Sweden at the Edge: Lessons for American and Swedish Managers [Reprint 2016 ed.] 9781512804164

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Sweden at the Edge

Innovations in O r g a n i z a t i o n s Series Jean-Marc Choukroun, Editor

Also in this series: The Social Engagement of Social Science: A Tavistock Anthology Edited by Eric Trist and Hugh Murray Volume I: The Socio-Psychological Perspective

Sweden at the Edge Lessons for American and Swedish Managers Edited by Michael Maccoby

njih, UNIVERSITY OF PENNSYLVANIA PRESS

Philadelphia

Copyright © 1991 by Michael Maccoby All rights reserved Printed in the United States of America Library of Congress Cataloging in Publication Data: Sweden at the edge : lessons for American and Swedish managers / edited by Michael Maccoby. p. cm. — (Innovations in organizations series) Includes bibliographical references and index. ISBN 0-8122-8153-5 1. Industrial management—Sweden. 2. Corporate culture—Sweden. I. Maccoby, Michael, 1933- . II. Series. HD70.S8S84 1991 658'.009485—dc20 90-44875 CIP

Contents

Preface Michael Maccoby

Introduction: Why American M a n a g e m e n t Should Be Interested in Sweden Michael Maccoby

Part I: Challenge and Response 1. Sweden's Industrial Transition Bo Ekman

19

2. Business a n d Union Leaders Respond Michael Maccoby

37

3. T r a n s f o r m i n g the Public Sector Jan Erik Rendahl and Michael Maccoby

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4. Small Business in Sweden: A Growth in Two Directions Ake Beckérus

57

Part II: Organizational Transformation 5. Scandinavian Airlines System (SAS): Strategic Reorientation a n d Social C h a n g e Anders Edström

77

6. Production Philosophy at Volvo Berth Jönsson

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7. Volvo C o m p o n e n t s : From Sweatshop to Playground Jan Forslin

121

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Contents

8. T h e Swedish Labor Unions Horst Hart

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9. Beyond Negotiation: Leadership for C h a n g e Jan Borgbrant and Michael Maccoby

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Part III: Sweden in America 10. Swedish Direct Investment in the United States Gunnar Hedlund and Lars Agren

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11. Managing International Gunnar Hedlund

201

Business: A Swedish

Model

12. Volvo Truck Corporation Lars Agren and Jan Forslin

221

13. Ericsson Telecom Anders Edström and Richard Margolies

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14.

Gustavsberg Lennart Strömberg

Part IV:

279

Conclusion

15. Lessons for Swedish Managers Lars Agren, Anders Edström, and Michael Maccoby

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16. Lessons for American Michael Maccoby

297

Managers

Index

303

Contributors

315

Preface

About This Book This book has grown out of my fifteen-year relationship with researchers, business leaders, union officials, and friends in Sweden. From the start, what appealed to me about Sweden, as it does to many other Americans, was the pragmatic Swedish focus on both economic and social development. I believe that the United States can learn f r o m both J a p a n and Sweden, but that the lessons from the two countries will be different. Both societies have achieved success not by a single emphasis, but by balancing values and interests. Both have created innovative organizations in the private and public sectors. Both emphasize consensus and equity. But key values are different. In the case of J a p a n , the ideal is to mold the individual to find fulfillment in serving the group. In the case of Sweden, it is to expand democratic participation in decision-making and to create a sense of security and fairness that encourages everyone to contribute to national development. Over the years, with not uncritical admiration, I have observed Sweden attempting to realize these values as it faces global competition and the rising expectations of a more educated population which takes for granted the benefits of the welfare state. Since the late 1950s, when David Riesman and I, inspired by innovators such as Edwin Land of Polaroid, envisioned the workplace as a new frontier for American ingenuity, I have scanned the business world for new modes of work that stimulated both economic and human development. 1 During the early 1970s in Norway and Sweden, I f o u n d people who both shared this goal and were creating the models. In 1973, I met Berth Jönsson of Volvo and began what became a close collaboration and friendship. We were on a panel speaking about "humanizing work" at Principia College, a small liberal arts college in southern Illinois. We found ourselves a m o n g experienced consultants and social scientists who argued that humanizing work was intellectual utopianism, since the majority of workers were satisfied and American

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industry was extremely profitable. "If it ain't broke, why fix it?" was the message. Having helped to organize a symposium on Technology and the Humanization of Work at the American Association for the Advancement of Science in 1971 and subsequently attending Labor Department meetings with companies and unions, I described experiments in job enrichment and organizational change at General Foods, Motorola, AT&T, and elsewhere which had increased productivity and stimulated ordinary workers to expand their knowledge and take on more responsibility. I reported meetings with autoworkers who resented the dehumanized assembly lines which did not allow them to build quality products. I argued that there was unnecessary material and human waste at work and that we were ignoring opportunities for improved quality and productivity. Jönsson, then assistant to P. G. Gyllenhammar, Volvo's visionary young chief executive officer (CEO), agreed. Faced with the rejection of traditional factory work by an educated Swedish work force, Gyllenhammar believed that in order both to attract Swedish workers and to gain the levels of quality and productivity demanded by an increasingly competitive global market, Volvo had to make work more challenging. He had set in motion the Kalmar project which would become a worldfamous model for humanizing factory work. Later that year, Sidney Harman, CEO of Harman International Industries, and Irving Bluestone, vice president of the United Auto Workers (UAW), asked me to direct a study project with the goal of improving the quality of working life in a Bolivar, Tennessee, auto parts factory. I sought help from Einar Thorsrud, director of the Norwegian Project on Worker Participation (which was somewhat misleadingly translated in the United States as "industrial democracy"). As described in Chapter 7, Thorsrud also influenced organizational development at Volvo Components. He agreed to come periodically to Bolivar to teach us his methods of gaining employee participation in the process of improving productivity and the quality of working life. In 1974, with Thorsrud's help, I conducted UAW officials and Harman managers on a tour of Scandinavian projects; the high point of the trip was a visit to the Kalmar plant. The Americans were both impressed and puzzled by the differences between Kalmar and their own experiences. At the Volvo plant, technology had been designed as an economically sound tool (meaning adapting the tool to human needs) for workers who thus gained some control over their tasks and cycle time. The car moved on carriers with a mechanism that turned the chassis on its side so that the workers did not have to crouch beneath it. The production area was relatively quiet, clean, and well lit by windows, and there were break areas where

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workers could solve a problem together or relax with a cup of coffee. All this was amazingly impressive to the Americans. What puzzled them was a conversation with a worker who felt he had been passed over for a job for which he had seniority. He felt he had no right to protest. One of the UAW leaders who heard his story said, "I'd slap a grievance on management." Whatever the merits of this worker's case, the Americans began to form a view of U.S.-Swedish differences which was reinforced at other meetings. Here was a society with a strong trade union movement pushing humanization of the workplace in terms of ergonomics, health and safety, and more challenging work. A very few innovators like Gyllenhammar saw that this force for humanization could be shaped to motivate the work force to produce higher quality products. But to American union leaders the Swedish vision was paternalistic. It did not emphasize individual rights or the bottom-up participation in change idealistically sought by the Norwegians (whose project fizzled in the late 1970s when the discovery of oil turned national interest away from manufacturing). In 1975, Jönsson asked me to work as a consultant to Volvo managers designing an auto assembly plant in Chesapeake, Virginia. The idea was to take a step beyond Kalmar and create a model for the American auto industry, combining the Swedish approach with the Bolivar emphasis on worker participation. The Chesapeake plant was eventually canceled because of the falling car market, but the lessons of Kalmar did make their way into America. At first, large American auto companies put down Kalmar. One General Motors visitor summed it up in 1975: too small and expensive for large-scale production. Kalmar produced some 30,000 cars a year compared to hundreds of thousands at large GM plants. It took ten years to show that Kalmar was about 20 percent more productive than larger plants with traditional assembly lines, a result of less waste, less need for supervision, better material handling, and continual improvement following worker suggestions. Eventually, General Motors learned that "good tech" is sometimes better than high tech and bought Kalmar carriers for its Saturn plant. In 1985, I met with Saturn and Volvo managers who compared concepts. The Swedes were at that time designing the newest Volvo assembly plant at Uddevalla, which goes, as they say, two steps beyond Kalmar in transforming the Ford assembly line into a self-managed craft team supported by a highly automated material handling system. The Uddevalla plant began production in the spring of 1989; it is too early to chart its results. I also learned about Sweden from other relationships with Swedes. In 1973, at a meeting of philosophers in Yugoslavia, I met Olof Lager-

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Crantz, t h e n editor of Dagens Nyheter, Sweden's largest newspaper, and we began a friendship a n d continuing conversation about Sweden. Lagercrantz introduced me to Swedish writers, some extremely critical of the welfare bureaucracy. I learned a different point of view about Sweden f r o m H a n s Zetterberg, who at the time was C E O of SIFO, Sweden's leading opinion polling company, and later became editor of Svenska Dagbladet, conservative daily. Concurrently, I had also been learning about Sweden at meetings of union and m a n a g e m e n t leaders organized by L e n n a r t Arvedson, then at SNS, a society f o u n d e d to f u r t h e r the positive role of business in Swedish society. In the later 1970s, I had several meetings with officials of t h e metalworkers' union (Metall) to discuss issues of leadership, organization, and ownership of industry. I debated their negative view of business leaders and their ideal of leaderless groups. I a r g u e d that good leadership was essential for c h a n g e and that since all g r o u p s had leaders, formally or informally, the vision of a leaderless g r o u p was unrealistic. Given their fear of d e m a g o g u e s and power seekers, they n e e d e d a better model of leadership with controls o n the excessive use of power. T h e s e discussions were a stimulus for my interviewing Gyll e n h a m m a r , w h o m the u n i o n leaders respected, a n d writing about him as a creative chief executive in The Leader ( 1981). I wanted to show that the ideal leader could combine successful business practice with caring about people a n d sharing power with unions. A f t e r the publication of that book, L e n n a r t Strömberg, m a n a g i n g director of the Swedish Council f o r M a n a g e m e n t a n d Work Life Issues (FArâdet, Râdet for företagslednings och arbetslivsfrâgor), invited me to be a consultant to o n e of the council's two m a j o r projects: on the kind of leadership n e e d e d by Sweden to a d a p t to the c h a n g i n g international business e n v i r o n m e n t . T h e other was a study of societal factors that influence business development. T h e Swedish Employers' C o n f e d e r a tion provided the council's main f u n d i n g , and G y l l e n h a m m a r chaired a distinguished board of academics. W h e n I met the board in 1982, o n e professor said, "This is the kind of problem-oriented research that cannot be d o n e in a Swedish university, because faculties only reward research that tests or develops a theoretical paradigm." T h e board asked m e to help discover the best examples of Swedish leadership, a n d to describe models for emulation a n d develop criteria for selection a n d education of leaders. Strömberg, m e m b e r s of the board, and some of the researchers were particularly interested in learning and employing the theory of social character, especially as I had used it in studies of managers a n d g o v e r n m e n t leaders. 2 For the next five years, I worked with a g r o u p f r o m the leadership

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project team, headed by Anders Edström, especially Àke Beckérus, J a n Borgbrant, J a n Forslin, J a n Erik Rendahl, and Strömberg. 3 T h e Swedish leadership project was an exciting opportunity to study the social character of the leadership of a whole country. O u r research strategy was to interview national leaders from the major sectors: political, business, public administration, and trade unions. T h e n we would take a few organizations in the process of change and headed by one of these national leaders, to study in depth. We discussed how to define national leaders. Which CEOs were national leaders? Would we include influential writers? When we tried to pick such leaders, there was too much difference of opinion a m o n g the researchers about which writers should be classified as national leaders. We agreed that a national leader must represent a constituency and be accountable for his or her actions. This accountability is clearer in the case of political and trade union leaders, but business leaders are also accountable, since they serve at the discretion of boards of directors and, as general directors, at the discretion of government ministers. We chose business leaders who were CEOs of large companies and also took a public role in national policy discussions. Percy Barnevik, CEO of Asea Brown Boveri, said: "I have no inclination to be a public figure, but the interests of my company in energy and high tech require that I take part in public discussions." Bjorn Svedberg, CEO of L. M. Ericsson, said: "I know that my company will need more electrical engineers than Sweden now produces. I have to try to influence public policy to develop the h u m a n resources needed by o u r industry."4 In May 1984, after we had interviewed the twenty-eight leaders, we invited them to discuss our findings and advise us on how we could best apply them. Eleven leaders attended and urged us to publicize what we considered the best leadership models and to explain why. In the spring of 1985, I published two articles on the study in Dagens Nyheter,5 emphasizing the importance of leadership in adapting to changing markets, technology, and social values, and describing Barnevik, J a n Carlzon of SAS, Gyllenhammar, and Allan Larsson of the Labor Market Board as exemplary models of leadership for business and government. In December 1985, we published the interview results in Swedish 6 but continued the in-depth studies of organizations through 1987. In December 1989, I again interviewed Ingvar Carlsson about his approach to leadership and the issues facing Sweden because of the Common Market and changes in Eastern Europe. T h e businesses we studied with interviews at all levels included Scandinavian Airlines System (SAS) (chapter 5) and Volvo (chapters 6,

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7, a n d 9). Beckérus, using social character theory in an innovative way, also studied a sample of small business leaders (chapter 4). In 1985, we e x p a n d e d the leadership study a n d with the cooperation of G u n n a r H e d l u n d , director of the Institute of International Business (IIB) at the Stockholm School of Economics, a n d his research associate Lars Âgren, we studied Swedish businesses in the United States (chapters 10 to 15). T h e study included a survey a n d case histories of the Volvo White T r u c k Corporation a n d Ericsson Telecom, as well as a smaller company, Gustavsberg. We believe this combination of survey a n d cases offers useful lessons to Swedish m a n a g e r s who seek success in the United States. Hedlund's analysis of the Swedish international corporation provides ideas f o r American managers. To u n d e r s t a n d Swedish industry, it is necessary for Americans to appreciate the i m p o r t a n t roles of trade unions a n d g o v e r n m e n t agencies. Horst H a r t , while not a m e m b e r of the leadership project, has written a description of how Swedish trade unions function at various organizational levels (chapter 8). T h e g o v e r n m e n t agencies studied were the Prison a n d Parole Board, the Building Board, a n d the Labor Market Board (chapter 3). In Sweden, the social character described in the introduction a n d elaborated in the cases both spurs on and reins in the forces of change. T h e s e historic forces are described by Bo E k m a n in chapter 1. I first met E k m a n in 1978, when, as senior vice president of Volvo f o r strategic p l a n n i n g a n d m e m b e r of the executive committee, he scanned the business e n v i r o n m e n t f o r G y l l e n h a m m a r and helped design the architecture f o r Volvo's expansion into new products a n d restructuring into decentralized businesses. In 1987, E k m a n left Volvo to h e a d the H o l e n G r o u p (including SIFO, SMG, and Holen N o r t h America, also f o u n d e d in 1988 to d o market research a n d organizational consulting in the United States). In putting this book together, the a u t h o r s met periodically to discuss the chapters a n d the lessons implied. T h u s , Sweden at the Edge became the final p r o d u c t of the leadership project, an o p p o r t u n i t y to summarize what we learned a n d to place it in an international context. S u p p o r t f o r this book has also been provided by the "Sweden Works" p r o g r a m , h e a d e d by E k m a n . To summarize, Sweden at the Edge combines different methods, including surveys, interviews, a n d participative observation. My own g r a d u a t e education at H a r v a r d University's Social Relations Departm e n t combined social and clinical psychology, sociology, a n d cultural anthropology, a n d subsequently I was trained as a psychoanalyst. I drew on all of these disciplines in working with the a u t h o r s of the chapters a n d a t t e m p t i n g to integrate their findings. O u r goal was not

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to describe the complete range of Swedish companies, government organizations, or leadership styles. Rather, we focussed on companies and bureaucracies at the cutting edge of managerial innovation, those we judged to be the models. These we tried to view objectively, weaknesses as well as strengths, and we did not hesitate to offer ideas for improvement. Indeed, one reason the organizations were so open is that they expected us to reciprocate with our analysis and suggestions. We have tried to set these cases in a holistic cultural and historical context to help the reader understand Swedish-American similarities and differences. My ability to work as a researcher and consultant in Sweden has been significantly enhanced by the fact that I have worked as a consultant for both unions and management in the United States. This is as rare in Sweden as it is in the United States, and Swedes sometimes ask me how I can possibly work for both "sides." The simple answer is that I have been hired independently by managements and unions to help with organizational and leadership development. And in the case of AT&T and the Communications Workers of America, I was hired jointly as consultant on service quality and the quality of working life. However, I believe the full answer has to do not only with my competence as a consultant, but also my values. As both researcher and consultant, I have evaluated organizations in terms of three criteria: their effectiveness in achieving economic goals; their impact on the well-being of employees; and their contribution to creating a free, democratic society. Free labor unions are an essential institution in a democratic society, to protect the rights and further the interests of employees who, individually, would be relatively powerless. But unions, like managements, can also abuse power. There is a large difference between on the one hand, the Swedish unions which cooperate with management to improve productivity and support education and research into improving the working conditions and competence of members, and on the other, Argentinian unions which have supported Peronism and blocked management at every turn. My interest in unions is not only because I share with them a vision of social justice, but also because I believe more competent and cooperative union leadership will better serve the interests of union members and the country. Of course, improved unions require enlightened management which like Volvo and SAS accept responsibility for improving the relationship. Swedish organizations have, I believe, used me well as a researcher and consultant. I feel that I have also used Sweden well as a model for American industry: an R&D lab for industrial relations and government-business cooperation. In my work with American companies and

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unions, after the trip to Kalmar in 1974 with autoworkers, I have often pointed to Sweden as an example of dealing with conflict creatively by emphasizing areas of mutual interest between labor and management. In 1984, when I brought a group from AT&T and the Communications Workers of America to visit Scandinavia, they were impressed by Volvo's involving the unions in key strategic decisions and by Carlzon's transformation of SAS's bureaucratic hierarchy into the business traveler's airline by educating and empowering the frontline worker to satisfy customers more effectively. On their return, AT&T management began to inform union leadership about company strategy, and the SAS model has been much discussed as helpful for AT&T's transformation from bureaucratic monopoly to a customer-driven business. In 1988, to inaugurate the 350th anniversary of Sweden's first New World settlement in Delaware, I invited Allan Larsson and Volvo representatives, including a factory worker, to describe the Uddevalla project to students, faculty, and Massachusetts state government officials at the J. F. Kennedy School of Government, Harvard University. This was an opportunity for Americans to hear about the governmentbusiness cooperation that transformed a moribund shipbuilding facility into a twenty-first-century auto plant. During the fifteen years I have visited Sweden, I have gradually developed deep personal and working relationships. In a way, I have felt like an American friend to the Swedish family, one who is trusted with intimate knowledge, an outsider used as a speaking partner to gain a more objective view of oneself. In this role it is not easy, perhaps impossible, to maintain detached objectivity. Yet, I have been most appreciated when my admiration and affection is balanced by tough criticism, and I have not withheld any. In this spirit, I hope that this book will be as useful to Swedish managers as it will be to Americans. Michael Maccoby Washington, DC July 1990

Notes 1. David Riesman and Michael Maccoby. "The American Crisis: T h e Cold War and Political Idealism," in James Roosevelt, ed., The Liberal Papers (New York: Doubleday, 1962). 2. See Erich Fromm and Michael Maccoby, Social Character in a Mexican Village (Englewood Cliffs, N.J.: Prentice-Hall, 1970); Michael Maccoby, The Gamesman: The New Corporate Leaders (New York: Simon & Schuster, 1976); The Leader (New York: Simon & Schuster, 1981); and Why Work: Leading the New Generation (New York: Simon & Schuster, 1988).

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3. My colleagues Richard and Cynthia Margolies, and later Douglass L. Carmichael, made visits to Sweden and helped to teach the theory and methods of social character to members of the leadership project. 4. Besides these, we interviewed Gyllenhammar; Antonia J o h n s o n , CEO of A. J o h n s o n ; Curt Nicolin, formerly CEO of Asea and then head of the employers' confederation; Tore Browaldh, then vice chairman of the Swedish Handelsbank; and Anders Althin, formerly CEO of Gambro. Political leaders included Ingvar Carlsson, currently social democratic prime minister; Kjell-Olof Feldt, f o r m e r finance minister; Carl Bildt, head of the Moderate (conservative) party; T h o r b j o r n Fälldin, former prime minister; Bengt Westerberg, head of the Liberal party ; and Lars Werner, head of the Communist party. T r a d e union leaders included Leif Blomberg, head of the metalworkers' union; Goran Kalin, formerly head of the SACO/SR, the professional employees' union; Stig Malm, head of LO, the central labor organization; Bjorn Rosengren, head of TCO, the central white-collar employee organization; Ingvar Seregard, formerly head of PTK, the bargaining organization for white-collar employees; Sune Tidefelt, formerly head of the foreman's union; and Olof Ljunggren, managing director and chief bargainer for the employers' confederation (SAF). T h e general directors in the public sector included Allan Larsson, of the Labor Market Board (AMS) and currently finance minister; Lennart Ljung, formerly Supreme C o m m a n d e r of the Armed Forces; Hans Lowbeer, formerly of the National Building Board; Bo Martinsson, of the Prison and Parole Board; Karl G. Scherman, of the Social Security Agency; Harry Schein, managing director of the National Investment Bank; and Carl Olof Ternryd, of the Military Materiel Procurement Agency. I interviewed all of these leaders, always accompanied by Edstrom, Rendahl, or Strömberg. Most leaders spoke fluent English. Some of the union leaders and Fälldin spoke in Swedish with my research colleagues translating, but all understood my questions in English. 5. March 29 a n d April 5, 1985. 6. Anders Edström, Michael Maccoby, J a n Erik Rendahl, and Lennart Strömberg, Ledare for Sverige (Lund: Liber, 1985).

Introductions W h y A m e r i c a n Management Should Be Interested in Sweden Michael Maccoby

Sweden is at the edge geographically, politically, and in terms of managerial innovation. At the northern edge of Europe, Swedes debate their relationship to the Common Market. In the 1930s, observers acclaimed Sweden as the middle way between Soviet communism and Western capitalism. 1 Now that communist ideology has collapsed, Sweden is no longer in the middle but at the left edge of Western ideology, a welfare state made rich by large capitalist companies, a free society that guarantees cradle-to-grave security. Sweden has become by default and example the ideal for Eastern European countries that want the fruits of competition without losing the ideal of solidarity. It may seem paradoxical that Swedish-led companies such as Volvo, SAS (a public-private Scandinavian company), and Asea Brown Boveri (a Swedish-Swiss company) are at the leading edge of managerial innovation, including new forms of production, service management, internationalization, and making use of unions as resources. This book attempts to show how the best Swedish organizations are successful at adapting to global markets by balancing social and economic values. My first working title was "Sweden Transforms Itself: Lessons for American Managers," but some of my Swedish colleagues objected. They said that only a few large companies and perhaps one or two gove r n m e n t agencies have really transformed themselves. Most Swedes, particularly those working in the public sector, resist change. T h e total tax burden, despite the newly lowered income tax, remains too high. Inflation in early 1990 was at 8.8 percent. Wages had soared by 11 percent during the previous year without corresponding productivity gains. Other European countries have overtaken Sweden in average income. Private sector employment is mostly created by the big companies, while small firms are stifled by government regulation and

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many fail. T h e Swedish system has reached its limit. T h e best Swedish companies may provide models f o r others, but it should be made clear that Sweden also presents lessons for Americans about what not to do. This self-criticism is typically Swedish. It holds Sweden to high standards but takes f o r granted remarkable achievements. This book presents some of Sweden's successes, recognizing the difficulties adapting to global competition and new values that threaten the Swedish solution. T h e prevailing Zeitgeist of free enterprise, unbridled individualism, antibureaucracy, and hostility to government and trade unions is a strong wind blowing even in Sweden. Yet traditional Swedish values provide a safety net for the high-wire activity of the global marketplace. T o build on the best of its achievements as described in this book is a challenge to Swedish managers and an opportunity for Americans to learn useful lessons.

American V i e w s of S w e d e n Those Americans most interested in Sweden view its prosperity and humane government programs built on labor-management cooperation as a model f o r the United States, one that is superior to the Japanese supercompetitive, authoritarian spirit. Those Americans who reject Sweden as a model are put o f f by high taxation, government spending, and over-regulation, which they, together with most Swedish businessmen, believe stifles opportunity and entrepreneurial initiative. Both views can be supported by facts, but neither pays attention to the Swedish success at creative capitalism. Sweden has built large successful international companies, supportive networks of banks and industries, with cooperation between business and government. T h e r e are lessons to be learned f r o m both Swedish organization and cultural values, including the Swedish drive to learn f r o m and adapt to a changing world economy. Some of these lessons are negative as well as positive. Sweden does not present a perfected model, even to its own leaders. T h e r e is continual debate over economic policy, particularly taxation and the costs of the public sector and transfer payments. Leaders in both business and government recognize that productivity must be improved, especially in the service sector. T h e y are aware that if the economy falters, with a negative balance of payments and rising inflation, the conservative press will be quick to declare the Swedish model dead, and financial markets will respond accordingly. O n e of Sweden's strengths to be admired is self-criticism and pragmatic experimentation based on values of economic and social development. This book reports some of that critical self-study.

Introduction

3

This introduction presents studies of Swedish leadership and organization in business and g o v e r n m e n t within a larger cultural context. A l t h o u g h I discussed the introduction with the o t h e r authors, it represents the accumulated experience of o n e American social scientist.

W h y American M a n a g e r s Should Be Interested in Sweden O n e reason why Americans may be interested in Sweden is that while industry in both countries went unchallenged in the post-World War II period, global competition forced Swedish industry to t r a n s f o r m itself before U.S. industry was compelled to d o the same. Since m o r e than 36 percent of the Swedish gross national p r o d u c t is f r o m international trade (compared with 14 percent f o r the United States), t h e r e has been great pressure f o r Sweden to become m o r e competitive to maintain its high s t a n d a r d of living, as well as its view of itself as a nation of winners. This has m e a n t either i m p l e m e n t i n g new competitive strategies o r closing traditionally p r o u d and p r o s p e r o u s industries, like shipbuilding which could n o longer c o m p e t e with the Koreans. U.S. m a n a g e r s can learn f r o m Swedish experience in protecting the losers, m a n a g e r s a n d workers in obsolete industries, f r o m paying a disproportionate price f o r c h a n g e (chapter 3). A n o t h e r reason f o r American interest is managerial innovation. Perhaps the most remarkable Swedish achievement has been to d o away with fear at work, as m u c h as that is h u m a n l y possible. Unlike Americans in traditional metalworking industries, Swedish workers d o not fear for their f u t u r e . Even if their present j o b disappears, they will be trained at g o v e r n m e n t expense for another. T h e y may have to move, but they will have a job. O n c e fear is removed, m a n a g e m e n t must then create positive motivation to work. Swedish companies such as Volvo, Saab, and SAS have been in the f o r e f r o n t of organizational and sociotechnical innovation to improve motivation a n d productivity of increasingly fearless and well-educated employees.* *A well-known problem for Swedish industry is absenteeism, which averages 17 percent (Ekonomifaktas Databank, J u n e 8, 1989) This figure includes time oft for child care, study, and military service which in other countries might force an employee off the company rolls. Absence for sickness, which accounts for about one-third of absenteeism, is undoubtedly increased by liberal g o v e r n m e n t policies that allow employees to stay home without losing pay. However, I once asked the doctors at Volvo to explore the reasons for illness. T h e y discovered that employees with marginal symptoms stayed home unless they felt needed at work. Interviews at other companies and government agencies confirm this finding. When the workplace is made more appealing and employees are given more responsibility, absenteeism in Sweden drops.

4

Introduction

The best Swedish management has demonstrated ability to succeed in the United States and against American competitors in Europe. Volvo bought bankrupt White Motors and built a profitable company (Volvo-White Truck Corporation), which in 1986 formed a joint venture with General Motors (Volvo-GM) to manufacture all of GM's heavy trucks. Electrolux acquired another White corporation and has become the world's largest producer of large kitchen appliances. L. M. Ericsson beat out the AT&T-Phillips joint venture in large telephone switches in the United Kingdom and France and is now struggling to succeed in the U.S. market. The Swedish successes have sometimes come after initial failures, as described in chapters 12 and 13. One lesson in these successes is the value of maintaining the positive qualities of the Swedish character while adapting to American culture, as opposed to trying to copy the American style. (Japanese companies such as Honda, Nissan, and Toyota have successfully taken this same adaptive approach.) Swedish a n d American Values Swedes who have spent time in the United States almost invariably conclude that they have been misled by popular American television programs like Dallas and Dynasty to stereotype American business culture as overly cutthroat. The majority of Swedish managers in the United States we surveyed believe that differences between Swedes and Americans in style and ways of working cause confusion and frustration. These differences arise partly because U.S. culture is so varied. The United States is more a continent than a country. The dominant values in midwestern states and the Pacific Northwest with large Scandinavian communities are not so different from those of Scandinavia. Latin American culture plays a large role in Florida and the Southwest and merges into the freedom-loving wide-open Western world. California mixes futuristic experimentation with Asian high-tech industry and Latin American spicing. The large Eastern cities are confusing mixtures of dynamic growth, old money and new wealth, black ghettos, and ethnic groups from eastern and southern Europe. The deep South has a culture of its own with traditional rural values and where, surprising to Europeans, there is more successful cooperation between blacks and whites than in any other part of America. Although we should be cautious in comparing homogeneous Swedish values with those of the various U.S. subcultures, my experience in both societies suggests that there are important similarities and differences between the two countries that can be explained by historical patterns.

Introduction

5

Both countries boast of democratic political systems, value individual f r e e d o m , a n d protect f r e e speech and o p e n debate. In both societies, people share a drive f o r individual dignity and continual personal development. This is seen most dramatically in t h e Swedish small-businessperson described in c h a p t e r 4, whose main goal is not to get rich but to gain control of his or h e r destiny a n d express his or h e r u n i q u e self. However, f o r many Americans this drive has a religious meaning, while the Swedish vision of self-realization is purely secular. Both societies believe that economic growth d e p e n d s o n vigorous, competitive private sector companies. Like the United States, most Swedish business is owned privately. (While ownership shares of the largest companies are traded on the stock exchange, t h e r e is m o r e concentrated ownership of Swedish firms. As in G e r m a n y a n d France, this favors a longer term outlook o n profit.) In both societies, the majority believe that the role of g o v e r n m e n t is not only national defense a n d economic d e v e l o p m e n t but also creation of a m o r e egalitarian society t h r o u g h progressive taxation a n d the provision of health, education, and welfare. Although they are m o r e liberal than Americans about sharing wealth a n d caring f o r the sick a n d homeless without r e g a r d to their ability to pay, Swedes are conservative about maintaining their roads, bridges, a n d buildings, not wasting their m o n e y on low quality products, but favoring elegant simplicity. Considering the economic a n d cultural differences between the two societies suggests that they have c o m p l e m e n t a r y strengths a n d weaknesses. America's strengths are in expressive individualism, risktaking e n t r e p r e n e u r i a l initiative, a n d great leaps of science a n d technology. Sweden's are in effective organization a n d m u t u a l support, incremental i m p r o v e m e n t of high quality products a n d processes, a n d sociotechnical innovation. Sweden has neither the resources n o r the gambling spirit for the kind of risky investments m a d e by U.S. companies a n d v e n t u r e capitalists in high-tech R&D. Swedish industry does best by designing products to be aesthetically pleasing, safe, reliable, durable, and ergonomically sound. Sweden's competitive niche, I believe, is in products and processes that are safe, sound, a n d elegant: o n e might say "good tech" as contrasted to high tech. This is t r u e as m u c h f o r the toilets described in c h a p t e r 14 as for Volvo cars a n d trucks.

The Value of

Lagom

Swedish industrial strengths are rooted in a tradition that values innovative organization, disciplined work, high ethical standards, and a

6

Introduction

particular type of fairness. Unlike most of E u r o p e , Sweden never had feudalism. A l t h o u g h t h e r e was a king and aristocracy, the f a r m e r s were an i n d e p e n d e n t force. T h e y internalized the L u t h e r a n ethic of h a r d work, individual conscience, and responsible paternalism. T h e Swedes have a t e r m f o r fairness, lagom, which m e a n s "just right." It is said that its root comes f r o m the Viking drinking h o r n which was passed a r o u n d the circle of villagers. 2 Each person was expected to drink not too m u c h a n d not too little, but j u s t e n o u g h so that the h o r n would be emptied. Swedish children learn that putting either too m u c h o r too little o n the plate is not lagom, a n d Swedish unions d e m a n d that wages be lagom e n o u g h to create solidarity. T h e value of lagom p e r m e a t e s Swedish culture a n d is a way of minimizing the envy a n d sibling rivalry that could destroy the solidarity of the Swedish national family. Sweden is a country of organizations. Over 80 percent of employees belong to unions, a n d t h e r e are unions of m a n a g e r s a n d professionals as well as workers (chapter 8). Swedes may belong to one, two, or t h r e e organizations set u p to p r o m o t e their interests. A Swede can always call o n an o m b u d s m a n to represent him or her. T h e r e is a long historical tradition of organizational competence. T h e sixteenth and seventeenth centuries saw the d e v e l o p m e n t of a strong centralized bureaucracy with a professional civil service, emphasizing efficiency a n d expertise, and innovative military organizations that overran N o r t h e r n E u r o p e a n d almost succeeded in conq u e r i n g Russia. T h e Swedish multinational organization described in chapter 10 makes use of Swedish values and informal relationships. Swedes think of themselves in terms of organizations, a n d teamwork is natural f o r t h e m . A reason that has been m e n t i o n e d o f t e n for the remarkable international success of Swedish tennis players in what is, a f t e r all, an individual sport is that Swedes treat it like a team sport. Young tennis players are e n c o u r a g e d to support, root for, and coach each other. This same spirit prevails in many companies, in contrast to American companies where many m a n a g e r s I have interviewed feel that intense internal competition u n d e r m i n e s cooperation. Sweden came late to the industrial revolution. At the e n d of the nineteenth century, it was still a p o o r country. Between 1860 a n d 1880, o n e - f o u r t h of the f o u r million Swedes emigrated to the United States in search of prosperity. What wealth t h e r e was lay in agriculture, fishing, mining, and forest products. Since Sweden was of a shape, population, and p r o d u c t mix similar to that of Chile, I have w o n d e r e d why Sweden has so o u t p a c e d Chile in its industrial development. O n e can point to many factors such as the exploitation of mechanical inventions (chapter 1), proximity to developed markets, and taking advantage of neutrality d u r i n g two world wars. However, I believe that what

Introduction

7

has allowed Sweden to make the most of its resources has been its cultural strengths employed by pragmatic leaders to resolve conflict between classes creatively, to develop the vision of a lagom society in which everyone participates. In the early part of the twentieth century, workers in newly f o r m e d unions m a r c h e d f o r their rights, but the eventual o u t c o m e of class struggle was a social contract based on a vision of a p r o s p e r o u s economy in which everyone participates and n o o n e suffers the fear of a b a n d o n m e n t a n d starvation. In the 1930s, Per Albin H a n s o n , the prime minister, described Sweden asfolkhemmet, "the people's h o m e , " a family. In the 1940s a n d 1950s, union, employers, and g o v e r n m e n t worked out a g r e e m e n t s on sharing wealth that were essential for creating wealth. In r e t u r n f o r s u p p o r t i n g mechanization a n d continual productivity improvement, Swedish workers gained high wages a n d the promise of continual e m p l o y m e n t . H i g h wages maintain strong domestic d e m a n d a n d thus stimulate production. All Swedish g r o u p s share the belief that the first priority of an economy is to create work. I h e a r d Olof Palme, the aristocrat who became a Social Democratic prime minister, state the reasoning b e h i n d this consensus about employment in a speech at H a r v a r d University in 1985. First, people are Sweden's most productive resource. T h e y must be educated a n d p u t to work f o r the benefit of the whole society. Second, people without work fall to pieces. All of us need to work a n d to be needed. Since t h e results of u n e m p l o y m e n t are depression, alcoholism, a n d suicide, t h e r e is a h u m a n e reason to maintain e m p l o y m e n t . 3 T h i r d , u n e m p l o y e d people become alienated f r o m a democracy. T h e y are less likely to accept responsibility as citizens, m o r e vulnerable to seduction by demagogues. From this consensus, Sweden has created the Labor Market Board described in chapter 3, which matches workers with jobs t h r o u g h o u t the country a n d helps to f u n d employers who create jobs in areas of high u n e m p l o y m e n t . As a result, Sweden's u n e m p l o y m e n t rate has been less than 2 percent, with a n o t h e r 1 percent in retraining programs.

Continual Debate Within the f r a m e w o r k of the social contract, there is continual debate, o f t e n heated, about what works best to maintain c o m m o n goals of prosperity, fairness, e m p l o y m e n t , a n d well-being. W h e n o n e side pushes beyond the boundaries of pragmatism, the other side screams bloody m u r d e r , as was the case in the early 1980s w h e n left-wing social democrats p r o p o s e d a tax on large business profits, to be p u t into f u n d s controlled by unions which would eventually own Swedish industry.

8

Introduction

The employers marched in the streets and finally prevailed on the government to transform the idea into a relatively benign mechanism for supporting the national pension fund (and incidentally boosting the price of shares on the stock exchange). The employers saw the original idea of the funds as a step down a slippery slope to socialism, as opposed to maintaining the balance between free market capitalism and the welfare state. The more common debates concern the type of taxation that will best stimulate entrepreneurial activity yet maintain a sense of fairness and solidarity. Many also question how Sweden can best preserve the natural environment without stifling business and how the medical system can be made more efficient yet give everyone equal treatment. Experts representing the interests of large organizations get together to balance and compromise. But this process maintains stability. It does not generally lead the way toward new directions. It leaves little room for the kind of change that requires innovative leadership. The Issue of Leadership When I first visited Sweden in the early 1970s, there was a distrust and rejection of leaders in general as dangerous power seekers. Many intellectuals, bureaucrats, and union leaders believed that the previous generation had found the formula for prosperity and all that was needed were expert administrators to fine-tune the system and gradually give more power to the workers in boardrooms and shop floors, eventually to create the egalitarian society. Like many Utopian visions, this did not take account of history. To compete internationally, Swedish industry needed to transform itself, and Sweden was fortunate to have wise older capitalists who could skip a generation of conservative company men and choose young, innovative business leaders like Percy Barnevik of ABB, Jan Carlzon of SAS, and P. G. Gyllenhammar of Volvo. Although they differed in their approaches to management, they were alike in determination to improve the competitiveness of their companies and to push responsibility down the organization. They sparked new visions of productive organization which put pressure on government and unions to adapt (chapter 2). Yet, despite recognition and even awe of what these large companies have done for the country, Swedes do not trust industrial leaders, and even less politicians. They have most confidence in expert scientists, universities, and environment groups who presumably speak for objective truth or human values as opposed to money and power. 4

Introduction

9

At a time when Swedish institutions require transformation, there is a lack of political leaders who can inspire people to rise above their narrow interests. While Swedish leaders ask for constraint and cooperation, what seems needed is teaching and preaching that emphasizes values and calls for bold initiatives like the creative models described in this book.

Strengths and Weaknesses Swedish strengths and weaknesses are as apparent to Swedes as they are to those Americans who work for Swedish companies in the United States. 5 Swedes are organization men and women. They seek consensus, work at developing friendly relationships, and tend to avoid open criticism or conflict that might fracture group solidarity. Yet, when conflict arises, they express a strong sense of integrity. According to American managers of Swedish-run companies, Swedes can also be stubborn, undisciplined, and self-righteous know-it-alls. In turn, Swedes see American managers as self-confident and experimental but also overcontrolling, self-promoting, and ambitious corporate politicians who put career ahead of company interests. 6 As a society, Sweden is extremely ambitious. Despite its small size, Sweden aspires to be the world's best society. Each year in December on Nobel day, Sweden plays the role of affirming what is best in the world of science and literature and, in the process, affirms its own right to judge. During the fifteen years I have visited Sweden and spoken to Swedes about their society, I have heard many complaints about feeling constrained and overcontrolled by bureaucracy. Yet these feelings may come from within as much as from the smothering welfare state. Swedes are rather formal and tend to be conformists. From an early age, Swedes are admonished to think before they speak, to watch what they say and do. Like the Japanese, they are deeply concerned about dignity and loss of face. This impedes playfulness and innovation, increases pressure to conform, and may in part explain the relatively high Swedish suicide rate, which has been exaggerated by Americans who want to find fault with Sweden. A less favorable comparison for Americans is life expectancy. 7 Like other European countries, Swedish society is more structured than the United States according to social class, and this is reinforced by unions and political parties. There are notable exceptions, such as Jan Carlzon of SAS whose father was a chauffeur for a regional official, but business leaders tend to come from families of business leaders. On the positive side, there is a business elite which accepts a certain

10

Introduction

a m o u n t of social responsibility. O n the negative side, despite a meritocracy w h e r e anyone who passes the tests can continue his o r h e r education, relatively few f r o m working-class backgrounds aspire to professional or managerial ranks. T h e m o r e p r e f e r r e d r o u t e f o r the exceptionally ambitious worker is t h r o u g h union a n d political leadership. However, the new generation, which defines itself m o r e i n d e p e n dently a n d t h r o u g h projects a n d c o n s u m p t i o n r a t h e r than work roles, has become a threat to organization. T h e y are less identified with both unions a n d companies, a n d they "turn off" at work if it does not challenge t h e m . 8 However, I have f o u n d m a n a g e r s reluctant to believe that ordinary workers are capable of learning to e x p a n d their roles a n d m a n a g e themselves, a l t h o u g h this has been d e m o n s t r a t e d at Volvo. In this, Swedes d o not differ f r o m most American managers, but it seems m o r e unexpected in Sweden. Although they accept in principle an egalitarian ethic, Swedes are extremely conscious of status a n d the credentials of schooling. Despite large investments, the school system has p e r p e t u a t e d the class system. Sweden spends m o r e p e r pupil on primary a n d secondary education than other countries, but the ideal of greater equality has not been achieved t h r o u g h the schools. A recent survey published by the Swedish National B u r e a u of Statistics showed that only 10 percent of children coming f r o m working class families received high marks in the Swedish language when they finished the compulsory nine years of school at age 16, c o m p a r e d to 70 percent of children f r o m white collar families. O n e contributing factor to this problem has been relaxed standards. Swedish children start school at age 7 b u t receive no written marks until the eighth grade. Such relaxed standards favor children f r o m families with educated parents who emphasize learning at home. While elementary schools are easy-going, the final grades at age 16 provide the sole basis for admittance to academic t h r e e or f o u r year secondary p r o g r a m s which lead on to higher education. T h e competition f o r admission to the universities is tough, a n d the working class children are h a n d i c a p p e d by their lack of academic discipline. Despite the fact that there is 80 percent participation by w o m e n in the work force, the only female C E O of a large company, Antonia J o h n s o n , inherited h e r position. Despite the "maternal" values of security a n d care in g o v e r n m e n t a n d m a n a g e m e n t , the L u t h e r a n patriarchal tradition is h a r d for m e n to shed. T h e r e are many angry women in Swedish companies who complain of prejudice a n d snide remarks. Women m a n a g e r s say they are criticized f o r being either too feminine o r too masculine. W h e n they face these failures to reach their ideals, Swedes are

Introduction

11

hard on themselves. T h e y feel they have been fortunate, saved f r o m the h o r r o r s of recent wars, a n d that they owe something to those less f o r t u n a t e . T h e y are reluctant to accept the conclusion that h u m a n n a t u r e sets limits to social e n g i n e e r i n g a n d that their Utopian aspirations may be beyond their reach.

The N e w Generation Is Swedish character changing? Is the traditional self contained, stubborn craft worker of the past becoming a m o r e sociable but self affirmative service employee? Is the g r o u p oriented Swede becoming m o r e critical of the teams he o r she chooses to play on? T h e r e is evidence of a character shift which is causing generational conflict in Sweden. To be sure, the changes take place within a c o m m o n context of Swedish traditions, and within the tapestry of national character are the d i f f e r e n t variations of social character described in the case studies of SAS, Volvo, a n d L. M. Ericsson. T h e Swedish leaders we interviewed described the value changes that took place in the late 1960s as breaking d o w n barriers of formality. C u r t Nicotin, h e a d of the employers' confederation (SAF, Svenska Arbetsgivareföreningen), r e m a r k e d in 1983 that he realized a c h a n g e had taken place w h e n he was spoken to in the familiar f o r m of address (du) by an a t t e n d a n t filling his boat with gasoline. However, there is a new, p e r h a p s m o r e p r o f o u n d , value c h a n g e in the affluent children of the dual wage e a r n e r family of the 1980s a n d beyond. T h e s e y o u n g e r Swedes are b r o u g h t u p in families w h e r e authority is shared as a matter of course. At any early age, they are p u t in day-care centers where they must develop interpersonal skills. T h e y expect to g r a d u a t e secondary school a n d continue learning at work, but they seek m e a n i n g t h r o u g h individual expression in c o n s u m p t i o n (dress, food, a n d travel) as well as production. T h e y p r e f e r service to industrial work, and some of the new generation assembly workers at Volvo r u n small service businesses o n the side. Unlike t h e rebellious sixties generation, the selfdevelopers, as I call t h e m , are critical but adaptive, experimental, and e n t r e p r e n e u r i a l . 9 T h e y are motivated at work by challenges a n d , m o r e than the previous generation, are willing to take responsibility and be m e a s u r e d by results. Since they are the offspring of a family structure that has only j u s t become the d o m i n a n t one, their n u m b e r s will increase. T h e y represent the f u t u r e . T h e most serious challenge to the new generation t h r o u g h o u t the industrial world, both in the United States a n d Western E u r o p e , may be its ability to provide leaders. For the m o r e individualistic new generation, paternalism has become a suspect, if not dirty, word, a n d while

12

Introduction

this m e a n s a greater sense of equality, it also implies less willingness to care f o r others. In Sweden, these attitudes are reinforced by a welfare society that bureaucratizes responsibility f o r child care, education, health, a n d care f o r the aged. T h e r e is a tendency for some of the most gifted Swedes to take their society f o r granted, exploit it, a n d complain that they c a n n o t make t h e big bucks available to Americans. Even now, o n e observes an intergenerational conflict in Sweden. T h e y o u n g inexperienced j o b seekers are seen by their elders as spoiled consumers, while y o u n g people see themselves as a d v e n t u r e r s r a t h e r t h a n bureaucrats. In fact, successful speculation o n financial markets has m a d e a sizable n u m b e r of y o u n g e r people rich, causing disapproval a n d envy f r o m older business leaders w h o have worked longer a n d h a r d e r f o r less reward.

H o w Successful Is Sweden? N o person o r society is without weaknesses a n d flaws which o f t e n are of a piece with their strengths. T h e r e were debates in o u r research g r o u p a b o u t how successful the Swedish economy is today. T h e skeptics pointed to the fact that o t h e r Organization of Economic Cooperation a n d Development (OECD) countries have caught u p a n d most have surpassed Sweden in average wages a f t e r taxes. 1 0 T h e y maintained that the m o t o r f o r Swedish prosperity was the few successful companies that might migrate a b r o a d leaving a rusting hulk behind, as Asea has d o n e partially, at least, by m e r g i n g with Brown Boveri and moving its h e a d q u a r t e r s to Zurich. T h e y a d d e d that successful Swedish e n t r e p r e n e u r s such as I n g m a r K a m p r a d of IKEA a n d H a n s Rausing of T e t r a p a k have moved abroad. However, this image of stagnation does not fit the experience of being in Sweden. Measures of take-home pay d o not account f o r public services a n d the quality of life they provide. Real wealth is gained not only t h r o u g h buying b u t also t h r o u g h personal activity, not to m e n t i o n the gray economy of n o n r e p o r t e d transactions, which is not a d d e d to the GNP. 1 1 Swedes s p e n d time building houses a n d caring f o r boats, cultivating g a r d e n s a n d a t t e n d i n g study circles. T h e y are in the habit of purchasing high quality products that seem to last longer t h a n in the United States. Since television only operates in the evening, they are m o r e likely to read, r a t h e r t h a n watch passively, a l t h o u g h the popularity of VCRs a n d cable may c h a n g e this pattern. T h e prosperity of Sweden d e p e n d s not only on its institutions, but equally, I believe, on the Swedish character, the work ethic, lagom, high standards, a n d the drive to learn. Swedish prosperity will ultimately d e p e n d o n n u r t u r i n g these qualities in family, school, and workplace. It will also d e p e n d o n instilling a sense of civic responsibility in the

Introduction

13

young, so they will ask what they can do for Sweden rather than what Sweden should be doing for them. Sweden has solved most of the social problems that plague the United States: poverty, medical care for all (costing a smaller percentage of GNP than the United States spends without including everyone). To be sure, there are debates about the quality and efficiency of medical services and increasing controversy about environmental pollution. There is a waiting list for day-care centers which puts an even greater burden on women at work. The government monopoly on social services blocks entrepreneurial initiative in this and other areas. My discussions with young Swedes suggest that deregulation and encouragement of small service businesses would release entrepreneurial energy. In the manner described by Beckérus, it would allow a flowering of creative self expression and stimulate higher levels of productivity. To summarize, Sweden's achievements are beyond the dreams of most of the world, but if the country does not to some degree transform itself, the risk is serious stagnation. Yet here is a country where the average worker can enjoy a summer house and a boat under clean skies. Sweden has lower infant mortality, longer life expectancy, and less crime than the United States. There are more telephones and personal computers per person than in any other country. Yet everyone is not satisfied. While a majority (60 percent) believe that Sweden has a very advanced social and political system, 74 percent of Swedish managers in U.S. affiliates say that Sweden looks less attractive when viewed from the United States. Seventy percent would like to stay in America, with the opportunity to make more money and perhaps live a more exciting, less constrained life. Many of these managers settle in the United States and spend their summer holidays back in Sweden, seeking, perhaps, to combine the best of both worlds: risk, riches, and adventure with safety, security, and mutual support. Sweden faces the enviable problem of having achieved its original vision of security, fairness, work, and a comfortable life for all, and finding this boring. It appears much harder to discover a new common vision combining stimulating work for everyone and shared responsibility for improving productivity. It is threatening to embrace a vision of freedom which implies the breakdown of government monopolies. It provokes resentment and envy as managers of expanding international businesses demand flexibility and support while those in the public sector feel constrained and pushed back. It causes insecurity for a small economy to open itself to the world market. As Hans Zetterberg points out, Swedes would like all the benefits of the small, protective community plus those that can be gained only by competing in the

14

Introduction

ruthless larger world. T h e Swedish character which prefers stability m u s t adapt to the continual c h a n g e d e m a n d e d by the global e c o n o m y . W i t h o u t a strong e c o n o m y a n d c o m p e t i t i v e industry, S w e d e n c a n n o t s u p p o r t its project for social d e v e l o p m e n t . T h i s m e a n s S w e d e s c a n n o t rest o n their laurels. T o maintain industrial leadership while furtheri n g egalitarian a n d e n v i r o n m e n t a l values is a considerable c h a l l e n g e but o n e that is also inspiring.

Notes 1. Marquis W. Childs, Sweden, the Middle Way (New Haven, C T : Yale University Press, 1936). 2. Arne Ruth, " T h e Second New Nation: T h e Mythology of Modern Sweden," in Lennart Arvedson et al., Economics and Values (Stockholm: Almquist and Wiksell International, 1986), p. 53. 3. See, for example, the studies in theJournal of Social Issues 44,4 (1988) on " T h e Psychological Effects on Unemployment." An example of Sweden's commitment to work is the company Samhall, supported in part by government funds, which employs the handicapped. While Samhall, with over 32,000 employees, has become increasingly self supporting and competitive in its goods a n d services, its major product is h u m a n well being. 4. According to a SIFO poll in 1989, the percentages of Swedes with large or rather large confidence in different groups went as follows: Scientists Environmental groups Universities Television Radio Newspapers Authorities Industry Politicians

89 72 65 57 54 51 28 25 23

5. T h e following discussion is based on a survey of 88 Swedish managers at headquarters, 49 in U.S. affiliates, and 27 Americans in U.S. affiliates. See chapter 10 for a description of the methodology used. 6. To be sure, the condition of employment tends to distort American values in the direction of being perhaps more self-seeking than they would be, if they had the same security of employment enjoyed by Swedish managers. (See chapter 13 on L. M. Ericsson in the United States.) 7. T h e more individualistic and informal Norwegians have a lower suicide rate of 14.6 compared with 19.4 per 100,000 for Swedes, despite sharing welfare policies and dark winters. However, Sweden's rate is lower than those of Switzerland (24.9), Denmark (29.0), and West Germany (22.2), which are also highly organized societies with people who are internally disciplined and driven to succeed. T h e U.S. rate is 12.5; Japan's is 17.7. O n the other hand, life expectancy in Sweden is 77.1 years as compared to the U.S. 75 years (New York Times, April 17, 1990, p. 8).

Introduction

15

8. According to Eva Meyerson, 15 of 17 ministers in the social democratic government of 1982—85 came from working class families and have been active since youth in the labor movement. (Meyerson, talk to the Harvard University Department of Sociology, 1987.) 9. See Michael Maccoby, Why Work: Leading the New Generation (New York: Simon & Schuster, 1988). T h e Swedish translation of this book published by Svenska Dagbladet was at the top of the business best-seller lists in 1989. T h e typology of expert, helper, defender, gamesman-innovator, and self developer, used throughout this book, is described in Why Work. 10. Svenska Dagbladet, March 30, 1989, p. 8. 11. Yet, the Economist reports that social democracy in Sweden has produced a per capita GNP of $21,300 compared to only $14,000 produced by Thatcherism in Britain (April 1, 1989, p. 42).

Part I: Challenge and Response

Chapter 1 Sweden's Industrial Transition Bo Ekman

Sweden was a late starter in the industrialization race. While Germany and the United Kingdom were conquering world markets and new colonies in the mid-nineteenth century with industrial and military might, Sweden was basically an agrarian society with 90 percent of its employment in farming. It was a poor country and could not sustain even a slowly growing population. Hundreds of thousands of the country's youth emigrated to the United States. Depression, starvation, and failing harvests gave little hope for a brighter future. Toward the end of the nineteenth century, industry began to develop and expand rapidly. The foundation for economic and industrial development, laid in this period, served the country well for almost a hundred years. But in the 1970s, Sweden and Swedish industry had to find new strategies and approaches to sustain competitiveness. The crisis of the 1970s and early 1980s inaugurated the transition from the old industrial base to a new one. Several specific factors contributed to Sweden's emergence as an industrial nation at the turn of the last century. The country was very rich in raw materials (and strategic ones) for the rapid industrialization (and rearmament) of the European continent. The iron mines of Kiruna were opened in the 1890s and complemented the still rich minefields of middle Sweden. The vast forest resources of the country were turned into pulp, paper, and timber and exported to the United Kingdom and the continent. The inland waterways and the new railroad (financed with foreign capital) provided an efficient transportation network in a vast country. The hydropower resources were exploited and provided Sweden early with cheap, clean, and flexible energy. Sweden already had a tradition of science and engineering. Great minds like Linnaeus, Celsius, Berzelius, and Polhem greatly contributed to the advancement of basic scientific and engineering knowl-

20

Challenge and Response

edge. 1 In the late 1800s and at the turn of the century, a generation of inventors developed products and concepts that were to diversify Sweden's industrialization. Sweden had the extremely good fortune of becoming both a strategic supplier of raw materials and supplier of advanced engineering products. Companies like Asea, SKF, Atlas Copeo, Scania, Ericsson, AGA, Swedish Match, and later Volvo were established, along with large forestry combines like SCA and MoDo. The steel industry and the shipyards started their growth into world leaders. One company— Stora Kopparberg which produced iron, ore, steel, copper, forestry products, and hydropower—had already been around for six hundred years. These companies took from the start an international approach and went beyond the domestic markets. Swedish industry has never been local. Over the past few centuries, Sweden's industrial base has also been strengthened by an infusion of skills from abroad. The forebears of today's Belgians brought their know-how to Sweden's seventeenthcentury mining communities. English and Scottish engineers helped build Sweden's nineteenth-century railroads. Italian engineers and craftsmen settled in Sweden during the 1950s, contributing their skills to heavy industrial firms. Subsequent waves of immigration from throughout Europe and elsewhere—with the Finns representing the largest single contingent—included many people with advanced industrial skills. Technology transfer and international exchanges on many levels, especially with the United States, have been vital in maintaining the momentum of technological renewal in Sweden, particularly during the past few decades. Well before World War I, SKF, AGA, Asea, Swedish Match, and other companies had subsidiaries all over the world, even in South America and Asia. In 1890, wood products accounted for over 38 percent of Swedish exports, with iron, steel, and ore representing 15 percent, paper and pulp 13 percent, agricultural products 9 percent, and engineering products 7 percent. In the period 1870—1914, industry shifted rapidly toward more semifinished goods. These industries gave Sweden an indigenous technology on which it could build its welfare and defend its neutrality and other policies. These industries also became the foundation for creating one of the richest nations in the world. The technologies covered a wide range: ball bearings, safety matches, advanced steelmaking techniques, AGA lighthouses, telephones, original designs for turbines, cars, trucks, tools, machinery, and ships. Later came chemicals, pharmaceuticals, electronics, and

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21

medical equipment. Swedish national income quadrupled from 1870 to 1914, and industrial production increased eightfold. Raw materials, good communications, cheap energy, advanced technology, and closeness to the world's most dynamic markets in continental Europe laid the foundation for Sweden's dramatic industrial take-off. But successfully turning natural riches into competitive and marketable products was dependent on good management, engineering competence, and skilled labor. Constructive Cooperation Early on, the Swedish Social Democrats and the unions adopted a reformistic, not revolutionary, approach to politics. This has paved the way for constructive cooperation between labor and capital for almost a century. The "Swedish model" of collective bargaining, industrial relations, and industrial restructuring became an additional asset on the road to the highest standard of living of the world, which Sweden achieved in the 1960s. Unions took a fairly aggressive and supportive approach to the implementation of new technologies. Productivity and competitiveness became household words in a country that had to build its standard of living on increasing exports and defending its world market shares. Between the two world wars, the Swedish economy performed well above average for the industrialized world, experiencing only a relatively mild setback during the Great Depression of the 1930s. During the interwar period, while world trade grew at considerably less than 1 percent annually, Swedish exports rose by just over 3 percent and industrial expansion by 5 percent annually. After World War II, neutral Sweden was well placed to participate in the subsequent burst of growth, fueled by the reconstruction of warscarred nations and the resurgence of world consumer demand. In the 1950s, Swedish GNP growth averaged nearly 3.5 percent annually. In the 1960s, the growth rate climbed to over 4.5 percent, while industrial output accelerated to a 6 percent growth rate and productivity to 7.5 percent. Postwar trade liberalization measures further stimulated the already strong internationalization of Swedish industry. Sweden became a member of the European Free Trade Association (EFTA), which today is negotiating a new role for its members in the emerging more unified European Economic Community (EEC). These two organizations have now abolished tariffs on industrial goods in an area with a population exceeding 350 million people.

22

Challenge a n d Response

The economic wealth that success in world markets created was used to build welfare for the citizens. During the 1950s and the 1960s, social security systems were rapidly developed: pensions, medicare, labor market policies, and child-care and housing programs. The public sector grew rapidly, attracting more and more people from increasingly efficient manufacturing industries. Employment shifted dramatically from the private to the public sector and from manufacturing to service industries, particularly in the last three decades. In the 1960s, the Swedish work force became too small to meet both growth and the restructuring of the economy. Labor was imported from Finland, Yugoslavia, Turkey, and southern Europe to meet the seemingly ever-increasing demand for Swedish products. When the 1960s turned into the 1970s, the Swedes had developed an attitude of taking economic growth and increasing standards of living for granted; industry was a machine that kept producing. The Swedes assumed that the basic industries of forestry, mining, shipbuilding, iron, and steel would produce wealth forever. During these years, Sweden invested heavily both in new social reforms and in expanded capacity in mines, steel factories, and shipyards. The future looked bright.

Crises of the 1970s Sweden was unprepared for the crises of the 1970s in the wake of the first oil shock in 1973. Almost no one sensed that the future would lead to dramatic structural changes in the very core of the economy and labor market. Few would have guessed that shipyards, much of steel, and most of mining would be out of business in less than ten years' time

Employment by Sector, 1 9 1 0 - 1 9 8 5 (percent)

1910 1930 1950 1960 1970 1980 1985

Public

Private

Manufacturing

Service

11 14 15 21 27 35 39

89 86 85 79 73 65 61

27 31 40 43 40 33 28

14 21 30 32 41 50 51

Source: Statistiska Centralbyrân.

Sweden's Industrial Transition

23

and that complementary and new technology-based industries would have to be developed. Sweden reacted with disbelief to the industrial crisis of the mid1970s and approached it as a cyclical downturn, albeit a deep one. After creating a homemade economic boom in 1974, the Swedish government developed a so-called "bridging policy" to help companies survive without layoffs and shutdowns. Every modern Swedish government has pledged itself to the full employment policy. But years went by, and no shore on the other side was found to bridge over to. Subsidies, handouts, inflation, and national debt increased, but production stagnated, profit levels sank, international market shares decreased, and investments hit all-time lows as a consequence. This was a new situation for Sweden. The often successful Swedish version of Keynesian economic policies simply did not work, despite enormous efforts. Ironically, it was the first liberal/conservative2 government in forty years that put the country into debt and rapidly increased the public sector (including financial transfers to pensioners, students, and others) from 50 percent to 63 percent of the economy during its 1976—82 administration. In addition, attitudes toward industry had become negative in the wake of 1968 (when the French student revolt spread to Sweden) and the leftist movement of the early 1970s. The fruits of industry were taken for granted. Many people were outright hostile about the business role in society, critical about the work environment, and concerned about environmental issues. From 1975 to 1976, wages increased by over 40 percent, greatly adding to the structural problems of the country. Inflation was fueled both by higher oil prices, internal costs, and world inflation. The wage increases continued and forced Sweden to embark on a series of devaluations starting in 1977. When the Social Democrats came back into power in late 1982, they devalued the Swedish krona 16 percent. From 1977 to 1982, the krona was devalued by 25 percent. The new government finally ended subsidies to industry, forced down increases of real wages, and restricted public sector expansion, while maintaining full employment. The objective of restoring balance in the economy was met with considerable help from declining oil prices and a falling U.S. dollar. In 1989 the budget deficit was virtually down to zero, unemployment was 1 percent, and the balance of trade had improved. However, inflation remained constantly higher than in other industrial countries, and the current account balance was again negative. Corporate profits jumped back to healthy levels and were strong

24

Challenge a n d Response

throughout the 1980s. T h e economy thus had a two-sided development. Business and industry were healthy, but the overall economy continued to show significant signs of weakness and declining competitiveness toward the end of the decade. T h e effects of the devaluations have subsided, and Sweden enters the 1990s facing a new round of economic adjustments.

