1. SCALE AND SCOPE The Dynamics of Industrial Capitalism Alfred D. Chandler, JR 劉耀仁世新大學平傳系

2. Introduction : Scale and Scope Before the railroad & telegraph system Process of production, Distribution, Transportation, and Process of production, Distribution, Transportation, and Communication in capitalistic economies had been carried on by Communication in capitalistic economies had been carried on by enterprises personally managed by their owners enterprises personally managed by their owners Operating the railroad & telegraph system Create new type of Business enterprise Create new type of Business enterprise Team of salaried managers who had little or no equity in the firm Team of salaried managers who had little or no equity in the firm New forms of the transportation & communication system Modern mass marketing & Modern mass production Modern mass marketing & Modern mass production Operating decisions became concentrated in the hand of the managers. Operating decisions became concentrated in the hand of the managers.

3. Introduction : Scale and Scope With Salaried Manager coming A new type of capitalism A new type of capitalism Decision about current operations, employment, output, and the allocation of resources for the future operations were made by salaried managers. Decision about current operations, employment, output, and the allocation of resources for the future operations were made by salaried managers. New institution and new type of economic provided a central dynamic of continuing economic growth and transformation New institution and new type of economic provided a central dynamic of continuing economic growth and transformation Examine the beginnings and growth of managerial capitalism globally and focusing on the history of its basic institution in the world ’ s three leading industrial nations. Examine the beginnings and growth of managerial capitalism globally and focusing on the history of its basic institution in the world ’ s three leading industrial nations.

4. Chapter 1 : The Modern Industrial Enterprise Simon Kuznets : National economies  3 sectors Agriculture, Industry and Services Agriculture, Industry and Services Simon Kuznets : Industry  6 sectors Mining Mining Manufacturing Manufacturing Construction Construction Utilities Utilities Transportation Transportation Communication Communication

5. US, Great Britain and Germany accounted for 2/3 of the US, Great Britain and Germany accounted for 2/3 of the world ’ s industrial output in 1870 world ’ s industrial output in 1870 In all 3 countries the largest economic growth came in the In all 3 countries the largest economic growth came in the industrial sector, while agriculture drastically declined in the industrial sector, while agriculture drastically declined in the long run long run Chapter 1 : The Modern Industrial Enterprise

9. Fundamental dynamic for change in capitalist economies The manufacturing enterprises whose collective histories are The manufacturing enterprises whose collective histories are presented in this study have provided a fundamental dynamic or presented in this study have provided a fundamental dynamic or force for change in capitalist economies since the 1880s. force for change in capitalist economies since the 1880s. New and improved processes of production developed Substantial economies of scale and scope Substantial economies of scale and scope Cost advantages Cost advantages Three-pronged investment in Production, Distribution and Management Three-pronged investment in Production, Distribution and Management Powerful Competitive Advantage Their industries quickly became oligopolistic; no longer competed on the basis of price Their industries quickly became oligopolistic; no longer competed on the basis of price Instead they competed for market share and profit through Instead they competed for market share and profit through functional and strategic effectiveness functional and strategic effectiveness Chapter 1 : The Modern Industrial Enterprise

10. Chapter 2: Scale, Scope, and Organizational Capabilities The New Institution Modern industrial enterprise Modern industrial enterprise - Contains a number of distinct operating units - Contains a number of distinct operating units - Managed by a hierarchy of full-time salaried executives - Managed by a hierarchy of full-time salaried executives - More than a production function (commercial, and research functions) - More than a production function (commercial, and research functions) - Each unit has its own office, managers and staffs, and acts as an independent enterprise. - Each unit has its own office, managers and staffs, and acts as an independent enterprise. Modern multiunit enterprise Modern multiunit enterprise - Owners  top-level executive  middle-level executive  lower-level executive - Owners  top-level executive  middle-level executive  lower-level executive - Boards of directors include both top managers (inside director) and part-time - Boards of directors include both top managers (inside director) and part-time representatives of the owners (outside directors). representatives of the owners (outside directors). - Hierarchy (composed of middle and top managers) makes the activities and - Hierarchy (composed of middle and top managers) makes the activities and operations of the whole enterprise more than the sum of its operation units. operations of the whole enterprise more than the sum of its operation units.

11. How and why the institution grew why adding new units? The manufacturing enterprises became multifunctional, multi-regional and multi-product The manufacturing enterprises became multifunctional, multi-regional and multi-product - Maintain a long-term rate of return on investment(by reducing overall costs - Maintain a long-term rate of return on investment(by reducing overall costs of production and distribution) of production and distribution) - By providing products that satisfied existing demands - By providing products that satisfied existing demands - By transferring facilities and skills to more profit markets - By transferring facilities and skills to more profit markets - To assure access to market, and prevent competitors from obtaining such access - To assure access to market, and prevent competitors from obtaining such access - Merely to reinvest retained earnings - Merely to reinvest retained earnings - Financial reasons(tax, price of securities, extend portfolio investment) - Financial reasons(tax, price of securities, extend portfolio investment) - Managerial reasons(greater control over the work force) - Managerial reasons(greater control over the work force) Chapter 2: Scale, Scope, and Organizational Capabilities

12. The initial motivation for its investment in new operating units Maintain its position of dominance Maintain its position of dominance - Actually permitted its managerial hierarchy to reduce cost - Actually permitted its managerial hierarchy to reduce cost - Improve functional efficiency in marketing and purchasing as well as - Improve functional efficiency in marketing and purchasing as well as production production - Improve existing products and process and to develop a new ones - Improve existing products and process and to develop a new ones - Allocate resources to meet the challenges and opportunities of ever- changing technologies and markets - Allocate resources to meet the challenges and opportunities of ever- changing technologies and markets Chapter 2: Scale, Scope, and Organizational Capabilities

