Business History Lectures 6-10 Flashcards

Question

What role did investors have prior to WWI?

Answer 1

In the years prior to WWI, investment bankers played a very prominent role in US industry -handling securities issues andserving on boards of directors; It is estimated that by the eve of WWI, these institutions were major shareholders, directors or trustees of corporations ‘worth one and a half years’ national product and 40 percent of the country’s produced capital’ (J. Bradford de Long p. 205)

Answer 2

JP Morgan. The fact that the banks made enormous profits has created considerable controversy as to the source of these profits

Answer 3

Tobin's q = Market value of an individual firm's assets/ replacement cost of the same firm's assets. The former being its value one the stock exchange and the latter being its book value.

Answer 4

Whether the JP Morgan men created value for the firms in which they had an interest. He looked into Tobin's q. If it rises above 1 then this indicated that the firm possesses some asset which is not recored by conventional book values.

Answer 5

``` -Perhaps erroneously, it is often blamed for the Great Depression post 1929. - But it marked a great political turning point, ensuring the triumph of FDR and the New Dealers in 1932 Presidential election . - An important element in the deal was financial regulation ```

Answer 6

- Considerable effort to increase trust in capital markets resulted in several regulatory Acts in the following years - The Securities and Exchange Commission (1935) formed under Joseph P. Kennedy - Regulation of: 1. Margin trading 2. Information disclosure by companies 3. Use of insider information - Separation of investment banks from commercial banks (Glass-SteagallAct) - After some decades, unwinding of some regulation in Reagan era and after, although information disclosure and insider trading regulation continue to be important

Answer 7

- The relationship between finance and the ‘real economy’ is important –not just in terms of channelling savings into profitable investments, but also in terms of the monitoring of management which has become separated from ownership. - This may explain the degree of polarisation between concentrated ownership and diffuse ownership systems; in the latter stock markets play an important informational role and the extent to which stock market prices correctly guide both investors and managers is crucial. - The business history of the US suggests that political forces are important in shaping financial systems with both anti-trust sentiment and the Wall-Street crash of 1929 being important determinants of the developing corporate governance system of the US

Answer 8

The financial institutions have often operated largely independently of domestic business, at least with respect to longer term finance. Before WWI, the City was very important in channelling funds into overseas investment. During and after WWI, restrictions on capital exports a continuing feature, while access to external capital became much more important for domestic business, often through new share issues (see Wilson chapter 6).

Answer 9

- The significance of family ownership and Chandlerian type ‘personal capitalism’ declined rapidly during the course of the last century. Acquisition activity financed by new issues diluted ownership, reducing ownership concentration. - In the UK more than anywhere, this made large family-owned businesses vulnerable to ‘hostile’ take-overs. According to Franckset al1, the City and institutional made it difficult for families to retain control, eventually making the ownership pattern in the UK far more diffuse than anywhere else in the world (inc.US)

Answer 10

It already has big business, whereas the UK is only just creating them.

Answer 11

- As a consumer (e.g. military purchases) - In establishing/updating legal framework for business - In raising taxes - As an owner (e.g. until recently the Royal Mail) - As a provider of information (e.g. GDP figures, censuses)

Answer 12

- As a defender of interests (e.g. low paid, unemployed, disabled etc.) - In preventing monopoly or abuse of monopoly - In securing ‘strategic’ interests

Answer 13

Look at notes

Answer 14

``` Product: Competition policy Indirect tax Product market regulation Exchange rate policy ``` ``` Labour and Skills: Educational Policies Training subsidies Wage subsidies Labour market regulation Employment taxes ``` Capital Market: Corporate tax policy Financial market regulation Land: Land use planning rules Infrastructure policy Technology: RandD Tax Credit IPR (intellectual property rights)

