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Market Competition and the Organizational Demand for Skills Empirical evidence from Swiss Industrial and Service Enterprises July 2001
PART I / PART II1. Introduction 2. The “open system” and “contingency” perspective of formal organizations 3. The impact of competition on organizational behavior and intraorganizational characteristics 3.1 Competition as a general precondition for autoplastic adaptive behavior4. Methodology and Data Sources 4.1 The sample and the two Surveys PART II: 5.1 Prevalent patterns and antecedents of price and quality competition among Swiss firms6. Conclusions As one of the most ubiquitous condition
of social life, competition is present whenever two or more actors aspire
to reach the same singular goals (e. g. winning a game) or to increase
their share of the same scarce resource (e.g. customers, votes, territories,
etc.). While social psychology has accumulated considerable evidence about
the behavior of competing individuals within small groups (e. g. Deutsch
1949; Johnson/Johnson 1989) as well as the correlates of intergroup competition
(e.g. Sherif et. al 1954/1961) Bornstein et. al 1999), it falls into the
realm of organizational sociology to analyze competitive relations between
mesosocial voluntary associations (e. g. social movements organizations,
political parties) on the one hand and corporate actors like firms, schools
and hospitals (or macro-entities like nation-states and international alliances)
on the other.Such research efforts can easily be justified
by considering how fundamentally the economic sector of modern societies
is determined by competitive intercorporate relations, how deeply processes
of political participation and regime formation are shaped by the competition
between political parties, and how insufficiently historical developments
would be understood without taking into account the rivalry between feudal
landowners, nation-states or larger (e. g. imperial and colonial ) territorial
actors. Only marginally (if at all) , such studies have touched the question raised in this present paper: How does the occurrence and intensity of competition relate to the level of human resources: to the composition of organizational staff and to the level (and kinds) of required skills? Evidently, this question has become increasingly salient recently insofar as many current (economical as well as technological and socio-cultural) developments have the common effect of increasing the pace and intensity of competition faced by companies in all economic sectors. For instance, tariff barriers and other protective governmental regulations become eliminated in the course of neoliberalist policies; new firms from emerging countries are entering markets hitherto comfortably managed by few well-established corporations; the pace of technological innovation and product obsolescence has increased; and customers and business partners have become more demanding and more ready to articulate dissatisfactions. (Adler/Docherty 1998). During the 1990ies, economic recession has contributed to a shrinkage of many markets, so that competitive intensity (particularly in the realm of prices) has increased. [1] Thus, many firms currently operate under conditions of “hypercompetitivity” (D’Aveni 1994) which forces them to commit many resources to continuous environmental scanning and learning processes, to reconsider permanently all their structures, commitments, planning schemes and operational activities, and to implement time-limited fast-response strategies in order to adapt to short-term unforeseen developments and events (Hamel & Prahalad 1989; Hill 1988). In addition, it can be assumed that in comparison to previous decades., competitive relations have nowadays more direct repercussions on the role of individual employees, and thus on the level of required skills. For instance, downsizing has the effect that a larger percentage of employees have to deal with customers and other extraorganizational concerns. Likewise the tendency to desaggregate monolithic enterprises into rather autonomous divisions or profit centers has the effect that more members have to adopt a commercial perspective because they have become incumbents of “boundary roles”. And finally, modern lean production and “total quality” philosophies aim at committing every employee to an “entrepreneurial spirit”: thus aspiring a condition where all activities of all members are continuously oriented at the firm’s most salient and invariant goal: prevailing within an environment of ever more intensive competition.
