Arthur sets out to articulate a theory of technology, and to a certain extend succeeds, at least in articulating the importance of technology and the layered, self-referencing and self-creating nature of its evolution.

The two main concepts I took away were the layered nature of technology, consisting of these three points:

1. Technology is a combination of components.
2. Each component is itself a technology.
3. Each technology exploits an effect or phenomenon (and usually several)

Secondly, Arthur lays out, in four separate chapters, the four different ways technology evolves, as summarized on page 163 (my italics added):

There is no single mechanism, instead there are four more or less separate ones. Innovation consists in novel solutions being arrived at in standard engineering - the thousands of small advancements and fixes that cumulate to move practice forward. It consists in radically novel technologies being brought into being by the process of invention. It consists in these novel technologies developing by changing their internal parts or adding to them in the process of structural deepening. And it consists in whole bodies of technology emerging, building out over time, and creatively transforming the industries that encounter them. Each of these types of innovation is important. And each is perfectly tangible. Innovation is not something mysterious. Certainly it is not a matter of vaguely invoking something called "creativity." Innovation is simply the accomplishing of the tasks of the economy by other means."

I liked the book for its ambition, view of technology as something that evolves, and clear-headed way of thinking about and expressing a beginning grand theory. The concepts are intuitive and beguiling, but I did miss references to - and attempts to build on, or differentiate itself from - other valuable concepts of technology, such as sustaining vs. disruptive, competence-enhancing vs. competence-destroying, architectural vs. procedural, and so on. There is a lot of research going on in this area - we are about to break up the formerly black and mysterious box called innovation and show that it really comes down to subcategories and the interplay of quite understandable drivers. Arthur's contribution here is significant - but it is, at least the way I read it, the way of the independent thinker who would have a lot more influence if some of the language and some of the categories were a bit closer to, or at least distinctively positioned in relation to, what others think and say.

 View all my reviews >>

View all my reviews >>

Oh well, back to research reports (of the administrative kind) and course preparation...

So - if you are a M.Sc. student at the Norwegian School of Management - you are herewith invited to participate in a case analysis contest. There are a couple of provisos: You have to form a team of 3-4 students, and at least two of those have to be strategy students (i.e., do the strategy major). The contest will take place at BI on April 14th from 8am to 8pm, and will involve analysis, presentations, feedback and - for the winners - some rather attractive prizes from both hosts.

Be a consultant for a day and test your skills with a real business case - with feedback from both faculty and bona fide strategy consultants!

The application deadline is April 1st. The number of places is limited, so ”first come, first served“ - and please send the application to kai.r.mathisen@bi.no. (And do mention that you saw it here - we are trying to track how information travels about this.)

And that's the beauty of freely available teaching cases - that others use them, and, sometimes, translate them. By now, this case is available in five languages. Which I think is rather cool...

This short and to the point book gives an excellent overview and guide to the research on the economic effects of information technology. Each chapter has pointers to more reading, good examples, concludes with avenues for further research. I will use this as an assignment for my technology strategy students - rather than giving them a few articles, they might as well read the whole book.

(Also available through Google Booksearch. Full notes below the fold.)

Introduction

- not only is Moore's law still in force, business have not even begun to exploit the full potential of information technology
- strategic value of IT still increasing (despite Carr), differences are increasing between leaders and laggards
- information technology responsible for the resurgence of productivity in the US since 1995
- decline in IT investments 2001-03 responsible for reduced productivity growth 3-4 years later
- companies with the highest returns also invested in organizational capital, the right combinations of incentive systems, training and decentralized decision making
- intangibles (organizational capital) important
- consumer surplus increasing tremendously, new and important measure of economy
- social networks intriguing for research

Chapter 1: Technology, innovation and productivity in the information age

- consumer price index does not take into account increases in quality and functionality of goods
- productivity research has a "drunk and lamppost" problem - measuring tangible results - getting better since 1995
- dot-com bubble lead Carr to think IT spending over and potential for competitive advantage reduced
- this is wrong: 2008 article HBR McAfee / Brynjolfsson says leaders grow more than laggards

Chapter 2: Measuring the information economy

- ICT-producing industries (hw,sw,services) less than 4% of BNP
- however, more than half of VC investments are in the ICT-producing indutries
- many ICT-enabled transactions (NYTimes.com visits, Google searches, Youtube videos) are free, hence do not make it into GNP calculations.
- 0.2% of spending is on internet access (counted) but Americans spend more than 10% of their leisure time online
- IT has had incredible advances in price/performance
- Dow 100 and other indicators have changed over the years, still tilted towards "old" economy
- big differences between effect of IT for individual firms, the key is investments in organizational capability

Chapter 3: IT's contribution to productivity and economic growth

- productivity paradox: difficult to measure, though everyone agrees IT contributes to productivity growth
- lackluster productivity growth in the US 73-95 (1.4%), then surge 96-2000 (2.6%), then 3.6% 2001-03. down to 1.6 2004-06, then 2.5% 2007-08. E&S believe this is reflects delayed effects of IT investments
- industry-level studies reveal sources of growth: IT-using industries behind the productivity effect
- country differences: little effect in developing countries - mostly because of lack of complementary infrastructure

Text box p 53-57: Sums up different effects of IT (Leavitt & Whisler; Malone; Coase; etc.) Important reference: Autor, Levy, and Murnane (2003): Technology substitutes for labor in routine jobs, complements labor for problem-solving or complex tasks. Discusses open source and Wikipedia).

