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Micro-level innovations and competitiveness
World Developmenr, Vol. 23, No. 1, pp. 143-148,1995 Copyright 0 1995 Elsevier Science Ltd Printed in Great Britain. All rights reserved 0305-750x/95 $9.50 + 0.00
Pergamon
0305-750x(94)00111-1
Micro-Level Innovations and Competitiveness JijRG MEYER-STAMER German Development Institute, Berlin, Germany Summary. -The reorganization of production within firms and the development of interlirm networks are currently much in fashion as elements of competitiveness. An analysis of developing-country experiences suggests that caution is required. Studies of intrafimr reorganization focus unduly on production and tend to assume that rapid improvements will lead to the attainment of international competitiveness. Evidence from Brazil suggests that even after improving performance, the competitiveness gap remains large. Further, an examination of the basis of the success of the East Asian newly industrialized countries shows that Taiwan and Korea diverge in important respects from the new orthodoxy of Just-in-Time and interfmn networking.
1. INTRODUCTION
improvements fast enough, especially if firms start from a low level of competitiveness. Furthermore, evidence from Taiwan appears to indicate that the firms can be highly competitive based on apparently traditional internal organizational schemes, provided that they are integrated in networks; thus, new management practices and networking may be alternative routes to competitiveness. In addition, evidence from South Korea seems to indicate that firms can also become competitive without a strong networking component and that the need to foster networking only arises at a later stage of the industrialization process. Thus, networking may to some extent be a stagedependent phenomenon, linked to collective learning processes and the emergence of societal institutions. The aim of this paper, however, is not to arrive at a clear conclusion of these issues, but rather to give a warning that things are more complicated than they first appear.
The explicit message of some contributions in this special issue is: Is it not surprising that new management concepts can successfully be introduced under highly unfavorable conditions, such as in Brazil with its heritage of authoritarianism, paternalism and class antagonism? Moreover, is it not striking that enterprise networks also emerge under unfavorable conditions, for instance in economically unstable environments, with little state support and with, at first glance, dubious cultural foundations? But there is also an implicit message, namely that there is a strong link between the introduction of new management concepts, networking and the competitiveness of firms. The reader could get the impression that the introduction of Japanese-style organizational principles and the strengthening of interfirm links can raise the competitiveness of firms in developing countries close to the level of international best practice. This argument is plausible, but the empirical evidence for it is to some extent ambiguous. This paper takes the role of the “devil’s advocate,” discussing a number of points that cast doubt on the argument. The first is that the discussion of new management concepts is incomplete since it addresses mainly the production process and largely neglects other functions of the firm. Second, the introduction of new management techniques does not necessarily lead to a rapid improvement in firm competitiveness; nor does the obvious competitiveness of firms in East Asia rest on Japanese-style management concepts or (in the case of South Korea) on dense intercompany networks. Instead, it is argued from the Brazilian experience that just copying experiences from other countries (especially Japan) may not bring about the necessary
2. DETERMINANTS OF COMPETITIVENESS AT THE MICRO LEVEL As a large number of countries are moving away from inward-oriented development strategies, competitiveness becomes an important issue for firms in these countries. Firms from other countries that established their presence on the world market some time ago are facing new challenges, too, since market patterns are changing, as customer preferences become more diverse and,volatile. This is an important feature of what has been coined the “new competition” (Best, 1990), which renders the traditional approaches of low-wage mass production less viable. With firms from an increasing number of countries competing for 143
144
WORLD DEVELOPMENT
world market share, especially in low-end market segments, competition is getting stiffer. The competitiveness of firms rests, first of all, in the success or failure in simultaneously meeting four criteria: - ESficiency: The indicators are labor and capital productivity. Both must be optimized; all in all, any one-sided emphasis of just one indicator (in the past it was labor productivity) can in the end lead to inefficiency - if, for example, optimization of manpower utilization proceeds at the expense of warehouse stocks or high reject level. - Quality: Certification through the IS0 9000 standard system is an issue of growing importance, particularly for developing country enterprises whose quality performance is often questioned by buyers in industrialized countries. - Flexibility: This refers to the ability to deal with the increasing differentiation and volatility of markets. There is a number of different aspects of flexibility: “The concept of flexibility is considered as relating only to change-over times. In fact, it has a number of different dimensions: product flexibility (the ability to change easily to produce new products), volume flexibility (the ability to accommodate changes in volume efficiency), routing flexibility (the ability to process parts via different routes within the plant in response to breakdowns or other factors), machine flexibility (the ability to make different parts within a product family), operation flexibility (the ability to vary the sequence of operations), and process flexibility (the ability to produce a product family in different ways possibly using different materials)” (UNCTC, 1990, p. 32). - Responsiveness: Leading enterprises measure this in terms of their capability to generate innovations in rapid succession (technology leadership). One indicator of innovativeness is the share of products in the overall product spectrum which have been introduced to the market within the last two to four years. Other enterprises see responsiveness as the ability to imitate rapidly the innovations of leading companies. One other factor is the ability to adapt swiftly to changing customer needs, changes in fashion and the like. In order to meet these criteria, enterprises try to optimize performance along the entire value chain from research and development (R & D) to production and marketing, at both the company and intercompany level. They must be in a position to formulate and implement strategies, and they must, above all, be able to adapt these strategies at any time in response to changing environmental conditions. In view of these considerations, it is noteworthy that the discussion about micro-level restructuring has essentially concentrated on the production process in the narrower sense of the term, for:
under the New Competition, the higher value added elements in business are not the production activities narrowly defined as material conversion processes. Consequently, material production is increasingly a support function to other business activities such as strategic plming, marketing, distribution, R & D, design, and managing suppliers networks (Best, 1990, p. 264). An efficient production organization is a necessary, but far tirn sufficient condition for competitiveness. ‘Iherefore, research that finds fundamental a restructuring of production organization does not necessarily give us any indication of the competitive potential of a firm. This narrowing of the discussion to the area of production can be explained by two factors. First, many analysts have a background in sociology; and industrial sociology has traditionally been concerned mainly with the shop floor. Only since the introduction of Computer-Aided Design has product development itself come in for some selective attention, although the two areas have continued to be strictly delimited. It was the management literature that first illuminated the dysfunctionality of a strict demarcation between development and production (Kochan, 1991). Other areas, however - in particular marketing and service - have remained outside the grid used for analysis. Second, most analyses proceed from the observation that the diffusion of new organizational concepts has come about unexpectedly, for instance, because giving responsibility to shop-floor workers appears to be difficult in societies without a track record of participation and democracy, and they are thus compelled to explain unexpected empirical findings.’ Since the question of competitiveness is, for this reason, often not even addressed, it is hardly surprising that the issue of the relative significance of production for an enterprise’s competitiveness does not arise.
