ESSAY Globalisation, coupled with advances in information technology and more demanding capital markets, has set in train “innovations in the organisation of the firm that may ultimately be as momentous as the invention of the multidivisional form in the first two decades of the 20th century” (Roberts, The Modern Firm, p2) Discuss.
Course name: Business in the Global Environment Course code: MN425 Candidate number: 77800 Michaelmas Term 2008 Number of words: 2187
MN425 Business in the Global Environment
Candidate number: 77800
Achieving high performance in a business results from establishing and maintaining a fit among three elements: The organisational design of the firm, its strategy, and the environment in which operates.1 In this paper, I will try to assess the organisation of a company from an evolutionary perspective. I am going to show that changes that took place in the previous years are as well as important as those changes that took off in 1920s. There are significant similarities between the recent evolution of organisation of a company and the invention of the multi-divisional form in the first two decades of the 20th century. The conclusion is that innovations in the organisation of the firm may be as momentous as the invention of the multi-divisional form. In order to satisfy my research aims, I will firstly describe recent development; present some theoretical arguments of organisation, and an insight into the link between performance and strategy. Then I am going to describe the multi-dimensional organisation that took off in 1920s with a specific reference to the Czech entrepreneur Tomas Bata. Lastly we will discuss whether the changes are as momentous as those in 1920s and what will be the impact of current economic crisis on company’s organisation. During recent years we are experiencing already the third wave of globalisation2. Hatzichronoglou3 notes that before this period of globalisation there was a period of internationalisation during the 1950s and 1960s, however the complex stage of globalisation corresponds to changes that took off in the 1980s, including deregulation and liberalisation4. Today more than ever before, both the external and internal environment is evolving and therefore the company’s organisation has to evolve as well. That includes the evolution of organisational structures, competences, responsibility, and delegation of work. What was the optimal form of organisational structure twenty years is no longer optimal. The company should regularly ask itself whether the existing organisation generates the highest performance available. We can see globalisation of goods market, markets with services, and financial markets. In all these markets, players are more demanding, markets are becoming more
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Robert (2004), p.12 First wave of globalisation took place between 1850-1914. After the post-WWI retreat another wave of globalisation took place between 1945-1980 3 Hatzichronoglou (1999), p.7 4 Apart from these changes that took off in 1980s, the World Bank (2007) mentions other: Deregulation and liberalisation in developed and developing countries, advances in information technology, fall in cost of communications, partial integration of world financial markets, changing relationship between investors and managers, focus on “shareholder value” 2
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MN425 Business in the Global Environment
Candidate number: 77800
matured, saturated, more sophisticated. With increasing competition in all markets, the company has to react. The advances in information technology allow for easier communication. New technologies allow for better communication within the company, better know-how sharing5. New technology makes it easier to send information across the world at negligible cost. With the deregulation of the financial markets and better information technology developed over the last two decades, the capital market has become more demanding, sophisticated, and innovative6. Recently, creating shareholder value has become the prime objective for the management. The market also sees a greater activism of institutional investors. More demanding capital markets are arguably putting increased pressure on firms to perform7. Nowadays, in order the companies to succeed on the market, to be able to function effectively, new forms of organisations took place. The question is what is the organisation of a company nowadays. Some companies have totally refocused their core business8, vertical disintegration and specialisation became the most significant organisational development of the 1990s9. We see that there are three main responses to the global competition: internationalisation10, specialisation, and de-integration. Roberts11 notes that some firms can increase value by existing businesses, focusing on what they do best and reducing complexity, others can gain by increasing the range of businesses, especially if the new business can take advantage of under-utilised capabilities or resources.
