OT: I've posted this at SI before.
The American Tobacco Company*
James B. Duke was born in 1856 on a North Carolina farm. At the end of the Civil War, his father returned home and found a shed of tobacco miraculously intact after the Union Army occupation and began selling the contents. Soon the elder Duke built a small factory to manufacture a brand of chewing tobacco named Pro Bono Publico (a Latin phrase meaning "for the public good"). Young James Duke entered the business with his father. He was a precocious, energetic boy who became the driving force behind the company.
During the 1870s James Duke’s vision of grandeur for the little factory were thwarted by the dominance of a huge rival firm, the Bull Durham Co. Its brand of chewing tobacco, Bull Durham, was so dominant and well entrenched that head-on competition seemed hopeless. So he decided on a new strategy. He would manufacture an unproven tobacco -- cigarettes. This was a venturesome move, because at the time cigarettes were a tiny segment of the tobacco market and their use was associated with degenerate dudes and dandies in big cities.
Duke brought ten professional tobacco rollers from Europe to his factory in North Carolina and set them to work. Each could roll a little over 2000 cigarettes per day. At first he had trouble selling his Duke of Durham brand. Tobacco shops refused to buy them because customers didn’t request them. So Duke innovated with his marketing strategy. In Atlanta, he put up a billboard of a famous actress holding Duke cigarettes in her outstretched hand. This was the first time a woman was used to advertise cigarettes, and the novelty created demand. In St. Louis, Duke’s salesmen found extreme prejudice against cigarettes. Tobacco shop proprietors simply refused to buy. So Duke hired a young, red-headed widow to call on tobacconists, and she got nineteen orders on her first day.
When a young Virginia engineer, James Bonsack, invented a mechanical cigarette-rolling machine capable of rolling 200 cigarettes per minute, Duke negotiated an exclusive agreement to operate the machine. With the new Bonsack machines, Duke simultaneously cut manufacturing costs from $.80 per thousand to $.30 and multiplied factory output many times.[1]
To find markets for this swollen output, he first tried to open New York City as a foothold in the East. There he ran into competition from local firms, and he also encountered resistance to machine-rolled cigarettes among smokers. But both these barriers yielded to an array of ingenious promotional practices. He advertised widely. He put pictures of actresses and athletes in cigarette packs and numbered them so that compulsive collectors would want complete sets. He hired people to go into tobacco shops and demand his new machine-rolled Cameo and Cross Cut brands. Immigrants entering New York were handed free samples.
Overseas, Duke’s minions were at work also. One great conquest was China. At the time a few Chinese, mostly older men, smoked a bitter native tobacco in pipes. Cigarettes were unknown. Duke sent experts to Shantung Province with bright leaf from North Carolina to cultivate a milder tobacco. His sales force hired "teachers" to walk village streets showing curious Chinese how to light and hold cigarettes. He installed Bonsack machines in four huge manufacturing plants in China that soon ran twenty-four hours a day. And he unleashed on the Chinese a full range of promotional activities. At one time his cigarette packs contained pictures of nude American actresses, which proved to be a big hit with Chinese men. Duke turned China into a nation of cigarette smokers.
Back home, his tactics wore down competitors and in 1889 he engineered a combination of his firm and other large firms into the giant American Tobacco Company. As president, Duke built the company into a monopoly that controlled 93 percent of the cigarette market by 1900 and dominated the snuff, cheroot, and smoking tobacco markets as well. Duke ruthlessly swallowed or bankrupted 250 competing firms during the next twenty-two years and continued to spread the gospel of smoking around the globe.
Duke’s monopoly lasted until 1911, when the Supreme Court ordered it broken up.[2] Duke himself divided the giant trust into four independent companies: Ligget & Myers Tobacco Company, P. Lorillard Company, R.J. Reynolds Company, and a new American Tobacco. After the breakup Duke retired from the tobacco industry and started a new electric utility, Duke Power & Light. He also gave money to a small North Carolina college which became Duke University.
Duke's career illustrates the power of commerce to shape society. His promotional practices accelerated the growth of smoking around the world. To find an outlet for the copious production of Bonsack machines, he turned China into a nation of cigarette smokers. His monopoly defined the structure of the tobacco industry and destroyed rivals; its financial power flattened the comparatively feeble efforts of anti-tobacco leagues to publicize health hazards. Duke’s ads made smoking glamorous. His bribes to legislators killed anti-smoking laws. And, due in large measure to Duke’s forcefulness, the tobacco industry resuscitated the crippled post-Civil War southern economy and created a powerful, enduring political coalition in Congress. Duke shaped society with his business strategies, but encountered the limits of business power when the Supreme Court ordered his company dismantled.
Footnotes:
[*] Excerpted from, Production Operations Management - Sixth Edition, William J. Stevenson, c1999 by the Magraw-Hill Companies, Inc p.47-49.
[1] John K.Winkler, Tobacco Tycoon: The Story of James Buchanan Duke, New York: Random House, 1942, p.56.
[2]United States v. American Tobacco Company, 221 U.S. 106 (1911).
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Josh
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