3. COMPETITIVENESS THROUGH MICRO-LEVEL RESTRUCTURING: THE BRAZILIAN EXPERIENCE Neglect of the question of competitiveness is a particularly striking feature of studies concerned with the diffusion of new management concepts in Brazil, especially since competitiveness is a very acute issue there. Since 1990, the path has been cleared for the transition from import substitution to a competitive orientation by abolishing quantitative and bureaucratic import restrictions and establishing a timetable for tariff reduction. The initial response on the part of the enterprises was to wait it out in the hope that intensive lobbying efforts would prove able to achieve a return to closed-market policies. In the meantime, however, they have recognized signs of the times and initiated intense efforts to increase efficiency and quality.
145
MICRO-LEVEL INNOVATIONS Table 1. Relative &iciency of Brazilian capital goods producers, 1990 and 1993 Performance Indicators
Brazilian capital goods producers 1990
30 Parts needing rework (o/o) 23-28,000 Rejects per million (WIP only) Warranty/repair costs as % of total gross sales 2.1 35 Through-put time (days)* Production lot size 1000 Annual inventory turns (raw materials and WIP only) 8 Average set-up time (minutes) 80 Value-added time as % of total production lead time 10 40 Idle machine time (% of total time of use) <1 R&D investment (% of turnover) Proposals for improvements (% of employees making at least one proposal per year) 0.1
1993
World Class Manufacturing Standard
12-20 1l-15,000 0.2 20 100-250 8-14 30-40 30 21 l-2
2 200 0.1 2-4 20-50 60-70 10 >50 15-20 3-5
1-2 <1 4-a
50-70 5-l
Source: Gazeta Mercantil, quoted from FESBRASIL l/1993, p. 7. *Average time elapsed between receipt of order and delivery.
Entrepreneurs experience the changes that have already taken place as a revolution. There is a widespread feeling that they have finally understood the dictates of the moment and initiated the same efforts as firms in other countries.* Even though the data in Table 1 reflect substantial improvements, however, they show that Brazilian firms still lag considerably compared to international best practice. This result corresponds with the findings of a recent cross-sectoral evaluation of industrial competitiveness (CNI, 1993, pp. 8-10). The findings in Table 1 are even more dramatic if we take into account that the marginal benefits of organizational restructuring tend to decrease over time. A first phase of substantial improvements gives way to more strenuous efforts and slower progress. For instance, reducing the reject rate from 20,000 parts per million (ppm) to 3,000 ppm constitutes an incontrovertible advance; the problem is that the standard for world-class manufacturing is 200 ppm (Sequeira, 1990, p. 35). Something similar can be said of the reduction of vertical integration. To be sure, increased use of sub-contractors is currently in vogue, and industrial corporations as well as industry associations and other bodies are working toward contracting out service activities and reducing vertical integration. But this is a worldwide trend, and Brazilian companies are starting out at a level far less favorable than that of companies in other countries. While, for instance, the vertical integration of German auto-makers has been somewhere around 40% before they started to restructure (Bochum and Meissner, 1990, p. 28), it is much higher in Brazilian industries3 It is thus questionable whether Brazilian industry will be able to improve its competitiveness decisively relative to its direct competitors in the world market, at
least in those large batch industries which have attracted most of the research on the diffusion of new organizational techniques. A good cause for skepticism is the fact that investment levels have fallen in recent years. The investment/GDP ratio has never been lower in the past 30 years. Even during 1987-90, it was around 25% on average (Conjuntura Economica, various issues), compared to 15% in 1993. A low propensity to invest is reflected in the fact that in 1993 the Technology Ministry faced substantial problems in finding applicants for the $300 million credit line that was cofinanced by the World Bank, and that public investment banks also had an overhang of available funds. In relative terms, the greatest demand in 1993 was for small credits (under $ US 1 million) to finance organizational innovations and selective purchases of new equipment4 Although it is beyond doubt that Brazilian entrepreneurs are well advised to give priority to organizational innovations (introduction of quality assurance, lay-out changes, reduction of stocks, lowering throughput times) (Meyer-Stamer et al., 1991), the problem nevertheless remains that on the whole technological level of production processes in industry is low. Higher investment in modem equipment is essential; and low levels of investment in new machinery are jeopardizing the success of modernization efforts as the whole. Brazilian industry is late in setting out to catch a train already travelling at breakneck speed. While enterprises in industrialized countries and the East Asian NICs were introducing new technologies and organizational concepts in the 1980s (OECD, 1992, pp. 89-l 11; MeyerStamer, 1993), Brazilian companies - free from any threat in the domestic market adopted a wait-and-see attitude. While elsewhere
146
WORLD DEVELOPMENT
companies were designing and implementing globalization strategies, Brazilian enterprises pursued selective export strategies. This explains why Brazilian companies are today faced with such a challenge: while companies in industrialized countries and NICs are undertaking major efforts to keep up with their main competitors, Brazilian companies are forced to step up their efforts just to draw closer international standards of competitiveness. It might be assumed that the introduction of new organizational concepts represents a step in the right direction, but it is impossible to say if this will prove sufficient. So far empirical data do not support this notion.
