Global Business History Final

Stephen Hymer

said that competitive advantage could be developed on the domestic market and then exploited abroad.

Jean-Battiste on Entrepreneurship

said that the decisive trait of entrepreneurship as the power to unify different elements behind the visionary goal of product creation.

Robin Marris

said that the growth of the firm is explained through managerial self-interest. This clashes with shareholders, so the rate of growth is a result of a political bargain Among managers and shareholders.

Werner Sombart (Entrepreneurs)

stressed the other aspects of the entrepreneur, whose vital energy and creativity brings to life economic factors that otherwise might be considered deadweight-factors such as labor and capital lingering beyond the denomination of property rights or their formal position in a company

Cultures

the attitude of a nation toward economic activity and economic change.

State

this entity plays various roles in this book. The state served in many contexts as a guarantor of the legal framework. In others, it was also a supplier of physical and intangible infrastructures. It can be a regulator, entrepreneur, and opponent, as well as a central or sector-specific planner.

The Company in the First Industrial Revolution - Trade and Markets

to manage market relationships, it was now necessary to build efficient networks of agents, representatives, or even independent but associated merchants. There was greater specialization in the wholesale and retail branches. Volume of trade caused specialization. Big merchants acted as mediators in long distance transactions. Increase in the size of the market and the degree of functional specialization during the First Industrial Revolution amplified the tensions between merchants and manufacturers. Then emerged strategies of downstream integration.

The influence of new technologies on big business in the Third Industrial Revolution

Now the conglomerates were over, businesses wanted to improve their efficiency and performance, which was supported by the Third Industrial Revolution. During the 1960s and 1980s, efficiency gains and a rapid decline in transport and communication costs encouraged the expansion of large companies. Multinationals and companies that were active in more sectors were able to exercise closer control over business operations, even in distant geographical areas. FDI flows skyrocketed in this period and many firms extended their borders even further and carried on strategies of diversification and international investment. The Third Industrial Revolution made firms more decentralized, and in some cases there was a reduction in the scale of production, accompanied by an increase in diversification, which allowed companies to focus on unthinkable strategies of specialization. The new technologies also influenced other aspects of business that had impact on the internal structures of many large firms. 1. Deverticalisation >> The once vertically integrated structures started to disintegrate due to the specialization process that required decentralization 2. Outsourcing >> To save both fixed and variable costs, and to achieve increased innovation. Firms also outsourced to focus more on functions like design and marketing 3. Hollowing-out Networks and new organizational forms= Outsourcing is based on specialized suppliers of components and services, who developed unique skills and capabilities in the production of specific items. Modularity = Components assembled through standardized interfaces, where innovation takes place inside each module. Modular architectures allow for mass production. The advent of modularity is one of the many conditions allowing for the efficient operation of organizational forms that are very different from the large vertically integrated enterprise. Business networks = Groups of independent subjects linked by repeated cooperative relationships aimed mutual benefit and that during this process develop learning communities. These processes had drawbacks as well: companies moving workforces abroad for example, left people in the home country without a job. Inside the networks are coordinators who have to control the whole process and who develop projects at the core of the network itself.

What do managerial hierarchies look like?

Organization on the basis of departments that were responsible for different functions, the head of each department was an intermediate level manager, who had to make sure lower level managers oversaw the various operating units of the firm. Functional departments were organized as line and staff activities, as discussed earlier in the railroad example. Line managers had executive powers, staff managers worked behind the scenes and performed functions like bookkeeping and accounting. The firm during and after the Second Industrial Revolution became a new kind of political entity as well. On the one side there were strong financial demands that called for an extensive group of shareholders who were interested in dividends. On the other hand =, at the highest level of the management, there was the need to use the firm's profits to fund expansion.

Cross-Cultural Management in the Global Business World

The core task of cross cultural management in a globalizing business world is to facilitate and direct synergistic interactions and learning at interfaces, where knowledge, values, and experience are transferred into multicultural domains of implementation.

Neoclassical Perspective

The primary perspective on the firm in economics is provided by neoclassical theory, a static form of analysis that treats business behavior in a partial slice of time. The assumptions are that the representative firm enjoys perfect information and operates efficiently at the lowest point of the marginal cost curve. The Neoclassical firm operated in a highly competitive, price-oriented system. There were a high number of units in the industry, very little functional integration, and an absence of proprietary technologies. Tech knowledge could be obtained freely or cheaply. This perspective is relevant to the business history of the first industrial revolution. The first industrial revolution produced a radical tech breakthrough, but the technologies ere largely general purpose, not expensive, and easily appropriable. The inventions were mostly immediately dispersed through collective invention. It was similar to an open source system in which incremental innovations circulate freely among users, and each contributed to the increase in overall knowledge. This type of firm was not inclined toward growth. This theory dealt mainly with perfect competition and monopoly. Internal structure was not considered. 1. The representative firm enjoys perfect information 2. The representative firm operates efficiently at the lowest point of the marginal cost curve 3. The representative firm is a price-taker with few possibilities of influencing the market in which it operates 4. Technology is exogenous 5. It can be complicated by comparing it with another slice in time (Time 1 and Time 2), but how you get from 1 to 2 is not stressed 6. The representative firm is small-medium sized that performs limited number of functions The neoclassical firm thus operated in a highly competitive, price-oriented system, where technical knowledge and other information could be obtained easily and at very low cost. This makes that the neoclassical view is particularly relevant to the business history around the First Industrial Revolution. The First Industrial Revolution was characterized by a process named 'collective invention', which is an open-source system in which usually incremental innovations circulate freely among users, and each user contributes to the increase of the overall stock of knowledge.

Rise of Transportations and Communication Networks

The second half of the nineteenth century witnessed a remarkable growth in communication and transportation networks. New developments like the telegraph and the telephone permitted faster, more efficient, and more extensive exchange of information. The telegraph was invented in 1844. The arrival of railways changed things significantly. Older forms of transportation became obsolete, tolls were eliminated and the road traffic was reduced to moving short distances. Coal and steam were revolutionizing water transportation. New steamships were reinforced with iron and were bigger, more reliable, and faster than old ships. The railway companies were thus the first big businesses. In both Germany and Italy, railway companies were the first big businesses that facilitated in the countries' industrial growth. As the new communication and transportation networks developed, the modern form of big businesses emerged. Railroads, here, were the most important, as they played a critical role in opening larger and more extensive markets, by making it necessary to find new ways of financing, by favoring the development of organizational capacities and managerial hierarchies, and by offering the first point for industrial relations and regulation policies.

Post-Chandlerism

Alfred Chandler was the world's leading business historian. He insisted that industrial big business was the engine of economic development. For chandler the task of entrepreneurs was to give birth to an extended managerial network. Now this book will give more emphasis on the political context for business activity, business networks, and specialization of function.

Contradictory Situation Found by Many Countries

Around the outbreak of World War II, many countries were in a contradictory situation: they were struggling to survive the Great Depression and at the same time encourage entrepreneurs to take full advantage of the economic opportunities generated by the technologies of the Second Industrial Revolution. Big business was one of the major products of the Second Industrial Revolution, and three features of the large corporation stood out: - The existence of complex organizational structures - The presence of often conflicting actors (entrepreneurs, managers, shareholders, employees, local communities, and the State) - The increasingly strategic role played by R&D

Important Factors in the Rise of Big Business

Before highlighting the three most advanced nations separately, there are several interwoven factors that seem especially pertinent to a comparison of entrepreneurial actions; - Market characteristics - Governmental regulation of economic competition - Social attitudes toward big business - Cultural resources available to corporations

Railroads and Finance

Building up a railway network required capital, and the nation's financial institutions often played a dominant role in the spread of the railway network. Over time, these financial institutions were fundamental in the growth of the modern industrial firm. - Germany : Railways favored the creation of the universal banks that played an important role in the growth of the biggest firms in the country - The enormous amount of money needed to build the railroad network in the United States led to the creation of specialized investment banks like J.P. Morgan - The majority of the Wall Street firms invested their financial instruments in railways and related companies

What Contributed to American Success in the 21st Century

By the start of the millennium, the United States was once again a global leader. The success of the US in the 1990s was based on factors that were both intrinsic and extrinsic to the American economy >> The US had high levels of productivity that increased even further during the decade. 1980s; American world market share in technology intensive industries = 25% ---> 2000s; American world market share in technology intensive industries = 40% Key contributors to the American success: - The size of the internal market - The pressures of foreign competition - The presence of an efficient institutional framework - Flexible capital markets - Public efforts in policies of procurement - Support of intellectual property rights - Scientific research The United States even outperformed Japan, and the success was mirrored by a rise in the country's international trade and investment outflows. Exogenous factors that explained the American business system's success - World trade levels that were greater than had ever been - The oil prices that started to drop again after tensions in the international oil market >> Energy costs fell again - The end of the Cold War relaxed the need for additional federal spending in military and defense industries These three factors were embraced by Bill Clinton, who wanted to support entrepreneurial creativity and thus increase productivity and wealth. He wanted to invest in infrastructure, and broadband communications networks in particular. Clinton wanted to control public spending and thus further reduce the US deficit. Lower public debt, namely, meant lower interest rates >> These allowed the 'new American economy' to boost private investments

Schumpter Approach (challenge to neoclassical theory)

Challenged the neoclassical approach. Two features; - Competitive Habit - Disequilibrium over Homogeneity Schumpeter was interested in the innovative role of the firm, and how the entrepreneur carried out this innovation. Schumpeterian firms grew actively by innovating and thus strengthening their competitive position. He emphasized the role of the corporation as the most powerful agent of change and growth. His beliefs were charactered by the competitive habit of the firm as the main driver of economic growth, and secondly the disequilibrium of the firm was more important than homogeneity. This challenged the neoclassical concept of the standard firm.

Alfred Chandler

Chandler launched one of the most important issues in business theories, namely he analyzed the relationship between the strategy and the structure of the firm. Technological regimes (scale intensity, tendency towards mechanization) determine the activity and competitiveness of firms, and also their optimal organizational structures. Technology, here, is an exogenous force, whereas other theorists and scholars always saw technology as endogenous. He implicitly considered technological change as an exogenous force that had a decisive impact on business's entrepreneurial choices. Tech determines the activity and competitiveness of enterprises and their optimal organizational structures.

China and India in the 21st Century

China and India are two countries that best embody the world of business in the early years of the 21st century. Historians are interested in this for two reasons: 1. For the first time since the monumental transformation brought about by the FIR, the epicenter of the world economy shifted from the usual areas to Asia. 2. This groundbreaking shift in international economic history brings us full circle. This means that before the 19th century, China and India held a superior position to Europe or its colonies, and that nowadays, although there are still large pockets of poor and marginalized citizens, these nations are bursting with scientific know-how, technological skills, and cultures friendly to business activities. Historical statistics have shown that for every peasant who starts to work in a factory, productivity increases sevenfold. As there is such a large hidden population in the countryside of these countries, this poses an advantage. This advantage, combined with heavy instruments by multinationals, should enable both countries to sustain their remarkable business expansion.

Agency Theory

Elaborating on the theory of Marris, where managers' actions were driven by self-interest, around the 1970s the conflict between managers and shareholders frequently became tense. In 1976, Micheal Jensen and William Meckling developed the agency theory, which explains the need to align, either through the market or by means of legal instruments, the personal interests of the subjects (managers, principals and shareholders, agents) who sign this contract. Jensen and William Meckling jumped emphasized the principal-agent problems that can arise between shareholders and managers. The interest of the principals and agents must be aligned.

