Most histories of business start out with the premise that business began with the advent of money and the end of the barter system. Many ancient civilizations therefore had a primitive business model with goods and services being sold for what we would call cash. Trade among various cultures was also a feature of the ancient world, dating back as far as the third millennium B.C. in Egypt. The Phoenecians, Greeks, and Carthaginians all created wealthy and powerful trading states during the first millennium B.C.; the Roman Empire built much of its dominance of the Mediterranean world on its continuous contact with other cultures and used its armies to help enforce good trading terms with client states.
With the decline of the empire in the fifth and sixth centuries, barter returned throughout much of Europe until the 12th and 13th centuries, when the city-states of Italy (Venice and Genoa among others) brought about a tremendous resurgence of trade on the Mediterranean. By the time the great age of exploration arrived in the late 15th century, the business of foreign trade, whether founded by monarchies or pools of investors, had been well established.
The seven northern provinces that formed the Dutch Republic were flexible enough to respond to these international market conditions; by the middle of the 17th century the Dutch were the supreme economic power, and Amsterdam was the world’s leading financial and commercial center. This balance of power shifted by the beginning of the 18th century, when Britain led the world into an industrial revolution; this is the point when the history of modern business can be truly said to have begun.
The Industrial Revolution
In the late 17th and 18th centuries, economic power grew fastest in Great Britain. It arose from a proliferation of inventions, the availability of capital, a relatively fluid social order, a rising and mobile population, a responsive legal system, a government with power divided between the king and parliament, and an entrepreneurial spirit that was shared by all of the social classes. These factors—collectively called the Industrial Revolution—produced a profound change in the nature of commerce and business. Inventions Beginning in the 18th century, the pace of invention began to quicken as industrialization created unprecedented opportunities for wealth—and a powerful incentive for invention. The invention of the process of invention during the period of industrialization has been called the most important invention of all.
One of the inventions that drove the Industrial Revolution was the steam engine. Before the 17th century, there were essentially four means of applying power to do work: humans (pushing, lifting, carrying), animals (pulling plows, transporting people), wind (powering sailing ships and windmills), and water (turning water wheels). The steam engine changed all this, providing a reliable source of power that could be used in many of the new industries that were being developed at the time.
The first commercially successful steam engine was developed by Thomas Newcomen (1663–1729) and first used in 1712. Newcomen’s primitive engine was improved upon by James Watt (1736–1819), who produced a more efficient engine using rotary mechanics. Thanks to Watt’s steam engine, factories were liberated from water wheels and built closer to their sources of supply; ships could move in all directions, no longer dependent on the direction of the wind or the currents. The steam engine also made possible a critical new mode of transportation—the railroad.
Transportation The invention of the steam engine also made possible steam-powered ships that could travel to their destination more directly than sailing ships, reducing the time and costs of voyages. Now goods that moved along the railroads to port cities moved overseas on steamships, creating a vast flow of commerce between trading nations.
One of the reasons that Britain’s industrialization moved at the pace it did was the availability of cheap transportation. From the 17th to the 19th centuries, Parliament passed a number of acts that facilitated the construction of roads, canals, and railroads.
In 1829 George Stephenson (1781–1848) and his son Robert (1803–59) successfully demonstrated a steam locomotive that traveled on iron rails. In 1830 it was adopted by the Liverpool and Manchester Railway and immediately put Britain ahead of the rest of the world in a form of transportation that was even cheaper than shipping
by canals. Thereafter no country that aspired to industrialization could succeed without a network of railroads to carry the goods.
The Factory System The first important industry to undergo profound changes during the Industrial Revolution was the textile industry, which was transformed by a series of inventions. Prior to 1700, most of the processes used to turn raw cotton or wool into fabrics were performed by hand, often by people working at home. During the 18th century, machines replaced human beings in all of the essential processes. This caused the cost of production to drop over time; merchants were able to sell fabric at lower prices, thus finding a mass market for their products.
The change from small groups of widely dispersed workers to mechanized processes performed under one roof signaled the birth of the modern factory. Factories provided employment to hundreds of thousands of workers who otherwise would have found no employment or means of survival, although conditions in the factories and settlements where the workers lived were often deplorable. And although Britain had a social system based on class, it did not prevent entrepreneurs of the lower classes from rising to become factory supervisors, managers, and owners.
Industrialization Spreads to Europe As Britain was expanding under industrialization, it not only traded with European countries but also was a party—sometimes reluctantly—to the transfer of technologies and ideas to the continent. European countries paid British engineers to help them establish new industrial enterprises; they hired British workers to come and work for them, and—as they imported the goods of British industry—they learned how the goods were manufactured. They even were the beneficiaries of British investment in some of their enterprises. Investors thus had an incentive to transfer ideas and technologies to receptive European countries. The more forward-looking of the continental countries made full use of these advantages.
Germany In 1850 Germany was a politically diverse group of rural and agrarian states. Though it was slow to industrialize, Germany eventually enabled its nobility to engage in commerce, abolished the guilds and other obstacles to industry, and provided trained workers from schools that were the first modern educational system. As Germany’s states unified, they formed a tariff union (Zollverein) that eliminated tolls and customs and allowed trade to flow freely within its borders. To tie these areas together, the country built a network of railroads similar to the one that played such an important role in Britain’s industrialization.
The country was also rich in resources, especially coal; it was also aggressive in developing its iron production capability. Germany was quick to adopt the new refining methods being used elsewhere, and by 1895 its steel output surpassed Britain’s. Germany ultimately excelled in industries that were fostered by its many fine universities. It came to dominate the field of chemistry and it made important advances in the production and applications of electricity.
France As early as the late 18th century, France realized that industrialization would play a leading role in economic growth. In 1794, the country established the first institution of higher learning devoted to science and technology, the École Polytechnique. In 1829, a private applied engineering school, École Centrale des Arts et Manufactures, was established. French engineers developed sophisticated weaving machines, notably the Jacquard loom, named for its developer, J. M. Jacquard (1752–1834).
Measured by industrial output against population, France was close to Britain and Germany. But in absolute growth, it lagged behind and never caught up, owing in part to slow population growth, slow urbanization, a succession of wars, a reliance on water power, the small size of its enterprises, and the scarcity of coal. France’s weak industrial capability was obvious during World War I.
Industrialization in the United States
In 1800 the United States was a new nation struggling to define itself;by 1900 it had the largest economy in the world and was the world’s leading industrial nation. America’s extraordinary economic growth during the 19th century is probably the most important business story in history.
The country, even before westward expansion, was vast in comparison with its population. There was abundant fertile land on which to grow food and other useful crops such as cotton. Natural resources were also abundant, in the form of wood, coal, iron and copper ores, and oil.
But America’s greatest resource was its people. A high birth rate provided most, but not all, of the rapidly growing population. Added to this were waves of immigrants who were ambitious, energetic, skilled, and entrepreneurial, eager to put their talents to work in the opportunities that the new country afforded. The first United States census in 1790 enumerated fewer than 4 million inhabitants; by 1870 there were almost 40 million inhabitants.
This rapidly growing population not only supplied labor to industry but was also a growing pool of customers for the products of that industry. But even with this rapid population growth, there was a constant shortage of workers; agriculture and industry simply grew faster than the population.
The country’s chronic labor shortage had two salutary effects on the growth of business and commerce. The first was that wages rose, attracting both native workers and ambitious and talented immigrants. The other was that agriculture and industry compensated for scarce workers by adopting and developing new technologies to increase productivity. By 1830—a surprisingly early date—productivity in the United States exceeded that of Great Britain.
Transportation Constructing roads, canals, and railroads to connect the vast expanses of the North American continent required vast amounts of capital. The federal government did not have the financial resources to pay for transportation projects as public works, so it was up to the states and the private sector—including investors from abroad—to find most of the money. This created opportunities for visionaries to build the arteries of commerce—and, at the same time, create great wealth for themselves.
Canals During the 18th century and the early 19th, water transportation was less expensive than land transportation—especially after the introduction of steam power. The existing rivers were soon supplemented and connected by systems of canals. The longest of these canals, and the one that inspired a wave of imitators, was the Erie Canal. The governor of New York state, DeWitt Clinton (1769–1828), understood the potential of connecting the Eastern seaboard with what was then the interior of the country. He pushed through the state legislature an authorization for $7 million to build a canal from Albany on the upper Hudson River to Buffalo on Lake Erie—a distance of 363 miles. It was one of the great engineering and construction projects of the century. After overcoming many obstacles, the canal opened in 1825 to great success. Soon many states and localities had built their own canals and created a web of water transportation.
Railroads America’s canals were soon displaced by an even more economical means of transportation—the railroad. The building of the nation’s railroad system required enormous amounts of capital. Fortunes were made by entrepreneurs who could combine building with financing—although it was sometimes difficult to distinguish between the builders and scoundrels. The first great railroad entrepreneur was Cornelius Vanderbilt (1794–1877). He began to invest in the stock of eastern railroad companies in the 1840’s; by the time of his death he controlled railroads that stretched from New York City to Chicago.
The watershed achievement of railroad building in the 19th century was the completion of the first transcontinental railroad. As the nation expanded westward it clearly needed a rail connection to California. In 1862, President Abraham Lincoln signed the Pacific Railway Act that authorized the Union Pacific to build west from Omaha and the Central Pacific to build east from Sacramento until they met at a still undetermined location. On May 10, 1869, the two lines celebrated their linking-up in Promontory Point, Utah, northwest of Salt Lake City.
Although Thomas Clark Durant (1820–85) was president of the Union Pacific, Oakes Ames (1804–73) received much of the credit for building the Union Pacific Railroad to meet the Central Pacific. It was Ames and his brother Oliver who invested their money to fund construction of the Union Pacific part of the transcontinental railroad.
