The hierarchy of the administrative structure is deliberately reduced in order to bring about an extensive decentralization of responsibility and devolution of authority by creating numerous smaller business groups close to the market with their own managers, but still maintained within the firm. As part of their work on what Bartlett and Ghoshal (1994) call a ‘managerial theory of the firm’, they describe the experience of a large company as it removed tight hierarchical administrative controls, substantially reduced the numerous layers of management in the firm and created a large number of business ‘units’ consisting of ‘front line’ managers with small teams directly in touch with customers and suppliers, and backed up by a layer of middle management whose role was essentially ‘supportive’. Such a large number of front line manager-entrepreneurs was established on whom was devolved such a high degree of power and authority to make independent decisions, including investment decisions, that what might be called a collection of small ‘quasi’ firms was created.
In this model, the creation of a high degree of trust, extensive socialization of personnel to the values of the firm, personal psychological incentives to excel in meeting targets, which were called ‘stretch’, and effective network relationships throughout the firm are heavily relied on to maintain the administrative cohesion of the firm. Elements of this attitude are, of course, characteristics of the organizational culture and ethos of many large firms. This type of operational structure is based on strongly manipulative, but ‘supportive’ guidance and advisory management at the higher levels. But internal and external pressure for growth remain unlimited and the strongest social and cultural ties may be insufficient to support the coherence of the firm. A point is likely to come when pressures for the development for more independence from the business units arise and new firms are created. But depending on the nature of the relationship and of the enterprises involved, such developments may foreshadow what I call the metamorphosis of the firm, bringing not only a different firm context but a different market context as well.
Metamorphosis
By the 1980s and the 1990s two concepts were in widespread use: the concept of a ‘core’ and that of a ‘network’. The former often referred to what a firm considered to be its primary business or businesses and was commonly used when the firm had decided it had over-reached itself from the point of view of efficient and profitable management and should retrench to emphasize its ‘core’. The network concept had appeared in 19th century literature in the form of industrial districts or clusters which consisted of geographically concentrated groups of small and medium-size firms operating closely together and depending on each other for a variety of services, including technology. The term ‘network’, or ‘business network’ now technically refers to formal contractual arrangements or alliances among a limited number of firms bound together in an interrelated managerial framework sometimes even referred to as ‘quasi firms’ or ‘virtual corporations’.
There are a great variety of different forms for business networks based on contracts involving technology licensing, franchising, R&D arrangements, information services, supply, marketing and advertising arrangements, etc. The literature at the time of writing is at an early stage and is rapidly growing. D’Cruz and Rugman (1944) apply a very interesting theory of such networks, which they define as a ‘governance structure for organizing exchange through cooperative, non-equity relationships among firms and non-business institutions’ (p. 276) to the Canadian telecommunications industry, seeing the network as a way of reducing costs in markets and hierarchies. Gomes-Casseres defines networks as simply ‘groups of companies joined together in a larger overarching relationship. . . each company fulfilling a specific role within the group.’ (Gomes-Casseres (1944) p. 4).
The spread of interfirm networking has been stimulated by the growth of global businesses the scale of operation of which is largely independent of national boundaries, especially in technological fields. The rapid and intricate evolution of modern technology often makes it necessary for firms in related areas around the world to be closely in touch with developments in the research and innovations of firms in many centres. Formal relations among such firms may advance the competitive power of each of them; to make alliances may be not only a rational response, but even at times a necessary one. Gomes-Casseres argues in a forthcoming book (1996) that what he calls the collective competition among alliances promotes rivalry and competition in industry as a whole which can be intense.
The individual companies do not lose their ‘independent’ identity but the administrative boundaries of the linked firms become increasingly fuzzy and the effective extent to which any individual firm exercises control is often not at all clear. Although formal contracts form the legal basis of such groups, their co-operative operations may not be based so much on the exercise of controls as on consensus emerging from shared goals and mutual dependence among the participants. There are advantages for individual firms that join an alliance but there are also costs and the balance between costs and benefits can shift as activities develop and as the individual firms within the alliance continue growing which can lead to difficulties in the relationships and even to the disintegration of the alliance.
The business network is very different from a cartel of independent firms in its structure, organization, and purpose. It is clear that this type of organization is likely to continue to spread for some time and continue to engage in a competition very different from that analyzed between firms in so-called free markets. This may call for a new ‘theory of the firm’ in economics and changed views about the behaviour of markets and the effects of ‘free market’ competition.
