Transcript The Information and Services Economy a.k.a. Business
The Information and Services Economy
a.k.a.
Business Architecture and Services Science IS210, Week 4 Profs Bob Glushko & Anno Saxenian UC Berkeley School of Information Fall 2006
Theoretical foundations: the classics
Economics: theory of the firm
Adam Smith: specialization & division of labor
Ronald Coase: firm v. market
Oliver Williamson: transaction cost economics
Production: mass production as blind destiny
Karl Marx
Henry Ford
Frederick Taylor
Alfred Chandler
Transaction costs revisited
Transactions that are frequent, uncertain & asset specific are very complex and costly (risk of holdup) are internalized within firm boundaries Firm allows use of fiat to resolve conflicts: assumes absolute hierarchical control 1.
2.
3.
4.
5.
View from 2006 Overlooks hybrids and multiple forms of organization Overstates efficacy of hierarchical control Fails to account for cross-national differences Understates role of social relations within & between firms Assumes boundary of firm based on cost alone
Beyond transaction costs What might a firm consider in deciding what stays inside, aside from minimizing costs?
Incentives to innovate
Incentives to cut costs
Flexibility to respond in changing environment
Ability to track external developments
Ability to learn from partners
Digital Equipment Corporation v. Silicon Valley
Karl Marx on Capitalism
Karl Marx Capital: A Critique of Political Economy, Volume 1: The Process of Capitalist Production 1867
Below this surface of free exchange, value is created through “exploitation” of labor by capitalist.
In capitalism, labor power is a commodity that can be bought and sold. Capitalist production: large numbers of laborers working together to manufacture commodities
Social nature of large scale production (cooperation) reveals the “collective power of the masses” & requires concentration of the means of production
Marx on Capitalism (cont.)
The motive of capitalist production is to extract maximum amount of surplus-value from workers
Surplus value: value created by workers beyond the amount they are paid for individual, isolated labor (value created in large scale, social production)
Extraction of surplus value = exploitation
Surplus value = profit, interest and rent income
Capital’s role is to direct and control the production process, which results in unavoidable antagonism between capital and labor “ The history of all hitherto existing society is the history of class struggles” Communist Manifesto
Marx on the division of labor
Manufacture is prevalent characteristic of capitalist production process 1.
2.
Two-fold rise of manufacture from differentiated crafts production: Loss of general handicraft skills via separation and application to production of single commodity Specialized division of labor isolates detailed operations, further reduces breadth of skills In capitalist manufacture, the detail laborer converts body into specialized implement; no longer produces (or able to produce) a complete end product
Karl Marx and Adam Smith
Marx studied Smith, was clearly influenced by him Marx’s distinction:
Division of labor in society: means of production dispersed among multiple independent competing producers, anarchy versus
Division of labor in manufacturing (the workshop)
:
means of production controlled by capitalist authority/despotism
Division of labor in society exists in many economic systems, division of labor in manufacture exists only in capitalism. Labor as appendage of capitalist’s workshop
Marx on science
Separation of intellectual powers of production from manual laborer: loss of the knowledge, judgment, and will that are practiced by skilled handicraftsmen
Conceptual/intellectual work is sole the province of capital. Science is pressed into the service of capital, and separated from labor, in modern industry.
Capital converts intellectual powers into control over labor through use of science
The power of the “master” lies in science and the gigantic physical force of the machinery combined with the mass of labor that make up factory
Frederick Taylor: scientific management
Ordinary management: “initiative and incentive” Scientific management: task management
Scientific management
1.
Develop science to replace old rules-of-thumb 2.
3.
Scientifically select, train, teach, develop worker Insure all work is done according to scientific principles 4.
