BUSINESS & ORGANISATION 1 (Mini-articles) Index

Now 85, Peter Drucker, the eminence grise of management theory, is still thinking clearly--though ambivalently. "The world has become so much less predictable, so ambivalent." He believes that the world is going through a period of drastic change of the sort that only occurs every few hundred years. He thinks that the increasingly pivotal role of knowledge in the economy will result in the transformation of of society's values and institutions. Much of his latest work picks up on one of his favourite themes, namely that organisations will increasingly be based on mutual understanding and responsibility, rather than rank or power. He is not, however, enthusiastic about the term "empowerment". "It is not a great step to take power out at the top and put it in at the bottom. It's still power. To build achieving organisations, you must replace power with responsibility."

The trend towards flatter organisations will continue, he thinks. But he acknowledges that delayering raises problems, particularly concerning rewards and recognition that can be given to employees with fewer chances of promotion. One of the ways in which the old hierarchies are being destroyed is through outsourcing. He is intrigued by the relationship between executives and the people who work for them but who are not their employees. Accordingly, he does not approve of large mergers such as between Glaxo and Wellcombe. "I have seen enough big companies to know their cultures are incompatible. It will take five years before they understand what each other are talking about."

Concerning Peter Drucker's latest book, "Managing in a Time of Great Change" in Financial Times, 23 June 1995

Barings collapsed early this year, completely wiped out with over $1 billion in losses, partly through fraud, partly through incompetence. The heads of banking and securities operations around the world will be anxiously asking themselves the same question. If this has happened to Barings, could this happen to us? Which other finance house can be sure it is safe?

The most obvious recent precedent is that of the US securities firm Kidder Peabody, where the head of government bond trading, Mr Joseph Jett, was fired last year for allegedly creating $350 million of fictitious profits over a two year period. Kidder was part of General Electric, a firm famous for its tight controls. As a result of Mr Jett's predations, Kidder is now being broken up or closed down.

Those with longer memories will recall the Rowntree affair of 1973, when one of the UK's biggest confectionery firms lost two-thirds of its net worth through unsupervised trading in cocoa futures. More recently, the drinks and foods group Allied Lyons (now Allied Domecq) made large and embarrassing losses through foreign exchange speculations as a result of which its finance director lost his job.

The pressing question is: How much fraud is there waiting to emerge in the world financial community? And all this is besides the question of how much of the billions of dollars that are laundered every year by the Mafia find its way into legitimate corporations.

Samuel Hargreaves in May issue of Job Society Newsletter

Unemployed Swedish executives are being offered an intriguing challenge: work without pay for six months, and you could end up with a stake in your own company. Stockholm-based MGruppen, one of Europe's oldest management institutes, has created a scheme called Renewal Enterprises, which has had considerable success in placing white-collar workers back into employment.

Executives receive only their usual unemployment benefit when attending the renewal scheme. Ideas for their new business--mostly in the service sector--come either from unemployed individuals or from people with good ideas who are happy for MGruppen to test their feasibility.

Last year more than 2,000 people participated in Renewal Enterprises in cities across Sweden. More than half ended up with full-time jobs--either in their own or in other companies. This compares with a success rate on Swedish government-fnded jobless projects for all types of workers which can be as low as 2 or 3 per cent.

MGruppen would like to extend the Renewal principle beyond the jobless and also that the scheme could be extended into many other countries. It believes many working executives have ideas that could be turned into viable businesses, but they do not want to take the risk of giving up their present jobs to put them to the test.

Samuel Hargreaves, Job Society Newsletter, March 1995

In order to compete with the performance of smaller, nimbler rivals, the two most successful things that managers in large firms can do is to encourage, firstly, competence building among all employees and, secondly, decentralised entrepreneurism.

The total breadth and depth of employees is far greater than anything possessed by senior managers and so the latter need to exploit these isolated reservoirs by linking them up. For example, Kao, a Japanese consumer-products company, has an internal information network which allows everybody to find out anything and everything to do with the company. The importance is not the information itself but the way it is shared and the synergies that result from this.

The second process is also a product of the view that senior managers are not the only ones with ideas, and the best companies, such as 3M, Canon, Intel and ABB make sure that their structures are non-hierarchical. ABB, for example, has been broken into 1,300 almost totally separate entities, and 3M consist of hundreds of project teams.

Although personal and enthusiastic leadership of companies is important, as is also a strong corporate culture, a lighter touch is now needed in the management of most large companies in order to trust in the creativeness and loyalty of employees who have been given a large degree of freedom.

Precis of article in Harvard Business Review, April, May, June 1995 by Christopher Barlett of Harvard Business School and Sumantra Ghoshal of London Business School.

Fraud is rife in business, according to a Security Gazette survey. More than two-thirds of finance directors polled said their company had suffered financial crime. Managers commit about 60 per cent of all frauds-- more than junior staff because they are audited less rigorously. Nearly a third occurred in finance departments. Altogether, fraud costs companies an everage of 2 to 5 per cent of their turnover.