Time vs. Piece Wages

For practical matters, employers who wanted to pay time wages had to move them to factories. Piece wages introduce direct proportionality between effort and payment, time wages could be and were made contingent on some minimum of effort supplied. By paying slightly higher wages than the workers' opportunity costs while threatening dismissal if efforts fell below a certain level, time wages could be made compatible with optimal effort levels. Piece wage putting out world causes cutting corners on quality and finish. Paying a time wage allows the employer to monitor quality through controlling what happens on the ship floor and he can also trade of quantity for quality to attain the combination the firm desires. If individual contributions to output cannot be disentangled, supervision and mentoring is necessary just to make sure that workers have the right incentives and do no shirk. For a time rate to work, there had to be incentive schemes that extracted maximum effort from workers.

M-Form General Motors

General Motors, established by William C. Durant, was the result of a merger of many firms in the automobile industry like Cadillac, Pontiac, and some small producers. The objective of the mergers would be not to cut costs, but to restructure the organization in order to further increase production. Durant unfortunately overestimated future demand and couldn't manage to integrate the various companies in a rational manner by creating a central office. Around 1920, the biggest shareholder in GM was DuPont. In a short period of time, DuPont replaced Durant and together with Sloan transformed GM in a multidivisional firm, where each division had its own organization for both production and distribution. Sloan perfectly understood that the time of consumers buying their first car was over, and that it was time to think further than the "any color as long as it's black" mentality of Ford. GM wanted drivers to think about the purchase of a replacement automobile, and the company started focusing on improving styling, comfort, and performance of its various models in varied colors. Around 1929, GM outperformed Ford with a market share of 32.3% (Ford had 31.3%), and Chrysler entered the market with 8.2%. By 1940, GM had almost half of the market with 47.5%, Chrysler had 23.7%, and Ford remained with 18.9%. The owners of GM (primarily the DuPont family) pushed for a strict application of the M-form, and wanted to exclude the divisional heads from headquarters. They wanted to concentrate power in an Executive Committee made up of top management and a few representatives of the stockholders. They wanted to control GM, and at the same time protect it from the tendency of uncontrolled growth which had characterized the firm before Sloan came in. This approach, however, had some drawbacks. Top management wanted to include the divisional managers more, whereas the owners definitely wanted to exclude them. Also, top managers started to fight the ownership's right to veto in new investments. Two factors that impeded owners from realizing their version of the theoretical M-form they longed for: - The government's antitrust policy - Late 1940s >> the Department of Justice launched a legal battle against DuPont, the stockholder - GM's success - The enormous profits made that GM had "the money necessary to do whatever they wished" The owners of GM took back control of the firm when performance started to decline around the years between 1956-1958, when the 'pure' M-form was fully adopted. The new structure reestablished the power of the shareholders' financial veto and imposed a strict separation between the divisions and the headquarters. The new top management did not involve the middle management, leading to a sense of mistrust and dissent. Instead of increasing efficiency and improving governance at GM, adopting the M-form in its theoretical version ended up causing the destruction of the company.

The role of the State as entrepreneurs and interventionists

Governments played a relevant role the creation, support, and ownership of a number of investments in capital-intensive industries. In several cases, the government was a large consumer, especially in areas that served the common good. Also, the government undertook all kinds of actions in order to protect these areas through orders, tariffs, and even financial aid. In Italy, for example, the State was the biggest and most important investor, and in the 1930s the IRI (Institute for Industrial Reconstruction) was developed.

Necessary investments to be made in managerial hierarchy (second industrial revolution)

In investing in production systems that were able to produce massive volumes, and at the same time setting up networks for distribution, big business became very complex in a very short period of tie, which required some changes in order to oversee production and distribution activities, coordinate incoming and outgoing flows of goods, and adequately allocate resources for future production and distribution. These changes were hiring mid-level managers who had professional capabilities in these fields. Good managers were talented in the POSDCORB-group of activities: - Planning - Organizing - Staffing - Directing - Coordinating - Reporting - Budgeting Some managers already introduced innovations within their field >> Albert Fink separated fixed costs and variable costs, F. Donaldson Brown, working at DuPont invented Return on Investment [DuPont Identity, finance].

Growth of Large Corporations

In the beginning of the twentieth century, with the coming of big business, the economies of several countries transformed. Existing sectors revolutionized, and entirely new industries developed. The United States and Europe were the first to experience all of this, and large corporations appeared with significant differences and timing among nations. By 1913, the United Stated provided 36% of the global industrial production, while Germany only supplied 16%, and the United Kingdom 14%. This was because the European nations were significantly smaller than the US, their resources were less abundant, and their markets were narrower.

India

India seems to hold a net advantage over China in terms of political climate. India is the world's most populated democracy and has been able to tolerate the coexistence of ethnic and religious groups that is potentially explosive. Additionally, its system of democracy has its deep roots even in the presence of strong social imbalances that are reinforced by its caste system. Still, even the people in the lowest castes have the right to vote and secure representation in the battle for social mobility and real equality. India is an example for nations that want to overcome problems of backwardness and minority conflicts. India's political system is part of the inheritance from the British colonial era. It guarantees rights and individual liberties to all. Even though the era of colonialism was not easy, there were some positive sides to it. One great asset is the English language, that is a very common language for the middle class, and with more than 350 Indians who are fluent, the country can boast an English-speaking workforce that is extremely large. Unlike China, which wanted to take advantage of the race of Western nations toward ''offshoring'', India followed a path that used its special resources in services. It started off with 24-hour call centers that progressed toward advanced service industries such as financial analyses, statistical and actuarial research, legal and financial consulting and so on. These sectors did well because the old industrialized areas of India were very eager to find new industries based in primarily immaterial assets. The actors of this more recent development were known for quantitative skills that were easy to combine with deep knowledge of the Vedic writings and their ties with the ancient Hindu mathematical traditions. The fact that India ranks so high in immaterial industries such as software is in good part the result of specific decisions. For example, science centers were established that enabled the development of high-tech industries that were possibly important for national defense. The government encouraged successful Indian scientists and technologists to return home, for the sake of the countries' success. A major player in this story is the Tata Group. Unrelated diversification is a common characteristic in the economies of China and the other NICs. One reason for this is that in a limited domestic market it is impossible to adequately take advantage of economies of scale. One way to overcome these limits is by entering the international arena, or to pursue a diversification strategy of smaller dimensions. One distinguishing characteristic of Indian entrepreneurs is that they have strong ethical ties that guide their actions. Social entrepreneurship seems to be an intrinsic part of India's economy. In this setting, even the civil service has its entrepreneurs. India still faces enormous problems of poverty, social inequality, environmental pollution, and we should be skeptical of forecasts that envision India as one of the world's top three top economies together with China and the US.

Multinationalization Today

Innovations in communication and transportation system made the transfer of people, goods, money, and information across the globe much easier. The years after World War II brought a new wave of globalization, economic integration, and intensification of cross-border investments The process of multinationalisation involved all the advanced industrialized economies >> European and American investors invested in foreign countries, including developing ones like Asia and South America because of their large endowments in natural resources. The lack of technical expertise and capital in these developing nations was coupled with an increasing demand for utilities and services, which made these countries very attractive areas for investment by foreign entrepreneurs. Business leaders working in developing nations attempted to replicate the Western strategies that had worked so well in their home countries. US enterprises were present in almost all industries in which organizational capabilities and superior technology gave them advantages. Between the 1950s and 1960s, European firms were catching up, with support of their governments. The US were slowly sinking deeply into debt, especially because of the war they were conducting in Vietnam. By the early 1970s, Germany, France, and Japan were catching up in foreign direct investment.

Institutional Investment

Institutions like pension funds and insurance companies were the largest shareholders in American firms, their investments exceeded that of individuals and households. The institutional investors tended to favor bonds, but inflationary pressures after the oil crises redirected their investments toward the stock market. The institutional investors put pressure on management and the financial resources they provided businesses. At the end of the 1980s, about 25% of the capital of the world's largest funds was in the hands of institutional investors. The fund managers kept a close eye on the performance of enterprises in which they had invested and they judged the appropriateness of the behavior of management. When performance wasn't according to standard and profits were not sustained, stock market losses occurred, and could be as much as 20% of a company's capital. The pressure for performance was thus very high, and top management should be constantly focused. New procedures like Total Quality Management and outsourcing practices arose in order to remain as efficient as possible and more and more attention was drawn to shareholder value. This attention sometimes went too far, because shareholders were paid too high dividends, which remained the company with few capital to reinvest in their operations.I

China

It has been hard for China to develop a coherent model of economic policy to be systematically repeated in order for it to always obtain well-defined results. Instead, a conceptual buildup of this type was accomplished by mixing some of the keys of the Japanese 'miracle' with those of the other Asian ''Tigers'': - Create a relationship based on a principle of reciprocity between big businesses and the state. At the same time, large firms were expected to compete in the global marketplace with export goals. - Target product areas where a competitive advantage could be secured by staying in fields requiring mid-level technologies that were not too difficult to apply, and where the maximum economies of scale could be obtained. - Provide support for the big groups considered to be the best interlocutor for a policy of rapid growth. Compared to Japan and other emerging Asian nations, the case of China had some significant differences: - Whereas Japan and other Asian nations focused on industries with relatively high capital intensity as they saw the path of competing via low labor costs to be potentially dangerous, China acted on all technological fronts and counted on a workforce that was paid at rates far lower than others. - While Japan and South Korea kept foreign multinationals out as a way of maintaining their independence, China used a qualified ''open door'' policy. - While the first-comers of industrialization acted on the basis of an economic policy of systematic interventions, of guidelines and of moral stances, China focused on releasing the ''animal spirits'' that had been repressed during the Maoist Cultural Revolution. In 1978, Deng Xiaoping launched a program of economic liberalization, initiating extensive new legislation. More rights were granted to private enterprise, while, on the other hand, the weight of state properties was reconfigured. Schumpeterian are entrepreneurs like Ma Yun, who succeeded because of his ability to speak English and created very large and successful corporations. Relations between these entrepreneurs and the state were not always easy, as they remind us of those traits of oriental power described by Marx and Wittfogel. Some of these entrepreneurs followed the Asian tradition of maintaining a very low profile regardless of their notable wealth. Others maintained connections with the political world, or adopted an opposing stance, challenging political harassment. Without a doubt can we infer that extremely low salaries are an essential component of the Chinese ''miracle'' but no less it he country's policy of openness to foreign investments. Four special economic zones were created in the provinces of Guandong and Fujian, of which their objective was to attract foreign capital by granting tax breaks on profits and by arranging exemptions for custom tariffs. Over the next decade, tax exemptions and the elimination of duties were revoked. Simultaneously, the state allowed complete managerial freedom and reconfirmed its promise that firms with foreign equity would not be nationalize. This open-door policy had unequivocal consequences: between 1979 and 1999 China's surplus grew to more than 40 billion dollars, although it did not bring about the nation's economic colonization. In the end, China was no longer just the world factory dependent on its low labor costs or the exporter of cheap goods. Over time China had favorably influenced consumers in the United States and other Western countries by transforming into commodities goods that were originally defined by their brands. Chinese manufactures started to form a relationship with Wal-Mart, which made sense because Wal-Mart's competitive advantage was provided by its ability to offer the consumer the lowest price possible. This ultimately helped to promote Chinese exports. Yet, China still needed other Asian Nations' exports. This was the path it was obliged to travel in order to cover its growing needs for raw material imports and capital goods. The need to create jobs for the large amount of young people flooding the labor market, the many peasants who are leaving the countryside for cities, and for the employees of declining, almost bankrupt State holdings is still there. Although China might be known for being present in labor-intensive sectors, China also has a great impact on other global industries where labor costs are not a determining factor. Some are afraid of the fact that Chinese prices are so low, due to the fact that many plants have been moved to China where labor costs are competitive. But fear over the medium-long term is not reasonable. The so-called ''China factor'' should be beneficial for both demand as well as what is offered by Western nations. Manufacturing firms have enjoyed major declines in some of the costs of production and many can expect to enjoy new opportunities inside China's growing domestic consumer market. There are concerns about the effect of China's economic growth on the environment and the planet's natural resources. Additionally the government is no longer Communist but it also shows few signs of being either democratic or transparent in its decision-making.

