SCALE AND SCOPE The Dynamics of Industrial Capitalism

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SCALE AND SCOPEThe Dynamics of Industrial
Capitalism

• Alfred D. Chandler, JR
• ???
• ???????

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Introduction Scale and Scope

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

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Introduction Scale and Scope

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

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Chapter 1 The Modern Industrial Enterprise

• Simon Kuznets National economies ? 3 sectors
• Agriculture, Industry and Services
• Simon Kuznets Industry ? 6 sectors
• Mining
• Manufacturing
• Construction
• Utilities
• Transportation
• Communication

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Chapter 1 The Modern Industrial Enterprise

• US, Great Britain and Germany accounted for 2/3
  of the
• worlds industrial output in 1870
• In all 3 countries the largest economic growth
  came in the
• industrial sector, while agriculture
  drastically declined in the
• long run

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Chapter 1 The Modern Industrial Enterprise

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

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Chapter 2Scale, Scope, and Organizational
Capabilities

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

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Chapter 2Scale, Scope, and Organizational
Capabilities

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

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Chapter 2Scale, Scope, and Organizational
Capabilities

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

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Chapter 2Scale, Scope, and Organizational
Capabilities

• Historical Attributes
• Modern industrial enterprises three most
  significant attributes
• - Clustered from the start in industries
  having similar characteristics
• - Appeared quite suddenly in the last
  quarter of nineteen century
• - Born and then continued to grow in much
  the same manner
• Table 5
• - 72 of the 401 companies were clustered in
  food, chemicals, petroleum,
• primary metals ,and the three machinery
  groups.
• - The predominance of American firms among
  the worlds largest industrial
• corporations
• - Only in chemicals, primary metals, and
  electrical machinery did the non-
• American firms outnumber the American
  firms

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Chapter 2Scale, Scope, and Organizational
Capabilities

• The large industrial corporations in U.S.
  ,Britain and Germany
• The large industrial corporations in U.S. had
  clustered in the same industry
• (Earlier in the twentieth 1973)
• The pattern is much the same for Britain and
  Germany
• American firms were bigger and more numerous
• American consumer goods, industrial goods
• Britain consumer goods (food tobacco
  industries)
• Germany producers goods (chemicals heavy
  machinery)

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Chapter 2Scale, Scope, and Organizational
Capabilities

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

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Chapter 2Scale, Scope, and Organizational
Capabilities

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

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Chapter 2Scale, Scope, and Organizational
Capabilities

• In 1880s1890s Second Industrial Revolution
• - New mass-production
• - A sharp reduction in costs as plants
  reached minimum efficient scale
• - Only a small number of them could meet
  the existing national and even
• global demand became oligopolistic
• - The first to build a plant of minimum
  efficient scale and recruit the essential
• management team remained the leader in
  its industry for decades.
• - The revolution in transportation and
  communication created opportunities
• that led to a revolution in both
  production and distribution.

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Chapter 2Scale, Scope, and Organizational
Capabilities

• The essential step in exploiting the new
  technologies of
• production
• Construct a plant of the optimal size
• The investment in production facilities large
  enough to exploit the full potential of the
  economies of scale
• Both technologies and markets were dynamic
• Size and costs of production plants differed
  widely from industry to industry

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Chapter 2Scale, Scope, and Organizational
Capabilities

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

• Economics of Scale and Scope in Distribution

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Chapter 2Scale, Scope, and Organizational
Capabilities

• Specialized facilities Skills in marketing and
  distribution
• The manufacturer had more accurate understanding
  of special facilities and skills than the
  wholesaler.
• The more the products required such skills and
  facilities, the less were the opportunities for
  the intermediary to achieve economies of scope.
• Intermediarys increasing investment in
  product-specificity
• Reduced the intermediarys cost advantage
• Discouraged intermediary making the necessary
  investment

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Chapter 2Scale, Scope, and Organizational
Capabilities

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

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Chapter 2Scale, Scope, and Organizational
Capabilities

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

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Chapter 2Scale, Scope, and Organizational
Capabilities

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

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Chapter 2Scale, Scope, and Organizational
Capabilities

• Top management
• The heads of the major functional departments,
  the president, and sometimes a full-time
  chairman.
• The full-time salaries top managers, the inside
  directorsand their staff, monitored the
  activities and performance of the middle
  managers.
• In making broad strategic decisions they worked
  closely with the outside directors, the
  part-time representatives of families, banks, and
  other shareholders.

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Chapter 2Scale, Scope, and Organizational
Capabilities

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

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Chapter 2Scale, Scope, and Organizational
Capabilities

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

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Chapter 2Scale, Scope, and Organizational
Capabilities

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

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Chapter 2Scale, Scope, and Organizational
Capabilities

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

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Chapter 2Scale, Scope, and Organizational
Capabilities

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

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Chapter 2Scale, Scope, and Organizational
Capabilities

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

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Competitive Managerial CapitalismThe United
States
PART?

