' Much that is to be condemned appears in their conduct. But they are after all productive institutions. They play useful, almost indispensable, roles in the economic order. Their most important function is to render more efficient the capital of the country. a) They make investment easy. b) They make withdrawal from an investment easy, and, in so doing, make capitalists more disposed to invest. c) They bring together all classes of investments, make clear their disadvantages, and so appeal to all classes of investors, e.g., those who wish above all security; those who demand a chance for large returns; those who can wait indefinitely for returns of any sort; etc. d) They make the properties represented in stocks and bonds per- fectiy available as a basis for loans. (Banks will readily accept such bonds and stocks as security, seeing that there is a continuous and unlimited market where these properties can be disposed of at almost any moment.) ' Adapted by permission from F. M. Taylor, Principles of Economics, pp. 295-96. (University of Michigan, 1916. Later published by the Ronald Press Company.) 428 BUSINESS ADMINISTRATION e) It is worth noting that the stock market furnishes government with the best available clue to the value of corporate properties when these are needed for the purposes of taxation or social control. D. WALL STREET' New York is the gateway of the nation's commerce, and Wall Street has been likened to a toll-gate, to pass which every product of the country must pay tribute. As no one likes to pay toU, this would account for much of the animosity so often manifested against the financial center. Yet someone must make, maintain, and operate the various agencies by which the products of the country reach the markets, and it is right that the service should be paid for. WaU Street is the directing head of the great system of transpor- tation, using that term in its broadest significance, as including, not only the railroads and steamships, but also the banks and exchanges, and all the other manifold agencies by which the products of the soil are brought to the homes of consumers in forms fit for human use. WaU Street, in its financial machinery, facilitates the natural flow of money, provides the means for the promotion of enterprises, safe- guards and assists the movement of commerce, and maintains that system of credits by which a tenfold power of service is given to every dollar. By the machinery of its stock market it promotes the diffusion of wealth; it makes possible for great capital to be accumulated for vast undertakings, governmental a,nd private, too big for individual effort; it enables a multitude of small capitalists to become partners in these big enterprises, by its agencies for the distribution of securities from the hands of producers into the hands of investors as the ultimate consimiers; and it is able by its speculative machinery to anticipate human needs, and to secure a more even and equitable level of prices. For this work it must be paid; call it a fee if it be regarded as pro- fessional service, call it a toU if it is thought to liken WaU Street to a gate, or a tax if one prefers to speak of WaU Street as exercising legislative power, or a price if it is thought more proper to regard WaU Street as a merchant seUing credit and securities for the most they wiU bring. But whether a fee, a toU, or a price, it cannot be disputed that WaU Street earns a reward for an indispensable service. WaU Street is the seat of (i) the stock market; (2) the money market. Each is distinct from the other, but both are interdependent. ' Adapted by permission from S. S. Pratt, The Work of Wall Street, pp. 45-48. (D. Appleton and Company, 191 2.) THE ADMINISTRATION OF FINANCE 429 The stock exchange is the head of one and the bank clearing-house of the other. The stock market is a place where securities may be bought or sold (a) for investment; (b) for speculation. The money market is in four main divisions, aU closely allied to each other and having many subdivisions: (a) foreign exchange, by which the operations of international enterprise and international commerce are financed; (b) domestic credits, by which, through checks and commercial paper, food and. merchandise are marketed and the manifold needs of inland trade cared for; (c) promotion, by which corporate and other large enterprises are created, underwritten, and financed; (d) stock-exchange loans, both on call and time, by which investment and speculative transactions in securities are made possible. C. Financial Policies and Occasionally Used Devices We saw in the preceding section the institutional life which the manager may use in his financial problems. In Section C and in the succeeding section we shall be concerned with an account of how the manager works out his policies, by way of various technical deAaces, through these institutions — or at least largely through them. As a means of facilitating our discussion, this material is arbi- trarily divided into two parts. -The first part (treated in the present section, pp. 429-69) is given to a study of the manager's use of relatively infrequently used devices, such as stocks and bonds, in the working out of his financial poUcies. Stated another way, it is given to a study of some of the ways by which the manager raises, expands, and contracts capital. No one should gather from this statement, however, that the expanding or contracting of capital is an infrequent thing. Quite the contrary, fluctation of capital is the characteristic thing in a going concern. How true this is wiU be clearer after we have studied Section D (pp. 469-512). For the present, let us be aware that we are now examining the devices which are used relatively infrequently in bringing about shifts in volume of capital. The method used in presenting the material of Section C is as follows: The discussion opens with Selection 11, which gives a general view of what is meant by capital, capitalization, and the various theories of capitalization. Selections 12-17 then present an accoimt of the various kinds of corporate securities, treating them as devices 430 BUSINESS ADMINISTRATION of which the manager makes use. The remainder of £he section (Selections 18-22) is devoted to a study of some of the more important financial policies which may be worked out through the corporate securities. On all of these subjects we must, in such a rapid survey, be content with the "sampling" method. We look at one significant sample after another of both devices and pohcies. Partly because of the dominant position of the corporation in our business life and partly because corporate pohcies and practices can without great difficulty be " translated' ' into pohcies and practices for a partnership or an individual proprietorship, the material of this section bears primarily upon problems of corporate finance. The student wiU have httle difficulty in applying the principles involved to the other forms of the business unit. PROBLEMS 1. Make a list of "theories" or "bases" of capitalization of corporations. 2. "Overcapitalization means capitalization over and beyond proper capitalization." Grant it. AVhat is proper capitalization ? 3. Explain what is meant by saying that the issuance of stocks and bonds is a contractual matter. 4. Where can one find the "terms of the contract" under which a certain stock is issued? Is it on the stock certificate? In the corporation charter ? 5. What is meant by "the law of the land" ? Does it refer to the char- ter ? To the companies act of the state ? To the state constitution ? To the general body of contract law ? To the common law ? 6. "On pressing the inquiry, we are able to find several main formative influences which explain the various developments of corporate capitaU- zation. The desire to apportion the elements of risk, income, and control involved in an enterprise largely accounts for the numerous forms of securities." Explain. 7. It is generally said that stocks represent ownership and bonds repre- sent a loan made the company. Is "ownership" a single, absolute, matter or may there be "grades" of ownership? Could bonds have voting power ? 8. The students should know the meanings of the following terms : capitaU- zation; capital; shares; stock certificates; preferred stock; cumulative preferred stock; participating preferred stock; convertible stock; guaranteed stock; special stock; overissued stock; unissued stock; foxmders' shares; outstanding stock; watered stock; authorized stock; redeemable stock; deferred stock; treasury stock; non- assessable stock; fuU-paid stock. THE ADMINISTRATION OF FINANCE 431 9. Classifications depend upon points of view. Draw up a diagrammatic classification of stocks. Try to weave in the foregoing terms. 10. The student should know the meanings of the following terms: mortgage bond; first mortgage bond; junior bond; senior bond; overlying bond; underlying bond; prior hen bond; income bond; debenture; participating bond; profit-sharing bond; joint bond; sink- ing fimd bond; terminal bond; divisional bond; collateral trust bond; refunding bond; deferred bond; extension bond; extended bond; optional bond; gold bond; serial bond; convertible bond; registered bond; coupon bond; improvement bond; lottery bond, drawn bond; branch line bond; receivers' certificates; land grant bond; guaranteed bond; dividend bond; interest bond; purchase money bond; car trust bond. 11. Draw up a diagrammatic classification of bonds.. Try to weave in the foregoing terms. 12. Define par value; face value; real value; market value. Is there any fixed relationship between par value and market value ? 13. "Where the preferred shareholders are in the minority they should see to it that their stock is cumulative." Why ? 14. "By this time the reason must have become clear for the veto power so frequently given preferred stocks, requiring the assent of preferred shareholders to any increase in bonds or preferred; or, generally, the purpose of the veto given any class of security on an increase in the amount of that class or any class having a prior claim on earnings or assets." What are these reasons ? 15. How does preferred stock facilitate reorganization after bankruptcy? incorporation of a business heretofore conducted as a partnership? forming industrial consolidations ? 16. Which would you rather have: common stock or preferred stock ? 17. Do you understand that corporate securities may properly be issued to secure working capital ? 18. "The more shareholders there are in a particular corporation the fewet the shares that can control." Explain. Is this always true ? ig. "There are cases where a corporation may ask no further payments on stock from its stockholders, but where creditors of the corporation may demand them." Explain. Remember stock certificates repre- sent contracts. 20. What factors determine the amoimt of capital stock of a corporation ? the amoimt of bonds ? 21. What is a deed of trust in connection with »bond issue? What does it contain ? 22. Define or explain: closed mortgage; open end mortgage. In the case of the open mortgage, protection of the investor should be cared for. Why? How? 432 BUSINESS ADMINISTRATION 23. "Whether bonds shall be issued under an open or a closed mortgage presents another consideration of marketability. Doubtless the investing public generally prefers a closed mortgage." Why ? 24. When is it appropriate to use a sinking fund ? How can one determine the amount which should be devoted annually to the sinking fund? 25. "The desirability of any given plan of amortization may be tested by the following five considerations: (o) adequacy of the sinking fund or redemption payment; (6) certainty of payments; (c) reasonableness of the distribution of the burden upon the corporation; (d) effect of the plan upon the market for the bond; (e) expense and labor involved in the plan." Illustrate each point. Should every corporation have a sinking fund ? 26. "We should remember, however, that paying the creditor and paying the debt are very different matters." Explain. 27. What are the advantages and disadvantages of convertible bonds? 28. Why are there so many kinds of bonds ? 29. "Why do corporations borrow? Why create a debt, which must be repaid with interest, when the sale of additional stock would bring funds permanently into the business without a fixed liability for interest ?" Answer the question. 30. Is it a good or a bad indication concerning a company when it decides to issue bonds ? 31. A corporation has outstanding $1,000,000 of s per cent bonds, $10,000,000 of 7 per cent preferred stock, and $10,000,000 of common stock. Gross annual earnings are $11,950,000; total expenses for the year are $9,900,000 in addition to depredation of the plant amounting to 10 per cent on a valuation of $11,000,000. What is the amoimt available for distribution among the security holders, and how will this amount be distributed among the holders of different securities? 32. In the case of the corporation described in the preceding question what would be the effect upon the dividends of the common stock if all the preferred stock were converted into s per cent bonds ? Would this be a wise move if the business were likely to fluctuate so that the net earnings of the corporation would be cut in half ? 33. A, B, and C are the owners of patent right, which A secured, B and C being his financing partners during the developmental period. It is estimated that probably $40,000 will be necessary to build the plant to manufacture the article, and $15,000 more will be needed for working capital. There is considerable probability of expansion, if the article "takes." It is proposed to create a corporation, and sell the patent to the corporation for stock; and also sell stock to outside investors to obtain developmental capital. What in your judgment should be the amoimt of capital stock issued? Upon what factors would the amount depend ? THE ADMINISTRATION OF FINANCE 433 34. "There is money market for acquiring loans of capital to carry on the business but there is no money market for original capital." Do you agree? 35. What is a reorganization? How can it be true that after reorganiza- tion of a corporation there may be outstanding a greater volume of securities with a smaller annual fixed charge ? What is the difference between fixed charges and contingent charges ? II. THE MEANING OF CAPITAL AND CAPITALIZATION There is no standard meaning for either of these terms, as far as the business world is concerned. One useful definition of capital is "the net assets of the business that have been contributed for con- tinuing use." Even with this definition one must be on his guard. Sometimes the term is used in the sense of the money value of these net assets; sometimes in the sense of the "capital goods" themselves. We may use the term capitalization to mean the corporate securities, stocks, bonds, and (sometimes) short-term notes. This use is arbi- trary and is adopted merely to meet our peculiar needs. What is "proper" capitalization for a corporation? To this question also there is no short satisfactory answer. We may speak of various "bases" of capitalization, (i) There is the theory that capitalization should be based upon the original cost of the property or the actual investment in the enterprise and that the corporate seciuities should not exceed this amount. (2) There is the theory that capitalization should be based upon the cost of reproduction, and a variant of this is the theory that it should be based upon the cost of reproduction less the depreciation which has taken place. (3) There is the theory that capitalization should be based on earning capacity; that corporate securities may properly be issued to an amount which wiU equal an appropriate capitalization of earnings. There remains for debate whether actual or expected earnings should be taken as the basis. There are other "theories" or "bases" of capitalization, but the foregoing will serve to indicate the range of opinion and controversy. The issues are of more importance in the case of public-utility corpora- tions than in the case of ordinary competitive business. If business is really competitive, competition is rehed upon to take care of the consumer, and protection of the investor becomes the main reason for regulating corporate issues. If the business is non-competitive, both consumers and investors may be interested in being protected. 434 BUSINESS ADMINISTRATION An interesting illustration of capitalization occurred a few years ago when a large concern took over some smaller ones and in the process issued bonds to the value of the tangible assets of the concerns, preferred stock to an amount representing a capitalization of present earnings, and common stock to an amount representing a capitaliza- tion of expected future earnings over and above the present earnings. See also p. 456. Policies Concerning the Kind and Amount of Securities. 12. CORPORATE SECURITIES VIEWED AS INSTRU- MENTALITIES A A person coming for the first time into contact with the multi- tudinous technical devices commonly used in corporate capital formation is likely to be somewhat dazed by the array of forms of stocks, bonds, and short-term notes. Bewilderment is not infre- quently followed by fascination and the next stage is an orgy of memorizing terms and factual descriptions in an attempt to see through these very captivating devices which become regarded as a sort of symbol of business opportunity and success. And too many of our textbooks encourage such futility. It is far more helpful to approach the subject by another path. The truth is that stocks and bonds and other technical devices are technical devices which are employed in attaining certain objectives. Like most other devices they are moved about, shaped, and utilized as seems best. They have no invariable form; there is no one unvarying content in the names applied to them; there is no unchan- ging way in which each is utilized. They are instruments and they are molded as seems to the user best in view of the purposes he wishes to accomplish. These technical devices are at once robbed of much of their mystery if we recall to our minds the fact that, after all, they are merely symbols or evidences of contracts which have been entered into between the corporation and its owners or its creditors, as the case may be. Speaking broadly, such contracts may be entered into in any lawful way and may accordingly have an almost unlimited variety of forms. This shows at once how futile it is to try to cata- logue and perchance memorize all the attributes of, let us say, com- THE ADMINISTRATION OF FINANCE 435 mon stock or preferred stock or mortgage bonds. These and other such names have come into use to S3mibolize certain rough types of such contracts, it is true, but the contracts are not invariable in form. There may be, for example, scores of variations in common stock or in any other one of these devices. About all one can say concern- ing the rights and obligations of the parties who have entered into such a contract is that their rights and obligations "depend upon the terms of the contract." Such a statement appeals to us at once as being true of ordinary contracts. Suppose you are to contract with Claire Louis for him to deliver you some apples for which you are to pay him. How numerous the variations might be in the details! How many apples ? What kind? When delivered? Where? What quahties? At what price? When paid? How paid? These are but the begin- nings of a long list of possible issues. Well, after all wherein is this different from the case of Claire Louis contracting with a corporation to turn money over to it and the corporation agreeing to give Louis in return certain rights? How much money? When deUvered? How delivered? What claims in return? Part ownership? Un- secmed claims of an ordinary creditor for the repayment? Provi- sion that the corporation will lay aside earnings in order to be sure to repay? Provision that specific property shall be put in pledge? There is no end to the possibilities. Let us, for the present, brush aside details in an effort to see the problems of corporate secm-ities in a large way. Let us say that the managers of a corporation have certain objectives in view. For example (i) they wish to secure funds to enlarge the business or (2) they wish to have the control of the corporation in certain hands. They set about having the corporation enter into contracts with various persons looking toward the attainment of these objectives. After these contracts have been drawn it may be said of them, for purposes of quick discussion, that they fall into rough types, but the only place in which one can find out precisely what a given contract provides is in that contract. New varieties of such documents emerge continually as new contracting parties find some new way desirable. The new forms emerge in response to the needs of the business com- munity; the needs of the business community are not strait jacketed into a lot of existing forms. It is helpful for a beginner to think of the matter in that light. If he does so think of it, he sees these technical devices as servants and not as masters; as a growing body 436 BUSINESS ADMINISTRATION of instrumentalities through which the manager may work out his policies. All the foregoing may be summarized as follows: When a cor- poration issues stocks and bonds, it enters into a contract with the holders. The. attributes of the particular security it issues (i) de- pend upon the terms of the contract and (2) this depends upon the law of the land. There is almost no limit to the variations which may be made in the contract. The variations which are made reflect pohcies of business and not respect for terminology. We must now take steps to see in this summary statement more than appears on the siurface. In particular, we must put content into the sentence which says that the attributes of any given security depend upon the terms of the contract and this depends upon the law of the land. Let us begin by noticing that the corporation is an artificial per- son, permitted to exist under rules set forth by the government (either state or national, in the United States). It will help us to see the status of this artificial person more clearly if we think in terms of a somewhat extreme statement: "Natural persons may do anything they are not forbidden to do but artificial persons may do only those things they are permitted to do." It follows that a cor- poration may enter into such contracts in such manner as it is per- mitted by its creator, the government. Sometimes the rules governing a corporation are set forth in a special enactment of the legisla- ture applicable only to that particular corporation. This is called a special charter. Such charters were the usual way of creating cor- porations prior to 1850. Today, however, while special charters are occasionally granted, the ordinary procedure is this: The legislature passes a general act (the companies act or the general incorporation law, it is likely to be called) setting forth general rules governing all corporations which get charters under that act, and the actual granting of the charter is made an administrative act. It is per- formed, generally by the Secretary of State, according to rules laid down in the companies act. Suppose, now, that a corporation has been formed under the companies act of the state of Illinois, and that it has "issued" some stock of that general type known as "preferred." How could a person contemplating a purchase of such stock ascertain his rights and obligations ? Generally, such an investigation should be left to THE ADMINISTRATION OF FINANCE 437 an expert, if much depends upon the accuracy of the outcome but in an ordinary case any la5mian can secure the main facts. To begin with, the outstanding features are likely to be set forth in the stock certificate. But even so, the stock certificate, if it is to be enforceable, must be drawn in conformity with the charter since the artificial corporation must act according to the rules governing it. Most of these rules wiU not appear in the charter; they wiU be found in the companies act. And there is much in the region back of the companies act. There is first of all the state constitution and for some purposes even the federal corustitution. Again there is the great body of common law which is used to interpret any doubtful parts of the statute law (in this case a companies act) and which also fiUs in the inevitable gaps which wUl be found in any statutory statement. And, again, there may be some statutes other than the companies act which must be considered. "The terms of the con- tract" thus reach back far into "the law of the land," and only experts should be called upon to draft such contracts or to interpret them when much is at stake. What should this leave in a beginner's mind? He should think of the law as an agency designed to give certainty to our relationships and should picture the corporation as a creatmre of the state brought into existence to meet needs. As a contribution to certainty, the contracts of this creature must be drawn according to the rules governing it but, within those rules, they may have the widest latitude. Do preferred stockholders have voting power? That depends upon the terms of the contract. Are their claims for divi- dends cumulative ? Do they have preference on both earnings and assets (in case of dissolution) ? May their holdings be converted into common stock or into bonds and if so upon what terms? It depends upon the terms of the contract. Now, no one should hide behind a phrase. "It depends upon the terms of the contract" may not wisely be made a substitute for clean thinking. The student will accordingly be expected to know in general what each main type of security usually represents in rights and obligations. But he must realize that every case is a different case and that these contracts may be drawn to meet the needs of the case. The problem before a financial manager in a given instance is that of determining what should appear in the particular contract which he is causing to be drawn. 438 BUSINESS ADMINISTRATION B« The corporate form immediately divides, or marks the line of division of management, into administration and control. Share- holders possess control, but through directors delegate administra- tion to officers. Var)dng rights given special classes of stock make a widely varying apportionment of income, control, and risk. Com- mon shareholders accept a maximum of risk in expectation of a maximum of income. They may share the incident of control equally or in varying proportions with other classes of stock. Shar- ing control in varjong proportion does not mean here through unequal divisions in the total amounts of common and other classes of stock, but that each share of one class represents an essentially different amount of control from each share of the other. If two classes of stock enjoy exactly equal rights, except that one has a preference as to income and perhaps assets, they do not divide control, but risk, and the combination of control plus risk in one,, as compared with the combination of control plus risk in the other, makes the ownership represented by one class entirely different from the ownership represented by the other. But the rights may differ, aside from the preference of one as to income and assets or either. We may speak of these divisions and combinations of income, control, and risk creating different kinds of ownership, as horizontal divisions. With that idea in mind we may make a diagram like this representing a simple case: CAPITAIIZATION, $3,000,000 $1,000,000 coiriTnon stock Greatest risk: half present control; no limitation of income. $1,000,000 preferred stock Less risk: half present control; limited income. $1,000,000 first mortgage bonds Least risk: little or no present control but contingent complete control; limited income. Now, if we make some further stipulations about this corporation, as that its net earnings are $200,000, that the preferred stock is 6 per cent noncumulative, and that the bonds are 5 per cent, without ' Adapted by permission from W. H. Lyon, Corporation Finance, Part I, pp. 7~ii. (Houghton Mifllin Company, 1916.) THE ADMINISTRATION OF FINANCE 439 any rights of control contracted for except the right of foreclosure on default of pajntnent of interest or principal, we can make the diagram a little more definite: CAPITALIZATION, $3,000,000 $1,000,000 common stock $1,000,000 preferred stock 6 per cent noncumulative $1,000,000 5 per cent first mortgage bonds Great risk: 50 per cent of actual present control; 45 per cent of present income which may increase in amount. Much less risk: 50 per cent of present control; 30 per cent of present income, which cannot increase in - amount. Least risk: no actual present but full contingent control: 25 per cent of income which cannot increase in amount. We have not yet mentioned another division of ownership, that represented by the number of shares of stock or the number of bonds. Though, in practice, corporation financing carries this division much further than private financing, the division itself is not peculiar to the corporate form. It appears in the partnership as complete in its nature as in a corporation, and makes a division into amount of ownership rather than kind — into quantity rather than quality. To carry out the metaphor of a horizontal division as indicating a division into kinds of ownership, we may call this division indicating quantity of ownership a perpendicular division. Further, to carry the metaphor into a diagram with the same facts as before, we have: Common stock, par, $100. Ownership divided into 10,000 parts. Preferred stock, par, $100. Ownership divided into 10,000 parts. Bonds, par, $1,000. Ownership divided into 1,000 parts. Now, these two kinds of divisions of ownership accomplish two very different results. The perpendicular division of amounts of 440 BUSINESS ADMINISTRATION ownership makes possible the fitting of every man's pocket-book or financial ability. As already stated, however, this is not peculiar to the corporation. A partnership can accomplish it, and to a limited extent in practice has accomplished it. One of three or more partners may have one-third or one-fourth or any other frac- tional amount of the total ownership. Nothing in the nature of a partnership prevents this from being carried very far, possibly even so far as the quantity divisions of ownership in the United States Steel Corporation or the Pennsylvania Railroad, whose security- holders number tens of thousands. The horizontal division into kinds of ownership makes possible a more difficult fitting than fitting a man's pocket-book. It makes possible the fitting of his type or state of mind. One man may be more or less willing to take a chance than another. The same man may be more willing at one time than another. He may be unwilling to take any risk whatever without having some control. We cannot consider corporate financing apart from ownership, nor ownership apart from owners. Ownership and owners enter into the consideration as necessarily as tie various gases enter into the composition of water. Personal ownership has not developed the abUity to fit types and states of mind closely. The fact that cor- porate ownership has, accounts for a great part, perhaps for the greatest part, of the success of the corporate form of enterprise. See also p. 734. The Powers of Stockholders. p. 671. Elimination by Combination of Risks. 13. A CLASSIFICATION OF STOCKS' [While the student cannot at this time do better than make intelligent guesses, he shoxild read this selection with these questions constantly in mind: Under what circumstances should the manager use this kind of stock? What financial policy has the manager adopted if he issues this kind of stock ?] In the first place, stock certificates may be classified according to their par value. The great majority of important railroad, indus- trial, and financial corporations have issued stock with a par value of ■Adapted by permission from J. Adams, Jr., "Stocks and Their Features — A Division and Classification," in Annals of the American Academy of Political and Social Science, XXXV (1910), 325-44. THE ADMINISTRATION OF FINANCE 441 $100. According to the laws of most states, any par value whatever may be fixed for the stock. Consequently there are par values all the way from one cent, in certain mining and oil-well properties, to a few banks and trust companies, such as the Humboldt Savings Bank, and the Union Trust Company of San Francisco, and the West Side Bank of Milwaukee, each with shares of a par value as high as $1,000. Some stocks, strange as it may seem, have no par value whatever. The Adams Express Company, a voluntary association, dating from 1854, has 120,000 shares of no stipulated par value, paying dividends of eight dollars per share annually. Similarly, the East Boston Company, a Massachusetts corporation going back to 1833, has < 50,000 shares of no par value. Several states have recently made provision for such stock. A further classification of stock certificates can be made with reference to their issue; i.e., into issued and outstanding, unissued, and treasury stock. Unissued stock is that which has been author- ized but not yet disposed of. It merely represents the right to admit new stockholders and has no value in itself. It has no active stock rights and is not an asset of the corporation. It usually is reserved for various corporate purposes, such as the conversion of bonds or the purchase of new lines or plants. Treasiury stock, on the other hand, is best described by Wood in words which have been frequently quoted: It is stock "issued and outstanding which has come into the possession of the corporation which issued it by purchase, donation, or in hquidation of a debt. If it has been issued fuU-paid it remains so, even if sold again below par, and it is con- sidered an asset of the corporation for bookkeeping purposes. But such stock, so long as it is held by the corporation or its representatives as treasury stock, neither participates in dividends nor in the meet- ings of the corporation as treasury stock; though it still represents a paid-for interest in the property of the corporation." Treasury stock is issued; but is evidently not outstanding. Examples most fre- quently occur in mining companies. Stocks can also be classified according to whether they are full- paid or assessable. Full-paid stock is simply that which has been fxilly paid for as required by law in money, property, or labor. The certificates of such stocks are issued stamped "fidl-paid and non- assessible," and, in the absence of any special statute on the subject. 442 BUSINESS ADMINISTRATION carry with them no legal liability. Assessable stock, on the other hand, is that which has not been fully paid for by its subscriber. It should be emphasized, however, that outside of mining and public utilities corporations, assessable shares are comparatively few. Very few instances of such stock are listed on the New York Stock Exchange. The legal status of assessable stock is such that creditors of the corporation can hold the owners of the shares Uable for the difference between the amount actually paid in and the par value of the stock. Turning next to a discussion of the various features of common and preferred stock, we find that the classification, to be complete, must be very elaborate. An outline is inserted to enable the reader to^ follow more readily the following classification. CLASSIFICATIONS OF STOCK CERTIFICATES ACCORDING TO THE RIGHTS AND LIMITATIONS ATTACHING TO VARIOUS TYPES OF STOCKS 1. Common 2. Deferred 3. Preferred, as to Voting power Other features Dividends (always) ( Cumulative (industrials generaUy). x^ivivxcuus yainays, -y jjon^umulative (railroads, generally). 4 ^ f Railroads (not often). ^^^^^ \ Industrials (generally). {Exclusive (seldom). Special (often). (Callable. Convertible. Participating. I Interest-bearing. Guamiteed!'" Founders'. 5. Debentiure "Common stock," meaning the junior issue, when there is pre- ferred stock, or stock analogous to preferred, sometimes has a real preference in regard to voting, for there are instances where the pre- ferred gives up the right to vote as a consideration for its receiving regular dividends. The usual provision is that if such disbursements are discontinued for a certain period,' varying with the individual corporation, the preferred stock shall resume its voting power. Common stock generally has the right to receive all the surplus remaining for dividends after the preferred has been paid its stipu- THE ADMINISTRATION OF FINANCE 443 lated percentage; and in a growing country such as the United States this feature is valuable, provided there is any worth in the company. Common stock usually has the right to share equally with the preferred in the corporate assets on the dissolution of the company. In many cases, however, especially the New Jersey industrials, which include practically all the large "trusts," the preferred stock has a preference in this respect. "Deferred" stock is an issue commonly used in England, but only infrequently met with in the United States. The name itself is largely explanatory of its nature. It is an issue in which divi- dends are deferred untU dividends on some other variety of stock, or interest on some particular bonds, have been paid. Having explained the nature of deferred stock, we may now consider preferred stock. This class may have a preference in any one, any two, or all three, of three particulars; i.e., dividends, always; assets, generally, and voting power, at times. It may also be "callable," "convertible," or "participating." Such stock always has a preference over the common as regards dividends, which may be either "cumulative," or "non-cumulative," the former being in the nature of a fixed charge, because if the cor- poration is unable to pay the dividend in one year, it must be paid in succeeding years, together with the dividends for those years, before the common can receive anything. No such duty attaches to non- cumulative stock. If the dividend cannot be paid this year, the rights of the common to share in next year's earnings are in nowise impaired. The superior voting right which the common stock sometimes possesses has already been spoken of. The preferred, likewise, in some instances, carries the entire voting power, though not so often as the common, and generally in less important corporations. On the other hand the preferred stock often has a voting preference in regard to special matters — usually in case of the creation or increase of funded debt, or the enlargement of the preferred issue itself. More than a majority of the issue, usually two-thirds to three-fourths, is required to sanction such changes. Mention may be made here of the various classes of preferred stock, and the safeguard that is occasionally thrown around pre- ferred dividends in the shape of what may be called "dividend funds." The difference between a first and second preferred stock is this: that while both are senior to the common, the first preferred ranks ahead 444 BUSINESS ADMINISTRATION of the second in regard to receiving dividends, and in some cases has priority as regards assets, also. Of the corporations whose stocks are active on the New York Exchange, only about 5 per cent possess two or more classes of preferred. No instance of a corporation having more than three classes of preferred stock has been found. It is proper to state here that what is commonly known as "pre- ferred" stock need not necessarily, in many cases, be called by that name at all. Under the laws of many states, stock possessing the characteristics of preferred stock may be known by almost any name, so long as that name does not generally import some other variety of stock. Concord & Montreal has its stock divided into classes I, II, III and TV, class IV corresponding to common stock. It should next be noted that preferred stocks may possess any one of three special features — they may be "callable," "con- vertible" or "participating." Very many preferred stocks are issued to procure money for corporate purposes on the inception of the com- pany, when not much could be realized by the sale of common stock, and bonds could be marketed only at a discount. Such companies may have hopes that in time their business wiU so improve that by issuing bonds at a low interest rate, or by selling additional common stock, they can retire the preferred stock, leaving the common stock in a much better position. Hence the callable feature may be inserted. This is never obligatory on the corporation, but merely optional with the directors. It is the opposite of the "convertible" feature, which depends on the stockholders' option. The participating feature of certain preferred stocks is compara- tively unknown to the pubhc; yet it is of the utmost importance, for it is practically only in this class of preferred stocks that the holder has an income unlimited except by the company's earning power. In cumulative preferred stocks he is nearly always limited to his fixed percentage, but here he shares with the common stock the surplus remaining after a certain amount has been paid on that class. Following our classification of stocks we may now consider those stocks which are analogous to preferred. The first of these is interest- bearing stock which is reaUy only another name for preferred stock. "Special stock" is a creation of certain Massachusetts statutes, especially the Acts of 1855 and 1882. Under the latter enactment, manufacturing "and other corporations," by vote of three-quarters of their stockholders at a meeting called especially for this purpose, may authorize "special stock," which must never exceed two-thirds THE ADMINISTRATION OF FINANCE 445 of the actual capital, bearing semi-annual dividends not exceeding 4 per cent, and subject to redemption at par after a fixed date, which must be expressed on the certificate. The holder of such stock is in no case liable for the debts of the corporation. "Guaranteed stock" is a term properly applied to the stock of a company, the dividends on which are guaranteed by another cor- poration, provided there are sufficient earnings to meet them, but not otherwise. It is sometimes erroneously employed as describing preferred stock, i.e., the corporation guaranteeing the dividends on its own stock. "Founders' stock" is practically unknown in this coimtry. No instance can be found in the manuals, though it may exist in small corporations. Briefly, it may be said to be stock ranking ahead of preferred, entitled to a certain fixed dividend and then to a certain proportion of the surplus after dividends on all classes have been paid. Having described the various classes of preferred stocks and their characteristics, and those analogous to preferred issues, there stiU remains for discussion the so-called debenture stock. This class of stock may be said to be on the margin between mortgage bond issues and regular stock issues. To the ordinary person a "debenture" signifies a non-mortgage bond. But it is also used to describe a stock. The whole amount secured may be "treated as borrowed capital consolidated into one mass for the sake of con- venience," and certificates issued entitling the holder "to a certain sum, part of this mass." It differs from stock in that the company promises, generally in the form of a covenant, to pay interest on specified dates. This interest has priority over dividends on any class of stock whatever, whether guaranteed or not. Such issues are common in England and Canada, but rare in the United States, though debenture bonds are well known here. In closing, we express the hope that intending purchasers will look well to the class of stock in which they contemplate investing, examin- ing all of the provisions of that particular issue; consulting, if neces- sary, the articles of incorporation of the company. u I— I I— I H Pi W U t^ u o H oi W 1-3 C/2 : ■ -Bl a ■•1 iy HUDSON TRUST COMPANY, TRANSFER AC3BNT, ASS'T SECBBTAXIT. !•»*•, I «^ W «l>* t^*S ?\^~' « a » fi « *> ;|'0 §fe 3"^ S^S.-S'*'°"8-a i ""a 5.S 5 ° g'S.g S 8 «4|isa|i!|lil||. 8fc.SgS^L'?o°£ s^g l'-§*'^1 SS'i, Jt a h s-S^S -"^1^ .Op .■$ «3fe|8-§'°|SfeS^-S^l11^g'3 [Form of Assignment on the Back op the United States Steei, Cospokahok Preferred Stock Certieicaie] For value Received hereby sell, assign, and transfer unto w P ?! ? .WO ^ > H V i >i 5 « 2 - Shares . 3 b H C) S z z o/ the Capital Stock represented by the within Certificate » transfer the said stock on the Books of the within named n Q It Corporation with full power of substitution in the premises, o g S g » I 1 I ^ Daied ig g 3 a 3 >€ n i< a 1 » B Z PI S H S g n B /« Presence of ^ 5 s 2 S >S 448 BUSINESS ADMDSflSTRATION 15. A CLASSIFICATION OF BONDS' A compreliensive basis for the classification of bonds is not to be found in the bond Usts nor in current market reports. The names and classes thus arranged are for purposes of convenient reference and usually follow the practice of the local exchange. Generally speaking, bonds receive their titles from one or more of the fol- lowing characteristics: (i) the character of the corporation using them; (2) the purpose of issue; (3) the nature of security given for payment; (4) the terms of payment; and (5) evidence of owner- ship and transfer. The first of these five characteristics is used as a basis for general classification. That is to say, quotations are usually arranged under the following heads: Government — state and national. Mimicipal and county. Railroad, express, and steamship companies. Traction companies. Gas, electric Ught, and water companies. Bank and trust companies. Investment companies. Industrials. Mining companies. Miscellaneous. Classification according to purpose of issue. — Among the many varieties of bonds which take their names from the purpose of issue the following may be noted: Adjustment bonds, bridge bonds, construction bonds, consoli- dated bonds, car trust bonds, dock and wharf bonds, equipment bonds, extension bonds, foimders' bonds, ferry bonds, general bonds, improvements bonds, interim bonds, interest bonds, purchase money bonds, refimding bonds, reorganization bonds, revenue bonds, sub- sidy bonds, terminal bonds, tunnel bonds, temporary bonds, unified bonds. Classification of bonds according to the character of security pro- vided for payment.— From the point of view of the security given for payment, bonds fall into two general classes, viz., (i) unsecured, and {2) secured. The secured bonds may again be divided into two general classes: (a) those having personal security, and (b) those ' Adapted by permission from F. A. Cleveland, " Classification and Descrip- tion of Bonds," in Annals of the American Academy of Political and Social Science, XXX (1907), 400-411. THE ADMINISTRATION OF FINANCE 449 secured by liens on specific property. These in turn may be sub- divided as follows: I. Unsecured a) Government bonds b) Corporate debentures II. Secured a) Personal security 1. Indorsed bonds 2. Guaranteed bonds (a) Guaranteed as to principal (b) Guaranteed as to interest (c) Guaranteed as to both principal and interest b) Lien security r. By character of property pledged (a) Real property (i) Land grant bonds (2) Real estate bonds (b) Personal property (i) Collateral trust bond (2) Sinking fund bonds 2. By the character or priority of lien (o) First, second, or third mortgage bonds (J) General mortgage bonds (c) Blanket mortgage bonds (d) ConsoHdated mortgage bonds (e) Income bonds (J) Profit-sharing bonds (g) Dividend bonds 3. By character of the holding participation receipts Bonds classified according to evidence of ownership and transfer. — Considered from this viewpoint there are three classes, viz., coupon bonds, registered bonds, and coupon registered bonds. Coupon bonds are issues, the contracts for payment of interest on which are evidenced by separate coupons or contracts for payment, which fall due consecutively on the interest-paying dates. The coupons may be detached and constitute complete promissory notes in themselves, payable to bearer. The coupons are usually written on small sections of a sheet of paper attached to the principal obliga- tion and as they mature are cUpped off and presented for payment. 4SO BUSINESS ADMINISTRATION They are frequently presented for payment through a bank as a check or draft would be. Registered bonds are credit instruments, the interest obligation in which is expressed in the same writing or paper as in a promissory note, the ownership of the bond being registered as a means of pro- tecting the payee against loss, necessitating a formal transfer and registration to transfer the title when the old. instrument is canceled and a new one issued. Interest is payable by money delivery or by check sent by mail to the address of the registered holder. Notice •should be given of any change in address. Registered coupon bonds are issues, the principal of which is regis- tered, the coupons being made payable to bearer. In practice a single bond issue may have any nvimber of these many distinguishing characteristics, so long as they are not -in con- flict. When applied to specific issues the nimiber of classes may be equal to the mathematical possibility of the several elements described in combination. The advantage of the analytical classi- fication here used is that by classifying and defining bond character- istics the terminology may be understood in any combination used. i6. RECITALS IN BONDS' A bond ordinarily is simply a promise to pay money at a given time, bearing a rate of interest, the interest usually being payable at stipulated intervals — annually or semi-annually. Such a bond is sometimes defined as an instrument in writing, under seal, whereby one binds himself to pay a certain sum of money to another on a day named. The essential recitals to be made in a bond depend largely upon the statutes and laws governing the issue. It is necessary to have a knowledge of the statutes under which the bond is sought to be issued, in order to be sure of all the recitals which should enter into any particular issue of bonds. It is quite a common practice to select some bond form which has been evolved by long continued experience and adopt and copy such a bond. Such practice is much better than to approach the subject in a haphazard manner, but no bond form should be adopted without careful investigation of the authority by which it is issued and the conclusion arrived at that the bond complies in all respects with the authority granted. These observations apply to » Adapted by permission from Andrew Squire, "Essential Recitals in the Various Kinds of Bonds," in Annals of the American Academy of Political and Social Science, XXX (1907), 248-56. THE ADMINISTRATION OF FINANCE 451 what may be called the unusual recitals in bond forms. Some of these recitals are not essential, but at times the recitals, if they are to become part of the contract between the obligor of the bond and the one who buys it, are very essential, and it becomes very necessary to have the exact terms clearly expressed. A bond written in any imusual phraseology is liable to attract attention and raise questions that might hinder the negotiation and sale of a bond that would not attract attention if written in the ordi- nary terms. A bond secured by mortgage, whether real estate, chattel or collateral trust, should usually, in addition to containing the obliga- tion to pay, advise the bondholder, either directly or by reference to the mortgage, of his rights and of the terms and conditions upon which the bond is issued and secured. Ordinarily, a proper form of mortgage bond will set forth: a) An acknowledgment of the indebtedness for. value received. b) A covenant to pay the principal at a certain place and time, in lawful money, or gold coin of a fixed standard of weight and fineness, with interest at an agreed rate, payable at a specified place, and at specified times, usually semi-annually, and ordinarily represented by coupons attached to the bonds. c) A description of the issue of which the bond is one, showing usually the amount of the issue, and, oftentimes, the pur- poses. d) A statement showing that the bond is secured by a mortgage or trust deed, as the case may be; the place where the instrument is recorded or filed, and a reference to the instru- ment for a description of the property mortgaged or pledged; the extent and character of the security, and the terms and conditions upon which the bonds are issued. Usually the bond is specifically made subject to the terms and conditions of the mortgage, so that, should there be any conflict between the terms of the bond and mortgage, or instrument secur- ing the bond, the terms of the mortgage will govern. e) A recital briefly advising the bondholder of his rights on default of payment of interest or otherwise. /) A provision that the bond shall not be valid until authenticated by a certificate endorsed thereon and executed by the trustee. This certificate to be executed by the trustee needs careful atten- tion. It should not be a certificate purporting to be anything more 452 BUSINESS ADMINISTRATION than an identification of the bond as one of the bonds of that par- ticular issue. The trustee should never represent that the bond is secured by a mortgage or other instrument executed to the trustee, because the trustee is not expected to in any sense determine that the bond is secured, or to what extent it may be secured. AU that is asked of the trustee is to identify properly the bond and guard against an over-issue. In addition to the foregoing there are various special provisions which frequently occur in bonds. For instance: 1. A provision for registration. — ^This in order that the bond^ which is usually payable to bearer, may be registered and held so that the owner would not be deprived of his property, should the bond be stolen or destroyed by fire. 2. A provision for redemption prior to maturity. — Such provisions are exceedingly common in railroad and corporation issues. Experi- ence has taught those who are in the habit of drawing bonds of this character, that almost every kind of business is Uable to develop far beyond the expectations of those interested at the time a bond is put out; and that, in order to finance an increasing business, whether it be a railroad or even an ordinary corporate enterprise, upon which larger demands are being made yearly for capital to be used in the business, additional stock must be sold or additional bonds issued. Sometimes resort must be had to the one method and sometimes to the other. When it is found better to issue new bonds, it is frequently of great advantage to be able to retire the underlying bonds, and it is very wise that the bond should contain a provision permitting such retirement. As a matter of experience, the bond should usually provide for its retirement only at some interest-maturing period. 3. For a sinking fund. — The sinking fund provision in a bond is sometimes a difl&cult one to deal with. [For a discussion of sinking fimds, see page 462, Amortization PoUcies and Practices.] 4. For the exemption of stockholders, directors and officers of the corporation from individual liability for the payment of principal and interest of bonds. — Provisions like this arise mainly from two causes : First, in the original promotion of many enterprises property which is of an uncertain value is, under a contract, turned over to a corpora- tion, sometimes accompanied with a money payment and sometimes without; sometimes in an undeveloped condition and sometimes in a developed condition, for a given number of bonds and a given amount of stock, all of which are issued as fully paid, and then the bonds and THE ADMINISTRATION OF FINANCE 453 stock are put upon the market by the party making the proposition. If the enterprise turns out successful, no question arises, but if, as is not infrequent, the enterprise is a failure, and the property mortgaged will not sell for sufl&cient to pay the outstanding bonds, then the bond- holder (who is frequently an innocent person) looks to see if he cannot hold the original promoters, the stockholders, directors, and officers in some way, for any deficiency. To guard against being so held, recitals of the character suggested are frequently put in the bonds. A second reason for such a recital arises from the double statu- tory liability provided for in some of the states. The constitution of some states provides that all stockholders shall be liable for an additional amount up to the amount of the holding of their stock to pay the indebtedness of the corporation. Most states have no such provision, but wherever such provisions do exist they make trouble and give rise to a considerable amount of litigation. Such litigation it is sought to escape by a contract provision in the bond or mortgage. o pq en a S o U •2 ^ J cd o g CD o a < CO 0) 4-1 4-> cn (U ■4-1 • l-H c D CO .> 4-> cd ■-1-1 ""O T3 o CQ US O u u V Oh (U > }-l a a m O O U CO o u Id ■= « O a 5 ! ■6 ji a o n >H •o ^ a ^ *+H- *s O I? ii b a a. u .a ■4-) (^ .a 1^ >> S a V oi > a t- 1 O 1 ■a I & V ^ •M ■K ri o u S 1 2 & E P d a. a o U "tS ol d Jtj .& 2 *o u »< J3 M CO >t "S 3 J2 1—1 3 m H a 6 ^ n 9 1 § J4 O, s !^3 4 M 3 o T3 a o <> 3! 5 "2 ti - •S 3 yil o to eS 2 -o ■ H ^ O (U ^ .a" 12; s 9 o SS o o a O ^ 63 5 I o a c oi a o U a o % ^ g < g i s 1 1 1 3 sow p pq c/) a bo M d d . i o T3 ■*-» O .S 15 ^■3 u .a I « I i Si 00 .a t id" -a o 7 3 z ° « >^ u -(7 tt >^ P.U 1 al T3 ..9 s 5?& V w a ■s M a a £ S 4S6 BUSINESS ADMINISTRATION i8. POLICIES CONCERNING THE KIND AND AMOUNT OF SECURITIES' [The kinds of securities issued by a corporation will ordinarily be a compromise between the kind the company would like to offer and the kind investors would like to have. Be sure you get from this reading an appreciation of the part played by amount and stabUity of income.] The next question to consider is: What issues of securities or credit instnmients should a corporation put out and what proportion of its total funds should be obtained by each of these issues? In order to raise funds from each of the four sources outside the business itself named above the corporation manager wiU offer: Sources Securities (a) To trade creditors Bills and notes payable (6) To banks Notes payable and endorsed notes receivable (c) To the investing public Mortgage bonds and perhaps preferred stock {d) To the speculative public Stock The amount of each security offered will depend in part on the assets and in part on the earnings of the corporation. Corporate assets in nearly every line of business fall naturally into six groups, as follows: (a) Fixed investments essential to the business, such as real estate, buildings and machinery, and in the case of holding com- panies, securities of subsidiary corporations. (6) Property that could be sold without breaking up the business, though the sale would probably be at a heavy sacrifice, such as, outlying real estate, securities of other companies control of which is not essential to the integrity of the corporation, raw materials, and goods in progress. (c) Finished products on hand. {d) Accounts receivable. (e) Cash. (/) Intangible assets, such as good-wiU, trade mark, etc. ' Adapted by permission from W. H. Lough, Corporation Finance, pp. 122-32. (Alexander Hamilton Institute, rgid.) THE ADMINISTRATION OF FINANCE 457 To the first five groups roughly correspond obligations for bor- rowed money, as follows: (a) Mortgages and mortgage bonds obtainable as a rule on good terms up to 60 to 75 per cent of the appraised value of real estate; 50 per cent of buildings; 25 to 40 per cent of machinery; 50 to 90 per cent of securities. (b) and (c) Income, profit-sharing and car-trust bonds, on a great variety of terms, preferred stock in some cases and to some extent short-term notes and bank loans. (d) and (e) Accounts payable and bank loans. Group (/) and the differences between the other assets and their corresponding liabilities are usually represented by stock issues and by surpluses. The reader will understand, no doubt, that this classification is merely approximate and is not always followed in practice; yet an analysis of balance sheets will reveal, on the whole, a close adherence by corporation managers to the principles just stated. The stability and amount of the earnings will, of course, greatly affect — in fact, determine largely — the value of a corporation's assets, and in that way will affect the amount and kind of securities that it may wisely issue. Now we take up the long-time obligations — especially mortgages and mortgage bonds — of corporations. Evidently they must be based on permanent, or fixed assets, and in amount will correspond roughly to the value of such assets. Here we meet with the diflficult and important question. What determines the value of fixed assets ? Most people would be inclined to say that the cost of the assets must determine their value. A moment's reflection, however, shows this statement to be untrue. Suppose, for instance, that a man has put up a plant at an expense of $100,000 for refining copper, and afterwards discovers that there is no copper within hauling distance. The plant would not be worth the expense of demolishing it. Evidently cost of construction would have very little to do with the value of such assets. The second opinion is that the value of fixed assets is determined by the expense of duplicating them. It is claimed, for instance, that to arrive at a fair valuation of the railroad property of the United States, all we need to do is to figure how much it would cost to reproduce this property under present conditions. The illustra- tion already used, however, would apply in criticism of this second opinion as well. 4S8 BUSINESS ADMINISTRATION The third opinion is that the value of fixed assets is determined by their earning power as in the above illustration. It takes no argument to show that this is actually the case in ordinary business practice. If you were going to buy anything in the nature of a fixed asset, from a university education to a steel mill, your first question as a business man would be, How much will this asset earn for me? Similarly, an investor in buying the securities of a corporation will inquire as to the value of the corporation's fixed assets, and will naturally estimate their value on the basis of earn- ings — not the present earnings altogether, but probable future earnings as well. Bear in mind that this principle that earnings determine value is appUcable only to fixed assets. The selling value is applicable only to fixed assets. The selling value of floating assets, such as raw material, tools, finished goods on hand, is another matter. That will be determined, normally, as the science of economics explains, by cost of production. The difference arises from the fact that fixed assets — land, buildings, machinery — are not intended for sale, - but for use. They generally have little or no value except for the purpose for which they were intended; and their value for their purpose can be determined only by their earning power. We have already intimated without going into details that the amount of investors' securities which may be issued by any corpora- tion depends both on the value of its fixed assets and on the amoimt of its income available for interest charges. There is no contradic- tion between these two considerations. At bottom the important factor on which to base bond i?sues of a going concern is the amount and stability of income. See also p. 433. The Meaning of Capital and Capitalization, p. 492. Short Term Loans and Trade Credit, p. 643. Chapter vii. Administration of Risk-Bearing. 19. SOME POLICIES WITH RESPECT TO PREFERRED STOCK' [Since the problem most frequently arising with respect to stock issues is concerning the wisdom of issuing preferred stock, this selection serves to open up a range of "policy questions" concerning stock ■ Adapted by permission from W. H. Lough, Corporation Finance, pp. 77-79 (Alexander Hamilton Institute, rgid.) THE ADMINISTRATION OF FINANCE 459 issues. The student should be able to work out for himself rough answers to these questions: Under what circumstances should the manager issue cumulative preferred stock? Under what circum- stances non-cumulative preferi'ed stock ?] Preferred stock had its origin in raUroad reorganizations, in reorganization after bankruptcy it is necessary to cut down the claims of the various bond issues outstanding in order to put the reorganized corporation in a reasonably safe condition. The interest on the first mortgage bonds is usually scaled; some of the junior issues are perhaps turned into income bonds, and in the seventies some bright mind conceived the idea of changing the inferior bond issues into preferred stock. [See page 465, Corporate Reorganization Pohcies.] Although preferred stock was originally the offspring of receiver- ships, it proved to be such a useful instrument for some purposes that it has been retained and is now much used, especially by indus- trial companies. The railroad companies are gradually giving it up. Apart from its usefulness already alluded to in cases of reorgani- zation, preferred stock serves four other purposes. First, it may be a convenient means of separating a company's stock into different voting classes. Sometimes the preferred stock has no vote at all; sometimes it elects a limited number of directors. either case the owners of the majority of the common stock may elect a majority of the board of directors. Therefore, a much smaller interest will control the business than would be necessary if all the stock issued voted alike. Second, preferred stock is often very useful in forming industrial consolidations. As we shall see in the study of these consolidations, they usually capitalized for a great deal more than the combined capitalization of their subsidiary companies. Ordinarily the extra capitalization, which represents prospects, takes the form of common stock, and the present value of the plants and businesses absorbed is represented by bonds and preferred stock. The subsidiary com- pany stockholders are much more inclined to exchange their common stock for preferred stock in the consolidation than they would be to exchange for common stock. If the subsidiary businesses have been successful and profitable it is reasonable to expect that dividends on the preferred stock can be paid, whereas nobody can foresee whether common dividends will be paid or not. The third purpose of preferred stock is to facilitate the incor- poration of a business which has been conducted as a partnership. 46o BUSINESS ADMINISTRATION In a partnership each partner has as much say with regard to affairs as any other partner, irrespective of the extent of his interest. It is true that in practice the senior partner usually controls, but in law they are all on the same footing. They may desire to preserve the same arrangement in the corporation, in which case they may create a non-voting common stock and assign that stock to each partner in proportion to his interest in the partnership and in addition may make a voting preferred stock, of which each partner receives an equal amount. In this case it is possible that the so-called preferred stock may have preference in nothing except voting power. Fourth, preferred stock obviously may attract conservative inves- tors who would not care to buy the more speculative common stock of a corporation. Preferred stock, in point of security, ranks between the lower grades of bonds, which are described in succeeding chapters, and common stock. The preferred stock of industrial corporations, on account of their fluctuating earnings, usually sells at much better prices than the common stock of the same corporations, even though the common stock may receive on the average as large or larger dividends. Sometimes a certain amount of stock will be set aside at the organization of a corporation and given voting power, which right is denied to all the other stock. In such a case the corporation has in existence two classes of stock, "voting" and "non-voting." This is not at all a common arrangement and is rarely, if ever, adopted except when a partnership business is put into the corporate form. It amoimts to the same thing as creating preferred stock with the preference confined to the privilege of voting. 20. POLICIES WITH RESPECT TO OPEN AND CLOSED MORTGAGES' [Although the holder of bonds is primarily interested in the amoimt and steadiness of the income of the company whose bonds he holds, he has, in the case of mortgage bonds, a strong secondary interest in the character and amount of the property put in pledge. This selection gives a gUmpse of how this pledging of property may be handled. The material in the latter half of the selection has ' Adapted by permission from W. H. Walker, Corporation Finance, pp. 118-20. (Alexander Hamilton Institute, 191 7.) THE ADMINISTRATION OF FINANCE 461 further value in that it also shows how steps may be taken to safe- guard the safety of bonds which have behind them no specific pledge of property. Remember that when a manager decides to issue bonds with any of the safeguards mentioned, his act reflects a financial policy.] When a corporation is growing rapidly, and needs constantly to' enlarge its capital by borrowing, the fact that its best assets are subject to the lien of a mortgage may render it difi&cult to borrow further on favorable terms. This is particularly true when the presence of the above clause prevents the new extensions or improve- ments themselves from being pledged under a new mortgage to secure additional funds. It is therefore customary, in raihoad finance, and occasionally with other companies, either to provide a bond reserve or to execute an open mortgage, under which additional bonds may, from time to time, be issued to meet new capital requirements. When the property is valuable enough to sustain a mortgage beyond the immediate amount required, the company frequently mortgages the whole property and authorizes upon this security, an issue of bonds much larger than is immediately needed. These unissued bonds, available for sale at any time for new capital, or for pledge as collateral for temporary loans, constitute bond reserve for financing future extensions. When, however, the property is not adequate to create a satis- factory bond reserve, or future extensions an contemplated beyond the amount of such reserve, and cannot be financed on separate mortgage because of the after-acquired property clause, it is cus- tomary to issue an open mortgage. V closed mortgage is one under which a fixed amount of bonds may be issued and which carries no Uen protection beyond that amount. An open mortgage is one which does not fix in advance the exact extent of the lien or the amotmt of the bonds that may be issued under it. The open mortgage always restricts the bonds issued under it by requiring the maintenance of an adequate margin of safety the value of the property above the par value of the bonds outstanding. The trustee is instructed not to permit the issue of additional bonds, unless this margin of safety is maintained, and certain definite requirements are imposed to insure this being done. The following are the more customary safeguards, and usually several of them are found in the trust deed: 462 BUSINESS ADMINISTRATION (a) Investment of the entire proceeds from the sale of bonds in the productive property or equipment covered by the mortgage, or to retire maturing prior liens thereon. (b) No additional bonds to be issued while the floating debt exceeds a certain amount or a certain proportion of the total liabilities. (c) No additional bonds to be issued unless the earnings available for fixed charges have averaged for a certain period of time a certain excess above the interest requirements, including interest upon the contemplated new issue. (<^) New bonds not to be issued above a certain maximum amount, or a certain amount each year. (e) No property to be sold without turniag in to the trustee the full proceeds, or a certain portion thereof, to offset the reduced security, or to retire a portion of the bonds. (/) Maintenance of adequate reserves against depreciation, usually upon some stated basis. Open mortgages are rare. A bond reserve serves all the purposes of a limited open-end mortgage, and stands in better favor at the present time. Both require rigid restrictions of similar nature. The after-acquired property clause is now the general rule, especially in the large refunding mortgage issues of American railways, which are showing a strong tendency to clear away the numerous small underl3Tng mortgages and provide ample bond reserves. It is clear that the bond reserve plan, especially if property is not adequate to secure the entire authorized issue in the beginning, must carefully restrict floating indebtedness, depreciation of the mortgaged property, and the investment of new funds in non-prod-ucing assets. 21. AMORTIZATION POLICIES AND PRACTICES' The security of a loan may consist of the market value of a product, structure, or natural resource, or of the earning power of a business. The bonding value of property of any kind is based upon its productive capacity, or "Value in use." An asset is worth only what it will produce. If, in the course of production, the value of the specific security decliaes, it becomes necessary that the bonded debt be retired at least as rapidly as the assets upon which it rests are consumed. Such assets are known as wasting assets. Any ' Adapted by permission from W. H. Walker, Corporation Finance, pp. 179-81. (Alexander Hamilton Institute, 1917.) THE ADMINISTRATION OF FINANCE 463 natural resource or stock of goods which is exhausted in the course of business is a wasting asset. Any specific structure or piece of equipment is a wasting asset, because deterioration caused by time or use, or both, is inevitable. On the other hand, a given lot of equipment which is being con- stantly replaced and improved so that its productive value as a whole is maintained, may not be considered as a wasting asset. The basis of amortization is therefore found in the nature of the security pledged, by allocating the causes of the wasting values. These causes are three in number: a) Depreciation in earning power, caused by time or operation. b) Reduction of assets by sales. c) Decline in value owing to changes in the market. Resulting from the nature of these causes, there are two bases of amortization : a) Upon the unit of time — debt amortized at a certain rate per year, or other unit of time. b) Upon the unit of production or sale — debt amortized at the rate of so much per ton of coal mined, per thousand feet of timber cut, per acre of ground sold, etc. To illustrate. — Bonds upon specific railroad equipment or single steamships usually mature serially, and are paid ofi in perhaps ten even annual payments, because time is the chief cause of their deterio- ration. Coal bonds are retired out of a fund accumulated at the rate of from three to five cents per ton mined, because production, which reduces quantity on hand, is the factor determining the diminution of the security. Failure to observe these xmderl)Tng principles and to distinguish clearly between them has resulted in numerous unsuitable, and often unsuccessful, provisions for amortizing bonds. It should be observed that the first and third causes, above mentioned, possess a suflScient element of uncertainty to produce wide divergence of opinion. The rate of obsolescence, or market decline, is purely speculative in most cases. Frequent errors of judgment in the rate of amortization, therefore, often result, even when the governing principles are clearly recognized. Sometimes borrowers are hampered by arbitrary sinking-fund demands on the part of investors, who lacking faith in the future of the business, seek rapid amortization as a protection. The protec- tion that they should actually have, in such cases, is often not 464 BUSINESS ADMINISTRATION amortization at all, but an intelligent policy governing capital invest- ments, maintenance, surplus and dividends. Bonds should never be amortized without good reason, but when amortization is necessary its true principles should be recognized and applied. The desirability of any given plan of amortization may be tested by the following five considerations: a) Adequacy of the sinking fund or redemption payment. 6) Certainty of payments. c) Reasonableness of the distribution of the burden upon the corporation. d) Effect of the plan upon the market for the bond. e) Expense and labor involved in the plan. It will be noted that the first two are for the protection of the creditors, and that the last three are important to the borrowing corporation. The creditor is interested in knowing that the plan is enforceable, the payments certain, and that the amortization pro- visions are ample to protect him against any decline in the value of the security. The borrowing corporation is interested in securing a just, gradual, and perhaps even distribution of its payments, so that it may be able to make them out of income without distress. The company also desires a plan which will involve as little inconvenience, uncertainty, and expense as possible, and which will enable it to market the issue to the best advantage. The methods of amortization may be summarized as follows : a) Retirement in series or by allotment. 1. Bonds maturing serially. 2. Periodical retirement by purchase in open market. 3. Periodical retirement by allotment and advertisement. b) Redemption fxmd accumulated against maturity. 1. Fimd held by trustee in bank. 2. Funds invested by the trustee in outside securities. 3. Funds invested by the trustee in bonds of the same issue, which are kept alive in the fund. It is a good policy for a corporation to borrow, and for the same reason it is a good poUcy not to amortize the loan under any plan unless it is demanded by investors or by the nature of the risk. If the profit of the business of the value of asse|;s is enduring enough to justify the expectation that the protection ofi the bondholders will remain constant or increase, it is usually unwise to provide for amortization. Serial repayment is a clumsy device, not frequently THE ABMINISTRATION OF FINANCE 465 used when it can be avoided. Amortization by redemption fund is more frequent. See also p. 501. The Meaning of Depreciation. p. 506. Reserves and Other Uses of the Surplus, p. 854. Chapter x. Analysis of a Business Case. 22. CORPORATE REORGANIZATION POLICIES' [This selection is written with particular reference to corporate reorganizations in the railroad field. In principle, however, its appli- cation is general. It should be read not only to secure descrip- tive facts concerning reorganizations, but also with the mind searching for principles of financial administration in times of financial embar- rassment.] The term "reorganization" is used in this study to denote the exchange of new securities for the principal of outstanding, unma- tured, general mortgage bonds, or for at least 50 per cent of the unmatured junior mortgages of any company, or for the whole of the capital stock. These exchanges have been the essential features of the operations which have been described. This exchange of securi- ties must take place upon a considerable scale. The exchange of new securities for old on a large scale usually takes place when a raUroad is unable to meet maturing obligations. But though impending insolvency is the usual occasion it is not the only one. Reorganization sometimes occurs when prosperity is too great as well as when it is too Httle. Or a management may desire to get rid of hampering restriction, or it may desire to manipulate conditions of control. This last named cause — the desire to manipu- late conditions of control — ^has been fortunately an infrequent cause of reorganization. When bankruptcy has at last occurred, three groups of interests take part in the reorganization which must ensue. These are the creditors, who find interest and perhaps principal of their bonds in default; the stockholders; and the bankers and financiers who advance ready money and subscribe to necessary guarantees. Of these the creditors and the stockholders are widely scattered, and are ' Adapted by permission from Stuart Daggett, Railroad Reorganization, pp. 335-86. (Harvard Economic Studies, Vol. IV, 1908.) 466 BUSINESS ADMINISTRATION quite unable to protect themselves by individual action. Their first impulse is, therefore, either to elect committees to represent them, or to authorize self-appointed committees of well-known men to look after their interests. Stockholders in a reorganization have little voice. They are the owners, and all that the corporation has is subject first to the bondholders from whom it has borrowed money. The creditors, then, are the most important factors, and they, like the stockholders, act through committees. There may be a committee for every class of bonds, or one or more classes may join together. The more general a committee, the greater the influence which it seems able to exert on reorganization, and the greater the likelihood that the plan which it approves may be accepted. The fact that a scheme has to meet the criticism of opposing interests during its formation renders it less likely to contain any injustice which conditions make it possible to avoid; and the endorsement of their representatives makes all classes of bondholders more ready to accord it temperate consideration. The situation which bankers and financiers occupy in relation to a bankrupt road is almost equally important. Their aid is essential to a reorganization while that of the officers and receivers of the company is not. And they are not subject to the pressure of imminent financial loss which forces creditors and stockholders to accept plans of which they do not altogether approve. It is true that these bankers may have money invested in the securities of the road. It may even happen that they have been formerly in control. In this case a certain pressure does exist. But as bankers their function is to do one or both of two things; namely, to advance cash to keep the rail- road system together pending reorganization, and to underwrite assessments or the sale of securities. Either one of these involves them in new risks, and in undertaking either they will be only indi- rectly affected by investments which they may previously have made. Their influence on reorganization is strong because they are necessary, and because they are free to participate or not to participate accord- ing to their opinion of the precise reorganization plan proposed. For much the same reason their influence is a wholesome one. The primary conflict which takes place in any reorganization is between the interests of the corporation which needs a lessening of its burdens, and the interests of the securityholders which is opposed to any reduction in their claims. The degree to which the former interest prevails determines the strength of the reorganized company. In THE ADMINISTRATION OF FINANCE 467 this conflict the bankers naturally take the side of the company. As bankers, who advance cash, and who usually receive their pay in securities, they wish to make the corporation prosperous, and to raise the quotations of its securities to a high figure. An important factor also is that as reputable banking firms they wish the future career of corporations which they have handled to reflect credit upon themselves. At the beguming of the ordinary reorganization, then, creditors, stockholders, syndicate, and corporation find themselves face to face. The interests of the sjmdicate and of the corporation most nearly coincide except in so far as the syndicate is an owner of stocks or bonds. The sjmdicate desires a radical reorganization,- — the corporation requires it. But as between stock and bondholders and the corporation; between the stockholders and bondholders; or between the junior and the senior bondholders; there is weU-nigh complete antagonism. The corporation, to repeat, needs a reduction iu the fixed charges which it has to pay. The securityholders wish to lose as little as possible. The stockholders hope to force sacrifices from the bondholders, and the bondholders to levy a heavy assess- ment upon the stock. The junior bondholders call upon their seniors to bear their part; and the seniors reply that they are well secured and that the juniors and the stock must take care of themselves. The first question which arises is that of the cash requirements. How much cash must be raised to pay off the floating debt, and how much working cash capital wiU the new corporation require? It is almost always true that a large floating debt has accumulated prior to reorganization. In general there are two ways by which cash for floating debt and working capital can be raised: (i) By assessment on security- holders. (2) By the sale of securities. Sales of securities may comprise the sale of securities of the bankrupt, or of other corporations held in that company's treasury, or they may be sales of part of new bond or stock issues reserved for that purpose. The case of an assessment is very different. Securities may be sold to outsiders or to present securityholders. In the one event no pressure at all can be brought to bear; in the other only that of the indirect loss which the difficulties of the reorganizing company would involve. An assessment, on the other hand, is levied solely on securityholders and is compulsory. Stockholders or bondholders 468 BUSINESS ADMINISTRATION who refuse to pay are ordinarily debarred from all participation in the reorganization, and lose all chance to recoup their losses from their share in subsequent prosperity. In return for the assessment some security is usually given, so that from one point of view an assessment and a sale resemble each other. The results of the discussion may be briefly summed up as follows: First. Reorganization is most frequently an attempt to extricate an embarrassed company from its difficulties. Second. These difficulties can generally be traced either to an unrestricted freedom of capitalization, or to destructive competition. Third. The shape in which trouble appears is likely to be that of a large floating debt or of excessive fixed charges; either or both of which may have brought the corporation to a critical condition sometime before the actual coUapse. Fourth. The best practice favors the retirement of floating debt by assessments on securityholders, though sales of securities are sometimes resorted to, or a combination of sales and assess- ments is employed. Fifth. Fixed charges are composed chiefly of interest and rentals. Interest payments are reduced by the retirement of out- standing bonds, by new bonds which bear a lower rate of interest, or by income bonds or stock, or by a combination of securities with a fixed rate of interest with securities upon which payment of interest is optional. Rentals may be reduced by direct negotiation, or the leased roads may be absorbed into the main system, and their security- holders receive new stocks and bonds as above. Sixth. The new bonds are of fewer kinds and have longer terms to run than the bonds which they displace. Seventh. This reduction in fixed charges imposes a loss on the greater part of securityholders, both irf respect to the annual interest which they can claim, and in respect to the selling price of their holdings. A similar loss is suffered by those securityholders who pay the required assessment. Eighth. The loss falls on securityholders according to the seniority of their holdings- — those bonds escaping which can expect to satisfy their claims from the selling price of the railroad at fore- closure sale. Ninth. The most important development in reorganization practice has been the increasing use of new securities bearing a fixed THE ADMINISTRATION OF FINANCE 469 rate of interest with new securities bearing a conditional rate of interest; a use which may make the losses of jimior securityholders temporary instead of permanent, and yet safeguard the interests of the corporation. In this connection preferred stock has gaiaed in popularity over income bonds. Tenth. This development, and the issue of new securities for floating debt and for other purposes, have caused the capitalization after reorganization in all but one of the cases whidi we have exam- ined to exceed the capitalization before. Eleventh. In order to perfect a reorganization additional pro- visions are often inserted, which protect junior securityholders against the reckless issue of new bonds, supply the corporation with ability to make necessary betterments from capital account, protect the corporation from sudden changes in control, and similarly supple- ment the main clauses. See also p. 450. Recitals in Bonds. p. 854. Chapter x. Analysis of a Business Case. [A reorganization in anticipation of a prospering enlarged business.] D. Financial Policies and Frequently Used Devices The preceding section dealt with the financial policies and tech- nical devices which the manager calls into use rather infrequently when he is bringing about some relatively permanent change in the capital used in the business. We turn now to day-to-day operations, devices, and policies. Any compehensive treatment of day-to-day financial operations would take us far beyond the scope of this present course. We must, therefore, again use a sampHng method. We begin (Selections 23-26) by getting some idea of the technical devices in this field which are of service to the financial manager. Here we take as our samples two important accounting records — the balance sheet and the profit-and- loss statement — and the more usual commercial credit instruments, such as the promissory note, the trade acceptance, and the bill of exchange. The use of these commercial credit instruments will be so readily understood that httle need be said concerning them. The accounting records call for a word of comment. We have not at this time the slightest interest either in "good accounting form" or in correct accoimting terminology. We wish to 470 BUSINESS ADMINISTRATION understand the balance sheet and the profit-and-loss statement not as ends in themselves but as means to ends. If we can reach an under- standing of these financial statements or reports, (a) we can see how they are of service to the financial manager in presenting data which will aid him in arriving at business judgments, and (b) we can get a clearer view of the consequences of financial acts or policies, because the consequences are always reflected in these financial statements. An ability to read understandingly a balance sheet contributes not a little to one's ability to understand financial poUcies and the conse- quences of financial acts. Turning from technical devices, we take up (Selections 27-29) the story of short-time advances to a business, giving particular attention to the attitude of bankers and trade creditors. We then try to understand (Selections 30-32) what becomes of the gross earnings of a business. In large part this matter explains itself, but there are some points which require discussion. Below there is given an ordinary form of the income statement of a corpora- tion. By glancing down through it one can readily sense the issues that arise, one after another, in the disposition of gross earnings. Those items which come up for discussion in Selections 30-32 are put in italics. a) Gross earnings from operation or manufacture b) Deduct operating or manufacturing expenses, including repairs, renewals, and depreciation and the result is the c) Net earnings from operation or manufacture d) Add income from other sources and the result is the e) Total income f) Deduct taxes and we have the g) Balance applicable to fixed charges h) Deduct interest j) Deduct rentals j) Deduct sinking fund and other charges, such as special reserves, and we have the k) Balance applicable to dividends and surplus t) Deduct dividends and we have the m) Surplus from the year's operations The section closes with an interesting bit of case material (Selec- tion 33), showing how one important firm handled its finances during a period of depression. It is particularly interesting in that it shows so clearly the interdependence of business relationships. There is no THE ADMINISTRATION OF FINANCE 471 such thing as financial policy separate and distinct from marketing policy, production policy, or personnel policy, to cite only a few of the more important relationships. PROBLEMS 1 . A new corporation has just been formed. The stockholders pay cash at face value for 1,000 shares of stock at $100 per share. Give the balance sheet. 2. The corporation, through its officers, buys land for $8,000, erects a factory at a cost of $15,000, puts in equipment at a cost of $20,000. Give the balance sheet. Would many accounts be summarized to get the figures for this balance sheet ? 3. A corporation, in seeking trade credit, gave the following statement to the firm from which it sought the credit. What the Business Has Cash Bills Receivable (Net) Accounts Receivable (Net) Merchandise Land Buildings Machinery- Fixtures Total . 281 421 6ig 248 934 000 400 926 548 03 Liabilities What the Business "Owes' Notes Payable Accounts Payable Bonded Debt Mortgages Accrued Liabilities Total Capital Stock Outstanding. . Surplus-Profits Reserves Total ISO 28 12 281 000 216 000 9fS 141 000 goi 505 548 41 14 99 81 a) Is this a balance sheet or a profit and loss statement ? b) Set up any division you please in surplus and undivided profits. What, to your thinking, is the difference between the two ? c) Try to have this company declare and pay a 10 per cent cash dividend I) Instead, declare a 10 per cent scrip dividend. How will the state- ment stand ? Do not trouble yourself about accounting terminology in answering this. Have the account tell the truth in your own language. e) Carry $5,000 undivided profits to surplus and $1,000 to reserve against storms. /) A fire destroys $1,500 worth of uninsured merchandise. Show effect upon the statement. g) Sell $10,000 merchandise getting $6,000 in cash. How do you account for the other $4,000 ? k) If this concern needs funds, why does it not "use some of the sur- plus," say, by selling part of it ? 472 BUSINESS ADKINISTRATION i) The concern suddenly decides it has "good-will" to the amount of $15,000. Have this appear in the statement. Do not trouble .yourself whether this is good accounting practice. j) Can one judge the success or lack of success of a business house by the cash bank balance it shows at the end of the fiscal year ? k) What is meant by saying that financial policies are reflected in the accounts ? ^ 4. What are some of the subclasses of current assets ? Why and when is it expedient to have several classes shown on the balance sheet ? 5. What are some of the subclasses of liabilities? Why and when is it expedient to have several classes shown on the balance sheet ? 6. What parties are interested in the balance sheet of corporations? Why are they interested? 7. "It may be said that a balance sheet is a cross-section of a business showing how it stands at a particular moment of time." What does the profit and loss statement show ? The budget ? 8. "It is well for the reader to bear in mind at this point that a balance sheet is only an expression of opinion regarding the financial condition of a business at a given time." Explain. 9. Study Selection 24 B, making certain you know the meaning of the terms used and how loss and gain is arrived at. 10. What is meant by book credits? checks? promissory notes? drafts? biUs of exchange? acceptances? 11. "The open accounts receivable of a manufacturer or wholesaler are looked upon as a much better and more liquid asset than the accounts receivable of a retailer." Why ? 12. "The objects and advantages of requiring promissory notes from purchasers are numerous. First, the note is the best evidence of the debt. Second, the note definitely settles the amount due from the buyer to the seller. Third, the note is an effective aid in compelling prompt payment of the account. Fourth, a promissory note is more readily transferable and salable than a book account. Nevertheless, the use of book-aCcount credit is far more extensive than the use of promissory notes." Why is book-account credit more extensively used ? 13. "It is not always good business policy for a company to take as much trade credit as it can get." Why not ? 14. "The reader must avoid any impression that one merchant may look to the one who handles the goods earlier in the chain for all the capital or credit needed in the conduct of his business." Is this true ? 15. "Who, then, suffers by the retailer's improvident credit granting? First, of course, the retailer himself. Second, the honest consumer. Third, the manufacturer, jobber, and other distributors." Explain. THE ADMINISTRATION OF FINANCE 473 16. If you \7ere making a short-time loan to a retail merchant what items on the balance sheet would be of particular interest to you ? 17. Compare the value of mercantile agencies, local credit men's associations, and the financial statements of the firm itself as to the reliability of their information as a basis for (i) extending credit; (2) investing in the business. 18. Study the reading "What a Bank Wishes to Know before Making a Loan" to see whether you understand why it is worth while to call for each item. 19. Some banks wish an industrial engineer to study a factory before making a loan. Why ? 20. "Enough has been said to indicate the true purpose and safe extent of short-term borrowing, whether from trade credit, bank loans, or the sale of short-term obligations to the public, (a) To produce, ship, store, sell and collect for the regular product of the business, when there is reasonable certainty of turning the transaction in time to repay the loan, (b) For current or capital expenditures pending the receipt of funds from the sale of stock or bonds which have been under- written, and the proceeds of which are expected in time to liquidate the temporary loan, (c) To carry unusual seasonal stocks, production, or accounts receivable which will ordinarily be liquidated in time to repay the loan or amply secure its partial renewal, (d) To pay dividends which have been earned but are temporarily locked up in assets that will be normally liquidated in time to repay the loan." Cite instances of each case. 21 . How may a merchant borrow on his accounts receivable ? Is it expedi- ent to do so? 22. "Actual surplus is usually created out of net earnings from operation. Fictitious surplus may be created by a stroke of the accountant's pen, simply by writing up the value of assets or charging maintenance items to inventory accounts." Illustrate. 23. What is a surplus? From what sources may it be obtained? For what purposes is it usually acamiulated ? 24. "Book surplus is distributed by {a) cash dividends; (6) scrip dividends; (c) stock dividends; (d) the creation of special reserves; (e) charging off a certain amount to make good, losses which have impaired capital, or to squeeze the water out of original over-capitalization." Be sure you know the meaning and method of each way. 25. "Whether or not all or part of the surplus should be distributed in the form of dividends wiU require careful consideration of many factors. Summarized they are as follows: o) Can the business safely reduce its liquid assets by the amount neces- sary to pay the dividends ? 474 BUSINESS ADMINISTRATION b) Is the margin between selling price and cost decreasing to such an extent as to threaten the profits enjoyed in the past ? c) Have all expenditures for capital accounts been justified and have they been bona fide expenditures ? d) What is the company's credit position and its ability to raise needed sums for expansion through the issue of capital stock or bonds ? e) Is the investment market favorable ? f) Can the profits safely stand increased fixed charges or increased amounts for dividend distribution ? " Explain each item. 26. Explain what is meant by (o) depreciation, (b) replacement, (c) better- ment, (d) extension. What confusion is likely to result in charging these items to their respective accounts ? 27. "In a general sense depreciation means a decrease in value; apprecia- tion on increases. Decrease in value may be caused by: a) Deterioration in physical condition, due to use or corrosion. b) Obsolescence. c) Changing business conditions, due to either new legislation or fluctuating market demands. (t) Unavoidable accident, or destruction by act of Providence." Should these be charged to capital account or to current expenses ? 28. The XYZ company contemplates for the coming year the following expenditures: (o) a slate roof to replace an iron roof on one of its main buildings; (6) an extension of its fabricating plant to house several new machines; (c) erection of a building to serve as a recreation room and lunch counter for employees; (rf) to replace a wooden warehouse, which cost originally $40,000, with a re-inforced concrete building, expected to cost $70,000; (e) to buy a trade-mark for $100,000. The finance committee proposes to finance these purchases by an issue of twenty-year bonds. The slate roof is expected to cost $2,500, against $1,000 for the iron roof. Extension $50,000, and the employees' building $35,000. Discuss the wisdom of this proposal. 29. What would happen if a corporation paid dividends annually without making allowance for depreciation, replacement, and repairs ? Would the original price of the stock return to the stockholders? Would there necessarily be a loss to them ? 30. What is a stock dividend ? A scrip dividend ? What are the advan- tages of such forms of dividend payment ? Are they advantages to the stockholder ? 31. "Scrip dividends really partake of the nature of a forced loan." Why or why not ? 32. Discuss the policy of paying dividends where (a) losses in fixed capital have occurred; (6) where losses in circulating capital have been sus- tained. THE ADMINISTRATION OF FINANCE 475 33. "It is often assumed that adequate and regular profits, provided they are correctly estimated, justify dividends. This assumption, however, is the direct source of a large proportion of financial embarrassments." Why? 34. What are the advantages of a stable dividend policy? By what methods may a stable dividend rate be maintained in spite of fluctuat- ing earnings? 35. What are the chief characteristics of a sound dividend policy? 36. Under what conditions or circumstances are the directors of a corpora- tion justified in borrowing the money with which to pay dividends ? 37. What is meant by saying that a concern may be economically sound but in financial straits ? 38. A concern decided that it needed to invest an additional $15,000 in machinery. Cite possible ways of getting the funds. Show effects of each way upon the balance sheet. 39. Could a small concern have used the methods sketched in Selection 2:^ ? 23. WHAT THE BALANCE SHEET SHOWS ABOUT FINANCIAL MATTERS' [This selection is written from the point of view of an auditor. His statements concerning what "should" be done or what is "right" may, however, be regarded not as discussions of good accounting practice, but of sound financial policy.] The credit man of today, whether he be commercial banker, investment banker, manufacturer, or merchant, in seeking informa- tion as to the financial standing of a concern has many avenues from which he can obtain data. The mercantile agencies with their investigations and reports; the credit clearing houses; the local credit men's associations; the opinion of those with whom the con- cern has done business in the past; all of these are available. These sources are, however, indirect and are all based largely upon hearsay and opinion. They may be satisfactory enough in indicating the general reputation of a concern; but to determine its present financial standing they are not only inadequate but are dangerous and obsolete as compared with the concern's own financial statement — provided, of course, that this statement is true, properly prepared and verified. These financial statements are technically known as the balance sheet and the profit and loss statement. A balance sheet is a state- ment showing on one side aU of the assets of a concern as of a certain ' Adapted from Paul Havener, Analysis of Financial Statements. (Privately printed.) 476 BUSINESS ADMINISTRATION date and on the other side all of the liabilities. Custom in this country places the assets on the left-hand side and the liabilities on the right-hand side. The difference between the assets and the Uabilities, if the assets exceed the liabilities, is the net worth. In the case of corporations, this net worth will consist of capital stock, surplus, and undivided profits. In partnerships, the net worth will be the capital accounts of the partners, together with any undivided profits. If the liabilities exceed the assets, there is no net worth or capital belonging to the owners left, and the difference represents the amount that the concern is insolvent. The left-hand side of the balance sheet shows what property the business has and the right-hand side shows to whom this property belongs. The profit and loss statement is an analysis of the operations of the business for a certain period of time, showing the total income and the expenses and losses during the period. It may be said that a balance sheet is a cross-section of a business, showing how it stands at a particular moment of time. The profit and loss statement shows how it arrived at this position from a previous one. The assets of a business are of two distinct types — ^fixed assets and current assets. Both of these can be further divided, but to keep these two kinds of assets always separate is one of the most important things in reading a balance sheet. Fixed assets, also known as permanent assets, invested assets, etc., are those which represent capital sunk into the business that cannot be converted into cash except upon the Uquidation of the business. They are usually such assets as land, buildings, machinery, equipment, furni- ture and fixtures, patent rights, good-will, etc. These assets are not in the regular course of business convertible into cash, and there- fore cannot be used to pay the current Uabilities of the business. Current assets, also known as liquid assets, floating assets, quick assets, working assets, represent cash and such other assets as in the regular course of business will be cash: such as accounts receivable, notes receivable, merchandise on hand, etc. All past due or doubt- ful current assets should be called slow assets. The purpose of most businesses is to convert current assets into cash as soon as possible. The liabilities of a business are also of two types, but the dis- tinction is not so great as in the case of the assets. The fixed liabilities are obhgations which do not mature for several years. They are usually secured by mortgage on the fixed assets, such as mortgage notes, bonds, purchase money obligations, etc. Current liabihties, THE ADMINISTRATION OF FINANCE 477 sometimes called quick liabilities, floating debts, etc., are liabilities which will have to be paid in cash within a short period of time, such as accounts payable, notes payable, pay-rolls, etc. We have before us the balance sheet of A, B and Company, which is as follows : BALANCE SHEET— A, B & CO. As of June 30, 1916 Assets Fixed: Land and buildings, etc $ 50,000.00 Machinery and equipment 75,000.00 Horses, wagons, etc 5,000.00 $130,000.00 Slow: Accounts past due $ 10,000 . 00 Due from officials 20,000.00 $ 30,000.00 Current- Cash on hand $ 21,000.00 Notes receivable 2,000 . 00 Accounts receivable 175,000.00 Inventories 75,000.00 $273,000.00 Deferred: Prepaid insurance and licenses $ 600.00 TOTAL ASSETS $433,6oO.OO Liabilities Current: Accoimts payable $ 40,000 . 00 Notes payable 60,000.00 TOTAL liabilities $roo,ooo.oo NET worth $333,600.00 Consisting of: Capital stock $200,000 . 