Business History Lectures Flashcards
Who was America’s pre-eminent business historian and what was his key insight?
Alfred D. Chandler. He helped redirect the field business towards dispassionate analysis of the anatomy of business, emphasising the importance of minimising costs as the key focus.
Key developments in the study of business history - 1948?
Stimulated by the work of Joseph Schumpeter, Arthur Cole establishes the Harvard Research Center in Entrepreneurial History as a way of ‘building the
entrepreneur into economic theory’; clearly intending to provide the key focus in business history -a journal Explorations in Entrepreneurial History is founded.
Key developments in the study of business history - 1958?
Havard Research Centre shuts down –energies apparently spent.
Key developments in the study of business history - 1962?
Alfred D. Chandler publishes the highly influential Strategy and Structure. This work
provides a new focus for business history. In economics, some of the ideas take root among
students of industrial organization, and especially in Oliver Williamson’s development of
transactions cost economics.
Key developments in the study of business history - 1969?
Explorations in Entrepreneurial Historytransformed into Explorations in Economic
History with focus on quantitative economics
Key developments in the study of business history - 1977?
Chandler publishes the even more influential Visible Hand: the Managerial
Revolution in American Business.
Key developments in the study of business history - 1990?
Chandler publishes Scale and Scope –this work compares and contrasts the
establishment of big business in 3 economies –US, Britain, and Germany. Again a big debate
is stimulated
Strategy and Structure - Alfred D. Chandler?
Published in 1962 - In economics, some of the ideas take root among students of industrial organization, and especially in Oliver Williamson’s
development of transaction cost economics.
What did The Visible Hand - When was it published and what did it investigate?
1977 - This work investigated the growth of US ‘big business’ in response
to the challenges of the newer technologies of the late 19th century:
– railways, steel, chemicals, food processing etc, the new industries forming the basis of the ‘2nd Industrial Revolution’.
What was the idea behind Chandlers’ ‘3-progned investment’?
Investment in production, management and distribution.
The Invisible Hand - What economic stimulus did this book achieve?
It helped establish the importance of corporate strategy, founded on a “3-pronged investment” approach and also helped show the powerful competitive advantages of first-movers.
Scale and Scope?
1990 - Provides a comparative analysis of big business in US, Germany and
Britain and how business organisation shaped economic performance
What were three important contributions from Economists and who were the associated economists?
- Theories of the Firm - Edith Penrose (1959)
- Transaction cost economics - Oliver Williamson
- Firm Strategy and competition - Michael Porter.
Theories of the Firm - Contributor/s and overview?
The theory of the firm consists of a number of economic theories that explain and predict the nature of the firm, company, or corporation, including its existence, behavior, structure, and relationship to the market. Edith Penrose (1959) provided support for many of Chandler’s ideas based upon managerial capabilities of the firm to utilise its resources, especially human resources. There was a particular focus on the development of a resource based view of the firm.
Transaction cost economics - Contributor/s and overview?
Oliver Williamson extended our ideas about the relative strengths of firms and markets and the boundaries of the firm. Organisations can sometimes be more efficient than markets as their conflicts are easier and less expensive to solve. Williamson is credited for potentially increasing the number of mergers that were allowed to take place due to his arguments on firms increasing efficiency through vertical integration, rather than the former being used to reduce competition alone.
How does vertical integration play a role in TCE?
Take for example a coal mine, which by definition will have a fixed location. Therefore, factories wishing to reduce costs should locate near thee coal mine in order to reduce the cost of raw materials (this is called fundamental transformation). When all plants locate near all these coal mines we are at a productive efficiency. However, in this instance, rather than becoming a codependent relationship, its now the coal mine vs the factory. The coal mine will have disproportionately large bargaining power as the factory will have to pay more to import coal from other mines. Williamson saw the solution in a long term contract but this contract can be incomplete, so one solution could be vertical integration. Therefore firms may merge due to efficiency reasons rather than for monopoly purposes
Michael Porter?
Stressed the role of firm strategy and competition in stimulating the competitive advantage of both firms and nations. His expansion on David Ricardo’s ideas of competitive advantage led to the intuitive idea that a you win as a business by either being cheaper or different (which is perceived by the customer as better or more relevant).
‘Black-boxe’?
A term coined by Oliver Williamson to describe the inner workings of a firm.
Neo-classical economics and its view of the firm?
No internal consumption or self-sustainability of a firm, the firm simply operates to produce for outsiders. The production will be desirable by a production function, which assumes technical efficiency (e.g. of internal organisation). Profit maximisation is the behavioural assumption but it is ensured anyway by perfect competition.
Edith Penrose - The Resource Based View of the firm - Books Key achievement?
Edith’s book ‘The Theory of the Growth of the Firm’ - 1959, helped bridge strategic management and organisational economics.
Edith Penrose - The Resource Based View of the firm - views of firms and competitive advantage?
A theory of competitive advantage. Firms were seen as heterogeneous with ‘pools of resources’. They were seen as difficult to imitate, and hence a source of continuing competitive advantage. This competitive advantage leads to firms receiving ‘rents’ and firms can be consistently successful. They can be dynamically reconfigured - primarily through the growth strategies of innovation and diversification. Such growth strategies make use of ‘excess capacity’ in management, which functions like a public good within firms
Edith Penrose - The Resource Based View of the firm - Competitive advantage sources?
