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Core management conceptsP. WillmanMN2177

2016

Undergraduate study in Economics, Management, Finance and the Social Sciences

This is an extract from a subject guide for an undergraduate course offered as part of the University of London International Programmes in Economics, Management, Finance and the Social Sciences. Materials for these programmes are developed by academics at the London School of Economics and Political Science (LSE).

For more information, see: www.londoninternational.ac.uk

This guide was prepared for the University of London International Programmes by:

Professor Paul Willman, Department of Management, London School of Economics and Political Science.

This is one of a series of subject guides published by the University. We regret that due to pressure of work the author is unable to enter into any correspondence relating to, or arising from, the guide. If you have any comments on this subject guide, favourable or unfavourable, please use the form at the back of this guide.

University of London International Programmes Publications Office Stewart House 32 Russell Square London WC1B 5DN United Kingdom

www.londoninternational.ac.uk

Published by: University of London

© University of London 2014

Reprinted with minor amends 2016

The University of London asserts copyright over all material in this subject guide except where otherwise indicated. All rights reserved. No part of this work may be reproduced in any form, or by any means, without permission in writing from the publisher. We make every effort to respect copyright. If you think we have inadvertently used your copyright material, please let us know.

Contents

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Contents

Chapter 1: Introduction .......................................................................................... 1

1.1 Introduction to the subject ....................................................................................... 11.2 Route map to the guide ........................................................................................... 11.3 Syllabus ................................................................................................................... 21.4 Aims of the course ................................................................................................... 21.5 Learning outcomes for the course ............................................................................ 21.6 Overview of learning resources ................................................................................ 21.7 Examination advice.................................................................................................. 5

Chapter 2: Management and the firm .................................................................... 7

2.1 Learning outcomes and reading ............................................................................... 72.2 Introduction ............................................................................................................ 82.3 The British experience .............................................................................................. 82.4 Railways and the second Industrial Revolution ......................................................... 92.5 Market failure and management ............................................................................ 102.6 Transaction cost economics .................................................................................... 122.7 Overview of chapter ............................................................................................. 142.8 Reminder of learning outcomes.............................................................................. 152.9 Test your knowledge and understanding ................................................................ 15

Chapter 3: Taylorism, motivation and performance ............................................. 17

3.1 Learning outcomes and reading ............................................................................. 173.2 Introduction .......................................................................................................... 183.3 Scientific management: the apogee ........................................................................ 213.4 Engineering and psychology ................................................................................... 233.5 Overview of chapter .............................................................................................. 253.6 Reminder of learning outcomes.............................................................................. 263.7 Test your knowledge and understanding ................................................................ 26

Chapter 4: The rise and decline of labour ............................................................ 27

4.1 Learning outcomes and reading ............................................................................. 274.2 Introduction .......................................................................................................... 284.3 Farmers and workers ............................................................................................. 294.4 Band of brothers ................................................................................................... 304.5 Overview of chapter .............................................................................................. 354.6 Reminder of learning outcomes.............................................................................. 364.7 Test your knowledge and understanding ................................................................ 36

Chapter 5: The rise of human resource management .......................................... 37

5.1 Learning outcomes and reading ............................................................................. 375.2 Introduction .......................................................................................................... 385.3 The emergence of HRM .......................................................................................... 395.4 Organisational behaviour ....................................................................................... 445.5 The psychological contract ..................................................................................... 465.6 Overview of chapter .............................................................................................. 485.7 Reminder of learning outcomes.............................................................................. 485.8 Test your knowledge and understanding ................................................................ 48

MN2177 Core management concepts

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Chapter 6: The origins of management science ................................................... 49

6.1 Learning outcomes and reading ............................................................................. 496.2 Introduction .......................................................................................................... 496.3 Inventory management .......................................................................................... 506.4 Telephone networks ............................................................................................... 526.5 Military planning ................................................................................................... 536.6 Overview of chapter .............................................................................................. 566.7 Reminder of learning outcomes.............................................................................. 566.8 Test your knowledge and understanding ................................................................ 56

Chapter 7: Accounting, finance and the firm ........................................................ 57

7.1 Learning outcomes and reading ............................................................................. 577.2 Background: definitions of accounting and finance ................................................. 587.3 Principal–agent theory ........................................................................................... 587.4 The institutional environments of accounting ......................................................... 617.5 Overview of chapter .............................................................................................. 627.6 Reminder of learning outcomes.............................................................................. 637.7 Test your knowledge and understanding ................................................................ 63

Chapter 8: Management accounting: costing....................................................... 65

8.1 Learning outcomes and reading ............................................................................. 658.2 Purposes of cost accounting .................................................................................. 658.3 Production and service departments ....................................................................... 668.4 Activity-based costing ........................................................................................... 698.5 Overview of chapter ............................................................................................. 718.6 Reminder of learning outcomes.............................................................................. 718.7 Test your knowledge and understanding ................................................................ 71

Chapter 9: Management accounting: decentralisation and performance measurement ....................................................................................................... 73

9.1 Learning outcomes and reading ............................................................................. 739.2 Introduction .......................................................................................................... 749.3 History .................................................................................................................. 749.4 Using return on investment (ROI) ........................................................................... 769.5 The balanced scorecard .......................................................................................... 789.6 Financial (ROI) versus balanced scorecard performance measure ............................ 809.7 Overview of chapter .............................................................................................. 819.8 Reminder of learning outcomes.............................................................................. 819.9 Test your knowledge and understanding ................................................................ 81

Chapter 10: Financial accounting ......................................................................... 83

10.1 Learning outcomes and reading ........................................................................... 8310.2 Management accounting and financial accounting ............................................... 8310.3 The elements of the financial report ..................................................................... 8410.4 Recognition and matching .................................................................................. 8910.5 Overview of chapter ............................................................................................ 9010.6 Reminder of learning outcomes............................................................................ 9010.7 Test your knowledge and understanding .............................................................. 90

Chapter 11: Modern portfolio theory ................................................................... 91

11.1 Learning outcomes and reading ........................................................................... 9111.2 Interest rates and the time value of money ........................................................... 9111.3 The return of a single security .............................................................................. 9211.4 The return of a portfolio ....................................................................................... 9211.5 Probabilistic considerations .................................................................................. 92

Contents

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11.6 Asset classes ....................................................................................................... 9311.7 What is a hedge fund? ......................................................................................... 9411.8 What is private equity? ........................................................................................ 9411.9 Market efficiency ................................................................................................. 9411.10 Optimal portfolio choice .................................................................................... 9511.11 The Sharpe ratio ................................................................................................ 9711.12 Overview of chapter .......................................................................................... 9711.13 Reminder of learning outcomes.......................................................................... 9711.14 Test your knowledge and understanding ............................................................ 97

Chapter 12: Security analysis and valuation ........................................................ 99

12.1 Learning outcomes and reading ........................................................................... 9912.2 Financial ratios .................................................................................................... 9912.3 Investment ratios ................................................................................................. 9912.4 Profitability ratios .............................................................................................. 10012.5 The profitability equation ................................................................................... 10112.6 Margin ratios ..................................................................................................... 10112.7 Efficiency ratios ................................................................................................. 10212.8 Leverage ratios .................................................................................................. 10212.9 Solvency and liquidity ratios ............................................................................... 10312.10 Overview of chapter ........................................................................................ 10312.11 Reminder of learning outcomes........................................................................ 10412.12 Test your knowledge and understanding .......................................................... 104

Chapter 13: The origins of modern strategy ...................................................... 105

13.1 Learning outcomes and reading ......................................................................... 10513.2 Two key definitions of ‘strategy’ ......................................................................... 10513.3 Porter and the five forces ................................................................................... 10713.4 Overview of chapter .......................................................................................... 11113.5 Reminder of learning outcomes.......................................................................... 11113.6 Test your knowledge and understanding ............................................................ 111

Chapter 14: Understanding organisational structures ....................................... 113

14.1 Learning outcomes and reading ......................................................................... 11314.2 Introduction ...................................................................................................... 11314.3 Organisational design ........................................................................................ 11414.4 Organisational boundaries: the issues ................................................................ 11514.5 Division of labour: the issues .............................................................................. 11614.6 Authority and communication: the issues ........................................................... 11614.7 Bureaucracy: the issues ...................................................................................... 11714.8 Know-how: the issues ........................................................................................ 11714.9 The components of organisation ........................................................................ 11814.10 The ‘M’ form .................................................................................................... 11914.11 Overview of chapter ........................................................................................ 12114.12 Reminder of learning outcomes........................................................................ 12114.13 Test your knowledge and understanding .......................................................... 121

Chapter 15: The analysis of organisations ......................................................... 123

15.1 Learning outcomes and reading ......................................................................... 12315.2 Strategy and organisational theory ..................................................................... 12315.3 Institutional theory ............................................................................................ 12515.4 Organisational ecology ...................................................................................... 12715.5 Critique ............................................................................................................. 12815.6 Organisational sociology and economics ............................................................ 129


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15.7 Overview of chapter .......................................................................................... 13015.8 Reminder of learning outcomes.......................................................................... 13015.9 Test your knowledge and understanding ............................................................ 130

Chapter 16: Contemporary strategic management ............................................ 131

16.1 Learning outcomes and reading ......................................................................... 13116.2 Introduction ...................................................................................................... 13216.3 Dynamic capabilities .......................................................................................... 13516.4 Core competences ............................................................................................. 13516.5 Critique ............................................................................................................. 13616.6 Strategy today ................................................................................................... 13716.7 Overview of the chapter ..................................................................................... 13716.8 Reminder of learning outcomes.......................................................................... 13816.9 Test your knowledge and understanding ............................................................ 138

Chapter 17: Strategy and decision-making ....................................................... 139

17.1 Learning outcomes and reading ......................................................................... 13917.2 Introduction ...................................................................................................... 13917.3 Efficient markets ................................................................................................ 14217.4 The decision process .......................................................................................... 14417.5 Overview of the chapter ..................................................................................... 14617.6 Reminder of learning outcomes.......................................................................... 14717.7 Test your knowledge and understanding ............................................................ 147

Chapter 18: The origins of marketing................................................................. 149

18.1 Learning outcomes and reading ......................................................................... 14918.2 Introduction ..................................................................................................... 14918.3 Definitions and a brief introduction to the history of marketing as a distinct ‘discipline’ of study ....................................................................................... 15018.4 Marketing and economic theory ......................................................................... 15018.5 Where does economic theory leave us? ............................................................. 15218.6 Marketing as ‘academic discipline’ .................................................................... 15218.7 The influence of other academic disciplines and marketing ................................. 15318.8 Types of marketing problems ............................................................................. 15318.9 The triumph of marketing? ................................................................................ 15418.10 Looking ahead: the marketing framework ....................................................... 15518.11 Overview of the chapter ................................................................................... 15618.12 Reminder of learning outcomes........................................................................ 15718.13 Test your knowledge and understanding .......................................................... 157

