Business administration; the principles of business organization and system, and the actual methods of business operation and management; based on a series of lectures delivered at the University of Michigan

Front matter

Goldwin Smith Hall

FROM THE FUNKK5IVEN BY

^Wj-ifiisui university Library

Preface

"When the University of Michigan established its course in Commerce and Business Management, it appointed as lecturer on the principles of business method and system Mr. Carl C. Parsons — an accountant, branch manager of an office equipment concern, and a contributor to SYSTEM.

Out of his own experience, from the descriptions of actuallyused methods published in SYSTEM, and with the collaboration of its editors, tbis series of lectures was prepared.

The lectures were more fully attended at the University than any other series in the course. The number of hearers often was greater than the enrollment of the entire School of Commerce, because outside students attended. For all realized the practical value of these lectures: that they were based upon facts — not upon theory, but upon business principles actually tried out and found successful.

This was the first time that the methods and systems of business, as actually used in operation, were reduced to their fundamental principles. No untried theories or abstract generalities were exploited; only plans of organization and methods of management in successful every-day use were given place.

"With these lectures as a basis, this book has been prepared. The material has been rewritten by the editorial staff of SYSTEM and much new matter has been added to bring it up to date and to give it a broad scope covering the whole field of business. The operating systems and managing methods of more than a hundred businesses were studied and the wide experiences of the contributors of SYSTEM were drawn upon by the editorial staff to insure the accuracy and practicality of every principle presented and every method described.

4 PREFACE

New charts and forms have been prepared throughout, which show the most modern methods and recent improvements in organization and system.

The matter in this book, therefore, has passed an unusual series of tests. As to accuracy, it has measured up to a high university standard; as to practicality, it has stood the test of actual use in business; as to thoroughness, it has passed the critical eyes of the editors of SYSTEM. It covers the entire field of business — not one line or department, but every activity — and thus supplies a broad view of all phases of business and their relations to each other.

This makes the book useful to both students and business men — as a text-book in schools of commerce and business colleges, and as a guide to improved methods and better results in a business. To colleges it offers the only complete exposition of business principles, based on actual practice in office, factory and selling fields — a course tried out and found successful in use by a great university. To business men it affords a complete and broad analysis of the methods of conducting all departments of an organization, every one proved good in actual operation.

THE PUBLISHERS.

Contents

Chapter Page

I. The Evolution of Business Systems 7

II. The Principles of Business Organization 13

Chapter I THE EVOLUTION OF BUSINESS SYSTEMS

One of the most striking examples of the advance made in recent years along all lines of human progress is the change in methods of conducting husiness. The revolution that mechanical invention has accomplished in the industrial world has its counterpart in the changes effected in business methods bj modern system and modern accounting. The business office of today is as different from the old time "counting room" as is the modern factory from the workshop of a generation ago.

Business has been reduced to an exact science. There is no more guess work, no more inaccuracy. "With increased competition in all lines of business, and with the great increase in the size of individual enterprises, has come the necessity for perfection in methods and organization.

The perfected business machine, with its intricacy of detail and its multiplicity of forms, may appear complicated in its structure, but, like one of the wonderful and intricate labor-saving machines in a factory, it should be judged entirely by its results. These results are the promotion of accuracy and dispatch, and an increase in output.

Two factors have contributed chiefly to this vast expansion in the mercantile world; have indeed made these enterprises possible: improved transportation facilities and organization.

Transportation Facilities and Business Growth

Not many years ago, all business was circumscribed by the lack of transportation facilities. It was limited to the small territory lying immediately about the seat of manuf acture, because either there was no practical way of handling freight consignments to a great distance or, where such facilities existed, the charges were so high as to be almost prohibitive. The Pittsburg manufacturer, therefore, had his own territory, and the Chicago manufacturer had his, with limits determined by the transportation facilities, more or less well defined, between the two cities. Little competition existed between the two.

Now, however, the railroads have made it possible for a manufacturer to place his goods at a low cost in any part of the country ; and with favorable conditions, he can undersell a rival at the gate of the latter 's plant.