Industrial Transition During the last half of the 1980s, Sweden's industrial sector was among the strongest in the twenty-four-country Organization for Economic Cooperation and Development (OECD). T h e nation's economic situation improved on practically all fronts during the 1980s, contrasting with the lackluster performance of the 1970s. On average, Sweden's GNP grew twice as fast from 1983 to 1987 as it did during the preceding decade, but still by no means spectacularly. T h e rate of inflation fell by four percentage points, and registered unemployment diminished from a peak of 3.5 percent in 1983 to around 1 percent in 1988. Sweden had in 1988 the lowest "misery index" (inflation plus unemployment) in the industrialized world. T h e persistent current account deficits of the late 1970s and early 1980s were eliminated during 1983— 1987, and the public sector deficit was sharply reduced. Sweden's overall government financial balance (including local governments and welfare programs) had a surplus for calendar year 1987. In 1989—90, current account deficits began to increase rapidly again. T h e 16 percent devaluation of the krona in late 1982 certainly improved competitiveness, but its main significance was good timing. Several problems are dampening prospects for the early 1990s, however. Industry is the basis of modern Sweden's wealth and is the sector that provides the greatest insight into the fundamentals of the country's economic performance and future prospects. Swedish economists know that higher net exports and greater capital spending by business are the key to consolidating the gains made since the early 1980s. At first glance, standard statistical classifications show modern Sweden to be an economy dominated by service industries and the public sector. Services account for nearly two-thirds of Swedish jobs, evenly divided between public and private sector jobs. Manufacturing now accounts for only 22 percent of employment. But behind the standard classifications, a different picture emerges. T h e production of goods, and the services necessary to produce these goods, account for 60 percent of the Swedish economy and

Sweden's Industrial Transition

25

the same proportion of jobs. These figures are slightly below the average for the industrialized world. Viewed from this perspective, the importance of industry in Sweden becomes clear, and a different light is shed on the public sector. The size of the public sector is a topic of strong debate in Sweden, and so is its efficiency. The public sector consists almost entirely of agencies that provide administration and services; only about 8 percent of Swedish industry is government-owned, and this percentage is decreasing. Nearly one-third of the economy and jobs consist essentially of nonmarket services, i.e., services that the public sector produces without significant competition. Sweden tops the industrialized world in this respect: the figures for the United States and Japan are 17 percent and 7 percent. Those who consider this structure economically unsound also regard it as an untapped source for potential future growth in market-related output and jobs, through the privatization of certain services and increased competition. For the 8.4 million inhabitants of Sweden today, agriculture provides less than 5 percent of jobs and 4 percent of national income. Successful manufacturing has made Sweden the fifth richest society in the industrialized world in terms of per capita income, down from first place twenty years earlier. But the Swedish economy is only about 3 percent the size of America's. The Swedish steel industry provides a good example of dramatic restructuring. Since 1975, nearly 20,000 jobs have disappeared from the industry, which is dominated by Svenskt Stài AB (SSAB), a company formed in 1978 by merging two privately owned groups and the country's only government-owned steel factory. SSAB is now twothirds state-owned, while the remaining shares are held by a consortium of private and public pension funds. In the specialty steel industry (stainless and other alloys), state loans and development projects financed a similar restructuring process which led to the emergence of two dominant companies. In contrast, Sweden's young and relatively small chemical industry (especially its pharmaceutical subsector) has grown faster than other manufacturing sectors since World War II. Largely dependent on imported raw materials, the industry as a whole still has an unfavorable trade balance. It employs 44,000 people and contributes around 8 percent of industrial value added. The rapidly growing pharmaceutical industry is highly researchintensive, with R&D costs amounting to roughly 35 percent of value added, or more than three times the average for all manufacturing industries. Swedish drug companies benefit from Sweden's high standard of medical research. The growth of this portion of the chemical

26

Challenge and Response

industry has been export-led, and Swedish pharmaceuticals enjoy a favorable balance of trade. About 9,000 people work for pharmaceutical firms in Sweden and about 4,500 in subsidiaries abroad. Engineering is the largest sector of Swedish industry. It employs about 375,000 people (nearly 10 percent of the labor force) and contributes 42 percent of industrial value added. It is also the most international sector of Swedish industry. Some 70 percent of its output is exported, accounting for 45 percent of the country's total merchandise exports. Swedish engineering is not unique in its structural profile. The big-name companies sit atop a broad base of small and medium-sized firms—85 percent of the country's engineering companies each employ fewer than 100 people. However, the products of Swedish engineering enterprises are more niche-oriented than those of other major engineering nations. The level of R&D spending by Swedish engineering firms has increased sharply in recent years. For Swedish industry as a whole, R&D expenditures now run at more than 10 percent of industrial value added. Some of the leading engineering companies are now devoting an equal or larger amount of funds to R&D and related services than to spending on property, plant, and equipment. Swedish society no longer suffers from the anti-business mentality of the 1970s. Sweden's manufacturing and commercial sectors have obviously contributed greatly to national prosperity, and the country's industrialists are more and more open to constructive debate on environmental issues. An article in the Financial Times of May 22, 1987 summarizes what many people regard as the main features of the "Swedish model" as it worked during the postwar period: Sweden still manages to combine the biggest public sector of any Western economy, the highest taxes, the narrowest wage differentials and the most highly unionized work force with one of the highest standards of living, one of the lowest rates of unemployment and one of the most vigorous industrial sectors, with an abnormally high number of successful multinational corporations.

Now, entering the 1990s, it seems that this model has come to the end of the road. The country seems to be facing economic stagnation. Apart from the 1976—82 period the Swedish government has been dominated by the Social Democratic party since 1932. Though normally classified as a left-wing party, Sweden's Social Democrats are nevertheless difficult to pigeonhole in relation to major political parties and programs in other countries. There are no exact counterparts

Sweden's Industrial Transition

27

elsewhere, and the party's p r o g r a m includes some surprising contradictions. As Sweden moves into the 1990s, a new political situation is emerging. T h e Social Democrats have slid f r o m their comfortable 44 percent in the opinion polls to about 35. At the same time, the governm e n t a n d the party are facing several political dilemmas. How will Sweden relate to the new E u r o p e in the 1990s as well as to t h e EEC a n d the dramatically c h a n g e d landscape in Eastern Europe? How will the energy a n d environmental problems be solved? Sweden has the ambition both to dismantle nuclear power plants a n d to radically improve protection of the e n v i r o n m e n t . N o issue is m o r e politically i m p o r t a n t in Sweden now than the e n v i r o n m e n t . O n the o t h e r h a n d , the c h a n g e of energy systems could dramatically f u r t h e r decrease the competitiveness of Swedish industry. A n o t h e r political issue of great importance is low productivity a n d efficiency of many services p r o d u c e d by the public sector. New f o r m s a n d m e t h o d s have to be introduced. T h e public is d e m a n d i n g m o r e choice and pluralism. This is a dilemma f o r a party that has treasured egalitarianism a n d collective solutions.

The Social Democratic Ethic T h e concept offolkhemmet (the people's home) figures strongly in the Social Democratic ethic. It is not a detailed blueprint of Swedish society but instead represents a strong a t t a c h m e n t to an egalitarian vision, many elements of which are widely shared even outside the party's own ranks. Sweden has thus been able to function in an e n v i r o n m e n t with two i m p o r t a n t f u n d a m e n t a l characteristics, political stability a n d a relatively strong base of shared societal values. T h e image of politically stable and contented Swedes calmly going about their business in their c o r n e r of n o r t h e r n E u r o p e is, however, a bit simplistic. T h e phrase "born free, taxed to d e a t h " would elicit a sympathetic smile f r o m many Swedes, a l t h o u g h they would also have to admit that, in r e t u r n for their taxes a n d fees, they receive an extensive variety of services and benefits. T h e t h r e e levels of g o v e r n m e n t in Sweden together collect roughly 53 percent of G N P in the f o r m of taxes a n d social security contributions. T h e exact percentage d e p e n d s on what definitions are used. C o m p a r a b l e figures f o r the United States and J a p a n are a r o u n d 30 percent, and the Western E u r o p e a n average is 45 percent. T h e words "born free" could easily provoke a "Yes, but" response. Although its citizens enjoy the same civil rights as in most o t h e r Western E u r o p e a n countries, Sweden is a tightly organized (some would say highly regulated) society. This may indeed h a m p e r its adaptation to a

28

Challenge and Response

rapidly deregulating environment in Europe. Public policy debate tends to focus on what is good or bad for society as a whole, rather than for the individual. This does not make Sweden a closed or introverted country, though, since Swedes make a genuine effort to stay attuned to international trends in many fields. T h e y are often both well-traveled and well-informed. This outward-looking mentality is partly a result o f trade. T h e Swedish economy is about 30 percent trade-dependent, one o f the highest such levels in the industrialized world. Consequently, Sweden's business sector has extensive interests and contacts abroad, and the financial community, after a late start, has seen much o f its market deregulated and is now finding its niche in the new global financial markets. Although the fortunes o f individual companies abroad may vary, by any standard, Swedish industry has been successful in world markets. T h e imperative that drives the internationalization o f the country's business community is that no Swedish company can grow beyond a modest level by concentrating on its tiny domestic market alone (8.4 million people versus Japan's 120 million or America's 2 4 0 million). Sweden itself, meanwhile, is wide open to foreign competition in most sectors. In terms o f markets, sourcing, production, and overseas subsidiaries, leading Swedish companies are now among the world's most internationalized. T h e i r shares are also increasingly being traded on stock exchanges throughout the world. I f Swedish individuals are the most heavily taxed in the industrialized world, its corporate citizens are definitely not. T h e favorable fiscal environment in which Swedish companies work, with generous depreciation allowances and options for deferring or eliminating taxes through the use o f investment reserves and other accounting devices, comes as a surprise to many who would have expected the opposite from a society often portrayed as strongly regulated and run by a leftwing government. T h e international waves of tax reform have finally also hit Sweden. Marginal taxes (the proportion o f an extra krona in earnings that goes to taxes) are now being decreased: from a maximum o f 80 percent to 5 0 percent in 1991, with an average o f 3 0 percent. It is a paradox that, in a country dominated by a workers' government for 6 0 years, work has been taxed much more highly than capital. T h i s situation is now changing, and the new tax reform laws will be crucially important for Sweden's continued restructuring and growth. T h e Swedish stock market defies conventional assumptions. T h e Stockholm Stock Exchange has shown spectacular growth in volume and market capitalization since 1980, responding to domestic liberal-

Sweden's Industrial Transition

29

ization a n d deregulation as well as to bull markets abroad. New equity markets such as over-the-counter shares a n d options trading, along with an increasingly sophisticated a n d diversified money market, have developed virtually f r o m scratch d u r i n g the 1980s. Like New York, Tokyo, a n d L o n d o n , Sweden has its new generation of financial entrep r e n e u r s whose values and contributions to the business community are debated every bit as hotly as those of their overseas counterparts. Shareholding has spread to new g r o u p s of the Swedish population, a n d the n u m b e r of shareholders has increased f r o m 1 to 3 million. H u n d r e d s of t h o u s a n d s of employees in Swedish companies are becoming shareholders t h r o u g h convertible d e b e n t u r e s . Since the mid-1970s, any m o d e r n industrialized country with a highly unionized labor force a n d relatively centralized wage bargaining has increasingly been r e g a r d e d as courting the d a n g e r s of institutional inflexibility or obsolescence. Sweden today is a society far f r o m free of labor disputes. D u r i n g collective bargaining, t h e r e are tensions within labor ranks, a m o n g employees in d i f f e r e n t industries, between national a n d local organizations, a n d p e r h a p s most notably, between the public a n d private sectors. But Swedish industrial trade unions are universally recognized as a m o n g the world's most receptive to new technology a n d associated changes in work practices. T h i s receptiveness is a logical corollary to centralized wage bargaining, which has p r e d o m i n a t e d since the 1950s but is now eroding. It is also consistent with the policy of seeking wage solidarity, i.e., equal pay for equal work regardless of the individual employer's profit margins. T h e ability to pay high, relatively u n i f o r m wages is d e p e n d e n t o n the efficiency a n d productivity of all companies in a particular industry. But if the ability to pay is questionable, Sweden's trade unions advocate the u p w a r d a d j u s t m e n t of efficiency and productivity a n d oppose any d o w n w a r d a d j u s t m e n t of wages. T h e p e r m a n e n t d e m a n d s to maintain u n i f o r m wages, even in sectors with stagnant productivity, have resulted in considerable unrest in the labor market a n d contributed to inflation. O n e of the most i m p o r t a n t tasks facing Sweden is to find a new model to control costs. B u i l d i n g Consensus Sweden has a tradition of tripartite cooperation. G o v e r n m e n t , labor, and m a n a g e m e n t leaders interact formally a n d informally at meetings in the b o a r d r o o m a n d o n the s h o p floor a n d t h r o u g h national, regional, a n d local f o r u m s of all kinds. Policy is not always f o r m u l a t e d at these meetings, but it is debated t h e r e a n d s h a p e d by the debate. Some

30

Challenge and Response

of the apparent similarities between the gradual consensus-building traditions in Japan and Sweden are by no means superficial. Consensus building is not always a rapid process. In the shipbuilding industry, for example, it took a lengthy and expensive period of government bailouts before the creation of effective multirepresentative bodies on different levels ensured the transformation of the shipyards into new bases of industrial activity. There was a similar national and local dialogue in mining, steelmaking, and other industries that required major restructuring. Alongside Sweden's track record in international business, a wealth of recent experience in restructuring ailing economic sectors has been based on consensus building. The next sector facing restructuring is obviously the public sector, including healthcare, education, social security, and other services, as the limit of the ability to tax the Swedish people has been reached. Either productivity must be increased or service and welfare levels must be reduced. Some Sweden watchers have asked whether the mid-1980s will come to be regarded as marking the end of an age of innocence. As the Financial Times recently put it, "Sweden can no longer live isolated and at ease in a northern idyll largely protected from the more unsavory aspects of the modern world beyond its borders." The assassination of Prime Minister Olof Palme early in 1986 was a shock to the Swedes, equivalent to what Americans experienced in 1963 when John Kennedy was murdered. Recent scandals in the wake of the Palme investigation, weapon smuggling, and scandals in the Swedish stock market (albeit small when compared to those in major world financial centers) have received widespread publicity, along with breaches of Sweden's restrictive arms export regulation. In economic policy, Western Europe's rapid progress toward a genuine common market is building up new pressures on Sweden to align its own institutions and policies more closely with those of the European Economic Community (EEC) whose twelve member nations account for about half of Swedish imports and exports. Sweden's neutrality has restrained the country from committing itself to closer alliances and has been the main argument against joining the EEC. This argument no longer holds as the political tensions between East and West are dissolved. Sweden has not yet found its role in the Europe of the future. N e w Directions These headline grabbing events and related debates will undoubtedly change outside observers' perceptions of Sweden. They will also signal

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31

the n e e d f o r new directions f o r the development, r a t h e r than the collapse, of the Swedish way. Sweden is now gradually adjusting its economy to the new E u r o p e a n d its f r e e m o v e m e n t of people, capital, goods, a n d services. T h e Social Democrats are intensely debating how to combine the old socialist vocabulary with an increasingly marketdriven world. A look at the labor market demonstrates Sweden's a t t a c h m e n t to shared values. Full e m p l o y m e n t is the top priority. T h e Swedish labor force participation rates are a m o n g the highest in the industrialized world. Almost 90 percent of m e n a n d 80 percent of women in the 20— 64 age bracket are employed. T h e f u t u r e problem is the lack of labor, especially in view of c h a n g i n g demographics. T h e r e will be 20—25 percent fewer y o u n g people e n t e r i n g the market over the next decade. Sweden's u n e m p l o y m e n t rates, which have d r o p p e d to as low as 1.5 percent, are the lowest in the world. T h o s e who are included in official u n e m p l o y m e n t statistics are often o u t n u m b e r e d by people und e r g o i n g j o b retraining or working in various g o v e r n m e n t - s p o n s o r e d programs, which provide a b u f f e r between those who find work immediately a n d those who d o not. Some projects, such as "work teams" for u n e m p l o y e d teenagers, contain a large make-work element, but t h e r e is no a t t e m p t to disguise this fact. Sweden has almost left behind simple h a n d o u t s as part of labor p r o g r a m s ; 75 percent is spent in organized programs, which can be considered as investments in h u m a n resources. In most o t h e r countries, it is the o t h e r way a r o u n d . T h e Swedish model places great emphasis on the role of work in social integration. A chronic u n e m p l o y m e n t rate of a r o u n d 10 percent, as in some other O E C D countries, is considered a far greater threat to folkhemmet than the occasional stock market scandal. Viewed f r o m this perspective, the industrial subsidy p r o g r a m s of the 1970s were probably less counterproductive on a societal level t h a n they may seem on a fiscal level. Sweden still works, because the Swedes r e m a i n basically confident in their institutions and agencies to provide jobs, redistribute income, and g u a r a n t e e an acceptable d e g r e e of social justice a n d efficiency. Public s u p p o r t f o r the basic values r e p r e s e n t e d byfolkhemmet would not have survived if Sweden's institutions had failed to reduce the extremes of inequality. However, extremes of equality itself is a topic of growing debate in Sweden. T h e most obvious issue is the fact that high, steeply progressive income taxes e n c o u r a g e d brain drain and d e t e r r e d internationally mobile talent f r o m locating in Sweden. T h e Social Democrats acknowledge the problem, a n d have decided on a tax r e f o r m f o r 1991. T h e y favor some shift f r o m direct to indirect taxes, similar to the 1986 United States tax r e f o r m . Tax r e f o r m was based on a deal be-

32

Challenge and Response

tween the Social Democrats and Liberal party; however, the Center, Moderates, and Communist parties decided not to join this political agreement. Like all developed industrial societies, Sweden is concerned about future jobs and the educational and training requirements they entail. In many sectors, the country is at the forefront of a continuous international transition to new technologies and work systems, which provide the basis for growth, but there is no grand design or visionary blueprint of the kind many people associate (correctly or incorrectly) with Japan's Ministry of International Trade and Industry. In Sweden, issues are debated well before anybody sets targets. Companies and trade unions often take constructive actions even before a public debate begins to generate pressure for legislative change. One example was the decision by certain companies in the early 1970s to appoint trade union representatives to their boards. A similar example is the concern about the quality of the working environment. In the future, industrial production will likely remain as important to the growth of the Swedish economy as it is today. Productivity will continue to be the decisive factor in competitiveness. Efficiency measures and the phasing in of new technologies are reducing the number of shop floor production jobs but are increasing the number of whitecollar specialists and administrators.

Economic Issues Managing Sweden's economy in such a way as to promote capital spending and technological advances in the business sector and to maintain a healthy net level of exports is only part of the economic policy picture. T h e control of inflation is another key issue. Historically, Sweden's inflation rate has been above average for the industrialized world and may be partially explained as a trade-off for low unemployment. In today's era of liberal market economics, Sweden's continued embrace of intermittent price and wage freezes is considered old-fashioned. But the societal commitment to full employment, the trade union commitment to relatively centralized wage bargaining, and the public sector's tax revenue requirements leave little room for maneuver. T h e struggle to control inflation continues, but not very successfully. Another consequence of the Swedish model is a low rate of household savings, which can be linked to high income taxes. In the 1960s and 1970s, Swedish household savings averaged 4.5 percent of disposable income; in the United States the comparable figure was 8.5 per-

Sweden's Industrial Transition

33

cent and in Japan an impressive 18 percent. In the 1980s, however, Swedish households showed a negative rate of net savings, since the system encourages household borrowing and corporate savings. It is worth observing, however, that because of Sweden's two-tiered system of compulsory employer-funded and publicly administered retirement pensions, its savings rate is not entirely comparable with those of other OECD countries. Increasing both public and private savings has become one of the most important national objectives for the 1990s in order to support long-term investments. The Swedish government has been an active and innovative borrower in the Eurocurrency markets as well as domestically. This makes interest rates a highly sensitive issue for the government as well as for voters and corporations, thus adding another political dimension to the issues of controlling inflation and modernizing the credit market. The process of deregulation in Sweden's internal financial markets is already well underway, but a financial sector fully open to the migrations of international funds would be uncharted waters for the Swedish economy. In early 1989, deregulation was speeded up, with effects yet to be seen. The same problems and opportunities face many other European economies, assuming that the European Community is fully successful in implementing its plans to create a genuine common market in goods, services, capital, and labor by 1992. Sweden spends a much larger percentage of its GNP on public welfare programs, including health care, child care, pensions, child and housing allowances, education, retraining, and unemployment benefits, than most other OECD countries. In demographic terms, the country is in the same boat as the rest of the industrialized world: negligible population growth and a rising proportion of elderly people. Swedes sixty-five years old and over may account for nearly 22 percent of the population after the year 2000, compared with 17.5 percent in 1990. This places greater pressures on the wealth-generating sectors of the economy. With its deep commitment to comprehensive social welfare programs run by public agencies, Sweden will be an important test case during the demographic transition now underway in the industrialized world. A small, neutral, trade-dependent country is vulnerable to the spread of protectionism. Sweden's foreign policy of nonalignment does not prevent it from being a member of the United Nations and its agencies as well as the OECD, the General Agreement on Tariffs and Trade (GATT), the Council of Europe, the European Free Trade Association, and the Nordic Council, and from maintaining close links with the European Community.

34

Challenge and Response

The N e w Strategies The economic crisis of the 1970s and early 1980s was a result of new technologies and shifting competitive advantages. These new technologies, in virtually every sector from electronics to biotechnology, are transforming the industrial society. This was not seen or understood in the early 1970s, and old strategies were defended for a long time. It took Sweden at least a decade to admit that steel, shipbuilding, and mining no longer played the fundamental role they had for so many years. The deepest meaning of the crisis was that a long successful industrial era was starting to be replaced by a new era where new strategies would have to be applied. In the wake of the crisis, a new generation of leadership emerged that has successfully managed the transition of Swedish industry. Old strategies had to be replaced by new ones such as: • • • • • • • • • • •

creative market segmentation and product specialization quality enhancement improved service levels increased value added per employee increased education and competence levels increased investments in market development and market shares increased degree of internationalization decentralization of decisions and organizations interactive management increased investments in research and development globalization of scope and activity.

Generations of Swedish managers oriented toward production and engineering have given way to a generation of market-oriented managers. Only one steelmaking group and only three forestry combines are left. Economies of scale have in some cases increased (like papermaking) and in other cases decreased (like automobile plants) production to create higher quality and productivity. If the strategies of the 1960s were simplistic—growth and volume—the strategies of the 1980s became more complex and flexible. Retaining flexibility has become a strategy in itself. Flexibility has been developed in many dimensions simultaneously: flexible production, financial flexibility, increased production ranges, the number of market segments, and different geographical

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markets. Direct investment abroad has increased steadily over the 1980s, and Swedish industry employs over 300,000 abroad. All the larger industrial groups have indeed become global corporate systems. Asea merged with Brown Boveri and moved its headquarters to Zurich. ABB, the new group, is a truly global corporation with 220,000 employees and sales of $20 billion per year. It is also of interest to note that General Motors has acquired 50 percent of SAAB, and Volvo has forged a strategic alliance with Renault. Main markets for Sweden are still Europe and North America, which account for 82 percent of exports. Practically every company and every economic sector has undergone reorganization and efficiency-raising measures. The drive to improve productivity and quality and efficient capital utilization has been unremitting. New technology has been introduced at a rapid pace. Break-even points have been lowered and margins widened. Resources have been focused on fewer sectors, fewer niches, and fewer markets. The strategy of Swedish industry has been to concentrate and innovate, thereby raising value added per employee, overall quality, and the level of return on assets. Investments in research and development, training, and streamlined organization have been larger than investments in tools, machinery, and buildings. During the 1980s, Swedish industry has assigned higher priority to profitability and strong balance sheets than to capital spending aimed at increasing its production capacity. The Swedish economy seems to develop in two directions. The twenty-five corporate systems, which represent the backbone of the economy, are internationalizing at a fast rate, growing more rapidly abroad than at home. They sell 75 percent or more of their turnover outside Sweden. Their employment decreases in Sweden and increases abroad. The Swedish capital base abroad has grown since 1986 from 90 billion kronor to 250 billion kronor. These corporations are starting to represent an "offshore" economy, developing under the conditions of global competition. Their strategic thinking is determined more by global competition than Swedish domestic conditions. On the other hand, the nontrade and public sectors represent an "onshore" economy, which runs the danger of developing at a slower rate and with lower productivity. Sweden's future as an advanced welfare state rests with its capacity to remain a competitive base for production of products and services for the international markets. This has also to be proved by attracting foreign companies to invest in Sweden and to use the country as a base for expansion in Eastern and Western Europe. Another capital issue is the lack of labor. In the near future, the

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population will continue to grow older, and fewer young people will enter the labor market. With unemployment of 1.5 percent, there is a need either to transfer labor from the public to the private sector or to increase immigration of skilled labor. Otherwise, industry will simply not find enough people for its expansion in Sweden. Also, young people's attitudes toward industrial work will have to be improved by creative changes in work organization and production technology. Economic policy has, of course, been important too. But real transition has occurred on shop floors, and in retail stores, offices, laboratories and design studios, dealerships, and warehouses. Without the involvement and support of the individual employee, no real change in competitiveness could have taken place. In the future, companies will be focusing their attention even more on developing "human capital," innovative organizational approaches and efficient relationships in the pursuit of greater competitiveness. Swedish industrial leaders are implementing a three-pronged strategy to prepare their corporations for the next decade. They are creating and adapting overall structures of production and marketing to the upcoming global competition. They forge alliances, buy companies, and merge. And they invest in existing structures and people in order to develop competence, effective leadership, good relations, new skills, and increased awareness of the need for change and flexibility. In the 1990s, the twenty-five largest export corporations, the backbone of the Swedish economy, will develop their strategies in a global context. Sweden will matter less. They are preparing themselves for the new Europe and the age of global competition. Sweden's identity and role as a nation will depend on its ability to keep these engines of economic growth within its borders to continue to finance the social and cultural aspirations of its people. Notes 1. Carolus Linnaeus (1707—78) introduced the binomial system of nomenclature for the scientific naming of plant and animal species. Anders Celsius (1701—44) was an astronomer chiefly remembered for the centigrade temperature scale named for him. Jons Jakob Berzelius (1799—1848) was a pioneer in the development of chemistry. Christopher Polhem (1661—1751) was an inventor and industrialist who used water power to operate advanced (for the time) equipment for metal fabrication. 2. A coalition of the Center party, Liberals, and Moderates (Sweden's most conservative party).

Chapter 2 Business and Union Leaders Respond Michael Maccoby

Business leaders led the transformation of their own companies and inspired or challenged other parts of Swedish society in the 1980s. They saw the need to make companies more productive, cut layers of corporate bureaucracy, and innovate. Three young managers captured the Swedish imagination with their dramatic leadership: P. G. Gyllenhammar of Volvo, Percy Barnevik of Asea (now Asea Brown Boveri), and Jan Carlzon of Scandinavian Airlines Systems (SAS). Gyllenhammar became CEO at age 36, Barnevik at 41, and Carlzon at 39. In choosing these young CEOs, the older generation of Swedish industrialists, headed by Marcus Wallenberg (1899-1982), skipped a generation. Many of the managers in their fifties who would ordinarily have moved up were too embedded in corporate bureaucracies that, in the turbulent environment of the 1970s, were no longer able to maintain stable growth. Psychologically, they were "good sons," expert administrators in awe of Wallenberg and the generation that had created prosperity by taking advantage of Sweden's favorable position in the postwar world. One executive of this generation told me a dream that he still had periodically. He was in an office being admonished by Mr. Wallenberg, and he realized that he was wearing short pants. He felt he could never feel fully grown up in front of this powerful father figure. Although the new business leaders were young, they were also independentminded and, in a way, tougher than their bureaucratic predecessors who maintained a more indulgent attitude toward large staffs, perhaps not feeling fully empowered to transform the companies they inherited. In the 1970s, a full decade before the others, Gyllenhammar first cut corporate staff from 1,500 to 100 and challenged the experts. He

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overruled Volvo's engineers and demanded that they design a new kind of factory. He took the lead in transforming corporate divisions into daughter companies and designing deals to balance Volvo's portfolio of businesses. In the process, he brought new, more entrepreneurial managers into leadership roles. Volvo's revenues grew from $800 million in 1970 to $13 billion in 1988 and the number of employees more than doubled to 75,000. In the 1980s, Barnevik sliced Asea's corporate staff from over two thousand to two hundred, invested in high-tech business, and made Asea a strong world-class competitor in the power industry by merging with the Swiss company Brown Boveri, creating a $20 billion industry with more than 200,000 employees worldwide, including the United States companies Combustion Engineering and Westinghouse Power Transmission Division, both acquired in 1989. Now he has slimmed down ABB's head office from 4,000 to 100 people. Under Carlzon, almost fifty percent of middle managers who were unable to delegate were retired or put in nonmanagerial jobs. SAS became the world model for service industries and through a series of deals including alliances with Continental in the United States, Swissair and Finnair in Europe, Thai and All Nippon in Asia, and Lan-Chile in South America, Carlzon has positioned the company for global competition. The Leadership Context Without undervaluing their talent and courage, the exceptional creativity of these leaders also results from their historical situation and the strengths of Swedish society. International competition forced them to create higher value-added quality products and services. To gain the support of strong unions, they had to take the needs of people into account. High taxes depressed take-home pay, pushing them to think about noneconomic incentives. In a society where one can no longer manage by fear, work must become meaningful in terms of selfexpression. The business leaders also believed they already had considerable human resources to employ, including a skilled work force, experienced international management, support from strong unions and trained union officers, shared ethical values, a national work ethic that valued high-quality production, and the belief that the rewards of hard work would be shared fairly. Furthermore, the increasingly educated work force sought more responsiblejobs and were able to fill them competently. In other words, environmental pressures forced Swedish business to raise the level of

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its thinking, to develop a new business logic based on a better use of h u m a n resources and a focus on the global customer. T h e new leaders had to develop visions for their companies both f r o m the outside in, based on the customer and competition, and the inside out, based on the needs of employees.

Social Character T h e social character of the new leaders fits the demands made on them. However, it clashed with the expert social character, which values control, strict rules, and hierarchical roles, and which populated the middle and u p p e r levels of business, government, and unions. T h e new leaders were gamesmen—innovators. 1 They enjoyed competition, deal-making, conflict and confrontation, thinking on their feet, and developing strategy. They hated bureaucracy, details, and routine. Unlike industrial barons of the past, their satisfaction was not in having power over others but in meeting intellectual challenges, redesigning work, having the power to make things h a p p e n and creating power for others, liberating internal entrepreneurs, and bringing rusty organizations to life. Barnevik discovered that many Asea managers were bureaucratic administrators, not entrepreneurs. Some managers had worked twenty years without feedback on their performance. Talented project managers were given more status. Everyone was educated in bottom-line management. As Jack Welch did later at General Electric, Barnevik got rid of losing companies and invested in the winners. A persuasive speaker, he infused the company with his urge to make things happen, to succeed. Gyllenhammar and Carlzon were equally driven to win, but they emphasized a more holistic and humanistic philosophy. 2 In Gyllenhammar, a semifeudalistic sense of caring for subordinates was married to the conviction that the f u t u r e success of Volvo d e p e n d e d on highly motivated and competent people. Within Volvo, he created a "PG culture," a set of values that was not shared by everyone but which supported new projects like those at Kalmar, Skovde, and Uddevalla, challenging the technocratic experts and their machinelike vision of organization and inspiring younger entrepreneurial leaders (see chapters 5 and 6). In transforming SAS (see chapter 4), Carlzon preached a philosophy of inverting the organizational pyramid to empower informed frontline employees to satisfy business customers. His vision not only made SAS profitable and the "airline of the year" for 1983, but it also inspired British Airways and others to transform service management. For Carlzon, people are motivated either by fear or love, and where

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fear predominates, as he believes it does in most American companies, everyone delegates upward. Where the motivation is love, which Carlzon defines as respect and support, people are free to express and develop their creative potential, to explore and take risks that serve the company and stretch themselves. In a culture of love, people feel needed, stimulated, and appreciated. The open architecture of the new SAS headquarters in Stockholm expresses this spirit of love and freedom. There is a "main street" down the center of the building, with natural light from the glass roof, lined with cafes and stores. The street manager arranges frequent concerts and lectures. However, in Carlzon's SAS, respect and mental stimulation are balanced by the demands to take responsibility and achieve results. What fear there is comes not from being punished for making the wrong decisions but for avoiding responsibility. In Hâkan Frisinger and Lars Bergvall, Gyllenhammar and Carlzon found chief operating officers to complement their visionary style. Frisinger was a tough taskmaster who insisted that Volvo quality equal its reputation. His uncompromising standards kept quality in the car corporation from deteriorating during a period of high absenteeism and worker alienation. Bergvall made sure that the airline functioned, that Carlzon's grand vision was supported by processes and measurements. The union leaders at SAS felt confident working with Bergvall. Carlzon has found it useful to distinguish between social character types. He contrasts "explorer bees," like himself who go out to find where the pollen can be found, with "worker bees," like Bergvall who make sure the pollen is gathered and the honey made. Carlzon believes that if the explorer bees are too dominant, there will be excitement but anarchy, and if the worker bees take over, the organization will become dull and inflexible. Balance must be managed to maintain a disciplined, entrepreneurial company. The new leaders saw a large part of their job in Carlzon's phrase, as being "preachers," describing the new vision over and over again to all parts of the company and urging employees to implement it. They created a new motivating sense of meaning in work. Their reward was a kind of glory (their income was one fifth or less than that of comparable U.S. CEOs), and they became national heroes, in the case of Gyllenhammar and Carlzon, interviewed on television like rock stars. This meant breaking the "law of Jante," the Norwegian-inspired view that anyone who sticks his head above others should have it whacked. This star behavior combined with uncomfortable organizational changes clashed with the values and interests of many people, and these leaders were controversial. They threatened the sense of order and security favored by the dominant social character we found

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at all levels of Swedish management: the expert. These worker bees want autonomous roles within a rational system, where individual achievement can be measured and behavior of subordinates controlled. T h e expert character fits naturally into a hierarchical bureaucracy in which higher level managers are expected to know more than their subordinates. Experts respect the system and the authority relationships within it. In contrast, the gamesmen see the system and organization as a tool that can be refashioned for competition. T h e measurement that most interests them is the bottom line. They expect subordinates to know more than they do about their own jobs. By decentralizing power and pushing responsibility to the front line, the new leaders threatened expert control, knowledge, and status. By emphasizing emotional factors necessary to compete and win, the new leaders seemed to undermine a sense of rationality. Despite the success of Gyllenhammar's initiatives, many expert managers at Volvo saw him as a kind of industrial poet, good for public relations, but out of touch with the hard realities of disciplining a work force. Expert middle managers at SAS complained that Carlzon's business emphasis diverted attention away from safety. Yet, these leaders also energized a large number of employees at all levels who saw a new opportunity to express themselves and realize humanistic values at work. Some of the brightest university graduates joined these companies because they admired the new leaders and wanted to become like them. The Unions Respond While they redesigned their companies, the consensus of the business leaders we interviewed in the early 1980s was that the old structures of government and unions were a drag on progress, too centralized, not flexible enough. They felt neither the country nor employees sufficiently understood the urgency of the need to change. National ideology was too socialistic, the public sector too expensive, taxes undermined motivation. They felt forced to focus not only on profit and organizational change but also on the political debate to encourage society to support business, to invest in research and education, and to develop the scientific, technical, and human resources essential for global competition. In principle, the Swedish unions fully supported the idea of adapting industry to international competition. T h e national union leaders we interviewed recognized that they had mistakenly supported uncompetitive industries in the 1970s in order to maintain employment. Now they believe that a healthy economy and secure jobs depend on investment in globally competitive industries and in human resources, while

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restraining wages. They were ready to cooperate, but how much so depended in part on their values and worldview. We found a contrast between Stig Malm, chairman of the LO (Landsorganisationen), the central blue collar labor organization, Bjorn Rosengren, chairman of the TCO (Tjänstemännenscentralorganisation), the central white collar organization, and Leif Blomberg, chairman of the metalworkers' union, from which Malm came. All three of these leaders, like the CEOs, were in their early forties. Yet, their values were not the same. Malm stated that he believed he had been elected LO chairman in part because he had been "very active in the area of developing Swedish industry. I have been very progressive in supporting changes and putting new technology into work." He applauded the new business leadership for its boldness. Describing how he had cut union staff, removed layers of hierarchy, and engaged more people in decision-making, he compared himself to the new leaders. Yet, when I asked his view about the decentralization of union activities, he said "I don't believe in that. Pehr G. Gyllenhammar has been working for decentralization, but I think that strong centralization is a prerequisite for getting unions and employers to work together." In other words, Malm would play the role of telling locals how to cooperate with management at a time when experience showed that locals needed more authority to work out more customized arrangements. There was in Malm's worldview a distrust of new forces in Swedish society. He was critical of the speculators in stocks and real estate. They did not build industry or create wealth and were a threat to Swedish values of productivity and equity. When I asked what appeals to the new generation, Malm said he was worried. I see two things: ( 1 ) There is a group of young punk rock people who don't give a damn about society. (2) A new type of egoism is developing in many groups. Invest only in yourself, don't bother about other people and their development.

Malm explained his job as "protecting the interests of over two million members." Although he saw the need for change, he took the role of a national defender-ombudsman who must amass power to maintain control over unruly, egoistic people. Without such central control, he believed that worker solidarity would be undermined. Whether or not this would happen, Malm's leadership limited the flexibility of local unions working with management. Blomberg expressed more faith in his frontline workers and was willing to be more experimental. Like the new business leaders, he saw his role more in terms of supporting locals than in controlling them

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and seemed to be a gamesman rather than a defender. H e said he most enjoyed the excitement of negotiations and deal-making. Blomberg spoke as a person who likes people and is not afraid of conflict but feels competent to resolve disagreements through dialogue. Although Blomberg also observed egoistic behavior in the young, his response, unlike Malm, was not to condemn but to understand and seek solutions: In one sense, it is easier and in another, it is more difficult to be young today. I went to school for seven years. Then I went to a company industrial school. When I was fourteen, I was working. My kids come to their jobs relatively unprepared. They have been in a school which is a protected environment. They have been in an indulgent atmosphere, without the norms and rules of the workplace. They have not really experienced the need to get to work at 7 and work until 4 o'clock and not sit around talking. They have had too much served on a silver plate and then find the workplace harder and more negative than the school environment. They have modern recreation centers which they have partly destroyed by spraying paint on the walls. When they are required to participate in caring for these centers, it works much better.

Business leaders describe Blomberg as helping transform industry and improve society. T h e y see Malm as trying to block any change, however beneficial to the economy, that limits his power. Bjorn Rosengren, head of T C O , the white-collar union, was like Blomberg a gamesman-style union leader, irreverent and feisty, who agreed that the new business leaders had challenged both unions and the public sector. Rosengren acknowledged that there is too much bureaucracy and that it needs to be more customer-focused. H e also expressed concern that young people were becoming turned o f f by all organizations including the unions. But he did not blame the young. H e observed that many were idealistic with a vision o f a freer society in which the goal of life is development of the whole person: They believe more in being together outside organizational structures, in people's inner potential, and less in the materialistic and egalitarian goals I had when I grew up in the sixties. Then, we were supposed to improve our standard of living, and everything should be divided equally.

H e added that " o f course, we have a great number of young people without visions. T h e y d o what is fun and expect that the rest will always fix itself. But this goes not only f o r Sweden but f o r the entire Western world." According to Rosengren, Swedish leaders must appeal to the best in the new generation. With reservations, he admired Carlzon's managerial philosophy: " T o o many teachers or nurses stick to the rules and d o not care enough about the pupil or patient. Leaders must create

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organizations where people can feel needed and cooperate. They must be freed from rules and overcontrolling management." I noted that Carlzon had criticized the unions for not being willing to decentralize, and Rosengren agreed that he had a point. If unions gave members more power to influence decisions, the young would be more interested. You cannot interest the young in unions just to get better wages. They must see the union as a means to develop greater solidarity and individual development.

However, Rosengren's role at the top of TCO is as a spokesperson and lobbyist. The various white-collar unions have their own leadership, and each must make the decision about how much authority to delegate. A CEO like Carlzon has more authority to transform a business than a democratically elected union leader has to change the union. The public-sector leaders, who have had the greatest success in transforming their organization, worked with local, not national, union leaders. Lessons for Americans Young business leaders were at the forefront of transforming Sweden. In changing their companies, they inspired employees who had been frustrated within the layered bureaucracies and felt newly liberated and empowered. But they also threatened established power, including middle management and national unions. How managers and union leaders responded depended to a large extent on their own values and worldview. To gain union support, they appealed to, educated, and involved local leaders and workers in the new strategy. We shall explore this further in the chapters on managing change at Volvo and SAS. It is relevant to emphasize that these changes were not dictated by government as part of an industrial policy. But government did help, by tax credits for investment and education and a national policy of developing an educated work force. Some government agencies, especially the Labor Market Board described in the next chapter, transformed themselves to facilitate change. Notes 1. Michael Maccoby, The Gamesman: The New Corporate Leaders (New York: Simon & Schuster, 1976); Why Work: Leading the New Generation (New York: Simon & Schuster, 1988).

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2. Although Barnevik is less known than the others for his philosophy, as a student he became very interested in the work of S0ren Kierkegaard, the Danish Christian existentialist, and lectured about him on the radio. T h e r e is in Barnevik's preaching of individual responsibility an echo of existentialism.

Chapter 3

Transforming the Public Sector Jan Erik Rendahl and Michael Maccoby

The Public Sector All the business leaders we interviewed shared concern about the large public sector, not only the size of money transfers like pensions, health insurance, child allowances, and housing subsidies but also the lack of productivity in the administration of services. T h e trade union leaders emphasized that authorities should become more service-minded with the public, and the politicians unanimously agreed that both efficiency and better service were needed. Swedes have taken pride in an honest, competent professional civil service. But these authorities were traditionally an arm of royal power and not public servants. Today, the criticism, even from government officials, is that public administration must become more responsive to its customers, the ordinary citizen. Similarities Between Industry and the Public Agencies T h e public sector is becoming more and more like business. Public sector leaders are pressured by demands for efficiency and rationality in economic terms. T h e authorities try to cover their costs by charging fees for services, including consultancy services. T h e system of lay advisory boards reinforces the resemblance: most government departments are answerable to a board consisting of politicians and representatives of trade unions and other organizations, which means that, formally at least, the position of the director general is much like that of a company president. Differences Between Public and Private Sectors T h e public sector has always been criticized for bureaucracy. One complaint which has been heard recently is that the swelling bureau-

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cracy on the public side is a result of the increase in bargaining activity between wage earners and employers. In the public sector, union work has been an integral part of the authority's activities, and the public sector has paid for a bargaining bureaucracy that is larger than that in companies. But the most important factor in building bureaucracy is the traditional emphasis on the correct handling of issues, following the rules, rather than efficiency or public service. T h e public sector includes a broad spectrum of activities, in which the differences a m o n g the authorities themselves are greater than those between any specific authority and a particular part of industry. What is special about the public agencies which exercise authority affecting individual citizens is that they are responsible for putting the law into practice. This means that as well as meeting their own particular goals, e.g., in the case of the National Prison and Probation Administration (KVV for Kriminalvârdstyrelsen), to provide for the h u m a n itarian treatment of offenders, they must consider rules applying to cases against private persons, appeal procedures, the right of access to public records, and the Official Secrets Act. All these laws and provisions call for a hierarchically structured organization. If a director general should want to restructure or reorganize operations to promote the fulfillment of the specific goals, these rules cast a silent shadow over all such efforts and limit the scope for management action. This is one difficulty which is greater for the director general than for the company president, who has more room to change. This is true for the United States as much as the Swedish public sector. Another fundamental difference is that an authority is responsible for an entire context, a fundamental need such as health or education, and it has to cooperate with other authorities in resolving and satisfying existing demands. While the private company lives by competition, the political intention is that the public agencies should form a cooperative system. They should represent a system of services available to the public and be based on the ideal of equality. T h e private sector, on the other hand, can design its services more unequivocally on a basis of market, consumer needs, and willingness to pay to satisfy them. We f o u n d , however, that even in a bureaucracy like KVV, administrators can become more effective and client-responsive by understanding their own values, even when this does not lead to structural change. Rendahl involved KVV managers in the study of their social character as it influenced their views about dealing with criminals. He f o u n d them polarized into "hawks" who believe in tough punishment to deter crime and "doves" who favored education and rehabilitation. Once the managers realized that they were formulating policy according to different values, they were able to depersonalize their debates

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and differentiate among criminals. Some criminals from deprived backgrounds responded well to rehabilitative education. Others, including those running the Swedish drug trade, were cynical businessmen who might be deterred enough by the expectation of extreme punishment to decide they were in an unacceptably risky business. The Challenge to Change As the general public and the appropriation-granting bodies call for greater efficiency in the use of resources and the provision of services, authorities are asked to reorder priorities, develop collaboration among themselves and with the public, and find constructive forms for cooperation with trade unions. The trend in government is toward general rather than detailed legislation. Blanket clauses are becoming increasingly common, and this gives the authorities greater freedom to adjust operations to local conditions. Thus, goal priorities have to be established, and strategies which can be applied locally within the authority have to be evolved. Detailed control should be replaced by demands regarding results, with more freedom for local management in deciding how they will meet their goals (see also Government Report 1984/85:202: "On Renewal in the Public Sector"). Rather than relying on management by instruction, the new pattern should be one of support, guidance, and the training of staff to make independent decisions according to new values of customer satisfaction and efficiency. A leader is needed who combines something of the expert-helper with the gamesman's feeling for contexts and strategies and who is interested in visible results. The Jan Carlzon model appeals to many as a way of transforming the public sector, but few director generals are innovators. The Public Administrators In fact, the dominant values of the seven director generals we interviewed were that of the traditional expert administrator. They were used to setting policy direction and managing a hierarchy which at each level interpreted these directions and gave instructions to the next level. Faced with the new pressures to become efficient and customerfocused, their natural tendency was to announce support for new initiatives and delegate implementation to lower-level managers who often paid lip service to the new direction and continued as before. Two notable exceptions were Carl Olof Ternryd, of the Defense Materiel Administration (FMV for Förvarets Materialverk) and Allan

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Larsson of the Labor Market Board (AMS for Arbetsmarknadsstyrelsen). Ternryd combined qualities of helping teacher and toughminded defender of values of quality and efficiency. We call this combination of types "protector." His motto "dare to be a leader" separated him from the more detached professional administrators, the experts. He tried to change the organization through hands-on challenges, pressure, and support. Larsson, a gamesman, took a different approach, closer to the SAS model, of creating a client-focused vision, decentralizing the organization, and redefining the management role to motivate and empower the front line to satisfy the Labor Market Board's clients. The Defense Materiel Administration The Defense Materiel Administration (FMV) has one main customer: the Swedish armed forces. Its task is to acquire for this customer materiel of the highest possible quality at the lowest possible cost, and to be responsible for its maintenance. The organization had 3,600 employees when Ternryd took over and 2,800 when he left. Ternryd saw his task as building an organization that would cooperate with industry while also gaining more flexible use of common resources by the various armed services. FMV relies on about 2,000 suppliers in Sweden and abroad. He saw his main problem as one of persuading his customers to cooperate among themselves so that he could streamline his own organization. He said: My organization is responsible for acquiring and developing materiel for military defense—everything from pea soup to aircraft. There is often war among the three branches of the armed forces. To get them to cooperate calls for diplomatic skill; I've not got much. Since I began this job, I've come to recognize just how necessary it is to have a leader, simply to get these people at least to move in the same direction even if they don't all take the same route. There used to be three different organizations in FMV—one for the army, one for the navy, and one for the air force. Now it's my job to get them into one organization, because there are so many things they have in common on the development front.

The more the services cooperate, the easier it is to cut costs. Ternryd first developed support for his strategies from the trade unions, and even worked with the unions in group meetings. Although change might threaten some jobs, Swedes do not worry they will be out of work, and the union saw change as giving more authority and better jobs for their members. Ternryd said, "I use the trade unions as a resource," then elaborated:

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I picked out 15 managers from the top and middle levels and got them together for three days. We asked ourselves: "What are the problems? How can we make one organization of the three branches of the armed forces? How can we collaborate, and how can we develop our strategy?" The purpose of this three-day session was to design a program for organizational development. We have produced a development program in three stages: one three-day seminar, one one-day seminar, and another seminar, each with 15 participants. I lead the program myself; it takes a lot of time but it's important. I open the seminar by presenting my own ideas on leadership and how I want to see FM V developing over the next five years. I tell them my three slogans, which encapsulate my philosophy of leadership: create a positive atmosphere; decide from the start that things are going to work and don't give up too soon; be open in your relations with colleagues, trade unions, and customers, really trying to understand what they expect of you and telling them honestly what is possible and what isn't. T h e strength of Ternryd's leadership style is his ability to articulate visions based on the principle of good relations and his ambition for the development of individual people and the organization as a whole. His weakness is that, up to a point, he forces change on people, so that his staff feel more or less compelled to act according to principles imposed from above. Because Ternryd is personally the source of change and takes such an active part in the various processes, he becomes the crucial figure, someone on whom all emotions are projected. T h e polite criticism, which we managed to glean from his organization, was that his leadership style is too personally dominating and that he is consequently too pivotal a figure. To this criticism, Ternryd responds: Sometimes they are uncertain whether I really have delegated things. But you can't delegate the ultimate responsibility. What you can delegate is the process part of the responsibility. Also you must always make sure that the person you delegate to has the capacity to do the job properly. And it must be agreed that the person concerned reports to you how the work is going. You have to remember what it is you have delegated and what you have not. T h e results have been increased efficiency and a more dynamic, motivated organization. Besides cutting staff, Ternryd succeeded in negotiating fixed contracts with suppliers and shared purchasing by the services, thus saving Sweden many millions. Since retiring as general director in 1988, Ternryd has organized a group of general directors to focus on managing the public sector more effectively. H e also takes a leading role in a group of senior managers who mentor uppermiddle-level women managers. At the Defense Materiel Administration, he required that his subordinates report periodically on what they were doing to educate and promote women managers. He plans to

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organize training for local government leaders, together with politicians, industrialists, and labor leaders. In effect, Ternryd had taken on the mission of spreading his ideas throughout Sweden. The Labor Market Board Allan Larsson led the Labor Market Board (AMS), one of Sweden's most important agencies, employing over 10,000 people. (In February, 1990, he was appointed Finance Minister by the Prime Minister, Ingvar Carlsson.) There is a central administration and 24 employment boards, with 319 regional employment offices and 113 employability institutions with 5,000 teachers who provide counseling, education, and vocational rehabilitation. The main task of AMS is to arrange contact between companies seeking labor and people seeking work. It can provide loans and credits to companies that locate in areas of unemployment and help train workers for new jobs. In the last resort, which is considered a failure of the system, it gives money to the unemployed. AMS is the government's instrument for implementing the universally shared value of full employment. Almost a million Swedes take new jobs in the course of a year. During 1985—86, Sweden's employment offices were notified of 700,000 vacancies and were visited by 700,000 job seekers. Ninety percent of the unemployed approach AMS together with 30 percent of those who have jobs but want better ones. AMS handles about 60 percent of all vacancies, and has a goal to increase its market share through improved services. The employment service of AMS, under Larsson, set out to become a more effective channel both for companies in search of labor and individuals in search of employment. When he took over what he considered an overcentralized bureaucracy, Larsson developed a business idea which he summarized in three goals: 1. To change from management by regulations to management by objectives. 2. To redistribute resources from in-house work to customeroriented services. 3. To develop the quality of service to meet the needs of customers. Over five years under Larsson, AMS cut away layers of bureaucracy and became a model of customer-focused public service. Headquarters staff was reduced from 700 to about 400 persons. Local offices were able to tailor services to local needs, such as the Umeâ office serving university students. Or the Aske training center which learned

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to sell its services on the open market and transformed its cafeteria into a gourmet restaurant. Larsson took employment training away from the National Board of Education and established the AMU group (Arbetsmarknadsutbildning) which is no longer funded by the government but must compete with other training producers. AMS has become AMU's main customer, one which demands the same responsiveness and efficiency it seeks to provide its own customers. Some of the AMU centers now offer "skill guarantees," meaning that if the trainee does not have the expected competence, the center will take the person back for further training at no additional cost. In 1984, Larsson described his attitude to change: I've had many jobs where my task has been to generate change: as wage earnerconsultant at Swedish Steel (SSAB), as the head of the Vi newspaper, as chairman of A-pressen (the Social-Democratic press). Change has been the important part of my m a n a g e m e n t job; there are always other people who are much better at r u n n i n g operations.

Describing his approach, he sounded much like Jan Carlzon: You must have a strategy and simple principles which can be backed u p by your board. It's a question of telling other people the goals and principles and asking them to cooperate in achieving them. When I became head of the National Labor Market Board, I presented a policy statement to the board and informed all the staff about the principles I wanted to work by. A m o n g other things I declared that jobs or j o b creation were to come first and cash support last, and that we should give better service by being less authority-minded.

Larsson, the gamesman, looks at problems in a structural and systematic perspective. Consequently, his way of supporting and helping people is by improving structures and systems, rather than by direct personal intervention and influence, although he has recognized the value of a personal declaration and explanation of visions and strategies. Allan Larsson told us: My present problem is to change the administration in order to redistribute more resources to the front line. Immediately after the first board meeting, I called the managers together and asked them a n d their staffs to see how we could simplify the administration and get more time to give our clients better service. I also asked the union representatives to join in this effort. In a couple of months we had over 1,000 suggestions, and starting from this, we could draw u p guidelines for developing the organization a n d our way of working.

Characteristic of the gamesman is speed between decision and action, and an ability to arouse enthusiasm in others and to bring possible

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stakeholders into the problem-solving and implementing of decisions. "My bad decisions always occur when I've neglected to act," he said, and repeated what he had said several times during the interview, that action and results are what ^ives his life meaning. Interviewed in 1989, Larsson saw the expanded vision of AMS as not only connecting people tojobs, but also influencing the way work is organized so that people are motivated to come to work and remain on the job. He noted that when people are challenged by a job and feel needed, absenteeism is low. When jobs are routine and people feel easily replaceable, absenteeism jumps. Larsson is convinced that Sweden will make better use of its people and pay less in unemployment benefits by investing in educating employees for more responsible work. This requires influencing employers as well as employees. Like Gyllenhammar, Carlzon, and Barnevik, Larsson has been a preacher and teacher to his organization. He took an active part in management training, as well as participating actively in conferences of all kinds and using the media to publicize what he expects and demands of his staff. He issued simple and clear pamphlets which present goals and tasks in concrete form. Larsson produced a plan, logical and uncompromising, for improving his organization's performance. Anyone who did not like his solutions or strategies was challenged to produce a better alternative, then sign on or leave the organization.

The Importance of Character How would leaders of a different social character have acted in Larsson's role? Even though other leaders might have come to a similar analysis of the situation, and might have come to much the same conclusion about what should be done, they would probably have acted differently with a different order of priorities. A leader with more of the helper in him would have done more to help individual people. He would probably have sent instructions to the public employment offices about the need for genuine care, responsibility, and protection for the most vulnerable groups. In contrast, the expert might have developed effective control systems and rules intended to support the individual employment offices in their work. But he would have delegated to subordinates the task of implementing the program and measured them on their results. Larsson realized that motivating civil servants was essential to realizing his vision. In 1988, he told us that he had found motivation to require even more leadership in the public sector than in private

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enterprise. "The reason for this is the lack of simple instruments to measure the relation between input, output, and outcome." He decided it was essential that employees in every local employment office understand the common goal and principles and implement them according to local needs. The key measurements, he emphasized, should be those of customer satisfaction, and he publicly recognized achievements in this area. This approach is similar to SAS's, but there are important differences. AMS is not under the same competitive economic pressure as a commercial company like SAS. In the public sector, without this pressure, the leader must be more persuasive. However, in both the public and private sector, it does not cost much to recognize achievement, and most people respond when the leader makes clear what he most values. Larsson had to deal with employees with different work values from his own. Most of them, especially the older ones, were either experts or helpers. These values became, in some cases, resistances to change. Helpers felt there was too much emphasis on funding employers and not enough counseling and direct help for the unemployed. Experts, especially in middle management, complained that Larsson was changing things too quickly, without sufficient study. When the previously dominant social character becomes frustrated, opposition can be expected as it was to Carlzon from middle managers who complained that the new business emphasis undervalued attention to safety. From a few interviews with individual members of AMS, we got the impression that although delegation and responsibility had increased, the central bureaucracy was resisting. The kind of reorientation that Allan Larsson attempted at AMS requires educating staff members so that they understand value differences, yet recognize the need to express these productively within a commonly accepted strategy. Larsson was able to gain support for his approach from different types of employees by expounding a leadership philosophy based on "the best of three cultures." This included the best of public service: fairness, legal security, and openness. The best of private enterprise, including concepts like goals, efficiency, and results. And the best of popular movements: social justice and popular support. We found in both business and public administration, that while leaders may have plans and opportunities for action, they find it difficult to carry them out unless the plans coincide with a social character appropriate to their implementation. It is not possible to change operations simply by acting on an intellectual recognition of what would be "best." To conclude, strong leadership at the top has proved essential in changing the culture of some of Sweden's leading companies. As chap-

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ters 5 (SAS) and 7 (Volvo) show, these leaders have had to deal with resistance rooted in values that were adapted to the old culture. Leaders like Ternryd and Larsson demonstrate that it is also possible to make the public sector more customer responsive and cost effective. However, lacking the compelling logic of the market to force painful change, public sector leaders must become even more responsive to the values of employees and engage them intellectually and emotionally in the process of transformation. Chapter 9 describes how this was done both in an auto factory and in a government agency.

Postscript While this book was already in production, Allan Larsson was unexpectedly appointed Finance Minister. Larsson was faced with a growing crisis of negative balance of payments, inflation, and rising demands for wage increases. There was no political consensus for action. He said to us in March 1990, "everyone wants more of a pie that is too small." His skill at mediation and motivation would be required to solve the short term problem of cutting public spending and controlling wages and prices. His innovative systems thinking would be needed to stimulate behavior to increase the size of the pie. Larsson believed that Sweden had to increase both productivity and labor supply. He saw productivity gains in terms not only of greater output per work hour, but also innovation in products and processes of design and production. To increase labor supply, he was planning ways to re-educate and motivate managers who retire early and employees with long term disability so that they would remain in the labor market.

Chapter 4

Small Business in Sweden: A Growth in Two Directions Ake Beckérus

The small business firm, and particularly its owner-manager, is often referred to as the backbone of business in all industrialized countries. Thus, if the state of affairs in the small business community is considered to be in order from a business expansion point of view, the affairs of the nation are also generally considered to be in order. However, many would argue that it is the other way around: that a nation's business fate stands and falls with the success of its big business firms— and so does small business. Some hard figures might prove this point. In Sweden, there are about 350,000 business enterprises. Only 4,000, or 1.2 percent, employ more than 100 persons, while 310,000, or 92.5 percent, have fewer than 10 employees. However, in terms of product-related research and development, generally considered to measure the health of a trade-dependent nation, big business has an impressive lead over small business. Not surprisingly, research and development demand not only an environment suitable for inventions but also financial resources and highly skilled staff, which the small firm usually lacks. But there is another point to be made in the never-ending comparison of the virtues of big versus small firms. Once a firm has reached a certain size, it enters into the landscape of impersonality and often becomes a standardized business machine rather than a social organism furthering the productive aims of its owner and the people employed by him or her. Thus, it could be argued, while big business is business as usual, small business is something more than just business, which as we will see, also creates certain obstacles for growth and development. Although all the big and well-known Swedish firms once started as small firms, almost all of them started at the turn of the century, and

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few are the products of mid-twentieth-century industrialization. T h e postwar period has thus produced very few Swedish firms that have grown u p to be giants like Alfa Laval and SKF. However, a small country like Sweden cannot give birth to big companies overnight, as in the United States where an e n t r e p r e n e u r with growth ambitions can exploit the potential of a huge domestic market. Would-be entrepreneurs in Sweden must reach out to the world market in order to grow very big, and that is a greater challenge now than it was fifty years ago. Also, there are certain growthinhibiting factors present in small firms, because of their basic "business structure." Factors that inhibit business growth, as generally defined, also trigger growth in another direction. This "growth duality" in small business is to some extent a reflection of an ongoing transition f r o m an old to a new entrepreneurial concept in the Swedish business world. This is the topic of this chapter. This transition is presented with reference to a research project recently completed in Sweden, involving some 500 entrepreneurs and their business ventures. 1 T h e study employed both in-depth interviews and a mail survey. T h e research project also involved the assistance of American researchers headed by Michael Maccoby. In fact, both the theoretical framework and the design were derived from Fromm and Maccoby's work on social character theory. 2

The Entrepreneurial Model Beginning with the traditional entrepreneurial concept, let us take a look at the way of doing business f r o m a triangular perspective (see Figure 1). This traditional one-man triangle of a business—the situation where the e n t r e p r e n e u r alone possesses the business idea, leader-

Ownership Figure 1. Triangular model for the entrepreneurial concept.

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ship, and ownership—represents the birth of our modern industrial era, and most companies started up in this fashion. Many of them remained this way and failed to grow despite the existence of a market, both in terms of capital and customers, that would have made expansion possible. An important part of the research project was to determine why some small businesses grow and others do not. The entrepreneurs trapped in this triangle were examined both in respect to their values and how they viewed the art of business. What part did the business firm play in their perception of the world and the meaning of their work? For most small entrepreneurs, managing a business meant: • adhering to a social heritage; • identifying oneself as being free and unattached; • viewing oneself as someone controlling his or her own fate. We found these criteria vital for a career as an entrepreneur. This is in addition to the kind of classic entrepreneurial sparkplugs needed to ignite a person to start a business of one's own. When asked to select major determinants of their business behavior, the entrepreneurs surprisingly rated these three criteria high above such classic business virtues as risk-taking, the need for achievement, or the urge to test an idea or product on the market. In the social sciences, the probability of a criminal career is sometimes explained in terms of a "social heritage," and in a symbolic sense, this heritage seems to apply also in business careers. In the entrepreneur's history, there is almost always some relative or close friend operating a business of his or her own. Whether one happened to inherit the business is irrelevant. The crucial point is that the environment from childhood on tended to approve and promote the art of doing business as a way to create a positive identity, regardless whether it made one a millionaire or a mere survivor. Doing business was considered a way of living that gave one's whole existence meaning and possibilities irrespective of the socioeconomic environment during childhood. Entrepreneurs very seldom refer to driving forces in altruistic terms—serving humanity—or view the business concept from a larger deindividualized perspective. The possibility of entering the world of entrepreneurship as an adult apparently decreases if one's upbringing educates the identity to reflect its possibilities and shortcomings against larger images of the world, where, by definition, it will appear diminished. Entrepreneurs are brought up to believe that they can determine their own fate, to a large extent, through business.