Answer 15

``` Product: National Champions State Aids Nationalisation/ Privatisation Trade policy Public procurement ``` Labour and Skills: Targeted skills policy apprenticeships policies Capital Market: State investment bank Strategic investment fund Emergency loans Land: Place-based cluster policy Enterprise zones Technology: Public procurement Selective technology funding

Answer 16

-Restricted Role for Government Defence - Justice - Certain public works A starting point in the Smithian tradition resides in the idea of ‘microeconomic’ market failure

Answer 17

- Karl Marx and other socialists have advanced the possibilities for collective ownership. In Britain Fabian (non-revolutionary) socialism has been an important influence on the Labour Party in Britain (at least until recent times) - John Maynard Keynes emphasised defects in the capitalist system and its failure at a macroeconomic level to generate full employment and which required government intervention - Corporatism. Cooperation between ‘big-business’ and the state.

Answer 18

1. Monopoly and market power –competition policy 2. Natural monopolies –state ownership or regulation 3. Learning and externalities -infant industries policies 4. Externalities in innovation – technology policies: Such as public R&D, support for R&D, Intellectual Property Rights (IPR) 5. ‘Sub-optimal’ industrial structures resulting in failure to achieve scale economies or critical mass of R&D –creation of national champions

Answer 19

A further important ideology that emerged in the 20th century was that of corporatism, an idea closely related to that of ‘rationalization’.

Answer 20

Corporatism can be regarded as an alternative to both Socialism/Marxism and liberal market capitalism and in which there is a close relationship between big business and the state acting cooperatively to secure ‘the public interest’.

Answer 21

Environmental safety laws.

Answer 22

Increasing business concentration, increasing protectionism and continuing labour unrest, all favoured the development of corporatism. Bodies such as the Federation of British Industries (FBI) became important lobbying groups for business

Answer 23

Tri-Partism: Brings organised labour (trade unions) into the picture. They were important during WWI due to the cooperation with union movements.

Answer 24

The Joint Industrial Councils

Answer 25

Imperial Chemical Industries. It was a 'national champion'

Answer 26

Imperial Chemical Industries. | A pioneering case of state-business cooperation. The government backed merger in 1926 of 4 companies.

Answer 27

Brunner-Mond, Nobel Industries, United Alkali and British Dyestuffs Corporation

Answer 28

It was a strategic response of government and big business in a relatively weak British Chemical Industry to the creation of IG Farben in 1924. It may be regarded as an early example of the creation of a 'National Champion' in what was considered by business and government as a 'strategic Industry'.

Answer 29

The governments interests are ahead of those of the individuals financing the company through investment.

Answer 30

In order to competed with the dominant US and German Industries.

Answer 31

A pervasive belief in Britain in the 1960s (and elsewhere in Europe) was the idea that British business could only ‘compete’ in world markets (and more particularly with US enterprise) if individual enterprises achieve a certain ‘critical mass’(e.g. through traditional economies of scale in production or because of the fixed costs associated with R&D) and that the resultant competitive firms operate in certain ‘strategic sectors’

Answer 32

Paul Geroski (2005) pointed out the case generally rests on 3 propositions: 1. That markets are ‘global’ i.e. demand is very homogeneous 2. That economies of scale/critical mass are large in relation to national markets 3. That a national presence is important in certain strategic sectors that are “particularly rich input-output hubs...[and whose growth] likely to stimulate growth in a wide range of complementary sectors”.

Answer 33

Global demand is far less homogeneous than commonly supposed and markets are often fragmented on national lines. The vast majority of brand names are national and rarely have much pill beyond their home market.

Answer 34

Some would argue that the case of Marlboro being a global brand means the tobacco is a global market. Yet, Geroski points out that the world tobacco industry is largely populated by many national brands that no one has ever heard of outside of their home market. Marlboro proves that is is possible to conduct a global strategy in this business, but it does not prove that you have to.

Answer 35

Studies based upon the concept of MES have tended to show that only in a few industries are economies of scale large in relation to national market size. For example in only a small number of industries in which MES is greater than 10% of the British market, while EU studies suggest that in 89% of industries MES is less than 10% of the EU market. Need to memorise diagrams MES: Y axis - Average costs X Axis - Flow of Output.

Answer 36

A strong domestic presence in come technologies may be important for widespread technological change (as we have seen with GPT). Geroski is concerned with the implication of monopolies in the form of national champions on competition (as he was the head of the UK Competition Commission), pointing out that critical mass (referring to adequate RandD and innovation in these sectors) can be achieved through clusters, as seen in Silicon Valley. OECD concur with this view, highlighting that the trade off between the creation of a national champion and a fall in competition is large, and that evidence for 'the bigger the better' is very weak. There is also a fear of foreign ownership.

Answer 37

The Industrial Reorganisation Corporation (IRC) in the post war heyday of national champions. Wilson (1993) notes various cases where the IRC promoted mergers of nationals significance in the late 1960s: -British Leyland (BMC-Leyland) -GEC/Elliott Automation -GEC/Associated Electrical Industries -International Computers Limited (ICL) -ICT and Elliott Automation - He contrasts the BMC merger unfavourably with the ‘successful - despite going bust after two years of Wilson writing his book’ GEC mergers. ICL a rather ‘mixed bag’ - it no longer exists due to the cheapness of imports in electrical..

