Chapter 73 - Titan: The Life of John D. Rockefeller, Sr.
Today’s Chapter is based on the book “Titan: The Life of John D. Rockefeller, Sr.” by Ron Chernow.
Here’s what Charlie Munger had to say about this book during Berkshire Hathaway’s 1999 Annual Meeting:
"Another book that I liked very much this year was Titan, the biography of the original John D. Rockefeller [by Ron Chernow]. That’s one of the best business biographies I have ever read. And it’s a very interesting family story, too. That is was just a wonderful, wonderful book. And I don’t know anybody who’s read it who hasn’t enjoyed it. So I would certainly recommend that latest biography of John D. Rockefeller the first."
— Charlie Munger
Previously on John D. Rockefeller:
Here’s what I have learned:
Economies of Scale
"Economies of scale are a wonderful thing. They are a primary source of competitive advantage.”
— Michael Porter
John D. Rockefeller's rise to become America's first billionaire stemmed from his single-minded obsession with maximizing efficiency and leveraging massive economies of scale in the oil refining industry. From early on, Rockefeller grasped that "in the capital-intensive refining business, sheer size mattered greatly because it translated into economies of scale." To build gigantic refineries that could drastically slash his unit costs, he borrowed heavily and prioritized the volume of trade which he always regarded as of paramount importance.
First, Rockefeller understood that due to his size, he would be able to leverage the use of rebates from railroads to cut costs. Rockefeller's first major coup was negotiating a rebate deal with the Lake Shore railroad in 1868. As he explained, "It was a large, regular volume of business, such as had not hitherto been given to the roads in question." By consolidating many small shippers into one massive shipper, Rockefeller allowed the railroads to operate more efficiently with faster turnaround times. While rebates were common at the time, no other firm received so many rebates so consistently over so many years or on such a colossal scale as Rockefeller's. He justified it by arguing that "bulk shippers deserved a discount" and that his firm invested heavily in facilities that increased railroad profits.
Second, Rockefeller was often criticised for forcing competitors to submit to his domination either by straight-up acquiring his competitors or either by using his size to push his smaller competitors into submission. As a matter of fact, between 1872-1873 alone, he bought out 22 of his 26 Cleveland competitors, capitalising on the depressed prices caused by overproduction in the industry. However, Rockefeller explains this “Cleveland Massacre”, by mentioning that "We had to do it in self-defense" as inefficient rivals "dragged oil prices down to unprofitable levels for everybody." By having full control of the production of oil, Rockefeller was able to control oil prices and maximise his profits.
By the late 1870s, Rockefeller's economies of scale strategy started to shine. He was the one controlling the amount of oil produced through his large network of refineries and, with his control over the railroads, "practically not a barrel of oil could get to a railroad without [his] consent." As such, Rockefeller was able to systematically undercut, acquire or destroy all of his competitors.
From a young age, Rockefeller understood the importance of keeping costs low partly because of his experience as a bookkeeper. And, the power of economies of scale was the way for Rockefeller to control costs.
"A penny saved in one place might then be multiplied a thousandfold throughout the empire."
— John D. Rockefeller
This dedication to cost control was apparent in his early ventures. When entering the oil refining business, Rockefeller was determined to gain complete control over the supply chain. Frustrated by unreliable suppliers, he famously told his associate Sam Andrews, "Hire a plumber by the month. Let us buy our own pipes, joints, and all other plumbing material." This desire for self-sufficiency and control over every aspect of the business, from sourcing raw materials to production, became a defining characteristic of Rockefeller's management style. This vertical integration approach minimized reliance on external factors, giving him tighter control over costs and ensuring consistent quality.
One of the most famous examples of this commitment to saving even the smallest amount is the story of the solder drops. After closely observing a machine sealing cans, Rockefeller inquired about the amount of solder used per can. When told it was forty, he simply asked, "Have you ever tried thirty-eight?". This relentless questioning led to a reduction to thirty-nine drops, resulting in savings of $2,500 the first year and many hundreds of thousands of dollars in the years that followed.
This concept of economies of scale reminds me of Charlie Munger’s famous talk delivered at USC Business School in 1994, where he goes over the importance of the importance of scale in business by giving exemples from Procter & Gamble and Wrigley:
“For example, you can get advantages of scale from TV advertising. When TV advertising first arrived—when talking color pictures first came into our living rooms—it was an unbelievably powerful thing. And in the early days, we had three networks that had whatever it was—say 90% of the audience.
Well, if you were Procter & Gamble, you could afford to use this new method of advertising. You could afford the very expensive cost of network television because you were selling so many cans and bottles. Some little guy couldn’t. And there was no way of buying it in part. Therefore, he couldn’t use it. In effect, if you didn’t have a big volume, you couldn’t use network TV advertising which was the most effective technique.
