Tag: John Rockefeller

Seizing The Middle: Chess Strategy in Business

Chess can serve as an apt metaphor for other areas of our lives, especially business. That’s because the game is a microcosm of the ways we use strategic thinking. There are not many areas where we can quickly assess the quality of our decisions and whether they are likely to have the desired effects. Chess helps us develop strategic thinking because we get immediate feedback on our strategic decisions. It also shows the benefits of thinking ahead.

Perhaps its value for teaching strategic thinking has something to do with the game’s longstanding appeal. Chess has been around for an estimated fifteen centuries, and precursors go back at least 4,500 years; it both reflects and teaches important skills. Seizing the middle is a chess strategy embodying the value of forward thinking. It involves using pieces to commandeer the middle of the board. A player can then restrict their opponent’s movements by controlling the maximal number of pieces in the game.

Strategies akin to seizing the middle are also used in areas such as business, economics, and negotiation. Analogous strategies involve limiting an opponent’s options by asserting control over a resource or area, be it physical or conceptual. Some of the most profitable businesses throughout history employed this strategy and treated the world like a chessboard.

John D. Rockefeller infamously used the strategy of seizing the middle to control the oil industry throughout the nineteenth century. Before he turned forty (according to a Fortune estimate) Rockefeller had personal control over an estimated 90% of the US oil refining industry via the Standard Oil company, and by the time of his death he was the richest person alive. Depending on who you ask, he was either a callous figure who valued money above all else or a shrewd businessman who boosted employment and gave away most of his fortune. Unsurprisingly, every detail of his life and especially his business strategies have been analyzed at great length. While the opportunities Rockefeller capitalized on are unlikely to come about again, they show how chess strategies can translate into business acumen.

It’s hard to overstate just how important the oil industry is to any nation. Because he controlled the oil, Rockefeller could leverage his power to make almost any negotiation go his way. A power which he used on the railroad companies.

Rockefeller recognized early on that railroads were the lifeblood of the oil industry because oil had to be shipped, and thus he sought to gain control of them. Railroads were to the oil business what the middle of a chessboard is to a player—without dependable, controlled access to them, a company could make precious few moves. As he loathed competition, Rockefeller sought to eliminate it—and one of his maneuvers to reduce his competition in the oil business was making sure no one else could transport it around the country.

In the nineteenth century, it was customary for shipping companies to offer rebates (partial refunds) or generous discounts to their biggest customers. Once Standard Oil became the largest oil refining company in the United States, Rockefeller was in an excellent negotiating position with the railroads. In exchange for huge amounts of regular business, the shipping companies agreed to give him an unusually large rebate. Cutting the costs of transporting oil gave Rockefeller a robust competitive advantage. Combine this with his efficient manufacturing process and shrewd usage of byproducts, and Standard Oil’s prices were a fraction of the usual cost of oil. Unsurprisingly, other oil companies had no hope of offering lower or even equivalent rates and still making a profit. If any of them seemed like they might pose a threat, Rockefeller could use his influence over the shipping companies to restrict their ability to transport oil.

Although controlling access to the railroads was a key element in seizing the middle territory of the oil business, Rockefeller had many more pieces in play. Should restricting railroad access be unfeasible, he would cut off competitor’s access to equipment, undercut their prices or buy up all the available raw materials. The amount of control Rockefeller had allowed him incredible power over the entire industry. In The Politics of the Global Oil Industry, Toyin Falola and Ann Genova explain that “Standard Oil had extended its control not only over its competitors but also over oil transportation. Nearly every method of transport from the oil fields to the consumer was owned by Standard Oil, which allowed the company significant control over prices.

Rockefeller thought in terms of first principles, which often meant controlling his own means of production. For example, he cut the cost of barrels by manufacturing them himself and the cost of laying pipework by employing his own plumbers. As Standard Oil grew, Rockefeller’s power grew exponentially. At a certain point, no one could compete with him. With the lion’s share of the market and profits to match, he could get credit for almost unlimited loans, giving Standard Oil a further advantage over competitors and a dominance over the oil territory.

As Alfred Chandler explains in The Visible Hand, Rockefeller’s strategy was part of a wider transition to a new type of industry, beginning in the 1840s and ending with the crash of the 1920s. Businesses started “seizing the middle” and taking control of the resources they depended on. A single company could take charge of everything from the natural resources required to make a product to the transport systems necessary to deliver it to customers. The implications of this were dramatic. Chandler writes of Rockefeller:

“He and his associates then decided to obtain the cooperation of its rivals by relying on the economic power provided by their high-volume, low-cost operation. They began by asking the Lake Shore Railroad to reduce its rates from $2 to $1.35 a barrel on Standard Oil shipments between Cleveland and New York City if Standard provided sixty carloads a day, every day. The road’s general manager quickly accepted, for assured traffic in such high volume meant he could schedule the use of his equipment much more efficiently and so lose nothing by the reduced rate. Indeed, the general manager, somewhat gratuitously, offered the same rates to any other oil refiner shipping the same volume.”

