Total Quality, Financial Restructuring and Theories of the Firm
Clashing Paradigms? Total Quality,
Financial Restructuring and Theories of
the Firm
DON GOLDSTEIN
(Department of Economics, Allegheny College, Meadville, PA 16333, USA)
The American corporate sector saw major reform movements during the 1 980s. Despite frequent
admixture in practice, two key movements can be singled out as analytically distinct:financial
restructuring (generally debt-financed, often involving mergers), and total quality management (a
particular approach to productive restructuring). Unfortunately the precepts and practices of
these movements often clashed. This paper examines these tensions and explores them by
reference to economic theories of the firm associated with each movement. While financial
restructuring has been interpreted through the lens of neoclassical agency theory, total quality
management has strong links with alternative approaches that can be grouped under the heading
‘capabilities theory’.
1. Introduction
Powerful currents of reform swept through the American corporate sector during the 1980s. In this
paper I will argue that these currents can usefully be separated into two analytically distinct
movements. One was a set of initiatives aimed at productive restructuring, in which firms sought
to transform their basic systems for’ identifying opportunities, creating value and developing new
capabilities. Many of these efforts revolved around management methods associated with the
Japanese, such as ‘total quality management’ (TQM); by the decade’s end, TQM had become a
key focal point, and it is there that I will focus as well. The other movement saw the emergence of
various approaches to cutting costs and eliminating waste, often under the spur of intense pressure
from shareholders. The predominant form assumed by these efforts in the 1980s was a financial
C Oxford University Press 1997
665
Total Quality, Financial Restructuring and Theories of the Firm
restructuring process that brought capital structure and often ownership changes to thousands of
companies, and I will concentrate in what follows on that process as well. Both TQM and
financial restructuring began, in many respects, in response to growing perceptions of relative
competitive decline by American enterprises in a broad range of global industries. But, I will
argue, the prescriptions for renewal offered by the two movements are often at odds. The
divergence occurs because there are different assumptions at work—about how value is created in
business organizations as inputs are transformed into outputs, and about how people in those
organizations interact and are motivated.
This divergence can be identified despite considerable admixture between the two currents in
practice. Although the prescriptions for change offered by TQM and financial restructuring differ
in principle, the influences of both may be found in actual corporate reform programs. Because the
two movements have been powerful, contemporaneous and have addressed the same set of
problems in sometimes-overlapping language, it is not surprising that managers have often adopted
practices associated with both within an ostensibly unified framework. Researchers into companylevel changes during the 1980s provide clear evidence of this mix, and I will discuss these findings
later in the paper. What I will attempt to establish is that despite the complexities observe d in
practice, financial restructuring and TQM each comprise systematically and analytically distinct
approaches to corporate reform. Exploring this divide has not lost its urgency with the passage of
time. Both modes of adaptation are still evolving at the heart of American business, where
corporate downsizing continues many of the thrusts of financial restructuring, in similar tension
with ongoing quality-related efforts.
In Section 2 of this paper, I trace the precepts and practices of the total quality and financial
restructuring movements, ending with a review of the evidence on the extent of their separation or
integration. In Section 3 1 argue that these disparate approaches can be associated with very
different economic theories of the firm. While debt-financed restructuring has been widely (and,’
at least in the main, favorably) interpreted through the lens of neoclassical agency theory, TQM
appears to have strong links with a cluster of recent theoretical approaches that I will call
‘capabilities theory’. These associations may lead to insights in both directions—into the efficacy
of different corporate reform strategies, and the power of contending theories of the firm. I
conclude in Section 4 with some suggestions for further research.
665
Total Quality, Financial Restructuring and Theories of the Firm
2. Corporate
2.1
Reform
Financial Restructuring
By ‘financial restructuring’, I refer to changed corporate structure and behavior that is
accompanied by a major shift in capital structure—a company’s mix of financing sources. As
detailed below, financial restructuring in the 1980s often, but not always, involved changes in
ownership. What was virtually ubiquitous in this movement was a replacement of equity by debt
financing. For present purposes, the crucial aspect of capital structure change is the pressure it
creates for organizational change. The sudden need to generate cash flow to cover sharply higher
debt servicing alters the decision-making environment with respect to costs, investments and
structure. Indeed, as will be explained, practitioners and theoreticians of financial restructuring
alike have regarded that changed environment as precisely the point.
Before proceeding, it is important to note that cost cutting, sharper scrutiny of investment and
concomitant structural changes also occurred without financial restructuring. These behaviors
went under many names, including ‘downsizing’ and ‘re-engineering’. Nonetheless, financial
restructuring was the most visible and widely discussed context for these developments during the
1980s. By the end of the decade, it had become common practice to treat corporate restructuring’
and ‘financial restructuring’ as practically synonymous (see for example Pickering, 1991; Hall,
1994; Blair and Schary, 1993). It has also been argued that a drive for ‘shareholder value’
underlay all of these phenomena—and that while this was attempted characteristically (but not
exclusively) through financial restructuring during the 1980s, it is approached via other avenues in
the 1990s.1 Thus financial restructuring makes a strategic entry point for thinking about this cluster
of corporate changes in the 1980s.
The most visible form of debt-financed restructuring in the 1980s was the merger wave —
divestitures, leveraged buyouts and other acquisitions. There are various available measures of this
activity; according to the Mergerstat Review, during 1980—1989 almost $1.4 trillion in mergers
and acquisitions occurred. But restructuring was not limited to companies undergoing ownership
changes, as many firms underwent debt-for-equity ‘recapitalizations’ using share repurchases or
special dividends. Federal Reserve data shows over a quarter of a trillion dollars in repurchases
alone over 1980—1989
I Along with increased global competition, an ‘especially salient’ generator of ‘the widespread remaking of American
companies during the past decade’, on both the organizational and financial sides, is ‘the intensification of pressures from
large shareholders, especially institutional investors’ (Useem, 1994, p. 13).
666
Total Quality, Financial Restructuring and Theories of the Firm
(Pickering, 1991). Recapitalizations responded to many of the same pressures as did debt-financed
acquisitions, and drastically changed the operating environments of the affected business units in
similar ways.
Often participants and scholarly observers described these effects, along with the ownership
changes in mergers per se, as correctives to American companies’ failings in adapting to economic
slowdown in many US industries. In these explanations, such pressures are largely attributed to
the loss of relative global standing in the face of increased foreign competition (Jensen, 1988; see
Paulus and Waite, 1987, for an investment bankers’ view). Other factors are cited as well,
including slowing demand growth (tobacco) and supply shocks (oil).
Two general arguments on the gains from mergers should be addressed here, by way of contrast
with the corresponding total quality approaches to be discussed later. One is that the ‘market for
corporate control’ operates to transfer assets to their most productive users. This earlier thesis
(Manne, 1965) was used in the 1980s to explain the large stock premiums paid for acquired firms
as arising from efficiency gains expected to occur under new ownership (e.g. Council of Economic
Advisors, 1985). The argument thus hinges in part on an acceptance of the ‘efficiency’ of the stock
market itself.
Another merger justification not specific to events of the 1980s is that the achievement of
‘synergies’ can explain merger gains alluded to in market for corporate control theory. If two
companies have different but potentially complementary assets or capabilities, and if each firm’s
missing one cannot easily be developed internally or purchased on its own, then a merger is seen
as a logical route (e.g. Morck et al., 1988). The result, so the theory goes, is a merged value
greater than the sum of the companies’ values separately. For example, a firm with strong R&D
but weak product development might profitably acquire one with the opposite pattern of
capabilities.
Other explanations address more specifically the particular features of corporate restructuring in
the 1980s. The most powerful and pervasive links the tremendous amount of debt taken on with
the economic slowdown discussed earlier. The ‘free cash flow’ hypothesis (Jensen, 1986) argues
that managers tend to over-retain corporate resources, relative to their firms’ economic prospects.
This creates a conflict between shareholding principals and managerial agents, one likely to be
most intense with the end of rapid, profitable growth (Blair and Litan, 1990). Firms in industries
facing such conditions are seen as the best candidates for leveraged acquisitions and
recapitalizations. Servicing a debt-financed payout to shareholders will preclude future overretention, thus enhancing current market value. Under the pressure of interest payments,
efficiencies will be sought by cutting
667
Total Quality, Financial Restructuring and Theories of the Firm
unnecessary employment, compensation (including managerial perquisites), investment and other
costs. Indeed, empirical studies find that 1980s mergers reduced employment and compensation
growth, especially for white-collar workers (see Rosett, 1990), and that massive capital structure
changes were followed by large investment cuts (e.g. Hall, 1994).
Another explanation specific to the 1980s focuses on the large number of divestitures that took
place—almost 10,000 during the decade, according to the Mergerstat Review. These are often seen
as a 1980s’ response to ill-conceived conglomerate mergers of the late 1960s and early 1970s.
Here the purported gain is increased focus. If top managers have little knowledge of particular
lines of business, or if organizational size and complexity stifles the flow of information from
business units to the top, or if there exist other diseconomies of size and diversification, then
divestitures might allow more sharply focused businesses to operate more efficiently. While
apparently average diversification actually decreased during the 1980s only outside the population
of the largest firms (Montgomery, 1994, p. 164), it is certainly true that managers were under
strong pressure from Wall Street to divest business units that were unrelated and thought to be
insufficiently unprofitable.
A feature of corporate restructuring in the 1980s that provided the mechanism for some of these
dynamics was the ‘going private’ transaction, typically in the form of a leveraged buyour (LBO).
In an IBO, a small investor group—often including top management—borrows enough to buy out
the shareholders, contributing only a small fraction of the price as equity. Thus an important
explanation of the intended economic gains centers on the added debt, as discussed above. In
addition, significant ownership stakes for managers are thought to provide them with incentives
for efficiency above and beyond those at work in the typical publicly held corporation. For their
part, an LBO’s non-managing owners are presumed to have both greater motivation and capacity
for monitoring performance than under widely scattered ownership. The combined 1980s impact
of the LBO’s financing, organizational and ownership changes was thought to be so great that one
proponent foretold the ‘eclipse of the public corporation’ (Jensen, 1989).
The final characteristic of restructuring in the 1980s that must be considered is the prevalence
of hostile takeovers. Acquisitions actively opposed by the target firms’ managements had occurred
previously, but never before with the support of the Wall Street establishment and never on such a
scale. While takeovers in the 1980s numbered only in the hundreds, among tens of thousands of
acquisitions overall, they were concentrated among very large firms; for example, the 23 largest
takeovers in 1984 accounted for
668
Total Quality, Financial Restructuring and Theories of the Firm
almost a third of the total reported dollar value of all mergers in that year (Goldstein, 1991). And
because they struck even huge firms in a highly visible way, takeovers induced defensive financial
restructuring among countless other firms. What is key in the present context is that managerial
entrenchment is seen as a barrier to competitive improvement, and an upheaval in managerial
personnel and structures as the way to overcome that barrier. The yardstick against which
managers are to be measured is, again, shareholder value.