Chapter 4: Business practices that enhance productivity

Seven pillars of the digital organization:
1. Move from analog to digital processes
2. Open information access
3. Empower the employees
4. Use performance-based incentives
5. Invest in corporate culture
6. Recruit the right people
7. Invest in human capital

Milgrom and Roberts: Important to adopt systems of complementary activities, rather than individual "best practices". Case of Lincoln Electric highlights this: Pay their workers twice as much as anyone, system of internal ownership, promoting from within, high bonuses and flexible work rules.

Discusses various studies - Barley (1986) on CT scanners and organizational change, Brynjolfsson et al found one-year returns to IT investments normal, 5-6 year returns very high. Others found that IT led to more flexibility (shorter setup time for production, hence shorter profitable runs), US-owned UK firms faster to adopt productivity changes than UK-owned ones. Italian firms on average 7 years behind the US.

Chapter 5: Organizational capital

- definition still emerging (seems to include prescription-like indicators, such as employee voice)
- organizational costs are typically most of an IT investment, $4m of a typical $20m ERP install, but typically expensed rather than depreciated
- two main methods: either to estimate expenses directly, or use capital markets as indicators
- Brynjolfsson, Hitt and Yang 2002 found high interaction effects between IT and organizational investments
- others try to do it from national accounts down, estimating annual investment in intangibles of $1trillion annually in the US

Chapter 6: Incentives for innovation in the information economy

- easy to determine markets for products and most services
- information is harder - one person's consumption does not diminish another's value
- information production often result of teamwork, hard to measure individual contribution
- information is experience goods, don't know value until you have consumed it
- marginal production cost near zero, so standard value calculations don't work
- bundling (with other information goods or regular goods) often used
- knowledge spillovers: (Grilliches 1958 on social rate of return of research)
- disruptive technologies: three examples where incumbents thrived on something initially seen as detrimental:
-- libraries vs. book publishers
-- photocopiers vs. journals
-- VCR vs. Hollywood
- new business models: sell the iPod rather than the CDs
- price dispersion - a measure of market ignorance. Amazon does not have the lowest prices but the biggest market share thanks to better customer experience
- summary: Key is to ask "Who will the winners be?" and "What mechanisms will be used to compensate for them?"

Text box: Nature of General-purpose technologies

David and Wright (2003, p144):
-- wide scope for improvement and elaboration
-- applicability across a broad range of uses
-- potential for use in a wide variety of products and processes
-- strong complementarities with existing or potential technologies

See also David's argument about the time it takes for businesses to reorganize around the new technology

Chapter 7: Consumer surplus

- consumer surplus emerging as measure of innovation: How much better off the consumer is
- easy to define but hard to measure
- examples: Enormous value of AC in the US south, not captured in sales of AC units. Internet offering lower prices but most value in more selection and variety.
- estimates of consumer surplus of computers (brynjolfsson 1996) as high as value of computers
- various studies, such as effect of sales of used books at Amazon or effect on patient health of new emergency call technology
- key research area: determining systematic approaches to estimating this value

Chapter 8: Frontier research opportunities

Promising areas for future research:
- the use of task-level data (including social network analysis)
- new goods and consumer surplus measurement
- understanding organizational capital and other intangibles
- incentives for innovation in information goods and open source economies

The Chaos

Dearest creature in creation
Studying English pronunciation,
I will teach you in my verse
Sounds like corpse, corps, horse and worse.
I will keep you, Susy, busy,
Make your head with heat grow dizzy;
Tear in eye, your dress you'll tear;
Queer, fair seer, hear my prayer.

Pray, console your loving poet,
Make my coat look new, dear, sew it!
Just compare heart, hear and heard,
Dies and diet, lord and word.
Sword and sward, retain and Britain
(Mind the latter how it's written).
Made has not the sound of bade,
Say - said, pay - paid, laid but plaid.

Now I surely will not plague you
With such words as vague and ague,
But be careful how you speak,
Say: gush, bush, steak, streak, break, bleak,
Previous, precious, fuchsia, via
Recipe, pipe, studding-sail, choir;
Woven, oven, how and low,
Script, receipt, shoe, poem, toe.

Say, expecting fraud and trickery:
Daughter, laughter and Terpsichore,
Branch, ranch, measles, topsails, aisles,
Missiles, similes, reviles.
Wholly, holly, signal, signing,
Same, examining, but mining,
Scholar, vicar, and cigar,
Solar, mica, war and far.

From "desire": desirable - admirable from "admire",
Lumber, plumber, bier, but brier,
Topsham, brougham, renown, but known,
Knowledge, done, lone, gone, none, tone,
One, anemone, Balmoral,
Kitchen, lichen, laundry, laurel.
Gertrude, German, wind and wind,
Beau, kind, kindred, queue, mankind,
Tortoise, turquoise, chamois-leather,
Reading, Reading, heathen, heather.
This phonetic labyrinth
Gives moss, gross, brook, brooch, ninth, plinth.

Have you ever yet endeavoured
To pronounce revered and severed,
Demon, lemon, ghoul, foul, soul,
Peter, petrol and patrol?
Billet does not end like ballet;
Bouquet, wallet, mallet, chalet.
Blood and flood are not like food,
Nor is mould like should and would.

