Co-operative Structures in Global Business

Communicating, Transferring Knowledge and Learning across the Corporate Frontier

Gordon H. Boyce

• Publisher: Routledge
• Year: 2002
• Print ISBN:
  9780415216449
• eBook ISBN:
  9781134606092
• Topic: Negocios y empresa
• Subtopic: Negocios en general

Using a series of twelve historical case-studies that are based on extensive archival research, this book explains why firms succeed or fail in communicating or transferring knowledge and discovering new expertise. By analysing how workable trade-offs between opposing forces have been achieved in the past, this study provides a set of guidelines for executives who embark upon inter-firm projects.

1 The theoretical and historical context

Introduction

This study examines inter-organisational structures as distinctive systems that support communication, knowledge transfers, and collaborative learning across corporate frontiers. It explores how participants in co-operative relationships exchange information efficiently, how they make transactions involving knowledge, and, in contrast to much of the literature that examines ‘learning organisations’ in terms of a single firm, how organisations learn by working together. These themes are examined using a series of eleven separate studies.

To provide an overarching framework for the cases, the book harnesses insights derived from economic theory and business history. Specifically, it applies and extends the economics of information to analyse these interfirm structures explicitly in systemic terms. This approach exposes questions to guide an evaluation of past practices. Further, the study mobilises business history in order to reveal different devices and techniques that were employed in the past to support communication and co-operation in a variety of specific contexts. The findings provide a basis for filling gaps in the theory and for expanding its parameters.

The book has two main objectives. The first is to extend our knowledge of the wide range of inter-organisational structures. History exposes a startling variety of frameworks, some of which may strike present-day businessmen as innovative and subtle. Improved knowledge of the array of possible forms may make for better-informed choices and more effective designs. The second aim is to extract from historical experience concepts and principles that can be taken into account when forming or analysing inter-firm frameworks. History reveals a battery of surprisingly sophisticated techniques that were used to initiate and sustain co-operative endeavours. It also provides a context within which to assess outcomes. Each of the following chapters examines one or two variables that can influence performance. Together, the cases cumulatively assemble a set of concepts and considerations to guide business practitioners and institutional analysts in assessing the dynamics of interorganisational relationships.

The book covers an extensive chronological period in order to show how changes in environmental conditions and relationship-specific factors shaped co-operative undertakings and determined their longevity. A long-term perspective also reveals patterns of learned behaviour and conditioned expectations which together set in train so-called ‘path dependencies’ that in turn channelled the course of institutional development. The chapters consider inter-organisational structures employed by economic actors from different countries to capture the dynamics of collaboration that unfolded across national and cultural frontiers. They also include examples of collaboration in the manufacturing and service sectors. Some of the participants in the projects examined below are widely known, but others are not; previously overlooked firms are included because they devised unusual frameworks or innovative techniques. In order to learn from success as well as from failure, these ventures consist of projects that achieved all of their founders’ objectives, some that were marginally effective, and others that did poorly.

At present, there is an urgent need for an improved set of guidelines for those engaged in co-operative undertakings. Since the early 1980s, firms have made increasing use of inter-organisational frameworks in an attempt to penetrate new markets and to develop new technologies. Yet, these initiatives have sustained an alarmingly high rate of failure. Estimates vary considerably, but something like thirty to seventy per cent of all new joint ventures disappoint their founders (Deloitte 1989; Harrigan 1985). Perhaps, greater awareness of history and economic theory can improve the record. With this in mind, the book examines why a particular type of inter-organisational structure was devised and how it operated within a prevailing business environment.

Today’s international economy is characterised by accelerating change and increasing turbulence. Technological innovation is unfolding at a growing pace and bringing forth new products and more efficient methods of production. Firms face intense competition on a global scale and must provide high-quality, low-cost goods with sophisticated options to retain their markets. They are compelled to provide better service and to develop greater innovative capabilities using fewer resources.

To contend with this increasingly complex and rapidly changing environment, firms are making a series of interrelated structural changes, just one of which is to rely more extensively on co-operative relations with other companies. In addition, large-scale enterprises are flattening their hierarchies to speed up information flows and seeking ways to improve the learning capabilities of staff. They are also focusing more on core businesses in order to develop a greater depth in their knowledge bases while they spin off previously sheltered units so that these face a market test. From a theoretical point of view, these adjustments compel us to reconsider our conception of the firm, but in terms of historical trends the structural forms appearing increasingly today are not entirely new. To place structural dynamics in a perspective needed to drive the analysis firmly toward communication, knowledge transfers, and learning, we must review the theoretical and historical literatures to isolate the salient themes.