00 Surplus 83,660.00 Profit per year 50,000.00 $333 .600 00 478 BUSINESS ADMINISTRATION The difference between the total assets and the total liabilities of any business, as previously mentioned, is the net worth. An analysis of the different classes of assets and liabilities will show clearly where this net worth is invested. With the balance sheet as a whole visualized before us, let us dissect each item therein. Fixed assets. — The first item of the fixed assets consists of land and buildings. On this particular item we ask the following questions: Are there any liens or mortgages against the real estate and buildings ? Is the land at cost ? Is the building at cost less a reasonable allow- ance for depreciation ? Does the concern own the land and buildings ? Frequently a concern will have mortgages or purchase money obliga- tions on this item and only show same on the balance sheet at a net value, that is, the value of same after deducting the liens thereon. This is wrong. These liens or mortgages may fall due within a short period of time, seriously upsetting the relation existing between the current assets and current liabilities. Again, there is the question of the basis of value. Occasionally concerns, during a bad year's business, revalue their real estate by charging same with arbitrary amounts and crediting profit and loss. Real estate, which is a general term including both land and buildings, should be valued at the original cost in the case of land, and cost less reasonable allowance for depreciation in the case of buildings. Any liens or mortgages thereon should appear among the liabilities of the company. The second item in the consideration of fixed assets is usually machinery and equipment. The important thing governing their valuation is depreciation. Depreciation is a general term and covers the gradual diminishing in value of an asset whether by wear and tear or by obsolescence. Many failures of concerns with long- established records, who have paid large dividends and big salaries to their stockholders and employees, may be traced to the failure to provide properly for depreciation on their machinery and equipment. The machinery in a factory can become obsolete over night in this age of modern invention. All items such as furniture and fixtures, automobiles, wagons, horses and mules should be revalued each year. The rate of depreciation on them varies so much, depending entirely on the use to which they are put, that no fixed rate of depreciation is satisfactory. Hence, in summarizing, it may be said that tangible fixed assets should appear on the books of the company at cost less full deprecia- THE ADMINISTRATION OF FINANCE 479 tion. In the case of liens or mortgages thereon, these should be shown among the liabilities and not deducted from the assets. Intangible assets, such as good-will, patent rights, trade-marks, copyrights, franchises and concessions, are not always to be condemned, as in many instances they are assets easily converted into cash. They should always, however, appear on the balance sheet under a separate heading and should not be included with the tangible fixed assets as they now are by many of oiur largest corporations, desiring to cover up so-caUed water in the capital stock issued. Current assets. — The first item of the current assets is usually cash. In more cases than you might suspect, this item is misleading. Banks sometimes ask concerns that are in the habit of overdrawing their accounts to deposit money with them, giving a certificate of deposit therefor. The concern then takes these certificates to other banks and borrows on them to the full amount of the certificates. Cash on hand should consist of money in the cash drawer and of funds in bank subject to check: money in cash drawer should, of course, be comparatively small, except in case of concerns located in places where there are no banks; from the funds in bank should be deducted all unpaid outstanding checks. Pledged certificates of deposit, miscellaneous paid bills, due bills from oflEtcials or employees are not cash items and should never be so called. In this balance sheet notes receivable appear too small in relation to the other assets and should lead to inquiry as to whether or not the concern has rediscoimted any of its notes. It is customary for a concern to rediscount its customers' paper and, if same is not paid at maturity, the concern rediscounting has to take it up, so this redis- counted paper is a contingent Uabihty which is liable to become a real one at an}' moment. The financial statement of a concern should show somewhere the possible liabihty covering all paper rediscounted. The remaining notes on hand should be due from customers of the company. Notes from officers, employees, and stockholders should be shown under a separate heading in the balance sheet. Past due notes and doubtful notes should be put under a separate heading called "slow assets." The thing to ask in connection with accounts receivable is how these accounts were created, whether entirely by legitimate trans- actions of the company or partly by items due from officers, employees, stockholders, or merchandise sent on consignment. If the latter be the case, these items should be eliminated and appear elsewhere in 480 BUSINESS ADMINISTRATION the balance sheet. Another important matter is to ascertain whether any accounts have been sold to discomit companies or assigned for any reason whatsoever. When accounts are sold to discount companies, the credit risk has not been eliminated; the business transaction is not closed, nor has the money been received from the customer. Inventories. — ^The important thing to consider in inquiring into the inventories of a company is the quantities, quality, and price at which the inventory was taken, and whether or not there are any liens on any of the inventories or consigned goods included therein. This is probably the easiest part of the balance sheet to state incor- rectly, and the only way that you can be sure the inventory appears at the right valuation is to know that it has been thoroughly tested as to quantities, quality, prices, footings, and extensions by disinter- ested outsiders. Deferred assets. — Deferred assets consist principally of prepaid insurance and hcenses. It is usually a small item except in cases of agricultural corporations, who close their books in the middle of a crop season. In many cases, inventories of supplies and materials should be put under this heading. It simply represents expenses prepaid, of which the following operating period will derive the benefit. In comparison with the other assets of the business, they should be relatively small. Current liabilities. — In regard to the liabilities of the business, the first item is usually accounts payable. This is an item which is readily manipulated and liable at all times to be understated. In auditing the affairs of a concern it is one of the most difficult items to verify. Notes payable, like accoimts payable, can be easily understated. In the balance sheet or auditor's report it is best that notes payable to banks, to note brokers, and to other creditors be shown separately. An important matter in examining this item is to ascertain whether or not any money has been borrowed by the proprietors or officials in the concern's name and turned over to the business with a credit to the capital accoxmt of the proprietor, instead of appearing as a liability of the business. Liabilities for pay-rolls and taxes, it should be remembered, are first hen on the assets, and in case these items are out of proportion, remember that they wUl be paid before anything else, perhaps leaving Uttle for the unsecured, common creditors. THE ADMINISTRATION OF FINANCE 481 Amounts due employees, officers, and relatives may in some cases be properly shown under a heading separate from current liabilities. Nevertheless, it should be distinctly kept before you that, in case of financial difficulties, such accounts usually get paid before any others. Contingent liabilities and reserves. — Full information should appear somewhere on the financial statement as to all possible contingent liabilities. We have already spoken of notes receivable, rediscounted, and accounts receivable sold. Accommodation endorse- ments have not infrequently been the cause of the failure of a pros- perous business. Full inquiry should be made as to whether there are any such endorsements outstanding, as they may appear at any time and demand payment in full. Inquiry should also be made as to- whether there are any suits pending in the courts, or judgments which might make a material difference in the financial position of the con- cern. With the employees' liability law and other similar measures, it is possible for liabilities of this nature to arise at any time. Out- standing contracts, leases, moneys borrowed from members of family should be looked into as to whether or not they have claims on the business. Special attention should be paid to reserve accounts. Reserve for depreciation should be deducted from the asset which it affects; reserves for taxes, for pay-rolls, and for interest are not reserves, but accrued liabilities, and should show among the current liabilities. Reserve for bad debts, when appearing at a lump sum of say $5,000.00 or $10,000.00, should be closely investigated. Reserves for bad debts should not appear on the liability side of the balance sheet, but be deducted directly from the accounts affected. In some instances, an arbitrary amount set aside like this is not enough to cover the accounts which the proprietors know are worthless. It is only by a detailed inspection of each account individually that the amount necessary can be determined within any degree of accuracy. A reserve for contingencies is usually a part of the capital of the busi- ness, consisting of profits temporarily withheld. Fixed liabilities. — Fixed liabilities, such as long-time bonds, should appear on the balance sheet under a separate heading among the liabilities and not erroneously deducted from the value of the assets against which they are liens. In the case of serial bonds, a certain amoimt of which fall due each year, the amounts falling due within a year of the date of the balance sheet should be shown as current liabilities and not as fixed ones. Due caution should be 482 BUSINESS ADMINISTRATION exercised in ascertaining upon just what assets the fixed liabilities, that is, the mortgages and bond issues, are liens. Occasionally they are first lien, not only upon the real estate of the company, but upon all other assets, and this should plainly appear on the statement. Capital, or net worth. — ^The important thing in analyzing net worth is first to see how the capital is invested and how it originated. Often the surplus of a concern is not real surplus, but a manipulation of the values of the fixed assets. 24. WHAT THE PROFIT AND LOSS STATEMENT SHOWS A' The examination of the profit and loss statement is principally a matter of comparison, the object, of course, being to see whether the business is going forward or backward. Let us now inspect the profit and loss statement of A, B and Company, just as we did their balance sheet. On page 483 appears the analysis of profit and loss of A, B & Company. The profit and loss statement is usually divided iato sales, less cost of sales, which gives the gross profit, less expenses, which leaves the operating profit, then special deductions and losses are taken off and special additions are added thereon, giving the net income for the year. Sales. — Comparison should be made with previous periods as to the volume of sales, and, in well-conducted businesses, this should usually show an increase. Inquiry should be made as to whether or not there is included under the heading of sales goods sent out on consignment or goods shipped to subsidiary companies, branches, or agencies. Such items are not sales but part of the inventory until sold. The total sales should be compared with the inventory in order to determine the munber of times same has been turned over during the period. Sales should also be compared with accounts receivable, as this will show how fast accounts are being liquidated, and also, in many instances, bring to Ught whether any accounts are included in accounts receivable not originating in sale of merchandise. From the total sales should be deducted full allowance for returnable packages, freights, discounts, etc. ' Adapted from Paul Havener, Analysis of Financial Statements. (Privately printed ) THE ADMINISTRATION OF FINANCE 483 Cosi of goods sold. — ^The most approved manner of arriving at the cost of goods sold, whether for mercantile or manufacturing con- cerns, is as follows: To the inventory of the goods on hand at the beginning of the year should be added the purchases of goods made during the year, or raw material plus cost of manufacture in case of manufacturing plants, plus any other direct charges, such as incoming freight, incoming drayage, etc. This gives the total goods to be accounted for. The inventory of goods on hand at the end of the year represents all goods which have not been sold, and is therefore deducted from the "total goods to be accounted for," ANALYSIS OF PROFIT & LOSS— A, B & CO. For Twelve Months Ending June 30, 1916 Sales $500,000.00 Goods on hand first of year $ 60,000 . 00 Goods purchased during year 415,000.00 Total to be accounted for $475,000.00 Inventory at close of year 75,ooo . 00 Balance cost of goods sold $400,000.00 Gross profit $100,000 . 00 Expenses: Rent $ 10,000 . 00 Salaries 20,000 . 00 Taxes 2,000 . 00 Interest 4,000 . 00 Miscellaneous 11,000.00 Total expenses $ 47,000 .00 Operating profit for year $ 53,000 . 00 Less: SPECIAL DEDUCTIONS & LOSSES: Bad debts $ 5,000.00 Fire loss 8,000.00 $ 13,000.00 Plus: SPECIAL ADDITIONS: Profit on sale of real estate $10,000.00 $ 3,000.00 Net income for year $ 50,000.00 Percentages: Gross profit 25 % on cost 20 % on sales Expenses ii-7S% on cost 9.4% on sales Operating profit 13 . 25% on cost 10 . 6% on sales Net profit 12.5 % on cost 10 % on sales 484 BUSINESS ADMINISTRATION leaving balance as cost of goods sold. This, when deducted from the total sales, gives the gross profit for the period. It is therefore obvious that the amount at which the inventories are valued deter- mines to a great extent the profit for the period. Expenses. — ^The expenses of the business should be carefully compared with the previous periods to see whether or not they have increased and whether or not the business is being managed economi- cally. The item of interest should be carefully looked into as com- pared with the notes and accounts payable, as a check on the total of same outstanding. When miscellaneous expenses are shown at too arge an amount, details should be required. Salaries of oflScials should be in proportion to the size of the business. When the total expenses are deducted from the gross profit, there then remains the operating profit for the year — from which, however, further deduc- tions must sometimes be made. Special deductions and losses. — All extraordinary losses, such as bad debts, fixe losses, losses through damage suits, should be absorbed during the period in which they are discovered and not charged di- rectly to surplus. When these items are charged directly to surplus, the profit and loss statement does not show the movement of the business from one balance sheet to another as it should. The amount charged ofi on account of bad debts should receive due consideration as compared with the total sales. Special additions. — All extraordinary profits, such as profits realized from the sale of capital assets, should appear in the profit and loss statement under this heading, and same should be added to the operating profit for the year, leaving the net income. Somewhere in the profit and loss statement shoxild appear a detailed statement of the percentages showing the gross profit based both on cost and on sales. Expenses, operating profit, and net profit should be treated in the same manner. On account of the confusion in the minds of many as to whether percentages should be figured on sales or cost, it is usually best to figure them both ways. The important thing in connection with the examination of the profit and loss statement is the comparison of same with previous periods and the comparison of same with balance sheet. See also p. 333. Measuring Aids May Result in Expense Standards. p. 335. Measuring Aids Reflected in the Profit-and- Loss Statement. THE ADMINISTRATION OF FINANCE 48s [This diagram should be compared with the profit and loss state- ments on pages 336 and 483. It is drawn to meet the needs of a manufacturing business, whereas they are designed for mercantile ■businesses. There is no difference in principle.] "TIQ V BBOl p ^1 1" s sss: 'i ||3H B S 1 llUff s Lit i I 'II 3 S! PI sshi i%} sii III 52& ssl Hi I I si c9 11 SI ..* 8» .K ' By Scovell, Wellington & Company. 486 BUSINESS ADMINISTRATION 25. FINANCIAL POLICIES REFLECTED IN ACCOUNTING RECORDS" Accounting is a matter of policy as well as of principle. That is, judgment must be employed to determine under given circumstances, what principles apply and how they are to be appUed. Like all good- instruments, accounting principles may be purposely, or ignorantly, abused and misapplied. To be productive, wealth must be supervised; nor is it possible to remove altogether the element of risk inherent in all forms of enter- prise. There is a big himian factor in business. For this very reason business is subject to manipulation which may be unfavorable as well as favorable in character. Like the modeling clay of the sculptor, wealth submits itself to an endless variety of formations. It is because of this that we speak of the policy of one company as conserva- tive, of another as radical, of another as aggressive, of still another as progressive or unprogressive. What do we mean by these terms ? Too frequently we employ them without any very definite signifi- cance and without more than a superficial inspection, or possibly from mere hearsay. The financial poUcy of a corporation is unavoid- ably linked up with its accoimting policy. Indeed, it is through its accounts that this poUcy takes definite form. Usually a poHcy resembles a chemical compound and can be studied best by being split up into its elements. Some of the elements entering into the formation of the financial policy of a corporation and which are reflected in its accounts are: 1. The attitude toward dividend payments. 2. The method of meeting current Uabilities. 3. The method of raising additional capital. 4. The selection of customers and collection of accounts. 5. Payments of employees. 6. The funded indebtedness. I. Some corporations make it their policy to pay annual dividends of a given amount and vary from that policy only in times of extraordi- nary prosperity or extreme depression. Usually such corporations have their capital stock scattered among a large number of holders who depend upon it to afford them a permanent and unvarying income. On the other hand there are many concerns that have no crystallized dividend policy, but which act upon the requirements of ■ Adapted by permission from E. A. Salieis, " Financial Statements Made Plain," in the Magazine of Wall Street, Vol. XX (191 7). THE ADMINISTRATION OF FINANCE 487 the occasion. Such companies are hardly for the steady-going investor. Instead of selling bonds or stock to secure additional capital, profits may be retained and invested. In this way the surplus account may be increased until it rivals and possibly surpasses, in size, the capital stock account. Truly, this is conservative policy, yet it is not the kind of policy best suited to the investor who desires to receive his profits as they accrue, rather than in the form of a large stock dividend years later. The power to pay or withhold a dividend, assuming the existence of profits, is in the hands of the board of directors. Whether or not to declare it is optional with them. Once declared, a dividend becomes the direct obligation of the company and must be paid. 2. Current liabilities constitute a most vital responsibility. They demand the constant vigilance of the management. Sometimes financial embarrassment occurs from the inability to secure enough cash to meet current liabilities, even though the concern be far from insolvency. This situation is liable to arise when general stringency occurs in the money market, it then being difficult to obtain aid through the hypothecation of other assets. Sometimes current liabilities are converted into funded liabilities to avoid immediate trouble — a procedure which only too frequently paves the way for future trouble. As a palliative against an extraordi- nary situation this plan may be justifiable, but as a permanent policy it is to be condemned. By comparing balance sheets for a consider- able period of years the tendency of current liabilities to increase may be noted; and if it is considerable the explanation therefor should be sought. The only justification for a permanent increase in ciu-rent liabilities is a corresponding growth in the volume of business transacted. Without this, the cause may be in over-buying or in the inability to meet obligations falling due. 3. The ease with which a corporation can raise additional capital to finance its growing demands is a pretty good index of its general reliability. Strong companies can usually choose what means they wish to encourage the influx of other people's money, but weak ones are driven to extremes to find some suitable form of security. Some of our railroad companies have exhausted their ingenuity and our language in their search for picturesque names for what in plain English ought to be called second, third, and fourth mortgage bonds. In general, new capital ought to be obtained through -the issue of sufficient stocks or bonds to secure the required amount of money 488 BUSINESS ADMINISTRATION without further resort to temporary bank loans, which, under the circumstances, might be made with difficulty. 4. Too much circumspection in the selection of customers is hardly possible, although the importance of this consideration varies greatly in different lines. Where sales of commodities or services are mostly for cash little attention need be given to possible losses from bad debts. Where many sales are made on credit the considera- tion becomes one of prime Importance. An up-to-date concern uses all available facilities to determine credit risks. Employment of mercantile agencies, co-operation with other corporations, and a systematized office practice are among essential features that char- acterize the work of progressive corporations. The investor will do well to go beyond the statement of accounts receivable shown in the balance sheet and attempt to learn to what extent worthless or doubtful accoimts have been included. If the balance sheet has been certffied by a firm of competent public accountants their vise may be accepted as a guaranty against occult and disreputable practices. 5. The investor should note the satisfactoriness of the wage system in use. If it is a good one it will be contrived to reward diligence and trustworthiness and to discourage laziness and inefficiency. In the long run no corporation can prosper with a labor force composed of dissatisfied, indifferent, or ignorant men. Managers are now thoroughly convinced that future leaders are best grown in a home soil under surroundings which encourage the display of initiative and force. 6. With the aid of the principles that have been discussed, study the funded indebtedness from all standpoints- — from that of the capacity of the corporation to bear fixed charges, from that of the mortgage hens that underlie the bonds, from that of future probable requirements for additional capital, from that of the relative size of bonded indebtedness compared with capital stock and surplus, and from the standpoint of legal and technical requirements. See also p. 828. Accounting as an Administrative Aid. 26. TYPES OF COMMERCIAL CREDIT INSTRUMENTS' A promissory note is an unconditional written promise by X (the maker) agreeing to pay, either on demand or at a definite future date, ' Taken by permission from H. G. Moulton, Principles of Banking, pp. 32-35- (The University of Ciiicago Press, igi6.) THE ADMINISTRATION OF FINANCE 489 a sum of money to Y (the payee) or to Y's order or to bearer. It may or may not designate the place at which pa3mient is to be made. Promissory notes may be issued by institutions and governments as well as by individuals. Bank notes, United States notes, certificates of deposit, etc., are forms of the promissory note. To indorse a note the payee writes his name across the back of the instrument. This act makes the payee, like the maker, responsible for the payment of the note. Notes may also be indorsed by third parties, A PROMISSORY NOTE after datt for value received tfw undersigned promise to pay to ttie ofder ot HE NATFONAL CITY BANK OF CHICAGO at Its BanUnt Houx In aicaao Illinois, altli tntertsi AFTER MATURTTY at tlu rale ot seom per emt ptr annum unttt paid and lo/A oats of colleellon and a reasonable altomey fee If not paid at maturity, Presantnimt and demand for patlnwnt, notice of non-payment, protest and notice of tfrotest an each and all hereliy ujiaeed ttp the matters, endorsers and guarantors Jatntly and seoerally. Any Indebtedness owing from said bank or legal fiolder fiereof to tlie undersigned or to any endorser or guarantor may be approprlatetfand applied by Maid bank or legal tiolder on tills note at any time either before or after maturity of this note and wUhout demand upon or notice to any one. suKNEss AODnessi A^ ^LA^^Zte. Or^ ^,^2?..;^^£^.-^-.^/^^^ thereby adding to the number of those responsible for the payment of the note. Notes which show only one person responsible for the payment are called single-name paper. Those which have two or more signers are called double-name or three-name paper. A bill of exchange is an imconditional written order, signed by X (the person giving the order — the drawer), ordering Z (the drawee) to pay, either on demand or at a definite future date, a sum of money to Y (the payee) or to Y's order or to bearer. The drawee may indi- cate his willingness to honor it by signing his name to the word "accepted" written across the face of the bill. Bills of exchange are of two kinds — foreign, and domestic or inland. A foreign bUl is legally defined as one the drawer and drawee of which live in different countries or different states, while a domestic bUl is one both parties to which live within the same state. Business custom, however, warrants our using the term domestic hill for all bills when both parties live in the United States, regardless- of state lines. There is likely to be some confusion as to when to use the term drajt. Draft and bill of exchange are often used interchangeably. 490 BUSINESS ADMINISTRATION For instance, we speak of drafts on London and bills of exchange on London, and we say New York exchange and drafts on New York. , In the business world, however, there is a growing custom of using the term draft when speaking of domestic transactions, while one frequently hears the term bill of exchange in connection with foreign transactions. TRADE ACCEPTANCE u < Hi & SwOu ■» Wtnfci n £ (city of drawer) (date) 0N_ No.. (date oe maturity) _JAY TO THE ORDER OF OURSELVES. .(DOLLARS $_ THE OBLIGATION OF THE ACCEPTOR HEREOF ARISES OUT OF THE PURCHASE OF^ GOODS FROM THE DRAWER. THE DRAWER MAY ACCEPT THIS BILL PAYABLE AT ANY BANK, BANKER OR TRUST COMPANY IN THE UNITED STATES WHICH HE MAY DESIG- NATE. T0_ (name oe drawee) (street address) (city of drawee) (signature of drawer) BY This form iisually has stamped across it another form which indicates its acceptance thus: ACCEPTED DATE PAYABLE AT LOCATION OF BANK. (signature of acceptor) BY Bills of exchange may be classified according to whether or not the parties to the order are bankers. A banker's draft is an order drawn by one bank and payable by another. It is not necessary, however, that the party to whom it is payable be a bank. In the case of individual or trade bUls of exchange the payee may be the drawer himself as well as a third party. The payee may also be a bank. The second party, the drawee, may likewise be a bank, in which case the THE ADMINISTRATION OF FINANCE 491 bill of exchange is in the form of the familiar check drawn by a person against his deposit account in a bank. Bills may be classified according to whether or not they arise out of actual commercial transactions. Hence we have bankers' or finance bills, trade or commercial bills, and accommodation bills. A FOREIGN BILL OF EXCHANGE CASHIER'S CHECK Ztil/VCH OV IIJ-IXOIS* S^ TlIE^NATlOSALGnYBANIiOFCHICAGO No. oZ ^-^ i;mcAr,o7^:='-i^4/yfy^ Payto tiik oiideh of {/(^^''''^^ ^n C7/^^-^t^y t y A>»-g^<^^z--^ O^Zc^/^^ Bankers' biUs are used merely as a means of making payments and transferring balances and are secured by the reputation of the bank that draws them. A commercial bill arises out of an actual sale of goods, and is secured, not only by the general responsibility of the drawer, but also by the goods which have been exchanged for the purpose of sale. Accommodation biUs are bUls which do not arise out of any business transaction already concluded, though there may be an intention to purchase goods with the funds procured. 492 BUSINESS ADMINISTRATION In order to illustrate the use of these instruments, suppose that X has bought a bill of goods from Y. X may pay in one of several ways : (i) He may "pay cash," and this may be in bank notes. United States notes, gold certificates, etc. (2) He may give Y a check on his (X's) bank. (3) He may draw and dehver a bill of exchange on Z payable to Y or Y's order. In such a case Z is presumably a debtor to X. (4) He may give Y a promissory note. This will merely defer actual PERSONAL BANK CHECK Paytotheordcrof. TherirslMonalBaiikofEnglewood2io9 /<>-» DCLUARS JLAPIgS PEPARTMEWT . payment. (5) Hemay "accept "a bill of exchange which Y has drawn upon him. This also merely defers actual payment. (6) He may transfer to Y some check or promissory note or bUl of exchange which some other person (say V) has drawn to X's order or to bearer. (7) He may buy from his banker a banker's draft drawn (on some other banker) in favor of Y. (8) He may buy from his banker a cashier's check. 27. SHORT-TERM LOANS AND TRADE CREDIT' The three forms in which corporations incur short-term or medium- term obligations, are, trade credit, bank loans and notes sold to the pubUc. The funds raised from the trade creditors are secured simply by buying goods on credit. It is not customary in most lines of business to demand cash immediately on deKvery of goods, except from con- cerns that are considered untrustworthy. Thirty days is usually allowed before merchandise bills become due and payable, and a ' Adapted by permission from W. H. Lough, Corporation Finance, pp. 133-46. (Alexander Hamilton Institute, 1916.) THE ADMINISTRATION OF FINANCE 493 company whose business requires it, can often considerably lengthen the average time of settlement in certain lines of business. In some lines — especially when the sales are in large lots — sixty to ninety days, or even six months, are frequently allowed. For ninety days or over the debtor company generally gives a formal promissory note or else accepts a time draft which amounts to the same thing. It is good business policy for a company to take as much trade credit as it can get on advantageous terms and with safety. These two qualifications are worth elaborating. A company does not obtain trade credit on advantageous terms: (a) when by so doing it acquires a reputation for "slow pay" which makes dealers unwilling to quote to the company their lowest prices; (6) when by so doing it loses the benefit of cash discounts larger than the prevailing discount on bank loans — ^provided in this case that the company is not already borrowing as much as it should from banks. A company cannot accept trade credit with safety when by so doing its short-time Uabilities are brought up nearly equal to its quick assets. Notice that the relation is not between total liabilities and total assets, but between quick liabilities and quick assets. A concern must have cash funds at hand to meet its accounts and bills payable when due and no other assets, no matter how available, will serve the purpose. A failure to realize just that simple fact has been responsible for many an unnecessary bankruptcy. We may infer from a study of representative balance sheets that a conservative company wiU not, as a rule, allow its accounts, bills and notes payable to run much over 75 to 80 per cent of its quick assets. This percentage is, in fact, not far from normal. It would be foolish to try to lay down any absolute rule where so much depends on the custom of each Une of business, on the seasons, on the nature of the company's assets, on the ease with which bank credit may be secured, and on the general commercial outlook. Bank loans are not usually to be had except on first-class security and for short periods. (Discussion omitted, see p. 495.) Notes sold to the public, as a source of funds may be used in order to raise funds from (a) concerns which supply merchandise, (6) banks or (c) the public. We have already seen how and to what extent they may be issued in the first two cases; we have now to consider the third case. The usual, although not a necessary, distinction between notes given in the ordinary course of trade or to banks and notes sold to 494 ' BUSINESS ADMINISTRATION the public is in the length of time of the debt. In the first-named cases they do not usually run over six months. Notes sold to the public are more likely to run from one to ten years. Two or three years is about the average period, intermediate between sixty-days to six-months notes, on the one hand, and ten- to one-hundred-year bonds, on the other hand. They are issued in denominations varying from $ioo to as high as $100,000. The chief objection to these instruments is that they do not appeal to any large dependable body of purchasers. The commercial banks do not care for them because they are not "quick"' enough. Com- paratively few individual investors will buy them because they are to be cancelled within a comparatively short period, and the average individual investor does not choose to watch his investments closely and renew them frequently. His idea, on the contrary, is to get hold of a safe security that yields a steady return and to keep it indefi- nitely. The market for medium-term notes, therefore,-^ is restricted, generally speaking, to persons of large means who are in fairly close touch with the financial world and who happen to have idle funds on hand. Such persons are most easily reached through the big financial houses and these houses almost invariably absorb note issues of any size and distribute them to their clients. On account of the Umitations of the market it is always difficult to tell in advance whether an issue of medium- term notes will be taken up by the public or not. It is still more difficult — ^in fact, impossible — to tell at the time of issue whether the notes can be readily renewed when the time of payment arrives. No conservative corporation manager wiU put out such notes unless he has first provided for their payment when due. This he may do in two ways; either by saving the necessary amount out of the corporation's income or by securing through bond issues the funds with which to pay orE the notes. The first course involves cutting down the borrowings of the corporation which, as has been pointed out, is likely to be undesirable. Ordinarily the second course would be inadvisable, for if bonds are to be put out at all they might as well be issued in the first place. This suggests the usual reason for the issue of notes to the pubUc, namely, as a temporary expedient when a bond issue is for the time being deferred. Although notes for the public are generally simply unsecured promises to pay, they may, especially for the longer terms, be on certain definite property. A corporation's holdings of securities THE ADMINISTRATION OF FINANCE 495 of Other companies are frequently put up under a trust agreement as collateral. It is difficult to draw a line between long-time collateral trust notes and short-time collateral trust bonds; in fact notes and bonds merge into each other and the distinction between them is in some cases merely nominal. 28. WHAT A BANK WISHES TO KNOW BEFORE MAKING A LOAN [The following is a sample of the blanks which banks require the prospective borrower to fill out before making a loan. Notice that the bank can learn many things concerning the soundness of the finances of the concern by studying the relationships of items.] Name (Corporate Style) Home Office Business. Branches The following is a true statement of the financial condition of this corporation at the close of business on the day of 19... and of all facts hereinafter, set forth, made to The Chase National Bank- of the City of New York, for the purpose of procuring credit and any other accommodations or benefits which may be requested. For such purposes, the bank may at any time assume that the condition and affairs of the corporation have continued substantially as good as herein set forth until notified by the corpora- tion to the contrary. The corporation agrees to immediately advise the bank of any substantial change in its condition or affairs. 496 BUSINESS ADMINISTRATION Fill All Blanks, Writing "No" or "None" Where Necessary STATEMENT OF STOCK Assets Cash on hand Liabilities Notes payable to own banks Cash in banks Due from customiers: On open accounts. . . . Notes payable for paper sold through brok- ers On notes receivable . . Trade acceptances re- Notes payable for mer^ Notes payable to others Accounts payable for merchandise pur- allied concerns: For merchandise sold . . . . Due from ofiElcers, direc- tors, employees, and Accounts payable to others Merchandise: Finished (how valued) Due to officers, direc- tors, employees. In process (how val- ued) Deposits of money with Land (valued at cost, mortgages, if any, in Habihties) . Mortgage ( ebt Buildings (present value, mortgages, if any, in liabilities) When due Interest rate Lien on what assets . Mchy. and equip, (pres- Bonded debt gages,^ if any, in liabilities) When due Interest rate Lien on what assets . Furniture and fixtures . . Other liabilities (item- ize) Investment in controlled or allied concerns other bonds, stocks, and investments (val- ued at cost) Capital stock, preferred Capital stock, common Surplus Good-will Patents Reserves (itemize) Other assets (itemize) Total Total ' THE ADMIMSTRATION OF FINANCE PROFIT AND LOSS ACCOUNT 497 Total net sales for year, less returns Net trading profit (after all expenses, including deprecia- tion, interest, etc.) $ Other income $ Total income Dividends: P \Otherwise disbursed $ Rate per cent paid in cash on preferred. . . .On common. . . Amount declared (not yet paid) $ Remainder of earnings carried to surplus CONTINGENT ASSETS AND LIABILITIES Endorsed bills receivable discoimted Are these included in assets ? Trade acceptances receivable discounted. Are these included in assets ? , Endorsements for affiliated or other interests For guarantees Approximate amount of outstanding contracts and com- mitments, as of statement date, for purchase of mer- TOTAL INSURANCE CARRIED BY CORPORATION WITH REGULARLY INCORPORATED AND LICENSED COMPANIES On buildings and Tnachinery Use and occupancy Life, for benefit of business 498 BUSINESS ADMINISTRATION OTHER BANK ACCOUNTS Naues of Banks Credit Lines Obtained On What Basis Is Accom- modation Obtained (Endorsements, Receiv- ables, CoUateral, etc.) ? Total COMMERCIAL LETTERS OF CREDIT If corporation imports merchandise against confirmed or miconfirmed commercial letters of credit, give total amount of credits outstanding on statement date .^ Unmatured drafts drawn against these credits up to state- Unused portion of commercial letters of credit outstanding ENDORSEMENTS ON CORPORATION'S NOTES RjESPONSIBrHTY OF ENDORSERS OUTSIDE OF Tms Business Naices of Endorsers Personal Assets ^^^^ Net Outside Worth Total Incorporated under laws of State of Date of charter Incorporated under laws of State of Date of charter Expiration of charter Authorized capital, preferred $ Issued capital, preferred $ common $ common $ Amount of stock issued by corporation for cash or property, other than good-will or services, preferred $ common $. Total maximum indebtedness last year $ Date. Minimum indebtedness last year $ Date. THE ADMINISTRATION OF FINANCE 499 MERCHANDISE Are goods shipped to branch houses carried on your books in merchandise account or accounts receivable ? _ _■ Is any of your merchandise on hand held against trust receipts ? Give amount on statement date $ In what account is merchandise held against trust receipts carried on your books ? On statement date did you have on hand any merchandise consigned to you ? Give amount $ Was this consigned merchandise included in merchandise items of statement submitted ? Have you established any reserve for fluctuation in value of merchandise ? Give amount of such reserve on statement date $ Do selling of&ces or branches borrow locally, or otherwise ? Give amount so owing on statement date $ ;••.•.•: If selling offices or branches borrow, are their loans included in liabilities of parent concern ? ; ■ • Is there anything in by-laws of charter of corporation limiting its borrowing capacity ? What is limit ? Does corporation borrow on collateral ? What kind of collateral ? Give amount so owing on statement date Are there any unsettled claims, or suits pending, against corporation not appear- ing on books as liabilities? Give amount $. Are preferred dividends cumulative? Give amount in arrears, if any, on statement date $ On what basis is depreciation charted on buildings ? ._ , On machinery and equipment ? What is appraised value of buildings? Of machinery and equipment? Are books regularly audited by public accountants ? Give date of last audit Give names of accountants who made last audit ._ If corporation sells commercial paper through brokers, or others, give names of such brokers (or others) Give date on which corporation regularly takes inventory and closes books . (Note. — On the opposite side of this sheet are the names and addresses of the officers and directors.) 29. BORROWING BY ASSIGNMENT OF ACCOUNTS RECEIVABLE' For vALtTE RECEIVED, we, the undersigned, have bargained, sold, assigned, transferred, and set over and by these presents do sell, assign, transfer and set over unto L. Spiegelberg & Sons, their successors and assigns, the claims and accounts more specifically set forth in the statement annexed hereto and made part hereof, which is a copy of the original claims and accounts, assigning, transferring and convey- ing to the said L. Spiegelberg & Sons all our right, title, and interest 'Taken by permission from C. W. Gerstenberg, Materials of Corporation Finance, pp. 908-9. (Prentice-Hall, 1905.) Soo BUSINESS ADMINISTRATION in and to the same and in and to the merchandise, the sale of which created said accounts with full power to reclaim said merchandise as heretofore stated. To HAVE AND TO HOLD the Same unto L. Spiegelberg & Sons, their successors and assigns, and we hereby constitute and appoint said L. Spiegelberg & Sons our true and lawful attorneys irrevocably in our name or otherwise but to their own use and benefit to collect and receive all moneys due or to grow due upon said accounts and to col- lect, sell, assign, transfer, set over, compromise, or discharge the whole or any part of said accounts and to receive, reclaim, and without notice to us, dispose of the merchandise, the sale of which created said accounts (in the event that for any reason said merchandise in whole or in part shall come back upon said accounts) and for those purposes do all acts and things necessary or proper in the premises. This assignment is made for due and valuable considerations, having been paid to the undersigned by L. Spiegelberg & Sons and also is made in furtherance of an agreement about to be made between the undersigned and L. Spiegelberg & Sons and as further collateral security for the payment of any indebtedness arisLag as a result of said agreement and otherwise. We hereby guarantee payment of said account at maturity and hereby represent that the accounts so assigned are just and true and are the result of bona fide sales and that the merchandise, the sale of which created the accounts hereby assigned, belonged to us solely and absolutely and was not in whole or in part consigned to us and that the debtors therein named have agreed to accept the same; that no payment has been made on said accounts; that there are no set- offs or counterclaims thereto and that the terms of credit are as specified and that any and aU remittances on said accounts coming direct to us shall be received by us in trust for L. Spiegelberg & Sons only and that the identical remittance in whatever form it may be received by us shall be immediately handed over to L. Spiegelberg & Sons and that all deductions on said accounts will be made good by us to L. Spiegelberg & Sons by pajmient of the same in cash or by payment of the same out of any balance to our credit in. the hands of L. Spiegelberg & Sons, if any, and should the purchasers reject, return, or refuse to accept any or all of the merchandise mentioned in said accoxmts that we will immediately give notice thereof to L. Spie- gelberg & Sons and it shall then be optional with L. Spiegelberg & Sons to surrender to us the said merchandise refused, rejected, or THE ADMINISTRATION OF FINANCE 501 returned upon receiving pajrment thereof in cash or if they so elect, to deduct from any balance which they may have on hand or out of any sum which they may thereafter have on hand to credit the amount of said merchandise. The said representations are made to induce Messrs. L. Spiegel- berg & Sons to make advances to us on the faith of the said accounts herein assigned by us. The said account so assigned by us shall in the event of the under- signed making an- agreement with Messrs. L. Spiegelberg & Sons for further advances on other merchandise become part of the accounts under said contract and shall be treated in the same manner as pro- vided for in said contract. In Witness Whereof Company has hereunto set its hand and seal this day of December, 1910. L. S. By See also p. 413. Note Brokers, Commercial Paper, Commercial Credit and Discount Companies. 30. THE MEANING OF DEPRECIATION' [The following discussion of the meaning of depreciation in the railroad business gives a hint of some of the difficulties involved in figuring depreciation in any complex industry. It is one of ' the difficult financial problems which confront the manager of such a business.] Does depreciation mean the loss of value in a car or an engine due to wear and tear ? If so, this sort of depreciation is amply covered by proper maintenance; in other words, it is usual when an engine or car goes into the repair shop, whether damaged in an accident or by legitimate wear, to replace its worn-out or damaged parts and restore it to its original condition. Repairs are classed as "running repairs," by which are meant the repairs necessary to keep equip- ment in safe running condition; and "general repairs," by which are meant the repairs needed to restore the equipment to its original condition. There are plenty of cases on roads both in this country • Adapted by permissioii from F. A. Delano, "The Application of a Deprecia- tion Charge in Railway Accounting," Journal of Political Economy, XVI (1908), 586-90. S02 BUSINESS ADMINISTRATION and in Europe, where locomotives and cars are so well maintained that there is no appreciable depreciation. Indeed, locomotives are running on English roads which are, though obsolete in many. respects, as good as new, though fifty years old; and there are many cases upon roads in this country where engines and cars twenty-five years old have been so well maintained that they are as good as when originally built. In respect to buildings and other structures, their ultimate life depends entirely upon the character of maintenance and care. Wooden buildings well roofed and painted, repaired when necessary, wiU last indefinitely, and of course, structures of masonry or iron are even more permanent. Buildings and structures on raihoads are rarely discarded except because they have outUved their usefulness, and something of a more eflScient type is needed in their place. Diagram I Curve illustrating condition of equipment, buildings, or structures over a long period of time. Space along vertical lines represents value of eq;iipment,-etc. Space along horizontal lines represents time interval. 1 00% 80 60 40 From the foregoing it wiU. be seen that if by depreciation is meant the loss due to wear and tear, it may be Ulustrated as to each piece of equipment or each building or structure, by a mathematical curve something like that indicated in the accompanying Diagram I. The distance from "A" to "B" represents the period of time in which under normal conditions the deterioration takes place; in the cas§ of locomotives, say three years; in the case of passenger cars, say two years; in the case of freight cars, a very variable quantity, averaging perhaps three years; in the case of buildings and structures, depend- ing whoUy on the character of the buUding and structure, climatic conditions, etc. The distance from "A" to "C" represents the diminution in value due to wear and tear down to the point where it becomes necessary to make extensive repairs. This is one view of what is meant by depreciation. Another view of depreciation is that it represents the amount by which the average condition of the physical property has deteriorated THE ADMIOTSTRATION OF FINANCE 503 below the original or new condition. It is assumed that each piece of physical property on the railroad, other than the real estate, is depreciating in value in the way represented by the curve already drawn, but that because the railroad is a composite of an immense number of units, the average condition of all the separate units combined is represented by a line at some point between the upper and lower nodes of this curve. Obviously, this will vary a little bit on the different roads according to the personal equation of management, local conditions, etc., which in turn are affected by good or bad business conditions. A corporation differs from an individual only in degree. In good times, expenditures for maintenance are Uberally made: in hard times all ejcpenditures of this kind which can be safely postponed necessarily cease. If then by depreciation is meant the Diagram n The result of composite curves similar to those shown below is a line or more strictly a band or zone representing average condition 100% drop for the original cost down to the average-condition value of equipment, buildings or structures, it is evident that there is a line, or more accurately, a band or zone somewhere between 100 per cent value and the 50 per cent value, and this band, speaking very liberally, will be somewhere between 60 per cent and 75 per cent of the original cost. It is obvious, however, that when the lower limit of this band which represents the average condition of the units is reached, depreciation does not continue farther, and that therefore if a regular fixed charge is to be made to cover this alleged loss of value the charge should cease at that point as the limit of actual depreciation of the units considered as a whole has been reached. Still a third view of depreciation is that it means the depreciation due to "obsolescence." It is argued that while each piece of equip- ment or every building or structure may be restored to its original condition, there is a diminution in value, due to obsolescence. Every manufacturer, as weU as every corporation, fully appreciates this. In a country which is developing rapidly it is frequently necessary to discard perfectly good equipment, buildings, and structures, and to S04 BUSINESS ADMINISTRATION replace them with something more efficient. It is possible that conditions will warrant "writing off" the cost of such equipment or structures and charging to cost of operation the entire cost of renewal with more modern and more efficient tools or equipment. It may be argaed that this is the kind of depreciation which it is the business of the railroad to provide for by monthly charge in its operation. The difficulty is to estimate the rate at which such depreciation takes place. To illustrate it, we may represent such a depreciation as this by a mathematical curve for each piece of equipment, building and struc- ture, as shown in Diagram III. The difference between the curve in Diagram III and that of Diagram I lies in the fact that Diagram III Diagram III Diagram showing condition of equipment, buildings, and structures as in Diagram I, but taking into accoimt depreciation due to obsolescence Rate of Depreciation Due to Obsolescence ioo% 80 60 40 ao shows a depreciation due to obsolescence, whereas Diagram I does not. In III we make a line "A — D," which is at a sUght angle to the horizontal. It represents the rate of depreciation due to obsolescence. It contemplates that every time a unit of equipment, a building or a structure, is restored to a condition "as good as new," it is not brought back to a value equal to that represented by its original cost, but to a value as much less than its original cost as the depreciation due to obsolescence may have brought it. To provide for this sort of depreciation it is obviously necessary to determine the rate of depreda- tion due to obsolescence. Who shall say ? Shall we be guided in the future from the results in the past ? Shall we say in respect to loco- motives that because locomotives are now as high, as wide, and perhaps as long as they may be built, there can be no further develop- ments in that direction ? Or, shall we accept the arguments of those who believe in electric transportation, that the steam locomotive will soon be discarded and the electrically driven motor take its place? THE ADMINISTRATION OF FINANCE 505 In one case, the rate of depreciation due to obsolescence will be small, while in the other case, it can be determined only by our surmise as to how soon the revolution from steam to electricity is going to take place. 31. THE SOURCES OF THE SURPLUS' [This selection and the following one should be read not merely to learn descriptive facts concerning the surplus but to see financial policies being reflected in the surplus.] One possible, though very unusual, means by which a corporation obtaias a surplus is by inheritance. Take, for instance, a corporation which is a consohdation of two companies, each having a surplus of its own. The consolidation may conceivably simply guarantee the bonds and other outstandiag debts of the subsidiary companies, may issue doUar for doUar in stock for the stock of the subsidiary companies and may transfer the former surpluses bodily to its own accounts. We may dismiss this first possible source of surplus, then, with the statement that it is too uncommon to be worth much dis- cussion. The second source of surplus, which also is rather unusual, is the selling of the corporate stock or bonds above par. Evidently the corporation in such a case receives a sum of money greater in amount than the obhgations which it incurs. Now this extra sum may be handled by an accountant in. three or four different ways. One way is to include it in the corporation's surplus account. The propriety of this method may be disputed, but this is. an accounting rather than a financial question. A surplus may originate, in the third place, in whole or in part from the sale of a corporation's fixed or semi-fixed assets. Thus if a manufacturing conipany owns a plant which has become obsolete and worthless for manufacturing purposes, and the value of which has been fuUy covered by a depreciation reserve — in other words, written ofi the books — ^and afterwards sells this plant, the sum resulting would go into the surplus account. Of course, the reader wUl under- stand that if the value of the plant in such a case had not been written off the books, but was stiU included in the corporation's balance sheet, the only effect of its sale would be a transfer of the amount received from the property account to cash or notes receivable or whatever was taken in payment for the plant. ' Adapted by permission from W. H. Lough, Corporation Finance, pp. 374-76. (Alexander Hamilton Institute, igi6.) So6 BUSINESS ADMINISTRATION A similar source of surplus is a revaluation of the fixed assets of a corporation when the revaluation shows an increase in their value. This increase would naturally be represented on the liability side of the balance sheet by a corresponding gain in the surplus. Generally speaking — and it must be remembered that there are some exceptions to this rule — an upward revaluation of assets is not in accordance with correct accounting or financial principles. Therefore, this fourth source of surplus is not commonly found. ' This brings us to the fifth and most common source of surplus, namely, saving from income. The uses to which income should be put after the fixed charges and reserves had been provided for, are found to be dividends and surplus. It wiU do no harm to reiterate the important principle that the dividends of practically every corpora- tion should be maintained at a fixed rate and should move only to increase. Fluctuating dividends destroy the confidence of the investing public and greatly reduce the credit of the corporation below what it might possess. The proper policy, with few exceptions, is to ascertain the minimum net earnings of a company in the years of greatest depreciation and rigidly hold the dividends at or below that minimum. The rest of the net earnings will be trans- ferred to the company's surplus account. 32. RESERVES AND OTHER USES OF THE SURPLUS^ "A surplus," says Henry R. Hatfield, "by whatever name it may be called, represents additional capital (normally derived from profits), the purposes for which it is created may be any of those for which capital is needed, or it may be used, as profits ordinarily are used, to provide means for paying dividends." Generally speaking, whether the surplus be hidden or shown on the face of the balance sheet, the proper purposes for which the surplus may be set aside by the board of trustees are the following: (i) to protect the corporate estate; (2) to improve the esprit de corps and increase the eflSciency of the personnel of the service; (3) to increase the business of the corporation without increasing issues of share or credit capital; (4) to reduce the funded debt; and (5) to equalize dividends. At the discretion of the board of directors, the surplus may be utilized to protect the corporate estate against impairment, through a series of continued operating losses. One method of accomplishing 'Adapted by permission from F. A. Cleveland and F. W. Powell, Railroad Finance, pp. 168-76. (D. Appleton and Company, 1912.) THE ADMINISTRATION OF FINANCE 507 this end is to retain for the use of the corporation a margin of undivided profits to insure against losses which may be due to fluctuations in the volume of business, the net result of which might be to decrease the corporate estate. A second purpose for which a fund or reserve may be created out of surplus is to insure against casualties, such as fire, storm, flood, and accident, where insufficient provision has previously been made through current charges against revenue. In establishing the policy of the corporation and in managing its affairs, the board must decide whether the corporation will incur an expense in the nature of premi- ums paid to other companies for carrying such risks or carry the risk itself. A third purpose for which surplus may be distributed is to create a fund to recoup losses from bad debts or to serve as a reserve to pro- tect the company against the infidelity of officers and employees. The reasons for the company's carrying its own credit and fidelity insurance are practically the same as those above set forth for carrying its own insurance against casualties. The margin of saving, however, is very much larger, since the percentage of actual loss to the corpora- tion from bad debts and from infidelity is relatively small compared with premiums which would be paid. This also may be accomphshed by setting aside a part of the surplus. A further provision may be made in like manner for protection of the corporate estate against depreciation due to failure to main- tain the property against wear and tear and waste from the elements. In similar manner, provision may be made for losses or deterioration due to obsolescence of type of equipment or the expiration of patents or other rights; While ordinarily such a fund would be created and maintained as a charge in the nature of current expense, and as such would be a deduction from earnings, failure to make ample provision for such protection in the past may suggest to the board the advantage of direct appropriation from surplus. StUl another form of reserve is to be found in amounts set aside to protect the corporation against loss due to speculation in its securities, or to protect it against a temporary impairment of its credit. Usually this function is performed without a definite fund having been pro- vided or appropriated. It is not an uncommon practice for a corpora- tion's officers to watch the market in order that the price of its securities may not be unusually or harmfully depressed by traders who may seek to obtain advantage from a "raid." In some jurisdictions 5o8 BUSINESS ADMINISTRATION it is made unlawful for a company to trade in its own securities; in such event it would be unlawful to appropriate or set aside a fund to protect its securities against speculative or other trading. The use of the surplus for the purpose of improving the esprit de corps or for increasing the efficiency of the personnel of the corpora- tion takes several forms. Amounts may be set aside as a fund to indemnify employees for time lost and personal expense caused by illness, injuries, etc. The advantage of so doing is apparent. The sympathy and interest of employees is a valuable asset of the corpora- tion. It not only tends to increase working efficiency, but it also enables the corporation to deal with employees on a more favorable wage basis. To the same end, funds may be provided or set aside as a pension fund. This may be done through an appropriation from surplus or through a direct charge against income. In like manner appropriations may be made for education, recreation, and social improvement of employees. Thus appropriations are made to local branches of Christian associations; social centers are established and maintained for the employees of a particular corporation; and contributions may be made to social organization and entertainment centers which are established and maintained for the benefit of several railroads. More frequently than for other purposes the surplus is used to increase the business of the corporation without increasing its out- standing shares or bonded debt. To this end surplus may be appropri- ated for extensions into new territory for improviag the facilities for doing business, for improving the road, for acquiring new equipment for use within territory already occupied, for constructing or acquiring enlarged terminal facilities, or for acquiring properties and equipment which may be used in collateral enterprises such as steamboats, mines, quarries, and timber. Assuming that added properties or equipment are desirable, the board has before it the option of deciding whether new securities wiU be issued or a portion of the surplus applied to such use. Surplus may be set aside to increase the working capital of the corporation; for the purpose of increasing the cash, stores, and other assets available for handling the current business, or for increasing credit accounts of customers. Seldom, however, is this accomplished through a definite appropriation or funding measure, but usually, when the surplus is not hidden, through carrying the amounts as undivided profits br in the general surplus account. THE ADMINISTRATION OF FINANCE 509 A further use of surplus for increasing the business of the corporation is found in actions taken to purchase the securities of other corpora- tions. This is one of the most effective methods of estabUshing con- nections and obtaining more effective working relations with other lines. Many considerations may be present which would move a board of directors to appropriate or set aside funds for the reduction of the funded debt. Common among these is the contractual obhgation estabUshed at the time bonds are issued, creating a sinking fund. Under such contracts, it is usually made obUgatory to set aside a definite amount each year which when invested will provide the means for retiring bonds or mortgage indebtedness when due. With- out such obhgation having been entered into, however, and as a matter of poUcy, it may be deemed expedient to reduce fixed charges. When the business of the corporation is unusually large, the creation of such a fund may not interfere with the declaration of dividends which will be satisfactory to shareholders; and in time of business depression or hghter traflSc, the fund may operate to increase the net income accruals or to decrease charges to such an extent as to protect the management from financial embarrassment and even make possible the payment of dividends. More directly, dividends may be equalized by appropriating or setting aside a definite reserve. When a road is so located that it must depend for earnings largely on freight traffic and on long haul business, the fluctuations over a period of years may be so great that without such a reserve it would be impossible to pay dividends with- out depleting the capital invested. All of these and stiU other funding purposes may be subserved by the board of directors in the exercise of their proper discretion in the management of surplus. The shareholders have no rights to any part of the earnings or profits until a definite fund has been set aside for distribution to them in the form of dividends. When the surplus is put back into permanent properties, or invested or set aside as specific reserves for purposes other than dividends, it is not usually available for distribution to shareholders, for it becomes so far merged in the general assets of the corporation that it cannot be readily converted into cash. Under such cir- cumstances the only methods which the board may utilize to enable them to distribute the surplus as dividends are either to issue bonds against the invested surplus, to declare share dividends, or to dis- tribute certificates of beneficial interest in properties which are not essential to the road. 510 BUSINESS ADMINISTRATION 33. HOW ONE FIRM PULLED THROUGH A DEPRESSION' Little more than six months ago [this article appeared in July, 192 1] Henry Ford had all but completed arrangements for borrowing $75,000,000., and in the face of what appeared desperate necessity. His plants were closed; there was little demand for his cars; he owed the Government $55,000,000 in taxes; notes for nearly $30,000,000 originally issued tq buy out his minority partners were due within a few weeks; a bonus of $7,000,000 was due his employees; whereas cash and treasury bonds together aggregated only $33,000,000. Yet Ford did not borrow from banks. He paid them up and today his sales are the greatest in history. How was the corner turned ? He has told his own story of the triple-faced wedge which he used to open the path that led his industries to a new prosperity. The three faces of this wedge were (i) the shipment of surplus cars, (2) ruthless economies, (3) transportation. The first thing which he did was to transfer the load. He had 125,000 surplus cars on his inventory and he pushed them off his inventory account into the hands of his 17,000 dealers. An Indiana dealer had his floor fuU of Fords. Imagine his consternation when a trainload roUed, unordered, into the city. His business future was at stake. He must and did accept the draft, but he could not pay for the cars. A former dis- gruntled Ford leader with superior resources bought the trainload at wholesale and startled the countryside by advertising a bargain sale of Fords. In other cities and towns the dealers went to their banks and borrowed on the cars. Shipments averaged about a tenth of a year's business and the credit was quickly obtainable. The cash flowed back into Detroit and by the middle of April Ford had not only paid up the current quarter's Federal taxes, but had anticipated payment on the remaining $26,000,000 of his purchase notes. The unloading plan was a success because it was economically sound and ruthlessly applied. Agents were bluntly told they were indebted to the Ford company and that to prosper in the future they must assist now. Those who rebelled were removed. Those who accepted are today the strongest proponents of the Ford methods. At the end of April Ford's inventory had been reduced from $105,000,000 to $63,800,000. He had been manufacturing his inven- tory, including spare parts, into finished car shipments to dealers which went out with drafts attached. At the above date there was ' Adapted by permission from the Wall Street Journal, Vol. LXXVIII, No. lo (1921), pp. i, 3, and Vol. LXXVIII, No. 18 (1921), p. i THE ADMINISTRATION OF FINAN.CE 51 1 reported due him more than $40,000,000 representing finished caxs, probably 80,000 of them, shipped out and accepted by dealers and carried on the company's books as an asset. This item increased $28,000,000 from the first of the year. The second method which he used was that of economies in his business. He combed his entire organization. Where he formerly employed 60,000 men to produce an average of 4,000 cars daily he now obtains an output of 4,500 daily with 45,000 men. The $6 minimvmi wage has been retained, but foremen have been put to work, tasks doubled up and adjustments averaging 20 to 25 per cent reduc- tion made in wages. He did not confine his combing to his factories. He came East and found $91,000,000 in "frozen" cars and parts in New York, Philadelphia and Boston. Changes in personnel followed and others were threatened. The cars began to move out. Mr. Ford said: Office and factory came in for a housecleaning. Back in November, 1920, our daily expense for labor and commercial overhead charges, cost of material not included, averaged $463,200 to get out an average of 3,146 cars daily, or $146 a car. Now for $412,500 a day we produce an average of 4,392 cars daily, or $93 a car. Formerly fifteen men were employed per day per car. Now it requires only nine. We went through the offices and cut out a lot of jobs created during the war. We literally took out and sold a trainload of desks. We told the men that occupied these desks that back in the shops there were plenty of good jobs at good pay, if they wanted them. Most of them did. We cut the office forces from 1,074 persons to 528. Telephone extensions were cut about 60 per cent. Interesting but useless statistical systems were abolished. We went through the shops in the same way. During the war we had a foreman for about every three to five men. Too many foremen sat at desks looking on. We sold all the desks and put most of the former foremen working. We now have a foreman for about every twenty men. Every- body and everything not producing was put in a position where it could produce or was eliminated. By April i conditions had so far unproved that factories were again running full tilt. Here enters the previously unemphasized matter of transportation. He began to use his Detroit & Ironton for all inbound and outboimd shipments possible, making connections with east and west lines at advantageous points along the road. Mr. Ford said: Before we got control of this road, it required an average of twenty-two days to haul raw material to the factories, make it into cars and get it to 512 BUSINESS ADMINISTRATION the dealers. The money tied up stood continually at about $88,000,000. Now that time has been cut to fourteen days. We will cut it stiU more. Where we had $88,000,000 tied up to make 93,000 cars a month we now make 114,000 cars a month with $60,000,000. This freed $28,000,000 for other purposes. Since April a further remarkable spurt in Ford business has taken place. Cash the first of June was around $36,000,000 and, there were no outstanding obligations except current merchandise acceptances. The measure of sales since that time and now, is factory capacity and not merchandising efforts. E. Organization for Financial Administratioit In view of the importance of the subject and the length of time it has been studied it is quite surprising that there is only a meager and imsatisfactory literature on organization for financial administration. It is even more surprising to find that business practice in this field is quite uncertain and mixed, not to say chaotic. There is no telling what one will find in the "financial department" and no telling what titles its fxmctionaries wiU bear. Usually there is a "treasurer." His duties may range from those connected with occasional con- sultation on financial policies or those connected with being little more than a custodian of cash to those involved in drawing a budget and handling all financial and accounting matters. Sometimes there is a "comptroller." He may merely have charge of the accounting, or he may, at the other extreme, be responsible for the original budgeting of the business and then for such supervision as may be necessary to carry out the budget, or his duties may be arranged in some other way. There may be an "auditor," a "credit man," and others. It is apparent that we shall gain little from digesting either the literature or the current practices of business in our study of the " set up " of a business for financial administration. There is, however, certain common-sense material which is worth surveying. If we picture an organization in which tlie financial department has reached such large development as to have at its head a "vice- president in charge of finance" it is dear that it may be charged with the following responsibilities (and if it is not charged with them they must be cared for elsewhere in the organization), (i) The vice- president in charge of finance should, in consultation with the president and general manager, draw up a plan of the wajrs by which the financial THE ADMINISTRATION OF FINANCE 513 needs of the business may be met. In some business organizations this includes the responsibility of preparing the budget which fore- casts these financial needs. It is better organization in most cases, however, to assign the preparation of the budget to a special assistant connected directly with the oflB.ce of the president and general manager, or to a department of standards and records. (2) Within this plan he must work out the details of institutions and devices which are to be utilized and the details of how and when to utilize them. (3) He should carry out the operations necessary to bring these detailed plans to accomplishment. (4) -He is of course the custodian of receipts and the agency through whom payments of funds are to be made. These are his routine duties as "cash custodian." It is, furthermore, appropriate that he should be charged with the responsibility for safekeeping financial documents. It is assumed that he will have under him whatever staff may be necessary to carry out these duties. It is not imusual for the entire accounting of the concern to be under the direction of such a vice-president in charge of finance. This is quite an understandable procedure in the case of a smaU concern where, indeed, the treasurer may actually be also in active charge of the books. In a large concern it is certainly arguable that the accounting work should be assigned to another department, such as a department of standards and records, thus leaving the vice- president in charge of finance free for more important duties. It is not unusual, also, for such a vice-president to be given functions which are ordinarily associated with the term "comptroller." In such an event he would keep check on the way in which the various departments are measuring up to such responsibilities as rest upon them in connection with the financial plan of the business. For example, he would be vitally concerned in the ability of the sales department to cause the planned income to flow in and to keep within their plaimed expenditures, not in the sense that he should supervise their activities in their own field, but in the sense that he would be responsible for securing conformance to the authorized budget. It is obvious that it is entirely arguable that such "comptrollers' functions" might equally well (probably better) be assigned to the department of standards and records. In our attempt' to visualize a possible organization for financial administration we should be able to see the matter more clearly if we had already discussed budgeting (see p. 831). We have, however, SI4 BUSINESS ADMINISTRATION seen enough of what is involved in budgeting (see page 337) to enable us to proceed. Only a few pages are necessary to give sufficient material for our present purposes. We begin (Selection 34) with a general order issued by one manufacturing concern in the process of defining the jurisdiction of its treasurer. It will be worth the student's while to draw a possible organization chart based on this general order. We then look (Selection 35) at some organization charts dealing with various aspects of financial administration. A selection (No. 36) on financial standards serves to remind us that we have already become aware of the existence of standards in the fi.eid (see pp. 333, 385) and to indicate their work and importance. Selection 37 shows concretely one device which the vice-president in charge of finance may use in plaiming to meet the financial needs of the business. PROBLEMS 1. Draw up an organization chart based on Selection 34. Does this cover the whole organization for the administration of finance ? 2. It was stated that the vice-president in charge of finance has the responsibility for drawing up a plan of the ways by which the fiilancial needs of the business may be met. Give this statement specific con- tent. Do the earlier sections of this chapter give material which will be helpful in this connection ? 3. An important school of thought beUeves it wise to differentiate planning and operation ia business. Does the material on page 513 do this? Are they always to be differentiated in an organization chart ? 4. What is meant by saying that it is a use of the principle of "checks and balances" when "comptrollership" is separated from "treasureship" in a business organization ? 5. What are the arguments for having credits and collections in the sales department? in the financial department? What is your conclusion concerning the proper place ? 6. What grounds can you give for the position that it is better to have the preparation of the budget in the hands of an "assistant to the president" than in the hands of a vice-president in charge of finance? 7. What are the grounds for saying that "comptrollership" with respect to the budget should rest with the vice-president in charge of finance ? with an assistant to the president? with a department of standards and records ? 8. What difference of "flavor" do you sense between "accounting depart- ment" and "department of standards and records"? 9. Could a bank more advisedly make a loan on the basis of a budget than on the basis of the material set forth (p. 495) in the reading "What a Bank Wants to Know before Making a Loan" ? THE ADMINISTRATION OF FINANCE 515 10. "The policy used in extending credit and in making collections should be harmonized with the remaining body of policy of the business estabUshment.'' Explain. 11. Using Selection 3.5 A, pick out the parts of the chart which have to do with financial administration. Are all items cared for ? 12. Are you sure that Selection 358 belongs in a section on financial administration ? 13. Draw up an outline of as many kinds of financial standards as you can think of. 14. Write a paragraph on the significance of financial standards. 15. Where do financial standards, come from? How does a business get them? 16. Distinguish between an "income and expenditure" budget and a "receipts and disbursements" budget. What use can a vice-president in charge of finance make of such a budget as is sketched in Selection 37 ? 34. AN ORDER DEFINING THE JURISDICTION OF A TREASURER' A. Explanatory note. — ^The jurisdictions defined hereinbelow extend to all subsidiaries of the company, except where specifically limited to the company. B. Definition of jurisdiction. — The treasurer will cpntrol the following functions, either directly or through the proper line executives, as provided under C. (omitted) hereinafter: I. Credits and collections a) Credits (i) Passing on the credit of aU customers either on individual transactions or through O.K. lists (2) Passing on the credit of vendors on request (3) Supervising the methods of gathering credit data by the sales force (4) Reviewing sales terms from the standpoint of credit (5) Furnishing other companies with data as to customers' credits b) Collections (i) Determining the manner and place of iacoming remit- tances (2) Recording all moneys received (3) Receipting, where required, for such remittances and indorsing for it, all iacoming drafts and checks 'Adapted by permission from General Order No. 57 of the Walworth Manu- facturing Company. Si6 BUSINESS ADMINISTRATION (4) Preparing and issiiing all collection "duns"; drawing all drafts against the company's and its subsidiaries' debtors; conducting all personal collection work and all arrangements for collecting through agencies or attorneys c) Financial claims Functional control, including supervision of correspondence and approval of adjustments by claim department having jurisdiction over the handling of all customers and inter- company claims arising out of questions of exchange, cash discoimt, interest, insurance, and other financial matters 2. Custody and maintenance of fimds a) Cashing all receipts other than cash b) Depositing all cash checks and cashed receipts c) Setting up and maintaining all petty cash funds d) Making all transfers of funds between depositaries e) Negotiating all short-time loans necessary to meet the current obligations of the company under the borrowing limits set by the president, and subject to the counter- signature of the president, a vice-president, or a director 3. Disbursements Disbursing all moneys, subject to proper voucher authoriza- tion, including arrangements with transfer agents in connection with pajnnent of dividends 4. Taxes Preparing aU tax returns required by governmental authorities 5. Insurance a) Determining the amount of insurance and kinds of policies required to afford aU necessary insurance protection, subject to the stipulations of the by-laws as regards surety bonds and to the instructions of the directors as to the basis of valuation in the case of fire and marine insurance b) Placing such insurance 6. Real estate Purchasing, mortgaging, leasing, renting, and selling all real estate, subject to the approval of the president or Executive Committee or Board of Directors ia the case of the Walworth International Company, where the transaction exceeds $1,000.00 in amount, and subject to the approval of the Board of Directors in the case of the sale or lease of any of the capital assets of the company THE ADMINISTRATION OF FINANCE 517 7. Sale of securities o) Reconmiending for decision by the boards of directors as to the need for and form of all new security issues b) Selling, either direct or through banks or syndicates, the company's subsidiary companies' securities, including the publication of all literature and advertising connected there- with, subject to the authorization of the boards of directors 8. Purchase of securities Purchasing all outside securities and buying in all company's and subsidiaries' securities, as authorized by the boards of directors 9. Financial statements and notices of dividend declarations a) Publishing and issuing all printed reports of the financial condition and progress of the company, other than those covered under A, 7 6 b) Issuing all notices of the declaration of dividends 10. Custody of corporate books, financial documents, and cor- porate seal a) Custody of all corporate books b) Custody of aU contractual title-vesting and negotiable docu- ments, representing the property and obligations of the company and its subsidiaries c) Custody and responsibiUty for affixing of all corporate seals 11. Financial program a) Approving all major appropriations as to availabihty of funds and all general reductions in selling prices as per General Order No. 41 5i8 BUSINESS ADMINISTRATION THE ADMINISTRATION CF FINANCE S19 o u S ?t ■0 <- ~ ■c W c3 R 111 X 2 1 < 520 BUSINESS ADMINISTRATION 36. FINANCIAL STANDARDS In financial administration as in other phases of business administration standards of performance are of great assistance, especially if these standards are the result of careful study rather than of blind tradition. In some cases the study must be made by the firm concerned in terms of its own peculiar circumstances; in other cases, the standards may be of wider application and associative study may well be made. This is an appropriate occasion for reviewing the list of questions prepared by a .group of business men concerning financial manage- ment (pp. 385-87) for that list of questions was in large part a list of standards which were being sought. We may also wisely look at certain other selections dealing, with standards in other fields. See also p. 221. Some Aspects of Rating Scales. p. 325-40. Measuring Aids in Sales Management. p. 370. Testing in Connection with Purchasing. 37. BUDGETING FOR CASH RECEIPTS AND CASH DISBURSEMENTS' [The following selection is written with the imderlying hypothesis that a staff assistant to the president is charged with "general control and supervision over the preparation and execution of the budgetary program." It should be read with this organization scheme clearly in mind (compare pp. 831-38).] 1. The staff assistant to the president, working in conjunction with the treasurer, wiU prepare estimates of cash receipts and cash disbursements for the budget period. 2. In preparing the estimate of cash receipts, the following will be necessary: (a) the accounts receivable outstanding at the beginning of the budget period will be analyzed and the estimated monthly receipts from these determined; (b) the accounts receivable resulting from the estimated sales will be determined and an estimstte made of the monthly collections from these; (c) if any notes are held by the company, the estimated monthly receipts from these must be deter- mined. » Adapted by permission from Budgetary Control for Business, pp. i-i 7. (Boston Chamber of Commerce, 1921.) • Prepared under the direction of J. O. McBansey. THE ADMINISTRATION OF FINANCE S2I 3. In preparing the estimate of cash disbursements, the following will be necessary: (a) the treasurer will prepare an estimate of the disbursements for taxes, insurance, interest, and other items which are under his control; (b) the accounts payable outstanding at the beginning of the budget period will be analyzed and the estimated monthly disbursements in payment thereof determined; (c) the accounts payable which will be contracted in connection with the various estimates calling for disbursements will be determined and an estimate made of the monthly disbursements required in pa5mient of these. 4. The form of the estimate of cash receipts, the estimate of cash disbursements, and the summary of cash receipts and disbursements is shown below. Summary or Cash Receipts and Disbursements For Quarter Ending March 31, 1922 Disbursements Receipts Loans required January February March Total Estimated Cash Receipts For Quarter Ending March 31, 1922 Source January February March Total Accoimts receivable* Customers — Class A Schedule No. i Customers — Class B Schedule No. 2 Customers — Class C Schedule No. 3 Notes receivable Not discounted SchediUe No. 4 Sales Customers — Class A Schedule No. 5 Customers — Class -B Schedule No. 6 Customers -Class C Schedule No. 7 Total * The classification of accounts receivable is on the basis of the terms of credit on which sales are mad^ 522 BUSINESS ADMINISTRATION Estimated Cash Disbttrsements For Quarter Ending March 31, 1922 Purpose Notes payable Accounts payable Outstanding, Jan. i Estimated cash disburse- ments for purchases Factory pay-roll Department A Department B Department C Factory expense Department A Department B Department C Departmental expense President's of&ce Treasvu-er's department Auditor's department Purchasing department Office manager's depart- ment Traffic department Sales department Production department New equipment General Taxes Insurance Interest Miscellaneous Total January February March Total REFERENCES FOR FURTHER STtlDY Moulton, The Financial Organization 0} Society. Jones, The Administration of Industrial Enterprises, chaps, ii, xxi. Lough, Business Finance. Walker, Corporation Finance. CHAPTER VI THE ADMINISTRATION OF PRODUCTION Purposes of this chapter: 1. To secure an appreciation of the spirit of modem production and to see how this spirit came into being. 2. To get an understanding of the outstanding problems in pro- duction control. 3. To see something of what is involved in so-called scientific shop management. ' The word production is another term which has several meanings. Most economists use the term to include all the steps involved in getting goods into the hands of the ultimate consumer. Thus, to the economist the term includes (a) those processes which change the form of goods (confer form utility) ; (6) those which move goods from places of less need to places of greater need (confer place utility) ; (c) those which keep goods from times of less need to times of greater need (confer time utility); and (d) those which are concerned with transfer of possession and ownership (confer possession utility). The business man ordinarily uses the term production to mean only those processes which are concerned with conferring form utility, and we shall use the term as it is used by the business man. Even with this narrowing it is a tremendously broad term. At the very least it includes all the primary industries and all manu- facturing industries (see p. 2) and it is quite arguable that it includes more. We are, of course, primarily interested in manufacturing industry. Even in this one field the range of activity is very great. A. The Background of Modern Production Production in some form goes back to man's first attempt to modify his environment. It developed slowly and painfully to the kind of tool industry which characterized medieval productive activity, and continued down to the time of the Industrial Revolution. That Revolution marks the transition to a very different kind of production, different both in the character of its processes and in the character of its contribution to human well-being. 522 524 BUSINESS ADMINISTRATION We have come to call this new kind of production, technological industry. This term is intended to indicate that man has turned, and is more and more turning, to science to get means and methods of harnessing the forces of nature to do his work. Our first task is that of securing an appreciation of the environment in which modem production is conducted. PROBLEMS 1. Readings 1-5 perhaps give the impression that the Industrial Revolu- tion was entirely dependent upon the coming in of science and tech- nology. Do you know what part was played by the development of (a) financial institutions, (6) markets and market institutions, (c) labor supply ? 2. There have been periods of great progress in the past and these periods have frequently been short-lived. Is there anything about modem scientific methods that justifies an expectation that oirr progress wiU continue ? 3. What do you understand to be the essence of scientific method ? Is it applicable to business problems ? 4. What is your explanation of the outburst of activity at the beginning of the nineteenth century shown on the chart on page 530 ? 5. Reading 2 gives us a hint of the contributions botany and physics may make to production. What can geology contribute? chemistry? psychology ? mathematics ? Be specific. 6. Notice the period in which there occiured the development of schools of technology. Can you relate this to developments in the field of marketing ? finance ? personnel ? 7. How do you explain the great development of such schools in a relatively new country like the United States ? 8. You now have certain facts before you concerning the engineering pro- fession. These people seem to be engaged in harnessing the forces of nature to gratify our wants. If they are to be managers in industry, is scientific training in itself sufficient ? 9. What does technological industry mean to you ? Is it synonymous with machine industry? Could we properly characterize agricultvure today as technological industry ? 10. You are a general manager of a manufacturing and selling business and you have a limited scientific background. How are you going to handle problems of building construction, power, plant layout, and equipment ? 11. Write out the arguments for and against a requirement of physics and chemistry in a business curriculum. 12. Why is it any concern of ours what intellectual effects machinery may have? THE ADMINISTRATION OF PRODUCTION 525 13. Be certain that you can explain in definite terms the relationship between technological industry and indirect costs in industry; between indirect costs and large-scale production. 14. What effect has the coming in of technological industry had upon ease or difficxilty of control in industry ? Explain in detail. 15. "Standardization is the magic word which reveals the circumstances under which an industry lends itseK readily to machine methods." What does this mean ? Standardization of what ? 16. Make a list of the advantages and disadvantages of standardization. 17. "The significant thing about the coming in of machinery is that it meant a transfer of thought, skill, and intelligence." What does this mean ? What has been the effect of this transfer upon (a) apprenticeship, (6) competition among workers, (c) the bargaining relation between employer and employee, (d) the development of large-scale production, (e) the development of impersonal relations, (/) the development of working-class solidarity ? 18. Draw up a statement of the effect of the machine upon the laborers who work in machine industries; upon other laborers. 19. One writer says that machine methods have profoundly influenced our mental outlook. How could this be true ? Have these methods had sufficient time or have they covered a sufficient proportion of our human activities to have had a profound influence of this sort ? 20. When we speak of industry in 1750 as having been "simple" and of industry today as being "complex," what do we mean? What are the component elements of this simplicity or complexity ? 21. Nowadays one machine completes the process of pin-making which in Adam Smith's day occupied ten men. Has there been an increase or a decrease in specialization ? 22. Write a paragraph developing the theme "the background of modem production.'' I. A BRIEF OUTLINE OF THE HISTORY OF SCIENCE' The nineteenth century, and particularly the hundred years in which we are now interested, must always stand out in the history of the world as the period which has combined the greatest development in all departments of science with the most extraordinary industrial progress. So far as man's thought was constructive, the early results were systems of philosophy, and explanations of the order of things as seen ' Adapted by permission from E. S. Dana, "The American JoumaJ of Science from 1818 to 1918," in A Century of Science in America, pp. 1-20. (Yale Uni- versity Press, 1918.) 526 BUSINESS ADMINISTRATION from within, not as shown by nature herself. We date the real beginning of science with the Greeks. The bringing together of facts through observation alone began, to be sure, very early, for it was the motion of the sun, moon, and stars and the relation of the earth to them that first excited interest, and, especially in the countries of the East, led to the accumulation of data as to the motion of the planets, of comets, and the occurrence of eclipses. But there was no co-ordination of these facts and they were so involved in man's superstition as to be of little value. In passing, however, it is worthy of mention that the Chinese astro- nomical data, accumulated more than two thousand years before the Christian era, have in trained hands yielded results of no small significance. It was the branches of mathematics, as arithmetic and geometry and later their appUcations, that were first and most fully developed : in other words, those lines of science least closely connected with nature. The geometry of Euclid (about 300 b.c.) was marvelous in its completeness as in clearness of logical method. Hipparchus (about 160-125 'B-C.) gave the world the elements of trigonometry and developed astronomy so that Ptolemy 260 years later was able to construct a system that was well developed, though in error in the fundamental idea as to the relative position of the earth. It is inter- esting to note that the Almagest of Ptolemy was thought worthy of republication by the Carnegie Institution only a year or two since. This great astronomical work, by the way, had no successor till that of the Arab Ulugh Bey in the fifteenth century, which within a few months has also been made available by the same Institution. To the Alexandrian school also belongs Archimedes (285-212 b.c), who, as every schoolboy knows, was the founder of mechanics and in fact almost a modern physical experimenter. He invented the water screw for raising water; he discovered the principle of the lever, which appealed so keenly to his imagination that he called for a fulcrum on which to place it so as to move the earth itself. He was still nearer to modem physics in his reputed plan of burning up a hostile fleet by converging the sun's rays by a system of great mirrors. To the Romans, science owes Uttle beyond what is imphed in their vast architectural monuments, buildings, and aqueducts which were erected at home and in the countries of their conquests. The elder Pliny (23-79 A.D.) most nearly deserved to be called a man of science, but his work on natural history, comprised in thirty-seven volumes. THE ADMINISTRATION OF PRODUCTION 527 is hardly more than a compilation of fable, fact, and fancy, and is sometimes termed a collection of anecdotes. With the fall of Rome and the decline of Roman civilization came a period of intellectual darkness, from which the world did not emerge mitil the revival of learning in the fifteenth and sixteenth centuries. Then the extension of geographical knowledge went hand in hand with the development of art, literature, and the birth of a new science. Copernicus (1473-1543) gave the world at last a sun- controlled solar system; Kepler (1571-1630) formulated the laws governing the motion of the planets; Galileo (1564-1642) with his telescope opened up new vistas of astronomical knowledge and laid the foimdation of mechanics; while Leonardo da Vinci (1452-1519), painter, sculptor, architect, engineer, musician, and true scientist, studied the laws of falling bodies and solved the riddle of the fossils in the rocks. Still later Newton (1642-1727) established the law of gravitation, developed the calculus, put mechanics upon a solid basis, and also worked out the properties of lenses and prisms, so that his Optics (1704) will alwajrs have a prominent place in the history of science. From the time of the Renaissance on science grew steadily, but it was not till the latter half of the eighteenth century that the founda- tions in most of the lines recognized today were fuUy laid. Our standpoint in the early years of the nineteenth century may be briefly summarized as follows: A desire for knowledge was almost universal and, therefore, also a general interest in the development of science. Mathematics was firmly established and the mathematical side of astronomy and natural philosophy — as physics was then called — ^was well developed. Many of the phenomena of heat and their applica- tions, as in the steam engine of Watt, were known and even the true nature of heat had been almost established by our countryman. Count Rumford; but of electricity there were only a few sparks of knowledge. Chemistry had had its foundation firmly laid by Priestley, Lavoisier, and Dalton, while Berzelius was pushing rapidly forward. Geology had also its roots down, chiefly through the work of Hutton and William Smith, though the earth was as yet essentially an unexplored field. Systematic zoology and botany had been firmly grounded by Buffon, Lamarck, and Cuvier, on the one hand, and Linnaeus on the other; but of all that is embraced under the biology of the latter half of the nineteenth century the world knew nothing. 528 BUSINESS ADMINISTRATION Now, leaving this hasty and incomplete retrospect and coming down to 1918, we find the contrast between today and 1818 perhaps most strikingly brought out, on the material side, if we consider the ability of man, in the early part of the nineteenth century, to meet the demands upon him in the matter of transportation of himseK and his property. In 1800, he had hardly advanced beyond his ancestor of the earUest civilization; on the contrary, he was still dependent for transportation on land upon the muscular efforts of himself and domesticated animals, while at sea he had only the use of sails in addition. The first application of the steam engine with commercial success was made by Fulton when, in 1807, the steamboat " Clermont " made its famous trip on the Hudson River. Since then, step by step, transportation has been made more and more rapid, economical, and convenient, both on land and water. This has come first through the perfection of the steam engine, later through the agency of electricity, and still further and more universally by the use of gasolene motors. Finally, in these early years of the twentieth century, what seemed once a wild dream of the imagination has been realized, and man has gained the conquest of the air; while the perfection of the submarine is as wonderful as its work can be deadly. Hardly less marvelous is the practical annihilation of space and time in the electric transmission of human thought and speech by wire and by ether waves. While, stiU further, the same electrical current now gives man his artificial illumination and serves him in a thousand ways besides. But the limitations of space have also been conquered, during the same period, by the spectroscope which brings a knowledge of the material nature of the sun and the fixed stars and of their motion in the luie of sight; while spectrum analysis has revealed the exist- ence of many new elements and opened up vistas as to the nature of matter. The chemist and the physicist, often working together in the investigation of the problems lying between their two departments, have accumulated a staggeriag array of new facts from which the principles of their sciences have been deduced. Many new elements have been discovered, in fact nearly all called for by the periodic law; the so-called fixed gases have been liquefied, and now air in liquid form is almost a plaything; the absolute zero has been nearly reached in the boiling point of helium; physical measurements in great pre- cision have been carried out in both directions for temperatures far THE ADMINISTRATION OF PRODUCTION 529 beyond any scale that was early conceived possible; the atom, once supposed to be indivisible, has been shown to be made up of the much smaller electrons, while its disintegration in radium and its derivatives have been traced out and with consequences only as yet partly understood but certainly having far-reaching consequences; at one point we seem to be brought near to the transmutation of the elements which was so long the dream of the alchemist. StUl again photography has been discovered and perfected and with the use of X-rays it gives a picture of the structure of bodies totally opaque to the eye; the same X-rays seem likely to locate and determine the atoms in the crystal. Here and at many other points we are reaching out to a knowledge of the ultimate nature of matter. In geology, vast progress has been made in the knowledge of the earth, not only as to its features now exhibited at or near the surface, but also as to its history in past ages, of the development of its struc- ture, the minute history of its life, the phenomena of its earthquakes, volcanoes, etc. Geological surveys in all civilized countries have been carried to a high degree of perfection. In biology, itself a word which though used by Lamarck did not come into use till taken up by Huxley, and then by Herbert Spencer in the middle of the century, the progress is no less remarkable. Although not falling within our sphere, it would be wrong, too, not to recognize also the growth of medicine, especially through the knowledge of bacteria and their functions, and of disease germs and the methods of combating them. The world can never forget the debt it owes to Pasteur and Lister and many later investigators in this field. More important and fundamental StUl than all the facts dis- covered and the phenomena investigated has been the establishment of certain broad scientific principles which have revolutionized modern thought and shown the relation between sciences seemingly independ- ent. The law of conservation of energy in the physical world and the principle of material and organic evolution may weU be said to be the greatest generalizations of the human mind. Although sug- gestions in regard to them, particularly the latter, are to be found in the writings of early authors, the establishment and general accept- ance of these principles belong properly to the middle of the nineteenth century. They stand as the crowning achievement of the scientific thought of the period in which we are interested. 53° BUSINESS ADMINISTRATION It might even seem as if the limit of the unknown were being approached. There remains, however, this difference in the analogy, that in science the fundamental relations — ^as, for example, the nature of gravitation, of matter, of energy, of electricity; the actual nature and source of life — the solution of these and other similar problems stiU lies in the future. A GRAPHIC PRESENTATION OF THE HISTORY OF SCIENCE" JSM The lines in this chart show the life-periods of the great masters in the history of djTiamics. The names are arranged alphabetically from top to bottom for convenient reference. This chart is typical of the appearance of a similar chart for any of the sciences and is interesting to us because it shows the dearth of workers in these fields in the sixteenth century and the great outburst of activity which took place with the beginning of the nineteenth century. 2. WHAT CAN SCIENCE CONTRIBUTE IN THE FUTURE? A. A HINT OF THE CONTRIBUTION OF PHYSICS^ The spirit of modem science is something relatively new in the world's history. That spirit has three elements. The first is a philosophy, the second is a method, and the third is a faith. Look first at the philosophy. I say that is new for the reason that all primitive peoples, and many that are not primitive, have held a philosophy that is both animistic and fatalistic. Every phenomenon which is at all unusual, or for any reason not immediately intelligible, used to be attributed to the direct action of some invisible personal 'Taken by permission from Carl Barus, "Historical Graphics," a letter to Science, XXX (1909), 372. " Adapted by permission from R. A. Millikan, "Twentieth Centirry Physics," Smithsonian Report for igi8, pp. 169-84, and "A New Opportunity in Science," Science, N. S., Vol. L (1919), pp. 285-97. THE ADMINISTRATION OF PRODUCTION 531 being. Witness the peopling of the woods and streams with spirits by the Greeks, the miracles and possession by demons of the Jews, the witchcraft manias of our own Puritan forefathers, only two or three hundred years ago. Now, the philosophy of physics, a philosophy which was held at first timidly, always tentatively, always as a mere working hypothesis, but yet held with ever-increasing conviction from the time of GalOeo, when the experimental method may be said to have had its beginnings, clear up to the present time, is the exact antithesis of the above. Stated in its most sweeping form it holds that the universe is ulti- mately rationally intelligible, no matter how far from a complete comprehension of it we may now be, or indeed may ever come to be. It believes in the absolute uniformity of nature. It views the world as a mechanism, every part and every movement of which fits in some definite, invariable way, into the other parts and the other movements; and it sets itself the inspiring task of studying every phenomenon in the confident hope that the connections between it and other phe- nomena can ultimately be found. It will have naught of caprice in nature. It looks askance at mysticism in all its forms whether put forth by Dionysius in Greece in 300 B.C. or by the devotees of Bergson in Paris in 1915. That is the spirit, the attitude, the working hypothe- sis of all modern science, and let me say that this philosophy is in no sense materialistic, because good, and mind, and soul, and moral values, which is only another word for God, these things are all here just as truly as are any physical objects, and with that kind of a creed they must simply be inside and not outside of this matchless mechanism. Second, as to the method of science, it is a method practically unknown to the ancient world, for that world was essentially sub- jective in aU its thinking and buUt up its views of things largely by introspection. The scientific method, on the other hand, is a method which is completely objective. It is the method of the working hypothesis which is ready for the discard the very minute it fails to work. It is the method which believes in a minute, careful, wholly dispassionate analysis of a situation; and any physicist or engineer who allows the least trace of prejudice or preconception to enter into his study of a given problem violates the most sacred duty of his profession. It is the faith of the scientist, and it is a faith which he will tell you has been justified by works, that man is not a pawn in a game 532 BUSINESS ADMINISTRATION played by higher powers; that his external, as well as his internal destiny is in his own hands. Take one illustration. In the mystical, fatalistic ages which preceded, electricity was simply the agent of inscrutable Providence; it was Elijah's lire from Heaven sent down to consume the enemies of Jehovah; or it was Jove's thunderbolt hurled by an angry God; and k was just as impious to study so direct a manifestation of God's power in the world as it would be for a child to study the strap with which he is being punished, or the mental attributes of the father who is behind the strap. It was only 150 years ago that Frankhn sent up his famous kite, and showed that these thunderbolts were identical with the sparks which he could draw on a winter's night from his cat's back. Then, 30 years after that Volta found that he could manufacture these same thunder- bolts artificially by dipping dissimilar metals into an acid. And 30 years farther along Oersted found that those same thunderbolts when tamed and running noiselessly along a wire would deflect a magnet, and with that discovery the electric battery was born, and the erstwhile blustering thunderbolts were set the inglorious task of ringing house bells, primarily for the convenience of womankind. Then 10 years later Faraday found that all he had to do to obtain a current was to move a wire across the pole of a magnet, and in that discovery the d3mamo was bom, and our modern electrical age, with its electric transmission of power, its electric lighting, its electric telephoning, electric toasting, electric foot warming, electric milk- ing^ — all that is an immediate and inevitable consequence of that discovery^ — a discovery which grew out of the faith of a few physicists that the most mysterious, most capricious, and the most terrible of natural phenomena is capable of a rational explanation and ultimately amenable to humaii control. In that statement I have revealed the taproot of the civilization of the nineteenth century. Add to it a bit to cover the harnessing of steam, and the development of the principle of the conservation of energy, and you have an epitome of the progress of the century just passed. It all grew out of the application of an extraordinarily small number of discoveries as to the way in which nature works. There is today a new opportunity in science for the young Ameri- can who is facing the problem as to where his life can be spent on the whole most effectively. It is to be assumed that most men are at bottom altruistic, that most men seek to direct their lives into channels in which they can make them most worth while for the race. I should like to divide aU altruistic effort into three great classes: THE ADMINISTRATION OF PRODUCTION S33 The first has to do with efforts toward the hnprovement of the mdividual characters and lives of men. This is the field which for thousands of years has been the chief concern of religion, and it is perhaps the most fundamental and most important of aU. Its needs and its opportunities are eternal, and no thinking man leaves it out of account. But it is not this field to which I am directing attention today. The second type of effort has to do, in one form or another, with possible and projected changes in the distribution of wealth. In this category are found all efforts toward social rearrangements, and educational reform, brought about either by legal enactment, or by the development of an enlightened public opinion. No man in his senses would belittle this tjrpe of effort. The needs are tremendous and every right thinking man bids every worker of this sort god- speed. But it may after all be questioned whether effort ia this field has as good a chance — I had almost said one-tenth as good a chance — of effectiveness in contributing to human well-being as has effort in the third field, namely, the field which -has to do broadly with the creation of wealth rather than with its distribution. This last is the field of scientific and engineering endeavor; for the scientist is, in the broad sense, a creator of wealth as truly as is the man whose attention is focused on the application of science. Indeed, the scientist is merely the scout, the explorer, who is sent on ahead to discover and open up new leads to nature's gold. His motive may be merely to find out how nature works, but once that knowledge has been gained, man almost always finds a way to apply it to his own ends, so that in a very real sense aU scientific effort is directed toward the improvement of human well-being through the creation of more wealth. B. A HINT OF THE CONTRIBUTION OF BOTANY' In the war period we faced what may be called "emergency" problems. This means that there was no time for prolonged research; in fact, what was demanded was available information rather than research. A few illustrations will be given chiefly to illustrate the nature of the needs that developed. AU branches of botany were called upon to answer questions, and the committee really acted as a clearing house of information. The emergency problems may be put •Adapted by permission from J. M. Coiilter, "Report of the Work of the National Research Coimcil." School Science and Mathematics, XXL {ig2i), 61^-11. 