Managers, engineers and government: The emergence of the mutual organization in the European aerospace industry

Technology in Socic~, Vol. 10. pp. 45-69 (1988) Printed in the USA. All rights reserved.

0160-719X188 $3.00 + .OO Copyright 0 1988 Pergamon Journals Ltd

Managers, Engineers and Government The Emergence of the Mutual Organization

in the European Aerospace Industry

Chhian Koenig and Raymond-AZain Thietart

ABSTRACT. For more tbatt two decades, the European aerospace industry .bas gone through a number of co/hborative ventures to establish or regain a defer&able competitive position on world markets. Some of these ventures have been marred by a host of organizational, finan& and commercial problems, wbi/e others have demonstrated the abi’/ity of firms from dzflerent count&s to band togetber to undertake complex, r&y projects. Both failures and successes provide useful lessons as to the management of internationaL macro- projects. Tbe purpose of this paper is two-fold. First, tbe authors investigate the rationaLe for collaborative structures in tbe context of the European aerospace industry and, in particular, tbe emergence of wbat are caLed “mutual organizations. ” Second/y, tbey draw [es- sons fim tbe management of these macro-pqkcts and assess the roles of corporate strategies, tecbnoiogy, and international relations. For this dual purpose, they rely on four case studies: two civil aircraft pro$cts (Concorde and Airbus) and two space organizations (ESRO and ELDO, the ancestors of the European Space Agency).

In the post-war period, the European aerospace industry has undergone a host of joint ventures and consortia and numerous forms of partnerships. Some of these collaborative macroprojects have met with success, while others were major failures, but in both cases they provide useful lessons as to the management of macro-projects.

In order to understand the emergence of collaborative ventures, it is necessary to have a framework for analyzing how economic activities are organized. To this

Chtitin Koenig is Professor of Strategy and Management at ESSEC, Cergy, France, and holds an M. A. firn Haruard University. His research and publicatiions deaf with the management of state-owned enter-ties and of lbrge, complex organizations.

Raymond-ALain Thietati is Professor of Management at the University of Park-X Nan- terrc and ESSEC. He has been a visiting ptvfessor at MIT and the European Insti2ute for Advanced Studies in Management. He fi a Council member of The Institute of M&a- agement Sciences and a consultant for ma&r corporataons and de Prencb government in strategy andcompetitive analyti. Llr. T&tart is on the edito&I board of de Strate- gic Management Journal, Harvard 1’Expansion and Sciences de Gcstion, and ir the edi- tor of the McGraw-Hi// se&s Strategic et Management and Manager. He is the author of four &ooRr and of more tfian jj’?y arUes on strategy and management. Hir act& reseatzfi interests are in strategic akances, macro-management, and acquisition processes and strategies.

46 Christian Koenig and Raymond-Alain Thetort

end, a simple strategic paradigm illustrates which factors influence the organization of economic activities. In particular, concepts developed in so-called transaction cost economics will be drawn upon to explain the emergence of various organizational forms. In the next section, this general framework will be applied to the European aerospace industry, where “mutual organizations” prevail. The logic of some forms of collaborative ventures will then appear before the explora- tion, in detail, of the managerial challenges that arise in these ventures.

The simplest strategic paradigm shows that strategic choices made by firms depend upon three factors: the nature of the competitive environment, the actors’ or leaders’ objectives, and the resources and capabilities at hand. A strategic choice then determines how resources are to be allocated in the long run. In order to be successful, a strategy requires an appropriate organization of economic activity (see Figure 1).

Leaders’ objectives will be emphasized in the case studies to follow. It is suff~- cient to say, in passing, that they may include market-share domination, profit, rechnological leadership, national sovereignty, and so forth.

Available resources and capabilities might be called strategic resources, defined

/..,a::,

Strategic Choice

Success Factors

organization of the

Economic Activity

FIGURE 1. A Simple Strategic Paradigm

Resources &

Managers, Engineers and Government 47

as those that can be allocated at the discretion of the firm and “which have present value in building a strategic position for the future” (Lorange, 1985). Such strategic resources include, for instance, managerial resources, proprietary technology, marketing know-how, access to distribution channels, finance, political influence, and the like.

The third type of factor which shapes strategic choice- that which deals with the nature of the competitive environment-deserves more extensive treatment here. Many concepts pertaining to the relationship between these factors and the organization of economic activity (most of which hold only when the other two factors are held constant) have been developed and will be of some use in this analysis of collaborative ventures.

Many institutional arrangements are available for running economic activities. A wide gamut of organizational forms have been put to work to produce and market goods. Among others, these include arms-length transactions and the vertically integrated firm. Economists have long thought that markets and firms are, indeed, alternatives for organizing economic activity. But each of these two ex- tremes of the spectrum of organizational forms involves costs-costs of setting up, running and monitoring an arm’s_length transaction, on one hand; costs of running the organization, on the other hand. The problem for organizers is, therefore, to design a proper governance structure that strikes an adequate balance between the costs of organizing and the costs of “running the economic system” (Arrow, 1969 and 1974; Coase, 1937; Williamson, 1975).

Why the Balance Sbifs

Williamson (1975, 1979, 1981) has developed an analytical framework based on transaction cost economics to help establish why this balance may shift in favor of market mechanism or in favor of the integrated firm. A transaction is said to occur when a good or service is transferred across a technologically separable interface. Generally speaking, the firm is said to economize on transaction costs, because it internalizes transactions. But, in and by itself, this is not sufficient to predict which type of governance structure should prevail in general: not only does the firm itself incur costs, but the institutional arrangement also has to match the attributes of the transaction.

In fact, if the transaction is a one-shot, highly certain in its terms, and does not require specific resources (say, a special machine or specially trained personnel), then the integrated firm enjoys no advantage relative to an arm’s_length transaction. Actually, the three attributes (the frequency with which transactions recur, the uncertainty to which they are subject, and the degree to which they are sup- ported by durable, specific investments) all draw the balance in favor of the integrated firm.

The frequency argument merely states that, all other things being equal, if a transaction recurs often and if the terms of the transaction vary little, both parties would be better off entering some form of long-term contract or integration in order to save on the cost of renegotiating or rewriting the contract every time a transaction occurs.

48 Christian Koenig and Raymond-A/ah Thietart

The uncertainty argument is more difficult to grasp, since two interpretations are possible. On one hand, Williamson would say that when there is so much

uncertainty surrounding a transaction that no contingent claims contracts can be written, then the integrated hierarchy is the preferred governance structure (Wil- liamson, 1975). On the other hand, students of vertical integration strategies have emphasized that, under conditions of high industry volatility, i.e., when the competitive environment or demand situation is conducive to price wars and low profit-

ability in the long run, then it is risky (not profitable) to commit assets to a large number of stages, from production to distribution (Harrigan 1983). This does not really contradict Williamson’s interpretation, for the volatility argument comes with some restrictive conditions which support the first interpretation.

