Chapte

r 3
Business Power
This chapter:
 Explains the underlying dynamics of the power of
business to change society.
 Discusses the limits of the power of business to change
society.

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 James B. Duke and the American Tobacco
Company Opening Case
 1870’s – Duke switched from chewing tobacco
to cigarettes.
 1881 –Used Russian immigrants to roll his
cigarettes and women to market them.
 1883 –Negotiates an exclusive contract for a
cigarette-rolling machine and expands his
sales to China.
 1884 – Embraced Rockefeller’s methods and
formed the American Tobacco trust.
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 James B. Duke and the American Tobacco
Company Opening Case (continued)
 1892 – 2.9 billion cigarettes sold.
 1903 – More than 10 million cigarettes sold.
 1911 – Duke’s monopoly broken up, but
millions of smokers remain.

Duke’s career illustrates the power of commerce to

change society.
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 The Nature of Business Power
 In past eras, dominant companies in
ascending industries changed societies
by altering all three of their primary
elements:
 Ideas
 Institutions
 Material things

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 What is Power?
 Power – the force or strength to act or compel another
entity to act.
 Business power – the force behind an act by a
company, industry, or sector.
 Social contract – society giving corporations the
authority to take necessary actions and permits a
profit.
 Legitimacy – the rightful use of power.

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 Levels and Spheres of Corporate Power
 Corporate actions have an impact on society
at two levels, and on each level they create
change.
 Surface level
 Deep level
 On both the surface and deep levels, business
power is exercised in spheres corresponding
to the seven business environments set forth
in Chapter 2.
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 Levels and Spheres of Corporate Power
TELPEPC (continued)
 Economic power is the ability of the corporation to
influence events, activities, and people by virtue of
control over resources, particularly property.
 Technological power is the ability to influence the
direction, rate, characteristics, and consequences of
physical innovations as they develop.
 Political power is the ability to influence
governments.
 Legal power is the ability to shape the laws of
society.

McGraw-Hill/Irwin 3-8 © 2006 The McGraw-Hill Companies, Inc. All rights reserved.
 Levels and Spheres of Corporate Power
(continued)
 Cultural power is the ability to influence cultural
values, habits, and institutions such as family.
 Environmental power is the impact of a company on
nature.
 Power over individuals is exercised over:
 Employees
 Managers
 Stockholders
 Consumers
 Citizens
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 The Story of the Railroads
 Railroads revolutionized transportation due to speed
and more direct routes.
 Railroads transformed capital markets.
 In the mid 1800s, railroads needed millions in capital to
continue expansion.
 Railroads sold bonds and offered stocks to raise capital,
creating the investment banking industry.
 Later, the financial and speculative mechanisms
inspired by railroad construction were in place when
other industries needed more capital to grow.

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 The Story of the Railroads (continued)
 Railroads spread impersonality and an ethic of
commerce.
 Trains took away young people from small towns and
brought in outsiders.
 For the convenience of the railroads, a General Time
Convention met in 1882 and standardized the time of
day.
 Towns reoriented themselves around their train
stations.

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 The Story of the Railroads (continued)
 Railroads changed American politics and
government.
 Political candidates and issues gained wider
exposure.
 Government subsidized but then later regulated
railroads.
 Railroads changed American society.
 Pioneered professional management teams,
division structures, and cost accounting.
 Contributed to the Indian wars.
 Imported labor whose descendents remain.
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 Two Perspectives on Business Power
 There is considerable disagreement about whether
business power is adequately checked and balanced
for the public good.
 Dominance theory – the basis of the dominance
model of the business-government-society
relationship discussed in Chapter 1.
 Pluralist theory – the basis for the countervailing
forces model in Chapter 1.

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 Two Perspectives on Business Power
Dominance Theory
 Business abuses the power its size
and wealth confer in many ways.
 Corporate asset concentration
creates monopoly or oligopoly in
markets that reduces competition
and harms consumers.
 The idea that concentration of
economic power results in abuse
arose in response to the awesome
economic growth of the
nineteenth century.
McGraw-Hill/Irwin 3-14
Dominance theory
The view that
business is the most
powerful institution in
society, because of
its control of wealth.
This power is held to
be inadequately
checked and,
therefore, excessive.
© 2006 The McGraw-Hill Companies, Inc. All rights reserved.
 Two Perspectives on Business Power
Dominance Theory (continued)
 A merger wave between 1895 and 1904 concentrated
economic growth.
 The public viewed these huge firms as colossal
monuments to greed.
 In the twentieth century, corporations continued to
grow in size, but the marked rise in asset
concentration slowed and leveled off.
 Today the number of transnational firms and the
scale of their activity has grown, however the largest
global firms do not show signs of concentrating
international assets.
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 Two Perspectives on Business Power
Dominance Theory (continued)
 Elite dominance – belief that Power elite
there is a small number of A small group of
individuals who, by virtue of individuals in control
wealth and position, control the of the economy,
government and the
nation. military.
 The Power Elite by C. Wright Mills
is the modern impetus for this
theory.

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 Two Perspectives on Business Power
Pluralist Theory
 Infused with democratic values Pluralist theory
 American society encompasses a A society with
large population spread over a multiple groups and
wide geography and engaged in institutions through
which power is
diverse occupations diffused.
 The Constitution encourages
pluralism

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 Boundaries of Managerial Power

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 Boundaries of Managerial Power
 Governments and laws in all countries regulate
business activity.
 Social interest groups represent every segment of
society and use many methods to restrain business.
 Social values are transmitted across generations,
reflected in public opinion, and embedded in the
law.
 Markets and economic stakeholders impose strong
limits.

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 Concluding Observations
 In a recent poll, 72 percent of Americans felt that “too
much power is concentrated in the hands of a few
large companies.”
 If corporate power remains generally accountable to
democratic controls, society will accord it legitimacy.
 If rule by law and a just economy exist, corporate
power will broadly and ultimately be directed
toward public welfare.

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