Robin Murray

GLC_From Sector Strategy to Flex Spec

 Robin Murray’s Legacy: From Sector Strategy to Flexible Specialization

 
 

By Michael Best

I attended Robin’s lectures at the Institute for Development Studies while a visiting professor in the economics faculty at Sussex University in 1976. He invited me to attend the meetings of the Brighton Labour Process Study Group, an extra-ordinary group of scholars. For me, it was a crash course particularly in the French structuralist school and regulation theory which had not yet crossed the Atlantic Ocean. In addition, Sussex University in the late 1970s was like a magnet for leading policy advisors in matters of statecraft and political economy. Stuart Holland, Prime Minister Harold Wilson’s youthful economic advisor, attracted major figures such as Barbara Castle and Jacques Attali, advisor to President Mitterand, to standing room only lectures. Chris Freeman was lecturing on long waves and building SPRU into a world leading centre for science and technology research and publisher of two major journals. New ideas were in the air like nowhere else, to use Alfred Marshall’s expression, perhaps facilitated by the lack of the departmental silos of traditional universities.  

Simultaneously Robin and Frances were deeply involved in community activism which culminated in Brighton on the Rocks: Monetarism and the Local State in 1983. The book is a stinging critique of “… a new economic policy, devised in Chicago and tried out in Chile, [which] has been devastating our lives at work and in our streets”. The book offers a practical methodology for politically active citizens to undertake research at the local level to unmask austerity as an economic ideology to cut taxes and government services as a requirement of sound public finance and job creation.

Brighton on the Rocks is a critique. The last sentence of the book captures Robin’s agenda to advance a new economics and the potential for local research to the discovery of how the capitalist system works.

 
 

“This book is rooted in a locality, but for that reason has universal relevance. The attack has been similar everywhere. Only if we start from where we live can we answer monetarism in argument and practice and pave the way for a new economics geared to need.”

 
 

The quote also signals the interconnectedness of theory and practice in economic research. It resonates with the first sentence of Albert Hirschman’s The Strategy of Economic Development (1958) itself a quote from Alfred Whitehead: “The elucidation of immediate experience is the sole justification of any thought; and the starting point for thought is the analytical observation of components of this experience”. 

Robin’s appointment, in 1982, as Director of Industry and Chief Economic Advisor to the Greater London Council presented a once in a lifetime opportunity to move from critique to leadership in industrial policymaking and to the “elucidation of immediate experience” for the purpose of the discovery of alternative economic ideas. The backdrop was rapid deindustrialization. The first two years of Margaret Thatcher’s government, 1979-81, witnessed a decline of twenty-five percent in U.K. manufacturing. National unemployment reached three million. Greater London had the largest concentration of industrial unemployment of anywhere, perhaps in the world. 

Nevertheless, Robin was prepared for the challenge. His interdisciplinary academic background at the London Business School and Sussex/IDS combined with community action research all came into play. In what follows I focus on Robin’s brief, intense, and exhilarating experience as Director of Industry at the GLC and draw lessons for an economics of industrial policy that informed his post GLC industrial advisory role in multiple contexts. 

Under Robin’s leadership, the GLC established the Greater London Enterprise Board (GLEB) in January 1983 as an industrial development agency with an annual budget of £30 million. The corporate plan listed as primary objectives to create and improve the quality of jobs in London and to regenerate London’s economic base by investing in London’s industry. GLEB’s charter was shaped by two propositions. The first was a ‘capital gap’ explanation of industrial decline in London. The second was that past industrial policy initiatives in Britain had failed from a lack of government influence over private business management and the failure to promote industrial democracy in the workplace even in the management of government-supported  or -owned enterprises.

These propositions implied a theory of the causes of industrial decline and a policy framework for industrial renewal. Industry had declined because of a lack of capital, the incapacity of private enterprises to coordinate investment decisions and because workers were systematically excluded from decision making. GLEB was empowered to make equity investments in private companies. Such investments could simultaneously fill the capital gap, create a basis for inter-firm planning and implement industrial democracy in the workplace. GLEB targeted private companies of which there were some 740,000 in the UK in contrast to a total of some 7000 public companies. The novelty of GLEB was to become a shareholder in private companies to draft the discretionary clauses of the articles of association to give GLEB power over the strategy and operations of business enterprises. If the concept of a local enterprise board worked in London, it offered the promise of decentralized but coordinated governance of enterprise boards throughout the UK to regenerate the nation’s economic base.