For instance, a firm in a nascent and, therefore, risky industry might want to

reduce risks by contracting with an existing distribution channel, rather than committing resources to the creation of its own channels. But, if the product is so new or so different that distribution channels do not exist or are inappropriate, then the situation returns to Williamson’s interpretation: Transactions are not possible, and the firm is induced to integrate.

Economies of Scale

A reverse example has to do with economies of scale. When scale economies in, say, the manufacturing of a component, are larger than a single firm can absorb, it is more efficient to have recourse to market transactions and let one firm manufacture the component for numerous customers. But Harrigan (1983) would say, if competitive conditions are such that rivals themselves are already integrated and threaten to foreclose new firms from access to the component, or have created high switching-costs to customers by means of their distribution channels, or if trade

secrets are at stake, then entrants have little choice but to integrate. For instance, when its patents on instant photography expired, Polaroid decided to manufacture in-house negatives, which had been subcontracted to Kodak, rather than let the latter use its experience to compete with the inventors of instant photography. In a different vein, Airbus had to set up its own sales force in direct contact with customers, since all the other commercial aircraft manufacturers were already for- ward integrated. To put it simply, when an industry is volatile, it is risky to extend the degree of vertical integration or the number of integrated stages from procurement to distribution, unless uncertainty is such that no transaction would other- wise occur.

Yet another aspect of uncertainty shifts the balance in favor of integration. When distributors of differentiated goods have sufficient power or are not easily controlled, they can actually enhance or debase the quality of the goods sold to them by the producer, who cannot then fully appropriate the rents that would

normally accrue to him. The producer also might incur costs that he would avoid if he could exercise quality controls over distributors. This attribute of transactions is referred to as distribution- or demand-externality (Williamson, 1980).

The last transaction attribute to consider is asset specificity. This simply means


that when two contracting parties each need to invest in durable, specific assets for the transaction to occur, then they should avoid short-term contracts and prefer integration. Among such durable, specific assets, one finds special tools, machin- ery or plants, specifically trained manpower, and specific: R&D programs.

Human Behavior

Additionally, two characteristics of human behavior have to be taken into ac- count when organizing economic activity: bounded rationality and opportunism. Bounded rationality refers to the cognitive and computational limits of human actors. As a result, individuals face limits in formulating and solving complex problems, processing information, and anticipating the consequences of their own decisions (Simon, 1957). Because of these characteristics, contracts to be drawn between two human actors are said to be incomplete. Obviously, the uncertainty attribute of a transaction is related to bounded rationality. Opportunism, akin to the notion of “moral hazard,” refers to the potential unreliability of human actors, in the sense that they are willing to modify, ex-ante or ex-post, the terms of the transaction in their own interests. This problem could be mitigated if parties were so numerous that competition between them would reduce their ability to act opportunistically. But it becomes serious when the parties are few. In this “small number” situation, as Williamson puts it, “it is in the interest of each party to seek terms most favorable to him, which encourages opportunistic representa- tions and haggling” (Williamson, 1975).

To summarize at this point, transaction cost economics identifies two sets of problems:

I

l The first set of problems consists of comparing the cost of planning, adapting and monitoring task completion under alternative governance structures and, then, of matching governance structures with the attributes of the transaction.

l The second set of problems deals with organizing economic activity in a way that economizes on bounded rationality and safeguards transactions against opportunism.

Thus, when transactions are repetitive, when they occur in a context of high uncertainty, and when the parties have invested in durable, transaction-specific assets, the integrated firm, with its hierarchical decomposition between strategic and operational decisions (to economize on bounded rationality) and its system of incentives and controls (to attenuate opportunism), seems to be the appropriate institutional arrangement to run economic activities.

This conceptual framework is very useful in trying to understand which activities are internalized in a firm and which are not. ’ But it tends to focus on two extreme forms of institutional arrangements: spot-market transactions and total internalization. As pointed out by Thorelli (1986) it tends to leave out a large variety of network arrangements, whereby two or more organizations are involved in long-term relationships. Network arrangement is an organizational form which is intermediate between markets and hierarchies and which has undergone consid-

SO Chtirrian Koenig and Raymond-Alain Thietart

erable development in present economies, particularly in the form of joint ventures, consortia, and other cooperative structures, such as those prevalent in the European aerospace industry. The transaction costs framework also leaves out micro-organizational issues, such as power coordination, culture and decision- making, which will be addressed ‘later.

Intermediate Arrangements

It is now appropriate to discuss these institutional arrangements that are intermediate between markets and hierarchies. At one end of the spectrum, one can picture a prime contractor and a number of independent subcontractors engaged in one-shot contracts which are typically not renewed when the terms of the contract have been met. In the context of aerospace, this is still a pervasive arrangement, whereby a plant manufacturer would allocate tasks on various so-called “systems” (flight controls, avionics, and the like) to specialized firms for the duration of the project.

At the other end, there is the vertically integrated firm, as used to be the case in the aircraft industry, when European firms, imitating their large American counterparts, each manufactured complete planes (although they did subcontract some systems), despite the fact that economies of scale did not warrant this extent of integration.

Yet, in some industries such as construction, it has been observed that there is a recurring relationship between the prime contractor and a set of subcontractors. Although each project - say, a new house- involves new contracts between the general contractor and special-trade subcontractors, so that there are no advantages in favor of integration, the preferred arrangement is usually intermediate between market transactions, i.e., contracting with different subcontractors for each project, and integration. Eccles (1981) called this intermediate arrangement the “quasi-firm. ” “Through a continuing association, both parties can benefit

from the somewhat idiosyncratic investment of learning to work together” (Eccles, l98l), and they can also reduce uncertainty about future business relationships.

The quasi-firm retains a prime contractor as principal and a set of subcontractors as agents in a recurring relationship. The quasi-firm is a “network,” since two or more organizations are involved in a long-term relationship (Thorelli, 1986). In this network, each party bears risks relative to his own activity. Yet, in other forms of networks, all members are joint risk-takers. This obviously is the case for most joint ventures or for any form of partnership. In these institutional arrangements, all parties act simultaneously as principals, i.e. , as members of the partnership and as agents. As principals, they are risk-takers who allocate work and share profits or losses; as agents, they each contribute to the final output. This system where the parties are both principals and agents is called “the mutual organization.“* Mem- bers of the organization are actually co-contractors.