Three main explanations for why factories arose when they did

One relies on purely technical and physical economies of scale and scope that might have caused the minimum efficient size of firms to become larger than the household. A second is in terms of the modern micro-economics of the firm: transaction costs were higher in decentralized households and the new technology changed monitoring costs and incentives to self-monitor. A third argument is that by concentrating all workers under one roof and placing them under supervision, actual labor effort is enhanced. 1. Fixed Costs and Scale Economies: some equipment simply couldn't fit in worker's cottages. Heating, lighting, power supply, security, equipment maintenance, storage facilities, and inventory control, were all activities in which scale economies were obviously the result of technical considerations. In others they were economic such as marketing and finance. As soon as fixed costs become important (fixed costs went up), the employer has an interest in supervising the workers because shirking and volatility in labor supply reduce the utilization rate of the fixed capital. Factory discipline became the norm. 2. Information Costs and Incentives: by Saving on transaction costs, factories are more efficient than cottage industries., and thus their rise was inexorable. The movement to factories was reinforced by consumer demand for products of standardized quality. Input monitoring became more important when consumers insisted on products of easily verifiable quality. Discipline and supervision in large factories were not the means to adapt to.a new tech environment, but constituted the road to increased output and profits. Tech progress was a by-product of the intensification of social control. 3. The Division of Knowledge: Adam Smith believed that specialization and the division of labor leads to economic progress through three separate processes: the growing familiarity of a worker with the process he is assigned to; his ability to produce improvements on it once he is thoroughly familiar with it; and the savings of time involved in moving from one task to another. Babbage thought that workers also had different inherent skill endowments and it would be wasteful for employees to carry out tasks for which they were overqualified. An optimal matching of tasks to ability was a key to efficiency he thought. Division of labor itself doesn't explain the emergence of factories. Internal specialization became more important because there was more and more knowledge that was necessary to operate the best-practice techniques in use. The era of the industrial revolution witnessed a huge expansion in the knowledge base of the techniques in use. In an increasing number of industries efficient production required more knowledge than a single household could possess. The owner of a factory can possess a large capital and having all his workers under his immediate watch may make experiments, hazard speculation... may introduce new articles and improve and perfect old ones. The fixed factor here is not only resources, but also the capacity of people to learned retain. Given the limitations on what each worker can know, they maintain, the total knowledge that the firm has to possess is chopped up into manageable bites, divided amongst works, and their actions are then coordinated by management. When a factory expands it will require either a sophisticated and efficient network for the distribution of knowledge or a different set-up of the unit of production. Factories served as repository units for technical knowledge and vastly reduced access costs to this knowledge for individual workers. Factories made people specialize and coordinated the exchange of knowledge between them. The Becker Murphy framework and the asymmetric information framework point to centrality of the relative costs of moving knowledge relative to moving people. The plant served as a unit that transmitted knowledge over time. Much of what the new tech required was unmodified or tacit knowledge that was hard to buy, sell, or obtain from books. Access to codified knowledge required encodified knowledge consisting just of knowing that it existed and the ability to read, understand, and apply it (all tacit skills). Firms are a single unit that knows things. They have corporate core competencies and organization practice. Over-the-counter knowledge was not suitable for most firms... technical knowledge combines the understanding fo general relations and principles with local problems, specific to the industry, to a product, and to s et of routines that a firm has adopted. The more specific and local these technical routines were, and the more tacit the knowledge was, the more production had to rely on an in-house supply of expertise. The idea of knowledge pooling becomes increasingly common.

Growth of Corporations in Italy

Prior to the outbreak of World War I, Italy underwent a hefty process of industrialization. Italy mixed elements of the First Industrial Revolution with elements of the Second, a predominance of small firms in the traditional sectors coexisted with a set of oligopolies in the industrialized sectors. The State intervened with tools such as protectionism, state order, special favors and subsidies. There were three important large firms in Italy: Fiat, Pirelli, and Falck. Unfortunately, the limits of the internal demand hindered them from growing to huge firms.

Transaction Cost Theory

Ronald Coase believed that firms' origins and characteristics lay in the need to contain the costs of transacting in the market. Williamson believed that transactions involve the costs related to searching and monitoring. Economic actors are have limited knowledge and bounded rationality and are inclined to act as free-riders - the more indosynchratic resources are, the higher transaction costs will be. Transaction cost theory has a powerful impact because it helped us to understand many historical events. It has provided an interpretation of the persisting efficiency of production systems that were alternatives to mass production.

Schumpeter Theory on Entrepreneurs

Schumpeter placed the entrepreneur at the center of the stage of the economic system. The entrepreneur was the engine of growth. Tech innovation was an independent variable and was crucial for the entrepreneurial hero, who was a man of production. One can think of Schumpeter being on the right extreme of the spectrum and Adam Smith being the left. Adam Smit deems entrepreneurship as irrelevant. The most important function of a business man in his opinion was to supply capital. Entrepreneurship is even less meaningful in the neoclassical paradigm based on market equilibrium. In this framework, the entrepreneur only needs to choose the most efficient production function and check that it is correctly assembled. According to Schumpeter, innovation did not adapt to the current market needs, but instead imposed its output on the market, and a good entrepreneur was not necessarily a risk taker, nor even an owner, but kept an eye on opportunities for innovation.

Today's Hybrid Form

Stakeholders and main controllers of firms influence the strategy, structure, and efficiency of the enterprise, and thus the national economic system. Three types of ownership that are inconsistent with strategies of diversification: - Personal/familial: Don't want to give up their power, so decentralization and delegation of power (the M-form) will be resisted - The State: Was believed to prefer the U-form over the M-form - Banks However, today's European businesses are heavily concentrated and based on a mixture of State, bank, and personal control. Some argued that it was a lack of adequate regulatory framework that reduced the efficiency of European firms. In Europe, there are plenty of large diversified M-form corporations, but there are also many variations on business forms. A lot or Europe's large corporations were accompanied by the persistence of business systems alternative to mass production >> Industrial districts and local production systems characterized by the clustering in a defined area of a high number of small firms, each one highly specialized in one or a few phases of the production process. This system led to strong social cohesion and low transaction costs, plus a high degree of flexibility and creativity = European hybrid business system, or H-form, an alternative for the US 'One Size Fits All' model.

First Signs of Decline the US

The Americans seemed irrepressible, but during the 1950s, the first signs of a slowdown appeared. Intense competition started to show, and the Americans were not prepared for this, as they enjoyed unchallenged success. The Americans helped Europe and Japan to recover after the wars, but this recovery went sooner than expected. American entrepreneurs responded to this in different ways. Some invested even more in R&D, others wanted to invest in fields where competition seemed to be less fierce, leading to mergers and acquisitions that were based on no rational criteria. Business saw in diversification strategies that promised a stabilization of revenue and profit , which led to huge increase in mergers and acquisitions.

Beyond the Industrial Revolution

The concentration of workers under one roof depends on the ratios of costs and benefits of moving information relative to that of moving people. During the second Industrial Resolution after 1860, there were many tech developments like the invention of the telegraph and later the telephone. There were also many inventions that facilitated the movements of knowledge inside the firm. Production technology continued to favor large units. The development of railroads created ever larger markets for standardized products. This abstracts from the complex relationship between mass production and the flexible specialization of their suppliers or other firms catering to more specialized needs. Interchangeable parts and the use of continuous production on assembly lines made the large scale production plant inevitable in many industries. The most important tech advance was electricity which made power supply less bulky and allowed household sized firms access power on the same terms as their large scale competitors. The growing optimal size of ships and the scale economies of railroaded have to be weighed against the democratization of transport which allowed household sized producers to sell transport services.

The Start of the First Industrial Revolution

The first industrial revolution started in British factories. Capital and labor concentration was not new - but what was new was the special combination of a centralized operation with a more efficient technology. New factories used water and then steam power to mechanize production. Specialization of function the related devision of labor called for new forms of labor discipline. Company or corporation started to be associated with a new organizational structure that came to have its own legal status. This was independent from that of the single individuals involved in the different steps of the product process.

Railroads and Management

The growth of the railroads necessitated a new distribution of ownership assets among the firms involved and brought about new forms of corporate management. The railway companies found themselves in a position where they had to manage enormous investments, large numbers of employees, and to coordinate their activities such for safe and efficient travel. This all led to the need for a systematic division of roles >> One side; investors/shareholders, other side; salaried managers with specific skills and abilities. This asked for new forms of management, and new American models for creating and controlling workforces and finances were developed. With increasing size and complexity, the managers started to delegate more and more tasks to other managers and lower-level employees. There was a clear distinction between line and staff, where line managers controlled the movements of people and trains, following a hierarchy. Staff were men who were responsible for standards and advising the managers of the functional departments. Railway companies dealt with the problems of running very large and complex enterprises very effectively; 1. Managers established standards for tracks and equipment like switches, air-powered brakes and signals 2. Managers took the task of perfecting goods such as the bill of the lading, agreements between firms, and accounting rules for train cars belonging to other companies 3. Semiprofessional associations like the Society of Railroad Accounting Officers and the American Society of Railroad Superintendents established standards that made it possible to transfer fully loaded railway cars 3000 miles

Growth of Corporations in Russia

The history of the large Russian corporation has its start prior to the October Revolution of 1917. Government interventions had a critical role in promoting and subsidizing local initiatives, using tariffs to protect businesses that served the national market and attracting foreign investments after ascertaining that local interest was scarce. The State also highly invested in infrastructure for the process of industrialization and modernization, especially in railways. The first large industrial corporations were in the field of capital-intensive sectors, which were highly oligopolistic. The State didn't block any form of cartels, it even formed some itself.

Growth of Corporations in Germany

The setting in Germany was quite similar to that in the United States, but there were also some differences. Owners in Germany, for example, continued to exercise a greater say in management decisions and kept making investments required for expansion. German owners also were attentive to making a good management hierarchy working. Similar as in the United States, the public opinion was favorable towards large corporations, and German entrepreneurs coexisted with management. Management methods based on family traditions or passed on from person to person were no longer adequate for expanding firms. Unlike what happened in the United States, in Germany the large corporations did not take on a leadership role in all sectors, but just in electro mechanics (Siemens and AEG), the chemical industry (BASF, Bayer, and Hoechst) and in the heavy machinery industry. German banks played a significant role in the economy, and their money would flow into investments in specific companies or specific industry sectors. The bank as a shareholder exercised a big role in the management of firms. Eventually, in the early twentieth century, the German companies got big enough to finance their own growth, and the increasing complexity to manage problems related to production, marketing, and new product development reduced the bank's role even further. German manufacturers understood that just the German market wasn't big enough, and that their focus should be on foreign markets. Also, in Germany there was no pressure from the government on how big business operated. Where there were first only 4 cartels, there were 103 in 1890, and 385 in 1905. The full recognition of agreements characterized the most dynamic sectors of Germany, namely the corporations in the cartel didn't sacrifice efficiency, and they still innovated, such that they stabilized volatile markets by leaving room for investments in R&D. Germany was also home to some of the best science departments in the world and the German universities became very important research centers. Moreover, there was an old-age existence of a highly trained class of artisans who made it possible to shift toward a flexible factory production with limited costs for training and supervising workers. Also, in some sectors there were entrepreneurial associations for the development of growth plans for the long term, as well as strategies coordinated with public policies and negotiated with other industry sectors. The same as in the United States, the small companies could exist next to the large corporations.

