managerial theory of the firm

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According to Bartlett and Ghoshal (1993), a ""managerial theory of the firm"" would be more attuned to the premises of the key actors within the firm so as to be able to illuminate the corporate world as seen by managers and encompass the issues that they perceive to be important. The form of the firm resulting from this managerial theory is a radical departure from the dominant M-form of the firm.

Contrast to the M-form --
Leadership in the M-form is fundamentally based on the view of companies as economic entities: managers in ABB and in most of the other companies we studied have premised their role on the recognition that large corporations are also complex social institutions. To capture the energy, commitment and creativity of their people, these managers are replacing the hard-edged strategy-structure-systems paradigm of the M-form with a softer, more organic model built around purpose, process and people. The renewal process we have described challenges the behavioral theory of the firm by the very existence of the leadership role; but it equally challenges Chandler's model of the M-form because of this basic change in the content of that role.

Chandler's study of the adoption of the multidivisional organization structure by fifty of the largest companies in the United States, and his detailed examination of four of the pioneers of that revolutionary structural form, led him to develop his highly influential strategy/structure thesis. His central conclusion was that companies being driven by market growth and technological change to develop greater diversity in their products and markets, were able to manage their new strategies efficiently only if they adopted a multidivisional organizational structure - the so-called M-form.

The reason this structural form proved so powerful was because it defined a new set of management roles and relationships that emphasised the decentralization of responsibility to operating divisions whose activities were planned, coordinated and controlled by a strong corporate management - the general office in Chandler's terms - which also made the company's ""entrepreneurial decisions"" about resource allocation. He showed how the management process created by this organization allowed companies to apply their resources more efficiently to opportunities created by changing markets and developing technologies.

Entrepreneurial Process: Aligning and Supporting Initiatives --
For example, (from Bartlett and Ghoshal, 1993), This entrepreneurial process, framed and institutionalized by ABB's new organization structure and management philosophy, is embedded in a redefined set of management roles and relationships. Front-line managers - the heads of the 1300 little companies - have evolved from their traditional role of implementers of top-down decisions to become the primary initiators of entrepreneurial action, creating and pursuing new opportunities for the company. Middle-level managers like Baker and Gundemark are no longer preoccupied with their historic control role, but instead have become a key resource to the front-line managers, coaching and supporting them in their activities. And top management, having radically decentralized the resources and backed them with strong delegated responsibility, focus much more on driving the entrepreneurial process by developing a broad set of objectives and by establishing stretched performance standards that the front-line initiatives must meet.

Integrating Resources and Capabilities --
Bower's intensive study of business planning and investment decision making in four divisions of a large diversified company he identified as ""National Products"" led him to develop a process model of the firm that enriched Chandler's work by challenging and expanding on several of its descriptions and conclusions. He presented a less heroic view of top management than Chandler's description of corporate entrepreneurs determining strategy through their control over resources. Instead, Bower described a process in which the shaping of new strategic initiatives and the investment proposals to support them (""definition"" in his terminology) were initiated by front-line managers. Furthermore, in his view, it was the middle-level managers who typically made the resource commitments, since projects reaching the executive committee level with their support (Bower used the term ""impetus"") were ""almost never rejected"" (1970:57). Thus, the major source of top management's power in Bower's model lay in its control over what he termed the ""structural context"" - ""the set of organizational forces that influenced the processes of definition and impetus"" (1970:71)

The Integration Process: Linking and Leveraging Capabilities --
In ABB, the middle managers' pivotal horizontal linkage role is supported by a top management that creates a value-based context to support and reward collaborative behavior, and by a front-line management that exploits the personal networks such horizontal relationships facilitate. It is a very different process than the vertical planning and resource allocation process at the core of Bower's model, but a vital one for a company competing in an increasingly knowledge- based economy.