534 BUSINESS ADMINISTRATION under three general heads and were cared for by three different groups. The first category was food, and numerous questions presented themselves. This food problem may be considered under three heads. The first is food production. Some of the problems already started had a bearing upon this, but had not progressed far enough to be productive. There was a great deal of information available relating to food production, but it was isolated and had never been brought together and focused upon the problem; For example, one of the important things was the problem of adjustment. People" everywhere were trying to grow the same crops, in spite of varying conditions. One of the problems was to adjust the proper crop to the locality and soil in order to secure maximum returns. Another problem was the substitution of w:ell known drought-resistant and disease-resistant races for those that are not resistant. There was a great deal of scattered information upon these subjects, but it had to be brought together and made available. Another problem was that of soil management, chiefly a question of fertilizers. Another phase of the food problem was food conservation. I do not mean conservation in the ordinary sense in which it was used during the war. It was the kind of conservation that started the disease-resistant surveys in the effort to conserve our crops from destruction. The start in this phase of the work was made by that group of botanists known as pathologists. There came in also another feature, the co-operation with the Bureau of Markets. Thorough studies were made of the marketing of products, and everything — ^from picking and packing to the final distribution — ^was considered. The third and very interesting phase of the food problem came under the head of vitamines, a subject that is coming to the front. It was known that the vitamine content of food was very important not on account of what is called food value, but on account of enabling one to use food with the greatest efficiency. It is vitamines that may be said to give a man " pep," and the question was raised in connection with the army ration. The problem was to discover a food with the greatest vitamine content that was capable of transportation and could stand storage. There are certain perishable products rich in vitamines, as liver, lettuce, milk, etc., but of course such products could not be transported in an army ration. A specialist in vitamines undertook the work, and found the greatest vitamine content in THE ADMINISTRATION OF PRODUCTION 535 peanuts; but the problem was that when peanuts are roasted the vitamines are reduced. Before the peanut was advised as a part of the army ration, however, the investigator found a wonderful vitamine content in the soy bean, and this became a conspicuous part of the army ration. The second general category of problems was timber. The first question asked was in reference to the most desirable timber for the manufacture of airplanes. The ordinary timber used for that purpose is spruce, but there was some question as to whether it would not be necessary to provide ourselves with some other kind that might be used when spruce was no longer available. It was a question of fiber, lightness, and elasticity. Some suitable timbers were found, and in connection with working upon them, the pathologists dis- covered an interesting situation. A disease might have started in the timber in such an inconspicuous way that an ordinary inspector would not detect it. If the timber were put in use the disease would spread, and sooner or later the airplane constructed from it would collapse. Many accidents in the early part of the war seemed to have been due to the fact that these little specks of diseased tissue had not been recognized when the timber was prepared. The committee was asked also to recommend timbers for various other structures in connection with the war, particularly in connection with the various camps in this country. The third general category was raw products. Few people realize the number of raw products obtained from plants for various uses, such as gums, oils, resins, fibers, etc. The bulk of these raw products had been imported from various parts of the world, chiefly Europe, and of course this source of supply was cut off. It was necessary to discover new geographical sources or new plant sources. A few illustrations wUl indicate where the pressure was felt. A substitute for red dyes was needed, and in a comparatively short time two or three common plants were found that yielded a red dye that did fairly weU as a substitute. The rubber supply offered another problem. The work had been started even before the war in connection with a Mexican rubber plant, for the Brazilian forests were no longer yielding enough. A substitute equal to the Brazilian rubber was not found, but certain substitutes were made available for supplementing the rubber supply. A nvunber of important drugs were called for which are obtained from plants, the supply of which had been cut off, and a number of these were secured. 536 BUSINESS ADMINISTRATION 3. TECHNICAL EDUCATION' Engineering schools, schools of applied science, institutes of technology — such schools naturally did not appear until the physical sciences obtained a considerable development, and their application to the arts and industries became general. In Europe, where these institutions first came into being, they have often evolved from simple beginnings through successive adaptatidns to the changing state of scientific knowledge and engineering practice. The earliest schools appeared in France and Germany. In France the ficole des Fonts et Chaussees, opened in 1747 as a draughting school, was reorganized in 1760 for the training of engineers for the government service. In 1794, the £cole Polytechnique was founded to fit men for the engineer and artillery service of the French army. The standards of this school have always been of the highest, and some of the most prominent engineers in private practice, as well as in the government service, have received their training in its classes. In 1829 the Ecole Centrale was founded as a private institu- tion, and has continued to be independent of government aid up to the present time. In this institution a majority of the French engineers not employed in the government service have been educated. A number of high-grade technical schools partly supported by the government exist in important centres outside of Paris, such as the ficole Centrale at Lyons, ficole des Mineurs at St. Etieime, and the Institut du Nord at LiUe. In Germany, the beginning of the first technical high schools (as the higher technical schools are now called) was made in Berlin in 1799, in the establishment of an academy for builders (Bau-Akademie). In 1 82 1 a trade school (Gewerbesckule) was also organized; and by the union of these two in 1879 was created the present technical high school. By 1835 a number of other trade and technical schools, with little uniformity of organization, were established at different places. These schools could only exact low entrance requirements and perform comparatively elementary work, as no schools existed in which a sound preparation in science could be obtained. After the incorpora- tion of the real or scientific school in the German system, the standards of certain of these early technical schools were gradually advanced, and the principle of specialization was introduced; until after a century of development a series of technical schools has evolved taking ' Adapted by permission from Nelson's Perpetual Loose-Leaf Encyclopaedia. XI, 641-42. (Thomas Nelson and Sons, 1920.) THE ADMINISTRATION OF PRODUCTION 537 equal rank with university departments and requiring equal prepara- tion for admission. Today, Germany possesses nine of these splendid institutions — located at Aix la Chapelle, Berlin, Brunswick, Darm- stadt, Dresden, Hanover, Karlsruhe, Munich, and Stuttgart^ — in which the most advanced instruction in engineering, architecture, industrial chemistry, and agriculture is presented. It is safe to say that the influence of these schools, together with university instruction in pure science, has been one of the strongest single factors in the remarkable industrial development which has been going on in Germany since the middle of the last century, and which has brought her to the front rank among the commercial nations of the world. In the United States, the institute of technology has received far more attention and attained a much larger development than any other form of technical or industrial school. This development has resulted in a type of institution equal in practical value to the most advanced schools of European countries. The Rensselaer Polytechnic Institute, the first of such schools estabhshed, was founded in 1824 at Troy, N.Y., by Stephen Van Rensselaer, the last of the patroons, as a school of apphed science. This institution soon took the form of a school of civil engineering, in which field it has retained a foremost rank to the present time, and its long hst of graduates includes many of the most prominent and suc- cessful workers in this profession. The Rensselaer Institute remained the only example of a school of applied science until nearly the middle of the century, when, in response to the growing demand for scientific instruction, the SheflSeld Scientific School (1847) and the Lawrence Scientific School (1848) were founded in connection respectively with Yale and Harvard Universities. The instruction in these schools was at first in pure rather than applied science; but later, courses of a true engineering type were developed. It was the period of the Civil War, and the years immediately following, however, that witnessed a general movement toward the establishment of schools of technology. The energy turned back at this time into industrial life, the increased knowledge of the country's resources, and the growth of railroads all tended to set in motion a powerful current of industrial expansion. Technical training was needed to fit men to cope with the new problems presented. In 1861, through the efforts of William Barton Rogers, the charter of the Massachusetts Institute of Technology was granted, and in 1865 the first classes were organized. 538 BUSINESS ADMINISTRATION The Worcester Polytechnic Institute was founded by John Boyn- ton, a successful Massachusetts merchant, in 1864, and was opened in 1867. Shop work has been one of the prominent features of the educational work of this institution since its foundation. In 1864 the School of Mines of Columbia University was created, out of which have grown the several schools under the faculty of Applied Science in that institution. In 1865 Lehigh University was founded by the Hon. Asa Packer of Mauch Chunk, and in 1866 courses in several branches of engineering were organized. In 187 1 the Stevens Institute of Technology opened its classes. The Sibley College of Mechanical Engineering and the Mechanic Arts was organized at Cornell Uni- versity in 1872, and other courses in engineering were soon added. In the next twenty years a large number of schools of advanced rank were founded either as separate institutions or departments of universities. The earlier schools were mainly on private foundations, but the passage of the Morrill Act by Congress in 1862, under which large land grants were made to the States for the support of instruction in the agricultural and mechanical arts, resulted shortly in the inclusion of engineering departments in most of the Western State colleges and universities. Among those of the first group are Purdue University, Lafayette, Ind.; the Rose Polytechnic, Terre Haute, Ind.; the Case School of Applied Science, Cleveland, Ohio; the University of Pennsylvania; Washington University, St. Louis, Mo.; and the Leland Stanford Junior University of California. Of later establishments are the Armour Institute of Chicago and the Carnegie Technical Schools of Pittsburgh. Prominent state institutions are the Ohio State University, Michigan College of Mines, the Universities of Illinois, Michigan, Minnesota, Missouri, Nebraska, Wisconsin, and California, Pennsyl- vania State College, and the Iowa State College of Agriculture and Mechanical Arts. According to the report of the U.S. Commissioner of Education for 1910, there were 129 universities, colleges, or schools of technology in the United States giving courses in engineering. There was reported a total of 30,337 students engaged in engineering studies, among which were the following: architecture, 775; civil engineer- ing, 7,889; chemical engineering, 869; electrical engineering, 5,450; mechanical engineering, 6,377; mining engineering, 2,656; forestry, 546; chemistry, 4,807. In addition to these there were 11,163 stu- dents reported as engaged in general science study. THE ADMINISTRATION OF PRODUCTION 539 4. THE ENGINEERING PROFESSION' If the writer may modestly put forward a suggestion for a defini- tion, he would word it: "The Engineer is he who by science and by art so adapts and applies the physical properties of matter and so con- trols and directs the forces which act through them as to serve the use and convenience of man, and to advance his economic and ma- terial welfare." In making the following classification of engineers it is obvious that agreement cannot be secured from aU as respects the number of branches to be recognized. With this apology and for the purpose in hand there are at least thirteen: a) The mining engineer and his close ally, the metallurgical engineer, are concerned with the discovery and the winning and extraction from the earth of its buried treasures of oil, fuel, and rock. He touches the geologist and mineralogist on one side of his functions, and the chemist upon the other. Midway he allies himseK to the mechanical engineer for the power to overcome his resistances and to the electrical engineer for its convenient transmission to the working point. If he concentrates his ore after winning it from the earth he calls again for his machinery upon the mechanical engineer. The metallurgical engineer who transforms the crude ore into marketable metal or into the merchant form or structural shape is allied to the chemist upon the one side for his processes, and to the mechanical engineer upon the other for his machinery. The electrical engineer is more and more furnishing him the energy for conversion by heat through electrical channels, the mechanical engineer furnishing the latter his power. The mining engineer may be both miner and metallurgist. The iron and steel metallurgist is usually a mechanical engineer. b) The electrical engineer is primarily entrusted with the trans- formation of mechanical or chemical energy into electric form, and its transmission in that form to the point of use, where it wUl be again converted into some other shape. The electrical engineer has made his own the question generating such electric energy for the solution of the problems of lighting, transportation of passengers by railway, and communication by telegraph and telephone. He touches the physicist in the realm outside his applications of science, and has the mechanical or hydraulic engineer next to him to supply mechanical ■ Adapted by permission from F. R. Hutton, "The Mechanical Engineer and the Fimction of the Engineering Society," Proceedings of the American Society oj Mechanical Engineers, XXIX (1907), 602-13. S40 BUSINESS ADMINISTRATION ^ energy to his generator, and the mechanical engineer beyond him, where his energy drives the tool, or operates the pump or the elevator. Where his energy is made to appear as high heat, he serves the metal- lurgist, the chemical engineer; where it appears as low heat or as light, he serves the individual members of the community directly, as he does in the problem of communicating speech. His field is very definite. , c) The naval engineer and marine architect is a specialized mechanical and structural engineer. His hull is a truss unsymmetri- caUy loaded and variably supported: his motive power a definite yet widely diversified problem. He covers in addition a wide range of special problems when his vessel is also a clubhouse or hotel, on the one hand, or a powerful fightiug machine upon the other. d) The military engineer must cover both the defensive and the offensive department of his avocation. On the one side he is a structural engineer, and the problems of effective transportation enter his field, which he therefore shares with what is usually called the civil engineer. On the side of attack, the problems of ordnance both for its construction and for its operation take him into the field of the mechanical engineer and electrical engineer, and his problems touch those of the physicist and the chemist and the mathematician on the research and theoretical side. e) The chemical engineer is a new applicant at the door of profes- sional recognition in certain quarters. He is the engineer in charge of production or manufacture where the process or the product, or both, are chiefly or entirely dependent upon the theories and practice of chemistry. He shares his field with the metallurgical engineer as respects the manufacture of metals; he is a mechanical engineer as soon as the plant becomes large enough to warrant the application of power and machinery to the mechanical handling of his product. Gas-plants, sugar and oil' refineries, and the straight chemical manu- facturing corporations call for such a man, whatever his designation. It would appear, however, that the normal tendency of growth and development in this field wUl be toward the utilization of two t)rpes of man. The one wiU be the chemist and the scientist; the other will be the mechanical engineer and executive. /) The sanitary engineer is a specialist in hydraulic engineering in the applications of water supply and drainage as means to secure the well-being of the community as respects its public health. His co-workers are the bacteriologist and the physician. It would seem THE ADMINISTRATION OF PRODUCTION 541 more serviceable, however, for the purpose in hand to group such men with what are hereafter to be called the civil engineers. g) The heating and ventilating engineers, making a specialty of the sanitary requirements of enclosed houses as respects their fresh and tempered air supply, are really sanitary engineers, having, however, an outlook and a relation to mechanical engineering in the appliances of their function rather than toward civil engineering. h) The refrigerating engineer is concerned with the transformation of mechanical or heat energy so as to lower the amount of such intrinsic energy in any material or space. He is most unassailably a mechanical engineer. *■) The hydraulic engineer is of two groups. The one type, con- cerned with the problems of the river or canal for navigation or for power with the dam and its accompanying details of waterways and controlling gatehouses and sluices; and with the gravity storage and distribution by mains of the city water supply has plainly his outlook toward civil engineering. The other tjrpe, concerned with the water motor and its attached machinery for its operation, with the mechanical handling of water for city use or for power in industry, the designer of pumps and hydraulic utilization machinery, has his outlook equally definite upon the field of the mechanical engineer. The future is Kkely to see this diflferentiation emphasized, the one class caUing himself a civil and hydraulic engineer, and the other class a mechanical and hydraulic engineer. j) The gas engineer has two sets of problems: The one is the intra-mural manufacture and storage of his product, where his functions are those of *the chemical manufacturer, and he should be both chemical and mechanical engineer; the other is the distribution problem for whose solution is required the skiU and knowledge of a type which is unnamed, but which, logically in parallel with the hydraulic engineer above, should be called the pneumatic (or gas) engineer. k) There is no recognized group of engineers of transportation, or transportation engineers. Such a group obviously exists, however, whether or iT,ot the name is attached to an organization inclusive of all, or is in general use. Such are the engineers of motive power on the steam railways, with the master mechanics and the signal engineers and the operative class on locomotives; such are the street railway engineers; the car builders; the main tenance-of- way engineers, the bridge engineers, the engineers of floating equipment. From the 542 BUSINESS ADMINISTRATION bottom of the rail upward, these have their outlook on mechanical or electrical engineering; from the bottom of the rail downward, upon civil engineering. I) The foregoing group does not claim to be exhaustive nor inclusive of all subdivisions of engineers even so far as it has gone. The current activities of the Engineering Building reveal bodies of municipal engineers, of illuminating engineers, of engineers concerned in fire protection, and many others. But the purpose has been to clear the way for the separation of the two most closely alHed in function and service, the civil and the mechanical engineer. The civil engineer is confessedly differentiated from the electrical and from the mining engineer: he has been more and more utilizing the achieve- ments of the mechanical engineer, or the latter has been invading the former field of the civil engineer. It is plain that to the civil engineer belong as of right all problems relating to the canal, the lock, the river, the harbor, the dock, the sea-wall, the break-water, the highway, the aqueduct, the bridge, the viaduct, the retaining wall, the permanent way of the railway below the foot of the rail. He also has nearly the whole of the municipal problem in streets, sewage, distribution of water; the location of railways, with geodetic and other surveying, are his. He has the foundation of structures in any event, but may have to share the roof and the skeleton steel frame with other specializations. Tunnehng is usually done by civil engineers, although it was originally a mining engineer's prerogative. m) To the mechanical engineer, on the other hand, belong as undoubtedly, and as of right, the problems* of the generation of power in power houses and power plants, and its transmission to the operative point unless this latter is done by electric means. It is also plain that to the mechanical engineer belong all design, creation, and manufacture of tools and machinery. This makes him therefore the natural administrator or executive of the production processes involv- ing the use of machinery in factories and mills, and it is here that he finds his broadest scope and widest opportunity, as will be further demonstrated hereafter. As creator of machinery, he wi^l be a drafts- man or designer of a producing plant; as operator of the plant con- sidered as a tool for production, he will be a general manager or superintendent, or wUl perform these functions as owner or as presi- dent, vice-president, agent, secretary, or treasurer. As a producer of power, the railway will make the mechanical engineer their superin- THE ADMINISTRATION OF PRODUCTION 543 tendent of motive power, and the rail and joint become also responsi- bilities of his; as administrator of men and machinery, he becomes master mechanic of the railway, and more and more such engineers are chosen to be general superintendents. The automobile or motor vehicle engineer is of course a mechanical engineer. From his knowl- edge and special training he becomes the inspector and tester for all departments of mechanical production. 5. SOME CONSEQUENCES OF TECHNOLOGICAL INDUSTRY A. THE TRANSFER OF THOUGHT, SKILL, AND INTELLIGENCE P Suppose it be desired to drill four holes in a number of plates, so that they bear a certain fixed relation to the edges of the plate; and suppose the operator to be equipped with the ordinary drilling machine which guides the drill so that it pierces the plate squarely. To drill these holes in one plate, with any degree of accuracy, requires a high degree of skill on the part of the operator; and to drill any number of such plates so that the spacing of the holes in them will correspond closely with those in the first plate requires a very high degree of manual skUl, considerable time per plate, and is a very costly operation. Suppose, however, a skilled workman makes a so-called "drilling jig" in which the plate can be securely clamped by set screws and in which all the plates can in turn be clamped in exactly the same posi- tion. The plate contains four holes, which have been very carefully located to correspond with the required location of the holes. Now it is evident that almost any unskilled person can drill the plate, when so held, as accurately as the most skilled workman can without it. Further, he cannot driU the plate inaccurately. True, he must have a slight amount of training in handUng the drilling machine, but this is small and soon acquired. The accuracy of the work no longer depends on the skill of the operator but on the accuracy of his tools. This principle, illustrated above, has been aptly called "The Transfer of Skill," and it is to be especially noted that this principle has nothing to do with division of labor, though, as can be seen, it allows an extension of the same. Nor is the principle inherentiy ' Adapted by permission from D. S. Kimball, Principles of Industrial Organi- zation, pp. 10-13. (McGraw-Hill Book Company, 1913.) 544 BUSINESS ADMINISTRATION applicable to machines alone ; it can be and is applied to hand methods. True, most machines are constructed with this end in view, the drilling machine mentioned above, for instance, having this characteristic in so far as guiding the drill vertically is concerned. It is evident that for a given operation the more skill that is trans- ferred to the machine the less is required in the operator. When nearly all the skill has been so transferred, but the machine still requires an attendant, it is called a semi-automatic machine. Turret lathes are excellent examples of this class of machinery. In drilling the plate without the jig the skilled mechanic must expend thought as well as skill in properly locating the holes. The unskilled operator need expend no thought regarding the location of the holes. That part of the mental labor has been done once for all by the toohnaker. It appears, therefore, that a transfer of thought or intelligence can also be made from a person to a machine. If the quantity of parts to be made is sufl&cientJy large to justify the expendi- ture, it is possible to make machines ,to which all the required skill and thought have been transferred and the machine does not require even an attendant. Such machines are known as full automatic machines. Automatic screw machines are excellent examples of a complete transfer of skill and thought. Care should be taken to dis- tinguish clearly between transmission of intelligence, as illustrated in drawings, specifications, and written or spoken communications in general, between men and the transfer of intelligence or thought from a skilled man to a machine. These principles, transfer of skill and transfer of thought, lie at the bottom of modem industrial methods. Under former and simpler methods of manufacture the machine was an aid to the worker's skill, the amount of skill that had been trans- ferred being very small. In the new machines the transfer of skill and thought may be so great that little or none of these are required of the attendant worker. IP Modem industry is stated by some writers to have begim in 1738 when John Wyatt brought out a spinning machine. Others place the period as between 1750 and 1800, when the power loom and steam engine came into being. It was marked by the development of labor-saving machinery. It was brought about by the change from handicraft to manufacture. ■ Adapted by permission from the Majority Report of the Sub-Committee on Administration of the American Society of Mechanical Engineers, 1912. THE ABMINISTRATION OF PRODUCTION S4S Early British economists held, that the application of the principle of division of labor was the basis of manufacture. From Adam Smith's Wealth of Nations, 1776, we quote: This great increase of the quantity of work which, in consequence of the division of labor, the same number of people are capable of performing, is owing to three different circumstances: first, to the increase of dexterity in every particular workman; secondly, to the saving of the time which is commonly lost in passing from one species of work to another; and lastly, to the invention of a great number of machines which faciUtate and abridge labor, and enable one man to do the work of many. Charles Babbage, the great British mathematician and mechani- cian, beUeved that from the above-quoted statement the most impor- tant principle was omitted. This omission he suppUed as follows in his Economy of Machinery and Manufacture, 1832. That the master manufactiwer, by dividing the work to be executed into different processes, each requiring difierent degrees of skm and force, can purchase exactly that precise quantity of both which is necessary for each process; whereas, if the whole work were executed by one work- man, that person must possess sufficient skiU to perform the most difficult, and sufficient strength to execute the most laborious, of the operations into which the art is divided. It appears, however, that another principle is the basic one in the rise of industry. It is the transference of skill. The transference of skill from the inventor or designer to the power-driven mechanism brought about the industrial revolution from handicraft to manu- facture. After the traditional skill of a trade, or the special, pecuhar skill of a designer or inventor, has been transferred to a machine, an operator with little or no previously acquired skill can learn to handle it and turn off the product. Methods of analyzing and recording operations were early devel- oped. Adam Smith records the divisions of the work of manu- facturing pins, listing eleven operations. Charles Babbage gives a table from a French investigator, showing the number of operations, time for each, cost of each, and expense of tools and material for making pins in France in 1760. He gives a similar table for English manufacture in his day. Thus we see the application of the principle of transf e-ence of skill at the basis of the development of the industry and an early apprecia- tion of the value of the detailed study of operations in making that transference more complete. But the machine was the viewpoint. 546 BUSINESS ADMINISTRATION It was looked upon as the producing unit. Combined and contrasted with this was a lack of knowledge of scientific principles and their sure apphcation. Charles Babbage treats of this forcefully. We quote: There is perhaps no trade or profession existing in which there is so much quackery, so much ignorance of the scientific principles, and of the history of their own art, with respect to its resources and extent, as is to be met with amongst mechanical projectors. In the same vein he emphasizes the need of accurate drawings as if having in mind the poor quality of the work from the average draftsman of his day. He further points out that there is another important factor in successful industry, in addition to machinery. We read that "in order to succeed in a manufacture, it is necessary not merely to possess good machinery, but that the domestic economy of the factor should be most carefully regulated." These quotations foreshadow modem methods of thinking out the work in advance and transferring this thought to the workmen. But from the period of the last quotation almost to the present there has been no change in the basic principles discovered and applied in industry. There has been nothing but an extension of those already known. The place of greatest advance has been in the drawing room. The art of machine design has been greatly developed. The last half of the last century saw a tremendous increase in inventions, a tremendous furtherance of the apphcation of transference of skill to machines and tools. The skeleton of an industrial organization of this period, one that was too large for a single executive to manage, con- sisted of a designing department and a production department, each with a head responsible to the manager. The first of these, the one that was the means of embodying skill in the machinery and tools of production, was highly developed and organized. Experiment, research, and detailed study were constantly resorted to, to aid hi reaching the dfesired result. The work was highly specialized and the employees highly paid. Not infrequently the manager or chief executive devoted much of his own time to this part of the business. The production department presented a contrasting condition. The workmen were given the tools and machines designed to the drawing room and using their own unaided skill were expected to produce work of the desired quality and quantity. Except in rare instances no efEort was made to transfer the skill of the management THE ADMINISTRATIOi'I OF PRODUCTION 547 to the production department and the employees, or to undertake the division of executive thought. Very httle consideration was given to the workmen as a producing unit. Within the past twenty or twenty-five years certain changes have taken place in the attitude of many production managers toward the problems that they face and the forces and means that they control. An increasing amount of attention is being given to the worker. But the most important change, and one that comprehends the others, is in the mental attitude toward the problems of production. The tendency is toward an attitude of questioning, or research, of careful investigation of everything affecting the problems in hand, of seeking for exact knowledge and then shaping action on the discovered facts. It has developed the use of time study and motion study as instru- ments for investigation, the plaiming department as an agency to put into practice the conclusions drawn from the results of research, and methods of wage payment which stimulate co-operation. All of these changes have affected the production department much more than the designing department. The effect is to extend the principle of transference of skill to production, so that it com- pletely embraces every activity in manufacture. The skill of the management is consciously transferred to all of the operations of the factory. This extension is expressed by these phrases: the drawing room is the planning department of design, and the planning depart- ment is the drawing room of production. We conceive the prominent element in present-day industrial management to be the mental attitude that consciously applies the transference of skill to all the activities of industry. B. THE INTELLECTUAL. EFFECTS OF MACHINERY' The question of the net intellectual effects of machinery is not one which admits of positive answer. It would be open to one to admit that the operatives were growing more intellectual and that their contact with machinery exercises certain educative influences, but to deny that the direct results of machinery upon the workers were favorable to a wide cultivation of intellectual powers, as compared with various forms of freer and less specialized manual labor. The intellectualization of the town operatives (assuming the process to be taking place) may be attributable to the thousand and one other 'Adapted by permission from J. A. Hobson, "The Influence of Machinery," Political Science Quarterly, VIII (1893), 111-23. 548 BUSINESS ADMINISTRATION influences of town life rather than to machinery, save indirectly so far as the modern industrial center is itself the creation of machinery. It is not, I think, possible at present to offer any clear or definite judgment. But the following distinctions seem to have some weight in forming our opinion. The growth of machinery has acted as an enormous stimulus to the study of natural laws. A larger and larger proportion of human effort is absorbed in processes of invention, in the manipulation of commerce on an increasing scale of magnitude and complexity, and in such management of machinery and men as requires and educates high intellectual faculties of observation, judgment, and speculative imagination. Of that portion of workers who may be said, within limits, to control machinery, there can be no question that the total effect of machinery has been highly educative. Some measure of these educative influences descends even to the "hand" who tends some minute portion of machinery. So also allowance should be made for the skilled work of making and repairing machinery. The engineer's shop is becoming every year a more and more important factor in the equipment of a factory or mill. But though "breakdowns" are essentially erratic and must alw'ays afford scope for ingenuity in their repair, even in the engineer's shop there is the same tendency for machinery to undertake all work of repair which can be brought under routine. Finally it should be borne in mind that in several large industries where machinery fiUs a prominent place the bulk of the labor is not directly governed by the machine. This fact has already achieved attention in relation to railway workers. The character of the machine certainly impresses itself upon these in different degrees, but in most cases there is a large amount of detailed freedom of action and scope for individual skill and activity. Making allowance, then, for the intelligence and skUl used in the invention, application, management, and repair of machinery, what are we to say of the labor of him who, under the minute subdivision enforced by machinery, is obliged to spend his working life in tending some small portion of a single machine, the whole work of which is to push some single commodity a single step along the journey from raw material to consumptive good ? His work, it is urged, calls for "judgment and carefulness." So did his work in manual labor before the machine took it over. His "judgment and carefulness" are now confined within narrower limits THE ADMINISTRATION OF PRODUCTION 549 than before. The responsibility of the individual worker is greater, precisely because it is narrowed down so as to be related to and dependent on a number of other operatives in other parts of the same machine with whom he has no direct personal concern. Such realized responsibility is an element in education, moral and intellectual. But this responsibility is a direct result of the minute subdivision. It is, I think, questionable whether the vast majority of machine workers get any considerable education from the fact that the machine in conjunction with which they work represents a huge embodiment of the deHcate skill and invention of many thousands of active minds, though some value may be accorded to Mr. Cooke Taylor's con- tention that "the mere exhibition of the skill displayed and the magnitude of the operations performed in factories can scarcely fail of some educational effect." The work of tending machinery is not of course to be regarded as absolutely automatic. To a certain limited extent the "tender" of machinery rules as well as serves the machine: in seeing that his portion of the machine works in accurate adjustment to the rest, the qualities of care, judgment, and responsibility are evoked. A great part of modem inventiveness, however, is engaged in devising auto- matic checks and indicators for the sake of dispensing with human skUl and reducing the spontaneous or thoughtful elements of tending machinery to a minimum. So far as the man follows the machine and has his work determined for him by mechanical necessity, the educative pressure of the latter force must be predominant. Machinery like everything else can only teach what it practices. Order, exactitude, persistence, conformity to imbending law — these are the lessons which must emanate from the machine. They have an important place as elements in the forma- tion of intellectual and moral character. But of themselves they contribute a one-sided and very imperfect education. Machinery can exactly reproduce; it can, therefore, teach the lesson of the exact reproduction, an education of quantitative measurements. The defect of machinery, from the educative point of view, is its absolute conservatism. The law of machinery is a law of statical order, that everything conforms to a pattern, that present actions precisely resemble past and future actions. Now the law of human life is dynamic, requiring order, not as valuable in itself, but as the condition of progress. The law of human life is that no experience, no thought, or feeling is an exact copy of any other. Therefore, if you confine SSO BUSINESS ADMINISTRATION a man to expending his energy in trying to conform exactly to the movements of a machine, you teach him to abrogate the very principle of life. Variety is the very essence of life and machinery is the enemy of variety. This is no argument against the educative uses of machinery, but only against the exaggerations of these uses. If a workman expend a reasonable portion of his energy in following the movements of a machine, he may gain a considerable educational value; but he must also have both time and energy left to cultivate the spontaneous and progressive arts of life. It is often urged that the tendency of machinery is not merely to render monotonous the activity of the individual worker, but to reduce the individual differences in workers. This criticism finds expression in the saying: "All men are equal before the machines." So far as machinery actually shifts upon natural forces work which otherwise would tax the muscular energy, it undoubtedly tends to put upon a level workers of different muscular capacity. Moreover, by taking over work which requires great precision of movement, there is a sense in which it is true that machinery tends to reduce the workers to a common level of skUl, or even of un-skUl. But this is by no means all that is signified by the "equality of workers before the machine." It is the adaptability of the machine to the weaker muscles and intelligence of women and children that is perhaps the most important factor. The machine in its development tends to give less and less prominence to muscle and high individual skill in the mass of workers, more and more to certain quahties of body and mind which not only differ less widely in different men, but in which women and children are more nearly on a level with men. C. TECHNOLOGICAL INDUSTRY IS COMPLEX INDUSTRY Industry that is dependent upon modern technology is very different from the tool industry of medieval times. I. Capital is not as mobile as in the medieval period. The railroad industry furnishes an extreme illustration of this fact. This industry is pre-eminently an industry of much fixed, specialized capital. Tracks, locomotives, cars, etc., require tremendous outlay, and when these instruments have been called into being they can be used only for the one purpose. Social capital has been committed to the enterprise in a way that is irrevocable. In both the railway and in other businesses not merely fixed capital but the expensive and intricate organization, both industrial and commercial, make changes THE ADMINISTRATION OF PRODUCTION 551 difficult unless one is willing to incur heavy costs. Under the regime of simple industry, processes were simple and little capital was required for any new business venture. If the venture proved unsuccessful, the enterpriser could shift fairly readily to some other line of activity. His loss of capital in the old enterprise would not be great nor would his capital requirements in the new enterprise be unduly large. It is self-evident that a very different situation obtains in complex industry. 2. In complex industry a large part of the costs of operation is without any very definite relation to the volume of the business transacted. In the railroad business it may well happen that 60 per cent of the total costs go on independently of changes in the volume of the traffic. This being true, it is not difficult to under- stand why the raUroad manager who wiU develop new business is eagerly sought after; nor is it difficult to see the justffication of build- ing branch hues which are not in themselves profitable, but which bring in a Uttle more traffic for a long haul on the parent line. From a manager's point of view, it is clear that he should give low rates on cheap and bulky commodities in order to induce them to move and thus increase the volume of his business. Thus the significance of the principle of "charging what the traffic will bear" is apparent, as is also the interest of the public in reduced rates as business develops. Failure to reduce rates under such circumstances might mean excessive profits for a public utihty. 3. This is perhaps only another way of sajdng that under com- plex industry the relation between total cost of production and the price of the product may be neither clear nor definite. Total cost in machine industry may be divided into two parts: (a) those costs specifically incurred for a given unit of business and which are vari- ously known as prime costs, direct costs, or variable costs; (6) those costs which are largely independent of the volume of the business and which have been called supplementary costs, indirect costs, over- head costs, or constant costs. The preceding paragraph showed that it pays to get business at a price which is below total cost, provided that price is above prime cost. In addition to this situation, there are plenty of cases where it will be wise for the manager of a complex industry to continue his business even though the price received for his product does not suffice to cover even the prime cost. For example, it has been asserted that a certain railroad has throughout its history hauled coal at less than prime cost because the railroad 552 BUSINESS ADMINISTRATION believed that this was the policy it must follow in order to develop manufacturing industries along its Hnes, and thus secure the traffic and profits involved in the hauling of manufactured goods. Another example may be found in the case of a manufacturer who believes that by a short war he may drive one or more of his competitors out of the field, and who accordingly cuts his price below even prime cost. Of course this cannot be expected to continue as a permanent policy. Another and a somewhat more subtle case is to be found when the price is to be cut below prime cost in order to develop added business of the same type. The logic of this situation hes in the fact that the increased volume of business may result in a different proportioning of the prime and supplementary costs through the introduction of special facihties for handling this new business. The consequence is that the price which was formerly below prime cost is now higher than prime cost because the prime cost (per unit) has fallen. 4. It is difficult for the manager to have complete knowledge of the factors involved. On the organization (both commercial and industrial) sides of his work, this is readily seen. The pressure for added business generally brings about a steady increase in the scale of operations so that personal supervision and control are no longer sufficient. Impersonal devices must be called to the rescue. Of these impersonal devices, accounting, and especially cost- accounting, stands out prominently. Cost-accounting in simple industry would not be a difficult matter. It would involve no intricate computations. In complex industry, however, the cost- accountant must grapple with both direct and indirect costs. He must find methods of distributing the indirect costs over the imits produced. If this is well done, it will be of great value, not merely with respect to finding what costs have been, but also with respect to determining what costs ought to be. 5. Competition is not a satisfactory "law of trade" in complex industry, and the incentives to combination are exceedingly strong. The railroad industry again gives an excellent illustration: If once a rate war breaks out there seems to be no stopping-place. The field cannot be abandoned, for the instrument can produce nothing but transportation, and a large part of the charges (e.g., interest on bonds) would accumulate even if not a train moved. If traffic falls off, costs will not fall proportionately. It follows then, that a manager may go on for long periods "producing transportation " and collecting a rate which does not cover his total cost per unit, THE ADMINISTRATION OF PRODUCTION 553 provided the rate covers added cost per unit or more. As has been seen, he may produce at less than added cost per unit. In addition, since the costs are largely joint costs, it may be impossible to know definitely until after it is all over just where the line between "paying" and "losing" business is (a situation particularly true in the earlier days of our railroads). It is not surprising that we have " Cut-throat Competition" under such circumstances. D. TECHNOLOGICAL INDUSTRY IS TREQUENTLY LARGE-SCALE INDUSTRY' A manager who is trying to arrive at a size of maximum effi- ciency will continually be considering such questions as these: 1. What effect will increased size have upon my costs of manu- facture ? Our study of indirect costs enables us to know some of the things which will pass through the manager's mind ia this connection. 2. What effect wiU increased size have upon my marketing problems, including both the purchase of materials and the selling of, the finished product and transportation costs in both connections ? 3. What effect wiQ increased size have upon the ease of difficulty of bearing the risks of my industry ? 4. Wm the efficiency of administration, in relationship to its costs, be increased or diminished by a growth in size? As the manager studies these issues he sees cases where there are distinct advantages in large-scale production. The first great group of advantages centers around the lowered costs of production arising from such factors as these: (i) the spread- ing of the indirect costs of a business over a large number of units of business; (2) the better utilization of the principle of division of labor in the organization of the business; (3) the better mechanical equip- ment which large firms can afford to buy because they can spread the cost over more business; (4) cheaper power arising from the fact that power can usually be produced more cheaply per unit when produced in large quantities; (5) better utilization of waste, either through selling it in large quantities, or through the development of by- products; (6) the regulation of production by running some plants to fuU capacity, which is generally economical, and closing down other plants in seasons of short demand; (7) the maintenance of scientific laboratories leading to continual improvements in methods and processes. ' Adapted by permission from L. C. Marshall and L. S. Lyon, Our Economic Orecmization. DD. 250-64. (The Macmillan Company, 102 1-) SS4 BUSINESS ADMINISTRATION A second group of advantages centers about the greater ability of the large concerns to bear risks. [This is discussed in detail in chapter vii.] The third group of advantages has to do with the market, includ- ing both purchasing and selling, and embraces such matters as the following: (i) purchasing over a wide area enables the concentra- tion of purchases in the most favorable market under the most favor- able conditions; (2) there is greater probability of regular demand for products when the scope of operations is great, either with respect to the territories involved or to the wide range of commodities; (3) goods may be advertised more efifectively, for advertising cost can be spread over a larger number of units of product; (4) lower transportation charges can usually be secured (a) by shipment in large quantities, since carload lots have lower rates than less than carload lots, (b) by distributing plants in various parts of the country so that the haul to the market wiU be a short one — this is sometimes called the saving of cross freights; (5) resources are available for the development of distant markets, and this may te highly important from the point of view of spreading indirect cost over more units; (6) through integration, the "market" connections of each unit are secured. The f oiurth group of advantages has to do with the administration of the business and includes: (i) the ability of the large concern to pay the amount necessary to secure a high-grade manager; (2) a corresponding ability to secmre high-grade men in the subordinate positions, such as purchasing agents, salesmen, labor administrators, etc.; (3) a corresponding abiUty to employ high-grade technological experts, such as chemists, geologists, and accountants; (4) the ability to reduce the expenses of administration by eliminating some employees, for example, when integration eliminates the purchasing and sales agents who formerly made connections between two of the units or processes which are integrated. In spite of aU these advantages the small firm still persists in many industries and we have no reason to suppose that it is fated to disa,ppear. Its hold is particularly strong where either the raw materials or the processes concerned are not capable of standardiza- tion, for large-scale industry necessarily depends upon standardization and routine. It has a firm grip also in those industries where varjdng individual tastes of consumers must be met; or wherever the personal relation between buyer and seller is highly important. In producing THE ADMINISTRATION OF PRODUCTION 555 "fitted" .clothes, fine rugs, elaborately bound books, high-grade furniture, and all forms of art work, the small business unit continues to hold its own. Then, too, many small firms grow up as satellites of large plants. On the flanks of the great packing houses, for instance, are a swarm of smaller concerns that thrive by making repairs, building means of conveyance, using surplus by-product materials, and in other ways making themselves complementary to the larger concerns. Even in the fields which we have come to consider particularly appropriate to "big business" the small firm has by no means disap- peared. Sometimes it is favored by public opinion, and thus, through its customers rallying to its support, secures stability of demand. It always possesses the advantage of having its management in more intimate and personal touch with detail than can ever be the case with the large business unit; its employees are likely to take a keener and more intelligent interest in its affairs than will the employees of the routinized large-scale businesses. The size of maximum efficiency of a business unit may or may not be reached before it practically controls its field and is thus called a monopoly. What is the size of maximum efficiency in modern business ? There is no definite answer. It varies from time to time and from industry to industry. It depends upon the technique of production, upon the market and the administration of the market, upon the technique of business administration, and aU these factors reach far back into the general social environment. There is, there- fore, no fixed goal with respect to the size of maximum efficiency. The goal has been up to this time a rapidly changing one. See also p. 745. Some Methods of Concentration of Control. p. 705. Relative Importance of the Main Forms of the Business Unit. p. 602. The Control of Large vs. Small Scale Industries. E, STANDARDIZATION IN MANtTFACTUEING' At its best, as set forth by Mr. Taylor and as realized in practice, scientific management means a thoroughgoing improvement and standardization of the material equipment and productive organiza- tion of the plant before an attempt is made to apply its pecuUar ' Taken by permission from R. F. Hoxie, Scientific Management and Labor, pp. 21, 22. (D. Appleton and Company, 1916.) 5S6 BUSINESS ADMINISTRATION metliods and devices to the determination of standards . of labor efficiency and wage payments. It means, thus, the installation of the best available machinery and tools so far as compatible with economy, or at least the overhauling and improvement of the existing equipment; the careful study of the materials of production and the determination of the speed and feed of the machines calculated under the circxunstances to be most effective; the rearrangement of the material equipment so as to avoid the dek)^ and expense of unneces- sary carriage of materials and partly finished product, and to secure so far as possible continuous straight-line production; the introduc- tion of known and new devices for economical and expeditious hand- ling of materials and product; the careful study and analysis of the detailed processes and methods of production looking to the elimination of waste motions; the improvement of accessories, and the most effec- tive application of force and co-ordination of effort; the reorganization of the managerial staff with a view to avoiding so far as possible multiplicity of duties and to securing -definiteness of fimction and responsibility and, therefore, managerial efficiency in every detail; the improvement of the methods of record-keeping and accounting so that exact knowledge may be had at all times of available equipment and materials on hand, their disposition, actual and prospective, that the productive needs of the concern may be met without friction or delay; reorganization of the sales and purchasing departments with a view to broadening and stabilizing the market for the product, and pvurchase by specffication at the most economical rates and in accordance with needs; improvements in the methods of stores-keeping which insure sufficiency of stock on hand, quick deUvery, and avoid- ance of interest and loss on superfluous and unusable stock; better methods of tool storage, care, and delivery; and many other material and organic improvements, all possible, theoretically precedent to and quite apart from the setting of new tasks; the introduction of new modes of payment or the alteration in general of labor conditions and relationships. See also p. 838. Standardization. B. Manufacturing Functions with Particular Reference to Control Our study of the preceding section has shown us somethiag of the background, and a bit of the spirit, of modern producing activities. Production, more than any other division of business activity, has THE ADMINISTRATION OF PRODUCTION 557 fallen under the influence of science. We rely upon technology to a far greater extent than have any peoples of the past to aid us in "our struggle with nature." In this present section we are to survey the control activities and problems involved in modern production as conducted in a manu- facturing plant. Since an introductory survey may deal more appropriately with similarities than with differences, we shall study these activities and problems in a somewhat abstract and gen- eralized way and shall avoid the detail that would be involved in working through specific manufacturing industries. We may properly omit much of the material presented in the orthodox manuals of pro- duction since such matters as location, plant construction, control of personnel, form of the business unit, and t3^e of organization are no more connected with production than they are with other business functions. We shall confine our attention to the problems most directly concerned with the control of production, with the control of those activities having to do with "the creation of form utihty." We begin (Selection 6) with an illustration of what is involved in modem manufacturing. It is, of course, an illustration in one field only and our minds should reach out to secure an appreciation of what is involved in other fields. The samphng method is continued (Selec- tion 7) by using " layout and routing" to illustrate the control problem in manufacturing. Selection 8 reminds us that this control problem varies with different tyi^es of industry, and Selection 9 shows us that, no matter what the type of industry may be, there are certain basic functions always present. Selection 10 gives us a sample of the prob- lems arising in the equipment function. We t\xnx then (Selections 11-17) to some samples of the measuring and communicating aids of control which the production manager may use. Our interest in these aids is not primarily in their "how it is done." We are more concerned with their "what" and "why." Selection 17 takes up certain aspects of the control problem with particular reference to the scale of operations and the section closes with the presentation of a few organization charts of producing businesses. PROBLEMS I. Selection 6 shows what is involved in modern manufacturing in the case of preparing to manufacture a certain new product. How many of those issues apply to preparation for the manuf actxure of an established product ? SS8 BUSINESS ADMINISTRATION 2. Should layout and routing problems be considered in planning an office ? a farm ? a kitchen ? Make a list of the factors involved in an appro- priate layout of an office. Might &e aisles enter into the calculation ? 3. "A modern factory on mass production is like a river, the various ele- ments flowing like tributaries from the different departments and merging smoothly into the stream of finished product." What are the cost consequences of a failure of one department to perform? Does the quotation show you the significance of progress records, control boards, and pre-planning ? 4. A writer says that ideally one should put up a factory building just to inclose properly arranged processing. What does he mean ? He also says this ideal can seldom be carried out. Why not ? 5. What are the different types of manufacturing industry? Give illus- trations showing how the control problem varies with the different t}^es. 6. "Variety creates expense and quantity creates income." Explain. 7. Compare Selection 9 with 6. Is the word "design" used in the same sense in the two selections ? Do you know the meaning of "planning," "design," "dispatching," "control board"? 8. A manager is considering the substitution of a newly invented machine for his present ones in a given production department. What issues does this raise in your mind ? 9. What arguments can you give for a separate toolroom imder the control of a separate functionary? 10. Draw up a list of the wastes that are likely to be present when a business has expanded its buildings without having had from the very beginning some plan of expansion. 11. "There is just one rule for constructing a building to house production and that is, employ a good architect." Comment. 12. It has been urged that manufactures of machinery would do well to issue time-study material in connection with their sales literature. Why or why not ? 13. What objections are there to having the foreman do the inspecting? Do you think that he should have no duties in this field ? 14. "The price of a rigid system of inspection must not be a loss of good wUl." Explain. 15. What are the gains coming from graphic schemes of control? 16. In what types of industry are progress charts particularly useful? 17. Just what is motion study designed to accomplish as a control instru- ment? time study? Compare the usefulness of "imit" time studies and "over-all" time studies. 18. What steps are prerequisite to the making of a time study for purposes of task setting ? 19. What is to your mind the outstanding argument for classification? for symbols? Do you gather that they are viseful to the manager THE ADMINISTRATION OF PRODUCTION 559 only in the field of production? In production, in what types of industry are they most helpful ? 20. What arguments can you see in favor of symbols composed of letters rather than numbers ? 21. One writer gives the following list" of possible items of indirect cost: Indirect material; oil; supplies; freight and express inward, when not charged to direct material cost; indirect labor; supervision; inspection; experimental; rent; taxes; insurance; interest; depreciation; main- tenance; repairs; power or power plant; light; heat; small tools; wastes of material, shrinkage of weight, defective work. Can you cite any items of direct cost ? 22. Take the following arbitrary case of the cost and price of a single unit of a certain commodity: ^ ......... Selling price $773- <- -Total cost J67S ^ ........... Total production cost $625 -^Prime or direct cost $4oo-> Direct materials $200 Direct labor $200 Production indirect or overhead Department Factory General $zoo $7S $50 Selling expense overhead $So Profit $100 23 How could one know that $100 department expense should be assigned to this unit? $50 selling expense? Is cost accounting needed in marketing operations ? "An outstanding need of any manufacturing plant is accurate costs.'' Why ? Can costs be predetermined ? Would anything be gained by having them predetermined ? 24. Precisely what is Gantt's point (p. 600) concerning idle machines and cost? One writer classifies the wastes in manufacturing as follows: 25 26. 1. Material waste a) Raw material b) Finished material 2. Time waste o) Direct time waste 6) Efficiency waste 3. Miscellaneous waste Put as much content as you can into this outline. Do you know how the wastes you cite can be eliminated ? " Cost accounting is a thing quite different from proprietorship account- ing." Explain. Does this mean that a producing concern must keep separate and distinct ccounting systems for the two purposes ? S6o BUSINIESS ADMINISTRATION 2 7 Draw up a list of factors makiag for a small scale of production. Speak- ing in generalizations, what factors enter into the determination of "the size of maximum efficiency" in a business? 28. In the case of a concern which is the result of a combination of several (formerly) competing concerns, what are the relative merits of central vs. local administration ? How would it do to have centralization of policy formation and decentralization of management? Is the solu- tion so simple ? 29. Tabulate the savings resulting from standardization of machines; of products. Why have we not gone farther than we have in standardiza- tion of these items ? 30. This is sometimes called the era of interchangeable parts. Does this presuppose standardization? Does it affect the control problem in production ? 31. Taylor, after years of experimentation, drew up rules concerning tension and care of belts. He did the same in the field of metal-cutting. Were these contributions to production control? Be specific in your answer. 32. Can you imagine a factory having the exact work of each machine planned out for each working minute for the next day ? the next week ? the next month? Is the problem related to the work of the sales department ? the finance department ? In what types of industry is such pre-planning most difficult to accompUsh ? 33. "Specialization really covers two ideas as the word is used in modern industry. The first idea is differentiation and the second is co- ordination of the differentiated elements." What is differentiated? Is it labor, or capital, or management, or plants, or territories? Is control of industry concerned only with that aspect of specialization which is here called co-ordination ? 34. Some managers object to having an organization chart made out for their organization on the ground that it will result in inefficient control. How can they argue this? What arguments can you advance for having an organization chart on the wall ? 6. AN ILLUSTRATION OF WHAT IS INVOLVED IN MODERN MANUFACTURING' As a practical illustration of what the modem system of manu- facturing consists of and how it is installed and carried on, I will take upi the various arts caUed into use and necessary to the successful ' Adapted by permission from J. V. Woodworth, American Tool Making and Interchangeable Manufacturing, pp. 23-26. (The Norman W. Henley Publishing Comnany, igii.) THE ADMINISTRATION OF PRODUCTION 561 constructing and placing on the market of a machine for which there is a large demand. After the developing and experimenting has reached a successful conclusion in a perfect working model, the first thing necessary is the designing and making of full sets of wood and metal patterns, to be used for casting the various parts which are to be cast. The man who does this must call into play a vast amount of ability and knowl- edge in order to accompUsh this part of the work. He must allow of all parts being sufficiently strong, so that the castings resulting will withstand all strain to which they may be subjected when in use, and he must provide for giving them, as far as possible, a symmetrical and artistic appearance. He must also allow for shrinkage in the metal when cast and for a certain amount of surplus stock at all points which are to be machined and finished. After the pattern-maker has produced these patterns in exact duplication of the designs, they are sent to the foundry, where the moulder utilizes his skill and brains, and, with the patterns as models, a heap of sand and a few crude tools to work with, works out his moulds, from which a set of castings are produced. This set is first machined and finished by the use of the best means available, which calls into use all the capacity and skiU of the machinist. After all parts have been finished and assembled, a finished machine is the result. Any defects in shape or strength in the patterns have now become apparent in the finished castings and the parts. The patterns are then carefully gone over and these defects rectified, and another set cast from them. This set is also finished and machined, and then assembled in another machine. This latter machine is found to be a great improvement over the first, as all defects and inaccuracies have been rectified and each and every part has been machined as accurately as possible. The machine now goes to the tool-designer, who is called upon to scheme up and design complete sets of tools, dies, fixtures, and appli- ances for the machining of all castings in repetition and for the exact duplication of each and every other part, from the largest shaft and gear to the smallest pin and screw. To be capable of accomplishing all this the designer must be — ^first of all — a practical man, familiar with aU mechanical principles necessary to the successful construction of the tools, as well as be possessed of a theoretical knowledge of the properties of all metals. He must design the tools to be both positive and accurate, as well as strong and durable. He must also allow of S62 BUSINESS ADMINISTRATION their being constructed as simple as possible, consistent with accurate production and rapid handling when in operation. He must, lastly be certain he is right in all measurements down to the smallest fraction of an- inch. In fact, he must construct a perfect set of tools for the exact duplication of aU the parts of the machine on paper. The designer must also provide for the tools being so constructed as to allow of being handled and operated to their fullest capacity by men of the average skill and iatelligence, with rapidity and without the possibility of error. By the time the designer has accomplished all this and gone over and verified aU his designs, until he is sure of their accuracy and of their coinciding perfectly where necessary, he has finished his part of the work. The tool designs and the machine now go to the tool-maker; he has the last, but not least, proposition to tackle. Where the pattern- maker had to produce his designs in wood, the draughtsman his on paper, and the moulder his in sand, the tool-maker has to create his in steel and iron, which can neither be whittled with a knife, nor the parts fastened together with glue, nor the mistakes and inaccuracies rubbed out with an eraser. Neither can the tool-maker shape his work in sand and locate the points with a trowel. He is the man on whom the accuracy, efficiency, and working qualities of the finished product depend. His skiU, ingenuity, and powers of creation and production are taxed to their fullest extent indeed; and, unless he is a man of brains, skUl, and experience, all work of the designer, pattern- maker, and moulder will have been useless. First in the machining and finishing of the tools and the placing of aU locating points, and then in the assembling of the parts, is his knowledge and skill called into play. As each tool, fixture, or device for the production of some special and distinct part is finished, it must be tried and proved; and the piece machined in it must fit exactly in its proper position and coincide perfectly with all other points necessary in the other parts, so that the performance of its separate and distinct motion will be guaranteed. And thus on to the end of the list, until the full set of tools is complete, so that a perfect and complete machine can be constructed by their use, with the certainty that all parts machined in them will be found to interchange perfectly, so that they may be selected haphazard in the assembling of a new machine or in the repairing of an old one. When all the foregoing has been accom- plished, the preliminary work necessary to the successful manufacture and perfect operating of the machines in any number desired, with the THE ADMnsriSTRATION OF PRODUCTION 563 certainty that each and every one will be an exact duplicate of the others, from the smallest pin or screw to the largest casting, is an accomplished fact. We may now go ahead and mamifacture by means of the interchangeable system, which allows of the construction of machinery at the minimum of cost and to the maximum of pro- duction; and, what is more, allows of constructing machines in exact duplication of each other, which could not be accomplished by any other means. 7. THE CONTROL PROBLEM ILLUSTRATED BY LAYOUT AND ROUTING- It is quite apparent that our manufacturing methods may be divided into continuous and intermittent processes. In continuous processes the material goes in at the receiving end of the plant, is worked continuously, and appears at the shipping-room as finished product. In intermittent or interrupted processes, various materials may be worked to varying stages of completion and stored away, the machinery working on one article today and another tomorrow and assembly into finished products being carried on as is found neces- sary. Buildings are more easily adapted to fit the needs of continuous processes than to those of any other. Sugar refineries, flour miUs, steel-rail mills and packing-houses are examples of continuous indus- tries where buildings often are closely adapted to the needs of the industry, and may often be so closely adapted as to be useless for any other purpose. At the other extreme are many industries that consist principally of assembling operations, little machinery being employed, and that of small size, the entire business consisting of small self- contained production centers. Floor space is the principal require- ment and, within limits, the building may be any shape. In some of these industries the density of the workers is almost the only limit- ing factor, so much so that legal restrictions are in force in many states to regulate the congestion possible in these calUngs. Between these extremes come aU manner of manufacturing processes, each presenting a dififerent combination of needs. The construction of a building perfectly adapted to a given industry presupposes a perfect knowledge of the character and capacity ' Adapted by permission from D. S. Kimball, Principles of Industrial Organiza- tion, pp. 234-42. (McGraw-Hill Book Company, 1913.) 564 BUSINESS ADMINISTRATION of the several machines or processes to be used and the logical arrange- ment that must be made with them so as to carry the material through the plant most economically. In continuous processes this informa- tion is comparatively easy to obtain since the capacity of each machine or set of machines devoted to any part of the work must bear a definite relation to other machines or groups of machines, or the other factors of the process; and the nature of the process usually dictates the natural sequence of operations, or suggests such handling or conveying devices as may be needed to keep the process continuous. In other extreme cases, where assembling is the predominating factor, the problem is still easier; since here sequence is not a factor, the production vmits are small and the output a computable quantity. In intermittent manufacturing, however, this problem is often most difficult and always deserves more consideration than is usually accorded to it, not only in securing a balanced equipment but also to obtain any approach to a flow of material through the plant with a minimum of transportation expense. Obviously, here also no definite rules or method can be evolved for solving such problems, but there are certain general principles that apply to all plants and which may be worth noting. When the equipment of each department has been selected, with the foregoing considerations in mind, the internal arrangement of each department can be completed tentatively, at least, due considera- tion being given to transportation, storage, power, etc. The floor space so determined can be compared with similar departments if such data are obtainable. With the equipment of the several departments selected and tentatively arranged it will remain to arrange the several departments with reference to each other so that the material will pass through the plant with a minimum amount of traveling and handling, and so that the factory shall work smoothly as a whole. This conception of the plant itself as a machine is a helpful one. There are many existing factories where a careful analysis and rearrangement of the plant along the lines suggested would work wonders. The ideal sequence is obtained in some continuous processes, the building following the sequences naturally or the two being mutually adapted to each other. It is obvious that no such sequence or adaptation of building can be secured in the average case of inter mittent production, many compromises usually being necessary. The general principle, however, should be appUed as far as possible, THE ADMINISTRATION OF PRODUCTION 565 particularly if a well-developed planning and routing department is proposed. This is true, not only of factories housed entirely in one building, but also of large plants occupying many buildings, with the added consideration of proper yard room and perhaps railroad connections. If the plant under consideration is a new one, care should be taken to provide ample facilities for additions and extensions ia such a manner that the equipment may be kept balanced without serious rearrangement. Thus, extension can be made without changing the original plan of the works. An ideal building plan is one built on some "unit" system, like a sectional bookcase so that additional units can be added at any time without disturbing the manufacturing system and organization. A little forehanded planning of this kind will often save large sums when additions or extensions are necessary. See also p. 844. The Range of Time and Motion Study. 8. THE CONTROL PROBLEM VARIES WITH DIFFERENT TYPES OF INDUSTRY A' In manufacturing, if we separate work into different types, we are apt to classify them on the basis of the material or of the product. The broader plan — the plan in accord with modern principles of manage- ment — is to consider in the same type those in which the fundamental principles of treatment are alike. Every plant presents the necessity for all the principles j. have indicated, but the principles vary as to relative prominence in different plants. Considered from the point of view of method of attack and manner of treatment, industrial plants may be considered in three groups in which variously predominate: (i) scientific research, required for a plant where the production is handled as a whole by a continuous flow, as in a paper mill or in a pulp mUl, or a cement mill, and where the principal study must be devoted to standardization of methods and improvement in quality; (2) planning and routing, required as the first essential where, as in a printing shop or a shop manufacturing miscellaneous but standard products with independent Adapted by permission from S. E. Thompson, "Scientific Methods of Management Applied to Various Types of Industry," Bulletin of the Taylor Society, II (1916), 2-s. S66 BUSINESS ADMINISTRATION machines, these also involving much detail because of small orders or numerous parts; (3) analysis and detail instruction required as the chief essential, such as in a mr chine shop, along with complex planning and routing. To illustrate what I mean by this grouping into types, I will take as an example two manufactories in which at first thought the indus- trial conditions are absolutely different, with no similar problems. At first thought, we would say that a plant making Portland cement is of a type as different as possible from a mill making paper. On the contrary (and in selecting these two examples, I am taking two processes which I know a little about) the two are essentially alike in type of management. I mean by this that the character of the prob- lems involved when viewed from the standpoint of the scientific method is the same, and siniilar principles of operation are required. In making this statement, I understand fully that the experience of a paper mill superintendent does not fit him for managing a cement mill. A cement mill manager, on the other hand, would be at sea in a paper mill. But let us consider the fundamental principles for a moment. In the paper mill, there are two chief raw materials, rags and pulp; in the cement mill there are two chief raw materials, one consisting essentially of limestone, and another consisting essentially of clay, or aluminous rock. In both cases, after certain preliminary treatment, the two raw materials go together, and then following a continuous process, not touched by hand until the product comes out in the one case at the end of the paper machine to the storehouse, and in the other case, from the grinders to the storage bins. The Ukeness is not merely superficial. In both products, quahty is the chief aim and scientific research is necessary to determine the best way of attaining and retaining quality, in both, the character of the raw materials varies, and must be allowed for. In both the aim is to so mix these varying raw materials as to produce the product of required quality. In both the operation of the principal machines, in the one case, the beating engine, and in the other case, the kilns, are controlled, under ordinary methods of management, largely by judgment. In both processes, the manufacturer usually works backward, from the quality of the finished product to the raw material, and makes changes after having gotten the results from a previous run. I wish I had the time at my disposal to indicate more in detail, the special features required for different classes of industry. THE ADMINISTRATION OF PRODUCTION 56? In the machine shop features requiring special attention and producing results are standardization of tools and machines, routing and instruction cards. In the bank, the chief item may be the development of the per- sonnel and the establishment of standard methods. In the pulp mill it may be a matter of research to determine the raw material and the methods that will produce uniformity. In the paper mUl, it may be the standardization of the furnish and the handling of the beating engine. In the textile mill , it may be the classification of the raw material and the routing to the different frames and in the spinning room the systematizing of the doffing. In the shop manufacturing a standard product, it may be the investigation of methods to produce quantity and quality. In the construction work, it may be the ordering of materials, the systematic distribution, the training to the right method. The relation of the variety of product to the quantity produced, so influences the art of manufacture and especially those branches dealing chiefly with arrangement of machinery and control of material in its processes through machinery, that it may prove of some assistance to the manager confronted with this problem if it be briefly discussed. Except as somewhat modified by highly standardized products repetitively manufactured, or when variety of design is the chief product for sale, variety creates expense, and quantity creates income. Therefore, in manufacture, the ratio of variety to quantity should be maintained as low as possible, consistent with the requirements for operation and service rendered by the product. In variety must also be included alterations to existing designs. Variety and quantity are related in manufacture in three principal forms of complexity: a) As finished groups composed of a variety of parts in varying quantities assembled in standard arrangement. This group is t3^ified by chemical compounds, automotive mechanisms, and printing machinery. ' Adapted by permission from G. D. Babcock, "Influence of Variety, Quantity and Complexity of Product in Manufacturing Control," Industrial Management, LXI (1921), 272-73. 568 BUSINESS ADMINISTRATION b) As finished single items made from one material or mixture and disposed of unassembled, typified by forge and foundry products, spare parts for mechanisms and coinage. c) As finished single parts or assemblies obtained through dis- assembly of complex mixtures or compounds, t3^ified by chemical elements, corn or other grain, packing house and coal tar products, and oil refining. Obviously all sorts of combinations of these principal classes occur in any single factory, but it is noticeable that its major product usually falls within one of them. These' three forms of complexity indicate widely varying requirements in manufacturing management and methods for control. In the first (a) class (complex assembly) no part of the product is salable. The number of finished units for sale is usually small for given investment. The variety and quantity of parts in each finished unit is fixed. The period of time required for production is usually long. The variety of mechanical and other processes is usually large and calls for a varied training in the operating personnel. Any adjustment in the rate of output of the finished unit necessitates readjustment in the rate of production of each element of the work. This is truly a complex problem. There is no simple plan which can be applied for its control. Either the number of units produced must be so large that each producer works constantly on one opera- tion, or centralized planning or daily conference of supervisors to co-ordinate the effort must be provided. Either planning or con- ference is expensive, but the minimum investment is so large, and the chances for irregular delivery so great, that some intensive plan must be applied and thus prevent the manufacturing effort from "nmning wild." Of the two methods of supervision, the central planning for all activities is rapidly supplanting daily conferences. In central planning, standards are required. These standards may be estab- lished opinions of the members of the executive staff, applied, when- ever occasion demands, by the plarming group. Even if these standards are but temporary, better and less costly results are usually obtained by planning. In times of emergency affecting es- tablished standards, or in the control of a product which is continu- ally varying, nothing will substitute for the conference. In the second (6) class (or a simple product) each part is salable. Any variation in manufacture or sale of one part does not seriously disarrange the plans for another. There is no fixed relation of the THE ADMINISTRATION OF PRODUCTION 569 parts in complex arrangement. The period of manufacturing time is usually short. The quantity of each item is usually large. Central planning is much simplified and exact control of output more easily obtained. If the quantity be increased to large amount, the requirements for central planning wiU decrease and somewhat change in form as in that of a complex product. Complexity will invariably decrease if variety is constant and quantity increases. There is, however, one particular problem in the manufacture of this class of product. The rate of demand for various parts is subject to frequent and large fluctuation. The anticipation of rate of demand and the control of stocks, both finished and raw, to deliver orders on time without excessive inventories, taxes to the extreme the most able planning group. In the third (c) class, (disassembly of complex material) new plan- ning problems enter. Neither the variety nor quantity of elements remain exactly constant in the base material. They occur, however, in a proportion so nearly constant as to worry the management in the profitable disposal of those elements for which the demand is light, but which must be produced in obtaining those for which the demand is heavy. By-products occur in this class of manufacture, as it seeks to produce one or more of the single elements. A by-product may become a main product as uses and markets are developed. There is usually some useless residue from the original material or from that which is introduced in its refinement. The high order to which this class of manufacture has reached is shown in the packing industry. Although the quantities of each element planned for in this class are not constant, the probability of fairly uniform returns is sufficient to provide for approximate standards. The beneficial results secured in planning for a complex product can be likewise obtained for this class. This product by its nature has a large influence in manufacturing control, and calls into intensive play more members of the organization than does any other class. Production, storage, sales, distribution, and finance are all much affected. Through our various sources of study and of educational enlighten- ment, practically all of the problems enterimg into the art of manu- facture have been solved and are matters of record. The elements used in planning management are weU established and limited in number. It is the work of combining these elements into methods fitting the problem that is most subject to error. It is errors of this sort, especially with regard to variety and quantity of parts and complexity of their grouping, made by inexperienced or incapable S70 BUSINESS ADMINISTRATION consultants or employees, which has until recently delayed its general adoption. See also p. 778. There Is No Single Correct Form of Organization. 9. FIVE ORGANIC FUNCTIONS IN MANUFACTURING INDUSTRY- [The preceding selections have served to indicate the great range of control problems in modern manufacturing. If the mind is to reaUy grasp these problems some system of classification must be used. The following selection will be foimd to justify careful reading and re-reading precisely because it reduces these problems to groups or classes.] In a manufacturing industry, according to the writer's examina- tion of the subject, the objective of the whole, namely, production, is realized by a synthesis of five organic functions, which are invariably present in every type of industry, but to very different extent in each, just as an army may require a great development of transport or it^ay not. These five organic functions are design, equipment, control, comparison, and operation. DESIGN Taking the first of these organic functions into consideration — that of design — it wUl be obvious that this must exist in every industry, but in a very different degree of development in some compared with others. In a chemical industry, for example, it exists in a very elementary form, that of a mere formula of mixture. In an electric manufacturing or a heavy engineering plant, on the other hand, it exists in the most highly developed state; it demands an elaborate equipment, a large staff, a collection of experts, a close and continuous touch with every detail of life in the shops. But the important point is that both the elementary and the highly developed condition in which we find this function have exactly the same end and aim, namely, that of prescribing in advance the changes which shall successively take place in material. In its fullest development the function of design covers the following items: 'Adapted by permission from A. H. Church, The Science and Practice of Management, pp. 28 ff. (The Engineering Magazine Company, 1914.) THE ADMINISTRATION OF PRODUCTION 571 1. The Piece or Other Unit of Manufacture: a) Nature of material. — May include specification of constitution of material, such as iron, steel, brass, yarns, or other particular materials, and alloys, or other particular kinds of mixtures; and of physical properties, such as hardness, elasticity, elongation, etc. h) Shape and dimensions. — May include specification of margins, allowances, fits, tolerances, and prescribe sizes of sheets or rolls from which the pieces are to be cut and "number out." c) Other properties. — Specification may include the prescription of surface-finish, patterns for markings, color or shade, etc. It may also be concerned with exact quantities, as in chemical manufacture. 2. The Accessories Peculiar to the Manufacture of the Piece: a) Template, jigs, etc. — In addition to the design of the unit of product, it may be necessary to design special jigs, templates, or cards, and special machine fixtures. h) Tools. — In some industries it may be desirable to specify the exact tool, drUl, broach, reamer, or tap by which the dimensions are to be realized or the special type of cutter or other standard accessory to be used on the jobs. This is chiefly for the purpose of securing accuracy and saving time in the operation department. c) Special rigging. — It is sometimes necessary to design temporary devices for handling unusually bulky, heavy, or awkward pieces. d) Machines. — In some cases the new product may demand a novel kind of machine, or a reconstruction of an old one, which has then to be designed specially. 3. The Details of Operation: a) *The method. — May include specification of the particular ma- chines to be used, and their speeds and feeds, the sequence of opera- tion, the sequence of handling at each operation, etc. b) *The time. — May be specified as preparation time and operation time. DetaUs may be carried very far, and time of every motion in extreme cases may be specified. *TIiese items of specification are necessary in proportion as the science and practice of operation is at a low level, or where, as in some machine shops, there is a great variety of work at each machine. In proportion as the scope of machines is limited, i.e., where they can only do one thing at one speed, in one way, the necessity for this class of detail disappears. In some industries there is almost no room for it. See also p. 560. An Illustration of What Is Involved in Modern Manufacturing. p. 624. Control of Manufacture under the Taylor System. 572 BUSINESS ADMINISTRATION EQUrrPMENT Again, the nature of the equipment and the method of its employ- ment may be entirely different in a paper mill, a foundry, and a soap factory; but yet each must have equipment, and in each certain laws as to the use of such equipment must be observed in the same way. In each there will be a layout more eflScient than any other, in each there will be decay and replacement of equipment, depreciation, maintenance and repair, etc., quite irrespective of the kind of equip- ment or its uses. On the other hand, the lay-out of equipment will be much more important in some industries than in others. Product that can be pumped through pipes, or conveyed on endless bands, is much more independent of physical lay-out than one which demands great effort to move it even a short distance. Every variety of equipment will have its own problems, but a large number of these problems are common; that is, they differ in degree and not in kind. But in no case is equipment absent altogether. In its fullest development the function of equipment covers the following matters: 1. Installation or Engineering Selection: a) Buildings. — ^Allotment of different parts of buildings to suitable uses, i.e., the lay-out of departments, installation of appliances for lighting, heating, ventilation, fire protection, etc. - b) Power plant. — Selection of the right type of plant, and suitable means of distributing and delivering power where required. Con- sideration of the margin of power necessary. c) Materials. — Provision of adequate equipment for storage and conveyance of materials. Storage racks, bins, fixtures, cranes, travelers, trucks, conveyors, etc., considered in reference to the volimie of work and lines of travel. d) Machinery. — ^Provision and installation of machinery and design of lay-out in relation to travel of product. 2. Maintenance or Administrative Use: a) Buildings. — Repair and maintenance of structures, maintaining an adequate service of light, heat, ventilation, and fire organization. Keeping premises clean and bright. b) Power. — Keeping up supply of power in right quantity, during right period, on an economic basis. Attending to storage of fuel against contingencies, oiling shafts, maintaining belts, and so forth. THE ADMINISTRATION OF PRODUCTION 573 c) Machinery and appliances. — Repairing and maintaining all kinds of equipment in working order. See also p. 76. The Interdependence of Construction and Equip- ment with Site Location. p. 578. A Sample of Problems Arising in Manufacturing Functions. CONTROL The function of control is also obviously common to all manu- facturing plants. Broadly stated, it is the function of the "boss." But as the boss cannot subdivide himself, and cannot attend to all the matters necessitating control, this function requires more or less development according to the industry. In some, such as continuous industries where product is subject to a fixed and un- varying sequence of manipulations wholly conditioned by the nature of the machinery employed, control does not need great elaboration. In other industries, such as engineering manufacture, the multiplicity of processes and parts, the necessity of storing, handling, and moving innmnerable articles of product, the importance of taking care of the element of delay, the necessity to co-ordinate instructions and material so that one does not have to wait for another, means a high degree of elaboration of the function of control, and it is consequently this function that commonly gets over-organized and smothered imder folds of red tape. But no industry exists in which control does not need intelligent organization on its own merits. In its fullest development the function of control covers the following matters: I. Installation of Control — The Delimitation of Duties: a) Within the other organic functions. — Commencing with the heads of departments, i.e., the men who are in charge of the organic func- tions of design, operation, equipment, and comparison, it plans their duties, decides what subordinates they should have, and what specific duties these subordinates should fulfil. It therefore plans the interior structure of the systems by which these functions are exercised. b) In its own special department. — It plans the relations between the above departments, and says which persons shall confer, and when. It arranges all the specially administrative duties, such as ordering, receiving or storing material; receiving customers' orders and passing them to the various departments concerned; supervising S74 BUSINESS ADMINISTRATION the current work of all departments, in the light of costs, wastes, delays, poor work, and other irregularities. It arranges all this by planning specific duties for specific persons, including the organiza- tion of specialists' advice or "staff" assistance. 2. Administrative Function of Control — Supervising, Ordering, Instruct- ing, and Training: a) Within the other organic functions. — Once organized under a head, each function is to a great extent autonomous. In other words, control of the departments of design, operation, equipment, and comparison is exercised through the heads of these departments, who are responsible for seeing that their subordinates are carrying out their duties as planned originally. b) In its own special department. — ^Administratively speaking, con- trol is the great co-ordinative function. It sets everything in motion by issuing orders. Its particular task is to issue orders in such a way that, when all have been carried out, the result is exactly what was in- tended. It also observes failures, studies their reasons, and sets in motion the mechanism of instruction or training to prevent similar failures in the future. See also pp. 581-602. Measuring and Communicating Aids. p. 624. Control of Manufacture under the Taylor System. p. 149. Education and Training. COMPARISON. Similarly, there is no industry in which the function of com- parison does not exist. In "continuous" industries, where what is being done today at twelve o'clock will be done tomorrow at the same hour, comparison is at its lowest development, though even here there are often analyses to make, temperatures to watch, operatives' attendance to check and so forth. For comparison deals with the record of quantities, whether such quantities are expressed in time, money, degrees, levels, or other notation. It therefore includes testing, inspecting, and cost accounting. Any data which are of significance at all are only so by comparison. This com- parison may be with previous or future work of the same kind, or it may be with standards. And such standards, again, may be specified standard set up by design, such as limits, fits, or .dimensions, or may be comparisons between time allowed for a job, and time taken, or may deal with physical standards such as temperatures, pressures, degrees of vacuum, specific gravity, and so forth. But THE ADMINISTRATION OF PRODUCTION 575 all these cases postulate two things: (i) the observation and record; (2) something by which to judge the value of the observation and record. No industry is without need for some of these methods of comparison, while in many industries a very considerable develop- ment of the function is both proper and profitable. In its fullest development the function of comparison covers the following matters: 1. Technical Sphere of Comparison: a) Chemical analysis. — Compares the composition of materials with purchase specifications (which are, of course, based on standards) and with the standards specified by design as to use of formulae of mixture. Embraces all comparison other than physical, i.e., all in which the constituent elements of bodies need to be compared with standards. b) Physical analysis, or inspecHon.^Compz,Tes the physical con- dition of materials which have been purchased or made with the stand- ards specified by purchase or design, such as regards dimensions, color, pattern, surface finish, etc. Carries out physical tests for hardness, elasticity, elongation, tensile strength, etc. Passes on all physical properties not necessitating analysis. 2. Accounting Sphere of Comparison: a) Time. — Records results of work of which the efficiency is measured in time, and compares with standards. Thus, attendance of employees, working and idle time of machines, time of operations in which result is dependent on duration, as in some industries, where product is matured, seasoned, etc. b) Quantity and number. — Records fluctuations which are ex- pressed in quantity or number, such as quantity of material in stock, consumption of tons of fuel in proportion to pounds of steam raised, number of employees present and absent, weight of components passing into a mixture, etc., and compares these figures with standards. c) Value. — This is the sphere of cost accounting. Records the cost of labor, expense, and material, as and when incurred and used, and compares with standards. Classifies the results of work as utilized capacity and waste. Groups labor, expense, and material so that the cost of jobs is ascertained and compared with expected or standard cost of such job. Seealsop-sjo. Measuring Aids: Testing in Connection with Purchasing, p. 581. Measuring and Communicating Aids: Inspection, p. S9S- Measuring and Communicating Aids: Cost Ac- counting. 576 BUSINESS ADMINISTRATION OPERATION The final organic function found in manufacturing is that of operation. This comprises the exercise of manual skills, trades, and callings, usually by way of operating machines, but not neces- sarily so. Just as the prime organic function of an army is the fighting corps, so the prime organic function of a plant is that of operation. Just as a transport corps will not win battles, though it may lose them; so the organic fxmctions of design, equipment, control, and comparison will not make an ounce of product, how- ever well arranged, though if badly arranged they may lose the battle of competition very easily indeed. Operation is definable as the act of changing the status (that is, the form, dimension, or corti- position) of material in accordance with the specification of design. In practical language it is the work of the shops, but only the operative work of the shops. It does not include foremanship, which is part of control; or inspection, which is part of comparison. It goes without saying that operation is a function present in every plant of every kind. In its fullest development the function of operation covers the foUowiag matters: 1. The units of operation. — Operation is the synthesis of a number of separate trades, skUls, and processes. Usually, but not always, these are exercised through the operation of machines. In most modern industries machines occupy nearly the whole field, and such hand skill as remains is usually in the natmre of producing greater refinement of finish than machines can be made to give. Every distinct skill or machine process is a unit of operation. Operation itself depends for its eflSciency on the application of processes to units of product in accordance with the best technical practice. 2. Preparation for operation. — In some industries, whenever prod- uct is varied, it becomes necessary to modify, add to, or take away some accessory of the machine. This is termed preparation and should always be reduced as much as possible, as it is a loss to production. It is generally considered to include, also, restoring the machine to normal condition and cleaning up after a job. 3. Operation. — Operation is the actual technical work of cutting, pressing, twisting, heating, weaving, mixing, assembling, etc., as performed on the material in accordance with the specifications of design, and by aid of the best technical efifort able to be put forth by the operator. THE ADMINISTRATION OF PRODUCTION 577 Note. — Operation does not include anything but the application of technical skill to transform and transmute material. Therefore it does not include in- spection, maintenance, or the handling of product at any other time than when putting it in position for operation and removing it from the machine. SUCCESSIVE DEVOLUTION OF THE ORGANIC FUNCTIONS OF MANUFAC- TURING DURING THE RISE OF AN INDUSTRY TOWARD MODERN CONDITIONS Stage I. Beginnings of indtistry. — The craftsman exercises all the manufacturing functions in his own person. (Selling and finance are not included in this discussion.) "The day of small things." Stage 2. Devolution of operation. — A workman and apprentices are engaged for the manual or operative work. The workman exercises supervision and becomes in course of time a fuUy fledged foreman. Later he has to devolve some of his duties on other fore- men, and is called superintendent. (Once an organic function is separated out, devolution goes on within it.) At this stage the owner looks after everything else, but ceases to do operative work. Stage 3. Devolution of equipment. — Equipment begins to assume importance. A mechanic is engaged to run the power plant, attend to repairs, and do odd mechanical jobs. Later we see him represented by a "works engineer " with a power staff, a repairs staff, an electrician, etc., on whom these specific tasks have been devolved. Stage 4. Devolution of design.- — The owner finds it necessary to devolve the preparation of designs and drawings, and so engages a designer and frees himself from this function. The designer's work grows and is devolved on subordinates until we may find ultimately a chief engineer, chief draftsman, a production engineer, an experi- mental staff, etc. Stage 5. Devolution of comparison. — Up to this point the owner has only guessed at costs, from rough memoranda compiled by him- self. He now devolves this work on a cost clerk, who represents the accounting side of comparison. As the business develops, the cost clerk has to devolve details on others, and becomes an account- ant, with subordinate pay clerks, time clerks, stores-record clerks, etc. Also the owner ceases to "pass" on each piece. of completed work, and devolves this task on an inspector, who represents the technical side of comparison. Later the inspector's work expands until we find a fully developed testing and inspecting department. Note. — At this stage all the activities of administration, exercised by the owner of the business at the beginning, have been devoluted to organic functions 578 BUSINESS ADMINISTRATION (themselves made up of groups of individuak with specific duties), save and except his personal controlling and supervising work — or, in popular language, his function as "boss." This latter work, however, soon outgrows the possibility of his attend- ing personally to all of it; hence we arrive at: Stage 6. Internal devolution of control. — Control, which remains vested in the owner of the business, is exercised by means of a regular internal devolution of this function. It begins with the owner him- self, who is directly supervising the heads or executives who have been placed in charge of the functions already separated out (as above), and also goes down through the purchasing agent, store- keeper, order department, correspondence oflSce, tracing depart- ment, shipping office, and so forth in definite lines of devolu- tion for special duties. Later we find the organization of "staff" assistants and advisers, whose expert knowledge is at the service of those requiring it. Note. — The five organic functions are now completely separated and organ- ized and each has its own internal system of devolution, enabling it to fulfil its special purpose. Our discussion of the problem of management as presented in this book ends here. The organization for manufacturing is now complete. But in large businesses the owner (or the board of directors representing the ownership) withdraws still further from actual contact with routine. We then reach: Stage '. Final stage. — The administrative and the determinative elements of management are separated. The former is devolved on a president or general manager, who is personally responsible, for the correct working of the five functions of administration. The determinative element is reserved by 'iie directors as their special field. They decide on points of policy. lo. A SAMPLE OF PROBLEMS ARISING IN MANU- FACTURING FUNCTIONS' [In a survey course it is not possible to discuss many of the details arising in the five organic fimctions sketched in Selection 9. That these details are multitudinous may be seen from the following outUne treatment of the issues which come up in connection with selecting and installing machines. This is, of course, only one phase of the eqtiipment function. For such discussion as we have been able to give other phases of this function see page 76, The Interdependence of Construction and Equipment with Site Location, and page 374, Purchase and Stores under Unsystematized, Systematized, and Scientific Management.] ■ Adapted by permission from Library of Factory Management, II, 71-75. (A. W. Shaw Company, 1915.) THE ADMINISTRATION OF PRODUCTION 579 A. Points to consider when choosing machinery I. Cost factors 1. Investment a) Initial cost of machine b) Cost of accessories c) Installation d) Depreciation 2. Operational a) Upkeep and repairs b) Supervision c) Power d) Wages of operator 3. Final a) Hourly charge when idle b) Hourly charge when running c) Normal productions per hour d) Unit cost of production n. Design factors 1. Materials of construction a) Kind used for different parts b) Distribution of metal c) Strength and stabiUty 2. Power a) Is it abimdant ? b) How applied ? c) Is control centralized ? d) Are heavy parts power-moved ? e) Is direct motor-mounting provided ? 