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The Growth of a Precious Human Identity To own and manage one's own business presents an adult with many possibilities for establishing a unique personality. T h e business forms an arena where the personality can be expanded and where room and identity can almost always be created. In terms of our triangular business model, an entrepreneur entering the triangle starts experiencing the tremendously powerful forces of its three walls. T h e combined forces of possessing the business idea, leadership, and ownership are brought into focus on one particular spot—the ego—and, like a magnifying glass, ignites the individual's potential. In other words, the transformation that takes place within the triangle shapes the individual not only into the well-known stereotype of a businessperson but also into a self perceived unique and precious human identity. If the triangle remains in its original shape throughout the adolescence of the firm, strong psychological forces will tie the entrepreneur's whole existence to the firm. Entrepreneurs using the triangular business structure do not live their lives in split realities where work is referred to as the other part of life. T h e firm is inevitably shaped into a symbolic extension of the entrepreneur's personality. This gradual process sooner or later creates a new and powerful unity that makes entrepreneurs feel that they have a unique human identity (or in philosophical terms, an existential identity) tied to the business firm. This assumption might have all the shortcomings of a purely theoretical construct, but contrary to most psychological and philosophical constructs, it has the visibility and concreteness in most day-today operations in the firm. In other words, human identity is not a dreamlike vision of "realizing oneself" but a process of continuous and concrete reinforcement of "the person I am," manifested in every detail of the business operation—business idea, product, sales, marketing, leadership, and organizational structure. A firm shaped in the triangular model traps the entrepreneur in a room with no doors with respect to growth in the traditional business sense. Even if there were doors, the entrepreneur would not be eager to use them since the process of expanding the firm would eventually endanger the precious identity derived through the business. A few years ago, an extremely successful Swedish small businesswoman literally vanished when her firm was facing bankruptcy. T h e woman simply disappeared, even though there was a good chance of reconstructing the firm by bringing in additional ownership capital. To understand why, it is important to know that the woman was competing with the whole low-price, high-quality Japanese recording tape

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industry and that one of her strategies was to compete with the help of her own identity. This daring Swedish woman, name and picture and all, stood up against the fearful Goliath of Japanese industry. Her ads appeared day after day in the Swedish newspapers, communicating the same message, "Here I am fighting this monstrous enemy." That was her precious human identity created by the business firm, and when the whole thing collapsed, she "died" along with the firm and, consequently, ceased to exist. She left a letter saying that she had withdrawn and wanted to remain "invisible" for the rest of her life. Even if this was a case of overreacting, our research findings indicate that the classic entrepreneurial business triangle not only produces what is commonly known as superior quality in terms of product and service but also produces a very important spin-off effect in terms of a lifetime ticket to a superior quality adult identity formation process. T h e most striking feature of this process is that it inevitably forces the entrepreneur to view business realities from a twodimensional perspective instead of the one-dimensional perspective usually associated with sound business practices. T h e dimension of human identity glued to the entrepreneurial archetype forms a major part of the yardstick used by the entrepreneur when measuring threats, the profitability of a business deal, or the success of a particular product on the market. Every foreseeable change, regardless of how minor it may seem, is consequently measured in terms of whether or not it might represent a threat to the human identity established through the business. A lot of the entrepreneur's lack of rationality when judging business prospects is due to this element of identity defense. Thus, a lucrative business deal might very well be rejected because it represents a threat to the businessperson's identity or whole sense of self. An Existential Quality This assumption of entrepreneurial duality leaves us with a business concept requiring presence in—and control of—every tiny detail in the firm's operations in order to keep up with the requirements of both dimensions of business and identity. This battle is often won by the strong, guarding forces of the precious human identity, leaving little space to expand the business. In short, entrepreneur or not, very few people would take the risk of experimenting with an identity or selfimage practically littered with existential-like values, such as feelings of personal growth, self-determination, freedom, usefulness, responsibility, and human dignity.

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Once these values become rooted within a business system, cautiousness instead of risk-taking, guarding and preserving instead of expanding, and enjoying peace instead of waging war often result. Money, profit, and growth appear to be surprisingly insignificant in the turmoil of psychological necessities facing the owner-manager trapped in the entrepreneurial triangle. These necessities are often dealt with on a semiconscious level, emerging into consciousness when the work situation allows reflection, which it seldom does. Concepts like the entrepreneurial triangle, emphasizing h u m a n identity and wholeness rather than character disposition, entrepreneurial talents, driving forces, and market characteristics offer new perspectives on the problems of business growth. Apparently, growth in business can be detrimental to growth in h u m a n identity, and factors preventing growth in business become embodied in the business structure itself. All of us are consciously or subconsciously searching for qualities that provide a sense of wholeness. If we see a picture of unrelated fragments, we automatically look for a shape representing some sort of meaning and purpose to us. Most people in working life are forced to accept a nine-to-five reality without a meaningful shape, but for entrepreneurs, the firm and their own identity represent a wholeness and unity, particularly if the business is shaped into the entrepreneurial triangle. Alien fragments are integrated or repulsed in accordance with what is psychologically and existentially reasonable and not what might be reasonable f r o m a business expansion point of view. This complicated mixture of existential and business evaluation affects the small business differently from a big business. In big business, there is much more emphasis on pure business evaluation because the size itself has a tendency to blow the entrepreneurial triangle to pieces, thereby promoting business and organizational rationality rather than existential rationality. A Small Mirror for a Giant Self-image Moving into the entrepreneurial triangle and examining its environment makes the self-image of the entrepreneur visible in every corner of the firm. From a superficial standpoint, one might expect that a person's self-image is so unique that finding similarities in a g r o u p as heterogeneous as entrepreneurs would be almost impossible. However, individualistic as the e n t r e p r e n e u r might be, we f o u n d some striking similarities in their self-images, and the role this played in dayto-day business operations. Generally speaking, work is simply synonymous with the life situa-

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d o n as a whole a n d not, as f o r most people, instrumental in realizing life goals outside of work. However, women e n t r e p r e n e u r s have a somewhat different perspective, even if the existing male culture in business serves as a r a t h e r effective shield. Women e n t r e p r e n e u r s have a m u c h stronger need to express m o r e life roles than j u s t work, without neglecting the d e m a n d s required by the business role. All the firms o p e r a t i n g on the triangular model were extremely rigid a n d lacked flexibility, a surprising fact since flexibility is believed to be the t r a d e m a r k of e n t r e p r e n e u r s h i p . T h e potential f o r c h a n g e was no d o u b t there, but if it is psychologically necessary to be involved in every detail of the business, it requires a lot of time and mental effort to change things. O n e step f u r t h e r into the triangle, t h e r e were also some striking similarities in the way of organizing work, in actions a n d behavior, and in the m a n n e r of experiencing a n d explaining. T h e s e similarities could be labeled the blueprint of the e n t r e p r e n e u r i a l triangle, a n d a sample of business variables can illustrate the details of that blueprint. Ownership constitutes the base where the concept of f r e e d o m always can be verified or identified. T h e concept of f r e e d o m works as a psychological d e v e l o p m e n t fluid. It stabilizes the identity as a businessperson a n d paints it with feeling a n d m e a n i n g . Overall responsibility is devoted to the task of maintaining a high level of e m p l o y m e n t security in the firm. Nobody should face the peril of losing his or h e r j o b . T o assume care and responsibility for employees is a very i m p o r t a n t part of the e n t r e p r e n e u r i a l identity, and in periods of financial stress, it creates an anxiety that goes beyond the risk of "just" losing the firm. Work organization must ensure that the e n t r e p r e n e u r ' s identity always is kept visible a n d coherent. If the whole is f r a g m e n t e d on account of some irregularities in the structure (i.e., malfunction of deliveries), there is d o u b t a n d confusion. T h e d a m a g e inflicted is repaired by tightening control and taking on m o r e work tasks instead of delegating work. Psychologically, e n t r e p r e n e u r s are p r e p a r e d to d o things themselves, despite a never-resting consciousness of their own lack of time a n d the d e m a n d to spread the responsibilities m o r e evenly in the organization. T h e structure does not recognize the n e e d of any professional management. T h e main strategy is based on the virtue of behaving as a friend, benefactor, a n d family head instead of a strategically o p e r a t i n g manager. It is the presence of others, and their d e p e n d e n c e , that gives the e n t r e p r e n e u r ' s identity strength a n d power, not the ability to lead and supervise others. T h e market and market relations are the load-bearing sections of the

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structure. T o be useful in relation to the market is a significant sign of the e n t r e p r e n e u r i a l identity. T h e market amplifies or questions the image a n d provides the necessary searchlight f o r an accurate identity verification. It is of utmost importance that the image does not get distorted, a n d it is t h e r e f o r e not surprising that nobody in the firm except the e n t r e p r e n e u r is allowed to handle this verification process. A high degree of codetermination or shared ownership is p a i n f u l for an e n t r e p r e n e u r . P a r t n e r s h i p in a psychological sense is only possible in relation to the life-partner, i.e., the o n e who by virtue of marriage has the "right" to share the e n t r e p r e n e u r i a l identity. T h e quality of working life f o r the e n t r e p r e n e u r is a question of business ideology r a t h e r t h a n the presence of rich and stimulating work tasks. T h e e n t r e p r e n e u r i a l identity represents an almost spiritual belief that the only possible way to achieve the status of a truly free h u m a n being is to own a n d m a n a g e a business firm. This is to a large extent reflected in the e n t r e p r e n e u r ' s attitude toward work. Despite inevitable hardships, t h e work is experienced in a j o y f u l m a n n e r . In the center of the work structure, holding all the pieces together, is the part believed to be the crucifix of all e n t r e p r e n e u r s — t h e inevitable lack of time. But this crucifix is actually J a n u s - f a c e d with two opposing images. O n the o n e side, lack of time triggers feelings of being the i m p o r t a n t one, the o n e who is n e e d e d a n d really counts. Energy is concentrated, ability is tested, a n d ambition never rests and always has a goal. Work tends to give e n t r e p r e n e u r s a social identity d e m a n d e d by their self-image. O n the other side, lack of time also triggers anxiety and feelings of shortcomings. One's ability never seems to be u p to standard, provoking psychosomatic symptoms like severe insomnia, p r o n o u n c e d feelings of restlessness, a n d inability to relax a n d stop thinking a b o u t the company. T h e surface structure of the business used to p r o d u c e a p r o d u c t or service a n d sell it on the o p e n m a r k e t has a basic color mixed by the psychological dependencies of business ownership. T h e p r o d u c t or service is not r e g a r d e d as a m e r e business object. Instead, its shape resembles the values a n d self-image of the e n t r e p r e n e u r . T h e customer is a fellow being making it impossible to use aggressive marketing methods. Competitors are viewed as colleagues, a n d the rules of the g a m e could be summarized as fair play. T h e fair-play rule is probably d u e to the fact that identity loses effect if one's success is attributed solely to bad competition. If the surface structure is based mainly on contract m a n u f a c t u r e , t h e r e is a constant search f o r a p r o d u c t of one's own. To only m a n u f a c t u r e for others is not natural for most e n t r e p r e neurs. In a work structure practically littered with tasks that are viewed as

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m e a n i n g f u l , there is however o n e type of task never associated with m e a n i n g a n d p u r p o s e . This includes both the d e m a n d s of and the actions required by government regulations. T h e d e m a n d s of governm e n t are always viewed as something outside the firm's sphere of interest. O n the o n e h a n d , this is d u e to the authorities' insensitive way of articulating their d e m a n d s . O n the o t h e r h a n d , the self-image of the e n t r e p r e n e u r refuses to acknowledge the control a n d lack of f r e e d o m which the g o v e r n m e n t culture is believed to represent. T h e e n t r e p r e neur's societal vision is firmly based on the belief that the imprint of society must be that of usefulness, w h e r e all citizens carry "their burden." A crucial f u n c t i o n in e n t r e p r e n e u r i a l businesses is the recruitment of new employees. Skill a n d professionalism are, of course, values to be sought, but the most i m p o r t a n t criteria is that the recruit u n d e r s t a n d s the connection between the tasks a n d what the c o m p a n y a n d its products stand f o r in the eyes of the e n t r e p r e n e u r . Skill and work ambition without the ability to grasp the m e a n i n g a n d p u r p o s e of the business is not worth m u c h . If the employee cannot detect and u n d e r s t a n d that the firm represents an extension of the e n t r e p r e n e u r ' s personality a n d serves as an identity booster f o r him o r her, the entire work structure in the firm might collapse. An e n t r e p r e n e u r i a l v e n t u r e is generally designed in total ignorance of the need f o r a social life outside of the business b u t has its implications with regard to how the family life is structured. If the e n t r e p r e n e u r is married, a n d most Swedish e n t r e p r e n e u r s are, the work structure usually engulfs the spouse into the business as some sort of elementary prerequisite f o r a social life together. However, if the spouse willingly accepts this condition of marriage a n d develops a similar existential d e p e n d e n c e o n the firm, the work structure gradually reflects a delicate democratic teamwork between the spouses, an assimilation process quite unthinkable for a m e r e hired h a n d . In this subtle team situation, neither spouse claims to be superior to the other. However, in the event that the assimilation does not take place, there is a great risk that the family life will be subject to a lot of strain, even if the spouse is working full-time in the firm. If the spouse f o r some reason does not participate at all in the business, the best family relations are f o u n d w h e r e the spouse has a professional life a n d is as equally driven as the e n t r e p r e n e u r . A critical issue in an e n t r e p r e n e u r i a l firm is the process of decisionmaking. A p a r t f r o m basic business economics, it is m o r e i m p o r t a n t that the decision-making "feels right" r a t h e r t h a n maximizes profit. T h i s reliance o n fingertip feeling is probably a reflection of the e n t r e p r e neur's d e e p psychological d e p e n d e n c e o n the firm a n d tends to make

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decisions extremely intuitive, even in situations where time allows m o r e fact-finding. T h u s , a lot of the alleged calculated risk-taking embodied in strategy is a process w h e r e o n e feels r a t h e r t h a n thinks to d e t e r m i n e right f r o m wrong. Which subconscious criteria are involved in this subtle emotional process is difficult to d e t e r m i n e , but a good guess is that the variables of h u m a n identity are involved j u s t as m u c h as the prospect of profit-yielding opportunities. W h e n t h e firm is owned a n d m a n a g e d by two persons, i.e., a formal partnership, the balance of power rests o n a f o u n d a t i o n of clearly divided spheres of competence. T h e interplay of d o m i n a n c e a n d indulgence is balanced by r e g a r d i n g the p a r t n e r s h i p in terms of values like "an equal person to discuss things with." But in fact, the only thing that is shared equally is the ownership. T h e spouses of the partners, in contrast with a one-owner situation, are not likely to be e n g u l f e d by the company. T h e r e is also a tendency that decision-making will be m o r e centralized a n d deliberately withheld f r o m the employees, since it is already shared by the partners. If the firm is o w n e d and r u n by a w o m a n , the work structure involves a readiness to articulate o t h e r life roles besides those of an e n t r e p r e n e u r . Women entrepreneurs seem to deal with g o v e r n m e n t authorities m o r e easily than their male counterparts, possibly because women, by virtue of their greater n u m b e r of life roles, have m o r e social c o m p e t e n c e to deal with the bureaucratic culture. Women also identify a n d solve conflicts m o r e rapidly t h a n their male counterparts, b u t they d o not a p p e a r to employ a softer leadership style. S u m m i n g u p t h e aspects of triangular enterprises, the possibilities of growth a n d expansion o f f e r e d by the market are to a great extent neglected by the e n t r e p r e n e u r owning a n d m a n a g i n g the firm. Of course, t h e r e are exceptions, firms that had grown mainly because the e n t r e p r e n e u r was a clear-cut g a m e s m a n with a drive to e x p a n d . But generally, small businesspersons t e n d to evaluate variables like profit, efficiency, organization, leadership, marketing, and growth with a twodimensional perspective. T h e e n t r e p r e n e u r s employing the triangular business model were, as a whole, not insensitive to profit-making or business expansion, b u t they would also m e a s u r e any new business prospect f r o m the angle of w h e t h e r it r e p r e s e n t e d a threat to the d e e p e r values of owning a precious h u m a n identity as well as a business firm. T h i s implies that a v e n t u r e in which the e n t r e p r e n e u r becomes too t r a p p e d in the e g o - p r o m o t i n g e n v i r o n m e n t of the e n t r e p r e n e u r i a l triangle would be slower to c h a n g e a n d m o r e cautious about taking risks t h a n what could be expected f r o m a v e n t u r e that is designed to make money.

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A New Entrepreneurial Concept Regardless whether the triangular entrepreneurial model is firmly cemented in the Swedish small-business community, there are signs that the triangle is beginning to disintegrate as a result of certain forces of change. First of all, we are moving to a knowledge and service industry, where human resources—particularly the way they are organized, utilized, and developed—will decide whether a company is competitive. This might sound like a paradox since we are living in a technological age, where spectacular industrial robots and microchips are likely to determine the use of human beings, not the other way around. However, while the technological level of the 1950s and 1960s might have restrained human knowledge and fantasy, the technological flexibility of the 1990s does not. On the contrary, in the tracks of a technology where everything seems possible, there follows a tendency to regard human knowledge and capabilities in a more flexible fashion. Human knowledge, skill, ambition, creativity, and fantasy are powers felt as able to create something valuable—and profitable—in a business environment of technological, administrative, and financial flexibility. Another force of change that is challenging the old entrepreneurial triangle is the new generation of employees going through the transition from adolescence to adulthood in a society where unquestioning obedience and respect toward authority are disappearing rapidly. The young generation of skilled technicians and administrators now entering entrepreneurial firms are not likely to accept a position with no influence on strategic company matters. In a Circle of Participation Thus, in the study of Swedish entrepreneurial ventures, a new model emerged, quite different from the old and still dominating one, appearing most frequently in new industries like computers, communication, and other high-tech ventures, and service firms requiring a high degree of professional knowledge. All these branches are expanding rapidly and so will, of course, the new entrepreneurial model, influencing and challenging the old archetype. The new model can be described as a circle where the influence on the business idea, leadership, and ownership is shared among the entrepreneur, employees, and a very active and knowledgeable board, although of course the entrepreneur is still the dominating figure. The

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pressure f r o m above (changed market conditions) and the pressure f r o m below (changed values of the work force) tend to flatten out the old entrepreneurial triangle. This forces the business idea, ownership, and leadership to r e g r o u p in a more horizontal fashion and simultaneously reduces the possibilities of enacting traditional entrepreneurial business strategies (see Figure 2). While the work structure of the entrepreneurial triangle was largely designed to support the entrepreneur's one-man show, the situation is different in the new entrepreneurial business structure. T h e two most outstanding differences are: 1. While employees in the old model unconditionally authorized the right of the e n t r e p r e n e u r to handle decisions and strategy alone, the employees in the new model d e m a n d to be regarded as participants instead of passive onlookers. Young and highly educated technicians want to feel that they are regarded as equal partners in every aspect of company operations. 2. T h e new e n t r e p r e n e u r knows, in contrast to his or her counterpart still trapped in the old model, that market success is dependent on whether all the company resources are successfully mobilized. This tends to promote a strategy where the continuous presence of the entrepreneur's identity in the work structure is replaced by a behavior promoting the employees' participation in decision-making and strategy. Psychologically, the key word participation becomes a productive force instead of a threatening one, and even a word like ownership is used in the process. T h e r e was, by the way, no trace whatsoever of this practice in the old model. These two major differences mean that the new e n t r e p r e n e u r is not psychologically glued to the company—at least not to the extent of inhibiting the ability to see that the company possesses more resources than the individual's own ambition and skills. T h e barrier of "my company" is still erected but not to the extent that it continuously demands presence in, and control of, the work structure in all its details. Furthermore, delegation of responsibilities is seen as the pro-

Business idea—Leadership—Ownership

j Employees J

Figure 2. Circular model.

Entrepreneur

ι

Board

ι

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ductive use of existing resources without causing any m a j o r identity d a m a g e f o r the e n t r e p r e n e u r . W h e n employees are valued as equal coactors in the business a r e n a — a n d motivated a n d g r a n t e d the use of their full capacity—this decreases the pressure experienced by the e n t r e p r e n e u r caused by lack of time. Incidentally, these m a n a g e r s were the only ones in the research sample that did not regard lack of time as a m a j o r problem in their work. T h e ambition to e x p a n d a n d grow also becomes m o r e focused o n market possibilities a n d less d e p e n d e n t on the structure of psychological a n d existential prerequisites rooted in the old e n t r e p r e n e u r i a l model. T h u s , growth in business terms would in the new e n t r e p r e neurial model take p r e c e d e n t over growth in terms of a precious h u m a n identity. Even taking into consideration that the growth potential in new branches exceeds those in old branches, the values of new e n t r e p r e n e u r s r e g a r d i n g the growth concept were considerably m o r e expansive than those of the old e n t r e p r e n e u r s . A N e w Business Logic A firm's growth potential is s t r e n g t h e n e d w h e n both the b o a r d a n d the employees participate in the evaluation of growth possibilities. T h u s , to have as many employees as possible evaluating the business idea, in working o u t guidelines f o r the firm's leadership strategy, a n d in owning the company is now r e g a r d e d by many new Swedish e n t r e p r e n e u r s as a productive a n d profitable way of using a n d developing c o m p a n y resources. O n e e n t r e p r e n e u r explained it in the following way: When I share the ownership with the employees, I don't have to motivate them to build up a sound capital base in the firm. They are just as eager as I am in that respect, and it also decreases the labor-management tension considerably. Had I been the sole owner, I would have faced a lot of problems that would have jeopardized business operations. Shared ownership is a business strategy in my mind. I don't feel that I have lost my company. It is simply a business necessity that I share the ownership instead of keeping everything in my own lap. I can recruit competent persons, motivate them, and make them work toward my goals.

In the new e n t r e p r e n e u r i a l concept e m e r g i n g in Sweden, the key word participation also m e a n s that m a n a g e m e n t stands f o r a considerable delegation of responsibilities a n d codetermination. T h e employees are looked u p o n as c o m p e t e n t coactors in the business a r e n a f o r m e d by the c o m p a n y and are thereby g r a n t e d the benefit of trust r e g a r d i n g the use of their skill a n d ambition to f u r t h e r c o m p a n y goals. A y o u n g and very successful Swedish e n t r e p r e n e u r describes his c o m p a n y philosophy in the following way:

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In order for my company to be successful, I need motivated employees, employees that feel they are part of the company, not only employed to do a clearly defined task. They should know that they share things with me, that they are involved. As a consequence, I am forced to reduce my own ego. In Sweden, complete ownership is an ego symbol and a very delicate subject for most entrepreneurs. Very, very delicate. But even if I am the one that has mortgaged my house and endangered the economic stability of my family life, I still want to share both the management and the ownership of this firm. It is in fact a sound business principle. If the employees increase their efforts, my part of the whole operation will be worth more, even if my slice of the entire cake is smaller than what the traditional entrepreneur would accept. The greatest hazard for a high-growth business venture such as mine is the loss of key persons. T h e success of my company is, without a shadow of a doubt, a result of the efforts made by the employees, and if I want to continue to grow and develop and stay in business, I have to deal in a rational and businesslike manner both with respêct to ownership and management strategy.

Such statements of company philosophy are becoming more common in the Swedish business world. There is an ongoing transition from the old to new business and leadership concepts in most Swedish firms. The most striking feature in this transition is the upgrading of human skill and competence relative to machinery and that has, in turn, challenged old doctrines on how to manage both the business and employees. The new emerging entrepreneurial concept is only one sign of this transition. But it is an important one because, even if flexibility is considered to be one of the main characteristics of a small business firm, clearly many entrepreneurs show a severe lack of flexibility in their leadership and business practices. Evidence of a change that seems to promote business growth is more than good news for Sweden. Even though promising changes are occurring as far as the entrepreneur's leadership perspective is concerned, there is one important question to be answered regarding the future development of small business in Sweden. Is the social climate and government ideology and industrial policy—the famous Swedish mixed economy—for or against small business? To answer that question, we will now leave the problem of small-business leadership and end this chapter with a brief analysis of the overall climate for small business in Sweden. From Winter t o S p r i n g for Small Business? Only fifteen years ago, most Swedish small-business owners would probably have cried out angrily that government and the business climate was definitely not for them. Even the government itself would probably have agreed to that statement after a few moments of critical

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thought. T h e climate was indeed frosty for small businesses in almost all respects. On the macro level, entrepreneurs were not allowed to participate in government and business summit meetings that discussed both the future of Sweden as a trading nation and serious industrial relations issues. T h o s e meetings, an important and regular feature o f the mixed economy, were traditionally a show featuring big business aristocracy versus big-business-indoctrinated top union officials and government ministers. T h e representatives o f the smallbusiness community were always politely guided downstairs to subcommittees o f minor importance. T h e s e values were also reflected in government measures regarding business and labor legislation, ranging from insensitive taxation o f ownership shifts in small family businesses to enforcing the same rigid rules for redundancy and hiring o f personnel for a small firm of five employees as for Volvo. Worst o f all for small business was the patronizing attitude o f the society as a whole, especially the media. Entrepreneurs carried little respect in the eyes o f the public. T h e climate was both ignorant and indifferent and, at worst, an entrepreneur was regarded as a "legalized criminal," someone who without hesitation cheated on taxes, cheated the customers, cheated the employees, and lived like a pharaoh on his fortunes. "Small business might be necessary but we don't have to love it" seemed to be a view shared by the government all the way down to the man on the street. T o understand why Swedish culture had become so ignorant of and indifferent to small business, one must understand the history o f Swedish industrialization and the values guiding it. T h e architects of modern industrialized Sweden were mainly Social Democratic policymakers, many of them former top-ranking union officials or those with their roots in the labor movement. T o p industrialists, like the Wallenberg family, entered into an early pact with the Social Democratic architects, thus becoming the civil engineers and finance directors o f industrialization. Naturally, they kept a special eye on both the profit possibilities and the development pace, while following the master blueprint strategically instead o f fighting it. Since small business lacked both leaders with union roots and industrialists like Wallenberg, they had no influence whatsoever, on either the blueprint or the strategic implementation o f it. Consequently, Swedish industrialization became a question o f advancing and protecting big-business ideas and values. This might not have been so bad for a business sector traditionally seeking solitude and freedom from government interference, had it not been for the fact that the pact tended to codify small business in a lot o f agreements and regulations designed to further big business—big union coexistence. T h u s , small business was quickly caught in the

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irritating t r a p of having n o influence at all on the macro level and restricted f r e e d o m of m o v e m e n t on the micro level. A n o t h e r fact that m a d e the Swedish small-business m o v e m e n t r a t h e r peculiar was that the r e c r u i t m e n t of e n t r e p r e n e u r s was not likely to grow out of the big-business e n v i r o n m e n t , as might be the case in o t h e r industrialized countries. T h e first priority of a creative and innovative worker discontent with his or h e r situation was not to start u p a business of his o r h e r own. Instead, a career as a white-collar employee within big business was m o r e t e m p t i n g a n d challenging in Swedish society. This has to d o with the f o r e r u n n e r s of industrializat i o n — t h e Swedish bruk—big companies employing the majority of the population in small a n d poverty-stricken towns in the h u g e f a r m i n g a n d forestry areas. T h e s e bruks catered to every need of their employees in a r o u g h a n d patriarchal f a s h i o n — h o u s i n g , stores, medical services, a n d so forth. For the employees, formerly p o o r farmers, the bruk symbolized security, a chance to survive a n d give the family at least some sort of decent life. In r e t u r n , they had to show respect and obedience to t h e patriarch (the o w n e r of the bruk). T h e s e values followed in the footsteps of industrialization a n d are to some extent responsible f o r the Swedish tendency of being cared for by industrial "patriarchs" a n d u n i o n o m b u d s m e n in m o d e r n times. This did not, of course, create a positive climate f o r e n t r e p r e n e u r i a l activities, and there are still parts in Sweden w h e r e it is impossible to imagine that an employee would leave the safe e m p l o y m e n t of a big c o m p a n y a n d start a business of his o r h e r own. However, there are areas with n o bruk tradition w h e r e small business, in fact, is the way to d o things. W h a t finally c h a n g e d things in the latter part of the 1970s was two different events that occurred simultaneously o n the Swedish business scene. First of all, big business r a n into trouble t h r o u g h o u t Sweden. Gradually, large companies lost m a r k e t share a n d profitability and eventually failed to provide e m p l o y m e n t opportunities. Secondly, the Swedish Employers Federation a n d o t h e r business g r o u p s began an ideological campaign against the d e e p - r o o t e d Swedish value of collectiveness. "Believe in yourself as an individual" was the catchword. Linked with the now h u g e collective misfits r e f e r r e d to as big business, it gave a t r e m e n d o u s boost to small businesses a n d small-business values. T h e birth of the individual Swede a n d the u p g r a d i n g of personal talents a n d abilities relative to the power of collective h u m a n resources was contrary to the Swedish value of solidarity at all costs, o n e of the main pillars of the ruling Social Democratic party. Conflicts occurred, but the new m o v e m e n t of individuality rolled o n and rapidly began to take root in the values of people, both work life a n d political thinking. T h e Social Democrats even had to s p e n d six

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years in opposition, and when they regained power, they had adopted a more pragmatic and less ideological view regarding the dynamics of business life. Regional development funds (established by the shortlived conservative cabinet throughout Sweden with the specific task of furthering small business financially and otherwise) were further strengthened by the new Social Democratic government. Even though the small-business minister, also installed during the brief conservative reign, was abolished, small-business issues were not. Instead, they became an important part of the Department of Industry. Outside the cabinet, the merchant bankers, who were indoctrinated by big business since the beginning of industrialization, started to look at small business with a new interest. Start-up loans and investment schemes were actually promoted to small business. Another activity that suddenly emerged from a different corner of the society was a huge variety of training courses for would-be entrepreneurs. Even if it is wrong to say that small business was surfing on a giant wave of popularity, the climate and values had changed drastically in favor of owning and managing a small business. Now, at the beginning of the 1990s, the climate is still favorable. Small-business organizations (and the increasing number of business magazines promoting their views) might not carry the same weight as big business organizations, but the small-business voice is at least listened to and is gradually becoming a force in the business community at large. It is unlikely that small business will ever slip back into obscurity again. The profession of small businessperson is now a more respectable occupation both in the eyes of the government and the man on the street. However, the changes beginning in the 1970s have not yet resulted in any major increase of employment opportunities within the small-business sector. On the contrary, the small-business share of new jobs created has actually decreased compared with big business. In fact, big business has regained its position as the safe and familiar face of the nation with regard to profits, industrial development, and employment opportunities. Thus, we are faced with an interesting paradox. Never before in the history of Sweden have conditions for small business been so favorable as they are now. As one small businessman put it, "It is a fantastic change. Some of the banks are actually begging me to accept a loan they flatly refused me ten years ago. And I had more potential then than I have right now." Yet small business is virtually at a standstill, refusing to grow at a pace comparable to the opportunities offered. Nobody blames the government any more, but it evidently takes time for an oppressed sector of a nation's business life to adjust to new conditions and new

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opportunities. Deep down, it is probably a question of changing old and firmly rooted values, but there are promising signs that the risk attitude toward business is changing. T h e n u m b e r of newly started businesses has reached an all-time high and so has, by the way, the n u m b e r of bankruptcies. This might be a sign that Swedes are finally exposing themselves to the adventurous perils of small business at a rate that nobody could have expected fifteen years ago. T h e amazing fact is also that neither the government nor the banks and other financing bodies are trying to stop them. This suggests two f u t u r e developments that might be promising for small business in Sweden. First of all, it is easier to start a small business today. People are encouraged to do so, and there is no lack of capital on the market to prevent them. Even the government allows this risk-promoting behavior to continue without obstacles. Secondly, for a Swede, it is a new experience to realize that the nation now not only occupies a top-ranking position as a welfare state, but also has won the world champion title when it comes to the n u m b e r of bankruptcies per capita! Although this may be a realistic measure of dynamic business activity, the main questions are will there be followers, and will the first failures make another try, more experienced and concerned with stabilizing and developing the business than loving it as a beautiful temple of personal freedom? T h e r e is no way to tell. A qualified guess might be that if gamesmanlike values such as risk-taking and competitive creativity are beginning to penetrate values like lagom and collective security, we might see the beginning of a real spring for small business in Sweden. This spring might even solve the major structural problem of Swedish industry, the lack of medium-sized companies, i.e., small businesses with a capacity and willingness to grow and expand and fill the now-empty gap between very big and very small business ventures. It is apparently not a question of lack of markets, capital, or even talent or initiative. It is, as this chapter has tried to illustrate, more a question of the combined effects of a nation's social character and the existential concepts influencing the leadership and growth strategies in the small firm itself.

Notes 1. T h e e n t i r e r e s e a r c h p r o j e c t is d o c u m e n t e d in A k e B e c k é r u s a n d B. Roos, Affärer som livsstil ( S t o c k h o l m : Liber, 1985); E n g l i s h t r a n s l a t i o n : Joyful Bondage: The Small Business as a Way of Life ( S t o c k h o l m : F A r â d e t , 1986). F a r m i n g was e x c l u d e d f r o m t h e study. 2. M i c h a e l Maccoby, Why Work: Leading the New Generation ( N e w York: S i m o n & S c h u s t e r , 1988).

Part II: Organizational Transformation

Chapter 5

Scandinavian Airlines System (SAS): Strategic Reorientation and Social Change Anders Edström

One of the most spectacular turnarounds in Sweden in recent years is that of the Scandinavian Airlines System (SAS). It has attracted a tremendous public interest and extensive publicity both nationally and internationally (Financial Times, 1982, 1983, 1986; Fortune, 1983; Wall Street Journal, 1983, 1985, 1987). The leadership of SAS mobilized employees, customers, unions, suppliers, and government agencies in a strategic reorientation of the company. The new business and leadership ideals also inspired other firms in their quest to become more competitive. However, the implementation of ideals in practice showed that a vision was not enough. Top management assumptions were too simplistic to handle the complexities of operations. Adaptations of ideas and approaches were needed to integrate people and operational functions in a new strategic pattern. The value orientation of managers (social character) and the requirements of the task were important intervening variables between the implementation of strategy and social change. The development at SAS since 1980 can be summarized in a nutshell as follows. During the period 1981—83, the corporation underwent substantive changes in business strategy, service, products, organization, leadership, recruitment, staffing, and image—in other words, a complete turnaround of the company. The commercial success was immediate. In 1980-81, SAS reported a loss of $14 million, and in 1981-82, a profit of $42 million. Market share and service also improved markedly. During 1984—86, the emphasis was on internal development.

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The original strategies were refined, flight schedules were adapted, and a campaign for further decentralization and local initiatives was launched. The aim was to win middle management for the new ideas and strategies and to increase productivity. Managers were expected to take more responsibility for both development and productivity. Since 1986, SAS has been aggressively working to establish a position as a major international carrier in a more deregulated market. The focus is on growth and expansion. The company has established agreements to coordinate and pool traffic at key international gateways and is seeking further partners in order to strengthen its international network. I will argue that even though the SAS example has certain unique characteristics, such as Scandinavian cooperation and government ownership participation, it illustrates a more general pattern of strategic reorientation. Industrial firms such as Asea and the Bahco Group have gone through major restructuring to become more business-, market-, and service-oriented. This process has forced them to reorganize, trim overhead costs, combat bureaucracy, and improve customer service. Government agencies, such as the Swedish postal services and railroads and the Labor Market Board, are going through major changes to adapt to a new, more deregulated, and competitive environment. These and other experiences have showed that fundamental changes in business direction or organizational mission require new ideas and strategies that challenge traditional beliefs and values, define the need for change, motivate the development of new competence, and legitimate new behavior patterns. If new challenges are defined in terms of traditional beliefs and values they will lead to "more of the same" and the need for change will not be recognized. A new vision and leadership is needed to mobilize people to work for new goals, learn new skills, and relate in new ways to others. Basic company beliefs and values are not changed easily or rapidly. New ideas and strategies can arouse enthusiasm if they are perceived as solutions to important problems, but enthusiasm is not enough. Ideals have to be implemented through operational change. This involves recruiting and promoting people with different values and competencies who can implement the new strategies. It also involves working persistently to change product designs, work organization, training, marketing and distribution, and production technology to put the ideas into operation. Individuals do not easily change their basic beliefs and values, however, short of personal crisis or therapy (Maccoby, 1988). New ideas can build resistance if people find that their values and needs are

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not respected. Leadership has to integrate people with traditional beliefs and values in a new dominating value orientation for the company. T h e need to shape a new strategic orientation gives business leadership political and pedagogical dimensions. Recognizing these will broaden and deepen our understanding of both business and leadership. It will also allow us to understand better how business firms can help shape the society in which they are a part. A change in business direction can be a model for social change with a significance beyond the particular example. Research on strategic reorientation and change still lack good empirical research to make theories and concepts better grounded and more useful for practical application (cf. Kimberly and Quinn, 1984; Schein, 1985; Tichy and Devanna, 1986). In particular, there are few longitudinal case studies to learn f r o m (Pettigrew, 1985). T h e present study will add to a meager empirical base. In order to bring out the significance of the SAS example, we need to understand it in its historical, business, and cultural context. As we have seen in chapter 1, shifts in competition, technology, and values gradually transform the business realities, u n d e r m i n e traditions, operating procedures, and dominating values. Corporations such as SAS need to adapt to these forces of change in order to survive and remain competitive. Some succeed through innovative change and become a source of inspiration as well as of envy for others.

History a n d Forces of

Change

SAS is a consortium formed in 1946 by three private companies in Denmark (DDL), Norway (DNL), and Sweden (SILA) to handle air traffic over the North and South Atlantic. T h e i r cooperation was extended in 1950 to include both European and domestic traffic. SAS has the first choice in operating domestic traffic in the three countries and exclusive rights to traffic outside the Scandinavian borders. When the cooperation was extended in 1950, the governments of the three Scandinavian countries came in as part owners. Swedish interests put u p three-sevenths of the capital in the consortium, and Norwegian and Danish, two-sevenths each. O n e company in each country is a joint venture of private industry and government, each holding 50 percent of the equity. After World War II, the airlines faced the critical question of capitalizing on technological progress to build customer demand. Technical know-how remained primarily within the air force, and a n u m b e r of mechanics, pilots, and engineers in SAS had a military background. It

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was not until 1980 that separate education and training of pilots for civil aviation was established. In the early history of the airline industry, security and technical quality was of paramount importance in building confidence in the marketplace. SAS was in the front line among airlines in coping with technological changes. Technological progress was so rapid that aircraft quickly became obsolete; new aircraft appeared with such distinctly superior features that all airlines had to acquire them to keep up with the competition. Examples of such technological leaps were the pressurized cabin, long-distance aircraft making fewer or perhaps no intermediate landings, and larger and faster aircraft that increased capacity and lowered costs per seat. These features of the new aircraft created commercial opportunities: extending the network by opening up new destinations, and flying faster and at lower prices in real terms on the existing network. T h e challenges to management were to rapidly build knowledge and experience of the emerging technology to recruit and train crews, mechanics, and engineers, and to invest in new aircraft, maintenance bases, and airport facilities. These technical developments, together with commercial questions such as coordination of timetables and routines for exchanging documents, settling accounts, or standardizing practices between airlines, made it advantageous and even necessary for companies in the industry to cooperate. SAS management was active in supporting cooperation within the International Air Transport Association (IATA), which became an important medium for this type of cooperation. SAS also increased efficiency by way of joint equipment specifications, inventory rationalization, and sharing maintenance and overhaul work with KLM, Swissair, and UTA. T h e airlines were highly regulated by national governments. Civil aviation authorities controlled the industry and operated airports and air traffic control. Concessions were granted to airlines through bilateral negotiations and agreements between governments. Governments organized their own cooperation in bodies such as the International Civil Aviation Organization (ICAO). Thus, airline management was much involved in technical, political, and operational issues. It required skill, competence, and diplomacy to handle negotiations and contacts with the authorities. People who had joined SAS after the war and proved themselves competent to cope with these issues found themselves in key positions in the company in the mid-1970s. Most of them were recognized experts in their respective fields such as engineering and maintenance, flight operations, government relations, and economic control. Since

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technology had b e e n such an important force of change, many of the key p e o p l e had a technical education and experience. Many had had careers in the national air force or with civil aviation authorities. T h e y had m a d e important contributions in their respective fields of expertise and thereby h e l p e d shape the company. T h e career of Dr. Knut Hagrup, president of SAS f r o m 1969 to 1978, can serve as a p r o m i n e n t example. Knut H a g r u p was born in the Norwegian city of Bergen on November 13, 1913; he completed his undergraduate work in natural sciences in 1933 and in business administration in 1934, and he graduated from the Royal Norwegian Air Force College as a pilot a year later. He earned his degree as an aircraft and engine designer at the University of Darmstadt in Germany, graduating in 1940. Within the short space of six months, he found himself in action against the Germans in the defense of Norway; he was captured but escaped to Sweden and found his way to Britain where he immediately joined the Norwegian forces in exile. He spent the whole of World War II both as a transport pilot and as chief engineer of the Free Norwegian Air Force. After the war, Dr. H a g r u p served as chief engineer for the Norwegian Civil Aeronautics Board before joining SAS in the same capacity when it came into being in 1946 as the consortium of the Danish, Norwegian, and Swedish airlines. Dr. H a g r u p became Vice President Operations of SAS in 1951 and in that capacity was responsible for coordinating the technical planning and research for SAS's pioneering Polar route between Europe and California in November 1954. By 1962 he was promoted to Executive Vice President, Technical and Operations, and in October 1969, he took office as the sixth President of the trinational consortium. During his SAS career, he was largely responsible for the technical decisions which were involved in SAS's purchases of more than a billion dollars worth of American flight equipment. As head of SAS, Dr. Hagrup also headed or served on the boards of many subsidiary and associated companies in the SAS group and on the board of Thai Airways International. Dr. Hagrup's election in 1974 as President of the I ATA capped a career of leadership in international matters. He was a long-time member of the IATA Technical Committee and was Chairman of the historic IATA symposium on Supersonic Air Transport in 1961; and he served on the IATA Executive Committee until his retirement in 1978. (Seawell, 1979). Other key managers had careers with similar backgrounds but varying patterns. SAS was noted for its low personnel turnover. In 1976—77, turnover at the head offices was 1 percent, half of which was d u e to death and retirement. At the same time, turnover at the technical bases was between 4 and 5 percent. A generation of managers had basically grown u p with the company.

Concentration on the Airline Business After 1946, SAS e x p a n d e d by e x t e n d i n g its route network, first internationally and later domestically. In 1957, for instance, SAS acquired

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50 percent of the equity in the newly formed Swedish domestic airline Linjeflyg. The remaining 50 percent was owned by the Swedish government. SAS also acquired positions in domestic air traffic in Norway and Denmark. In 1961, SAS formed the charter airline Scanair in order to capitalize on the opportunities in the market for charter travel. From 1946 to 1961, growth was confined to the airline business where there were opportunities for synergies, particularly in technical and operational functions. The new jet age meant a rapid increase in capacity, when a large number of airlines renewed their fleets at the same time. The industry went through a period of overcapacity and economic losses, "the jet crisis." To strengthen its position in the marketplace, SAS invested in hotels, flight restaurants, and kitchens, and somewhat later acquired travel agencies, tour operating companies, and freight brokers. It was a means to assure a more stable volume and capacity utilization of the fleet. Although SAS integrated forward in the value-added chain, there was no doubt that the center of gravity remained in the airline business (Galbraith 1983; Galbraith and Kazanjian, 1986). The values and established modes of thinking which had been developed for a long time in SAS continued to dominate. The new businesses were, by and large, left to themselves and regarded with a certain skepticism by the key people in the airline. A member of the previous management team expressed it in the following way: People who have worked in the airline for a long time and got used to an industry with a lot of international contacts had the impression that their jobs were more particular and looked down on businesses like charter flights, travel agencies, and domestic air traffic.

This business thinking was molded by experiences in the airline business. The basic beliefs and values which had emerged there historically defined the business reality. Toward the mid-1970s, SAS lost market share, and productivity started to go down. Customers left SAS partly because for the fullpaying passenger the service did not match the price. Punctuality was poor and service onboard and at airports was sub-standard. Employees felt that their proposals for better service met difficulties in getting management acceptance because technical and operational issues got a higher priority. Punctuality, for instance, was low because the aircraft waited for late incoming passengers rather than sticking to the original schedule. In a stagnating market with tacit price competition, passengers started to leave SAS for competing alternatives. The employees with direct customer contacts felt the customer's dissatisfaction with

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SAS b u t also the difficulties of d o i n g anything about it. Relations with customers deteriorated. Service employees felt that they did not have the o p p o r t u n i t y to d o a good job. It became obvious that decisions were m a d e on a basis and with a priority that did not include customer needs. H o w can we explain the tension between customer views a n d the behavior of the company? T h e d o m i n a t i n g corporate beliefs a n d values are i m p o r t a n t explanatory factors. T h e y had been developed and institutionalized d u r i n g a period of rapid technological development, as we have seen above. T h e technical a n d operational elements of the business were d o m inant because that type of competence had previously g u a r a n t e e d success. O t h e r parts of the company were not u n i m p o r t a n t , but there was n o d o u b t w h e r e the center of gravity was. D u r i n g the 1970s, technological c h a n g e slowed d o w n a bit, a n d the importance of technological a n d operational capabilities for the competitive power of SAS declined in relative terms. Flight safety was taken f o r granted, and m o r e a n d m o r e companies matched the service which SAS offered. However, the d o m i n a t i n g ideals a n d modes of thinking stayed the same. T h e business was defined and discussed in terms of flight network, time schedules, type of airplane, a n d passenger kilometers, that is, mainly t h e terms of production. Business a n d customer relations were seen f r o m this f r a m e of reference. Actions a n d adaptation were discussed with the tacit assumption of a given and growing m a r k e t where the key to success was to a d a p t the cost structure. Cost-cutting campaigns were t h e r e f o r e a standard ingredient in the m a n a g e m e n t repertoire. Overall, the thinking a n d actions of m a n a g e m e n t were quite reasonable given the previous circumstances. T h e goals of flight safety a n d technical a n d operational quality directed efforts in education of technical a n d flight personnel. Detailed instructions a n d p r o c e d u r e s f o r m a i n t e n a n c e a n d sanctions against risk-taking that might affect safety were emphasized. Dominating values in the c o m p a n y were quality, precision, planning, and control. T h e s e values were e m b e d d e d in organizational forms, administrative systems, procedures, a n d relations a m o n g people, for instance, the relations between superior a n d subordinate. M a n a g e m e n t was centralized to assure c o h e r e n t behavior in the entire system of maintenance bases and air terminals a n d detailed control of safety a n d costs. M a n a g e m e n t was built on expertise in specific work a n d a strong emphasis on detailed instructions. T h e basic values were also legitimized by g o v e r n m e n t control agencies which also emphasized security, control, quality, a n d procedures. Since the technical and operational functions were critical f o r

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company growth and survival, managers from these functions came to dominate corporate management. Their values and modes of thinking dominated the company. These values were not, however, shared by everyone in the organization. There were other values with loci in other parts of the company. The existing power system, the organizational arrangements, and leadership supported beliefs and values which became more and more resistant to change. Initiatives and proposals by people in marketing or customer-related positions were often kept in desk drawers, which created growing frustration among many employees and dissatisfaction among customers. Traditional experiences and values aggravated rather than solved the problems. Service and customer relations remained a low priority. SAS lost market share. Strategic Reorientation The dominating value orientation defined top management's approach to change. Managers emphasized analysis, comparative studies of other companies, and trials on a limited scale. The overwhelming part of the work was done internally without consultants. The effort was dominated by top management, and new values were not easily accepted. Many of the studies and analyses generated good ideas and proposals, but were only improvements on the same basic approach. Despite much effort, the practical results were marginal. There was a lack of commitment and enthusiasm among employees. They did not notice any major changes, and many felt that the problems they encountered were not really addressed. The lack of broad information on what top management was doing to improve things increased feelings of uncertainty. Furthermore, SAS posted a loss in 1979—80 for the first time in seventeen years. It was not until a new leader arrived at SAS that a more profound reformulation of the mission and strategy for the company took place. As part of the turnaround process in 1980—81, the new president, Jan Carlzon, presented a new business direction. It reflected a new interpretation of the business realities and a new view of human motivation and leadership. Overall, one is justified in talking about a new holistic vision of the corporation. The ideas were new to SAS, but they were not so new or revolutionary in a wider context. Carlzon had developed his ideas over a number of years as managing director of Vingresor, a tour operating company, and Linjeflyg, the Swedish domestic airline. Some of the ideas of market segmentation, organizational forms, and product de-

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velopment existed within SAS but had never been seriously tried. T h e unique challenge was to transform the ideas into action by creating a common understanding of goals and strategies. Carlzon used his power to legitimize new business strategies and values. T h e new management realized that it was no longer enough to be a safe carrier with a good network and timetable. T h e company had to create new services f o r the customer. Since the business traveler is the most frequent and least price-sensitive customer, it was natural to focus on this market segment. A n analysis of customer requirements gave ideas f o r pricing and service improvements. In this analysis, one could distinguish between the basic or primary service, which was a safe flight from point A to point B, and secondary service, which included such elements as ticket sale, check-in, service on board, transportation to and f r o m the airport, and hotel upon arrival. T h e strategy that evolved during the first months after Carlzon took over can be summarized in the following basic points: • emphasis on the full-paying passenger (business traveler's airline) • a marginal capacity filled by tourist class passengers but a clear differentiation in service between the two market segments • resources consolidated and the organization designed to meet the needs of these segments • rather than operating unprofitable lines, cooperation sought with other airlines at important junctions, such as Bangkok and N e w York • a decentralized organization to become more responsive to the market • freight marketed through a new concept o f door-to-door transport with more flexible pricing. T h e goal was to make each geographical market (route sector) profitable. With a service chain instead of a basic service, the business opportunities were extended. With a somewhat wider spectrum of services, more customer needs could be satisfied. Also, business and service relations became less programmed and provided a wider range of choices f o r the customer within the overall framework. Details were increasingly defined in direct interaction between service personnel and the customer. Expectations of flexibility and a service orientation were created in the market. A new f o r m of customer relationship was promised.

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T h e service chain concept focused attention on the relationship with the customer and the market as the primary concern rather than internal efficiency. T h e standing question became, "What is the customer willing to pay for?" It also led to a much more differentiated view of service. Coordination of the service chain became an important management concern. Economic potential and organizational requirements of different market segments became objects of study and action. T h e new strategic orientation was based on the empowerment of employees to make decisions to deal with specific situations and customers. They should not have to check with their superiors or consult procedures. In unclear situations, it was better to act than not do anything at all. With more freedom, there was also more responsibility to achieve goals and follow the overall strategies. A market-driven business promoted values such as independence, personal responsibility, flexibility, and risk-taking. T h e challenge was to persuade an organization with strong emphasis on planning, control, and expert knowledge to adopt the new business values. Carlzon was successful in presenting the new values in both words and action. They appealed to large groups of employees. Marketing and service personnel felt that the definition of the company's challenges reflected their own experiences and helped them understand their own problems. T h e new business strategies included a n u m b e r of projects that had already been underway. This helped to capitalize on existing competence and to build motivation. Furthermore, many people realized that something had to be done and, since the new management had both ideas and enthusiasm, they went along. T h e previous management had understood many of the problems that SAS faced, but the company could not acquire a new direction within the existing value orientation. These values were deeply rooted not only within the previous top management but also a m o n g middle managers and employees. T h e value conflict was not solved but pushed to the side in a period of intense work and initial success. SAS was on its way to redefine itself as being in the travel business rather than in the airline business. This change really started in the beginning of the 1960s, but not until the 1980s was there a determined effort to change the business thinking (Figure 1). T h e shift f r o m a concentration on the airline business to a travel business that integrates air transportation with hotel, ground transportation, service in airports, and destination services is a drastic change. It requires a new view of the business, and new competencies, particularly in marketing, financial analysis, personnel, and information tech-

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nology a n d services. It is like c h a n g i n g the c o m p a n y identity: the way people see themselves, what they are, what they are able to do, a n d how they want to work. It involves a m a j o r c h a n g e in c o m p a n y values. Having analyzed the vision f o r a strategic reorientation, we now t u r n to the leadership of the strategic change.

Leadership O n e of the m a n a g e r s in SAS c o m m e n t e d u p o n how the new ideas a n d t u r n a r o u n d affected him: " H e [Carlzon] was able to deliver many of the t h o u g h t s and opinions which I already had in mind. T h e world seemed right to m e again." This m a n a g e r had a new perspective on his own work. H e had been thinking along similar lines without being able to shape t h e m . T h e same m a n a g e r r e t u r n e d to his own values d u r i n g the interview: "I also like that o n e is working with the personnel who were previously repressed. Now they dare to come forward m u c h m o r e with their values a n d ideas." T h e c h a n g e in value orientation gave this m a n a g e r legitimate s u p p o r t to act m o r e according to his own j u d g ment.

Manufacturer of airplanes and motors

• Airline J SAS is formed (1946) I Linjeflyg (1957) I Scanair (1960)

Travel agency • tour operating company J. Hotel (1960) i Catering (1961) J. Nyman & Schultz travel agency (1970)

i Vingresor/ Club 33 tour operating company (1971) Figure 1. T h e shift in SAS strategic organization.

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In this section, four aspects of leadership are analyzed which are important for shaping strategies and values: the personal example of the leader, the language for expressing new strategies and values, the tacit message, which conveys value differences, and the emphasis on action which links strategy and values to operations. It illustrates how one particular leader deals with the political, pedagogical, and problem-solving dimensions of his role. The Personal Example The personal example of the leader is of great importance for shaping a new orientation for the company. This is nothing new in the history of leadership. Seneca wrote: "People rely more on their eyes than on their ears. Therefore, it takes a long time to educate through rules and instructions, but it is short and effective with the help of examples" (Johannesson, 1983). Carlzon had early in his life come to work in roles where the reactions of the audience or the customers were both the primary inspiration and the best source of knowledge. His work experience ranged from part-time work as a journalist to President of SAS. To develop services that people want runs like a thread through his career. As organizer of a student carnival and as travel guide and local representative of Vingresor (a tour operating company) the challenges were similar. One needed to be sensitive to what people wanted and then develop it with an unshakable confidence. Carlzon also had a personal drive for the attention and enthusiasm of others, which constantly stimulated him to take on more spectacular tasks. At Vingresor, where Carlzon started as a tour guide and advanced to managing director, he built up his competence to lead a service company in a tough competitive environment. He practiced product development in close contact with the market and decentralized decisionmaking with profit responsibility. He continually watched the reactions from the market and from employees. Carlzon considers Vingresor the best education he had, and in 1984 he described his experience in the following way: I learned to build flexibility into the organization. We could expand rapidly if the market increased. It had to be a flexible operation at the margin. I also learned that if you want to be flexible, you cannot control the company from the top. You had to decentralize responsibility. The people closest to the market and with the best access should also implement the changes. In that way, I learned to cooperate with people in the company. There must not be matters of prestige or rigidly defined boundaries between departments. I had to work

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with motivation, development, and education so that they would understand the situation.

At Linjeflyg, Carlzon had the opportunity to develop his ideas further in a more traditional and rather bureaucratic environment. He recognized the commercial needs for a reorientation and felt the expectations of change from the majority of employees. It was his strength as a leader to be able to grasp the context of the business as well as the feelings and expectations of the employees. He was truly market-oriented in his leadership. Carlzon's career has been closely linked to company crises and challenges. It is precisely in periods of change that he has been at his best. With a strong sense of timing, he has accepted a job when the need for change has been evident. It is natural to see Carlzon as a stage director who works to produce new performances. He loses some of his interest after a successful first night. Others must be there to guarantee that the performance runs with good quality every night during a long season. Carlzon is already thinking about the next challenge. Carlzon was recruited to SAS by the chairman of the board to fill a need for giving a market orientation to the company. His vision of the new SAS was not as revolutionary for himself as for the employees. It was the product of long experience which was adapted to the new situation. It contrasted markedly to the established definition of SAS's reality. Instead of viewing airline operations as a cost-effective and high-quality network centered on airplanes, Carlzon described it as a service chain directed at the customer. This was natural for him, given his experience at Vingresor, where a tour was packaged through the conscious selection of hotel, sight-seeing, and air and ground transportation to suit a particular type of customer. A basic assumption in Carlzon's philosophy was that people would have freedom and responsibility to act according to their own judgment as long as they accepted the idea and theme of the overall performance. If they did not want to accept the overall definition of the situation, he felt they should look for a new job. The basic ideas formed a theme in a business and social drama where work roles were redesigned, service and products were developed, and new actors were contracted. The director was the key person. The drama gave him as well as others the opportunity to perform and get attention. The drama was exciting since it went beyond established practices. Carlzon's ability to express ideals in a vision with goals and strategies that appealed to values and experiences within the company

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m e a n t that many employees were motivated a n d committed to change their part of the operations. H e represented a new value orientation a n d b r o u g h t a new type of competence to SAS.

Expressing N e w Values and Strategies T h e power of ideas a n d values is partly a matter of f o r m . T h e power of language to control t h o u g h t a n d reasoning a n d the ability of those in power to use language as a means to influence is central to leadership. Symbols can be novel a n d constitute a break with tradition a n d established values. T h e language used by leaders does not give a complete image or definition of the situation. Rather, it puts the new ideals in focus to convey a need f o r change. In SAS's b r o c h u r e on values and strategies, "Let's Get in T h e r e and Fight!" the simple a n d metaphorical language a n d the drawings which give airplanes life a n d h u m a n characteristics contrast effectively with the traditional expert a n d bureaucratic language. Illustrations of complex relationships simplified in this m a n n e r , almost like a book for children to paint in, showed a new way of describing reality. It was r e f r e s h i n g to some but insulting to others, particularly the technical experts. D u r i n g the internal debate before the b r o c h u r e was printed, it was criticized for lack of objectivity, particularly in the comparisons of SAS with o t h e r airlines. People in the technical a n d operational departments were skeptical because they felt their expertise was devalued. T h e overall vision was never challenged. T h e message includes an analysis of the c o m p a n y situation, competition, and overall objectives. It also communicates values about people a n d business and presents an action plan that outlines a new direction, strategies, organization, products, and service. T h e p a m phlet also gives advice o n what people can d o immediately by helping colleagues, selling SAS, a n d helping passengers. An analysis a n d action proposals are described in the s u m m a r y a n d with the help of concrete a n d specific examples. It conveys the impression of a large n u m b e r of possibilities. T h e title urges employees to fight for their jobs a n d for the f u t u r e of SAS. It will be a fight where employees help each o t h e r a n d leave rivalries aside. T h e challenges are the strong competitors and SAS's high cost structure. Employees are asked to help reduce unnecessary overhead and improve service and work f o r m o r e satisfied customers. "Let's Get in T h e r e a n d Fight!" was a m e a n s to mobilize the organization f o r a new business a n d market orientation. T h e r e d color

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evokes urgency, a n d the f o r m a t makes the b r o c h u r e easy to carry. It has been distributed to all employees a n d also became p o p u l a r outside the company. T h e mobilization was total. Values and strategies were c o m m u n i c a t e d t h r o u g h many channels with a high d e g r e e of consistency. T h e message was f u r t h e r developed in in-service and m a n a g e m e n t programs, personal communications f r o m Carlzon and o t h e r key managers, Inside SAS (the c o m p a n y newspaper), the media, a n d c o m p a n y advertisements. T h e message is repeated over and over again both to the market a n d to employees. Communication costs increased, b u t attention a n d interest was directed toward SAS. It was in the center of public debate. The Tacit Message T h e official message communicates not only by what it says, b u t also by what it leaves out. T h e message will be i n t e r p r e t e d differently by employees with different value positions. Since large organizations are complex a n d differentiated in terms of the values of different employees, any message evokes an o p p o s i n g one. In SAS, a tension between experts in technical a n d operational matters a n d those who symbolized the new ideals of service, market, and business occurred. A polarization between the old a n d new SAS was s u p p o r t e d by the language. T h e new SAS with its new strategy, organization, a n d image implied an old SAS that was n o longer worth m u c h . M a n a g e m e n t did not recognize or give credit to previous m a n a g e m e n t who created the base f o r the new direction. High-quality maintenance and operations were taken for g r a n t e d . T h e tension between old a n d new values surfaced particularly in problem situations. W h e n a DC-10 skidded off the runway at New York's Kennedy Airport, this started a debate o n flight safety, a n d alternative values surfaced again. T h e J o i n t Scandinavian Flight Safety Office j o i n e d forces with internal groups and expressed their concern that commercial initiatives might jeopardize flight safety. As a consequence, top m a n a g e m e n t renewed the pledge that flight safety had the highest priority in the new competitive strategy. It also introduced a new action p r o g r a m a n d education to assure that safety concerns were constantly kept in mind. T h e strong emphasis of individual responsibility, clear leadership, and the leader's responsibility to define direction created a certain a m o u n t of anxiety. Many m a n a g e r s felt that they would not be able to live u p to the expectations a n d particularly to the example which Carlzon set himself. In addition, loyalty, as evidenced by seniority, was not valued as highly as before. T h e efforts to create a flatter organiza-

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don put pressure on middle managers, and their concerns for job security and dignity were even expressed in the newspapers (Carlzon, 1986). T h e r e was also tension between people who valued more genuine relations and the official emphasis on the short and superficial relations between customers and employees characteristic of most service roles. T h e introduction of a business class went against traditional Swedish values of equality. Service was seen by some as manipulating the customer or, alternatively, as servility. A debate that surfaced when SAS offered the majority of employees the opportunity to attend service courses showed these differences clearly. Top management and particularly Carlzon himself denied that the company was degrading employees and promoting manipulation of customers. T h e change in SAS was supported with information and education and by the realization that the majority of employees wanted a change. T h e difficult problems which emerged when learned needs and behavior patterns were frustrated were not seriously recognized in the new leadership philosophy. H u m a n capacity and character were idealized. Rationality, independence, initiative, and personal responsibility were attributed to people without considering difficulties and imperfections. A tacit message is a reality in any serious change process, and the question is how to handle it. Are differences seen as legitimate, and are values and strategies developed as a consequence of critique? T h e latter is particularly important if the critique can be supported by solid arguments and facts. If management is not willing to be open to good arguments, the confidence in leadership and the commitment to its values and strategies are undermined. If management is too willing to modify its stand without rational arguments, values and strategies become unclear and fuzzy. In the case of SAS, there are several examples where top management has changed its stance as a result of strong opinions and arguments of employees. This is a demanding balance which can be handled if leadership rests on explicit values and strategies. The Emphasis on Action Values and strategies have little impact if they are not closely coupled to action. T h e implementation of new ideas in projects at SAS is often accompanied by dramatization, emotionality, and enthusiasm. This is a means to overcome the uncertainty and skepticism mobilized by the need for change.

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In SAS Carlzon recruited a new management team. With the support of consultants and employees, the new management identified more than a hundred different projects to improve punctuality; to introduce separate check-in counters, passenger lounges, and cabin configurations; to improve service onboard; and to implement new business strategies. The projects were prioritized and resources were allocated. They created and focused energy within the organization. Since there was an overall direction of change, top management did not have to carry the whole burden and could become less operative and more supportive. The punctuality project had a special symbolic significance. Punctuality is high on the business traveler's list of criteria for evaluating an airline. In one of the first projects started in SAS, the head of operations control center (the best position in the organization for improving punctuality) was asked to calculate what it would cost to make SAS the most punctual airline in Europe within six months. He asked for 8 million kronor (about $1.2 million) in operating costs per year. He was granted this with no further questions. Since industry statistics are compiled regularly, it is possible to check on whether the goal is being attained. After four months, the operating control manager reported that SAS had become the most punctual airline in Europe. The extra operating cost would in fact be less than 1 million kronor (about $160 thousand) per year. The astonishment was great both inside and outside the company. Technical people found it hard to believe this was possible with so little investment. The increased power of the operations control center, the intensive top management attention, and the general crisis situation made people committed and fostered discipline. This project was extremely important in that it was definite, measurable, and successful. It showed how a small group of people can achieve astonishing results with adequate responsibility and resources, and how it is possible to achieve cooperation around a concrete goal which has high top-management priority. The project of creating an organization for controlling punctuality was used repeatedly as an example to others of the power of the new ideals and strategies. The leadership developed the commitment of employees and customers to SAS's new strategic orientation. The major ideas were tested, communicated, and successively refined in a truly marketoriented way. By personal example, language, and action, Carlzon staged an exciting drama where others were invited to play their roles. The roles were specified by goals and strategies and supported by information. Carlzon has a well-developed sense for emerging busi-

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ness trends and employee feelings which made it possible for him to sense reactions to the tacit messages and modify or clarify strategies. Let us now turn to how others have responded to the new leadership.

