The organization as a vehicle for competition
A number of factors have changed since we entered the era of globalization.56 First, we have seen an increase in the free flow of labour and in the quantities of goods and services traded across borders. This has led to an increase in the size and power of the private-sector organization, to the point where it has now outgrown many nation states. The two organizational forms still depend upon each other, but the change is already a reality, in some countries more than in others.
To understand society we need to study how our organizations function as organisms. Our dominant social-science methodologies focus on individual choice and the individual's perspective. This frequently leads us to draw false conclusions, for instance about unemployment and social injustice. Has it become harder to find work today than it used to be? Has life become less tolerable? Perhaps so, if we make comparisons with certain special periods, such as times of war or crisis, or times of economic recession, like the decades following the Second World War when we needed to rebuild society, and also like today. But life has not become harder from a long-term perspective; certainly not since Adam Smith wrote The Wealth of Nations. Child labour and slavery did not raise many eyebrows at that time, nor did the unfavorable position of women, at work and at home. Today we take many of these changes for granted. That is partly because our demands on society have changed so rapidly, in step with our standard of living.
It is true that many individuals and populations in the southern hemisphere are less well off today than they were fifty years ago. There are more people suffering, because the world population keeps growing exponentially. But more people are also better off. Putting it differently, at no other time in the history of mankind have more people lived a better life than today. Life has now become better in Africa, South America, and Asia, just like it did in Europe and Northern America.
For most of us living in the West or in Asia, the new competitiveness primarily affects the organization, not the individual. In these regions it is companies that are "dying", not people, not nowadays. The distinction is important. Globalization and free-trade initiatives have broken up many of the world's monopolies. Private-sector companies have replaced economic initiatives undertaken by nation states. This has been to everyone's advantage. For one thing, we no longer have to invade a country in order to profit from its resources, establishing colonies and depriving nations of self-rule. Trade has to a large degree replaced physical violence, raids and wars, as a means of creating wealth. That does not mean that the problem of exploitation has disappeared, nor that we have ceased engaging in wars, but the outcome of our conflicts is often - not always - less violent than in the past.
What we are seeing is not so much individual competition, as organizational competition. This is not the same thing: as individuals we can change jobs, or even countries if we need to. Most people who are laid off are able to find new jobs if they are willing to move, so long as the in crisis. Thus losing your job is not as serious as it used to be only a generation ago because we can find new jobs. The consequences are not so severe as they used to be, either, as we have developed a welfare system which will help unemployed until they find a new job. We have become more flexible, both more able and willing to change jobs. Now with the Internet we can work from almost anywhere, even on the move. This does not mean that we can avoid future financial crises followed by mass unemployment, but it does mean that we know such things will be temporary and we normally find a way out of the crisis sooner.
We are turning into a society where it is normal to have many different employers over a lifetime, while our fathers and grandfathers often had only one and it was considered disgraceful to change jobs. We may also have several jobs simultaneously, and work flexible hours. Another point has to do with the efficiency with which the State now allows firms to start and to cease their activities, voluntarily or through bankruptcy. That is, the State's organizational structure for handling companies' ups and downs has become more effective.
Companies are not only selling internationally, they are also producing their goods overseas, finding themselves forced to do so because their competitors are doing it or threatening to do it. If firms do not move their production abroad their costs will increase and they will lose customers. This happens not because the firms want it, but because we as consumers are not willing to pay a higher price than we have to. It explains the success of companies like Walmart, IKEA, and Dell. Even though Walmart faces considerable criticism for its treatment of its employees and for its hard-nosed business strategies in both China and the USA, it continues to gain market share. The whole business of ecological production is facing the same dilemma; so is the petroleum industry. It is the consumer who chooses to move from gas to diesel, or to ethanol, or even better to electricity - not the producing companies. Companies do not have malevolent intentions, they simply adapt to consumers' choices.