3. Lubrication a) Forced ? sigh-feeds used ? b) If not forced, oil holes accessible ? c) Oil and grease cups on bearings ? d) Gears inclosed ? run in oil baths ? 4. Bearings a) Ordinary b) BaU bearing c) Roller bearing 5. Method of chucking work a) Ordinary b) Magnetic c) Air controlled S8o BUSINESS ADMINISTRATION 6. Safety a) Machine b) Operator 7. Speed changes a) Number and ratio b) Quickness of change 8. Operation a) Friction b) Vibration c) Ease of feeding and discharging d) Self-helping attachments 9. Repairs a) Are wearing parts interchangeable ? b) Accessible, and easily changed ? 10. Miscellaneous a) Facilities for quick set-up b) Other kinds of work possible ? c) Is it easily movable ? d) Rigged for use of cutting lubricant e) Fit location available ? B. Readjusting production when you instal new machines I. Workmen must be taught to 1. Tend more than one machine 2. Keep tools in condition 3. Keep magazine filled, if automatic 4. Provide sufficient oil supply 5. Remove parts and clean out chips 6. Keep close watch on operations II. Shop routine must be altered to 1. Insure ample work ahead at all times 2. Provide continuous removal of finished product 3. Give ample facilities of raw stock and finished product 4. Keep tools always fit and laid out for next job 5. Permit long runs on each set-up in. Business and seUing policies must be revised to 1. Meet new schedules, if such are necessary 2. Fit change in labor conditions, if extensive 3. Create new and permanent demand for increase in output 4. Insure permanent service of the new equipment, if product changes THE ADMINISTRATION OF PRODUCTION 581 II. MEASURING AND COMMUNICATING AIDS: INSPECTION' [This selection should be closely connected in your reading with Selection 9. Inspection was there listed as one of the three main elements ia comparison. This present selection gives a hint of how the discussion of aU the functions mentioned in Selection 9 may be elaborated.] While the necessity of inspection depends to a certain degree upon the nature of the product, it is a question as to just how far, when, and where it pays to inspect — as to whether it pays to inspect each component part minutely, as to how often a part should be inspected, and as to where it should be inspected, in a central inspection depart- ment or otherwise. The possibiUties and scope of a system of inspection have enlarged greatly with the development of specialization. While formerly the chief aim of inspection was to prevent the necessity of hand fitting, the adage being that "an ounce of inspection is worth a pound of fitting," an up-to-date inspection system is planned to accompKsh a varied number of ends, among which the following are the most fre- quently sought: 1. To prevent loss in prestige due to non-uniformity or defects in product which may cause accidents or delays. 2. To prevent necessity of hand fitting. 3. To prevent expense of replacing defective parts. 4. To prevent additional labor on parts already spoiled. 5. To prevent acceptance of defective raw material. 6. To pay workmen only for good workmanship. 7. To prevent decrease in quality due to an increase in quantity caused by the introduction of wage systems. 8. To stimulate good workmanship through the moral effect of keeping records of defective workmanship. 9. To point out imperfections in machines and processes as well as in workmanship. 10. To point out proper allowance for unavoidable loss in making cost of price estimates. 11. To point out operations in which the workman must be better educated or instructed. . Adapted by permission from A. D. Wilt, Jr., "The Relation of Inspection to Money-making Shop Management," in The Engineering Magazine, XXXII (1907), 725-36. S82 BUSINESS ADMINISTRATION 12. To stimulate good will through fairness in fixing responsibility. An inspection system may be operated for one or all of these pur- poses, but it may not always be devised so as to accomplish all of them. The inspection necessary to produce a perfect automobile, adding machine, or cash register may be entirely unnecessary to pro- duce one of the so-called "tonnage" products, such as rolled steel bars or castings, or such products as cloth and leather. But never- theless the same principles of shop management are involved in every case, and can be applied in varying degrees to any class of manu- facture. Upon the degree to- which they can be applied — upon the certainty with which several conditions can be satisfied — depends the success of any plan of inspection. Conditions which must be satisfied before it can be determined how far, when, and where it pays to inspect are as follows : I. Responsibility must be fixed with certainty. II. The price of a rigid system of inspection must be not a loss of good will. III. The authority of an inspector must end when he has passed upon the quality of the work. It is safe to postulate, at least, that his authority could cover the following functions: 1. That of detecting the defect. 2. That of detecting the cause — ^locating the responsibility. 3. That of prescribing the remedy. 4. That of administering the remedy — of disciplining or instruct- ing the responsible party. 5. That of reporting the defect. An ideal system of inspection is one which will enable the inspector to express his opinion as to the cause of the defect, and leave the duty of placing the responsibility and disciplining the men to a higher authority. IV. The responsibility of detecting defects must be placed on the operator as well as on the inspector. V. Comparative records must be kept of all appreciable rejections. Many different plans of inspection have been devised which will accomplish some or all of the benefits that have been pointed out. Each plan must depend more or less upon the nature of the product. It would be impracticable to rely entirely upon a plan of centralized inspection in the manufacture of boilers or safes, but as many of such large products contain some small parts, it might pay to have both THE ADMINISTRATION OF PRODUCTION 5^3 central and local inspection. It is therefore impossible to recommend any one particular plan for all classes of manufacture, so only the particular features of the plans in most general use will be pointed out. Most of the plans of inspection are variations of one or more of the following: 1. Local inspection by traveling inspectors. 2. Local inspection by foremen. 3. Departmental inspection departments independent of depart- ment foremen. 4. The centralized inspection department. 5. The "chain" plan of inspection. 1. The plan of local inspection by traveling inspectors. — The distinguishing principle of this plan is that each production center is visited by a traveling inspector. Either this plan, or that of having local inspection by foremen, is essential in the manufacture of large products which cannot be readily transported. 2. The plan of local inspection by foremen. — Some manufacturers have attempted to secure the benefits of traveling inspection by placing the whole duty of inspecting upon the foreman. This is prac- tically the same principle as setting a thief to catch a thief, for as a foreman is partly responsible for the spoiled work in his department, it naturally is not to his interest to report all defective work. The many duties of a foreman generally prohibit his assuming the direct responsibihty of inspecting, so sometimes the plan is adopted of having a small inspection department in each department. 3. Departmental inspection departments independent of department foreman. — The inspector in this plan is generally not under the department foreman. The stock is inspected and counted just before it leaves the department. In this way the responsibihty is fixed with quite a degree of certainty and celerity, and it is practical to have the duty of inspector, end when he has located the defects. Its chief drawbacks lie in the difficulty of preventing collusion between the inspector and foreman. 4. The plan of centralized inspection. — It has become almost an axiom in factory management that the greater the centralization or specialization, the less is the cost of manufacture. While this does not necessarily follow in all cases, I have become convinced that it pays in the fimction of inspection. It pays because but one skilled inspector is necessary, for an inferior grade of labor can be employed to do the routine inspection, owing to the fact that the responsibihty S84 BUSINESS ADMINISTRATION of the inspectors is narrowed down to the simple duty of detecting and reporting defects. The chance for partiality is reduced to a minimum, and consequently the chance for ill will, owing to the isolation of the inspection department from all other departments. The chief claims for merit in this plan are its economy, its security from collusion, and the surety with which it supplies reliable records of all rejections. 5. The chain plan of inspection. — 'The "chain" plan is practical only in the manufacture of such products as will permit of a sequence of operations in one department. The plan is to have the last man in the " chain " do the inspecting. Advantage is frequently taken of the opportunity to pay all operators in the chain only for good work turned out at the end of the chain, the theory being that this compels each man to goad on the other fellow to increase his output as weU as to turn out accurate work. When this is done it seems to me it be- comes a " chain-gang " plan. It has the merit of preventing additional labor on defective work, but is so conducive to ill will that it is not used very extensively. There are other plans of inspection, most of which are variations or combinations of the above. It has been my experience that in every case their efficiency can be measured by the degree with which they satisfy the five given conditions, namely: certainty in fixing responsibility, success in preserving good will, efficiency in delimiting the inspector's authority, surety in making the operator detect defects, and accuracy in providing records of appreciable rejections. 12. MEASURING AND COMMUNICATING AIDS: GRAPHIC PRODUCTION CONTROL' [As time has gone on, many schemes of using graphic methods of control have come into use. The diagram shown on page 585 gives a hint of the possibihties in this field.] The three factors influencing the processing of materials are: Plant arrangement, shop transportation, control of production. If we analyze these three a moment, it will be found that the best plant arrangement with the most efficient shop transportation methods will not insure results if the methods of production control are at ' Adapted by permission from C. E. Knoeppel, " Graphic Production Control," Industrial Management, LVI (1918), 383-90. THE ADMINISTRATION OF PRODUCTION 58s fault. On the other hand, given the most efficient methods of pro- duction control, with only a fair degree of efficiency as to arrangement and transportation, and better results will be forthcoming than in the case just mentioned. In other words, provide proper production control first, then tone up and make better the arrangement of plant and the shop transportation of materials, GENERAL SCHEME OF GRAPHIC CONTROL ORAPHIC PRODUCTION CONTROL \WHATI5 SHOWN 69 VITAL FACTS HEC£5- SARY FORSHOP JOBOIIMACHmFHFXTJOS AHEAP, ffORKDISTRIBUT- lOHTWE KEEPING loifMi/CHmimsBmoo/fE AJAmmUHOFTHFm,liA MEASURE OF EFFORT [GRAPHIC FLEHENrSX XHOWIT IS SHOWN FvnDAMENTAt. cosmim miEmiHe moUCTIOH CHARTS CUIS1£S OF k) alloata thai must be KmWH ABOUT AHY ORDER. PROGRESS PECORD I &RAPHIC CONTROLBOARD I DISPATCH BOARDS I PRODUCTION DIALS STRAieifTUHESFOR LEH6TH0FmitK/IAYrum FORACCOHniSHNEHT 5£E DIAORAH AHO DETAILED INSTRUCTIONS ZARDSINRACKSJIHE PUNCHED BY DISPATCH CLERK CL OCKFURff, MOVABLE HAND.ADYAIfCEBBY flHAL PROCESS IHSPECTOR. With this fundamental in mind, the next step is to create a mechanism to take over the work of intelligently and efficiently controlling production. This should be done through the organiza- tion of a control department, a phrase which means more than "Production Department" or "Planning Department." What will this control department control? Let us determine what the elements are. The activities of the workmen must be guided or there will be only ordinary results in production. The S86 BUSINESS ADMINISTRATION movement of material as to purchase, receipt, issuance and trans- portation must be intelligently guided. The work to be done or the operations must be known and properly defined. The equipment (machines, tools, jigs and fijftures) must be in readiness for the work that is to be done. Hence we have four elements in control under which can be classiQed all factors influencing production, as follows: labor, which does the work; material, on which the work is done; operations, which is the work done; equipment, with which the work is done. If one or more of the four elements are neglected in, or eliminated from, any plan of production control, graphic or otherwise, do not look for any substantial results, /or they will not he forthcoming. Control brings labor, material, work and equipment together and co-ordinates them for efficient manufacture. 13. MEASURING AND COMMUNICATING AIDS: A PROGRESS CHART' [This is an illustration of the widely known Gantt Progress Chart for keeping track of the progress of work. The chart here reproduced deals with progress in deliveries. The same method is used to watch production progress.] At the left of the chart is a list of articles to be procured. The amounts for which orders have been placed are shown in the column headed "Amount Ordered." The dates between which deUveries are to be made are shown by angles. The amount to be deUvered each month is shown by a figure at the left side of the space assigned to that month. The figures at the right of each space indicate the total due at that date. If the amount due in any month is all received, a light line is drawn clear across the space representing that month. If only half the amount due is received, this line only goes half way across. In general, the length of the hght line indicates the amount deUvered during that month. The heavy line shows cumulatively the amount deUvered up to the date of the last entry. It will be noted that, if this Une is drawn to the scale of the periods through which it passes, the distance from the end of the line to the current date wiU represent the amoimt of time- deUveries are behind or ahead of the schedule. It is thus seen ' Adapted by permission from H. L. Gantt, "Organizing for Work," Industrial Management, LVIII (1919), 91. THE ADMINISTRATION OF PRODUCTION 587 that the short lines are the ones which require attention as they are farthest behind schedule. A, B, C, and D.are summaries. A is a summary of the orders shown on the lower part of the chart. r ^:i. s = fjT" _~L1 1 -l- p T" V Tj- nr J 1 § 1 l3 ■ 22 m S "1 s -« 1 1 p ~iS N i: S| en 1 1 «• CO ^-1- 5 S "Id n cf s 1 S -i- 1 1 N' h ^ E l-Ei -^-s r^ s g 1/>N iii 1 CO 1 ^ «-s- i-f ~f3 i: r S -E| 1 1 1 r 9U. 1 f 1 ^ z: a W C^ -S s ■* c 1 N ^ « 1 n- r^ ifi ^ CO, «o| pi g M r i it f^^ £ S h ^ ^ J k" 1 § J ^ -m Oh 2: ^1 "ff>| 5| (Vi < 11 1 i c 8 1 o 1 § 1- u J 1 5 ■ i 2 ■u CJ ^ 5 c u. > > DC til 0- i < p. ; 1 S c ■J Lfl Si % 3 ■> 6 J f lO Kl _1 < i < (C a: 1 0. tf + ir £> r^ CO S88 BUSINESS ADMINISTRATION 14. MEASURING AND COMMUNICATING AIDS: TIME STUDY' Time study is the one element in scientific management beyond all others making possible the " transfer of skill from management to men." The nature of time study, however, is but imperfectly under- stood and it is therefore important to define it clearly. "Time study" consists of two broad divisions, first, analytical work, and second, constructive work. The analytical work of time study is as follows: o) Divide the work of a man performing any job into simple elementary movements. b) Pick out all useless movements and discard them. c) Study, one after another, just how each of several skilled workmen makes each elementary movement, and with the aid of a stop watch select the quickest and best method of making each elementary movement known in the trade. d) Describe, record, and index each elementary movement, with its proper time, so that it can be quickly found. e) Study and record the percentage which must be added to the actual working time of a good workman to cover unavoidable delays, interruptions, and minor accidents, etc. /) Study and record the percentage which must be added to cover the newness of a good workman to a job, the first few times that he does it. (This percentage is quite large on jobs made up of a large number of diflterent elements composing a long sequence infrequently repeated. This factor grows smaller, however, as the work consists of a smaller number of different elements in a sequence that is more frequently repeated.) g) Study and record the percentage of time that must be allowed for rest, and the intervals at which the rest must be taken, in order to offset physical fatigue. The constructive work of time study is as follows: h) Add together into various groups such combinations of ele- mentary movements as are frequently used in the same sequence in the trade, and record and index these groups so that they can be readily found. '■ Taken by pennission from F. W. Taylor, " Discussion of Report of Committee on the Present State of the Art of Industrial Management," in Journal of American Society of Mechanical Engineers, XXXV (1913), 494-95. THE ADMINISTRATION OF PRODUCTION 589 i) From these several records, it is comparatively easy to select the proper series of motions which should be used by a workman in making any particular article, and by summing the times of these movements, and adding proper percentage allowances, to find the proper time for doing almost any class of work. j) The analysis of a piece of work into its elements almost always reveals the fact that many of the conditions surrounding and accom- panying the work are defective; for instance, that improper tools are used, that the machines used ia connection with it need perfecting, that the sanitary conditions.are bad, etc. And knowledge so obtained leads frequently to constructive work of a high order, to the standardi- zation of tools and conditions, to the invention of superior methods and machines. See also p. 844 The Range of Time and Motion Study. 15. MEASURING AND COMMUNICATING AIDS: MOTION STUDY' [This is an account by F. W. Taylor of the work of Mr. Gilbreth in making a motion study of bricklajdng. Such a motion study should, of course, be followed by time study and task-setting, in the Taylor philosophy.] He [Mr. Taylor] would briefly go through the study which Mr. Gilbreth made. He found himself standing on a scaffold with a pile of bricks on the floor and the mortar board alongside him, a brick wall being built on the left. The first motion made by a bricklayer was to take a step to the right. Was that step necessary? He would show later on that the step was not necessary. Next, after taking the step to the right, the bricklayer stooped down to the floor, disengaged a brick from the pile of bricks, and raised his body up again, either to full height or to partial height. Was it necessary for the bricklayer to lower a 240-pound weight to the floor in order to raise an 8-pound brick 2J feet ? Mr. Gilbreth, after a great deal of work, devised a scaffold on which the bricks were placed at the same level with the wall, and kept at the same level at aU times with the wall. It was a scaffold on which the man stood in one place, while a Uttle table was placed alongside him on which the bricks and mortar ' Taken by permission from Transactions of the American Society of Mechani- cal Engineers, XXXII (1910), 787-88. 59° BUSINESS ADMINISTRATION rested. That was a very simple invention, but why was it not done 4,000 years ago, or why had it not been done in the meantime? Because no one had made a scientific motion study of the bricklayer. The bricks were placed on this supplementary platform at just the right height, so that the bricklayer merely turned round, picked up a brick with a rotary motion of the body and put it on the wall. Mr. GUbreth then found that every bricklayer, as he raised the brick, threw it over in his hand at least one, sometimes two, sometimes three times. That was done for the purpose of examining whether the brick was sound and not chipped; he would not put a brick with a chip out of it on the outside of tifie wall where it showed. He therefore threw up the brick from habit, apparently jiist for the fun of it; he threw it up a second time to look at the edges, and sometimes a third time before he laid it on the wall. Mr. Gilbreth said, Was that necessary? and after a great deal of thought he devised the following plan for doing away with all of these motions. As the bricks were unloaded from the car or from the team, a laborer was stationed at a suitable bench, where the bricks were examined by him, and placed right side up, with the proper edge and the proper end on a wooden frame about 3 feet long; this frame held about 90 pounds of bricks, and was so constructed that the bricklayer's hand went right into it and seized the brick without having to disengage it from the tangle on the floor. He took the brick out in the exact position in which it was to be laid in the wall, without any throwing and without any change of position. Mr. Gilbreth next found that the bricklayer worked with one hand only at a time. Why? Because the brick pile being on the floor and the mortar board some distance from it, they were too far apart for the man to take a dip of the mortar and pick up a brick at the same time; it took two motions. By building the scaffold in the way he had described, and by placing the bricks and the mortar close together, using a deep mortar box instead of a mortar board, brick pile and mortar box were brought within the range of the bricklayer's two eyes at the same time, so that he picked up a brick with the left hand, took a dip of mortar with the right hand with a single movement as far as time was concerned, then turned around, spread the mortar, and laid the brick in the wall. The step which was first taken by the bricklayer had been abolished, by reason of the fact that Mr. Gilbreth had studied in great detail the exact position which the feet of the workman should occupy with relation to the wall on the left THE ADMINISTRATION OF PRODUCTION 591 and the brick and mortar on the right, in order to reach his brick pile and mortar with the greatest ease in the several different kinds of bricklaying. The workman, if he had his feet in the proper position, could move from one to the other without a step. The scaffold had been made adjustable, so that a cheap workman was able to walk all day long round the building and adjust the scaffold with the workmen on it to its new height, keeping the wall and the bricks and the work- man at all times at the proper height as they went along. The workman did not have to stop while the scaffold was adjusted. Mr. Gilbreth also found that all bricklayers, a'fter they set the brick, tapped it down in order to get the joint the right thickness. From his experience in his youth Mr. Gilbreth knew that if the mortar was properly tempered it was possible to take the brick and press it with the hand to the right height. The mortar was therefore carefully tempered, so that the bricklayer could readily press the brick to the right height and thus save the time taken in tapping. He desired to summarize what had been done, because it was typical of what could be accomplished in every trade, without excep- tion. He did not say that as much as this could be accomplished in aU cases, and yet it was typical of what could be done through motion and time study in every trade, provided sufficient attention was given to the subject. He believed it was three years before Mr. Gilbreth finally completed his motion study and obtained the fuU benefit from it, so that the motions of the bricklayer were reduced from eighteen to five, and in one case from eighteen to two, 16. MEASURING AND COMMUNICATING AIDS: CLASSIFICATION AND SYMBOLS' Classification is nothing more nor less than segregating those things with which we deal into like and unhke according to various bases — ^kind, purpose, use, effect, or what not. Necessarily dealing first with units, as investigation proceeds we are inevitably led, if progress is to be made, to a sifting and sorting and finally to a more or less logical grouping of these units upon a basis which will best serve our purpose. A classification should conform with the following requirements: First: It must be logical and utilitarian — ^founded on a basis proper to its effective use. If the object be to classify the various ■ Adapted by permission from H. H. Farquhar, "Factory 'Nicknames' That Save Time," Factory, XXIII (igig), SO-S3- 592 BUSINESS ADMINISTRATION kinds of wood for the practical use of a paper manufacturer, for instance, who is primarily interested in length of fiber, one would not logically group first (or probably at all) by tensile strength or color, for there is no apparent relation between these characteristics and fiber length: if the classification is to be of most practical use to the architect, however, tensile strength and color would form primary subdivisions of the classification while the length of fiber would be of little or no concern. Second: It must proceed consistently from the general to the specific. In classifying different kinds of expense in the factory, for instance, it would be inconsistent to start first with, say, "wages," foUow this next with those in the "machine shop," and then as the third groups have "direct" and "indirect" wages. A more logical, as well as practical, grouping would be first "machine shop" then "wages," the latter then being subdivided into "direct" and "indirect." Third: It must be capable of being indefinitely and consistently expanded. Plenty of "gaps" must be left for subsequent use. Fourth: It must be consistent in adherence to the particular basis and method used; in other words, it must possess continuity. Fifth: It must be inclusive up to the present state of knowledge. Proper classification and S5Tnbolization are as indispensable to real progress and scientific control in the industrial estabhshment as ' in the chemical laboratory. That this need is quite generally felt is evidenced by the rarity of a case where a plant is found which has not made some attempt along these lines. A symbol is simply a sign, letter, emblem, Or character of some kind which is used to represent another, usually a longer, expression. After a given classification is determined upon, the next step is to assign to each component of the classification a s3mibol which will approximately represent it. The act of symbolizing then naturally succeeds and must logically conform to the classification. Since there is, however, almost no limit to the field from which symbols are chosen, it follows that the list of requirements to which a system of S3mibols must conform is unfortunately short. It is hoped, however, that there will be not a few who will agree with the writer that the following requirements should nearly all be raised to the "must" class: First: It must be definite and clear. One symbol must mean but one thing, and any one thing must have but one s3mibol. THE ADMINISTRATION OF PRODUCTION 593 Second: It must be flexible for possible expansion of the classi- fication. Third: It preferably should be capable of being easUy learned. Fourth: It preferably should be capable of being easily remem- bered — amnemonic and suggestive. Thanks to Berzelius we are not likely ever to forget that C stands for carbon, N for nitrogen P for phosphorus, and so on; how many of us, however, can picture or reproduce from memory the hieroglyph which the almanac tells us stands for Aries, Taurus, or Gemini; Mercury, Venus, or Earth? Fifth: It preferably should be as brief as is consistent with definiteness. And since the object of brevity is the saving of time, this requirement emphasizes the fourth one above (easily remembered) in that time may not be unnecessarily lost in repeated reference to the key. Sixth: It preferably should be as simple as is consistent with definiteness and clearness. It is not only more mnemonic but also infinitely simpler to write C instead of the hierogl)^h for carbon. It is, moreover, perfectly definite and perfectly clear. It may, on the other hand, be simple to write H6s for tenpenny wire nails, but it is neither definite, clear, nor mnemonic. Seventh: It preferably should be elastic. The rules for its formu- lation should not be so rigid as to make necessary the violation of any of the above requirements. Eighth: It preferably should be easily and consistently expanded. The degree of subdivision in the symbol should correspond exactly with the degree of subdivision of the corresponding group or item of classification; for this purpose 1 consider letters are better than figures, as there^ are 26 letters but only 9 numerals available for use in any one position. Ninth: It preferably should be as foolproof as it is possible to make it. It should be difficult to make and easy to catch mistakes in the writing and interpretation of symbols. Thus if we use both capital letters and numerals in our symbol system, we must omit the letters I, O, Q, and preferably U, because when written hurriedly by hand they are extremely likely to be mistaken for numerals i, zero, 2, and the letter V, respectively. Tenth: It preferably should enable (or at least materially faciU- tate) a broad view and grasp of the whole subject dealt with. In other words, it must be simple, easily grasped and retained, and on a utilitarian basis. This reflects back to and emphasizes several of the above points. 594 BUSINESS ADMINISTRATION Many different systems of symbolization are in use today, some of which are fairly comprehensive while others are simply unconnected makeshifts. It is not necessary to describe all these in detail, but the most common fall under one of the following broad bases of symboli- zation : r. Composed entirely of numbers A. By the use of whole numbers B. By the use of decimals C. By the use of fractions D. By the use of decimals and fractions 2. Composed entirely of letters A. By the use of capital letters B. By the use of small letters C. By the use of capital and small letters 3. Composed of numbers and letters DECIMAL AND MNEMONIC SYMBOLIZATION OF SAMPLE ACCOUNTS Name of Accotmi 1 Main Account °?b1fS?' Class of Expense Decimal Mnemonic Symbol Symbol Selling 300 c Direct Manttfacturing . 400 D Assembling Dept 410 DA Foundry 420 DF Machine Shop Miscellaneous labor and expense Building repairs ' Retainers (idleness) Furniture repairs Machine or work place repairs Inspection expense Power transmission repairs Reclamation of errors All other expenses stores and supplies Trucking expense Wages and salaries Cleaning expense 430 431 432 433 434 435 436 437 438 439 439.1 439 2 439-3 439.4 DM DMA DMB DME DMF DMM DMN DMP DMR 14 let- ters still avail- able DMS DMT DMW DWZ Pattern shop 440 DP Forge 450 DR PrODDCT 500 EtoW Stores 600 S Machinery — Capital 700 Y Land and Buildings — Capital 800 Z See also p. 197. Job Analysis. p. 221. Some Aspects of Eating Scales, p. 333. Measuring Aids May Result Standards. Expense THE ADMINISTRATION OF PRODUCTION 595 17. MEASURING AND COMMUNICATING AIDS: COST-ACCOUNTING A. THE DISTRIBUTION OF EXPENSE' The underlying idea of all methods of expense distribution or apportionment is to use some one or more of the visible, tangible, measurable elements as. a gauge, and to prorate the expense allotment by it. That is, they burden each job or each unit of product in pro- portion to the material that goes into it, or the wages paid for it, or the time spent working on it, or the use it makes of the machines and other facilities in the factory. This gives us five cardinal methods of expense distribution: by material, by percentage on wages, by man hours, by machine rates, and by production factors. We will take up their operation and their characteristics successively. Distribution of expense by material is a method of limited apphca- biUty. Its usefulness is confined to comparatively simple industries such as metallurgical or structural material works, where the product is nearly or quite uniform. In a brick yard, or a blast furnace plant, or a gas works, or perhaps in a pipe foundry or other estabUshments of like character, it may work as well as any other plan, simply because there is no need of distribution, properly speaking, but only of equal subdivision. Indeed, if the product of a plant is absolutely homo- geneous^ — all just alike — ^it makes no difference whether you apportion expense by count, or weight, or measure, or flat cost — you cannot get wrong as between one unit and another. The percentage-on-wages method of apportioning factory expense is probably the most generally used. As a starting-point in this method, we take the total for a given time (say a month or a year) first of the wages of the productive labor during that period, and second of the factory expense during the same period, and we find what is the percentage relation of the expense to these wages paid to pro- ductive labor. Suppose we find that the total factory expense is 60 per cent of the direct labor pay-roll; then we load every job done during the period with 60 cents additional for each dollar of direct wages that is expended upon it. If we find, for instance, that a cer- tain small steam pump is shown by the job ticket to have cost $50 for material and $100 for labor, we add 60 per cent of fioo, or another $60, for the factory burden, and obtain as the shop cost of the product S50 plus $100 plus $60 equals $210. ' Adapted by permission from C. B. Going, Principles of Industrial Engineer- ing, pp g7-io2. (McGraw-Hill Book Company, igii.) 596 BUSINESS ADMINISTRATION If our output is all substantially of the one general class, and if the various machines, tools, or pieces of apparatus in our manufactur- ing plant are not very different one from another as to expense of operation, and if our wages are fairly uniform as between one opera- tive and another, the results obtained by this method will be quite accurate. But if we have a great difference in equipment, having some very small machines taking little room and power, and cheaply operated, and sOme very large machines taking up a great deal of room and power, and involving large expense for operation and wages; if we have passing through the shop some very heavy work and some very small and light work; if some of our labor is highly paid and some is very cheap — this method may lead to very inaccurate results. The third method is the man-hour plan. It varies from the pre- ceding system in that the distribution is made proportionate to the time worked on each job instead of to the money paid for that time. At the first glance this might seem like the same thing, but on further consideration it will become evident that there are important differences. , For example, suppose we take a job away from a $3-a- day man, and give it experimentally to a good clever $i.so-a-day helper who completes it in the same number of hours that his prede- cessor did. Under the man-hoiu: plan it will still carry the same expense burden as it did before, -because it takes the same time. This is a correct result, for the mere change of operative has not changed in any way the demand which the work makes upon the general organization and facilities of the plant; has not changed in any way the amoimt of expense it creates, and hence should not change the expense apportioned to it. In some particulars, therefore, the man-hour plan is more correct than the percentage-on-wages plan, but when we look a little farther we find that, like the percentage-on-wages plan, it takes no cognizance of the machine element. All jobs taking two hours are burdened the same, whether the two hours' time is on a valve-seat grinder or on the largest engine-bed planer in the shop. The machine-hoiu: method of expense distribution makes a much closer approach to accuracy than either of those so far described, because it recognizes the fact that in modern manxifacturing the pro- ducing unit is not a single individual, but a complex combination of the machine or piece of apparatus, the man or men tending this machine, the equipment surrounding the machine, and the suitably THE ADMINISTRATION OF PRODUCTION 597 prepared space necessary for the installation and operation of the machine. In further explanation of this method of expense distribu- tion the term "machine" is used in a general sense, with the under- standing that it includes anything from a soap kettle to a jeweler's lathe. In the administration of the machine-hour method of apportioning factory expense, the preliminary step is to determine on an hourly basis the cost of running each machine in the works. This cost includes the charge for rental, hghting, and heating of the space the machine occupies, and the surrounding space necessary for its opera- tion; interest on the cost of the machine and allowance for repairs and depreciation; cost of power to run the machine; cost of services, such as cranage and transportation of various kinds to feed or to remove materials; cost of indirect labor attendant upon the machine; any incidental or special expenses; and a just proportion of the general burden of administration, superintendence, non-productive factory labor, etc. Having obtained the totals of these various charges for a jnonth or a year, they are divided by the number of hours during that time the machine can be expected to run, this figure being reached by a careful study of past experience and if necessary corrected by later actual observation. The quotient is the hourly rate of that machine. Every job coming to the machine is then assessed with this charge for the number of hours or fraction of an hour it spends on the machine. Evidently, if each machine in the plant is thus rated, and each job coming to each machine is thus assessed with its individual expense burden, and if all the machines are in operation during the normal and expected portion of the time, the whole expense burden would be distributed in close accordance with the use each job has made of the facilities of the shop. This seems as fair a basis as could be found. The trouble begins when the activity of the plant differs largely from normal. The machine rates then distribute too much or not enough to cover the actual expense, according as the plant is running overfull or is partly idle. B. THE SERVICES OF COSX-ACCOUNTING ' Through the aid of accurate information concerning costs the proprietor or administrative officer is enabled to keep in close touch ' Adapted by permission from J. R. Wildman, Principles of Cost Accounting, pp. 2-4. (The William J. Hewitt Press, 1911.) SqS business administration with conditions, shape the operating policy of the future, and guide the operations as they mature. He is enabled: a) To determine which lines of production or merchandise are profitable and which are unprofitable; to institute methods for extending and increasing the sale of such Unes as are profitable and to retard the sale of, or withdraw entirely from the manufacture, or sale of, such lines as are unprofitable; to decide intelligently the lines on which commissions may be allowed to salesmen and the extent of such commissions. b) To reduce costs; either through a reduction of the elements composing costs, or through an increase in the production. c) To allocate "leaks" and stop unnecessary waste or ex- travagance. d) To develop the highest type of productive efficiency. To bolster up the weak points and harmonize the work of the different departments, or operating groups. e) To gauge the efficiency of managers, relatively speaking, by comparing one manager with another. The manager, whose cost of producing soil pipe per ton is $7.00, is obviously not as efficient or capable as the man who under precisely similar conditions can pro- duce the same product at a cost of $5.00 per ton. /) To compare the work of similar foremen, departments, machines, operatives, or other centers of production. g) To compare costs in general of one period with another. h) To compare actual costs with estimated or predetermined costs. The tendency today is toward standardization. Modern business organization has become so complex as to have passed beyond the limits of individual observation, unless the individ- ual has some artificial means of transcending these limits. The time has passed when the administrative officer can be in touch with aU the details of the business. Cost statistics offer such a man a means of transcending his individual limits. They afford him an opportunity of having placed before him at stated intervals a picture, as it were, of his business operations. The administrative officer, or proprietor, draws his conclusions from the picture, and is afforded thereby a basis on which to found his judgment as to future operations and policies. THE ADMINISTRATION OF PRODUCTION 599 o % Q < E-i en O U en W 1-1 <: > 6oo BUSINESS ADMINISTRATION C. THE BASIS OF MANUFACTURING COSTS' Inasmuch as the cost of an article is the means by which the economy of its production is measured, proper costs may assist materially in producing economy of production if the cost system is devised with the idea ia mind that this is to be its primary functioh. In order that it may perform such a function, the results must be available at once to the executive ia immediate charge. Moreover, all items of expense that do not contribute to production must be eliminated from the cost and presented in another form. To operate a cost system, we must realize that all the expenses of a manufacturing business may be divided into three classes, as follows: (i) the expense of buying and storing the raw material (this expense must be added to the cost of the material before it is deUvered to the factory, and not put on the product as a manufacturing expense) ; (2) the expense of marketing the finished product; (3) the expense of operating the factory, which is further divided as follows: expense which does not contribute to production; expense which does so contribute. The last item is the only one with which we are concerned in the determination of manufacturing costs. While there is undoubtedly one most correct way of determining these costs, we must recognize that all such methods are more or less approximate, and therefore no one can be considered perfect. The attempt to get absolutely exact costs has led to no end of complica- tions, often with the result that the reason for obtaining the cost was entirely lost sight of in the desire for accuracy. The most important fact, therefore, is that we shall not include in manufacturing costs the items that do not contribute to production. Let us suppose that a manufacturer owns three identical plants of an economical operating size, manufacturing the same article — one located in Albany, one in Buffalo, and one in Chicago — and that they are all rmming at their normal capacity and managed equally well. The amount of indirect expense per unit of product would be sub- stantially the same in each of these factories, as would be the total cost. Now suppose that business suddenly falls off to one-third of its previous amount and that the manufacturer shuts down the plants in ■ Adapted by permission from H. L. Gantt, "The Basis of Manufacturing Costs," Industrial Management, LIII (1917), 369-70. and "The Relation between Production and Costs," The Journal of the American Society of Mechanical Engineers, XXXVII (1915), 467. THE ADMINISTRATION OF PRODUCTION 6oi Albany and Buffalo and continues to run the one in Chicago exactly as it has been run before. The product from the Chicago plant would have the same cost that it previously had, but the expense of carrying two idle factories might be so great as to take all the profits out of the business; in other words, the profit made from the Chicago plant might be offset entirely by the loss made by the Albany and Buffalo plants. If these plants, instead of being in different cities, were located in the same city, a similar condition might also exist La which the expense of the two idle plants would be such a drain on the business that they would offset the profit made in the going plant. Instead of considering these three factories to be in different parts of one city, they might be considered as being within the same yard, which would not change the conditions. Finally, we might consider that the walls between these factories were taken down and that the three factories were turned into one plant, the output of which had been reduced to one-third of its normal volume. Arguing as before it would be proper to charge to this product only one-third of the indirect expense charged when the factory was running full. If the foregoing argument is correct, we may state the following general principle: The indirect expense chargeable to the output of a factory hears the same ratio to the indirect expense necessary to run the factory at normal capacity, as the output in question hears to the normal outpitt of the factory. This theory of expense distribution, which was forced upon us by the abrupt change in conditions brought on by the war, explains many things which were inexplicable under the older theory, and gives the manufacturer uniform costs as long as the methods of manu- facture do not change. Under this method of distributing expense there will be a certain amount of undistributed expense remaining whenever the factory runs below its normal capacity. A careful consideration of this item will show that it is not chargeable to the product made, but is a business expense incurred on account of our maintaining a certain portion of the factory idle, and chargeable to profit and loss. Many manu- facturers have made money in a small plant, then built a large plant and lost money for years afterward, without quite understanding how it happened. This method of figuring gives a clear explanation of that fact and warns us to do everything possible to increase the effi- ciency of the plant we have, rather than to increase its size. 6o2 BUSINESS ADMINISTRATION This theory explains clearly why some of our large combinations of manufacturing plants have not been as successful as was anticipated, and why the small but newer plant is able to compete successfully and make money, while the combinations are only just holding their own. The idea so prevalent a few years ago that in the industrial world money is the most powerful factor, and that if we only had enough money nothing else would matter very much, is beginning to lose its force, for it is becoming clear that the size of a business is not so impor- tant as the policy by which it is directed. If we base our policy on the idea that the cost of an article can only legitimately include the expense necessarily incurred either directly or indirectly in producing it, we shall find that our costs are much lower than we thought, and that we can do many things which imder the old method of figuring appeared suicidal. The view of costs so largely held, namely, that the product of a factory, however small, must bear the total expense, however large, is responsible for much of the confusion about costs and hence leads to unsound business policies. Of course a method of accounting does not diminish the expense, but it may show us where the expense properly belongs and give us a more correct understanding of our business. i8. THE CONTROL OF LARGE vs. SMALL-SCALE INDUSTRIES A. A PROTEST AGAINST TOO GREAT CENTRALIZATION' Many of you have undoubtedly had more or less opportunity to observe the deplorable inefficiency of most of our large industrial concerns, especially those commonly known as trusts, where a number of formerly independent plants have been united under one common management. The plants are usually scattered over a considerable area and the central offices located in some commercial center. The first step in the organization of these corporations has usually been the removal of the resident owners and managers from the various localities to the central offices and the subsequent attempt to carry on the functions of management by the superintendent and heads of departments. These men, in most instances, not having had any real knowledge of manufacturing costs and profits, are, of 'Adapted by permission from R. B. Wolf, "Individuality in Industry," Bulletin of the Society to Promote the Science of Management, Vol. I (1915)1 PP- 2-3- THE ADMINISTRATION OF PRODUCTION 603 course, incapable of conducting the business intelligently. It there- fore becomes necessary for the central office to perform much of this work for the various plants. A central purchasing department has undoubtedly many advan- tages, but as ordinarily conducted in large corporations these advantages are almost entirely oflEset by the obstacles placed in the way of free choice on the part of the mill organizations and the conse- quent discouragement of individuality in making selections. The impossibility of handling all of the pvu-chases by one capable man necessitates delegating a lot of minor purchases to subordinates, who have no real knowledge of actual mill requirements. Even though they know what is required in one mill, they cannot know in others where conditions are not the same. The purchasing agent should have full power to build up an efficient organization for keeping informed of the market conditions, so that requisitions from the nulls can be handled with promptness and dispatch. The department should be able to furnish full com- plete information to the individual plants whenever they need it in order to properly purchase supplies. It should encourage the mills to furnish specifications and welcome attempts on their part to keep comparative records for the purpose of determining the best materials to use. It should always conduct itself toward each separate organi- zation as if it were an outside firm, employed to give advice and assistance in every way possible to enable purchases to be made economically. Each plant should receive frequent reports from the purchasing department, giving complete information about materials found to be giving good results in other places. This one feature alone would make it immensely valuable to the parent-corporation. Let us take accounting next. Why are accounts kept and what is their purpose? In the last analysis, accounts are records of the progress of accompHshment and are used to enable those in charge of the corporation's affairs to decide upon the future policy to pursue. Why, then, should any attempt be made by the central office to keep accounts that are of strictly local interest to the individual plants? And why even attempt to dictate how and when these accounts should be kept? In so far as comparisons between indi- vidual plants are concerned this is justified, but no further, and even in this case it should not be pushed to a point where compari- sons which local conditions at the plants demand are not allowed. 6o4 BUSINESS ADMINISTRATION The foregoing should not be misconstrued to mean that I believe a central accounting system for corporations is not necessary or desirable, for it most certainly is. The accounting department should confine itself, however, to such accounting as is of inter- plant nature and not attempt to dip into local conditions, except in an advisory capacity. The selling, in most cases, can be handled by the central office much better than any other function; indeed, the main purpose in forming large corporations was primarily to stop ruinous competition between plants, especially in periods of slight demand. There should, however, be much closer touch between the selling department and the mills and a much more intimate knowledge of operating conditions by the salesmen. The degree of this intimacy is, of course, one of the important things to be decided by the chief executive. "Maintenance and construction" is another thing which should be touched upon. There is usually much damage done to the indi- vidual plants by decisions of "absentee" engineers, whose knowledge of the plant conditions cannot be of such an intimate nature that they can make intelligent decisions. This very often actually retards progress in the organization and serves to discourage individual eSort upon the part of the local mill management. A high-grade consulting engineer employed to devote his entire time to the corporation's affairs would be a very valuable asset. He should conduct himself toward each individual plant exactly as he would if they were all independent establishments and his own clients. There would be this very important difference, however, which would mean much greater freedom of action, i.e., he would be entirely free to give each plant the benefit of his experience in others, and in this way would be a constant, highly intelligent means of exchanging ideas of mutual interest and benefit. I make a plea for the development of plant individuality. This is not merely a return to old conditions existing prior to amalgamation but a regaining of all the advantages of the old order of things with the additional advantages of the new. B. THE SMALL-SHOP BASIS OF PRODUCTION' Leadership "carries" better in the small industry. The pro- prietor's personality and enthusiasm can lay hold upon twenty-five ' Adapted by permission from G. H. Haynes, " The Small Industry in a Democ- racy," The Journal of the American Society of Mechanical Engineers, XL (1918), 535. THE ADMINISTRATION OF PRODUCTION 605 or fifty men, whereas to a force of five hundred he would be simply "the boss." Esprit de corps and morals are of natural growth in the small shop; they are hard to develop and maintain where there is no human contact between the employer and the workmen and where the workmen are not personally known to one another. In the small shop there can be brought home to the individual workman the direct interest which he has in maintaining both the quantity and the quality of the product; he can be brought to see clearly how his own work is discredited and his own wage lowered in consequence of the soldiering or waste of material by any member of the working force. It goes without saying that the mutual understanding between employer and employees in a small industry is a strong influence in lessening the frequency and the seriousness of labor controversies. In fact, the advantages of the small shop are so obvious that in these days of giant corporations some of the most interesting and promising experiments in industrial management are in the attempts to reorganize production "on the small-shop basis," assigning to a superintendent and small force of men the making of a particular part or the completion of a certain series of processes in turning out the finished product. See also ^."jo^. Relative Importance of the Main Forms of the Business Unit, p. 600. The Basis of Manufacturing Costs. P- S33 • Technological Industry is Frequently Large-Scale- Industry. 19. SOME ORGANIZATION CHARTS' [It is well to be clear concerning what an organization chart is. It is not organization itself; it is not even a picture of that organiza- tion. At the most, it is a picture of certain aspects oi an organiza- tion, usually of hnes of authority and sometimes of lines of communication. It shows nothing of what is most vital of all, the spirit and vigor of the organization. The accompanying charts are accordingly useful primarily in hinting at the relationships of the different parts of the businesses concerned.] Taken by permission from articles by S. H. BuUard, L. V. Estes, and Norman Howard in Industrial Management, LIX (1920), 58-9, 492, and LX (1920), 442. 6o6 BUSINESS ADMINISTRATION THE ADMINISTRATION OF PRODUCTION 607 "Work through selection No. 9 on Five Organic Functions in Manufacturing Industry (pages 570-78) and see where these functions are dealt with in the organization charts on pages 606 and 607." 6o8 BUSESTESS ADMINISTEATION ORGANIZATION PLAN OF A MODERATE-SIZED SHIPYARD SHOWING ADMINISTRATIVE AND OPERATIVE FUNCTIONS ^ _ _ff^S?Lf>L.ffifl5_^t2'^i^,^12e5fS?%i _ [BOARD OF DIRECTORSi JGENERAL ma nager! _ _ » JHSE££IiW. ^fifiarSj . J4ATERIAL_R^Qm£I^NTS GENERAL OFFICE ^'1-T-f STEWGRtPHEftS OFFICE SUPPLIES EHSINEERirtf DIVI5iqM HACHINERf 0E5IGK 51JPPLV DIVISION -f- il- ^^^iPQFI^<^'iP^J<2iJ2i!ipypAo'iBi^-±. -»— ^ "g FIMAHCE DIVISION 'M N£W CDfiTMCTSj^ ACCOUNT I HO IHOUSTRIALRELATHIH! EHPLOVMEHT RESTAURANT FIRI& POLICE PATROL Jl©— — WORKS MANAGER SALES DEPARTMENT 1 I ll NEW CONTRACTS __/,M«El2'WJ?iflaW?^ _ R£P0ffTS_0£JpS^_HQiOm^lJP PSOGJiS^, ttfORKeeSHOPCWOERS tf^^ WORK 5ChEPULE5 )[!iPAKHiM6 HHtRULS rWPIKTPM a [CORPS PIECE WORK IN5T. TT POWER LIGHT t HEW PLANT DIVISION augpiHG HMHIEHmtE TRfcHSTOftTATLOH jAFlTYfc&^mTATIOH YARD LABOR — irr J5i*S5f i£^ll>£UEftTS_ RI661NG LOFT BOAT SHOP TOOL 5UPPLV UACHINERY DIVISIQH ;^f^ 'xoDucrmjfsco/ios »ap£Cr!Mjf£P(»n INSPECTiqH DEPT IISCELLANEOUS STWE5 CONTRACT STORES ■A6SICATED STEEL ■LCOHSTHUCnOH Uf/eS OF AVTHORITV - FUNCTIONAL LINES ~ 1 . — , ,_ _\J ^^PDOOUCTI X'ff£«wrs3^ " PI£CfWOPK~IHSTALLhTI0N^ C. Scientific Shop Management In the foregoing sections we have seen the background of modern production and what is involved in production control. There remains a survey of that outlook on production control which is called scientific management. This term is used in both a broad and a restricted sense. It has been broadly applied to all attempts to establish, by scientific methods, standards of performance and poHcies and mechanisms of control. Thus interpreted there is little forward-looking management that may not be included in the term. In a more restricted sense it refers to the "Taylor System," as that has been developed by F. W. Taylor and a small, devoted group of followers. Since the Taylor System is the most highly developed of all so-called scientific management, it has seemed best (aside from the historical introduction presented in Selection 20) to arrange our selections so that they bear mainly upon that system. THE ADMINISTRATION OF PRODUCTION 609 PROBLEMS 1. Write out a paragraph showing that the scientific management move- ment (Taylor began his work in the i88o's) is related to the trust move- ment and to the revolution in marketing methods. 2. Review Section C- (pp. 153-92) of the chapter on the administration of personnel, noticing particularly the questions on page 162. How do you account for the fact that the earlier writings of the "efi&ciency movement" were in the field of wage payment ? 3. "Some of the wage systems are merely modes of payment. Others are philosophies of management." Explain. 4. Precisely what do you conceive Taylor's contribution to have been ? 5. "Was there no planning in industry prior to the advent of the Taylor Planning room ? Of course there was." What is the real significance of the use of the planning room ? 6. What is meant by calling the Taylor plan "functional management" ? Can you draw an organization chart of the Taylor plan? Is such a chart essential ? 7. Does the separation of "planning" from "doing" mean that less skilful workers are likely to be in demand ? 8. "The Taylor System seeks to restore individual responsibility in industry." Do you agree ? What are the devices used ? 9. "The Taylor scheme is just a further development of specialization. Still further responsibilities are taken away from the worker, and management is also further specialized to enable it to assume these responsibUities." Comment. 10. What are the advantages of functional foremanship ? Has it dis- advantages ? Is it the essence of the Taylor plan ? Do you under- stand that every business is to have eight foremen ? 11. It has been charged that the standardization required under the Taylor plan hinders progress. What things require standardization under this plan? Is such standardization essential or merely desir- able ? WiU it hinder progress ? 12. Do you agree that the method of Taylor management is the method of a true science ? 13. "It is of the essence of the Taylor plan that there should be precise prediction." What are the prerequisites of precise prediction ? 14. Notice the organization chart illustrating unsystematized management (p. 622). What defects in control are indicated by this chart? 15. Many strong and wealthy business organizations grew up in the period of unsystematized management. Does this fact nullify the claims of the Taylor plan ? 16. Compare Selections 9 and 23. Are they dealing with the same things ? Are they contradictory ? 6lo BUSINESS ADMINISTRATION 17. Take the reading on "The Control of Manufacttire under the Taylor System" (p. 624) and think out what items would have to appear on the balance of stores sheets; on the balance of work sheets. What are the risks of waste if these balance sheets are not kept ? 18. "The one word which characterizes the Taylor plan is prevision." Do you agree ? 19. "The Taylor plan is useful for only certain types of industry." Do you agree ? Even if you do not agree, what types do you suppose the writer had in mind ? 20. Notice that Hathaway lists "the general plan of organization" as the first problem to attack in installing the Taylor plan (see p. 633). Why ? 21. Notice how far down in the list he puts time study. Why? 22. "The Taylor plan should always be a development rather than an installation in a plant." Why or why not ? 23. "Scientific management substitutes the rule of natural law for arbi- trary decisions of foremen and employers." How is this natural law obtained ? Why are trade unionists so generally opposed to scientific management if it operates as the quotation indicates ? 24. Give arguments for and against the position that scientific management democratizes industry. What does it matter, anyhow ? 25. "Scientific management makes trade unions and trade union regulations unnecessary as a protection to the workers." Do you agree ? 20. THE BEGINNINGS OF SCIENTIFIC MANAGEMENT' [In various places in this volume we have caught glimpses of the forces which along about 1880 conspired to bring in a new order of economic phenomena (see especially pp. 153-59, 178, 256-62). This present selection, written in 191 2 when the efficiency movement and scientific management were just beginning to attract widespread popular attention, will be found to be a useful addition to these glimpses.] The history of the efficiency movement is like that of many another extension of knowledge, whether physical or mental. It is a record of independent partial contributions of discovery or interpretation, which later are found to be all interrelated parts of one great, har- monious and comprehensive whole. ' Adapted by permission from C. B. Going, "The Efficiency Movement," Transactions of the Efficiency Society, I (1912), 11-17. THE ADMINISTRATION OF PRODUCTION 6ll Taking only the larger manifestations of this faith, we may identify distinctly at least seven which have come into being and have gathered force and volume within approximately the last century — some of them, indeed, within the last generation and a few within the last decade. The first is the profession of engineering, which has grown up from the root idea of efiiciency in the use of power and mechanical eSort, and has carried this vitalizing principle into every branch into which it has expanded. The second is the conservation jnovement, seeking to prevent hitherto reckless waste in the use of natural resources and the funda- mental materials of industry. The third is fire prevention, which looks toward better protection from a special form of waste of structures, equipment, and manu- factured products. Fourth, we find the propagandism of general hygiene and its extension into the wider sphere of eugenics, adapting the theory of conservation and the ideals of waste-prevention to the individual human unit and to the race at large. Fifth comes welfare work and the effort toward reduction of industrial accidents — a manifestation differing distinctly in scope from general hygiene, and addressing its effort toward a particular class and a specialized purpose. Sixth, in scientific management (using the term in a broadly descriptive sense, and not the narrow titular one in which it has some- times been monopolized) we find generically the same concept, worked out into concrete policies and methods intended to raise the eflSciency of processes and the prevention of waste in production, supervised or secured by hrnnan toil. Seventh, less manifestly but no less truly, earnest prosecution of cost study and analysis, which leaped so strikingly into notice less than twenty years ago, is part of the same impulse — a potentially and then actively constructive application of effort toward efficiency in the realm of money. To this group of seven distinctive manifestations of a single impel- ling idea in seven different fields should perhaps be added an eighth — the movement toward greater efficiency in government. It is only in the field of apphcation and in the elements or facts to which the effort is applied that these several movements differ. The essential concept or energizing ideal is always the same. It is 6l2 BUSINESS ADMINISTRATION the elimination of waste. It is the raising of the ratio of useful result to effort expended. It is the bringing up of actual performance as near as possible to the level of a reasonable and equitable standard. What might be called a self-conscious attempt at the improvement of industrial efficiency was specifically expressed in the literature and thought of the subject by occasional contributions dating back to the first half of the nineteenth century, although no well-informed wave appeared until about a quarter of a century ago. Perhaps it would be truer to say that there were two waves of thought, starting at different points of the horizon but converging and gradually coalescing. The first of these impulses was originally analytical and was addressed to the careful, critical examination of costs, with a purpose of discovering the elements of expense and reducing them to basic units, so that one cost could be compared accurately, intelligently, and usefully with another. This is of course vitally necessary to the determination of standards, and on the fixation of standards depends the measurement of efficiency. The literature of cost study did not become prominent until about 1896, but from that date on it increased rapidly in volume and in intensity and definiteness of interest. The second impulse was primarily constructive and addressed to individual situations with the piu-pose of reducing existing costs, whatever they might be, sometimes without very definite vision of either absolute, attainable standards, or of the relative importance of the factors attacked; but always with confidence that progress toward better things could be made, and would be made if any factor in the expense formula were diminished. For that was the under- lying purpose in the earUer wage systems, and in the work of the sincere systematizers, who did much good, however many crimes may have been committed in the same name by later and less genuine disciples. These agencies rapidly developed into the more complete, better balanced, and earnestly considered policies of comprehensive control, of which so-called "scientific management" is the most widely known example. In a rapid review of this modem constructive movement for the betterment of industrial efficiency, the first efforts (first, at least, if we follow the order of public announcement) centered upon the workman, as the man most familiar with the conditions and possi- THE ADMINISTRATION OF PRODUCTION 613 bilities of every operation, and took the form of offering an induce- ment to him to increase his output by a better use of his knowledge, skill, and the facilities supplied. These measures were proposed in Mr. Henry R. Towne's "Gain Sharing," and reduced to more specific and practical methods in the Halsey premiiun plan, published in 1891, and in the Rowan, Ross, and other forms of premium pajrment which are substantially modifications of Halsey's idea. While these measures were dictated by a sincere attempt to pro- mote efficiency, they had faults of two opposite kinds. First, as the only element directly acted upon was the worker, many inefficiencies might still remain uncorrected in materials, machinery, processes, distribution, and sequence of work, or other matters. Second, in the temptation of increased earnings, with no accurate determination of a standard method or task, a worker might be stimulated to over- exertion. Five years later, in 1896, Frederick W. Taylor presented the differ- ential piece-rate method, in which there is to be found a definite sug- gestion of organized methods designed to check both these tendencies, while still retaining the incentive of reward for high performance. It is scarcely more than a suggestion. The only specific institution pro- posed is a rate-fixing department, replacing by careful and thorough study the somewhat haphazard methods of setting standards by the judgment (or guess) of a foreman or minor official. The working conditions, upkeep of machinery and tools, dispatching and routing of Jobs, etc., are broadly referred to as details in which the manage- ment should co-operate; but the prime force in the system is repeat- edly stated to be the desire inspired in the worker to obtain the larger wages paid for accomplishment of the established task. Five or six years later another important advance toward full recognition of the necessities for efficient working appeared in H. L. Gantt's paper on "Task and Bonus" (1901), supplemented by his second paper on "Graphical Daily Balance" (1903), both presented to the American Society of Mechanical Engineers. These formulated a complete scheme of management involving the use of scientific principles. In addition to the careful, thoroughly informed study of the operation and of the best way of performing it, there now appeared the added elements of printed scheduled instruction cards, and of deliberately appointed instructors, showing the workers how to perform the task. The method of payment, while it retained the bonus award to the successful task-worker, no longer penalized the 6 14 BUSINESS ADMINISTRATION worker who tried but failed. He was still protected in the ruling day rate of his class. Immediately thereafter, also in 1903, came Frederick W. Taylor's classical contribution on Shop Management, in which all the foregoing elements were embodied and incorporated with still more advanced ideas of scientific control of manufacturing operations. Much more attention was given to elementary time study as a basis for scientific time setting. Most striking of all, a new form of organization was proposed. All work was first separated into the two great functions of planning and execution. Each of these functions again was sub- divided into four. Functional organization instead of fractional was proposed as the efficient means of performing all work in the most efficient manner. About five years later yet came two contributions of unequal importance but both significant. The first was the suggestion, by Charles U. Carpenter, of the committee system, characteristic of a school of thought which I have elsewhere called the "school of sug- gestions" because it depends chiefly upon creating an attitude of mind in the managing officials. The second was Harrington Emer- son's proposal of the "efficiency system," defined first in his book Efficiency as a Basis of Operation and Wages, and amplified in The Twelve Principles of Efficiency. Mr. Emerson, like the specialists who preceded him, accepted most of the elements of scientific operation aheady recognized, as, for example, time study, task setting, standardized methods and standard instructions, dispatching and schedules of work. He recog- nized fully also the necessity of functional as well as fractional dis- tribution of duty in any efficient organization. Instead, however, of the functional foremanship advocated by Taylor, Emerson adopted , the model of line and staff furnished by the Prussian military organi- zation, which was so triumphantly successful in 1 870-7 1. More important, however, than any institutional forms or measures advocated was Emerson's recognition of efficiency as a universal ideal — his identification of the agitation going on in industrial fields as part of something world-wide, indeed, universe-wide — ^as part of a great awakening to the sinfulness of waste, and of a struggle toward better utilization of the materials and forces supplied by an i nfini tely efficient nature. Efficiency, therefore, is a concept immeasurably larger, vastiy wider, and more general in its relations and applications, than scientific THE ADMINISTRATION OF PRODUCTION 615 management, which is often mistakenly used as if it were a synony- mous term. Scientific management is one mode of promoting effi- ciency in one class of situations. The Taylor System is the most highly developed, most completely institutional, and therefore most closely speciaUzed form of scientific management. 21. SCIENTIFIC MANAGEMENT IN PRODUCTION Mr. Taylor insists that the general principles, or philosophy, of scientific management should not be confused with the mechanism, which is merely incidental. He emphasizes four fundamental prin- ciples. First, the method of scientific management is the method of a true science. The organizing engineer "objectifies" a plant to be or- ganized; he enters as an "outsider," bound by no traditions and preju- dices of its management, holds it, so to speak, at arm's length, studies it by departments and as a whole, compares it with other similar plants of his experience, and observes defects that the "insider" does not see. In this process the truly scientific method of analysis into units and experimental recombination of them is followed, not super- ficially but exhaustively, until enough data are collected from which trustworthy laws may be derived. A second general principle of scientific management is that there should be, and as a result of the laws derived by observation and experiment may be, a scientific selection of machines, material, and workmen. The third principle of the new management is that a workman once discovered and assigned to the performance of the function to which he is adapted, the management should provide continuous instruction for him. The fourth of Mr. Taylor's principles of scientific management is that there should be intimate co-operation between management and men and a redistribution of responsibiUties. The workabiUty of the new management, says Mr. Taylor, depends upon such sym- pathetic co-operation. There must be mutual recognition of the possibility of mutual helpfulness. This recognized, there must be a readjustment of duties, for under present systems of management ' Adapted by permission from H. S. Person, " Scientific Management," Pro- ceedings of Tuck School Conference (1912), pp. 4-5, and "Scientific Management," Biillelin of the Taylor Society, II (1916), 17-19. 6l6 BUSINESS ADMINISTRATION there is reqmred of a workman so much as to make impossible his highest eflSciency. The. manager, under the present system, requires of the workman simply the accomplishment of a certain result. To the workman is left the determination of the methods as well as the actual performance. Under scientific management the experts in the planning room determine the method and leave to the workman freedom to apply all his energy to actual performance. These four general principles constitute, according to Mr. Taylor, the philosophy of scientific management. The devices employed to give effect to these principles constitute the mechanism. Aims, plans, policies and methods as they concern productive processes. As I analyze it, there are three principal aims in it: (i) seeking of more precise information through investigation, experi- ment, etc.; (2) as great an amount of prediction of what is going to happen in business operation as is possible on the basis of the unusual amount of exact information acquired; (3) precise control of the processes of conducting the business by various functionalized people in such wise as to bring about as precisely as possible the predictions which have been made on the basis of the exact information required. 1. Seeking of more precise information. It is in the scientific- management plant that investigation and experiment — the establish- ing of an experiment room with adequate equipment under the direction of capable investigators — ^have been worked out. It is in connection with this investigation and experimentation that time study has come in. I cite it as a method of acquiring precise informa- tion. Time study simply means a method of acquiring exact informa- tion with respect to the time which it takes a person to do a certain thing, with certain definite equipment, under certain definite condi- tions. 2. Precise prediction. If one by time study and other investiga- tion has secured and filed information telling the time of performing a unit operation with certain tools and materials under certain condi- tions, then if an order comes in to do or make something which represents a combination of these unit operations, by a simple mathe- matical calculation it is possible to determine how long it will take to fill the order, what materials and tools must be provided, what condi- tions established, when work on each part should begin, when and how they should be assembled, etc. In other words, an accurate layout of work on the job becomes possible. In most plants layout is by guess. Guess involves waste. An accurate layout of separate THE ADMINISTRATION OF PRODUCTION 617 jobs means accurate layout and dovetailing of all jobs, and economical and efficient operation of materials, equipment and labor; in other words, more precise control. 3. Precise control. This means that to each of a number of persons shall be assigned, with authority, the responsibility of main- . taining'one or more of the standard conditions on the basis of which the prediction or layout of a job is made. The principal standard conditions to be maintained are: (See p. 555.) a) Standard materials. V) Standard storing and issuing of materials. c) Standard conditions under which work is performed. d) Standard methods of performing operations. Through what machinery are the three primary aims of scientific management (investigation, prediction, precise control) accomplished ? This machinery is described in the words functional organization. Functional organization is carried out to an unusual degree in manufacturing plants by scientific management. First, there is functional organization in large; planning is separated entirely from doiag. Now, in an ordinary manufacturing plant an order is received to make something. That is sent down to the foreman with an order to "make twenty-five of these by the 2Sth of June." The foreman turns to the workman and says, " start on these day after tomorrow." There your foreman has planned who is to do it; how long it will take; how it is to be done; and so on. Under scientific management, on the other hand, in a room called the planning room, where is kept on file aU the information which has been gathered regarding aU phases of operation, the planning is done. First, a list is made of the operations involved in fiUing this order, and of the materials and equipment required; second, an estimate is made of the time it takes to do each one of the operations with due allowance for uncertainties; third, a day is determined when work on the order is to start in order to meet the date of promised delivery. AU planning of that sort is done, and proper orders are made out. On the proper date these orders are issued to the man who has charge of the material, telling him to send it to such and such a machine; and to the workman at that machine, telling him to start the work. Accompanying the order issued him is the analysis of the job and definite instructions for its performance. I have been speaking about functional organization in the large — separation of performing, planning and investigating. There is also 6i8 BUSINESS ADMINISTRATION functional organization in detail. [The following is one ilkistration of functional organization in detail.] B' Let us go over the duties which [an old-fashioned] foreman in charge, say, of lathes, or planes, is called upon to perform, and note the knowledge and qualities which they call for. He must be a good machinist; must be able to read drawings readily; he must plan ahead and see that the right jigs, clamps, and appUances, as well as proper cutting-toolsv are on hand, and are used to set the work correctly in the machine and cut the metal at the right speed and feed; must see that each man keeps his machine clean and in good order; must see that each man turns out work of the proper quality; must see that the men under him work steadily and fast; must constantly look ahead over the whole field of work and see that the parts go to the machines in their proper sequence and that the right job gets to each machine; must, at least in a gen- eral way, supervise the time-keeping and fix piecework rates; must discipline the men under him, and readjust their wages. Under functional management, the old-fashioned single foreman is superseded by eight difierent men, each of whom has his own special duties, and these men, acting as the agents for the planning depart- ment, are the expert teachers, who are at aU times in the shop helping and directing the workmen. Being each one chosen for his knowledge and personal skill in his specialty, they are able not only to tell the workman what he should do, but in case of necessity they do the work themselves in the presence of the workman, so as to show him not only the best but also the quickest methods. The following is a brief description of the duties of the four types of executive functional bosses which the writer has found it profitable to use in the active work of the shop: (i) gang bosses, (2) speed bosses, (3) inspectors, and (4) repair bosses. The gang boss has charge of the preparation of aU work up to the time that the piece is set in the machine. It is his duty to see that every man under him has at all times at least one piece of work ahead at his machine, with aU the jigs, templets, drawings, driving mechanism, sling chains, etc., ready to go into his machine as soon ' Adapted by permission from F. W. Taylor, Shop Management, pp. 96-98, and The Principles of Scientific Management, pp. 100-125. (Harper and Brothers, copyright by author, 191 1.) THE ADMINISTRATION OF PRODUCTION 619 as the piece he is actually working on is done. The gang boss must show his men how to set their work in their machines in the quickest time and see that they do it. He is responsible for the work being accurately and quickly set, and should be not only able to but willing to pitch in himself and show the men how to set the work in record time. The speed boss must see that the proper cutting tools are used for each piece of work, that the work is properly driven, that the cuts are started in the right part of the piece, and that the best speeds and feeds and depth of cut are used. His work begins only after the piece is in the lather or planer, and ends when the actual machining ends. The speed boss must not only advise men how best to do this work, but he must see that they do it in the quickest time, and that they use the speeds and feeds and depth of cut as directed on the instruction card. In many cases he is called upon to demonstrate that the work can be done in the specified time by doing it himself in the presence of his men. The inspector is responsible for the quality of the work and both the workmen and speed bosses must see that the work is all finished to suit him. This man can, of course, do his work best if he is a master of the art of finishing work both well and quickly. The repair boss sees that each workman keeps his machine clean, free from rust and scratches, and that he oils it and treats it properly, and that all of the standards established for the care and maintenance of the machines and their accessories are rigidly maintained, such as care of belts and shifters, cleanliness of floor around machines and orderly piling and disposition of work. The following is an outline of the duties of the functional bosses who are located in the planning room, and who in. their various functions represent the department in its connection with the men. The first three of these send their directions to and receive their returns from the men, mainly in writing. These four representatives of the planning department are the (i) order of work and route clerk, (2) instruction card clerk, (3) time and cost clerk, and (4) shop disciplinarian. Order of work and route clerk. — ^Af ter the route clerk in the planning department has laid out the exact route which each piece of work is to travel through the shop from machine to machine in order that it may be finished at the time it is needed for assembling, and the work done in the most economical way, the order of work clerk daily writes 620 BUSINESS ADMINISTRATION lists instructing the workmen and also all of the executive shop bosses as to the exact order in which the work is to be done by each class of machines or men, and these hsts constitute the chief means for directing the workmen in this particular function. Instruction card clerks. — ^The "instruction card," as its name indicates, is the chief means employed by the planning department DIAGRAM ILLUSTRATING THE PRINCIPLE OF FUNCTIONAL OR SCIENTIFIC MANAGEMENT^ PLAMNING PERFORMING for instructing both the executive bosses and men in all of the details of their work. This instruction card is filled in by one or more members of the planning department, according to the natmre and complication of the instructions, and bears the same relation to the planning room that the drawing does to the drafting room. Time and cost clerk. — ^This man sends to the men through the "time ticket" all the information they need for recording their time ' This diagram is taken by permission from F. B. Gilbreth, "Units, Methods, and Devices of Measurement under Scientific Management," Journal of Political Economy, XXI (1913), 619. THE ADMINISTRATION OF PRODUCTION 621 and the cost of the work, and securies proper returns from them. He refers these for entry to the cost and time record clerks in the planning room. Shop disciplinarian. — In case of insubordination or impudence, repeated failure to do their duty, lateness or unexcused absence, the shop disciplinarian takes the workmen or bosses in hand, appHes the proper remedy. He sees that a complete record of each man's virtues and defects is kept. This man should also have much to do with readjusting the wages of the workmen. At the very least, he should invariably be consulted before any change is made. One of his important functions should be that of peace-maker. 22. STAGES IN MANAGEMENT' All types of management seem to fall into three general classes, which for want of a better terminology we shall call (i) unsystema- tized, (2) systematized, and (3) scientific. Let us look briefly at the five important features of every manu- facturing plant, excluding designing, advertising, and selling. These are: (i) accounting and costs; (2) purchasing; (3) storage of mate- rials; (4) execution of the work; and (5) eflBiciency of the worker. [This selection will be confined to the discussion of the execution of the work. — Ed.] Execution of work. — Orders in the unsystematized shop are recorded in a simple manner, sometimes even received and trans- mitted orally by the salesman. These are described in part orally to the superintendent, who may further enlighten the foreman on any of the details of such orders. It is assimied that the superintendent knows his business, that the foremen know theirs, and a workman is expected to sense what is wanted and to ask questions when he is not sure. In this way an attempt is made to fill in the exact and accurate information which the selHng end either has not secured or has not transmitted in writing. The "single foremanship" plan prevails where one foreman handles as many men as he can. The number of men and the amount of work he can look out for is limited by the amount of detail he can carry in his head and by his physical and nervous endurance. He gives work to each workman when the latter has finished his last job, and depends largely on the worker's knowledge of what to do and * Adapted by permission from H. P. Kendall, "Systematized and Scientific Management," Journal of Political Economy, XXI (1913), S93~6i4. 622 BUSINESS ADMINISTRATION how to do it. As questions arise in the progress of the work, or where the written order is incomplete, the workman goes to the foreman who in turn goes to the of&ce for instructions. Meanwhile progress on the work stops. The workman goes for and selects his tools and appliances, and does his work in the way in which he is accustomed to do that par- ticular kind of work. A difference in method of doing the same kind ORGANIZATION CHART ILLUSTRATING UNSYSTEMATIZED MANAGEMENT VICt-PRESIPENT of work by different workmen and in different shops is often quite marked. In the systematized plant, this crude rule-of-thumb method has been changed. A complete set of order-cards for recording and trans- mitting orders is in use. The worker receives a written order for the work he is to do. But this seldom takes the form of an instruction card giving him complete information for every move and every tool. It is likely to say what the work is, assuming that he will do it in a satisfactory manner. Workers almost always record their time for each job on a card, which registers the labor cost accurately. They do not always register the time lost in securing tools, materials, and further instructions. The planning of a job, except in plants where THE ADMINISTRATION OF PRODUCTION 623 the work is very largely repetition, is likely to be done as the work proceeds. Piecework is used wherever possible and is considered the most economical way of performing a given operation. It is the aim of most systematized plants to secure as much piecework as possible. This may be unfair for different kinds of work to both employees and employer. Systematized management keeps things running smoothly, avoids most of the mistakes due to the lax methods of unsystematized man- agement, and turns out a good product. But a lack of centralized planning and centralized control of the workers causes loss of effi- ciency. This is especially true in rush times, or when certain parts of a factory are congested. It is impossible, then, with the means at hand, so to plan the work as to get it out to the best advantage; for with the foreman of one room or department planning his work, and- another his, the two can seldom be made to interlock perfectly. The theory of the proper execution of work under scientific man- agement is that it should be planned completely before a single move is made — that a route-sheet which wUl show the names and order of all the operations which are to be performed should be made out and that instruction cards should be clearly written for each operation. Requisitions on the stores department showing the kind and quality of the materials and where they should be moved, and lists of proper tools for doing the work in the best way, should be made up for each operation. Then by time-study the very best methods and appa- ratus for performing each operation is determined in advance and becomes a part of the instruction cards. By this means the order and assignment of all work, or routing, as it is called, should be conducted by the central planning or routing department. This brings the control of all operations in the plant, the progress and order of the work, back to the central point. Infor- mation which even in the systematized plant is supposed to be fur- nished by the knowledge of the workman or the gang-boss or foreman is brought back to the planning room and becomes a part of the instruction card. Under scientific management the efficiency of the worker and machine depends on five other conditions, after assuming that the parts of the management which have to do with purchasing, storage of materials, etc., are well performed. These conditions are: (i) analysis and synthesis of the elements of operation; (2) scientific 624 BUSINESS ADMINISTRATION selection of the worker; (3) trainmg of the worker; (4) proper tools and equipment; (5) proper incentive. All these conditions it is the duty of the management to provide. See also p. 374. Purchase and Stores imder Unsystematized, Systematized, and Scientific Management. 23. CONTROL OF MANUFACTURE UNDER THE TAYLOR SYSTEM' The production of anything consists of three stages: a) Determining what is to be produced — ^what materials are to be used and their disposition in the article to be produced. This is the function of the engineering or designing department. b) Determining how it is to be produced and when the various steps incident to its production are to be taken. This is the function of the planning department. c) Performing the physical work in accordance with the plans of the designing and planning departments. This is the function of the manufacturing department. Obviously the planning department is the logical complement of the engineering or designing department. Briefly stated its fimctions are so to plan and control the processes of production that the per- sonnel and the facihties of the plant, physical and financial, will be utilized to the best and fullest advantage, that the work will be done correctly and economically and that deliveries will be made on time. In the planning department is assembled practically all of the clerical work which in a plant run under old style management is done here and there in the manufacturing departments, either by clerks, the foremen or even the workmen themselves. It is the repository of all data and working records required for the planning and control of work done in the plant. The basic data required for the planning department should include: a) Data relating to product and materials. — Drawings and bills of materials of the product (or their equivalent which in some cases may take the form of samples or patterns). ' Adapted by permission from H. K. Hathaway, "On the Technique of Manu- facture," Annals of the American Academy of Political and Social Science, LXXXV (1919), 149-55- THE ADMINISTRATION OF PROBUCTION 625 Specifications for both the product and the materials entering thereinto. This class of data should cover all of the information with respect to the product that may be needed in planning or in its manufacture. b) Data relating to plant equipment. — Complete information with respect to each machine, its capacity, speeds, adjustments, classes of work or operations to which suited, location, etc. Similar data with respect to work places other than machines, tools and appUances, etc. This class of data should be so complete that work may be planned with a full knowledge of, and in accordance with the manufactiuring faciUties, in such a way as to make the best use of the plant and its equipment. c) Elementary time study data. — "Unit times" covering all of the elementary operations entering into the processes of manufacture, the adjustments and operation of machines, the use of the various tools and appliances, allowances for fatigue, for changing time cards upon the completion of each job, for inexperience of new operators, for variations in quantities, etc. In short, all of the data necessary • to the compilation of detailed instruction cards for any operation to be performed, indicating the method to be followed and the time that the job should take under the standard conditions that have been established. There are also built up and maintained for products that have been manufactured, files of route charts or diagrams, route sheets, instruction cards and tool lists which will be described farther on. The active records of the planning department consist principally of the progress sheets (or charts) and the route sheets on which the progress on the various orders in process of manufacture is recorded and the "Balance of Stores and Worked Materials" sheets (stock ledgers or perpetual inventory) which show for each item of pur- chased or manufactured materials carried in stock, the quantity on hand, the quantity on order but not yet received in stores, the quantity required for (apportioned but not yet issued to) manufacturing orders or shipping orders that have been issued and the balance available for use on future orders. From this point perhaps it will be best to describe the processes that take place in the planning department from the time that a manufacturing order has been issued and the necessary drawings, biUs of materials, specifications or samples provided, describing each 626 BUSINESS ADMINISTRATION Stage in the process of planning and the manner in which the work is controlled as it progresses through the shop. Routing and duties of the roide clerk. — The manufacturing order together with all data relating to design, etc., is turned over to the route clerk who plans in detail for each unit or article to be produced for the manufacturing order: a) The quantities of each kind of material required for each different part. h) Whether these materials are to be taken from stock on hand in the store-room or procured especially for the order. c) Whether the part or article is something to be manufactured from material on hand or to be procured or is to be drawn from manu- factured stock on hand in the store-room. d) If the part or article is to be manufactured, the operations which must be performed in order to convert the primary material into the finished article, the sequence in which these operations must be taken up, the machine or work place best suited to the per- formance of each operation. If the product called for by the manufacturing order consists of a nmnber of parts to be assembled together after having been manu- factured or drawn from the store-room, the route clerk prepares a diagram or route chart showing graphically the manner in which the various parts are to be assembled into groups or sub-assemblies and the manner in which the various groups or sub-assemblies are to be assembled to bring about the completed machine or article, the relation of the several parts and groups to each other, the relative importance of each part and group as a guide in determining the order in which the work should be prosecuted in the shop so as to have those parts requiring the greatest time to produce finished as nearly as possible simultaneously with all other parts. Likewise on the charts he shows all of the information previously described. For each unit to be manufactured, that is to say, for each part, for each group of parts to be assembled and for the assembUng of the completed article, a route sheet is prepared giving the information above referred to in such a manner that the progress of the work may be recorded and regulated as it goes through the shop. He also causes to be prepared the orders on the store-room (stores issues) for the primary materials and stock parts. Based upon the route sheets there are prepared by t3T)ists all of the orders relating to each of the several operations on each piece THE ADMINISTRATION OF PRODUCTION 627 P ' or assembled unit that will be required as the work progresses. These include: a) Move orders issued to men whose sole duty it is, on the orders of the planning department, to move materials from place to place in the shop. b) Time cards which are issued to the workmen at the start of each job and serve the purposes of recording progress of work on the route sheets, making up the pay-roll and of cost keeping. ROUTE CHART FOR SPECIAL VALVE' ■ Bna!.Cos>in9 SHV'^UIV ■ -Orillond Top fill. S-Boi^.reOm.foce.turn.dMI ■ndtap 19. 3-RfmovcaMdirfand hand num. V6 ToUlforlUZY <^k„3 SHV4U2YB 1 l-CeiTteroixHvnilofi+UIY.numb«reacl'pi«eLli I [DonotpostufitllUIYisatLII Whenf.n.MndUlVbV &I)E-Drili ^hdebonlyDIO 3-&rlntltofitUrf I bl.(Dontf»atuntilUiy.jatl5l) I ToteMmwitfiUIY. I HViSUIYl rmm\ AssEHBUNs ruiva ClMi,PlU6 SQi- THE FORM OF THE BUSINESS UNIT 721 business may be such that it cannot be conducted by a company, or that it depends upon the unlimited personal responsibility of those engaged in it. In many cases to limit the liability of a firm would be seriously to affect its credit. When an increase of capital is desired under such circumstances, it can be obtained in two ways, by loan, or by the introduction of a limited partner. But if a loan is chosen it must be very carefully arranged, otherwise the lender may find himself unexpectedly in the position of a full partner with unlimited liability. If, on the other hand, a limited partner is brought in, his liability will be limited to his contribution, while he will still have the advantage of sharing in the profits of the firm. The managing partners will obtain the necessary capital, without having surrendered any part of the control or management of the business. Moreover, the difficulty of publicity wUl be overcome, for the firm name will remain the same; the name of the limited partner need not form a part of the bill-heads or advertisements, nor need the word "Limited" be added. The articles of partner- ship wil' be as secret as before; private arrangements between the partners wiU not be disclosed; and, what is perhaps even more important, the amount of the capital subscribed by the general partners will not become public property. What has been said with regard to business men applies also to professional men, such as medical practitioners, solicitors, stock- brokers, and so on. Small traders.— The advantages offered by the Act to small traders are equally obvious, and the register shows that a very large proportion of limited partnerships have been registered by this class. Here again the Act is useful in aSording to a trader a simple and inexpensive means of obtaining additional capital without converting his business into a company. In addition to those already referred to, there are many other circumstances in which the limited partnership principle has been adopted with advantage. The following instances may be quoted. Sleeping partners. — A sleeping partner is in a somewhat precarious position, since his liability is unlimited though he exercises no control over the business. The Act provides him with an easy way of limit- ing his liabihty. Retiring partners. — It frequently happens that a senior partner, who wishes to retire from active management, is quite willing to allow some, or all, of his capital to remain in the business. He 722 BUSINESS ADMINISTRATION will thus be saved the inconvenience and anxiety of having to find an investment for his capital, and will be able to retire without crippling the business by withdrawing his money, and without rendering it necessary to find a new partner. Relatives of deceased partners. — The same considerations apply to these as to retiring partners. Instead of withdrawing the share of the deceased partner from the business, or leaving it in and con- verting the concern into a limited company those entitled to the deceased partner's share can now become Hmited partners themselves. The articles of partnership should contain a clause making this possible. Amalgamation. — ^The following is another example of a useful purpose to which the Act may be and has been put. A, the owner of a business, is anxious to retire; he is approached by B and C, the owners of another business, with a view to a purchase. Instead of a sale, an amalgamation is arranged, and A becomes a limited partner in the amalgamated concern. His good-will, fixtures, stock- in-trade, book debts, and other assets are then credited in the books as his contribution to the capital. This is made possible by the provision of the Act that a limited partner may contribute "property valued at a stated amount." Co-partnership. — Perhaps the most important section of the Act and the one which, if generally utilized, may prove of the greatest benefit to the community at large is section 4. This section provides that a "body corporate" may be a limited partnes. Q. DEFINITION AND GENERAL NATURE OF JOINT STOCK COMPANIES' [The student should notice that in many jurisdictions these companies, also, are regulated by statute, although "the association is based upon the common law right of the members to contract with one another."] A joint stock company may be defined as an unincorporated and voluntary association formed for the purpose of profit, having a common name, possessing a common capital contributed by the persons composing it, which capital is divided or agreed to be divided into shares of which each member possesses one or more, and which ' Adapted by permission from Scott Rowley, The Modern Law of Partnership, II, 1417-20. (Bobbs-Merrill Company, 1916.) THE FORM OF THE BUSINESS UNIT 723 represent the interests of the members, and are transferable by the owner without the express consent of the other members or the creditors of the association. "Joint stock companies may be cited as quasi corporations of a private character. They are associations having some of the features of an ordinary common-law copartnership, and some of the features of a private corporation." Those definitions in which a joint stock company is denominated a partnership, con- template the individual liability to third persons imposed by the law upon the members of the association, rather than the nature of the company in respect to its formation, the management of its affairs, its duration and dissolution which are among its distinctive char- acteristics. From the preceding definitions we may deduce the following observations concerning the general nature of joint stock companies. (a) Such a company owes its existence to the contracts of its members as set forth in the articles of association by virtue of which it has a valid legal entity under the common law, with a right to extend its existence as the parties forming it may see fit to provide in such agreement. But as hereinafter shown they are largely regulated by statute in many jurisdictions. The real character of the association must in each case be determined by the laws and the articles of agreement under which it is formed, and courts reading such articles in the light of conditions existing at the time they were made will, as far as possible, give effect to the same among the members themselves when they themselves only are interested, and for the purpose of determining the fiduciary relations existing between the association and its members, the association itself through all the changes in its membership, may be regarded at least in equity, as an ideal separate entity involving and possessing equitable rights and relations. (6) Since the association is based solely upon the common-law right of the members to contract with each other, there seems to be no reason why they may not legally do all the things they usually undertake to do, nor why the courts may not apply to them the same principles which permit parties to agree upon such forms of associa- tion as they may choose and hold these terms to be binding upon all who agree to, them expressly or impliedly, but upon no other persons. As between themselves, therefore, each member of an unincorporated association, after all the assets of the company are exhausted, is bound to pay his proportion of the debts of the concern; but as to 724 BUSINESS ADMINISTRATION the creditors each member is liable for all such debts, no matter what the private arrangements among the members may be. They might stipulate with each other in the articles of association that they shall not be responsible other than out of joint funds, yet as to the rest of the world it is clear that each is liable to the whole amount of debts contracted, nor can this liability be shifted except by a transfer of shares in the exact mode prescribed by the articles of association. (c) The association has a common name, which is usually descrip- tive of the business for which it is formed and does not consist of the names of persons. In this name it may enter into contracts in the manner prescribed by the articles of association, and may generally sue and be sued under that name. (d) The capital of the company is divided into shares, and the number of shares held by each member determines his interest and the extent of his control of the management, and as between the members themselves fixes his proportion of Uability for debts of the association. Ordinarily these shares represent a certain amount of money, or the value of property transferred to the company by the shareholders. (e) The shares are transferable at the will of the owner, or at his death become assets of the estate in the hands of his personal representative. That the shares are transferable is evidence of the intent that such death or transfer shall not result in the dissolution of the company and gives it the quahty of perpetual succession. The transfer of shares must be made in conformity with the articles of association, for by these the shareholders have themselves provided the means by which their interests, rights, and liabiUties in the company may be made to devolve upon others and to these they must be held. 10. SOME RESULTS OF INCORPORATION' A corporation, it appears, then, is an association of persons. But there are other associations of persons for business purposes — partnerships, syndicates, and other associations resting merely on contract. If any of these associations take the benefit of this joint- stock corporation law, they become corporations. What do they gain by it? In other words — and the putting of this question as really the fundamental one, greatly clarifies the subject — what is incorporation? What is it, and of what advantage is it, to become " Adapted by permission from Thomas Thacher," Incorporation," in Yale Law Journal, IX (1899-igoo), 85-88. THE FORM OF THE BUSINESS UNIT 725 a body corporate or corporation ? Suppose that a number of persons have come together to form an association for business, and the question is raised whether or not they shall file their articles and become incorporated. Will they have any broader powers as to the business they may do? Certainly not. They can engage in any lawful business, unincorporated. Incorporated, they can do nothing more. If they desire to be able to change the business upon the agreement of less than all the associates, the articles can so provide. As to the business they may do, they rather assume a restraint than gain a greater freedom, by incorporation. And they subject them- selves to the burden of making reports about their business to state officials. They do not by incorporation acquire the right to use a larger capital in their business, and as to the issue of shares and the getting of additional capital in the future, the articles may provide as fully, and perhaps with less restrictions, if the association is to remain unincorporated. The statute contains convenient pro- visions as to organization and management, which are carried into the articles without being expressed, if the articles are filed. But like provisions may be expressed in the articles with but little more trouble, if the association is to rest on agreement merely. Speaking generally, the association, if not incorporated, may have as broad powers, as large a capital and as much freedom of action, as if it becomes a corporation. Indeed it is under less restraint and, if its associates are of one mind, it is practically unlimited, as an individual is, as to what it may do or what it may own. Its power for good or evil as an influence in the line of business in which it operates is quite as great. By becoming a body corporate, the association gets simply the right to be regarded, in its legal relations, as though it were a being separate from those who compose it. That is the meaning of the phrase as determined by the usages of the past. Call it an independent entity, if you please, ^or a legal person. The idea is graphically set forth by these names; and the names are of value in its application. Incorporation creates the right to be regarded as a separate being. The association is an association of persons after incorporation as before. The associates and their successors, that is, in a stock corporation, the stockholders, associated together, under the articles, are the corporation. But in the relations of the associa- tion with the individual stockholders and with all outsiders, it is, when incorporated, to be dealt with and regarded as an independent body. 726 BUSINESS ADMINISTRATION And from this come two results: first, that the death of the associates or the transfer of their interests does not affect the existence of the corporation; and, second, that the individual stock- holders are not chargeable with the acts or omissions of the cor- poration, are not liable for its debts or obligations or for the wrongs which it commits, except so far as the statute may expressly provide. The first of these results is, in many cases, the sufficient inducement to incorporation, because of the convenience of having a business so organized that many can participate in its profits, that interests may be divided and sold or bequeathed without disturbing the business itself. All this may, it is beUeved, be accomplished by agreement. Witness the imincorporated joint-stock companies engaged in the express business. But the statutes have been carefully worked out; and if there is any omission it can be supplied by further legis- lation; and so it is much more convenient to reach these ends by incorporation than by agreement merely. Still, that the same continuity of the association, the same transferability of interests could be accdmpUshed by agreement merely, is not to be forgotten when legislation is proposed, based upon what the corporation gets from the state. But what cannot be got by agreement is the irre- sponsibiUty of the associates or stockholders for the acts or omis- sions of the association. Theoretically, perhaps, this might be deemed possible, because all who should have dealings with the association might conceivably so agree. But practically, it is im- possible to secure this result save by the action of the state. This, then, is the chief thing which the state confers by incorporation, freedom from personal Uability, or, in some cases, limitation of personal liability, for the debts and wrongs for which the association is responsible. This is common to corporations of all kinds, and is peculiar to corporations. And there is nothing else of which this can be said. A few applications of what has been said to the suggestion made at the outset seem appropriate. Since freedom from, or Umitation of, the personal liability of the associates is the only thing common to all corporations and peculiar to them, and it comes by grant from the state, this is the chief basis of the right and the propriety of legislative regulation of the management of incorporated companies. Authorizing the associates to do business, to invite credits, without the ordinary hability of individuals, the state is bound to concern itself with the management of their capital, which is the sole reliance, or in excep- THE FORM OF THE BUSINESS UNIT 727 tional cases, the chief reliance, of creditors. The propriety of statu- tory regulations looking to good management cannot be doubted, and good management means management intelligent, effective, and honest. Out of the common provision that the affairs of corporations shall be managed by a board of directors comes a legitimate basis for regulation of management in the interest of stockholders. Stock- holders, as a rule, have no voice in the management save to determine by their vote at fixed periods who the directors shall be, and to make by-laws. The power to make by-laws does not permit the general management to be taken out of the hands of the board, in which it is vested by law. Hence, in matters of regulation looking to good management — management intelligent, effective, and honest — it is proper that the Legislature should consider not only the interests of outsiders who are or may become creditors, but also the interests of stockholders. In the interest of creditors or those who may become such, provisions requiring reports to be made, revealing the financial condition of corporations, find legitimate basis; but intelligent legislation of this kind wUl require no further publicity than the purpose requires. The interests of stockholders require only private reports to them. And as to those who may think of purchasing stock, it is doubtful whether they may not best be left to the rule of caveat emptor, with the additional protection as to stocks dealt in on the exchanges of the regulations which such exchanges may adopt, and with, perhaps, more stringent enactments as to mis- leading statements in prospectuses and the like, whether issued by corporations or not. The stock of many corporations changes hands but rarely. They are private institutions, and except for the protec- tion of creditors, there would seem to be no reason why they should be required to make their affairs public. Statutory provisions operating upon all corporations are not justified by reasons relating to such franchises as the franchise of operating a railroad. Legislation based upon such reasons should be limited to the particular class of corporations holding such franchises. II. HISTORICAL STAGES IN THE CORPORATION' Having regard to their creation, there have been three princi- pal eras of private corporations. During the first period they were ' Adapted by permission from W. F. McCook, "Suggestions on the Organiza- tion of Corporations," in Yale Law Journal, IV (1894-95), 169-72. 