Discussion Paper November 2015
German Managers’ Organizational Know-how
in the Inter-war Period (1918 – 1939):
A Cross-country Inquiry on National Contextual Environments*
by
Erich Frese
*A previous version of this paper was presented at the 70th Annual Meeting of the Academy of Management, Montreal, Canada, August 2010.
This paper can be downloaded here: http://uo.uni-koeln.de/de/team/team/prof-em-dr-erich-frese/
Prof. (em.) Dr. Erich Frese, University of Cologne, Department of Business Administration, Albertus-Magnus-Platz, 50923 Köln, Germany, E-mail: [email protected].
1 Abstract
This paper inquires by comparing the management of organizational problems practiced from German and U.S. companies the state of organizational know-how in large German companies during the inter-war period of the twentieth century. From an organization design perspective and based on a case study-like analysis the article examines whether at that time prevalent German organizational forms indicate deficiencies in know-how or result from the national contextual environment. Country-specific profit seeking behavior shaped by cultural imprinting, institutional rules and personal traits is elaborated as influencing German and U.S. managers’ perception and solution of organizational design problems. Given the fragmentary state of the available data base the investigation pursues an approach which draws on the existing literature, especially on the records of contemporary witnesses and on published scholarly archival work. Because large companies are considered, empirical evidence can only be revealed for industrial product companies; there were no large German consumer product companies at that time. For the undertaken cross-country comparison the U.S. companies Du Pont and General Motors and the German companies I.G. Farben and Siemens are chosen. As the main result the study claims that during the inter-war period German and U.S. managers of large industrial product companies widely shared the same body of organizational knowledge, but due to their profit-seeking behavior differed in its use.
2 1. Introduction
Inquiring the state of organizational know-how of large German companies in the inter-war period means to explore the subjective theories guiding managers’ perceptions and solutions of organizational problems nearly one hundred years ago. Scholarly literature has rarely examined these issues explicitly. Most of the studies that have been conducted take a cross-country approach and compare the established organizational forms of German and U.S. firms. Given the reputation of U.S. managers as creators of „the most technologically advanced, fastest- growing industries in their day“ (Chandler (1990), 593), this methodological approach comes hardly as a surprise.
1.1 Prior Work on German Inter-war Organizational Knowledge
Apart from rather speculative attempts to trace back German entrepreneurs’ and managers’ assumed deficits in organizational knowledge to their authoritative attitudes (Hartmann (1968); Kocka (1980)), the state of scholarly research on the emergence and spread of inter-war organizational structures can be outlined by distinguishing two research approaches.
The first cross-country research approach is for example pursued by Chandler (1990). In a study comprising the 200 largest industrial enterprises in the U.S. and Germany he elaborates empirical insights in the existent organizational forms and draws, on the whole, a positive picture of the German organizational knowledge. According to Chandler, at the beginning of the twentieth century large German companies were capable “to adopt new technologies and to build the organizations necessary to exploit them” (Chandler (1990, 428)); indications for a general organizational backwardness are not revealed (see Chandler (1990, 548, 558); for a similar evaluation, see Fear (2005, 6-7)). Considering the extensive contacts existing between German and U.S. managers since the end of the nineteenth century this conclusion appears plausible (Nolan (1994)). In this respect, the case of the German chemical company I.G. Farbenindustrie AG is very instructive. The company had several subsidiaries in the USA (for example American I.G. Chemical Corporation; see Chandler (1990, 572-573)), managers travelled frequently and some German top managers spent a considerable part of their career in the USA (Holdermann (1953); Chandler (1990, 479)). The I.G. Farben board, therefore, had excellent knowledge of the organizational concepts their U.S. colleagues used and this knowledge was present during the reorganization of the German I.G. Farbenindustrie (ter Meer (1952, 782)). While appraising the work of Chandler which improved our level of information on the organizational forms existing in German and U.S. companies, the weaknesses in the theoretical underpinning of the inquiry must not be overlooked. The conclusions are not 3 sufficiently based on an organization theory covering managers’ design activities. Basically, Chandler renders anecdotal evidence on attributes of the organizational forms in German and U.S. companies. It is shown, for example, that the Siemens structure appears to have been more carefully and systematically defined than the structure of General Electric (Chandler (1990, 549)) and that the structure of Vereinigte Stahlwerke AG was quite similar to the one being put in place at United States Steel (Chandler (1990, 558)).
The second cross-country research approach examines the spread of organizational forms regarded as efficient; it draws conclusions on firms’ organizational knowledge from the building and adoption of a single organizational structure, the multi-divisional form (MDF). The design rationale of this structure is to organize tasks according to products or geographic markets to which outcomes are directed. These research interests are an offspring of the reorganizations that were carried out country-wide after the end of the Second World War. They intensified the discussion about the dominating role of the U.S. management model (Djelic (1998); Schröter (2005)) and about borrowing administrative ideas from the U.S. (Franko (1974, 503)). In the mostly large-sampled empirical surveys the development and adoption of the MDF fulfil the function of indicators measuring the level of organizational knowledge (see for this view Kogut and Parkinson (1998) and for conclusions on U.S. superiority the empirical studies from Franko (1974), Cable and Dirrheimer (1983), and Whittington, Mayer and Curto (1999)). This research concept assumes that managers in a global scale are facing the same task requirements and that the MDF can be valued as offering the superior solution for these problems. Though scholars hold different theoretical views focusing, for example, on management theories (for example Chandler and Redlich (1961); Scott (1973)), economic theories (for example Williamson (1971); Williamson and Bhargava (1972)), and institutional theories (for example Fligstein (1985)); Palmer, Jennings and Zhou (1993)), they more or less explicitly take both assumptions as a basis of their inquiries. The first assumption claims in reference to Chandler’s strategy-structure-paradigm (Chandler (1962)) that large companies in advanced economies, to assure growth, diversify their resources into related industries. As a result, “a universal logic of corporate development, converging over time on increasingly similar strategies and structures” (Whittington, Mayer and Curto (1999, 520)), is emerging. The second assumption, being highly influenced from Williamson (1975), proposes that pursuing the described diversification strategy the introduction of the MDF is associated with improved profitability (Teece (1981); Scott (1973, 142)). When inquiring the role of the MDF, scholarly interest mostly focuses on post-war reorganizations. However, the inquiries from Fligstein (1985) und Franko (1974) offer also insights into the inter-war period. For the U.S. economy
4 in the 1920s, Fligstein proves the existence of two MDFs (Du Pont; General Motors). In his investigation on German firms, Franko draws for the same decade the conclusion, that one structure (IG Farben) meets the attributes of MDFs. However, his classification raises the question why the Siemens structure, incorporating divisional components (see, for this appraisal Kocka (1969, 372-374)), is not considered. Including the Siemens structure as a semi-MDF one can resume for large companies: In the inter-war-period, two comparatively sophisticated MDFs existed in the U.S. and two less developed MDFs in Germany.
The foregoing review of the prevailing research approaches representing the state of the literature on inter-war U.S. and German organizational structures reveals that scholarly inquiries draw conclusions from the spread of rather coarsely classified organizational forms. The questions how managers perceive organizational problems and how organizational solutions are developed are widely neglected. The following investigation of German companies’ state of organizational know-how focuses in a more differentiated way on managers’ problem solving activities being the core of any paradigm of organizational design activities.
1.2 Object of Inquiry
Companies can be attested to exhibit adequate organizational knowledge when they are able to meet successfully new challenges with reorganization activities based on in-house efforts. However, trying to reveal the extent of knowledge in complex social systems on an empirical level will soon meet practical and methodical limits. This is especially true for historical inquiries. Fortunately, in the case of large German inter-war companies, three peculiarities facilitate inquiring the structure and the impact of organizational knowledge. First, for the period considered available data supports the assumption of a cross-country and cross-industry predominance of an organizational paradigm that perceives the problem of organizing companies in the industrial product industry in the same way. In the USA and Germany the “theories in use” (Argyris (2003)) guiding managers’ organizational design activities were derived from the same cognitive paradigm of systems engineering. Second, scholarly literature agrees that the United States, the “seed-bed of managerial capitalism” (Chandler (1977, 498)), set the international standard of best practice in organization design. Therefore, it suggests itself to compare German companies with the organizational forms of U.S. firms. Third, in the immediate period after the Second World War large German companies faced complex new organizational requirements that to a remarkable degree have been fulfilled by using pre-war
5 know-how. These reorganizations, therefore, indicate to a certain degree the German inter-war organizational knowledge.