13. Historical Attributes Modern industrial enterprise ’ s three most significant attributes : Modern industrial enterprise ’ s three most significant attributes : - Clustered from the start in industries having similar characteristics - Clustered from the start in industries having similar characteristics - Appeared quite suddenly in the last quarter of nineteen century - Appeared quite suddenly in the last quarter of nineteen century - Born and then continued to grow in much the same manner - Born and then continued to grow in much the same manner Table 5 Table 5 - 72% of the 401 companies were clustered in food, chemicals, petroleum, - 72% of the 401 companies were clustered in food, chemicals, petroleum, primary metals,and the three machinery groups. primary metals,and the three machinery groups. - The predominance of American firms among the world ’ s largest industrial - The predominance of American firms among the world ’ s largest industrial corporations corporations - Only in chemicals, primary metals, and electrical machinery did the non- - Only in chemicals, primary metals, and electrical machinery did the non- American firms outnumber the American firms American firms outnumber the American firms Chapter 2: Scale, Scope, and Organizational Capabilities

15. The large industrial corporations in U.S.,Britain and Germany The large industrial corporations in U.S. had clustered in the same industry The large industrial corporations in U.S. had clustered in the same industry (Earlier in the twentieth ; 1973) (Earlier in the twentieth ; 1973) The pattern is much the same for Britain and Germany The pattern is much the same for Britain and Germany American firms were bigger and more numerous American firms were bigger and more numerous American – consumer goods, industrial goods American – consumer goods, industrial goods Britain – consumer goods (food & tobacco industries) Britain – consumer goods (food & tobacco industries) Germany – producer ’ s goods (chemicals & heavy machinery) Germany – producer ’ s goods (chemicals & heavy machinery) Chapter 2: Scale, Scope, and Organizational Capabilities

16. Economies of Scale and Scale in Production Major innovations in the process of production during the last quarter of the 19th century (exploiting the cost advantage of the economies of scale and scope) Major innovations in the process of production during the last quarter of the 19th century (exploiting the cost advantage of the economies of scale and scope) Newer industry -- drastic change in capital-labor ratio, expanded output by improving and rearranging inputs Newer industry -- drastic change in capital-labor ratio, expanded output by improving and rearranging inputs - Greatly improved equipment - Greatly improved equipment - Reorienting the process of production - Reorienting the process of production - Placing the several intermediary process within a single works - Placing the several intermediary process within a single works - Increasing the application of energy - Increasing the application of energy Chapter 2: Scale, Scope, and Organizational Capabilities

17. Labor-intensive industries Labor-intensive industries (apparel, textiles, lumber, furniture, printing and publishing ) (apparel, textiles, lumber, furniture, printing and publishing ) - Large modern firm remained relatively rare - Large modern firm remained relatively rare - A sharp reduction of unit cost did not accompany an increase in the volume - A sharp reduction of unit cost did not accompany an increase in the volume of materials processed by the plant of materials processed by the plant Capital-intensive industries Capital-intensive industries - Production units achieved much greater economies of scale - Production units achieved much greater economies of scale - “ Minimum efficient scale ” -- had an impressive cost advantage over small plants - “ Minimum efficient scale ” -- had an impressive cost advantage over small plants - Economies of joint production – a significant cost reduction - Economies of joint production – a significant cost reduction - Fixed costs and sunk costs much higher than in the more labor-intensive industries - Fixed costs and sunk costs much higher than in the more labor-intensive industries Chapter 2: Scale, Scope, and Organizational Capabilities

18. In 1880s~1890s Second Industrial Revolution In 1880s~1890s Second Industrial Revolution - New mass-production - New mass-production - A sharp reduction in costs as plants reached minimum efficient scale - A sharp reduction in costs as plants reached minimum efficient scale - Only a small number of them could meet the existing national and even - Only a small number of them could meet the existing national and even global demand – became oligopolistic global demand – became oligopolistic - The first to build a plant of minimum efficient scale and recruit the essential - The first to build a plant of minimum efficient scale and recruit the essential management team remained the leader in its industry for decades. management team remained the leader in its industry for decades. - The revolution in transportation and communication created opportunities - The revolution in transportation and communication created opportunities that led to a revolution in both production and distribution. that led to a revolution in both production and distribution. Chapter 2: Scale, Scope, and Organizational Capabilities

19. The essential step in exploiting the new technologies of production Construct a plant of the optimal size Construct a plant of the optimal size The investment in production facilities large enough to exploit the full potential of the economies of scale The investment in production facilities large enough to exploit the full potential of the economies of scale Both technologies and markets were dynamic Both technologies and markets were dynamic Size and costs of production plants differed widely from industry to industry Size and costs of production plants differed widely from industry to industry Chapter 2: Scale, Scope, and Organizational Capabilities

20. Economics of Scale and Scope in Distribution Chapter 2: Scale, Scope, and Organizational Capabilities By integrating forward into distribution and backward into purchasing. Explaining such vertical integration requires a more precise understanding of the processes of volume distribution. The intermediary The intermediaries’ cost advantage had resulted from exploiting the economies of both scale and scope. The wholesalers’ advantages of both scope and scale had their limits. - A manufacturer of a single product rarely achieved such a volume in retailing - When limits were reached, it become more advantageous for manufacturers.