728 BUSINESS ADMINISTRATION created by royal prerogative. These franchises were generally granted as royal favors. They were more or less related to the administration of public afiairs or the increase of the material interests of the home government or its colonies. The purpose of their creation was largely to extend the political power or increase the revenues of the Crown. The essential characteristics of such corporations were only two, perpetuity and exclusive rights. The directors or managers constituted the corporation. Stockholders, as the term is now used, were then unknown. Their existence was not contemplated in the deed or grant of incorporation. Their rights, duties, and liabilities were not defined. They were share- holders only in the Umited sense that they had the right to share the profits earned by the stockholders or managers. The foundation of this right lay in contract only. Their relation to the directors was that of trustees and cestui qui trust. As a general rule they could not even select their own directors, the right to fill vacancies in that body being vested in the remaining members of the board. The second period is that in which, both in this country and in England, corporations were created by legislative enactment. Each corporation was created by a separate enactment. The most general plan of creation was to constitute certain persons named as incorporators or commissioners, authorizing them to receive subscriptions for the capital to be applied to the under- taking named in the enactment. When a given amount of capital was thus subscribed they were directed to call the subscribers to- gether, and the latter perfected their organization by electing their officers and directors and defining their respective duties by by-laws adopted by them. Thus the stockholders have come prominently into view. Their power in the organization and management of the corporation is increased; that of the directors is diminished and defined. The stockholders select the directors, define their duties, and limit the duration and scope of their offices. The public was not as yet quite prepared for the idea that he, for whose benefit the common undertaking is carried on and who derives all the resulting profits therefrom, should enjoy absolute immunity from the common law Uability of joint undertakers. Therefore a conservative compromise between general, individual liability on the one hand and entire immunity from the claims of creditors on the other, was hit upon, and it was generally provided that the individual liabiUty of the stockholder for the debts of the THE FORM OF THE BUSINESS UNIT 729 corporation should bear a limited, fixed relation to the amount of stock held by him. This liability has been defined to be second- ary, the creditor being first required to pursue the corporation to the extent of its assets. This idea is preserved in our national bank statutes, whereby the stockholder is made individually liable in an amount equal to the stock held by him. It is in most of the charters of our state banks, and in some states it applies to all private corpo- rations. The prominent characteristics of corporations of this era, as contrasted with the preceding one are perpetuity, power of the stockholders over the management of the company, and Hmited liability of the stockholders. As these corporations were created by an act of the legislative body, politics often dominated its action both in granting and with- holding franchises. Strong lobbies grew up at our capitals, whose business it was to procure valuable franchises and sell them to others. The more liberal the scope of the charter, the greater the immunity of the stockholder, the more valuable the franchise was to sell. So broad and unHmited became the scope of these franchises that they were properly called "omnibus" charters. One such might be" instanced imder which a steamship line was operated on the Atlantic seaboard; it was next used as the contractor to construct an inter- state railway in the Southwest; now it is used to supply a large city with gas. Naturally this nefarious traflSc in public franchises worked its own destruction; took from our legislature the power to grant franchises, and produced the third era of corporate creation which may be called the "free corporation era." England has not entered into this era as completely as our states have. There the right still resides in Parliament to create certain corporations, such as railway companies. In aU of the states of our Union and as to almost aU kinds of corporations, the right to be- come a corporation is free to any of its citizens voluntarily associating themselves together for such purpose. The evident purpose sought to be secured by these free corpo- ration statutes was to encourage opposition in manufacture and commerce and to prevent monopoly. With few exceptions, there is no liabiKty on the part of the stockholders beyond paying for the stock for which they have subscribed. This done, the com- pany can borrow money, increase its liabilities to any extent it can procure credit, run itself into hopeless bankruptcy, and the stock- holders enjoy absolute immunity from the claims of creditors. 73° BUSINESS ADMINISTRATION Looking at the present condition of the markets for our corporate securities, we may see that the striking characteristics of the cor- porations of our third era are protection to the stockholder, risk to the creditor. The reason for this is not hard to find when we consider the manner in which many of our corporate enterprises have been organized. 12. FORM OF CORPORATION CHARTER We, the undersigned, in order to form a corporation for the pur- poses hereinafter set forth, under and pursuant to the provisions of the Act of the Legislature of the State of New Jersey, entitled "An Act Concerning Corporations (Revision of 1896)," and the acts amendatory thereof and supplemental thereto, do hereby certify as follows: ARTICLE I The name of the corporation is: ARTICLE II The principal and registered oflSce of the Company is in the Building , New Jersey, and the name of the agent therein and in charge thereof, and upon whom process against this corporation may be served, is ARTICLE III The objects for which and for each of which the corporation is formed are:' It is the intention that the objects, purposes, and powers specified in the clauses contained in this third paragraph shall, except where otherwise expressed in said paragraph, be nowise limited or restricted by reference to or inference from the terms of any other clause of this or any other paragraph inr this charter, but that the objects, purposes, and powers specified in each of the clauses of this para- graph shall be regarded as independent objects, purposes, and powers. ARTICLE IV The following provisions for the regulation of the business and the conduct of the afiairs of the Company are hereby established: 'This "object clause" varies with the nature of the business. Ordinarily it is comparatively simple, but it may be made very broad and comprehensive, as in the case of the U.S. Steel Corporation, given in the following selection. THE FORM OF THE BUSINESS UNIT 731 The corporation may use and apply its surplus earnings or accu- mulated profits authorized by law to be reserved to the purchase or acquisition of property, and to the purchase or acquisition of its own capital stock from time to time, to such extent and in such manner and upon such terms as its Board of Directors shall determine; and neither the property nor the capital stock so purchased and acquired, nor any of its capital stock taken in payment or satisfaction of any debt due to the corporation, shall be regarded as profits for the pur- poses of declaration or payment of dividends, unless otherwise deter- mined by a majority of the Board of Directors or a majority of the stockholders. The corporation in its by-laws may prescribe the number neces- sary to constitute a quorum of the Board of Directors, which number may be less than a majority of the whole number. The Board of Directors shall have power, without the assent or vote of the stockholders, to make, alter, rescind, or amend the by-laws of the corporation, to fix the amount to be reserved as working capi- tal, to authorize and cause to be executed mortgages and hens upon the real and personal property of the corporation; and from time to time to sell, assign, transfer, or otherwise dispose of any or all of the property of the corporation, but no such sale of all the property shall be made except pursuant to the vote of at least two-thirds of the Board of Directors. The Board of Directors from time to time shall determine whether and to what extent, and at what times and places, and under what conditions and regulations, the accounts and books of the corpora- tion, or any of them, shall be open to the inspection of the stock- holders; and no stockholder shall have any right of inspecting any account or book or document of the corporation, except as conferred by statute or authorized by the Board of Directors, or by a resolu- tion of the stockholders. The Board of Directors shall have power to hold its meetings, to have one or more offices, and to keep the books of the corporation (except the stock and transfer books) outside of the State of New Jersey at such places as may be from time to time designated by them. AETICLE v The Company shall be authorized to issue capital stock to the amount of dollars. The number of shares of which the capital 732 BUSINESS ADMINISTRATION Stock shall consist is shares of the par value of dollars each. (If preferred stock is desired, insert provisions therefor at this point.) ARTICLE VI The names and post-office addresses of the incorporators, and the number of shares of stock for which severally and ■ respectively we do hereby subscribe, the aggregate of our said subscriptions being dollars, which is the amount of capital stock with which the Company will begin business, are as follows: Names Post-Office Addresses No. of Shares ARTICLE VII The duration of the Company shall be perpetual. In Witness Whereof, we have hereunto set our hands and seals this day of 191 [L.S.] [L.S.] [L.S.] 13. A CHARTER OBJECT CLAUSE- III. The objects for which the corporation are formed are: To manufacture iron, steel, manganese, coke, copper, lumber, and other material, and all or any articles consisting, or partly consist- ing, of iron, steel, copper, wood, or other materials, and all or any products thereof. To acquire, own, lease, occupy, use, or develop any lands contain- ing coal or iron, manganese, stone, or other ores, or oil, and any wood lands, or other lands for any purpose of the company. To mine or otherwise to extract or remove coal, ores, stone, and other minerals, and timber from any lands owned, acquired, leased, or occupied by the company, or from any other lands. To buy and sell, or otherwise to deal or to traffic in iron, steel, manganese, copper, stone, ores, coal, coke, wood, lumber, and other materials, and any of the products thereof, and any articles con- sisting or partly consisting thereof. To construct bridges, buUdings, machinery, ships, boats, engines, cars, and other equipment, railroads, docks, slips, elevators, water- works, gas works, and electric works, viaducts, aqueducts, canals, ' From the charter of the United States Steel Corporation. THE FORM OF THE BUSINESS UNIT 733 and other water-ways, and other means of transportation, and to sell the same or otherwise to dispose thereof, or to maintain and operate the same except that the company shall not maintain or operate any railroad or canal in the state of New Jersey. To apply for, obtain, register, purchase, lease, or otherwise to acquire, and to hold, use, own, operate, and introduce, and to sell, assign, or otherwise to dispose of, any trade-marks, trade-names, patents, inventions, improvements, and processes used in connection with or secured under letters patent of the United States, or else- where or otherwise, and to use, exercise, develop, grant licenses in respect of, or otherwise to turn to account any such trade-marks, patents, licenses, processes, and the like, or any such property or rights. To engage in any other manufacturing, mining, construction, or transportation business of any kind or character whatsoever, and to that end to acquire, hold, own, and dispose of any and all property, assets, stocks, bonds, and rights of any and every kind, but not to engage in any business hereunder which shall require the exercise of the right of eminent domain within the state of New Jersey. To acquire by purchase, subscription, or otherwise, and to hold or to dispose of stocks, bonds, or any other obligations of any corpora- tion formed for, or then or theretofore engaged in or pursuing any, one or more of the kinds of business, purposes, objects, or operations above indicated, or owning or holding any property of any kind herein mentioned, or of any corporation owning or holding the stocks or the obligations of any such corporation. To hold for investment, or otherwise to use, sell, or dispose of, any stock, bonds, or other obligations of any such other corporation; to aid in any manner any corporation whose stock, bonds, or other obligations are held or in any manner guaranteed by the company, and to do any other acts or things for the preservation, protection, improvement, or enhancement of the value of any such stock, bonds, or other obligations, or to do any acts or things designed for" any such purpose; and while owner of any such stock, bonds, or other obligations, to exercise all the rights, powers, and privileges of owner- ship thereof, and to exercise any and all voting power thereon. The business or purpose of the company is from time to time to do any one or more of the acts and things herein set forth; and it may conduct its business in other states, and in territories, and in foreign countries, and may have one oflSce, or more than one 734 BUSINESS ADMINISTRATION oflBce, and keep the books of the company outside of the state of New Jersey, except as otherwise may be provided by law; and may hold, purchase, mortgage, and convey real and personal property, either in or out of the state of New Jersey. See also p. 434. Corporate Securities Viewed as Instrumentali- ties. p. 440. A Classification of Stocks. p. 448. A Classification of Bonds. p. 450. Recitals in Bonds. p. 456. PoUcies Concerning the Kind and Amount of Securities. 14. THE POWERS OF STOCKHOLDERS' A. OF THE POWER OE THE DTOIVIDUAL STOCKHOLDEE, AND OF THE STOCKHOLDERS ACTING INDIVIDUALLY Of the individual. — It is a fundamental principle of the partner- ship that each member is in all matters within the apparent and legitimate scope of the partnership business the general agent of his co-partners, and the firm and all its members are liable for what- ever is done by him in transacting the business of the partnership in the ordinary way. The position of the stockholder of a corpora- tion is entirely different. He is neither the agent of the corporation nor of its members, nor are his acts or contracts as an individual binding on either, though made with reference to the affairs of the corporation and for its benefit. The reasons for this difference in the powers of the members of a corporation and that of a partnership are to be found in a com- parison of the natures of the two organizations. The partnership can in no sense be viewed as having an existence apart from that of its members. Its liabilities are their liabilities. They, in short, are the partnership. The corporation, on the other hand, while it, like the partnership, is made up of individuals, is an entity entirely distinct from the members that compose it. It is a legal person, endowed with powers that belong in no wise to its corporators, and which caimot be exercised by them. Its liabilities are not the liabilities ' Adapted by permission from W. L. Kitchel, "The Power of Stockholders to Bind a Corporation," in Yale Law Journal, V (1895-96), 84-92. THE FORM OF THE BUSINESS UNIT 735 of its members, except to the limited extent to which they have by their subscription assumed them. It follows then that a stockholder, acting not in a corporate capacity, should have no more power to control this separate and distinct individuality than should any other person. Nor does the fact that his interests are bound up in that entity give him this power, for by his contract of membership he has surrendered his control, except in so far as by his vote he participates in corporate matters. A second reason for the wider power of the partner as compared with that of the stockholders is derived, not theoretically, but from the practical working of the two associations. The partnership is made up of comparatively few persons, who have united in a common enterprise with a full knowledge of one another and with confidence and reliance each in the other. Not so in the case of the corporation, which from its origin contemplates a membership more or less nu- merous and composed of individuals whose very existence may be unknown to the others. It stands to reason, therefore, that in his contract of membership the stockholder has intended to confer upon his fellows no such powers as does the partner on entering into the partnership. Of stockholders acting individtially. — The principle having thus been established that the individual stockholders caimot bind the corporation, it necessarily follows that any number of the stockholders acting individually can have no greater power in this respect. And when carried to its extreme it is a necessary consequence of this rule that stockholders owning a rnajority or even all the stock of the company cannot control the corporation, except when acting duly in their capacity as members of the corporation. This applies also with equal force to a single member who himself represents a majority or even all the stock. Illustrations. — In conformity with these rules it has been held that a stockholder has no authority to release a debt due the corpora- tion; that individual members cannot transfer the corporate property. Nor can they even, although holding a majority of all the stock, make a valid lease or sale of such property. Nor can they mortgage the same. Shareholders, when not acting as a corporation, cannot convey lands of the corporation, though all join in the deed. The owner of all the capital stock of a corporation does not become thereby the legal owner of its property, and cannot maintain replevin for it in his own name. 73<5 BUSINESS ADMINISTRATION B. OF THE POWER OF A MAJORITY Its extent. — In considering the power of a majority it will be found that it is similar in both corporations and partnerships. In the charter on the one hand and in the partnership agreement on the other are laid down in greater or less detail the general purposes and ends of the organization. In becoming a member both the stockholder and partner impliedly agree that in all that is necessary or incidental to the attainment of these purposes the majority shall have supreme authority and may bind the association. The necessity of implying such an agreement is evident when it is considered that if there were no such understanding it would be possible for one dissenting member to prevent the transaction of any business whatsoever, however thoroughly it might be included within the purposes of the association. Its limit.- — From the fact that this power of the majority rests wholly upon the original contract of the members, be it a charter or a partnership agreement, it follows that in both classes of organization it must be limited in its extent by the scope of that same contract. To adopt any other view would be to hold that the dissentient stock- holder would be compelled to resort to one of two courses of action, both equally unjust. On the one hand he could remain a member of the corporation and be bound by the act of the majority, thereby being made a party to an obligation which in entering into the cor- poration he had never contemplated assuming, which he had never agreed expressly or impliedly to assume, and which by his dissent he had even refused to assume. That such a case is extremely unjust is palpable, and the other alternative is equally oppressive. All that would remain for such a stockholder would be to withdraw from the corporation. In this way a majority could absolutely control the organization, and the existence of such a power, susceptible to so great abuses and so conducive to corruption, would open the way to the greatest injustice. Hence, we drive the general principle that a majority of the stockholders can bind the corporation in all matters within the scope of the corporate purposes and in such matters only. In applying this general rule it will be found that the classes of cases which come under its control are several, and it will be necessary briefly to examine these in order. By-laws. — In the first place, to facilitate the attainment of the corporate purposes it is essential that a system of by-laws should be adopted, regulating the government and business methods of the THE FORM OF THE BUSINESS UNIT 737 company. In so far as they are reasonable and tend to effect these purposes, by-laws adopted by the majority are binding on the corpora- tion, and their right to make them rests on the implied agreement of the shareholders in forming the company. But any such rules, incon- sistent with the original agreement which is the fundamental rule of the company, or which are injurious to the interests of the concern, or are unreasonable or contrary to the general principles of the law, it is, in accordance with our rule, beyond the power of the majority to thrust upon the corporation. Appointment of agents. — As it is necessary that in its business transactions the corporation should be represented by agents, it is impliedly agreed in the charter contract that such agents should be appointed. Hence, their appointment being within the limits of the charter powers, it is also, in accordance with our rule, impliedly agreed that the majority may select and confer authority upon such agents as may be necessary, and their choice in this matter will bind the company. Ratification. — Not only- may the majority bind the corporation by its own acts within the limits laid down in the general doctrine, but it may also exert the same power by way of a ratification of unauthorized acts of its agents. Hence it follows that an act of an agent outside of the scope of his authority may by vote of the majority be made binding upon the corporation. But it also follows that this power of ratification has the same limitations as the primary power of the majority and hence no act of an agent which is beyond the limits of the charter can be made effective. Alteration of charter.- — To materially alter the terms of the charter is clearly an act which is beyond the purpose of the charter agreement, unless therein otherwise stipulated. Hence our rule would prevent the acceptance of such alteration by a majority. Transfer of all corporate property. — To sell out all the property and privileges of a corporation is an act which is consistent with the purposes of its charter, when it is made necessary by the condition of the concern, as where the business has become unprofitable, and hence, it is within the powers of the majority to bind the corporation by a sale under such circumstances. But a transfer effected by them while the affairs of the concern are prosperous, whether for a purpose beneficial to the stockholders or not, is invalid, and at the suit of a stockholder an injunction will be granted to prevent such transfer, and if it has already been completed it wUl be declared void and an account- ing will be decreed. 738 BUSINESS ADMINISTRATION Restrictions on general rule. — Although, as is seen from the cases already reviewed, the doctrine as stated has been thoroughly estab- lished, still in the greater niunber of corporations the power of the majority will be found to be actually much more strictly confined, in most cases extending only to a general oversight of the afiairs of the company and to the appointment of its agents, while all other matters are delegated to the agents thus appointed. This limitation, however, can be easily reconciled with the general rule, for it will be found that, wherever such a restriction exists, it is invariably provided for by the express terms of the charter itself, which, as we have seen, must be in all cases the ultimate criterion of the powers of the majority. C. POWER OF STOCKHOLDERS ACTING UNANIMOUSLY Having thus disposed of the power of the individual stockholder and of the majority, there remains the final division of our subject — the power of the stockholders acting unanimously. An act of all the members in their corporate capacity is an act of the corporation itself. Hence this division of our subject embraces simply the ques- tion as to the power of the corporation to bind itself. It is no longer a matter of the power of the stockholders, but involves the whole doctrine as to the so-called ultra vires acts. A discussion of this theory is entirely beyond the scope of this article. Suffice it to say that the rale applying to a majority does not extend to the action of the whole membership. While no mere majority, however large, may transcend the limits laid down by the charter, it is otherwise with the stockholders acting unanimously, for many of their contracts and actions will be sustained, even though entirely without the scope of the charter purposes. It is readily seen why such acts should be binding in so far as they are not nullified by the intervention of other principles of law. The charter was created and existed only by the unanimous agreement of the stockholders. Hence it may be altered or entirely repudiated by any subsequent unanimous agreement on their part, and as among themselves they will be bound by any action in pursuance of such an agreement, however aUen it may be to the terms of the original charter. But it is just at this point that the general principles of the law and of public policy intervene and determine which of these acts shall be deemed valid and which of no effect. The rules governing this determination can be ascertained only from a study of the doctrine of ultra vires powers. THE FORM OF THE BUSINESS UNIT 739 It is no doubt true that for a complete discussion of the subject originally undertaken an examination into the doctrine of ultra vires would be necessary. But so extensive is this doctrine, and the results dependent upon it, that it should more fitly be treated as a matter entirely independent of the subject in hand. 15. LIABILITY OF CORPORATE DIRECTORS It should be noted that only those powers which are given by the corporate charter, whether expressly or by implication, can be exercised by the board of directors, or by the vote of the directors and shareholders combined. Anything done beyond such powers is tdtra vires, and subjects the corporation to an action by the state to forfeit its charter. It is the purpose of the paper to point out some of the duties and to indicate some of the liabilities attaching to corporate management. It is important, first, to determine what the legal relationship is between a corporation and its directors. Are they trustees in the strict meaning of that word or in any sense in which the law defines that word ? Or are they merely agents appointed by and acting for the corporation in its business transactions ? ' There is a great difference, both in the duties and the liabilities of trustees and agents. A trustee is said to be one to whom property has been conveyed to be held or managed for another. While he acts for another's benefit he has large discretion and is usually inde- pendent from control by the legal owner of the property. The power and the equitable estate are vested in him for the purpose of control- ling the subject-matter of the trust. This authority does not come from the beneficiary but is to be found in the trust instrument and in the law relating to it. On the other hand, an agent is one who by the authority and on behalf of some other person undertakes to do some act or transact some business for another. He is at all times under the control of such other person relating to the affair in which he is acting. He has no title or interest in the property involved and his agency is terminable at any time by his principal. He is directed and con- trolled by his principal and is not clothed with discretion in the ' Adapted by permission from W. P. Rogers, "Corporations," Chicago Legal News.XLVIl (1914-is). 382-84. 740 BUSINESS ADMINISTRATION matter, unless it is specially given by his principal. His duties and liabilities are, therefore, much more limited than are those of a trustee. A director of a corporation holds a position somewhat similar both to that of a trustee and an agent and yet in many ways diSerent from either. He has neither legal nor equitable title to the property. This remains in the corporation. He manages it for the corporation, although in the conduct of its affairs he receives little or no authority or instruction from the corporation. These he finds in the laws relating to his position. It is true he may ask advice of the stockholders relating even to the ordinary affairs of the corporation but he is under no obligation to do so. Concerning these, his position gives him power to act. But in a few extraordinary matters such as disposing of all the corporation's property, increasing the capital stock, or amending the corporate charter, the law usually requires some action of the stockholders preliminary to final action by the board of directors. There are many cases in which the question whether directors are trustees or only agents has been discussed, and the better con- clusion seems to be that they are agents but invested with large discretionary powers, and that they hold a fiduciary relation to the corporation and its shareholders. Because his powers are so ample, the law imposes upon the director the duty of diligence toward his trust, which must always be exercised in the interest of the benefi- ciary and never in his own behalf. It also holds him responsible for losses resulting from negligence or mismanagement of the property, by rules much more stringent than are applied to an agent. In accepting the ofl&ce, directors impliedly contract to give to the corporate management their best judgment and such diligence in the duties connected with it as may reasonably be required. They cannot be relieved from liability on account of their imprudent management by reason of their ignorance or lack of experience or their honest purposes. They undertake, by assuming the oflSce, to give to the business whatever time and attention may be re- quired of them in properly managing the interests intrusted , to them. If they act with reasonable care, skill, and diligence, but never- theless commit an error of judgment or make a mistake of some character from which financial loss results to the corporation, they win not be held personally liable. THE FORM OF THE BUSINESS UNIT 741 Directors must not be negligent in conducting the corporation's business. They must act in good faith. It is sometimes said that they must act with as much care toward the corporation's business as an ordinary prudent man takes in the management of his oWn affairs. But this rule has been much criticized and is evidently too stringent. If one as director is required to give to corporate business the same diligence which a prudent man gives to his own aiiairs, practically all the director's time would be thus occupied and he could not be diligent with his own affairs. The weight of judicial opinion is that directors are liable only for losses traceable to their own wrongs or gross neglect of their duties. That directors are liable in an action at law to their principal, the corporation, for losses resulting to it from malfeasance, mis- feasance, or their failure or neglect to discharge the duties imposed by their office, and in equity, to the stockholders for these losses (the corporation declining to bring suit) is clear, upon the authorities. Though the corporation is the legal entity, yet the stockholders are interested in the operations of the corporation while in a state of activity and, upon its dissolution, in the distribution of its property, after all debts are paid, and so its officers or agents stand in a fidu- ciary relation to both. But it is otherwise as to creditors. The directors of a going corporation, whether able to pay its debts or not, owe no allegiance to them. It is true that the creditors may extend credit upon the faith that the company has assets to pay its debts, and that these assets are prudently managed; yet they are strangers to the directors; they maintain no fiduciary relation with them; there is a lack of privity between the two. Of course the Legislature may by statute change this common law rule, and there are many statutes which have modified it. These statutes are so different in the various states that they cannot here be enumerated. Directors are held responsible to the corporation or to its share- holders for losses sustained by reason of their idtra vires acts. Directors' services for their corporations are presumed to be voluntary and without expectation of pay. It is supposed that com- pensation to directors comes in profits from the business in the form of dividends on their stock. Directors, therefore, are not legally entitled to compensation for official services rendered by them unless the same has been provided for by the charter or the by-laws of the corporation. 742 BUSINESS ADMINISTRATION Their position not infrequently presents tempting opportunities for directors to personally profit in transactions for their corporation. But the law wiU not permit a director thus to secure secret profits. Should he do so, the corporation upon discovering this fact may either rescind the, transaction or require him to account to it for any such profits. It is a breach of trust for a director to accept a gift from one who is contracting with the corporation. He may be required to turn over to the corporation all such gifts, bribes or secret profits. Should the corporation refuse to bring an action against the guilty director, it may be instituted by a shareholder. B' What might be called the amateur aspect of a directorship has probably increased greatly during recent years. By this is meant the idea that such a position is an avocation, a luxury, a compUment paid to a successful business or professional man, something like the bestowal of an honorary degree. And amid the great variety of other considerations that prevail, many have little or nothing to do with the management of the company's affairs. For example, one is elected because a relative is a large stockholder and would be pleased. Another bears an honored or conspicuous name which would look well upon statements. A third has large interests and is rather expected to "bring business." It is tacitly imderstood that none of these men will be called upon to contribute much of his time. It must be observed, in the first place, that there has been no relaxation as far as the statute books are concerned in the theory that directors are to exercise an active, if not continuous, control over the pohcy of a company. Many of the theoretical safeguards, however, have become either dead letters or the merest farce. For example, the provision that directors must be stockholders has become so atrophied that the phrase "qualifying shares" is employed frankly as though it were wholly legitimate and did not signify in its very origin a defiance of the spirit of the provision. For qualifying shares, as is well known, are merely those which are entered on the books of the company in the names of the several directors who have no stock but are desired as members of the board. So, although the title remains in the company itself, they become stockholders as far as the records are concerned, and everyone is satisfied. Two very obvious hnes exist along which reforms might proceed. One is to recognize the maxim that everybody's business is nobody's ' Taken by permission from Frederick Dwight, "Liability of Corporate Direc- tors," Yale Law Journal. XVII (ioo»-8). .w-A». THE FORM OF THE BUSINESS XJNIT 743 business, and that as long as boards consist of numerous members with vaguely defined responsibilities very few will feel any serious sense of personal liability and will be inclined to attend to their duties only so far as it is convenient for them to do so. This proposition is emphasized by the modern rise of executive committees in importance — representing a logical if unconscious trend toward a concentration of responsibility — or perhaps, more properly, a realization of the difficulty of assembling a numerous body of busy men in a practically volunteer capacity at intervals of such frequency as to render their meetings very serviceable. The executive committee is merely an inner circle of the board composed usually of those directors who are most accessible, most interested in the operations of the corporation, and most familiar with them. It bears the same relation to the full board that an ordi- nary agent does to his principal, and in general its acts are those of the board. In many companies, indeed, its existence has reduced the directors practically to the level of a ratifying body whose services might easUy be discarded. But the other very simple, if not whoUy effectual, remedy would be to define sharply and apply vigorously the penalties which lie ready for indolent directors. The lesson to be gathered from the cases seems to be that, although courts adjure directors to be good and to give some heed to the companies they have honored with their "assistance," at the present time they are not required to be familiar with the operations of the company {Wakeman v. Dalley), they need not attend meetings of the board if inconvenient to do so {Briggs v. Spaulding), they are not responsible for the misconduct of executive officers appointed by themselves {Wheeler v. Aiken Co. Bank) unless, indeed, the wrong- doing is so palpable that it is practically forced upon their attention {Gibbons v. Anderson), and if they persuade two or three of their number to do aU the work, the latter alone will be held responsible for a neglect of such duties {Warren v. Pennoyer). Where else in human affairs may be found so admirable a combination of distinction without anxiety, of reward without toil? Would it not be well for the corporations and society at large if penalties that are admitted to be proper in the abstract were insisted upon until the prodigious number of pseudo-directors who are now in evidence were " squeezed out," and a really hard-working director, as distinguished from an officer, became less of an anomaly than he seems under present conditions ? 744 BUSINESS ADMINISTRATION i6. THE DISSOLUTION OF A CORPORATION' Unless otherwise provided by statute, a private corporation may be dissolved only in five ways: (a) By the weight of authority, by expiration of its charter. (b) By an act of the Legislature repealing its charter, under the power of repeal reserved by the state in granting the charter. (c) By the loss of an essential integral part, which cannot be supplied; as by death or withdrawal of all the members, where there are no means of supplying their places; but this does not apply to modern stock corporations. (d) By surrender of its charter with the consent of the state. (e) By forfeiture of its charter for misuser or nonuser of its powers. But (i) A forefeiture only takes effect upon the judgment of a com- petent court ascertaining and decreeing a forfeiture, unless the Legislature has clearly provided otherwise. (2) Where the acts or omissions of which the corporation has been guilty are, by statute, expressly made a cause of for- feiture, the court has no discretion to refuse a judgment of forfeiture. But in other cases the court has a discretion to determine from the circumstances whether judgment of ouster of the franchise to be a corporation shall be rendered, or whether the corporation shall be merely ousted from the exercise of the powers illegally assumed. (3) The Legislature, as the representative of the state, may waive the right to insist upon a cause of forfeiture, as by acts recognizing the right of a body to continue as a corporation. But, to constitute a waiver, the acts must be inconsistent with the intention to insist upon a forfeiture. (4) The forfeiture must be enforced by the state, by its authorized representatives. It cannot be enforced or insisted upon by private individuals, either collaterally or directly. (s) A forfeiture may be enforced by scire facias where there is a legal existing body, capable of acting, but who have abused their power; or by an information in the nature of qtio warranto where the body is merely a corporation de facto, or where it is neither a corporation de facto nor dejure. The procedure is now generally fixed by statute. ' Taken by permission from W. L. Clark, Jr., Handbook of the Law of Private Corporations, pp. 291-92. (West Publishing Company, 1916.) THE FORM OF THE BUSINESS UNIT 745 17. SOME METHODS OF CONCENTRATION OF CONTROL' [No attempt is made to give a full treatment of the various methods of concentration of control. The following selection gives an excellent simmiary of the field.] Thus far we have examined organizations which may be called simple associations. In each of the forms discussed in the fore- going pages, the individual has been the constituent unit, and, in each case, the individuals as units have been simply and directly associated. Formally, at least, the natural persons who are the members have stood in an immediate relation to the direction of the management of the organization. The highest and most efficient form of organization by simple association is the corporation. Looking around us today, what do we see? On all sides we behold complex organizations which indirectly, through subordinate and simpler forms, deal with markets which are sometimes world- wide in extent. Of course, independent simple associations, such as partnerships and uncombined corporations, continue to exist, just as the single-individual organization does; and, moreover, combinations were not unknown in earUer times; but a substantially accurate idea of the evolution of business organization will be gained if one thinks of a new cycle of development as opening about the time of the Civil War, or say 1870, and reaching a climax about i8g8 — a cycle in which the constituent units more and more frequently became associations of individuals, and the resultant organizations were compound affairs or combinations. It may be saidtiat artificial persons (corporations) more and more form the units of the later associations. For over a generation we have been growing more and more familiar with the rich terminology of combination. The columns of the press bristle with "combines," "trusts," "associations," "pools," "consolida- tions," "rings," "mergers," and what not. Few readers, or writers either, for that matter, discriminate carefully among the terms which indicate the various forms of com- bination; but there are as many different kinds of combinations as there are kinds of simple association, and in dealing with these different kinds it will be found conducive to clear thought to apply the various terms according to their logical denotation and best usage. To combine is simply to become one of the parts of a whole, and a combination is merely a union of persons to make a whole or group ' Adapted by permission from L. H. Haney, Business Organization and Com- bination, pp. 128-32. (The Macmillan Company, 1914.) 746 BUSINESS ADMINISTRATION for the prosecution of some common purpose. The idea of purpose is not separable from the meaning of the word as used to indicate unions or men, for men hardly unite without a common object in view; and it is significant that even the dictionaries use the word "confederacy" in defining human combinations. Aside from the idea of purpose, however, the word "combination" is properly used as the most general and colorless term to denote any sort of union of persons, and will generally be so used in the following pages. The law, with which we are constantly touching hands in this subject, recognizes two classes of persons, the natural and the artificial, or corporate; and generally, in present-day business, persons of the latter kind are the ones which are directly concerned in the formation of combinations. Indeed it would be well if the word "association" could be used to indicate direct unions of individuals or natural persons, for that word implies a personal relation, a linking together in fellowship, which is not found in the combination of artificial persons. This is, perhaps, a refinement which cannot now be insisted upon, but it has been observed in these pages. When the term combination is used alone it will mean a compound combination, or combination of associations. Next, the idea of "federation" should be brought in. Federation is alliance for mutual support, or a union by agreement of independent and autonomous powers for mutual benefit in relations external to any one member, and it implies that outside of such external relations the members retain their independence and autonomy. Thus a federation, both in political and business life, is a relatively loose form of combination based upon mutual consent. Another general term is "consolidation." Consolidation, by the logic of words and by best usage, applies only to firm, compact alliances. It should, therefore, never be applied to federated organiza- tions, but only to combinations in which the members are so compactly united as to lose a large measure of independent and autonomous existence. They are fused. For example, both the Southern Whole- sale Grocers' Association and the United States Steel Corporation are combinations, but the former is a federation organization while the latter is a consolidation. The law recognizes the distinction between consolidation and mere combination, for the validity of consolidations, involving as they do a greater loss of individuality on the part of their members, depends upon statutory authority and not upon public policy; whereas combinations other than consolidations THE FORM OF THE BUSINESS UNIT 747 have their validity determined by public policy, and the laws rarely authorize but often forbid them. A "merger," as the term clearly indicates, is a form of organiza- tion in which the identity of the parts is lost. The members are absorbed, as it were, into a common whole, and the merger is thus a complete and absolute consolidation. Though the term is loosely used, there is considerable legal authority for confining "merger" to consolidations in which one business organization absorbs another or others and continues to exist, as when a railway system absorbs a branch Une. In view of this fact, it is logical to use another term, "amalgamation," to indicate a consolidation in which aU the com- bining organizations give up their identities, become fused, and coalesce in a new organization. An outline classification of combinations, then, would run some- what as the following: — • I. Simple Combinations: I . Association (direct combination of natxu-al persons as in partnerships) . II. Compound Combinations: 1. Association (the loosest agreements directly between individual members of different associations: trade "associations," some simple "agreements," etc.). 2. Federation (combination of organizations which remain separate and retain considerable autonomy: most simple "agreements" and pools). 3. Consolidation (combination of organizations in which, while members may retain nominally separate, direction of business is fused). a. Partial Consolidation: (i) Securities holding (direction of business organizations con- solidated through stock ownership, with separate existence formally maintained). b. Complete consolidation: (i) Merger (complete consolidation, members of one business organization absorbed by another). (2) Amalgamation (complete consolidation, members of two or more organizations coalesce to form a new organization). See also p. 671. Ehmination by Combination of Risks. p. 553. Technological Industry Is Frequently Large Scale Industry. 748 BUSINESS ADMINISTRATION i8. SIMPLE BUSINESS TRUSTS' When the word "trust" is mentioned, most men at once think of some illegal combination. The term is in bad odor. Yet if one were to inquire of a lawyer concerning trusts one would probably be told that they are very desirable social institutions, and that they are perfectly legal. Moreover, in the conservative state of Massachusetts, one could find scores of harmless business organiza- tions which are carried on under the trust form. Whence comes this seeming paradox? The trusts thought of by the lajrman are the "standard oil trust," the "sugar trust," and the like. These are aU more or less monopolistic combinations of corporations. The lawyer, however, has in mind the general idea of the trust institution, which is a very different matter. While trusts may be readily perverted when used for combinations, they are necessary and beneficial in many other relations. The lawyer may be thinking of the trustees appointed by the courts to administer the estates of deceased persons, infants, etc. Also, in some states, trustees are chosen to carry on businesses for groups of individuals, and to supervise investments. Such uses of the trust institution need involve no monopoly; and they need combine no corporations. The simple business trust is a form of business organization under which the legal title to property is vested in an individual trustee or individual trustees. (Corporations may act as trustees, as is the case with trust companies. In such cases, the trust is the function; the organization is a corporation.) The property is managed by them in the interesft of the former title holders who become "bene- ficiaries" (cestuis que trustent). The trustees thus become, not agents — as are partners — ^but principals; and they can make con- tracts, and can sue and be sued in their own names. The benefi- ciaries, in turn, are neither partners nor agents. They cannot convey the property to others; nor can they usually maintain any action at law for its protection. They oidy have the right of action against the trustees. With such a relation existing between trustees and beneficiaries, it is apparent that without any special provision to the contrary the debts of the business lie against the trustees, not against the beneficiaries. Under the common law, trustees may and do issue certificates of beneficial interest, the capital embraced in the trust being divided - Adapted by permission from L. H. Haney, Business Organization and Combi- nation, pp. 117-27. (The Marmiiian Company, 1914.) THE FORM OF THE BUSINESS UNIT 749 into shares. These certificates are much like the stock certificates of a business corporation. Lawyers distinguish several classes of trusts: active and passive, simple and special, express and resultant, etc. The terms active and passive are self-explanatory. A " simple " trust is one established without any special instructions to the trustees, thus allowing great discretion on their part. An "express" trust is created by an instru- ment which designates directly and expressly the property, persons, and purposes of the trust; whereas a resultant trust is one which results from the construction put by the law upon some existing or past relation. Practically all business trusts may be classed as active express trusts; but, as it is next to impossible to define the duties and policies of trustees, they are all virtually "simple" trusts. From the economic point of view, two classes of trusts are clearly distinguishable: (i) trusts of real estate, and (2) trusts of personal property. Personal property trusts, in turn, are of two kinds: (a) industrial trusts for carrying on some manufacturing, mercantile, or other business; and (b) securities-holding trusts, organized for investment in or control of corporations or joint-stock associations. There is a kind of holding trust in existence to-day which, within certain limits, is entirely legal, however undesirable it may be. Such trusts are known as "voting trusts," and are sometimes called "stock pools." The voting trust is a kind of special express trust, which may be defined as a form of organization in which holdings of stock are combined by placing them in the hands of trustees to be voted in a stipulated manner. A voting-trust agree- ment is entered into; and the stocks are transferred to the trustees and taken out in their names, negotiable trustee receipts being given by them in exchange. They are authorized to collect dividends, and are bound to pay such dividends over to the holders of the trust receipts. Unified voting is the object in voting trusts, and the ownership of stocks is not vested in the trustees: they are trusts of management, not of property. If this form is at hand for organizing business imits, and has actually been used in not a few cases, one's next inquiry is: What are its potentialities ? Why is it used at all ? Why is it not more used? The answer to these questions involves a discussion of the advantages and disadvantages of the simple business trust. Applying the six tests of efficiency of business organization, we note first that the trust is readily and cheaply formed. It does not 750 BUSINESS ADMINISTRATION require the sanction of the state. In facility of formation, then, it is on a par with the partnership. As to capital, the trust lies between the partnership, as ordi- narily organized, and the corporation. The trustees issue certifi- cates which accommodate a number of investors; but the character of the management makes it impossible to appeal to so wide a market as do the stocks of a corporation. Furthermore, the trust certifi- cates can be sold or assigned only in states which authorize by statute the assignment of those rights to personal property which are contin- gent upon suit at law {choses in action). In other states the buyer may have to file a bill of equity to get the title. The liabiHty of the members of trusts is in practice handled very satisfactorily, from the point of view of the investor. It is common to make an agreement that neither the trustees nor the beneficiaries shall be liable for the debts of the trust, which provision is made a part of every contract entered into by the trustees. In a word, it is provided that the trust property alone shall be looked to for the satisfaction of debts. This leaves the beneficiaries in a more desirable state than even the stockholders of a corporation, as there would be no excess of par value of shares over value of property to be drawn upon. Unless some such agreement is made, it appears that the trustees are personally liable: trustees can be held personally for material ordered for a trust estate, and for contracts made. The foregoing tests, then, are met fairly well. Aside from questions of legality, the crucial test, therefore, comes in the efficiency of direction. Here we find that the continuity of management is excellent; for trustees are not likely to be changed. In this the trust has an advantage over the corporation for businesses in which continuity is highly desirable. It also appears that in practice trustees can handle business with more ease and dispatch than the average board of directors. But the case is not so favorable on the important points of motivation and flexibility. True, the trustee is in equity bound to take such care of the trust estate as he would of his own property. That fact, however, can have but an uncertain and intermittent motive force, and can not adequately take the place of responsibility to shareholders. The beneficiaries have no power to remove trustee managers. They possess no remedy for unskUfulness on the part of trustees; and they can remove trustees who are guilty of fraudulent acts only by means of an uncertain bill in equity. As to flexibility, the trust is sadly deficient. The deed THE FORM OF THE BUSINESS UNIT 751 of trust once drawn up and put in force, its provisions are not subject to change except by the unanimous consent of all parties. The courts cannot change the powers of trustees, nor alter the terms of the trust agreement. And a trustee who has accepted a trust can neither renounce the duties and responsibilities of his office, nor delegate them to another. We must conclude that the trust will supply a safe and efficient instrument for direction only in case of businesses which are little subject to change, and which require relatively Uttle discretionary action on the part of the managers. Such a business is the holding and managing of real estate. A final disadvantage of trusts lies in their doubtful legal status. As a general proposition, at common law, trusts are quite legal: anyone who can enter into a contract, or make a will, or deal with legal title to property, may vest property in trustees. But, of course, this proposition is subject to the limitation set by public policy and by statute law. Trusts for combining corporations may be illegal as being the result of idtra vires acts by the corporations. New York and other states forbid trusts of real estate except in certain cases; and some states have abolished all trusts and uses except those which are estabUshed by will or deed. Considered from a social standpoint, the business trust is so hable to abuse, and requires such safeguarding, that it may fairly be called a dangerous institution. It wUl be remembered that the idea of the trust developed from the need of a suitable agency to manage the estate of incompetent persons, not to conduct businesses for competent persons. While the trust supplies a stable and en- during organization, as used in business, it almost of necessity places in the directors (trustees) a discretion which is out of all proportion to their actual responsibility. It is not a safe form, viewed from the standpoint of society. 19. CO-OPERATIVE INDUSTRY' [The sample of co-operative industry here discussed is taken from agriculture. Of coiurse the principles here treated are of wider application.] There is much confusion in the use of the term "co-operation" as applied to agricultural efforts. It is commonly applied to any group of farmers who associate themselves together. They may ■ Adapted by permission from G. H. Powell, Fundamental Principles of Co- operation in Agriculture, pp. 1-5, 9-10. (Circular No. 123, California Agricul- tural Experiment Station, IQ14.) 752 BUSINESS ADMINISTRATION organize as members of a voluntary unincorporated association of individuals; or as an incorporate capital stock association to handle farm crops for profit or for other purposes, or as non-profit corporations without capital stock. It is beUeved that its use as applied to business organizations in agriculture should be restricted to incorporated associations, societies, exchanges, or agencies which are formed exclu- sively for the benefit of the members; whose voting power is based on equality of membership; whose membership is confined exclusively to active producers, the membership ceasing to exist when the pro- ducer withdraws from the organization, and whose earnings are dis- tributed on the basis of the product, rather than on the capital con- tributed by each member, after a fair rate of interest is paid for the use of capital actua,lly employed in the business, if any, and other overhead charges are deducted. A co-operative organization, there- fore, is not a corporation in which the capital is contributed primarily in order that it may earn a profit; nor one composed of producers and non-producers; nor one in which the producer's product is handled by a corporation for the benefit of the stockholders rather than for that of the members; nor one in which the membership is not under the control of the organization; nor one in which the members do not actually control the organization. It is an association of farmers who unite in an effort to handle their common interests through an agency which is controlled by them, on the principle of an industrial democracy, and exclusively for their benefit. The stock corporation as defined by the statutes of most states is not the form under which to incorporate a farmers' business organiza- tion, though most of the so-called co-operative associations have been incorporated under the stock corporation statutes. The stock corpora- tion laws have been enacted primarily to meet the needs of capital, not primarily for the benefit of those who may use the facilities of the corporation. The membership in such organizations is not under legal control, because the right to seU the stock is a legal incident of its ownership. A stockholder may sell his farm and continue to be a stockholder in a stock corporation and still have the right to examine the affairs of the association, or he may sell his stock to someone who is not interested in the organization, or who may even be antagonistic to it; or he may withdraw his membership and still remain a stock- holder. There is no legal way by which the stock, and therefore the control of the corporation, can be confined to the membership after the stock has once been issued, unless the association is able to take over THE FORM OF THE BUSINESS UNIT 753 the stock and hold it as a trustee, until it can be resold to a member. Neither is the voting power of the stockholders under control in a stock corporation, because the voting power is generally proportional to the number of shares held by each stockholder. As a matter of fact most of the so-called ' co-operative associations of the country have been incorporated as capital stock corporations in the absence of other statutes under which they could be incorporated and many of them operate by mutual agreement expressed in the articles of incorporation, or in the by-laws, on strictly co-operative principles: others vote in accordance with stock ownership, fix the maximum ainount of stock to be owned by any member, and appor- tion the stock on the bearing acreage of the iiembers, but make no profits on capital. These organizations usually provide that a with- drawing member shall offer his stock to the association before he can sell it outside, a provision that is useless if the association is not able to take it over. They may provide also that all the earnings shall be returned to the members prorated on the business transacted by each after interest is paid on the capital invested and other overhead charges are deduced. The stockholders may vote equally by agreement and the capital invested may be paid only a fair rate of interest for its use. The difficulty in such organizations lies in the fact that some of the condi- tions to which they agree are not, in case of trouble, enforceable in the courts, and the organization ceases to be co-operative when the stockholders desire for any reason to exercise their legal privileges along non co-operative lines. As a result of organizing a so-called co-operative association under the stock corporation laws, many of these organizations often pass into the hands of non-producers or of rival interests, following the withdrawal of members through the sale of farms and the sale and transfer of stock; or a partial control may be held by dissatisfied stockholders who have withdrawn as members. In other states, especially in California, the statute provides for the incorporation, organization, management, and co-operation of agricultural, non-profit associations which do not have capital stock and whose business is not carried on for profit. These associations issue certificates of membership to each member but the membership cannot be transferred or assigned to any other person, nor is the pur- chaser of a property of a member entitled to membership by virtue of such purchase. In such associations the basis of voting and the 754 BUSINESS ADMINISTRATION control of the membersliip is subject to rules made by the association. These associations may accumulate a capital with which to transact business though the capital is not in the form of a paid-in capital stock. It may be accumulated pro rata from the proceeds of the shipments of the members, or in any other way agreed to by the members. In Nebraska co-operation has been defined and given a legal status. The law says, "for the purpose of this act, the words 'co-operative company, corporation, or association ' are defined to mean a company, corporation or association which authorizes the distribution of its earn- ings in part or wholly, on the basis of, or in proportion to, the amount of property bought frAm or sold to members, or of labor performed, or other service rendered to the corporation." It differs from the general incorporation law of Nebraska by providing that every co- operative corporation has the power "to regulate and limit the right of stockholders to transfer their stock; and to make by-laws for the management of its affairs; and to provide for the distribution of its earnings." In Wisconsin, a law was passed in 191 1, which provides for the formation of "a co-operative association society, company, or exchange, for the purpose of conducting agricultural, dairy, mercan- tile, mining, manufacturing, or mechanical business." The law pro- vides that "no stockholder in any such association shall own shares of a greater par value than one thousand dollars .... or be entitled to more than one vote." It provides that the directors shall apportion the earnings, subject to revision by the association at any time, "by first paying dividends on the paid-up capital stock not exceeding 6 per cent per annum, then setting aside not less than 10 per cent of the net profits for a reserve fund until an amount has been accumulated in said reserve fund equal to 30 per cent of the paid-up capital stock, and 5 per cent thereafter for an educational fund to be used in teaching co-operation, and the remainder of said net profits by uniform dividend upon the amount of purchase of shareholders and upon the wages and salaries of employees, and one-half of such uniform dividend to non-shareholders on the amount of their purchases, which may be credited to the account of such non-shareholders on account of capital stock of the association; but in productive associations such as creameries, canneries, elevators, factories, and the like, dividends shall be on raw material delivered instead of on goods purchased. In case the association is both a selling and a producing concern, the THE FORM OF THE BUSINESS UNIT 755 dividends may be on both raw material delivered and on goods pur- chased by the patrons." The law provides that no corporation or association doing business for profit shall be entitled to the use of the term "co-operative" as part of its corporate or business name unless it has complied with the provisions of the act. In a strictly co-operative organization a fundamental principle should be "one man, one vote." It should be a real industrial democ- racy in which the members trust each other and lean upon each other's judgment as men. In such an organization neither the capital con- tributed, nor the volume of business transacted should be the basis of the responsibility or influence of the individual member, because neither can co-operate or be made a basis for lasting co-operation. In the European co-operative associations the "one man, one vote" principle is apphed as a test to separate the true co-operative associa- tions from the pseudo co-operative. Since co-operation is founded on man, not on capital nor on products, there is no fundamental difference in principle where capital is eliminated and product is substituted as the basis of voting and control. The control of a co-operative association should be founded on the equality of mem- bership, whether the member contributes a large or a small volume of business. It is the members who, as men, co-operate in these organizations. There is a strong sentiment against the "one man, one vote" principle of voting when first presented to the average producer. The large producer fears control by smaller interests; the small landholders, domination by their larger neighbors. The history of the co-operative movement, both in Europe and in the United States, shows clearly that this adverse sentiment is a prejudice rather than an actual weakness in practical operation. Equality of membership strengthens the desire td co-operate, and men work together ia business harmony just as they now do in the equal control of churches, schools, and in governmental responsibilities. REFERENCES FOR FURTHER STUDY Haney, Business Organization and Combination. Marshall, Readings in Industrial Society, pp. 714-79. CHAPTER IX BASIC FEATURES OF ADMINISTRATION Purpose of this chapter: 1. To see what, in general terms, is involved in business adminis- tration. 2. To canvass present-day knowledge with respect to sound rules of action in the field of administration. In our preceding discussions of various business functions we have made it a point to conclude each discussion with a brief consideration of an appropriate way to organize the department at issue. We have now reached a stage ia our study where it is worth while to raise the general question of what is involved in administration. We are primarily concerned with business administration, but this general question may well be considered with public administration, school administration, and other possible forms of administration in the background of our thinking. There has been a quite considerable volume of writing directed at the question, "What are the fundamental 'laws' or 'principles' of administration?" The problem is too new for a conclusive answer. The following, therefore, represents only an approach to the answer. We have not troubled ourselves greatly in this course over terms and definitions. It is best, however, in the next few pages, to be fairly definite in our use of certain terms. Let us arbitrarily (see pp. 2, 3) use the term administration to include (a) policy formation, (b) the planning and setting-up of the organization, and (c) the run- ning of the organization. Let us, furthermore, note that it is something of a misnomer to ask for "principles" or "laws" of administration. Administration implies action and it is more appropriate to speak of sound rules of action in the field of administration than it is to speak of principles or laws. True enough, these rules of action may depend, for their appropriateness; upon some background scientific laws, as we shall later see. But that is another matter. We address ourselves, accordingly, to the question, "Can we formulate sound rules of action in the field of business admioistra- tion?" Frequently a specific problem clarifies issues. Letusassiune 7S6 BASIC FEATURES OF ADMINISTRATION 7S7 that John Jones, mature and able but largely innocent of business knowledge, asks us to tell him how to go about determining what are sound rules of action in this field. As I conceive it, our answer might well run as follows: I. Any action should be in terms of the phenomena — ^facts — -in which the action is to occur. The first task, therefore, is that of secur- ing an appreciation of business facts, or data. We cannot now stop to state the details of the enormous mass of data upon which action is to be taken. We can only point out certain elementary considerations connected with securing acquaintance with the necessary facts. First of all, remember that classification is an indispensable aid in securing a knowledge of business facts. They are so multitudinous that it is absolutely futile to try to survey them as isolated units. They must be taken in groups. Any grouping which is useful is a good grouping, and the one upon which we have based our study of business data is the functional grouping shown on page 15. Whether one expects to become acquainted with business facts through personal contact or through study of the experiences of others as set forth in printed volumes, he will find this classification an aid to understanding. But this is the merest beginning. These business facts or phenomena have their roots down deep in basic sciences such as physics, chemistry, the earth sciences, and the social sciences. To cite only one illustration, the business phenomenon of a differential wage system reaches back into such realms of study as psychology, history, and mechanics. There is no end to the amount of study which may be given to business facts if one cares to go below the surface. No one himian being could possibly have a deep knowledge of all the basic sciences of busiaess. On the other hand, one who expects to "administer" in the realm of business facts will do well to have a decent understanding of the main principles of the various sciences. In no other way can he really know busiaess facts; in no other way can he administer in terms of fundamental principles as opposed to "rules of thumb." In other words, remember, secondly, that the study of business facts is not merely the simple direct study one might at first thought suppose. One must know these facts in terms of a knowledge of the underlying sciences. Bear in mind, thirdly, that new as our study of business admin- istration is, we have already reduced many of the relationships of these facts to "standards," and one may wisely be on the alert for these standards. In this course we have seen financial standards, 7S8 BUSINESS ADMINISTRATION standards of labor performance, standards of sales and purchase performance, and many others. Admittedly, our present standards are not all good. Some are indifferent. Some are positively bad. If, however, we come to know business facts in terms of the basic sciences we may confidently look forward to a steady and rapid increase of good standards. That is, indeed, the fundamental idea in so-caUed scientific management. To summarize, in trying to arrive at good rules of action in business administration one must know busiaess facts, and if one wishes to go far he must know them (a) ia terms of an appropriate scheme of classification, (b) in terms of underlying scientific principles, and (c) in terms of standards of performance. II. All this is merely preliminary to developing rules of action. Let us now assume that we are to lay down rules of action with respect to the administration of some entirely new project. Any project whatever may be chosen as an illustrative case.' In any novel project one will not go far astray in laying down the following as an appropriate chronology of action. 1. The first thing to do is to get clearly in mind your objective. In most cases this objective should not be visualized or stated in terms so general that action is likely to be diffused and uncertain. It may be that a large objective must be narrowed down or, in some cases, broken into sub-objectives. It goes without saying that an ODJective can be set only in terms of the facts involved.^ 2. With the goal or objective, or objectives, in mind an appropriate second step is the selection of the proper road by which to reach the goal. (This may be called either a second step or a, part of the first step, as one chooses.) In most cases, there is not one but several roads to a busiaess goal and a phase of policy formation is the definite decision to use a certain road, or roads, to the exclusion of others.' ■ The setting up a school of business in an established university may perhaps be kept in mind as an illustrative case, since the students will know the main facts reasonably well and there is an advantage in discussing a case where all have much the same background of factual knowledge. ' To follow out the illustration suggested, the objective "setting up a school of business" is too vague, It must be reduced to more specific terms. Is this school of business to prepare people to be managers and administrators or to be clerks ? Is it to train only in terms of money-making or also in terms of social service? It will be noticed that the determination of both objective and sub- objectives is a phase of policy formation. ' Again following out the suggested illustration, once the objective is clearly defined to be, let us say, that of preparing for administration, what parts are to be played by field work, discussion method of instruction, lectures, etc. 7 Again, BASIC FEATURES OF ADMINISTRATION 759 3. Having selected the route (routes) which shall be used to arrive at the determined goal (goals), the next series of steps to be taken in an enterprise of even moderate size is: (a) Plan the organization and control system which are to be used, and (b) instal them. Both these steps must be in terms of the facts at issue (see pp. 778-88). 4. Operate the organization you now have. m. A review of the last few paragraphs will show that they have been concerned with what to do. No rules of action have been sug- gested concerning kow to do it. For these rules you are referred to Selection 5. (Pages 813-23.) The foregoing may all be summed up in diagrammatic form thus: In the light of Business facts which One can should be classified follow and understood in certain terms of basic sciences rules of and reduced to action standards on What to do in business administration andean also follow certain rules of action on How to doit It is a point having some significance that such an outlook on rules of action in business administration is likely to cause one to reject the commonly accepted dictum that it is not possible to train for the higher reaches of business administration involved in policy formation. There seems to be no reason why, as our knowledge of business facts in terms of the basic sciences grows and our awareness of what is involved in forming business judgment increases, we may not progress in our training for pohcy formation. No doubt it is a hard task and no doubt our knowledge will develop slowly, but there seems to be no good reason for regarding that field as forbidden ground. Quite the contrary. The readings in this chapter are arranged in accordance with the following plan: The first selection discusses the mental aspects of administration and shows the technique of forming a business judgment. Selection 2 points out that there is no single, unvarying, correct form of organization but that the organization must be in in securing a competent faculty, choice is to be made between, for example, slow development of young men or selecting mature men at high salaries from the teaching or business worlds. It will be noticed that we still have questions involv- ing policy but we are now also getting over into the realm where an organization is being planned. Final decision on all these points should be in terms of the facts of the particular case. 76o BUSINESS ADMINISTRATION terms of the facts of the particular case. Selection 3 reviews some of the current utterances on the essential components of organization and management, and Selection 4 shows the more outstandiag types of organization. One might, perhaps, call them standards in the field of organization. Selection 5 is a "how" selection (worthy of very careful study) which in some sense summarizes the "how" features of all the preceding selections. Selection 6 reminds us again of some of the forms of the measuring and commimicating aids which are at the disposal of the administrator. The chapter closes with a glimpse of what is involved in the industrial leadership of today. PROBLEMS 1. "The problem of management consists in the practical application of two great intellectual processes: analysis and synthesis." Be sure you can explain what the writer has in mind. Are, then, the principles of management simply the principles of any sound mental effort ? 2. It is said that synthesis precedes analysis. Does it not foUow analysis ? Can the two be independent ? 3. In the realm of business administration, what is the function of instinct ? memory? habit? reason? 4. Assume that you are "up against a blank wall" in some problem. Outline a good technique of handling this situation. 5. What conditions determine fertiUty of suggestion in the solution of a business problem ? How do you account for the fact that occasionally someone who has been regarded as quite mediocre "suddenly" becomes a first-class person ? 6. What is the function of the associative process in business administra- tion? 7. Defend the position that training for business should include courses whose bearing on "business" seems very indirect. 8. Take some problem and, by introspection, see if you follow the steps indicated on pages 768-78. 9. "We shall never be able to reduce policy formation to a set of rules. We can do httle in the way of formal training in this field." Do you agree? 10. Lough says that the basic managerial traits are: a) Health ,. „ > chiefly physical b) Energy] c) Observation "j d) Concentration I chiefly mental e) Judgment J -'; , , .,. > chiefly affective g) Ambition J BASIC FEATURES OF ADMINISTRATION 761 h) Persistence"! j) Reliability [chiefly volitional y) Control J Would you modify this statement? Does it contradict the material in this chapter ? 11. "All organizations will differ somewhat from one another, because the objects, the results that are sought, and the way these results must be obtained are different; and, moreover, the material out of which the organization is made, differs in kind." What does this mean? If true, how can organization be profitably studied ? 12. Define or explain: (o) continuous analytical industry, (6) assembling or intermittent or interrupted industry. In which is the control problem more diflficult ? 13. How should you organize the following enterprises: (o) the removal of the snow from the streets of Chicago after a heavy storm; (J) to obtain information for the government concerning industrial conditions in various plants working for the government, and report in three weeks; (c) same as (6) but given six months for the investigation? 14. Draw up a list of reasons against the idea that there is one universal, correct form of organization. Do the reasons convince you ? 15. "Thus we know pretty definitely the factors that make for organization. They are structiure, lines of authority, responsibility, division of labor, system, discipline, accoimting records and statistics, esprit de corps; but when we attempt to determine the parts played by these factors, we find that their relative importance changes with the purpose, condi- tions, and materials." Is this a statement of principles of organiza- tions ? If not, what is it ? 16. Jones lists as administrative principles (i) the measurement of author- ity; (2) division of functions; (3) choice of persons; (4) co-ordination; (s) co-operation; (6) the systems of orders; (7) the system of reports; (8) information; (9) promotion; (10) the normal incentive; (n) admin- istration and human nature. What do you think these are ? 17. Emerson says there are twelve principles of efi&ciency "so constant, so true, that they may be used as gauges" of the efficiency of "any industry, any establishment, any operation, " viz. : (i) ideals; (2) com- mon sense and judgment; (3) competent counsel; (4) discipline; (s) the fair deal; (6) reliable, immediate, and accurate records; (7) planning and dispatching; (8) standards and schedules; (9) standard- ized conditions; (10) standardized operations; (11) written standard practice instructions; (12) efficiency reward. What do you think these are ? 18. "Management is teaching." What idea is this quotation trying to express ? 762 BUSnSfESS ADMINISTRATION 19. "The most important problem is that of getting the right man for the head of the company. And if you have the right man, the choice of the t)rpe of management may safely be left to him." Does this dispose of the question whether there are principles of management? 20. "We are wasting a lot of time talking about organization and the like. There is nothing to organization but leadership. What we need to study is the psychology of leadership." Do you agree ? 21. "Organization and system are something forced on us by the necessities of the case. They have no virtues in themselves. They add nothing to leadership, but if poor, they may detract from leadership.'' Explain. Do you agree ? 22. "Just as the manager needs good organization and standards for routine, so he needs a broad background and philosophy with which to meet emergencies." How can a manager prepare for these emergencies ? 23. "The science of organization insists that lines of authority and lines of comniunication shall be carefully outlined." What does this mean ? 24. "Along with responsibility must go commensurate power or authority." Do you agree? If so, is this a "law of management" ? 25. "The sum and substance of control in a large plant is contained in this statement: We should have centralization in policy making and decen- tralization in execution." Comment. 26. "There are two dements in the control of work — desirability of exercis- ing foresight, and the necessity for preserving flexibility — ^which- are antagonistic." Can they be reconciled ? If so, how ? 27. What types of industry or undertakings are apt to find the military type of organization the best ? Which are apt to find the functional type the best form ? 28. "The vital defect in modern organizations of business, particularly of the military type, is the foreman system." What does this mean ? 29. "The functions of staff and of line are not antagonistic; they are not rival and alternative types of organization." Do you agree? 30. "If there is any one leading lesson in the Unit System for the average manager of an industrial establishment, it is the insistence on the psychological value in every man signing his name for what he is indi- vidually responsible, and nothing more." Explain. 31. If you wish to pick out one idea as the dominant one, what would that idea be in the case of Une organization? staff organization? com- mittee system ? Taylor scheme ? Which scheme is most in line with the human analogy cited on page 808 ? 32. Place the organization of the following activities in terms of the various forms of organization which have appeared in the preceding questions : (a) a baseball team; (6) the work of a university; (c) the work of a church; (d) an intercollegiate debate. BASIC FEATURES OF ADMINISTRATION 763 33. "How is one to draw up an organization scheme? My answer is that he must break up his problem into its component parts and then must organize to solve it on the simple basis of opportunism — doing what he can as he can." Do you agree? If you accept this position are you forced to conclude there are no principles of management ? 34. "The mechanism of management must not be mistaken for its essential, or underlying philosophy. Precisely the same mechanism will in one case produce disastrous results, and in another beneficial." Why, or why not ? 35. Are Taylor's functional foremen a principle of management or a technical device or an illustration of some principle of management or something else ? 36. "The regulative principles of the art of management are three: (a) the systematic use of experience; (b) the economic control of effort; (c) the promotion of personal effectiveness." Does this cover all the points raised in questions 15, 16, and 17 ? 37. What is the relationship between accoimting and statistics? between standards and records ? 38. How do you account for the great development which has taken place in the field of business analysis in the last generation ? 39. "It is evidently more economical to produce each month about the same quantities than to run at a forced rate for one or two months and then drop below normal." How does the budget help to bring this about ? 40. "As a matter of fact, a definite and binding budget, which can be debated and settled by all the responsible officials and directors of a company at the beginning of a fiscal year, is a highly effective method of securing the unity of purpose which is an essential factor in every efficient organization." Explain. 41. "Budgets should be both annual and monthly." Explain why this would be advantageous. 42. "The departmental budgets are especially valuable in holding depart- ment heads to given standards.'' Just how ? 43. Answer the objection to budget-making that a particular business will fluctuate widely with business conditions and will not run in a unif orm channel. 44. "Budgeting may be all right for a large business but it is a waste of time for a small one. It is even worse, in that it tends to prevent prompt action." Do you agree ? 45. "The diversification of industry and the constantly increasing necessity of depending upon indirect supervision and management together with rapidly changing business conditions necessitates the use of scientifically prepared forecasts." Why? How may these forecasts be prepared? 764 BUSINESS ADMINISTRATION 46. Regard the following organization chart as designed merely to raise the question of how to organize to care for standards and records (see pp. 757-58) in business. The dotted line shows liaison connections. Genera! Manager r~. n r \ 1 Production Finance Standards and Personnel Markets I I Records | | What does the chart imply with respect to the handling of standards and records? What is the implication of the use of the word "standards" ? Would this department handle the budget ? 47. "The measuring aids of business management." Put content into the expression. 48. "The handmaidens of the new administration." Explain. 4g. "The business manager is being transformed from a mere owner of private property into a responsible agent, exercising delegated author- ity." Explain. 50. "The whole situation conspires to create an opportunity for a new race of executives which shall justly appreciate the various classes of responsi- bility resting upon it." Put content into the phrases (a) "the whole situation"; (b) "classes for responsibility." 51. "A new and larger conception of the function of business leadership is called for." Explain. 52. An investigation was made recently into the promotional advancement of many hundreds of business executives. In the case of higher execu- tives they seem quite as likely to have been taken over from some other very different Une of industry as to have come up through the one they are now managing. Do you think this is t3rpical? If typical is it fortunate or unfortunate? What bearing has your answer on training for management ? 53. How do you account for the fact that good administrators are ordinarily highly paid men ? I. THE MENTAL ASPECTS OF ADMINISTRATION A. MANAGEMENT AND ITS TWO GREAT INSTRUMENTS' In any industrial undertaking there are two elements present, which, though sometimes merging into each other, and always exerting reciprocal influence, are nevertheless quite distinct in their 'Adapted by permission from A. H. Church, The Science and Practice of Management, pp. 1-25. (The Engineering Magazine Company, 1914.) BASIC FEATURES OF ADMINISTRATION 765 essence. The first of these is the determinative element, which settles the manufacturing policy of the business — what to make — and the distributive policy — where to sell and by what means. The second is the management element, which takes the policy as determined and gives it practical expression in buying, making, and selling. Of these two elements, which are not infrequently combined in small businesses, the first — ^the determinative — represents the higher and scarcer faculty. The larger the business, the more difficult will it be to obtain men capable of adequately filling the exacting demands for judgment, foresight, courage, and experience which decision on large points of poUcy sets up. The danger in vast organi- zations commonly Ues, not in any prospective failure on the side of the management element, for in this department the assistance of aU kinds of experts can be obtained; errors, moreover, are of less vital consequence, and their results can be more quickly reduced to safe proportions. It is failure in the determinative element that pulls down flourishing businesses. When the general of an army blunders, it may easily neutralize the army's efficiency as a fighting unit. The time has, perhaps, not yet come when we may reduce the determinative element to a body of principles, or even working rules. It contains, today, too many unknown and variable factors. The following, therefore, makes no attempt to deal with this aspect of industry; it covers the element of management alone. The problem of management, broadly regarded, consists in the practical application of two great intellectual processes. What- ever the end aimed at, whether the conduct of a military campaign or the manufacture of an industrial product, the processes involved are those of analysis and synthesis. In proportion as analysis is keen and correct, and ssmthesis is sure and unerring, so will be the resulting efficiency. If our power of synthesis is less than our power of analysis, academic and theoretical "systems" will result. If, on the contrary, we neglect analysis and force synthesis without having shrewdly studied our ground, some, and even considerable, practical success may result, but there wiU be a great waste of opportunity and failure to attain the most efficient results. The neglect of analysis- and the forceful use of synthesis are typical of the successful businesses of the past. The strong, shrewd, "practical" man could afford to neglect a careful analysis of his problem, because he had a very large margin of profit to draw on. 766 BUSINESS ADMINISTRATION His wastes were great, his lost opportunities many, but he knew nothing about them and cared less, because his operations were successful in proportion to his expectations. If his profits were not, as we can see now, as large as they should have been, they were at least as large as those of everyone else. During the last fifteen years there has been a considerable develop- ment of the art of analysis in the problems of management. The early beginnings of this movement were characterized by a desire for more exact knowledge. It began to be realized that manufactur- LQg is, in fact, made up of a long series of very small steps, and that it is desirable to ascertain the money value of these steps, so that comparisons may be made. In this way the movement toward cost accounting began and presently reached a high state of development. The next step on the path of development of the practical use of analysis was due to the desire of employers of labor to find some satisfactory basis for rewarding it according to results. To meet this need, the particular kind of analysis now known as "time study" was rediscovered. So far we have been considering the instrument of analysis as applied to the individual piece or component, or, to use a convenient but unbeautiful word, to the job. Once, however, that analysis set out on its career, its sphere of action steadily widened. The routing of product and the layout of machines is, then, a further development of the instrument of analysis that has very important bearing on e£B.ciency. It is of course nothing novel. New plants have always given some attention to the matter. But its exact study, its investigation by charts and diagrams, the adaptation of buildings to special agreement with their uses, the careful scrutiny of methods of transporting product within the plant — all these are very modern applications of the instrument of analysis, which are having important economic results. It is evident that all this activity — the separate kinds of efifort involved in acquiring material, bringing it into storage, moving it from place to place at the right moment, providing drawings and instructions, communicating them to the persons concerned, testing the product, and getting it out of the plant by a given date — involves a large number of steps, in any of which considerable inefficiency may exist without any more noticeable result than a general slug- gishness of working, which in its turn may have come to be regarded as the natural condition in the plant. It is obvious, therefore, that BASIC FEATURES OF ADMINISTRATION 767 here is a field for the instrument of analysis in which important laurels may be expected to be gathered. The modern name for the organization which is, or should be, biult up on a thorough analysis of the different activities concerned in the movements of material and instructions varies according to the fancy of the user. By some it is called "planning," by others "dispatching," but by whatever name it is known it has always been in existence in all plants from the beginnings of the factory system, for the simple reason that business could not be done without it. The only difference between modern types of planning and the older practice is that, today, it is recognized as a subject of analysis, and that the planning department, or by whatever name it is known is not merely a haphazard outgrowth of the business but is organized after a careful analysis of the needs of the plant, with special reference to the kind, urgency, and aim of the operations carried on. In the foregoing paragraphs we have considered the principal applications of the instrument of analysis as foimd in modern industrial management. Whatever progress has been made in the past decade or two is due principally to the revival of this important instrument and its application to some of the most pressing problems of management. But there is one thing that must not be over- looked. Analysis is not a constructive instrument. We can make nothing by its aid. It distinguishes, it provides very accurate knowledge, it eliminates, but it does not build. That is the task of synthesis. What, then, is synthesis? What kind of activities are grouped under that head ? In what does it differ from analysis, and in what practical ways is it applied? These are interesting questions and win be briefly discussed. Just as analysis is the art of separating and dissecting, so syn- thesis is the art of combining. As a practical art it naturally pre- cedes analysis, or, more correctly, it precedes conscious analysis. While the elements of a problem are simple, the mind, intent on its aim, analyzes unconsciously to a degree sufficient for its needs. But in proportion as the number of elements grows — and in modern industry they have grown to a very large number — then conscious analysis must be brought into play, not to supersede but to supple- ment the operations of synthesis. The art of management up to a few years ago was wholly carried on by synthetical methods. In the industrial sense, synthesis is the 768 BUSINESS ABMINISTRATION combination of the faculties of men — that is, their capacities to do work of various kinds, with material — that is, with some object on which different kinds of work could be performed. Nothing what- ever of the necessity for employing the synthetical method has been removed or superseded by the introduction of analysis. The old management has not been improved out of existence. It has not been even diminished in importance. It has only been given a new tool or instnmient— an instrument of study, a microscope, some- thing by which the true inwardness of problems may be searched out, instead of having to rely on their surface appearance and their face value. The old problems of management still remain problems, stiU require synthetical solution, but the chances of their correct solution are greatly aided by the modern uses of analysis. The main distinction between synthesis and analysis ia this connection is that synthesis is concerned with fashioning means to effect large ends, and analysis is concerned with the correct local use of given means. The view taken by synthesis is a wide and comprehensive one; it surveys the whole field of action; its great task is to determine "what to do." The view taken by analysis, on the other hand, is a narrow and limited one; it concerns itself with the infinitely small. Its task is to say "how to use certain means to the best advantage." See also p. 844. The Range of Time and Motion Study, p. 850. The New Industrial Leadership, p. 588. Time Study, p. 589. Motion Study. p. 354. An Organization of the Sales Department. B. AN ANALYSIS OF "BUSINESS JUDGMENT"' [The student wiU do well to bear in mind that the expression "business judgment" is used in different senses by different persons. Some use the expression in an inclusive sense, meaning the formation of a judgment on the basis of objective and definite data when such data are available and meaning also the formation of a judgment when the data are not so satisfactory; when the act seems almost intuitive, indeed. Others use the expression in a narrower sense with particular reference to those cases where the data are not in ' By F. A. Kingsbury. BASIC FEATURES OF ADMINISTRATION 769 simple and satisfactory condition. It will be apparent that the following selection uses the term in its inclusive sense.] What is often called "business judgment" is, like judgment in any other field, a complex process involving usually a whole series of interdependent judgments and inferences. To this process the psychologist commonly applies such terms as "reasoning," or "pur- posive thinking," or "reflective thinking," distinguishing it sharply from that casual, aimless sort of revery sometimes dignified by the name "thinking." The types of activity involved in reasoning about a business problem, however much they may differ in content and detail, are fundamentally Uke those involved in reasoning about problems of law, medicine, literature, or science; and with such qualifications as are hereinafter pointed out, an analysis of the elements in an act of purposive thinking about any sort of problem applies as weU to thinking about business problems. A functional or behavioristic psychology regards reasoning, like instinct, habit, and memory, as primarily a way in which the indi- vidual adjusts himself to his physical and social environment, that is, as a method of solving problems, although on a higher and more complex level than the other ways named. Instincts provide unlearned (i.e., inherited) methods of meeting in a stereotyped way certain sorts of problematic situations which are relatively universal for the race. Habits are individually acquired methods of solving problems which recur in one's experience sufficiently often to become more or less automatic in their operation. Memory provides a method of problem-solving through recalling ways in which one has previously met similar situations. But where instincts, habits, and memories give us "old" solutions, it is the function of reasoning to provide workable, "new" solutions for types of difficulty hitherto not met.. This is made possible by the selection and utilization in new ways and in new combinations of the effects of previous experience. In behavioristic terms an act of reasoning would be described as a protracted act or series of interdependent acts called forth by some situation in which behavior is thwarted by an obstacle, real or anti- cipated, which cannot be directly resolved by the simpler habitual or instinctive mechanisms. In successful reasoning the delay in consummating the act permits the functioning of discriminative and integrative (associative) processes which lead to behavior tending 770 BUSINESS ADMINISTRATION to relieve the original difficulty. The formal mechanisms in which these discriminatory and integrative processes are embodied may be one or more of several kinds, varying with the habits of the individual and the nature of the materials, and including vocal and subvocal reactions, imagery of various verbal or concrete tj^pes, and incipient or even overt motor impulses and attitudes. The precise character of these mechanisms is of less significance that the use made of them. Any complete act of reflective thinking, whether it deals with business problems or other problems, may be described as involving the following elements: 1. A difficulty, real or anticipated, not suggesting directly any method of solution recognized as feasible. 2. The definition of the problem and location of the difficulty, by analysis of the situation into its essential and nonessential factors; a comparative and discriminative process. 3. As a result of such location of the essential factors, the sug- gestion of a partial or complete solution, through the ordinary mechanisms of associative suggestion. 4. Elaboration and critical evaluation of the suggested solutions to ascertain their probable worth. 