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Blackford Chapter 1
Political frameworks
Great Britain
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unified nation, began building empire late 1600s, oversea empire  North Merican ,
British East India Co
Germany
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Not unified, several large German principalities, Lack of unification impeded business
development
North America
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British colonies, American revolution 1776, British business and gov had huge influence
Japan
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Independent nation, Bahuhan system (like monarch), Daimyo : local lords , owned
allegiance to the monarch family and ruled provinces called han, Didn’t favour foreign
trade
China
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Preindustrial times was a united nation, Ruled by dynasties
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Chinese merchants didn’t fully develop many of the legal and financial institutions
important of recon development
The Economic setting (these are the themes of industrial revolution they are better discussed n
lec notes for each of the above countries)
• All of the above countries were commercial economies not subsistence ones
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Elements characterized these commercial economies
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Commercial agriculture and regional specialization
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Food no longer grown for farm consumption
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Use of increased technology allowed for mass production of food along with new
transportation to access markets
•
Regional specializations of production occurred making each nation more efficient and
productive and increasing standards of living
Trade
•
Regional specialization in trade
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Domestic commerce and foreign trade expanded rapidly
•
China and Japan were different didn’t like foreign trade
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Growth of cities
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Urbanization in all countries
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Significant areas of trade and commercialization
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London was THE city
Politics, Economics and Society
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All played a really large role in how business developed
•
Stabilization of all three increased living standards and growth
Merchants
• British merchants
o Overseas trade
o
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Joint stock companies
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Muscovy Company first of its kind
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Received charters
o
Partnership agreements based on family ties
o
Overseas trade was less vital than domestic commerce which was 3x bigger
o
Originally didn’t have social status but this changed as merchants made money
Colonial American merchants
o
Basically the same as the british merchant
o
Except they had status from the beginning and was the bases of why America
prospered
o
Were most important political leaders in America
Tokugawa Merchants
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Merchant houses
o
Governed by Daimyo
o
Ex Mitsui
o
Static view of society
o
4 HUGE businesses
o
But smaller trade was still very important
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o
Very different set up than british
Chapter Two –Blackford –The Many Paths to Industrialization
• Industrialization fundamentally altered key business practices that the history of business
can be divided into two basic time periods: preindustrial business, and industrial business
•
Alterations in the work process and ways of work: machinery, centralized labour at
factories, and workers became more specialized
Political Frameworks
• Governments removed barriers to economic growth, and took action to stimulate
economic activity
Great Britain
• Strong national government, standard currency, legal system, system of taxation, no
internal barriers, strong regional markets, and a national market
•
Bubble Act of 1720 outlawed many joint stock companies, new limited liability laws that
passed in 1856 and 1862 reversed the Bubble Act
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Family business remained very important
United States
• Declaration of Independence in 1776 and the American Revolution their situation
changed abruptly
•
Colonies no longer part of the British empire, and now as states they had to devise a
national government
•
National government was weak, there was no president or feudal court system, could not
levy taxes, regulate trade, or deal with general warfare problems
•
Merchants wanted a stronger national government to regulate trade between states,
settle land disputes, help expand overseas trade, and supported building a Navy
•
Created a constitution to provide all this
Japan and China
• Decentralized military government, some sense of unity, no modern government, change
towards industrialization came from outside sources
•
In 1854 two ports were opened to trade, however, this forced opening of their country
troubled many Japanese people
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Wanted to rid their land of foreigners and build up their economic and military might; new
slogan became “rich country, strong army”
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Universal military service, national army formed, government under prime minister came
to be, modernized civil service, constitution promulgated
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Most aid for industrialization came from new national government, abolished roadway
inspection stations, ended political barriers to internal trade, transportation improvements
provided population mobility, ended the four-class system, allowed peasants to grow
whatever crop they desired, established joint stock banks, central bank, railroads, canals,
ports, and the government built pilot project factories and sold these to private owners at
a cheaper cost
Government, Business and Industrialization
• Strong national governments were required
•
Large universal banks and trade associations or cartels were of special importance
The Industrial Revolution
• 1st industrial revolution- led by Great Britain, involved making relatively technologically
simple products (cotton textiles)
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2nd industrial revolution- based on more scientifically and technologically complex
industries (alloyed steel)
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3rd industrial revolution- grounded in changes in communications and information
handling
The Timing of Industrialization
• Cotton textiles were first industry to industrialize in Great Britain
•
Consolidation of work in factories, new types of machinery, and new sources of power
helped Great Britain
•
Centralization of work in factories offered employees and investors many advantages: cut
transportation costs, allowed more supervision, improvements in scheduling, and allowed
for the use of new technologies in Britain
•
Great Britain fell behind the US and Germany in the 2nd Industrial Revolution
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Agriculture was still more important than industry to America’s economy
•
For all the changes that had occurred in Japan, heavy industry was just really beginning
to grow in 1920
Raw Materials
• Great Britain was able to industrialize quickly due to their raw materials: cotton, coal, food
•
US had an abundance of raw materials which helped them surpass Great Britain in
1900s as world’s leading industrial power
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The US had wood, and wood was more important for initial industrialization in American
than in England
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Japan was not well endowed with raw materials, but possessed enough to sustain
industrialization
Capital
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Initial industrialization did not require as much capital as one might have imagined
•
In the US and Great Britain local banks were significant sources of capital, private
investors provided investments into manufacturing and railroads, local networks, family
and friends were important source too
•
Japan’s capital came from varied sources: government, agriculture, private investors,
wealthy landlords, leading merchants
Labour
• Combination of rising birth rate and declining death rate more than doubled population of
England which provided strong workforce, plus immigration
•
Several sources of labour for the US: major rural to urban migration, immigration from
abroad, but overall shortage of labour supply
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In Japan the workforce was mainly women until 1920 when men took over the force
Markets
• Great Britain: strong domestic and foreign markets, population increase provided
demand, improvement in living standards increased disposable income, formed overseas
markets
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United States: development of domestic market was of utmost importance, transportation
improvements, and a population ready to buy products
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Japan: domestic and foreign markets strong, transportation improvements increased
trade
Industrialization in China
• An observer in 1750 might have said the Chinese economy was advanced and ready for
industrialization
•
However, industrialized after many other countries, not until the early 1900s
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Dynasty was weak, major religious conflict, no financial institutions, no laws, no
instruments needed for industrialization, lacked commercial laws needed to develop
businesses, and lacked raw materials
The Process of Industrialization
• Two phenomena merit stress in explaining industrialization in Great Britain: first, it
evolved as a challenge and response process as an innovation of manufacturing brought
forth an innovation in another stage as a way of removing production bottleneck, and
secondly, industrial advances were interrelated
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Examples: spinning wheels into spinning machines, charcoal into coking coal
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The United States sought to achieve high volume production with low cost production and
were successful in three major industries: liquids and semi liquids (flour, soap),
processing agricultural goods into consumer products, and steelmaking and metal
working industries
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Japan was able to benefit from the mistakes of Great Britain and the US, borrowed ideas
from other nations, learned from their mistakes, technology transfers, and war helped to
stimulate their economy and production of factories
Industrialization and the ‘Tragedy of the Commons’
• Rapid exploitation of natural resources to produce goods for national and international
markets
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Examples: American Buffalo, over fishing, forestry
Chapter 3 Blackford
• Industrialization had the most significant impact on Britain compared to other nations.
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Small Family firms such as (sole proprietorship) & (partnerships) accounted for most of
great Britain’s industrial and economic growth during the eighteenth and nineteenth
century s
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Firms were very unstable during this time and would often fail, only to be refilled by
another entrepreneur
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In the eighteenth century nearly 33,000 firms declared bankruptcy
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As industrialization sped up business continued to go under
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Family firms remained popular in Britain, where as in the united states industrialization
was used to help accelerate Nation income and total population to nearly triple that of
Britain by 1920 (segmented markets)
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Subcontracting small firms was large during this time
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Over sea markets took a third of Britain’s industrial output
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Political factors in Britain were geared towards smaller firms
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In contrast to America, cartels are legal in Great Britain and act as a form of merging.
Cartels were what preserved small business in Britain
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Britain’s system worked un until the late 19th century
Industrial Districts
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Small companies complemented the work of each other by locating in a particular region,
with no single company controlling their steps
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Geographically Britain was perfect for industrial districts; individual companies would
perform a certain part of the job, only for it to be finished by another family company in
the surrounding community. Ex. Cotton textile factories & Sheffield Steed district (pg 67)
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Great Britain also had a highly successful way to market the finished goods
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Sheffield steel was huge in the 1700 & 1800s providing steal to most of Europe (firms
would also complement each other by only performing a certain part of the job.
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Networks of firms, whether joined together in industrial districts or linked in
subcontracting arrangements, remained important in industrial times
Big Businesses in Great Britain
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Big business were slower to develop in Great Britain but it does not mean they did not
exist (Ironworks of Ambrose Crowley)
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Great Britain experienced a wave of mergers in the late 19th century, leading to the further
development of bug business (Existence of economies to scale and scope)
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Overall Britain’s smaller more segmented firms, along with existence of well established
system of wholesalers and retailers, militated against vertical integration did not compare
to their American counterparts
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British entrepreneurs were successfully in making branded packaged goods: Cigarettes,
beer, soap, sugar, flour. These were effectively marketed resulting in growth to serve a
national market by exploiting economies of scope and scale
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Industrialization was used to introduce machinery into the brewing industry ultimately
growing firms into big businesses
Management
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Even with largest big business in Great Britain, family ownership and management long
remained more common than in the United States. Ex as late as 1930, 70% of Great
Britain’s 200 largest companies had family members sitting on the board of directors
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New levels of management and salaries were introduced according to importance
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Managers and labours had to establish a relationship in great Britain often to establish
forms of subcontracting smaller companies to help divide some duties within a company
British business and sales and services
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Business and sales service advanced with that of manufacturing, and were essential to
development of industrial firms
Retailing
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IN 19th and 20th century new types of retailing outlets began challenging family firms
(department stores)
Development of Banking
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Banking legislation passed by parliament allowing formation of joint- stock companies
(1833)
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Britain had a banking system led by a handful of large city banks
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Britain’s banking system met capital needs of 19th century
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Businesses in Industrializing Germany
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Germany was a latecomer to industrialization
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Germany industrialization stressed in heavy not light industries and emphasized producer
rather than consumer goods
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Cartels and banks were a large part of business development in Germany
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Labour skill was important in Germany and they embraced changes in technological
advancements unlike that in Britain and U.S (for fear management would deploy
technology in ways that undermine the control of work process)
Chapter 4 Rolls-Royce and The Rise High technology Industry
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It began in England with three men: Engineer Henry Royce race car driver Charles Rolls
and team manager
• In 1903 in the midst of a recession Henry Royce became convinced that he could design
a superior product.
• Rolls took an interest in Royce’s new vehicle which was called the “Royce” it had ten
horse power and 2 cylinders.
• In 1904 C.S Rolls and. Co. was brought into existence
• By 1907 the company ha raiser enough capital to build a new plant in Derby, England.
• With the new plant in place they were able to design a new 6 cylinder car called which
was called the 40/ 50 model.
The Birth of the Rolls –Royce Brand
• Rolls died in a flying accident in 1910• After the death of Rolls, Rolls-Royce cars came to be based on elegance and sheer
quality rather than speed.
• The cars ere custom ordered since the ob cards bore the customer’s name the cars were
referred to as their future owner’s name.
• The cars were sold with Chauffeurs and the chauffeurs were held to the highest
standards.
• There were two categories that the chauffeurs were expected to follow:
o -Politeness: must always tip their hats to the customers; always respond in sir or
madam, or their title such as lord or lady.
o -Filling up with Gas: They must fill up with gas at every possible opportunity ex.
during meals that way there may be no possibilities of a road side failure so the
brand can’t be tarnished.
World War I
• During the war the demand for cars fell to zero so the company decided it was in their
best interest to start building plane engines.
• They soon realized that selling engines to the government was very different than selling
cars to the public.
• After world war one there was a meeting called to discuss the merger of weaker car
companies under the proposed merger the British car companies would have been
forced out of business
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Organization Building and Ernest Hives
• Rolls Royce entered a ne era hen Ernest Hives became the new general manager in
1937.
• As a manager Ernest highly emphasized teamwork, but with the condition that a strong
leader ( usually himself) be present.
Design Engineering: Small changes, Not Radical Innovations
• World War II was a war of technologies in which both sides invested vat resources in an
attempt to build superior weapons.
• Allies prevailed because they had private firms that were willing to cooperate with
government agencies to engineer and development certain projects.
• Rolls Royce’s biggest advantage was it was its policy of carefully improving an existing
design rather thn attempting to make radical changes that might lead to a catastrophic
set back.
Chapter 5 – Blackford – Charles Ziegler
• Merchant houses suffered as a result of the political changes that accompanied the Meiji
Restoration. Adoption of Yen currency decreased their importance as money changers.
This made Japanese merchants more conservative than their British or American
counterparts.
• Business leaders taking advantage of new opportunities did go into shipbuilding,
railroads, manufacturing, and banking did so increasingly through the formation of jointstock companies.
• In Japan, big diversified companies called zaibatsu because powerful in industry and
some other business fields in the opening decades of the twentieth century. This is
different from the emphasis on large, vertically integrated corporations
• Mitsui, Mitsubishi, Sumitomo, and Yasuda are known as the “big four” zaibatsus of
Japan. Mitsui was formed from Tokugawa merchant houses. By the end of the 1920s,
zaibatsus accounted for about ¼ to 1/3 of Japans GNP.
• During this time, Japanese trading companies or “Sogo Shosha” were a valuable factor in
industrialism. They were important not only as traders for the zaibatsu, but because they
possessed knowledge of foreign technology in Asia, Europe, and the United States.
• Mitsui Bussan and Mitsubishi Shoji were the largest and most important trading
companies. Mitsui worked in the textile industry by importing machinery for other textile
companies, and opened up foreign markets.
• After WW2, American industrialists in Japan broke up Zaibatsus, but by 1960s they were
reinstated to increase Japan’s economy over that of communist China’s.
• As Mitsui was dismantled, it reorganized into a new form called Keiretsu in the
1950s/60s. Now there was no central office, only a meeting of the individual companies’
executives each Monday called the “Monday club”. Stock interchanges among Mitsui
companies and borrowing from Mitsui bank provided unity.
• Mitsubishi was founded by Iwasaki Yataro, who purchased a samurai status in the Tosa
domain and rose the domain’s bureaucracy as a procurer of arms and ships. After the
Meiji restoration the domain was abolished and its ships became the basis for a shipping
company with Iwasaki as its manager. In 1873 Iwasaki took over and renamed it
Mitsubishi.
• Most Zaibatsus were organized as a central family partnership that owned stocks in other
“core companies” such as banks, mining companies, trading companies, etc.
• Of 50 biggest manufacturing businesses in Japan, 28 were in textiles. To sell their
products, early manufacturers sometimes set up their own sales outlets, a form of vertical
integration similar to which was common in America in the late nineteenth and twentieth
century. However this was relatively uncommon until after WW2
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The sino-japanese war of 1894-5 shocked the Chinese, but left the Qing dynasty
unaffected. The result was a conservative backlash against foreigners in China called the
“Boxer Rebellion”
In 1911, a revolution replaced the Qing dynasty with a republican government ending
2100 years of imperial rule in China. Sun Yat-sen, the leading republican emphasized
three principles in his overthrow of the Qing: Nationalism, Republicanism, and
nationalization of the land.(a vague form of state planning). The movement was strongly
towards socialism
Yuan Shikai assumed presidency of the republic in 1912 as a military dictator, controlling
the largest army in China.
Agriculture was increasingly commercialized, and most of China’s economy consisted of
small family farms. In the cities, such as shanghai, modern businesses called gongsi,
industrial establishments arose
Guanxi: relationships based on kinship, sworn brotherhoods, student teacher
relationships, so on: dominated social and economic life.
Native place associations called Huiguan and Tongxianghui, the former elitist and
traditional, the latter developed in the republican period and less elitist.
Printing and book publishing were the top industries in China 1876-1905
Dasheng mills were modern factories, using machinery from Lowell, Massachusetts,
installed with the help of Western engineers. The dasheng mills introduced large-scale
industrial production to the countryside and new types of labor organization to the shop
floor.
In running the Dasheng mills and the growing group of affiliated companies, Zhang
adopted an authoritarian management style. He delegated supervisory jobs to mill
managers, but kept decision making powers in his own hands.
Chapter 5 – Japanese and Chinese Businesses during Industrialization.
• From a merchant house in Tokugawa times, Mitsui emerged as a large, diversified,
nationwide company in the late Meji period. Called a zaibatsu, Mitsui had extensive
interests in banking, manufacturing mining and trading. New companies grew up. As new
firms and forms of business arose in Japan, types of business management, the status of
business leaders and the nature of labour relations all underwent alterations. Family
networks lay at the heart of zaibatsu. Family connections and ties to localities were of
great importance, regardless of company size.
• Merchant Houses and Industrialization
Many Japanese merchants had become more conservative than their British or American
counterparts because of the restrictions, including currency reform and political changes,
placed on their activities in the Tokugawa period. Most lacked the daring to enter into
industrial enterprises. Business leaders who did take the risk did so through shipbuilding,
railroads, manufacturing, and banking by way of joint stock companies. Legal recognition
through a general incorporation act of 1893 spurred their development. Japan possessed
3336 joint stock companies in 1882 and 8612 twenty years later.
•
Zaibatsu Development
Zaibatsu provided a way for Japan to compete effectively with other nations. They were
more diversified than big business in Britain and the States. They were composed of
manufacturing ventures, mining ventures, a bank to finance these concerns, and a
trading company to sell the products overseas. In the years leading up to the first world
war eight major Zaibatsu emerged – Mitsui, Mitsubishi, Sumitomo, Yasuda, Asano,
Okura, Furukawa, and Kawasaki. By the 1920’s zaibatsu accounted for one-quarter to
one-third of Japan’s GNP.
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•
The growth of trading companies: The Sogo Shosha
Of special importance in the rise of the zaibatsu and the growth of the Japanese
economy was the development of the sogo shosha. The trading companies handled the
foreign trade of the zaibatsu’s. The trading companies were not only important to their
zaibatsu but also to the development of the Japanese economy, especially the industrial
sector. Between 1868 and 1914 sogo shosha were formed to compete with the west, who
initially handled Japanese trade. By the end of this period they were operating throughout
Asia, Europe, and the United States. However they were generally specialty traders not
fully developed trading companies. It wasn’t until 1930 they became fully developed
general trading companies.
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Managing Zaibatsu
Most zaibatsu came to consist of a center company organized as a family partnership
and other companies, called core companies – the bank, trading company, mining
ventures and manufacturing enterprises – which were often joint stock companies, a
majority of whose shares was owned by the center company. The core companies in turn
would own smaller companies as there subsidiaries. In a typical zaibatsu, officers in the
Center Company, usually family members, held presidencies or dictatorships in the core
companies and helped coordinate the activities of the zaibatsu as a whole. Families
continued to control the center companies of the zaibatsu until after the Second World
War.
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Significance of Zaibatsu
They offered a viable alternative to the districts of small firms in Great Britain and the
large, vertically integrated manufactures of the States. With their sogo shosha and banks
they were able to compete effectively with leading western companies. The zaibatsu
succeeded more through the exercise of economies of scope than those of scale. It was
by bringing together in family controlled enterprises a wide range of financial, insurance,
shipping, and marketing services that the zaibatsu moved ahead. Economies of scale in
finance were especially significant.
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The continuing importance of non-zaibatsu firms in Japan.
Not all Japan’s largest business were zaibatsu. Relatively large independent firms
existed, for instance, in textiles; however, relative to their American counterparts they
were small. In sales and services a range of large and small non zaibatsu firms jock-eyed
for position.
Cotton textile companies
Of Japan’s fifty largest manufacturing and mining companies in 1896, twenty eight were
cotton textile companies. These firms were not highly integrated like the US ones and
were more like the British counterparts. They depended on other companies, often the
trading companies, to buy their raw cotton and sell their finished cloth. The reason they
were not large and integrated like the American firms is because their national market
was smaller.
•
Smaller businesses in manufacturing.
While zaibatsu and some other large businesses, such as those in cotton textiles, were
very important in Japans industrial development, smaller firms were also significant. In
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1909 businesses employing 5-49 workers made up 46 percent of manufacturing
employment, those with 50-499 workers made up 37 percent and more than 500 was 21
percent. Unlike America even in the boom years during World war one less than one-third
of the industrial workforce was employed by large establishments.
•
Businesses in sales
Vertical integration into sales was uncommon in Japan until after World War II, and even
less so in America. Japan resembled Great Britain more than the States in terms of
marketing. Japans major urban markets were relatively close together on one island. In
1885 there were over 1 million retailers in Japan which had a population of about 38
million. From the 1880’s on retailers became highly specialized often selling only 1 line of
goods. These specialty stores grouped together in planned shopping streets, such as the
famous Ginza in Tokyo, which opened in 1878. By around 1910 Japan had a complex
marketing system composed of several tiers and types of wholesalers and retailers. Well
into the years after WW II foreign business had a difficult time breaking into this network,
this difficulty helps explain why foreign firms had trouble getting started in Japan.
•
Labour relations in industrializing Japan
Confusion has often existed about Japanese labour relations. It has sometimes been
incorrectly assumed that the system, with its emphasis on cooperation between
managers and workers, was mainly a holdover from a family notion of business that
existed in Tokugawa times, or that there was something unique to the culture that
encouraged such close cooperation. Labour relations in Japan have, in fact, long been
complex. While merchant houses were operated as family enterprise, not all businesses
were run this way. Artisians and skilled workers often laboured on a contractual basis,
frequently moving from firm to firm looking for higher pay and better opportunities.
Unskilled labourers were often hired on seasonal contracts or for specific tasks. For most
of these workers lifetime employment and seniority based wages were unheard of.
Women composed 62 percent of the of Japans industrial workforce in 1909. They had
neither lifetime employment or seniority based wages they lived in company housing and
