Business History Exam Answers

Question 1

Do examples of German industrial finance through banks and ‘finance capitalism’ demonstrate banks create value for the firms they invest in?
Intro/ Thesis

Answer 1

The creation of the universal banks called “Grossbanken” in the 1850s helped shape the structure of the German financial market, supporting a process of concentration in which the relevant owners were either families, individuals or other companies.
Thesis: Developed with the railway construction and later with the industry, these multipurpose banks helped the new, capital-intensive firms of the 2nd Industrial Revolution achieve economies of scale and scope through its involvement in financing initial investment, as well as monitoring and participating in top-level decision making.

Question 2

Do examples of German industrial finance through banks and ‘finance capitalism’ demonstrate banks create value for the firms they invest in?
Paragraph 1
German industrial enterprises and banks’ huge decision making impact

Answer 2

German industrial enterprises and banks’ huge decision making impact
• According to Chandler, the rise of the railway system and the new institutions that financed them had a much greater impact in Germany than elsewhere. Grossbanken was created as a result of the unprecedented demand for capital from the railway venture in the 1940s.
• These banks were the instruments that made possible the rapid accumulation of capital on a scale vast enough to finance the building of the new continental transportation and communication infrastructure.
• Chandler argues that German firms were much more likely to have made 3-pronged investments than British firms with the support of its bank-based financial system. Thus one can argue that these banks created value in providing enough capital to facilitate growth within the German economy.
• As railroads were taken over by the state, the Grossbanken began to concentrate on financing industrial enterprises, investing in industrial securities and exerting high-level influence through proxy voting.
• Through its simultaneous provision of retail, development and investment banking, firms were able to exploit the cost advantages of scale and scope, acquiring powerful first-mover advantages in many European and world markets.

Question 3

Do examples of German industrial finance through banks and ‘finance capitalism’ demonstrate banks create value for the firms they invest in?
Paragraph 2
How the bank-based system added value through higher monitoring

Answer 3

How the bank-based system added value through higher monitoring
• The representative of the banks sat on the boards of many enterprises, participating in top-level decisions, particularly on resource allocation.
• Wenger and Kaserer outlined the massive impact these banks had on the country’s major corporations highlighting the high levels of influence these banks had over businesses, and still continue to have to this day.
• Through the banks concentrated ownership system, the banks could monitor management more effectively than scattered American stockholders-. Newman
• While giving rise to more pressure on the firm’s managers as the banks were monitoring their decisions, Roe argued this induced managers to maximize firm value through a more efficient allocation of resources.
• It also provided the banks with the opportunity to quickly replace managers whose performance was unsatisfactory, signalling to investors that a company was fundamentally sound
• As a result, greater monitoring made savers more willing to finance production and innovation, further increasing investment capital and firm confidence.
• Other advantages included better internal information flow and the ability to make more credible arrangements with labour than the diffused owners of an American firm.

Question 4

Do examples of German industrial finance through banks and ‘finance capitalism’ demonstrate banks create value for the firms they invest in?
Paragraph 3
Counterargument - how the banks could abuse their power

Answer 4

Counterargument - how the banks could abuse their power
• However, while realising the advantages of close monitoring and participating in top-level decision making, firms could also suffer from the banks ability to exploit their powerful positions in the firms.
• Levine discusses examples of the banks’ rent seeking opportunities that could have adverse effects on the firms’ corporate finance.
• An example of this may be that large equity owners could shift the assets of the firm to higher-risk activities since shareholders benefit on the upside while debt holders share the costs of failure. In Germany, as well as Japan, banks usually had a simultaneous holding of debt and equity, diminishing the incentive to take on more risk.
• Other examples of abusing their managerial power could be paying themselves special dividends and exploiting business relationships to maximize private benefits at the expense of minority shareholders.
• Lastly, concentrated ownership could also have enduring political and macroeconomic implications. Powerful and controlling owners that use pyramidal structures, cross-holdings, and super voting rights to magnify their control could shape public policies in ways that protect them from competition while subsidizing their ventures. This distortion of corporate decisions and national policies could impede economic growth.

Question 5

Do examples of German industrial finance through banks and ‘finance capitalism’ demonstrate banks create value for the firms they invest in?
Conclusion

Answer 5

• With the challenges of the 2nd industrial revolution, the provision of highly demanded investment capital by the Grossbanken provided German firms with the means to invest in capital-intensive industries.
• This was especially significant as Germany started to dominate these industries, marking a significant time in Business History; the loss of British leadership in the global manufacturing industry.
• Nevertheless, although these banks created the necessary investment capital, decision making powers and efficient monitoring for the firms to be able to increase investment, the bank-based system also came with its disadvantages.
• Levine also concluded that countries with better functioning banks and markets grow faster, but the degree to which a country is bank-based or market-based does not matter much. Different governance systems ‘fit’ different technologies. (This last point can be avoided)

Question 6

2. Discuss the role of Zaibatsu business groupings in Japanese industrial development during the Meiji period.
   Into/ Thesis.

Answer 6

• The Zaibatsu refers to a ‘financial group’ of firms controlled by a family and typically organized around a bank with specialized sales, marketing and distribution companies to service the manufacturing firms in the group (Amatori and Colli)
• Zaibatsu played a role in the Meiji restoration of 1868, which opened up japan to foreign technology and produced a remarkable spurt of industrial expansion and technological change
• Key features of Zaibatsu business groupings, including diversified holdings, internal financing, family wealth and ownership, access to natural resources and a skilled labour force resulted in a significant leap in the industrial expansion of the Meiji period from (Tang).
•
Thesis: Their strong cultural values, government divestment and internal financing, and their extensive degree of diversification and collusion between firms and their subsidiaries all provided the basis for a successful industrial economy (Amatori and Colli). However, it is important to recognise that there were other factors which complemented Zaibatsu, and therefore also played a role in Meiji industrial development.

