Introduction to Business History

Prof. Dr. Shubhabrata Basu

Chair – PGP MumbaiStrategic Management Area

Introduction to Business HistoryModule 1 Summary

Prof. Dr. Shubhabrata Basu

Integrated Programme in Management

IIM Indore

Business = Σf(FOP)

→ Output → $

Phoenicians → Value Add

Directly/Indirectly @ FOP

Mercantile

CommunityEntrepreneur

Labour Kapital

Land

π

ππ

π

π = Landlords

π = Industrialists

King, State, Guilds, Individual Traders/ Industrialists

M/C, Eqpt. $, Knowledge

Rules, Laws, PEST, Infra., Real Estate

Slave,

Indentured,

Knowledge

Workers

Consultancy

Knowledge Economy, City States e.g. Singapore

Manufacturing

Agro-Economies

π (notional) = SP/Rev (notional) – CP (real)

Knowledge & Skill Transfer, Own Enterprise, World wide Expansion vs. Exploitation, Degradation, Low Life Expectancy

Value Created @ POS :Age of Mercantilism – Balance of Trade

Colonies – Indentured Labour,

Richness of Crops, Trade in own

ships (navy), Wage cuts, Exploit

domestic resources

Ban on trade by Colonies, Staple

Ports, Ban on Bullion Payments,

Export Subsidies, Non-Tariff Barriers

Rich & Poor Divide↑, King Wasted Money on fruitless Wars

Physiocratic Reaction – Agriculture as source of Value Creation,

Reduce Superfluous Consumption, Let People Prosper as they are

Adam Smith: Theory of Moral Sentiments – How Emotions are

Generated – See → Evaluate → Benchmark against beliefs and Biases

→ cost-benefit tradeoffs → Societal Reaction → Decide

Co

gn

itive

Pro

cess

Axiomatic Truths: Man can think independently, Left to himself he can do

more benefit to himself & society, Nature is Harmonious.

Let man be freeLaissez Faire

5 TTs and 4 Waves: Colony expansion → trade expansion → demand increase → supply side

constraints → from labour to automation → cotton → railroad → iron/steel & petroleum,

automobile, chemical & pharma, electrical & electronics → network centric world

Characteristics: Time saving, labour extending/stretching/multi-skilling, resource extending, capital increasing, energy conserving

Reasons for fast adoption: Technology diffusion, all users, no novelty, no source of competitive advantages, Darwinian Evolution

Success Factors: Existing base of supporting industry, large scale mechanization, easy scientific laws.

Problem: Slowing rate of Innovation, no radically new scientific discoveries, boundaries w.r.t. FOP getting blurred.

If Nature Balances → Man be substituted,

Labour Markets should clear, Man vs. M/C

No Restriction on Movement, Migration to

Colonies as Indentured Labour, a new breed

of rag2riches Industrialists born, Some

Munificent Conditions helped

Railroad: Tool for connectivity,

Expansion, Infrastructural Demand,

Land Acquisition, Spinoff Business,

Employment, Experiment with Mgmt.

Styles, Dev. of Capital Markets &

statistical tools, Time & motion study,

Standardization, Politics-Business

Nexus, Ethical Dilemmas

Oil Industry: Efficiency led industry

consolidation, Standardization,

Innovative Products, Industrial Goons,

Business – alternative power centre,

political backlash, monopoly Anti-trust,

Business break up, TU violence,

Philanthropy, Creation of Universities

Steel Industry: Technology led

innovations, Growth from War

Economy, Scale Economies,

Work hours, TU unrest, selling

business for profits,

Philanthropic Spinoff of

business research centres to

Universities

Auto Industry: Work Flow,

Granularization, Time & motion,

synchronization, standardization,

scale & scope economies, low cost

mass market, rigidity, lack of

flexibility & innovation, efficient

labour market, Implicit Duopoly,

Assembly line vs. multi-brand

approach.