Answer 38

- Although there were pre-war examples of public ownership, this was often in the form of municipal enterprise (e.g. water, tramways...) , it was the Labour Government of 1945-1951 which engaged in extensive nationalisationof British industry with both ideological and industrial policy rationales - Many of these not seriously opposed by Conservatives and on return to power in 1951 they denationalised only iron and steel and road haulage, although they favoured more decentralised management structures

Answer 39

- Network ‘natural monopolies’ –telecoms, railways, electricity, gas, water where efficiency considerations suggest a single supplier is better. - Control of ‘commanding heights of the economy’ (economic planning) - Resolution of labour problems (e.g. coal) - Stimulation of technological change (e.g. coal).

Answer 40

- Often the merger involved many small units (e.g. individual mines, municipal electricity establishments etc.) with no existing large central organisational capability. Britain didn't have a particularly great education system suited for this.

Answer 41

1. The Labour Government of 1945-51 which embarked on a considerable ‘experiment’ in nationalization 2. The Conservative administration of 1979-1997 which eventually reversed this process via a process of privatisation

Answer 42

France is the best with 14.6% employment and 16.5% output. The UK has 8.2% of employment and 11.1% of output. Today, France still has around 20% of output, whereas the UK has about 2%.

Answer 43

Has an independent legal identity, and was based on taking an 'arms-length' relationship between government and management with the relevant government minister responsible for 'broad objectives' while management were responsible for the running of the corporation. A government minister makes appointments to Board. They are financially independent. Corporation keeps surpluses and can borrow from external capital makers (backed by HM Treasury guarantee). Most external financing from Exchequer via a 'National Loans Fund' - but very little money paid back into this fund.

Answer 44

- By the 1960s, there was growing dissatisfaction with the performance record of the public corporation, although the evidence is somewhat mixed. - The ‘control’ problem was widely recognised. While model creators envisaged a separation between ministerial responsibility for strategic objectives and management responsibility for day to day operations, in practice this was not achieved, with ministers frequently intervening in management decisions.

Answer 45

Interference in pricing decisions in inflationary environments, limiting energy price rises. The UK government held down the cost of electricity below the mc.

Answer 46

In the 1960s corrective measures were implemented, including the setting of 'financial targets' for each corporation. 1967: A set of objectives set in place: (i) Prices reflecting long-run marginal costs (ii) Rates of return on investment should exceed a ‘test discount rate’ (iii) avoidance of cross-subsidization

Answer 47

In Leslie Hannah’s view, the efficiency of the public corporation was frequently hindered by forms of ‘technological nationalism’ which constrained management to make technological choices which favoured British owned technologies.

Answer 48

- The prime example here is in the development of nuclear power in Britain –and the case of the Advanced Gas Cooled Reactor (AGR) - The AGR and the development of the supersonic passenger airline Concorde have been shown on cost-benefit grounds to constitute two substantial industrial policy failures.

Answer 49

By the 1970s, there was an additional reason for nationalization –private Companies which found themselves in financial difficulty. The government didn't want them to go bust due to losses in employment.

Answer 50

Rolls-Royce nationalisation in from 1971-1987 enabled the development of a highly competitive aero-engine maker. The reason for nationalisation stem from an inability to secure short-term financing. British-Leyland created by the government to be a national champion in motor vehicles. Continuing difficulties led to its nationalisation in 1975.

Answer 51

If rates of return on capital are compared, they were roughly 3 times as large in large private sector firms in the period 1970-1985, i.e. largely before the big privatization programme instituted by the Conservative administration. Net negative return out of investing in public comapnies

Answer 52

Big business in the 20th century. 1914-1939

Answer 53

1. Patterns 2. Strategies and organization for growth (the innovation of the M-form) 3. The legacy of WW1 and the role of the state 4. The role of ‘first mover advantages’ in sustaining big business

Answer 54

They tended to keep their competitive advantage over others.

Answer 55

- The largest US businesses in 1912 were considerably larger than those in either Germany or Britain - Largest British Firm in 1912 less than half size of US Steel - J&P Coats (UK - textiles) formed from acquisition of several firms in 1896 but represented the industries of the First Industrial Revolution

Answer 56

List still US dominated but increasingly reflecting the 2nd IR. List begins to reflect newer industries with JP and Coats now 47th in the world. A concentration in oil, metals, chemicals, vehicles and tobacco.

Answer 57

1. Size and capital intensity 2. Persistence and growth 3. Integration of potentially separable processes or plants: -vertical integration -horizontal integration 4.Diffusion of stock ownership (especially in US/UK) and the divorce of ownership from control 5. Diversification through acquisitionand through RandD creating new products 6. Multi-divisional organisation along regional or product lines

Answer 58

Most firm growth took the form of building bigger plants to attain economies of scale (late 19th and 20th). This frequently involved horizontal mergers. Prior to this vertical integration was often used. Once in the industry, firms can learn and benefit from economies of scope through diversification.

Answer 59