4. MICRO-LEVEL RESTRUCTURING VS. NETWORKING? THE CASE OF CHINESE CAPITALISM There is not doubt that Chinese industrial enterprises - in Taiwan, in Southeast Asia, and increasingly in the People’s Republic - are exceptionally competitive. Their efficiency and competitiveness is, however, based on a entrepreneurial model as fundamentally different from the Western model as it is from the Japanese and Korean ones. One observer has characterized Chinese firms as follows (Redding 1990, pp. 205): - Companies are for the most part small, have a simple organizational structure, and are specialized in one product or market segment. - Companies are centralized all important decisions are taken by the entrepreneur; and this entails a close connection between ownership, control and family structure; i.e. professionalized management is the exception. - Organizational culture is marked by patemalism; workforce loyalty is low, employee turnover is high. - There is a high emphasis on cost efficiency and optimal financial dealings. - Relations to the surrounding world are structured as networks based on personal relationships. - Companies are closely but informally linked with other firms, suppliers and marketers. - Companies are marked by a low level of ability to establish a strong presence in the brand-name sector. - Companies are highly adaptable and capable of strategic action. Most of these features are, in the view of the West, dysfunctional for the development of competitiveness. That the companies are nevertheless competitive is associated in particular with one aspect: the dense network of relationships into which Chinese companies are integrated. This networking entails a number of external economies which represent a key to under-
standing their competitiveness: sustained close contacts, continuity in supplier relationships, regular exchange of information and low transaction costs owing to a lack of costly contractual provisions (Redding, 1990, p. 213). These networks provide what Western companies are forced to organize internally at some expense. The networks do the same job, and do it more quickly and inexpensively. Lean production is not a challenge for these companies - they always have been lean. The starting point for networks are extended kin relations, kin being understood here in the broadest possible sense - e.g. inclusion of close friends of distant relatives or persons from the same town or village. Kin relations so broadly defined constitute the basis for trust-based relationships (Menkhoff, 1992), and trust is, as is known from the recent literature on company networks, the basic tissue without which networks cannot function (Nadvi, 1992). This type of relationship stimulates effective entrepreneurship while at the same time penalizing ineffective or predatory behavior. The costs of entry are relatively low, because it is not difficult to mobilize capital and establish supplier relationships among members of a kin network. On the other hand, the cost of exit (in cases of mismanagement or, in particular, fraudulent behavior) are high, for these costs are not only economic but also entail social consequences-loss of status, social decline, or even ostracism. The system is characterized by a high level of entrepreneurship. Employees set up on their own and are accepted as part of the network. They may be provided with credit by their former employer, who may even hold a share of the capital in the new company. That is why Chinese companies grow in a direction different from that typical of Western firms: what is important is less the size of the individual company than the number of companies with which it is involved. What grows is thus the network, which can then achieve the sales performance of a major enterprise. This form of entrepreneurial organization does display disadvantages in comparison with major enterprises of the Western, Japanese, or Korean type. Not only is it, as one observer once pointed out (MontaguPollock, 1991, p. 23), somewhat complicated to organize, for instance, a public electricity utility on this principle, but there are also certain industries for which it is inappropriate. One example would be the automobile industry, where the minimum-efficient company size is far beyond that which could be managed as a family company. To this extent it is not surprising that Taiwan’s take-off in the automobile industry has not yet materialized. Another example is the chemical industry, and here, too, it is not by chance that first steps toward the formation of conglomerates (seen by many observers, falsely, as a sign of the Koreanization of the Taiwanese economy) have been
147
MICRO-LEVEL INNOVATIONS
undertaken in this sector. Nevertheless, the 1980s have shown that the Chinese entrepreneurial model is successful, not only in traditional industries but also in high-tech industries (especially in the computer industry) - precisely in those areas in which efficiency and responsiveness are the factors that determine competitive advantage. This experience indicates that there is more than one pattern of organization through which companies can survive in the competition.