5. Acceptance of solution and consequent action, if valid; or rejection, and repetition of stages 2, 3, and 4 until satisfactory solution appears. It is not, of course, always possible to trace these as temporally distinct and successive stages. In certain types of situation some of these processes may be subordinated to or merged in others. Never- theless, we may use these divisions as a basis for a further analysis and description of the processes commonly involved in reasoning. I. "A difficulty, realized or anticipated, not suggesting directly any method of solution recognized as feasible." It seems trite, yet it is exceedingly important, to bear in mind that no purposive thinking ever occurs except on occasion of a problem to be solved, a difficulty to be overcome. The problem may, perhaps, be an intellectual one, arising from apparent incompatibility between accepted beliefs. In such cases, the immediate problem may be to "explain" the situation. Thus, a manufacturer who has saturated himself during the war and post-war period with the conviction that the sure way to large profits is through buying large stocks of materials for future use, now finds himself faced by the conviction that he is not making profits, but is suffering losses. His first problem is to readjust and revise these con- BASIC FEATURES OF ADMINISTRATION 771 flicting convictions, to find an explanation; afterward he will decide what to do about it. But in business judgments, the difficulty is usually a practical one; here is a concrete situation calling for prompt action — growing competition, increasing complaints, threatened litiga- tion, financial stringency, a destructive fire — but the way to action is blocked. Were there no blockiag or inhibition present, in the form of fear, uncertainty, doubt, or powerlessness to act, some kind of action, either reflexive, instinctive, or habitual, would follow at once. The fact that the impulse to act is somehow inhibited is what puts the whole situation on the level of rational and volitional action. Such problems may be concerned either with setting up ends to be attained, or with finding means for the attainment of ends; although inasmuch as most ends are instrumental to some more remote end, the distinction is not for present purposes a vital one. Again, the problem may call for the making of decisions which are designed to influence a large number of acts (as in the formulation of some business policy); or the intention may be to affect only a single action. The difficulty may present itself in various forms: a) The situation may suggest no course of action whatever; a "blank wall"; a "baffled feeling"; as, for example, when one meets with a totally unexpected disaster. b) The situation may suggest a possible course of action, but of doubtful value; i.e., there are verbal or other inhibitions present, characteristic of the attitude of doubt, which prevent action along the line suggested; as, for example, when one is confronted with the opportunity to obtain, at an abnormally low price, a stock of goods larger than one ordinarily feels able to buy. c) The situation may suggest two or more alternative courses of action whose relative value is not evident. That is, it is not clear which promises greater ease of accomplishment, economy of time or expense, certainty or quantity of result, freedom from annoying after- effects, or other advantage. Whether or not all these considerations present themselves vividly, the psychophysical mechanisms they symbolize may be active to such a degree that no one alternative leads to free, unimpeded action; the alternatives block one another, until such time as reasoned reflection succeeds in making one of the alterna- tives dominant. An example would be the problem of deciding between several possible sales policies or methods — selling through jobber, direct to retailer, to mail-order house, direct to customer, etc. 772 BUSINESS ADMINISTRATION In situations of this kind, where possible courses of action have akeady suggested themselves; stages 2 and 3 may be merged in stage 4, the deliberative criticism of the alternatives and of their anticipated consequences. 2. The next stage, "the definition of the problem and location of the difficulty," is often synchronous with the first stage; that is, the problem makes its first appearance in very definite form. But many business problems are of a character so involved that the crux of the difl&culty is not immediately apparent, and the situation has to be analyzed into its significant and non-significant factors. Thus, a slump in sales in a given territory may be due to any of a considerable number of factors, and a large part of the task of relieving this particu- lar diffi culty consists in analyzing the situation into its factors, geographical, financial, personal, social, political, etc., and deter- mining which are significant and to what extent. Only then can one look for an adequate solution to suggest itself. The problem may, on analysis, define itself as essentially a problem of (a) putting in a more efficient salesman; (b) meeting prices or terms of a local com- petitor; (c) improving transportation or delivery conditions; (d) counteracting harmful propaganda; (e) making connections with new dealers; (/) stimulating present dealers to larger efforts, or something else. One or another of these, in turn, may call for still further definition. Defining the problem calls for the accumulating and examining of such facts as are likely to reveal the real nature of the problem, and isolate it from the mass of irrelevant and confusing attendant circimi- stances. Here the definite adoption of an attitute of suspended judgment, pending the location of- the difficulty, helps to inhibit the tendency to follow impulsively suggestions which in most cases would prove false leads, obscuring the issue and wasting time and energy. These more or less relevant facts may be gotten at either through casual observation or inquiry, or through systematic investigation (experiment, accumulation of data from records, etc.), and their accumulation is stimulated, guided, and facilitated by the recall (or reading of inquiry) of similar situations. If the facts in the case are too munerous or too complex to be held in mind while they are being reviewed, they may be systematically arranged so as to facilitate suggestions of solutions: (a) by use of pictorial or graphic dcAdces; for example, tack maps of sales territories; charts analyzing a business organization; graphs showing fluctuations of price, output, etc.; BASIC FEATURES OF ADMINISTRATION 773 diagrams of various sorts, etc.; (6) by statistical tabulations and analyses; (c) by outlines or summaries, written or verbal; {d) or even by the unsystematic jotting down of suggestions, lists of factors, arguments, etc. Often a pencil in hand serves as a stimulus to thought. Throughout this survey, a discriminative and selective activity has been going on. Certain factors have appeared which further the progress of thought (i.e., suggest associations) in the direction desired. Others suggest no associations beyond an attitude of negation. The latter are rejected from further consideration; the former, or the associates they suggest, carry the thinking process on to the next stage. 3. "The suggestion of solutions"; the inference stage. During the analysis of the problem not only have certain factors suggested themselves as significant, but they have (often simultaneously with their appearance) suggested possible courses of action, or pointed the direction for further inquiry. This, of course, occurs through the ordinary associative mechanisms, and therefore implies preAaous experiences, first-hand or second-hand, involving similar elements. Very frequently this is the crucial point in business judgments. Mistakes in judgment are very often directly traceable to inadequate knowledge, and a consequent insufficiency of potential suggestions. Men fail not only because they "don't know," but because often they "don't know that they don't know." On the other hand, the successful "captain of industry" is very frequently a man of wide information concerning matters political, geographical, historical, or scientific, which to his smaller-minded contemporary seem irrelevant and useless. Nevertheless, this rich background of ideas and view- points enables him to anticipate the effects on general business condi- tions, and consequently on his own affairs, of apparently remote yet real influences, and thus to provide effectively against future contin- gencies. A wealth of experiences is of inestimable value in making for sound and ready business judgment, not only in providing direct suggestions, but in aiding in the organization, interpretation, and evaluation of other experiences. Often the intermediate associates which logically link situation to suggestion are not consciously present; one leaps from problem to solution without stopping to trace his path, and perhaps without being able to trace it if he tries. This occurs, of course, in those fields in which the individual is most practiced. It involves the 774 BUSINESS ADMINISTRATION phenomenon called "associative shifting," where the chain of asso- ciates A-B-C-D-E is, by repeated practice, condensed into the direct association A-E. Such acts of mental habit are often called "practical judgments," and they constitute a considerable part of the everyday thinking of the business man. But in most new situa- tions, of course, they constitute only a fraction of the total reflective process. These suggestions of solutions may appear in various forms: a) One may recall some concept, term, formula, rule of procedure, or other verbal generalization which has been developed around previous experiences of this sort. This is the usual thing if the problem is of a sort that naturally, leads to some categorical classifi- cation of the situation; it is therefore more common in such fields as legal reasoning, medical diagnosis, and other fields having a consider- able body of technical terminology than in most business situations. Nevertheless, inferences in business problems often assmne the form of classifications of this, hat, or the other situation under such verbal generalizations as "safe," "be cautious," "likely to make trouble," "unprofitable," "risky," "speculative," "unethical," "good bargain," "worth investigating," or other categories which go far to determine what action shall follow. b) One may recall some specific previous situation, recognized as similar in its essentials, and the procedure there followed, with its consequences. s) One may feel impelled toward a certain course of action, suggested by some element of the situation, but not referable to any specific experience. Fertility of suggestion is afiected by various factors: (a) Native ability, the inherent quaUty of brain structure which makes possible varied and prompt recall; in practice, the influence of this factor cannot with certainty be separated from that of other factors; (b) extent of experience or knowledge in the field concerned and in related fields (even though the relation may apparently not be close); (c) extent to which these experiences and ideas have been utilized, organized, or reflected upon, thus enriching, systematizing, and strengthening their associative connections; (d) degree of interest in the problem, and consequent attention and care devoted thereto; (e) completeness of analysis of the problem; (f) systematic arrange- ment of data, as previously described. BASIC FEATURES OF ADMINISTRATION 775 4. "Elaboration and critical evaluation of the suggested solu- tions." If the comparative, discriminative, and associative processes involved in the analysis of the problem and its suggestions for solution have suflSced to overcome whatever inhibitions to action were present, i.e., if they have been sufficient to establish an attitude of beUef in the validity of the solution, decision and action will follow. In a complex situation the inhibiting influences are not thus easily resolved. If doubt remains, or if the case is as described in ic, wherein definite but not yet evaluated alternatives have already sug- gested themselves, elaboration and evaluation of the h3rpothetical solution is necessary. By "elaboration" is meant the consideration of the consequences, positive and negative, favorable and unfavorable, expected to follow from the adoption of the hypothetical solution. These consequences, suggested through the ordinary associative mechanisms (and hence, like other inferences, dependent on previous experiences), may perhaps take the form of imagery, whereby one pictures to himself the results in visual, auditory, motor, or other sjrmbols; often the imagery assumes the form of a semidramatic rehearsal of the anticipated situation; or (as is more frequently the case with thinkers accustomed to deal with abstract relationships) they may be couched in vocal or subvocal word symbols. Usually these suggestions are in some degree affectively toned, either agreeably or disagreeably. That is, the suggestion of certain consequences is characterized by positive emotional reactions and kinestheses, which we variously caU feelings of approval, affirmation, or satisfaction, desire, liking, etc. Other suggestions are characterized by negative reactions of aversion, disapproval, dissatisfaction. These reactions play a central part in determining the outcome of the thought activity, since those reflective processes which arouse the negative, self-inhibiting type of reaction thereby tend to be dismissed from further consideration; while those arousing the affirmative, self- reinforcing type of responses determine the direction the reasoning process shall foUow. Hence the importance of maintaining the critical attitude previously referred to, so that the case may not be closed through the urgency of some special emotional influence until the evidence is all in. What is called "good judgment" is in large degree the capacity for and habit of withstanding the strong desires or aversions which are urging action, until other considerations have a chance to be reviewed, their values appreciated, and a decision 776 BUSINESS ADMINISTRATION reached in terms of far-reaching as well as immediate considerations. Conversely, "poor judgment" often connotes not lack of ability to foresee probable consequences, but habitually insufficient resistance to urgent impulses. In this connection it may not be amiss to call attention to the very common habit of making decisions in line with personal predilections, and bolstering them up with reasons worked out to make the decision look plausible — ^what the psychologist calls "post-rationalizations," and which are, of course, in the main irrational. This process of deliberation and evaluation of the hypothetical solution (or the alternative solutions — for indeed, most decisions resolve themselves into some sort of choice, even if no more than " to do or not to do") is then largely a matter of weighing emotionally toned, anticipated consequences. When one set of impulses succeeds in becoming dominant, i.e., in dissolving the inhibitions, action follows. This readiness to act constitutes the essence of the attitude we call "belief." But frequently doubt remains and action is suspended. Further critical testing is called for. This testing may be either (a) explicit (on the "action level," experimental) — ^by trying it out on a small scale before taking larger risks, to ascertain whether actual consequences correspond to those anticipated; or (6) implicit (on the "thought level," "rational") — ^by (i) further comparison with similar or analogous situations whose consequences are known; (2) compari- son with other accepted general principles or formulas than those used in reaching the hj^othesis; (3) comparison with testimony of authori- ties, persons or books, on similar or related problems; (4) sub- mission of data, methods, and conclusions to competent critics, to discover possible omissions or errors. The adequacy of this critical evaluation depends, therefore, on a variety of conditions. In business judgments (as in other kinds), these are emotional and volitional as well as intellectual. The value of critical foresight may be negated by ill-founded antipathies or prejudices. In business, even more than in other fields, correct judgments depend largely on the accuracy with which one estimates the probabilities of human behavior, either individual or collective. While scientific judgments largely involve insight into the behavior of non-human objects, and medical and legal judgments the correct reference of cases to certain categories, business judgment is largely concerned with contingencies of human behavior. Therefore, a correct comprehension of the influences that determine individual or BASIC FEATURES OF ADMINISTRATION 777 mass behavior — ^likes and dislikes, ethical and aesthetic standards, customs and fashions, instincts and acquired tendencies, what people are likely to do or not to do under certain circumstances — is of primary importance in business judgment. 5. Whereas the terminus of a scientific judgment may be the formulation, modification, or verification of a verbal generalization, practical judgments eventuate in more overt forms of behavior. The action need not follow immediately. The direct outcome of a reasoned business decision may be a more or less explicitly formulated program for futiure action, which is to be consumated when certain future conditions are realized. The realization of these conditions then automatically brings about this action, the psychologically crucial point being not the moment of action, but the moment of decision. If the program of action is designed to meet in a uniform way a large number of similar situations, we call it the formulation of a business policy. The determination of a policy usually involves consideration of a greater and more significant range of consequences than does a decision on a single act, which is not expected to produce such weighty or long-continued consequences, or stand as a binding precedent in the minds of all persons concerned. But apart from these minor differences, the psychophysical mechanisms are fundamentally the same in all acts of reasoning. To summarize: 1. Acts of business judgment may be defective for various reasons: (a) failure to formulate problem correctly and definitely; (b) failure to discriminate between significant and non-significant elements in the situation; (c) experience and information inadequate to suggest associations; (d) experiences recalled too imperfectly or too slowly for the exigencies of the situation; (e) unfamiliarity with concepts, terminology, technique, and practices prevalent in the field concerned; (f) data too poorly organized to suggest solutions readily; (g) infer- ences from incomplete and non-representative data; (h) insufficient interest, attention, and care; (*) failure to maintain critical attitude; liability to "snap judgment"; (/) emotional bias, giving too much or tno little weight to various factors. 2. Or, from a somewhat different standpoint, we may say that efficiency in business judgment depends on: (a) quality of brain structure; (b) aptness (native or acquired) for seeing similarities and differences in the field concerned; (c) practice in analyzing problems; (d) adequate knowledge of facts and principles, and readiness in 778 BUSINESS ADMINISTRATION recallifig them; (e) knowledge of and skill in using special forms of technique for getting and organizing data (experiment, statistics, etc.); if) organizing data and keeping results organized as work proceeds; (g) exercise of care in getting sufficient body of data to insure reliability of conclusions; Qi) exercise of care in making as complete critical verification as circumstances permit; (*) main- tenance of critical attitude (suspended judgment) ; habitual resistance to immediate impulses. See also p. 649. The Significance of the Human Equation in Business Problems, p. 651. The Formation of "Judgments." 2. THERE IS NO SINGLE CORRECT FORM OF ORGANIZATION A' Various activities that are not industrial, such as the church, the civil government, the army, the navy, educational organizations, charitable organizations, all involve size and numbers and complexity, and they are all organized; but good industrial organization wiU be Ukely to differ from these other organizations, and all organizations will differ somewhat from each other, because the objects, the results that are sought, and the way these results must be attained, are different; and, moreover, the material out of which the organization ■ is made differs in kind. It is, of course, true that there is much that is common to all effective endeavor: the definite knowledge of what one wishes to accoiiiplish; the principles of directing and controlling effectively large numbers of people; making the most of different kinds of skiU; the securing of co-operation, so that each one helps instead of hinders another; the systematic and orderly way of doing things, so that there are no tieglected steps, no false movements, no lost time — are all common to good organizations of all kinds. But, with differ- ing purposes, the factors that make organization have varying importance. With one purpose in view, the pririciple of the division of labor for specialization of skill may be all-important; in another situation, this may become insignificant in comparison with the ■ Adapted by permission from Russell Robb, Lectures on Organization, pp. 2-34. (Privately printed, 1910.) BASIC FEATURES OF ADMINISTRATION 779 proper control and direction of large numbers. The problem in another organization may be the systematization and division of work mainly to bring order and efficiency into a situation of complexity. The significant feature in another case may be almost wholly a question of dispatch, where the question of economy even may hinge much more on the time required than on any other factor. Again, we may have suc»:ess hinging upon systems of accounting, records, and statistics, where the accurate knowledge of costs and other details of the business and the system for securing these may be the central factor about which the organization is constructed. In the popular mind, perfect organization usually is associated with the army. The division of the men into companies and regi- ments, the clearly defined duties and authority of the officers, the discipline that secures precision in all evolutions and obedience to all commands of the superiors, suggest to most people the perfection of concerted action, and furnish the type to which they feel that all organizations should conform as nearly as possible. An army in modern times, with its different branches of service, its attention to commissary and sanitation, its great multiphcity of technical appUances of war, its connection with the activities of civil life, becomes very complex; but in the beginning, military organization was a necessity in order to direct and handle eSectively large num- bers of men, and so to prevent the hordes who went fighting from being merely a mob. The great numbers acting together could not act effectively imless there were order and system in all their evolu- tions, and an organization binding the order and system together. Moreover, the product came in one supreme moment: the organiza- tion was for an emergency. Its whole success or failure was shown by the action of the army at a critical time; and for this reason military organization has taken a severe line, in which everything is subordinated to obedience and definiteness of procedure and certainty of predetermined evolution and action upon command. Authority and responsibility taper down with evenness, each one knowing his exact limitations and his part. Each one in authority must be trained to assume instantly all the duties of the one next above, for the captain of one moment may be colonel in the next. MiHtary organization has contributed much to all other types of organization through its example of the value of discipline, the user fulness of definite procedure, and the effectiveness in administration of placing responsibility, but it has been the cause of mistakes in 78a BUSINESS ADMINISTRATION building up other organizations, through the forcing into prominence of the main features of a military organization when the end that is sought is much more influenced by other factors, when the necessity for control is less than for specialization of effort and for the co- ordination of different kinds of action. This becomes plainer when one considers, for instance, an industrial organization depending for its success very largely upon the ability with which the principles of division of labor are applied. There are many examples. The success or failure of the watch-industry would not depend upon instant obedience, upon definite evolutions of men, upon predeter- mined movement in emergency, upon a definite line of succession in authority; it would depend upon such things as study and care and economy in purchasing materials, upon the development of processes to make the most of each worker's special skill and ability, the saving of time in the handling of the product, the working of the plant to save interest and rent, the discovery of consumers, and the prompt deUvery of the product. The main purpose is different from the main military purpose, and the organization must vary accordingly. Large and coniplex construction is often undertaken where, in the words of contracts, "time is of the essence." The need for the structure may be vital to the integrity of an important business already established. The saving in interest and in earning power, if the work is completed in months instead of in a year or two, may be a large amoimt. The organization for such an undertaking will not be the same as for deUberate construction systematized in all details for the lowest total construction-cost. It may be necessary to cut "red tape" that would be desirable in other situations, it may -pay to take the chances of less thorough deUberation of plans, the lines of authority even may be changed — all because the relative importance of factors is changed. The construction of the great irrigating reservoirs in India, where a few years ago during the famine so many of the natives were em- ployed, furnishes a good example of the variation in organizations according to the material one has to work with. One can imagine approximately what sort of an organization would be necessary in most other places to imdertake the vast excavations necessary to form reservoirs in great irrigating works: there would be a large mechanical equipment of steam-shovels, with the minor organization of drivers, mechanicians, and superintendents, the systems of records, BASIC FEATURES OF ADMINISTRATION 781 of fuel-supply and repairs; the placing of equipment; the orderly procedure of the work; the great number of workmen to direct and supervise; the system of pay, shelter, commissary, sanitation — all would have to be molded into a great comprehensive organization. In India there were no steam-shovels, mechanicians, fuel-supply, repairs, shelters, or commissary. The excavation was done directly by hordes of natives in gangs of twenty or thirty, each with his or her basket, and one with his little "scooper" or koiti. When the basket was filled, it went on the worker's head and was carried to the dump, where the native received a small tag that entitled him to payment for one basketful of excavation. The workers consisted of gangs, over which were the foremen who furnished the laborers for the work. There was no system of housing, for there were no shelters: all slept on the ground in the open. There was no com- missary organization, for the workers "found themselves," and in any case would have refused any food prepared for them, because of caste prejudice. The payment of workers required no elaborate system of pay-roUs and receipts, because each worker simply cashed in the tags he had received. No doubt those in charge of these Indian excavations had their problems of organization, but they were different from our problems, and probably the most of our approved systems would have been of about as much use as an American type- writer to a Chinese merchant. There are all kinds of industries, and one is perhaps as good as another for the purpose of illustrating organization. If one is credibly informed, the organization of some of the patent-medicine companies differs considerably from that of other manufacturing companies, and yet they are stUl ably organized. There is at least one where two or three rooms in a large building are devoted to the manufacture of the medicine, a minor function in the organization. The remainder of the building is largely devoted to a printing estab- lishment for the preparation of advertising matter, to advertising departments, correspondence-clerks, and stenographers. Here we have a manufacturing establishment, but the purpose and conditions require special attention to the office-system. The accomplishment of the purpose is not greatly affected by attention to manufacturing methods and details, but is very greatly affected by skill in advertise- ment and system in the departments where the real effort and most of the expense lie. 782 BUSINESS ADMINISTRATION Most organizations have grown gradually, and the conditions surrounding this growth often influence greatly the form that the final organization takes. Long existence of customs and methods and the consequent knowledge of the plan throughout the organiza- tion may be of more importance than the features that might be secured by a theoretically better structure. It is understood, for instance, that the very successful Studebaker organization is administered by an executive committee of five members, each member of which is at the head of a functional department of the business. Committees are not ordinarily very effective as heads of undertakings. They have difficulty in reaching decisions, and one member is likely to prove dominant and carry his ideas without being responsible for the results. The Studebaker organization, however, has grown up about a family of five brothers, all able and active in the business. From small beginnings they had threshed out their problems together and had learned the art of conference. They had found how to draw from each his contribution to the general knowledge and to the particular question, and they had discovered ways of reaching conclusions without interminable dis- cussions or unplaced responsibility. One might hesitate to form a new organization on this plan, but he would just as surely fail to discard it when so completely established and so well proved in efficiency. In parts, at least, of many organizations one finds variations from the theoretically best plan on account of the person- ality or particular ability of important officers or heads. It wiU be unfortunate if the emphasis given here to the diversity of conditions and to the difference in the purposes of imdertakings should be construed as an argument that no general principles can be applied to organization. It is intended simply to show that there is no "royal road," no formula that, once learned, may be applied in all cases with the assurance that the result will be perfect harmony, efficiency, and economy, and a sure path to the main purpose in view. This is not an imagined difficulty. We all are inclined to get a bit twisted toward some favorite panacea, and if one is to attempt to better a business organization, it helps greatly to be able to ap- proach the problem with an open mind, and not to have a special predilection toward a factor that one has somewhere found admirable. The gain from organization is so evident when it is applied to a confused situation, and the satisfaction so great in having affairs run smoothly, that, as we continue grouping forces and introducing BASIC FEATURES OF ADMINISTRATION 783 system, we easily become convinced that we cannot have too much of it. Like the "diminishing returns in agriculture," however, the returns from increasing organization do not continue proportional to the efforts, and limits are reached beyond which one may well proceed with care. It becomes necessary sometimes to remind ourselves that organization, as an end in itself, is of no value. A business organization is for the purpose of accompUshing definite pieces of work, of arriving at a definite result with the least expendi- ture of labor and material, the smallest expenditure for plant, and the shortest time of use of the plant; and if organization does not prevent waste or enable us to get results attainable in no other way, it has no value. Now and then there are men who seem to go at once to the root of a question, and who, from a mass of detailed explanation, exposi- tion, and talk, seem suddenly to pick from the medley the two or three saUent features — the things of such transcendent importance that all else drops away as if mere comment. Such men have a proper sense of proportion and the true sense of thoroughness, be- cause they do not get involved in detail before they have blocked out the plan. When it is urged that it is not worth while to follow all detail in every direction, when it is urged that one must first make sure that he knows in which direction it is most profitable, in a broad sense, to work, this must not be mistaken as advising a policy of "good enough," for it is not that; it is the pohcy of refusing to waste our resources on the non-essential and the ineffectual; it is being dissatisfied with the accomplishment of the infinitesimal in one direc- tion when accomplishment of magnitude is possible in another. It is obvious that the organization of a plant will depend largely upon its size and the degree to which it is specialized. Increased size naturally brings with it greater subdivision of labor and the consequent need of added co-ordinative influences. Under the older and simpler systems of production, when small numbers of men were the rule, the relations between master and man were very simple. Each man was competent to perform any and all operations, producing perhaps the entire article himself. The instructions, few ' Adapted by permission from D. S. Kimball, Principles of Industrial Organiza- tion, pp. 68-70. (McGraw-Hill Book Company, 1913.) 784 BUSINESS ADMINISTRATION and simple, were given verbally, and duplication in a modern sense was unnecessary. As the size of industries has grown, as specializa- tion and division of labor have been extended and as special or scientific knowledge has become more and more necessary, these simple relations have been forcibly expanded and the concerted labors of master and man have been replaced by administrative, planning, and constructive departments, to properly co-ordinate the work of which has become a study in itself. The tendency toward complexity in organization due to increased size is not so great, however, as that due to the character of the industry and the degree to which it is specialized. Manufacturing industries are, broadly speaking, of two general classes, namely, continuous and intermittent. In a continuous process the material goes in at the receiving end of the plant, is worked continuously, and appears at the shipping room as finished product. A continuous process may be either analytical or synthetical; that is, it may take some natural product and separate it into component parts or change its general form; as, for instance, the industries built on salt prod- ucts, ore, oU and sugar refineries, saw-mills, etc. Or they may take a few natural products and passing them through fixed processes build them up into some other form, as may be seen in paint works and wall-paper factories. In general, such industries deal only with a few raw materials, these passing in at one end of the factory and flowing, so to speak, through a number of fixed processes and passing out at the other end in the form of a limited number of finished products and by-products. The organization that the personnel of such a plant will most naturally take will depend on the character of the industry, but will, in general, be comparatively simple. Intermittent or interrupted industries, on the other hand, may take many kinds of raw material, carry them to any desired stage of completion, store the finished or semi-finished parts when neces- sary, and assemble the various kinds of finished product as the market requires. This finished product may cover a wide range both as to relative size and character. Ship-building plants, agri- culture implement works, and plants manufacturing electrical ma- chinery are excellent examples of interrupted industries which form by far the larger part of organized industry. The above classifica- tion, is, of course, not clearly defined; in fact, these types of in- oustry represent extreme cases rather than distinct classes. The natural tendency toward specialization constantly tends to limit BASIC FEATURES OF ADMINISTRATION 785 the range of intermittent processes and this, in an extreme case, might reduce a factory of the intermittent type to one of the con- tinuous type. Many factories, indeed, have both continuous and interrupted processes in operation at the same time. Plants of this kind tend naturally to divide into departments and are naturally more complex in character than those of the continuous type. Aside from these considerations, the exact form of organiza- tion of any plant nearly always depends to some extent on the character and ability of the men available. Able men are always rare and the exact subdivision of authority and responsibility often depends on this factor rather than on a more logical basis of an abstract analysis of the problem. For this reason and the other reasons advanced above, it is not possible to formulate fixed rules for planning industrial organizations. There are, however, certain general principles that long experience has shown to apply to all forms of organization and that are, therefore, worthy of note. See also p. 565. The Control Problem Varies with Different Types of Industry. "That's the hardest question in business," exclaimed one of the half-dozen managers of distinguished enterprises recently asked to Ust the vital factors of control in an organization — to take apart the enterprises they have brought to success, and point out the ideas, poUcies, methods, and results which seem to them so important that the chief himself should have them under his eye and hand. According as different concerns emphasize one or another factor in their schemes of management, policies of executive control may be roughly divided under five headings: I. Detail management. — Most managers are driving themselves to their physical limit in the handling of the details of service, employ- ment, and especially finances. Some executives have been literally crowded out of this position by the growth of the business and have taken a stand at some point along the current of trade, where by watching every order, every credit, every contract or expense item, they can fairly judge and control the business. • Adapted by permission from C. D. Murphy, Library oj Business Practice, I, 9-24. (A. W. Shaw Company, 1914.) 786 BUSINESS ADMINISTRATION 2. Money management. — Many proprietors and directorates giiide their businesses entirely by ledger statements and throw upon subordinates hired to round out their ability all other matters relating to the conduct of the enterprise. In one case a directorate which is managing a business entirely as a matter of investments and profits has never seen the chain of stores from which its dividends come. A detail manager pledged to enthusiasm by a generous salary has authority over everything except financial policies. The disadvan- tages of this plan are that there is no proprietary control of the methods used in dealing with the trade, nor of the spirit among the men; the business runs at high speed but roughly, with much jarring; and the management has too little real knowledge of conditions to forecast the future most effectively. 3. Leadership management. — Encouragement and the rousing of enthusiasm among employees is the contribution this type of manager makes to his business. His is an enterprise that requires extraordinary initiative; his men have to be keyed up to the fighting spirit — they need the "flaming torch" to lead them. Systematized routine is, therefore, left to handle problems where a solution has been found and a precedent established. The management devotes itself to "breaking trail" in every new and difficult path of the enterprise. 4. Guiding management. — Some managers and directorates put their entire organization as a tool in the hands of their most brilhant executives, advising and aiding them to carry out for the profit of the concern whatever inspirations promise best or to exercise the particular genius of each. This is the type of business where the manager occupies a broad field and insists only on dividends rather than confining his business to a definite product or service. This pohcy is especially the recourse of a concern which has outgrown one line — the big business viewpoint, where the manager has perhaps realized his visions and depends on the inspirations of his men for further expansion. 5. Balanced wawogeweMi.— Rockefeller's success is credited to the poise which he has always maintained in his corporation. In a business so balanced, neither men, money, nor service has undue emphasis; no one department or method is allowed to excel or over- top others, but every part constantly learns from other lines, con- stantly is kept up to the mark and in proportion with all others. This type of management combines the last two and rounds out the incompleteness of all. BASIC FEATURES OF ADMINISTRATION 787 Study of the work of high executives indicates that they need a background of detail experience and that in emergencies they may have to handle the work of a department, but that they study- themselves as frankly as their employees and use their resources to hire men who shall round out their own abilities. Skilled lawyers are constantly at the service of department heads in order to guard contracts; and technical men in a dozen different lines are kept available by various managers who recognize, as Funk has said, that their greatest value is in securing a co-ordinating expert service. Money management is an extreme of this type. There is in New York a body of men whose ability to manage money is drawing dividends from a score of middle western stores into which none of them has ever stepped. Of buying, of working with men, of plan- ning for expansion and choosing "good towns" for additional branches, they know nothing. This ability they have bought in the person of a trusty auditor and an experienced superintendent. They have limited the business to a cash basis, held down ad- ministrative problems to a minimimi, and are enabled to control successfully merely by holding the strings of local and total reports, capital and surplus, purchases, sales and expense, profits and dividends. By comparative and graphic financial reports, they are shaping the future of a business in which capital is the big factor. Their method has been to reduce men and service to their lowest terms and shrewdly to pick out the essentials in the control of funds. An entirely different spirit is behind the policy of the manager who heads and inspires his men. He may have the other factors, finance, service, future plans, well in hand, but his biggest duty, as he sees it, is to lead his men — to teach them that he asks them to go nowhere except where he wiU go first. He has worked out a course which his enterprise is to take, and in order to keep close to it, he goes first. The manager who guides instead of leading and furnishing inspiration for his enterprise is making the best of a temperament judicial rather than executive. He hires department heads who are full of ideas but perhaps lack the ability to separate the good from the bad business propositions. His men furnish many ideas and inspirations; he guides their ambitions, challenges the visionary enterprise, and backs his workers in carrying out their plans. 788 BUSINESS ADMINISTRATION At his best, he attracts to himself partners or subordinates who so round out one another's powers as to make for extraordinar)- €fficiency. The directorate of a great railroad is said invariably to follow this method in filling the president's chair. Periodically the effective- ness of the system in all departments is discussed. The most recent executive has come up through the engineering or operating or seUing department, and in hne with his natural bias has brought that function to extraordinary efficiency. Another department far from his experience shows at low ebb. If an executive can be found in this weak department, he is elected to the presidency, and the business is thus made continually to race with itself. Management is not only the hardest problem in business, but the problem that comes nearest to the secret of failure and success. Up at the top of every business — ^at the apex of its pyramid of functions- — sits some one to whom all lines, wires, and paths of communication lead; where focus problems, records, and plans; from whom radiate the spirit, the policies, and the initiatives which are to write in the future of the enterprise. 3. SOME STATEMENTS ON THE ESSENTIALS OF ORGANIZATION [The parts of this selection should be read not as authoritative pronouncements in thisfield,but as a preparation for Selections 4 and 5. Read, asking yourself, "Are these really essentials ? Are they princi- ples? Are they anything more than a check list of some rules of action ?" (See pp. 756-59.)] A. "dimensions" of organization' In spite of all the wide differences in organizations, we do, to use a mathematical term, know the "dimensions" of organization. We can conceive of no real organization, for instance, widiout a structure of some kind, without a definite plan. However work is apportioned, and by whatever means it is directed and carried out, we may be sure that the method must have definiteness. We may choose the wrong kind of men to do things, we may not plan to bring their work to them so that their time is most efficiently used, we may ' Taken by permission from Russell Robb, Lectures on Organization, pp. 2-34. (Privately printed, 1910.) BASIC FEATXJRES OF ADMINISTRATION 789 not use care that special skill is conserved; but if we have some plan that assigns definite duties, we have made a beginning in organization. We have, too, from our earlier organizations, the examples of the value of lines of authority. They add to definiteness. They provide the control and direction by subdividing for that purpose. As authority tapers down, it relieves from responsibility except in the fields for which men are fitted. It provides a definite court of appeal in case of diflBiculty, and thus saves endless disputes and arguments and consequent confusion. This tapering authority never leaves affairs without a head, and it assures the steady progress of the imdertaking because it provides a properly trained supply of new men to fill vacated superior positions. We know also the value of the factor of responsibility in organi- zation, the great incentive there is to careful and energetic work when praise and blame can be accurately placed, and we know that, as this responsibility is segregated, as men are relieved from divided responsibility, initiative increases, and we get the vigor of independent action and leave ability untrammeled. As imdertakings become more complex, the factor of division of labor, of specialization, grows in importance. We use great care in choosing men for their different duties according to their fitness, and we increase this fitness and create special skill by narrowing duties so that all attention and study and practice are confined in one direction. In division of labor, advantage is taken of a natural tendency. Men do most readily what they can do best. It increases their interest and enthusiasm and efficiency. We know that a great factor in organization is "system," the mechanism of the whole. It transmits intellectual power, physical power, and skill to the main purpose. It touches all parts of the undertaking, for it is the introduction everywhere of order and method. It relieves those who direct from the details of execution, and it reUeves the man with special skill from the duties for which he is less well fitted. It brings work to men in condition for the application of their particular function. It moves all in accustomed routine so that the waste involved in initial effort is avoided. It insures that important steps wiU not be forgotten. It makes use of mechanical aids to save human labor and thought. It arranges the processes so that the greatest good is secured from the use of the property devoted to the undertaking, and it introduces method 79° BUSINESS ADMINISTRATION into the use, so that the property is not idle — so that time, the opportunity for accomplishment, is not wasted. With system and order, the value of discipline appears as a factor, for it holds all to the chosen system of working. It has to do with the rules and regulations necessary to carry out the system, with securing obedience to these rules, and with the training and instruction that assures full understanding. As a part of the main- taining of the system is tlw provision for watchfulness and super- vision to keep the movement in the right direction, and the provision for checks to insure against dishonesty, against errors in judgment, and errors from carelessness. We have another very important factor in organization, in accounting, records, and statistics, for these furnish the chart and the compass, the sounding-lead and the log. They are to show us where we are, where we have come from, where we are tending and how fast, and where the shoals lie, and they can tell us, too, how the craft is working. They must be largely depended upon to acquaint those who are directing undertakings with the progress and with the conditions, and this becomes more marked as organizations become larger and more complex, because it becomes increasingly difficult for those at the top to gather their knowledge from their own observation. An organization is much looked upon as a machine, as a cold- blooded product of synthesis, as an artificial sort of being that recognizes such realities as order, system, discipline, skill, and ability, but has no place anywhere for the "spirit" of anything. But if we are to look upon "organization" as something more than "system," if it is to be a sort of organism, we must recognize another factor, and that is esprit de corps. It induces enthusiastic and unselfish working together, with regard more to the whole result than im- mediately to one's own personal part in the achievement. It leads one to do his part well for the advancement of the whole. It leads one to see the advancement in his part because the whole is gaining in achievement and stability. If we have the military groups, it makes those groups support one another and act together as one; if we have the functional groups, it removes the friction, it covers the borderland, it helps to co-ordinate. It is not easy to define this spirit exactly. It is not mechanical and is not obtainable on com- mand, but it gives life and power to the organization. It will not exist without some understanding of the whole and without respect BASIC FEATURES OF ADMINISTRATION 791 for the purpose and methods. It comes down from the top. It is a reflection of the feeling and the policy of those directing, a reflection of the respect of the superiors for their purpose, and of their earnest- ness in their work, and of their feeling toward those farther down who are joining in the work. Thus we know pretty definitely the factors that make organiza- tion. They are structure, lines of authority, responsibihty, division of labor, system, discipline; accounting, records, and statistics; and esprit de corps, co-operation, "team play"; but when we attempt to determine the parts played by these factors, we find that their relative importance changes with purpose, conditions, and material. We begin to realize that there is an art of organizing that requires knowledge of aims, processes, men, and conditions, as well as of the principles of organization. B. "laws" of organization' [Mr. Knoeppel distinguishes between principles of organization and laws of organization. He speaks of six principles of organization: 1. Investigation — finding out what to do. 2. Co-ordination — ^building the machine which will do it. 3. Records — ^getting data to serve as basis of conclusions in carry- ing out what is to be done. 4. Planning — arranging and co-ordinating all details so that the various steps can be rapidly and efficiently carried out. 5. Standardization — carrying out the steps determined in a proper way. 6. Incentives. His conception is that principles underlie laws, just as the con- stitution of the United States is, in his mind, an elaboration of the principle that all men are created free and equal; all laws passed must conform to this constitution. He lists the following twelve laws of organization.] First law, objective. — Working up a tentative plan with reference to the ultimate development desired. Second law, greatest complication. — ^The determination of the most complicated phases of the objective. Third law, concentration. — ^Placing in each division of a business all of the factors which effect the performance of its own function. ' Adapted by permission from an advertisement by C. E. Knoeppel and Com- pany, in Industrial Management for November, 1918, 792 BUSINESS ADMINISTRATION Fourth law, individualism. — ^Placing in the hands of one man, most competent to handle the work, one or more functions of a busmess. Fifth law, mental capacity. — Dividing work in an organization, with reference to the knowledge and ability that will be required of a man in charge of one or more functions of a business. Sixth law, specialization. — Dividing work so that a man may operate in limited fields rather than cover many diversified fields, in order that a few things may be done well rather than a large number superficially. Seventh law, respensibility. — ^Holding a man responsible for the total proven results he secures in his division and not for the detaUs or the methods that he uses in securing these results. Eighth law, permanency. — ^Training men to fill other positions than their own and providing for understudies so that changes in an organization may easUy be made without disruption. Ninth law, cross fertilization. — Giving each pivotal man in an organization some opportunity during the year to know the methods of the departments his work influences mostly and of the departments which influence his work. Tenth law, relationship and instruction. — ^Providing a man with a clear-cut conception of the relationship existing between himself and those he is associated with, as well as with a written outline of duties, functions, responsibihties, results expected, and methods affecting his work. Eleventh law, personnel. — Analyzing the requirements of given positions and finding men whose qualifications match the given requirements. Twelfth law, staff and conferences. — Creating an analytical and advisory body in an organization to co-operate with the executive as well as a conference plan to make it difficult to determine where staff advice ends and line acceptance begins. See also pp. 820-22 for a criticism of the "Principles" of Taylor and of Emerson. C. MANAGEMENT " LAWS'" I. The management of any business is solely responsible for all functions pertaining to management. 'Taken by permission from L. V. Estes, "Managing for Ma^dmum Pro- duction," in Industrial Management, LVII (1919), 174. BASIC FEATURES OF ADMINISTRATION 793 2. The duties of every position, with the authority and responsi- bility pertaining to that position, must be determined and recorded. 3. The qualifications for each position must be carefully deter- mined and definitely understood. 4. Individuals possessing these qualifications — or the most of them — ^must be selected and trained for the positions. 5. The function of preparation for what, how and when work is to be done must be separated from and must precede its execution. 6. Investigation, analysis and standardization of conditions relat- ing to equipment, tools, methods, time, etc., must be carried out by the management. 7. The benefits which result from elimination of losses and wastes must be shared in part with employees. 8. The standards once determined must be recorded for use of the organization as a whole. 9. The determination of a definite and fair day's task for each worker — ^high and low — must be arranged for. 10. This task must be assigned to the worker best qualified to perform it. 11. Progress being made as to each task assigned must be reported by the execution section to the preparation section at regular intervals. 12. The preparation section must record the progress being made and must know at all times the exact condition of every task for which they have orders. 13. Workers must be trained to do the work by the best and Ccisiest method, following the standard furnished them. 14. Workers must be systematically trained in the performance of a mmiber of tasks with the idea of increasiag their abiHty and value. 15. A reward, proportionate to the time taken as against the time allowed for each task, must be arranged for. 16. Records which are comprehensive and reliable must be com- piled showing the results of each worker's efforts. 17. The accimiulative cost of every job, order, or task must be available — not necessarily in summary — as material, labor and expense are charged against the same. 18. A special study should be made of the "human factor" in industry and the results of such study practically applied. 19. With standards established, the exceptions either above or below the standard must be brought to attention of the executive in charge and commendation or constructive criticism made. 794 BUSINESS ADMINISTRATION 20. Continued study for further improvement and greater good must be carried on and the results of each study must be applied. D. ADMINISTRATION AS LEADERSHIP' What is industry ? It is more than a division of labor, or a use of capital, or a production of goods, or a distribution of profits. It is an art of life: its inevitable product some sort of character. It is a daily relation of human beings, who are richly endowed with sensibilities, and who possess a pathetic capacity for indiSerence, shortsightedness, and brutality; and for enthusiasm, loyalty, and sacrifice. An industrial estabUshment should be a company of brothers banded together for mutual aid and the public good, and sustaining each other with sympathy in a process of self-expression. The most significant thing about industry is that it is a process of deaUng with human nature. For men of talent it is chiefly an opportunity for leadership. Is there anything more natural and reasonable than the suggestion that we endeavor to discover what fine leadership has signified in the past; that we bring the wisdom of former times to bear upon the problems of the present ? But, it may be responded, economic leader- ship of the present sort is recent. It has httle history; and what there is has been half forgotten, half concealed. This may be freely conceded. But there is a long and fascinating history of administra- tion, pertaining to the work of great mihtary leaders, and statesmen, diplomats, reformers, the framers of ecclesiastical poUcy, and other prominent ones who have made for themselves a lasting mark in some field of the domain of organized action. But it may again be objected that these are diSerent fields of leadership, and that the results of experience cannot be carried over from one to the other. It is true that there are differences in climate, and language, and country, and period. In war the use of artillery involves a different combination of the laws of physics arid chemistry from that of the machine in industry. This would be important if we had in view courses in applied physical science. Likewise, it may be urged that political action is not restramed by the cost of production, in the sense that normal industry is; and that 'Adapted by permission from E. D. Jones, "Education and Industrial EflS- ciency," in Papers and Proceedings 0} the Twenty-seventh Annual Meeting of the American Economic Association, V (1914), 215-26. BASIC FEATtlRES OF ADMINISTRATION 795 its results cannot be promptly evaluated or liquidated, to facilitate a turn-over. This would be pertinent if we had in view courses in the administration of values; such as accounting, appraising, finan- cing, and investing. But these objections do not hold when we have in view the study of business administration, as the art of handling men. Here the subject-matter is hiunan nature. The administrator in whatever sphere he works has to judge men, and understand how judiciously imposed responsibilities develop them, and how dangerous failure is to them. He has to safeguard against the same human defects of ill will, selfishness, and despondency; and he places reUance on the same factors of ambition, intelligence, and stabihty of character. The material of courses devoted to the human nature of joint action may be grouped, either with the object of bringing out most prominently the personality of individual leaders, or with the main purpose of elucidating the principles, one by one. Best of all, perhaps, is some compromise plan of taking up one principle at a time and elucidating it by a single, carefully studied, and fully presented episode from the life of a great administrator. Sttidy of individual leaders.- — The first arrangement, which aims to bring personality into view, has the advantage of interest and an atmosphere of reality. Individual example, which transcends every other influence upon conduct, is brought into play. Reviewing the lives of administrators, we may perceive, in such a man as Napoleon, an astonishing mastery of detail, coupled with weakness in demanding too rigid an obedience from his marshals, and in tolerating no advisors of independent mind at his court. Unshakable decision may be seen in Lincoln, while in the pages of Guicciardini we may read of the fatal irresolution of Clement the Seventh. For the effects of concentration upon principal aims we may review the life of Grant, which seems to have been framed on Bacon's advice, "Go through with that which is in hand, and interlace not business, but of necessity"; while Lord Brougham will provide the picture of scattered energies. On compromise and the middle course Sir Henry SavUe can teach us; while Chatham wiU serve as an illustration of a statesman ready for extreme measures. In Robert E. Lee we may observe the function of religious faith in easing the mind of anxiety, after duty is performed. Efficiency in defeat may be illustrated by Wolsey's extraordinary fertility of invention, 796 BUSINESS ADMINISTRATION Richelieu's power of making the most of all circumstance, Mazarin's cool objective temper, and Beaconsfield's courage. If we wish to study the talents which reveal themselves in speed of execution, there is the story of Sir Henry Vane's construction of the English navy under Cromwell, while the philosophy of judicious delays extends from Fabian to Joffrey. On the choice of men Cromwell gives us the grand test of moral force, saying, "I raised such men as had the fear of God before them, and made some conscience of what they did, and from that day forward, I must say to you, they were never beaten." If we would learn how proper limits may be set to effort, there is the history of Frederick the Great, who never overreached him- self, while, contrariwise, in the policy of Laud and Strafford, de- nominated by the word "thorough," and in the answering "root and branch" of the ParUamentary leaders, we may observe the stern virtue of avoiding half-measures overstepping practical limits. In Wellington's career we may trace, working together with immense capacity and devotion, the results of aloofness, and indis- criminate praise and blame, and finally, in his political life, intol- erance; while Julius Caesar, that predecessor whom he resembled in arms, challenges our admiration for his art of making common cause with his men, his astonishing power of searching out and rewarding those who deserved praise, and his leniency where the motives of his opponents were honorable. The study of principles. — The advantage of arranging material for the student, with the chief object of bringing out the principles of joint action, is that with such a plan the way is opened for the introduction of precepts from the wisdom literature, gems of advice from the maxim writers, the discussions of strategy, the rules of investigation which constitute the scientific method, together with facts from psychology, and postulates from ethics. By this arrange- ment of the subject, greater stress is put upon the reasoning involved. The student becomes accustomed to trace analogies between activi- ties of diverse kinds, and to formulate the general or pure prin- ciples common to those activities. While the results are not so vivid as in the other arrangement, they tend to be left in the student's mind in a more clear-cut and compact form, apt for ready use, somewhat as a creed or code of action. Of the many principles of administration which offer themselves for inculcation, but a word or two can be said. What may be BASIC FEATURES OF ADMINISTRATION 797 called the mechanics of organization will involve the definition and distribution of authority and responsibility, including the neces- sary distinctions between planning and execution, and between general matters and details. It will aim at the adjustment of capacity to function, and the establishment of control through standards, sequences, and schedules, with individualized orders and records, tasks and rewards. These various steps combine to bring into existence a group of agencies, co-ordinated to mutual functioning, and taking the form of a system, including every individual and operation, and providing an avenue for the down- ward passage of ideas associated with initiative and the upward movement of facts connected with response. When attention is turned to questions of policy, the student will find his energies awakened by the fascinating variety and the sobering depth of significance of the subject. What are the various types of discipline which, in aU degrees, from mere instinctive obedi- ence up to the most intelligent loyalty, have ever been reUed upon to insure response to constituted authority? In what proportions are confidence in leadership and confidence in the co-operation of comrades blended in discipUne? In co-ordinating various agencies, what is the applicability of the rule that only factors of analogous degrees of excellence should be united? "No man seweth a piece of new cloth on an old garment." And what are the Umits of the counsel that the manner of a part must conform to the manner essential for the whole ? What, likewise, are the limits of the policy of preliminary prepa- ration, of which the German army has again given the world a striking illustration ? It is, undoubtedly, a prime means of storing up a portion of the ciurrent energy of an organization for concen- trated delivery at a future time. But what of the saying of Pit- tacus, "Only power reveals the man"; an idea more explicitly expounded by Lovds XIV to his son, when he said, "The higher the position, the more it has objects that cannot be seen or known until we occupy it." Again, there is a connection between preliminary preparation, with its tendency toward a fixed objective, and the disregard of small incidental successes. The value of the latter Sir Walter Raleigh, having in mind the imcertainties of fortxme, emphasized. In yet another direction preUminary preparation bears upon the policy of seizing the initiative, for it has been well said that one can only plan specifically for what he himself initiates 798 BUSINESS ADMINISTRATION When we have as great a respect for human nature as for the nature of machines, and the value of products, we shall want the administrator to understand the character of attention and the significance of pleasure in work. If the time ever comes when what is now accepted as estabUshed in psychology, concerning the condir tions imder which human talents find efficient expression, becomes accepted in industry there will be a great revolution. The nature of many tasks will be changed, and the method of presenting tasks will be changed. [The discussion of matters affecting "the will to do" is here omitted. Consult chapter iii, pp. 153-192.] Time fails to speak of understudies, and of the arrangement of men in promotion chains, of cabinets and committees, of the means of giving to poUcy proper flexibility, of the fimction of compromise, of the many fine rules of diplomacy, and of the democratic theory that those pleasures are greatest which are shared. Literature. — The literatxure of administration, considering the sense in which administration is here used, is extensive. First of all, there is biography, infinite in amount, from ancient Plutarch to modem Bradford, writing of Lee, the American, and varying in quahty from the stern stuff which came from under the heavy hand of Carlyle, to the Ught workmanship of La Bruyere and Sainte-Beuve. For the study of benevolent tyrants (or the benevolent study of tyrants) there are Mommsen's chapters on Sulla and Julius Caesar. For the r61e of intuition as an aid to leadership, there is Monypenny's Disraeli. For tenacity of purpose there is Thayer's Cavour. It is well to seek out the great analyzers of human motives, such as Samuel Johnson, Bacon, Bulwer, Goethe, and Emerson. The philosophy of joint action may be found in the wisdom hteratiure, extending from Proverbs to Bacon's Advancement of Learn- ing. There is much of it in such maxim writers as La Rochefoucauld and Chamfort, as well as in the aphoristic paragraphs of Goethe and Schopenhauer. Besides these, there are pertinent treatises by lesser men not to be overlooked, such as Sir Walter Raleigh's Cabinet Council, John Foster's Decision of Character, Lecky's Map of Life, and Sir Arthur Help's Essays. The early Hteratiu'e of poUtical science, before modem constitu- tions so greatly hedged the executive about, is suggestive. And especially thought-provoking is the literature of the Renaissance, when the priuciples of poUtics were in such a formative and unrec- onciled state as the principles of business administration are now. BASIC FEATURES OF ADMINISTRATION 799 And here there is particularly to mention the writings of MachiaveUi. It is well to accompany the study of the products of this penetrating mind with the explanations of Morley, Villari, and Lord Acton. Military science deserves careful attention, for it is, at present, the most highly developed branch of administration, with the pos- sible exception of political science. It differs from the latter in that little sacrifice of efficiency has been tolerated for the sake of democratic distribution of power. The emphasis which this litera- ture places on the rugged virtues imparts to it something of the strength of soul of the classics. The great work in this field is that of General Karl von Clausewitz, the father of German strategy. It bears the simple title On War. The writings of the officers of the general staffs of Germany, England, and France constitute a reliable body of professional treatises, the general tone of which is surprisingly broad and philosophical. To offset the influence of studies in strategy, the student may tiurn to the Uterature of art, especially of that portion of it which considers art as a phase of self-expression, and as a source of pleasure in work. Here two names suggest themselves to us at once: John Ruskin and William Morris. It is, of course, unnecessary to make particular reference to the Literature of personal efficiency, psychology, and scientific manage- ment. Conclusion. — ^The project, then, which I would urge upon teachers of economics and business administration, in our colleges and universi- ties, is to regard the business leader not merely as a ruler of matter and force, or as a calculator of value relations, but as a leader of his fellow-men. And this, not alone with reference to the leisure and wealth won from industry, but in the Ufe of industry itself. See also p. 667. Entrepreneurship and Administrative Qualities. 4. SOME TYPES OF ORGANIZATION [Although there is no single correct form of organization of uni- versal appUcation, it is possible to make a survey of existing organi- zations and to see that they fall into certain rough types. One type shades off into another and a single business unit may have all types, and many combinations of types in its various departments.] Soo BUSINESS ADMINISTRATION A. LINE AND STAFF ORGANIZATION' There are two great principles in organization commonly known as line and staff, or, to use the terms preferred by some industrial engineers, "military" and "fimctional." Line organization is essentially simple, mathematical subdivision. An army under a major-general is divided into brigades under brigadier-generals; each brigade is divided into regiments, under their colonels, and each regiment into battalions under lieutenant- colonels or majors; each battaUon is divided into companies under captains; each company is again subdivided under its lieutenants, and so on down to the corporal with his squad. Promotion is step by step upward; the private may hope to be made a corporal, a sergeant, a lieutenant, a captain, a major, a colonel, a general. The lines of authority and responsibility run continuously through the whole body from top to bottom, as the veins of the leaf gather to the stalk, and many leaf-stalks to the twig, and many twigs to the branch, and many branches to the trunk; and veins and stalk and twig and branch and trunk have practically similar duties to perform in the Hfe and growth of the tree. Staff organization is a division according to functions — division by which one miUtary department does all the engineering work for the whole army, another suppUes all clothing, or rations, etc. It is the division by which the roots absorb moisture and salts from the earth, the leaf cells make chlorophyll, the sap carries the products of these laboratories to the ceU-buUding processes of the tree. Staff functions are co-ordinate and co-operative, but they do not stand to one another in any order of ascending and descending scale. The captain, simply as captain, ranks and commands the Keu tenant; that is a line relation. But the engineer, as engineer, does not command the quarter-master; the quarter-master does not rank and command the surgeon; the leaf does not rank the root; that is a staff relation. On the other hand, the captain is primarily responsible only for his own company; each branch of the tree supports only its own twigs and each twig its own leaves. That, again, is line organization. The scope of the individual is limited in area, but unlimited in responsibility within that area. But the engineer builds a bridge for the entire army — general, colonels, captains, and privates; each root and leaf con- tributes its share to the life of the entire tree. That is staff organiza- ' Adapted by permission from C. B. Going, Principles of Industrial Engineer- ing, pp. 41-44. (McGraw-Hill Book Company, 1911.) BASIC FEATURES OF ADMINISTRATION 8oi tion. The responsibility of the individual is unlimited in area, but limited to one function throughout that area. The functions of staff and line are, therefore, not antagonistic; they are not alternative and rival systems of organization, between which we may choose and say we will adopt this or that and refuse the other. Line organization is essential to discipline and essential to the continuous existence of the whole body. If the general retires there must be a colonel to succeed him; if the captain is killed in action, the lieutenant must take command of the company, or the men are scat- tered and lost. Staff organization is essential to efficiency, each branch of it in its own particular function. If the commissary fails and there is ho food for the troops, the engineer cannot make up for the deficiency by vigorously building bridges. Each staff must have a line organization within itself for discipline and continuity; but every complete organization must embody the principles of both line and staff if we are to secure the best results, the staff supplying expert functional guidance, applied through the line's direct control. In manufacturing and industrial operations generally there is no lack of development of line organization, but there is too often a very meagre appreciation of the valuable results attainable by far-reaching appUcations of the staff principle. This is generally characteristic of modem industrial concerns, and it is here that we are likely to discover weakness when the attainment of high efficiency is desired. Under line organization, the foreman is supposed to decide every question for the men under his particular control — employment or discharge, wages, jobs, difficulties with materials, difficulties with tools, difficulties with processes, difficulties with other employees. If the question is too big for the foreman he goes to the superintendent, and if it is too much for the superintendent he puts it to the general manager, and it may finally go to the board of directors. The assump- tion under-lying is akin to the supposition that the corporal must be a better shot than the private, and the sergeant than the corporal, and the Ueutenant than the sergeant, and so on up to the general in command. B. THE T3NIT SYSTEM' An interesting concrete example of modern scientific organiza- tion is furnished by the most extensive railway system in the world, the Union Pacific System-Southern Pacific Company, popularly known as the Harriman Lines. ' Adapted by permission from C. D. Hine, Modern Organization, pp. 14-33. (The Engineering Magazine Company, 1912.) 8o2 BUSINESS ADMINISTRATION As a resiilt of studies and recommendations made by the writer in 1908 under the direction of Mr. Kruttschnitt, there has been inaugurated a unit system of operating organization. The working outline of this organization can best be imderstood from the follow- ing standard forms of official circulars by which it is promulgated: Rail Company OFFICE OF GENERAL MANAGER Circular No 191 ■• The following appointments of Assistant General Managers are an- nounced, effective , 191...: I. Mr 2. Mr 3- Mr 4. Mr S- Mr 6. Mr 7. Mr 8. Mr Each of the above named officials continues charged with the responsi- bilities heretofore devolving upon him and in addition assumes such other duties as may from time to time be assigned. The titles, "General Superintendent," "Superintendent of Motive Power," "Chief Engineer," " Superintendent of Transportation," "General Store-keeper," "Superintendent of Telegraph," and "Superintendent of Dining Cars," will be retained by the present holders or their successors to such extent only as may be necessary for a proper compUance with laws and existing contracts. All persons imder the jurisdiction of this office will address reports and communications, including replies, intended for the General Manager or for any Assistant General Manager, simply: "Assistant General Manager" (Company telegrams "A. G. M."), no name being used unless intended as personal or confidential, or to reach an official away from his headquarters. It is intended that an Assistant General Manager shall be in charge of this office during office hours. Each official transacts business in his own name and no person should sign the name or initials of another. All persons outside the jurisdiction of this office are requested to address communications, including repUes, intended for the General Manager or for any Assistant General Manager, simply: "General Manager Co Bldg. " no name being used unless BASIC FEATURES OF ADMINISTRATION 803 intended as personal or confidential or to reach an oflScial away from his headquarters. General Manager Approved: Vice-President Division OFFICE OF SUPERINTENDENT Circular No ..191.. Effective this date, this Division discontinues among its oflBcials the use of the titles, Master Mechanic, Division Engineer, Trainmaster, Traveling Engineer and Chief Dispatcher. The following named officials are designated: 1. Mr. A. B Assistant Superintendent 2. Mr. CD Assistant Superintendent 3. Mr. E. F Assistant Superintendent 4. Mr. G. H Assistant Superintendent 5. Mr. I. K Assistant Superintendent 6. Mr. L. M Assistant Superintendent They wiU be obeyed and respected accordingly. Each of the above named officials continues charged with the responsi- bilities heretofore devolving upon him, and in addition assumes such other duties as may from time to time be assigned. All of the above will be located in the same building with one con- solidated office file in common with the Superintendent. All reports and communications on the Company's business, originating on this division, intended for the Superintendent or for any Assistant Superintendent should be addressed simply "Assistant Superintendent" (telegrams "A. S."), no name being used unless the communication is in- tended to reach an official away from his headquarters, or to be personal rather than official, in which latter case it wiU be held unopened for the- person addressed. It is intended that an Assistant Superintendent shall always be on duty in charge of the division headquarters offices during office hours. The designation of a particular Assistant Superintendent to handle specified classes of correspondence and telegrams is a matter con- cerning only this office. Each official transacts business in his own name, and no person should sign the name or initials of another. The principle 8o4 BUSINESS ADMINISTRATION to guide subordinate officials and employees is to be governed by the latest instructions issued and received. Train orders will be given over the initials of the Train Dispatcher on duty, as will messages originated by him. Officials and other persons above and outside the jurisdiction of this division are requested to address official communications, intended for the Superintendent or for any Assistant Superintendent, simply: "Super- intendent Division " (telegrams "Supt."), without using the name of the Superintendent except for personal matter. Approved: Superintendent General Manager Any study of the underljdng principles of the unit system must take into account a most distinctive characteristic of a railway, namely, its physical extent. The head of a manufacturing plant, of a bank, or of a department store, could in a few hours' time per- sonally see every employee of the establishment and observe most of the constituent activities. After a railway once begins business no division superintendent even can hope ever to see all of his trains assembled or all of his employees congregated in one place. So few can come to him that he must go to them. This results in an anomalous condition. While the superintendent or other oflScial is on the road, the routine business at headquarters must be transacted or the company's interests will sufier. Under a feudal conception that because the super- intendent is an official he can be in at least two places at the same time, it is the custom on most railways to have the chief clerk at head- quarters sign the name of the absent superintendent to official com- munications. When the superintendent is absent from headquarters the chief clerk perforce handles communications to such subordinate officials as the master mechanic, the division engineer, the train- master, etc., officers all receiving larger salaries than the untitled chief clerk and presumably men of wider experience and better .qualifications than he. Sooner or later every chief clerk oversteps the tenuous line and in the name of routine business is consciously or unconsciously restricting the authority or activity of those who are in reality his official superiors. The unit system of organization eliminates "government by chief clerks" by insisting that no person shall sign the name or initials of another. Since the business must go on and no person may sign for another, it follows that a sufficient number of duly qualified BASIC FEATURES OF ADMINISTRATION 805 officers must be appointed By giving all the uniform title of assist- ant this or that, every one is available foi prompt comprehensive action should occasion so require. This requirement is worked out in practice by having normally at headquarters the senior assistant, who is in effect, though not in name, the chief of staff. At the headquarters of an operating division he is, as stated, the man who was previously to reorganiza- tion the assistant superintendent of the division. The former chief train dispatcher of the division is usually started near the foot of the Ust of assistants. His duties are unchanged and he re- mains at headquarters handling such endless details of operation as directing the work of train dispatchers and telegraph and telephone operators, assigning locomotives, distributing cars, manning trains; in fact, he is the incarnation of detailed administrative activity. At a normal division headquarters, then, there are two assistant superintendents on duty, one as chief of staff, the other as chief dispatcher, one the senior and the other a jimior, one a distinct head of the office, the other in effect his senior's aide. Both assist- ants being clothed with authority, either can act on any problem that may suddenly develop in an unforeseen absence of the other. On divisions of very light traffic one assistant at headquarters may be sufficient. No distinct grade of senior or chief assistant is created in any unit. Normally nimiber one, the real senior, is "on the lid," as it is termed, at headquarters, and is excused from outside road duties. In case of his prolonged absence, the head of the unit, the general manager, or the superintendent, as the case may be, designates the most available of the other assistants to remain at headquarters and sit on the lid. An unwritten law here operates to make such designated assistant the chief or senior of all the others for the time being. No formal annoxmcement of such designation is necessary. A railroad does not change its physical location frequently, as does a fleet or an army, and the chance of confusion of relative rank is remote. Advantage is taken of this elastic feature of assignment on some divisions to rotate various assistants through the senior chair in order to gain the splendid comprehensive training for higher positions which the position affords. Assistants thus favored are imanimous in expressions of appreciation for the valuable knowledge and experience acquired. Each assistant when at headquarters signs communications to subordinates in that branch of work in which he is technically 8o6 BUSINESS ADMINISTRATION expert and for which he is held responsible by the head of the unit. For example, the maintenance assistant superintendent issues in- structions to his roadmasters or track supervisors; the mechanical assistant to his engine-house foreman or car-repair foreman; the transportation assistant to his yardmasters, etc., etc. Each, however, after signing is supposed to send his communication over the desk of the senior assistant, both for the latter's information and for review and co-ordination. This has proved a valuable check upon official caprice in issuing unnecessary instructions. More energy is now expended in seeing that instructions already issued are carried out, and less in promulgating those that in themselves may uncon- sciously confess a laxity in previous enforcement. It is obvious that under this system the senior assistant has a most comprehensive knowledge of the affairs of the unit. The head and the other assist- ants come and go between the road and the office. The senior assistant has a practical grasp of operation that enables him to aid the head of the unit in balancing its component elements, in minimizing departmental jealousies, and in engendering a spirit of team work. When the head of the unit or any assistant is on the road, he is represented at headquarters not by a chief clerk but by a chief of stafi, the senior assistant, who transacts business in his own name. This somewhat elaborate covering of headquarters results, as intended, in more traveUng and in better outside supervision by the other assistants. Their increased avaUabUity for outside work is the strong- est of the several strong features of the system. C. THE COMMITTEE SYSTEM' Committees in general. — Factory problems are nearly always many sided and hence difficult of solution by any one man, especially where, under stafi organization, he is charged with and capable of handling only one phase of the work. Furthermore, as before stated, when several men are on the same authoritative level there must always be some definite means provided so that they can harmonize their efforts. There is no way by which these ends can be served comparable with a good committee system. There are several inherent advantages in a good committee. First, it is impersonal in its action, and its verdict, like that of any jury, is usually based on the facts presented. The very atmosphere of a committee tends to compel all of its members to lay aside pettiness and personal prejudice and to act in accordance with the merits of the case. The • Taken by permission from D. S. Kimball, Principles of Industrial Organiza- tion, pp. 88-Qi. (McGraw-Hill Book Company, 1913.) BASIC FEATURES OF ADMINISTRATION 807 foreman who would, over the telephone, blame a fellow-foreman for a delay will hesitate to do so in his presence or in that of his superior officers. The decisions of a committee are, therefore, likely to be more accurate than those of an individual because of the greater accuracy of its basic information. A misstatement on the part of a member is not likely to go imchallenged. Secondly, committee meetings tend to promote a better un- derstanding between men of the same authoritative level and of different levels. Distrust and jealousy of each other are rapidly eliminated as men know one another better and see the good side of each other's nature. There is something likable in all men if one can succeed in discovering it, and this can be done only by bringing them into dose personal contact with common problems to be solved, not by wrangling and fault-finding, but by an earnest endeavor to find the very best solution. Thirdly, the committee method tends to awaken interest in the work and to draw out the best efforts of all of its members, and tends generally toward a better esprit de corps. Committees are always of an advisory character. They can- not replace strong personality but they can be used effectively to assist a strong executive in finding out what is actually going on in the factory, in deciding what should be done, and in enUst- ing the good will of those under him. The best and most natural basis of committee work is a report on the matter under discussion, and reports are greatly enhanced in value when discussed by an intelligent and representative committee. There may be many kinds of committees and for many purposes, but only a few typical ones wiQ be discussed here. In general, committees should not be too large or too small. If too large they become very unwieldy, and if too small they may not secure a broad representation. A com- mittee of six members is usually large enough. The manufacturing committee. — ^Referring to Figure 4 [omitted] it is apparent that no one of the four vice-presidents [chief salesman, chief engineer, factory manager, and treasurer] would be able, in general, to advise the general manager on the entire manufacturing pohcy of the works. But if these four men are collected into a manufacturing committee, each of the four important divisions of the works is represented by an expert. The general manager would be the natural chairman and such a committee, through him, can direct the manufacturing policy of the plant with great intelligence. The matters that naturally come before this committee are: 8o8 BUSINESS ADAUNISTRATION 1. The general manufacturing policy of the plant, the char- acter and sizes of the articles to be made. 2. The approval of all orders of extraordinary character and the approval of orders for stock, if goods are manufactured for stock. The approval of all extraordinary manufactvu-ing expendi- tures and recommendations for economies. The reports that would naturally be laid before it would, there- fore, include the profit and loss statement, stock and sales reports, and similar general statements. [The original continues with a discussion of various committees. That discussion is here omitted and the reader is referred to pages 236-239 for other examples of committee organization.] D. THE HUMAN ANALOGY' The Master Designer of the universe brought into being the highest development of his handicraft, the human body — the most perfect type of organization. So perfect was this organization in its inception, so flawless in its fimctioning under the severest conditions, that not in the slightest detail, has a change been made since its organization. We little realize what an efficiently managed and complicated manufacturing plant we possess built upon that frame- BUSINESS ORGANIZATION MODELED FROM HUMAN ORGANISM Data from all Available Sources Executive Stapp Senses Line Organization Brain Depahtuent Managers Superintendents and Foreman Clerks, Assistant Managers Assistant Foreman- Workmen Voluntary Organism Involuntary Organism 'Adapted by permission from an advertisement by C. E. Knoeppel and Company in Industrial Management for November, 1918. See also article by J. H. Van Deventer in Industrial Management, LX (1420), 260-64. BASIC FEATURES OF ADMINISTRATION 809 Opkce of the General Manager (Cerebrum) Chief of Action Dep't (Cerebellum) Department of Planned Functions wt t ^^ t ^^ T \^ T t I- ^ aCDCDCDCDCDCDC F Chief of Routine Dep't / Medulla \ lOblongatal V F Department of Routine Functions V F V F F V F A — Action-department managers. B — Information experts assisting the above. C — ^Incoming information (sensations). D — Outgoing orders to the working force (muscles). E — ^Routine-department managers. F — Outgoing orders to the working force (involuntary muscles). Notice that the action-department managers are provided with assistants to relieve the arduous and varied efforts they are called upon to make, whereas the routine department managers, not being under the strain of original work, are required to perform their duties without assistance. Compare this with the organization scheme of your plant. work of bones; and in a still lesser degree do we realize how the complex system of the body is so admirably controlled imder the scientific management of the brain and nervous system. A better example of organized control cannot be found anywhere in the whole wide world; its component parts are of a finer kind of design than we will ever approximate, and the functions and their relations are co-ordinated more smoothly than we will ever be able to arrange human relations. Every fimction of the body is a skilled function, doing something it has been fitted to do. First, we have the cerebnmi, or office of the general manager. As befits the dignity of its position its location is at the very top. It is the center of intelligence, thought, reason, judgment. Directly 8lo BUSINESS ADMINISTRATION beneath it is the cerebellum, or office of the action manager. Con- trolling as it does the voluntary muscles of the body, it is the respon- sible party for all of our physical movements. Directly underneath the cerebelliun is the medulla, in which is located the chief of routine affairs, a very important official as we shall later find out. These three constitute the main officers of the company, but each has many subordinates. The spinal column constitutes the connecting link of authority between these various under officials. By it the reflex centers, or department managers, are kept in touch with their imme- diate head, the cerebellum. Also, through its agency, the routine department managers, otherwise called the s)nnpathetic gangha, answer to the commands of their superior, the medulla oblongata. Each of the action department managers has two subordinate officials working under his orders, one of which is the information expert who records and collects information in the way of sensations; the other is the gang boss or action department foreman, who carries out the orders of his department manager which are based on the information received from the information expert. Physiologists call the information expert and the gang boss by different names — the sensory and the motor nerves. Their functions are kept quite as distinct as those of the functional foremen in what is known as scientific management. In addition to these, there are a number of very highly specialized and high-priced officials who look after extremely important divisions of work. As a group they are called the cranial nerves, and among them are the heads of the optical, auditory, and the other sensory departments. We see from the above that the type of management of this model plant is strictly a line and staff organization, carried out to a finer degree than any of us are accustomed to. There is evidently no sparing of specialists where they are needed, and the duty strongly impressed on each of these is to take full charge of his job and leave the general manager free to think of the big thoughts. E. THE "two-plane" PLAN OF ORGANIZATION' This form of organization — ^precisely as the human brain does the thinking and the nervous system takes care of routine — separates creative from routine functions and provides a duplex organization, the creative part of which does the orginal thinking. It has time to ' Adapted by permission from J. H. Van Deventer, "How to Develop Execu- tive Ability," Industrial Management, LX (ig2o), 260-64. BASIC FEATURES OF ADMINISTRATION 8ll do it because it is free from routine. The creative part of this organi- zation continually breaks new ground, and its findings and discoveries, when approved and adopted, are passed over to the corresponding routine plane. The chief value of the 'two-plane" organization plan lies in compelling an analysis of the business from a new point of view which leads to the encouragement of proper routine with the liberation of detail from the creative minds. Routine keeps the ship of industry afloat, but creative thought is the motive power that gives it headway. The development of both of these two distinctively different classes of activity is essential to the attainment of the fullest degree of success. The creative plane in any organization cannot be properly developed without a corresponding development of the routine plane. Too much steam and too Uttle flywheel is a fatal combination; much less safe than the reverse condition. Perfect the routine first, for it is the backbone of the business. This is the plane for the substantial level-headed fellows gifted with persistency and for temperaments lacking imagination and happiest under the cross fire of intense activity. For the creative plane the qualifications are: a broad knowledge of the policy of the organization as a whole; an intimate knowledge of the particular requirements of the department or division; unlim- ited enthusiasm and the gift of imagination. [The author gives an excellent diagram of an organization planned on the "two-plane" basis. The following wiU serve as samples — they are only samples — of the entire scheme.] PRESmENT'S POSITION Creative plane. — President formulates company policies through consultation with his staff; critically analyzes reports from all divi- sions prepared by his assistants; consciously directs the development of enthusiasm and eflSciency of all division heads ; interprets through his personaUty, actions, and contact with employees the spirit of the organization; makes critical study of the weak points in the organi- zation and initiates steps to strengthen them. Rouiine plane. — Assistant to president receives routine reports from every division and prepares final digest of these for president's attention; maintains schedule of appointments, disposing of unneces- sary interviews personally or by delegation; maintains the executive correspondence and data files; acts as secretary at staff conferences 8l2 BUSDIESS ADMINISTRATION and maintains follow-up of decisions therein arrived at; prepares bulk of correspondence for president's signatiu:e, either on own initia- tive or under brief instructions. SALES posrrioN Creative plane. — Vice-president in charge of sales studies the possibilities of new markets; instigates sales campaigns; investi- gates serious difficulties of sales resistance; interprets further possi- bilities of product through the analysis of performance data; creates new sales arguments; develops the sales force and establishes and develops the dealer and distribution organization. Routine plane. — Assistant to vice-president tabulates daily sales report; prepares sales analyses and records of increase; maintains follow-up; supervises sales correspondence and general routine of business with dealer and distributor; supervises circulation of form letters and the preparation and maintenance of mailing lists; respon- sible for the proper maintenance of all routine in connection with the sales organization. FESTANCIAI. POSITION Creative plane. — ^\'^ice-president and treasurer estabUshes and modifies general financial policy with approval of the president and board of directors; supervises bond and stock issues, loans, invest- ments; makes critical study of costs and profits. Routine plane. — Assistant to vice-president and treasurer analyzes market conditions and trend of business; prepares graphical and statistical financial reports; compiles credit data; operates account- ing department; manages cashier and pajrmaster's offices; checks purchases; maintains cash accounts; compiles regular daily reports for president and treasurer; makes final tabulation of cost data based on factory costs. For the Taylor plan, frequently called functional organization. See p. 615. Scientific Management in Production. p. 624. Control of Manufacture under the Taylor System. p. 354. An Organization of the Sales Department. BASIC FEATURES OF ADMINISTRATION 813 5. "REGULATIVE PRINCIPLES" OF TEIE ART OF MANAGEMENT' No apology is necessary for an attempt to formulate some definite basis on which to build a truly scientific art of management. The regulative principles of the art of management are three: 1. The systematic use of experience. 2. The economic control of effort. 3. The promotion of personal effectiveness. If these three principles are correctly stated, then the scientific basis of management is capable of being derived from their develop- ment and extension. I. The first principle: The systematic use of experience. — Experi- ence is the knowledge of past attainment. It includes a knowledge of what has been done, and also how it has been done. It is in- separably associated with standards of performance, that is, with the ideas of quantity and quality in relation to any particular method of doing something. The great instrument of experience, which makes progress pos- sible, is "comparison." By systematic use of experience is meant the careful analysis of what is about to be attempted and its reference to existing records and standards of performance. In many cases it may be found that gaps in existing experience occur. In such cases the experimental determination of data may be undertaken, so that we have a full covering of the ground, either by the experience of others or from our own experimental determinations. In setting out to examine any work it is necessary to ask: What experience, in the form of methods and standards of per- formance, already exist ? Is our performance equal to these standards ? Is it so far behind that it will pay to expend time, energy, and money to approximate more nearly? Are existing standards based upon the use of the most advanced practices and methods of the present day, or is there reason to sup- pose that experimental redetermination of such standards would show a new maximum of effectiveness ? In the experimental accimiulation of experience the economic value of such experience must be kept in view. If the inquiry ' Adapted by permission from A. H. Church and L. P. Alford, "The Principles of Management," in American Machinist, XXXVI (1912), 857-61; and A. H. Church, The Science and Practice of Management, p. in. (The Engineering Magazine Company, 1914.) 8 14 BUSINESS ADMINISTRATION relates to operations which will be repeated many times, as in the processes of manufacturing staple articles, detailed experimental investigation may be worth wMle. In other cases it is well to con- sider the total economic value involved, the possible maximum that could be saved, and the probable cost of the investigation. Experience tends to pass into traditional practice. That is its most useful form. Every kind of experience must pass into the mind of a man before it can be utilized practically; hence it follows that new experience should be crystallized into new traditions of practice as fast as possible. In the shop men are not always running to textbooks to see if they are right — at least the competent practical man is not. Even if it be conceded that practice in the present day is all wrong and needs to undergo exhaustive study and reform, this only means that we are engaged in developing new standards of practice, which will take the place of the old traditional practice, and will in turn form a new tradition. The proper place for these new traditions or standards of practice is precisely the same place as where the old ones were kept, namely, in the minds and memories of those who do and are responsible for doing the work. Further, it is impossible to record it all — something must remain with the man. New experience can be transmitted in one of two ways, either in minute instructions of which individual workers do not perceive the drift, or as a connected body of new practice. The latter form is the better, though it demands educational efforts somewhat apart from ordinary shop routine. Not imtil the new experience has be- come fixed as a habit wiU its full value be realized. 2. The second principle: The economic control of effort. — Effort is experience in action. Before we can do we must think, that is, dig into our stores of experience relative to the proposed undertaking. Having taken thought, we proceed to action. In order to produce organized action it is necessary to control effort in various ways. These are: "division," "co-ordination," "conservation," and — in industrial undertakings — "remuneration." Most of the discussions about management are, in fact, discussions about the various methods and degrees of controlling effort and fixing its reward. It is possible to manipulate effort so as to produce an organization of the utmost flexibility or, on the other hand, one of hard and fast rigidity. In certain special cases rigid organization is permissible, BASIC FEATURES OF ADMINISTRATION 815 but in general manufacturing, flexibility is really essential. By flexi- bility is meant the power of self -adjustment to unforeseen events. Division of effort. — Division of effort is largely controlled by design. This is the principle of the unit part or component. Modern practice regards the complete machine or device as an aggregation of parts, and it is one test of ef&ciency when these parts come to- gether in perfect shape, without requiring readjustment to correct faults of workmanship in their progress through the shops. "Division of effort" is a universal principle throughout all the activities of manufacturing. Starting with design which controls the maximum limit of operative division, it is usually found desirable that operation should also be divided into processes. These usually correspond to machines. To some extent they are controlled by "settings." It is important to have as few settings as possible, as nothing else is so wasteful of time. One setting in a jig is, therefore, made to subserve several processes in some cases. In other cases one setting in a machine holds the work for a series of consecutive processes, which may be of a different character, as turning, boring, threading, etc., at one setting. From this it is apparent that there are limiting considerations to the division of effort. It is not merely a question of dividing to the bitter end. There are cases in which it is better to combine opera- tions and, in fact, execute them simultaneously. This is worthy of attention, because it will be found that in aU the principles of management that have yet been ascertained the limiting conditions are not yet formulated. Every such principle has limita- tions and it is neither necessary nor advisable to push it to its far- thest possible development. For example, the provision of jigs for repetition work and where it is required to secure dimensional rela- tions of exactness, as in drilling holes, though a very old idea, has not yet been definitely settled as regards its limiting conditions, and there are frequent cases in which doubt exists whether the expenditure* for such jigs was, after all, a wise one. By many of the enthusiastic advocates of particular systems of management, the existence of Umiting conditions is hardly suspected, consequently they ride. their favorite hobby to exhaustion, till many useful ideas become discredited in the eyes of practical men. It is not enough to know that a principle can be applied — it is even more important to know when not to apply it. 8l6 BUSINESS ADMINISTRATION The third great field of division of efEort is in connection with administration or control. This is the great battleground of the systems at the present moment. Thus, to mention only two, we have Taylor's fimctional system and Emerson's hne-and-sta£f plan. Also we have the old method of simple, delegated authority in hier- archical form, from president to manager, manager to superintendent, superintendent to foreman and so on. Which is the best ? Obviously, the question cannot be answered until we have ascertained what principles have been appUed in each case to produce these forms of organization, and what are the limiting conditions that control, or should control, them. The subject is a tempting one, but it must be postponed untU, at least, the remaining modes of manipulating effort have received attention. Co-ordination of effort. — ^The co-ordination of effort is an insep- arable counterpart of the division of effort. By co-ordination is meant the prearrangement of a number of separate efforts in such a manner as to produce a definite end. A still more perfect co- ordination is attempted when this end is to be attained in a definite time. Co-ordination in design means that vmit parts are so designed that ultimately they fit together. Co-ordination in division of operations means that when all the operations are performed, certain definite shape and dimension are given to the part. Both kinds of co-ordination are part of everyday practice, and are generally realized with a good percentage of success. Co-ordination of operations in regard to time is, however, a more advanced matter, and in many plants is still in a very unsatisfactory stage. The co-ordination of administrative effort is the most complex and debatable problem of aU. The moment we begin to divide effort, we must also begin to provide for its co-ordination. Adminis- trative effort does not possess the same tangibility or definiteness as do design and operation, because it is wholly made up of spheres of influence of personal authority. Therefore, in proportion as we divide administrative effort (executive functions), its co-ordination becomes more difficult. The more we subdivide authority, the less flexible becomes our organi- zation. There is a point midway between simple delegation of all author- ity and the method of analyzing it into component functions and handing out each of these functions to separate many that is probably the most effective way of dividing administrative effort. The BASIC FEATURES OF ADMINISTRATION 817 limiting conditions to excessive functionalism can, however, already be seen as shown above. Conservation of effort. — ^Efiort requires not only to be divided and co-ordinated but also conserved. The conservation of effort means proceeding along the line of least effort to attain a given end. Remuneration of effort. — The remimeration of effort has very little relation to any of the other manipulations of effort, for these would still be necessary if no remuneration was offered at aU. But as no plants are manned with staffs who work for the mere pleasure of working or "for their health," the question of remuneration is very important. 