The sources of competitive advantage may be in terms of ‘know-how’, technologies or reputation. Hence, can be hard to break down unlike other barriers to entry.
Edith Penrose - The Resource Based View of the firm - Management role?
There is a key role of management, with a firm specific nature limiting rate of growth but not scale. For instance, even if you have a large number of good managers, the bigger a company, the less of an impact such individuals have. As a result, the company follows the ‘status-quo’. Good decisions get drowned out.
The three organisational forms/stages in the development of ‘big business’?
- The ‘entrepreneurial firm’ based around a single owner/ manager.
- A ‘centralised’ managerial firm - with a management tier organised according to managerial function.
- A ‘decentralised’ managerial firm, with management organised into operating divisions based upon product or regional lines.
How do the industrial revolutions link in with business history?
They represent an extremely useful way of thinking about the linkages between the evolution of business and the broader development of economy and society. We have technological change providing the links between social change and organisation change.
When were the three Industrial Revolutions?
- 1750-1815
- 1870-1914
- 1973 onwards.
The First Industrial Revolution?
- Approximate dates
- Location
- Technologies
- Motive
- Material
- Automation
- Process Type
- Size of firm
- Advantages
- Organisation
- Industry Structure
- Type of Capitalism
- Mode of Governance
- Approximate dates
- 1750-1815 - Location
- UK - Technologies
- Machinery - Motive
- Water, Steam - Material
- Iron - Automation
- of transformation - Process Type
- Labour - Size of firm
- Small - Advantages
- Specialisation - Organisation
- Entrepreneurial - Industry Structure
- Competitive - Type of Capitalism
- Personal - Mode of Governance
- Markets
The Second Industrial Revolution?
- Approximate dates
- Location
- Technologies
- Motive
- Material
- Automation
- Process Type
- Size of firm
- Advantages
- Organisation
- Industry Structure
- Type of Capitalism
- Mode of Governance
- Approximate dates
- 1870-1914 - Location
- USA/ Germany - Technologies
- Chemicals - Motive
- Electricity, oil - Material
- Steel, Plastics - Automation
- of Transfer - Process Type
- Capital - Size of firm
- Large - Advantages
- Internal integration - Organisation
- multi-divisional - Industry Structure
- Oligopolistic - Type of Capitalism
- Managerial - Mode of Governance
- Hierarchies
The Third Industrial Revolution?
- Approximate dates
- Location
- Technologies
- Motive
- Material
- Automation
- Process Type
- Size of firm
- Advantages
- Organisation
- Industry Structure
- Type of Capitalism
- Mode of Governance
- Approximate dates
- 1973 Onwards - Location
- USA/ East Asia - Technologies
- ICT, Biotechnology - Motive
- Nuclear, Renewable - Material
- Silicon, Smart Materials - Automation
- Of control - Process Type
- Information - Size of firm
- Mixed - Advantages
- External Integration - Organisation
- Networked - Industry Structure
- Mixed - Type of Capitalism
- Collaborative - Mode of Governance
- Networks
The three key elements of The First Industrial Revolution and what combined them all?
- Substitution away from human skill and effort to powered machines, e.g. the steam engine.
- Substitution away from animate to inanimate sources or energy, e.g. coal.
- Use of more abundant raw materials (coal, cotton, iron).
These were combined by the factory, for example, the textiles industry
The management organisation during The First Industrial Revolution?
Owner-managed single plant/ factory. I.e. and ‘entrepreneurial form’ of organisation. It was limited in scale and capital requirements with the owners taking all entrepreneurial and strategic operating decisions.
What were Alfred Marshall’s ideas about the owner-managed entrepreneurial firm?
- There is a limit to the coordination ability (function) of a single owner/ entrepreneur, leading to a -shaped LRAC curve. Due to limits in scale, the firm cannot grow past a certain point but the number of firms can grow. This leads to firm inefficiency even if all firms operate on their lowest LRAC curve. It may be more efficient to have fewer firms producing more. Therefore, the firms may be individually efficient but the industry as a whole may not be. This is consistent with perfect competition whereby all firms operate on lowerst LRAC point.
- Life Cycle Effects - A lot of the reason for a firms success is due to the original entrepreneur. First we have the innovator, then the maintainer then the third germination usually fails through either lack of innovation or failure to expand.
What was necessary for The Second Industrial Revolution?
Infrastructure. This led to the exploitation of new technologies, a much larger scale of production and much greater capital requirements.
What were the four important things the development of railway systems in the US and Western Europe led to at the start of the Second Industrial Revolution?
- Helped create national markets.
- Provided new organizational challenges and a requirement for a layer of management to coordinate operations
- Required more capital than individuals could provide
- Provided a major source of demand for iron and steel
What was the main way to capture economies of scale using The Second Revolution?
For most industries vertical integration strategies were predominantly used to capitalise on reducing costs, be it through forward integration towards distribution or backwards towards raw material processing.
The Third Industrial Revolution - Overview and examples of firms?
- Characterised by ICT and to a lesser extent Biotechnology.
- Limitations to managerial form organisations exposed with a new focus on network firms
- examples include Toyota, Sun Microsystems.
What is the ‘network based firm’ approach?
A network based firm is one that makes it an explicit part of its strategy to exploit being part of a network. They focus on very small parts of the vertical chain and outsource most other activities. They are frequently co-located in geographical clusters (Silicon Valley).