Global Trends 3rd Industrial Revolution

The technologies of the Third Industrial Revolution led to a shrinking of space, according to Raymond Vernon. This shrinking of space, which meant the reduction of physical distances, and an elimination of barriers to the movement of people, goods, capital, resources, knowledge, and data changed business at both macro- and microeconomic levels. Imports and exports skyrocketed , and foreign investments increased significantly. The same goes for levels of immigration in developed nations, who had markets with professionals for skilled and unskilled workers.

Forms of Enterprise

defined by design, size, strategies, and interrelationships. The crucial relationship is that between headquarters and operating units.

Max Weber (Entrepreneurs)

described the entrepreneur as the beholder of an instrumental relationally, which makes him capable of linking systematically his goals with the most proper means

Kondratieff identified 3 technological waves

identified three technological waves and the entrepreneur, who was looked upon as a sort of translator identified them and took advantage of these waves. 1798-1842: Innovation in the textile and metallurgy sectors 1843-1897: Innovation in railways and closely related activities 1897-outbreak World War II: Innovation in electricity, chemicals, and automobiles

Entrepreneurs

persons who innovate, take risks, grab opportunities, and make decisions at the highest level. They are able to synchronize their firm's activities.

1970s Economic Crisis

1970s >> Economic crisis, stagflation = High unemployment, no productivity increases, high interest rates, and growing inflation. Not even the largest American corporation was spared the enormous economic problems. The economic crisis made managers realize it was hard to manage companies that operated in highly diversified sectors. Some of the big problems could be traced to the administrative structures of the conglomerate management. The headquarters were relatively small and focused primarily on controlling functions like finance and the purchase of new businesses. The supervision of the headquarters was reduced to little more than establishing objectives for the various units and assessing the results obtained on a quantitative basis. The system came to be known as management by numbers, with ROI as a guiding star.

Peter Drucker

According to Drucker, big business could best be understood by looking at its technological foundations, at the human effort that went into the efficient coordination of its individuals, and at the social impact the big business had in the modern capitalism. Now more and more attention was devoted to technology as the principal driver of the press of growth. The most important sources of growth were the mass-production, mass-distribution industries central to the Second Industrial Revolution. As you can see, the new theoretical approaches dealt with several issues: - Developing an understanding of the determinants and dynamics of the firm's growth - Behaviour policies and strategies - The optimal architecture

Edith Tilton Pentrose

According to Penrose, firms are a stratification of resources and competencies, modern firms first learn, and then know. Growth is explained by how firms exploit their resources and human capabilities. Over time, the firm evolves and creates new knowledge and gains capabilities applicable to the industry. The firms ability to best exploit its physical and human capabilities is its source fo growth.

Managerial Corporation

After the 2nd world war the US took an economic leadership role with its large, vertically integrated, multidivisional, and multinational "managerial corporation". In many sectors the optimal size of the firm was a large oligopolistic firm. This kind of organization was partly responsible for the dominant position of America in the period after World War II. Understanding how large corporations became successful meant understanding economic growth >> So macro-economics (the wealth of the nation) were explained by microeconomics (the success of large corporations).

Growth of Corporations in the US

Around World War I, several large corporations developed in the US, where in most cases the characteristics of these firms were very different from those of previous forms of enterprise: - They were based on stock shares and not partnerships - They tended to integrate a growing number of activities inside the firms - The management of these firms was different >> Distinction between ownership and control Mid nineteenth century: more than a million in capitalization and more than 500 employees was rare. 1901: United States Steel Corporation had 1.4 billion dollars in capitalization and over 100.000 employees. It accounted for 7% of GNP. Later on, Standard Oil, Remington, American Tobacco, DuPont, Singer, and Heinz and Campbell emerged. The market in the US was large and extremely dynamic, as the American population grew exponentially, and the power of the consumer increased. The Americans favorably viewed the improvements in material comforts and living standards brought on by the growth of big business. At the same time, however, they showed signs of mistrust, as the big business threatened some of the country's well respected values like free competition. Especially small entrepreneurs started to voice themselves in the so-called antitrust battle. The big corporations with huge economies of scales and thus very low prices pushed them out of the market >> 1911 : The court chose to break up Standard Oil and American Tobacco. American paradox = One hand there are political forces that were intent on limiting the growth of large corporations, but the reality is that the antitrust legislation produced the opposite result: the prohibition of price agreements and cartels brought a wave of mergers, that formed giant corporate entities. The big business that arose between 1880 and 1920 can be seen as successful attempts by America's urban middle class and working class to establish a new order based on efficiency, continuity, and systematic controls. The effects spilled over into the complete American society. Higher education quickly adapted to the needs of the industry, educating middle- and upper-class Americans for citizenship. At around World War I, the structure of new sectors was oligopolistic. However, there still existed opportunities for smaller companies. Their principal advantage was flexibility, which allowed them to produce goods that were highly differentiated, and to adapt quickly to shifting consumer needs.

The conflict between ownership and control (Berle and Means)

Berle and Means stressed that the fact that ownership of shares was easily transferable changed relations between a corporation and its owners. One significant consequence of this separation between managers and owners was that there would be a divergence of interests of the controlling group (top management) and the interests of the majority of the shareholders. >> The attitude of Berle and Means toward managers was pessimistic: "Managers were capable of shifting profits to their advantage, arranging things such that they could choose how to invest the profits, in the pursuit of objectives that would bring them prestige, power, and personal satisfaction rather than focusing on the interests of the majority of the shareholders." For Berle and Means, ownership and control were opposites, where the one worked against the other. Question: Who should be held responsible? >> Three possible answers that represent three forms of modern corporate governance - Interest and responsibility of managers should refer only to the shareholders, going back to the traditional concept of the rights of the owners - Give official recognition to the situation that had emerged, namely that managers only acted in their own interests - Recognition of the principle that the modern listed company was to be at the service of not only its owners or the individual that managed it, but of the entire community This was the ideal situation according to Berle and Means

American Superiority

By the time of World War II, America had been the world's leading economic power for many decades. In the US, the birth of large corporations where technology made it possible was greatly favored by the availability of natural factors, an uncommon dynamism in the internal market, by antitrust policies, and by the diffusion of a culture that was well suited to business and organizational change. The governmental support in R&D and the two World Wars, plus the Cold War stimulated the demand for technologically advanced products in fields such as air transportation, electronic, synthetic materials, and pharmaceuticals. All these products could be used or easily transformed for civilian use. All the men that had joined the army engaged in training programs that would help them to reenter the workforce, and increasing competition from the Soviet Union forced the government to invest even more in R&D and education. The US were a paradise for consumers, due to the modern distribution channels. America was surrounded by a climate of confidence, that pushed the country toward new risky undertakings. English was becoming the universal language of business.

Movement Towards the M-Form Late 20th Century

By the time the Harvard researchers completed their survey, European firms started to rethink their competitive strategies, and implemented the multidivisional structure more and more. This happened at the same time the US firms were in the middle of their process of de-conglomeration. - Great Britain: Diversification was particularly evident in the mid-1990s; two-thirds of the top 100 British companies was diversified into related fields, 24% was diversified into unrelated fields. The spread of diversification, here, mirrored the adoption of the M-form - Germany: Conglomerates were popular, but the Germans decided to stick to the U-form with a holding-company structure - France: Low diversification strategies. The functional structure was no longer in use, and had been replaced by the M-form, or the holding company - Italy: There was a trend toward diversification, which was accelerated by adopting aggressive financial strategies. During privatizations that occurred during the 1990s, some of the most important Italian firms diversified and introduced the M-form

The effects of shrinking space on firms

Companies that already became big had to renew their strategies and get their position as first mover back. Due to the new technologies, new firms could enter the market, particularly in the computer industry, where those in the computer industry were rewarded for being the first movers and for having a bundle of capabilities in manufacturing, technology, and marketing. Companies such as General Electric, IBM, and AT&T became big in this period. IBM's investments allowed engineers to improve the design of the computers and to implement a language needed for operation: software. IBM grew very fast, also with the help of indirect support from the US government in the form of financing for R&D, but also by being IBM's biggest customer in testing new products. Factually, the government gave IBM the entry barrier in a new and promising market. By the end of the 1950s, IBM dominated the market and covered almost all segments of the industry. In around the 190s, IBM held about 70% of the world market. Motorola produced car appliances and started working with semiconductors later on. Texas Instruments had been active in producing detection equipment for the oil industry, and started manufacturing radars and sonar equipment during the war. Texas Instruments soon became the largest semiconductor producer in the world, holding between 11 and 12% of the market. The semiconductor market changed with the maturation of microchips and microprocessors, and only a few big and efficient producers remained. Intel started producing memory chips and enjoyed continuous growth.

Industrial Relations

Europe was also different in the role of the workers in the organization. In a lot of countries, workers were involved in decision making, or there were councils through which the employees could get information on top management decisions and the direction the company was heading in. European workers had some autonomy. When modern, bureaucratic techniques of job management were introduced in Europe, they were filtered through a unique system of labor-management relations, and were very often rejected or heavily adapted to the local European environment. In other European countries like Italy and Spain, workers' participation took different forms. Here, workers were given a little bit of voice in order to prevent them from rising. Another difference between the US and Europe was in management. In the US, there were institutions for training managers, and even business schools. In Europe, there was no training for management, and the training that was available was just on-the-job. Managers were obtained internally.

Why the Factory System

However, many workers were offended by the paternalism and the controls of the new system, as those controls always seemed to be in favor of the capitalists. Some workers were determined to fight back to the factory system and get some control over their lives back >> This set in motion labor struggles and political movements that would extend up until now. Through integration, businessmen could better coordinate their operations and control their costs and the quality. As the scale o operations increased, the machinery became more complex and expensive. It provided solutions to many problems but also created new ones like maintaining expensive machinery, delegating authority, in reporting, and in defining entirely new economic roles and procedures. Schumpeter saw the factory system as a successful innovation, one that generated profits and thus encouraged others to change the way they did business. The whole system would benefit as the economy became more efficient ; consumers would have cheaper products, workers would have new jobs and thus money to buy products, and managers would of course continue to have problems that called for continued innovation Marxist view on the spreading of the factory system >> Entrepreneurs concentrated the workforce in a single location in order to exert a closer control over the workers and to achieve a more efficient exploitation of their labor. The more means of production and the more control, the more machinery that could be introduced, and the lower the labor costs of output became. Specialization reduced the skill levels of the workers, lowering their wages again. The economic progress was denied to the working class who were eventually no longer able to buy industrial goods. According to Marxist theory, this would create a final great crisis for the capitalist system.

