Business Practices and Competition

Lesson 5

"Students should learn how less than perfectly competitive markets operate and examine their impact on the economy. They should also learn that a pure market economy has disadvantages. . ."

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 ?

Activity 5-1

Objectives

·Learn how many industries are dominated by a few large corporations and that these corporations often are conglomerates that own many product brands

·Analyze the effect of large corporations on consumers and society

·Use the Internet to do directed research

Materials

Handout-Investigating the Soft Drink Industry

Transparency Model-Fortune 500: The 100 Largest US Corporations

Handout-Fortune 500: The 100 Largest Corporations- worldwide (reference for teacher)

Transparency Model-Market Share

Time

Two to four days

Evaluation

Completion of handout and participation in discussion

Vocabulary

corporation economies of scale market share market structure, concentration ratio conglomerate vertical integration subsidiary horizontal integration shared monopoly or oligopoly

Suggested Procedure

Note: Students should be familiar with the different forms of business organization and market structure, especially from the vocabulary above, before beginning this activity. This knowledge is necessary in order to answer the discussion/study questions.

1. Ask students what are the names of different soft drink companies. Create a list on an overhead transparency. (They will most likely think that many brands represent different companies when often they belong to the same company.) Announce that they are going to investigate this industry.

2. Have students read over handout and find a partner.

3. Have pairs of students use the Internet to complete handout.

4. Facilitate a class discussion using the discussion/study questions. Compare list generated in Step 1 to findings from research. Find out what other industries students researched and use discussion/study questions to analyze results.

5. To emphasize how many brands, even of the same product, can come from one modern corporation, ask your students the following:

­ What do Biz, Bold, Cascade, Cheer, Dawn, Joy and Tide have in common? All are detergents.

­ What do Camay, Coast, Lava, Head and Shoulders, Ivory, Pert, Prell, Safeguard and

Zest have in common? All are soaps or shampoos.

­ What do Crest and Gleem have in common? Both are toothpaste brands.

­ What do Jif and Skippy have in common? Both are peanut butter brands.

­ What do Pampers and Luvs have in common? Both are diaper brands.

­ What do Pro-V, Secret, Sure and Vidal Sasoon have in common? All are deodorants or hair sprays.

­ What do Comet, Mr. Clean and Spic and Span have in common? All are household cleaners.

­ What do ALL of these plus Chloraseptic, Clearasil, Crisco, Downy, Duncan Hines, Pepto-Bismol, Pringles, and Tylenol have in common? All are from one company, Procter and Gamble (#17 on the 1999 Fortune 500 list).

­ What do Tostitos, Cheetos, Doritos and Fritos have in common? All rhyme, are snack foods and come from Frito-Lay (which also has Lay's potato chips).

­Is Frito-Lay an independent company? No, it is a subsidiary of the Pepsi-Cola Company.

6. To emphasize the size of modern corporations, ask your students the following:

­ How much do you think the #1 company by revenue sold in 1998? Where do you think Microsoft ranked?

$161.3 billion-General Motors; Microsoft ranked 137th in 1997 revenue.

­ How much do you think the top 10 revenue companies in 1997 sold combined? Who might they be?

$973.8 billion; see Transparency Model

­ Project transparency to reveal answers and discuss figures. Stockholders' equity is the sum of all capital stock, paid-in capital and retained earnings at the company's year end.

7. To emphasize predominance of concentrated markets, project Transparency Model-Market Share and discuss.

Additional Activities

1. Have students investigate the market structure of an industry or the brand products of a large corporation. Either investigation should reveal the immense size of modern corporations.

One approach could be to tell students to choose one product their family usually buys and to research the parent company. Have the students find what other products the company sells, and its market share with its major product lines. Have each student report their findings to the class and count the number of corporations represented. (This will work best if all students choose a cereal brand, household soap/detergent or type of car.)

2. Have students take an inventory of the products in their house. They should create a list of all the brands. They can look on the labels to find the parent company of each brand and record that next to the brand name. In the end, they should calculate how many brands per company they have in their house and therefore determine which companies their family buys from the most.

Investigating the Soft Drink Industry

I. Go to www.nsda.org. Once there, double click on "About Soft Drinks". Click on the subtitles to search for the following information:

1. In 1998, how many gallons of soft drinks per year did the average American consume? The whole country consume?

2. What percentage of beverages sold in the US are soft drinks?

3. How many dollars of soft drinks were sold in the US in 1997?

II. Go to www.beverage-digest.com. Click on subtitles to find the following.

1. Which three companies have the largest market share? What percentage for each?

2. What is the concentration ratio for the soft drink industry?

3. Which three brands have the largest market share? What percentage for each?

4. Record a few other statistics about the top ten companies and/or brands that help you understand the current status of the soft drink market.

III. Go to www.pepsico.com or www.cocacola.com/co or elsewhere on the Web to find what other products besides soft drinks that these 2 companies make and sell.

IV. Investigate another industry to find out what companies and brands have the largest market share? Find answers to Section II above for that industry. Some industries to consider are: auto, aircraft, fast food, soap, blue jeans, snack food, tire. You will need to search the Web.