2. The “open system” and “contingency” perspective of formal organizations Since several decades, there is a general trend that economic firms have to focus ever more attention, energy and resources to extraorganizational concerns, because environmental conditions are getting more complex, volatile and unpredictable, and more decisive for the company’s chances of survival and growth. Thus, societal pressures to conform to ecological standards, nondiscriminatory practices and many other legal regulations have increased, customers and other stakeholders are better organized and more inclined to articulate grievances or even file suits, and outsourcing and “just-in-time” strategies have created a more densely-knit web of interdependencies among different firms. And most importantly: creating values for customers and clients has become the major goal around which all business activities are organized, and the implementation of such customer-oriented strategies demands that these ideas are understood and practiced on all organizational levels and by every single subunit and individual employee (Adler & Docherty 1998; Horte et. al 1996). Given the increasing salience of all these
environmental factors, firms may institutionalize a general “market-oriented”
philosophy which gives priority to external adaptation at the cost of internal
organizational concerns (e. g. job stability or work satisfaction) (Gordon
1986; Budros 1997). Since the early 1960ies, organizational
sociology has reacted to these developments (or in some way even anticipated
them) by developing “open systems” models of formal organizations: seeing
them as reactive and adaptive (and less frequently even as proactive) entities
within a challenging environmental field. These approaches contrasted with earlier
stages of organization sociology which were characterized by a neglect
of such environmental relations. For instance, classical socio-technical
systems theory was focusing almost exclusively on intraorganizational
aspects, especially on the role situation of the shop floor worker, (Adler & Docherty
1998). Doing this, it followed the classical Marxist approach which defined
the worker as the major “stakeholder” of business organizations. Extraorganizational
relationships were regarded solely as the prerogative or interest of management,
which was supposed to have a perspective completely different than that
of ordinary workers (Adler & Docherty 1998). The major substantive hypothesis of contingency theory can be summarized by the simple statement that coping with high complexity engenders higher levels of informality and decentralization. The larger the heterogeneity, variability and unpredictability of external stimuli, demands and pressures that impinge on an organization, the more it has to develop a structure where many individuals and subunits are capable and allowed to scan the environment, to collect and transmit information, to react rapidly to changed circumstances and to participate in collectively binding corporate decisions. Conducting one of the earliest empirical
studies to substantiate these relationships, Simpson and Gulley have found
out that voluntary associations with multiple goals and adaptation problems
are more likely to develop a highly decentralized internal structure, and
to involve a large percentage of membership in its major activities. In
addition, they tend to maintain more complex processes of intraorganizational
communication in order to keep up with the larger quantity of inflowing
information (Simpson & Gulley 1962). Later studies (mainly focusing on industrial
enterprises) have confirmed that as environmental changes become more manifold
, less predictable and more rapid at the same time, it becomes increasingly
important that all subunits and all individual employees in the corporation
are capable and motivated for change:
As a result. control structures become decentralized,
in order to empower all employees for making decisions in accordance with
their own understanding of the companies interests and goals: Consequently, a high basic level of intelligence and skill is necessary across all categories of workers and employees, and the need for higher educated personnel rises. In particular, employees have to be able to accumulate their own experiences on the job and to engage in autodidactic endeavors of advanced training (e. g. Industry Canada 1998). Transcending this one-sided focusing on “complexity”, a major synthesis of an environmentally oriented organization theory has been proposed by Lawrence (1981) who argues that all economic firms experience two types of insufficiencies which engender highly divergent strategies of adaptations: 1) Scarcity of information:
2) Scarcity of resources
As both contradictory strains are usually present, each firm has to find ways to equilibrate efficiency and adaptation needs at the same time. When uncertainties are relatively low and resource constraints high, organizations are likely to adopt highly formalized and centralized “machine bureaucracies”; when uncertainties are considerable and resource scarcities insignificant, they will tend toward loosely structured “adhocracies” of the “organic management type” (Lawrence 1981). When both strains are very intensive, they may tend toward “simple structures” characterized by small, unstable organizational units; and when both are low or absent, optimal conditions exist for the unfolding of “professional bureaucracies” (typically found in subsidized public service organizations and governmental administrations) (Lawrence 1981). Within this conceptual framework, competition
can easily be characterized as an environmental condition which is difficult
to cope with because it generates substantial uncertainties on the one
hand and resource scarcities on the other. Like many other approaches within the paradigm
of “contingency theory”, the theoretical model Lawrence proposed was (at
least implicitly) heavily indebted to the “social neodarwinist” approaches
which focus on ecological and evolutionary studies of “commensalistic”
organizational populations (e. g. Hannan & Freeman 1977; Brittain & Freeman
1980). [2]
In fact, contingency theory has never succeeded
in eradicating the basic heretic question: Do organizations really
adapt?
Consequently, studying organizational change
mainly means: focusing on the differential birth and death rates of various
organizational forms (Boone & Witteloostuijn1995). Thus, in contrast to the older “contingency theory” of organizations which has given priority to the unilateral influence of the environment on intraorganizational processes and structures (Burns & Stalker 1961, Hambrick, 1983, 1985; Miller & Friesen, 1984) , newer research studies focus on more bilateral causal relationships conditioned by strategic organization action. (e. g. Swamidass / Newell 1987). More specifically: by deciding about entering new product markets, cooperating with other firms, outsourcing specific tasks, migrating to other countries, changing production technologies or modifying the skill demands of their employees, firms basically change their environments instead of adapting to given environmental conditions. The more degrees of freedom they have in making strategic choices, the more environment-structure - relationships can be reduced to insignificance.(Porter 1980; Miller 1986; 88). There is consensus that when we see organizations
adapting to their environment, this is a very complicated process influenced
by many intervening factors. (Kieser & Kubiceck 1983:355). Thus, change is
not happening automatically, but has to be implemented intentionally by
managerial decisions and implementations. This implies that “adaptive”
strategies can be objectively dysfunctional (e. g. when environmental problems
and opportunities are not adequately perceived and interpreted); that they
may occur as discontinuous events, with too much delay - or never at all. On a general level, reorganizational measures may be inhibited by the basic fact that organizations have a vital interest to be stable actors in order to be highly reliable to their customers and suppliers and in order make use of the cost-saving qualities of routinized procedures (Hannan & Freeman 1989:74; Boone & Witteloostuijn 1995). In addition, all change involves risks because the consequences of acting differently are more difficult to predict than consequences of keeping activities as they are. (Greve 1998). Thus, a major precondition facilitating organizational change is the capacity and motivation of a firm to tolerate risks: a variable highly dependent on subjective preferences on the one hand and objective capabilities (e. g. buffering slack resources) on the other (Miller & Chen 1994; Greve 1998). It has also been argued that most organizations
are not able to adapt optimally to their environmental circumstances because
they lack sufficient knowledge about their internal capacities and shortcomings.
