Chapter 1 - The Power of Principles an Historical Persperctive

8/10/2019 Chapter 1 - The Power of Principles an Historical Persperctive

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1840, 1910, and Today

The years 1840, 1910 and 2009 representwidely disparate business conditions.

The general economic principles behindbusiness strategy are enduring.

Business practices evolve with changing

environment.


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Doing Business in 1840

Numerous intermediaries - Farmers tofactors to brokers agents to buyers

Substantial price risk for participants Infrequent transactions

Scarcity of information regarding sales and

prices of comparable goods


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Infrastructure in 1840

Infrastructure in transportation,communication and finance were poorly

developed in 1840. Poor infrastructure meant the dominance of

small family run firms.

Markets were local.


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Transportation in 1840

Railroads, in their infancy, were fragmented.National railway network had not yet

arrived.Waterways were used for long distance

transportation. Yet routes were limited.

With poor transportation, producers werelimited to local markets


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Communication in 1840

Postal service was the dominant mode oflong distance communication.

Postal service relied on the horse andstagecoach.

Telegraph was expensive and was used only

for important time-sensitive information.


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Finance in 1840

Most businesses were sole proprietorships orpartnerships which made long term debt difficultto obtain.

Shares of stock were not easily traded and cost ofcapital was high.

No institutional mechanism existed for handling

business risk. Futures trading to manage price risk was yet to

come about.


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Production Technology in 1840

Most factories used century old methods ofproduction.

Textile manufacture was mechanized. Use of standardized parts (prevalent in

clocks and guns then) was just beginning.

Scale intensive industries and high volumeproduction were non existent.


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Government in 1840

Government was involved in largeinfrastructure investments such as canalsand railroads.

Later in the century government regulationof the business environment was emerging.

Prime Meridian Conference led to thesystem of standard time.


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Business in 1840

Technology limited production to traditionalmodes.

Production served local markets.Without transportation infrastructure and

access to large markets, mass production

technologies would not have been useful.


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Business in 1840

Without communication infrastructure,information on prices, sellers and buyers

was not readily available. Credit was available based on personal

relationships.

As a result businesses were small andinformally organized.


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Business Conditions in 1910

Mass-production technologies madepossible high volume low cost manufactureof goods.

Railroads dominated transportation andallowed mass distributors to reach widelyscattered customers.

Telegraph and telephones greatly improvedlong distance communications.


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Business Conditions in 1910

Manufacturing became more verticallyintegrated.

Multidivisional firms emerged in responseto the size and complexity of operations.

Industries were becoming concentrated.

As standardization increased so did laborrelated conflicts.


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Finance in 1910

Securities markets traded shares of largeindustrial firms.

Credit bureaus made credit relatedinformation easily accessible.

Innovations appeared in monitoring and

reporting business activities. Public disclosure of accounting informationwas in vogue.


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Government in 1910

Government regulation extended to suchareas as corporate law, antitrust and worker

safety. Increased regulation forced managers to

collect a lot of data on internal operations.

Mandatory secondary schooling providedthe labor force needed by large bureaucraticorganizations.


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Business in 1910

Expanded infrastructure allowed firms toexpand their markets, product lines and

production scale. New technologies allowed high volume

standardized production.

Growth of financial infrastructure madelarge scale firms viable.


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Doing Business Today

Large vertically integrated firms have beendeclining.

Alliances and joint ventures could workbetter than mergers and acquisitions.

Diversification yields to

deconglomeration. Firms adopt complex matrix structures.


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Transportation Infrastructure Today

Air, rail and ground transportation havebecome better coordinated.

Sophisticated communication and dataprocessing technologies enable containershipping.

Cities like Atlanta have grown relying on airtransport in spite of poor rail and waterconnections.


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Communications Technology Today

Capacity for instantaneous transmission of complexinformation makes possible global markets forproducts and services.

Technology has enhanced worker productivity. Coordination of activities has become easier with

modern computer and communication technologies.


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Finance

Regulation of banking and securities marketsresulted in a stable financial services sector.

Capital markets and financial institutions became

more active in evaluating firm performance. Globalization of financial markets made many

mergers and acquisitions possible.

Liquidity crisis of 2008 has slowed economic and

entrepreneurial activity.


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Production Technology

Modern technologies such as CAD/CAMhave made low cost tailor-made production

feasible. Use of new technologies often means

reorganizing the firm around these

technologies.


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Government

In some areas (airlines, trucking andfinancial services) traditional regulation has

been relaxed. Regulation has increased in other areas

(workplace safety, discrimination and

environmental protection).


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Government

Intergovernmental treaties and agreementscreate regional free trade zones.

Governments anti trust policy encouragesin-house development of capabilities.

Government policy supports basic research

and the commercialization of R & D projects.


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Business Today

With rising demand from developingnations the market size has increased.

Firms focus on a narrow range of activitiesand enjoy the economies of scale.

Financial innovation enables faster growth

of firms and the ability of new entrants tochallenge the incumbents.


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Infrastructure in Emerging Markets

Unlike the advanced nations, manydeveloping nations still lack transportation

and finance infrastructures. Businesses are reluctant to invest in

countries where corruption, cronyism and

conflicts are rampant.


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Business Conditions and Strategy

Business conditions change over time and sodo the optimal strategies.

Principles needed to arrive at successfulstrategies do not change.

Recipes change from period to period but

principles behind the recipes do not.

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Chapter 1 - The Power of Principles an Historical Persperctive