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In the past the problem was not that the company did not have know-how in the company. The problem sometimes was that the company did not know that they had certain know-how in the company. Recently employees start putting their knowledge online, they share their professional interests and they allow for information sharing. 6 Some economists argue that the capital market deregulation went too far. For example Stiglitz (2003) strongly criticized the excessive deregulation in the economy that took place during the Reagan, Bush, and Clinton administrations (even though he was the Chairman of the Council of Economic Advisors to the President Bill Clinton) 7 Roberts (2004, p.181) uses as an example of more the increased linkage of top CEOs compensation to performance. However, I am persuaded that the ongoing financial crisis will change the managers’ compensation. This question is largely linked with the issue whether the sole objective of a company should be profit maximisation. The impact of the crisis on company’s organisation is discussed in the following part. 8 For example IBM shifted its business in consulting, some companies are redesigning jobs and relationships with employees who are more often allowed to work from home or have more flexible working hours. 9 Langlois (2003) 10 Caves (2007) argues that to secure scale economies and reduce costs – a multi-plant firm may allocate particular tasks to each plant and that multinationality is most likely to occur when there are high firm-scale economies and relatively low plant-scale economies. 11 Roberts (2004), p.228
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MN425 Business in the Global Environment
Candidate number: 77800
Organisation should focus on the relationship between efficiency and size. Knight12 even argues that “the relation between efficiency and size is one of the most serious problems of theory”. So what is the optimal organisation of a company? Are firms getting smaller? Brynjolfsson et al. (1994) argue that the current downsizing of firms, the popularity of outsourcing and the rise of value-adding partnerships is not simply a management fad. Will the economy be full of monopolies or will the trend rather be towards more competition? Coase (1937, p.394) disagrees and explains why production is not and will not be carried on by one firm. First, as a firm gets larger, there may be decreasing returns to the entrepreneur function, that is, the costs of organising additional transactions within the firm may rise. Secondly, it may be that as the transactions which are organised increase, the entrepreneur fails to place the factors of production in the uses where their value is greatest, that is, fails to make the best use of the factors of production. Finally, the supply price of one or more of the factors of production may rise, because the "other advantages" of a small firm are greater than those of a large firm13. Robert Coase14 in his famous article15 even asks a rhetorical question: […] in view of the fact that it is usually argued that co-ordination will be done by the price mechanism, why is such organisation necessary? There are also innovations of forms of organisation16. A firm consists of the system
of
relationships
which comes
into existence when
the direction of
resources is dependent on an entrepreneur. Organisation is also closely linked with strategy of a company. A company that can not define its short-term and long-term strategy can not define its optimal organisation and consequently it can not deliver optimal performance. Performance of a company depends on the strategy, the organisation, and the environment. The environment is changing even more rapidly than ever before. In the traditional view of management scholars, the environment has 12
Knight (1933), preface Coase (1937), p.396 summarises: “Other things being equal, therefore, a firm will tend to be larger: (a) the less the costs of organising and the slower these costs rise with an increase in the transactions organised. (b) the less likely the entrepreneur is to make mistakes in the transactions organised and the smaller the increase in mistakes with an increase. (c) the greater the lowering (or the less the rise) in the supply price of factors of production to firms of larger size. 14 Coase also argues that there is a difference between the co-ordination outside the firm and inside the firm. While outside the firm there is the main drive the price mechanism, coordination through a series of exchange transaction on the market; within a firm, these market transactions are eliminated. 15 Coase (1937), p.388 16 Following Coase (1937), p.393 13
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MN425 Business in the Global Environment
Candidate number: 77800
often been taken to be relatively stable, changing only slowly and infrequently.17 Roberts18 even notes that many management scholars and practitioners have asserted in recent years that, in sufficiently turbulent environment, ex ante strategizing from the top becomes nearly pointless. On the other hand a strategy is very important for employees and customers. Employees need to share the strategy the common goals, otherwise they would work only for money which is not sufficient. As the market is getting more matured and saturated, differentiation is becoming an issue. Different strategy linked with different organisation of a company might bring significant advantage on the market19. Obviously the organisation of a company has to take into account external and internal factors. External factors are legislation, local culture and habits20, all institutions – both formal and informal, customers, suppliers, and industry development. On the other side, internal factors are the strategy of the company, internal environment and norms and employees. Chandler argues that strategy should determine organisation. But there is a lot if inertia in changing a strategy. Therefore Roberts (2004) proposes the opposite model: Strategy to follow organisation. He says21 that the idea is to alter the strategy and some of the more formal but malleable elements of the organisation to keep up with the changes in technology and markets22. Therefore changing strategy in short cycles is not a good option as it takes time for the organisation to adapt23. Roberts24 uses as a good example the British Petroleum Exploration (BPX). BPX had been structured through a collection of geographically defined Regional Operating Companies (ROCs), which had staffs of technical and business people overseeing the actual operations. Performance data were usually aggregated to the level of the ROCs and the managers had very limited power and 17
