SURVEY - MASTERING MANAGEMENT: The new battlegrounds for capitalism Japanese and European models of capitalism have lost out to the Anglo-Saxon

SURVEY - MASTERING MANAGEMENT: The new battlegrounds for capitalism Japanese and European models of capitalism have lost out to the Anglo-Saxon. Ben Hunt finds shareholder value driving companies across the world

80% match; Financial Times; Oct 9, 2000

The conflict between capitalism and socialism came to an end a decade ago, only to see a new one rising from its ashes. Business and academia alike began to argue that capitalism was in fact many capitalisms, each with its own economies, social systems, cultural values and management styles. Anglo-Saxon capitalism, which had evolved in the UK and US, was distinct from the version found in Japan and Germany, occasionally referred to as the Rhenish model. Indeed, the former was frequently viewed as inferior. In the 1980s and early 1990s, Japan was admired for its management styles and operational practices. Many US and UK manufacturers tried to emulate Japanese methods such as just-in-time inventory control and employee involvement.

Today, however, something new is happening. After a decade in which Rhenish capitalism, to varying degrees, has been struggling, both Japanese and German corporations are restructuring and reforming along the lines of their US and UK counterparts (see boxes). The argument that Japan and continental Europe have to catch up in areas such as shareholder value and corporate governance, not to mention information technology, has been won. Moreover, Japanese business is coming to terms with the fact that US corporations and others have beaten them at their own game. By designing and building in customer-facing processes to all aspects of their business, US companies have extended Japanese management styles beyond the shop floor.

Although there is scope for disagreement over the depth of reform taking place, it is significant that multinationals everywhere champion similar objectives. Increasingly, shareholder value is the measure of corporate performance and corporations are willing to use similar tools, such as downsizing, to reach performance goals. Overall, it is hard to dispute that management styles around the world are locked in to a similar trajectory and, in the process, are becoming more homogeneous.

Global business framework

The dominant view is that the restructuring and reform process has something to do with market and financial pressures, increasingly at the global level. The rise of Anglo-Saxon practices, such as decentralisation and greater focus on core competences, is, in this interpretation, the product of a more competitive climate where corporations everywhere shed inefficient fat and obey the logic of the financial markets. In Japan, for example, such measures are adopted, or need to be adopted, because companies are inefficient, unprofitable and need to become more focused on the market.

There are merits to this interpretation, but it does not explain recent change. In the Anglo-Saxon context, it is true that companies choose restructuring to shore up flagging profit rates. But equally, so have companies with strong balance sheets. Furthermore, many of the strategies or restructuring measures have taken place more or less continuously through different business cycles in the last 20 years. Downsizing, for instance, has continued since the early 1980s, but intensified in the 1990s, a time of record corporate profitability in the Anglo-Saxon nations.

Similarly, parallel strategies and restructuring methods can be seen in nations with varying states of economic health. Explaining change with reference to market or competitive pressure is therefore not a helpful explanation of why these particular strategies are becoming dominant.

It is useful to place change in a wider context. The starting point is that the dominant framework in which business operates has changed dramatically in the past two decades. Post-war "corporatist" relationships between the state, business and labour, always weak in the US, were dismantled during the 1980s in the Anglo-Saxon world. Reforming labour relations led to industrial and corporate restructuring in the 1980s. In the 1990s, the corporatist framework continued to erode, allowing organisational freedom, efficiency and flexibility. Gradually, another framework was built around corporate governance. Here, the focus shifted to shareholder value, management accountability and transparency. Japan and continental Europe are still faced with the tensions of both frameworks, while Anglo-Saxon nations have made the change.

The new framework differs qualitatively from its predecessor. First, it encourages market-driven strategy. Decisions become more based on change in the marketplace. Second, it carves a new role for management. In particular, it encourages a move away from "autocratic" leadership and hierarchies, towards decentralisation. To illustrate these points further, it is instructive to examine the rise of market-based performance measures such as shareholder value, changing patterns of growth and investment, decentralisation and the rise of internal markets. These measures are seen in Japan and continental Europe.