To summarize, proponents of the financial restructuring movement have generally viewed the
competitive woes of American corporations as our-growths of insufficient managerial concern for
profitability and shareholder value. Top managers have been seen as slow to adjust to the harsh
realities of global markets, and as too protective of no-longer-affordable perks, personnel and
practices. These problems are thought ofren to be embedded in organizational and ownership
forms that dampen the impulses of product market competition and owner dissatisfaction.
Similarly, the productive restructuring efforts exemplified by the total quality movement have also
targeted US corporate managers’ slow reactions to emerging international competition, and their
resistance to breaking with old ways. I turn now to the origins of that movement, and to its
distinctive approach to how managers should react and in what directions change should occur.
2.2
Total Quality
As noted above, TQM was one among several major productive restructuring frameworks
employed by American firms during the 1980s. These rubrics also included creation of highperformance workplaces, employee involve ment or empowerment, self-directed teams, and justin-time and/or lean production. Despite important differences in focus and approach, key
commonaliries exist. Each aims in its own way to engender faster and more sensitive and flexible
response to market conditions; to exploit synergies and feedbacks among formerly disparate
components of the firm; and to utilize employees at many levels in broader problem-solving roles
than had been traditional. (I will return in section 2.3 to these commonalities, and the extent of
their overlap and divergence with the basic thrusts of financial restructuring.) As practiced in
Japan, TQM has been distinguished by explicit attention to all of these aims. Although the
American boundaries between total quality and other productive restructuring efforts have not
been neat, many researchers have concluded that in the US context the TQM label can
669
Total Quality, Financial Restructuring and Theories of the Firm
generally be used in a distinguishing way (see, for example, Hackman and Wageman, 1995).
Total quality management in the United States can be seen as a response to the rapid and farreaching competitive gains of Japanese firms and industries during the past 40 years. Those gains
have been perceived as attributable in large part to the adoption by Japanese corporate managers
of methods associated with the Americans W Edwards Deming (1953), Joseph Juran (1951) and
Armand Feigenbaum (1956), and the uniquely Japanese development of these methods. This
approach focused on external integration with consumers and suppliers, internal integration of
production with design and sales,2 statistical quality control, employee participation, and systems
rather than individuals as the key elements in quality improvement. Quality improvement in turn
was seen as key to long-term corporate competitiveness.
The application of these precepts in the United States in the 1 1980s emerged from the
international competition that brought TQM to America’s doorstep. But these ideas are rooted in
developments in American industry, where Deming, Juran and Feigenbaum were exposed to the
work done on statistical quality control at the Bell Telephone Laboratories during the 1930s.
Despite a flurry of US interest in these ideas sparked by the War Department’s Office of
Production Research and Development, it was in Japan that they first gained widespread
acceptance and elaboration. Japan’s extreme postwar competitive disadvantages lent urgency to
corporate and governmental efforts there to increase reliability and quality in Japanese
manufacturing. This fertile ground was first seeded by Westinghouse and Bell people in the
Allies’ Civil Communications Section, which—perceiving a threat to Japanese reconstruction
coming from backward manufacturing—sponsored a series of seminars during 1949—50 for top
executives. These extremely influential sessions were followed shortly by visits from Deming,
Juran and Feigenbaum. By the 1960s, their ideas had been widely adapted by the Japanese into the
practice of ‘Company-Wide Quality Control’ (see Garvin, 1988, Chaps 1 and 10—and Bushnell,
1994a, Chap. 7—on this history.)
Although the three quality proponents and others remained active in the United States
throughout this time, their work gained little attention here until the 1980s. Manufacturing reform
efforts existed in American industry before then, but had not generated much momentum or
urgency. A sea change occurred at the end of the 1 970s, on the heels of recession, sragflarion and
a growing unease over the inroads of US firms’ international competitors. Analyses of American
managerial inadequacies were widely discussed (see
2I
first encountered the terminology ‘internal and external integration’ in Baldwin and Clark (1991, pp.
10, 13).
670
Total Quality, Financial Restructuring and Theories of the Firm
especially Hayes ‘and Abernathy, 1980). Japanese management became a focal point, with
‘quality circles’ the first major import. There followed a rapid proliferation of other Japan-inspired
corporate reform efforts, abetted by a growing legion of highly paid management consultants.
There is now some data on the extent of this movement at the end of the 1980s. Some caution is
warranted here, because much of the research generating this data has encountered difficulties in
measuring and assessing the incidence and effects of TQM (see Hackman and Wageman, 1995); I
return to this problem in section 2.3. Representatives of 192 firms responded to a 1990 Conference
Board survey of the Fortune 500 largest industrial companies and 500 largest service firms, along
with some smaller ones known to have total quality programs (Troy, 1991). Of these, 158 had
quality programs in place (another 13 had programs in the planning stages). The median starting
year was 1986, with the oldest efforts generally among durable goods producers. Another 1990
survey of the Fortune 1000 finds
—30% with over a fifth of their employees in quality circles, and 43% providing statistical and
quality training to more than a fifth of their workers; over three-quarters of these firms had at least
some workers involved in TQM programs (Lawler et aL, 1992, pp. 16, 27, 95). About half of the
large firms in the US automotive, banking, computer and healthcare industries are found in a third
study to have >25% of their employees in ‘quality-related teams’; the companies whose strategic
planning processes were organized around customer satisfaction’ had doubled over three years, to
37% (Ernst and Young, 1991, pp. 22, 30). By decade’s end, corporate interest in total quality was
so intense that the General Accounting Office’s 1991 report on quality management had within
five months generated more orders than any prior GAO publication—and 1000 copies were still
being requested weekly (Winter, 1993).
A distillation of the key component parts and principles of this movement was listed above —
external and internal integration, statistical quality control, worker participation and a systems
approach. Their interaction is intended to reduce cost and build market share, with feedbacks
between the two —all leading to greater long-run profitability. In what follows, I elaborate upon
these points.3
Total quality advocates have stressed the need to integrate externally, with the firm’s customers
and suppliers. Product ‘fitness for use’ may be taken as a first principle (Juran, 1978), and
ascertaining its determinants requires
There is a tremendous variety of sources that could be drawn upon in explicating the ideas and practices of TQM. Here
I focus on the writings of its best-known advocates. For a broader range, see especially the pages of Quality Progress
magazine, the journal of the American Society for Quality Control.
671
Total Quality, Financial Restructuring and Theories of the Firm
closely studying both the customers’ needs and the product’s record of satisfying those needs after
purchase. Because end product quality is also a function of materials and intermediate goods,
fitness for use is thought to require a different kind of relationship with suppliers as well.
Eschewing the playing off of many vendors against one another in pursuit of lowest cost inputs,
total quality experts advocate close cooperation with one or a few suppliers over time to refine
their understanding of what is required and their ability to deliver it consistently (Deming, 1981).
Another core idea of quality management is the use of statistical techniques to reduce variation
and defects in output. It is thought that once the existing range of variation in some customer
usage-defined quality variable is measured at a stage of production, the causes of variation can be
identified and progressively reduced. This ‘statistical control’ (Deming, 1982) approach to quality
differs sharply from what is seen as the American manufacturing tradition of inspection, which
looks at output divorced from the context of its production process. In the process orientation of
TQM, statistical methods provide a tool that is used during integrated problem-solving throughout
the organization.
Internal integration occurs as the information gleaned from customers, suppliers and efforts to
establish statistical control in production is fed into product design; product design and production
experience are utilized to further improve production systems; and the resulting impact on
customer satisfaction is carefully tracked after sale. Thus responsibility for quality is seen as being
diffused throughout the organization, not departmentalized with inspectors.
This diffusion is often said to require a particular set of internal social relations, based on
participation by employees and their treatment as valuable resources: ‘In my judgment, the
collective worker education, experience, and creativity is the major underemployed asset in the
economy of the US’ (Juran, 1978, p. 16; emphasis in the original). Quality depends first of all on
the active participation of employees at eve ry level in monitoring and improving systems, without
fear of reprisal for identifying shortcomings or of working themselves out of jobs. Further,
because of the design—production—sales integration discussed above, participation frequently
takes the form o f work in teams that cut across departmental lines; indeed, managerial career paths
are often viewed in TQM circles as necessarily cross-functional, to foster leadership abilities in
this respect. Finally, to elicit the employee commitment implied in these relations, it is thought to
be incumbent upon the firm to commit itself in turn to some degree of job security.
Implicit in the foregoing is that it is organizational and technical systems,
672
Total Quality, Financial Restructuring and Theories of the Firm
not the activities of isolated individuals, that most fundamentally affect quality. Outcome determining systems can be thought of as nested, from narrowly limited ones outward. For
example, a worker’s ability to keep a machined part’s size.within an acceptable range of variation
depends on skill and effort, but these in turn are affected by training opportunities and the role of
the foreman, which in turn are shaped by broader company policies. The output variation also
depends on the characteristics of the input material and the tooling, functions of supplier quality
and engineering, each again part of wider corporate systems. And each of these relations can be
turned around; what is asked of suppliers and the firm’s own engineers, in terms of the precise
characteristics of their contributions to the firm, must reflect the production information arising
from the workers’ experience.
Clearly, these TQM components—consumer and supplier linkages, cross-functional
integration, statistical control, participation and a systems approach—are interdependent. They are
intended to interact in such a way that the firm’s long-term competitiveness is strengthened. One
formulation points to both ‘cost’ and ‘income’ impacts of quality improvement: costly defects and
rework are reduced, and systems improvement raises productivi ty; meanwhile, revenues rise as
enhanced ‘fitness for use’ builds market share (Juran, 1969). Costs of quality implementation are
recognized, but are thought to be dwarfed by the benefits—apparently with some justification,
from the limited empirical study that has been done (see Garvin, 1983, 1988). TQM advocates
assert that these lower costs and higher revenues will mean greater profits. But proponents
emphasize repeatedly that the true profitability test is a long-term one; emphasis on short-term
profits is included among Deming’s ‘seven deadly diseases’ of American management (Deming,
1986).
2.3
Movements in Collision?
Both the financial restructuring and TQM movements are rooted in the American corporate
sector’s crisis of global standing. Both aim to restore corporate competitiveness and profitability.
And both have taken top corporate managers to task for complacency and resistance to change.
Beyond these similarities, however, lie many profoundly different principles and prescriptions for
change. I begin exploring those differences with an examination of the basic assumptions at work
in each—about the sources of value, the threats to profitability and the motivation of employees—
and defer to the end of this section the question of just how separate, in practice, these movements
are.