Capital markets, corporate finance, ownership, and control

In Britain, the small business which operated in the fields of the First Industrial Revolution were supported by local and regional banks. At the same time, a dynamic stock market played an important role in supporting entrepreneurial initiatives in manufacturing and commerce. Around World War II, 1700 companies were listed on the London Stock Exchange, which channeled the resources necessary to foster growth to a number of important mergers and acquisitions in the capital intensive sectors. In lots of cases, the growth process was controlled through the perpetuation of the traditional approach of a federation under a holding company, which was a financial company that directly controlled a number of subsidiaries. Still, in many British firms the founding families kept playing an important role. In Germany, the growth of large companies was supported by the stock market, along with a consistent self-financing and an efficient banking system with many large institutions >> Banks were a key component of the German capitalism, where they shaped the company in selecting and monitoring top management, and at the same time weakened the Stock Exchange Market as a way to channel financial resources toward the industrial system.

R&D in the Second Industrial Revolution

In large corporations, the process of innovation became linked to national and international scientific engineering networks, and the people who worked in R&D kept relationships with the professors and teachers that trained them. The number of employees in R&D departments increased impressively in the period 1920 - World War II, and innovation became a collective process. The R&D centers were comparable to assembly lines, in the sense that there was a business system with bureaucratic rules, defined roles, and a complex and rigid hierarchy. >> R&D became a strategic asset, and products had to be protected by patents R&D is an expensive process, and sometimes a long process that doesn't offer direct results as well, meaning firms put a lot of money in R&D, but do not immediately see effects. In the leading countries of the Second Industrial Revolution, R&D departments operated alongside a network of other institutions that were also preoccupied with technological advancement. This created a series of spill-over effects, which benefited the manufacturing sector as a whole. - Germany cultivated technical skills and engineering. - 1930 >> Most advanced technological level in Europe - United States had the most sophisticated and efficient national system of innovation, in establishing R&D laboratories that were funded by large corporations. Also, there were private research labs, performing commissioned research

The British Competitive Advantage

In textiles and cotton manufacturing, tech innovations in spinning and weaving imported the industry's productivity enormously. This was also seen in iron, steal, and coal. The quality of products were also improving. There was a positive framework of sig capacity for distributing goods and extending credit as well as a good cultural climate that embraced science, innovation, and experimentation. The British took Adam Smith seriously and exported manufactures and imported the food and raw materials that could be producer cheaper elsewhere. The most important exports were textiles and metals. The main shift in metals was the composition of metal exports: finished metals gradually gave way to machinery and engineering product, the high-tech products of that age. JOHO: The structural transformations were rooted in radical transitions both at the meso level (industries) and the micro level (firms). In manufacturing, product innovations and new ways of organizing the production process contributed to the rate of growth in particular industries. Water power remained the primary source of energy, but it was supplemented increasingly by the steam engine. In textiles, and particularly in cotton manufacturing, technological innovations in both spinning and weaving improved the industry's productivity enormously. The cluster of innovations characterizing the early phase of the First Industrial Revolution could be traces to a series of factors that were economic, cultural, institutional, and legal. - Britain already had a strong commercial sector with capacity for distributing goods and extending credit - Britain had a cultural climate generally favorable to science, innovation, experimentation, and new practices - Britain had legal protection of intellectual property (patents) What also contributed to the so called 'great transformation' were entrepreneurs, who came in all shapes and sized, with widely skewed social origins and levels of professional training. In general, the countries that had more fragmented social structures (Britain, and the Netherlands), offered the most favorable environment for the development of entrepreneurial initiatives. The British entrepreneurs were mostly masters who transformed their shops into factories, and expanded from local, to regional, to national, and sometimes even international. Many traditional landowners looked suspiciously at the process of change, but also mixed the new opportunities with the activity they always engaged in, like promoting investments in mining, or building capital-intensive infrastructure that would provide a necessary link to new markets. Much further down the scale of innovations and investments were instrument-makers like James Watt, who invented the steam engine.

The New American Economy

In the new economy, as it was called, investments grew and ere done in technology- and knowledge-intensive industries like ICT, electronics and microelectronics, computers and biotechnology, and especially Internet development. The investments worked, labor productivity grew. The new economy created a number of new jobs, especially in the ICT industry. Venture capital = An innovative financing instrument that supported and sustained initiatives in technology-intensive sectors by investing in small start-ups, betting on their entrepreneurial ideas and ability to become successful. Apple, founded by Steve Jobs and Steve Wozniak was one of these start-ups. High-tech new businesses required lots of capital, and institutional investors and pension funds started to invest their huge resources in the New Economy. The investments on average offered returns of 30-40% per year. The Internet market showed a lot of potential and companies like eBay, Amazon.com, America Online, Yahoo!, and Google were able to achieve huge results. Another feature of the new economy was that already existing and rather static industries could be changed radically due to the new technologies like IT that were implemented in the management of purchases, sales, and stocks.

Technologies of the Second Industrial Revolution (1820 - 1860)

In the second half of the nineteenth century, department stores started to appear, and they quickly gained popularity thanks to innovations like free admittance, fixed prices, a vast assortment of goods, special sales, and low margins, which made it possible for quick turnover of inventory. The United States was also the pioneer in two related sectors: mail order sales, and retailing chains. The mail order sales concept was popular in markets far from the urban areas. The store chains grew quickly starting at the beginning of the twentieth century. They grabbed important shares of the market from traditional shops thanks to their economies of scale and diversification. The area where the transportation and communication infrastructure made its biggest impact was in manufacturing through; - The invention of automatic packaging machinery - New processes became more widely available Important changes took place in firms that produced and assembled interchangeable parts - The availability of a new and more flexible energy source like electricity made possible interactions between chemicals and metallurgy This complex interconnection of innovations is currently called the Second Industrial Revolution, which was characterized by the fact that volumes were much higher, the rate of change was much faster, the speed of shipping goods was increased, and economies of scale and scope were achieved.

The Company in the First Industrial Revolution - Characteristics of the Productions Process

Innovations on average clustered around stages of the production process, meaning that scale effects were not generated. Innovations in one stage of the production process created bottlenecks and pressured firms to introduce innovations at other stages. This was positive, but did not foster integration in the various production stages. As in the case of textiles, the production process remained fragmented. Many entrepreneurs had many factories under their control. The lack of coordination between stages of production was also due to the fact that similar units of production tended to cluster in the same geographic area, which had a lot of advantages; - Benefits derived from a fast flow of goods and services - A plethora of skilled workers - Lower cost of information - More efficient knowledge sharing Companies had little or no influence on prices, knowledge circulated relatively freely, and innovations could seldom be kept secret for long.

John Dunning

International activity of the firm can be explained by firms developing competitive advantages at the domestic country and the advantages present in the host country (productive and skilled work force for example).

Richard Nelson and Sidney Winter

Introduced the issue of routines. Routines are the ways in which organizations are able to remember successful behavior to maintain their leadership positions. Firms and economic agents are characterized by bounded rationality, cumulative learning based on experiences, and trial-and-error processes, and they typically reduce uncertainty by employing routines that lead to path dependence. Competitiveness depends on the ability of management to understand and fully exploit the bulk of resources accumulated inside the firm itself.

Growth of Corporations in Japan

Japan was the first non-Western nation to reach a front row position in the international economy. The government actively supported industrialization and created and managed companies itself. Often, the government brought in foreign experts and subsidies. After a while, the government turned some of its firms over into private firms. thus began the central institution of Japanese industrialization, the zaibatsu - a diversified group owned and controlled by a wealthy family. The limitations of the national market and the inability to develop adequate technological competencies kept the Japanese firms lagging behind.

Keireitsu

Japan's impressive success has already been discussed in Chapter 12, but at around World War II, it still wasn't as successful as the US and Europe, as Japan was late in industrialization. After World War II, Japan was catching up, and its firms were able to enter the realm of international oligopolies as top players. The zaibatsu slowly were replaced by keireitsu. There were two forms of keireitsu: Type 1 = Kynyuu keireitsu = Grouping competitive firms that operated in different sectors of industry, trade, and finance. These firms were connected to each other by a complex network of interlocking shares. The biggest of these were re-creations of the main zaibatsu from before the war. An exchange of shares between subsidiary firms assured that the control of the majority shares remained inside the group. A new type of actor slowly emerged; the large house banks that also played a dominant role of the early zaibatsu. During the liquidation process of a firm, shares not held by small investors were bought up by banks, who resold them to financial institutions like insurance companies, and real estate holdings. Thanks to the banks, groups were able to reconfigure themselves via interlinked shareholdings and thus reestablish ties similar to those of the former zaibatsu. The vertical structure was replaced for a horizontal one >> Due to cross-shareholdings, integration of management groups, loans, and a structure for coordination through periodic meetings that was a sort of club existing of presidents of the largest companies in the group. The keireitsu was controlled in an informal way, as there was no central body, and shareholders could not control the strategic or operating decisions of the affiliated companies. Also, there was a high level of trust among the firs, as there was not only an exchange of shareholdings, but the tight network the keireitsu operated in had close commercial, financial, and personal tights. The banks were a sort of glue in the keireitsu, they were entrusted with information regarding the daily management of the firms and could exert influence on investment decisions given their roles as principal lenders. The principal function of keireitsu was not to increase business volume or to search out new entrepreneurial opportunities, it was just to assure stability of decision-making and organizational structures. Although determined in legislation, shareholders couldn't nominate the board members, as in Japan there was a common sentiment that firms do not belong to shareholders, but to the employees. Because of this, and because of the highly common lifetime employment, the Japanese workforce was loyal and highly motivated. Type 2 = Kigyoo keireitsu = Vertical grouping of businesses, made up of a head group (usually a large manufacturing company) and tens of related companies that operated as suppliers. An example is Toyota

The 1970s

Late 1970s, beginning 1980s different types of services emerged. Three areas of businesses were active in this new wave; finance, trade, and services to business. Finance and trade benefited from deregulation and liberalization. Services to business, which include management consulting also expanded rapidly. The internationalization of retail forced companies to confront increasingly complex and varied cultures of consumption, meaning that strategies of expansion had to be planned more carefully. Consulting services became more popular, as businesses needed good advice and knowledge on accounting, finance, and how to tap foreign markets. Around the 1970s, the Americans began to lose dominance, particularly due to the devaluation of the US currency, as well as the technological progress Europe and Asia made. By the end of the 1980s, American businesses had lost their position as the world's most active foreign investors.

Cartels

Legal institutions played an important role in regulating markets and competitions. Europeans, namely, were tolerant to setting up agreements. Between the wars, the setting up of cartels all over Europe became an essential component of economic policies undertaken and planned by dictatorial regimes as well as by democracies. Cartels allowed their participants to benefit from relative stability in prices and demand, but they also limited incentives towards integration and growth. Stability of market quotas allowed companies to plan investments while maintaining a stable level of employment, which was favorable in the interbellum period, especially after the outbreak of the financial crisis at the beginning of the 1930s.

The Factory System's Impact on Society

Macroeconomic level = Most of the changes were in the rate of economic growth, the amount and quality of international trade, and the relative contributions of agriculture and manufacturing to GDP. Microeconomic level = Employers were confronted with several issues, like governments that became involved in their management. They experimented with various solutions in terms of factory layout, but also in terms of organizing and disciplining workers. Employers needed more and more employees on their limited workspace, and in order for the production process to run smoothly, employers attempted to enforce behavioral rules. Worker's Level = Working in the factory system meant a radical transformation of lifestyle, and at the same time they had to undergo a dramatic and difficult process associated with urbanization. Their new life was characterized by clocks, bells, and shift work that took place both night and day. The factory introduced carefully defined and relatively rigid roles and hierarchies. From the social and cultural point of view, the uneasy life and sharp transitions workers experienced in the machine-oriented world of the factory system were more important than the wealth generated by this more efficient system of production.

