Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Chapter 3 Business Power

3-2 James B. Duke and the American Tobacco Company o 1881 – Duke used Russian immigrants to roll his cigarettes and women to market them o 1883 – Negotiates an exclusive contract for a cigarette-rolling machine and expands his sales to China o 1884 – Embraced Rockefeller’s methods and formed the American Tobacco trust

3-3 James B. Duke and the American Tobacco Company Opening Case o 1892 – 2.9 billion cigarettes sold o 1903 – More than 10 million cigarettes sold o 1911 – Duke’s monopoly broken up o Duke’s career illustrates the power of commerce to change society

3-4 The Nature of Business Power o Companies in ascending industries change societies by altering all three of their primary elements: o Ideas o Institutions o Material things

3-5 What is Power? o Power: The force or strength to act or to compel another entity to act o Business power: The force behind an act by a company, industry, or sector o The social contract legitimizes business power by giving it a moral basis o Legitimacy: The rightful use of power o Business power is legitimate when it is used for the common good

3-6 Levels and Spheres of Corporate Power o Corporate actions have an impact on society at two levels, and on each level they create change o Surface level o Business power is the direct cause of visible, immediate changes, both great and small o Deep level o Corporate power shapes society over time through the aggregate changes of industrial growth

3-7 Levels and Spheres of Corporate Power Economic powerAbility of the corporation to influence events, activities, and people by virtue of control over resources Technological powerAbility to influence the direction, rate, characteristics, and consequences of physical innovations as they develop Political powerAbility to influence governments Legal powerAbility to shape the laws of society Cultural powerAbility to influence cultural values, habits, and institutions such as the family Environmental powerThe impact of a company on nature Power over individualsExercised over employees, managers, stockholders, consumers, and citizens

3-8 The Story of the Railroads o Railroads revolutionized transportation due to: o Speed o Cost o Direct routes

3-9 The Story of the Railroads o Railroads transformed capital markets o In the mid 1800s, railroads needed millions in capital to continue expansion o Railroads sold bonds and offered stocks to raise capital, creating the investment banking industry o The financial mechanisms inspired by railroad construction were in place when other industries needed more capital to grow

3-10 The Story of the Railroads o Railroads spread impersonality and an ethic of commerce o Towns reoriented themselves around their train stations o Urbanization and the centralization of corporate power in cities was speeded o Rural areas were redefined

3-11 The Story of the Railroads o Railroads changed American politics o Trains changed the way candidates were picked o Trains enabled associations to have national meetings o Rails spread issues that might in an earlier era have remained local

3-12 The Story of the Railroads o Railroads changed American society o Pioneered professional management teams, division structures, and cost accounting o Contributed to the Indian wars o Imported labor whose descendents remain

3-13 Figure Railroad Track Miles in Operation: 1830–2007

3-14 Two Perspectives on Business Power o Dominance theory: The view that business is the most powerful institution in society, because of its control of wealth o This power is inadequately checked and, therefore, excessive o Pluralist theory: The view that business power is exercised in a society where other institutions also have great power o It is counterbalanced and restricted and, therefore, not excessive

3-15 Two Perspectives on Business Power: Dominance Theory o Corporate asset concentration creates monopoly or oligopoly in markets that reduces competition and harms consumers

3-16 Two Perspectives on Business Power: Dominance Theory o Merger waves are caused by changes in the economic environment that create incentives to combine o The public viewed the huge firms as colossal monuments to greed o In the twentieth century, corporations continued to grow in size, but the marked rise in asset concentration slowed and leveled off

3-17 Two Perspectives on Business Power: Dominance Theory o With economic globalization, the number of multinational firms and the scale of their activity has grown o Adherents of the dominance theory believe that the increasing size and financial power of global corporations will be converted into the same old abuses o No corporation, no matter how large, is assured of prospering

3-18 Two Perspectives on Business Power: Dominance Theory o Elite dominance o Belief that there is a small number of individuals who, by virtue of wealth and position, control the nation o Power elite: A small group of individuals in control of the economy, government, and military o The theory of its existence is associated with the American sociologist C. Wright Mills

3-19 Two Perspectives on Business Power: Pluralist Theory o No entity or interest has overriding power, and each may check and balance others o Features of American society which support the thesis of pluralism o It is infused with democratic values o American encompasses a large population spread over a wide geography and engaged in diverse occupations o The Constitution encourages pluralism

3-20 Figure Boundaries of Managerial Power

3-21 Boundaries of Managerial Power o Governments and laws in all countries regulate business activity o Social interest groups represent every segment of society and use many methods to restrain business o Social values are transmitted across generations, reflected in public opinion, and embedded in the law o Markets and economic stakeholders impose strong limits

3-22 Concluding Observations o In a recent poll, 87 percent of Americans felt that “big companies... have too much... power and influence” o If corporate power remains generally accountable to democratic controls, society will accord it legitimacy o If rule by law and a just economy exist, corporate power will broadly and ultimately be directed toward public welfare