Midterm Review

for MGMT 101

Section 212 and 214
Nikolay Diankov

John Jacob Astor

Opportunity, information, resources, &
information
Why This Case?
Who was the first businessman and how did he get started? The case of
Astor answers this question and tells us about the man who initially
owned most of Manhattan.

Key Points
Astor began as a sole proprietor but eventually moved on to form a
corporation (American Fur Company)
The transition we see in Astors career from generalist to specialist is
also a major theme of early American business history
Astor was an early practitioner of backward integration to assure
himself of supplies in the fur business
Astor was also one of the first who showed willingness to take big risks
today for the sake of bigger profits in an indefinite future
Astor was successful because he had a sound understanding of the
business environment he operated in; he also understood the
importance of seizing opportunities with speed and firmness

To refresh yourself on the significant events in Astors life, see

Slater, Lowell, and the

Factory
Technology & Trade
Why This Case?
Once upon a time, there were only farms in America how then did the
first organization come about? This case tells some of those stories.

Key Points
Slater & Lowell represent two stages in industrialization, as witnessed by
the different business models they had during roughly the same time
period:
Slater: small-scale, agriculturally-based enterprise
Lowell: larger scale, factory-based enterprise, forward integration

Factory brought new advantages to business that previously did not exist
mostly, increased managerial control (improved quality, decreased
shrinkage, etc.)
Certain hardships faced by 18th century entrepreneurs like Slater &
Lowell were both similar and different to those faced by business people
today: contracting between partners, raising capital, securing technology,
protecting technology, finding labor, judging performance/success

Slater, Lowell, and the

Factory
Technology & Trade

Craft & Factory in the 19

Cent.
19 Century Industry from Below

th

th

Why This Case?

Up until now, we discussed perspectives of owners/managers.
In this case, we get a glimpse into the minds of workers
themselves.

Key Points
Story of Samuel Clough showed the significance of mobility of
the American worker, freedom of spirit/optimism, social
mobility of America (ability to move in and out of social circles)
There were some real differences between Clough and the mill
workers:
Clough: independent, versatile, ambitious, never complained
Mill workers: worked together as a team, lots of complaints

Railroads & Modern

Mgmt
Profit, Decision-Making, and Accounting
Why This Case?
This case shows some of the first financial and
accounting tools used by managers.

Key Points
Fink recognized that very few of the costs in the
railroad industry were dependent on rail traffic;
instead, he noted that the industry was
characterized by highly fixed costs (2/3 of the
industry costs were fixed)
This realization led to the discovery of economies
of scale and cost accounting

Railroads & Modern

Mgmt
Control Problems Revisited
Why This Case?
This case is also the first time we see an explicit need for
organizational structure and systems.

Key Points
Big challenges in this industry were geographic dispersion and
difficulties in communicating
Extreme attention to detail was required to run this business
successfully
The complexity of leading the larger RR organizations led to the
development of the first formal organization structure
Good structural arrangements allocate authority and responsibility to
relevant decision-makers, provide information channels to collect
data for decision-making and evaluation, coordinate employees work,
and monitor performance/capability

Railroads & Modern

Mgmt
Control Problems Revisited (contd)
McCallum

Perkins

Emphasized decentralized decision

making

Distinguished between line and staff

Muddled lines of authority some (staff as

supervisors)

Used staff as standard-setters

Separated divisions by regions

X
X

Emphasized autonomy of divisions*

Recognized importance of org structure

X
X

*Precursor to multi-divisional structure

Jay Gould & Railroad

Consolidation
Competition in a Context
Why This Case?
This case is the first time in American business where we start to see the
separation of ownership and management, a condition which is prevalent
everywhere today.

