THE STRATEGY OF SPANISH INDUSTRIAL FIRMS IN THE LATE TWENTIETH CENTURY: A CONVERGENCE FAILURE
Veronica Binda
1) DIVERSIFICATION AND CONVERGENCE
In thetwentieth century the strategy of diversification has played a fundamental role in the development of the largest industrial enterprises in the world, revealing itself to bea crucial point in sustaining their growth and competitiveness. The decision to move into new geographical or product marketsboth permittedto use thecompetences and the resources acquiredthanks to the core activity and created ways to escape productive ties that would have seriously mined the activity of big firms. Alfred Chandler[1] affirmsthat in the United States,at the end of the nineteenth century,the new big machineries andthe technologiestypical of the “Second Industrial Revolution”permitted to exploit important scale and scope economiesfor the first time and therefore to produce decreasing unitary costs to the increasing quantity. The growth of the productive process efficiency generated a large surplus that could find employment in the development of fundamental activities for a further growth of the enterprise. The exploitation of the productive potentialities of the machineries, the systematic investment in the activity of research and development and the emerging of geographical or product markets to conquer,stimulated the great American enterprises to use the surplus in the pursuing of a strategy of diversification. The birth of new lines of product or the conquest of unexplored regionsallowed the firms to continue their own growth in spite of the conditions of the originary markets that, with the increase of competition, were saturating. Chandler claims that the strategy of diversification proved itself winning in particular if considering products relatedto the core activity, because throughout an expansion in neighboring sectors it was possible to fully exploit sinergies in knowledge, production and distribution and to maintain the control of the whole created systembasingon competence. Above all the strategy of unrelated diversification was successful beginning from the 1960s, even if often not long lasting in the American case. Undertakinga radically different activity from the original one permitted a risk reduction through its subdivision in different sectors, a lowercapital cost and a better use of the managerial resources. On the other hand, the incompetence and the incapability to organically manage such different lines of product constituted the main risk of this strategy. The modern industrial enterprise, as described by Chandler, rarely continues to grow or maintain a competitive position for a long time if the addition of new units isn’t followed by the development of suitable managerial abilities.
The empirical evidence collected on the world’s largest industrial enterprises has shown that the strategy of diversification, related or unrelated, is currently the mostlyused and is the one thatguarantees a higher level of competitiveness to the American and European enterprises, regardless ofthe differentnational contexts and business cultures of these countries. A recent analysis of two researchers, Richard Whittington and Michael Mayer[2], faced the theme of the potentially difficult destiny that diversification could have met in Europe, because of the different features of ownership and financial structure and of the heterogeneity of the historical paths followed by these nations in comparison to the United States. According to these authors, the obstacles met by the diversification during its spreading in Europe have been many: France for instance,presents a system of financial relationships, a personal capitalism and a technical culture that could havearrested the expansion of the firms in new activities just like the predominance of the banks and the strong technical inclination in Germany. In particular, the empirical evidence collectedrelatively to the feature of ownershipand to the importance covered by Rhenish capitalism model[3], in which the concentration of the ownership is strong, seemed an obstacle to the diversification becauseit was suspected that the major shareholder would have prevented an excessive expansion of the enterprise for fear of losing its control. The results of the study onthe largest industrial enterprises in France, Germany and Great Britain in 1983 and in 1993 have not confirmed this hypothesis. In front of the greater economic efficiency guaranteed by this strategy, the resistances have been outdone by the necessity ofremainingcompetitive in order to survive. The big enterprises of these countries, choosing to grow through diversification, succeeded in emulating the American “first - movers” and to compete with them on a functional and strategic level.
The diversification revealed itself a winning strategy also in nations with radically different models of capitalism from the European and American ones, as Japan and South Korea. In these countries the development of specific abilities has allowed huge industrial groups to manage different activitieswith success and also to conquer the foreign markets. The pathfollowed has not often been the same as the American enterprises: in the Japanese and Koreancase,the diversifiedbusiness groups are formed around few entrepreneurs that, having the capability, the will and the necessary contacts to create great enterprises, have exploited them to enter different sectors. In this system the State has played a fundamental role, protecting and sustaining the groups but requiring the enterprises to export and to measure their competitiveness on the global market. The search of an efficient way of production, also following a different path from the chandlerian one, has had the same result: the creation of the fundamental organizational abilities to keep on pursuing strategies of diversification and growthsuccessfully.