Chapter 19: The origins of marketing − the development of the practice ....... 159

19.1 Learning outcomes and reading ......................................................................... 15919.2 Introduction ...................................................................................................... 15919.3 Product1...............................................................................................................................................................................................160

19.4 Markets ............................................................................................................. 16119.5 Pricing ............................................................................................................... 16219.6 Channels and distribution .................................................................................. 16419.7 Brands and advertising ...................................................................................... 16519.8 Summary ........................................................................................................... 16719.9 Reminder of learning outcomes.......................................................................... 16719.10 Test your knowledge and understanding .......................................................... 167

Contents

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Chapter 20: Marketing in the digital age ........................................................... 169

20.1 Learning outcomes and reading ......................................................................... 16920.2 Introduction ...................................................................................................... 17020.3 Impact on conventional businesses .................................................................... 17220.4 Internet and branding ........................................................................................ 17420.5 Summary ........................................................................................................... 17420.6 Reminder of learning outcomes.......................................................................... 17520.7 Test your knowledge and understanding ............................................................ 175

Appendix 1: Syllabus .......................................................................................... 177

Notes


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Chapter 1: Introduction

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1.1 Introduction to the subjectThis subject guide is for the MN2177 Core management concepts course. It covers the main areas of general management and the intellectual foundations of management concepts as well as the functional areas of accounting, business strategy, finance, marketing, organisational behaviour and operations management. This is an alphabetical list, but each subject will be dealt with in an integrated fashion. The aim is to present the core concepts in each area, then to show the relationships between these concepts. This course forms the basis for the study of more specialised courses.

The course begins by showing how these functional areas emerged as subjects for academic study. It will pay particular attention to the social scientific origins of the management field in the core disciplines of economics, psychology and sociology. It then proceeds chronologically, illustrating the rise and development of the functional area disciplines in response to specific business problems.

1.2 Route map to the guideWe begin by looking at the pre-industrial roots of some management tools such as accounting and operations. It then deals specifically with the growth of the large industrial firm and the intellectual issues raised by this development. It describes the separation of ownership and control and the problems of agency. Several chapters deal with the issues of creating and managing an industrial labour force, looking at scientific management and the growth of theories rooted in psychology and sociology for the management of labour. The rise of collective labour organisation and the response of human resource management is then covered.

The second broad section of the course is more quantitative, showing how mathematical techniques were applied to the management of the firm. We then move on to consider, first, the rise of internal accounting measures in the firm and, second, financial accounting, particularly the firm’s reporting requirements. There is then a specific focus on the increasingly important area of finance; we look at risk, return and asset pricing, before turning to the financial analysis of the firm. These materials are presented in a non-technical way wherever possible.

The third broad theme is organisation and strategy; looking at the origins of business strategy and the various ‘schools’ within the strategy discipline. We pay particular attention to contemporary developments in business strategy and to strategic decision-making.

Finally, we look at the marketing field. The location of this at the end of the course has a two-part rationale. First, marketing was a later development than some other disciplines and it is possible to show how ideas were borrowed and used. Second, it synthesises economics, psychology and sociology and thus is a good ‘case study’ of the use of social science in management.


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1.3 SyllabusThe full syllabus for this course can be found in Appendix 1.

1.4 Aims of the courseThe aims of the course are to:

• give you a thorough grounding in the key management sub-disciplines

• provide an overview of the development of these disciplines

• illustrate the disciplinary anchors of these disciplines in sociology, psychology and economics.

1.5 Learning outcomes for the courseAt the end of the course, and having completed the Essential reading and activities, you should be able to:

• demonstrate an understanding of core management concepts

• apply these concepts to specific business situations

• analyse and evaluate managerial tools such as balance sheets and marketing plans

• explain the relevance of social science to business practice.

1.6 Overview of learning resources

1.6.1 The subject guideThis subject guide presents a basic introduction to the concepts of management covered in the course. It seeks to describe and explain the central concepts, and to provide reading lists and advice on the examination. However:

1. It is not a textbook and often refers you to other texts or readings.

2. If you do not follow up the Essential readings, you will find it very difficult to do well in the examination.

For each chapter, we recommend that you begin by reading the text of the guide itself and thinking about the ‘Test your knowledge and understanding’ question at the end of each chapter, then work through the Essential readings outlined at the start of the chapter. Further reading is identified should you wish to study a topic in more detail, and a comprehensive list can be found on the virtual learning environment (VLE).

The advice normally given to International Programmes students is that, if they are studying one course over a year, they should allow at least six hours of study every week.

1.6.2 Essential readingTo study this course, you need to study Essential readings from a range of textbooks and academic journals.

Textbooks to borrow or purchase

Make sure you have a copy of the core textbook for the course:

Willman, P. Understanding management: social science foundations. (Oxford: Oxford University Press, 2014) [ISBN 9780198716921].


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This will be referred to as ‘Willman’ in the reading lists at the beginning of each chapter, followed by the relevant chapter or theme numbers.

You will also need to refer to several chapters of the following book so either make sure that you have access to a library copy or purchase it:

Kaplan, R. and A. Atkinson Advanced management accounting. (Harlow: Pearson Education, 1998) third edition [ISBN 9780130802200].

Detailed reading references in this subject guide refer to the editions of the set textbooks listed above. New editions of one or more of these textbooks may have been published by the time you study this course. You can use a more recent edition of any of the books; use the detailed chapter and section headings and the index to identify relevant readings. Also check the VLE regularly for updated guidance on readings.

Other Essential readings

The guide also refers to various other Essential readings. We aim to ensure that all these are freely available to you. As a general rule, if an Essential reading is a journal article, you will be able to find it in the Online Library; if it is an extract from a book, registered students on the course will be able to download it from the VLE.

If you have any problems accessing any of the Essential readings, let us know by raising a query via the Student Portal.

1.6.3 Further readingPlease note that as long as you read the Essential reading you are then free to read around the subject area in any text, paper or online resource. You will need to support your learning by reading as widely as possible and by thinking about how these principles apply in the real world. To help you read extensively, you have free access to the VLE and University of London Online Library (see below).

A list of Further readings relevant to the subject matter covered in each chapter is given at the beginning of the chapters. You can find a complete list of all the Further reading and references cited on the VLE.

You may also find the following additional textbooks useful in relation to the different parts of the course:

Additional introductory reading

Witzel, M. Builders and dreamers: the making and meaning of management. (Harlow: Pearson, 2002) [ISBN 9780273654377].

Accounting

Atkinson, A.A., R.S. Kaplan, E. Matsumura and S.M. Young Management accounting. (Harlow: Pearson, 2011) [ISBN 9780273760160].

Business strategy

Grant, R.M. Contemporary strategy analysis. (Chichester: John Wiley & Sons, 2012) [ISBN 9781119941880].

Finance

Brealey, R.A., S.C. Myers and F. Allen Principles of corporate finance – global edition. (Maidenhead: McGraw Hill, 2013) [ISBN 9780077151560].

Marketing

Weitz, B.A. and R. Wensley Handbook of marketing. (London: Sage, 2006) [ISBN 9781412921206].


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Operations management

Hopp, W.J. and M.L. Spearman Factory physics. (Long Grove, IL: Waveland Press, 2011 reissue of 2008 edition) [ISBN 9781577667391].

Organisational behaviour

Buchanan, D. and A. Huczynski Organisational behaviour. (Harlow: Pearson, 2013) [ISBN 9780273774815].

1.6.4 Online study resourcesIn addition to the subject guide and the Essential reading, it is crucial that you take advantage of the study resources that are available online for this course, including the VLE and the Online Library.

You can access the VLE, the Online Library and your University of London email account via the Student Portal at: http://my.londoninternational.ac.uk

You should have received your login details for the Student Portal with your official offer, which was emailed to the address that you gave on your application form. You have probably already logged in to the Student Portal in order to register! As soon as you registered, you will automatically have been granted access to the VLE, Online Library and your fully functional University of London email account.

If you have forgotten these login details, please click on the ‘Forgotten your password’ link on the login page.

The VLEThe VLE, which complements this subject guide, has been designed to enhance your learning experience, providing additional support and a sense of community. It forms an important part of your study experience with the University of London and you should access it regularly.

The VLE provides a range of resources for EMFSS courses:

• Electronic study materials: All of the printed materials which you receive from the University of London are available to download, to give you flexibility in how and where you study.

• Discussion forums: An open space for you to discuss interests and seek support from your peers, working collaboratively to solve problems and discuss subject material. Some forums are moderated by an LSE academic.

• Videos: Recorded academic introductions to many subjects; interviews and debates with academics who have designed the courses and teach similar ones at LSE.

• Recorded lectures: For a few subjects, where appropriate, various teaching sessions of the course have been recorded and made available online via the VLE.

• Audiovisual tutorials and solutions: For some of the first year and larger later courses such as Introduction to Economics, Statistics, Mathematics and Principles of Banking and Accounting, audio-visual tutorials are available to help you work through key concepts and to show the standard expected in exams.

• Self-testing activities: Allowing you to test your own understanding of subject material.

• Study skills: Expert advice on getting started with your studies, preparing for examinations and developing your digital literacy skills.

http://my.londoninternational.ac.uk


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Note: Students registered for Laws courses also receive access to the dedicated Laws VLE.

Some of these resources are available for certain courses only, but we are expanding our provision all the time and you should check the VLE regularly for updates.

Making use of the Online LibraryThe Online Library (http://onlinelibrary.london.ac.uk) contains a huge array of journal articles and other resources to help you read widely and extensively.

To access the majority of resources via the Online Library you will either need to use your University of London Student Portal login details, or you will be required to register and use an Athens login.

The easiest way to locate relevant content and journal articles in the Online Library is to use the Summon search engine.

If you are having trouble finding an article listed in a reading list, try removing any punctuation from the title, such as single quotation marks, question marks and colons.

For further advice, please use the online help pages (http://onlinelibrary.london.ac.uk/resources/summon) or contact the Online Library team: [email protected]

1.7 Examination adviceImportant: the information and advice given here are based on the examination structure used at the time this guide was written. Please note that subject guides may be used for several years. Because of this we strongly advise you to always check both the current Regulations for relevant information about the examination, and the VLE where you should be advised of any forthcoming changes. You should also carefully check the rubric/instructions on the paper you actually sit and follow those instructions.

The examination will be a three-hour unseen written examination covering all aspects of the syllabus. In the examination, you will be asked to:

• Reproduce some knowledge. This will get you close to a pass, but you will also need to be able to apply this knowledge to the question.

• Apply knowledge to new situations. This will lift you to high lower-second or low upper-second marks, provided you get the questions right.

