State and market between the two ww

COMPARATIVE BUSINESS HISTORY
State and market
in the period between
the two world wars
Edoardo Sappino - Romina De Stefani

The
multidivisional
corporation
and
managerial
capitalism

From the U-Form to the M-
Form
US were the leading industrial country
U-Form based on functions was the most widespread
organizational form among big businesses
Product of internal growth and mergers
High authority centralization
Board managers involved in day-to-day activities
Technical and managerial know-how and organizational
design capabilities have been acquired and developed
Framework of large American firms in 1918:

What was changing in the 1920s
GDP an aggregate
demand stabilization
No more external factors for expansion (growing population, urbanization)
Surplus of internal
resources, mainly from
R&D
New process of diversification coming from the development of new products based
on previously acquired technology in order to avoid a drop in production output
Real GDP Per-Capita in the US

Independent divisions based on product line or geographic area
Top managers not occupied in day-to-day operations, thus they were
able to concentrate on supervising and allocating resources
Decentralization of decision-making
The only limit for growth are firm’s core sciences and technologies
The new organizational form (M-Form)
Shumpeter
Chandler
Williamson

Shumpeter Williamson
Belied by
Criticized by
Powell
Chandler
Considered by book's
authors the best interpreter

The General Motor Case
Created in 1908 by William C. Durant merging different firms
His aim was to increase production
In early 1920s, DuPont as major shareholder entrusted Alfred Sloan
Sloan set up a well coordinated multi-divisional firm composed of
independent divisions with their own organization for both production
and distribution
He also won the “fight” with Ford
1921 19401929
Ford 55.7 %
GM 12.3 %
GM 32.3 %
Ford 31.3 %
Chrysler 8.2 %
GM 47.5 %
Chrysler 23.7 %
Ford 18.9 %

How did he do this
Sloan’s ability to apply theory, separating headquarter from divisions
The financial control system developed by Donaldson Brown
Product diversification on an income basis with higher customization
Even if:
The practice of reorganization was not simple
Conflicts between ownership and management
Issues of disagreement were
Who should be included in the
planning process
Ownership’s right to veto new
investment

Ownership and Control
A. Berle and G. Means (1932) acknowledgement
of the rising importance of managerial firms
New dominant economic form
Change in the relation owner --> control
Possible divergences
Pessimistic opinion on managers
Reasons of the rise of managerial firm
Fragmentation of ownership
(not all the time)
Organizational revolution that followed
the growth of large corporations

“How to establish to whom the members of a
group are to be held responsible?”
1) The interest and the responsibility
of managers should refer
exclusively to shareholders
2) Give official recognition of the
situation that have emerged
3) Companies are to be at the service
of the entire community

Walter Rathenau’s view was similar to that of Berle
and Means
Large firms should not sacrifice itself for the private interest of
shareholder as they are a crucial component of the economy and a
“part” of the community
Weakening ownership and its depersonalization must be an
objective of public policies
Dealing with the gradual withdrawal of shareholders from daily
management, he identified two kind of shareholders
Speculators Permanent investors

Berle, Means and Rathenau struggled with
problems of contemporary importance
Society’s role in controlling companies
Stakeholder concept in corporate governance

Europe
between
the two
wars

Europe just exited WW I
WWI showed the importance of domestic mass production in key
sectors
WWI pushed the creation of large organizations
New strategies and organizational structure, imperfect convergence
with US
The European market was different from US
No continental scale
Cultural environment less favorable
Less dynamic
Lower trades and FDI
High barriers to capital mobility
Consumption styles antithetical to those of mass production
Suffered internal
divisions and
autarky policies

Cartels in Europe
Established to create stability in prices
Most of time pushed by governments to reach two aims
Political aim: protect
domestic firms from
foreign acquisition
Economic aim: reach
scale and scope
economies
Discouraged growth
Encouraged efficiency
Good social alternative to “US-style” industrial concentration because
they granted a stable level of employments inside of them
EFFECTS

