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Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin
Chapter 3 Business
Power
3-2
James B. Duke and the American Tobacco
Company
o 1881 – Duke used Russian immigrants to roll his
cigarettes and women to market them
o 1883 – Negotiates an exclusive contract for a
cigarette-rolling machine and expands his sales to
China
o 1884 – Embraced Rockefeller’s methods and formed
the American Tobacco trust
3-3
James B. Duke and the American Tobacco
Company Opening Case
o 1892 – 2.9 billion cigarettes sold
o 1903 – More than 10 million cigarettes sold
o 1911 – Duke’s monopoly broken up
o Duke’s career illustrates the power of commerce to
change society
3-4
The Nature of Business Power
o Companies in ascending industries change societies
by altering all three of their primary elements:
o Ideas
o Institutions
o Material things
3-5
What is Power?
o Power: The force or strength to act or to compel
another entity to act
o Business power: The force behind an act by a
company, industry, or sector
o The social contract legitimizes business power by
giving it a moral basis
o Legitimacy: The rightful use of power
o Business power is legitimate when it is used for the
common good
3-6
Levels and Spheres of Corporate Power
o Corporate actions have an impact on society at two
levels, and on each level they create change
o Surface level
oBusiness power is the direct cause of visible, immediate
changes, both great and small
o Deep level
oCorporate power shapes society over time through the
aggregate changes of industrial growth
3-7
Levels and Spheres of Corporate Power
Economic power Ability of the corporation to influence events, activities, and people by virtue of control over resources
Technological power Ability to influence the direction, rate, characteristics, and consequences of physical innovations as they develop
Political power Ability to influence governments
Legal power Ability to shape the laws of society
Cultural power Ability to influence cultural values, habits, and institutions such as the family
Environmental power The impact of a company on nature
Power over individuals Exercised over employees, managers, stockholders, consumers, and citizens
3-8
The Story of the Railroads
o Railroads revolutionized transportation due to:
o Speed
o Cost
o Direct routes
3-9
The Story of the Railroads
o Railroads transformed capital markets
o In the mid 1800s, railroads needed millions in capital to
continue expansion
o Railroads sold bonds and offered stocks to raise capital,
creating the investment banking industry
o The financial mechanisms inspired by railroad construction
were in place when other industries needed more capital to
grow
3-10
The Story of the Railroads
o Railroads spread impersonality and an ethic of
commerce
o Towns reoriented themselves around their train
stations
o Urbanization and the centralization of corporate power
in cities was speeded
o Rural areas were redefined
3-11
The Story of the Railroads
o Railroads changed American politics
o Trains changed the way candidates were picked
o Trains enabled associations to have national meetings
o Rails spread issues that might in an earlier era have
remained local
3-12
The Story of the Railroads
o Railroads changed American society
o Pioneered professional management teams, division
structures, and cost accounting
o Contributed to the Indian wars
o Imported labor whose descendents remain
3-13
Figure 3.1 - Railroad Track Miles in
Operation: 1830–2007
3-14
Two Perspectives on Business Power
o Dominance theory: The view that business is the
most powerful institution in society, because of its
control of wealth
o This power is inadequately checked and, therefore,
excessive
o Pluralist theory: The view that business power is
exercised in a society where other institutions also
have great power
o It is counterbalanced and restricted and, therefore, not
excessive
3-15
Two Perspectives on Business Power:
Dominance Theory
o Corporate asset concentration creates monopoly or
oligopoly in markets that reduces competition and
harms consumers
3-16
Two Perspectives on Business Power:
Dominance Theory
o Merger waves are caused by changes in the economic
environment that create incentives to combine
o The public viewed the huge firms as colossal
monuments to greed
o In the twentieth century, corporations continued to
grow in size, but the marked rise in asset
concentration slowed and leveled off
3-17
Two Perspectives on Business Power:
Dominance Theory
o With economic globalization, the number of
multinational firms and the scale of their activity has
grown
o Adherents of the dominance theory believe that the
increasing size and financial power of global
corporations will be converted into the same old
abuses
o No corporation, no matter how large, is assured of
prospering
3-18
Two Perspectives on Business Power:
Dominance Theory
o Elite dominance
o Belief that there is a small number of individuals who,
by virtue of wealth and position, control the nation
o Power elite: A small group of individuals in control
of the economy, government, and military
o The theory of its existence is associated with the
American sociologist C. Wright Mills
3-19
Two Perspectives on Business Power:
Pluralist Theory
o No entity or interest has overriding power, and each
may check and balance others
o Features of American society which support the thesis
of pluralism
o It is infused with democratic values
o American encompasses a large population spread over
a wide geography and engaged in diverse occupations
o The Constitution encourages pluralism
3-20
Figure 3.2 - Boundaries of Managerial
Power
3-21
Boundaries of Managerial Power
o Governments and laws in all countries regulate
business activity
o Social interest groups represent every segment of
society and use many methods to restrain business
o Social values are transmitted across generations,
reflected in public opinion, and embedded in the law
o Markets and economic stakeholders impose strong
limits
3-22
Concluding Observations
o In a recent poll, 87 percent of Americans felt that “big
companies... have too much... power and influence”
o If corporate power remains generally accountable to
democratic controls, society will accord it legitimacy
o If rule by law and a just economy exist, corporate
power will broadly and ultimately be directed toward
public welfare