The Evolution of Business Chapter Two The Evolution of Business © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. McGraw-Hill/Irwin Introduction to Business

Learning Objectives Understand how property rights work to control the way productive resources are used in society. Define the system of feudalism and understand how combining land and labor speeds the accumulation of capital. Appreciate the functions of money in business and how the development of money promoted the rapid development of capital and enterprise.

Learning Objectives Describe the system of mercantilism, and appreciate the role played by merchants and bankers in speeding development in global trade. Explain the causes of the industrial revolution and the development of capitalism, unionization, and the class system. Explain how and why the form of business organization used to manage business commerce has changed over time.

The Emergence of the Hierarchy Hierarchy of authority the ranking of people according to their relative rights and responsibilities to control and utilize resources

Division of Labor in a Tribe Figure 2.1

Hierarchy and Property Rights the right of people to own, use, or sell valuable resources Aristocracy people given the right by a ruler to control a country’s resources, including its land and labor

Property Rights and Resources Figure 2.2

The Hierarchy of English Aristocrats Figure 2.3

Feudalism Feudalism the business or economic system in which one class of people, aristocrats, controls the property rights to all valuable resources, including people

Feudalism, Mercantilism, and Capitalism Figure 2.4

From Barter to Money Double coincidence of wants each person has to want the product that the other person has to offer for the exchange to be successful When people agree to use money to buy and sell products it increases the profitability of trade

Money as a Standard of Value Figure 2.5

From Money to Capital Interest rate Risk the price at which capital will be loaned Risk the possibility of incurring future financial losses because of one’s investment decisions See current interest rates at money-rates.com

Mercantilism: Trade and Enterprise the business system in which a product’s price differences are exploited by trading the product across markets and countries Merchant a trader who uses the discrepancy between the value and price of a product in one market and another to trade goods for profit

The Growth of Enterprise Bankers the people who estimate the risks associated with a new venture and determine the way profits from a venture should be shared

Craft Guilds and Occupational Specialization Craftspeople workers or artisans with the skills to produce higher-quality goods and services Craft guild a group of skilled artisans organized to control and govern different aspects of its trade

The Industrial Revolution an era in the 18th and 19th centuries that marked improved production and trade brought about by advances in technology

Why Did the Industrial Revolution Occur So Late? Innovation the development of new and improved products and new and improved methods to create them

Question? What is a combination of companies linked to by legal titles and property rights that allow them to function like one large company? Corporation Cartel Trust Alliance The correct answer is “C” – trust. See next slide.

Monopoly Trust a combination of companies linked to by legal titles and property rights that allow them to function like one large company

Capitalism, Unionization, and the Modern Class System the economic or business system in which the private ownership of resources becomes the basis for the production and distribution of goods and services

Capitalism, Unionization, and the Modern Class System Capitalists people who personally own or control the physical capital of industrial production such as machinery, factories, distribution networks, raw materials, and technology

Capitalism, Unionization, and the Modern Class System Proletariat the class of unskilled workers who have no capital and only possess the rights to sell their own labor Trade union an organization that lobbies on behalf of its members (workers) to increase their bargaining power in work-related negotiations

Capitalism, Unionization, and the Modern Class System a social ranking of people based upon the amount of their capital and wealth, and because of factors such as heredity, kinship, fame, and occupation

The Class System in Capitalism Figure 2.6

Changing Forms of Business Organization Figure 2.7

Question? Which form of business organization is a non-incorporated business entirely owned by one person? Unlimited liability Limited liability Partnership Sole Proprietorship The correct answer is “D” – sole proprietorship. See slide 2-31.

The Joint-Stock Company Unlimited liability a legal system in which the personal capital and wealth of all of a company’s stockholders can be seized to pay its debts

The Limited Liability Company a legal system that prevents creditors from seizing the personal wealth of a company’s stockholders to pay a company’s debts

The Partnership and Sole Proprietorship two or more skilled professionals who agree to pool their talents and capital to establish a company in which they are the stockholders and owners Sole proprietorship a non-incorporated business entirely owned by one person

Video – Denim Blues Levi Strauss is a name that most relate “jeans” or levis. Changes in trends and consumer preferences forced Levi Strauss to diversify its product lines over many years. The chapter discusses the hierarchy of authority. How does this concept relate to Levi Strauss? What qualities does Levi Strauss have that may ensure continued success in business? How does the video segment relate to the evolution of capitalism as discussed in the text? Title: Denim Blues Summary: Levi Strauss is a name that most Americans recognize. They usually relate the brand to “jeans” or levis. Changes in trends and consumer preferences forced Levi Strauss to diversify its product lines over many years. In fact, at one time the company had over 65,000 different products on the market. Over the past six years, Levi’s has seen it sales volume decrease by 40%. With the first three months after 9/11/2001, Levi’s was down a whopping 12% in sales. Further, Levi’s management perceives its marketing plan as consistent with the research data. Outside industry experts disagree, however. There was a time not long ago when Levis would introduce mass produced trendy jean wear (at around $30) and simultaneously attempt to market high-end products to an entirely different market segment. In a sense, Levis was trying to be all things to all consumers at the same time. Based on this and other examples, industry experts suggest that Levi’s must segment the market and target their segments more directly and carefully if they are to return to profitability. High labor and production costs and the need to respond rapidly to changes in the marketplace have forced Levis’ to locate all of its manufacturing facilities outside of the U.S. The company has reduced the number of products it sells form 65,000 to 20,000. While Levi Strauss is a 4.2 billion dollar firm, it needs to find a way to define its customer more clearly, target that market, and continue reducing costs as it has recently. While Levis may no longer be manufactured in the United States, it may remain an American icon nevertheless. Discussion Questions: 1. The chapter discusses the hierarchy of authority. How does this concept relate to Levi Strauss? Answer: The hierarchy of authority is a ranking of people according to their relative rights and responsibilities to control and utilize resources. The interview features the CEO as the only representative of Levi Strauss. As the outside industry experts suggested that the firm has a failed marketing strategy, the CEO clearly assumes a high degree of authority by attempting to defend Levi’s approach in the marketplace. It is clear that power is centralized at Levi’s and that most of the decision making is centralized at that level also. 2. What qualities does Levi Strauss have that may ensure continued success in business? Answer Levis has strong brand recognition and, as the CEO tells us, while the jeans may not be manufactured in the U.S. any longer, they remain an American icon. One could argue that the CEO has clear sense of the goals for the business, and is aware of the various aspects of the business. The CEO also appears to be very aware of the slide in sales and profitability of the firm demonstrating awareness of the role of stakeholders in the business. Finally, there is evidence that Levis has the courage to be innovative and take risks (e.g. high-end market segmentation and simultaneous mass production aimed at mass markets., 3. How does the video segment relate to the evolution of capitalism as discussed in the text? Answer: Capitalism creates strong competition, as is the case for Levis. As business commerce has evolved, so has the forms of business organization. Levis continues to evolve its business model. Examples include reducing its complexity (from 65,000 to 20,000 product lines); reducing costs (relocating all manufacturing facilities outside of the U.S.). It does show that it may not e as sensitive to “change” as it should be (apparent misreading of the market data; inability to answer the fundamental question: “Who are our customers?).