Questions

Transcontinental Railroads

Gilded Age industrialization had its roots in the Civil War, which spurred Congress and the northern states to build more railroads and increased demand for a variety of manufactured goods. The forward-looking Congress of 1862authorized construction of the first transcontinental railroad, connecting the Pacific and Atlantic lines. Originally, because railroading was such an expensive enterprise at the time, the federal government provided subsidies by the mile to railroad companies in exchange for discounted rates. Congress also provided federal land grants to railroad companies so that they could lay down more track.

With this free land and tens of thousands of dollars per mile in subsidies, railroading became a highly profitable business venture. The Union Pacific Railroad company began construction on the transcontinental line in Nebraska during the Civil War and pushed westward, whileLeland Stanford’s Central Pacific Railroad pushed eastward from Sacramento. Tens of thousands of Irish and Chinese laborers laid the track, and the two lines finally met near Promontory, Utah, in 1869.

Captains of Industry

Big businessmen, not politicians, controlled the new industrialized America of the Gilded Age. Whereas past generations sent their best men into public service, in the last decades of the 1800s, young men were enticed by the private sector, where with a little persistence, hard work, and ruthlessness, one could reap enormous profits. These so-called “captains of industry” were not regulated by the government and did whatever they could to make as much money as possible. These industrialists’ business practices were sometimes so unscrupulous that they were given the name “robber barons.”

Vanderbilt and the Railroads

As the railroad boom accelerated, railroads began to crisscross the West. Some of the major companies included the Southern Pacific Railroad, the Santa Fe Railroad, and the North Pacific Railroad. Federal subsidies and land grants made railroading such a profitable business that a class of “new money” millionaires emerged.

Cornelius Vanderbilt and his son William were perhaps the most famous railroad tycoons. During the era, they bought out and consolidated many of the rail companies in the East, enabling them to cut operations costs. The Vanderbilts also established a standard track gauge and were among the first railroaders to replace iron rails with lighter, more durable steel. The Vanderbilt fortune swelled to more than $100 million during these boom years.

Railroad Corruption

As the railroad industry grew, it became filled with corrupt practices. Unhindered by government regulation, railroaders could turn enormous profits using any method to get results, however unethical. Union Pacific officials, for example, formed the dummy Crédit Mobilier construction company and hired themselves out as contractors at enormous rates for huge profits. Several U.S. congressmen were implicated in the scandal after an investigation uncovered that the company bribed them to keep quiet about the corruption. Railroads also inflated the prices of their stocks and gave out noncompetitive rebates to favored companies.

Moreover, tycoons such as the Vanderbilts were notorious for their lack of regard for the common worker. Although some states passed laws to regulate corrupt railroads, the Supreme Court made regulation on a state level impossible with the 1886 Wabash case ruling, which stated that only the federal government could regulate interstate commerce.

Carnegie, Morgan, and U.S. Steel

Among the wealthiest and most famous captains of industry in the late 1800s wasAndrew Carnegie. A Scottish immigrant, Carnegie turned his one Pennsylvanian production plant into a veritable steel empire through a business tactic called vertical integration. Rather than rely on expensive middlemen, Carnegie vertically integrated his production process by buying out all of the companies—coal, iron ore, and so on—needed to produce his steel, as well as the companies that produced the steel, shipped it, and sold it. Eventually, Carnegie sold his company to banker J. P. Morgan, who used the company as the foundation for theU.S. Steel Corporation. By the end of his life, Carnegie was one of the richest men in America, with a fortune of nearly $500 million.

vertical integration

Rockefeller and Standard Oil

Oil was another lucrative business during the Gilded Age. Although there was very little need for oil prior to the Civil War, demand surged during the machine age of the 1880s, 1890s, and early 1900s. Seemingly everything required oil during this era: factory machines, ships, and, later, automobiles.

The biggest names in the oil industry were John D. Rockefeller and his Standard Oil Company—in fact, they were the only names in the industry. Whereas Carnegie employed vertical integration to create his steel empire, Rockefeller used horizontal integration, essentially buying out all the other oil companies so that he had no competition left. In doing so, Rockefeller created one of America’s first monopolies, or trusts, that cornered the market of a single product.