21. Specialized facilities & Skills in marketing and distribution The manufacturer had more accurate understanding of special facilities and skills than the wholesaler. The manufacturer had more accurate understanding of special facilities and skills than the wholesaler. The more the products required such skills and facilities, the less were the opportunities for the intermediary to achieve economies of scope. The more the products required such skills and facilities, the less were the opportunities for the intermediary to achieve economies of scope. Intermediary ’ s increasing investment in product-specificity Reduced the intermediary ’ s cost advantage Reduced the intermediary ’ s cost advantage Discouraged intermediary making the necessary investment Discouraged intermediary making the necessary investment Chapter 2: Scale, Scope, and Organizational Capabilities

22. Another incentive for the manufacturer to invest in a sale force of his own was competition New production technologies with their unprecedented output created a new type of competition. New production technologies with their unprecedented output created a new type of competition. These few large plants could meet existing demand and quickly began to compete for international market. These few large plants could meet existing demand and quickly began to compete for international market. Cost advantages of scale reflected the market share. Cost advantages of scale reflected the market share. In the new capital-intensive, oligopolistic industries No longer afford to depend on intermediary. No longer afford to depend on intermediary. Need a sale force of their own which holding a market share large enough to assure the cost advantage of scale. Need a sale force of their own which holding a market share large enough to assure the cost advantage of scale. Chapter 2: Scale, Scope, and Organizational Capabilities

23. The motive for integrating backward by building a purchasing Organization Take the place of commercial intermediaries. Take the place of commercial intermediaries. Integrating forward to into wholesaling. Integrating forward to into wholesaling. The establishment of a central purchasing office Provide the enterprise with skilled, product-specialized buyers. Provide the enterprise with skilled, product-specialized buyers. To schedule flows between production and traffic departments To schedule flows between production and traffic departments Product-specific services and facilities were essential in coordinating flows and reducing cost  In these ways integrating backward into purchasing, like integrating forward into distribution, replace the existing commercial intermediaries. Chapter 2: Scale, Scope, and Organizational Capabilities

24. Building the Integrative Hierarchy In the creation of modern industrial enterprise The first step in the creation of modern industrial enterprise was the investment in production facilities large enough to achieve the cost advantage s of scale and scope. The first step in the creation of modern industrial enterprise was the investment in production facilities large enough to achieve the cost advantage s of scale and scope. The second step was the investment in product-specific marketing, distributing, and purchasing networks. The second step was the investment in product-specific marketing, distributing, and purchasing networks. The third and final step was the recruiting and organizing of the managers needed to supervise functional activities. The third and final step was the recruiting and organizing of the managers needed to supervise functional activities.Organizing The resulting managerial hierarchies were established along functional lines.Each function was administered by a department. The resulting managerial hierarchies were established along functional lines.Each function was administered by a department. Normally, the functional departments were organized along the line-and-staff principle, with line officer having executive authority and Normally, the functional departments were organized along the line-and-staff principle, with line officer having executive authority and staff officers having an advisory role. staff officers having an advisory role. Chapter 2: Scale, Scope, and Organizational Capabilities

25. Top management The heads of the major functional departments, the president, and sometimes a full-time chairman. The heads of the major functional departments, the president, and sometimes a full-time chairman. The full-time salaries top managers, the “ inside directors ” and their staff, monitored the activities and performance of the middle managers. The full-time salaries top managers, the “ inside directors ” and their staff, monitored the activities and performance of the middle managers. In making broad strategic decisions they worked closely with the “ outside directors ”, the part-time representatives of families, banks, and other shareholders. In making broad strategic decisions they worked closely with the “ outside directors ”, the part-time representatives of families, banks, and other shareholders. Chapter 2: Scale, Scope, and Organizational Capabilities

26. First-Mover Advantages and Oligopolistic Competition Inventors, Pioneers, First-movers First in the development of a new set of improved products or processes came the inventors. First in the development of a new set of improved products or processes came the inventors. Then came the pioneers, the entrepreneurs who made the investment in facilities needed to commercialize a product or process. Then came the pioneers, the entrepreneurs who made the investment in facilities needed to commercialize a product or process. The first movers were pioneers or other entrepreneurs who made the three of investments in production, distribution, and management required to achieve the competitive advantages of scale, scope or both. The first movers were pioneers or other entrepreneurs who made the three of investments in production, distribution, and management required to achieve the competitive advantages of scale, scope or both. Chapter 2: Scale, Scope, and Organizational Capabilities

27. First-mover advantages The entrepreneurs who invested in plants big enough to exploit the economies of scale or scope brought into being the modern industrial enterprise. The entrepreneurs who invested in plants big enough to exploit the economies of scale or scope brought into being the modern industrial enterprise. - The first to do so acquired powerful competitive or “ First-mover ” advantages. - The first to do so acquired powerful competitive or “ First-mover ” advantages. The first movers managers had already worked out the bugs in the production processes.They had already become practiced in assuring prompt delivery. The first movers managers had already worked out the bugs in the production processes.They had already become practiced in assuring prompt delivery. They knew how to meet customers ’ special needs and to provide consumer credit,installation,and after-sales repair and maintenance. They knew how to meet customers ’ special needs and to provide consumer credit,installation,and after-sales repair and maintenance. To compete with the first movers,rival had to build plants of comparable size and to make necessary investment. To compete with the first movers,rival had to build plants of comparable size and to make necessary investment.

