Summary Business History

CAP. 8 TECHNOLOGY AND ORGANIZATION, THE SECOND INDUSTRIAL REVOLUTION

The Second Industrial Revolution

New transportation and communication systems set off the transformation of entire sectors, especially in

manufacturing in which they were a success in commercial distribution.

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Department stores started to appear in the second half of the 19 century, and gained popularity thanks to innovations

like free admittance, fixed prices and special sales.

They first became popular in the US, and by the 1870s they also began to appear in other European nations.

The US was the pioneer inn two related sectors:

 Mail order sales: was popular in markets far from urban areas, and it offered a larger range of products, able to

meet all the needs of families.

 Retailing chains: these mass retailers grabbed important shares of the market thanks to their economies of scale

and diversification.

In this era, the birth of large manufacturing firms gave a push to economic growth, in US, Germany, GB.

This is due to the invention of a large variety of manufacturing processes in sectors like chemicals, electricity or

machinery, such as automatic packaging machinery and distillation; in addition, the availability of a more flexible

source of energy like electricity made possible interactions between chemicals and metallurgy.

This interconnection of inventions is defined as Second Industrial Revolution, differentiated to the 1 IR because the

increasing in volume and in the rate of change was faster.

By combining new technologies, greater volume and speed of shipping, companies were able to develop new

processes and reduce unit costs thanks to economies of scale and scope.

Sectorial dichotomy

The impact of technologies marked a distinction between large firms concentrated in sectors like food, oil,

transportation and other sectors where mechanization was simpler and machinery was used to help workers rather

than replace them, like textiles, clothing in which quantities and speed hadn’t changed.

In these sectors, innovation didn’t lead to build bigger plants, increasing production meant only adding more workers

and machinery dedicated to the process, industry sectors characterized by technologies of this type, continued to be

highly labor intensive and conducted in small and medium size plants. 5

In sectors where manufacturers were able to take advantage of the new technologies, very large firms dominated, in

which multiplying manufacturing capacity yielded lower unit costs obtained through economies of scale.

For example in oil industry, the innovation of distillation led to the creation of larger size distillers that produced more

products in less time.

Production

An example of the importance of pursuing economies of scale and scope was the rise of Standard Oil, one of the first

modern firms to appear in America.

At the beginning of the 1880s there were 40 firms that worked together in an alliance that give them the ability to

control production; these companies were independent and everyone had ties with the Standard Oil Company via

exchanges of shares. In 1882, they decided to come together as the Standard oil Trust.

It was created a centralized office that could focus on taking full advantage of economies of scale. Tasks:

 to reorganize the manufacturing processes,

 to coordinate flow of materials

This reorganization cut in half the average costs.

Also in Germany dye manufacturers made big investments to exploit economies of scale and scope, examples were

BASF, Bayer. th

At the end of the 19 century the Taylor “scientific organization” was diffused, work was divided into essential tasks

and management had to impose a new, efficient order on the workers eliminating operational autonomy.

The worker was compensated with higher salary, rendered possible by additional earnings produced by “scientific

organization”. Taylor’s method became reality with the arrival of the assembly line for automobile production in Henry

Ford’s factory.

Distribution

It became necessary to make investments in distribution activities integrating them vertically.

Before 2 IR, the typical intermediary commercialized products of many manufacturers, this allowed distributors to

count on a greater volume and to realize economies of scale and lower unit costs.

The intermediaries’ advantages of scale and scope disappeared, the greater volume produced by firms gave them the

same advantages of scale as retailers. It was also, now, important the development of new competencies for

marketing and distribution.

Products became more personalized, and this called for new skills to sell, install, maintain and repair them.

Manufacturers had competencies and resources to do this, while wholesalers were seldom in the same situation.

In the US, the first to integrate into the distribution system were sewing machine manufacturers like Singer.

Limits were: limited skills in operating machines of vendors and no possibility to offer special payment terms.

Advantages: constant flow of information regarding costumer’s needs.

This integration led to the organization of an extensive supply system, based on centralized offices with specialized

personnel responsible for procurements, who had to find resources of raw materials and negotiate requirements,

prices and delivery dates with suppliers.