Banquet is not nearly parquet,
Which exactly rhymes with khaki.
Discount, viscount, load and broad,
Toward, to forward, to reward,
Ricocheted and crocheting, croquet?
Right! Your pronunciation's OK.
Rounded, wounded, grieve and sieve,
Friend and fiend, alive and live.

Is your R correct in higher?
Keats asserts it rhymes with Thalia.
Hugh, but hug, and hood, but hoot,
Buoyant, minute, but minute.
Say abscission with precision,
Now: position and transition;
Would it tally with my rhyme
If I mentioned paradigm?

Twopence, threepence, tease are easy,
But cease, crease, grease and greasy?
Cornice, nice, valise, revise,
Rabies, but lullabies.
Of such puzzling words as nauseous,
Rhyming well with cautious, tortious,
You'll envelop lists, I hope,
In a linen envelope.

Would you like some more? You'll have it!
Affidavit, David, davit.
To abjure, to perjure. Sheik
Does not sound like Czech but ache.
Liberty, library, heave and heaven,
Rachel, loch, moustache, eleven.
We say hallowed, but allowed,
People, leopard, towed but vowed.

Mark the difference, moreover,
Between mover, plover, Dover.
Leeches, breeches, wise, precise,
Chalice, but police and lice,
Camel, constable, unstable,
Principle, disciple, label.
Petal, penal, and canal,
Wait, surmise, plait, promise, pal,

Suit, suite, ruin. Circuit, conduit
Rhyme with "shirk it" and "beyond it",
But it is not hard to tell
Why it's pall, mall, but Pall Mall.
Muscle, muscular, gaol, iron,
Timber, climber, bullion, lion,
Worm and storm, chaise, chaos, chair,
Senator, spectator, mayor,

Ivy, privy, famous; clamour
Has the A of drachm and hammer.
Pussy, hussy and possess,
Desert, but desert, address.
Golf, wolf, countenance, lieutenants
Hoist in lieu of flags left pennants.
Courier, courtier, tomb, bomb, comb,
Cow, but Cowper, some and home.

"Solder, soldier! Blood is thicker",
Quoth he, "than liqueur or liquor",
Making, it is sad but true,
In bravado, much ado.
Stranger does not rhyme with anger,
Neither does devour with clangour.
Pilot, pivot, gaunt, but aunt,
Font, front, wont, want, grand and grant.

Arsenic, specific, scenic,
Relic, rhetoric, hygienic.
Gooseberry, goose, and close, but close,
Paradise, rise, rose, and dose.
Say inveigh, neigh, but inveigle,
Make the latter rhyme with eagle.
Mind! Meandering but mean,
Valentine and magazine.

And I bet you, dear, a penny,
You say mani-(fold) like many,
Which is wrong. Say rapier, pier,
Tier (one who ties), but tier.
Arch, archangel; pray, does erring
Rhyme with herring or with stirring?
Prison, bison, treasure trove,
Treason, hover, cover, cove,

Perseverance, severance. Ribald
Rhymes (but piebald doesn't) with nibbled.
Phaeton, paean, gnat, ghat, gnaw,
Lien, psychic, shone, bone, pshaw.
Don't be down, my own, but rough it,
And distinguish buffet, buffet;
Brood, stood, roof, rook, school, wool, boon,
Worcester, Boleyn, to impugn.

Say in sounds correct and sterling
Hearse, hear, hearken, year and yearling.
Evil, devil, mezzotint,
Mind the z! (A gentle hint.)
Now you need not pay attention
To such sounds as I don't mention,
Sounds like pores, pause, pours and paws,
Rhyming with the pronoun yours;

Nor are proper names included,
Though I often heard, as you did,
Funny rhymes to unicorn,
Yes, you know them, Vaughan and Strachan.
No, my maiden, coy and comely,
I don't want to speak of Cholmondeley.
No. Yet Froude compared with proud
Is no better than McLeod.

But mind trivial and vial,
Tripod, menial, denial,
Troll and trolley, realm and ream,
Schedule, mischief, schism, and scheme.
Argil, gill, Argyll, gill. Surely
May be made to rhyme with Raleigh,
But you're not supposed to say
Piquet rhymes with sobriquet.

Had this invalid invalid
Worthless documents? How pallid,
How uncouth he, couchant, looked,
When for Portsmouth I had booked!
Zeus, Thebes, Thales, Aphrodite,
Paramour, enamoured, flighty,
Episodes, antipodes,
Acquiesce, and obsequies.

Please don't monkey with the geyser,
Don't peel 'taters with my razor,
Rather say in accents pure:
Nature, stature and mature.
Pious, impious, limb, climb, glumly,
Worsted, worsted, crumbly, dumbly,
Conquer, conquest, vase, phase, fan,
Wan, sedan and artisan.

The TH will surely trouble you
More than R, CH or W.
Say then these phonetic gems:
Thomas, thyme, Theresa, Thames.
Thompson, Chatham, Waltham, Streatham,
There are more but I forget 'em -
Wait! I've got it: Anthony,
Lighten your anxiety.

