Enterprise, Management and Innovation in British Business, 1914-80

R.P.T. Davenport-Hines, Geoffrey Jones

• Publisher: Routledge
• Year: 2005
• Print ISBN: 9781138419094
• eBook ISBN: 9781135778699
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

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BRITISH BUSINESS AND THE TRANSITION TO A CORPORATE ECONOMY: ENTREPRENEURSHIP AND MANAGEMENT STRUCTURES

By T.R.GOURVISH

Business historians, in their work on the single firm—its birth, growth and, where appropriate, decline—have naturally included sections dealing with entrepreneurial response, organisational forms, and, if relevant, the separation of ownership and control and the emergence of managerial hierarchies. That this writing is often, if not invariably, divorced from a more general, theoretical, approach should not surprise us. There is, of course, no obligation on the historian of an individual business to theorise; indeed, many of such studies are commissioned histories, with all the constraints on subject matter which they impose, whether directly or indirectly. Nor is theorising a straightforward matter. For example, conventional neo-classical economics offers little comfort to those who wish to emphasise the role of the entrepreneur and organisational structures in the dynamic process of business development. Moreover, the situation still persists, notwithstanding the theoretical heritage of Schumpeter and Penrose; the behavioural school of Barnard and Simon; the transaction costs approach pioneered by Commons and Coase; and the imaginative attempts to build constraints into profit-maximising assumptions in micro-economic theory.¹ For many years scholars, whether economists or historians, have often complained that much more empirical work is required before confident generalisations on entrepreneurship and organisational change can be attempted. At the same time, theoreticians remain critical of what they deem the blinkered approach of historians of single business entities.²

The behavioural and managerial emphasis of organisation theorists offers some instructive insights into the perceptions of managers, the goals of firms, and the relationship of both to business decision-making. However, where this approach merely replaces the profit-maximisation objective with the maximisation of some other element—whether turnover, capital assets, prestige or whatevers—it can be as deterministic and difficult to apply as the conventional neo-classical model. Furthermore, much of this rather eclectic work has the additional weakness of downgrading the consideration of any economic phenomena, such as market changes, technological innovation, and protection. For the business historian, the most useful applications of the ‘behavioural school’ derive from the concept of ‘bounded rationality’, that is the notion that within organisations intended rational choices or responses are constrained both by uncertainty and by the limited capacity of human beings for computing and processing information. This is important in that it sets defined limits to an efficiency-based model of corporate behaviour, and gives prominence to a study of the activities of individual entrepreneurs and managers, where game theory and conflict models have an obvious relevance.³

Penrose has offered business historians numerous insights into the dynamic experiences of the firm, although her discursive treatment certainly does not amount to an integrated theoretical model of either the firm or its growth. On the other hand, she does emphasise the importance of the historical process and the value of using specific case studies, thereby combining the theoretical approach of the economist with the historian’s recognition of real situations. Furthermore, her work on diversification strategies and their relevance for an extension of a firm’s growth possibilities, and on the managerial costs of and limits to growth, have been major contributions to an understanding of the dynamics of corporate growth. They have been built on and extended by others, notably Marris.⁴ Penrose gave considerable attention to the ability of management to cope with the growth process, and this is an area which has been explored in considerable depth by Chandler. His work represents the best example of a quasi-theory attractive both to historians and to other students of corporate development. In Strategy and Structure and The Visible Hand he focuses upon the emergence of the ‘corporate economy’ in the USA, characterised by the market dominance of large, multi-divisional companies and their complex managerial hierarchies. The approach is plainly historical, in that detailed case studies are used to demonstrate that entrepreneurial and organisational responses were firmly linked to technological change and market development. The American market expanded in the nineteenth century with the coming of the railroads, which pioneered new organisational structures to cope with the operational complexity arising from size and dispersion and with the separation of ownership and control. They also provided the infrastructure to encourage manufacturing businesses to adopt mass production techniques and vertical integration. The diversification strategies of these growing firms then put pressure on the centralised, departmental or ‘unitary’ form of organisation, which had been inherited from the early railroads. In the 1920s this produced a structural response in the shape of the multi-divisional or M-form organisation. For Chandler, the organisational structure followed on from the strategy of growth and diversification.⁵ An historical approach is also evident in Hannah’s Rise of the Corporate Economy, which identifies merger activity in manufacturing as the major element in corporate development in the UK.⁶

