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12. The Lincoln Electric Company is a longtime maker of welding equipment in Cleveland, Ohio, whose industry performance has been legendary. Its operations have focused around its well-known piece-rate incentive system, which permits it to gain significantly greater utilization of its capital assets than competitors, with a resulting competitive advantage on costs. In the mid-1990s, however, Lincoln experienced some difficulties in establishing new facilities outside of the United States and ended up modifying its organizational system when it opened facilities in Asia. What factors might contribute to the difficulties that even a well-managed firm might face in transferring its management and production systems to international locations?

ENDNOTES

1Caves, R., and D. Barton, Efficiency in U.S. Manufacturing Industries, Cambridge, MA, MIT Press, 1990, pp. 1–3.

2Chandler, A. D., Strategy and Structure, Cambridge, MA, MIT Press, 1962.

3Alchian, A., and H. Demsetz, “Production, Information Costs, and Economic Organization,”

American Economic Review, 62, 1972, pp. 777–795.

4The classic statement of these two problems is in March, J., and H. Simon, Organizations, New York, Wiley, 1958, pp. 22–27. For a review of research on these problems, see McCann, J., and J. R. Galbraith, “Interdepartmental Relations,” in Nystrom, P. C., and W. H. Starbuck, Handbook of Organizational Design, rd. 2, New York, Oxford University Press, 1981, pp. 60–84.

5Prahalad, C. K. The Fortune at the Bottom of the Pyramid, Upper Saddle River, NJ, Wharton School Publishing, 2010, pp. 175–206.

6Isaacson, W., Steve Jobs, New York, Simon & Schuster, 2011, pp. 407–408.

7Simons, R., Levers of Organization Design: How Managers Use Accountability Systems for Greater Performance and Commitment, Boston, Harvard Business School Press, 2007, pp. 7–13.

8Garvin, D. A., and L. C. Levesque, “Meeting the Challenge of Corporate Entrepreneurship,” Harvard Business Review, 84(10), 2006, pp. 102–112.

9Siegel, J., Lincoln Electric, HBS Case #9-707-445 (rev. August 25, 2008); Bartlett, C., and J. O’Connell, Lincoln Electric: Venturing Abroad, HBS Case #9-398-095.

10This distinction is taken from information processing approaches to organization design. For a review, see McCann and Galbraith (1981). A similar distinction between informational decentralization and informational consolidation is sometimes made in economic analyses of organization structure. See Baron, D., and D. Besanko, “Information, Control, and Organizational Structure,” Journal of Economics and Management Strategy, 1, Summer 1992, pp. 237–276.

11Hindle, T., The Economist Guide to Management Ideas and Gurus, London, Profile Books, 2008, pp. 169–170.

12We would like to thank Suresh Krishna for developing this example.

13The network structure described in the first section is an alternative that relies on external contracting relationships.

14Garnet, R. W., The Telephone Enterprise: The Evolution of the Bell System’s Horizontal Structure, 1876–1909, Baltimore, MD, Johns Hopkins University Press, 1985.

15Baron, D. P., and D. Besanko, “Shared Incentive Authority and the Organization of the Firm,” unpublished mimeo, Northwestern University, Department of Management and Strategy, July 1997.

16Baron, D. P., and D. Besanko, “Strategy, Organization, and Incentives: Global Banking at Citicorp,” unpublished mimeo, Northwestern University, Department of Management and Strategy, April 1998.

Endnotes • 469

17Hamel, G., “First, Let’s Fire All the Managers,” Harvard Business Review, December 2011, pp. 48–60.

18Anderson, J. C., Hakansson, H., and Jan Johanson, “Dyadic Business Relationships within a Business Network,” Journal of Marketing, 58(4), 1994, pp. 1–15.

19For an extended discussion of the network organization, see Baker, W. E., “The Network Organization in Theory and Practice,” in Nohria, N., and R. G. Eccles, Networks and Organizations, Boston, Harvard Business School Press, 1992, pp. 397–429.

20Kali, R., and J. Sarkar, “Diversification, Propping and Monitoring: Business Groups, Firm Performance, and the Indian Economic Transition,” Indira Gandhi Institute of Development Research, Mumbai Working Papers -WP-2005-006, November 2005.

21For studies of interfirm networks that focus on European network examples, see Rank, C., Rank, O., and A. Wald, “Integrated versus Core-Periphery Structures in Regional Biotechnology Networks,” European Management Journal, 24(1), February 2006, pp. 73–85. For studies of Japanese and biotechnology examples, see Nohria, N., and R. G. Eccles (eds.), Networks and Organizations, Boston, Harvard Business School Press, 1992,

pp. 309–394.

22Richman, Barak D., “Community Enforcement of Informal Contracts: Jewish Diamond Merchants in New York,” Harvard Law School John M. Olin Center for Law, Economics and Business Discussion Paper Series. Paper 384 (2002). http://lsr.nellco.org/harvard_olin/384.

23Roberts, J., The Modern Firm: Organizational Design for Performance and Growth. Oxford, Oxford University Press, 2004, pp. 32–67.