So when TV came in, the branded companies that were already big got a huge tailwind. Indeed, they prospered and prospered and prospered until some of them got fat and foolish, which happens with prosperity—at least to some people…
And your advantage of scale can be an informational advantage. If I go to some remote place, I may see Wrigley chewing gum alongside Glotz’s chewing gum. Well, I know that Wrigley is a satisfactory product, whereas I don’t know anything about Glotz’s. So if one is 40 cents and the other is 30 cents, am I going to take something I don’t know and put it in my mouth—which is a pretty personal place, after all—for a lousy dime?
So, in effect, Wrigley, simply by being so well known, has advantages of scale—what you might call an informational advantage.”
— Charlie Munger
This idea of using scale as a business advantage reminds me of the way Wayne Huizenga built Blockbuster into the largest video rental business in the world. Huizenga realized that by being in the video rental business industry, Blockbuster’s concept could be easily copied since there was nothing proprietary. As such, Huizenga believed that in order to dominate the market, he had to roll out the concept quickly and achieve a level of scale that would make Blockbuster difficult to dislodge due to economies of scale.
On this subject, Huizenga once said, "We better hurry up and develop this thing before somebody else figures out that what everybody is saying isn't right. And so, you know, we had to move quick.” As such, Huizenga did what he did best: he went on a acquisition spree in order to have fast growth. He understood that the key to Blockbuster’s success would be growth—at nearly any cost in order to “build enough mass in markets to support advertising and create a loyal base of Blockbuster card-carrying customers.”
Master of Raising Capital
"What you lack is credibility, not capital. It's not because your character is flawed. It's just that you haven't established trust that would allow a stranger or a third person to lend you money. That's why it's so hard for you to get it. If you can convince the other person that you are trustworthy, money will naturally flow in.”
— Chung Ju-Yung
One of the key drivers behind John D. Rockefeller's phenomenal rise was his unmatched ability to raise vast amounts of capital to fund his ambitious growth plans. As Rockefeller himself admitted, "The hardest problem all through my business career was to obtain enough capital to do all the business I wanted to do and could do, given the necessary amount of money." From his earliest days, Rockefeller was a master at borrowing money and negotiating with banks. His partner Maurice Clark, once said "Oh, John was the greatest borrower you ever saw!"
The reason Rockefeller was able to find so many lenders was partly due to his great reputation as a borrower. As a matter of fact, he was meticulous about repaying loans promptly and never fudged numbers when discussing issues. His reputation for honesty, transparency, and prompt repayment earned him the trust of bankers. This proved to be an invaluable asset as it enabled Rockefeller to secure crucial loans that fueled Standard Oil’s expansion even during times of economic uncertainty.
"It is impossible to comprehend Rockefeller's breathtaking ascent without realizing that he always moved into battle backed by abundant cash. Whether riding out downturns or coasting on booms, he kept plentiful reserves and won many bidding contests simply because his war chest was deeper."
— Ron Chernow
However, what really made Rockefeller stood out from his peers was his ability to raise capital by selling equities in his own company. By incorporating Standard Oil, Rockefeller sold shares and raised equity capital from outside investors, transforming his company into a mini-empire controlling over 10 percent of American petroleum refining.
Rockefeller was a pioneer in using incorporation to fuel a company's growth while still maintaining control. As a matter of fact, when acquiring competitors, Rockefeller usually urged his sellers to take Standard Oil stocks instead of cash as payment. Furthermore, Rockefeller encouraged his own employees to acquire shares in the company. By making his employees shareholders, Rockefeller fostered an "esprit de corps" and incentivised them to help the company steamroll over competitors.
This concept of having a great reputation in order to have easier access to capital with the banks remind me of what we have learned from Chung Ju-Yung. In fact, Chung Ju-Yung’s experience at Hyundai is a perfect example of how important reputation is for a businessman. He once mentioned that “a man’s trustworthiness, sincerity and honest are his capital.” In fact, he explains that while it would be ideal for a company to have enough internal capital to run on its own, it is still possible to run a business without any capital, as long as it has a good reputation.
As a matter of fact, Chung first success started when he was running a rice shop which he was entrusted by his boss due to his diligence and honesty. He was also able to get capital to start his business because of his reputation for being trustworthy. By consequence, whenever he ran Hyundai, Chung always made sure that his credibility would remain intact. In fact, even whenever he got into a project that would certainly amount to significant loss, he made sure to complete the project in time to make sure that his company held their words. He fully understood the meaning behind’s Warren Buffett’s saying that “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.”
When he was once advised his brother to give up on a project, he responded with: “Trust is everything to a businessman. The moment you lose trust, it's all over. It's my dream to create the best construction company in the Republic of Korea, and you're telling me to abandon it all? Whatever happens, we're going to finish this job. We have to.” More importantly, Chung Ju-Yung’s understood that in international projects, it wasn’t just his reputation on the line, but the credibility of the entire country that laid on his shoulders. He once mentioned that “if Hyundai were to have quit after becoming the first Korean company to take an overseas project, we would have been kicking away the ladder for other Korean construction companies trying to enter foreign markets.”