needed passes to leave it was considered slave like from an outsiders perspective.
Dissatisfied workers responded in different ways, some woman ran away from the mills,
leading to high turnover rates. A few frims belonging to the Japan industrial club,
dominated mainly by zaibatsu and companies heavy in industry, began offering seniority
wages during WWI, and some started forming unions which allowed collective bargaining
with management. Nonetheless the government was generally hostile to the formation of
unions.
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Business in Industrializing China
As in Japan, China’s government tried to spur economic development to catch up with
the west; but it proved less effective than the Japanese government. Imperial China did
not often wholeheartedly embrace economic development, at least not to the degree of
that the Japanese government did.
Chinese governments and economic development
By 1900China had a population of 450 million, 80 percent of whom laboured on the land.
The standard of living for the average Chinese had been on par with western Europe as
late as 1750, but it slipped in relative terms in the 19th century. With the population rising
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so quickly along with heavy foreign encroachments the Chinese government was
severely strained. There were 5 leaseholds granted to foreigners covering more
extensive territories: a large part of Shandong to Germany, the Liaodong to Russia,
Guangzhou wan to France, and the New Territories adjacent Hong Kong to Great Britain.
Altogether about 400,000 foreigners lived in China in 1920. To re-establish their nations
sovereignty and to encourage economic growth, the Qing dynasty considered reforms in
its last years, including educational reform, the establishment of modern infrastructure
and drafting a constitution. In 1903 the dynasty created the first ministry of commerce. In
1911 a revolution replaced the Qing dynasty with a republican government, ending 2100
years of imperial rule.
•
Shanghai’s Industrial Districts
The production of print machinery, one of China’s modern industries, demonstrates well
the importance of networks. Focused in industrial districts in Shanghai, making printing
machinery was tied to the growth of modern book publishing, which grew up in that same
city. The evolution of the two industries was symbiotic, as each spurred the other. Initially
they had to import the machinery from the west but by 1895 Chinese entrepreneurs set
up workshops to fix machinery which eventually led them to making their own and selling
it. By the 1920’s and 30’s they began to reach Japanese and south Asian markets with
sales of their presses. Shanghai became the centre for machine making in china.
•
Conclusion
With the development of zaibatsu such as Mitsui and Mitsubishi, big business arrived in
Japan. As in the US, the rise of big business changed Japanese business firms. Family
control remained longer strong longer in Japan than in the US, and in this respect they
resembled their counterparts in the Great Britain and Germany. The continued
importance of small business in Japan illustrates the complexity of their business
situation during industrialization. Companies of many sizes contributed to the
development of the Japanese economy. As a very rough generalization, one may say
that just as zaibatsu allowed Japan to compete with the west Universal banks and cartels
helped Germany.
"The Rise of Modern Business" Blackford
Chapter 6 - American, British, and German Businesses in the Interwar Period
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Frequent changes in business during interwar period
The interwar period was turbulent economic time, with lots of ups and downs, like a rollercoaster as Blackford describes it
What occurred in American business affected Europe and vise versa (expected in an
interconnected world)
American Business
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Issues with managing were revealed after WW1, revealed basic deficiencies in the
management of large manufacturing businesses. The recession exposed serious
management problems previously hidden during a period of prosperity.
• The solution?
Decentralized Management designed to allow their companies to react quickly to market change
Diversification and Decentralization
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Beginning of the consumer economy: early 20th C. many companies produced a
widening range of consumer durable goods. 1920s US was rapidly becoming a consumer
society, with consumer durables bought on time through instalment payments becoming
central to the nation's economy. (kinda ironic that the US economy is based on debt,
think back to the cause of the recent crises)
Consumerism and consumer buying tied to American economy which led to the creation
of the advertising industry advertizing and marketing became big business in their own
rights
Both GM and Ford 'helped' consumers by setting up financial agencies to loan money to
buy products.
Henry Ford introduced the conveyer-belt mass production techniques revolutionary
concept - assembly lines brought work to labourers at fixed stations in factories, built on
earlier advances in using interchangeable parts in American factories through the 19th C.
comparison of diversified and centralized management
As manufacturing businesses became more diversified in terms of their products and
markets, and more directly affected by the ups and downs of consumer buying,
centralized management could no longer adequately run the company, a point driven
home by a postwar slump
The new system = Decentralized
In decentralized management the head office came to concentrate upon planning for the
entire company and on coordinating the operations of its parts
No longer did a few people or few committees in the head office run all aspects of a firm's
business
General Motors: Pioneer in Decentralized Management
• GM was fathered by William Durant who although an energetic empire builder, failed to
provide his company with adequate management
• Enter Alfred P. Sloan Jr. and the purpose of decentralized management. Sloan prepared
an "organization Study" that contained a plan to revamp the management of GM even
before the crises of 1920.
• The plan introduced decentralized management to GM by clearly outlining the duties and
responsibilities of the head office and the divisions and by providing for effective
communications among the different parts of the company.
• The plans goal was to combine divisional autonomy ( which means each division makes
their own decisions) with supervision by a strong central office (opposite of Ford =
differentiable products) as the automobile market matured, Sloan and DuPont recognized
the need to differentiate their cars ranging from Chevy to Cadillac, from each other and
from those of their competitors
• They eliminated overlap in the prices, products and markets of the divisions - (each car
was completely different) to ensure coordination in the work of the divisions, DuPont and
Sloan created the office of group vice-president
• Sloan and DuPont also created a strong central or head office called the corporate
officeSloan and DuPont established a number of interdivisional relations committees this allowed for discussing common issues that may be affecting the company
- Finally, Sloan and DuPont improved financial reporting and statistical controls (like each
dealer reporting to head office number of cars sold each day)
• -thus creating a model long followed by other diversified corporations (keep in mind this is
pre-1920 so its quite impressive)
The Spread of Decentralized Management: Strategy and Structure
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The more diversified a company was in terms of its products and markets, the more likely
it was to establish some form of decentralized management
Issues with decentralized Management
• over several decades, too many layers of management were created in many of the
companies using decentralized management systems
• too often managers in the corporate office lost touch with what was going on in their
companies' factories, as too few of them understood operational management
Small Business in Manufacturing
• Decrease in small business during period
• With the rise of large manufacturing companies, the share of small firms in both industrial
employment and output dropped
• Success of small business came from specialization
• Success came through the development of specialized products for niche markets. some
entrepreneurs specialized in products with only limited demand thus avoiding competition
with big businesses (who did not see the value of entering small unappealing fields)
• As the firms developed, they were able to acquire and keep their growing number of
employees through a combination of monetary and nonmonetary incentives
Big and Small Business in Industry
• Before the civil war, most business was small firms but with the acceleration in
industrialization that occurred after the Civil War, this situation changed
• Lots of large companies
• The spread of large companies with decentralized management systems accelerated the
trend toward concentration and the growth of oligopoly in the United States, (in economic
terms, this ment that the decisions of the managers of big businesses rather than the
market forces determined the prices and quantities
Business in Sales and Services
• The interwar years brought changes to the service and sales businesses. especially
sales, as the continued development of chain stores and the rise of supermarket eroded
the importance of independent retailers
Chain stores = low prices and high profits
• Chain stores gave lower prices to consumers while still earning substantial profits
• Chains engaged in the most up to date business practices: the use of new accounting
methods to keep track of inventories, new store layouts and new forms of advertizing
• Many chains cut out the middlemen in distribution, dealing instead directly with the
growers and producers of goods.
• Chains also engaged in extensive backward vertical integration (this is like what would
happen when Zehrs starts to buy up the bread, milk, etc producers)
From Associationalism to the Welfare State
• one reason for the merger movement of the 1920s and a more general business
rationalization movement - an attempt to make businesses more efficient and productive
• Historians often label the nature of government-business relations in the US during the
interwar years "associationalism" - used to regulate business as in the war effort to build
a stock pile of weapons, "just in case" (I think this is the military-industrial complex)
• President Herbert Hoover tried to set up an associative state as an alternative to either
government control of the economy (what he called statism or cut-throat competition and
individuals)
• A great and ambitious attempt, but the GD revealed the inadequacy of the idea.
• In this widespread situation of economic distress business rationalization came to mean
much more then simply making individual firms more efficient or smoothing out small
variations in the business cycle.
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Rationalization came to include economic recovery, with the recovery efforts led by the
federal government.
• Anti-trust laws were suspended, and prices and production quotas were set in an attempt
to help businesses get back on their feet
• However, when rationalization moved beyond the efforts to make companies more
efficient and productive and threatened to encroach on management rights, business
leaders backed off from the movement
• Federal government spending on the war ended the Great Depression, and
unemployment finally dried up in 1942. (that is crazy...)
Labor Relations
• In America employers fought for control with employees, especially skilled workers
• But during the WW1, federal government struck a deal with union leaders
• As long as they did not strike during the war, the government would allow unions to
organize factory workers
• But after the war many businesses tried to destroy the union
• But then after the GD, the government tried to strengthen the working class and once
again helped them build unions.
• In 1935 - National Labor Relations Act which gave workers the right to form unions on
their own, and for companies to collectively bargain with them on the eve of WW2, 16
percent of all nonagricultural workers belonged to unions
British Business
• Mergers and efforts to make manufacturing firms more efficient were commonplace, and
through the mergers large companies developed in some fields of British manufacturing
• Great Britain remained primarily a land of smaller companies business in interwar years
• Small firms dominated the business landscape
Rationalization, Consumerism and Big Business
• 1920s - economic recovery was the main goal
• business leaders looked to rationalization - and to mergers, which they often equated
with rationalization and efficiencies - for their salvation they learned from the subsidiaries
(like fords conveyor system)
• The government encouraged businesses to adopt mass-production methods, a situation
that stimulated merger activity, as firms sought to expand their production capacities.
• Like the US, automobiles were the symbol of a consumerist society.
• Although not as far as America, the increased british consumer demand created the
possibility of economies of scale (cost advantages of expanding business) which then
encouraged the growth of larger factories and firms
Changing Business Management
• As time progressed, more and more of the large british companies established
centralized bureaucratic management systems, but like the US they could not manage
• Activities were organized by divisions, and each division had a chief who reported to
head office. head office controls financial matters and strategies like the US,
sophisticated accounting and record keeping bound together all the parts.
• Big business managers
• But unlike the states, many business leaders came from "business" families. some
companies even recruited their top managers from the government. (Vickers - the leading
arms makers recruited from the military)
Imperial Chemical Industries
• the company was formed as part of the business rationalization movement, the firm
expanded its operations in the 1920s and 1930s to become one of GB's largest and most
complex companies
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•
•
It moved into the synthetic production of ammonia that makes fertilizers and explosives.
Then started producing synthetic gasoline from coal
Of the four companies merging to form ICI, Nobel Industries had the greatest influence
on its management practices
• While their system of management succeeded in lowering production costs, it had flaws,
ICI was simply too complex in terms of its products and markets to be run well by a
centralized management
• Therefore ICI replaced central with Decentralized.
The Limits of Rationalization
• It turned out to be the case that those big firms that did result from mergers were not
necessarily as efficient as they might be.
• Like the US, many managers were unwilling to accept any type of impingement by the
government.
The Failure of Rationalization in the Steel Industry
• British steel makers felt intensifying pressure from large vertically integrated American
and German competitors in many markets (an increasing share of Britain's production
went to Commonwealth markets, made up of countries associated with the British Empire
business was bad and therefore needed a bailout
• The bank did not want to invest in an unprofitable industry, nor did they have the
management techniques, and they didn’t want to be tied to the government in any way
• The government sought to form cartels in the steel industry, these efforts, however,
accomplished little in the way of rationalization and increased efficiencies
British Labour Relations
• Unlike US, where the government until the 1930s opposed unions, the British accepted
them, and indirectly promoted the establishment of trade unions
• As industrialization became more technologically complex with the development of such
fields as chemicals, synthetic fibres, and automobiles, and electrical equipment the
British were less educated in the sciences and engineering, and were affected by the
shortcomings.(interesting point, the British had to balance the advantage that the US had,
so they lowered wages to have a competitive advantage to make up for what they lacked)
Retailing in Great Britain
• Small retailers continued to predominate in sales
• Resale price maintenance agreements meant the large retailers could not lower prices to
compete with mom-and-pop stores
• Competition had to take place in terms of service, where small retailers close to their
customers often had the advantage
Business and City Planning in GB and the US
• The plans were intended to make the cities more efficient economically, move them
ahead of their urban rivals
• Extend the social influence of business people and professionals over working-class
residents
German Business
• The German state, especially under the Nazis, increased its involvement in economic
affairs, until businesses, especially those in heavy industry, became almost simply part of
the state
German Business during the 1920s
• WW1 brought changes to government-business relations in Germany
• As in the US and GB, the government became increasingly involved in business affairs
• Germany had the most complete system of social welfare programs and industrial
relations in the world
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Business and government actions brought prosperity to Germany in the mid and late
1930s
German Business and the Nazis
• Under Hitler, Germany became a dictatorship; the Nazi government forced all major
industries to form cartels. with cartels becoming not independent business associations,
but arms of the state
•
Small businesses, like Japan, were still important to the state, for they were the
subcontractors of the large state run firms
Conclusions
• Development during the interwar years, especially in Great Britain, raise the important
issue of international competitiveness
• Family connections and influence remained pronounced in Britain's large manufacturers,
considerably stronger than the US counterparts
• GB lost grounds during the interwar years relative to their rivals, US, Germany, and
Japan.
• But GB did lead in the financial service industry although they lost on automobile and
steel industries to the US and Germany.
Blackford Chapter 7: Japanese and Chinese Business in the Inter-War period
Japanese Business:
• Japan like most western civilizations went through rapid expansion during ww1 as
western nations could not supply the Asian markets (Japan could)
• The inter-wars period was accompanied by tremendous economic ups and downs for
Japan, until the mid to late 1930’s when exports began to increase. This was caused by
the removal of the gold standard, devaluation of the yen, and with significant increases in
government military spending.
• Japanese business/political leaders responded to these ups/down similarly to western
nations (rationalized business firms, promote consumerism beneficial to nationalistic
goals, etc.)
• Business rationalization took place in Japan during inter-wars period. The government
backed the formation of cartels as a way to make business strong in world trade and
passed the Major Industries Control Law of 1931.
• The growth of heavy industry and development of the new-zaibatsu (conglomerate of
different Japanese businesses into a large corporation) played an important role in the
economic recovery.
• Nissan (heavy industries) and the Riken Group (chemical industries) were among the
most important.
• Consumer industries also followed and started cartels (soya sauce and the Kikkoman
Company formerly the Noda Shoyu Company), however these cartels where not as
connected to the government as the new-zaibutsa corporations.
• After WW2 most ziabutsa’s were dispersed in order to maintain economic democracy
• Japanese consumerism was much more related to government needs rather than
western civilizations market based approach (eg. Radios/Trucks served purposes for the
government and as such they pushed the products onto consumers)
• Small/medium size firms still composed the majority of Japan’s output despite the
movement to the ziabutsa corporations. These small firms served as subcontractors to
the large ziabutsa corporations. These constellations of firms and subcontractors is what
enabled Japan to compete with their western counterparts and that by close to the end of
the inter-war years is what characterised their manufacturing.
• Japan passed the Department Store Law limiting the size of retail outlets until the 1980’s
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Ziabutsa Corporation where heavily scrutinized in the inter-years for corrupting the
government and using their power to influence the government to follow their own
interests
Work councils fought for rights/payments of the workers of a firm
Wages in small firms were generally less than there large counterparts and had more
unstable working conditions.
Japan used urban planning as a way to control the socioeconomic environment during
this period. Developed the use of zoning (just like western nations)
Chinese Business:
• 2 efforts dominated Chinese political economy during the time 1. Unify the country
internally 2. Resist Japanese hegemony over the nation.
• 2 parties fought for to unify China the GMD (Nationalist party) and the CCP (Chinese
Communist Party)
• Japanese aggression towards China has been piecemeal since the early 20th century and
resulting in war with all of China in 1937.\
• In the mid 1920’s the 2 opposing Chinese parties forces unified, and successfully brought
China under one government the GMD who next goal was to eliminate the CCP
• Nationalist party made some attempts to develop the country however it focused to much
on the military aspect, and began to lose power due to an inadequate land distribution,
and the control warlords still exerted in some areas
• Shanghai was the business mega center in China in the 1930’s
• Shift from private ownership of heavy industries in the early 1930’s to public ownership in
late 1930’s
• Business in China is similar to that in Japan however their is much more conflict and as
such a good system to operate under is never achieved in this period.
Chapter 8
•
1944 – the Bretton Woods Agreement was completed by representatives of the fortyfour nations present
•
Thereafter, United Nations sought to reduce trade barriers among themselves
•
General Agreement on Tariffs and Trade (GATT)
•
Breton Woods Agreement and the GATT were similar : to stimulate the growth of
national economies around the globe and through this stimulation to remove what
was believed to be one of the major causes of war, economic recession
•
Value of world trade increased fivefold between 1950 and 1970
•
New market opportunities led large American industrialists to diversify in terms of
their products and markets, and, as the companies diversified , they adopted
decentralized management systems, extending a trend from the 1920’s
•
Bretton Woods Agreement and GATT both strongly promoted by the U.S gov’t,
sought to create a prosperous international economy open to American trade.
•
Between 1945 and 1960, America’s GNP increased by 52% and the nation’s per
capita GNP rose by 19%
•
Then in the 1960’s the GNP of the United States climbed 46% and the per capita
GNP grew by 29%
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Multinational corporations (MNCs), usually defined as companies with production
facilities in more than one country, were a major response of American business
leaders to expanding business opportunities around the world
•
Conglomerates were companies with many different divisions, at least eight,
producing and selling unrelated goods and services
•
A new phenomenon in the post war years was the development of discount stores
as a challenge to established retailers, large and small
•
Despite the growth of big business and big gov’t – some would say because of their
continued development – Great Britain’s economy did not advance as rapidly as did
that of the United States or Japan
•
Diversification came later to Great Britain than to the United States and, at first, was
slower to spread in Great Britain
•
When diversification occurred, it took place rapidly, in the single decade of the 1960’s
•
Ironically, as leading British companies adopted American management practices
and structures, they fell prey to same problems afflicting U.S firms
•
As large firms grew in importance in British manufacturing, smaller companies
declined in significance, more than U.S or Japan in 1971
•
Reasons for decline: few government policies aided small firms only in 1971
government made an effort, consumer demand for standardized goods favoured
mass production in big factories by big businesses
•
High speed growth characterized Japan economy in 1950s and 1960s
•
Demand in Japan for the three c’s cars, colour televisions, and air conditioning.
•
Minister of agriculture and commerce was formed to stimulate and guide Japan’s
economic growth by indirect methods as part of the shift away from direct controls
begun by the new minister of finance, Matsukata Masayoshi in 1880
•
Honda built his company as a independent entrepreneur
•
Subcontracting was big in japans automobile industry
•
Because of subcontracting Japan automobile businesses were able to expand production
greatly at little cost, allowed them to keep their capital investments and labour costs lower
than they would otherwise have been
•
Subcontractors suffered most in recession
•
Companies making technologically advanced products found that wholesalers and
retailers couldn’t demonstrate, sell, finance, and service their goods leading the company
to enter into sales
•
Superstores combined general merchandise and supermarket sales under one roof
•
Tsutsumi Yasujiro founded the family business based on development of resorts for
japans emerging middle class, Tokyo’s Seibu Railway, which possessed land holdings
and a fledging department store
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Built his business empire with little government help and by operating outside zaibatsu
groups
•
Seibu group by mid 1990 was estimated for a while to be the worlds richest private
person worth $280 billion
•
Big businesses in Japan offered wages and promotions based on seniority, along with
extensive benefits, since there were shortages of skilled labour.
•
Unions were illegal during interwar years, became legalized after world war 2
•
West German in 1950-1960 reorganized to lead their nation into a period of high speed
economic growth similar to japans
•
Codetermination law of 1976 required firms with 2000 or more employees have
supervisory boards consisting of equal number of representatives of labour and
management to set grand policies for the firms
•
SMES, small and medium size firms, were more dependant on outside financing and also
on professional as opposed to family management
•
By late 1950s virtually no private businesses remained in china
•
Workers labouring in state enterprises had what’s called an iron rice bowl: they were
rarely fired even if they performed poorly; had low costs, state subsidized housing;
received many other benefits from the state, including free medical care, these benefits
made low wages they received tolerable
•
Government encourages formation of town and village enterprises in late 1950s and early
1960s, separating large scale industry and small rural industries
•
Policy makers hoped to create high tech districts as engines of economic growth
•
Silicon was a primary raw material used in making semiconductors
•
By 1970 silicon valley was not only assembling integrated circuits but also micro
processors
•
Small and medium size firms were involved in silicon valley, ever changing and
amorphous these companies made the region at the foremost high tech center in the
world after world war 2
•
What created the high tech region- work of people at near by universities, labours of
business entrepreneurs, and federal government spending for military purposes
•
By early 1970s what had been a small cluster of companies had expanded into a full
fledged high tech district
•
Silicon valley entrepreneurs got ahead by establishing a large, informal, flexible network
of linked but independent companies
•
Health became and issue with all of this since unless handled carefully, these substances
would harm the health of workers and to often few safe guards were in place, especially
in the early days.
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Chemical fumes, corrosive acids, other toxic substances hurt production line workers who
were usually not even warned of the dangerous situations in which they laboured as they
fabricated silicon wafers and assembled electronic products
•
Fell largely on immigrant workforce, raising environmental justice issues
•
Diversified British companies adopted centralized management directly from America
•
Global business remained complex as it always had been
•
Large American companies had more levels of management than their counterparts
elsewhere, run by executives increasingly trained in finance and marketing rather than in
operations
•
Small nimble firms composing the economy of Silicon Valley were quite capable of
responding to market demands, making them the envy of policy makers around the
globe.
The Rise of Modern Business
Chapter 9
•
•
•
•
•
•
•
•
•
•
•
•
1971 President Nixon suspends the convertibility of the American dollar into gold
The dollar’s value is no longer tied to a fixed standard
Recessions and globalization in the early 70s, 80s and 90s forced executives to alter
their ways of doing business
Britain’s economy was slow in the 70s and 80s but became a European power in the 90s
and 2000s
America’s economy slumped in the 70s and 80s but became a global giant in the 90s and
2000s
America’s problems stemmed from a lack of reinvestment in capital improvements and
when they did they were add-ons rather than more effective rebuilding form the ground
up
American company GM had 20 levels of management (1970s) while Toyota had 9
Worker productivity was rising 3.4% from ’47-’64 but dropped to 2% form ’65-’75, to 1%
from ’76-’78 and in ’79 dropped 0.9% and another 0.3% in ’80
Japan’s industrial worker productivity climbed 7.4% annually from ’47-’80, the difference
was the capital invested
Japan had a bubble economy in the 80s (really high real estate and stock prices) which
burst in the 90s and began recovering in the 2000s
China began to grow in ’78 when the government removed socialist policy
BFGoodrich Company
o Tire and PVC company
o Increased competition in the ’70s- needed to restructure
o ’71-’95 sold $2 billion in assets, bought $1 billion in acquisitions, difference paid
off debt
o ’82 stopped producing original equipment tires and in ’87 stopped making
replacement tires selling the rest of the division to Michelin
o ’93 sold almost all PVC operations
o Mid ’90s they were in specialty chemicals and aerospace
o Late ’90s, left chemicals and changed management to a decentralized system
where different business units ran their own operations
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•
•
•
•
•
’83-’90 US output per worker rose 30% compared to Japan’s 35% Canada’s 13%
and Germany’s 19%
•
Small companies gained weight with the use of computers in the 70s and 80s
and were able to compete more directly with large firms
•
Small companies close in geographic location supported each other serving as
an alternative to mass producing big businesses
•
72-88 plants with at least 100 employees accounted 2/3 of job creation
•
Small companies were better at gross job creation but because they went out of
