<html><head /> <body> <META http-equiv="Content-Type" content="text/html; charset=UTF-16"><title>Nations, Firms and Their Workers</title><meta name="keywords" content="nations,workers,britain,companies,company,competition,enterprises,europe,externalisation,firms,france,germany,global,gospel,growth,howard,internalisation,international,japan,kingdom,labour,market,marketplace,pressure,states,trade,unions,uk,united,US,industry,"><table style="font-family:Verdana; font-size:larger; " align="center" border="0" width="50%"><tbody><tr> <td style="background-color:silver; border-color:white; border-left-style:none; border-style:none; " width="730"><span style="font-family:Verdana; font-size:larger; ">Nations, Firms and Their Workers</span></td> </tr> <tr> </tr> </tbody></table><br><table style="font-family:Verdana; font-size:medium; " align="center" bgcolor="white" border="0" width="50%"><tbody><tr> <td height="131" width="669"><span style="font-family:Verdana; font-size:x-small;"><strong>Editors Introduction</strong></span><span style="font-family:Verdana; "></span><span style="font-family:Verdana; font-size:x-small; "><IMG SRC="auth_gospel.JPG" WIDTH="90" HEIGHT="119" ALT="Gospel" VSPACE="0" HSPACE="0" BORDER="0" ALIGN="right"> In a global marketplace, national differences between firms--how they are organised and how they manage workers--matter. As more firms become international players, will such differences fade away? Howard Gospel (right), professor of management at King's College, London, examines and compares those differences that give nations, firms and their workers that stamp of individuality.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">It is widely acknowledged that the world of business is more competitive than ever before. Firms across the globe compete fiercely with each other--to fall behind these days is to threaten the survival of the company.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">Yet in spite of all the talk of a shrinking world, a concept many managers would readily accept, firms themselves continue to be organised in radically different ways. The structure of an American company, for example, is very different from its Japanese competitors; different both in the way it relates to the domestic economy and in the way it is managed. Within Europe, national differences are often surprisingly large.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">It's true that as firms interact more and more at the international level, and find themselves facing similar problems and pressures, these differences are likely to diminish: there is already evidence for this. But what is it that makes these firms so very different in the first place? Why is it that in some countries, employees are more heavily protected in terms of pay, job security and fringe benefits than in others? Why do some companies seek to control every aspect of their business while others rely much more heavily on outsourcing and subcontracting?</span><br><br><span style="font-size:x-small;"><strong>Balancing market and state forces</strong></span><br><span style="font-family:Verdana; font-size:x-small; ">It's perhaps stating the obvious to point out that the markets--product, labour, and capital markets--in which firms operate are crucial in determining how they manage their businesses. The size of a market, its geographical boundaries, and the degree of competition within those boundaries are all factors which play a part. Markets play a part in determining how a firm organises its labour. Greater competition--for labour, for instance--might lead large firms to internalise the management of their workers: providing in-house training, company level pay deals and so on.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">But other, equally powerful factors are at work. Within the firm itself, what might be termed internal influences are at work. Most obvious is the overall strategy and structure of the firm. How the firm positions itself in the markets in which it operates will have an important influence on how it organises it workers. So too will its managerial structure. A firm which relies on a hierarchy of professional managers will take a different view of its labour force than one which is essentially still run by a tightly knit group at the top--perhaps a family owned firm, for instance. Also important will be the choice of technology a company uses, which in turn will have a direct bearing on the firm's division of labour.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">Markets and firms are therefore of central importance: other factors may also play a part at times. The state itself has an important impact. It can, for instance, impose regulatory requirements on the management of workers--hiring and firing at will can be much more difficult in some countries than others. Trade unions, too, are important because of their ability to organise workers across firms and industries: though there has in the past been a tendency to overestimate their role.</span><br><br><span style="font-size:x-small;"><strong>Firm comparisons</strong></span><br><span style="font-family:Verdana; font-size:x-small; ">One useful way of looking at how firms manage labour is to divide approaches into what we might call the internal and external. In approaches to employment relations, for example, some firms may build strong internal systems with extensive training and company-specific wages and benefits; while others may rely more on the market process.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">In the area of work relations, some firms use subcontracting--they externalise much of their labour management; while others organise their production in-house using an internal division of labour. For industrial relations it's the difference between some kind of bargaining arrangement at the industry level--through employer associations, for instance--and an internal works council or enterprise bargaining approach. It's important to remember, though, that the distinction between internal and external is rarely clearcut. Firms--and countries--tend to fall somewhere in between the two extremes. What's significant, therefore, is where on the spectrum they fall.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">It's much easier to see how these various factors come together by examining how labour management has worked--and how it has changed over time--in the major industrial countries. In this way we can get some idea of how firms differ across countries and over time; and some sense of the common pressures at work which help shape the modern firm.</span><br><br><span style="font-size:x-small;"><strong>Britain</strong></span><br><span style="font-family:Verdana; font-size:x-small; ">From the late nineteenth century until the Second World War, product markets in Britain were slow-growing, fragmented both nationally and internationally. Labour markets, for the most part, were well-stocked with unskilled and semi-skilled labour. Financial markets were already quite sophisticated, with a large stock exchange and the beginnings of a market in corporate control which resulted in periodic merger waves. Most firms remained small, often family owned and managed. Those large firms which did exist, mainly as a result of mergers, were usually loosely organised holding companies.