Focus on management history Henri Fayol as strategist: a nineteenth century corporate turnaround

Daniel A. Wren University of Oklahoma, Norman, Oklahoma, USA

The rise and fall of firms in a competitive environment is a familiar fact of life in the study of business history. Firms emerge, grow, struggle to survive, prosper and endure, or may eventually go into decline Abstract Successful corporate turnarounds and disappear from the scene. Navin (1970) occur, thus avoiding liquidation, identified what a Fortune 500 roster would but historical examples are few. In have been in 1917 and found that size in late nineteenth century France terms of assets helped explain survival but Henri Fayol became managing director (CEO) of a vertically not in a clear and consistent manner. integrated iron and steel firm and Mergers, acquisitions, diversification, and made various decisions that the development of new industries based on retrieved the firm from the brink of emerging technologies were forces that liquidation. In examining his affected organizational survival. Reports by career, the competitive nature of the industry, and his decisions, it Forbes (Newcomb, 1987) and Fortune is suggested that he employed a (Newport, 1989) also indicated the precarious deliberate and comprehensive nature of survival among US corporations. corporate strategy to guide the Prescriptions for preventing or delaying firm toward its objectives. While he developed his theory of the decline of a firm fail to reach any management from these consensus. Organizational redesign to align experiences and claimed that its strategy and structure (Chandler, 1962); application was the primary cause changing managerial leadership, mergers, of the turnaround, this paper acquisitions, alliances, downsizing, divesting suggests that there were several other factors at work. unprofitable ventures, focusing on core competencies and resources (e.g. Hitt et al., 1999; Huber and Glick, 1993; Pettigrew and Whipp, 1991) and re-engineering (Hammer and Champy, 1993) are some options offered for guiding a corporate turnaround. While there have been case studies of modern corporate revivals (e.g. Doody, 1988; Lutz, 1998; Miles, 1997) corporate turnarounds of earlier periods have been neglected. What is unique about this corporate turnaround is it I am indebted to John D. Breeze and two anonymous occurred in France in the late nineteenth reviewers for their helpful century; its primary change agent attributed comments and to Donald this success to the use of managerial skills Reid and Tsuneo Sasaki for and, in turn, this experience led to the their contributions to the development of a theory of management[1]. study of Henri Fayol's life and work. In 1888 Henri Fayol became the managing director (Chief Executive Officer) of the fully integrated steel producing firm of Commentry, Fourchambault and Decazeville (Comambault) when it was headed for
Keywords
Renewal, Corporate strategy, Steel industry, Strategic management, France

bankruptcy. Ten years later, he wrote in his notebook: ``When I assumed the responsibility for the restoration of Decazeville, I did not rely on my technical superiority F F F I relied on my ability as an organizer [and my] skill in handling men (manoeuvrier des hommes)'' (Blancpain, 1974, p. 23). In the case of Comambault he attributed its turnaround to the administrative methods employed:

With the same [coal] mines, the same [steel] mills, the same financial resources, the same markets, the same Board of Directors and the same personnel, solely with the application of a new way of running the company, the firm experienced a rise [in its performance] comparable to its earlier decline (Fayol, in Verney, 1925, p. 8).

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Was this an accurate conclusion, or did Fayol overstate the reasons for the firm's recovery? While not underestimating Fayol's administrative abilities, Breeze suggested ``that the company survived primarily because of the technical and financial actions that [Fayol] took, rather than a rapid turnaround stimulated solely by the administrative procedures and policies themselves'' (Breeze, 1985, p. 46). Were there any external factors that contributed to the turnaround? Jean Chevalier, who wrote extensively on management and organization and was President of the Comite National de l'Organisation Francaise, stated: ``To tell the truth, it was not Fayol's presence [as Managing Director] which restored profitability. It was the rise in [the] market price of pig iron from 57 francs in 1888 to 70 francs in 1890, a rise which must be placed in the context of wages which remained at their lowest level in the last 20 years of the [nineteenth century]'' (Chevalier, quoted in Reid, 1995b, p. 33). According to Chevalier, it was the rising tide of an external factor, the market, while paying no more in wages, that restored Fayol's firm to prosperity.

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Can we determine the nature and conditions surrounding Fayol's firm to assess the extent to which external factors might have contributed to the recovery of Comambault? What internal adjustments were made to align the firm's capabilities to its competitive environment? Was the recovery attributable to Fayol's administrative abilities or to other factors? We will examine Fayol's early life and career, analyze the characteristics of France's steel and iron industry, and present the actions that Fayol took in an attempt to discover the true circumstances that led to Comambault's recovery. As we shall see there were other strategic factors that played a role in the turnaround and their significance lies in the way Fayol responded to them.

Fourchambault et Decazeville, 1854-1954 (1954). Fayol's supervisor at the Commentry mine was Stephane Mony, who would become Fayol's mentor. It is highly likely that Fayol's technical skills led to his promotion to manager of the Commentry mine in 1866, age 25, succeeding Stephane Mony. According to Amedee Fayol, Henri Fayol's great nephew, a member of the board of directors asked Mony if it was wise to promote Fayol to such a position of responsibility: Mony responded ``Monsieur Fayol is 25 years, I am 65, that yields an excellent average'' (Fayol, 1960)[4]. Mony's confidence was not misplaced.