Question 7

2. Discuss the role of Zaibatsu business groupings in Japanese industrial development during the Meiji period.

Paragraph 1
Role as an alternative to state leadership and internal financing

Answer 7

2. Role as an alternative to state leadership and internal financing
   • Japanese banking system provided a much more expansive form of financial commitment. Major zaibatsu were built around banks that channelled funds to constituent firms (Jones and Zeitlin)
   • Business groupings offer an alternative means of coordinating activities to the State, whose role is subject to various types of government failure.
   • Diversified holdings allowed them to spread risk, as well as internal financing of investments
   • Tang believes that Zaibatsu’s ability to finance investments internally, autonomy to invest without shareholder interference, and lower risk-aversion from having diversified holdings were great contributors to Zaibatsu’s success in being first entrants in new industries relative to independent firms
   • By channeling profits from older industries into new lines of activity like electrical machinery manufacturing, the zaibatsu form of organization generated scale economies in finance, trade and manufacturing, drastically reducing information-gathering and transactions costs
   • With tunneling coordinating growth across industries, business groups provide an alternative to a state-orchestrated big push (Morck and Nakamura). Morck and Nakamura see a key role of the Zaibatsu in what they call the “tunnelling’: transferring wealth from one group firm to another
   • Their resulting privileged position allowed them, for example, to buy ‘pilot plants’ as Government disengaged from involvement in the process of industrial modernisation (Amatori and Colli)

• Thus, through a variety of mechanisms Morck and Nakamura see the Zaibatsu as substituting for ‘failing state leadership’

Question 8

2. Discuss the role of Zaibatsu business groupings in Japanese industrial development during the Meiji period.

Paragraph 2
Extensive degree of diversification, and cooperation between firms and their subsidiaries:

Answer 8

Extensive degree of diversification, and cooperation between firms and their subsidiaries:
• The typical zaibatsu was diversified into various related sectors, with many concentrated in finance, shipping and international trade
• Growth was often through unrelated diversification (i.e. businesses with no necessary technological or market relationships to each other, a process pioneered by Mitsui who operated as a holding company)
• By WWI, zaibatsu had already become highly integrated and diversified conglomerates with interests in many unconnected industrial sectors (Wilson). This allowed zaibatsu to be successful in coordinating of complementary investment activities, something which the government failed in doing. This was crucial for Zaibatsu to be able to achieve the ‘big-push’, unlike the government.
• Zaibatsu ventured abroad, establishing many subsidiaries in Asia especially. This created the basis for what became in the late-20th century a flood of Japanese multinational investments, supporting how Japan’s growth during this period was very much investment-led, not export-led.
• While trading/banking arms of these organisations were central features of both strategy and structure, industrial operations were managed along highly functional and sophisticated lines
• Merger activity featured prominently in this process of concentration → high level of cooperation and collusion among Japanese firms (Morck and Nakamura)

Question 9

2. Discuss the role of Zaibatsu business groupings in Japanese industrial development during the Meiji period.
   Paragraph 3
   Other factors contributing to Meiji industrial development (counterargument)

Answer 9

4. Other factors contributing to Meiji industrial development (counterargument):
   • To attribute all industrial development to the Zaibatsu would be ignorant though, as there was a large amount that assisted in Zaibatsu’s ability to push forward change
   • Japan had in place an efficient system of education based on thousands of primary schools scattered throughout the country, this assisting in producing the high levels of technical skills that characterised Japan’s primary sector (Amatori and Colli)
   • Additionally, domestic investment in industry and infrastructure drove Japanese output. Investment in infrastructure by both private and public sectors, along with the government serving as a coordinating agent among the various sectors, resulted in an infrastructure basis that could support the industrial development.
   • Furthermore, Tang argued that the role of Zaibatsu in Meiji development, though very important, is often overstated. Out of the 144 new industries in the Meiji Period, only 17 were started by the Zaibatsu (Tang).
   • Tang claimed that Zaibatsu had few opportunities to capitalize on inter-industry scale economies since their enterprises were mostly unrelated, thus limiting their ability to share resources and technologies.
   • Moreover, these conglomerates had many interests in commerce (eg. transport, trade), which he argued were not subject to significant scale economies.
   • Though diversification was an advantage, the extent to which Zaibatsu diversified may have actually had a negative consequence. Tang believes that increased organisational complexity arising from excessive diversification may have also weakened the desire for continued innovation, and offset any benefits from further diversification

Question 10

2. Discuss the role of Zaibatsu business groupings in Japanese industrial development during the Meiji period. Conclusion

Answer 10

• Zaibatsu were at the heart of industrial activity during the Meiji period of 1868 to 1912, and held significant influence over national and foreign policies
• Zaibatsu were extremely efficient and their strategies were suitable to Japan’s rapidly expanding industrial economy (Amatori and Colli)
• Being highly integrated and diversified conglomerates, as well as their ability to generate scale economies in prominent sectors such as finance, trade and manufacturing, thus reducing information-gathering and transaction costs, created a solid foundation for a strong industry
• Zaibatsu achievements include a number of firsts in Japan, including the first modern steel ship, the first insurance company, and the first multidivisional (M-form) corporation (Tang)
• However, as discussed above, it is important to recognise that Zaibatsu were not the only driving force in industrial development.
• Other complementary factors, such as Japan’s education system, and heavy investments by both the private and public sector, created a supportive environment for Zaibatsu to driving industrial development.
• Finally, it has been argued that Zaibatsu’s significance in Meiji development is at times overstated, thus overshadowing the other factors that contributed to Meiji industrial development.

