Carnegie Steel
Andrew Carnegie's steel maker, which grew into the largest and most automated producer in America.
Carnegie Steel won by knowing its costs per process and worker while rivals did not, running mills full even at $2 profit per ton, and adopting new furnaces and a chemist early. Losses in downturns were smallest, profits hit $40 million a year, and he sold to Morgan for $480 million. Lesson: focus on one business, master unit costs, and reinvest in efficiency.
What was said about Carnegie Steel
1Knowing costs to the penny
Carnegie built per-process, per-worker cost accounting that his rivals lacked. Iron makers of the day learned their results only when the books were balanced at year end. Carnegie insisted on weighing and monthly reports that spread labor costs over each product and process, so he knew each department's cost and what each man at the furnaces saved or wasted.
The reports also tracked raw material inputs, waste and scrap, defects and returns, and idle time on furnaces and converters. Every manager opposed it and it took years to install, but it let him compare one furnace and one worker against another and price and invest with real information. "I felt as if we were moles burrowing in the dark and to me this was intolerable."
Low costs let him cut prices, take share and run the mill full. Carnegie and Henry Clay Frick lived by the mantra "cut the prices, scoop the market, watch the costs and the profits will take care of themselves." Carnegie would rather offer big customers low figures and keep the factory full than hold back for fear of breaking the market: "I would run the factory full next year even if we made but $2 per ton."
Their reasoning was that prices and profits are cyclical and set by market forces, while costs can be controlled and any cost saving is permanent. Running full absorbed fixed costs, so in downturns Carnegie's losses were the smallest of his rivals.
2Early bets on new furnaces and a chemist
New furnaces rivals called extravagant paid for themselves through saved waste. His accounts showed older furnaces wasted almost half the material when heating large masses of iron. In some years most of the company's profit came from savings made by the improved furnaces, and rivals took many years to follow.
Carnegie had watched the steam loom ruin his father's handloom business and resolved to be on the right side of technology. He said "the expenditure would have been justified even if it had been doubled."
Hiring a chemist at a blast furnace turned waste into profit. Carnegie suspected the new steelmaking process still held a lot of waste and employed a chemist, which competitors pronounced an extravagance. The Lucy furnace became the most profitable branch of the business, and for years Carnegie alone had this edge.
He said they had almost a monopoly of scientific management, and that later rivals found "they could not afford to be without one."
He reinvested in the newest equipment for 25 years while rivals coasted. Carnegie bought the newest technology every time and plowed earnings back into bigger plants, keeping his plants the biggest and most automated. When prices fell, Carnegie Steel's losses were the least of its rivals.
Many older competitors did not see why new equipment mattered, other firms cruised once founders got comfortable, and British steel coasted after the 1880s rail boom. "But, for 25 years, Carnegie never let up."
3The all-in bet on steel
A 1872 visit to a Birmingham steelworks made him bet everything on steel. Carnegie was rich on paper but spread across bridge companies and railroad stocks, with under $5,000 in cash. After seeing the giant Birmingham steelworks he reasoned railroad demand for rails would make steel a mass production business that replaced iron.
He had used iron in his bridge works and saw steel was clearly superior, so he moved before rivals. "If you believed in America, you believed in railroads. And if you believed in railroads, you believed in steel."
He sold every outside holding to focus on one business. Carnegie withdrew from railroad ventures and resolved to own no stocks after catching himself checking quotations first thing each morning. His rule was "put all good eggs in one basket and watch that basket."
He argued the true gold mine lies in your own factory, and said he had rarely met a man who achieved preeminence in moneymaking while interested in many concerns.
He owned his suppliers, from coke to Lake Superior ore. If a company supplied something he needed, Carnegie bought it, took it over or partnered with it. His bridge business led him to make his own iron and then his own steel, and he bought the Frick Coke Company and vast Lake Superior ore reserves.
The same logic brought Henry Clay Frick, who dominated coke, in as a partner. Controlling inputs is part of why his downturn losses were the smallest.
Growth was funded from cash flow, keeping bankers at a distance. Carnegie sold bonds to Junius Morgan for some plants but otherwise guarded his independence from investment bankers and securities markets as jealously as Rockefeller did.
Railroads, by contrast, had to spend millions on track and rolling stock before earning anything, which made them dependent on public markets.
4How Carnegie managed people
His real skill was choosing people who knew more than he did. As a boy he got friends to gather food for his rabbits by naming the rabbits after them. Later he admitted he did not understand steam machinery but tried to understand people, finding experts for each part.
He credited his success to "the faculty of knowing and choosing others who did know better than myself." Frick was drawn in because he "knows his business down to the ground."