Thus began a journey into the world of business and industrial organization to arrest industrial decline and foster regeneration. The Sector Strategy division within GLEB was tasked to develop expertise of London’s major sectors and advise the GLEB on investments. The focus was on ‘key’ firms with over 40 employees. The concept of sector strategy was originally conceived as a method to address the problem of negative effects of GLEB investments on other firms. In one early case, GLEB funding saved a firm that was pursuing a price-cutting strategy to drive other London firms into bankruptcy. To avoid counter-productive investments the GLEB board approved the following set of sector and enterprise guidelines for interventions:

  1. Intervene in key firms that can influence strategic planning and business organization of the entire sector.

  2. Intervene where sector wide competitive advantage could be created.

  3. Intervene to promote industrial districts.

These criteria distinguished proactive from reactive investments. Reactive investments meant acting as a lender of last resort by rescuing firms that were failing in the market. Proactive investments meant seeking out firms that could become catalysts for sector revitalization. 

To identify proactive investments, a sector strategy research protocol was formulated that combined desk research with ‘intimate knowledge’ (a term of Alfred Marshall’s) gained from ‘going inside’ business enterprises. The closest to an existing methodology for business strategy research is the SWOT (strength and weakness; opportunity and threats) framework used by consultancies and taught in business schools. The idea was to rethink the conventional SWOT analytical framework in three ways: first, to go inside the firm and the factory to examine and, where required, formulate methods to improve management practices, labour organization, and the production process; second, to move from strategy and competitive advantage at the level of the individual enterprise to inter-firm relations in a sector or Marshallian industrial district; and third to reframe the SWOT framework to account for the role of government policymaking to influence progressive changes in the strategy and structure of a region’s business enterprises.

As a publicly-funded venture capital agency, GLEB staff were welcomed by managing directors to engage in strategy discussions and undertake factory tours. Both were invaluable learning experiences from the inside of London’s manufacturing enterprises. Company visits were combined with visits to union headquarters, specialist education facilities, research agencies, trade associations, trade fairs and amateur historians with experiential knowledge of each sector. The London Industrial Strategy (GLC 1985) proposes strategies for over twenty sectors in the London economy.

The Greater London Enterprise Board’s existence was cut short by the Thatcher government’s abolition of metropolitan level government in March 1986. It was a bold experiment in which important industrial lessons were learned, both negative and positive, and equally important lessons that have long been and alas continue to be ignored at great cost to cities, regions, communities and the quality of work life in the U.K. I will start with the immediate lessons and work to deeper causes that came to inform Robin’s thinking and informed his post GLEB industrial policy work.

For Robin, as noted above, theory and practice are interwoven not independent realities. This implies the elucidation of local experience, in this case GLEB’s investments and research, is also the starting point for learning and creating new economic understandings and ideas. From this viewpoint, GLEB’s industrial policy engagement in London’s industry was a valuable learning experience about both the limits and the requirements of local government industrial policy.

GLEB’s short existence was not sufficient time for a full assessment of its accomplishments and failures. But much was learned. No one was in a better position than Robin to give a reflective assessment so what follows is conjecture based on a comparison of the economic policy framework that informed the inception of GLEB with that which informed the second industrial policy project he led, the Cyprus Industrial Strategy beginning in 1987. I participated in both.

Three lessons became clear in the process of conducting the London Industrial Strategy sector studies.

First, London firms could not be saved by an infusion of capital. The financial accounts revealed that no amount of capital investment in London manufacturing enterprises would have achieved GLEB’s objectives. The financial condition became apparent by looking at the books of enterprises, all of which were private and therefore not published. London industrial firms were deeply distressed almost without exception but capital infusion did not get at the root causes.

Second, equity investments in enterprises did not give GLEB power, as assumed, over business enterprises. Managing directors of firms, regardless of intention, had few degrees of freedom for restructuring. Worse for GLEB, equity investment even in the more successful firms could quickly involve a large commitment of staff time, energy, and financial resources in saving a company in which it had an equity position (Best 1989 and 1985).

