KEYNOTE
ADDRESS
Organizational Capabilities in American Industry:
The Rise and Decline of Managerial Capitalism
William Lazonick
1
BarnardCollege,ColumbiaUniversity
and
Institutefor •4dvancedStudy,Princeton
Organizational Capabilities
Organi?ationalcapabilitiesrepresentthe power of planned and
coordinated
specialized
divisionsof labor to achieveorgani?ational
goals.
Throughplannedcoordination,
thespecialized
productive
activities
of masses
of individualscan coalesceinto a coherent collectiveforce. Through
planned coordination,organizationscan integrate the various types of
knowledgeneeded to developnew productsand processes. Through
plannedcoordination,
organizations
can speedthe flow of work from
purchased
inputsto soldoutputs,therebyenablingthe enterpriseto achieve
lower unit costs.
Over the pastcenturythe growingtechnicaland socialcomplexity
of
the specialized
divisions
of laborthat mustbe plannedand coordinated
to
achieveeconomicsuccess
havemade organizational
capabilitiesever more
criticalfor attainingand sustaining
competitive
advantage.Increasingly
and
acrossa wideningrangeof industries,the benefitsof plannedcoordination
in developing
andutilizingproductive
resources
havejustifiedthe highfixed
costsof buildingthe organizations
that can plan and coordinate.
Organizationbuildingis a socialphenomenon
that canbe supported
or hinderedby the particularpolitical,cultural,andeconomic
environments
in whichany givenbusinessenterprisepurchases
its inputs,producesits
goods,andmarketsits products.It is thereforepossibleto characterize
not
only particularenterprises
but alsothe nationaleconomiesin whichthose
enterprises
operateby the existence
of moreor lesspowerfulorganizational
capabilities.From the late nineteenthcentury,wheninternationalindustrial
1Aversion
of thispaper
willappear
in Howard
Gospel,
ed.,Industrial
Training
and
TechnologicalInnovations(London, 1990).
BUSINESS _AND ECONOMIC
HISTORY, SecondSeries,Volume Nineteen,1990.
Copyright(c) 1990 by the BusinessHistory Conference. ISSN 0849-6825.
35
leadership
passed
fromBritainto the UnitedStatesandGermany,superior
organizational
capabilities
were critical. So too with the rise to dominance
of JapanoverBritain in cottontextilesin the 1920sand 1930s--ashift in
internationalcompetitiveadvantagethat rehearsedthe more recent and
more broad-basedsuccesses
of JapaneseindustryagainstAmerican and
Europeancompetitors[6, 16, 17].
My purposehere is to providean outlineof the development
and
erosionof organizational
capabilitiesin Americanindustryduring the
twentiethcentury--a
centurythathaswitnessed
the riseandrelativedecline
of U.S. "managerial
capitalism."The generalhistoricalperspective
that I
shall sketchout is by no meansdefinitive. Only in recent years has
scholarly
research
begunto discover
andcomprehend
theinternalevolution
of businessorganizations.There is muchmore detailedresearchto be
done. My hope is that a synthesisof existingknowledgeon the
development
anderosionof organizational
capabilities
in the United States
will be helpful for undertakingthat research,as well as for stimulating
debateover the institutionaldynamicsof capitalistdevelopment
in the late
twentiethcentury.
The Rise of Managerial Capitalism
Sincethe earlynineteenth
century,the geographic,
occupational,
and
socialmobilityof labor in the United Stateshasplaceda premiumon the
buildingof managerial
structures
for successful
industrialenterprise.The
U.S. experiencecontrastedwith that of Britain where geographic
concentrationsof skilled labor, reproduced on the job and in local
communities
from generationto generation,
madeit possibleto conducta
successful
business
enterprisewith little in the way of managerialplanning
and coordination. In Britain, capital could move to existingsuppliesof
labor. In the United States,capitalhad to entice labor to move to it or
alternatively
developand utilizetechnologies
that madethe enterpriseless
dependenton skilledmanuallabor that wasin scarcesupply.To solvethe
labor problem,U.S. industrialists
had to build managerialstructuresthat
could ensurethe sustainedavailabilityof the requisitelabor servicesand
that couldplan and coordinatethe developmentand utilizationof labordisplacing
technologies
[4, 15, 16].
In the nineteenthcentury,as today,buildinga managerialstructure
meant trainingpersonnelin relevantindustrialknowledgeand motivating
themto usethat knowledge
to furtherthe goalsof the enterprise.Higher
educationwas as yet unimportantin the training of managers. They
acquiredrelevantknowledgeon the job--typicallyon the shopfloor--and
oftenmoved
fromfirmto firmto expand
theirknowledge
base,bringing
with them the skillsas well as businessconnections
that they alreadyhad
acquired.
The interfirm,andinterindustry,
mobilityof suchtechnically
trained
personnelwas a major factor in the diffusionof new technologyin the
nineteenth-century
UnitedStates[10,24]. With enoughacquiredexperience,
andsomefinancialbacking,sometechnologists
wouldstarttheir ownfirms.
But if an entrepreneur
wishedto take advantage
of expanding
market
37
opportunities
in the nineteenthcentury,he had to createincentivesfor
technicalspecialists
to remainin his employratherthan go to work for the
competition.To retainthesespecialists,
and to ensurethat they usedtheir
positionsof responsibility
and authorityfor the benefit of the firm, the
entrepreneur
oftengavekey personnel
stakesin the enterprise
in the forms
of equity sharesand promisesof promotionto positionsof greater power
andpay. Gainingthe commitment
of managerial
personnel
to the firm was
a cumulativedynamicprocess:the more successful
the firm, the greaterits
ability to retain and reward key managerialpersonneland the more the
personnelwouldseekto further the interestsof the firm [5, 6, 14].
The buildingof managerialstructures
was,therefore,both an effect
and causeof the growthof Americanenterprises.Extensivemanagerial
structuresevolvedin industriesin whichhighfixedcostsof technology
and
organizationcould, through planned coordinationand the resultant
achievementof large market shares,be transformedinto low unit costs.
The
Lowell
textile firms that launched
the industrial
revolution
in the
United Stateshad managerialstructures
thatweremoreextensive
and costly
than thosethat existedin the dominantBritishcottonindustry. But it was
the growthof the railroadsfrom the 1840sthat launchedthe managerial
revolutionin the United States. Particularlyas the railroadsevolvedinto
regionaland nationalsystems,it becamenecessary
to build managerial
structuresto plan and coordinatethe flow of peopleand goods[5].
The railroadsnot only provideda schoolfor industrialmanagers-Andrew Carnegiewasthe mostfamous"graduate"--but
alsogaveindustrial
enterprisesthe ready accessto nationalsupplyand productmarketsthat
could make high fixed-costinvestmentsin productivetechnologyand
m.anagerialorganization potentially worthwhile. Through planned
coordination,
enterprises
that undertookthesehighfixed-cost
investments
in
organizationand technologycould surge ahead of their rivals in the
development
and utilizationof productiveresources.For example,with
railroadsprovidingaccessto nationalmarketsfor materialsand finished
products,the leadingsteeland oil refiningcompanies--Carnegie
Steel and
StandardOil in particular--madehugeinvestments
in plant and equipment
as well as raw materials,and then, throughthe plannedcoordinationof
productiveactivities,capturedthe large market sharesthat enabledthe
transformationof thesehigh fixed costsinto low unit costs. As a result,
theseenterprises
were able to underpricetheir competitorsand emergeas
dominantin their respectiveindustries[5, 6].