How does networking in reality work and why is there little fear of opportunism?
The mutuality in the relationships mean that lead Manufacturer
will share investment plans with little fear of the opportunism which
encourages vertical integration in the Chandlerian model of the firm. Each iteration allows every part of the supply chain to become more efficient and thereby reduce costs. Toyota, for example managed to reduce then umber of parts in their cars by over 50% in 15 years. Such an improvement reduces production costs but also repair costs.
What are the 3 alternative rival conceptions of the entrepreneur by Schumpeter, Kirzner and Casson?
Schumpeter - Entrepreneurs as disequilibrating ‘agents of change’ through innovation and ‘creative destruction’
Kirzner - The entrepreneur seen as establishing equilibrium through local knowledge of a situation (the Austrian view)
Casson - As a co-ordinator of resources
What is meant by the term ‘creative destruction’ - Schumpeter?
They are innovators that create something new and destroy something from the past.
What was Jospeh Schumpeter’s (1883-1950) view of the entrepreneur and what was the entrepreneurs function?
The entrepreneur was the central agent for change with the function:
to reform or revolutionise the pattern of production by exploiting an invention or, more generally, an untried technological possibility for producing an old one in a new way, by opening up a new source of supply or materials or a new outlet for new products, by reorganising an industry and so on
What were the 5 innovative functions of the entrepreneur as understood by Schumpeter?
- Product Innovation - The introduction of a new good.
- Process Innovation - The introduction of a new method of production (or handling a product
in a new way commercially) - The opening of a new market by an existing branch of manufacture
- The conquest of a new source of supply
- The carrying out of the new organization of any industry –this may involve
breaking up a monopoly or creating one.
What was Baumol’s view on economic policy?
Baumol believed that economic policy can have little effect on the supply of entrepreneurs but can alter the ‘rules of the game’ in ways that dramatically change the relative pay-offs (wealth, power, prestige) to productive , unproductive and possible destructive entrepreneurial activities.
What was Baumols clarification on productive and unproductive entrepreneurs and how do changes in ‘rules of the game’ affect the aforementioned?
Productive entrepreneurs are those that create wealth through innovation while ‘rent diversion’ activities are those that simply redistribute existing wealth.
He argued that changes in the rules of the game via laws, institutions or customs changed the incentives (social prestige, approval and pure economic reward) may results in significant changes in the allocation of entrepreneurial activity.
Why, in Baumols view, was Britain the first to industrialise?
The Pre-Industrial Revolution Britain changed the law to increase the pay-off for innovation as opposed to rent-seeking.
What were the two main reasons that enabled entrepreneurs to innovate in Britain?
Monopoly Trading Privileges made available through Royal or Parliamentary privileges eroded by The Statute of Monopolies (1624) which enabled merchants to attain patents that were seen as novelty.
Primogeniture in Britain encouraged business activity among younger sons of nobility, freeing up wealth for the individuals that were focused on a less hedonistic lifestyle. In France, business activity among nobility was less socially acceptable.
What is a quantitative method to measure innovative entrepreneurship and when was there growth in industrial productivity?
The number of patents which record the number of novel application for a product or process. A major growth in industrial productivity can be seen from 1750 onwards where it grew by 1% per annum, which coincides with an increase in patents.
Who argued about the macro differences in Britain and what was their argument?
Robert Allen argued that the key macro differences in Britain was the high price of labour (wage) compared to wages elsewhere and the domestic cost of energy, especially coal being relatively low. The low relative cost of substituting labour for coal led to the Industrial Revolution being primarily British. This made it worthwhile to incur the high R&D expenses.
How do we also involve the demand side into our historical accounts?
A large enough market is required to make the fixed costs of innovation worthwhile. for instance, in cotton, the export market demanded vast amounts of cheap cotton and helped prevent the cost of cotton falling to a much larger extent. The economy as whole experienced growing prosperity, establishing a strong home market.
Recite the McKendrick about the 18th century consumer consumer revolution in Britain.
[The] characteristics of ….. the closely stratified nature of English society,
the striving for upward social mobility, the emulative spending bred by social
emulation, the compulsive power of fashion begotten by social competition –
combined with the widespread ability to spend (offered by novel levels of
prosperity) to produce an unprecedented propensity to consume:
unprecedented in the depth to which it penetrated the lower reaches of
society and unprecedented in its impact on the economy…..
What were two macro-inventions in Britain during the 18th Century and what did they achieve?
Newcomen Steam-Engine and machinery such as the spinning Jenny.
They provided trajectories for subsequent micro-inventions.
They were examples of biased technical change which radically altered optimum factor proportions, in this case higher ratios of both capital and energy to labour.
What do we mean by factor proportions?
The proportion of workers to the factors, such as capital and technology. A higher ratio meant that less workers were needed per unit of capital or technology.
What effect did micro-inventions have on factor proportions?
They had no effect on factor proportions but were responses to entrepreneurial challenges as the technology was developed. This often involved ‘collective invention’
Collective invention?
free exchanges of knowledge amongst innovative entrepreneurs.
What is Schumpeter’s famous ‘trilogy’ in the process of technological change?
- Invention - A new idea
- Innovation - The first commercial application of an idea
- Diffusion - The process by which innovations are adopted and imitated and
welfare/productivity gains are realised
Using Schumpter’s trilogy, describe the conception of the Spinning Jenny
Invention - The spinning wheel.