A third and most important lesson takes us to the deep structural causes of British deindustrialization and national policymaking failure revealed by the exercise of the SWOT sector analyses to competitor localities at the level of granularity applied to London. It required systemic observation including visiting competitor regions to characterize the threat to and structural weaknesses of London industry. It was in these visits that the systemic weaknesses of and threats to U.K business performance became clear. It is in the study of modes of competition at the level of regions and nations that the power of Robin’s methodological claim that critical matters of universal relevance can be discovered by systematic observation of the local is exemplified. So too did the resistance to addressing entrenched mindsets with respect to prevailing management views, business practices, economic discourse, and government policymaking.

The first clue to the structural weakness of the business/economic system to which individual firms could rarely transcend was in the trade statistics. The United Kingdom’s share of world manufactured trade dropped from 28% in 1958 to 12% in 1982. Over the same period manufacturing imports grew at 10% annually compared to 5% for manufactured exports.

The national trade statistics revealed a similar pattern across London’s manufacturing sectors. Import penetration from the continent was decimating London’s manufacturing employment as firms were suffering from both a sharp decline in demand combined with equally dramatic increase in interest charges. Visits to the surviving firms did not reveal robust firms gaining market share even as local competitors went out of business.

The sector trade statistics identified the regions in Europe that were thriving at the expense of British manufacturing. Britain’s furniture import penetration rose from 3.5 percent in 1968 through 7 percent in 1973 to 15 percent in 1978 (London Industrial Strategy 1985: 97-118). By 1985 only two of 25 North London furniture firms remained in an industry that once employed over 16,000. Yet between 1973 and 1981, world-wide exports of wooden furniture increased nearly 2.5 times. Italian exports increased fivefold to overtake Germany the other major furniture exporter in the world at that time. Italy enjoyed a nearly $2 billion trade surplus in furniture in 1980.

It was factory visits to the thriving SME sectors in Germany and Emilia Romagna that, by comparison, revealed the structural causes of Britain’s industrial decline and failure of its business system to meet the competition. It took us into a world of production capabilities, business organization and governance institutions alien to the British economics discourse, business culture, and policymaking mindset.

A visit to German furniture consultants Gerhard Schuler who arranged 10 or 15 factory tours revealed an entirely different business system. The difference was reflected in accounting systems to measure and simultaneously target areas to improve production performance. First, German factories measured productivity performance by capital turns, the ratio of fixed and working capital to sales. WIP (work-in-progress) turns were tracked to facilitate identification of targets to increase flow and priority engineering changes. Second, instead of the British price setting method of attributing overhead or indirect labour charges to a product’s direct labour time, German enterprises practiced activity-based costing to set prices and educated frontline workers to encompass ‘indirect’ skills such as quality control, machine setups, rapid changeovers all in pursuit of flexible production capabilities. Whereas British accounting practices were conceptualized in terms of the goal of reducing direct labour time, the German enterprise accounting practices were designed to foster a flexible production system in which multi-skilled workers were key to rapid changeovers, rapid adoption of new technologies, and continuous improvement in methods.

Another aspect of Gerhard Schuler had a profound effect on Robin and me. The consultancy had a library including factory layouts of 2300 furniture firms around the world including many in the U.K. But what impressed us most was not simply attention to plant layout but to the critical importance of product and process engineering and craft skill levels. This level of productive structure knowledge must have been invaluable to German banks doing due diligence, to local governments conducting industrial policy research, and to foreign companies and governments conducting strategic planning exercises. As a medium-sized knowledge-intensive firm with a global footprint, Gerhard Schuler welcomed an invitation to demonstrate the potential of specialized wood-processing software to Greater London furniture firm owner/managers. It was not well attended.

Visiting Emilia-Romagna was equally instructive but revealed a business system with different strengths. We found industrial districts constituted by dynamic networks of heterogenous firms pursuing a business strategy of focusing on a core capability and partnering for complementary capabilities in contrast to London sectors constituted by homogenous firms making the same product and pursuing a cost minimization strategy of competing on price. Ironically, the London firms and sectors mirrored the microeconomics of textbooks but found themselves unable to compete against the networked groups of specialized enterprises from abroad in the same sector. 

For example, we visited a furniture company in Emilia-Romagna that focused on edge-banding for cabinets, tables, desks, etc. for kitchen, bedroom, office furniture makers. It had under ten employees, but their specialized machining and tooling and labour skills and resulting flexible production process enabled them to supply high quality edge-banding to all other companies in the region. They had experiential knowledge of machining and expertise in materials, shapes and adhesives that could not be matched by a department within a vertically integrated company. 