Business history

Business history has made an important contribution to our understanding of both the internal organisation of modern corporations and changes in industrial structure. By providing a rich empirical base that supports institutional comparison, it has had a significant impact on the development of new economic theories of the firm. However, there is considerable scope for discovering new evidence about the range of co-operative structures employed in the past and for examining how they operated in actual practice.

From the perspective offered by mainstream American business history one might infer that the structures appearing today represent something of a retreat by hierarchical organisations. The pioneering work of Alfred D. Chandler Jr (1962, 1977, 1990) charted the initial rise of big business and bureaucratic management structures in the United States. These developments occurred as a result of dynamic interaction between firms and a new business environment that emerged following the completion of the national transport and communication systems in the 1870s. Within the context of a quickly growing national market, rapid product and process innovation, and from the 1890s unique anti-trust legislation, US enterprises could grow to great size by establishing strong capabilities based upon investment in executive resources, mass-marketing techniques, and massproduction facilities. Firms that were first movers in harnessing these new capabilities did so by integrating vertically and by building hierarchical structures and systems. Such administrative innovation made it possible to capture durable economies of scale and scope, especially in technologically advanced sectors. The extension of the visible hand of managerial control over activities that hitherto had been co-ordinated by market transactions between suppliers, manufacturers, and distributors arose as a consequence of a two-way process wherein firms were shaped by, and shaped, the wider business environment. By prising open the modern business institution and exposing the structures and systems inside, Chandler explained the logic behind the initial development of the hierarchical organisations that are being reformed today.

However, other segments of the business history literature have taken a complementary, more externally oriented, view of institutional growth. Interacting with a distinct segment of the American business arena, small businesses in the US, and indeed throughout the world, have relied heavily on informal, externally focused arrangements (Scranton 1989, 1997; Piore and Sabel 1984). Similarly, scholars of British business found that within the context of a slower growing, more fragmented market, with more craftintensive production processes and lenient regulations, family-based networks endured for long periods. In Britain, these structures also sustained the emergence of large-scale operations, but they were not comprehensively transformed into extensive hierarchies (Payne 1967; Hannah 1976; Brown and Rose 1993; Boyce 1995a). Profound resource scarcities also induced Japanese business to rely upon alliances, and enterprise in many Asian countries still exhibits a similar constitution (Fruin 1991; Gerlach 1992; Numazaki 1986, 1993). In these environments, smaller and more flexible companies specialised in a particular production or marketing function, but relied on large co-operative frameworks – as an alternative to comprehensive hierarchical structures – to secure economies of scope and to win competitive advantages. However, this branch of business history has focused largely on alliances or network structures. Less work has been done on other types of inter-firm relationships.

Theory

Economists have outlined a strong framework for explaining why some business activities are conducted in markets and why others are co-ordinated within the firm. In recent years, more has been done to develop theories that explain how co-operative frameworks function and how they differ from markets and hierarchies. One way to advance this work is to focus directly upon the communicating processes that underpin inter-firm relationships.

Business historians, as well as executives who are reforming Western corporate hierarchies today, have been influenced by a variety of economic theories that explain the design and internal processes of business institutions. Agency theory, transaction cost economics, the voice-exit approach, game theory, and sociological economics provide an array of prescriptive and descriptive frameworks. (Management theory provides complementary and contrasting perspectives: the notes below consider some of the principal works in this vast literature.) Implicitly, all of these economic theories raise information, communication, and learning issues that, if treated in a more broadly based and a more explicit manner, will help to extend our understanding of inter-organisational structures.

Agency theory

Principal–agent theory stemmed from the work of Berle and Means (1932), who addressed the problem of how the divorce of ownership from the management of large-scale enterprises exposed serious incentive problems. The question revolved around how shareholders could be assured that professional executives, who owned little if any of the equity of the firms they ran, would safeguard the interests of the owners. Principal–agent theory assumes that economic actors are self-interested and have imperfect information. The challenge centres upon how ex ante (before the fact) contracts can be devised to ensure that agents (managers), who possess superior information relative to their principals (shareholders), act in the best interests of the principals when the latter cannot observe and assess their behaviour directly. This situation arises in many bilateral relationships within and beyond the firm’s boundary. Essentially, agency theory is concerned with how to arrange contracts that include incentive structures and monitoring mechanisms in order to overcome the effects of the asymmetry in the information available to the two parties (Williamson 1975; Jensen and Meckling 1976; Arrow 1985).