673
Total Quality, Financial Restructuring and Theories of the Firm
What is the most basic source of value, and therefore of profitability? I infer from section 2.1
that practitioners of financial restructuring would point to the right choice of technology and of
scale of investment, given the profit
opportunities of the firm—and the right incentives for the employees making the choices. An
inference is required, because not much is said directly addressing this question in the relevant
literature. As Donaldson ruefully notes, ‘One of the most elusive aspects of the whole
restructuring phenomenon is defining and documenting the nature and degree of value creation’
(1994, p. 78). The assumption has ofren seemed to be that one knows it when one sees it: it is
whatever increases the market value of the firm (in some formulations, ‘shareholder value’). On
that, Donaldson’s and other case studies of late-i 980s restructuring leave no doubt. Driven by
years of buyouts, managers’ attention had become ‘riveted on the interests of a single external
constituency’, the shareholder, with those interests defined as a combination of stock dividends
and share appreciation’ (Useem, 1993, pp. 11—12).
TQM, in contrast, is really based in ways of exploring value-creation. A simple formulation
might locate the source of value in the interaction of the firm’s functions in learning how to define
and reliably deliver ‘fitness for use’. (I will return in Section 3 to the important contrast between
‘choice’ and ‘learning,’ which is central to understanding the two movements compatibility with
very different theories of the firm.) A corresponding contrast is between stock market and product
market based arbiters of value. In financial restructuring, market valuation subsumes all other
relevant indices in measuring performance, allocating capital and ratifying changes in direction. In
TQM, stockholders are one among several groups of constituents, and long-term product market
position is the only reliable indicator of value creation.
What, then, are the chief threats to profitability? Here the restructuring movement has been
explicit. First on the list would be waste—too much investment, inventory, employment or
compensation, given the profit opportunities of the firm—with inadequate concern for the bottom
line as a corollary. The alternatives are thought to be known, but the wrong choices have been
made. A related problem highlighted in the restructuring movement is lack of corporate and
managerial focus. The underlying problem is seen as management’s tendency to grasp and direct
too many and too disparate product market activities. Poor focus may result from conglomeration
or other forms of empire-building.
Here is an area of at least implicit agreement with TQM, in which too much distance from
operations is often seen as an important managerial
674
Total Quality, Financial Restructuring and Theories of the Firm
shortcoming. It is a precept of TQM that top managers should know the basics of all aspects of the
business. But knowing the business in TQM is seen as useful to the extent that it permits
managerial leadership in redesigning systems to strengthen and exploit customer, supplier and
internal cross-functional linkages. And it is precisely failure to do so that poses the key threat to
long-term profitability for TQM adherents. For them, waste cannot simply be excised with
dramatic cost-cutting programs. Cuts made in particular areas without changes in overall systems
are likely to be rendered counterproductive by unanticipated feedbacks from or upon other
activities. Quality-motivated cost cutting is thought to require learning to identify the interrelated,
systemic sources of waste. In general, then, the income and cost effects of quality are thought to be
jeopardized most by the failure to orchestrate the interdependencies mentioned above, and to
establish control over variation in producing fitness for use.
Finally, what is the assumed source of employee motivation in each movement? In financial
restructuring, various forms of opportunism are seen as underlying the tendency toward waste and
the failure to make market value-maximizing investment choices. If opportunistic behavior is
basic human nature, then variants of shirking (work avoidance, perquisite seeking) will be the
tendency at all non-owning levels of the workforce. In contrast, the assumption in TQM is
generally that employees are constructive, creative and want to do a good job. ‘The human needs
of job satisfaction and self-fulfillment’ (Tsurumi, in Deming 1982, p. 85) are viewed as potentially
powerful engines of corporate competitiveness; management’s job in TQM is to remove the
barriers that inadequate organizational systems erect against them.
Given these generally divergent starting assumptions, the two movements clashing
prescriptions for corporate renewal follow naturally. In financial restruc turing, corporate managers
should evaluate and trade business assets and units to maximize market value (Arzac, 1986).
Potentially synergistic assets should be bought from or sold to other firms. The performance of
business units should be monitored, and those that are more valuable elsewhere—i.e. whose sale
can generate a premium—should be sold off. Particularly likely candidates for restructuring are
companies in ‘mature industries’, where waste (with respect to declining profit opportunities) most
needs to be reined in. Because this process is painful, it is often seen as best accomplished by new
owners, such as an LBO firm specializing in managing a portfolio of retrenchment cases (Jensen,
1988).
In TQM, the potential for a given cluster of business assets and units to create value needs to be
learned and developed over time. Especially in the
675
Total Quality, Financial Restructuring and Theories of the Firm
early stages of a TQM program, the company is expected to devote time and resources to finding
out what it is doing; it is striking that this is not assumed to be adequately known. What are the
customer’s needs and experiences with the relevant products, and what are the amounts and
sources of variation in quality-related variables attributable to suppliers and to the firm’s own
systems? Synergies are sought, but are expected often to be found in the kinds of integration
discussed earlier—across corporate functions, and across vendors and consumers. None of the
above necessarily precludes decisions to buy or sell assets or units. But the logic of TQM argues
that neither purchase nor sale are expected to yield relatively quick or unproblematical results.
In financial restructuring, debt-servicing pressures frequently lead to a great deal of scrutiny of
capital investment. As noted earlier, Hall (1990, 1994) finds substantial reductions (in investment
and in R&D) after major increases in debt, but not after mergers per se. Kaplan and Stein (1993)
and Long and Ravenscraft (1993) both find significant investment cuts after LBOs. Because overinvestment is said by many restructuring advocates to be a key problem to be solved, the contrast
with TQM has to do with the notion that capital spending in and of itself plays a primary role in
determining corporate performance. Deming, in particular, often ridicules over-reliance on capital
investment decisions (e.g. 1982, p. 10), in favor of starting instead with the investigation and
improvement of systems. New technology and capital equipment are thought to be most effective
when developed or introduced as solutions to problems unearthed by quality analysis 4
Like its treatment of capital spending, financial restructuring frequently emphasizes reducing
employment and/or compensation to the minimum thought to be required. Often costs are to be
reduced by means of layoffs in conjunction with a shift to contracting out of functions. Rosett
(1990) finds that union workers’ wage growth during 1976—1987 decreased by hundreds of
millions of dollars after mergers. Both blue- and white-collar workers often faced layoffs after
hostile takeovers in the 1980s (Bhagat et al., 1990), with proportionately heavier reductions of
white-collar employees. Similarly, Lichtenberg and Siegel (1990) found substantial cuts in nonproduction workers’ compensation and employment following LBOs.
The logic behind these financial restructuring cutbacks seems to be that the remaining
employees can work ‘harder and smarter.’ In contrast, TQM adherents have generally rejected a
strategy of getting employees to ‘do their best,’ as if what they should be doing is well known.
And a climate of job
Garvin (1988, p. 211) quotes a Japanese company’s quality manual: ‘When automation is introduced.. . without locating
and grasping the vital points which [affect] quality.., such automated machines will only manufacture defective products,
automatically.’ (See Bushnell, 1994a, pp. 215—225 for further discussion of the relationship between quality and
technology.)
676
Total Quality, Financial Restructuring and Theories of the Firm
insecurity has not been seen as conducive to worker participation in continuous quality
improvement. Fear and insecurity are thought to reduce the incentives for such employee
commitment, while instability in personnel decreases the potential for building a shared ‘pool’ of
working knowledge and relationships (Deming, 1982, pp. 60—62). On the other hand, the extent
of outsourcing in and of itself is not seen as crucial; it is widely used by Japanese firms in many
industries. What matters is the quality of inputs and relationships obtained, both of which—in a
TQM framework—may well suffer if contracting out is used as a route to short-term cost
reduction.
The last area of divergent prescriptions I will mention quite briefly is the form of employee
compensation. Advocates of financial restructuring often call for performance-based
compensation. At the upper levels at least, this is thought to entail making managers owners via
some form of payment in corporate stock (Brindisi, 1985). For its part, TQM’s focus on improving
systems—technical and organizational—is often taken to mean that incentive schemes based on
individual performance measures are likely to be flawed.5 Such measures are thought to be
affected by the environment and the firm’s overall systems, and penalizing or rewarding
employees on this basis is seen as not only unfair, but also likely to hurt morale and hinder
participation (Walton, 1990, Chap. 8). Not much seems to have been said about stock
compensation in the quality literature, although some TQM advocates tend to be generally
suspicious of stock price as an unbiased indicator of corporate performance.
I have sought to delineate the underlying assumptions and characteristic prescriptions of
financial restructuring and TQM in the sharpest way possible. Not surprizingly, their boundaries in
practice are not so neat. Indeed, elements from both approaches often appear side by side in actual
corporate reform efforts. Within the framework proposed here, such overlaps would be seen as a
kind of hybridization, one likely to be problematic because financial and productive restructuring
are not only disparate, but also work at cross-purposes. Other researchers have viewed matters
similarly. For example, Levine and Tyson (1990, p. 220), in discussing participatory work reforms
that overlap substantially with, the TQM efforts detailed here, claim that ‘Recent takeovers,
leveraged buyouts, mergers, and restructuring. .
Typically.., lead to the rapid dismantling of human organizations and the rapid erosion of human
capital.’ But many scholars have understood these phenomena to comprise a more unified,
integrated set of restructuring
According to Hackman and Wageman (1995, p. 328), ‘TQM authorities are clear and decisive about basing pay on
performance: Do not do it.’ Deming in particular insisted on this point; Juran’s followers have been more accepting of pay
based on employee performance evaluations (Main, 1994).
677
Total Quality, Financial Restructuring and Theories of the Firm
practices. One is Useem (1994, p. 13), who argues that restructuring companies are exploring
many different but connected paths’, including ones that I have placed on opposite sides of the
divide.
Some case studies of recent restructurings confirm that the practices and terminologies of both
financial and total quality approaches are often employed in complex combination. These histories
show the frequent juxtaposition of the ideas of focus, downsizing, the discipline of debt and
shareholder value, along with notions of employee empowerment, cross-functional teamwork, and
customer-defined value. From his studies, Donaldson (1994, pp. 162—163) concludes that among
the chief legacies of 1980s restructuring are ‘a return to the core competence of the enterprize’,
and ‘rejection of the idea that the public corporation should be insulated from the discipline of the
capital markets’. Useem (1993, pp. 57—58) reports a sweeping ‘devolution of authority’, giving
lower-level managers and operating units greater autonomy’; but the exercise of this autonomy is
to be evaluated strictly according to performance measures tied to ‘shareholder value,’ defined in
stock market terms.