Dominant firms also emergedin machinerymanufacture,such as
sewingmachines(Singer)and agriculturalequipment(McCormick). To
competein these industriesrequired large investmentsnot only in
productionfacilitiesbut alsoin marketingcapabilities.To be competitive,
companieshad to investin the trainingand motivationof knowledgeable
andreliablesalesmen
whocouldprovideafter-sales
serviceto the equipment
usersandwhocouldalsosupplyinformationfrom the field to manufacturing
personnelconcerning
the need and potentialfor productdevelopment.As
productinnovationbecamecentralto successful
industrialenterprise,the
buildingof an effectivemarketingorganization
becameas important,if not
more important,to commercialsuccessas the buildingof an effective
38
productionorganization.In a growingnumberof industries,the planned
coordination
of production
anddistribution
activities
withinan organization
providedthe basisfor attainingand sustaining
competitiveadvantage.To
accomplish
the necessary
plannedcoordination
requiredthe buildingof
managerial structures--firm-specific
investments in, and long-term
commitmentsto, highlytrainedpersonnel[14].
The building of organizationalcapabilitiesbecame even more
importantin the nextwaveof managerialenterprises
that emergedfrom the
last decadesof the nineteenthcenturyin the science-based
electricaland
chemicalindustries.As theseindustriesdevelopedit becameapparentthat
the integrationof productionand distributionfacilitieswould not be
sufficientfor a firm to sustainwhateverinitial competitiveadvantageit may
have had. The further growth of the enterprise required continuous
innovation,whichin turn requiredinvestments
in researchand development
facilities. Firms such as General Electric, American Telephone and
Telegraph,andDu Pontled the wayin establishing
R & D capabilities
and
integratingscientificpersonnelinto the managerialstructure[11, 23].
With the rise of the science-based
industriescamethe growingneed
for personnel
who had attaineda conceptual
comprehension
of scienceand
technology
priorto takingup positions
in industry.Followingthe successful
Germanexampleof weddinghighereducationand industrialdevelopment,
Americanbusinesspeople
beganto lookto the educational
systemto provide
their firmswith the requisitepersonnel.Prior to the 1890sthe U.S. system
of highereducation,like the British Oxbridgesystemon whichit originally
wasmodeled,wasnot integratedinto the industrialsphere. Even the landgrantcollegesystemthat had comeinto beingin the 1860sandthat would
play a key role in the integrationof highereducationinto the economyhad
been createdprimarilyto enhancethe socialstatureof America'sfarmers
and artisansrather than to improve their productivecapabilities. As
individualstrying to make a living off the land or in their workshops,
however,farmersand artisans
had little usefor the land-grantcolleges[14].
Theseinstitutions
onlybecameintegratedinto economicactivityfrom
the late 1880sas the United StatesDepartment of Agriculture,with the
subsequent
supportof rural bankers,agriculturalmachinerymakers,and
mail-orderhouses(all interestedin rural prosperity),beganusingthe landgrantcolleges
to developnewagricultural
technologies
andtrain agricultural
"salesmen"
who,throughuniversityextension
courses,couldhelp diffusethe
new technologies
to the farmers. At aboutthe sametime, someland-grant
colleges--most
notablyM.I.T.--begantrainingmechanical,electrical,and
chemicalengineersand scientists
readyand willingto take up employment
in managerialenterprises.Many of theseengineersand scientists
went on
to climbthe managerialhierarchyto positionsof industrialleadership[14,
211.
Increasingly,
after the turn of the century,major firms adoptedthe
practiceof regularlyrecruitingmostnewmanagerial
personnel--and
notjust
sdentistsand engineers--from
the systemof highereducation.At the same
time, dominantbusinessinterests--Carnegie
and Rockefellerto namejust
two of the mostimportant--pumped
financialresources
backinto the system
of highereducationto ensurethat, amongotherthings,it wouldbe able to
39
fulfill its new-foundfunction of peoplingthe burgeoningmanagerial
structures.The competition
for business
fundingultimatelyforcedthe elite
institutions such as Harvard and Yale to direct some of their educational
attentiontowardservicing
the personnelneedsof managerialcapitalism[14].
By the 1920s the U.S. systemof higher educationhad taken its
presentform and had becomedeeplyintegratedinto the economicsystem.
Higher educationprovidedfuture managerialpersonnelnot onlywith the
basiccognitiveequipmentneededto comprehend
the natureof increasingly
complextechnologybut alsowith the behavioralsocializationneededto
functionwithin the new managerialorgani?afions.As a result, higher
educationbecamea standardcredentialfor embarkingon a managerial
career. It providedthe pre-employment
foundations
for the development
of managerialpersonnelwithin the firm. Educated recruits could be
expectedto have the cognitivecapabilities
for acquiringindustry-specific
technicalknowledgeas well as the behavioralcharacteristics
requiredto
interact within the organizationalcontext and respond positivelyto
organizational
incentives.
American industrynow had availablethe semi-processed
human
resourceson which the organizationalcapabilitiesof U.S. corporate
enterprises
wouldbe built. The graduatesof highereducationenteredthe
firm aslower-leveltechnicalspecialists,
and overthe nextseveralyearswere
rotated from one departmentand functionto anotherto enable them to
gainthe experience
necessary
to moveup the corporate
ladderintopositions
requiringgeneralmanagerialcapabilities.In the processthe corporation
determinedwho would move up the hierarchyfurthestand fastest. But
even for the most promisingof managers,the climb to the top was a
career-longprocess,during which the employeehad to demonstrate
continuouslyhis (until recent years rarely her) commitmentto the
organization.Comparedto manyof the fast tracksof today,rewardsfor
devotedperformance
wouldcomeslowly,but steadilyandsurely.With the
widespreadseparationof ownershipfrom controlthat had occurredin
American industryby the first decadesof this century,moreover,an
ambitious
managerial
employee
ostensibly
couldenvision
endinghis career
at the pinnacleof the company's
hierarchyof statusandpower[14].
In return for the employee'slong-term commitmentto the
organization,the enterprisemade a long-term commitmentto the
"organization
man" to providehim with employmentsecurityand social
status. The firm also had a strongincentiveto investin the productive
potentialof the careermanager.A precondition
for the firm to makethis
commitmentwas an entrenched
positionin its relevantproductmarkets.
The firm couldonlyofferthe employee
long-termsecurity,
andwouldonly
makelong-terminvestments
in humanresources,
if thefirm itselfhadsound
prospects
for long-termsurvivalas a productiveentity.