business more net job creation was the same as that of large companies
•
The top 10 companies in supermarkets, specialist clothing, home improvement
chains and department stores grew total market share from 23% to 30%, 24% to 30%,
17% to 27% and 42% to 53% respectively
•
Presidents Jimmy Carter and then Ronald Reagan began the deregulation of
many industries
•
Deregulation of transportation (first time since 1930) meant airlines had more
control over rates and fares resulting in better service at lower costs while profits
remained the same due to increased number of passengers
•
The same was done with trucking and the railroads with similar results
•
The Depository Institutions Deregulation and Monetary Control Act of 1980
allowed different financial institutions to compete for deposits and loans
•
Savings and loan institutions began seeking higher profit margins than long-term
loans to homeowners- inexperience and fraud lead to overextended banks
•
Lacking federal monitoring, by ’89 $500 billion was needed to protect depositors
and the Financial Institutions Reform, Recovery and Enforcement Act bailed out failed
thrift banks and re-regulated industry
•
British industry accounted for 22% of global exports in ’52, and had a decline
relative to other countries to 11% in ’69 and 7% in ’80, in ’83 Britain imported more than it
exported in industrial goods
•
NOTE** Britain was still growing GDP per capita more than tripled from 1900-’84
while disposable income per capita rose 46% from ’71-‘92
•
British companies became too rigid in the 80s due in part to the adoption of
American decentralized management methods
•
British companies concentrated too much on former colonial markets rather than
emerging richer markets
•
Britain’s education system slowed growth as science-based industries made the
practical man who learned on the job much less realistic (in the 80s 25% of British senior
managers held college degrees while 85% of American and Japanese senior managers
did)
•
In the 70s British pharmaceutical companies and food and drink companies
remained world leaders
o Glaxo created an anti-ulcer drug and found new ways to reduce the time
to get drugs to market and marketed them successfully
o Glaxo was the largest company in GB in terms of market capitalization in
92
‘55-’76 Britain’s share of international trade in private services dropped from 40% to 15%
Deregulation of Britain’s financial sector lead to increased competition in ’86 allowing
merchant bankers, stockbrokers and insurance companies to compete
’76 GB borrowed from the International Monetary Fund to stay solvent with the post WWII
increase of the welfare state at which time consumer spending made up 50% of GDP
(very high)
Edward Heath won parliament in ’70 where he tried and failed to limit welfare groth
’73-’74 Harold Wilson, James Callaghan and the Labour Party took office promoting
social harmony and economic stabilization, limiting the state’s role in welfare
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• Late 70s Margret Thatcher wins office and begins implementing economic policy pushing
Britain to wards increased competitiveness and privatization
o She reduced taxes while limiting inflation
o Took until ’83 for her policies to help lower inflation and unemployment
o Limited union activities in ’80 and ’82 including the right to strike (’64-’67
2.3 million days lost to stoppage, ’69 saw 6.8 million days lost)
o Britain’s industrial workers were moving away from unions, 70% were
covered in the 80s but only 50% by the 90s
o Ended government ownership of national industries in the 80s
•
Improvement in Britain’s industrial productivity relative to other nations in the 80s
coincided with a decline in industrial concentration
o In ’71 71000 of 75000 manufacturers had no more than 200 employees,
21% of industrial workers
o In ’88 133000 or 135000 manufacturers had no more than 200
employees, 31% of industrial workers
o This was seen outside of manufacturing as well, in ’79 companies with
500 of less employees accounted for 57% of private sector employment
but by ’86 they accounted for 71%
o Small companies in GB didn’t contribute as much as in other countries,
in GB companies with less than 300 employees accounted for 32% of
GDP while in West Germany they accounted for 46%, 50% in the US and
60% in Japan
o In the 90s GB began to close the gap in manufacturing output per person
hour eventually surpassing European rivals including reunited Germany
who had trouble reviving East Germany who were Communist
•
Japan who had been experiencing great growth slowed in the 70s due to the oil
shocks of 73 and 79
•
Collapse of the Bretton Woods Agreement increased the price of Japanese
exports and opened Japanese markets to foreign firms
•
Japan develops a bubble economy in 80s which bursts in the early 90s damaging
financial institutions who had invested in securities and land whose values had
plummeted
•
Japan’s recovery began in the early 2000s after a decade of depression
•
70s and 80s China begins to open the economy to market forces, 90s even more
liberalization of markets and in 2000s GDP is growing by 10%+ annually
o yuan was kept artificially low
o workers pay low by international standards
o imported state-of-the-art technical knowledge
•
Japan’s Ministry of International Trade and Industry worked closely with
businesses to try to advance in high tech fields in the 70s and 80s but widely failed
•
A counter trend also occurred in the 70s 80s and into the 90s of deregulation
•
In the 2000s Japan began to see economic recovery due to deregulation
•
In the ’85 the Japan Committee for Economic Development issues a report
calling for the adoption of less bureaucratic and more flexible types of management
•
Companies began using smaller work groups who could respond quickly to the
company’s environment
•
Cut down on mid level management
•
’87 78% of Japanese companies composed of only 20 employees and gave the
country 31% of its employment
•
Small-scale manufacturers composed 86% of Japan’s industrial companies in ’72
an 87% in ‘86
•
Small firms began working more independent from large firms but were less
successful in sales and services
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Big box companies in the 90s began cutting into small companies market shares
in Japan
•
Many companies switched it a modified senior wage system in which wages
were determined by the function a person performed as well as their seniority because
of aging work forces
•
In the recessionary 90s most companies removed seniority wages all together
and brought in temporary workers and female workers (10-20%
•
80s and 90s tourism a top global industry and praised for being “green”
•
Tourism generated $430 billion in expenditures in the US in ’95 and was second
to health care for employment
•
Tourism sometimes left a negative mark on communities stressing infrastructure
and changing landscapes and often provided mostly entry level jobs
•
Aboriginals were often neglected and taken advantage of when the railroad
provided greater access to the west in the early 1900s
•
Skiing became a big tourist attraction in Colorado and Idaho
Business History Creating Modern Capitalism
Chapter 1 – Introduction
Joseph Schumpeter (1883 – 1950) an economist, one of the most astute of all analysts of
capitalism, called it a process of “creative destruction”
The capitalist era, especially during the period since 1820, has been unique in human history, a
time of spectacular economic growth
Capital and Capitalism
•
•
The term “Capital” first appeared in 1630.
Definition: Accumulated wealth reproductively employed
•
•
The term “Capitalism” first appeared in the 1850’s
A capitalist system is organized around a market economy that emphasizes private
property, technological innovation, the sanctity of contracts, and payment of wages in
money.
Capitalism opened up labour markets and fostered cash wages systems
Created a merciless competition into every aspect of life.
o Eg. Politics, the military, and even religion became more competitive
Capitalism did promote the dissolution of feudal restrictions, and helped to promote freer
labour markets
•
•
•
The Three Industrial Revolutions
•
The First Industrial Revolution
o 1760 – 1840
o Led by Great Britain, with U.S., France, and then Germany
o Agricultural productivity increased
o Manufacturing which for thousands of years was led by human and animal
energy was powered more and more based on water and by steam generated
from coal.
o Machine tools came into wider use
o People started to work by the clock
o New products were steam engines and factory produced items such as cotton
textiles, ironware, and pottery
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The Second Industrial Revolution
o 1840 – 1950
o Led by the United States, Great Britain, and few European nations such as
Germany, France, and the Low Countries
o Communication and transportation were revolutionized
o Telegraph and railroad, then by the telephone, automobile, truck, and airplane
o Production was powered by electric motors
o Mass marketing arose
o Typical products include “producers’ goods” such as steel, turbines, and
chemicals.
o An array of consumer goods, which were now mass produced, branded, and
individually packaged
The Third Industrial Revolution
o 1950 – to the present
o Led by United States, Japan, and Europe
o “Rise of the information economy”
o Increase in international trade, investment, and finance
o Computer technology was introduced and “knowledge work” came to have
surpassing importance
o Growth in other professionals serving business, such as accountants, engineers,
lawyers, and consultants
o Science based products became the primary growth sectors in the developed
world
o Instantaneous global communication became possible on a large scale, and then
almost indispensible for certain kinds of business
McCraw Chapter 2 – Josiah Wedgewood and the First Industrial Revolution
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1774 - Josiah Wedgewood and Thomas Bentley – owned and managed one of
Britians most successful and innovative firms in the pottery industry
men living at the inflection point in the history of capitalism
organized manufacturing and marketing became more significant in Britains economic
structure
industrial, agricultural and commercial productivity grew
“wedgewood was the greatest man who ever, in any age, or in any country…. Applied
himself to the important work of uniting art with industry”
pettery industru grew in Burslem Britain – broadly representing the national economy
o manufacturing in early 18th was diverse, small in scale, and regionally
concentrated by industry
o manufacturing output was spread across a broad range of industries: baking,
milling, brewing, distilling, pottery, leather, processing, building materials, and
woolen textiles
o cotton textiles, ironware and engineering (manufacturing and machinery) – made
up less than 10% - technological leaders of first Ind. Rev.
Starting date for first industrial revolution – highly debated
agricultural output slowed after 1760
manufacturing and commerce increased by 1% in the 2 decades after 1760
after 1780, cotton and iron manufacturing became more significant components of
industrial output, which was becoming a increasingly larger part of national product
by 1800, industry, commerce, and services made up more than half of Britains national
product – 1st country in world to have less than ½ in agriculture
many industries and regional economies became more efficient in the 18th C
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Josiah Wedgewood – bibliography
born 1730 and therefore saw all the changes of the beginning of the first Ind. Rev.
began apprenticing with his bro at age 14, in the pottery industry
in his 20’s realized that success in the earthenware manufacturing (pottery) demanded
precise, systematic knowledge of production techniques and changing customer wants
1750 – table linens and books more commonly bought and tea, coffee and chocolate
were introduced from the far east and the new world
o requiring a new demand for cups, pitchers, pots, sugar bowls etc
1762 – came up with a replacement to porcelain he described as… “species of
earthenware for the table quite new in its appearance, covered with a rich and brilliant
glaze bearing sudden alterations of heat and cold, manufactured with ease and
expedition and conseqeuently cheap.”
1762 – moved his production to a larger Brick House Works in Burslem
1769 – Bentley became wedgewoods partner in selling ornamental china
W and B lobbied aristocrats and politicians for the construction of roads, turnpikes and
canals, linking Chester and Liverpool
1766 – Wedgewood cut the first sod of earth on the Trent-Mersey canal
Wedgewood married in 1764 to his distant cousin – SWEEET lol, then they had 8 kids,
then Wedgewoods grandson – Charlew Darwin was born in 1809
1765 – opened an office in a smalle wholesale ware-house in london – then began
looking for showroom space there – wanted to facilitate retailing and display
mid 1769 – Etruria factory was the new place of production for W and B
o heart of factories org. was specialized manufacture – based on carefully planned
division of labour
 separated the production of useful ware from vases and ornamental
ware, allocating kilns and workshops to each
 shops were arranged in sequence in order to provide efficiency
 both incorporated the latest technology (engine turning lathes)
 1782 installed a steam engine
Marketing - pottery exports reflected the outlines of British commerce
throughout the 18th C (especially after 1750) international trade became more important
than ever
by 1750 Britain had become a net importer of grains and agricultural production fell
rapidly
manufactured exports, woolens, metalwares, glass, cotton, and pottery grew 6 fold
1771 – Inertia selling – W and B
started marketing to selected customers (german aristocracy) pottery products, giving
them the opportunity to buy the products at a certain price or return them at no cost
1772 – all of his product had his name carved into it to stop forgery
W realized that Britons had more money now to spend on non-essential/luxury goods
than people in previous generations did
Organizing the workforce – new org. imposed new standards on work force
at Etruria, and other late 18th C factories craftsmen and laborers, were not required to be
punctual, had to come to work every day for 6 days a week, and work until the bell tolled
bells tolled at 5:45 (1/4 hr before the men could see, then at 8:30 for breakfast, and 9 for
recall, then at 12 for lunch, and 12:30 for recall, and then until the last bell, when they
could no longer see – CRAZY!
Devised a clocking- in system to keep track of workers time
In order to ensure clealiness and careful working habits – W issued “potters instructions”
and “rules and regulations”
Began training his artisans rather than relying on outsiders to become experts in
ornamental ware
Product Management and Finance
by the time Etruria was in full operation W and B had become renowned for it ornamental
ware and Queensware
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1772 – firm was producing upwards of 100 good forms of vases”
strategically produced few of certain kinds to keep them scarce and more desirable
but to meet increasing demands he simplified decoration processes and ordered that
they be finished with machine lathes - simplified
by 1769 – had cash flow problems – spending more on raw materials, wages, and other
costs without financing its bills fast enough to finance expanded production
1769 firms had debts totally 4000 pounds
initiated a thorough analysis of the firms current cost structure for vase production –
which resulted in Wedgewoods Price Book of Workmanship
o most important discovery was between FIXED and VARIABLE cost
o “making the greatest quantity possible in a given time”
o actively solicitated special commissions – they often involved high labour and
materials costs for small one-time increase in output
 avoided these made-to-order sales unless they had significant marketing
value – such as a sale to Catherine the Great of 1774
o lengthened production runs for certain ornamental wares, reduced stocks in
market downturns and kept careful tabs on marketing costs and sales
Wedgewood and Capitalism
mid 1770’s Wedgewood and Bentley were preeminent British pottery manufacturers
W published his views in An address to the young inhabitants of the Pottery
o He suggested that people should consider the country before and after
industrialization – wages increased, peoples homes became more comfortable,
industrious exertions has changed for the better of our country – building lands
and roads
o However his workers did not share his unabashed faith in industrial capitalism –
they resented the enforced specialization of the factory system
o Others found the training tedious and the rules of behaviour overly restrictive
o Almost all workers resented their own dependence on the ebb and flow of market
forces
o Led workers into confrontations with Wedgewood in 1769 and 1790 and W
withdrew from active management of the business
W considered himself a benevolent employer – supplied housing for his workers and
subsidized a sick club, and a primitive health insurance
He wanted to not only increase profits for himself but also in order to increase ‘constant
employment’ for his workforce and capital equipment
For this he expected loyalty, punctuality, and consistently high performance – he could
not understand why many of his workers were less than content with the social contract
he had established at Etruria
Econ exam notes
Chapter 3
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British Capitalism & the 3 Ind Rev’s
“The Great Exhibition” 1851- world’s first fair, celebrating recent technical and material
progress. Open for 141 days
Charlotte Bronte famous writer visits 5 X
How did GB come to dominate world markets during the 1st ind. Rev?
“The Glorious Revolution” 1688 change in British constitutional Government, first major
change accomplished without bloodshed... King William replaced King James II and
called Parliament and passed important acts:
The Bill of Rights 1689 prohibiting standing armies during peacetime and non-parliament
levied taxes, and outlawing cruel punishment and allowing for freedom of speech for
members of parliament
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Until then constitutional system was unusual by European standards... Monarchy was the
law in other nations and exploited country’s human and material sources
• Parliamentary oversight meant significant fiscal power during an era of frequent warfare
o Ex- during “9 yrs of war” agains France, military expenditures were almost 75%
of total gov. Spending (1688-97)
o 7 yrs of war 1756-63 cost Britain equivalent of today’s 13 TRILLION US dollars...
obtained through taxes and state borrowing
Dutch Financial Innovations:
• The Mortgage
• The promissory note
• The bill of exchange (forruner of modern paper currency, bnank checks) making it safer
without needing to ship gold and silver
1700s there were triangular of square trading patters
British goods to Africa, Africans as slaves to South and Central America, West Indian islads and
southern N.A to Britain
N.A lumber and tobacco especially to Britain
For Britain, NA and West indies served 3 major economic functions:
1. To serve as growing markets for British Manufactures
2. To produce raw materials for Brit
3. To help defray costs of managing/defending empire
Commercial exploitation and feeling subservient led to American war for independence
Early 19th century decentralization, monopolies going under
Most early infrastructure privately financed and operated, technological innovations increased
investment which increased output
• Britain’s coal ind. 18th century importance – savings in transportation and technology led
to increased coal mining throught eh first and second ind. Rev.s
• “The Rocket” Railway- mostly H2O and steam
Q) What ind. Best exemplified the 1st Ind Rev in GB?
A) Cotton textiles
Q) By 1830, cotton cloth accounted for as much as ____ of British total exports?
A) ½
Manchester was called “Cottonopolis”
Banking- short term finance for long-distance trade and short-term loans
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Through 19th century, capitalist ideology bent toward reforming political systems gained
momentum in GB
1833 Brit abolishes slavery in all colonies
Malthus predicted a catastrophic famine due to England’s population boom... avoided
through investments in farming and infrastructure and importing food
o Unprecidented decline of aggies as occupation
Adam Smith English as “a nation of shopkeepers” where retail trade occupation as
common as farming
Labour in 1st ind rev- few rights, women and children work, less care of efficiency
2nd ind rev- unions fight for rights
Henry Ford
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1914 paid handsomely- 5 dollar days
• 3rd ind rev. Capitalism VS socialism
o Labour party gains strength, social and economic planning regulated
o Within 31 yrs (1914-45) Britain experienced 2 WW’s and the Great Depression,
causing many people to lse faith in capitalist system
• John Maynard Keynes:
o Neoclassical economist, concerned by market mechanism failures during Great
Depression. Gov, he argued, should stabilize finiancial system and stimulate
demand through increased public-sector employment, to restor health of national
and international markets
 E represented a compromise between capitalist (conservative) values
and moderate socialism (Labout party)
Labour party’s rise to power causes
1. Welfare state: “cradle to grave” education needs, coverage of healthcare and
housing
2. Large and steady # of trade union jobs if necessary through nationalism of
important industry
Post WWII Brit has trouble jkeeping up with growth rates of Japan, Germany and several others.
Britain loses its colonies and influence, cold war 47-89 divides world into two led by USA and
USSR, reducing Britain transitions to second-tier power. Also fell behind in developing new
technologies like computers, electronics... but continues to be invigorated with high levels of
foreign direct investment
Pharmaceuticals (ex Glaxco is one of world’s largest pharmaceutical companies).
London = naturally advantaged as a financial center in the world: between NY and Tokyo markets
and time zones
Thomas K. McCraw
Chapter 4 Summary – Rolls-Royce and the Rise of High-Technology Industry:
• Rolls-Royce was founded in 1906 by Henry Royce , Charles Rolls, and Claude Johnson
• In its first year, Rolls-Royce produced less than 100 cars, having at least 3 different
models.
• As a response to this the board of directors decided to increase Rolls-Royce capital and
in 1907, with capital increasing from £60,000 to £100,000, allowing them to build a new
plant in Derby, England
• With this new capital, Rolls-Royce expanded production of a new six-cylinder car called
the 40/50 model. This car was their breakthrough.
• As a marketing ploy, Claude Johnson named one of the first 40/50s the “Silver Ghost”
(the body being painted silver and the fixtures and trim being genuine silver platted)
• After a 15,000 mile endurance test (needing only £2 in repairs afterwards) the 40/50
model set the standard for all Rolls-Royce cars (even today in some respects).
• Rolls-Royce was known as the best made car in the world.
• By 1909, Rolls-Royce cars came to be based primarily on elegance and quality rather
than speed and performance.
• All Rolls-Royce cars were custom ordered and on the assembly line they were referred to
by the name of the customer.
• Unlike companies like Ford and General Motors who did their own body work to
maximize economies of scale, Rolls-Royce only made the chassis and the engine,
leaving the body work to be contracted out to other companies.
• During their first two years, Rolls-Royce was an exceptionally fast-growing business
• Between 1909 and 1913, British car production rose 300%.
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Business in the car industry was risky however and between 1901 and 1905 221 British
firms entered the auto business but by 1914 only 20 of these firms remained.
Rolls-Royce and Ford were founded around the same time but used very different
production methods:
o Ford: mass production of a single standardized car model, to be sold at the
lowest possible price.
o Rolls-Royce: much smaller volume of production, custom made and sold at a
high price.
In 1913, Ford produced 200,000 cars per year, Rolls-Royce produced only 1,500 cars per
year.
In 1914, when WW1 broke out, the only way for Rolls-Royce to keep running and to avoid
bankruptcy was to convert their plant from making cars to producing equipment for the
war effort.
Rolls-Royce’s car the “Silver Ghost” began being used as a staff car for military officers
and proved strong enough to be used as an armoured vehicle.
Rolls-Royce however quickly turned to making aero engines.
Henry Royce took it upon himself to design a new engine from scratch after deciding that
the government designs were inferior to what he felt they could develop.
By 1915 Royce had designed the Eagle engine, which became a mainstay in the
British war effort.
This engine only added to Rolls-Royce’s reputation.
Rolls-Royce did not concern itself with making much profit from the war, as making
engines with the government as their only customer was far less profitable than building
luxury cars.
By 1917 the Eagle engine was in high demand by British military, by the end of the
war Rolls-Royce was making 50/week.
After WW1 the British car industry weakened, where there had been hundreds of firms
only 88 remained.
By 1929 only 31 companies were still around, 3 firms controlling 75% of Britain’s total
output.
Rolls-Royce cars remained low production.
Ultimately the problem for British car makers was having to compete with
American car giants Ford and GM who brought American mass-production
techniques to the British car industry.
In order to compete in the age of mass-production, Rolls-Royce put emphasis on
producing quality cars and reducing costs.
By 1930 the luxury car industry virtually collapsed under the weight of the Great
Depression and Rolls-Royce’s fortunes were to be found in developing their aero engine
the Kestrel, selling upwards of 5000.
In 1933, Rolls-Royce designed the 27 litre Merlin aero engine, destined to become
the most important product in Rolls-Royce’s history.
In 1937 Rolls-Royce received a new General Manager Earnest Hives (1886-1965) who
would have a huge impact on the company. He possessed a remarkable grasp of all
things business.
After WW2 began in 1939, Hives had to coordinate production at Rolls-Royce with
several hundred contractors in the U.K. and the U.S., dramatically increasing the scope
of production.
Interestingly, Rolls-Royce hierarchy was relatively informal, few people bearing official job
titles. This allowed Hives to move people around as he saw fit.
WW2 brought sweeping changes to Rolls-Royce and between 1939 and 1946 they
produced 80,000 aero engines and absolutely no automobiles.
During this time Rolls-Royce’s workforce grew from 12,500 to 60,000 by 1944.
Rolls-Royce proved to be a major asset to Britain during the war, proving itself to
be adaptable to wartime demand.
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Merlin engines powered some of the most famous aircrafts during the war.
During the war, Rolls-Royce dramatically increased its total shop floor employment and
greatly expanded its management staff from 39 managers to 246.
Rolls-Royce couldn’t meet the huge demand for Merlin engines alone despite their efforts
to increase production through subcontractors and the development of shadow factories.
Therefore they were forced to licence the engine to two large mass-production-oriented
firms: Ford (U.K. division) and Packard, a carmaker in the U.S.
This mass-production made it possible to turn out Merlin engines in unprecedented
quantities.
Rolls-Royce’s basic strategy for making aero engines was to control the two ends
of production: design engineering and testing, instalment, service and repair.
Rolls-Royce ‘s great service to the war effort came from its ability to improve the
engine continually and to keep up with the constantly changing demands of the
R.A.F. (Royal Air Force).
The production of Merlin engines represents an early example of the technologyintensive production processes associated with the Third Industrial Revolution.
The design and service functions at the beginning and end of the production
process were the areas most critical to the success of Rolls-Royce in the war
effort, as the Merlin’s had to be improved constantly in order to stay ahead of
German aero technology.
Entering the Jet Age
In 1939 Germany and Britain were the only countries with the technical capability to
develop and build a practical jet engine.
R.A.F. engineer Frank Whittle was the first to develop a practical jet design outside of
Germany.
Rolls-Royce picked up his design and, after negotiations with the Rover corporation who
had originally been chosen to manufacture the Whittle engine for the R.A.F., began
production in 1942.
By 1945 Rolls-Royce had the technical skill and desire to compete globally in the
emerging aero space industry.
New Generation of Jet Engines
In the late 1960s the level of competition in the civil aero engine market increased
dramatically.
In 1968 Rolls-Royce won an exclusive contract with the American company
Lockleed to develop the RB211 engine for the “jumbo jet” L1011.
Rolls-Royce was to be paid a fixed price for each engine, with no provisions for cost
overruns and a heavy penalty for late deliveries.
The scale of the RB211 project was unprecedented for Rolls-Royce, but consistent with
the companies aggressive pursuit of new markets in the past.
By the 1960s Rolls-Royce had become an industrial “national champion” with a
significant role in the nations commercial prestige and balance of trade.
Despite the long-term potential of the RB211, the engines start-up costs proved steep.
By the end of 1970, Rolls-Royce’s cash flow was depleted.
By 1971 the firm was forced into receivership, declaring it was unable to continue in
business.
The government eventually stepped in, realizing that neither the RB211 project nor
Rolls-Royce as a company could be allowed to die.
Under the plan to keep Rolls-Royce in business, the firm was financially reconstituted as
a new limited liability company with the British government as its sole shareholder.
Eventually the government sold off parts of Rolls-Royce that were not considered
strategic or in the national best interest, including the car division which became known
as Rolls-Royce Motor Cars Limited.
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By the 1990s Rolls-Royce cars were still among the world’s most expensive and
exclusive cars.
Rolls-Royce continues to be one of the best known and most valuable brand names in
existence.
Chapter 5 – McCraw - Jeffery Fear
• Berlin wall falls
o East and West Germany face reunification
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Political changes common & sudden modifications in the “economic order” the
collection of customs and institutions that frame the production and consumption
of goods and services
o
In Britain and America “economic order” usually seen as a product of slow
evolution over centuries
o
The rise and fall in Germany (of political economies) = revolutionary process
creating separate spheres of politics, society, and business
The Political Unification of Germany – 1871
o
Germany centralized in 1871 – prior Germany rested on common literacy,
language, and “Germany” was a vague idea promoted by passionate nationalists
that hoped for a unified democratic state
o
Napoleon 
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brought together the heterogeneous collection of German states at the
center of Europe