Commitment and Resistance Top management's business thinking was not necessarily the same as that characterizing the organization as a whole. Changes at the top could not be taken as evidence that changes had penetrated all levels of management or all divisions. This became evident also in SAS. In many of our interviews (Edström et al., 1988), we noticed that the language had been affected by the overall change. Within divisions, maintenance bases, and airports, people were talking about their own units and strategies in terms of customers, suppliers, and products as if they were selling their services on a market. For many managers this was a rather abstract exercise since they lacked personal experience with sales and marketing, or of business deals. Their efforts were supported, however, by the continuing success of SAS which was attributed to the changes in business strategy. In this section, the support and influence that the new business strategies and values generated within other levels of management, the unions, and society at large are analyzed. It cannot be a complete account. Instead, I will use examples to outline the major direction of support and influence.

Management During the turnaround, large parts of the company were engaged in the implementation of strategic projects, such as the punctuality project and EuroClass, the new service for business travelers, which cut across organizational boundaries. The direction and strategies for divisions and other units were put aside for the moment to implement the business traveler's airline and achieve profitability. When these projects had been accomplished, management attention turned inward to a particular division or unit of the firm. Our studies at the local level within the airline indicated a much more differentiated process of change than met the eye, if one concentrated on the change at the top. Instead of a single process of change, it is better described as a large number of change processes with different speeds, climates, and character. They did get their inspiration and rationale, however, from the overall strategic change and freedom of action. Three main types of approaches to change and development were

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observed a m o n g the different organizational units. T h e differences can be attributed to local variations in work context and value orientation of the managers. By context I mean type of work activity and technology. Value orientation refers to the emotionally rooted values common to a group but differentiated between groups. T h e typology is based on an intensive analysis of fifty-five managers at different organizational levels in SAS. T h r e e main value orientations were identified: control, relations, and development. These orientations correspond roughly to the social character types which Maccoby (1988) found in his studies of United States managers: expert, helper, and innovatorgamesman. Managers with different value orientations responded differently to the overall strategic change. T h e first orientation, control, has strong roots in the previously dominating production orientation. T h e overall business strategy became the guideline for these managers, and change was accomplished through systematic improvements in products, organization, education of personnel, and administrative systems. T h e process is characterized by planning and systematic implementation. Improvements are sought departing f r o m the new ideas of a service chain. T h e r e is a major difference between the old and new model of controlled development. T h e present one is much less d e p e n d e n t on authority and less concerned with personal prestige. Quality and performance are in focus. A manager whose basic personal values are consistent with a systematic and controlled approach to change can be characterized as follows: To sum up, NN can be described as a person who can be himself, but who recognizes his own weaknesses. Objectivity, task orientation, challenge and results are what primarily impel him. This means working rationally, methodically, logically and persistently, seeing that things are in order and that existing resources are utilized. He is happiest as part of a team of competent experts, able to discuss openly the demands and problems in the operations and develop satisfactory solutions together. (This and following interview quotes are from Edström et al., 1986.)

As manager of a maintenance base with a rather stable supply of heavy maintenance work and no immediate crises in view, NN also works in an environment where modest and gradual change is important and productive. NN has worked in industrial production his whole life. Even though his experience of airplane maintenance is modest, his values and way of thinking is very compatible with existing values. In recruiting his immediate subordinates, NN has also made sure that their values are compatible with his own, although their experience and competence are somewhat different.

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Secondly, we f o u n d units that built u p good relationships a n d used t h e m to achieve c h a n g e in operations. In these units, m a n a g e r s personally get their energy a n d motivation in satisfying and productive relationships. This is what makes work worthwhile for t h e m . T h e y tend to work with education, p l a n n i n g seminars a n d consultants to achieve c o m m o n solutions. T h e y invite participation and codetermination. T h e general m a n a g e r of o n e of the m a i n t e n a n c e bases is an example of the relation orientation. H e c o m m e n t s on his own j o b : I like listening, giving my own opinion of course, and getting at the essence of what a qualified group has to offer. To boast a little, I do think that one of my strengths is really being able to absorb what there is in a group, to draw a conclusion, formulate it and state it as our conclusion.

Making a decision w h e n t h e r e is n o consensus is m o r e difficult. "Sometimes I wait too long b e f o r e making a decision, if t h e r e is n o consensus. You have to make a decision, and you must make it yourself. That's not my strong side." This particular maintenance base enjoys a special position, since it is located at the C o p e n h a g e n Airport, the m a j o r h u b of the SAS network. T h e large volume of overnight stops provides a steady flow of light m a i n t e n a n c e work, a n d a large n u m b e r of foreign flights gives a n o t h e r source of r e v e n u e t h r o u g h sale of maintenance services to o t h e r airlines. Skillful relations are also n e e d e d to handle the unions. Coordination a n d cooperation would be an i m p o r t a n t ingredient in the j o b f o r a base manager, irrespective of personality. T h e challenge of an idea provides energy a n d motivation in the developmental a p p r o a c h to change. In o u r sample, we f o u n d two subtypes of this category, the innovator a n d the integrator. T h e innovator is m o r e dramatic a n d not d e p e n d e n t on relations with others, while the integrator takes m o r e account of relationships. T h e innovative orientation resembles most closely Carlzon's own a p p r o a c h . T h e excitement of creating something new releases c o m m i t m e n t f r o m subordinates. T h e most innovative a n d dramatic changes fall into this category. O n e of the key m a n a g e r s in the t u r n a r o u n d , a division manager, followed the innovative a p p r o a c h to change. H e is extremely actionoriented, likes to take on challenges a n d to achieve results. W h a t he likes best in his job, h e says, is: to stand in the middle of the battle. Perhaps not in the middle of conflict but in the middle of the move forward to achieve results. But the day after you have achieved the results you have to think like the great actors: What the hell am I going to do now?

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This manager wants to achieve, win, and break records. He longs to do the impossible. When he is afraid that other people may foul up, he tends to intervene, without considering the feelings of other people. Passivity scares him and even makes him feel depressed. I'll be damned if I can sit still at those big meetings when things are heating up. It goes on and it's well structured and—damn it!—it's important too, but we are operative people in this group, and we are constantly forced to plan. But we are mammals with many biological instincts, and when we know that danger and our daily problems are perhaps smoldering just outside the door, then it's difficult to sit in a meeting. You get an urge to do something.

The division manager is enthusiastic and intense about his work. He believes it is important to mobilize people, and has an ability to motivate them by his own enthusiasm and by relating work to business strategy. He has primarily been engaged in special projects, many of which were important to the corporation and performed under extreme time pressure.

The three different approaches to change that we have identified are ideal types; any particular real case corresponds more or less to the type. In our empirical research, we have seen several variations of each particular type. While most managers have accepted the new strategic orientation, objectives, and strategies as they have been formulated by top management, the problem was how to implement them. The analysis of value types helped us understand some of the problems. The innovator above went too far and was not sensitive to the value orientations of others. They did not get a chance to work according to their own orientation, which successively built up resistance. Even though much was accomplished in a short time, it undermined his position in the longer term. The insensitivity to the value orientation of others also characterized some of the control people. The ability to cope constructively with differences in value orientations among colleagues and subordinates was of paramount importance for implementing strategic change. The most successful managers were able to build a small constellation of managers that complemented their own value orientation and competence. This inner circle became the locus for dialogues on strategy and implementation. There is also a problem of being too sensitive to the needs of others. Managers with the relation orientation sometimes fell into this trap. They would be open to a dialogue on strategy, but when it was difficult to reach a consensus, they would shy away from action which

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would frustrate others. The conflict went against their need for good relationships. Managers with a development orientation were good at empowering others, but particularly the innovators fell short in supporting their subordinates when they needed it. Subordinates with a control orientation needed a clear definition of strategies in order to act effectively. The successful innovators included managers in their inner circle who could complement them in bringing ideas and strategies closer into line with operational realities. Freedom of action need not be constrained only by the supervisor. Technology, administrative systems, and a high volume of transactions can lead to repetitive and programmed work. Delegating authority may not help much if the other factors cannot be affected. We found in SAS that particularly innovators and relation-oriented managers had a tendency to underestimate the impact of technology and control systems such as budgeting and measurements. Again, the key to success was in the formation of an inner circle which could complement each other both in value orientation and competence. The innovative approach to change which Carlzon and other key managers (often recruited from outside) have introduced is still alien to most employees. In the latest phase of the SAS change process, the airline has a separate operational management (Figure 2), and there is evidence that innovators have a harder time finding satisfying roles and contexts. The pendulum within the airline is swinging back again in the direction toward traditional control values. The focus is different, however. There is a much stronger emphasis on profitability and business strategy and much less on the technical and operative issues. The innovative approach is concentrated in corporate management.

Figure 2. The SAS Group in 1988.

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T h e reason f o r the differentiation between airline operations a n d corporate d e v e l o p m e n t can be explained in two ways. First, it has become increasingly difficult to differentiate basic air travel f r o m what the competitors can offer. O n e needs to combine hotel, g r o u n d transportation, service in airports, destination services, a n d financing in o r d e r to create a m o r e u n i q u e p r o d u c t . Basic air travel has to be o p e r a t e d in a cost-effective m a n n e r to achieve t h e standards defined for the complete travel chain. A control orientation is m o r e a p p r o p r i ate to the role of the airline within the corporation. T h e second explanation is that the d o m i n a t i n g value orientation is control. In o u r sample of managers, we f o u n d that 50 percent h a d a control orientation. T h e s e m a n a g e r s strive to work according to their own value orientàtion, a n d since they are the majority, they will eventually influence the whole airline. T h e two explanations combine to p r o d u c e a stronger emphasis on control. T h e analysis of value orientations have helped to identify important problems in implementation of strategic change. T h e managers' ability to f o r m a small constellation of subordinates who could complem e n t not only their competence b u t also their value orientation in view of the task r e q u i r e m e n t s seemed crucial f o r success. Obviously, value orientation a n d task r e q u i r e m e n t s are not the only factors. In the Swedish context, cooperation with the unions can facilitate or seriously delay a strategic change. Unions SAS leadership assumed that unions would be p a r t n e r s in the developm e n t of the c o m p a n y but o p p o n e n t s in wage negotiations. In practice, there has been a m o r e o p e n a n d participatory relationship with unions and, in the longer term, a m o r e decentralized organization f o r the unions. T h e u n i o n structure of SAS is extremely complex with about forty different unions divided a m o n g the t h r e e Scandinavian countries. SAS is t h e r e f o r e a special e x a m p l e in this respect. To cope with the complex structure, unions in each country have a coordination committee to deal with c o m m o n matters, such as electing representatives to different decision-making groups, and representation o f t e n follows national boundaries as well as union lines. T h e r e are different union traditions in the t h r e e Scandinavian countries. Broadly speaking, o n e can say that Sweden and Norway are characterized by strong central u n i o n coordination. D e n m a r k , o n the o t h e r h a n d , has strong local unions with weaker central control. This

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makes the Danish unions more prepared to negotiate locally and gives them a strong position vis-à-vis management. They can initiate strikes, while in Sweden this would always be a central union decision. Because SAS lost money in 1979—80 and employee morale was going down, the unions favored a change. The new top management responded to this by being open to the unions and informing them as early as possible to get their cooperation. With a fast pace in the turnaround process, however, it was often too late for unions to make any contribution. In general, the unions accepted management's proposals of a new business direction, goals, and strategies. In the process of reducing overhead and moving people from administrative jobs to service jobs, the unions played the traditional role of negotiator. They were able to smooth changes and spread them over time. In retrospect, the expansion in volume made a lot of the proposed reductions in personnel unnecessary. In 1984—85, top management made an explicit effort to engage the unions more actively and earlier in the process of change. Special seminars were held with representatives from the different unions to inform them about the challenges for the company and to discuss strategies and actions. During this process, unions were favorable to management's analysis but required better contacts and information before decisions were made. The frequency of top management and union meetings was increased to once a month. In every division and local unit, unions are represented in management decision-making meetings. For Carlzon, unions were an important sounding board as well as potential allies in the development of the company. There is little doubt that openness and participation generally increased as a result of the turnaround process. Unions were invited to strategy meetings, but their influence outside their traditional role of negotiating wages and working conditions is hard to evaluate. It is of a more indirect nature. The presence of union representatives will force managers to prepare better and will undoubtedly also make them reflect on the interests of the unions in the different issues discussed. The direct contribution in problem solving appears less important. The open attitude toward unions has most likely facilitated the strategic reorientation. Unions have been drawn into the process, which has created new challenges for union management. The change process has forced unions to begin rethinking their role in the company. First, management is working hard to break down boundaries between different categories of employees to get a more flexible work organization. This meets with particularly strong resistance in Denmark, since it conflicts with established union bound-

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aries. Second, more decentralized decision-making goes against the strong centralized decision-making style of many unions, particularly in Sweden and Norway. Third, the emphasis on developing the company rather than negotiating requires new competence and skills among union representatives who need to discuss business strategies and plans. It may also tie union representatives closer to the company and its management which will make the union's adversarial role more difficult to maintain.

Society

The SAS example has aroused a lot of interest in Sweden. It responds to concerns, aspirations, and problems in other organizations. SAS became a successful example for other companies to learn from or imitate. A number of government services are being forced by deregulation and customer demands to provide better service. It is also true, however, that as a public company SAS has actively worked to inform all relevant shareholders about the company. "Management by media" has been an important ingredient in creating a positive image for the company in the marketplace, to help motivate employees, and to achieve better leverage in negotiations with the government for traffic rights and many other issues. SAS is characterized by increased openness both internally and externally. There is a strong increase in employee and market communications. There is also an openness with business magazines and newspapers, a recognized need for research, and a willingness to present SAS and its strategies to external groups. Carlzon is personally heavily involved in strategic communication both to employees and external groups. In one article (Carlzon and Hubendick, 1983), he estimated that he spent about 40 to 50 percent of his time during the turnaround phase on information to employees and others. Presentations have been made to the traffic committees of the parliaments and civil aviation boards in three Scandinavian countries. SAS has taken the initiative to start a service academy for more advanced education in service and service-related businesses. The idea was later modified, and SAS sought cooperation from other companies to start a more advanced project organization for development and action learning. SAS also marketed commercially its know-how on service, service management, and organizational change. When the company introduced service courses for all service personnel, it aroused much exter-

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nal interest. To cater to this potential market, SAS formed a joint venture, SAS Service School, which sold service courses to other companies. The interest was great for a number of years before the company was broken up in 1985. Similarly, SAS internal consultants who had been engaged in the internal process of change began to sell their services outside the company. Since 1987, there is a separate company, SAS Business Consultants, which offers its services to other companies. In a book about SAS, Carlzon (1986) analyzed motives, conditions, and strategies for change. The book has sold extremely well in Sweden and has been translated to other languages. The book provides an account of Carlzon's basic assumptions regarding business, leadership, and human beings. It is his personal version of the SAS ideology. The impact of all these activities has been considerable, although not easily measurable. First, SAS is used as a model in the public debate about service, leadership, and human motivation. Since SAS is an important company in Scandinavia, most people know something about it. Second, consultants who have worked with SAS are important links to other companies to disseminate experience. Large-scale studies of the Swedish Postal Services and the Swedish Railway System have been made by the same consultant company that worked intimately with SAS. The strategies and organization proposed for these organizations are similar to those which SAS has adopted. The similarities should not be overemphasized, but the underlying forces of change are the same. In the Labor Market Board and other government agencies, the links are not as clear-cut, but interviews with key people, such as the general director Allan Larsson, indicate that they consider the SAS example a source of inspiration. The list could be made longer but would not change the overall pattern. It is likely that the external image has facilitated the strategic reorientation. Employees feel proud of their company when it is in the focus of favorable attention, and customers and other important shareholders also get a positive impression of SAS which can motivate them to participate and facilitate the reorientation. Operational Change and Economic Outcome SAS's strategic reorientation has had profound impacts on operations. They have, however, been gradual and taken much longer than the shift in strategy. Strategies are still being implemented seven years after the SAS board approved the first plans. A summary of operational changes illustrates the broad spectrum of change:

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• Service products have been further refined by more direct flights, new check-in procedures at hotels, upgrading service on intercontinental flights, and new pricing for economy fare. • Traffic networks have been built around major hubs in Copenhagen, Stockholm, and Oslo. Cooperative agreements to adjust timetables and service and to extend the network have been concluded. A new company has been formed for feeding traffic from remote destinations to the major hubs. • The organizational form has shifted gradually from a functional form to a business area organization which reflects the integrated service chain. • Work organization has changed in all major units that integrate previously separate units, identify profit centers, and give more responsibility to middle managers and frontline supervisors. • Administrative systems, e.g., economic control systems, have been adapted to decentralized profit centers. • Stations are gradually getting more shopping facilities and better layout to handle the traffic flow. The new Copenhagen airport is an example. • A new educational and training program for managers has been put in place. It is adapted to middle managers and young managers with potential. • A reduction in overhead is under way through a restructuring of the maintenance function and consolidating staff units which have grown during the expansion of 1984—86. The heavy maintenance activities at Arlanda will be closed, and the maintenance of engines has been placed in a separate company, a joint venture, Volvo Flygmotor (Volvo Aircraft Engine). Important changes have been substantial and are continuing. The present approach to change in the airline is different, however. The innovative approach has been replaced by a systematic and gradual change process which is better adapted to the dominating control orientation of managers. The dominating value orientation has resisted change. It seems to be productive, however, in the more restricted role which the airline has in the total service chain. The impact of the new business strategies were immediate. Major changes in products were made during 1981—82, and the impact was clear in 1982-83. After two years of loss, SAS could show a profit in 1981 —82 of $42 million. The economics of airlines are such that a small increase in volume will on the margin make a big difference in profitability. The rapid success gave a big boost in confidence both among

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employees and outsiders. In the following section, the economic outcome in terms of market share, gross profit margin, productivity, punctuality, and safety is analyzed. T h e expansion of traffic was concentrated on domestic and European traffic while the intercontinental lines continued to show unsatisfactory results. T h e competition was stiffer on this market segment, and the SAS network was probably less competitive. T h e market for direct flights was smaller. If one had to go through Copenhagen, why not take Amsterdam instead or London where one might find more convenient connections to the final destination? T h e new service product of first business class was not enough to make overseas travel profitable. T h e success in the domestic markets was d u e to better flying schedules and marketing which strengthened the airline compared with train service. EuroClass meant an increase of full-paying passengers f r o m 45 percent in 1981 to 52 percent in 1985, and within the same timeframe there was a 30 percent increase in total traffic. SAS has been able to increase its market share on the European market and at the same time achieve a more favorable mix of passengers (Table 1). T h e efforts to increase service and create an integrated chain of services which would cover all elements of business travel, such as hotels, g r o u n d transportation, and hotel check-in, meant higher costs. People had to be employed to handle limousine service, check-in at hotels, lounges at the airports, service at the gates. T h e large n u m b e r of shorter flights within Scandinavia and Europe also mean higher costs for landing, fuel, and inspection. Measures of productivity become misleading if these changes are not taken into account. Most figures show that productivity, as measured by the n u m b e r of employees, has been fairly constant d u r i n g the period 1978—87. SAS can be characterized as a high-service, high-cost airline.

TABLE

ι. SAS Passenger Traffic in Europe Compared with Total Market

European market (AEA* statistics) SAS SAS—EuroClass SAS—Economy class

198081

198182

198283

198384

198485

198586

+4 +1 -3 +5

0 0 +7 -5

-3 +5 +5 +5

+7 +8 +9 +7

+9 +5 +8 +1

+3 +9 + 10 +8

* A E A = Association o f European Airlines.

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The increase in profitability comes from a better gross profit margin (Figure 3). Except for 1984—85, we see a continuous rise in profit margin. SAS was one of the most profitable airlines in Europe for 1986-87. From the summer of 1987, figures show a decrease in productivity and gross profit margin. It is impossible to say whether this will be a short-term change or the start of a longer-term trend. With increasing competition in Europe, SAS will be forced to do something about its high structural costs which result from an organization that spans three countries with one maintenance base in each country. One way of dealing with this problem would be through a merger or close cooperation with another European airline, which would allow not only a more

78/79

79

80

81

82

83

84

85

86

87

Figure 3. SAS gross profit margin, 1978—87. Source: SAS annual reports.

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attractive network, but also rationalization and a better match between overhead and volume. Service quality is hard to measure in an aggregate fashion for the company as a whole. Punctuality which is an important ingredient of service is more easy to grasp. Punctuality is recorded continually at each airport. Available statistics showed that SAS increased its punctuality markedly during the turnaround phase. They were also able to remain the most punctual airline in Europe for a number of years. Increasing traffic volume, higher load factors, new airplanes, more congestion in the airports, and higher capacity utilization of other resources have meant a decrease in punctuality. Overall punctuality within Europe has been high, while the intercontinental traffic, especially during the winter months, has been suffering. Increased competition has pitted the commercial interests against the security interests. The pressure to cut indirect costs and to increase punctuality and capacity utilization makes it harder to keep strictly to security procedures. Although there has been a renewed emphasis on quality, it has been hard to reach the standards which have been specified. The actual incident reports are not easy to interpret since they mix different types of occurrences, some more serious than others. If we look at reported major incidents which are reasonably homogeneous, there is no trend over time. In view of a larger number of flights, one could even argue that security has been improved. If we look at reported minor incidents, which is a more heterogeneous category, there seems to be an increase over time. If we take account of the increased volume of flights, this trend practically disappears. There is apparently no easy relationship between commercial pressures and safety. Safety margins may have been substantial, and temporary departures from procedures may not have a significant impact. On the other hand there is a considerable inertia and impacts may occur in the longer term. Actions within the airline interact with traffic control, basic training of pilots and mechanics, airport management, civil aviation authorities, and manufacturers. It is also possible that safety will just become more cost-effective with no change in recorded incidents or accidents. There is little doubt that the new business strategies and leadership have been successful economically. This does not give the whole picture, however. The new vision and strategies call for SAS to become a major international airline—even with increasing deregulation in Europe. In March 1989, Carlzon unveiled a new global strategy. It includes the European Quality Alliance with Swissair and Finnair, involving

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route coordination and eventual ownership stakes of each in the other. It also includes a 9.9 percent ownership of Continental Airlines in the United States (16.8 percent in 1990), and cooperation that gives SAS a base in Newark and easier connections to many American cities. SAS and Continental are each 50 percent owners of the Service Quality Institute, headed by Jan Lapidoth, which started out to train the Continental front line in the SAS approach. It also includes 30 percent ownership in Lan Chile, 25 percent in Airline Britain Holdings (ABH, which includes British Midland), and a 40 percent stake in the Intercontinental hotel chain. Besides this, there are agreements for route coordination and preferential passenger handling with All Nippon Airways (ANA), and with Canadian and Thai airlines. Whether this innovative approach to globalization continues to be successful will depend on implementation of the business strategy and competitor reaction. Will it, for example, be possible to make enough money in the high-service segment of business travel, or will business travel become a commodity with strong price competition and minor possibilities to differentiate a unique service product? References Carlzon, J. (1986). Moments of Truth. New York: Harper & Row. Carlzon, J. and U. Hubendick (1983). "Kulturrevolution i SAS" ("The Cultural Revolution in SAS"). In L. Arvedson and B. Rydén, eds., Vàga Leda (Dare to Lead), pp. 1 9 - 2 9 . Edström, Anders, L-E. Norbäck, and Jan-Erik Rendahl (1985). Leadership and Corporate Development—The Case of Scandinavian Airlines Systems (SAS). Working paper 1985:6. Stockholm: FArâdet. . (1986). Realities and Fantasies in Leadership: The Case of Lars, Ole and Ragnvald. Working paper 1986:2. Stockholm: FArâdet. . (1988). "Exemplets Makt" ("The Power of the Example"). Unpublished manuscript. Stockholm: FArâdet. Financial Times, August 6, 1982. "How SAS Decided to Get in There and Fight." . October 31, 1983. "The Revolution at SAS." . September 15, 1986. "Preaching What He Practices." Fortune, May 30, 1983. "SAS's Festival of Profits." Galbraith, John (1983). "Strategy and Organization Planning." Human Resource Management 22, 1/2: 63—77. Galbraith, John, and R. Kazanjian (1986). Strategy Implementation. St. Paul, Minn.: West. Johannesson, K. (1983). Svensk retorik (Swedish Rhetoric). Stockholm: Norstedts. Kimberly, J., and R. Quinn (1984). New Futures: The Challenge of Transition Management. New York: Dow Jones-Irwin. Maccoby, Michael (1988). Why Work: Leading the New Generation. New York: Simon & Schuster. Pettigrew, A. (1985). The Awakening Giant: Continuity and Change in ICI. Oxford: Basil Blackwell.

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Schein, E. (1985). Organizational Culture and Leadership. San Francisco: JosseyBass. Seawell, W. (1979). Foreword in K. Hagrup, Cooperation in World Civil Aviation. Sixteenth Wings Club "Sight" Lecture. Presented at the Wings Club on May 16, 1979. Tichy, N. and M. Devanna (1986). The Transformational Leader. New York: Wiley. Wallstreet Journal. July 20, 1983. "SAS Gets Less Sassy and Rethinks Flight Plan as Competitors Catch Up." —. August 1, 1985. "Hard Sell: SAS Tells Employees: T u r n A r o u n d Was Nice, Now Let's Do Better." . November 25, 1987. "SAS's Moves to Buy Part of BCal Illustrate J a n Carlzon's Think-Big Strategy." Walton, R. (1980). "Establishing a n d Maintaining High Commitment Work Systems." I n j . R. Kimberly, H. Miles, et al., eds., The Organizational Life Cycle. San Francisco: Jossey-Bass. Wild, R. ( 1975). Work Organization: A Study of Manual Work and Mass Production. New York: J o h n Wiley. Wirdenius, H. et al. (1976). Utveckling αν arbertsledningsfunktionen. Experiment med en samrâdsprocess inom industriföretag (The Development of the Leadership Function at Work. Experiment with a Consultation Process Within an Industrial Firm). Stockholm: PArâdet. Zaleznik, A. and M. F. R. Kets de Vries (1984). "Leadership and Executive Action," in: M. F. R. Kets de Vries, ed., The Irrational Executive. Psychoanalytic Studies in Management. New York: International Universities Press. Zetterberg et al. (1983). Del osynliga kontraktet. En Studie i 80-talets arbetsliv (The Invisible Contract. A Study of 80 Workers). Stockholm: SIFO.

Chapter 6 Production Philosophy at V o l v o Berth Jönsson

As Volvo entered the 1970s it had already gained two decades of unionmanagement participation primarily through innovative quality of work-life projects and joint collaboration within the local Group Works Councils. It was not until the late 1960s, however, that the discussion about new forms of participation moved to a new production philosophy. In the late 1960s and early 1970s Swedish industry was faced with a very tight labor market situation. This meant extreme difficulties to recruit Swedes for industrial work, particularly young Swedes. There was a true mismatch between expectations and education of the young, on one hand, and the nature of jobs offered by industry, on the other. The young felt that their knowledge could be better used in more skilled work instead of a fairly routine type of mass production. Volvo decided to maintain its manufacturing base in Sweden to form a wholeness in terms of product development, design, and production with close communication channels in the home market. Despite the labor market situation, Sweden was still the main base for recruiting people and managing a big organization. An international move would create new and unknown problems. The domestic labor market was well known and most familiar to Volvo managers. This pretty gloomy picture fifteen to twenty years ago with explicit implications for quality and productivity led to intense discussions and major reconsiderations within Volvo in terms of how to attract people by involving them more in the process and how to find an appropriate match between people and technology. At Volvo, a whole new approach to these issues started to develop in 1971, when a new chief executive officer Pehr G. Gyllenhammar took over. I joined Volvo at that time as assistant to Gyllenhammer and

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later became vice-president for Human Resources. Gyllenhammer initiated a number of activities in mid-1971 primarily along two lines: 1. Establishing a more proactive "Representative System." 2. Reformulating the design criteria and objectives for how production ought to be organized. It is important to underline that the decisions to improve both standards simultaneously were complementary to each other. Our view was that the decisions should be important enough to be highly visible throughout the company. Leadership had to sort out real problems but at the same time dramatize the new strategy and thereby enhance the diffusion process. Two important decisions were taken concerning the "Representative System." The first was to invite two employees—one blue-collar and one white-collar representative—to become members of the AB Volvo Board. This was a highly controversial proposal at the time. It was given a one-year trial period. In 1972, all parties agreed that the result was encouraging enough to be continued on a permanent basis. Board representation later became a law in Sweden. The advantage for Volvo, however, was that we had taken the initiative and developed the system from our own experience, not because someone imposed it on us. The second decision occurred the same year, when Volvo formed a Group Works Council with about twenty members—Gyllenhammar being the chairman and with a majority of representatives from the employees. The Group Works Council meets four times a year and has a working committee which is very active with a large number of issues ranging from personnel policies to business investments of the Volvo Group. Works Council members have learned a great deal about the company, including the business environment and market conditions, opportunities to implement new technology and its implication for how work can be organized, just to name some of the more important areas covered by the council throughout the years. There are few strategic issues which have not been covered in one form or the other in the meetings and the work of the council. The support shown by the unions and employees to management because of this forum cannot be overestimated. This is not to say that there have not been disagreements or tough discussions. On the contrary. But there has been a willingness to deepen mutual understanding and reach consensus. An effective representative system has been a good foundation for starting a dialogue and a creative process on how to develop new forms of organizing work. Here, I would like to quote Gyllenhammar, who was already saying in 1971 :

Ill This so-called Swedish Model, where employees are beginning to participate in managerial decisions, is more than just an invention due to pressures from labor unions. Sensibly used, I think it is one of the few tools with which to really move an organization in the future. In the late 1960s, a n u m b e r of initiatives were taken to change the organization of work at Volvo. T h e efforts were made on local levels by individuals who saw a need for change. T h e various changes were disconnected and very much based on an idea of trial and error. T h e problems of personnel turnover and increasing absenteeism with direct consequences on quality and productivity reached such levels that many people in manufacturing were forced to find better ways of involving the employees in the work process. These early experiences formed a very important base for the decision to move in a new direction in production technology and work organization. This decision was taken in 1971 by Gyllenhammar with a lot of internal hesitation f r o m many production managers, especially at the higher levels. T h e first strategically and symbolically important case, the Kalmar plant project, opened u p a completely new perspective and attracted a n u m b e r of young and creative engineers. To them and other people involved, this pioneering project outlined a new and more exciting f u t u r e in the field of manufacturing. T h e Kalmar plant, which began production in 1974, was designed to allow for g r o u p work, increased responsibility including control over the work cycle, continual incremental rationalization, attractive work environment, and improved ergonomics through tilted carrier. T h e contemporary plant, opened in 1974, for production of gasoline engines in Skövde was inspired by the Kalmar plant. In fact, this was the beginning of a whole new era within Volvo. Ever since then, new investments have been based on new thinking in terms of production technology and work organization. O n e case has never been identical with another. T h e aim is to find the optimal solution of a particular plant design based on such criteria as: • • • •

design of products market demands choice of appropriate technology the needs of people involved.

T h e variety of solutions today is striking. T h e r e are some common denominators, however, when observing these plants and the way they are organized. Some of the more important factors are:

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In the middle 1970s, automation started to play an i m p o r t a n t role in finding the most efficient ways to meet production goals. Because of an explicit pragmatism both f r o m m a n a g e m e n t a n d unions in this field, Volvo has rapidly been mechanizing. T h e drive f o r automation stems primarily f r o m the shortage of labor a n d thus increased labor costs. In the process of mechanization, Volvo has had to find the optimal mix between new technology a n d the use of people. T h e r e has always been a careful analysis, not believing in salvation t h r o u g h new u n p r o v e n technology but u n d e r s t a n d i n g the people a n d organizational dimensions as well to find an ideal mix. T h e r e f o r e , it has been crucial to design these new capital-intensive plants f o r people. T h e seeming paradox is that when we n e e d f a r fewer people p e r unit, we become m o r e d e p e n d e n t on people. T h e match between people a n d technology is extremely i m p o r t a n t in o r d e r to make m a x i m u m use of all the money spent. Volvo has become utterly d e p e n d e n t on the skill and c o m p e t e n c e of its employees. In fact, investing in new machinery a n d systems means m o r e careful analysis of the n e e d to invest in people, in their knowledge a n d their involvement in the whole process. Volvo's experience is that new technology has been a driving force not only to create new opportunities for people to make use of their knowledge but also to develop as individuals: to become m o r e active h u m a n beings who are contributing m o r e effectively to the company. T h e r e is n o question that this evolution d e m a n d s a lot m o r e f r o m managers on all levels. How have m a n a g e r s developed d u r i n g this phase? First of all, Volvo has become m o r e careful in the selection of managers. I would even say that, to some extent, the new highly visible plant projects have served as a kind of self-selection process. T h i s means that m a n a g e r s who have searched for a new challenge have also applied f o r the new positions, because they realize that they will be c o n f r o n t e d with s o m e t h i n g m o r e interesting which will develop t h e m selves as managers. Secondly, work itself has been the most i m p o r t a n t

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means to develop managers. A partly new situation with m o r e autonomy to develop the system has forced m a n a g e r s to work h a r d a n d to develop their organization jointly with people. T h e r e has been a movem e n t toward business orientation a n d away f r o m the old production a n d administration focus. T h e projects have been strongly target-oriented, but beyond that, managers have had a lot of f r e e d o m to develop their own organization as part of a decentralized structure. This implies that t h e r e has been a lot of trial a n d e r r o r a n d that o n e plant does not mirror a n o t h e r plant. O n the o t h e r h a n d , t h e r e has been a lot of e n c o u r a g e m e n t f r o m the top a n d s u p p o r t t h r o u g h exchange of experience a n d j o i n t problem solving. Inspiration by example has been m o r e i m p o r t a n t t h a n formulas for change.

T o w a r d a N e w W a y of Learning In the early 1980s, issues related to learning a n d the n e e d to develop the organization t h r o u g h people came even m o r e into focus. For t h e entire Volvo group, two i m p o r t a n t decisions were taken. O n e was to start what we called the "monitor survey." By systematically interviewing employees, we created a new information base concerning their feelings in many i m p o r t a n t areas, such as: • • • •

loyalty to the company willingness to contribute to the c o m p a n y goals ability to use one's knowledge a n d skills m a n a g e m e n t style and dialogue between m a n a g e r s a n d their associates • perception of quality of products and competitiveness. This is j u s t a sample of areas covered in the survey. Many others o p e n u p a d o o r between m a n a g e m e n t a n d employees and allow f o r the necessary dialogue o n crucial issues. T h e structure of the survey is such that it has become an integrated part of the decision-making process at Volvo. Based on survey results, training p r o g r a m s have been implem e n t e d , a n d changes in the way m a n a g e m e n t provides information a n d discussions on how to develop the organization of work a n d o t h e r issues have occurred. O n e Volvo c o m p a n y decided to change the budget p r o c e d u r e a n d scheduling based on feedback f r o m the survey. In some Volvo companies, the president is asked to r e p o r t back to the board of directors o n survey results. T h e m o n i t o r surveys also showed a g a p in the organization which highlighted the "mental distance" between the higher echelons in the

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pyramid and the operational levels. We found a high correlation between the ability to develop one's skills and abilities, on one hand, and the perception of the company's future, on the other. The fewer possibilities to use one's talents, the less optimistic about the future of the company one tends to be. The data reemphasized the necessity to develop people and jobs in order to make them identify with the company and to generate optimism about future prospects. With a rapidly growing company, we saw the need to initiate a new educational process at Volvo. We wanted to combine a deeper knowledge about the roots of the company and its current business with discussions about basic values and developing the role of managers at all levels. People in all parts of the organization need a broader perspective of their job in order to relate their area of responsibility to the overall context. It is the responsibility of top management to see that such a possibility is established. However, one-way communication does not work with well-educated people. They must be able to participate in an open dialogue about their work and future. Managers themselves have to take an active role in this process and become educators within their own companies and departments. Through the dialogue process, managers not only can learn a lot about the company, but they also develop deeper relationships with their associates. Maybe the most efficient way to learn is to be a teacher. Managers will have to play this important role even more in the future as work teams increasingly take over traditional managerial functions of planning and control. With these prerequisites, Volvo's so-called Dialogue Program started covering all 75,000 employees worldwide. The process still goes on and has led to a large number of local initiatives and improvements. In the best cases, the process does not end but continues as a strategic dialogue for change. People witness that the Dialogue Program has opened their eyes to the demands in the marketplace. They better understand the needs for quality and performance within their particular area of responsibility. They also discuss the basic values of the corporation and how they can integrate those values in their work. To many managers, the process not only works cognitively, i.e., increases their knowledge about the corporation and its business environment, but also opens their eyes to the various personalities among their associates and the potentials of different people. The dialogue process helps managers to communicate and to get closer to people. More specifically, the six basic values being communicated and discussed from the perspective of a particular work situation are:

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quality involvement communication care development competence.

To get people committed to developing a company based on these values is an exciting journey which hopefully never ends. Organizing Work for the 1990s The latest phase in the development of production technology and work organization is occurring at two main Volvo subsidiaries—the Volvo Components Corporation and Volvo Car Corporation. The Volvo Components case is interesting because it is using the latest technology available and leading toward automation. This project is covered by Jan Forslin in the next chapter. For various reasons, the car assembly process has always seemed to fascinate people. It symbolizes the modern production logic of F. W. Taylor of simplified, fragmented jobs. Final assembly of cars has since Chaplin's movie Modern Times been the symbol of industrial work and the trade-off between productivity and boredom. During the 1970s and 1980s, Volvo Car Corporation (VCC) refined its methods and organization, as previously described. VCC is now entering the 1990s by starting up the Uddevalla plant which will demonstrate the next major step. The Uddevalla project has taken a new approach in two ways: 1. The development of a new concept and the learning process has been more thoroughly undertaken than in any of the other projects; this includes the use of a training workshop. 2. The vision of the final plant design and organization of work is more advanced than any comparable plant. A N e w Learning Experience A new learning experience is slowly getting under way. Twelve people started work in the spring of 1986 at Uddevalla Project Training Workshop and seventy were working there by fall. The factory will not be employing any revolutionary technology, but it is a factory with a totally new approach to work and the workers. The objectives of the training workshop include:

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1. to train people to build cars in the most efficient way 2. to let people—the pioneers—decide for themselves how work should be organized. Thus, the learning process should also be the process by which work is finally designed. The traditional assembly line is based on the premise that the products are identical. Today, however, there are many differences between the lightest and the heaviest car in a given model series: different engines, gearboxes, heater systems, equipment specifications, and so forth, result in the Volvo 700 series being made in some 800 different versions. Therefore, people building the cars will need to be more knowledgeable, versatile, and flexible. The knowledge needed to build a car must not remain the sole property of experts but must be spread out widely. In traditional factories, an expert does the thinking and planning, then tells the other workers how the job is to be done. The new plan involves everyone in the business enterprise. Most importantly, workers become involved in planning, quality work, material handling, and problem-solving as well as the assembly work. One cannot be bound to preconceptions, but instead, the division of work and working methods should evolve together. To have flexibility when dealing with problems is fundamental to this work approach. A new industrial craftsmanship should be one of the foundations of the new workplace. This implies that people want to see the whole work, career possibilities, development of skills, and intellectual development. Young Swedes in particular carry this desire to see manufacturing in the context of meaning, service, and personal relations. Ultimately, the result might be a multitude of ways to manufacture a car depending on the skills and ambitions of a particular team. In this type of development work, experts and staff members become resource and support people to the team. Learning takes place not only within a team but even more so in the interaction between teammates and engineers or other staff. In the training workshop, car builders can acquaint themselves with the new techniques in a natural way. The can acquire new knowledge by acting out their new roles in production in an environment that allows free rein to their individual talents. A former teacher, now a car builder in the workshop, said in response to the question what had prompted her to seek work in the plant: "The work here is more independent. . . . I can think in more creative terms than before. I have to solve problems, and I see the result of what I do every day in the form of a finished car. And I like working in a team."

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The Plant Vision Uddevalla is a former shipbuilding and trading town on Sweden's west coast. Around 40,000 people live in the city. In 1984, the Swedish State decided to close down the shipyard. This meant that 2,300 people would find themselves out of work, and the city would lose its largest and most important employer. Volvo happened to be planning at the same time to build a new factory to increase production. Volvo therefore looked into the feasibility of building a factory in the old Uddevalla shipyard area. In January 1985, Volvo presented the decision to build a car plant in Uddevalla capable of producing 80,000 cars per year in a two-shift operation. When the immense gantry crane was demolished in February 1986, it marked the end of one long industrial era and the start of a new one. When this final symbol of the shipyard had fallen, a new industry started to rise in the same place—the Volvo Car Corporation's Uddevalla plant. Uddevalla is an example of the "Swedish model"—unique cooperation among company, union, local politicians, and national government. From the earliest discussions, labor unions were involved with more or less the same authority as management. T h e guidelines were rapidly agreed upon: to achieve a workplace where the system in which car builders were skillful mechanics could be restored. Volvo wants well-trained and experienced craftsmen whose objective is to build topquality cars and to do this efficiently: in short, a workplace that would restore professional pride and dignity. T h e Uddevalla car builders have the very best professional training. They have become well-rounded employees, in some ways like oldfashioned craftsmen but also trained to use computers and to be familiar with the new techniques. They must understand the entire production process, not just fragments of it. T h e car builders are divided into groups of teams of eight to ten. Each group has responsibility for a much greater part of each system in the car than at the Kalmar plant. Production components arrive at the material center where they are quality-tested and placed in stock. Parts are then picked up for each specific car according to computer lists, and dispatched on carriers to the car builders in their production workshops, where assembly takes place on stationary bodies. Part of the work is done with the car body in a tilted position to avoid difficult bending. T h e r e are no traditional foremen to supervise work and decide who does what. Instead, each group is trained to work cooperatively.

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Each group is able to access information on the results of their work via a computer placed right in the working area. This goes for quality production as well as for financial information. T h e jobs and the assignments of white and blue collar workers have been integrated as much as possible. They work close to each other—in order to encourage speedy and informal contact. In order to promote good social relations in each group, there is a mix of age groups and sexes. T h e experience from Kalmar has shown that this is the best way to get the most out of the different levels of skill and knowledge among the individuals within a group. T h e Uddevalla plant applies the well-proven system of apprentice and master craftsperson, but with the support of today's high technology in the engineering and computer fields. T h e training workshop is vital to the development of full-scale production, so the vision can be tested. A young woman who used to work on the assembly line said, " I have learned more about the assembly of an automobile in two weeks in Uddevalla than during two years on the line." Another worker said, "We can no longer say 'this is my job and when I am finished I can rest.' Now we are all responsible for the product, and we must help each other." T h e outcome of j o b design cannot be predicted in advance. T h e beauty of the Uddevalla project is that the team decides its own way of organizing work given the overall goals. T h e possible outcome of job design will vary from teams building large parts of a car to the possibility for a team to finish a complete car. Over time, there will be a dynamic development where the solution varies.

Material Rewards and Ownership During the 1980s, as part of an integrated effort to develop employee involvement at Volvo, various incentives have been implemented. It is important to understand, however, that these incentives do not play an independent role but rather are complementary to changes in the organization of work and the development of relationships and competence. T h e incentives include: • shares given to all employees as a reward for good performance • profit-sharing bonus as an annual incentive of equal amount given to all employees; money is allocated to a fund managed by the employees and invested in Swedish stock • pay system related to performance, as measured by productivity, within a specific profit unit or plant.

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The incentives may vary depending on the phase of development or because of special local conditions. Volvo management thereby stimulates a decentralized organization to act and develop its own strengths. At the same time, corporate management sees to it that there is a glue that keeps the various parts together within a framework based on common values. There are always improvements needed within Volvo. The corporation is to a great extent internationally dependent. Close to 90 percent of everything which is produced in the domestic market is sold elsewhere. Everyone involved in the process of designing, manufacturing, and marketing products has to be knowledgeable and sensitive to a great variety of demands on quality and service. Competence is a must on all levels and in all functions. Investing in people is investing in the future, and no compromises can be tolerated. The company has learned a lot during the turbulent years of the 1970s and the rapidly increasing investment phase of the 1980s. Continuous learning must go on by improving the already known methods and sometimes trying new paths. The involvement of the union at the strategic level and all employees in the realization of these values is the key factor to continued industrial development at Volvo.

Chapter 7 V o l v o Components: From Sweatshop to Playground Jan Forslin

Production has again become a strategic issue in many companies, as reflected by notions like world-class manufacturing. T h e advances of information technology have created new opportunities for production of goods. Along with new opportunities go new and more complex demands on a manufacturing company—especially in a small country like Sweden. Gradually, it has been realized that even quite recent ways of thinking about and evaluating organizations, well-tested models for structuring work processes, established ideas about values and human motivation, and past experiences are now of limited value. T h e r e is a search for new leadership, and paradoxically, in the age of advanced technology, people have again become "the most valuable asset." AB Volvo as a corporation has earned a reputation for an unconventional rethinking o f industrial relations, personnel policy, leadership, and work organization. T h e Engine Division within Volvo Components has had a strong influence on the development within production engineering in Swedish industry. Despite being a part of AB Volvo with its clear identity within the Swedish automotive industry, the Engine Division is by virtue of its production also strongly linked to the broader Swedish engineering industry in terms of technology and values. This separate identity is reinforced by its location in the town of Skövde, well within reach from Gothenburg, the headquarters of Volvo, but still distant enough to be seen as a regional employer. This chapter is based on intermittent research over a period of fifteen years* during which the division has struggled to move into the world of high-tech production (Forslin, 1990). * T h e author has had the advantage not only o f conducting surveys and interviews but also o f a more anthropological approach, spending long periods in the company and

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From Craft to Control The Skövde plant grew out of a local foundry and metalwork shop. In the 1920s, the company was subcontracted as a supplier of engines to a Swedish auto producer under the Volvo nameplate. After some years, it was acquired by AB Volvo and there was a rapid increase in technical development and company size. Since then, the division has always been the main, and most of the time the sole, supplier of engines to Volvo. Irrespective of various organizational innovations, the three basic production units within the division are the foundry, gasoline engine manufacturing, and diesel engine manufacturing. During the 1950s, the Swedish economy was flowering, and the consumption of cars became possibly the first priority for an emerging middle class. The high level of economic activity also increased the demand for trucks. T h e main concern of the Skövde engine factory at that time was to produce as much as possible to meet market demand and to rationalize production in order to cut costs and increase profitability. The plant was characterized by low mechanization, skilled craft work, and a paternalistic leadership. But a new, technically educated management soon introduced modern production methods. The next two decades would be in the hands of the young production engineer—the hero of Swedish industry and provider of the material means for the welfare state. The United States was the homeland of the automotive industry and the model for it. Henry Ford first introduced the assembly line in 1913 for engine assembly (Lacey, 1986). More than forty years later, and after more than thirty years of engine production by craft work in the Skövde plant, that technology was adopted by Volvo. Mechanization by transfer lines and assembly line became the technical vehicles for enhanced productivity. Also brought from the United States was a new production philosophy. Work study methods were already in existence in Sweden, but with the import of the method-time-measurement system (MTM), this software technology programmed the minds of Swedish industrial engineers (De Geer, 1978; Giertz, 1980). The MTM system seemed to

having informal talks with people on all levels, participating in business meetings, management seminars, and union conferences. Part of the study has been done as an action research with the external research staff participating directly in the internal process of organizational change. I am thus most obliged to the company and all the individuals who have shared their experiences freely. T h e research has been supported financially by the Swedish Work Environment Fund.

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fit the thorough and meticulous Swedish nature well. The system was rooted in F. W. Taylor's scientific management and proposed extreme fragmentation of the work process. Tempo work was introduced with scaled-down work cycles within fractions of a minute. Qualifications and control were taken from worker and foreman and given to specialists who developed the work method further. Almost overnight, skilled craft work became degraded to unskilled jobs for which people with little if any previous training or industrial experience were recruited. Semirational bureaucratic ideals were introduced on higher levels in the organization. Control was strengthened by centralization and growth of staff departments. Because of professionalization and increased managerial functions, production lost power. The shop manager and, even more so, the once-independent supervisor were subordinated to a complex web of controls from several specialist functions, such as planning, work study, quality control, and maintenance. The Engine Division was in a dependent position. Design and marketing were located at the Gothenburg headquarters, as were the car and truck assembly plants, which were the recipients of the engines from Skövde. Decision-making on even minute investments was centralized in the AB Volvo board in Gothenburg, and the requisition of money was cumbersome and slow. This organizational position created a singular culture dominated by the pursuit of internal efficiency. The values of the good producer—economizing with resources, quality and dependability, rationality and predictability, and technical ingenuity— determined managerial goals and perspectives.

Hard Labor and Material Benefits The managerial and technical staff at Skövde took study trips to the United States, and their experiences drew much attention. The Engine Division became a center for production technology, and the staff toured Sweden spreading the message. Training programs were arranged, and the young engineers leaving school during the 1950s and 1960s were uniformly indoctrinated. The new approach was highly successful in terms of increased output per workhour—as had Henry Ford's once been. There are other interesting parallels with the first Ford era. Expanding Swedish industry had a seemingly endless need for workers at the same time as agriculture was developing into bigger production units and becoming entirely mechanized. Thus, there was the same flow of labor from agriculture to industry as in the days of Ford. After World War II, as the Swedish welfare state took shape, improved productivity in agriculture as well as industry was a necessary

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prerequisite for increasing national wealth. The increased surplus generated was to be evenly distributed to mold a more equal society. The union position in regard to the new production technology was on the whole favorable as long as it could influence the distribution of wealth (De Geer, 1978; Forslin, 1986). In the Skövde factory, there were Social Democratic and Communist factions within the company union. Only the latter disapproved of the introduction of the assembly line, which was successfully done by management in a couplike manner. The communists lost the battle and ceased to exist as a part of the union. The new work organizational ideals implied that ordinary workers were deprived of the intellectual aspects of work. Division management was aware of the increased demand on the workers as a result of the new work methods and compensated in ways other than increased wages. The Engine Division had an advanced personnel policy for its time. The parallels with the wage policy and the sociological department at the early Ford Motor Company are evident. The medical care at the division became a model for the rest of the country, and early on, the company hired an industrial psychologist for personnel selection. The internal industrial school had a good reputation. The work council system, however formal and not very active, was well ahead of even later national labor contracts on cooperative industrial relations. Thus, paternalistic and even "progressive" streaks combined with a rational but autocratic expert-oriented leadership. Personnel Upheaval The generation that experienced poverty and unemployment during the 1930s and hard, poorly paid farmwork accepted "modern times" in the factory. Their children, however, the sons and daughters of the prosperous welfare state to whom economic security and individual opportunity were self-evident had different aspirations (Zetterberg et al., 1983). During the 1960s with the economy still booming, dead-end jobs in industry no longer attracted the young who had options elsewhere (Forslin, 1978). Swedish company officers traveled all over Europe to convince the underemployed and unemployed of the benefits of working in Swedish industry. The entry of women into the labor force helped, and the demand for daycare services for mothers at the conveyor belt increased correspondingly. Recruitment problems and a high turnover became problems for industry (Hedberg, 1967; Forslin, 1978). The engine plant in Skövde was no exception. Despite its relatively rural location, the local labor supply did not meet company needs. Migrant labor and immigrants of thirty nationalities were mixed on the shop floor. Other more dramatic

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indications of social protest lay ahead. By the end of the decade, students were rioting in Europe. In Sweden, there was a heated debate about improvement of the working environment and the degrading conditions of industrial work. Subsequently, as the Left called for industrial democracy, the debate became politically polarized. In Sweden, wildcat strikes became a new feature of a traditionally peaceful labor market. Even the assembly line of Skövde engines was briefly hit. Management realized that their world had changed, and dissatisfaction could not be solved by wage increases alone.

The Sociotechnical Era The solution to the industrial problems seemed to some Swedish researchers to be within reach, nearby in Norway, where unions and managements had been experimenting cooperatively with new forms of work organization. The experiments were conducted in the 1960s with assistance from social scientists primarily from the Work Research Institutes in Oslo—the late Einar Thorsrud being the most renowned. Thorsrud had a major impact on the thinking of Volvo management. For a summary of the development of these ideas in Scandinavia, see Sandberg (1982). The inspiration for this development had come to Norway from the Tavistock Institute in England, and the now classic sociotechnical organizational research. Some of the most basic papers within this tradition can be found in a book by Pasmore and Sherwood (1978). Other important developments were the new theories of motivation and organizations transmitted from the United States. Abraham Maslow, Fredrick Herzberg, Victor Vroom, and Douglas McGregor had an impact on management training in the beginning of the 1970s and presumably moved the perspective of many Swedish managers toward a more humanistic direction. In the Engine Division, as in many other industries beset by worker dissatisfaction, the personnel department had emerged as a new power center. Such departments had previously been a refuge for obsolete technical staff. Now they were more often manned by academically educated social scientists with an international perspective. In the case of AB Volvo, the young corporate management had formulated a personnel philosophy, which signaled a new view of the production organization and people's role in it. A strategy along two lines was adopted: a proactive collaboration with the unions and restructuring of the work process. These initiatives went hand in hand with the impulses that were transferred by the personnel department at the engine plant. Books on industrial democracy, such as Emery and Thorsrud's (1964), were widely read—despite a fairly leftist inclination for its

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time-—and management went to Norway for examples. Einar Thorsrud had personally also strongly affected the views of the Volvo management in Skövde. Sociotechnical theory focused on the work organization. The semiautonomous work group became the prototype, by which the traditional ideals of a highly controlled and fragmented work process were challenged. The group provided an opportunity to resynthesize work by delegation of managerial prerogatives. Within the group, members could help and support each other in problem-solving as well as in balancing variations in work load. The reliance on the group was in sharp contrast with the explicit ambitions in scientific management of splitting the collective (Taylor, 1911; Braverman, 1974). The Swedish researchers now left the descriptive and hypothesistesting tradition and became more action-oriented. Social scientists were thus early participants in the new development, and one of their first efforts at the Skövde plant was to initiate research in an existing machining department with the objective of developing the work organization and the supervisors' role along the lines of sociotechnical theory. The experiment came to an end without any tangible result— apart from a learning experience for the supervisors which proved to be important for the future. A N e w Factory G e n e r a t i o n The 1960s had been profitable for AB Volvo, and the future of the automobile seemed bright. Market expansion was more international, and at the beginning of the 1970s, investments were made for a new, bigger passenger car with a new gasoline engine for which a new factory was built at Skövde. The Ε-factory, as it was named, was planned in accordance with a different type of specification, which encompassed improvements in the working conditions as well as an entirely new work organization. The planning of the factory was done in an elaborate network with a steering group, project leadership, and work groups for specific issues. The union was for the first time brought in to participate in the planning of a new factory, and it emphasized improvement of the physical working conditions. In this respect, the factory became a success. With innovations such as windows at eye level—a break with the prison-inspired architectural tradition and of great symbolic value— looking toward the green areas outside the building, a low noise level, well-lighted areas, and small workshops, it seemed more like a modern airline terminal than a traditional factory. The most spectacular break with the traditional organization was

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in the large engine assembly department. T h e traditional line typified the negative past with its i n h u m a n e routine work. Now a flexible, nonline solution was specified with buffer stocks and technical provisions for g r o u p work. T h e engines were assembled on self-propelling carriers in work cycle times varying f r o m two to twenty minutes. Within the groups of six to eight persons, rotation between work stations took place twice per shift. Buffer stocks increased the independence of the workers who now could decide on work pace and rest periods. T h e specifications for the new plant also envisaged f u r t h e r development of the organization with delegation of supervisory and staff authority to the presumably increasingly independent work groups. Similar, but less detailed, specifications were laid down for the new machining departments. Machine operators in Skövde were still regarded as skilled labor, but work in machining had also been made routine, subject as it was to the same organizational principles as all other types of production work (Forslin, Söderlund, and Zackrisson, 1979). Now, the more automated technology supported an application of the new organization principles, and g r o u p work was chosen in several cases. O n e of the departments that stood out from the rest was the machining department for engine blocks, where development took place largely as a result of the group's own initiative. T h e modern version of transfer lines was highly automated, facilitating a group work organization. T h e supervisor, who had experienced the transition f r o m craftlike work to tempo work, wanted to repair the damage done at that time by using advanced technology. He became a champion of g r o u p work in his department. T h e organization contained several groups, which operated fairly independently, deciding on allocation of tasks within the group, monitoring the machining process, setting tools, and making minor repairs. T h e objective was that, in time, all twenty operators would be able to handle all operations and all the equipment. An evaluation was made in this department one year after the start of production (Forslin, Söderlund, and Zackrisson, 1979). T h e interviews showed a substantial improvement in comparison with traditional departments in terms of work content and opportunity to develop one's competence. Work was more varied and challenging. T h e operators reported that they could influence their method of work and use their knowledge on methods and equipment. They thought they had better opportunities to develop their abilities and to perform more skilled work. T h e g r o u p felt they had improved interpersonal relations and were helping each other. T h e department met production goals and showed ingenuity in improving machine operations. T h e teams had, to some extent, become multiskilled and thus more flexible.

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The physical structure of the new plant provided possibilities for new forms of work organization, the general direction of which was pointed out in the plant specifications. How far any department went was left to the decision of the factory management and the supervisory staff. In practice, it turned out to be entirely dependent on the interest and ideas of the individual supervisor. Because the new factory was staffed with traditional workers and supervisors, further development of prescribed group work never occurred. The new organizational structures were mainly promoted by a few representatives from the personnel department who subsequently acted as "speaking partners" or internal consultants to those supervisors who wanted to develop the new work organization in their departments. Worker participation in this process was still limited and marginal. Some handpicked key operators had influence on the design in some new departments. But to a large degree, it was a matter of implementing the visions formulated by the sociotechnically oriented personnel staff. This had a detrimental effect on management commitment to the ideas of the new plant and was one lesson that was applied to the next design case. A b o r t e d Development The experiences of the new work organization confirmed basic propositions in sociotechnical theory and demonstrated the feasibility of the new production perspective, allowing for more freedom and development of human resources. The road lay open for an entirely new design of production work that would meet both economic demands and human needs. By now, the new plant had become famous and attracted many foreign as well as domestic visitors. Its work organization concept became a leading idea that would be formalized later in a national agreement on participation and efficiency. As during the productivity phase, the Engine Division again took the lead in production engineering, but now in the opposite direction. Although the physical structures and ideological basis for a new era in production engineering were established in the new factory, the expected development never quite took off. Although a first generation new work organization was successfully operating in some departments with beneficial effects, the continuous development of an interplay between increased authority and competence on the shop floor did not occur. A follow-up study seven years after the start of production showed that the organization had not developed much further than the

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achievements of the first year. In some instances, there were even signs of regression toward more traditional ways of operation. The pioneers had gained a lot of external praise, but they had little success in spreading the example internally. Some supervisors felt threatened by the concept of groups without leadership and frustrated about their own prospects in the new system. A few key persons left, and their replacements had no inclination to implement the earlier visions; traditional views on production took over. Most of the professional staff that had been recruited represented a traditionalist outlook. Conflicts between line supervisors, who wanted to carry on with the new model, and the conventional production engineering were devastating to any concerted eifort to move on. This struggle was won by the engineering experts with support from middle and plant management. Without having been given a fair chance to fail, the new organizational concept was abandoned, or mothballed.

A Satellite Survival In addition, the personnel staff who had been most active in planning the new factory fell into disrepute. Production engineering again seized power. The hard-liners talked about a "lost decade for productivity." Work organization was wiped off the agenda. However, a new satellite factory, which was planned in the mid-1970s, provided an opportunity for further work in line with the new ideas. This small factory within the diesel engine organization would be located in Vara, some 70 km from the mother plant. The design of this plant was similar to the previous factory, which was regarded as a good model. It was, however, explicitly stated that there should be no experiments with the work organization. While group work and assembly on carriers were allowed, apart from this, a conventional plant was expected. A disputed choice of plant manager made the new plant move in a different direction. The new manager had a personal inclination for developing human resources and work organization. At the outset, when only the outer shell was ready, he involved workers directly in the work design process. The workers were newly hired and mostly farmers with little industrial experience. Also, the union that they formed was open to new ideas and very cooperative, even by Swedish standards. The result was a democratic process and innovative organizational concepts. Of importance here was the participation of one representative from division management who personified the sociotechnical philosophy. Apart from his own creative contributions, he managed to raise sup-

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port from a policy group at division level. The work with the new factory also gave him an opportunity to keep the internal discussion alive. Part of the new design concept was to keep the superstructure small. The foreman level was eliminated, limiting the managerial structure to the plant manager and two supervisors. The latter had been involved in the early organizational development efforts in Skövde, which had given them useful experiences. Staff functions were kept at a minimum, which was facilitated by less-than-projected sales during the first four years. The satellite employed some 100 blue collar and five white collar employees, one of whom was a receptionist. This plant was attractively designed with spacious, well-lit premises, and big windows facing the peaceful rural landscape. The offices were placed in immediate connection to the production. The small size reinforced informal relations. Workers and management together designed the groups and the work organization. Work methods were developed by the workers themselves in cooperation with experts and with experimental equipment in Skövde. The assembly work cycle encompassed half the engine, and each worker produced two engines per day—a substantial change from the traditional fraction-of-a-minute cycle on an assembly line. It was also a big step forward in comparison to the gasoline engine plant in Skövde. The manually transported carriers resting on air cushions were flexible in terms of buffering and work pace. Each group was encouraged to increase its competence and take on new responsibilities. Thus, the pay system rewarded increments in competence on a group level. As functions that normally are part of a foreman's responsibilities like personnel, productivity, quality, and economy were mastered, the group bonus increased. To support this development a training program was designed accordingly. The work groups frequently gathered for problem-solving and also conferred each morning with their supervisor in day-to-day matters. Once a week, they had more comprehensive meetings with management when long-term issues were discussed and decided upon. Despite the absence of one layer in the supervisory structure, the management team seldom had reason to interfere with production. They had more time for long-term planning and external contacts than fire-fighting supervisors usually do. Reportedly, they could leave the plant for weeks at a time, for example, to attend courses, without serious effects on the daily running of the plant. The overall development was guided by a joint managementworker committee operating quite informally and ensuring direct par-

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ticipation in plant management. During this process, the committee produced a booklet describing the jointly formulated philosophy of the plant. This document is used not only for customers, visitors, and new recruits but also for continuity in the internal discussion on means and ends in organizational development. It also strengthens the identity of the Vara plant and its aspirations. The geographical distance from the mother plant was two-edged. On the one hand, the plant could work with relatively little disturbance from headquarters staff and was unaffected by the Skövde culture. On the other hand, plant management did not have easy access to the power structure and had little influence on the official image of the plant. Conflict soon arose with parts of division management, which resulted, for example, in a less favorable pay level for the local management. Despite good performance and an unusual level of employee commitment, the new factory was encapsulated and rejected for a long time. Again, this pioneering plant received enthusiastic external attention (e.g., Maccoby, 1981). However, not until a major change of top managerial staff had taken place in Skövde was the plant internally accepted as a good model.

