The Development of Modern Business

Firms may develop in a variety of ways. The simplest type of firm conducts a single function to provide an individual product or service from one site. Thus, a firm can grow geographically (production at more than one site), by scale (horizontal integration to produce more of the same product), by scope (diversification into other products) and by function (vertical integration of sequential activities such as production and distribution). As firms grow they often develop legally (additional statutory rights through incorporation) and organisationally (new structures and procedures). Figure 1.1 indicates these various directions of growth and internal development. Growth can, of course, be multidirectional and multinational. It may also be concentrated upon fewer products, functions or sites than previously in a process known as specialisation. Growth can occur by internal initiative within the firm, by acquisition of another company, or by a cooperative venture with another business. Finally, growth can also be negative when firms decide to reduce their activities or ‘downsize’. Indeed, the majority of businesses fail and disappear (sadly the loss of most records makes it difficult to discover why). Finally, most firms begin and remain small (perhaps 80 to 90 per cent of firms in industrialised countries are classified as small or medium-sized enterprises). The principal task of the business historian, therefore, is to analyse why and how a minority of enterprises grow larger.

The role of the entrepreneur is today regarded as crucial in the success of the business enterprise, a perception that has not always existed. How that role is fulfilled most effectively, though, remains a matter for much contention. The postwar ascendancy of many Japanese firms was particularly associated with long-term strategic planning through shared decision-making. Entrepreneurial skills were concentrated on a narrowly focused individual firm and its enterprise group within a local setting. Emphasis was placed on strategies that were market-driven, fostered close interfirm relationships, and empowered employees. The dominant Westernised, or at least American, paradigm has been somewhat different. It emphasised broad generic management skills in large diverse corporations, with decision-making concentrated in elite head offices that oversaw wide geographic empires and concentrated upon performance-monitoring and problem-solving.

Today, there is much speculation about the formidable opportunities and challenges presented by new communication technology. The internet is expected to cause national markets to become integrated into a global arena by lowering the cost and enhancing the speed of making transactions. At the same time, the ‘boundary units’ shown in Figure 1.4 are confronting a growing flood of information about environmental conditions. The need to process this data and make it accessible to decision-makers is compelling firms to invest in ‘knowledge-management’ systems and ‘intranets’. Moreover, the internet is spawning ‘virtual firms’ run by a core of entrepreneurial specialists linked by e-mail to knowledge workers who contract to perform specific tasks. What these unfolding trends reveal is that changes in communication technology have a direct impact on the institutional arrangements included in Figure 1.2. Simultaneously, they enlarge markets, increase the span of corporate control, and encourage the proliferation of cooperative structures.

Our modern capital markets are of global proportions. An investor in Sydney can buy shares in a Japanese, American or British corporation as easily as she can in an Australian one. Similarly, she may invest in a shipping enterprise, a property firm or a computer company, such is the diversity of opportunity. The broadening and restructuring of international financial markets over the last half century and the accompanying information technology revolution have made this possible. Corporations themselves think globally when seeking new investment or acquisition opportunities. Good investment decisions, by the institutional or private investor, however, require effective information channels. Vast quantities of information have become easily accessible particularly through the internet. However, as we saw in Chapter 3, the bounded rationality of the human mind means the investor’s task of selecting good-quality, reliable information may be no easier than in the past and perhaps more difficult. For companies seeking new or additional finance, signalling their worth also becomes more difficult in a crowded market.

Working conditions and the relationship between employee and employer are in a state of flux. Decentralising technologies, such as the computer, support for outsourcing, the growth of service industries, and sustained higher levels of unemployment are changing the employment relationship that was part of industrial society. Each of these factors has increased the incidence of external labour markets after several centuries when internalisation had become increasingly popular. In addition, flexibility of skills and individualised work contracts are increasingly seen as the most effective means of harnessing new knowledge and extending economic growth. Again, this reverses the popularity of deskilling and collective bargaining. This process of change is vividly demonstrated in Japan where the broad employment contract, common among large-scale firms since the Second World War, is being replaced by narrower terms in firms such as Nissan and Matsushita. British employment conditions were radically altered in the 1980s and, more recently, in Australia centralised wage determination is in retreat. Firms have mostly recognised the importance of fostering good human resources as a valuable corporate capability and in this chapter we will examine the manner in which they have developed labour-management policies in response to environmental conditions and used them as a source of competitive advantage.

Today, firms have two generic strategic choices when pursuing profit maximisation: sell at low price to secure high volume, or produce distinctive goods in smaller volumes but with a large margin. In addition to these broad strategic options, branding is becoming more significant, opportunities to pursue niche strategies are more widely available, and greater attention is being devoted to quality of service and loyalty schemes. None of these developments is new. They have been evident to varying degrees and in different forms since a recognisably modern form of consumer society arose in the USA, Britain and Australia early in this century (consumerism appeared in Japan after 1950).

Since the early 1980s, firms in the West have shown greater interest in forming cooperative ventures with other companies. Such inter-firm arrangements are nothing new, but as we suggested in the previous chapter, this development is part of the more comprehensive structural response to rapidly changing environmental conditions. (Chapter 10 below considers aspects of inter-firm cooperation in an international context.) Thus, companies are focusing on developing core capabilities and deeper knowledge bases that can be used in combination with those of other firms to pursue a common strategic objective, such as developing a new product or process or penetrating a different market. Inter-firm structures also help to mobilise the financial resources needed to meet development costs (Chapter 4), but, fundamentally, the proliferation of strategic alliances reflects the need for firms to combine their learning abilities.

International business has occupied a prominent position in many economies in the twentieth century. Of the nations we are studying, America, Britain and Japan have been among the largest sources of international business, Australia, America and Britain some of its leading recipients. The globalisation of markets and technology, particularly in the 1990s, has increased dramatically the size and reach of many international firms and influenced the ways in which they organise their activities. The arrival of foreign firms can provide a stimulus to a nation’s economic development through flows of investment, technology, skills and knowledge. At the same time, receiver countries fear the threat to national self-determination and endogenous progress from large, and perhaps culturally alien, corporations. Sender nations are also sensitive to the likely loss of exports and leakage of competitive advantages as domestic firms move abroad. Thus, the activities of large powerful international firms have generated strong emotions regarding business ethics and the extent of their corporate responsibilities, particularly in small developing host economies. As multinationals increasingly cross cultures and continents in the twenty-first century, their relationships with their hosts have become a paramount issue. American firms like K-Mart, Wal-Mart, Coca-Cola and McDonald’s have recently learned some hard lessons about the obstacles to international expansion; what works at home often does not in the host nation (Box 10.3).

Governments have played a pervasive role in the economies of many nations. Such roles have periodically included that of facilitator (economic development and stabilisation, role model, information conduit), arbitrator (competition, regulation, corporations law, property rights) and participant (buyer and seller of goods and services). In a sporting analogy we can say that the state has been coach, referee and player; sometimes all three!

Our concluding chapter is divided into three parts. We begin by summarising the main arguments and conclusions of the book and follow this up with a look at how the modern history of business enterprise supports our understanding of current and prospective corporate issues. We then finish up with a look at the current state of business-history research.