RESEARCH AND PRACTICE
IN HUMAN RESOURCE MANAGEMENT

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Smith, A. E., (1995). The Flexible Firm: Strategy or Structure?, Research and Practice in Human Resource Management, 3(1), 85-96.

The Flexible Firm: Strategy or Structure?

Anthony E Smith

Abstract

This paper examines the flexibility debate, particularly the links between technological and organisational change with the emerging management policies and practices. It is a response to Godard’s (1991) call for additional evidence if the extent to which these policies and practices are economically rational. Drawing on evidence from a survey of just under 1000 companies in Canada, the paper concludes that flexible practices are more likely to be adopted by large, technologically advanced employers that operate within concentrated markets. The implications therefore confirm Godard's arguments that the extent to which it is rational to adopt flexible practices can vary considerably in accordance with firm-level structural variables, and that this comes over time to be reflected in managerial choices and ultimately in the extent to which flexible practices are adopted.

Introduction

Increased international competition has produced various initiatives world-wide for greater organizational flexibility, and an emerging new economic order may be characterized by smaller firms, industrial districts, vertical disintegration, flexible firm strategies and production networks, and flexible technology (Sengenberger, Lovenian and Piore, 1990). The emerging technological paradigm of flexible specialization implies, not only that certain flexible organizational forms may be observed in different firms or industries, but that flexible specialization is a necessary successor to mass production (cf. Curry, 1993). This paper focuses. on the notion of the flexible firm. It questions the evidence for practical strategies for organizational flexibility and calls for further study of the processes underlying management policies and practices [1].

Flexibility has two basic dimensions: flexibility in employment and flexibility in work (Pollert, 1988 and 1991). Flexibility in employment is a labour market concept. As markets and the business cycle undergo their usual changes, managers of firms find it desirable to shift the size of their work forces. In the last two decades there has been a large and varied list of innovations which have increased flexibility in employment. Part-time and temporary work, sub-contracting, and homework are just some of the forms of employment flexibility [2].

Flexibility in work refers to flexibility within the firm or within the production process. This is the notion that flexible technologies enable a more rapid transfer of machines and processes between production functions or types. Coupled with more flexible forms of work organization, such as working time, group and team approaches, the new technologies enable a firm to produce variations of products, even different products, cheaply in small batches. Thus it is possible for firms to respond easily and quickly to rapidly changing markets. Over the past two decades a variety of “flexibilities” have been observed in a number of production activities, including innovative ways of organizing, rewarding and managing work [3].

Mere flexibility is not, however, the central issue. The debate on flexibility goes beyond its function or desirability. “What has so excited the academic world, and many political circles as well, is the notion that a new socio-technological paradigm is upon us. This new (or revived) paradigm is based on a combination of flexible forms of employment and inter- and intra-firm structure along with the new computerised flexible technologies” (Curry, 1993, p.102) [4].

However, theoretical arguments on the strategies of flexibility have been conducted at an abstract level and not related to specific policy issues, except as illustration of general themes; while empirical research to date has tended to focus on measuring the diffusion of workplace innovations across firms and industries. Of course it is important to measure the diffusion of new employment and work practices, but it is also important to evaluate key theoretical and empirical questions concerned with the nature of employment patterns, production relations and work organization. In the light of the advent of such forces as global competition, the trade agreement between Canada, the United States and Mexico, and technological changes, this paper reports the results of a study of the management of technological change and work organization in just under 1,000 unionized companies in Canada to contribute to the growing body of research into the links between technological and organizational change with emerging management policies and practices.

