Ben: Hello, I'm Ben Wattenberg.
On this edition of "Think Tank" we go to the
Harvard Business School to talk about the
global business revolution.
What does it mean and what do the business
revolutions of the past teach us about the
present?
Joining us is Assistant Professor Nancy Kane,
author of the "Power of Commerce: Economy
and Governance in the First British Empire."
Professor Kane is presently writing a book
on the history of business revolutions.
The world is in the midst of a Third Industrial
Revolution, or at least that is what they're
teaching at the Harvard Business School.
The First Industrial Revolution began in the
late 1700s with the arrival of early factories,
machine tools, and the first corporations.
The Second Industrial Revolution began in
the 1840s and was triggered by the advent
of the railroad, the telegraph, and later,
the internal combustion engine.
With revolution comes opportunity.
Andrew Carnegie built an empire based on steel.
Jay Gould built a fortune out of railroads.
John Rockefeller controlled the oil market.
At the end of the 20th century, we are in
a Third Industrial Revolution born of rapid
innovation in information processing and communications
technologies.
And once again, there are great opportunities
as well as great risks.
To prepare Harvard's business students for
this fast-changing world, Professor Nancy
Kane invites them to study the past.
Nancy Kane of the Harvard Business School,
welcome to "Think Tank".
Nancy: Thank you.
Ben: You are a business historian.
You are writing a book, I understand, about
the three industrial revolutions.
What are they?
There's an obvious question to start with.
Nancy: Well, they are moments, I'd say, succinctly
of overarching defining economic change.
The change is not necessarily confined to
economics but it's mostly, if history serves
us well, driven by economic change often with
technological drivers, technological causes.
Ben: Okay, what's number one?
Nancy: First one.
Britain, 1760 to 1820, Manchester, the West
Riding of Yorkshire, Northwest England, the
Silicon Valley of the 18th century were spinning
textiles, mostly cotton, some metalware industry,
and manufacturing which seems primitive by
our standards but would've been a quantum
leap in productivity, and in income, and the
possibility of profits by the standards of
the time.
So the first one is Britain, late 18th century.
Ben: Is that driven by the steam engine?
Nancy: Steam engine is important but it doesn't
really...it's not the critical driver.
The critical driver are things that seem so
quaint by our standards.
The spinning jenny, Arkwright's water frame
to weave more efficiently.
The steam engine is important but it isn't
the thing that gets the revolution started.
I mean, there's a whole host of it in related
factors, but the technology, again by our
standards, is primitive.
And it's concerned primarily around spinning
and weaving textiles, and to a certain extent
around metalworking processes.
Ben: And theoretically, it flies under the
flag of Adam Smith?
I mean, he is...these are entrepreneurial
activities in a fairly free environment.
Nancy: They are...yes.
They are entrepreneurial activities.
The political environment is propitious, is
nurturing of those things.
But I'm not sure Smith himself would've waved
the banner of progress around these things.
I think the technological change he was just
beginning to witness when he wrote "Wealth
of Nations" which is published in 1776, I
think that technological change may even make
him a bit nervous because it's such a significant
change.
Visually, economically, culturally, it's the
birth of a management class in a very nebulous,
small-term kind of way.
It's changing regional balances of power,
right.
Suddenly, Manchester, Liverpool, the north
of England is important.
Agriculture continues to be the major source
of wealth in England, and of power, but suddenly,
there's emerging some cracks in that balance
of power, this landscape of that power.
And so, I quite...I mean, I really think Smith
was actually a bit nervous about what he saw.
Ben: Okay.
What's phase 2?
Nancy: Second Industrial Revolution, less
well-known to students of elementary and high
school history, is the period of time centered
in the United States between roughly 1870
and 1920.
This is called the Second Industrial Revolution.
It's, again, got technological drivers that
are critical, the railroad and the telegraph,
which link people, and places, and goods,
and businesses in new ways, and which create
a national market for the first time.