Enterprisesthat experiencedsustainedgrowth, moreover, could
continuallycreate new opportunities
for the exerciseof authorityand
responsibility
that couldbe offeredto loyalmanagerialemployees.Hence
the importance
for personnelmanagement
of a diversification
strategythat
wouldcontinually
take the firm into new productand geographic
markets
in whichit couldmakeuseof the organizational
capabilities
it alreadyhad
developed in capturing existing markets. By generating not only
employment
stabilitybut alsonewopportunities
andrewards,the continuous
growthof the firm was criticalto creatingincentivesfor careermanagersto
contributetheir skills and efforts to the pursuit of organi?ational
goals.
Success bred success.
The successful
implementation
of a diversification
strategyrequired
thebuildingof an appropriate
organization
structure.
The abilityto integrate
technicalspecialists
into the organization
and transformsomeof theminto
general managerswas the key to the successof the multidivisional
structures,
which,asAlfred Chandlerhasshown,emergedin the 1920sand
diffusedrapidlyin the 1930sand 1940sacrossdominantf•rmsin American
industry[4]. The multidivisional
structureenabledthe firm to augmentits
organizationalcapabilitiesfor the purposeof expandingthe scopeof its
activitiesto a wider range of productlines and more geographically
extensive markets.
By separatingstrategic from operating derision-making,top
managementcould focus all of its attention on planninglong-term
investmentstrategies. But in focusingon strategicdecision-making
top
managementhad to ensurethat the operatingdivisionswould respondto
the overallgoalsof the firm--topmanagement
had to delegateauthorityto
middle managerswithout losingcontrolover the pursuitof the strategic
objectivesthat had been set at the top. Essentialto the superior
performanceof the enterprisethat adoptedthe multidivisional
structurewas
the organizationalintegrationof the managerial structure through the
trainingand motivationof salariedpersonnel.
Centralized control facilitated the planning and coordinationof
management
development
programsthat fosteredorganizational
integration.
Management
development
built on the pre-employment
technicalandsocial
trainingthat managerial
personnel
had acquiredin the nation'seducation
system. The trainingacquiredthroughmanagement
development
was not
confinedto particularfunctionalactivities,productdivisions,or geographic
regionsof the firm. Enterprise-wide
managementdevelopmentprograms
made it possibleto adopt job-rotation schemesthat were part of a
continuous
processof transformingspecialists
into generalists.Often the
schemesinvolvedthe movementof peoplenot only betweendivisionsbut
also from divisions to centralized
staff functions and back.
Besidesprovidingtraining, managementdevelopmentalso became
integral to the incentive system within the managerial structure.
Management
development
programs
expanded
thepotentialfor advancement
within the firm, while encouraging
junior and middle managersto conform
to enterprisegoals rather than to the goalsof particularworkgroups,
functions,divisions,or regions. Giventhe dependence
of top management
on salariedemployees
to whomit had delegatedconsiderable
authorityand
in whose training the firm had made significantinvestments,
positive
incentivesof promotion up the hierarchywere much more powerful
inducements
to securingsuperiorperformance
thanwere negativesanctions
of demotion and dismissal.
Just as the delegationof authority extended decision-making
responsibility
downthefirm'shierarchy,
sodid openlinesof promotion
help
41
to ensurethat the loyalty of managerialpersonnelwould extend up the
hierarchy.Moreover,the verypossibility
for movingup the hierarchymade
middle managerswillingto passon informationand delegateauthorityto
subordinateswho might one day take their places, thus extending
appropriatetrainingand effectiveincentives
furtherdownthe organizational
structure. At the same time, by separatingcontrolof key staff functions
from the divisions,
top management
ensuredthat criticalinformationwould
not becomethe propertyof self-serving
entitieswithin the firm [14].
The Managerial Structure and the Shop Floor
The long-term attachment of salaried employeesto particular
organizationsin effect made managerialpersonnelmembersof the firm.
Not so for shop-floorworkerswho, even to the present in the United
States,generallyhave the statusof hourlyworkerswho are paid set rates
for performingparticularjobs. A blue-collarworkermayspenda "lifetime"
with the firm, especiallywhen employmentoperatesunder seniority-based
unionrules. But Americanideologyhasit that the shop-floorworkeris a
dispensable
cogin the productive
machine.
Indeed,sincethe late nineteenthcenturyAmericanmanagement
has
soughtto put this ideologyinto practicethroughthe structuringof the
hierarchicaland technicaldivisionsof labor [16]. The very formation of
coherent managerial structures in U.S. firms created a clear-cut
segmentation
betweensalariedmanagersandwageworkersthat contrasted
sharply with the integrated character of the managerial structures
themselves.The processof segmentation
betweenmanagersand workers
beganin the late nineteenthcentury,and its impetuswas an obsession
of
American managerswith taking skills off the shopfloor. Up until the
1870s,Americanindustrialists,
and particularlythosein metal and wood
manufactures,
relied extensively
on craft workersto organizeproductive
activitieson the shopfloor. These workersoften were immigrantsfrom
Britain and Germany who had acquired their skills within the more
traditionalworkplacesof Europe. But in the last decadesof the nineteenth
century,the combinationof expandingnationalmarketsand rapid changes
in process
technology
gaveAmericanmanagers
boththe incentiveandability
to dispensewith skilledcraft workers[16].
Through the planned coordinationof mechanizedproduction
processes,
Americanmanagerscould achievethe high rates of throughput
that made it possibleto gain competitiveadvantageor were essentialjust
to remaincompetitive
in capital-intensive
industries.The attemptsby craft
workersto maintaintheir traditionalshop-floorprerogatives,
even in the
face of deskillingtechnological
change,threatenedthe achievementof what
Alfred Chandlerhas called economiesof speed[5]. Having investedin
interconnected
and expensive
processtechnologies
that were capableof high
levelsof throughput,managementdid not want to be boundby traditional
craft normsconcerning
the allocationand paceof work as well as ratesof
pay.
It was the challengeto the positionof craft controlthat prompted
the workers to form the American
Federation
of Labor in the late 1880s.
42
The rise of craft unionism,however,only strengthened
the resolveof U.S.
massproducersto rid their workplacesof craft control. This they did not
only by the violent suppression
of strikesand the victimizationof union
labor but alsoby the cooptationof someof the more skilledcraftsmen-particularlythoseengagedin the set-upand maintenanceof machinery--into the managerialstructureas engineersand supervisors.At the same
time,Americanmanagersfoundreadyat handa massiveinfluxof unskilled
immigrantlabor, primarily from southernand easternEurope, eager to
work in the mechanized factories.
A portionof theseworkerswere assignedto unskilledheavylabor
that had not yet been mechanized.But an increasingproportionfound
themselves
assigned
to "semi-skilled"
operations.The cognitive
requirements
of semi-skilledjobs were minimal. Besideseliminatingheavy labor,
machinesperformedwhat for humanmindsand handshad previously
been
complextechnicalfunctions. Meanwhile a small group of elite, skilled
personnelsetup andmaintainedthe machines.Left to semi-skilled
workers
were routine operativefunctionsrequiredto maintainthe flow of work.
What made thesejobs demanding,both physicallyand mentally,was the
paceof work, as managerstried to extractthe maximumoutputfrom the
high-throughput
technologies
in whichtheir firms had invested.To avoid
costly downtimeon, and damage to, the expensivehigh-throughput
machinery,it was essentialthat the semi-skilledoperativesremain attentive
and cooperativeon the shopfloor.