consolidated most of the German land into the Confederation of the
Rhine – which eventually had 39 member state

Introduced French commercial laws, modern state bureaucracies, public
education, new freedoms of trade, citizenship and religion

Defeated in 1815
o
The German state Prussia – began to introduce thoroughgoing political,
economic, and educational reforms to modernize their economies and improve
positions against the French.
o
Resistance against French rule also unleashed German nationalism
o
Congress of Vienna decided that Napoleon’s consolidation of German states
would be maintained
o
The Bismarck’s Reich left a number of important legacies – some which still
shape modern-day Germany
o
The Social Democrats pushed for social welfare measures (to improve wages,
workers conditions, etc)
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Economic Development Pre 1871
o
By 1900 the unified nation of Germany had become a major economic force
o
There were 5 major institutions that were in existence before 1871 that pushed
Germany to rapid industrial development
1) Zollverein customs union – free-trade area with a joint commercial policy and a
common external tariff – founded in 1834 – involved nearly 3 dozen states led by Prussia
– trade did not move easily across state lines –
2) Railroads played a major role in this development – first built on a regional basis – and
connected to form a national network around 1850 – the firms in mining, ironworking or
textiles paid the highest dividends in German business – railroads spurred the ...
rise of banking- Universal banks created : a combination of commercial bank, investment
bank, and investment trust – private banking houses formed joint stock or limited
partnership banks
3) Craft tradition skilled workers much pride in crafts - they were the labour elite - before
1914 most factories were collections of workshops
4) Comprehensive Education System from primary to vocational school - from
polytechnical to university courses – universities were strong research orientation,
especially in physics, chemistry and mathematics
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Mittelstand - broad of small class and medium sized business was the heart and soul of
German capitalism
o
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A mixture of handicrafts trades, small craft shops, small and medium sized
industrial firms, agriculture – associated business and small and medium sized
wholesalers
German cartels – Cartel= associations of legally independent firms – form of cooperative
competition
World War I, 1914-1918
- War created change – new relationships between industry, labour, and the government –
resulting in greater power for labour.
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Labour got a larger role in microeconomics and government decision making – the war
transformed the government into a new, powerful macroeconomic force
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War changed the relationship between the state and economy
The Weimar Republic
- Republic est. In 1919 – replaced the imperial form of government
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Named after the city where the constitutional assembly took place
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Emerged from the German Revolution in 1918
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Period of liberal democracy lapsed in the 1930s – leading to the power of A. Hitler in
1933
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New government could legislate contrary to the constitution despite the fact that
the constitution of 1919 never changed 1933 typically seen as the end of the
Weimar Republic and the beginning of Hitler’s 3rd Reich
McCraw Chapter 6
August Thyssen and German Steel
August Thyssen (1842-1926)
• Legendary for the aggressive way in which he expanded his steelworks, and for his
success as an investor on the stock market
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Nick name “the Amercian”
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Preferred complete family control
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After WWI 1918, company’s finances slipped downhill
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Need to modernize worn out equipment, constant problems with
labor, and increasing international competition left his company
in need of cash.
1925 reaching the end of his financial capabilities.
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Industrialist advocated a merger of all or most German steel
firms into a gigantic company
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Thyssen family decided to join resulting in a giant company
Early years August Thyssen
• Born 1842, to a modestly wealthy family
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Acquired an unusual good education for that time
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1871 Thyssen backed by his father, founded his new hoop-iron mill Thyssen & Co.
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1872 August married 18 yr old Hedwig Pelzer.
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Thyssen devoted himself single-mindedly to his business affairs ..provoked divorce with
Hedwig
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Divorce soured Thyssen’s relationship with his children, also affected
future of the business.
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Hedwig divorced him if he agreed to pass the firm onto the children’s
hands upon his death.
Early growth and Diversification of Thyssen & Co.
• Founding 1871, came in midst of a feverish economic boom.
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1873 prices of iron and steel products dropped with Vienna stock market crash.
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However Thyssen & Co. expanded production, employment, and sales.
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1880 crucial period of developing for the company (rolling mills)
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Diversified products and integrated related product lines
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Moved into distribution by opening in Berlin a branch sales office that
eventually became his main trading company
1884
1886 – shape of firm was set
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Company’s policy was to offer a full range of iron good
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Exported heavily, his output had to conform too many different national
standards. Denominated in both inches and centimeters, manual written
in English, French, and German.
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Had segmented markets and export orientation.
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Offered very specialized products
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Specialization in Europe versus standardization and high volume
production in America.
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Developed a general policy of maintaining the highest technological standards in bot
products and production techniques.
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Reputation for quality and prompt delivery.
Thyssen’s Organizational Structure
• Organized his company into a series of departments, each responsible for production and
trade.
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Department heads responsible for hiring and firing, and for setting wages.
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Each department kept track of its own inventories and appraised its own capital assets
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Goal: decentralize authority while maintaining tight supervision from above.
1880
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Thyssen standardized management procedures and defined what he expected
from his managers. : leitmotifs of Thyssen & Co.’s corporate culture.
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Understood managerial performance as commercial success and department profitability
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Thyssen actively tried to stamp out the bureaucratic, civil-servant culture that sometimes
crept into German business firms of this era.
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Thyssen judged his managers by what he called their “results” –commercial success.
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Monitored them by using monthly reports with standardized accounting
procedures – monthly accounting reports
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This type of internal financial accounting was more advanced than corresponding
American practices.
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Departments were treated as semi-autonomous commercial centers.
Tariff Protection and Vertical Integration
• Modern German steel industry grew up behind tariff walls.
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1879 imposed almost prohibitively high tariffs on iron, steel, and many other products.
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Government also permitted internal cartels in coal, iron, and steel.
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Tariff protection + cartels= industrial inefficiency but from 1870-1914 (outbreak of WWl)
German companies achieved outstanding performance under the prior.
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Tariff walls kept out British government and Belgian steel, which gave the infant German
industry time to develop.
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German steel companies came to be dominated by a handful of powerful companies.
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1887 strong presence of cartels in coal jeopardized Thyssen & Co.
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1890 Thyssen bought all 1,000 shares of the mining companiny,
Gewerkschaft Deutscher Kaiser (GDK) or the “mining company German
Emperor” –steel company
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Located in great location for shipping to south Germany and export
markets.
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Thyssen rushed to integrate each stage of the steelmaking process, situating GDK’s steel
mills directly on top of its coal reserves.
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Franz Dahl, Thyssen’s plant director, knew how to blend the peculiar technical demands
of individuals processes with the layout of the plants as a whole. He turned Thyssen’s
GDK into the largest producer of crude steel in Germany.
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GDK : had several advantageous characteristics which made it one of the premier steel
works in the world.
•

Favorable situation on the Rhine, largest inland river harbor in Europe

First class staff of plan managers

Integrated state-of-the-art facilities

Policy of careful laboratory testing of its metals.
Vertical integration was a success, but it stretched company finances to the limit, at a
point GDK had to be covered by short term credits from his other firm Thyssen & Co.,
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which had already taken out extensive loans from large banks. Prussian Mining Authority
came to Thyssen’s rescue by purchasing some of his important mines.
•
August Thyssen now the fifth largest coal producer in Germany, held top position for
most of the 20th century.
•
Because Thyssen vertically integrated he was able to outrace the cartelization movement
•
The long term survival of the GDK depended on a heavy reinvestment of profits.
Thyssen and Cartels
• Thyssen was labeled an “enemy of cartels” and an “American-style” entrepreneur
•
In contrast to Thyssen’s predictions, the cartel movement in German steel actually grew
stronger than ever, with him ironically playing a leading role.
•
GDK joined coal syndicates (cartel) and pig iron syndicates (cartel)
•
Thyssen & Co. executives became major figures in plate and sheet cartels.
•
Thyssen himself eventually joined a cartel
•
1904 he promoted most powerful German cartel, Steel Works Association
Thyssen and the Banks
• Thyssen financed one of the largest and most capital intensive industrial complexes in
Germany by his own personal wealth and credit alone, which made him very independent
of banks and boards. He did however borrow heavily from banks, yet he received special
treatment so he would not feel restricted in his leadership.
•
Thyssen financial standing was seriously questioned only twice before WWl in 1914.

Thyssen’s firms were granting credits to one another-sign of financial
strain

Family disagreement, led one of his sons to cast doubt publicly on his
father’s creditworthiness.
Organizing the Thyssen-Konzern
• Had to cope with organizing and running a very large operation, his solution was to form
German Konzern

German Konzern: a multisubsidiary organization with a parent company
that controlled the financial and strategic direction or legally independent
subsidiary firms.

Usually run by a family
•
GDK Dinslaken ( a branch of the first GDK) Sales grew rapidly after the turn of the
century with the development of an engine capable of recycling burned off gas,
transforming waste into power and energy.
•
Gas engine furthered Thyssen strategy of diversification
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•
1911 machine-engineering department had become large and it spun off as an
independent firm. The new Maschinenfabrik Thyssen AG (Thyssen Machine Company)

•
Intentions to conquer the world market”
Thyssen- Konzern reflected a strategy of vertical integration and production
diversification, he also gave much autonomy to his top executives.
Other reasons why Thyssen embraced the Konzern structure:
• Financial Advantages
•
•
•

Decentralized Konzern allowed Thyssen companies a great deal of
flexibility

Extend and receive credits with one another and with outside firms.

GDK and Thyssen & Co. private companies so funds could quickly move
from firm to firm.
Enhanced Internal Competition

Thyssen trading companies had to give the most favorable deals to
Thyssen manufacturing works, while the manufacturing works had to
offer the trading firms the most favorable prices and conditions on their
products.