Figure 2 illustrates the relative position of the various macro-organizational designs mentioned, from market transactions to the vertically integrated firm via quasi-firms and mutual organizations, with respect to two variables: asset specific-

ity and externality.

Managers, Engineers and Government jil

Lou specificity

Lou externality

High specificity

High externality

Market Hierarchy

Prime Prime Co-contractors

Sub-contractor Sub-contrator Recurring

relationship

<Independent

as11 fiml

recurring

relationship

relationship

(Puasi fin) (Mutua 1

organization)

Vertical

Hierarchical

relationship

Wertically

integrated

fiml

FIGURE 2. Continuum of Macro-organizational Designs

Economies of Scope

Risk-allocation is not the only difference between quasi-firm and mutual organizations, as is shown in Figure 2. The construction industry might be considered again here. A plumber or carpenter does not need to invest in assets that are specific to each contract. His equipment and skills are, to a larger extent, flexible enough to deal with various house projects. There is some externality in this industry, however, since the quality of the finished house depends upon the quality of the work performed by each special-trade subcontractor. This externality, however, is mitigated by the fact that there is a large lot of subcontractors (because of small economies of scale) for the prime contractor to pick from every time he is awarded a new contract. It can been seen, nevertheless, that there is a recurring relationship between prime and subcontractors, because there is some asset-

12 Christian Koenig and Raymond-Alain Tbietart

specificity in the relationship itself: Contractors do learn how to work together and can save on the set-up cost of the relationship by working together again on several contracts. This learning process represents “economies of scope” of sorts.

Learning presumably also occurs in mutual organizations. But it is the “small number” situation which contributes to the preference for joint risk-taking. If

there were a sufficiently large number of potential members of the mutual organizations, then there would be no need for such partnerships and a less-committing quasi-firm would do. Moreover, the mutual organization means that there is asset- specificity in the transaction. Not only is there the specificity of learning how to work together, but each member needs to invest tangible or intangible assets that are specific to the mutual organization. As shall be discussed soon, this is true in the aerospace industry, as it is true in most macro-projects. But, then, why would all members not merge to form a vertically integrated firm?

In a way, the mutual organization resembles the integrated firm in the sense that the activities of the members are integrated into one organization which has no reason not to adopt the hierarchical decomposition principle propounded by Williamson to economize on bounded rationality and safeguard against opportunism. But there are major differences. The mutual organization, as mentioned earlier, is a network of principals and agents, and problems of bounded rationality and opportunism appear among members of the network as principals, regardless of the hierarchy they might set up to operate their organization. In any form of collaborative venture, problems of communication and coordination of principals arise as well as problems of members trying to appropriate the results of the mutual organization for their own profit. To the agency relationship, problems of the integrated firm (see, for instance, Pratt and Zeckhauser, 1985) are thus added problems of relationships among principals. But it is not wise to anticipate micro- organizational issues in the mutual organization since they are addressed in the case studies. The mutual organization differs from the integrated firm in terms of asset-specificity. When several firms join together to form a mutual organization to operate on a project or run an economic activity, they do not relinquish all of their assets to the organization. Transaction-specific assets are only a share of the total assets of each member. Thus there is more asset-specificity in the mutual organization than in the quasi-firm, but less than in the integrated firm.

Another obstacle-but not the least-to vertical integration is the opposition of each firm to a merger at the possible expense of a loss of control. Members of a mutual organization prefer, almost by definition, a plural organization to a singu- lar one.

Joint projects, joint ventures, consortia and networks have become common ways of running economic activities. It is necessary at this point, however, to analyze why mutual organizations have become the prevalent way of doing business in the European aerospace industry.

Emergence of the Mutual Organization in the European Aerospace Industry

How can the European aerospace industry be interpreted in the light of the framework described above? The aerospace industry is characterized by high asset-


specificity in exchange-as is usually the case in macro-engineering. It is also an industry with large economies of scale and experience effects and with technical and economic risks. All these factors assume a particular importance in the Euro- pean context.

For the sake of simplicity, this paper will focus on the aircraft industry, since similar conditions usually prevail in the space industry. A salient characteristic of the aircraft industry is that each major element of a given aircraft or, as one could say, each production element, (e.g., fuselage, cockpit, tail, wings) is specifically designed for a final product and requires costly, specific equipment and trained personnel. There are some economies of scope in aircraft manufacture, since some production segments can serve on different airplane models: Fuselage sections developed for the Boeing 707 were used on the 727 and 737, and there is a similar commonality between the Airbus A-300 and the Airbus A-310. But this only con- firms the high degree of asset-specificity involved in producing and putting

together all the major elements which constitute the final product. It is almost a truism to say that the aerospace industry is a risky business. Every-

one has in mind numerous technical failures that have marked the history of this activity. But it is well to emphasize the high degree of commercial and economic risk. Commercial risk is related to development time (from launching decision to

operation) which runs from an average of over five years for a commercial aircraft to over ten years for some space projects or advanced aircraft. This duration makes accurate market predictions very hazardous. But development also entails high economic risks. Typical development costs for a commercial aircraft amount to the sales equivalent of 70 planes, i.e., $3.5 billion for the Airbus A-300. Moreover,

the sales equivalent of 40 additional planes has to be spent over the life-cycle of a project for product improvements. This makes a total of 110 sales equivalent. Financial needs, starting from development, follow a continuous path and cul- minate at the sales equivalent of 100 planes. For a plane like the Airbus-300, this means cumulated financial risks of up to $5 billion, which are larger than any sin-

gle European firm can stand. 3 At the present time, no aircraft manufacturer holds enough capital to face such

a risk. In an industry where experience effects are important, however (the experience coefficient is about 0.8) Boeing manages to use resources drawn from successful programs, such as the 727 or 737 to help finance new programs. Lacking this experience and adequate financial resources, European manufacturers are nat- urally induced to pool risks in a mutual organization.

This inducement is reinforced by another facet of the economics of this industry: economies of scale. Economies of scale are to be consideted with respect to the size of the market. It is generally considered that the break-even point for an aircraft program is, broadly speaking, between 300 and 600 units, depending upon whether it is a new aircraft or an offspring of another program and on the ability to gain experience early. Obviously, no single European country has a market large enough to make a program profitable. Joining together to have access to a large market does not solve the problem: The markets of all the main participating countries in Airbus are not large enough either. Pooling market access in a mutual organization, however, may get the programs started and gain early experience.

