Scenario Two: Virtual Countries

Scenario Two: Virtual Countries^[9]

Imagine that it is now the year 2015….

The huge global conglomerate has emerged as the dominant way of organizing work. These keiretsu-style alliances, each with operating companies in almost every industry, have minimal national allegiance. Members of the same family work for Sony/Microsoft or General Electric/Toyota, and feel little loyalty to the United States or Japan. It would be considered disloyal and unusual for members of the same family to work at competing keiretsu. The alliances meet all our needs on a cradle-to-grave basis by providing income and job security, health care, education, social networking, and a sense of self-identity. Our organizations are as powerful and influential as nations, and we owe allegiance to them. They have no dominion over our land, but they control our much more significant assets—access to knowledge, the networks, and our livelihood. They even wage war on each other—using lawyers instead of armies, valiantly protecting the trademarks of our company.

These days, if you want to define me, you can ignore my geographic location; I can be stereotyped according to the company I work for, in whose service I expect to retire. My friends and family members from around the world all work for the same organization. Occasionally, although I work for Shell/Daewoo, I must ride a nonaligned airline, and I run across someone from Exxushita. We always converse, full of curiosity, but guarded—taking advantage of a rare opportunity to see ourselves as others see us.

Employees own the firms in which they work, through pension plans, stock options, employee participation contracts, and other vehicles. And just as the modern nation states ultimately turned to democracy, many of the corporations of the twenty-first century have moved to representative governance. Our firm is one—employee-shareholders have the right to elect the management of the company, not just the board of directors, but managers at almost every level throughout the organization. Decisions are made hierarchically, but every year, on election day, we choose from slates of managers who vow to do the best job for the company as a whole. Since our livelihoods depend on the choice, nearly all of us take advantage of the keiretsu's "open-book" financial reports, which provide a constantly-updated overview of the business's priorities and assets.

Some people think of this system as paternalistic and bureaucratic. But actually, there is very little "fat" in the system. Nepotism, ossified command structures, and sinecures don't last long, since everyone benefits from improved performance. Specialist "organization designers" travel through the massive alliances, brokering partnerships and helping make sure that people communicate effectively across boundaries. All of us tend to get along, because our companies attract people who agree with the prevailing attitudes. We all know the "Shell/Daewoo way", and we live and die according to it.

The Virtual Countries scenario has four major elements:

• large verticallyand horizontally-integrated firms;

• pervasive role of firms in employees' lives;

• employee ownership of firms;

• employee selection of firm management.

Large Verticallyand Horizontally-Integrated Firms

The second MIT scenario posits a world economy dominated by large conglomerates which operate globally across a number of industries. As with the present-day Asian keiretsu arrangement, there will be a small number of core firms—large holding companies which sell products with widely recognized brand names—occupying a position at the center of the economy. These companies in turn will have a series of permanent or semi-permanent relationships with various smaller supplier firms, which will stand at the periphery of the system. The industry structure in most sectors will be oligopolistic, with a small number of major competitors holding dominant positions, and high entry barriers preventing upstarts from challenging the hegemony of market leaders.

The huge conglomerates envisioned in the Virtual Countries scenario could grow out of a continuation of the merger wave that has swept through the global business environment since the mid-1990s. The value of announced mergers involving U.S. firms totaled $519 billion in 1995 and $659 billion in 1996, by far surpassing the $353 billion registered in 1988, the previous peak year.^[10] Recent mergers have been concentrated in industries affected by government deregulation—telecommunications, broadcasting, financial services, aviation, natural gas and electric utilities—or where public policy has directly or indirectly encouraged consolidation, as in the case of the aerospace and health care sectors. But the globalization of markets has also driven some mergers and led to the creation of numerous international joint ventures, such those which are in place in the airline industry.

Management theory of the last decade has emphasized the importance of firms staying tightly focused and relying on their "core competencies". This trend was largely a response to the conglomerate craze of the 1960s and 1970s, when many large firms diversified into areas entirely unrelated to their original businesses. In the sectors with the greatest volume of recent mergers, the activity has primarily involved the buying of competitors or diversification into closely related areas. The result has been rapid consolidation in a number of industries, often on a global scale. When a firm sells off a business unit unconnected to its central activities and buys an entity with a position in its core industry, the company is effectively substituting scope for scale.

