Organizational Capabilities and the Economic History of the Industrial Enterprise

In the paper

“Such challengers did appear, but only a few of them.”

In the paper

“The creation, maintenance and expansion of such capabilities permitted American and German firms in the two decades before World War I to drive British competitors from international markets, and even Britain's home market, in most of the capital-intensive industries of the Second Industrial Revolution.”

In the paper

“These industrial firms first appeared as modern transportation and communication networks were completed-networks that themselves were built, operated, enlarged and coordinated by large hierarchical firms.”

In the paper

“Firms grew by moving backward to control materials and forward to control outlets (vertical integration); but, as will be described shortly, they did so largely in response to the specifics of the short-lived business needs or opportunities.”

In the paper

“Although product pricing remained a significant competitive weapon, these firms competed even more forcefully through functional and strategic efficiency”

In the paper

“In geographical expansion that utilized the capabilities honed in exploiting the economies of scale, the firm usually concentrated on a single line of products.”

What the sources say

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  cites Scale and Scope

In the paper

“In machinery the British did not even try.”

What the sources say

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In the paper

“AEG sold more products in Britain than did the largest British firm.”

What the sources say

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In the paper

“This is why so many of the new companies met their needs by building almost immediately a national marketing and distribution network staffed by their managers and workers.”

In the paper

“In the years following World War I, the first movers and a small number of challengers continued to grow by entering markets abroad and those of related industries.”

What the sources say

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In the paper

“The story was much the same for pharmaceuticals, films, agricultural chemicals, and electro-chemicals.”

What the sources say

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In the paper

“From the 1890s on, continuing research and development that improved existing products and developed new ones in this critical science-based industry was carried out in Schenectady, Pittsburgh, and Berlin, but not in Britain.”

What the sources say

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In the paper

“In the 1880s and the 1890s, these pioneering German firms became the industry's first movers.”

What the sources say

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In the paper

“Indeed, in 1913, the two largest commercial enterprises in imperial Russia were Singer and International Harvester.”

What the sources say

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  cites Scale and Scope

In the paper

“In the first years of this industry, British pioneers were as active as those in Germany and the United States.”

What the sources say

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In the paper

“At the same time, Harvester distributed through a network of branch offices in 11 cities that encompassed 80 percent of the implement dealers in Russia.”

What the sources say

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In the paper

“Where the British works produced only 30 or 40 dyes, the Germans were making 300 to 400.”

What the sources say

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In the paper

“In entering related product markets which reflected knowledge acquired in utilizing the economies of scope, the firm often entered more than a single line.”

What the sources say

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  cites Scale and Scope

In the paper

“But within a decade after the establishment of Thomas Edison's first central power station in 1882 in New York City, two first movers in the United States (General Electric and Westinghouse) and two in Germany (Siemens and Allgemeine Elektricitäls Gellsellschaft, AEG) had made the investments in production, distribution and management to exploit economies of scale and scope.”

What the sources say

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  cites Scale and Scope

In the paper

“When the minimum efficient scale of production was very high, as it was in steel, copper and aluminum, building abroad was rare.”

In the paper

“What was true of chemicals and electrical equipment was also true in steel, copper and other metals and in heavy and light machinery.”

What the sources say

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  cites Scale and Scope

In the paper

“But they failed to make the essential investments in production, distribution and management.”

In the paper

“By World War I, American firms had achieved comparable global competitive power in the production of elevators (Otis Elevator), pumps (Worthington Pump), boilers and other steam equipment (Babcock & Wilcox), printing equipment (Merganthaler Linotype), and heating equipment (American Radiator).”

What the sources say

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In the paper

“By the turn of the century Bayer and the other German chemical leaders had created the largest and most carefully defined industrial managerial hierarchies the world had yet seen.”

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In the paper

“For example, by the time Bayer had completed its works at Leverkusen, its sales force of trained chemists was working worldwide with more than 20,000 customers.”

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In the paper

“Even when suppliers and distributors were competent and reliable, they were often unable to deliver on schedule and in the quantity and quality required by the new capital-intensive industries.”

In the paper

“Bayer, BASF, Hoechst and three smaller German enterprises did.”