• Make new connections between topics and concepts. This will enable you to gain a first-class mark.

In the examination you must read the questions carefully to make sure you have understood them, choose the questions you wish to answer from the list available and manage your time carefully. You should always check the instructions on the examination paper before you begin and follow them carefully.

Remember, it is important to check the VLE for:

• up-to-date information on examination and assessment arrangements for this course

• where available, past examination papers and Examiners’ commentaries for the course, which give advice on how each question might best be answered.

http://onlinelibrary.london.ac.uk

http://onlinelibrary.london.ac.uk/resources/summon

http://onlinelibrary.london.ac.uk/resources/summon

mailto:onlinelibrary%40shl.london.ac.uk?subject=

Notes


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Chapter 2: Management and the firm

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2.1 Learning outcomes and reading

2.1.1 Learning outcomesBy the end of this chapter, and having completed the Essential reading and activities, you should be able to:

• explain key elements in the history of the firm

• discuss the main theories of firm formation

• outline several key managerial problems in the firm.

2.1.2 Essential readingWillman, Chapters 1 and 2.

2.1.3 Further readingChandler, A. The visible hand: the managerial revolution in American business.

(Harvard: Harvard University Press, 1977) [ISBN 9780674940529].Di Maggio, P. ‘Introduction: making sense of the contemporary firm and

prefiguring its future’ in Di Maggio, P. (ed.) The twenty-first century firm: changing organisation in international perspective. (Princeton: Princeton University Press, 2001) [ISBN 9781400828302].

Jensen, M.C. and W.H. Meckling ‘The theory of the firm: managerial behaviour, agency costs and ownership structure’, Journal of Financial Economies 3 1976, pp.305–60.

Williamson, O.E. ‘The modern corporation; origin, evolution, attributes’, Journal of Economic Literature 19 1981, pp.1537–68.

2.1.4 Works cited Arrow, K. J. The limits of organization. (New York: Norton, 1974)

[ISBN 9780393093230].Bromiley, P. The behavioral foundations of strategic management. (Oxford,

Blackwell, 2005) [ISBN 9781405124706].Cassis, Y. ‘Big business’ in Jones, G. and Zeitlin, J. (eds) The Oxford

handbook of business history. (Oxford: Oxford University Press, 2007) [ISBN 9780199263684; 9780199573950], pp.171–94.

Coase, R.H. ‘The nature of the firm’, Economica, 4(16), 1937, pp.386–405.Coase, R.H. The firm, the market and the law. (Chicago, Ill: University of

Chicago Press, 1988) [ISBN 9780226111001].Davis, G. Managed by the markets. (Oxford: Oxford University Press, 2009)

[ISBN 9780199216611].Doeringer, P. and M. Piore Internal labour markets and manpower analysis.

(Armonk, NY: M.E. Sharpe, [1971] 1985) [ISBN 9780873323321].Ghoshal, S. and P. Moran ‘Bad for practice: a critique of the transaction cost

theory’, Academy of Management Review 21(1) 1996, pp.13–47.Gospel, H. ‘The management of labor and human resources’ in Jones, G. and

Zeitlin, J. (eds) The Oxford handbook of business history. (Oxford: Oxford University Press, 2007) [ISBN 9780199573950], pp.420–46.

Landes, D.S. The Unbound Prometheus: Technological Change and Industrial Development in Western Europe from 1750 to the Present. (Cambridge: Cambridge University Press, 2003) [ISBN 9780521534024].

Michie, R.C. The global securities market. (Oxford: Oxford University Press, 2006) [ISBN 9780199280612].

Penrose, E. The theory of the growth of the firm. (Oxford: Oxford University Press, [1959] 2009) [ISBN 9780191570360].


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Pfeffer, J. New directions for organisational theory. (Oxford: Oxford University Press, 1997) [ISBN 9780195114348].

Prais, S.J. The evolution of giant firms in Britain. (Cambridge: Cambridge University Press, 1981) [ISBN 9780521282734].

Salaman, G. Class and the corporation. (London: Fontana, 1981) [ISBN 9780006355182].

Thompson, E.P. The making of the English working class. (London: Penguin, 1966) [ISBN 9780394703220].

Williamson, O.E. The economic institutions of capitalism. (New York: Free Press, 1985) [ISBN 9780684863740].

2.2 IntroductionThe corporate firm is a rather late arrival on the scene. Before the 19th century, only a handful of corporate-type entities existed and these were largely extensions of state power. Companies such as the Hudson Bay Company or the Dutch East India Company were important agents of empire. Governments granted them exclusive rights to trade and to conduct business in certain markets or products. So, for example, in 1670 the Hudson Bay Company was granted exclusive rights to fur trapping in large areas of Canada by the British government. It was a truly international venture, being the idea of two Frenchmen who gained a Royal Charter in Britain with the encouragement of Boston merchants. The company built forts, extended the speaking of English, founded cities and established distribution channels. The Hudson Bay Company still exists in Canada as a chain of department stores. At its inception, the company had 32 investors who shared risks and returns.

The Dutch East India Company, founded earlier, in 1602, funded risky long-distance trading in any items between Europe and the Far East. Investors, primarily in Amsterdam, would pool funds to support risky trips which, if successful, provided huge returns. This in turn prompted the development of the Amsterdam securities market in which spot and future contracts, call and put options, hedging and short selling were all possible (Michie, 2006, p.27). The number of investors was very large indeed. These entities have some important characteristics for the future analysis of the firm. Investors control supply side risk (with monopoly) before sharing investor risk, they get government to provide the support, and they diversify away some operational risk by embracing a range of uncorrelated activities.

2.3 The British experienceThe Industrial Revolution took off in Britain in the early 19th century and, as Michie notes, in the period before 1850, ‘The British economy remained mostly untouched by joint stock enterprise’ (2006, p.69). Enterprises were either entrepreneurially owned, as in manufacturing, or owned by local inhabitants, as in utilities and canals, and were funded by retained profit or bank loans. Railways changed everything, requiring large-scale finance but set against the prospect of steady low-risk returns from natural monopoly. This provided investors with an attractive alternative to government debt.

A crucial early development in Britain occurred in the textile industry: the growth of the factory. As well as the massive impact on output, it is significant for the development of management as an activity. Historically, cloth had been produced domestically (for example, in the home), usually by workers who had other concerns such as farming, using simple


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equipment and raw materials provided by an entrepreneur – who was also the purchaser of the finished product. This was a flexible and relatively low-capital-cost operation, but it left the entrepreneur with little control over production volumes. As the key historian of the Industrial Revolution has noted:

…the domestic weaver or craftsman was a master of his time, starting and stopping when he desired. And while the employer could raise the piece rates with a view to encouraging output, he usually found that this actually reduced output. (Landes, 1969, p.59)

This backward-sloping labour supply curve arose because the workers tended to have a subsistence income target, not a utility maximising one. Cutting the rates did no good either − it led either to the worker quitting or stealing some of the raw material in compensation (Salaman, 1981, p.27). In short, incentives alone did not work. What the entrepreneur needed was control of labour time and, to achieve that, work discipline and the absence of alternative income sources. The answer: the factory, in which workers were monitored (or managed). This was problematic because it was not, generally, a process they welcomed (Thompson, 1968).

Now this process is highly significant. The modern economic theory of the firm relies heavily on the ideas of monitoring, incentives and hierarchy. Historians have debated the relative importance of these contractual arguments for the growth of the firm versus technological ones; once the factory existed, it became possible to apply steam power and technological innovations in equipment to the raising of output, but the factory came first.

Economic structure aside, there is no doubt that the scale of firms increased. Prais (1976) quotes figures for both USA and the UK indicating that in both by the late 1920s the 100 largest firms accounted for approximately a quarter of all output. It was to rise to over a third by 1960. A vast amount of economic activity was moving from markets into firms. With this, a vast amount of employment came to be located in large, bureaucratic enterprises under formalised employment contracts. Let us look at the story in slightly more detail, and chronologically.

2.4 Railways and the second Industrial RevolutionAs Cassis (2007, p.175) puts it, ‘big business in the third quarter of the nineteenth century primarily meant the railroad companies’. They became exemplars in two ways. The first we have noted: they are almost the prototypical joint stock enterprise in that they needed lots of investors. The second concerns models of employment and management. They were the first modern organisations to develop ‘extensive hierarchies of managerial and white collar staff’ (Gospel, 2007, p.427). They engaged in systematic recruitment, set up promotional hierarchies and pay scales. Assuming lifetime or at least long-term employment, they introduced welfare arrangements such as housing, sick care and pensions. In the UK at least, they liked to recruit employees with a military or police background or relatives of those already employed; this led to a readier acceptance of the employment relationship as an authority relationship, necessary for a dispersed workforce. There were no unions until after the First World War.

By the turn of the century, as Cassis notes, in a variety of sectors:

The large enterprise of the turn of the twentieth century… appears as a centralised and vertically integrated firm, with its


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own distribution and purchasing facilities, whose various functions, including marketing, were entrusted to a hierarchy of salaried managers, and which tended to cluster around sectors where economies of scale and scope could be achieved through mass production. (2007, p.178)

This was more true of the USA than many parts of Europe.

The impact of the First World War was crucial. First, these mass-production industries – food, chemicals, oil, engineering – became central to the war effort, and expanded considerably. There was little product market competition. After the war, there were further merger waves in these sectors, particularly in Germany (Cassis, 2007, p.181). Big business became bigger. Second, there was a massive change to the labour market: labour markets were tight (because labour was scarce) and labour was crucial to the fighting of industrialised war. In Europe, a significant proportion of the male labour force was in the army, then dead. Unions became strong and employers had to bargain. Global securities markets collapsed. There was a mass of government debt to compete with equity investment. Governments wanted to control the securities markets in which this debt was traded and capital markets contracted. UK investors sold massive amounts of overseas securities and the London stock market became more localised. US investors had a very good war, and US markets – particularly New York – grew massively. As Michie puts it:

…the global securities market was reduced to a series of compartmentalized marketplaces only loosely linked to each other rather than the fully integrated system that was in full flow before 1914. (2006, p.204)

After the War, in the 1920s and 1930s, government involvement in business, particularly in European labour and capital markets, continued.

2.5 Market failure and managementCoase argues that firms exist because of market – or, more specifically, price mechanism – failure in the presence of transaction costs.

[T]he fact that it costs something to enter into…transactions means that firms will emerge to organize what would otherwise be market transactions whenever their costs were less than the costs of carrying out the transactions through the market. (1988, p.7)

Certain types of transactions in markets entail considerable costs of price discovery, negotiation and enforcement. For such transactions, Coase argues, it may be more efficient for what he terms an ‘entrepreneur’ to use ‘authority’ to direct resources to their most efficient ends. The boundary of the firm is set where the costs of organising a transaction within the firm equal the costs of carrying it out through the market. Within this boundary, the firm makes products or services; beyond it, it buys or sells them.