EDITH PENROSE
Waterbeach, Cambs.
January 1995
References
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INDEX
Acquisition and merger, 135–71
; and administrative integration, 167–70
and barred entry, 148–51
conglomerate, 114n. 135, 115
combination, 151–2
and competition, 145–8
direction of, 114– 15
and diversification, 112 ff.
and dominant firms, 170–1, 210 n. 236
economic basis of, 138 ff.
and existing activities of firms, 114–15
and empire-building, 163– 6
and foreign subsidiaries, 169
incentives to sell out, 139
and indexes of business activity, 211–12
and interstices, 212–14
limitations on, 113–15, 213–14
and managerial services, 113–14, 143, 166–70, 184–5
measuring relative importance of, in economy, 218–19
measuring significance of, for firms, 171
of parts of firms, 152–9
and rate of expansion, 184–5
and security prices, 211–12
significance of, in growing economy, 209 ff.
as a source of growth, 213
success of, 167–8
and taxation, 140–1, 153
and technological characteristics of firm, 105
and types of entrepreneurial services, 160–6
and valuation of shares, 141–2
and vertical integration, 148
Adelman, M. A., 217 n. 247, 220 n. 250, 222 n. 258
Administration, see Management.
Advertising, and diversification, 102–4. See also Market; Selling efforts.
Alchian, A. A. 38 n. 41
Alderson and Sessions, 35 n. 38, 72 n. 80
Amoskeag Manufacturing Co., 25 n. 29
Andrews, P. W. S., 34 n. 37, 47 n. 54, 49 n. 56
Australia, 141, 209
Authority, delegation of, 46
Babbage, Charles, 61 n. 66
Bain, Joe S., 146 n. 178, 206 n. 229, 225 n. 262
Balance of processes, 61 ff.
Baldamus, W., 81 n. 96
Barlow, E. R., 169 n. 199
Barnard, Chester, 15 n. 15, 16, 17 n. 17
Berle, A. A., Jr., 220 n. 250, 251
Barriers to entry, and acquisition, 148–51
artificial, 202, 208–9
and capital requirements, 202, 206–8
and consumer loyalty, 206–8
and economic growth, 202–4, 208
and innovation, 204–6
patents as, 208–9
Blair, John, 213 n. 241, 220 n. 250
Blough, Roger M., 232 n. 272
Boulding, Kenneth E., 5 n. 6, 10 n. 9, 24 n. 25, 29 n. 34, 35 n. 158
Brech, E. F. L., 143 n. 173
Briggs, Asa, 167 n. 195
Brunner, Elizabeth, 34 n. 37
Buchanan, N. S., 25 n. 28
Business cycle, and growth of firms, 214–15
Butters, J. K., 139 n. 166, 140 n. 167, 168, 141 n. 17, 171, 143 n. 174, 185 n. 215, 209, 233, 211 n. 238, 213 n. 240, 241, 220 n. 25
Canada, 210, 221, 227
Capital requirements, as barrier to entry, 202, 206–8
and diversification, 116–86
and dividend policy, 24–5
and entrepreneurial ability, 34–5
and merger, 146
and rate of expansion, 81, 178, 181–2
of small firms, 192
Cary, W., 139 n. 166, 140 n. 167, 168, 141n. 170, 171, 143 n. 174, 185 n. 215, 209n. 233, 211 n. 238, 213 n. 240, 24
Chamberlin, E. H., 11 n. 11, 202 n. 225
Christensen, C. Roland, 44 n. 50, 142n. 172, 143 n. 175
Clark, J. M., 208 n. 230
Comparative advantage, principle of, and growth of firms, 197–200.
