The Change Agenda For 21st Century Corporation

the 1990s".

The modern corporation has a lot of history and legacies to overcome. Human organization has always been hierarchical, in churches, in armies, in feudal monarchies, and in modern bureaucracies. Business was no exception. The modern corporation grew, logically enough, out of the coming of the railroads and the telegraph beginning in the mid 19th century. Before then, companies had been relatively small and localized, with modest needs for controls, information, and capital. But the railroads created the first large, dispersed organizations and required firm controls and rapidly delivered information when the small local lines merged into big regional and national lines.

 

The business historian Alfred D.Chandler Jr.describes how the railroads, especially the Erie under its general superintendent, David C. McCallum, produced the first large, modern corporation. He created a structure for the administration of a complext organization, enunciated the principles of administration that would govern it, and created a flow of information to track and evaluate the operations of a far-flung enterprise. McCallum believed in the strict adherence to hierarchy so that subordinates dealt only with immediate superiors. He was the first to use information technology, in this case the telegraph, not only to transmit urgent news but to gather information to help management monitor the railroad.

It is interesting that Chandler's history, The Visible Hand: The Management Revolution in American Business, attributes to that 19th century revolution two of the same drivers that we today think especially important in our management revolution:information and speed. Then it was the telegraph that created new information technology; today it is the computer and all its electronic links. Then it was the railroads that made business move faster;today it is automation, TV,the jet, the telephone, the fax, e-mail, and the rest of our electronic paraphernalia, and a whole array of management devices to make business act and react faster.

The lazy idiot theory

The completion of the classic corporation required three more elements:the detailed ordering of human activity, the invention of the assembly line, and the perfection of the corporation as an organization. The first came with "scientific management,"the invention of Frederick Winslow Taylor, a mechanical engineer, who laid the basis at the turn of the century for dividing work into minute, repetitive components and then telling the worker just how to do it, with no deviation. Scientific management assumed the worker was ignorant, stupid, and would spend as much time "soldiering"as he could get away with. The worker did exactly what the foreman told him to do, and management planned the work. Taylorism did greatly raise factory output but it also dehumanized work.

New manufacturing machinery, plus the huge demand for Model T Fords around the world, pushed Henry Ford into making the next major advance in industrial organization, the invention of the moving assembly line. After experimenting with moving lines to produce auto components, Ford started making the entire Model T on an assembly line at Highland Park, Michigan, in October 1913. The labour needed to assemble a car dropped immediately from 12 hours, eight minutes to two hours, 35 minutes. By the following spring the time spent assembling a car fell to one hour, 35 minutes.

The finished model of the classic 20th century corporation emerged after World War I out of the near ruin of General Motors caused partly by the postwar recession and partly by the loose if inspired management of its founder, Will Durant. Alfred P.Sloan Jr.became president in 1923 and set about organizing, in his carefully analytical and intellectual way, the large modern corporation.

GM survived pretty much as he created it until the 1990s, and was enormously successful most of that time. Sloan believed a big company had to be decentralized, so that the divisions would have operational autonomy. But they would be guided, helped,coordinated, and above all held accountable by a a corporate staff, especially by a finance committee. Management relied heavily on what soon became ahuge staff. Sloan saw his own role as "selling ideas, rather than simply giving orders," demonstrating more wisdom than many CEOs have shown since. As early as the 1940s, Peter Drucker saw that GM needed to begin changing, but that piece of wisdom escaped GM until the 1990s.

In human terms, the 20th century corporation created "the organization man," the title of William H.Whyte's famour book about corporate life in the 1950s. The young corporate manager then believed that his goals and the corporation's were the same. He (at the time there was no question of "she") cherished "the idea that his relationship with The Organization is for keeps." He was optimistic, not cynical, about the system. He did not think his bland fellowship needed to recruit any geniuses, but if any eccentrics were recruited by mistake the organization could iron out their rough spots. The organization man wanted to rise, but not so high that his neck would stick out. In the view of executives and personnel officers of the 1950s the leader in those stable times should be an administrator. If the organization needed a new idea from time to time , let it come from the staff. The corporation did not want people with drive and imagination.

Hierarchy lives

The corporate culture after World War II may have been hypocritical and deadening, but before dismissing it as a hopeless anachronism, we should point out that it worked well. Loyalty gave managers security and the many tiers of hierarchy promised them a lifetime of possible promotions. If the old AT&T had 100 levels of hierarchy, as sometimes seemed the case to those dealing with the company, and promotions came on the average once every two years, then AT&T could promise an ambitious trainee a satisfying career path for 200 years.

