Text 1. A matter of choice

Business

That hardy workhorse of capitalism – the joint-stock company – looks surprisingly durable. But pressure on it is increasing

Browse in the business section of any decent bookshop and you are confronted with an extraordinary array of possible futures for the company. Will it be digital or doughnut shaped? Virtual or elephantine? Networked or focused? Lean or fat? Mean or soulful? The future seems to hold almost every possible fate for the corporation except one: being bland and boring.

Much of this is hype, of course: bland and boring does not sell books. But it does point to an important fact: that the organization which so many of us take for granted is in a state of rapid evolution. To understand just how rapid take a look at John Kenneth Galbraith's "The New Industrial State", an intriguing portrait of the state of corporate America back in 1967. Mr Galbraith argued that America was run by a quasi-benevolent oligopoly. A handful of big companies – the big three car companies, the big five steel companies, etc. – planned the economy in the name of stability.

They were hierarchical and bureaucratic organizations that were in the business of making long runs of standardized products. They introduced "new and improved" varieties with predictable regularity; they provided their workers with life-time employment; and they enjoyed fairly good relations with the giant trade unions. (About 40% of the manufacturing workforce was then unionized.) What's more, they were all American.

That world is now dead. America's giant companies have been either eviscerated or transformed by global competition. Most have shifted their production systems from high-volume to high-value, from standardized to customized. And they have flattened their management hierarchies to make themselves nimbler and fitter. Few people these days expect to spend their lives moving up the ladder of a single organization. It is reasonable to expect that further dramatic changes lie ahead. But where exactly will they take us? Where is the modern company heading?

Bigger and bolder

There are three standard answers to this question, the first two of which are almost diametrically opposed to each other. The first—particularly popular in anti-globalization circles – holds that a handful of giant companies an engaged in a "silent takeover" of the world, in the words of Noreena Hertz, £ Cambridge University academic. The past couple of decades have seen an unprecedented spurt of mergers. The survivors, it is maintained, are the real lords of the universe today: far more powerful than mere nation states.

Like Mr Galbraith's oligarchs, these corporate barons plan the world economy for their own sinister purposes. But they have none of the offsetting advantages of providing life-time security and a stable environment. The trouble with this view is, er, the facts. As Martin Wolf of the Financial Times has pointed out, Ms Hertz's claim that "51 of the 100 biggest economies of the world are now corporations" abuses statistics. She measures companies by sales, but national economies by GDP (which is a measure of value added, more akin to corporate profits).

Rather than increasing their hold over the universe, big companies have been losing ground. In 1970, both the television and car markets in America were controlled by triumvirates, each with a combined share of around 90%. Today, the big three are hanging on to around half of each market.

Futuristic industries offer no more comfort. Two American business-school professors, Fariborz Ghadar and Pankaj Ghemawat, point out that in computer hardware, computer software and long-distance telephony, the top five companies' shares of worldwide sales declined by 15 to 30 percentage points each between 1988 and 1998. It is hard to think of an industry that has become more competitive in recent years – let alone one that is likely to do so in future.

The second school of thought argues almost the opposite of the first: it says that big companies are a thing of the past. For a glimpse of the future, its proponents recommend the Monorail Corporation, which sells computers. Monorail owns no factories, warehouses or any other tangible asset. It operates from a single floor that it leases in an office building in Atlanta. Its computers are designed by freelance workers. To place orders, customers call a free-phone number connected to Federal Express's logistics service, which passes the orders on to a contract manufacturer that assembles them from various parts. FedEx then ships the computer to the customer and sends the invoice to the SunTrust Bank, Monorail's agent. The company is not much of anything except a good idea, a handful of people in Atlanta, and a bunch of contracts.

This school has the benefit of having economic theory on its side. In 1937, Ronald Coase, a Nobel-prize-winning economist, asked a fundamental question: ''Why do firms exist?" His answer: companies make sense when the "transaction costs" associated with buying things on the market exceed the fixed costs of establishing and maintaining a bureaucracy. Modern technology is shifting the balance of advantage away from firms and towards markets. Their current goal is to focus on the few things at which they undoubtedly excel and to hand over everything else to equally focused specialists.

Yet the idea that the firm will retreat to the periphery of the economy still looks far fetched. As Gary Hamel and C.K. Prahalad, two management academics, have pointed out, firms possess certain "core competences", usually cultural ones, that cannot easily be purchased on the market. Even leaving culture aside, there are still market failures that persuade firms to try to do things internally rather than externally. If a firm thinks a contractor possesses knowledge that is vital to its own survival, it has every incentive to take over that supplier.

The network is everything

The third forecast is an offshoot of the second: that the discrete company is no longer the basic building block of the modern economy. This school argues that it is being replaced by the "network".

In some parts of the world, such webs have long been the norm. The economies of Japan and South Korea are dominated by keiretsu and chaebol – large groupings of inter-related companies. In other parts of Asia, the overseas Chinese operate through a maze of interlinked family companies. Nor is it just an eastern fashion. Italy's most important commercial empires knit together strings of companies through cross-shareholdings.

Now companies everywhere are dissolving the boundaries with their suppliers, customers and even rivals. A study in the late 1990s by Booz-Allen & Hamilton, a consultancy, reckoned that alliances in the United States had grown by 25% a year over the preceding decade, and by more in Europe and Asia. In his new book, "The Agenda", Michael Hammer, the co-inventor of the re-engineering fad, stresses the importance of firms "losing their identity" in an extended enterprise, and "getting past the idea" of being a self-contained unit.

Networks are seen not just as an answer to external competition, but also as a way of giving more freedom to today's prized "knowledge workers". The inventor of that term, Peter Drucker, who laid out his own forecast for the firm's future in this newspaper (November 3rd), argues that the way forward lies in networks, such as the purchasing co-operative that has been set up by Detroit's big three car makers.

In Silicon Valley, hierarchical organizations are dissolving into fluid "networks of treaties". Free-floating groups of entrepreneurs form such a network to market an idea. They then sell it to the highest bidder and move on to produce another idea and to create another firm, with the money being supplied all the while by the valley's venture capitalists. Hence the talk of a Kleiner Perkins keiretsu, based around the eponymous venture-capital firm.

Despite all this, however, the idea that the basic agent in the modern economy is ceasing to be the firm and becoming the network is unconvincing. One reason is that the networking concept has bundled together too many contradictory ideas. For instance, some networks take a step back from the market (a keiretsu protects its member companies behind the walls of a group), while others break down corporate carriers precisely in order to become more market-driven (the funkier Silicon Valley lot).

The older sort of network hardly looks futuristic. America has dismantled most of its conglomerates, and now the same process

is beginning to happen in Japan and South Korea as managers there desperately try to focus their unwieldy organizations. Even in the more recent alliances, it looks as if the firms are governing the networks rather than the other way round. In Silicon Valley, the firm remains the basis of economic activity.

Firms possess both a legal personality and a system of internal accountability; networks have no clear way of deciding either ownership or accountability. This makes it difficult for them to make joint decisions or to divide up profits (witness the desperate attempts of Airbus to become a stand­alone company). Where a network works, it is usually because a firm is driving it. Without that, a tendency to agonize over the most mundane decisions takes over.

(The Economist)

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