Thyssen directors could freely tender outside offers for new equipment,
forcing the Thyssen Machine Company to outbid or outclass other
suppliers

Directors salaries based on their financial success of their companies.

Thyssen favorite saying “If I rest, I rust”
Streamlined Management

Top executives of each of the Konzern company acted with great
authority and autonomy.

Thyssen firms had small corporate boards and only a few ppl with pwer
of attorney.

The decentralized organization with its numerous firms did multiply the
total number of board of directors’ chairs. In 1920 when the question
arose as to whether or not to unify the Konzern, the most controversial
question was which directors would be appointed to oversee the
centralized firm.

Extreme independence of the Thyssen directors made a centralized
organization almost unthinkable.
Beating the Cartels
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•
•

Konzern useful to Thyssens in his off-and-on battles with the cartels.

He could expand production, since the new firms were not part of any
existing cartel agreement.

High degree of supervision and interlocking controls which made a
Konzern a unified economic and administrative unit.

Of importance a series of formal corporate offices which administratively
bound the separate companies into a coordinated and systematic whole.

Principle of “delegate, but supervise”

1906 Thyssen set up a central Auditing office to provide an overview of
Konzerns finances.
Supervision

It standardized cost accounting and audit the cash
accounts for all the Thyssen firms.

It also consolidated the individual firms’ balances into a
Konzern balance.

It became the prime authority on the effectiveness of the
firms’ management.

Carried out “organizational studies”, and made extensive
recommendations for the internal structure of Thyssen
firms.
Thyssen firms formed a cohesive Konzern becosue they had unified central direction,
formal institutional arrangements, and a more or less uniform set of financial standards.
Thyssen and His Managers
• Thyssen was modest and would rather live in mid size houses, travel second class, and
stay at second rate hotels. He was a little stingy… he never own an auto mobile.
•
Inside his firm he acted as first among equals, although he had veto power he let himself
be overridden by majority vote of his managers, they agreed that he genuinely listened to
their recommendations.
•
Thyssen listen carefully even to his most junior managers when they presented
suggestions for improvement.
•
Thyssen remained the ultimate decision maker, but an elite group of salaried managers
actually ran the Konzern.
•
Thyssen’s competitive edge was his ability to choose good, often strong-willed people,
and then to take their advice.
•
Had a sixth sense for choosing capable young managers and putting them into positions
of great authority. ( Franz Dahl)
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Thyssen and is Children
• Did not have such a great relationship with his sons. And where excluded from the
direction of the firm.
•
The children of both August and Josef Thyssen had minimal influence on the ThyssenKonzern.
The impact of the War, 1914-1925
• First ww was profitable for the Thyssen- konzern, firms converted to war time production
which altered size and scope of production. These changes demanded a new financial
structure.

1915 Thyssen companies formed a “company of interest” or the IG

It pooled the profits of member companies and redistributed them
according to the amount of wages and salaries paid by the individual
firms.
•
Victory over Germany in 1918 left the national economy and the Thyssen-Konzern in
disarray.
•
Versailles Treaty required that the Germans pay reparations and transfer the AlsaceLorraine region back to France, in which one of Thyssen most modern plants was
located.

Treaty also tore down tariff walls protecting German steel goods.

German steel industry now became dependent on Swedish iron ore,
which had to be imported and paid for with depreciating marks.

German politics tumbled into chaos

Some of the “reddest” pockets in Gemany were found within the GDK
and the Thyssen Machine Company, it appeared that certain Germany
mines would be socialized.
•
Thyssen – Konzern had to convert back to peacetime production
•
Following the stabilization of the German Mark in 1924, Thyssen – Konzern turned to the
united states investement bank Dillon Read & Co. for help, and managed to acquire a
large loan, based on “assets and reputation”.
Founding the Vereinigte Stahlwerke AG
• 1925 Germany’s steelmaking capacity had climbed back to its prewar level, thanks to
American loans, government subsidies, and economics of inflation.
•
But German steel still suffered from a number of structural problems

Too much vertical integration

Too much scope

Too many niche products
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•
•
•

Not enough scale

These characteristics had resulted from a cartel system.
Albert Vogler; had written a memorandum outlining an alternative strategy for steel, this
document launched a serious debate about the future among German steel producers.

He argued the “the time of the syndicates has passed”

According to him the strategic goal for steel should be a thorough
rationalization: improvement of productivity ratios, a better division of
labor, pooling of research capabilities, and reduction of administrative
and marketing costs.

He offered a vision of mass production geared to enhance international
competitiveness.
Six large German steel firms now began negotiations to form a “union of steel” (VSt)

VSt negotiations forced Thyssen to make a choice between two of the
most cherished principles of his corporate strategy.

1) the desire to be number one in the steel industry in scale and
reputation VERSUS the desire for independent family control.
Until the last minute all had second thoughts about the merging. However all resistance
was finally overcome, in may 1926, the shareholders of companies merging into the VSt
approved the consolidation.

•
Half the assets of the Thyssen-Konzern would never enter the VSt but
core facilities did join.
Official founding date of the VSt was april 1st 1926, and Thyssen-Konzern came to end.
Operating the Vereinigte Stahlwerke AG
• Modeled on the United States Steel Corporation.
•
1927 mined about 18% of all German coal and produced just under 50% of all German
pig iron and crude steel.
•
VSt also build on the financial relationship the Thyssen-Konzern had developed with
American bankers.
•
Government gave them tax breaks, allwed them to defer payments.
•
Vst tourned out to be a bureaucratic dinosaur, fusion of former rivals made internal
decision making unwieldy and highly politicized.
•
Heinrich Dinkelbach, proposed that the VSt be reorganized into a Konzern structure,
redesigning the firm into a much more decentralized structure.
•
Operations were decentralized into profit centers.
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•
The VSt and its subsidiaries struggled to produce coal, steel, etc. During the war. Like
many German firms it used forced labor and prisoners of war.
•
Constant interruptions of work air-raids and bombings, lead to the stop of production
1945.
Post war reconstruction
• August Thyssen-HUtte Ag (ATH) rebuilt its position in the German steel industry through
a policy of expansion and acquisition.
•
1964 -65 it produced 8.6 metric tons of steel, the largest single-company total in Europe
and the fourth largest in the world.
•
ATH by 1965 had managed to reunite many old Thyssen firms
•
By 1967, the ATH revenues made it the third largest company in Germany.
•
The german steel industry as a whole was again led by a constellation of firms very
similar to the group that had led the industry 50 yrs earlier.
MCCRAWChapter 7 – The Deutsche Bank
•
Founded in 1870 to help finance surging German exports and imports, the bank soon
moved into domestic banking
•
Had a commercial role by taking deposits and offering short term loans
•
Investment bank, it managed the long term credit needs of its customers by underwriting
stock and bond flotation’s
•
Most were private clients, big industrial firms
•
Underwrote securities of national governments and railroads- public owned
•
“universal bank”
•
By 1914, most powerful institution in Germany
•
Faced a series of national crises

The defeat in the war of 1914-1918

Revolution in 1919

Hyperinflation of their investment
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•
•
Run by two executive boards
•
ADELBER Delbruck – supervisory board

George Siemens and Hermann Wallich – managing board
1884- Managing took control of the management assisted by German corporation law
o
•