5. LONELY BUT COMPETITIVE: EXPERIENCES FROM KOREA In contrast, experiences from Korea show that medium-sized enterprises can become internationally competitive even without dense intercompany networks. A study on medium-sized industrial enterprises producing sports shoes, machine tools, and microcomputers (Hillebrand, 1993) found that the competitiveness of these companies rests on two pillars: on the one hand, efficient (although traditional) patterns of organization at the firm level, and on the other hand selective support of individual firms by associations and public sector institutions. The enterprises displayed a clear orientation in terms of markets and customers, introduced systematic in-house research and development, and invested in computer-aided automation and advanced training schemes for their personnel. They are supported via: a relatively dense network of private and public institutions to overcome critical constraints in R & D, personnel development, management, technology transfer, and the procurement of information, marketing and financing (Hillebrand, 1993, p. 104). Yet, company-level competitiveness emerged on the basis of hierarchic, Taylorist organization. Only recently has this started to change: the Korean management style has traditionally featured autocratic leadership, top-down decision-making and strict supervision of the workforce. Thee need for change to a new management style or a new corporate identity is recognized by the majority of enterprises; practical implementation differed in the various sectors (Hillebrand, 1993, p. 98). Among other aspects this change has been driven by the experience that quality performance has often been insufficient (Humphrey, 1993). The Korean experience highlights two features. First, companies can achieve a high level of competitiveness based on traditional organizational principles. Yet they face problems if they try to achieve a truly world class manufacturing standard since in the
conventional organization the workers’ commitment, especially in terms of producing high quality, is not sufficient. Contrasting the Taiwanese experience, the case of Korea supports the thesis that giving more responsibilities to the workers is a key feature of new best practice. Second, the Korean experience appears to show that the state can substitute for intercompany networks if it succeeds in building institutions (in the fields of technology, training, quality control, export marketing) that maintain a close contact with companies and support their efforts to become competitive. What distinguishes the Korean experience in this field from that of other countries is that the government has succeeded in building institutions with a clear mandate and a strong commitment to support (and not to control) the private sector (Kim and Nugent, 1994).
6. CONCLUSION The connection between organizational innovations within and between firms and their competitiveness is anything but clearcut: - The experience of Brazil shows that the successful introduction of new concepts of organization does not of itself necessarily lead to competitiveness if enterprises start from low levels of efficiency and quality. - The example of Chinese companies indicates that flexible, high-quality production with short innovation cycles is also possible in enterprises with strict hierarchical structures and rigid control. In this case, the important element that explains the competitiveness of Chinese enterprises seems to be the integration of firms into networks. - The Korean experience shows that middle-sized enterprises which are not integrated into enterprise networks can be supported by associations and public sector institutions in ways which enable them to achieve international competitiveness. Three conclusions may be drawn. First, there are different paths to competitiveness. What is presently taking place in many industrially advanced countries is an open process of searching for a new best practice, the contours of which are, at best, only just starting to emerge. Second, there are sequences along the path toward sustainable competitiveness; and activities at the company level, intercompany networking, and support provided by associations and public sector institutions have a distinct and specific significance in the different sequences. Third, researchers would be poorly advised to approach the empirical situation in developing countries with too closed an analytical framework. When the situation is such that no best practice is evident, and it is not possible to determine definitively which phase of the process of searching and adjustment enterprises and institutions are cur-
148
WORLD DEVELOPMENT
rently involved in, any narrowly specified search for particular patterns of organization will tend to lead to distorted results. Competitiveness is created at the firm level, but it requires a certain kind of interaction between societal actors in order to shape a supportive environment. Systemic competitiveness, emerging in
a society as the outcome of complex patterns of interaction between government, enterprises, and other actors, will have very specific forms in each society (Esser ei al., 1993; Messner and Meyer-Stamer, 1994).
NOTES 1. See, for example, the line of argument in Kaplinsky
(1988). 2. Press reports abound. See for instance, “A revolu@o popular brasileira” (Veja. March 9, 1994). Infer alia, this report claims that the number of companies with IS0 9000 certification has risen from 30 to 140 in two years. This compares with around 20,000 firms in the United Kingdom (FrankfurterAllgemeine Zeitung, February 2,1994, p. 12).
tool linn representative who maintained that “whereas in Europe the parent company would produce around 40 per cent of the final machinery, in Brazil they were forced to make 80 per cent, after the most strenuous of efforts to bring the level down from an original 90 per cent.”
4. Verbal communication from the Banco National de Desenvolvimento Econ&nico e Social, Rio de Janeiro, and the Banco Regional de Desenvolvimento do Extremo Sul, Florian6polis, May 1993.
3. For instance, Porteous (1993, p. 212) quotes a machine
REFERENCES Best, M., The New Competition: Institutions of Industrial Restructuring (Cambqdge: Polit Press, 1990). Bochum, U., and H. R. Meissner, ‘Lgistik und industrielle einer Neue Herausforderungen Reorganisation. Sozialvertrtigliche Interessenpolitik,” betrieblichen Technikgestaltung; Werkstattbericht, No. 79 (Ministerium &r Arbeit, Gesundheit und Soziales des Landes Nordrhein-Wesfalen, 1990). CNI, Estudo da Competitividae de Indtistria Brasileira: a Visrio Empresarial (Rio de Janeiro: Confederapb National d+~Inddstria, 1933). Esser, K., W. Hillebrand, D. Messner and J. Meyer-Stamer, Systemic Competitiveness - Key Policy Issues (Berlin: German Development Institute, 1993). Hillebrand, W., “Technological modernization in Korean small- and medium-scale industry - a new success story,” in K. Esser et al. (Eds.), International Competitiveness
in Latin America
and
East Asia
(London: Frank Cass, 1993). Humphrey, J., “Quality issues for Korean manufacturing industry,” IDS Bulletin, Vol. 24, No. 2 (April 1993), pp. 72-79. Kaplinsky, R., “Industrial restructuring in LDCs: The role of information technology,” Paper prepared for Conference on Technology Policy in the Americas (Stanford, CA: Stanford University, December 1988). Kim, L., and J. B. Nugent, “Korean SMBs and their support mechanisms: An empirical analysis of the role of govemment and other non-profit organizations,” Paper presented at conference on Can Intervention Work? (Washington, DC: World Bank, February 9.1994). Kochan, A., “Simultaneous engineering puts the team to work,” Multinational Business, No. 1 (1991), pp. 41-48. Menkhoff, T., “Yinyong or how to trust trust? Chinese noncontractual business relations and social structure: The Singapore case,“InternationalesAsienforum, Vol. 23, No.