The revolutionary idea that Coase introduced in 1937 was the notion of transaction costs. Much later, he argued that without transaction costs firms would not exist, but nor would markets (1988, pp.6–8). Although economists were primarily interested in markets, they focused primarily on prices, and when they discussed market structure, they referred to the number of firms and products, rather than the ‘social institutions that facilitate exchange’ (1988, p.8) and thus defined transaction costs.


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Coase has pointed the way to an explanation of why so much economic activity took place outside markets, but it was many years before this insight was pursued − we see how below. But what the market failure approach did not do, was to offer a route to the study of the firm’s internal operations. The stylised ‘entrepreneur’ allocated resources using ‘authority’ to maximise ‘efficiency’ and set the boundary of the firm where market and hierarchy transaction costs equate. None of these concepts is defined, and they really do not tell you much about what went on within the firm. Coase is not really concerned with why some ‘entrepreneurs’ might be better than others. As a result, Coase made little impact – at the time – on the study of management either. However, in the longer term, the impact was substantial.

Several features of the Coase argument are replicated in much economic theorising about organisations down to the present day. First, in the pursuit of a theory of the firm, organisations are considered simple alternatives to markets such as the pursuit of efficiency by other means. There are two problems with this: first, firms may pursue multiple objectives (of which efficiency is one), and since these objectives may be in conflict, efficiency might not be the prime objective in the short term. Moreover, there is no obvious reason why markets could not emerge from organisational failure, rather than vice versa. In fact, much later, with the growth of outsourcing, they did, and one needed to explain why a ‘make’ decision turned into a ‘buy’ decision, with the corollary that firm size tended to shrink (Pfeffer, 1997).

Transaction cost arguments can provide a perfectly reasonable explanation of this shrinkage, but Coase did not pursue it. Second, as Penrose (1959) was to note many years later, markets do not make anything; they exchange but do not produce – firms do both and are thus much more than mere alternatives to markets. She makes the perceptive observation that there is a difference between a theory of the firm and the economics of the firm. Much later, Bromiley (2005, p.13) makes a parallel point about the difference between explaining why firms exist versus explaining what they do. For business strategy: ‘The existence of firms stands more as a constraint on theorizing than an interesting problem; a theory that predicts firms should not exist is clearly deficient.’

To use a metaphor: on the one hand, economists tended to see the world as a sea of markets with the occasional island (the firm). Those who study management tend to see the world as a desert of firms with the occasional oasis.

The second feature which has endured in economics is the representation of the firm in terms of one or more stylised actors; for Coase it is the ‘entrepreneur’, for later economists it is the ‘principal’ or ‘agent’. This simplification enables formal modelling but it is not receptive to ideas about organisational diversity or complexity; firms are timeless and geographically unembedded. The third feature is that intra-organisation relationships are treated in a very unproblematic way. Coase’s ‘entrepreneur’ exercised authority unproblematically, obeyed by those she hired. For Jensen and Meckling, monitoring ensures compliance and incentives provide motivation. Fourth, and related, rationality is an assumption, not a variable. Actors within firms are built in the same way as actors within markets, so that if one replicates the competitive conditions of markets within firms, the same behaviours will emerge. By extension, if an organisational feature is empirically common, logically it must be efficient, since inefficient organisations will disappear over time. Organisational diversity should disappear too.


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This has had consequences for the relationship between economic theories of the firm and empirical studies of what managers do, such as those discussed below. Specifically, as Pfeffer (1997, p.46) notes, the economic approach sees hierarchy design in terms of the prime need to control managers with self-interested goals and employees who are effort-averse. These assumptions about individuals within firms lead to the argument that hierarchies have control and coordination costs, rather than focusing on the positive impact managers might have on a firm’s performance. In fact, as we shall see, were one to design an organisation according to economic principles, it would probably be inoperable, primarily because of the reaction of employees to such organisational controls. However, before we turn to this, we need to look at the development of economic ideas about hierarchy. Coase looked at market failure, but what about the dynamics of hierarchy?

2.6 Transaction cost economicsWilliamson’s early work concerned managerial decision-making; he found that managerial discretion often undermined efficiency. Much later, he would articulate the problems of the ‘propensity to manage’ in two forms. It exists:

• instrumentally – managers pretend they can manage complexity, when they cannot

• strategically – managers pursue their own sub-goals (Williamson, 1985).

However, rather than turning to markets as the answer, he focused on the internal operations of the firm. The two aspects of ‘propensity’ rest on two assumptions about individual behaviour which are core to the entire project. Individuals are boundedly rational; they have limited capabilities to deal with information complexity and information uncertainty. Specifically, and crucially, they cannot write complete contracts. Second, individuals are opportunistic, in that they pursue ‘self-interest seeking with guile’ (1985, p.47); this is an extension of the conventional economic assumption about the pursuit of self-interest which may roughly be summarised as the idea that, since one cannot discover in advance who is trustworthy, organisations need to be designed to cope with a pandemic of dishonesty.

The third leg of this structure is the idea of asset specificity. The central issue is the existence of human or physical assets which are locked into a particular exchange relationship, for example, they have lower values elsewhere. This might be ex ante; for example, you have to build a pipeline to an oilfield and you are creating (in effect) bilateral monopoly. Or it might be ex post; for example, you have worked in the same firm for many years developing firm-specific skills. The three legs come together, as Bromiley notes:

… efficient operation may require investments that have little value outside that operation, but the parties cannot trust one another, nor can they write the perfect contract… bringing both parties to the transaction into the same company (internalisation) may be more efficient than doing the transaction in the market. (2005, p.97)

As with Coase, transaction costs in markets and hierarchies are important and Williamson borrows Arrow’s (1969) definition as follows:


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• Ex ante costs: the costs of drafting, negotiating and safeguarding an agreement

• Ex post costs: misalignment, haggling costs, the costs of running and referring to governance structures, ‘bonding’ costs.

But contractual governance costs can be optimised in either markets or hierarchies – ‘… transactions, which differ in their attributes, are aligned with governance structures, which differ in their costs and competences’ (1985, p.27) so that transaction costs are minimised.

The influence of transaction costs economics has been substantial, perhaps because of its scope, but also because of the nature of its assumptions. Asset specificity alone does not give you the firm; opportunism is key. Since opportunism is a very strong form of the self-interest assumption, it has attracted substantial criticism. It is a very negative view of human propensities (Ghoshal and Moran, 1996), it may well be ethnocentric and it is not empirically grounded. However, it not only gives you a theory of firm formation but also an approach to the optimisation of firm structure; for example, Williamson explains the growth of the multi-divisional firm in terms of efficiency – it economises on the transaction costs of capital markets and minimises managerial activity detracting from shareholder value (1985, p.288).

Activity 2.1

What assumptions about human behaviour does Williamson (1985) make? Try to make a list.

Williamson also develops an approach to the employment contract which is of generic interest to the relationships between owners, managers and labour, which we discussed at the outset of this chapter. Employment contracts are often characterised in economics as incomplete. They also have asymmetric authority (the employer issues instruction), asymmetric information (sometimes in favour of the employee), asset specificity (the skills and equipment used are often not transferable) and they are often of long duration. They are, empirically, the building blocks of hierarchy since monitoring and incentives are central to them. Williamson’s approach can be illustrated by reference to Figure 2.1.

Williamson (1985) discusses three contractual possibilities. Under spot contracting the parties contract at T1 that, when event 1 occurs, the exchange of money for effort (X1) will occur. If this occurs once, the spot contract form is efficient. However, if the game is repeated, two problems emerge. First, the transaction costs are high, both ex ante and ex post. Second, opportunism – by both parties – is likely. Under contingent claims contracting, the parties at T1 try to write a comprehensive contract covering all events and their related effort bargains. This fails the bounded rationality test in many circumstances, particularly where the number of discrete events is high. The third option is adapted from Simon (who was Williamson’s PhD supervisor). According to this approach the parties agree to an authority relationship. The employee, in exchange for a single comprehensive effort bargain, agrees to allow the employer the authority to make state-of-the-world definitions across a range of events. The problem here is how to define the acceptable range of events. However, an authority relationship economises on transaction costs and does allow some form of monitoring.


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Spot contractsT1..........E1..........X1T2..........E2..........X2T3..........E3..........X3Contingent claims

E1..........X1E2..........X2E3..........X3

Authority relation

T1..........T2.......... ..........X2T3..........

Figure 2.1: Alternative contractual forms

What Williamson comes up with as the optimal form relies very heavily on Doeringer and Piore’s (1971) idea of an ‘enterprise market’. He emphasises several elements: internal promotion ladders to encourage on-the-job training and cooperation, pay rates attached to jobs within these ladders (rather than individual performance), ascending with position on the hierarchy, moderate rather than intensive metering, and job security bolstered by a grievance or arbitration procedure to resolve disputes. He is, in effect, describing the institutional structure of managerial capitalism – what Davis (2009, pp.195–200) has referred to as ‘corporate feudalism’ – in which long-term attachments between firms and employees, bolstered by firm-specific benefits and privileges such as pensions, profit sharing and long-term employment, characterised not only the fabric of managerial work but, increasingly with the advent of labour unions and particularly in the USA, that of all permanent employees. And a key part of the efficiency gains that come from this considerable investment in hierarchy comes from its impact on the behaviours of those in the hierarchy. His distinction between ‘consummate’ and ‘perfunctory’ cooperation outlines but does not perform a theory of value creation by managers.

Consummate cooperation is an affirmative job attitude – to include the use of judgement, filling gaps, and taking initiative… Perfunctory cooperation, by contrast, involves job performance of a minimally acceptable sort … where… incumbents… need merely to maintain a slight margin over the best available inexperienced candidate.

Based on findings from different disciplines, understanding this difference provided the motivation for the development of theories about both management and labour performance.

Activity 2.2

What are the advantages to employers of long-term relationships with employees?

2.7 Overview of chapter In this chapter, we have tried, first, to describe in brief the emergence of the large firm and, second, to outline the first main attempt to develop a theory of it. This theory has a number of features that are significant for the chapters to follow.

1. It emerges essentially as a negative explanation about market failure: firms are implicitly second-best structures that arise when markets fail. Logically, one optimises the performance of a firm hierarchy by making sure it runs as close to being a market as possible. Within


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firms, managers potentially engage in problematic behaviours because the structures bring out the worst in them – opportunism. Coase is the precursor of a range of anti-managerial theories of organisation.

