Business management
From Hobson's Choice
Business management is the activity of making decisions about enterprise purpose, strategy, or methods. For example, business managers may decide what business plan to use, what business form (corporation, limited liability partnership?) to adopt, what mix of products to produce or distribute, what components or industrial services to provide internally (versus buying form outside), and whether to grow through acquisitions or internal expansion.
Business management has evolved over the millenia into a standard structure, dominated by the integrated corporation.
Contents |
Functions & Methods
Firms require strategies for maintaining a competitive mix of products, efficient production methods, viable relations with labor, adequate finance capital, and market stability. Juggling all of these tasks requires compromises; under some circumstances (particularly if the previous management was very poor), even the best performance can result in the liquidation of the company. A common case is a sudden reduction in the revenues from a particular activity arising from (a) a reduction in demand, (b) an alternative supply (cheaper imports from abroad, for example), or (c) a sharp reduction in available finance capital (arising from disinflationary policies). If this crisis occurs too suddenly, it may be impossible for the firm to finance transition to another business activity.
The danger of a discontinuous loss of revenue has led business owners to devise many different strategies for dealing with them. These include:
- Accumulating large amounts of cash
- Separation of ownership and management;
- Industrial combination (such as trusts, pools, cartels, or business groups);
- Vertical integration;
- Oligopoly;
- Conglomerates;
- Political action.
Accumulating large amounts of cash is very obvious, but usually requires that the cash be successfully and safely invested—not always an easy task. Moreover, it ties up cash that could be better used on the business itself. If management is separated from ownership, it greatly increases the risk of a hostile takeover, since large reserves of cash can arguably be used to pay for the takeover if invested aggressively by the new owners.
Separation of ownership and management accomplishes several things at one. First, I turns the owners' stake in the enterprise into just another investment: incorporation with elected corporate officers (CEO, president, and so on) means that the owners of the business are free to sell off their shares and buy shares in something else. While it doesn't reduce the risk of failure, it reduces the consequences to the owners. Second, it prevents dynastic succession of family owners from leading to an incompetent or untrained manager. Third, it ensures that the manager is strongly motivated to maximize shareholder value, rather than being deflected by sentiment or shame. Professional managers are bound ethically to serve the ownership of the firm, in a way that a few large owners are not. Fourth, it allows firms to expand to far beyond the capital that a single family could possibly accumulate.[1]
Industrial combinations include trusts, pools, cartels, and business groups. These provide limited protection against sudden loss of revenue; in particular, they prevent companies from driving prices below shutdown cost in price wars. Trusts, in particular, can be used to eliminate competition (by organizing boycotts of incipient competitors). Business groups are more likely to be part of a strategy of diversification, and are more related to conglomerates (see below), but they also connect member firms to reliable sources of capital and (sometimes) suppliers.
Vertical integration is a strategy in which firms ensure reliable supplies by taking control of their suppliers, or else ensure reliable demand for their products by taking over their retailers. In some cases, the different steps in the supply chain are autonomous—they are owned by a single holding company, or else subsidiaries, or simply different business units. In this case, the different units are largely responsible for their own profitability and industrial management; the benefits of vertical integration are, here, a form of hedge. In other cases, vertical integration is part of a strategy of business-industrial partnership, i.e., a situation in which business managers work with their engineers and process managers to re-engineer the entire process of bringing goods to market. Historically, the latter strategy works at smaller scales, such as where the entire integrated business unit can be managed by a single team.
Oligopoly (or monopoly) is a further step towards ensuring the benefits of industrial combination. Industrial combination may seek to win the higher prices of oligopoly, but it is never as effective. Industrial combination leaves rival business management teams intact; it is constrained by the need to keep member firms from shutting down. In contrast, a winner of market dominance may be able to squeeze suppliers, workers, customers, and even government officials. The management of an olipolistic firm can disregard the interests of other stakeholders in setting rates of output, and even impose formats/standards that make competition effectively impossible.[2]
Conglomerates are a form of diversification in which a company buys a wide variety of unrelated businesses as part of a business strategy. One such strategy is to have different business units that fare differently over the course of a business cycle, such as high tech, oil field services, insurance, and banking. In the case of General Electric, there is a technical complimentarity to the non-financial operating units: while medical imaging, television broadcasting, engineering, and appliances may seem very diverse, they have a lot of industrial processes in common. A major scientific innovation affecting one is likely to affect the others also. Outside of the United States, conglomerates have actually been quite successful, even when the different businesses are integral operating units.[3]
Political activity remains a potent defense strategy for business. For a fuller discussion of this, see Business management (class).
