45-855 Railroads, The First Big Business: Topic 4 Part 3

4. Railroads as Big Business (Cont.)
   
   
4. The Trunk Lines as Big Business
   
   
1. You cannot point to a specific date and say "that was the first big business". Like most things, they emerged slowly with much trial and error but clearly by the early to mid 1850s the great Trunk Line Railroads – the New York Central, the Pennsylvania, the B&O, and the Erie – were big businesses with recognizably "modern" management structures.
   
   

2. In 1851-52 The Erie reached Dunkirk, New York, the Pennsylvania reached Pittsburgh, PA, and the Baltimore & Ohio reached Wheeling, WV. In 1856 the Pennsylvania RR acquired working control of the 468 mile long Pittsburgh, Ft. Wayne, and Chicago Railroad giving the Pennsylvania a continuous route from Philadelphia to Chicago.
   
   
3. By 1856 telegraph control of railroad operations became widespread. In the beginning, the telegraph companies were independent companies that paid for the privilege of putting their poles along the railroad’s right-of-way. Some railroads took over the telegraph operations themselves while others continued to contract the service out. Every railroad station had a telegraph operator.
   
   
4. The trunk lines that were completed by the mid-1850s were literally forced to pioneer what became new ways of corporate management. No railroads before this period had the traffic volume and/or mileage to raise complex administrative problems.
   
   
5. In 1855 before the Pennsylvania acquired the PFW&C, it cost about $2M to run the railroad. In comparison, the largest comparable non-railroad businesses were the huge New England textile mill complexes and they were only about $.3M to run the largest of these mills. By the late 1880s the Pennsylvania employed over 50,000 men – an order of magnitude change from businesses before the Civil War.
   
   
6. The trunk line railroads were spread over a vast territory. Shops, terminals, stations, warehouses, office buildings, telegraph lines, bridges, roadbeds, all had to be administered and maintained.
   
   
7. Coordination was complex. Every day stations loaded different amounts of freight and every day there was a variety of traffic that had to be dealt with. Cargoes were unpredictable – it could come from anywhere and go anywhere.
   
   
8. Consequently, short run decisions had to be made daily (accepting and directing large quantities of freight daily); and long run decisions had to be made about what level to set freight rates (see Topic 6).
   
   
9. With such complexities, complex organizational structures evolved to handle them. Consider the textile mill – the works could be viewed within an hour and decisions could be made slowly. In contrast, the railroad was spread over a large area and weeks were required to view all of the physical plant. Decisions had to be made quickly – the condition of the freight and the safety of passengers required it. Consider a canal – it was also spread over a large area but the canal did not run, maintain, or repair the equipment used upon it! The locks could run, ceterius paribus, independently, and barge speed was slow.
   
   
10. For these reasons, the B&O, the Erie, and the Pennsylvania all made important contributions to the science of modern management. Between them they fashioned the earliest large-scale administrative structure in American business.
    
    
5. Management Innovations of the Trunk Line Railroads
   
   
1. The earliest railroads used the same simple form of business organization that almost all other businesses used at that time – the unified or entrepreneurial form of organization. This was the traditional owner-controlled facility in which the owner made the day-to-day operational decisions and set long term goals.
   
   

2. The B&O was the first to separate the management of financial and accounting activities from those of moving trains and obtaining traffic. This change was due to the fact that the sheer volume of transactions grew so large that it became a formidable management problem – conductors, freight agents, station agents, and so on, brought in a river of coin. No other business had ever seen this massive volume of transactions.
   
   

3. In the 1850s Daniel McCallum of the Erie Railroad perfected the operations department (responsible for moving trains and obtaining freight and traffic business) and devised the system of information flows using the telegraph. He was the first to clearly define the duties and responsibilities of the executive and administrative officers on a large railroad and to spell out the lines of authority and communication between the various officers of the road. Part of this scheme was a detailed system of information that flowed upward through the organization using the telegraph.
   
   

4. Brief summary of McCallum’s organizational structure for the transportation department: At the top was the General Superintendent. Underneath him were
   
   
1. Masters of Engine and Car Repairs – Responsible for the condition of locomotives and shops.
   
   
2. Car Inspectors
   
   
3. General Freight Agent – Supervision of freight charges and the setting of freight rates. He negotiated contracts with shippers and handled loss and damage claims.
   
   
4. General Ticket Agent – Supervised all passenger ticket matters and negotiated ticket arrangements with other railroads.
   
   
5. General Wood Agent – Responsible for supplying the wood for the locomotives and for storing it along the road.
   
   
6. Superintendent of Telegraph – Responsible for the construction and maintenance of telegraph lines and for the telegraphers.
   
   
7. Foreman of Bridge Repairs – Inspected and was responsible for the repair of bridges
   
   
8. Division Superintendents – These men were in charge of day to day operations on about 125 miles of road (determined by natural geographic boundaries). Underneath them would be the station managers, the division level officers corresponding to those at the headquarters – a) to g) above.
   
   

5. In the 1870s Albert Fink of the Louisville & Nashville perfected a detailed cost accounting system that was widely copied throughout the American railroad industry. Fink’s system made control through statistics a reality. Fink’s system had 75 specific categories (some of which were totals) divided into 4 general areas:
   
   

1. Movement Expenses – These were largely variable costs dealing with the movement of trains.
   
   
2. Station Expenses – These were partly variable and partly fixed costs. The stations always had to be manned regardless of traffic but the greater the traffic the greater the number of laborers needed to load and unload freight.
   
   
3. Maintenance of Road – These were variable costs but with a floor. That is, because of weather, regardless the level of traffic, a minimum of maintenance had to be done. However, as the traffic increased so did the wear and tear of the road.
   
   
4. Interest – This was a fixed cost.
   
   

6. Fink devised elaborate formulas to precisely calculate the ton-mile cost corresponding to these four categories. This allowed him to at a glance tell which portions of the railroad were costing more to operate than other portions and the reasons for the costs. This system was very influential and widely copied by other railroad managers.
   
   

7. By the 1880s the operations department was split into the transportation department that handled the movement of trains and the traffic department that was responsible for obtaining business. This produced the three great functional departments: Finance, Transportation, and Traffic.
   
   
8. These three departments coupled with the line and staff form of organization invented by J. Edgar Thomson of the Pennsylvania Railroad, plus Fink’s cost accounting system, created the standard railroad management structure that was to last well into the 20^th Century.
   
   

9. This form, known as the U-Form, spread rapidly to other industries becoming the de facto standard. This form of management set up functional departments in centralized offices with middle managers responsible for the specified functions. The line and staff form ensured that staff managers at the central offices received information flows from the line officers in charge of running the day to day functions of the business. This information flow was used to create overviews of the entire organization that allowed for greater statistical control and increasing efficiency in the operations as well as provided for efficient long range planning. All of this was pioneered by the railroads.
   
   

10. Below are three charts, the first two are for a typical railroad in the 1970s before railroads were deregulated by the Staggers Act of 1980. The first shows the overall organization and the second shows how the the operations department was organized.
    In sharp contrast, compare the 1970s Railroad with the BNSF organizational chart from 1995. The BNSF 1995 chart reflects the concern the railroad has with serving its customers. In contrast, the pre-deregulation railroad organizations reflect the stasis of the industry due to government regulation. In effect railroads lost control over their pricing early in the 20^th Century. The long run effects were that there was less competition, less imprtance placed on long-term strategic planning, and less need for the decentralized, market-oriented structure seen in the 1995 BNSF organization. Indeed, railroads evolved backwards during the 20^th Century towards a centralized, functionally departmentalized structure.

Site Links