54 Chtirtian Koenig and Raymond-Alain Tbietart

There is yet another reason why the mutual organization has become the preferred mode of cooperation in European aerospace. Facing the economics briefly mentioned above, all manufacturers have developed risk-sharing schemes with partners. But cooperation may take several forms. The most common one has been the prime contractor/subcontractor organization of the quasi-firm type, where the dominant partner remains responsible for the overall design and for selling the product, while subcontractors bear risk relative only to their own shares of the work. This is still common practice in military aircraft. To mention only one case in the commercial sector, Aeritalia (Italy) has long been a subcontractor for Boe- ing, notably on the 747 and 767.

But many European manufacturers and governments have shown reluctance toward a cooperation system in which a national firm is dominated by a foreign partner. This sort of political opposition to integration or to extensive subcontract- ing has become an additional inducement to form mutual organizations where the main subcontractors are also partners.

Whether or not this was a judicious choice and a workable arrangement can only be appreciated in the light of experience. For this reason, four case studies of cooperation in the European aerospace industry have been chosen to illustrate the pitfalls of collaborative ventures, as well as the performances of mutual organizations and the managerial issues which arise in them.

Concorde: The False Mutual Organization

Concorde was an entirely political aeroplane: The plane was to show that we were good Europeans.

-Sir Richard Way, Permanent Secretary Ministry of Aviation, 1963-66 (Quoted by A. May [1979])

Concorde is an interesting case for illustrating the conditions required to set up an adequate mutual organization. Since almost everything went wrong, except for the major technological achievement, the project offers useful hints concerning the “dos” of international cooperation as well as indispensable lessons on the “don’ts. ”

In the late 195Os, British Aircraft Corporation (BAC) and Sud Aviation started working on the development of a commercial supersonic aircraft. After a meeting of the two ministers in charge of aviation, P. Thorneycroft for Britain and R. Buron for France in 196 1, it was decided that cooperation was required for success and for gaining technological supremacy over American manufacturers. But BAC and Sud Aviation each favored a different type of aircraft: a long-range Mach 2.2 for BAC and a medium-range (unable to cross the Atlantic) Mach 3 successor to the commercially promising Caravelle for Sud Aviation.

While Bristol-Siddeley and Snecma were starting work on the engine, BAC and Sud Aviation could not reconcile their views on a definite design. Amid power struggles between the two firms, the two chief designers, Servanty (Sud Aviation) and Strang (BAC), finally got together and produced a 20-page sketch of how the

Managers, Engineers a& Government 55

basic design would look. This served as a basis for the November 29, 1962, Agree- ment between France and Britain, the cornerstone of the Concorde progranx4

Before examining the contents of the agreement, it is worth having a look at some of the results. The agreement stipulated a seven-year development period, with first flight in late 1966 and certification by the end of 1969, at an estimated cost of between $150 and $170 million. Although no serious market study was done, the guesses were that from 150 to 200 planes could be sold, and a production run was set up for 100 planes. Concorde first flew in 1969 and became operational in 1974 at the time of the first oil shock. The estimated costs in 1973 had risen to $1065 million (see Table 1). In 1974, when the project was halted, only 16 planes were to be built, including two prototypes and two preproduction planes. Nine were sold, five to British Airways and four to Air France, upon government insistence. The technological achievement seemed unprecedented, but so was the commercial and financial disaster.

This commercial failure can be traced to the origins of the program. The government agreement did not reconcile the difference between the two firms as to which version should be built; it stated that equal attention should be devoted to both medium- and long-range versions. Moreover, the governments themselves did not agree on the purpose of the whole project. Both probably had in mind the development of high-technology employment, but the goals of Gaullist France were to preempt Americans from this seemingly lucrative and strategic business, regardless of cost, while the British saw in the agreement an opportunity to show the French that they could be good Europeans and thus soften De Gaulle’s views on Britain’s application for EEC membership. Ironically, De Gaulle vetoed Bri- tain’s application two months after the Concorde agreement, although he sup- ported the continuation of the project.

In the 1962 agreement, the rules of the game for managing the project were

TABLE 1. Concorde: Estimated Costs, 1962-73 (Au costs in f milEon at time made.)

Increase in costs since last estimate

Changes in Revision Additional Date of economic Programme of development estimate Estimated Total conditions slippage estimates tasks Other

Nov. 62 July 64 June 66 May 69 May 72 June 73

Total

to 1973

150-170 - -

275 150 18 - 47 40 -

-450 175 34 - 38 103 730 280 107 - 57 115 -

970 240 83 26 22 70 39 1,065 95 65 20 10 - -

Amount 895 307 46 175 328 39 Per cent 100.0 34.3 5.1 19.6 36.6 4.4

h,~rce: House of Commons, Committee Public Accounts (1973, Appendix 2, vii, xii).

x5 Christian Koenig and Raymond-Alain Thietart

also set. The basic objective was complete equality with respect to managing the project, allocating and sharing the work, costs, and sales proceeds. It also recommended that an integrated management should be set up, a first in international cooperation. A Standing Committee of officials from the two countries, later called the Directing Committee, with rotating chairmanship, was to supervise the program and to exercise control through an Aircraft Committee of Directors (ten

members) and an Engine Committee of Directors (eight members), also with rotating chairmanships.

Manned with high-level officials who had little time to spend on the project and for whom it was difficult to compromise, the Directing Committee delegated more and more work to the Administrative and Technical Subcommittee, which was responsible for subcontracts. For each contract, the Committee was presented with possible choices by BAC and Sud Aviation, who had to accept tenders from a pre-established list. The subcommittee then recommended a choice to the Standing Committee, based on the 50-50 equality role. Consequently, the final decisions were not always in line with the wishes of the design teams, and the decision from specification to the placing of a contract could take well over two years and often entailed duplicated costs (Costello and Hughes, 1976; Hochmuth,

1974; May, 1979). At the industrial level, there was no real integrated management, but a replica-

tion of the government committees’ dual structure. This decision meant power struggles, haggling and inability to compromise, so that more and more decisions moved upward to the Standing Committee and then to government level. In a recent interview, a former member of the design team said jokingly that it was De Gaulle who chose the colors for the Concorde’s seats. He was probably only slightly exaggerating.

The Concorde program, therefore, was plagued at the outset by a cumbersome dual structure which, according to Geoffrey Knight, a former BAC vice-chairman, “had built into it rich sources of discord, delay and duplicated expenditure”

(Knight, 1976). It was not until mid-1964 that Sud Aviation came to terms with BAC on the

long-range version, after Pan Am’s option on BAC’s project. But even then all conflicts were not resolved. The airlines were pushing for a stretched version, and the French were unyielding. The new design did not appear until May 1965. For similar reasons, another length increase was agreed upon in late 1968, causing additional costs and delays one year after the first prototype had been unveiled.