3 (1992), pp. 261-288. Messner, D., and J. Meyer-Stamer, “Systemic competitiveness: Lessons from Latin America and beyond - perspectives for Eastern Europe,” European Journal of Development Research, Vol. 5, No. 4 (1994). Meyer-Stamer, J., “Experiences with new management techniques in advanced developing countries - a new challenge for European industry?,” Mime0 (Berlin: German Development Institute, 1993). Meyer-Stamer, J., C. Rauh, H. Riad, S. Schmitt and T. Welte, Comprehensive Modernization on the Shop Floor: a Case Study on the Brazilian Machinery Industry (Berlin
German Development Institute, 1991). Montagu-Pollock, M., “All the right connections: Chinese management has amazing advantages over ‘modem’ methods,” AsianBusiness (January 1991). Nadvi, K., “Industrial district experiences in developing countries,” Background paper for UNcTAD/GTZ symposium on The Role of.J.ndustrialDistricts in the Application, Adaptation and Diffusion of Technology (Geneva: November 1992). OECD, Technqlogy and the Economy: The Key Relationships (Paris: OECD, 1992). Porteous, M., “Revolution in a recession? Advanced technologies and Brazil’s machine tool sector in the crises,” in H. S&nits and J. Cassiolaro (Eds.), Hi-Tech for Industrial Development (London: Routledge; 1993). _ Redding, S. G., The Spirit of Chinese Capitalism (Berlin: de Gruyter, 1990). Sequeim J. H., World-Class Manufacturing in Brazil: A Study of Competitive Position (S~O Paulo: American Chamber of Commerce Publications Division, 1990). UNCTC, “New approaches to best-practice manufacturing: the role of transnational corporations and implications for developing countries,” Mimeo (New York: UNCTC, 1990).
Pergamon
0305-750x(94)00111-1
Micro-Level Innovations and Competitiveness JijRG MEYER-STAMER German Development Institute, Berlin, Germany Summary. -The reorganization of production within firms and the development of interlirm networks are currently much in fashion as elements of competitiveness. An analysis of developing-country experiences suggests that caution is required. Studies of intrafimr reorganization focus unduly on production and tend to assume that rapid improvements will lead to the attainment of international competitiveness. Evidence from Brazil suggests that even after improving performance, the competitiveness gap remains large. Further, an examination of the basis of the success of the East Asian newly industrialized countries shows that Taiwan and Korea diverge in important respects from the new orthodoxy of Just-in-Time and interfmn networking.
1. INTRODUCTION
improvements fast enough, especially if firms start from a low level of competitiveness. Furthermore, evidence from Taiwan appears to indicate that the firms can be highly competitive based on apparently traditional internal organizational schemes, provided that they are integrated in networks; thus, new management practices and networking may be alternative routes to competitiveness. In addition, evidence from South Korea seems to indicate that firms can also become competitive without a strong networking component and that the need to foster networking only arises at a later stage of the industrialization process. Thus, networking may to some extent be a stagedependent phenomenon, linked to collective learning processes and the emergence of societal institutions. The aim of this paper, however, is not to arrive at a clear conclusion of these issues, but rather to give a warning that things are more complicated than they first appear.
The explicit message of some contributions in this special issue is: Is it not surprising that new management concepts can successfully be introduced under highly unfavorable conditions, such as in Brazil with its heritage of authoritarianism, paternalism and class antagonism? Moreover, is it not striking that enterprise networks also emerge under unfavorable conditions, for instance in economically unstable environments, with little state support and with, at first glance, dubious cultural foundations? But there is also an implicit message, namely that there is a strong link between the introduction of new management concepts, networking and the competitiveness of firms. The reader could get the impression that the introduction of Japanese-style organizational principles and the strengthening of interfirm links can raise the competitiveness of firms in developing countries close to the level of international best practice. This argument is plausible, but the empirical evidence for it is to some extent ambiguous. This paper takes the role of the “devil’s advocate,” discussing a number of points that cast doubt on the argument. The first is that the discussion of new management concepts is incomplete since it addresses mainly the production process and largely neglects other functions of the firm. Second, the introduction of new management techniques does not necessarily lead to a rapid improvement in firm competitiveness; nor does the obvious competitiveness of firms in East Asia rest on Japanese-style management concepts or (in the case of South Korea) on dense intercompany networks. Instead, it is argued from the Brazilian experience that just copying experiences from other countries (especially Japan) may not bring about the necessary
2. DETERMINANTS OF COMPETITIVENESS AT THE MICRO LEVEL As a large number of countries are moving away from inward-oriented development strategies, competitiveness becomes an important issue for firms in these countries. Firms from other countries that established their presence on the world market some time ago are facing new challenges, too, since market patterns are changing, as customer preferences become more diverse and,volatile. This is an important feature of what has been coined the “new competition” (Best, 1990), which renders the traditional approaches of low-wage mass production less viable. With firms from an increasing number of countries competing for 143
144
WORLD DEVELOPMENT