Fayol's rise to top management

During his six years as a mining engineer in the Commentry mine Fayol began keeping notes on events that occurred in the mines that affected output. For example, as early as 1861 he observed that all work had to be stopped because a horse working in the St Edmund pits fell and broke its leg. A replacement could not be obtained due to the absence of Stephane Mony, and the keeper of the stable refused to release a replacement because he had no authority to do so[5]. Fayol's conclusion about the problem was not a result of his technical training but a managerial insight that authority to get things done must be present at all times or delays and disorder would follow. In later years when he formulated the principle that authority and responsibility are inseparable, he may have recalled that early incident. His promotion to director of the Commentry mine in 1866, replacing Monsieur Mony, brought him to a position where few of the problems he encountered were predominately technical. Reid (1995b, p. 23) provided illustrations of Fayol's managerial experiences at Commentry such as grouping the workers in teams according to their preferences, this reduced turnover because the workers stayed together for a long time in their groups, the groups became cohesive by refusing to take in inferior or undesirable workers, and they worked harder as group members than otherwise. Fayol also reversed the division of labor by giving the work groups responsibility for timbering the mine rather than leaving this to specialists, and stopped using sub-contractors, giving the supervisors more control over the timing and quality of work. In 1872 Fayol was given more responsibility by adding the coal mines at Montvicq and the iron mine at Berry to his

Fayol's early life and career

Jules Henri Fayol was born July 29, 1841 in Constantinople where his father was fulfilling his military service obligation by supervising construction projects under an agreement between France and Turkey (Sasaki, 1995). Andre and Eugenie Cantin Fayol returned to France after Andre completed his military service and lived in La Voulte where Henri received his elementary education in a missionary school. Andre worked as a Superintendent at iron foundries in Le Pouzin and Le Teil, near La Voulte, and could afford to send Henri to a polytechnic school in the city of Valence where he graduated from the Lycee Imperial in 1858. Andre Fayol was an engineer and Henri followed in his footsteps, entering the National School of Mines at Saint Etienne at the age of 17, graduating as an engineer at age 19 in 1860[2]. Henri Fayol's son wrote that his father was hired into the coal mine at Commentry to help solve the problem of underground fires indeed, Fayol spent the first two nights of his career at a coal mine fire (Fayol fils, 1929, quoted in Breeze, 1985, p. 45). Subsequently, Fayol studied the causes of underground fires, how to prevent them, how to fight them, how to reclaim mining areas that had burned, and eventually developed a detailed knowledge of the geological structure of the Commentry basin[3]. The Commentry mine was owned by the Societe Boigues, Rambourg and Company, a limited partnership (societe en commandite) which also owned the mills of Fourchambault and Torteron, a forge at d'Imphy; a foundry at Montlucon, and an iron mine at Berry (La Societe de Commentry

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Commentry duties. At this period of his career Fayol's notes began revealing why he would place so much importance on short and long range planning and coordination in his later writings. He became critical of higher management's practice of letting the sale of coal drive its production. While it was thought that this should be the case in most enterprises, Fayol saw that it was not true for coal mining due to the nature of the coal formations. When the company's sales people sold a higher grade of coal, for example, the mines had to dig both high and low grade coal which could not be separated in the extraction process leaving an abundance of low grade coal that was more difficult to sell (Reid, 1995b, pp. 24-5). It was easier to sell high grade coal, but at the added cost of labor and inventory for the less desirable lower grade of coal. Fayol sought to solve this problem by preparing sales and production plans with records of inventory that sales people could use to guide their selling. ``Production, therefore, not market demand, was the key to Fayol's conception of planning'' in the mining industry (Reid, 1995b, p. 25). In the mining industry at that time, the demand for coal was relatively stable while the unpredictable side of the equation was the composition and amount of coal that was embedded in the earth. Under these circumstances decisions about sales needed to be based on the firm's capability to deliver. The uncertainty of delivery was a long term planning problem, that is, how to extract the required quality and quantity of coal; while short term planning in Fayol's notion depended upon coordinating sales efforts with inventory and production capabilities. Following the death of several partners the limited partnership of Boigues, Rambourg and Company was reorganized in 1874 as Commentry-Fourchambault (Comambault), a joint stock company (Societe anonyme). The new Board of Directors named three of its members as a committee to run the company: Stephane Mony to manage the Commentry division, thus making him Henri Fayol's supervisor; Etienne Glachant for the Fourchambault group; and Anatole le Brun de Sessevalle, the son-in-law of Paul Rambourg, one of the firm's founders, to handle financial affairs in Paris (La Societe F F F 1954, pp. 110-111). Friction between the board of directors and the Managing Director's Committee arose when it sought to make operational decisions without consulting the board. The board asserted its authority by limiting their powers to only those matters where

authority had been specifically delegated (Reid, 1995b, p. 29). Over a period this management by committee gradually disintegrated: Glachant resigned for reasons unknown; Mony died in 1884, age 84; and de Sessevalle resigned bitterly March 5, 1888 stating: ``[the board] bestow[ed] on him their criticism, create[d] hindrances for him F F F which paralyzed his efforts, [making] his situation untenable'' (Reid, 1995b, p. 30). It is likely that when Fayol later wrote of the principle of centralization/decentralization he had these prior events in mind. The company history referred to this period as one of desperation the output of steel fell from 38,000 to 15,000 metric tons (1 metric ton = 2,204.6 US pounds) between 1884 and 1889; dividends had fallen from 32 francs, 50 centimes per share in 1883 to 20 francs in 1885 but no dividends had been paid since then. Newly developing steel mills in the north and the east of France were a ``menace to the prosperity'' of mills in the center of France; the coal beds of Commentry were exhausted; the mill at Torteron was closed in 1880 as unprofitable; and the Fourchambault mill was losing money. It appeared to the board that the wisest move would be to abandon its iron and steel business and the coal mines that fed it raw materials and Henri Fayol was their choice to oversee this dissolution. The reason for the selection of Henri Fayol was not clear not even to Fayol who admitted to his knowledge of managing mines but the post of managing director had traditionally been given to metallurgists, which was not his experience. Regardless, he was invited on Tuesday, March 6, 1888 to come to the main offices on the Place Vendome to interview for the managing director's position. The President of the Board assured him of the board's ``manifest esteem for his character and [they] were inspired by his experience and judgment.'' In spite of this assurance, which Fayol thought was a very diplomatic way to invite him, he felt that it was simply because the fate of the firm ``appeared hopeless'' (La Societe F F F 1954, p. 173). Fayol accepted the post and, after ``four months of reflection and study F F F presented the board with a complete plan, an assortment of exact facts and figures that no one found fault with and [received] the support of a majority of the board'' (La Societe F F F 1954, p. 175). Instead of liquidation, perhaps Monsieur Fayol should be given a chance to restore the firm's prosperity the board had little to lose. For Fayol it was an opportunity to manage one of France's largest iron and steel firms.