Large-scale survey research to date presents a similar picture. It is important to note that none
of these studies have explicitly juxtaposed financial restructuring and TQM. This problem is
compounded by weaknesses on both sides. No research of which I am aware has examined
financial change, organizational change (such as specific kinds of downsizing) and behavioral
change in a unified framework. Nor is there much work in which what would constitute TQMrelated changes is specified, in which actual quality-based operating changes are explored, and in
which outcomes are measured in a carefully controlled way. (See Hackman and Wageman, 1995,
for an excellent discussion of these problems in the empirical quality literature.)
Nonetheless, several studies have looked at variables related to financial restructuring and
TQM. Lawler et al. (1992) examine the simple correlations between employee involvement and
TQ programs, on the one hand, and downsizing and ‘delayering’ on the other. They find Fortune
1000 companies that have downsized to be no more or less likely than others to be using employee
involvement or most quality-related practices (pp. 86, 100). But delayering in their sample is
positively associated with both employee involvement and TQM (pp. 86, 99). Osterman (1994)
investigates the extent of ‘workplace transformation’—or a shift to ‘flexible work organization’,
seen as encompassing TQM and other changes—in a large sample of establishments. He finds in a
multivariate setting that neither job security policies nor strategic emphasis on employment cost
cutting are significantly
678
Total Quality, Financial Restructuring and Theories of the Firm
associated with the likelihood of workplace transformation. ‘Evidently, contrary to expectations, it
is possible to introduce innovations in work practices without reassuring employees that their jobs
are not at risk’ (p. 186).
Yet the same case study and survey literature also can be read as highlighting the potential for
conflict:
As the traditional Weberian pyramid gave way to a leaner and flatter organizational chart, in
no case was the motive to empower the workforce, to give managers greater control over
decisions, or to improve the quality of work life. The steps were instead simply derivative of
management’s commitment to increase shareholder return. (Useem, 1993, p. 84)
Individual stock- or earnings-based compensation could undermine ‘support for cross-functional
teams, interdivisional cooperation, and collective identity’ (Useem, 1993, p. 116). Donaldson
similarly notes that various corporate constituencies must collaborate in creating profitability, and
worries that ‘This fact of cooperative corporate efficiency, together with the inevitable
uncertainties of real-time decision-making in an evolving competitive environment, is destined to
produce an imperfect result when viewed from a single perspective’ (1994, pp. 11—12), i.e. the
perspective of shareholders. Particularly threatened may be the participation of 1980s
restructuring’s big losers, ‘the long-term investors of human capital who had made a career
commitment’ (Donaldson, 1994, p. 167).
Again, echoes of these caveats are found in the survey studies. Osterman (1994, p. 185) finds
that companies with greater reliance on contingent workers are significantly less likely to exhibit
workplace transformation, indicating among work innovators A high valuation on attaining a
committed work force’. This association suggests an area of incompatibility between TQM-type
reform and one particular restructuring avenue toward reduced employment costs. While Lawler et
4/. (1992) find positive correlations between delayering and many TQ-participation practices, they
generally did not observe these links for downsizing. They did find that firms whose employee
involvement programs had matured before the onset of downsizing were significantly more likely
still to be using these participatory schemes than those whose downsizing preceded or coincided
with El efforts (p. 86). In a study of 365 corporate members of the Association for Quality and
Participation, Buch (1994) finds that 70% had undergone downsizing. About 54% of these
respondents reported that downsizing’s effect on existing El was negative (p. 7). Cameron (1993,
p. 93), in two samples of automotive industry firms, notes that ‘Downsizing often precedes or
accompanies quality initiatives in organizations ... and its consequences are most often inhibitors
679
Total Quality, Financial Restructuring and Theories of the Firm
to successful TQM.’ He found that the most common downsizing strategy is simple ‘workforce
reduction’, used by ‘Every organization in my study’, which ‘contradicts some cardinal principles
of TQM’, and whose effects are 'rare1y positive and generally negative’ (p. 102). It is this conflict,
according to Cameron, that underlies the frequency of unsatisfactory results from downsizing.
What this literature shows is that the relationships among the concepts and components of these
corporate reform approaches are complex and have been viewed in different ways. In assessing
these findings, I would argue that observing combinations of practices consistent with both
financial restructuring and TQM does not necessarily contradict the idea that they can be viewed
most usefully as two essentially different approaches. One must ask whether and how they work in
tandem. The perspective adopted here suggests that intrinsic conflicts between the two approaches
could, over time, assert themselves. Of course, it is also possible that in particular circumstances
these distinct approaches would end up complementing rather than contradicting each other. These
possibilities should be testable in focused, longitudinal empirical work.
A crucial step in investigating the relationship between financial restructuring and total quality
in practice would be to place the assumptions and prescriptions of each in the context of economic
theories about what firms are and how they function. One way of pursuing the possibility that they
reflect different ways of systematic thinking about management is to examine how these two
movements correspond to similarly divergent economic theories. I turn now to a beginning
exploration of this theme.
3. Corporate
3.1
Reform And Theories Of The Firm
Financial Restructuring and Agency Theory
There is a variety of basically neoclassical theories of the firm, in that they utilize a well-defined
production function, and envi sage decision-makers’ maximizing choices leading firms to
equilibrium in key variables. I will focus this discussion on the agency perspective, one of the
most influential variants. Agency theory figures most prominently in economic theories of
financial restructuring, and its recent development has clearly been influenced by the restructuring
movement. In turn, during the 1980s this way of thinking about financial restructuring came to be
widely accepted by practitioners and journalistic observers.
680
Total Quality, Financial Restructuring and Theories of the Firm
Agency theory in economics and finance owes much to Michael Jensen (Jensen and Meckling,
1976, is a seminal work). The agency-theoretic firm is basically the profit-maximizing one of
economics texts, complicated by the separation of ownership and control in the modern
corporation. Owners (the principals) must delegate control to managers (their agents) because
ownership is diffused among many shareholders, and because information is diffused in the
productive organization (Fama and Jensen, 1983). The agency problem arises out of this
informational asymmetry. Managers are thought of as knowing the available technologies and
investment opportunities, and the probability distributions attached to alternative projects; but they
lack the owners’ pure profit motive . For the owners, it is the reverse. The most basic solution to
this problem is the board of directors, seen in agency theory as being appointed by shareholders to
monitor managers in the owners’ interest.6
A concept often employed in agency-theoretic models is the firm as a 'nexus of contracts’ (see
Jensen and Meckling, 1976, pp. 310—311; Jensen and Ruback, 1983, p. 43). The various agency
relationships are structured through a set of internal and external market transactions, governed by
explicit or implicit contracts. This web of contracts links the providers of managerial expertise,
work effort, intermediate goods and risk capital. The latter are thought of as principals by virtue of
their role as residual risk-bearers, with contracts conveying ownership. All of these contracts are
thought to be designed to base each provider’s compensation on its marginal product; the
connection is likely to be imperfect due to informational problems, but an optimal balance
between accuracy and contracting costs is achieved.
Of particular interest are managerial contracts. Here the optimal contract is viewed as one that
best aligns managers’ interests with shareholders’, given the costs. The company’s stock is an
effective contractual payment in this model because its price is seen as reflecting not only the
(prospective) performance of the firm, but also the manager’s marginal contribution to that
performance (Fama, 1980). What is key about this perspective on manager—shareholder relations
is that because what to produce is known (the firm’s profit opportunities) and how to produce it is
known (its technology set), the focus is on the incentive structure of the contracts. How well are
managers motivated to make the right choices—i.e. the value- maximizing ones?
6 In legal theory, the board technically guards the interests of the corporation itself For a discussion of this distinction,
and of some circumstances in which the two views of the board have differing consequences, see Margotta (1987).
681
Total Quality, Financial Restructuring and Theories of the Firm
It is the focus upon this question that links agency theory and the 1980s financial restructuring
movement. Before the 1980s, the board-directed, professionally managed corporation had been
viewed by theorists and practitioners as the solution to the organizational problems of
ownership— control separation. But institutional and market changes came to be seen as causing
shareholder monitoring and contracting safeguards to break down. The changes included slowing
growth and increased international competition, and generated conflict over the uses of corporate
cash flows. The basic framework employed in response by 1980s financial restructuring
participants is very much a Principal-agent one, in which asymmetric information and managerial
opportunism figure strongly. Such a framework is not necessarily just a fact of nature; it would be
quite foreign, for example, to most Japanese in addressing corporate adjustment problems. It arises
in association with the neoclassical agency theory taught in business schools and disseminated
more broadly in a host of ways.
I have already described the free cash flow hypothesis, the dominant theory of 1980s corporate
restructuring (Jensen, 1986). It can now be seen as an agency-theoretic explanation—again, one
widely accepted by practitioners and press as well. Here, financial restructuring is seen as
resolving the agency problem in the face of contracting breakdowns created by slowing growth
and competitive stress. Massive capital structure changes, often accompanied by managerial
replacement and/or new organizational forms, are thought to drive out inefficiency by effecting
drastic changes in the explicit and implicit terms of agents’ contracts throughout the organization.
The premier example is the LBO. With its smaller group of capital suppliers, monitoring is
thought to be more effective. And because top managers are often included in that group, the key
agents are turned into principals.
The free cash flow hypothesis is a good illustration of the two -way influence between agency
theory and the restructuring movement. For example, prior to the theory’s first publication, an
investment bankers’ panel on LBOs produced the following remarks: ‘When it’s a public company
and the manager doesn’t own much stock, his career often is tied to empire building’; after the
LBO, ‘the manager begins to realize that he’s got a huge debt burden, and. . . an equity interest....
Now he only buys machines he really needs’ (Mergers and Acquisitions, 1984, p. 36). By the end
of the decade, similar opinions were often couched in the language of the theory: ‘The success of
these ventures [LBOs] came largely from the discipline imposed by the need to service the debt—
or the “control function of debt,” as Harvard Business School professor Michael Jensen puts it’
(Institutional Investor, 1989, p. 138). The key result in these scenarios, with the pressures of debtservicing being
682
Total Quality, Financial Restructuring and Theories of the Firm
the chief instrument, is reduced agent discretion. No longer will free cash flow be diverted to
empire-building and waste, and hence effort and efficiency will rise. Profitability and market value
will rise because the new incentive environment causes managers to do the right thing.
3.2
TQM and Capabilities Theory
I have shown in Section 2 that in TQM ‘the right thing’ is not considered to be obvious a priori,
either to managers or to financial market-based corporate restructuring professionals. This TQM
perspective can be associated with a set of theoretical economic frameworks in which finding and
transforming viable competitive strategies hold center stage—Aoki’s model of the Japanese
company, the evolutionary theory of the firm and an ‘organizational capabilities’ approach. Each
in its own way is a theory of productive restructuring. I will argue that these perspectives differ
from the agency theory just described in ways that are quite similar to the divergences between the
quality and financial restructuring movements. The associations with TQM and differences from
agency theory are not neat or simple, because each of the three capabilities frameworks differs
from the others as well. But the commonalities are powerful, and have begun to stimulate a body
of work exploring and synthesizing their overlaps and distinctive emphases. (See Nelson, 1991;
Chandler, 1992a,b; Teece et al., 1994a,b.)