Market-based performance measures

The shift towards market-based strategy is reflected in managing for shareholder value and customer relationship management. The dominance of shareholder value as the prime corporate performance measurement seems assured everywhere, at least in theory. Managers of large corporations are increasingly likely to use the price of a company's stock as the main guide to allocating resources and making decisions. The incorporation of stock options into management compensation packages creates an important incentive. Whereas in the past, strategies such as reinvestment in the core business, staff retention and size were measures of success, today the efficient management of capital has become a benchmark for comparison. Other business objectives or "drivers of value", such as sales, are assessed by whether they create shareholder value.

The second important corporate performance measure is customer satisfaction. There is an increasing tendency to allow customers to dictate how organisations are managed. Leading companies organise along customer-driven processes, rather than tasks driven by internal hierarchies. Manufacturers have long used just-in-time for better response to customer needs (one of many examples of a cross-over between Japanese management practices and the rest of the world). A further trend has been for global manufacturers to expand customer services and even re-brand themselves as services companies.

Firms have striven to incorporate customer feedback into product innovation and research and development, so ensuring products will be launched more successfully. Management performance and pay is increasingly tied to customer satisfaction, especially in service industries. Levels of customer complaints - and an organisation's ability to respond - are viewed as benchmarks of success or failure.

There are many reasons for using these measures, not least, for shareholder value, the rising power of institutional investors in financial markets. However, market pressures cannot be the most important driver. Managing for shareholder value, for instance, is built on the premise that capital should be viewed by managers as a scarce resource. This has motivated companies to return capital to shareholders by buying back shares.

However, such a view has become popular at a time when financial markets and Anglo-Saxon economies are characterised by high levels of liquidity and relatively easy access to capital. Institutional investors may demand higher returns than other financiers, such as banks, but this is a measure of institutional pressure rather than market forces such as supply and demand.

Market-based measures of performance have risen to prominence partly because notions of what companies and managers are for have changed. In the 1970s, a "corporatist" consensus governed relations between business, state and workforce. Although there was conflict between these groups for much of the post-war period, this consensus existed around wider economic aims - growth, stable employment, rising living standards and so on. With the collapse of this consensus, there has been a reversion to market-based criteria to judge business success. By default, company objectives have narrowed and become more focused on serving constituents, or stakeholders, in the marketplace.

Accompanying this shift has been a rethinking of the role of company management and boards. Traditionally, managers have had autonomy to pursue objectives. For example, in the US, post-war arrangements between managers and shareholders were explicitly built on the concept of "trusteeship", where managers of companies were widely viewed as custodians of the public good. This trust, however, began to break down in the late 1980s and 1990s in the Anglo-Saxon world, when it was argued that shareholders require far greater transparency and accountability in the workings of boardrooms. In the emerging corporate governance framework, various codes of conduct began to replace relationships of assumed trust.

Growth and investment

The transition from one framework to another can also be seen in dominant patterns of growth and investment. Corporations, now including those in Japan and continental Europe, increasingly favour forms of growth that do not tie up resources for significant amounts of time but can increase shareholder value. This is one of the most important reasons for acquisition-led growth rather than organic growth, or reinvestment in the core business. It is also an important reason for the recent increase in strategic alliances. These allow companies to access new markets, skill bases and technologies through pooling resources, without committing long-term investment.

A more short-term outlook is often attributed to market pressures. Long-term investment, under the auspices of a long-term plan, is now said to be near impossible. According to conventional wisdom, this is because, with markets moving so fast, it is much harder for businesses to stick to a goal for any length of time. Too much change is likely to happen in between, making the plans redundant. This is increasingly viewed as a problem across the board, but especially in research-intensive industries such as pharmaceuticals. In this context, investing in the core business is more likely to be viewed as a problem rather than a desirable choice.

However, it is more accurate to see the transition as a result of more deep-seated changes in the changing framework of business. Before the 1990s, investment was seen as an important driver of economic growth and prosperity. Government often played a role in promoting investment. In the 1980s, corporations still tended to use surplus capital to diversify and/or invest in the core business. In the 1990s, by contrast, companies have concentrated more on their core competences (either by shrinking product portfolios or recognising key processes where they truly add value in the marketplace).