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The French iron and steel industry

Wrought iron is the oldest form of iron but there is no record of when it began. In the mid-seventeenth century two Englishmen, Thomas and George Cranege, developed the ``puddling'' technique (McHugh, 1980, p. 81). In this process, hot gases from burning coal or wood were passed over a charge (``puddle'') of iron to remove the impurities caused by oxidation. Puddling was a low yield process, resulting in about 70 percent of iron for every pound of ore smelted. The result was brittle, highly susceptible to wear and tear, and was limited in how many shapes in which it could be formed. In 1854 Henry Bessemer added a blast of air to the gases from the burning coal, creating a shower of sparks and raising the temperature sufficient to force a greater amount of impurities from the iron[6]. The Bessemer converter yielded a stronger, more malleable, lighter product that was more suitable for use in machinery, shipbuilding, and construction where the weight was crucial. The first Bessemer converter in France was at Le Creusot, owned by the Schneider family and relatives and under the management of the head of the family Euge ne Schneider. Unfortunately, the Bessemer process was not successful in France because France's iron ore contained an abundance of impurities such as phosphorous which, at that time, could not be removed. Other countries, such as the USA and Great Britain, would have greater success with the Bessemer process. The German, William Siemens, one of four brothers who would each achieve distinction in special scientific fields, developed a steel making furnace that was more widely used in France and Germany. Siemens did not invent the open hearth process but his furnace followed its principles and used regenerated gases to heat the charge to ever higher temperatures. A Siemens furnace was built at Montlucon in 1863 for Boigues, Rambourg and Company. Despite its higher temperatures, the Siemens furnace would not be useful in France until Emile Martin and his son Pierre developed a process that added scrap iron, together with a high manganese ore from Rhenish Prussia, to create better steel. This Siemens-Martin process, although French historians preferred the ``Martin process'' perhaps because of their intermittent difficulties with their neighbors to the east, became a technological breakthrough for the French steel industry. Another advance came in 1878-1879 in the chemistry of steel making with the efforts of the Englishmen, Sidney Gilchrist Thomas

and his cousin, Sidney Gilchrist. They found that limestone added to molten iron combined with the acid phosphorus to form a slag[7] that could be evacuated. Called the ``Thomas acid'' process, it could be used in either Bessemer or Siemens-Martin furnaces to draw out phosphoric acid from the converter liners rather than having this acid leak back into the molten iron. In France this was particularly critical to successful smelting because of the high phosphorous iron ore (Minette) (Samuel-Lajeunesse, 1948, p. 190). It was not one but a series of technological innovations that ushered in the Age of Steel. This age emerged slowly with more puddled iron than steel being produced in England and Germany until 1887; France did not produce more steel than wrought iron until 1894 (Landes, 1969, p. 260). Technology would have a significant impact on the conduct of business in the iron and steel industry. Instead of a fragmented series of coal producers, transport by canal or rail, and iron ore mines, the imperative would be to integrate backward to raw material sources and/or forward toward the ultimate consumer. While puddling would serve local markets, new blast furnaces required coke, made from coal, and sufficient iron ore and flux[8] to provide a 10-12 ton charge every eight hours. Iron and steel production was dispersed among three regions in France: in the center there were ample coal and iron deposits making it the most dynamic in its formative years with the Schneider interest at Le Creusot, the foundries and mines of Decazeville, the industrial belt around St Etienne, and the Commentry-Fourchambault (Comambault) mines and mills. In the east, the Lorraine region was dominated by the family interests of Francois de Wendel but the Franco-Prussian War dealt a blow to the region as Germany annexed many of the major mines and mills in 1871. The AlsaceLorraine region would continue to be a Franco-German bone of contention and competitive uncertainty. In the north, the Pas de Calais area west of the Valenciennes basin, coal was abundant as were ports for foreign exchange or bringing in low phosphorus iron ore from Italy, Spain, and North Africa. Transport was a major part of the cost of coal consequently, French coal cost two to three times the price of British and German coal. Parisians depended on Belgian coal to make gas for lighting and at 44 francs a ton for coal, transport costs added 30 francs per ton (Fohlen, 1976, p. 52). The price of coal served to retard French industry because of its importance in making coke for smelting