In the early years, the project was challenged by President Kennedy’s decision to launch an American SST program (Horwitch, 1982). But dramatic cost escalations triggered worries and criticism. This brought the first serious crisis in the program. When the Labour Party came back to power, Prime Minister Wilson was put under pressure to negotiate a termination of the project with the French. He was re- minded that the 1962 agreement did not include a break-clause, an oddity originally backed by the British government, which thought its French counterpart might wriggle out soon after signing the agreement. De Gaulle’s reaction was to order that all contracts at government or industry level be suspended. This crisis,


which lasted ten weeks, had one positive impact, however: informal cross-links

were developed between engineers and this encouraged better cooperation between firms (Hochmuth, 1974).

The financial rumblings and the growing tensions between dissenters and sup- porters in both countries finally led to an inquiry into cost controls in 1965. In 1966, a new structure was adopted. The Standing Committee became the Direct- ing Committee and the Technical and Administrative Subcommittee became the Concorde Management Board (CMB), with enlarged authority, while, at the industrial level, the Committee of Directors created a Concorde Executive Commit- tee led by two key figures from the two firms, Giusta (Sud Aviation) and Russel (BAC). This was still not integrated management, though. The executive committee was mostly an administrative body with little or no strategic power.

As a result, although the crosslinks had been developed, coordination was lacking and decisions moved up to the CMB and Directing Committee, and, with tighter control by the technical agencies of both governments, most conflicts were resolved and decisions made at top-government level. Simultaneously, key people in most committees were being replaced. In early 1969, the CMB finally decided to get rid of the executive committee and the firms were asked to designate project managers who were to report to the chiefs of the Committee of Directors, Henri

Ziegler, a prominent figure in the French aircraft industry, who had recently been placed at the head of Sud Aviation, and Geoffrey Knight, BAC’s vice chairman.

Additionally, contract incentives (or disincentives) were changed. Until 1968, contracts were placed on a cost-plus basis. After that, a complex scheme was set up. Firms’ profits decreased when there was cost escalation, unless cost increases could be persuasively attributed to the aircraft’s performance increases. As a result, manufacturers had an incentive to suggest design modifications, at no risk to themselves (Hall, 1980).

In the last years of the program, before the 1974 termination, tension increased between BAC and Sud Aviation. Sud Aviation merged in 1970 with Nord Avia- tion and SEREB (ballistic missiles) to form SNIAS, known today as Aerospatiale, and Ziegler reduced the importance of the Concorde project in the new firm while appointing a new chief engineer. In the meantime, Sir George Edwards tightened BAC’s structure. But the two firms appeared again as competitors on a new front: SNIAS was launching Airbus with German manufacturers, while Sir George was (unsuccessfully) trying to get public funding to launch the BAC 3 11, a competitor to Airbus. Moreover, BAC and Sud Aviation were competing for Concorde sales. Market projections were grossly exaggerated guesses. In the early years, airlines showed reluctance toward a supersonic transport, since they had already had to write off fleets of propeller planes to be replaced by jets in the late 1950s and early 1960s. Moreover, while the American SST decision of 1963 spurred the Concorde program, it appeared that jumbo-jet development looked more attractive to airlines. In this unfavorable context, there was no integrated marketing management, and the two firms were competing for market prospects all over the world.

The lessons to be drawn from Concorde are numerous. As Hochmuth (1974) puts it

58 Chrihzn Koenig and Raymond-A&in Tbietart

. . . effective program strategy is much easier to achieve when ventures are not too closely supervised by the government and the firm makes its own major decisions. But where the government risks public funds, government bureaucratic involvement in management is

inescapable. The problem is how to confine this involvement to legitimate protection of the government’s interests.

This problem was never properly dealt with. Lack of goal congruence; inade- quate incentives; fuzzy intermediate goals, controls and information systems; and, above all, a cumbersome dual structure all caused strategic power to drift away from manufacturers to the government level. Although international cooperation did function at lower management levels, Concorde never was a mutual organization.

Airbus Industrk: The Emergent Mutual Organization

After Concorde, an engineer’s dream built by politicians, comes Airbus, a businessman’s dream built by engineers.

- L ‘Ex&ansion Magazine (1980)

Having gained 30% of the market for widebody aircraft, Airbus Industrie is now becoming a serious contender for the new generation of single-aisle planes. Although financial performance is probably still mediocre, the commercial success of Airbus Industrie shows that mutual organization is a workable concept.

Encouraged by their respective governments to cooperate with European part-

ners, Hawker Siddeley, BAC, Breguet and Nord Aviation started working in the early 196Os, separately or in teams, on projects of a large-capacity, short- to

medium-range aircraft. Airlines expressed a need for such a new plane, called an “airbus,” although they did not agree on a specific configuration.

Just as in the case of Concorde, each manufacturer defended his own design. In particular, BAC put pressure on the British government to support an entirely British airbus, designed for British European Airways (BEA, later to merge with BOAC to form British Airways). After much haggling, an essentially political compromise was reached in September, when the French, British and German governments signed a Memorandum of Understanding in exchange for Rolls

Royce leadership on the design of a new engine, the RB207. Sud Aviation was awarded design leadership on the airframe, working with Hawker Siddeley and Deutsche Airbus (a joint venture of MBB and VFW-Fokker); Snecma of France and MTU of Germany worked on the engine.

During the 1967-69 period, Rolls Royce made a choice to work on the RB211 engine designed for the Lockheed Tristar. Partly for this reason, partly because air- line orders failed to materialize, the aircraft project was scaled down to a 250~seat version, the A. 300B. Both the British government, under pressure from BAC, and Rolls Royce resigned in early 1969, while Hawker Siddeley decided to continue working as an associated partner on the wings.

In May 1969, however, France and Germany signed a new agreement for the A.300B program, Sud Aviation and Deutsche Airbus having equal shares, and


Hawker Siddeley being design consultant and subcontractor along with Fokker, a Dutch company, and CASA, a Spanish company.

A year and a half later, Airbus Industrie was set up under French law as a “Groupement d’Interet Economique (or GIE). For Airbus Industrie, the GIE offered several advantages. The GIE has no capital, makes no profit, and is fiscally transparent. Profits, risks and taxes percolate to members. Partners are joint risk- takers; each is responsible for securing adequate funding from its government, and is liable for the debts of the GIE under its own assets (AirbusIndustrie, 1981).

The GIE thus helped formalize cooperation without merger of the firms involved. It also represented security to customers to whom it offered a unique interface for sales and service. The GIE is able to receive full new members, it avoids locking up large amounts of capital, and, finally, it is a flexible organization, which is able to react to changes in membership and in customer demands.