3. The third principle: The promotion of personal effectiveness. — The ideal plant is one which ^has good equipment, good methods, and good men. It is a comparatively modem discovery that the welfare of the plant and the welfare of its employees are closely connected. By welfare we do not mean, however, the semi-philanthropic ideals which result in model villages and other "social welfare" experi- ments, but only the application of the principle of the "square deal" to working relations during working hours. The Latin poet defined happiness as the possession of a healthy mind in a healthy body. The definition is perhaps a somewhat pagan one, but eminently practical at that. If the plant cannot secure these gifts for its people, it can at least see that all con- ditions shall be favorable, or, at any rate, that they shall meet few conditions in their working hours inimical to either health of mind or body. Remuneration stands, of course, at the head of these conditions, but it is not the only one, nor does it stand unconnected with others. In spite of Thomas Carlyle, the "cash nexus" is far from being the only link between employer and employee, even today — that is, if he is wise. In every considerable organization esprit de corps is always latent, and if it remains latent or is turned into latent, or open, discontent it is a mark of the very worst management. Every human being desires to feel that his work is important. Even the criminal frequently has pride in his criminality. With certain kinds of creative work the mere doing of it is associated with a high degree of personal satisfaction, because the author or the artist is only following out the law of his being. In proportion to the number of elements in a problem the diflScuIty of its solution augments. Personal effectiveness and its 8l8 BUSINESS ADMINISTRATION favoring conditions contain innumerable elements, many of which probably defy human analysis. Therefore we must proceed modestly and cautiously on the path of discovery, and far from attempting to lay down the laws, it will be well if we succeed in observing the interplay of a few of the most obvious conditions of personal effectiveness. To begin with, we must assume physical health. From this it is but a step to recognizing that shop conditions must be such that health can be conserved. This point is beginning to be understood, and modern shops avoid the dirt, darkness, and obscurity, and extremes of cold and heat that a generation ago were accepted as good business. We have progressed so far as to be aware that, on the contrary, they are very bad business. Closely allied is the question of affording facilities for personal cleanliness, dining halls for the midday meal, and other auxiliaries to physical needs of shop existence. The most widespread application of this third principle today is in the safeguarding of machines and operations. The real center of the problem is, however, not on the physical plane, or only incidentally so. The psychological elements are not so obvious, but they are much more important. As in most of the analyses we have made, it is observable that these two groups are nearly independent of one another; that is, their efficiency can vary independently. We may have very bad physical conditions and yet a fine esprit de corps or, on the other hand, a finely arranged modern shop and a sullen, discontented population within its walls. The independence is not quite complete, siace bad physical con- ditions must affect the psychological side to some extent, even though not observable. But, on the other hand, the finest psycho- logical adjustment will not make a dark shop light, or a cold shop warm. Some of the conditions of personal effectiveness are these: The individual must feel leadership; have adequate encouragement and reward; be physically fit and under good physical conditions; and receive a definite allotment of responsibility. These conditions apply not only to the operative force but to all grades of employees. In fact, some of them apply with greater urgency to the man "higher up" than to the actual worker. It is evident that they have, or should have, a considerable and control- ling influence on the arrangements made for the division and co- ordination of administrative effort. BASIC FEATURES OF ADMIKISTRATION 819 A good deal has been made by some of the modem schools of management doctrine of the claim that this or that system creates a fine spirit of co-operation between the plant and its men, but for the most part these daims are merely statements of a desirable end to be attained, and not indications of a method by which it can be attained. The truth is, of course, that no single element of a system, or even a combination of half a dozen such elements, as methods of payment, functionalized authority, etc., more than touch the fringe of the question. Highly organized systems may coexist with fine esprit de corps, but the latter is not dependent on any form of system or organization. Of all the conditions controlling a fine working atmosphere, leadership probably plays the most important part. In warfare men prefer to serve under the general who wins battles, though that entails hardships without number and toil without end. In in- dustrialism, mechanism is a mighty unimportant thing compared with an "old man" who is a bom leader of men. The weakness of one prominent school of management doctrine is that it pretends that it has superseded leadership by substituting therefor elaborate mechanism. Such a contention betrays a complete misapprehension of how men are constituted, and of what the true functions of elaborate mechanism really are. All such mechanism is but a collection of mechanical tentacles or feelers, to enable the con- trolling mind and spirit of the management to be in several places at once. If the personality behind these tentacles is a feeble one, the mechanism will not supplement its deficiencies in the slightest degree. This is not to say that such mechanism is useless; on the contrary, it is essential in the large-scale operations of modern industry, and it is, therefore, highly important that it should be carefully arranged and well balanced, but it is in itself inert and lifeless — a purely passive channel through which the capacities of leadership may exert them- selves. In other words, organization and system are something forced on us by the necessities of the case, and that something has no virtue either in itself, or in any possible combination of its components. It does not add one single cubit to the stature of leadership, though, on the other hand, its absence or its bad arrangement may detract ;onsiderably from the full realization of what would otherwise be possible to leadership. 820 BUSINESS ADMINISTRATION It is more than probable that types of organization depend for their success op their harmony with the particular type of leadership that is endeavoring to make use of them. This would explain why systems are successful in one case and fall down in what appears a similar case. At the present stage of the analysis of management we can do no more than make a note of this. It must always be remembered, however, that organization is a tool, and that it is our duty to fit it to the leader and not try to compress the leader to fit the system. Understanding of the limiting conditions of this part of the problem must be left to future progress to compass. Recapitulation: 1. Experience must be systematically accumulated, standardized, and appUed. 2. Effort must be economically regulated : a) It must be divided. b) It must be co-ordinated. c) It must be conserved. d) It must be remimerated. 3. Personal effectiveness must be promoted: a) Good physical conditions and environment must be main- tained. b) The vocation, task, or duty should be analyzed to deter- mine the special human faculty concerned. c) Tests should be applied to determine in what degree candi- dates possess special faculty. d) Habit should be formed on standardized bases, old or new. e) Esprit de corps must be fostered. f) Incentive must be proportioned to effort expected. It may be interesting to subjoin here a brief comparison of the chief principles put forward by Taylor and Emerson, and show their place in relation to this tentative attempt to formulate the funda- mental and constructive principles of management. Mr. Taylor's principles. — Mr. Taylor's "scientific management" is a collection of axioms and an arbitrary combination of specific mechanisms rather than a body of principles. Among its leading features, time-study, functional foremanship, standardization, plan- ning in advance, and task-bonus may be selected as characteristic. The place of time-study is obviously xmder the first principle, namely, the systematic use of experience. It is a tool for supple- BASIC FEATURES OF ADMINISTRATION 821 menting and extending our experience, and its economic limitations have been discussed under that heading. Functional foremanship is related to the principle of the economic control of efiort, and par- ticularly to the division of administrative eSort. Standardization belongs to the same principle, and its particular niche is under the head of conservation of effort, in an avoidance of complexity where uniformity and simplicity can be maintained. In reforming old industries, standardization usually means cutting down, but in new industries it means the avoidance of unnecessary kinds, sizes, and methods. It means building up along the lines of least effort — either result flowing readily from acceptance of the sub-principle of the conservation of effort. Planning in advance is largely an application of the co-ordination of effort. A certain amount of planning is inherent in every estab- lished routine, because the very idea of division of effort necessarily implies some measure of co-ordination. The necessity for preserving flexibility acts as a limiting condition to planning too elaborated and intensive. Task-bonus is, of course, a special variety of application of remuneration of effort. Its value as a practical device must rest upon the degree to which it actually promotes personal effectiveness. It is one of many methods of remuneration, but the conditions to which this and the other methods apply in the most effective degree have not yet been studied and compared in any serious way. One more point of Taylor's system may be mentioned. It is his claim that the science which underlies each act of each workman is so great that no workman is able to fully understand it (and pre- sumably give it effect) without specific and very detailed guidance from above. This point has been covered by what has already been said on the subject of forming new traditions and habits based on the new knowledge that recent progress has given rise to. This is obviously a case of applied systematic experience. If Mr. Taylor had in mind the use of his slide-rules in making this claim, then it is obvious that the use of such sUde-rules, where they are useful, should become as much a part of the man's working habit as is the use of shifting gears or other devices for controlling the working of the machine. Mr. Emerson's principles. — Emerson's twelve principles will not detain us long. His first principle, "clearly defined ideals," is not especially an industrial principle. It is presupposed that a man 822 BUSINESS ADMINISTRATION knows what he wants or he can do nothing successfully. It certainly comes, however, under the head of systematic use of experience, if we try to apply it practically. His second principle, "common sense," is hardly a principle at all. It is simply one of the basic conditions of all successful human endeavor, and might be ranked with "sound judgment," "perseverance," and other moral and mental attributes. It is not especially industrial. His third principle, "competent counsel," must also be ranged under the systematic use of experience. It means from those best qualified to provide it. His fourth principle, "discipline," comes under the division of administrative effort. One of the prime functions of administration is to secure discipUne, that is, to prevent irregular activities which are not co-ordinated with the useful activities necessary to the work. Idleness, absence, disregard of instructions are examples of unco-ordinated, and there- fore harmful effort. The fifth principle enunciated by Mr. Emerson is "the fair deal." This is a psychological matter belonging to the promotion of personal effectiveness. His sixth principle, "reliable and immediate records," is, of course, the fimction of comparison spoken of, though not the whole of it. The seventh principle, "dispatching," comes under, and in fact is, the practical mechanism of the co-ordination of effort. The eighth, ninth, and tenth principles, "standards and schedules," "standardized conditions," and "standardized operations," have been discussed imder the Taylor system; so with the eleventh, " standard-practice instructions." In these four cases standardization means conformity with the principle of conservation of effort, while standard-practice instruc- tions are a part of planning, and therefore of co-ordination, of effort. Finally we have the twelfth principle given by Mr. Emerson, namely, "efficiency reward," which is simply another phrase for "remimera- tion of effort." These illustrations have been made to demonstrate that as far as can be seen at present the three fundamental principles formulated in this paper, with their derivatives, do actually find a place for aU divisions which modern analysis of industrial working has brought to light. The important point is, of course, that by stating and fixing what are believed to be the three basic and fundamental principles of industrial activity, and deriving the subordinate details from these BASIC FEATURES OF ADMINISTRATION 823 in logical order, a beginning has been made toward finding a truly scientific basis for the art of management, on which all its prime facts can be built up, later, into a coherent and understandable system of theory and practice. 6. MEASURING AND COMMUNICATING AIDS OF CONTROL A. STATISTICAL REPORTS FOR THE CHIEF EXECUTIVE I' The principal objectives of the use of statistics in business are: I. To ascertain inner, controlling, master facts which cannot be ascertained by casual observation of the complex mass of obvious facts which constitute the experience of the business and in which they are contained. The sales manager about to undertake a sales campaign, does not trust to chance or to casual observation more than is necessary. He investigates and analyzes characteristics of the consuming public in a market — estimates among other things their probable demand for and capacity to purchase the particular commodity he proposes to introduce and the kind of advertising methods to which the purchasers of that market are most likely to react. The utility corporation analyzes statistically a growing suburb before it determines its policy of extension and capital invest- ment. The merchandise and credit managers of a wholesale distrib- uting house estimate the purchasing power of a region, through the statistical analysis of crop and other governing conditions, before determining policy with respect to a season's business. The manager of a retail store may analyze sales of different articles by sizes, seasons, etc., in order to determine a quality, quantity, and seasonal schedule of purchases, thereby adjusting orders to probable turnover. 2. To determine standards by which to value and guide current performance and in terms of which to estimate future performance. The merchandise manager of a department store receives each morn- ing a summary sheet showing sales of the preceding day compared with sales of the same day the year before; cumulative sales of the month to date compared with cumulative sales of the corresponding period of the year before and with estimates for the current month; 'Adapted by permission from H. S. Person, "Statistical Control, Including Costs as a Factor in Production, " The Annals of the American Academy of Potitical and Social Science, LXXXV (1919), 144-46. 824 BUSINESS ADMINISTRATION cumulative sales of the year to date compared with those of the corresponding year before, and so on. He can ascertain at a glance whether sales are going well; if they are not he may institute at once a special sales campaign — likewise any business selling commodities or services. A production manager time-studies operations under different conditions and with different materials and methods, and by statistical treatment of the data establishes several standards — standards of conditions, of materials, of methods, of performance. He can then value and guide current performance and can estimate with precision future performance. He may keep his record in terms of imits of output and in terms of units of cost. Cost units are no different from other units in statistical treatment. A telephone company analyzes statistical records of calls and establishes a standard of performance for an operator or for a system and on the basis of these standards can determine whether an operator is efficient or a system is approaching the volume of business for which it will be inadequate, requiring extension or replacement. The electric light or telephone or other similar company by statistical records determines the hours, the days, and other seasons when its various peak loads are bound to occur, and establishes operating policy accordingly. The use of statistics in determining such standards for measuring current performance and estimating future performance is one of the latest developments of the use of statistics in business, offers one of the most profitable instruments for improvement in managerial methods, and unfortmiately involves some of the greatest dangers of misuse. These misuses are prevalent in current practice. The first is the error of so organizing the f imction of recording, classif37ing, and analyzing data as to secure the returns too late for use in controlUng current operations, in which case the statistics are but records of past performance and have so limited a usefulness as to raise the question whether they are worth the cost of collection. The second error is that the imits of enumeration may not be homogeneous, and to the extent that they are not, their value in the control of current practice or of forecasting future performance is invalidated. The third error in the use of statistics in establishing standards and measuring performance is that the units of statistical record may not correspond to the units of the operating processes. This is a common error, for only too frequently the statistical function is not recognized as a production function, and the statistical depart- ment and methods are developed independently of the production BASIC FEATtJRES OF ADMINISTRATION 825 department and methods. The analjrsis of processes by the produc- tion manager for the purposes of operating control is different from that of the statistical department for purposes of record, with the result that the statistics fail to be useful to the production manager. The same authority that approves the establishment of production methods should approve the estabhshment of statistical methods in so far as they are concerned with statistics of operation, in order to insure that the units of statistical record shall be identical with the unit process of production. Furthermore, the only way of assuring such correspondence is to make the "papers" which control produc- tion the original documents from which statistical data are drawn. 3. To establish a series of facts which suggest tendencies or permit comparisons which suggest causal relations, or at least correlation, between series. Time curves may be plotted showing sales — by salesmen, by territories, by articles, etc. By these the sales manager may keep informed concerning the sales tendency in a territory, of a commodity or of a salesman. Comparison of these curves may permit the manager to determine that the salesman whose record of gain is best is concentrating on leaders which yield small profit, while a sales- man whose record for gain is not so good may be selKng a wider variety of articles, thereby laying the foundation of a better long-run business in his territory. Ciirves of wages paid, hours of work, output per man, separations, hirings, cases of discipUne, idle machine time, etc., may be compared and correlations proved — ^i.e., it may be observed that when one curve shows a particular tendency another shows a similar or different particular tendency. The establishment of such correlations permits more accurate forecasting of results and the estabhshment of more dependable policies. There is opportunity for the development of statistics of this kind in every business and the results may be considerable, but in no two businesses is it the same, and each is a field for special study. There are many data pertaining to the social-industrial condi- tions in which a business is carried on, of importance to every manager in determining policy, but to collect, classify, and analyze these would be too great a burden of cost for one business. We have in mind data relating to crop conditions, prices of basic materials of industry, bank clearings, commercial failures, etc., which when consoUdated and compared throw light on general business conditions. Statistics of this sort are now available through statistical service agencies, and it is not necessary for the individual business to secure them. 826 BUSINESS ADMINISTRATION But there remains a considerable number of special "lines" of statistics, especially pertinent to its materials, products, and markets, which a business may profitably maintain. 4. To determine laws governing industrial operations. A com- parison of different Unes of statistics might disclose such relations as to prove principles to which the term "law" could properly be applied. Extraordinarily large numbers of homogeneous data are essential to the establishment of laws. These are seldom available in the records of a single industrial concern. The most noteworthy case of the scientifically precise observation, recording, classification, analysis, and general statistical treatment of industrial data which has led to the formulation of laws, was the study by Mr. Taylor and his associates which led to the discovery of the laws of metal-cutting, which revolutionized that art. The hope of the discovery of laws governing industrial operations depends upon the pooling of the statistical interests of many concerns — co-operative statistics which will yield homogeneous data in great volume. See also p. 180. Wage Incentive: A Wage Formula, p. 319. Some Phases of Market Analysis. IP In the first place, it must be recognized that the reports for the chief executive must be simple and condensed. Too many or too elaborate reports are as bad as no reports. In instances where a properly selected system of reports for the executive has not been worked out and a heterogeneous mass of reports is constantly supplied to him, it generally happens that many of the reports receive scant attention. The executive is too busy with other matters to spend his time in ploughing through a mass of details which could have been presented in summary form. He needs reports prepared especially for his purposes. If these summaries indicate the need of more detailed information from any department, it is always possible for the execu- tive to secure the detailed reports and records from which the sum- maries were prepared. The summaries for the chief executive should enable him to detect irregularities which call for further expla- nation, and to judge tendencies affecting the business as a whole. ' Adapted by permission from M. T. Copeland, Business Statistics, pp. SSi-S4- (Harvard University Press, 1917.) BASIC FEATXJRES OF ADMINISTRATION 827 To the regular reports may be added summaries of the results of any casual tests or occasional experiments in which the executive is interested. The following plan is outlined for purposes of illustration. A system of this sort would apply to a manufacturing company, such as a shoe factory, textile miU, or foundry, which is turning out stand- ardized products. The same general scheme is applicable, with some modifications, to other manufacturing companies and an analogous scheme would apply to a mercantile business such as a wholesale house or a department store. Daily reports: Orders (nimiber and value), production (quan- tity), shipments (quantity or value), and delinquent deUveries (number and value). This last item is added because the mere fact that it is being constantly reported to the executive will tend to have a salutary effect upon the whole organization and help to keep the volimie of dehnquencies at a minimum. A daily record of the first three items should suffice to show the general tendencies of the business from day to day, at least so far as these tendencies are revealed by statistics. Weekly reports: Total orders for the week, total orders to date (since beginning of season or year), unfilled orders, total production for week, total production to date, man-hours (total and percentage of normal) or machine-hours (total and percentage of normal), spoiled or second-grade product (quantity and percentage of total production). Two of these items, it is to be noted, are totals of daily figures. For comparative purposes it is ordinarily desirable to include with these weekly reports statistics for the total orders received during the corresponding week and the total orders to the same date in the preceding year. The production figures may likewise be compared with the corresponding figures for the preceding year, or, if a schedule has been worked out, with the schedule. Monthly reports: Orders for each class of product (total for month, total to date), orders by sales districts (total for month, total to date, and comparison with quotas), returned goods, produc- tion by departments (total and percentage of normal), materials used (total for month and total to date), material on hand, stock in process (for these last three items figures should also be given to show the increase or decrease over the preceding month), and labor turn-over. For several of these items statistics should also be given for the corre- sponding period in the preceding year in order to facilitate comparisons. 828 BUSINESS ADMINISTRATION The monthly reports should be presented in a form which en- ables the executive to compare the results for one month with those for preceding months. In many businesses, where the demand is seasonal j "peak loads" occur regularly in certain months and one of the problems which faces the executive is that of lessening the disturbing influence of peak loads upon his organization. A set of reports such as is outlined above will give an executive a knowledge of the main facts about his business so far as they are represented by statistics. Many of these statistics, as a general rule, can advantageously be presented in graphic form. From these reports general tendencies should be revealed and irregularities detected. The reports should indicate whence more detailed state- ments can be obtained for each period. B. ACCOUNTING AS AN ADMINISTEATIVE AID' Assuming that the matter to be dealt with under the head of accounting has to do with the use of business reports, the next step is to consider from what various standpoints data need to bei gathered and reports prepared. Who are the parties who are interested in the business, and what is the nature of their respective interests? The answer to this question may help to explain the great increase in demand for trained accountants which has made itself felt in the last few years. It is not difficult to see that in a business organized as modern large-scale industry is organized, there will be need for reports for at least two purposes: 1. To furnish each one of the fimctional managers with informa- tion that will enable him to judge how well his subordinates were carrying out their duties, and to aid him in planning and carrying out his own duties in a successful maimer. 2. To furnish the president or general manager with data that will enable him to judge of the success of the work of his subordinate managers and also enable him to determine the poUcy of the business as a whole and correlate the work of his subordinates in such a way as to carry out this policy consistently. While the reporting for managerial purposes is the chief function of accounting, there are also other interested parties to whom reports must be submitted. The various parties who have investments in ' Adapted by permission from A. C. Hodge and J. O. McKinsey, Principles of Accounting, passim pp. 6-11. (The University of Chicago Press, 1920.) BASIC FEATURES OF ADMINISTRATION 829 the business desire to be able to judge of the profitableness of that investment and the desirability of continuing it or of adding to it. Also, it may be found desirable to interest additional investors and thus secure additional capital to extend the business and place it on a more profitable basis. The prospective investor would demand that information be furnished him to give him some idea of the condition and earning power of the business before he would risk his funds by investing them therein. Another class which is keenly interested in the financial and operating health of the business enterprise is the creditors. There are two chief kinds of creditors besides the bondholders who have already been included among the investors, though strictly speaking they are really long-time creditors. The two kinds of short-time creditors are: (i) trade creditors, and (2) commercial banks. Both classes typically require reports setting forth the financial condition of the concerns which apply to them for credit. Some commercial credit agencies and many banks have standard forms upon which applicants for credit are required to make reports. The emphasis in these reports is somewhat different from that in reports to owners and long-time creditors like bondholders, but on the whole they usually contain about the same information as the latter. And neither type of report presents anything like as difficult a problem in accounting as the first class mentioned, namely, the reports for managerial purposes. Such a business as we are discussing may also be of such im- portance, owing to its mere size, or to the nature of its product, that it involves a public interest in the way the business is carried on. There is nothing new or strange about this as applied to the so- called "utilities," such as the common carriers, the gas and electric companies, etc. In the case of these businesses it is recognized that the public is closely concerned and regulation is undertaken with the double purpose of making sure: (i) that the service rendered is adequate and satisfactory in quality, and (2) that it is rendered at a reasonable rate. It is easy to see that no regulatory body could hope to accompUsh much along the lines indicated unless they were furnished with reports showing the amount of investment in the company in question, along with its earnings and expenses. The necessity of reporting to government agencies is not confined to the utilities, however, but extends now to practically everj' busi- ness enterprise. The requirements of reporting for the purpose of 830 BUSINESS ADMINISTRATION the income, excess profits, and war-profits taxes have practically forced even the most insignificant businesses into some sort of record- keeping. To summarize our discussion with regard to the various parties interested in the modern business, and demanding reports prepared from the records kept in that business, we may indicate these inter- ested parties as follows: 1. The managerial staff a) President or general manager h) Sales manager c) Head merchandise man, or purchases manager (in a commercial business) d) Factory superintendent or production manager (in a manufac- tiuring business) e) Comptroller or financial manager /) Other fimctional managers, varying with the organization of the business 2. Investors, present and prospective a) Stockholders, of various classes h) Bondholders, also of various classes 3. The creditors a) Trade creditors b) Commercial banks c) Other creditors 4.' The government a) For regulation of the price 6) For regulation of the quality c) For purposes of taxation d) For purooses of limitation on the amounts of certain materials and services that can be used e) For the protection of those employed — regulation of hours, wages, working conditions, child labor, female labor, etc. Given a certain type of business organization, with relations to investors, creditors, and the pubUc, it is the accountant's ■ task to determine what forms of reports will best serve the various purposes for which reports are needed, to ascertain what data will need to be gathered to serve as a basis for the preparation of these reports, to design a system of records which wUl facilitate the gathering and necessary analysis of this data, and finally to prepare from the data BASIC FEATURES OF ADMINISTRATION 831 thus gathered the reports and schedules determined upon. This task is not an insignificant or an easy one. To prepare him for this task several things are necessary: 1. He must acqmre some insight into the natxure of the problems in the solution of which the business executive may reasonably expect aid from the accountant. 2. He must have some idea of the type of information desirable to aid in solving these problems and of forms of reports in which this information may be presented. 3. He must understand the analysis necessary to make available the desired information and the various possible bases upon which this analysis may be made. 4. He must learn how to design forms of records which will enable him to provide for the recording of individual business trans- actions, evidenced by various types of business papers involved, in such a way as to provide the analysis which has been decided upon as desirable. See also p. 335. Measuring Aids Reflected in the Profit and Loss Statement. p. 475. What the Balance Sheet Shows, p. 482. What the Profit and Loss Statement Shows. p. 595. Measuring and Communicating Aids: Cost Accounting. C. BUDGETARY CONTROL' The planning which may be done in connection with any business is of three kinds: 1. That which deals with the operations of the separate depart- ments of the business, such as production, sales, and finance. 2. That which deals with the co-ordination of the operations of the several departments to the end that a well-formulated program may be made for the business as a whole. 3. That which deals with the determination of future conditions and the shaping of the plans of the business to meet these conditions. The discussion in the following pages is restricted to planning of the second kind. Furthermore, it is restricted to a discussion of the more elementary principles of this method of planning. 'Adapted by permission from Budgetary Control for Business, pp. 1-17. Prepared under the direction of J. O. McKinsey. (Boston Chamber of Com- merce, 1921.) 832 BUSINESS ADMINISTRATION The procedure to be followed by a business firm in the installation and operation of budgetary control is very similar to that of a govern- mental imit. A possible procedure, stated briefly in outhne form, is as follows: 1. Each department prepares an estimate of its "activities" for the budget period. How these activities are stated depends on the nature of the operations of the department. The sales department states the sales it expects to make and the estimated expenses it will incur in making these sales. The production department states the estimated production for the period and the estimated cost of this production. The "service" departments, such as the personnel department, the traffic department, the auditing department, and the office manager's department, state the estimated expenditures of their departments. Because of the interdependence of these departments, some wiU need to use the estimates of other departments in making their estimates. For instance, the production department must know the estimated sales before it can estimate the production necessary to meet the sales demands; the treasurer must know the plans of all the departments before he can estimate his cash receipts and cash disbursements. Consequently a procedure must be set up which provides for a proper schedule of the estimates with reference to preparation and distribution. 2. The departmental heads will transmit the departmental esti- mates to an executive who has supervision of the budgetary program. Sometimes the Comptroller acts ia this^ capacity, while, in many cases, this duty is delegated to a member of the staff of the General Manager or President. This official combines the estimates of all the depart- ments into a proposed budget for the business. This proposed budget should show the estimated receipts from all sources and the estimated expenditures by all departments of the business. 3. The official in charge of the budget program makes a com- parison between the estimated revenues and the estimated expendi- tures as shown by the proposed budget. If the estimated expenditures exceed the estimated revenues, one of the following courses of action must be taken: a) The departmental expenditures may be reduced. In making such reductions a problem arises which is not usually involved in the reducing of governmental expenditures, namely, the reduction of expenditures may result in a reduction of revenues. For instance, if the expenditures of the advertising department are reduced, this may BASIC FEATURES OF ADMINISTRATION 833 result in a reduction of sales. In the same manner, a reduction of the expenditures of the production department may result in a reduction of production with the consequent lack of sufficient goods to meet sales demands which will involve a reduction of revenue from sales. Care must be taken, therefore, in the reduction of expenditures to see that revenues are not reduced correspondingly. b) Additional capital may be secured. If it is not deemed wise to reduce expenditures, plans must be made to secure additional capi- tal with which to finance the excess of expenditures over revenues. The officer in charge of the budgetary program may make recom- mendations with reference to possible procedure, but he is usually not invested with authority to determine the plans to be followed. 4. The proposed budget, as prepared by the officer in charge of the budgetary program, is submitted to an advisory committee, com- posed of the principal executives of the company and presided over by the President. This committee considers the proposed budget and makes such revisions as it thinks necessary. In case the proposed budget involves important changes in the company's policy, or involves significant plans of financing, it may be necessary to submit it to the Board of Directors for consideration. In some businesses all budgetary plans are submitted to the Board of Directors for approval. After the preliminary budget, as prepared by the executive in charge of the program has been approved, it constitutes the working program for the budget period. The budget, as adopted, sets limits upon the expenditures of aU the departments. These limi ts cannot be exceeded without the permission of the Advisory Committee. The budget also sets up a standard of performance for certain departments. For instance, it states the sales that are to be made by tte sales department and the goods which are to be produced by the production department. 5. Each department makes plans which will enable it to carry out its program as outlined under the budget. For instance, the advertising department makes contracts for advertising space; the sales department sets quotas for its salesmen; the production depart- ment through its planning department sets up schedules of production. 6. Proper records are established that the performance of each department may be properly recorded and comparisons made between the estimated and the actual performance. Periodic reports are made to the executive in charge of the budgetary program and are by him transmitted to the Advisory Committee, and in some cases to the Board of Directors, which show a comparison between the estimated 834 BUSINESS ADMINISTRATION and the actual performance of each department for the period. Based on these reports, the Advisory Committee, or Board of Directors, may make such revisions of the budgetary program as it may deem desirable. Budgetary control, if properly executed, accomplishes the follow- ing resxilts: 1. Co-ordination of sales and production,' (a) by estimating sales possibihties and planning production to produce the goods necessary to meet these possibilities; (b) by limiting production to the amount necessary to meet probable sales demands as shown by the sales esti- mate and thus preventing an excess inventory of finished product. 2. The formulation of a profitable sales and production program, (o) By determining the lines of goods most desirable for a well-rounded sales program and adapting production, in so far as is consistent with (b) below, to produce the necessary quantity of these Unes; (b) by determining the lines of goods most desirable for a well-rounded production program and planning sales, in so far as is consistent with (a) above, so as to sell the amount of these lines necessary to secure economical production. 3. Proper control of expenditures, (o) by requiring the preparation by each department head of an estimate of the expenditures of his department during the next budget period ; (6) by requiring the sub- mission of these estimates to the Advisory Committee (a committee composed of the chief executives of the business) for consideration and aj^proval; (c) by the prohibition of any expenditures in excess of lie departmental estimates without the permission of the Advisory Committee; (d) by requiring the submission of monthly reports showing a comparison between the actual expenditures for the month and the estimated. 4. Formulation of a financial program, (a) by the estimating of cash receipts based on the sales program and the estimate of collec- tions; (b) by the estimating of cash disbursements based on the production, purchasing, plant and equipment, and departmental expense budgets; (c) by determining the excess of disbursements over receipts and the preparation of a financial program which will secure funds to provide for this excess. 5. Co-ordination of all the activities of the business, (a) by the preparation by each department of an estimate of its activities during 'The points here brought out with reference to co-ordination of sales and production in a manufacturing business apply as well to co-ordination of sales and purchases in a mercantile business. BASIC FEATURES OF ADMINISTRATION 835 the budget period ; (b) by the stud5dng of these departmental estimates by the departmental executives and the Advisory Committee; (c) by the modification of the activities of each department to the end that they co-ordinate with the activities of each other department; (d) by the preparation of an estimated balance sheet and an estimated state- ment of profit and loss showing tht anticipated results of the operations provided for by the budgetary program; (e) by the formulation of plans and policies which will make possible the attainment of the estimated results as shown by the financial reports prepared in (d) above. The scope of the budget program is indicated by the statement of its purpose. It includes all the a.ctivities of the business. It involves the following: 1. Preparation of an estimate of:' (a) sales, (b) purchases, (c) production, (d) labor cost, (e) manufacturing expense, (/) plant and equipment cost, (g) administrative expenses of each department, (h) seUing expenses of each selling unit, {i) funds required to finance these estimates. 2. Co-ordination and approval of these estimates by a central authority. 3. Monthly reports making possible control and revision of the estimates as approved. It is as essential that the limitations of budgetary control shall be understood as that the benefits which may be derived from it may be realized. These limitations may be stated as follows : 1. The budgetary program is based on estimates. Estimates cannot be made which are entirely accurate, and consequently they must be used with judgment and not followed arbitrarily. It is also necessary that provision be made for frequent revisions of these esti- mates as actual performance shows variations from the estimated performance. 2. Budgetary control cannot take the place of administration and management. It is not its purpose to deprive executives of the necessary freedom of action which is essential to progressive manage- ment. Its purpose is to provide the information on which adminis- trative decisions and administrative control are based. 3. Budgetary control cannot be perfected immediately. The procedure called for by the budgetary program is usually new to • The estimates suggested here are those required by a manufacturing busi- ness. The estimates for a mercantile business can be easily determined by analogy. S36 BUSINESS ADMINISTRATION executives, and it takes time to train them to properly make and use estimates of future plans. Too much should not be expected at the beginning from the installation of budgetary control. It is impossible to make any estimates or plans for budgetary control until the length of the budget period is determined. The length of the budget period is governed by a number of factors, the most important of which are, (a) the nature of the business with particular reference to the length of its turnover period, (b) the method of financing employed, (c) the market conditions, (d) the adequacy and completeness of the data with reference to past operations. Before it is possible to proceed with the operation of a budgetary program, it is necessary to formulate an organization by which its operation wiU be effected. The budgetary program contemplates the co-ordination of the activities of all the departments into a pro- gram for the business as a whole. It is obvious that it is not desirable for this co-ordination to be undertaken by any one of the departments which is to be subject to the control exercised in its accomplishment. This responsibility must be vested in an authority which is inde- pendent of any department. Consequently control of aU matters pertaining to the budgetary program is usually vested in the President of the Company. In most cases he delegates a considerable part of his authority to a staff assistant who has direct control of budgetary plans and procedure. To provide a central control of budgetary plans and to bring about co-operation and co-ordination there is often created an Advisory Committee composed of the heads of the principal departments and presided over by the President. This Committee must approve all estimates before they become effective. The responsibility for the preparation of the departmental estimates is placed upon the heads of the departments. In some companies after the budget is approved by the Advisory Committee it is submitted to the Board of Directors for consideration and approval. The duties of the President, the Advisory Committee, the Staff Assistant to the President, and the Departmental Heads with refer- ence to the budgetary program may be summarized as follows: a) The President. The President of the company has direct control over all matters pertaining to the budgetary program. All officers to whom authority is delegated by him are acting as his agents and are responsible to him for the proper performance of their duties. In all cases of disagree- ment between departments with reference to the co-ordination of estimates, the decision of the President is final. BASIC FEATURES OF ADMINISTRATION 837 b) The Advisory Committee. Under the authority and direction of the President, the Advisory Committee considers all departmental estimates and makes such changes and revisions as it thinks desirable. No estimate is effective until it has received the approval of the Advisory Committee. In the consideration of the departmental estimates the Advisory Com- mittee may call on departmental heads to explain the reasons for any variations in their estimates from the performance of past periods. The committee receives through the Assistant to the President monthly reports showing comparisons of the performance of the past month with the estimated performance. On the basis of these reports it may make revisions in the budgets for the remainder of the period if it deems such revisions necessary. c) The Stafi Assistant to the President. Under the authority and direction of the President, the Staff Assistant to the President has general control and supervision over the preparation and execution of the budgetary program. His general duties may be classified under the following headings: (i) To receive from the departmental heads the monthly estimates discussed above; (2) to transmit these estimates to the Advisory Committee with such recommendations as he may think necessary; (3) to receive from the Advisory Committee the estimates as approved and to transmit these to the departmental heads; (4) to receive monthly reports prepared by the operating departments or the General Auditor's Department showing the departmental performance for the month; (5) to transmit monthly reports to the Advisory Committee showing a comparison between the actual performance and the estimated performance for the month for each department and to make such recommendations as he may deem necessary; (6) to transmit to departmental heads any revisions in the original estimates which have been made by the Advisory Committee; (7) to recommend to the President, and the Advisory Committee, such changes in the budgetary procedure as he may deem desirable. He has the impUed authority to do all things which are necessary to the proper performance of these duties. d) The Departmental Heads. These executive heads of the various departments are responsible for the preparation of the estimates of their departments. Any recommendations which any departmental executive desires to make with reference to changes in budgetary procedure must be transmitted 838 BUSINESS ADMINISTRATION in writing to the Assistant to the President. He will refer these recommendations to the Advisory Committee. As previously explained, after the budgetary program is formu- lated it is necessary to have periodic reports showing the performance of each department that a comparison may be made between the estimated and the actual performance. It is necessary, therefore, that two things be done: (a) reports desired be determined, (6) responsibility fixed for the preparation of these reports. After the departmental estimates have been approved, it is necessary for each department to formulate plans to carry out its estimate. The method by which this is done will vary with the different departments. For instance, the sales department may find it necessary to set up quotas for the different sales units and for salesmen at each unit in order to secure the amount of sales called for by its estimate. The production department wiU find it necessary to set up balance of stores records that the inventory schedules called for by the production budget may be maintained, and to operate a planning department that its schedule of finished goods may be enforced. Other departments will find it necessary to use similar means to carry out their budgetary program. See also p. 337. Measuring Aids, Quotas and Budgetary Control, p. 520. Budgeting for Cash Receipts and Disbursements. D. STANDARDIZATION [The student will do well to read this selection with the issue, "Should a business have a division or department of Standards and Records?" before his mind. If so, should it be responsible for "measuring and communicating aids" ?] I' The forward march of civilization has only been rendered possible by the adoption of standards. Standards passed on from father to son and from generation to generation represent the ratchets on the wheels of progress, and have enabled each forward step painfully and slowly made, to "be maintained. Without the privilege of drawing on the accumulated experience of the race as represented by its standards, each individual would be compelled to start in right at the beginning and progress would have been impossible. ' Adapted by permission from G. C. Harrison, Cost Accounting to Aid Production, PP- 33~34> 39-40- (The Engineering Magazine Company, 1921.) BASIC FEATURES OF ADMINISTRATION 839 Whereas the savage had very few and simple standards, as civili- zation developed standards increased in tremendous degree both as regards number and complexity, and in modern life the standards covering the multitudinous activities of human kind are of incalculable number. Until recent years the standards followed by the various trades were largely rule-of-thumb or traditional knowledge, and as Mr. Taylor stated in the Principles of Scientific Management, " instead of having only one way which is generally accepted as a standard, there are in daily use, say, fifty or a hundred different ways of doing each element of the work." In the management end of industry we also find a variety of standards or ideals, many of which are wholly false or only partly true. In some concerns the main standard appears to be a large tonnage, and where this idea is most rampant, time and time again it win be found that at the close of the month light but highly profit- able work wUl be relentlessly sidetracked, no matter how urgently required by the customer, in order to manufacture some relatively unprofitable but heavy material for which there is no immediate demand but which wiU enable the month's tonnage production to appear in a favorable light to the directors. We are aU familiar with the wild scramble in many shipping rooms at the close of the month to get out goods in order to swell the month's shipments. The fundamental idea underlying scientific rrianagement is the substitution of definite, scientifically determined standards for all these nebulous ideals, and clearly defined methods of reaching these standards for haphazard and rule-of-thumb methods. This obviously applies to all phases of scientific management such as time and motion study, standard practice instructions and planning and dispatching methods. Standards and records are as inseparable ideas as latitude and longitude, debit and credit, east and west. Standards without records are as ineffective as firing at a target would be if the marksman had no means of determining whether he was making hits or not, and, vice-versa, records without standards would be equivalent to carefully recording the result of every shot but giving the marksman no definite target at which to aim. With standards and no records we are in the position of a traveler with a time table and no watch, while conversely with records without standards we are in the position he would be with a watch but no time table. 840 BUSINESS ADMINISTRATION A very common illustration of standards without records is presented by the concerns who issue many rules and instructions but provide no systematic method of ascertaining whether such instruc- tions are followed, with the inevitable result that they are "more honor 'd in the breach than the observance," and in the innumerable systems which are operated in a way far different from that originally intended. A further illustration of the use of records without standards is that of the man who keeps the most minutely detailed account of his personal expenditures, but has no budget to work to, with the result that having no definite scheme of saving, his accounts do not mate- rially aid him in this connection, but merely provide him with the sad history of where his money went. Numerous illustrations of standards combined with records pre- sent themselves, among which may be mentioned: taximeters which show the actual amount earned figured at a standard rate for a certain distance; the time book on which a red line is ruled at the opening hour, all persons signing above the red line being on time and aU after late; or the recording time clock which shows in printed red ink figures all cases of tardy arrivals, or variations from standard. The budget systems of finance when properly carried out are perfect examples of the effectiveness of combining standards and records, the standards being the appropriations made for the various purposes and the records showing the extent to which the actual payments made conform to these standards. H' The Century Dictionary defines a "standard" as "that which is set up as a unit of reference; a form, t3rpe, example, instance or combination of conditions accepted as correct and perfect and hence as a basis of comparison; a criterion established by custom, public opinion or general consent; a model." The above definition, almost but not quite, gives the significance of the word "standard" as it is used in connection with scientific management. If we change it to read: "That which is set up as a form, type, example, or combination of conditions accepted as correct; a criterion, established as a result of scientific investigation," we should have a better definition of the term in the limited sense in which it is " Adapted by permission from H. K. Hathaway, " Standards," BuUetin of the Taylor Society, V (1920), 12-13. BASIC FEATURES OF ADMINISTRATION 841 used in this paper. Inasmuch as it is the destiny of mankind to constantly advance and improve I would add, parenthetically, "for the time being," or "representing the present stage in the development of the art." We may classify the standards of scientific management imder the following headings: Equipment: including machines, tools or implements, facilities for handling, transporting or storing materials; materials; methods; accomplishment; product. Standards of accomplishment are dependent upon standards of equipment, materials, methods and product, ni' To operate an office efficiently, it is necessary to make critical analysis of results and purposes, to maintain a certain standard of production or know why it does not exist, and to promote plans working for efficiency. Several years ago The Curtis Publishing Company began work of this nature. It was soon apparent that it could be most efficiently handled by staff specialists. A group known as the Standardization Division was formed. These people spend their time exclusively in the analysis of work, planning of new methods, determination of standards, working out and promoting of prize offers, establishment of schedules, and in other similar activities. The speciaUsts work in all departments, both office and factory. In this way we have one department working together for the good of the Company as a whole, working with the Jsnowledge of what changes wiU mean in other departments, and working for general efficiency, rather than a number of departments working separately and often blindly in so far as interdepartmental relationship is concerned for the improvement of method and quality, or for their own individual cmrtailment of expense. This method may lead you to suppose that our Standardization Division has direct authority over our management. This is untrue. The division has no authority whatever. They are given free foot for unlimited investigation, our cost records are open to them, our company problems are theirs — they have the right of appeal. It is the job of the standardization force to "sell" their plans to the management by demonstrating the practicality and economy of them. 'Adapted by permission from W. D. Fuller, "Application of Scientific Prin- ciples to Office Management," Bulletin of the Taylor Society, IV (1919), 8-9. 842 BUSINESS ADMINISTRATION In this way, the activities of our managers are in no way hampered, their authority is in no way curtailed, while at the same time the standardization force is kept keyed up to a high standard of endeavor. This method is not the quickest in its action. Evolution never works as rapidly as revolution, but its results are lasting. Many things can be accomplished in this pleasant way without recourse to the doubtful expedient of revolutionary change. Our plan has been in effect eight years. The results which have been obtained, the better work which is being done, and the savings which have been made, have won the hearty accord of even those executives who were formerly unsympathetic with the plan. See also p. 555. Standardization in Manufacturing. p. 333. Measuring Aids May Result in Expense Stand- ards, p. 520. Financial Standards. E. ECONOMIC SELECTION' Economic selection is choice based solely on long-run 1 ast cost. A wooden sidewalk may cost less to build than one of concrete, and yet not cost less in the long run, for the wooden sidewalk will require repairing and rebuilding much oftener than the concrete. To ascertain which sidewalk will cost the less "in the long run" is to solve a problem in economic selection. So, to determine which promises to be more economical, to build the railroad around or over the hill at a low first cost and with a high-annual operating cost, is a problem in economic selection. The frequency of the occurrence of the problem of economic selection may be illustrated by an example taken from transporta- tion service. Let us say that transportation service is required between two towns. Among the structures which can be made to perform this service we have the traU, highway, canal, railroad, etc. At this point is met the problem of making the economic selection from the foregoing possible structures. Let us assume that the railroad is determined to be the most economical structure for the stated service. The next step is to choose the most economical route for the railroad between the two towns. Assume the choice made and ' Adapted by permission from J. C. L. Fish, Engineering Economics, pp. 1-3. (McGraw-Hill Book Company, 1915.) BASIC FEATURES OF ADMINISTRATION 843 the center line of the raUroad staked out. After the railroad is located there arise the problems of selecting the most economical structures for its major parts. For example, the service to be per- formed by one part of the railroad is to support the track as it passes over a valley and stream therein. Shall this part of the railroad be a trestle or a bridge ? Let us suppose that a bridge is ascertained to be the more economical. Next it is necessary to consider the bridge by itself. It may be built of wood, of stone or concrete, or of steel, or of a combination of any two or more of these; and it may be of any one of several types. Suppose that on making economic compari- son, a steel span with concrete abutments is chosen. Next the atten- tion is directed to the various parts of the bridge, each in turn, and economic selection is made for each part. So the work of making economic selection goes on, even to choosing the footing course of the. abutment and the paint which shall be used to cover the steel span. Let us imagine, now, that all parts of the raihoad have been selected and designed in detail. After this comes the construction. There are different methods of constructing each component structure. For example, the earthwork can be executed with plows and scrapers drawn by horses, or with steam shovels and cars, or otherwise. For each part of the earthwork one of the possible methods must be selected. Finally, the railroad must be operated, and economic selection must be made from the different feasible ways of conducting the operation as a whole, and from the various ways of conducting each component operation. In the foregoing illustration of the frequency of the occurrence of the problem of economic selection we have omitted to mention the fact that before any structure can be properly selected from a number of feasible structures the major parts and characteristics of each must be selected tentatively and in a general way for the purpose of estimat- ing cost. The omission of descriptions of advance tentative selections does not, however, in any way impair the illustration. Wherever it is possible to devise two or more differing structures capable of performing a stated service, or to make two or more designs for a selected structure, or to devise two or more ways of constructing a designed structure, or to devise two or more ways of operating a completed structure to perform the stated service, the problem of economic selection arises. This is true in the case of small as in the case of large structures. 844 BUSINESS ADMINISTRATION It would appear that the principles of economic selection are an important part of the knowledge which is indispensable to owners or their executives and to all others who hold responsible positions in connection with the choice, design, construction, or operation of structures. See also p. 93. How to Strike a Balance in Location Factors. F. THE RANGE OF TIME AND MOTION STUDY' In its original conception the Taylor system of scientific manage- ment seems to have been literally a system of shop management con- cerned primarily with the problem of efiScient manufacture or productive efficiency in the shop. The problem was to secure the most effective character and use of machinery, tools, and materials, the most effective material and organic arrangements in the shop, and the full co-operative activity of the workers. As time passed, however, the character, scope, and significance of scientific management seem to have steadily enlarged in the minds of Mr. Taylor, his immediate followers, and his imitators, so that when the term "scientific management" was definitely adopted by adherents of Mr. Taylor as descriptive of his system, the intent, apparently, was to emphasize claims for it much broader and more fundamental than those originally made — claims which seem to warrant the following siunmarization: 1. Efficiency, not only in the mechanical aspects and as it depends on organic arrangements and human effort in the shop, but with respect to the functions of a going industrial establishment, is gov- erned by fundamental natiural laws, not made by man and unalter- able by man. And not only this, but the direct relation between productive effort and human welfare, as well as the distribution of the products of industry, is likewise governed by such natural and unalterable laws, i.e., the specific character and amount of work which any laborer can and ought to do, and the proportions of the product which ought to go to management and men and to each individual workman are thus governed. 2. Scientific management has discovered the means by which the facts underlying these natural laws, which govern production in the ' Adapted from R. F. Hoxie, " Scientific Management and Labor Welfare," Journal of Political Economy, XXIV (igi6), 833-43. BASIC FEATURES OF ADMINISTRATION 845 larger sense — ^productive welfare and distribution — can be deter- mined and established as objective, matter-of-fact data, quite apart and divorced from human judgment, opinion, or will; i.e., the means by which all productive arrangements and processes, and all the relations between managers or employers and workmen, can be reduced to an exact scientific basis of objective fact and law — a, means, in other words, in the application of which human will, judgment, and cunning cannot enter so as to affect the result, and which, there- fore, will necessarily reveal the truth in regard to the most efficient arrangement and method, the kind and amount of work which any man can and ought to do, and the share of the product which every factor and every individual ought justly to receive. This means is time and motion study. "Scientific management," declared Mr. Taylor, "attempts to substitute in the relations between employers and workers the govern- ment of fact and law for the rale of force and opinion. It substitutes exact knowledge for guesswork and seeks to establish a code of natural law equally binding upon employers and workmen." In time and motion study it has discovered and developed an "accurate scientific method by which the great mass of laws governing the easiest and most productive movements of men are investigated. These laws constitute a great code which, for the first time in industry, completely controls the acts of the management as well as those of the workmen." But, apparently, according to Mr. Taylor, time and motion study not only makes possible the ruling out of force and opinion from indus- trial affairs, a relatively just distribution of the product, and the pro- tection of the worker's welfare at all points, but, coupled with the fundamental natural laws which govern all industrial affairs and relations, it actualizes this possibiUty. It makes possible the assignment of each worker to the task for which he is best fitted, and the safeguarding of him against over- fatigue and over-exhaustion; and because of this same harmony of interests it turns the possibility into reality. It not only makes pos- sible the removal of the higgKng for advantage and the rough and arbitrary discipline of foremen and employers, but it actually elimi- nates these things. "Scientific management," declared Mr. Taylor, "democratizes industry. It gives a voice to both parties, and substitutes the joint obedience of employers and workers to fact and law for obedience to personal authority." "No such democracy has ever existed in 846 BUSINESS ADMnSflSTRATION industry before. Every protest of every workman must be handled by those on the management side, and the right or wrong of the com- plaint must be settled, not by the opinion of the management or the workman, but by the great code of laws which has been developed, and which must satisfy both sides." It gives "to the worker in the end equal voice with the employer. Both can refer only to the arbitra- ment of science and fact." There can be Uttle doubt, then, that Mr. Taylor looked upon scientific management as trxily scientific in the sense that its productive and distributive policies and methods are based upon unalterable laws of nature and upon facts discoverable, but unalterable, by the management or workmen concerned. In this his followers appear to have been well in accord with him. Moreover, it is evident that time and motion study is the principal means upon which they rely for the discovery of this scientific foundation of scientific management. Time and motion study, therefore, must he regarded as the chief cornerstone of scientific management, its main distinguishing feature, and the point of departure for any understanding andjtidgment of its claims, especially with reference to its scientific character and labor welfare. In its narrower conception, and as understood by labor, generally, time and motion study is looked upon simply and solely as an instru- ment for task-setting and efi&ciency-rating, used thus, in the main, to determine how much can be done by a workman engaged in a given operation, within a given time, and, therefore, to set the maximimi task accomplishable by him and the group of laborers to which he belongs. Labor thus pictures a cowering workman over whom stands a labor driver. In one hand he holds a split-second watch. In the other he has a sheet of paper on which are set down the elementary motions of which the job is made up, with spaces opposite each in which may be recorded the time taken by the workman to make each motion. The watch is started. The workman jumps to his task. The time taken for each motion involved in the doing of the job is recorded. The operation is then repeated enough times to satisfy the observer that he has discovered the shortest time required by the worker to make each motion. These shortest times are then siumned up as the necessary time, and this, with some allowance for human necessities, breakdowns, and delays, is set as the task time. This, I say, is labor's habitual conception of time and motion study. It is supposed to be employed only or mainly for the purpose of task-setting, and it is assumed to be used to set the minimum time BASIC FEATURES OF ADMINISTRATION 847 or the maximum task to which the laborers can be forced. This view of time and motion study, however, accords ill with the later and enlarged conception held, apparently, by Mr. Taylor and by many, if not all, of the present members of the scientific-management group. Judged by this standard, it is erroneous in two very essential respects. In the first place, time and motion study, according to this later conception, when used for task-setting purposes, is not designed to discover and set the minimum time or the maximum task, but the scientific time or task, i.e., the reasonable or just task, considering the technical conditions, the character and training of the workmen, the element of fatigue, etc. In the second place, time and motion study, in its larger concep- tion, is not merely or perhaps mainly a method used for task-setting and efficiency-rating. On the contrary, in the light of the recent claims based upon its use, made by Mr. Taylor, and of the problems to the solution of which it is apparently being applied by progressive scientific managers, time and motion must he conceived as little less than a universal method of attempted accurate industrial analysis, usable with or without the stop-watch to discover at almost every step of the productive and distributive process, not only the most effective material, organic, and human arrangements, adaptations, and com- binations, but the reasonable demands which can be made upon the intelligence and energy of the management as well as the men, and the just apportionment of the product to all the factors and indi- viduals concerned. According to statements made by scientific managers, this process of analysis, or time and motion study, in the larger sense, should where possible begin with the determination of a site for manufacture. The really scientific manager, starting out de novo, will consider all available sites with reference to the time and motion expenditure, determined by actual experiment, necessary in securing an adequate supply of proper materials, in the going to and from the shop of the numbers of the different classes of workmen needed or likely to be needed, in the shipment and marketing of the product, etc. Having in mind the character of the productive process, and the most efficient productive arrangements possible, he wiU then, with regard to the greatest possible saving of waste time and motion, work out with the utmost care and with reference to future expansion the plans for the construction of his plant. This will involve a most careful study of all the general 848 BUSINESS ADMINISTRATION internal arrangements and processes, the most efl&cient methods of planning the work to be done and of routing it through the shop so that there may be no delay in transmitting orders, no waste carriage of materials and partly finished products, no lost time in the assembly .room wa.iting for delayed parts. With the same ends in view, and in the same manner, he will also determine the most effective placement of machinery, the storage of tools and materials, and the location of the various elements of the office force. The shop constructed and the machinery installed, he will apply time and motion study in an endless series of experimental tests to determine what possible improvements can be made in machinery and its operation, and in the tools, fixtures, materials, and specific processes of work. The best feed and speed for each machine, with reference to the different grades of materials, will then be established. The different jobs or processes will be analyzed and re-analyzed, and their elements experimentally combined and recombined, the tools and fix- tures changed and rearranged, and all these variations timed and retimed in an effort to discover the most efficient productive combina- tions and methods. This time and motion study analysis will extend, it is thus claimed, to every feature and all organic relationships of the mechanical process of production. But it will not stop there. It will be extended to cover the managerial functions and the office work. The duties of the managers, superintendents, and especially of the shop foremen will be analytically studied and reorganized. As a result, the work of the old managerial functionaries will be spUt up and new depart- ments with new department heads estabUshed. In place of the single old-line foreman, for example, charged with hiring, discipline, dis- charge, apportionment of work, the setting up of jobs, the determina- tion of speed and feed of machinery, repair of machinery and belting, inspection of the product, etc., there will be a separate head charged with the selection, hiring, adaptation, and discharge of workmen, and a series of fimctional foremen, each responsible for a particular duty, e.g., a gang boss, a speed boss, a repair boss, an inspector of work, an instructor, a route clerk, a time and cost derk, a disciplinarian. The methods of storage and delivery of tools and materials, the dis- patching of orders from the office to the shop, the purchasing of materials, the marketing of products, and all the methods of account- ing wiU likewise be subjected to time and motion study, in this larger sense, with a view to discovering the most efficient means and methods. BASIC FEATURES OF ADMINISTRATION 849 All this and much more is time and motion study in the larger con- ception of the term, which seems to be sanctioned by progressive scientific managers. And not until, through this broader time and motion study, a larger degree of improvement and standardization of the general productive process has been well advanced, should the scientific manager, according to these experts, enter upon time and motion study in the narrower sense, i.e., putting the time-study men, with stop-watches, over the workmen engaged in a particular job for the express purpose of setting tasks and rates of wage payment. Nor, under the direction of this reaUy scientific manager, we are told, will this part of the time and motion study correspond to the conception of it held by labor. On the contrary, it wiU be done in the same spirit and with the same care that we have noted above. It win endeavor to discover by repeated analysis and experimental timing the best character, combination, and arrangement of tools, materials, machinery, and workmen, the most efiScient and convenient Ughting, heating, and seating arrangements for the workmen, the proper period for continuous operation by them, considering the element of fatigue, the rest periods needed, their most efficient character, combination, and sequence of motions, etc. Moreover, these particular job experiments will not be confined to one man, or to a few of those who are to accomplish the task. Many men wUl be timed with the idea of discovering, not the fastest speed of the fastest man, but the normal speed which the group can continuously maintain. If necessary, hundreds and perhaps thousands of time and motion studies will be made to determine this, before the task is set and the rate established. And whenever a new or better method or combination has been discovered by the time and motion analysis, which is supposed to continue even after the task is set, the whole process of careful and extended timing for task-setting will be repeated, and new tasks and rates established reasonably conformable to the new conditions. Finally, as an integral part of this broader time and motion study, all the results secured by it will be continuously and systematically filed as a permanent asset and guide to future action. Thus conceived, time and motion study appears to be considered a method of analysis appUcable to practically every feature of the productive and distribu- tive process, considered apart from its piurely financial aspects, a process of analysis apphed continuously throughout the life of the estabUshment. And the scientific management based upon it is &5° BUSINESS ADMINISTRATION conceived to be a perpetual attempt to discover and put into operation the new and continuously developing technical, organic, and human arrangements, methods, and relationships constantly revealed by it to be more efficient and more equitable. That this broader conception of time and motion study as the essential basis of scientific manage- ments exists, not as a mere dream, but as a practical ideal striven for with the confident hope of realization, the writer can attest from his experiences in the best class of scientific-management shops. For other selections bearing upon Measuring and Communicating Aids of Administration, see pp. 192-226. Measuring Aids of Personnel Administra- tion, pp. 325-40. Measuring Aids in Sales Administration, pp. 370-74. Measuring Aids in Purchase Administra- tion, pp. 581-602. Measuring and Communicating Aids in Production, p. 149. Education and Training. 7. THE NEW INDUSTRIAL LEADERSHIP' If we consider the industrial history of the United States for the long span dating backward from this year of grace to about 1840, we can distinguish at least three great movements which have occupied the minds of men in industry. The first period was still engaged in the process of setthng the country, as previous decades had been. In section after section of the newly opened West there was required that basic equipment which is the foundation of modern civilized life. Our nation's first industrial task was the stupendous one of clearing the farms, and of building the common roads, and of estabUshing villages and cities, and of opening outlets for the marketing of surplus products. The victory was not to mere parsimony and patience, and the weaker economic virtues, but to industry animated with boldness, planning touched with imagination, and sacrifice sustained by a vision of a new state and a fairer civilization. 'Adapted by permission from E. D. Jones, The Business Administrator, pp. 1-2 1. ((The Engineering Magazine Company, rgi4.) BASIC FEATURES OF ADMINISTRATION 851 The second industrial movement of the period we are consider- ing centered upon the task of providing an adequate mechanical equipment. Its characteristic achievement was to develop inanimate sources of power, and apply them in a thousand new ways to lift the burden of physical toil from human shoulders. Accordingly, the second act transfers the scene of chief significance from the field to the factory. The first billet of Bessemer steel was produced in America in a little furnace at Wyandotte, near Detroit, in 1864. The first band-saw was brought from Paris to New York in i86g. The first middlings purifier essential to the modern milling process was built in Minneapolis in 1870. The twine-binder was invented in 1874. In the wonderful centennial year of 1876, there was given to the country the telephone, the incandescent light, the typewriter, and the first steel-frame building. In the middle years of the seventies the hermetical sealing and the refrigeration of fruits and meats was achieved, so that a great additional range was possible for the dietary of the nation. And now that these achievements are no longer in their origins, and that the issues called up by them are recognized as virtually settled, and as there is no longer any threatening opposition to try men's souls in the process of establishing and defending them, a third industrial problem can be seen to emerge and become the center of interest. This is the question of business administration. This administrative phase of our industrial evolution has, of course, aheady a history of value; and this history is concerned with the doings of a very interesting generation of men. For years the United States, with its enormous domestic market, its ample capital, its freedom from tradition, and its colossal daring, has been perhaps the most favorable spot in the world for trying out new ideas of organization and management. The executives who first took advantage of these conditions were, for the most part, self-made men. We often refer to the more noted of them as captains of industry. The majority were individuals of pronounced motor temperament and endowed with exceptional talents: men capable of fighting their way upward and of gaining the advantage in a rough- and-ready struggle for the survival of the fittest. These men seized leadership by right of ability, but, technically speaking, they secured it as the perquisite or privilege arising from the ownership of great fortunes. They hved in a day when men generally managed their own capital. In many cases they were the 8S2 BUSINESS ADMINISTRATION first to build up institutions of great size in the lines of industry with which they were connected. Their poUcies were like those of most conquerors — direct, simple, and intensely personal. Living in a highly individualistic and self-confident society, they worked out rules of action, each man for himself. As the attention of a new community naturally centers strongly upon the process of growth, many of them were builders rather than administrators; more comfortable with tests of excellence which were physical rather than intellectual, private rather than social. As their communities had broken sharply with European traditions, and had as yet little appUcable history of their own, they entertained a poor opinion of lessons drawn from the past. As they were devoted to Uttle else than industry, they saw few analo- gies between the administration of business affairs and the adminis- tration of other forms of social action. Being so much in a world of their own creation, they looked upon the administration of industrial enterprises purely as a process of each man minding his own business. Their organizations were, therefore, mere extensions of themselves, usually bearing their names and ruled as their households might be. Enterprises so conceived were incapable of serving as a rall)dng-point for the loyalty of the various classes of persons who might become connected with them. The owner alone was fully energized. He carried staggering loads of responsibiUty, driving affairs forward by individual energy rather than by the true administrative process of evoking and guiding the energies of others. Whatever reservations have to be made in praise, the courage and independence of these men must be recognized as splendid. They possessed a thorough mastery of details, as a result of the small beginnings from which they started. They had the ease and speed of decision due to technical mastery and early imposed responsibihty. They were preserved from errors of theory by a wholesome and inti- mate sense of reality. The names of the leaders of this generation of giants will long remain household words in America. Since the ranks of the first generation of administrators have begun to be seriously thinned by death, a notable change has been taking place in the character of our industrial leadership, and in the conditions under which it is exercised. The growth of business into units embracing, under a single administration, hundreds and even thousands of stockholders and employees and uniting many minds in operations which require long periods of time for their com- BASIC FEATURES OF ADMINISTRATION 853 pletion, call for searching tests of performance, and exact and just methodp of apportioning rewards, so that the wills of many persons can be brought into energetic concurrence. These changes are transform- ing the business administrator from a mere owner of private property into a responsible agent, exercising delegated authority. They increase the element of trust or responsibility or service, for the measurement and valuation of which a new outfit of standards is urgently needed. The occupant of this position will be the central pivot upon which a vast number of human relationships will turn. Upon these men will rest a sort of trusteeship to preserve the property intrusted to them, and a demand of leadership to guide and guard their employees. Upon them will also rest a general responsibility to the pubUc to help this day to Uve its Ufe, and this generation to make its contribution to progress. The whole situation conspires to create an opportunity for a new race of executives, which shall justly appreciate the various classes of responsibility resting upon it. The old ambition to build up big business units, and to accumulate great fortunes, is now no longer so fresh and full of zest as it once was. It does not get the response, and call out the best men, as in the old dramatic, careless, buccaneering days. To simply repeat what the last generation did in the way of piling up fortimes, and to do it on the same intellectual and aesthetic and ethical plane, but without the novelty of being the first to do it, nor the excuse that first comes bread and then the higher things of life, and without even the freedom of action and the general applause of the days of laissez faire, is not to set forth a very moving aim. The hungry intelligence of industry is asking for great new objectives worthy of great efiEorts. It asks for tasks as noble for us now as the opening of the continent or the building of the railroads was for a past generation. A new and larger conception of the function of indiKtrial leadership is called for. See also p. 764. The Mental Aspects of Administration. REFERENCES FOR FURTHER STUDY Church, The Science and Practice of Management. Scott, Influencing Men in Business. Taylor, Scientific Management. CHAPTER X ANALYSIS OF A BUSINESS CASE Purposes of this chapter: 1. To get a clearer view of what may be involved in expanding a business. 2. To test our ability to form certain kinds of business judg- ments on the basis of some typical business data. Throughout this volume there has been frequent use of "case material " of the sort that sets forth a series of actual occurrences in some field of business activity. These cases have, however, usually been narrow in their scope. It is now expedient for us to take some "business case" of fairly wide reach and see if we have developed any ability to form tentative business judgments. The case chosen for this purpose is that of the Noel Slate and Manufacturing Company. Noel, a successfiJ salesman in the slate business, developed a small-scale manufacturiug and selling business in this field. A bit later he thought that he saw an "opportunity" in the slate business and he decided to reorganize his company so as to take advantage of this opportunity. He needed capital. His way of securing it was to circulate among his friends and business acquaint- ances the following material. You will find it interesting not only as an illustration of how such things are sometimes done but also as an opportunity to "test your teeth" on an actual problem. The material is presented under four heads: A. The Engineer's Report B. The Accountant's Report C. The Prospectus D. The Stock Subscription Form PROBLEMS 1. What seems to you the "big idea" which Noel conceived? 2. Review the selection on "Promotion and the Promoter" (pp. 390-91). Indicate the various stages of promotion of the Noel Slate and Manu- facturing Company. 8S4 ANALYSIS OF A BUSINESS CASE 855 3. What is Noel putting into this proposition? What does he hope to get out of it ? 4. At what points, if any, do you criticize the engineer's report ? 5. At what points, if any, do you criticize the accountant's report ? 6. What criticisms, if any, do you make of the prospectus? Write a better one. 7. Noel obviously wishes to have control of the new corporation. Has he control? If so, is his control secure? If not, suggest appropriate ways of getting secure control. 8. What do you think of the way Noel went about securing funds ? Would he have done better if he had gone to some investment credit institution ? 9. Could this project have been handled better in the form of an individual firm or a partnership ? 10. Assume that you are considering whether you should invest in the stock of this new concern. Tabulate the strong and weak points of the proposition. What conclusion do you reach ? 11. Add five problems to this list. A. The Engineer's Report Part I In making this report, our engineer spent a week in the Western Vermont Slate Field, and visited all of the mills, quarries, and pros- pects mentioned. While the detail lists of equipment were taken from the report submitted by your resident engineer, all data and statements made in that report were carefully corroborated in detail by our engineer. We can, therefore, subscribe to, and indorse that report in every particular. The credit reports of a prominent mercantile agency are included in this report to give evidence of the soundness of the industry even conducted in the primitive way it is today. Careful reference should be made by interested parties to Bulletin No. 586 of the United States Geological Survey, entitled, "Slate in the United States," which should really be considered a part of this report. All letters quoted in this report are now on file in your ofi&ce. INTRODUCTION Object. — The object of this report is to determine: First, the advisability of entering into the milled slate industry in this field on a large scale. Second, the most advisable procedure in the event of entering into this industry. 8s6 BUSINESS ADMINISTRATION Description of the industry. — ^The quotations in this report are from Bulletin No. 586 of the United States Geological Survey, entitled "Slate in the United States," by T. Nelson Dale and others, to which reference should be made for a technical discussion of the composition and formation of slate. " The term slate, in ordinary usage, denotes a rock which has more or less perfect cleavage, being thus adapted to various commerical uses." Qtiarrying. — While in most cases the slate outcrops on the sur- face, considerable stripping, or removal of upper soil and rock, must be done before slate of any commercial value is reached. The slate in the western Vermont field has a dip of from 1 5 to 50 degrees depend- ing upon the locality. In opening a quarry a large hole is dug in front of the face of the slate vein to allow easy working of the vein. The top of the vein is then stripped down to slate of commercial value. The present practice in removing the slate is to drill through the exposed face of the vein, at right angles to the cleavage, at intervals of approximately 12 to 18 inches, to a depth of about 8 inches. Steel wedges are then inserted into these holes and pounded with hammers until a slab splits away from the vein. This slab is then hoisted and carried to stock by means of an overhead cableway. Until quite recent years the drilling was done by hand and the hoisting of the rock, and pumping of water from the pit, was done by horse-power. At the present time electric power is available and the drilling is done by compressed air and the hoisting and pumping by means of electric motors. In some veins it is also possible to cut out the slabs by means of channeling machines, as in the marble quarries. These machines, by means of compressed air drills mounted upon them, cut the exposed face of slate into rectangles of the desired size in much the same way that ice is cut on an ice pond. After these cuts have been made to the desired depth, the slabs are wedged away from the main body of the rock. This method is much faster and more economical than the old hand method of quarr5dng. After the first hole is sunk additional stripping is done by blast- ing, the overburden being blown over into the hole from which the slate has akeady been removed. Practically no powder is used in the slate itself on account of breakage. The maximum size of slabs removed from the quarry is generally governed by the natural joints ia the vein. The usual thickness of slabs at the present time is approximately six inches, but with the ANALYSIS OF A BUSINESS CASE 857 introduction of modem machinery in the mill, it will probably be more economical to use slabs up to 18 inches in thickness. Roofing-slate is sawed, planed, split, and trimmed at the quarry. The mills for finishing mill stock are generally located at a considerable distance from the quarry on account of labor supply, facilities for shipping, etc. The mill stock is hauled from the quarry to the mill by automobile truck, teams, electric or steam railroad, or in one case by boats. Milling. — "On account of their peculiar properties slates are adapted to a great variety of uses — ^roofing, flooring, electric switch- boards, blackboards, hand slates, billiard and laboratory table tops, vats, tubs, mantels, grave linings, wainscoting, hearths, chimney and well caps, memorial tablets, bread boards, refrigerator shelves, etc." Slate at the quarry is divided into two classes: roofing-slate and mill stock. Mill stock would include all of the slate used for the purposes mentioned above except roofing. The large slabs when received at the mill are laid out by the foreman for cutting into standard sizes, or sizes determined by the orders on hand, with the least possible waste. They are then placed on the bed of a table saw similar to a cross-cut saw in a wood-working plant. The saw itself is a circular steel saw, about 48 inches in diameter, with coarse teeth. After sawing to the required rough size, the slate is split so as to finish to the required thickness, and the flat surfaces parallel to the cleavage are smoothed down by means of a planer. This planer is almost identical with planers used in machine shops for finishing iron and steel. The tool covers 8 to 12 inches in width. After planing, the slate is removed to a finishing machine called a rubbing bed. This machine consists primarily of a disc, or table, of cast iron, usually 12 feet in diameter, mounted at a convenient height above the floor on a vertical shaft driven by a mortise gear. This table revolves at a speed of 70 R.P.M., and sand and water are fed onto it at the center. At the present time all sides and edges of slabs are finished by holding the slab stationary while the plate with its sand and water revolves under it. By the proper distribu- tion of weights on the slab, a uniform rate of cutting is secured. Beveling of the finished slab is now done roughly with an air chisel and finished with a rasp and hand hone. A bevel of | inch requires from three to five cuts with the chisel besides the time and labor required to finish with rasp and hone. 8s8 BUSINESS ADMINISTRATION If a finer finish than the rubbed finish is desired it is obtained by means of a hand hone, or by a poUshing head upon which a hone is mounted. At present only two of the miUs in this field are equipped to drill holes in switchboard slabs. After the slabs are completed various finishes are applied. They are enameled black and baked, oiled, or marbleized as desired. EnameUng is usually done with an air brush, while marbleizing or graining is done by dipping the slab in a tank of water on which the color has been floated in the pattern desired. After finishing, the slabs are crated for shipment. Description of the field. — "The most important district, which furnishes the well-known 'green' and 'purple' slates, Ues between the Taconic Range and Lake Champlain, extending from the town of Sudbury, in Rutland County, southward to Rupert, in Bennington County, a distance of 26 miles. This belt also passes south-southwest into Washington County, N.Y., where, however, it has thus far proved of less economic importance." This district is shown in detail on the map accompanying this report. The locations of quarries and prospects are only approxi- mate, except the Cedar Point Quarry and the Lake Shore Slate Co. prospect, which are accurately located. Practically all of the mills are located in Fair Haven and Hydeville. Transportation in the field is furnished by the following: Rutland Railway, Light and Power Co. — an electric line running from Poultney through Fair Haven to Rutland. Rutland is 16 miles east of Fair Haven. Delaware and Hudson Railroad — two branches. Rutland Railroad from Rutland North and South. The center of the labor supply for this industry, both in the quarry and the mill, is in Fair Haven, Vermont. While all operators state that there has been a great shortage of labor in the last two years, they agree that labor is now becoming more plentiful. The labor situation will be discussed later in this report. Water in quantities is easily obtained in all localities. Coal is scarce at the present time and costs $14.00 per ton. It is expected that the supply will increase and the price decrease in the near future. Electric power is obtainable in any desired quantity at all points from the Rutland Railway Light and Power Co. at approximately If cents per kw-hr. The current is 220 volts, 3 phase, 25 cycles, but 60 cycle current can be obtained if demaiided. ANALYSIS OF A BUSINESS CASE 859 Cutting-sand for rubbing and polishing is readily obtained locally in large quantities. Crating-lumber is available from local mills at an average cost of $35.00 per thousand feet, delivered. EXISTING QUAEMES (See map on page 860 for location) NO. I Name. — ^W. H. Pelkey Quarry. Location. — ^About i mile south of Fair Haven, in Vermont, on Rutland Railway Light and Power Co. electric hne. Owner. — ^W. H. Pelkey, Fair Haven, Vermont, owns the quarry and about 200 acres of land surrounding. Transportation. — ^The output is at present handled in a mill owned by the same party, located about | mile from the quarry. Good road. down grade all the way past mill to Delaware & Hudson raUroad station. AU hauling is done at present by one team. Product. — ^At present this quarry is producing nothing but green slate for structural and roofing purposes. This slate is of no value whatever for electrical purposes and is even too hard for good struc- tural stock. The present quarry is therefore valueless for the pur- pose of this report. Mr. Pelkley claims to have a high-grade, clear vein on one end of his property, and is very anxious to dispose of it. This property was investigated by our engineer in company with your resident engineer, and Mr. John R. Mahar, a practical quarryman with about 40 years' experience in this field. It was decided that this purple prospect was of no commercial value whatever for the following reasons: (i) not sufficient purple slate in sight to justify working; (2) slate of good color but entirely too hard; (3) vein covered by large hUl of hard rock; (4) on account of its extremely favorable location, and the scarcity of clear purple slate, this property would have been worked years ago if investigation had justified it. The property has been trenched by someone to determine the length and character of the deposit, but the results apparently did not justify working. Equipment. — The present green slate quarry is equipped with: One io"Xio" belt-driven, single stage, air compressor One 35 horse-power motor for compressor One double drum hoist One 25 horse-power motor for hoist Two masts and complete cableway equipments 86o BUSINESS ADMINISTRATION Two shanties and trimmers for roofing-slate One small blacksmith shop Working force. — Seven men, driver and one team. MAP OF THE FIELD HaV£W HAVCH CKSTLtroA VER.MOHT POULTHLY- /VCW YO/iK Quarry* Slate Quarry* Slate Prospects Slate I Green and Variegated 7 Purple Variegated A Purple 2 Green and Variegated 8 Purple Variegated B Purple 3 Purple 9 Green C Purple 4 Variegated lo Mottled D Purple S Variegated II Purple Variegatea E Purple Variegated 6 Variegated 12 Purple Variegated * Locations of quarries and prospects are approximate only. ANALYSIS OF A BUSINESS CASE 86l Output. — As operated at present the total output of green mill stock will probably average about 7,000 feet per month. Sale or lease. — Mr. Pelkey will sell the entire property including land, quarry, purple prospect, and mill for $90,000.00. The mill will be discussed later in this report. The quarry property is of no value to a company contemplating the manufacture of electrical slate on a large scale. NO. 2 [Omitted] NO. 3 Name. — Cedar Point Quarry. Location. — ^About 4 miles north of Hydeville, in Vermont, on Lake Bomoseen. Owner. — Penryhn Slate Co., Hydeville, Vermont, own the quarry and 50 acres surrounding. Transportation. — In summer the slate is hauled to the mill at Hydeville in barges towed by launch. In winter the hauling is done on sleds on the ice. In spring and fall, especially spring, hauling must be done over the shore road around the lake. This road is not very good and is very bad in the wet weather in spring. Haul by road is between 5 and 6 miles. Product. — ^The product of this quarry is the best grade of purple slate being produced in this field. It is the only slate from this field that the General Electric Co. will purchase. Equipment. — Three cableways Two double drum hoists. 34" drum. 25 horse-power motor One i4"Xi2" Ingersoll-Rand, belt-driven, single stage air com- pressor One 40 horse-power motor for compressor Derrick for loading stock Incline track from quarry to mill with cars and hoist One scow is'X3o', 40 tons capacity One motor boat 25 feet. 12 horse-power motor There is a rough mill located at the quarry which will be dis- cussed later. Working force. — Twenty-seven men. Output. — ^They report average monthly output of 25,000 square feet. 862 BUSINESS ADMINISTRATION Sale or lease. — ^This company is willing to sell this quarry together with another quarry producing roofing-slate, and both mills. The mills will be discussed later. They have been unable to get out enough stock to keep their own mill ruiming at its capacity of 40,000 feet per month. While this quarry produces the best slate of any quarry now operating in the field, it is not considered a good purchase. Owing to physical conditions it would be very hard, and perhaps impossible to increase the output to 100,000 feet of finished slate per month. Being a very profitable enterprise the price asked would undoubtedly be very high. Nos. 4-12 [Numbers 4-12 of the original report are omitted from this reproduction. They raise no new problems. So far as method is concerned, they differ little from the reports on Numbers i and 3.] PROSPECTIVE LOCATIONS FOR NEW QTTAERY (For locations see map on page 860) A Name. — Lake Shore Slate Co. property. Location. — West Castleton, Vermont. About 4 miles north of Hydeville, and about 55 miles from Fair Haven. Owner. — The Lake Shore Slate Co., of Hydeville, Vermont, holds title to all real and personal property. There is no mortgage on this property. This corporation is capitalized for $80,000. The prin- cipal owner, with whom all dealings should be made, is Mr. Lester Hazard, who lives on the property, and whose father originally operated it. Transportation. — As shown on the map, there are two roads available for hauling stock from this property. The west road, away from Lake Bomoseen, is the best road and hauling over it wovdd not conflict with the hauUng from the Cedar Point Quarry who use the lake road. It would also be very easy to carry stock from the quarry to the lake by cableway and carry down the lake either in scows or on the ice. Product. — This property was opened up on one end of the vein years ago and operated profitably. It has not been operated how- ever since the death of Mr. Hazard's father. The quarry which was opened is now filled with water to a depth of 50 or 60 feet. This could easily be pumped out in about one week. The slate exposed in this old quarry is the best dear purple slate in this field. It is ANALYSIS OF A BUSINESS CASE 863 even better than that produced at Cedar Pomt. The vein is approxi- mately 25 feet thick, 75 feet deep, and i mile long, all on this property. Approximately 10,000 feet of slate is all ready to take out of the old quarry as soon as the water is removed. The present hole extends to the bottom of the vein. Equipment. — There is one old cableway on the property that might be used. No other equipment that could be used. Output. — There is approximately 10,000,000 feet of good slate in sight from surface indications. This would probably be exceeded in operation. By opening the vein at several points a production of 100,000 feet per month could easUy be reached. Sale or lease. — The entire property covers 640 acres. Mr. Hazard will lease the entire slate property, including the necessary area for dumps, etc., for a flat monthly rental not dependent upon the amount of slate taken out. He made a tentative price of $400 . 00 per month, but this could probably be cut to $350.00 in closing. There is an old mill on the property and also a water-power wheel of 80 horse- power. If these were included in the lease the price would be $100. 00 per month additional. Neither of these items should be included as the miU is of no use on account of age. If desired will sell entire property. No price quoted. Remarks. — This vein has a very steep dip, probably about 50 degrees. As there are few natural horizontal joints, the property was difficult to work in the old days on account of the great size of the slabs. This is not believed to be a great disadvantage with modern machinery. It would probably be possible to make use of the trenching machines used on the vertical slate in the Maine field. This is the only objection that could be found to this property locally It was pronounced by Mr. M. R. Johns as the best property in the field. B-F [The descriptions of these prospects are omitted. They do not differ in method from the description of prospect A.] SLATE MILLS NOW LOCATED IN THIS FIELD NO. I Name. — J. H. Prince. Location. — One mile north of post-office in Fair Haven, Vermont. Owner. — J. H. Prince, Fair Haven, Vermont. Buildings. — One building 5o'X8o' frame, two-story for about half its length Two small sheds attached 864 BUSINESS ADMINISTRATION One office attached 6,500 square feet total floor space Equipment. — Three 10 horse-power electric motors One rubbing-bed 12 feet in diameter Two Ruggles saw tables, 6'o"Xio'o"; 7'o"Xio'o": Two Ruggles saw tables, 4'6"X8'o"; 3'6"X6'6" Two Ruggles planers, 3'6"X7'6"; 4'o"X9'6" One Ruggles planer, 5'o"Xio'o" One bench saw for crating One power operated crane for unloading One industrial track with car from crane through mill to dump One belted Gould duplex pxmip One grindstone and carborundum, wheel for sharpening saws and planer knives One saw bendi in box shop on second floor. Toilet facUities. — Poor. Heat. — Stoves. Shipping facilities. — No railroad siding. Haul to railroad station about I mile from mill. Product. — Electrical slate 72 per cent; structural slate 12 per cent; biUiard slate 9 per cent; grave vaults 7 per cent. Some roofing. Output. — Claim ouput of 50,000 feet in past six months. This is probably high and 40,000 feet would be nearer the facts. The mill has a capacity of 10,000 feet per month. Statement of hilling. — Electrical slate ... . 25,591 ft. $19,081 . 66 Structural slate 4,185 ft. 2,615.08 Billiard slate 3,151ft. 1,299.35 Grave vaults 2,354 ft. 762.00 Totals 35.281 ft. $23,758.09 $23,758.09 Roofing slate 608.69 sq.ft. 7,834.92 Jan. 1, 1920, Inv. R. Slate . . $2,354.00 Oct. 1, 1920, Inv. Slate . . . 1,500.00 854.00 $ 6,980.92 6,980.92 Total $30,739.01 The foregoing billing is for period January i to October i, 1920. ANALYSIS OF A BUSINESS CASE • 86$ Working force. — Eight men. Credit report. — The following credit report was secured. Aged about 40, married, and has been engaged in the slate business here off and on for years, apparently maintaining a clear record and meet- ing with fair financial success. In the fall of 1909, he became associated with a local slate quarry, later purchasing same and has since operated in his own name. The quarry is being graduaUy developed. Repeated efforts have been made to obtain a statement from him but he has never been disposed to furnish any information respecting his financial condition. Is in good personal standing and regarded competent in this line. He is credited with the ownership of quite a fair amount of real property on which there is understood to be some mortgage encumbrance, but he is credited with having a substantial equity therein, and he is foimd assessed on the last Grant Tax list with various properties aggregating a total investment of $20,300. He is also credited with having some money invested in personal securities, carries a good averable balance at bank where he has been known as a borrower to a considerable extent, retiring his paper as agreed and he is looked upon here as responsible for his ordi- nary business requirements, but in the absence of a detailed showing of his financial condition, it is found difficult to advance a definite estimate of his net worth, though in some quarters it has been estimated at $50,000 or more. Prospects are regarded favorable. Has the name here of taking care of his obUgations in a satisfactory manner. No fires. Sale or lease. — ^Will sell complete property consisting of quarry and mill for $90,000. This price is considered excessive even if the property were desirable, which it is not. The miU has not nearly enough capacity for the purpose of this report, and is not sufficiently well built to justify expansion to the desired capacity. Remarks. — As the slate obtained from the quarry is not of the proper quality, and the mill is not desirable, this property does not' deserve any further consideration, except for the cost and selling price information contained in the foregoing description. Nos. 2-10 [These numbers are omitted. They follow, in general plan, Number i. The essential figures for our purposes are contained in the following summary table which covers all ten cases.] 