Then comes the test of organization and system. Each firm must count the cost, must eliminate all waste, must secure the benefits of large scale production, must buy cheap, produce economically, route scientifically and market its product without waste. Other things equal, the victory comes to the best organization. Systematization of office and factory has developed side by side with large production and a national market.

The Growth of the Modem Idea of Corporations

The old idea of a business was a one-man enterprise or a partnership, a conception which had serious limitations. It was limited, first, by the fact that such a firm lacked stability. Its success depended upon one or two men, and ordinarily it was either discontinued or at least materially weakened at their death or retirement from business.

In the second place, the plan was of limited desirability, because each member of the firm became individually responsible for all of the obligations of the firm. He could not invest a part of his fortune in a business without risking all of it. He could not tell at what time his partner's action, which bound the firm, might jeopardize his property.

These disadvantages have given rise to the corporation, a business institution which may be regarded in a two-fold

EVOLUTION OP SYSTEM 9

character: a contract among the stockholders and at the same time an organization to effect certain purposes. Under modern law, it is given a charter by the state.

The first corporations to conduct business were government grants of monopoly, such as the East India Company, which was granted a charter by the English crown to develop trade with England's eastern colonies.

From this form of chartered organization arose the semipublic corporations of the present day, such as railroads and other public service companies. While they are private corporations in their organization, at the same time they perform a public function and do a work which is of such importance to the community that they are of necessity governed by certain special laws imposed by authority of the state.

It was early recognized by business men that the corporate form of organization was peculiarly adapted to the carrying on of a large enterprise. The reasons for this are evident. Private concerns depend upon the fortunes of one man; corporations are self -perpetuating and stable.

Personality in Partnerships and in Corporations

In the one-man business or the partnership, the value of personality was strongly emphasized. As instances of large enterprises built upon strength of personality, we have such institutions as the Armour Company and the Pullman Company, which were started, and built up for a period, mainly upon the personality of one man.

But it must not be understood that corporations eliminate personality. By system this personality is spread over the entire business, as is the case with the Armour Company under its present form of management. While one man does not and cannot personally supervise all the work, yet through organization, his personality becomes the vital force of the concern.

By sound, systematic upbuilding, the organization can be made so perfect that it can almost take the place of personality itself. As long as the Pullman Company was operated by its founder, the strong characteristics of this man pervaded every part of the organization; but today, although no one has arisen who is his equal, the organization which he built up has been able to take the place of his personality and to increase the business faster since his death than before. There has been, during recent years, a tendency toward widespread organization because business men have realized that all of the advantages tending toward success and stability are with the large organizations as against the smaller ones, or the private enterprises.

How Retail Stores Have Gained Centralization

Typical among great modern organizations are various centrally-controlled retailing systems. Manufacturing alliances and associations of wholesalers have long lost their novelty. Economy in overhead or operating expenses and in selling cost formed a firm basis for such combinations. To eliminate competition was to minimize selling expenses. But combination seemed to afford retailers no such saving. Sales would still depend on store personality, upon advertising, upon locations numerous and costly.

These very factors, however, are now the retailer's advantages. Economy in buying has coupled itself with multiplication of convenient stores and shrewd exploitation of the firm's personality. The many units, all successful, have made striking totals.

Selling Direct from Producer to Consumer

A step beyond the organization of the retail stores and containing another factor of economy, is the scheme of organization in which the manufacturer sells directly to the consumer. The plan is not as new as the retailing combination, but its success, extending over a longer period of years, has been equally as great. Some of the shoe companies are types of this method. Ordinarily the manufacturer sells to

EVOLUTION OP SYSTEM 11

the jobber, the jobber in turn to the wholesaler, the wholesaler to the retailer, and from him the product passes to the consumer. In each one of these transactions there must be a profit to the person handling the goods, and there must also be the expense of the transfer from one to another and the expense of accounting.