“A contract is a contract. Even if we are in dire monetary straits, we have to build Thailand the high-quality expressway they are expecting within the time we have. That's why we are here. We cannot and will not just cut and run. We have to finish what we started for the good of the Hyundai brand and for the good of the country."
— Chung Ju-Yung
Leadership and Employee Management
"The greatest leader is not necessarily the one who does the greatest things. He is the one that gets the people to do the greatest things.”
— Ronald Reagan
Another reason for Rockefeller’s success was, in my opinion, due to his visionary leadership abilities and skills at managing and motivating talented employees. From the earliest days, Rockefeller displayed an uncanny knack for assembling and inspiring a team of exceptional executives.
Rockefeller fostered an environment where top talent could thrive. As a matter of fact, he was always open to exchange ideas with his trusted advisors among the company. Rockefeller believed in open communication and actively sought feedback from his employees. He invited them to share their suggestions and complaints directly with him, fostering a culture of transparency and continuous improvement. Rockefeller's hands-on approach, especially in Standard Oil's early years, highlighted his commitment to building a strong and dedicated workforce.
As such, Rockefeller also understood that achieving his ambitious goals required a team of capable and like-minded individuals. He recognized the importance of surrounding himself with “trustworthy people who could inspire confidence in customers and bankers alike," understanding that the cornerstone of success lay in building strong, reliable relationships. He carefully selected his partners and cultivated an atmosphere of trust and shared vision within Standard Oil.
“It is chiefly to my confidence in men and my ability to inspire their confidence in me that I owe my success in life.”
— John D. Rockefeller
One of these top talent that Rockefeller was able to attract in his team was Henry Flagler. Once Flagler joined Standard Oil as a partner, Rockefeller began "to assemble the team of capable, congenial executives who would transform the Cleveland refiner into the world's strongest industrial company." Rockefeller and Flagler both shared an ambition of being contented but never satisfied, hence why they worked so well together. Their close partnership exemplified Flagler's belief that "a friendship founded on business was superior to a business founded on friendship."
A key reason why Rockefeller was able to attract so many talented executives such as Flagler was due to his pioneering use of corporate ownership to motivate employees. As we have mentioned previously, when Standard Oil was incorporated, Rockefeller encouraged his employees to be invested in the company’s growth, because he understood that fostering a sense of ownership among his employees was paramount to Standard Oil's success. He encouraged employees to invest in company stock, making money readily available for that purpose. This move not only increased loyalty and motivation but also aligned employees' financial interests with the company's performance. As Ron Chernow aptly noted, "With employees receiving huge capital gains and dividends, they converted Standard Oil into a holy crusade."
This innovative approach, combined with Rockefeller's lead-by-example work ethic, created a high-performance culture at Standard Oil. As one aide recounted, "I have seen him sign his name to hundreds of papers at a sitting. He did each signature carefully as if this particular one was to be the only one by which he was to be remembered for all time. Each signature became in his mind a work of art." This desire for excellence originated with Rockefeller but was radiated throughout the organisation.
This reminds me of Charlie Munger’s Herb Kay Memorial Lecture, ‘Academic Economics: Strengths and Weaknesses, after Considering Interdisciplinary Needs,’ at the University of California at Santa Barbara, 2003. In this speech, Munger explains how Les Schwab’s success is due to his understanding of the superpower of incentives:
“Now I’ll give you a harder problem. There’s a tire store chain in the Northwest, which has slowly succeeded over 50 years, the Les Schwab tire store chain. It just ground ahead. It started competing with the stores that were owned by the big tire companies that made all the tires, the Goodyears and so forth. And, of course, the manufacturers favored their own stores. Their “tied stores” had a big cost advantage. Later, Les Schwab rose in competition with the huge price discounters like Costco and Sam’s Club and before that Sears Roebuck and so forth. And yet here is Schwab now, with hundreds of millions of dollars in sales. And here’s Les Schwab in his 80s, with no education, having done the whole thing. How did he do it? (Pause). I don’t see a whole lot of people looking like a light bulb has come on. Well, let’s think about it with some microeconomic fluency.
Is there some wave that Schwab could have caught? The minute you ask the question, the answer pops in. The Japanese had a zero position in tires and they got big. So this guy must have ridden that wave some in the early times. Then the slow following success has to have some other causes. And what probably happened here, obviously, is this guy did one hell of a lot of things right. And among the things that he must have done right is he must have harnessed what Mankiw calls the superpower of incentives. He must have a very clever incentive structure driving his people. And a clever personnel selection system, etc. And he must be pretty good at advertising. Which he is. He’s an artist. So, he had to get a wave in the Japanese tire invasion, the Japanese being as successful as they were. And then a talented fanatic had to get a hell of a lot of things right, and keep them right with clever systems. Again, not that hard of an answer. But what else would be a likely cause of the peculiar success?”
— Charlie Munger
Beyond the Book
Read "Learning from John D Rockefeller" by Investment Masters Class
Listen to "#16 Titan: The Life of John D. Rockefeller" by Founders Podcast