This paper does not provide a systematic review of the existing literature within the flexibility debate, but it may be useful to note four features of management’s approach towards employees that have been identified as needing further research. The first concern is the issue of labour market dualism. That is, the extent to which employers have increasingly used different types of secondary labour (employees who are treated less favourably than key groups within the more permanent work force). Employers may be reducing their commitments to, and dependence on, a primary work force (Atkinson, 1985) in order to increase efficiency and reduce costs or to weaken the power of the primary work force. Second, in most advanced industrial societies, pressures to promote employee participation and commitment are continuing to grow (Kochan, Katz and McKersie, 1986; Purcell, 1992). A key tendency appears to be the emphasis that is being placed on “individual” as opposed to “collective” relations. Accompanying this has been the upsurge of interest in direct forms of employee involvement such as briefing groups and quality circles. Indeed, the shift in emphasis from “collectivism” to “individualism” or, to put it more appropriately, from management-union relations to management-employee relations, goes to the very heart of the debate about the move towards the human resource management approach. It has also been claimed that employers are seeking to by-pass unions and develop a more personal relationship with employees to win their support for management policies (Barkin, 1989). Third, over the last two decades there has been a good deal of discussion of the effects of different payment systems (see, for example, Milkovich and Newman, 1987; Storey, 1992). One relevant aspect is the extent to which employers have moved away from individual incentive payments, which foster a calculative approach to the wage-effort bargain, towards collective systems of payment linked to more general performance indicators. The payment system is being increasingly used to foster employee identification with corporate goals and performance. This approach is more likely in companies that have experienced reduced output and employment. Fourth, and closely related to changing pay systems, is how employers are using techniques designed to measure work and responsiblities. More generally, it has been argued that the use of so-called scientific management techniques is an important method of managerial control of employees [5].

The emerging evidence suggests that changes in employment and work practices reflect contextual changes, such as increased competitive constraints and the “globalization” of production, but that this relationship is far from determinate, with managerial strategic choices playing a key mediating role (Kochan, Katz and McKersie, 1986; Storey, 1992). However, this paper adopts a broader perspective, and emphasizes the strategies of flexibility and their relationship to firm and industry variables.

The first section briefly outlines recent developments in the study of labour regulation and technological change. The second section draws on survey data collected in 1991 to provide some critical perspectives on key contemporary debates on technological and organizational change and managerial policies. Two main issues are emphasized. First, the nature and extent of technological and organizational change at the firm level have not been systematic in linking such changes with new types of flexibility. Second, flexible practices are more likely to be adopted by large, technologically advanced employers that operate in concentrated markets.

The Regulation of Labour and Technological Change

Clearly there are likely to be variations in the implications of decisions to adopt new technology for managerial approaches to labour regulation. In this sense the overall business strategy developed by an organization to respond to changes in the commercial and technical environment is a “corporate steering device” which sets the parameters within which sub-groups of managers develop policies and approaches to implementing technological change (Child, 1985).

Four strategic choices or policy directions regarding labour regulation can be identified which may be applicable in such cases. First, the elimination of direct labour by substituting new technology for human involvement to provide automated, continuous-production processes. Second, sub-contracting of work outside the organization by hiring professional and managerial staff to work on a contract basis from home using computer workstations linked to company headquarters. Similar developments may be possible where the high reliability of equipment allows maintenance work to be sub-contracted. Third, improved employee flexibility by breaking down existing horizontal and vertical skill demarcations among employees, thus increasing the range of tasks, or the amount of discretion, or both. Fourth, degradation of jobs using new technology to deskill tasks and increase direct management control over work through scientific management practices. In practice, the balance between these options is likely to vary among firms, depending on factors such as product and labour markets and the nature of the production task.

Such policies have important implications for an organization’s internal labour market. Thus, as noted above, the debate on flexibility focuses on the argument that the principle reason why management reconsiders its approach towards the work force and unions is the need to create flexible labour to meet the dynamic conditions of competitive markets (Atkinson, 1985; Kochan, Katz and McKersie, 1986; Metcalf, 1987; Piore and Sabel, 1984; Streeck, 1987). In most advanced industrialized societies, governments have debated ways of reducing labour market (including pay) rigidity as well as increasing overall organizational flexibility; managements have been concerned with job flexibility, multi-skilling, and increasing their ability to hire and fire; and unions have reassessed their stance towards new production concepts and employee involvement [6]. The focus has been on two types of flexibility: numerical - adjusting the number of employees employed to meet fluctuations in demand, and functional - the adjustment of employees’ tasks to meet changing workload and production methods. Allied to both is pay flexibility; that is, a firm’s ability to adjust labour costs, particularly pay, to changing market (both product and labour) conditions. However, to what extent have managers adopted such innovations?

