Self-Management and Efficiency

Large Corporations in Yugoslavia

Stephen R. Sacks

• Publisher: Taylor & Francis
• Year: 2017
• eBook ISBN: 9781351388382
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The book, first published in 1983, examined whether the Yugoslavs' extensive implementation of their principle of self-management by small work units was costly in terms of economic efficiency. Were they atomizing their firms into inefficiently small fragments? Was the system of worker self-management appropriate only for small firms? Can a modern industrial enterprise of efficient scale, indeed very large scale, by run that way? In order to answer these questions, the author applies to large firms in former Yugoslavia the transactions cost analysis developed by the economist Oliver Williamson.

1	Divisionalization in Yugoslav Corporations

Introduction

For more than three decades the Yugoslav economy has been characterized by a continuing process of decentralization. The centralized command economy of 1945, patterned on the Soviet model, had by the early 1950s begun to develop into a system of self-management by independent enterprises. By 1965 the independence of enterprises from central-government control was fairly complete and a principle of autonomy for divisions within the enterprise had begun to evolve. These developments are a logical consequence of the fundamental principle that underlies the philosophy of the entire Yugoslav economic system: wherever possible small work units are to be organized as separate, independent entities.

From an economist’s point of view, the desirability of divisionalizing enterprises is arguable: the issue has generated a substantial body of literature (largely in business-oriented journals) that deals with the merits of divisionalization in a capitalist environment.¹ Proponents cite various cases that support their position. For example, it is widely believed that General Motors saved itself from bankruptcy by dividing into autonomous divisions and that Ford Motor Company nearly failed because for a long time it did not do so. On the other hand, some large American firms (e.g. Republic Steel) prefer to operate without divisionalization. The same issue is significant in a socialist environment but has received little attention in western literature. In contemporary Yugoslavia the question of whether activities within the firm should be coordinated by an administrative or a market mechanism is of primary importance.

There are a number of questions one might ask about an economic system in which large corporations are run as though they were sets of smaller firms. Some particularly important questions concern transfer prices, that is, the prices at which intermediate goods and services are sold between divisions within a large firm. But these are only part of a larger question, namely, whether the Yugoslavs’ extensive implementation of their principle of self-management by small work units will be costly in terms of economic efficiency. It is not easy to see whether Yugoslavia is improving the efficiency of its system of resource allocation or atomizing its firms into inefficiently small fragments.

The purpose of this chapter is to describe the divisionalization of large socialist enterprises in Yugoslavia and to examine the autonomy of, and the relationship among, the divisions. While a number of fundamental analytical questions will be raised, the major purpose is not to evaluate these important developments, but rather to set the stage for the analysis of their economic significance which will be undertaken in the following chapters.

This chapter focuses first on the autonomy of the divisions of the Yugoslav enterprise, and then examines the transfer prices at which goods and services are sold between divisions. In the final section attention centers on the structure of the entity formed by a collection of divisions (an entity still regarded by Yugoslavs as an ‘enterprise’, although that word is no longer fasionable) and examines the ties that hold it together.

Autonomy of the basic organization of associated labor

For a long time special attention has been paid in Yugoslavia to the subunits of the enterprise.² As early as 1953 a subunit could be granted the status of legal person with the right to enter into contracts outside the enterprise. Further, the law stated that every unit able to perform its economic activity independently had the right to become an independent enterprise, although it needed permission from the rest of the enterprise to withdraw. Regulations issued in 1954 required that when a new plant was registered a statement had to be submitted specifying whether or not the new unit could act in its own name and in the name of the enterprise, whether or not the enterprise was liable for the subunit’s debts, and whether or not it had a separate legal identity and bank account. If built at a separate location it had to have its own management organs, bookkeeping and bank account. A 1965 law strengthened the autonomy of enterprise subunits, and constitutional amendments in 1968 introduced new terminology that emphasizes the importance and independence of the subunits. These changes made explicit the possibility (already contained in earlier laws) that subunits may have the status of legal persons if their work is such that they can independently enter the marketplace.

In more recent years the importance of subunits has increased further. Constitutional amendments in 1971 (later embodied in the Constitution of 1974) increased their independence, and the Law on Associated Labor (LAL) of 1976 further strengthened this trend. According to current Yugoslav law, the basic economic unit is not the enterprise but the ‘basic organization of associated labor’, or BOAL, as the divisions are referred to in western literature. They are the holders of all social sector assets and have final authority in all decision-making. They may voluntarily join together to form enterprises,³ but the extent to which they may delegate authority to central organs of the enterprise is limited. Major decisions that affect all divisions must be voted on by all of them. Perhaps most important for this study, every division has the right to buy or sell outside the enterprise.