That does not mean there are no moral dilemmas: there certainly are. There are and have been many firms which have known that their products are bad for health or for the environment, and yet have not ceased production. For example, car manufacturers who have decades of investment in fossil-fuel technology behind them and have built up a competitive advantage in their industry do not want to change unless they have to. They want to profit from the investments they have made in the old technology for as long as possible; but, the day consumers change their mind, that ceases to be an option. The problem, rather, lies with human behaviour. Consumers see ecological issues as important, but (so far at least) they have not been willing to pay higher prices or reduce consumption or their standard of living. The same consumers complain that farmers are mistreating pigs, but they continue to buy the same meat in the same supermarket only a week or two after the scandal has broken. Consumers are not always willing to pay more for their bacon in order to ensure that animals have enjoyed a good (or better) life. Instead we demand that others, firms or nations, make the changes for us. Thus, we would like China to pollute less. The Chinese reply, "Yes, we will do that, once we have the same living standard as you. We should not have to suffer or be hampered in our development because you have polluted the earth."
Companies like H&M and Nike are typical global companies in the sense that they produce their goods where they can do so most cheaply. In consequence their business ideas are often more about logistics than about product lines or production techniques. They represent the beginning of phase one in globalization, so to speak. Globalization progresses when smaller companies and individuals are able to do the same thing, exploiting the same logistic principles through e.g. trading via Internet auctions, using sites like Alibaba and eBay. This is the second phase of globalization, involving micro-multinationals. Larger companies still get the best prices, but globalization means that bigger is not necessarily better. Smaller companies are often more flexible, faster, and quicker to spot and exploit windows of opportunity. If the multinationals are still growing more numerous and more powerful, that is because sizeable capital is still required to engage in large-scale business, and smaller companies quickly grow larger or are acquired by larger companies. It is also because multinationals are coming to realize that they need to organize themselves as sets of smaller independent units in order to remain competitive, so that they can operate like micro-multinationals.
Whether through the use of force or by engaging in commerce, the aim of the individual has always been the same: the production of wealth, primarily personal wealth. Kings and noblemen have always been concerned with questions of wealth. Nowadays this opportunity to build great wealth is open to ordinary people. Anyone with the means, the ruthlessness, and/or the entrepreneurial spirit needed can become rich in just a short time, as we saw happening in Russia after its privatization schemes were introduced, initiated by Mikhail Gorbachev and implemented by Boris Yeltsin. With globalization it no longer takes generations to become rich, sometimes just a few years are enough (consider Microsoft, Dell, Google, Facebook and Skype). The reason is that globalization yields economies of scale much faster than was possible in the past.
The centre stage has been taken over by the private-sector organization, the corporation. This means that power has been transferred from the public to the private sphere. It means that the nation state is ceding its power to individuals - less in some countries and more in others, for instance less in Sweden than in the USA; but the trend is clear, and it is global. The super-rich today constitute a new social class which has become largely independent of the States where they are citizens. This trend has been strong in certain countries, such as Russia and the former Soviet bloc, and in certain businesses (those where money is earned internationally without dependence on large-scale production facilities, e.g. the work of pop stars, athletes, and e-entrepreneurs). These individuals have to a considerable extent been encouraged to operate as they do by their own societies, in school and at university. Our modern democracies, supported by our new-style social sciences, have encouraged people to dispense with the values of their forefathers and with their national and cultural identities, to set themselves free from all attachments. People have been turned into individualists taught to amuse themselves, for whom responsibility is a lesser consideration. We have produced generations which have avoided becoming passionate about political or philosophical ideas, so that any form of social or collective thinking has been eradicated. These generations have been taught indirectly that they are only really allowed to show actual enthusiasm for things that change nothing, like cheering at a football match. These are values that go directly against the values dominant today in Asia, and especially in China, even though things have been deteriorating here too, especially along the more economically developed areas along the coastline in the east, far less in the western parts. Ethics is at the heart of Confucianism, as it is of Christianity. (Of course, the fact that people are members of these religions or faiths is no guarantee of unselfish actions.)
The shift towards a corporate-state system is a change with tremendous consequences, both positive and negative. It means less power for the general public, but it also means that wealth can be produced faster and in all corners of the world. In some cases it takes the form of exploitation, in others that of free trade. Much existing literature sees this as an either/ or issue. So for instance many economists refuse to notice the exploitation of workers and land, and many sociologists refuse to notice the higher standard of living given to people by new uses of capital. The reality is an imperfect world, with some good and some bad.
