Download The Information and Services Economy aka Business

The Information and Services Economy
a.k.a.
Business Architecture and Services Science
IS210, Week 4
Profs Bob Glushko & Anno Saxenian
UC Berkeley School of Information
Fall 2006
Theoretical foundations: the classics
 Economics: theory of the firm
Adam Smith: specialization & division of labor
Ronald Coase: firm v. market
Oliver Williamson: transaction cost economics
 Production: mass production as blind destiny
Karl Marx
Henry Ford
Frederick Taylor
Alfred Chandler
Transaction costs revisited
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Transactions that are frequent, uncertain & asset
specific are very complex and costly (risk of
holdup) are internalized within firm boundaries
Firm allows use of fiat to resolve conflicts:
assumes absolute hierarchical control
View from 2006
1.
2.
3.
4.
5.
Overlooks hybrids and multiple forms of organization
Overstates efficacy of hierarchical control
Fails to account for cross-national differences
Understates role of social relations within & between firms
Assumes boundary of firm based on cost alone
Beyond transaction costs
What might a firm consider in deciding what
stays inside, aside from minimizing costs?
Incentives to innovate
Incentives to cut costs
Flexibility to respond in changing environment
Ability to track external developments
Ability to learn from partners
Digital Equipment Corporation v. Silicon Valley
Karl Marx on Capitalism
 Karl Marx Capital: A Critique of Political Economy,
Volume 1: The Process of Capitalist Production 1867
 In capitalism, labor power is a commodity that can
be bought and sold.
 Below this surface of free exchange, value is created
through “exploitation” of labor by capitalist.
 Capitalist production: large numbers of laborers
working together to manufacture commodities
 Social nature of large scale production (cooperation)
reveals the “collective power of the masses” &
requires concentration of the means of production
Marx on Capitalism (cont.)
 The motive of capitalist production is to extract
maximum amount of surplus-value from workers
 Surplus value: value created by workers beyond the
amount they are paid for individual, isolated labor
(value created in large scale, social production)
 Extraction of surplus value = exploitation
 Surplus value = profit, interest and rent income
 Capital’s role is to direct and control the production
process, which results in unavoidable antagonism
between capital and labor
“The history of all hitherto existing society is the
history of class struggles” Communist Manifesto
Marx on the division of labor


Manufacture is prevalent characteristic of capitalist
production process
Two-fold rise of manufacture from differentiated
crafts production:
1.
2.

