The rise of Standard Oil fundamentally changed human life. On the back of this success, John D. Rockefeller became the richest man in history. Standard Oil cleared up a chaotic early oil industry and transformed it into the most important in the world economy. In doing so, John D. Rockefeller used tactics that would be illegal today, but his business strategy offers valuable lessons to any aspiring entrepreneur.
Standard Oil’s success can be attributed to five pillars – superior organization, superior financing in service of establishing economies of scale, supremacy in transport, finding efficiency wherever possible, and smart dealings to bring competitors into the fold. The story of these strategies is told in Titan: The Life of John D. Rockefeller.
Rockefeller’s company was one that allowed individual initiative to flourish. Its executives weren’t micromanagers:
To orchestrate such a gigantic operation, he had to delegate authority, and part of the Standard Oil gospel was to train your subordinate to do your job. As Rockefeller instructed a recruit, “Has anyone given you the law of these offices? No? It is this: nobody does anything if he can get anybody else to do it…as soon as you can, get some one whom you can rely on, train him in the work, sit down, cock up your heels, and think out some way for the Standard Oil to make some money.” True to this policy, Rockefeller tried to extricate himself from the intricate web of administrative details and dedicate more of his time to broad policy decisions.
The kind of freedom provided to employees allowed the company to adapt quickly to new situations. There was also a policy of allowing each employee to argue for a raise in front of the executive committee once a year. Additionally, employees were paid above average wages.
Rockefeller wouldn’t tolerate any hint of unionization, but employees were kept happy enough that this never occurred. This harmony was present among the organization’s executives as well:
Rockefeller placed a premium on internal harmony and tried to reconcile his contending chieftains. A laconic man, he liked to canvass everyone’s opinion before expressing his own and then often crafted a compromise to maintain cohesion. He was always careful to couch his decisions as suggestions or questions. Even in the early days, he had lunched daily with brother William, Harkness, Flagler, and Payne to thrash out problems. As the organization grew, he continued to operate by consensus, taking no major initiative opposed by board members. Because all ideas had to meet the supreme test of unanimous approval among strong-minded men, Standard Oil made few major missteps. As Rockefeller said, “We made sure that we were right and had planned for every contingency before we went ahead.”
Other companies weren’t organized so efficiently from top to bottom and as such found themselves unable to compete.
Don’t quibble on costs if they help your strategic position
Standard Oil was the first modern corporation. John D. Rockefeller organized his firm to produce in bulk so that it would be able to accrue more resources and sell below its competitors. Rockefeller was famous for avoiding Wall Street in later years, but he had a good relationship with banks in his early career and was a frequent borrower. This was done so that he could build top of the line plants that wouldn’t need frequent repairs and could outproduce rival refineries, most of which in the early days were low-quality amateur operations. The difference between Standard’s operation versus the independent refiners allowed the former to get a clear advantage:
What made an expeditious shutdown of outmoded rivals vital to Rockefeller was that he had borrowed heavily to build gigantic plants so that he could drastically slash his unit costs. Even his first partner, Maurice Clark, remembered that ‘the volume of trade was what he always regarded as of paramount importance.’ Early on, Rockefeller realized that in the capital-intensive refining business, sheer size mattered greatly because it translated into economies of scale. Once, describing the ‘foundation principle’ of Standard Oil, he said it was the ‘theory of originators…that the larger the volume the better the opportunities for the economies, and consequently the better the opportunities for giving the public a cheaper product without…the dreadful competition of the late 60’s ruining the business.’ During his career, Rockefeller cut the unit costs of refined oil almost in half, and he never deviated from this gospel of industrial efficiency. – pg. 150
These operations allowed Standard Oil to produce kerosene so cheaply that it could sell below the production costs of other refineries and still earn a profit, which induced many refiners to sell their plants and join Rockefeller. Those that refused to sell and come into Standard Oil wouldn’t be able to compete with the company’s gigantic resources and, thanks to them, elasticity in price-setting. John D. Rockefeller borrowed a lot of money to make this happen. He had the stomach for it because he knew just how enormous the benefit for the money would ultimately be.