Economies of scope are economic factors that make it cheaper to make a variety of products together instead of making them on their own. For example, McDonald's can produce both hamburgers and French fries at a lower average expense than what it would cost two separate firms to produce each of the goods separately. This is because McDonald's hamburgers and French fries can share the use of food storage, preparation facilities and so forth during production.

Answer 60

the pursuit of a strategy for continuing growth of the individual firms. Only comparatively recently can we observe any tendency for downsizing, e.g. through share buy-backs.

Answer 61

Learning in the industry and then diversifying to exploit economies of scope. Diversification through formal Rand D departments and product innovation.

Answer 62

1. Becoming multi-national. 2. Diversification. 3. Mergers. 4. Economies of scale and scope.

Answer 63

A decentralised structure based on independent operating divisions with a unitary structure. Below the Board of directors is the executive committee, then thecentralised advisory staff (finance, legal etc). Each operation is then split into divisional/ regional branches each with its own branch for production, sales, finance and RandD.

Answer 64

In the 1920s in the US. The main structure of big business were either a highly centralised structure or a loose 'federation' of semi-independent organisations in the form of holding companies.

Answer 65

Chandler examines the way in which DuPont (chemical), General Motors, Standard Oil and Sears Roebuck (retailing) met rather different strategic challenges through the M-form organisational structure.

Answer 66

Prior to 1920, GM was organised as a rather lose holding company, with separate divisions such as Cadillac, Buick, Olds, Oakland, Chevrolet competing with each other rather than Ford - so little organisation or strategy. In 1920 the recession hit, dropping sales by 75% between summer and autumn. Alfred P. Sloan was appointed as CE in 1921.

Answer 67

GM had an inability to compete with Ford due to FOrds' huge cost advantage. The change was the implementation of a new coordinated marketing strategy focused on competing with Ford. Each motor division would focus on a different market segment - e.g. Cadilan on 'luxury cars', Chevrolet on 'low end'. The structure followed the strategy, with each division making its own operating devisions.

Answer 68

Economies of scale could be reaped due to shared parts between divisions. Role of central office to monitor performance and provide strategic coordination, research etc. The change was a success - between 1927 and 1937 GM made over $7 billions whilst Ford lost $200.

Answer 69

Us corporations took the lead in creating formal RandD departments in the 20th century in the newer industries.

Answer 70

The formal RandD department which was often attached to the headquarters in the M-form of organisation, and became preferred over alternative patterns of organisation of research. It was an early adopter of both. It established a centralised 'experimental' RandD Station before WWI, and then faced with problems of excess capacity after the war in its explosives business. The department became an important source of product innovation and diversification between the wars.

Answer 71

The threat of anti-trust action.

Answer 72

From initially different starting points, the two companies converged on a remarkably similar organisational structure which became known as the Multi-divisional M-Form.

Answer 73

DuPont's change of strategy towards diversification that created the opportunity to implement the new structure; under William Durant GM already existed as a diversified but centrally un-coordiated 'holding company'.

Answer 74

Generally there was no simple diffusion of M-FOrm as the 20th century business grew, crisis usually forced the issue. GM and DuPont managers had a central role in restructuring. Changes of chief executive were often needed for the change to be implemented.

Answer 75

1. Decision making at decentralised local level by those who have the best knowledge to make the relevant decision. 2. Avoidance of overload at head office which can focus on strategic/ investment decisions as well as monitoring/ evaluating divisional performance. 3. Internal Market Hypothesis: Arguably, head office may do better than external capital market in allocation of capital divisions due to superior information and lower cost of capital. 4. Expansion into new regions (diversification) possible.

Answer 76

Arguably, head office may do better than external capital market in allocation of capital divisions due to superior information and lower cost of capital.

Answer 77

Limitations emerge when information flows between divisions are important and where diversifications are unrelated. One could argue that changes with the Third IR increased the significance of informational flows

Answer 78

1. Political patterns of production. 2. Political attitudes. 3. State Intervention For many European economies the peace did not produce economic prosperity whilst the US experienced great prosperity.

Answer 79

The war transformed much of the pattern of production, not only increasing the production of goods directly required in the war effort, but also in producing substitutes for goods whose import had been cut off. Such goods included magnetos and dyestuffs.

Answer 80

War produced rationalisation of industry - prompted in many instances by Government - it involved mergers, larger scale plants, standardisation of parts and attempts to adopt mass production techniques.

Answer 81

Companies directly supplying arms, explosives etc such as Vickers or Nobel faced with downturn so sought to diversify through acquisition.

Answer 82

It generally implied the horizontal amalgamation of firms, and the amalgamation of firms, and the application of rational/ scientific principles to the problems of management. Hannah 1983 - the concept 'lacked precise meaning'. Depressed trade conditions in much of the economy after 1919 (until well into the 1930s) provided an additional incentive for industrial reorganization

Answer 83

Germany, but Briatian and the US also found it important. It offered an alternative ideology to free-market competitive capitalism and socialism.

Answer 84