28. Oligopolistic Competition In those industries where scale or scope provided cost advantage,the number of players remained small,and there was little turnover among the leaders. In those industries where scale or scope provided cost advantage,the number of players remained small,and there was little turnover among the leaders. The largest firm in the industries may become the price leader,basing prices on estimates of demand in relation to its own plant capacities and those of its competitor. The largest firm in the industries may become the price leader,basing prices on estimates of demand in relation to its own plant capacities and those of its competitor. Price remained a significant competitive weapon,but these firms competed more forcefully for market share and increased profits by means of functional and strategic efficiency. Price remained a significant competitive weapon,but these firms competed more forcefully for market share and increased profits by means of functional and strategic efficiency. Continuing Growth of the Modern Enterprise Once the investment in production and distribution was large enough to exploit fully the economies of scale and scope,and once the necessary managerial hierarchy was in place, the industrial enterprise grew Once the investment in production and distribution was large enough to exploit fully the economies of scale and scope,and once the necessary managerial hierarchy was in place, the industrial enterprise grew -it added new unit -in four ways. 1.Horizontal integration. -it added new unit -in four ways. 1.Horizontal integration. 2.Vertical integration. 2.Vertical integration. 3.Geographical expansion. 3.Geographical expansion. 4.Product diversification. 4.Product diversification. Chapter 2: Scale, Scope, and Organizational Capabilities

29. Horizontal and vertical combination Horizontal combination In a large number of cases the incentive for acquisition or merger of enterprises producing competitive products was to gain more effective control of output, price, and markets. In a large number of cases the incentive for acquisition or merger of enterprises producing competitive products was to gain more effective control of output, price, and markets. Such horizontal combination increased organizational capabilities and Such horizontal combination increased organizational capabilities and productivity only if a single, centralized administrative control was quickly established. productivity only if a single, centralized administrative control was quickly established. Vertical combination Vertical combination The reasons for vertical integration were more complex. The reasons for vertical integration were more complex. Increased productivities rarely resulted from vertical integration unless the additional processes were directly connected to the firm ’ s existing ones by its own rails, conveyors, or pipe. Increased productivities rarely resulted from vertical integration unless the additional processes were directly connected to the firm ’ s existing ones by its own rails, conveyors, or pipe. Chapter 2: Scale, Scope, and Organizational Capabilities

30. The reason for vertical integration: Vertical integration was to assure a steady supply of material into the enterprise ’ s production process. Vertical integration was to assure a steady supply of material into the enterprise ’ s production process. It reduced the cost of high inventory storage and other caring costs. It lowered the risk that suppliers would fail to carry out contractual agreements. It reduced the cost of high inventory storage and other caring costs. It lowered the risk that suppliers would fail to carry out contractual agreements. If the investment was not made to reduce the cost of transaction risk, it might be made merely as a profitable portfolio investment. If the investment was not made to reduce the cost of transaction risk, it might be made merely as a profitable portfolio investment. Geographical Expansion And Product Diversification Geographical expansion into distant markets was based primarily on organizational capabilities that had been developed by exploiting economies of scale. Geographical expansion into distant markets was based primarily on organizational capabilities that had been developed by exploiting economies of scale. Product diversification was based on organizational capabilities that had been developed by economies of scope. Product diversification was based on organizational capabilities that had been developed by economies of scope. Chapter 2: Scale, Scope, and Organizational Capabilities

31. Structural change When diversification moved beyond producing a full line, new marketing personnel and facilities had to be acquired. When diversification moved beyond producing a full line, new marketing personnel and facilities had to be acquired. Diversification into related industries brought far more thoroughgoing administrative restructuring. This structural change came when the senior managers realized that they had neither the time nor the necessary information to coordinate and monitor day-to-day operations. Diversification into related industries brought far more thoroughgoing administrative restructuring. This structural change came when the senior managers realized that they had neither the time nor the necessary information to coordinate and monitor day-to-day operations. The solution was to establish a structure consisting of divisional offices to administer each of the major product line. The solution was to establish a structure consisting of divisional offices to administer each of the major product line. Chapter 2: Scale, Scope, and Organizational Capabilities

32. Competitive Managerial Capitalism Competitive Managerial Capitalism From the 1890s on, the United States was the world ’ s leading industrial nation. From the 1890s on, the United States was the world ’ s leading industrial nation. What Crucial differences in the nature of markets and in the speed of adopting new technologies led American industrialists to make a greater investment in new units of distribution, purchasing, production, and research and development than did industrialists in other economies? What Crucial differences in the nature of markets and in the speed of adopting new technologies led American industrialists to make a greater investment in new units of distribution, purchasing, production, and research and development than did industrialists in other economies? Why did the modern, integrated, multiunit enterprise appear in greater numbers and attain a greater size in a shorter period of time in the United States than it did in Europe? Why did the modern, integrated, multiunit enterprise appear in greater numbers and attain a greater size in a shorter period of time in the United States than it did in Europe? Why, by World War I, were managerial hierarchies becoming more extensive and the resulting separation of ownership and management becoming more clear-cut in the United States than in other economies? Why, by World War I, were managerial hierarchies becoming more extensive and the resulting separation of ownership and management becoming more clear-cut in the United States than in other economies? Competitive Managerial Capitalism The United States PART Ⅱ