Food Industry: Free knowledge

from assembly line, efficiency,

rigidity & flexibility, consistency,

modular innovation, brand loyalty

and resilience, tradeoffs (burger vs.

pizza, limited product line), Franchise

model of growth – high authority,

high profit, low ownership, SKD

delivery model

Financial Meltdown in Capitalism

• Assumption: Entrepreneur/Agent (manager) can

– Assess Risk Correctly

– Convert Risk to Reward

– Investor Benefits from Profits

• 150 years Capital Market Success

– Norm: Risk → Reward →

– Bred Complacency

• Remember

• Recovery is round the corner

πEntropy

Inertia

Balancing Zone, Market Correction etc.

Introduction to Business HistoryModule 2 Summary

Prof. Dr. Shubhabrata Basu

Integrated Programme in Management

IIM Indore

Purusha Sukta: Rik Veda

Hymn:10:90 Sage - Narayan Entrepreneur

Labour Kapital

Land

Past Social Org. was “consciously

sacrificed” & new social order was

established based on knowledge

specialization & eugenics(?)

Community movement was allowed

Initial Nexus between Knowledge Consultants (Brahmin) and

Administrators (Kshatriya). Caste rigidity, imbalance in power

led to realignment & rebalancing. From Vedic Brahmanism to

Buddhism & Jainism. New Nexus between Kshatriya (Buddha &

Mahavir) & Shresthi (Best/most efficient Seller). Golden Age

(India: land of gold)- Maurya, Kushan & Gupta Period.

Turco-Afghan-Mongol Period.

Societal upheaval - New rulers,

new theologian (Ulema) – safe

occupation – Business – social

mobility re-established - modern

business communities emerged

Mughal – Trade Relations –

Insignificant , in favor of Mughal

Empire supported

by Land Revenue

Controlled transit

bottlenecks

Minted own

coinage

Mughal Subahdars extorted Trade

Guilds – Multiple Entry Tariffs

High transaction

cost of produce

Primary Producers didn’t

benefit from high sale price

Later Mughal/local Nawabs – less

control over land/transit points

Money Lender/Traders usurped

power- Monopoly over Economy

Discard old, mint new coins yearly

Loans to Zaminders – rent farming

Service charge on foreign currency

exchange

Maratha Incursion/Chauth

Royal Charter of 1600AD – Monopoly Trade Rights EIC Ascendency: Rent → Revenue

Trade π,

Bullion

Exchange,

War

Indemnity

Subsidiary Alliance, Land

Revenue (Mughal’s Name),

License – Plantation-Mining,

License to Joint Stock

Company, Coin Minting

→

Eastern Part – Indo-English

Joint Stock Co.; Western Part

– Family Owned Business

English Education & Influence

Society: Hierarchy to Heterarchy –

LELK – in same plane - redefinition

of skill & knowledge Utility/Value

From Individuals moving ↕ Communities &

Professions demanded same/similar

privilege – from Caste to Class based

Society, old rules defining job and activities

challenged & changed

Cultural Shock

Resistance

Adaptation

Swadeshi Movement, Reject

things English, Adopt things Indian

Ready Availability of Factor Inputs,

Ready Markets, Availability of

Traditional/modern technology for a

price, conformity to work/ethical

standards, fillip to local industry

Environmental Shock: WWII, 1947D⁻ S ⁻; D↑ S ↑; D ⁻ ↓ S ↑Incur Losses - Close

Control Supply-Control Demand-

License Raj, Nationalization, 5-Yr Plans

Find New Markets – SE

Asia, Middle East, Africa

Improve Quality and Build

Capabilities – IITs, IIMs

Family Business – Indian Identity & PSUs Prospered

Assured demand, technology↓, productivity ↓, TU↑

Competitiveness↓, Internal Consumption & Debt↑,

Politico-bureaucratic and business nexus emerged

BoP Crisis –

Economic LPG

Gold to IMF –

psychological

jolt – NEP 1991

Invite FDI, FIIs Institutional/Policy Support than Subsidy to New Age Firms & Industries in Service Sector, Tax Holiday to IT & ITeS Co. Firms graduate from Outsourced to

