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

3. 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.

4. 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.

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

6. Division of Labor in a Tribe
Figure 2.1

7. 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

8. Property Rights and Resources
Figure 2.2

9. The Hierarchy of English Aristocrats
Figure 2.3

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

11. Feudalism, Mercantilism, and Capitalism
Figure 2.4

12. 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

13. Money as a Standard of Value
Figure 2.5

14. 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

15. 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

16. 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

17. 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

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

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

20. 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.

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

22. 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

23. 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

24. 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

25. 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

26. The Class System in Capitalism
Figure 2.6

27. Changing Forms of Business Organization
Figure 2.7

28. 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.

29. 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

30. 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

31. 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

32. 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?).