For instance, they are not well informed about the competencies of their
personnel and about the potential savings which could be realized by rational
reorganization: The more informal and decentralized an organization, the more it is prone to experience such handicaps because informality means that little systematic information about intraorganizational structures and processes can be collected, and decentralization implies that much information remains on the level of specific subsystems, so that top managers remain insufficiently informed. Because of such shortcomings,, low potentials for rational environmental adaptation has been found in samples of Canadian day care facilities (Baum & Singh 1996) and in Californian wineries (Delacroix and Swaminathan 1991). Finally, it has to be considered that any successful adaptation presupposes a certain pool of uncommitted “discretionary resources” which can be dedicated to the required new processes of decision-making, planning and implementation. While competitive challenges may be necessary to stimulate higher levels of performance and encompassing endeavors of adaptive reorganization, the constraints they generate for the firm should not be so heavy that organizations lose all capacities for autonomous actions. Instead, the should have the “slack” needed to conceive and try out new activities, to become temporarily absorbed by learning processes, to initiate product innovations and market campaigns which can easily fail, or to survive periods of fundamental reorganization during which much energy is absorbed by elaborating and implementing new structures and norms (Kieser/Kubicek 1983). Thus, Lawrence rightly argues that organizational learning and innovation processes will be most likely when intermediate (instead of high) levels of environmental constraints (in terms of informational uncertainties and/or resource scarcities) prevail (Lawrence 1981).
3. The impact of competition on organizational behavior and intraorganizational characteristics 3.1. Competition as a general precondition for autoplastic adaptive behavior The theoretical paradigm of “contingent
organization” presupposes that organizations are forced (or at least: positively
induced) to adapt rationally to their environment because if they don’t,
they would be punished by being eliminated or at least by reduced profits
and weaker chances of further growth. This “social Darwinist” view is based on
the premise that there are heavy environmental constraints which cannot
be eliminated by organizational action: so that organizations have to accept
them as given structural conditions which limit (or even: determine) their
courses of action. Of course, this condition is best fulfilled
in highly competitive environments which offer no opportunities for “exit”
strategies” (e. g. by getting governmental subsidies or by becoming a monopolist
player. 3.2. The high significance of firm-specific factors A firm’s capacity to be profitable on its
product market is a result of many different causal factors, some of them
associated with the structure of the whole industry, others with characteristics
of the “industrial district” where the firm is located; but most of all:
with the specific firm’s capabilities and resources (Marsden 1998). Empirical
studies show that such particular factors on the level of the single organization
(and its staff) far outweigh the influence of overall industry factors
(Rumelt 1991). It has further been substantiated that
from the point of view of competitiveness and profitability, the most precious
assets a firm possesses are most often not its tangible resources (like
land, buildings, raw materials etc.), but highly intangible external
resources (like customer goodwill, patents trademarks and copyrights)
on the one hand and intangible internal resources (like staff skills,
management capacities and efficient forms of organizational cooperation)
on the other (Marsden 1998).
While competition has always been acknowledged in economic theory as a condition heavily determining a firm’s behavior and performances (e. g. Weiss 1963; Bain 1968), its impact on staff characteristics intraorganizational structures - a genuinely sociological issue - has long been neglected. With the exception of two early publications of Arnold Rose 1955 and Simpson & Gully (both studying voluntary associations), research on the causal correlates of competition has mainly been initiated in the 1970ies: particularly with Rushing’s comparative studies of profit and nonprofit hospitals (Rushing 1974; 1976) and Pfeffer & Leblebici’s study of small manufacturing organizations. On a most general level, it has been found that competition increases the degree to which organizations turn their attention toward their external environment (instead of focusing introvertedly on their own internal affairs). This is exemplified by the empirical study of Rushing who found that only competitive hospitals were likely to increase their medical personnel in accordance with rising numbers of patients (Rushing 1974). As a consequence of this shift toward environmental concerns, , intraorganizational structures and processes are affected in at least four different ways: First, by necessitating more attention
to environmental circumstances, competition induces a higher degree
of organizational activation.