He also borrowed a lot of money to buy up refineries, but this borrowing was worth it, as in short order he would gain control of most of Cleveland’s refineries. This so-called “Cleveland Massacre” set the stage for the company to dominate the market at a rapid pace.
John D. Rockefeller borrowed a lot early on, but did it for his strategic purposes, which he knew would put him in position to pay the money back. He never borrowed for frivolous purposes or without a well thought out plan that had a good chance of being successful. Establishing economies of scale is always vital in business and he had no problem with borrowing to get it.
Become supreme in transport
Each industry has crucial areas that bind it together – some ingredient needed to make the final product, for instance. Transport is a crucial area that binds every industry together and Standard Oil was keen to control as much of it in the petroleum industry as it could.
This infamously included collusion with the railroads for rebates on freight. While Standard Oil would get kickbacks from the railroads, competitors would have to ship their barrels of oil under a much more expensive price and so would never be able to compete with the petroleum giant’s prices.
But the company’s dominance didn’t just come through railroads. John D. Rockefeller recognized the importance of pipelines early on and constructed them to move oil from the producing regions to refining centers. This further consolidated Standard’s control of the industry.
In moving product, tank cars superseded barrels as the preferred method of shipping on railroads. Though pipelines would eventually supersede the tank cars, they were crucial in providing stability to oil transport in the early years of the industry, as barrels leaked. Standard Oil manufactured enough tank cars to retain a decisive advantage. These cars were used as a strong negotiating tool and weapon to keep the railroads in line.
Still uneasy at the specter of the oil fields drying up, the railroads shrank from investments in custom-made facilities for handling oil, worried that this specialized equipment might someday be rendered worthless. Exploiting this fear, Rockefeller worked out a clever bargain with the Erie Railroad in April 1874. The railroad would transfer control of its Weehawken, New Jersey terminal to Standard Oil if Standard met two conditions: First, it would have to outfit the rail yards with modern apparatuses that would help to expedite oil shipments to New England and the South; second, it would have to ship 50 percent of its western refinery output over Erie tracks. For Rockefeller, the arrangement promised multiple advantages, for he not only received preferential rates from Erie but could also chart the oil movements of competitors across the country. He could even block the export of rivals’ oil – an option that, having made this huge investment, he freely exercised. As he argued, “I know of no parallel case in other branches of business where the competitor felt injured because he could not use his rival’s capital and facilities for his own advantage and the disadvantage of the owner of the capital and facilities.”
As the owner of almost all the Erie and New York Central tank cars, Standard Oil’s position grew unassailable: At a moment’s notice, it could crush either railroad by threatening to withdraw its tank cars. It also prodded the railroads into granting favors for tank cars not enjoyed by the small refiners who shipped by barrel. For instance, railroads levied a charge for the return of empty barrels, while tank cars traveled free on the return route from the East Coast to the Midwest refineries. Tank car clients also received the exact same leakage allowance received by barrel shippers, even though the tanks cars didn’t leak – which effectively allowed Standard Oil to carry 62 gallons gratis in every tank car.
When the Pennsylvania Railroad went to war with Rockefeller’s company, he manufactured another 600 tank cars to more easily handle the increased volume he would give the Erie and New York Central Railroads as the Pennsylvania would see decreased revenues.
In controlling all these methods of transport, Rockefeller made his company the supreme arbiter of the industry, as all competitors or antagonists would need to go through his web to even get to market.
Find efficiency wherever possible
John D. Rockefeller was a notorious penny pincher. He made his own children go over their account books with a fine-toothed comb. He wasn’t averse to spending money for good causes, but he made sure that every penny was spent in the best possible way.