Elaborating and evaluating the level of organizational knowledge of German inter-war companies the following inquiry has to deal with the fragmentary state of the available data base which excludes large-scaled statistical investigations. Therefore, the inquiry pursues a case study-like qualitative approach which draws on the existing literature, especially on the records of contemporary witnesses (for example Tacke 1977) and on published scholarly archival work (for example Chandler 1990).
A comparative analysis of firms in the United States and Germany has to consider the difference in firm size. Using Chandler’s criteria for the year 1930 (Chandler (1990, 644)), there were at least one hundred U.S. firms (manufacturing industries) of the inter-war period that were considered “large”. However, only six German firms fulfil this criterion of size and are relevant for the following cross-country comparison (Vereinigte Stahlwerke AG (VSt), I.G. Farbenindustrie AG (I.G. Farben), Allgemeine Electricitäts-Gesellschaft (AEG), Fried Krupp. AG (Krupp), Siemens-Schuckert Werke AG (Siemens-Schuckert) and Siemens & Halske AG (Siemens & Halske). This sample implies that in the following empirical evidence can only be revealed for industrial product companies; there were no large German consumer product companies at that time.
The study is structured in six parts. After this introduction the second part explores the construct of organizational paradigms and reconstructs the Du Pont/General Motors-model as a concept reference that incorporates organizational know-how of U.S. managers in large industrial product companies during the inter-war period. The third part elaborates national features based on culture, institutions, and personal traits guiding managers’ exploitation of available knowledge when organizational solutions are developed. In part four, empirical evidence is provided to prove the proposed attenuated profit seeking behavior of German managers and to substantiate the assessment of the prevailing organizational forms in Germany. Part five examines the well documented historical reorganizations that took place after the Second World War, which, to a high degree, utilized German inter-war organizational know-how. Reviewing this time of extraordinary competitive challenge facilitates drawing conclusions about the level of the inter-war organizational know-how in Germany. The last part presents conclusions and suggests directions for further research.
As its main theoretical contribution the inquiry supports the proposition that German and U.S. managers perceiving and solving organizational problems exploited available organizational
6 know-how differently depending on a national profit-seeking behavior shaped by cultural imprinting, institutional rules, and personal traits of actors. Asserting these country-specific effects implies that the mere shape of organizational structures does not allow drawing conclusions about the level of organizational know-how of the acting managers. Even the fact that in German companies the establishment of company-wide planning systems was rudimentary must not indicate deficiencies in know-how. It rather could be traced back to country specific profit-seeking behavior, as will be shown later.
2. The Organizational Paradigm of Systems Engineering in the Inter-war Period: Elaborating the Du Pont / General Motors – model
The following sections examine the formative elements of the paradigm of systems engineering and its incorporation in the concepts of organizational design of large U.S. companies.
2.1. Organizational Paradigms
This study considers organizational paradigms as cognitive schemes describing managers’ principles of knowledge processing that influence the perception of the organizational task, the building of assumptions on cause-effect relations and the heuristics of organizational problem solving (see Brown (1978); Merkle (1980); Pfeffer (1982); Guillen (1994); Shenhav (1999)). For the inter-war period, the prevailing paradigm can be indicated as “systems engineering” – a concept striving for the comprehensive analysis of rather mechanically defined functionalities and deterministic cause-effect assumptions (Briggs (1964); Hendrick (1987); Meister (1987); McKenna and Wright (1992)). In this view, organization design has to be conceived as a “linear extension” of technical standardization and systematization (Shenhav (1999, 18-19)), finding its concise expression in the functionalistic and analytical thrust of engineering-based management (Nelson (1980)).
For managers facing complex organizational problems and applying the concept of systems engineering two heuristics of task modularisation play an essential role (see for the design rule of modularization Simon (1965); Baldwin and Clark (2000)). The first principle differentiates between the design of the competence and the control system (see, for example, Galbraith (1977); Frese, Graumann and Theuvsen (2012)). The competence system assigns tasks defining the responsibility of organizational members. The control system ensures the discretionary use of the competences in adherence to the overall goals of the company. The second principle of modularization distinguishes between measures of coordination and motivation being widely
7 adopted in organization theory (Thompson (1967); Galbraith (1977); Milgrom and Roberts (1992); Frese, Graumann and Theuvsen (2012)). Coordination is defined as a task-oriented activity aimed at overcoming the split-up of information in organizations. Solving the coordination problem means implementing rules for retrieving, transmitting, and processing information to ensure the exploitation of given resources (resource efficiency) and to handle interfaces (process efficiency). Motivation activities are person-oriented devices addressing problems of commitment in view of the tension between individuals’ personal goals and the overall goals of the firm (motivation efficiency).
The literature on design-oriented organization concepts that existed in the inter-war period does not offer valid insights into the principles of building organization structures. This is especially true for the German literature, but applies also for the United States, where only a few contributions have made a genuine effort to develop a more conceptual view (see the review in Starbuck (2003)). Though the results do not go beyond a systemizing elaboration of pattern found in managerial practices (Davis (1928); Mooney and Reiley (1931); Urwick (1933); Gulick and Urwick (1937)), the authors at least draw a picture that contains main elements of systems engineering (see, for example, the characterization of the work of Urwick and Gulick in Merkle (1980, 263-265)). The conclusions of Merkle and especially the research of Guillen (1994) give support to the proposition of the dominating influence of systems engineering both in the United States and Germany. This scholarly reasoning corroborates the assumed common cross-country body of organizational know-how in the industrial product industry. However, more research is needed to confirm this basic assumption.
Because the inquiry of this paper does not conduct own archival work, a deeper understanding of the prevailing paradigms can primarily result from a review of the literature dealing with organizational forms in large firms in the inter-war period. When the introduction of organizational structures is explored in the following, organizational change is attributed to the design activities of top managers. However, the construct of a manager actively designing the organizational structure of her or his firm raises objections especially in influential strands like organization ecology (Hannan and Freeman (1984); Hannan and Caroll (1992)). But, studies carried out on reorganizations of the inter-war period reveal that tuning out the manager is contradictory to their active role in reorganization activities. In reviewing studies from the USA, the reorganizations of Du Pont (Chandler (1962); Stinchcombe (1990)) and General Motors (Faber (2002); Freeland (2001)) in the 1920s verify that managers with differentiated ideas on the effectiveness of organization measures were the moving force behind the restructurings. The same holds true for German reorganizations, that took place in the context of large merger
8 movements in the 1920s and 1930s (see Plumpe (1990) for I.G. Farben and Reckendrees (2000); Fear (2005) for VSt).
2.2. Reconstructing U.S. Managers’ Organization Design Paradigm
For the evaluation of German managers’ design activities in the inter-war period this section elaborates as a U.S. reference model the principles guiding the major reorganizations in the American firms E. I. du Pont de Nemours & Co. (Du Pont) and General Motors Corp. (General Motors) in that time.
The triggering sign that served as the catalyst for the historical reorganizations of Du Pont and General Motors was a deterioration of the profit situation. As the seminal study of Chandler (1962)1 impressively describes, the exceptional merit of the involved managers lay in the discovery that the missing organizational coverage of the diversification strategy caused the crisis. When managers searched for structural solutions ensuring the effective exploitation of the given profit potential they realized that a direct cause-effect link between organizational measures and firm’s profit could not be revealed. Therefore, proxies that allowed an assessment of possible profit effects had to be introduced.
In this context, the Du Pont/General Motors-model (DP/GM-model) provides rules for the design of competence and control systems on the one hand and for the design of coordination and motivation effects on the other hand. In the Du Pont and General Motors cases, the competence system was primarily structured according to function-oriented or product-oriented criteria. As far as the control system is concerned, the DP/GM-model can claim historical uniqueness as it developed the first company-wide planning system for large companies to fulfil the requirements of control ambitiously. The review of the rather limited number of studies inquiring process aspects of managers’ decisions on reorganizations renders differences in the formulated design rationales for coordination and motivation measures. Analytically revealed means-end-relations are primarily put forward when coordination devices are considered. The principle that separating competences affords integrative measures apparently covers managerial organizational know-how in that time (see Chandler and Tedlow (1985, 680), for a typical coordination argument). Different from the coordination view, motivation arguments are less analytically derived but mostly rest on managers’ beliefs. Inter-war managers believed especially in the high-powered incentives of markets (Williamson (1975), when they preferred
1 See in this context the theoretical reconstruction of Chandler’s study by Stinchcombe (1990). 9 intra-firm profit-based motivation measures (see Chandler (1962, 111), for such a motivation argument).