Roberts (2004), p.24 Roberts (2004), p.27 19 Figure 1 shows the link between these factors, but there is no best and unique combination of them. 20 It is possible to change customers’ habits. It is possible to change their consumption basket, to get them used to new products and services. Habits do evolve, so do people. 21 Roberts (2004), p.28. He uses the example of Nokia, a successful Finnish manufacture of mobile phones. 22 For example Czech companies after the Velvet Revolution in 1989 were supposed to be transformed into private entities that would be able to compete with foreign companies. However there were several big obstacles. First they produces goods that nobody really wanted, there were no markets for them. Second they lacked experienced managers as people who were in charge of running the entities were mostly communist. Third external environment was completely different. While during communism the only aim of a company was to fulfil a plan that had been agreed. 23 Roberts (2004, p.23) follows institutional economics in saying that: “While it is easy enough to change the formal architecture, it certainly takes real time to change the set of people in the firm and the networks among them., to redefine the fundamental beliefs they have, and to induce new behavioural norms.” 24 Roberts (2004), p.185 18
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MN425 Business in the Global Environment
Candidate number: 77800
control over the resources used in their units. After the reorganisation the managers of a number of fields were given authority how to run theory operations. The change was successful as it resulted in increased outputs and reduced costs. The main issues were as follows: rating business units with clear scope of responsibility and clear accountability, strong norms emerged from mutual trust, flattering hierarchy and increasing spans of control, outsourcing improved information, measurement and communication systems a creation of a culture that is oriented to delivering performance25. Here, I would like to discuss the differences and similarities between the previously described organisational changes and the period of 1920s. In the 1920s several companies26 like Dupont, Sears Roebuck and Co. or Standard Oil of New Jersey, E.I. du Pont de Nemours and Company, General Motors created new multidivisional form of organizing and managing their companies. Roberts27 even argues that the multidivisional organisational design must rank as one of the major innovations of the last century. Companies were becoming more sophisticated, they were larger than ever before and this gave the rise of corporate governance. For the first time in history the separation of management and ownership became the model for the biggest corporations. Alfred Chandler28 in his book The Visible Hand29 describes the problems linked with increasing number of mergers at the beginning of the 20th century. After merger initial administrative processes were more complex than those in the companies that grew by internal expansion.30 In the new consolidation a family or single group of associates rarely held all the voting stocks.
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Another option might be the organisation of management consulting companies. Each office is an independent unit with own revenues and cost plans. However these plans are thoroughly discussed with the management board of such a company. Every office then works hard to meet these agreed targets, the profit stays in the office. Every office pays for consultants from different offices, workload can be shifted to an office with spare time. Knowledge from previous project is stored and can be accessed for free from any office around the world. Should a project require specific local knowledge, the question is being raised and sent to consultants who share their knowledge portfolio on the intranet. There is a need to fulfil the plan and frequent comparison is being made between offices. 26 Companies like Sears Roebuck and Co., Standard Oil of New Jersey, E.I. du Pont de Nemours and Company or General Motors 27 Roberts (2004), p.2 28 Alfred DuPont Chandler, Jr. (September 15, 1918 – May 9, 2007) was a professor of business history at Harvard Business School, who wrote extensively about the scale and the management structures of modern corporations. He found that managerial organization developed in response to the corporation's business strategy. 29 Chandler (1993). Especially the part The Management and Growth of Modern Industrial Enterprise is focused on our topic. 30 Chandler (1993, p.415)
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MN425 Business in the Global Environment
Candidate number: 77800
The owners no longer administered the enterprise; experienced managers – rarely with major share ownership – were being paid for managing the company. In this part, I will also write about the Czech entrepreneur Tomas Bata31 who was the founder of the Bata Shoes Company32 – one of the world’s biggest retailer, manufacturers and distributors of footwear in the world. Bata benefited from postWWI situation when he realised that the production of cheap, low-cost shoes for the general public33 is the key to a success in the business. Bata set up factories around the globe that were made self-sufficient and autonomous in their production, design and distribution strategies; these factories were supposed to meet the local demand and promote Bata brand.
