476 Giant Enterprise .pdf

Giant Enterprise BA / HISTORY 476 1 2 3 Industry Consolidation & Regulation Corporate Ownership Conglomerates & Development of Giant Enterprise Industry Consolidation & Regulation Era of the merger and industry Consolidation Motives Industrialization Economies of Scale Better quality...

Giant Enterprise BA / HISTORY 476 1 2 3 Industry Consolidation & Regulation Corporate Ownership Conglomerates & Development of Giant Enterprise Industry Consolidation & Regulation Era of the merger and industry Consolidation Motives Industrialization Economies of Scale Better quality Free Enterprise Efficient Production Higher living standard End price competition Era of the merger and industry Consolidation Econ 101 What are economies of scale and why is this the most powerful advantage that large firms have? Era of the merger and industry Consolidation Econ 101 Era of the merger and industry Consolidation ● ● ● ● Corporate Revolution (1895-1907) ~266 businesses per year collapsing into the shells of other corporate entities Single firms came to dominate industries Giant corporation became the central economic institution in American capitalism Public dissent fell on “Free enterprise” Centralized Control Era of the merger and industry Consolidation Forms of Consolidation Pools Trust Holding Co. ● ● First form especially of consolidation – popularindustry with railroads Popular in the RailRoad ● ● Firms would stick tostuck agreements during good but not in bad times Loose federation: together only in good times ● ● Interstate ended RRInterstate pools Broken up by the Commerce Act ● ● ● ● Rockefeller and Morgan promoted strong central power Samuel Dodd organized first trust: Standard Oil Total power ended up in the hands of trustees Broken up by State of Ohio vs. Standard Oil Co. of Ohio ● New Jersey law enabled firm’s chartered in NJ to hold stock in other states Became almost indistinguishable from trusts Northern Securities signaled stricter regulation ● ● The Money Trust ● Morgan and his close associates holding 341 directorships in 112 corporations with assets of more than $22 billion ● Pujo Committee investigated this trust in hearings 1912–1913 - Morgan died shortly after ● The country thought that it could solve the money problem by passing legislation creating an American central bank ● President Wilson did not want to eliminate trusts but their unfair practices What enabled monopoly power? ● Firms didn’t die with their owners ● Vast expansion of capital markets ● Growth of the NYSE Monopoly Power Econ 101 ● At what point does a monopolist set output? ● Does this output maximize total surplus? ● What happens to consumer surplus when a market goes from competitive to monopoly? Monopoly Power Econ 101 Antitrust Movement Antitrust Movement Industrialization’s early impact ● Industrial Society introduces ○ ○ ○ ○ ○ Unemployment crisis Strikes Safety Regulations Labor Management issues Workers comp ● These problems had to be considered before government could deal with the business issues associated with Industrialization ● Recurring pattern in Industrial society is to decide how much Government should get involved Antitrust Movement Industrialization’s early impact ● What prompted the Government’s intervention in the Industrial age? ○ Hint: Had to do with the Railroads Antitrust Movement “Open Society” ● Popular American belief that one should be able to succeed if their abilities enabled them to ○ The little person can become the big person ● Largest force behind Antitrust were small business owners reminiscing on simpler times with free competition Antitrust Movement Legislation State Legislation ● By 1890, 21 states had antitrust legislation that enabled them to dissolve trusts ● Ineffective because businesses usually operated across state lines Sherman Act "Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations, is hereby declared to be illegal." Antitrust Movement Legislation What was the initial issue with the application of the Sherman Act? Antitrust Movement The Rule of Reason ● Since the Sherman Act was too vague, subsequent cases came to define the “Rule of Reason” ● This set the precedent that not all, but only a “Unreasonable restriction of trade” was illegal ● Teddy Roosevelt realized the need for giant enterprise and was more concerned with if the trust or company was acting in the public interest ● Holding companies Standard Oil and American Tobacco were dissolved Antitrust Movement Wilson Administration: Sherman supplements Federal Trade Commission Clayton Antitrust Act ● ● Supplemented and supported