Competition, and acquisition, 144–8
of ‘big business’, 204–6, 232 n. 272
compelling specialization, 94, 116–20
in ‘creativity’, 94
and diversification, 98 ff., 110–11, 116–20, 120–2
and innovation, 99–102
and investment requirements, 116–18
and problems of growth, 178–9, 181–2
and research, 94. See also, Innovation; Management; Market
Concentration, in Australia, 209
in Canada, 210, 221
and diversification, 225–6
and dominance, 226–8
in a growing economy, 217 ff; in Great Britain, 221
headstart theory of, 226
industrial vs. financial, 218n. 248
and inequality, 216–17; 221–2
Marxian theory of, 226 n. 264
measurement of, 216–17, 221, 222, 224
and market growth, 221
process of, 216 ff
and purchase and sale of ‘businesses’, 158
in specific industries, 158, 223–5
in United States, 219, 220, 221
Conklin, 217 n. 246
Cooper, W. W., 45 n. 52
Co-ordination, problems of, 15–16, and size, 16–17
and acquisition, 113, 166–70; See also Acquisition; Management
Corporation, importance of, 5, 18–19, 135–6
Costs, administrative, 81, 83, 178
‘full-cost’ pricing, 117 n. 139
influence of, on product selection, 199
internal opportunity, 87, 93, 117, 155–7
investment expenditure as, 199
and size of firm, 200
and technological change, 80–1
and vertical integration, 92
Credit policies, effect of, on small firms, 192–3
Cudahy Packing Co., 127 n. 148
Curtice, Harlow H., 108 n. 126
Curtis, Francis J., 47 n. 55
Cyert, R. M., 29 n. 33
Demand, and entrepreneurial attitudes, 32–4
composition of, 71–5
and diversification, 102–4, 115, 122–5
and resources of the firm, 71–5
significance of, for growth of firms, 70, 72–5. See also, Entrepreneur
Knowledge
Dewing, A. S., 168 nn. 197, 198
Diversification, and acquisition, 112 ff., 126
and areas of specialization, 97–8
and changes in demand, 116–18, 122–4
and competition, 94, 100, 110, 116 ff., 120–2
and concentration, 225–6
and demand for investment, 116–18
direction of, 125–6
efficiency of, 92–3
‘full-line’, 118–20
as a general policy for growth, 126–8
and innovation, 99–102
market base for, 102–4
and market imperfections, 93
meaning of, 94 ff.
measuring, 96
opportunities for, 98 ff
and purchase and sale of ‘businesses’, 159–9
and research, 94, 99–102
and selling efforts, 102–4
and specialization of resources, 65
technological base for, 104–12
types of, 95–6
and uncertainty, 116, 123–4
through vertical integration, 128–31
and wartime activities of firms, 110–11
Dividend policies, 24–5
Division of labour, and balance of processes, 61–3
and size of firm, 61
Dixon, Robert L., 129 n. 149
Dominance, and merger, 170–1, 211
and process of concentration, 226–8
Dorfman, Robert, 44–5 n. 51
Drucker, Peter, 205 n. 227
E. I. DuPont Corp., 166–7 n. 194
Earley, James S., 101 n. 118
Economies of growth, 87–91
Economies of size, managerial, 82–4
of operation and of expansion, 84–7
technological, 80–2
Edwards, Corwin D., 220 n. 250, 231 n. 271
Edwards, Edgar O., 174 n. 203, 187 n. 217
Eisner, Robert, 73 n. 85
Enterprise, distinguished from managerial competence, 29 n. 33, 30
role of, 30 ff
and supply of capital, 34–5. See also Entrepreneur Entrepreneur, and acqusition, 113, 160–6
and availability of finance, 34–5
and character of firm, 36
definition of, 28–9n. 33
and environment, 189–91
and empire-building, 36, 163–6
and firm’s view of demand, 32–4, 71–5
judgment of, 37
and management, 29 n. 33
and profit motive, 160–3
response of, to risk and uncertainty, 50–7
services of, and growth of firms, 32
versatility of, 32–4
Environment, effect of changes in, 179–80
as entrepreneurial ‘image’, 38, 189
and innovation, 101
as objective ‘fact’, 189–91
and productive opportunity, 37–8. See also, Productive Opportunity
Evans, G. H., Jr., 74 n. 86
Expansion, and creation of unused services, 60–1
critical points in, 142–4
direction of, 58 ff., 85 ff.; economies of, 170–2
inducements and obstacles to, 70
internal vs. external, 39, 138
and managerial services, 46–9, 166–70, 176 ff.
and market conditions, 184–5
obstacles to, 39, 58, 59
and organization of firm, 46–9
and need for planning, 40–1. See also Firm, Growth.
Expectations, 37–8
and demand, 72–3. See also, Productive Opportunity
Farr Alpaca Co., 33 n. 36
Felt and Textiles, Ltd., 210 n. 234
Firm, as an administrative organization, 13 ff., 166–70
as a collection of resources, 21 ff., 132–4
Theory of the Growth of the Firm Page 38