Key Points
Because railroads are such a fixed cost business, a lack of basic economic
understanding and a focus on expansion rather than profits led to several
early failures
Investors, speculators, and managers all had different interests in mind,
therefore challenge was to find ways for them to serve the same goals (and
not allow speculators to drive investors into the arms of managers as they did
here!)
Most efficient way to do business is to let the market determining prices (i.e.
the invisible hand); attempts to collude result in market inefficiencies, the
Prisoners dilemma, and an eventual breakdown of alliances
Pooling and cartels were first introduced here;
Why Oligopoly (capital was still a constraint; large distances-local knowledge
is advantageous; monopoly does not want to service inefficient markets)

Standard Oil (A) and (B)

More on Competition in the Late 19th
Century Economy

Why This Case?

- The growth and evolution of a monopoly; Reviews the concepts of horizontal and
vertical integration

Key Points:
- The oil industry was one that tended to become a monopoly. Reasons:
Economies of scale; industry is quite inefficient unless the players
(drillers, transporters, distributors, refiners) consolidate and co-ordinate
their activities; pooling/alliances are ineffective.
- Ways to compete against monopolies: introduce innovative products
(pipelines); develop new markets that the monopoly is not interested in
(oil by-products); cooperate (producers closed wells); Work the political
process (put legislative pressure);

Standard Oil (B)

Standard Oil as a 2nd Industrial Revolution
Company

Key Points (Continued)

- Keys to Rockefellers success: Stock purchases; leverage over railroads;

horizontal and vertical integration; ability to react fast to threats
(European threat; producers, etc); knowledge of people - appointed best
managers; economies of scale; shipment arrangements; flexibility and
foresight (entered marketing, wholesale, export businesses).
- Monopoly is the power to fix prices, to exclude competitors or to control
the market in a particular geographic area
- Types of monopolies:
a) Natural One firm can produce all or more than the market can bear.
Therefore if a second firm enters the market both firms will be unprofitable
b) Legal Exclusive right granted by a government unit to provide
services. The rates of such services are regulated by the aforementioned
government unit.
Other important concepts: Trust; New Organizational structure;

Mass Production &

Distribution
Vertical Imperatives of Technological
Change

(3)
(4) Purchasing/Supply Chain Mgmt
(2) Marketing/Sales/Distribution
Continuous
Backward Integration
Forward Integration
Production

Why This Case?

This case highlights the transformation of the manufacturing
organization into what it is still today.

Key Points
Sequence of events kept repeating itself during this time in the
manufacturing industry: (1) idea for a product was born, (2)
demand was driven up through a a marketing organization, (3)
large continuous-process batch production began to meet demand,
(4) purchasing organization was developed to achieve economies
of scale, and (5) product line was expanded to get more out of
value chain
Early manufacturing firms who participated in these steps tended
to remain dominant (even today!) because of their first mover
advantages (high capital intensity, economies of scale, reputations,
etc. kept others from entering)

Managers Brain & Pinkerton

Detectives
2 Industrial Revolution on the Shopfloor: Struggle at
nd

Homestead

Why These Readings?

These readings provide a look at how industrial workers viewed
managements attempt to control their labor in the late 19 th century;
it is important because these events eventually led to a
transformation in industrial labor relations.

Key Points
Workers attitude toward work and management is not simply a
touchy-feely subject these attitudes can constrain the effectiveness
of managerial action
These issues remain relevant today, particularly with knowledge
workers (i.e. employees at professional services firms)
Institutions and environmental contexts play key roles in determining
the power that different constituencies have in bargaining processes
Rise of managers entailed the seizure of power from both owners and
workers

Mass Production &

Scientific Mgmt
Revolution on the Shopfloor Contd: A Philadelphia
Contribution

Why This Case?

This case shows the original contribution of Taylor Scientific
Management to the rise in productivity in the XX century.

Key Points
Scientific management was a complete mental revolution, rather
than a bunch of technical changes
As technological advancements occurred in the workplace,
managers needed to improve the way their workers behaved so that
they could get the ROI that technology made possible
Scientific management was mostly reserved for industries where
mass production was an element because it worked best when large
increases in efficiency could be made
Scientific management was hard to implement in full because it
ignored the worker and did not appropriately align worker-manager
interests

J.P. Morgan
2nd Industrial Revolution in the Capital Markets &
on Capitol Hill
Why This Case?
This case explains the origins of investment banking, a career many of
you are interested in. It is also the first time we hear about anti-trust
legislation.