Within one decade, from 1914 to 1924, the organizational structures of Du Pont and General Motors were radically changed. The implemented reorganizations were without precedent as far as the importance of the questions raised, the thoroughness of the analysis and the consistency of the implementation are concerned. The reasons for the extraordinary endeavors and the features of the change activities undertaken can be found, first of all in the characteristic traits of the acting persons and in the contextual conditions of the markets. The change agents were mostly managers with professional training in engineering and natural science. In the case of General Motors, many of the leading managers could also draw from experiences as independent entrepreneurs. This is especially true for Alfred P. Sloan, who ruled the fate of General Motors for more than three decades. Therefore, the DP/GM-model combines the analytical mind-set of the technician in a singular model with the expertise of the professional manager and the creative independence of the entrepreneur. The contextual conditions of the market were further factors influencing the reorganizations at Du Pont and General Motors. For Du Pont, acting in a “high-tech” industry with large research expenditures (Chandler (1994, 3)), the challenge was found in the permanent generation and acquisition of knowledge to secure product innovations (see Haber (1971, 247-249)). The competitive conditions for General Motors, acting in a “stable-tech” industry continuing to produce “much the same line products” (Chandler (1994, 3), were challenging, too. One of the most complex products, the automobile, with a high capital lock up was manufactured on the basis of mass production. The high share of assembling activities opened discretionary scope for the design of new production processes to increase logistical effectiveness. Fluctuations in demand caused by business cycles, changes in buyers’ preferences and the marketing campaigns of strong competitors made it extremely challenging to combine cost-efficient stability and customer-oriented flexibility (see Katz (1977)).
Different from General Motors, the reorganization at Du Pont primarily focused on the restructuring of the competence system; therefore, analyzing and solving the trade-offs between resource-efficiency (utilizing economies of scale) and process-efficiency (handling critical interfaces in the value chain) (see Frese, Graumann and Theuvsen (2012) for this efficiency concept) dominated the assignment of tasks to business units. For the Du Pont managers the challenge was to solve a contradiction. On the one hand, they had to realize the advantages of diversification strategies, which meant tendencies to modularize the value chain (“decentralization”). On the other hand, they had to raise scale effects through company-wide
10 concentration of resources and important activities (“centralization”). Modularization allows the assignment of parts of the value chain to self-contained units and in this way secures process efficiency by internalizing critical interfaces. Concentration by building “central units”, for example for purchasing, production, research and development, increases resource efficiency. Du Pont developed a solution for this problem in the form of a modified concept of divisionalization. Compared with the Du Pont situation, General Motors’ strategy made less demands on the reorganization of the competence system. The need to reorganize the competence system resulted primarily from the rather uncoordinated and unsystematic acquisition of companies that William C. Durant pursued when he built up General Motors. Organizational change, therefore, in the first line meant to re-align the General Motors conglomerate in accordance with the market strategy of segmentation developed from Sloan.
One outstanding contribution of the General Motors and Du Pont reorganizations lay in the insight that the design of both the competence system and the control system are closely connected. Building product-oriented modules in the form of product divisions makes it easier to generate company-wide plans. More than simply producing coordination effects, this form of modularization also enables managers to realize motivation effects by assigning monetary performance outcomes to units (“profit center”, see Chandler (1962, 111)). Though both Du Pont and General Motors recognized the importance of company-wide planning systems, as will be explained, the concept found its most sophisticated shape and implementation at General Motors (Hawkins (1963); Johnson (1978); Kuhn (1986, 104-106)). The General Motors control system culminated in the uncompromisingly pursued target of 20 per cent return after tax while operating on average at 80 per cent of capacity (Johnson (1978, 495)).
3. Culture, Institutions, and Personal Traits Shaping National Pattern in Exploiting Available Organizational Know-how
This part examines why in the inter-war period even under the cross-country rule of systems engineering national solutions for German organizational structures arose. The first section describes the conceptual framework that allows to explain these design effects. The next three sections elaborate country-specific factors based on culture, institutions and traits shaping national organizational solutions
11 3.1 Organizational Structure and Country-specific Features
In the following cultural, institutional, and trait-based factors are introduced as key variables2 influencing directly and indirectly the emergence of country-specific coordination and motivation measures. The inquiry focuses especially on indirect effects being exerted by differences in managerial profit seeking behavior. Figure 1 visualizes these effects playing a pivotal role in the further investigation.
Organization Structure
Profit-seeking Behavior
Aspiration Level of Position of Profit Goal Profit Goal
Culture Institutions Institutions Personal Traits Self-efficacy of Regulation of Self-containment of Self-containment of Planning Capabilities Market Transactions Co-operative Goals Technical Goals
Legend A B: A causes B
Figure 1: Country-specific Determinants of Profit-seeking Behavior and Organization Structure
The influence of profit-seeking behavior on the emergence of organization structures has been widely neglected in scholarly research. Ostensibly, only Chandler addresses this question when he examines differences in national management systems in his cross-country study (1990). However, he elaborates this problem only cursorily. To substantiate Chandler’s approach the following inquiry investigates whether German inter-war managers, in contrast to their U.S. colleagues, exploited given profit potential only to a limited degree. This attenuation of the profit orientation is derived from two contextual conditions of the German inter-war economy – from the reduced level of the profit strived for and from the lower-ranked position of the profit goal under other company goals. The aspiration effect is derived in the following from cultural imprinting and from institutional regulation. The cultural impact is reflected in the degree of managerial self-efficacy of planning capabilities. The institutional impact considers the stabilizing effects of market regulations. The ranking effect is traced back to institutional rules
2 To meet the space restrictions of this article the key variables are not derived from an overarching framework. See for an overview on the state of cross-country research Gannon and Newman (2002). 12 and to personal traits of acting managers. Institutional rules regulating market transactions give non-competitive, co-operative goals a self-contained status. For managers being professionalized in engineering or science this trait attribute fosters the self-containment of technical goals.
3.2. Culture Influence: Self-efficacy of Planning
In organization theoretical frames culture is widely conceptualized by referring to cognitive categories (see Erez and Earley (1993)).3 Therefore, any cognitive model of an organization paradigm is open to cultural influence. In pursuing this perspective, the proposition that U.S. managers experience higher degrees of self-efficacy4 in planning than their German counterparts is examined. Empirical evidence supports the assumption that differences in planning behavior are country-specific; this conclusion finds theoretical validation in Rotter’s concept of the perceived locus of control (Rotter (1972)) claiming that individuals differ in the assessment of their capability to achieve desired outcomes. Literature widely assumes that the locus-of-control variable differs across culture (see Markus and Kitayama (1991)). Highly revealing for our inquiry is the empirical investigation from Schwartz (1994) proving higher scores on perceived control for U.S. Americans than for Germans. When “perceived locus of control” is considered as a proxy for “perceived self-efficacy in planning”, it seems reasonable to expect that U.S. managers set higher levels of aspiration when analytically preparing the exploitation of profit potential. This conclusion is validated by a recent empirical study that compares the perceived planning capabilities of U.S. and German managers (Egelhoff and Frese (2009)). As a consequence, one can assume that U.S. managers tend to establish more ambitious planning systems than German managers.
3.3. Institutional Rules: Stabilized Market Transactions and Self-contained Co-operative Goals
During the inter-war period the German economy was, partly because of the societal and political upheavals after the First World War, a highly regulated system. The core of the institutional framework, the concept of “organized capitalism” (see Winkler (1974) and for a
3 These theories mostly have been developed during the last decades. Therefore, their empirical examination does not cover the inter-war period. Considering that change in culture manifests itself as a long-term process, we assume relevance for our study. 4 Self-efficacy implies a “judgment of one’s capability to accomplish a certain level of performance” (Bandura (1986, 391)). 13 microeconomic analysis of comparable typologies Hall and Soskice (2001)), can be described as a governance pattern with strong tendencies to substitute competitive market transactions by transactions based on co-operation. These co-operative agreements grounded on a corresponding system of law. In principle, German law guaranteed the freedom to form cartels (see Bernert (1990)). Cartel building relied on self-organized negotiation processes in a network of societal and economic groups (for example employer and industry associations, trade unions, and banks) and these connections played an important role in German industries in the inter- war period (Reckendrees (2003); see Keller (1981) for a brief historical review). When the market system shifts from a competitive to a regulated one this leads to a stabilization of the transactional environment.