The corporation was something solid to hold on to. It replaced some of the social context and ties that were disappearing elsewhere, in the school, the church, the community, and the family. The classic corporation was, in fact, a huge success. It excelled at mass production. It worked well too where control was especially important, in the airlines, for example. With its intricate division of labor, it ceated functional excellence. People could get very good at their jobs. In a stable, predictable environment, the classic corporation could do what it wassupposed to do very well. It made possible the American manufacturing revolution, which raised standards of living to a level unimaginable a century ago. And it still does most of the work of sustaining our economy. Hierarchy has not disappeared. Jobs have not disappeared. Mass production has not become superfluous.

However, the classic corporation had inherent weaknesses that became more of a handicap as time passed. The hierarchies designed to control work became so cumbersome they were an obstacale to getting work done. The staffs meant to think for the organization and help the operational people became oppressive burdens that drove out innovation and entrepreneurship. The people doing the work had no real power;the people with the power did little real work.

The classic corporation may have bred functional excellence, but it did not encourage coordination. Staffs and divisions feuded among each other; Chevrolet viewed Pontiac as being as much of a competitor as Ford. Mass production pushed products out on the market,but was not sensitive to what the market might want to pull out of the factory. In fact, the corporation grew more and more distant from the customer. Instead of spreading to the people who needed it to do their work, information got bottled up in the hierarchy. Ideas and conflicts got suppressed by a form of "teamwork" that meant playing along and not rocking the boat rather than working as a team to generate the best possible results.

The immediate threat

In short, corporations worked much as organizations of all kinds have worked through history. Catholics who strayed from Church doctrine by a hair confronted the Holy Inquisition. Medieval guilds would expel a member who dared to experiment with the way things were made traditionally (just as today unions seem to be the defenders of the status quo). In ancient Egypt physicians were trained to perform exactly 128 procedures, each in only one way. Egyptian artists learned there was only one way to paint a crocodile or a person. Even in our lifetimes, armies prepared, as they always have, to fight the last war. Human nature seems to dislike change, whether it be in the way we kill, cure, worship, or work.

It takes a war to shake up an army and it took something like a war to shake up the American corporation. Its faults suddenly magnified and multiplied in 1979 and 1980 when a superior competitor strode onto the world market. America discovered that Japanese copying machines were better and cheaper than our own, that Japanese integrated circuits were far more reliable, and their exports of excellent cars brought Chrysler and Ford to the edge of ruin. The postwar complacency of the American corporation came to an end, although not all at once. The most immediately threatened companies, such as Xerox and Ford, began to change quickly. Companies cushioned for a while from competition by their size and success, such as General Motors and IBM, did not understand the new reality until more than a decade later.

Even the virtues of the classic corporation became a handicap. Skill at mass production is less of an advantage when new technology and organization allow you to meet the market by changing the product frequently, and by mass customizing. Big staffs and hierarchies became even more of a burden because they slow decisions and smother initiative. A rigidly functional structure stands in the way of the kind of teamwork that can produce rapid and innovative responses to competition. A company that insists rigidly on a chain of command cannot take advantage of new information technology. The old corporation no longer made a good fit with the people that ran it, the people that worked for it, or the people that brought from it. The assumption that lay behind Taylorism - that the worker was stupid, ignorant, and lazy - is certainly not true now, if it ever was. Until 1910, when the great expansion of secondary school education began in the United States, barely 10 per cent of young Americans were high school graduates.

In the mid-1990s, 70 per cent of the students who entered ninth grade graduated, and 62 per cent of them went to college. As well as being better educated, poeple are more independent-minded today. Americans raised in the 1960s and later question authority and are not about to do just wat they are told. They can make their own decisions. Customers are also more demanding. The drivers of change - new information technology, tougher competition, and the demands of society and the customer, all of these contribute to the obsolescence of the classic corporation.

Jerking Hondas wheel

The same need to change exists in Europe and Asia as well as in the United States, of course, but it is muffled if not suppressed by other, different, and even contrary pressures. Perhaps only in Britain is the corporation as free to experiment and innovate as it is in the United States. On he Continent and in Japan a whole set of social, economic, and political constraints forces executives to react differently from the way American executives react to the same problems. Cozy relationships between politicians and executives, between banks and corporations have inhibited independent behaviour. The stockholders who might rebel against incompetent managers in the United States have been generally too insignificant or well-behaved to revolt in Europe or Japan. In France and Germany, especially, labour unions have a power they have lost elsewhere. In Germany some of the very features of the economy that made it such a success after World War II have inhibited change. The social market economy is a market economy

with a social side meant to limit the pain the market can inflict on workers. Germanys industrial democracy puts the workers in positions of power on corporate supervisory boards. When confronted with the need to change, European executives have one overwhelming fact to consider - that the unemployment rate in Europe is double what it is in the United States. Ironically, the very changes that might create jobs in Europe are inhibited by the high rate of unemplyment.

