Financial Daily from THE HINDU group of publications
Monday, Jun 07, 2004
Corporate - Insight
Towards an organisational economy
With C. K. Prahalad, Ghosal was one of the two Indians who, in recent times, had made the weightiest contributions to the theory and practice of strategic management.
While Prahalad built his edifice of core competence on the resource-based view of the firm first advanced by Edith Penrose in the late 1950s and later resurrected by Birger Wernerfelt in the 1980s, Ghosal, for his part, built further on the competency-based perspective of Prahalad to advance a new perspective not only of the firm but the economy as a whole.
To that extent, Ghosal's contribution transcends the domain of management and enters the realm of political economy.
Managerial theory of the firm
Perhaps Ghosal is best known for his article `Beyond the M form: Towards a Managerial Theory of the Firm', which appeared in the Strategic Management Journal in the summer of 1993.
This was when Hamel and Prahalad had shot into prominence with their theory of core competence and their perspective of strategy as stretch and leverage.
In order to acquire dynamic capabilities to adapt to fast-changing environments, firms ought to focus on developing core competencies which would enable them to continuously innovate and thus earn Schumpetarian rents over prolonged periods of time.
Hamel and Prahalad came out strongly against the SBU (strategic business unit) mentality, arguing that getting out of the compartmentalisation that this mentality engendered was a key pre-requisite for building core competencies.
Ghosal, ever the theoretician, at once realised what these developments portended for theory. If successful firms were beginning to view themselves as a portfolio of capabilities rather than businesses, he reasoned, the economic and behavioural theories of the firm were no longer capable of explaining the emerging realities. For, the economic theory of the firm revolved around the primacy of markets, but here were firms such as GE and ABB that had turned inward and began viewing themselves as being involved in the task of developing capabilities.
Again, the behavioural theory of the firms revolved around the negotiation of interests among different constituencies of the firm, but here were firms that had got out of the SBU mindset and in which co-operation across divisional boundaries was a redeeming feature.
Clearly, there was the need for a new theory of the firm that looked upon organisations as collectivities of people capable of self-volition. This need Ghosal proceeded to fill, along with Bartlett, through their managerial theory of the firm.
The managerial theory of the firm attempts to explain firm behaviour from a managerial perspective. Accordingly, the way managers perceive reality, the premises that they make, and the issues that they consider important determine the coming into existence and the subsequent behaviour of firms. In other words, firms are what managers make of them.
According to Ghosal, The new, transnational organisations (the exemplar being ABB) have the following characteristics that clearly set them apart from traditional organisations (an exemplar being Westinghouse):
How can one explain the emergence of such organisations? From the platform of the managerial theory of the firm Ghosal answers this question thus: the managers in these organisations had gone beyond strategy to purpose, beyond structure to processes and beyond systems to people.
Strategy, structure and systems were still there but these three Ss had yielded centre-stage to the three Ps purpose, people and processes.
Beyond strategy to purpose
The new organisation, to Ghosal, is a value creator rather than a value appropriator. In advancing this bold proposition, Ghosal picked up issue with Porter.
Terming value appropriation in cutthroat competition with customers, suppliers, competitors and employees as being central to the Porterian model, he questioned whether current reality was indeed that harsh.
Management, to Ghosal, was not the art of appropriating to oneself as big a chunk as possible of a fixed pie, but creating an expanding pie that would generate enough for all.
The model corporation is a continuous innovator creating value for society. And this was becoming a reality because of the managers of corporations such as ACC going beyond strategy to enunciating an organisational purpose in terms such as "to improve living standards." These managers define their role in society in their own terms, not waiting for a `corporate social responsibility' to be allotted to them by society at large.
Beyond structures and systems
The fact that the modern corporation has to be a competency-based one necessitates going beyond vertical management characterised by hierarchical structures to horizontal management with its emphasis on processes which, in turn, means more attention to co-ordination than vertical control.
Ghosal's model corporation is one that is free from the `SBU' mindset; that places value on teamwork and emphasises that knowledge and technology belong to the whole organisation.
Vertical management with its emphasis on division of labour and vertical control fits well with an emphasis on systems organisational routines or procedures that human beings subordinate themselves to.
Horizontal management, because of its very nature, cannot be accomplished without the active and enthusiastic participation of the people who make up the organisation.
Marxism through other means?
Ghosal's managerial theory of the firm and his replacing the three Ss with the three Ps are significant and bold contributions to strategic management. But he went on to advance a much bolder viewpoint with much broader ramifications in his `A New Manifesto for Management' that was published in a special issue of the Sloan Management Review.
If this brings to mind Marx's Communist Manifesto, one has only to remember that Ghosal remained to his last days a "middle class Bengali" intellectual as he loved to describe himself. Ghosal's manifesto advances the rather bold view that we are living not in a "market economy" but in an economy that is coming more and more to resemble what he calls an "organisational economy".
While Marx saw in the working class of the 19th century the progressive force that would usher in the change from a market economy to a socialist economy, Ghosal saw in the managerial class of the 21st century the harbinger of a change from the market economy to an organisational economy.
Marx pinned his hopes of eliminating exploitation on the socialist economy while Ghosal saw in the organisational economy the way out of value appropriation. Finally, Ghosal predicted a decline in the role of the state not very unlike Marx who predicted that the state would wither away.
Are we to believe that the modern multinational corporation is fast becoming a creator of value for society than an appropriator? Those of a Leftist dispensation may perhaps take strong exception.
Perhaps Ghosal may come under fire from diehard believers in the magic of the market as well. Whatever the case, there is no denying the fact that Ghosal took a giant leap from a small platform of observed facts the hallmark of all great theoreticians. May his soul rest in peace.
(The author is on the faculty of the Institute for Financial Management and Research, Chennai.)
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