Question 11

5. Outline the major differences in ownership patterns of big business among advanced capitalist economies. Has family control of business been a good or bad thing based on the case studies in this module?
   Intro

Answer 11

• Throughout the Industrial Revolutions there has been a large amount of change in the ownership of companies with some countries being more suited to a family ownership approach more than others, be that due to the ability for owners to pass on their company or the competition surrounding firms.
• In capitalist economies, we have recently witnessed a variety of entities, ranging from networks and multidivisional corporations, down to family firms and individual entrepreneurs.
• Influential features such as the imperative role of the financial system, state intervention and even influences from marker-cum-technological environments (Wilson) will shape the strategy and structures of the firms, inevitably determining the success of enterprise, which as we will see, has led to the success of family firms in dominating industries today.

Question 12

5. Outline the major differences in ownership patterns of big business among advanced capitalist economies. Has family control of business been a good or bad thing based on the case studies in this module?
   Para 2
   Ownership Patterns

Answer 12

• Variety of firm structures that make up individual markets. Previously, (Chandler) emphasized the diffused ownership ‘managerial’ corporation, as the most efficient vehicle for the development of ‘big’ business in sectors where scale and scope economies are important
• US: 80% widely held, adopting M-Form organisational structures, such as global giants such as IBM. 20% family run, but still very important i.e. Mars accounts for 1/3 of Fortune 500. La Porta. .
• Mitsui Group and together control 12.1 percent of both capital and votes in Toyota. It is a Japanese ‘networked’ skills base, where an explicit part of its strategic plan is to exploit being a network – Elgar. Lead manufacturer shares investment plans and with little fear of opportunism.
• However, there is still a great importance of the family firm, across multiple nations.

Question 13

5. Outline the major differences in ownership patterns of big business among advanced capitalist economies. Has family control of business been a good or bad thing based on the case studies in this module?
   Para 1
   Family Firms

Answer 13

Family Firms:
- Prior to the 1890s merger waves, it was a common failure of British firms to prioritise a steady flow of profits for established families, with high pay-out ratios as there was an unwillingness to retain corporate earnings for investment purposes, compared to their American counterparts. It has been attributed by Chandler that Britain’s rapid decline when compared to its counterparts was due to a primary pursuit of ‘personal capitalism’. Although there was sometimes a failure between ownership and control, it would be arrogant of us to view family firms as a failure, as supported by Pollard, family businesses represented a predictable response to instability, uncertainty and poor property rights, ultimately leading to the creation of some of the most successful big businesses to date.

Question 14

5. Outline the major differences in ownership patterns of big business among advanced capitalist economies. Has family control of business been a good or bad thing based on the case studies in this module?
   Para 3
   Cadburys

Answer 14

Cadbury’s

• Until 1940, the owners managed and the managers owned – Chandler. This unfortunately put a limitation on the company, as it meant that there was no separation between the Boards of Directors and managers.
• Was pre-Chandlerian, with the board representing management functions rather than strategic functions, operating on a day-to-day task as opposed to long term strategy.
• No divorce between ownership and control – Chairman and 5/7 Board members were Cadbury’s. This was a common feature in the UK. Even if firms were listed on the stock exchange, it was likely that the owners would have large percentages of shares to influence voting rights.
• Was unsuccessful, until merger with Fry’s to make the British Cocoa and Chocolate company. Preferred overseas operations as opposed to rationalisation movements like Standard Oil i.e larger factories or vertical integration. Just wanted to boost sales under combined label. Amatori and Colli – merging processes gave a more superior outcome to the combined sum on initial parts.
• Scale and Scope – Allowed both families to retain control and typified the frequently, rather looser outcomes from mergers.

Question 15

5. Outline the major differences in ownership patterns of big business among advanced capitalist economies. Has family control of business been a good or bad thing based on the case studies in this module?
   Para 4
   Zaibatsu

Answer 15

Zaibatsu

• Zaibatsu relied on decentralized production structures to successfully manage hundreds of companies and thousands of employees
• Unlike US corporations at the time, these Japanese businesses expanded by creating new subsidiaries (sometimes in entirely new fields so the zaibatsu could grow through internal expansion, vertical integration, and diversification)
• Family is an ‘ownership-related’ concept, and the understanding of the family and it’s objectives is crucial to the comprehension of the family firm – Cliff.
• In Japan, social values and attitudes to the family are different from anywhere else, and is not defined solely by biological terms. They believe that family is defined as those who contribute to the economic welfare of the group, allowing Zaibatsu family groupings to expand, but employ salaried managers that are ‘adopted family’ – Morikawa.
• Main objective: Protect and expand the wealth of the family lead by capable individuals, rather than to bequeath the wealth to only blood-related family members – Chen. This therefore proves that family firms do not strive solely for short-term solutions: they are able to adapt to current and future situations too.
• ‘Where the objectives of family firms are united, close networks of trust have the advantage of providing a combination of incentives, including effective monitoring and loyalty to protect the family wealth – Pollak.