Recommended search strategy: Go to www.yahoo.com. Click on "Business and Economy" section. Enter "[name of industry] industry association" into the search box and hit 'return' on the keyboard. Scroll through search results looking for a national association for that industry, such as the National Soft Drink Association that was used in Section I. Go to website and investigate!

V. Extra Time: Try to find the brands of the top 2-3 companies both in and outside your selected industry.

Discussion/Study questions: Is bigger better?

1. What form of business are Pepsi and Coca Cola? How does that contribute to their size?

2. What type of market structure is the soft drink industry?

3. What are the advantages of having a few large companies dominate an industry? disadvantages?

4. What allows large companies to keep prices low? What makes it hard to keep prices low?

5. Are Pepsi and Coca-Cola conglomerates? How so?

HANDOUT 5-1

Activity 5-2

Objectives

· Promote awareness of US/Mexico border as First/Third World border

· Understand the reasons for the exportation of factories to the Third World

· Consider solutions to the problems created by global free trade

Materials

Student Handouts: In Search of Greater Profit/In Search of Cheaper Labor

Readings: Paying the Price for Free Trade/Up in Arms But Down in Clout/Why Mexico Scares the UAW/optional: Hope and Heartbreak

Time

Two class periods and homework

Evaluation

Answers to questions can be turned in.

Vocabulary

Multi-national corporation maquiladora tariff UAW

Free trade The Big 3 NAFTA

Suggested Procedure

1. Ask students what they know about the differences between the US and Mexican economies. Ask them how much money the average worker in each country might make. ($.40 Mexican minium wage, $5.75 US minimum wage)

2. Introduce the basic idea of the Maquiladora factories and review the vocabulary terms.

3. Have students read first two articles and answer questions #1-10.

4. Discuss article, especially why all these corporations are moving operations to Mexico.

5. Have students read third article and answer questions #11 and 12 to find out what has happened in Mexico.

6. Lead class through "Discussion Questions."

7. What should be done? List problems.

Additional Activities:

1. Use any standard table on comparative GNP (World Resources is good) as a basis for

students predicting what countries would have low wages and would thus be most

attractive to corporations in search of cheap labor.

2. Have students watch the movie, "Roger and Me," to see how General Motors' decision to relocate factories to Mexico in the late 1980s affected workers, who were consequently laid off, and the community of Flint, Michigan.

In Search of Greater Profit

Key terms

multi-national corporation UAW the Big Three maquiladora border towns NAFTA free trade tariff

Read the article " Up in Arms, But Down in Clout" and "Why Mexico Scares the UAW" and answer the following questions:

1. Why are the UAW workers on strike?

2. Where have the jobs gone? What type? How many?

3. What is the big shift? Why has it happened?

4. What has happened to union wages? Explain using statistics.

5. Why are there fewer strikes today? Use GE example to further explain answer.

6. Explain what Huffy has done, referring to wages.

7. What is the outlook for union workers?

8. What has changed with US factories in Mexico?

9. What has helped increase the number of auto and auto parts exports from Mexico to the US?

10. Besides US companies, who else is moving operations to Mexico? Why?

Read the article "Paying the Price for Free Trade" and do the following:

11. From entire article, compile a list of criticisms of NAFTA and foreign factories in Mexico.

12. Review list and circle or highlight key criticisms.

Discussion Questions:

1. Why are US corporations moving to Mexico? How is the US government helping this trend?

2. Why are there serious problems with toxic waste in the border region?

3. Why don't Mexican workers getting paid 50 cents/hour just move and get a job somewhere else?

4. If the US increased tariffs to goods produced in Mexico, how would it effect companies with maquiladoras?

5. How would a global minimum wage affect these multinational corporations?

6. What would happen if there were a set of United Nations environmental standards that applied to every country on Earth?

HANDOUT 5-2

In Search of Cheaper Labor

Read the article "The Border Boom: HOPE AND HEARTBREAK" and answer the following questions:

1. Why are US corporations moving to Northern Mexico?

2. Why do you think Mexico is willing to have these corporations in their country even though they are not receiving any of the profit?

3. How is the US government helping the Maquiladoras?

4. Why do the owners of the companies feel for the most part that what they are doing is all right?

5. Why are there serious problems with toxic waste in this region?

6. Why don't the Mexican workers profiled in this article just move and get a job somewhere else?

7. What would you do if you were Norma? How? Why?

8. What would happen if conditions in Mexico improved and people like Norma were able to find meaningful work near their families and away from harmful chemicals?

9. What would happen if there were a set of United Nations environmental standards that applied to every country on Earth?

10. How would it effect multi-national corporations if there were a global minimum wage?

11. If the US applied taxes (tariffs) to goods produced in Mexico (making them more expensive for Americans to buy) how would it effect the companies whose factories are in Mexico? Do you think they would stay in Mexico, or return to the US?

{the last three questions are based on real proposals}

Further Discussion:

Another way that corporations cut labor costs is to get machines to do the work instead of people. Often, we assume that this is a step towards progress. The people who held those jobs, however, may disagree. Think about the following:

1. Why can't those workers just go out and get another job?

2. If we don't use human resources to build things, what kind of resources are we using?

3. What kinds of jobs would be left if we mechanized everything we could?

4. What machines do you use often now? Could the things they do be done without machines?

HANDOUT 5-2 (optional)