06 May 2013, 05:13

7 business lessons from Andrew Carnegie

Over the last month or so I’ve been working my way through a biography of Andrew Carnegie written by David Nasaw. The book is aptly named ‘Andrew Carnegie’.

Overview

The book is a fatty. At almost 900 pages I didn’t have the upper body strength to endure the physical book so I purchased the audio book version. 

The book goes into deep detail of Andrew Carnegie’s life. Throughout the book you come to learn that Carnegie was a prolific writer, stored a lot of what he wrote and that’s why this book has so much more content than some of the other biographies from that time (mid 1800’s to early 1900s). 

At times, with that level of detail, it becomes a little bit of a slog. There’s a lot of great stuff in there but you literally get a blow by blow account of every major voyage taken, trips to golf courses and when he went trout fishing. 

If you’re a big fan of the old tycoons of that era then this book will suit you. If you’re not so keen, avoid this book and look to those of the other businessmen of the time.

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Business lessons learned

The book does detail a lot about how Carnegie rose to be so wealthy. One thing that struck me was that he didn’t seem like a complete prick — although he did quite happily employ others to take on that role for him. Here’s a few things I noted down that led to the success of Carnegie Steel (along with the insane demand growth for steel…).

1. Have rich friends

Carnegie’s story is certainly a rags to riches story. His father was certainly not a go-getter and his mother needed to support the family (not such a big deal in this age, but in the 1800’s it wasn’t such a good look it seems).

Carnegie got his initial start by getting the attention of people who did have wealth. In particular, the management of the Pensilvania Railway in the form of Tom Scott. 

When Carnegie got invited to invest in companies by Tom Scott, Tom Scott would also provide the capital and provide a very friendly way of repaying that debt – through the dividends of from that investment. Talk about easy street! 

By the time Carnegie got involved in Iron (which later became steel, and in turn became Carnegie Steel), he was independently quite wealthy. 

2. In the tough times, run to capacity

I’ve been pondering how this would apply to industries that aren’t in manufacturing, but the lesson was there: always run to capacity, ignore your margin.

Throughout the ups and downs, Carnegie insisted that his steel plants remain open and run at capacity — even if that meant forgoing top margins on your product.

This was smart in that it allowed Carnegie interest to not contract in size in the down times of the market. At the same time, his competitors would contract in size and after the market rebounded his concerns were much larger and capable of getting larger contracts. Oh, and now they were at much fatter margins. 

3. Don’t be loose lipped with your finances

Carnegie Steel was run as a partnership and there were several partners. Carnegie himself always retained more than 50% which gave him significant control but a common theme was that the profitability of the business was kept quiet. 

It wasn’t until Henry Frick was booted out the company (remember the hired prick comment from earlier? Henry was your man if you needed a harsh task master) that this unravelled. Frick took Carnegie Steel to court to argue that his share value – that he was forced to sell back to the concern upon being kicked out – was worth significantly more than the book value. To establish market value Frick outed the extremely high profitability of the firm which shocked everyone.

The benefit of this is that nobody can use your profitability as a bargaining chip when negotiating rates. Carnegie Steel took it a step further in using it as a reason why tarifs should stay in place…

4. Control the Government

Carnegie was personally a friend or at least influential advisor, to almost every President of the United States from the time of starting Carnegie Steel. This gave him tremendous leverage in negotiating and getting deals.

5. Invest in technology

One of the reasons that Carnegie Steel was so insanely profitable was because Andrew Carnegie constantly invested in the newest technology of the time to drive down the costs of production. This allowed him freedom thanks to higher margins.

6. Invest in yourself

Carnegie was often at odds with his other partners on the amount being paid out in dividends. He was always a fan of keeping more money in the business to invest in new technology, new plants and increasing the integration across the industry.

7. Cash is king

While early on Carnegie had relatively little cash (to his later life), he pushed hard to make his cash work for him when young. This was risky but it paid off.

Even early on in the life of what would ultimately become Carnegie Steel, he became the go-to man for the businesses he was involved in as well as friends. 

If an investment looked smart he was always ready to take advantage of it.

That’s a wrap

As mentioned, if you’re really keen on the history of business in a America, this is a good book. If not, don’t read it.