Loss of general handicraft skills via separation and
application to production of single commodity
Specialized division of labor isolates detailed operations,
further reduces breadth of skills
In capitalist manufacture, the detail laborer
converts body into specialized implement; no
longer produces (or able to produce) a complete
end product
Karl Marx and Adam Smith
 Marx studied Smith, was clearly influenced by him
 Marx’s distinction:
 Division of labor in society: means of production dispersed
among multiple independent competing producers, anarchy
versus
 Division of labor in manufacturing (the workshop): means
of production controlled by capitalist authority/despotism
 Division of labor in society exists in many economic
systems, division of labor in manufacture exists only
in capitalism.
 Labor as appendage of capitalist’s workshop
Marx on science
 Separation of intellectual powers of production from
manual laborer: loss of the knowledge, judgment,
and will that are practiced by skilled handicraftsmen
 Conceptual/intellectual work is sole the province of
capital. Science is pressed into the service of capital,
and separated from labor, in modern industry.
 Capital converts intellectual powers into control over
labor through use of science
 The power of the “master” lies in science and the
gigantic physical force of the machinery combined
with the mass of labor that make up factory
Frederick Taylor: scientific management
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
Ordinary management: “initiative and incentive”
Scientific management: task management
Scientific management
1. Develop science to replace old rules-of-thumb
2. Scientifically select, train, teach, develop worker
3. Insure all work is done according to scientific
principles
4. Division of labor between management and
workmen: each does what they are best fitted to
Scientific management
 Management’s role: planning ahead according to the
“laws of science”
 Defining the tasks involved in a job, subdivision of labor
 Establishing many rules, laws, formulae to replace judgment
of workers
 Tasks must be systematically recorded and indexed
 Requires thousands of pages of scientific data just for an
ordinary machine shop
 Workers: execution of tasks defined by management
 The “science” amounts to so much that the man who is
suited to handle pig iron cannot possibly understand it, nor
even work in accordance with the laws of this science,
withouth the help of those who are over him”
Taylor’s influence: efficiency movement
 Taylorism: notion that there is “one best way” of
performing a job that can be discovered by
scientifically analyzing work
 Taylor’s “time and motion” studies break job into
component parts and measure each to the second;
Taylor was famous for studies of shovels
 Heavily influenced early management schools
 Taylor was professor at Tuck School of Business,
Dartmouth;
 Harvard University offered graduate degree in business
management in 1908, first year curriculum based on
scientific management
 Ideas influential in early Soviet Union
Henry Ford on mass production (1926)
 Mass production not just about quantity of output or
use of machinery
 Mass production is focusing on manufacturing
project the principles of power, accuracy, economy,
system, continuity, speed, and repetition.
 Management’s job is to interpret these principles
 Goal is productive organization that delivers in
continuous quantities a useful commodity of
standard material, workmanship and design at
minimum cost
 Necessary precondition of mass production is a
capacity of mass consumption to absorb the output
Henry Ford on mass production (II)
 Advance over early factory system: mere massing of
men and tools, dominance of profit motive
 Failure of pure financial emphasis in manufacturing
becomes evident with labor revolt, social strife
 Rise of engineering emphasis (rather than simply
financial, profit motive)
 Limits of early 20th c. “efficiency movement” with its
time and motion studies: need a wholly new method
 e.g. Don’t just rationalize pig iron loading by making worker
load 47 1/2 tons a day (rather than 12 11/2 tons) for $1.85
rather than $1.15/day) , but make it unnecessary for
workman to carry 106,400 lbs for $1.85/day
The motor industry as a model
 Ford Motor Co as pioneer of mass production
 Start with conception of public need: goal is to
match use-convenience with price-convenience
 Service element remains utmost
 Profit and expansion are trusted to emerge as
consequences
 Mass production precedes mass consumption and
makes it possible by reducing cots and permitting
greater use-convenience and price-convenience
 500% increase in production allows 50% reduction in cost,
with accompanying decrease in selling price, which likely
multiplies by 10 the number of people who can buy it
The principles of mass production
The keyword to mass production in shop is simplicity;
three plain principles:
1. Planned orderly and continuous progression of
commodity through the shop;
2. Delivery of work instead of leaving it to workman’s
initiative to find it;
3. Analysis of operations into their constituent parts.
Importance of consistent quality: small spring leaf
must be identical strength, finish and curve with
millions of others designed to fulfill the same
purpose. Requires automatic machinery, the most
accurate measuring devices, controls, etc.
The effects of mass production (Ford)
1.
2.
3.
4.
5.
Increase in industrial control and engineering,
rather than financial control.
Products of highest standard of quality ever
attained in output of great quantities.
Creation of a wide variety of single-purpose
machines that reproduce skill of hand
Elimination of hard work in the form of wasteful
and laborious burden-bearing.
Growing need for skilled artisans and creative
genius in mass production.
The effects of mass production (II)
Ford’s view of the effects of mass production
“The problem of management is to organize production
so that it will pay the public, the workmen, and the
concern itself.”
 Results in higher wages than any other method of
industry: workers earn more, can buy more
 Mass production increases supply of human needs
and development of new standards of living,
enlargement of leisure.
How does this differ from Marx’s view?
Alfred D. Chandler: introduction
Alfred Dupont Chandler, Jr. The Managerial Revolution
in American Business (1977) –a Pulitzer Prize winner
Prior work:
Strategy and Structure: Chapters in the History of the
Industrial Enterprise (1962)
 Examines E.I. Du Pont de Nemours and Co., Standard Oil of
New Jersey, General Motors, and Sears Roebuck and Co.
 Argued that managerial organization developed in response
to a corporation’s business strategy
Chandler and the “visible hand”
 A business historian’s view of the rise of the firm.
 Thesis: From 1950s to 1920s, the formative years of
modern capitalism, the US saw the emergence of a
new business institution and a business class.
Growth of the “modern business enterprise”
Emergence of new class of salaried managers
 Rise of managerial capitalism, modern business
enterprise replaces market mechanisms in
coordinating economic activity and allocating
resources; the visible hand of management replaces
the invisible hand of the market
Chandler’s modern business enterprise
 By WWII modern business enterprise was the most
powerful institution in the American economy, its
managers the most influential group of economic
decision-makers.
 Definition of modern business enterprise:
 Many operating units, each with distinct administrative
office; multi-product, multi-location enterprise
 Units are hierarchically ordered and monitored and
coordinated by full-time middle and top salaried managers
 Traditional American business firm was a single-unit,
single product, single location enterprise, with
individual or small number of owners/ managers,
governed by market and price mechanisms.
Modern business enterprise, cont.
 The modern business enterprise, by its very actor of
coordination across multiple units, brings imperfect
competition and the misallocation of resources.
 At odds with economic theory, with perfect competition and
the invisible hand as most efficient way to coordinate
activities and allocate economic resources.
 Historians focus primarily on entrepreneurs, not on the
institution of the business enterprise itself
 The Visible Hand traces transition of the US from
rural, agrarian to urban, industrial society due to
revolutionary changes in processes of production
and distribution (transportation, communication,
finance.)
Chandler’s general propositions
1.
Modern multi-unit business enterprise replaced small
traditional enterprise when administrative
coordination permitted greater productivity, lower
costs, and higher profits than coordination by market
mechanisms
 Internalization and routinization of transactions
lowers transaction costs.
 Linkage of producing units with buying and
distribution lowers costs of information on markets,
supply.
 Sounds like Williamson, but . . .
Administrative coordination
 Far more important, for Chandler, were cost
reductions due to coordination
 Internalization permits administrative coordination
of flow of goods from one unit to the other
 Effective scheduling of flows achieves more
intensive use of facilities and personnel, thus raises
productivity
 Administrative coordination permits certain cash
flow and more rapid payment for services.
2. Advantages of internalizing activities of multiple
business units into a single enterprise can’t be
realized without creation of a managerial hierarchy
Modern business enterprise
3.
Modern business enterprise appeared for first time
in history when volume of economic activities
reached level that made administrative
coordination more efficient and more profitable
than market coordination.