It is a fact that more and more wealth is being placed in fewer hands. The reason is that our economic system is working more efficiently than ever; money yields interest, and that interest in turn is used to make new investments which can easily be diversified, globally, just by pressing a few buttons on a PC. The PC itself is becoming ever easier to carry around and connect. If you cannot do the economic, technical, and legal stuff yourself you can always hire someone else to do it for you. Thus about two-thirds of all American fortunes are inherited, and the number of millionaires is increasing. Some lose their money when there is a downturn on the stock exchanges, but there are only a few who manage to squander their entire fortune (often deceived by their advisers, as in the case of the unfortunate Mike Tyson). If the number of billionaires has been drastically reduced in Russia and other new economies during the current financial crisis, that is largely because they became accustomed to running excessively high risks in the financial markets. Others, who invested in real estate (globally), manufacturing, or raw materials have been more fortunate.
A company is not immoral, but amoral. It operates as a two-edged sword. On one hand it creates wealth, primarily for its owners, but also for its employees, allowing them to achieve an increased standard of living. On the other hand the organization exploits workers in other countries, by making them accept working conditions that are deemed unacceptable in its home country. The company has no human feelings of solidarity: it does not care about people if their performance does not affect the economic performance of the company. On the other hand it does not possess some evil plan to harm people, either. Considered as a legal "person" it is rational, and its actions are highly predictable.
Why, then, do we decide to make our living by joining a company? An individual knows he cannot achieve his goals single-handedly; his time and effort are insufficient. Instead he needs others to work for him, persuading them to work towards the same goals. This is done by offering salaries, recruiting people and placing them in the hierarchical structure we call a company, where each individual is paid proportionately to his or her contribution to the owner's wealth-creation. These wealth-building organizations are given legitimacy by national laws and international trade practices. This economic and political system - which we used to call "capitalism", but which many now prefer to call "the free-market economy" justifies its operation by referring to the risk it is taking in its business endeavour, assuming that all agents bear the same initial risk.
It is said that Napoleon drew a distinction between risk and hazards. Risk occurs when you stand to lose a battle. Hazards occur when you could lose the entire war. As a parallel in the corporate world, "hazard" could be used for exposure that might lead to bankruptcy. But corporations, abetted by economic theory, have propagated the myth that risks can be diversified, as when we create portfolios of shares. That assumes that not all share prices will fall simultaneously; but occasionally they do.
Most of the success which the free-market system has had in convincing the masses of its intrinsic fairness lies elsewhere, in the nature of honest, hard work, in the competition between equals, and as an engine for wealth creation among a group of individuals who profit from its business endeavors. In reality this fairness of hard work is only partly true, as suggested above.61Most non-democratic countries run on a system of nepotism, quite at odds with any democratic or meritocratic logic. Even within more developed democracies, many people receive occasional gifts and bribes. Still, the doctrine of hard work is evidently true for sufficiently many for it to be accepted by a majority, for a large part of the world's workforce to be willing to accept the free-market model in one form or another.
Two important cogs in the machinery of our technological-industrial world are higher education and research, and private-sector companies and production. Experience, so far at least, has shown that both areas operate more effectively as private organizations. The Chinese experiment is rather confirming this. The Chinese model builds instead on public ownerships, which must be separated from how things are run. The market economy has an overwhelmingly positive effect on the sciences and on development of new technology. Thus it is no coincidence that among the twenty best-performing universities in the world, eighteen are American. These private institutions compete keenly to produce results that are useful to industry, so as in turn to make profits and improve the competitive standing of shareholders. But the institutions also function rather like clubs, enabling their alumni to prosper because they gain first-mover advantages and are supported by like-minded fellow alumni. Some of their money returns to their alma mater, further reinforcing its finances and its reputation irrespective of meritocratic considerations, so that more people with ambition try to get in. In this way these institutions have become probably some of the most efficient meritocratic mechanisms we have ever developed. This is the success story of universities like Harvard, Yale, Princeton, Stanford, and MIT. It is a now a proven winning strategy for countries all over the world, a recipe that Asian countries and regions are already learning how to apply. The China Europe International Business School (CEIBS) in Shanghai is a good example. So may also be the large number of new schools recently built all around China today, many which are privately run.
What is primarily driving the competitive advantage of nations are new technologies, not our political systems are built on social-science findings. It might on the contrary be argued that our competitive advantage has developed more or less despite the latter social systems. Perhaps these are better understood as a part of the general evolution of our societies as we have become more affluent.