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">As a result, most British firms tended to externalise their labour management: many relied on subcontracting and devolved control to craft workers. They relied on the occupational labour-market system of apprentices and were slow to develop in-house training arrangements. They hired and fired as market conditions dictated; fixed wages by the same criteria; and created only the most rudimentary systems of wage differentials, along with minimal benefits systems. They tended to deal with unions through employers' associations which fixed wages for a whole trade or industry and which processed grievances through external disputes procedures.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">Of course there were exceptions. Some firms, such as a few large-scale employers in chemicals and mass consumer goods, developed stronger internal systems. These firms operated in larger product markets or where labour was more scarce or where firm-specific skills were important. Having started out on one path, it tended to be difficult for firms to change course. But after 1945, British employers did start to move, albeit slowly and unevenly, towards a strategy of internalising the management of their workers. They developed much more structured internal labour systems.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">The challenges posed by tight postwar labour markets and increased competition in product markets acted as spurs to change. The last 20 years, however, have seen the beginning of a reversion to strategies of externalisation, especially in terms of work and employment relations. More competitive product markets, slacker labour markets and greater financial market pressures have all tended to push firms in this direction. Outsourcing, subcontracting and the use of temporary, part-time and contingent working have all become much more common.</span><br><br><span style="font-size:x-small;"><strong>France</strong></span><br><span style="font-family:Verdana; font-size:x-small; ">Perhaps surprisingly, the history of the firm in France has much in common with that in Britain. But French financial markets were much less developed than those in Britain, and the traditional enterprise, small and often family owned and managed, survived much longer as the predominant form. Those large firms which did emerge, however, were more centralised than their British counterpart and more likely to employ graduate engineers as managers. Mergers played less of a role than they did in Britain.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">French firms tended to externalise their labour management--laying off workers according to the business cycle for instance; though they did this to a lesser extent than in Britain. French employers strongly preferred not to deal with trade unions, but when this was inevitable they chose to bargain through employers' associations, setting wages at the industry level. As in Britain, there were exceptions to the general rule and they tended to be in the same industrial sectors--railways, electricity and some larger steel, chemical and auto companies. Not only did these firms operate in labour markets where new skills were in short supply: they also tended to be those firms which were more centrally coordinated and professionally managed.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">For more than 30 years after the Second World War, the management of French firms became increasingly internalised. In industrial relations, however, French employers displayed uncertainty, even ambivalence, about their strategies. Large firms both relied on external multi-employer bargaining and also sought to develop company agreements with trade unions. Only in the past 20 years or so has there been an accelerated move towards company-specific systems of labour representation, usually with a diminished role for outside trade unions.</span><br><br><span style="font-size:x-small;"><strong>The United States</strong></span><br><span style="font-family:Verdana; font-size:x-small; ">In contrast with the British and French experience, the movement towards internalisation of labour management started much earlier in the United States. By the late nineteenth century, the markets for many producer and consumer goods had become mass markets. The market for labour, especially skilled labour, was much tighter. Large firms, including those which were the result of mergers, were run increasingly by extensive hierarchies of salaried managers. These firms were international leaders in developing mass-production techniques and elaborate internal divisions of labour.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">Among small firms in traditional sectors, labour management in the early twentieth century was externalised: based on employment-at-will, apprenticeship training and bargaining with craft unions through employers' associations. The big firms, though, increasingly came to impose internalised arrangements on their employees. They developed their own internal divisions of labour, with career, wage and benefit hierarchies based on seniority and in-house training. As unions grew from the 1930s onwards, big firms which accorded them recognition usually insisted on bargaining at plant or company level.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">In the last decade or so, however, the drive towards internalisation has been reversed. Increased outsourcing, extensive layoffs and a deterioration of internal benefit systems has been driven by greater product market competition--especially foreign competition; new patterns of demand in labour markets; greater short-term financial market pressures; and a wave of corporate restructuring which has often led to looser forms of organisation.</span><br><br><span style="font-size:x-small;"><strong>Japan</strong></span><br><span style="font-family:Verdana; font-size:x-small; ">Japanese firms went further and faster in the process of internalisation. By the early twentieth century several large companies, operating in protected national markets, had emerged. These, for the most part, were centrally organised. Links to other companies and banks meant firms relied little on the relatively small equity market. As they adopted Western technologies, these firms created in-house training and labour systems to attract scarce labour. Initially, these tended to be restricted to managerial, white-collar and some skilled workers; but post-1945, Japanese firms saw a considerable extension of this internalisation, partly as a result of trade union pressure and collective bargaining.