world market share, especially in low-end market segments, competition is getting stiffer. The competitiveness of firms rests, first of all, in the success or failure in simultaneously meeting four criteria: - ESficiency: The indicators are labor and capital productivity. Both must be optimized; all in all, any one-sided emphasis of just one indicator (in the past it was labor productivity) can in the end lead to inefficiency - if, for example, optimization of manpower utilization proceeds at the expense of warehouse stocks or high reject level. - Quality: Certification through the IS0 9000 standard system is an issue of growing importance, particularly for developing country enterprises whose quality performance is often questioned by buyers in industrialized countries. - Flexibility: This refers to the ability to deal with the increasing differentiation and volatility of markets. There is a number of different aspects of flexibility: “The concept of flexibility is considered as relating only to change-over times. In fact, it has a number of different dimensions: product flexibility (the ability to change easily to produce new products), volume flexibility (the ability to accommodate changes in volume efficiency), routing flexibility (the ability to process parts via different routes within the plant in response to breakdowns or other factors), machine flexibility (the ability to make different parts within a product family), operation flexibility (the ability to vary the sequence of operations), and process flexibility (the ability to produce a product family in different ways possibly using different materials)” (UNCTC, 1990, p. 32). - Responsiveness: Leading enterprises measure this in terms of their capability to generate innovations in rapid succession (technology leadership). One indicator of innovativeness is the share of products in the overall product spectrum which have been introduced to the market within the last two to four years. Other enterprises see responsiveness as the ability to imitate rapidly the innovations of leading companies. One other factor is the ability to adapt swiftly to changing customer needs, changes in fashion and the like. In order to meet these criteria, enterprises try to optimize performance along the entire value chain from research and development (R & D) to production and marketing, at both the company and intercompany level. They must be in a position to formulate and implement strategies, and they must, above all, be able to adapt these strategies at any time in response to changing environmental conditions. In view of these considerations, it is noteworthy that the discussion about micro-level restructuring has essentially concentrated on the production process in the narrower sense of the term, for:
under the New Competition, the higher value added elements in business are not the production activities narrowly defined as material conversion processes. Consequently, material production is increasingly a support function to other business activities such as strategic plming, marketing, distribution, R & D, design, and managing suppliers networks (Best, 1990, p. 264). An efficient production organization is a necessary, but far tirn sufficient condition for competitiveness. ‘Iherefore, research that finds fundamental a restructuring of production organization does not necessarily give us any indication of the competitive potential of a firm. This narrowing of the discussion to the area of production can be explained by two factors. First, many analysts have a background in sociology; and industrial sociology has traditionally been concerned mainly with the shop floor. Only since the introduction of Computer-Aided Design has product development itself come in for some selective attention, although the two areas have continued to be strictly delimited. It was the management literature that first illuminated the dysfunctionality of a strict demarcation between development and production (Kochan, 1991). Other areas, however - in particular marketing and service - have remained outside the grid used for analysis. Second, most analyses proceed from the observation that the diffusion of new organizational concepts has come about unexpectedly, for instance, because giving responsibility to shop-floor workers appears to be difficult in societies without a track record of participation and democracy, and they are thus compelled to explain unexpected empirical findings.’ Since the question of competitiveness is, for this reason, often not even addressed, it is hardly surprising that the issue of the relative significance of production for an enterprise’s competitiveness does not arise.
3. COMPETITIVENESS THROUGH MICRO-LEVEL RESTRUCTURING: THE BRAZILIAN EXPERIENCE Neglect of the question of competitiveness is a particularly striking feature of studies concerned with the diffusion of new management concepts in Brazil, especially since competitiveness is a very acute issue there. Since 1990, the path has been cleared for the transition from import substitution to a competitive orientation by abolishing quantitative and bureaucratic import restrictions and establishing a timetable for tariff reduction. The initial response on the part of the enterprises was to wait it out in the hope that intensive lobbying efforts would prove able to achieve a return to closed-market policies. In the meantime, however, they have recognized signs of the times and initiated intense efforts to increase efficiency and quality.
145
MICRO-LEVEL INNOVATIONS Table 1. Relative &iciency of Brazilian capital goods producers, 1990 and 1993 Performance Indicators
Brazilian capital goods producers 1990
30 Parts needing rework (o/o) 23-28,000 Rejects per million (WIP only) Warranty/repair costs as % of total gross sales 2.1 35 Through-put time (days)* Production lot size 1000 Annual inventory turns (raw materials and WIP only) 8 Average set-up time (minutes) 80 Value-added time as % of total production lead time 10 40 Idle machine time (% of total time of use) <1 R&D investment (% of turnover) Proposals for improvements (% of employees making at least one proposal per year) 0.1
1993
World Class Manufacturing Standard
12-20 1l-15,000 0.2 20 100-250 8-14 30-40 30 21 l-2
2 200 0.1 2-4 20-50 60-70 10 >50 15-20 3-5
1-2 <1 4-a
50-70 5-l
Source: Gazeta Mercantil, quoted from FESBRASIL l/1993, p. 7. *Average time elapsed between receipt of order and delivery.