A huge volume of research has examined the impact of stabilized markets on the structure of the emerging organizational forms (Emery and Trist (1965); Thompson (1967, 70-73); Duncan (1972)). Following this strand of organization theory, literature primarily focuses on the direct structural consequences of the stabilization effect and widely neglects that co-operative goals and market regulations also lead to an attenuated profit-seeking behavior (see Vitols (2001); Sorge (2005); for theoretical extensions Knetter (1989)).
Organizational studies inquiring the inter-war period mostly focus on the structure of the competence system and examine the coordination requirements caused by different degrees of uncertainty and complexity (for example finding structural solutions for critical interfaces; Thompson (1967); Galbraith (1977)). There are only a few studies addressing the influence of institutional rules on the control system, especially on the planning system. The conceptual inquiry from Dornseifer (1993, 87) is a notable exception. However, for the shape of the planning system this investigation offers differentiated insights into the organizational consequences of the changing complexity and dynamic of the contextual environment only to a limited degree. A deeper understanding of these cause-effect-relationships is provided by goal-oriented motivation theories focusing on the difficulty of the goals that managers strive for. In this context Locke and Latham (1990) claim that the more difficult and challenging goals are, the more effort and persistence will be exerted to complete the tasks (see also Mitchell and Daniels (2002)). Therefore managers, being confronted with unregulated and competitive markets will strive more intensively for profit than managers in less challenging markets − and the lower the intensity of profit-seeking, the weaker are the incentives for detailed planning.
The institutional rules that governed the U.S. economy in the first half of the last century differed in various aspects from the German system. Considered in the light of the preceding
14 considerations on German market regulations, the following inquiry focuses on the product market.5 For this market, the very fact that in the USA since 1890 the Sherman Act and subsequent antitrust legislation (see Burns (1936)) defined the standards of competitive enterprise systems, suggests significant differences between the prevailing organizational structures in both countries. However, comparing large companies in Germany and the USA must not lose sight of the fact that in the period from the late 1910s to the 1930s, in many U.S. industries a governmentally approved cartelism was practiced. As Himmelberg (1976) reveals in his historical study, the older, more mature and less profitable producers of standardized industrial goods like steel, oil, paper, and rubber were the dominating forces in the bargaining for lessening competition. As in Germany, where “Industrieverbände” played a pivotal role, in the USA, beginning during the US engagement in the First World War, “Industry Trade Associations” (“organized groups of producers of broadly similar commodities and service”; Burns (1936, 43)) were the driving forces to ease the restraints of the Sherman Law and to revise antitrust legislation. After the War, this experience in co-operation fostered the transition to a “middle way” (Burns (1936, 45-46)) between competition and co-operation leading to an acceleration of trade association activities in the form of an intensified interchange of information, especially information on prices.6 During the great depression, the New Deal Program initiated by President Roosevelt opened a new period for the role of trade associations. In 1935, these tendencies to governmentally approved cartelism were declared unconstitutional, though co-operative ideas continued to influence regulatory practice in a variety of ways during the following years.
The preceding outline on inter-war regulative tendencies in the U.S. economy reveals that not only in Germany competition was restrained by institutional rules. However, there were remarkable differences explaining why in both countries regulative measures stabilizing markets played different roles. While a broad spectrum of large German firms utilized the established principles of controlling prices and production rates, for large U.S. firms the relaxation of antitrust laws was typical only for specific industrial sectors. For a cross-country study inquiring the influence of profit-seeking behavior on the exploitation of available know- how for organization design activities, the pattern of national regulative concepts deserve
5 Of course, the degree of institutional pressure for managerial acting depends also on the regulatory state of the capital market. For German companies, corporate laws (Handelsgesetzbuch, Aktiengesetz) reduced shareholders’ influence on corporate management. In the USA, especially the regulation of securities law strengthened the position of shareholders and attached pronounced value to managerial profit orientation (see Fear and Kobrak (2006) for differences between the United States and Germany). 6 In 1921, a survey proved the existence of 626 trade associations, 276 of them were active in statistical work and 107 of them were “open price associations” and engaged in the circulation of detailed price-information on current and even prospective transactions (Himmelberg (1976, 7; 105)). 15 particular consideration. In the USA regulative tendencies emerged foremost in industries when managers of large firms shared the same strategic challenges and relied on the same organizational measures to meet them. This can be proved for large U.S. producers of standardized industrial products facing similar market conditions. The large U.S. steel companies can be mentioned as a typical example. In this industry, managers tend to agree, like their German counterparts, on co-operative market behavior and developed organizational structures similar to the German firms (see Chandler (1990, 127-140; 488-496); Reckendrees (2000); Fear (2005)).
Different to the German companies trying to utilize the economy-wide regulations, many U.S. firms acted under competitive market conditions and attempted to build sustainable individual competitive advantages based on a strategy of differentiation (see Fligstein (1990, 75-160) for a thorough analysis of competitive and co-operative elements in the U.S. history). In these firms, primarily producing and selling non-standard goods developing brand loyalty through advertising, introducing new products, and expanding market shares were the key strategic measures. “This new conception of control was the product of the sales and marketing revolution of the 1920s” (Fligstein (1990, 118)) – it generated impulses for the development of organizational forms in large U.S. firms, not in German ones. In Germany, most of the firms in comparable industries, as was the case for consumer goods (see Chandler (1990, 146-170; 428- 434) for branded and packaged products industries), had a medium-sized character. The existing large German firms (for example Siemens and I.G. Farben) utilized the benefits of co-operative agreements. The resulting attenuated profit-seeking behavior provided only minor incentives to advance organizational forms.
Summarizing the foregoing inquiry on the role institutional rules played in U.S. and German markets it can be concluded: Due to the low distribution of large firms and the high regulation in the industries German managers of large companies faced less pressure than most of their U.S. colleagues to exploit the conventional wisdom of systems engineering to meet demanding requirements for organization design.
3.4. Personal Traits: Self-contained Technical Goals
The dominance of large companies producing industrial goods and the fact that literally no large consumer product companies existed explain why large German companies relied to a high degree on technical know-how (see empirical data in Kocka and Siegrist (1979) and Chandler (1990)). Therefore, managers with a background in engineering and science owned a
16 dominating position on the board of German companies (see Dornseifer (1993) for this conclusion and O’Sullivan (2000, 234) for a corresponding statement). Only a few studies address these country-specific features and inquire the relationship between technical orientation and organizational structuring. Notable exceptions are surveys conducted by Dornseifer and Fligstein. Comparing the different organization structures of large German and U.S. companies in the late 19th and the early 20th century, Dornseifer (1993, 89) claims that a management pursuing a predominantly technical view will not be supportive of initiatives aimed at extending the existing accounting system to a company-wide planning system. In a longitudinal study (1919–1979) of the largest hundred U.S. companies Fligstein (1985) reveals the relationship between technical professionalization and preferences for the organizational shape of the competence system. His results, especially the preference of technicians for function-oriented departments, support the assumption that technically oriented managers own a specific goal orientation (see for further empirical evidence Allen (1997)).7 Some studies show a departmental effect (see Dearborn and Simon (1958); Lawrence and Lorsch (1967)) claiming that fulfilling technical tasks shapes individual patterns of perception and problem solving. The professionalization effect that results from long-term socialization through education and training is highly important in this context (see Thompson (1967, 101), for empirical evidence Schrader (1995)).
This specific orientation finds its wide-spread expression in the established organization structures due to the broad influence technicians can utilize in firms. To understand this influence the differentiation from Thompson (1967) between “technical” and “administrative” roles is insightful. Whereas “technical” tasks belong to a high degree to the domain of the technician (engineer, scientist) with well-structured and widely accepted professional pattern, “administrative” tasks can be assigned to competences shaped by various forms of academic education, vocational training, and practical experience. In this context the role of the technician is strengthened by an assignment effect. While non-technicians can take over “technical” roles only to a limited degree, the range of “administrative” roles allowing technicians to assume responsibility is usually wider. Thus, the task flexibility of technicians constitutes a broad and powerful domain of influence. Whether this latency of influence enfolds and fosters attenuated profit-seeking depends on the requirements the process of managerial decision making has to fulfil. According to Thompson, the technicians' influence increases when a founded knowledge on complex technologies is required to substantiate strategic decision making. Only when the
7 Shenhav (1999, 198) points to a general professionalization effect: professionals assume autonomous roles based on a body of knowledge with self-sustaining structure and self-propagating logic. 17 company faces competitive markets and the securing of survival becomes a challenge merchants representing economic competences do gain influence on decision making as a countervailing power to the one-sided technical view. The institutional and market framework did not favor the emergence of non-technical (commercial) power bases in large German industrial product companies during the inter-war period. Therefore, the domain of merchants was constrained to tasks with low strategic range like accounting.