Contrast with Cyert and March's Views on Embedding Purpose and Challenge --
Using clinical field data, experimental studies and computer simulations, Cyert and March formulated a behavior-based theory of the firm that challenged many of the economists' classic assumptions. By viewing organizations as coalitions of participants with disparate demands, they developed a notion of goal formation in firms that was based on an internal process of bargaining among coalition members. The objectives developed through this process were given stability by internal control mechanisms, particularly by standard operating procedures, yet were adaptable to changes in the external environment and to internal changes in the coalition. To explain decision making behavior, Cyert and March developed four key concepts about the way in which firms set objectives, manage expectations, and make choices. In their model, behavior was driven by the quasi-resolution of conflict, uncertainty avoidance, problemistic search, and organizational learning.

The Renewal Process: Creating Purpose and Challenge --
In sum, ABB has created a much more rational macro framework for goal setting and learning, capturing them both in a third core organizational process we describe as the renewal process. Like the entrepreneurial and integration processes, it is defined by a set of top, middle and front-line management roles that not only drive the process but also embed it in the organization's ongoing activities. But, while the front-line managers are the key drivers of the entrepreneurial process and middle management provides the anchor for the integration process, it is the top management of the company that takes the lead in inspiring and energizing the renewal process.

This process of purposeful corporate renewal is very different from the individually based, negotiation driven process by which Cyert and March assumed that companies established their goals and aspiration levels. In fact, many of Barnevik's earliest actions were designed to break the coalitions and redefine the policies that had made ABB's precedent companies operate in such a politically negotiated manner. By reassigning managers, stripping out organization layers, redefining SOPs, and shifting the locus of power towards the operating companies, he reshaped coalition membership and redefined the relationships among them. Rather than waiting for the new organization to develop and institutionalize new objectives and behavioral norms through what Cyert and March described as ""accidents of organizational genealogy"" (1963:34), he intervened strongly to define a new common purpose and ambition to shape those objectives and standards.

In doing so, Barnevik seems to reject Cyert and March's assertion that ""people have goals, collectives of people do not"" (1963:26) as well as their complementary belief that the organizational aspiration level is determined by the attainable goals aspired to by individual coalition members according to their perceptions of the past. Instead, he has focused ABB on a very streched, future oriented sense of corporate mission that is defined with sufficient conviction and communicated with sufficient intensity that it can result in a simultaneous raising and convergence of individual aspiration levels within the company. It is an activity to which he has devoted an enormous amount of time, firstly in developing a clearly articulated sense of purpose, and then in overlaying it with a more dynamic sense of challenge.

While many companies have aspired to the voguish objective of ""creating a shared vision"", Barnevik seems to have moved well beyond the rhetoric towards making this an operating reality at ABB. He has done so through several means. The company's mission statement is designed to engage organization members worldwide and to align their interests with ABB's broadly defined corporate purpose ""to contribute to environmentally sound sustainable growth and make improved living standards a reality for all nations around the world"" (P6). With such a statement, Barnevik has created the sense of ""public interest"" and ""social welfare"" that Cyert and March saw as providing the common goal of political institutions (1963:28). However the mission statement then expands that unifying altruistic purpose into a more managerial objective: ""to increase the value of our products based on continuous technological innovation and on the competence and motivation of our employees... becoming a global leader - the most competitive, competent, technologically advanced and quality minded electrical engineering company in our fields of activity"" (P6). This translation of the broad mission to a strategic objective lends it a sense of organizational reality and legitimacy, and gives it more managerial power and relevance. Barnevik has further operationalized the broad vision by expressing the goals in financial performance terms - ""10% operating profit and 25% return on capital employed by the mid 1990s"". Such statements have not only provided a common aspiration level, they have also moved the mission statement beyond the ""ambiguous goals"" and ""vague objectives"" that led Cyert and March to conclude that such solutions to the goal setting problem were ""misdirected"" (1963:28).

Beyond creating a shared purpose, Barnevik has taken on a major role in providing the organization with a sense of ambition that, on the one hand, legitimizes the company's stretch targets and, on the other hand, creates sufficient strategic turmoil to stimulate organizational learning. For example, recognizing that ABB was too dependent on a stagnant European market, Barnevik set an objective of expanding its North American sales to represent 25% of the company's total. To initiate change, he acquired Combustion Engineering and Westinghouse's power transmission and distribution business in the United States, grafting these operations on to ABB's existing BAs. Not only did such a move boost the North American share of ABB's sales from 12% to 18%, it also exposed the Europe dominated business to North American technical developments (such as process control automation) and management practices (such as time based management) that were previously neither well understood nor effectively practiced in the ABB system.