The archaic word albeit
Does not rhyme with eight - you see it;
With and forthwith, one has voice,
One has not, you make your choice.
Shoes, goes, does*. Now first say: finger;
Then say: singer, ginger, linger.
Real, zeal, mauve, gauze and gauge,
Marriage, foliage, mirage, age,

Hero, heron, query, very,
Parry, tarry, fury, bury,
Dost, lost, post, and doth, cloth, loth,
Job, Job, blossom, bosom, oath.
Faugh, oppugnant, keen oppugners,
Bowing, bowing, banjo-tuners
Holm you know, but noes, canoes,
Puisne, truism, use, to use?

Though the difference seems little,
We say actual, but victual,
Seat, sweat, chaste, caste, Leigh, eight, height,
Put, nut, granite, and unite
Reefer does not rhyme with deafer,
Feoffer does, and zephyr, heifer.
Dull, bull, Geoffrey, George, ate, late,
Hint, pint, senate, but sedate.

Gaelic, Arabic, pacific,
Science, conscience, scientific;
Tour, but our, dour, succour, four,
Gas, alas, and Arkansas.
Say manoeuvre, yacht and vomit,
Next omit, which differs from it
Bona fide, alibi
Gyrate, dowry and awry.

Sea, idea, guinea, area,
Psalm, Maria, but malaria.
Youth, south, southern, cleanse and clean,
Doctrine, turpentine, marine.
Compare alien with Italian,
Dandelion with battalion,
Rally with ally; yea, ye,
Eye, I, ay, aye, whey, key, quay!

Say aver, but ever, fever,
Neither, leisure, skein, receiver.
Never guess - it is not safe,
We say calves, valves, half, but Ralf.
Starry, granary, canary,
Crevice, but device, and eyrie,
Face, but preface, then grimace,
Phlegm, phlegmatic, ass, glass, bass.

Bass, large, target, gin, give, verging,
Ought, oust, joust, and scour, but scourging;
Ear, but earn; and ere and tear
Do not rhyme with here but heir.
Mind the O of off and often
Which may be pronounced as orphan,
With the sound of saw and sauce;
Also soft, lost, cloth and cross.

Pudding, puddle, putting. Putting?
Yes: at golf it rhymes with shutting.
Respite, spite, consent, resent.
Liable, but Parliament.
Seven is right, but so is even,
Hyphen, roughen, nephew, Stephen,
Monkey, donkey, clerk and jerk,
Asp, grasp, wasp, demesne, cork, work.

A of valour, vapid, vapour,
S of news (compare newspaper),
G of gibbet, gibbon, gist,
I of antichrist and grist,
Differ like diverse and divers,
Rivers, strivers, shivers, fivers.
Once, but nonce, toll, doll, but roll,
Polish, Polish, poll and poll.

Pronunciation - think of Psyche! -
Is a paling, stout and spiky.
Won't it make you lose your wits
Writing groats and saying 'grits'?
It's a dark abyss or tunnel
Strewn with stones like rowlock, gunwale,
Islington, and Isle of Wight,
Housewife, verdict and indict.

Don't you think so, reader, rather,
Saying lather, bather, father?
Finally, which rhymes with enough,
Though, through, bough, cough, hough, sough, tough??
Hiccough has the sound of sup...
My advice is: GIVE IT UP!

                                -- Gerard Nolst Trenité

* No, you're wrong. This is the plural of doe.

There. That should do it.

Scale and Scope: The Dynamics of Industrial Capitalism

The Modern Industrial Enterprise

The modern industrial enterprise grew in three steps:

• investments in production facilities large enough to exploit a tech­nology's potential for economies of scale and scope
• investments in national and international marketing and distribution network
• the recruitment and organizing of managers to supervise the functional units, and, more important, to coordinate them.

Managerial capitalism (topic of Chandler's The Visible Hand) refers to "a new type of capitalism--one in which the deci­sions about current opera­tions, employment, output, and the allocation of resources for future opera­tions were maid by salaried managers who were not owners of the enterprise".

Scale, Scope and Organizational Capabilities

(General theory of why and how industrial enterprises began and evolved).

The industrial enterprise is a subspecies of the business enter­prise. In addition to having a number of distinct operating units and being led by salaried managers (the two basic characteristics of business enterprises), it carries out modern production processes. The industrial enterprises grew by adding new units - dif­ferent in terms of geography, economic functions or prod­ucts. These units were added because they provided

• economies of scale: "when the increased size of single oper­ating unit producing or distributing a single product reduc­es the unit cost of production or distribution"
• economies of scope: "resulting from the use of processes within a single operating unit to produce or distribute more than one product", also termed "economies of joint produc­tion or distribution"

In production, increased output in the old, labor-inten­sive industries came mainly by an increase in size (adding more ma­chines and people). In the new, capital-intensive indus­tries in­crease in output came as a dramat­ic reduction in capi­tal/labor ratios, due to new machines and processes. Thus, economies of scale were much more important in capital-intensive industries, whereas in the labor-intensive one the large firm did not have significant advantages over the small ones. Economies of scope came from producing many different end products with the same raw material and inter­mediate processes

"The potential economies of scale and scope, as mea­sured by rated capacity, are the physical charac­teristics of the production facilities. The actual economies of scale or scope, as determined by throughput, are organi­zational. Such economies depend on knowledge, skill, experience and team­work--on the organizational human capabilities essential to exploit the potential of tech­nological processes." (p. 24)