One such way that he found savings was in tin cans:
With a talent for seeing things anew, Rockefeller could study an operation, break it down into component parts, and devise ways to improve it. In many ways, he anticipated the efficiency studies of engineer Frederick Winslow Taylor. Regarding each plant as infinitely perfectible, he created an atmosphere of ceaseless improvement. Paradoxically, the mammoth scale of operations encouraged close attention to minute detail, for a penny saved in one place might then be multiplied a thousandfold throughout the empire. In the early 1870s, Rockefeller inspected a Standard plant in New York City that filled and sealed five-gallon tin cans of kerosene for export. After watching a machine solder caps to the cans, he asked the resident expert: “How many drops of solder do you use on each can?” “Forty,” the man replied. “Have you tried thirty-eight?” Rockefeller asked. “No? Would you mind having some sealed with thirty-eight and let me know?” When 38 drops were applied, a small percentage of cans leaked – but none at 39. Hence, 39 drops of solder became the new standard instituted at all Standard Oil refineries. “That one drop of solder,” said Rockefeller, still smiling in retirement, “saved $2500 the first year; but the export business kept on increasing after that and doubled, quadrupled – became immensely greater than it was then; and the saving has gone steadily along, one drop on each can, and has amounted since to many hundreds of thousands of dollars.
John D. Rockefeller also made sure to find as many uses as he could for all the byproducts of the oil that his company refined:
Rockefeller performed many similar feats, fractionally reducing the length of staves or the width of iron hoops without weakening a barrel’s strength. He was never a foolish penny pincher, however; for example, he saved on repairs by insisting that Standard build only solid, substantial plants, even if that meant higher start-up costs. He also tried to use all of the fractions refined from the crude oil. During its first two years, Standard Oil had dealt largely in kerosene and naphtha. Then, in 1874, the company branched out into petroleum by-products, selling paraffin wax for chewing gum and residual oil tar and asphalt for road building. Before long, the company was manufacturing lubricants for railroads and machine shops, as well as candles, dyes, paints, and industrial acids. In 1880, Standard Oil took over the Chesebrough Manufacturing Company in New Jersey in order to strengthen its sales of petroleum jelly.
The only exception to this early on was with the fraction of refined oil called gasoline. In those days, no one had any idea what to do with it.
The use of these byproducts and the savings that John D. Rockefeller found in his careful examination of his company, allowed Standard Oil to consolidate even further its advantage over competitors and its dominance of the industry.
Don’t crush your competitors – hire them
In establishing his monopoly, John D. Rockefeller knew that he needed to preserve at least a semblance of competition. He also didn’t want to antagonize the owners of other refineries. He wanted to bring them into his own company. Viewing Standard Oil almost as a church, he regarded the company as doing right in the world by stabilizing the petroleum industry.
Whether by chance or design, Rockefeller’s 1872 business papers have vanished, and we aren’t privy to his thoughts during these crucial negotiations. But in later years, he was a fair-minded bargainer who often paid too much for properties that served a strategic purpose. Indeed, his papers are chock-full of lamentations about how he overpaid for properties. When it came to mergers, he didn’t fight for the last dollar and tried to conclude matters cordially. Since he aimed to convert competitors into members of his cartel and often retained the original owners, he preferred not to resort to naked intimidation. As Rockefeller said, he and his colleagues weren’t “so short-sighted as to antagonize these very men whom they were eager to come into a close and profitable relationship with them.”
Standard’s corporate structure essentially allowed other refineries to pretend that they were still independent, when in actuality, these refineries and their owners were part of its gigantic machine. The goal wasn’t to crush them, but bring them in if possible, with lucrative offers of the company’s stock which would inflate many times over in value. These inducements proved too good to pass up.
John D. Rockefeller followed these strategies to untold success. Always keep an eye out for these things in your own field.
Yet, there were personal qualities that also ensured his success, chief among them his persuasiveness. He used many of the same techniques you’ll find in Stumped, because time doesn’t change how people respond to persuasion.