On the opposite coast, the Central Pacific was a joint enterprise operated by men who became known as “the Big Four,” outsize personalities who collaborated to build the western half of the transcontinental railroad. The key figure was Collis Potter Huntington (1821–1900), who, along with Mark Hopkins (1813–78), Charles Crocker (1822–88) and Leland Stanford (1824–93), incorporated the Central Pacific Railroad. Their construction company was later investigated by the government when it was revealed that it had been paid approximately twice as much as its part of the construction should have cost.
Following that first meeting of the tracks at Promontory Point, several other transcontinental lines were laid, as well as many other trunk and feeder lines. As early as 1840 the total mileage of American railroads was 4,510—exceeding the total mileage of Britain and continental Europe combined.
Inventors Inventions and innovations had been essential to industrialization in Britain and Europe—and it was the same in the United States.
Textiles American manufacturers were eager to learn about advances in technologies in their industries, and offered bounties, high pay, and advancement as inducements to ambitious Europeans willing to emigrate. One of the most influential of these immigrant inventors was Samuel Slater (1768–1835), who had apprenticed in Britain with Jedediah Strutt (1726–97), developer of the
first water-powered spinning machine. In 1789 Slater immigrated to the United States, where he engaged in a series of ventures to build water-driven spinning machines. He continued to develop textile manufacturing technology and was a major innovator in the development of the American factory system.
Steamships A number of inventors contributed to the development of a reliable steam-powered shipping industry. The most important was Robert Fulton (1765–1815); in August 1807 his boat, the Clermont, made a test run from New York to Albany. Fulton proved the practicality of steamboat travel the following year when his rebuilt boat began weekly trips between the two cities.
The “American System” of Manufacturing A number of inventors working in different industries developed manufacturing processes that, taken together, were more important than the products they manufactured. This came to be known as the “American System”—special-purpose machines and standardized work processes that resulted in repetitive tasks that could be performed rapidly by relatively unskilled workers. This system gave American industry a competitive edge in the growing world economy.
Eli Whitney (1765–1825) is best known for inventing the cotton gin, the machine that separated cotton seeds from cotton fiber. It revolutionized textile production, but it was widely pirated, and Whitney never realized the wealth that should have been his. He also developed a precision process to make uniform parts that could be assembled interchangeably into finished guns—an achievement that was arguably as important as the cotton gin.
Another important contributor to the “American System” was Cyrus Hall McCormick (1809–84), who developed the grain reaper. This invention not only increased agricultural productivity—releasing surplus farm workers for growing industry—but also refined the efficiency of the manufacturing processes.
Thomas Edison The most prolific inventor of all was Thomas Alva Edison (1847–1931), who differed from earlier inventors by using a sustained and organized invention process. In 1876, he combined his research laboratory with his manufacturing facility. From then until his death in 1931, he worked tirelessly to produce a steady flood of commercially viable products.
General Electric The model for institutionalizing innovation was established by Charles Proteus Steinmetz (1865–1923), who fled Germany for New York in 1889, and obtained employment with an electrical equipment company. He soon founded his own laboratory, which in 1892 was acquired by the General Electric Co.. In 1900 General Electric organized the first modern industrial research laboratory, and the following year it promoted Steinmetz to chief consulting engineer.
Other companies, including DuPont, Corning Glass, Parke-Davis pharmaceuticals, and Eastman Kodak, soon had their own research laboratories, which would be the source of countless new products and processes over the coming years.
Communications If commerce were to flourish in a county as large as the United States, there needed to be not only a large and efficient transportation system but also a way to speed communication between far-flung areas. Initially, mail was conveyed by railroad; the Railway Mail Service was established in 1869 as a separate branch of the Post Office Department. But faster communications were needed—and, during the first half of the 19th century, a number of inventors in Europe and the United States worked on the problem of transmitting messages by means of electricity.
The Telegraph Samuel Finley Breese Morse (1791–1872) believed that the flow of electricity could be made visible and that “intelligence” could be transmitted by wires across distances. He and other experts constructed a machine that transmitted electrical impulses through a wire that then drove another device at the other end to inscribe a series of dots and dashes on a moving strip of paper. Morse devised a code of dots and dashes for the letters of the alphabet. The system thus permitted messages to be sent almost instantaneously between two points.
On May 24, 1844, the message, “What hath God wrought,” flashed from the nation’s capital to Baltimore and then back again. This was the beginning of the telegraph system and the coding that became known as “Morse Code.” Morse’s company, the Morse Electromagnetic Telegraphy Co., licensed his patent; the Western Union Telegraph Co. ultimately came to dominate long-distance telegraphic communications.
The Telephone If words could be transmitted by code, inventors soon realized that the voice itself might be transmitted as well. Alexander Graham Bell (1847–1922) developed a system that converted sound waves to a varying current of electricity. His father-in-law, Gardner Greene Hubbard (1822–1897), submitted Bell’s patent application on February 14, 1876. It was granted on March 7, 1876; some have called it the single most valuable patent in history. In 1877 Hubbard headed a group that
formed the Bell Telephone Company (later renamed American Bell), although Bell ultimately lost interest in further developing the technology.
The Telephone System In 1880 Theodore Newton Vail (1845–1920) was hired to be the first general manager of American Bell. Vail envisioned linking all of the phones in the United States into one system. He started by persuading a potential competitor, Western Union, not to enter the telephone business, and he then acquired a controlling interest in Western Electric to provide technology and equipment for his countrywide network.
In 1907 as head of American Telephone and Telegraph (a wholly owned subsidiary of American Bell), Vail successfully fought and bought out most of his competitors. He realized, however, that the monopoly he was creating would be vulnerable to government antitrust action. To forestall such action, he proposed a regulatory commission to monitor AT&T’s business, ceased acquiring competitors, and agreed to connect his long-distance lines with any local independent operator that wanted to be a part of the system. In return, the government agreed not to bring antitrust actions against the company.
The agreement lasted until 1974, when the U.S. Justice Department filed an antitrust suit against AT&T—“Ma Bell”—which was then the world’s largest company. The company split itself into pieces, separating its long-distance and regional phone operations. The breakup launched competition within the telephone industry, and eventually the telecommunications revolution.
Entrepreneurs and Financiers Industrialization and the growth of the American economy in the 19th century created opportunities for many ambitious and talented entrepreneurs to become extraordinarily wealthy. Along with their wealth came power—the power to shape industries, and even the power to affect government.
John Pierpont Morgan (1837–1913) played a central role in shaping the course of American industrialization. He established his own investment bank, J. P. Morgan & Co., in 1861. The railroad boom was on, and railroads required huge amounts of capital that Morgan began to provide. Morgan’s investment reach also extended to other industries; he underwrote Edison’s incandescent light, invested in Edison’s power generation and distribution plants, and in 1892 financed the creation of General Electric. His greatest achievement in industrial finance was the creation of the United Steel Corp., the largest industrial company in the world.
Andrew Carnegie (1835–1919) began investing at the age of 22, and established an iron works company in 1864. He used these early investments to create an empire of iron and steel. He relentlessly sought ways to reduce the costs of production by gaining control of the entire process from mining the ore, transporting it to the plants, buying the coke to convert the ore, and then processing it with the latest technology. At the same time, he bought out competitors and combined them into an ever-larger empire.
In early 1901 Carnegie sold his company to J. P. Morgan for the then unheard-of price of $480 million. Morgan combined Carnegie’s company with his own to form the United States Steel Co.
John Davison Rockefeller (1839–1937) entered the refining business in 1863—four years after the first oil well was drilled at Titusville, Pennsylvania, giving birth to the American petroleum industry. Cleveland soon became a major refining center, but Rockefeller disliked the disorderly and fragmented industry and moved to bring order to it. In 1870 he organized the Standard Oil Company; his strategy was to buy smaller companies and combine them into a company large enough to exert control over the market. By the end of 1872 Standard Oil had bought 34 competitors and controlled almost all of the refining companies in Cleveland; by 1879 the company controlled 90 percent of America’s refining capacity
In its search for a way of legally organizing its large and diverse business, the company tried a number of organizational structures. In 1882 it created the first modern trust in American history, the Standard Oil Trust in Ohio. But the Ohio attorney general brought suit against the trust, and in 1892 the Ohio Supreme Court annulled the charter. The company then moved the trust to New Jersey and renamed itself Standard Oil (New Jersey). By this time the company owned an estimated three-fourths of all of the petroleum business in the United States.
The passage of the Sherman Antitrust Act of 1890 intensified attention on the giant company, and it was constantly fighting efforts to break it up and limit its power. Court battles with the company continued until a Supreme Court antitrust decision of May 15, 1911, dissolved Standard Oil Trust and reorganized it into 38 companies.
The Birth of Marketing
Industrialization not only created opportunities for mass production, but also led to the development of mass markets. Mass marketing soon followed by utilizing the power of newspapers, magazines, and the U.S. Postal Service.
Mass Marketing Before the Industrial Revolution, products were mostly handcrafted and sold on a one-to-one
basis to customers. The mass production of consumer goods enabled retailers to sell quantities of similar products to a larger base of customers. Selling to mass markets required companies to communicate to all of their potential customers. Advertising, a small and scattered industry, began transforming itself into a sophisticated group of comparatively large companies.
Retail Merchandisers The 19th century brought the ascendancy of merchandisers that combined distribution with mass marketing. The growing urban population provided a concentrated market for John Wanamaker (1838–1922), who saw an opportunity to create a new kind of store—the department store—that offered a wide variety of wares under a single roof.