Secondly, general needs for high adaptability increase the need for basic levels of skill. High competitive intensity means that firms have to maintain high levels of generalized “adaptability”: so that they are permanently able to respond rapidly to unpredictable environmental developments and events. While a condition of generalized insecurity may lower
the need for highly specific qualifications (because these may quickly
become obsolescent in a rapidly changing environment), it raises the need
for employees with a rather high level of basic skills: so that they are
capable of participating in advanced training courses (or of learning additional
matters by themselves): In concrete terms, this may imply that highly competitive firms articulate higher needs for personnel with at least a minimal skill level (e. g. basic vocational training or advanced general education), because such people are more likely to bring along such generalized abilities (and motivations) for further learning. In a major recent empirical study
including
ca. 750 firms from eight European regions, it has been shown that about
three out of four enterprises considered a “skilled workforce” as the most
important factor for sustaining their competitive advantage (Schienstock
/Kautonen / Roponen 1998). This accords with Aaker (1989) who found that
reputation for quality was rated as the most important basis for competitive
advantage by the managers questioned. Likewise, a comparative industrial survey
in the Finnish Tampere region has clearly shown that Generally, increased global competition
seems to induce firms of all size to increase their innovativeness (e.
g,. by expanding their budget in R & D). This implies a growing need for many different
types of skills and qualifications: particularly for rather diffuse creative
and entrepreneurial talents and social competencies (not essentially related
to educational knowledge and formal degrees):
Table 3.1: Percentages of firms advocating
different training needs for their employees
The rather informal character of these skills - as well as the increased environmental volatility which hampers forecasts and planning procedures - may be responsible for the finding that most Finnish firms rely more on “ad hoc” training procedures than on longer-term systematic courses. [7] This high importance of informal skills accords well with the notion that one of the most significant competitive assets of a firm consists in its pool of “tacit knowledge” which is not acquired by regular education (and thus cannot be important by recruiting employees with specific formal certificates and degrees). As a general rule, the most profitable
and enduring competitive advantages of a firm stem from particularistic
resources which cannot be copied and transferred: so that they are not
available to other firms. This is easily seen when different bases of skills
and knowledge are compared. When production processes are based completely
on completely explicit scientific knowledge (like chemical recipes for
the production of medical dugs) or on professional skills transmitted in
formal schooling, firms have no stable advantages because exactly the same
competencies can be acquired by any other firms. On the other hand, there
are firms which can exploit “monopolistic rents” almost forever, as
they rely on implicit knowledge which remains in their “private possession”
because it is transmitted only by means of informal socialization processes
within the organization. (Itami 1987; Ghemawat 1991). The gains stemming from such exclusive
“invisible assets” (Itami) can far outweigh the handicaps stemming from
the fact that fluctuations are costly and rapid expansion of staff may
be impossible because every new employee has to engage in time-consuming
“learning-on-the job” processes and (informal socialization by peers) in
order to master such skills Similarly, the importance of tacit knowledge rises when organization switch from highly formalized bureaucratic structures to decentralized, loosely-coupled structures, because explicit written rules and programs have to be substituted by more informal, less visible norms and procedures (Lei/Hitt/Goldhar 1996). This salience of tacit knowledge loosens the degree to which competitive success is connected to higher (formal) skill levels among employees, because even individuals without vocational education may be able to acquire it, while highly educated employees may not grasp it because they are too much oriented toward transorganizational (e. g. professional) sources of knowledge and information. Third, decentralized decision making structures are needed in order to react to rapidly changing needs of customers and to sudden unforeseen moves of significant competing enterprises. Thus, Moores and Duncan have found that
under high competition, New Zealand firms are more profitable when their
degree of centralization is low, while centralized firms work more successful
in less competitive contexts. (Moores & Duncan 1989). Similar findings
have been reported by Neghandi and Reimann (1972). As a possible explanation, it is argued
that under high environmental pressures, highly centralized firms risk
to be maladaptive, because too many tasks are delegated upwards to a permanently
overloaded peak. Less decentralized firms may be better able to satisfy
customers because their employees are freer to oriented their activities
toward the client’s needs. In fact, only decentralized organizations
may be able to institutionalize many “boundary roles” able to collect relevant
information about their environment and to use this knowledge for reacting
quickly to changing market conditions and their competitor’s actions. By aiming to combine increased adaptiveness
with high levels of system integration, “team empowerment”
has the double advantage of making command chains shorter and decision
processes swifter on the one hand, without creating too much individual
discretion and leeway on the other. At the same time, teams are social group
contexts capable of socializing employees into the company’s culture and
making them acquainted with highly specific skills and practices: so that
newcomer’s become swiftly assimilated “on the job”: without expensive measures
of formal education and training.