In the paper

“In 1913, 160,000 tons of dyes were produced worldwide.The German firms made 140,000 tons (72 percent of this output by the Big Three); 10,000 more were produced by Swiss neighbors up the Rhine.”

What the sources say

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  cites Scale and Scope

In the paper

“In office machinery, such first movers as Burroughs Adding Machine, National Cash Register, Remington Typewriter Company, and the Computing-Tabulating-Recording Company (renamed International Business Machines in the early 1920s) dominated their industries worldwide.”

What the sources say

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In the paper

“As a result, by 1913, two-thirds of the electrical equipment made in British factories by British labor was produced by subsidiaries of General Electric, Westinghouse and Siemens.”

What the sources say

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In the paper

“Total British production was 4,100 tons.”

What the sources say

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In the paper

“They began to build one or two giant works along the Rhine, carefully planned to utilize economies of scope.”

What the sources say

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In the paper

“Many U.S. firms did not respond to the intensified competition and the resulting decline in their rate of return on investment by reinvesting in maintaining and expanding existing capabilities.Instead, they used the retained earnings to acquire facilities and personnel in other existing business, in which their own capabilities did not give them a competitive edge.”

What the sources say

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In the paper

“At GE, the lines whose operating results were accounted for separately rose from 10 in 1900 to 193 in 1930 to 282 in 1940.”

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In the paper

“And in automobiles, the great new transforming and growth industry of the interwar years, the first mover, Ford, and its two challengers, General Motors and Chrysler, quickly dominated world markets.”

What the sources say

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In the paper

“In electricity, the two U.S. first-movers began to pull ahead of the Germans.”

What the sources say

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In the paper

“In the 1920s, Du Pont, Union Carbide, Allied Chemical, Dow and Monsanto all diversified into a wide variety of products that reflected their specialized major technological base.”

What the sources say

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In the paper

“Before the 1960s, industrial enterprises in the United States and Europe rarely moved into markets where their learned capabilities did not give them a distinct competitive advantage.”

What the sources say

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In the paper

“In telephones and related equipment, the international division of AT&T's Western Electric (and its successor ITT) remained the world's largest producer.”

What the sources say

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In the paper

“For U.S. companies, the war and German's postwar difficulties boosted the growth of overseas sales for chemical, machinery and metal companies.”

What the sources say

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In the paper

“Moreover, large industrial multi-market firms-be they American, European or Japanese -have throughout this century used retained earnings (the profits from products earlier commercialized) to fund the high cost of developing new ones.”

What the sources say

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In the paper

“Their competition came less from British and French companies and more from firms in neutral nations who had benefitted from the hiatus of German dominance to expand their capabilities.”

What the sources say

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In the paper

“In the United States, the chemical firms were among the first to adopt a multidivisional structure-that is, to set up autonomous divisions to integrate production and distribution of major product lines with a central corporate headquarters, which in turn monitored the performance of and planned and allocated resources for the divisions.”

What the sources say

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In the paper

“Today the product lines of large multimarket industrial firms have become far more focused on their core capabilities (Scheifer and Vishny, 1991).”

What the sources say

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  cites Scheifer and Vishny, 1991

In the paper

“By 1929, General Electric dominated the world's electrical equipment market.”

What the sources say

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In the paper

“In the 1920s, these firms developed first-mover advantages in X-rays and other equipment (that helped to transform medical practice), in electrical appliances (stoves, refrigerators, washing machines, heaters and the like that helped transform household living) and radio (that helped to transform communication, entertainment and politics).”

What the sources say

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In the paper

“In 1929, American manufacturers turned out 85 percent of the world's production.”

What the sources say

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In the paper

“In most cases, they were in time forced to pull back in and to concentrate on businesses that were closer to their core competencies.”

What the sources say

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In the paper

“Such competition for market share kept oligopolies from becoming monopolies.”

In the paper

“These potential cost advantages could not be fully realized unless a constant flow of materials through the plant or factory was maintained to assure effective capacity utilization.”

In the paper

“Such capabilities and the resulting retained earnings became the basis for their continued growth.”

In the paper

“Organizational capabilities, honed by oligopolistic competition, provided the dynamic not only for the continuing growth of such firms, but also for the industries which they dominated, and for the national economies in which they operated.”

In the paper

“Such coordination did not, indeed could not, happen automatically.It demanded the constant attention of a managerial team or hierarchy.”