Question 16

5. Outline the major differences in ownership patterns of big business among advanced capitalist economies. Has family control of business been a good or bad thing based on the case studies in this module?
   Conclusion

Answer 16

Conclusion:

• Although there are a variety of industry leaders in capitalist economies that are organisationally more advanced, for example by basing strategy around decentralised decision making, family firms have shown they are also able to adopt such strategies (Mars)
• Although it was thought that firms would be limited by finance, motivation, and succession there has been sufficient proof through the above case studies, that family firms have no limits to resources or growth when under the correct supervision.
• Our main criticism of family firms has been based upon the idea that personal capitalism limits financial and capital resources.
• Despite this, if the firm has the ability to differentiate ownership and control, the efficient properties of a family firm outweigh the disadvantages greatly.
• Ultimately, the market-cum-technological and institutional environments in each country were primarily responsible for fashioning the techniques, strategies and structures of the indigenous firms within it.
• Chandler often understates the degree to which family firms have persisted and still make up a substantial number of companies bot in the US and across the world.

Question 17

6. Using examples from this module, discuss the advantages of the M‐Form corporations when compared to other types. Use at least THREE case studies in your answer. 

   Introduction and Thesis

Answer 17

• The Multi-Divisional Form (M-form) consists of a decentralised structure based on independent operating divisions, each with a unitary structure.
• Because of its potential advantages, the multi-divisional form has become one of the most applied systems for corporations globally.
• Growth becomes possible by adding divisions through diversification or expansion into geographical regions

Thesis: Unlike with the personal, entrepreneurial and U-form, which are subject to diseconomies of scale and thus experience limits to continuing growth, the M-form provides a strong foundation for diversification and expansion within corporations. The ability of the M-form to respond to the significant problem of allocating decision-making powers in a complex and large firm makes it superior to the other forms in supporting innovation, as well as internal growth

Question 18

6. Using examples from this module, discuss the advantages of the M‐Form corporations when compared to other types. Use at least THREE case studies in your answer.
   Paragraph 1
   American Railway System

Answer 18

• From the inception of the railroads there was a great need for a deviation from the highly centralised authority that comes with the U-form, and a need for the “fragmentation of corporate property and a systematic division of roles”
• This is where the emergence of a “decentralised line and staff type organisation’ came in to help increase the efficiency of the organisation, and make it more suitable for further innovation through increased control, support.
• The shift to the M-form with an organisation based upon geographical divisions, each headed by a divisional superintendent responsible for day to day movement and each reporting to the chief superintendent allow the American Railway system to overcome the growth constraint imposed by the unitary structure (Chandler)
• This decentralised organisation allowed for the railway system to continue to expand, whilst continuing to have efficient communication and coordination within division heads and chief superintendents . Diversification possible through creation of new divisions (or moves into new geographical regions)
• Efficient coordination within the M-form in the US guaranteed speed, regularity, and reliability in a system that moved a wide variety of goods between hundreds of cities and towns (Chandler)
• Chandler: The shift from the unitary form to a ‘managerial’ and ‘diffused ownership’ structure of the American Railway through a ‘decentralised line and staff type organisation’ was what allowed the industry to innovate and achieve economies of scope and scale

Question 19

6. Using examples from this module, discuss the advantages of the M‐Form corporations when compared to other types. Use at least THREE case studies in your answer.
   Paragraph 2
   General Motors

Answer 19

• Under William Durant, GM already existed as a diversified but centrally un-coordinated ‘holding company’. When the recession hit in 1920, sales fell by 75% between summer and Autumn.
• The first change that GM made was the implementation of a new coordinated marketing strategy focusing on competing with Ford, where each motor division would focus on a different market segment.
• New organisational structure followed the strategy, with each division making its own operating decision → realised economies of scale as the different car models shared parts
• The adoption of the M-form at GM increased efficiency, competitiveness and greater flexibility, contrary to the U-form in which it was generally more difficult to change production methods as U-form firms tended to become overspecialised (amoretti and Coli).
• Importance difference = top management was no longer occupied in the day-to-day operations. New divisions had all the line/staff functions necessary to operate effectively
• Result of the restructuring: between 1928-1937, Ford lost $200m while GM made over $7b. This underlines the success of the M-form organisation and how Ford suffered by failing to follow in their footsteps and take on the M-form themselves

Question 20

6. Using examples from this module, discuss the advantages of the M‐Form corporations when compared to other types. Use at least THREE case studies in your answer.
   Paragraph 3
   DuPont

Answer 20

• U-form firms were generally less flexible in their ability to change their production methods because they become over specialised. Previously, whenever a new chemical was developed within the U-form resulted in too many mistakes, incentivising DuPont to reorganise the firm into an M-form with multi-divisions by products (Qian and Roland)
• Manufacturing of different types of explosives was overseen by different production managers, who reported to a general manufacturing manager (Qian and Roland)
• Doing so increased the efficiency of their production processes and cut costs
• R&D department became an important source of product innovation and diversification between the wars.
• Top management was able to oversee diversification process and was able to transfer financial, technical, and managerial resources from one division to the other.
• Previous forms had many built-in constraints as a result of no dispersed management functions, and did not have the support system for expansion and diversification.
• Independent divisions based on product lines or geographic areas were established

Question 21

6. Using examples from this module, discuss the advantages of the M‐Form corporations when compared to other types. Use at least THREE case studies in your answer.
   Paragraph 4
   Conclusion

Answer 21

Conclusion:
• According to Chandler, almost every successful company in the US between 1920 and 1960 adopted the M-form.
• The M-form combines distinct brand and economies of scale advantages of a large conglomerate, while maintaining the operational flexibility of a small firm
• Being a more flexible organisational form, the M-form can lead to a higher propensity to innovation or form, an important dynamic advantage compared to the U-form
• For these reasons, it is not surprising that Chandler argued that it played a crucial role in the rapid growth of American businesses through this period.
• Decentralised structure provides optimal level of centralization in a company:
• Central management could still dictate overall direction of firm
• Each division operates autonomously to cater to its own needs (greater accountability for division-specific issues)
• More efficient transfer of information as opposed to the U-form.
• Avoidance of ‘overload’ at head office which can focus on strategic/investment decisions as well as monitoring/evaluating divisional performance
• Diversification (or moves into new geographical regions) possible through creation of new divisions
• DuPont and General Motors were pioneers in solving those problems associated with U-form’s incapability of dealing with expanding product lines and businesses (Amatori and Colli).