The reason for the sudden appearance of the large hierarchical or­ganization needed to exploit the economies of scale and scope around the end of the nineteenth century stems from modern transportation and communication (telegraph, railroad, steamship, cable) that were reliable and fast enough to maintain throughput. "Thus, the revolution in communication and transpor­tation created opportunities that led to a revolution in both produc­tion and distribution". (p.26)

In distribution, the firms initially grew "by integrating for­ward into distribution and backward into purchasing" (p.28). One reason for this was the increasing "product-specificity"; as prod­ucts became more complex, it was not cost-efficient to have a wholesaler handle the difficult transaction processes. Another reason was competition; in the fierce battle for market share in an oligopolistic marketplace an intermediary who made his profit from handling products of more than one manufacturer became redundant. In ad­dition, the sales force provided information about the market. In purchasing, the reason for integration came from a need for coordination, and the cost reduction from buying in volume.

The hierarchical organization was set up along functional line; produc­tion and marketing came first, then purchasing, R & D and finance. Later came smaller departments like traffic (trans­portation), engineering, legal, real estate, and even later personnel and public relations. The head of the major functional depart­ments, the president and sometimes a full-time chairman of the board was the senior decision-making unit.

First-movers into a market or a technology got com­petitive advantages; in general, challenging the first mover meant taking customers away from him, difficult since the first-mover already had achieved economies of scale and scope compared to the challenger. Since it was difficult to challenge a first mover, only few could do it; the well-established com­panies who had the financial muscle necessary. Thus the capital-intensive markets quickly became oligopolist­ic, oc­casionally monopolistic. The firms competed for market share and profits often using price as a competitive weapon, but mostly by function­al and strategic effi­ciency.

Once the industrial enterprise was established, it grew in four ways:

defensively:

• by horizontal combination (acquisition and merger of com­petitors)
• by vertical combination (acquisition of units upstream and downstream)

offensively: (generally preferred)

• by geographical expansion
• by product diversification (the making of new products re­lated to the firm's existing technologies or markets)

The two latter strategies resulted in a modification in admin­istrative structure; the multidivisional structure ap­peared. The corporate office let go of day-to-day operational responsibilities, instead focusing on performance monitoring of the divisions, planning and implementation of long-term cor­porate strategy, and specialist advice through corporate staff to the top and middle management of the divisions. The staff usually was composed of the old financial department, a corporate personnel office and a central research laboratory. The divisions had responsibilities for a single product line, or sometimes a geographical area.

Labor-intensive industries (such as textile, lumber, prin­ting) did not provide competitive advantages for large in­tegrated com­panies. In some of these industries the mass retailers came to dominate, with large, efficient purchasing departments that elimi­nated the intermediaries.

The United States: Competitive Managerial Capitalism

Key characteristics: Oligopolistic competition between large, integrated companies, primarily in con­sumer goods.

Key influences:

• the Sherman anti-trust act (1890) which ended an era of horizontal cartel organizations, which evolved into single companies capable of enforcing rationalization on the indi­vidual units. Change of focus from controlling price and output to maximizing throughput.
• 1911: Standard Oil, American Tobacco and du Pont dis­solved by court ruling
• all the mergers and acquisitions decreased owner family influence--instead investment banks became important
• engineering (MIT 1880s) and business schools (Wharton first in 1881) to supply the production and business managers (this also in Germany, not in Britain)
• as the complexities of running a large company in­creased, the inside directors (full-time managers of single units) gained control of the instruments of power (the or­ganization), where­as the outside directors, who sat on boards, represent­ing the owners and financiers of the companies, still held the legal power over the companies.
• in the "stable" industries, such as oil, rubber and steel, expan­sion came mainly by vertical integration through mergers and acquisitions. The primary example is Stan­dard Oil, which initially achieved a monopoly in distribution, but after its dissolution became several fully in­tegrated companies com­peting in a oligopolistic market
• in food and chemicals the expansion came mainly thro­ugh diversification into new products (Du Pont started out in explosives but moved into paint, nylon, rayon, other fibers, plastics and photo chemicals) and markets (exemplified by the large producers of perishable foods, such as Anheuser Bush, who invested heavily in distribution, using new inven­tions such as the refrigerated rail car.
• in machinery the picture is more mixed, but product diversi­fication and geographical expansion was the most common strategies.
• in transportation, the main examples are Ford and GM. Ford achieved first mover advantage by dominating the low end of the auto market. Henry Ford's autocratic manage­ment style and failure to understand marketing led to a disastrous fall in market share (from 57 % in 1921 to 31 % in 1929), which was captured by GM under Alfred Sloan, and Chrysler. GM used R & D heavily, also commer­cializing the Diesel engine in locomotives, thus replacing steam engines with diesel in railways in less than a decade.
• in electrical and electronic equipment General Electric and Westinghouse became dominant first movers, General Electric being a merger of amongst other compa­nies Edison. these companies became system builders, hiring a technically trained sales force to market their products. The two leaders cross-licensed patents, giving them a stron­ghold on the market.

The complexity of the machinery industries made the manag­ers most influential; bankers and owners did rarely have much say in the strategy of the companies, except in financial difficulties.