The research director of the survey, Mark Speed, said that consultants and freelancers also posed fraud risks because they were seldom subject to audit once they stopped working for a company. One in three frauds involved people from outside a company. "There's probably quite a serious threat in future with the increasing use of consultancies and freelancers," he said. Yet 86 per cent of respondents said their company's fraud control systems worked.

Barclays Bank said its controls were "extremely good". But five people, including Ms elizabeth Lockwood, a Barclays loans advisor, were jailed in January for their part in a £11.7 million cheque fraud. Barclays has a central inspection department which monitors employees and carries out snap checks for fraud. The Bank said: "From time to time people will attempt fraud. Having a system doesn't stop people from trying it." The trick was to catch them when they did. Mr John Conyngham, of Control Risks, said: "Any manager with significant responsibility over suppliers and contractors could be susceptible."

From an article in Financial Times, 5 June 1995

The origin of TNCs as we know them today was partly logistical and partly accidental. They would probably have happened in any case, but the particular way they came into existence was very much an American phenomenon.

Firstly, logistical: America is very large. It therefore has large quantities of many raw materials. Also, it was able to develop a large, and thus efficient, railway system. Also, because it was large, it was able to acquire a large population very quickly--both internally by the usual methods and by immigration. It therefore developed very large consumer goods companies which competed fiercely with one another, stimulating immense improvements in sourcing, production distribution and marketing which, together, brought prices down steadily from year to year throughout the decades of the last century. The customer was becoming king and profits began to be imperilled.

These downwards pressures could only be resisted by cartels between manufacturers which steadily started to raise prices again. Fortunately, when legislators saw that this was heading towards monopolisation, the Sherman Antitrust Act was passed and cartels were decisively banged on the head. This could be called the accidental part. The rest is history. If companies couldn't combine illegally, then they would have to do so legally by buying one another out. And this is what they did, and this is the origin of TNCs and why they took large scale production to even greater volumes and then began to spill out into the rest of the world. Since then, of course, they have served as templates for the Japanese and Korean TNCs, and goodness knows how many more that will emerge from Guandong and other provinces along the Chinese coastline.

From the Newsletter of the Job Society, June 1995

Attention to their workforces was the outstanding attribute of the top five performing companies in the United States between 1972 and 1992. In terms of the percentage returns on their shares, Southwest Airlines, Wal-Mart, Tyson Foods, Circuit City and Plenum Publishing were clear leaders and they all had a great deal in common. None of them rely completely on technology, patents or strategic positioning--although these are important--but in the approach they use to managing their workforces.

Their secret, and on which their management placed the greatest emphasis, was in paying close attention to the needs of their workforces, and not to confuse labour rates with labour costs. High pay, in both motivating and attracting a more productive and participatory workforce, is a far more cost effective approach than having a low paid and thus reluctant workforce which pulls productivity downwards with every passing month.

Compared with the average US airline industry with 131 employees per aircraft,, Southwest Airlines had only 79 employees per aircraft. Again, compared with an average of 848 passengers per employee for the industry as a whole, Southwest scored with 2,318 passengers. When everybody has the same computer technology, where is the competitive advantage? With people, it's easy to talk about competitive advantage but hard to achieve.

Precis from Competitive Advantage Through People, Jeffrey Pfeffer, Stamford Graduate School of Business

High-skill jobs, such as those in research and development, as well as low and medium skill jobs are now becoming more labile--and for the same reasons--cheaper costs abroad. At the present time, this is particularly so in the case of several Japanese industrial firms because their economy is suffering from impact of the high yen.

Hitherto, many firms, and particularly Japanese ones with their strong national identity, have been reluctant to consider shifting their R & D abroad because it might contribute to a "hollowing out"of their own industrial heartland and lead to lower morale generally. However, it is not just lower costs which is driving R & D from home countries to more distant parts. The high yen has only been the final straw. There are several other weighty reasons why it is happening. It is good for public relations and helps to restrain trade barriers, there are synergistic effects between specialisations which might exist in a foreign country, and it does a company no harm at all to be thoroughly conversant with the foibles of a foreign culture for the sake of developing specific products or more appropriate versions of them.

To choose two examples among many, in which extremely valuable research is being done abroad, NEC, a large Japanese electronics company is establishing an R & D facility in Bonn to develop parallel-processor computers; and Sharp, another huge combine, and one of Japan's fastest growing electronics companies, plans to set up a multimedia research laboratory in the US in July. In both of these cases, lower salaries are the least important factor.

Newsletter, Job Society, June 1995

Examining the reasons for the success of 200 of the largest manufacturing companies in the last century, Alfred Chandler, in his Scale and Scope: The Dynamics of Industrial Capitalism (Harvard University Press, 1990) has shown that a three-pronged strategy was necessary in every case.

First, there needed to be investment in production facilities large enough to take advantage of economies of scale. Technical innovation by itself was not sufficient--it had to be implanted within large-scale plant and machinery. Second was investment in product-specific marketing, distributing and purchasing networks. Third was the recruiting and organisation of managers capable of operating the firm efficiently.