Key Points
Investment banks arose because of organizations need to grow and
expand either organically/operationally or through acquisitions
Bankers found two vehicles to raise this capital: stocks and bonds
J.P. Morgan differentiated itself by establishing a brand and a
reputation important management concepts today.
In fact, their reputation served as a barrier to entry for many others
banks into the field of investment banking
J.P. Morgan as an entrepreneur He was the first to channel large
amounts of European funds in the US economy (saw an opportunity
where others did not)
J.P Morgan was considered business builder and was trusted by
businesses and the US government

DuPont
2nd Industrial Revolution Institutions,
Adapting
Abbreviated DuPont Timeline
Gunpowder Trade Association
1902 Alfred, Coleman, & Pierre purchase for $12 million
Consolidation & accompanying multi-divisional structure (line & staff distinction,
central office, less family involvement)
1912 Supreme Court decision in violation of Sherman Antitrust Act
Some diversification
1919 Further centralization, Haskells subcommittee recommended functionally
departmentalized structure (grouping related effort not things, aligning
responsibility and authority)
Excess capacity after war leads to diversification
Acquisitions, move into paints and varnishes
Diversification causes problems
Subcommittee investigates and recommends m-form
M-form rejected
1921 Crisis, new subcommittee formed and m-form accepted

DuPont
2nd Industrial Revolution Institutions,
Adapting
Why This Case?
Decentralization is the organizational structure most companies use
today. It started in the early 1900s and extended to over 80% of
companies by the 1970s. DuPont was one of the first examples!

Key Points
Well-intended, intelligent individuals can have honest debates
regarding what to do in ambiguous situations: the changes that
DuPont made were not obvious
Organizational change is difficult, especially when the changes
involve moving away from past successes
No structure is perfect all have trade-offs
One structure may work with a certain set of business conditions and
in a certain environment, but it will not work always structure must
complement strategy

DuPont
2nd Industrial Revolution Institutions,
Adapting Standard Oil
DuPont
Consolidated, rationalized, and Consolidated, rationalized, and
vertically integrated
vertically integrated
operations
operations
Family initially was a big part
of business

Family not important to

business

More stable industry

Less stable industry
Allowed for association to exist Association only existed for a
for 3 decades
few years
Consolidation happened at the
end of a trend; took advantage
of models from steel and RR
industries

Consolidation happened at the

beginning of a trend

All companies initially

absorbed into a single

All companies were

independent with distinct

ITT
How the Adaptation Evolved
Why This Case?
This case does a good job of reviewing many course concepts:
organizational structures, use of information, separation of ownership and
control, changing role of managers and staff, government influence on
business, etc.

Key Points
ITT management model brought high returns for shareholders, mostly
because it eliminated agency costs (managers were put under pressure to
make the numbers at all costs)
Strategy-structure-systems: ITT had a diversification strategy, that was
supported by a centralized management structure that set a single
standard across all divisions and used tight financial controls
Despite its successes in creating value, this structure/style had limitations:
Growth was hard to maintain became tough to integrate new firms
Debt grew out of control
Ethical questions arose

ITT
How the Adaptation Evolved

ITT

DuPont

Centralized administrative
offices

Centralized administrative
offices (1903)

Product lines and directors

Product lines and directors

Unrelated diversification

Related diversification

Objective was to manage costs, Objective was to be flexible,

prevent problems, achieve
empower people
predictability
Divisions were semiautonomous, but ultimately
Geneen made all decisions

Businesses were autonomous

and had authority to make
decisions

Centralized structure

Decentralized structure (in the

end)

Does the New Economy

Measure Up?
Dynamics, Distant Mirrors, & Related
Matters

Why This Case?