Social Darwinism and the Gospel of Wealth

In time, many wealthy American businessmen, inspired by biologist Charles Darwin’s new theories of natural selection, began to believe that they had become rich because they were literally superior human beings compared to the poorer classes. The wealthy applied Darwin’s idea of “survival of the fittest” to society; in the words of one Social Darwinist, as they became known, “The millionaires are the product of natural selection.” Pious plutocrats preached the “Gospel of Wealth,” which was similar to Social Darwinism but explained a person’s great riches as a gift from God

Regulating Big Business

Without any form of government regulation, big business owners were able to create monopolies—companies that control all aspects of production for certain products. Economists agree that monopolies are rarely good for the market, as they often stifle competition, inflate prices, and hurt consumers.

In the late 1880s and early 1890s, the U.S. government stepped in and tried to start regulating the growing number of monopolies. In 1887, Congress passed theInterstate Commerce Act, which outlawed railroad rebates and kickbacks and also established the Interstate Commerce Commission to ensure that the railroad companies obeyed the new laws. The bill was riddled with loopholes, however, and had very little effect. In 1890, Congress also passed the Sherman Anti-Trust Act in an attempt to ban trusts, but this, too, was an ineffective piece of legislation and was replaced with revised legislation in the early 1900s.

The Labor Movement

Events

1866 National Labor Union forms

1869 Knights of Labor forms

1877 Railroad workers strike nationwide

1886 Haymarket Square bombing American Federation of Labor forms

1892 Miners strike in Coeur d’Alene, Idaho Homestead Strike occurs

1894 Pullman Strike occurs

Key People

Eugene V. Debs -  Labor leader who helped organize Pullman Strike; later became socialist leader and presidential candidate

Samuel Gompers -  Union leader; founded American Federation of Labor (AFL) in1886 to represent skilled urban craftsmen

The National Labor Union

The first large-scale U.S. union was the National Labor Union, founded in 1866 to organize skilled and unskilled laborers, farmers, and factory workers. Blacks and women, however, were not allowed to join the union. Though the National Labor Union was not affiliated with any particular political party, it generally supported any candidate who would fight for shorter workdays, higher wages, and better working conditions.

The National Labor Union existed for only six years. When the Depression of 1873hit, workers’ rights were put on hold; Americans needed anywages, not better wages. Moreover, union members found it difficult to engage in collective bargaining with company heads when companies could easily hire thousands of immigrant “scabs,” or strikebreakers.

The Knights of Labor

The Knights of Labor, however, survived the depression. Originally a secret society in 1869, the Knights picked up where the National Labor Union had left off. The union united skilled and unskilled laborers in the countryside and cities in one group. Unlike the National Labor Union, the Knights allowed blacks and women among its ranks. Although they did win a series of strikes in their fight against long hours and low wages, they generally had difficulty bargaining collectively because they represented such a diverse group of workers. The Knights did not exist for very long: when members were falsely associated with the anarchists who were responsible for the Haymarket Square Bombing in Chicago in 1886, the union fell apart soon thereafter.

The Homestead Strike

Several major labor strikes occurred in the early 1890s, foremost among them theHomestead Strike, which protested wage cuts at one of Andrew Carnegie’s steel plants in Pittsburgh, Pennsylvania. When Pittsburgh police refused to end the strike, Carnegie hired 300 private agents from the renowned Pinkerton Detective Agency to subdue the protest. The laborers, however, won a surprising victory after a bloody standoff. President Benjamin Harrison eventually sent troops to end the strike.

The Pullman Strike

In 1894, reelected president Grover Cleveland made a decision similar to Harrison’s to end the Pullman Strike in Chicago. When Pullman, a railroad car company, cut employees’ wages by 30 percent, labor organizer Eugene V. Debsorganized a massive strike. Over 150,000 Pullman workers refused to work, Pullman cars were destroyed, and train service was cut off from Chicago to California. Cleveland sent federal troops to break up the strike and had them arrest its ringleader, Debs.

The American Federation of Labor

During these turbulent years for America’s labor unions, the American Federation of Labor (AFL) quietly grew in power, coordinating efforts for several dozen independent labor unions. Samuel Gompers founded the union in 1886, seeking better wages, working conditions, shorter working days, and the creation of all-union workplaces for its members. Unlike the National Labor Union and the Knights of Labor, the AFL represented only skilled white male craftsmen in the cities. Despite this limitation, however, the AFL survived the Gilded Age and would become one of the most powerful labor unions in the new century.