Because until you can move carpets, and cows,
and iron bars around, you can't really have
a national steel industry.
And that, of course, requires some other technological
innovations.
Ben: And that drives national advertising.
Nancy: And that drives National Biscuit Company.
You need a biscuit?
Nabisco.
That drives national advertising.
The first issue of Printers' Ink is the end
of the...is the middle of the 1880s and it's
growing up in tandem with the rise of big
business.
Ben: Printers' Ink being the trade magazine
for the advertising [crosstalk 00:07:51]
Nancy: The early trade magazine for the advertising
industry.
So this is the birth of Coca-Cola, of Sears,
Roebuck, of Montgomery Wards, of all the department
stores.
Ben: Of catalog sales.
Nancy: Of catalog sales because you need a
railroad before you can have the 19th-century
counterpart of electronic commerce.
This is the birth of U.S. steel which is...it
grows out of Carnegie Steel.
This is the birth of General Electric.
Two hundred and forty-seven of last year's
Fortune 500 companies are founded between
1880 and 1920.
Two hundred and forty-seven.
So if we think a quarter is a long time, you
know, in the half-life of capitalism, imagine
what that says about the window of opportunity
at these moments of change.
Ben: But what is the third exclamation point?
Nancy: Well, I call it the Third Industrial
Revolution.
That's historical bias.
We could call it the information revolution,
we could call it the communications revolution,
we could call it the computer revolution.
And we were doing that two years ago before
the internet was on everyone's lips.
Ben: Right.
Nancy: But it begins somewhere I think around
1970.
One of my very esteemed colleagues, Al Chandler,
dates it earlier.
He says you can't understand the information
revolution without understanding the transistor
and a lot of different innovations that came
out of the Second World War, government-sponsored
research.
Ben: Radar, that kinda stuff.
Nancy: Radar.
I've chosen 1970 because it seems to be a
moment when a variety of stabilizing buttresses
in global capitalism seem to give way.
The American dominance, which has persisted
in the global economy since 1945, is no longer
a sort of postulate or first principle.
The power of information technology is understood
in terms of the mainframe.
IBM comes out with its sort of paradigm-shifting
system 360 in 1963, makes its first investments
in that.
And that's just beginning to be felt.
By the mid-'70s, it will be something called
the Home Brew Computer Club meeting in a classroom
at Stanford University full of a bunch of
hobbyists saying, "There's something really
neat going on in a personal computer."
Apple will be founded in that decade.
Microsoft will be founded in 1978.
I like to date it about 1970 because a bunch
of different drivers seem to come together.
There seems to be a concatenation of stuff
happening that's interesting then.
Ben: Yeah, yeah.
Are we still in that Third Industrial Revolution?
Nancy: Most definitely.
Most definitely.
We are I think...to go back to the Second
Industrial Revolution and use an analogy,
we are in the very thick of it.
And that's why...that's one of the reasons
the stock market is so excited about technology
and high technology.
That's also one of the reasons the market
is quite capricious because the buttresses,
the lynchpins, the ballasts of a competitive
order in high technology and all the other
firms are affected by it, many of which are
Second Industrial Revolution firms, hasn't
yet been established.
That ecosystem isn't yet stabilized in any
real sense.
Ben: In the last four years in the global
economy, the, I guess, global gross domestic
product has grown at a rate of 4% a year.
In the previous 20 years, it's grown about
2% a year.
A big argument going on, is this just a normal
up fluctuation or is this a new plateau in
this Third Industrial Revolution, golden age
of the economy, all this technology?
You are a historian, you ought to be able
to look forward as well.
Nancy: Oh, absolutely.
Absolutely.
That makes historians a bit nervous.
Let's just be...truth in advertising but...
Ben: You just talk and I'll call my broker.
Okay, right, yeah.
Nancy: I think it's directly a function of
what's happening in this Third Industrial
Revolution.
Ben: So it may well continue at that higher
level of growth?
Nancy: It might well continue.
