Week 2: Day 4
Evolution of Modern Management

This continues Teaching Note 1 through the rise of the professional manager.

The objectives for today are that the student will:

1. Understand the role of the Industrial Revolution in creating the modern economy;
2. Be able to explain the institutionalization of capitalism in the US;
3. Know who Adam Smith is and understand the principles of modern capitalism;
4. Explain the role of railroads in the U.S. in the emergence of the modern manager;
5. Differentiate the functional form and MDF type of organizations and explain their significance.

 

OUTLINE

 

 I. Industrial Revolution: Why Great Britain?

A. Industrial Revolution defined: a period from 1750 to roughly 1870 in which much of Western Europe experienced rapid economic development attributable to technological innovations, principally in the use of steam for manufacturing.

B. Key events that created economic change:

1. Institutional changes - issuance of currency and laws favoring private business

2. Inventions - steam engine (James Watt)

 

A. Characteristics of laissez faire economics:

1. The means of production, land and capital, are privately owned. "Capital", here, means the plant and equipment used to produce goods and services.

2. The economy is organized and coordinated through the interaction of buyers and sellers (or producers) in markets.

3. Suppliers, the owners of land and capital as well as laborers, pursue their own self-interests in seeking maximum gain and profits from the use of their resources. Buyers of goods and services similarly spend their money to yield the greatest satisfaction.

4. With suppliers and buyers pursuing self-interest the market is constructed in which the value (or price) of goods and services is determined through the "haggling" of seller and buyer.

5. With a competitive market of buyers and sellers following self-interest, the economy is self-regulating and there is little role for government. The sovereign is necessary mainly to protect society from foreign attack, uphold the rights of private property, guarantee contracts, and assist, where necessary, in the building of "infrastructure", to include roads, canals, and similar "public" goods.

B. Adam Smith's Wealth of Nations (1776) is an inquiry into the nature and causes of economic development that concludes:

1. Individuals are bound together by market exchanges -- buying and selling

2. Economic development is dependent upon manufacturing with higher productivity attributable to "division of labor", or specialization of work performed by workers.

3. Higher productivity is also dependent upon use of technology by which one person can do the work of many.

 

A. The Civil War created a stronger national government and market, with increased technological development through the Second Industrial Revolution that lasted until the 20th century.

(1) The rise of the railroads were key in this development, nationalizing markets by providing for movement of goods and people and urbanizing America through increased manufacturing which required concentrated labor markets.

(2) Unlike the experience in Europe, where national markets are smaller and many competitors operated short lines, in the U.S. railroads become "big business" to be able to provide service to a much larger national market.

B. Railroads also created new problems for business:

1. Increased demand for capital led to use of stock markets for raising capital.

(a) The stock markets become a key source of capital for building "big business"

(b) The use of "equity" financing (selling stocks or ownership) divorces "ownership" and "management" functions - the demise of the single "owner-manager", as stock owners increase in numbers.

2. The divorce of "ownership" and "management" functions gives rise to the need for the "professional manager" who is adept at running a specialized business for the stock-holders.

3. The national market expansion of railroads required the use of "middle managers", or train superintendents, to supervise the business in key markets, or at key rail terminals.

C. To coordinate and control the large scale enterprise, railroad managers, such as Daniel McCallum, developed a new organizational form:

1. The original organizational form used by business is the "functional" form which is departmentalized by function, such as production, personnel, and accounting. This form works well for single product, single market firms under the "owner-manager"

2. To organize business operations in multiple markets across great distances, the multi-divisional form was evolved. The MDF type of organization divides the firm into its market or product divisions, each headed by a manager responsible for the division's success. The divisional managers report to the corporation's headquarters. The "headquarters" is an innovation in assume responsibility under the Chief Executive Officer, accountable to the stockholders, for the overall policies and financial performance of the business.

D. The success of railroad management is copied by other businesses:

1. There is a demand for an increasing number of professional managers.

2. In 1881 Wharton School at the University of Pennsylvania becomes the first business school in history, in response to the demand to create new managers.