Chandler describes how the change in business practices allowed managers to start thinking like chess players: a few moves ahead. Being able to anticipate and plan had the undeniably significant effect of allowing companies to invest more in research and development because they could forecast where current trends headed:

“In allocating resources for future production and distribution, the new methods extended the time horizon of the top managers. Entrepreneurs who personally managed large industrials tended, like the owners of smaller, traditional enterprises, to make their plans on the basis of current market and business conditions. . . . The central sales and purchasing offices provided forecasts of future demand and availability of resources.”

Seizing the middle didn’t just help create the energy industry as we know it today. The strategy also contributed to the creation of the modern film industry.

For four tumultuous decades, known as The Golden Age of Hollywood, eight studios all but governed the global film industry. Between the 1920s and 1960s, Fox, Loew’s Inc., Paramount, RKO Radio, Warner Bros., United Artists, Universal, and Columbia Pictures formed the studio system. Much like Standard Oil needed control over the railroads to ensure their success, the film oligarchy also prioritized power over distribution systems. In this case, that meant owning the cinemas that showed their films. For the most part, they also owned the production facilities, and held Hollywood staff and stars under strict long-term contracts.

For example, actor Cary Grant signed a five-year contract with Paramount in 1931. This gave the studio such control over him that they could literally loan him to other studios—in 1935, Paramount lent him to RKO so he could star alongside Katharine Hepburn. Having popular actors with the cache to draw audiences to anything they appeared in under contract restricted the movements of any other studios, dictating the number of pieces that could be on the board.

New anti-trust laws in the late 1940s and the rise of television in the 1950s contributed to the end of the Hollywood studio system. Both Grant and Hepburn escaped the grip of their respective studios and took control of their own careers. Grant refused to renew his contract once it expired and became possibly the first freelance Hollywood actor. Hepburn bought out her contract after being assigned to a string of unsuccessful films.

Hollywood nonetheless achieved a lot during the studio system days. This era, beginning with the rise of “talkies” (films with sound) shaped many of our expectations of films. Many major cinematic genres and conventions were devised during the Golden Age. The low cost of producing films with all aspects of production and distribution under tight control meant studios could take chances with unproven actors, directors, and scripts for films like Citizen Kane. Although the era produced a lot of formulaic, repetitive, or dull works, it also gave birth to many that remain popular and well-loved even now.

In The Hollywood Studio System: A History, Douglas Gomery describes how Adolph Zukor, founder of Paramount, devised the studio system:

“During the 1910s, Adolph Zukor through his Famous Players and then Paramount corporations developed a system by which to manufacture popular feature-length films, distribute them around the world, and present them in Paramount picture palaces. . . . Zukor taught the world how to make motion pictures popular and profitable in a global marketplace. He also laid down the principles of the studio system.

From his entry into the industry, Zukor wanted to take control of the new movie business . . . and began to develop a national distribution system which would hereafter serve as the basis for the studio system. . . . Zukor was smart and looked to see how other industries developed their corporate economic power . . . and made films in a factor like a system; and he developed a distribution division (Paramount) to sell his wares throughout the world.

. . . In the end, Zukor and his followers developed a set of operating principles. Their industry—symbolized by their Hollywood studios—would be made up of a small set of corporations that produced, distributed, and presented films in order to maximize the profits of their corporations. The number . . . would total eight.”

To control the game, one tries to control as much of the board as possible. At the outset, using your pieces to seize the middle of the playing field is a great strategy, because it gives you the widest possible vantage point from which to control the movement of the other pieces. Both Rockefeller and the studio system in Hollywood employed this strategy successfully, allowing them to anticipate change and maneuver effectively for decades.

Samuel Andrews: The Man With the Billion Dollar Ego

We can learn valuable lessons from the life of Samuel Andrews. Haven’t you ever heard of him? There’s a reason. He was John D. Rockefeller’s right-hand man and stood to become one of the world’s richest men. But then something got in the way. 

***

There is an important lesson to be learned from the story of Samuel Andrews, as told by biographer Ron Chernow in Titan: The Life of John D. Rockefeller.

John D. Rockefeller learned to clean oil from Sam Andrews. Andrews was the ideal partner for Rockefeller. While he lacked business sense, he had mechanical knowledge that Rockefeller didn’t. The quality of kerosene that Andrews was able to produce, and the efficiency of his process, rendered him indispensable—until something got into the way. But before we get to that, a bit of history.

It was Rockefeller himself who propositioned Andrews to go into business in the first place.