If we look back at GNP numbers which are loose
and shaky in terms of how...because there
is no bureau of labor statistics, there is
no department of commerce to collect those
in the 18th and 19 centuries.
But if we reconstruct those numbers as best
we can, we see that these moments of change,
these windows of opportunity bring spikes,
bring spikes in production.
And over the long term, those spikes seem
to lead to a rising increase in economic productivity
and in growth.
But are those spikes lead to a smooth path
towards that?
No.
I mean, the late 19th century, the Second
Industrial Revolution is froth with peaks
and valleys as 4% or 6% gives way to 2% during
significant business downturns.
So, is it likely that we're on autopilot or
cruise control with 4%?
I think not.
Is it likely that this kind of technological
change, and the organizational innovations,
and product innovations, and human resource
innovations that can come out of this can
drive long-term sustained increases in productivity?
Yes, it is.
Ben: Let me suggest something else.
If this revolution began in 1970, give or
take a few years, if we had been sitting...and
it's still going on, part and parcel of the
same deal.
If we had been sitting here in 1970 and I
told you, "Nancy, we are gonna be in within
a decade or so in for an era of global peace
where democracy is riding the crest of the
wave, where international trade is gonna increase
beyond our belief, where markets are going
to be worshiped by all including the communists
in China."
The fifth aspect would be technology and we
would agree that yeah.
Now, all those things happened and not a whole
lot of people were predicting them.
Nancy: No, no.
Ben: Now, isn't it fair...is it plausible
then to say that we are...the 1990s are the
third and a half industrial revolution?
I mean, isn't there a break in there somewhere
around the mid-'80s or so where suddenly,
all of these vast structural changes have
come about?
More than just technology and ships and, you
know...I mean, the structure of all the things
that you all at Harvard Business School and
in the entrepreneurial capitals of the world
have been saying, "What we need are more property
rights, and market rights, and laws, and such,
and such, and such in trade and democracy."
Nancy: Absolutely, Ben.
Maybe we should say that we're in the Third
Industrial Revolution Chapter 2 or Chapter
3, or somewhere in the middle of a novel getting
close to a denouement but...and it's much
more...you're absolutely right, it's much
more than just technology.
I mean, the...and the examples you gave are
perfect examples of that.
You know, globalization is, you know, buzzword
of the...and along with empowerment.
One of, you know, the words of the '90s is
linked to this technology.
I mean, it's a lot easier for IBM to do business
in China if they can connect to managers,
and markets, and input supplies via the internet
than it is if they don't have that kind of
technology.
But there's much more going on, right.
There's this huge political issue.
The five or six-round bout between state-planned
economies and capitalism that really ended
in the late '80s, right.
And capitalism won.
Adam Smith, you know, can roll over and rest
easy in his grave.
And that's a political issue as much as it's
a technological issue, just as the rise of
organized labor, antitrust legislation, labor
legislation that came out of that, the rise
of the federal reserve system.
Those were political issues that came with
the Second Industrial Revolution.
Till you have a factory...till you have mass
numbers of people working in a factory, you
don't really have organized labor.
Ben: Right.
Nancy: So, I think it's Chapter 3, and as
you said, being driven by much more than technology.
Politics, social issues, the power of communication
to make one person or one brand a global brand
very quickly so that Michael Jordan is known
around the world as is Madonna.
All those threads are interrelated in this
very rich quilt, chaotic weave of the Third
Industrial Revolution.
And they're gonna give way...if history's
any guide, they're gonna give way to another
very interesting quilt.
And a few people like your hypothetical conversants
in 1970 are thinking about it very clearly.
And if history's any guide, those are people
like Josiah Wedgewood, or John Rockefeller,
or Bill Gates in 1970 who saw that there was
a market for software, for this new strange
machine called the personal computer.
Ben: Do you know of specific businessmen and
businesswomen who avocationally really get
off on studying business history of the sort
that you commit?
Nancy: Yes.