Entrepreneurs experience the changes that have already taken place as a revolution. There is a widespread feeling that they have finally understood the dictates of the moment and initiated the same efforts as firms in other countries.* Even though the data in Table 1 reflect substantial improvements, however, they show that Brazilian firms still lag considerably compared to international best practice. This result corresponds with the findings of a recent cross-sectoral evaluation of industrial competitiveness (CNI, 1993, pp. 8-10). The findings in Table 1 are even more dramatic if we take into account that the marginal benefits of organizational restructuring tend to decrease over time. A first phase of substantial improvements gives way to more strenuous efforts and slower progress. For instance, reducing the reject rate from 20,000 parts per million (ppm) to 3,000 ppm constitutes an incontrovertible advance; the problem is that the standard for world-class manufacturing is 200 ppm (Sequeira, 1990, p. 35). Something similar can be said of the reduction of vertical integration. To be sure, increased use of sub-contractors is currently in vogue, and industrial corporations as well as industry associations and other bodies are working toward contracting out service activities and reducing vertical integration. But this is a worldwide trend, and Brazilian companies are starting out at a level far less favorable than that of companies in other countries. While, for instance, the vertical integration of German auto-makers has been somewhere around 40% before they started to restructure (Bochum and Meissner, 1990, p. 28), it is much higher in Brazilian industries3 It is thus questionable whether Brazilian industry will be able to improve its competitiveness decisively relative to its direct competitors in the world market, at
least in those large batch industries which have attracted most of the research on the diffusion of new organizational techniques. A good cause for skepticism is the fact that investment levels have fallen in recent years. The investment/GDP ratio has never been lower in the past 30 years. Even during 1987-90, it was around 25% on average (Conjuntura Economica, various issues), compared to 15% in 1993. A low propensity to invest is reflected in the fact that in 1993 the Technology Ministry faced substantial problems in finding applicants for the $300 million credit line that was cofinanced by the World Bank, and that public investment banks also had an overhang of available funds. In relative terms, the greatest demand in 1993 was for small credits (under $ US 1 million) to finance organizational innovations and selective purchases of new equipment4 Although it is beyond doubt that Brazilian entrepreneurs are well advised to give priority to organizational innovations (introduction of quality assurance, lay-out changes, reduction of stocks, lowering throughput times) (Meyer-Stamer et al., 1991), the problem nevertheless remains that on the whole technological level of production processes in industry is low. Higher investment in modem equipment is essential; and low levels of investment in new machinery are jeopardizing the success of modernization efforts as the whole. Brazilian industry is late in setting out to catch a train already travelling at breakneck speed. While enterprises in industrialized countries and the East Asian NICs were introducing new technologies and organizational concepts in the 1980s (OECD, 1992, pp. 89-l 11; MeyerStamer, 1993), Brazilian companies - free from any threat in the domestic market adopted a wait-and-see attitude. While elsewhere
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companies were designing and implementing globalization strategies, Brazilian enterprises pursued selective export strategies. This explains why Brazilian companies are today faced with such a challenge: while companies in industrialized countries and NICs are undertaking major efforts to keep up with their main competitors, Brazilian companies are forced to step up their efforts just to draw closer international standards of competitiveness. It might be assumed that the introduction of new organizational concepts represents a step in the right direction, but it is impossible to say if this will prove sufficient. So far empirical data do not support this notion.
4. MICRO-LEVEL RESTRUCTURING VS. NETWORKING? THE CASE OF CHINESE CAPITALISM There is not doubt that Chinese industrial enterprises - in Taiwan, in Southeast Asia, and increasingly in the People’s Republic - are exceptionally competitive. Their efficiency and competitiveness is, however, based on a entrepreneurial model as fundamentally different from the Western model as it is from the Japanese and Korean ones. One observer has characterized Chinese firms as follows (Redding 1990, pp. 205): - Companies are for the most part small, have a simple organizational structure, and are specialized in one product or market segment. - Companies are centralized all important decisions are taken by the entrepreneur; and this entails a close connection between ownership, control and family structure; i.e. professionalized management is the exception. - Organizational culture is marked by patemalism; workforce loyalty is low, employee turnover is high. - There is a high emphasis on cost efficiency and optimal financial dealings. - Relations to the surrounding world are structured as networks based on personal relationships. - Companies are closely but informally linked with other firms, suppliers and marketers. - Companies are marked by a low level of ability to establish a strong presence in the brand-name sector. - Companies are highly adaptable and capable of strategic action. Most of these features are, in the view of the West, dysfunctional for the development of competitiveness. That the companies are nevertheless competitive is associated in particular with one aspect: the dense network of relationships into which Chinese companies are integrated. This networking entails a number of external economies which represent a key to under-
standing their competitiveness: sustained close contacts, continuity in supplier relationships, regular exchange of information and low transaction costs owing to a lack of costly contractual provisions (Redding, 1990, p. 213). These networks provide what Western companies are forced to organize internally at some expense. The networks do the same job, and do it more quickly and inexpensively. Lean production is not a challenge for these companies - they always have been lean. The starting point for networks are extended kin relations, kin being understood here in the broadest possible sense - e.g. inclusion of close friends of distant relatives or persons from the same town or village. Kin relations so broadly defined constitute the basis for trust-based relationships (Menkhoff, 1992), and trust is, as is known from the recent literature on company networks, the basic tissue without which networks cannot function (Nadvi, 1992). This type of relationship stimulates effective entrepreneurship while at the same time penalizing ineffective or predatory behavior. The costs of entry are relatively low, because it is not difficult to mobilize capital and establish supplier relationships among members of a kin network. On the other hand, the cost of exit (in cases of mismanagement or, in particular, fraudulent behavior) are high, for these costs are not only economic but also entail social consequences-loss of status, social decline, or even ostracism. The system is characterized by a high level of entrepreneurship. Employees set up on their own and are accepted as part of the network. They may be provided with credit by their former employer, who may even hold a share of the capital in the new company. That is why Chinese companies grow in a direction different from that typical of Western firms: what is important is less the size of the individual company than the number of companies with which it is involved. What grows is thus the network, which can then achieve the sales performance of a major enterprise. This form of entrepreneurial organization does display disadvantages in comparison with major enterprises of the Western, Japanese, or Korean type. Not only is it, as one observer once pointed out (MontaguPollock, 1991, p. 23), somewhat complicated to organize, for instance, a public electricity utility on this principle, but there are also certain industries for which it is inappropriate. One example would be the automobile industry, where the minimum-efficient company size is far beyond that which could be managed as a family company. To this extent it is not surprising that Taiwan’s take-off in the automobile industry has not yet materialized. Another example is the chemical industry, and here, too, it is not by chance that first steps toward the formation of conglomerates (seen by many observers, falsely, as a sign of the Koreanization of the Taiwanese economy) have been
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MICRO-LEVEL INNOVATIONS
undertaken in this sector. Nevertheless, the 1980s have shown that the Chinese entrepreneurial model is successful, not only in traditional industries but also in high-tech industries (especially in the computer industry) - precisely in those areas in which efficiency and responsiveness are the factors that determine competitive advantage. This experience indicates that there is more than one pattern of organization through which companies can survive in the competition.