Wanamaker opened his first store in 1861. From the beginning he worked to build customer loyalty, and in 1868 he opened a second store and renamed the company John Wanamaker & Co. He wrote and bought advertising that proclaimed his policies: a full guarantee on all merchandise, one price for all, payment in cash, and a cash refund if the customer was not satisfied. The primary brand image was the store, and customers flocked to a store with a name they had come to trust.
A different segment of the market beckoned to Frank Winfield Woolworth (1852–1919). In 1878, Woolworth was working in a store in Watertown, N.Y., when he helped to create a new five-cent counter. He grasped the potential of the idea of eliminating skilled, expensive clerks and replacing them with low-paid women clerks. The following year, 1879, Woolworth tested his idea with his first store in Utica, N.Y., but it failed because of a poor location. That same year he opened a similar store in Lancaster, Pa., that was an immediate success.
Despite early setbacks, Woolworth persevered and continued to expand. Selling many low-priced products, he relentlessly looked for low-cost merchandise, including toys, ornaments, and glass goods from Europe. In 1900 he began to build a strong brand identity by creating a uniform design for his 59 existing stores, and by 1919 there were 1,081 Woolworth stores in the United States and Canada—with even more in Britain, where he had extended his chain in 1909.
Mail Order Merchandisers During a selling trip to small towns in the Midwest, Aaron Montgomery Ward (1844–1913) realized that many rural folks were suspicious of local stores and disliked patronizing them. He saw an opportunity and began a business in 1872 to sell directly to customers through the mail, developing proprietary systems for buying, warehousing, advertising, processing orders, and shipping goods to his rural customers. Ward’s catalogs, promising “satisfaction guaranteed—or your money back,” were known as “dream books,” and enticed farmers to join urban dwellers in the growing consumer culture that mass production had made possible.
What Ward had begun, Richard Warren Sears (1863–1914) improved. In 1891 Sears formed a mail order partnership with Alvah Curtis Roebuck (1864–1948) that became Sears, Roebuck and Company. Sears was a born salesman and risk taker who produced catalogs that promised thousands of items at low prices. Roebuck sold his interest to Sears in 1895, and Sears then had the good fortune to add two new partners, one of whom was Julius Rosenwald (1862–1932), who ran the business side while Sears managed the marketing. Sears offered rebates and sweepstakes, and even offered farmers the opportunity to examine goods before paying for them, with the promise “Send no money.” With Sears’s marketing flair and Rosenwald’s business discipline, the company grew rapidly; by 1900 it had $10 million in sales, surpassing Montgomery Ward.
Product Innovation Industrialization made mass production of traditional products possible, and also led to the development of new kinds of products.
Packaged foods Willie Keith (W. K.) Kellogg (1860–1951) began experimenting with foods based on nuts and grains while he was at his brother’s Seventh Day Adventist sanitarium in 1880. The brothers built machinery to produce wheat flakes, and in 1984 created cornflakes and sought to build a national market for W. K.’s packaged breakfast foods. W. K. left his brother’s employ in 1902, and in 1906 incorporated the Battle Creek Toasted Corn Flake Co., later changed to the W. K. Kellogg Co. From the beginning W. K. spent heavily on advertising, and by 1909 company sales surpassed 1 million cases.
In 1891 Charles William Post (1854–1914), plagued by stomach ailments, came to Kellogg’s sanitarium, hoping for a cure. When he failed to regain his health, he was treated by a local Christian Scientist and soon recovered. Convinced that part of his recovery was the result of a healthy diet, Post began experimenting with a coffee substitute made of wheat, bran, and molasses. In 1895 he launched this product as Postum, a cereal beverage, and in 1896 he incorporated the Postum Cereal Co. The next year Post brought out Grape-Nuts cereal, and in 1904 he began to compete directly with Kellogg in the corn flake cereal market with a product he eventually called Post Toasties. Post, like Kellogg, realized that advertising was the key to success, and by 1899 he was spending $400,000 annually to promote his packaged foods.
Coca-Cola Health claims were also important to the beginnings of another product that is now consumed worldwide. Coca-Cola was concocted in 1886 by a druggist in Atlanta, Dr. John S. Pemberton (1831–88), and touted as a nerve and brain tonic. The drink was not a success, and the druggist sold his ownership in pieces, with one share going to Asa Griggs Candler (1851–1929) in 1888. In 1891 Candler became the sole owner of the product, its formula, and its trademark. Candler was a marketing innovator, and before the end of the 19th century, Coca-Cola was sold in soda fountains in all of the 48 states.
It was a further innovation, however, that multiplied the company’s growth. In 1899 two attorneys in Chattanooga, Tennessee, negotiated a contract with Candler for exclusive bottling rights in most of the United States, thus separating the bottling businesses from Candler’s company. By the end of the 1920’s bottled Coke outsold fountain Coke, and soon the company’s trademark was one of the best-known in the world.
Disposable Razors When King Camp Gillette (1855–1932) took a sales job in 1891 with a company making crimped bottle caps, the president advised him to invent a similarly disposable product. Gillette enthusiastically took up the challenge, and in 1895 he conceived of a razor made up of thin disposable blades clamped in a device to hold them rigid while men shaved. He engaged an MIT graduate who developed machinery to sharpen steel ribbons into blades. By 1903, Gillette’s small Boston firm was able to produce his new razors and, like other entrepreneurs with a vision, he invested in heavy advertising. By 1908 the company sold 300,000 holders and 14 million blades—and established a legacy of product innovation.
Brand Management The idea that a product or company name could become a marketing focus was not new at the end of the 19th century. Many producers and manufacturers had promoted an awareness among customers of their company or product names as a way of distinguishing them from competitors. The art of “brand management,” however, was not perfected until the 20th century.
Procter and Gamble The Procter and Gamble Company, founded in 1837, introduced a cake of white soap that floated on water, taking out its first advertisement for the product in 1881. The company named this product Ivory Soap. Though Procter and Gamble advertised it widely, the company did not establish a clear and consistent theme about its virtues; nevertheless, the soap was very successful and alerted the company—and its competitors—to the possibilities of promoting products to a national market in a coordinated and carefully planned fashion.
When Procter and Gamble launched its next important product in 1912, a vegetable shortening called Crisco, it had its strategy in place. Under its president William Cooper Procter (1862–1934), son of the co-founder, the company had tested and refined the product with women cooks, secured testimonials from scientists and home economists, and persuaded one railroad to use the shortening exclusively in its dining cars. The company tested a variety of different marketing campaigns in different cities, researched how consumers used shortening, and studied how competitors’ products were selling and used. Crisco was a huge success—and established the model for brands that were specifically created and marketed. Procter and Gamble became the leader in building a portfolio of branded products; the brand names, not the company name, became king.
Lever Brothers In Britain a similar company was founded in 1885 by William Hesketh Lever (1851–1925) and his brother. Lever Brothers’ first product was a packaged soap that they named Sunlight—the world’s first packaged and branded laundry soap. Made mostly from vegetable oil, the soap rapidly caught on with the pubic, and by 1911 the company was producing one-third of the soap sold in Britain.
Lever expanded the soap line through acquisitions, and in 1917 he diversified into foods. By 1924 the company had grown to be the largest commercial company of its kind in the world. In 1930 Lever merged the company with a Dutch margarine producer, Margarine Unie, and changed its name to Unilever.
The Growth of the Automobile Industry
Industrialization in the first half of the 20th century produced the largest industry of all, the automobile industry. Most consider Karl Benz (1844–1929) and Gottlieb Daimler (1834–1900), who in 1885 invented the internal combustion engine, the founders of this important new industry—although the industry soon revolved around a few key American automotive companies.
Ford Motor Company Henry Ford (1863–1947) wanted to produce cars he could sell at a low price, and he saw the assembly line as the means of vastly increasing the productivity of his workers—thereby lowering the cost of producing each car. He also saw that the more individual components he could produce internally—instead of buying them from outside suppliers—the more he could control the cost of the completed car. Finally, by paying his
workers the unheard-of wage of $5 a day, Ford guaranteed his company a loyal and productive workforce.
Ford’s great success, the Model T, was first shipped to dealers in October 1908, after two years of design and development. By the time the last Model T was produced in May 1927, 15 million cars had been sold. Ford had managed to reduce the price of the coupe to $290, and the car had made the American family mobile. It had forced governments to pave dirt roads and to create highways for long-distance travel. It had spawned a host of roadside businesses, including gas stations, restaurants, hotels, and a new kind of lodging, the “motel.”
General Motors Ford’s primary competitor was General Motors, which was founded by William C. Durant (1861–1947). Durant, however, was an erratic manager, and he gained and lost control of the company several times. By 1920 General Motors was again in financial trouble, and Pierre S. du Pont (1870–1954), whose family company was the second largest shareholder, forced Durant to resign. Whatever Durant’s failings as a manager, his vision of mass-marketed cars, along with models of differing styles and prices, was the basis of General Motors’ growth. It became the largest auto manufacturer in the United States—and, by 1928, the largest and most profitable industrial company in the world.
The man who realized Durant’s vision, Alfred Pritchard Sloan, Jr. (1875–1966), had come into the organization when Durant bought the Hyatt Roller Bearing Company in 1916. From 1920 to 1923, when he became president of General Motors (GM), Sloan began an organizational transformation that was to become the model for several generations of chief executives in widely differing industries.
Under Sloan, GM offered more comfortable cars, more stylishly designed, at every price range, and with a choice of colors. He also understood that buyers at different income levels wanted different kinds of cars; this led him to organize the GM product line by income level corresponding to car price. These lines evolved into Chevrolet at the lowest price level (competing with Ford’s Model T), followed in increasing price ranges by Pontiac, Oldsmobile, Buick, and Cadillac. GM also introduced the annual model change, small but noticeable changes in the styling of the cars each year to create a steady demand for new models. Chevrolet remained the auto sales leader for most of the next five decades.