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iron ore. An Anglo-French Treaty of 1860 reduced tariff protection for the French iron and steel industry, as did subsequent treaties with Belgium and Germany. These treaties encouraged importing coal and iron ore forcing French firms with deposits of ore and coal to be more competitive in internal markets and making them less competitive in external markets. A defensive stance by the industry was to form the Comite des Forges in 1864 to organize the industry in a quasi-cartel for protection. This move, however, offered no relief when a lengthy international economic depression began in 1870. The depression occurred at a critical time in the growth of the French iron and steel industry just when capital was needed to acquire the emerging technologies that would enable improved production processes. The worst period came between 1874 and 1886: using 1850s prices as equal to 100, a ton of iron ore dropped to 56 and a ton of pig iron to 42. Firms that could not reduce their mining and smelting costs commensurate with this decline in prices were in a bind for raising equity capital or for borrowing. Vichniac (1990, p. 54) noted that the iron and steel ``industry was one of the hardest hit during this crisis,'' leading to numerous bankruptcies. The center of France, where firms such as Le Creusot and Comambault operated, was hit harder by the depression from 1874-1886 than the other producing regions. The center's share of the market for pig iron dropped from 22 percent in 1880 to 8.1 percent in 1890; for finished iron and steel products its market share declined from 31.7 to 20.7 percent during this same period (Vichniac, 1990, p. 55). By comparing the industry structures before and after this crisis we can gauge its impact. The seven largest producers in 1860 were: Chatillon; Wendel; Le Creusot; Commentry-Fourchambault (Comambault); Terrenoire; Decazeville; and Alais (Gille, 1968, p. 73). These seven enterprises accounted for 53 percent of the iron and steel production in France. Mortality among these large firms was high: the foundries and forges at Alais exited in 1874 (Locke, 1978) and Terrenoire departed in 1886. Both of these firms were in the center of France, as was the predecessor to Marine-Homecourt, which had been a rising firm until the 1860 Anglo-French Treaty lowered tariffs and its unsuccessful efforts to adopt the Bessemer process led it to decline (Smith, 1995), leaving it out of the larger firms that Gille (1968) listed. By 1881 only Le Creusot and Comambault would rank among the top 30 firms in France in terms of capitalization (Gille, 1968, p. 283, p. 295).

A corporate turnaround
Chandler (1962, p. 13) has defined strategy as ``the determination of long-term goals and objectives of enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out those goals.'' Responsibility for the formulation and implementation of strategy rests with a top management group and declining performance often calls for changes in those responsible. Comambault's dividends to its shareholders dropped with the FrancoPrussian War of 1870-1871 but rose steeply to 60 francs per share in 1875-1877. Declining performance continued to reduce dividends until none were paid after 1885. The situation that faced Comambault in 1888 was critical: market share was in decline; other steel firms were failing; the long economic depression took its toll; coal and transport were costly; English and German steel were competitive threats; technology was expensive; and the capital needed for improving mining and milling processes was dear. Fayol became managing director in 1888 but financial controls remained centralized with the board of directors (Reid, 1986). In 1889 in anticipation of liquidating the firm, the board devalued the company's assets by swapping two old shares for one new share stating this reduction of the amount of capital was ``implemented to absorb the losses of previous years (1884-1888)'' (La Societe F F F, 1954, p. 333). Capitalized at 25,000,000 francs, consisting of 50,000 shares at 500 francs par, Comambault's capital was restructured at 12,500,000 francs, 25,000 shares at 500 francs par value. This action, a reverse stock split, was a way of showing that the losses of 1884-1888 had to be written off the accounting ledgers to more accurately reflect the worth of Comambault. For a shareholder whose shares were devalued alternatives would have been to try to sell their shares, taking whatever would be offered; or hope the assets of the firm would bring more if it were liquidated; or pray that Monsieur Fayol could revive the company. From the viewpoint of the firm this reduction of capital had at least two potential effects: if the assets were liquidated, potential buyers would have a better idea of the value of the firm; or, if the firm recovered and resumed dividends it could pay, for example, 6 percent on a 500 franc share rather than formerly when 6 percent had been paid on two 500 franc shares. In brief, the cash flow outward for future dividends would be reduced. The effects of this financial maneuver were soon apparent. Even though Comambault

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produced only 15,000 metric tons of iron in 1889, its lowest tonnage since it was Boigues, Rambourg, it paid a dividend of 20 francs per share (4 percent) (Brodie, 1967, p. 4). In 1890 the dividend was 30 francs (6 percent) and dividends would rise steadily throughout Fayol's tenure as managing director. The long range implications of this reverse stock split and the resumption of dividends became apparent when Comambault sought to raise equity capital for later strategic moves. The operation of a steel mill is heavily dependent on a steady supply of coal for coking, iron ore, limestone or other flux material. In 1875 Fayol had been asked to study the coal reserves in the Commentry basin and his report indicated that this strip mine was being rapidly depleted. Stephane Mony, formerly in charge of Commentry, appears to have suppressed this report from the board of directors until 1881 (Reid, 1986, p. 84). In the meantime, the board had not acted to acquire other sources of coal, apparently intent on winding down operations. Fayol, however, knew the situation and his search for coal led to the acquisition of the Societe Nouvelle des Houilleres et Fonderies de l'Aveyron (Decazeville) in 1892. Comambault issued 6,500 shares at 500 francs par value to pay the shareholders of Decazeville, increasing its capitalization to 15,750,000 francs. This would not have required an outlay of cash but a board of directors' vote to create treasury stock to make the purchase. Comambault now had a reliable source of coal, added foundries, another 3,000 employees, and the Commentry coal crisis had passed. Fayol was also an opportunist Schneider and Company had an anthracite coal mine at Brassac but had abandoned it due to flooding. Anthracite, in contrast with bituminous coal, has very little sulphur and this ``hard'' coal was excellent for the coking ovens. Comambault acquired the mineral rights and Fayol sent his younger brother, Paul, to study the situation. Paul Fayol was a 1866 graduate of the National School of Mines and had worked the Commentry pits (Sasaki, 1995). By 1891 Paul Fayol had acquired steam engine pumps to drain the mine and keep it dry, restoring it to full output and earning the job of manager of that mine. The Brassac pits took up the slack in coal production as the Commentry mine continued its decline and eventual abandonment in 1911. One part of executive ability is to recognize ability in others and Fayol seems to have had a knack for this. Pierre Girin first came to Fayol's attention for his work in the changeover at Imphy to specialty steel