Lessons from the American experience:

• patents not powerful deterrents to entry; the main first-mover advantage in complex products was the investment in prod­uct know-how; the chal­lengers would normally take to long to follow up
• mergers not successful when not followed up by rationalization
• advertising not a powerful deterrent either

The overriding importance of the "three-pronged investment" (production, distribution and organizational capabilities) stressed again. The complexity of the decision-making med the American companies to pioneer the multi­divisional or­ganizational structure.

Great Britain: Personal Capitalism

Key characteristics: Family-owned companies, where the own­ers prefer to take out profit as dividends and keep their day-to-day influence, lead­ing to Britain coming in late in the second industrial revolution.

The term "personal capitalism" refers to the fact that British companies to a much larger extent than their American and Ger­man counterparts were "personally managed", both in terms of having smaller managerial hierar­chies and being managed in a "personal" style; the British senior managers directly supervised middle and lower level managers, and therefore did not need the elaborate or­ganizational structures and artifacts of the American and German corporations. The entrepreneurs and their heirs played retained their power; the salaried manager never got to have the final say about corporate strategy. The owners were more interested in stable income than reinvestment in com­petitive advantage, taking out profit as dividends rather than making the "three-pronged investments". Stabilization in the market was achieved by cooperation between competitors.

The British population was smaller and more urban than the American. The mass distributors in Britain concentrated on the urban working class, carrying a smaller line of goods, integrating backward, and being managed non-hierarchically. Cooperatives were much more prevalent than in the US. Investments were made in distribution, but in production the invest­ments were smaller and followed an evolutionary pat­tern. British industrial­ists con­centrated on branded and packaged consumer goods, particularly food. A notable ex­ception to the personally managed firms was the large Irish brewery Guinness.

In the capital-intensive industries large firms appeared in rubber (Dunlop), glass (Pilking­ton), explosives (Nobel), chemicals (Courtaulds). Growth was financed from retained earnings, keeping the families in control. In machinery and electrical equip­ment, chemicals and steel, American and German firms won the competition, largely because the British industrialists failed to invest enough. Once foreign firms had made the scale and scope investments, the oppor­tunity window was difficult to reopen.

Mergers and acquisitions in Britain were motivated by mar­ket control, and the merged companies remained discrete units, with committees doing the coordination. Little rationalization was done. The family domination continued, with managers being trained at work instead of at educational institutions. There never was established a tight link between universities and the industrial community, as in Germany and USA.

Chandler divides British industries into the "stable" (oil, rubber, industrial materials, textile) and the "dynamic" (machinery, industrial chemicals and branded, packaged products).

In oil, the first world war gave the British oil companies. Anglo-Persian, (Anglo-Iranian in 1935, BP in 1954), became a vertically integrated company in the years from 1912 to 1920, creating a large, functional­ly departmentalized organization struc­ture. In the world's first oil glut in 1928, Anglo-Persian, Royal Dutch-Shell and Jersey Standard met at a hunting castle in Achna­carray in Scotland to set up an agreement which stabilized market share and prices "as is". Texaco, Gulf, Standard Oil of California and Socony-Vacuum (later Mobil) joined the Big Three in 1932; this oligopoly of the "Seven Sisters" remained in power up to the 1970's.

In rubber, Dunlop became the dominant firm by expan­ding its production and marketing facilities. The founding family, which had created its domestic dominance, lost control in 1922, after which it expanded internationally, competing successfully in all markets except USA and Canada, were the American first-movers were too strong.

In industrial materials (rayon, stone, glass, clay, paper, metal fabrication and making) some strong organizations emerged (such as Pilkington Brothers in glass, and Stewart & Lloyds in steel). The firms remained family-owned and operated, with formal or informal agreements to restrict competi­tion. Attempts at rational­ization through mergers in iron and steel had limited success. Textiles was a much more important industry in Britain than in the US, but automation was slow to come compared to USA. The British textile industry was the world's largest buyer of dyes, mainly buying from Germany.

Of the dynamic industries, machinery was dominated by American sub­sidiaries, although British auto makers such as Morris and Austin regained most of the market, much like GM and Chrysler had taken it from Ford in the USA. In electrical consumer products, EMI was the exception, becoming a world­wide market leader along with RCA. In chemicals, following extensive rationalization, Nobel and Brunner Mond merged into ICI in 1926. ICI became Britain's dominating industrial company, organized like du Pont with patents-and-process agreement which called for full exchange of technical information between the two firms. Similar agreements were made with IG Farbenindustrie, SO New Jersey and Royal Dutch-Shell for coal-based fuel technol­ogies, with German and Norwegian (Norsk Hydro) in nitrates, and with the International Dye Cartel in dyes. ICI established ties with researchers, inventing polyethylene in 1935. ICI soon rivaled du Pont in inventiveness, making it an even partner in the technologi­cal agreement. In 1962, ICI changed into a multidivisional struc­ture, with the help of McKinsey.

In branded, packaged products ("the bastion of the family firm") the only other major British firm to adopt a mul­tidivisional structure, Lever Brother (Unilever from 1929) did almost every­thing different from their competitors. It started out as a family owned soap company, investing in production, marketing and management until it was the largest soap producer in Britain. It integrated backwards, buying suppliers of raw materials around the world. From 1910 to 1920, it acquired all its major rivals, largely through exchange of stock. In 1926, despite still being a family-led opera­tion, it had an organizational structure close to multi­divisional. In 1929 it merged with the Dutch company Margerine Unie, the dominant producer of margarine in Britain. It was the largest international merger before World War II and made Unilever the largest industrial enterprise in Britain. After rationalization it retained the most of the British market, compet­ing chiefly with Procter & Gamble and Colgate-Pal­molive-Peet.