To overcome this, various manufacturers have placed their own retail stores in every large city and sell directly to the consumer, cutting out the jobber and the wholesaler. In order to make the work a suceess, perfect organization and perfect system have been required.

So much has been written on combinations such as the steel industries and the harvester companies that it is only necessary for our purpose to point out the additional saving which such organizations as these bring about. It is possible for several manufacturing plants organized under one leadership to materially decrease the cost of manufacturing because the production of various parts for the whole combination can be limited to one institution. Instead of one factory manufacturing complete machines and making every part of the product, the work can be divided, and by specialization, which always means decreased cost of manufacture, the various parts may be apportioned to different branches of the combination. At the same time, the selling expense is materially decreased, because in each case the combination is in a position to control and regulate the prices of its products the country over. The same elements of economy of operation are true with them as with the retail organization: decreased advertising expense, less stock to carry and a very marked decrease in the overhead and accounting expenses.

The Incentive to Personal Effort in Corporations

As the institutions have increased in size, a perfect system has been demanded and, as usual, where such a demand has been made, it has been met. 1S0 perfect is the organization of the steel companies that the working ability not only

12 BUSINESS ADMINISTKATION

of each plant, but of each individual employee, is known. When Charles M. Schwab was asked what was the great factor in these institutions that took the place of the incentive of ownership he said: "The deadly parallel." By this he meant that an exact report concerning each man is kept. There is an average below which no man's work can go, and as any man shows ability to advance, the position is always waiting for him. Each man knows that his work is more carefully watched than if an employer were with him all the time. He knows that his efforts are measured, that there is a dead line below which he cannot drop, and possibilities of advance ahead if he shows ability above the average. The inducements for individual effort are even greater in a large corporation than in a business of one's own founding, for the possibilities of promotion offered by the large scale enterprises are so much higher. There is always the keenest competition between the several branches which are manufacturing the same product. If it costs a quarter of a cent more to manufacture a certain class of steel in Joliet, Illinois, than it does in Youngstown, Ohio, the superintendent of the former plant knows that he must explain the cause of this difference. If the difference prevails for any length of time, he knows that either someone else will take his place or that his plant will have to go to manufacturing some other article. The central organization, perhaps located in New York City, can detect an imperfect piece of work turned out by any factory, indeed can almost hear the sound of the hammers.

The business man of today constantly fears what he calls "too much system." This is not the danger, because systematization means the conducting of the necessary details of a business in the most economical manner. The proof of the successful system is that it does its work in the easiest possible manner, and gets results worth while. Some .concerns, undoubtedly waste both time and money gathering worthless statistics. But this error is not a case of too much system, — it is too much red tape.

Chapter II THE PRINCIPLES OF BUSINESS ORGANIZATION

In denning business organization, we must not take for our unit of measurement a complete modern corporate institution. We must go back of this to the two fundamental elements governing all business transactions between members of the human race. These two elements we can class simply as "producing" and "selling." Any individual or any body of individuals doing either one or both of these things becomes a business organization. Joining together these two primal elements there is a third element which becomes a most important factor in any business. This can be described under the title of "accounting" or "reckoning." When a farmer raises a bushel of turnips, takes them to market, sells them and records the transaction in the back of the family almanac, he has performed all the functions of a business organization.

The name "production" need not necessarily imply original production, nor the transformation generally known as manufacturing. Its meaning signifies, rather, the bringing of the product from a certain source of supply to the hands of the selling medium. A retail merchant who sells dress goods has a "production" division in his business, — the department which searches out goods and brings them to his shelves from the wholesale house. The latter finds its source of production in the manufacturing. Even the manufacturer is not the real producer, but the farmer is who owns the sheep from which came the raw material. In each of these business organizations, however, the two prime factors of producing and selling constitute the fundamental basis of the business,

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How Control is Vested and Exercised in Business

Turning now from the analysis of the functions of a business to an examination of its sources of authority, we find a variety of methods in which control may be exercised. In every organization there is an ownership element which constitutes its primal authority and control. Fundamentally, the form of this ownership is of no material importance, whether it is vested in an individual, in a partnership or in a corporation of stockholders. The essential fact is that this ownership constitutes the fountain head of all business organization, and subordinate to this authority, however it may be vested, are ranged the three departments of production, accounting and selling, by which the purposes of the owning power are put into effect. The form of any business organization so far as developed up to this point can be illustrated in a simple diagram such as shown in Form 1.