Chrysler Corporation The third large U.S. automobile manufacturer, Chrysler, was created in the early 1920’s by Walter P. Chrysler (1875–1940). Chrysler moved through a number of executive positions in different automobile companies, and from 1923 to 1924 he and a team of engineers at Maxwell Motors, where he was president, designed a new moderately priced car with advanced engineering features, which he named the Chrysler. It was an immediate success, and in 1925 Chrysler renamed the company the Chrysler Corp.
In 1928 Chrysler launched the Plymouth, which incorporated advanced engineering features not available on similarly priced cars. The car was an instant success, even though it cost half again as much as comparable Fords and Chevrolets. By increasing manufacturing capacity and reducing costs, Chrysler was able to reduce the price of the Plymouth and move it almost to reasonable price parity with Ford and Chevrolet. Chrysler’s basic strategy of producing well-engineered cars at a slightly higher price than competitors proved successful over a long period of time.
Organizing the Corporation
The larger these new companies grew, the more problems executives encountered in managing them. It was not until the 20th century that top executives devised new organizational solutions to the increasing problems of size.
E.I. Du Pont The company that had the widest and longest-lasting influence on corporate structures was E. I. du Pont de Nemours & Company, which in 1900 was a loose collection of companies producing different kinds of explosives, owned and managed by various groups of family members. When the elders of the family considering selling the company in 1902, Pierre S. du Pont and two cousins bought them out to preserve the business within the family. The three cousins organized the firm into a centrally controlled structure with clear lines of responsibility for functional areas. Sales and profits grew faster than they had grown before the changes.
Until the end of World War I, the centralized structure of the firm served the business well. When the war ended, the company expanded into paints, chemicals, and dyestuffs. The company had been accustomed to selling explosives by the ton to a small number of customers; now it had products like paint that were sold in small quantities to innumerable customers through retail outlets. The company’s centralized structure did not lend itself to a diverse product line, and in 1921 the board of directors approved a restructuring plan that created autonomous divisions.
These divisions produced and marketed distinct product lines, run by general managers who were responsible
and accountable for the performance of their own division. Coordination was through an executive committee that included the president and other senior executives, but none of the operating general managers. Thus a balance was struck between the relative autonomy of the divisions and a central coordinating entity.
General Motors During GM’s crisis of 1920, Pierre S. du Pont gave Alfred P. Sloan the opportunity to put into practice his evolving ideas about organization.
The organizational challenge facing Sloan was the opposite of that facing du Pont at that time. Whereas du Pont needed to find an organizing structure to manage its new diversified product lines, GM was a loosely federated group of entities that needed some kind of stronger centralized control. In December 1920 the GM board approved Sloan’s plan to create a structure with autonomous divisions under a central office with coordinating control.
Subject only to the executive control of the president and the executive committee, the general manager of each division was expected to know the demands of the market for his product line and to develop it to its fullest potential. He was held responsible for his division’s success or failure.
The central coordinating group of the firm was the executive committee, consisting nearly entirely of senior officers who did not have operating responsibilities. Together with the president, the committee governed the firm by setting broad strategic policies and approving major initiatives to accomplish these policies. The finance committee oversaw the company’s financial performance.
Word of the GM model’s success spread rapidly to other firms that were grappling with many of the same problems of diversification. Sears Roebuck adopted a similar multidivisional structure after it realized that the United States was becoming increasingly urbanized and that its traditional catalog business would fail to capture customers who now lived in cities. The company’s divisions, as eventually structured, were geographic regions rather than product lines. This was Sears’ early advantage that its competitor Montgomery Ward was never able to overcome.
Oil companies, led by Standard Oil (New Jersey), responded to the need for vertical integration and crude oil sources spread increasingly all over the world by creating similar regional divisions. As they began to develop new markets for petrochemicals they also created divisions along product lines.
Management Theorists With industrialization and the advent of the factory system, large groups of workers were brought together for the first time to produce goods using machines. Factory owners pushed workers for maximum productivity and this policy resulted in long hours at low pay, frequent injuries from dangerous machines, the use of child labor, and appalling living conditions in factory towns. The idea that treating workers well and organizing their work with careful planning would result in productivity increases was virtually unknown. That would change gradually over more than a century until the new field of “management” was born and its applications spread beyond factories to all kinds of organizations.
Robert Owen The first important thinker to address the question of how to manage factory workers was Robert Owen (1771–1858). Owen’s major contribution to management came in 1800, when he and his partners bought the large cotton mills at New Lanark near Glasgow. His past experience in mill management had convinced him that if he treated workers decently and with respect, their productivity would significantly increase. He stopped employing children under the age of 10, built schools for infants and older children, and shortened the working day. He improved workers’ housing, paved the streets, and opened a company store with low prices. Owen’s reforms enabled the mill to prosper, and its schools became widely known.
Frederick W. Taylor The concept that both owners and workers can prosper under the right conditions was carried forward by Frederick Winslow Taylor (1856–1915), arguably the most influential management thinker in the first half of the 20th century.
As a management consultant, Taylor experimented with ways of speeding up the production of the workers, including the introduction of piecework and the use of a stopwatch to find the best way to coordinate the actions of the workers and their machines. He believed that “there is always one method and one implement which is quicker and better than any of the rest.” In 1911 he published the most widely read business book of the first half of the century, The Principles of Scientific Management, which helped to spread the gospel of “Taylorism.”
George Elton Mayo In 1927 AT&T invited a Harvard business professor, George Elton Mayo (1880–1949), to study workers at the Hawthorne Works of Western Electric in Chicago. AT&T was interested in knowing if the level of illumination in the plant had any effect on workers’ productivity—a classic instance of the Taylor approach. Mayo and his team studied a room
where five young women were assembling electromagnetic relay switches; over the period of 1928 to 1932 the team varied the working conditions in the room—not only illumination, but rates of pay, periods of rest, and other factors—and collected reams of data on performance. The results at first baffled them. It seemed as if everything they did improved productivity. When they introduced piecework, added rest periods, provided a free meal, and shortened the workday, output increased. But when they took all these elements away and returned the room to its original conditions, output increased to the highest level ever.
Mayo’s team realized that the workers had become a dynamic social group and had responded to the attention the researchers were paying them. They concluded that the very fact of their interest in the workers had motivated the women to show the researchers how well they could work—what became known as the “Hawthorne effect.” Mayo’s theories, which were the beginning of the human relations approach to management, became increasingly important in the second half of the 20th century, eventually displacing the practice of Taylorism.
Chester I. Barnard It took a working executive to fully understand and articulate the realities of managing people in large organizations. Chester Irving Barnard (1886–1961) held a succession of management positions at AT&T, Pennsylvania Bell, and New Jersey Bell, where he was responsible for consolidating a number of smaller companies into each of the larger companies. The lessons he learned in dealing with the human dimension of integrating many diverse personalities into a new whole shaped his thinking on how organizations function, what motivates workers, and how authority flows from top to bottom.
Barnard delivered a series of lectures at the Lowell Institute in Cambridge, Mass., that became a classic of management thought when they were published under the title The Functions of the Executive in 1938. He argued that the harmony and cooperation necessary for carrying out the purpose of the organization are achieved only when workers sense that their interests and aspirations are aligned with the organization’s goals. Top management achieves this by the exercise of its authority, but workers will accept that authority only if they understand the task at hand, believe the request is consistent with the organization’s goals, believe the request is compatible with their own interests, and are able mentally and physically to carry out the task.
Postwar Recovery
At the end of the 1920’s a worldwide depression brought widespread business failures and a decade of struggle for the survivors. With the coming of World War II, businesses turned to the challenge of meeting the needs of wartime economies. The end of the war in 1945 created an unprecedented economic boom in the United States, as pent-up consumer demand was finally unleashed. Consumers who were deprived of many goods during the war had bought war bonds and had accumulated money to spend. Young G.I.’s returned home eager to start their lives, so they married and had children right away, helping to create the greatest baby boom in history. They also began a mass exodus out of the nation’s cities to the new so-called suburbs.
The late 1940’s saw an audacious bet on the future by William Jaird Levitt (1907–94) and his father and brother. They believed that they could profitably build and sell low-priced small houses in suburban areas by using mass production techniques they had learned building civilian and military housing during the war. Their first project, Levittown, was begun in 1947. Levittown consisted of 17,500 two-bedroom Cape Cod houses on Long Island, N.Y. Veteran loans helped new families to pay for the houses, and by 1951 the company began a second Levittown in Bucks County, Pa., comprising 16,000 houses. Later Levittowns appeared in New Jersey and Florida.
The Automobile Market Suburban living demanded flexible transportation, and nothing provided it better than the automobile.
The government had brought Henry Ford II (1917–87) back from military service and installed him at Ford in 1943, fearing that his aging grandfather, Henry Ford, could not manage the company’s wartime production. He led the company through several decades of successful new models, to become a strong second to General Motors.
Alfred P. Sloan retired as CEO of General Motors in 1946 and as chairman in 1956. His successors continued his management structure, which proved to be robust as the company continued to lead the U.S. automobile industry.
After some initial postwar success, the Chrysler Corporation had difficulty in finding the right product mix. Although the company pioneered the popular minivan in the 1980’s, it remained third behind GM and Ford and merged with the German company Daimler-Benz in 1998.
