Concept of commercial institutions developed out of family-owned trading companies and businesses

 

 

Commercial institutions exist to foster a profitable combination of work and trade. Surely, through time there have been self-sufficient organizations--mostly families--that provided for their own needs with little need for goods or services from the outside. Economic institutions came into being as the result of some degree of specialization--in which goods and services were traded with other goods and services--or money. Such specialization brought to bear ideas of production, of improved quality, and of betterment of the general good due to all of the above. Economic institutions developed in and around markets, and markets have existed for many millennia. As published in a book on trade written in 1270, as quoted of Boileau by Braudel,

 

  'For it is clear that the goods come to the open market and there it can be seen if they are good and fair or not . . . for of things . . . sold on the open market, all may have a share, poor and rich.' . . . This very ancient form of exchange was already being practised at Pompeii, Ostia or Timgad, and had been for centuries or millennia before that: ancient Greece had its markets, as did classical China, or the Egypt of the Pharaohs, or Babylonia where exchange made its very earliest appearance. European travellers have described the multi-coloured splendours and the organization of the market 'of Tlalteco next to Tenochtitlan' (Mexico City) and the 'regulated and policed' markets of Black Africa, where they were struck by the orderliness of the market, if not by the abundance of goods on offer. The origins of the markets of Ethiopia go back into the mists of time.  

   

In the earliest stages of commercial activity, most trade was in agricultural products in which farmers sold or exchanged produce in excess of what they needed for their personal use and subsistence. Thus, operating such enterprises consisted in harvesting the crop or crops in question, taking in to a nearby market and negotiating the exchange in question. The procedures for carrying out such activity would typically be demonstrated and overseen by the father--who would selectively grant authority to other family members to participate in the exchange. Management and oversight was generally live and in person--passed from parents to children along with advice and instruction in the growing of the crops in question and caring for any livestock similarly offered for sale or trade.

 

 

As cities grew in Europe in the sixteenth century, management of markets became a primary area of concern. Physically expanding market areas became impediments to urban transportation and public health and safety--consuming any public space as it became available. In most burgeoning cities, regulations were established to manage and control market activity. On the one hand, there was a need to restrict markets to specific locales. On the other, there was a growing need to assure a supply of staples to the growing population and to protect produce from the elements by building large trading 'halles'. In Paris in that era, for example, the city's meat supply "extended over a large area of France". Such developments increased the need to organize business and trade activity to correspond with such local requirements and opportunities.

 

By the same token, similar requirements surfaced for municipalities and other government entities.

     

With the economic growth of the sixteenth century, especially after 1570, new markets were set up, rising from their former ashes, or rather slumber. And what disputes they caused! Old charters were looked out to see who had or would have the right to collect market dues, who would be responsible for the equipment: 'lanthorne and market bell', cross, weighing-scales, the stalls, cellars or sheds to be hired, and so forth.  

   

In England, market activity was about the same in the thirteenth as the sixteenth centuries, though they had substantially decreased in the mean time. In the latter century, however, there were fewer markets than before--with wider radius of activity--although with substantially the same volume of trade. At that time, it is clear that overland trade in the period increased substantially. By the same token, markets themselves became highly specialized. Three hundred of the eight hundred market towns in England and Wales 'confined themselves to single trades', including both agricultural and manufactured items. This development was 'accentuated' in the seventeenth and eighteenth centuries in England and elsewhere. Travelling merchants and salesmen who visited farms in advance of the markets, purchasing and selling future contracts further stimulated this development. These developments formed the foundation for organized business activity by encouraging specialization, improved efficiency, and response to market opportunities.

 

 

In Europe in the late sixteenth century, intermittent markets slowly gave way to permanent shops, where items were crafted and manufactured and goods were sold. The first significant information requirement of such firms were the credit records--as the boom in shops activity was largely the result of liberal credit terms granted by shopkeepers. Markets grew into large regional fairs; shops grew into warehouses. Money changing advanced from bartering at temporary fairs to permanent exchanges and stock exchanges in the major cities. These developments extended into the late seventeenth century throughout England and Europe--as they also did in the Middle East, India, and China at that time.