33. Competitive Managerial Capitalism The United States

34. The Domestic Market What most strikingly differentiated the United States from Great Britain and Germany in the late 19 century were the geographical size and very rapid growth of its domestic market. What most strikingly differentiated the United States from Great Britain and Germany in the late 19 century were the geographical size and very rapid growth of its domestic market. In addition to its size, from the 1870s until the Great Depression of the 1930s the American domestic market grew faster than that of any other nation. In addition to its size, from the 1870s until the Great Depression of the 1930s the American domestic market grew faster than that of any other nation. Until the depression the United States outdistanced other leading industrial economies in the growth of both population and per-capita income — the two basic ingredients that determined overall consumer demand. Until the depression the United States outdistanced other leading industrial economies in the growth of both population and per-capita income — the two basic ingredients that determined overall consumer demand. American manufacturers were much less dependent on foreign trade than were those of Britain and Germany. American manufacturers were much less dependent on foreign trade than were those of Britain and Germany. Chapter3: The Foundations of Managerial Capitalism in American Industry

35. The Impact of the Railroads and Telegraph In the United States the geographical extent of the country(even before the West was won)as well as the distances between urban centers meant that far greater mileage had to be constructed than in other industrial countries. In the United States the geographical extent of the country(even before the West was won)as well as the distances between urban centers meant that far greater mileage had to be constructed than in other industrial countries. The railroad provided the technology, not only to move an unprecedented volume of goods at unprecedented speed, but to do so on a precise schedule, that is, a schedule stated not in terms of weeks or months but of days and even hours. The railroad provided the technology, not only to move an unprecedented volume of goods at unprecedented speed, but to do so on a precise schedule, that is, a schedule stated not in terms of weeks or months but of days and even hours. These managers subdivided their operations into smaller operating groups and then appointed middle managers to supervise, monitor, and coordinate the different functional activities on each division. These managers subdivided their operations into smaller operating groups and then appointed middle managers to supervise, monitor, and coordinate the different functional activities on each division. Chapter3: The Foundations of Managerial Capitalism in American Industry

36. To prevent what railroad managers had come to consider ruinous competition and to assure the continuing flow of traffic needed for economic survival, the railroads formed regional federations. To prevent what railroad managers had come to consider ruinous competition and to assure the continuing flow of traffic needed for economic survival, the railroads formed regional federations. Besides being the first businesses to be administered through extensive hierarchies and the first to compete in a modern oligopolistic manner, the railroads were the first enterprises to be funded by modern financial institutions. Besides being the first businesses to be administered through extensive hierarchies and the first to compete in a modern oligopolistic manner, the railroads were the first enterprises to be funded by modern financial institutions. The cost of constructing and equipping railroads was so much higher than that of all previous business ventures, railroad transportation became the first modern high-fixed- cost business, and so the first in which continuous capacity utilization became a major concern. The cost of constructing and equipping railroads was so much higher than that of all previous business ventures, railroad transportation became the first modern high-fixed- cost business, and so the first in which continuous capacity utilization became a major concern. Chapter3: The Foundations of Managerial Capitalism in American Industry

37. The Revolution in Production The Revolution in Production Branded, Packaged product Branded, Packaged product Mass-Produced Light Machinery Mass-Produced Light Machinery Electrical Equipment Electrical Equipment Industry Chemical Industry Chemical Metals Metals The new form of transportation and communication The new form of transportation and communication Brought about an organization revolution in distribution. Brought about an organization revolution in distribution. Created an even greater revolution in production. Created an even greater revolution in production. Stimulating impressive technological and organization change. Stimulating impressive technological and organization change. The laying down of railway and telegraph precipitated a wave of the Second Industrial Revolution at the end of nineteenth century. The laying down of railway and telegraph precipitated a wave of the Second Industrial Revolution at the end of nineteenth century. Chapter3: The Foundations of Managerial Capitalism in American Industry

38. The new technologies The new technologies Transformed the processing of many foods Transformed the processing of many foods Revolutionized the refining of many metals and materials. Revolutionized the refining of many metals and materials. Created brand new chemical industries Created brand new chemical industries Brought into being a wide range of machinery Brought into being a wide range of machinery In the last decade of nineteenth century had a most profound impact by Thomas Edison, Werner Siemens, and other inventor that led to mass production and distribution of electric power. In the last decade of nineteenth century had a most profound impact by Thomas Edison, Werner Siemens, and other inventor that led to mass production and distribution of electric power. Transformed mechanical processes of production. Transformed mechanical processes of production. Created a new form of urban transportation. Created a new form of urban transportation. Revolutionized the making of many metals and chemicals. Revolutionized the making of many metals and chemicals. Chapter3: The Foundations of Managerial Capitalism in American Industry

39. Technological innovations become available worldwide, entrepreneurs had to make the three-pronged investment. (It was the investment,not the innovation ) Technological innovations become available worldwide, entrepreneurs had to make the three-pronged investment. (It was the investment,not the innovation ) To realize the cost advantages of scale and scope in production. To realize the cost advantages of scale and scope in production. To create a product-specific marketing network. To create a product-specific marketing network. To recruit and train a team of salaries managers who would assure the continuing flow of goods through the processes of production and distribution. To recruit and train a team of salaries managers who would assure the continuing flow of goods through the processes of production and distribution. Chapter3: The Foundations of Managerial Capitalism in American Industry The major investments of the critical decades (1880s~1890s). –Transformed the American industry. –Had a powerful impact on the legal,financial and education environment until the twentieth century.