2. The theory is not empirically based. Not only is it surprising that economics developed a theory of the firm long after firms came to dominate industries (and then ignored it), it is surprising that the theory was not informed by any extensive observation of industry structure or firm behaviour. Empirical examination of the internal operation of the firm has remained unfashionable within economics and, as we shall see, it does not infect the modern field of organisational economics very much either.

3. Because the transaction cost approach remained marginal to economics for 30 years, and economics remained relatively uninterested in the firm, a space was created into which business disciplines such as marketing, organisational behaviour and strategy moved. Academic economics becomes much more involved with the study of managerial behaviour than with the growth of the economics of strategy and organisation and, less directly, of financial economics from the 1960s.

2.8 Reminder of learning outcomesHaving completed this chapter as well as the Essential reading and activities, you should be able to:

• explain key elements in the history of the firm

• discuss the main theories of firm formation

• outline several key managerial problems in the firm.

2.9 Test your knowledge and understandingWhat is transaction cost economics and why is it important for the theory of the firm?

Notes


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Chapter 3: Taylorism, motivation and performance

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• describe the main elements of Taylor’s approach

• discuss the strengths and limitations of scientific management

• explain the main elements of the human relations approach.

3.1.2 Essential readingWillman, Theme 2.

3.1.3 Further readingBraverman, H. Labor and monopoly capital. (New York: Monthly Review Press,

1974) [ISBN 0853453403]; 1988 edition [ISBN 9780853459408].Guillen, M.F. Models of management: work, authority and organisation in

a comparative perspective. (Chicago: Chicago University Press, 1994) [ISBN 9780226310367].

McGregor, D. The human side of enterprise. (New York: McGraw-Hill, [1960] 2006) [ISBN 9780140091243] Chapter 1: Management and scientific knowledge.

Taylor, F.W. The principles of scientific management. (New York, Harper, 1923) [ISBN 9781599866796] Chapter 1.

3.1.4 Works citedAbernathy, W.J. The productivity dilemma. (Baltimore: Johns Hopkins, 1978)

[ISBN 9780801820816].Batt, R. and Moynihan, L. ‘The viability of alternative call centre production

models’, Human Resource Management Journal, 12(4), 2002, pp.14–34.Burawoy, M. Manufacturing consent: changes in the labor process under

monopoly capitalism. (Chicago: University of Chicago Press, 1979) [ISBN 9780226080383].

Granovetter, M. ‘Economic action and social structure: a theory of embeddedness’, American Journal of Sociology 91 1985, pp.481–510.

Lewchuk, W. ‘Fordism and British motor car employees, 1896–1932’ in H.F. Gospel and C.R. Littler Managerial strategies and industrial relations: an historical and comparative study. (Farnham: Ashgate, 1983) [ISBN 9780435323653].

Marglin, S. ‘What do bosses do?’, Review of Radical Political Economics 6 1974, pp.60–112.

Mayo, E. The human problems of an industrial civilization. (New York: Macmillan, 1933).

Nelson, D. Frederick W. Taylor and the rise of scientific management. (Madison: University of Wisconsin Press, 1980) [ISBN 9780299081607].

Nelson, D. A mental revolution: scientific management since Taylor. (Columbus, OH: Ohio State University Press, 1992) [ISBN 9780814205679].

Norwich, J.J. A History of Venice. (London: Allen Lane, 1982) [ISBN 0713915625].

Quattrone, P. ‘Accounting for God: accounting practices in the Society of Jesus’, Accounting, Organisations and Society 29 2004, pp.647–83.


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Rose, M. Industrial behaviour. (London: Penguin, 1988) [ISBN 0140091335].Sabel, C.F. Work and politics: the division of labor in industry. (Cambridge:

Cambridge University Press, 1982) [ISBN 9780521230025].Thompson, E.P. The making of the English working class. (London: Penguin,

1966) [ISBN 9780394703220].Willman, P. Technological change, collective bargaining and industrial efficiency.

(Oxford: Oxford University Press, 1986) [ISBN 9780198272625].Witzel, M. Builders and dreamers: the making and meaning of modern

management. (Harlow: Prentice Hall (2002) [ISBN 9780272654377].Wren, D.A. The History of Management Thought. (New York, Wiley, 2005).

[ISBN 9780471669227].

3.2 IntroductionThe 19th and early 20th centuries in Europe and USA were, arguably, characterised by two features relevant to the design and conduct of business. The first was a belief in technological progress (and its benefits). The second was an inclination towards optimisation; put differently, if one thought systematically and rationally about a business problem, one could improve the chosen dependent variable – efficiency, productivity, profits, etc. In the absence of a theory of the firm, many analysts and practitioners felt the appliance of science to the factory could yield substantial benefits. Many had an engineering background (Witzel, 2002) and, again arguably, saw the optimisation problem as an engineering problem.

The problem to be optimised was how to run the most efficient business. Intellectual furniture existed; there were not many examples of large-scale manufacturing businesses but there was a history of large-scale organisation in two fields: government (particularly military) and religion (particularly international religious orders). In these organisations, many ‘managerial’ techniques had been developed. I offer two examples.

Jesuits knew about accounting. They had resources, international reach and an objective: saving souls. But,

A strictly economic analysis of the nature and role of accounting as an instrument for allocating, monitoring, and administering resources within the hierarchical structure of the Society of Jesus would leave undiscovered important aspects of the practices deployed by the Order to manage, organise, and account for its multifaceted activities. (Quattrone, 2004, p.675)

How to optimise the allocation of resources to maximise the saving of souls? The first thing one needs is a management accounting system to tell you where the resources come from and go to. The second thing, more controversial perhaps, is you have to put an economic value on a soul. At the margin, one might have to choose which soul to save or whether the expenditure was worth the return.

Venice knew about fighting wars at sea to generate and protect trade (they are not the only historical example). In the Arsenale, they built assembly lines.

[Venice] could standardise designs and build up stores of spare parts, making it possible to complete even major refits in a fraction of the time… the designs themselves, as well as the techniques, could be revolutionized….One of the secrets of Venice’s rise to power lay in the fact that she never saw the twin necessities of defence and commerce as altogether separate…the nobles were merchants and the merchants noble… (Norwich, 1982, p.109)


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How to maximise throughput and reduce production times; standardisation of inputs, process and product is an important component. Alignment of defence and commercial interests is another. You could use the ships to fight and then carry the spoils home.

How are these examples relevant to the operation of the industrial firm centuries later? First, they indicate that techniques for resource allocation and mass production had a long history in ostensibly non-commercial operations which could be adapted; there was something to work on for engineers to optimise. Second, they hint at the source of the agency problem in business. Military operations (which are a matter of life and death) and religious organisations (which are a matter of afterlife and eternal death) can generally exert more forces for cooperation or compliance on organisational participants than organisations that rely primarily on shared financial interests. Borrowing the techniques from such organisations did not borrow the underlying cooperation.

In much of the West, for the majority of the early period of industrialisation, it was not entirely clear why a pre-industrial workforce would wish to become an industrial one (Marglin, 1974; Thompson, 1968). If one invested in a factory in, for example, the cotton industry in England (which was important for the first Industrial Revolution), the capital investment required in steam production and productive equipment required high rates of utilisation which in turn required long hours of work. Control of absenteeism, turnover and simple inactivity was required to generate a rate of return. What incentives could be used to exact this? Money is one obvious answer, but we saw also the problems with simple incentives in the last chapter. Moreover, what would one buy with it? Penalties are another; throughout the 19th century in England, employment in factories was governed by the ‘master and servant’ Acts; the presumption of obedience was central. A third was the removal of opportunities. Prior to factories, farmers and their families used to spin cotton as an activity supplemental to their central activities. With the advent of expensive machinery, such an approach became hazardous to profit, and the need for a workforce with no other means of support became paramount.

Many management ‘theorists’ emerged in the late 19th and early 20th centuries, convinced that applying scientific principles to the management of firms would result in improvements in efficiency and productivity and, for the more messianic, a better world. The term ‘scientific management’ has often been applied to the ideas they promoted. We will look at just the most influential, F.W. Taylor, however, several characteristics of the set are relevant. First, they were obsessed with efficiency as an outcome variable; many of their works display a strong tendency to sample on this dependent variable, often with erroneous results. Second, they believed in general rather than specific solutions; their recipes were in principle universally applicable and promoted one best way of doing things. Third, they inclined, like Emerson and Fayol, to sets of points or principles which summarised their approach; 12 principles of efficiency for Emerson, 14 points of administration for Fayol. Fourth, since they were often engineers, they saw agency problems in engineering terms. Employees were important appendages to machines ‘and in the interests of plant efficiency should be treated at least as well as we treat machines’ (Emerson, cited in Witzel, 2002, p.227). Some were even military engineers who saw the exercise of authority as unproblematic.

An enormous amount has been written about Taylor (Braverman, 1974). He tends to be better thought of by those in operations management and


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research who are interested in the optimisation of processes than by those in organisational behaviour who are interested in the human response to this. Frederick Taylor argued that ‘scientific management’ consisted in devising the one best way to complete a task and then ensuring the workmen closely followed the rules, using supervision and monetary incentives. Five principles were central.

• The separation of conception from execution: managers analysed and designed work tasks, employees performed them.

• Simplification of tasks: each task was broken down into simple components which were then aggregated to exclude unnecessary efforts.

• Close supervision: employees were closely monitored to ensure adherence to best practice.

• Strict obedience to ‘one best way’: employee innovations in work design were excluded.

• Monetary performance incentives were applied to output generated in this way.

After initial successes, Taylorism was adopted by large firms such as DuPont and Ford. It was seen at the time as industrial science not capitalist ideology – Lenin was a fan. As we shall see, elements of it were adapted much later. It provided one basis for the modernisation of Japanese industry in the post-Second World War period. Its utilisation in service businesses grew as scale economies were pursued. ‘The factory of the past becomes the office of the future’ (Batt and Moynihan, 2002). However, it generated some of the characteristic problems of later versions of agency theory. The model ‘first-class’ workman in Taylor is a passive and obedient agent, indeed selected on those characteristics.

Let’s put the above list together, again in a negative way.

• Separation of conception from execution – the operator has no incentive to learn or share learning. If the operator does learn a better way, he is likely to appropriate the benefits.

• Simplification of tasks – skills are not worth developing, either for the firm or the employee. Indeed ‘de-skilling’ and thus loss of market power by employees is seen as one major consequence of the application of Taylorism (Braverman, 1974).

• Close supervision – many supervisors are needed and overhead rises. Taylorist firms develop high supervisory ratios, and efficiency losses.

• Strict obedience to ‘one best way’ – attracts the intrinsically obedient who are unlikely to innovate.

• Monetary performance incentives – given that people respond to symbolic rewards – this is expensive and likely to generate a simply calculative approach by the employee.

