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Unformatted text preview: The Global Economy and World Politics Professor Edward Weisband Part III: The Firm Lecture 24: National Vertically Integrated Firms and Fordism The Fordist Firm: Vertical Integration and Economies of Scale First Cut Vertically integrated Fordist firms Calculate efficiency standards according to economies of scale (Alfred Marshall) Adopt a strict labor regime that separates mind from body according to the principles of scientific management and the devaluing of human capital (Frederick Taylor) The five keys to economies of scale and Fordism are: Mass production Standardized commodities Mass inventories Manufactured within national industrial formations Domestic Markets Economies of Scale: Cost Relative to Profit Economies of Scale = Cost Reductions from Mass Production in relation to Profitability Per Unit of Volume Produced Economies of scale relate efficiency, productivity and profitability By emphasizing the relation of costs of production to VAPr Economies of scale suggest That firms in certain sectors and industries confront pressures To be organized in terms of large size To produce mass inventories Sold in domestic markets at relatively small profit margins BUT with low overall input costs and large overall profits Henry Ford Four months after the forced annexation of Austria by the Nazis, Henry Ford accepts the Grand Cross of the Supreme Order of the German Eagle for his invaluable contributions to the Third Reich. Ford's services include large cash donations to the Nazis to finance their takeover of Germany, the manufacture of thousands of military vehicles and warplane engines to power the Nazi conquest of Europe and Britain and the supply of vital war materials. Ford is the first American and only the fourth person in the world to receive the highest decoration which the Reich can give to a nonGerman. One of Fords' brother honorees is none other than Il Duce, Benito Mussolini. German diplomats award Henry Ford, center, with their nation's highest decoration for foreigners, the Grand Cross of the German Eagle, in July 1938. Introduction of Fordism Henry Ford (July 30, 1863 April 7, 1947) was an engineering genius and political fascist who, in addition, was brilliant at innovation in the strict sense of the term Innovation represents business or industrial applications of invention to the production of goods and services Ford applied these principles to the reorganization and restructuring of industrial manufacturing processes Although the principles of economies of scale were understood prior to Ford Perhaps his most important innovation was to apply economies of scale to inventions in automobile engineering as a new process of manufacture called Fordism Fordism represents the innovation that combines vertical integration of specialization With mass assembly to produce a new range of automobiles At prices affordable to the middle class Defining Features of Fordism as Innovation in Manufacturing Fordism 1. 2. Internalization and the vertical coordination of ALL FORMS of Specialization The logic of economies of scale: Assembly Line and Mass production High volume, low unitlevel profit, large inventory profit JustInCase Warehouse Inventories Mass Distribution and Marketing of identical products and product lines 3. Devalorization of Labor: Principles of "scientific management" Taylorism and the devaluation of human capital and labor Fordist Firms and Vertical Integration Fordism represents mass production coordinated by hierarchy On the basis of economies of scale Fordist firms tended to acquire a Hierarchical or vertically integrated structure Relative to internalized specializations and attempt to mitigate the risks associated with interdependence By incorporating market functions within hierarchy for purposes of managerial coordination and above all, cost reductions Fordist Economies of Scale & Input Costs Fordism Generated Lower Input Costs: Workers specialized in single tasks Did not have to develop alternative skills (no multitasking) And were thus more productive Bulk purchasing lowered costs per unit of input Internalized research and development controlled those costs Bulk advertising Managerial expertise THEREFORE increased efficiency in the use of such inputs spread across production units decreased production costs Efficiency Standards in Fordism: Mass Purchasing, Production, Inventory, and Distribution PROCESS--COST REDUCTIONS Mass production Economies of scale and bulk purchasing Mass assembly Monotonous, specialized tasks routinely performed Which causes a systematic deskilling of labor By separating mind and body PRODUCT--PROFIT MARGINS ON STANDARDIZED PRODUCTS Standardized, uniform products Leads to large inventories of identical products Example: Ford's Model T All Model T's were same size, color, etc Ford's Model-T [FORD] See my people? Well, here's my theory of what this country is moving toward. Every worker, a cog in motion. Well, that's the notion of Henry Ford! One man tightens and one man ratchets and one man reaches to pull one cord. Car keeps moving in one direction. [ENSEMBLE] A genuflection to Henry Ford! Hallelujah! Praise the maker of the Model T! [FORD] Speed up the belt. Speed up the belt, Sam. [ENSEMBLE] Hallelujah! [COALHOUSE] Hell, I'll take her! [ENSEMBLE] Sure amazin` how far some fellas can see! [FORD] Speed up the belt. Speed up the belt, Sam. Speed up the belt. Speed up the belt, Sam! [ENSEMBLE & FORD] Speed up the, speed up the, speed up the speed up the belt! [ENSEMBLE] Mass production will sweep the nation. A simple notion, the world's reward. [FORD] Even people who ain't too clever can learn to tighten a nut forever, attach one pedal or pull one lever [ENSEMBLE] For Henry Ford! Henry Ford! Henry Ford! Henry Ford! [FORD] Grab your goggles [ENSEMBLE & FORD] And climb aboard! [COALHOUSE] I'm ready, Lord! Second Cut Why Efficiency in Mass Production: Large Inventories And Low Prices Cost advantages are derived From mass production and mass market distribution Because mass production reduces the average cost Of each commodity produced Identical individual products within large inventories Can be sold at lower prices Thus lower profit margins for individual products Lead to overwhelming large profit margins for the entire inventory Distributed by means of mass markets Cost reductions in relation to mass produced outputs represents Fordist efficiency standards Therefore, Fordism is the industrial and technical application of Marshallian concepts of economies of scale As Fordist firms produce more Fordist Standards of Efficiency Based on Economies of Scale Average costs of inputs decline Of same products or similar product lines Therefore, scale economies within a firm organized According to the dictates of assembly line and mass production Can generate output in more efficient ways And justify the carrying costs Of vertical integration and hierarchically organized industrial firms Overall valueadded profitability (VAPr) at the margins derive from Mass volume sales and large inventories Over a long period of time Not from the price or profit margin Generated from the sale of particular or unique Sets of products, product lines, or services Third Cut Fordism represents a form of production based on a industrial geography oriented to specific regions within a national economy The Ford River Rouge Complex was able to turn raw materials into running vehicles within this single complex (a prime example of vertical integration) The Spatialization of Fordism Over 100,000 workers were employed there in the 1930s The Rouge's coke ovens and foundry produced nearly all the parts of the Model T The Heartland Phenomenon: Agglomeration Fordism and the logics of economies of scale led to an industrial geography that emphasized the necessity of close proximity among firms, industries, and sectors relevant to the production process (agglomeration) Example: Automobile factories had to be built close to energy sources such as coal or water Moreover, related industries and sectors clustered around prime resources and related capital inputs including transportation and communication infrastructures Example: Textile factories had to be built near the cotton belt Thus Fordism became spatialized in accordance with the dynamics of geographic concentration OR agglomeration Fordist Efficiency Standards and Risk Production Costs Fordism: National Vertically Integrated Firms Lowered by applying the logics of economies of scale, mass production, mass inventories, and mass marketing Transaction Costs Carrying Costs Profit Margins --RISK!! Lowered because vertical integration internalized the specializations necessary for production and thus the risks of interdependence High because of the costs associated with vertical integration and bureaucratic hierarchy and JustInCase Inventories Low on mass produced, standardized products but high overall because of large numbers of individual sales ? Fourth Cut The Rise and Demise of the Fordist Firm: Heteronomous Demands and Efficiency Standards The question: IF the logic of Fordism based on the logics of vertical integration and economies of scale generated cost efficiencies and profitability... WHAT set of forces led to the erosion of the Fordist model of production and distribution? WHY do mass production, mass inventories, and mass forms of distribution in domestic markets no longer generate sufficient levels of profitability to justify vertical integration of firms? THE ANSWER to these questions points in the direction of heteronomous demand up scales of value addedness that in turn led to new efficiency pressures that required new forms of industrial organization and innovation The Challenge to Fordism: Market Choice and Heteronomy As we have seen in the past, hierarchical coordination and vertical integration of specialization solves one set of efficiency problems BUT these solutions generate their own new set of problems If the fordist vertically integrated firm solves the problem of efficiency through vertical integration and mass production Its capacity to generate value addedness up the scales of profitability become limited Thus, the entire logic of Fordism required revision At the historical moment when the carrying costs of the Fordist firm became excessive relative to the profit margins generated by and through standardized product lines Now, heteronomous demand rejected Fordist mass produced products The Linkages: Efficiency, Market Demand, and Production Ford extended market heteronomy By making available product lines That would otherwise have been inaccessible To the middle and working classes But once consumers began to demand greater variety AND were willing and able to pay for customized end products Heteronomous market demand turned against the product lines produced according to the Fordist logic of economies of scale and mass production Consumers in heteronomous markets generated demand and sought variety in product lines Thus the efficiency standards of economies of scale that guided Fordism became eroded A new logic OF INNOVATION was needed to link efficiency, market demand, and production beyond the agglomeration geography of national economies of scale ...
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This note was uploaded on 05/02/2010 for the course ECON 2064 taught by Professor Weisband during the Spring '10 term at Virginia Tech.

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