Group 5
Wilson Ng, Diana Zhao, Kelsey Chan, Jayme Yuen
We agree with Chandler’s definition of the firm as a legal and administrative
entity that becomes, “a pool of learned skills, physical facilities, and liquid capital,”
once established (Chandler 483). Firms are necessary because they promote jobs
or enhance a sense of community while producing goods and services. For-profit
firms help drive the local and global economy, potentially creating an international
presence that may not otherwise exist. Apple is one example of a firm that supports
Chandler’s claims of what defines a firm.
During the Second Industrial Revolution, new technologies were created
which enabled companies to produce more within a short period of time. This
increased efficiency allowed greater production at a relatively lower cost if the
machines were run to produce a high enough throughput. The start-up and fixed
costs associated with this new technology was very high and so a high throughput
was also required to keep the average cost per unit low. Given that their production
now exceeded that demanded by the local market and the production times were
more streamlined and predictable, companies continued their growth by expanding
to sell their products internationally. With the opening of international markets, there
was an even greater opportunity for economic growth but the competition became
even more intense. Not only did firms have to compete for their local markets now,
they also had to compete against global firms who were trying to expand.
In addition to maintaining a high throughput, increasing their knowledge, skill,
experience, and teamwork became essential tasks for firms that wanted to stay
ahead in the competition. With the expansion in size and coordination required,
managers were hired with the critical role of monitoring and coordinating all the
activity within the plants. Apple Inc., for instance, being the world’s second largest
company by market value, began to hire experienced mid-level managers to ensure
the effectiveness and efficiency of the company as newer products were launched,
and as its size grew significantly larger. This management-centred structure led to a
more hierarchical organizational structure as seen in the three pronged set of
investments that dominated the firm: management, manufacturing, and marketing.
As mentioned previously, for their manufacturing costs to remain low, they needed
to maintain a certain minimal level of throughput; in order to maintain this level of
throughput and stay competitive, skills, experience, and teamwork were emphasized
and they needed managerial supervision to ensure all process continued to run
smoothly; finally, in order to compete in such a fierce market, a good marketing
strategy and campaign were used to draw new customers and encourage customer
loyalty. Apple’s objective when it first started was to create a need for computers,
since there was no demand, nor necessity for personal computers. It began by
advertising the usefulness of computers: they would diminish human workload and
no one has to be a scientist to achieve that reduction. As that necessity was
established, Apple aimed at the fun part of their products. The modern multi-unit
industrial enterprise was created as a result of the three pronged investment and this
became and remained oligopolistic (Chandler 486).
While trying to stay ahead of the competition, firms often grew using one of
two strategies: expand geographically and sell their product to new customers, or
expand product-wise and create new, yet similar or related products. First movers
had a great advantage because they could develop and market their product before
everyone else, thus allowing them more time to fix some of their bigger problems
before the second movers came in. Although Apple has been able to reach a large
amount of customers through partnerships in retail stores, Apple has expanded
geographically by creating their own stores to exclusively sell and promote their own
products: as of November 2012, Apple has 394 retail stores in fourteen countries.
Apple has been one of few companies capable of expanding new product lines and
having first mover advantage. This was seen with the Apple I which was a fullyfunctional computer but it stood out from its competitors since it had a display screen
and most computers at that time had no monitor. Apple has had a history of
expanding products and being the first mover. With the iPod being the best selling
music player in 2001 followed up by the iPhone six years later. And in 2010, with the
launch of the iPad, becoming the first tablet computer to achieve mainstream
popularity (Foulds).
Once the demand in a given market was high enough for a plant to operate at
the minimum required efficiency in terms of profitability, firms looked into using their
acquired learning and skill to open new facilities. Given this information and the
known advantages realized by first movers, the number of plants built internationally
could be seen as one indication of how high above the minimum efficiency threshold
a firm was producing at, or in other words how profitable their market was. As well
as creating opportunities internationally, the skills and abilities of a plant were also
an asset when expanding into other related product markets.
Sometimes, firms grew by combining forces with their competitors or by
changing their tactics to supply raw materials or distribute finished products as an
alternative to directly competing with completed manufactured products. Regardless
of their strategy, it was essential for all firms to continue learning and evolving their
skills and physical assets if they wanted to remain competitive. This is widely seen
today where we have a global market for many of our products and there are
relatively few industries that feature a monopoly.
There are various theories that can be applied to the firm’s organizational
structure including the neoclassical theory, principal-agent theory,and transaction
cost theory. The neoclassical and principal-agent theories are similar as they both
consider the firm to be a legal entity that acts rationally with a production plan that is
chosen to maximize the profits and value of the firm; if it is beneficial, outsourcing
may be used to maximize profits. Primarily the only thing that differentiates the
principal-agent theory is that it applies a hierarchy where the owners are at the top to
ensure that the managers act in the best interests of the firm. In contrast, the
transaction cost theory focuses on transactions and considers the investment into
facilities and employee skills. In society today, although many companies use
outsourcing, they are also weary of its potential consequences such as a
dependence on the contractor if none of their internal employees have the skill or
knowledge to be able to fix any problems or necessary adaptations that may be
needed in the future. Outsourcing work, however allows you to have relatively
instant, expert-quality skill to complete a task without having to invest the time,
money or effort to train your staff to produce work at the required level. Because the
future was so uncertain, long-term contracts were difficult to negotiate.
When analyzing a firm, one should look at the firm itself, including its strategy,
structure and core abilities to help understand its effect on the economy, and not
only its transactions. Over time, all firms evolve and adapt to their constantly
changing environment and so only firms who ceaselessly learn and grow as a
company are sustainable in the long-run. Having been created in 1976, Apple has
been able to stay in business as a high competitor for 37 years but with today’s fastpaced technology development, even the best firms can quickly fall behind.
References
Chandler, A.D., 1992. “What is a firm?: A historical perspective.” European
Economic Review, 36(2/3): 483-492.
Foulds, Jane.The history of Apple. EzineMark. 13 Apr. 2013. Web. 8 May 2013.