In fact, Taylorism depends on what in a different context Granovetter (1985) has referred to as both an oversocialised and undersocialised idea about the employee: oversocialised into obedience and undersocialised in being entirely motivated by money, not intrinsic rewards. Moreover, Taylor’s optimal employee is individually selected not collectively organised; in early 19th-century USA, this emerged as a problem.

Activity 3.1

Consider an organisation you know − school, shop, office. What would be the advantages and disadvantages of applying scientific management to that organisation?


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Let’s look at the model of organisation and of management. Organisations are seen as machines. Some of the machines are people but they can be managed the same way: managers think, workers do. Standardisation of (labour) input, work process and product output are the sources of efficiency; this is a mass-production model. The market does not send in shocks that disturb the organisation of work on a regular basis. Employee recalcitrance is endemic and monitoring is permanent. Task- or peer-based intrinsic rewards do not operate and the employee is homo oeconomicus. How well has Taylor understood the employee as economic man?

We would argue that in at least two respects the Taylor approach anticipates later developments by academic economists, albeit not formally.

• In the emphasis on the importance of selection and fit, there is understanding of both moral hazard and adverse selection.

• In the rigid adherence to the separation of conception from execution, there is a grasp of the problems of information asymmetry.

3.3 Scientific management: the apogeeScientific management in general and Taylor’s version in particular left a substantial legacy. The engineering efficiency approach to the design of operations generated huge returns to scale, and many large businesses in chemicals, engineering and car manufacture adopted it (Nelson, 1992). Much of the thinking was to become incorporated in the academic disciplines of operations research and management, which in turn found a central place in the MBA curriculum. For many, the ultimate expression of the engineering approach to production management came in the car industry, and in particular the operations of Ford, the most successful of the early car manufacturers.1

Ford dominated the early history of the car industry, both in success and failure. The Model T introduced in the 1920s was based on a strategy of low price and simple design; this generated huge growth in car ownership and thus market size. The production approach underpinning this was standardised design, assembly line technology and mass production. This had a number of implications. For Ford, the most serious was inflexibility; his early factories could only produce Model T cars, and retooling for product innovation required long-term plant closure that led to permanent loss of market leadership to General Motors (Lewchuk, 1983).

In assembly line car production, capacity utilisation is vital. Mass production degenerates into batch production whenever the line is stopped or product rectification is required; fixed capital costs are high, and the gap between capacity and output needs to be small. This is exacerbated by vertical integration; car assembly – the final operation before distribution and sale – has lower minimum efficient scale than upstream operations such as engine manufacture and body production, so interruptions to assembly within an integrated car manufacturing operation generate costs throughout the firm. Assembly is also the most labour-intensive phase of production.

1 This section relies on Abernathy (1978) and Willman (1986).


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PRESS SHOP BODY SHOP PAINT SHOPStamping of body panels

Steel: sheet strip and coil

PanelsSub-assemblies

Bodyassemby

Body inwhite

Clean, prime,paint body Painted body

ASSEMBLY PLANT

Trim lines Finalassemby

Test and rectification

Finished car shipped to distributors/dealers

Thousands of parts and trim items

Component plants Engine dress

and rear end assembly

RAW-MATERIAL SUPPLIERS

Steel: rod and bar stock

Forging of high-strength parts

FORGE

Casting of engine blocks, crankshafts etc.

FOUNDRY

Machining

Machining

ENGINE PLANT

Engine assembly and test

TRANSMISSION PLANT

Transmission assembly and test

Engine

Transmission

Figure 3.1: Cost components of car assembly

Figure 3.1 identifies the cost components of car assembly. There are three sets. First, capital equipment in the form of plant layout; this defines capacity and is fixed. The next two concern labour. The first is the hourly cost of labour. If the system is optimised at 100 per cent operation, these are the only costs. The third component represents lost capacity; the source of most lost capacity is labour behaviour, and control of this is at the centre of the derivative of Taylorism that some commentators call ‘Fordism’. The key dependent variable is ‘man hours per car’, for example, the labour input to each unit produced. Absenteeism, errors in work, stoppages due to disputes and the need for direct supervision inflate this denominator.

The key elements of the labour strategy that supports optimisation were as follows.

• The simplification of tasks and high assembly line speeds; automation of simple tasks where possible.

• Use of high levels of hourly pay and the avoidance of bonuses. Ford introduced the ‘$5 day’2 to attract and retain the labour required, and to reduce absenteeism.

• Close supervision of employees and strict discipline.

• Avoidance of labour unions.

In order to do this, Ford favoured company towns and company housing. Most significantly the firm invested in a ‘personnel department’ that not only provided welfare but also acted as a labour police force, monitoring absence, sickness, agitation and dissent. Optimising workforce performance was the key to optimising capacity utilisation. The main Taylorist absentees from this labour-management formula were incentives and heavy supervision; assembly line speeds substituted for both (Guillen,1994, p.56).

Many of these considerations still apply to the modern car industry. By extension, they apply to many capital-intensive mass-production operations. Labour costs may be a small proportion of total costs, but labour control becomes vital. As Braverman has put it:

2 This was a lot of money at the time.


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Taylorism dominates the world of production; the practitioners of ‘human relations’ and ‘industrial psychology’ are the maintenance crew for the human machinery. (1974, p.86)

How did psychology intervene, and what is ‘human relations’ in this context?

3.4 Engineering and psychologyThere were parallel but discrete origins in the USA and UK. In the USA, Munsterberg at Harvard – an admirer of Taylor – became concerned with fatigue, monotony and learning in work; he advocated selection testing and motivational tools. In the UK, the influence of wartime research on soldiers was deployed in the 1920s by Myers, among others, to study stress and fatigue and to develop recommendations on the optimal working day and rest periods and the avoidance of accidents and absenteeism (Rose,1988). The unit of analysis tended to be the individual worker (and by extension individual differences), but the concern was less directly with individual well-being and more with those variables also of concern to scientific management. As Wren puts it:

While the engineer studied mechanical efficiency, the industrial psychologist studied human efficiency with the same goal in mind of improved overall greater productivity. Acceptance by industry of the heretofore ivory tower psychologist was facilitated by the psychologist’s interest in efficiency. (2005, p.193)

A paradox of early theorising about employee behaviour was that both scientific management and the early psychologists focused on the individual as the unit of analysis but the employee response to both frequently involved collective action, which in turn generated the high levels of labour conflict that were of so much concern. An alternate approach relied on late 19th-century sociology and focused on the group.

Durkheim focused on the bonds that held societies together to generate solidarity. Traditional societies were bound together by kinship, religion and similarity; this generated ‘mechanical solidarity’. The division of labour, the growth in differentiation of status and the scale of modern societies broke down these bonds and generated anomie; this was an individual state of confusion, normlessness and anxiety, but it was generated by the absence of any groups or institutions that could provide a set of norms and values appropriate to a highly differentiated society – ‘organic solidarity’. Durkheim’s work contains far more analysis of societies with mechanical solidarity than those with organic and he is a little short on detail about how it might be achieved. The enduring legacy for the management field was his concept of the individual as plastic, shaped and shapeable by membership of norm-generating groups.

To get from this to a set of management techniques one needed something approaching an optimisation model – and it came from economics. Pareto, a 19th-century polymath who was an engineer, economist and sociologist, referred to the idea of a ‘social system’ – characterised by interdependent and varied components with self-equilibrating tendencies. This went into Harvard University as a broad idea and came out as a major influence on academic sociologists such as Parsons and Homans on the one hand and, on the other, as a central plank of what became the ‘human relations’ school – the idea of the factory as a social system that could achieve


24

equilibrium. In order to explore this approach and its effect on modern management theory, let us look at its most famous piece of research – the Hawthorne studies.

The Hawthorne studies took place in the USA in the eponymous plant of Western Electric from 1924–1933.3 It was a massive factory; by 1929, 40,000 men and women worked there. Western Electric was one of the forerunners in applying scientific management to its production units and it was regarded as a well-run plant. Numerous researchers using a variety of methods performed a series of behavioural experiments and deployed interviewing and observation techniques in ways that would get modern researchers fired and, given that the experiments involved some behavioural manipulations and physical deprivations, maybe sued (Wren, pp.370–73). In fact, the most widely quoted finding is simply a method flaw. Over time, researchers realised that every time they paid attention to a group of workers (subjected them to a ‘treatment’) output rose temporarily, then fell back – the ‘Hawthorne effect’.

The studies began with a concern for physical environment. The illumination tests, 1924–1927, subjected groups to lighting variations and, broadly, found no correlations between lighting and productivity. Subsequently, the ‘relay’ tests, 1927–29, involved experimental alteration of bonus arrangements, rest periods and hours of work, with mixed results. A third set of studies, in the ‘Bank Wiring Room’, probably had the greatest impact. Researchers discovered output restriction under incentive schemes that was enforced by informal groups. Workers felt that if they produced too much output, management would cut the rates, and if too little, they would be disciplined. Informal work groups emerged enforcing output norms lower than those management wanted, using emotional and physical sanctions. Further studies analysed informal group structure in depth, finding that supervisory behaviour with respect to informal groups was important. Managers who listened and communicated well were likely to be more integrated into work groups.

The results had potentially radical implications. Workers would act against self-interest by obeying group output norms. Managers who integrated with informal groups, using what would later be called a management ‘style’, gained much better understanding of group structure and how to manipulate it. Such groups could be used to improve output. In these studies we see the seeds of the organisational behaviour discipline – in its concern with intrinsic (non-economic) motivators, teams and team building and leadership. We can also see a logic which leads to the development of the modern human resource function; individual and collective affect (emotional states) may have an impact on firm performance, and it is thus worth investing to control these variables. More immediately, it allowed one of the key researchers, Elton Mayo, to identify worker discontent as anomie remediable by intervention designed to restore Pareto equilibrium to the social system of the factory. The intervention points were selection of workers, allocation and organisation of tasks, leadership style and the construction of teams (Guillen,1994). To quote Mayo:

The hallmark of human-relation theories is the primacy given to organizations as human cooperative systems rather than mechanical contraptions…

Any company controlling many thousands of workers…tends…to lack any satisfactory criterion of the actual value of its methods of dealing with people. (Mayo, 1933)

3 This section relies on Rose (1988).


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Since cooperation was the objective, unions were peripheral to the analysis.

Hawthorne in particular and the human relations school in general have been subject to a number of criticisms. However, the impact of human relations thought on subsequent academic research agendas is considerable, and the notion that the ‘mechanical’ and the ‘social’ systems of industrial enterprises must be jointly maximised was exported from the USA, most particularly in the work of the Tavistock Institute.