Also in cases where price competition prevails,
teams can be media for diffusing and institutionalizing cost-saving strategies
in he whole enterprise, so that all employees become more committed to
the overarching goals of increasing efficiency: Fourth, finally, it is widely acknowledged that competition increases the need for powerful mechanisms of organizational control and integration. When firms operate in a competitive environment,
they quickly learn when their organization is insufficient: when resources
are wasted, when the same work is done twice because of lack of internal
communication, when tasks cannot be readily completed because the contributions
of different subunits are not coordinated, when buildings or machines are
suboptimally used because there is no sufficient overview and planning
of activities; when employees produce too little because they are not sufficiently
supervised; when managers cannot solve urgent problems because they have
not acquired the necessary knowledge and skills, when customers get angry
because they experience poor organizational services...... Thus, Arnold Rose has found that competitive
organizations show a higher tendency to formalize their structures and
activities: e.g. by relying on written statutes, rules and protocols. Such
formalization provides them with an easy access to intraorganizational
information - which may be highly functional for optimizing coordination
and for securing an efficient use of internal resources. Similarly, Rushing has found that hospitals
in noncompetitive settings are much more likely to expand their activities
without investing in correlative mechanisms of organizational integration
(e. g. by increasing the clerical component and the administrative ratio),
while competitive clinics show a clear tendency to increase complexity
and integrative components at the same pace (Rushing 1976). This also accords
with the findings of Lawrence and Lorsch that the most successful firms
are those which combine high levels of systemic differentiation and integration
(Lawrence and Lorsch 1967: 53). “The tall structure, with its increased review and control of decision making, it utilized when change or heterogeneity is confronted by an organization in a competitive environment. Conversely, horizontal differentiation, or departmentalization, is employed when the organization is in a less competitive environment.” (Pfeffer & Leblebici 1973)
3.4 Price competition and quality competition: two highly divergent challenges with contradictory organizational implications As consumers always want “the best offer for the lowest price”, firms have a certain leeway to which extent they compete by lowering the prices or by raising the quality of their products or services. (Veliyath & Fitzgerald 2000). While in most cases, a mixed strategy will prevail, price competition certainly dominates when products cannot be differentiated qualitatively (e. g. in the case of gasoline or standardized silicon chips (Marsden 1998)); and quality competition is stressed when prices are not flexible (e. g. because of interfirm cartellization or governmental regulations). Generally, it is difficult to cope with intensive price competition and high quality competition at the same time, because these two conditions demand highly divergent measures of adaptation. Thus, price competition often forces firms to downsize in order to reduce costs at the short-term; but because dismissals most often lead to less personnel in the R & D sector, the firm’s capacities to innovate are weakened and its chances for longer-term perspectives of survival and growth may be reduced (Bruton / Keels / Shook 1996). In other cases, high price competition induces firms to substitute higher-paid skilled personnel by cheaper unskilled employees: thus reducing their general capacities to deliver high-quality products and to implement strategies of quality improvement. (Budros 1997). Leaving aside such exogenous contingencies, it can generalized that price competition and quality competition are correlates of two diametrically opposed market structures. a) Price competition dominates in “stable
markets”: characterized by “mature”, basically invariant products and consolidated,
steady consumer demands.
As a consequence, successful price competitors
are likely to maintain rather bureaucratized structure characterized by
extensive formalization and centralized decision making procedures:
Given their high needs for intraorganizational
stability, price competitors are more likely to search new market outlets
for given production lines than to change procedures in order to keep existing
markets (Ward / Bickford / Leong 1996). b) Quality competition reigns in dynamic
environments in innovative and unconsolidated markets
Given two firms facing the same current market conditions, they can nevertheless follow divergent strategies according to their horizons of time. The short-term oriented firm A will prefer price competition for optimizing its sales in the face of current competitors and for maximizing this year’s profit; while firm B will prefer product development and innovation in order to conquer additional markets and/or to remain competitive in the middle- and longer-term future (Howard 1990).
3.5 The highly divergent behavioral consequences of price and quality competition for the coping firms On a most general level, price competition
and quality competition diverge highly in the degree of specificity of
the adaptation problems to which they give rise. If measurements are possible at all, unrealistically high investments in technology, organization and personnel have to made in order to establish the necessary procedures: “....increased resources are necessary to measure the quality of output or the performance of agents. Sorting, grading, labeling, trade marks, warranties, licensing, time and motion studies and a variety of other techniques to measure the performance of agents are all, albeit costly and imperfect, devices to measure the characteristics of goods and services and the performance of agents. Despite the existence of such devices the dissipation of income is evident all around us in the difficulty of measuring the quality of automobile repairs, in evaluating the safety characteristics of products and the quality of medical services, or in measuring educational output. The problems of evaluating performance are even more acute in hierarchies because of the difficulties of achieving low cost measurement of the multiple dimensions of an agent's performance.” (North 1996)
3.6 The broadened scope of quality competition The high prevalence of quality competition is illustrated by a transnational company survey encompassing eight European regions, where Schienstock et. al have found that “high product quality” was the foremost factor to which most firms attributed their advantage in competing with rival enterprises (Schienstock/Kautonen/Roponen 1998). Similarly, Chaston and Mangles (1997) have found that the most important influences on performance included optimization of employee productivity, development of new products, investments in continuous improvements of product quality and measurement of customer quality expectations. But the term “quality” has assumed a much broadened meaning than in the past. While in traditional industrial competition, the term referred almost exclusively to intrinsic attributes of the physical product (e. g. its durability, its precise and reliable functioning etc.), it now tends to encompass all stages of a firms activity: from the criteria applied in the choice of raw materials and production procedures (e. g. ecological considerations) right to the support services offered after customers have bought it and set it in operation. The raising salience of post-selling quality performance has been illustrated by the aforementioned comparative study which has found that about 40% of all firms defined “after sales services” as their essential competitive advantage. (Schienstock/Kautonen/Roponen 1998).