products and was given more responsibility after the acquisition of the Decazeville mill. The older mill at Fourchambault had been a high cost producer and was closed in 1901. Girin supervised that shutdown and the reassignment of Fourchambault's employees to other operations. At Decazeville Girin installed two Martin blast furnaces, increasing output to 20,000 tons per year three more Martin furnaces were added later enabling Decazeville to become the leading mill for the firm. In recognition of its prominence, the name of the firm was changed to the Society of CommentryFourchambault and Decazeville or as it became known in a shorter version, Comambault. In addition to the talent of Pierre Girin, Fayol added the abilities of Joseph Carlioz who was head of the commercial department and responsible for the procurement of raw materials and supplies as well as the storage, shipment and marketing of Comambault's products (Breeze, 1982, 1985). Carlioz was trained as an engineer and had worked for a trade association in the iron and steel industry before joining Comambault. As the French railroad system developed in the late nineteenth century it became possible to unify the internal market for steel products. Regional producers ceased to have the protection of high transport costs (Fohlen, 1978, p. 379). Capacity to produce was no longer as critical in competing as the ability to market the products and this would be the task of Carlioz when he was hired in 1900. Fayol had observed that purchasing and selling were just as important as manufacturing if an enterprise was to succeed. Carlioz's duties encompassed a wide range of activities from purchasing, to selecting sales agents, maintaining customer relations, and contacts with industry trade associations. When Carlioz retired in 1918, the same year as Fayol, he became a professor of administration at the Ecole des tudes Commerciales in Paris, Haute E publishing books on the commercial function and furthering Fayol's ideas (Breeze, 1982). Carlioz was praised for his knowledge of the industry and his occasional role as an internal arbitrator of disputes within the metallurgical trade association (La Societe F F F 1954, p. 197). Fayol recognized his limitations in metallurgy but developed Comambault's competence in the chemistry of steel by delegating research in this area to others. The Thomas process for removing the silicates, i.e. the chemical ``acids,'' during

Manufacturing and commercial talents

New product development

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smelting in the Martin furnaces was essential for better quality control and for specialty steel products. Alexandre Pourcel, Fayol's classmate, had pursued metallurgical chemistry after his graduation, gaining renown for his knowledge of how to dephosphorize iron ore with the Thomas process. Fayol brought Pourcel in as a consultant to Comambault and later Pourcel became a member of the board of directors. Fayol's interest in the scientific method of problem solving also led him to create a Research Service Department, headed by a young engineer, Pierre Chevenard (La Societe F F F, 1954, p. 178). The task of the department was to find ways of improving steel so that it could be better suited for specialty products such as machine fabrication, construction equipment, marine engines, artillery, armor plate for ships and tanks, etc. By alloying steel with various components to harden and strengthen them, Fayol was moving Comambault out of the production of staple steel products where there were more competitors into a niche where it might better compete. Charles Edouard Guillaume of the Bureau of International Weights and Measures had been experimenting with steel with varying percentages of nickel added to increase its strength. Fayol brought Guillaume to the Imphy mill where research was conducted on nickel steel as well as chromium steel. Working in Comambault's Research Service Department, Guillaume developed the advanced steel alloys that earned him the Nobel Prize in Science in 1920. The more malleable, yet resilient steel served Comambault's products well, especially with contracts with the French Army and Navy. The iron and coal deposits in the center region of France were in decline and transport by rail had opened regional firms to national competitive forces. The coal pits at Commentry and Montvicq and the iron deposits at Berry neared depletion, placing the mill at Montlucon in a precarious position. Beginning in 1895 a number of firms began to cross geographical boundaries to merge with others: for example, Chatillon Commentry with Neuves-Maison in 1897 and Marine with Homecourt in 1903. The industry structure was changing and Fayol realized that Comambault was not strong enough to remain competitive without expanding to the north and east for better minerals, mills, markets, and lower transport costs. In the east, La Societe de La Chiers, under the direction of Paul Morard, had an

Alliances and acquisitions

abundance of iron ore at Joudreville but was lacking capital to exploit those mines. Comambault entered into an alliance with La Chiers to form the Societe Civile Mines de Joudreville. The accord provided that Comambault would finance the works and take any ore not used by La Chiers. Fayol also recognized the risk in the east due to its proximity of its long-time foe, Germany, but sought to reduce that danger by an alliance with La Societe de Mines des Lens. Lens had excellent coal for making coke and Fayol wanted to build a mill at Pont-a-Vendin, near Lens (La Societe F F F 1954, pp. 154-5). The mill would strengthen Comambault's position in the east and have the ore of Joudreville and Lens' coal. To strengthen these resources Comambault also acquired the Societe Civile de Batere whose mines yielded an iron ore rich in manganese to be used for specialty steel products. Comambault's board, however, did not approve of the proposed Pont-a-Vendin mill bringing its long simmering feud with Fayol into direct conflict. Fayol had not been invited to be a member of the board of directors until 1900, long after dividends had been resumed, demonstrating that Comambault had returned to prosperity (Reid, 1995a). Fayol, at least in his notes, was critical of the board members as inept since they were not selected for their administrative abilities nor did they exercise sound judgment in their financial decisions. Here again was the issue of centralized decision making by the board and Fayol's belief that as Chief Executive Officer (CEO) he should have more authority. Pont-a-Vendin created a crisis and Fayol delivered an ultimatum to the board in terms of funding this venture (Reid, 1995b, p. 31). The board acceded and the mill was built. Rather than a happy ending, the company history noted that when the war with Germany began in 1914, the Germans seized the Joudreville and Lens mines and the Ponta-Vendin mill (which, incidentally, had been built to German specifications) (La Societe F F F, 1954, p. 155). Not until after the war was Comambault able to resume its expansion to the north and the east.

