Aspire | Action | Acquire
Aspire | Action | Acquire

Gaming the competition

In the 1990s, Harvard professor Michael Porter, published a topology of industry competition. At the centre of the topology is inter-firm rivalry, surrounded by their suppliers, customers, substitute products, and potential new entrants. Referred to as the “5 Forces model”, the relative power of each of the players was argued by Porter to shape an industry and its competing firms. The genius of John D Rockefeller was to master the 5 forces up until the forced dismantling of his Standard Oil Trust.

More than any other business titan of his day, J D Rockefeller understood that profits are maximised from delivering products from locations of abundance (competitive advantage) to locations of scarcity (competitive disadvantage). During the nineteenth century, railroads became the most efficient bridge between production and consumption geographies. In the absence of competition, the railroads charged monopolistically and this typically invited costly duplication and financial speculation. Unlike the freight they transport, railroads have the competitive disadvantage of being locationally fixed. They cannot shift routes like other transport modes without great financial loss.

As described in the book The myth of the robber barons, there were few barriers to entering the oil business with drilling equipment costing less than $1,000. “By the early 1860s, speculators were swarming northwest Pennsylvania cluttering it with derricks, pipes, tanks, and barrels.” Faced with erratically changing supply costs, J D Rockefeller bought out his competing refiners. This began in Cleveland and extended to the main refiners in New York, Philadelphia, and Pittsburgh during the mid-1870s. By creating a monopsony, his rebadged Standard Oil began to buy out the drillers who had few options to sell their unrefined oil. This preceded horizontal integration into supplying customers.

A necessary strength of ultra-wealth creators is their ability to survive economic disasters. By the outbreak of the financial panic of 1873, caused by an over-speculation on rail stocks, Rockefeller and his partners had rationalised production. To that time the majority of refined oil was exported providing Standard Oil further insulation against the mid-to-late 1870s depression. Rockefeller’s Standard Oil pumped crude from its own fields and marketed its final product to end consumers. By the late 1880s, however, the wells of Pennsylvania were depleting, and many people thought that this would be Rockefeller’s downfall. Instead, the breakup of Standard Oil would be incited by a journalist.

In the book Breaking Rockefeller, its author Peter Doran, categorizes competitors to the Standard Oil Trust as either those he defeated and at “peace” or those who resisted and “at war.” A surprising trait about his takeovers was that his early management ranks were drawn from owners who had swapped their own businesses for shares in Standard Oil. Not all takeover targets were happy with the prospect of a Rockefeller buyout. One of those to resist was the father of journalist Ida Tarbell, whom was instrumental to initiating the anti-trust case that broke up Standard Oil.

The downfall came as a consequence of setting up a rebate scheme with Tom Scott of the Pennsylvania Railroad who was one of Andrew Carnegie’s mentors. Carnegie too was another to exhibit the trait of surviving potential economic collapse; having committed to construct the Edgar Thomson Steel Mill which opened a year before America’s 1873 financial panic. Like Rockefeller, Carnegie had integrated vertically into the production of coke, essential for making steel, before making a deal with Henry Clay Frick, known as the “coke king”; whom would run the Carnegie mills before a spectacular fallout.