Not all machineoperativesobliged. In the last two decadesof the
nineteenthcentury"scientificmanagement"
arosein enterprisesthat had
investedin modernequipment.The goalof "scientific
managers"
wasto get
theseworkersto cooperatein the generationof high levelsof throughput.
The new technologies
that were beingput in placewere not only skilldisplacingbut also effort-saving--the
same amount of output could be
producedwith less effort on the part of the shop-floorworker, so that
generatinghighlevelsof throughputno longernecessarily
requiredthat the
operativeactuallywork harder and longer. If only workerswould trust
"scientific
managers"
to set outputnormsconsistent
with the effort-saving
capabilities
of the new technologies
and to fix pieceratesthat wouldgive
workersa fair shareof the productivity
gains,both capitalandlabor could,
as FrederickTaylorput it, "togetherturn their attentiontowardincreasing
the size of the surplusuntil this surplusbecomesso large that it is
unnecessary
to quarreloverhowit shallbe divided"[16, 19].
Taylorand his disciples
hadlittle success
in gainingthe cooperation
of workersin the generationof high levelsof throughput.Workerswere
disinclinedto place their trust in the "scientific
managers,"
becausethe
industrialcapitalistswho really ran the factorieswere committedto
extending
andprolonging
the "non-union
era." The capitalists
simplyrefused
to bargainwith the workers'representatives.
Underminingevenfurtherthe
questfor high throughputwas the rise after the turn of the centuryof a
more militant labor movement,headedby the IndustrialWorkers of the
World who advocatedsabotageof the flow of work in order to pose a
threatto the capitalists
andtherebyprotectthe interestsof shop-floorlabor.
With the struggleover "restrictionof output"takingcenterstagein
capital-labor
relations,industrialmanagersbecameevenmore insistentthat
skill and initiativenot be left on the shopfloor, and that, by the same
token,shop-floorworkersnot havecontroloverthe reproductionof relevant
skillsthroughcraft-regulated
apprenticeship
training. Fearful that skilled
shop-floorworkerswould usetheir scarceresources
to reducetheir effort
and increasetheir pay, managementdeemedthat knowledgeof the shopfloor production
process
mustresidewithinthe managerialstructure.In the
shortrun, as alreadymentioned,managementtransformedskilledworkers
into managerialpersonnel.In the long run, managementinvestedin new
machinetechnologies
that displacedshop-floorskills. In the process,the
semi-skilledpositionswere increasingly
filled by new immigrantswho had
arrivedwith few skillsor by blackswho had left the Southin searchof a
better living. Ethnically as well as organizationallyand economically,a
socialgulf separatedshop-floorworkersfrom the managerswho planned
and coordinatedtheir work [16, 19].
To get these increasinglyalienatedshop-floorworkers to supply
sufficienteffort to maintain the flow of work, managementturned in the
earlydecades
of thiscenturyto an extensive
relianceon supervisory
labor
--a strategythat, however,often servedto exacerbatethe conflicton the
shopfloor,especially
whenlabormarketsweretight. In its relianceon the
"drivesystem,"
moreover,management
had not yet resolvedthe problemof
how to ensurethat supervisors,
typicallyrecruitedfrom amongthe shopfloor workers and with meager prospectsfor rising further up the
managerialhierarchy,wouldact in waysthat furtheredorganizational
goals
[12, 161.
From the late 1910s,pressured
by the exigencies
of wartimelabor
shortage,the massproducers
beganto solvethe problemof restrictionof
output on the shop floor. With the support of a repressivestate,
managementattacked and eliminatedthe radical elementsin the labor
movement. In the aftermathof World War I, managementalsorebuffed
large-scale
efforts--inparticularthe GreatSteelStrikeof 1919--bythe more
conservative
AFL to organizemass-production
workers. By removingthe
possibility
for workersto gaintheir ends'throughcollectiveunionvoice,the
demonstration
of capitalistpower set the stage for more progressive
measures,particularlyin firms that had attaineddominantmarket shares,
to gain a degreeof cooperationfrom semi-skilled
workers.
Personnel
departments
wereput in placeto rationalizelaborpolicies,
therebyerodingthe autonomyof the foremento whommanagement
had
been obliged to delegate substantialcontrol. "Companyunions"or
"employeerepresentation
committees"
were setup to providean institutional
contextfor workersto air their grievances
to management.Attentionwas
paid to the training of foremen to promote rather than undermine
cooperative
shop-floorrelations,and linesof authoritywere put in placeto
ensurethat foremenexercised
controlin accordance
withcompanypersonnel
policy[12].
Most important,duringthe boomof the 1920s,a significant
number
of dominantenterprises
beganto providetheir shop-floorworkerswith
"goodjobs"--employment
thatofferedhigherpayandmorejob security
than
could be found in the more competitivesectorsof the economy. The
managements
of entrenchedfirms began,howevermodestly,to sharewith
workersthe hugesurpluses
that their firmswere accumulating,
and in an
era duringwhichthe labor movementwasin anycaseweakened,workers
wholandedthe "goodjobs"wereinclinedto cooperate
in ensuring
the rapid
flow of work throughthe productionprocess. With effectivemanagerial
coordinationof high-throughput
productionprocesses
now extendingdown
to the shop floor, the 1920s saw phenomenalproductivitygrowth in
Americanmanufacturing.Skills had been taken off the shop floor and
production
workersremainedbut "hourly,"
andostensibly
dispensable,
labor.
Nevertheless
the plannedcoordinationof the specializeddivisionof labor
was enabling dominant managerialenterprisesto win a measure of
cooperationfrom theseworkers. As a result, thesefirms were able to
transformthe high fixed costsof their investmentsin organizationand
technology
into low unit costs,largemarketshares,andhugeprofits[16].
Managerial Capitalism in the Age of Mass-Production Unionism
With the depressionof the 1930s,the "goodjobs" of shop-floor
workersvanished.At the beginningof the downturn,dominantenterprises
soughtto maintainemploymentfor their shop-floorworkers. But as the
depressiondeepenedin the early 1930s,massivelayoffs of production
workersbecamethe rule. It appears,however,that dominantenterprises
made greater efforts to keep their managerial structuresintact. Top
executivesrecognizedthat it would be difficult to recreate integrated
managerialorganizationsthat had taken decadesto build if they were
permittedto break apart. The economicsuccess
of the 1920smeant that
most dominantfirms had the financialpower to take the long view in
maintainingthe integrityof their managerialorganizations;
they cameinto
the 1930swith huge surplusesand little debt. It also appearsthat many
dominantfirms usedthe doldrumsof the 1930sto createnew productsand
searchfor new markets,and to implementmultidMsionalorganizational
structuresto carry thesestrategiesthrough. If, in the crisisof the 1930s,
deskilledshop-floor
workersweredeemeddispensable,
integratedmanagerial
structures
were not [15].