Financing

The acquisition of Decazeville in 1892 had been through the issuance of stock, a necessary move for a cash short firm. Upgrading mills with Martin furnaces, pumps for the Brassac mine, acquisitions such as the Batere mines, the accord with La Chiers, and capital for Pont-a-Vendin required additional funds. In 1906, Comambault declared a 60 francs dividend, a

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12 percent return on a 500 francs par value share; this was the highest dividend paid since the profitable years following the Franco-Prussian War. This high dividend enabled Comambault to sell 6,000 new shares in 1906 at 800 francs, a 300 francs premium above the par value. This increased the amount of capital to 18,750,000 francs. The premium paid, that is 300 francs for each of the 6,000 shares, created a capital surplus of 1,800,000; in total, the 1906 stock issue yielded 4,800,000 francs for expansion. The timing would suggest that this money was used primarily to upgrade the Decazeville mill and to acquire the mines at Batere. Capital for Pont-a-Vendin appears to have been provided for with another stock sale in 1911 of 6,000 shares of 500 francs par for 1,200 francs each, a premium per share of 700 francs. The 60 franc dividend continued through this period and at a price of 1,200 francs the yield would be 5 percent, a fair return on equity considering the continuing prosperity and dividends of Comambault. Total capital in 1911 amounted to 21,750,000 francs (43,500 shares at 500 par); the premium on the 6,000 new shares that year yielded 4,200,000 francs as surplus capital, added to 3,000,000 at par, for an additional 7,200,000 francs. The implications of these sales of shares are twofold: one, Comambault's recovery enabled the resumption of substantial dividends making it an attractive investment; and its profitability made it possible to acquire additional resources or pursue other avenues for continuing its prosperity. Under Fayol's guidance, pre-war Comambault was in a position to expand to the east and the north where it would have more competitive strengths. In brief, Fayol's actions were those illustrative of strategic decisions made by top management to position Comambault for a renewal of its viability. The long term goals were profitability and survival for the firm, the welfare of its employees, and regained confidence of its shareholders. The courses of action and the decisions made were strategic in the sense that they were directed toward revitalizing the essential resource base, the coal and iron raw materials; upgrading the firm's capabilities through research, selecting capable subordinates, and acquiring capital for development and expansion; relocating the firm geographically to compete in a unified market; and re-positioning the firm in specialty steels.

Fayol gathered top talent with Girin and Carlioz in the two vital functions of the firm, manufacturing and commercial. Research into new steel alloys began to enable specialty rather than staple steel products. In this competitive niche, Comambault could produce to order at higher margins and with less competition than that encountered in staple products. Product improvement was enabled by the Research Service Department of Chevenard, enlisting Fayol's classmate, Alexandre Pourcel, and using Guillaume's Nobel Prize winning abilities. Finally, as mergers began to span geographical regions, Fayol engaged in alliances to position Comambault to compete in other areas. That the war interrupted the implementation of this strategy does not detract from its wisdom. Fayol's actions were of general management, utilizing the firm's physical and human resources in the most productive manner possible. He was a strategist before that term became popular and before he developed his experiences into a theory of management.

Fayol's administrative theory

Placing Fayol's actions into the framework of his firm and the iron and steel industry enhances an understanding of his view of administrative theory. He stated that ``the responsibility of general management is to conduct the enterprise toward its objective by making optimum use of available resources. It is the executive authority, it draws up the plan of action, selects personnel, determines performance, ensures and controls the execution of all activities'' (Fayol, 1949, pp. 60-1)[9]. Since Fayol was the managing director, the CEO, his perspective was of the overall success of the firm to include the formulation of goals, strategies, and plans and to work through others to insure that these activities were implemented. Although the examples he most frequently cited concerned mining and metallurgy, he made generalizations to other types of organizations that had to be managed well if they were to succeed. As CEO he was responsible for a multiunit enterprise of some 10,000 employees, 3,000 of whom were added with the acquisition of Decazeville. In developing his theory of management he identified five central elements: planning (prevoyance meaning anticipation or foresight); organizing, to include selecting and training personnel; command, a rough notion of directing others' efforts; coordination; and control. He observed that ``the plan of action is, at one

Fayol as strategist

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and the same time, the result envisaged, the line of action to be followed, the stages to go through, and the methods to use'' (Fayol, 1949, p. 43). Planning included envisioning what needed to be done and how it will be done in brief, determining goals and strategies to accomplish them. ``Before taking action it is most necessary to know what is possible and what is wanted'' (Fayol, 1949, p. 44). In brief, identify existing capabilities and resources and determine what goals were appropriate. Comambault's failure to plan in its earlier days was a primary factor in bringing Fayol to his top level position. As coal and iron deposits were being depleted without plans for their replacement, Fayol's early actions were devoted to restoring the resources needed for the blast furnaces and the fabrication of finished products. Since coal pits and iron mines required preparation before extraction could begin, Fayol emphasized the need for long range as well as short range planning. Similarly, as he saw the rise of competition in the north and east of France he began moves for the firm that would extend its reach to compete on a national basis. Although his examples were devoted to the industry he knew best he felt that no one in any endeavor could dispute the usefulness of planning: ``The best of plans cannot anticipate all unexpected occurrences which may arise, but it does include a place for these events and prepare the weapons which may be needed at the moment of being surprised'' (Fayol, 1949, p. 49)[10]. The organizing element of Fayol's theory is less apparent from what is known about the firm and the industry. At one point in his 1908 speech he described Comambault in two geographical regions, the ``group L'Allier'' consisting mainly of the Commentry mine and the Montlucon mill; and the ``group Nievre'' consisting of Fourchambault and other activities. These were considered a ``formidable industrial group'' but Fayol provided no specifics on how these groups were managed. He described Comambault by the necessary functions: technical (production, manufacture, adaptation); commercial (buying, selling, exchange); financial (obtaining and optimum use of capital); security (protection of property and persons such as safety, insurance, etc.); and accounting (inventory, costs, statistics, balance sheet). These were characteristic of Fayol's firm and of typical American line-staff organizations of the nineteenth century. Only later at firms such as General Motors and Du Pont would we see the idea of organizing by product groupings or, even

later, strategic business units. Fayol's view of the enterprise was both shaped and limited by the businesses he observed but he added that different firms require an organization depending upon the nature of their objectives:
In industrial concerns it is the technical [manufacturing] aspect which is of greatest importance; in commercial concerns then it would be the [marketing] aspect; F F F in the school, teaching F F F in the army, the military F F F in the church, the religious aspect. The most highly developed organ is that of the professional function which is characteristic of the enterprise'' (Fayol, 1949, p. 57).

