The Rise of Big Business Flashcards
Railroads in the US
first US railroads built in 1830s
by 1850: largest business in America
required large capital investment
large, complex networks over great distances: innovations in managerial hierarchy
division of labor btw operation and finance (separation of ownership and control)
development of capital markets
Development of railroads and communication generated 2 central innovations
1) Development of complex enterprise organizations
- administrative hierarchies
- full time salaried managers on administrative tasks
- Managerial hierarchy: top and middle managers supervised, coordinated, and evaluated work of lower level managers
2) Modern Accounting
- constant flow of info needed
- full-time internal auditors
- railroad central to the development of accounting profession
Mass Retailer
- direct contact with customers
- reduced market transaction by eliminating middlemen
- high velocity of stock-turn (lower margins, lower price, higher profits)
- profits on volume, not markup
- economies of speed
- OWNERSHIP NOT SEPARATED FROM CONTROL (because no need of large capital thanks to large volume of cash flows)
Mass production and consequences
- specialized and expensive machinery
- semi-qualified and cheap manpower
- high barriers to entry (oligopolistic or monopolistic)
- increased demand for administrative staff (to coordinate)
- functional departments
Firm Growth Stategies
- Horizontal combination/alliances
- cartels (price agreements)
- alliance with competitors to avoid price competition - Horizontal Integration (merge)
- acquisition of add. business activities at the SAME level of the value chain
- reduce threat of competition
- diversify by growing horizontally
Advantages of Horizontal Integration
- economies of scale
- economies of scope
- increase market power
- reduction in competition
- fulfilling customer expectations
- increase negotiation power
- reduction in cost of international trade by operating factories in foreign markets
Forms of Horizontal Integration
Trust: a firm controls other firms: a legal arrangement that allows one person to manage property that belongs to others (avoid competition)
Holding: a central firm possesses other firms by holding majority of their stock
A new company
Vertical Integration
In order to capture cost savings, plants had to be kept running at near capacity
coordination needed
Why : reduce transaction costs, extend monopoly power, avoid double markups, assure input supply and timely delivery
Benefits of vertical integration
- secure source of supply and distribution channels
- protection and control over asset
- access to new business opportunities and new forms of technologies
- simplified procurement and administrative procedures
Disadvantages of vertical integration
increase overhead and capital expenditures
loss of flexibility (inability to respond quickly to changes in demand)
additional administrative costs
Diversification
to use all organizational capabilities
development of by-products