The speed at which evolution affects private-sector companies is more dramatic than the evolution of nation states. Who does not remember the glory days of IBM? Unlike States, private-sector companies seldom foresee their decline, in large part because it happens so much quicker. Whereas nation states tend to go about their lives in a rather relaxed fashion, relying on their own stability, private-sector organizations are in constant turmoil, perpetually occupied with questions of prosperity and survival. The nature of their existence reminds one of those tribes back in prehistory which were under attack from all directions simultaneously. It is not enough to be competitive in one particular area, such as production, recruitment, or marketing: you need to compete on all fronts at once. If you fail in any area at any time, that may be the end of you. Metaphorically speaking this is what we call fierce competition. Thus we say that in economic "war" there is no ceasefire. A private-sector organization can by definition never find that safe haven enjoyed by so many nation states (except in the case of monopolies or oligopolies, which have made a deal with the State to be left alone). That is part of the bargain that private-sector companies make with the nation state: they volunteer to accept vulnerability, in exchange for promise of a life of luxury if they survive.
It is true that nation states evolve and may be absorbed by competitors, but in their case this takes much longer. Just as one-time States such as Hanover, Sardinia, Sicily, Nassau, Frankfurt am Main, Lucca, Parma, Modena, and Tuscany have all disappeared as sovereign entities, so smaller companies are absorbed by larger ones through the mechanisms of merger and acquisition (M&A). When States like Poland, Persia, and Korea were annexed or broken up at the beginning of the twentieth century, opinion was strongly divided as to whether or not this was "natural" and therefore acceptable. Commercial M&As are looked on much more favorably, as the process has come to be seen as an efficient way of managing resources. They have also been standardized and regulated by law. Furthermore we assume that employees will be able to find new jobs if necessary; so organizational rearrangements occur far more smoothly in the economic domain than in that of politics.
A private-sector organization is not expected to explain to the public why it is expanding. There are no general elections over such questions, no public debates. Nation states on the other hand have to offer excuses for their aggressive actions. For instance, when Britain took control of parts of Persia it was "not to be forgotten that it [Britain] was the land which brought them the idea of freedom", and when Japan conquered Korea, the Koreans (the argument went) "should be thankful to be ruled by such a great warrior nation".62 In the private sector all this sort of thing is left to the forces of competition, dispensing with most of the moral rhetoric.
In the commercial sphere, unlike the sphere of nation states, this kind of activity is perfectly in order, or even encouraged. So we can talk about the growth and expansion of companies, but not of nation states, even though the consequences are much the same. The process still leads to acquisition and accumulation of wealth by particular groups, indeed even the people involved are very often the same. Those who sought their fortunes in the service of the nation state a century ago often come from the same families which are seeking their fortune in private-sector organizations today. They comprise ambitious risk-takers; often they form the better-qualified and more adventurous section of the population. Sometimes they are clever businessmen, at other times they are just toughs. It is this same group of personalities who have always contributed most to the strength of the nation state. Using private-sector organizations has been a much more intelligent and efficient means of achieving the same goals. That was the model for Dutch sea-power in the seventeenth century, which established the first true corporate state. It was the same model adopted by Britain in the eighteenth century, which was responsible for the foundation of their great empire.
When companies become market leaders and dominant players they use their position to take control of the market, setting industry standards and forcing out competitors. The example of Microsoft is well known, as is that of Standard Oil more than a century ago. The response, from companies found doing this, is standard: to re-establish public confidence you have to give back to the public part of what you gained, in the form of donations to charity and other good causes. You have hurt the common good, so you have to rebuild the contract by giving something back to the common good. In all these cases the companies only give back fractions of what they earned from their monopoly position, so that in hindsight we can say that it was often a good investment. Numerous American scholarships were financed by the Rockefeller Foundation after the Second World War, and the Gateses have launched a programme to fight AIDS in Africa.63The effects of both initiatives have been positive, but we ought not to forget how the money was generated in the first place. We should assume that the primary aim of such initiatives is to win public support. Purely altruistic actions are rare exceptions.