However, an era of a quite new sort of industrialisation is now occurring which is based on micro-electronics and information technology--with several new consequences. Firstly, hierarchies are becoming lateralised and we see the rise of small subcontractors being co-ordinated by what can only be called virtual companies. Secondly, there is a switch of emphasis toward the economic production of low volumes of particular products--though usually within global marketing and distribution systems. Thirdly, there is a steady trend towards the compaction and miniaturisation of both capital and consumer goods. These trends might just save us in an era of resource depletion.

From the Job Society Newsletter, May 1995

There may be economic reasons for paying huge salaries and bonuses to senior executives, but there is no scientific justification for saying that they need to be compensated for their long working hours and stressful jobs. On the contrary, our studies have shown consistently that, in naturally hierarchical mammals such as homo sapiens, individuals at the top of the tree are much healthier and suffer less stress than those lower down.

Having to work fast or under pressure shows little sign of being bad for your health on its own. The most stressful jobs are those where the person has the least control, least variety and little or no opportunity to develop or use new skills. In our study of the British Civil Service, for example, the lowest grades are three times more likely to die over a ten year period than senior administrators and they have six times more sick leave, although they are not deprived by any absolute standards.

The three classic risk factors for heart disease--cholesterol levels, blood pressure and smoking--accounted for only a third of the different rates of heart disease that we found. There is some strongly suggestive evidence that people at the bottom of a hierarchy produce higher levels of a stress hormone called cortisol and this can cause widespread biological damage in the long term, including heart disease and diabetes. Stress over long periods also harms the immune system. This contributes to the higher levels of cancer and infectious diseases in the lower social classifications.

From a paper by Michael Marmot of the International Centre for Health, University College, London, 1995

The age of the large hierarchical organisation is coming to an end. If big companies are to flourish, they will need to be reorganised in a series of interlinked creative compartments--ideally of about 100 people each. Fairtlough uses the living cell as a metaphor for the creative compartment.

Also, there are striking similarities in the 'ecological' balance between companies and that of animal species, where predator and prey populations co-evolve, each needing the other. In Japan and China, fierce competition often exist between companies in the same sector, but there is also much co-operation, particularly when one is also a sub-contractor to another, or where two or more companies might be investing in core research that would be too costly to carry out otherwise.

As the hollowing-out of large firms continues, we may expect them to become co-ordinators rather than primary operators, concerned with big objectives but only doing some of them in-house. Benetton, the Italian fashion house, is a successful example of this structure. It has several thousand retail franchises which contract to sell only Benetton products but remain separate firms. Again, on the manufacturing side, it is parcelled out among more than 200 companies, small independent firms and even individual home-workers, mostly in northern Italy.

This cellularisation process raises questions whether parent group directors will be as important as they once were, and, if not, should they continue to merit the pay dfferentials that they have traditionally enjoyed.

From Creative Compartments by Gerard Fairtlough, biologist and founder of Celltech

Now that corporations have reneged on the offer of jobs-for-life for their management, what can they expect by way of loyalty? They can't; and they shouldn't expect the sort of commitment that they used to receive. Instead of being anxious about it and hoping that it might linger on among those who remain, companies should, in fact, stamp it out. If they don't, they will condemned to decline further. In companies where loyalty to the coporation remains strongest, change is been least effective and managers are the most overworked. Where loyalty to the corporation is weakest, the reverse is true.

There is a middle way. Those companies which are realistic have moved to the next phase--not expecting loyalty and hard work to the company but to the project. That, at least, can be asked for. In such cases, managers team up through the hierarchy to perform speciific jobs lasting perhaps three to five years. After that, they go on to the next project. If that is with the same company, good. If not, move on.

The old form of corporate community went beyond the world of work. It was also a social organisation which grew up to replace the links of home town, family or neighbourhood. The intensity of loyalty to the company had much to do with the human hunger for society. It remains to be seen whether the mobile manager, moving from task to task, will find that hunger satisfied; and if not, what he or she will do about it. Some of the effects of blue collar shock can be seen in the inner cities and public housing estates. The long-term results of white-collar shock are yet to be assessed.

From the book, White Collar Blues, by Charles Heckscher, 1995

The number of transnational corporations in the world's 14 richest countries has mushroomed in the past quarter-century from 7,000 in 1969 to 24,000 today, according to the UN Conference on Trade and Development. Altogether, the world now has over 37,000 of them, controlling about a third of all private assets and sells about $6 trillion--about the same as America's GDP last year.

So far, most of the facilities that are scattered around the world are distribution or assembly points for products manufactured in the home country. But what is happening now is a much more purposive globalisation as firms compete against one another in all their activities. Not only are they moving their production facilities around to benefit from the cheapest hands, but they are also appointing local management, setting up dispersed research departments in every country and, generally, burying themselves within local cultures.

The new 'multicultural multinational', as some are calling this new animal, is based on two fervent ideas. The first is an evangelistic one--that innovative people are the key to success, whever they may be found. The second is almost ecological--that technology is slowly making the world one marketplace.

Even if nation-state governments don't realise it yet, their validity has gone and a quite new network of economic power and, ultimately, political power is slowly knitting together around the world.

From the Job Society Newsletter, June 1995

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