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  • Jon Smart

(6) Organising for Outcomes: From Steam to Steel

This is the 6th blog post in a series. It is helpful to understand where we’ve come from, how today’s ways of working have evolved, and the context that those ways of working evolved in. This helps us to understand why we’re working the way we’re working and what we might want to change in today’s context, which is significantly different compared to previous technology-led revolutions. 


In the previous post we looked at the world’s first org chart and the innovations in Ways of Working introduced by the second technology-led revolution, the Age of Steam and Railways. In this post, we look at the ongoing evolution of Ways of Working in the third technology-led revolution, the Age of Steel, Electricity and Heavy Engineering, to learn lessons from the past and to understand why we work the way we do in large organisations today. 



The second revolution drives the third revolution

In the same way that first technology revolution (Arkwright’s textile mill) fuelled the second technology revolution (the Age of Steam and Railways), creating demand for a railroad to speed up the transportation of raw cotton and finished textiles between the port city of Liverpool and inland ‘Cottonopolis’ (Manchester), so the second technology revolution drove the third (the Age of Steel, Electricity and Heavy Engineering). 


The frenzy of railroad building, with an inflated bubble of financial capital chasing ‘guaranteed’ returns, created an insatiable demand for metal rails and bridges. 20 years and a US civil war after McCallum’s 1855 Plan of an Organization, innovations in steel production significantly lowered cost and improved quality.  In addition, steel rails and bridges, compared to iron, are 15 to 20 times more durable, enable heavier freight loads to be carried, are less brittle and hence less likely to break, which further drove the demand for steel. In 1873 the cost of steel rails was $100 per ton. By the 1890s it had dropped more than 80% in price to just $18 per ton.  This was due to both technical innovation and, as we will see, management innovation. As with each technology-led revolution, there was innovation in Ways of Working, in how organisations do what they do.


In 1875 the Edgar Thomson Steel Works in Pennsylvania opened, the first of many Bessemer steel mills owned and led by Andrew Carnegie and his Carnegie Steel Company. This marks the start of the third technology-led revolution, with an explosive growth in the volume of steel production. 


The nature of the relationship between the railroads and steel is evident in the naming of the works, with Carnegie naming it after J. Edgar Thomson, the president of the Pennsylvania Railroad company, the biggest customer of the steel works and also a shareholder in the Carnegie Steel Company! This steel works is still producing steel at the time of writing, 150 years later.


Following the 1875 start, with hyped valuations as with every technology revolution, predictably the bubble burst between 1893 and 1895 (the Panic of 1893). This was followed by a new golden age which ran from 1895 to 1907 (retrospectively referred to as the ‘Gilded Age’ after the Mark Twain novel ‘The Gilded Age: A Tale of Today’) and then this particular revolution matured in the years from 1908 to 1918, giving a life span of 43 years, from 1875 to 1918, before we see the arrival of the fourth technology-led revolution, the Age of Oil and Mass Production (more on that later).


Andrew Carnegie

Andrew Carnegie, a key person in the third technology revolution, had a fascinating life, working in all of the first three technology-led revolutions. His life is a classic ‘rags to riches’ story, being born into poverty and going on to become the richest person in the US at the time. 


Carnegie was born in Dunfermline, Scotland in 1835, the son of a domestic handloom weaver, an occupation which predates the first industrial revolution. Due to textile mills leaving his father out of work, the Carnegie family emigrated to the US when Andrew was just 12 years old. By the time he was 13 he was working 12 hours a day, 6 days a week in a cotton mill as a bobbin boy, changing spools of thread.  At age 18, he got a job as a telegraph operator at the Pennsylvania Railroad and within six years, by 1859, at just 24 years old, Carnegie had been promoted to be the superintendent of the Western Division.  


The president of the Pennsylvania Railroad, J. Edgar Thomson, had adopted the decentralised line-and-staff model, based on the work of Daniel McCallum.  Carnegie learned much about management, data and cost control from his time at the Pennsylvania Railroad, most of it from the work of McCallum and his peers. 