One interpretation of the widespread substitution of scope for scale is that firms are responding to the increased competitive pressures created by the arrival of truly global markets. By this argument, companies are refocusing because their competitors will hurt them if they don't. Some observers believe that once the consolidation of major industries on a world-wide basis has run its course, and oligopolistic industry structures return, unrelated diversification may once again appear attractive, and a series of mergers could ensue to create a second generation of conglomerates, this time on a global scale. Such a sequence of events could serve as the means of forming the world-spanning conglomerates of the Virtual Countries scenario.

Another force that could drive the world toward a Virtual Countries future would be the legal system's inability or unwillingness to protect intellectual property. Should intellectual property laws be weak or confusing, or enforcement of them lax or ineffective, a greater degree of vertical integration may become a strategic imperative for firms whose products have significant knowledge content. Such an approach could become necessary because, in the absence of legal safeguards, capturing the value inherent in a piece of knowledge would require producing and selling a tangible product which physically embodied that knowledge. Under such circumstances, larger companies would be at an advantage, and there would be strong incentives to prevent important knowledge from passing outside the boundaries of the firm.

The management structure employed at the large conglomerates in the Virtual Countries scenario could vary. In some cases, a traditional hierarchy might be maintained, with tight top-to-bottom controls in place to ensure that consistent performance was achieved at operations located around the globe. Alternatively, the conglomerates might be structured in a more decentralized manner, with arm'slength agreements and transfer pricing arrangements characterizing transactions between operating divisions, and employees heavily incentivized by performancebased compensation and promotion schemes. In this scheme, the corporate headquarters would still play an important role in establishing the organization's overall mission and shaping its culture, and in facilitating collaboration between business units where appropriate.

An example of such an approach is the decentralized organizational structure adopted in the last decade by such firms as Asea Brown Boveri, General Electric, and Johnson and Johnson. In all three instances, the traditional multidivisional structure was set aside, and "focal units", consisting of between 200 and 500 employees, were created to operate more or less as autonomous businesses. A thin layer of corporate staff was retained, and the traditional ownership structure, with a single publicly traded corporation serving as a sort of vast holding company for the entire agglomeration, remained unchanged.^[11]

Pervasive Role of Firm in Employees' Lives

In the Virtual Countries scenario, the conglomerates will assume full responsibility for meeting the "life maintenance" requirements of their employees. This will include first providing for tangible economic needs, through such means as a guarantee of lifetime employment, generous benefits packages, and retraining in the event that economic or technological changes make employees' skills obsolete. Affiliation with a large, respected company will also help employees meet more intangible needs: It will confer status and a sense of identity, and associating with colleagues at company-sponsored activities and events will become the primary social and recreational outlet of workers.

Employees will be expected to purchase goods and services only from companyaffiliated firms. They will fly the company airline, purchase cars and appliances from company subsidiaries, subscribe only to the company-affiliated Internettelecommunications-entertainment service. The keiretsu of Asia already exhibit some of the these characteristics. One member of a 21st Century Initiative sponsor discussion group told of an evening spent in Tokyo, where a Japanese salaryman entertaining foreign business associates showed them the list of company-approved products issued to all employees—and then ordered the brand of beer produced by his firm's subsidiary.

In the Virtual Countries scenario, ties to the company will extend far into employees' personal lives. Family members will tend to work for the same company, and attempts by young couples to marry across company lines will meet with disapproval from parents and co-workers, in the same way that marriages across racial, ethnic, or religious lines are now discouraged in many parts of the world.^[12]

By providing completely for employees' life maintenance needs, the large firms will be assuming responsibility for many of the "safety net" functions performed by government in the Western European social democracies during the second half of the 20th century. With private firms taking on this larger role and also operating freely on a transnational basis, it is anticipated that the authority of government and the scope of its activities could be significantly reduced. In parts of world where one or a handful of industries are dominant, private firms may literally take on many of the former roles of the state, including the provision of defense and police protection. Such circumstances would entail the creation of a vastly expanded version of the company town, with the emergence of the "company region" or even "company country" as distinct possibilities.

Nationalism could well decline, as the allegiance citizens formerly felt for their countries gets translated into employees' expanded sense of loyalty to their companies. The notion of citizenship itself would likely become substantially less important—companies might begin issuing the equivalent of passports, allowing only their employees, or approved guests, to travel to regions where their facilities were located, much as firms now issue badges to staff and visitors to grant access to offices and factories.