3.7 The new ubiquity of price competition When trade relations become global, price
competition becomes more ubiquitous because local and regional protection
break down. In particular, most firms from highly developed countries like
Switzerland are increasingly challenged by cheaper competitors from low-wage
countries. In the past, many Swiss firms could reduce
competitiveness by producing high quality products, because no other firms
in other countries were able to reach the same levels. In fact, the label
“Swiss Made” was a long time sufficient to provide the reputation of high
quality - a collective reputation from which all singular branches and
companies could profit without having to generate and their own individual
reputation. Thus, the rather high competitive success
of many Swiss firms in foreign markets may at least partially be attributed
to the “structural competitiveness” of Switzerland as an “industrial district”:
i.- e. as a territory endowed with many advantageous traits vis-à-vis other geographical regions. [9]
“Companies in the Tampere region concentrate on high quality niche markets in the first place. They see quality and time of delivery as their competitive advantage. These niche markets, however, do not present a safe segment any longer. More companies from all over the world have learned to produce high quality. What is now needed is to produce high quality and user-friendly products at a reasonable price and to deliver them on time.” [10] In order to escape the cumulative pressures of quality and price competition, firms are forced to outperform competitors in other respects: by being quicker than other in introducing new products or by being more flexible to react to changed customers needs: “Nowadays companies from all over the world can manufacture products of high quality at low costs, sell them for a reasonable price and deliver them within a short time period. Success within the global market mainly depends on the capability of companies to rapidly and continuously produce new products and services; innovativeness is the number one factor in global competition.” (Schienstock/Kautonen/Roponen1998).
3.8 Some factors influencing a firm’s capacity to cope with intensive competition 3.8.1 Firm size Since the time of Karl Marx, it is common wisdom that the evolution of private capitalism tends to produce larger enterprises, because big firms are better able to survive in economic competition. Within the Fordist paradigm of industrial organization, this relationship has primarily been elaborated with respect to price competition. Thus, it has been argued that for many different reasons; larger firms are better able to minimize costs by realizing of “economies of scale”: e. g. because they can exercise monopsonic power on suppliers or because they are better able to make use of highly routinized mass production technologies (which result in an downgrading of required skills). More recently, it has been observed that larger firms have a similar edge in exploiting “economies of scope”: associated with the basic fact when producing good A, a firm may have lower costs of producing related goods B,C,D. For the case of quality competition
instead, contradictory theoretical argumentations have been proposed. On
the one hand, Piore and Sable have asserted that small firms practicing
craft-like production styles are better able to cope with the newer trends
towards customized high-quality products, because they have more flexibility
to adjust outputs (quantitatively and qualitatively) to such new demands
(Piore & Sabel 1984). On the other hand, it is also widely acknowledged that
larger firms have higher capacities to develop large amounts of specialized
knowledge and skills, and to maintain collaborative relationships with
universities or other innovation-oriented institutions (Schienstock/Kautonen/Loponen
1998). In addition, they can engage in risky innovative
endeavors with less fears because conventional procedures can be maintained
at the same time (within other subunits of the same organization).
Empirically, various studies have shown that
larger companies are more likely to innovate, Thus,. The Finnish study
in the Tampere region has shown that firms above 200 employees are much
more prone to innovate by introducing new products as well as new production
procedures). [11] On the other hand, larger firms are often
characterized by traditional Taylorist structures which go along with a
high percentage of unskilled labour - a factor hampering innovativeness
in many respects (Schienstock/Kautonen/Roponen 1998). Thus, it has been
observed that while large firms cultivate develop and maintain highest
expertise and skills in most areas, they are often not capable of exploiting
it fully for their own purposes. Instead, many experts - frustrated by
lacking opportunities to realize their ideas and be promoted - leave the
firm in order to found new “spin-off” enterprises. These small new firms
then are often developing and licensing innovations (which then might be
bought back later by the larger firms) (Brittain & Freeman 1980). Additionally, several empirical studies
have shown that while larger firm may be more capable of providing the
capital and human resources necessary for improvements or innovations,
they are often heavily handicapped by rigid internal structures and a tendency
to focus more on internal than on environmental matters. Thus, larger firms have been found to maintain
a lower degree of market orientation and to show signs of complacency and
inertia which makes them unfit for risky measures of change (March 1981;
Aldrich & Auster 1986; Hitt et. Al. 1990). Their mere structural complexity
leads to reduced capacities for information processing and slower speed
in executing formally decided measures and plans (Galbraith 1977; Pelham
2000). By contrast, smaller firms can be expected
to react more flexibly to environmental stimuli of any kind, because more
employees occupy boundary roles [12],
because their structures are less bureaucratized and their communication
systems less complicated (Katz 1970; Feigenbaum & Karnani 1991 etc.):
Consequently, while larger firms may
draw more advantages from their institutional embedments and their capacity
to control salient environmental factors, such advantages may be more than
offset by their smaller capacity to maintain intensive environmental relations:
This reasoning also implies that size is an
intervening variable moderating the relationship between firm strategies
and achieved performance. Thus, when a small firm focuses on a market-oriented
strategy, it is more likely to gain significant competitive advantages
than a bigger firm, because it is better able to adjust its whole internal
organization to the external strategic needs (Pelham 2000).