Bartlett and Ghoshal Framework

Multinational companies have adopted a variety of new organizational structures in order to be successful. Bartlett and Ghoshal came up with a framework of four organizational models: - The multinational firm - The international firm - The global firm >> Represented the centralized structure typical of the classic US multinational ; mother company with weak subsidiaries. - The transnational firm >> Represents a company surrounded by independent subsidiaries, all different in capabilities, which collaborated by sharing knowledge and innovations. The new style of globalising multinationals. The Internet Revolution allowed firms to communicate more effectively and efficiently, thus reducing transaction costs. 'Network' organizational structures have become more and more common among international firms, as have cross-border alliances.

Re-Engineering

Re-engineering = Huge layoffs and deep changes in strategies and organizational structures. The origins of re-engineering can be traced to the intense pressure that competition exerted; revolutionary changes in the ownership of America's largest companies had transformed the relationship between shareholders and managers. The new economy made it possible for entrepreneurs like Bill Gates, and Steve Jobs to become super successful, and the roots of their success lied in a new form of entrepreneurship: - Science and hi-tech knowledge were at the core of all the successful initiatives, and entrepreneurs were almost always students studying computer science or electronics, or university graduates, or academicians and scientists - >> They were able to single out new market segments with huge potentials for expansion due to their technical knowledge they gained during their studies - Efficient instruments were available to direct appropriate financial resources into the projects mentioned above at their early stages The highly innovative firms of the new economy were increasingly going public after a start-up period that was funded by the venture capital firms, and they were more and more attractive for investors on the stock market

IG Farben and ICI (Imperial Chemical Industries)

On December 25, 1925 several German chemical firms set up a federation called IG Farben (IG = Interessen-Gemeinschaft, or community of interest) via mergers, with the aim to restore German leadership in the world's chemical industry that had been lost after the war. Immediately after its establishment, IG Farben started a strategy of taking over foreign firms in order to penetrate promising markets. The first move they made was a bid to take over the British Dyestuffs Corporation, which was considered unacceptable by the British government, which managed to promote an all-British merger that created the ICI (The Imperial Chemical Industries). The ICI case was not isolated in interwar Europe, but it is particularly telling in many respects: - The sectors that were dominant in the First Industrial Revolution were giving way to the capital intensive ones of the Second. Most of the counties involved in World War I had tested the advantages of high volumes of production and scale intensity, since the war had proved the effectiveness of domestic production systems and industries at all levels. Almost everywhere the war effort made it necessary to create large organizations, where some got so large that they hardly could adapt to peacetime conditions. - ICI clearly indicates the characteristics of the European interwar company >> Protectionist, corporatist, and increasingly interventionist

Necessary investments to be made in distribution (second industrial revolution)

Only machinery is not sufficient to obtain and maintain great success, a high level of vertical integration in order to maintain a constant throughput in the manufacturing process is also necessary. Before the technologies of the Second Industrial Revolution reached superiority, the typical intermediary collected products of many manufacturers to count on a greater volume for their buyers. This allowed the distributors to realize economies of scale as well. During the Second Industrial Revolution, however, products became more and more diversified and personalized, which called for special skills related to how the products were sold and installed. In the beginning, the intermediaries adapted to this by building structures to meet the demands from manufacturers, but these structures could only be used for a single line of products and this made the traders more dependent on manufacturers for whom they were distributors. The new products made with the new technology required demonstrations of the product first, which meant marketing had to be specialized as well. After the product was sold, it had to be installed and maintained periodically as well, which meant specialized technicians had to be hired. Manufacturers had the resources and skills to offer all of this, but wholesalers hadn't, they didn't have the means to demonstrate, maintain, and repair the products. >> Result: Majority of the manufacturers started to own and manage own sales points, where someone demonstrated the machine, someone repaired and maintained the machine, a commercial director who did the payment conditions, and where someone did the actual marketing and sales. In a short period of time, there were also employees needed to take orders from customers, to oversee advertising, organize product deliveries, coordinate installation, maintenance and repairs of the products, and plan financing programs for customers. Large corporations started to create centralized office with specialized personnel for procurements.

Trains, industrial relations, and regulation

Railways also played a role in the arena of relations between management and workers. Also, they were the first sector of the American economy in which competition was regulated by the federal government. In growing, the companies had to face some classic issues of industrial relationships; - Recruitment, training, and managing workers - Organizing workers who were scattered over vast geographical areas - The introduction of worker recruitment, fixed salaries, and clear internal hierarchies with established career paths - The introduction of insurance systems, and pensions for employees - Unions and collective bargaining were not accepted by management The railway sector in the United States developed various cartels and price-fixing agreements in an effort to control competition. The strategic and organizational know-how that had been acquired in the railways was rapidly transferred to other industrial sectors, thanks to managers and entrepreneurs who had started their careers in the railroad sector and then embarked into manufacturing. The Carnegie strategy is a famous example that will be discussed in more detail later on.

Conglomerates

Result of the wave of mergers and acquisitions >> Conglomerates = Firms that operated in a number of sectors that were unrelated. Diversification was a common corporate strategy of American businesses throughout the twentieth century. The level and type of diversification between 1950 and 1960 was based on the extraordinary economic situation of America. Firms enjoyed huge profits, but putting these profits to use was a serious challenge. Investors were more interested in long term growth of their investments, making it unnecessary to distribute larger dividends. Top executives had considerable sums of money to be used for investments >> These investments were done in activities abroad who promised good profits and growth. Unfortunately, not all sectors were suitable for internationalization. Some sectors were at maturity, so investing abroad or in R&D didn't have much appeal. Firms in these sectors purchased controlling shares in companies that were already operative or exchanged shares with other firms. Armco Steel is a good example; They started to diversify when they saw demand for steel stagnated. Armco started to invest in firms further and further away from their original business. They even bought an insurance company and further expanded into other fields of finance. At the end of the 1960s Armco leased manufacturing assets, and even entered the real estate industry. Factors stimulating the growth of conglomerates; - Increasing fiscal pressure - Global competition - Developments in management science; The application of mathematical models - Diversification; Profits in one sector could compensate for losses in the other The conglomerates got a lot of critique. Different management scholars defended the conglomerates, on the basis of the strong points conglomerates had when compared to other forms of enterprises; - Reduction in risk - Lower cost of capital - Managerial resources that could be put to better use

East Asian Multinationals

The East Asian multinationals arose for different reasons than the American firms. they expanded abroad on the basis of advantages that frequently were not related to the possession of superior technology. Superior organizational capabilities, and support of the banking system and other companies made these achievements possible. More recently, multinationals in emerging countries have been able to invest successfully abroad because they started adapting to emerging market needs, and succeeded to get access to untapped resources and markets. Companies like these are referred to as 'Dragon Multinationals', and they embraced internationalization in order to achieve competitive advantage that were unavailable at home by establishing partnerships and joint ventures.

First Industrial Revolution

The First Industrial Revolution (1760-1830) witnessed the rise of the factory. It caused the ever growing physical separation of the unit of consumption (household) from the unit of the production (plant). Manufactories are where there was a concentration of former artisans and domestic workers under one roof, more or less continuing what they did before. The other involves a more radical change in production technique, with substantial investment in fixed capital combined with strict supervision and rigid discipline resulting in what became known as "mills." The First Industrial Revolution transformed the world economy, gave Great Britain a dominant position, and gave shape to the world's first long-term change in population dynamics. From 1820-1879, Great-Britain's population grew faster than that of the rest of Europe, and their GNP growth rate was higher than the average of the rest of the world. From 1789-1914, Great-Britain, Belgium, and France were all growing fast and at the same rate.

Growth of Corporations in France

The French case falls midway between what happened in countries such as the United States, Germany and Great Britain on one side, and Russia, Japan, and Italy on the other side. It was claimed that France was lagging behind because of the French Revolution. Around World War I, effective large French corporations were rare, and small compared to those that existed in the United States and Germany. Also, almost all countries in the country were still owned and controlled by families, which probably slowed down investments in mass production and mass distribution. At the beginning of the 1900s, some of the French firms grew by investing in technologies, professionalizing their management structures, and developing organizational competencies. The iron and steel industry was one of these examples.

Sectorial Dichotomy and the Conditions for Success (distinctions between sectors)

The Second Industrial Revolution created a distinction between the areas where the large corporation predominated and the other sectors >> The biggest firm operating in the US, Germany, and Great Britain were concentrated in the same sectors, where they would remain predominant up until the 1970s : food, chemicals, oil, metallurgy, machinery, and transportation vehicles. In other industries where the mechanization process was simpler and machinery only had to help workers instead of replace them, neither the quantities produced nor the speed would change a lot. These industries were : clothing, woodworking, textiles, leather goods tanning, saddle making, furniture, construction panels, and printing. Innovations in these sectors did not lead to building bigger plants that would allow for the continuous, rapid manufacturing that would offer economies of scale. Instead, increasing production would mean adding more workers and machinery dedicated to the process.

Role of the State in Japan

The State played an essential role in maintaining and increasing the competitive position of Japan, especially that of the exporting sectors. The Ministry of International Trade and Industry (MITI) had adopted more selective criteria for support and quickly scored success. Primary period postwar period: To accumulate foreign currency to finance the reconstruction of a nation that had been dependent on foreigners. One example where the MITI reached incredible growth was in the Japanese steel sector, which MITI saw as main strategic product due to its high value added. The Japanese market was tightly regulated, with demand and prices carefully controlled by the government. Managers of the Japanese steel industries were allowed to make own investment decisions, and further steps included; - Protectionism became more rigorous - A new system for supporting prices was put into place - A system that linked permits to expand manufacturing capacity to past results.

The Emergence of the Large Firm

The arrival of these corporations meant that it was necessary to come up with some form of governance via salaries managers who had specific technical skills. Before the Industrial Revolution, there were a few examples of such large corporations: in most cases they were banks, or overseas companies like the East India Company. These companies, however, still employed a relatively small number of workers, especially when compared to the normal workforce in the twentieth century. The same counts for the manufacturing capacity of the early industrial firm. In the early nineteenth century, the firm was concerned with a single function and a single product, while neither ownership structures nor internal organization was different from the preindustrial time. What led to the modern big business were advances in technology and markets that finally permitted firms to reach dimensions and complexity that were previously impossible to imagine. It was the large variety of processes that formed the growth of large corporations. This would not have been possible without changes in communication and transportation systems, which offered possibilities to reach a much larger market, and to count on more solid relationships with both suppliers and clients.

Entrepreneurs and Organizations

The connecting tissue of the enterprise can be found in management's intermediate layer. Organizations with beaurocratic rules and routines can easily undermine the entrepreneur's vision. Many authors stressed the centrality of the organization and the long, slow decline of the nineteenth-century forms of entrepreneurship. Organization signified routine, whereas entrepreneurship was associated with creativity; one stands for conformism, whereas the other suggests deviance; one promotes stability, whereas the other is for change. Innovation comes from within the corporation and not through a top-down process is an opinion shared by a wide array of management scholars. Alfred Chandler believes that the entrepreneur had the responsibility of allocating resources at the highest levels in the company, managers stayed within the resource and conceptual framework created by the top executives, true entrepreneurs of the new order. Chandler said the one of the essential tasks of the entrepreneur was to create, staff, and perfect the managerial hierarchy. In the first half of the twentieth century, it were the United States that were dominant on studies on the rise of large organizations. Take Taylor, Berle and Means, Burnham, and Whyte. Central in their work was the centrality of the organization, and the long and slow decline of entrepreneurship from the nineteenth century. There are many different views and opinions on entrepreneurship, and a lot of authors have dedicated extensive research on it. We cannot deny that entrepreneurship is a vital part of our modern economic, social, cultural, and political systems. The main views on entrepreneurship; 1. Entrepreneurship shapes the modern economic, social, cultural, and political systems 2. Entrepreneurship depends on the terrain in which it operate. According to Cipolla, Schumpterer made the mistake of reducing a whole to a part that in this case is the entrepreneural activity. It is an important element but not the whole.