By considering the contract as the basic unit of analysis, agency theory offers an austere view of economic action that is ‘under socialised’ in the sense that it ignores social context (Wrong 1961). Its behavioural assumptions are open to question; in some social and cultural settings people naturally exhibit co-operative propensities and share common values or expectations that reduce the effects of imperfect information. Even in the absence of such social and cultural affiliation, systems installed for monitoring purposes may also generate two-way exchanges that generate mutual trust. In contrast to the ex ante presumption of opportunistic propensities, ex post processes (adjustments that are made after a contract is signed) may give rise to cooperation. Thus, although information asymmetry lies at the heart of the agency problem, its effects can be reduced not only by cleverly designed legal provisions that convey incentives and by assessment mechanisms, but also by mobilising ex ante or creating ex post some form of social–cultural foundation. The relationship, rather than the bare contract, becomes the focus of attention once communicating activities and learning processes are incorporated into the analysis (see Powell 1990: 323).

Transaction cost economics

The so-called ‘new institutional economies’ of which Oliver Williamson (1975, 1981, 1985; Williamson and Ouchi 1981) is a pioneering proponent, offers a rigorous framework for understanding business structures. Building on Ronald Coase’s (1937) insight that, in contrast to one of the assumptions of conventional microeconomics, there are costs involved in making transactions, Williamson developed a set of theoretical tools to explain why some exchanges are conducted through markets and some are not.¹ Williamson began by assuming that:

1. economic actors have a propensity towards opportunistic behaviour (their pursuit of self interest is not benign but is infused with calculating, guileful intent); and
2. they are afflicted by bounded rationality (they try to act rationally in an economic sense but lack the full information and the analytical capacity needed to determine with absolute accuracy the costs and benefits of their actions).

In light of these assumptions, exchanges will be affected by a number of transaction cost variables including the number of potential bargainers, the frequency of exchange, the presence or absence of highly specialised assets, and the degree of prevailing uncertainty. Interaction among these factors will determine whether a transaction is carried out through markets or corporate governance. Thus, when the number of bargainers is small, uncertainty and the frequency of exchange are both high, and transactions rely upon specialised assets that have few if any alternative uses, the transaction will be internalised within the firm.² Alternatively, when there are many potential bargainers available, uncertainly and the frequency of exchange are both low, and non-specialised assets are involved, the market will be used.³ If these variables are aligned between these two extreme combinations, co-operative mechanisms – the so-called ‘intermediate modes’ – such as relational contracts or trilateral governance, that is third-partymediated arrangements, will be employed. [In his later work (1985), Williamson indicated that intermediate structures were more widely used than he previously believed.] The selection of transacting mechanism – whether firm, market, or intermediate mode – will be based on which alternative offers the lowest cost in light of how the transaction cost variables listed above are configured.⁴

Williamson’s analysis points to a number of themes that can be explored further to reach a fuller understanding of co-operative structures. First, his behavioural assumptions are ‘under-socialised’ and can be questioned in much the same way as those that underpin agency theory.⁵ Moreover, his earlier work (1975: 37–9) indicates that ‘atmosphere’, or the extent to which parties derive non-pecuniary benefits from exchanges, shapes the interplay of the transacting variables he identifies. However, he leaves wide scope for business historians and practising managers to determine how social and cultural forces influence intermediate mode design and operation within particular contexts.

Second, even though Williamson emphasises the efficacy of hierarchical authority in facilitating ex post adjustment, he does recognise that relational contracts may have desirable attributes and distinctive processes of their own. For example, if sufficient trust is present co-operative structures can achieve learning-by-doing effects, considerable flexibility, and diminished opportunism.⁶ These frameworks can also generate a specialised language that sustains close interpersonal relationships and thereby secures ‘communicating economies’ (Williamson 1985: 62). Our analysis focuses directly upon these communicating and trust-building processes and the purposes for which firms and individuals used them (see Doz 1996; Ring and Van der Ve n 1994).