In the late 1940’s, an odd-looking car built in Germany began to appear on European streets and roads. It was noisy, with a rear-mounted, air-cooled engine and a rounded
shape that looked like a giant bug. The car had been conceived and designed in the late 1930’s by Ferdinand Porsche (1875–1951) to be a low-priced “people’s car,” or Volkswagen. The “beetle,” as it was dubbed by The New York Times, eventually became the largest-selling car in history.
Plans to manufacture the car were interrupted by World War II, but following the war production began in Germany under the enlightened leadership of Heinz Nordhoff (1899–1968). He focused on building high-quality cars and creating a large international dealer and service organization.
In 1972 Volkswagen produced the 15,007,034th beetle and announced that it had surpassed the production of Ford’s Model T. Customers—often young families—discovered that an inexpensive car could be as well-made as a luxury car. This discovery was to reverberate throughout the automobile market, as Japanese makers began to offer small, inexpensive cars of high quality in the years following. A generation of young buyers became converts to foreign cars before American manufacturers awoke to the consequences of global competition.
The oil shocks of the 1970’s accelerated a major shift in the world automobile market. The Organization of Petroleum Exporting Countries (OPEC) created crises in the availability of the world’s supply of oil. The steep rise in the price of gasoline that followed made smaller, fuel-efficient cars more desirable than they had been when gas was cheap and plentiful.
Unfortunately, Detroit had left the small car market to foreign producers, most of them Japanese. These foreign cars began to sell as never before, and owners discovered what earlier buyers of the Volkswagen beetle had discovered—the cars were made to high quality standards, were reliable, and were supported by strong dealer and service organizations.
The Quality Movement Prior to World War II, Japan had been known for the poor quality of its export goods. After the war both the government and industry realized that its economic recovery would depend first on its domestic market and later on exports. To compete effectively, Japanese industries had to produce goods of the highest quality. They found inspiration and methods in a surprising source—two Americans, William Edwards Deming (1900–93) and Joseph Moses Juran (1904–2008). Deming and Juran developed a range of quality concepts that found only a limited audience in the United States, but after they were invited to deliver lectures on quality control in Japan, Japanese manufacturers eagerly adopted their ideas.
The basic concept of quality control can be summarized as “Build it right the first time.” Conventional mass production relied on a stage at the end of the assembly line to correct any defects that had been built into a product. But it was less expensive not to have built defects into the product as it was being manufactured. That would require an extra effort by production workers to ensure that what they did was free of defects. Japanese manufacturers developed management protocols to achieve this commitment from every worker.
The Toyota Production System Quality became the most important management movement since the end of World War II—the most notable example being the production system of Japan’s Toyota Motor Company, which combined mass production and individual craft methods.
Under Kiichiro Toyoda (1894–1952), the company instituted a just-in-time (JIT) inventory system that delivered parts to the assembly line at the time they were needed—creating a more flexible manufacturing system than Fordism enabled. This was just the start of Toyota’s much-vaunted production system. In 1950 a young Toyota engineer, Eiji Toyoda (b. 1913), who in 1967 became president of the company, visited Ford’s vast Rouge plant to study its production methods. After three months he wrote to headquarters that he “thought there were some possibilities to improve the production system.” Under its innovative production engineer, Taiichi Ohno (1912–90), Toyota instituted statistical quality control and continuous improvement (kaizen), and further developed its system of just-in-time inventory control (kanban). The company worked with its supplier companies to make them a part of its production system. Toyota also adopted its “total quality management” (T.Q.M.) system, which became the most visible aspect of its production system.
Japanese Cars on the World Market In the 1970’s and 1980’s, responding partly to limitations of domestic capacity, Toyota and other Japanese manufacturers opened plants in North America and successfully transplanted their production systems to American workers. They also began to produce larger cars, first family sedans and later luxury cars. Their reputation for high-quality small cars carried over to the larger cars, and now Detroit faced direct competition in its core markets.
In 1989 the Honda Accord family sedan outsold Ford’s popular Taurus; Toyota’s Camry took over this lead position in 1997. Internationally, by the end of the 1990’s, Toyota had sold over 29 million of its compact Corollas—making it the best-selling automobile in history. In addition, Japanese cars forced European manufacturers to confront the challenge of the evolving global marketplace and to examine the source of Japan’s success.
Consumer Electronics Cars were not the only consumer products at which Japanese companies excelled. In 1957 a Japanese company—later renamed Sony—cofounded by Akio Morita (1921–99) released the TR-63, the first commercially successful pocket-sized transistor radio. The success of the TR-63 in world markets was the beginning of a shift of consumer electronics production outside the United States, mainly to Japan. Japanese manufacturers quickly learned the technology of miniaturization and applied it to a number of other products, including television sets, videotape recorders, hand-held calculators, portable cassette tape players, CD and DVD players, and cellular telephones. By combining a creative approach to new product design with high-quality manufacturing, Japanese manufacturers captured the world market for many consumer electronics products.
Business in the Information Age
As the end of the 20th century neared, businesses in Europe, Japan, and the United States began to shift from a primarily manufacturing base to technology- and information-driven organizations. Advances in communications and the spread of capitalism led to globalization, the opening of markets worldwide to competition. The industrial age was at an end, replaced by the new information age. Advances in communications and the spread of capitalism led to globalization, the opening of markets worldwide to competition.
Information Technology In the post-World War II boom, as companies grew in size and the number of transactions multiplied, they sought economies in converting repetitive tasks requiring increasing numbers of workers into automated processes employing far fewer workers. These economies were realized by the development of the digital computer.
IBM and the Digital Computer The first computers (See “Computers”) were large mainframe machines that automated the billing process and related accounting functions. In 1964 I.B.M., under its CEO Thomas J. Watson, Jr. (1914–93), introduced its System 360 machines—a family of computers graded in size with interchangeable software and peripherals. These relatively smaller, relatively less expensive machines led to the accelerating adoption of computers by major companies, and IBM became the dominant computer manufacturer through the 1970’s.
Computer Networks Improved computer technology in the 1960’s made possible interconnected computers and greater flexibility for users outside the data processing department. One of the most successful adaptations of networked computers was American Airlines’ SABRE computer reservation system. Developed in the early 1960’s as a way of keeping track of one airline’s sales of seats, SABRE was extended to travel agents’ desks in 1976, presenting a choice of seats on many competing airlines. Eventually the system was augmented to include hotel, car, rail, and entertainment reservations; the system ultimately became more profitable for American Airlines than its passenger flights.
The Personal Computer During the 1970’s and 1980’s the mainframe computer was downsized, and the so-called personal computer (PC) was born. The first inexpensive general-purpose PC was the Altair, introduced by Micro Instrumentation Telementry Systems. The PC enabled workers to run a range of application software—including word processing, spreadsheets, databases, and graphic presentations—on their desktops. It also served as the terminal for access to management information originating in remote server computers.
The Software Industry In the early 1970’s, a student at Harvard University, Bill Gates (b. 1955), wrote a version of the computer language BASIC for the Altair. In 1975, along with Paul Allen (b. 1953), he founded Microsoft to sell software products for the new PCs. Microsoft came to dominate the computer industry through its ubiquitous operating system, Windows, which ran on an estimated 95 percent of computers worldwide. Microsoft also successfully sold products ranging from computer games to word processing software. Its aggressive sales tactics and size made it a continual target of competitors’ lawsuits and antitrust regulators. At the turn of the century Bill Gates was the world’s richest man.
Networked computers developed in the 1960’s and 1970’s enabled information systems that encompassed all the workings of an organization. The German firm SAP offered company-wide software systems to integrate all aspects of a business, giving workers access to real-time management information. By the beginning of the 21st century SAP was one of the world’s largest independent software companies, and an example of the globalization of the marketplace in a software industry long dominated by the United States.
The Internet In the 1990’s, the growth of the Internet, a network that linked computers all over the world, created new marketing opportunities for business. Companies opened Web sites from which they marketed their products and services, and used electronic mail (e-mail) to communicate within the office and with other
offices around the world.
One of the fastest-growing businesses spawned by the Internet was that of providing Internet access to PC users. The most successful Internet service provider (ISP) was America Online (AOL), founded by Stephen M. Case (b. 1958) in 1985. During the 1990’s AOL added subscribers at a much faster rate than competitors, and its market value soared so high that it was able to acquire the Time Warner media conglomerate in 2000. The merger resulted in little real business benefit. The failure of the combination was made evident when AOL was spun off from Time Warner and reverted to life as an independent firm in 2009.
The Internet also created a new kind of business, dubbed e-business, in which entrepreneurs hoped to eliminate the need for “bricks and mortar” stores and sell directly to customers. One of the most successful e-businesses was Amazon.com, founded by Jeffrey P. Bezos (b. 1954) in 1995 as an online bookseller. Amazon.com’s revenues have grown steadily over succeeding years—aided by the addition of new product lines.
The most successful large Internet firm was eBay, launched in 1995 by Pierre Omidyar (b. 1968). An Internet auction house that brings sellers and buyers together in cyberspace, eBay adapted the auction concept to the Internet and has experienced rapid revenue and profit growth. In the process, it created a trading economy of $20 billion a year.
In what has been called the “dot-com boom” of the 1990’s, thousands of entrepreneurs opened Web sites offering a staggering array of goods and services; significant venture capital flowed into these companies, and their stock prices climbed to astronomical heights. Then came the “dot-com bust.” The stock prices of most Internet companies collapsed in 2000, as it became apparent to investors that most of the dot-com companies had few actual sales. (See “The Internet.”)
Telecommunications Information technology created vast amounts of data; and transmitting these data to the growing world of computer networks required a comparable increase in the means of communication. Local phone companies and long-distance carriers rushed to add capacity and created a boom in business for suppliers of fiber-optic cable and sophisticated switching and routing systems. The added capacity far outstripped demand, however, and many companies, large and small, were caught with heavy capital investments in transmission capacity but no revenues to pay for them. The result, in 2000–01, was a series of severe downsizings of many major companies and bankruptcies at others. The largest casualty was the long-distance giant MCI, which emerged from bankruptcy in 2004 after a two-year reorganization.