Inhouse Value added Models (Infosys

1.0 to Infosys 3.0). Business Models

transformed from Family Businesses

to Professionally Managed DMNCs

3 groups – Family Business Conglomerates & MNCs (Tatas,

Birlas, M&M, Ambanis) vs. Joint Stock Professional

Enterprises (Infosys, HCL) & Foreign MNCs (HUL, P&G)

Social Enterprise

– Goonj, G-Auto,

& PSUs

EntrepGrass Root Capital MarketAdmin

Evolution and Emergence of Knowledge Based

Egalitarian Business Economy and Society

Trade in textile-spices-opium - minerals & bullions

Replaced Hundi System

Railways by 1880s totally supplanted Hundi System

Questions/doubts

• In the Class discussion today the data proved that there is a decline in the sales of two-wheeler vehicles

after liberalization. And you have said that it is because of people became economically better off after the

liberalization and could afford four-wheeler vehicles.

• But I feel that in a country like India where the number of people moving from middle class to rich is lower

than the number of people moving from poor to middle class there should be an increase in the sales of

two- wheeler vehicles.

• So Is there any external factor that has resulted in such a phenomenon? or by any chance is it a case that

the growth in the initial period of post liberalization is limited to the rich and middle class and didn't reach

the bottom of the ladder? and from a Auto mobile company's point of view can we say that in general when

economic growth in India is high it should be prepared for more demand for four- wheelers and less

demand for two- wheelers?

• There are studies that show that percentage movement from middle class to upper middle class (courtesy

IT sector) is higher than any other segment – consequently Car Manufacturers have made a killing. Also,

with change in demography (the 1991 generation or GenX & Ys) bikes with a perception of machoism is

more acceptable than scooties (instead of scooters). Hence in the 2 wheeler segment, bikes (heavier &

costlier) ones and scooties (for the college girls) sell more. The scooter is dead as a door nail.

Doubts:

1. In retrospect, a common comment that is made, is that the 2nd 5 year plan's radical shift in focus to industries,

even before agriculture stabilized was a decision rushed into. On the same note, so was the decision to shift focus

from industrial sector even before it gained some foothold. But it is too hard to believe and digest, that not one

could foresee or logically predict that industries take a long gestation period to bear fruits. It is definitely not a

paucity of acumen of any sort but somewhere, a politically motivated move. Could you please

elaborate/negate/agree with justifications, to confirm or challenge this deduction of mine, courtesy just my gut?

• Typically in business, you invest in the frontier technology/sector – rather than your cash cow product or

contiguous sector. Due to product life cycle, investing in a contiguous sector is less profitable.

2. During the Swadeshi movement, the aim was to embrace it as an identity and pay a premium for Indian and locally

produced goods over the British goods, in the name of Nationalism and Patriotism. In the contemporary sense of

it, is this what we would call as Brand Loyalty? If yes, How could a firm possibly cultivate such a followership,

almost like a sense of devotion for the product?

• Sort of – though in terms of construct – they are different. Brand loyalty is build on persistent efforts in reinforcing

the said quality and reminding a free customer of the same. Nationalism/Patriotism often follows MOB mentality –

i.e. irrational decision making process

3. With regards to discussions relating to economies of scale and scope, I got to thinking of a common observation and

wanted to know if it had any relation to it. ATMs of various Banks are clustered at a same spot in a shopping mall

or for that matter, even Bank Branches in central office complexes in a city. Is there a reason for the same? What

logic validates this phenomenon?

