Today we republish an excerpt from the book I wrote twenty-one years ago, including some short but sweet diverse business history stories. The original has been slightly edited and we have added a few more pictures. (The complete book, expanded but only available as a PDF, can be purchased here.)
Although we don’t always think about it, we are connected to our past. When I was growing up in the 60s, my father traveled on business every week. Mom would pick him up and drop him off at the Indianapolis airport, and we kids got to tag along. I developed a fascination with the airline business that continues to this day. Several years ago, I was flying into the same Indianapolis airport. As we made our approach, I could see below me a spectacular view of that giant of sporting facilities, the Indianapolis 500 track. My heart leapt. Then, out of the blue, it struck me that my late Dad had probably seen this view many times, and reacted exactly as I had. It’s something we never talked about, but suddenly I was sure that we shared this connection – a new and unexpected link between me and my past.
Looking backward can help us to understand the present and forecast the future. But looking at history also has a value in itself. It can strengthen our understanding of our human nature and help us tackle the challenges we face today with greater insight and wisdom. Unfortunately, most people in the world of business have little or no appreciation of the heritage of business history. We are totally focused on the present and the future, to the neglect of the past. Students in law school have to study legal precedents and understand the heritage of Roman jurisprudence and English common law. Musicians in training study the works of Bach and Beethoven and listen to CDs of the greatest performers of the past. But very few business schools require any study of business history. It’s a serious omission.
The widespread ignorance of business history is a real shame, because those who study business history have a heightened appreciation of the importance of what today’s business leaders are doing and can accomplish. While millions read with fascination about the exploits of our famous explorers and great generals or the breakthroughs of our leading scientists and thinkers, we give short shrift to the role played by entrepreneurs, industrialists, and managerial geniuses in our history.
Furthermore, business history can also be a fountain of great ideas and insights for enterprises of the present and future. Let me make my point by telling a few stories from the treasure trove that is business history.
The Art of Branch Management
Take a look at an interesting enterprise I studied. Two men owned a successful business. They decided to open a branch in another city. They gave the manager of that office “sweat equity” – ownership of 25% of the branch. After a period of time, it turned out that the manager was “cooking the books,” falsifying the profits, and stealing money. The owners went to court to get back the money the manager had stolen, but they did not get much. However, they did not give up. They got rid of the first manager and brought in a new fellow, who did a great job and increased the profits of the branch. The branch did so well that it became, according to one source, “a nursery of future branch managers.”
The owners were the Medici family of Florence, the branch office (of their trading and banking company) was Venice, and the time period was A.D. 1402-1440. The story has a few other interesting details I haven’t yet mentioned. For example, the Venice branch had a female slave to help around the office. Thirteen employees of another branch were killed by pirates. If you look back at these stories and say, “What has changed?” you realize that many of the challenges of business have remained the same – finding and keeping dedicated employees, developing accounting systems that are reliable and accurate, dealing with risks and new challenges. In fact, the 25% “sweat equity” figure chosen by the Medicis is amazingly close to recommended numbers in a consultant’s study I reviewed in my position on the board of an Internet company, six centuries later.
In 1916, US railroads were among the most important, powerful, and massive enterprises in world history. They had accumulated investments exceeding $21 billion. Their employment rolls totaled 1,700,000 workers. The entire system had been built and managed without the kind of resources modern enterprises take for granted, such as Federal Express, the Internet, NASDAQ, or Excel.
Industry leader Pennsylvania Railroad called itself “the standard railroad of the world.” It was to turn-of-the-century America what IBM was to the business world in the 60s and 70s, or what Microsoft later became – in fact, relatively speaking, the Pennsylvania was probably much more important in its day than either of those great computing companies.
From its founding in 1846, the Pennsylvania had competed with railroads from other coastal cities for the lucrative trade to the west. Industry pioneer Baltimore and Ohio reached out from its namesake city, while Vanderbilt’s New York Central empire had the best lines directly into New York, which was emerging as the most important port on the east coast. The Pennsylvania’s New York passengers and freight had to be ferried across the Hudson River from New Jersey in order to reach Manhattan, a severe competitive disadvantage in comparison with the Vanderbilt line.
After years of study, the Pennsylvania under President Alexander Cassatt in 1900 boldly decided to build tunnels under the Hudson and a giant new terminal in Manhattan. The project took until 1917 to complete. It cost the Pennsylvania $160 million, at the time the largest private investment in history. The Pennsylvania remained a blue chip until after World War II, and even after the late 60s demise of successor Penn Central, its New York real estate holdings remained valuable. Today the Norfolk Southern Railroad profitably operates much of its original route.
Despite the enormous importance of his leadership role as the head of one of America’s greatest enterprises, Cassatt today is far less famous than his impressionist painter sister, Mary Cassatt. And his grand neo-classic Pennsylvania Station was thoughtlessly demolished in 1963, perhaps our nation’s single greatest architectural loss.
