Lesson 5
Business Practices and Competition

California History/Social Science Framework

ASSUMPTION:

Corporations are continuing to increase in size, wealth and global reach. In many industrial sectors, a few mega-corporations dominate the market. We should assess these trends and evaluate efforts by multi-national corporations to remain competitive in the context of global markets by exporting US labor to third world countries. In particular, consideration should be given to negative impacts on both first and third world workers and the environment. Students should be aware that what is good for the corporation, is not always good for society as a whole.

DESCRIPTION:

This lesson helps students weigh the benefits and costs associated with large corporations and shared monopoly industries. This lesson also introduces students to the kinds of exploitation caused by corporations seeking to maximize their profits in the global market place.

ACTIVITY 5-1

Students will use the Internet to investigate the market concentration of the soft drink industry and the dominant corporations in it. After students read and answer questions about the soft drink industry, they can research other industries to determine market concentration and learn about other conglomerates to see which brands/companies they own.

ACTIVITY 5-2

Students will read two articles about US companies closing down their plants in the US and relocating to Mexico. Students will be asked to answer questions which are both factual and interpretive and which point to possible solutions of the problem. The lesson is particularly suited to exploring the ethical dimensions of global markets and multi-national corporations.

BACKGROUND FOR THE TEACHER

Large, powerful corporations are the dominant players in today's world economy. In US non-farm industries, corporations account for over 90% of revenue, while proprietorships, partnerships and cooperatives make up the rest. Among corporations, the 500 largest as measured by Fortune magazine for 1997 had a total of $5.5 trillion in sales, or 68% of the $8.1 trillion GDP value. The top 10 on the Fortune list had a total combined revenue of $973 billion in 1997, or 12% of GDP. Because of foreign operations, not all of these corporations' revenues counted towards GDP. The comparison is used more as a barometer. The top Fortune 500 company by revenue in 1997 was General Motors with $178 billion. That revenue is roughly greater than each of at least 150 countries' GDPs and less than only 30 countries'.

How have corporations become so big? Many corporations have become conglomerates, or a company consisting of a number of subsidiary companies in unrelated industries. A subsidiary is a company owned or controlled by another company. For example, Pepsi Co, Inc. is a conglomerate with its obvious beverage division and with subsidiaries such as Frito-Lay and Tropicana Juices (acquired in July 1998) as well as other subsidiaries. Pepsi is horizontally integrated with these subsidiaries and vertically integrated in its soft drink operations by owning some bottling operations.

Large corporations like Pepsi can keep prices low by reducing their costs through mass production and economies of scale. They can buy supplies in bulk at a discount and use technology to lower costs. However, the costs of advertising, transportation and distribution around the country, as well as mountains of bureaucratic work push up prices. Additionally, companies in industries with few significant competitors have the power to raise their price. Apart from price, other factors besides price to consider when evaluating the pros and cons of large corporations are the quality of products, working conditions, impact on the environment, ability to influence the government and laws, movement of operations to foreign countries and impact on culture.

Not only do corporations have tremendous wealth and size, but certain industries, such as the soft drink and auto industries are dominated by a few corporations. Both these industries are shared monopolies, or oligopolies where the market concentration ratio is greater than 50%. The concentration ratio is the percentage of total sales in an industry accounted for by the largest four firms. In 1996, GM(32.1%), Ford(25.1%) and Chrysler(15.9%) accounted for 73.1 % of the car and light truck market[Automotive News, October 7, 1996]. In 1997, Coca-Cola, Pepsi Co and Dr. Pepper/Seven Up (a subsidiary of Cadbury-Schweppes) had 90% of the market share in the soft drink industry [National Soft Drink Association, www.nsda.org]. Adding to market concentration and the size of corporations is the record number of companies merging or taking over one another. In 1997, there were $938 billion in merger and acquisition activity, up 40% from 1996 [Fortune, April 27,1998].

Another issue to consider is the fact that many multi-national corporations (primarily US based) are packing up their factories at home and setting up shop in Third World countries where, because of the depressed economies, they are able to pay as little as 25 cents an hour for labor ($.50 in Mexico). American workers, who have organized in unions to protect their wage levels, suddenly find themselves out of a job, while those who replace them must endure factories with few health and safety standards, labor policies and/or poor environmental standards.

Those who own and manage the factories feel that it is a move they must make for if they do not exploit the cheapest labor possible, someone else who does will out sell them, or worse, will take over their business. In the world of hostile takeovers, every company is struggling to remain solvent.

Corporate executives justify their actions in terms of their duty to stockholders and the laws of the market economy. They do not believe that they have any responsibility to look out for the welfare of another country's citizens. This seems to be the role of that country's government. The question arises, what are the ethical responsibilities of such corporations. This is another example of how the market economy pretends to be values-neutral while in fact it is valuing profit and private gain over broader social and environmental welfare.

One solution, proposed in the book, For the Common Good , is to reinstate a compre- hensive tariff system. This woul d again make nations the primary economic unit. A move like this would force each nation to become more self-sufficient and less dependent on the success of just a small number of products for export. This is of course antithetical to the current intentions of many reflected in the North American Free Trade Agreement.

Corporations today clearly have the clout to make a positive impact on society and the environment with their business practices. For example, Coca-Cola has helped increase the recycling of cans and bottles by making them recyclable and promoting awareness of recycling. In 1996, the National Soft Drink Association estimated the 57.6% of soft drink bottles and cans were recycled. However, this percentage and the market for recycling could be much improved by more effort from Coca-Cola. As of Fall 1997, Coca-Cola did not use any recycled plastic in their growing number of plastic bottles instead opting to use cheaper plastic made from virgin materials, mostly oil. If Coca-Cola (with 44% of the soft drink industry market share) chose to use recycled plastic, they would give the recycling market a tremendous boost. This would greatly help "close the loop" of recycling. If they demanded recycled plastic, there would be more incentive for greater collection rates of plastic bottles and for the recycling industry to expand its infrastructure which would lead to lower prices.

Finally, Adam Smith himself could give sound advice to the modern world. He warned of the dangers of monopoly and the concentration of wealth. It will be important, if we are to do anything about the growing gaps between the few rich and the many poor, to reinstate strong anti-trust laws. Of course, this means disentangling the political ties between government and business, which fundamentally means challenging the belief that what is good for big business is good for society.

QUESTIONS TO EXPLORE

Should US workers abandon all the gains they have made by unionizing in order to keep their jobs?

What are the ethical responsibilities of a company to its workers?

Is it true that what is good for big business is good for society?

When is bigger better and when is it not ?

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