The first to be considered is Masahiko Aoki’s model of the ‘J-firm’ (1990a, 1990b).7 A key
element is its use of ‘horizontal coordination’: rather than just implementing a centrally
determined plan, the company’s employees and departments continuously modify production
schedules and processes in response to informational feedbacks among them. Seniority-based pay
ranks without narrow job descriptions, and lifetime employment with secure exits for poor
performers, provide the flexibility and incentives for workers to acquire and practice the
multidimensional, often firm-specific skills required for horizontal coordination to work. 8 This
combination of ‘weak-decision’ and ‘incentive -ranking’ hierarchies in production planning is
matched in financial
Aoki actually develops models of two kinds of firm, the J-firm described here and one patterned more after AngloAmerican practices. While it is the J-firm that is associated with TQM, both are relevant; the characteristics of Aoki’s
American-type model could provide an explanation of American firms’ recent difficulties, seen through total quality
lenses. Historically, it may be that much of what happens in Aoki’s J-firm was once accomplished in a very different
context within the large American corporation (see Lazonick, 1990). Chandler (1977) argues that the multidivisional
corporation rose to dominance precisely due to its ability to pursue internal and external integration.
The exit guarantee depends on the Japanese keiretsu, or alliance of related firms and banks. A primary manufacturing
company might arrange for a worker to be employed in a less demanding job with a parts supplier or a retail operation.
683
Total Quality, Financial Restructuring and Theories of the Firm
relations (Aoki, 1990b, p. 18). The firm’s largest capital supplier is its main bank lender, which
ranks its major customers in terms of credit allocation according to relative long-term
profitabiities; otherwise, in the absence of a crisis the bank leaves management alone. These
elements work together in Aoki’s model to ensure a stable, long-horizoned environment in which
horizontal coordination allows rents to be generated from the firm’s unique capabilities in
developing and acting upon information.
Another approach that focuses on company-specific informational processes is the
‘evolutionary’ theory of the firm, proposed by Richard Nelson and Sidney Winter (1982). Lacking
a sharp boundary between the known and the unknown, the evolutionary firm achieves working
understandings of its profit opportunities and technological possibilities through a groping process
of learning. Decision-making is embedded in ‘routines’ that determine the organization’s range of
possible behaviors—what information will be looked at, how it will be acted on and how the
results will be fed back into further learning. Firm evolution is path-dependent, with routines
inherited from the past acting like an organism’s genes. Thus routines will be in many respects
firm-specific, as will the kinds of knowledge that employees must absorb in order to participate in
them. All of these features ‘tend to limit the individual firm to the exercise of a distinctive package
of economic capabilities’ (Nelson and Winter, 1982, p. 134).
The last alternative framework to be addressed is one built explicitly around such
‘organizational capabilities’ of the firm, an approach associated with Alfred Chandler (1992a,b)
and others. ‘Organizational capabilities are combinations of human skills, organizational
procedures and routines, physical assets, and systems of information and incentives, that enhance
performance along a particular dimension’ (Baldwin and Clark, 1991, p. 4). Like the J-firm’s
horizontal information flows and the evolutionary firm’s routines, organizational capabilities are
products of constant learning and relearning, from and about the firm’s activities, its suppliers and
customers, and its own members. And again similarly, capabilities are firm-specific: they reside in
the ‘organizational setting in which they were developed and used’ (Chandler, 1992a, p. 84).
Capabilities may take the form of particular areas of technological expertise, or the ability to
translate changes in demand quickly and effectively into new products, or the capacity to adjust
and speed the flow of materials through a particular kind of production process. Capabilities
development must be invested in; it requires long-term commitment of human and financial
resources (Lazonick, 1990).
In all three theoretical approaches, firms depend on time-consuming interactions among their
functional components in learning to construct
684
Total Quality, Financial Restructuring and Theories of the Firm
business capacities. Thus I shall refer to them collectively, despite their distinctive terminologies,
as ‘capabilities theory’. The prefix ‘organizational’ should be understood, because organizational
setting and development are central in all three perspectives. I noted above some recent
explorations of the similarities among these approaches. In one, Teece et al. (1994a) describe a
‘dynamic capabilities’ perspective that is rooted explicitly in the evolutionary and organizational
capabilities traditions (the latter through the related resource-based’ approach—see Wernerfelt,
1984). Their paper emphasizes many of the key, common attributes in this emerging body of
work:
capabilities are built through learning, require the integration of multifaceted skills and functions,
and are tied to specific corporate histories. All of these features are seen evolving within and
depending upon particular organizational contexts, thus making capabilities difficult to transfer,
replicate or imitate.
The parallels between capabilities theory and the precepts of TQM are strong. They share
common approaches to understanding how firms work, and how to go about reforming them when
they work poorly. Some examples will make the association clear.
The need for systematic information flows linking the firm with its suppliers and customers is
axiomatic in TQM. In terms of suppliers, for TQM mutual confidence and aid between purchaser
and vendor’ is essential:
‘Economists teach the world that competition in the marketplace gives everyone the best deal.
This would be true if the purchaser . . . could know the quality of what he is buying’ (Deming, 1982,
pp. 25, 28). Similarly, management faces a ‘control problem’ in that ‘productive inputs are
heterogeneous’—in themselves, and in how ‘The firm itself creates distinctions among inputs in
the course of “imposing the routines’ order” on them’ (Nelson and Winter, 1982, p. 113). In TQM,
close ties with suppliers allow firms to reduce this informational vulnerability.
This external integration is also seen extending to end users, and ‘the ability to link knowledge
of customers with the details of engineering design in creating and improving products’ (Baldwin
and Clark, 1991, p. 10). Discussing the rise to competitive success of US heavy equipment makers
at the turn of the century, Chandler writes that
The sales force provided the engineers with information on the customers specific wants and
the types of performance they expected.... In these industries, product improvement and
innovation became an even more powerful competitive weapon [than advertizing or price].
(1977, pp. 410—411)
In present-day efforts to regain competitive footing, a TQM advocate argues
685
Total Quality, Financial Restructuring and Theories of the Firm
that ‘in corporate America the clarion call for improved customer service is as sacrosanct as
motherhood. But unless a company knows what its customers want . . such a goal is mere lip
service’ (Walton, 1990, p. 41).
In both TQM and capabilities theory, managers also must foster informational transfers within
the firm. ‘Internal integration is achieved when problem solving is tightly connected across
departmental boundaries [and] plays a critical role in activities such as product innovation, the
introduction of new technologies and entry into new markets’ (Baldwin and Clark, p. 15).
Similarly, a prominent management consultant: ‘Japanese companies that are organized to design
and produce new products quickly put all relevant development resources together . . . generally on a
full-time basis’, rather than ‘working through functional centers’; ‘scheduling is done within the
group’, rather than centrally; and ‘As a result of their new abilities, these companies are able to
significantly increase their rate of innovation’ (Stalk, 1991, pp. 90—92). Such interconnections in
solving the problems of quality are thought to rely upon, in Aoki’s terminology, intra-firm
coordination via ‘horizontal exchange of information regarding emergent events and the flexible,
co-ordinated read justments of planned work schedules among shops’ (1990a, p. 29). TQM efforts
typically devote considerable energy to removing organizational, cultural or motivational
impediments to the discretionary employee involvement implicit in horizontal coordination:
It is not easy to get a worker or manager to help you run the business if he is worried about
getting fired or having his plant shut down.... The team in the new, quality sense requires . . .
[that] the players must raise the difficult questions, and the boss must listen. (Main, 1994, pp.
63—64).
The ultimate efficacy of information flows within the firm—creating ‘fitness for use’—is
thought to be tied directly to the strength of its external linkages. In the example discussed above
by Chandler, once the sales force had communicated customers’ needs to engineering, ‘The
engineers in turn had to be in constant conversation with the managers of the production
department’ (1977, p. 410). For quality innovator Juran, the firm must ‘formalize the community
character at the design inputs’ (1969, p. 16) by placing the engineering function at the center of the
same kind of feedback loop, from post-sale tracking to manufacturing. In both capabilities theory
and TQM, it is the systemic interdependence among the firm’s functions that is key.
The significance of these linkages and horizontal information transfers for TQM, and the
latter’s kinship with capabilities theory, reside in the quality approach’s overarching focus on
organizational learning. Cole (1994, p. 66)
686
Total Quality, Financial Restructuring and Theories of the Firm
argued that ‘The power of the new quality improvement paradigm rests very much on its
implications for organizational learning’. He explicated these implications in terms of ‘Identifying
. . creating . . standardizing . . . and diffusing’ the organizational routines required for delivering
Juran’s ‘fitness for use’ (p. 67). Neither the potential customers, nor their wants, nor how to
translate those wants into products are presumed to be known a priori; management’s task is said
to be to facilitate the ongoing organizational activities required for learning and relearning answers
to these questions. Information about customer preferences is to be diffused as widely as possible
throughout the firm; this flow of information then serves as a reference point for employees as
they ‘make continual changes in organizational routines and . . communicate best practices so that
they are spread throughout the firm’ (pp. 72—73). 9 This organizational learning metaphor closely
echoes Deming’s earlier admonition that ‘doing one’s best’ is insufficient; rather, managers must
lead employees in creating knowledge about what to do, what techniques to use to do it, and why
(Deming, 1982, preface). For Deming, even the core process of establishing statistical control in
production is understood as a way of seeing in a highly uncertain environment—learning the
characteristics of the technology actually in place, and then innovating by learning how to modify
it (Deming, 1982, pp. 124—130).
As with financial restructuring and agency theory, the association between the quality
movement and capabilities theory often seems to flow from the influence of the former on the
latter. Frequently this effect can easily be traced to the empirical focal points of researchers’ work.
For example, the Baldwin and Clark study that I have cited illustrates and supports its argument by
reference to comparative studies of US and Japanese air-conditioner and auto makers and use of
flexible manufacturing systems. (Or see Lazonick and West, 1995.) The correspondence for
Aoki’s theory is natural and direct, since it was developed in studying the Japanese companies in
which total quality methods first blossomed. In other cases, the association appears to reflect
independent developments, and has only appeared ex post. Thus although the similarities between
TQM and evolutionary theory have been explored by Winter (1994), the evolutionary line of
inquiry arises from other roots. Chandler’s early work on American corporations is similar in this
respect.