``` In Britain certain leading industrialists such as Dudley Docker(engineering) and Alfred Mond(chemicals) became keen advocates of greater state involvement in business as well as increased protection for British business from international trade ```

Answer 85

1. Managers develop a science for each element of work –replacing rules of thumb 2. Workers selected to follow methods so designed 3. Managers cooperate with workers to ensure that all work is done in accordance with the principles of the new science 4. There is an almost equal division of the work and the responsibility between the management and the workmen

Answer 86

Frederick Winslow Taylor. | It was also known as Taylorism.

Answer 87

The story of Schmidt at Bethlehem steel. | Scientific management never achieved as much influence in Britain as it did in the US.

Answer 88

He observed that Britain had a personal style of capitalism.

Answer 89

Anglo-Persian Oil, ICI and Unilever. | Formation of ICI "the most I pronto merger in Britain of the 20th century".

Answer 90

A response by Britain to "the most significant event in the world chemical industry" by Germany with the amalgamation of two interessengemeinshaft (IG) into IG Farbenindustries. Britain mergers Nobel Industries, Brunner-Mood, BDC and United Alkali Company into Imperial Chemical Industries (ICI) in 1926.

Answer 91

The 'national champion' industrial policy which became popular after the war.

Answer 92

1. Economies of large scale production 2. Market share/market power diversification –economies of 3. Scope/synergies 4. Managerialism/empire building

Answer 93

Outcome dependent on nature of merger - be it horizontal, vertical or diversification. They increased market concentration and market concentration.

Answer 94

Wave 1: 1890-1906 - smaller than the US wave. Wave 2: 1918-1933 - Horizontal consolidations rather than acquisitions - increase in market concentration. Wave 3: 1956-1973 - Mainly diversification/ conglomerate mergers, market concentration increased by some state sponsorship.

Answer 95

According to Hannah, mcc of the 1920s merger boom enabled rationalisation especially in newer industries. Successive mergers helped create a cadre of firms which were much larger than the biggest firms in 1919. She also showed that Britains 5-firm concentration ratio increases similarly across all 15 industry groups between 1919-1930.

Answer 96

From WWI 1929, industries in Britain, the US and France became increasingly concentrated. This continued post WWII.

Answer 97

Since many equilibrium concepts are unique and independent of initial conditions and other historical data.

Answer 98

Most recent historical economic theory emphasises path dependence. It basically means history matters. One instance would be the persistence of competitive success, with rankings of the world's leading companies tending to grow and show great continuity.

Answer 99

Stresses capabilities and other assets which are hard to replicate. Cahndler's concept of 'first mover advantage stressed in Scale and Scope may be useful adjunct to the resource based view.

Answer 100

1. A change in the business environment. 2. Either Chance or Firm Proficiency lead to 3. a first mover advantage for a company. 4. from FMA the firm can undertake other mechanisms to enhance FMA. 5. This lead to profits/. Note: 2 can bypass other stages and also generate profit. Diagram by M.B.Lieberman and D.B.Montgomery (1988)

Answer 101

1. Technological or Organizational Leadership 2. Pre-emption of scarce assets 3. Switching costs and buyer preferences

Answer 102

1. The Learning Curve 2. R&D, patents and prizes. 3. Control over assets that already exist.

Answer 103

Can generate sustainable leadership in technology. Based on learning by doing, by gaining knowledge through experience, hence driving down unit average cost of production. Its success depends on whether the knowledge gained is appropriable, and becomes the proprietary asset of a firm. This will depend on whether the knowledge can spill-over to other firms and whether such knowledge can be patented. process innovation is generally easier to appropriate as products are revealed in the marketplace.

Answer 104

- Economists have produced models in which the first mover in R&D can claim a considerable ‘prize’ in the form of a ‘patent’ which creates a monopoly position - Empirically, patents seem to be especially important in just a few industries, notably chemicals (as we saw last week) and especially pharmaceuticals - In other industries imitators can ‘invent around’ patents and do so at less cost than the innovator . For this reason many firms rely on secrecy and learning curve advantages to protect their innovations.

Answer 105

1. Pre-emptive investment in plant and equipment. 2. Prime Retail locations. 3. Concentrated resource deposits. 4. Pre-emption of geographical or product space or shelf space - making it unprofitable for others to make an entry and be profitable.

Answer 106

Tesco’s land bank-it is reckoned that Tesco holds over 100 potential site locations in Britain, preventing entry by (e.g. Wal-mart /Asda)

Answer 107

In a circle in which the varieties of a product are situated. The model is only used if there are fixed costs attached to the generation of variety (so if each required RandD expenditure). Thus there are increasing returns to scale which forces a trade-off between variety and price.

Answer 108

Customers are either different in the variety they prefer or they like variety for its own sake.

Answer 109

When the market is small, there a a few firms/ varieties. As the market grows two things can happen. Either new firms are able to enter or incumbent firms create their own new varieties, pre-empting product space and making entry unattractive.

Answer 110

Pre-cooked grain often eaten at the start of the day. Origins in fringe religion and a drive for 'healthy' foods. Dr John Harvey Kellogg - a committed vegetarian - experimented with pre-cooked grain from his sanitarium where the vegetarian regime offered dull food. Experiments led to wheat flakes and through his brother, corn flakes with which his brother founded the Battle Creek Toasted Corn Flake Company.

Answer 111

Flaking process copied by C. W. Post - a patient at the sanatorium who founded Post Cereals which became General Food. Process of cereal "puffing" invented by Alexander P. Anderson of Quaker Oats. Todays market in US now dominated by 'Big-Four' - Kelloggs/ General Mills/ Post/ Quaker Oats, owning 90% in 1970 and 86% in 1995 within the US market.. The market is highly profitable despite small MES.

