Capitalism has been spectacularly successful over the last two hundred years in harnessing technology and labor. This continues to take place first and foremost inside the individual firm. Changes in the way it is owned and managed in response to ever increasing scale and scope of industrial production have in this respect been instrumental to that success. To date, the balance of power within the firm has see-sawed back and forth between the two, giving rise to four distinct types of corporate capitalism — family, managerial, institutional, and welfare — each with its own management philosophy and organizational structure.
Keywords Agency Role of Management; Bureaucracy; Corporation; Family Capitalism; Financialization; Institutional Capitalism; M-Firm; Managerial Capitalism; Oligopoly; Technostructure; U-Firm; Welfare Capitalism
Imagine for a moment the marketplace as a giant wheel, its hub the center of all economic production, its rim the sum total of the needs and wants we individually signal, the spokes that connect the two is the for-profit firm. Now watch the wheel turn: that's capitalism in action. Dent or break enough 'spokes' and the wheel will collapse or fly apart: livelihoods are lost, good and services go unsold, firms go bankrupt, orderly markets breakdown. And that's why, to paraphrase the great sociologist Max Weber, control over the means of production — land, labor, machinery, and materials — must be exercised by a common management, for this arrangement alone assures the most efficient use of each. As does a distinct form of private ownership: the joint-stock company, whose shares can be bought and sold on the open market (Collins, 1980).
For this to work, however, ownership rights, privileges and obligations had to have the force of law. But for such de jure protections to be extended, the enterprise had to be a legal entity in its own right, i.e. be incorporated. Otherwise, shareholders were required to pay any and all of the venture's debts whether or not they actually had a hand in running them up. So either the individual shareholders actively participated in day-to-day affairs of the business, a managerial non-starter, or else trust that company officers are not spendthrifts or incompetents.
Understandably, the risks outweighed the potential rewards for many prospective investors. Vast amounts of capital were withheld consequently until the individual shareholders' liability was somehow limited by law. The first viable work-around, the commenda, enriched the Italian merchants of the fourteenth through sixteenth centuries, and their patronage of the arts fueled the Renaissance. It restricted the liability of non-managing partners but not, significantly, of managing partners. They too were exempted eventually as the commenda morphed into the modern-day corporation (Gillman & Eade, 1995).
Capitalism is by its very nature ecumenical. Scale, however, greatly affects organizational structure: the manner in which operations are monitored and supervised, decisions are made and communicated. How authority is exercised is not as important as who exercises it; the owner or the manager, and at whose behest? In search of an answer, corporations have reinvented themselves four times so far, progressing in organizational forms from family to managerial, to institutional and welfare capitalism.
The family as corporate entity is actually a very old legal principle. Aristotle commented in the fourth century BCE on how the family had to honor any commercial obligation entered into by any of its members. Back then, of course, the small farms, artisan's workshops, and trader's market-stalls around which economic life revolved were family owned and run. Yet the industrialized European Community (EC) of today bears a striking resemblance to the Greek city-states of antiquity: over 75 percent of businesses in the EC around the year 2000 were family-owned. These going concerns accounted for 65 percent of all the goods and services produced there (Jones & Rose, 1993, p. 1). And nowhere is the latent appeal of family capitalism more evident today than in China's surging economy. Between 1989, the first year they were counted, and 2002, private enterprises, most of which were family owned, grew in number over twenty-five-fold to top the two million mark (Zhang & Yu, 2005, p. 4).
Why family capitalism? Well, first of all, members of extended families know and trust each other. They willingly float short term loans to tide over financially strapped relations and frequently pool resources to mutual advantage. As such they're far more approachable than a bank or venture capitalist when the time comes to raise seed money. As employees, secondly, they will work long hours for little pay and require less supervision. All of which an owner can put to good advantage in keeping overhead costs low, provided that he or she remains a hands-on manager. The more separated an owner grows from day-to-day operations, the more extended the lines of intra-company communications and control and the more problems this creates. That's why most family-run businesses remain 'mom and pop' operations.
But family capitalism is entrepreneurially friendly only to a point. Successfully starting a business and expanding one are two very different undertakings. Each additional market entered, new product-line launched or production-technology installed increases a firm's scale and scope. Confronted daily with too many decisions and too many problems to solve, many of a technical nature, the hands-on, informal management style that was once such a strategic asset becomes a liability. A more hierarchical management structure that cedes operational control to specialists and business professionals is required. Without it, as many a family-owned and -run blast-furnace, shipyard, and textiles-mill in nineteenth-century Britain discovered too late, a firm cannot leverage the economies-of-scale or more efficient production technologies as well or as quickly as their better organized competitors and profits turn into losses, success into failure. To accommodate this necessary growth, a family-owned firm had to recast itself as a bureaucracy.
Now, families have successfully made this transition yet maintained overall control by reserving very senior management positions for themselves. France's Michelin is one, South Korea's chaebol conglomerates are another. Their success rests as much on what they didn't do as what they did, though, for the owners of family businesses are just as prone to human temptation as the rest of us. And there are many pitfalls unique to their station in life just waiting to ensnare them: nepotism, the siphoning off of capital to finance opulent lifestyles, management decisions inspired by family feuding instead of sound business sense, succession struggles, etc. Avoid these and the successive generations of the family can and do provide their firms continuity, a strong corporate culture, and an emphasis on the company's long-term as opposed to its short-term financial performance.
In capital- and technology-intensive industries like oil, steel, car manufacturing, etc., economies of scale matter: the more production capacity at a firm's disposal, the lower its unit-costs compared to its competitors'. Coordinating the inputs to and outputs from such a complex techno-structure was virtually impossible without the attendant bureaucracy. With its centralized decision-making, standardized production, and uniform administrative procedure, this nineteenth century innovation perfectly suited mass industrialization. It imposed a machine-like precision and orderliness on day-to-day operations that allowed the firm to undertake and coordinate on a very large scale a host of highly specialized, often technical functions.
At first, the 'managers' that held this bureaucratic structure together were largely first-line production supervisors or technical experts. They held their positions by virtue of their functional knowledge and expertise. As their number grew within the firm, however, so did the need to monitor, coordinate, and direct their efforts and, by extension, the efforts of those below them. This responsibility increasingly fell to a new class of professional manager versed in more generic business principles and practices. And with them came a top-down, pyramidal management structure that could easily accommodate growth widely adopted by corporations adopted in the first half of the twentieth century. (Wilson & Thomson, 2006).
And they had to grow to earn the profits to constantly reinvest in increasingly expensive production technologies. At stake was their continued ability to manufacture the high-tech items consumers and businesses wanted at the lowest possible...
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