3.5. Conclusions
The preceding sections elaborated the thesis that national cultural attributes, institutional rules, and personal traits influence companies of distinct countries differently, though following the same organization paradigm in their design activities. The following two propositions summarize the results of the inquiry and outline the framework for the evaluation of the prevailing organization forms in German companies.
Proposition 1: When designing the competence system, the more articulated the profit orientation and the more competitive the markets the more challenging it becomes to balance the organizational trade-off between resource-efficiency and process-efficiency. Deficiencies in process-efficiency (for example delay in delivery) are perceived immediately due to their high noticeability and might impair customer orientation. In contrast, deficiencies in resource- efficiency impairing the realization of economies of scale are less obvious. This explains why in a challenging market, the advantage of a product-oriented structure, the internalization of critical interfaces, is put forward under pronounced profit orientation. In a context of stable markets and limited profit orientation, however, even complex cross-functional interfaces can be handled in a function-oriented structure with an appropriate degree of process-efficiency. When under these conditions, technicians hold powerful positions and as a consequence, resource-efficiency is highly evaluated, the preference for functional structures is even more articulated.
Proposition 2: The more pronounced profit orientation is articulated and the more competitive the markets are, the more the development and refinement of the control system move into the center of organization design activities. When striving for challenging aspiration levels for profit and facing competitive markets, setting ambitious goals and controlling their realization define managers’ critical tasks urging the building of an effective and efficient company-wide planning system. In stable markets and under weak profit orientation, less effort in establishing or refining planning systems can be expected.
18
4. Empirical Evidence: How German Managers Perceived and Solved Organizational Problems
The foregoing sections developed the framework for examining whether and to what degree prevalent organizational forms during the inter-war period indicate the influence of different national contextual environments. The analysis in this part will proceed in two steps. First, empirical evidence is utilized to prove the proposed attenuated profit-seeking behavior of German managers. Next, the DP/GM-model will be compared with the German I.G. Farben/Siemens-model (IG/S-model) in order to substantiate the assessment of the prevailing organizational forms in Germany.
4.1. German Managers’ Attenuated Profit-seeking Behavior
For a statistical analysis of the claimed attenuated profit orientation of large German companies, the available historic data set is limited. In fact, when comparing Du Pont and I.G. Farben (see Plumpe (1990, 183)), the data proves that in the mean of the years from 1925 to 1931 Du Pont earned a higher return on investment than I.G. Farben (see for the high profitability of Du Pont Haber (1971, 348-350)). But, without controlling further variables which presumably influence performance measures, the informative content of the data analysis is questionable. Under these circumstances, utilizing a case study - like approach, seems more promising to reveal different degrees of profit orientation in German and U.S. companies. In the following, conclusions are drawn from German and U.S. companies where the profit-seeking behavior is comparatively well documented in the literature. First, Du Pont and I.G. Farben are considered which belonged to the same industry. Then, Siemens and General Motors are compared as companies, wherein family groups exerted influence on board decisions.
I.G. Farben and Du Pont As has been previously mentioned, the Du Pont reorganization was triggered by a critical deterioration of profit. In contrast to this profit-driven change process, the reorganization that started at I.G. Farben in the 1920s was not primarily a result of market forces; rather, the restructuring and realignment of a conglomerate of separate companies was induced by far- reaching merger activities. Even before the First World War, the German chemical industry made an effort and succeeded in overcoming structural problems in various industries by
19 founding co-operations and arranging agreements (see the overview in Feldenkirchen (1987)). In 1904, Hoechst and Casella established a community called Interessengemeinschaft (I.G.); BASF, Agfa and Bayer formed an I.G. in 1905. After the First World War, the institution of I.G.s gained even more importance in the chemical industry, where members increasingly shared the view that reorganizing most of the companies as a single legal entity would promise a solution to their perceived industry problems. In 1925, the major chemical companies merged to form a single legal entity, the I.G. Farbenindustrie AG (for details, see Stokes (2004, 214- 251)). In contrast to the reorganization concept of Du Pont which saw in profit orientation the cornerstone of control, establishing and organizing the I.G. Farben trust paid less attention to profit. There are two main reasons for this constrained focus on profit:
1.) In markets with a low intensity of competition, the underdeveloped state of profit control will not inevitably impair firms’ future prospects and existence. During the inter-war period, German chemical firms faced such a benevolent environment. Agreements and state protectionism in the form of subsidies and tariffs offered a broad spectrum of instruments to regulate competition (for the role of governmental tariff regulations in the I.G. Farben corporate policy, see Stokes (2004, 247-251)). Under these conditions, it comes as no surprise that market-oriented control systems installed at I.G. Farben exhibited a low level of sophistication.
2.) Du Pont and I.G. Farben pursued different strategies. In the case of Du Pont, the development of strategies was explicitly driven by profit goals and perceived market opportunities. The I.G. Farben strategy was highly committed to technological programs and the generation of innovations. Chandler (1990, 580) characterizes the differences this way: „At I.G. Farben new-product development in the interwar years appears to have paid much less attention to marketing than was the case at Du Pont. For I.G. Farben the commercialization of a product remained essentially technological“ (for this „primacy of technology“, see also Stokes (2004); Johnson (2004, 181); Plumpe (1990, 201-203)).
By comparing the operative accounting control and the strategical investment analysis at Du Pont and I.G. Farben the following paragraphs substantiate the proposition, that in firms with varying degrees of profit-seeking orientation the shape of the company-wide control systems and especially the role of monetary-performance indicators will differ.
The accounting system of I.G. Farben primarily delivered cost-oriented information and did not provide regularly data on operative profitability. Sophisticated information about the profit contribution of products resulted mostly from the initiatives of individual managers’ (see Plumpe (1990, 433-436)). Managers’ low sensitivity to monetary performance finds its
20 enlightening expression in the fact, that Carl Bosch, during his tenure as CEO of I.G. Farben, reportedly displaced only one department head for poor profit performance (Plumpe (1990, 311-313)). In contrast to this rudimentary state of profit control, at Du Pont a comprehensive control system based on carefully worked out indicators for monetary performance existed and ensured a high level of profit-relevant information (Chandler (1962, 60-62; 94-96)).
Du Pont and I.G. Farben had also different systems for long-term investment analysis. Du Pont assigned a pivotal role to realizing ambitious returns on investment when decisions on investments were made (see Chandler (1962, 65); Johnson (1978, 495)). In contrast, investment analysis was not based on methodically elaborated procedures at I.G. Farben, but was haphazardly based on individual managers’ interests and inquiries. A typical example is in the late 1920s the handling of the nitrogen and synthetic gasoline businesses when during a period of international depression prices and market shares eroded (Stokes (2004, 239-241)). A single manager at I.G. Farben was critical of these developments. His internal memorandum is instructive if only for the fact that his analysis uncovered the fragmentary character of the established control procedures. To substantiate his arguments the author had at first to clarify elementary questions such as defining relevant costs and revenues and determining the interest rate for the capital invested. Another example highlighting the underdeveloped state of investment control is the critical survey initiated by Wilhelm Gaus, head of the Oppau factory, of the prospects of the synthetic fuels program. He wrote: „After a careful consideration of all of the factors affecting the calculation of profits, I do not see any reason at all to support the expansion of gasoline production“ (Stokes (2004, 241)). With his critical conclusions Gaus obviously lost sight of the fact that in I.G. Farben’s research-oriented strategy, profit was not the first consideration. CEO Carl Bosch, as a pioneer of the high-pressure synthesis (and a Nobel Prize winner), was highly committed to the hydrogenation technology and rejected Gaus’ suggestion, even going so far as to label his objections an act of disloyalty. In a situation which at Du Pont would have led to intensive efforts to strengthen profit prospects, Bosch saw in governmental interventions a measure to stabilize the relevant economic conditions. Using his close contacts to state authorities, he got state support in the form of tariffs on imported petroleum and petroleum products.