As goodjobs vanished,
shop-floor
workerssoughtto remaketheir
relationswith their capitalistemployers.Supportedby a government
that
recognizedthe political and economicadvantagesof a viable union
movementin the mass-production
industries,workerssuccessfully
put an
end to the "non-union
era." The major objectiveof the mass-production
unionsthat arosein the last half of the 1930swas "securit3/'--the
assurance
that their memberswouldenjoyboth employment
stabilityand substantial
sharesin their firms' prosperity.
The key to securitywas seniority. Unionized mass-production
workerscontinuedto be paid hourlyrates attachedto jobs, the form of
paymentsuggesting
that anyindividualworkerwasdispensable
to the firm.
But, barringanotherGreatDepression,
seniorityprovisions
gaveworkersthe
prospects
of steadyemployment
aswell asprotectionagainstdiscriminatory
treatmentfor their involvementin unions. Indeed, over time, and typically
throughplant-levelbargaining,senioritybecamethe basison which shopfloor workers moved up internal job ladders to positionsthat paid
progressively
higherhourlyrates. Mass-production
unionismgaveworkers
substantiallymore collectivepower that could be used to challenge
managerialprerogatives
to controlconditionsof work and pay. But by
givingworkersemploymentsecuritymass-production
unionismalsohelped
to overcomethe legacy of workers' mistrust of corporatemanagement
createdby the massivelayoffsduring the Great Depression. The accord
between organizedlabor and corporatemanagementcreated a basis for
labor-management
cooperationin creatingvalue on the shopfloor [3, 6].
U.S. industrialcorporationsalso ensuredthat unionizationdid not
extendtoo far up the organizational
hierarchy. Specifically,
in the mid1940sattemptsat unionizationby foremenwere stifled,helpedby a legal
ruling that declaredthat foremenwere part of management,
and hence
could not demandunion recognitionunder the National Labor Relations
Act. With well-developed
personneldepartments
in place--andextendinga
processof organizational
integrationthat had alreadybegunin the nonunion era of the 1920s--corporate
managementwas able to delegate
supervisory
authorityto foremenwithout fear that theserecruitsfrom the
shopfloor wouldabusetheir managerialpower. By definitivelyaccording
managerialstatusto foremen,moreover,corporationsextendeda powerful
positiveincentiveto shop-floorworkersby givingthem the opportunity
of
risingto managerial
positions,
evenif therewaslittle chanceof promotion
beyondthe level of first-linesupervisor.In the 1940sthe problemof "the
man in the middle"was resolvedin a way that established
effectivelines
of authorityandcommunication
betweenthe highermanagement
levelsand
the shopfloor. Theseorganizational
linkagesenhancedmanagerialcontrol
[16, 181.
This modifiedstructureof managerialcapitalism
enabledU.S. mass
producers
to take advantage
of the propitiousmacroeconomic
conditionsof
the 1940sand dominatethe international
economyinto the 1960s. But it
is importantto notethatthe organizational
structures
availableto U.S. mass
producers
were not creationsof the post-WorldWar II era. Rather they
were extensions
of a processof organization
buildingthat had begunin the
late nineteenthcenturyandthat permittedmostof the enterprises
that had
emergedas dominantin the rise of managerialcapitalismto remain
dominantinto the secondhalf of the twentiethcentury. Althoughunions
now sharedpower with managementin bargainingover sharesof value
gains,workersleft investment
decisions
to management;
unlikethe earlier
craftorganizations,
theirunionswerenotinherently
opposed
to technological
changeand redivisions
of labor on the shopfloor. In the postwarera of
economicgrowth and U.S. internationaldominance,mass-production
unionismshoweditself to be compatiblewith the transformation
of high
fixedcostsinto low unit costsin mass-production
enterprises.
Ensuringthe continued
dominance
of the U.S. economy
in the 1940s
and 1950swas the movementof manyU.S. firms into new productand
geographic
markets.The growthof multinational
operations
wouldnot have
beenpossible
if the U.S.-basedenterprises
that wentmultinational
had not
alreadydevelopedthe organizational
capabilitiesneededto dominatethe
vastU.S. domesticmarket. The continuedgrowthof manyof thesefirms,
and their ability to share the gains of success
with their managersand
workers,wouldnot havebeenpossible
withouthugeinvestments
in research
anddevelopment--activities
thatenabledenterprises
to buildon theirexisting
technological
capabilities
to generateproductinnovations.In the United
Statesduringthe 1940sand 1950s,thesefirm-levelinvestments
in R & D
receivedsubstantial
supportfrom privateand publicfundingthat enableda
vast expansion
of the systemof highereducation,as well as from direct
government
financialsupport,
generally
justifiedasmilitaryexpenditures,
but
with apparentlysignificant
spillovers
into commercial
uses[20].
The Decline of Managerial Capitalism
Sincethe 1960sU.S. industryhasenteredinto a periodof long-term
relativedecline,not unlikethe experience
of Britishindustrysincethe late
nineteenthcentury. As both causeand effectof this declinehas been the
erosionof the organizational
capabilitiesthat U.S. industrialcorporations
hadbuilt up overthe previoushalf century,if not longer. During the 1960s
the erosionof the organizational
capabilitiesof U.S. industrialenterprises
beganon the shopfloor--theweakestlink in the structureof organizational
integrationthat had been achievedpreviously. Shop-floorworkers had
neverbeen extended"membership"
in the firms for whichthey labored;in
theirwork theyhadbeenreducedto "appendages
of the machines"
(to use
Karl Marx'sapt phrase),andtheybelongedto powerfulunionorganizations
that couldrefuseto cooperatewith managementin the bargainingprocess
if workers' interestswere not being met. During the 1970s and 1980s,
however,the erosionof the organizationalcapabilitiesof the major U.S.
industrialcorporations
hasgonemuchfurtherthan lossof controlover the
shop-floorlabor force. As we shah see, the erosionof organizational
capabilities
has alsooccurredwithinthe managerialstructuresthemselves.
The result has been the waning of "managerialcapitalism"as a
dominant force in internationalindustrialcompetition. The decline of
managerialcapitalismhasnot occurredin a competitive
vacuum. The U.S.
economyhas been in relativedecline. That is, the dominantmanagerial
enterprises
thatform the coreof the U.S. economy
havecontinued
to grow,
and in manycaseseveninnovate,but in their competitivecapabilities,
these
enterpriseshave been surpassed
by more powerfulmodesof business
organization,
particularlythoseemanatingfrom the Japaneseeconomy.
Elsewhere
I
have
elaborated
on
the
characteristics
of
the
organizational
capabilities
of Japanese
"collective
capitalism"
thathavemade
the institutions
of "managerial
capitalism"
obsolete[16, 17]. Sufficeit to say
here that the strengthof Japaneseenterprisederivesfrom organizational
integrationthat extendsbeyondthe limitsof the plannedcoordination
of the
specialized
divisionof laboras practicedunderU.S. managerialcapitalism.
First, organizationalintegrationin Japan extendsacrosshorizontallyand
verticallyrelatedfirms to a muchgreaterextentthanin the United States
(wheresuchintegration
is indeedoftenillegal)sothatplannedcoordination
spans units of t'mancialcontrol to encompassmultifirm business
organizations.Second,withindominantJapanese
enterprises,
organizational
47
integrationextendsfurtherdownthe organizational
hierarchy,beyondthe
managerialstructureitself,to includemale blue-collarworkers.