The dual impact of a clearly defined anchor of corporate purpose juxtaposed against a slightly dissonant corporate ambition is felt particularly strongly in the front-line units. It is here that managers confront the gap between current performance and the aspiration level defined by the visionary purpose statement and the stretching ambition. If this process is to remain in balance, however, this tension created in the front-line units must be resolved. And without a high level of credibility and trust, such resolution can easily degenerate into horse trading or grand compromises. Creating and maintaining credibility and trust in the system, therefore, is a key requirement and these tasks define the main responsibilities of middle management in the renewal process.

One important means for executing these responsibilities lies in their stewardship of the various horizontal coordination mechanisms we have described. In contrast to Cyert and March's assumption that ""firms do not resolve potential conflict... by a procedure of explicit mediation"" (1963:27), managers like Ulf Gundemark create and manage a portfolio of boards, committees and project teams that serve not only as channels for the communication and transfer of knowledge, but are also explicitly designated as forums where managers can negotiate differences and resolve conflicts in an open and legitimate manner.

Middle managers also ensure the legitimacy and credibility of this tension-filled process by creating a decision making context which is both participative and transparent. To ensure the credibility of top management's ambitious objectives, for example, Ulf Gundemark formed a Relays Vision 2000 Task Force of nine operating managers from various front-line companies, and charged them with the task of translating Barnevik's broad vision of ABB's place in the global power equipment industry into specific strategies for the relays business. After six months of intensive effort this task force developed a set of self-funding proposals that ranged from strategic investments to expand into new products (like metering) and new markets (like telecommunications), to plans for increasing employee motivation and organizational effectiveness. With a legitimacy and credibility that came from being defined by peers rather than being imposed by the top management, the strategy was accepted by front line managers like Jans who began trying to meet the ambitious challenges by expanding beyond their existing business boundaries into the new products and markets legitimized by Vision 2000.

The behavioral theory of the firm is, in essence, premised on the absence of leadership, while ABB's renewal process is clearly driven by highly effective leaders at the company's top level. In this specific attribute, the Cyert and March model is fundamentally different from Chandler's conceptualization of the classic M-form organization, which was premised on a strong leadership role of the top management. Alfred Sloan's towering presence in General Motors is perhaps the best known illustration of this role, as reflected in Chandler's (1962) description of him as the architect of GM's strategy, the builder of its structure, and the designer of its systems. Even since Sloan and his pioneering contemporaries discovered how the then emerging strategy of diversification was facilitated by the divisional structure and how that structure could be supported by some tightly designed planning and control systems, this strategy-structure-systems link has become an article of faith that has shaped top management roles in most large M-form organizations.

While it is clear that the role played by Barnevik and other top managers at ABB is not well captured by Cyert and March's model, it is important to understand how it also has diverged from the top management role described by Chandler. Given their starting point in the midst of a fusion between two large worldwide companies, Barnevik and his colleagues in ABB's group executive management initially focused on these tasks of formulating the merged company's strategy, structure and systems. Over time, however, their roles have evolved to be significantly different from these classic responsibilities of leadership in M-form organizations. From being formulators of corporate strategy, they have become the shapers of an instititutional purpose with which all employees can identify and to which they can commit. Instead of being the architects of formal structure, they have come to see themselves as the developers of organizational processes that can capture individual initiative and create supporting relationships. And, rather than being the designers of systems, they have refocused on the individual as the primary unit of analysis in the leadership task and have become the moulders of people.

Leadership in the M-form is fundamentally based on the view of companies as economic entities: managers in ABB and in most of the other companies we studied have premised their role on the recognition that large corporations are also complex social institutions. To capture the energy, commitment and creativity of their people, these managers are replacing the hard-edged strategy-structure-systems paradigm of the M-form with a softer, more organic model built around purpose, process and people. The renewal process we have described challenges the behavioral theory of the firm by the very existence of the leadership role; but it equally challenges Chandler's model of the M-form because of this basic change in the content of that role.

Framing the Model: Toward a Managerial Theory of the Firm --