The main interest of the analysis of the Spanish case is constituted by the fact that the political and economical history of the country,in the twentieth century, presents strong particularities in comparison to the nations studied by Whittington and Mayer and also in comparison to the history of the countries protagonists of the Asian model of development, “industrial late comers” as Spain. The Civil War and the Autarky experimented during the first decade ofFranco’s period,in fact,interrupted for a long period the growth of the great enterprises that were developing themselves at the beginning of the century according to the path followed by the United States and by the other European nations, and only during the 1950sSpain succeeded in obtaining a political stability accepted at international level and started a plan of development of the economy. In the attempt of regaining the accumulated disadvantage, the State became the principal actor of the industrialization and intervened both through politics of regulation and protectionism and with the foundation of public enterprises in the main sectors. The foreign investors, that entered Spainprincipallywith the economic opening of the country from the end of the 1950s, were fundamental for the take-off and the industrial development. Spaingrew importantly but, at the death of Franco, the serious mistakes committed in the economic policy and the unsolved problems,emerged powerfully. The countryleft in inheritance to the democratic govermentsstill presented a weak economy and it had been harshly struck by the economic crisis of the 1970s. Consideringthis particular path of industrial development, the aim of the project is to analyze the strategic choices and the performance of the great Spanish enterprises in the 1980s and 1990s. The fundamental model of development, which the strategy of these firms is compared to, is the chandlerian one with which the Spanish enterprises have been in contact ever since the end of the Autarky and that, throughout the action of the European multinational firms mainly after the integration in the EEC (1986), has completely changed the relationships of competition among the enterprises seeing the multinationals victorious on the national firms. On the other hand it is important also to compare the behavior of the Spanish firms with the other “late comers”thattoday present a strong industry in which the diversification, even if pursued through the organizational structure of the groups and not of the multidivisionals, is at the base of the economic prosperity.
2) METHODOLOGY AND PROBLEMS
The opening towards the outside, that Spain experimented at the end of the 1970swith the transition to democracy, brought many economists to question themselves on the competitiveness of the Spanish enterprises in the world market. Aware of the debate terms and of the importance that the strategic choices had covered since the Postwar period, manyresearchers have analyzed the degree of diversification of the Spanish industry in the 1980s and 1990s[4], confirmingitslow level. These analysis show an ample picture of the diversification choices of the Spanish firms but, studying samples of enterprises of various dimensions, they neglect the weight of the great firms. It is in the great industrial enterprises, in fact, that the diversification has reached its maximum level and it is on this levelthat it becomes necessaryto compare the results obtained from the Spanish firms with those of the European and American enterprises. To this purpose the same criterions adopted and the exact period taken in consideration by Whittington and Mayer in the analysis of the cases of France, of Germany and of Great Britain, have been used: for 1983 and 1993 two samples, each of which composed by the one hundred largestindustrial enterprises by turnover in the country, have been selected. The principal source used for creating the samples is the “Anuario El Pais”publication,that reports the list of the largest enterprisesevery year. All the non industrial enterprises have been eliminatedfrom this list, according to the classification of Whittington and Mayer: the commercial, financial, public service and construction firms, strongly present in the list, can’t befoundin the empirical analysis proposal. Subsequently the industrial firms belonging to a same holding have been gathered thanks to the information drawn from “Duns & Bradstreet” and “Fomento de la Producción”, considering in a unitary way the total sales of the group. Subsequently the identity of the owner subject has been established, classifying the enterprises in foreigners and “national” (public and private) so to exclude from the analysis the firms whose head office was in a foreign State,and to concentrate only on the Spanish enterprises. When the sources permitted to ascertain it,even the nature of private owners was specified, be it personal, family, banking, group of firms, cooperative society orwidespread ownership,because the affiliation to one or the other category often implicated a different propensity in undertaking investments and risks, enlarging the company, submitting its control to external managers, moving into other makets. It has finally been necessary to identify the strategy adopted by each of the national enterprises, cataloging it according to the classification proposed by Whittington and Mayer for other European States. They measured the strategy classifying it in four types:
- “Single business strategy” if at least the 95% of the turnover originated from a single activity;
- “Dominant business strategy” if an activity reached at least 70%, but didn't overcome the 95% of the turnover;
- “Related diversification strategy” if no activity reached the 70% of the turnover, but there weremarket or technological relationships among different activities;
- “Unrelated diverisification strategy” if no activity reached the 70% of the turnover and almostno technological or market relationship existed among different activities[5].
The peculiarity of someof the great Spanish enterprises’ featuresmade it difficult, if not impossible, to completely follow the methodology adopted for the other European countries. The conclusive role that the foreign enterprises cover in the Spanish samples, first of all, limits the sources of the data. While in France, Germany and Great Britain the “national” samples were composed inaverage from 70 enterprises, in the Spanish case the analyzable firms in 1983 were 66 and in 1993 only 38, statistically provoking the pursuit of less significative results. Besides Whittington and Mayer, when confronting industrial groups,took only the group leaderin consideration, while in the Spanish case a similar choice is not adequate becausethe role practiced by the largest industrial enterprises, that are those belonging to the public groups INI and INH, would be eliminated from the calculation effected for the strategy, considering them as if they weighed “one” in their totality andfirms of smaller dimension in comparison to those considered for the other countrieswould be inserted in the sample. For this reason both the necessities have been taken in consideration, counting the strategy of every group only oncebut avoiding to insert in the samples firms of reduced dimensions, often all single business, that would have unbalanced it, reducing the weight that the great groups practice in the sense of a greater diversification and moving the analysis from the large enterprise to very small companies, incomparable with those of the rest of Europe. In the calculation of the first one hundred enterprises, therefore, the great firms belonging to the INI and the INH have been counted separately although their strategy and their structure has uniformly been considered, making it coincide with the group one and counting it only once. The last remarkable problem in the analysis has been the computing of the strategy one. The sources analyzed for this type of investigation are various: for what concerns the classification of the productive activity of the enterprises the international codes of classification of the industrial activities (SIC)have been considered[6]. The SIC were needed above all for cataloging with precision the type of developed activity, but they didn’t permit a cataloguing of the strategy adopted because they do not allow a measurement of the activities’correlation degree andneither of the sales percentage guaranteed by every type of product. For this reason, besides the SIC, has been used an intuitive logicconcerning the correlation among activities and other sources for the measurement of the percentage of sales guaranteed to the company from every product. The most significant quantity of this information is in the majoreconomic newspapers and periodicals’ files of the years between 1982 and 1994 (El Pais, El Mundo, Actualidad Económica, Dinero, Fomento de la producción, Inversión, Mercado). Other data have emerged from the Informes Anuales of the firms, from the commemorative publications published in the event of particular anniversaries of the foundation of the companies, from business cases, from monographic publications on single enterprises and from the biographies of the most important Spanish entrepreneurs.