I mean, that is anecdotally talking to lots
of business leaders, I can't tell you how
responsive the cord is.
And a lot of it takes place around the enterprise
of biography.
And there's lots of interesting media statistics
to tell us about how interested people are
in biography and we know the History Channel
is very, very interested, is very, very compelling
for people right now, at least if, you know,
subscribers are any signs.
Ben: Well, and that program, "Biography,"
is one of the great success stories in cable
television, that particular series.
Nancy: Exactly.
And what business people tell me and some
of this is told through work I've done talking
to alumni, and some of it is done through
work I've done writing cases about specific
businesses, and some of it just comes from
speaking about business history to business
leaders.
And the immediate response is, "Wow.
This looks a lot like something I'm dealing
with now.
What can I learn from the way Rockefellers
thought about market share?
Or what can I learn from the way Andrew Carnegie
dealt with human resource management issues
and the kind of trouble and confusion he suffered
around some of those issues?"
Ben: What's the answer?
What can you learn?
What can a businessman today...if he sat through
your courses and learned about Carnegie, and
Rockefeller, and Bill Gates, and whoever,
what should he know about what to do tomorrow
from what happened yesterday?
Nancy: Probably the most important lesson
he can learn...and this is not something that
I think is drummed into us in the pace and
the challenge of everyday business life is
that once you...you need to have a strategy
and a structure for your organization that
are mutually reinforcing.
It's not enough to understand your strengths
and weaknesses inside your company.
Also, have to understand what the opportunities
and threats are on the outside.
Ben: We don't let the guests get away with
strategy and structure.
That's too archaic.
You've gotta tell us what you're talking about,
yeah.
Nancy: Okay.
John Rockefeller decides that the name of
the game, the way to make money in oil refining...this
is before oil refining is an established business,
before his companies will be some of the world's
leaders in the global oil business, decides
that the way he has to make money in this
particular business is to run his plants very
full, to never let the refining fire go down.
We have to run them absolutely full.
We have to use every single bit of capital
that we possibly can.
This is not a labor-intensive business, oil
refining.
And once he understands that, then he understands
that the fast...before you can run your plants...it's
not so dissimilar from making steel today
or parts of the automobile manufacturing business.
Once you run your plants absolutely full,
you can drive price down very, very quickly.
Ben: You have more product to advertise out
the capital costs of the investment.
Nancy: Absolutely.
And it's all high fixed costs.
It's not marginal cost.
So once you can do that, you can command incredibly
important price advantages.
Oil is not exactly like a double latte.
It's much harder to brand than a tennis shoe
or a specialty coffee drink.
So price is the name of the game with the
consumer.
And he does a little bit of marketing but
it's primarily understanding that.
Once he understands that, if he can get most
of the capacity, if he can control a lot of
the capacity and 16 years after getting into
the oil business on a very, very part-time
basis, he has 90% of the American oil refining
capacity.
Ben: In effect, creating the antitrust laws.
Nancy: The Sherman Antitrust Act passed in
1890.
Antitrust.
Why antitrust?
Why not pro-competition, antimonopoly?
Because standard oil is structured as a trust
and it's the biggest game in town as far as
big business.
And that's why that...that is the genesis
of the...or one of the very important catalysts
to the Sherman Antitrust Act.
So if your strategy is I wanna own world markets
or I want to own a big chunk of the American
market...and compare this to some of what
Bill Gates I think saw very precociously with
regard to operating system software and then...
Ben: He's about as well-liked as John D. Rockefeller
was.
Nancy: There are remarkable similarities in
the public's attitude towards both these business
leaders and towards the size of the markets
that they control.
Centralized business power makes Americans
nervous.
Never mind that the economics of software
production or oil refining may lead to efficient
production with one, or two, or three producers
only.
Never mind that.
There's a lot of...I think there are a host
of complicated reasons that make us nervous
about centralized power.
But once Rockefeller has a strategy, once
he has a strategy, then he creates a structure.
And his strategy is basically acquire capacity
as efficiently as you can.