Over time Bata created multi-domestic and multi-
dimensional type of company. When organising the company, Bata did not follow the simple strategy of profit maximisation. He perceived that the purpose of a company is to serve the society34. Bata’s system of organisation was following the method of delegation and accountability35. The manager must delegate some of these responsibilities to others.36 Tribus (2001) argues that such a concept of organisation was very unique37. Similar approach of employees’ participation used the Lincoln Electric Company. They devised a work system which allowed workers who could devise better methods to profit from them38. Chandler39 summarizes the change that occurred in 1920s: “There was a shift in strategy from horizontal combination to vertical integration, moreover middle 31
Tomas Bata was born in 1876 in Zlín, Czechoslovakia and died in an airplane crash in 1932 ,when Bata Shoe Company was already present in 60 states around the world. 32 By the early 1930s the Bata enterprise – and Czechoslovakia – were the world’s leading footwear exporters. 33 The purchasing power of the general public had been significantly reduced during WWI. 34 See Annex 35 For example, the manager may appoint someone to be in charge of the tool-room, where expensive tools are kept and supplied to workers. Having delegated this responsibility and the authority that goes with it, the manager still retains accountability. This is a subtle but important issue. You may delegate responsibility and authority, but you cannot delegate accountability. 36 Tribus (2001), p.11. What made the Bata system different from other methods of cost accounting was the agreement that if the workers could devise an improved method, which reduced waste, improved times of delivery and produced a profit beyond expectations, the workers could share in this profit. In other words, Bata produced a system which encouraged each work unit to become more entrepreneurial. 37 Tribus (2001), p.14 38 Also in Japan the Kyocera Corporation employs the "Amoeba System" in which individual work units, called 'amoeba', are engaged in buying and selling to other 'amoebas'. At Kyocera the individual amoebas do not share the profits among their own workers but the entire work force does participate in a profit sharing scheme. Semco, in Brazil, uses a scheme which is similar, in some respects, to the Bata method. 39 Chandler (1993), p.454
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MN425 Business in the Global Environment
Candidate number: 77800
managers were permitted to focus on managing and coordinating the processes of production and distribution and the top managers to concentrate on evaluating, planning, and allocating resources for the enterprise as a whole. At the same time the training and outlook of these industrial managers was becoming increasingly professional. Both developments further enhanced the economic power of the large industrial enterprises and of the men who managed them” When we are thinking about previous examples we have to ask whether it is possible to replicate them. Every company is different, every country is different, local culture is different. Moreover all these things are evolving in time. Lack of reorganisation might be the core or at least the contributor to the current struggle of U.S. automotive industry. Ando and Kimura40 claim that the international production and distribution networks in East Asia present distinctive characters in their significance in the regional economy, their geographical extensiveness involving a large number of countries in the region, and their sophistication of both intra-firm and arm’s-length relationships across different firm nationalities.
The more complex
organisation of the company required also more sophisticated statistical reporting and accounting methods41. The current economic crisis will bring a lot of organisational and strategic change for many big corporations. Such a change is often difficult and the economic crisis might therefore serve as a feasible environment for restructuralisation and organisational change. It would be very positive if the crisis shifts the organisation towards more stakeholder approach. Following the question is whether the current changes are as momentous as in the 1920s, Dosi et al42 argue “We do not observe any abrupt fading away of the Chandlerian multidivisional corporation in favour of smaller less integrated firms”. Strategy and organisation of a company remain the key to a success. Roberts43 also 40
Ando and Kimura (2003), p.2 F. Donaldson Brown – an electrical engineer who joined the chemical company DuPont’s Treasury department in 1914 – proposed a model of financial analysis that is in its simplified form being used until today. When DuPont acquired 23% of General Motors Corp. Brown was given the task to put in order GM’s financial statements. This acquisition is considered as the first large-scale reengineering effort in the USA and lots of credit was given to Mr. Brown by Alfred Sloan, GM’s chairman. The DuPont model was used as a dominant form of financial analysis until 1970s. This accounting innovation helped to lay the base for modern asset accounting by effectively combining and consolidating for the first time three basic types of accounting – financial, capital, and cost. With these innovations, modern managers had completed the essential tools by which the visible hand of management was able to replace the invisible hand of market forces in coordinating and monitoring economic activities (Chandler 1993, p.448). 42 Dosi et al (2008) 43 Roberts (2004), p.10 41
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MN425 Business in the Global Environment
Candidate number: 77800
notes that there needs to be a fit between strategy and organisation and between these and the technological, legal, and competitive environment. However, when comparing the changes in organisation in 1920s and now, we have to realise that will discover that we cannot "install" or "copy" this system of organisation. What type of organisation structure an enterprise will have would depend upon its growth stage; apart form the size and the success factors inherent. Businesses go through economic or performance cycles. The company can grow through these cycles because of our portfolio depth and breadth. Size and diversity create consistent performance.44 Overall the speed of changes in the organisational structure that we can see today will be affected with the economic crisis, but neither globalisation nor the advances in new technologies will be stopped. It will still lead to more flexible and innovative organisation. Therefore, the conclusion is that innovations in the organisation of the firm nowadays are as momentous as the invention of the multi-divisional form in the 1920s.