Both these extensionsof organi?ational
integrationsignificantly
enhancethe organizational
capabilityavailableto Japaneseindustrywhile
significantly
increasing
the risksconfronted
by Americanfirmsthat would
attemptto makethe hugeinvestments
in facilitiesand personnel
necessary
to remaincompetitive.Confronted
by an international
economy
that they
no longerdominate,
manymajorU.S. enterprises
havesoughtto adapton
the basisof the pastsuccesses,
therebyreapingthe returnson their prior
investments
withoutcommittingsufficientresources
to ensuretheir future
prosperity.Short-runadaptiveresponses
inevitablylead to the erosionof
organizational
capabilities
asthebusiness
enterprisecanno longermaintain
the incentives
for keyemployees
to remaincommitted
to the organization
--evenif, asis increasingly
lesslikelyto be the case,theseemployees
have
thetrainingandthephysical
facilities
available
thatare necessary
to enable
the enterpriseto remain at the forefrontof innovation.
Deskilling on the Shop Floor
As already indicated,the vulnerabilityof American industrial
enterprises
to superiororganizational
capabilities
from abroadwasgreatest
on the shopfloor. With a few exceptions
suchas IBM and Kodak, U.S.
industrial
enterprises
hadnevermadelong-term
employment
commitments
(as distinctfromimplicitpromises)
to theirshop-floor
workers.Inherent
in insistence
by Americanmanagers
of their "rightto manage"
the shop
floor wasthe ideology
that,at anytime and for anyjob, anyindividual
shop-floor
workerwasdispensable--paid
by the "hour"for the job at hand
and no more.
In termsof workers'skills,managerial
ideologycouldclaimsome
relevance.Intenton takingskillsoff the shopfloorwhereworkersmight
usethemto controlthe paceof work,U.S. managerial
enterprises
hadnot
made significantinvestmentsin the skills of shop-floorworkers.
Management
tendednot to countthe deskilled
shop-floor
workeramongthe
firm'svaluedassets.But in termsof workers'efforts,this managerial
ideology
wasmuchlesswell-founded.
In practice,
to gainthe cooperation
of shop-floor
workersin maintaining
the rapidandsteadyflow of workso
essentialto achievinglow unit costs,management
had to offer them a
measureof employment
securityand a share(howeverindirect)in the
prosperityof the enterprise[16].
Priorto the GreatDepression,
someof themorefarsighted
industrial
managers
hadsystematized
theirpersonnel
policies
to providehardworking
shop-floor
workerswithrealisticpromises
of economic
security.As we have
seen,when the promiseswere not kept duringthe Great Depression,
workerstookthe matterof economic
security
into their ownhands. Once
the majorindustrial
corporations
hadrecognized
the newmass-production
unions,it wasnot managerial
personnel
policybut ratherthe workers'own
collectiveorganizations
with their emphasis
on seniorityrightsthat would
provideworkerswiththe employment
security
and economic
gainscritical
for gainingtheircooperation
in theworkplace.In effectmanagers
of most
of the greatU.S. industrialcorporations
cameto rely on independent
union
organi?ations
to ensurethe stabilityof the long-termrelationbetweenshopfloor workersand the firms for whichtheyworked.
This institutionalarrangement
remainedviableas long as the U.S.
industrialcorporations
continued
to dominatetheir markets. But when,in
the 1960sand 1970s,the corporations
stumbledin the faceof international
competition
and soughtto roll backthe bargaininggainsthat workershad
made over the previousdecades,
the adversarialcharacterof U.S. labormanagement
relationsbrokethroughthe cooperative
veneer. In industries
suchas steelandautomobiles
thatweredominated
by adaptive(as distinct
from innovative)oligopolists,
the costsof the accordwith labor that had
beenstruckin the 1940sbeganto outstripproductivity
gains. As long as
there wasno seriousforeigncompetitionand the U.S. nationalfirms in an
industrydid not engagein significant
pricecompetition
amongthemselves,
U.S. corporations
were ableto passoff higherlabor coststo consumers
in
the form of higherprices. By the late 1960s,however,the limits of the
adaptive strategy had been reached. With powerful international
competitorson the scene,domesticinflation only servedto erode U.S.
international
competitive
advantage
[16].
The U.S. competitiveness
problemwasnot onlyhigherwagesbut also
laggingproductivity
growth. High wages,tight labor markets,and the
availabilityof unemployment
benefits--not
to mentionthe restiveness
of
youngerblue-collarworkers,both blackand white,in the wake of the civil
rightsandantiwarmovements--had
weakenedmanagerialcontrolovershopfloor workers. Alienatedin any caseby the routinenature of their work
and without any formal power to influencethe nature of the work
environment,
blue-collarworkerssoughtto controltheir expenditureof
effort by unauthorized
work stoppages,
work to rule, and absenteeism,
all
of whichhad adverseconsequences
for productivity.
In the 1970smanyobservers
of Americanindustrypointedto the
alienatedshop-floorworker, confinedto routine and repetitive tasks
requiringlittle skill development,
as an explanation
of the slowdown
in the
growthof laborproductivity
in Americanmanufacturing
that hadbegunin
the mid-1960s. In many plantsaroundthe country,experiments
in job
enlargement
and job enrichmentwere undertakento try to enhance"the
qualityof worklife"(as it was called)in order to elicit more effort from
workers. Althoughthe initial impactsof theseprogramswere generally
positive,manyof the experiments
in the early 1970swere cut shortwhen
the workerswhosejobshadbeenenrichedand enlargedbeganquestioning
traditionalmanagerial
prerogatives.
In the longrun, attemptssuchasthese
at piecemealtransformation
of the organizational
structuremaywell have
reduced rather than enhancedorganizationalcapabilityby creating
expectations
for more meaningfulwork whichin the end were not fulfilled
[13, 16, 251.
In the 1980sJapanesesuccess
in taking market share awayfrom
once-dominant
U.S. massproducers
madeit dear that the primesourceof
Japanese
competitive
advantage
wasnotlowwages(asmanyAmericans
had
chosento believein the 1970s)but superiororganizational
capabilities.
Many Americanindustrialmanagersalsocameto recognizethat the major
difference between the internal organizationof U.S. and Japanese
enterprises
wasthe extentto whichJapanesemanagersdeveloped
skillson
the shopfloor and delegatedauthorityto blue-collarworkersto use those
skillsto ensurea rapid flow of high-qualitywork. As a result of the
Japanesechallenge,American industrialmanagersbegan to realize that
enhancing"the qualityof worklife"wasnot just a meansof elicitingeffort
fromworkers(as hadbeenthe casein the failedexperiments
of the 1970s).
Rather industrialmanagerscame to rec%tmize
that upgradingthe
skillsof the shop-floor
laborforcewasan endin itselfbecause
it augmented
the firm's human-resource
"assets."To maintainthe rapid flow of highqualitywork usingnew, automatedmanufacturing
technologies
requires
shop-floorworkers with the cognitivecapabilitiesto ensure that the
machineswork properly with a minimum of downtime. U.S. massproductionindustriescan no longer competeusingworkerswhoseown
mechanical
motionsmerelycomplement
thoseof the machine,aspreviously
hasbeenthe case.The effectiveuseof the newtechnologies
requiresshopfloor workerswho can ensurethe quality,as well as the quantity,of work
[16, 221.