 

 

Small-scale manufacturing from the fifteenth to the eighteenth centuries established a basis for defining business operations and organizing day-to-day activities of enterprises. In 1924, Hubert Bourgin outlined four basic categories of enterprises prior to the Industrial Revolution.

 

  Category A: The tiny family workshops, countless in number and grouped in 'clusters', each with a master-tradesman, two or three journeymen and one or two apprentices . . . In each of these 'monocellular' elementary units, 'the tasks were undifferentiated and continuous', so that there was often no division of labor.  

  Category B: Workshops which were scattered, but connected to each other. . . The coordinator, or go-between, or director of the work was the merchant entrepreneur who advanced the raw material, saw that it went from spinner to weaver, to fuller, to dyer, to shearer, who took care of the finishing processes and the payment of wages, and at the end of the day pocketed the profits from sales at home or abroad.  

  Category C: 'Concentrated Manufacture', which appeared later, at different dates depending on the industry and the country . . . Their characteristic feature was the bringing together under one roof, usually in a large building, of the labour force; this made possible supervision of the work, an advanced division of labour - in short increased productivity and an improvement in the quality of products.  

  Category D: Factories equipped with machinery, using the additional energy sources of running water and steam. [In contrast with the later Industrial Revolution] . . . examples are the naval yards of Saardam near Amsterdam in the seventeenth century, with their mechanical saws, their cranes, their mast erecting machines; and so many little 'factories' using hydraulic wheels; paper mills, fulling mills, saw-mills or the sword-works in Vienne in the Dauphine, where the grindstones and bellows were mechanically operated.

 

In all of these cases, enterprises faced the joint challenges of defining business mission, setting policy, and establishing procedures to support both while responding to the needs of the marketplace. In the family workshops of Category A, these tasks were undertaken in person and under the watchful eye of the master-tradesman himself--understandably also the father of the family. In Category B, the merchant entrepreneur was in the position to fill the same roles while serving as the primary or sole source of communication and information sharing of the entire organization. In fact, he could easily be the only person of common acquaintance in the group.

 

With Category C, we can see the beginnings of the Industrial Revolution if lacking the advanced machinery and possibly the scale of operations. Under this structure, the need for policies and procedures--along with functional specialization are introduced--once again, in anticipation of the new world of the nineteenth century. Of course, Category D brings more of the same.

 

In this era, no specialized tools to control operations and assure compliance with policy were needed--other than possibly some ledger books and the leader's five senses.

 

 

Operating over great distances, firms were forced to develop additional means of defining and controlling operational limits and requirements. The first enterprises to face such challenges were the great trading companies--which of necessity bartered and trafficked in agricultural goods and craft items. The first large-scale enterprise to expand globally was the East India Company based in Amsterdam. This organization was matched in England with the English East India Company or South Sea Company. This phenomenon resulted in a need to more formally define and document issues of business mission as well as procedure.

 

  Since the merchant profession could not do without a network of reliable go-betweens and associates, the family offered the most natural and sought-after solution. The history of the great merchant families is therefore every bit as valuable as the history of the princely dynasties . . .  

     

  The family firm was not the only answer of course. In the sixteenth century, the Fuggers made use of factors, who were merely employees in their service. This was the authoritarian model. The Affaitadi, a firm originally from Cremona [of violin fame], preferred to run subsidiaries, sometimes associated with local firms. . .  

Whatever the form of agreement of cooperation between merchants, it required loyalty, personal confidence, scrupulousness and respect for instructions. There was quite a strict code of behavior among merchants.    

 

Such networks formed the basis for answering the two fundamental questions of business management and control: What business are we (the collective members of the organization) in; and how do we go about that business? Though complicated by the barriers of time and space, methods could be devised to control these two factors--with a high degree of dependence on the traditional accounting model. Up until the end of the eighteenth century, however, such issues of policy and process were never overly complex. With the coming of the Industrial Revolution, complexity of unprecedented proportions was introduced into the worlds of business and government.