chapter 1 - the power of principles an historical persperctive
TRANSCRIPT
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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.