As a precondition
for technology-specific
trainingfor workersunder
the auspices
of the employingenterpriseitself,the large-scale
adoptionof
new "flexible"technologies
requiresa supplyof more highlyeducatedshopfloor workersthan U.S. industryhasusedor hashad availablein the past.
To generatea large supplyof workerscapableof acquiringthe requisite
trainingbothwithinand outsidethe manufacturing
enterprise,institutional
rigiditiesin the U.S. educational
systemmustbe confronted.When,in the
early twentieth century, vocationalschoolingentered U.S. secondary
education
to trackyouthsawayfrom collegeand into the blue-collarlabor
force,the resultantsegmentation
of the laborforcewasconsistent
with the
sodaldivisionof laborbetweenmanagersandworkersin the world of work
[2]. But in recentdecades
the sameeducational
systemhaslosttouchwith
the changinghuman-resource
needsof an industrialera in which the
potentialfor automationhascreateda new role for shop-floorworkersin
monitoring
the quality,aswell as ensuring
the quantity,of work [22].
Mass
Education
and Deskilled
Labor
What is now neededis an educationalsystemthat rejects the
conception
of theworkerasa mereappendage
of the machineandprepares
futureworkersfor activeinvolvement
in speedingthe flow of work while
maintaining
its qualityin the "flexible"
factory.There is no point,however,
in buildingnew organizational
structuresand educationalsystemsif those
who run the largestindustrialcorporationseschewinnovativeinvestment
strategies
that can make use of skilledworkerswho are encouraged
to
exercise
initiativeon the shopfloor. Yet prevailingorganizational
structures
withinU.S. manufacturing
enterprises
may be inhibitingthe adoptionof
innovativeinvestmentstrategiesbecausethey reflect a century-long
managerial
obsession
withtakingskills,andinitiative,off the shopfloor. It
wouldappearthat even enteringthe 1990smany,if not most,American
50
managersare reluctantto developskillson the shopfloor for fear of losing
controlof the flow of work [16].
Despite conservativeinvestmentstrategiesin the mass-production
industries,the 1980s witnessed,somewhatbelatedly, the widespread
recognitionof the need to improvethe qualityof masseducationin the
United States. At the same time, however, blue-collar workers have
experiencedmassive,and typicallypermanent,layoffs in the face of
internationalcompetition. Good blue-collarjobs have vanishedin the
United States,not becauseof a lack of effectivedemandas in the 1930sbut
becauseof the supply-side
effectiveness
of international
competitors.Youths
in working-class
schoolsand communities
see that the goodjobs are no
longerthere. Yet they are confrontedwith an educationalsystemthat is
gearedtowardgeneratingblue-collarworkerswho will be able and willing
to spendtheir livesdoingroutinework. The systemno longerhas a hold
on them. Particularlyin blackcommunities,
classdiscipline,a modicumof
which was previouslysecuredby the prospectsof steadyand well-paying
blue-collarjobs, has broken down.
The Decline
of Innovation
Although mass education for blue-collar workers has been
deteriorating,
the United Statesstill possesses
a powerfulsystemof higher
education,capableof generating
technicalspecialists
requiredfor innovation
in the late twentiethcentury. But the systemof highereducationis less
integratedinto the U.S. industrialeconomythan it usedto be. For one
thing, international competitors, with their powerful organizational
capabilities
in place,are able to make ampleuse of the openU.S. system
of higher education. One reasonwhy U.S. industrialcorporationsare
havingincreasing
difficultyin maintaining
controloverintellectualproperty
is that they have becometoo reliant on the publiclyfundededucational
institutionsto foot the bills for R & D, rather than, as they did in the past,
usethe highereducational
systemas the foundationfor investments
in inhouseR & D. In addition,over the post-WorldWar II decades,the
spilloverof militaryR & D expenditures
to civilianusesappearsto have
diminished[20].
At the same time, the evolution of U.S. financial institutions has
generatedstrongdisincentives
for highly educatedAmericansto become
technicalspecialistsand pursue the types of managerialcareers with
particularenterprises
that, as outlinedabove,were criticalto the building
of organizationalcapabilitiesin the era of U.S. industrialdominance. The
deregulationmovementof the 1970sand the related financialrevolutionof
the 1980s opened up new opportunitiesfor the graduatesof higher
educationto make large sumsof moneyquicklywith little experiencein
either technologyor the organizations
for which they worked. The new
opportunitiesmade the slow climb up the managerialhierarchyof an
industrialcorporationdistinctlylessattractivefor theseeducatedpersonnel.
When combinedwith the rise of formidableinternationalcompetition,
moreover,the financialrevolutionhas placed the long-term existenceof
many once-stableindustrialcorporationsin jeopardy,so that the firm-
51
specificcareerthat a collegegraduatecouldoncetake for grantedis now
by no meansassured[15].
More generally,the dominationof financialinterestsover industrial
interestshas been eroding U.S. organi?ationalcapabilitieseven at the
manageriallevelwherehistoricallyorganizational
integrationin the United
Stateshad been most complete. To be innovativein the late twentieth
centuryrequiresnot onlyappropriate
human-resource
development
andfarreachingorganizational
integrationbut alsomassivefinancialcommitments
in the face of returnsthat are more uncertainthan ever. In general,
financialcommitmentmeansthat thosewho, as employees,creditors,or
owners,can lay claim to the revenuesof the frm will not enforcethose
claimsin waysthat underminethe development
and ut'•izationof the firm's
organizational
capabilities
[15]. In the private-sector
enterprise,financial
commitmentgenerallymeansthe retentionof earningsfor the sake of
developing
the resources
of the frm. High degreesof financialcommitment
characterize
thoseindustrialenterprises
in JapanandGermanythat are the
major internationalcompetitorsin the late twentieth century. In
internationalcompetition,financialcommitmenthas becomeever more
criticalto thedevelopment
andutilization
of organizational
capabilities.
Yet
sincethe 1950sa numberof forcesin the U.S. economy
havebeeneroding
financial commitment.
The erosionbeganwithinthe industrial
enterprise
itself. Duringthe
frst halfof thecentury
whenthemajorU.S. industrial
corporations
roseto
international
dominance,
ownership
wasincreasingly
separated
fromcontrol.
Stockholding
waswidelydispersed
amongportfolioinvestors
who,by virtue
of thefragmentation
of ownership,
cededto professional
managers
theright
to determine the allocation of the frm's financial resources. The interests
of thesetopmanagers
wereboundupwiththeinterests
of theirmanagerial
organizations.
Theyhad typicallypursuedtheir careerswith the firmsthat
theynowran. As salariedmanagers,
moreover,
their onlyclaimsto higher
levelsof remuneration
derivedfromthe long-runcompetitive
performance
of the enterprise.