Gerge Siemens- 1870-1900
Decided to establish banks in Shangai and Yokohama
o
Anticipated enormous growth in German trade with far east
o
In New York, Paris, London
o
Trade financing, which paid high commissions, normally went to institutions that
were on site and had connections to trading centers worldwide
Closed the far east branched in 1874
o
“question of the liquidation of the bank is now being seriously considered
Entry into domestic Banking
•
The core of the domestic banking was so called “current account”, a vehicle of managing
short- term deposits and short term loans for firms
o
Flexible line of credit , allowing them to overdraw the account up to specified limit
•
Franco Prussian war , with injection of liquidity, pushed down interest rates and sparked
economic expansion based on easy credit
•
German corporation law reduced restrictions of joint stock corporation
•
1873- 1876
•
o
Took over five failing banks, including two large ones
o
By 1876, held the most assets than any other bank in Germany
After 1875, expand new domestic role by moving into new product lines
o
Accepting short term deposits , unconnected to any current account- no other
bank does that
•
The establishment the German central bank, in 1876, reassured that traditional ideas
about liquidity constraints in German banking were now obsolete
•
Rediscounting guaranteed taking the viability of a bank taking short term deposits and
then lending them out
•
Current accounts always exceeded that of deposits
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Forays into investment banking
• Long time financing involved the flotation of stocks and bonds
•
Industrial firms looked to specialists such as deutsche bank
o
The bank would advise a firm on how to structure a deal
o
What type of security, in what quantity and at what price
•
Managed placements of industrial placements of industrial securities some of the
prominent names in German business
•
Its investment banking role, the Deutshe Bank served mainly as an intermediary between
its clients and the capital market
•
Involved in both the short term and long term finanancing of its industrial customers , it
tended to establish close relationships
•
House bank for Siemens & Halske
•
Owning equity in many of its corporate and placing bank officials on their supervisory
boards
•
Influenced its customers development through the control of proxy voting rights
•
Controlled block votes at the annual meetings of Germany’s most powerful industrial
companies, both through its own share holders and its proxies
•
In 1909, one of the banks managing claimed the it was biggest in the world
•
Strong trajectory until the first world war
o
Governments demand for loans expanded for loans expanded enormously
o
“the private business of the bank in commercial bills and stock market
transactions had virtually disappeared”
•
Banks 1919 report “the war has upset the regular course our economic life and shaken
German trade and industry to their foundations. Through paralyzing the activity of our
foreign branches it also severely interfered with our banks organization
•
Foreign assets were gone, reconstruct its balance sheet
Hyperinflation and “the death of money”
•
Climax in 1923
•
“deprecation of money “
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•
4.2 trillion marks to the dollar by 1923
•
The government printed ever greater numbers of binds, the Reich bank printed ever more
money to buy them
•
Economic environment was so chaotic that planning for the future was proved almost
impossible
•
The bank was drowning in administrative work
o
“Strain of unproductive work on everyone work on everyone was concerned”
•
Forced to hire thousands of workers
•
37,000 by 1923
•
By 1924, currency stabilized as a result of new government policies
•
Reduced its capital by 25 % and its reserves by 43 % from 1913 to 1924
•
Ninth largerest bank in 1926
Picking up the pieces
•
Had addressed the crisis between 1914-1923, with a strategy of expansion through
acquisition
o
Believed that larger size would translate into increased strength and stability
•
142 branches by 1924
•
Had reduced its employees from 37, 000 in 1923 to 13, 261 at the beginning of 1929
•
Faced increasing competition from and abroad, as foreign banks began lending directly
to Germany
•
By 1927, short term lending by German credit banks to German non- bank firms was only
37 % greater than by foreign banks
•
Integration within industrial sector proceeded even faster than within the financial sector
•
Strongly endorsed consolidation in industry as banking
•
Oscar Wassermann ( managing board 1923- 33) believed it was imperative in the 1920’s
for bankers to resume their role as coordinators of business within Germany
•
Greatest merger of all time in 1929, when the Deutshe bank itself fused with its biggest
rival the Disconto –Gesellshaft and four smaller banks
•
“ be in a position to develop a force of such magnitude that it could not circumvented in
the securities business and the reconstruction of the German economy at home and
abroad
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•
800,000 accounts, RM 5 billion, 289 branches , 77 suburban branches
Economic, Political and Moral Collapse
•
•
After the great merger targeted savings deposits
o
Saving banks became increasingly involved with involved in the short term credit
markets as a result of deregulation
o
It needed the funds
In 1930 Hitler’s national Socialist Party made big gains in the parliamentary elections
o
Due to the rapid deterioration of the German economy
•
Many of the firms to which it lent money were themselves at risk of failing
•
Banking system broke down entirely in 1931
•
The government required 35% of the shares of the Deustche Bank and Disconto
Gesellshaft
•
Banking stabilized in 1933
•
In 1932, Hitler received the popular vote,
•
1933, Hitler declared emergency of power, established himself of dictator of Germany
•
Economy began growing again
•
Wasserman agreed to leave the Deutshe bank by the end of 1933, because he was
Jewish
o
•
•
On the managing board for 21 years
George Solmssen became the spokesperson for the managing board
o
Born to Jewish parents, was not immediate target because he was baptized
o
Disgusted by his colleagues appease Nazi- ant- Semitism
o
Power until 1938
Deal with problems and challenges as a result of Nazi takeover
o
Decide how best to establish and maintain connections to the Nazi party
o
Two bank employees were part of Nazi party
•
Nazi officials were never comfortable with the Deutshe bank , labeled it the “catholic
bank” cause 4 Catholics were on the managing board
•
Nature of the Deutshe bank business was radically transformed
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•
IMPOSED STRICT CAPITAL Market controls, virtually prohibiting the floatation of private
devices
•
Encouraged to transform private deposits directly into state loans
•
December 1938,
o
new laws restricting the bank accounts of all Jews
o
Jewish account holders were permitted to withdraw small amounts each month to
cover necessities, additional withdrawals had to be approved by the state
•
the deutshe bank was forced to keep records of jewish clients
•
Jewish customers left the country, the bank is ordered the bank to turnover their assets
•
heavily involved in the so called aryanization of property, that is, the sale of Jewish
property to non Jews
•
accepted the spoils of war such as Czech bank and numerous other foreign banks
•
Government condemned the high degree of concentration in German banking, singled
out Deutshe Bank
•
o
In 1942, 43 ordering the closure of numerous branches
o
placing limits on the number of outside supervisory boards on which bank
directors could serve
political assaults on the banks turned violent
o
two directors were executed for uttering “ defeatist remarks”
•
1n 1945, came to the end National Socialism
•
Soviets took control of Berlin in May 1945, arrested many DEutsche Bank’s reaming
employees, blasted open the vaults and shut down the institution
The occupation
•
The western occupying powers accepted the private banking system
•
Differed how such a system should structured in the defeated Germany
•
American pressure announced a bank decentralization plan
•
Deutsche bank argued small banks argued were unable to spread risks effectively, nor
could small banks finance large projects
•
Without the Deutsche , it was nearly impossible to attract foreign capital
•
After the national currency reform, the successor banks came together
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•
German banking leaders now began to push for recentralization
•
The established banks drafted a proposal in 1950 calling for the partial reconstitution of
the great banks
o
Three banking districts within west Germany and suggested that each of the tree
big banks establish one regional banks in each district
o
under this the Deutsche Bank’s ten successor banks would be reduced to three
•
allied powers accepted the proposal in 1951 by Herman J. ABs
•
Once the containment of communism became their chief objective, a strong German
economy and the prospect of strong German began to look better and better
•
Federal Republic of Germany gained full sovereignty in 1955, it enacted a law removing
all limitations on the regional scope if credit institutions
•
The Deutsche bank formally reconstituted itself into a single banking enterprise on May 2,
1957
o
Hermann J. Abs , was elected spokes man of the banks managing board
The Deutsche Bank since 1957
•
After becoming whole again in 1957 resumed its historic path of growth
•
The bank maintained and strengthened its core competences in domestic business
financing
•
Dramatic growth in the retail banking market, revolutionary changes in banking
technology and extraordinary opportunities in the international arena
•
In 1994, German Gnp 10 times larger than in 1960
Retail Banking
•
In 1960’s, began moving aggressively into retail banking
•
By 1993, it had several retail customers and retail operations accounted for 60 % of its
business with non banks
Technological Revolution
•
Total assets increased 51- fold between 1960 and 1994
•
The advent of the computer
•
Punch card system in 1950’s
•
1990’s atm
•
Computer revolution,
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•
Communications revolution
•
Collect huge quantities of information from the far reaches of the globe
•
Large scale entry into foreign financial markets
Becoming a “global Player”
• After WW2, began with financing exports and imports
•
Executed a successful strategy of expansion through acquisition
o
12 foreign branches by 1980 and 65 more by 1990
o
30% of the bank’s branches were allocated abroad
•
Global financial networks which, visible to all, will develop towards the end of this century,
and trying to adjust to our own strategies
•
Alfred Herrhausen (spokesperson of managing board) hoping to transform into global
player
•
To shift the global nucleus of their investment banking operations from Frankfurt to
London
•
Hilmar Kopper, and his colleagues had to decide which to extend which universalbanking services to extend the rest of Europe and which to extend to financial market
overseas
Conclusion
•
Rapid but carefully controlled growth had always been one of the defining characteristics
of the Deutshe bank
CHAPTER 8 S UMMARY
Henry Ford, Alfred Sloan and the Three Phases of Marketing
•
How and why did the market for cars and trucks become so immense in the 20th
century?
o
One reason has to do with population growth. At the start of the century there
were about 1.6 billion people in the world and 76 million in the US, these
numbers by the 1990s more than tripled.
o
During these years the most developed parts of the world became exceedingly
rich so purchasing power multiplied many fold. In the US per capita income grew
by a factor of five and by the 1960s, the economies of Germany and Japan
among others began to catch up with the US economy.
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•
For mass production industries the fantastic growth in industrialized countries had great
implications. Over the course of the Second Industrial Revolution, potential markets for
almost any useful item became huge so new products proliferated and production runs
stretched far beyond previous lengths, continuous improvements of products and
processes became routine and immense economies of scale resulted.
•
The embodiment of such trends was found in the motor vehicle industry. By the 1970s
one out o every 6 businesses in the US was involved in the manufacture, distribution or
operation of automotive products.
•
Social and Environmental consequences of the automobile:
o
Liberation of the human spirit through instant and autonomous mobility
o
The individual elation of joyriding and road trips
o
The end of solitude for farm families
o
The evolution of suburbs
o
The phenomenon of commuting.
•
First makers of the car – Karl Benz and Gottlieb Daimler, with gasoline powered vehicles
in 1885
•
Armand Peugeot builds another workable car some time later and by the 1890s the
European industry began with France in the lead and Germany second.
•
Three Phases of Marketing
o
The first phase is market fragmentation. In 1990 no automobile company had
a broad market reach, a well known name or a capital investment, or a national
dealer network; they were each confined to a small geographic area.
o
Each company had a different product design and different production and
marketing strategies.
o
Some characteristics are: Slow and expensive flow of transportation and
information, limited geographic market and commodity products.
o
In 1909 – the peak of proliferation, approx. 274 companies were manufacturing
cars in the US mostly with low volumes of production, high margins and high
prices. These are more characteristics typical of the first stage of development of
many consumer products.
o
The second phase is unification. In this phase the market becomes defined
and united by a superior brand or product configuration.
o
Key characteristics of the second phase marketing are high volume production,
low margins, low prices and national and perhaps international mass distribution.
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Also, faster and less expensive flow of transportation and information and
branded products.
o
The classic Phase II product in the automobile industry was the Ford Model T.
o
Shortly after its introduction in 1908, this car established a dominant design for
the industry.
o
The third phase is market segmentation. In this phase consumers were now
targeted not only in terms of demographics but on the basis of lifestyle as well.
o
Alfred Sloan Jr. Of General Motors boldly segmented the market on the basis of
price and product policy.
o
Some key characteristics include: value pricing to capture as much margin as
brand loyalty allows, volume of unit sales high enough to achieve scale
economies in manufacturing and marketing, global market with numerous
demographic and psychographic (lifestyle) segments. Enhanced research
capabilities leading to more precise segmentation and brand proliferation with
brands targeted at specific segments.
•
Henry Ford (1863-1947)
•
Ford was the classic American mechanic, but several orders beyond the average
because of his remarkable intuitive flashes about how machines could be made to work
better.
•
His first automobile was his “quadricycle” of 1896, an impractical though distinctively
lightweight vehicle.
•
His first company was launched in 1899 and failed. His second company also failed and
in 1903 he made a third company called the Ford Motor Company which had 2 investors
and paid in capital of $28,000.
•
The company brought out a series of models identified by the letters of the alphabet such
as the A,B,C,F,K,N,R,S and then in 1908, the Model T.
•
Ford saw that the proper design of the car must precede all considerations about
inexpensive manufacture, but that the key to success was the manufacturing process.
•
Ford evangelized about the wonders of mass production.
•
Standardization is his hobby. Ford believed that machine production in his country has
diversified our life, has given a wider choice of articles than was ever before thought
possible and has provided means wherewith the people may buy them.
•
Standardization instead of making for sameness has introduced unheard of variety.
•
The Model T was the ultimate standardized machine.
•
It was more durable and reliable than anything else on the market near its price range.
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•
Ford finally satisfied the basics of the mechanics, marketing etc and decided to
concentrate the company’s resources on this one model and no other.
•
The decision to focus on the model T made possible a cycle of ever-improving product at
ever-higher volume and ever-lower price.
•
As the price of the model T fell, its production shot forward at an accelerating rate. For
example it took the company 7 years to reach its millionth unit sold but only 18 months to
reach its 2 millionth.
•
By the early 1920s the Ford Motor Company was producing more than 60 percent of all
motor vehicles made in the US and about half made in the entire world.
•
This unprecedented scale led to and then depended on a series of radical changes in the
production process which included:
o
The moving assembly line – became fully operational in 1914.
o
The five dollar day – introduced in 1914. This was instituted according to his
vision in promoting consumer buying power through high wages and the new era
of enlightened industrialism that the five dollar day symbolized. His motives for
this had more to do with reducing the unacceptable turnover in his plants than
anything else.
o
He also reduced work hours from 9 and 10 hours to 8 hours. Also he reduced the
work week from 6 days to 5 days.
•
Fordism – a term that became synonymous with machine mass production of
standardized products.
•
Alfred P. Sloan Jr. (1875-1966)
•
Became the President of GM in 1923 succeeding Pierre du Pont
•
Ford Motor Company vs General Motors
•
During the industry wide crisis in 1920-21 Henry Ford was simultaneously taking his
company private producing at nearly full throttle and building a vast new facility at River
Rouge.
•
This placed heavy cash demands on the company and so Ford responded by requiring
that his 6400 dealers accept and pay him cash for 90,000 new cars for which there was
no ready market.
•
The choice was to pay or to lose the franchise.
•
Alfred Sloan of GM always went out of his way to accommodate the company’s dealers.
He did this by:
o
Offering financing for startup dealers
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o
Financed dealers’ wholesale purchases as well as individual buyer’s retail
purchases through the General Motors Acceptance Corporation.
•
By 1925, the auto industry ranked first amongst all American industries in cost of
materials, wages paid, value of products and value added in manufacturing.
•
The contest for supremacy between Ford and GM played out against a backdrop of
robust macroeconomic growth, exhibited all the basic themes of modern corporate
strategy:
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The shifts in consumer tastes
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The imperatives of a particular industry structure
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The force of the personality
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The decisive role of leadership and management.
How did GM win a victory against Ford in so short a time?
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The principal reason was that Henry Ford’s product policy remained so inflexible
– the policy to keep building the Model T with better materials, constant
improvements and reduced cost to the consumer. (Classic example of Phase II
marketing)
By 1927, a combination of forces finally caused Ford to abandon the Model T. These
forces were:
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The rising consumer preference for enclosed cars
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The proliferation of new models from Chrysler, GM
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The advent of annual model changes which amounted to a revolution in styling
•
GM exploited all these changes plus other kind of appeals, through ingenious advertising
campaigns.
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Nor did GM surpass Ford in marketing alone; it also copied Ford’s state of the art
production methods and has taken them a step further.
•
They did this by making parts that could go into several different makes and models; it
had converted large economies of scale into economies of scope as well.
•
In response to competitive pressures in 1927, Ford shut down his factories for many
months and retooled them producing a new model of car, the Model A – a quantum
improvement over the Model T.
•
Sloan as one of the great organizational innovators in US business history created an
early version of what came to be called the multidivisional structure also called the Mform.
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•
This design set out clearly the lines of responsibility and reporting within the company. It
proved to be so structurally sound that it accommodated the immense growth of the
company past total employment of more than half a million people.
•
In the M-form organization, division heads may be called managing directors, presidents
or vice presidents. They have full profit or loss responsibility for the products or services
in their bailiwicks.
•
This change in the focus of responsibility amounted to revolution of business thinking as
older organizational forms had tended to allocate manager’s responsibilities not
according to product but according to form.
•
These functions would include the sales, manufacturing and purchasing functions among
others. (see page 286 for diagram of M-form)
•
The M-form combined the virtues of centralized control with those of decentralized
decision making. It matched power with responsibility up and down the organization.
•
As a result is solved the management problem of maximizing individual autonomy without
creating hopeless disorder.
•
Essentially what Ford could do with physical machines, Sloan could do with human
organizations. Ford’s greatest innovation was the assembly of separate mechanical
parts into the Model T i.e. the assembly line; Sloan’s greatest innovation was the
assembly of organizational parts into one smoothly functioning whole through the M-form.
•
The M-form provided a framework for motivating the large numbers of managers to work
together. An example of how this was done was when he instituted a series of crossdivisional committees and had many top managers serve on multiple committees of
different makeups forcing all executives in some way or another to communicate with
each other.
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The American Automobile Industry during the “American Century”
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In 1945, Henry Ford was ousted from an active role in the company at 82 years. He was
replaced by his grandson Henry Ford II.
•
In reviving the company in the 40s and 50s Ford replicated the multidivisional structure
introduced by Sloan in the 20s.
•
In 1950 Ford overtook Chrysler to regain second place in the American market.
•
There was a dramatic post-war spike in demand and so new domestic firms entered the
market.
•
Cars with names like Kaiser and Frazer began to appear on the roads in the US but none
of them really challenged the larger companies Ford, GM or Chrysler who controlled 87
percent of the domestic market in 1950
•
One important reason for GM overtaking Ford in the auto industry was that Alfred Sloan
understood that the market was changing and so he was able to introduce an element
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of fashion into his cars through an investment in styling and colour. He had “a car for
every purse and purpose”. For example Chevrolet was plainest and least expensive and
Cadillac was the fanciest and most expensive.
•
In between those two models were also Pontiac, Oldsmobile and Buick. (in ascending
order of price and stylishness)
o
This took the industry Phase II marketing typified by the standardized Ford Model
T to the segmentation of Phase III.
•
The Challenge of Japanese Imports
•
A threat began appearing not only from Europe but also from across the Pacific Ocean
i.e. the entry of Japanese manufacturers into the US market took place.
•
Toyota Motor Sales at a cost of $1 million opened its first American sales subsidiary in
October of 1957. That same year Nissan brought out the Datsun 210 in California.
•
However, their initial automobile models the Datsun 20 or the Toyota Toyopet Crown
were not ready for the US market as they were not compatible with the usual build of
vehicles in the US. So the Japanese retreated but came back with a greatly improved
product aimed directly as the US market.
•
In 1967 the US imported some 82,035 Japanese cars.
•
By 1980, Toyota, Nissan and Honda captured more than 16% of the US market share.
Ford and Chrysler both made losses of more than $1 million and were soon about to
declare a state of bankruptcy. It was only GM that remained robust with its share of 46%
of the market.
•
By 1990 the combined share of 3 Japanese firms climbed to 22%.
•
Mazda and Mitsubishi then became involved into the US market and now combined with
Toyota, Nissan and Honda held 26.5% share of the market compared to Chrysler’s 9.3%
and Ford’s 21%
•
By 1980 Japan became the world’s leading producer of cars and trucks.
•
One key to Japanese success had been a corporate strategy which favoured outsourcing
over vertical integration.
o
Quality was the goal and it was achieved partly through the introduction of the
“Toyota Production System”.
McCRAW
Introduction
•
America from the beginning has plenty of land which is one of the classic economic
factors of production followed by labor, capital and entrepreneurship.
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•
Even before 1776(official birthday of America), their was a presence of the classic
economic factors which attracted people from outside to come some classic examples
are 1607 the settlers at Jamestown arrived under the charter of the Virginia company of
London. Puritans founded Boston in 1630 under the auspices of the other English
corporation, the Massachusetts Bay Company.
William Penn and his community friends persecuted in England for their religious beliefs,
they acquired in 1681 a royal grant of land in America, and proceeded to develop it
religiously and commercially.
The contours of American capitalism
• the most striking attributes of American capitalism:
1. the systematic development of the north American continent’s rich natural
resources
2. the deliberate diversification of the national economy away from agriculture
and into manufacturing, mining, and services
3. the exceptional heterogeneity and energy of the American people
4. the effectiveness of the public polices in the promoting growth
The American people
• in 1800 population of united states was about 5.3 million people mostly British, German
and African decent.
•
In 1900 American population was much more diverse and huge. 15 times more people =
76 million
• fewer than half of the population were both American and the children were born to both
native born parents.
• High density of people of polish , Italian had immigrated to united states.
Public policies, economic diversification, and nineteenth-century growth
• Thomas Jefferson,1780: his dream was to have a vast population of yeoman farmers.
• Alexander Hamilton,1791:vision of diversified economy that took advantage of both
manufacturing and production by machine. He argued in favor of “energetic “ government
. this type of government would have helped build roads and canals, sponsor a national
banking system, and offer protective tariffs and cash bounties to manufacturers.
•
They both were supremely talented public servants, made early debates over American
economic policy exceedingly contentious.
•
Debates between tradeoff between government’s “energy” and private liberty
•
Jefferson became president in 1801, he began to see things differently and started using
considerable energy himself. Jefferson and his brilliant secretary of the treasury, the
Swiss- born Albert Gallatin, began to appreciate the need for government action in
creating a transportation infrastructure. He signed legislation that included a provision to
construct “national road” across the Allegheny mountains( key east west route , still used
as U.S highway 40 and interstate 68).
the American system
• American nations manufacturing wasn’t that competitive as productive british firms were,
during the first industrial revolution. British connected merchants proved willing to “dump”
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on the American market cargoes of ironware, pottery, and textiles at prices that undercut
those of local manufacturers
Nascent American producers with political representatives acted over the above and
resulted in series of tariff acts starting with first congress in 1789
These tariffs became main source of revenue for federal treasury
Policy evolved on an hoc basis and then became explicitly protectionist with the tariff of
1828
American policy was never free trade but they favored protectionist policies ….
even the American leaders of nineteenth century favored protectionism ( people like
james Madison, Abraham Lincoln, William mckinley)
Henry clay – provided the first full articulation of the thoroughgoing program of economic
development. He named his plan as “ the American system”- talking about the internal
improvements in the economy and tariff protection and encouragement of manufactures.
After the civil war ended, bondage for 4 million people but abolition of slavery didn’t mean
confer equal bargaining power upon those who had been liberated. Racism and
oppression was still present and movement towards quality was slow.
Clays plans were never implemented in the sweeping way he had envisioned though it
shaped into a more powerful government .
1870 federal aided railroads and similarly cities started individual banks, canals and
railroads.
Political forces advocating the protection of the infant, adolescent or ailing industries
behind the walls of tariffs.
These high degree of protection were necessary for growth is not clear but it reduces the
harmful effect the American industry might have faced due to the foreign competition
even though they would have had to face domestic competition.
Hospitality toward business
• In the middle of the nineteenth century it was possible for almost anyone to operate and
issue currency. This ended though during civil war
• Limited liability corporations were easy to form
• There were practically no environmental protection laws , cities like Pittsburgh and
Chicago grew so dirty that sunlight could hardly pierce through the smoky air.
• Government through out hindered union org and sometimes directly helped the
corporations in stopping employees from strikes
• In all kinds of cases court used to favor the side of employers
• Law didn’t care about how employer used to treat their employees and exempted
companies from damages from most deaths and injuries during work.
• Bankruptcy law were interpreted more and more lenient favoring business debtors over
creditors
• Law of imprisoning for debt was abolished long before it was abolished in Europe
• The reason for America having more entrepreneurs than any other country would be the
lenient attitude of Americans over bankruptcy made Americans to try their hands in riskier
and even more riskier projects
The evolution of big business
• Four broad categories of potential government intervention in capitalist economies:
1. Laissez faire, with minimal intervention
2. Frequent, uncoordinated intervention mostly in free market
3. Systematic state guidance of private decision making
4. Thorough state management and decision making for the whole economy
• America was under the 2nd point mentioned above
• Jefferson especially before he became president favored the least possible government