Such an organization is characteristic and complete. It applies to any business enterprise, whether the yearly volume of business is numbered in three or eight figures. The corner groceryman who constitutes his own business organization performs all the functions of the great department store. He becomes the "production" division when he buys his goods from the wholesaler and prepares them for the shelves. He becomes the "sales" division when he writes a price card to put in the window and sells some of the goods to a customer over the counter, and he becomes the "accounting" division when he goes to his desk and makes an entry of the sales in his order or cash book. At the same time he is exercising these offices by power of the appointment received at his own hands as owner.

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When ownership is vested in one individual, the matter of control and authority is of the simplest form. The owner may have a factory manager, an office manager and a sales manager, but all three divisions are under his absolute control and dictation. It is possible that the individual owner may arrange his organization so that he need not give it his actual personal supervision and yet retain a cohesive and co-operative administration. This can be done by forming an executive committee made up of his division managers, who, while retaining their respective positions in the organization, will be bound by united action of the committee on all important matters of business policy, the owner delegating his control to such a committee under general instructions.

How a Partnership is Formed

In a partnership, two or more individuals are bound into one controlling factor by a certain partnership agreement. This agreement is in legal form and should be of the most exact, detailed and binding character to avoid any misunderstandings or complications. This legal partnership becomes in reality the controlling ownership in itself and the members of the firm are circumscribed by its provisions. The partnership agreement defines the shares that each member of the firm shall have in the conduct of the business, his duties, the voice that he shall have in deciding any matters of policy. It determines the division of profits, the proportionate assessment for losses, and the manner and methods by which the business shall be conducted. The agreement may also provide for a receivership or sale of the respective interests in case of vital disagreement among the partners. In the matter of determining the control of the business, the partnership agreement may provide for a division of duties and of authority among the various partners (Form 2), or delegate the entire management to one of the partners (Form 3), or iZ

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all the members of the firm may form an executive committee under whose general control and authority the division managers carry on the business (Form 4). It is frequently the case that some member of the firm is a "silent partner," known to the world only under the title "and Company."

In Form 4 it will be noted that the managers of the producing, accounting and selling divisions are given the actual working or operative authority over the business, under guidance of a committee made up of the partners of the firm.

Owing to the various advantages of a corporation, as described in the introductory chapter, such a form of ownership is best adapted to modern business conditions. Such ownership also permits a more systematic and cohesive organization and more successful co-operation of the working parts because of the definiteness of its control and its accurate and fairly defined limits of authority.

In a corporate organization, ownership is vested in the stockholders of record, and these stockholders are bound by the stock subscription list, the articles of incorporation and the constitution and by-laws. These documents provide for the election of a board of directors, an executive committee and various officers, to whom the administration of business is thus delegated by vote of the stockholders. Form 5 shows the analysis of a corporate organization.

Formation of an Incorporated Stock Company

The process of forming an incorporated stock company is somewhat complex and varies in different states. The general plan, however, is based on a stock subscription list to which those who wish to become stockholders attach their signatures and state the number of shares for which they subscribe. Heading this subscription list is the form agreement stating the purposes of the organization, its name, the amount of capital stock, and the par value of each share. After the required amount of capital has been subscribed, a stockholders' meeting is held, at which a constitution and

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The board of directors may arrange the further details of organization as it sees fit, but it frequently transfers its authority largely to the president, who may become the general manager. Or any director or an outside individual may be appointed by the directors as general manager and given full authority, subject to the board. The board may elect an executive committee to which its authority is delegated, and in some cases another committee is chosen as an advisory committee, at the head of which stands the general manager. This advisory committee, in most large institutions, is made up of the general manager, who is closely connected with the operation of the factory and the organization of the office; the treasurer, who is interested in the financial work ; the legal advisor ; and in many instances some officers of the banking house through which the institution conducts its financial work. This advisory committee is able to meet successfully the difficulties of administration which come up from time to time.

