Appunti lezioni Business History

Class 4: The 1st Industrial Revolution

During the first industrial revolution, there was a huge increase in productivity. The improvement in technology was the cause, characterized by:

• Increase in capital stock used in production (Solowian stock)
• Expansion in international trade (European phenomenon), increasing aggregate demand at an international level, leading to specialization
• Scale and dimension effects
• Increase in human knowledge: creation of clusters of enterprises, transfer of knowledge

Post-Civil War Developments

After the civil war, the parliament gained more power. The creation of an infrastructural system, including canals and a road network, was more advanced in Great Britain than in other countries and had a strong impact on the industrial revolution. The parliament approved the creation of the network, which was important for the creation of a national market and accumulation of social capital (social knowledge of the infrastructural system, rise in patents). It was also an instrument to create a financial system because a large amount of capital was needed.

Wide adoption of the factory system posed a challenge for managers who had to coordinate activities, contrasting with the previous putting-out system. A factory has high social costs and external diseconomies (effect on the environment).

The Role of Entrepreneurs

The first entrepreneurs came from the merchant class or craftsmen who increased the scale of their production (especially in textile). They were price takers, focusing on cost reduction with the main objective being the stability of profits rather than maximization. The economic districts (clusters of enterprises) are characterized by a network of informal relations that allow sharing of information about technology and reduction of uncertainty.

Skilled workers were able to control production as they had knowledge of the production system, leading to very simple organization, small factories, and no managerial scheme. Different types of entrepreneurs, with different backgrounds, learned by doing. The main problem was the difficulty in maintaining and transferring knowledge about the production system, which led to crises in the next generations of entrepreneurs.

Social networks played a crucial role, becoming an instrument of organization for the enterprise. The network also helped in:

• Relationship with the market
• Corporate finance

Raising capital for creating manufacturing activity was not easy. The financial market was not so developed, and the major bankers were focused on international trade. Also, manufacturing was a risky activity, so they preferred to invest in trade. The solution was the creation of a social network.

Joint Stock Companies

At the beginning of the 17th century, joint stock companies needed parliamentary approval to be created due to the South Sea Bubble. Hence, they existed only for huge companies (transport, commerce). In the 18th century, entrepreneurs had to self-finance or raise capital through their social network, limiting the British industry's growth in size. However, the positive effect was that the diversification and cross-sector transfer of resources was easier.

Case Study: Wedgwood

Major producer of pottery in Great Britain and a huge innovator in his field. Key characteristics of his company were:

• Importance of network: to raise capital
• Division of labour: standardization of work
• Creation of canal: to reduce costs due to breakages of goods transported on the road. He had to do lobbying, with his social network being important
• Capability to create a market for pottery: innovative, creating a new line of products, segmentation of the final market. He created a brand and used advertisement as part of the marketing strategy to be competitive
• Transfer of knowledge: creation of handbooks about production techniques and organization of work

Case Study: Nestlé

The second industrial revolution is noted for its timing and the characteristics of the activity. It had a specific, non-traditional approach to the sector. Another feature was the ability of this large-sized corporation to survive. Being the first mover gave a strong advantage.

The importance of the transportation system allowed Switzerland (a small country) to be connected to the rest of Europe, which provided a huge demand.

• Nestlé belonged to the merchants, related to capabilities. This class was also characterized by openness to international markets.
• Failure of previous activity pushed him to look for another business.
• Training: practical, at a chemists’.
• Family strategy: married a doctor’s daughter, which gave him access to this field.

Milk Sector

Specializing in children's milk, as the death rate of newborns was very high. The upper-middle class began to change the way they looked at children, leading to a rise in living standards. Urbanization posed a problem of providing fresh food in cities, amid the quantitative growth of the population. Women in factories needed a quick way to feed children. The strategy:

• Marketing awareness of the good quality of Swiss milk, leading to brand creation, and the idea of a pharmaceutical product. This idea was not completely new but its success was due to an incremental innovation of something already on the market: R&D, trial and error processes in laboratories using chemical knowledge.
• The second investment was in machinery contracts.
• Problem of stable supply: solved by acquiring close competitors, increasing size, and establishing his own farm for vertical upstream integration (internalization of transaction costs, common transactions reducing uncertainty). Vertical downstream integration implied creating a network of agents to increase marketing capabilities.

Internationalization

Nestlé was not a multinational enterprise as it didn't invest abroad. The small size of the national market incentivized expansion abroad and creation of ownership advantages. The first expansions were in Germany and France, due to proximity and market knowledge. In France, he had a brother who helped him.

Liability of foreignness required gaining trust in foreign markets, leading to brand creation. Eventually, he decided to sell the enterprise because:

• The company became too big and he lacked managerial knowledge.
• Financial resources were needed. Acquisition of close competitors increased the size and diversification.

Lesson 8: Building a Complex Organization

Public Opinion by W. Lippman – a book discussing the creation of public opinion and how it is affected by institutions, created by specialized people rather than the public themselves. The Great Society is dominated by technology, requiring people with formal training/education to manage such complexity. The origin can be associated with the creation of the American system of manufacturing: manufacturing through a highly standardized process. The advantage is that...