Technically, income is earned solely by divisions, not by enterprises (LAL, articles 14 and 18). A division may earn income by (1) selling goods or services on domestic and foreign markets, (2) selling goods or services to other divisions within the enterprise, or (3) engaging in joint efforts with other divisions (so-called ‘pooling of labor and resources’). Even income that is earned jointly with other divisions must be distributed in its entirety among the participating divisions; none may be considered ‘enterprise income’ (LAL, articles 70 and 82). Such distribution is to be made ‘according to the contribution’ of each division to the value of joint output (LAL, articles 66 and 82). In most cases this is done with transfer prices, but any objective measurement is allowed. The important point here is that each worker’s income comes from his division, not directly from the enterprise.

Current law makes clear (LAL, articles 338–41) that every division has the right to separate off from its enterprise. The only restrictions are that it must give adequate notice and that it is responsible for fulfilling any obligations to which it had committed itself. This includes not only delivering goods promised to other divisions of the firm, but also compensating them in case the withdrawal would ‘substantially diminish the income earning possibilities’ of the remaining divisions. Such occurrences are rare but there are some examples. For instance, a division of Radio Industrija Zagreb (RIZ) left to become part of another electronics enterprise that had a product line more appropriate to that division’s activities; Agrocommerce of Titograd separated from Agrooprema of Belgrade and they became competitors; workers at Alumina in Skopje voted to pull out of Energoinvest of Sarajevo after a dispute over investment in duplicate capacity.⁴

The legal definition of a division is not easy to implement. The law states that if the performance of a subunit of an enterprise ‘can be expressed in terms of value within the work organization or on the market… the workers… shall have the right and duty to organize… [that unit] as a basic organization of associated labor’.⁵ Furthermore, a division must have only one activity and cannot perform related activities if it is possible to organize a separate division for those other activities. These principles are so imprecise that there is considerable debate and disagreement among Yugoslav businessmen, economists and lawyers over how to meet legal and practical requirements of the law. The problems that can arise are illustrated by a discussion I heard at a conference of business lawyers in Zagreb. The topic was whether selling alcoholic and non-alcoholic drinks constitute separate activities; if so, it would seem that a café must have two divisions, even though the same employees work in both. This is, of course, an extreme example, but it illustrates the kind of problem the new rules have raised.

In practice, a café with a dozen employees will not have more than one division. However, a chain of cafés with a dozen workers in each may or may not be organized with each establishment as a separate division. There is no general rule in such matters. In Montenegro in a chain of fifty-two hotels there was considerable debate over whether to have fifty-two divisions or a smaller number. In the end they agreed to group hotels on a geographical basis into eighteen divisions. Similarly, a manufacturer of eyeglass frames and lenses had its 110 retail shops organized into sixteen divisions. Some of these divisions included all of their shops in a republic and others included only those in a single city. The central management of the enterprise argued for consolidation of all 110 shops into a single division. Their reason; although not publicly admitted, was that they wanted to reduce and make more enforceable the firm’s agreed limit (then 30 per cent) on the shops’ sales of goods made by other manufacturers.

In manufacturing enterprises a single division often includes all workers involved in a particular product line from raw material to finished product. For example, in a Zagreb firm, workers who melt cocoa, make a particular style of hard chocolate and package it are all in one division. Those who work on a different type of candy are in a separate division, although some of the boxes sold by this firm in retail stores contain candy from several different divisions. In another firm the three vertical steps (melting, forming the candy and packaging) might be organized into three separate divisions. Similarly, in one firm all the steps in producing a particular shoe are included in one division, while in another firm the uppers and soles are sold by two divisions to a third division that then sews them together. A Slovenian electronics firm with 27,000 workers is divided into sixty-six divisions. Most correspond to a particular product (e.g. broadcast antennae, motors for home appliances, telephone switchboards, etc.), but some are defined on functional lines (e.g. data processing center, engineering design, equipment installation and repair, workers’ restaurant, etc.).

In most enterprises certain administrative services that are provided to all of the divisions of an enterprise are performed not by divisions but by ‘work communities’. The law specifies that planning, personnel services, bookkeeping, legal services, maintenance and security of buildings, filing and typing are to be organized in this way. Another group of activities may be viewed either as providing administrative services to other divisions or as directly creating something of measurable value, and hence can be organized either as work communities or as divisions. These include marketing, project design, engineering and R & D, data processing and personnel training (LAL, articles 400–7; see also Constitution, articles 29 and 30). Work communities operate under special restrictions. They may not withdraw from the enterprise and they can be dissolved at the discretion of the divisions, which would then divide up any assets. They have no funds of their own: by mutual agreement the divisions provide money to pay their costs, including personal and collective consumption for the workers at a rate equal to the average earned in the divisions. When permitted, organizing such activities as a division rather than a work community allows somewhat greater flexibility. Withdrawal from the enterprise still requires permission of the other divisions, but it is allowed to sell services outside the enterprise. For example, a Montenegrin hotel enterprise changed the status of its purchasing department from that of work community to that of division so that it could supply food to an off-shore oil rig.