Sherman Act Prohibited Price Discrimination and inter-company stockholding ● ● Regulatory committee that could demand reports from companies To this day, primary purpose is consumer protection Webb-Pomerene Act ● ● Enabled firms to combine if it was to export goods Used to promote American business in foreign markets Corporate Ownership Monopoly to Oligopoly ● Development after courts dissolved Monopolies ● Several companies in one market which still control most of the market ● Supreme court did not dissolve U.S. Steel despite its $1.4bn valuation because its market share decreased to 50% ● Because of the size of these companies, management began to separate from ownership → corporate reorganization Monopoly to Oligopoly - True or False A firm who was significantly larger than any other competitor in its industry and had 40% market share would be prosecuted by Roosevelt as a monopolist Diluted Ownership of Firms ● After Civil War, many corporations become much larger in size ● For first time in history, minority interests or company managements gained control over many firms ● Trend continues through remainder of 19th century and into 20th ● Raises questions on whether management and shareholders’ interests are the same Corporate Management & Control ● Control of broad policy vs day-to-day management ● Swindling ○ ○ ○ Railroad Industry Union Pacific Insider Information What did Union Pacific do? ● Institutionalized Financial Control ○ Bankers have considerable control over broad policy decisions ■ Bond issuances and restrictions ■ Access to capital ■ Board of directors Banking Act of 1933 ● ● ● ● Separated commercial and investment banking Restricted public offerings of securities Reduced power of banking houses After WWII, resurgence of American economy provides opportunity for bankers to gain more control by financing expansion of companies Increasing Competition ● Firms had to build competitive advantages with multiple players in one market ● Companies had to focus on cost saving and extracting the most value ● 1909–1948: Only 36 of the firms remained in and 205 firms moved in or out of the top 100 largest industrials. ● Since 1945, tech change has enabled new firms to enter into the space with the largest industrials Fluctuation in 100 largest firms ● Role of Bankers ● In early 1900s, Iron and Steel industries dominate. Coal, shipping, and leather industries also important ● These industries now yield to auto, aircraft, oil, electronics industries ● 1960s Merger Mania increases conglomerates Increasing Competition How many of the original companies from 1909 where still in the Top 100 by 1948? Diversification & Decentralization ● Technological, engineering, and research capabilities ● Increases with WWII as defense needs bring new markets to old firms ● Science is king -> firms with most R+D diversify the best, have best org structure to support ● Administration and structure necessary to support diversification and decentralization Conglomerates & Development of Giant Enterprise Steel Steel: pre-Civil War Characteristics ● Uses: cutlery, tools, luxury items ○ Relied on wrought & cast iron to produce cheaper goods ● Primarily mined areas surrounding Lake Superior (Michigan + Wisconsin) ● Located near coal fields ● Small scale production Steel: Post-Civil War Characteristics ● Second largest industry next to coal ● 4,437.5 times increase in output post-Civil War. ● Less coal requirements = more geographic mobility ○ Began moving west (chicago) ● Large scale production (vertical integration) ○ Watch out Ford, steel vertically integrated first! (coal fields, ships, railroads) ● Major technological breakthroughs Name 2 technological breakthroughs in the steel industry post Civil War that led to extreme industry growth. Industry Advancements The Open-Hearth process is introduced to the market The Electric Furnace becomes popular 1865 1900 1851 1890 1950 Henry Bessemer patents the Bessemer process The Mesabi Range is discovered The Oxygen Furnace changes the steel market forever Industry Advancements The Open-Hearth process is introduced to the market The Electric Furnace becomes popular 1865 1900 1851 1890 1950 Henry Bessemer patents the Bessemer process The Mesabi Range is discovered The Oxygen Furnace changes the steel market forever Steel: Bessemer Process ● Developed by Henry Bessemer ● Used air to remove excess carbon ○ Increased production efficiency 10x ● Used to make steel train rails, the primary support of the industry at this time ● Limited to highly phosphoric ores Industry Advancements The Open-Hearth process is