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Oct 23, 2018 | 3 min read

Economy

The company: a brief history

Tom Morisse

Research Manager


FABERNOVEL
Today, the company is the predominant form of economic exchange: in Europe for instance, companies account for about 80% of GDP and 70% of jobs. The largest companies even reach the scale of entire countries – just think about Walmart, its $500bn of revenue and its 2.3m of employees. And yet the modern company is a very recent innovation, and one that dates back just a few centuries. How did this phenomenon develop at such a rapid pace?

Prior to the emergence of the modern company, economic activity was delivered by political or religious institutions, and the artisans and merchants who traded goods from one person to the next.

During the Renaissance, the closest parallel to the modern company were the naval expeditions, where explorers brought the idea, rich noblemen funded it, and profits were shared when the voyage returned to its home port.

The drawback was that this exchange had to be repeated for each voyage. The modern company was born when this arrangement was made permanent: at the start of the 17th century, the East India Companies, in England, the Netherlands and France, were established as permanent institutions and legal entities. To prevent the providers of capital from being locked in, the system of shares was developed, enabling investors to resell their stakes to others.

Nevertheless, the very first companies were closely related to the states. They administered lands that were conquered during the Age of Discovery. For a long time, these companies could only be established by royal decree, thus limiting their number. This all changed during the second half of the 19th century, when laws in Europe and the United States were introduced to allow companies to be founded without government approval. The company was democratized.

The 19th century marked another turning point in the history of the company: this was the era of the Industrial Revolution. The emergence of railways gave rise to companies of unparalleled size and complexity. To coordinate the flow of passengers and goods over thousands of miles, the main activities were separated and placed in the hands of the first managers: managers responsible for traffic, track repairs and train maintenance.

To increase efficiency, large companies moved towards economies of scale at the dawn of the 20th century. An example of this vertical integration could be found at Ford, which handled the entire chain, from steel mill to dealership. This integration relied on the division of labor and innovations in accountancy that enabled detailed cost analysis.

Once these economies of scale had been achieved, company development continued with economies of scope in the 1920s. To keep growing, product ranges were expanded to reach new consumers, and companies entered new countries. General Motors and its different brands – Buick, Cadillac, Chevrolet, Oldsmobile, Pontiac etc. – make a good example of this approach. To increase the number of divisions without impairing overall consistency, core functions were strengthened, along with strategic and budget planning to carefully allocate resources.

The mergers that multiplied during this era resulted in another key turning point in the history of the company: the separation of ownership and management; senior executives became salaried employees.

In the 1960s, company structures became even more complex. To meet increasingly sophisticated demands, aerospace companies were structured along two dimensions: projects on one side, and capabilities on the other, which were drawn upon on a project by project basis. This matrix organization was applied to many different companies.

With the emergence of new technologies and the growth in international trade, the company transformed into a network at the end of the 20th century. Outsourcing grew and subcontracting chains were extended, with the help of IT systems. Exchanging data with suppliers has been, for instance, one of the keys to Walmart’s success.

What is the situation today? With the Internet, there has been an explosion in the number of connections between people, companies and objects. Some companies have managed to position themselves at the heart of these exchanges of money, time and data. First and foremost, the GAFAs. But that is one story that we have already told

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