In order to get some sense of the actual size of divisions, I have calculated averages for a sample of sixty-seven large industrial enterprises in 1978. The size of these enterprises varied from 1,519 to 37,512 workers, the average size being 12,461. The number of divisions per enterprise varied from 6 to 180 and averaged 47 divisions. Average division size can be calculated in two ways: the total number of workers in all sixty-seven enterprises can be divided by the total number of divisions; or the average division size can be calculated for each enterprise and then these averages can be averaged. Although the data do not suggest that larger enterprises have larger divisions, it still seems wise to avoid giving more weight to the larger enterprises, so I used the second method. Average division size varied from 88 to 766 workers, the unweighted average being 315 workers per division. For the same year, a sample of twenty-four large trade sector enterprises averaged 5,580 workers divided into an average of thirty-nine divisions. The average division size was 177 workers. Apparently, these trade sector firms employ about half as many workers as do the industrial enterprises and divide them into nearly as many divisions.

The most obvious advantage of dividing up these large enterprises is the improvement in incentives for hard work. The motivational value of a system based on profit sharing among workers is greater when several hundred rather than several thousand others share the results of any incremental effort by each worker (see Tyson, 1979). The same type of logic suggests that any collective decision to work harder (or even to maintain a previous level of effort) can be more effectively implemented in a smaller group; that is, mutual monitoring of co-workers’ effort is easier. Along different lines, it is interesting to note that one finds in business journals a view of large enterprises that is analogous to a view of the Soviet-type economy found in comparative systems literature: the only way to make subunits act in the best interests of the whole is to give them considerable autonomy and to evaluate (and reward) them on the profit they earn. It should be noted that these observations do not apply to Yugoslav ‘work communities’.

The extreme autonomy of the divisions (which is not merely a legal principle but in many cases a practical reality) is perhaps best demonstrated by an examination of transfer prices. But first a few words are needed concerning the more general role of competition and prices in the Yugoslav economy. Firms do not always compete with one another. Indeed, collusion and market sharing are common. But as Comisso (1980, p. 200) points out, the pressures to collude and divide up markets are often political pressures, which are applied by governments to offset the reluctance of firms and divisions to suppress the apparently strong tendency to compete. While ‘excessive’ competition is often interregional (in one republic a light bulb plant will be built or an airline established despite excess capacity in another republic), it can also be found within a single republic. For example, Comisso cites the efforts of the Serbian government to force manufacturers of household appliances to agree on complementary product lines. In this case the effort was to persuade producers of thirty-eight different products to specialize, at least with regard to air conditioners, electric motors, water heaters and space heaters (Ekonomska Politika, 16 May, 1977, p. 19). Similarly, in 1981 the provincial government in Kosovo tried to persuade its metal processing industry to achieve closer coordination among its eighteen work organizations, fourteen divisions and one complex enterprise (Bulletin, 23 June, 1981, p. 3). In both these cases the problem of overcapacity resulted from each producer’s determination to go ahead and build production facilities that would allow it to compete in all product lines. In a peculiar reversal of the traditional problem in the United States, the Yugoslav situation seems, at least in some cases, to be one of competition persisting despite government efforts to suppress it.

Of course, this view should not be overstated, and in any case it applies more to competition between firms than to competition within firms. Indeed, perhaps the major difference between relationships between and within firms is the greater likelihood of successful collusion between divisions within the firm. On the other hand, even within the firm, prices play a very important role. Despite extensive discussion of ‘polycentric planning’, the fact is that the Yugoslav system of planning is simply too vague to be plausible as a mechanism for decision-making. The standard rhetoric is presented by Schrenk (1981, p. 3): ‘Expectations and ambitions of individual BOALs and enterprises [are] iteratively reconciled for consistency’; ‘Harmonized micro-plans have to be consistent…’; ‘Creation of universal transparency … and the elimination of deviations from planned (preagreed) actions’; ‘Calibration of investment through ex ante coordination.…’ Such notions may serve to facilitate the operation of a market but cannot replace prices as the basis for production decisions. Referring to a plethora of self-management agreements, Comisso (1980, p. 200) says ‘many existed only on paper,… while others were simply suspended…’. In the absence of any functional alternative mechanism, the Yugoslav system is essentially a set of contracts based on prices.

Transfer Prices

Transfer prices are the prices charged for goods and services sold between divisions within an enterprise. They are determined by intensive negotiations between buyer and seller, who are, in fact, bargaining over their own incomes, and who actually sign a legally binding contract specifying prices and quantities. These negotiations are not a sham: there have been a few cases where deliveries of goods between divisions in an enterprise were halted (briefly) because agreement on a transfer price had not been reached.⁶

An important question is whether or not production decisions are based on transfer prices. In some cases divisions seem to agree first on quantities and then on prices. That is, they might appear not t...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Foreword
• Introduction
• Chapter 1 Divisionalization in Yugoslav Corporations
• Chapter 2 Giant Corporations in Yugoslavia
• Chapter 3 The Theory of Transfer Prices
• Chapter 4 The Efficiency of Divisionalized Corporations
• Chapter 5 Investment Decisions in the Divisionalized Firm
• Chapter 6 Case Studies
• Chapter 7 Divisionalization in Other Socialist Countries
• Chapter 8 Summary
• References
• Index