The Flexible Firm?

A comprehensive mail survey of unionized Canadian firms was conducted by the author in 1991 to provide data on new technology and industrial relations developments in just over 2,000 firms across key sectors of the Canadian economy. Just under half (45.4 percent) of the response (962 firms) came from manufacturing, with the balance coming from business services (13.1 percent), retail (10.1 percent), public administration (9.2 percent), transportation, communication, and utilities (8.9 percent), finance (6.2 percent), and forestry and mining (6.1 percent). The questionnaire asked about the firm’s major bargaining unit. Respondents were asked whether certain .changes such as employment patterns, employee participation, pay systems, and work organization, had been introduced in their firms between 1980 and 1989. The questionnaires were addressed to the senior industrial relations manager or equivalent but, because of the nature of the information sought, the questionnaire could have been completed by three or more individuals: respondents with responsibilities for industrial relations, for human resource management, or for both [7].

The survey had two related major purposes: to assess the extent of innovations in Canadian firms and their impact on industrial relations. Utilizing the model adopted by Godard (1991) to examine management practices, the key variable in the present study is management innovations, an additive index of 16 items normally associated with management’s approach towards employees. Eight structural variables are included: size (the number of employees in the primary establishment), market (the percentage of sales accounted for by the four largest firms in the primary market over which the good or service is sold), and the various types of production system (unit and small batch production, large batch and mass production, continuous process, routine administration, non-routine administration, and policy-making).

Table 1 shows the overall incidence of management practices, together with a breakdown by type and industrial sector.

Table 1
Incidence of Management Innovations
All Firms Business Services Finance Forestry & Mining Manufacture Public Admin Retail Transport Comm & Utilities P<(Chi-Square)
n=962 n=126 n=60 n=58 n=437 n=88 n97 n=86
Percentages
At least one innovation 46 68 57 62 66 61 67 53 .001
Secondary Labour
Part-time 18 27 52 18 28 5 30 14 .001
Sub-contract 19 10 24 20 28 27 26 10 .062
Casual 30 43 30 15 20 13 24 50 .001
Contract out 33 21 31 9 34 25 9 24 .062
Overtime 33 35 58 21 37 43 44 34 .001
Shiftwork 22 3 24 15 36 10 37 17 .001
Participation
Quality circles 13 10 24 7 16 10 9 3 .006
Briefing groups 11 13 17 15 8 15 20 9 .006
Semi-autonomous work groups 11 22 17 6 12 2 8 13 .006
Consulation 32 11 15 30 38 40 21 36 .001
Pay Systems
Individual PBR 4 3 7 2 8 4 5 6 .633
Group PBR 24 33 25 11 23 - 49 12 .001
Bonuses 5 3 6 3 7 1 9 10 .663
Scientific Management
Work Study 22 11 15 14 31 6 13 16 .062
Job Evaluation 23 24 28 29 21 16 31 26 .062

Note: All tests of significance are two tailed

As Table 1 indicates, the most common management innovations were contracting work out and overtime, followed by joint consultative committees and use of casual labour. The least common were individual incentive schemes. Nine of these varied significantly (p < .05) across industries - part-time labour, casual labour, overtime, shiftwork, quality circles, briefing groups, semi-autonomous work groups, joint consultative committees, and group incentive schemes. Sub-contracting labour, contracting work out, work study, and job evaluation did not quite reach the .05 level (p < .07), while individual payment-by-results and bonuses showed no significant variation across industries.

Table 2 shows the correlations and coefficients for the regression of management innovations on the structural variables. This regression provides support for the argument that management innovations vary systematically and that this variation tends to be more likely for large establishments and process technologies.