intervention so choose category 1 where as Hamilton with his “energetic” government
choose category 3 but neither came true
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•
American experience never came across category 1 and 4 it did came across category 3
though during war times
• During first industrial revolution in America most businesses were proprietorships or
partnerships, even small no of canals, banks and turnpikes were incorporated as joint
stock companies
• Issues related to deaths and destruction by locomotive smokestacks emitting flurries of
sparks, which often set fire to houses , barns, fields and prairies. And even meant
hundreds of tons of metals hurtling at high speeds through unfenced towns, country sides
and grade crossings. Deaths of tramps, pedestrians, horseback riders , passengers and
railroad employees.
• In later 1800s agriculture grew and became commercial but more than that
industrialization grew
• U.S steel, American tobacco and standard oil were largest manufacturing companies of
united states at starting of twentieth century.
• No giant firms have never dominated the entire economy
you can view the list of fortune 500 companies from the book
• There are big firms in American history but most of the firms are small sized though
entrepreneurs tried to make their businesses big but failed.
big business, antitrust, and industry structure
• Trust movement- a trust is a legal device designed to vest custodianship of assets in
the trustee or group of trustees, who act in the interest of the owner of the assets. Work
of the trustee is usually not subjected to public scrutiny thus made it very attractive .
• One company holding another company was illegal though it was legal by 1880’s (late)
thus making trust form abandoned.
• There were a lot of fights between different sectors of businesses
• The success of second industrial revolution …. Individual artisans lost their power,
wholesalers who were very powerful then lost power as big companies connected
directly to retailers .,, retailers lost the bargaining power as big companies were really
strong, small producers being to small used to end up selling out or working under the
bigger ones
• Reason for American companies to grow gigantic
Tiny size of American govt along with absence of landed aristocracy, large church or
large standing army .without these institutions a vacuum of power was created , and
there were no forces to control the market. Nor European companies had an open
access to American unified market
• 1in around 1880’s adverse public opinion soon began to crystallize and it became clear
something had to be done about the big giant companies, courts started to pay attention
towards the collusive price fixing ,. Laws against cartels started to come in.
• in 1890s us congress enacted the milestone Sherman antitrust law which declared
Illegal” every contract, combination in the form of trust or otherwise or conspiracy, in
restraint of trade or commerce”
“every person who shall monopolize or attempt to monopolize or combine or conspire
with any other person ot persons to monopolize any trade or section of trade among the
several states or with foreign nations”
•
under this act Standard oil which grew really huge was broken into still large firms
antitrust policy had powerful effects on controlling, stoping cartels, preventing anticompetitive mergers, eliminating resale price maintenance and encouraging
entrepreneurships.
where the money came from
• in united states financial capital was effected my following factors :
1. land
2. spirit of entrepreneurship
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3. scarcity of labour
4. scarcity of gold and silver
labour being scarce , real wages of worker were high attracting immigrants
factorial imbalance made government and entrepreneur use land like money
public land was acquired by federal government (almost 2 billion acres) of which in last
quarter of twentieth century 1 billion has been disposed of
1. ¼ sold to public
2. ¼ given away under homestead act of 1862
3. 11% to railroads
4. 7% allocated for state support
5. remaining was given over for various uses such as veterans’ bounties and the
reclamation of swampland.
Successive discovery of gold and silver in California, Colorado , Nevada and Alaska
helped u.s to overcome its historic shortage of hard money. Though discovery was not
adequate in relation to modern economic development.
Credit present in many forms : bills of exchange, specie reserve, bank loans , stocks,
bonds , mortgages, debentures etc.
Due to exigencies of second war with british there was a need to set up a central bank
which passed notes and controlled the money supply though due to empowerment being
centralized it failed and for several years u.s didn’t have any central controlling bank.
in 1913 federal reserve system was created to avoid the centralization of the power
this bank was designed in such a way that 12 regional branches were connected to it and
it operated just like a central bank as other countries had .
gradually thousands of banks sprung up and mostly failed wasting all the public savings
so reforms were made , banks had to deposit insurance at federal reserve, strengthening
it. And both investment banks and commercial banks were kept separate.
In 1980s disastrous mistakes were made, several hundred billion dollars to the national
debt due to deregulation , and the saving and loan crisis .
Securities markets
• By the ending of the 19th century the stack exchange markets grew and few grew huge
like san Francisco mining exchange , the Chicago board of trade. But the major was the
wall street with major investment banks flushing several million worth dollars of today.
• In 1929 came the stock exchange crash. The great depression which lasted until 1941,
employment unto 25 %.
Management
• Managers had a very influential role in development of American businesses
• Managers were remarkably insulted from the interference of owners.
• Conspicuous due to the rise of big companies.
• In twentieth century managers acquired the power to make decisions on their own and
had the power to retain large amount of money according to their will , which in return
was good for the firms long term standing and could have retained money against the
will of owners of paying high returns of dividends
• Downside, managers could have overinvested in unpromising initiatives.
• Managers functions included the use of increasingly sophisticated tools of information
retrieval , cost control and financial accounting
• Costing techniques were pioneered by such innovators as albert fink “father of railway
economics”
• Scientific management by Frederick winslow taylor
• Other management pioneers included young financial officer F.Donaldson Brown of du
pont , invented the concept”return on investment”
• With the invention of computers management grew to different level.
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Globalization
• United states even after favoring protectionist policies moved towards free trade:
1. Franklin d. Rooservelt administration wrested primary control of trade policy from
congress and lodged it in white house.
2. After world war 2 big economies like Germans , Italy’s , great Britain ,Japanese
lost every thing or most of their economic structure , so America was untouched
that’s why they opted for free trade to get benefited from this situation,
• America coordinated to slash the tariff rates and to develop and liberalize national
economy throughout the world.
•
American policy makers from 1940s onwards promoted the economic integration in
pursuance for several reasons :
1. they feared return of great depression and they wanted to develop strong foreign
markets for American products.
2. The specter of soviet union expansion called for strengthening the economies of
western Europe and administration announced its marshall plan for systematic
economic aid templated.
3. The soviet union’s berlin blockade(1948), the triumph of the communist
revolution in china (1948), the successful test of a soviet atomic bomb(1949), and
the communist invasion of south korea(1950) confirmed of the Americans to “
contain” the spread of the communism. That would have done through economic
means as well as military ones.
4. Even the want to share the “American way of life” fusion of democracy with
capitalism
The waning of the American dream?
• Wages of workers fell but executives’ salaries rapidly increased and followed with the
big bonuses
• American investment bankers reaped profits and fees from mergers and acquisitions
that that would have inconceivable even in the buccaneering nineteenth century
• Top 20% of wealthy people holded 88% of wealth were as least wealthy had an average
net worth of 20% of national wealth
• The richest one % had less than 20% of national wealth in 1976 where as by 1990 it
increased to 40%
• Union membership were on a hike since the beginning of the 2oth century
• “Creative destruction “ written by Schumpeter is essential fact about capitalism
• as an economist joseph Schumpeter once wrote, the essence of capitalism is precisely
this kid of disruption. Schumpeter saw capitalism itself as a “ process of industrial
mutation- if I may use that biological term – that incessantly revolutionizes the economic
structure from within , incessantly destroying the old one, incessantly creating a new one.
• “Creative destruction” the sweeping out of the old products, old enterprises, and old
organizational forms by new ones has been the hallmark of the American business
system
Chapter 10 – McCraw
• From the 1920s to the mid1950s, the International Business Machines Corporation
dominated the market for data processing technology under the leadership of Thomas J.
Watson Sr. From the mid-1950s until 1971, his son carried on the company as the new
IBM with the new computer technology. The Watsons and IBM were great success.
•
The computer industry in the United States was the creature of two historical
developments. In many ways, the computer was only the latest entrant in a long and
continuing attempt to manage the information explosion that accompanied the Second
Industrial Revolution. The other historical development was the governments’ new
investment in R&D spurred technological innovations, primarily in electronics,
communications, advanced materials and aerospace. In 1990, IBM alone spent nearly $7
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billion on R&D. 1960, IBM’s new System/360 threatened much smaller industries and
other countries did not attempt to challenge the American lead in commercial market.
The company that became IBM was first established in 1911. Computing
Tabulating Recording Company was the product of a merger of several small firms. The
financier Charles R. Flint, who ran the new company from his offices near Wall Street, put
the deal together. The constituent firms manufactured scales, coffee grinders, meat
slicers, and time clocks. In 1914, Flint hired a 40-year-old unemployed executive name
Thomas J. Watson to run C-T-R. TJ took from his experience at National Cash Register
(1903 when he joined) of what marketing could accomplished, as well as an enduring
love for field sales forces. At C-T-R he re-created what he learned from National Cash
Register, Patterson’s innovations, such as providing professional training for all new
sales recruit, giving sales people exclusive rights to their territories and implementing
sales quotas. He also tied the manufacturing and engineering organizations closer to the
sale forces. In 1924, he renamed the C-T-R Company the International Business
Machines Company (IBM).
By 1939, IBM sales of about 40 million.
The stock market crash of 1929 and the subsequent Great Depression put intense
pressure on the profits of most American companies. IBM turned out to have both history
and new legislation on its side. In 1933, President Roosevelt push through National
Industrial Recovery Act and IBM followed in quick succession. IBM's revenues, which
had suffered in the early years of Depression, quickly recovered as orders for its
punchcard machine poured in from both business and government. When the US entered
WWII the entire military began to use IBM cards. The company sales went from 40
millions to 142 millions in 1945.
In 1940, the government and IBM worked closely with their high-tech supplier to
developed computers that would meet their specific goals. IBM’s punchcard businesses
dominated and it accounted for 85 percent of its revenue.
Thomas J. Watson Jr entered the family business by the age of 23. Tom Jr
wanted to change the punchcard technology but TJ resisted. Tom Jr and his dad were in
a difficult relationship. IBM’s dominance in punchcard machines greatly facilitated its
move into computer. In 1952, Tom Jr, was named the company’s president.
The 650 Series of electronic computer were launched in 1954 and was the first to
be mass-produced by the company. These machines were run on punched cards and
became the first generation computers. Not all was well at IBM. There were some serious
compatibility problems with IBM’s hardware. In response, IBM used its tremendous scale
and scope to develop System/360 and its successors. Introduced in 1964, System/360
turned out to be one of the most important products of the Third Industrial Revolutions.
The 360 project changed the company’s structure in several ways. IBM became the
world’s largest manufacturer of computer components and this was a major change.
Also, becoming the world’s largest producer of semiconductors.
Chapter 11: Toyoda Automatic Looms And Toyota Automobiles
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•
•
-from an early age, Sakichi Toyoda wanted to be an inventor and wanted to contribute to
Japan’s economic development
-the textile industry was the biggest industry in Japan in the late 1800s but faced
pressure from foreign competition, and Toyoda wished to build a better handloom to
make the textile industry more efficient
-he invented a more productive manual loom but it did not sell very well because small
textile companies could not afford it and large textile companies preferred to purchase
imported power looms
-in 1895 he invented a yarn-reeling machine and had much greater success; founded
Toyoda Company, and also invented a steam-power loom (the first to be built in Japan
and had a fourfold increase in worker productivity)
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•
-Mitsui & Company (most prominent trading company) bought 10 year agreement to
exclusive rights to the loom and Toyoda became an engineer to their company but
resigned from the company in 1902
• -following a trip to America in 1910, Toyoda marveled at their industrial progress and was
impressed by the automobiles he saw, but remained focused on looms
• -outbreak of WWI in 1914 sparked a massive boom and Toyoda’s business, Toyoda
Spinning and Weaving Company, could barely keep up with the demand
• -Toyoda worked with his son to invent an automatic loom and began to mass-produce it
in 1925, and founded the Toyoda Automatic Loom Works; production of the G-Type
automatic loom began in 1927
• -one worker could operate 25 automatic looms, compared with 2-3 power looms
• -the loom began to spread throughout Japanese textile industry, and exports followed
• -the British Platt Brothers signed an agreement in 1929 with Toyoda to sell the looms in
Britain, but it was not that successful because textile companies in England feared that
the efficiency of the machine would lead to job loss
The First Japanese Economic Miracle
• -by 1914, British dominance of the textile industry had gone unchallenged, but the
Japanese would be the leading textile producer by the 1930s
• -Japan had many integrated spinning and weaving companies, which became quite large
and tended to challenge the British companies
• -Japanese textile managers made an important discovery that put them ahead of their
competitors: they discovered how to blend high-priced US cotton with low-priced Indian
cotton to make high quality yarn; also mobilized skilled and disciplined female workforce
• -there was a willingness by Japanese firms to adopt new technology, unlike in Britain
• -Toyoda’s son, Kiichiro, imagined a career in the automobile industry after his father’s
death; Sakichi left his son a large inheritance so that he could start his own business
Toyota Motor: The Early Years, 1930-1953
• -in 1929, he went to US and Britain to visit automobile plants and conducted research on
automobiles, determined to create a viable automobile company in Japan
• -most of the automobile industry was dominated by foreign companies in Japan
• -in the mid 1930s the Toyoda Automatic Loom plant began to invest in Kiichiro’s
automobile dream and work began on a prototype; brand name Toyota chosen
• -the 1936 Automobile Industry Law limited production of Ford and GM and allowed
Toyota and Nissan to have dominance in the auto industry
• -Toyota produced several different car and truck models
• -in 1937, Kiichiro persuaded the board of directors of Toyoda Automatic Loom to create a
separate automobile company; created the Toyota Motor Company (TMC)
• -Japan’s entry into WWII in 1941 increased demand and created a period of prosperity of
the Toyota Motor Company; proved devastating to Toyoda firms in textiles
• -the war shifted the balance of power within the Toyoda Group, reducing the importance
of textiles, and they became the Toyota Group
• -the war stimulated the development of close subcontracting relations
• -by the end of the war, TMC was in far better shape than other Japanese companies
• Peril and Promise, 1945-1953
• -after the war Toyota shifted its specialty-parts production to affiliates which had formally
produced aircraft parts; began to rely on outside subcontractors
• -Toyota has outsourced much of its component production
• -most of the vehicles produced during this period were trucks, not cars; American
vehicles also began flooding the Japanese market again
• -Toyota also had problems with its labour union, which became much more radical when
it aligned itself with the United Automobile Workers of America
• -the company needed financial assistance from banks and as a precondition of aid, the
banks demanded that the company restructure itself and create a separate sales
company; the Toyota Motor Sales Company (TMS) was created in 1950
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•
-Kiichiro resigned as president to take symbolic responsibility for the lay-offs that had
occurred, but it was understood that he would return as president after a period of time
• -collapse of the auto labour union ushered in an era of relative labour peace; wages of
employees fell and company maintained labour-cost advantage relative to US companies
• -the Korean War (1950-53) created a large US demand of Japanese trucks, business
boom
Toyota Motor: The Making of a World Leader, 1954-1980
• -government was encouraging Japanese automakers to form joint ventures with foreign
automakers
• -the leaders of Toyota died in 1952, and Kiichiro’s cousin (Eiiji Toyoda), was left with the
business and was instructed to stick to the car business
• -in the early 1950s, the demand for trucks increased rapidly while the demand for cars
increased at a little slower pace, but there was explosive growth
• -the growth caused an increase in competitors; there was some consolidation but Toyota
and Nissan accounted for more than 50% of domestic production
• -although Nissan appeared to be more dominant, it did not take long for Toyota to close
the gap and gain an advantage
• -Toyota had a much easier time organizing its parts suppliers because it had close ties
with its subcontractors, while Nissan did not
• -Toyota took bigger risks and invested in new facilities in order to facilitate growth, while
Nissan was much more reactive in their investment practices
• -although Nissan had built better domestic cars for many years, Toyota had finally
perfected its domestic car (“The Corona”) in 1965
• -Toyota would produce its most famous car, “The Corolla”, in 1966 and it would go on to
become one of the most popular selling cars of all time
• -one of the reasons for Toyota’s success was the Toyota Manufacturing System, a
manufacturing approach developed over a 20 year period
• -it stressed an aversion to waste and attempted to eliminate inefficiencies
• -the two pillars of the Toyota Production System were:
o jidoka (self-working): machines should operate with minimal supervision
o inventory replenishment: workers should provide parts only when the next
o Station on the assembly line needed them
• -most growth occurred in the domestic market, with some growth in exporting especially
in Southeast Asia
• -the weakness in automobile industry was a lack of competition between the top 3
automobile makers (they focused on comfort features like air conditioning rather than
improving the technology of the vehicle)
• -in Japan it was the opposite; the large number of competitors forced the companies to
constantly improve product quality, product efficiency, and marketing
• -Americans were slow to recognize the need for small cars; left a void to fill
Toyota Motor Corporation: The Challenge of Leadership, 1980-1995
• -in 1982 Toyota Motor Company and Toyota Motor Sales merged to form the Toyota
Motor Corporation
• -during the 1980s Toyota widened its lead over Nissan in the Japanese market and the
demand for its exports continued to increase
• -it was also technologically advanced in comparison to other companies (introduced cars
with multi-valve engines, electronically controlled fuel injections, superchargers, etc)
• -it also entered the luxury car market with its introduction of the Lexus
• -in 1983 Toyota and GM agreed to establish a joint venture called the New United Motor
Manufacturing, Inc.; this paved the way for Toyota to build a new, wholly owned plant in
the US
• -in the 1992s the recession created many challenges for Toyota and political tension in
the auto market
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Chapter 12 Japanese Capitalism
Japan :
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Late industrializer
People among world’s best educated
Island nation with dense population, most living by sea
Its capitalism developed exceptionally rapidly
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Prior to Meiji Restoration of 1868, country had sealed itself off from rest of world,
preserving feudal-like society while other countries were already entering 2nd Industrial
Revolution
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Used power of government to accelerate development
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Why was Japan able to develop a modern industrial sector so fast, while countries like
China, Russia and Mexico failed?
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Japan’s version of capitalism has been described as “human capitalism”, “competitive
communitarianism” and “non capitalistic market economy”
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By 1890s, Japan had a written constitution, a commercial code with limited liability for
corporations, and a growing indigenous capitalist class
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3 main differences between Japanese capitalism and other versions:
the governance and employment structures of large firms
the extent and variety of interfirm linkages
the perceived role of the government
The Precapitalist Era
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Pre 1543, Japan traded with China and exchanged much culture, adopting a system of
writing, and the notion of bureaucratic government, in which civil servants chosen on
merit rather than familial ties
Has always been careful to limit outside control of their country – when trading with
China, and then later with Westerners
1st Westerners to arrive in Japan, mid-late 1500s were Spanish and Portuguese Christian
missionaries
Many Japanese quickly adopted Christianity
Japan in civil war when westerners first arrived
Warlord Tokugawa established rule in 1603 and his family kept ruling power until 1868
Members of the Tokugawa clan served as shogun, head of the central government
(bakufu). The shoguns ruled ¼ of the country’s agricultural land, with the remaining area
divided into about 260 domains (han) and governed by lords (daimyo)
Tokugawa rules increasingly viewed foreigners and foreign practices as threats
Actively suppressed Christianity
British left voluntarily, Spanish and Portuguese expelled in by 1640
All but a tiny amount of trade conducted with the Dutch and Chinese off a small coastal
island, Nagasaki, was forbidden.
Tokugawa Society (1640 – 1868): The Building of Social Infrastructure
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Tokugawa rules imposed hierarchical class structure: samurai – warrior class (7%),
followed by peasants (80%) followed by artisans\craftsmen and then merchants, who
were regarded as a necessary evil in the largely agrarian society
Major cities – Edo, Osaka and Kyoto were some of the largest in the world, Osaka a
central hub of commercial activity
Pervasive guilds limited entrepreneurial activity, but still trade among han
Management of daimyo income, most of which came from rice taxes on peasants, was
an important business
Big cities of Japan also featured money exchange shops that supplied commercial credit,
and merchant houses selling goods. The latter were generally family run, but larger
ones had staff, apprentices etc
Developed commercial networks in rural areas as well, many farmers marketed crops
and had other jobs too
Advanced educational system made these advances possible
Low population growth rate also helped Japan advance
Advances society and culture, but weak military and technology
1853 Matthew Perry of United States sailed into Edo bay and demanded Japan open its
ports to allow trade
Japan had no choice
By 1859 Japan had trade treaties with the US and many European countries
Treaties were considered unequal, other countries had ‘extraterritoriality’ / special
privileges in Japan and Japan could not levy tariffs greater than 5%
Samurai class outraged by shoguns caving to foreign demands, they carried out attacks
on Westerners and Western property with the slogan “revere the emperor and expel the
barbarians’
Shogun too became scapegoat and were overthrown by samurai
This was a coup d’etat and seen as movement to restore power to imperial family, which
had been steadily cloistered in Kyoto
Established a new government in Tokyo with 16 year old emperor, event known as Meiji
(‘enlightened rule’) Restoration.
Early Meiji Japan (1868-1885): Growth of Traditional Industries
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Power rested in oligarchy of a few samurai
Catching up with the west economically and militarily became highest priority
Instituted reforms to achieve that goal
Han abolished and replaced by prefectural system modeled on French example
Abolished caste system, guilds, and restrictions on occupational choice and domestic
travel, prompting migration from agriculture to industry
Stripped samurai of warrior status, established army base don universal conscription
Rice tax replaced with land tax
Established modern property rights
Enacted universal compulsory primary education for girls and boys
Extensive efforts to learn from abroad:
o Lots of institutional borrowing – encouraged foreigners to come and provide
instruction on western methods of organization, administration and production
o Japanese students encouraged to study abroad and return home to Japan
o Tried western techniques in business, agriculture, industry and technology, but
lots failed – ex capital intensive agriculture didn’t work because Japan has cheap
labour and scarce land
Large factories didn’t work under government control
Government pulled out of direct ownership of firms, but continued to play key role in
economy
Investments in infrastructure (communications, transportation etc)
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Promoted trade associations, established quality certification programs
1884 Meiji government released Kogyo Iken “a proposal for economic development” one
of world’s first national development plans
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1881 economic crisis – inflation, debt, deteriorating trade balance
stabilization program – sold off factories, slashed government spending, put taxes on rice
wine and tobacco
harsh impacts felt by many, but did stabilize economy
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Economic growth at this time came mainly from expansion of farm sector (45% of
increase in GDP came from agriculture, much higher than for Germany, the US and the
UK)
Silk and tea main agricultural exports
Japanese Economy from 1880s – 1940s
Emergence of the Zaibatsu
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1880s turning point – modern business sector emerging alongside traditional economy
ziabatsu (‘financial clique’) an institution in which diversified group of businesses owned
by a family
Big Four Zaibatsus : Furukawa, Okura, Sumitomo, Yasuda – likened to Japanese
versions for Rockefeller, Vanderbilt and Ford families of the US
Zaibatsu initially concentrated on non-manufacturing activities
Mitsubishi an ex of a zaibatsu, started with a shipping company, then launched Tokyo
Marine and Fire Insurance Company, then foreign exchange and discount bank – from
just shipbuilding to all the associated financial services as well.
Zaibatsu expanded the scope of business while retaining a decentralized management
structure
Played large role in certain industries ex shipping and foreign trade
But not only companies venturing into modern industries
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Rather than internalize related functions like many US corporations, Zaibatsu created
new firms to conduct peripheral operations, and maintained coordinating links with them
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Unlike American companies, hardly any Japanese companies integrated vertically
Rise of Textiles and Beginning of Heavy Industry (1886-1913)
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Textile industry big part of Japanese economy, 28% manufacturing output and 56%
exports by 1920
Japanese government had little to do with performance of textile industries – rather, the
unequal treaties may have forced Japanese entrepreneurs to invest where they had a
comparative advantage, thus building the textile industry
Privately owned Osaka Spinning Mill was Japan’s 1st successful modern mill, paved way
for other entrepreneurs to establish textile mills
Development of textile industry reflected and contributed to emergence of corporation as
Japan’s predominant form of business organization
Largest companies in Japan were initially textile mills
1872 joint stock company appear in Japan (about 300 years after in Europe)
1893 – formation of commercial code defining legal rights and obligations of Japanese
corporations
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beginning in late 1800s, begin move to heavy industries
government intervention sparked by military needs plays vital role (ex shipbuilding and
steel)
1896 Shipbuilding Promotion Act – subsidies for construction of large iron and steel
vessels
1896 Navigation Subsidy Law – granted special subsidies for purchase of Japanese-built
ships
1897 establishment of government owned Yawata Iron Works – Japan’s largest
enterprise at the time
Yawata large share of domestic iron and steel production, but not a financial success –
Japan remained net importer of domestic iron and steel products
Came closer to achieving self sufficiency in ship-building
Economy remained largely traditional – primary industry still 60% of labour force in 1910
But trend toward industrialization clear – primary sector shrinking and secondary growing
between 1880 and 1910
Japan passed thru first industrial revolution in less than 50 years (1/3 time taken by
British)
Military Power, World War I, and the Interwar Period (1914-1931)
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another important transition for Japan – from potential colony to imperial power