Of more importance than the structure or appearance of the organization were the people within it: ``of two organizations similar in appearance, one may be excellent, the other bad, depending on the personal qualities of those who compose them (Fayol, 1949, p. 57). He realized it was people, not structure, that made the difference. Fayol included the people part of an undertaking with the process of organizing. Selection, evaluation, and training were the essential components and of these he wrote mainly about selection because the consequence of poor selection was ``commensurate with the rank of the employee.'' More time should be spent on selecting the right managers for those positions and it is apparent that Fayol made some excellent choices: Pierre Girin for his manufacturing prowess; Pierre Chevenard to lead the research and development effort; and Joseph Carlioz for commercial activities. The outside use of consultants such as Alexander Pourcel and Charles Eduoard Guillaume also proved useful in moving Comambault into a better competitive position. Fayol's inclusion of coordination as an essential element of the manager's job was also reflected in his experiences with a fully integrated firm. Raw materials from the coal pits and iron mines had to arrive at the blast furnaces at the correct time and in sufficient quantities to maintain operations. After smelting the iron and steel moved to fabrication as rolled sheets, I-bars, plates, and other specialty steel products. From extraction to transport to smelting to fabrication to selling each part of the firm had to be in harmony with the others. Command was the term Fayol used to describe the managerial task of setting activities and people in motion diriger, directing, also was used to describe this element. In his diary a July 29, 1898 entry read: ``In business administration, the question of [managing] people represents more than one-half of the problem''

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(Blancpain, 1974, p. 24). In this activity Fayol had built effective work teams in the mines, stopped paternalistic practices such as monitoring church attendance by employees, closed company stores where local merchants were available, and demonstrated other people management skills that led to his promotions. Control was the fifth and last element of managerial work that Fayol discussed and consisted of using information to compare performance with what the plan intended to accomplish. If plans had been unfulfilled or had gone astray, controlling intended to identify weaknesses and errors in order to prevent reoccurrence. ``A good system of control provides against undesirable surprises, capable of degenerating into catastrophes'' (Fayol, 1949, p. 109). He promised to address the control element in the third part of his book which he never finished.

Conclusions
Comambault's board of directors fully intended to liquidate a faltering firm and to that end depreciated the capital assets of the firm to reflect more closely its market value. Replacing the previous managing director, the board hired Henri Fayol to oversee the dismantlement of Comambault. As a gifted engineer, Fayol was considered capable of managing the firm's mines but as he was not a metallurgist, his ability to manage the entire firm was not known. However, Fayol proved his mettle as a CEO, rescuing Comambault from bankruptcy. Was this success achieved, as Chevalier (1946) contended, because the market price of pig iron rose from 57 francs in 1888 to 70 francs in 1890 while wages remained at their lowest level in the last years of the nineteenth century? The 13 franc, 23 percent rise in the price of pig iron in this three-year period undoubtedly contributed to Comambault's recovery, but it would have also aided other firms as well. After 1890, no similar price increase was apparent and the period up to 1913 was one of intense international price competition. Between 1890 and 1913 France doubled its iron production and quadrupled its output of steel. During the same period its primary competitors, Germany and the UK, either doubled their iron and steel production (the UK) or increased production threefold in iron and fivefold in steel (Germany) (Mitchell, 1976, pp. 773-5). By 1913 the French iron and steel industry was one-half the size of the UK's and one-fourth the size of Germany's

output. In this competitive environment it is unlikely that pig iron prices explain Comambault's successful recovery. Wages did remain low as blast furnaces replaced iron puddling. Puddlers, considered skilled labor, were being replaced by semiskilled, lower paid furnace tenders and by foreign labor (Vichniac, 1990, p. 158). Wages remained low, but prices were in decline: if 1905-1913=100, price levels in France for 18851894=99.2, and 94.5 in 1895-1904 (Mitchell, 1976, p. 820). Under these circumstances, purchasing power, i.e. real wages, were not in decline. As Levasseur (1907, pp. 475-6) concluded, the rate of earnings slowed after 1883 but the cost of living had not increased: ``it is the amount of goods and services which the average French family consumes that has increased, not the level of prices''. The iron and steel industry became more capital intensive, enabling a greater output but with a lesser skilled labor force. This would have applied to all firms equally and would not give any competitive advantage to Comambault. Was the turnaround due to the ``technical and financial actions that [Fayol] took, rather than F F F stimulated solely by the administrative procedures and policies themselves'' (Breeze, 1985, p. 46)? Breeze did not underestimate Fayol's administrative abilities but can we attribute Comambault's successful recovery to technical actions, presumably in manufacturing or engineering, and finance? Fayol stopped publishing results of his studies of coal mining when he became the managing director but his expertise served him well. His study of the depletion of the Commentry coal pits, and, with his brother Paul Fayol, restoring the anthracite deposits at Brassac, provide examples of using his technical skills in mining. Employing Pourcel and Guillaume to advise the company on dephosphorizing iron ore or making nickel alloy steel, however, involved recognition of the need for technical expertise in metallurgy. In these instances Fayol's engineering background helped him recognize problems that were beyond his knowledge in coal mining. Financial explanations of his success rests on less firm ground: financial decisions were centralized in Paris in the board of directors and Fayol struggled to gain more decisionmaking autonomy. For instance, Comambault should have acted more quickly in moving into the Lorraine region where most of the growth opportunities existed. Six of the top ten firms in the French primary metals industry were in that region by 1913 (Smith, 1998, pp. 57-8, p. 68).