introduced to the market The Electric Furnace becomes popular 1865 1900 1851 1890 1950 Henry Bessemer patents the Bessemer process The Mesabi Range is discovered The Oxygen Furnace changes the steel market forever Steel: Open-Hearth Process ● Developed by William / Friedrich Siemens + Emile / Pierre Martin ● Could use scrap iron and various types of iron ore ● Utilized lower-cost coal (bituminous) ● Slower, but more-accurate process ● Beat-out Bessemer system by 1909 Industry Advancements The Open-Hearth process is introduced to the market The Electric Furnace becomes popular 1865 1900 1851 1890 1950 Henry Bessemer patents the Bessemer process The Mesabi Range is discovered The Oxygen Furnace changes the steel market forever Steel: Minnesota's Mesabi Range ● Plentiful ore deposits with little barrier to entry for ~50 years ● Soft, easily mineable in comparison to Lake Superior ○ “Surface Mining” Industry Advancements The Open-Hearth process is introduced to the market The Electric Furnace becomes popular 1865 1900 1851 1890 1950 Henry Bessemer patents the Bessemer process The Mesabi Range is discovered The Oxygen Furnace changes the steel market forever Steel: Electric Furnace ● Most-accurate method for producing steel, but expensive ● Wasn’t used much before WWI, but become more popular as higher quality steel became required Industry Advancements The Open-Hearth process is introduced to the market The Electric Furnace becomes popular 1865 1900 1851 1890 1950 Henry Bessemer patents the Bessemer process The Mesabi Range is discovered The Oxygen Furnace changes the steel market forever Steel: Oxygen furnace ● Invented in the 1950’s by Australians ● Enables cooking a batch of steel in 40 minutes ○ Improvement on the previous 610 hours ● Stronger steel than other methods of production Which businessman dominated the steel industry throughout the late 1800s? Steel: Key Players Andrew Carnegie Yo, dudes. Screw politics, let’s make some iron together! Charles M. Schwab aka, “The Mediator” J.P Morgan Andrew Carnegie: Time Well Spent Invests lots of earned capital and runs military branch of the Pennsylvania Begins working as telegraph messenger boy Civil War (1861-65) 1849 Born Died Nov. 25, 1835 Aug. 11, 1919 1848 1853 Post-Civil War Begins working on railroad as a secretary Focused entirely on steel & philanthropy (Age 13) Immigrated to U.S. from Scotland, gets first job earning $37/week Andrew Carnegie: Steel Years Bessemer Process ● ● Implemented at Pittsburgh plant Major reduction in steel price Vertical Integration ● Carnegie Steel produced all of the inputs for steel productions (railroads, coal, coke) Big Business ● Sold to J.P. Morgan for $492 million ● Created first billion dollar company Andrew Carnegie: More info ● Surrounded himself with brilliant people ● Major public speaker, especially in relation to charity ● Set up many foundations and hundreds of libraries J.P. Morgan & the Federal Steel Corporation ● Conducted business in an organized manner ● Unlike Carnegie Steel, made finished steel products (vertical int.) ● Right hand man: Judge Elbert Gary Charles M. Schwab ● Organized arrangement between Carnegie Steel and the Federal Steel Corporation to become largest merger ever ● Given a salary by Morgan of $1 million per year ● President of U.S Steel Which country is the largest producer of steel today? Steel: Today ● Labrador, Venezuela, Australia, etc… ● US steel production ○ 20% electric furnace ○ 79% oxygen furnace ○ ~1% other (open-hearth, etc…) ● China has the highest production levels ● United States Steel Company has less than 25 percent of the U.S steel market What was one of Carnegie’s jobs/roles before moving into the steel industry? Giant Enterprises Tobacco American Tobacco Company ● Formed in 1890 by Buck Duke ○ Sold machine-made cigarettes for half the price ● Huge advertising budget ● Purchased/merged with his major competitors ● Captured over 60% of the tobacco industry by 1900 ● Had great power in the industry and questionable marketing methods ● American Tobacco company --------> 13 new companies Oil John D. Rockefeller and Standard Oil ● 1860 - Rockefeller sees more in refining oil than in selling produce ○ All his efforts go to refining ● 1870 - Standard Oil Company of Ohio is the largest in the American oil industry ○ Rockefeller is not yet satisfied ○ Standard Oil absorbs most of Cleveland's refineries ● 1880 - Standard Oil has a virtual monopoly over oil refining and transportation in the East ○ Used “persuasive” means to buy smaller companies ● Standard Oil --------> 34 smaller companies John Rockefeller