He creates an organizational structure, a
senior team of people, a kitchen cabinet if
you will, and he governs it with consensus.
Very different kind of governing or management
ethos to the one we believe prevails in Microsoft.
So, he understands that he...if he's brought
in people into the oil industry, acquired
their capacity, he needs to give them time
to speak, time to air their views.
And so, he has a structure in place for gathering
information, marketing, manufacturing, distribution
that fits very nicely with what the strategy
is, world...aggrandize market share, run your
plants full, keep the price low.
That commands all kinds of other advantages
upstream, right, with crude oil suppliers
and downstream with distributors if you're
the biggest player in town.
So, if you ask me what do you really need
to learn from history?
And you can see it so forcefully in history
because you see people fumbling their way
into victory or walking backward into the
future as one of my colleagues, Richard Tedlow,
says.
You see it so clearly in history.
It's not enough to just have a strategy to
win in a market.
You have to have an internal structure that
supports that.
And you can't let your structure drive your
strategy because capitalism waits for no man.
The market waits for no one.
The question is very important, what will
the government's role be in an emerging set
of industries in which there clearly are economies
of scale and economies of scope?
Economies of scale meaning add more inputs,
get more than...get more output than the inputs
you add.
Double your inputs, get more than double outputs.
Economies of scope in that if I produce a
set of chemicals, I can also produce a kind
of nylon very efficiently.
If I produce Excel, I can also produce Word.
If I produce Excel, I can also produce Encarta.
So, the short answer is I'm not exactly sure
what the government will do.
I mean, if we just take Microsoft for an example,
the government is very avidly interested in
most of the moves that that company makes.
And the division of the government that's
interested in that is the Department of Justice,
it's the Antitrust Division.
And there's a lot of pressure, political and
competitive, on the Antitrust Division to
make sure that Microsoft doesn't get too big
and too powerful.
Now, what do those words mean?
Well, that's a very important question and
it's not clear exactly what those words mean
for the Department of Justice, or for Microsoft's
competitors, or for American voters.
Ben: Let's just close this off not by talking
about business, you're a business historian,
but talking about history.
The kind of history you do is not the history
of kings, queens, presidents, wars.
It is, to some extent, bottom-up history.
And I wondered if you could explain this distinction
to me.
I know there is a big argument going on within
the historical community, the academic community
as to whether you should be talking about
the grand political decisions or about what
people do or perhaps somewhere in the middle
about how businesses operate.
I mean, the French historian...is it Braudel?
Is that his name?
Nancy: Fernand Braudel.
Ben: Yeah.
I mean, he is talking about how the peasants
lived in the Middle Ages and how that drives
the engine.
I wondered if you can tell us what...where
you stand on that and where business history
fits into that model?
Nancy: I think business history is a wonderful
nexus or bridge between them.
I mean, that's why what we have here is so
vital and really so rich.
That is we don't...I don't have to neglect
wars, or presidents, or legislation, or the
personalities of workers, or managers, or
lobbyists, or consultants because all of those
things are within the purview of a single
business leader, a single company.
So, for example, when we teach a case on organized
labor here, we've got the General Motors sit-down
strike which is an incredibly, incredibly
precocious snapshot of what was to come in
American labor relations from the '30s on
all the way into our time.
We don't just cover Alfred Sloan and his perspective
on organized labor, right.
We also, you know, think about what Frank
Murphy, the Governor of Michigan was thinking
about and what individual workers were writing
and talking about.
Because for that period, we actually have
film footage.
So we are, it seems to me, the enterprise
of business history is a way of speaking to
the breadth, the broad landscape of change
in a way that doesn't suggest that any one
group is somehow the most representative or
the most important in understanding the past
and how it describes and explains, and it
adds up to who we are today and where we're
going.
Ben: Okay.
Thank you very much, Nancy Kane of the Harvard
Business School, and thank you.
For "Think Tank," I'm Ben Wattenberg.
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