Division of labor between management and workmen: each does what they are best fitted to
Scientific management
Management’s role: planning ahead according to the “laws of science”
Defining the tasks involved in a job, subdivision of labor
Establishing many rules, laws, formulae to replace judgment of workers
Tasks must be systematically recorded and indexed Requires thousands of pages of scientific data just for an ordinary machine shop
Workers: execution of tasks defined by management
The “science” amounts to so much that the man who is suited to handle pig iron cannot possibly understand it, nor even work in accordance with the laws of this science, withouth the help of those who are over him”
Taylor’s influence: efficiency movement
Taylorism: notion that there is
“one best way”
performing a job that can be discovered by scientifically analyzing work of Taylor’s “time and motion” studies break job into component parts and measure each to the second;
Taylor was famous for studies of shovels
Heavily influenced
early management schools
Taylor was professor at Tuck School of Business, Dartmouth;
Harvard University offered graduate degree in business management in 1908, first year curriculum based on scientific management
Ideas influential in early Soviet Union
Henry Ford on mass production (1926)
Mass production not just about quantity of output or use of machinery
Mass production is focusing on manufacturing project the principles of power, accuracy, economy, system, continuity, speed, and repetition. Management’s job is to interpret these principles Goal is productive organization that delivers in continuous quantities a useful commodity of standard material, workmanship and design at minimum cost
Necessary precondition of mass production is a capacity of mass consumption to absorb the output
Henry Ford on mass production (II)
Advance over early factory system: mere massing of men and tools, dominance of profit motive
Failure of pure financial emphasis in manufacturing becomes evident with labor revolt, social strife
Rise of engineering emphasis (rather than simply financial, profit motive) Limits of early 20 th c. “efficiency movement” with its time and motion studies: need a wholly new method
e.g. Don’t just rationalize pig iron loading by making worker load 47 1/2 tons a day (rather than 12 11/2 tons) for $1.85 rather than $1.15/day) , but make it unnecessary for workman to carry 106,400 lbs for $1.85/day
The motor industry as a model
Ford Motor Co as pioneer of mass production Start with conception of public need: goal is to match use-convenience with price-convenience
Service element remains utmost
Profit and expansion are trusted to emerge as consequences
Mass production precedes mass consumption and makes it possible by reducing cots and permitting greater use-convenience and price-convenience
500% increase in production allows 50% reduction in cost, with accompanying decrease in selling price, which likely multiplies by 10 the number of people who can buy it
The principles of mass production
The keyword to mass production in shop is simplicity; three plain principles: 1.
2.
Planned orderly and continuous progression of commodity through the shop; Delivery of work instead of leaving it to workman’s initiative to find it; 3.
Analysis of operations into their constituent parts.
Importance of consistent quality: small spring leaf must be identical strength, finish and curve with millions of others designed to fulfill the same purpose. Requires automatic machinery, the most accurate measuring devices, controls, etc.
The effects of mass production (Ford)
1.
2.
3.
4.
5.
Increase in industrial control and engineering, rather than financial control.
Products of highest standard of quality ever attained in output of great quantities.
Creation of a wide variety of single-purpose machines that reproduce skill of hand Elimination of hard work in the form of wasteful and laborious burden-bearing.
Growing need for skilled artisans and creative genius in mass production.
The effects of mass production (II)
Ford’s view of the effects of mass production “The problem of management is to organize production so that it will pay the public, the workmen, and the concern itself.”
Results in higher wages than any other method of industry: workers earn more, can buy more
Mass production increases supply of human needs and development of new standards of living, enlargement of leisure.
How does this differ from Marx’s view?
Alfred D. Chandler: introduction
Alfred Dupont Chandler, Jr. The Managerial Revolution in American Business (1977) –a Pulitzer Prize winner Prior work:
Strategy and Structure: Chapters in the History of the
Industrial Enterprise (1962)
Examines E.I. Du Pont de Nemours and Co., Standard Oil of New Jersey, General Motors, and Sears Roebuck and Co.
Argued that managerial organization developed in response to a corporation’s business strategy
Chandler and the “visible hand”
A business historian’s view of the rise of the firm.
Thesis: From 1950s to 1920s, the formative years of modern capitalism, the US saw the emergence of a new business institution and a business class
.