But although authority is passed from stockholders to directors, from directors to an executive committee, and again to an advisory committee, there must be some positive limitation that will prevent any of these bodies violating the general policy of the institution. For example, one of the largest organizations in the country places a limit of $10,000 upon the expenditures which can be made by the advisory committee. Any expenditure under this amount could not seriously affect the policy or the finances of the company. If an expenditure between $10,000 and $25,000 is to be made, it must first be approved by the executive committee, and if an expenditure of more than $25,000 is deemed necessary, it must be passed upon by the board of directors. It is imr

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PRINCIPLES OP ORGANIZATION 23

practicable for any unimportant details of such a business as this to pass beyond the general manager or the advisory committee, but the financial limit which has been placed upon their actions makes it impossible for any step of a serious nature to be taken unless it has the approval of the executive committee, or, in the most vital matters, of the directors themselves. Thus details are decided by the lower officials and only questions of general policy reach higher.

All Business Organizations Based on One Principle

The details of the business organization following ownership control are practically the same, whatever form that ownership takes. No matter how complicated an organization may appear, when properly analyzed it can always be reduced to the rudimentary form shown in the diagram: that is to say, ownership concentrating its power of control into a central authority, known as the general manager, whence such power is administered through the medium of three executives over the main divisions of the organization, thus carrying out the three functions of the business : production, accounting and selling.

The special organization of these three divisions varies according to the nature of the business, its size and the perfection of the system to which its operation has been reduced. The complete function of each division which will be performed through the different departments of work may be so closely involved as to make their separation not easily distinguishable. Frequently a general manager is his own production- manager, sales manager and chief accountant combined, and when acting as such performs all the duties of the minor executives of each division. It is also true that the heads of divisions or departments are sometimes so named as to make their real position in the organization seem uncertain. For example, an official may hold the title of "business manager" and have charge of both the accounting and sales divisions, when, in fact, his proper title is that

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PRINCIPLES OP ORGANIZATION 25

of assistant general manager, as he simply represents the executive in his detail work.

When we analyze the organization of a business further than the three great subdivisions of producing, accounting and selling, we enter the realm of administration, which will be treated in a subsequent chapter. The general subdivision of these three departments, however, showing how all the functions of the business are related to each other, may be illustrated as in Form 6, which outlines the principal departments to be found in a fully organized manufacturing business under corporate ownership. In this diagram, the purchasing agent is the buyer of material for the factory, but he might in some eases be in the accounting division instead of under the authority of the factory superintendent. Some of the other sub-exeeutives might be shifted to different divisions of the business to suit local conditions, but the general relationship will be in most cases that shown in the diagram. Another analytical chart, showing the organization of a manufacturing business in all its details, is presented in Form 7.

The Auditor an Official of Peculiar Independence

It will be noticed that the office of auditor is peculiarly situated, subordinate only to the board of directors. The position of auditor may be filled in either one of two ways. There are at present large auditing companies which from time to time go over the work of an entire business organization in order to prove the accuracy of the work in each department. The position of auditor on this chart, however, means that there is a certain official retained by the executive committee as an active member of the organization. The work which the auditor performs in an organization of this kind is usually of a statistical and reportorial nature, such as drawing up comparative tables of the work done, particularly that of the accounting department. For this reason he is not put under the general manager nor under the secretary or treasurer, who may be interested in the conduct of the work, but keeps an independent position and is responsible only to the executive committee. Only in this way can he be so independent that he can criticise either favorably or unfavorably the work that has been done. He must be able to act without fear or bias, and bring before the executive committee the exact details of the business which they need most to know. They have given up their authority, but at the same time they must know that the trust they have imposed is carried out.