Big-Box Retail The continuing suburban expansion of the late 20th century gave retailers a new opportunity to change the basic nature of shopping. With large tracts of land available for building they created “big-box” stores, which earned their profits not through price markups but by sales volume. Big-box stores came to dominate many retail categories, including bookselling (Barnes & Noble), hardware (Home Depot), and electronic goods (Best Buy). They put many traditional mom-and-pop stores out of business and relegated others to niche positions.
Wal-Mart, a low-priced department store, became the biggest big-box chain. Founded in 1962 by Sam Walton (1918–92), Wal-Mart was guided by one overriding principle: efficiency. By simplifying store layout, pressuring suppliers to design products to its specifications, and hastening the pace at which its distributors operated, it squeezed costs out of the retail supply chain and passed on the price savings to customers. At the turn of the century Wal-Mart was the largest private employer in the United States and the world’s largest company, with sales of $405 billion in 2010. Its influence was felt throughout the retail economy, as many of its competitors were forced to adopt the same high-speed, low-overhead tactics that Wal-Mart used. Wal-Mart’s huge size and market power made it a target for critics who accused it of ruining downtowns across the country and depressing retail wages and benefits industry-wide.
The Biotechnology Industry In 1973 two young biologists, Herbert Wayne Boyer (b. 1936) and Stanley Norman Cohen (b. 1935), genetically engineered molecules in foreign cells to produce predetermined patterns of DNA—called recombinant DNA—and began the modern biotechnology industry.
Genentech In 1976 Herbert Boyer, along with the venture capitalist Robert Arthur Swanson (1947–99), founded the pioneer biotechnology company Genentech. Within the first three years the fledgling company cloned the first human protein in a microorganism, cloned human insulin, and cloned human growth hormone. In 1982 it marketed the first recombinant DNA drug, human insulin, which it licensed to Eli Lilly and Company. The same year Genentech marketed a growth hormone for children with a growth hormone deficiency, becoming the first biotechnology company to manufacture and market its own recombinant pharmaceutical product.
The Growth of Biotechnology Today’s biotechnology
industry operates in medicine, agriculture, and the environment and is made up of two kinds of firms. The first group is start-up firms like Genentech, usually begun by scientists with specific products to commercialize. The other is large pharmaceutical firms that have entered the field either by acquisitions (Roche acquired Genentech in 2009) or their own research and development efforts. The former need abundant capital to grow and many have to scramble to find it—especially the smallest firms. The latter also need capital but can either generate it from their operations or can borrow it on favorable terms.
The industry grew rapidly from 2000 to 2007 when the worldwide financial crises began, but slowed considerably after that. Amgen, the world’s largest independent biotechnology company rose from $3.2 billion in sales in 2000 to $15 billion in 2008, but has remained at about that level through 2010. The financial crisis was an important factor, but not the only one. The industry as a whole continues to face strong headwinds. The high cost of research and development with uncertain successes, expiring patents on major drugs, too few promising drugs in the research and development pipeline, increasing competition from larger firms, health care reform that threatens pricing in the marketplace, and the sluggish recovery from the global financial crisis have slowed the growth of the industry.
Biotechnology also raises many contentious issues. Food crops genetically engineered in the United States have been banned in Europe. Genetically “improved” livestock are feared by some as possibly harmful and decried by others as destructive of animal rights. Stem cell research looking for cures for Alzheimer’s disease and diabetes, among other diseases, is limited by political pressure from some religious groups. There is little doubt that biotechnology will play an increasingly important role in medicine, agriculture, and the environment. But progress is likely to be slower than anticipated at the beginning of the 21st century.
Enron and Corporate Corruption
In the first decade of the 21st century, it began to be revealed that much of the economic boom of the 1990’s was built on shady accounting practices at some of the country’s largest corporations. The poster child of this wave of corporate corruption was Enron, once a Houston-based oil company that faked its way into becoming the seventh-largest corporation in America but ultimately became synonymous with corporate malfeasance.
Under a management team headed by Kenneth L. Lay, Jeffrey K. Skilling, and Andrew S. Fastow, Enron utilized a controversial but legal system of partnerships called structured finance, which allowed the company to raise billions of dollars without incurring any debt on its books. But by the end of 2001, an errant partnership caused the entire scheme to start unraveling, and all that debt was suddenly due. Within just a few weeks, Enron was bankrupt and its leadership was under criminal investigation. All three men were convicted; Mr. Lay died before he was sentenced.
A casualty of the Enron scandal was Arthur Andersen, formerly the nation’s most respected accounting firm. For years, Andersen’s cozy relationships with many of its clients flew beneath the radar of federal investigators. But when the Securities and Exchange Commission started looking into Enron (whose books Andersen had helped cook), the firm’s partners started shredding documents that could implicate the company. On June 15, 2002, Andersen was convicted of obstruction of justice, a felony, and by law was forbidden from auditing public companies. Although the conviction was ultimately overturned, Andersen lost almost all of its clients and became the target of hundreds of civil suits. The conviction also shed light on improper accounting by other Andersen clients which in July, 2002, eclipsed Enron as the world’s largest bankruptcy filing after having misstated more than $7 billion.
Other white collar crimes by executives at Tyco, Qwest, Global Crossing, Merrill Lynch, and Salomon Brothers turned 2002 into the year of the corporate scandal, and forced Congress to react with unusual muscle. Less than a week before the WorldCom bankruptcy filing, both houses overwhelmingly passed a reform bill known as Sarbanes-Oxley, and President George W. Bush signed it two weeks later, promising “no more easy money for corporate criminals, just hard time.”
The legislation established a regulatory board to oversee corporate governance and the accounting industry, empowering the body to investigate and to punish corrupt auditors. It also created protections for corporate whistle-blowers and mandated long prison terms for executives who deliberately defraud investors.
The hue and cry over corporate scandals dissipated with the passage of Sarbanes-Oxley, especially as the country turned its attention to a confrontation with Iraq. As a result, issues like exorbitant executive compensation and mismanagement of corporate pension funds and 401 (k) accounts went unaddressed. Indeed, by 2003, WorldCom had renamed itself M.C.I., moved its headquarters to Dulles, Va., just outside Washington D.C., and
received a $45 million no-bid contract from the Pentagon to build a wireless phone network in Iraq. (Bernard Ebbers, WorldCom’s former C.E.O was sentenced to 25 years in jail on July 13, 2005. M.C.I. was acquired by Verizon for $8.4 billion in January, 2006).
Business in the 21st Century
The globalization of the marketplace continued into the first decade of the 21st century. But the rapid growth of the world economy was interrupted by the financial crisis that began in 2007. On balance, however, it was the very fact of the globalized market that mitigated the effect of the crisis on certain industries and companies within those industries.
The U.S Automotive Industry in Crisis Long before the financial crisis of 2007 the U.S. automobile industry was in a state of turmoil. The challenge of well-made foreign cars and union contracts—including restrictive work rules and the heavy costs of health care and pensions for retired workers—added costs to each car produced. Additionally the inattentiveness of top management to the growing demand of customers for high quality and reliable vehicles resulted in a decreasing market share for American manufacturers. The financial crisis only made matters worse.
General Motors and Chrysler both filed for bankruptcy protection under Chapter 11 of the Bankruptcy Code in 2009. Of the Big Three, only Ford, which had mortgaged virtually all its assets, including its iconic blue oval logo, for a cash hoard, avoided the bankruptcy court. To save GM and Chrysler from possible liquidation—apparently considering them “too big to fail”—the government invested $50 billion in GM and $7 billion in Chrysler. Bankruptcy court allowed GM to shed health and pension obligations and pare its brands to Chevrolet, Buick, Cadillac, and GMC. In 2010 the Treasury Department sold $13.5 billion of its shares in the company and by the end of the year had recovered about $23 billion of its bailout investment, but there was wide-spread belief that the U.S. would never recover its full investment. Near term, GM is concentrating on marketing in developing countries and in 2010 for the first time it sold more cars in China than in the U.S. But GM’s future lies with new models due in 2012 and 2013.
Chrysler has passed through several owners since 1998 when it was bought by Daimler-Benz, the German car company that builds Mercedes-Benz cars. Looking to expand its market share in the U.S. by selling mid-priced cars, Daimler also hoped to realize economies of scale by sharing engineering departments. It did not work out and Daimler sold 80 percent of Chrysler to a private equity fund in 2007. In the bankruptcy proceedings of 2009 the U.S. Government pressured Chrysler to enter into a global strategic alliance with Italian car maker Fiat that was eager to re-enter the U.S. market. The test of this alliance will come as Fiat introduces a new version of its low priced Fiat 500 to U.S. car buyers. Its success is not assured and Chrysler’s future is uncertain.
Meanwhile, Ford seemed to be spending its cash on well received new cars and models. It swung from a loss of $14.5 billion in 2009 to a profit of $3 billion in 2010. It even pushed heretofore fast-growing Toyota into third place in the U.S market behind GM and Ford.
Foreign Carmakers Jockey for Position Toyota grew impressively from a 9 percent market share in the U.S. in 2000 to 16.7 percent in 2009. Then quality problems and increasingly larger recalls in 2009 and 2010 checked its growth in 2010 to a market share of 15 percent. Its reputation for quality and reliability was compromised and may take several years to restore.