Answer 112

67 brands in 1970, and figure steadily growing since –but very few have achieved significant market share, and many have disappeared. - Why did the big 4 introduce so many unsuccessful brands? arguably, the product space has been made deliberately very congested, creating a barrier to entry (although there are other arguments e.g. that economies of scope make it cheaper for incumbents to introduce new varieties). Investigation in 1972-81 by US FTC but found inconclusive.

Answer 113

- Switching costs arise when customers need to learn how to use a specific product or when complementary products are important - New products –‘early’ names have ‘disproportionate’ influence on customer –“Coca-Cola, Kleenex...” Late-comers may need to advertise more heavily These effects seem to be confirmed in marketing studies and are more prevalent in consumer markets than industrial markets - Brand names may be important where there are information asymmetries, because of the reputation involved. Brand names tend to favour big business.

Answer 114

Free-Rider effects: In innovation contexts , imitators may be better placed, especially where complementary assets in (for example) marketing and distribution are important. Incumbent Inertia: In certain circumstances firms may find it optimal to ‘cannibalize’ existing assets rather than destroy them through radical innovation. They find it hard to adapt so just keep the very successful model

Answer 115

Teece 1986 - discusses various cases in which the follow makes the profits, such as EMIs CT Scanner or RC Colas introduction of diet Cola

Answer 116

IBM adopted a defensive RandD posture, using its reputation to ensure customers waited for the IBM version.

Answer 117

Xerox's behaviour when its patent on plain paper photocopying expired (it was the most profitable company in 1971 despite only being the 52nd largest) or Ford's decision to stick with the Model T when salsa began to fall