Siemens and General Motors The limited profit orientation of large German companies is also confirmed when Siemens and General Motors are compared. As has been described, General Motors pursued the shareholder value concept during the twenties and thirties uncompromisingly. An effective planning system 21 provided the instrumental basis to realize such targets. Siemens presented quite another picture. Even after the Second World War, when managers concentrated their efforts on the restructuring of the whole company, Siemens was still considered a “technical company” where under the watchful eyes of the “technical faculty”, widely removed from the profit goal, “technical-progressive considerations had importance in its own right” (Tacke (1977, 241)). As in the case of I.G. Farben, most top managers during the inter-war period had a professional background in engineering and science. Non-technicians (merchants, lawyers) mostly held positions in the “Gemeinschaftsabteilungen” (central administrative staff units) at the Berlin headquarters; their influence on board decisions was weak (Tacke (1977, 22)). Facing a rather beneficial economic situation no distinct profit-induced pressure to increase efforts was exerted. Gerd Tacke, the first non-technician CEO in the history of Siemens after the implementation of the post-war reorganizations, observed when looking back (Tacke (1977, 80)): “Before 1945 financial issues played a secondary role in daily business” … “Decisions on investment and on new business activities were made, without proving the possibility and form of financing.”
Viewing the dominant position of the Siemens-family one would expect an active pursuit of shareholder interests and a consequent exploitation of profit potentials. This assumption cannot be proven as the strikingly passive management of equities and mergers during the first half of the last century reveals. How reluctant Siemens-Halske, the core firm of the Siemens group, carried on the integration of acquired companies can be shown on the example of the Schuckert- Werke. In 1903, Schuckert was taken over when the firm got into financial difficulties (Feldenkirchen (1995, 68-70)). In fact, Carl Friedrich v. Siemens as chairman of the Schuckert “Aufsichtsrat” (supervisory board) demonstrated to the outside world the “unity of the house” (Tacke (1977, 20)) while inside, the integration of the acquired companies into the Siemens group was pursued only to a limited degree. Basically, over decades both Siemens-Halske and Siemens-Schuckert lead a life of their own. Tacke (1977, 20-23)) gives in his report on the post- war development of Siemens account of the outgrowths and sometimes even strange appearances of this maintained individuality. It fits to the passive role of shareholders that not until the end of the 1960s an “investment committee” for the whole group was established.
In contrast to the Siemens family, the Du Ponts played an active role and held the reigns when they made a large investment in the automobile industry and bought a considerable part of the shares of General Motors (1917). Using Du Pont’s administrative and financial methods they initiated as one of the first measures a reform of the General Motors board committees to align the coordination of decisions on production, investment and finance with the overall strategy of the firm (see Freeland (2001)). This shareholder-driven realignment of structures and
22 processes was forcefully pushed forward with high expertise. To keep a watchful eye on the huge investment Pierre S. du Pont even abandoned his responsibilities at Du Pont and devoted his whole time as president of General Motors when the company faced a financial crisis in 1920. In his new task he was actively assisted by a group of familiar former members of the Du Pont administration (see Chandler and Salsbury (1971, 433-443)).
In summarizing, it can be concluded that the foregoing comparative view on leading German and U.S. companies further backs the assumption that the national managers had different profit-seeking attitudes.
4.2. Sophisticated Competence Systems and Underdeveloped Control Systems in German Companies
The following reconstruction and evaluation of the organization paradigm predominating design activities in large German companies is based on literature on Siemens and I.G. Farben. The other German companies, AEG, Krupp and Vereinigte Stahlwerke (VSt), which also had to establish organizational structures under the challenging requirements of large firms, are excluded. In the cases of AEG and Krupp the fragmentary state of literature does not allow a substantiated evaluation of the practiced concepts guiding the development of organizational solutions. As far as AEG is concerned scholarly research in the field of business history has so far widely neglected this company. Although Krupp found scholarly interest to a higher degree, organizational issues are underrepresented (see the study from Keßler (1995) on the development of Krupp’s management system). For the Vereinigte Stahlwerke (VSt), the literature is quite comprehensive (Reckendrees (2000); Fear (2000)). Nevertheless, here methodical problems set limits for utilizing the data presented in various publications. To include VSt into the inquiry would mean to consider from the time of foundation until the beginning of the Second World War only one decade of exceptional conditions. The extraordinary context of the start-up, the heterogeneity and instability of the shareholder groups, critical threats of liquidity and market restructurings due to the autarky policy of the Nazi- regime constrain comprehensive comparisons with U.S. companies.
Siemens was organizationally divided into three groups, according to product criteria: Siemens & Halske (low-voltage products), Siemens-Schuckert (high-voltage products) and Siemens- Reiniger (medical equipment) (see Feldenkirchen (1987)). The following analysis only considers Siemens & Halske and Siemens-Schuckert, the two largest companies. Siemens & Halske, which as the parent company also performed administrative functions for the whole
23 group, consisted at large of two product units (telephone equipment and measurement instruments; see Chandler (1990, 545). This grouping comprised two separate value chains, allowing the departmental disclosure of profits. In the case of Siemens-Schuckert, the value chains of the products were interlocked to a high degree, setting limits for a departmental disclosure of profit. To secure high resource-efficiency, Siemens-Schuckert did not practice a unique concept of product-orientation; for the whole company production activities were concentrated in plants and customer-oriented activities were assigned to sales departments (Chandler (1990, 547)). The high complexity of most of the products afforded the presence of sophisticated product know-how all over the value chain. As a consequence, the whole process of adding value was affected by a constellation of tensions between the plants and the sales branches, being both technologically oriented. Under these conditions, any attempt to establish divisional product areas would have made the handling of conflicts even more difficult. Presumably, this assessment explains why the cross-functional management of product requirements was assigned to the sales department. The former Siemens management was aware of the challenge to coordinate complex interdependencies between resources, markets (customers) and products for large diversified companies. Early in the beginning of the last century, Alfred Berliner, head of the sales department, analyzed the role of the plants and noted, “The dynamo plant … in the consequence of separating production and sales has been reduced to a mere place of manufacturing with no interest in the whole business” (Kocka (1969, 380)).
When the I.G. Farben management developed a company-wide organizational structure (see the comprehensive overview in Stokes (2004)), it faced problems partly comparable to those of the Siemens-Schuckert management. The value chains of the different products were interlocked in a complex system at both companies. Therefore, a “pure” divisionalization could not be expected (see Plumpe (1990, 144-147); ter Meer (1952)). The production resources were concentrated in plants at different locations with the consequence of high interdependencies in the value chain. Different to Siemens-Schuckert, the company-wide organization structure of I.G. Farben attached higher importance to the product dimension. The sales area was subdivided according to groups of products and the cross-functional product coordination laid in the responsibility of so-called “Sparten”. Though the ”Sparten” were board committees with no formal authority, they were very powerful as a result of their backing by the board. Leaving the technical dominance of the I.G. Farben board aside – the Commercial Committee had only a shadowy existence besides the Technical Committee – the difference to the structure of the Du Pont competence system was not so large. Whereas at Du Pont, the product divisions took responsibility for sales and cross-functional product coordination, these tasks were separated at
24 I.G. Farben. The responsibility for sales was placed in separate units and cross-functional product coordination was assigned to board committees. This arrangement appears as the consequence of the specific conditions that determined the formation of I.G. Farben, which came into being by the merger of different companies. Within this group of companies (Konzern) the realignment of the product program played an important role. Therefore, the board was engaged in organizational settlements to overcome resort egoism in conflict-laden decisions on products.
The foregoing elaboration of the organizational knowledge applied allows the conclusion that the prevailing structural characteristics of the competence systems in large German companies can be ascribed to the same body of organizational forms and cause-effect-relations being used in U.S. companies. There are no indicators, which would allow assuming substantial deficits in the knowledge of German managers. They had to deal with organizational problems that were as challenging as the tasks their U.S. colleagues were facing. The complicated balance between resource-efficiency and process-efficiency strived for in the IG/S-model was a “mixed” solution that required considerable analytical exploration of various interdependencies and the development of sophisticated coordination devices.