Lessons from the British experience:

• the failure to use scale as a competitive weapon, and the failure to set up a managerial organization, was the main reasons Britain slipped from second to third place in produc­tion.
• British firms paid no attention to organizational struc­ture; they developed in an evolution­ary manner rather than as a result of careful planning
• a large and stable income rather than risky investments was the rule for the family-operated companies (with some excep­tions) may be the most important reason that Britain lost out in the second industrial revolu­tion

"In sum, the collective histories of British enterprises demon­strate the essential need to create and maintain com­petitive capa­bilities in order to assure continuing profitability and productivity in an industry".

Germany: Cooperative Managerial Capitalism

Key characteristics: Large, integrated companies, primarily in production goods, managing the oligopolistic markets mainly by cooperation through negotiation.

Despite the competitive setbacks suffered by the German industries during the first World War and the crisis years of 1918-1920, the capability of the German industrial enterprises made them successful competitors abroad. The main dif­ference be­tween Germany and Britain is the dominance of salaried manag­ers, the main difference between Germany and the US is the concentration of integrated enterprises in producer's goods, the prevailing of some fa­milies, and, most important the strong coop­erative climate between companies. German companies paid more attention to their work force than their American counter­parts, creating a system termed "orga­nized capitalism" by German historians.

Germany had a more rural population pattern than Britain, especially in the Eastern parts. The coming of the railroad was more important than in Britain, where distances were shorter and the availability of alternative transport (canal, sea and road) was more available. The railway was national­ized in the 1870's at Bismarck's initiative. The buil­ding of railways and other indus­trial enterprises led to the growth of new, large financial institu­tions. The new banks played an important part in creating the German industrial enterprises, because of their relative size (com­pared to American banks) and their participation in top-level decision-making. Contrary to Britain and the US, there were no legal constraints to trade in Germany. Even so, the cartels set up were often not successful, since the trade associations had no means of enforcement.

German institutions of higher learning were pioneers in institutional­izing the systematic acquisition and transfer of knowl­edge, providing the best technical and scientific training in the world. In 1910 Germany had 16.500 students of en­gineering, compared to Britain's 1100. The advent of business schools (Handelshochschulen) came in 1900, about the same time as in the US. The ties between research institutions and the industrial community was especially strong in chemistry, electrical equip­ment, metals, non-electrical machinery and optics.

In Germany, Chandler divides up the industries in the Ger­man contem­porary terms the lesser (rubber, rayon, syn­thetic alkalies, explosives and light machinery) and the great (iron and steel, copper, heavy machinery, dyes, fibers, fertilizer and other industrial materials). Since the German economy was transform­ed into a "command economy" twice (during the two world wars) he discusses the pre-WWI and the period between the wars sepa­rately.

In branded, packaged material there was less entrepreneurial response in Germany than in the US, the direct link between producer and consumer never becoming as prevalent. In other industries there were some success, such as the two oil companies Deutche Petroleum and Deutche Erdöl. These companies, who had their sources in Rumania and the Baku area near the Caspian Sea, would probably have been major members in the world oil oligopoly had not the first world war and the subsequent Russian revolution dis­rupted them. In rubber, Continental became a major player, along with Michelin of France. Pfaff challenged singer in sewing machines. Bosch made electrical parts for cars, AEG became a giant in electrical machinery. In general, the first mover dominated the industry.

The great industries in Germany clustered around heavy machinery, chemicals and metals. In machinery, economies of scope were exploited. In locomotives, Hanomag expanded into trucks, BEMAG into typesetting machines. Other makers of transportation equipment included MAN, Opel and Deutz. In electrical machinery, Siemens and AEG (Allgemeine Elektricitäts-Gesellschaft) dominated, con­centrating production in massive factories and employing world-wide sales organizations. These two companies, together with GE and Westin­ghouse, shared the world market. Siemens diversified into telegraph and com­munications, competing with AT&T. Together they started Tele­funken, the continental pioneer in radio.

In chemicals the German industries became dominant thr­ough three large companies: BASF, Bayer and Hoechst. These companies exploited the economies of scope heavily, expand­ing from dyes into pharmaceuticals (Bayer: Aspirin, Hoechst: Novo­cain). AGFA (somewhat smaller) diversified into photographic film. In pharmaceuticals, Schering, Merck, von Heyden and Riedel built global enterprises before WWI, giving Germany a world lead in chemicals. The companies formed IG's (Interessengemein­schaften) to coordinate the markets.

In steel, Germany was the leader in Europe, with large works primarily located in the Ruhr area. These works (Thy­ssen, Krupp and Stumm amongst others) integrated forward into machinery.