Answer 118

``` Date: 1973- Location: USA, East Asia Technologies: ICT, biotechnology Motive: nuclear, renewable Material: silicon, smart materials Automation: of control Process Type: Information Size of Firm:miced Advantages: external integration Organisation: networked Industry Structure: mixed Type of Capitalism: collaborative Mode of Governance: networks ```

Answer 119

Involved 'stand-alone' proprietary technologies. Technological development and economic progress defined by the success of the Chandlerian vertically integrated multi-divisional enterprise with in house RandD strategies.

Answer 120

The complexity of technology post war increasingly favoured more open innovation strategies which allows firms to specialise in their own specific core capabilities.

Answer 121

IBM succeeded by considerable amount of entry into the market and the rise to prominence of networks of firms collaborating in innovation - we coined the term 'collective innovation' previously. The two forerunner technologies in which this occurred were semi-conductors and then computers.

Answer 122

Increasingly disintegrated internal supply chains but also increasingly International

Answer 123

A key feature of the 3rd IR, being the various types of business network. The 2nd IR led to dominance of business by large firms realising economies of scale and competitive advantage through vertical integration. The importance now shifted to networks.

Answer 124

Business network firms achieve competitive advantage by cooperating with other firms and achieving improvement in productivity by obtaining external economies rather than internal economies associated with vertical integration.

Answer 125

Requires mechanism for coordination and control somewhere in-between the market and the firm based hierarchies.

Answer 126

General purpose technologies. E.g: 1st IR: The Steam Engine 2nd IR: Electricity and the internal combustion engine. 3rd IR: Biotechnology and ICT

Answer 127

1. Pervasive: generic function that is vital to the functioning of a large segment of existing or potential products and production systems 2. Improvement: Technological dynamism –continuous learning and improvement 3. Spawning: Innovational complementarities –improvement in GPT stimulates profitability of innovation in using industries and vice versa

Answer 128

The semi-conductor. These Semi-conductors can be reprogrammed to do just about anything.

Answer 129

The tremendous savings in applying binary logic come about because of the great scope for standardization and cost reduction due to learning effects and independent scientific advance

Answer 130

Early History: Evacuated tubes which allowed electric currents to be modified - switched/ amplified. 1947: Amplification properties of transistors discovered by ATandT. allowed the first silicon transistor and planar process. 1959: First patent application for an integrated circuit Early development of Fairchild Semiconductor 1971: Intel's invention of '4004' micro-processor. 1986: 1st RAM chipe containing 1 million transistors. 1005: Chips pass 1 billion transistor mark.

Answer 131

Bell labs developed the transistor in a corporate laboratory owned by ATandT. Pervasiveness recognised by ATandT (the owner). They adopted a liberal cross-licensing strategy, believing that the spillover benefits from tapping into the capabilities of others would be greater than those from proprietary development. This open approach to innovation the face of technological complexity/ uncertainty was to become a much more important business strategy in the 3rd IR

Answer 132

An important competition in the early stages of the development of the transistor was the use of either germanium or silicon as the material for manufacture. Silicon offered better electrical properties but was initially considerably more expensive. In the US, military and space procurement favoured silicon, and the importance of this source of demand, together with the unsuitability of germanium for the planar process made for greater cost reduction with silicon - and substantial advantages for US over European and Japanese firms

Answer 133

As with the gun production in the US during the 19th century, the implicit industrial policy of the US, and its support for the second-placed technology - proved important. However, later this advantage of the US over Japanese firms unravelled when consumer electronics became a more important source of demand where Japanese advantages became more important

Answer 134

Boeing worked with suppliers to develop items for a specific planned. It was a failure the first time it was used that had many supply chain problems. Boeing got the formula of a network wrong. Plain delivered 3 years late.

Answer 135

Just as electrification a key GPT of 2nd industrial revolution, semi-conductor based Information Technology (IT) is key GPT of 3rd industrial revolution. Overal productivity growth slows initially but there is a rise of new firm entry (as measured by entry into the stock market) and investment by new firms relative to incumbent firms which are more wedded to older technology.

Answer 136

-Measures of innovation (e.g. patents, trademarks) stronger in IT era than in electrification era. -IT is spreading more slowly, but price of IT is falling 100 times faster than did the price of electricity

Answer 137

S-shaped. Slow initial adoption, growth phase, then levelling off.

Answer 138

No sign by 2005 that diffusion of computers across households had slowed down. Constant growth.

Answer 139

Global electronics industry has embedded the semi-conductor in larger system

Answer 140

Consumer electronics and computer. This is what embedded the use of semi conductors into the larger systems such as televisions etc.

Answer 141

In consumer electronics, the large vertically integrated ‘Chandlerian’ M-form corporation has continued to be an important component of the global industry, although the early US pioneers have been displaced by Asian firms (e.g. Sony, Matsushita and more recently by Taiwanese and Korean firms and new US firms)

Answer 142

IBM initially dominated the industry, yet over the past few decades large firms have come to dominance, , although they make up a smaller part of the vertical supply chain as well as a much smaller enterprise than previously.

Answer 143

Invention of Radio (Marconi) as a system requiring electronics. Military significance seen in WWI as warring factions cut undersea cables. US Navy attempted to 'nationalise' US radio businesses but was blocked by Congress. This led American Marconi to be taken over by Radio Corporations of America (RCA), with GE being the major shareholder, later joined by AT&T, Westinghouse and United Fruit.

Answer 144

The amalgamation of interests through the creation of RCA controlled all important radio patents. RCA "was anxious to create an industry in which competition would be ‘orderly and stabilized’”.

Answer 145

Few at time saw potential of radio as a means of broadcasting to a mass consumer market. However David Sarnhoffof RCA envisaged a business model making money from selling receivers to a mass market while providing broadcasting content free of charge –an example of a ‘hardware/ software’ effect where network externalitiesseen as fundamental.

Answer 146

Between 1922-1931 sales grew from 100'000 to nearly 100'000'000. The diffusion pattern repeated in black and white TV and later with other consumer electronic products (colour tv, VHS, CD player, DVD, mobile phones)

Answer 147

RCA dominant in emerging radio industry making money through 'patent packaging; in licensing technology (users tied to buying licences for several components). Only RCA able to pursue large RandD due to structure. Sarnhoff's realised that production of radios was not profitable due to simplicity and competition in the future. Therefore, this encouraged forward integration into 'software' such as radio content, crating NBC in 1926, also entered the phonograph/ record player market through purchase of Victor (1930). The RandD allowed RCA to pioneer television development in US. It set standards in the industry of broadcasting used later in the coloured television.