Decline of Conglomerates

The decline of the American conglomerate was serious, with two outstanding reasons; - Top management was either incompetent or unable to understand the technological processes and the various markets in which the conglomerate's companies operated - The almost impossible task of governing aggregates based on a huge number of divisions 1980s: The intention was to reduce the broad spectrum of activities or even return completely to the firm's core business so as to recover some of the terrain lost from global competition. From here on, strategies of de-conglomeration were pursued. Buying and selling companies offered great rewards, and new institutional investors arose. Shares were sold and purchased continuously. There was a market for the control of businesses that were at times purchased by buyers that had no ties with what they bought. Complete companies were bought, sold, separated, and reassembled in different ways >> De-conglomeration became a super popular phenomenon.

Schumpeter vs. Neoclassical Theories

The economic process in classical and neoclassical economics can be seen as a spectrum, with Schumpeter and his ideas on the right extreme and Adam Smith on the left extreme. According to Adam Smith, the most important function of the businessman was to supply capital, and similar work from David Ricardo stressed the automatic nature of economic movements. So too with Karl Marx, who claims that the social relationship binds capitalists and workers. Later, entrepreneurship is even more neglected by the neoclassical view based on the concept of market equilibrium. Fortunately, there was also a middle ground between Schumpeter and the classical and neoclassical economists. Jean-Battiste Say described entrepreneurship as the power to unify different elements (workers, owners, and financial supporters) behind the visible goal of product creation. According to Alfred Marshall, the entrepreneur was portrayed in his daily activity, embedded in the company, aiming to keep the system going. Israel Kirzner underlined the psychological dimension of entrepreneurial actions, he viewed alertness as the entrepreneur's essence. Alertness is described as the ability to recognize the opportunities that arise in markets from a misallocation of resources. Mark Casson, finally, defines the most relevant talent of an entrepreneur as his ability to make effective decisions regarding the coordination of scarce resources. All of these discussed scholars see the entrepreneur as 'one of us', instead of a hero like Schumpeter does.

Necessary Investments to be Made in Production

The first objective of large manufacturing corporations : Reach high levels of production and keep it stable in order to fully exploit economies of scale and diversification. The initial capital investments in their factories were way higher than that of labor-intensive counterparts. The only way to get the best out of these investments was to fully use the plants. Two considerations in determining costs and profits; 1. The nature of the manufacturing capacity that was installed 2. The quantity of raw materials put into the manufacturing operations in a given amount of time The new technologies of the Second Industrial Revolution allowed for a net reduction in costs when a minimum efficient size was reached. In many industries, the volumes produced by one single plant were sufficient to meet national, or even global demand. These industries soon became oligopolies. Even if these technologies would have been available earlier, the same huge firms wouldn't have achieved the same success, due to the fact that the modern network of transportation and communication wasn't complete. The Second Industrial Revolution also had an impact on the workshop level, namely that it was no longer possible for a foremen to control the complete workforce. Taylor and his work 'scientific organization' stressed the importance of the division of the work into different tasks. Organizational know-how was collected by the management, which then could impose a new and more efficient order on the workers, leading to a eliminated autonomy on the shop floor. Workers were paid higher salaries in order to keep them satisfied.

The European market in the Second Industrial Revolution

The imperatives of the new technological wave brought by the Second Industrial Revolution forces entrepreneurs and governments to look at new organizational, financial, and competitive practices. Many of the European entrepreneurs succeeded in building competitive corporations characterized by strong and enduring capabilities, but the framework in which this building took place was different from that in America. The model of the managerial corporation in Europe was slowed down by market structures, and by the industrial policies adopted by each countries. It is not difficult to find explanations for this phenomenon - The first half of the twentieth century was characterized by crisis and chaos >> Two world wars, a huge economic crisis, and dictatorships - A leading element that shaped European firms was the small size and dynamism of internal markets Europe was lagging behind when compared to the United States. A lot of European countries were still characterized by an overall predominance of agriculture, and Great Britain still maintained her leadership position in industries of the First Industrial Revolution. Not only was demand low, as population barely grew, but also consumption styles were far from that of mass-consumption societies. Also, at the end of the war, the European market was fragmented into nationally protected economies in which a limited penetration of foreign investments and products was allowed.

Differences between European and American firms Late 20th Century

The implementation of the M-form occurred kind of randomly in Europe: - United Kingdom: Top management was unwilling to delegate power and responsibility, so a centralized M-form was adopted - Germany: Managers wanted to dedicate themselves to strategic planning, but there was little independence in divisional management, and low attention was paid to marketing - France: Loose organizational structure, characterized by a strong and pervasive State presence. Top management had close relationships with politicians - Italy: Anarchy was tolerated, but autocratic decisions were made at the central level The European divergence from the US model was the consequence of national differences. Many European managers weren't comparable to American managers, partially due to their lack of 'soft skills'. The European education system was more inclined towards academic theory than to empirical evidence. European leaders were occupied with the day-to-day activities, which limited their ability to plan for the long term. Also, there was little attention for marketing, and European firms remained rather small, when compared to the Americans.

The Company in the First Industrial Revolution - Ownership, Control, and Management

The industrial revolution led to the emergence of a more diverse array of business people but also forced them to find and manage a quantity of fixed assets and a labor fore that was normally larger than they had been in the past. Larger workforces, more fixed assets, new technologies and larger markets revolutionized the unit of production, which opened up new challenges and choices for entrepreneurs. We shouldn't attribute all these factors to increases in the scale of activity and in the organizational and managerial complexity, this was more for the Second Industrial Revolution. The relatively small size of the factory meant that necessary financial resources could be provided by wealthy individuals, and that the ownership and control were in the hands of the founders and their families. One of the first systems of limited liability was the partnership, which became the legal device that allowed for the association of other individuals with the company's founder/owner. Management and ownership in the First Industrial Revolution thus remained at the owner and his family. Sometimes, support was provided by a so called foremen who was responsible for organizing the working hours, timetables, and who had to manage the workers' behavior inside the factory.

U-Form to M-Form

The large firms in the US were the result of internal growth or mergers. In the case of mergers, inefficient plants were closed and others were built according to the state-of-the-art technology in order to take advantage of economies of scale and scope. The new plants manufactured the same, but they also were part of a new organizational design. Sign of success of a merger : Drop in cost per unit and significant growth in market share. The typical large American firm was characterized by a U-form (where the U = unitary), where the organization was based on functions like production, marketing, sales, finance, and human resources. These functions were overseen by the board of directors, and authority was highly centralized. This U-form was difficult to implement, given that large organizations exist of plants, distribution centers, warehouses, laboratories, and offices spread over a complete nation, or even several different nations. >> Development : given these challenges, the multidivisional corporation arose. The appearance of this new form was due to factors within as well as outside the firm; - 1920s; GNP and aggregate demand started to stabilize - 1930s; GNP and aggregate demand dramatically dropped - Firms could no longer count on factors such as population growth, the construction of railways, and booming cities for expansion - Many firms created a surplus of internal resources due to earlier investments in functions not directly linked to production - Managers had to get rid of these resources or make better use of them Now managers had to be smart, and diversify themselves, in order to survive, and the old U-form could not manage the process of diversification. The first to come up with a plan to adapt to the new environment were DuPont and General Motors. They created divisions that were built on a common technological or geographical base. Here, the M-form (M = multidivisional) arose.

Conclusion on Company Growth During the Second Industrial Revolution

The new firms thus became big, set up vertically integrated distribution systems and created managerial hierarchies in order to remain big. New firms who wanted to enter the market had to make huge investments in order to compete with the biggest firm, which set huge barriers to the market. Moreover, they had to steal the loyal customers of the first movers. The dynamics of competition were very bitter.

Varieties of Capitalism

it determines the regulation of competition, the relationship between finance and companies, the nature of industrial relations, and the structure of the society's welfare systems.

Great Britain

The new technologies of mass production and increasing international competition had the biggest impact on the birthplace of the First Industrial Revolution: Great Britain. In the years around World War I, a lot of big firms (Dunlop, Courtaulds, and Pilkington) had successfully integrated manufacturing with a good marketing network. The opportunities and challenges for Great Britain were different than those of Germany and the US. British firms, for example, were specialized in consumer goods, where in some cases investments weren't made in mass production. A lot of firms were still family-owned and managed, and the path they followed was often less efficient. The challenges and opportunities for British firms were in: - The characteristics of their markets - The attitude of the public - The positions taken by their legislators as regards large corporations - The education system Around 1870, Britain had one of the world's highest per capita incomes, as well as the highest level of urbanization. Looking further at their numbers, neither internal market demand nor that coming from abroad gave incentive to take advantage of the opportunities as presented by the Second Industrial Revolution. Also, Britain continued to export products typical for the First Industrial Revolution, like textiles (38% of exports), and iron and steel (14%). Also, Britain's socioeconomic structure wasn't favorable for large corporations to grow. Back in 1870, England had completed its transformation into an urban-industrial society. While parts of America moved further and further away from the urban areas, forcing the US corporations to create their own marketing network (the sales points as discussed above), the majority of Britain already resided in urban centers which had been developed at the same time as the industry. Unlike as what was necessary in Germany, British cities were not in need of expansion or being rebuilt. The educational system in Britain was much slower in its response to the needs of the country's new industrial firms. Little or no was done regarding managerial training. Also, third generation English entrepreneurs had a form of cultural resistance to the technological and organizational needs of the new industrial revolution. Where in 1856, it was an Englishman who invented the first artificial colorings, and the country was blessed with large supplies of coal, and had an enormous textile industry that offered the best potential market, it were the Germans who took on the role as first movers in the end of the eighteenth century.

The Situation in Europe in the Late 20th Century

The research focused on the United Kingdom, Germany, France, and Italy, and lasted from 1950-1970. The researchers found a shift toward the M-form in the countries, that was partially due to the Americanization of the European culture, which extended to include managerial culture. The Americanization came from the Marshall Plan that was set up to provide European countries with the resources necessary to speed up the reconstruction of their economies, and at the same tie build a barrier against the Soviet Union and their communism. It helped, the GDP of the European countries grew significantly in the period between 1950 and 1970, following the two pillars of Americanization: opening markets and abolishing trade barriers. >> 1957: European Common Market (ECM). Steady growth in demand offered not just new economic space for existing producers, but also for new ones, and offered producers possibilities for mass production and diversification. The Fordist and Taylorist methods of working became widely known in Europe. Governments tried to attract as much foreign capital and knowledge as possible, sometimes by smoothening the law. The foreign investments had to fill knowledge gaps, or foster industrialization and employment in depressed areas. New challenges arose; European firms had to adapt their structural features to the requirements of the new market situation. An adequate managerial class had to be developed, and existing structures had to be transformed.

