Transcript Chapter 3 Lesson 3

III. Big Business
• Following the Civil War, large corporations
developed
• Could consolidate business functions and produce
goods more efficiently
• Retailers began using new techniques to attract
customers
The Rise of Big Business
• What advantages do large
corporations have over small
businesses?
The Rise of Big Business
• 1900 big business
dominated the
economy
• Factories and
distribution facilities
o Distribution – the act or process
of being given out or dispersed
to clients, consumers, or
members of a group
The Rise of Big Business
• Stockholders owned
corporations
o Corporation – an organization
that is authorized by law to
carry on an activity but treated
as though it were a single
person
• Stocks raised large
amounts of money and
spread the financial risk
• State legislatures issue
charters to
corporations
The Rise of Big Business
• Money raised from
selling stock used to
invest in technology
• Economies of scale –
the reduction of costs
of a good brought
about especially by
increased production
at a given facility
• Fixed costs- cost a
company pays even if
it is not operating
o Loans, mortgage, taxes
The Rise of Big Business
• Operating costs – costs
incurred when running
a company
o Wages, shipping costs
o Buying raw materials
• If sales drop it is
cheaper to shut down
• Big manufacturers had
high fixed costs and
low operating costs
The Rise of Big Business
• Big corporations had
several advantages
o They could produce goods at
a lower cost
o Could stay open during bad
economic times
o Operating costs were small
compared to fixed costs
o Cutting prices to increase sales
o Rebates from railroads
o Eventually small business could
not compete
The Rise of Big Business
• How do economies of scale
affect corporations?
The Rise of Big Business
• Corporations can produce
large quantities of goods,
which lowers the production
costs of those goods
Consolidating Industry
• What new business strategies
allowed businesses to weaken
or eliminate competition?
Consolidating Industry
• Falling prices
benefitted consumers
but cut into profits
• Many companies
organized pools to
keep prices at a
certain level
• Most pools did not last
long
Andrew Carnegie and
Steel
• Scottish immigrant
• Went to work at 12
• Worked his way up to
become the secretary
of the superintendent
Pennsylvania Railroad
• Carnegie became the
superintendent
• Bought shares in iron
mill that made railroad
supplies
Andrew Carnegie and
Steel
• 1875 Carnegie opened
a steel mill
• Bessemer process –
made high quality steel
quickly and cheaply
• Carnegie used vertical
integration
o Instead of buying they owned
o Coal mines, limestone quarries,
iron ore fields
Rockefeller and Standard Oil
• John D. Rockefeller
pushed for horizontal
integration
• Standard Oil bought all
of its competitors
• 1880 controlled 90% of
oil industry
• Monopoly – total
control of a type of
industry by one person
or one company
New Business
Organizations
• Americans feared
monopolies
• 1880s many states tried
to stop horizontal
integration
• Made it illegal for one
company to own stock
in another
New Business
Organizations
• 1882 Standard Oil
formed the first trust
o Trusts – a combination of firms
or corporations formed by a
legal agreement, especially to
reduce competition
o Person who manages the
property is called a trustee
o Stockholders received a share
in the trust and its profits
o Trustees could control a group
of companies
New Business
Organizations
• Holding companies – a
company whose primary
business is owning a
controlling share of stock in
other companies
• 1889 incorporation law
allowed companies to own
stock in other companies
• Holding company does not
produce anything itself
• Owns stock in companies
that do produce goods
• Holding company manages
its companies by merging
them into one
Investment Banking
• Investment bankers
help put holding
companies together
• J.P. Morgan most
successful investment
banker
• Helped sell large blocks
of stock at a discount
to bankers
• 1901 bought out
Andrew Carnegie and
formed U.S. Steel
Selling the Product
• N. W. Ayer and Son the
first advertising
company
o Created large ads
o Instead of small print
o 1900 retailers spent 90 million
on advertising
• 1877 John
Wanamaker’s
Philadelphia
department store
o Largest space to retail selling
on a single floor
Selling the Product
• Chain stores – a group of
stores owned by the
same company
• Woolworth’s focused on
low prices
• To reach millions in rural
areas retailers issued
catalogs
• Sears and Roebuck and
Montgomery Ward two
largest mail order retailers
• Used attractive
illustrations and
descriptions to sell items
Consolidating Industry
• What makes monopolies
disadvantageous for the
consumer?
Consolidating Industry
• If there is a monopoly,
competitive pricing
disappears, driving up costs
to the consumer