Many larger firms try to exploit such advantages
by segmenting themselves into smaller divisions, thus combining the functional
advantages of smallness and bigness at the same time: Finally, it has to be considered that quality competition offers to many small firms excellent chances for survival and growth which are less available to larger enterprises. Many firms try to reduce competitive pressures by migrating to less contested niches. They typically do this by developing and producing highly specific products addressed to highly specified customer segments. The smaller the firm, the more probable that it finds such a highly specific small niche which offers a sufficiently large and stable base of subsistence. The bigger firms need larger markets which are less likely to be uncontested (or to compete simultaneously in different market niches which are unlikely to be all equally uncontested). Niche specialization means that a firm tries to exploit quasi-monopolistic rents by conquering a leader position within a narrowly defined field. This usually implies that it commits all resources to raise the quality standard of its production and products by optimizing its technology and organization and by internalizing highly professional skills. “The niche differentiator often
requires a more highly skilled workforce than others in its industry. This
is particularly true of the niche quality differentiator, which often counts
on production people to have the know-how to build a high quality product
in the absence of formal process controls used in high volume settings.
Although various mechanisms are available to achieve quality, total quality
management (TQM) programs are currently favored by a wide spectrum of firms,
including niche manufacturers.” (Ward/Bickford/Leong 1996) 3.8.2 Expanding or shrinking markets For three different reasons, firms operating
on expanding markets are better able to react rationally to competitive
challenges and to implement successful adaptive change. Finally, it has also been observed that expansion and contracting processes have highly divergent influences on the average level of skills. When firms have to downsize their staff because they are competing with little success (and/or within shrinking markets), they may still be forced to upgrade the skill the level of their labor force (either by selectively dismiss unskilled personnel or by substituting less skilled by more educated employees). The reason is that the total variety of organizational tasks has to be allocated to fewer heads, so that each average worker has to be able to cope with a larger variety of different tasks. Consequently it is more likely that any role also entail more complex problems which necessitate to hire workers with a higher basic level of knowledge and skills. In a Canadian case study conducted by Bob Russell, this increased role polyvalence has been found to be the major factor for higher skill demands in reorganizing firms (Russell 1997). Thus, when firms switching to lean production procedures may need higher skills, this may not be primarily caused by increased task complexity and higher qualifications demanded for functioning in “empowered teams”. Instead the more trivial reason may lie in the “horizontal expansion of jobs” (each comprising a larger spectrum of rather undemanding single tasks) (Russell 1997). Expanding markets instead provide optimal opportunities for implementing standardized procedures and for buying capital-intensive mass production technologies - so that roles can be more specialized and taylorized and a shift toward lower skilled personnel may be observed.