Innovation - James Hargreaves invented the Jenny which allowed many spindles by a single wheel.
Diffusion - adopted rapidly in Britain and France but not to India - the primarily exporter of textiles in the world during the mid 18th century.
Why did the spinning Jenny not spread to India in the 18th century, despite spreading to France and across Britain?
It was very capital intensive, 70 shillings as opposed to one shilling for a wheel. As each was worked by one individual, this would imply a 70-fold increase in the capital-labour ration. Allen shows that at these prices, the adoption of the Spinning Jenny was only profitable in Britain and France.
How was the macro-invention of the steam engine improved and then aided by micro-inventions to become prevalent in many industries?
Steam engine invented by Thomas Savery (1968) and was developed on by Thomas Newcomen into working 'atmospheric engines' This adaption was majorly inefficient and only used for pumping water out of mines where energy was cheap. James Watt (1768) invented the separate condenser which provided greater efficiency meaning the applications became viable in factories. 1884 - further developments in compounding and rotary motion enabling the use in sea and land transport. Many more applications found through entrepreneurial challenges from then on.
What is the difference between the machinery used pre and post industrial revolution?
Machinery was around pre Industrial Revolution, but the difference post was the use of powered machinery. The use of such machinery drove factories to have a centralised power source, be it water or steam.
Who was Richard Arkwright and what was his significance?
Richard Arkwright was famous for the invention of the water frame, used for cotton spinning. This made use of water power for the worlds first successful cotton-spinning mill at Cromford, which was organised as. a factory village.
What problems were associated with factories during the First Industrial Revolution?
- Recruitment - Factories were seen as prisons and were indeed modelled as prisons.
- Time orientated work replaced task-orientated work.
- Problems of supervision and discipline - no class of foremen existed.
- The problem of accounting for large amounts of fixed capital.
Economics advantages of the factory system during the first Industrial Revolution, aside from powered machinery?
- Centralised location - Hours could be controlled and work supervised (unlike the putting out systems)
- Productivity gains through division of labour/ specialisation (Adam Smith used the example of a pin factory)
According to Adam Smith, how is productivity increased by specialisation?
- Increasing dexterity in individual workers concentrating on a single task
- Reduced time lost in rotating between tasks
- The invention of machines which abridge simple tasks
What was a main advantage of the putting-out system (aka the domestic system) with respect to merchant and risk, and how was this risk overcome?
The merchant could reduce risk by only paying for completed articles once there was demand. This meant all the risk was on the supplier. Such system became antiquated once there was a more stable level of demand - especially from overseas - reducing the risk to merchants.
What were the problems of the putting-out system?
- Pilfering of raw materials
- Difficulty of speeding up/increasing production –higher wages would often result in reducing hours of work (the backward bending supply curve) –tension between “time free” worker and “time-bound” merchant
(D.Landes A Revolution in Time 1983).
What were the benefits of the putting-out system?
The merchant would supply raw materials to the artisans and pay for completed articles. As a result, it was a very flexible system, with the merchant being able to adapt to fluctuations in demand.
Josiah Wedgewood: Famous for?
1720-1795. One of the entrepreneurs who developed the district known as ‘The Potteries ‘ in Staffordshire - transforming from a small market to a centre of global trade.
Josiah Wedgewood: revelations and innovations leading to his success?
His organisational skills are often cited as the key to his success, with a constant strive to innovate and specialise. Entruria acted as a model. In Etruria a mater potter might supervise 150 workers, compared to the traditional 10. This was partly driven by product innovation which required the development of new tasks for each process.
Wedgewood also incorporated a hierarchy of wages according to skill.
What challenges did Wedgewood face in developing the factory system and how were these overcome?
- Potteries were notorious for failing to comply to the disciplines of clock time. Wedgewood implements fines for lateness, a clerk of the works and the bell. A primitive clocking in system seems to have been a Wedgwood invention.
- He was a stickler for cleanliness. ‘That won’t dot for Josiah Wedgewood’.
- Wedgewood created a foreman class due to his absence from the factory filling the death of his partner Bentley.
- Recruitment of skilled artist was a challenge, so Wedgewood implemented in house training (including that of girls). In 1790 around 25% of the workforce were apprentices.
What were Wedgewood’s key product innovations?
Queensware - Wedgewood becomes ‘Potter to Her Majesty’ and is allowed to call it Queensware after producing a tea-set for Queen Charlotte in 1765 - an enormous commercial success.
Black Basalt (1768) - A fine black porcelain was used to depict newly escalated Etruscan poetry in Italy.
Jasperware - Stoneware with a matt finish, often blue and white with white decoration in relief.
Wedgewood quote
Fasion is infinitely superior to merit… and it is plain from a thousand instances if you have a favourite child you wish the public to fondle and take notice of, you have only to make choice of proper sponsors (1779)
Argument for intellectual property law in the form of a patent or a trade-mark.
Innovation can be a competitive advantage for the innovating firm, but only if the cost to the imitator is greater than the cost to the innovator. When an innovation is easy to imitate, as many of Wedgewoods were, success may depend upon a complementary asset.
What might complementary assets involve?
- Reputation.
- Strong marketing/ distributional network.
- Better access to raw materials.
- Better internal organisation for innovation.
Why can it be seen today the Early Jasperware failed in its time despite being considers today as one of Wedgewoods finest achievements?