With the outbreak of the US Civil War in 1861, Daniel McCallum was appointed as superintendent of the US Military Railroad. Carnegie, 20 years younger than McCallum, was appointed as the Superintendent of the Military Railroad in the East. It is highly likely that Daniel McCallum and Andrew Carnegie, both Scots by birth, knew each other and worked together. 


Following the war, in 1865, having seen first-hand the demand for bridges and rails, Carnegie founded Keystone Bridge Company and Union Ironworks. He stayed close to the President and Vice President of Pennsylvania Railroad, securing contracts for bridges and rails. 


At this time, at just 30 years old, Carnegie had worked in all three of the first industrial revolutions. First textiles, then Steam & Railways and now Carnegie became a key figure at the beginning of the Steel and Heavy Engineering revolution. There cannot be many people in the world who have first hand experience of working in each of three consecutive industrial revolutions. 


Innovations

Given that Carnegie had first hand experience of Ways of Working innovations from Daniel McCallum and others from the 2nd technology revolution, he was able to apply these principles to the iron and steel industry, which was a first. These included ways of working innovations such as early and often data, detailed cost accounting, a focus on speeding the flow of traffic (value) through the system and decentralised ‘line-and-staff’ with autonomy and continuous improvement.


For example: 

  • Carnegie imposed a rigorous cost accounting system which included weighing scales at all points in the mills to see where material was saved or not saved 

  • Manual workers in a particular job were compared with all other workers in that job (workers being viewed as just another ‘resource’, as cogs in the machine, like coal or iron ore, at this time) to judge performance and remuneration

  • The production of iron beams and plates was combined with the bridge company, drastically cutting the time and labour required to move material from one operation to another 

  • Carnegie hired a German chemist to find out what was going on within the blast furnace, having been surprised to find that owners of iron works knew very little about what went on inside the furnace. From this, Carnegie and team were able to work out how to significantly increase output, through hard driving furnaces (increasing the flow of air)

  • A superintendent at one of the works, Captain William Jones, shared Carnegie’s obsession with continuously improving the flow of value. Jones significantly improved the flow of the metal through the production process before it cooled, resulting in huge savings and increased output as the metal did not need to be reheated at each stage.   


In addition and uniquely, Carnegie innovated with vertical integration, owning all aspects of the end to end flow of value, from mining iron ore and coal, to production and to shipping. This included Carnegie’s own railroad, the Bessemer and Lake Erie Railroad, used to haul iron ore from the Great Lakes to the steel works in Pittsburgh. The railroad is still in operation at time of writing, owned by the Canadian National Railway and today called the Bessemer Subdivision, the link to steel living on in the name.  


Previously, transferring the intermediate products from one organisation to another significantly slowed down the end to end time to value and kept costs high due to profit being taken at each step. Now, time to value was sooner, costs were considerably lower and all the profit from iron ore to shipped steel went to Carnegie and partners.


Continuous Improvement

Carnegie was leading a culture of challenging the status quo, using detailed and timely data to continuously improve the ‘How’. He didn’t accept ‘this is how it works in this industry’. Carnegie led a culture of measurement and experimentation leading to improvement. He was scientific in his approach, unlike the prevailing laissez faire ‘rule of thumb’ approach prevalent at the time. He incentivised this behaviour in his leaders and he was a role model. Carnegie also reinvested much of the profits back into the business, continuously investing in improvements, always upgrading, always in search of efficiencies.  


For example, when Carnegie became aware of a steel rolling mill design that could roll rails more efficiently, he ordered the existing rail mill, which was only three months old, to be ripped out and the new one installed. 


Bessemer

In 1872 Carnegie visited Henry Bessemer in England. Around 15 years earlier, Bessemer had invented and patented an improved process for making steel, which lowered cost and improved quality, making steel a preferable alternative to iron. The first Bessemer steel works was in Sheffield, England. Bessemer was selling licences for the use of his process and soon there were Bessemer steel works in Europe and the US.


US and Germany forge ahead overtaking Britain

Alexander Holley was a key person in the growth of US steel production, working for Carnegie. He had visited Bessemer in 1863 and had purchased the US rights to the Bessemer process on behalf of a consortium of investors, which included Carnegie. He designed and built many Bessemer steel works in the US and over time held ten patents for improvements to the Bessemer process. 