Honda still trails Toyota with a 10.5 percent market share in the U.S. in 2010, mostly unchanged since 2008. Nissan trails Honda with 7.7 percent but is slowly increasing its market share. In the intensely competitive U.S. market, Korean carmaker Hyundai and its sister company Kia have increased their share from almost nothing in 2000 to a total of 7.6 percent in 2010 by paying close attention to detail and quality and under-pricing similar-size cars from the U.S. and Japan.
All carmakers are eyeing the markets in China, India, and Latin America as the areas where future growth is expected. Globalization is now more than moving production to low-wage countries. Increasingly car makers are moving production to countries where their future customers are, cutting transportation costs and building local brand identity. Long term automakers will have to judge how the volatile oil market will impact gas prices at the pump and how that should guide their transition to hybrid and all electric vehicles.
The Commercial Airliner Industry The world’s airlines buy their largest planes mostly from two companies, Boeing and Airbus. The former is a U.S corporation and the latter is a division of a European consortium, European Aeronautic and Space Company (E.A.D.S.). Both have responded to the need of commercial airlines for aircraft that are fuel efficient, as the cost of jet fuel has
increased and cut into profits. Boeing launched its innovative new mid-sized 787, called the Dreamliner, built of light weight composite materials by a widely scattered system of suppliers and assembled in the U.S. It has received more orders for the plane that any in its history. Airbus took a different route. It produced the huge A380, capable of carrying as many as 800 people in a one-class configuration. But the challenges of constructing such complex aircraft delayed both programs and it is likely to be years before either is profitable. Looming in the near future is China that is not only a rapidly growing market for commercial aircraft but is also putting together a company to produce large airliners in competition with the Big Two.
Heavy Equipment The financial crisis that began in 2007, and caught most companies by surprise, did not affect all companies or countries equally. Many firms assessed the damage and repositioned themselves to grow in a global marketplace. No industry was better able to accomplish this than heavy equipment. They had the advantage of building on their existing global expertise.
Caterpillar, a manufacturer of earth moving equipment, engines, and financial products, saw sales and profits drop significantly in 2009 as a result of the crisis. But in 2010 sales and profits rebounded as developing countries enjoyed economic growth, with 68 percent of its sales revenue coming from outside the U.S.—a figure that has remained relatively steady since 2007. Approximately half of Caterpillar employees are based in Europe, Latin America, and in the Asia Pacific region to serve global customers.
John Deere was also set back by the economic crisis but rebounded in 2010. Deere positioned itself to benefit from the growth potential of its core products, farm and construction equipment, in the world marketplace. The company forecasts that 70 percent of the world’s population will live in cities in the next 40 years, demanding considerable building of new infrastructure. In addition it expects that farm output will have to double by mid-century to feed the world’s population. The company has focused its products and marketing to meet these demands.
Unions in American History
The story of business in the United States would be incomplete without some mention of the union movement. Since businesses are forced to make profits for its owners or its shareholders, every cost diminishes the size of their profit. Labor costs have always been a significant factor—often the most significant—and so the struggle for owners and managers even today is how to pay workers enough to keep them working, but not so much that profits are reduced to an unsatisfactory level.
The first national labor organization was the Knights of Labor, founded in 1869 as a secret society. After a large railway strike in 1877 membership grew rapidly and in 1879 the Knights dropped the secrecy element. By 1886 membership totaled 700,000, many of them participants in the more than 1,600 strikes that took place that year. Some strikes resulted in deadly violence, including the famous Haymarket Affair in Chicago that began with the police firing into a crowd of striking workers at the McCormick Reaper Works, killing and wounding several men. At a workers’ rally the next day, a bomb was thrown into a group of policemen, followed by shots being fired by workers and police. No one knows how many workers were wounded or killed but seven police officers died. Seven workers were convicted of murder on flimsy evidence and were hanged.
The union movement and the Knights of Labor in particular suffered mass defections as a result and soon disappeared. The five-year-old American Federation of Labor (A.F.L.) replaced the Knights as the dominant union but its membership was mainly made up of skilled workers. Each of the 100 national and international chapters represented a craft and each maintained power to represent its own workers. The A.F.L. avoided taking political positions and concentrated on increasing wages, reducing the number of hours members had to work, and improving working conditions. In 1900 only 5 percent of all workers were in a union.
In 1905 the International Workers of the World (I.W.W.), commonly known as the “Wobblies,” was formed to oppose the A.F.L. because of its refusal to include unskilled workers in the union. “Big Bill” Haywood of the Western Federation of Miners became the spokesman for the I.W.W. and led it to hold increasingly radical positions that included more power to the workers over production. Although the original founders quickly disagreed about policy matters and several groups left the organization, Haywood expanded the I.W.W. membership by accepting immigrants, African-Americans, and women, and by organizing agricultural workers, dock workers, lumbermen, textile, and mine workers.
The I.W.W.’s aggressive tactics and outspoken attacks on capitalism created many enemies among both business and government leaders. When the U.S. declared war on Germany in 1917 the Wobblies became the object of
government scrutiny under the new Espionage Act. More than 150 I.W.W. leaders were arrested that year for allegedly interfering with the draft and encouraging desertion. All were convicted and sent to prison. Although the union still exists today it never regained its power among American workers after 1917.
The Great Depression of the 1930’s that led to President Franklin Roosevelt’s New Deal dramatically changed American business and the federal government’s role in it. In 1935 Congress passed the National Labor Relations Act (also called the Wagner Act) which guaranteed workers in private industry the right to form unions that were authorized to engage in collective bargaining and to call strikes.
In that same year the continuing problem of unions divided by craft and industry was resolved when eight unions in the A.F.L. formed the Committee for Industrial Organization (C.I.O.) and quickly organized workers in the auto, rubber, and steel industries. In 1939, under the leadership of John L. Lewis (1880–1969), the C.I.O. organized the first successful strike against General Motors and U.S. Steel. Lewis, who made his name as head of the United Mine Workers, was elected president of the C.I.O. (now known as the Congress of Industrial Organizations) the following year.
Big business did not always settle with the unions and strikes often turned violent during the Depression. In the late 1930’s or early 1940’s, a young outspoken socialist named Walter Reuther (1907–70) led several strikes against Ford and General Motors in Detroit. In 1937 Ford security guards savagely attacked Reuther and his union associates while they were planning to hand out leaflets to workers. Reuther was hospitalized and the membership in the United Auto Workers (U.A.W.) quickly grew. Other bloody strikes would follow but once the war broke out Reuther became a staunch supporter of the effort to defeat Germany and Japan. At the end of the war over 35 percent of the workforce was in a union.
After the war Reuther had such great success in negotiating excellent wage and benefit packages for the U.A.W. members that he became president of the C.I.O. in 1952 and brought about a merger with the A.F.L. in 1955. This was the last period of the union movement’s greatest strength, when more than 25 percent of the workforce belonged to a union. In 1947 the Taft-Hartley Act had, however, blunted much of the union movement’s effectiveness by preventing boycotts and hampering one union from supporting another union’s strike.
Union membership steadily declined over the next 30 years as right-to-work laws and anti-union propaganda increased. Mob influence and revelations of union corruption greatly aided the growing negative image of unions as did the perception that the higher pay rates and superior benefits were hurting the nation’s economy.
During the 1980’s and 90’s several large industries, including steel and textiles, essentially abandoned the United States for places around the world where labor costs were far less and unions did not exist. The outsourcing of traditional American jobs continued unabated for the next two decades as manufacturing declined precipitously and service industries (healthcare, finance, education, etc.) grew continuously and now make up 68 percent of the national G.D.P. In 2011, a mere 12 percent of U.S. workers were in a union and only 8 percent of private industry workers were. Workers in public sector unions make up the rest. Despite these numbers, unions remain powerful in the political arena because of their ability to organize millions of people and to raise large amounts of money for candidates who support their cause. In recent years there has been a slight increase in union membership as the service industries and government employees have made efforts to organize workers throughout the country.
after-sales service service provided to buyers after a sale; often tied to warranty contracts; in some industries it is more profitable than the sale; maintains contact with the buyer and can increase the probability of repeat sales.
agile manufacturing ability of manufacturing processes to respond to individual customer demands to deliver a semi-customized product without sacrificing quality; its main object is customer satisfaction.
authority power vested in managers to direct the activities of their subordinates; accepted by subordinates because they perceive the legitimacy of that authority.
B2B commerce conducted between two or more businesses by electronic means, usually the Internet; distinguished from business conducted electronically between businesses and individual customers.
brand equity quality of a branded product or service that is recognized by customers favorably; can allow brand owners to charge a premium price over competing products or services.
brand management approach to management that focuses on the successful introduction of new brands and the continuing marketing management of the brand during its commercial life; the intention is to establish the brand in the consumer’s mind and to ensure that it achieves as long a commercial life as possible.
centralized management organization of line management and staff management functions in a central location; distinguished from a multidivisional organization.