Table 2
Structural Variation in Management Innovations
Independent Variables r b
Size .431 .981
Market .231 .531
Unit .06 2.21
Unit2 .06 .33
Mass .231 -.942
Process .122 .922
Routine -.181 -.912
Non-routine .06 2.11
Non-routine2 .06 .37
Policy .08 .11
r2 .45

Notes: b = unstandardized coefficients for management innovations 2 = p < .05 level; 1 = p < .01 level; all tests of significance are one tailed

The coefficients are also significant and in the expected negative direction for mass production and routine administration, indicating that highly-paced technologies embody “technical” control and, hence, require less “indirect” control. The coefficients for unit and non-routine administration were initially insignificant. Following previous research on the implications of automation (Woodward, 1980), a quadratic term was introduced to test for nonlinearity. The results reveal significant positive effects for unit and non-routine administration and insignificant negative effects for their squared value. Thus, increases in unit and non- routine administration give rise to increases in management innovations only up to a point, beyond which further increases may begin to be associated with decreases. Finally, of the remaining coefficients, only market is statistically significant in the expected direction.

Conclusions and Implications

This paper began by noting that the debate on flexibility continues to be conducted internationally. “This has occurred despite trenchant critiques of the various flexibility theses” (Curry, p.99). Drawing on evidence from a survey in Canada, the paper has analyzed practical strategies for organizational flexibility. Managers have not generally resorted to using the secondary labour market. The development of consultation systems with unions has been quite common, as has been the adoption of participative techniques for individual employees. The use of scientific management techniques has not been widespread, but group payment incentives to win employee support and commitment have been growing. In the main, flexible practices are more likely to be adopted by large, technologically advanced employers that operate in concentrated markets.

It should be stressed that the analysis cannot be viewed as an unequivocal “test” of the flexibility paradigm. Not only are the data restricted to unionized firms, but also the measurement of management innovations excludes a number of initiatives. Nonetheless, the analysis can contribute to the limited body of multivariate research to date. If it is assumed that Canadian managers are representative of managers in general, then the findings take on a broader applicability.

What are the main implications of these findings? First, one of the ironies of the recent discussion of employer labour market strategy is that it contradicts traditional dual labour market theory. Dual labour markets are essentially an attempt to explain the causes and effects of inherently imperfect markets for labour. Dualism breaks with neo-classical economic approaches by recognizing inequality in work and attempting to find structural explanations for it. The notion of dualism is that there are core and peripheral industries, corresponding labour markets with differential pay levels, a distribution of functions between conception and execution, and so on (Doeringer and Piore, 1971). Berger and Piore (1980) conceive of dual labour markets as the result of firms and employees dealing with economic flux and uncertainty. Employers will be expected to make more use of secondary labour in peak periods and reduce it when markets are slack. The current discussion, however, reverses this argument. It claims that in the recession employers have made more rather than less use of secondary labour.

It can be plausibly argued that the depth of the recession has led employers to rethink their definitions of the “normal” level of output. If they believe that this level is likely to be lower in the future than it was in the past, then it is rational for them to reduce the size of the primary labour input, and if output is currently above the new “norm”, to make greater use of secondary labour. But in fact there are likely to be considerable variations between employers in this respect, both because of differences in the actual and predicted state of demand and because they are likely to be at different stages in the process of adjusting the balance between different types of labour. For the first stage of adjusting to a fall in demand there is likely to be a reduction rather than an increase in secondary labour. In addition, it is possible to meet any demand above the norm by extending the hours of work of primary labour, notably by resorting to overtime or shiftwork.

Second, in the related discussion of management control strategies, scientific management is treated as the benchmark against which change is judged. Thus, present concerns with flexibility signal a break with the assumed past domination of tight pre-set specification of tasks embedded in a high division of labour. Although there are differences in emphasis between writers, they can be considered to have developed a new perspective on management control strategies and offer a basis for updating earlier theories of post-industrialism, as they stress the potential of technology to increase flexibility and skill levels and to offer more rewarding work. (For a review, see Wood, 1989).

The problem with the “flexible firm” model is that it over-emphasizes management’s co-ordinated pursuit of flexibility. It is almost as if flexibility is an end in itself, whereas flexibility is only one managerial concern and cannot be abstracted from its other goals and areas of interest (Maclnnes, 1987; Pollert, 1988 and 1991). Managements may be exploring ways of increasing functional flexibility or alternatively the use of part-time labour, without this necessarily meaning that they are pursuing all forms of flexibility.