“Sam,” he said, “we are prospering. We have a future before us, a big future. But I don’t like Jim Clark and his habits. He is an immoral man in more ways than one. He gambles in oil. I don’t want this business to be associated with a gambler. Suppose I take them up the next time they threaten a dissolution. Suppose I succeed in buying them out. Will you come in with me?”

Andrews agreed, and they shook hands on the deal.

Only a few weeks later, Rockefeller quarreled with Clark. “If that’s the way you want to do business, we’d better dissolve, and let you run your own affairs to suit yourself,” Clark warned.  Rockefeller moved swiftly.

Rockefeller met with his partners and stated publicly that he wished to dissolve the partnership. The two sides walked away after the meeting with contrasting feelings. The Clarks imagined they had cowed the young whippersnapper, while Rockefeller raced to the office of the Cleveland Leader to place a notice dissolving the partnership.

The next morning the Clarks were stunned to see the notice. The Clarks failed to realize that Rockefeller had Andrews on his side. As per the partnership agreement, the business went up for auction.

Ron Chernow describes the situation thus:

Even as a young man, Rockefeller was extremely composed in a crisis. In this respect, he was a natural leader: the more agitated others became, the calmer he grew. It was an index of his matchless confidence that when the auction occurred, the Clarks brought a lawyer while Rockefeller represented himself. “I thought that I could take care of so simple a transaction,” he boasted. With the Clarks’ lawyer acting as auctioneer, the bidding began at $500 and quickly rose to a few thousand dollars, then inched up slowly to about $50,000—already more than Rockefeller thought the refining business worth.

Since this was such a critical and defining moment in Rockefeller’s career, we can read his own words:

Finally it advanced to $60,000, and by slow stages to $70,000, and I almost feared for my ability to buy the business and have the money to pay for it. At last the other side bid $72,000. Without hesitation I said $72,500. Mr. Clark then said: “I’ll go no higher, John; the business is yours.” “Shall I give you a check for it now?” I suggested. “No,” Mr. Clark said, “I’m glad to trust you for it; settle at your convenience.”

At age 25, he and Sam Andrews controlled Cleveland’s largest refinery. No sooner had the ink dried than they took up a metagame strategy, one of rapid expansion, that he knew was diametrically opposed to how the Clarks would likely respond.

Refinery after refinery came under their control. From the start, Rockefeller used his business sense and relied on Sam Andrews for technical advice. Rockefeller held Andrews in esteem until Ambrose McGregor was named superintendent of the Standard Oil refineries in Cleveland. McGregor demonstrated superior ability. Andrews was shown to be less capable. His ego took a beating.

One day in 1878, Andrews snapped at Rockefeller, “I wish I was out of this business.”

Rockefeller remained calm and called his bluff, replying, “Sam, you don’t seem to have faith in the way this company is operating. What will you take for your holdings?”

“I will take one million dollars,” Andrews shot back.

“Let me have an option on it for twenty-four hours,” said Rockefeller, “and we will discuss it tomorrow.”

“Samuel Andrews was taken into the business as a poor workingman with little or nothing in the early stages when it was difficult to find men to cleanse the oil. … He had too much conceit, too much bull-headed English obstinacy and so little self-control. Was his own worst enemy.”

The next morning when Andrews arrived, Rockefeller had a check made out for one million dollars.

While he appeared confident, Rockefeller was petrified at the thought of Andrew’s holdings hitting the open market and depressing the stock. Andrews thought he had bested Rockefeller. However, when Rockefeller sold the shares to William H. Vanderbilt for a quick $300,000 profit, Andrews changed his mind, voicing his displeasure to Rockefeller.

Rockefeller, feeling some sense of loyalty to the man who had helped him build and empire and quickly fallen out of favor, offered back the stock for the same price at which he had sold it.

Feeling slighted, his ego bruised, Andrews spurned the offer. This decision kept him from becoming one of America’s richest men. The very same stock would have been worth $900 million by the early 1930s.

Later Rockefeller would say of Andrews, “He was ignorant, conceited, lost his head…governed by the same wicked sort of prejudice accompanying the egotism so characteristic of that type of ignorant Englishman.”

There is a little Sam Andrews in all of us. The lesson to walk away with is that temperament matters. A lot.

The ability to keep your head when others are losing theirs is a superpower. The world doesn’t always work the way you want to it. People will slight you. You’ll get fired. You’ll make mistakes. People who are smarter than you will compete for your job. And how you respond to all of this will make all the difference.

Rockefeller gained an advantage by keeping his head while others lost theirs. In fact, the higher the stakes, the cooler he was said to become. Andrews, on the other hand, couldn’t keep his head. As a result, a blow to his ego prevented him from being one of the richest men in the world.

Footnotes
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    Source: Chernow, Ron. Titan: The Life of John D. Rockefeller. New York: Knopf Doubleday, 2007