3) EMPIRICAL ANALYSIS
3.1) RESULTS
Even if in smaller proportion in comparison to the samples composed by firms of various dimensions, the most greater Spanish companies confirm the tendency to a low level of diversification in comparison to the European ones (table 1).
Table 1-Strategy of the 100largestindustrial enterprises in Europe
Spain / France / Germany / Great Britain1983 / 1993 / 1983 / 1993 / 1983 / 1993 / 1983 / 1993
Single Business / 63,1% / 60% / 24,3% / 19,4% / 18,3% / 12,7% / 6,7% / 4,5%
Dominant Business / 7,8% / 15% / 10,8% / 15,2% / 16,7% / 7,9% / 16% / 10,4%
Related Diversification / 15,7% / 15% / 52,7% / 51,5% / 40% / 47,6% / 66,7% / 61,2%
Unrelated Diversification / 13,1% / 10% / 12,2% / 13,6% / 25% / 31,7% / 10,7% / 23,9%
Source: proper Elaboration and Whittington and Mayer, The European corporation
As occurred in the United States, also in Europe the largest industrial enterprises in the 1980s and 1990s showed the results of a growth persecuted throughout diversification (dominant business or related or unrelated diversification) in over the 60% of the cases, while the percentage of single business firms seldom reached the 20%. The tendency at the end of the century shows an intensification of this course: the number of enterprises assembled on their “core business”decreased in all the nations between 1983 and 1993. The results obtained in Spain are very different: in both these years a total predominance of the single business strategy can be noticed, with values that overcome the 60%, despite the fact that the 1980sand the European integration had created many opportunities of growth for the Spanish enterprises. In 1993, in comparison to a light diminution of the number of the single business firms, only dominant business strategy benefited, while those of related and unrelated diversification subsequently fell behind. The decision to assemble their own activity in an only product was dominant at the beginning of the democratic phase and did not suffer big variations even if the economic conditions of the new period were favorable to strategic improvements and the widening of their own markets. The largest Spanish enterprises at the end of last century had rarely undertaken the strategy of the diversification as a path of growth, and when they tried it, in most of the case they did not have apositive performance often incurring in real disasters. The elements that have hindered their choice of diversifying are numerous, they have both economic nature and political origin and are the resultsof interaction among foreign and national, public and privatesactors. The picture shown in the 1983 sample, allows many topics of reflection.
3.2) EXPLANATORY FACTORS
3.2.1 - ACCUMULATION OF CAPITAL AND DIVERSIFICATION
The principal factor that has started the pursuit of diversification strategies in the largeAmerican enterprises was the accumulation of a huge quantity of resources thanks to a radical improvement of the productive process of the core activity and the pursuit of scale and scope economies. Had a similar process of accumulation of wealth ever occurred in the same period in any national firmin Spain? Had the Spanish industrial enterprises reached the dimensions that had been the motor of the growth and the critical stage that had allowed the foreign competitors to face with the right resources the adventure of diversification?In 1983 no Spanish firm was present among the major one hundred industrial enterprises by sales in the world, and only two of them can be found in the European list[7]. In this outline the public firms had chosen to grow up to the maximum ceiling of the domestic market and they had remained small in comparison to the European rivals[8]. These great firms grew in protected sectors and they had scarce incentives to increase their own competitiveness. Besides they suffered from obstacles in the management which made it difficult to pursue a rational and efficient strategybecause the economic aims were overlapped by the political and social finalities, that implicated a notable use of business resources[9]. The surplus was often nonexistent, above all for the enterprises belonging to the great public holding INI: in 1983 the group was not profitable because of the crisis of the 1970s, that had forced it to save and to gather under its own guardianship a big number of enterprises belonging to various sectors. The State didn't have either the necessary resources to restore to health all these firms or the organizational and managerial competences to manage such a vast and diversified group[10]. The result was a drain of resources from the most profitable enterprises to those in difficulty and a worsening of the economic conditions of all the public firms. In this context it is not possible to assert that at the beginning of the 1980s in the public firms(that were also relatively the largest of the country by sales) that surplus of resources produced by the efficiency that Chandler held at the base of a solid process of growth was present.