Innovation in business enterprise, while important to its success and survival, is a function mainly of industrial management and is discussed there.
Development
For most of human history, business enterprise was very small, family-based, and relatively simple in managerial structure. If there was a firm involved, it was likely to be a partnership, and lack any principle of ownership. Capital tended to be small, and not very durable.[4] After the 18th century, a wave of technical improvements made capital accumulation possible; finance capital evolved to support massively more expensive governments, leading to business corporations. By the 19th century, the separation of ownership and management was common in the most developed economies, leading to business management as an actual profession.
During the wave of mergers and acquisitions of the period 1919 to 1929, there appears to have been a shift in the character of business management, from requiring considerable technical expertise in the related field, to requiring more political skills. According to Stigler, merger activity shifted from seeking monopoly to seeking oligopoly—mainly as a result of legal intervention by Congress.[5] Political action, in this case, meant adhering to antitrust regulations while preserving a state of peace (or carving out entirely new markets through monopolistic competition; typically this included staking out a strong position though intellectual property rights, branding, and cost cutting; but it also included cession of some markets in exchange for dominance in others.
In recent years, business management has striven (with dubious results) to imitate, or even co-opt, financial management; this development would lead to businesses being little different from hedge fund. Small and medium-sized firms would continue to consider their operating units or subsidiaries as having special attributes, but large firms would have to manage by statistics, with little or no reflection as to the productive and combinational potentials of their units. Long-range strategy, beyond pursuit of oligopoly, would be untenable. If this prognosis is correct, then future management style may rely on the concept of three-tiered entities; industrially managed operating units, strategically-managed clusters of units, and financially-managed super-clusters, with intermeshing control from different corporate headquarters.
Notes
- ↑ At the time of this writing (2010), Toyota Motor, was the largest non-financial firm in the world (by assets); it held $293 billion in assets (Forbes, "The Global 2000: Assets" 21 April 2010). The eight largest personal fortunes for that year were those of Carlos Slim Helu & family ($53.5 billion), William Gates III ($53), Warren Buffett ($47), Mukesh Ambani ($29), Lakshmi Mittal ($28.7), Lawrence Ellison ($28), Bernard Arnault ($27.5), and Eike Batista ($27); these also sum to $293 billion (Forbes "The World's Billionaires," 10 March 2010). Needless to say, none of these men had all their assets invested in a single business.
- ↑ The classic example of this is Microsoft, whose market power stemmed from the Catch-22 faced by its business rivals: an operating system needs many applications that run on it to be competive, but developers of applications need to have those applications run on an operating system that is competitive. So, for example, BeOS was greatly admired as an operating system, but the pool of applications for it was small because so few people used it. Microsoft won its marketing power because IBM chose MS DOS to be the operating system of its Personal Computer (PC) in 1981, and MS DOS was able to ride IBM's pre-existing market power to market dominance of its own.
- ↑ A commonly stated motive for acquiring companies by a conglomerate is that the current management was underperforming; the shares are depressed, and after the acquiring firm takes over, it will dramatically enhance shareholder value, leading to a big capital gain. Studies suggest that this strategy rarely works, but that doesn't mean corporate raiders don't believe they are individual exceptions. See David J. Ravenscraft & Frederic M. Scherer, Mergers, sell-offs, and economic efficiency, Brookings Institution Press (1987), Chapter 5. Since this book was published, conlomerates died out in the USA. However, in such cases, merger and acquisition activity is the main line of work of the conglomerate, and conglomeration is not a strategy for survival.
- ↑ Fernand Braudel, Civilization and Capitalism, 15th-18th Century: The wheels of commerce University of California Press (1992), Part I: "The Instruments of Exchange" (p.25ff) describes the organization and methods of pre-modern enterprise. On p.370, Braudel discusses the capital intensity of various traditional enterprises, such as shipping.
- ↑ This describes the situation in the USA. Other countries, representing smaller markets, usually had inevitable competition from abroad.
George Stigler, "Monopoly and Oligopoly by Merger," American Economic Review (1950); available in is collected works, The Organization of Industry University of Chicago Press (1983), p.95ff. Quoted in Edith Penrose, The Theory of the Growth of the Firm Oxford University Press (1959/2009), p.210, ft.236. Stigler cites two distinct phases of merger activity, one of which {foolishly} sought monopoly, and the other of which {prudently} sought oligopoly. The main difference between the two, although Stigler does not mention this, is that the two forms require quite difference strategies for defense of continued revenues. Monopoly requires technical expertise to ensure the means of serious competition never arises. Oligopoly requires the diplomacy of peaceful coexistence.