40. Branded, Packaged product Occur in : -Tobacco industry - Grain industry - Consumer chemicals industry - Fresh meat and other perishable products The large enterprise had a competitive advantage over smaller firms. The cost advantage of both were enough to transform industries and to create powerful new enterprises. Chapter3: The Foundations of Managerial Capitalism in American Industry

41. Tobaccoquantitycost Man-made 3000 c/day 5 shilling 60 pence Machine 125000 c/day 10 pence For example : Chapter3: The Foundations of Managerial Capitalism in American Industry Packaging and brand became part of the production process. The manufacturer placed its brand name on the packaged product and began to advertised it. Fresh meat and other perishable products--develop and build a network of refrigerated cars, ships, and depots.

42. Originally developed to produce small arms —” American system of manufacturing “ in the 1880s. Adopted the first modern mass-production methods of fabricating and assembling fully interchangeable and standardized parts. Including: - Small arms - Sewing machine - Agricultural machine Chapter3: The Foundations of Managerial Capitalism in American Industry Mass-Produced Light MachineryMass-Produced Light Machinery Singer Sewing machine company McCormick Harvesting machine company 75% 1.market share 2.the rest

43. ELECTRICAL EQUIPMENT The enterprises created in the 1880sto commercialize the invention of Thomas Edison, Elihu Thomson,and George Westing-house. Thomson-Houston---created the most effective sales organization both at home and abroad Chapter3: The Foundations of Managerial Capitalism in American Industry General Electrical Westinghouse (AEG) Siemens & Halske American European had become the leaders of a global oligopoly that would remain little changed until well after World War Ⅱ

44. INDUSTRIAL CHEMICALS In the late l880s and early l890s American entrepreneurs made the investments and created the managerial teams necessary to exploit new electrolytic technologies in chemistry and also metallurgy. - Skill engineers and with the knowledge of chemistry as well as physics knowledge →replace commercial intermediaries - Invented and produce dynamite (Alfred Nobel ’ s patent) - Based on coal and coke - Beginning to make impressive investments in research and development by World War Ⅰ and much larger than those of British firms.(greatly enhanced organizational capabilities) Chapter3: The Foundations of Managerial Capitalism in American Industry

45. Leadership --- German entrepreneurs - Exploiting the new processes for producing man-made dyes, pharmaceuticals, and aim on the basis of coal-tar chemistry - Had responded even more rapidly and efficiently to the new opportunities and had achieved a strong competitive advantage in the all-important European markets Chapter3: The Foundations of Managerial Capitalism in American Industry

46. Chapter 3: The foundations of Managerial Capitalism in American Industry Pioneering Enterprise Only pioneering enterprises made interrelated investments in production, Only pioneering enterprises made interrelated investments in production, distribution, and management, these enterprises quickly dominated the market. distribution, and management, these enterprises quickly dominated the market. Overcapacity and Declining throughput At established industries pioneers were plagued by overcapacity, and declining At established industries pioneers were plagued by overcapacity, and declining throughput. throughput. Increasing output and overcapacity intensified completion and drove down Increasing output and overcapacity intensified completion and drove down prices. prices. The resulting decline of price in manufactured goods. The resulting decline of price in manufactured goods.

47. Formal agreement The respond to intensified competition and resulting price decline The respond to intensified competition and resulting price decline  Reach formal agreements (enforced by trade associations)  Reach formal agreements (enforced by trade associations) - Reduce output - Reduce output - Set prices - Set prices - Allocate regional markers - Allocate regional markers New capital and energy-intensive industries specially intensified to form New capital and energy-intensive industries specially intensified to form such associations. such associations. Unstable Situation Such cartels remained unstable because the difficulty for providing mechanism Such cartels remained unstable because the difficulty for providing mechanism from secretly cutting prices by granting rebates or falsifying their books. from secretly cutting prices by granting rebates or falsifying their books. In US & UK, such opportunistic behavior was particularly rampant because In US & UK, such opportunistic behavior was particularly rampant because contractual arrangement between manufacturers. contractual arrangement between manufacturers. Chapter 3: The foundations of Managerial Capitalism in American Industry

48. Sherman Antitrust Act Enforcement became even more difficult in US after 1890, when congress Enforcement became even more difficult in US after 1890, when congress passed the Sherman Antitrust Act. passed the Sherman Antitrust Act. Reinforced the common law by declaring such combinations illegal. Reinforced the common law by declaring such combinations illegal. Close inter-firm cooperation was defined as illegal collusion Close inter-firm cooperation was defined as illegal collusion Chapter 3: The foundations of Managerial Capitalism in American Industry Circumstance of Sherman Antitrust Act With little debate and even less opposition, Act made clear the strong antimonopoly bias of the American public Act also reflected the most important non-economic cultural difference between the US & UK, Germany

49. Impact of Sherman Antitrust Act Sherman Antitrust Act was to have a profound impact on the evolution of Sherman Antitrust Act was to have a profound impact on the evolution of modern industrial enterprises in US. modern industrial enterprises in US. Technology and markets determined when enterprises appeared Technology and markets determined when enterprises appeared and in what industries they were located. and in what industries they were located. Sherman Act defined the continuing interrelationships between the Sherman Act defined the continuing interrelationships between the new enterprises within a single industry. new enterprises within a single industry. Chapter 3: The foundations of Managerial Capitalism in American Industry