A key reason was the failure of Wedgewood to connect the product with patronage, as was done with Black Basalt and Queensware.
What were the key reasons of Wedgewoods success?
- Partnership with Thomas Bentley combined own skills as scientist-
innovator with those of a ‘well networked’ salesman - Fastidious attention to building a reputation
- Marketing through patronage and fashion (e.g. Queen Caroline) –maintaining
an exclusive London show-room, replicated elsewhere; warehouses dedicated
to ‘a fine price’ - Penetration of middle class with different marketing techniques, often exploiting
feelings of loyalty –e.g. to royalty or the Pope, and a preparedness to ‘fine tune’
products to class characteristics (e.g. using drapes rather than nudes for more prudish middle classes) - Knowledge (e.g. in exploitation of foreign markets) and use of social networks
(e.g. ambassadors). - Pricing strategy –prepared to be different –positioning his products as high price/quality
Week 3.
What were the three types of business organisations at the start of the 19th century in Britain?
- Sole Proprietorships.
- Partnerships
- Corporations organised as joint stock companies.
What limitations were there on size and growth of sole proprietorships and partnerships during the first IR?
- Access to capital without ownership dilution, which families/ owners were often unwilling to do. Internal financing often the main method for long term capital 2. Death of founder
- Organisation of hierarchy - no separation between entrepreneurial and functional management decisions due to an absence of class managers.
- Typically small businesses.
How could the 4 problems of limitations in the size of proprietorships and partnerships during the first IR be solved?
The use of joint stock type of company, with access to external funds and a separation of ownership from management.
What is the ‘Separation Theorem’, who conceptualised it and what was the application?
- Capital-intensive production processes often involve returns over many years, long after the owners of a firm may be deceased.
- Profitable investments (from society’s point of view) may be foregone under the owner-manager ‘entrepreneurial’ type of enterprise when the profits
occur at dates different from the preferred consumption stream of the owner. - Irving Fisher (1930) considered the case of a farmer who can use land for mining (declining returns over time), farming (constant), or forestry (increasing). A strong preference for a constant consumption pattern might (for example) favour farming even if one of the others had a higher present value.
- With a perfect capital market, Fisher proposed the separation theorem, in which
production is optimally left to a firm which maximises the present value of investment opportunities. If this is forestry, the farmer can sell equity in the forestry firm on liquid capital markets to achieve a consumption pattern which is preferred to that provided by farming.
How could problems around financing a company be resolved during the First Industrial Revolution?
Incorporation - The creation of a separate legal entity in the form of corporations. Corporations have the ability to raise capital through the issuing of shares, becoming a joint stock company. Members will have limited liability, up to the amount of their investment. In 1815 Britain this would have required a ‘charter’ of incorporation.
What famous corporations were created by the Crown in Britain with special monopoly privileges? What was different about the two examples given?
- East India Company.
- Hudson’s Bay Company.
These two companies employed a class of managers who sort to maximise the long time value of the organisation
What was Adam Smiths view on corporations in the Wealth of Nations (1776) and what problem did he elude to being a reason for this?
He viewed them as less efficient than sole traders or partnerships and needed monopoly privileges and limited liability to stay in the game. Smith also believed that these companies had an unfair advantage in terms of limited liability.
He used the principle-agent problem to explain the inefficient of corporations..
What is the principle-agent problem?
The principle (owner) is unable to fully monitor the actions of the agent (manager).
Does 18th century Empirical analysis back-up Smiths hypothesis about the inefficiency of corporations?
Pollard (1965) argues the contemporary evidence ‘overwhelmingly’ backs up Smiths assertion.
Abbé Morellet listed 55 joint stock companies in 1769 set up in Europe since 1600 and posited ‘all failed from mismanagement, notwithstanding they had exclusive privileges.
But, not all companies were unsuccessful, with Smith citing the Hudson Bay Company.
What were the three reasons as to why inefficiencies were rife among corporations during the First Industrial Revolution?
- Fraud by promoters.
- Wastage of capital on promotion.
- Failure of management consistent with the principal-agent model.
What were Alfred Marshall’s views on Joint-Stock Companies?
Despite being 100 years after Smith, Marshall was still skeptical about such companies.
‘a great body of shareholders were almost powerless’ leaving ‘vast temptation for fraud’. However, the increasing importance of this form of business ‘a strong proof of the marvellous growth in recent times of a spirit of honesty and uprightness in commercial matters’
However, Marshall’s opinions did change over the editions of his famous ‘Principles’ between 1890 - 1920. In the 8th edition he notes:
‘ Their scope for expansion is without limit’
What was the South Sea Bubble and the Bubble Act ?
The South Sea Company was formed in 1711 by incorporating £9 million of
government debt into a company to exploit trade in South America. 190 other
‘questionable ventures were floated in 1719-20’before the ‘bubble’ burst and share prices fell back to around 15% of their peak (Wilson p.44)
A subsequent Parliamentary enquiry into the practices of the South Sea
Company, resulted in the South Sea Bubble Act of 1720. Although intended
to ‘shore up’ the South Sea Company, it made joint stock company formation very costly and difficult.
What was the impact of the Bubble Act (And its date)?
1720 - Incorporation cost at least £600 in legal experiences.
- Encouraged partnerships but limited impact due to the smallish capital requirements of the early industrial revolution and the cultural emphasis on personal relationships and personal finance. Even in textiles, iron and breeding where capital was in excess of £20000, they were just as likely to be partnerships.