Between 1970 and 1972, the Dutch and Spanish governments joined the programs, but only CASA became a member of Airbus Industrie, with a 4.2% share, while Aerospatiale (successor to Sud Aviation) and Deutsche Airbus each held 47.9%. In 1978, after British Aerospace (BAe) was created by merging BAC and Hawker Siddeley, the British decided to join in and help develop the A.310, a

smaller version with a newly designed wing. The organization of production has remained broadly the same for the A. 3OOB,

the A. 3 10 and the new, single-aisle, 1 X)-seat A. 320 currently under development. The organization was originally masterminded by the German engineer, F. Kracht, who had long been working with French firms. Basically, large, completed subassemblies are flown by a specially designed plane, originally used by NASA for rocket transport, to the Toulouse Aerospatiale facilities where they are plugged in for final assembly. To date, no problems or delays have been encountered in this operation. .

The Structure of Airbus Industn’e

Regarding the structure of Airbus Industrie, it is basically a coordination device and a conflict-resolution mechanism. The Board of Control, which consists of representatives of the four member firms, is similar to the board of any corporation. It is headed by Franz-Joseph Strauss, a key German political figure and a keen supporter of Airbus. The board is assisted by an executive committee, which also acts as a relay between the board and the management of Airbus Industrie. The latter’s decisions have to be approved by the board of control.

Governments supervise Airbus Industrie through an organ called the Executive

Agency. But each member firm secures development funds from its own government. Royalties paid to the latter by Airbus Industrie itself were originally calcu- lated so that governments would be reimbursed after the sale of the 360th aircraft (for the A.300 and the A.310).

Originally, Airbus was a primarily French structure. Ziegler was its first executive president, succeeded by B. Lathiere with R. Beteille, a renowned technician, as general manager. This early French dominance reflected that country’s large share of the total work after Britain’s resignation from the project. Since Deutsche

60 Chrirtian Koenig and Raymond-Alain Thietart

Airbus had built up infrastructure and technological competence, the Germans started asking for more power in the Airbus organization. This view was shared by British Aerospace when it became a member.

The changes in personnel that have occurred in recent years illustrate this tension, as well as the growing institutionalization of Airbus Industrie. BAe had long been pushing to be granted financial management, while Deutsche Airbus wanted one of its executives to take over the general management position. When Lathiere left in 1985 and Beteille retired, a compromise was reached. Financial management was given to R. Whitfield, who had been specially recruited by BAe, while J. Schaffler of Deutsche Airbus was made general manager (after his retire- ment, he was succeeded by H. Flossdorf). But the executive president was still an Aerospatiale man, J. Pierson, an unyielding manager. In 1986, CASA also gained an executive position when A. Hurtado was nominated procurement manager.

This redistribution of power also illustrates Airbus Industrie’s evolution into an institution in its own right. The “founding fathers” had helped to establish a common set of values that made managers “transcend themselves,” as Beteille said, i.e., made them work for Airbus, rather than for their parent company. The

Airbus workforce has been multiplied by three in about ten years, with Airbus Industrie’s own recruitment now representing over 45 % of total employment, while BAe is still underrepresented.

Most Airbus Industrie personnel are still hired for clerical work, but a number of executives, including a recently created Human Relations Management position, were recruited directly. A personnel status report, now in preparation, would make it necessary for employees of member firms to choose, after a few years, between joining the Airbus workforce or returning to their original company.

Airbus Industrie, however, may still be viewed as a “minor child that cannot give orders to its parents,” as one of its executives put it. It was, nevertheless, able to persuade members to accept the same basic work allocation (integration, systems, cockpit, wings, fuselage, tail) for the A.320 as had existed for the A.300 and the A.310. This had originally been resisted by member firms who feared that their own engineers would lose expertise in designing and making a complete aircraft. At the design stage, all member firms still submit concurrent projects with

Airbus acting as a final arbiter. Various incentives exist to make members act in favor of the common good.

Being both principal and agent, each member has a vested interest in minimizing costs so as to increase sales and profits. Also, since all accounting is done in US dollars, a decrease in the dollar acts as an incentive to control costs. But there are disincentives, too. Procurements are done on a territorial basis. That is to say that purchases made in the country of a member are paid for by the respective firm, while the costs of purchases made in an outside country are shared according to membership shares. Although this procedure is bound to be changed, it has long been an incentive to carry out procurement outside the Airbus community. Finally, there is still a risk of member firms competing with each other on other projects, which increases tension and haggling within the mutual organization.

Because of the GIE status, it is impossible to make a financial assessment of Air- bus’s performance. Nevertheless, with a stronghold gained on the American mar-

Mbaagers, Engineers and Government 61

ket with Eastern, Pan Am and Northwest Airlines orders, it shows the promising commercial results of a mutual organization that has managed to keep government at arm’s length, although some of the problems of managing a mutual organization have not subsided.

ESRO: The Virtual Mutual Organization

Hochmuth, in his book on transnational organizations (1974), gives two other interesting examples, which illustrate the “dos” and “don’ts” for mutual organizations.

In the late 1950s, discussions between government officials and scientists were being held, with the basic idea of creating an organization comparable to CERN (Centre Europeen de Recherche Nucleaire) in the field of space science. Pierre Auger, then the head of CERN, was asked to coordinate the first efforts which would lead, in 1962, to ESRO (European Space Research Organization). His experience at CERN undoubtedly helped him to design the new organization, which included a Director General with real power, assisted by a Council composed of two delegates (one scientist and one government representative) from each of the ten member countries.

The initial objective of this new organization was purely scientific, to run 400 experiments requiring 440 sounding rockets and 34 satellites over a period of eight years. To achieve this objective, the Director General had a great deal of freedom. He was free to make decisions within broad guidelines and within a three-year budget which had been voted by the Council. Decisions in the Council were governed by majority (two-thirds) rule, except for the budget, where unanimity was required. Appointment and dismissal of top personnel had been delegated by the Council to the Director General. ESRO was also a legal entity. It could acquire assets and could design and construct facilities. Finally, in order to keep the ten countries committed to the space projects, the so-called “juste retour” principle was enforced: 80% of each country’s contribution had to be spent within that country itself. Thus the industries of the member countries were getting a large share of their own country’s financial efforts.

In order to carry out its mission, ESRO needed industry cooperation and wanted to have a single contractor for each project to facilitate coordination and control. To keep specialists busy in each firm and in each country, however, the European organization awarded contracts to prime contractors who, in turn, subcontracted to other firms.