Trains and Markets

There were three characteristics that made the difference between railroads and that which had preceded it: Speed >> Trains offered a fast means of moving both merchandise and people Regularity >> Extended diffusion and interconnection of trains Reliability >> Large quantities of goods could be shipped with a precise timetable that was not affected by meteorological conditions Companies now were able to exploit a truly national market and quickly meet the needs of customers in every corner of the country. Furthermore, now that the movement of goods did not depend on the force of animals and men, on water and wind, or on weather conditions, firms could increase production.

Markets

nationsl markets are determined by factors such as the number of inhabitants and per capital income. For most firms it is usually the domestic market that is the more reliable point of reference (for large/medium nations).

Role of the State in Europe Late 20th Century

Together with families and financial institutions, European States were directly involved as corporate owners in manufacturing and services. Western Europe's 'activist States' initiated massive programs of intervention at the end of the reconstruction years, using 'soft' instruments: - Credit provisions by State-controlled financial institutions - Subsidies - Purchase orders - Tax exemptions - State Owned Enterprises in industries considered essential for a modern economy - Promotion of R&D Nationalization = The creation of State-controlled firms. Nationalization became increasingly popular in the four countries after the war. Especially companies in the energy sectors came in the hands of the State, but some countries got even further than that, like the French Renault that was taken over by the government. Nationalization had influence on the strategies, behaviors, and organizational choices of Europe's big business as well: the State-control enterprises had to compromise between efficiency and social goods, with the idea of boosting demand and employment in the back of their heads. Beginning of the 1980s >> External pressures and internal inefficiencies started to undercut State ownership, which is privatization. The privatization wave lasted for nearly 15 years and still isn't complete. Of course, the process differed in all four countries 1. Great Britain: Privatization resulted in the emergence of US-style public companies. Also here, the presence of institutional investors was pervasive. 2. France: First the banking system was privatized, and later on the manufacturing and service industry. They opted for a soft privatization process, and wanted to avoid foreign ownership in strategic and capital-intensive sectors 3. Noyau dure = Stable financial and industrial investors who had to stabilize and protect management and make strategic decisions. 4. Italy: Here, the State-owned companies were not made public, but sold to individuals and families

Managers

over the course of acquiring theoretical and practical experience, have developed a precise, often firm-specific, functional know-how. They have autonomy within a framework designed by the entrepreneur.

Incentives to Go Abroad (Dunnings OLI Model)

Using the M-form, the largest multinational companies were able to adapt rather easily to international expansion. In moving abroad, the multinationals opened subsidiaries, built totally new plants, or sought the support of local partners to reduce uncertainty. R&D usually was conducted in the home country, creating a strong dominance of the mother company. The foreign subsidiaries had a relatively low degree of autonomy in planning strategies, approaches and investment decisions. Incentives to go abroad were the absence of a big internal market, or superior capabilities in marketing and sales. Several scholars studies why firms went abroad, where John Dunning was the most influential >> He described certain advantages on which a foreign firm could rely, including the internal characteristics of the company, its capabilities, and assorted competencies that he labeled the 'ownership advantages'. Some incentives could be found in specific factors, generated by the resources found in the host country. These were 'location advantages', which range from infrastructure, to political climate, and cultural attitudes. The shape that the foreign operations took could vary from simply exporting to vertical integration, which is referred to as the level of internalization. The three factors described are the OLI framework: Ownership-Location-Internalization, and it describes incentives to go abroad.

Walter Rathenau

Walter Rathenau had similar ideas of what the modern corporation should look like: he focused on the phenomenon of a gradual withdrawal of the shareholder from the daily management of the firm. Rathenau identified two types of shareholders : Permanent investors & Speculative investors. The second group of shareholders were the ones that were in conflict with management. The firm should place itself at the service of collective interests and assume the role of a pillar of the conservation and defender of the nation State. Both theorists were struggling with two fundamental problems: - They wanted to establish society's role in control of the great corporations emerging from the Second Industrial Revolution - They sought to implement a stakeholder concept of corporate governance.

The Third Industrial Revolution 1969

Where the Second Industrial Revolution was chemical in nature, today's industries are based in science in physics, and in the efforts to go beyond the limits of space, of time, and of existing materials. >> Third Industrial Revolution = The creation of totally new industries, with new market opportunities and radical changes in at least three broad clusters of businesses: 1. Communications : Internet and modern communication systems were made possible by both the personal computers and by technological advancements in fixed telephony and cellular systems 2. Transportations : Technological advancements due to World War II made bigger and faster aircrafts 3. Physical materials : Nuclear experimentation became important in those industrialized countries that ran out of traditional sources of energy. This created a new field of biotechnology A key factor in the Third Industrial Revolution was the availability of General Purpose Technologies. GPTs could be applied to a wide range of industries. The microchip and microprocessor played the same role in the Third Industrial Revolution that steam power had played in the First Industrial Revolution. The Third Industrial Revolution enabled companies to expand their activities on a considerably larger scale than they had been able to in the past. Heavy investments in R&D contributed to cultures of learning and knowledge management. But the adoption of new technologies forced companies to reorganize, decentralization became necessary.

Transformation that Came Along with the Factory System

While some factory owners ignored the problems that arouse, some owners acknowledged the problems and attempted to solve them. Entrepreneurs experimented with a wide variety of solutions to the problems stemming from the abrupt social changes they were creating. Factory villages with shops originated, with the financial help of the factory owners. This was especially for the workers that had to travel to reach the factory. The process of industrialization rapidly imposed urbanization, and company towns and villages were built around factories throughout Europe and America. In many, the company and the founding family held a leading role in the social and civil life of the town. Paternalistic relationships between entrepreneurs and workers were established, where they gained the most strength in regions where local and national institutions were weak. Paternalism turned out to be a very effective method of control, it even led to a so called industrial bourgeoisie, that began to institute governmental rules that were aimed at mitigating the harsh aspects of the factory system, like new laws regulating the employment of women and children but also forms of compulsory insurance.

William Shockley

William Shockley, researcher at Bell Labs, the R&D labs of American Telephone & Telegraph (AT&T), replaced vacuum tubes and electromechanical switches for transistors. This invention removed the bottleneck in the American telephone system at the end of the 1950s. The most important application of Shockley's discovery came later, when Texas Instruments and Fairchild Semiconductor invented the integrated circuit. The first microchips were developed in the early 1950s, and a decade later this was followed by the microprocessor, designed and manufactured by Intel. These microchips and microprocessor were essential to the development of personal computers.

The role of World War II

World War II imposed serious demands on manufacturing industries in all countries involved. The budgets on R&D were removed, and expenditures skyrocketed. The American government opened the Office of Scientific Research and Development (OSRD), which had the job of supplying public funds to research institutions. During the War, Germany and America succeeded in making significant technological advances that changed the structures of markets, industries, and companies involved. Examples : radar technology, jet engine. Raw material shortages made it necessary to come up with efficient substitutes. This way, synthetic rubber, fibers, and synthetic polymers were developed and widely used during the war. At the end of the war, research efforts intensified even further in those areas characterized by big science, which was especially intense in the United States, who were in a Cold War during the 1950s and 1960s.

Business Dynamism

dynamism is the process by which firms continually are born, fail, expand, and contract, as some jobs are created, others are destroyed, and others still are turned over. Another analytical dimension is that on dynamism. The firms studied tend to increase in size over time, due to scale economies. Given a certain technology, one expects to find that firms expand until the point at which marginal returns start to decrease. All the phases of the dynamic process of continuity and discontinuity, expansion, stagnation and decline are relevant to the analyses of business scholars. In explaining the dynamic process, the following should be considered; - Relational complexity; - Organizations are increasingly faced with significant internal and external relationships - Technological imperatives; - Dynamism of the consumption market - The efficiency of financial markets; Have to channel resources to the firm - The presence of legal frameworks; Should protect the firm's assets and facilitate trade All these elements (most of them technology-related) can force the business enterprise to adjust and adapt. We should not forget about cultural patterns, which play a considerable role as well. Take the presence of legal frameworks, which can be the direct outcome of culture and history. Therefore, we should analyze history carefully.

The Setting of the Factory System

entrepreneurs combined fixed capital and working capital to produce large quantities of standardized goods for domestic and foreign markets. Modern factories fathered a sig amount of workers under one roof. A second break with the past was the clear separation between the units of production and consumption. The third feature of the factory was the specialization of labor where each worker was assigned a small number of tasks. Machines and workers were specialization. The new factory machines were complex and required the present of workers specialization the their maintenance. They were also expensive. They also required more energy than in the past, so they were often located near power sources like water wheels.The steam engine helped to mitigate some of the location constraints. Differences of a modern factory: 1. The factory gathered a significant number of workers under one roof, much more than ever had been the norm 2. There was a clear separation between units of production and consumption 3. There was specialization of labor for both machines and workers Problems with the Machines: - They were much more sophisticated than the tools used by the craftsmen and guild master - They were complex from a technical point of view and thus required the presence of workers specialized in the maintenance of the machinery - They were expensive - Employees could no longer be the owner of machines - A regulated system of training and supervision was required to ensure proper use of the machinery The machines used in the First Industrial Revolution required more energy than in the past. This energy had to be cheap and almost continuously available. The factory system spread quickly through the British economy and then diffused more slowly throughout Europe. The work was unpleasant, and wages were low.

The Company in the First Industrial Revolution - Finance

entrepreneurs frequently have to find the capital necessary to finance the day-to-day activities of the business. Frequently, they also need funds for fixed assets as well as working capital. The crucial task for the innovator was to efficiently exploit multiple channels of funding in the short and long term. Entrepreneurial activity in manufacturing was typically only one component of a local portfolio of diverse investments in other sectors. The level of capital required never reached the level required by the second industrial revolution.

Theories about the modern firm

technologies (electronics and telecommunications) had a pervasive impact on the firm's structure and its dynamics. Richard Langlois believes that expansion of these twenty first century markets were due to the globalization process. New tech made coordination among firms easier and lowered transaction costs and uncertainty. Coordination fo the production process by market forced became more important. The JOHO summary says Richard Langlois states that the new technologies made the coordination process among firms easier and lowered transaction costs and uncertainty. As a result, the coordination of the production process by market forces increased and the role of large integrated managerial firms decreased. Single parts can be made by individual, independent producers.

The British Exception in the First Industrial Revolution

their rate of growth and the way in which they grew after the nepoleonic wars was outstanding. The heart of GB economy was manufacturing. The main reason they were able to succeed was because of their expanding gross product and value added and the resulting redistribution of the workforce. Europe eventually followed the British pattern but the pace of growth varied. In many countries, the process of economic specialization was well advanced and the economic relevance of agriculture was reduced. Europe eventually followed, but at a way slower pace. At the end of the nineteenth century, the percentage of the labor force in agriculture had fallen to less than 50% in Belgium, Germany, Denmark, the Netherlands, Switzerland, and France. In the other European countries, agriculture remained the main source of wealth and employment. Thanks to the openness of the world economy, new countries were able to follow Great-Britain, and some of them even became the leading exporters in manufacturing by the mid-nineteenth century. European countries now enjoyed a stable position in the international market, thanks to specialization in manufacturing. Now, they were able to finance large imports of goods from the rest of the world.

Friedrich Nietzsche (Entrepreneurs)

underscored the diff between those who are ahead of the conventional wisdom of their times and those who adapt to it. The role of individuals who follow a path that does not appear rational are moved by an unusual willpower. Entrepreneurs are moved by unbound energy and wealth is not their goal; instead they aspire to social ascent and are encouraged by the joy of creating, the pleasure of victory over competitors, and the awareness of their role as heads of organizations that sometimes turn into economic empires.