Answer 148

1960 - RCA at forefront of consumer electronics industry, but in 1988 it sold of its entertainment business and electronics business to Thompson SA (France).

Answer 149

It is an outstanding example of how a firm which moves outside its 'core-capabilities' and diversities in an 'unrelated way' - so not based upon economics of scope - faces possibly insurmountable difficulties. Whether through strategic errors (chandler) or that of 'managerial empire building' and dissipation of rents through excessive investment, RCA eventually disappeared entirely as an independent company.

Answer 150

From 1960 when it diversified into golf equipment, car rental paper manufacture, frozen food, real estate development and carpet manufacture. It also attempted to compete with IBM in computing, threatening through dilution its strong RandD base in consumer electronics.

Answer 151

Sony and Matsuishita. They were able to build integrated learning bases.

Answer 152

1. Matsushita –strength in marketing and distribution 2. Sony –technical strengths in production - VHS and Betamax videocassette players –the great ‘standards battle’ - Sony Walkman - CD Player

Answer 153

1. Data Processing Era: Making the M-form more efficient 2. Micro Era: Growth of standalone micro PC in uncontrolled fashion by professionals 3. Network Era: Development of both internal and external networks, including internet. Graph: Y axis - organisational learning x axis - Year.

Answer 154

Gun production

Answer 155

By military demands in WWII and developed in universities (code breaking and controlling gunnery fire)

Answer 156

UNIVAC produced the Remington Rand which proved successful in predicting Eisenhower;s successful presidential campaign in 1951. Big businesses purchased following this, namely Dupont, GE, US Steel.

Answer 157

1953- the Defense Calculator. A decade later its revenues were $1.24 billion

Answer 158

1. Company Pay-rolls 2. Cost accounting 3. Management accounting 4. Largely parallel scientific and engineering usage in design etc.

Answer 159

One which gains competitive advantage by specialising in just a small part of the value chain. It acknowledges that it cannot have strong or unique capabilities in every part of a possible complex value chain.

Answer 160

M-form organisations.

Answer 161

A different mode of production of electronically computer production developed from the 1950s involving more specialisation within the value chain. The the of mechanism is somewhere between market and corporate hierarchy. It is a prime example of a 'high tech cluster'.

Answer 162

A rapid rate or technological advance and collective learning. e.g. Silicon Valley.

Answer 163

Broadcasting: The value of the network (V) expands with the number of individuals receiving (N) Telephone: Value increases with N and each new addition connects directly with all previous.

Answer 164

For the broadcasting firm, V=cN, where C is a constant, N is individuals receiving and V is the value of the network. This may be an underestimate.

Answer 165

For Telephone networks: V = c N(N-1)/2, approximately V = cN^2. so V/N = cN. This law may be an overestimate if not all connections equally viable.

Answer 166

The value of the network depends upon the number of groups of size greater than or equal to 2 that can be formed from N. V = c x 2^N..

Answer 167

Sarnhoff's law, Metcalf's Law, Metcalf's Law

Answer 168

1. A networked firm is able to be flexible to external situations and may be able to partake in radical innovation if I a large enough network. Large firms find it difficult to respond flexibly but are well but achieve both economies of scope (esp. U form) and incremental innovation. 2. Coordination of activities and forms of governance may work better when they operate in a close geographical proximity.

Answer 169

1. Specialised inputs 2. Pools of skilled labour 3. Technology/ knowledge spillovers.

Answer 170

Discussess competitive performance of Route 128 and Silicon Valley in terms of relation between firms in a cluster (firm based pairs and network based). Similarities between network based system and Japanese production systems (e.g. Kieretsu) where single firm dominates.

Answer 171

APPOLLO and DEC Corporate loyalty Independent corporations Internalising and wide range of capabilities with extensive vertical integration Inability to change to rapid changes in technology (e.g p.c development and workstations. Comparative advantage of large firms in routines. Based on incremental technological change.

Answer 172

SUN and HEWLETT PACKARD Labour mobility Collective Learning curve. Even large corporations integrated into social and technical networks. Formal and informal knowledge exchange (SUN pioneered open system software) Faster product development in situation of radical technological change - new startups. Better exchange of personnel capabilities between firms

Answer 173

1. Design of computer and components 3 Software 2/3/4 Material supplier, manufacture other electrical components, Vid monitor manufacture 2/3/4 Instrument manufacture, board, assembly of circuit board 2/3/4 Fabrication of equipment manufacture, semi-conductor component, computer case 4 final assembly 5 Distribution or value added reseller. Clusters would have a number of firms in each category enabling flexible corporation, competition and collective learning.

Answer 174

1982 - building 'workstations for scientific/ engineering computing. They pioneered open systems - adopting UNIX operating system and making its systems open to suppliers and investors. Gave away Java, Jini and Solaris "forging a worldwide network of enterprise and program users where applications are quickly and inexpensively shares, refined and reborn" - G. Jones and J. Zeitlin

Answer 175

Never made a Chanderlerian '3-pronged investment', never becoming a major manufacturer, limiting itself to prototypes, final assembly and testing. Was unable to convert huge user base into paying customers.

Answer 176

Source code freely available although rights on the intellectual property are not renounced (license and public licence). Enables developers to modify, sell or give away new products providing they make the source codes freely available. Allows rapid development and likely to produce a higher rate of return for the original innovator. Gets rid of acute imitation.

Answer 177

Sam Walton in 1962. Worlds largest retailer and private employer. Leader in seeing value of out-of-town sites 'pre-empting' geographical space to deter potential competition. Unable to implement strategy into Germany, but does well in UK. This can be seen as an inability to adapt strategy.

Answer 178

Bar codes, more frequent deliveries, out of town locations, reduction in inventory costs through strong distribution. A focus on poorer communities. A proprietary satellite network in 1987 for audio and video. Radio frequency identification allowing for detailed tracking of inventory.

Answer 179

South Korea, Taiwan, Hong Kong and Singapore. These countries favoured export export orientation and foreign technology acquisition. They have been able to integrate into the global electronics industry through carving out specific business niches through a variety of strategies. This is possible due to globalisation and extensive standardisation in the electronics supply chain.

Answer 180

1995 - Showed how latecomer firms in the Asian Dragon economies overcome severe disadvantages by increasing technological capabilities.

Answer 181

1. FDI 2. Joint Venutures 3. Licensing 4. Original equipment manufacture (OEM). 4. Own-design and manufacturer (ODM) 5. Sub-contacting 6. Foreign and local buyers. 7. informal means 8. Overseas acquisitions/ equity investments 9. Strategic partnerships

Answer 182

1. Simple assembly - Original equipment manufacture. 2. Own-design manufacturer of simple products. 3. Own brand manufacture.

Business History Lectures 6-10 Flashcards

(249 cards)