The ‘business history’ approach, as Oliver Williamson has dubbed it, has a great deal to offer as a basic framework for the study of particular firms and industries, and has helped to identify specific issues, notably the central importance of managerial resources, and the impact of the external economic environment upon those resources. Its relevance is strongest in twentieth-century applications, of course, where with the emergence of large-scale enterprise the ‘invisible hand’ of the market began to be replaced by the ‘visible hand’ of management. Whether, as Williamson has asserted, the work of business history can be usefully combined with a transaction costs emphasis is a matter for argument. The assumption that firms will seek to supersede market transactions and the price mechanism until the cost of organising an additional transaction internally equals the cost of transacting in the market is clearly an important one. It has obvious relevance for an understanding of business organisation, particularly when modified by reference to institutions as well as markets. The approach can be employed to analyse decisions to integrate production and selling functions, and it has been used successfully in the study of multinational enterprise, where the highlighting of information costs, uncertainty avoidance, and the relationship between principal and agent is of key importance.⁷ At the same time, the information cost emphasis reduces the role of technology in determining the operations of firms inside and outside markets, while the transaction cost model appears to be rather difficult to handle empirically in historical contexts, particularly if quantitative precision is desired.⁸ Nevertheless, the work of Chandler, Williamson et al. probably offers the best set of ground rules presently available for an analysis of the transition from small family-owned and dominated firms to the giant enterprises and more concentrated industrial structures of ‘managerial capitalism’, and the increased presence of multinational enterprise.⁹

II

This article draws upon the editors’ selection of British company histories in order to explore some of the main themes in corporate development advanced by Penrose, Chandler, Williamson et al. These are:

1. (i) the type of organisational structure employed, the causes of managerial innovation, and the adaptability of management to expansion, technological change and transformed market conditions; and
2. (ii) entrepreneurial and organisational factors in Britain’s apparent ‘corporate lag’, namely, the delay in emulating, for example, American developments, with particular reference to the persistence of a ‘family’ presence in management. Equally important, though given less prominence here, are:
3. (iii) the supply of managerial resources and its implication for the pace of change from entrepreneur-dominated to manager-dominated enterprises; and
4. (iv) the relationship between organisation and performance, with particular reference to the role of individuals, the relative merits of centralisation and decentralisation strategies in securing control of large businesses, and ‘profit’ versus ‘service’ conflicts in public sector enterprise.

The considerable bias in the selection of companies and corporations has been pointed out elsewhere. The 13 businesses to be studied are, with the exception of Archibald Kenrick & Sons of West Bromwich, large concerns. They are still trading, and have an exceptionally long life. Omitting the nationalised enterprises established by legislation in 1946–47, three of the remaining ten companies had roots in the eighteenth century, three were founded before 1837, and three were established in the period 1861–81. All are identifiable today, although Colvilles is now part of the British Steel Corporation, Wills is part of the Imperial Group (itself part of Hanson Trust), and Harland & Wolff has been government-owned since 1975. There is a strong emphasis on manufacturing, where ten of the companies are located. Finally, all have been the subject of a commissioned history. Despite the usual protestations of the authors about ‘independence’, this fact lays them open to some suspicion at least of restraint in the handling of business behaviour and the role of personalities.¹⁰ However, for our immediate purposes the problem should not be exaggerated. While it must of course be conceded that to rely solely on such examples would be to underestimate the importance of failure and of disappearance by merger in business progression, the company attributes of longevity and, ultimately, large size are useful in any examination of the transition from small to large, from entrepreneur-dominated to manager-dominated enterprise. Indeed, it is prominence in the UK economy, coupled with a sense of tradition, that has encouraged these firms to display a statesmanlike attitude to archive-gathering and the commissioning of serious business histories.¹¹