5. LONELY BUT COMPETITIVE: EXPERIENCES FROM KOREA In contrast, experiences from Korea show that medium-sized enterprises can become internationally competitive even without dense intercompany networks. A study on medium-sized industrial enterprises producing sports shoes, machine tools, and microcomputers (Hillebrand, 1993) found that the competitiveness of these companies rests on two pillars: on the one hand, efficient (although traditional) patterns of organization at the firm level, and on the other hand selective support of individual firms by associations and public sector institutions. The enterprises displayed a clear orientation in terms of markets and customers, introduced systematic in-house research and development, and invested in computer-aided automation and advanced training schemes for their personnel. They are supported via: a relatively dense network of private and public institutions to overcome critical constraints in R & D, personnel development, management, technology transfer, and the procurement of information, marketing and financing (Hillebrand, 1993, p. 104). Yet, company-level competitiveness emerged on the basis of hierarchic, Taylorist organization. Only recently has this started to change: the Korean management style has traditionally featured autocratic leadership, top-down decision-making and strict supervision of the workforce. Thee need for change to a new management style or a new corporate identity is recognized by the majority of enterprises; practical implementation differed in the various sectors (Hillebrand, 1993, p. 98). Among other aspects this change has been driven by the experience that quality performance has often been insufficient (Humphrey, 1993). The Korean experience highlights two features. First, companies can achieve a high level of competitiveness based on traditional organizational principles. Yet they face problems if they try to achieve a truly world class manufacturing standard since in the
conventional organization the workers’ commitment, especially in terms of producing high quality, is not sufficient. Contrasting the Taiwanese experience, the case of Korea supports the thesis that giving more responsibilities to the workers is a key feature of new best practice. Second, the Korean experience appears to show that the state can substitute for intercompany networks if it succeeds in building institutions (in the fields of technology, training, quality control, export marketing) that maintain a close contact with companies and support their efforts to become competitive. What distinguishes the Korean experience in this field from that of other countries is that the government has succeeded in building institutions with a clear mandate and a strong commitment to support (and not to control) the private sector (Kim and Nugent, 1994).
6. CONCLUSION The connection between organizational innovations within and between firms and their competitiveness is anything but clearcut: - The experience of Brazil shows that the successful introduction of new concepts of organization does not of itself necessarily lead to competitiveness if enterprises start from low levels of efficiency and quality. - The example of Chinese companies indicates that flexible, high-quality production with short innovation cycles is also possible in enterprises with strict hierarchical structures and rigid control. In this case, the important element that explains the competitiveness of Chinese enterprises seems to be the integration of firms into networks. - The Korean experience shows that middle-sized enterprises which are not integrated into enterprise networks can be supported by associations and public sector institutions in ways which enable them to achieve international competitiveness. Three conclusions may be drawn. First, there are different paths to competitiveness. What is presently taking place in many industrially advanced countries is an open process of searching for a new best practice, the contours of which are, at best, only just starting to emerge. Second, there are sequences along the path toward sustainable competitiveness; and activities at the company level, intercompany networking, and support provided by associations and public sector institutions have a distinct and specific significance in the different sequences. Third, researchers would be poorly advised to approach the empirical situation in developing countries with too closed an analytical framework. When the situation is such that no best practice is evident, and it is not possible to determine definitively which phase of the process of searching and adjustment enterprises and institutions are cur-
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WORLD DEVELOPMENT
rently involved in, any narrowly specified search for particular patterns of organization will tend to lead to distorted results. Competitiveness is created at the firm level, but it requires a certain kind of interaction between societal actors in order to shape a supportive environment. Systemic competitiveness, emerging in
a society as the outcome of complex patterns of interaction between government, enterprises, and other actors, will have very specific forms in each society (Esser ei al., 1993; Messner and Meyer-Stamer, 1994).
NOTES 1. See, for example, the line of argument in Kaplinsky
(1988). 2. Press reports abound. See for instance, “A revolu@o popular brasileira” (Veja. March 9, 1994). Infer alia, this report claims that the number of companies with IS0 9000 certification has risen from 30 to 140 in two years. This compares with around 20,000 firms in the United Kingdom (FrankfurterAllgemeine Zeitung, February 2,1994, p. 12).
tool linn representative who maintained that “whereas in Europe the parent company would produce around 40 per cent of the final machinery, in Brazil they were forced to make 80 per cent, after the most strenuous of efforts to bring the level down from an original 90 per cent.”
4. Verbal communication from the Banco National de Desenvolvimento Econ&nico e Social, Rio de Janeiro, and the Banco Regional de Desenvolvimento do Extremo Sul, Florian6polis, May 1993.
3. For instance, Porteous (1993, p. 212) quotes a machine
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