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

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Competitive Managerial CapitalismThe United
States
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Chapter3 The Foundations of Managerial
Capitalism in American Industry

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

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Chapter3 The Foundations of Managerial
Capitalism in American Industry

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

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Chapter3 The Foundations of Managerial
Capitalism in American Industry

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

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Chapter3 The Foundations of Managerial
Capitalism in American Industry

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

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Chapter3 The Foundations of Managerial
Capitalism in American Industry

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

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Chapter3 The Foundations of Managerial
Capitalism in American Industry

• Technological innovations become available
  worldwide, entrepreneurs had to make the
  three-pronged investment. (It was the
  investment,not the innovation )
• To realize the cost advantages of scale and scope
  in production.
• To create a product-specific marketing network .
• To recruit and train a team of salaries managers
  who would assure the continuing flow of goods
  through the processes of production and
  distribution.

• The major investments of the critical decades
  (1880s1890s).
• Transformed the American industry.
• Had a powerful impact on the legal,financial and
  education environment until the twentieth century.

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Chapter3 The Foundations of Managerial
Capitalism in American Industry

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

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Chapter3 The Foundations of Managerial
Capitalism in American Industry

• For example

Tobacco quantity cost
Man-made 3000 c/day 5 shilling 60 pence
Machine 125000 c/day 10 pence

• Packaging and brand became part of the
  production process.

• The manufacturer placed its brand name on the
  packaged product
• and began to advertised it.

• Fresh meat and other perishable
  products--develop and build a
• network of refrigerated cars, ships, and
  depots.

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Mass-Produced Light Machinery
Chapter3 The Foundations of Managerial
Capitalism in American Industry

• Originally developed to produce small
  armsAmerican system
• of manufacturing in the 1880s.

• Adopted the first modern mass-production methods
  of fabricating
• and assembling fully interchangeable and
  standardized parts.
• Including
• - Small arms
• - Sewing machine
• - Agricultural machine

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

• INDUSTRIAL CHEMICALS
• In the late l880s and early l890s American
  entrepreneurs made the investments and created
  the managerial teams necessary to exploit new
  electrolytic technologies in chemistry and also
  metallurgy.
• Skill engineers and with the knowledge of
  chemistry as well as physics
• knowledge ?replace commercial intermediaries
• Invented and produce dynamite (Alfred Nobels
  patent)
• Based on coal and coke
• Beginning to make impressive investments in
  research and development by
• World War?and much larger than those of British
  firms.(greatly enhanced
• organizational capabilities)

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Chapter3 The Foundations of Managerial
Capitalism in American Industry

• Leadership --- German entrepreneurs
• Exploiting the new processes for producing
  man-made dyes, pharmaceuticals,
• and aim on the basis of coal-tar chemistry
• Had responded even more rapidly and efficiently
  to the new opportunities and
• had achieved a strong competitive advantage in
  the all-important European
• markets

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Chapter 3 The foundations of Managerial
Capitalism in American Industry

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

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

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Chapter 3 The foundations of Managerial
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• Sherman Antitrust Act
• Enforcement became even more difficult in US
  after 1890, when congress
• passed the Sherman Antitrust Act.
• Reinforced the common law by declaring such
  combinations illegal.
• Close inter-firm cooperation was defined as
  illegal collusion

• Circumstance of Sherman Antitrust Act
• With little debate and even less opposition, Act
  made clear the strong
• antimonopoly bias of the American public
• Act also reflected the most important
  non-economic cultural difference
• between the US UK, Germany

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

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

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Chapter 3 The foundations of Managerial
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• Consolidations clustered in 3 time period
• 1st period 1880s ( Before the New Jersey law)
• Growth through merger and acquisition became
  increasingly widespread during the 18801990)
• The consolidation occurred almost wholly in
  refining and distilling industries (American
  Cotton Oil American lead)

• 2st period 189093 (after the New Jersey law)
• lasted until the coming of a severe economic
  depression in 1893
• more mergers occurred than in the previous
  decades
• Soon several of these enterprises began the move
  toward administrative
• centralization and rationalization.

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Chapter 3 The foundations of Managerial
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• 3st period 18971903 (the most largest and the
  most significant merger movement)
• Because of continuing antitrust legislation,
  the increasing difficulty of enforcing
• contractual agreement by trade association during
  the economic depression, and the return of
  prosperity and buoyant stock market.

• The predominant motive was to market control
  through legally enforceable combinations.
• - transforming existing trade associations
  into holding companies
• - uniting non-associated competitors
• Another motive was to profit from the marketing
  and manipulation of securities
• - picked up speed, investment bankers and
  stock brokers began to participate in the process
  
• After the Supreme Court had indicate by its
  ruling in several cases, cartels carried on
  though trade associations were vulnerable under
  the Sherman Act.

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

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Giant United States Steel Corporation - One
of few mergers continued to be managed as
federations - Remained more concerned about
controlling price and output than about fully
exploiting the economies of throughput (Ch. 4)
Chapter 3 The foundations of Managerial
Capitalism in American Industry

• American Sugar Refining and Corn Products
  Refining
• - Change in strategy was delayed
• - Endure the trauma of bankruptcy and
  financial reorganization

• Primary producers of fabricated products -
  Consolidated and administratively centralized in
  order to exploit the economies
• of scale.
• Centralization and rationalization were more
  profitable than attempting to
• control price and output by means of a
  decentralized holding company.

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

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Chapter 3 The foundations of Managerial
Capitalism in American Industry

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

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Chapter 3 The foundations of Managerial
Capitalism in American Industry

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

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

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Chapter 3 The foundations of Managerial
Capitalism in American Industry

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

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Chapter 3 The foundations of Managerial
Capitalism in American Industry

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