III

Our first task is to analyse the evolving organisational structures of the case studies (Table 1 provides an outline analysis). The impression they leave is that before 1914 British firms made very few significant organisational changes to match their growth, technological change, and a competitive world increasingly shaped by the corporativism of the United States and Germany. One searches in vain in our selection of commissioned histories for organisational charts to match those reproduced by Chandler for the USA. ‘Organisation’ receives comparatively little attention from our authors; indeed, the word is absent from the index of most of the books dealing with the pre-1945 period.¹² What is important, and this emerges clearly, was a general move to limited liability status, a process begun in the 1880s. By 1900 seven of the nine businesses then in existence had registered, three in 1880–85, four in 1891–95; only Bowater and W.H.Smith remained as private partnerships (see Table 1). The new entities were de facto private companies, although the legal distinction between ‘private’ and ‘public’ was not made until the Companies Act of 1907. They kept the number of members small, applied restrictions on the transfer of shares, and usually made no appeal to the public for funds. If money was required, it was raised by the issue of non-voting loan stock. The controlling ordinary share capital was retained by the participating partners and their families. These moves were part of a general tendency in Britain to adopt the limited liability form. About 132,000 companies were registered in London in the period 1880–1914, and the bulk of them was ‘private’. Of the 63,000 on the register in 1914, 48,500 or 77 per cent were of this type.¹³

TABLE 1 SAMPLE OF BUSINESSES, WITH OUTLINE INFORMATION ON STRUCTURE

Why was the decision to register taken? Certainly, by the 1880s the environment was more conducive to incorporation, with the expansion of the financial sector, a intermediries. But a common theme was the concern about future viability after the mid 1870s. Difficulties experienced in the climate of falling prices and squeezed profit margins led firms such as Kenricks (1883), Harland & Wolff (1885), and Courtaulds (1891) to seek the shelter of limited liability. Furthermore, of Glasgow Bank in 1878 not only encouraged banks to move from unlimited to limited liability (the Midland, then known as the Birmingham & Midland, did so in 1880), but also persuaded firms in several industries that the advantages of limited liability outweighed the disadvantages.¹⁴ In some cases, growth was the spur. For Wills (1893), Pilkington Brothers (1894), and David Colville & Sons (1895), the context was sustained growth and the need to secure its financing. Limited liability status was a means to increase the number of partners in order to cope with the problems of expansion, an example of response to Penrose’s managerial limits to growth. For Wills in particular, the move followed the successful exploitation of new technology—the Bonsack cigarette-making machine.¹⁵ Moreover, the classic case of incorporation to finance growth—brewing—is unrepresented in our case studies. Here, a wave of company registrations in the 1880s and 1890s was both a response and a prelude to growth based on the acquisition of breweries and tied houses.¹⁶ Finally, entrepreneurial or family factors should not be overlooked. The conversion of both Courtaulds and Colvilles to limited liability status owed much to personal circumstances. For Courtaulds it was the death of Harry Taylor in 1890 and the prediliction of George Courtauld III for country life; in Scotland, it was the age of the founder, David Colville, 82 in 1895, and his eldest son’s interest in politics.^17...

Table of contents

• COVER PAGE
• TITLE PAGE
• COPYRIGHT PAGE
• EDITORIAL INTRODUCTION
• FAILINGS AND ACHIEVEMENTS: SOME BRITISH BUSINESSES, 1910–80
• BRITISH BUSINESS AND THE TRANSITION TO A CORPORATE ECONOMY: ENTREPRENEURSHIP AND MANAGEMENT STRUCTURES
• MODELLING THE GROWTH STRATEGIES OF BRITISH FIRMS
• CONSUMER MARKETING IN BRITAIN 1914–60
• SCIENCE AND TECHNOLOGY IN BRITISH BUSINESS HISTORY
• PRIVATISATION: THE TRIUMPH OF PAST PRACTICE OVER CURRENT REQUIREMENTS