50. State of New Jersey (1889) Authorizing the formation of holding companies that might operate on national scale. Authorizing the formation of holding companies that might operate on national scale. Permitted the formation of a company that could hold the stock of existing corporations chartered in any state. Permitted the formation of a company that could hold the stock of existing corporations chartered in any state.Impact Members of trade associations, as well as other corporations, were able to exchange their stock for shares in a new holding company. Members of trade associations, as well as other corporations, were able to exchange their stock for shares in a new holding company. The legal form The legal form - Permitted rationalization of facilities and personne l - Permitted rationalization of facilities and personne l - The consolidation or creation of nation-wide sales forces - The consolidation or creation of nation-wide sales forces - The recruitment of a managerial hierarchy to operated and plan for the - The recruitment of a managerial hierarchy to operated and plan for the enterprise as a whole. enterprise as a whole. Chapter 3: The foundations of Managerial Capitalism in American Industry

51. Consolidations clustered in 3 time period 1st period 1880s ( Before the New Jersey law) Growth through merger and acquisition became increasingly widespread during the 1880~1990) Growth through merger and acquisition became increasingly widespread during the 1880~1990) The consolidation occurred almost wholly in refining and distilling industries (American Cotton Oil & American lead) The consolidation occurred almost wholly in refining and distilling industries (American Cotton Oil & American lead) Chapter 3: The foundations of Managerial Capitalism in American Industry 2st period 1890~93 (after the New Jersey law) lasted until the coming of a severe economic depression in 1893 more mergers occurred than in the previous decades Soon several of these enterprises began the move toward administrative centralization and rationalization.

52. The predominant motive was to market control through legally enforceable combinations. The predominant motive was to market control through legally enforceable combinations. - transforming existing trade associations into holding companies - transforming existing trade associations into holding companies - uniting non-associated competitors - uniting non-associated competitors Another motive was to profit from the marketing and manipulation of securities Another motive was to profit from the marketing and manipulation of securities - picked up speed, investment bankers and stock brokers began to participate in the process - picked up speed, investment bankers and stock brokers began to participate in the process After the Supreme Court had indicate by its ruling in several cases, cartels carried on though trade associations were vulnerable under the Sherman Act. After the Supreme Court had indicate by its ruling in several cases, cartels carried on though trade associations were vulnerable under the Sherman Act. Chapter 3: The foundations of Managerial Capitalism in American Industry 3st period 1897~1903 (the most largest and the most significant merger movement) Because of continuing antitrust legislation, the increasing difficulty of enforcing contractual agreement by trade association during the economic depression, and the return of prosperity and buoyant stock market.

53. Scale economies based on carefully scheduled high- volume flows Du Pont Du Pont - reorganize and rationalize the American explosives industry through merger and acquisition - reorganize and rationalize the American explosives industry through merger and acquisition The formation of American Cotton Oil, Southern Cotton Oil, National Lead, Virginia-Carolina Chemical, National Biscuit, American Tobacco, American Radiator, General Electric.. The formation of American Cotton Oil, Southern Cotton Oil, National Lead, Virginia-Carolina Chemical, National Biscuit, American Tobacco, American Radiator, General Electric.. - Through exploiting the cost advantages of scale - Through exploiting the cost advantages of scale - From a strategy of horizontal combination to one of vertical integration - From a strategy of horizontal combination to one of vertical integration - From a strategy of achieving market control through contractual cooperation to one of achieving market dominance - From a strategy of achieving market control through contractual cooperation to one of achieving market dominance Chapter 3: The foundations of Managerial Capitalism in American Industry

54. American Sugar Refining and Corn Products Refining American Sugar Refining and Corn Products Refining - Change in strategy was delayed - Change in strategy was delayed - Endure the trauma of bankruptcy and financial reorganization - Endure the trauma of bankruptcy and financial reorganization Chapter 3: The foundations of Managerial Capitalism in American Industry Giant United States Steel Corporation - One of few mergers continued to be managed as federations - Remained more concerned about controlling price and output than about fully exploiting the economies of throughput (Ch. 4) Giant United States Steel Corporation - One of few mergers continued to be managed as federations - Remained more concerned about controlling price and output than about fully exploiting the economies of throughput (Ch. 4) Primary producers of fabricated products - Consolidated and administratively centralized in order to exploit the economies of scale.  Centralization and rationalization were more profitable than attempting to control price and output by means of a decentralized holding company.

55. All the mergers that lasted, they successfully exploited the economies of scale and those of scope All the mergers that lasted, they successfully exploited the economies of scale and those of scope - Few enterprises resulting from merger remained among the two hundred leaders unless they transformed themselves from a mere holding company into an operating one - Few enterprises resulting from merger remained among the two hundred leaders unless they transformed themselves from a mere holding company into an operating one (centralized, functionally departmentalized structure) (centralized, functionally departmentalized structure) - Production technologies gave large plants cost advantages - Production technologies gave large plants cost advantages - product-specific distribution and marketing needs warranted an investment in a sales organization - product-specific distribution and marketing needs warranted an investment in a sales organization Transformation of holding companies into centralized operating enterprises Transformation of holding companies into centralized operating enterprises - Occurred between the merger movement at the turn of the century and the nation's entry into World War I - Occurred between the merger movement at the turn of the century and the nation's entry into World War I - Successful mergers had made their shift to an operating company that integrated volume production and distribution - Successful mergers had made their shift to an operating company that integrated volume production and distribution Few combinations that continued to operate outmoded plants Few combinations that continued to operate outmoded plants - Did not build new ones that were close to optimal size - Did not build new ones that were close to optimal size - Failed to grow and usually failed to make as satisfactory a return on their invested capital - Failed to grow and usually failed to make as satisfactory a return on their invested capital Chapter 3: The foundations of Managerial Capitalism in American Industry