He ran the company by letter, often from Scotland, and harassed managers. Carnegie managed through written reports and correspondence, staying clear of operating duties. Charles Morris argues this let him criticize without worrying about his own performance, making him harder to live with but a more successful tycoon.
"By staying clear of operating responsibilities, he was free to criticize and harass without worrying about possible shortfalls in his own performance."
He tried to cheat Frick of his stake, ending the partnership bitterly. Carnegie harped on underlings' small failures and took credit for their successes. When Frick, arguably the managerial genius behind Carnegie Steel, retired, Carnegie worked to deny him his stake, and Frick's parting words were to meet him in hell.
He also issued pro-labor manifestos while cutting workers' pay. The story is told in the biography Meet You in Hell.
5The sale to J.P. Morgan
Carnegie sold for $480 million and later admitted he sold too cheap. Profits reached $40 million a year before Morgan paid $480 million and combined the company into US Steel, the first billion-dollar corporation. Carnegie later told Morgan he had undersold by $100 million, and Morgan replied "very likely, Andrew."
Soon after the purchase, his successors at US Steel netted $60 million in one year.
The Tycoons: Carnegie, Rockefeller, Gould & Morgan
Carnegie tracked costs monthly while rivals did not know theirs, and would run the mill full even at $2 profit per ton. He bought the newest equipment and controlled coke and ore supply, so his losses in downturns were the smallest, and he ran it by letter, often from Scotland.
Carnegie built per-process, per-worker cost accounting that his rivals lacked. Iron makers of the day learned their results only when the books were balanced at year end. Carnegie insisted on weighing and monthly reports that spread labor costs over each product and process, so he knew each department's cost and what each man at the furnaces saved or wasted.
The reports also tracked raw material inputs, waste and scrap, defects and returns, and idle time on furnaces and converters. Every manager opposed it and it took years to install, but it let him compare one furnace and one worker against another and price and invest with real information. "I felt as if we were moles burrowing in the dark and to me this was intolerable."
Low costs let him cut prices, take share and run the mill full. Carnegie and Henry Clay Frick lived by the mantra "cut the prices, scoop the market, watch the costs and the profits will take care of themselves." Carnegie would rather offer big customers low figures and keep the factory full than hold back for fear of breaking the market: "I would run the factory full next year even if we made but $2 per ton."
Their reasoning was that prices and profits are cyclical and set by market forces, while costs can be controlled and any cost saving is permanent. Running full absorbed fixed costs, so in downturns Carnegie's losses were the smallest of his rivals.
He reinvested in the newest equipment for 25 years while rivals coasted. Carnegie bought the newest technology every time and plowed earnings back into bigger plants, keeping his plants the biggest and most automated. When prices fell, Carnegie Steel's losses were the least of its rivals.
Many older competitors did not see why new equipment mattered, other firms cruised once founders got comfortable, and British steel coasted after the 1880s rail boom. "But, for 25 years, Carnegie never let up."
A 1872 visit to a Birmingham steelworks made him bet everything on steel. Carnegie was rich on paper but spread across bridge companies and railroad stocks, with under $5,000 in cash. After seeing the giant Birmingham steelworks he reasoned railroad demand for rails would make steel a mass production business that replaced iron.
He had used iron in his bridge works and saw steel was clearly superior, so he moved before rivals. "If you believed in America, you believed in railroads. And if you believed in railroads, you believed in steel."
He owned his suppliers, from coke to Lake Superior ore. If a company supplied something he needed, Carnegie bought it, took it over or partnered with it. His bridge business led him to make his own iron and then his own steel, and he bought the Frick Coke Company and vast Lake Superior ore reserves.
The same logic brought Henry Clay Frick, who dominated coke, in as a partner. Controlling inputs is part of why his downturn losses were the smallest.
Growth was funded from cash flow, keeping bankers at a distance. Carnegie sold bonds to Junius Morgan for some plants but otherwise guarded his independence from investment bankers and securities markets as jealously as Rockefeller did.
Railroads, by contrast, had to spend millions on track and rolling stock before earning anything, which made them dependent on public markets.
He ran the company by letter, often from Scotland, and harassed managers. Carnegie managed through written reports and correspondence, staying clear of operating duties. Charles Morris argues this let him criticize without worrying about his own performance, making him harder to live with but a more successful tycoon.
"By staying clear of operating responsibilities, he was free to criticize and harass without worrying about possible shortfalls in his own performance."