Urbanization

The Gilded Age saw the United States shift from an agricultural to an urban, industrial society, as millions of Americans flocked to cities in the post–Civil War era. Nearly 40 percent of Americans lived in urbanized areas by 1900, as opposed to 20 percent in 1860. Many young people left the countryside in search of new wonders: cities were at the height of modernization for the time, with skyscrapers, electric trolleys, department stores, bridges, bicycles, indoor plumbing, telephones, and electric lamps. Industrialization and the rush to the cities led to the development of consumerism and a middle class.

Mass Immigration

In addition to this major shift from rural to urban areas, a new wave of immigrationincreased America’s population significantly, especially in major cities. Immigrants came from war-torn regions of southern and eastern Europe, such as Italy, Greece, Poland, Russia, Croatia, and Czechoslovakia. This new group of immigrants was poorer and less educated than the Irish and German immigrants who had made the journey to the United States earlier in the century. By the early twentieth century, more than a million immigrants were entering eastern U.S. cities on a yearly basis. Many immigrants could barely make a living, working as unskilled laborers in factories or packinghouses for low wages.

What is Vertical and Horizontal integration?

Many a times, while gazing through the business daily, you come across the words “Vertical integration” or “Horizontal integration”. While some take it as a business gimmick; others do have but only a slight idea of what it is. In any case, as a regular business reader or as an entrepreneur, one needs to be aware about all the aspects of vertical and horizontal integration.

Both of these relate to strategies that are made to grow your business but they differ in approach. And most of the times which one to choose is not a very straight forward decision.

In this post we will try to completely understand Vertical and Horizontal integration and list certain key things that a business should take care of while looking forward to any of these options

What is Vertical Integration?

Out of all the definitions I read online the best one is from Investorwords which says.

Vertical integration is the process in which several steps in the production and/or distribution of a product or service are controlled by a single company or entity, in order to increase that company’s or entity’s power in the marketplace.

Simply said, every single product that you can think of has a big life cycle. While you might recognize the product with the Brand name printed on it, many companies are involved in developing that product. These companies are necessarily not part of the brand you see.

Example of vertical integration: while you are relaxing on the beach sipping chilled cold drink, the brand that you see on the bottle is the producer of the drink but not necessarily the maker of the bottles that carry these drinks. This task of creating bottles is outsourced to someone who can do it better and at a cheaper cost. But once the company achieves significant scale it might plan to produce the bottles itself as it might have its own advantages (discussed below). This is what we call vertical integration. The company tries to get more things under their reign to gain more control over the profits the product / service delivers.

Types of Vertical Integrations:

There are basically 3 classifications of Vertical Integration namely:

1. Backward integration – The example discussed above where in the company tries to own an input product company. Like a car company owning a company which makes tires.

2. Forward integration – Where the business tries to control the post production areas, namely the distribution network. Like a mobile company opening its own Mobile retail chain.

3. Balanced integration – You guessed it right, a mix of the above two. A balanced strategy to take advantages of both the worlds.

What is Horizontal Integration?

Much more common and simpler than vertical integration, Horizontal integration (also known as lateral integration) simply means a strategy to increase your market share by taking over a similar company. This take over / merger / buyout can be done in the same geography or probably in other countries to increase your reach.

Examples of Horizontal Integration are many and available in plenty. Especially in case of the technology industry, where mergers and acquisitions happen in order to increase the reach of an entity.

As per me an apt example of Horizontal Integration will be You Tube, which was taken over my Google primarily because it had a strong and loyal user base. (There was no rocket science in technology used at Youtube which Google couldn’t have done without taking over, but yes to increase the viewers was definitely as complex without the takeover.)

Executing these strategies and key points to remembers

Vertical and Horizontal integration strategy generally can be done by businesses which have established themselves and probably have a stable life as compared to ones which have to address risks on a regular basis. The immediate advantage of implementing them is to

1. Have economies of scale

2. Expand your knowledge and capabilities

3. Increase market (and profits)

4. Own the whole life cycle so that you can change it the way required

5. Reduce competition (by merging with them rather than competing)

6. Provide better services

7. Many more (refer links below)