Given the intellectual connections just detailed and the practical conflicts discussed earlier, it is
not surprising that some capabilities theorists have in varying degrees expressed misgivings about
the financial restructuring
Referring to the problem-solving presentations observed in Japanese factories, Cole (1994, p. 75) observes
that ‘the steady stream of such presentations gets one to thinking about the factory as a school and laboratory,
and not just a producer of goods and services’.
687
Total Quality, Financial Restructuring and Theories of the Firm
movement. Winter (1993) argues that while it is possible for the groove created by a set of routines
to become a rut, poorly adapted to a changed environment, a financial-restructuring approach to
reform may founder on the difficulty of valuing the ‘unconventional assets’ represented by the
firm’s future-oriented routines.’0 Lazonick (1992) views failure to ‘control the market for
corporate control’, with the accompanying loss of ‘financial commitment’, as an important
contributor to the erosion of American firms’ organizational capabilities and hence
competitiveness. Nelson (1991) argues that
While changing formal organization.. . . is easy, and selloffs and buyups are possible,
significantly changing the way a firm actually goes about making operating level decisions
and carries them out is time consuming and costly to do. Or rather, while it may not be too
difficult to destroy an old structure or its effectiveness, it is a major task to get a new structure
in shape and operating smoothly. (pp. 67—68)
These skeptical views follow naturally from the theoretical lenses through which capabilities
theorists view corporate reform, which tend to foster a perspective that differs sharply from that of
the agency theorists discussed earlier.
3.3
The Theoretical Divide
In many ways, the critical differences between the frameworks I have grouped under the headings
of agency and capabilities theory parallel the divide between the financial restructuring and total
quality reform strategies. The reform movements deal with practical answers to questions of value
creation and destruction, and the role of employees therein. The theories attempt to establish
abstract frameworks within which such problems can be addressed. In agency theory/financial
restructuring, the goal is redesigning agents’ contracts to increase the incentives for making the
right choices. A necessary step is removing from the individual (or the individual department) any
shields from the discipline of quantitative performance measures. The discretion of agents is to be
reduced. In capabilities theory/TQM, the goal is redesigning systems so that interdepartmental and
cross-functional complementarities can develop. A key task is removing the organizational
barriers to individual effort and motivation. The discretion of employees is to be enhanced. I will
attempt to highlight some of these theoretical differences first
15 Baldwin and Clark (1991) pursue a related problem: traditional capital budgeting methods typically do not
adequately value capabilities that have to do with external and intemal integration, and therefore tend to
contribute to underinvestment in them.
688
Total Quality, Financial Restructuring and Theories of the Firm
at the level of basic method, then by an examination of approaches to two common forms of
corporate restructuring—mergers aimed at synergies, and divestitures.
The central dynamic of decision-making in agency theory is choice. Agents must choose
among available alternatives. Their information may not be perfect, but the characteristics of the
available choices are taken as given, as independent features of the alternatives, over which the
agents themselves have no control. Uncertainty here is interpreted in a typically neoclassical
way—as a probabilistic set of outcomes whose distribution is knowable. The essence of the
asymmetric information problem is thought to be that managers know the probabilities attached to
alternative projects, but shareholders do not. Although choice is the problem, the fact that the
alternatives are given means that in any situation there is one and only one correct choice; any
firm or manager, properly motivated, will arrive at the same conclusion. In contrast, the basic
decision-making dynamic in capabilities theory is learning. Employees of the firm do not choose
from a menu of investment possibilities. Instead, they must create opportunities by searching out,
sifting through, and piecing together bits of information from among a potential infinitude.
Uncertainty in this framework means that the available alternatives are not known, nor are they
independent of decision-makers’ actions. Further, the capacity to engage in this process must be
developed and refined over time. Firms learn, and they must learn how to do it. Because
companies’ histories, processes and capacities differ, learning is firm-specific (Nelson, 1991).
A closely related difference has to do with the unit of analysis. In agency theory, it is the
individual (or individual contracting process); for capabilities theory, it is the organization.
Chandler (1992b) makes this point with respect to transaction cost theory, but the logic applies
equally to the agency focus on contracts, which are transactions whose drafting and
implementation impose costs. I argued above that because agency theory sees what to do and how
to do it as known, it focuses on the incentives provided by individuals’ contracts—explicit and
implicit—regarding what choices they will make. Hence the firm is defined, and its behavior
determined, by the aggregation of market contracts through which its activities are carried on. In
contrast, corporate activity is seen as fundamentally collective by the three capabilities theories.
Capabilities and routines are acted upon and participated in by individuals; but the organization
provides the networks and conventions within which individuals act, and these profoundly affect
the possibilities, processes, and outcomes of choice. Aoki (1990a, pp. 44—46) emphasizes that
although this characteristic is related to the ‘firm-specificity’ of employees’
689
Total Quality, Financial Restructuring and Theories of the Firm
Total Quality, Financial Restructuring and Theories of the Firm
knowledge, it goes further; unless that knowledge is collectively ‘communicated and utilized’, it
‘cannot be economically exploited’. Rather than being defined as a set of individual market
transactions, the firm at its most basic level generates organizational, extra-market economies and
capabilities. ‘The very essence of capabilities/competences is that they cannot be readily
assembled through markets’ (Teece et al., 1994a, p. 14); this proposition is at the heart of the work
done and inspired by Chandler. In addition, the focus of capabilities theorists on external
integration implies that market transactions themselves must be understood as containing an
important social dimension. For example, individual transactions wi th suppliers may be
powerfully conditioned by the nature of their long-term relationships with the firm.
In a broader sense, these differences boil down to basic methodological commitments:
neoclassical agency theory employs an atomistic method, and the others what might be called a
holistic one. For the former, it is the inherent characteristics of the basic building blocks that are
the starting point. The nature of the firm is then defined by the agency relationships and
contractual relations among them (or, in the case of physical assets, contracts with their owners).
Inductive logic can be employed to derive the behavior of the firm—or, say, one of its business
units—from the choices made by its contracting individuals. If one company’s individual
components were lifted out and dropped into a new organizational setting, a firm identical to the
original one would result. In the capabilities theories, the organizational whole imposes its own
dynamics on each of its component parts. In different firms, identical individuals with identical
employment contracts might make different choices. Even its machines may perform in ways that
are uniquely related to the organizational systems embedded in a given company. Conversely, the
assets represented by capabilities cannot easily be removed from the firm. An extended quote from
Aoki may be useful in making this point:
employees’ information processing and communicative capacity to generate
[informational] rents is a collective one nurtured in the organizational framework.. . it cannot
be embodied in, nor be portable by, individual employees. Consequently its distribution
cannot be written into individual contracts. In other words, the firm cannot be dissolved into
a bundle of individual employment contracts. (1990a, p. 28)
There is another association here. The kinds of general methodological differences just
discussed may correspond to different broad understandings of what it means to manage in
business, just as I suggested in section 2.3 for
690
Total Quality, Financial Restructuring and Theories of the Firm
divergent corporate reform approaches. Neoclassical (and agency) theory’s atomism—replete with
factors of production with identifiable marginal products—seems to mirror a managerial approach
that sees the firm as a collection of discrete functions, each capable of performance and evaluation
on its own. Hampden-Turner and Trompenaars (1993) have argued that different national cultures
contribute to distinctive managerial approaches, and that the one just described is associated with
an American proclivity for ‘analyzing’ rather than ‘integrating’. They asked managers from 12
countries to choose between the following:
(a) A company is a system designed to perform functions and tasks in an efficient way. People
are hired to fulfill these functions with the help of machines and other equipment. They are
paid for the tasks they perform.
(b) A company is a group of people working together. The people have social relations with
other people and with the organization. The functioning is dependent on these relations.
At one end of the scale, 74% of US executives choose (a), while at the other end only 29%
ofJapanese managers do so (p. 32). 11
The emphasis of capabilities theory on organizational synthesis, and the implication that key
business assets may not be readily ‘portable’, define an important difference from the agency
perspective on corporate restructuring. I will illustrate first by examining the acceptance in the
agency-theoretic merger literature of the notion of ‘synergies’ [e.g. see Jensen and Ruback, (1983,
p. 6): ‘ . . . competition among managerial teams for the rights to manage resources limits divergence
from shareholder wealth maximization by managers and provides the mechanism through which.. .
synergies available from combining or reorganizing control and management of corporate
resources are realized.’] The idea that assets from two separate organizations might be more
valuable when brought together in one implies that not just
The analytical breakdown of a companys functions into ever-more-specialized tasks is often associated historically
with the American, Frederick Taylor. Chandler (1977, p. 277) reported that a managerial contemporary of Taylor’s argued
that ‘While Taylor focused on “analysis” of tasks, he failed to consider their “synthesis” into the organization as a whole.’
Although Taylor’s program itself was never widely implemented (see Lazonick, 1989; Bushnell, 1994a), financial
restructuring seems to fit easily into the general outline of what continues from this ‘scientific management’ tradition. It
presumes that a blueprint for an efficient division of labor exists, or can be devised by management—and that this blueprint
should serve as the basis for codifiable individual performance standards, and for compensation based thereon. Lacking
such a system, it is thought, employees will tend to create waste as they pursue their own interests. TQM, on the other hand,
appears to run counter to each of these aspects of the managerial paradigm associated with Taylor’s influence. It seeks to
redefine the tasks of management in ways that erode the sharp distinction between managerial and worker functions, a
dichotomy that flows from a Taylorist approach.
691
Total Quality, Financial Restructuring and Theories of the Firm
the individual assets, but also their complementarities, matter. But in this literature, the role of
organizational setting in defining those complementarities is seldom addressed. If it is, it has to
do with the contractual costs of using assets under different ownership forms (Klein et al.,
1978). The synergy is seen as determined foremost by the intrinsic characteristics of the given
assets, and secondarily by reduction of contracting costs in their use. Otherwise, the context in
which they interact is simply not thought to affect their characteristics.12 The qualities of
productive assets, physical and human, are thought to be portable.
In contrast, capabilities theory can be thought of as an entire framework for exploring the
effect of organizational context on the development, adaptation and atrophy of
complementarities. That is what notions of cross-functional internal and external integration are
all about. It also underlies the concept of hierarchies of routines whose coordination is effected
through the operation of organizational memory (Nelson and Winter, 1982). But these
examples suggest that such complementarities are built over time, not purchased. Teece et al.
(1994, pp. 15—16) are ambivalent about the potential for splicing capabilities into the firm
through acquisitions:
.the properties of internal organization cannot be replicated by a portfolio of
business units amalgamated through formal contracts. .
the key feature of distinctive competences and capabilities is that there is not a market
for them, except possibly through the market for business units or corporate control . . .
they typically must be built because they cannot be bought.