The overall conclusion from this survey is that relatively few firms in Canada have explicitly and comprehensively reorganized their work force on a flexible basis. Consistent with the argument developed in Godard (1991), these considerations in turn vary systematically in accordance with three sets of structural variables: size, technology and market conditions. First, flexible management practices are likely to be more rational for large employers. Not only do these employers have various cost-economies, but employee consciousness is generally more problematic because of the alienating effects of size. Second, flexible practices are likely to be more rational in capital intensive firms with uncertain and complex technologies, requiring high levels of formal and informal training, and employing advanced process production techniques. Third, flexible practices are likely to be more rational in firms producing essential or unstandardized goods and services, with a high rate of capital utilization and operating in concentrated markets.

As Godard (1991 ,p.386-387) concluded:

to argue that size, technology and market conditions determine the extent to which it is rational for management to adopt [flexible] practices is not to suggest that they rigidly determine variation in these practices. It L to suggest, however, that failure to adopt the[flexibility] paradigm ma)! not reflect [mistaken]. ..strategic choices as much as it does cost-benefit considerations consistent with the rational pursuit of profit: considerations which vary in accordance with structuTal variables. Though there are undoubtedly limits to managerial rationality, it is a mistake to think that these considerations are not at the core of managerial decision processes or that they do not become reflected in the extent to which [flexible] practices are adopted.

Indeed, it may be that managerial strategic choices in part evolve retrospectively, as rationalizations of prior decisions and the associated learning processes (Pfeffer, 1982). Thus, not only may strategic choices be of less importance than structural variables, it may be that they serve more as rationalizations for, rather than determinants of, the extent to which these practices are adopted.

Future research in union and non-union firms needs to study the processes underlying the formation of management policies and practices in more detail. Forthcoming studies would also benefit from including an extended set of innovative and structural variables. Although the present results appear to be generalizable across countries and occupations, these findings need to be replicated, preferably in a longritudinal setting, before any firm conclusions as to causal directions can be made.

Footnotes

[1] It is beyond the scope of this paper to examine the evidence for flexible specialization. For an insightful critique, see Curry (1993).

[2] The right to “hire and fire” has been and, despite the effects of various labour struggles to the contrary, remains an important prerogative of management. Furthermore, the increase of temporary employment and employment subcontracting in large firms has been an ongoing trend for many years (Christopherson, 1989).

[3] The quintessential example of flexibility in work is considered to be the “Third Italy”, a collection of industrial districts in north-central Italy. These concentrations of small clothing, textiles, machining, and engineering firms are said to have made great strides in utilizing flexible technology and employment to quickly and efficiently adapt to changing markets (Amin, 1989; Murray, 1987; Piore and Sabel, 1984).

[4] Curry (1993) draws attention to the contradictory tension between the employment and work meanings of flexibility. On the one hand, there is a notion of flexibility as an important component of technology and production organization. The technological ability to produce an ever increasing variety of goods ever more efficiently is an important component of most optimistic notions of industry. This notion of flexibility can be conceived of in terms of progress in the development of the forces of production. On the other hand, there are the less sanguine realities of flexibility. That is, it is the most recent development in the continuing search by industry of ways to deal with the ever-present “problem” of the inherent flexibility of labour power. New technological, ideological, and juridical forms are continually developed which, in effect, shift or transfer inherent labour flexibility to the organization.

[5] The basic argument here was originally advanced by Braverman (1974) and has become central to a substantial body of literature, commonly referred to as labour process theory. For a review, see Godard (1990).

[6] The reality is that both management and government policies have combined to force an increased casualization of the work force, and that what amounts to a decline in the security of employment and pay levels has become ideologically viable (Pollert, 1988).

[7] The survey included questions which were susceptible to differences in the way the parties perceived them due to their roles and relationships. Thus management and union respondents were asked questions about the effects of innovations and the extent to which these were negotiated. More factual questions pertinent to the analysis in this paper were asked of only management respondents.

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