In an influential study, Guillen has analysed the theoretical development of both scientific management and human relations thought, and their impact on business practice in four Western countries. He argues that:

The development of engineering as a profession was the direct cause of scientific management, much as the development of social-psychological science accounted for the appearance of the human relations paradigm. (Guillen, 1994, p.26)

Scientific management adoption always precedes human relations adoption, and indeed in Germany he finds, for various reasons, human relations thinking has little effect on practice. The more consistent impact of scientific management on production is associated with the simultaneous development of cost accounting, production and inventory controls and incentive schemes (also developed by engineers) (1994, p.41).

If, as in the USA, human relations thinking emerges as a solution to problems of labour unrest generated by the application of scientific management, its ideological component becomes important. Several eminent sociologists in the 1950s, such as Daniel Bell, C. Wright-Mills and W.H. Whyte, saw human relations as a manipulative technique promoting solely managerial ends; later Marxist sociologists such as Braverman (quoted above) saw it as ‘manufacturing consent’ (see also Burowoy, 1979, and Sabel,1982). In Britain, however, it gave rise to a set of concerns about humanising the workplace through the reorganisation of work.

Activity 3.2

One key question emerging here is the relative primacy of engineering and social considerations. Does one, as Braverman implies above, (a) optimise on process efficiency and productivity and mould social concerns around that (as the human relations approach implies), or (b) is it worthwhile to choose a sub-optimal production technique because it has compensatory effects on the workplace as social system which, in turn, positively affects some performance measure?

3.5 Overview of chapter1. Early theorists were concerned to optimise production in large firms

using both existing organisational tools and a systematic ‘engineering’ approach.

2. This became systematised in the influential work of Taylor whose techniques were widely adopted and developed.

3. However, widespread concern about the approach to employees led to the application of social psychology to understanding worker behaviour, also in the interests of increasing performance.

4. This in turn led to the emergence of the ‘human relations’ approach.


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• describe the main elements of Taylor’s approach

• discuss the strengths and limitations of scientific management

• explain the main elements of the human relations approach.

3.7 Test your knowledge and understandingWhat was scientific management? Is it still influential in business today?

Chapter 4: The rise and decline of labour

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• outline the key features of the history of labour unions

• describe the potential benefits of unions to firms and employees

• discuss the reasons for union decline in modern industrial societies.

4.1.2 Essential readingFreeman, R. and Medoff, J. What do unions do? (New York: Basic Books, 1984)

[ISBN 9780465091324] Chapter 11.Willman, Chapter 3, Theme 3.

4.1.3 Further readingGospel, H. ‘The management of labor and human resources’ in Jones, G. and

J. Zeitlin, J. (eds) The Oxford handbook of business history. (Oxford: Oxford University Press, 2007) [ISBN 9780199573950], pp.420–47.

Pencavel, J. ‘The demand for union services: an exercise’, Industrial and Labor Relations Review 24(2) 1971, pp.180–90.

4.1.4 Works cited Berg, M. The machinery question and the making of political economy.

(Cambridge: Cambridge University Press, 1980) [ISBN 9780521227827].Blanchflower, D. and A. Bryson ‘Changes over time in union relative wage

effects in the UK and the US revisited’, Chapter 7 in J.T. Addison and C. Schnabel (eds) International handbook of trade unions. (Cheltenham England and Northampton Mass., USA: Edward Elgar, 2003) [ISBN 9781840649796].

Blanchflower, D. and A. Bryson ‘What effect do unions have on wages now?’, Journal of Labor Research 25(3) 2004, pp.383–414.

Braverman, H. Labor and monopoly capital (New York: Monthly Review Press, 1974) [ISBN 9780853453406].

Crouch, C. Trade unions: the logic of collective action. (London: Fontana, 1982) [ISBN 978006358732].

Davis, G. Managed by the markets. (Oxford: Oxford University Press, 2009) [ISBN 9780199216611].

Freeman, R. and J. Rogers What workers want. (Ithaca: ILR Press, 1999) [ISBN 9780801485633].

Gomez, R., A. Bryson and P. Willman ‘Voice transformation: the shift from union to non-union voice in Britain’ in A. Wilkinson et al. (eds) The Oxford handbook of participation in organisations. (Oxford: Oxford University Press, 2010) [ISBN 9780199207268].

Hobsbawm, E. The age of extremes: the short twentieth century, 1914–1991. (London: Michael Joseph, 1994) [ISBN 0718133072]. Vintage (1996) [9780679730057].

Marglin, S. ‘What do bosses do?’, Review of Radical Political Economics 6 1974, pp.60–112.

Tuchman, B. The proud tower. (London: Macmillan, 1966) [ISBN 9781299237247].


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Willman, P. Technological change, collective bargaining and industrial efficiency. (Oxford: Oxford University Press, 1986) [ISBN 9780198272625].

Willman, P., T.J. Morris and B. Aston Union business: trade union organisation and financial reform in the Thatcher years. (Cambridge: Cambridge University Press, 1993) [ISBN 9780521417259].

4.2 IntroductionAlthough circumstances in the 19th century differed between Western countries, particularly between nation-states in Europe and the immigrant society of the USA, it is fair to say that industrialisation in both required the creation of an industrial labour force. The rhythms, seasonality and control structures of a pre-industrial and agrarian society were very different from those needed by factory systems in the 19th century. This was the transition that obsessed both Marx and Durkheim. Although their analyses were very different, they were both concerned with the disappearance of one labour pattern and its replacement by another. In practice, it was a process that was both political and economic, full of conflict, and lasting in its impact on both industrial practice and academic theory.

This chapter is not a full history of this process. It is structured around several propositions. First, industrialisation in general and the factory system in particular required a labour force substantially different both in its social structure and its labour practices from what preceded it. Second, this was neither a comfortable nor welcome process for many members of that labour force, and their resistance to it took the form both of unionisation and political action. Third, the performance attributes of that labour force were sufficiently central to the success of specific firms that strategies for the management of workforces needed to move beyond compulsion to cooperation: capital-intensive operations required both skills and continuity, and both gave employees bargaining power. Fourth, the generation of compliance necessitated a specific set of managerial activities which began as labour welfare and continues as human resource management.

Eric Hobsbawm (1994), a Marxist historian, coined the term ‘the short twentieth century’ to refer to the period between 1914 and 1991. It covers the period from the start of the First World War to the collapse of the former USSR. It was in his interpretation one long set of wars, conducted by different means but which, particularly for Europe, resulted in major changes for labour and labour markets. Millions of employees put on uniforms and were killed. Immigration to the USA aside, international labour mobility shrank massively. But production and labour compliance became central to the fighting of wars that were won, increasingly, by the industrial production of food, energy and fighting machinery. In the latter part of the period, the central conflict was between a capitalist system and an ostensibly socialist, worker-owned, one. The paradox for both was that labour had to be controlled, but it also had to be bought. In this climate, we see the elaboration of the institutional machineries of labour performance and cooperation. In order to set the stage for this, let us turn to 19th century background.


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4.3 Farmers and workersTextiles in England were crucial to the first Industrial Revolution (Gospel, 2007). Factory owners installed machinery, attracted labour and exerted control over it (Marglin, 1974). Advocates and critics alike were under no illusions about the dominant forms of managerial control. Contemporary commentators, such as Ure, spoke of the ‘bloodless strife’ of trade and used military analogies to describe hierarchy and authority (Berg, 1980, p.201). Critics such as Marx spoke of male employees as ‘sergeants’ and women and children as ‘soldiers of the line’ (Braverman, 1974, p.64). Machinery fragmented work, controlled workers and shifted power to owners; machinery was broken in riots, rioters were imprisoned and transported. Unionisation emerged, primarily among the ‘sergeants’ who possessed scarce skills and bargaining power, not among the women and child soldiers. Textile unions consisting of male workers became among the largest in Britain. Similar patterns of labour force development, but not necessarily unionisation, developed in the USA and Japan (Gospel, 2007, p.425).

Railway companies came to dominate both the industrial landscape and the capital markets but, although military analogies were explicitly used in employment relations, the direct control approach to labour management was not. Railway operation does not generate huge concentrations of employment: employment is dispersed across the network and direct supervision is very expensive, but the potential for the disruption of service by a discontented workforce is enormous. The solution was largely the same in both the UK and USA: railways developed elaborate internal labour market structures with equally elaborate employment-dependent benefit systems to retain and pacify labour, without unions, until after the First World War.

Subsequently, as we have seen, large firms came to dominate Western economies. There are a number of ways to measure firm size; we could use volume or value of output, financial resources, market value or market share. For the present purposes, employment is the appropriate measure and Gospel has summarised the broad historical sweep of labour concentration. Referring to the UK, the USA, Italy and Germany, but also to Japan, he observes:

With slight differences between countries, the typical large employer in the early to mid-19th century was a textile company; by the mid- to late 19th century, the biggest single group of major firms in most economies were railway companies; by the mid-20th century, the main groupings were manufacturers (steel, chemicals, automobiles, electrical) and by the end of the 20th century, the biggest single group of large firms was to be found in retailing and financial services. (Gospel, 2007, p.424)

Throughout the ‘short’ 20th century in Western economies, which also roughly coincides with Davis’s period of ‘corporate feudalism’ characterised by managerial autonomy, these large firms had to come to terms with the ‘labour problem’. As we will see below, organisational size is a potent variable that explains many features of organisational structure and performance, and labour conflict is no exception. Unionisation spread in Western countries throughout the large manufacturing and service companies listed above. It also spread throughout government employment. The trends for the USA and the UK are shown in Figure 4.1.


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Figure 4.1: Long-term trends in unionisation in the USA and UK

Source: Willman (2014).

4.4 Band of brothersIn both countries, the ‘short twentieth century’ was a better period for union membership than that which went before or since. The initial turning point was the First World War, but the Great Depression was a bad hiccup. Recovery from the Depression dip roughly coincided with the Second World War. As we have noted above, tight labour market and product market conditions were very important, but government action to incorporate an organised labour movement into the war effort was also key. This was particularly important in Europe; for example, in 1914 it was by no means clear to contemporary politicians that trade unions loosely coordinated by the international socialist movement would support a call to arms that would have union members from different countries fighting each other (Tuchman, 1966). High levels of unionisation were sustained in many Western economies throughout the post-war period of corporate feudalism, but as Figure 4.1 (above) shows, decline started to set in from the late 1950s in the USA and the 1970s in the UK. There are very few Western countries (the exceptions are mostly countries in Scandinavia) that have not seen sustained decline in union membership, particularly in the private sector, since the mid-1970s.

Three questions concern us here. First, why did unionisation become widespread in the short 20th century? We deconstruct this into two subsidiary questions: why do workers join, and why do managers in firms choose to deal with them? Second, what changed to cause union decline in the late short 20th century? Third, what is the impact of this phenomenon on theorising about management? These questions will be examined in the remainder of this chapter.