Growth of the “modern business enterprise”
Emergence of new class of salaried managers
Rise of managerial capitalism, modern business enterprise replaces market mechanisms in coordinating economic activity and allocating resources; the visible hand of management replaces
the invisible hand of the market
Chandler’s modern business enterprise
By WWII modern business enterprise was the most powerful institution in the American economy, its managers the most influential group of economic decision-makers.
Definition of modern business enterprise:
Many operating units, each with distinct administrative office; multi-product, multi-location enterprise
Units are hierarchically ordered and monitored and coordinated by full-time middle and top salaried managers
Traditional American business firm was a single-unit, single product, single location enterprise, with individual or small number of owners/ managers, governed by market and price mechanisms.
Modern business enterprise, cont.
The modern business enterprise, by its very actor of coordination across multiple units, brings imperfect competition and the misallocation of resources.
At odds with economic theory, with perfect competition and the invisible hand as most efficient way to coordinate activities and allocate economic resources.
Historians focus primarily on entrepreneurs, not on the institution of the business enterprise itself
The Visible Hand traces transition of the US from rural, agrarian to urban, industrial society due to revolutionary changes in processes of production and distribution (transportation, communication, finance.)
Chandler’s general propositions
1.
Modern multi-unit business enterprise replaced small traditional enterprise when administrative coordination permitted greater productivity, lower costs, and higher profits than coordination by market mechanisms
Internalization and routinization of transactions lowers transaction costs.
Linkage of producing units with buying and distribution lowers costs of information on markets, supply.
Sounds like Williamson, but . . .
Administrative coordination
Far more important, for Chandler, were cost reductions due to coordination
Internalization permits administrative coordination of flow of goods from one unit to the other
Effective scheduling of flows achieves more intensive use of facilities and personnel, thus raises productivity
Administrative coordination permits certain cash flow and more rapid payment for services.
2. Advantages of internalizing activities of multiple business units into a single enterprise can’t be realized without creation of a managerial hierarchy
Modern business enterprise
3.
Modern business enterprise appeared for first time in history when volume of economic activities reached level that made administrative coordination more efficient and more profitable
than market coordination.
Volume of activity increases due to new technology & expanding markets 4. Once a managerial hierarchy has been formed and successfully carried out its function of administrative coordination, the hierarchy became a source of power, permanence, and continued growth.
Professional management
5.
6.
The careers of salaried managers directing these hierarchies became increasingly technical and professional.
Education, training , and experience become source of advancement and replace family relationships or money As multiunit business enterprise grew in size and diversity, and as its managers became more professional, the management of the enterprise
was separated from its ownership.
Widely dispersed stockholders replace personal, bank, or family ownership; they lack the knowledge, influence, experience, or commitment to control firm, so current operations and future planning lies in hands of managers.
Modern business enterprise
7. Career managers prefer long-term stability and growth of the enterprise over maximization of current profits.
Salaried managers make decisions that preserve their ; lifetime careers in the enterprise: seek to protect sources of supplies, markets; take on new products and services to insure full use of existing facilities and personnel; reinvest profits rather than pay out dividends.
Desire of managers to keep organization fully employed became force for its continued growth.
8. As the large enterprises grew to dominate major sectors of the economy, they altered the basic structure of these sectors and the whole economy.
The managerial revolution
New enterprises take over form market the coordination and integration of the flow of goods and services from the production of the raw materials through production to sale to end consumer.
As technology became more advanced and as markets expanded, administrative coordination replaced market coordination in more sectors By mid 20 th c. emergence of a relatively small number of large mass producing, large mass retailing, and large mass transporting enterprises in which the salaried managers coordinated production and distribtuion and allocation in major sectors of the American economy
Stepping back
Adam Smith: specialization & division of labor
Ronald Coase: firm v. market
Oliver Williamson: transaction cost economics
Karl Marx: rise of capital and labor, class struggle
Frederick Taylor: tasks and the “one best way”
Henry Ford: mass production & consumption
Alfred Chandler: the visible hand What differentiates Chandler and Williamson’s arguments about the rise of the firm?
How would Marx view the debate?