Lecture 4:

Third industrial revolution¸ changing nature of technology from chemicals to physics.

Main cluster:

1. Communications, like internet, personal computer
2. Transportation, bigger and faster aircraft
3. Physical materials, atomic energy
4. Biotechnology, manipulation of cells

General purpose technology, semiconductor and integrated circuit and one of the basic pillars of modern electricity.

During the third industrial revolution, the death of distance started to occur. Transporting information and goods is cheaper than ever, more efficient distribution networks and homogenization of culture. Therefore new market possibilities started to occur due to communication technologies, like big data an statistics

Pessimist view of ICT-revolution and productivity, like you can see the computer age everywhere except in the productivity statistics and the ICT revolution mostly affected entertainment and communication.

Neutral or positive view, the cumulative impact on labour productivity by 2006 was about the same as the steam over the whole 150-year period (1760-1910).

National systems of innovation, network of institutions at every level cooperating in the innovative process. Public institutions like laboratories took part, but also private companies and private universities.

Why did the system emerge then and not before, because the R&D costs were high and low-hanging fruits were disappearing, new inventions required a larger amount of basic research than previously.

The case of the US:

Private companies were leading the research. Universities were providing management expertise and received direct or indirect support from private companies. Private research laboratories had close ties with the government.

Federal government promoted research in three ways:

1. Provision of funds for research institutes and laboratories
2. Strategic buying to research in specific technologies
3. Creation of federal agencies with ties to business community to promote cooperation

While there was no increase in GPD there was an increase in intellectual property products lot of innovation).

Gordon says that the wave of innovation during this period was unrepeatable, Bakker et al, suggest as well large gains, but less than Gordon, because for example the increase in productivity is lower than previously thought and main clusters are not the dominant force of productivity improvement.

War is good for innovation, because we see a lot of innovation during this period

To meet war demands, budget constrained were removed and government agency established to ensure private companies contributed to competency in high-tech industries.

Features of success of USA (American Hegemony. This continued over time)

1. USA is productivity leader, high income level and strong demand
2. Largest economy
3. Government stimulus during war was continued due to cold war
4. First-rate scientists came to U.S.
5. Training programme for soldiers and in general
6. Investment in secondary and tertiary education
7. Consumer’s paradise in postwar era, because of developed distribution channels and strong advertising. It created changes in for example culture and housing.

The consumer culture, companies and values spread over the world

The origins of the beauty industry:

It included a lot of products, from cosmetics and bath products to deodorant and dental care.

The rise of the sector started in the 19^th century because:

1. Cultural shift: personal cleanliness became something normal
2. Economic reasons: rising wages increased discretionary income, transition from handicraft to mass production and marketing in the industry, urbanization and hygiene increased demand

America took leadership in the beauty market(followed by Europe): but why?

1. They had higher income levels
2. The market was homogenous
3. The dominant discourse of ideal female beauty was Caucasian
4. Developed retail network and advertising

As for other sector, the international market had potential for the spread of American firms because:

1. Further rise of income outside the U.S.
2. Dominance of Hollywood and its American beauty ideals
3. Realization of economies of scale with mass market products

Nevertheless American companies faced difficulties with going abroad, because there are several barriers to American hegemony:

1. The consumer preferences: the European market was highly segmented, Asian citizens on the other hand had different beauty standers. Also some market were highly volatile
2. Distribution channels: Restriction on media advertising and the existence of less commercial programs
3. Human physiology and government regulations: like different skin tone, diet, climate and government regulation was important for these products

How can a firm expand:

1. Vertical: backward (toward a raw material resources) forward (toward consumers of final products)
2. Horizontal: market extension within the same industry
3. Product extension (additional products): concentric (producing related products) conglomerate (producing unrelated products

Acquisitions and conglomerated emerged during the second half of the sixties. They are over during the seventies.

One example of the beauty industry, BAT, an American tobacco company, moved into cosmetics and fragrance industries.

Consequences for the firm of conglomerated:

1. Structure was highly decentralised
2. Mid-level entrepreneurship was fostered
3. Headquarters were small and focused on controlling functions such as finance or acquiring business
4. Reliance on statistical analysis
5. Even bigger companies than before (big businesses became bigger)

Causes of the emergence:

1. Favourable conditions: because there were large profits that had to be put to good use. These could be used for dividends, but a lot of shareholder were affluent and preferred long-term investment. Therefore companies started to invest internationally (although some sectors required substantial R&D, so they moved to industries that were profitable)
2. Economic explanations: access to market power to squeeze out small competitors and a firms resources may be good for other sectors, like the customer base, R&D or distribution channels
3. Sociological factors: self-interested managers seek for prestige and power not for shareholders’ profit and self-deluding managers overestimated their capacity to manage new businesses
4. Knowledge related factors: ICT decreases information/transaction costs within the firm and development of management as a science improves efficiency of managers to act on different markets.

Causes of the collapse of the conglomerates:

1. Macroeconomic factors: crisis of the 1970s exhibiting high unemployment, high interest rates and growing inflation
2. Restructuring of the economy: from manufacturing to services.
3. Difficult to manage companies in highly diversified sectors: specific problems of industries were forgotten and different corporate cultures and markets
4. Institutional investors came into play: shares were sold and purchased continuously which contributed to value a manager’s ability on the basis of indicators