- The comparative independence between industry and financial institutions of the City of London, largely responsible for the speculative mania.
In conclusion, the Act was just one of several factors preventing incorporation.
Why were second and third generations taking control of businesses often likely to fail?
The family tend to live on the profits of the business, reducing the cash flow. This would lead to the dilution of ownership.
Why was there a need for developments in British Corporate Law in the 19th Century?
There was a need to access external capital in major way, which began with canal construction in the late 18th century. By 1800, 100 Canal Acts had been passed by Parliament.
What were the key developments of British corporate law in the 19th Century?
Deed of covenants, Repeal of Bubble Act in 1825, Decisive shifts in the financing of investments occurring at this were the creation of joint-stock banks and the construction of railways.
Deeds of covenant?
An innovation in the 19th century between many subscribers, achieved the advantage of joint stock status, without incorporation, circumventing the law. The relevance of this innovation can be seen through the formation of gas companies at this time.
What was the Hudson Bay Company and what was its significance?
One of Britain’s original great trading companies. Incorporated by the Royal Charter from Charles II in 1670, giving it monopolist of the fur trade in Rupert land, establishing Forts for trading in the Hudson Bay. Factories were where the ‘factor’ or agent stored wares waiting trades.
Organisation of the Hudson Bay company?
Goods were only able to enter a few times a year. Furs were exported and other goods - often hunting equipment - were imported.
Agents would remain in fort, relying on aboriginals to bring furs up-stream, or for middlemen to conduct local trades.
Operations centralised with key decisions being made in London and relaying detailed notes.
Local Employees with few skills and ‘virtually indentured’. Therefore, little incentive for entrepreneurship.
What was the inefficiency of the HBC?
- Monopoly positions of middlemen restricted trades.
- Inability to exploit local knowledge.
- Could only enter the Bay a few times a year due to freezing.
Competition to the HBC?
Disadvantages and advantages
Late 18th century the North-West Company, based in Montreal began trading. The organisation was very different. They shipped from Montreal due to lack of access to the bay, which meant a huge cost disadvantage and that they had to access customers directly via large numbers of trading posts where furs were collected.
Advantages?
‘Wintering partners’ could act flexibly, on the basis of better local knowledge. As partners they received shares of the profit, incentivising actions in line with the companies interest. ‘Voyageurs’ undertook arduous journeys into the interior but could be promoted.
What was the resolution of the HBC vs NWC?
Competition between different forms of organisation, one being centralised with detailed instructions to subordinates; the other decentralised, more flexible and therefore able to be more competitive and change to market environments. The HBC adapted by putting posts inland and reformation of organisational processes, which ultimately led to its triumph.
Bubble Act: Reform years?
Repealed in 1825 but still needed incorporation through Act of Parliament.. Reforms in 1835, 1838 and 1844. Act finally removed in 1856.
Bubble Act: The result of repeal?
Ability to fund railways and banks.
What does the HBC show us?
- The joint-stock notinherently inefficient compared to other business
forms and it can respond to competitive challenges. - It also tells us that managerial organization is important, dependent upon a ‘fit’between an strategy, a firm’s organization
and its environment.
What was the impact of railways in Britain? When was it contracted?
Prior to railways, transportation based on improvements to canals and roads. The Railway network constructed in after the 1830s. It paved the way to the 2nd IR in helping create national markets.
What were the 4 impacts on Society and Economy of the railways network in Britain?
- Construction - unprecedented demand for iron and later steels in many
different forms, from simple (rails) to complex (locomotive engines) - Promoted innovation through wider marketswhich increased specialization
and competition - Release of working capital previously tied up in stocks of raw materials
- New organizational and managerial challenges
What were the managerial challenges of the Railways in Britain?
- Required the largest capital out of companies in Britain, also meaning they were the largest companies.
- Most raliway comapnies became joint-stock enterprises, creating a separation between ‘ownership’ and ‘control’. This created a new rentier class of owners and one of salaried managers,
- Geographical dispersion %%%%%%%%%%%%%%&&&&&&&&&
What was ‘Railway Mania’?
A merger wave in Britain of the 1830s, leading to the creation of very large companies, making railway companies especially even larger.
Where did the management techniques for railways come from?
- Canal and coach companies.
- Mark Huish - General Manager of LNWR (1846-58) -pioneered methods of
depreciation provision, accounting for rolling stock and track. Progress was made in
terms of costing, pricing, marketing, and the use of statistics
What was the Assessment of British Railway Management in Britain?
- Poor generally, many changes were forced on management due to the difference in the scale of the challenges.
- Hawke (1970) argued that railways failed to increase productivityafter 1850s –
by 1890s limitations largely recognised.
What were the possible factors leading to the poor review of Railway Management in Britain?
- Existing management techniques borrowed from canal operation, coach
or sea transportation inadequate (e.g. canal companies did not own barges and were not concerned with whereabouts of barges) - Narrow recruitment -limited pool of talent at chief executive level, often
through internal promotion - Narrow social background of chief executives
What is the history of US Railroads?
US railroads expanded very rapidly in the 1850s and were
often, by the second half of the nineteenth century, far larger than their British counterparts, on average perhaps 10 times as large (Wilson p. 39). By the
time their networks were fully developed by 1910, the whole network was 240,000
miles in the US against 12,000 miles in Britain
Who created the organisational chart showing line and staff structures and what was his view of them with regards to railroads?
