54 • Chapter 1 • The Power of Principles: An Historical Perspective

areas using traditional multidivisional structures. These firms adopted complex matrix structures, in which two or more overlapping hierarchies are used simultaneously. Other firms, including Benetton, Nike, and Harley-Davidson, simplified their internal hierarchies, controlling product design and brand image but leaving most other functions, including manufacturing, distribution, and retailing, to independent market specialists.

Modern Infrastructure

Infrastructure today is marked by communications, transportation, and computing technologies that ensure coordination of extensive activities on a global scale. This, in turn, increases the interdependence of geographical markets and has magnified the costs of infrastructure failure. The interdependence of contemporary infrastructure was made tragically apparent in the aftermath of the September 11, 2001 terrorist attacks on New York and Washington. These attacks simultaneously halted two critical infrastructure sectors of the world economy—financial markets and air traffic. In addition, the attacks placed huge strains on other sectors whose influence cuts across the world economy, for example, insurance and leisure resorts.

Transportation

Automobile and air travel transformed the transportation infrastructure. Interstate trucking has become a competitor to the railroads in the shipment of freight. Air, rail, and ground travel have become better coordinated. Increasing demands from shippers of large volumes of goods for efficient and reliable transportation over long distances, coupled with more sophisticated communications and data processing technology, have allowed goods to be shipped in containers that move from ships to railroads to trucks. The widespread use of air travel for both freight and passengers has reduced the need for cities and firms to be close to railroads and waterways. What Chicago was to the second half of the nineteenth century, Atlanta was to the second half of the twentieth, despite its relatively poor rail and water connections.

Communications

Although fundamental developments in broadcasting, telecommunications, and computer technology occurred before World War II, many observers argue that the growth of these areas since 1950 has defined the economic infrastructure in the late twentieth century and set the stage for the twenty-first century. Observers struggle with how to characterize this new infrastructure, a recent effort being Thomas Friedman’s discussion of a “flat” world that combines globalization, technological change, and post-9/11 world politics.15 In particular, telecommunications technologies, such as the fax or the modem, have made possible the nearly instantaneous transmission and reception of large amounts of complex information over long distances, creating global markets for a wide range of products and services. This technology, coupled with continuing improvements in data processing, has also drastically increased worker productivity, and has made the paper-based coordination and control of older integrated firms obsolete. The Internet has increased the possibilities for interfirm coordination via contracts, alliances, and joint ventures.

Finance

The failure of financial markets in 1929, followed by worldwide recession in the 1930s, led to the creation of the modern financial infrastructure, through the separation

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of commercial and investment banking, the enhanced role of central banks, and the increased regulation of securities markets. The result was a stable financial services sector that supplied firms with equity and debt funding that the firms themselves could not provide through their retained earnings.

Deregulation of financial services in the 1970s and 1980s changed the role of the financial sector in the economic infrastructure. Since 1980, capital markets have more actively evaluated firm performance. The ready availability of large investment funds allowed mergers and acquisitions (M&A) to multiply in number and dollar amount per deal. Most recently, venture capitalists and investment banks are enabling entrepreneurs with good ideas to rapidly achieve the scale necessary to compete with larger rivals.

Production Technology

Computerization, the Internet, and other innovations have increased the sophistication of production technology, though with complex economic implications. Changes in production technology, such as the development of computer-aided design and manufacturing (CAD/CAM), have changed traditional ideas of price/quality tradeoffs and allowed the production of high-quality, tailor-made goods at low cost. In using new technologies, however, managers in the 2000s must choose between reformulating their strategies and reorganizing around new information and production technologies or using these technologies incrementally to reinforce traditional modes of production and organization.

Government

Government regulation of economic activities increased in the first half of the twentieth century, in response to two world wars and the Great Depression. Since the 1960s, the government has relaxed many of the traditional regulations on some industries while increasing them on others. The breakup of the Bell System, the deregulation of airline, trucking, financial services, and health care industries, and the weakening of banking regulations have been major influences in the economy since 1970. Intergovernmental treaties and agreements on the development of regional free trade zones, such as with the North American Free Trade Agreement (NAFTA) or the European Community, have greatly affected how firms compete in an increasingly global marketplace. Regulation of workplace safety, discrimination, and the environment became common in the 1960s and 1970s.

The government also spent vast sums on the military and public works. One area where the government has influenced infrastructure has been in support of Research and Development (R&D). Throughout the twentieth century, U.S. antitrust policy encouraged firms to develop new capabilities internally, through R&D efforts, rather than through M&As. Since World War II, a complex R&D establishment has developed that involves extensive government funding of basic research priorities in partnership with major research universities and private firms. Government policy has encouraged the diffusion and commercialization of R&D projects as well. The growth of the Internet out of the U.S. Defense Department and National Science Foundations origins is just a recent instance of the importance of government support of infrastructure R&D.

Summary Ever-rising demand in developed nations and globalization of trade flows have increased every firm’s potential market size. This has made it possible for specialized firms to achieve the kinds of economies of scale that were once