Employee Ownership/Employee Selection of Firm Management

The Virtual Countries scenario assumes that employees would hold a controlling interest in the shares of most firms, either directly, through straightforward equity holdings, or indirectly, through employee pension funds. Another possibility envisioned in this scenario is that employees would select their firm's management themselves—either indirectly, through appointment of top management by the pension fund's managers, or directly, through employee elections of managers at all levels of the firm.^[13]

The concept of employees holding significant stakes in their companies and exerting control over selection of management is an extrapolation from two recent mainstream trends. The first is the rising power of institutional investors and their increasing willingness to assert their will in matters of corporate governance.^[14] The second is the somewhat less prominent movement toward employee ownership of companies. By year-end 1995, nearly 10,000 ESOPs were in existence in the U.S., involving more than 10 million employees. In most employee-owned firms, however, management operates relatively autonomously, with employees exerting limited control. The aggressive role taken in 1996 by United Airlines employees in pushing for a new CEO and blocking a proposed merger with USAir stands as a counterexample in which employees were quite engaged and exerted significant authority.^[15]

A striking instance of employee ownership and selection of management is found in the group of worker cooperatives operating in and around the city of Mondrag n in the Basque region of Spain. The first cooperative in Mondrag n was started in 1956 by a group of five foundry workers inspired by the ideas of Jos Mar a Arizmendiarrieta, a Basque priest. By the late 1980s there were nearly 100 worker cooperatives in and around Mondrag n, employing over 20,000. The cooperatives jointly support a bank and technical institute. Employees elect members of a governing council, which in turn selects the management of each enterprise. A large percentage of profits from operations are split among workers in proportion to their salaries, with employees able to take the full amount from their profit-sharing accounts when they leave their firms.^[16]

Another model that combines employee ownership and election of management is the partnership structure, common in professional service firms. Many large law, consulting, investment banking, and accounting practices are organized in this way, with the partners jointly owning the firm and also selecting the management team which runs it. While employees below the partner level are excluded from full participation, most are on a career track in which they are eligible to be considered for partnership. Though it does not involve all members of a company, the partnership nonetheless stands as a successful model of broad ownership and self-management within a firm. Selected features of the partnership approach could be incorporated in the more inclusive, firm-wide employee ownership and governance structures envisioned in the Virtual Countries scenario.

Some members of the Working Group expressed skepticism about the workability of employee election of management, voicing concerns that electioneering and cronyism would flourish. Those who saw such a practice being viable envisioned it as the extension of recent efforts at some large firms to distribute responsibility and accountability more widely throughout the organization. This line of thinking was based on the assumption that greater involvement by employees in decisions affecting their own work would grow into an interest in selecting first the managers responsible for overseeing their part of the organization, and eventually, top management of the firm as a whole.

^[9]The term "virtual countries" was brought to the attention of the MIT Scenario Working Group by executives at National Westminster Bank, one of the 21st Century Initiative's founding sponsors. The term was then used inside NatWest to refer to an organization that now possesses or might in the future attain some of the important characteristics of a nation-state. The European Union, for example, was referred to as a "virtual country" within NatWest. The NatWest usage was thus somewhat broader and more general than the quite specific meaning applied to the term in the MIT scenarios.

^[10]See Kramer (1997); cited figures were based on global data collected by Securities Data Company on merger and acquisition activity, joint ventures and partnerships and venture funding.

^[11]Taylor (1991) discusses ABB's practices. The 21st Century Initiative's Interesting Organizations project examined GE and Johnson & Johnson; on the database, see chapter 7 of this volume. Bartlett and Ghoshal (1993) suggest that the innovative organizational forms put in place in recent years at ABB and a handful of other firms—GE, 3M, Toyota, Canon—represent a new model likely to replace the multidivisional structure that has been dominant for the last half-century.

^[12]The notion of a taboo against marriage between employees of different firms was explored by the science fiction writer William Gibson in his futuristic novel Neuromancer; see Gibson (1984).

^[13]The idea of employee election of managers was developed in detail by Bruce Sterling in his science fiction novel, Islands in the Net; see Sterling (1989).

^[14]On the growing influence of institutional investors, see Useem (1996). Another testament to the increasing assertiveness of employee pension fund managers is a piece by the general counsel of CALPERS, the California Public Employees Retirement System, contending that the pension funds' longer investment horizons will eventually prevail over the short-termism that resulted in the "hollowing out" of many U.S. companies in the 1990s. See Koppes (1996).

^[15]ESOP figures from National Center for Employee Ownership; see http://www.nceo.org.

^[16]Whyte and Whyte (1991) give an account of the rise and development of the Mondrag n cooperatives. Thomas and Logan (1982) examine the economic performance of the cooperatives.