Holley was also a founding member of the American Society of Mechanical Engineers (ASME) in 1880, which was instrumental in sharing learnings about new ways of working, an important point which we will revisit.  


Holley led the building of the Edgar Thomson Steel Works for Carnegie, opening in 1875, where he, along with Captain William Jones and others, continued to improve and refine the process of steel production. A continuous improvement mindset by the leaders led to lower prices, sooner time to value, increased output and an estimated 40% profit margin for the Carnegie Steel Company.   


The profits from Carnegie’s first steel works and favourable US trade tariffs enabled Carnegie and his partners to buy up other nearby steel mills, eventually owning a total of 15 steel works before the turn of the century. 


Around 1890 the US and Germany overtook Britain in steel production which for the past 100 years had been the ‘workshop of the world’. Prior to the opening of Carnegie’s Thomson Works, in 1874, steel output in the US was 157,000 tons per year. 36 years later, in 1910, US companies were producing 26 million tons of steel annually, a 165x increase. At this time Germany was producing 17 million tons and Britain was producing 6 million tons. USA had become the biggest steel producer in the world. 


Steel producers in Britain had failed to innovate as fast as US producers. Based on papers presented at ASME meetings, at the time there was a clear articulated desire for the US to lead on the global stage. There was insufficient continuous improvement within the British steel industry to be able to compete on a cost basis. In addition, the US and Germany had import tariffs to protect local markets, there were transportation costs to add to export steel, the geographical market is larger in the US and in Continental Europe and there were practices in the US which would now be in violation of competition law or be considered insider trading, where steel producers (e.g. Carnegie) and railroad company bosses (e.g. J. Edgar Thomson) would own shares in each other’s businesses and agree to trade with each other exclusively.    


The wealthiest person in America

In 1901, Carnegie Steel Company was sold to US Steel, a merger of three significant steel companies into one newly formed organisation, the merger and financing being led by John Pierpont Morgan. US Steel became the first corporation in the world with a market capitalization of over $1 billion.   


Carnegie received $225.64 million for his share (equivalent to $8.1bn in 2024), which made him the wealthiest American in the decade from 1900 to 1910, and the second most wealthy person in America to date, after John D. Rockefeller.    


Andrew Carnegie had gone from a weaver’s cottage with one main room, which served as a living room, dining room and bedroom for the family, to being the wealthiest person in the US. He didn’t forget his roots. Carnegie gave $350 million, the vast majority of his wealth, to philanthropic causes, in particular funding 3,000 public libraries throughout English-speaking countries.  


Learnings from Carnegie

Learnings that we can take from Carnegie and his associates for today’s ways of working in large organisations include: 


  1. Continuous improvement: Incentivise and lead by example on the topic of continuously improving how you do what you do. Run safe to learn experiments aligned to clear outcomes. Have hypotheses which are tested early and often in thin slices with the cheapest cost of learning. Role model, encourage and reward this behaviour, supporting intelligent failure (i.e. early and cheap learning). Carnegie was quick to innovate, continuously improving the How, willing to reinvest profits in improvements, not content with the status quo.

  2. Have an early and often data feedback loop. Visualise the system of work. Measure, reflect, adapt, repeat. If there is no data, if the system of work is not being measured, there is no feedback loop and there can be no agility in improving outcomes. This is a scientific approach, rather than a ‘rule of thumb’ approach as was the prevailing norm at the time

  3. Focus on the end to end flow of value, eliminating work waiting, such that time to a return on the capital invested is sooner, risks are smaller, there is less waste, there is less inventory (and hence less capital) in progress, learning is sooner, the cost of failing (learning) is cheaper, costs are lower and customers are happier. Carnegie did this by not allowing metal to cool down between intermediate steps (reducing waiting time), via vertical integration minimising hand offs (reducing waiting time) and by relocating his bridge company to be by the steel works to reduce transportation cost and waiting time. 


Impediments are not in the path.

Impediments ARE the path.


An important part of your role, as a leader (leaders at all levels, in all roles: everyone can be a leader), is to identify and alleviate impediments to a balanced set of outcomes (including society and the one planet we call home), continuously. 


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