Weve studied about Industrial Revolutions of the past (1 st and 2nd), but we
seem to have gone/be going through one ourselves too! This reading explores
that possibility.

Key Points
Are we in the throes of a fundamental transformation a 3rd Industrial
Revolution?
How do computers compare to the inventions of the past?
1st Industrial Revolution (1760-1830): steam engine, power loom
2nd Industrial Revolution (1860-1900): electricity, internal combustion engine
3rd Industrial Revolution (1995-today)??: computer, Internet

Author argues that performance may not be considered comparable because

there has been an unprecedented rate of decline in price of computing power
and an unprecedented speed with which diminishing returns set in
Contribution of Internet to productivity does NOT equal its contribution to
consumer welfare

Management from A to Z

NOTE: These will not explicitly be covered on the exam; I

just wanted to make sure you knew these basic
definitions, given this is a Mgmt 101 class!
Sole Proprietorship: A business structure in which an individual
and his/her company are considered a single entity for tax and
liability purposes.
Corporation: The most common form of business organization,
which is chartered by a state and given many legal rights as an
entity separate from its owners. Characterized by the limited liability
of its owners, the issuance of shares of easily transferable stock, and
existence as a going concern*.
Trust: A legal arrangement in which an individual (the trustor) gives
fiduciary* control of property to a person or institution (the trustee)
for the benefit of beneficiaries. Also, a monopolistic corporation,
prior to the enactment of antitrust laws.
Conglomerate: A corporation consisting of several companies in
*More definitions:
different
businesses.
Going concern: The idea that a company will continue to operate indefinitely, and will not go out of
business and liquidate its assets.
Fiduciary: An individual, corporation or association holding assets for another party, often with the legal
authority and duty to make decisions regarding financial matters on behalf of the other party
Source:

Management from A to Z
(contd)
Partnership: A type of unincorporated business organization in which
multiple individuals, called general partners, manage the business and are
equally liable for its debts; other individuals called limited partners may
invest but not be directly involved in management and are liable only to the
extent of their investments. (Or more generally, a relationship of two or more
entities conducting business for mutual benefit.)
Limited Partnership: A business organization with one or more general
partners, who manage the business and assume legal debts and obligations,
and one or more limited partners, who do not participate in day-to-day
operations and are liable only to the extent of their investments.
Limited Liability Company: A type of company, authorized only in certain
states, whose owners and managers receive the limited liability and (usually)
tax benefits of an S Corporation without having to conform to the S
corporation restrictions.
S Corporation: A form of corporation, allowed by the IRS for most
companies with 75 or fewer shareholders, which enables the company to
enjoy the benefits of incorporation but be taxed as if it were a partnership.
C Corporation: A business which is a completely separate entity from its
owners, unlike a partnership.

Source:

Some Examples of Course

Themes
Gradual separation of ownership and control, e.g. the rise of
professional managers within companies
Importance of the Industrial Revolutions and their effects:
economies of scale in the steel, oil and textile industries; new
industries, new markets, new technologies
Productivity gains through technology, e.g. investment in new
equipment, theories of management
Innovative organizational structures leading to innovative
solutions: Planning and Development Departments, Research and
Development, Centralized vs. Multi-Divisional Structure
Other innovations, e.g. new financial tools and accounting tools
assisting managers such as use of ROI and cost accounting
Role of communication and information

Some Final Advice

Part I:
Include answers that show youve done the reading/attended class try to differentiate
yourself from someone who might not have!
e.g. stints/amalgamation (Homestead); bonds/stocks/ syndicate (JP Morgan); line and staff
(Railroads and DuPont), etc.

REMEMBER : There IS a right answer here!

Parts II & III:

Start by identifying your thesis what point will you make in this paragraph or essay?
How will you make the point? Use an outline to make sure that you have enough
supporting detail.
Compare/contrast bring in other cases & readings. This will help you develop a
more thorough, analytical argument.
REMEMBER: There may not necessarily be a right answer here its more about how
you structure and support your argument.

GOOD LUCK!!!!