Managerial hierarchy

The critical component in the 2 IR was the entrepreneur’s ability to create and control an extensive management

hierarchy, managers in fact enjoyed decision-making autonomy in good-size segment of the firm’s activities.

In the beginning managerial hierarchies were organized on the basis of departments that were responsible for specific

functions, in charge of the departments was an intermediate level of managers who coordinated the actions of lower

level managers, those lower level managers oversaw the various operating units of the firm.

Functional departments were organized as line and staff activities, line managers had executive powers, while staff

managers performed functions such as accounting, quality control, personnel management.

For the first time there was the creation of production and sales departments and for procurement and supplies.

One of the most important departments was dedicated to financial control in which employees invented and adopted

innovative accounting and verification procedures.

There were also research and development departments, important in technologically advanced sectors.

An example of functional organization was the American chemical company DuPont, or with some variations

Germany’s Thyssen, where managers enjoyed a great deal of independence.

CAP. 9 NATIONAL PATTERNS

The United States

Large corporations:

 based on stock shares, not partnerships

 tended to integrate a growing number of activities inside the firm, pursuing and horizontal expansion, and

integration 6

 there was a distinct separation between ownership and control in the largest companies and in this period it was

emerging a progressive shift from a personal capitalism to a managerial capitalism

 there was an incredible increasing in size of firms

 market was extremely dynamic, thanks to: population growth and increased power of customer

 other factors for the growth of the companies were public opinion and choices adopted by legislators

The US was about to become the first nation of mass consumption, Americans favorably viewed the improvements in

material comforts and living standard brought on by the growth of companies.

In the 1880s, new interest groups started an antitrust battle and so in 1911, for the first time the courts chose to break

up large corporations like the Standard Oil and American Tobacco.

In 1912 creation of Federal Trade Commission that banned intercompany agreements.

The so called “American Paradox” revealed that these measures produced the opposite result, in fact wave of

mergers were created that put into the market products with lower unit costs and prices.

The growing of business was also due to educational and training system. Business schools trained students to

become familiar with strategies and management practices of big business groups.

At the eve of the WWI, the structure of the new sectors was oligopolistic, with also the increasing of small firms that

coexisted with big ones.

Germany

In comparison with US

 the owners continued to exercise a greater say in management decisions and to make investments

 as in the US, the public opinion was favorable toward large corporations

 large corporations didn’t take a leadership role in all sectors, in the area of consumer goods they were nonexistent

 Germany was predominant in heavy machinery industry, which called for a high level of capitalization

 Important role of universal banks in the management of firms as shareholders, financial institutions were larger

than Americans and because of their bigger role they were able to acquire more opportunities to participate in

decision making at the highest level

 The principal motors of growth were exports, especially of machinery and chemicals

 There was no legislation against cartels and for this reason they grew a lot

 Presence of some sectors of entrepreneurial associations that had an important role in coordinating policies

among different regions of countries

 There were excellent institutions of higher education, universities became centers of research in science and

technology

 Germany promoted a new middle class made up of engineers and researchers who guided the process of

modernization.

Great Britain

It was different from others.

 Large corporations were concentrated in consumer goods sectors

 There was limited vertical integration and the persistence of family businesses without and extensive managerial

hierarchy

 In 1879 GB had the world’s higher per capita incomes and highest level if urbanization

 The internal market was less dynamic than other nations and increases in per capita income had begun to slow

down

 GB in addition continued to export product typical of 1 IR

 While in American people moved further and further from urban areas, this didn’t happen in GB, this made the

choice of internalize distribution impractical

 Another difference in the regulation, there were no sanctions or obstacles to agreements because large

corporations were not disruptive for small firms and for this reason there was no reason to adopt antitrust policies

 Great diffusion of mergers, that were smaller than Americans and that remained a federation of independent firms

 Educational system was characterized by the creation of universities to respond to technical necessities, bit

nothing regarding managerial training this could be attributed to a profound revolt against industrialized

societies in public opinion, in addition entrepreneurs had a form of cultural resistance to the technological and

organizational needs of the revolution

 However, GB remained strong in sectors like international finance and it was the first to suppor