Question 22

7. “First mover advantages the only strategy for maximizing opportunity and profits?” Discuss this statement with reference to at least TWO case studies in your answer. 

   Intro/Thesis

Answer 22

• It is necessary for this question to clarify what constitutes a first mover to avoid ambiguity, with the standard definition being based on market entry. Such a broad definition causes a large number of entrants to be classified as first-movers, but as per the data, this is a necessity in order to appropriately evaluate the respective firms.
• First-mover advantages → the ability of pioneering firms to earn positive economic profits. - Due to the problem of disaggregating such data on profit, market share and rates of company survival are often used as proxies due to their correlation with profits.
- Thesis: It seems undoubtable that in the short run first-movers can maximise both opportunity and profits. Yet, this is only a strategy that can be undertaken if a firm is in an appropriate position to exploit the change in environment, so in the view of Chandler, has undertaken the three pronged investment.
- It is also not the only strategy that can be used in order to maximise both opportunity and investment. In this essay I will compare through the use of ‘first-movers’ and firms that establish after the original phase, which I will call ‘second-movers’.

Question 23

7. “First mover advantages the only strategy for maximizing opportunity and profits?” Discuss this statement with reference to at least TWO case studies in your answer. 

   Paragraph 1

Answer 23

Paragraph 1.
• Fig.1 shows the different mechanisms that can lead to a firm making economic profit following a change in the business environment.
• FMA’s arise from three primary sources: Technological leadership, pre-emption of assets and buyer switching costs.
• Cereal market in US is dominated by the Big Four → Kellogg’s, General Mills, Post, Quaker Oats
• Big 4: 86% of US market in 1995 → very stable and highly profitable
• Federal Trade Commission (FTC) alleged that the major US breakfast cereal companies sustained their high profit rates through a strategy of tacit collusion in preempting supermarket shelf space and product differentiation niches. The lawsuit was dismissed, but the cereal firms have continued to sustain exceptionally high profit rates, although such high profits may have been attained through sources other than spatial pre-emption.
• they pre-empted the entry of what otherwise would have been new monopolistic competitors and thereby prevented the emergence of a more atomistic market structures (F. M. Scherer)
• In Chandlers view, those firms who initially made the necessary 3 pronged investment, obtained powerful ‘first mover advantages’, which challenges very difficult.
• This case shows that there is potential for sustained economic profit within certain industries, especially when firms can maintain their position of leadership and prevent other firms from competing effectively.

Question 24

7. “First mover advantages the only strategy for maximizing opportunity and profits?” Discuss this statement with reference to at least TWO case studies in your answer. 

   Paragraph 2

Answer 24

• Some firms may take the strategy of being a ‘second-mover’ firm. Such a strategy avoids the potential risks of first movers and learning from the first mover and adopting a strategy that will allow them to outcompete the market, thus earning economic profit.
• A first-mover who attains short turn economic profit, may then return to zero profit, with other firms in the market subsequently catching up, earning more profit and having more market share.
• Second movers can be successful through better marketing, a more adaptable organisational structure or learning from the diffusion of information (Ghemawat and Spence) to name a few. It is now recognised that diffusion of information occurs far more rapidly than previously thought (Ghemawat and Spence), suggesting that this form of FMA is less successful in producing economic profit.
• GM’s success in surpassing Ford’s position, which Ford initially secured through its first mover advantages, through a strategy of reorganisation and the adoption of the M-form is an excellent example of how first mover advantages are not the only strategy in maximising opportunities and profits (Amoretti and Coli)
• General Motors was able to outcompete Ford, despite not having First Mover advantages itself, through a strategy of reorganisation and effective marketing (Amoretti and Colli).
• GM began with implementation of a new coordinated marketing strategy following the 1920s recession that resulted in sales falling 75% between summer and Autumn.
• Focusing on competing with Ford, where each motor division would focus on a different market segment.
• This study shows how despite the first-mover (Ford) making short term economic profit, it was unable to maintain this position due to incumbent inertia and the skill of GM in both reorganisation and marketing. One can argue that GM was in such a dire situation prior to altering its strategy that it had to adapt in order to survive, rather than it actively undertaking the strategy of being a second-mover. Although this seems likely, this case still clearly shows the potential for second-movers to maximise economic profit and opportunity.

Question 25

7. “First mover advantages the only strategy for maximizing opportunity and profits?” Discuss this statement with reference to at least TWO case studies in your answer. 

   Paragraph 3

Answer 25

• A further example of a ‘second-mover’ having more of an advantage is Apple. Despite now having the highest market value of any company within the world, they tend not to be seen as a true innovator. They weren’t the first into object-oriented computing, they weren’t the first mp3 player, they weren’t the first mobile phone.
- But they look at something, they improve upon it, they weigh it, and they come in and make it more user friendly.” (Galloway). From this case it is also obvious that first-mover strategies are not the only way to maximise economic profit and opportunity. Apple is able to maintain profitability and add on to its products without incurring any huge risk in radically changing the way it does business.