The Complex Demands These two new factories had been planned with personnel concerns as the main moderating force. Since then, however, several fundamental conditions had changed. After the recovery from the first oil crisis, the market changed in character. Among other things, Japanese competition had forced Volvo into a narrower niche; quality became even more important, but also performance. Hence, the introduction of turbo car engines. Various countries—Volvo exports now dominated sales— differed in regulations on exhaust control and in tax stipulations on engine capacity. The number of variants in engine size and design grew drastically. The days of mass production of a standard product were gone, but the specialized equipment for extended series production remained. With capital costs growing, it was also important to reduce production inventory, making frequent changeovers between models necessary. The lack of flexibility took its toll in terms of extra work and poor production flow. To reduce the stock of components, demands on punctuality in meeting delivery schedules were sharpened. All in all, a much more complex and demanding situation had to be mastered by the organization using quite different thinking. Productivity in terms of output per workhour had so far been the almost exclusive measure

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of success. Now uptime, shortened setup times, fast maintenance and repair, prompt deliveries, immediate spotting of quality problems, and rapid retooling became additional demands. The Engine Division felt the consequences of the new situation. First, after several years of meager investments in new machinery, a wave of dramatic modernization of existing plants was initiated in the early 1980s. The solution to the new demands was partly technical. Flexible manufacturing systems were taking over from the old rigid tool machines like the transfer lines. Robots were exchanged for labor where possible. Material and production control systems strengthened their grip over planning, and systems experts emerged in positions of power. Japanese theorists in quality control and logistics were called in. On top of these changes, the division had to meet an unprecedented and entirely unanticipated boom in demand. Since the beginning of the 1980s, Volvo cars have been selling so well that engines had to be produced at or above the capacity ceiling of the plant, with permanent night and weekend shifts. In such a situation, delivery capacity and punctuality became the prime objectives. These changes should act in favor of sociotechnical thinking, because the complex and even turbulent situation could not be handled with a centralized system and a rigid, low-competence organization. This reinforces the sociotechnical philosophy that had been developing during the past ten years. Flexibility and multiple skills were needed on the shop floor. However, the fascination with new technology took the upper hand in many places, despite the official policy of Volvo Components to emphasize work organization and human resource development. Given the decentralization within the company, which increased independence on the profit-center level, a coordinating element was needed. The new division management developed a new philosophy as a managerial tool. The philosophy describes the strategic goals and states the values that support their attainment. A broad information campaign was launched, and an elaborate management development program became an important part of the internal dialogue about the new philosophy and indoctrination. The message was that the division along with the rest of Volvo Components is moving into an era of advanced technology which, however, is available to any competitor in the world market. It is the utilization of technology by proper use of human resources that creates the competitive edge. People being a company's most valuable asset was a serious theme in the eyes of management, backed by the long internal experience in organizational development. The unions were fully committed to the new philosophy and developed their own version.

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With a decentralized leadership, specific measures should not be prescribed, but the general direction of a desirable development and accompanying values or beliefs could be pointed out. As long as objectives were met and development was in accord with the basic values of the company, it was up to individual plant management and the workers to formulate their own specific solutions to fit their unique situation. Increased control and specialization was giving way to its opposite: commitment and competence with multiple skills. This development in management philosophy fits well with a conceptual scheme which Richard Walton (1980) developed in an analysis of work organization models. The changes in the Engine Division have taken the company from a mechanistic tight control structure with an essentially instrumental motivation to a work organization where the motivation intrinsic in work itself is the prime motivating force (Burns and Stalker, 1961). The new work forms are still far from dominating but represent an ideological innovation. Now the ambition is to reduce control further and create a true commitment to the company on all levels by means of a well-communicated production and leadership philosophy. The structural conditions are then of less importance and motivation has a moral quality—one is committed to a good cause.

Conflicting Perspectives The development up to this point can be described as a result of a bottom-up strategy in changing the organization in the sense that management had reacted to social impulses from the shop floor. T h e change had started with tentative initial trials in limited sections of an existing plant, moved to new work design in new plants, and then developed into a full-scale change of organizational culture encompassing all functions and levels. T h e initiative had mainly been with some staff departments responding to social pressure and a value shift. Top-management support had frequently been shaky. With the new philosophy, the message was now given full and visible support by division and company management. The Engine Division must be regarded as an organization unusually open to external influences as well as to external evaluation, but it is also in line with corporate leadership. It has established a widespread international network with academia, outside consultants, and even competitors in an exchange of ideas and experiences. The Engine Division has been open to thousands of visitors. Mainly thanks to its junior management but with consent from the higher-ups, the external researchers have been able to move freely within the organization, which of course, involves risks of disclosures in a less-than-perfect

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working organization. T h e same openness is an important ingredient in the company philosophy and underlines the stress on learning and avoidance of isolation, or company ethnocentricism. Exposure to alien ideas and breaking up of organizational boundaries have become important parts of the management development programs in which union representatives also participate. T h e r e has been a forum in the Engine Division for a continuous discussion on organizational development. In this joint union-management body, experiments and innovations have been evaluated, and the representatives of both sides have been through a collective learning experience. Participation in the committee is not from a bargaining position but as partners in a free and unconditional discussion. This tradition has led to an increasingly open policy toward the union and a shared view on what is beneficial f o r the company. Again, this reflects an advanced Swedish industrial relations tradition of respect and cooperation. By formulating a policy on organizational development, this forum also took the first step in the process of management by ideas, as expressed in the new philosophy, with the ideal of substituting detailed control with coordination and direction by means of company ideology· In the history of the Volvo Engine Division, alternating efforts can be traced between development of the work organization and that o f leadership. T h e r e has seldom been a unified approach. A f t e r the experimentation with new work forms and egalitarian ideals during the 1970s, it was felt as necessary to develop managerial competence. O n e reason f o r the less-than-complete success of the changed work organization was its mismatch with managerial attitudes and competence. N o w the endeavor was to strengthen line management—again, in line with the decentralization principle. Besides management development programs, all first-line supervisory staff got the opportunity o f a year of specially designed training in new technology, economy, leadership, etc., and in basic skills like mathematics—the School of Entrepreneurs. T h e purpose was to prepare supervisors f o r a broader, more managerial perspective and to strengthen their self-confidence. Back at work, they were expected to take on a new, more complete r o l e — t o become an entrepreneur, as formulated by the managing director of Volvo Components. T h e supervisory training was, on the whole, a success and created new hopes in this group. Some people grew considerably and changed their roles. Others tried but eventually gave in to the traditional structures in their usual surroundings. Overall, there was a strengthening of managerial self-consciousness, which was an intended effect. However, it was expected that a parallel development would take place among

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the workers. I f the supervisors were taking on broader responsibilities, they would have to delegate to the workers and to develop the work organization to match their new role. Leadership training should also promote a change in this direction. Some of this took place, but for a while the development in large parts of the division became the opposite. This has been the case in the important third of the division represented by the once sociotechnically pioneering gasoline engine unit where the number of managers and degree of control have increased. Managers involved themselves very directly in troubleshooting and follow-ups. This reinforcement of a "managerial culture" meant a renewed recognition that strong leadership not only is legitimate but important. T h a t process increased the self-confidence among managerial staff. Leadership was more active in communicating on company policy and performance, but not in delegating responsibility. Instead of more autonomous work groups, control has increased and the collective aspects have been fading away. Symbolic of the prevailing spirit are the signs encouraging orderliness and tidiness swinging f r o m the ceiling of the workshops. A popular book on production planning by Cox and Goldratt (1984) became a best-seller within Volvo Components and an important motivation f o r identifying bottlenecks, which definitely improved performance. This strategy also involved strengthening maintenance and engineering functions. These measures were partly situational and a reaction to an extreme work load due to production at a near-capacity, which disclosed a number of technical deficiencies. But they were also a function of values differing f r o m those of top management, which in some instances, led to open conflicts. Also, the workers' union was critical. A f t e r some years of struggling with technical improvement, secured deliveries, and improved quality, this intensified leadership proved successful, however, and the gasoline engine unit even received the internal award in 1988 f o r exceptional achievements. Instead of getting locked into a fight over prestige, top management recognized and learned f r o m the success, which after all, contradicted the official policy in several respects. Part of the company philosophy is a high degree of openness with unions and to involve them in strategic issues, based on the belief that "shared information leads to the same conclusion." This policy has also been very successful in terms of real influence by the union on company decision-making and a strong commitment to company goals. A n indicator of common values within both union and management is that, over the last ten years, all three presidents of the workers' union have accepted white collar jobs within the company. O n the other

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hand, at lower levels within the organization, union-management did not always achieve the same close cooperation. In particular, the metalworkers' union has been unhappy with the lack of opportunity for the development of most of its members and the one-sided strengthening of the management structure. This is against at least one of the objectives and main strategies of the union, which is to achieve a more democratic work organization. Interestingly, the 1982 national union-employer agreement on work organization does not specify or prescribe certain work forms or procedures for codetermination but rather expresses common values and guiding principles. Emphasis is made on local adjustment and "customized" solutions. This is entirely nontypical in an industrialrelations context, where legalistic precision and conclusive formulations are the ideals. T h e new approach corresponds well with the developing philosophy of management by ideas and values rather than by bureaucratic controls. It seems to be based on the same insight— that in a complex and changing environment, standardized solutions do not solve but aggravate the problems.

The Customer Is Always Right T h e conflict between a strong leadership approach and the organizational development philosophy can be seen as a reminder of the old management style with its roots in the early 1960s. T h e decentralization and autonomy of low organizational levels give middle management a wide opportunity to express personal preferences in work, as long as they are in accordance with company policy and values. However, the internal discussion on values had not been completed, and the new philosophy was in some respects imposed on lower management. Nor was it used consistently, for example, in promoting people to higher managerial positions. T o some extent, the sociotechnical pioneers had not fared well careerwise. As it was, there existed a philosophical gap in the organization that was sometimes quite painful. These gaps should be seen within the background of the organizational position of Volvo Components within A B Volvo. During the 1980s, the company had emerged as an independent company owned by A B Volvo. However, the independence is only partial. Design, marketing, and finance are still under the control of the "customers" for the components: Volvo Cars and Volvo Trucks. T h e two customers have a strong influence on investments, designs, production schedules, and prices. That does not leave much for Volvo Components management to use as a lever to impose its ambitions on lower level management. In particular, division management

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was in a weak position. In the case of gasoline engines, agreement with the customer seemed to be stronger than with division management and their interests more in common. The daily demands on deliveries—especially in a situation of too little capacity—and on quality tended to dominate. The more philosophical, low-key control from Volvo Components became a weak voice in the rumbling noise from the customer—who in practice is pushing to become the de facto management. "People are the most valuable asset" has to compete with "the customer is always right." With its proximity to sales and the market, the horizontal managing in Volvo Components tended to become stronger than the vertical. That is, the influence from Volvo Car was felt to be more relevant by production units. The producers of gasoline and diesel engines had less in common than each had with its designer. Consequently, the most recent organizational adjustment of Volvo Components to a changing world eliminated the divisions and introduced business areas. These areas cut across the total organization of Volvo Components and its various geographical locations. There is not even a local site management. Thus, local production groups feel the full consequence of strong customer dependence. Ironically, just after several years of less-than-satisfactory productivity and low profitability within the division, when its organization had adjusted to the heavy work load and started to benefit from investments in new technology and human resources, it ceased to exist as an organizational unit and concept. The division had managed to become one of the most profitable parts of the Volvo Corporation, and at the same time, it was wiped off the organization chart.

The Next Generation Development within Volvo Components can be summarized as follows. On one hand, the company reacts to the changing demands of the market and, on the other, to social and technical forces in the environment. So far, it has been a management prerogative to make this interpretation, identify the problems, and draw the conclusions to be translated into action. In that semirational process, personal idiosyncrasies of the manager affect interpretations as well as what kind of action is undertaken. The managerial stratum that had successfully dominated the development of the Engine Division from World War II up to the first years of the 1980s was extremely homogeneous, not only with respect to age but also in terms of its background and, thus, values and ideals. By means of peer recruitment from one specific technical school, all

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additions to the first veteran core of managers and technical staff fitted well into the existing culture—essentially a control culture as formulated by Zaleznik and Kets de Vries (1984). Economizing with limited resources, attention to quality, and technical problem-solving were the prime demands on production management, the managerial view being narrow and down-to-earth, paying attention to detail. The expert style of leadership (Maccoby, 1976 and 1988) took over from the more patriarchal managerial tradition. Even if leaders became more disinterested and rational experts, a patriarchal streak remained, as expressed in caring for the staff especially by improved health and safety. The organizational ideal was the well-functioning machine with human cogs. In terms of human resources, the concept was dequalification and tight control—McGregor's Theory X in an explicit application. Such a culture fosters obedience and conspiracy, rather than innovation and risk-taking. Still, this first generation of pioneers did introduce an entirely new production philosophy and turned the small company into one of the biggest and, for its time, most modern enterprises in the Swedish engineering industry. During the recruitment difficulties in the 1960s, new social value elements were added to leadership. This period was still dominated by the engineering hard-liners, but as more broadly educated professionals were recruited, internal conflicts between subcultures emerged. In particular, the increasingly influential personnel department advocated a more organic organizational ideal. Development of human resources, increased autonomy, and reliance on the work group for social support as well as social control were emphasized. A weakened loyalty to the company and a corresponding increase in union strength, and contempt of personnel benefits as being manipulative were other reactions during this highly politicized time. The importance of leadership was played down. The first-line supervisors particularly felt threatened—quite correctly, because "Get rid of the boss" was a war cry in some quarters, which prohibited a more serious discussion about new work roles. If leadership was to be practiced, it had to be "democratic," whatever that meant. Egalitarian ideals turned managerial staff into nonleaders. Leadership became obscured and vague. To be democratic and peopleoriented was interpreted as not making demands on subordinates, which led to an inability to express clear expectations and to exert detailed supervision when that was needed, but also an unwillingness to delegate and thereby develop human resources. What was achieved was a perverted form of Theory Y, resembling in many ways laissezfaire leadership. Still, problems had to be solved to make the produc-

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don system work. Such problems would typically be handled by the supervisors, if not plant managers—and on a very practical level. They became a human buffer for the deviations from plans. In practice, of course, they also made the decisions themselves and sold them to their subordinates. Many supervisors who were highly regarded by their subordinates for being kind, caring, and unpretentious were also developing an ulcer or other psychosomatic illnesses. By being preoccupied with the minute details and fire-fighting, they were unable to be leaders. Under the aging postwar leaders, the once vigorous Engine Division gave in to a more indecisive and less energetic management. Newly appointed senior managers could be perceived as temporary solutions before younger alternatives were available. The final years of the 1970s were characterized by reactivity rather than decisive action. Investments had been low for several years. Commitment to the earliest philosophy was still strong. The original ideas were not fulfilled, and there was a lack of direction. It can be disputed whether a manager is able to pursue a leadership inconsistent with his or her own deeprooted values. A full-fledged pursuit of a new management philosophy could probably not be expected Until the next generation was established at the top, as well as within lower echelons. After the stagnation during the second half of the 1970s, the shift of managerial personnel took place almost overnight. At one point, more than one third of the management structure was staffed by new persons. Still, most of the new leaders have been brought up within the Engine Division. Certainly better educated than their predecessors, they have nevertheless earned most of their occupational experience in Volvo and represent a continuity in company tradition. Their outlook on leadership and human resources, however, has been molded by the experiences accumulated over fifteen years of experimentation. The new pioneers first emerged as isolated phenomena in various parts of the organization. Through patient work, they have gradually grown in influence and are now at the helms of power. Some of them are the creators behind the new company philosophy and its enthusiastic advocates. Now they are entering the scene as a young top management team with both extensive experience and a modern perspective. Even apart from the early sociotechnical pioneers, a large proportion of the new professional staff has one way or another—and with varying options—been in contact with new ideas on leadership and work organization. Part of that perspective is active cooperation with the union, which has transformed itself into a role of a speaking partner. There are fewer predetermined conceptions of the work organization, and more guidance by value statements. Autono-

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mous work teams are part of the new plants now starting up, as is individual career planning for blue collar workers. If the industrial era ended with the collective in the forefront, high tech has started with an emphasis on leadership and a renewed interest in the individual and personal achievements. It would probably carry the reasoning too far to speculate whether the recent change in direction reflects a more general societal change. The technological base is no doubt shifting from mechanics to electronics. Automated process control and information processing are overriding the business idea of the industrial stage: exchange of human movement energy and movement precision for mechanical. If this transition has such a profound effect as envisaged by, for example, Daniel Bell and Alvin Toffler, the adjustment of an individual company would demonstrate the practical implications of an entirely new society. Volvo Components as a production organization for the future will also be highly dependent on its ability to cope with a technology that best meets the requirements of the prevailing situation. Over the years, the company has been quite successful in this adjustment process—technically as well as in terms of utilizing human resources. For the future, it will have to be a conscientious producer but not base its production on control of an unskilled work force using guilt as the predominant sentiment. Instead, enthusiasm, commitment, and competence will be the motivating forces. In the new generation of plants, the application of new managerial concepts can now be demonstrated, and the outlines of the factory of the future can be traced in the newly completed H-factory. The technological level is sophisticated with flexible computercontrolled tooling machines and a high degree of intersystem integration. Management is now operating in a highly competitive global market where customer orientation, quality, and secure deliveries are emphasized. Although there is no singular, predetermined model for work organization, these demands require multicompetent work teams to assure the necessary flexibility in production and availability of the equipment. The role of group leader rotates between the members after necessary training. In order to make the organization responsive to turbulent shifts in conditions, decisions are delegated to the shop floor where much of the necessary competence is being built. Teamwork is combined with development of individual competence, careers for workers, and personal training programs. The intellectual faculties of workers have finally been reevaluated, and the demarcation line between white and blue collar employees is gradually dissolving. With decentralization and reliance on the organizational bottom line for problem-solving, the organization has become flatter; not only

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missing the foremen but also with reduced expert functions. The oncepowerful staff departments operate on a service basis subject to external competition. The production management has regained power but is also more egalitarian and open to dialogue. Managerial teams and decision-making by consensus are necessary for optimal solutions in a complex and unpredictable situation. Each era is distinguished by its own architecture. The industrial period was increasingly functional with little regard for aesthetics. Postindustrial buildings are aesthetic, irregular, decorated, and glasscovered. There are winter gardens in the middle of the workshop, cafeterias in atriums with fountains and live fish, places for community and leisure activities, such as visiting with family members or friends. The borders dissolve between work and leisure, work and community, work and play. The enslaving sweatshop has finally given in to the highly productive playground.

Conclusion The Engine Division is, as stated initially, a part of AB Volvo. The era of searching for new models of organization and leadership was instigated some fifteen years ago, when the new corporate leaders took office. The new management headed by P. G. Gyllenhammar identified a changed situation with a shift in work values. With a combination of decentralization and inspiration, by opening up the organization and exposing key persons to new experiences and knowledge, a cultural transition in the corporation has been achieved. With this patient and cautious approach to change, few casualties have occurred and local factors have been given ample margin. From a local perspective, this invisible consent and support have not always been consciously felt or recognized—just like the fish in the bowl is oblivious of its water. If the sociotechnical period reduced leadership and relied on organizational structure to promote freedom and coordination, the solution to complex demands is to supplement reduced structures with leadership for direction and commitment. In this way, leadership is regenerated with emphasis on inspiration and personal example but also on increased communication and an open dialogue on all organizational levels. The new factories are the combined product of systemic changes and an open, permissive, and visionary leadership. Not until all parts of the system were striving in the same direction and supported each other was a lasting cultural change possible. A new leadership would probably not be enough for a change unless the market required it and the technology permitted it. On the other hand, it still takes leadership to bring about such changes.

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As with t h e previous revolution thirty years a g o , a convinced a n d c o m p e t e n t leadership has been necessary for the transition. T h e n , t h e pioneers i m p l e m e n t e d a m o r e o r less r e a d y - m a d e system o f ideas along with m o d e r n technology. T h i s time, new solutions have d e v e l o p e d locally a n d t h r o u g h various e x p e r i e n c e s have b e e n cross-fertilized. T h e n t h e p r o d u c t i o n ideology prescribed centralized p o w e r a n d dee m p h a s i z e d t h e d e v e l o p m e n t o f h u m a n resources. Now participation, personal d e v e l o p m e n t , a n d learning a r e indispensable parts o f w o r k — not the least if a f u t u r e g e n e r a t i o n will view industrial work as a viable livelihood.

References Braverman, H. (1974). Labor and Monopoly Capital. New York: Monthly Review Press. Burns, T. and G. M. Stalker (1961). The Management of Innovation. London: Tavistock Publications. Cox, J . and E. Goldratt (1984). The Goal: Excellence in Manufacturing. Stockholm: Ingeniörsförlaget. (In Swedish, 1986). De Geer, H. (1978). Rationaliseringsrörelsen i Sverige (The Rationalization Movement in Sweden). Stockholm: SNS. Emery, F. E. and E. Thorsrud (1964). The Form and Content of Industrial Democracy. London: Tavistock Publications. Forslin, J . (1978). Arbetsanpassning. Utvärdering αν en psykologisk modell mot bakgrund av tvâ empiriska studier (Labor Turnover. Interpretation of a Psychological Model Against the Background of Two Empirical Studies). Stockholm: PArâdet. . (1986). "Public Acceptance of New Technology in Sweden." In Public Acceptance of New Technologies. An International Review, ed. R. Williams and S. Mills. London: Croom Helm. . (1990). Det Avklippta Bandet (The Cutting of the Assembly Line). Stockholm: Norsteds. Forslin, J . , J . Söderlund, and B. Zackrisson (1979). "Automation and Work Organization." In Automation and Industrial Work: A Fifteen Nation Perspective. Part one, ed. J . Forslin, A. Sarapata, and A. Whitehill. London: Pergamon Press. Giertz, E. (1981). Om arbetsstudieutbildningens institutionalisering i Sverige (The Institutionalization of the Education of Studies of Worklife in Sweden). Stockholm: Kungliga Tekniska Högskolan. Hedberg, M. (1967). The Process of Labour Turnover. Stockholm: PArâdet. Lacey, R. (1986). Ford. The Men and the Machine. London: Heineman. Maccoby, M. (1976). The Gamesman: The New Corporate Leaders. New York: Simon & Schuster. . (1981). The Leader. New York: Simon & Schuster. . (1988). Why Work: Leading the New Generation. New York: Simon & Schuster. Pasmore, W. A. and J . J . Sherwood (eds.) (1978). Sociotechnical Systems. A Sourcebook. La Jolla, Calif.: University Associates.

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Sandberg, T. (1982). Work Organization and Autonomous Groups. Lund: Liber Förlag. Taylor, F. (1911). The Principles of Scientific Management. New York: Harper & Row. Walton, R. (1980). "Establishing and Maintaining High Commitment Work Systems." In The Organizational Life Cycle, ed. J. R. Kimberly, H. Miles, et al. San Francisco: Jossey-Bass Publishers. Zaleznik, A. and M. F. R. Kets de Vries (1984). "Leadership and Executive Action." In The Irrational Executive. Psychoanalytic Studies in Management, ed. M. F. R. Kets de Vries. New York: International Universities Press. Zetterberg, H. et al. (1983). Det osynliga kontraktet. En Studie i 80-talets arbetsliv (The Invisible Contract: A Study of 80 Workers). Stockholm: SIFO.

Chapter 8 The Swedish Labor Unions Horst Hart

Together with Norway, Sweden seems to have the most well-developed labor union organizations in the world. Even on the local level, most workplaces of some size have union organizations (klubb) of their own. T h e larger the workplace, the more elaborate are these local organizations. In the same workplace, the larger national unions are also represented, thus, there will be one union-club for one of the worker unions, one for salaried employees, one for supervisors, and one for professionals. Such local union organizations are led by a council (klubbstyrelse), the chairman of which plays an important role in creating workplace policies and strategies. Most of the national collective wage agreements have to be adjusted to local conditions. This is done through an agreement between local unions and employers. Control of the work environment is also a task for local unions. In connection with the modernization of labor legislation ten years ago, local unions gained the rights to negotiate employers' decisions on any issue. Today, the legal framework for most union-employer relations can be f o u n d in a few laws, all of them formulated as a result of this reform. Union rights are defined in laws about union representation on company boards, the work environment, work protection, and codetermination and rights for local union activities. Usually, the rules are formulated in a very general way. O n e important way to specify these general rules and adjust them to local conditions is to make agreements between a local employer and local unions. Such is the situation today at workplaces and companies with more than 50 employees. In smaller firms, the presence of unions is much more problematic, and a majority of these workplaces have no union organization of their own. Local unions are influential in almost all important decision-making within the larger Swedish companies. To-

146

Organizational Transformation

day, union participation is considered as rather unproblematic to management in most companies. This chapter will give a background to this situation. Foreign observers of Swedish industrial relations often point to the national scene, where the Social Democratic party, which has held power for a long time, has made it possible for national labor unions to gain considerable power. Unions play an important part when formulating the important issues for political reforms (Korpi, 1978 and 1981 ).1 Control over political power strengthens the ability to organize and influence employers. Others (Ashenfelter and Pencavel, 1969, or Bain and Elsheikh, 1976) use the power concept in another meaning. Union power is related to the ability to control bargaining processes. Here, the legal formulation of the collective bargaining process becomes crucial.2 One very common explanation of the position of Swedish trade union organizations relates union growth to the fact that the Scandinavian countries have strong organizations on the employer's side (Clegg, 1978; Ingham, 1974).3 One interesting attempt to bring these different theories into one scheme is made by Kjellberg (1982). 4

The National Scene Although the Swedish union structure is as strong in the public sector as in the private (or industrial) sector, this discussion will be concentrated on the private sector. One of the most important characteristics of Swedish labor union organizations are their well-organized locals. However, Swedish unions traditionally have been (and still are) centralized organizations. Historically, the Swedish national unions are the result of successful centralization efforts. However, it is important to distinguish between different clusters of union organizations. There are close relations between the political and union branches of what is called the labor movement, which in Sweden means close connections between the Social Democratic party and national unions. T h e centralization of important decisions and policy formulation goes back to the beginning of the century. Being one of the cornerstones of the Social Democratic labor movement, the Social Democratic party considered the unions as important parts of their efforts to gain political influence and power. From a union perspective, control over the public institutions through political power was as important as direct negotiations with employers. On the central level, when describing attitudes toward change, despite the basic similarities between the existing union organizations, there are important differences. National unions, belonging to the confederation of academic professions (SACO for Sveriges Akade-

Swedish Labor Unions

147

mikers Centraiorganisation), 5 traditionally concentrate union interest and political activities to more narrow and genuine union issues. For them, the most important priorities have been salaries and development of professional skills. Most members can combine their own interests as union members with their position as professionals. SACO unions only seldom participate in debates about industrial development, productivity, or workplace conditions. Recently, these union attitudes have started to change. As a result of legislative reforms, SACO unions have to cooperate more closely with other unions. The unions making up the federation of salaried employees (TCO) and the workers' unions within the LO have developed roughly similar union positions during the postwar period. They recognize they must accept technological change and reorganization of production resources to assure economic growth and full employment. Unions have to develop a position where they are powerful enough to maintain a system of redistribution of the economic results. The "solidarity wage policy" has been the important ideological formulation of the positive attitude toward rationalization of industry. Companies and firms should, according to this philosophy, be forced by militant collective bargaining to agreements that maintain high wages across the board so as to optimize productivity and a sense of equity. Companies which cannot reach these levels have to be eliminated from the market. Resources in terms of labor and capital can then be more efficiently used in other branches or in other regions. This strategy needs assisting institutions, who take care of the consequences. Here, the unions put strong pressure on the political system to find such measures. Active labor market policies aligned with industrial policies early on became one of the most important characteristics of Swedish welfare-state policies. Closures and redundancies were met with measures in terms of adult education and training, subsidies for reallocation, development of information systems for job-seeking, etc. Besides maximum wage increases, productivity gains should be used for improvement of working conditions. Even here, a combination of active political measures have been combined with efforts to reach national agreements with the counterparts on the employers' side. On the political side, the development of controlling public agencies with enough power to exert effective control over the work environment can be mentioned. In terms of collective bargaining within the quality of working life field, a lot of agreements were made. The system of collective agreements had become so complicated that the institution of collective bargaining became questionable at the end of the 1960s.6 These union strategies were formulated after World War II. The

148

Organizational Transformation

usual way is to adopt them in a union congress as policy documents for further action. It started with a very important document, The Labor Unions and the Problem of Full Employment,7 which has continued to be a central ideological document for formulating national union strategies. During the 1960s a series of policies concerning other industrial relation problems were accepted by union congresses. Union strategies were formulated for issues within the field of industrial democracy, union reaction toward technological change, and wage formation. All documents were expressions of the same ideology. Working conditions could be controlled through a variety of central agreements between central unions and employers' organizations. T h e content of agreements should thus be the result of aggregated wants or needs, agreed to and institutionalized at the central level. T h e results then needed to be translated into prescriptions implemented through internal union or employers' activities. In the late 1960s, a variety of general collective agreements were negotiated at the top, regulating different functions on a company level: wages, j o b security, work environment, employment protection, and internal organizational issues, such as regulating the rights and obligations of local union representatives. Disputes about different interpretations were again to be settled at the central level. For most issues (with the possible exception of treatment of work environment problems), it follows from this negotiation structure that local unions have a rather passive role, restricted to three important functions. First, local unions were responsible for collecting union fees. A second important role for the local union was to control and supervise the stipulations in the general agreements and to notify the center when employers did not follow agreements. Thirdly, local unions played an important role within the process of formulating and aggregating union interests to the center. Local unions regularly participated in a sophisticated indirect, representative, democratic communication system through which the union policies are formulated. T o summarize, twenty years ago, union decisions were made at the top, agreements with employers were made on this level, and central unions were also able to influence national welfare policies. Membership was reduced to a passive participation with few possibilities to become involved with policy formulation. Local union activities were defined by the central levels. From this description, it seems as if local unions are less important in creation and reproduction of the social system of the workplace. In a historical perspective, local unions have always been very important in the local network based on the collective relationships among workers. Working-class culture is reinforced by local labor unions. This has

S w e d i s h Labor Unions

149

traditionally been organized through a variety of leisure-time activities within the context of the local community. However, unlike the United States, Swedish local unions have never played a significant role in resolving grievances between workers or between workers and supervisors. While union representatives may be involved, they do not usually play an active part.

Reconstruction of Local Unions This system began to be criticized in the 1960s and early 1970s. A series of strikes started a widespread discussion, and soon central union organizations began to reconsider the postwar centralized negotiation system. LO and T C O requested several parliamentary commissions with the mission to formulate necessary legal reforms. O n e question in common for all these reform activities was how to give local unions a more active and important role in the various negotiation activities. During the period 1972 to 1977, several laws were passed. O n e regulated union representation on company boards (two union members were elected by local unions to the company boards and had in principle the same rights as other board members). Another regulated the rights for local union representatives (including stronger employment protection than other employees). T h e Employment Protection Act defined a stronger local union influence on decisions about layoffs and downsizing. It defined a right to local negotiations and introduced a restricted right to veto all notices of dismissals which did not follow the principle of last-in first-out. T h e reform period ended with the Codetermination Act (Medbestämmandelegen 1977). T h r o u g h these reforms, the system of legal rules defined a new local industrial relation. T h e first consequence was the development of rather bureaucratic, rule-fulfilling local practices, but this did not function well. Local union leadership had to become more engaged in an ongoing dialogue with management. National unions still kept control over wages through centralized collective bargaining. They also tried to introduce several measures to keep control over the differentiated local activities by means of general reform programs, handbooks, and guidelines for local action. Labor legislation reform occurred during a few years at the beginning of the 1970s. T h e general design of the various laws had much in common in terms of legal techniques. T h e basic idea was to describe a minimum rule or some general principle which mandated an automatic solution. Exceptions were possible if local parties succeeded in reaching an agreement. For example, the Employment Protection Act states a general principle. In case of redundancy, the last employee

150

Organizational Transformation

hired has to be laid off first. If nothing else occurs, it is illegal for an employer to use any alternative principle. But it is possible to make a local agreement with the unions within the company or the workplace, defining alternatives to the general principle. In addition, within this legal f r a m e no one can challenge the alternatives agreed to by unions and employers. Not even central unions can protest a local agreement. T h e Codetermination Act operates in a similar way. T h e general rule states that an employer has to inform local unions about planned decisions and other matters. Before a decision is formally made, management has to take u p negotiations with local unions. How this is institutionalized is a question for management and local unions. As long as unions are informed and some system for local negotiations exists, the local parties are free to define how this will be done. Legal sanctions like these put more emphasis on local activities. Indirectly, it has become a way to restrict activities initiated f r o m the center. As long as the local parties agree, central unions (and employers' organizations) have fewer possibilities to interfere with company policy. Even if not intended, the consequence of the reforms has been a shift f r o m the central level down to the company and workplace level. T h e legal reforms were implemented at the same time as the economic recession in the mid-1970s. As in the rest of Western Europe, Sweden experienced a decline in industrial activities. Some industries, important for the national economy were especially hard-hit. Shipbuilding and textiles were almost extinguished. Others (steel production and mining) went through major cutbacks. Swedish labor market policy and industrial policy, famous for their active design, could not stop these structural changes. Union actions were paralyzed with internal conflicts and antagonism between unions in different parts of the country (and even f r o m different departments within the same company). A six-year loss of power for the Social Democratic party accentuated the helplessness demonstrated by central union organizations. During this period, union organizations, partly using labor legislation as an argument, started to reorganize internal activities. Since 1980, one of the larger unions within the T C O organization, the union for salaried employees in industry (SIF for Sveriges Industri Förbund), while keeping the staff on the central level constant, have doubled the n u m b e r of regionally based union staff. Since 1977, a great n u m b e r of workplace organizations have been founded, most frequently within areas where union strength traditionally was considered weak (retail trade and health sectors). Despite the economic crises, the public sector continued to grow without a corresponding growth within the production sector. Private

Swedish Labor Unions

151

investments decreased. In the beginning of the 1980s, consciousness and consensus grew about the necessity of a massive modernization of most of the sectors. Efforts were made to raise the investment rates. Starting with the larger companies, the last five years have also resulted in a variety of redesign projects, reorganizations, and investments in new technology. Again, like the modernization efforts during the 1950s and 1960s, these projects are implemented with an active participation from labor unions. On a national level, union representatives participate on boards of development and modernization projects. Resources are allocated to projects in which unions and employers' organizations cooperate. Funds are raised for training, retraining, and educational programs. But all these efforts do not mean that the situation has returned to the conditions that prevailed twenty years ago. Today, decisions about funds, development programs, and action research programs are decided through a decision-making process in which local unions play an important and active part. Twenty years ago, local representatives on the shop floor (more often than today, single individuals) would have received ready-made programs from the central union organization. Contemporary Organization of Unions The organizational chart for the Swedish union system is complex. Formally, the most powerful units within the Swedish union network are the national unions. For blue collar unions, the principle for recruiting members is according to industrial branch. All workers in one industry essentially belong to the same union (even though there are exceptions). Thus, you will find unions for metalworkers, textile workers, state employees, municipal employees, etc. All blue collar unions together form the LO, which has taken over some of the responsibilities from the national unions. Most of the decision-making power lies within each of the national unions. LO can typically only recommend activities and measures to each separate union. TCO uses a similar organizational principle, organizing white collar workers in industry, civil servants, or municipal employees. SACO is formed by professional unions (doctors, teachers, academics, civil servants, etc.). As mentioned in the beginning, a few years back, almost without exception, wage agreements were negotiated on the central level. These central agreements were considered to be recommendations for applied negotiations between each union and its counterpart on the employer's side. Once a central agreement was reached, the necessary adjustments for each union were negotiated under peace obligation. 8 Since many unions were involved, it became more and more common

152

Organizational Transformation

that unions which had to negotiate with the same organization on the employer side formed cartels, which took over the responsibility from the central organizations. Cartels thus came to play an important part (and still do in the public sector). In the private sector, these cartels still exist, although they have lost most of their bargaining power. Some of these cartels are formed by unions in the same sector but from different central organizations (blue- and white-collar employees, academics, T C O unions, etc.). T h e number of persons employed in these central organizations depends on the number of members. T h e larger unions have up to 500 employees, the smallest only five to ten. Most of the larger unions have regional organizations. Depending on the industrial structure of the branch in question, the regional organization can have different forms in different parts of the country. Different national unions also use different organizational principles, resulting in a variety of solutions on this level. During the last twenty years, there has been a tendency toward organizational reforms, resulting in a decreasing number of larger regional units. 9 T h e role of these regional organizations is also dependent on how well developed the various industrial branches are in the region. T h e regional union organizations are more important for members employed in small companies. Small workplaces often have difficulties in organizing union activities of their own. One solution has been to find equal partners in other small companies. This is done for some bargaining issues, making use of the bargaining skills of the regional union offices, or to control the work environment situation, where regional experts have become more important as a "service-institution" to members in small companies. Some unions concentrate most of their activities in regional institutions. This is particularly true for construction workers. Also, in some parts of the country, the union for municipal employees and the academics have comparatively powerful regional units. All the national central organizations also have regional representation of their own. These "district organizations" only deal with regional issues that cover more than one union. They are important actors in most of the regional political networks in the field of regional economic policy, education, training, and other relations in connection with a regional decision-making process. Members from the district organizations often represent the unions in various boards and other decision-making institutions. T h e district organizations together with the regional organizations are important actors within a well developed regional system, in which the other important actors are the regional organizations of the state (for employment policies, industrial development, and school systems), regional employers' organizations, firms, and municipal organizations.

Swedish Labor Unions

153

Local Union Organizations In small working places, usually only one or a few union contact persons are elected. More elaborate union organizations on the workplace level seem to need at least fifty union members. 10 Local union activities are channeled through roughly two local organizations. One deals with control of and decision-making in connection with health and safety issues and work environment protection. The other deals with internal union activities and with issues that are defined as union activities either in central collective agreements or in one of the labor laws. In larger workplaces (those with more than 100 employees), there is usually one organization (klubb) for the blue collar workers, one for the salaried employees, sometimes one for the supervisors, and one for the professionals. For public-sector workplaces, such as hospitals or schools, there are usually several organizations for administrators, nurses, doctors, and teachers. Thus, the public-sector mix of local union organizations usually is broader, sometimes also more complex because of the average larger size of these workplaces. The everyday activities of the union are performed by a number of

LO

O

TCO

o

OJJ^^ŒZQi Q GTD n ÌQtrirt District organization

0333 Work-place organizations

SACO-SR

o

NATIONAL 3NS CARTELS

ŒlD

Q GXDRe8i

anal urban dep; rtments

^

033D Work-place organizations

'

District organization

0333

Work-place organizations

Figure 1. Organizational structure o f Swedish labor unions.

154

Organizational Transformation

elected representatives. T h e s e elected representatives f o r m a council, which is the executive of the local union. T h e division of labor within these councils is defined by the internal rules. T h e most i m p o r t a n t position is that of the chairman who is generally responsible f o r the local negotiations. T h r o u g h this position passes most of the information flow f r o m central a n d regional unions to the o t h e r council m e m bers a n d to the members. T h e chairman is also responsible for the p e r f o r m a n c e of o t h e r council members. Within the council t h e r e are some m o r e obligatory positions, the council secretary, the treasurer a n d o n e position responsible for internal education a n d training. Usually the safety controller is also a m e m b e r of the council. T h e n u m b e r of council m e m b e r s d e p e n d s o n the n u m b e r of m e m bers. T h e larger the local organization, the m o r e complex the council structure. T h e large companies usually have organizations with both a hierarchical a n d a functional division. T h e r e has been an increase in the n u m b e r of representatives e n g a g e d in local u n i o n organizations. T h e following figures are taken f r o m a panel study 1 1 and show an interesting d e v e l o p m e n t of the local organizational structure. Most c o m m o n is a single-level organization where the council m e m b e r s do all union work together. Even if t h e r e is a certain division of labor within the council, most council m e m b e r s participate in most council activities. T h e larger the workplace, the m o r e complicated the local union organization. It has become c o m m o n to a p p o i n t "contacts" (kontaktombud) who are responsible f o r the communication between the council a n d the members. T h e i r function is to bring suggestions and opinions to the council a n d to c o m m u n i c a t e decisions, strategies, and opinions to the members. Multilevel organizations can be f o u n d in large companies and large administrations. H e r e , the top organization, the council presides over a larger n u m b e r of subgroups, each led by a g r o u p council. This type of multilevel organization has become m o r e c o m m o n .

TABLE Ι.

Local Union Structure, 1978-1985 (percent)

Type of organization One council for the entire workplace Council and contacts Council, group councils, or contacts Only contacts Other organizational forms Total number

1978

1980

1985

47 27 11 12

48 28 8 14

33 30 15 20

3 1078

2 792

2 1452

Swedish Labor Unions

155

Table 1 contains two processes. A t large workplaces, often belonging to large companies or public organizations, local unions in general have no problems in recruiting enough members f o r local executive positions. T h e unions and employers have found a system which allows diversified local union activities. Local unions have enough resources to organize a wide range of activities. T h e increase in multilevel local union organizations is a measure of a positive evaluation of strong and well-developed local union activities ( f r o m traditional negotiations to internal education o f union members). O n the other hand, Table 1 shows a decrease in workplaces with a single-level union organization, while the number of workplaces with only a contact organization is increasing. Here, it seems as if the pressure on local union representatives to participate in a wide variety of actions is too strong. Lack of enough members willing to represent a local union causes workplace problems to be pushed up to the regional union level. A t the end of World War I I , most local union activities were performed without any help or support f r o m the employer. Management did not approve of union activities during working hours. Today (even if most union activists spend a great deal of their free time with union issues), most of their work is usually done with at least a reduction of working hours. According to rules in an act regulating the union rights to perform union activities during working hours (1973), union representatives can reach local agreements about how to resolve the time and economic compensation for such activities. Today, few question the legitimacy o f performing union work with compensation f r o m the employer. Only a minority o f employers question the right of the unions to do so. T h e labor law reforms produce a situation in which a majority of local union representatives are free to work f o r the union, with hardly any control from employers. Increasingly, unions report a regulation

TABLE 2. Employer Control of Compensation for Union Workers (percent of the unions' answers, more than one answer is possible) Employer reaction

1978

1980

1985

N o control

32

45

40

Formal restrictions (agreements) but no control

23

27

30

32 24

27

32

19

28

1

1

1

1078

792

1452

Restricted because of practical reasons (replacement, etc.) Restricted by local or central agreement Restricted by employers only Total number

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of the working time used f o r u n i o n purposes because of time spent negotiating local codetermination agreements. Local u n i o n activities have reached a scope that some kind of restriction seems necessary to both parties. What D o U n i o n Councils D o ? Going twenty years back, m e m b e r s of the local u n i o n council had r a t h e r restricted responsibilities. Basically, they had to supervise the fulfillment of a g r e e m e n t s m a d e on the central level. Even so, local union representatives still had some, o f t e n informal, power since not everything could be f o r m u l a t e d in general rules within the f r a m e of a collective a g r e e m e n t . Even then, local unions a n d union representatives could influence local decisions. Much of the local influence was tied to t h r e e activities: wage negotiations, health a n d safety protection, a n d a g r e e m e n t s about work committees (företagsnämnd). Today, local unions are working with basically the same type of issues, b u t their significance has c h a n g e d . In particular, issues about technology, organization, a n d economics have become m o r e central in a system of j o i n t decision-making. T h e y were earlier connected to the work committee activities. We will soon come back to what this means, but first we need a description of what local u n i o n representatives really do. How d o they s p e n d the increasing n u m b e r of working h o u r s at their disposal? T h e r e are only a few empirical studies that describe local u n i o n activities. Most of t h e m are case studies. But if we go to the typical local union today, we will find o n e or two u n i o n representatives working full-time on union issues. T h e chair of the union council a n d the safety controller usually take care of most of the everyday u n i o n work. T h e chair is at most workplaces a central and i m p o r t a n t person. T h r o u g h him o r her, most of the communication flows (from members, managem e n t , o t h e r unions, political parties, etc.). D e p e n d i n g on the type of work, the safety controller in some workplaces plays an equally important role. In the typical union council, the rest of the m e m b e r s work with u n i o n issues part-time a n d to a m u c h lesser extent. In o n e study five years ago, an a t t e m p t was m a d e to reconstruct a time b u d g e t f o r a small sample (15 local u n i o n council members, 100 representatives). 1 2 T h e y spent their time as shown in Table 3. As this table shows, changes d o not occur rapidly within the Swedish u n i o n system. So, even if local unions today are m u c h m o r e autonomous in relation to control of union activities, still a considerable p r o p o r t i o n of time is used for activities outside the workplace. This probably has to d o with the fact that it is not easy to recruit u n i o n

Swedish Labor Unions

157

activists. Active persons tend to be overloaded with work in many different union and political contexts. The second comment is about how time is spent in relation to "traditional" and "modern" union activities. Most of the negotiation activities have to do with either wage issues or with management problems. Developments during the last ten years have created a new role for local unions. Still, negotiation of local wage issues remains important. In addition, local unions have gotten more and more involved in management problems. It is quite common today that union representatives regularly discuss plans and problems within a wide range of issues with management on different levels. At the beginning of the 1970s, wages and work environment issues were considered to be the most important. Ten years later, the priorities have changed. While wage formation issues are still considered important, among union activists other problems, management, strategic decisions about markets, investment, and technology have become much more important, as we have seen in previous chapters. Traditional issues around work environment protection have lost their significance. 13 Local Systems for Discussions Between Management and Unions Today, relationships between management and union representatives are well-integrated in the decision-making system, but the local codetermination system is rather complicated. In some workplaces there are permanent negotiation groups

TABLE 3.

Local Union Council Members' Use of Time

Type of activity

Internal activities (council meetings, contact with members, preparation of negotations, etc.) Negotiations Health and safety protection Participation in management groups Project groups Other union concerns (central, regional, or within local community) Total percent Total time used by 100 union representatives (hours/ week)

Percent of time used

40 10 14 19 7 10 100 1,175

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which meet regularly to discuss and decide upon special issues. Labor legislation was from the beginning thought to strengthen this method of increasing employee influence on decisions. It was very common in connection with the implementation of the Codetermination Acts in the years after 1977. However, the nature of the decisions in these fields were not easily managed within a traditional negotiations system. T h e importance of formal negotiations in its traditional meaning in connection with decisions about organization, technology, investments, and strategies seems to have decreased. Another more modern and flexible system is based on union representation in the ordinary decision-making system (from representation on the company board of directors downward to participation on the group level). This is becoming more usual. T h e system of various functional committees has a long tradition and was introduced during the 1960s. These committees were introduced through a central agreement on industrial democracy (företagsnämndsavtalet, the agreement about work councils). It soon developed into a functionally differentiated system of subcommittees, responsible for different enterprise functions subordinated to the works council. While these committees may play an important role, more progressive companies try to exchange the committee system for the system of direct representation in decision-making groups on different levels. Still another system of influence takes care of resolving more occasional and restricted issues as they arise. Such problem-solving groups, often called project groups, almost without exception include union representation.14

The Union System for Recruitment and Ideological Training Being an activist within local unions is not always valued positively, either by employers or among colleagues. Twenty years ago, most of the work for local unions was done purely as leisure-time activities. T h e ability to deal with union problems during working hours has meant an important upgrading of such activities. Still, most unions have problems in recruiting new activists. One common technique used for recruitment and internal education is the study circle. For a great variety of purposes, people come together in informal and self-directed discussions, which are often run within the framework of local unions. In most local union boards, there is one person elected, responsible for education and training of members in union matters. Almost any subject concerning union problems can form the basis for a study circle. Often, such circles start with

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written material produced either by educational and training departments within national unions or by special training organizations. Some of these courses are subsidized by government agencies (for printed material, for remuneration to circle leaders, etc.). Typical union circles of this kind focus on the role of being a union activist as well as on the work environment, business administration, economics, and how to behave as a board member. Study circles of this kind have to be conceived as means for the mobilizing interest and educating newly recruited activist members. Study circles are also initiated by union members or local groups on subjects not defined or prepared by the union organization. Issues of local interest, with or without direct relation to the workplace can form a basis for a study circle. If there are enough members (a minimum of five) together with certain other conditions that have to be fulfilled (accepted plans and enough meetings), such study circles also can be subsidized. The study circle as an institution was developed within quite a different situation and goes back to the beginning of the century. Lack of education among early socialist activists created an important demand for literacy. The national school system was only adjusted minimally to handle workers' children. Study circles were a cheap and efficient method for adult education in various subjects and were widely used within the early labor movement (as well as within churches and temperance movements). Locally administered study circles are important for recruitment. They form a frontline educational and training program for employees interested in union matters. Most unions also have more regular training schemes, and the larger national unions run a number of schools for further education of active union officials. In connection with the discussion of quality circles, study circles are a natural, institutionalized, and thus culturally entrenched alternative. Today, such study circles are getting more and more common even outside the original context. Companies use the study circle method in situations where a broader participation of employees is necessary. More and more frequently, local development projects are run as study circles or use study circles as one of the planning methods. Future Development of Local Industrial Relations During the 1970s, the industrial relations climate became like that of central European countries. As unemployment rates grew and plant closings became more common, the traditional cooperative attitude between employers and unions changed to one of militant conflict.

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Militancy was most outspoken on the employers' side on the national level. On the local level, the degree of conflict depended on the company's success. Companies with good performance still based their own development on good relations with local unions. Companies in trouble tried to limit union influence as much as possible. 15 There was also a tendency to legalize these conflicts as a result of the labor law reforms. The different laws provided parties on all levels with recommendations to solve conflicts by use of formal procedures. Many unions as well as employers criticized this bureaucratic development, but for several years it was hard to find good solutions. At present, a new culture of consensus is emerging between unions and employers. Still, it is restricted to cooperation in modernizing industry. The total picture of this "modern project" which has started on a local level is not known. On the management side, the Japanese experience has been important. Some of the basic assumptions from Japan could be transformed and adjusted to well-known national institutions. The foundation in 1984 of development funds to be used for education, training, and other activities necessary for employees to understand and control modern technology were introduced as a mean to equalize wage levels between more or less successful companies. Profits were supposed to be used for retraining and education within the company. Local unions and management had to reach agreement on the use of these funds. The latest codetermination agreements are less bureaucratic and emphasize the importance of the individual and broad participation of employees, not just union representatives. 16 Many employers are reporting shortages of skilled labor. The discussion between employers and unions imply less of a zero-sum game. All parties have a chance to gain in a cooperative strategy. Investments also result in a variety of opportunities for cooperation. Here, the traditional positive union attitude makes it natural for management to continue to ask for union participation. A shift has occurred in the labor culture. Compared to the situation ten years ago (and parallel to the situation in the 1960s), the state and various state agencies today are comparatively passive in the formulation of industrial relations. The role of the state in the development funds is restricted to a passive and mainly administrative role in collecting and distributing to planned development projects. In some respects, the public authorities play a central role. Public research and development funds remain important for the discussion about workplace conditions and development and implementation of new technology. 17 Cooperation for research and development projects has

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added legitimacy to projects of various kinds in which management, employers, and unions have participated as partners. These various trends occur on different social levels. One possible conclusion about the development inside the Swedish trade union movement is that, when focusing on the local level of union organizations, the tensions between different organizational levels soon become obvious. This has been one of the major issues during the last ten years. The three levels within the trade union system correspond to three different kinds of relations to counterparts on the employer side. The national level includes the national union confederations and corresponding national unions. They can be seen as important political forces that together with the employer's federation and the political system form the framework for union action. This "national game" is important in several respects. It is (as in many other countries) the place where most of the political decisions as well as collective agreements are discussed and evaluated together. The outcome of these close connections in a national communication network has been a high degree of consensus about important fundamentals of employment, investment, and regional and social policies. The output of these networks is negotiated contracts between participants, collective agreements, and shared ideologies on important issues (e.g., investments, wage structures, democracy, and participation). The crisis within the national network is most obvious in terms of a decreasing number of collective agreements, national programs, and important ideological documents. They are substituted by recommendations to others in the form of action programs with a minimum of obligations. This central decision-making network seems to be losing importance. The shift in focus to the local unions is only a part of the explanation why the central decision-making process is weakened. Possibilities for effective national political programs have been widely reconsidered with the result that local political institutions are becoming more important. On the employer side, a conscious shift of power from their central organizations to the individual firm is occurring. Secondly, it is possible to define a middle level within the unions. This middle level is a combination of the district organizations and the unions on a company level where the unions of the big companies are important parts. With the shift from national political decisionmaking, the role of a formal and informal regional network is becoming more important. Within urbanized regions, this organizational level is forming the frontline positions of the participating actors. Most important are the big firms and their corresponding union organizations. Here, alternatives are formed, discussed, and communicated to the national political scene. Important issues on this level are new plant

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policies, how to modernize production and administration, and local wage policies. T h e discussion o n this level, seen from a macro perspective, reveals ideological pluralism, and solutions which are difficult to c o m b i n e with national policies are o f t e n proposed. As already discussed, it is also possible to d e f i n e a third local shopfloor level. T h e most important issues o n this level concern the traditional capital-labor antagonism. T h e local level is b e c o m i n g m o r e and more important as an arena for solving disputes of this kind. T h e local level is also active in d e v e l o p i n g better working conditions, alternatives to traditional decision-making systems, and other quality of work life issues. T h e last decade has been rather important in terms of recognition of first-line experiences from the two sides. As a result of participation in a dialogue directed to problems within the firm or workplace, m a n a g e m e n t is b e c o m i n g aware of the importance of the employees' skills, and local unions and their m e m b e r s tend to recognize the importance of professional knowledge.

Notes 1. W. Korpi, Arbetarklassen i välfärdskapitalismen (The Working Class in Welfare Capitalism) (Stockholm, 1978); Den demokratiska klasskampen (The Democratic Class Conflict) (Stockholm: Prisma, 1981). 2. O. Ashenfelter and J. Pencavel, "American Trade Union Growth, 1900—1960." Quarterly Journal of Economics 83, 3 (1969); G. S. Bain and F. Elsheikh (1976), Union Growth and the Business Cycle: An Econometric Analysis (Oxford: Oxford University Press, 1976). 3. H . A . Clegg, Trade Unionism Under Collective Bargaining. A theory based on comparison of six countries (Oxford: Oxford University Press, 1978); G. Ingham, Strikes and Industrial Conflict. Britain and Scandinavia (London: Macmillan, 1974). 4. A. Kjellberg, Facklig organisering i tolv länder (Union Organization in Various Countries) (Lund: Arkiv, 1982). 5. In Sweden, professionals also organize into unions. T h u s there are powerful national organizations for medical professions, civil servants, engineers, administrative staff, economists, legal professions, and so on. Most of the unions for academics are a combination of unions (interest) and professional organizations (monopoly of skill). In case of labor disputes (e.g., strikes), members are excluded from union actions if they hold executive positions. 6. SIFO, Det osynliga kontraktet (The Invisible Contract) (Stockholm: SIFO, 1983). 7. Fackföreningsrörelsen och den fulla sysselsättningen. 8. One of the cornerstones in the Swedish negotiation system is a common agreement on the concept of peace obligation. Once a national agreement is reached, neither employers nor regional or local unions are allowed to use industrial actions. Wildcat strikes or lockouts can be actionable in a special labor court (Ârbetsdomstolen). 9. T h e consequences of these processes of centralizations have been debated and analyzed in several studies: Leif Lewin, Hurstyrsfacket? (How are the

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Unions Ruled?) (Stockholm: Rabén and Sjögren, 1976). Axel Hadenius, Facklig organisationsutveckling (Development of Union Organization) (Stockholm: Rabén and Sjögren, 1976). 10. After the Codetermination Act was introduced in 1977, institutionalization of local union activities in more regular forms resulted in a considerable number of new workplace organizations. Most of them came from small firms, and most later disappeared. R. Molin, "Svensk fackföreningsrörelses organisation" ("Organization of Swedish unions") (manuscript). 11. The data for this panel consist of questionnaires to employers and unions for workplaces with more than 100 employees from the industry, trade, transport, postal, telecommunications, education, health, and social work sectors. 12. H. Hart, G. Rimfors-Jonsson, and L. Teeland, Klubbstyrelsers organisation (Organization of Union Boards), Department of Sociology, University of Gothenburg, 1980. 13. Ch. Berggren, Fack, företagsledning och besluten om företagens framtid (Unions, Management and Decisions About the Future of the Company) (Lund: Arkiv, 1986). The study is based on an interview study with management and union representatives in 451 companies with more than fifty employees. 14. Hart H. Hörte, S. Â, Medbestämmandets utveckling (The Development of Codetermination), Research report no. 72, Department of Sociology, University of Gothenburg, 1982, ch. 3 and 9. 15. Because this period occurred at the same time as research projects around evaluations of the impacts of the codetermination reform, there are today a series of research reports, which registered the shortcomings of the union attempts to influence strategic decisions. 16. T h e central codetermination agreement between LO, TCO, and SAF is typically called a development agreement. 17. The National Board for Technological Development and the Swedish Work Environment Fund are two important influences when defining what kind of problems are considered to be of importance.

Chapter 9

Beyond Negotiation: Leadership for Change Jan Borgbrant and Michael Maccoby

Two previous chapters have described dramatic changes in Volvo's production system. They focused especially on new factories, "green field" sites. It is harder to change a "brown field," within an embedded industrial bureaucracy. This chapter is based on the results of a research project conducted between 1982 and 1986 at the Volvo body plant Kf at Torslanda works near Gothenburg and the eastern region of the National Swedish Board of Public Building (KBS-O, for Kungliga ByggnadsstyrelsenÖst). 1 Both organizations have been concerned with the question of strategic change. They have been trying to change themselves in order to be better prepared to meet new demands from customers as well as from their own employees. Their leaders, P. G. Gyllenhammar of Volvo and Hans Löwbeer 2 of KBS, have led this change and proposed a new vision. In both cases, this calls for decentralization of decision-making in order to improve productivity and customer satisfaction. We chose one organization each from the public and private sectors to explore the differences and similarities in their management of change. The two questions to be explored were: 1. What factors are most important for creating an efficient management function where human, technical, and economic resources are used and developed? 2. What factors support or hinder the change process? Volvo Torslanda works had about 6,000 employees in 1986, with about 2,600 workers in the body plant. We focused on the Kf paint shop with 1,200 employees who paint a thousand cars a day. The National Swedish Board of Public Building is responsible for providing buildings for the 200,000 employees of the national and civil

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g o v e r n m e n t s in Sweden. This required 79 million square feet of office space in 1986. Since 1977, the board has been organized into a central office with 700 employees a n d five regional offices with 1,400 employees. For this study, we focused o n the office f o r the eastern region (KBS-O), which includes the area a r o u n d Stockholm. T h e 850 employees of KBS-O are responsible f o r 40 percent of the total n u m b e r of buildings u n d e r the board's control. T h e research was designed to enable representatives within these organizations to participate in analyzing a n d interpreting the data. T h e r e was a prestudy of fifty-one (25/26) 3 interviews, with individuals chosen to represent different organizational levels. Later, two questionnaires were used. T h e first, in 1983, was administered to (1,377/ 530) people, a n d the results were r e p o r t e d back to t h e m . In 1984, a second was administered to a sample of (640/167). Besides these, ind e p t h individual interviews were conducted with a new g r o u p of (51/ 18). G r o u p interviews of eight to eighteen each were conducted with ninety-five persons (63/32). Besides these, the research g r o u p of six persons m a d e observations at a variety of meetings (43/76) with the t o p - m a n a g e m e n t g r o u p a n d a project reference g r o u p which included representatives f r o m the unions in each organization. T h e results were presented in six reports (see references). In this chapter we focus o n leadership that supports change. It became increasingly clear in the course of the research that bosses a n d workers alike underestimate the complexity of the change process. T h e interested few struggle to make it h a p p e n while the majority ignore the process. T h o s e s u p p o r t i n g change think it can occur quickly, but they are o f t e n d i s a p p o i n t e d — " I don't u n d e r s t a n d why n o t h i n g happens"; "I've talked about this for years a n d n o t h i n g has been accomplished." Most c h a n g e projects in the two organizations start because top m a n a g e m e n t decides t h e r e is a n e e d to a d a p t to competition o r to improve effectiveness a n d cut costs. Typically, they begin the c h a n g e process, telling people to c h a n g e with a series of one-way, top-down communications. Down the hierarchy, managers, middle managers, a n d line supervisors all follow the same style. This a p p r o a c h causes insecurity a n d resistance. People feel they are being p u s h e d a r o u n d a n d that their interests are being t h r e a t e n e d . Many of these attempts at change fail. In contrast, we find that in successful change projects t h e r e is a dialogue that includes different perspectives so that employees on all levels of the organization become aware of the reasons f o r change, the complexity of the c h a n g e process, a n d the needs that will come with the change. F u r t h e r m o r e , employees gain influence in the implementa-

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tion of change. One of our main findings was that the successful management process creates mutual responsibility for change. Success depends directly on the degree to which workers and bosses are willing to agree to a new vision, what it offers and demands from them. This cannot be achieved by either management directive or traditional negotiation but requires strategic dialogues, led by management, that include all parties at all levels. These dialogues can be the main tool to implement the Industry Agreement of 1985 between the Swedish Employers Federation (SAF) and the trade unions (LO and PTK) 4 which calls for worker participation in changes in technology and work. Change There will be a number of different attitudes toward change among individuals and groups within any organization. We define a group as a number of people who share the same criteria for belonging, who have common tasks and interests. In the organizations studied, the groups are part of larger parent organizations. For example, top management is one group within Kf and KBS-O. Another group is middle management, a third is composed of supervisors. A fourth group might be shop floor workers. In Sweden, all these groups, including most top managers, are organized into separate unions that are affiliated with national unions. People recognize that those at different levels have different interests. Where you sit defines how you stand on organizational issues. Employees of both industry and the civil service believed that groups at different levels had different opinions and aims for the change activities. Different expectations for change affect both the motivation for change and the engagement in the change process. The desire for a bigger role and responsibility by one group may clash with the desires of another, but in some cases, the goals of different groups can be mutually supportive. Top management and workers may have mutual interests in change, especially given new demands to improve quality and cut costs. This is because an expanded role for workers can lead to greater motivation and productivity. For the middle manager, often squeezed between top management and workers, it is usually difficult to see the advantage in change. The question for each group is whether the change will bring advantage or loss. Of course, there are variations among individuals. For some, change is positive: it is experienced as opportunity for personal growth and career development, offering new challenges and increased re-

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sponsibilities. These people are more active in the change process and try to accelerate it. Change can be threatening. Many examples were observed where change caused stress for people who felt their role, personal interests, or position in the organization was threatened. Some see change as a threat to their knowledge which they guard as though it were capital. Anxieties increase when one feels inadequate to meet new demands. Change can mean uncertainty, such as difficult tasks, a new workplace, or new coworkers. Change may conflict with individual work values and sense of dignity. Individuals at any level may try to deflect or avoid change: they hinder the flow of information, do not attend meetings, or spread incorrect or damaging information. The change process requires a great deal of energy from the people involved, whether they cooperate and participate or resist and obstruct the change. Even those who want change may be reluctant to invest the energy. It often takes a long time to get ideas accepted, and visible results come slowly. It can be a thankless task; even innovative managers often ask if effecting organizational change is worth the required effort. Finally, each individual will ask the question: What does the organization really want from me? And then the next question is: How much do I want to give them? Is it possible to create a change process that takes into account the different values and concerns of people in the various groups? This question is especially relevant in Sweden today because it is no longer possible to use the power of management to force successful change. Not even the traditional method of negotiation based on different group interests can create acceptance and motivation for change in every employee. Can a process be evolved that will evoke and involve the energies of the different types of people, defined not by group but by what satisfaction they seek at work? We will discuss these questions further in the next section. Can Change Fit All Groups in an Organization? Traditionally, changes are analyzed from management's perspective and imposed from the top; most are never discussed from the perspectives of the various groups they affect. As unions have become stronger and have demanded to be involved in decisions about change, the method for resolving differences has been negotiation. In negotiation, individual groups lay out their own interests and concerns, working by means of a barter process. Negotiation has a clear beginning and

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proceeds to particular decisions, item by item. This works for shortrange issues and quick solutions, but it is not useful for creating new long-term solutions. A n alternative method is a strategic dialogue. T h e goal is to create change in such a way as to optimally satisfy the needs of the groups that will be affected by change. Strategic dialogue must be distinguished from an ordinary dialogue which is essentially a conversation in which each group or person presents a view about a question. T h e strategic dialogue is a management tool for interpreting organizational strategy at the group level and, at the same time, informing the organization of the groups' thinking and experience. It is not a democratic dialogue in which each person's view has equal weight. It is an attempt to solve a problem or implement a new strategy in a way that will gain the perspective, knowledge, visions, and support of different groups and individuals representing different interests and values. A strategic dialogue poses a question, such as: " H o w can we change the organization to be more effective and also more satisfying?" or " H o w can we design a new information system (or factory) in such a way that jobs are more challenging?" Strategic dialogues take place at different levels and have different functions. At higher levels, participants represent interest groups in the design of organization and work systems. This was the case in the design of Volvo's new factory at Uddevalla (chapter 6). On the shop floor or frontline level, workers represent their personal interests and values in determining how new approaches will be implemented. A strategic dialogue can work because the interests of different groups are linked in a number of ways. As an obvious example, if workers are not motivated to produce quality, it is difficult for the business to succeed. If the business does not succeed, then workers' jobs are at risk. Management, particularly in highly competitive international auto markets, needs workers to care about high quality, cutting costs, and productivity. But why should workers care about these if they feel their own concerns and needs are not equally valued by management? It is necessary for all the groups to realize their mutual interests and to understand how they are related. Problems can be raised from two perspectives—from the outside in and from the inside out. Both are essential to gaining commitment to change. T h e outside-in analysis starts with questions about the market, business goals, strategies for change, organizational systems, and subsystems (e.g., technical, administrative, and social) and ends up discussing how these conditions affect the individuals' situation and tasks.