Turning to the control system, it would be premature to conclude on deficiencies in organizational know-how from the fact that, ostensibly, large German companies did not utilize company-wide planning systems. The elaborated model of German managers’ specific profit- seeking behavior resulting from low self-efficacy of planning capabilities, exposed roles of technicians and institutional rules stabilizing markets, shows its power of explanation when the emergence of company-wide planning systems is examined. The existence of only weakly profit-oriented attention directing indicators does not generate effective impulses pushing the building of sophisticated planning systems. Proposing that attenuated profit-seeking and not lacking planning know-how caused underdeveloped control systems, finds, for example, support in German accounting literature of the inter-war period. Heinrich Dinkelbach, the “architect” of the VSt management system, was quite aware of the benefits of a plan-based control system and did not question German managers’ capability to cope with the task of realizing such a system (Dinkelbach (1932)). He developed the idea to advance the existing internal accounting system to a company-wide planning system, but apparently did not get the support of top management. To understand the different role planning systems played in U.S. companies, it is helpful to consider the emergence of the planning system at General Motors and Du Pont, where a strategy and a crisis effect qualify the rise of the planning system as a unique development. The companies experienced at the same time (about 1920) a critical drop
25 of profits threatening their existence. Due to the orientation on the same organization paradigm and the interchange of managers both pursued similar reorganization principles. The building of company-wide planning systems was one result of these activities. Therefore, the following analysis can focus on General Motors when the building of the planning system is explored.
The strategy effect covers that General Motors pursued an organizationally demanding competitive strategy. Thompson’s coordination concept of long-linked technologies (1967, 15- 16) allows to elaborate the organizational consequences. It describes value creating in the automobile industry as a step-wise proceeding transformation of inputs into outputs where various interdependencies have to be considered. For General Motors these coordination requirements being already highly complex found an even more demanding form due to Sloan’s marketing strategy of product differentiation and frequent model changes (Kuhn (1986, 199- 202)). In this contextual environment the needs to make reliable sales forecasts and to carefully coordinate logistical measures lead inevitably to the emergence of some form of a planning system.
The crisis effect can be traced back to a concurrence of circumstances - the lack of corporate direction due to Durant’s uncoordinated acquisition policy and the depression of the market for automobiles (1921). This very need for urgent corrective organizational actions might not have led to such a remarkable solution would not the firm have been in the most favourable position to draw on extraordinary managerial competence. Pierre du Pont, one of the most influential and experienced entrepreneurs of his time, who had played an important role in the Du Pont reorganization, took charge of the restructuring. Among other managers he brought Donaldson Brown, the architect of Du Pont’s system of financial and statistical procedures, to General Motors. Finally yet importantly, Alfred P. Sloan, the outstanding manager, having been critical with his company’s inability to bring order in its operations for a long time, opened the path to a radical change including the implementation of an effective planning system. The system labelled “statistical and financial controls” (Chandler and Salsbury (1971, 500)8), was a new organizational achievement. This positive qualification is approved when the Ford Motors Comp., the most powerful competitor of General Motors, is considered. Ford did not use a planning system at a level of development and sophistication comparable to General Motors. In his inter-war comparison of General Motors and Ford, Kuhn (1986, 261) even goes so far, to ascribe to Henry Ford an anti-planning attitude toward any system of performance control.9
8 The term “planning system” was not used in those times. 9 When in the early years after the Second World War this strange orientation caused a severe crisis Henry Ford II took an easy road to organizational change. The General Motors system was adapted or even 26 When in the inter-war period General Motors and Ford, two of the largest U.S. firms, show such extreme differences in the way they design their control systems, the questions about the spread of the company-wide planning system and their level of sophistication in U.S. firms arises. To the best of our knowledge no empirical inquiries offer valid clues about these questions. Fortunately, literature on organizational design activities early after the Second World War gives some hints that allow a rough answer. Ford was not the only company introducing the planning system in these post-war times. General Electric is another example; not until the 1950s Ralph Cordiner, Chairman of the Board, introduced a company-wide planning system (Cordiner (1956)). Besides these singular cases, Chandler’s overview about the diffusion of the multidivisional structure (Chandler (1962, 324-326)) gives some support to the assumption that the majority of large U.S. firms introduced planning systems after the war. Informative insights provide the publications of the Controllers Institute of America (founded 1931). The early post-war announcements address the benefits of planning in a rather general way without mentioning the problem of establishing planning systems or defining the role of the controller in the management of planning activities (see Bulletin no.4, 1947: The organization of the controller’s office; Bradshaw and Hull (1949)). A likewise diffuse picture is drawn in one of the first post-war text books on planning and control (Goetz (1949). This characterization also applies to the first edition of Koontz’s and O’Donnell’s classic on management claiming “to provide a conceptual framework for the orderly presentation of fundamental knowledge in management” ((1955), preface)). Not until the third edition (1964) the role of planning is assigned a pre-eminent position10 including a detailed description of the General Motors model ((1964, 300-335; 591-596)).
The foregoing paragraphs revealing empirical evidence on the rise of the planning system in U.S. companies corroborates the conclusion that the company-wide planning system of General Motors (and Du Pont) did not represent the control standard for the whole U.S. economy. The pronounced strategy and crisis effects, not to neglect the extraordinary managerial man power being present, represented an unique concurrence of challenging circumstances and capabilities. No large German company sheltered in a regulated market had in the inter-war time to master a task of comparably complexity. There was no profit-driven pressure triggering
copied by hiring from General Motors top managers (see Nevins and Hill (1963, 317-319); Kuhn (1986, 267-269)). 10 Koontz and O’Donnell (1964), preface “…the authors have chosen to deal with the function of planning first”. “…with accelerated sophistication in the understanding of planning and its importance in relation to other functions, presenting planning early appears to be wise.” 27 urgently a reorganization like conceiving and implementing an innovative company-wide planning system.
5. Organizational Restructuring after the Second World War: Exploiting Inter-war Organizational Know-how to Meet the New Competitive Challenge
Reviewing the literature in the previous part suggests that deviations of the IG/S-model from the DP/GM-model can be partly explained by the contextual conditions causing different organizational requirements. This conclusion is substantiated when the historical reorganizations are considered that took place after the Second World War. Do the post-war reorganizations, triggered by far-reaching political and economic changes indicate that German managers had remarkable inter-war organizational problem-solving capabilities? The question is valid because the managers who assumed key roles in large German companies during the inter-war period were also mostly responsible for post-war reorganizations (Berghahn (1986, 47; 289); Schröter (1997, 153); Erker (1999, 8-10); Abelshauser (2004, 478-480)). Therefore, a considerable amount of inter-war organizational knowledge could have been applied in post- war reorganizations – and the unbroken continuity of the systems engineering paradigm allowed German companies to do so.11 In this context the remarkable inquiry from Abelshauser (2004) on the development of BASF since its post-war re-founding merits particular attention. Based on extensive archival work, his study offers insightful views on the subjective theories of the actors of that time and reveals, that the BASF management still utilized the inter-war paradigm of organization design: “Serious events and processes such as integration into the Farben trust; the shock of the Great Depression; the transition to the policy of autarky; and the challenge of armament and the war economy, not to mention ultimate destruction, collapse, and occupation had changed little in the norms of entrepreneurial behaviour and thinking in Ludwigshafen” (Abelshauser (2004, 376)).
Of course, even when there were no large deficiencies in German organizational knowledge and German managers used given inter-war organizational know-how without significantly
11 At present times, in the course of the ongoing global competition on organizational practice, inter-war concepts lost their dominant position. Systems engineering, which offered well-structured design recipes were increasingly replaced by methods where ambiguous problem indicators and complex cause-effect relations made comprehensive reorganizations highly demanding projects (March (1991); Lillrank (1995); Liker, Fruin and Adler (1999); Miner and Raghavan (1999)). Recognizing deficiencies in organizational know-how and achieving effective transfers of knowledge are now strategic issues and investing in organizational capabilities is a competitive challenge (Baldwin and Clark (1994)). Consultants now assume a decisive part in tracing new organizational concepts, transferring know-how and implementing new structures. 28 infusing knowledge from external sources, it would be unrealistic to assume that American concepts had no influence on the reorganization activities. The post-war political and economic opening to the USA encouraged the transfer of concepts (see Schröter (1997, 152); Kipping (1998, 55-60); Kleinschmidt (2002)) and the presence of U.S. subsidiaries in Germany (see Hartmann (1963); Schröter (1997)) led to a broader understanding of U.S. management systems. However, consultants who specialized in organization issues and were familiar with U.S. design concepts did not play a role worth mentioning (see Kipping (1996); Zeitlin/Herrigel (2000), 26-30)12. Overall, literature and company accounts do not confirm that far-reaching reorganizations were fuelled by a massive adoption of U.S. models. German managers showed a remarkable self-confidence13 and believed in their capacity to develop and implement a new overall structure. This attitude finds its enlightening expression in the retrospective comments made by Gerd Tacke, the CEO of the restructured Siemens AG, on the Siemens reorganization: “It would be misstated to claim that this concept [divisionalization, the author], developed in the USA and transferred to Europe in a broad stream of literature, had no influence on the reorganization of our company. But this movement had no deep impact on the concept that formed the basis of the restructuring of the Siemens group and on the way it became implemented. The basic ideas, in fact, have been independently developed in our company and reached maturity in 1966” (Tacke (1977, 225)).