Though this arrangement was reasonably satisfactory from ESRO’s perspective, it was not the best solution for industry. Theoretically, twenty European fitms could bid for each one of the satellite projects. Since only one firm could be awarded the contract, this procedure wasted time and resources, and created unnecessary red tape in the ESRO administration.

As a result, contracting was difficult. This difficulty, compounded with cost underestimation and the worsening European economic situation, resulted in a gradual shift of power within ESRO. The Director General gradually lost his influence and power to the Administration and Finance Committee of the Council.

62 Chrirtian Koenig and Raymond-ALain Thietart

Over time, the decision-making process moved up the hierarchical ladder. This progressive shift of power led to a continuing increase in administrative costs, The bureaucratic process, finally, dominated strategic vision.

In the mid-1960s the ESRO Council realized that the organization was para- lyzed and that a solution had to be found. Instead of turning to the politicians in order to find a solution at the government level, ESRO decided to try to solve its problems by itself. Mr. Bannier, a Dutchman, was appointed by the Council to audit the international organization and to suggest policies to improve its functioning. His recommendations were as follows: to return real authority to the Director General, to limit the number of programs submitted to the Council and to its committees, to award a greater autonomy to ESTEC and ESOC (the technical arms of ESRO), and to ease the budget rules.

At the time that these changes were proposed, Professor Auger left the organization and was replaced by Professor Bondi, who, with the help of a small advisory committee, started to reinforce ESRO’s financial and political situation. He tried to get stronger commitments to the organization’s projects from hesitant countries, and initiated a shift toward application satellites in order to provide a stronger base for ESRO’s scientific activities. Finally, he organized a better ESRO- industry relationship.

Pushed by market forces and ESRO’s new leadership, as well, the industry reor- ganized itself around three industrial consortia: MESH, COSMOS and STAR. Under this new structural arrangement, the working relationships between ESRO and the industry improved. ESRO had the expertise and the decision-making power, and dealt with one responsible prime contractor at a time. Even if costs ended up twice the initial estimates, ESRO achieved scientific success. This success may be attributed to the specific organizational characteristics of the venture: strong leadership, shared vision, good ESRO-industry relationships, goal congruence, international institutionalization, and satisfactory crisis management.

ELDO: The Stillborn Mutual Organization

ELDO presents quite a different story. The ambitious ESRO scientific program, requiring satellites to be launched over an eight-year period, led to the idea that Europe should have its own spacecraft.The British, with their Blue Streak rocket as a possible first stage for the launcher, and the French, with De Gaulle’s objective of European independence and the Emeraude rocket as a compatible second stage, were behind the idea.

A five-year program, with a budget of $196 million to build a European spacecraft capable of launching small satellites, was agreed upon during the first international conference in January 1961, which was attended by representatives of twelve countries. After hard negotiations, work was allocated. The British got the first stage; the French, the second stage; the Germans, the third stage; the Ital- ians, the satellite; the Belgians, the ground control; and the Dutch, the telemetry.

A convention was drawn and signed in April 1962 and ratified in early 1964. Although this convention was apparently similar to ESRO’s, there were striking differences. For example, supervision of the program was undertaken at the coun-


try level. Also, ELDO could place contracts only if these were agreed to by the government of the country where the work was to be carried out.

The reasons for this procedure were historical. France and Great Britain already

had large industrial and scientific teams working on space projects. These teams had to continue working and tasks had to be allocated and financed, pending the ratification of the convention. The convention merely formalized the procedure. The result was that national bureaucracies kept control of technical capabilities that ELDO could never develop independently afterward.

Another striking difference between ESRO and ELDO was the preponderance of “politicians” and bureaucrats in the latter organization. If, at ESRO, scientists were in charge, the ELDO had a definite political undertone. For example, at the ELDO preparatory conferences, national representatives were either from the ministries of economics or from the ministries of aviation. In the case of ESRO,

representatives were scientists and delegates from governmental organizations concerned with science. Also, if the Chief Executive Officer, i.e., the Director Gen- eral of ESRO, was a renowned scientist (Pierre Auger), ELDO had a distinguished diplomat as Secretary (Ambassador Carrobio di Carrobio). The Secretary General was the principal (and not the chief) executive officer. The result was that ELDO had a structure which was highly dependent upon politicians and bureaucrats. For instance, the governments were transmitting the demands of their national industries to ELDO without a real evaluation of the proposed projects. Eventually, they found themselves in a quasi-coalition with their national contractors against ELDO’s global interests.

In the same vein, this structure was an anomalous assemblage of national programs where government priorities dominated. And, to make things even more difficult, the rule of unanimity on all substantial issues had been adopted.

In early 1964, three events occurred. First, the budget was revised to $300 million from an initial Ql97 million. Second, France challenged the project on the

basis that the planned rocket was already obsolete. Third, Italy requested that a “juste retour” principle be adopted.

Instead of a discussion of the above issues at the Council level, an “Intergov- ernmental Conference” was held in January 1965. The procedure of addressing problems at the highest level was going to remain a characteristic of ELDO’s

decision-making process. Another consequence of this “consultation” was that no decision was made so that a period of uncertainty followed. This period led to a slowing down of the work. At the beginning of 1966, two other events occurred. The British Minister of Aviation sent a memorandum to the other nations ques- tioning the usefulness of continuing ELDO. A few days later, ELDO announced that estimated costs had reached $425 million.

After several meetings at the ministerial level and thanks to the success of the firing of the first complete EUROPA I configuration (with the last two stages inert), decisions were made. These decisions consisted of a reallocation of the countries’ contributions, a renewed commitment to the EUROPA I program, a new project for launching a 200-kilogram satellite, an increased budget of $626 million, a “juste retour” principle with a minimum of 80% of the budget spent in the contributing country, the creation of a “Committee of Ministerial Alternates”

G4 Cbrirtian Koenig and Raymond-Alain Thietart

institutionalizing a decision-making structure above the Council level, and the establishment of two Management Directorates responsible for the initial and

supplementary programs. The formation of the new directorates weakened the authority of the General Secretariat. For example, the DFA (Direction of Future Activities) was almost autonomous from the Secretariat. The Director had the rank of Deputy Secretary General and had a separate budget. He reported directly to the ELDO Council. Even if these decisions gave renewed impetus to the organization, the crisis which led to them slowed the work pace and lowered morale.

On the industrial front, the main actors decided to coordinate their efforts to prevent the collapse of ELDO. The outcome of the industry maneuvers was the creation of an Industrial Integrating Group whose role was to solve the problem of lack of coordination between ELDO and the different industrial partners. By mid- 1967, SETIS was created. Its role was to advise ELDO on technical matters. Unfor- tunately, it had no financial or operational responsibility, and was compelled to leave the supervision of industrial contracts to the government technical units.