1876 – Japan sent ships top Korea to pry open their market
Japan wins two major military campaigns – with China and another with Russia
the latter shocked the world, with Japan defeating a European power
Japan gains 2 colonies: Korea and Taiwan
1899 unequal treaties revised in part and 1911 gained full tariff autonomy
1902 signed military alliance with Great Britain
1912 new emperor “Taisho”
time of liberalization
introduction of party politics
emergence of some major institutions
2 years into Taisho period WWI starts
economic boom for Japanese industry
increasing demand from warring nations and Asian countries whose trade with Europe
disrupted by war
composition of exports shifted from raw materials to finished goods
increased growth from war stimulated growth of trading companies
increase in shipbuilding, and production of industrial goods (chemicals, machinery
etc)when the war interrupted their ability to import them
postwar recession devastated some of the companies that had experienced rapid growth
during war
in this time zaibatsu expanded in scale and scope even in economic downturn by taking
over failed firms (consolidation)
consolidation also happened in banking sector – economic recession, huge earthquake
with massive destruction, companies with huge debts to banks, all cumulated in banking
system looking people's confidence and demise of many banking institutions
in response, Japanese goverment instituted stringent banking regulations:
increased capital requirements of banks and large consolidation
zaibatsu benefitted from this consolidation because they owned 4 of the 5 largest banks
zaibatsu important, but constituted only about 1/3 Japan's GDP before 1930
most Japanese industrial workers were employed not with Zaibatsu but at small and
medium sized firms
Zaibatsu significant for their productivity (higher at large companies) and higher wages
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Dual structure of Japanese industry: small number of large, modern companies
coexisting with large number of small, traditional firms
The Japanese Enterprise System: Some early developments
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several institutions came out of large firms
emphasis on in-house training, seniority wage and promotion system, permanent
employment and profit sharing bonuses emerged between 1910 and 1930
these practices emerged over time as the outcome of comflicts and compromises
between workers and management
permanent employment and seniority wages not widely applied to blue collar workers
before WWII
important development in 1910-1930 period: shift in operational control from
shareholders to managers
Plight of small business and agriculture:
1920-1930s small businesses found it hard to compete with modern department stores
appearing
agriculture suffered due to wartime food shortages that led to increased rice production in
Japan's colonies, depressing the prices for growers in Japan
Great Depression in US also caused silk market to crash
prosperity of zaibatsu made them obvious target for dissatisfied rural workers who still
made up 50% labour force
felt zaibatsu were enriching themselves at nation's expense
post some money making scandals ('dollar buying scandal') of zaibatsu, public was
outrages and head officer of Mitsui zaibatsu assassinated
zaibatsus and politicians associated with them discredited, contributing to ascendence of
Japanese military
The Wartime Economy (1932-1945): Toward Government Controlled
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New emperor in 1926 – 1989, the Showa era
turbulent start – banking crisis in 1927, economic recession depeening social rifts and
contributing to rise of militarism
• Japanese military took over a state in China, leading to condemnation of Japan by
international community
• Military continued to act out, with extremists assassinating government officials,
prominent indusstrialists opposed to the military, and even staging a failed coup d'etat
• 1937 Marco Polo bridge incident – clashes between Japanese and Chinese soldiers lead
to all out war
• US and many European nations respond with economic sanctions of Japan
• Japanese military argued this was an attempt to maintain colonial enterprises in Asia
• resentment of these economic sanctions contributed to their Pearl Harbour attack (1941),
igniting a long and bloody war that ended in 1945
Economic Recovery and Trade Friction
• 1932-1945 period of extreme militarism in Japan, but not all bad economically
• recovered quicker than most countries from the great depression
• expansionary fiscal and monetary policy, an yen depreciation, stimulated their economic
recovery
• fall in value of yen led to expansion of exports
• export boom resulted in resentment from other countries still suffering economically, and
imposition of trade restrictions by many countries. Export boom seen as “social dumping”
• not all Japanese industries prospered in the 1930s – silk industry struggled with
depressed US market and competition from new materials like nylon
• biggest growth happened in heavy industries like steel, shipbuilding, machine tools,
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machinery, trucks
Government Intervention: From Helping Hand to Iron Fist
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early 1930s Japanese goverment began to intervene more in industry, biggest
intervention prio to that had been 1925 law mandating formation of export cartels in
certain industries
1931 – Major Industries Control Law – made cartel agreements enforceable on nonparticipants in 2/3rds of cartel members requested, this law inspired by German ideas of
'industrial rationalization'
# of cartels operating in Japan resultantly jumped up
other rationalization measures:
government presided over a number of large mergers
enacted specific laws governing militarily important industries – ex Oil Industry
Law of 1934 and other similar ones for automobiles, steel, machine tools, aircraft
manufacturing, shippbuilding etc
extensive government intervention in Manchukuo, province taken over from China
became testing ground for soviet-style economic plans
military, untrusting of zaibatsu, relied on South Manchurian Railway Company to
implement its 5 year development plans
failed because company bad at managing heavy and chemical industries
so military relied on new group of entreprenuers “new zaibatsu”...specialized in a
narroweer range of industries, less concentrated shareholding, and more supportive of
Japanese war effort
post 1937, as economy moved into wartime footing, industrial structure shifted markedly
to heavy industry and munitions production
government intervention more pronounced and heavy handed, exerted lots of authority
over industry
military spending rose dramatically
1943 Munitions Company Law allowed for closing of firms considered non-essential to
war effort and diverting their workers to other companies
also authorized stationing of government appointed supervisors to ensure firms were
doing their best to meet government production targets
had big negative effects on light industry and civilian business – many shut down and
their plants and equipment put toward to war effort
most destruction of business came not from war damage but government ordered
scrapping of equipment
textile industry took heavy toll
however, extreme growth of heavy industry meant that even after lots of destruction, its
capacity was still higher than prewar levels, and knowledge gained in plant operations
could be used to rebuild after the war
government wartime controls had long term effects on composition of industry and on
nstitutional superstructure. Ex weakening of power pf large shareholders – wartime
expansion demanded investments that even the richest Japanese capitalists could afford,
making bank borrowing and outside equity much more important in corporate finance,
thus diluting zaibatsu ownership ties
wartime system of delegated monitoring of banks remained the 'main bank' system after
the war
practice of subcontracting to promote expansion of heavy industry in war remained
postwar a distinctive aspect of Japanese capitalism
government promoted changes in labour relations – fixed wages rather than piece rates,
seniority wage systems etc
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wartime planning in Japan, as in Germany, failed miserably in short run
frequent mismatches between supply and demand
shortages lead to hoardings
wartime controls had negative impact on standard of living, as resources and
consumption diverted to military cause, ignoring everyday needs of its own people
The Japanese Economy in the Postwar Period
The Allied Occupation (1945-1952): Reform and Recovery
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from late 1800s to 1940, Japan's economic expansion had been accompanied and
influenced by its military success
now Japan had lost the war badly and needed to recover
huge death toll, Japan stripped of its colonies (important trading partners), GNP at 50%
of prewar levels
lots of unemployment, inflation, food and fuel shortages
Allied Occupation of Japan post war- aimed to restore a basic level of subsistence, and to
'defeudalize, demilitarize and democratize'
many members of the Allied Occupation (SCAP – Supreme Commander of the Allied
Powers) were from US and wanted to revamp japan's institutions based on an idealized
US model (ie re-wrote constitution of japan including things not even in America's yet, like
equal rights for women)
also the famous “renunciation of War” article saying Japanese people forever renounced
war
idealism and naivity doomed some of the reforms
also, shifting priorities back in the US – beginning of Cold War made US want to turn
Japan into a beacon against communism and to make its economy strong enough to
survive without US aid
Reversal of many of the reforms from SCAP
some policies that had indigenous support in Japan endured, like the land reform policy
(SCAP's most successful initiative):
pre WWII, lots of farming done by tenants, beholden to landowners
wartime price regulations worked against landowners, shifting balance of power
SCAP saw feudalistic landowner-tenant relations as one of the bases of Japanese
militarism
worked to break up large farms and landowners given very small price for their land
policy provoked landowner complaints, but was effective – farms were now smaller and
less efficient, but that was offset by the more stable and liberated rural populace
SCAP also dissolved the zaibatsu, and purged prominent business leaders. Aim to
punish the 'feudal' elements responsible for the war and to reduce Japan's ability for
future war. Zaibatsu seen as preventing the development of a middle class that could
have opposed the military
SCAP also implemented measures to inhibit concentration of economic power –
Elimination of Excess Concentration Law, and Antimonopoly Law (one of most severe
antitrust measures anywhere at time)
Antimonopoly Law was adjusted a few times to be less restrictive, and enforcement
sporadic
Labour – SCAP pushed legislation allowing collective bargaining, right to strike etc
huge growth in trade union membership
rebirth of labour unions fed radicalism and SCAP had to crack down, preventing various
strikes and leading to labour unrest
Many SCAP reforms important in long run but little success economically in short run
dissatisfaction with SCAP in America so dispatch Joseph Dodge to Japan to make some
very rapid changes
“Dodge Line” - series of tough policies laid down – force Japanese to lay down a
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balanced budget, slashed subsidies etc
most importantly, unilaterally decided to set the exchange rate of the yen
these policies created conditions for Japanese trade to expand, but immediate effect was
deeper recession
Japanese Initiatives
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most post WWII reform proposals came from Americans
important exception: priority production system
goal to focus economic resources on rebuilding some essential sectors ex coal, electric
power, steel and shipping
government owned Reconstruction Finance Bank (RFB) established
its functions later absorbed by Japan Development Bank (1951), and, to lesser extent,
Export Bank of Japan (1950)
long term credit banks established to supply long term loans to capital intensive
industries – Industrial bank of Japan (1952) and Long Term Credit Bank of Japan (1952)
priority production made large increases in the output of a few designated goods, but rest
of economy was slow and unsteady
Allied Occupation done in 1952, Japan still in very poor state
poor state provided fertile ground for Japanese entrepreneurs – this was time when
owners of what would become Sony got their start (1st product a rice cooker that didnt
work...), as well as owners of what would become Honda
1950 outbreak of Korean war also increased demand for Japanese products, lifting
Japanese economy out of slump
The Era of High Speed Growth (1953-1973)
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by 1953 per capita GNP had surpassed prewar level
1955 formation of Liberal Democratic Party, a business-oriented coalition supported by
farmers.
Remained in power 38 years, providing political stability, economic growth became #1
priority
late 1950s nation entered aged of mass consumption, rise of which supported and
accompanied by leveling of income distribution, which became on of world's most equal
ambitious “ten year income-doubling plan of 1961-70” was more than fulfilled
during this period Japan overtook Canada, France, Britain and West Germany to become
2nd largest economy in non-communist world
The Development of the Japanese Firm
• evolved in many ways during 1953-73 period
• permanent employment, seniority based wages and promotions spread to a much wider
group of corporations, becoming the norm to which all companies aspired
• profit-sharing based on firm performance and not individual merit
• emergence of “Enterprise Unions” - single company unions encompassing BOTH blue
collar and lower tier white collar workers
• these now the primary types of unions in Japan, as opposed to typical craft-unions or
industry wide unions common to US and Europe
• modern enterprise unions emerged in context of intense labour strife – postwar
liberalization has fostered left-wing unions more interested in class struggle than
rebuilding, resulting in violent clashes with management. Management tried to break up
radically inclined unions by encouraging cooperative unions at firm level
• Enterprise unions serve as consultative organ for labour and management
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coupled with permanent employment, make Japanese labourers willing to accept new
techonolgy and very satisfied
Japanese employment system described as full of 'flexible rigidities' – variable
compensation through bonuses, vague job assignments coupled with frequent employee
rotation, etc
major structural difference between Japanese and Western corporations: management of
information and personnel. In American system, heirarchical chain in which decisions
about operations made at top, based on information that flows upwards. Information
about people (hiring, promotion), left to discretion of individual managers. Japanese
system is the opposite. Very centralized and powerful human resources departments, but
operations decisions left to discretion of local managers.
Different priorities and goals than western corporations – managers in Japan tend to
downplay importance of shareholders and see employees and true core of firm. More
priority on market share and product innovation, pursuing longer-term objectives (vs
Western rivals concerned with return on investment and stock prices)
long term inclination may be explained by their historical insulation from pressures of the
stock market, putting focus on long term investment
The Creation of New Interfirm Linkages
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pre WWII, old and new zaibatsu figured prominently in economy
postwar period, wider variety of interfirm groups appeared (keiretsu)
4 main types:
enterprise group (kigyo shudan) – conglomerate, 'horizontal' keiretsu. Includes 6
major kigyo shudans ex Mitsubishi
each includes many firms, spans many different industries
core subgroup ('president's club') that meets periodically to discuss business
matters
each group has a 'city bank', serves as main bank, generally the largest source of
loans, but not exclusive lender
companies borrow from many banks, not just those in groups
Main bank of group is usually an important shareholder, thus acting as a
shareholder and lender, also large source of financial assistance when a client firm is in
trouble
each group has a general trading company 'sogo shosha', dealing in a huge
variety of goods and handling an enormous volume of trade, bring in raw goods, and also
provide financing for small companies
within kigyo shudans, cross shareholding, or reciprocal ownership, plays a large
role. Group firms linked by trade networks, personnel transfers, collective industrial
projects, and high-level executive councils that meet on a periodic basis
critical difference between kigyo shudans and zaibatsu – latter controlled by family owned
holding companies. Kigyo shudan lack holding companies, having a much more complex
and diffuse ownership
Structure
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Second type of Japanese corporate group : Keiretsu
known as 'vertical', production oriented entities
ex Toyota, Nissan, Toshiba, Hitachi
each group has a parent company, acting largely as a design and assembly shop, and
then tiers of subcontractors making parts for the main firm
because of this structure parent company much smaller than American and European
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competitors
3rd Type – distribution keiretsu
also vertically oriented, consist of small retailers forming domestic distribution channel
for a manufacturer
4th type – guruhpu “group”
firms affiliated with large retailers or railway companies
many evolved as parent companies and then established new enterprises
small and focused
Keiretsu not cartels (though government not opposed to cartels and encourages them in
certain sectors), cartels are group of firms in same industry that collude to prevent price
competition. Keiretsu not collusive, if they were, they would be more concentrated, and
with higher profits than independent companies, but this not seen
competition between members of different corporate groups may account for intense
rivalry in most Japanese industries
The “Developmental” State: The role of Japanese Government
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role of public policy in economic success
during era of high-speed growth, clearly had good macroeconomic policy
microeconomic level, 'industrial policy', more controversial
two types of industrial policy:
selective targeting – selectively intervening to alter nation's industrial structure,
first from light industry to heavy and chemical industries, and second to knowledge
intensive, high technology ones
use of cartels – promoted to reduce 'excessive competition', which is seen as bad
in Japan
means of government intervention also unusual. Rather than formal, legal methods,
Japanese government more often used informal, 'carrot and stick' type tactics – making
suggestions and then punishing or rewarding firms for disobeying or obeying those
suggestions. Known as administrative guidance. Facilitated by placing retiring
bureaucrats in high ranking and lucrative jobs in the private sector.
Another type of intervention – use of 'visions' and guides to policy and signals to private
sector. Largely predictions rather than indicative plans
effectiveness of such interventions highly debated, but performance of economy is not.
Huge growth and structural shift between 1955 and 1970.
Confronting Economic Maturity and the Bubble Economy (1974-1994)
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by early 70s, concern rising about environmental toll of such rapid growth
government responded by passing some of most strict environmental laws
Japanese industry one of most energy efficient and leader in production of pollution
control equipment
part of Japan's prosperity reflected and abnormal and speculative environment of the late
1980s called the bubble economy. Economic downturn followed the burst of the bubble
in 1990 and in 1993 the voting out of the Liberal Democratic Party for the first time since
1955
Overcoming Shocks to the System: The Japanese System Bends, but Holds Firm
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resource poor Japan hit hard by sharp increase in oil prices of 1973. “oil shock”
for first time in postwar era, real output fell, and inflation skyrocketed
oil shock threatened foundations of employment system, managers faught to avoid
layoffs
alternative ways to reduce redundant workers – voluntary retirement, transfers within
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company or other firms etc.
Shareholder forced to bear much of the burden
first oil shock signalled end of high growth period for Japan
another oil shock in 79, but Japan better prepared that time
additionally, a number of shocks in the value of the yen.
Oil and yen shocks affected overall growth and forced structural changes
some firms had no choice but to leave their industry – particularly true to small, labour
intensive firms in textile industry and energy intensive industries like aluminum
Other responses - move upscale, developing specialty products, diversify into other
industries, locate production abroad, slash production costs
latter achieved with labour saving technology and by transferring tasks to low wage
subcontractors
between 1974 and 1990. structure and growth rate changed a lot, but underlying
institutions didn't
role and effectiveness of government policy changed in 70s and 80s
time of deregulation and liberalization – during much of prior time of growth, economy
had been largely sheltered from foreign competition
deregulation came to Japan later than in other industrialized nations
privatization program sold off Japan National Railways, Japan Tabacco and Nipon
Telegraph and Telephone company
agriculture, distribution, construction and financial services remained highly
regulated/protected until mid to late 90s
deregulation slower in Japan, but also different definition – means relaxation of
regulations, allowing for continued bureaucratic supervision, unlike Western view of
deregulation which means removing regulations
Japanese Trade and Investment: A Briar Patch of Conflict
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Ironically, as Japan's government loosened controls, foreign governments imposed more
restrictions
various trade conflicts led to 'voluntary' export restraints VERs being imposed by US on
Japanese steel and auto industries, Europe did same with many Japanese exports
United States also initiated a series of negotiations aimed at opening up the Japanese
market
rise of yen and new barriers to exports led many Japanese firms to begin production
overseas, including in the United States, which many Americans found alarming.
Some view Japan's wide trade surplus as evidence of a closed market. This not
necessarily true. Japan imports fewer manufactured goods than other countries and
hosts less foreign investment, it has less intra-industry trade (doesnt import what it
exports and vice versa), but also has lowest tariffs of any industrial nation
some studies suggest that keiretsus act as obstacles to trade and foreign investment in
Japan. Even if they do limit foreign firm participation, it's unclear as to if that's because
they are very efficient and competitive, or because there are barriers to entry to more
efficient foreign firms
The “Bubble” Economy
• rise of yen since 1985 provoked fears of recession in Japan
• that, coupled with demands from trading partners that Japan expand its economy, led
government to lower interest rates
• this ignited lots of speculation
• asset prices skyrocketed, land and equity prices soared
• eventually speculative boom came to an end
• banks hit hard – were major holders of equity, but also had made huge loans with land as
collateral. Collapse of stock prices shrank their capital base and decline of land prices
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led to explosion of bad debts
burst of bubble shattered some of the confidence the Japanese had in growth, but also
exposed bad parts of Japanese business – ex connections to organized crime,
favouritism toward privileged insiders
Japanese Capitalism - A Paradigm to Emulate?
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Japan had always been viewed as a model, even before its economic power.
Unfortunately, took some bad avenues – military conquest and colonization.
When dispossessed of its colonial empires by defeat in WWII, Japan directed most of its
national energies toward economic development
how well the “East Asian Miracle” of Japan's development can be applied to developing
countries is uncertain.
Applicability of the Japanese model to the former communist nations of Eastern Europe is
an emerging controversy
Durability of Japanese model also debatable. Once thought that the distinctive features
of the Japanese model were faults or distortions, and that with development and time,
Japan's economy would come to look more like those of rich Western countries.
So far, many of these supposed defects have proved to be surprisingly resilient and
highly efficient.
Chapter 14 – Retrospect and Prospect
What we know
• In Europe during the thousand years before the 1700, per capita income rose at only
about 0.11%, which would mean that it has doubled every 630 years.
• How did such remarkable growth occur? The three industrial revolutions.
• The United States was the productivity leader through the growth years, except for the
very first few. It remained the leader at the end of the twentieth century however – but the
lead was not as big.
• Conventional theory would not predict the lack of convergence and the radically different
performance between the developed and the developing countries.
• At the end of the of the twentieth century, real per capita income for advanced
industrialized countries was six times the average for the rest of the world. Which is
greater than the spread after the First Industrial Revolution.
• For many countries, the direction of performance has not converged toward the high
standards set by the leaders, but instead it has gone the other way.
• We know that growth and development have been much stronger in capitalist economies
than in non-capitalist ones. However not every capitalist country has been high
performing. Therefore, capitalism appears to be a necessary (but not sufficient) condition,
for strong economic growth.
• In order for a country to be ‘capitalist’ it requires the following:
o It must have a market economy, and it’s legal system must protect private
property, and the sanctity of contracts.
o The value of a good or service must be determined not by some external notion
such as a just price, but by a simple test of what someone will pay for it.
o Property must be alienable.
o Wages must be paid in money.
o Entrepreneurial opportunity and technology advancements must be encouraged.
o Investment credit – since capitalism depends heavily on investment credit
• Capitalism in a continual innovation, meaning it never stands still. Individuals can either
gain or lose fortunes, companies prosper or falter, and national economies are always
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moving (usually forward, only backwards in recessions and depressions). Joseph
Schumpeter “stabilized capitalism is a contradiction in terms”
Constant motion of capitalism has to do with human condition of unquenchable
aspirations – meaning always wanting more. 8 examples throughout the text (company
chapters):
o Josiah Wedgwood was on the continuous search for better techniques:
jasperwire, other new forms of potter, systematic development of brand equity
through selling to aristocrats, organization of factory work force.
o With Rolls-Royce, Henry Royce has a restless quest for better designs of
automotive and aero engines, Ernest Hives’s search for a system I which he
could subcontract production of the Merlin engine, while still keeping control of
the it’s design and quality.
o August Thyssen was obsessed with serving the interests of himself, his family,
his company, and his country. Had to compete with other firms within the cartel
system. The result was a corporate strategy that came to emphasize export
markets, vertical integration, and a broad product line.
o With the Deutsche Bank, the early bank of George von Siemens first faltered
then prospered, then was faced with war, then hyperinflation, and then the
Nazi’s. the Deutsche Bank’s responses to the upheavals, shoed how a
company’s structural evolution under capitalism: a commercial bank became a
merchant bank, then also and investment bank, an investment trust, and finally a
universal bank.
o Battle between Ford and GM for the top position in the car industry for the
twentieth century. Henry Ford had become and multimillionaire and a crackpot.
Alfred Sloan was calculating and supremely effective as a business manager.
o IBM had a story of business and personal drama. Tom Jr. would not have taken
the gamble of the System/360, had he not wanted to outdo his father.
o Kiichiro Toyoda took funds generated by his father’s licensing of looms to a
British firm, and vested them into an enterprise that became the strongest car
company in the world. The Toyoda/Toyota story shows how technology is
transferred under capitalism: the technology of automatic looms from Britain to
Japan, than back to Britain, technology of cars from the United States to Japan,
than back to the United States, and the spread of Toyota Productions System to
many other industries and companies through out the world.
o Toshifumi Suzuki transplanted the American 7-Eleven style convenience store to
Japan. But he was forced to overcome adamant objections to the idea within his
own company. However he and colleagues proved to be so successful, that they
were able to rescues their American partner from bankruptcy. Back in Japan,
there were able to build and Third industrial revolution company: lean with
assets, rich in knowledge and information technology, attuned to customer
preferences, and bale to change with dazzling speed.
The 3 revolutions merged imperceptibly together, and tend to arrive at different countries
at different times. 3 examples (the country chapters):
o The British struggled the most during the Second due to the institutional legacy
caused by the First. Germany encountered difficulty with the Third, due to its
success in the Second. Both Germany and Britain, like all European countries at
the econ of the twentieth century, struggled between the goals of strong
economic performance and full social justice. The Third industrial revolution
intensified the struggle.
o The United States was the top performer in all 3 revolutions. It also struggled with
economic success and social dislocation. American’s have aspired to be free and
equal, but at the close of the twentieth century us was not as certain that the
United States as a country could still have the best of both of these rather
different worlds.
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o
Many Japanese people have helped to accomplish an indisputable economic
miracle during the decades after World War II. Japan was the safest city to live
in, but also the most congested. The Japanese government had the most
capable and efficient civil servants, but also the most corruptible electoral
system. It had one of the most productive economies, but was the most heavily
regulated. By the end of the twentieth century, the average person in Japan and
a income about one third greater that the average person in the United States.
However they were unable to enjoy their income as much since goods were
much more expensive.
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