At the same time, they have returned excess capital to shareholders by buying back shares. Reinvestment has been heavily channelled into information technology in the US and UK, which has increased operational efficiency. This trend is well documented in the US. In a significant development in the UK, during 1999-2000 information technology became the single biggest recipient of investment in the manufacturing sector for the first time.

The drive to decentralisation

The restructuring of company hierarchies and demise of autocratic management styles is clearly seen in management literature. Large corporations in the past suffered under the weight of dozens of management layers which had the effect of slowing decision-making. This was part of a more general business model which placed emphasis on heavy reinvestment and the retention of employees.

More recently, companies have stripped out layers of middle management in a bid to cut bureaucracy and speed up decision-making, as well as shrinking company boards - a process now seen in Japan.

In the last ten years, large corporations have extended an earlier process of decentralisation, by turning subsidiaries into separate profit centres. Increasingly, in internal markets, these units cross-sell to each other, compete as separate entities and are subject to external competition for the business of the parent.

The management writer William E. Halal has written extensively on internal markets. As well as pointing to efficiency gains, he has said that: "the hope that participation, team spirit, inspiring leadership, and other vague ideas can create dynamic action among tens of thousands of people in the typical organisation is little more than pious thinking." This indicates an important development: companies that feel they cannot create enterprise through the coherence of their culture, or management leadership, resort to further decentralisation and market principles to generate "dynamic action".

In this context, the emergence of internal markets can be seen as related to changing relationships between managers and employees. In Japan, for example, loyalties among employees to companies that once offered jobs for life, a feature of an older framework, have weakened greatly. Japanese managers are looking to encourage entrepreneurship among employees as a replacement for these relationships.

Conclusion

Today's business framework brings a number of distinct advantages for companies everywhere. Corporations can use various tools to make their organisation and operations more flexible and manage capital more efficiently. Anglo-Saxon companies that have used these tools have recorded record profit rates in the last decade.

It also brings new challenges. The challenge for managers everywhere is that a market-oriented approach, with short-term measures of growth, makes it difficult to sustain long-term vision. At the same time, corporate governance requirements leave managers and boards grappling with new roles in managing large corporations. Business in the near future will continue to be dominated by an adjustment to these new circumstances. l

Winds of change in Japan

* 1997 Sony shrank its company board to 10 directors from 38, and was one of the first Japanese corporations to do so

* 1999 Sumitomo Bank and Sakura Bank, traditionally part of different keiretsu, announced a merger

* 1999 Nissan said it would cut 14 per cent of its global workforce, including 16,500 jobs in Japan, as well as cutting its supplier network and selling non-core assets

* 1999 Nippon Telephone and Telegraph announced job cuts of 20,000 over three years; Mitsubushi planned to cut 10,000 jobs by early 2004

* 2000 Merger and Acquisition Consulting launched the first domestic hostile takeover in Japan.

It bid ´14bn for Shoei Corporation, a real estate and electronic components group linked to the Fuyo group

Changes in the governance environment

Characteristics of "Rhenish" business

* Sales, market share and headcount dominate performance measures

* Interlocking patterns of ownership and close banking relationships

* Undeveloped market for corporate control

* Employees are most important stakeholders

* Large company boards

* Salary-based management pay

Examples of recent change

* Greater attention paid to financial markets

* Selling of cross-shareholdings, bond financing and growth of equity culture

* Emergence of hostile bids

* End of lifetime employment systems; downsizing

* Shrinking board size

* Legal reform

Anglo-Saxon practices emulated

* Managing for shareholder value

* Higher role ascribed to corporate finance and shareholder value

* See above

* More flexible approach to labour

* Greater accountability and transparency

* Introduction of stock options to compensation packages

Ben Hunt is head of New World Research, a financial research company. He is editor of a number of management books and was previously director at Brightwater Research and Editing.