• Economies of scale and scope are intrinsic (within the firm’s production process) phenomenon – while locating &

clustering ATMs is Network Externality phenomenon. A customer would feel safe if another couple of customers

are withdrawing their money from adjacent ATMs – rather than middle of no-where (SBI Rau ATM – 2008)

Doubts:

4. This is a question that was partially answered in the class too. Yet I believe I have failed to achieve a certain clarity about the

same. Why was technology not imported to/by India during the British Raj? This is not regarding just the influx of entrepreneurs

from the colonial masters, but also about the BEIC not setting up units here during their years of trading here, rather exported

raw materials, and imported the finished goods. There is definitely reason to believe that profit margins would have been higher

what with the transportation costs to-and-fro eliminated, just the cost of setting up the industries acting as a fixed cost. Also since

the administration was in their hands, they could have exported the finished goods to home land for their demand Perhaps,

references to timelines and years would further help my understanding, pardon my ignorance of the same. My question here,

has its roots in the conjecture that had technology been imported here sooner, we would have been mechanised sooner;

perhaps on par with the industrialised countries as on date, had we been an early adapter to it.

• Will you be willing to get a degree from an ONLINE format that adopts MOOC? If no – which is the general response – then that

answers your question. Though a technology is developed and tested, there is a time lag for its mass adoption

5. This question may be a little out of context. Please bear with me, it refers to a problem of efficiency. With the principal-agent

system bearing satisfactory (understatement :P) results in the private sector, why are government systems (PSUs etc) inefficient

in the sense of tasks and execution of targets and customer services? Agreed, direct accountability is a factor, which is absent in

a government system, but where is this seepage/infusion of pessimism that "Government system is inefficient" coming from?

Where is the fundamental flaw?

• Govt/PSU have higher degree of accountability than private sectors – that delays response time. Also PSU are like common

goods – hence no one champions their cause – there are no additional incentives. Hence they are increasingly classified these

days under social NOT ALWAYS for profit enterprises.

6. With regards to today's (Session 19) lecture, how is that Apple shall permit those 1000 units that don't pass "apple" standards to be

sold under its brand name in the local markets of China? If it was so frivolous a difference, then they might as well sell it to the

world and accept the product as their own for all customers.. I fail to follow the reasoning here.

• Its not Apple (a black 20% eaten apple) – but can be a green/red apple with a different brand name like AMPLE or bear a logo

like mango and with the brand called MANGO!!!

No Comments from my side – already explained I guess!!!

• Entrepreneur -> The one with the idea and capability to "nurture" factor inputs (if he is made available the initial

capital/inputs/requisite funds) -> Traders/Vaishyas -> Modern day Company/firm (going by crude understanding of the

Coase theroy that you talked about as the reason for existence of firm/company -> intermediaries are inefficient unless

organized as firm-> because firm performs the essential function of value addition)

• Kapital -> Knowledge Capital/ advisor -> Brahmanas-> Modern day Consultants

• Landlord-> Protector of factor inputs-> Kshatriyas -> modern day Investment Banker.

• Labor (the same as you told) -> User of skills -> Sudras -> modern day OM/ marketing /HR people.

• I have attached a file (FOP model), to explain my doubt better and the basis of allocation.

• 2) What did we gain by abolishing managing agency system? Why don't we see any managing agency houses today?

What led us to internalize the concept of managing agency into present day manager.

• Explanation -

• The reason I know for the decline of agency houses is due to the abuse of the system/ exploitation of benefits in your

favor because of information asymmetry -> basically the principal agency problem. But this problem still exits even

today and as long as management is separate from ownership, this is bound to exist. Then how are we better off? In

fact, if we see today's scenario, why isn't it better for a company to outsource its management to a better firm who has

the capability to do that, when the information asymmetry has to remain anyways. Also, the firm/agency can be chosen

by majority vote of shareholders. If we can outsource a part of our business, why can't we outsource this? Is it just

because we have not got such perfect firms today which can provide this service of managing a business or there is

something more to it? It is always possible to get a group of people who are specialized in a task. If there can be

consulting firms, why can't there be managing firms?