Business Power Chapter 3 This chapter: Explains the underlying dynamics of the power of business to change society. Discusses the limits of the power of business to change society. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved

James B. Duke and the American Tobacco Company Opening Case 1870’s – Duke switched from chewing tobacco to cigarettes. 1881 –Used Russian immigrants to roll his cigarettes and women to market them. 1883 –Negotiates an exclusive contract for a cigarette-rolling machine and expands his sales to China. 1884 – Embraced Rockefeller’s methods and formed the American Tobacco trust. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved

James B. Duke and the American Tobacco Company Opening Case (continued) 1892 – 2.9 billion cigarettes sold. 1903 – More than 10 million cigarettes sold. 1911 – Duke’s monopoly broken up, but millions of smokers remain. Duke’s career illustrates the power of commerce to change society. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved

The Nature of Business Power In past eras, dominant companies in ascending industries changed societies by altering all three of their primary elements: Ideas Institutions Material things McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved

What is Power? Power – the force or strength to act or compel another entity to act. Business power – the force behind an act by a company, industry, or sector. Social contract – society giving corporations the authority to take necessary actions and permits a profit. Legitimacy – the rightful use of power. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved

Levels and Spheres of Corporate Power Corporate actions have an impact on society at two levels, and on each level they create change. Surface level Deep level On both the surface and deep levels, business power is exercised in spheres corresponding to the seven business environments set forth in Chapter 2. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved

Levels and Spheres of Corporate Power (continued) Economic power is the ability of the corporation to influence events, activities, and people by virtue of control over resources, particularly property. Technological power is the ability to influence the direction, rate, characteristics, and consequences of physical innovations as they develop. Political power is the ability to influence governments. Legal power is the ability to shape the laws of society. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved

Levels and Spheres of Corporate Power (continued) Cultural power is the ability to influence cultural values, habits, and institutions such as family. Environmental power is the impact of a company on nature. Power over individuals is exercised over: Employees Managers Stockholders Consumers Citizens McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved

The Story of the Railroads Railroads revolutionized transportation due to speed and more direct routes. Railroads transformed capital markets. In the mid 1800s, railroads needed millions in capital to continue expansion. Railroads sold bonds and offered stocks to raise capital, creating the investment banking industry. Later, the financial and speculative mechanisms inspired by railroad construction were in place when other industries needed more capital to grow. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved

The Story of the Railroads (continued) Railroads spread impersonality and an ethic of commerce. Trains took away young people from small towns and brought in outsiders. For the convenience of the railroads, a General Time Convention met in 1882 and standardized the time of day. Towns reoriented themselves around their train stations. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved

The Story of the Railroads (continued) Railroads changed American politics and government. Political candidates and issues gained wider exposure. Government subsidized but then later regulated railroads. Railroads changed American society. Pioneered professional management teams, division structures, and cost accounting. Contributed to the Indian wars. Imported labor whose descendents remain. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved

Two Perspectives on Business Power There is considerable disagreement about whether business power is adequately checked and balanced for the public good. Dominance theory – the basis of the dominance model of the business-government-society relationship discussed in Chapter 1. Pluralist theory – the basis for the countervailing forces model in Chapter 1. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved

Two Perspectives on Business Power: Dominance Theory Business abuses the power its size and wealth confer in many ways. Corporate asset concentration creates monopoly or oligopoly in markets that reduces competition and harms consumers. The idea that concentration of economic power results in abuse arose in response to the awesome economic growth of the nineteenth century. Dominance theory The view that business is the most powerful institution in society, because of its control of wealth. This power is held to be inadequately checked and, therefore, excessive. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved

Two Perspectives on Business Power: Dominance Theory (continued) A merger wave between 1895 and 1904 concentrated economic growth. The public viewed these huge firms as colossal monuments to greed. In the twentieth century, corporations continued to grow in size, but the marked rise in asset concentration slowed and leveled off. Today the number of transnational firms and the scale of their activity has grown, however the largest global firms do not show signs of concentrating international assets. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved

Two Perspectives on Business Power: Dominance Theory (continued) Elite dominance – belief that there is a small number of individuals who, by virtue of wealth and position, control the nation. The Power Elite by C. Wright Mills is the modern impetus for this theory. Power elite A small group of individuals in control of the economy, government and the military. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved

Two Perspectives on Business Power: Pluralist Theory No entity or interest has overriding power, and each may check and balance others Infused with democratic values American society encompasses a large population spread over a wide geography and engaged in diverse occupations The Constitution encourages pluralism Pluralist theory A society with multiple groups and institutions through which power is diffused. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved

Boundaries of Managerial Power UPDATE with new Figure 3.2 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved

Boundaries of Managerial Power Governments and laws in all countries regulate business activity. Social interest groups represent every segment of society and use many methods to restrain business. Social values are transmitted across generations, reflected in public opinion, and embedded in the law. Markets and economic stakeholders impose strong limits. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved

Concluding Observations In a recent poll, 77 percent of Americans felt that “too much power is concentrated in the hands of a few large companies.” If corporate power remains generally accountable to democratic controls, society will accord it legitimacy. If rule by law and a just economy exist, corporate power will broadly and ultimately be directed toward public welfare. McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc. All rights reserved