A Dutch Tale
The Netherlands, commonly called Holland (although that name really refers to just part of the country), is a small but very independent nation that has relied for centuries on trade and treaties for both survival and prosperity. Among the leading Dutch and Anglo-Dutch companies that have flourished in this unique environment are Shell, Unilever, and Philips. However, no Dutch company reflects the entrepreneurial spirit of the country – or the dramatic history of the airline industry – better than the national airline, KLM.
The world airline industry was born in the 1920s and 1930s. In mapping the earliest airline routes, the European powers naturally reached out to their colonies in Africa and Asia. In 1929, Imperial Airways (today known as British Airways) reached from London to India, and later met up with Qantas to reach Australia. Air Orient (later Air France) by 1931 plied the routes from Paris to Saigon.
The Netherlands had founded one of the first airlines, KLM (“Royal Dutch Airlines”), in 1919 under the management of thirty-year-old Albert Plesman. The Dutch wanted to get to their remote colony, the Dutch East Indies (today Indonesia) and its capital Batavia (now Jakarta). But, unlike France and Britain, the Netherlands did not have a series of colonies in which they could land en route. Therefore, KLM had to negotiate landing rights in British and other locations.
However, Plesman turned this lemon into lemonade, linking a series of stops to create the shortest and best route from Western Europe to Asia. On October 1, 1931, KLM opened regular passenger service from Amsterdam to Batavia, covering 9,000 miles in just ten days, with 81 hours of flying time. At the time, this was the world’s longest scheduled airline route. Sometimes the three passengers could be bumped by the higher-priority mail. Even after the Brits opened their competing service to the Far East, many British businessmen preferred KLM because of its great reliability. This map shows the KLM route as of 1933:
When war broke out and Hitler conquered Holland, Plesman was taken prisoner. But his alert staff and pilots were quick enough to fly KLM’s fleet out of Amsterdam to safety in Britain. KLM planes served the Allied cause throughout the war, flying routes in the Mediterranean and the Far East. After the war, Plesman continued to run KLM until his death in 1953. Today KLM, the oldest of the world’s major airlines, plays a key role in world aviation from its hub at the Amsterdam airport.
Ralph Hitz was born in Vienna in 1891. He ran away from home to work as an elevator boy at the Hotel Sacher. (Ever hear of a Sacher Torte?) But Ralph’s father, a horse dealer, lured him home by promising to take the boy to New York on his next business trip. (New York was a great place to buy cavalry horses.)
In 1906, at the age of 15, Ralph again ran away, this time to become a bus boy at a hash house on New York’s Broadway. He subsequently worked his way through kitchens across America – Oklahoma City, Houston, Galveston, and Cleveland. He gradually learned English but never lost his thick accent.
By 1928, Hitz was the manager of the Gibson Hotel in Cincinnati. His results were so phenomenal that he was able to start his own company, National Hotel Management, which operated (for a share of the profits) such famous hotels as the Book-Cadillac in Detroit, the Netherland Plaza in Cincinnati, the Nicollet in Minneapolis, the Congress in Chicago, and the Adolphus in Dallas.
His crowning achievement was the opening of the Hotel New Yorker – Manhattan’s largest hotel, with 2,500 rooms – ten weeks after the stock market crash of 1929. Does the date sound inauspicious? Not necessarily. By the Depression year of 1936, the New Yorker was making a profit of $1.5 million on revenues of $5.5 million. Note that this hotel was not for rich people; it was a large-volume hotel for the masses of road warriors – at $3.50 a night.
How did Hitz do it? Check out the May 1937 issue of Fortune to learn all the details, but I’ll mention a couple. Hitz’s team tracked every regular customer. If they didn’t hear from a particular patron for a few months, they’d send a letter asking if anything was wrong. If a bellhop saw a little boy with his parents in the elevator, he’d ask the little boy what his birthday was. A birthday card would follow. Hotel management knew the preferences of every regular guest. Teams of clerks kept track of all this information in the days before computerized databases. The New Yorker’s positioning line was “The Big Hotel that Remembers the Little Things.”
In a thousand ways, from marketing to telephone operators to kitchen management, Ralph Hitz perfected the operation of his hotels. Today Ralph Hitz is long gone, but the New Yorker is still in business at 8th Avenue and 34th Street.
What lessons might we learn from Ralph Hitz? Looking back, I see that he could afford to capture customer histories and send out birthday cards and other messages because he had access to cheap Depression-era labor. By the 1950s and 60s, labor costs had risen dramatically, and these labor-intensive marketing techniques may have seemed impossible. By the 90s, top-end hotel chains like Four Seasons and Ritz-Carlton prided themselves on knowing these kinds of details about their customers. They could afford to, on the profit margins they achieved at prices of $300 and up per night.