Question 26

7. “First mover advantages the only strategy for maximizing opportunity and profits?” Discuss this statement with reference to at least TWO case studies in your answer. 

   Conclusion

Answer 26

• In conclusion, the 2nd IR was particularly rich in mechanisms generating 1st mover advantages and enabling those adopting such a strategy to maintain their position, but it would be incorrect to state that this is the only way for firms to maximise opportunity and profit.
• The outcome of pursuing a first-mover strategy will evidently depend on the industry, the proficiency of the company, lack, protection of proprietary goods etc. Therefore, some industries will not even be able to benefit from this strategy.
• The case studies referenced to in this essay clearly indicate that being a second-mover can be just as profitable, if not more profitable in the long term. The case of the cereal market in the US represents the potential for first-movers to maximise profit and opportunity and maintain their dominant position, but this appears to be a minority case.
• Companies such as Apple have clearly shown that it can be beneficial to allow the first-mover to take the risk, and then adopt and modify their own products and business. Their ability to continue making high economic profit is a testament to this strategy.

Question 27

8. What were the advantages and disadvantages of the factory system? How did firms adapt their strategies to overcome possible disadvantages over the time?
   Intro/Thesis

Answer 27

Introduction: The emergence of the factory system involved a radical change in the organisation of work from the existing mode of production called the ‘putting out system’.
Thesis: Realising the advantages of the factory system posed a number of entrepreneurial challenges for the firms of the first Industrial Revolution in terms of costs, recruitment and discipline.

Question 28

8. What were the advantages and disadvantages of the factory system? How did firms adapt their strategies to overcome possible disadvantages over the time?
   Para 1
   The Advantages of The Factory System

Answer 28

The Advantages of The Factory System
• With the introduction of the factory system, entrepreneurs combined fixed capital and working capital to produce large quantities of standardized goods, significantly enhancing output levels.
• According to Amatori and Colli, advantages of the factory included the ability to employ machinery powered by a centralised source of energy, lower monitoring costs and productivity gains through the specialisation of labour.
• Specialisation was achieved through labour divisions, increasing dexterity by assigning specific roles each worker could concentrate on.
• This was a way to speed up production, as shown by Adam Smith’s “pin factory”, were workers significantly reduced time lost in rotating between tasks and made use of the concept “learning by doing”.

Question 29

8. What were the advantages and disadvantages of the factory system? How did firms adapt their strategies to overcome possible disadvantages over the time?
   Para 2
   Challenges with the Mechanisation of the production process and how they dealt with them

Answer 29

Challenges with the Mechanisation of the production process and how they dealt with them:
• With the diffusion of new technology, costs increased and a rising demand for energy put a location constraint on the factories.
• In response to increased energy requirements to meet the rising production levels, factories were purposefully located in areas where it was possible to benefit from power derived from water wheels situated on rivers, streams, and waterfalls.
• Another challenge was that of increased fixed costs resulting from the increased use of complex and expensive machines.
• Factories addressed this challenge through the introduction of the steam engine, together with an increase and improvement in the use of water power through numerous micro-inventions, which provided manufacturers with cheap and efficient energy and helped mitigate the location constraint. An interpretation of Allen, proves the factory to be a micro-invention, stemming from the development of the central source of power. Empirically, this shows that micro inventions are able to significantly improve efficiency after the initial change in factor proportions.
• In the textile industry, Arkwright’s cotton mill at Cromford was one of the first factories to make use of powered machines with the invention of the water frame for cotton spinning.
• In the iron industry, large scale production rapidly replaced small domestic units. It can be argued that the main driver was Henry Cort’s ‘puddling and rolling’ process for iron, changing the fixed costs involved in the refining of iron.

Question 30

8. What were the advantages and disadvantages of the factory system? How did firms adapt their strategies to overcome possible disadvantages over the time?
   Paragraph 3
   Other entrepreneurial challenges and how they dealt with it

Answer 30

Other entrepreneurial challenges and how they dealt with it
• The spread of the new organisational form also generated a variety of consequences for employers with respect to labour effort and supervision. In the factory system, there was a need for speed, regularity and supervision.
• In Mokyr’s view, the key to the rise of the factory system was the successful substitution of piece rates by time wages. No longer able to use a piece-work system, mass producers had to learn how to overcome inefficient herd behaviour and maintain discipline in a workforce that frequently did not give its paternalistic employers the respect the bosses thought they deserved.
• Entrepreneurial challenges such as the problem of recruitment, discipline and efficiency were also central issues of the first industrial revolution
• Josiah Wedgwood imposed a number of strategies to overcome these challenges.
• Due to his potteries failing to conform to new social disciplines of clock time, Wedgwood introduced the bell, a clerk of the works, and fines for lateness.
• Industrial Paternalism: Was a vital means in which employers were able to inoculate the middle-class virtues into their workers. Wedgewood did this is Eutoria in order to create a local, stabilised community - Wilson
• There was little experience of a foreman supervising 150 workers and his personal attendance was often necessary. With death of his partner Bentley, he needed to be away from Etruria more frequently, spurring Wedgwood into creating a foreman class. Skilled artisans were given extensive power, and had the authority to negotiate pay for coworkers, reliving the industrialist from all duties. Similarly, meant overhead costs were minimised and the risks were spread among the capitalist as well as the worker (Wilson)
• Recruitment continued to be a constant challenge. As a response, Wedgewood engaged in in-house training and by 1790 around 25% of his workforce were apprentices.
• According to McKendrick, he also introduced a hierarchy in wages according to skills, which may have acted as an incentive to its labourers.