During the 1950s,however,top managersceasedto be merely
salariedemployees. Throughstock-based
compensation
systems,they
became
substantial
owners,
andhencethebeneficiaries
of theprolonged
run
up in stockpricesthat endedonlyat the closeof the 1960s. Duringthe
1950sand 1960s,the incentives
increased
for top managers
of the major
corporations
to identifywith the short-runmarket performanceof their
companies'
stocks.The methods
for improving
short-run
performance
often
conflictedwith the long-term financial requirementsfor building
organi?ational
capabilityfor the sakeof sustained
innovation.
By the sametoken,top managersnow had vastlymore scopethan
previously
to usetheir positions
of strategic
management
as the basisfor
their own individualaggrandizement
rather than as the basis for the
development
of the organizational
capabilities
of their enterprises
as a
whole. Hence as an alternativeto engagingin innovativeinvestment
strategies
in their currentor technologically
relatedlinesof business,
many
top managersof the 1960sbecameconglomerateurs,
eachonewith financial
controlover a multitudeof industrialenterprises
in whichhe had neither
52
organizationalroots nor technologicalexpertise. These conglomerate
managerscontrolledthe financialresources
requiredto undertakeinnovative
investment
strategies.But the planningand coordination
of thesestrategies
was the task of the new "middle"managers--often
(initiallyat least) the
former top managersof the acquiredcompanieswho now headed the
conglomeratedivisionsand who had the requisiteunderstanding
of the
division'sorganizationalcapabilitiesto managethe innovationprocess.
Besidesknowledgeof products,processes,
and people,however,the
managementof innovationrequires financial commitment--andmore
specificallycontrol over the allocationof enterpriseearnings--which
is
preciselywhat the new "middle"managerswhoserole it was to manage
innovationwithin the conglomerate
structureno longerhad the power to
provide.Moreover,evaluated
by the headofficeon thebasisof their shortterm performance,the divisionalheads who indeed pursued innovative
investmentstrategiesquicklylearned(if theywere still aroundto make use
of theirknowledge)
that adaptive
behavior--managerial
behaviorthat did not
make large and sustaineddemandson enterpriseearnings--gota better
receptionfrom the conglomerate
bosses.
Although the conglomeratemovementabated and indeed reversed
itself somewhatin the 1970sas manyill-manageddivisionswere sold off,
considerable
damageto the organizational
capabilityof manyU.S. industrial
corporationshad been done. At the same time, increasinglypowerful
internationalcompetitivechallengesmade the top managersof U.S.
industrialenterprises
think twiceaboutcommittingtheir firms'resources
to
long-runinnovativestrategies.Insteadthe tendencywas for thesefirms to
try to adapton the basisof their successful
investments
of the past. In this
adaptivemode,the rewardsof promotionto top management
positions
went
to thosewho displayedthe mosttalentfor improvingthe "bottomline." We
can conjecturethat it was this type of top manager,driven by financial
goals,who was most likely to cooperatewith the raidersin the hostile
takeovermovementof the 1980s.The popularityof "goldenparachutes"
and
other compensation
schemesdesignedto bribe top managementto make
way for corporateraidersrevealedthat America'sindustrialleaderscould
pursuetheir own individualends not only throughthe mediumof the
securitiesmarketsbut alsoby sellingtheir very officesof financialcontrol.
The use of securitiesmarketsto buy and sell industrialenterprises
for the sake of individualgain has often torn apart U.S. organizational
capabilitieswithout creating the conditionsfor putting more powerful
organizational
capabilities
in their place. The problemis not mergersand
acquisitions
per se, but the purposesfor which,and the conditions
under
which,theyare undertaken.It may makestrategicsensefor an innovative
firm to acquireor mergewith other existingenterprises
whichhavealready
developeduniquecapabilities
ratherthan adoptthe muchslowerand more
uncertainstrategyof developing
theseoperations
fromthe groundup. The
success
of suchmergersand acquisitions
in permittingthe productionof
higherqualitygoodsat lowerunit costsdependson the willingness
andthe
abilityof the previously
distinctand separateenterprises
to integratetheir
capabilities
so asto join forcesin pursuitof a commonorganizational
goal.
53
As demonstrated
by the historyof Britisheconomic
decline,however,
the simpleverticalor horizontalamalgamation
of firms or operations
withoutorganizational
integration
doesnot resultin sustained
competitive
advantage--a
lessonthatwasrepeatedin the UnitedStateswiththe riseand
fall of the conglomerate
movementin the 1960sand 1970s[6]. Financial
integration
doesnotimplyorganizational
integration.And as demonstrated
by the organizational
advantages
of the Japanesesystemof enterprise
groups,organizational
integration
canoccuracross
unitsof distinctfinancial
control[1].
As financialcommitmentand organizational
capabilityhaveeroded,
the United Stateshas lost competitiveadvantagenot only in the "mature"
industriesof the Second Industrial Revolution but also in the high-
technologyindustriesof the Third IndustrialRevolution[7, 8]. The
formationof Sematechas a consortiumof the major U.S. electronicfirms
to combineresourcesin the researchand developmentof semiconductors
wasa stepin the directionof a more collectivecapitalismthat mighthave
been able to respondto the new competition. Yet even IBM--the U.S.
industrialorganization
par excellence--is
so consumed
with its struggles
for
restructuringits own productfines that it has been unable to provide
effectiveleadershipin restructuring
the supplyof its industry'svital capital
inputs. The exampleof Japansuggests
that the generationof innovation
andthe attainmentof competitive
advantage
in suchtechnologically
complex
and highfixed-costindustries
requirethoroughgoing
verticalintegrationof
the industry'sproductivecapabilitiesas well as a degree of horizontal
cooperation
amongmajorcompetitors
in ensuringthesupplyof high-quality
capitalgoods.
In the high fixed-cost,high-technology
industries,it is only such
collectivized
organizations
that caneffectivelynurtureand sustaininnovative
new venturesinto dynamicgoingconcerns.The experience
of the 1980s
showedthat the mode of venture capital that providedthe financial
commitmentto innovativenew venturesin the past is no longeradequate
to meet the exigencies
of the new internationalcompetition.Althoughthe
venture capital funds grew enormouslyduring the 1980s,a plethora of
venturecapitalfirms competingfor scarcehigh-technology
personneland
eager for short-term returns have underminedthe building of the
organizational
capabilities
thatthe success
of innovative
investment
strategies
requires[15].
The comparative
historyof capitalistdevelopment--and
in particular
the successful
Japanesechallengeto the once-dominant
United States,not
to mentionthe previously
dominantBritain--shows
that nowmore than ever
industrialleadershiprequiresthe long-term commitmentof resourcesto
organizations
that canplan and coordinatethe development
and utilization
of productive
capabilities.In developed
capitalisteconomies,
however,those
who controlwealthcanchooseto live off the pastratherthan investin the
future. A necessaryconditionfor continuedinvestmentin innovation,
markedby the buildingof organizational
capabilities,
is that suchadaptive
behavior be constrained.
A
sufficient condition is that the economic
uncertaintyinherent in innovativeinvestments
be reducedby means of
$4
policiesthat educatethe laborforce,mob'fiize
committed
fmandalresources,
and coordinateinterdependent
innovativeefforts[17].
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