Daniel C. McCallum. He believed that such structure is required in larger railroads.
What new branches of analysis were innovated due to the creation of large railroad companies?
- Financial accounting –new performance measures including the ‘operating ratio’ common in US as a way of measuring profitability, defined as “the percentage of gross revenue needed to meet operating costs”
- Capital accounting
- Cost accounting –Albert Fink (Louisville and Nashville) developed cost accounting techniques to examine divisional performance and develop fare structures based on cost
What was an important legacy of Railways in Britain and the US?
Joint-stock corporation with dispersed ownership. Over time, this became a typical
form of large enterprise, in both the US and Britain.
How was external financing satisfied in other European countries?
In some European economies, where capital markets were still weak, new innovations included joint-stock investment banks.
What were the key differences between Bank-based and market-based systems?
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How does the Chandlerian view of family firms and the real-world actuality compare?
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Lecture 4
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What is an important feature of the 2nd IR?
The loss of British economic leadership in the second half of the 19thcentury -in some industries to the US, and in some industries to Germany. A focus more on precision engineering, such as watches, clocks, bicycles and footwear. The US was one of the first to make such goods.
What were the Germans renowned for during the 2nd IR?
Mainly chemicals and dyes.
Compare the productivity of workers across between Britain and the US.
From around 1900, the US takes over in productivity, with every consecutive year after this, up until 1973, increasing in relative productivity.
Why, after 1973, the UK begin to close the productivity gap?
Following WWII, as a more service based economy, Britain began to reduce the productivity gap.
Compare the productivity of workers across between Britain and the Germany.
Germany began to move ahead in productivity following WWII (1973) as a result of the ‘economic miracle’
Compare the manufacturing output per employee between the UK and US
Relative output per employee never drops below 150%, meaning US workers produce 1.5x as much in the same time. This suggests there is something fundamentally wrong with Britains manufacturing techniques.
Why might there be such a huge difference between the UK and US in manufacturing per worker?
One reason could be the tendency for the UK to make more bespoke goods, and less amass produced goods.
Compare the manufacturing output per employee between the UK and Germany.
Once again, Germany only overtakes the UK after WWII.
How did Britain attempt to prevent itself falling behind in productivity with America and what occurred later in the 19th century?
The 1851 Great exhibition “of the Works of Industry of all Continents” attention was drawn to the extent of mechanisation in US ( a parliamentary fact finding mission). Later in the 19th century, a surge of imports from the US, which became known as the ‘American Invasion’. Items included Clocks, bicycles, typewriters and sowing machines.
Post WWII, what Councils were established to investigate the reason for the productivity gap?
Anglo-American Productivity Councils were established. The productivity gap became apparent to US observers during the war itself
Who popularised the idea of the 2nd Industrial Revolution and what was this period known for?
Alfred Chandler. Following the railways, the modern managerial business was born, providing fertile opportunity for mechanisation on a large scale.
What did the new technologies of the 2nd IR require and what was there potential for?
Required large amount of capital, and led to large potential for economies of scale, enabling businesses to operate oat the lowest point on the LRAC.
What were Alfred Chandler’s 3-pronged investment approach that took advantage of organisational capabilities?
- Investment in productionfacilities sufficiently large to
achieve significant cost savings; - Investment in product specific networks-
facilities for marketing, purchasing and distribution - Investment in management to supervise and co-ordinate
the above activities and achieve the economies
What was Chandlers view of Britain during the 2nd IR?
HE viewed it as a faliture of British capitalism that sufficient numbers of firms dod not undertake the ‘3-progned investment’
What happened to the traditional industries, such as textiles, timber, furniture, printing, during the 2nd IR?
They were largely unaffected.
What industries were there major changes in during the 2nd IR and what is the current nature of such bsinesses?
-distribution made possible by the railroads, post, and telegraph
national branding allowed for penetration of rural areas
-metals –esp. constructional steel –rails, bridges, buildings
-electrical equipment
-industrial chemicals
-light machinery
-food, drink, tobacco processing
-packaged goods
In many of these industries, very powerful firms and oligopolistic structures
emerged, many of them familiar names to this day
How does Chandlers idea of the ‘First Mover Advantage’ link in with the 2nd IR?
In Chandler’s view, those firms which initially made the necessary
3 pronged investments, obtained powerful ‘first mover advantages’ making
challenges very difficult –‘path dependency’ and ‘persistence’
What were the ‘First Mover Advantages
- Pre-emption: where economies of scale large in relation to market size
- Learning effects: first to move down learning curve
- Lower capital costs: uncertainty of incumbent’s moves to entry
by challenger
When were successful challenges to first movers possible?
On the basis of: changing technology/markets/anti-trust actions
What were the institutional differences between Britain and the US during the 2nd IR?
Britain more ‘locked into’
‘personal capitalism’, limiting potential for growth – family preference for
‘dividends’ rather than investment and lack of investment in management
What was the Sherman Act and what was its significance?
1890 - Formalised a strong
anti-monopoly sentimentin America. The Sherman Act aimed to make
collusion and price fixing cartels illegal.
What was Chandlers view of the Sherman Act? What was the outcome of mergers?