866 BUSINESS ADMINISTRATION TABULATION OF DATA REGARDING TEN SLATE MILLS NOW OPERATING IN THE WESTERN VERMONT FIELD a Naue Month- ly Output Feet Floor Space Square Feet Num- ber 07 Saw Tables Num- ber OF Rub- bing Beds Num- ber oy Plan- ers . Number op Employees §i Quarry Mill Total 1... J. H. Prince. 6,700 10,000 25,000 4,000 5,000 6,000 8,000 15,000 15,000 12,000 6,500 S,200 13,625 9,180 4,200 3,800 4,950 6,425 8,850 6,125 4 4 9 S 4 4 3 6 II S 2 3 3 2 3 3 9 2 4 3 3 5 8 3 8 9 27 4 5 IS 12 6 12 S 8 10 24 10 10 10 20 20 20 10 16 19 SI 14 IS 25 32 26 ^ . . . 4.. . . 6... 7. . 8... 32 IS lO. , . Totals 106,700 68,855 55 20 43 103 142 i4S PRODUCTION AND DEMAND FOR MILL-STOCK SLATE The records of the United States Geological Survey from 1879 to date show that from 1879 to 1884 slate was produced for roofing purposes oiJy. The table on page 867 shows the value of slate pro- duced, for purposes other than roofing, from 1884 to date. From 1905 to date this slate is classed as "Mill Stock." It is estimated by some of the most experienced men in the industry that the production of mill stock slate for the year 1920, in the state of Vermont, will approximate 1,200,000 feet at an esti- mated valuation of $780,000. This is 100 per cent increase over 1918. At the present time it is impossible to purchase any finished slate in this field, especially electrical slate, for delivery in less than six jnonths. AU mills in the district state that they are from six to eight months behind in their orders, and they are receiving no can- • cellations of orders. It wiU be noted from the data given for the mills in the field that in order to be assured of a steady supply of slate to meet their requirements, such firms as the Brunswick-Balke-CoUender Co., Otis Elevator Co., Cutler-Hanmier Manufacturing Co., etc., have been compelled either to enter the field themselves, or to contract for the entire output of a quarry and mill. Furthermore they are compelled to use inferior slate for electrical purposes. It is univer- sally conceded that the clear purple slate is the best slate produced in this state for electrical purposes. It will be noted, however, in ANALYSIS OF A BUSINESS CASE 867 the detailed report that only one mill in the district, namely the Penryhn Slate Co. is producing this clear purple slate. It will also be noted from the detailed report of mills that none of the better class of mills desires to seE, and that prices quoted on mills and quarries are out of aU reason. This condition is of course due solely to the excellent condition of the business as a whole. This in spite of the fact that there is not an efficient quarry or mill in the entire state at the present time. Year Value of Mill Stock Vermont Entire U.S. Average Price Per Square Foot 1884. 1885. 1886. 1887. 1888. 1889. 1890. 1891. 1892. 1893. 1894. 1895. 1896. 1897. 1898. 1899. 1900. 1901. 1902. 1903- 1904. 1905. 1906. 1907. 1908. 1909. 1910. 1911. 1912. 1913- 1914. 1915- 1916. 1917. 1918. 8,000 10,000 $243,016 684,609 257,267 260,000 128,194 202,307 93,849 99,915 39,701 119,782 94,702 121,988 177,874 126,101 228,729 162,421 178,295 251,531 175,683 196,911 307,347 308,811 287,197 273,583 346,645 291,241 281,89s 379,226 700,336 720,500 314,124 489,186 347,191 482,457 427,162 594,150 507,916 644,284 673,115 745,623 911,807 947,906 921,657 1,219,560 943,409 793,304 876,089 999,098 1,027,605 1,013,220 1,233,838 977,930 819,672 1,177,260 1,277,249 1,498,164 $0,157 .165 .171 .192 .178 .166 •195 .182 .179 .200 .230 .310 A visit was made by our engineer to the plant of the General Electric Co. at Schenectady, New York, on Friday, November 12, 1920, to interview them regarding the demand for slate for electrical purposes. 868 BUSINESS ADMINISTRATION Mr. Patterson, of the Switchboard Engineering Department, stated that slate for switchboard purposes had always been difficult to obtain, and that for the past year the conditions had been such that slate was almost impossible to get. He stated that they always preferred the black Monson slate from Maine, as this only required oiling to be ready for use. The output of this district is, however, so very limited, that the greater part of their slate must be obtained wherever possible. Mr. Patterson, not being familiar with the detail requirements of the company, introduced our engineer to Major H. M. Hobbs, of the same department, who supplied the following information: They always try to carry sufficient slate in stock for six months' requirements, but this has been impossible for the past year. They have estimated their total requirements for the first three months of 1921 at twenty-seven car loads, of 3,000 feet each, of a total of 81,000 feet. This is for switchboard use only and does not include miscellaneous small stock used for switch bases, box linings, etc. Their popular thickness is ij inches. Mr. R. E. Carter, of this company, purchases all insulating materials. He stated that they had always had trouble getting electrical slate, and especially so in the last year. He wiU not buy green or variegated slate for electrical purposes except when it is absolutely impossible to get anything else. Mr. Carter has been in the Vermont field and studied it in detail. He buys a great deal of clear purple slate when it is available, and prefers that from the Cedar Point Quarry, which he states is the best slate produced in Vermont. He states that there is not only room, but an actual necessity for a well-financed, up-to-date plant in this field, producing slate of electrical quality. Mr. Carter attributes the low production in the field to a lack of capital and initiative to put the quarries and mills on an efficient basis. He does not credit the statements of the producers that it is impossible to obtain labor. He states that on account of the extra labor and expense necessary to prepare the colored slate for use, over the Monson black slate, that it should sell for less. At the present time, however, the colored slates are bringing practically the same price. By improved methods the cost of the colored slate could be reduced to such a point that it would be more advantageous to use it, with a consequent increase in demand. ANALYSIS OF A BUSINESS CASE 869 Interviews by our engineer with various electrical manufacturers in the Chicago district have substantiated the above statements. It is also found that it is a great deal more difficult for the small manu- facturers to obtain slate than it is for such firms as the General Electric Co., Westinghouse, etc., who can afford to send their buyers into the producing field to purchase the slate at its source. It should easily be possible to dispose of the entire output of a plant producing 100,000 feet of slate per month by yearly contract with firms of good standing, although it would probably be more profitable to dispose of the output in the open market at consequently higher prices. There is no doubt whatever concerning the demand for finished mill-stock, slate for electrical pmrposes, without even considering the possibilities of stock for billiard tables, structural uses, etc. At the time of our engineer's visit to the plant of the Fair Haven Marble & Marbleized Slate Co., they were manufacturing all of the interior wainscoting, stair treads, etc., for a building being constructed as far away as Saskatoon, Saskatchewan. Reference to the reports of the United States government will show that the export of finished slate is increasing every year. It should be remembered also that no campaign of education is being conducted for slate as is the case with almost every other material at the present time, such as brick, concrete, roofing, etc. Users of electrical slate for switchboard purposes have in a great many cases been forced to substitute marble for slate owing to the great difficulty in obtaining slate when needed. This slow deUvery, of course, causes additional expense and trouble to the manufacturer of switchboards, and ako to his customer, due to correspondence telegrams, etc., made necessary by the delay. One switchboard builder has stated: "The slow deUveries of many of our slate orders have easily cost us ten times as much as the slate itself, and we dare say these same delays have cost our customers even more." Another manufacturer writes as follows: We have your letter of November 2 in which you inquire about the delays and attendant expense to which we have been put owing to the slate situation in the past few months. You are, of course, well aware just how we stand on this and we can- not put it too strongly that delays incident to transportation difficulties and other delays which we understand have been due to the scarcity of slate have occasioned us considerable expense, annoyance and loss of 870 BUSINESS ADMINISTRATION prestige with our customers. We aim not so much toward securing this material at the best price, as in serving our customers with the greatest possible dispatch. CONCLUSIONS AND RECOMMENDATIONS A close study of the existing conditions in the western Vermont field as shown in the discussion of the mills and quarries, reveals the fact that, in spite of the primitive methods of working, the lack of initiative, and business acumen, all of the plants are operating at a good profit. The credit reports also bear this out. At the present time, slate is being produced in this field at a total cost of 22 to 30. cents per foot of finished product. This cost is about equally divided between the quarry and the mill. The report on the J. H. Prince miQ shows that the average price obtained for his slate was 67 cents per foot, or a gross profit of about 37 cents per foot if we take the highest cost price. It must also be borne in mind that these mills are really doing a wholesale business and sell only to the larger manufacturers. The Noel Slate and Manufacturing Co. have a great advantage over any of the mUls in their facilities to dispose of slate direct to the user. This is emphasized by the following facts. The General Electric Co. are now entering into so-called "Instru- ment Contracts" with switchboard builders all over the United States, and in part consideration of such contracts, they furnish the local builders with complete drawings and manufacturing informa- tion; also advising them where slate and other materials may be purchased. The Westinghouse Electric and Manufactiuring Co. are expand- ing their switchboard business through their service departments, located in the principal cities. These local service departments pur- chase their own slate. It appears, therefore, that there will be a steadily increasing, local demand for slate blanks, and that a party carrying complete local stocks win be in a very advantageous position to secure the business. With existing mills and stocks at Chicago, Pentwater, and Toronto, and with others in contemplation, the Noel Slate and Manufacturing Co. are meeting the demands created by the latest policies of the principal electrical interests. In order to obtain the slate necessary to take care of their present business, and to make the justified expansion in that business, we believe from our detailed study of the conditions in the field that the ANALYSIS OF A BUSINESS CASE 871 followmg procediire will prove to be extremely profitable, and will offer a safe field for investment, with possibilities of immediate returns: 1. Immediate leasing of the property described in this report, owned and controlled by the Lake Shore Slate Co., and located at West Castleton, Vermont. While this property is not as accessible as might be desired, the slate contained therein is of the best quahty, color, and size, and will be in demand when the variegated and green slates will not be accepted. Before completing the lease, we would advise having definite confirmation of the practicability of working this vein by a practical quarryman, preferably, if possible the opin- ion of a man who might later be given charge of the quarry operations. This is, in the opinion of our engineer, the only available property that will give the amount of slate required, and of the proper quahty. All users of electrical slate consulted by us agree that their greatest trouble is due to lack of output at the quarries in the Winter We believe that, on account of the steep dip of the vein on this prop- erty, it may prove possible to work it in the French manner, as is now being done in the deposits of vertical cleavage in Maine. This can only be proved by experiments in operation. In any event the water in the present opening should be pumped out before freezing solid, and the pit kept free from water, so as to begin producing slate for the spring business when the other producers are short. 2. Closing of an arrangement with the General Slate Co., or their operator, Mr. Earle, to supply 10,000 feet of purple variegated slate, similar to sample submitted with this report, per month, beginning April i, 1921. This would insure a mill supply at that time in case it was impossible to open the purple quarry this winter. This would also aid in the inmaediate accumulation of large stock in your branch mUls. 3. The immediate preparing of plans for the construction of a modem slate mill, in the town of Fair Haven, Vermont, with a capacity of 100,000 feet of finished slate per month. Part II of this report is devoted to detail recommendations regarding the design and cost of this mill. We recommend the town of Fair Haven for the mill location on account of its being the center of the labor supply, having banking facilities, and shipping facilities, and being readily accessible for slate-buyers. 4. The investigation and development of a process for molding smaU switch bases, etc., from slate dust with a possible binder; 872 BUSINESS ADMDOSTRATION these parts to be made with the necessary holes cored in, thus avoid- ing the expense of drilling. The switchboard engineers of the General Electric Co. were particularly interested in the possibilities of this process. Conclusion. — ^It is believed that the construction of a modern building, with proper toilet facilities, a lunchroom, garage, proper heating and ventilating equipment, good floors, and good lighting, will insure a plentiful supply of labor. Such a mill will be able to pick the best labor in the entire district. With the mUl located in Fair Haven, labor can be drawn from as far as Rutland on the east and Poultney on the south, as these points are connected by the electric line which gives good service. Our engineer could not find any evidence in the field of a feeling of antagonism toward this enterprise. Such a feeling reaUy has no basis for existence, as such an enterprise, based upon an output greater than the combined output of aU the plants now in the field, should be a greater boost for the entire industry. It may possibly compel those now operating in the field to adopt modern methods, and improve their plants, but this would eventually reboimd to their advantage. It would certainly put the slate industry on a firmer business foundation, as it would insure a steady supply of material to the user, and would result in more general use of slate for all purposes. The immediate community would benefit greatly from the increased business activity, the increasing demand for slate, and the consequent rise in property values. An increase in pro- duction is alwa)^ of benefit to a community. In this connection we wish also to recommend that, if possible, an educational campaign be conducted concerning the properties and uses of slate. There is a great deal of ignorance manifest in all architects' and engineers' offices regarding slate. As it is always black when seen in switchboards, the ordinary engineer believes that only black slate can be used for the purpose, and draws his specifica- tions accordingly. The same is true regarding the use of slate for plumbing purposes. It is believed that if engineers and architects could be educated to specify purple slate that the demand would be greatly increased. We believe that the fact that the Noal Slate and Manufacturing Co. are in a position to furnish slate cut, beveled, drilled, and finished, to specifications on short notice from stock, gives them an exceptional position in the slate business, as does their pohcy of carrying standard sizes in stock, for immediate shipment. ANALYSIS OF A BUSINESS CASE 873 Since January, 1916, they have kept a record of the quantities and sizes of slate sold. We have examined this record and we feel that we can readily accept their statement that since March, 19 19, approximately 85 per cent of their orders for sizes wider than 12 inches and longer than 24 inches have been for sizes listed in their No. 7 Price List which list includes all of the switchboard sizes which have been standardized by the General Electric and the Westing- house companies, as well as many other so-caUed stock sizes. This suggests, indisputably, the wisdom of a "Milled Stock Department," instead of the heretofore inefficient practice of milling each order separately direct from the rough blocks. We recommend that liberal sp>ace be aUoted for stock sizes of known activity, the minimum and maximum limits for each size to be determiaed and revised from time to time, and that mill orders be entered periodically for the replenishing of this stock. This will even up the demands upon the mill and serve as an excellent "balance wheel" at times when the. sales curve takes a dip. Strip stock, in widths and thick- ness of known demand, but in random lengths, should also be carried in stock in liberal quantities, so that orders for small sizes, Usted or special, may be produced from such stock by cross-cutting on a carborundimi machiue. Detail recommendations for the design of the mUl wiU be given in Part II of this report, but consideration should be given here to the possibility of reducing cost of production, and increasing output by improvements in methods employed. The tabulation of mill data on page 866 shows that the average monthly production per rubbing-bed is 5,335 feet of slate. In all of these plants aU of the stock is handled by hand on to and off the machine, and the machine operator does all of his own clamping, lifting, etc. It is agreed by your engineer and ours that this production per bed could easily be increased to 12,500 feet per month with one operator. Rough stock is now brought in and cut on the saws at an average thickness of 6 to 8 inches. We beUeve that it will prove practicable to use diamond-tooth saws and increase this thickness to 12 or even 18 inches. This will not only reduce the time and cost of sawing in the mill but also reduce quarry costs by allowing the removal of thicker blocks, thus increasing production at that point. These diamond-tooth saws should be built with two cars, so that whUe the saw is working on one car the other can be loaded. The plain saw tables used at present are not actually sawing over 25 per cent of the time owing to the handling of material by hand. 874 BUSINESS ADMINISTRATION The installation of handling machinery will also increase the production of the planers on account of the time saved in setting up the work. The use of carborundum and diamond saws also increases pro- duction by the fact that the cut surface does not have to be finished on the rubbing-bed, as is the case with stock cut by the present steel saws. All of these increases per machine also operate to cut down the required floor space, and consequently the cost of the building. We firmly believe that close study in the design and operation of the plant wiU reduce the cost of manufacture of finished slate from 30 to 40 per cent right at the start, and that further reduction can be made after the plant has been in operation long enough to become standardized. At present waste is removed from the mills by carts. The installation of conveyors for this purpose, that will remove the waste as it is formed, will increase production by giving greater freedom of movement to the operators, and more available floor space. Nearly all of the labor in this field is American-born and much above the average in intelligence and ideals. We, therefore, believe that the introduction of some form of bonus or profit-sharing system into both the quarry and mill would result in a much lower cost of production. This should be given serious consideration. [There follows, in the original report, several pages of photographs of the quarries, etc., mentioned in the preceding pages.] Part II [Part I was dated November 19, 1920. This part is dated De- cember 29, 1920.] This section of the report is devoted: Section I. To the equipping and opening of a quarry for the production of purple slate and its transportation to the mill. Section II. To the location of the slate mill. Section III. To the production layout of the mill. Section IV. To the complete design of the mill. Section V. To an estimate of the cost of quarry, transportation, and mill. Section VI. To the estimate of cost of operation and produc- tion, and estimated profits. Section VII. General discussion. ANALYSIS OF A BUSINESS CASE 875 I. QUARRY Since the writing of Part I of this report in November, 1920, a lease has been entered into by the Noel Slate and Manufacturing Co. with the Lake Shore Slate Co. covering the property recommended in Part I of the report. This lease calls for a monthly rental of $300.00 for the entire slate rights of property regardless of the amount of slate removed. The old mill, water-power, and houses on this property were not included in the lease, but can be obtained later if it is found desirable. To the north of the Lake Shore Slate Co.'s property the vein continues on the property of George Phillips and beyond this property the vein runs on the property of one Andrus. It is reported that the vein on these two pieces of property is of equal value with that of the property of the Lake Shore Slate Co. We do not recommend the actual leasing of these two pieces of property at the present time, unless it is found absolutely necessary in order to tie up these rights. If these rights can be obtained under option, this should be done instead of an actual lease being entered into. Mr. M. R. Johns who was mentioned in the first part of this report has gone over the Lake Shore Slate Co.'s property a second time and advises that the vein should be worked at four openings. There are two openings on the property at present which would mean that two new openings would be necessary. The water is now being removed from the two old openings by means of pulsometers and an old boiler which was located on the property. The two old openings will therefore be ready for immediate working at any time. We have had the matter of channeling machines up with the IngersoU-Rand Co. of Chicago who do not beUeve that the use of the rail type of channeling machine would prove practicable on this property, due to the narrowness of the vein and the consequent frequent benching required to start new cuts. They do, however, recommend a bar type machine which we would advise tr)dng out after the quarry is started in operation. It may be found, however, by experiment that it will be possible to either use the present standard channeling machine or develop a special machine for this purpose. It is believed that the only successful method of transporting slate from the quarry to the mill will be by means of motor trucks. The cost of these trucks will be in Section V of this report. •It has been found that electric power in sufficient quantities to operate this quarry is not available at the present time. In order 876 BUSINESS ADMINISTRATION to obtain power it would be necessary to carry a high tension line approximately five miles and the Rutland Railway Light and Power Co. are at present not in a position to finance this line. It would therefore be necessary for the Noel Slate and Manufacturing Co. to pay for the installation of this extension, which we are advised would cost between $10,000.00 and $13,000.00 including transfor- mers. This amount would, however, eventually be returned by monthly rebates on the power biU. II. LOCATION OF SLATE MILL It is recommended that if possible the slate mill be located in the town of Fair Haven, Vermont. This town is the center of the labor supply in this district and is also the center of both banking and shipping facihties. Due to the fact that several of the parties at present operating slate mills in this district are members of the Board of Trade of Fair Haven and to their attitude, indicated in pre- liminary negotiations, we do not believe that any concessions will be made by the town of Fair Haven in order to have this industry located at that point. The price of the land, however, should not be a serious consideration compared with the entire cost of the enterprise. It might be possible by further negotiations to obtain exemption from taxation for a considerable period. A piece of former residence property is available for building purposes in the immediate neighborhood of Durick & Keenan and the Old English Quarry Mill, but it is doubtful whether or not this property has sufficient area. Its location is ideal for the purpose intended as it is located adjacent to both the electric and steam rail- roads, and also to the river for the disposal of waste. We would recommend a careful investigation of this property regarding size, price, etc. ' If the property mentioned above does not prove satisfactory, we would recommend the locating of the mill on the eastern edge of town between the electric and steam railroads. The property is readily available in this vicinity. HI. PRODUCTION LAYOUT The recommended production layout is shown on the accom- panying blueprint of drawing No. 703 PA-i. [Omitted — Ed.] It may be found advisable to instal one large roughing-saw at the quarry so that no blocks will be sent to the mill which are too large to be handled on the 8'Xio' saw tables installed in the mill. ANALYSIS OF A BUSINESS CASE 877 Rough stock will be delivered to the mill by motor trucks, from which it will be handled into the yard storage by means of the s-ton overhead crane. Stock purchased from other quarries will be received on the raihoad track and handled to storage by the same crane. It will be noted that the machinery in the mill is laid out in four distinct units, each independent of the other, but so arranged that stock may be cross fed from unit to unit at any stage of the process. Stock will be taken either from yard storage or direct from trucks or raihoad cars to industrial cars on tracks projecting from building into storage yard. The slate is carried on these cars into the first bay of the building, where it is transferred by overhead crane either onto horses for laying out, into floor storage, or direct onto the first saw tables. By having floor storage at this point, it will not be necessary to keep the outside doors open for stock in cold weather. The electric cranes in this bay are to be operated from the floor by pendant control, so that the man handling the slate will also operate the crane. Trucks are to be provided with platform at the same height as the tables on the various machines. These trucks wiU be equipped with roller bearings and can easily be pushed by hand. By means of these trucks, slate is to be transferred from machine to machine, or from machine to storage, or vice versa. Jib cranes are installed between saws as indicated for handling material horn one saw to another, from trucks to saws, or from saws to trucks. A small araoimt of storage space is available on the floor betweien saws. A small supply of slate may be stored in this space, either on the flftor or on one of the push trucks. Tongs will be used on jib cranes, and all other hoisting apparatus, for quick handling of blocks. Such tongs are now successfully used in a great many stone quarries and plants. A considerable storage space is provided between the saws and the planers, so that these are practically independent units. The majority of the slate can be handled by hand when it reaches this point. Extra large, heavy pieces will be so stored that they can be handled by means of the storage battery Uft trucks mentioned later in this report. A storage space is provided after the large planers for planed stock to the rubbing-beds. Material will be handled here the same as in the storage between saws and planers. 878 BUSINESS ADMINISTRATION Sipall pieces, which it is necessary to rub on one side before they are planed, will be carried by hand from the rubbing-beds to the small planers located against the wall. After coming from the rubbing beds, slate wiU be stored on racks, or skids, which will be handled by means of storage battery lift trucks into the storage space in the finishing department. Refuse from all machines will be thrown into receptacles located immediately alongside of the machines. These receptacles will be so designed that they can be pushed as trucks, or picked up and carried by storage battery lift trucks. It is estimated that one man can remove, with a lift truck, all of the refuse from the plant. From the storage in the finishing building slate may be taken either directly to the shipping department, or to any one of the finishing operations by lift truck. Ample space is provided on shipping platforms, under the yard crane, to allow accumulation and sorting of stock for carload ship- ments. All supplies such as lumber, sand, etc., will be received on the railroad track, or by means of trucks, and handled by yard crane. rV. DESIGN OF THE MILL The general design of the mill building is shown on accompan3dng blueprint from drawing No. 703 PA-2. [Omitted — Ed.] The yard crane and storage yard are to be covered with a corrugated iron roof and corrugated iron siding is to be provided down to the top of rail- road cars as shown. Floor wiQ be installed imder the crane only at the shipping point. The railroad track is depressed under the yard crane so as to bring car floors on a level with shipping platform. The main building will be of light steel construction with pre- pared roofing laid on wood. The entire floor area will be well lighted by means of the sash installed in the "A" frame and skylights over the roof. The outside walls will be constructed of brick with steel sash as indicated. Toilet facilities are provided for both shop and office employees. Two systems of sewers are contemplated, one for sanitary purposes, and the other for the handling of waste from the machines. This latter sewer will be so arranged that abrasive compound used on the machines may be recovered and used over again. Ample electric lighting is provided throughout. ANALYSIS OF A BUSINESS CASE 879 V. ESTIMATE FOR QUARRY, TRANSPORTATION, AND MILL QUARRY Power service $13,000.00 One air compressor with motor 3,500.00 One air receiver tank 350.00 Air piping 2,000.00 Four air hammers 580.00 Air hose 100.00 Steel for drills 400.00 One drill sharpener, complete 725.00 Six cableways, complete with hoists .... 44,220.00 Erection, freight, houses, etc 10,000.00 Total $74,975.00 Say $75,000.00 The foregoing figures include only sufficient equipment to open up the quarry. It is believed, however, that the additional equip- ment required to reach maximum output will consist only of some additional cableways, or derricks, as will develop in course of opera- tion, and possibly some bar-channeling machines. It is believed that the figure of $75,000.00 is amply high to allow the proper beginning of operations. TRANSPORTATION As is shown later, imder estimate for mill, 200,000 feet of slate per month must be transported to the mill, or 8,000 feet per day, figured on the basis of 25 working days per month. As one board foot of slate weighs approximately 15 pounds, one day's supply of 8,000 feet will weigh approximately 60 tons. It is estimated that a 3-ton motor truck could make the round trip from quarry to mill in two hours, or four trips per day of eight hours. This would give a capacity of 12 tons per day, and five trucks would be required to give the necessary 60 tons per day. These five trucks should be secured for a total of $20,000.00. Sometime during the first year, probably at the approach of winter, a sixth truck should be secured on account of the more difficult operating conditions, and to allow the withdrawal of one truck at a time for repairs. 88o BUSINESS ADMINISTRATION MILL Capacity. — 100,000 feet of finished slate per month. (All meas- urements are in board feet.) Waste. — 50 per cent between rough and finished stock. Rough stock. — 200,000 feet per month. Average size of rough stock. — ^4'o"X8'o". Average size of finished piece. — 2'o"X4'o". Largest size of finished piece. — ^4'o"X7'o". Average content of rough piece. — 64 feet. — r — =3,125 pieces of rough stock per month. 125 pieces per day (25 days per month), isf pieces per hour, or i piece every 3.8 minutes, from yard storage to first saws. RXrBBING-BEDS, SAWS, AND VIANERS Investigation of all the present plants in the field shows an aver- age output of S,33S feet of finished slate per month per rubbing-bed. This should easily be increased by proper handling methods to 12,500 feet per month. Eight rubbing-beds will therefore be required for a monthly output of 100,0.00 feet of finished slate. Present plants show a ratio of two and three-fourths saws per rubbing-bed. Fifty-five saws are giving a present output of 106,700 feet of finished slate per month, or 1,940 feet per saw, per month. This should easily be increased to 4,000 feet per month. With an output of 12,500 feet per month, three saws will be required per rubbing-bed, or a total of twenty-four saws. Consultation with operators and manufacturers, and investigation of the following table [omitted— Ed.], shows that these saws should be 4'6"X8'o", 6'o"Xio'o", and 8'o"Xio'o". Present plants show a ratio of 2.15 planers per rubbing-bed. Forty-three planers are giving a present output of 106,700 feet of finished slate per month, or 2,481 feet per planer, per month. This should be increased to at least 4,000 feet per month. With an out- put of 12,500 feet per month for each rubbing-bed, three planers per bed wiU be required, or a total of twenty-four planers. Consultation with operators and manufacturers, and investigation of the following table [omitted — Ed.], shows that these planers should be 3'6"X7'o", 4'o"X8'o", ands'o"Xio'o". ANALYSIS OF A BUSINESS CASE 88i ESTIMATE or EQUIPMENT FOE MILL Required I'™» Cost 1 S-ton, 3-motor yard crane .... $6,500.00 4 24-iiich gauge tracks, each 30 feet long 150.00 4 Industrial cars 600.00 8 Saw tables, 8'o"X I o'o" 14,900.00 8 Saw tables, 6'o"Xio'o" 12,600.00 8 Saw tables, 4'6"X8'o" 10,300.00 8 Planers, s'o"Xio'o" 10,100.00 8 Planers, 4'o"X8'o" 8,820.00 8 Planers, 3'6"X7'o" 8,400.00 8 1 2'o" diameter rubbing-beds . . . 14,400.00 2 2-ton, 3-motor cranes 8,000.00 4 Jib cranes, 24-foot radius, 2000 lb. . . 3,000.00 4 Jib cranes, 24-foot radius, 1000 lb. . . 2,800.00 4 Jib cranes, 18-foot radius, 2000 lb. . . 2,800.00 ,4 Jib cranes, 18-foot radius, 1000 lb. . . 2,400.00 50 Special push trucks ...... 6,250.00 3 12-foot carborundum machines . . . 6,000.00 1 Carborundum beveling machine . . 2,000.00 15 Drill presses 5,000.00 2 Belt sanding machines 2,000.00 2 Air brush outfits, complete .... 400.00 3 Chipping hammers 200.00 I 7" X 6" air compressor and motor . . 1,200.00 1 Air receiver tank 100.00 I Oven complete 3,000.00 I Dipping tank 250.00 Toolroom equipment 500.00 4 Storage battery lift trucks .... 12,000.00 I Battery charging outfit 500.00 Office equipment 2,000.00 Box-making machinery . . .- . . 1,000.00 Storage racks 2,000.00 Refuse receptacles 1,500.00 Erection, freight, etc 10,000.00 Shafting and belting 5,000.00 Motors 10,000. 00 Total $176,670.00 Say $178,000.00 882 BUSINESS ADMINISTRATION ESTIMATE OF BUILDING Biiilding 2cx)'X24o', or 48,000 sq. ft. Concrete, brickwork, etc $41,800.00 Carpentry 19,200.00 Structural steel, skylights, glazing . . . . 55,000.00 Painting, hardware, roofing, etc. .... 8,000.00 Heating 17,000.00 Electric lighting . . 3,000.00 Plumbing and drainage 9,000.00 Power wiring 11,000.00 Insurance and general conditions .... 6,000.00 Total $170,000.00 CRANEWAY 40' X 240', or 9,600 sq. ft. Concrete, etc $ 7,600.00 Carpentry - 200.00 Steelwork, sash, glazing, etc 22,100.00 Painting 300.00 Insurance and general conditions .... 1,800.00 Total $ 32,000.00 GENERAL SUMMARY OF, ESTIMATES Quarry $ 75,000.00 Autotrucks 20,000.00 Land for mill 5,000.00 Mill building 170,000.00 Covered craneway 32,000.00 Switch track 3,000.00 Complete boiler plant 13,000.00 Machinery foundations 5,000.00 Electric power supply 3,000.00 Machinery 178,000.00 Engineer's fee 51,000.00 Total $555,000.00 While the estimate given is for a plant capable of producing 100,000 feet of finished slate per month, we would advise installing only one unit of machinery at the beginning. This will not only allow a thorough trial of the equipment and method of operation, but will also establish a source of income before the total expenditure is made. We also advise omitting the covered craneway and crane until all of the machinery is installed and the plant operating to ANALYSIS OF A BUSINESS CASE 883 capacity. By leaving out the concrete floor in the three bays in which machinery is not to be installed at once, this space would serve as a covered storage, and the trucks could be driven directly into the building and unloaded with the electric crane in the first bay. The boiler plant and heating equipment could also be omitted, at least until wiater. The foregoing procedure would require the following list of equipment for immediate installation: 'Item No. Required I 24-inch gauge track, 30 feet long 1 Industrial car 2 Saw tables, 8'o"Xio'o" . . . 2 Saw tables, 6'o"Xio'o" . . . 2 Saw tables, 4'6"X8'o" . . . 2 Planers, s'o"Xio'o" .... 2 Planers, 4'o"X8'o" .... 2 Planers 2 i2'o" diameter rubbing-beds . 2-ton, 3-motor crane .... Jib crane, 24-feet radius, 2000 lb. Jib crane, 24-feet radius, 1000 lb. Jib crane, i8-feet radius, 2000 lb. Jib crane, i8-feet radius, 1000 lb. Special push trucks .... 1 2 -foot carborundiun machine Carborundiun beveling machine . Drill presses Belt sanding machine . Air brush outfit, complete Chipping hammers .... 7"X6" air compressor and motor Air receiver tank Oven complete . . ... Dipping tank Toolroom equipment .... Storage battery lift truck Battery charging outfit . . . Ofiice equipment Box-making machinery Storage racks Refuse receptacles Erection, freight, etc Shafting and belting .... Motors Total . Call this Cost $ 37- SO 150.00 3>72S-oo 3,150.00 2,S7S-oo 2,525.00 2,205.00 2,100.00 3,800.00 4,000.00 750.00 700.00 700.00 600.00 1,875.00 2,000.00 2,000.00 1,500.00 1,000.00 200.00 140.00 1,200.00 100.00 3,000.00 250.00 500.00 12,000.00 500.00 2,000.00 1,000.00 500.00 400.00 4,000.00 2,000.00 4,000.00 $67,182.50 $68,000.00 884 BUSINESS ADMINISTRATION Building items omitted would be as follows: Covered craneway $32,000.00 Complete bofler plant 13,000.00 Machinery fovindations , . 3,000.00 Heating equipment 17,000.00 Power wiring 6,000.00 Total omissions $71,000.00 The general summary of estimates for immediate expenditure would therefore be: Quarry $75,000.00 Autotrucks 20,000.00 Land for mill 5,000.00 Mill building 147,000.00 Switch track 3,000.00 Machinery foundations 2,000.00 Electric power supply 3,000.00 Machinery 68,000.00 Engineer's fee 32,300.00 Total $355,300.00 We have not recommended cutting down the investment for quarry or trucks, as we beUeve that the quarry should be opened to capacity while the mill is being tried out and developed. VI. COST OF OPERATION AND ESTIMATED PROFITS With the equipment recommended for the quarry, we do not believe that the cost of producing quarry stock can be reduced to any considerable extent below the cost in the present quarries. It will probably be possible to reduce this cost to some extent later on by possible developments of machinery, but we do not beUeve that for the purpose of this report that a lower cost should be considered. The table on page 866 of Part I of this report shows a total of 103 employees in the present quarries, for a production of 106,700 feet of finished slate per month, or 1,035 f^^t per employee. It must be remembered however that some of these men are engaged in taking out roofing-slate, which is not considered in the 106,700 feet of mill stock. Also, there are a certain number of men employed as foremen, etc., who will not be required in this single quarry. We believe that 100,000 feet of finished slate per month can be removed from the quarry with a maximum of 40 men. ANALYSIS OF A BUSINESS CASE 885 MONTHLY COST OF QUASKY STOCK (25 working days — 8 hours per day) Labor, 40 men at 60 cents per hour .... $4,800.00 Power 1,000.00 Rent of quarry property 300.00 Interest ($75,000 at 8 per cent per year) . . . 500.00 Depreciation at 10 per cent per year . . . . 625.00 Overhead 750.00 Total ... $7,975.00 These figures indicate an approximate cost of $0.08 per foot of finished slate for mill stock at the quarry. MONTHLY COST OF HAULING Five trucks, each making four trips per day of approximately 10 miles per round trip, at a total cost of 40 cents per mile, per truck. Total cost per month, $2,000.00. This gives a cost of $0.02 per foot of finished slate. MONTHLY COST OF MILLING It is estimated that the mill as laid out, when operating at full capacity, can be run by a force of eighty men. Labor, 80 men at $0.60 per hour .... $9,600.00 Power 1,500.00 Heating . . . 650.00 Interest on investment ($460,000 at 8 per cent per year) . . . 3,067 . 00 Interest on working capital ($100,000 at 5 per cent per year) . . . 668.00 Depreciation (10 per cent per year on $460,000) . . . 3,833.00 Supplies 500.00 Maintenance 500.00 Overhead 2,500.00 Total $22,818.00 With a production of 100,000 feet per month the foregoing gives an approximate cost of $0.23 per foot of finished slate for milling and finishing. 886 BUSINESS ADMINISTRATION TOTAL COST OF SLATE Quarry $0.08 Hauling .02 Milling and finishing .23 Total ... $0.33 per foot While Part I of this report states that the average cost of slate in the field is $0.30 per foot, this is beUeved to be too low for total cost, as we do not think that the cost of production is at present actually known, and do not think that interest, depreciation, etc., are included in that figure. It should also be noted, that while the selling price is given in Part I at $0.67 per foot, this applies to slate as it comes from the rubbing-bed, while the cost given above includes the entire cost of finishing, drilling, and crating. For this reason the selling price of slate from this mill will actually be greater than $0.67 per foot, but to be conservative the profits are estimated on a selling price of $0.67 per foot. PROPITS On the foregoing basis the estimated profits of this enterprise would be as follows: While the plant will be capable of producing 100,000 feet per month for 1,200,000 feet of finished slate per year, we will base our figures on sales of 1,000,000 feet per year to allow for possible shut down, and an accumulation of finished stock. Sales, 1,000,000 feet at $0.67 $670,000.00 Cost at |o. 33 per foot 330,000.00 Profit $340,000.00 A profit of $340,000.00 is equal to 61 per cent on an investment of $555,000.00. A profit of $340,000.00 is equal to 50 per cent on sales of $670,000.00. We believe the foregoing figures to be extremely conservative. Vn. GENERAL DISCUSSION The plant shown on the drawings accompanying this report [Omitted — Ed.] is a t3^ical layout, made without consideration of ANALYSIS OF A BUSINESS CASE 887 the property on which the plant will be built. It is not to be con- sidered as a final design as the completed plant will depend in detail upon the ground and surrounding conditions. The estimates given, however, will amply cover any possible change in design. It is believed that experiments now being made will prove the advisability of designing special machinery, or adapting other exist- ing machinery to this industry with great financial benefit. Such possibilities howsver, have not been considered in this report. December 29, 1920 LaNE AND Lane By J. C. Lane B. The Accountant's Report December i, 1920 Noel Slate and Manufacturing Co. M. C. Noel, President, 1318 East 56th St., Chicago, Illinois. Deas Sir: In accordance with your request, we have audited the books of account of the Noel Slate and Manufacturing Co. for the period July I, 1920, to October 31, 1920, and are submitting our report, here- with, accompanied by the following exhibits and schedule: EXHIBITS I. BALANCE SHEET, OCTOBER 3I, I92O II. SURPLUS ACCOUNT STATEMENT JANUARY I, 1920, TO OCTOBER 31, 1920 III. PROFIT AND LOSS STATEMENT JANUARY I, 1920, TO OCTOBER 3I, 1920 SCHEDULE A. CUSTOMERS ACCOUNTS RECEIVABLE CERTIFICATION We certify that we have made a careful examination of the books of account and other corporate records of the Noel Slate and Manufacturing Co. for the period ended October 31, 1920, and that Exhibit I (Balance Sheet) is indicative of the true financial condition of the Company as at the close of business on said October 31, 1920, subject to verification of separate balance sheet items as covered by subsequent comments. Respectfully submitted. Smith and Jones Certified Public Accountants JFS*K 888 BUSINESS ADMINISTRATION EXHIBIT I Balance Sheet October 31, 1920 RESOLTRCES Current: Cash on hand and in bank $ 1,058.21 Liberty Bonds 400.00 Customers' accounts receivable (Schedule "A") 24,447.95 Merchandise inventory 9,011.12 $34,917.28 Deferred: Stock in other corporations $10,000.00 Trade acceptances receivable — discounted . 2,207.11 Sundry accounts receivable 716.34 Accrued interest 8.52 Contracts, etc i . 00 Deferred charges to operation .... 307.11 13,240.08 Fked: Buildings $5,333-75 Machinery 8,476.59 Furniture and fixtures 1,068.04 Automobile 7So.oo $15,628.38 Less: reserve for depreciation .... 5,425.14 10,203 . 24 Total $58,360.60 LIABILITIES Current: Bank loans payable $ 1,800.00 Trade acceptances payable 4,353-93 Creditors' accoimts payable 10,737.18 Customers' allowances ...... 33-" Accrued pay-roll 265.90 $17,190.12 Deferred: Sundry notes payable $ 1,000.00 Sundry accounts payable 214.46 Accrued liabilities 142 . 30 Trade acceptances receivable — discounted . 2,207.11 3,563-87 Total $20,753.99 Capital: Capital stock outstanding $20,000.00 Surplus (from Exhibit II) 17,606.61 37,606.61 Total $58,360.60 ANALYSIS OF A BUSINESS CASE 889 EXHIBIT II Surplus Account Statement January i, 1920, to October 31, 1920 DISTRIBUTION Jan. 1, 1920, deficit $ 1,955.21 Oct. 31, 1920, surplus (to Exhibit I) Subject to 1920 federal taxes . . 17,606.61 Total "... $19,561.82 ADDITIONS Oct. 31, 1920, sundry adjustment . . . . $ i.oo Oct. 31, 1920, net profit for period (from Exhibit III) Chicago factory . $10,408.81 Pentwater factory 9,152.01 19,560.82 Total $19,561.82 EXHIBIT m Profit and Loss Statement January i, 1920, to October 31, 1920 Expenditures Chicago Pentwater Cost of goods sold: Merchandise inventory, Jan. i, 1920 — Est $ 8,000.00 $ 3,000.00 Merchandise purchases 31,906.99 4,980.97 Freight charges 2,344.83 417-3° Direct labor 4,207.91 8,008.93 $46,459.73 $16,407.20 Less: inventory, Oct. 31, 1920 — Est . . 6,889.39 2,121.73 $39,570.34 $14,285.47 Sgo BUSINESS ADMINISTRATION Expenditures Chicago Pentwater Factory expenses: Executive salary $ 2,100.00 Superintendent's salary $ 2,136.08 Inter-factory freight 603 ■ 74 Crating material 47S09 i,496-47 Ground rent 350.00 Fuel, light, and power 392.87 1,076.53 Shop supplies and expense 2,339.85 2,000.15 Insurance 61.52 162.31 Depreciation — buildings 227.20 285.79 Depreciation — equipment 210.29 496.09 $6,156.82 $8,257.16 Selling expenses: Executive salary $ 2,100.00 $ 1,850.00 Advertising 1,456.58 130.00 Cartage i,655-77 426.67 Auto expense 619.98 Depreciation — automobile 125.00 $ 5.957-33 $ 2,406.67 Administrative expenses: Executive salary $ 3,048.15 $ 2,406.85 Superintendent's salary 2,136.08 Office salaries 699.61 410.89 Traveling expenses 920.62 540.68 Life insurance — officers 303.60 60.95 Printing and stationery 288.22 169.28 Telephone and telegraph 126.91 74.54 Postage 90.77 53.30 Collection and legal expense 97-35 57- 18 Discount allowed 584.75 343-42 Interest paid 672.27 394.83 Bad debts 119.98 Taxes 14.7.88 Other sundry expenses 275.92 162.05 Depreciation — ^fixtures 87.73 1.27 $ 7.463-76 $ 6,811.32 Total $59,148.25 $31,760.62 ANALYSIS OF A BUSINESS CASE 891 Expenditures Chicago Pentwater Net profit for period (to Exhibit II) Subject to 1920 federal taxes .... $10,408.81 $9,152.01 Total $69,557.06 $40,912.63 Sales: income Accrued General $69,338.60 $39,405.01 Inter-factory 406.00 2,190.85 $69,744.60 $41,595.86 Less: returns and allowances .... 668.00 962-45 Net sales $69,076.60 $40,633.41 Miscellaneous income: Recoveries through claims $ 293.35 $ 172.29 Discount earned I3S-42 79-54 Interest earned 46.63 27-39 Sundry income 5 . 06 $ 480.46 $ 279.22 Total $69,557.06 $40,912.63 SCHEDULE "A" Customers Accounts Receivable October 31, 1920 [It is not necessary to give the details of this list. There were 43 firms represented in the list, with a total of $24,447.95. The accounts were all "good," and no single firm owed more than $2,700.] COMMENTS Cash, $1,058.21. — This total was distributed as follows: Hamilton State Bank $558.21 Cash on hand 500.00 Total $1,058.21 Canceled checks for the four-months period ended October 31, 1920, were examined, bank balance employed reconciled with certi- fication of the Heimilton State Bank, and cash on hand together with November receipts verified as to their subsequent deposit up to and including November 20, 1920. 892 BUSINESS ADMINISTRATION Liberty bonds, $400.00. — ^These bonds were submitted for our inspection and found to represent four one-hundred-dollar bonds of the fourth 4I Liberty issue. Customers accounts receivable $24,44'/.^;. — ^A careful examination was made of all outstanding accounts and is reflected in detail by Schedule "A." This schedule also discloses the class of customers and territory served, and we found very few unpaid invoices dating over sixty days. An investigation was made as to unfilled orders on hand as at November 18, 1920, and the invoicing total verified to be $i3j77o-47' These orders were distributed for shipment as follows: Chicago factory Westinghouse Electric and Manufacturing Co. $2,596.85 Other customers 4,416.93 $ 7,013.78 Pentwater factory Q48.70 Direct quarry shipments S>8o7 . 99 Total $13,770.47 All of the foregoing orders were verified with customers original pur- chase requisitions. Merchandise inventory, $g,oii.i2. — Many difficulties arise in the determination of an accurate inventory at either cost or market value. Although it is true, that a physical listing might be made of the Chicago stock, the individual identity of the various slabs with original purchase invoice is not possible, due to cutting and resizing. The salvage of what is termed "scrap" is dependent solely upon the demand for small sizes. Still greater difficulties are encountered in computing the merchandise inventory of the Pentwater factory. The principal service of supply at this point is from the Brunswick- Balke-Collender Co. on a contract basis computed per square foot on what is termed "Rejects and Spoils." Cuttings of electrical slate procurable from these slabs vary and the identity of the cost per car- load is lost upon its first sorting at the plant. We have adopted Mr. Noel's plan of computing the inventory on the following basis: Inventory, January i, 1920 (Est.) plus merchandise purchases (Janu- ary I, 1920, to October 31, 1920), less cost of merchandise sold. Cost of merchandise sold has been determined on the following plan: Chicago: J of net sales for period. Pentwater: \ of net sales for period. ANALYSIS OF A BUSINESS CASE 893 There .is Kttle question as to the comparative accuracy at Chicago, as it is the practice to double the "Vermont list price" on sales. The ratio employed on Pentwater inventory is conservative and we are assured by the president, Mr. M. C. Noel, that the final total of this asset is extremely low. It may be noted that the inventory at the close of the period represents a decrease of $1,988.88 under January i, 1920. Stock in other corporations, $10,000.00. — This represents the out- standing capital stock of the Noel Slate and Manufacturing Co. of Canada, Ltd., of which ninety-five shares ($9,500.00) have been originally issued to the Noel Slate and Manufacturing Co., as attested by Williams and Williams of Toronto, Canada, solicitors for the Canadian Company, and the remaining five shares ($500.00) indorsed over to the Illinois Corporation, as verbally stated by Mr. Noel, president. The statement submitted by Mr. W. G. Rightmire, manager at Toronto, Canada, on October 31, 1920, indicates a present book value of $101 . 28 per share on this stock. Trade acceptances receivable — discounted, $2,207 ■ ^^- — This figure is verified by letter of Hamilton State Bank under date of November 20, 1920, and covers four acceptances, all maturing prior to December 28, 1920. The practice of discounting customers' paper immediately is followed in practically all instances. Sundry accounts receivable, $716 .34. — This amount is composed of the following personal and sundry items: M. C. Noel, president I 17.71 O. L. Lester, secretary 35 00 Due from carriers 290.99 Due from government . . 12.50 Noel Slate and Manufacturing Co. of Canada . . 360. 14 Total $716-34 The first two items are overdrafts against officers' salary accounts. The item of $290.99 covers three loss and damage claims against common carriers, aU of which were paid during November. A daim for refund has been filed with the collector of internal revenue for rebate of $12.50 on account of excess payment on 1918 corporation income taxes. The account against the Canadian factory is for merchandise and the present level of exchange has deterred its settlement. 894 BUSINESS ADMINISTRATION Accrued interest, $8.52. — This is the interest on Liberty Bonds held due October 15, 1920. Contracts, etc., $1 .00. — At the request of Mr. M. C. Noel, presi- dent, we have set up the nominal value aforestated on the contract entered into between the Brimswick-Balke-Collender Co. of Michigan and the Vermont and Pennsylvania Slate Co. on June 20, 19 16, for a period of ten years and assigned to the Noel Slate and Manufacturing Co. August 19, 1918. This contract provides for the deUvery of all slate slabs known as "Rejects and Spoils" to the Pentwater plant at a price per square foot, subject to adjustment every three years. This adjustment is dependent upon the market value of slate preva- lent. This contract also places sufficient land at their disposal for operations at a nominal ground rent of five ($5.00) dollars per annum. From past observation, Mr. Noel states the minimum price considered for the sale of the remaining term of the contract would be $10,000.00. In passing, we also draw attention to the ground lease from the Taylor Marble Co., the value of the remaining term being, however, of a speculative nature. Deferred charges to operation, $307.11. — This is made up of the two appended items: Development expense $250.00 Unexpired insurance S7-ir Total $307.11 The development expense hsted is in conjunction with the proposed Vermont quarry and factory, covering advance made to resident engineer retained at Fair Haven, Vermont. All insurance policies on hand were examined and unearned premixmis determined there- from. Insurance carried is workmen's compensation, auto Uability, and fire to the amounts of $4,000.00 at Chicago and $2,000.00 at Pentwater, Michigan. Policies in favor of the Corporation are also carried on the Uves of M. C. Noel and T. E. Muir in the amounts of $5,000.00 and $2,500.00 respectively. There are ordinary life- policies taken out in May, 1919, and have, therefore, no cash sur- render value as at the date of this report. Fixed assets, $10,203.24. — Initial charges and subsequent addi- tions to these accounts have been entered upon the books of account at cost and sufficient reserves set up to cover depreciation sustained. The Chicago factory is a one-story brick building (2o'X7o') erected in 1915 on land sub-leased from the Taylor Marble Co., ANALYSIS OF A BUSINESS CASE 89s September i, 1915, for a ten-year period. The Pentwater factory was also erected on leased ground and is a one-story cement block structure built in 1916 and turned over to the Noel Slate and Manu- facturing Co. two years later. Depreciation has been allowed against these assets with a view toward their extinguishment by August 31, 1925, and June 19, 1926, respectively. A depreciation of 10 per cent per annum has been allowed against the machinery and fixtures account. The automobile is a 1917 Buick roadster purchased in the fall of 1919, on which we have estimated the life at five years. We are appending a table indicating the depreciation charged against each class of asset since date of acquirement to October 31, 1920, inclusive: Description Cost Depreciation Percentage Net Buildings $ 5.333-75 8,476.59 1,068.04 750.00 $2,204.07 2,699-35 396.72 125.00 41 32 37 17 $ 3,129.68 ••• 5,777-24 671.32 625.00 Fixtures Automobile Total $15,628.38 $5,425-14 35 ' $10,203.24 Bank loans payable, $1,800.00 — This amount covers total direct liability to the Hamilton State Bank, as set forth in their verification of November 20, 1920. Trade acceptances payable, $4,353.93. — ^The distribution and maturity of these acceptances are as follows: Date Given Creditor Date Due Amount August 9, 1920 August 24, 1920 September 10, 1920 September 10, 1920 October 10, 1920 September 24, 1920 September 30, 1920 October 10, 1920 Conrad Slate Co. Conrad Slate Co. Conrad Slate Co. Amos Slate Works Stevens Slate Co. Conrad Slate Co. Conrad Slate Co. Stevens Slate Co. November 9, 1920 November 24, 1920 December 9, 1920 December 10, 1920 December 10, 1920 December 22, 1920 December 29, 1920 December 29, 1920 $1,096.05 1,207.76 361.24 I 24 . 46 257-79 328.75 385-11 592.77 Total $4,353-93 Written confirmation of the foregoing totals was secured from creditors on aU of the foregoing items with the exception of $124.46 due the Amos Slate Works. Creditors' accounts payable, $10,'/ 37. 18. — ^A careful examination was made to ascertain all liabilities under this caption by reference 896 BUSINESS ADMINISTRATION to statements on hand and written verification from the larger creditors. We have included all known liabilities as of this date in our total figure. The present practice is to discount bills or settle on the creditors regidar terms of thirty days net. Customers' allowances, $33.11. — This covers sundry refunds due customers on overcharges and allowances. Accrued pay-roll, $265 .go. — ^This is the total pay-roU at the Pent- water factory for week ending October 30, 1920. Sundry notes payable, $1,000.00. — ^This represents the balance of various loans from Mr. C. E. East, which are rapidly approaching liquidation. Interest charges thereon have been paid promptly. Sundry accounts payable, $214.46. — This is the unpaid balance to the credit of Mr. T. E. Muir, superintendent at the Pentwatcr plant as of October 31, 1920, on salary and bonus account. Accrued liabilities, $142 .30. — We have endeavored to include all liabilities incurred on which no invoice has yet been rendered, and the foregoing figure covers the total of accruals for power, taxes, etc. Trade acceptances receivable — discounted, $2,20^ . 11. — ^The Hamil- ton State Bank has confirmed this contingent liability. Capital, $3'/, 606 .61. — ^The stock certificate book and corporation record were submitted for our inspection. The authorized capitaliza- tion is $20,000.00, consisting of two hundred shares of par value of $100.00 each. AU the stock is outstanding and with exception of required nominal issues held by the president, Mr. M. C. Noel. Present officers and annual compensation authorized are as follows: (President \ . > 112,000.00 \Assistant Treasurer/ • • • • > • The Company was incorporated under the laws of Illinois on August 5, 1914. This report indicates a present book value of outstanding stock of $188.03 per share. PROFIT AND LOSS The detailed operating statement for the ten-months period is set forth in Exhibit III. This statement shows the operations of the Pentwater and Chicago factories individually, and certain of the administrative expenses have by necessity been charged on a pro rata basis. We have made this division on a percentage derived from the ratio of net sales of the two factories to total sales, viz: M. C.Noel i„ Treasurer ANALYSIS OF A BUSINESS CASE 897 Percentage Chicago 63 Pentwater 37 Total 100 The appended table is an interesting reflex on operations for the ten-months period, setting forth the percentage of profits on gross income. Percentage Chicago Pentwater Cost of goods sold 56.9 34.9 Factory expense 8.8 20.2 Selling expense 8.6 5.9 Administrative expense 10.7 16.6 85.0 77.6 Net profit 15.0 22.4" Total 100. o 100. o Various analyses and tests were made as to the integrity of this operating statement. GENERAL We are submitting the following table of earnings and sales from incorporation to October 31, 1920: Net Profit and Year Net Sales Compensation of M. C. Noel 1914 I 2<399- 51 ' Loss (s mo. only) 191S 24,036.0s I 712-38 1916 30,265.51 3,687.89 1917 36,109.14 4,172-87 1918 91,314.25 14,714.70 1919 52,599-14 4,820.7s 1920 107,113.16 29,560.82 (10 mo. only) Total .... $343,836.76 $57,669.41 The loss in 1914 is attributed to the initial establishment of the Company. Inasmuch as this is a close corporation, in which no one other than Mr. M. C. Noel is vitally interested, we believe the earnings to be more equitably set forth by combining the net profit with drawings of the president. The low figure in 1919 is due to inability to secure raw material and the marked increase during the current year to the utilization of "tailings" and "scrap" on numerous orders for small sizes. As stated elsewhere, the market value of this class of material is dependent solely upon the demand. 898 BUSmESS ADMINISTRATION HISTORICAL On July I, 1914, Mr. M. C. Noel resigned from the position of western manager of the Conrad Slate Co., of HydevUle, Vermont, and opened an oflSce at 1318 East s6th Street, Chicago, marking the beginning of the organization of the Noel Slate and Manufacturing Co. AppUcation for incorporation was made and granted by the State of Illinois August 5, 1914, the initial capitalization being $2,500.00. On September i, 1915, ground was sub-leased from the Taylor Marble Co. and present factory erected that fall. In May, 1916, the capitalization was increased to $10,000.00 due to the growth of the business. In June, 1918, Mr. Noel turned over the Vermont and Pennsylvania Slate Co. of Pentwater, Michigan, a co-partnership, to the Noel Slate and Manufacturing Co. at a net value of $5,077 .51, a figure computed on cost and the capitalization was further increased to $20,000.00. The present financial status of. the Company is clearly set forth in the accompanying balance sheet. C. The Prospectus NOEL SLATE AND MANUFACTURING COMPANY Incorporated in lUinois, August 4, 1914 Head Office: 1318 East 56th Strfeet, Chicago, 111. Tangible assets (net worth) December 31, 1920 (approxi- mately) $ 40,000.00 Conservative value of contracts, leases, and Good WiU . . 75,000.00 $115,000.00 Proposed increase $500,000.00 CHARACTER OF BUSINESS This Company has been doing a general slate business, including the merchandising of stock sizes, the milling and finishing of special sizes, and the fabrication and erection of slate interiors and fixtures for the building trade. The principal specialty has been slate for electrical purposes. The slate business is particularly steady and constantly growing; it is not affected by fad or fashion; the demand is even more constant than for building materials in general and it is reasonably sure to keep pace with the electrical industry at large; no commercially feasible or cheaper substitute for slate is known, whereas it is cheaper than marble and better than marble for a great many purposes on account of being non-porous and stronger. ANALYSIS OF A BUSINESS CASE 899 The dectxical industry alone affords a large and constantly increasing market for slate. Marble is becoming obsolete for switch- boards and slate is taking its place. Slate is used almost exclusively for mounting the details of controlling apparatus, rheostats, switches, and numerous other electrical devices. Our business has had a steady growth during the past six and one-half years, and has shown large profits on a relatively small invested capital. But these results are not sufficient criteria for esti- mating profits from our proposed new developments, for the reason that many of the limitations under which we have been working wiU be removed as soon as our quarry developments and Fair Haven Mill are completed. The hmitations referred to may be smnmed up as follows: 1. Loss of business due to scarcity of slate and consequent inability to meet desired deUveries. 2. Abnormal loss from the resizing of existing stocks. 3. The frequent payment of premiums for raw material at times when our own facilities were over-sold. 4. The large number of incoming less-than-carload shipments. 5. Loss of prestige with certain customers whose business we could not take care of promptly or properly. There has been an insistent and yet patient demand for slate — a demand that has been grossly ignored by most of the producers in that they either have not seen or have neglected their opportunity to meet the demand by modernizing their plants and their business methods. Fortunately for the industry, as far as its future is con- cerned, there has been no available or satisfactory substitute for slate. Hence, it is not too late to reclaim the ground that has been lost. We expect to meet the demand by adding prompt and efficient service to inherent values. Without the slightest egotism and without the possibility of contradiction, the Noel Slate and Manufacturing Co. is the only slate concern not of the old school. Practically all of our competitors have been "born and raised" in the business, and possibly because of the absence of any aggressive competition they have been content to plod along in the same old rut — ^good slate men in their own way, but minus the business acumen and initiative which alone can impel growth and increasing profits. Satisfied with being over-sold, they have not seen the commercial advantages of making "spot" de- liveries, nor of modernizing their plants in order to obtain constantly decreasing costs. 900 BUSINESS ADMINISTRATION With a stock of active sizes (finished and semi-finished) equal to one or two months' output, the possibility of a shut-down due to accidents or labor troubles, would not be a serious matter in com- parison with a competitor having no finished or semi-finished stock on hand. THE DEMAND FOR ELECTRICAL SLATE If evidence is wanted of the uses of and demand for electrical slate, one has only to turn the pages of any of the several periodicals which are devoted to the commercial and engineering phases of the electrical business such as: The Electrical World, New York; The Electrical Review, Chicago; The Electrical Record, New York; The Electric Journal, Pittsburgh; Journal of Electricity, San Francisco; The Electrical News, Toronto, Canada; Journal of the American Institute of E E, New York; Electrical Merchandising, New York. These pubUcations abound in illustrations of electrical and alUed appUances which are mounted on slate bases or backs. There are vast industries for the production of a wide range of measiiring, indicating, recording, and testing instruments, the sale of which must necessarily be attended by the sale of slate blanks upon which to mount them. Obviously the demand for slate will always be somewhat proportional to the sale of these instruments. At the present time, many of the principal users of electrical slate have large orders placed with producers of an inferior product, simply because they cannot obtain their requirements from their favorite source. THE FtrSE INDUSTRY It is a well-known fact that the fuse business has become a vast one, there being at least ten large manufacturers of these small but important devices, and the business is still growing. Nearly aU makers of fuses are large buyers of slate. Nearly all users of fuses are users of slate. Hence, the growth of the electrical slate business has been and will continue to be somewhat proportional to the growth of the fuse business, as well as to the growth of other branches of the electrical industry. THE GROWTH AND SUCCESS OP OUR BUSINESS The growth and success of our business may be definitely laid to the following main causes: I. The growth of the electrical industry at large. ANALYSIS OF A BUSINESS CASE 901 2. The loyal and effident services of our entire personnel, and especially of the superintendents of our several factories. 3. Our never ceasing effort to keep in stock as many as possible of the standard and active sizes of slate, thereby out-classing all competition in the matter of deUveries. 4. Our unimpeachable price policy, which had its inception in January, 1916, when we published the first piece price-list, thereby following the lead of the window-glass industry. For nearly five years we were the exclusive publishers of such a list as applied to slate, while the only other list which has since made its appearance is much roferior to our current list in many important respects. 5. The development of a large business for small sizes of slate thereby enabling us to make advantageous and profitable use of the salvage ends and tailings from larger slabs. 6. The proximity of our Chicago, Pentwater, and Toronto factories to large markets for electrical slate. 7. The persistent but conservative amount of publicity, as com- pared with practically no advertising on the part of our competitors. 8. The closest possible attention to inquiries, orders, and all correspondence. The manufacture of electrical devices designed for mounting on slate is of itself a prodigious industry, being represented by well- known and highly successful concerns whose sales of these devices aggregated no less than $50,000,000 .00 during 1920. Electrical application and control would be impossible without these devices. Their necessity insures their continued demand, as well as the demand for slate panels and bases upon which to mount them. ELECTRIC ELEVATORS AND CRANES The extensive and constantly increasing use of the electrically operated elevator and its never-ending improvement, create a large demand for slate. The numerous electrically operated cranes, both large and small, that are being installed every year, require slate control panels for each installation. The Cutler-Hammer Manufacturing Co. of Milwaukee, and New York, are the largest manufacturers of electric control apparatus in the world, having twenty-three acres of floor space, and still growing. This concern used about forty carloads of electrical slate in 1920. 902 BUSINESS ADMINISTRATION OUR ORGANIZATION TO DATE M. C. Noel: has been president and general manager of the Noel Slate and Manufacturing Co. since its organization in 1914; has entered into a contract with the corporation to remain its active head for ten years from January i, 1921. J. E. Muir: has been with our Company since January i, 1916, and Superintendent of om Pentwater factory since July i, 1916. W. G. Rightihre: has been with us since the organization of our Canadian Company in January, 1919, and is now general manager of that property. (The outstanding stock of the Noel Slate and Manufacturing Co. of Canada, Ltd., is $10,000.00, all of which is owned by the Noel Slate and Manufacturing Co. of Illinois.) R. M. Whitney: a mechanical and industrial engineer with some previous experience in the slate business. Was retained by us in October, 1920, to collect certain statistical information and report on several phases of the slate industry of Vermont, iromediately after which we retained his services as manager of our Vermont interests. Messrs. Muir, Rightmire, and Whitney are men of proven worth to our company and to the slate industry. They have subscribed UberaUy to our proposed new stock issue, thereby proving their interest and faith in our future. The slate industry in the United States is 170 years old. The best slates for electrical purposes are the black slate of Maine and the Cedar Mountain clear purple slate of Vermont, both having practically the same physical and electrical characteristics, and both haviag fine drilling qualities. The Maine slate is difficult and expen- sive to quarry and is about five hundred miles farther from the center of the electrical market than the Vermont quarries. The Noel Slate and Manufacturing Co. have secured a ninety- nine-year lease from the Lake Shore Slate Company covering the slate rights on their Cedar Mountain property, about five miles from Fair Haven, Vermont, upon which there is a known deposit of about 15,000,000 feet of slate, which our experts advise us can be success- fully worked from four openings, two of which are already made. The f uU consideration for the lease mentioned above is a monthly rental of $300.00 beginning March i, 1921, and is subject to can- cellation by us only, on thirty days' notice. The cash price asked by the Lake Shore Slate Company for this property was $90,000.00, whereas our lease gives us all the rights and advantages of ownership. ANALYSIS OF A BUSINESS CASE 903 The legal sufficiency of the lease mentioned above has been passed upon by our Chicago and Vermont attorneys. The salient points of our proposed preferred stock issue are: 1. It is a direct and the only preferred obligation of a going corporation which has been continuously successful since its incor- poration in 1914. 2. We are engaged in a basic, extractive industry upon which the electrical industry is enormously dependent. There is nothing new or experimental about the quarr3dng or marketing of electrical slate. The demand for the product does not have to be created — it actually exists, and our proposed output of 100,000 feet per month cannot possibly satisfy the full demands of the electrical industry. 3. In the opinion of our experts, and of the General Electric Company's purchasing department, the Cedar Mountain purple slate is the best in the Vermont Slate Belt. There is at present only one other operation on the same vein — that of the Conrad Slate Co. 4. The net profit, after actually padding the estimated disburse- ments and scaling the estimated income, is conservatively placed at four times the fixed dividend rate on the preferred stock. 5. About 70 per cent of the proceeds from the proposed issue of preferred stock will be immediately invested in tarigible property such as quarry equipment, mill machinery, raw materials, and factory site, provided the latter is not obtainable as a free site from the town of Fair Haven for which negotiations are now pending. About $150,000.00 will be needed as working capital. D. Stock Subscription Form NOEL SLATE AND MANUFACTTJIONG COMPANY A Corporation of the State of Illinois Capital Stock now issued and outstanding — $20,000.00 of one class, having a book value as of December 31, 1920, of approximately $115,000.00. PREFERRED STOCK AGREEMENT It is proposed to change the charter of the Noel Slate and Manu- facturing Co., an Illinois corporation, to provide for: 5,000 shares 8 per cent cumulative sinking fund preferred stock, par value $100.00 each; and 10,000 shares common stock, no par value. 904 BUSINESS ADMINISTRATION Said preferred stock to be preferred both as to assets and dividends. Dividends payable either annually on December 31 or semi-annually on July 31 and December 31. Said preferred stock to be callable at par and accrued dividends on any dividend date on sixty days' notice to stockholders at the last address furnished the Company. The 10,000 shares of said common stock shall be issued to the present owners of the stock of the Company in exchange for their present shares, the owners thereof agreeing to set aside 5,000 shares oj said common stock and to transfer same, pro rata, to the preferred stock- holders upon ftdl payment of their subscriptions without further con- sideration. From the net earnings of the Company in each year, after making proper provision for all expenses, reserves, depreciation, depletion, and all dividends on the preferred stock accrued or due, there shall be set aside into a fund for the redemption of the preferred stock, not less than one-half of such net earnings. As often as the redemp- tion fund shows $50,000.00 accumulated therein, 500 shares, as near as may be of the preferred stock shall be retired pro rata on all stockholders, but fractional shares shall not be retired, and the amount apportioned to such fractional shares shall remain ia said redemption fund for further accumulation. The remainder of such net earnings may be appropriated as dividends, reserved or applied as determined by the Board of Directors. No dividend in excess of $5.00 per share per annum on the common stock shall be paid until all of the preferred stock is retired. Said issue of preferred stock shall be a closed issue and no new stock or other securities or obligations shall be issued by the Company having a superior or equal lien on the property of the corporation except with the consent of two-thirds of the said preferred stock issued and outstanding (this provision, however, shall not apply to the creation of ordinary debts in the operation of the business). The proceeds from the sale of preferred stock shall be used for the purchase of a factory site at Fair Haven, Vermont (unless a suitable site can be leased on favorable terms), the erection of a modern slate mill having from 40,000 to 50,000 square feet of heated floor space, the equipment of same, the equipment of the necessary quarry developments, for working capital and for such other needs of the business as the Board of Directors may determine; said slate miU to be designed and biiilt by Lane and Lane, industrial engineers. ANALYSIS OF A BUSINESS CASE goj The Board of Directors of the Company shall consist of seven members. The undersigned hereby subscribes to the number of shares of said proposed preferred stock set opposite his name, to be paid for when and as called for by the Board of Directors at the rate of $ioo. oo per share. This subscription to be binding only in the event that $500,000.00 par value of said preferred stock be subscribed for and that said stock be authorized by the State of Illinois in accordance with the above provisions prior to May i, 1921. ^tness the Hand and Seal of the undersigned this day of , 1921. No. of Amount Shares (Seal) $ Subscriber's address INDEX INDEX fThe references are to pages] Absentee management, i68. Acddent prevention, see Safety. Accommodation bills, 491. Accountant's report, 887. Accounting: administrative aid, 828; factor in organization, 790; records reflect financial policy, 469, 486; a source of cost information, SS^; see also Balance sheet; Costs; Cost accounting; Profit and loss statement. Accounting department organization, 519 (chart). Accounts receivable, 479, 482; assign- ment of, 41S, 499; purchase of, 415. Administration, i, 756; basic features, 756; finance, 385; historical back- ground, 850; under large-scale pro- duction, SS4; as leadership, 794; market, 243; mental aspects, 764; personnel department, 115, 226; production, 523; risk-bearing, 643. Administrative functions, 607 (chart). Administrator: qualities, 667; task of, 4,10. Advertising, 267; administration, 352; character of demand aroused, 270; classification, 269; co-ordination with sales department, 352; by manufac- turer, 314; reduces number of middle- men, 30s (chart); see also Demand creation. Advertising agency, functions, 271. Advertising control, 329. Advertising manager, 294 (chart). Advisory committee, 836. Agency: consequences, 711; formation, 711; objects, 710; an organization device, 710; termination, 713. Agent, 739; corporation, 737; powers, 712. Amalgamation, 747. Amortization, 462. Analysis: of a business problem,^ 772; industrial, 847; used m administra- tion, 765. Annuity insurance, 684. Application blank, 219. Army tests, 209. Assembling, 262; of a business proposi- tion, 391. Assembly process of manufacturing, 567- Assessable stock, 442. Assets, 476; corporate, 456; deferred, 480. Associations, 716. Associative action: in financial admin- istration, 417; see also Co-operation. Auctions, a marketing device, 301. Auditor, 475. Automatic machinery, effect on work- ers, S49- Automobile banks, 415. Balance sheet, 475; analysis of, 478; sample, 477, 496. Bank check, sample, 492. Bank loan, information required, 495. Bankers: as collection agents, 411; influence reorganization, 466; as promoters, 392; as underwriters, 404. Banker's bills, 491. Banking: specialization in, 409; by trust companies, 423. Bill of exchange, 489; classification, 490; sample, 491. Bond houses, 407. Bonds, 438, 450; classification, 448; ownership and transfer, 449; recitals in, 450; redemption, 452; risks in purciasing, 679; sample, 454; why issued, 434, 448; see also Corporate securities. Bonus system, 176, 184. Borrowing, to finance an enterprise, 394. Brand, determination of, 313. Bricklayer, illustration of motion study, 589- Brokers, 278; help in assembling, 264; produce trade, 275; as promoters, 392; as underwriters, 404. 90Q 910 BUSINESS ADMINISTRATION Budgetary control, 337, 831; limita- tions of, 83 s. Budgets: cash, 520; sales, 333. Bush terminal, loi. Business activities, classification, 4. Business administration, see Adminis- tration. Business case, analysis of, 854. Business depression, 662. Business education, vii; elements of curriculum, viii. Business judgment, see Judgment. Business manager, see Administrator. Business organization, see Organization. Business problems, character of, 644. Business risk, see Risk. Business unit: form of, 696; tests of efficiency, 703; see also, Corporation; Individual proprietorship; Partner- ship. Buying, 366, 369, 367, (chart); aids to, 369; see also, Purchasing. Buying records, 367. By-laws, 736. By-products, 569. California Fruit Grower's Exchange, 276. Call loans, 412. Callable preferred stock, 444. Capital, 433; changes in volume of, 429; fears of, 164; immobility, $$0; and labor, 127, 168; risks, 678. Capitalization, 433, 438. Captains of industry, 851. Case, analysis of business, 854. Case and problem method, x, xi. Cash, 479; budget estimates, 520. Central manufacturing district, 96. Centralization of control, protest against, 602. Centralized personnel department, 231. Chain-store system, 257, 284; classifica- tion, 296; organization, 298 (chart). Chance, 659; see also Risks. Channels of distribution, 317. Charter: corporation 436; object clause, 732. Check system, value, 411. Cities: advantages and disadvantages for plant location, 79, 84; satellite, 80. City advertising, 106. City planning: Boston, 112 (map); purposes, scope, methods, 109; Tor- rance, 113 (map). Classification, 591; an aid to knowledge of facts, 757; manufacturing prob- lems, 570. Climate, importance in plant location, 30, 40, 95. • Club buying, 368 (chart). Collection by bankers, 411. Combinations, 746. Commercial acceptance trust, 415. Commercial banks, 410; part of financial organization, 401. Commercial bill, 491. Commercial centers: Baltimore, 108; Boston, 1X2 (map); Chicago, 98; location, 50; New York City, 84; Philadelphia, 106; United States, ss. Commercial credit institutions, 410, 415- Commercial credit instruments, 469, 488, 498. Commercial enterprises, corporate form in, 70S- Commercial loans, 412. Commercial paper houses, 414. Commercial risks, 659. Commission houses, 277. Commission merchants, 275; assemble produce, 264. Committee system, 806. Commodity analysis, 323. Common stock, 438, 442; see also Corporate securities. Coimnunicating aids: of control, 823; of prodiiction, 581, 584, 586, 588, 589, S9I, S9S- Companies Act, 436, 720. Company store, 283. Comparison: in production, S74; use in administration, 813. Competition, sometimes dangerous, 552. Comptroller, 512; 606 (chart); super- vises budget, 832. Concentration: automobile products, 49 (map); causes of, 46; of control, 745; cottonspinning, 44 (map); fiour mills, so (map); of industries, 45; lumber products, 49 (map); manu- facture of utilities, 323; manufactures in New York, 84; manufacturing, (48) map. Consolidation, 746. INDEX 911 Constant cost, see Costs. Construction: manufacturing plant, 563; unit system, 565. Consumer: co-operative chain stores, 298; determines plant location, 30, 86, 9S; needs determine demand, 332. Consumer's goods, marketing of, 302. Consumption per capita use in market analysis, 321. Contingent liabilities, 481, 497. Continuous process, 563, 784. Control: budgetary, 832; concentra- tion of, 74s; department, 585; of effort, 814; factors of, 785; graphic, 584; large- vs. small- scale industry, 602; measuring and communicating aids, 823; organization of, 14; production, 556, 573; under scientific management, 617, 631; by share- holders, 438; zones of business, 3; see also Measuring aids. Convertible preferred stock, 444. Co-operation, 751; in financial adminis- tration, 417; reduces risk, 670. Co-operation of specialists, 248; rela- tion to marketing, 261; see also Specialists; Specialization. Co-operative buying syndicates, 263. Co-operative stores, 286. Co-operative wholesale associations, 274. Corporate assets, 436. Corporate directors, liability of, 739. Corporate financing, 438; diagram, 403. Corporate form: compared with part- nership, 716; importance, 70s; re- duces risk, 674; when used, 696. Corporate policy, in issuing securities, 4S6. Corporate reorganization, 465. Corporate securities, 433, _ 434, 438; issuance, 456; underwriting, 405; value, 4S7; see also, Stocks; Bonds. Corporate suretyship, see Suretyship. Corporate trusts, 424. Corporation, 70s; charter, 436, 730; dissolution, 744; history of, 727; objects, 732; sale of property, 737; see also Business unit; Corporate form. Cost accounting, 2S9, S74> S9S. 6°i; services of, 597; system, 636. Cost of starting a business, 389. Costs: basis for capitalization, 433; basis of, in manufacturing, 600; beginnings of study, 612; of machin- ery, S79; variables in, 599. Cotton manufacturing: advantages and disadvantages of southern location, 40; location, 38; risk of price changes in, 661. Country, advantages and disadvantages for plant location, 79. Coupon bonds, 449. Creative instinct, 154. Credit department, 419. Credit extension, 488; legislation, 418; for marketing, 266; terms of, affects working capital, 397; trade, 492. Credit information, 475. Credit manager, jobbing house. 281. Credit men. National Association of, 418. Cumulative preferred stock, 443. Current assets, 476, 479. Current liabilities, 476, 480; policies respecting, 487. Debenture stock, 445. Deferred assets, 480. Demand: analysis, 3iSi changes affect price, 344; elastic, 348. Demand creation, 267; a goal of sales management, 309; see also Advertis- ing. Demand loans, 412. Department stores, 284; characteristics, 291; number, 291; organization, 293, 294 (chart); relation to manufacturer, 295- Depreciation, soi, S07. Description of occupations, 202, see also Job analysis. Design, 570; of machinery, S79. Deterioration, risk in marketing, 266. Differential piece rate, 613. Differentiation of products, 346. Direct cost, see Costs. Direct selling, 257. Director, 740. Disassembly process of production, S69. Disciplinarian, 621. Discipline, a factor in organization, 790, 822. Discount house, 415. 912 BUSINESS ADMINISTRATION Dispersion, see Concentration. Distribution, analysis, 317. Dividend policy, 486, 509. Domestic credits, 429. Draft, 489. Dynamic risks, 655. Earnings, basis for capitalization, 43^. Economic activity, forms of, 2. Economic organization, forces respon- sible for, 256. Economic selection, 842. Education: expansion related to mar- keting, 261; tedinical, 536; see also Training. Efficiency, reasons for lack of, 132. Elastic demand, 348. Employee representation, 187; an ex- treme case, 188. Emplojfment division, 119; 124, 241, 608 (charts); selection and placement, 146; see also Personnel department. Endowment insurance, 685. Engineering concerns: as financing houses, 409; as promoters, 392. Engineering, contribution to produc- tion, S39. Engineer's report, 855. Entrepdt: causes of decline, 53; natural trade of, 52. Environment, physical, 11. Equipment, of manufacturing plants, S72. Esprit de corps, 158, 60s, 79°) 807, 817. Executive, see Administrator. Executive committee, 743. Executives, in early development of the United States, 851. Expenditures, control of, 832, 834. Expense distribution, 595, 601; see also Cost accounting. Expense standards, 333. Experience, use in management, 813. Extractive industry, location, 28. Factories, location, 73. Facts, basis tor action, 757. Fatigue, 195; detection of, 196; methods of reducing, 140. Fidelity insurance, 693. Finance administration, 12, 385; ocgaii- ization for, 512, 813, 518 (diart); standards, 520; unsettled problems of, 38s. Finance company, 415. Financial centers, 58. Financial manager, duties of, 513. Financial organization of society, 398; use by business manager, 400. Financial policies, 251, 429, 469; deter- mination, 240; elements of, 486; Ford case, 510; influenced by fore- casting, 422. Financial problems: marketing, 266; starting a business, 388. Financial program, formulation of, 834. Financial services, 420; utility to manager, 421. Financial standards, 520. Financial statements, 470, 475. Financing, 391; corporate, 403 (dia- gram); methods of, 392; non- corporate, 402 (diagram); partner- ship, 395 ; side line, 394. Fixed assets, 476; valuation of, 478. Fixed capital, 396; increases risk, 663. Fixed liabilities, 476, 481. Follow up: personnel, 149; production, 636. Forecasting: reduces risks, 670; ser- vices, 420. Foreign exchange, 429. Foreman, 147, 152, 200, 223; duties of, 618; inspection by, 583. Founders' stock, 445. Fraternal organization, 716. Freight rates, see Transportation rates. Fuel supply, important in plant loca- tion, 29. Fidl paid stock, 441. Functional foreman, 618. Functional middlemen, see Middlemen. Functional organization, 617; diagram, 620. Functions of administration, 1. Functions in manufacturing, 570. Future trading facilities, a marketing device, 301. Futures, 273, 690. Grading, 267. Grievances, 235. INDEX 913 Gross earnings, disposition of, 470. Group relations, 126 (chart). Guaranteed stock, 445. Guaranty, reduces risk, 683, 692. Health division, 124, 126, 241 (charts); occupational disease, 138. Hedging, 688; reduces risks, 683. Hiring specifications, 197. Hours of work, 143. Human analogy, organization, 808. Human equation, in business problems, 649. Importers, 263. Incentives, 153, 8r7; absence of, 171; history of, 154; and output, 127. Incorporation, results of, 724. Indexes of business conditions, 420. Indirect costs: relation to marketing, 258, 260; see also Costs. Individual proprietorship, 708; finan- 'cing, 402 (diagram); when used, 696; see also Business unit; Small shop. Industrial imitation, 86; in plant location, 35. Industrial plants: Central Manufactur- ing District, 99; classification, 565; construction and equipment, in rela- tion to site location, 76. Industrial representation, see Employee representation. Industrial Revolution, 256. Industrial risk, see Risks. Industrial society: financial organiza- tion of, 398; forces causing change, 17; specialists in, 243. Industrial unrest, 164, 664; encouraged by scientific management, 64r. Inspection, s8r, 574; by purchasing department, 366; purposes of, 581. Inspector, 6T9; duties of, 582. Instincts, 168. Instruction card, 620. Insurance, 683; fidelity, 693; organized suretyship, 693; principles of, 676; when not needed, 686; iee a/jo Risks. Insurance companies: as financial insti- tutions, 425; as investors, 407; part of the financial organization, 401. Intelligeiice test, 209; rating, 2to; use of, 211. Interchangeable system, in production, 563. Interdependence: of business problems, 378; mcreases risk, 66 r. Interlocking directorates, a marketing device, 301. Interview, 220. Interviewer, qualifications, 221. Introduction of new employees, see Placement. Inventory, valuation of, 480. Investment: encouraged by limited liability, 677; risks of, 678. Investment banking, 407; part of financial organization, 401. Investment credit institutions, 404. Investment loans, 412. Invoices, 366. Job analysis, 122, 197; how to make, 200; reasons for, results of, 198; samples, 202. Job classification, 199. Job specification, 197. Jobber, 262, 279; chain store, 297; dry goods, S7> fruit and produce trade, 275; relation to orthodox system of distribution, 306. Jobbing contractors, 301. Joint stock company, 716; character- istics of, 722. Judgment, 644, 651; analysis of, 768; confidence in, 668; of financial mana- ger, 470- Keyed copy, in advertising, 329. Labor: and capital, 127, 168; fears of, 164; inefficiency, 135; objections to scientific management, 639, 846; risks of, 678; see also Personnel. Labor administrator, 232. Labor audit, 122-23; uses of, 224. Labor policies, 235, 238. Labor reserve, a necessary cost, 669. Labor supply: Central Manufacturing District, 99; 126 (chart); determines plant location, 3r, 42, 95; New York City, 8s. Labor turnover, 124 (chart). Large-scale production: advantages, 553; control, 602; reduces risks, 670, 673; relation to marketing, 260. 914 BUSINESS ADMINISTRATION Law, see Social control. Law of large numbers, reduces risks, 671,682. Laws of administration, 756, 791. Lawyers, as promoters, 392. Layout, 563; under scientific manage- ment, 616. Leadership, 794, 818; industrial, 850. Lease and royalty contracts, a market- ing device, 301. Liability, 476, 481, 698, 704; of corpo- rate directors, 739; of trustees, 750. Life insurance, 683. Limited' liability, 698; encourages investment, 676. Limited partnership, 718. Limited Partnership Act, 720. Line and staS organization, 800. Lloyds' insurance, 687. Loans: classified, 412; ways of making, 412. Local concentration, see Concentra- tion. Location, 557; see also Plant location. London, as a financial center, 58. Machine industry, see Technological industry. Machinery: educative influence, 547; installation, 580; selection of, 579. Mail-order business, 257, 259, 285, 287; competition with local retailers, 289; organization, 288 (chart); wholesale dry goods, 58. Mail orders, advantages, and disadvan- ages, 368 (chart). Maintenance, of equipment, 572. Management: faults of, 132; "laws," 792; types of, 621; see also Admin- istration. Manager, see Administrator. Manufacturer: chain-store system, 297; marketing problems, 313; relation to department store, 295; relation to orthodox system of distribution, 306. Manufacturer's agent, 278. Manufacturer's retail branches, 285; chain stores, 297. Manufacturing: character of owner- ship, 706; history of development, 577; importance of corporate form, 705; plant equipment, 572; value of products, 706; what is involved, 560; see also Production. Manufacturing business: organization, 606 (chart) ; sales management, 308. Map system, for sales control, 325. Margin buying, 273. Market, 249; analysis, 313, 314, 319; area increasing, 259; monopoly, 345. Market administration, 243, 352. Market forces, 250. Market functions, 250, 262; develop- ment of, 246. Market price, 343. Market structures, 250; by classes of commodities, 299; forces shaping, 256. 259- Marketing, 12; changes in method, 304 (chart); large-scale, 554; problems of manufacturer, 313; of producer's goods, 301; and production problems, 647; of raw materials, 299; systems of distribution, 257. Master plan, of sales department, 356. Measuring aids: of control, 14, 823; financial admfnistration, 420, 475, 482, 486, 495, 520; market adminis- tration, 309, 32s, 329, 331, 33S, 337; personnel administration, 192, 195, 204, 206, 219, 220, 221; in plant location, 93; of production, 581, 584, S86, 588, 589, S9I. S9S; purchasing, 371- Mediums, advertising, 329. Men, as purchasers, 324. Mercantile agency, history, 415. Merchandising plans, 341. Merger, 747. Middlemen: in distribution, 303; evolu- tion of, 304 (chart); functions, 246, 262; tendency to reduce number, 30s (chart). _ Military organization, 779, 800. Mining partnerships, 714. Mnemonics, 593. Momentum of early start, 35, 84. Money market, 429. Monopoly: marketing, 259, 344; price, 345- Monotony, reduction, 141. Mortgage bond, 45r. Mortgages, open and closed, when issued, 460. Motion studjj, 589; range of, 844. Motivation, see Incentives. Name for product, 315. National advertbing, 259. INDEX 9IS National Association of Credit Men, 417; rules for mark-up, 340. National Metal Trades Association, employee relations, 191. Net worth, 476, 481. New York City: financial center, 58; market, 319. Night work, 143. Note brokers, justification for, 413. Note selling, 493. Notes payable, 480. Notes receivable, 479. Obsolescence, 463, 503, 507. Occupational disease, 138, 146. Operating expenses, 334. Operation of manufacturing plants, 576. Ordinary partnership, 714. Organization: essentials of, 788; factors of control, 785; for financial adminis- tration, 512, S18; interdependence of functions, 378; personnel depart- ment, 226; place of personnel depart- ment 236; place of risk bearing, 694; sales department, 354; setting up of, 756; significance to administrator, 15; no single correct form, 778; of specialists, 17; specialization, 783; types of, 799. Organization charts, 237,695; account- ing, 519; chain drug-stores, 298; department store, 294; finance ad- ministration, S18; human analogy, 808; interrelation of departments, 608; mail-order house, 288; manu- facturing and selling business, 19, 606; personnel department, 125, 126, 237, 241; wholesale house, 280. Organized market: conditions needed for, 272; hedging, 688; price in, 344. Original cost, basis for capitalization, 433- Orthodox system of distribution, changes from, 257, 259; breakup of, 306; types, 303. Output, 127; conditions precedent, 128; at any cost, 155; see also Incentives. Overhead costs, see Indirect costs; Costs. Overtime, 143. Par value, 440. Parasitic industries, 87. Participating preferred stock, 444. Partnership, 714; articles of, 718; changed to corporation, 459; finan- cing, 395, 402 (diagram), 440; powers of, 734; termination, 717; when used, 696; see also Business unit. Partnership association, 719. Pensions, 184. Perpetual inventory, 397. Personal effectiveness, in management, 817. Personnel: executives relationship to, 12, 115; service facilities. Bush Terminal, 104. Personnel administration, 115, 227; co-ordination with production, 237 (chart); measuring aids, 192; spirit of, 159, 236. ^ Personnel committee, 238. Personnel department, 116, 226; ad- ministration, 226; functions, 124 126 (charts); goal of, 227; organiza- tion, 118, 226; 241, 6o6(charts); place in business organization, 236; records, 122, 145, 186; size, 119. Personnel policies, 235, 238. Phrenology, 213; errors of, 214. Physical examination, 144. Physical fitness, maintenance, 140. Physical supply, a goal of sales manage- ment, 309. Physiognomy, 2r3, errors of, 216. Piece work, 173, differential rate, 179. Placement, 146. Planning, 568, 756, 831; importance of, 644. Planning department, 624, 630; bulletin board of, 632. Plant construction, 557. Plant, physical conditions, 136. Plant location, 23, 93; agencies aiding business manager, 90, 96, loi, 105; forces determining, 28, 60, 83, 84, 88; subareas, 62. Policies: concerning issuance of securi- ties, 456; financial, 240, 469, 486; influenced by forecasting, 422; per- sonnel, 235, 238; price, 340; produc- tion, 239, 251, S98; reorganization, 465; sales, 239, 251, 313. Policy formation, 251, 650, 756; train- ing for, 759. Ports, classes of, 51- Power, determines plant location, 30, 39, 42. 95- 9i6 BUSINESS ADMINISTRATION Preferred stock, 438, 443; when issued, 458. President: control of budgetary pro- gram, 836; duties, 811. Price: knowledge of, for buying, 367; in world-market, 658, 661. Price fluctuation: desirable for organ- ized market, 273; forecasting, 420; risk in marketing, 265. Price maintenance, 351. Price policies: determination, 343; dis- tributor's, 347; follow the leader, 346; mark-up, 340; turnover, 341. Prime cost, see Costs. Principles: of administration, 756, 796; of organization, 791. Prior liens, intensify risk, 682. Private property, 643. Problem solving, 770. Producer's goods, marketing of, 301. Product, analysis, 314. Production: administration, 523; char- acteristics of variable branches, 675; .contribution of engineering, 539! control, ss6; co-ordination witi sales, 834; graphic control, 584; inter- changeable system, 563; and market- ing problems, 647; scientific back- ground, 523, 530; scientific man- agement, 615; stages of, 624; see also Manufacturing; Scientific man- agement; Technology. Production department, 608 (chart). Production policies, determination, 239, 251, 598. Profit and loss statement, 33s; analysis of, 482; diagram, 485; samples, 336, 483, 497- Profit sharing, 183. Progress chart, 586. Promissory note, 488. Promoter, 390; classification of, 391. Promotion, 390, 429, 703; Three- Position Plan, 185. Prospectus, 898. Psychological test, objections to, 204. Psychology of business judgments, 769. Public markets, 286. Purchasing, 263, 366, 369; administra- tion, 250, 374; interdependence with other functions, 378; testing, 370; see also, Buying; Marketing. Purchasing agent, 263, 277, 362, 603. Purchasing department, functions, 365. Quality, analysis of product, 315. Quick assets, 396. Quotas, 337. Ratification, 712, 737. Rating scales, 221; army, 222; fore- man, 223. , Raw material: marketing, 299; relation to plant location, 95; shipment, 52. Recess periods, 140. Records: advertbing results, 330; buying, 367; for control, 624; a factor in organization, 790; insepar- able from standards, 839; personnel department, 122, 145, 186; produc- tion, 633; sales, 326, 646. Records and research, 126 (chart). Recruiting, 126 (chart). Reflective thinking, elements of, 770. Registered bonds, 450, 452. Regulative principles of management, 813. Reorganization, 465; policies, 465; use of preferred stock in, 459. Reports: for chief executive, 826; parties interested in, 830. Reproduction cost, basis for capitaliza- tion, 433. Research: justification, 651; produc- tion, 566; to reduce risk, 669; sales, 3SS- Research division, 121, 124 (chart). Reserves, 481; created from surplus, 506; reduce risks, 669. Responsibility, a factor in organization, 789. Retail agencies, 282; bulk retailer, 287; chain store, 284, 396; company store, 283; co-operative store, 286; depart- ment store, 284; mail-order house, 285; manufacturer's retail branches, 28s; public market, 286; retail wholesale stores, 283; specialty store, 283; unit stores, 282; wagon retailer, 286. Retail stores, location, 66, 71. Retail- wholesale store, 283. Retailers, 262; in distribution, 305 (chart); mail-order competition, 289. Risk: capital investment, 673; elimina- tion by combination, 671; forms of, 654; industrial, 659; in merchandis- ing, 26s; prevents improvement in methods, 673; reduced through research, 669; of shareholders, 438; ways of dealing with, 664. INDEX 917 Risk beiuing, administration of , 13 , 643 ; place in business organization, 694. Routing, 563, 626, 63s, 627 (chart). Sabotage, causes of, 170 Safety, 136; 126, 241, 124 (charts); devices, 138; National Safety Council, 137. Sale: by description, 26g; by sample, 269. Sales administration, 352; manufactur- ing business, 308. Sales budgets, checked with expense standards, 333. Sales department: co-ordination with advertising, 352; master plan, 356; organization, 354, 812, 358 (chart), 606; with production, 834; schedules, 356. 3S9, 361. Sales force, management, 313. Sales manager, problems of, 308. Sales policies, 251; determination, 239; manufacturer's, 313. Sales quota, 322, 338. Sales records, 326, 648. Sales service. Bush Terminal, 104. Salesmen: control, 325; elimination, 268; necessity for, 280; used to reduce number of middlemen, 305 (chart); value of, 328. Sanitation, 124, 142; outside the plant, 144. SateUite cities, 80; Chicago, 81 (map); St. Louis, 82 (map). Savings banks, 426; as investors, 407, 427; a part of the financial organiza- tion, 401. Schools of technology, is8, 536. Science : the basis of business facts, 75 7 ; contribution to production, 523, 530; diagram, 539; history of, 52 Si im- portance, 644. Scientific management, 157, SS5, 608, 623, 820, 839, 844; beginnings of, drg; bricklayer illustration, sgi; field of, 646; forces behind, 259, forms of wage payment, 174, 178; fundamental idea of, 758; objections to, 639; principles of, 615; purchas- ing department, 376; unscientific character of, 641; value of, 637; see also Taylor System. Scientific method, 654. Seats for workers, 141. Selection, ip2, 146; economic, 842. Selling, 267; administration, 250; func- tions of, 3S4; at the market minus, 347) 348 (chart); at the market plus, 349. 35° (chart); methods, 268; see also Marketing. Selling agent, in distribution, 305 (charts). Selling houses, 277. Service, personnel, r2S 126, (charts); see also Personnel department. Service facilities, 87; Bush Terminal, 102; Central Manufacturing Dis- trict, 100. Shareholders: control by, 438; powers of, 734; risk of, 438. Shop committees, see Employee repre- sentation. Shopping lines, 324. Short-term loans, 492. Short-term notes, why issued, 434. Side-line financing, 394. Sinking fund, 462; created from sur- plus, S09. Site location, 62, 71, 73, 74, 76, 96. Size of maximum efficiency, 555, 601. Skill: necessary in machine industry, 548; transfer to machinery, 543. Sleeping partner, 721. Small shop: advantages of, 554, in control, 604; see also Individual proprietorship. Social control, 128; executive's rela- tionship to, 13; importance in plant location, 95; related to form of business unit, 699; relation to marketing, 261; see also Control. Social environment, analysis of, 331. Sorting, 267. Special partnerships, 714. Specialists: aid administrator, 787; increase risk, 663; reduce risk, 670. Specialization: affects organization, 783, 789; co-ordination of specialists, 16, 243; development of, 244 (dia- gram); by financial institutions, 404, 409; functions, 247 (diagram); geo- graphical, by broad areas, 23; increases risk, 65 7, 661 ; in inspection, 581; of machinery, S43; management of labor, 233; in marketing, 259, 262; products, 346; in risk-bearing, 683, 692; by small areas, 64, in; value of, S4S- Specialized centers, in plant location, 37- 9i8 BUSINESS ADMINISTRATION Specialty store, 283. Specification, sample, 371. Speculation, 265, 657. Speculative contracts: dangers of, 6go; reduce risk, 687. Speculative industries, 675. Speculative insurance, 686, 687. Spring balance test, 195. Standard of living, relation to market- ing, 26r. Standardization, 838; manufacturing and production, 555, 574, 634, 648; records necessary, 839. Standards, 568; administrative, 757; determined by statistics, 823; finan- cial, 520; in marketing, 648; pur- chasing, 370; of science, 645. Starting a business, 388; costs of, 389. Static risks, 655. Statistics: in business, 823; in market analysis, 320; in organization, 790. Stock certificate, sample, 446. Stock exchange, 427. Stock market, 429; part of financial organization, 401. Stock subscription form, 903. Stockholders, 438; powers of, 734. Stocks: classification of, 440; risk in purchase, 679; why issued, ^134., 438. Stores department, 374. Stores systems, 634. Stores, work of purchasing department, 366. Storing, 264. Strength tests, 195. Strikes, fear of, 166. Style goods, 323. Subsidiary industries, 87. Suburbs, for plant location, 80. Sunday work, 143. Supply: analysis of product, 315; changes affect price, 344. Suretyship, 693; reduces risk, 683, 692. Surplus: reflects financial policy, 505; sources of, 505; unavailable for dividends, 509; uses of, 506. Symbols, 591. Synthesis, used in administration, 765. System, a factor in organization, 789. Systematized management, 622; stores department, 375. Taylor System, 359, 361; see also, Scientific management. Technical education, 536. Technological industry, 524; advan- tages, 553; complexity, 550; conse- quences, 543. Technology: executive's relationship to, ir, 523; schools of, 258, 536. Territory, of salesmen, 327. Testing, 574; of purchases, 370. Tests: of advertising copy, 329; fore- man, 223; intelligence, 209; psycho- logical, 204; trade, 209; U. S. Army, 223; vocational, 206. Time study, 588, 628, 636; range of, 844; records, 625. Time work, 174. Toledo Factories Building, 105. Trade acceptance, sample, 490. Trade credit, 492; when disadvanta- geous, 493. Trade-mark policies, 313. Trade tests, 209, 212. Traffic, 366. Traffic Bureau, Central Manufacturing District, 98. Training, 149; methods, 151; technical, 536. Training division, 1 2 1 ; 1 24, 241 (charts) . Transportation: importance in location of commercial cities, 50, 53; relation to site location, 74, 268. Transportation facilities: Bush Termi- nal, loi; Central Manufacturing District, 97; New York City, 84; plant location, 33. Transportation rates, 39, 41, 95. Treasurer, 512, SiS- Treasury stock, 441. Trust companies: functions, 423; as investors, 407; part of financial organization, 403. Trust deed, 461. Trustee, 739, 748. Trusts, simple, 748. Turnover, 341; and working capital, 397- "Two-Plane" plan of organization, 810. Ultra vires, doctrine of, 738. Uncertainty, 659; see also Risks. Underwriters, 404; a marketing device, 301 ■ INDEX 919 Underwriting: advantages of, 404; reduced risks, 692; when advisable, 405- Underwriting syndicates, 406. Unissued stocli, 441. Unit store, 282. "Unit" system: of organization, 801; of plant construction, 565. Unsystemized management, 621, 622 (ciart); stores department, 374. Utilities, marketing, 323. Ventilation, of workrooms, 142. Vocational guidance, 205. Vocational testing, methods, 206. Wage-earners, in manufacturing indus- tries, 706. Wage payment: basic rate, 183; effect on financial policy, 488; factors considered, 180; fair wages, i8i; incentive, 156; methods, 173, 613; a philosophy of management, 178; profit sharing, 183; workmen and management points of view, 176. Wages, determination of salesmen's salaries, 328; in market analysis, 321. Wagon retailers, 286. Wall Street, 428. Warehouses: general, 264; location, 73; specialized, 265. Waste products, in plant location, 95. Wasting assets, 462. Wealth statistics, in market analysis, 321. Welfare work, see Personnel depart- ment. Wholesale agencies, 274; location, 72; organization, 280 (chart). Wholesaler, 262; in distribution, 305 (chart); mail-order houses, 274; service to retailers, 281; specialty, 274. Will to do, 1 S3, 158; see also Incentives, Women, as purchasers, 324. Workers: educative influence of machinery on, 547; see also Labor; Personnel. Working capital: forms of, 396; and trade credit, 397; volume of, 396. Working conditions, 141, 201; see also Fatigue; Safety; Sanitation; Venti- lation. Workmen's compensation, 137. PRINTED IN THE U.S.A.