56. Political and Legal Responses Antitrust law In 1911 antitrust action in the courts resulted for the first time in the dissolution of the three major integrated industrial enterprises. In 1911 antitrust action in the courts resulted for the first time in the dissolution of the three major integrated industrial enterprises. One of the strongest pressure groups was small business, the small manufacturers and distributors in those industries where big business dominated. One of the strongest pressure groups was small business, the small manufacturers and distributors in those industries where big business dominated. The Federal Trade Commission Act and the Clayton Act were both passed in 1914-firmly prohibited the maintenance of market power through contractual cooperation. The Federal Trade Commission Act and the Clayton Act were both passed in 1914-firmly prohibited the maintenance of market power through contractual cooperation. The Impact of antitrust law These actions, however, did not prevent increases in market share through functional and strategic effectiveness. These actions, however, did not prevent increases in market share through functional and strategic effectiveness. This was because many who enforced the antitrust laws agreed that large industrials were able to increase productivity and so reduce prices. This was because many who enforced the antitrust laws agreed that large industrials were able to increase productivity and so reduce prices. Then, antitrust laws brought little relief to its strongest supporters. Then, antitrust laws brought little relief to its strongest supporters.

57. Chapter 3: The foundations of Managerial Capitalism in American Industry The Response of Financial Institutions Merger movement The merger movement was the most important evolution of modern industrial enterprise in the United States from 1880s to the 1940s. The merger movement was the most important evolution of modern industrial enterprise in the United States from 1880s to the 1940s. These mergers put representatives of investment banks on the board of American industrial enterprises for the first time. These mergers put representatives of investment banks on the board of American industrial enterprises for the first time.Capitalist Prior to the mergers of the 1890s, entrepreneurs creating new enterprises had obtained fund for the initial investment in plant and facilities from local businessmen and local banks. Prior to the mergers of the 1890s, entrepreneurs creating new enterprises had obtained fund for the initial investment in plant and facilities from local businessmen and local banks. When their requirements had outrun local sources, industrialists had turned to wealthy individuals, who often identified themselves as capitalist. When their requirements had outrun local sources, industrialists had turned to wealthy individuals, who often identified themselves as capitalist.

58. Chapter 3: The foundations of Managerial Capitalism in American Industry The Response of Financial Institutions Full-time manager Such venture capitalist played a relatively small role in the great merger movement. These mergers were instigated and financed by promoters, by investment banks. Such venture capitalist played a relatively small role in the great merger movement. These mergers were instigated and financed by promoters, by investment banks. The representatives of American banks on the board of the newly consolidated enterprises had little personal knowledge of the businesses, and they continued to rely on the full-time managers. The representatives of American banks on the board of the newly consolidated enterprises had little personal knowledge of the businesses, and they continued to rely on the full-time managers. As the knowledge and the experience of the full-time managers on the board increased and the new enterprise succeeded in financing its current operations and long-term growth primarily from retained earnings, the influence of the financiers waned. As the knowledge and the experience of the full-time managers on the board increased and the new enterprise succeeded in financing its current operations and long-term growth primarily from retained earnings, the influence of the financiers waned. The Response of Educational Institutions The merger movement and the resulting rationalization of production and distribution had a major impact on American educational institutions. The merger movement and the resulting rationalization of production and distribution had a major impact on American educational institutions. After 1900 the relationship between higher education and the industries enterprise became closer. After 1900 the relationship between higher education and the industries enterprise became closer. The rationalization of production and distribution that followed the great merger movement created a demand for executive in other areas besides production. The rationalization of production and distribution that followed the great merger movement created a demand for executive in other areas besides production.

59. Chapter 3: The foundations of Managerial Capitalism in American Industry The Coming of Competitive Managerial Capitalism Separating of ownership from management The rapid growth of these hierarchies in the two decades before 1917 was already bringing about a separating of ownership from management. The rapid growth of these hierarchies in the two decades before 1917 was already bringing about a separating of ownership from management. By 1917 the distinction between “ inside ” and “ outside ” director becoming clear in the United States. By 1917 the distinction between “ inside ” and “ outside ” director becoming clear in the United States. By World War I managerial capitalism had taken root in those industries most essential to the continuing health and growth of the American economy. By World War I managerial capitalism had taken root in those industries most essential to the continuing health and growth of the American economy. Three basic factor had encouraged the expansion of the new modern industrial enterprise: Three basic factor had encouraged the expansion of the new modern industrial enterprise: - The large, rapidly growing, geographically extensive, affluent domestic market. - The large, rapidly growing, geographically extensive, affluent domestic market. - The continuing development of capital-intensive technologies of production. - The continuing development of capital-intensive technologies of production. - The legal environment that prevented the enforcement of the contractual price- and-output arrangements - The legal environment that prevented the enforcement of the contractual price- and-output arrangements

60. Chapter 3: The foundations of Managerial Capitalism in American Industry The Coming of Competitive Managerial Capitalism In the United States the structure of the new industries had come,with rare exceptions, oligopolistic, not monopolistic. In the United States the structure of the new industries had come,with rare exceptions, oligopolistic, not monopolistic. In these oligopolies the new managerial enterprises continued to compete functionally and strategically for market share and profit. In these oligopolies the new managerial enterprises continued to compete functionally and strategically for market share and profit. By World War I the system of competitive managerial capitalism in the United States was already different from the continuing personal or family capitalism practice in Britain and the cooperative or organized capitalism developing in Germany. By World War I the system of competitive managerial capitalism in the United States was already different from the continuing personal or family capitalism practice in Britain and the cooperative or organized capitalism developing in Germany.