24Bottazzi, G., Dosi, G., Lippi, M., Pammolli, F., and M. Riccaboni, “Innovation and Corporate Growth in the Evolution of the Drug Industry,” International Journal of Industrial Organization, 19(7), July 2001, pp. 1161–1187.

25Thompson, J. D., Organizations in Action, New York, McGraw-Hill, 1967. 26McGahan, A. M., How Industries Evolve, Boston, Harvard Business School Press, 2004. 27This example was developed from materials in Isaacson, W., Steve Jobs, New York:

Simon & Schuster, 2011, and Lashinsky, A., “Inside Apple,” Fortune, May 23, 2011.

28Galbraith, J. R., and R. K. Kazanjian, Strategy Implementation: The Role of Structure and Process, 2d ed., St. Paul, MN, West Publishing, 1986.

29Garicano, L., “Hierarchies and the Organization of Knowledge in Production,” Journal of Political Economy, October 2000.

30Stinchcombe, A. L., Information and Organizations, Berkeley, University of California Press, 1990.

31Badia, E., Zara and Her Sisters: The Story of the World’s Largest Clothing Retailer, New York, Palgrave Macmillan, 2009.

32Kogut, B., and U. Zander, “Knowledge of the Firm and the Evolutionary Theory of the Modern Corporation,” Journal of International Business Studies, 1993, pp. 625–645.

33Chandler, Strategy and Structure.

34This example draws from multiple sources, including: Khanna, T., Song, J. Y., and

K. M. Lee, “The Paradox of Samsung’s Rise,” Harvard Business Review, 89(7–8), 2011, pp. 142–147; “Samsung’s Radical Shakeup,” Business Week, February 28, 1994, pp. 74–76; Samsung: Korea’s Great Hope of High Tech,” Business Week, February 3, 1992, pp. 44–45; “Good to Be Big; Better to Be Good,” The Economist, August 18, 1990, pp. 7–10; and “Samsung: South Korea Marches to Its Own Drummer,” Forbes, May 16, 1988, pp. 84–89.

35This example is based on material from Khanna, T., and K. G. Palepu, Winning in Emerging Markets: A Road Map for Strategy and Execution, Boston, Harvard Business Press, 2010.

The Social Context of Firm Behavior • 471

medical research and development. Governments in other nations have even greater latitude in regulating health care markets.

Firms comply with regulations to avoid penalties, but compliance also gives firms a recognized legitimacy and a right to compete. For example, the U.S. Food and Drug Act of 1906 and, especially, the 1962 Kefauver-Harris Amendments to the FDA Act, assure American consumers about the quality of brand-name prescription drugs. With FDA approval in hand (and with similar approval from the European Medicines Agency, the Japanese Ministry of Health and Welfare, and their counterparts around the world), drug companies have a ready market for their costly new medicines. Some industries achieve similar benefits though self-regulation. For example, appliance makers can obtain a seal of approval from the Underwriters’ Laboratory, certifying the safety of their products. On the other hand, efforts by cellular telephone companies to establish standard billing practices have failed to placate many consumers.

The behaviors of firms facing similar market situations may be circumscribed within narrow bounds even in the absence of government and self-regulation. Firms in the same market situation will likely operate within a set of shared general understandings and values regarding customers, competitors, products, and other aspects of a business, which necessarily leads to similar conclusions about how to produce and sell their products. This need not imply collusion or even lockstep consistency. While managers may agree on the facts concerning demand, competition, and so forth, they can differ sharply on how to perform those tasks to best satisfy consumer needs and generate profits. They may choose to compete for different market segments, offer different sets of products and services, and bring different capabilities and skills in their approaches. These differences are critical for effective competition.

Shared understandings may stem from a common history, such as when managers all grow up in a similar location or social context. In some businesses, such as restaurants and hotels, there may be a set of competitors from particular ethnic backgrounds whose entrepreneurial networks have chosen to specialize in some businesses over others. For example, among U.S. immigrants, those from the Philippines are much more likely to work as nurses than their overall proportion of the population would suggest, while those from Vietnam are much more likely to be working as hairdressers. Shared understandings may stem from common regulatory and technological constraints. Managers facing common constraints may develop common assumptions and sets of “best practices” to address those constraints.

Disagreements about what are thought to be consensual matters in an industry may signal the emergence of new opportunities for competitive advantage. For example, the growth of practices associated with mortgage securitization in the early 1980s led to significant changes in lending practices that violated long-held industry assumptions.2 Technological or regulatory changes can also stimulate a reexamination of shared assumptions about industry competition. For example, the use of joint ventures and strategic alliances as modes of corporate growth has increased markedly since the early 1990s as a result of both technological changes and the relaxation of U.S. antitrust enforcement policies regarding joint ventures and alliances.3

While shared understandings can persist in industries for long periods of time, they also can change quickly and dramatically. The changes that occurred across the Middle East and North Africa in 2011 that have come to be known as the “Arab Spring” have roots in regional economies just as they have in regional politics. Of special importance has been the development, much of it prior to 2011, of beliefs, values, and behavioral norms of an emergent Muslim middle class that is strongly supportive of the development of thriving market economies. The implications of this