When synergy-through-merger has been addressed elsewhere in capabilities theory, the focus
has been on the acquisition of particular assets whose characteristics can actually be enhanced
via long term integration into organizations with special, corresponding managerial and
technological capabilities.13
Agency theory’s limited concern with organizational context also appears in its approach to
divestitures, which can be thought of as aimed at synergies in reverse. A set of assets is
expected to be more valuable in isolation than in combination with the larger organization.
Here it is assumed that nothing from that larger organizational context was intertwined with the
productive capacities of the divested business unit. The agency-theoretic interpretation
• of 1980s divestitures is that the true value of divested business units can be 12 For a discussion (from
outside the neoclassical agency framework) of the organizational ‘digestion problems’ attending many would-be
synergistic mergers, see Ravenscraft and Scherer (1987).
13 See Chandler (1977, pp. 474—475) and Lazonick (1990, p. 40), on the diversification paths of multidivisional
corporations.
692
Total Quality, Financial Restructuring and Theories of the Firm
realized when they are freed from the suffocating agency costs of managerial empire building.
Likely candidates would be those units whose financial performance is seen as sub-par. Again,
asset capabilities are seen as portable; everything that is valuable about them can be transferred to
a new owner and setting. And again, capabilities theory would suggest a different focus—on any
roles played by the assets in question in systems of profit-generating interdependencies in the
original firm. Unlike the atomistic view of agency theory, this holistic one militates against
evaluating a division’s or a business unit’s own profit-center performance in isolation. The
additional question would be whether that part of the organization contributes significantly to
overall ‘core competencies’ exploitable in various markets (Prahalad and Hamel, 1990). Indeed,
capabilities ‘may unravel if the subunit is separated from the parent’ (Teece et al., 1994, p. 16).
The implied debate between agency and capabilities theories can be thought of as one between
theories based on adaptive versus innovative processes in the firm (see for example Lazonick and
O’Sullivan, 1996). 14 Agency theory, like neoclassical understandings in general, concerns itself
with how firms adapt to exogenous changes by redeploying existing resources and/or reallocating
the returns from those resources. The crucial role here is played by markets, comprised of the
nexus of contractual transactions among individual actors. Capabilities theory focuses instead on
how firms innovate, by allocating returns from existing resources in ways that generate new
productive capabilities. Here the organization itself plays the lead, as the irreducible medium
within which grow the capacities to recognize, develop, transmit, and transform value-creating
business capacities.
4. Conclusion
I have argued that there were two major cross-currents of corporate change during the 1980s, and
have sought to understand their often conflicting imperatives by reference to corresponding
theoretical developments on the nature of the firm. The argument can be briefly put. Financial
restructuring, assuming that the path to efficiency is known but that self-aggrandizing employees
often avoid it, applies the pressures of debt-financed reorganization in trying to eliminate waste
and restore profitability. These key commitments share much with neoclassical agency theory, in
which opportunistic agents’ sub-optimal choices in using corporate resources can be corrected by
the renewed contracting safeguards of massive capital structure changes. TQM
14
thank a reviewer for this journal for pointing our this distinction.
693
Total Quality, Financial Restructuring and Theories of the Firm
starts from the presumption that waste and poor performance most likely arise because managers
do not understand what customers want and/or the organizational obstacles to supplying it;
improvement requires the internally and externally integrative efforts of employees to define and
provide quality. TQM’s approach is consistent with several strands of capabilities theory, in which
profitability requires learning how to create organization-based business capacities, which emerge
from and reside in interdependencies among the resources of the firm.
The foregoing suggests a mutual influence between theoreticians and practitioners. Both
activities—looking to academic theorists for assistance and advice, and studying the changing
business world to form and test theory—are likely to be particularly intense when ferment or crisis
occurs. The past two decades have seen both. If nothing else, the material here shows that the
questions posed during this period can be answered in very different ways. Further assessing the
usefulness of those answers will require additional research in at least two directions.
One is theoretical. It will be clear to the reader that I believe capabilities theory to have great
potential for generating insights into ‘the firm’, and productive restructuring in particular.
Capabilities theory is still in a formative stage, and efforts to extend it—including the further
exploration of complementarities and conflicts among the various strands of the approach—are
likely to generate high returns. Part of this elaboration will require coming to theoretical terms
with recent work on the firm from within or very close to the neoclassical tradition. I refer here in
particular to Milgrom and Roberts (for example, 1990), and to Williamson (especially 1991). Both
represent efforts to model the same dynamics of corporate change that capabilities theory
addresses, while following key neoclassical conventions. Analyzing the strengths and weaknesses
of this work (see Bushnell, 1994b) will provide important insights into the mutual lessons of
theory and practice here.
An important avenue for elaborating capabilities theory itself, one with the potential to
strengthen its contribution to the practice of productive restructuring, may be the role of power
relationships within the firm. By way of contrast, its attention to the distribution and exercise of
decision-making power is one of the features of agency theory that makes it most persuasive as a
framework for understanding and guiding financial restructuring. But with the exception of
Lazonick (for example, 1989), capabilities theorists have not stressed power relationships—among
workers, managers, and shareholders—as important determinants of firms’ abilities to develop and
transform productive capacities. Providing workers with access to information, and the ability to
act upon that information, are consistently highlighted
694
Total Quality, Financial Restructuring and Theories of the Firm
in total quality thinking as critical to organizational transformation. Hackman and Wageman
(1995, p. 336) have pointed out the consequences for TQM of restricting such access or
prerogatives, arguing that a basic failing of the American quality movement has been its effort
.to achieve fundamental change wi thout changing the fundamentals.... (1) how frontline work is structured, (2) how gains are allocated, (3) how opportunities for learning are
apportioned, and (4) how authority is distributed.
Similarly, Appelbaum and Batt (1994, p. 43) criticize TQM structures because ‘they leave
unchanged within the firm both the work organization and hierarchical power relations’. If indeed
the state and evolution of power relations are crucial to capabilities formation, then capabilities
theory will need to develop a language and stance for addressing those issues. Such a development
could offer welcome assistance to those grappling with productive restructuring in the field.
Another urgent research program suggested by this paper is empirical work on corporate
financial restructuring, TQM and the relationships between the two. We lack carefully defined and
gathered data on financial restructuring in relation to organizational initiatives like downsizing;
similar information about TQM vis-a-vis related efforts such as employee involvement; and
research that is specifically designed to learn about the relationships among these kinds of subplots within the corporate restructuring story. For example, the literature of both practitioners and
scholars suggests that the desired effects of financial restructuring are intimately bound up with
control changes and/or the heavy use of leverage. Thus it may be feasible to use company financial
data for information about the incidence and extent of that approach to restructuring, rather than
relying solely on the self-reporting typical of the studies surveyed in the last section. In addition,
we need longitudinal data on practices and outcomes. Without substantial time horizons, it is
simply too difficult to make inferences about causal relations among reform efforts and results.
These approaches could add considerably to our systematic information about similarities and
differences in the firm-level empirical regularities accompanying TQM and financial restructuring
per se, and their combination.
This imperative flows partly from the evolution of corporate reform in the 1990s. While the
financial market conditions required for debt-financed restructuring have declined (Goldstein,
1995), the kind of corporate downsizing that has emerged in the 1990s often involves the same
kinds of operating changes—without the presence of massive borrowing or ownership
695
Total Quality, Financial Restructuring and Theories of the Firm
transfer—and many of the same protagonists. As already noted, a key contributor to both financial
and organizational upheaval among American firms has been ‘the intensification of pressures from
large shareholders, particularly institutional investors’—pressures that ‘are likely to strengthen in
the years ahead’ (Useem, 1994, p. 13). We ignore at our own peril the lessons of the 1980s about
financial and productive corporate transformation.
Acknowledgements
I have discussed many of these ideas with Tim Bushnell, whose encouragement and advice I
deeply appreciate. Eileen Appelbaum, Judith Biewener, Jim Crotty and participants at a seminar at
Buffalo State University have made many useful suggestions. I also thank two reviewers for this
journal for their extremely helpful comments. Responsibility remains, of course, my own.
References
Aoki, M. (1990a), ‘The Participatory Generation of Informational Rents and the Theory of the Firm,’ in M. Aoki et al.
(eds), The Firm as a Nexus n/Treaties. Sage: London, pp. 26—52.
Aoki, M. (1990b), ‘Toward an Economic Model of the Firm ,‘ Journal of Economic Literature 28(1), 1—27.
Arzac, B. R. (1986), ‘Do Your Business Units Create Shareholder Value?,’ Harvard Business Review, January—February.
Baldwin, C. and K. Clark (1991), ‘Capabilities and Capital Investment: New Perspectives on Capital
Budgeting,’ Division of Research, Harvard Business School, Working Paper no. 92-004 (Also published as
‘Capital Budgeting Systems and Capabilities Investments in US Companies after the Second World War,’
Business History Review, 68,73—109, 1994.)
Bhagat, S., A. Shleifer and R. Vishny (1990), ‘Hostile Takeovers in the 1980s: The Retum to Corporate Specialization,’
Brookings Papers on Economic Activity, Microeconomics, pp. 1—72.
Blair, M. and R. Litan (1990), ‘Corporate Leverage and Leveraged Buyouts in the Eighties,’ inJ. Shaven and
J Waldfogel (eds), Debt, Taxes, and Corporate Restructuring. The Brookings Institution: Washington, DC, pp.
43—80.
Blair, M. and M. Schary (1993), ‘Industry-level Pressures to Restructure,’ in M. Blair (ed.), The Deal Decade:
What Takeovers and Leveraged Buyouts Mean for Corporate Gevernance. The Brookings Institution: Washington,
DC.
Brindisi, L. (1985), ‘Creating Shareholder Value: A New Mission for Executive Compensation,’ Midland
Corporate Finance Journal, Winter, 56—66.
Buch, K. (1994), ‘The Effect of Downsizing on Employee Involvement Activities and Attitudes,’ AQP Research/or
696
Total Quality, Financial Restructuring and Theories of the Firm
Practice Series. Association for Quality and Participation: Cincinnati, OH.
Bushnell, P. T. (1994a), The Transformation of the American Manufacturing Paradigm. Garland: New York.
Bushnell, P T. (1994b), ‘Management Paradigm ‘Transformation and the Theory of the Firm,’ Manuscript, Allegheny
College
Cameron, K. (1995), ‘Downsizing. Quality, and Performance,’ in R. Cole (ed.), The Death and Life of the American
Quality Movement. Oxford University Press: New York, pp.93—li4.
Chandler, A. D., Jr (1977), The Visible Hand: The Managerial Revolution In American Business. Belknap Press:
Cambridge, MA.
Chandler, A. D., Jr (1992a), ‘Organization Capabilities and the Economic History of the Industrial Enterprise,’ Journal of
Economic Perspectives, 6(3), 79—100.
Chandler, A. D., Jr (1992b) ‘What Is a Firm? A Historical Perspective,’ European Economic Review, 36,
483—492.
