Growth of Big Business Big Business A very large profitable enterprise Possibly exploitative or socially harmful How do they differ? Who could be seen as a “big businessmen” in today’s world? Maybe they are a robber baron or a captain of industry? Explain what makes them so large. Forbes 2011 Rank Name Worth Age Source Country 1 Carlos Slim Helu & family $74 B 71 telecom Mexico 2 Bill Gates $56 B 55 Microsoft USA 3 Warren Buffett $50 B 81 Berkshire Hathaway USA 4 Bernard Arnault $41 B 62 LVMH France 5 Larry Ellison $39.5 B 67 Oracle USA 6 Lakshmi Mittal $31.1 B 61 Steel India 7 Amancio Ortega $31 B 75 Zara Spain 8 Eike Batista $30 B 54 mining, oil Brazil 9 Mukesh Ambani $27 B 54 petrochemicals, oil & gas India 10 Christy Walton & family $26.5 B 56 Walmart USA Why did Big business grow? Availability of work force National markets created by transportation Access to raw materials and energy Lower-cost production Inventions Advertising Financial resources The Rise of Big Business Focus Questions • How did business structures change? • Who were the leading industrial tycoons, and what did they achieve? A Favorable Climate for Business The American ideal was one of self-reliant individualism. A strong work ethic made one successful, and entrepreneurs, businessmen, who risked their money and talents in new ventures. Free markets With capitalism, competition determines prices and wages, and most industries are run by private businesses. In the 1800s, business leaders believed in laissez-faire capitalism with no government intervention. They believed government regulation would destroy self-reliance, reduce profits, and harm the economy. Social Darwinism Charles Darwin believed that members of a species compete for survival in a natural selection process. Many thinkers believed that inequalities were part of the natural order. Applied to society, stronger people, businesses, and nations would prosper, and weaker ones would fail in a “survival of the fittest.” New Market structures Making “Big money” was appealing but start up costs were high allowing only a few to compete Oligopoly- market structure dominated only by a few large, profitable firms Can you think of one today? Monopoly- market structure where one company has complete control of a product or service Can you think of one today? Good or bad? Why can a business like a monopoly be good for society? Why can a business like a monopoly be bad for society? Business Structure Changes Trust: a set of companies managed by a small group known as trustees, who can prevent companies in the trust from competing with each other Corporation: A company recognized by law to exist independently from its owners, with the ability to own property, borrow money, sue or be sued Andrew Carnegie $75 Billion Andrew Carnegie Scotland (1848) In 1861, at the age of 26, he started up the Freedom Iron Company, and used the new Bessemer process for making steel He formed all of his companies into the Carnegie Steel Company in 1899, which controlled raw materials, manufacturing, storage, and distribution for steel. Vertical Integration John D. Rockefeller $192 Billion Born in 1839 His working life started as a bookkeeper He established one of the first oil refineries 1870—With partners, forms a business trust: Standard Oil At its peak, controls 90% of all oil companies Horizontal Integration • Horizontal - Bringing together of many firms in the same industry • Vertical – bringing together many businesses to make up the phases of production Corporate Monopolies Horizontal and Vertical Integration Textbook, page 241 Big Business and the Government Leave Business Alone Laissez-faire Social Darwinism Limit Business Sherman Anti-Trust Act Preserving free competition and not restraining trade Avoid monopolies 1911--Splits Rockefeller’s Standard Oil into 34 companies (A U.S. Court of Appeals found in 2001 that Microsoft violated the Sherman Act antitrust law.) Simulation Business A 3 volunteers (owner) Business B 5 volunteers (shareholders) Step 1 (August): Business A, set the price for tshirts Step 2 (September): Business B opens up a store across the street, set the price for t-shirts at store B Class: Which store will you shop at? Simulation Step 3 (October): Business A, respond to the t-shirt price of Business B Class: Which store will you shop at? Step 4 (November): Business B, respond to the t-shirt price of Business A Class: Which store will you shop at? Step 5 (December) Repeat process Class: Which store will you shop at? Business Person A You own a successful t-shirt shop on Castro Street. You are just one shop but you’ve managed to stay in business because you are the only tshirt shop on Castro Street. Recently, a t-shirt shop opened up across the street and it’s part of the national chain, Shirt Me Up, that has stores all over the nation. You are worried about losing some of your customers to them but you are willing to cut prices and offer sales if it will keep you in business. Basics – t-shirts cost $6 to manufacture and you currently sell them for $12. You need to make at least a $2 profit on each t-shirt in order cover the cost of your rent and pay your employees. If you lose money for more than a month then you will not be able to pay for your rent. Task: Respond to the sales ideas from Person B in competitive ways in order to stay open. Business Person B You are a local manager for the national t-shirt company, Shirt Me Up, that has stores all over the nation. You are currently managing the new store that just opened up on Castro Street. There is a t-shirt shop already on Castro Street, but you are pretty confident you can drive them out of business since you can draw on money from the national office. Basics – t-shirts cost $6 to manufacture and your competitor currently sells them for $12. They need to make at least $2 profit on each t-shirt to cover the cost of rent and employees. This is true for you also, but you can lose money for several months in a row because your national office will cover your costs. Task: Start the competition by telling the shoppers in your group that you are willing to offer t-shirts for $10 and ask if they will shop at your store instead. No matter what your competitor does, respond by offering your tshirts for less money. It doesn’t matter if you lose money, because eventually they’ll go bankrupt and then you won’t have to compete with them anymore. When they go out of business, raise your prices to $20 a t-shirt. What would Rockefeller say… Monopolies are good because we can produce goods at a lower cost to consumers! Now everyone can have cheap oil and gas. What would the Populists (poor farmers) say? Monopolies are bad because they control the whole industry and there is no competition over prices. We have to pay high prices to ship our wheat on the trains! And these companies pay low wages to their workers! Exit ticket Was Big business good or bad for society? Provide an example in your explanation.