Modern
Corporations:
divergences
US vs. EU

> HOW:
financial aids, protectionistic mechanisms,
special tariffs,...
> AIM:
help sectors affected by low internal demand;
prevent economic activities from
bankruptcy
1. The State Intervention

ITALY
1939
80% shipbuilding
25% mechanical sector
50% steel industry

2. The structure of the financial markets
& impact on corporate financial strategies
BRITAIN
a) Regional and local banks > small, centralized
economic activities
b) London Stock Exchange > H-FORMs
Many British firms remained largely personal
and controlled by the original owner

BRITAIN
"Preserving family control and ownership,
whatever the costs."
(Wilson, 1995)

GERMANY
BANKS
Central role in:
- financing
- influencing operations
- monitoring managers' actions

3. Relationship labour-management
a) THE LEVEL OF PARTICIPATION OF WORKERS IN THE
DECISION MAKING PROCESS
«The European workforce maintained a prominent
position in the corporate framework.»

US: attractive managerial careers,
managerial disciplines in business schools
Great separation ownership-control
Highly formal
M-FORM
EU: on-the-job training
internal labour force then held to be accountable for leadership
positions
Less clear separation ownership-control
More informal in terms of power and responsibility
H-FORM
b) THE COMPOSITION OF THE MANAGERIAL CLASS

JAPANT H E F A S C I N A T I N G
S T O R Y O F T H E
C O U N T R Y ’ S R A P I D
E C O N O M I C
D E V E L O P M E N T

ECONOMIC
DEVELOPMENT
EUROPEAN GDP GROWTH RATE: +1,0%
JAPANESE GDP GROWTH RATE: +0,2%
EUROPEAN GDP GROWTH RATE: +1,0%
JAPANESE GDP GROWTH RATE: +1,5%
1820-1870
1870-1910

FROM FEUDALISM TO
MODERNIZATION
THE TOKUGAWA DYNASTY
> Hostility towards foreigners
> Closeness towards trades, human capital and
technology
> Social rigidity: divisions in castes

FROM FEUDALISM TO
MODERNIZATION
THE TOKUGAWA DYNASTY

FROM FEUDALISM TO
MODERNIZATION
THE MEIJI REVOLUTION
a group of aristocrats and samurai took control of the country
THE CATCHING-UP STRATEGY
- Economic modernization in:
infrastructures
technologies
development of industrial policies
creation of monetary and fiscal policies
1868

FROM FEUDALISM TO
MODERNIZATION
- Imitations of Western models:
1868
BRITAIN: postal service & communication
GERMANY: Army & military system
FRANCE: Education
US: Banking system

FROM FEUDALISM TO
MODERNIZATION
- Great emphasis on education and high-quality
human capital
State's grants for international education
programs;
Foreign professional hires
1868

FROM FEUDALISM TO
MODERNIZATION
- Establishment of STATE-OWNED ENTERPRISES
(SOEs)
to promote up-to-date technology
1868

FROM MERCHANTS TO
ENTERPRENEURS
THE BIRTH OF ZAIBATSU
"Accounted for 1/3 of the entire output
of the Japanese manufacturing sector
and more than 10% of the total capital
invested in the country."

FROM MERCHANTS TO
ENTERPRENEURS
THE BIRTH OF ZAIBATSU
- Multi-subsidiary structure
- Controlled by the family of each zaibatsu
- The house bank was the main financial
creditors
- Internal expansion and diversification

FROM MERCHANTS TO
ENTERPRENEURS
THE JAPANESE DUALISM
IN THE PRODUCTION SYSTEM
small and medium-sized enterprises
not fully indipendent
partially contractually related to the zaibatsu

FIRST FORMS OF
MANAGEMENT
BANTO, THE FIRST GENERAL MANAGER
- Skilled young particularly close to the
zaibatsu family thank to many years of
employment
- Concerned towards:
welfare of all workers (insurance,
education, training courses, facilities,...)
technological improvements
coordination

FIRST FORMS OF
MANAGEMENT
BANTO, THE FIRST GENERAL MANAGER
nationalism
The end of the social castes
TOYOTA

State and market between the two ww

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