Jobs are also a major inhibitor of change in Japan. The 1990s recession in Japan forced corporations there to take another look at the guaranty of lifetime employment so that they might be freer to change and raise productivity. But they backed off the thought of dropping lifetime employment contracts, although they have done some tinkering. Ryuzaburo Kaku, CEO of Canon Inc, says that the restructuring of Canon does not include an end to the lifetime employment system.

Only business, not government, can offer employment, he says, therefore companies have a responsibility to maintain the existing social system. Kaku believes that only companies that come up with ways of maintaining employment will survive in the 21st century, and those that pursue only profits will not survive.

Japan, which only a decade or two ago had so much to teach Americans about improving management, now finds itself hobbled from keeping up with American management. However, global competition is forcing Japan to change. The cartels that keep prices high are eroding, companies such as Matsushita and Canon and Honda are restructuring, with the constraint of not laying off large numbers of employees. The Japanese feel the need to change. When Nobuhiko Kawamoto became CEO of Honda in 1990 he sensed something had to be done quickly to prepare Honda for the future...As a result, I made a decision to jerk Hondas steering wheel. Beyond what his own company should do, Kawamoto believes Japan should move to share common standards, values, and perceptions with the rest of the world. In the last 50 years, he says, Japan has forced or coerced its own way in the world. The country has changed twice radically in the last century, after the Meiji Restoration and after World War II, but the Japanese psyche is still back in

the Tokugawa period of isolation and rule by shoguns. That has to change, says Kawamoto.

Fed up at Daimler

In Europe, in spite of regulations, restrictive trade practices, old boys networks, strong unions, and high unemployment, business has started to respond to the urgent need to change. The privatisation of major companies, such as British Telecom, Deutsche Telekom, Pechiney, Saint-Gobain, and scores of others has forced them to become mor efficient. Being competitive in international markets is at least as important to European firms as it is to the Japanese, and more so than to Americans. Much of German business has always been export-oriented. In the cases of big companies based in small countries, such as Electrolux in Sweden, Nestle, Roche Holdings, and Sandoz in Switzerland, Philips in the Netherlands, and Solvay in Belgium, domestic sales are a very small fraction of total sales.

European executives and investors are rebelling against the comfortable, established ways of doing business in Europe. When Deustche Bank got fed up with huge losses and poor acquisitions at Daimler-Benz AG it used its position as majority stockholder to force out CEO Edzard Reuter in 1994. What a shock to the German business establishment! His successor, Jurgen Schrempp, set about doing other stocking things, mainly abandoning the money-losing Dutch aircraft subsidiary, Fokker N.V. in 1996.

A cozy collective bargaining system that sets industry-wide agreements has produced labour peace but has also given German workers the shortest work-week and the highest pay in the industrialised world. But when the metals industry federation, Gesamtmetall, agreed in 1995 to a pay increase well above the rate of inflation and a one-hour cut in the work-week to 35 hours, rebellious componies forced the head of Gesamtmetall to resign. Some companies quit the federation; others just negotiated their own deals with labour.

In France, graduates of the grandes ecoles at the summit of business and government have looked after each other nicely. They formed a tight network which pretty well has run the country. When a small bank, Banque Pallas-Stern, got into trouble in 1995 it naturally turned for help to Frances biggest company, Elf Aquitaine SA, a depositor and shareholder. Instead of helping, Philippe Jaffre, the Elf chairman, pulled his $200-million deposit out of the bank and said, This bank is not my problem. The bank sank. The network is losing its solidarity.

Europe offers one example of what may be a model of the corporate form of the future. ABB Asea Brown Boveri Ltd, a $36-billion-a-year electrical engineeing company, is an obsessively decentralized organization with a minimal staff at corporate headquarters in Zurich. Percy Barnevik, the Swede who pulled together the Swiss-Swedish giant in 1987, cut the combined headquarters staff of 6,000 people to 171. They supervise 1,300 operating companies with 5,000 profit centers in 140 countries. The difference between ABB and earlier decentralized large organizations, such as GM, is that the entrepreneurs are out in the field, at the fingertips of the company, and not in the home office. Just one layer of managers separates the top of the company from managers in the field. A proprietary automated information system ties the company together.

Driving Change

How the best companies are preparing for the 21st century

By Jerry Yoram Wind and

Jeremy Main

Published by Free Press

Distributed by IBD(Delhi)

Price: $17.50, Pages: 360