The first World War took away the markets for German industrial enter­prises. Their facilities in the allied countries was seized by governments, later acquired by their com­petitors. Competitors from foreign countries moved in. After the 1918 armistice came a political revolu­tion, a weak government, infla­tion and hyper-inflation, mainly due to the harsh terms of the surrender. France occupied the Ruhr area in 1923. The Dawes plan of 1924 stabilized German economy. From then on the recovery was impressive; generally, the German companies re­gained their market shares in less than five years. Exceptions were oil, where the British Anglo-Persian Oil company took over, and in to a certain extent the lesser industries. The German auto­mobile industry started, with companies like Daimler-Benz, Adam Opel, BMW, Adler­werke, Audi, Horch, DKW and Wanderer. Ford, Chrysler and GM established German subsidiaries, but were locked out by tariffs until Sloan of GM bought 80% of Opel in 1929. Opel then quickly became Europe's largest producer of cars. Ford overinvested in a large plant and was priced out of the market.

In the great industries, recovery was rapid. Siemens and AEG, having lost all their foreign facilities, still recovered to their old glory by 1929. In steel, were Germany lost 70% of its inland ore sources to France, rational­ization was needed and came with the merger of most of the industry into the giant Vereinigte Stahl­werke in 1926. In chemicals, the for­mation of I.G.Far­ben­industrie A.G., a giant alliance between Bayer, Hoechst, BASF and 5 other companies in 1925 was followed by rationalization, making the IG the "most powerful industrial enterprise both home and abroad".

Conclusion

• the dominance of owning families, who preferred income over growth (that is, took dividends rather than reinves­ting their profit) in British companies was the main reason for the British industries to lose market share, and subsequent­ly profitability, to the American and Ger­man companies.
• organizational capabilities the key. These organizational capabilities were mainly devel­oped in firms that had to com­pete in production or market development, whereas the more traditional companies, in where the production process re­mained simple and the markets stable, this did not happen
• first movers often let their advantage disappear, sometimes because the managers moved to competitors (Ford is a poi­gnant example).
• challengers to first movers often large, well established companies moving into new markets
• the role of managers was to develop existing businesses; invention left to outsiders; subsequently, investment in R&D was low
• diversification key to growth

After the wars:

Chandler gives a short history of the evolution after the second world war. The most important trends were:

• the eroding of the British market shares, given away to Ger­many and USA
• the coming of Japan, who mastered technology transfer
• the diversification in the late 60's and the divestitures in the 70's (leading to a lack of com­munication between corporate and functional offices).
• the change in ownership: form long-term oriented in­dividuals and institutions to portfolio managers
• the coming of managerial capitalism in all countries, even Britain
• the intensified competition from the 60's on
• the coming of information technology

There is one person with the fortitude to put her money where her mouth is, I say...

I just spent the Christmas vacation under the covers with a flu, rereading this collection of three of the "Smiley" novels (in a Norwegian translation, which isn't quite the same thing, though the translator is good).

The arena John le Carré creates here (or, rather, reports from, since he was a part of the real thing for a while) is the stealthy and paranoid world of Cold War espionage and counter-espionage, with the physically unimpressive spy-hunter George Smiley as the absent-minded and socially inept anti-hero.

The three books follow each other, not unlike the three main parts of "The Lord of the Rings" (come to think of it, it shouldn't surprise me if le Carré structured it this way on purpose): The first book (Thinker, Tailor, Soldier, Spy) concerns the hunt for a "mole" inside Circus, an thinly veiled version of MI6, defectors and all. The second has Smiley as a less central character, instead giving an operational agent named Jerry Westerby (the "Honourable Schoolboy" of the title) first billing, as he tries to locate and then secure an important Chinese defector through investigations during the final weeks of the Vietnam War. The third ("Smiley's People") concerns Smiley's attempt to penetrate the Soviet intelligence organization in a final battle with his nemesis, a the shady and very competent spymaster Karla.

I like these books for their accurate depiction of the fear underlying much of the cold war, the way "little people" become pawns in a game they (and, many times, not their bosses either) understand. Aside from the gloriously tragic figure of Jerry Westerby, the spy game is one of meticulous investigations, bureaucratic frustrations, occasional high hopes with correspondingly deep disappointments. How far can you go in order to win - can you sacrifice people, sometimes with their consent, for an uncertain victory in a cause you are no longer sure about? I think these three books are the best John le Carré wrote, with the possible exception of "The Little Drummer Girl". Reading them again brought back the haunting specter of the dictatorship next door, the nagging fear most people of my generation grew up with, the uncertain enemy with powerful weapons, fought by vicarious means with a realization that the individuals involved had very little to say in the big decisions.

The question remains - who, if anyone, had?

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Levenson draws lines to modern economy and shows how Newton had a quite sophisticated understanding of modern economy, was a smart investor, particularly in the South Sea bubble in 1720, and then fell victim to his own greed. Highly recommended!

Now Jay Leno, car collector and talk show host, has made a version of this for LA, doing a lap around Mulholland Drive and Beverly Hills in a Mercedes SLS AMG. Though not as exciting as the original (given that the driver is identified, it would have landed him in jail), it nevertheless induces some of that sinking stomach feeling from going really fast around a bend with a good car. (Note that the speedometer is never shown.) Enjoy:

(Yes, it is kind of childish, I know. But fun.)

The raw film from the front camera is now being offered as a free Bittorrent download under a CC license. There is even a competition (in Norwegian only) for best reuse of the footage.

Kudos to the people behind NRK Beta, the experimental part of NRK, who again come up with interesting ways of making their material available!

Update 20.12: Boingboinged!

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