For two reasons, it may be expected that older organizations are less likely to react adaptively to competition. On the one hand, older organizations are more likely to have highly consolidated and rigidified structures, so that they are less disposed to react to any external stimuli with internal change and innovative procedures (Hannan, Freeman 1984; Davis & Stout 1992). Miller argues that as organizations age, their very early success makes them assume more simple structural forms which may diminish their capacities for future adaptive change: “....a troublesome paradox exists: the sources of dangerous simplicity may underlie initial success and, thus, may be doubly difficult to combat. Indeed, it is very hard to distinguish between the concentration and passionate dedication so necessary for success and competitive advantage and the simplistic fixations and extremes that lead to failure.” (Miller 1993: 119): Thus, Baum and Singh have found in their comparative study of day care facilities that older organizations were more likely to experience disruption when their markets niches changes (Baum & Singh 1996). Secondly, older organizations are less likely to succumb because they enjoy higher “social legitimation” (Hannan & Carroll 1992) and because they are more integrated into supporting institutional environments. For instance, they are more likely to enjoy a high public reputation, to be supported by highly loyal employees, to profit from a high status among customers; to be embedded in supportive elite networks, to enjoy the help of public agencies, to have a high standing on the labour market, and to get bank credits when needed. (DiMaggio & Powell, 1983; Mintz & Schwartz, 1985; Podolny, 1993; Barnett 1997). As a consequence, social Darwinist selection processes in economic markets don’t guarantee the “survival of the fittest”, because with increasing age, survivors are increasingly protected from direct impacts of environmental competitive pressures. “The net result is that the strong-survivor hypothesis is self-defeating. Environmental selection increases competitiveness, but by increasing concentration, it triggers the rise of large, impervious, but increasingly impotent organizations.” Barnett 1997). Thus, many older firms tend to become overstaffed without being punished immediately for these inefficiencies. This is seen in the regularity that many of them have to regain their competitive capacities by downsizing when environmental competition pressures suddenly increase (Budros 1997). Even younger organizations may share competitive weaknesses when they are “spin off’s” of older firms: because they are likely to have “inherited” their mother’s shortcomings (Barnett 1997). Empirical studies indicate that the increasing survival chances associated with higher age accrue disproportionately to larger organizations. In fact, smaller firms seem to suffer from a “liability of obsolescence” which leads to increasing risks of mortality over time (Ranger-Moore, 1991; Barron/West/Hannah, 1994; Baum, 1996). 4. Methodology and Data Sources 4.1 The sample and the two Surveys The data used in the following empirical
analyses stem from two surveys conducted in 1996 and 1998 by the Economic
Department of the Federal Technical University in Zurich (Switzerland),
both of them comprising several thousand private enterprises of the industrial
and the tertiary sector. Table 4.1: Frequency distribution of
firms in the total sample:
according to size categories and economic sectors
4.2 Operationalizing the intensity of competition In the first survey conducted in 1996,
the informants were asked to give a judgment on the intensity of competition
the firm currently faces on its sales markets: Table 4.2: Frequency distribution of
firms on the two scales of “intensity
of competition” (percentage values)
4.3 On the measurement of the dependent variables In the second survey conducted in 1998,
informants were asked to indicate the firm’s size of staff on five levels
of occupational qualification:
In addition, they were asked whether the firm
had the intention to increase, maintain or decrease the number of personnel
in these same five categories (within the following two years: 1988-99). These data are only available for a reduced
sample, because various managers (particularly of larger enterprises) were
not able to provide precise figures, and even more of them were uncertain
about the firm’s future employment perspectives. Table 4.3: Staff on different skill
levels: current percentage figures
and direction of envisaged future change.
In addition, the prevalence of formal advanced training was measured by asking respondents (a) whether the firm made use of internal or external programs for advanced vocational training, and (b) how many employees were enrolled in such courses. It was found that 71% of all firms made use of internal programs and 53% of external educational institutions (and 40% of both). Among all the firms which made use of any formal mode of advanced training, the average enrollment rate was 39%. In order to grasp the level of informal on-the-job training (as an indicator of job complexity), informants were asked how much time new incumbents of operative production roles usually needed to get fully skilled in their respective job, and whether this introductory time has recently increased, decreased or remained on the same level. The time indicated ranged from one day to two years, with an arithmetic mean of 68.5 and a median of 40 days. Most respondents held that this initial training period has recently increased (42%) or at least remained on the same level (51%). Finally, we wanted to know which skills were considered to be “essential” or at least “important” for average incumbents of operative roles. Table 4.4: Importance given to various
skills for ordinary operative workers
Evidently there are two very different categories of highly essential skills: one centering on specialized vocational knowledge, and the other clustering around highly informal “key qualifications” (Schlüsselqualifikationen) related to personal action capacities (flexibility and autonomy) on the one hand and to social competencies (particularly communicative skills) on the other (Table 4.4). PART I / PART IIFootnotes [1] For a discussion of the relationship between market contraction and competitive intensity, see: Gimeno et. al. 1997). [3] This also accords with the early finding of Simpson & Gully that only larger voluntary associations show high correlations between the complexity of external pressures and various aspects of intraorganizational structure (e. g. decentralization, membership involvement and the intensity of internal communication). [4]“Main findings from the firm survey of the Regis project. Regional Innovation Systems: Designing for the future”. http://www.uta.fi/laitokset/tyoelama/regis/survey.html [5]
Dito.
[6]
Dito.
[7]
Dito.
[8]
See for instance Mohr 1971 who has substantiated this lack of adaptive
motivation in the case of public health agencies.
[9]
For a discussion of the “industrial district” theory see Sabel et. al.
1987; Pyke and Sengenberger 1994; Schienstock et. al. 1998.
[10]“Main
findings from the firm survey of the Regis project. Regional Innovation
Systems: Designing for the future”. http://www.uta.fi/laitokset/tyoelama/regis/survey.html
[11]
"Main findings from the firm survey of the Regis project: "Regional Innovation
Systems: Designing for the future.” 1997. http://www.uta.fi/laitokset/tyoelama/regis/survey.html
For similar relationships in other European regions, see Schienstock/Kautonen/Roponen
1998).
[12]
This is an implication of Peter Blaus axiomatic theory which states that
the larger a system (of any kind), the smaller its periphery in relationship
to its total size. (Blau 1977: 19ff).
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update: 02.07.2014
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