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The inside-out analysis starts with questions about how each individual experiences his or her work, motivation and meaning, social environment, and the climate in the team as well as how the team works and how management functions and responds to suggestions and new ideas. It leads to a discussion of how circumstances external to the individual hinder or support work performance. Everyone affected by incremental changes must have the opportunity to express reactions and contribute suggestions and solutions for the process. They must have relevant papers and information for discussion, and should be able to trust the information given. Dialogue requires a democratic spirit even though decisions are not made by vote or even necessarily by consensus. People must agree on the problem to be explored and the criteria for solution. They must respect each other's point of view and be willing to gather further information to resolve differences of opinion. There must be engagement: open disagreement and creative conflict must be encouraged. Furthermore, good dialogue allows a play of ideas; people need not be committed to the ideas they suggest for exploration. Finally, dialogue requires leadership that draws conclusions on the basis of the dialogue and makes a decision. At the end of each meeting, every member of the group should have a clear idea of what is going to be done about the issue discussed, who is responsible for it, when it is to be done, and what the expected results are. A dialogue that includes this outside-in and inside-out analysis is a strategic dialogue. The function of a strategic dialogue is to develop both the organization and the individual members within the work teams. Such dialogue makes the organization more effective and productive because all employees have input into the process. Workers have the opportunity to analyze their work and requirements, the formal roles and structures within the organization, and the administrative system. At the same time, they can discuss their feelings and reactions, and observe the process of communication with each other. There is an ongoing learning process, and an arena in which to develop new knowledge about work and what it requires from people. Sometimes there are unresolvable differences in interests which must be negotiated. But decision and negotiation do not end the dialogue which must be an ongoing process in an organization adapting to changing conditions. All management decisions do not require strategic dialogue. There are times when a quick decision must be made, and there is no time for discussion. But changes in organization, technological systems, and design of work are never achieved rapidly. They must be

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planned before they are implemented. Decisions will be better if there are a series of strategic dialogues among those affected. S u p p o r t for a n d Resistances t o C h a n g e In this section, we discuss factors that either hinder or support an organization's efforts to achieve a management process built on strategic dialogue among individuals and groups. There are three groups of factors. The first has to do with the hardware—technical equipment and buildings. The second has to do with software—administrative systems for control and accounting, all of which could be programmed on computers. The third has to do with what we call "humanware," involving people—relationships between individuals and groups, the communication processes within the whole organization, and the organizational culture. Humanware causes the most difficulty for people trained in engineering and accounting. Hardware and Software Hardware can support or hinder the kind of change that could be supported by all groups. Technical equipment that was highly functional when installed can inconvenience daily work and hinder future productivity. This happens especially when the equipment lacks builtin flexibility. An example is the production line at the paint shop where equipment limited the organization of well-functioning groups. In such a case, the solution to replace all the equipment would have meant major capital investment. Equipment needed for a good work environment may not yet have been developed, such as air purification equipment. Is it good business to buy new equipment? What are the criteria used to judge good business? Can the new equipment be used in the present plant or office? Can the employees' knowledge and values be developed to fit the new equipment? Plant facilities must be included in this context. Is there adequate space for meetings adjacent to the work area? This is a basic condition for the development of dialogue between the boss and coworkers on a team. An example of software comes from the area of administration. Forms for reporting results of variables—the production process, personnel data, and financial statements—are generally designed to give top management information to control these variables. When Kf and KBS-O decided to move toward more decentralization and participation, the accounting systems did not give adequately detailed

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information needed by the self-managing teams. Centralized, topmanagement-oriented reporting systems do not organize data to be useful for team efforts. A further example comes from the area of policy. The original guidelines at KBS-O did not allow flexibility to make desired changes in work structure. The procedures to produce more accurate instructions were so complicated that management, unions, and involved workers were reluctant to alter the guidelines to be more supportive of decentralization. The reward system belongs in the category of software that helps or hinders change. Do existing wage scales and systems for negotiation at Kf and KBS-O support change? Are groups rewarded for trying to find more productive ways to do the job? Our findings were that both organizations must give much more attention to the question of reward. Rewards, of course, are not just an economic question; they should also come in the form of career opportunities, more interesting and challenging work, and public recognition. The information system, a key part of the software, is all the different ways in which information is sent and received within the organization. It includes notes from meetings, bulletin boards, organization newsletters, and any written message to any individual or group. It also includes any collection of suggestions or ideas. At both Kf and KBS-O, people were receiving fragmentary information, misinformation, and disinformation. The system worked to increase anxiety rather than to give individuals a basis for understanding the market circumstances that required a continuously developing organization. We found that the unions were much better than management at giving quick and adequate information. Union representatives considered providing information to be one of their most important responsibilities, both through personal contact with members and with simple, concrete bulletins distributed efficiently. When management did give out information, most workers already knew it. Our study made it clear that a lack of knowledge impedes change. Investments were made in new equipment (e.g., new robots, accounting systems, and word processors). To use this new equipment appropriately, management had to understand the production process, and workers had to understand the technology. When workers are unsure whether they have the skills for using the new equipment, their insecurity depresses motivation. Management can respond after the fact with training programs or administrative solutions. But is the individual motivated to learn to use the new equipment when it means a long period of difficult study? Would the worker prefer to find a new job, either within or outside the

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organization? Beyond the provisions of the law, the question is: how much is it the workers' responsibility to manage their own change process, and how much should the company do for the workers in this situation? These questions are better answered when the new technology is the result of a strategic dialogue before the fact.

Humanware We humans are driven by a search for satisfaction and meaning. O u r behavior at work is in large part influenced by shared values and relationships. T h e atmosphere within the work group directly affects change. If people are hopeful about change, they will discuss problems and look for solutions in an open, constructive way. T h e boss and coworkers will discuss their daily work and its needs from different perspectives. When motivation is discussed, it may become clear that the boss, consciously or unconsciously, sees the workers' motivation as different from his or her own, and so gives their interests less respect and less consideration. When the management process is examined, there may be a large discrepancy between the boss's view of management and that of the workers. For example, we find workers want more use made of their ideas and more consultation, while some managers feel uncomfortable with a participative style or hesitate to ask workers for ideas because they do not believe they have the power to implement them. T h e n discussion becomes uncomfortable, and the boss uses his or her power to change the discussion to something else. T h e more we have reviewed our findings, the clearer it has become that the individual's attitude and expectations are crucial in the change process. We have seen many examples where the unspoken argument is, "I have always done it this way and I always will." Repeated incidents of this kind discourage initiative. Readers will readily respond to the comments we collected in interviews when people talked of their experiences in offering a coworker a new approach: • That sounds interesting, but have you really considered . . . and how expensive that can be? • Don't you remember what happened last time you made a suggestion? It nearly ruined things for both of us. • You always take everything so seriously. Relax. Things will work themselves out sooner or later. • Have you thought about these ideas carefully? You really should do that more before you go around throwing out half-baked notions.

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These excuses rationalize what we have come to call the "expert orientation." On the basis of in-depth interviews, we find that most managers have a strong need to be the expert and control those they supervise. Paradoxically, they also seek more autonomy from their own supervisors. Unless experts can redefine their expertise to include teaching and creating a dialogue, they view loosening of control as a threat. These examples illustrate the complexity of the factors involved in change. While hardware factors are a definite hindrance to change, most difficulties will come from software and humanware: one should not underestimate human ability to see impediments in economic, technical, and administrative situations that have never actually been examined to see if they are true hindrances. "No" is often simply more comfortable, especially for the expert who sees his or her control at risk. "Yes" opens the possibility for uncertainty and difficulties. A strategic dialogue, of course, will discuss these hardware, software, and humanware factors. In addition, a strategic dialogue will deal with the goals of the organization and strategies for the management process. T h e next section looks at the importance of strategic dialogue for a holistic management function. A Holistic a n d M u t u a l M a n a g e m e n t Function To develop the organization and make the change process successful, it is necessary to develop a mutual management function. T h e concept of management function is based on the theory that different parts of a system mutually influence each other. It is important that the idea of management not only be thought of as authority by bosses over people on lower levels of the organization. Bosses and coworkers are both participants in the management process and are mutually responsible for outcomes. In holistic mutual management, everyone participates in the process of integrating the external strategy to satisfy customers and the internal strategy to develop technology, organization, and people to support this strategy. Management is often discussed in terms of decision-making, planning, and controlling. In our study, we have learned instead that the management process must be directed toward: 1. Clarifying the purpose of the organization. 2. Analyzing and describing the need for change. 3. Developing holistic strategies for change. 4. Evaluating results. 5. Facilitating learning. 6. Building an effective work team.

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Clarifying the Purpose of the Organization What should be the organization's best contribution to the market and customers is a basic strategic question. To understand the strategic situation in a way that creates a clear goal for the organization is an important part of the management process. Work toward that goal will differ depending on the team level within the organization. T h e top manager's primary work must focus on understanding the dynamics between the organization, the market, and the customer in order to develop an appropriate vision. T h e middle manager focuses on how to interpret the organization's vision into concrete and reliable goals, and how the vision relates to the present work structure, equipment, cultural climate, and workers' knowledge and abilities. Supervisors must translate the intentions and goals of the organization into the daily work of the team. Managers and supervisors must become educators to communicate the whole complicated picture, and learners to understand the workers' responses and make use of them for continuous improvement of work processes. Analyzing and Describing the Need for Change Because of the varying reactions and attitudes toward change within an organization, it is important for the manager and coworkers to pay attention to questions of change within a historical context. It helps to understand why a situation exists by looking at its history. Doing something today in a way that was appropriate to the situation three years ago may no longer be appropriate. New technology at Kf makes it possible to raise quality standards. New government demands to cut costs force KBS-O to question practices that were accepted in a less stringent environment. Outside changes affect the organization, changes within the organization affect the workers. Teams must be able to see new and different demands, not as a criticism of themselves and their work but as the natural result of changed conditions. T h e need for change must also be related to the management process: management that worked well five years ago may not be able to meet new demands. Developing Holistic Strategies for Change T h e management process must develop organizational strategies that make it possible to reach the goals of the organization and support the necessary changes. These strategies should always be concerned with both personal and technical development. T h e strategic dialogue poses such questions as, "How can we

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increase the availability and transmission of information that provides feedback?" All levels of the organization must answer this question and, in so doing, produce and share information that provides a better evaluation of the work they do within the perspectives of the visions proposed for the organization. Another question might be, "How can we develop the human resources we will need in the future?" This includes the education and development of employees with both long-range and short-range organizational planning in mind. T h e answers may include traditional courses, personnel-administrative activities, financial management, work enrichment, systematic daily challenges and accomplishments, and using the knowledge within a group and sharing it with other groups. A third strategic question might be, "How can we best use new technological innovations?" Management should use every opportunity to take advantage of innovations, whether new production equipment, office technology, or information systems. It should always be asked, "Do we really need to use new equipment now, or can we do better through training and organizational development?" Technology should be considered as a tool to be used by people to improve the quality and cost-effectiveness of their work, not a substitute for people. Evaluating Results Our study shows that the continual evaluation of both the production and management processes—the reasons for failures, defects, or successes—is important to motivate continual change. T h e problem is that people do not know when they do a good job. There may be no clear criteria by which to evaluate the task. A first step in the evaluation process would be to develop explicit criteria for a good product or service. T h e next step would be as simple as making this criteria known to everyone in the team and providing a clear example of the quality desired. A third step would be to develop useful measurements. T h e whole management process itself must be mirrored and evaluated. Do workers really have a good chance to contribute to the production of high-quality goods and services? Are they supported when they take risks, and try new ideas? T h e whole evaluation process must be kept in a positive atmosphere, rather than a judgmental one, so all members of the work team will want to develop themselves while doing the j o b they are hired for. To provide a basis for holistic analysis, the data for evaluation must be concerned with external questions, such as customer satisfaction, competition, and profitability, and with

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the internal questions of individual values, group interests, and organizational structure and climate. Facilitating Learning The experience at Kf and KBS-O demonstrates how important it is for management and workers to be aware of the learning dimension, whether it is about every person's daily work, or about the purpose of the whole organization. Managers must understand that their role includes both teaching and learning. Ideally, everyone in the organization will become both a learner and a teacher. At each point, successes and failures must be recognized and analyzed, and the learning from them shared and incorporated into the next stages of work. Good examples of change must be found and made available; suggestions and new ideas must be encouraged and evaluated seriously.

Building an Effective Work Team Creating a strategic dialogue in the work team first depends on the team members' values of working in groups. While their earlier experiences in or expectations of work groups will color their attitudes toward dialogue, the organizational structure also has a large impact. The structure can be designed in ways that either support or hinder work teams. The teams we have studied work most effectively in groups of ten to twenty-five individuals. The production process and the work design can also support or hinder teamwork. We found certain criteria important for developing a strategic dialogue within the work team: • Each individual feels able to participate and contribute to the aims of the organization. • Each person has access to relevant information. • Every member has confidence in the physical safety of the work environment and feels respect and support from other members of the team. • Contributions are rewarded. • Individuals have the authority to decide how the work is to be done and the responsibility for maintaining mutually-decided standards for the goals of the work. • People treat each other with respect.

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W h e n people express their different interests a n d values, d y n a m ics are created within a g r o u p which must be m a n a g e d sensitively to develop new a n d creative solutions, and not t o j u d g e people as good or bad. T h e m a n a g e r is responsible f o r synthesizing and s u m m i n g u p what is h a p p e n i n g . Further, the leader must make sure that everyone has a chance to express a view a n d that each is seriously considered. We have f o u n d that bosses and coworkers n e e d m o r e knowledge about themselves, how they contribute to a well-functioning team, or how they inadvertently cut off dialogue. T h e y n e e d to learn how to translate the substantive issues of the organization into a f o r m that can be clearly u n d e r s t o o d a n d discussed within the whole team.

Conclusion T h e two organizations we studied provided a n u m b e r of examples that s u p p o r t o u r conclusions about the importance of strategic dialogue in creating an effective m u t u a l m a n a g e m e n t function. It is o u r experience that organizations already own the knowledge necessary f o r this creation. T h e problem is that t h e r e are only a few individuals initially willing to accept the work necessary f o r the organization to r e s p o n d to the d e m a n d s created by customers a n d changing circumstances. People tend to look m o r e at problems than at goals; they get caught u p in fire-fighting r a t h e r t h a n envisioning better ways of d o i n g things. An essential part of developing the m u t u a l m a n a g e m e n t function also requires examining closely what m a n a g e r s actually struggle with d u r i n g the day. Are their issues part of those we discussed above: organizational p u r p o s e , analyzing, a n d describing the need f o r change, developing holistic strategies f o r change, evaluating results, facilitating learning, a n d building a n effective work team? O r are they trying to solve yesterday's problems that should have been delegated to those closest to them? Of course, there will be different opinions as to how m a n a g e m e n t is exercising this function. Are they talking a good game, or are they actually behaving the way they describe? J u s t the realization that t h e r e are different definitions and values is an i m p o r t a n t o p e n i n g in the strategic dialogue. W h e n there is an opening, t h e r e may also be disturbance a n d conflict. H e r e , it has been useful to have a person f r o m outside the team to m i r r o r the process in the group, to observe how power may have been used in the g r o u p to cut off u n c o m f o r t a b l e dialogue, and to reflect this back to the group. We, as outside researchers, have filled that role several times. In both Kf a n d KBS-O, t h e r e are several examples of changes that have come about as a result of the strategic dialogue between the

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members of the research group and the managers, coworkers, unions, and the project group in the organizations. T h e new business ideas that pay more attention to the role of service, customer orientation, and strategies have been worked out at KBS-O and explained in an informative brochure. KBS-O developed its management philosophy to accent the dialogue within the top-management group and paid special attention to training managers and coworkers in the management process. In Kf, there has been more open dialogue among top management to develop the training system. T h e supervisors told us they lacked the skills to lead a problem-solving process with work teams, and when we reported this, management offered training. T h e dialogue between the research group and the organizations were stimulated by the inside-out and outside-in data we collected within the organizations. This model for strategic dialogue for management and organizational development can be criticized. It requires time and emotional resources that might be thought better directed to the ongoing work. Are there other models available that conserve and develop human resources necessary for the organization to meet the demands on it and compete with other organizations? We do not know of any. Even if it appears an expensive method in terms of time, energy, conflicts, and temporary problems, it appears to us the best investment an organization can make in its future.

Notes 1. This research was done under the Leadership program at the Swedish Council for Leadership (FArâdet). T h e research at K f was supported by the Swedish Work and Environment Fund and at KBS-O by the Swedish Council for Building Research. 2. Since July 1986, Hans Löwbeer has been director general of the Swedish Bank Inspection Board. 3. From this point on, numbers from the two organizations will be reported in this form. In each case, the first number represents data from Kf, and the second number represents KBS-O. 4. Agreement on developmental issues S A F - L O - P T K , 4/15/82, with a specified agreement on forms and areas for employees' proposals, 9/9/85.

References Borgbrant, Jan (1980). Ledningsutveckling: Modellanalys i anslutning till tvâ utvecklingsprojekt (Leadership Development and Model Analysis of T w o Development Projects). Dissertations N o 11. Linköping: Linköpings University, Department of Education. . (1985). Bortom förhandling: Strategisk dialog i arbetslag (Beyond Ne-

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gotiation: Strategic Dialogue in Working Teams). Final r e p o r t . FAràdet, Stockholm. B o r g b r a n t , J a n , Roland Duberg, T o r b j ö r n Malm, M a r g a r e t h a Milsta, Kalju Plank, a n d L-G. Svensson (1984). Ledningsutveckling—Ledningsfilosofi, c h e f e r och m e d a r b e t a r e vid e n karossfabrik (Kf) och en byggnadsförvaltning (KBS-Ö). Starka och svaga sidor i offentlig och privat verksamh e t — t v â fallsstudier. (Leadership Development: L e a d e r s h i p Philosophy, Managers, a n d Coworkers in a C a r Factory a n d a Construction Agency. S t r o n g a n d Weak Characteristics of a Public a n d a Private Business—Two Cases). Partial r e p o r t 4. FArâdet, Stockholm. Crozier, Michel a n d E r h a r d Friedberg (1980). Actors and Systems: The Politics of Collective Action. T r a n s . A r t h u r G o l d h a m m e r . Chicago: University of Chicago Press. Duberg, Roland a n d J a n B o r g b r a n t (1984). Ledningsutveckling: Ledningsfilosofi, c h e f e r och m e d a r b e t a r e (Leadership Development: Leadership Philosophy, Managers, a n d Coworkers. Theoretical framework). Partial r e p o r t 1. FArâdet, Stockholm. Edström, A n d e r s , Michael Maccoby, J a n - E r i k Rendahl, a n d L e n n a r t Strömb e r g (1985). Ledare for Sverige (Leaders for Sweden). L u n d : Liber förlag. Maccoby, Michael (1976). The Gamesman: The New Corporate Leaders. New York: Simon & Schuster. . (1981). The Leader: A New Face for American Management. New York: Simon & Schuster. Malm, T o r b j ö r n , M a g a r e t h a Milsta, Ulf Stolpe, a n d J a n Borgbrant. Ledningsutveckling—Ledningsfilosofi, c h e f e r och m e d a r b e t a r e vid e n byggnadsförvaltning. Historien förklarar n u e t (Leadership Development: Leadership Philosophy, Managers, a n d Coworkers in a Public Construction Agency. History Explains the Present). Partial r e p o r t 3. FArâdet, Stockholm. Plank, Kalju, L-G. Svensson, a n d J a n B o r g b r a n t (1984). Ledningsutveckling— Ledningsfilosofi, c h e f e r och m e d a r b e t a r e vid en karossfabrik. Historisk b a k g r u n d till nuläget (Leadership Development: Leadership Philosophy, Managers, a n d Coworkers in a C a r Factory. Historical B a c k g r o u n d to the Present Situation). Partial r e p o r t 2. FArâdet, Stockholm.

Part III: Sweden in America

Chapter 10

Swedish Direct Investment in the United States Gunnar Hedlund and Lars Ágren

Foreign direct investment (FDI) in the United States has expanded tremendously in recent years. This surge is even more impressive because much of it has taken place during a period with very high exchange rates for the United States dollar. Also noteworthy is the simultaneous expansion of trade and FDI. This provides a f u r t h e r indication that these two modes of international business complement rather than substitute for each other. Much of this investment has not been very successful in terms of profitability (e.g., McClain, 1986). Usually, returns f r o m FDI are higher than domestic returns, so there seem to be special circumstances making it difficult for a foreign investor to succeed in the United States. T h e Swedish patterns concerning volume of investment and performance conform with the general one—very rapid expansion since the late 1970s and meager results in terms of profitability and perceived success in relation to competitors. Two separate studies, f r o m 1981 and the present one from 1985—86, give the same picture of frustrated efforts, although it looks brighter today than five years ago. T h e main focus of this chapter will be the industry structure in relation to the investing firm. Much work in industrial organization and recent applications in the strategy literature focuses on such aspects when analyzing international or global activities of industrial corporations. We will try to describe and assess the influence on entry strategy and performance of both local (United States) and global industry structures. We refer mainly to degree of seller and buyer concentration locally and to the existence of important non—United States competitors on the United States market.

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Empirical Data T h e analysis will use the results from a mail questionnaire study of Swedish firms. All firms with at least one sales or manufacturing subsidiary in the United States were asked to return the questionnaire. Slightly different versions were sent both to headquarters and to the largest subsidiary. T h e Swedish-American Chamber of Commerce (SACC) membership directory was used when defining the population to be included in the survey. T h e r e are in total 162 parent firms in the population. Responses were received from 130 companies, either from headquarters, the subsidiary, or both. In addition, answers from 7 companies identified as having made investments in the United States but not being listed in the SACC directory were included in the data base. T h e response rate is much higher for larger companies. For firms listed on the AI list of the Stockholm Stock Exchange, the response rate is 96 percent. Therefore, the answers should give a good picture of the experiences of larger Swedish firms. Some Characteristics of Swedish FDI in the United States Parent Company Characteristics T h e international experience of investors varies greatly. Almost half of the companies with United States affiliates established their first subsidiary outside Sweden after 1970. T h e number of subsidiaries outside Sweden varies from 1 (11 firms) to 300(1). T h e size of the investing company varies, as Table 1 shows. T h e firms' experience of operating in the United States also varies a lot. Table 2 shows that almost 70 percent of the firms have less than 20 percent of their total sales in the United States; 7 percent depend on

TABLE Ι. Total Sales in 1985 for Companies with United States Affiliates (n = 137) Sales (U.S. $ millions) 0-20 21-200 201-1,000 1,001-10,000 10,001 +

Percent (n = 137) 5.9 27.4 23.7 30.4 12.6

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more than 40 percent on the United States market. T h e figures also indicate that the importance of the United States market has increased. T h e expectations expressed by managers participating in the survey point in the direction of a further strengthening of this trend. Of those firms who had invested in the United States through a green-field operation, 15 percent had done so the first time before 1945. As many as 69 percent took place after 1970, and 35 percent during the 1980s. T h e corresponding figures for acquisitions were 5 percent, 81 percent, and 41 percent, respectively. T h u s , there is an enormous concentration of investments during the last fifteen years. Characteristics of Affiliates T h e annual sales of the Swedish subsidiaries vary between less than $ 1 million and almost $3 billion. More than half of the sample has less than $ 10 million in annual turnover. Total capital varies between practically nothing (23 percent less than $1 million) and $500 million. Around 50 percent of the affiliates have fewer than 20 white collar employees, and only 8 percent have more than 500. Thus, Swedish FDI in the United States is characterized by a large number of small firms, in terms of sales, capital, and employment. Many of these smaller firms are sales companies without manufacturing operations. Still, 58 percent of all affiliates did some form of local manufacturing. Almost half of the affiliates report some form of R&D activities in the United States. Almost half of the affiliates take more than 50 percent of the products sold in the United States from Sweden. About one third of the firms export more than 30 percent of annual sales. Most export only marginal quantities. Green-field entry has been the dominant mode so far (66 percent of the number of cases), acquisitions accounting for the remaining one

TABLE

2. United States Sales as a Percentage of Total Sales f o r Firms with Affiliates in the United States Percent of total sales

Percent offirms

1980a

1990 (expected )

0-5

20.7

33

7.0

6-10

20.7

22

19.3

11-20

25.0

28

26.3

21-40

26.7

41 +

6.9

17

38.6

"According to a study by Svenska Handelsbanken (Leksell et al., 1981).

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third. O f the affiliates surveyed, 78 percent were established after 1970, and 43 percent after 1980 (Table 3). T h e geographical distribution of sales within the United States is reported in Table 4. T h e results indicate a rather diffused pattern with some concentration in the Northeast and Midwest. This is most likely due to the structure of Swedish industry, which has been geared to industrial buyers in relatively mature industries.

Industry Structure Facing Swedish Affiliates in the United States Most Swedish firms have very low market shares in the United States. Table 5 shows that over 50 percent of the firms have market shares of less than 10 percent. (There is, however, a not insignificant group of extremely niche-oriented firms that command very high market shares.) This should be seen against a local market structure which is fairly concentrated (Table 6). Thus, the typical case is a small Swedish affiliate competing against much bigger firms. Table 7 confirms the impression of concentrated market structures.

TABLE 3. Date of Establishment of Affiliates in the United States (n = 98) Percent of affiliates

Date Pre-1945

7

1945-1959

8

1960-1969

7

1970-1979

35

1980-1986

43

TABLE 4. Geographical Distribution of Sales within the United States (n = 115) Percent of sales Location of affiliates

0-25

26-50

51-75

766

Northeast

53

34

6

Southeast and southwest

75

22

2

1

Midwest

63

29

5

3

West coast

74

21

2

3

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Concentration in itself may have an effect on entry strategy and performance. We will discuss such effects and the role of relative market share later. Before that, we want to investigate the degree of global competition. Recent theorizing gives a prominent place to this aspect. If anywhere, this should be important in the United States. Table 8 shows that competition is dominated by United States

TABLE 5.

TABLE

United States Market Shares f o r Most I m p o r t a n t Products of Swedish Affiliates in the U n i t e d States (n = 118) Percent of market share

Percent of affiliates

0-2 3-5 6-10 11-20 21-50 51 +

36 9 9 16 19 11

6. Market Share of Largest P r o d u c e r C o m p e t i n g against Swedish Affiliates in t h e United States (ra = 74)

TABLE 7.

Percent of market share

Percent of affiliates

0-10 11-25 26-50 51-70 70+

21 27 46 5 1

United States Sales Accounted for by the Four Largest Firms C o m p e t i n g against Swedish Affiliates in the United States (n = 74) Percent of total U.S. sales

Percent of affiliates

0-30 31-69 70-89 90-100

20 15 42 23

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firms, which is not surprising. Still, around 25 percent of the top four competitors on average are European or Japanese. Thus, several considerations having to do with a concentrated local industry dominated by local (United States) firms, on the one hand, and with non-American competitors, on the other, influence the decisions of investors. It is extremely important to note that many of the large United States firms are also competitors in other markets, so the degree of globalization is underestimated by looking only at the European and Japanese figures. Other aspects of industry structure, such as vertical integration, product differentiation, and advantages of scale have not been measured in the survey. However, the main characteristics of Swedish FDI in the United States and elsewhere are rather clear. A few comments should serve to clarify them. 1. Swedish FDI is mainly in advanced industrial goods. Competitive advantage is usually in terms of product quality and technological sophistication. During the last few decades, industries have matured, and it has become more difficult to uphold such differentiation. 2. The degree of vertical integration is very complex and varied in the mechanical and electric engineering industries, which account for the bulk of Swedish FDI. Relationships between suppliers and customers are generally long-lasting; both parties have invested in each other. The pattern in the specific industries varies a lot between firms, there are global component specialists as well as integrated manufacturers and pure assemblers. 3. Advantages of scale in manufacturing have been less important than, for example, in the chemical and other "heavy" industries. 4. R&D as a competitive weapon continues to be very important. However, in most industries, the absolute requirements of scale have not been prohibitive.

TABLE

8. Nationality of Largest Competitors (rank order) of Swedish Affiliates in the United States (percent) (η = 81) Competitor

United, States

Europe

Japan

No. No. No. No.

80 75 71 69

15 18 21 24

5 7 8 7

1 2 3 4

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Our interest in industry structure variables derives from their possible effects on entry strategy in the United States and performance of foreign affiliates. In summary, the following broad hypotheses will guide the discussion: 1. Seller concentration in the United States constitutes a barrier to entry for Swedish affiliates, makes market share gains difficult, and depresses profitability. The relatively small market shares of Swedish affiliates exacerbate the problems. 2. Global competition has the same effects. 3. Concentration and global competition favor acquisition over green-field operation as an entry mode (because of competitive dynamics and speed requirements).

The Influence of Industry Structure on Entry Strategy and Affiliates' Performance Industry Structure and Entry Strategies Entry strategy will be analyzed in two respects—the choice between green-field entry and acquisition on one hand, and the size of the commitment in the United States on the other. Recent theorizing leads one to believe that concentrated local industry structures and the existence of global competitors would create a preference for acquisitions and to larger commitments and a more rapid buildup of positions. However, the empirical data from the survey give surprisingly little support for these ideas. Table 9 shows no significant relationship between the market share of the four largest suppliers and the propensity to use acquisitions by the Swedish investor. Similarly, the presence of non-U.S. global competitors within the United States does not seem to affect the choice of entry mode (Table 10). Thus, we end up with no support for hypotheses linking industry structure and the choice between acquisition and green-field entry.

TABLE 9.

Acquisitions and Green-Field Entry after 1975 by Swedish Affiliates in the United States by Market Share of the Four Largest Competitors in the Industry (number of affiliates) j.-^yy

Percent market share

strategy

1-60

61 +

Green-field Acquisition

11 4

20 6

Chi-square = 0.00, ρ = 1.00; Kendall's Tau Β = - 0 . 0 4 , ρ = 0.40; η = 41.

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Can the hypothesis of large commitment by the foreign entrant in dense and globally competitive arenas also be rejected? Table 11 shows the relation to be positive, but not at a significant level. T h e lack of correlation holds for the four-firm concentration ratio, for entries after as well as before 1975, and for large and small investors. Industry Structure and Performance of the Firm If industry structure does not influence entry strategy, does it influence the performance of the firm? It could be argued that a concentrated structure leads to entry barriers which depress profitability. On the other hand, stable oligopolies or price leadership by a clearly dominant competitor may create a price umbrella with supernormal returns within the entire industry. Table 12 indicates that the result of the affiliate is very weakly but positively correlated with the market share of the four largest competitors. Other objective as well as subjective measures of performance

TABLE

io. Entry Strategy of United States Affiliates of Swedish Firms by Presence of Non-United States Competitors on the United States Market (number of affiliates)

Entry strategy

All 4 largest competitors United States

; of 4 non-United

Green-field Acquisition

26 11

13 4

States

More than 1 of 4 non-United States 14 7

Chi-square = 0.44, ρ = 0.80; Kendall's Tau Β = 0.02, ρ = 0.44; η = 75.

TABLE

11. Turnover in 1984 of United States Affiliates of Swedish Firms by Market Share of the Largest Competitor (number of affiliates) Percent market share

Turnover (million US$)

0-40

41-80

81 +

0-10 11-25 26-50 51 +

10 3 0 3

11 4 4 6

5 0 2 3

Chi-square = 5.59, ρ = 0.47; Kendall's Tau Β = 0.14, ρ = 0.14; η = 51.

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(both as seen by headquarters and by the subsidiary) give the same result. This supports the price umbrella theory. Another, and related, explanation for the observed relation between industry concentration and firm results could be the fact that many Swedish firms follow niche strategies. This should make them especially well-suited to take advantage of the price umbrellas provided by larger and more diversified competitors. T h e existence of non-U.S. competitors does not seem to affect performance, whether measured objectively or subjectively. Crosssubsidization, leading firms to price competition for strategic reasons, thus, does not appear to be very frequent. Global competitive dynamics, at least for Swedish firms in the United States, do not produce any drastic consequences for profitability. It is often argued by practicing managers that one of the reasons for low returns in the United States is the structure of buyers rather than of sellers. T h e enormous size of the United States market, it is said, makes firms underestimate the necessity to concentrate efforts. A more critical idea, however, has to do with geographical diffusion of sales. We created a measure of concentration of sales by taking the share of total sales of the affiliate in the most important geographic area (in terms of sales) for the affiliate. Four areas were defined as Northeast, Midwest, Southeast and Southwest, and West Coast. Thus, if a firm had 60 percent of sales in the Northeast, it was assigned a concentration index of 60. T h e same, of course, applied if the 60 percent were on the West Coast. Maximum diffusion means an index of 25, when sales are spread equally over the four regions. This is by no means a perfect index, but for a first analysis, it is sufficiently clear and straightforward. Table 13 indicates that the relationship is not clear. When performance is measured by asking headquarters officials how the affiliate

TABLE 12. Return on Total Capital Measured Subjectively at Headquarters Level f o r United States Affiliates o f Swedish Firms by Market Share o f the Four Largest Competitors (number o f affiliates) Percent share of four largest competitors

Result compared with industry average

0-60

61 +

Much below/below

12

21

Average

4

3

Better/much better

3

12

Chi-square = 3.03, ρ = 0.22; Kendall's Tau Β = 0.23, ρ = 0.10; π = 55.

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is doing, geographical concentration seems to lead to worse performance, but the relationship is not very strong at all. T h e r e f o r e , we must leave the issue of the wisdom of geographical concentration without any conclusion. It may be o f interest to note that a majority of both headquarters respondents (62 percent) and respondents f r o m affiliates (71 percent) disagree with the statement, "Activities in the United States should be more concentrated geographically."

Market Share, Experience, and Autonomy: Determinants of Performance? So far, our results have been mainly negative. Industry structure does not seem to influence either entry strategy or performance very strongly. So what does influence performance? O n e obvious candidate is the market share of the affiliate. Studies by SPI and others have documented the co-variation of profitability and market share. A weakness with most of these studies, f o r our purposes, is that the distinction between market shares on home markets and abroad, through exports and/or FDI, is rarely made. Our data enable us to investigate whether the relationship holds for affiliates of multinational corporations on a large foreign market. We find a very weak positive relationship between the market share of the affiliate and performance and must conclude that there is little evidence f o r market share as a strong determinant of profitability in our sample (Table 14). O n e possible explanation f o r the results is that many firms are at an "investment stage" in the United States, spending money to increase market shares. However, our main conclusion is that there is no simple relationship between a multinational corporation's market share on one local market and the firm's performance on that market. Another intuitively appealing explanation f o r success in foreign

TABLE 13. Spearman Correlation Coefficients (significance levels)

RATESOFR (n = 84) MAXGEO

-0.45 (0.69)

SDRETURN (n = 81) 0.04 (0.97)

MAXGEO = Geographical concentration. RATESOFR = Rate of return compared to competitors, as judged by headquarters respondent (5-degree scale). SDRETURN = Return on total capital in affiliate, 1984.

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operations has to do with the experience of the investing firm. Extensive experience in the United States and the experience of international business in general should lead to better performance. Tables 15 and 16 seem to deny the importance of experience. Early experience in the United States, either in the form of green-field entry or by acquisition (not reported in the table), produces the same results as late entry. Early establishment of foreign subsidiaries in general also does not seem to lead to better performance. One possible explanation for this might be that the more experienced investors are active in more mature industries, those generally with lower rates of return. So, is there nothing that management can do which can be shown to affect performance strongly? There is, in fact, one variable which correlates very strongly with subsidiary performance. T h e degree of autonomy of the affiliate, compared to the situation in other countries and as judged by headquarters respondents on a five-degree scale,

TABLE 14. Performance o f United States Affiliates o f Swedish Firms, as Judged by Subsidiary Respondents, by Market Share o f Affiliate (number o f affiliates) Performance compared to competitors

Percent market share 0-1

2-5

6-15

16-40

41-99

Much worse

8

8

5

4

3

Worse

4

5

1

6

1

Average

3

5

3

2

1

Better

3

7

5

7

1

Much better

1

7

-

6

1

Kendall's Tau Β = 0.11, ρ = 0.10, η = 99.

TABLE 15· Performance o f United States Affiliates, as J u d g e d by Headquarters Respondents, by Year of First Green-Field Entry into the United States (number of companies) Performance (relative to competitors )

First entry Pre-1974 1975-1985

Much worse than average

Better than average

Much better than average

Worse than average

Average

5

14

5

8

1

11

15

7

10

4

Chi-square = 2.25, ρ = 0.69; Kendall's Tau Β = 0.008, ρ = 0.47; η = 80.

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S w e d e n in A m e r i c a

varies strongly and positively with both subjective and objective performance measures. For one example of the results, see Table 17. It is impossible to infer from the data a causal direction. Probably, a lot of the correlation comes from the fact that successful operations are given a lot of autonomy rather than the other way around. Still, the result is of interest and deserves further research. One aspect which we can analyze somewhat is what determines the degree of autonomy, apart from the possible influence from performance. It seems that companies that have a large proportion of sales in the United States and that have more experience in the United States give more autonomy to their subsidiaries. As these variables are not significantly linked to performance directly, the importance of experience seems to be in

TABLE

16. Performance of United States Affiliates, as Judged by Headquarters Respondents, by Year of Establishing First WhollyOwned Subsidiary Abroad (number of companies) Performance (relative to competitors )

First subsidiary

Very much below average

Below average

Average

Above average

Pre-1920 1921-1959 1960-1979 1980-1985

2 I 12 4

3 9 18 8

2 5 9 2

1 4 15 6

Much above average

!

3 3

Chi-square = 8.27, ρ = 0.76; Kendall's Tau Β = 0.04, ρ = 0.29; η = 108.

TABLE

17. Autonomy of United States Affiliates Compared to the Case in Other Affiliates, as Judged by Headquarters Respondents, by Performance of United States Affiliate Compared to Competitors (number of companies) Performance

Autonomy

Very much below average

Below average

Less than average: Average: Higher than average:

3 9 9

8 18 15

Average

Above average

Much above average

3 11 4

2 13 17

1 5

Chi-square = 14.55, ρ = 0.07; Kendall's Tau Β = 0.17, ρ = 0.016; η = 118.

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terms of enabling the company to build up management capability and a capacity for self-management in the United States.

Summary and Discussi on Most of our hypotheses about the influence of industry structure on entry strategy and about the consequences for performance of the choice of strategy were not supported by the survey data. T h e same applies for most other relationships investigated, such as between market share and performance. Several possible explanations for the lack of clear results should be discussed. T h e r e are methodological shortcomings with our study. T h e sample size as well as the population size is too small to allow sophisticated multivariate analysis. Relationships could be hidden away in our simple tables, although efforts were made to control for important variables. Also, the mail survey method itself makes capturing the nuances of international strategy difficult. Such difficulties notwithstanding, we suspect that our results do accurately depict reality. Some other studies support the seemingly surprising lack of correlation between industry structure and entry strategy. Ajami and Ricks (1981) find that oligopolistic reaction may have been important earlier for FDI in the United States, but now market size and other "non-industry" factors are crucial. If this is so, the likelihood is great that also the mode of investment chosen is relatively independent of industry structure considerations. Caves and Mehra ( 1985) find only weak support for the structure of the industry determining mode of entry. Therefore, the few statistical studies that have been made tend to offer the same caution as ours in attributing explanatory power to industry structure variables. It is, of course, possible to find single cases which support the hypotheses, our conclusion is that such cases are relatively rare, albeit important. T h e rarity of supporting cases may be explained by the dearth of cases above "threshold levels" in terms of imperfections originating from concentrated and/or global industry structures. For most firms, foreign market entry can still be, and is, analyzed largely without thinking too much about retaliation from already established firms, countermoves in the home market, etc. Factors other than industry structure still drive the internationalization process. Several aspects of our sample are of interest in this context. T h e timing of much recent investment was during periods with a high exchange rate for the United States dollar and a low one (because of several devaluations) for the Swedish krona. Creating sales companies in the United States to sell products imported from Sweden was gener-

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ally a good idea. These sales outlets did not need to be acquired. For many firms, green-field entry was a realistic possibility and perhaps the fastest way to exploit economic competitiveness. Another characteristic of the sample has to do with the prevalence of focus or differentiation strategies (Porter, 1986) among Swedish firms. Conceivably, the choice of entry mode is less constrained for firms working in narrow segments where the position of large firms' primary product lines is not threatened. Furthermore, such product/technology/application area strategies may in themselves make acquisitions relatively unattractive. Arguments for internalization are stronger than in the case of more standard products. Firm-specific know-how has to be transferred to the foreign unit and to the final customer, and an acquired company may not be able to do this effectively for a long time. Finally, the surprising lack of correlation (let alone causality) between market share and performance could be due to firms with relatively large market shares being involved in expensive share gain campaigns. However, this explanation is a bit far-fetched, since over time, the winners of such games should be able to reap the benefits of victory. It is difficult to argue that right now there are only market wars with bleeding contestants and no market victories. A more reasonable conclusion is that the observed relationship between market share and profitability for the large "home market," which is what PIMS (Profit Impact of Market Strategy ; see Buzzell and Gale, 1987) is mostly about, does not carry over to the situation faced by a multinational corporation in a "host market." Many of the blessings of a high market share have to do with total volumes, not with the position in a given country. Great care should be observed when translating strategic recipes for a one-nation world to a multinational setting. References Ajami, R. A. and D. A. Ricks (1981). "Motives of Non-American Firms Investing in the U .S." Journal of International Business Studies 13 (winter). Buzzell, R. D. and B. T. Gale (1987). The PIMS Principles. New York: Free Press. Caves, R. E. and S. Mehra (1986). "Entry of Foreign Multinationals into U.S. Manufacturing Industries." In M. E. Porter, ed., Competition in Global Industries. Boston: Harvard Business School. Leksell, L. et al. (1981). Market Entry and Growth Strategies in the U.S.: The Swedish Experience. Stockholm: Svenska Handelsbanken. McClain, D. (1986). "Direct Investment in the United States: The European Experience. In H. P. Gray, ed., Uncle Sam as a Host. Greenwich, Conn.: JAI Press. Porter, M. E. (1986). "Competition in Global Industries: A Conceptual Framework." In M. E. Porter, ed., Competition in Global Industries. Boston: Harvard Business School.

Direct Investment In t h e United States

Appendix Products Sold by Swedish Firms in Study Sample 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48

Consulting (engineering) Fishing tackle Parking structures and other construction Industrial gases Construction management Excavators Pumps Separators Pollen Advertising services Engineering consulting Car insurance HVDC systems and products Export air freight forwarding Pharmaceuticals Air, gas, and process compressors Gasoline station pumps Compact cell filters (air pollution control) Process chemicals Automatic door products Freight forwarding Chemicals Mining and metal trades Wooden toys Internal distribution systems (forklifts, etc.) Shipform equipment Medical X-ray film Cement Offshore living quarters Automatic couplers for railcars Disposable paper products Furniture Road compaction machines Pipes Electrical equipment Household appliances Welding equipment Jet engine test facilities and equipment Financial services Air pollution control systems Industrial food freezing equipment Artificial kidneys Stainless steel wire Photographic equipment Seeds Chain saws Investment company Automatic teller machines

197

198 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98

Sweden In America Roof racks for cars and vans Engineering measuring devices Intravenous nutritional solutions Cargo access equipment High-temperature cermet elements Bandsaw blades Tires Lighting products Heavy construction and mining equipment Medical instruments Consulting Lighting products Granulators Pre-hire employee evaluations Domestic sewing thread Remote control for mobile hydraulics Cooling tower fill media Data control systems Fume extraction Auto body tools, body shop equipment Miter boxes, wood clamps, wood chisels, etc. Carton and bag sealers, tape dispensers Clamps and tubing Stoves for boats Crystal Chemicals and plastic products Pharmaceuticals Financial services Investment company Fashion eyewear Beverages Submersible pumps Office furniture Cars Fire- and heat-protection equipment Automobile collision repair equipment Carbide cutting tools Coin and currency handling machines Wallpaper and posters Air transport services Carbide and high-speed cutting tools Insurance and reinsurance Financial services Construction Railroad signal and communication equipment Surgical instruments Balancing valves Instrumentation and electronic instruments for ball bearing condition Refrigerator compressors and systems Piston and screw processors, heat pumps

Direct Investment In the United States 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137

Heavy forklift trucks Oil trading Machinery for the pulp, paper, and fiberboard industries Halogen work lamps Screen printing machinery Vinyl flooring sheets EDM-tooling Laboratory instruments and equipment Hydraulic equipment Reinsurance Rust-proofing material Store fixtures Strip steel Power electronics Retractable awnings Electric submersible pumps Rock drills Paper chemicals Financial services Cable Office supply products Pharmaceuticals Cars Freight forwarding Ball bearings Household balances Molded and extruded rubber goods for industrial use Offset printing presses Mining machinery Freight forwarding Research on and development of energy techniques Cigarettes, cigars, pipe tobaccos, and smokeless tobaccos Rubber goods for industrial use Auto parts Electronic measuring devices Electrical steel for motors, generators, and transformers Liner shipping Packaging machinery Construction

199

Chapter 1 ] Managing International Business: A Swedish Model Gunnar Hedlund

What is the most multinational economy in the world? Several answers to this question are possible. The United States is the largest exporter and importer and the largest source as well as recipient of foreign direct investment (FDI). Japan has the largest surplus on the current account and, more importantly, the most rapidly growing exports among larger industrialized countries. Kuwait and other raw-materials exporting countries could also muster statistics to claim the title of multinationalship. However, if we consider trade and investment flow per capita, and if we disregard the Kuwaits of this world, it is fair to say that Sweden is one of the most multinational countries in the world. Her exports amount to over 30 percent of the GNP, and her direct investment abroad means that about one of every four people employed by Swedish manufacturing industry works abroad, in subsidiaries of Swedish Multinational Corporations (MNCs). The corresponding figures for the United States are around 10 percent and one of every six people. The transformation of Sweden and its industry cannot be understood without reference to her history in international business. The successes as well as the problems—not the least of which are the seemingly perennial difficulties of forcefully penetrating the United States market—are anchored in some fundamental characteristics of the country's industrial history, and the heritage of managerial practices and attitudes which are a part of that history. This chapter summarizes the development of Swedish MNCs, discussing what they have done and how they have done it. A clear model of multinational management has evolved. Its characteristics are relatively autonomous foreign subsidiaries, an informal and per-

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sonalized management style, and an organizational structure with a very large "control plan" in which foreign units report directly to corporate headquarters. T h e model has lately been put under some strain because of changes in the firms and in their environment. I shall argue that radical departure from the model would be detrimental. Despite recent tendencies to emulate supposedly progressive management systems and organizational structures à la mode, the best foundation for continued success in international business is the historical model. T h e basic argument is that the dominant modern forms of MNC management lack dynamism and a potential for global coordination, whereas the classical model contains the seeds of such virtues. T h e chapter concludes with a discussion of attempts to enter the United States market. T h e traditional Swedish way of managing MNCs is claimed to entail both advantages and traps within a specific United States context. Genius Firms a n d R a w Materials: Sources of International Business Opportunities Exports of minerals and forestry products have been an important part of the Swedish economy for centuries. One of the largest corporations in pulp and paper production of today (Stora) dates back from the thirteenth century. T h e Sala silver mine was for centuries the world's largest. Swedish timber replaced depleting British forests in providing props for mines and charcoal for iron furnaces. Raw materials also attracted foreign investment. LKAB, the largest iron mine company (now state-owned) was founded by British industrialists in the late nineteenth century. Long before that, Walloon and Flemish entrepreneurs immigrated to Sweden and brought their expertise in mining and industry to bear on the frontier lands of northern Europe. Exports of raw materials-based products continue to be of great importance to the Swedish economy. However, the relative weight has gradually declined. For example forest-based products constituted around 40 percent of merchandise exports in 1900, and around 7 percent today. Whereas resource-based internationalization of necessity predominantly took the form of exports instead of FDI on sales of know-how, the development of mechanical and electrical engineering industries exhibits a quite different pattern. Around the turn of the century, a number of significant inventions or improvements of existing technology originated in Sweden. These became the foundations for an array of industrial companies, many of them still in existence today. Some of the most important are shown in the accompanying list.

Managing International Business AGA:

Alfa-Laval:

Electrolux:

Ericsson:

Esab:

Nobel:

Sandvik:

SKF:

Swedish Match:

203

F o u n d e d on the basis of the invention of the gas lighthouse by Gustaf Dalén in 1904. Later, the production a n d distribution of industrial gases became the core business. Established in 1883 to exploit the invention of the centrifugal separator by Gustaf de Laval. F o u n d e d in 1910 as the vehicle for the exploitation of the invention of the refrigerator by Platon and M u n t h e r . I m p r o v e m e n t s on Bell's patents f o r telep h o n e s a n d i m p o r t e d technology f r o m the United States created this firm, which dates f r o m 1876. Oscar Kjellgren perfected gas welding a n d f o u n d e d Esab in the early 1900s, greatly facilitating repair and construction of ships. Today, Esab is the world's largest p r o d u c e r of gas welding e q u i p m e n t . Alfred Nobel invented dynamite in 1866, which led to the f o r m a t i o n of a n u m b e r of firms, still existing today. A lucky combination of buying the Bessemer patent f o r steel production, having iron ore suitable f o r this m e t h o d , a n d skillful adaptation of the principle to industrial use b r o u g h t Sandvik into the world market. T h e company was f o r m e d in 1868. Sven Winquist invented the ball bearing and established SKF in 1907. Later, Volvo was f o u n d e d as a n offshoot f r o m SKF, initially partly owned by SKF. ( T h e alliance still exists today.) A technique f o r p r o d u c i n g safe matches that lit only o n contact with the surface on the matchbox was developed in the 1840s and constituted the core of a company which would later become the center of a n incredible financial empire, crashing with the suicide in 1932 by Ivar Krüger. Later, the company went back to its core business but is relatively diversified even today.

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Sweden In America

The list could be made longer, and include the inventors of the zipper and the adjustable wrench. Suffice it to say that the turn of the century produced the bulk of the firms which still dominate Sweden's industrial landscape. Much of the development was initiated by domestic science and technology. However, imported technology also played an important part (e.g., Sandvik, Ericsson, and Alfa-Laval with the purchase of the German Alfa patent). Of course, there were also more "normal" firms, which would only later make their mark with technical breakthroughs. Atlas Copeo struggled long before hitting upon the successful business of steel mining drills (together with Sandvik). Asea was, and to a large extent still is, a typical "electrical major," involved in a multitude of areas. Its world leadership in high-voltage directcurrent power technology dates from well into the twentieth century, although the company was formed in 1883.

Instant Internationalization The distinguishing mark of Swedish industry is its quick internationalization. A few years after incorporating in Sweden, most of the firms mentioned above had significant positions on foreign markets. An Esab story, probably true and certainly so in spirit, claims that the third employee of the firm was president of international operations roaming around the world, including the jungles of Borneo, converting natives to the new method of welding, almost before business at home had broken even. Ericsson had factories in Russia which were confiscated in the 1917 revolution. Alfa-Laval established a subsidiary in the United States almost immediately after the company had been formed. Instant internationalization shaped the character of the companies irreversibly. Entrepreneurship in the commercial and marketing sense followed and paralleled technical entrepreneurship. Legendary teams of technical and commercial people tower in the histories of many of the firms. Also, the limited home market meant that foreign operations from the start were crucial to the companies. The best and brightest were sent abroad, rather than the strange types who could not or did not want to engage in power fights at home. Spending a significant time abroad has been a condition, at least implicitly, for getting the top jobs. Through decades of rotation of both technical and managerial personnel, an internationally experienced cadre of employees was built up. It consisted mostly of Swedes, however, which later has become a more important limitation.

Sticking t o t h e Knitting MNCs from Sweden have stuck with their original businesses to a remarkable degree. Profits have been reinvested in geographical ex-

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205

pansion within the major fields of business rather than used for diversification or returned to the shareholders. (In later decades, the national tax policy has explicitly prevented this from happening.) This means that the identity of the firms has been kept relatively intact. Sustained investment in improving products, finding related areas of business, and penetration of new markets have created world leaders within well-defined fields. The fact that the companies have succeeded in adapting with the times and keeping their early lead, without resorting to the role of passive portfolio administration, is testimony to the robustness and flexibility of whatever management systems and styles have been used. Thus, the question of what international business has meant in Sweden can be summed up in the three expressions "genius firms," "instant internationalization," and "sticking to the knitting." To summarize how the global careering has been handled is a more complex matter. Greatly simplifying, one can still identify four traits distinguishing the management of Swedish MNCs from those prevalent in most other companies: autonomous subsidiaries, informal and personalized control and coordination, nonprofessional management, and a "soft" management style. Headquarters Visits Every Eight Years In one of the firms mentioned above, the Australian subsidiary claimed that it did not enjoy any visits from headquarters for eight years. Although company folklore is probably prone to exaggerate, and despite a world war that helped to keep foreigners away, it is significant that stories like this exist at all. Research confirms the impression of autonomous subsidiaries. Table 1 summarizes the results of a comparison of United States, Japanese, and Swedish MNCs and shows the Swedes to score highest on subsidiary autonomy and the Americans the lowest.

TABLE

ι. Influence of Subsidiaries and Headquarters of Swedish, United States, and Japanese MNCs (scale: 1 = low influence, 5 = high influence)

MNCs

Subsidiary influence (A )

Headquarters influence (Β )

Difference (A-B)

Swedish (24 subsidiaries) United States (21 subsidiaries) Japanese (31 subsidiaries)

4.10 3.39 3.93

2.49 2.72 2.18

1.61 0.67 1.75

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S w e d e n in America

Subsidiaries' autonomy f r o m headquarters is most likely related to the relative weight of foreign operations in the corporation. T h e facts of early establishment abroad and great dependence on success in foreign lands gave credibility and status to the subsidiaries. Furthermore, control was exercised by placing people on the spot as managers or technical experts rather than by orders from Sweden or systems to impersonally track and guide the foreign units. Headquarters' views and regard for the firm as a whole were internalized by the top echelons in the subsidiaries through rotation around the globe and long careers within the firm. Thus, the firms were well-integrated and operations coordinated, despite the high degree of decentralization. FDI mostly followed a sequential pattern, the firm moving toward progressively committed established forms (from single export orders, over having a sales agent, to forming a sales company and starting manufacturing) and toward more distant and dissimilar (for Sweden) markets (see Johanson and Vahlne, 1977). Still today, sales companies constitute the major part of FDI, both in terms of output f r o m the foreign units and in terms of employment. Manufacturing has increased rapidly, particularly through the increased use of acquisitions of established companies rather than green-field entry into a market. Lately, also other functions have started to internationalize. Purchasing is increasingly coordinated globally. Volvo's operations in J a p a n entail the buying of components as well as selling of cars. Of long-term importance is the increasing reliance on know-how and technology in the subsidiaries. A n u m b e r of firms set u p research units abroad or engage in acquisitions and cooperative arrangements to tap foreign sources of knowledge. (See Hâkanson and Zander, 1986, for a review of the dynamics of these processes, and of the management challenges they pose.) Thus, autonomous subsidiaries are gaining increased strategic importance, which sets the stage for an interesting period of experimentation with mechanisms for coordination and control. More about this later. T h e organizational structure of most Swedish MNCs reflects the standing of the subsidiaries. T h e prevalent form has been and still is the mother-daughter structure, i.e., a structure in which foreign subsidiaries report directly to the CEO of the firm without intermediate steps such as a head of international operations, global product divisions, or regional divisions. This means that a moderately sized M NC may have control spans for the CEO approaching three-digit numbers. This is, of course, heresy for most organization theory, but it has worked very well in practice. Swedish firms exhibit the general European pattern described by Franko ( 1976), but in an extreme way. T h e mother-daughter structure has not been abandoned, as it was long ago in the United

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States MNCs and, more recently, in most other European countries. In the United States, the dominant pattern was to first create an international division, lumping all the "daughters" together under a unified and specialized command. Later, most firms adopted structures whereby domestically headquartered product divisions split up the foreign units between them, forming global product divisions (see Stopford and Wells, 1972). The success of Swedish MNCs, and the fact that they have been exposed to competition all along, throws some doubt on Franko's interpretation of the mother-daughter structure as a relic allowed to survive only because of lack of competition in Europe. There may indeed be other ways of running a ship than those preached at business schools and consulting firms. People, Not Systems Most organizational theory posits a relationship between decentralization and formalization. The argument is that control, as authority is dispersed among many people and units, can no longer be based on personal contacts and informal manners of working together but has to be embodied in systems and formal procedures. In Swedish MNCs, however, diffused power has been accompanied by continued reliance on informal, personalized control. Table 2 gives an indication of the differences with other countries. Rotation of managerial and technical personnel has substituted for impersonal systems. (See Edström and Galbraith, 1977.) Networks of personal contacts have been built up and preserved over time be-

TABLE 2.

"For which of these areas do you have written manuals from HQ?" Answers from Respondents in Subsidiaries of Swedish, United States, and Japanese MNCs.

Area

Swedish

U.S.

Japanese

Only technical design and manufacturing Only accounting Only marketing Only company philosophy Only technical—marketing—accounting All or most of the above None

10 3 5

2 15 1

5 5 2 3 5 5 4

Total number of answers

24

21

29

2 4

1 2

-

-

-

-

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Sweden In America

cause of internal promotion policies and the Swedish prevalence of long careers within the same corporation. A nervous system of informal—vertical as well as horizontal—communication links, a shared understanding of corporate priorities, and a company culture specifying how things are d o n e within the firm have evolved. These aspects are largely implicit, nobody in the company can exactly put their finger on them. In some of the companies, an element of pride is evident in the frank admittance that nobody knows how the corporation manages to conduct itself in a coordinated fashion. "You have to work here for 20 years in order to understand the organization." "We have no organization chart." "That's what I would like to know too." Such are the answers one gets asking about how the firm is managed. Financial control systems have not played the same role as in, for example, United States firms. Even if such systems have been introduced, their role in headquarters-subsidiary relationships has been limited. Strict bonus-pay systems are not generally the rule. Large elements of subjective j u d g m e n t are exercised in determining compensation levels for subsidiary management personnel. Transfer prices between units are subject to a great deal of negotiation. All this means that resource allocation on the basis of impersonal yardsticks and coordination through the setting of prices and simulation of marketlike conditions are not dominant modes of control. Relative to practice in other industrialized countries, Swedish firms rely less on both hierarchical authority, formal measurement systems, and internal markets and more on socialization, rotation of managers, and the emergence of shared views of the company's strategy and identity. In Etzioni's (1961) terms, normative control takes precedence over coercive and calculative control. Max Weber could have said that the word is more important than the sword and the purse.

The World's Softest M a n a g e r s ? Peripheral autonomy and informality are seen in a particular light if one considers some aspects of the Swedish management culture in general. According to Hofstede (1980), Sweden is an extreme country in scoring a m o n g the outliers on three of his four dimensions of national culture, in the sense of work-related values. Sweden is diagnosed as a m o n g the lowest on "power distance" (perceived distance between superior and subordinate in the organizational hierarchy), a m o n g the lowest on "uncertainty avoidance" (negative attitudes to ambiguity in structure and relationships), and a m o n g the very highest on "femininity" (reflecting a nurture-oriented "soft" management style). Particularly on the "masculinity"-"femininity" dimension, Swe-

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d e n differs markedly f r o m countries like the United States and the United Kingdom. Swedish m a n a g e r s are o f t e n seen as unclear and indecisive by their foreign colleagues. T h e y frequently complain about being present at meetings, where supposedly decisions are taken. However, it is not clear to a n y o n e except the Swedes what the decision is, and a translation a n d clarification process has to follow. T h e impression of "softness" is a fact. W h e t h e r what is perceived is really softness is debatable. D a u n (1984) argues that it is a d e e p reluctance to be abrasive, p u t oneself in the limelight, and openly c o n f r o n t conflict which is at the core. Behind the scenes, tough action may still be taken. It should also be r e m e m b e r e d that an ideology of participatory nonauthoritarianism a n d egalitarianism spread particularly vigorously d u r i n g the 1960s and 1970s. T h e entire Western world was affected by this, but the Scandinavian countries p e r h a p s m o r e than others. How d e e p these attitude shifts are is not yet clear. O n a superficial level, strong leadership is now again celebrated in the business a n d general press, as in o t h e r countries. T h u s , t h e r e may be a r e t u r n to a pattern of much m o r e charismatic a n d assertive leadership, reminiscent of the one-company town patrons a n d colorful genius e n t r e p r e neurs of earlier times. However, a d e e p respect f o r expert knowledge and "rational" solutions in Swedish society will probably inhibit any strong tendencies to outright patriarchal leadership.