The exploitation of the German inter-war organizational legacy gained momentum at the end of the fifties, when German firms experienced increasing competitive pressure. Antitrust competition rules, which forbade cartelization, abandoned inter-war contractual limitations on competition (see Bernert (1990)). In addition, tariff reductions resulting from European economic integration and the growing presence of foreign companies in the German market (see Herrigel (1996, 148-151)) triggered the need for organizational change (Abelshauser (2004, 378-381)). The reorganization activities of the chemical companies BASF, Bayer and Hoechst, which succeeded I.G. Farben and of Siemens were not completed until the end of the sixties.14 With regard to the competence system, the restructuring further expanded on the concept of divisionalization by developing the divisional elements already present in the inter-
12 See the interview conducted with Ralf Sammet, CEO of Hoechst AG (Zeitschrift für Organisation. 40. 1971, 281-283) and Abelshauser (2004, 663-665) for BASF AG. 13 See Schröter (1993) for a characterization of German managers in the post-war period. 14 The uniformity of time pattern is illustrated by the following examples - BASF AG: 1970 (Vahs (1990, 172-174); Bayer AG: 1971) (Vossberg (1972)); Hoechst AG: 1970 (Drenkrad (1971)); Siemens AG: 1969 (Tacke (1977, 270-273)). 29 war structure. When the company-wide planning system was established, new ground was explored for the control system.
A new focus on profits and the resulting pursuit and exploitation of existing profit potential moved the state of planning systems in German companies into the centre of managers’ attention. Setting challenging profit targets and controlling realized performance rely, to a high degree, on planning. For this reason alone, to suggest that the establishment of company-wide planning systems were a mere imitation of the American model would be inaccurate. However, by the power of example, the very fact that large American companies used planning systems may have helped German managers overcome their scepticism of planning. Building the planning system itself, transforming the control system from a conglomerate of technologically shaped and fragmentary rules to a system integrating operative profit planning (Abelshauser (2004, 428-431)) was apparently not perceived as too challenging. Junior staff members, who in the beginning of the sixties had graduated in Germany with degrees in business administration, played an active role in this process. From their university courses, they brought ideas into reorganizations activities about the functioning of planning systems and the Du Pont system of return on investment.15
All German companies placed the main responsibility for the reorganization project on commercial staff units. This decision initiated and accelerated a development that strengthened commercial and economic arguments within companies, especially on the boards, at the expense of technicians’ influence.16 Therefore, the post-war organizational restructuring marks the end of the, until that time undisputed subscription of the “technical faculty” on the position of the CEO in large German companies.17 Viewed from Thompson’s theory of power, outlined in part three, these changes are closely combined with ambitious profit-seeking in competitive markets. For the first time in modern history of German business, the performance of Thompson’s “administrative functions” was no longer the domain of technicians.18
15 This information derives from interviews conducted with managers who started their careers in the sixties at Siemens and Bayer and participated in the development of planning systems. 16 See Abelshauser (2004, 478-481) for BASF and the influential role of Rolf Magener, head of finance, who completed a sales apprenticeship in Ludwigshafen in the I.G. Farben era. 17 The first CEOs with non-technical background were G. Tacke, Siemens AG (1967), H.-J. Strenger, Bayer AG (1984), J. Strube, BASF AG (1990), and J. Dormann, Hoechst AG (1994). 18 This change had far reaching consequences for the academic establishment and the scientific development of the German „Betriebswirtschaftslehre” (business administration). U.S. scholars of business management faced during the first half of the last century far more complex practical problems than their German colleagues. In the USA, this challenge stimulated the development of the science of management to an incomparably higher degree as has been the case for the German Betriebswirtschaftslehre. It says a lot about the difference between the two that the term Planung (planning) only found its way into German business administration after the Second World War (see Frese (2000)). 30 In concluding, a retrospective view of the “historical” inter-war reorganization of Du Pont from the perspective of the post-war reorganization of BASF - as one of the I.G. Farben successors - seems worthwhile. Two companies, with prominent positions in two leading industrial nations, implemented radical reorganizations to effectively exploit their markets’ profit potential; in using basically the same organizational paradigm, they came to similar solutions. In both companies, a critical deterioration of the profitability prompted organizational restructurings. At Du Pont, the new competence and control system were established in the 1920s. The BASF reorganization took place in the 1960s - up until then, the primacy of technology eclipsed and profitability became the focal element in the company’s goal system.
6. Final Conclusions
The present inquiry on the level of organizational knowledge of large German companies in the inter-war period makes two main contributions to the literature. Firstly, the paper develops the concept of organizational know-how guiding German managers design activities by introducing the construct of systems engineering as an organizational paradigm being widely shared by large firms in advanced economies of these times. In using this approach the study substantiates the proposition that the prevailing organization structures of German and U.S. companies resulted mostly from features of the existing country-specific contextual environment, not so much from the state of knowledge. To put the result in a nutshell: German and U.S. managers in large companies shared widely the same body of organizational knowledge, but differed in its use. Secondly, the paper reveals the shape of national managerial profit-seeking behavior as the pivotal variable explaining main organizational differences in German and U.S. firms.
From this conceptual perspective it is examined why managers in highly developed industrial nations draw differently on organizational measures, especially on corporate planning systems or on divisional structures.
For the explanation why managers choose or dismiss the building of planning systems the article sheds light on country-specific preferences for corporate planning systems. It gives support to the proposition that in the first line the intensity of managerial profit orientation and the associated intensity of competition influence the exploitation of the available organizational knowledge. The inquiry provides the insight that for a deeper understanding of the interplay between profit-seeking behavior and corporate planning power-based influence structures have to be considered. This applies especially for firms where value-adding processes depend on engineering-based or science-based capabilities. Referring to the power concept from
31 Thompson the analysis reveals that managers with economic professionalization tend to exert more influence on important decisions and will foster the building of corporate planning systems when sound knowledge in business administration is valued as a critical resource (as was the case for Du Pont and General Motors). Weak competition and low profit orientation will strengthen the position of managers with technical professionalization taking a critical stance towards corporate planning systems (as was the case for Siemens and I.G. Farben).
While it seems plausible to assume that managers with a high profit orientation tend to establish planning systems, such a direct relation between profit orientation and organizational forms can hardly be substantiated for the design of the competence system, for example for the building of divisional structures. The present article supports the proposition that the degree of profit orientation determines the weight of resource-efficiency (preferring function-oriented structures) and process-efficiency (preferring product-oriented structures). Finding a balance between these criteria sets crucial demands on the design of the competence system. As a contextual factor explaining managerial preferences for a resource-based or a process-based view the range of managers’ professionalization comes into play. The study claims that a high technical professionalization of the acting managers tends to concentrate managerial attention on resource efficiency, whereas a high economic professionalization corresponds with striving for market-oriented and customer-oriented process efficiency.
Though the inquiry provides new theory-based insights in the concepts guiding the organizational design of large German companies, the still preliminary state of the literature offers a broad spectrum of promising projects for future research. Scholarly research activities should make any effort to strengthen the empirical grounding of the inquiries. So far, empirical evidence is introduced mainly by referring to existing literature. Future research deserves more archival work aligned with the introduced concept of organization knowledge.
As questions that merit particularly investigations, the emergence of rudimentary forms of corporate planning systems in German companies have to be mentioned. Research, so far, mostly investigates the spread of planning systems in U.S. and German companies by examining whether comprehensive planning systems existed or not. To improve the understanding of the role of planning it seems appropriate to prove whether firms exhibited different stages in the development of comprehensive planning systems. In this context, the question whether existing accounting systems comprised preliminary forms of planning systems deserves closer inquiries.
32 References
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