Question 31

8. What were the advantages and disadvantages of the factory system? How did firms adapt their strategies to overcome possible disadvantages over the time?
   Conclusion

Answer 31

Conclusion
• The introduction of the factory system significantly increased worker productivity through the employment of large machinery powered by a centralised source of energy.
• While competing alongside existing modes of production, it quickly became the dominant system of the first industrial revolution as the putting out system lacked incentives to improve efficiency and technology.
• Although the new system had its own disadvantages in terms of costs, recruitment and discipline, this induced the entrepreneurs at the time to innovate new strategies and impose regulations to tackle the issues of this new production process.

Question 32

8. What were the advantages and disadvantages of the factory system? How did firms adapt their strategies to overcome possible disadvantages over the time?
   Paragraph 1
   Competing Technologies – Factories vs. Putting Out

Answer 32

The Advantages of The Factory System
• With the introduction of the factory system, entrepreneurs combined fixed capital and working capital to produce large quantities of standardized goods, significantly enhancing output levels.
• According to Amatori and Colli, advantages of the factory included the ability to employ machinery powered by a centralised source of energy, lower monitoring costs and productivity gains through the specialisation of labour.
• Specialisation was achieved through labour divisions, increasing dexterity by assigning specific roles each worker could concentrate on.
• This was a way to speed up production, as shown by Adam Smith’s “pin factory”, were workers significantly reduced time lost in rotating between tasks and made use of the concept “learning by doing”.

Question 33

8. What were the advantages and disadvantages of the factory system? How did firms adapt their strategies to overcome possible disadvantages over the time?
   Paragraph 2
   Challenges with the Mechanisation of the production process and how they dealt with them:

Answer 33

Challenges with the Mechanisation of the production process and how they dealt with them:
• With the diffusion of new technology, costs increased and a rising demand for energy put a location constraint on the factories.
• In response to increased energy requirements to meet the rising production levels, factories were purposefully located in areas where it was possible to benefit from power derived from water wheels situated on rivers, streams, and waterfalls.
• Another challenge was that of increased fixed costs resulting from the increased use of complex and expensive machines.
• Factories addressed this challenge through the introduction of the steam engine, together with an increase and improvement in the use of water power through numerous micro-inventions, which provided manufacturers with cheap and efficient energy and helped mitigate the location constraint. An interpretation of Allen, proves the factory to be a micro-invention, stemming from the development of the central source of power. Empirically, this shows that micro inventions are able to significantly improve efficiency after the initial change in factor proportions.
• In the textile industry, Arkwright’s cotton mill at Cromford was one of the first factories to make use of powered machines with the invention of the water frame for cotton spinning.
• In the iron industry, large scale production rapidly replaced small domestic units. It can be argued that the main driver was Henry Cort’s ‘puddling and rolling’ process for iron, changing the fixed costs involved in the refining of iron.

Question 34

8. What were the advantages and disadvantages of the factory system? How did firms adapt their strategies to overcome possible disadvantages over the time?
   Paragraph 3
   Other entrepreneurial challenges and how they dealt with it

Answer 34

Other entrepreneurial challenges and how they dealt with it
• The spread of the new organisational form also generated a variety of consequences for employers with respect to labour effort and supervision. In the factory system, there was a need for speed, regularity and supervision.
• In Mokyr’s view, the key to the rise of the factory system was the successful substitution of piece rates by time wages. No longer able to use a piece-work system, mass producers had to learn how to overcome inefficient herd behaviour and maintain discipline in a workforce that frequently did not give its paternalistic employers the respect the bosses thought they deserved.
• Entrepreneurial challenges such as the problem of recruitment, discipline and efficiency were also central issues of the first industrial revolution
• Josiah Wedgwood imposed a number of strategies to overcome these challenges.
• Due to his potteries failing to conform to new social disciplines of clock time, Wedgwood introduced the bell, a clerk of the works, and fines for lateness.
• Industrial Paternalism: Was a vital means in which employers were able to inoculate the middle-class virtues into their workers. Wedgewood did this is Eutoria in order to create a local, stabilised community - Wilson
• There was little experience of a foreman supervising 150 workers and his personal attendance was often necessary. With death of his partner Bentley, he needed to be away from Etruria more frequently, spurring Wedgwood into creating a foreman class. Skilled artisans were given extensive power, and had the authority to negotiate pay for coworkers, reliving the industrialist from all duties. Similarly, meant overhead costs were minimised and the risks were spread among the capitalist as well as the worker (Wilson)
• Recruitment continued to be a constant challenge. As a response, Wedgewood engaged in in-house training and by 1790 around 25% of his workforce were apprentices.
• According to McKendrick, he also introduced a hierarchy in wages according to skills, which may have acted as an incentive to its labourers.

Question 35

8. What were the advantages and disadvantages of the factory system? How did firms adapt their strategies to overcome possible disadvantages over the time?
   Conclusion

Answer 35

Conclusion
• The introduction of the factory system significantly increased worker productivity through the employment of large machinery powered by a centralised source of energy.
• While competing alongside existing modes of production, it quickly became the dominant system of the first industrial revolution as the putting out system lacked incentives to improve efficiency and technology.
• Although the new system had its own disadvantages in terms of costs, recruitment and discipline, this induced the entrepreneurs at the time to innovate new strategies and impose regulations to tackle the issues of this new production process.
• However, as discussed by Landes, the system also suffered from inefficiencies such as the pilfering of raw materials, difficulty in increasing production and lack of control over the efficiency and reliability of the merchant’s labourers and his product.
• By collecting workers in a centralised place in a factory, hours could be controlled and work supervised, enhancing actual labour effort and removing significant problems of the putting out system.