Technologists a n d Elites, N o t M a n a g e r s A final element of the Swedish m a n a g e m e n t model has to be a d d e d . It is not d o c u m e n t e d in research as well as the a u t o n o m o u s and informal aspects, particularly with regard to comparisons between nations. Still, it is i m p o r t a n t a n d may be particularly so in u n d e r s t a n d i n g the problems of getting a foothold in the United States market. Until r a t h e r recently, the p r e f e r r e d background for a Swedish C E O was to have a degree f r o m a technical university, like the Royal Institute of Technology (KTH) in Stockholm or Chalmers University of Technology in G o t h e n b u r g . It is significant that the late Marcus Wallenberg, who p e r h a p s could rightly have aspired to an honorary doctorate in many fields and places, always insisted on the title of Tekn.Dr. (Doctor of Technology), which h e got f r o m K T H . T h e origins of the reverence f o r an expertise in science a n d technology is a matter f o r economic history to explore. T h e G e r m a n inspired educational system probably played a part. G e r m a n was taught as the first foreign language in school until at least World War II. T h e establishment of prestigious technical universities resembles

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the German pattern, as does the emphasis on technical education at the craft and worker level. There was never a gentlemanly class of classically educated gentry, as in England. Engineers have always been held in high esteem. T h e accent on science and technology in schools may be a characteristic of all late industrial nations, a group Sweden certainly belongs to. Germany, Japan, and even the United States during the era of "Yankee ingenuity" showed similar biases. In the Swedish case, the lucky coincidence (?) leading to the formation of genius firms around the turn of the century confirmed in every little schoolboy's heart that the road to success was indeed to take part in the great technological revolution. This creates a quite different attitude than going to school in Britain and hearing one's parents complain about the latest subtraction from the empire and seeing the city and country estates of gentlemen with degrees in Classical history and Latin. A second source for recruiting the management elite is the Stockholm School of Economics. During the last few decades, it has taken over as the prime supplier of CEO raw material. It was founded by industrialists, and on the surface, it looks like a typical United States business school. However, there are some important differences. First, the curriculum has always, and particularly in earlier times, included a much larger dose of economics than most business schools. Just the fact that the English name includes "Economics," whereas in Swedish the school is called "Handelshögskolan" ("handel" means trade or commerce) indicates that the school has felt the need to communicate a distinct identity. Another sign of this is the accepted view that most of the legendary faculty members are economists, not business administration types. Second, the view that management is a special profession with its own set of techniques and tools is not shared at all to the extent in United States business schools. Having spent twenty years of my life in or near the Stockholm School of Economics (as student, faculty member, and administrator), and two in United States business schools, my personal view is that the atmosphere is quite different. Like in the United States, many students at the Stockholm School of Economics often have megalomaniac plans to become the president of a large firm. However, they rarely really believe they are at school to learn the profession of management. They rightly assume that the most difficult part of the career is getting into it in the first place. T h e sorting mechanism for selecting generally intelligent, seemingly hard-working, and socially competent individuals has favored them, and although the school is not a breeze, life for the next four years or so contains large doses of traditional, and pleasant, student life. Contacts with friends

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are i m p o r t a n t , as they are all likely to meet later in life. T h e size of the nation (8.4 million inhabitants) strengthens this traditional role of elite schools. It is so m u c h taken for granted a n d naturally occurs that the school does not even have a list of alumni. T h e y find each o t h e r anyway, a n d they r e m e m b e r to d o n a t e money without any formal fund-raising organization. T h e Stockholm School of Economics is m o r e like the French elite schools t h a n the United States business schools. It produces a tight-knit and c o m p e t e n t network of people with a similar outlook on life a n d a shared vocabulary. It does not try to replace personal leadership qualities with m a n a g e m e n t principles but takes a h u m b l e r view of the usefulness of business techniques. Its success in really educating f o r leadership, r a t h e r than administration, is as h a r d to assess as in the case of the typical business school. This sketch of my own alma m a t e r I h o p e conveys a picture of skepticism, my own as well as that in Swedish society as a whole, r e g a r d i n g the notion that m a n a g e m e n t is a profession. Technical proficiency—either in technology in the limited sense or in delimited functional fields such as accounting or finance—is important, but beyond that, leadership a n d top m a n a g e m e n t is a question of knowledge of the industry, personal leadership qualities, and general intelligence and integrity. T h e very concept of "profession" is problematical in Swedish. I r e m e m b e r first being exposed to the mysteries of this word when, at the age of 16, living with a Scottish family in E d i n b u r g h , I was told that the n e i g h b o r h o o d contained mostly "professional people like us." T h i s clearly was m e a n t to impress u p o n m e that it was a relatively well-off and educated community, which was true. In Sweden, everybody had a profession, unless they were outlaws, u n e m p l o y e d , o r so rich they did not have to work, so although I understood what the word meant, I could not quite visualize what the nonprofessional n e i g h b o r h o o d s were like. Later, I had the same etymological struggle with "yuppies." T h e Oxford English Dictionary devotes t h r e e columns to "profession." T h e gist of present usage is clear f r o m the r e f e r e n c e to "an occupation considered to be socially superior to a trade or handicraft." Many examples make it clear that tradespeople need not b o t h e r associating with the professional classes (Maurice, 1839: "Profession in o u r country . . . is expressly that kind of business which deals primarily with m e n as m e n , a n d is thus distinguished f r o m a trade, which provides f o r the external wants a n d occasions of men"). It is also clear in the United Kingdom that a professional is not really a m e m b e r of the highest class of landowners a n d gentlemen. In Swedish, "profession" is translated as "yrke," which includes all occupations. A p l u m b e r or car

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mechanic has an "yrke" as well as a lawyer, priest, or CEO. In fact, the "lower" occupations are more of "yrke" than the higher. "Yrkesskola" is a school where handicrafts, trades, and skills are learned. To insist upon "management" as a profession rather than as the natural and rational way good people conduct themselves anyway, is in a way to degrade the activity. Recent Changes in the "Swedish M o d e l " A distinct model of managing international business has emerged. It is rooted in the country's industrial history and has resisted the onslaughts of miracle brews from business schools and consultants for a long time. However, the model is changing. Hedlund and Áman (1984) provide a summary. Salient tendencies include: • Use of divisionalized corporate structures, increasingly with global reach, such as in global product divisions. Thus, the mother-daughter structure is being modified. In practice, hybrid types of basic forms are used (see Hedlund, 1984). • Greater emphasis on financial reporting and control. • More coordination between headquarters and subsidiaries entailing some withdrawal of authority as experienced by management in the subsidiaries. • Less dominance by technologically trained top managers and increased acceptance of "professional management." T h e reasons for the changes have to do with increased use of acquisitions to enter foreign markets, increased competition and maturing product lines, greater size and diversity of the firms, and the increased use of non-Swedish managers. However, it would be a strong exaggeration to say that the difference between the way Swedish MNCs are managed and, for example, the dominant pattern in large established United States MNCs has been greatly reduced. T h e r e is still pronounced informality, reliance on transfer of people, and respect for the views of subsidiaries. T h e tensions on the established model of MNC management fundamentally have to do with the difficulties of genuinely global coordination of business. T h e traditional methods worked well in the ethnocentric and polycentric stages of evolution but now need to be adapted to geocentric ambitions. (The concepts are Perlmutter's, 1965.) Ethnocentrism means a reliance on home country competencies and attitudes and is associated with product and technology flows from the center to the foreign subsidiaries. Polycentrism entails more autono-

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mous foreign units, which are largely self-contained and develop their own distinct identity. Geocentrism implies ambitions for global coordination and transnational management practices. A pattern in the direction of geocentrism is now emerging, pointing toward a new management model. I believe it will be a basis for MNC management in the future. Paradoxically, it seems to be more consistent with the old Swedish model than with the half-hearted emulation of the creed of global product divisions, strategic business units, financial control systems, and a standardized cosmopolitan business elite. The Heterarchical M N C — T h e Future of International Management Organizational innovation is pointing toward a new principle of working in the global business environment: heterarchy. Heterarchy means shifting leadership according to task and competence. For detailed discussion of the concept and the trends in practice it tries to capture, see Hedlund (1986) and Hedlund and Rolander (1990). In summary, heterarchy entails: 1. A structure with different kinds of centers. Headquarters functions are geographically diffused, and no dimension (product, country, or function) is uniformly dominant. A Swedish MNC may have a financial center in Brussels, the largest headquarters division in London, an R&D center with group responsibility for certain products in India, a regional unit in Hong Kong with a role of coordinating activities in Asia, and an Italian unit with global responsibility for component supply. T h e overlap of responsibility following from wrong-centeredness is seen as an advantage. Thus, the heterarchical firm does not worry too much about logical inconsistency, but instead focuses on practical coherence. T h e structure is flexible over time: at a certain moment, global product management is most important; next year, perhaps integration of total R&D resources is paramount. T h e flexibility and multidimensionality goes beyond what is possible in a formal matrix organization, which often has a tendency toward rigidity rather than—which is the intention—permitting a fast and flexible response (see Hedlund, 1986, pp. 22—23, for further discussion). 2. A strategic role for foreign subsidiaries, not only for "their" company but for the corporation as a whole. Corporate-level strategy has to be both formulated and implemented in a geographically scattered network. Thus, the United States subsidiary, for

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Sweden In America example, will be assigned global roles in addition to the o n e of serving its "own" market. 3. A dramatic increase in communication between units of thefirm,as well as between subsidiaries. As long as the M N C was an i n s t r u m e n t f o r the gradual exploitation of advantages based o n a n d originating f r o m the h o m e country e n v i r o n m e n t , communication flows were relatively simple. One-way flow f r o m h e a d q u a r t e r s o u t to each subsidiary was d o m i n a n t . W h e n the M N C starts utilizing its potential for genuinely global approaches, the need f o r reciprocal, complex, a n d lateral flows increases. (See Kogut, 1983, f o r a discussion of the "sequential advantages" of MNCs with global ambitions.) T h e design of the information systems, technical as well as h u m a n , of the firm becomes a strategic matter in this context (see H a g s t r ö m , 1988). 4. Management primarily by normative integration r a t h e r than by calculative or coercive mechanisms (Etzioni, 1961). " C o r p o r a t e culture," " m a n a g e m e n t ethics," " m a n a g e m e n t style," a n d similar concepts become critical in u n d e r s t a n d i n g why a heterarchy does not break down into anarchy. T h e m o d e r n M N C cannot rely o n the organizational pyramid to solve the coordination problems. T h e relevant dimensions (e.g., product, geography, function) vary so m u c h between contexts a n d over time that any fixed assignment of coordinating roles will be w r o n g most of the time. Marketlike integration systems, such as manipulation of transfer prices and performance-based incentive systems, are too c r u d e to e n s u r e the level of cooperation required in exploiting global opportunities. This is not to say that such systems are not i m p o r t a n t or that they should not be used, only that they c a n n o t substitute f o r the internalization of strategies, objectives, a n d values on a broad basis within the firm.

5. Holographic organization, in the sense that information about the whole is stored in each part of the company. T h e basic strategy, guiding principles of behavior, a n d access to detailed information are widely shared in the organization. I n f o r m a t i o n technology is of crucial importance h e r e a n d is likely to be the force leading companies to heterarchy. T h e heterarchical model, the outlines of which can be seen in what Swedish a n d o t h e r MNCs are actually doing, depicts an effort to create a genuinely global firm. T h e M N C as we know it today is an "overgrown national corporation,"* built on historical national strengths

* I owe this concept to Hasan Ozbekhan.

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and exploited in an ever-wider geographical context. Radical changes in the economic environment now face this institution with formidable challenges. How do mature MNCs uphold their competitive edge when new technology emanates from all corners of the world and more focused and flexible national firms compete in even the most advanced product fields? How does one really utilize global spread? My contention is that many of the aspects of the "old" Swedish model serve well in addressing these problems: the big role for the subsidiaries, the emphasis on normative integration, the importance of international rotation of personnel, the respect for the specifics of products and industries, and the prevalence of long stays within the same firm. T h e United States plays a special and important role in almost any global thrust of a non-American corporation. T h e ability to handle the complexities of this market is an important test of the viability of any model of international business management. Therefore, it is well worth pondering upon the results achieved so far. As chapter 10 makes clear, both Swedish and other European firms have experienced great problems in establishing firm footholds in the United States. Might this have anything to do with management styles, organization structures, and the like? Taking o n the United States—The Weaknesses of the Swedish M o d e l Annual and quarterly reports from Swedish MNCs more often than not contain references to problems in the United States and French subsidiaries. These problems furthermore tend to persist for many years and continue to frustrate and puzzle top management and the stock market. I will argue that both the positive and negative experiences in the United States can at least partly be derived from the historical aspects of the Swedish management model. On the positive side, many firms were established very early in the United States. T h e size and sophistication of the market was respected and admired, and most firms refrained from imposing alien business practices on the United States operations. In fact, even such hygienic matters as making sure accounting systems were consistent were long ignored. T h e United States subsidiaries were allowed a life of their own, which produced some advantages. T h e study reported in chapter 10 shows that subsidiary autonomy and performance are highly correlated, and probably causally related reciprocally. T h e tradition also prepares the stage for assigning global roles to the United States subsidiary. Some recent ventures provide illustrations of the expansion of

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strategic functions in relation to the United States. Datatronic—a small Swedish computer software company—acquired much larger Victor Technologies in 1985. This was not just a way to utilize know-how in Datatronic, but a much more ambitious step in which long-term potentials for reciprocal technology flows are important. Pharmacia (pharmaceuticals and biotechnology) is setting u p a research unit in La Jolla, California. Electrolux bought White (appliances or white goods) in 1986, becoming the only really global player in this field. Volvo bought its White Truck Corporation in 1981, intending to integrate operations between Europe and the United States in the future. Although the two White acquisitions have not yet—and may not for a long time—produce global synergies, they testify to the ambitions for global coverage. Volvo's car operations perhaps serve as a better example of how the United States market determines the strategic direction of the whole firm. T h e 700 series of automobiles was developed explicitly with the United States market in mind. T h e looks, equipment, and image surrounding the car are dominated by concerns for United States customers. Until the 700 era, product development was guided instead by Swedish priorities (sturdiness, practicality, and reliability but without flashiness—honest but perhaps boring). T h e disappointing part of these adventures in the United States is that Sweden sells about as much to Norway (with a population of five million) as to the world's largest economy. This is true despite efforts over the years to gain access. In a way, experiences in the United States seem remarkably like entering J a p a n : a strategically important market, get in even if you have to invest, expensive to do business, curious legal environment, difficult to get really large volume, suspicions of barriers to entry and penetration which lie below the surface, special distribution system (importance of dealers), strange banking system, different technical standards, difficult FDA rules, restrictive immigration laws, and so on. Chapter 12 shows that industry structure may indeed be of relevance in some cases (such as Volvo-White), but the main conclusion is that little success and failure can be explained this way. Instead, a number of managerial issues stand out. Drawing also on other research and experience, four observations can be made. First, Americans working f o r * Swedish MNCs often complain about lack of clarity as to objectives, strategies, and ambition levels. They ask for more explicitness, assertiveness, aggressiveness, and * I t is natural for an American to work " f o r " a firm. A Swede would normally say that he or she works "in" it. T h i s may indicate one of many differences between managerial instrumentalism in the United States and company-specific allegiance in Sweden.

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timely feedback. They do not plug in as easily as the Swedes to the implicit and strong views on corporate priorities, partly because they rarely stay in the same firm as long as the Swedes. The reaction can be understood in terms of the historical reliance on informal and personalized control, the tendency to avoid open confrontation of conflict, and an attraction to "soft" management. The structure of American-Swedish attitudes easily leads to the processes of Bateson (1936) termed "complementary schismogenesis." The Swedes see the Americans as too aggressive and explicit and counter by trying to smooth over, provide overarching generalities, and excuse bad performance. The Americans are driven to even more insistent calls for clarity and explicitness (unless they silently resign themselves to tolerating what is after all the headquarters way). The net effect is a vague feeling of lack of direction and uncertainty as to where one stands personally among the Americans, and an equally vague feeling that the Americans cannot be trusted to work in the best interest of the firm among the Swedes. Obviously, there are many exceptions. Volvo's success in working with White is one, and it is important to note the directness of the management style in this case (see chapter 12). Second, there are similar tensions about unity of command and ambiguity about who is the boss. The implicit matrix structure in most Swedish firms means that the head of a division in a United States subsidiary, for example, has at least two bosses to consider: the president of the United States company, and the head of the division back in Sweden. Usually, this is not even explicitly recognized as a matrix situation, and a vague distribution of responsibilities between the two bosses is common. The local boss is in charge of operations and the Swedish one of strategy, which does not always help to know who to turn to. On a smaller scale, the Americans are also frustrated about the ambiguity of the leadership. Swedish project leaders tend to be rather invisible and unassertive, and it is not clear who to blame when a project fails. Hofstede's (1980) diagnosis of Sweden as being low on power distance and uncertainty avoidance fits the problems described. The United States business culture is insisting more, but not radically so, on distance and clear relationships between the boss and subordinates. Third, there seem to be differences in the view of what a manager is supposed to do. For the Swedes, an essential thing is to be an expert in the industry and function in which one is working. For an American manager, there is more of a profession to the management task in general, and management skills are regarded as transferable between industries, functions, and situations. The gap between the two views

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becomes particularly visible when large numbers of people communicate at different levels within the firm. T h e really senior international jet-setters from headquarters usually understand the differences and adapt somewhat to them, whereas the lower ranks do not as easily. It is particularly difficult to address the problems this gives rise to, since a great deal of mutual respect and admiration—and a feeling of being rather much alike—cloud the view. Fourth, a very complex identity crisis at both headquarters and the United States companies is set in motion by the double process of global integration, on the one hand, and increased strategic importance for the United States units, on the other. Global divisions created in Sweden eagerly try to wipe out the feudal fiefdoms they perceive the foreign units have formed during the polycentric era. T h e CEO of the firm pronounces the United States the main strategic objective and spends a lot of time on road shows hunting Unites States investors and, together with the president of the United States affiliate, acquisitions in America. T h e four problems described above are interrelated, and all originate in the evolution of a particular model of international management in Swedish MNCs. Of course, it does not follow what the best answer is to the challenges posed from the description of them. A compromise type of solution may be the worst. For example, the Volvo White case (chapter 12) seems to describe the success of the Swedish focus on industry knowledge, technical expertise, and a strong corporate culture. On the other hand, the Ericsson case (chapter 13) seems to indicate the problems inherent in such approaches. T h e main differences in the two cases appear to be: (1) strong leadership that took account of Swedish-American differences; and (2) rapid learning and adaptation to the United States market. The N e w G l o b a l Economic E n v i r o n m e n t — A Renaissance for the Swedish M o d e l ? In summary, the strengths and weaknesses of Swedish MNC management is a very complex matter. Obviously, any argument would have to consider the influence of the type of industry, size of the firm, what markets are served, the type and change of technology, and other variables. Assuming a continued trend in the direction of tighter global integration, emergence of new industrialized nations, the rapid spread of scientific knowledge and technology as well as management capability, and a high rate of change in supply and demand globally, the balance is still, in my view, positive for the Swedish MNC model. Global integration cannot be achieved without a multidimensional

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and flexible organizational structure (see Bartlett, 1986). The heritage of living with implicit and complex matrices serves well in this regard. Research so far casts doubt on the desirability of more unitary structures, such as the global product division (see Davidson and Hasperlagh, 1982). It will be increasingly important to utilize the total competence in the "subsidiaries," to the extent that it becomes hard to locate "headquarters," certainly not by pointing at a floor of an office building. Technology and information in general will flow reciprocally between units of the firm. All experience tells us that well-developed informal networks are necessary for such complex integration to take place. As a whole, the traditional Swedish model seems a better base to start from than hierarchically organized structures of distinct strategic business units (SBUs), each controlled from a global headquarters in the home country. The bias for sticking with the knitting may also be an asset. Certainly, conglomerates and strongly diversified firms have not had an easy time lately. The overwhelming consensus among serious researchers is that extensive diversification is simply bad strategy and leads to inefficient firms. Imperatives of global coordination will most likely reinforce this point. You cannot engage in international transfer of technology unless you know a great deal about what is being transferred. You cannot build up a strong corporate culture and effective communication networks on the basis of very diverse products and technologies. There may also be a curious blessing in the rather limited size of MNCs from small countries. The smallness of the country makes large headquarters an embarrassment, so they tend to be small. The entire firm is kept rather small also by the policy of concentration, which allows reliance on personalized control rather than only on systems. The efficiency of giant firms in transferring technology and learning from experience can certainly be questioned. It is amazing in retrospect how difficult it has been for GM, Ford, and Chrysler to utilize the expert knowledge in their European subsidiaries (e.g., Opel, Ford Europe, and Talbot) about the manufacture of small cars. That kind of failure would definitely be lethal in a more closely-knit world economy. Geniuses and genius firms crop up all over the place. The challenge for Swedish MNCs, as for others, is to tap and guide this tremendous potential. A multitude of models will be tried in the race to find effective ways of achieving this objective. The Swedish one is only one, but still a very interesting one. My guess is that returning to the basics and developing new forms of management from them are more in tune with the demands of today and the future than adaptation to the least common denominator of cosmopolitan managerial professional-

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ism. In conclusion, the Swedish model could have a renaissance and continue to surprise.

References Bartlett, C.A. (1986). "Building a n d M a n a g i n g the T r a n s n a t i o n : T h e New Organizational Challenge." In M. E. Porter, ed., Competition in Global Industries. Boston: H a r v a r d Business School. Bateson, G. ( 1936). Naven: A Study of the Culture of a New Guinea Tribefrom Three Points of View. C a m b r i d g e : C a m b r i d g e University Press. Daun, Â. (1984). "Swedishness as an Obstacle in Cross-Cultural Interaction." Ethnologia Europaea: 95—109. Davidson, W. H . a n d P. H a s p e r l a g h (1982). " S h a p i n g a Global Product Organization." Harvard Business Review (August): 125—32. Edström, Α., a n d J. K. Galbraith (1977). "Transfers of Managers as a Coordination a n d Control Strategy in Multinational Organizations," Administrative Science Quarterly (June): 2 4 8 - 6 3 . Etzioni, A. (1961). A Comparative Analysis of Complex Organization. New York: Free Press. Franko, L. (1976). The European Multinationals. Greenwich, C o n n . : Greylock Press. H a g s t r ö m , P. (1990). "New I n f o r m a t i o n Systems a n d the C h a n g i n g Structure of MNCs." In G. H e d l u n d , C. Bartlett, a n d Y. Doz, eds., Managing the Global Firm. L o n d o n : Routledge. H e d l u n d , G. (1984). "Organization In-between: T h e Evolution of the MotherD a u g h t e r Structure of M a n a g i n g Foreign Subsidiaries in Swedish MNCs "Journal of International Business Studies (fall): 109—23. . (1986). " T h e H y p e r m o d e r n M N C — A Heterarchy?" Human Resource Management 25, 1 (spring): 9—35. H e d l u n d , G., a n d P. Â m a n (1984). Managing Relationships with Foreign Subsidiaries—Organization and Control in Swedish MNCs. Stockholm: Sveriges Mekanförbund. H e d l u n d , G., a n d D. Rolander (1990). "Action in Heterarchies: New Approaches to M a n a g i n g the MNC." In G. H e d l u n d , C. Bartlett, a n d Y. Doz, eds., Managing the Global Firm. L o n d o n : Routledge. Hofstede, G. (1980). Culture's Consequences. L o n d o n : Sage Publications. H â k a n s o n , L., a n d U. Z a n d e r (1986). Managing International Research and Development. Stockholm: Sveriges M e k a n f ö r b u n d . J o h a n s o n , J., a n d J-E. Vahlne (1977). " T h e Internationalization Process of the F i r m — A Model of Knowledge Development a n d Increasing Foreign Market Commitment,"Journal of Management Studies ( s p r i n g / s u m m e r ) Kogut, B. (1983). "Foreign Direct Investment as a Sequential Process." In C. P. Kindleberger a n d D. Andreksch, (eds.), Multinational Corporations in the 1980s. C a m b r i d g e , Mass.: M I T Press. Perlmutter, H . V. (1965). "L'Entreprise internationale—trois conceptions." Revue économique et sociale (May). S t o p f o r d , J. M., a n d L. T. Wells (1972). Managing the Multinational Enterprise. New York: Basic Books.

Chapter 12

V o l v o Truck Corporation Lars Âgren and Jan Forslin

In May 1981, AB Volvo bought the bankrupt American truck company White Motor Corporation and formed a new venture—Volvo White Truck Corporation. The purchase was another attempt by Volvo to penetrate the North American truck market. Five years after the acquisition, the new company has proved its capability and another deal with Volvo as the main partner has evolved, this time with the giant automaker General Motors (GM). This case study analyzes the situation at the time when the company was formed and the actions that have led to its present successful operations. (The newly formed joint venture with GM will not be commented on in any detail.) The objective is to understand the strategic aspects of the investment as well as the cultural and managerial implications of establishing an enterprise in a foreign context.* Normally, the mission of the automotive industry is associated with production of attractive vehicles of various kinds. Design, quality, performance, and price are the main attraction parameters. According to this perspective, it is the end product that counts, and the production of components becomes a secondary matter, a support to the competitiveness of the final product—the vehicle. A quite different situation can be described from the components perspective. The sales of vehicles then became an instrument for mar*The study is based on interviews with American and Swedish staff within Volvo White Truck Corporation, at its headquarters in Greensboro, North Carolina, and at the plant in New River Valley, Virginia. Internal documents and publicity material were also used. Michael Maccoby joined the authors in some of these interviews. Interviews have also been made within Volvo North America, Inc., Volvo Truck Corporation, and AB Volvo. Apart from technical and managerial staff within the various parts of Volvo, this interview study has encompassed some dealer personnel and customers and one local trade union president.

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keting c o m p o n e n t s . In the e x t r e m e case, it does not matter in what products the c o m p o n e n t s are m o u n t e d as long as it increases the market f o r the c o m p o n e n t . This is the typical position of a supplier to the automotive industry. W h e r e a c o m p a n y positions itself along this spectrum a n d how it perceives its mission may vary over time, d e p e n d i n g on w h e r e the prospects f o r profit are the best. For example, with a m a t u r e p r o d u c tion technology, it might be less interesting to be a producer of components a n d m o r e attractive to d o business by selling the final product because production capacity can be b o u g h t at a low cost f r o m subcontractors. If the market is, however, actually declining, it might be i m p o r t a n t to control as m u c h of the production process as possible. Also, if t h e r e is a technological leap, which creates new opportunities f o r profitable production, marketing of c o m p o n e n t s becomes correspondingly m o r e interesting. This strategic issue is illustrated clearly when the E u r o p e a n and N o r t h American truck industries are c o m p a r e d . In the United States, production of c o m p o n e n t s have gradually been taken over by specialized suppliers leaving assembling, marketing, a n d some design to the truck m a n u f a c t u r e r , who is thus a d d i n g less a n d less value in the process. In E u r o p e , the concept of integration still prevails, m e a n i n g that the drivetrain is p r o d u c e d by the truck m a n u f a c t u r e r . E u r o p e a n m a n u f a c t u r e r s t h e r e f o r e contribute to a larger p r o p o r t i o n of the value a d d e d to the final p r o d u c t than their American counterparts. D u r i n g the last ten years, the profit margin on trucks has been declining worldwide, particularly in the N o r t h American market, making c o m p o n e n t s m o r e important. W h a t is now being witnessed, and the light in which o n e should see the Volvo White story, is a global competition f o r the sale of truck c o m p o n e n t s . Today, N o r t h America is the battleground f o r that fight—a battle in which E u r o p e a n companies, so far, clearly have taken the lead. Does this reflect different m a n a g e m e n t philosophies?

The Quest for a Global Strategy AB Volvo, today the largest private c o m p a n y in Sweden, was f o u n d e d in 1925. T h e first p r o d u c t of AB Volvo was an automobile called Jacob, first p r o d u c e d in 1927 a n d subsequently m a n u f a c t u r e d a total of 205 cars. Trucks were a d d e d to the Volvo product line in 1928 when a 28horsepower delivery truck based on the J a c o b passenger car with a 1.5 ton load capacity was launched. In 1987, the total sales of AB Volvo were $12.3 billion. In recent years, cars have been by f a r the d o m i n a n t profit g e n e r a t o r and, in

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1986, accounted for 60 percent of the total corporate profit. Trucks came in second, accounting for 22 percent. This fine result for cars can partly be explained by the upswing of the American market combined with the favorable exchange rate for the United States dollar during the first half of the 1980s. It should be emphasized that, historically, the balance between cars and trucks has been quite different. In fact, during 1987 and 1988, the trend again turned. Falling dollar rates and increased competition in the United States market have affected sales of passenger cars negatively, whereas the result of Volvo's truck operations has improved markedly. Volvo has evolved as one of the leading manufacturers of heavy trucks—defined as over 16 tons gross vehicle weight (GVW)—in the world. In 1987, Volvo heavy trucks, continuing an upward trend, captured 10.1 percent of the world market. At the same time the total market for heavy trucks grew by some 10 percent to 390,000 units. Volvo's total sales, including medium heavy trucks, were 47,700 units. Volvo, like its major European competitors, is a totally integrated truck manufacturer, i.e., the company develops and produces all major drivetrain components (engines and transmissions) in-house. The vast majority of the trucks produced by Volvo fall into the heavy segment, and it is in this category that AB Volvo can be counted as one of the dominating manufacturers. In the medium heavy segment, Volvo produces some 5,000 to 7,000 units a year, and is only a minor force. The primary motive for entering and remaining in this segment has been the importance of being able to offer dealers a full product line. Volvo started exporting trucks during the 1930s, and over the years, the company has established manufacturing and assembling activities in a number of different locations around the globe. Table 1 provides details on the geographical spread of the Volvo Truck Corporation manufacturing activities.

TABLE Ι.

Volvo Truck Production Divided Geographically (1987 figures, all weight classes) Country

Units

Percent

Sweden Belgium United States* Other countries Total

14,200 13,800 11,500 7,000 46,500

30.5 29.7 24.7 15.1 100

* Including White, Autocar, and Volvo. Source: AB Volvo, Annual Report, 1987.

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Table 1 does not reflect that most of the manufacturing is being done in Sweden, while the foreign operations are mainly limited to assembling and outfitting. Still, truck production at Volvo must be characterized as highly international, with only about one third of the vehicles being produced in Sweden. T h e international dependence of the truck operations becomes even more evident when looking at sales (Table 2). T h e domestic market, despite a market share of 50 percent for Volvo, contributes only 6.6 percent of the total number of trucks sold. T h e United States market is by far the biggest single market of Volvo trucks; the volume here corresponds to 26 percent of the total number of trucks sold. Taken together, however, the countries within the European Economic Community are more important, accounting for about 49 percent of the total Volvo truck sales.

Western Europe—Stagnation at Home, Expansion

Abroad

Western Europe provides about one third of the total world market for trucks and is the home of many of the largest and most aggressive

TABLE 2. Volvo Truck Sales in M a j o r Markets (1987 figures, all weight classes)

Country

Total weight (GVW), tons

New registration of Volvo trucks (1987)

United States*

Market share in country (percent )

>12

12,510

5.4

United K i n g d o m

>7

6,060

11.5

France

>7

4,410

10.2

Sweden

>7

3,170

49.9

Netherlands

>7

2,210

16.8

>15

2,100

23.2

Belgium

>7

1,650

19.8

Norway

>7

1,490

34.6

Denmark

>7

1,390

29.1

Italy

>7

1,230

5.9

Finland

>6

1,130

29.5

West Germany

>7

1,120

2.4

Spain

>7

1,030

5.9

Portugal

>7

1,020

23.9

Brazil

* Including White, Autocar, and Volvo. Source: AB Volvo Annual Report, 1987.

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players in the field. A quick glance at the top-ten list of truck manufacturers in the heavy segment ( > 1 6 tons GVW) shows that six out of these are based in Europe. T h e top three are all based in Europe: Daimler-Benz, Volvo, and Renault. T h e aggressiveness of the Western European companies is highlighted by the fact that the three leading Europeans have all made significant inroads into the American market. In all three cases, the admittance ticket to this market has been acquisitions. Daimler-Benz reached its present position in the United States by buying Freightliner; Renault bought a controlling share of Mack, and Volvo bought White Motor Corporation. T h e American presence in the European market is, on the other hand, limited, and the tendency is withdrawal rather than expansion. T h e acquisition of United States companies by European manufacturers may change this picture in the future. In the heavy truck market, the Japanese are still not very active, probably because of the small, almost nonexistent, domestic market in J a p a n for the biggest trucks. Hino is the only manufacturer in this class and operates mainly in Southeast Asia. Sweden is one of the leading producers and exporters of heavy trucks, and the Swedish position has obviously been f u r t h e r strengthened by Volvo's successful entry in the United States market. In fact, Sweden comes out as the leading manufacturer of heavy trucks in the world if the sales of Volvo and Scania, the other Swedish producer of heavy trucks, are combined. Both Volvo and Scania are characterized by an extremely large dependence on exports and by their concentration on heavy trucks. Whereas the two companies historically were of roughly equal size, Volvo has, by virtue of its successful entry into the United States, very clearly taken the lead in recent years. Scania still has no significant presence in the United States market, although it has started trying to build a market in some northeastern states. As seen f r o m Volvo's perspective, Daimler-Benz is thus the most important competitor worldwide. Not only is that company active in all important European markets, often as the largest importer, but Daimler-Benz is also (unlike Volvo's archrival Scania) successfully penetrating the United States market.

North America—Foreign Investors Reshape the Industry Like the Western European truck market, the American market represents about one third of the total world market for trucks. T h e truck market in general is very volatile, and the American market is no exception. In the class 8 segment (15 tons and above), the most impor-

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tant part of the market for Volvo, total market size has varied from 160,000 units (in 1979) to 73,000 units (in 1982). In 1987, total sales in class 8 were 131,156 units. On average, the future size of the class 8 segment is judged to be about 110,000 units per year. Table 3 shows the heavy truck manufacturers which were active in the American market in 1987. Several manufacturers are producing more than one brand of truck. Paccar manufactures Kenworth and Peterbilt, whereas Volvo White produces Volvo, White, and Autocar. Apart from Volvo White Truck Corporation, which is 100 percent owned by Volvo, foreign interests are also present in Freightliner (100 percent owned by DaimlerBenz) and Mack (45 percent owned by Renault). The American truck market is in many ways very different from the European. As mentioned before, most European truck manufacturers follow the integrated concept. In America, on the other hand, a very large number of the truck manufacturers can, to a large extent, be described as assemblers only. There are significant differences between the manufacturers in terms of the degree to which they adhere to the "American Concept," i.e., act as assemblers only. Freightliner and Paccar are the two most typical in that they work only as assemblers. Ford, GM, and to a lesser degree, Navistar work as both assemblers and manufacturers of driveline components. Mack more or less follows the European concept in that about 95 percent of all Mack trucks produced are equipped with Mack engines. The important actors, when it comes to the development and production of driveline components, are outside suppliers like Cummins, Caterpillar, Fuller, Eaton, and Rockwell. Combinations of these

TABLE 3.

Truck Manufacturers in the American Market in 1987, Class 8 Company

Market share (percent )

Navistar* Paccar Freightliner Mack Ford Volvo White GM Others

22.0 20.3 17.8 13.9 9.8 8.3 5.6 2.3

*Formerly International Harvester. Source: AB Volvo.

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c o m p o n e n t s are t h e n selected, not by the truck m a n u f a c t u r e r s , but by the individual buyers of the trucks u n d e r strong influence of the component producers. T h e d e m a n d s of the buyer can also be very clearly seen in the outward design of American trucks. Every buyer will specify the way h e wants his o r h e r truck to be painted, so if you walk along the assembly line in an American truck plant, literally every truck will look different. T h e influence of suppliers a n d customers o n the final design of trucks is thus m u c h stronger in the United States t h a n E u r o p e . American dealers are also relatively m o r e powerful because they may carry m o r e than o n e make of truck. This is in s h a r p contrast to E u r o p e a n conditions where dealers are normally tied very closely to one manufacturer. A p a r t f r o m suppliers, m a n u f a c t u r e r s a n d customers, a very imp o r t a n t influence in the market is exercised by the American government. D u r i n g the last few years, two m a j o r changes have been instituted by the g o v e r n m e n t . In 1981, the trucking market was deregulated, which m e a n t free access to the transport market and an abolishment of all tariff restrictions. T h e deregulation has caused a dramatic decrease in the profitability of trucking companies. Since 1981, about 50 percent of all truck operators have g o n e b a n k r u p t . For truck dealers, the effect has been an increase in the n u m b e r of bad debts a n d cancelled orders. T h e profitability of the dealers has p l u m m e t e d . T h e s e effects are also felt by truck m a n u f a c t u r e r s . In the wake of deregulation, the professionalism of truck buyers has increased, a n d today buyers are m u c h m o r e concerned with fuel economy, truck quality, a n d overall cost p e r f o r m a n c e . Not only are the attitudes of individual buyers c h a n g i n g as an effect of deregulation, b u t the whole structure of the trucking industry has b e g u n to change. T h e owner-operated trucks are decreasing markedly in n u m b e r , while the i m p o r t a n c e of the big fleet operators increases correspondingly. T h e s e big operators are h u g e by E u r o p e a n standards. O n e of these companies (Roadway) in 1985 b o u g h t a total of 1,000 trucks f r o m Volvo White. T h e bargaining power of the big truck operators against truck m a n u f a c t u r e r s is obviously immense. A n o t h e r development having similar implications is the growing importance of leasing companies. T h e other government-instituted c h a n g e can, on the surface, be said to be relatively m i n o r but has nevertheless had p r o f o u n d effects on truck m a n u f a c t u r e r s . In 1980—81, the Surface T r a n s p o r t a t i o n Act was c h a n g e d so that the length of the tractor would n o longer be included when calculating the total length of the vehicle. This is in s h a r p contrast with regulations prevailing in E u r o p e , where tractor length is included when calculating the total length of the vehicle, so it is very

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important to make the tractor as short as possible. The effect of this change has been that the popularity of so called cabover designs (where the engine is located under the cab) has declined dramatically. In the first quarter of 1983, 45 percent of all class 8 trucks sold were cabovers. In the first quarter of 1986, the share of cabovers had gone down to 22 percent. The reasons for the popularity of conventional designs in which the engine is placed in front of the cab are that they are perceived to be safer by drivers and more convenient to service. Finally, prevailing regulations in the United States market differ from Europe regarding the maximum acceptable weight of trucks. In Europe, the maximum total weight of a truck allowed is on average 52 tons. In the United States, the corresponding figure is only 38 tons. In neither case is it likely that regulations will change dramatically in the future. A change in the United States regulations is in fact highly unlikely because of the low standard of the American road network. One effect of these differences is that the weight of the tractor becomes an important selling point in the United States market, which puts European trucks at a disadvantage. At present, some Volvo products, for example, the Ν12 tractor, are virtually impossible to sell in the United States for weight reasons. V o l v o Trucks in the United States—Three Attempts to Enter the Market The United States market is the largest single market for cars and trucks in the world and the most important market for AB Volvo. Volvo's presence in the United States market dates to 1955, when the first Volvo passenger car was exported to the United States. During the years after the introduction of Volvo passenger cars in the United States market, a number of other Volvo products were added to the program, and today, the activities of Volvo North America are among the most broad-ranging of all Volvo companies outside Sweden. The importance of the North American market for AB Volvo can be judged from the fact that it accounts for about one-third of the company's total sales. European truck manufacturers very early on started exports to and assembling activities in a number of other European countries as well as in a number of African, Asian, and South American markets. Their presence in the North American market, however, for a long time remained zero. The reasons for this can be sought among several different factors. The presence of strong domestic manufacturers with a firm grip on the distribution network has no doubt been important. The size of

poratlon

229

the North American continent combined with customers' high demands on service has certainly been an important impediment. To this can be added the perhaps most formidable entry barrier of them all, namely, the different nature of the North American truck market. As has already been mentioned, the European truck market is dominated by integrated manufacturers while American truck manufacturers tend to be assemblers of trucks built to customer specification. In other words, American trucks look different from European trucks, and American buyers put different demands on the manufacturers. However, during the last ten years, there has been a growing insight among leading truck manufacturers, that being a regional manufacturer is not enough in order to gain sufficient economies of scale in the production of critical components. This diagnosis was already made by Volvo in the early 1970s and was the main reason that the company decided to enter the American market in 1975. In its first attempt to penetrate the American market, Volvo Truck Corporation essentially followed the same strategy it used when its passenger cars were introduced about twenty years earlier: Volvo tried to build a dealer network of its own. To a large extent, it used the already existing network for the distribution of its passenger cars. At first, Volvo marketed only medium-range trucks suitable for a regional distributor, and sales were concentrated in the thirteen northeastern states. Since those states are densely populated, it was judged that it would be easier to build a sufficiently large service organization there. Progress was, however, slow. In 1975, 186 trucks were sold; two years later, this figure had grown to no more than 455. In particular, it proved to be very difficult to attract a sufficient number of dealers (in 1978, the total number of Volvo Truck dealers was 45). Volvo was an entirely unknown force as a truck manufacturer in the eyes of American dealers, and in addition to this, the company could not offer any products specifically designed to suit the American market. The prospects for a successful penetration along this marketing concept seemed bleak. However, when the American truck manufacturer Freightliner decided to end its sales cooperation with White Motor Corporation in 1978, a second opportunity opened up for Volvo. Freightliner had been active mainly as a manufacturer of trucks, the distribution arm of which had been White Motor Corporation. In the face of growing economic difficulties at White, Freightliner decided to go it alone. In doing so, Freightliner needed to broaden its product line in order to become sufficiently attractive to dealers. Volvo had not, at this time, brought the heavy end of its total product range to the United States, and the program of Freightliner and Volvo's medium-range program

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formed a natural combination. Volvo and Freightliner decided to join forces. An agreement was made in 1978 according to which Freightliner took over the total responsibility for the distribution and service of Volvo trucks in the United States market. In 1978, a total of 747 Volvo trucks were sold in the United States, and in 1979, when the truck market peaked, the numbers went up to 1,998 units. The following year, the truck market sharply declined, and Volvo sales fell to 974 units. At the same time, Freightliner was having difficulties. The profitability of the company was low, and the owner, Consolidated Freightways, had started to become impatient. By the beginning of 1980, Freightliner was up for sale. Volvo judged the asking price by Consolidated Freightways to be unacceptable and declined the offer. With hindsight, that could be described as a good decision, but at the time, it was hazardous since Freightliner was then acquired by Daimler-Benz. After more than five years in the American market, the situation looked more than gloomy. Essentially, Volvo Truck Corporation was left with three alternatives: • leave the United States market • build its own distribution network, a strategy that had already failed once • acquire a domestic manufacturer with its own distribution network. A fourth alternative could have been to form another cooperative venture. At this point, however, there was no evident partner. The scene was thus set for the acquisition of White Motor Corporation.

The Acquisition White Motor Corporation (WMC) was one of the oldest and had been one of the most famous truck manufacturing companies in the United States, established in 1902. White had also been one of the dominant manufacturers, and its share of the truck market had reached about 20 percent during the 1950s. Up until 1960, American trucks had been equipped with gasoline engines, and the subsequent shift toward diesel engines caught WMC by surprise. The company tried to develop its own diesel engine, but by the time it was ready, the market had shifted and the White engine was too small. During the 1960s, White also made a number of capital-intensive diversifications, and the company assumed heavy debt levels. In particular, the diversification into farm implements turned out to be an unfortunate one.

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231

In 1970, White reported a major economic loss and decided to change its strategy. The company decided to concentrate on truck production and to develop a new product program (the New Family), which was to be located at a new plant in New River Valley, Dublin, Virginia. The building of the plant started in 1973, and production began two years later. The energy crisis in 1973 coincided with the culmination of investments in the new site and the new truck family. Meanwhile, White's market share for trucks had shrunk from 15.9 percent in 1970 to 8.6 percent in 1974. As a consequence of increased energy costs during 1973—74, the truck industry worldwide was hit by a deep recession. The total market was at one point down by 50 percent, the same time that the first products in the New Family program were introduced. This modern truck program was characterized by a high degree of standardization of components in cabs and chassis. The product was, however, introduced prematurely, and for several years, White had to correct a number of design weaknesses which were highly detrimental to the company's reputation. Production of construction vehicles and farm implements was mothballed in 1975, and the number of employees decreased from 17,900 in 1974 to 9,700 in 1977. During 1979, high interest rates further negatively affected the corporation, despite the strength of the truck market. The White share of the total market was 8 to 9 percent of 160,000 vehicles. The problems that had accumulated during the second half of the 1970s were compounded by a decline in the demand for trucks. In 1980, the losses of White amounted to $32.5 million. Of this, costs for terminating unprofitable operations accounted for $19.5 million. In September of that year, White Motor Corporation filed for Chapter 11 bankruptcy. At the beginning of 1981, White Motor Corporation was for sale. When White was offered for sale, Daimler-Benz bid on it but was just finalizing its acquisition of Freightliner, and its offer was considered too low by the bankruptcy court. When the purchase of Freightliner was finalized, Daimler-Benz became a domestic producer, whose further acquisitions would be subject to antitrust investigation by the Department of Justice. This was a critical period for Volvo. If the opportunity to buy White were lost, Volvo would have had great difficulties remaining in the American market. There were initially two options for a potential buyer of White. First, the company could be bought as a going concern. This would have meant taking over liabilities, all personnel, and not insignificantly, pension obligations along with the assets. Volvo decided that it could

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not afford this due to the huge and insufficiently specified pension commitments. A second alternative would have been to wait until the various parts of the company were sold at auction. In that case, one would run the risk of losing the best personnel. The White reputation and the goodwill of the product would also have become further tarnished. During 1981, White's market share went down to 3.9 percent, and the threat of being completely wiped out of the market was an immediate one. The most favorable alternative was to buy only those assets that were deemed necessary for the future operation of the company. This opportunity became available only as Daimler-Benz acquired Freightliner and thus was temporarily stopped from making further acquisitions. A purchase of White assets only had to be confirmed in court, and when a positive response was received, Volvo made a thorough investigation of White, which resulted in a plan for reconstructing the company. The Volvo delegation participating in the negotiations consisted of top managerial staff at AB Volvo and Volvo Truck Corporation. The negotiations proceeded rapidly and were characterized as being uncomplicated. Initially, the parties were far from each other. However, at the beginning of May 1981, White changed its position considerably, and a letter of understanding was signed. A final agreement was ready in July. According to Chapter 11, all strategic decisions made by White management had to be accepted by the bankruptcy court. Before the agreement with Volvo became valid, it had to be endorsed, a process which made the agreement—including the price—official. This was a very sensitive period because anyone could make a bid for the company in the meantime. The time for a new bid elapsed by the end of August, but before then, there were rumors that Daimler-Benz was going to offer a higher price. Nothing of the kind happened. The final deal has been described as favorable for Volvo, and the price (about $70 million) quite low. The White staff seems to have been psychologically prepared to be taken over by Volvo. The deal came as a relief after a long period of uncertainty. White's main factory in Virginia was closed 30 percent of the time during the year before Volvo took over. In connection with the acquisition, the total number of employees was reduced from 4,800 to 2,300. Despite a large number of people not being offered new employment, there do not seem to have been any hard feelings against Volvo but rather against the old White management.

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233

White A s s e t s — A n Underestimated Potential? T h e White bankruptcy and subsequent Volvo acquisition was preceded by an extensive organizational cleanup and changes in the product program. T h e new product line was quite advanced and contained three types of trucks: trucks for the long haul or construction transports with conventional cabs, long-distance trucks with cabover, and trucks for medium-range distances and delivery transports. T h e New Family program was designed to allow mass production of custommade products. Standardization of parts and components—other than drivetrain components—had made it possible to reduce the number of articles in inventory from 160,000 to 16,000. Besides the White program, there was a separate brand, "Autocar." This is a conventional model for off-road transports but also suitable for timber and construction transports and as a heavy refuse truck. Apart from such special applications, it can also be used for normal road transports. T h e prestigious Autocar represented the ideals of United States trucking traditions—a hard-working, no-nonsense truck. White had ended production of trucks in the Cleveland factory, which dated from 1910 and was in very poor condition, and the remaining White assembling facilities (located in Utah and Virginia) were modernized. T h e production of cabs was located in Orville, Ohio, and was in need of modernization. T h e company had staff functions distributed in several places. Apart from the three production sites and several stores for spare parts, there were offices in Detroit, Cleveland, and Chicago. Several measures had already been undertaken by White to improve earnings. Nonprofitable and noncompetitive operations and plants were closed, and contracts with a number of badly performing dealers were terminated before the agreement with Volvo was completed. The Reconstruction Improving Dealer Relations T h e first strategic decision by the management of the newly formed Volvo White Truck Corporation (VWTC) was to improve dealer and customer relations. T h e president and CEO of Volvo Truck Corporation spent one year in the United States during this period. Together with the newly appointed CEO of Volvo White, he held meetings with all former White dealers and informed them about Volvo, the reasons

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for its interest in White, and their future plans. They also listened to the opinions of the dealers and their views on how to rescue White. Traditionally the relation between manufacturers and dealers had been quite adversarial. In order to strengthen their position, dealers would typically represent two different manufacturers. Those who had survived White's crisis were those with a second brand, and this, of course, had strengthened their attitude in favor of dual dealership. Volvo was now trying to establish a closer relationship in a European manner. That the CEO of Volvo Truck Corporation spent one year in the United States in direct contact with dealers and customers was an exceptional and appreciated move, convincing dealers and customers that Volvo had a serious and long-term commitment. Rationalizations and Improved Systems The production capacity of the New River Valley and Ogden plants could, with minor investments, be increased by almost 50 percent. Engineering services, however, had to be upgraded in order to develop the new product concept and to minimize lead times. Much of this work was done by Volvo specialists. By coordinating procurements with Volvo Truck Corporation, some savings were achieved, and the selection of new suppliers for components reduced costs up to 50 percent in some cases. An effort was also made to upgrade vendor quality. Multiyear contracts made it possible for vendors to commit necessary resources and to cut prices. Today, both the New River Valley and Ogden plants are capable of producing the entire product program. This gives a greater flexibility and helps to cut transportation costs. The magnitude of the rationalizations undertaken by the company can be judged by the fact that the old White Motor Corporation in 1974 had about 7,000 people employed in the truck production part of the company and a production of some 85 trucks per day. In 1987 VWTC had approximately 2,900 employees and produced 55 trucks per day, which corresponds to about a 30 percent increase in productivity. The White spare parts inventory contained a large proportion of unsaleable parts, and the service level was low due to poor systems support—a fill rate of 60 percent compared with 94 percent which is considered normal. The spare parts operation of White had been running at a loss, something virtually unheard of in an industry where sales of parts is normally the most profitable aspect of the business. A new spare parts center and a new order and delivery system, together with more efficient inventory control, improved the service.

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At the same time, a new ordering system for the dealers was developed. In other areas too, there was a very definite need to improve the existing management systems. One such area was the reporting of sales. At the time of the acquisition, there was no system in place showing either profitability per product group or per customer category. A comprehensive systems redesign became one of the major tasks for the first Volvo staff that came over. Improving Product Quality The New Family program had a good potential, but at the time of the acquisition, it still suffered from several weaknesses, some of which were quite severe. It thus became of prime importance to improve the product program and to secure its quality. In 1981, Volvo White was able to introduce the "Integral Sleeper" (combined driving and sleeping compartments) developed by White. The Integral Sleeper became an instant success and has since been one of VWTC's best-selling products. It has also been very important in supporting the VWTC climb into the prestige end of the truck market. An upgraded version of the Autocar tractor with a new hood and a shorter wheel base was introduced in 1982. The following year, the New Family program was upgraded. For the conventionals, this implied a new hood, an improved frame, and a new front in Volvo style. In 1984, an adjustment of Volvo engines to the White program was made, and in 1985, the new version of the Volvo twelve-liter engine was introduced. In product design, the balance between American and Swedish elements is delicate. Volvo hesitated to change nameplates, and only minor changes in the exterior of the trucks to underline the Volvo connection were made. After an internal debate, it was decided to include the Volvo diagonal line in the new front grill, which was seen as discreetly, but definitely, underscoring the Volvo relationship. In terms of marketing, an intensive drive was initiated to resurrect the quality image of White products and to make it include Volvo. The value of having the "best of two cultures" in the products was stressed. There was also an emphasis on the advanced technical level of the products and, above all, on product quality. Volvo made a conscious effort to communicate, not only to dealers and customers but also to the employees and other important stakeholders, that the "bad old White days" were over. The putting of the Volvo "slash" on the White front in 1983 was a subtle way of signaling both the changed ownership of White and the fact that the quality of White trucks was now up to

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Volvo standards. An interesting sign of the thoroughness of this "cultural revolution" is the story told by an American at VWTC headquarters that, after the acquisition, all pictures and other mementos of the old White company were removed, "from headquarters down to the dealer level." All in all, there was a systematic shift in emphasis to the more prestigious segment of the truck market. The White customer base had been very heavily geared toward fleet sales. White trucks were regarded as low quality, low price products competing mainly with GM, Ford, and to a lesser extent, International Harvester. In order to improve profits, VWTC management decided early on to move toward the high quality, high margin end of the market. In doing so, VWTC was helped by the new ordinance on vehicle length, which gave a new chance for conventionals, while cabovers suddenly became obsolete. As expressed by one VWTC employee: "In 1982—83, it would have been unheard of a Peterbilt/Kenworth owner trading it in for a White. Today this often happens with White Integral Sleepers." Product Acceptance The balance between an American and a Swedish image is particularly sensitive in customer relations. Despite the United States being the most open market in the world, many observers have pointed to conservatism and nationalistic values in the American trucking industry. "Buy American" expresses a strong sentiment, particularly in an industry that has been put under economic strain and rapid structural change. There are cultural values built into a product and assumptions about user behavior. When first entering the American market, Volvo did not take into account that American drivers have another approach to driving and to the truck itself than European drivers. This caused some problems in connection with the introduction of Volvo components, particularly the Volvo engine and gearbox. The American driver tends to put more strain on the engine, which causes poor fuel economy and excessive wear. A basic problem for an unknown foreign make is that in the United States fleet drivers are normally not connected to one specific and thus personal vehicle but alternate among various trucks within the fleet. Thus a driver may occasionally drive a truck like the Volvo that demands a different technique, but may never get used to it. American trucks traditionally have unsynchronized gearboxes that not only can take rougher treatment but in fact demand it. A fully synchronized Volvo gearbox will wear down much quicker than in Europe.

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Such examples may be regarded in hindsight as minor nuisances easy to correct. But when an entirely new product is introduced, the first image that is created with the users might be crucial for product reputation and future success. With a well-established brand, the tolerance is higher for shortcomings. For a foreign make with unproven performance, there might be no second chance. Another condition that tilts the field against a foreign producer is the intensely competitive nature of the trucking industry. As profit margins have become very small, there is less room for experiments with purchases from new producers. Several years ago, truck operators might have been more willing to give a new make a chance. Today, many cannot afford the risk. Not only does the introduction of a new kind of vehicle bring extra costs and a potential technical or financial failure, but its value on the secondhand market is uncertain. A sales representative has to be quite convincing, under such circumstances, when presenting cost estimates and arguing the long-term benefits of the purchase. On the other hand, as buyers start to judge value on a factual basis, there is less room for personal idiosyncrasies—gone are the "bells and whistles."

Creating a N e w Corporate Headquarters A problematic feature of the old company had been the widely spread out corporate offices. An early step by the new management was to concentrate managerial functions in one place. T h e Detroit area, where the old headquarters had been located, was associated with the long crisis of the past. Since production in the area had been terminated, there was no reason for keeping the headquarters there. Detroit and Cleveland had also become unattractive parts of the country with bad crime statistics, high unemployment, and decaying industries. A transfer from Detroit would give Volvo White a fresh start, a symbolic act showing that a new era had begun. T h e choice of Greensboro, North Carolina, was primarily made because of its closeness to the main production facility in New River Valley, a two-hour drive into Virginia. It was a courageous choice in terms of the unproven willingness of key people to follow the move. Very few, however, turned down the offer of renewed employment. In retrospect, Greensboro turned out to be a fortunate choice and more of a plus in the recruitment process than a drawback. T h e city is now considered as having good qualities. T h e Atlantic ocean, as well as the Appalachian mountains, are only a few hours' drive away. T h e climate is pleasant, and the community has attractive residential areas.

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Intercultural Relations Starting and running a business in a foreign context always raise issues of cultural differences. In this case, the new headquarters turned out to be a truly multicultural environment in which everybody despite different backgrounds was expected to contribute in a highly strenuous and uncertain situation. Not the least uncertainty was how to create a cooperative climate between the Swedes and Americans. In this context, the factual differences between Swedes and Americans must be stressed in terms of employment conditions at Volvo White. A f t e r the acquisition of White, the staff at the new headquarters consisted of several categories of personnel with quite diverse expectations. Swedish technicians and managerial personnel from the parent company were brought in on a more or less temporary basis. While Americans typically were allocated to production and marketing, the Swedes were found in technical staff positions and within the design function. T h e total number of Swedes in the company has hardly ever exceeded twenty persons, and they have continued to be employed by the parent company while working with Volvo White. If for the Swedish expatriates a period with Volvo White almost invariably means a step forward in an already secure career within the Volvo Corporation, it is different for the Americans. They are, from a practical point of view, employed by Volvo White, and thus, like any other American company, the fate of the company affects the future of its American staff directly. Career prospects are within Volvo White, which is a small organization with a limited number of openings. T h e stronger emphasis on career opportunities, grades, and titles attributed to the Americans is a mutually perceived national difference, which should be understood against this background. T h e Americans were also perceived to have a more competitive attitude. In terms of regional subcultures, it was pointed out that many of the Americans come from a highly competitive "Manhattan culture"—particularly the computer people—while the Swedes, coming from a less fastmoving nation, resemble the more rural population of North Carolina. T h e combination of being an ethnic minority within the staff and representing the owner is a delicate position for the Swedes to be in and involves the national pride of both parties. This is particularly true when a small corporation from a small country is making its way into a mature and self-confident industry with a well-established national image: trucking is as American as apple pie. In no case, however, has there been any suggestion of favoritism in either direction. T h e mutual perceptions of Swedes and Americans at Volvo White actually seem to be very positive. Cultural differences are appreciated

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rather than considered as obstacles to cooperation. T h e two groups joke about each other's particularities, but there is mutual respect and fondness. Neither the Swedes nor Americans form cliques or bar each other from contacts. Politicizing is reportedly nonexistent, which has been interpreted as a result of the management style of the present CEO. Most of the Americans were recruited from the old White company, and there were lingering bad feelings to overcome. Some of the White personnel felt beaten down, despite having been selected for the new company. Newcomers and their differing views had to be accepted by those with a past to defend, while the new recruits had to respect the experiences of those who represented the old corporation. Again, the new and the old group appear to have mixed successfully. Another cultural aspect is the similarity within social strata across nations. T h e middle class in any country embraces similar values, as does the peasant or even the Lumpenproletariat, the world over. Also, within the same industry, there are shared values and mores shaped by similarities in technology, product, market conditions, education, and social structures. As most professional employees in the new company have spent considerable time within the truck industry, there are many uniting elements. One value that stands out as bridging cultural differences is the high regard for professional competence. Knowledge and ability in a newcomer, whether national or foreign, facilitate acceptance. Likewise, newcomers have expressed their respect for the former White staff. T h e Swedish CEO has a reputation as a competent truck manufacturer and a skilled technician. Some state that without these personal characteristics, his kind of leadership would not have been successful. M a n a g e m e n t by Consensus In many respects, the management response to this difficult and potentially conflictual situation outlined above has been an open and flexible leadership. Volvo's policy is to have a Swede as CEO in its foreign operations. For all other positions, the selection of nationalities among the staff is open. T h e CEO of Volvo White, Thage Berggren, has been with the company since the acquisition, coming from a ten-year experience in a similar position with Volvo Truck Corporation in Belgium. He has personally advocated and practiced a communicative and informal leadership style. Openness, shared information, and decision-making by consensus have been the vehicles both for avoiding and solving conflicts and for creating a commitment to a common cause. Judging from the interviews, the motivational impact of this

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leadership style cannot be overstated. Initially, however, it met with some resistance and feelings of discomfort and insecurity, the American tradition being described as much more of the boss telling you what to do. One cultural difference that is reflected in several contexts is the attitude toward authority. The American habit was not to question a superior, which was a new experience for a Swedish manager who counts on subordinates to share their questions and doubts. Before he could convince his subordinates that he was earnest in soliciting their opinions, information was withheld, and some bad decisions were made. The egalitarian, informal, and communicative leadership style—combined with technical competence—has however been appreciated and has proved successful. At Volvo White, the CEO encouraged the management group to participate actively in decision-making and to become a team. Meetings were continued late into the evenings until consensus was achieved. One American manager remarked that he had been used to holding his cards close to his chest. Thage Berggren would not allow members of the group to keep their views to themselves. He made them sit together until everyone had expressed their opinions. An observation that supports the claim that the Volvo White top managers do function as a team is that their views on priorities and analyses of the company situation are very similar, whether one talks to a production, design, or marketing manager. During the initial phases of the reconstruction, the work load and the exhilarating emotional state of participating in the creation of a new company probably reduced the drive toward conspiracy and power games associated with the routine existence of mature organizations. An American manager said "during the first one and a half years, no one had time to be particular about jurisdiction." The Americans we interviewed sometimes objected to the slow decision-making process that goes with the consensus approach. Related to this is the American view that Swedes take a longer range view, while they themselves are more action-oriented. Paradoxically, Swedes report that they find the American administrative tradition bureaucratic, with much more checking and signing off and little freedom for making even minute decisions like trivial purchases within the limits of one's budget. The policies of openly sharing information and distributing, for example, economic data to all organizational levels are seen as contributing to trust in management and commitment to the company. The CEO believes that "if people get to hear about the good news, they will also accept bad news."

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The feeling of being involved is not limited to the top-management team. An open and egalitarian climate also reaches the operational level. In the New River Valley plant, a Quality Circle program has been initiated by the plant manager. Initially, the attitude of the union and workers was skeptical. During the White era, there was a similar Round Table program, which the union claims was not taken seriously by management. This time, however, workers have become gradually convinced that management is sincere. All suggestions receive at least a written reply with a copy to the supervisor. Other support for the system is the concerted emphasis on quality issues, which is reflected in a bonus system based on quality. The Volvo White experience demonstrates that the Volvo approach to involving the union in business strategy and sharing information can be transported to the United States. The local president of the United Auto Workers (UAW) is included in management meetings and trips to meet important customers. The previously strained industrial relations can be illustrated by the large number of grievances filed, which at the Cleveland plant could amount to 100 during a week. This has changed dramatically, the grievances have almost disappeared, and there has never been a work stoppage. Other more visible symbolic deviations from what has been customary in the industry underscores the more egalitarian policy. The CEO insisted on open offices, which were accepted with some resistance. Nobody travels first-class on business trips, and the hotel accommodation is the same for everybody. The CEO seldom wears a jacket in the office, and an act of strong symbolic value is his driving a huge White truck to and from work. The union leader contrasts Berggren's tours of the plant, stopping to ask questions of workers, with those of a former CEO who marched through the factory, eyes straight ahead, followed by a retinue of subordinates. The egalitarian spirit is supported by the formal organization with its relatively few layers and the absence of titles in the organization chart.