Third, Williamson’s framework has a static, equilibrating character that focuses on the internal transacting efficiency of each institutional arrangement.⁷ I t p r o v i d e s a ‘snapshot’ perspective that does not come to grips fully with the dynamics of institutional change. There is little room for growth, learning, power, or other strategic factors to influence initial mode selection or subsequent shifts in arrangement.⁸ These issues are explored in the cases that follow.

Finally, like conventional microeconomics, transaction cost analysis employs calculative rather than a communicative rationality (Lundvall 1993: 59). It is based mainly upon cold assessment of costs and benefits and ignores those less precisely determined motivations that influence relationship-building activities. (The latter include the long-term benefits of pursuing mutual growth, joint learning, sharing complementary resources, reputation gains, access to diverse information, and non-pecuniary benefits). From this angle, it is important to consider how particular cultural values shape conceptions of trust and how the social milieu in which transactions unfold support specific communicating mechanisms, or informal, inter-organisational systems. The nature of the social and cultural context will determine the extent to which it either creates transacting ‘friction’ or lubricates information exchange and learning, thereby reducing the cost of co-operation. One of the aims of the present study is to explore how business leaders can shape the outcome by creatively influencing social and cultural elements to facilitate joint initiatives (see Casson 1991; Powell 1990).

Intermediate modes, voice-exit, and game theory

Richardson (1972) was one of the first economists to recognise the ubiquity of intermediate modes. He suggested that firms should not be seen as ‘islands of planned co-ordination in a sea of market relations’, but rather as entities that are enveloped in webs of interdependence. Indeed, markets and firms – as transacting frameworks – represent points at opposite ends of a spectrum of institutional arrangements characterised by degrees of interdependence. At these poles price and managerial control provide co-ordinating mechanisms. Between these extremes Richardson saw an array of co-operative intermediate arrangements that function effectively when participants willingly sacrifice some degree of their sovereignty; the relevant co-ordinating mechanisms for them are trust and power. However, for Richardson, what draws participants in intermediate modes together is the opportunity to combine capabilities that are complementary but dissimilar. At issue, therefore, is how firms gather and process information to discover initially that they have capabilities which can be blended and subsequently how they learn jointly to create a broader set of complementary attributes to sustain further growth.⁹ Moreover, how do firms communicate to build the trust needed to induce them to sacrifice a measure of their right to pursue self-interest? Following Richardson’s perspective, Powell (1990) calls for studies that show how information is processed and learning unfolds within these frameworks. These concerns draw attention to the systems that underpin inter-organisational structures.

The idea that communication and learning processes support co-operative business ventures underlies Hirschman’s (1970) contrast between voice- and exit-based relationships. Hirschman’s framework explains inter-firm operations in terms of how economic actors respond to disagreements or problems. Partners in voice relations, as the name implies, communicate intensively to resolve difficulties and preserve long-term ties. In contrast, when discord arises those firms that pursue exit strategies will find another party to deal with and thus exit from an existing relationship. These different patterns of behaviour reflect the time horizon observed by participants, the degree of trust between them or the credibility of threats to exit, and their conceptions of the benefits derived from sharing knowledge. T...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Figures and tables
• Preface
• 1 The theoretical and historical context
• 2 Agency agreements in international business: Dynamic model of shipowner– agent relations, 1870–1939
• 3 A family-based network: The Holt–Swire–Scott connection, decision-support systems and staff development, 1860–1970
• 4 A multinational joint venture: The Orient Paint, Varnish and Colour Co., 1932–49
• 5 A purchasing co-operative: The Steel Manufacturers’ Nickel Syndicate, 1901-39
• 6 A licensing pyramid: John Brown Company and International Curtis Marine Turbine Company, 1908–29
• 7 A technology transfer agreement: Babcock & Wilcox, 1880–1970
• 8 Learning within an inter-organisational group: The Union Steamship Co. and oil propulsion, 1912–39
• 9 A joint exploration venture: Western Mining Corporation and Hanna/Homestake, 1960–72
• 10 Contracts based on knowledge: The J. Walter Thompson Company and Unilever – compounding intangible assets, 1900–70
• 11 An Australian supplier chain: The New South Wales Bottle Co., 1909–80
• 12 Hollywood networks, 1970–99
• 13 Conclusion: Inter-firm relationships
• Notes
• Bibliography