along with who/what formed The Southern Improvement Company in 1870? Two Massive Conglomerates Ling-Temco-Vaught, Inc. ● Electric company created by James Ling ○ Acquired companies through issuing stocks and bonds 1959 - Portions of L-T-V are sold for cash 1964 - L-T-V divided into three divisions 1967 - Acquired Wilson and Co., exchanged for L-T-V stock Attorney General filed antitrust suit after Jones and Laughlin Steel Company takeover 1986 - Filed for bankruptcy General Foods Corporation 1894 – Postum Cereal Beverage (coffee substitute) invented ○ Large attention paid to advertising 1920s – Acquired many different food companie 1929 – Became conglomerate known as General Foods Corp 1979 – Had 32% of America’s coffee market Mid 1980’s – Owned more than 60 major brands 1985 – Acquired by Philip Morris Companies for $5.6 billion Major brands: Maxwell House Coffee, Jell-O, and Kool-Aid Labor Labor Unions - Three Approaches Name Goals Methods Welfare Unionism Elevate social, intellectual, and moral position of the workers Campaign against monopolies Business Unionism Higher wages, better working conditions, shorter work week Used union as bargaining power to advance interests Revolutionary Unionism Overthrow capitalism and replace with communism or socialism Movement not prevalent in America Welfare Unionism ● Goals ○ Increase social, intellectual, and moral position of the workers ○ Create equal opportunities for all ● Mostly concerned with social and political actions over wages ● Done through campaigning against monopolies ● Examples = ○ Knights of Labor ○ National Labor Union Knights of Labor ● Became open labor union in 1978 ● Membership: ○ Open to laborers except lawyers, doctors, and bankers ○ Members included skilled and unskilled labor ○ Didn’t discriminate membership based on gender and race ● Key Goals: ○ abolish wage system for a utopian cooperative order ○ establish bureau of labor statistics, weekly payday, 8-hour workday, abolish child labor and contract labor ● Led successful strike against Jay Gould’s Western Railroad System Business Unionism ● Goals: ○ Higher wages ○ Better working conditions ○ Shorter work week ● Did not care much for social reform and accepted capitalism ● Created bargaining power through unions in order to advance interests ● Example = ○ American Federation of Labor (prior to 1955) Revolutionary Unionism ● Goals: ○ Overthrow capitalism and replace with communism or socialism ● This movement not very prevalent in America ● Example = ○ IWW IWW (Industrial Workers of the World) ● Organized Western unskilled and migratory workers in lumbering, shipping, and fruit growing ● Goal was to place unions in control of a business ● Wished to overthrow the capitalist structure of the U.S ● Used striking aggressively ● Basically non-existent after 1920 and are two examples of Welfare Unionism The New Deal and Energy The New Deal Energy Measures ● Tennessee Valley Authority (TVA) ● Rural Electrification Program Tennessee Valley Authority (TVA) ● During WWI, government builds power plant and munitions plant on Tennessee river in Alabama ● During 1920s, government tries to sell plants to private enterprise ○ Blocked by Senator George Norris ● 1933 TVA created by Roosevelt ○ ○ ○ Produce and sell nitrogen fertilizer Produce and sell electric power Flood control, land reclamation, general regional development ● Conflict with private utilities, TVA is cheaper ● Criticism and accused as being socialist Rural Electrification Administration ● Private utility companies have no desire to provide power to thinly populated areas ● Rural Electrification Act (1936) ○ Created nonprofit electrical cooperatives among farmers ○ Congress lends money to the cooperatives ● By 1950, 90% of all farms electrified ● Disliked by private utilities Thomas A. Edison ● “World’s greatest inventor and the world’s worst businessman” ● Revolutionary inventions ● Primary interest was inventions, not profit ● Industrial research laboratory ● Mistake in AC vs DC ○ Westinghouse Electric Company vs Edison General Electric George Westinghouse ● Father of alternating current ● Second to Edison, greatest inventor of his day ● Westinghouse Electric Company ○ Willing to lose money for publicity - Chicago World’s Fair ● Weak in administration ○ Over-extended himself ○ Connected with over 100 companies at one time or another History tends to repeat itself What modern day inventor/business man is similar to Edison in that they had a passion for inventing and showmanship but aren’t always viewed the best in the public eye when it comes to running a business?