Personnel Policy Despite its internationally relatively small size, the Volvo Corporation has a reputation for advanced personnel policy and responsiveness to changing social forces. Volvo is regarded as one company that has managed to put into practice many principles which most companies restrict to attractive-looking policy documents. Volvo is above all known for practical actions that improve conditions at the bottom of the organizational hierarchy and at the same time increase production efficiency. The pioneering and controversial break with the assembly-

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line tradition, as at the Kalmar plant, has become an inspirational model for the automotive industry. There is a Volvo tradition of promoting a humane and democratic leadership. There have been no layoffs at VWTC during the Volvo era, something that used to be standard procedure. White reacted very directly to the market, which meant hirings one day and layoffs the next. Volvo White has not adopted the same reactivity to the market, and production at the New River Valley plant has been within 37 to 39 vehicles per day for two years. This stability has been appreciated by the production personnel and has strengthened their trust in Volvo and willingness to attack quality problems and improve efficiency. The wages for production personnel are considered good. Volvo White was admittedly the first company in the industry to dispose of the automatic cost-of-living allowance (COLA). Nevertheless, the wage level is higher than for other jobs in the region, which is illustrated by the fact that for sixty-five advertised jobs in the New River Valley plant there were 3,000 applicants. Volvo White has not—in contrast to other companies in the automotive industry—pleaded for wage concessions in critical situations. This along with the no-layoff policy has strengthened union and worker trust in the company. The Volvo White case thus illustrates how an open and egalitarian leadership is effective in handling a culturally complex and potentially conflictual situation. Consensus management and a stress on sharing views have proved to be an efficient approach. An open attitude to the union and sharing of vital information on all levels in the organization have also contributed to a commitment to the new company.

Summary Volvo Truck Corporation in the early 1970s made the decision that the company had to enter the United States market in order to gain a sales volume large enough to secure long-term profitability, especially in the manufacture of engines. The first attempt to enter the United States market failed, in large part, because of the difficulties of establishing a sufficiently large dealer network. With hindsight, one can question whether Volvo would have ever succeeded in the United States market, regardless of the size of the dealer network, given that the company had no products designed for that market. This hypothesis is also supported by the very limited results achieved during Volvo's cooperation with Freightliner. During 1980, it became more and more apparent that Consolidated Freightways had lost patience with Freightliner, and Volvo was offered the opportunity to buy the company. The price asked was,

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however, judged to be two to three times too high, and Volvo declined the offer. Freightliner was then acquired by Daimler-Benz in early spring 1981, at a price of roughly $260 million. In retrospect, Volvo seems to have made the best deal. Admittedly, Daimler-Benz in Freightliner got a company with a strong dealer network, a much larger market share (9.5 percent in 1981, as opposed to 3.9 percent for White at the time of Volvo's acquisition) and a much better name. Seen from a longer perspective, Daimler-Benz acquired a company with an aging product line and partly run-down production facilities. Daimler-Benz is now reportedly forced to spend large amounts of money on product development in order to keep its market share. Volvo's acquisition of White can be described in exactly the opposite terms: the market share was low, and the reputation of the company in terms of product quality was one of the worst in the market. On the other hand, White had clearly the most modern product line of all American manufacturers, and its main production plant was the most up-to-date in the United States. This is not to say that the difficulties faced by Volvo were not formidable. Given the shape of White, most industry observers probably regarded the company as beyond rescue. On the face of it, the Volvo White venture has been a success. Not only is Volvo White making a profit, but as of mid-1985 the company had recouped both the initial investment of approximately $70 million and the losses of about $60 million suffered during the first years of the company's existence. On one very essential point, however, this third attempt of Volvo to gain a significant presence on the United States market has failed— so far. T h e number of Volvo trucks—and for that matter Volvo components—sold remains disappointingly low. As can be seen from the table below, the success of Volvo White Truck Corporation is almost entirely due to sales of White and Autocar products, while Volvo trucks continue to sell in very small quantities.

TABLE 4. Registration and Market Share, Class 8 No.

1985 share

No.

1986 share

1987 share

No.

Volvo CI 8

1,009

0.7

1,057

0.9

750

0.6

White

9,170

6.7

8,626

7.7

8,660

6.6

Autocar Total CI 8

1,739

1.3

1,678

1.5

1,430

1.1

11,918

8.7

11,361

10.1

10,840

8.3

Source: Volvo Truck Corporation.

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T h e n u m b e r of Volvo engines sold to date is also low; by 1989, only about 100 White trucks had been e q u i p p e d with Volvo engines. To some extent, this is a deliberate strategy. T h e American c o m p o n e n t m a n u f a c t u r e r s are very strong, a n d a head-on attack could prove disastrous for a c o m p a n y of Volvo White's size. According to several Volvo sources, the strategy is slowly to make the m a r k e t d e m a n d Volvo engines instead of overtly p u s h i n g t h e m on the market. To d o so will not be an easy task. T h e ability to provide service remains of p r i m e importance in a market w h e r e the survival of truck operators hinges on the u p t i m e they get out of their vehicles. In this context, Volvo's network of some 200 dealers should be c o m p a r e d with the 2,000 or so service points provided by the leading United States engine m a n u f a c turer Cummins. T h e slow introduction of Volvo C o m p o n e n t s into the White program has, nevertheless, given the c o m p a n y a valuable chance to detect a n d correct problems in the engine design associated with the driving habits prevalent a m o n g American truck drivers. Daimler-Benz has also f o u n d it at least as difficult as Volvo to introduce its own truck designs a n d c o m p o n e n t s in the United States market. T h e progress of DaimlerBenz is f u r t h e r slowed by the fact that the Daimler-Benz engines are built according to the V-concept, which is generally not accepted by American customers. T h e consensual m a n a g e m e n t style that has been practiced at Volvo White—with its emphasis o n openness toward employees and unions, team-building within the m a n a g e m e n t group, and a high degree of i n d e p e n d e n c e for the subsidiary—probably requires an "indoctrination" into the corporate culture. T h e informal ties to the Volvo corporation a n d an u n d e r s t a n d i n g of its value system are i m p o r t a n t f o r m a n a g i n g a n d controlling a subsidiary—in Sweden or a b r o a d — a n d , at the same time, allow m a x i m u m f r e e d o m . This should be seen as a case f o r m a n a g e m e n t by ideas a n d values, which entails fewer orders a n d regulations and m o r e u n d e r s t a n d i n g a n d inspiration. T h e substitution of informality and communication for tight controls a n d centralization makes the implicit cultural element vital for success. Despite the proportionally few Swedes within Volvo White, this egalitarian m a n a g e m e n t style has become p r e d o m i n a n t a n d widely accepted also by the Americans. T h e r e is reason to believe that this leadership has not been deliberately chosen, but r a t h e r is a s p o n t a n e o u s expression of the m o d e r n Scandinavian culture. Against this background, it is interesting to note that this a p p r o a c h is also working well in the multinational situation. T h e participative element in leadership seems to be strong e n o u g h to p r o m o t e a cross-national integration without o n e set of national values

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being unilaterally imposed. The leadership that now is emerging in Sweden, as practiced within Volvo White, is evidently a viable approach in an American context. T h e turnaround of Volvo White has been an impressive achievement despite a supposedly temporary drop in market share during 1987. It is somewhat ironic though that the market share of Volvo White is about the same as that held by the old White Motor Corporation the year before its bankruptcy. Since very few Volvo trucks contribute to that share, one could argue, pressing the case a little, that what has been achieved so far is a resurrection of White. With the input of new capital, technical know-how, and Volvo's managerial skill, the products and facilities of White are back in business. As far as VWTC's long-term strategy is concerned, a further problem can be detected. An important part of the company's strategy has been to move from the low quality end of the market to the high quality end, the obvious reason being that profit margins tend to be higher in the high quality bracket. Selling low to medium quality trucks to the big fleet operators is at best a break-even business, and Volvo White has consciously tried to push down the percentage of its sales going to the big fleets. At least so far, however, the general market development has gone in the opposite direction, and the proportion of fleet sales has gone up markedly also for VWTC. This is largely a reflection of the present state of the United States trucking market, where small operators tend to be pushed out by big ones and by the rapidly growing leasing companies. Today, full service leasing companies command about 33 percent of the market for heavy trucks. The next chapter in the history of Volvo Truck Corporation in the American market is now about to be written. A joint venture with General Motors will be the fourth phase in Volvo's continued struggle to become firmly established in the United States truck market. In order to really become a force in the industry, the company needs to reach a market share of some 15 to 20 percent. The joint venture with GM, in which Volvo will have a controlling share of 65 percent, could be the way to reach this target. Only a few comments about the Volvo-GM deal are offered here. The deal has been described as favorable for Volvo, both by outside observers and by Volvo representatives. Essentially, the agreement between Volvo and General Motors forms a new company, Volvo GM Heavy Truck Corporation. This company includes the assets of Volvo White Truck Corporation and the GM Heavy Truck division. Volvo, as the majority shareholder, manages the company, which is headquartered in Greensboro. In addition, a separate company has been created under the name of Volvo GM Canada Heavy Truck Corporation.

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One year after the formation of Volvo GM Heavy Truck Corporation, our impression is that most problems inherent in a merger of this kind seem to have been solved surprisingly smoothly. The joint venture has not meant any change of the managerial staff at corporate headquarters. The established culture has remained intact and has been further reinforced. A company philosophy has been formulated and communicated to all employees. In that document, company objectives and strategic actions are stated. The next step is to develop specific action plans in the various departments and plants. The transfer of production has likewise not caused any extraordinary disturbances. A test of the strength of the new organization was involuntarily carried out when a defective front axle was detected. Thousands of vehicles had to be recalled for adjustments, which created an extreme stress on the several manufacturers who had used the same component. In comparison, Volvo GM came out very well with a quick response and remedy. In terms of product development, the company is dropping GM's volume truck, the Brigadier, and is presently adapting a White truck for Brigadier customers. The most difficult issue is now the reorganization of the dealer network. In areas with both GM and Volvo White representation, some dealers will have to be dropped. In other areas, new dealerships will have to be started. The profitability of such dealerships is still poor, and the investment, compared with the alternatives, quite high and longterm. The new company therefore will have to develop new forms of partnerships in order to attract new people into heavy truck sales. The concept of partnership also applies to the customers. One explicit objective for Volvo GM Heavy Truck Corporation is to become the best business partner to the customer, which indicates a different, more integrated relationship. The customer gets more support but is also part of a dialogue on, for example, product development and adaptation. In the future, the customer relation might develop into a leasing arrangement in which the truck manufacturer guarantees performance and costs but is free to choose components and design. References Annual Reports of AB Volvo for the years 1984-1987. Kinch, N. (1986). "The Emergence of a Strategy in a Network Context—The Volvo Case." Working paper, University of Uppsala. Cummings (1986). Truck Manufacturers Executive Business Report (May). Pearce, M. C. (1985). The West European Truck Industry. London: Economist Intelligence Unit.

Chapter 13

Ericsson Telecom

Anders Edström and Richard Margolies

The United States is often characterized as a melting pot. People of different nationalities came to America to start a new life and, over several generations, built a new nation which extended over a whole continent. The melting pot metaphor catches the dynamics, complexity, and differentiation of the enterprise. It also alludes to the open character of the American society where people can enter and leave of their own free will and where business firms have free access to its huge market. Openness, complexity, size, differentiation, and rapid change make the United States a bewildering experience for both individuals and business firms. We will be concerned in this chapter with how a particular business firm, Ericsson, entered the United States market for public telecommunications and how it struggles to make sense of and learn from its experience. For Ericsson Telecom, the public telecommunications arm of Ericsson, the critical elements of American society are the actors in the telecommunications industry. These include telephone companies, competitors, component manufacturers, important corporate users of telecommunications, regulatory agencies, the media, and financial analysts who specialize in this particular industry. Further, Ericsson acts in the labor market to recruit primarily university graduates in computer science and electronics. It also has to relate to the local communities where it is based, such as the suburbs of Dallas and Los Angeles. In coping with the challenges and uncertainty of the American market, the firm is guided by ingrained values and assumptions that have been important in achieving past successes. They have been formed by historical events, carried by tradition, and embedded in organizational structures, strategies, products, leadership, and work

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design. These corporate values condition behavior and competence and give meaning and identity to employees. Experience and research tell us that basic values and assumptions are resistant to change. Firms tend to preserve them, and adapt in ways that are consistent with their basic character. When employees do not respond to leadership and work conditions, and customers do not respond to marketing and products, the firm is forced to reflect on its experience. Established values and assumptions can then be challenged in trying to fit the aspirations and values of the individual firm to the requirements and conditions of the environment. The Challenge of the Changing International Telecommunications Market Public telecommunications are dominated by state monopolies of postal, telegraph, and telecommunication services (PTTs). The introduction of new systems is thus affected by fiscal and political considerations as well as customer demand. In large industrial countries, domestic companies, so-called national champions, are the dominating suppliers to the PTTs—Plessey to British Telecom and Siemens to the German Bundespost. Besides national champions, there are often one or two additional suppliers. On the German market, for instance, Alcatel controls 30 percent of the market through its German subsidiary Lorenz. Most markets have, until recently, had a stable structure where changes in market shares have been regulated by the state. Deregulation has upset this traditional structure. Public telecommunications is emerging as a dynamic industry dominated by a limited number of global competitors. The introduction of digital switches in the 1970s marked a new period of change in the industry. A series of technical innovations in components, computer memory, and switching design led to a shift in basic technology from analog to digital, with profound effects on the industry. The superiority of digital systems is based on higher capacity, lower running costs, and better earnings opportunities in that new types of services could be offered to the market. Changes in technology interacted with competitive action and deregulation to produce a new business environment. Technological innovations have been developed commercially both by component suppliers such as Texas Instruments, Motorola, and NEC, and by equipment suppliers such as Alcatel, Northern Telecom, and Ericsson. Telephone companies and end users have responded to the new possibilities by developing new public and private networks which have stimulated further technical improvements. In-

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249

dependent component manufacturers have emerged as a new force in the industry. Access to new integrated circuits is critical in the development of new switching systems. New cooperative agreements have been concluded between component and equipment suppliers to cope with their interdependence. Equipment suppliers need to handle both new components and service demands. Telephone companies require modular designs and increased control of modifications in order to customize and modify their networks in response to shifting requirements, which will lead to increased customer programming of switching equipment. Corporate customers seek new interfaces between private and public networks. Competence built up at one stage of the value-added chain will also be important for the others. The industry is becoming more dynamic and interactive as a result. The cost of developing new digital systems has increased dramatically and shifted from hardware to software. About 70 percent of system development costs are now attributable to software. Rapid technological development was accompanied by limited domestic growth which forced companies to expand internationally in order to recover the high costs of design. The growth of the world market in millions of lines was estimated to be only 10 percent for the entire period from 1983 to 1989, and the value in dollars was predicted to fall somewhat as a result of competition. The competition intensified and became more global in scope. Only a limited number of firms will be able to carry the high development costs in electronic components and telecommunications equipment, particularly for advanced switches. The overall market trend conceals important differences between countries, generations of systems, and applications. Some developing countries are expanding substantially, while the industrial countries are characterized by a modest growth as analog systems are replaced by digital ones. In the industrial countries, corporate customers are increasing their demand relative to households. Demand for more advanced network lines for the transmission of data, speech, and images (ISDN for integrated systems, digital network) is expected to increase significantly in the 1990s. Information systems and telecommunications have become strategic factors in business development. Airlines have turned to large computer reservation systems, such as American Airlines's Sabre system, to improve their competitive position with travel agencies. Banks and other financial institutions use computers and telecommunications to speed up transactions and information flows and to allow trading in overseas financial markets through on-line communication. These are just two examples of how corporations use telecommunica-

250

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tions to globalize their business. Corporate customers generate new demands for services from the telephone companies and bargain for better prices and service. They also build u p their own technical capability to supplement the public services. Government policy for public telecommunication has also changed, especially in some of the largest industrial countries where markets are gradually being deregulated. These changes are a consequence of the high speed of technological development and the slowness of monopolized telephone systems to replicate domestically what may be available from foreign suppliers. England and Japan have privatized their formerly nationalized telephone systems. In the United States, the dominant telephone company and equipment supplier, AT&T, was divested of its virtual monopoly and 80 percent of its assets which opened the United States local switch market to foreign suppliers, such as Ericsson. Deregulation makes it possible for new firms to offer telephone and telecommunication services, and traditional firms are forced to become more market- and profit-oriented. T h e forces of change are most visible and most intensely felt on the American market. All major component and equipment suppliers are active here. Deregulation has made it possible for new telephone companies to provide long-distance services. Competition has increased among telephone companies, especially for corporate customers. T h e United States market may become a model for other countries which have just started on a similar path. An investment in the United States is seen as an investment in the future. In the fierce global competition, the United States is the principal battleground, both because of its size, 30 percent of the world market and because new customer services are developed first here. Ericsson's Market Position As a result of a continuing strength in system development, Ericsson has secured a position as one of the foremost companies in the industry. It presently ranks fourth in size of the world's telecommunication companies (Table 1). T h e introduction of the digital switch AXE, in March 1977, showed that Ericsson had adapted to the electronic age. At the end of 1986, the AXE system had been sold to 65 countries and about 8.5 million lines had been installed. Many of Ericsson's customers are small. T h e ten largest markets account for 72 percent of the installed capacity, and the five largest for 48 percent. Twenty of the 65 countries to which Ericsson has sold the AXE system have only one switch installed. A very large proportion of Ericsson's customers are among the developing or recently indus-

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trialized countries. Ericsson is strong in Latin America, the Middle East, and Asia. However, the early orders for AXE from Australia, France, and Holland at the end of the 1970s proved its ability to do business also with advanced customers. Ericsson's traditional strength has been to handle PTTs on government-controlled markets. The nature of these markets has meant that companies have had to act on both a political level and a technical sales level. Top management fulfills the political and sometimes ceremonial role, while managers at middle levels act in the technical and sales-oriented roles. Until 1983, Ericsson's organization was structured according to these different roles. Group management and board directors dealt with political relationships, while the operational divisions coped with the operational level. The operational divisions were kept at arm's length from the subsidiaries. The corporate marketing department was strong and influential in handling relationships with the subsidiaries and in appointing managers to key positions abroad. Subsidiaries reported directly to the corporate managing director. In this respect, Ericsson followed a traditional pattern among Swedish multinational companies. Increased global competition has already caused casualties. Philips gave up the development of a digital system of its own and started a joint venture for the international marketing of systems developed by AT&T. After substantial design problems, ITT first withdrew from competition on the American market and later merged its telecommunications business with that of the French Compagnie Générale d'Electricité (CGE). The industry is going through a period of restructuring. One expects that a smaller number of competitors, often in collaboration with one another, will account for the next generation of

TABLE Ι.

Local Lines Installed in 1980 and 1986

Company

1980

1986

Market 1986

AT&T Northern Telecom ITT Ericsson Siemens Alcatel-Thomson NEC

6,100 1,100 3,200 2,000 3,200 1,300 700

7,000 4,700 2,600 3,200 2,000 2,600 1,700

16.2 12.2 7.4 8.5 6.5 9.4 4.2

Source: AD Little and Northern Business Information.

share (percent)

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Sweden In America

systems. Success on the United States market will be important for the long-term survival of any company. The System Is the Strategy LM Ericsson was founded in 1876 by Lars Magnus Ericsson, a skilled instrument mechanic. The instrument shop Ericsson started made its first telephone based on the original Bell design in 1877. The company's further development was based on its own designs. L. M. Ericsson started to export in the 1890s, and around the turn of the century, the company established offices or subsidiaries in Russia, England, the United States, and elsewhere. Expansion and internationalization continued, broken off only by the two world wars and Great Depression. The company has successively diversified into new areas, most of which have had technological and/or market synergies with public telecommunications. Since 1985, Ericsson Telecom has been the name of the public telecommunications business area while the whole company is called Ericsson. Ericsson Telecom accounts for the main part of the company's profit and represents the core of its technological competence. Ever since Lars Magnus Ericsson started the company, it has been technically oriented. The original telephone design came from the United States, but Ericsson improved on it, and his telephones became more reliable and durable than the original. Ericsson was not a glamorous inventor but an expert technician who could visualize improvements and higher quality. For a long time, design employed relatively few people compared with manufacturing. In value-added terms, manufacturing dominated until the 1960s. To manage operations, Ericsson built up a strong functional line and staff organization. The major functions were marketing, design, and manufacturing. The emphasis was on technical quality, reliability, and easy handling. Electronics and stored program control (SPC) changed the company. System design expanded the number of employees and its budget when the development of the digital system AXE started in the early 1970s. The development of AXE was headed by a new generation of engineers who had a formal education in electronics and computers. They worked primarily on a project basis and since projects would change in composition depending on the task at hand, they had to get used to working with different people and developing informal contacts that could bridge administrative boundaries. The new generation of project managers had to be skillful and convincing in presenting

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ideas to the older line managers in order to get support for the project and forceful and diplomatic in guiding the project through to completion. Gradually, a large number of projects were superimposed on the established line organization and made it so complex that it was hard to get an overview of what was going on. T h e architecture of the A X E system became the model for organizing the system development function. T h e major subsystems of the AXE had separate design groups which were responsible for their own maintenance and further development. In this fashion, the system architecture was built into the organizational structure. T h e marketing o f AXE had to be done by people who were familiar with the technology and who could explain its potential to customers. A number of people familiar with systems design were recruited into marketing positions. All customer orders involved some degree of modification to fit the particular needs and environment in which it was being installed. Since AXE had a modular design, modifications were relatively easy to make. Technical competence was involved in marketing, design, and maintenance. It therefore seemed logical that Björn Svedberg, one of the key project managers in developing AXE, should become managing director in 1977. At the same time, another influential project manager, Hakan Ledin, was appointed to the inner circle of top management. T h e values and experiences of system development were now guiding top management. T h e technical innovators were primarily found in design groups and laboratories rather than on top management levels. Therefore, ideas for projects tended to originate at lower levels and had to be marketed internally to get sufficient resources. T h e project managers were the skilled marketers. T h e strengths that allowed Ericsson to expand in the 1970s and 1980s were high quality and reliability of system design and skill in building customer relationships. As we have seen above, project managers have been crucial for both. Systems have been developed gradually over time, although pressures have been mounting to shorten development time. Customer relationships, usually with PTTs, are also gradually developed to span many levels of the customer organization, though they often start with the technical planners. Marketing AXE to external customers has been similar to marketing a new system design project internally. Ericsson's approach to business development is cautious and builds on entrepreneurial efforts of a few people who develop local contacts and work hard to get the company into a position where it can compete for a customer tender offer. People abroad are all well trained

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in system design a n d in p r o d u c t characteristics. If they are successful, the local organization is strengthened and will eventually become a subsidiary. O n c e in the country, Ericsson will stay even if business varies. T h e outlook is long term. Market expansion has been broad. Sales focused m o r e on volume than profitability. T h e relationships between h e a d q u a r t e r s a n d subsidiary were informal a n d built on personal relationships. H e a d s of subsidiaries had direct r e p o r t i n g relationships to the C E O of the group. T h e subsidiaries had to build good relationships with the operational division to get the technical s u p p o r t they n e e d e d . O n the o t h e r h a n d , h e a d q u a r t e r s d e p e n d e d o n the subsidiaries' skill in developing local business relationships. T h e subsidiaries abroad have Swedes in key positions. T h e expatriates have intimate knowledge of t h e c o m p a n y a n d a strong sense of loyalty. A critical n u m b e r of key m a n a g e r s defined the business as basically system development. For these managers, the essence of the business was the system, and they t e n d e d to see business d e v e l o p m e n t in terms of the new capabilities of the AXE system. Technical competence, reliability, a n d the ability to convince others of one's own solution are i m p o r t a n t values in system development. T h e s e values dominated the company. United States Market: Early Efforts and Third Time Lucky? T h e Ericsson G r o u p has d o n e business in the United States continually since the beginning of the twentieth century. However, in relation to the size of the American market, the t u r n o v e r has been modest. Ericsson m a d e a n u m b e r of attempts at establishing itself in the United States, both u n d e r its own auspices a n d in collaboration with others. Over the years, a n u m b e r of acquisitions and opportunities f o r collaboration were evaluated a n d rejected o r did not receive e n o u g h of a response f r o m the o t h e r party. T h e decision in J a n u a r y 1984 was the third m a j o r a t t e m p t to break into the United States market. In 1902, Ericsson o p e n e d a sales office in New York City. T h e customers came f r o m the so-called i n d e p e n d e n t companies, that is, telephone companies outside the Bell system. In 1904, Ericsson established the T e l e p h o n e M a n u f a c t u r i n g C o m p a n y in Buffalo, New York, with about 200 employees. However, the c o m p a n y ran at a loss, except for two years, before being closed in 1920. It was not until a f t e r World War II that Ericsson m a d e a new a t t e m p t to break into the United States market, when it b o u g h t 60 percent of N o r t h Electric C o m p a n y in O h i o in 1951. T h e c o m p a n y m a d e telephones and t e l e p h o n e exchanges and had big orders f r o m

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the United States government, particularly the air force. The goal was to introduce Ericsson's products on the United States market. However, the project required a great deal of extra capital and met with considerable technical difficulties. The company lost money for more than ten years. In December 1967, United Utilities bought Ericsson's share in North Electric. A third attempt by Ericsson at establishing itself in the United States market started in 1980 with the creation of Anaconda-Ericsson, a joint venture with equal holdings between Atlantic Richfield Company (Arco) and Ericsson. During the first phase, Ericsson's cable investments in Mexico and South America were merged with Arco's. Ericsson's goal was to create a stronger business position in the United States market. Anaconda-Ericsson was regarded as a bridgehead for several of the group's branches of operations. The surplus from the cable operations was to finance investments in information systems and telecommunications. Within Arco, there was a small company which manufactured small communication exchanges. It suited Ericsson's plans to expand in office automation. In the slightly longer term, it was felt that there would be opportunities within public telecommunications. In the Public Telecommunications division, there was already an interest in the United States market, influenced by the successes of the transmission equipment division. Customer contacts were organized from Sweden. At the beginning of the 1980s, equipment was offered to GTE-Sprint, Western Union, and MCI, all long-distance companies competing with AT&T. In the spring of 1983, MCI ordered three telephone exchanges. The order was the result of direct negotiations and did not arise from open tenders in competition. The penetration of the United States market before 1984 followed a familiar pattern: Ericsson created a first bridgehead, which was then extended. The market profile was low. Operations were controlled from Sweden, not from Anaconda-Ericsson. The 1984 Decision to Enter the United States Local Switch Market On January 16, 1984, Ericsson's corporate management decided to invest resources in the development of a local switch for the United States market. The development efforts were estimated at about 300,000 hours spread over two and a half years. Apart from starting the technical development project, corporate management wanted to create a substantially stronger marketing organization for the American market. It was estimated the total investment would cost close to $100 million.

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In the market plan, two alternative strategies were presented. Alternative A implied a low profile and continuing slow expansion by way of transmission, long-distance stations, and mobile telephones, for which orders had already been contracted. T h e advantage was low risk. Alternative Β was a much more aggressive strategy, but it also meant greater risks. It was described as a full frontal attack on the United States market, in order to exploit the window opened after divestiture of the Bell Operating Companies from AT&T. As a result of an out-of-court settlement in the antitrust case, seven independent regional telephone operating companies were created, known as the Regional Bell Operating Companies (RBOCs), on January 1, 1984. T h e RBOCs became independent of their main supplier, Western Electric in the AT&T group. T h e RBOCs jointly owned Bellcore, a development and service company with technical specialists. In order to break into the market, it was decided to sound out the market on a broad front and contact all the RBOCs. T h e goal was to become one of three suppliers to four of the Bell companies. Expectations were yearly sales of 700,000 lines, or about 10 percent of the market by 1990. It would make Ericsson the third largest supplier after AT&T Technologies and Northern Telecom which were considered almost immovable because of their large installed base of switches and established service relationships. Certain milestones were identified for the breakthrough, such as a first order by the middle of 1985. T h e technical work was supposed to be ready during 1985, and the first exchange was expected to come into operation by the middle of 1986. Never before had Ericsson invested in a breakthrough without first having an order, a bridgehead to build on. T h e idea of a full frontal attack was alien to the organization. It meant a substantial investment without any guarantee of orders. T h e high profile was strange to many, particularly to the head of Public Telecommunications. The Entry Strategy T h e order from MCI represented a first step for Public Telecommunications into the part of the market known as interexchange carriers or long-distance. T h e American market for telecommunications equipment can be roughly divided into two parts, the market for local traffic and the market for long-distance traffic. T h r o u g h Western Electric, AT&T has been the dominant supplier to both segments. Ericsson aimed primarily for the RBOCs and secondly for the interexchange carriers. Local exchange traffic was dominated by the RBOCs with 80

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percent of the market. The remaining 20 percent was divided between about 1,500 independent telephone companies. The largest of these are General Telephone and Electronics (GTE) and United Utilities. GTE had the capacity and the competence to develop its own equipment. At the end of the 1970s, Northern Telecom managed to break in as a supplier to the Bell companies. The major reasons for this success were a technically superior system that fulfilled American specifications and an aggressive and effective marketing effort. It should also be mentioned that the cost of market adaptation was limited by the fact that Canada and the United States largely follow the same specifications. By the beginning of 1984, Northern Telecom was well established as the second supplier to the Bell companies with about 20 percent of the market, which represented a good 60 percent of Northern Telecom's turnover. Divestiture of AT&T in January 1984 was the formal starting signal for a race between foreign competitors to get a foothold in the American market. It was assumed that Ericsson would enter that market on its own strengths but share the economic risk with Arco. Greenfield investment was also the favored strategy among the competitors. Ericsson Telecom considered itself to have a lead over its competitors in technology, which was to pave the way for a market breakthrough. The modularity of the AXE system, powerful processors, and the possibility for the customers to make their own adaptations represent decisive product advantages. The task was to demonstrate and explain these advantages to the market. One senior manager expressed it as follows: "As before we are in the process of staking out the future. We have the competence, we have the systems technique which is required for development, and there is a market" (interview, May 10, 1984). An important part of the strategy was to invest in an evaluation of AXE by Bellcore in order to be approved as a supplier. This is a long process that other foreign suppliers chose not to do or to do later than Ericsson. It followed the traditional path of convincing the customers' technical planners that the ΑΧΕ-system had a technological advantage that could benefit the customers. The system was the strategy. Headquarters-Subsidiary Relations On January 1, 1983, the activities of the Ericsson group were reorganized into seven business areas, and corporate staffs were gradually reduced. Many staff people were transferred to new business areas. As far as possible, the subsidiaries were divided between the business

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areas. Ericsson, Inc., the United States subsidiary, which spans several business areas, reports directly to the group chief executive. T h e head of a business area is responsible for overall strategy and profitability. Business area managers were recruited internally among former divisional and company managers. T h e changeover to an organization by business area took time, and detachment of Public Telecommunications from the group proceeded particularly slowly. Since corporate management had a strong background and competence in this area, they did not let go easily. Public Telecommunications in Sweden had been only marginally affected by the reorganization when the decision to enter the United States market was made. T h e new organization presupposed a new relationship between corporate management and the business areas. Corporate management would play a more strategic and integrative role, while the business areas would be responsible for running their respective operations. With the same people in key positions, this was difficult to achieve. T h e subsidiaries continued to act autonomously and even expected increased independence. N o new mechanisms for coordination were introduced.

Management Values Ericsson is characterized by a hierarchic organization with a major element of informal and collégial groups spanning organizational boundaries. Information important to business and technical development travels mainly along these informal channels. This is a result of the complexity of the systems that require collaboration across administrative boundaries. One department manager put it this way: You could say that it is a relatively small group of people who keep a watchful eye on operations the whole time. T h e y have to intervene when people do not quite know in which direction to move. T h e r e is no one who has an overview of the whole (interview, May 5, 1985).

A manager is mainly a coordinator of several subsystems. H e or she is primus inter pares, first among equals, who guarantees mutual understanding among the different subsystems and checks that no important issues fall through the cracks. T h e members of corporate management have been promoted mainly from positions in public telecommunications. Hard work, technical expertise, and company loyalty are important criteria for promotion. T h e typical management group is more like a group of colleagues than an integrated team. T h e members are experts in their own fields.

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It is not appreciated if one of them treads on another's ground. Open conflict is avoided so as not to risk friendships or threaten the common loyalty. Loyalty has become institutionalized since the deaths of the founding forebears, such as Marcus Wallenberg. Every member of a management team is expected to behave independently and with responsibility, but there is little formal control of how he or she exercises that responsibility. Initiative can be taken locally by any department and is carried out with the resources under departmental control. Insofar as further resources are required, a certain amount of exchange and barter can take place between departments. Major requirements are always referred u p the hierarchy. T h e organization needs both customer orders and strong support from corporate management in order to achieve coordination between departments on larger projects. When it comes to fulfilling customer requirements or solving acute problems, the people respond loyally to the call. T h e decision to enter the United States local switch market was interpreted as corporate management's decision. T h e head of Public Telecommunications had loyally supported it, but in his heart, he had some doubts. It meant a potential threat to his control of the business area since the head of the United States subsidiary was a member of Ericsson's corporate management and, in that capacity, his superior. Also, the marketing approach was contrary to his previous experience. T h e business plan for the United States was thorough. Competitive and market conditions were analyzed, and the economic and cashflow consequences calculated. Once the analysis was completed and everyone understood the situation, they were expected to act independently to implement the decision, even if it was a major all-embracing decision. A Strategic Triangle: W h o Is Leading? T h e responsibility for the United States breakthrough rested with the American subsidiary. As far as the technical development was concerned, this meant that the person responsible for the project was sitting in the United States with some technical resources and was buying additional services from the organization in Sweden. T h e market strategy was also to be shaped locally in the United States. This division of responsibility was unusual for Ericsson, whereas previously Sweden had always maintained control. Contacts and coordination between headquarters and subsidiary were expected to work well by the appointment of Hâkan Ledin as the chairman and CEO of

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the subsidiary and Kjell Sorme, the former manager of systems development within Public Telecommunications, as manager of Ericsson Network Systems at the United States subsidiary. About a hundred contractual employees, mostly in systems design and product planning, were assigned to Richardson, Texas, where Ericsson Network Systems was based. In the home organization, a special marketing department was created, with the task of assisting the American subsidiary with resources for submitting tenders and marketing material and to act as its representative in the home organization. An assistant project manager for systems design was appointed to coordinate the Swedish part of the development project and to help in the training of the American design engineers. This new organization meant that most of the resources and technical competence were in Sweden, while the main responsibility was relocated to the United States.

The Subsidiary Requires More Than It Gets It soon became obvious that technical resources were going to be scarce. In particular, there was a shortage of experienced systems people who had a deep knowledge of the architecture of the AXE system. The order from MCI required more resources than had been estimated to deal with problems that arose in servicing the first United States switch order. A large tender to United Telecom also required technical resources from Ericsson Network Systems. Successes with mobile telephones, which are based on AXE switches, allowed systems designers to be able to carry out obligations already undertaken or to develop new functions in high demand on the market. Failure at this early stage could damage Ericsson's image in public telecommunications in the United States. It was not possible to cope with all the needs in the subsidiary, and experts from Sweden had to come to deal with the situation. In the United States, things were in the startup phase with many new recruits who first had to be trained. On the American market, there were opportunities to offer products to the Bell companies outside the local exchange area. One such product was signal transfer point (STP), a limited AXE exchange. In the subsidiary, people wanted to submit a tender, but the home organization did not think it could supply the technical resources. As a result of the group president's intervention, Ericsson managed to get the business area in Sweden to cooperate. There were similar differences of opinion when the United States subsidiary wanted to become involved in ISDN, the new opportunity for integrating sound, data, and

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images in the same system. To people in the subsidiary, it seemed that a project was first underway, then stopped, and then taken u p again. In addition, there was competition in the autumn of 1984 for tenders on the English market, and Ericsson came u p against AT&TPhilips and Northern Telecom. If Ericsson were to lose this order, it would mean a major breakthrough in Europe for one of the two established American competitors. For some Ericsson executives, a failure in England seemed worse than a failure in the United States. T h e English project also called for large technical resources. Those responsible for the United States project were working without any definite customer orders that could help in the internal competition for technical resources. Ericsson Telecom's priorities were different from those of Ericsson, Inc. because the former had responsibility for the global result. Since the United States had been separated from the home organization, Ericsson Telecom's motivation had been reduced. Ericsson, Inc. claimed that its assessment of what the United States market needed should be given greater weight. Ericsson Network Systems in Texas tried to protect itself from too strong control from Sweden regarding marketing and strategy. Because of the company structure and the values of technical experts, there was an unwillingness to confront problems when all the key actors were present. T h e result was constantly shifting priorities. T h e strategic triangle—corporate headquarters, business area, and subsidiary—did not result in a stable coalition nor, consequently, a common strategy. Built-in Powerlessness: Shifting Priorities and Strategy A built-in powerlessness plagued the United States project. At the operational level, there was skepticism and discouragement. During the spring of 1984, people in the marketing department in Sweden were working with great enthusiasm on a number of requests for information, which were the result of the road show displaying the AXE system on the American market. Similarly, they were working on regular tenders to the Bell company U.S. West, which also aroused great enthusiasm. But authority and resources did not fit the strategy. Responsibility was more firmly shifted to the United States, but the United States project was getting less priority compared with England, so morale in the United States deteriorated. T h e people in Ericsson Network Systems gradually became more anxious that they were not getting the support needed. At the beginning of 1985, management in the United States felt that the home

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organization did not understand what was needed for a breakthrough. This opinion was shared by those responsible operationally for the technical project. It was difficult to get the technical departments in Sweden to give the development project a sufficiently high priority in competition with others. T h e uncertainty affected the management of operations, but it did not prevent progress. A great deal was done on both the technical and marketing side. However, it turned out that some of the work was in vain because it was not accepted by potential customers. By the autumn of 1984, Ericsson had become the first nonAmerican company whose system was approved for evaluation by Bellcore. T h e first phase in the evaluation was to take eighteen months. It is a desk evaluation, where the system documents are scrutinized. This is followed by a second phase, which consists of testing the system in the field. T h e evaluation project follows a strict timetable drawn up by Bellcore. T h e project thus required cooperation between the Ericsson subsidiary in the United States and the technical and marketing units in Sweden. It involved a considerable investment in labor time for Ericsson. T h e project was handled at the operational level of the organization. Conditions were ideal for the Ericsson organization to show its strength. Emerging Crisis: Success in England Means Delay in the United States In April 1985, Ericsson received an order for local exchanges from British Telecom. T h e order could make England the business area's largest market within a couple of years. Just before this event, it had become clear that Ericsson had lost tenders for U.S. West and United Telecom. In both cases, the order went to Northern Telecom. T h e United States project had lost much of its ability to compete for technical resources. It was obvious as early as 1984 that the project was not getting the resources planned. Instead of the budgeted 125,000 hours in Sweden, it received only 10,000 hours. What should have been the delivery of a system by the middle of 1986 was postponed by about one year. In the spring of 1985, the group's difficult economic situation had also come into focus. T h e losses on information systems, particularly in the American market, were seen as a potential threat to the whole group. T h e entire United States investment was reappraised. In the summer of 1985, a new manager was appointed for Public Telecommunications, and immediately afterward, it was officially announced that Ericsson, Inc., would get a new CEO. Björn Svedberg

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took over as chairman of Ericsson, Inc. and Hans Werthén, chairman of the Ericsson Group, became a member of the board. A little later, it was announced that Ericsson was taking over all the holdings in Ericsson, Inc., buying out Anaconda's 50 percent share. All these signals indicated a new thrust for Public Communications as well as a new commitment to the United States market. The investment in the United States represented much more than the development of a new technical system to fit the American market. It was a strategic reorientation dictated by the necessities of changing technology and international competition. There was a need for a stronger central business coordination rather than central control of system development. The potential of different markets and customers became the key to sustaining future systems development. The reorientation was guided, however, by entrenched values and modes of thinking that were rooted in previous experiences in systems development for stable national markets. Building the Subsidiary Organization In the summer of 1983, Ericsson resources were gradually built up in Richardson, Texas, to complete the system design work for the MCI order. These were supplemented by staff for product planning and product sales. Technology transfer took place primarily through the transfer of engineers and managers. By the end of 1984, there were about a hundred expatriates in the United States subsidiary, mainly from Sweden. Over a period of two and a half years a new organization was created with more system design resources than any other subsidiary. The number of employees increased about tenfold, from sixtyfour in May 1984 to 575 at the end of 1986. The majority were software engineers who worked to adapt the AXE switch to United States requirements. This sharp rise strained the organization's ability to coordinate work. Brooks (1975), in discussing software designers who work independently on subsystems, argues that the added burden of managerial coordination is made up of two parts—training and communication. Each worker must be trained in the goals of the effort and the work plan. Since software design is inherently a systems effort—an exercise in complex interrelationships—the time required for communication is greater than the decrease in individual task time brought about by adding people and partitioning the work. Adding inexperienced people then lengthens rather than shortens the schedule. Ericsson, Inc.'s situation was made even more difficult by the

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nature of its customers. With MCI, the customer was an unconventional, aggressive company that wanted many features and services quickly and was not subtle in d e m a n d i n g them. T h e subsidiary's suppliers were managers located in the h o m e organization across the ocean, with limited contact with the United States market. These managers often spoke about United States market issues and set objectives with a confidence that was not always based on sufficient understanding of the local requirements. Another factor was the different ways of working and communicating between Swedes and Americans discussed below. O n e sees how the communication problem in Ericsson's large software development project became an issue. T h e selection of key actors is one of the most important levers which the company possesses for exerting influence on the subsidiary. Transfer of people is one way of transmitting both company values and competence. How this instrument is used in a particular situation also reveals a good deal about the company's values and character. T h e general manager of Ericsson Network Systems was one of Ericsson's foremost managers in systems development. T h r o u g h o u t his career he had been employed in systems design and product planning. In that role, he had also taken part in marketing the AXE system. This choice of general manager symbolized both the great importance management attributed to the development project and also how highly it valued his leadership qualities. T h e role of general manager meant a considerable enlargement of his job. T h e biggest challenge was to build u p business relationships and market the company's products, and simultaneously to build u p a new organization, economic control systems, and administrative routines. T h e j o b resembled that of a chief executive. Other key actors also possessed thorough technical competence. It seemed as though the company was overloaded with technical competence and understaffed when it came to general management, marketing, and finance. This situation accorded with the Ericsson tradition to employ engineers and to let them extend themselves into marketing and other tasks. Toward the end of 1984, an American sales manager was brought into management. After less than a year, he was removed. Since then, a locally engaged finance manager and personnel manager have also been fired. When it came to staffing the United States subsidiary, the Swedes seemed to have difficulty assessing people in relation to the jobs they were to do. Previously, cooperation and loyalty had been given more weight in hiring than competence and experience within the area concerned. In assessing American managers, the Swedes looked for

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people with knowledge of the United States telecommunications market and particularly for those who had worked for AT&T. They did not realize that the Americans' skill in marketing themselves as attractive candidates did not necessarily reflect ability to produce. Furthermore, those with AT&T experience came with a monopoly mentality. T h e values in Ericsson strongly emphasized loyalty, and the informal and collégial groups often overestimated the competence of their own members. This hypothesis is supported by a comparative study of middle managers in Ericsson and IBM (Edström, 1983). It appeared to be more important to success and promotion opportunities to have the backing of the authorities in Ericsson, as compared to IBM where achievement was more important.

Creating a New Marketing Organization In order to cover the American market, a field organization was created. A locally recruited American was responsible for the sales organization. T h e organization became a kind of hybrid between American and Swedish experience. In American companies, it was common for the marketing manager to be responsible for specialized functions in sales, installations, product support, and product planning. In Ericsson, sales, product support, and product planning were assembled in one unit, while installations were separate. T h e many small markets in which Ericsson worked did not allow specialization. T h e sales representative was also a product specialist and had to cope with personal sales, submitting tenders, negotiating contracts, and installation. In Ericsson Network Systems, a separate sales organization was created, in order to specialize in personal sales (figure 1). This new field organization mainly included Americans with no experience of Ericsson. This created a cultural boundary between sales (mostly Americans) and product management (Swedes). T h e idea was to have regional managers who were responsible for coordinating contacts with the seven RBOCs and the three most important longdistance companies outside AT&T: MCI, United Telecom, and GTESprint. Ericsson Network Systems recruited five regional managers. O n e of them came from Thorn-Ericsson in England. T h e others were former employees of the Bell system. O n e of the regions was r u n directly f r o m Richardson. It soon turned out that the regional managers worked in something of a vacuum, and their responsibilities were rather vague. In addition, former Bell employees were not always able to make the contacts they wanted. As former employees, they belonged in both their own and other people's eyes to their former position in the

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Bell hierarchy. It was therefore difficult for them to contact anyone far above that level. Furthermore, with their limited experience of the AXE system, they were very dependent on support from product specialists in Richardson. Role expectations differed among the two parties in the relationships. The product manager expected that the regional manager would supply the information to prepare the next move in his customer strategy. The regional manager, on the other hand, expected to play the major role in customer contacts and wanted support and service from the product specialists in Richardson. How each was to serve the other while being a team member was not made clear. In the middle of 1985, the market organization was changed, and the marketing manager was given other work. The regional managers then reported directly to those responsible for the products. But the differences in outlook and expectations persisted. The result was that the monthly marketing meetings became occasions for mutual information. People listened to one another, but there was very little strategic discussion of how customers should be handled or of priorities. This was worked out informally, and the outcome depended on the individuals involved. This lack of clear roles and authority made it more difficult to create a coordinated and customer-oriented strategy. Despite the friction that arose, business opportunities were created. Three field trials were contracted. Two of them were used for

Figure 1. Organizational structure of Ericsson Network Systems, 1985.

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phase Β in Bellcore's evaluation of the AXE system. At U.S. West the regional manager was the key actor. It is perhaps significant that he is the only regional manager with long experience at Ericsson. Another field trial was contracted with NYNEX in New York. There was no particular key actor. Corporate management was mobilized in critical phases, along with those responsible for products in Richardson and the manager responsible for the region. The whole deal was orchestrated from Richardson. The third trial was a joint marketing venture for ISDN between Southwestern Bell in Dallas and Ericsson Network Systems. In this agreement, key people in Sweden were important. Ericsson's tried and tested method of developing business relationships with the technical product experts caught on. Adapting to United States Customers' Commercial Focus It took time for Ericsson to recognize the customer's very strong position in the American market. With PTTs and a nationalized telephone system, particularly in the Third World, one can definitely say that the king (or government) is the customer. In the United States, where there are over a thousand telephone companies and dozens of equipment suppliers, the customer is king. In this competitive climate, where there are always alternative competent suppliers, the customer's wishes, requirements, and needs carry great weight. Furthermore, the regional Bell companies are advanced operating companies with long experience using digital systems. American companies also consciously foster competition between their suppliers. This was of course the very basis of Ericsson's business opportunities in the United States. While Ericsson had considerable success selling the AXE system, it did not have the experience with customers who themselves were so technically experienced in digital systems. Customers in the United States can argue on the basis of their own knowledge of other digital systems. It is therefore even more necessary to really understand the customer's intentions. The likelihood of differing interpretations is greater. The Bell companies are independent incorporated companies, demanding yield on invested capital. They were more sensitive to cost and earnings flows than the state-owned companies and administrations who are Ericsson Telecom's traditional customers. Given these conditions, there were urgent demands for short delivery times, quick service, and new functions that could increase revenues and prevent earnings loss when breakdowns or other disturbances occurred, and which could reduce maintenance or running

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costs in the network. This situation was in striking contrast to many other countries, where such things as employment, political advantages, or technology may have greater importance. T h e experience of supplying to MCI also showed clearly that Ericsson Network Systems was compelled to reappraise its customer service. MCI represents an extreme case: a young entrepreneurial company that challenges AT&T for long-distance traffic. T h e company is extremely commercially oriented and lacks the traditions for planning, solid technical competence, and systematization that characterizes Ericsson's traditional customers. When Ericsson's switch encountered MCI's telephone traffic in the New York area, the system revealed weaknesses at high-capacity utilization. T h e r e were stoppages and consequent loss of earnings, and hence a potential threat to MCI's image and profitability. Ericsson reacted slowly to the situation, which led to the customer's great frustration. Even though Ericsson mobilized resources and the problems were dealt with, the damage to Ericsson's reputation was significant. In actual customer contacts, sometimes the Ericsson sales representatives were too expert (Maccoby, 1988). They may want to prove they are right or get bogged down in a lot of details that do not interest the customer, or they may be too interested in demonstrating their own competence and fail to listen to the customer. They may also be too rigid when it comes to exact delivery times and too unwilling to take calculated risks. It is mainly in discussions with critical actors at the higher levels and in commercial discussions that too sharp an expert profile can negatively influence decisions. In more detailed deliberations with technicians in the middle ranks of customers' organizations, on the other hand, it can be a strength. Interviews with customers also showed that Ericsson's technical know-how was valued, though the customers wanted Ericsson to listen better to their ideas and needs.

Managing Americans: Insecurity, Self-Reliance, and Careers With a restricted economic safety net and knowing that companies lay off people when they are in difficulties or when the individual is not achieving, the career—or its symbolic expression in the r e s u m e becomes something that strengthens the individual's value on the United States labor market. In the United States school system, grades are used so that individuals can be ranked down to the last and lowest place. Work is regarded as an arena where successes are applauded that reinforce the individual's sense of development and worth, both personally and econom-

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ically. Definite steps u p the career ladder are therefore important. T h e American system is based on an individualistic ideal of life as performance. This is different f r o m the Swedish value of "lagom" and an ideal that submerges class and individual differences by emphasizing group cohesion, respectful cooperation, and the importance of not standing out above one's peers. In the United States, Ericsson Network Systems adapted itself in certain respects to the American concern for career. Seven different grades for technicians were established, ranging f r o m j u n i o r engineer to principal engineer. This range marked differences in experience and competence as well as in wages. Ericsson in Sweden has no equivalent differentiation. T h e American employees had expectations regarding the development of their careers with regular evaluations of their progress and new tasks. They also expected feedback f r o m their immediate boss, especially praise for successes. Clear goals and well-defined areas of responsibility were valued, since they define the j o b and give criteria for individual successes. Because individuals often strive for results and applause, they will try to look good by drawing attention to themselves and dramatizing relatively small successes. Swedes criticized Americans for marketing themselves to make a good impression because they underestimated the cultural significance of how many of their United States employees saw this as necessary to overcome their career insecurity. Besides personal feedback, Americans expected the manager to create an environment characterized by enthusiasm and a certain drama. American employees expected their boss to be a combination of trainer, cheerleader, and referee. When the manager set clear goals, American employees could understand the rules of the game and apply themselves. Since they expected little in terms of j o b security, there was a direct line f r o m good task performance to good j o b record to increased marketability as a means to security. Titles and awards strengthened f u r t h e r their record and sense of security. In order to understand American attitudes, it helps to see how they feel more vulnerable at work than do Swedes. They do not expect Ericsson to assign them a new j o b elsewhere if the United States venture fails, and most would not want to move to Sweden or elsewhere in the global Ericsson system. Most Americans were in their late twenties or early thirties, and Ericsson was usually their first or second job. Ericsson executives initially did not place much importance on the different j o b experiences and cultural values of Americans. Because the executives were u n d e r considerable stress in the marketing and technical development of projects, they tended to see Americans as

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disloyal. They attempted to quiet Americans' anxiety by expressing their personal confidence that Ericsson would succeed. In other words, they managed with the cultural assumptions normal in Sweden rather than adapting their analysis and management style to the American values. Managing Swedes: Security, Company, Family One can conceive of Ericsson as a protective mother. Sweden is also described as Mother Svea. Hofstede (1983) claims that on a femininemasculine scale, Sweden is clearly on the feminine side. This concept is best understood as the importance of caring for human welfare and a sense of equality as traditional matriarchical values. Swedish social democracy has institutionalized and extended these values. Swedes expect the company to look after its employees. There is less distance between managers and their teams. Superiors and subordinates are regarded more as colleagues. They avoid conflict, do their jobs, and seek consensus. This is the price employees pay for security and support, since the employees are subconsciously regarded as family members rather than open competitors on a labor market, as with Americans. The manager is like the "oldest child." There is a strong tendency to avoid conflict and emotional outbursts, so as not to disturb the family feeling and to maintain respect and independence for others in the group. When arguments do occur, it is usually over issues of expertise and facts. The Swedish attitude to work is that it should be an expression of knowledge, competence, and an opportunity for learning to master a task. Sweden is a culture that highly values experts. There are expectations of lifelong employment, job security, and company loyalty. Joint problem-solving is valued, and the boss is often brought into discussions of problem-solving. Quality, completeness, and consistency are important values. The typical weaknesses of Swedish managers are insufficient clarity in decision-making, too little strategic dialogue, and too much information. The boss does not note people's feelings, and frustrates their need for feedback, either praise or criticism. It is difficult for managers to hold planning discussions. Those that are convened are insufficiently clear, and provide few criteria for success to the organization or the units. Often, meetings end without clear decisions. The lack of any consistent and communicable strategy and goal with clear subgoals which can be followed up is perhaps what creates the most frustration. There has also been a lack of respect for estab-

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lished goals. N o rewards or penalties have been linked to them. In a situation characterized by great uncertainty, such as Ericsson, Inc.'s, the American employees in particular feel there should be steps along the way that can identify progress. T h e picture of Swedes in Ericsson that emerges from our survey and interviews has been described in similar terms by the Swedish ethnographer, Ake Daun (1984). H e describes as being typically Swedish "silence, seriousness, avoiding conflict and strong emotions, and oriented toward the rational." T h e different attitudes and values found in Ericsson affect various areas of managing people and tasks. For example, Swedes view teams as a generalized environment of people working together, trusting each other like a family. Americans view teams as a structured, hierarchic organization for making decisions and taking specific actions, with a leader and each person in a clear role, like a military or sports unit. These cultural values have been dominant in Ericsson and other large industrial firms. They are now challenged by new cultural values carried by a younger generation of Swedes and Americans that promises once again to transform the Ericsson culture. Besides the value changes in young employees, American business culture and labor relations are changing.

Reappraisal and a New Start In the early summer of 1985, anxiety began to be felt more broadly about the huge costs of the United States investment. T h e restructuring of the information systems business area in the United States was burdened with high costs. T h e costs for public telecommunications also increased substantially. When transmission sales declined during 1985, the budget submitted for 1986 seemed unacceptable to Ericsson Telecom management in Sweden. T h e management of the business area felt that a generous budget might jeopardize the entire United States investment at the coming board meeting in November 1985. On these premises, Ericsson Network Systems made a new long-term budget. During 1985, Ericsson, Inc., had engaged consultants to suggest a new organization of the interaction between subsidiary and parent organization. As a result, policy committees were created, one for each division in Ericsson, Inc. T h e policy committee had a coordinating role between the business area headquartered in Sweden and its operating division in the United States. T h e committee was to prepare product and market plans, investment plans, and to suggest the organization and manning of the operations of the business area in the United

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States. T h e CEO of Ericsson, Inc., the manager of Network Systems, the head of Ericsson Telecom, and his deputy were permanent committee members. Economic and technical responsibility for the technical project was taken over by the business area, which meant that costs were charged to the business area and not to Ericsson, Inc. By relocating responsibility to the business area, resources and commitment on the part of the parent organization were to be guaranteed. In November 1985, Ericsson's board approved the new longrange budget for the United States. In J a n u a r y 1986, a first meeting of the policy committee for public telecommunications was held. In February 1986, Peter Thomas, an American, became president of Ericsson, Inc. In February 1986, a great gathering was held in Richardson, Texas entitled "Challenge USA," in which Ericsson's top management took part. It was a demonstration of unity and fighting spirit. It symbolized a new start with a stronger support f r o m Ericsson Telecom and more corporate attention. In recruiting the new president for Ericsson, Inc., the company defined explicitly what the president's role would be: The president is responsible to the board for the whole as well as its divisions. He is to manage the activities so that goals established by the president of the group through the board and by the managers of the business areas are reached in an optimal way. Within the budgets and plans established, the president has full operational authority.

As a result of these measures, the president of Ericsson, Inc., acquired a more clearly defined platform, and an American was recruited for the post. At the same time, the Swedish organization was changed. T h e business area became more detached f r o m the g r o u p and key positions were changed. T h e structural changes marked a new era in relations between the business area and the subsidiary. In February 1986, there were high expectations, and the climate was positive. A clearer differentiation of roles for both Ericsson, Inc., and Ericsson Telecom brought a new focus. However, it also began to break u p the old family feeling. T h e new American president generated high expectations, particularly a m o n g the American employees in Ericsson Network Systems. Many hoped things would now be put right. On the whole, the change in president received good press and was celebrated by the a n n o u n c e m e n t of new orders on the mobile telephone side. It was felt that he would bring marketing know-how and a marketing orientation to Ericsson, Inc. T h e C E O appointed a new American f r o m I T T as divisional

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manager for Network Systems. Altogether, seventeen people were recruited from I T T in about six months. People in the subsidiary talked about the " I T T mafia." Since I T T had a bad image among Ericsson employees, this was unwelcome news. Even among American Ericsson employees, the wave o f recruitments from I T T aroused anxiety. People were afraid that career opportunities would be determined by political considerations rather than by competence. T h e change in C E O meant a clear Americanization o f Ericsson, Inc. O f the four operational divisions, three were headed by Americans and the fourth, Mobile Telephones, by another foreign national. New values and experiences were brought in. T h e r e were no Swedes in top positions. T h e new management style was characterized by greater systematization, clearer subgoals, and tighter economic control. A clear schedule for management meetings, at which the operations were checked and planned along with the economic control system, represented the core o f the new management philosophy. At every meeting, milestones were defined and later followed up. Formal j o b descriptions were introduced. T h e new management's demands for information from the operational level increased noticeably. Staffs were expanded at Ericsson, Inc. A function for strategic planning and information systems was created. T h e personnel and finance functions were reinforced. This expansion reflected more systematic and detailed control o f operations. However, the new management was invisible to most employees, and information was sparse. T h e large number o f Swedish expatriates working in the subsidiary became an issue. T h e C E O felt that they should only be used when local competence was lacking. This led to some dejection among many contractual employees. Americans who had been employed for a long time also began to feel some apprehension because of the emphasis on control. T h e new policy committees began to function. Contact with the marketing department in Stockholm was improved and given greater substance as a result o f the orders for field trials. T h e marketing function at Ericsson Network Systems was reorganized with a department to supply the two testing stations, while another dealt with the marketing o f new orders. T h e latter was staffed entirely by local employees. A new project structure was created in Ericsson Telecom in Sweden for the United States project, with one person having responsibility for all the work until the testing installations were finished. In September 1986, the new organization was finalized and another big meeting was held to inform and mobilize the engineers in particular to commit themselves to the project. What had previously been a problem between the operational and the strategic management of the project

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had been largely solved by the new structure. The marketing strategy was now clearer, and attention was focused on the large local exchanges with advanced functions. The idea of becoming a complete supplier was being realized. Difficulties of integrating Swedish and American work values and approaches to management appear to have been limited, at least temporarily, by the Americanization of the subsidiary. The new managers represented one particular school of American management which emphasizes clear lines of authority, reporting relations, and control. In view of the great need for integration between the business area in Sweden and the subsidiary in the United States, however, these differences of how to manage, communicate, motivate employees, and coordinate complex technical and organizational tasks may lead to inefficiencies and hurdles in the future.

Results a n d Lessons The first phase of Bellcore's evaluation of the AXE system was ready in June 1986, and the report was published in September. The results began to circulate in the Bell companies even before the official report was ready. Despite a number of negative remarks, the conclusions were interpreted positively both in Ericsson and on the outside. Bellcore's engineers became important spokespersons for the AXE system, since they were invited by the Bell companies to comment on the report. Bellcore's analysis played an important part in the contracts for field trials which Ericsson, Inc., signed in 1986. They confirmed Ericsson's strategy of pursuing this evaluation to show the excellence of the product. Later, in the autumn of 1986, Ericsson received its first commercial order for six limited AXE exchanges to be used as Signal Transfer Point exchanges for U.S. West. In early 1987, Ericsson was, together with Siemens, one of the best placed companies to break into the market. After U.S. market leaders AT&T and Northern Telecom, Siemens's prime competitors for a piece of the market are Sweden's Telefon AB, L. M. Ericsson and Japan's N i p p o n Electric Corp. So far, Siemens leads the newcomers, with trial orders for their EWSD switch at five of the seven regional U.S. p h o n e companies. . . . But Ericsson is close behind, with three trial orders. T h e next two years, analysts say, will decide which company graduates beyond these small orders to a status as a mainstream supplier in the U.S. (Wall Street Journal, "Siemens Launches Risky Drive in Phone Gear," February 9, 1987)

In April 1987, Ericsson signed a contract with U.S. West for 60 AXE switches. By November 1987, Ericsson had also signed contracts

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for different types of AXE applications with ΝΥΝ EX, Bell South, and Southwestern Bell to account for commercial orders of 200,000 equivalent lines. T h e first switches did not meet the performance standards, and Ericsson had to assign a large number of specialists to fix them. New features had to be postponed until the design problems were solved. Ericsson Telecom is still not a mainstream supplier to the Bell Operating Companies, but neither are its foreign competitors. T h e market battle proved tougher than expected for all new entrants. Compared with the original market plan, Ericsson received trial orders one year later than estimated. It also took longer than expected to obtain volume orders. A total of 200,000 lines at the end of 1987 was still far short of the 700,000 lines which were predicted for 1990. Ericsson Telecom has revised its forecasts and is adapting to the slower pace by a tighter control on overhead and administrative expenses. T h e technical development project originally estimated at 300,000 hours will instead cost about 600,000 hours. T h e doubled figures are evidence that the market is constantly developing, and that new features have to be included if the company is to keep up. It took a long time to establish the project in the Swedish organization because of competition for resources with other projects and underestimating the requirements and complexity of the United States market. Ericsson consciously published ambitious plans and kept development times short. An older manager stated that Ericsson has never achieved a breakthrough on a large market in less than five years. It is not surprising that plans have been delayed. T h e decisive factor seems to be the extent to which the company has learned from the experience and built that learning into its management, organization, and administrative systems. Partial Learning T h e United States experience was important for the decision to restructure the relations between the business areas, Ericsson Telecom, and the subsidiaries. Subsidiaries were divided into five regions, with the United States as one. T h e United States is getting design, marketing, and installation support resources in Sweden which are specialized for that region (Figure 2). T h e new structure strengthened management capacity to deal with joint decision-making and problem solving. T h e North America Operations in Sweden had more resources which were dedicated to the support of North American markets. Change in formal structure, however, is not the same as changes in organizational practice. It takes much longer to develop the service

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