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GE Annual Report 2006
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MN425 Business in the Global Environment
Candidate number: 77800
Reference Ando, M. and F. Kimura (2003). The Formation of International Production and Distribution Networks in East Asia. Working Paper 10167. National Bureau of Economic Research. December 2003. Brynjolfsson, E., T. W.Malone, V. Gurbaxani and A. Kambil, 1994. Does Information Technology Lead to Smaller Firms? Management Science. Vol. 40, No. 12, December 1994, pp. 1628-1644. Caves, R. (2007). Multinational Enterprise and Economic Analysis (3rd Edition), Cambridge University Press. Chandler, A. D., Jr. (1962). Strategy and Structure. Cambridge, MA: MIT Press. Chandler, A. D., Jr. (1993). The Visible Hand: The Managerial Revolution in American Business (Paperback). Belknap Press. Coase, R. H. (1937). The Nature of the Firm. Economica, New Series, Vol. 4, No. 16. (Nov., 1937), pp. 386-405. Dosi, G., Gambardella, A., Grazzi M., and Orsenigo, L.(2008). Technological Revolutions and the Evolution of Industrial Structures: Assessing the Impact of New Technologies upon the Size and Boundaries of Firms. Capitalism and Society: Vol. 3 : Iss. 1, Article 6. Available at: http://www.bepress.com/cas/vol3/iss1/art6 Drucker, Peter F. (1954). The Practice of Management. New York: Harper & Row Publishers. Johnson, H. T. and R. S. Kaplan(1987). Relevance Lost: The Rise and Fall of Management Accounting. Harvard Business School Press: Boston. Knight, F. H. 1933. Risk, Uncertainty and Profit, London School of Economics Series. Preface to of Reprints, No. 16, 1933. Langlois, R.N. (2003). The vanishing hand: the changing dynamics of industrial capitalism. Industrial and Corporate Change, Volume 12, Number 2, pp. 351-385. Roberts, J. D. (2004). The Modern Firm. Organisational Design ofr Performance and Growth. Oxford University Press. Schmukler, S.L. 2004. Financial Globalization: Gain and Pain for Developing Countries. Federal Reserve of Atlanta Economic Review. Second Quarter 2004 Salter, Malcalm S., Stages of Corporate Development, Journal of Business Policy 1, No. 1, Spring 1970, pp.23-27. Stiglitz, J., (2003). The Roaring Nineties: Seeds of Destruction. New York: Allen Lane. Stiglitz, J., 2002. Globalization and its Discontents. New York and London: W. W. Norton & Comp. Thain, D. H., (1969). Stages of Corporate Development, The Business Quarterl. Winter 1969, pp . 33-45. 15.
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MN425 Business in the Global Environment
Candidate number: 77800
Tribus, M. (2001). Lessons from Tomas Bata for the Modern Day Manager. Conference on Tomas Bata, Zlin, Czech Republic. United Nations Conference on Trade and Development (Unctad) 2004. World Investment Report 2004.The Shift Towards Services. United Nations New York and Geneva. Varian, H. R. (2002). If there was a new economy, why wasn't there a new economics? New York Times; New York, N.Y.; Jan 17, 2002;. Webster Jr., F. E. (2005). A Perspecive on the Evolution of Marketing Management. Journal of Public Policy & Marketing. Vol. 24 (1), spting 2005 pp.121125. Winter (1973). The Industrial State: Old Myths and New Realities. Harvard Business Review, March-April, 1973, pp. 133-148. World Bank (2007). The Coming Globalization. Global Economic Prospects REFE Zeleny, M. (1990). Management Wisdom of the West. Management, (1990) pp 119-125.
Human Systems
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MN425 Business in the Global Environment
Candidate number: 77800
Annex Figure 1. The design problem is to select the strategy and organization to achieve maximal performance I the context of the environment (Roberts 2004, p.19)
Designer
Strategy
Activities
Organisation
Environment
Performance
Figure 2.: Tomas Bata’s scheme of stategy, organisation, and firm’s aims
The Aim
Required to Achieve the Aim
Serve Society!
Provide Satisfaction to the market Now and in the Future
Make Money Now and in the Future
Provide a Satisfying Environment for Employees Now and in the Future
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