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Counterfactually, the board could be viewed as correct when the Germans seized mills and mines in that region in 1914; this argument would be based on 20/20 hindsight, however. Fayol was limited by the power of the board of directors in financial matters but it must be recognized that he was able to use the financial opportunities appropriately when possible. The dividend policy enabled sale of shares at a premium, enabling the firm to re-position itself. In capital decisions, the firm succeeded but Fayol was dependent on the board of directors. Was Fayol wholly factual when he said:
With the same mines, the same mills, the same financial resources, the same markets, the same Board of Directors, and the same personnel, solely with the application of a new way of running the company, the firm experienced a rise [in its performance] comparable to its earlier decline (Fayol, in Verney, 1925, p. 8)?

Fayol (1908) made this statement in an address to the Mineral Industry Society and repeated it in a later publication on the importance of the administrative function (Fayol, 1927)[11]. It is not in accord with the facts, however. It was not with the same mines and mills, the same personnel, nor the same finances, etc. that Comambault recovered. We do not know if Fayol spoke and wrote to promote his ideas about management, selectively forgetting all of the other events; or did he intentionally mislead us to believe that his administrative procedures were so excellent that no other causal factor should be examined? The celebratory occasion for Fayol and the laudatory comments at that event suggest that he had the respect of a significant group of others (Verney, 1925). Attributions of success are often self-serving but it is difficult to believe that deceit was the foundation. Comambault executed a successful turnaround under Fayol's direction so let us look to events rather than statements. The evidence suggests that Fayol's success was due to what Chandler (1962) would call strategic management. This does not preclude technical nor financial nor administrative ability but reflects a broader view of the firm. Fayol's concept of corporate governance was ``to conduct the undertaking toward its objective by seeking to derive optimum advantage from all available resources and to assure the smooth working of the six essential functions'' (i.e. technical, commercial, etc.) (Fayol, 1949, p. 6). Through experience Fayol became a strategist with a top management view of the firm. He established research facilities to

advance the firm's technological capacity; built alliances with other firms occasionally; acquired other firms or resources as needed; proposed new mills to expand the geographical base of the company; utilized the abilities of others on research, manufacturing, and selling; and repositioned the firm into specialty steels to gain a competitive advantage. By 1913 Comambault was the twentyseventh largest publicly held firm in France in terms of assets (Smith, 1998). It was among the seven largest firms in iron and steel in 1860 but two of those, Terrenoire and Alais, later went bankrupt. Comambault acquired Decazeville, leaving only Chatillon, Le Creusot, and de Wendel (the latter two were family held) as the large firms of 1860 still operating in 1913. Mergers, for example, Marine with Homecourt, and Chatillon Commentry with Neuves Maisons and newer, faster growing firms in Lorraine had pushed Comambault lower in iron and steel industry standings by 1913 when it would rank eleventh of 34 firms. If Cassis (1997, p. 242) had included Comambault in his sample, it would have ranked ninth of the 11 largest iron and steel firms in terms of the number of employees in 1910. Fayol had saved the company and increased its assets, but other firms had grown faster through mergers or by locating in areas with more accessible coal and iron resources. Henri Fayol retired from Comambault December 31, 1918 and turned his interest in administrative theory to France's public sector until his death November 19, 1925. Comambault survived the world depression of the 1930s and World War II but lost its coal mines when they were nationalized in 1946. The steel mills were acquired by Le CreusotLoire, a part of Schneider et Cie, after 1954 but by 1986 Schneider had divested all of its interests in steel. No identifiable trace remains of the firm that an engineermanager saved from liquidation over a century ago but his ideas about strategic management live on.

Notes

1 I will use the terms ``management'' and ``administration'' interchangeably. Discussions of differences in the translation of Fayol's administrator and governor into English may be found in John Breeze (1985); Morris B. Brodie (1962); Donald Reid (1995a, p. 67); and Daniel A. Wren (1994, p. 192). 2 Two of Fayol's classmates would also have distinguished careers: Alexandre Pourcel, a metallurgist, developed a means of removing phosphorous from steel; and Daniel Murgue, who became known for developing methods to ventilate mines, enabling mechanization at

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10

11

the mine face and for transporting coal from the mine. Verney (1925, pp. 6-7) lists numerous technical studies and reports produced by Fayol. These enhanced Fayol's reputation as a scientist and undoubtedly influenced his strategic recommendations as the firm repositioned itself. I am indebted to Tsuneo Sasaki for the unpublished recollections of Henri Fayol's nephew, Amedee Fayol. I am indebted to Donald Reid for his work on the Fayol archives which brought this and numerous other experiences to my attention. Iron melts at 1,5758C, 2,7958F. The Bessemer process had its patent battles. See McHugh, (1980, pp. 112-35; pp. 158-62; pp. 359-60). Slag is the waste of producing metal, usually in the form of silicates of calcium, magnesium and aluminium. Flux refers to the acidic silicates, lime or limestone that are added to the charge to promote the fusion and separation of the metal. Fayol first published his management theory in a journal for the mineral industry in 1916; here I have used the 1949 translation by Constance Storrs. John Breeze has suggested that the Storrs' translation does not capture Fayol's intent adequately. A preferred reading would be: ``The best of plans cannot anticipate all unexpected occurrences which may arise but it includes a place for them and has readied the weapons [or defenses] that are needed when one is surprised.'' This interpretation suggests a contingency view of planning that would include plans for what to do if unforeseen events occurred. Breeze (1980, p. 35) noted that this was also reprinted as a part of a collection of articles by Fayol under the title L'Eveil de l'Esprit by Dunod, Paris in 1927 after Fayol's death.

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