But I believe that if Ralph Hitz were alive today, he would be operating inns with $100 rooms and he would know everything about his customers. Of course, he would take advantage of today’s low-cost computers and database management software, and he would probably use the Internet as a super-efficient tool for communication and management. Hitz would care about every detail and he would act on it, just as he did seventy years ago.
A Little Publishing Story
In 1924, two young fellows pooled their $4,000 in savings and rented a one-room office at 37 West 57th Street in New York. They wanted to publish books. But with no authors in their stable, their future looked bleak. Their phone rang only when someone dialed a wrong number. They decided they must dream up their own book ideas, and started to write ideas on index cards. Finally they picked one of their ideas – the creation of an inexpensive crossword puzzle book. They asked others about the idea, and nearly everyone told them they were crazy. The leading distributor of books thought so little of the idea that he told them, If you must publish it, keep your name off it, or you‘re dead in the publishing business.‖ Publishing such an insignificant title was sure to lead to a permanently scarred reputation in literary circles.
But in the next ten years, Richard Simon and Lincoln Schuster sold 1,500,000 crossword puzzle books. Would you have listened to the experts or would you, like Simon and Schuster, have plowed ahead?
(We told the following story in a post last year, but in case you missed this great one, here it is as originally told in my book.)
A Big Entertaining Story
Walt Disney (see his biography here) was tired of taking his daughters to shabby amusement parks. For years, he dreamed of opening a nicer, cleaner park for families. But it was only a dream.
Elsewhere, in 1948, the government decided that it was wrong for the big movie studios to control most of America‘s theatres. So Paramount, Fox, M-G-M/Loew’s, and Warner Brothers had to sell their extensive theatre chains. Paramount, with the largest chain, created a new company, United Paramount Theatres. One of Paramount‘s smart young lawyers, Leonard Goldenson, left the studio company to run the theatre chain.
But Goldenson thought the future was in television as well as film. This was not a common belief in the entertainment business, and most movie people were downright hostile to the new medium: Jack Warner banned televisions from appearing or being mentioned in Warner movies. As badly as Goldenson wanted into television, there seemed to be no way in.
The two dominant networks, CBS and NBC, had tied up all the good local affiliates – 60 stations each. Only the struggling ABC, with just nine affiliates, was available, and no one really wanted it. At least not at the $25 million price that Life-Savers founder Ed Noble wanted for it. Goldenson went to his board for approval to pay the $25 million. They balked at the idea of buying an also-ran network. In the end, Goldenson finally convinced the board, and United Paramount took over ABC.
By the early 50s, ABC had survived, but it was still an also-ran. Enter Walt Disney. He needed the money to build his dream amusement park, but no banker would hear of it. They could only picture those shabby amusement parks that Walt so despised. So he went to the television powerhouses, offering to provide television programming and access to his library of classic films, if they‘d help him finance his dream.
Sarnoff, the technological pioneer at NBC, said No. Paley, the programming wizard at CBS, took longer, but also said No. That left only Goldenson, the also-ran, the guy without the deep pockets of the other two networks. But Walt had to keep trying if he was to make his dream become real.
In the final event, Goldenson became convinced that Disneyland made sense. He extracted an arm and a leg from Disney to help get the financing – a weekly TV show, access to the film library, and partial ownership and all the profits from the food sold at Disneyland for ten years. Now Goldenson‘s only problem was getting his hands on the $15 million to build Disneyland.
Enter our third character, Goldenson‘s business acquaintance Karl Hoblitzelle. Hoblitzelle had started as an administrative assistant at the St. Louis World‘s Fair of 1904. After the fair, he heard there might be a need for more vaudeville in the Southwest, and headed to Texas. There he built a chain of vaudeville – and later movie – theatres, including the nation‘s first atmospheric theatre (with twinkling stars in the ceiling), the Majestic in Houston, and the now-restored Paramount in Austin.
But Hoblitzelle was a man of broader vision than many old vaudevillians. He had wisely invested in his neighbors‘ burgeoning businesses – producing and selling a commodity called oil. And he had become Chairman of the Board of Dallas‘s powerful Republic Bank. Who do you think lent Disney the money for Disneyland? Hoblitzelle‘s Republic Bank. Who guaranteed the loan? Goldenson‘s United Paramount-ABC.
Two struggling entrepreneurial leaders, Leonard Goldenson and Walt Disney, were able to find each other, take a chance on each other, and draw in an older businessman with vision, Karl Hoblitzelle. These were independent men acting freely in pursuit of their dreams. Without their visionary acts, today there probably would be no ABC, there would be no Disneyland or Disney World.
American Business History Center