He believed the act helped to promote merger and industrial concentration, a trend that was underway as larger firms attempted to achieve scale economies. Frequently mergers created giant holding companies, through the exchange of shares in existing companies for those in the holding company
What period was described by Chandler as “the largest and certainly the most significant in US history”?
The merger boom from 1897-1902.
Case Study: The Us Cigarette Industry.
- In the 1880s, the cigarette market was only
a smallish part of the overall tobacco market - For Chandler, story begins with James B Duke and
the invention of the Bonsack machine,
capable of producing 120,000 cigarettes
a day, compared to 3,000 by a good hand-worker. A few Bonsack machines were clearly
capable of supplying the entire world market at the time! - 4 years after opening a factory and admin. offices in New York, and signing an exclusive contract with Bonsack, it was supplying half the nation’s consumption of cigarettes. In 1887 W. Duke & sons produced 487 million
cigarettes.
How did John D. Rockefeller capitalise on the 2nd IR?
Standard Oil was created in this way by John D. Rockefeller, whose Standard
Oil Trust rationalized production into big refineries, converting the smaller ones
into specialist producers of items such as lubricants, vaseline etc.
Accoridng to Chandler, how was Duke able to capitalise on the 2nd IR and the Cigarette market?
According to Chandler, the key elements were:
- Intensive nationaladvertising, establishing a national brand name
- A vertical integration strategy combining mass production with
mass distribution
- Forward integration
- Backward Integration
How did Duke facilitate forward integration?
Network of national sales offices headed by a salaried manager. Staff visited local retailers, drug stores etc … “managers worked closely with New York headquarters to ensure effective scheduling of the high volume to jobbers and a few large retailers..”
How did Duke facilitate backward integration?
purchasing network in tobacco region of US
Because of vagaries of size of crop and curing required, prices very volatile.
Duke counteracted this by building own storage and curing facilities and buying direct from farmers…
How did Duke’s strategy work in other industries and why was the strategy successful in the tobacco industry?
Failure of Duke to move decisively into cigar marke,where individuality remained important.
In cigarettes: other producers forced to follow suit… desire to control competition forced merger of Duke and its 4 largest competitors to form the American Tobacco Company in 1890, becoming a founder member of the Dow Jones Industrial Average in 1896.
This was eventually broken up by anti-trust action in 1911.
What variants in the Duke Story can be found
that ended up monopolising their respective industry?
Variants on the Duke story can be found in other industries using similar continuous process technology. First movers in many industries became established household names not just in US: Diamond Match, Quaker Oats, Pillsbury Flour, Quaker Oats,
Campbell Soup, Heinz, Borden’s, Carnation, Libby, Procter and Gamble, Eastman Kodak…..
Integration in perishable goods and machinery also important.
‘Fordism’ and its relevance in America?
A term named after Henry Ford and used to describe an economic system characterised by both mass production and consumption.
The US were leading in manufacturing productivity by following such an approach.
What were the two a features es of the ‘American system of Manufactures.’
- The inter-changeabilityof manufactured parts
2. Arranging the manufacturing process into a sequence of machines each dedicated to a simple operation
What was Henry Fords additional to the American system?
The assembly-line.
What was the history of interchangeable parts and how did it catch on?
- The idea can be traced as a concept to French gunsmith-inventor Honoré Blanc
who stunned gathered revolutionaries in 1790 by assembling gun-locks
from parts taken randomly from bins. Experiments reported to US Congress
by Thomas Jefferson……. - Idea caught on in US in woodworking industries, e.g. housing construction, where
pre-fabricated ‘4x2’ was ubiquitous, and windows/ glass came in standard sizes.
Here, the abundance of supplies of wood, and relative scarcity of labour made the use of machines to abridge labour highly attractive. - It is possible that these trends were helped by greater homogeneity of demand
in US –although as Landes (1998) has pointed out consumer resistance to
standardized production did exist, e.g. in the realm of furniture.
What was the effect of interchangeable parts on the skillset of workers?
In the US, the deskilling of workers began, but less so in Europe whereby workers were more organised and resistant to mechanisation. Laws France have since hindered productivity gains but maintained brand image.
Why was interchangeability in metallic goods beneficial and negative, especially during the war, and what were its implications on the gun market?
Inter-changeability in metallic goods requiring fine tolerances much more difficult
to achieve, but the tanks were quickly produced and assembled.. Government intervention in US gun-making kept this enable parts to be swapped out rather than the entire gun having to be sent off and replaced?
What was the application of interchangeable part s in the gun industry?
The pursuit of standardized interchangeable parts became a distinct objective in gun manufacture because of
its obvious interest to the military. In 1812 Eli Whitney stated to the US War Department that the Britishgovernment had ‘on hand over 200,000 stands of muskets, partially finished or awaiting repair’
In 1798 US government awarded Whitney a contract on the basis of his determination to apply mechanized techniques on the basis of ‘a new principle’ of manufacture. Simeon North was simultaneously working on similar ideas in pistol manufacture
Many contemporaries remained sceptical but Whitney had a ‘great influence in spreading the idea to government small arms armouries at Springfield and Harpers Ferry’
What was required for large single purpose machines to be viable? Give an example of this and whether its technique was followed in Britain/ US.
Large standardised demand. In Britain, the Portsmouth Pulley Rocks were being produced for the Royal Navy. It started in 1805 and operated using the same machinery for over 100 years. Wasn’t implemented around Britain, but in the US it was somewhat implemented in the form of making guns.