First, union membership: unions provide their members with three kinds of service (Pencavel, 1971). They represent them collectively in wage and benefit bargaining; individually in collectively agreed grievance and disciplinary procedures; and they offer personal insurance against misadventure such as unemployment or ill health. There is widespread evidence from Western countries in the modern era that unions can generate benefits for workers who are members. These benefits may be monetary: there is a union wage differential (for example, a premium

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union members are paid as compared with similar non-union workers) in many Western countries, particularly in the USA for much of the 20th century, although this declined as union density declined in the latter half of this century (Blanchflower and Bryson, 2004). Table 4.1 indicates that the amounts in some countries may be substantial; there are also sectoral and skill-based differences within countries.

There is, equally, substantial evidence that employees want to be represented in their dealings with employers (Freeman and Rogers, 1999). We saw in Chapter 2 that employment contracts are incomplete; they contain many ‘silences’ that must be filled by discussion or negotiation and individuals often want to be represented in this process. There is some evidence from the UK that this is increasing in importance compared to collective action (see Figures 4.2 and 4.3)

Country Years Union % increase

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Austria 1994, 5,8 and 9 15

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Canada 1997-9 8

Chile 1998, 9 16

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France 1996-8 3(ns)

Germany 1994-9 4(ns)

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Portugal 1998-9 18

Spain 1995, 7-9 7

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UK 1993-2002 10

USA 1973-2002 17

Table 4.1: Union wage differentials in selected countries

Source: Compiled from data in Blanchflower and Bryson, 2003 and 2004.

We read this modern evidence back into the argument for the early 20th century growth of unions at our peril and with some conditions. Strike activity in the early 20th century was – to generalise – much higher than in the last quarter of the century in most countries, but it is probably the case that most employees who joined unions did so for instrumental (i.e. such as benefit-related) reasons, so it was in the unions’ interest to confine those benefits to members and prevent spillover to non-union members. This is relevant to the third category of services – individual insurance. Early unions operated in the absence of a welfare state and thus were often as much benefit societies as bargaining agents as they had the funds to provide sickness benefit, unemployment benefit and funeral benefits (Willman et al., 1993). Over time, and with the growth of corporate feudalism and government-provided welfare, these benefits dwindled. In late 20th century Western Europe, employees were likely to rely on the state for many benefits, and in the USA it was the firm that employees relied on. As Davis (2009, p.59) notes, American multinational firms


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took on some of the welfare functions performed elsewhere by European welfare states. Embedded here is the hint that the firm can substitute for the union in providing certain types of employee benefit (see the next chapter).

Either way, since the wage differentials of union membership were often generalised to all employees, unions in the late 20th century had a harder and harder time justifying the instrumental rewards of union membership. There is very good social-psychological evidence to show that some people join unions for ideological, or at least non-monetary, reasons, but none to show that this can be the basis of mass membership. As Crouch (1982, p.55) noted, unions had to develop a range of services that were unrelated to their central public purpose but met some needs of potential members and which were available only to members.

Figure 4.2: Stoppages 1960–2006

Source: UK Data ‘Stoppage days’.

Activity 4.1

Think about the reasons why employees join unions. Do they explain why union membership in the UK and USA is in long-term decline? (See Figure 4.1.)

Figure 4.3: Employment tribunal claims registered 1972–2006

Source: Advisory Conciliation and Arbitration Service.

So, employees could see some benefits in union membership, but why would firms agree to deal with unions? There are at least three ingredients

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to the answer. First, because the economic benefits often outweighed the costs − this is essentially a bargaining power argument. In a railroad or steel mill, for example, labour costs tend to be a small proportion of total costs, but withdrawal of labour can lead to enormous costs, therefore the union wage differential might seem cheap at the price. Second (and implied by the first) there are economic rents that managers, autonomous of owners, can share to make their job easier (the agency argument from Chapter 2 may be relevant here). But, third, what if unions could be managed to provide benefits to the firm?

The argument for firms dealing with unions is put forward by Freeman and Medoff (1984). Their dependent variable is labour productivity; the outcome is indeterminate, dependent on the three effects; the reasoning is purely economic; and the identification of ‘voice’ solely with labour unions is an assumption. But the argument is that, since higher-priced labour (monopoly wage gains) should either get you better labour or make it easier to automate, and ‘voice’ should both lower exit and improve the quality of management, these two effects could generate net benefits if management controls are sufficiently strong to prevent the establishment of unproductive work rules (known as featherbedding).

The data they use to justify this is from the USA. There are some data from elsewhere that point the same way. To repeat, this is an argument about why firms need voice, not why they need unions. But it also indicates why unionisation might have become so prevalent in the Western private sectors where oligopolistic competition existed, since it defines the set in which the costs of unions to employers might be less than the benefits (Gomez et al., 2010). It may also point the way to the answer to the third question about the decline of unions.

However, first we need to identify some properties of the set of circumstances in which union effects on productivity are negative. Under what circumstances is the positive outcome described by Freeman and Medoff (1984) unlikely, and the costs of union activity likely to outweigh the benefits to employers? A note of caution: such circumstances used to and do exist. Here we identify four; they are not mutually exclusive.

• Perishable products and spot contracting. Perishable products are those that need to be produced, sold or moved before their market value disappears. When their production, sale or movement depends on labour, substantial bargaining power devolves on collectively organised labour. In many such markets, there is volume volatility or uncertainty. Let us offer two historical examples (Willman, 1986). Newspapers used to be produced by typesetting methods that required substantial, skilled labour. But nobody knows how much news there will be tomorrow and nobody needs yesterday’s paper. In this situation, labour power is substantial and labour demand is variable. Dock (longshore) work is similar. Ships arrive at uncertain times and, because they are charged to be in dock and because many products need to be unloaded fast, similar uncertainties existed. The central question is: who bears the volatility risk? In both industries, in many countries, the employer solution was to generate a hiring hall: each day, employers would hire from a larger pool the labour they needed, so the potential employee bore the risk. This is, in Williamson’s terms (see Chapter 2), a spot contract in the labour market. The union response is uniform, which is to shift the volatility risk, shrink the available labour pool by limiting it to union membership and exact compensatory payments equivalent to wages for those not hired, so the employer has limited hiring options and no incentive not to do so.


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In the two industries mentioned, it meant that union members became among the highest-paid manual workers in their respective economies. In the short term, the management control problem was intractable. In the longer term, the automation of both industries swept the problem away.

• Natural monopoly. Whether in the public or private sector, unions maintain substantial powers in situations where monopoly enables them to inflict considerable damage on the consumer. Examples would be power supply and transport in the private sector or education and health, which is most often to be found in the public sector. Bargaining power for unions is enhanced where skills levels are high, and thus the substitution of current employees is difficult in the event of conflict. This natural monopoly may be local; by this we mean that it may be internal to the firm in the form of a production bottleneck. For example, in a large-scale retailing operation, unions find it difficult to organise a high turnover and dispersed group of employees in stores, but much easier to organise drivers who distribute saleable and perhaps perishable products, who are concentrated and smaller in number.

• Occupational communities. Historically some industries internationally have been more conflict-prone than others. They are often characterised by a strong overlap between community networks and employment networks. Examples would be mining, dock work (as above), rail employment, prison officers and lumberjacks. Where a community depends on a single industry or employer, disputes with the employer often become disputes between the employer and community. Unions become representatives of the community and union membership becomes socially compulsory. This is known as the Kerr–Siegel hypothesis. Again, it can operate at a micro level: even in large metropolitan areas, organisations (such as the police or fire services) that recruit serially from the same families can experience the same effects.

• State ownership. Public sector union membership is much higher than private sector membership in many economies. Several factors are at work. First, the potential for disruption is considerable. Second, the government often wishes to maintain employment standards as an exemplar to the private sector. Third, organisational size is often very large. Fourth, political decisions, rather than product market conditions, often define employment terms and levels. Fifth, organisational aims are essentially contestable: performance measures in public sector organisations are often set with organisational objectives in mind that are not fully shared by the employees subject to them. Put another way, the employer benefit might not equate to a definition of the welfare benefit of such organisations.

So we turn to the question of union decline. Employees want a voice. But the key property they want is that the employer will listen and respond, improving their relationship with the firm. Employers want a voice. But they do not necessarily want the wage premium or the joint decision-making involved in negotiating with unions. So it could become rational for employers to reject the union voice and invest in their own. Consider Figure 4.4. This contains data from the UK.


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Figure 4.4: Union and non-union voice

Source: Gomez et al., 2010.

Figure 4.4 is based on very comprehensive survey data and it covers private sector employers. It is interesting data not only for the UK, but as a test case on employer choice, since during the period covered there was no legislation requiring employers to deal or not deal with unions. There was also very little legislation requiring them to have any mechanisms within the firm supporting voice. Three categories decrease. Two are related to unions. Union-only voice, where the firm relies entirely on unions for voice (as in the Freeman and Medoff (1984) argument), goes down most. Dual voice, where managers use both union and non-union voice, declines, but less rapidly. But, if we focus on the other two curves, we see that voice mechanisms that the employer sponsors (non-union voice) expands, and the sector where there is no voice contracts.

Firms want voice. They want mechanisms for feedback from employees to managers. This leaves open what kinds of feedback occur and whether the firm uses it to respond to employee concerns, but it is wholly inconsistent with the separation of conception from execution at the heart of Taylorism, and quite difficult to reconcile with the idea that firms are receptive to perfunctory cooperation. There is substantial evidence from other Western economies that employers find the need to engage with, learn from and explain to those who work for them. The next chapter examines this more closely.

Activity 4.2

Imagine you are the CEO of the organisation running the public transport system in the city in which you live. What problems might unions cause you and what measures could you take to deal with these problems?

4.5 Overview of chapterSo the final question to address is: what is the impact of this on theories about management?

• Engagement of employees with the firms for which they work is intrinsically problematic. An employment contract is initiated by a firm in order to generate an outcome, which may be measured in a variety of ways, as we shall see below, but will involve measures of productivity, customer satisfaction, contribution to profit or a variety of preferred measures. It may be accepted by an employee for many reasons, but these reasons are likely to be both economic and non-

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economic. By this we mean only that there is overwhelming evidence that employees want more from work than pay.

• This employment contract is incomplete, and in most Western economies in the 20th century the employer would fill the ‘silences’ unless constrained by the state or by the collective organisation of employees in a union. However, filling the silences involves a ‘command and control’ approach in only a minority of cases and managerial practices to generate employee voice predominate even in the absence of any compulsion for their use.


• outline the key features of the history of labour unions

• describe the potential benefits of unions to firms and employees

• discuss the reasons for union decline in modern industrial societies.

4.7 Test your knowledge and understandingWhy do workers join unions and why do employers negotiate with unions?

core management concepts - university of london · 2.4 railways and the second industrial...

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