Entrepreneurial Advantages in Business Organization Changes

Entrepreneurs Taking Advantage of Changes in Business Organization

Transformation of American Businesses (Late 1880s)

  • Shift from family-run operations to larger business structures.
  • Traditional businesses relied on single-source funding, risking total loss in financial downturns.

Government Support for Free Enterprise

  • Laissez-faire capitalism: A system where businesses operate freely from government intervention.
    • French term meaning "allowed to do."
    • Government's role limited to tariffs and land grants.
    • Tariffs aimed to make imported goods more competitive with American products.
    • Western land grants supported railroad development.

Entrepreneurs and Corporations

  • Entrepreneurs: Businessmen who organize their own businesses to make a profit.
  • Corporations: A business structure where investors buy stock certificates, becoming stockholders.
    • Stockholders receive dividends: Shares of the company's profits.
    • Pooling of investor money allows for investments in new buildings, products, and improvements.
    • A board of directors makes major decisions about the company's operations.

Limited Liability

  • Corporations become legal entities, protecting owners and investors from actions against the company.
  • Losses are limited to the amount invested, encouraging risk-taking and innovation.
  • Contrasts with sole ownership or partnerships, where businessmen face greater potential losses.

Andrew Carnegie: A Case Study

  • Immigrated from Scotland at age 13 and worked his way up from a cotton mill to managing a telegraph service.
  • Became a private secretary for the superintendent of the Pennsylvania Railroad, improving scheduling of passenger and freight trains.
  • Invested in railroad stock, eventually gaining control of the Pennsylvania Railroad.
  • Entered the steel business in 1873 and, by 1899, his company out-produced all British factories.
Carnegie's Business Practices:
  • Focused on cost reduction and efficiency improvements.
  • Employed new production techniques and hired scientists to improve steel quality.
  • Attracted talented individuals and meticulously tracked expenses.
  • Encouraged competition among managers to find cost-efficient methods.
Vertical Integration
  • Carnegie bought out all his suppliers to control the entire steel manufacturing process.
  • Acquired coal and iron mines, ore freighters on the Great Lakes, and railroads.
  • This control ensured consistent quality, quantity, and pricing of steel.
Horizontal Consolidation
  • Carnegie bought up all of his competition
  • Purchased rival steel producers, sometimes forcing them to sell by underselling them.
  • By 1901, Carnegie became the second richest man in the world and sold his company for 500,000,000500,000,000.

John D. Rockefeller: A Second Great Entrepreneur

  • Started as a bookkeeper and became a partner in a wholesale business by age 21.
  • Invested in the oil industry after its discovery in Titusville, Pennsylvania on 08/27/1859 by Edwin Drake.
  • By 1870, his company, Standard Oil, became the nation's largest refinery.
Rockefeller's Vertical Integration
  • Controlled all costs by acquiring companies involved in barrel/can production, railroads/pipelines, and storage facilities.
  • Negotiated special rates and rebates with railroads, ensuring they wouldn't transport competitors' oil.
Rockefeller's Horizontal Consolidation
  • Similar to Carnegie, Rockefeller destroyed or forced competitors to sell out.
  • By 1879, Standard Oil controlled over 90% of the oil refining business in the U.S.
Trusts and Monopolies
  • Companies combined under a single board of directors to control prices.
  • Rockefeller's ruthless tactics led to a monopoly, allowing him to cut costs and raise prices.
  • Bankrupted competitors who resisted and acquired their assets cheaply.

Unregulated Business Practices

  • Entrepreneurs exploited the lack of government intervention to maximize profits.
  • Examples also include: JPMorgan in banking, and Swift and Armour in meat packing.

Prioritization of Profit

  • Profit was the primary driver, overshadowing concerns for working conditions, pay, and the impact on others.
  • Employee conditions were secondary until the labor movement gained momentum in the early 1880s.

Examples of Other Entrepreneurial Pursuits and Philanthropy

  • J. Pierpoint Morgan invested significant wealth in rare books and manuscripts, which led to the establishment of the Pierpoint Morgan Public Library in New York City after his death.
  • Bistavis Swift made his fortune in the meatpacking sector, starting with a 2525 cow and scaling up to millions.

Review Question

Question: What did John D. Rockefeller use to control all the costs for his corporation?

  • A) Vertical consolidation
  • B) Horizontal consolidation
  • C) Vertical integration
  • D) Horizontal integration

Answer: C) Vertical integration