He tried to cheat Frick of his stake, ending the partnership bitterly. Carnegie harped on underlings' small failures and took credit for their successes. When Frick, arguably the managerial genius behind Carnegie Steel, retired, Carnegie worked to deny him his stake, and Frick's parting words were to meet him in hell.
He also issued pro-labor manifestos while cutting workers' pay. The story is told in the biography Meet You in Hell.
The Autobiography of Andrew Carnegie
Carnegie put all his capital into one business, knew every cost by process and worker, and adopted new furnaces and a chemist early. Profits reached $40 million a year before he sold to J.P. Morgan for $480 million.
Carnegie built per-process, per-worker cost accounting that his rivals lacked. Iron makers of the day learned their results only when the books were balanced at year end. Carnegie insisted on weighing and monthly reports that spread labor costs over each product and process, so he knew each department's cost and what each man at the furnaces saved or wasted.
The reports also tracked raw material inputs, waste and scrap, defects and returns, and idle time on furnaces and converters. Every manager opposed it and it took years to install, but it let him compare one furnace and one worker against another and price and invest with real information. "I felt as if we were moles burrowing in the dark and to me this was intolerable."
Low costs let him cut prices, take share and run the mill full. Carnegie and Henry Clay Frick lived by the mantra "cut the prices, scoop the market, watch the costs and the profits will take care of themselves." Carnegie would rather offer big customers low figures and keep the factory full than hold back for fear of breaking the market: "I would run the factory full next year even if we made but $2 per ton."
Their reasoning was that prices and profits are cyclical and set by market forces, while costs can be controlled and any cost saving is permanent. Running full absorbed fixed costs, so in downturns Carnegie's losses were the smallest of his rivals.
New furnaces rivals called extravagant paid for themselves through saved waste. His accounts showed older furnaces wasted almost half the material when heating large masses of iron. In some years most of the company's profit came from savings made by the improved furnaces, and rivals took many years to follow.
Carnegie had watched the steam loom ruin his father's handloom business and resolved to be on the right side of technology. He said "the expenditure would have been justified even if it had been doubled."
Hiring a chemist at a blast furnace turned waste into profit. Carnegie suspected the new steelmaking process still held a lot of waste and employed a chemist, which competitors pronounced an extravagance. The Lucy furnace became the most profitable branch of the business, and for years Carnegie alone had this edge.
He said they had almost a monopoly of scientific management, and that later rivals found "they could not afford to be without one."
A 1872 visit to a Birmingham steelworks made him bet everything on steel. Carnegie was rich on paper but spread across bridge companies and railroad stocks, with under $5,000 in cash. After seeing the giant Birmingham steelworks he reasoned railroad demand for rails would make steel a mass production business that replaced iron.
He had used iron in his bridge works and saw steel was clearly superior, so he moved before rivals. "If you believed in America, you believed in railroads. And if you believed in railroads, you believed in steel."
He sold every outside holding to focus on one business. Carnegie withdrew from railroad ventures and resolved to own no stocks after catching himself checking quotations first thing each morning. His rule was "put all good eggs in one basket and watch that basket."
He argued the true gold mine lies in your own factory, and said he had rarely met a man who achieved preeminence in moneymaking while interested in many concerns.
He owned his suppliers, from coke to Lake Superior ore. If a company supplied something he needed, Carnegie bought it, took it over or partnered with it. His bridge business led him to make his own iron and then his own steel, and he bought the Frick Coke Company and vast Lake Superior ore reserves.
The same logic brought Henry Clay Frick, who dominated coke, in as a partner. Controlling inputs is part of why his downturn losses were the smallest.
His real skill was choosing people who knew more than he did. As a boy he got friends to gather food for his rabbits by naming the rabbits after them. Later he admitted he did not understand steam machinery but tried to understand people, finding experts for each part.
He credited his success to "the faculty of knowing and choosing others who did know better than myself." Frick was drawn in because he "knows his business down to the ground."
He tried to cheat Frick of his stake, ending the partnership bitterly. Carnegie harped on underlings' small failures and took credit for their successes. When Frick, arguably the managerial genius behind Carnegie Steel, retired, Carnegie worked to deny him his stake, and Frick's parting words were to meet him in hell.
He also issued pro-labor manifestos while cutting workers' pay. The story is told in the biography Meet You in Hell.
Carnegie sold for $480 million and later admitted he sold too cheap. Profits reached $40 million a year before Morgan paid $480 million and combined the company into US Steel, the first billion-dollar corporation. Carnegie later told Morgan he had undersold by $100 million, and Morgan replied "very likely, Andrew."
Soon after the purchase, his successors at US Steel netted $60 million in one year.
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