In the paper

“Such capabilities accounted for the long-term persistence of profits by the same players over the decades.”

In the paper

“The cumulative learning sharpened by such oligopolistic competition created organizational capabilities that became powerful barriers to new entrants.”

In the paper

“They were created during the knowledge-acquiring processes that are always involved in commercializing a new product for national and international markets.”

In the paper

“Such economies depend on knowledge, skill, experience, and teamwork-on the organized human capabilities essential to exploit the potential of technological processes.”

In the paper

“By any economic criterion the British entrepreneurs should have quickly dominated the world.”

In the paper

“In the context of this strategy, the primary impact of World War I was to weaken German industrial leaders.”

In the paper

“The failure to develop such capabilities has been central to the disintegration of these centrally planned economies.”

In the paper

“Because their wholesaling or direct sales organizations met the distribution requirements essential to maintain a steady throughput, few capital-intensive firms felt the need to take on the financial and managerial costs and risks of building their own retail network.”

In the paper

“The point of recounting this bit of history is to document that, unless investments were made essential to utilize the cost advantages of scale and scope, the enterprises and the industries and national economies in which they operated lost out in international markets to foreign enterprises that made them.”

In the paper

“If the firm is the unit of analysis, instead of the transaction, then the specific nature of the firm's facilities and skills becomes the most significant factor in determining what will be done in the firm and what by the market.”

In the paper

“But that integration again should be seen in terms of the enterprise's specific capabilities and needs at the time of the transaction.”

In the paper

“Such growth was driven much less by the desire to reduce transaction, agency and other information costs and much more by a wish to utilize the competitive advantages created by the coordinated learned routines in production, distribution, marketing, and improving existing products and processes.”

In the paper

“These organizational capabilities permitted Bayer and the other first movers to commercialize and market worldwide several hundred different dyes and a wide range of new man-made pharmaceuticals and films.”

In the paper

“The resulting German competitive advantages quickly demolished Britain's economic comparative advantages.”

In the paper

“Such growth was more important to the history of the modern corporation than that of vertical integration.”

In the paper

“In the 1870s, the new dye industry in Britain had almost every advantage.”

In the paper

“Transactions cost considerations played a significant part in the determination of the extent of both forward and backward integration.”

In the paper

“Nevertheless, in the brief period between 1925 and the onslaught of the Great Depression, the learned knowledge and skills of the German enterprises in chemicals, electrical equipment, machinery and metals permitted the German enterprises to by 1929 regain their earlier position in world markets.”

In the paper

“The basic technological characteristics of an industry in which the firms operated at the time of overseas investments were more important than imperfect information costs in determining the number and location of plants built abroad.”

In the paper

“The electrical equipment industry, while employing a smaller number of professionally trained technicians and scientists, transformed economic life even more than chemicals.”

In the paper

“Moreover, without such a base for organizational learning, company-and industry-specific capabilities in production, distribution, R&D, purchasing, and labor relations, the necessary competitive strength could not be developed.”

In the paper

“Just as I find the earlier growth of the industrial firm difficult to explain fully in terms of transactions, agency and other information costs, so I find it hard to explain the recent process of expansion and contraction with these same concepts.”

In the paper

“Growth into new product markets was more complex than expansion abroad, because it almost always required new investment in complementary physical and human assets.”

In the paper

“The commercializing of a new product or process, in itself a continuing learning experience, rests on cumulative organizational learning in the development, production and marketing of earlier products.”

In the paper

“First, the full impact of the international competition that began a century ago was held back by world events.”

In the paper

“The international competition which had been developing before 1914 did not become a full-fledged reality, therefore, until the 1960s.”

In the paper

“In all these moves into related product markets, the competencies of the existing companies clearly shaped the direction, timing and methods of diversification.”

In the paper

“The ability of large established firms to use learned routines and integrated capabilities to enter related product markets helps to explain a significant change in the ways in which major new industries are coming to be created.”

In the paper

“The expansion into related product markets came first in science-based industries, where opportunities were greater for exploiting economies of scope in production and R&D.”

In the paper

“Secondly, the response of U.S. firms to this competitive challenge delineates the ways in which a firm's core competence helps to determine successful paths of, as well as limits to, growth.”