Cole, R. (1994), ‘Different Quality Paradigms and their Implications for Organizational Learning,’ in M. Aoki and R. Dote
(eds), TheJapanese Finn: Sources of Competitive Stength. Clarendon Press: Oxford.
Council of Economic Advisors (1985), Economic Report of the President. Government Printing Office:
Washington, DC.
Deming, W E. (1953), ‘Management’s Responsibility for the Use of Statistical Techniques in Industry,’ Advanced
Management, November.
Deming, WE. (1981), ‘What Top Management Must Do,’ Business Week, 20 July, 18—44. Deming, W E. (1982), Quality,
Productivity, and Competitive Position. MIT Center for Advanced Engineering Study: Cambridge, MA.
Deming, WE. (1986), Out of the Crisis. MIT Center for Advanced Engineering Study: Cambridge, MA. Donaldson, G.
(1994), Corporate Restracturing. Harvard Business School Press: Boston, MA.
Ernst and Young, and American Quality Foundation (1991), International Quality Study: Top-line Findings. Ernst and
Young: Cleveland, OH.
Fama, E. F. (1980), ‘Agency Problems and the Theory of the Firm,’ Journal of Political Economy, 88(2),
288—307.
Fama, E. F. and M. C. Jensen (1983), ‘Separation of Ownership and Control ,‘ Journal of LAW and Economics, 26,
301—325.
Feigenbaum, A. V. (1956), ‘Total Quality Control,’ Harvard Business Review, November—December.
Garvin, D. A. (1983), ‘Quality on the Line,’ Harvard Business Review, September—October.
Garvin, D. A. (1983), Managing Quality. The Free Press: New York.
Goldstein, D. (1991), ‘Takeovers and the Debt Assessments of Firms and the Stock Market,’ unpublished Ph.D.
dissertation, University of Massachusetts, Amherst.
697
Total Quality, Financial Restructuring and Theories of the Firm
Goldstein, D. (1995), ‘Uncertainty, Competition, and Speculative Finance in the Eighties ,‘ Journal of Economic Issues,
29,719—746.
Hackman, J. R and R. Wageman (1995), ‘Total Quality Management: Empirical, Conceptual, and Practical Issues,’
Administrative Science Quarterly, 40, 309—342.
Hall, B. (1990), ‘The Impact of Corporate Restructuring in Industrial Research and Development,’ Brookings Papers on
Economic Activity, Microeconomics, pp. 85—13 3.
Hall, B. (1994), ‘Corporate Restructuring and Investment Horizons in the United States, 1976-87,’ Business History
Review, 68, 110—143.
Hampden-Turner, C. and A. Trompensars (1993), The Seven Cultures of Capitalism. Currency-Doubleday: New York.
Hayes, R. and W J. Abernathy (1980), ‘Managing our Way to Economic Decline,’ Harvard Business Review, May—June.
Institutional Investor (1989), ‘No Turning Back for LBOs,’ March, 133—15 1.
Jensen, M. C. (1986), ‘Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers,’ American Economic Review,
76, 323—329.
Jensen, M. C. (1988), ‘Free Cash Flow and Takeovers,’ in J. Coffee et al. (eds), Knights, Raiders, and Targets.
Oxford University Press: New York, pp. 194—210.
Jensen, M. C. (1989), ‘Eclipse of the Public Corporation,’ Harvard Business Review, September—October,
61—74.
Jensen, M. C. and K. Ruback (1983), ‘The Market for Corporate Control: The Scientific Evidence, ’Journal of Financial
Economics, 11, 5—50.
Jensen, M. C. and W H. Meckling (1976), ‘Theory of the Firm: Managerial Behavior, Agency Costs and
Ownership Structure, ’Journal of Financial Economics 3, 305—360.
Juran, J. M. (1951), Quality Control Handbook. McGraw-Hill: New York.
Juran, J. M. (1969), ‘Mobilizing for the 1970s,’ Quality Progress, August, 8—17.
Juran, J. M. (1978), ‘Japanese and Western Quality—A Contrast,’ Quality Progress, December, 10-18.
Kaplan, S. and J. Stein (1993), ‘The Evolution of Buyout Pricing and Financial Structure in the 1980s,’
Quarterly Journal of Economics, 108, 3 13—357.
Klein, B., K. Crawford and A. Alchian (1978), ‘Vertical Integration, Appropriable Rents, and the
Competitive Contracting Process, ’Journal of Law and Economics, 297—326.
Lawler, E. E., S. A. Mohrman and G. E. Ledford (1992), Employee Involvoment and Total Quality Management:
Practices and Results in Fortune 1000 Companies. Jossey-Bass: San Francisco.
Lazonick, W (1989), ‘The Breaking of the American Working Class’ (a review essay on David Montgomery, The Fall of
the House of Labor), Reviews in American History, 17, 272—283.
698
Total Quality, Financial Restructuring and Theories of the Firm
Lazonick, W (1990), ‘Organizational Capabilities in American Industry: The Rise and Decline of Managerial Capitalism,’
Business and Economic History (2nd Series), 19, 35—54.
Lasonick, W (1992), ‘Controlling the Market for Corporate Control: The Historical Significance of Managerial
Capitalism,’ Industrial and Corporate Change, 1,445—488.
Lazonick, W and M. O’Sullivan (1996), ‘Organization, Finance, and International Competition,’ Industrial and Corporate
Change, 5, 1—49.
Lazonick, W and J. West (1995), ‘Organizational Integration and Competitive Advantage: Explaining Strategy and
Performance in American Industry,’ lndustrial and Corporate Change, 4,229—270.
Levine, D. and L. D’Andrea Tyson (1990), ‘Participation, Productivity, and the Firm’s Environment,’ in
A. Blinder (ed.), Payingfor Productivity. The Brookings Institution: Washington, DC, pp. 183—236.
Lichtenberg, F. and D. Siegel (1990), ‘The Effects of Leveraged Buyouts on Productivity and Related Aspects
of Firm Behavior,’ Journal of Financial Economics, 27, 165—194.
Long, W and D. Ravenscraft (1993), ‘Decade of Debt: Lessons from LBOs in the 1980s,’ in M. Blair (ed.), The Deal
Decade: What Takeovers and Leveraged Buyouts Mean For Corporate Governance. The Brookings Institution:
Washington, DC.
Main,J. (1994), Quality Wars: The Triumphs and Defeats of American Business. The Free Press: New York. Manne, H.
(1965), ‘Mergers and the Market for Corporate Control ,‘Journal of Political Economy, 73,110-120. Margotta, D. (1987),
‘Finance Theory: Its Relevance in Corporate Control,’ Akron Business and Economics Review, 18(4).
Mergers andAcquisitions (1984), ‘Roundtable: The Leverages Buy Out Market,’ Summer, 26—40. Milgrom and Roberts
(1990), ‘The Economics of Modern Manufacturing: Technology, Strategy, and Organization,’ American Economic Review,
80(3).
Montgomery, C. A. (1994), ‘Corporate Diversification,,Journal of Economic Perspectives, 8(3), 163—178. Morck, R., A.
Shleifer and K. Vishny. (1989), ‘Characteristics of Hostile and Friendly Takeover Targets,’ in A. Auerbach (ed.),
Takeovers: Causes and Consequences. University of Chicago Press: Chicago, pp. 101—136.
Nelson, K. K. (1991), ‘Why do Firms Differ, and How Does it Matter?,’ Strategic Manageneent Journal, 12, 6 1—74.
Nelson, K. K. and S. Winter(1982),An Evolutionary Theory of Economic Change. The Belknap Press of Harvard
University Press: Cambridge, MA.
Osterman, P (1994), ‘How Common is Workplace ‘Ii~ansformation and Who Adopts It?,’ Industrial and Labor Relations
Review, 47, 17 3—188.
Paulus, J. D. and S. K. Waite (1987), ‘Discussion (of Ravenscraft],’ in L. Browne and E. Rosengren (eds), The Merger
Boom. Federal Reserve Bank: Boston, MA, pp. 38-47.
Pickering, M. (1991), ‘A Review of Corporate Restructuring Activity, 1980—90,’ Staff Study no, 161. Board of Governors
of the Federal Reserve System: Washington, DC.
Prahalad, C. K. and G. Hamel (1990), ‘The Core Competence of the Corporation,’ Harvard Business Review, May—June,
79—9 1.
699
Total Quality, Financial Restructuring and Theories of the Firm
Ravenscraft, D. and E M. Scherer (1987), Mergers. Sell-offs, and Economic Efficiency. The Brookings Institution:
Washington, DC.
Roserr,J. (1990), ‘Do Union Wealth Concessions Explain Takeover Premiums?,’ Journal of Financial Economics, 27,
263—282.
Stalk, G, (1991), ‘The Strategic Value of Time,’ inJ. D. Blackburn (ed.), 7Jme-based Competition. Business One
Irwin: Homewood, IL, pp. 67—101.
Teece, D, G. Pisano and A. Shuen (1994a), ‘Dynamic Capabilities and Strategic Management,’ Working
Paper no. 94-9, Consortium on Competitiveness and Cooperation. University of California, Berkeley.
Teece, D., K. Romelt, G. Dosi and S. Winter (1994b), ‘Understanding Corporate Coherence: Theory and Evidence,’Journal
of Economic Behavior and Organization, 23, 1—30.
Troy, K. (1991), Employee Buy-in to Total Quality: A Corporate Progress Report. The Conference Board: New York.
Useem, M. (1993), Executive Defense. Harvard University Press: Cambridge, MA.
Useem, M. (1994), ‘The Different Faces of Organizational Restructuring,’ Looking Ahead (National Planning Association),
16, 12—14.
Walton, M. (1986), The Doming Management Method. Perigee Books: New York.
Walton, M. (1990), Doming Management at Work. Perigee Books: New York.
Wernerfelt, B. (1984), ‘A Resource-based View of the Firm,’ Strategic ManagementJournal, 5, 17 1—180.
Williamson, 0. E. (1985), The Economic Institutions of Capitalism. The Free Press: New York.
Williamson, 0. E. (1988), ‘Corporate Finance and Corporate Governance,’ Journal of Finance, 43, 567—59 1.
Winter, S. G. (1993), ‘Routines, Cash Flows, and Unconventional Assets: Corporate Change in the 1980s’ in
M. Blair (ed.), The Deal Decade: What Takeovers and Leveraged Buyeats Mean fir Corporate Governance. The
Brookings Institution: Washington, DC.
Winter, S. G. (1994), ‘Organizing for Continuous Improvement: Evolutionary Theory Meets the Quality Revolution,’ in J.
Baum and J. Singh (eds), The Evolutionary Dynamics of Organizations. Oxford University Press: Oxford,
700