In 1968, a new crisis hit ELDO. The new estimated costs had tripled since the inception of the program, reaching a high of $720 million. Also, Britain warned that it would not participate after 1972. In late 1970, a fourth European Space Conference was held in Brussels. Britain, again, confirmed that she would with- draw from the program after 1972. Belgium, France and Germany, determined to go ahead by themselves, but constrained by their resources, had to find an organizational solution. A few years later, this solution revealed itself to be the creation

of a new European organization: the European Space Agency. ELDO is a case in point of a mutual organization which was never able to

achieve precise objectives. First, no clear impetus from the top was ever given. Par- ticipants aimed for parochial goals without really caring about the overall objective of the organization. There was a definite lack of goal congruence. Second, the power structure was in the hands of the politicians. Decisions were rapidly esca- lated to the ministerial level. ELDO managers never had the last word. Decisions were made outside the formal structure. Third, the industrial integrator could never build an operational and multinational organization which could have been used as a coordinator for all European space industry efforts. Finally, the succes- sion of crises and the escalating costs, combined with a blurred vision of the organization, led to low morale, demotivation and demobilization of people.

Airbus, Concorde, ESRO and ELDO illustrate four different forms of mutual organizations. Though, at the macro-organizational level, they seem to exhibit the same characteristics, they are, in fact, very diverse at the micro-organizational level. Their diversity, however, narrows when the four organizations are compared two by two in terms of their relative successes. For example, on the one hand, Airbus and ESRO, the two successful organizations, are very comparable in terms of their organizational features. On the other hand, Concorde and ELDO, the two less successful ventures, are similar with respect to their managerial design (see Table 2).

Managers, Engineers and Govemnaent 65

In the first group, Airbus and ESRO, professionals are in charge; they have

full power to implement decisions and are the real champions for their projects. The two organizations are relatively decentralized from the standpoint of managerial and administrative decision-making, and have relatively short and rational decision-making processes. Coordination between partners and integration of industrial firms are satisfactory. Roles are well defined, and there is a shared view of what the organizational goals should be. At Airbus and ESRO, there is a reinforcing mechanism which pushes the partners to stick together. In the first case, partners are shareholders and suppliers. In the second case, the “juste retour” principle is insurance against an inequitable sharing of the resources. When there is a conflict, it is generally solved within the organizational structure, allowing for

speed and relatively unbiased attention to the problems. In the same vein, as far as control of operations is concerned, only end results and financial standards mat- ter. The general managers are in charge of controlling and implementing a correc- tive action if necessary. Finally, each organization is flexible and adaptable in responding to a changing environment.

Turning to Concorde and ELDO, the picture is different. Here the top management is highly involved in internal politics. Decisions are made at ministerial levels, and general managers lack the power to give the organizations the required leadership. The impact of such an arrangement is that all administrative and strategic issues are dealt with at the apex of the structure. Centralization of decisions increases the time needed to analyze alternatives, make choices, and translate those choices into actions. There is also a definite lack of coordination between partners and with industry. Upper goals, generally, are not well shared by the national participants. Divergent objectives prevail. In a similar vein, there is no real organizational identity. Cultural values are blurred. No reinforcing mechanisms and incentives exist. Or, when they do, they are unsatisfactory and frequently constitute sources of conflict. Since decision-making is centralized, conflict resolution takes place more often at the highest level, e.g., at the government level. Finally, neither organization is flexible. Parochial objectives prevail, preventing them from adapting to new situations easily.

Thus, the analysis of the four organizations show that the most successful are the ones which have adopted what can be called adaptive forms of management. The least successful ones are of the stable kind. In a rapidly changing environment, where technological and economic forces are uncertain, it is likely that a more adaptable type of management leads to success, as is the case with Airbus and ESRO. When organizations lack strategic vision, leadership, positive incentives, and fast decision-making processes, as in the cases of Concorde and ELDO, they are bound to fail.

In addition, the mutua1 organization raises several ex-ante and ex-post managerial issues. Among the ex-ante issues, there is the right choice of partners which needs to be complementary and “synergistically” reinforcing. The ownership mix and risk allocation between participants have to be done in such a manner that there is a definite inducement to cooperate and also a fair balance between each individual contribution. The cost of the transaction has to be matched by the benefits that each partner gets. Also, the objectives of the mutual organization

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dust

ries

68 Christian Koenig and Raymond-AIain Tbietart

need to be clarified and shared by its members to limit future haggling. Finally role definition is a must to secure an efficient and smooth functioning of the organization.

The ex-post managerial issues are challenging as well. First, opportunistic partner behavior needs to be limited and monitored with the implementation of bal- anced incentives and appropriate control mechanisms. The mutual organization must be granted enough power to make decisions almost by fiat. Generally, the decision process, which - by nature - is long in such types of organizations, needs to be improved to prevent low morale and lack of sense of direction. The weak sense of loyalty which can be observed in some mutual organizations is also an important issue. Organizational identity has to be developed as quickly as possible and has to be grounded on specific cultural values. Career management is another problem. Member organizations should reward their employees’ efforts when they are delegated to the new structure and should give them a guarantee concerning the full appreciation of their time and work. Finally, to prevent problems of com-

petition between the mutual organization and its partners, precise and equitable rules should be drawn.

These managerial issues and the recommendations which have been given are based on the study of the four cases that have been discussed. It is likely, however, that further analysis of new situations will improve the understanding of an

increasingly important form of organization: the mutual organization. The industrial challenges associated with the management of large-scale ventures require the creation of innovative organizational structures. Alliance between diverse partners seems to be one of the key factors for survival in an environment where risks are high and resources scarce. The mutual organization, when appropriately managed,

is probably one satisfactory answer to these challenges.

Notes

1. Williamson (1975) talks of “hierarchical transactions for which a single administrative entity spans both sides

of the transaction.”

2. Note that joint ventures, in which one partner does not contribute in a recurrent way or which the two part-

ners set up as an integrated activity, do not qualify as mutual organizations.

3. For a general and accurate description of the aircraft industry, see Newhouse (1982).

4. The plane began to be called the “Concorde” only in 1963. The British did not fancy spelling it with an “c,”

but finally conceded to the French spelling in 1967, more than four years after the program had started.

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481-508.

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37-51. Williamson, O.E., Markets and Hierarchies (New York: Free Press, 1975).

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Documents

Managers, engineers and government: The emergence of the mutual organization in the European aerospace industry