4.
Volume of activity increases due to new technology &
expanding markets
Once a managerial hierarchy has been formed and
successfully carried out its function of
administrative coordination, the hierarchy became
a source of power, permanence, and continued
growth.
Professional management
5.
The careers of salaried managers directing these
hierarchies became increasingly technical and
professional.

6.
Education, training , and experience become source of
advancement and replace family relationships or money
As multiunit business enterprise grew in size
and diversity, and as its managers became more
professional, the management of the enterprise
was separated from its ownership.

Widely dispersed stockholders replace personal, bank, or
family ownership; they lack the knowledge, influence,
experience, or commitment to control firm, so current
operations and future planning lies in hands of managers.
Modern business enterprise
7. Career managers prefer long-term stability and
growth of the enterprise over maximization of
current profits.
 Salaried managers make decisions that preserve their ;
lifetime careers in the enterprise: seek to protect sources of
supplies, markets; take on new products and services to
insure full use of existing facilities and personnel; reinvest
profits rather than pay out dividends.
 Desire of managers to keep organization fully employed
became force for its continued growth.
8. As the large enterprises grew to dominate major
sectors of the economy, they altered the basic
structure of these sectors and the whole economy.
The managerial revolution
 New enterprises take over form market the
coordination and integration of the flow of goods and
services from the production of the raw materials
through production to sale to end consumer.
 As technology became more advanced and as
markets expanded, administrative coordination
replaced market coordination in more sectors
 By mid 20th c. emergence of a relatively small number
of large mass producing, large mass retailing, and
large mass transporting enterprises in which the
salaried managers coordinated production and
distribtuion and allocation in major sectors of the
American economy
Stepping back
Adam Smith: specialization & division of labor
Ronald Coase: firm v. market
Oliver Williamson: transaction cost economics
Karl Marx: rise of capital and labor, class struggle
Frederick Taylor: tasks and the “one best way”
Henry Ford: mass production & consumption
Alfred Chandler: the visible hand
 What differentiates Chandler and Williamson’s
arguments about the rise of the firm?
 How would Marx view the debate?