The multinationals are the planet's re-colonizers, carrying out a task to which the nation state is no longer equal. From the same perspective we could say that the nation state needed to create the multinational enterprise. The activities of multinationals are less visible and their intentions remain mostly hidden, even to most of their employees, who find that they are only small cogs in a large machine. It is ironic: the managers really have no intention of becoming colonists, but that is irrelevant to the outcome. A manager just wants to find a good job, earn a good living, live a good life. Meanwhile the organization grows in strength and expands its sphere of influence. Embassies, chambers of commerce, and elected representatives take care of the rest, so that everyone ultimately works for the competitive advantage of the nation.
As with companies, so with cultures. Each culture is like an organism, an organism which is always growing or declining. The result of this evolutionary process is devastating to certain cultures, groups of people, and nations. In Africa, for instance, the main problem is not exploitation by private-sector companies but our non-presence, or lack of long term commitment. By subsidizing our own farmers we are denying to Africans today the best chance they have of competitive advantage, in agricultural production. We do not see the consequences of our export subsidies for farmers in countries like
Ghana: how they are forced to leave their land and try to make a living as street sellers in the capital, how their families are ruined, how the elders back in the villages are forgotten. Thus poor countries are often threatened from two sides at the same time, by multinationals and by nation states working in an inexplicit form of collaboration for their national advantage.
Even where these external threats are lacking, there are plenty of internal ones: corruption, lack of national identity (since Western colonialists based the national boundaries on political and economic interests rather than on ethnic identities), and a climate unfavorable for developing a strong work ethic. In consequence Africa saw no real substantial economic growth for a decade, until just recently. Of the 700 million people living south of the Sahara, almost all have a problem of either chronic malnutrition or nutritional deficit, the only real exception being the inhabitants of South Africa. Ninety per cent of Nigerians lives on less than two US dollars a day, seventy per cent on less than one dollar.
When nation states succeeded in the past in conquering other countries by force, there was then always the problem of management. The inhabitants quickly turned against their conquerors. This was the story of the British Empire, to a certain extent of the Roman Empire, and of Alexander the Great's Hellenistic empire. The way that countries are run by private-sector companies today is a very different story. Employees of a company that is acquired by another company will often forget who the ultimate owner is. They do not really care that the majority owner is German or Dutch and sitting on a yacht somewhere in the Bahamas. Their loyalty and identity remains with the local company they are working for. Unlike under colonialism, the workers are also allowed to retain their national loyalties. Only the profit leaves the country, invisibly, wired to a Swiss bank account. Thus with the commercial company there is much less confrontation than there was when nation states were running things. But the economic consequences are very much the same.
Some things were easier under the logic of nation states. Most employees do not have feelings of pride in working for a particular company, as they might be proud to serve a nation. It does not stir the same high emotions. For most citizens, their national identity is unconditional and for life, whereas their identification with a company is tied up with financial remuneration and is limited. Companies are aware of this and would like to change the situation, but they cannot. It does not help for them to build strong corporate identities through what is called branding, to hoist rows of colorful flags outside their headquarters, or to send their employees to lavish company celebrations; they never really succeed in winning their employees' hearts, only their minds, and only for a limited time. Most high-end knowledge workers can see through the corporate loyalty agenda (one reason, of course, being that they are often the same people who created it in the first place and keep it going).
Managers are rather like the condottieri or mercenaries of Renaissance Italy. Our free-market system is made up of commercial organizations called companies. These companies comprise managers who will fight on one side one day and on a competitor's side the next day. The decision about which side they fight for is largely a question of money, as it was for the condottieri; and as in Renaissance Italy these condottieri often become princes and heads of state. Loyalty to and identification with one's company, though always highly praised, is easily abandoned in favour of another company. Also, just like the condottieri, most businesspeople try to avoid hard work when possible. It is not the work itself that attracts them, but the rewards for working hard. It is possible to find managers who work for other motives too, for honour or for the good of society; but they are rare. As a group they are looking for money; the easier the better.
In private-sector companies, especially in the individualistic Western world, we are all individual agents seeking to promote our private self-interest. In Asia, particularly in Japan, that was different for a long while; but Japan too is now moving away from the honour-based model of the samurai, the old warrior class. One reason for that is that Japanese companies are less able now to guarantee secure jobs for life, which is another consequence of global competition and perhaps also of a change of mentality among the new generation. Those who grew up in comfort in the 1980s and 1990s are less willing to make great sacrifices at work. As the competitive advantage of Japanese firms has weakened, employees are slowly learning that companies are not like people. If they do not make money with you they will let you go, so the social contract is broken. Trust between companies and workers is hard to rebuild. Meanwhile Japan is losing ground to neighbors to its West, and principally to its old arch-rival, China.