Chapter 11 chapter of the 1978 Bankruptcy Act that permits debtors to retain control of their businesses; debtors and creditors are given flexibility in working out a plan to keep the business operating while paying off some or all of their debt.
chief executive officer (C.E.O.) most senior executive of a firm, or other organization, who has ultimate responsibility for the whole organization; reports to a board of directors.
chief operating officer (C.O.O.) senior executive who is responsible for the day-to-day operation of the firm or organization; usually reports to the chief executive officer.
cloud computing The storing on outside computer servers of applications and data instead of on a user’s computer; this can reduce the cost of computing for users but it carries the risk that the data may be more easily collected by third parties than if it were stored on the user’s computer.
conglomerate corporation composed of several companies operating in different industries; in theory, different companies prosper in different market conditions, leveling the performance of the whole; conglomerates have generally fallen out of favor, as many were not able to effectively manage their diverse activities.
continuous improvement (kaizen) production process in which workers continually improve their working practices; introduced by the Japanese and a factor in the high quality of Japanese products.
corporate brand reputation a company develops that distinguishes it from its competitors; distinguished from product brand; see brand equity.
corporate culture values, beliefs, ethics, and ways of doing things, within an organization; often communicated informally among workers; can be an important adjunct to management but can also be an impediment to change.
corporate governance control of private corporations by top management and boards of directors; can contribute to improving business performance and preventing mismanagement and fraud.
corporate strategy identification of a corporation’s long-term goal for success and the organization of its resources to achieve that goal.
corporation business organization legally chartered by a state or the federal government, having its own rights, privileges, and liabilities, and distinct from its owners. Investors own shares and, in limited liability, their potential loss in case the business fails is limited to the amount of their investments; see partnership.
data collection The monitoring of data from mobile devices and desktop computers by organizations that may be unknown to users; this can include websites that install tracking technologies that collect information on visitors that can be sold to marketers; it can also include tracking the location of mobile devices; the privacy issues raised by data collection have prompted Congress to introduce several bills that require trackers to inform users when they are being tracked.
deindustrialization flight of industry from a region that results from a change in technologies or the economy; frequently caused by foreign competition.
delayering removal of layers of management deemed unnecessary; intended to increase the speed of decision making and improve responsiveness to customers.
diversification strategy that increases the company’s number of products or services in order to achieve growth or to lessen the market risk of individual products or services.
e-business commerce conducted electronically between sellers and buyers, usually over the Internet.
economies of scale cost of producing a product or service declines as a firm grows in size; associated unit costs decrease when more products and services are produced.
first mover (advantage) company that first introduces a product or service; can be an advantage in some instances; some companies specialize successfully in being second movers.
Fordism production of inexpensive goods by assembly-line methods; named for Henry Ford’s assembly lines that produced the Model T; see mass production.
general manager executive of an organization who is vested with the authority and responsibility for all aspects of the organization; in a multidivisional organization the general manager may be one of several, each of whom is responsible for a separate division.
globalization opening up of markets in many countries of the world to competition; companies have access to new markets but also face new competitors.
Hawthorne effect often favorable effect that supervisors can have on workers’ performance when they pay special attention to the workers; named for the studies conducted by George Elton Mayo (1880–1949) at the Western Electric Hawthorne plant in Chicago from 1928 to 1932; interpretations differ on exactly what the studies showed, but the prevailing view is that the very act of the researchers’ closely studying the workers motivated the latter to improve their performance.
horizontal organization organization that has minimized the layers of management between top management and the production process (of goods or services); intended to speed up decision making and responsiveness to customers; often includes reorganizing the management of process flow; see delayering.
human capital skills and knowledge acquired by people that improve their productive capacity; results from investment in education, health care, and training.
human resource management (HRM) approach to management that emphasizes the value of individuals and their differences; distinguished from management that applies a single approach to everyone; see scientific management.
information technology systems of computers, software, and telecommunications that generate and analyze data from the operation of a firm and communicate it to decision makers.
intellectual capital/property concepts, ideas, computer programs, patents, and other creative products that are definable, measurable, and proprietary; distinguished from tangible assets such as factories and real estate.
just-in-time (kanban) production process in which the components of a product are produced and delivered during the final assembly; requires that manufacturers and suppliers coordinate their production schedules; minimizes the cost of idle inventory.
kanban See just-in-time.
kaizen See continuous improvement.
keiretsu network of Japanese firms linked by mutual obligations; consists of complementary firms that can include banks, manufacturers, suppliers, distributors; allows for sharing of information and resources, coordination of activities, and mutual support.
knowledge industry industry in which the principle asset is the knowledge (education, training, skills, and experience) of those who work in it; distinguished from an industry in which the principal assets are tangible; increasingly firms are realizing that almost any industry depends on the assets of the knowledge of its workers.
lean production system of production introduced by Toyota that combines total quality management (TQM); a highly motivated and committed workforce organized in teams; a manufacturing process so flexible that it allows different models of the same car to be built at the same time on the same assembly line in response to shifting market demand; a cooperative supplier network system that delivers high-quality components at exactly the moment they are needed during assembly; and an innumerable number of refinements in work-flow, eliminating all tasks that do not contribute value to the end result.
limited liability principle that investors in a business organization are limited in their potential loss to the amount of their investments in the event that the business fails.
line management managers who have direct responsibility
for the production of products or services which generate the firm’s revenues; distinguished from staff management.
mass customization production process in which the methods of mass production have been modified to allow for limited variation, often based on demand, of individual products; allows low pricing of customized products; see agile manufacturing.
mass market market that includes large numbers of consumers.
mass production production of large numbers of a single product; unit costs are minimized allowing competitive pricing.
middle management managers in an organization who are below senior management and above junior management; many organizations have eliminated layers of middle managers deemed unnecessary, in an effort to increase efficiency and responsiveness to customers.
multidivisional organization organization in which a central corporate office administers and coordinates the activities of autonomous divisions responsible for producing products for different markets, or divisions that operate in different geographical areas.
outsourcing procurement of products, or services, outside an organization; in some organizations outsourcing is limited to peripheral items or services; in others it can encompass a wide range of items; see just-in-time and virtual organization.
partnership nonincorporated business arrangement of two or more investors who agree to share profits and debts; individuals are responsible for the debts of the company if it fails; see unlimited liability.
postindustrial society concept that the principal source of value and wealth will come from workers’ information and knowledge; argues that the traditional sources of value and wealth, labor and capital, are comparatively less important to society.
price war competition between two or more companies in which each lowers prices to increase market share; can drive some competitors out of business (which may have been the strategy of one or more of the others).
principal agent (problem) relationship between the owners of a firm and the firm’s managers (agents); sometimes characterized by a conflict between the interests of shareholders and the managers who run the firm.
productivity measure of the output of goods or services compared with the input required to produce them; higher productivity results in greater profits if prices are stable; also allows for lower pricing if competition requires it.
product placement The display of products, or advertisements for products, in entertainment contexts such as TV shows and movies; such placements are an additional source of revenue for entertainment producers.
putting-out gainful small-scale manufacturing work done in the home; a widespread means of production before the age of industrialization.
quality control process of reducing the number of defects in the products and services being produced.
reindustrialization process of restoring a former industrial area; often requires initial government assistance; allows for the introduction of new technologies that can enhance competitiveness; Japan and Germany are examples of successful reindustrialization following World War II.
research and development (R&D) systematic development of new ideas, products, and processes, that can be applied to the benefit of a business organization; grew out of the requirements of industrialization for technological innovation; modeled on early laboratories, including those of Thomas Edison and General Electric.
scientific management comprehensive system of management advocated by Frederick Winslow Taylor (1856–1915). It included detailed cost accounting; meticulous production scheduling; coordinated purchasing, inventory, storage, and maintenance procedures; time studies of workers; and an incentive wage based on piecework; sometimes mistakenly thought to consist only of time and motion studies of workers.
shareholder one who owns equity securities issued by a limited corporation; the shareholder is entitled to attend annual meetings, vote on officers and initiatives presented to shareholders, and receive dividends if the corporation pays them; the shareholder is limited in liability to the amount of the shareholder’s investment in the event that the corporation fails; see limited liability.
six sigma measure of quality that requires fewer than 3.4 defects per million operations; popularized by General Electric.
skunkworks group, generally outside the main organization, charged with developing a new product or service in a short period of time; the emphasis is on total commitment of members to rapid innovation; term coined at
Lockheed during World War II to designate groups charged with developing advanced aircraft, including the P-38 fighter; term derives from the comic strip “Li’l Abner.”
smart phone A mobile phone with applications beyond voice communications; users have a wide choice of applications that include still photography, video, GPS, web browsing, e-mail, social networking, and games.
staff management executives and workers who advise but do not direct other managers and who are not directly responsible for the production of products or services which generate revenues; distinguished from line management.
strategic alliance agreement between two companies to cooperate on a specific business activity; the intention is to combine complementary strengths to the advantage of each; the combination often has a limited life span. supplier chain A system of companies that produce
components of a product assembled by an end manufacturer; the chain can begin with small companies producing basic components that are supplied to intermediate firms that produce sub-assemblies that are in turn sent to end producers for final assembly; supplier chains are often considered part of the end producer’s strategic advantage; Toyota was a pioneer in perfecting this system.
synergy value that accrues when two or more companies combine, through merger or acquisition, in excess of their total values before combining; complementary strengths reinforce each other when synergy is achieved. This has proved difficult to achieve in practice.
systems analysis application of the concepts of systems to organizations and processes; systems are conceived as elements working together to achieve a common end in which the operation of each element affects one or more of the other elements; no element can be understood apart from its effect on at least one other element, and often on more than one other element.
Taylorism See scientific management. team designated, usually small, group of workers who are charged with a specific task; they are given considerable latitude in they way that they carry out their task.
technology application of science to practical products or processes, especially in industry; technologies before the age of industrialization were mainly mechanical and were invented by trial and error.
total quality management (TQM) approach to management that empowers everyone in an organization to deliver a high-quality product or service to the customer; the customer can be the next stage within the organization or the end buyer; the object is to achieve maximum customer satisfaction at the lowest cost.
unlimited liability organization in which the principals are all responsible for debts should the organization fail; as distinguished from limited liability.
virtual organization organization comprising a network of independent groups that cooperate and coordinate their activities to produce a product or service; uses information technologies to manage the process; requires new management methods to achieve the required coordination and cooperation.
zero defects approach to management in which an organization sets a goal to deliver products or services that are 100 percent free of defects; an important component of total quality management.