Question 36

‘The United States has a better environment for big business development.’ Answers with respect to at least THREE case studies.
Introduction

Answer 36

The success of big business in the United States is mainly due to the vertically integrated, functionally-departmentalised corporations that form oligopolistic market structures: paving the road to success for the past 70 years. Per Chandler, there are three instrumental reasons that have shaped this success: an extensive and growing domestic market (which is relatively more affluent than that of its counterparts); the availability of new production technologies for mass production; and, federal law regulations. However, the US has always been a forerunner in the development of big business. The size and affluence of the US, its approach to and longevity of business have combined to forge a competitive environment that facilitated – and still facilitates- the growth of big business.

Question 37

‘The United States has a better environment for big business development.’ Answers with respect to at least THREE case studies.
Para 1

Answer 37

Supported by Chandler, it was the development of new technologies and the creation of new markets that caused economies of scale and scope, hence stimulating big business enterprise. The exogenous factor of the home market gave American businessmen the upper hand, demonstrating its power by doubling the size of the market in Britain. This was one of the advantages: putting the firms well down the curve in each of the industry’s functional activities before challengers went into full operation. The US Cigarette industry was an example of this. Following the licencing of the Bonsack machine enabling the beginning of mass production, Duke was able to exploit the size and scale of the markets, deploying excessive advertising nationwide, hence establishing a national brand name. The US businessmen were the first to exploit benefits stimulated by the market, whilst building sufficient knowledge and reputation in the industry: warranting the attempt to outcompete other nation who lacked protectionist measures. The volume and scale of the US national market meant that if a firm only owned 30% of the market share in the US, it would far exceed output than that of a firm in Britain, that had 30% market share; creating a competitive advantage for US big business on a national, and international scale.

Question 38

‘The United States has a better environment for big business development.’ Answers with respect to at least THREE case studies.
Para 2

Answer 38

First movers in the US business environment could gain competitive advantage by exploiting internal economies of scale, but most industrial giants that rose to prominence at that time, typically did so by external economies by merger and acquisition strategies. The 1890 Sherman Act prohibited cartelisation price-fixing agreements that had prevented rising costs and intense competition. Hence, this stimulated a wave of merger activity as an alternative to achieve the desired level of market control. Supported by Davis, this movement gave rise to the opportunity of exploitation of good connections to increase concertation in financial markets, hence aiding the underdevelopment of US capital markets. The likes of JP Morgan, Rockefellers, and the Mellons, helped to finance the industrial mergers with the incentive of effective monitoring of the firms by actively participating in top-level decision making i.e Rockefellers and Standard Oil. One can certainly conclude that American business could acquire the finance it needed from a large and wealthy coterie of venture capitalists, playing a crucial role in the merger wave of 1890-1910 (Wilson). Chandler identified that a prevalent influence for the rise in merger activity was the tremendous opportunities associated with exploiting economies of scale and scope, hence providing an environment to support the rise of big business.

Question 39

‘The United States has a better environment for big business development.’ Answers with respect to at least THREE case studies.
Para 3

Answer 39

The systems of entrepreneurial capitalism can be regarded as the most advanced form of business organisation in existence (Jones and Zeitlin). The large-scale, functionally departmentalised corporations controlling oligopolistic market structures became the ultimate successor to American business. The M-Form structure appeared in the US, among multiple firms, allowing each division within the corporation to make autonomous decisions independent of long term strategy: enabling US firms to take the lead in creating formal R&D departments. In the case of General Motors, the implementation of a new coordinated marketing system, allowed each division do compete with Ford, but focusing on individual manufacture than when aggregated, satiated the long-term strategy. Following the success of a pioneering business strategy and structure, there was quick diffusion of this across the US. Despite this, a divisional organisational structure was typically only deployed at a time of crisis, hence meaning that certain firms could not reap the same benefits of the M-Form structure, thus who were ahead of the learning curve such as Du Pont and General Electric were successful in maximising full utility of this environment.

Question 40

‘The United States has a better environment for big business development.’ Answers with respect to at least THREE case studies.
Para 4

Answer 40

In contrast, the British big business development lasted from 1950s-mid 1970s, including unprecedented levels of merger activity. Since, little has changed in terms of business culture and organisational sophistication, hence the M-Form has almost seemed inappropriate to deploy in a lot of British industries (Wilson). There has been a continual adaptation of the M-Form in the US, inspiring innovation and with products, as well as organisational structure. The recent development of the networked firm has set the US ahead of the rest, as a different mode of organisation of electronic computer/technology firms. They now involve much greater specialisation within the value chain. This region today, is best known as Silicon Valley, where the likes of Google, Apple, Samsung and other consumer electronics firms reap more benefits by using one another’s innovations than there would be from duplicating and competing against one another: the cohesiveness of the network providing the environment for big business to flourish in the US as opposed to elsewhere.

Question 41

‘The United States has a better environment for big business development.’ Answers with respect to at least THREE case studies.
Conclusion

Answer 41

Chandler’s main thesis cumulates the benefits of a ‘three-pronged investment’ approach, however, capital in required for businesses to adhere to strategy, and the developments of the US capital market adhered to those requirements. The economic environment in America has provided corporations with the most promising market in the world (Wilson) giving the US the early advantage to lead industrial patterns that, even to this day, are superior to any other nation, defending a competitive environment and allowing big businesses to thrive.