Unlike a private-sector company, the nation state does not throw its people out when they are no longer useful, not even when they commit crimes. We can say that a modern welfare state operates on three levels. It prefers all citizens to earn their living, but if not then the State will provide social-security benefits. In between there is a layer of economic support, providing funds for anything from stay-at-home mothers to companies in trouble. For a company to receive State support it has to demonstrate that its collapse would entail negative consequences for society, for instance if workers in a rural area are unlikely to find new jobs. Otherwise the company is on its own. At the end it all depends the nature of the company, on how it has been designed as an organizational entity; it has limited liability, which means that the owners have limited responsibility. It is a person-like creation without a person's responsibilities. It is a money-making, wealth-creating machine: for better or worse, an organism adapted to its environment.
Globalization is just another word for achieving Man's age-old goal of creating more wealth by treating the entire planet as one big opportunity. Those who stand to profit are the same men and cultures as before. The only thing which has changed is the tool or the vehicle through which this happens. The company has now proved to be much more efficient than the nation state. A combination of State and company working together is even more efficient, defining a new formula for success in international business.
Table 4.1: A formula for collaborative success in international business
First they try to buy their resources
If this does not work they send in their diplomats
If that does not work they send in the intelligence people (the middlemen)
If that does not work they send in the army
What pickings are left they acquire by negotiation, without being so greedy as to leave the other side desperate (the mistake made by Napoleon and by the victors of the First World War)
Iraq is a good example here. American companies were thrown out of that country at the time of the Gulf War, during the administration of George Bush senior. All major oil contracts went to French and Russian companies. But the USA was becoming too dependent on Saudi oil. Iraq had the second largest oil reserves. If the USA could control Iraq, it could also ensure special contracts to control the supply of oil. However, events are often surprisingly unpredictable, thanks to the sheer complexity of social actions. The US army had no difficulty in defeating the Iraqi army, but it failed to create stability. For one thing the majority population are Shia Muslims, who are arch-rivals of the USA in that region. On the other hand the Americans could not trust the Sunnis, whose armies they had just defeated. By the time the oil fields were finally secured, the US had forfeited its special relationship with Iraqi leaders. Instead the contracts have now gone to the highest bidders, companies from other countries. The withdrawal of US troops from Iraq in December 2011 was acknowledgment of a de facto defeat.
If the US oil industry lost out, the same was not true for all American industries. The US military-industrial complex accounts for more jobs and profits than the oil industry, and it won, in the sense that it gained new orders, signed new contracts, and made higher profits. Also, some American officials and businessmen looted the country's resources.66 Thus it was a financial win for some, but not for the country as a whole, and certainly not for Iraqi citizens. Unofficial figures talk about a million casualties.
American soldiers never had the will to win in Iraq. The Shias, supported by Iran, did have that will, as Hezbollah has in its war with Israel. Military strategy tells us that the strength of your competitor can be defined as a combination of three factors: his material resources, his intellectual abilities, and his willpower and determination. These three factors together will determine the competitive advantage of any (public- or private-sector) organization in any market. The Prussian general Karl von Clausewitz, who taught strategy at the military academy in Berlin and learned much by contemplating Napoleon's success and the failures of the Prussian army, defined the ability to win a war as a combination of total available resources with willpower, itself a function of the motive for going to war (Clausewitz 1832).
Business education today neglects the factor of willpower, in favour of reckoning only with general intellectual abilities or formal competence, education, and training. At the same time many practicing businesspeople, especially entrepreneurs, tell us that success is before anything else a matter of willpower, of not giving up. Percy Barnevik, former chairman and chief executive of ASEA Brown Boveri, said in a recent interview that ninety per cent of business success is the ability to see projects through, to be persistent. The thing is never to give up, to take the pressure. You also need to know where you want to go. If your focus is clear and your will is strong enough you will sooner or later find a way. Peter Drucker talks about "concentration", but by this he seems to mean the same thing. Thus an organization can be seen as the collective willpower of numerous individuals, all pulling in the same direction. That is also what produces the competitive advantage of a nation.