Furniture company owners in London saw the competition as low-cost rivals within the U.K. when the real competition was from companies within rival industrial districts with superior production engineering, new product development and technology management capabilities. The obsession with accounting practices that focused on direct labour time rather than capabilities left the U.K. business system structurally incapable of new product development, technology management, and design-led business strategies, the requirements for enterprise resiliency.

The role of local government was closely attuned to the needs of the region’s business system. In the Cyprus Industrial Strategy, Robin described the flexible specialization production system and elaborated the array of ‘extra-firm infrastructures’ coordinated by local government to support an innovative business system (Murray 1987; 1989; 1992). In his report titled Industry and Development Banking in Jamaica (1991) he included as an appendix a translated constitution of the Emilia-Romagna financial consortium as an exemplar of a targeted policy instrument to address working capital needs of SMEs. The Emilia-Romagna consorzio fide supplies due diligence and provides loans backed by local and regional government guarantees to meet working capital needs (Credit Consortium of small and medium industries of the Province of Modena). It is a superior alternative to addressing the capital needs of enterprises to either the private sector alone or GLEB equity investment approach.

To our knowledge, local government in Emilia-Romagna and Germany did not, in principle, provide subsidies, grants, equity investments or loans directly to individual enterprises. Instead, they institutionalized the power to convene to build a consensus across the economic constituencies (firms, banks, schools, ‘real’ resource centres) for the purpose of investing in, fostering and coordinating ‘extra-firm infrastructures’ to supply the requisite business services to SMEs.

Small firms in the UK did have low productivity. But it was the way they conceptualized competition, were organized, and were victims of historically high interest rate policies that combined to drive up costs. Most SMEs in London’s manufacturing sectors pursued a price-led, cost minimization strategy and saw the competition as other firms making the same product. The real competition was coming from SMEs in other localities that collectively pursued product-led competition and established production and work organization practices and inter-firm relations to succeed. Sadly, the accounting systems London manufacturers used did not measure working capital turns (sales divided by inventory), so they suffered from excess inventory, excessive working capital requirements, and resulting financial charges that escalated with the nearly doubling of interest rates in 1979 to 17% and remained in double digit territory for all but one year in the Thatcher era. With a decline in sales, London’s factories became inventory warehouses and were, in effect, enriching the banks to finance their working capital requirements. In many cases, manufacturing companies were paying more in bank charges than in labour costs!

London manufacturers and employment fell victim to macroeconomic policy prioritization of stabilization policy at the expense of business capability development. In this local and national government worked at cross purposes at the cost of deindustrialization. The three-layered German government system worked in sync to foster a capability-informed macroeconomics to the benefit of the nation’s economy. 

Robin invited Sebastiano Brusco to give a lecture to the GLC on the Emilia-Romagna economic model in 1985 (Brusco’s article “The Emilian Model: Productive Decentralization and Social Integration” published in the Cambridge Journal of Economics in 1982 is a classic). Brusco was surprised at the resistance to his thesis that, properly organized, groups of small firms could be highly productive. Unfortunately, it was a novel concept not only to business and economic discourse at the time but in local government thinking. Such was the seductive power of the market or plan dichotomy of economics that cut across political allegiances.

In March of 1986, metropolitan level government was abolished, and the London Industrial Strategy program ended. The U.K. national government continued its relentless drive to centralize economic governance wilfully blind to the importance of local government policymaking to industrial success elsewhere with devastating consequences for employment in British manufacturing. Robin would have been horrified but not surprised by the poor performance of the British government in response to the Covid-19 pandemic and the comparative success of German governance and production.  

I returned to the University of Massachusetts, Amherst in 1985, forever thankful for the opportunity, rare for an academic, to learn about production and business organization from the inside of business enterprises and industrial policy institutions. I will always treasure the two years I worked with Robin officially as senior economic advisor at the GLC. Early on he informed me, before I knew it, we were on a journey to develop new principles of production and organization. He was exactly right, although it took me years to realize its implications. I dedicated my book How Growth Really Happens: The Making of Economic Miracle through Production, Governance and Skills to the memory of Robin. It would not have been written without his inspiration, guidance, and, most of all, friendship.