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">Such structures facilitated training and cooperation within the enterprise, and enabled Japanese firms to move towards so-called lean production systems. In the early twentieth century and again immediately after 1945, Japanese workers sought to create unions on general and industrial lines; they did not succeed. Large employers were the driving force behind enterprise-based unions and bargaining.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">It's important to bear in mind, however, that the drive towards internalisation in Japan has been accompanied by related strategies of externalisation. The internal system for some employees is dependent on the use of subcontracting, part-time and temporary working patterns for others. Though there has been some increased use of such techniques of externalisation in recent years, they have not so far been as pronounced as in Britain and the US.</span><br><br><span style="font-size:x-small;"><strong>Germany</strong></span><br><span style="font-family:Verdana; font-size:x-small; ">The German experience falls somewhere between these extremes. As far back as the late nineteenth century, large firms in fast growing product markets introduced elaborate division of labour in industries such as steel, chemicals, and electrical products. These firms were centralised, functionally organised and employed quite sophisticated managerial hierarchies. Unlike the US, where labour generally was in short supply, or Japan, where skilled labour was scarce, in Germany there was a reasonable supply of workers, though with high turnover and some shortages in expanding new sectors. Traditionally, the German labour markets for skilled workers were organised on occupational lines through apprenticeship training. Firms sought new finance from the banking system rather than the equity markets. As a result, firms tended to be insulated from the sort of financial market pressures encountered in other countries.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">All this gave large German firms an incentive to internalise labour management and this they did: with in-house training and extensive benefits systems common, and with the early introduction in some companies of internal works committees. There were nevertheless some tendencies towards externalisation: in traditional metal working, for instance, most initial training was through occupational apprenticeship.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">For 30 years after the war, product markets were buoyant and labour markets tight. Large firms remained centralised. As in Japan--but unlike the Anglo-Saxon countries--company growth was mainly internal and firms were less subject to short-term financial pressures. Big firms went for internalisation with more sophisticated divisions of labour as they moved towards mass production. Such companies offered secure jobs, good promotion prospects and extensive fringe benefits. They also provided internal training beyond the apprenticeship level.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">But there are two significant aspects of externalised labour management in Germany: apprenticeship, organised at the occupational level, remains strong; and wage agreements are negotiated on a multi-employer industry basis. Germany thus has a hybrid system of internal and external coordination which, while different from that in Japan, has certain structural similarities. It's true that in recent years there have been pressures on this mix; pressures which have tended to pull in opposite directions. Higher unemployment and greater competition has led to some weakening of internal labour markets, though the legal system combined with union strength means this had not had such a pronounced impact as in the US and the UK. At the same time, multi-employer bargaining has come under pressure, with firms tending to pay more attention to internal works councils and company specific pay deals.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">For the most part, then, large firms in these five major countries can be seen fitting along a spectrum: with British and French companies closer to the external end; the US and Germany in the middle; and Japan near to the internal extreme. It's also clear that historical developments in the nineteenth and early twentieth centuries played a significant part in shaping these national differences. Looked at over the long-term, however, it also becomes clear that all five countries have seen some movement towards internalisation, especially in the 30 years or so after the Second World War. More recently this trend has become more uneven, with signs of a reversal--though to varying degrees--again, in all five countries.</span><br><br><span style="font-size:x-small;"><strong>Does difference matter?</strong></span><br><span style="font-family:Verdana; font-size:x-small; ">One important question is: do these differing strategies for managing workers have any impact on the economic performance both of firms and the national economies in which they operate?</span><br><br><span style="font-family:Verdana; font-size:x-small; ">Strategies of externalisation do have some obvious advantages. For the firm, they save on administrative costs and provide flexibility both in terms of the numbers employed and the wage bill. Where employers' associations are comprehensive and strong, they may be able to constrain wage increases and thus allow the economy to be run at relatively full capacity. But firms have less control over their labour supply and over work organisation. Recruitment costs are likely to be higher as is staff turnover at times when the labour market is tight. Worker commitment to the firm is also likely to be harder to develop under externalised arrangements.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">Strategies of internalisation have their disadvantages too. They entail high fixed administrative costs which come with a large workforce. It will obviously be harder to reduce the workforce when times are difficult. For the employees, too, there are downsides: as workers they are less mobile and much more dependent on the firm. And for the national economy, internalisation could mean a build-up of inflationary wage pressures when firms do not coordinate wage bargaining.</span><br><br><span style="font-family:Verdana; font-size:x-small; ">There is, however, recent evidence to suggest that some types of employment contracts can bring greater employee commitment and higher productivity: those which offer greater job security, internal promotion, and pay and benefit scales which reward workers according to their contribution rather than market forces. In the real world, what firms seek--or should seek--is a mixture of internal and external strategies which best meet their needs, those of their workers and, therefore, those of the national economic environment in which they operate.</span><br><br><br> <span style="font-family:Verdana; font-size:x-small; font-style:italic; ">This article was taken from CentrePiece magazine, published by the Centre for Economic Performance at the London School of Economics and Political Science. </span></td> </tr> </tbody></table> </body></html>