In the early eighties, when awareness of the microelectronics revolution was at its peak and debates raged alternately heralding its promises and fearing its threats, Ingersoll Engineers came up with a set of surprising results from a survey of British manufacturing. When assessing the risk of investment in automated technologies their results showed an inverse relationship between the level of automation and the likelihood of achieving increased productivity. In fact, they found only an 18% rate of success in firms that went for the "high technology" option, in contrast with an 84% success rate in firms that focused mainly on reorganization, introducing only a few selected changes in equipment (See Fig.3).

Rather than conclude that computer integration and flexible manufacturing systems (FMS) cannot yield expected results, what Ingersoll argued is that organizational change is a precondition for reaping the potential benefits offered by the new equipment. They also found that there is considerable leeway to improve production processes through organizational change that can be undertaken before any new equipment is incorporated. In some of the cases they studied as much as 80% of the initial improvements in productivity could be attributed to reorganization alone[10] .

These findings are in line with the increasingly accepted explanation of the productivity paradox in the OECD countries. At a time when investment in modern equipment was growing rapidly and new technologies had been widely applied, instead of the expected increase in efficiency there was a decline in the rate of productivity growth in these economies. The TEP Report locates the main causes of this phenomenon in the "various diffusion barriers including human resources, organizational and management practices and more broadly the surrounding social, economic and institutional environment[11] .

After several years of great interest in microelectronics and the information technology revolution, the center of concern thus shifted to another wave of equally pervasive but "soft" generic technology. By the mid-eighties the managerial revolution, centered on the new organizational practices developed in Japan, had become the focus of a debate in terms of promises, threats and applicability. Slowly it came to be understood that the greater success of Japanese firms was rooted in an organizational model which allowed them to take much better advantage of modern technologies[12] . Since then there has been a mushrooming of consultancy services in the new organizational practices, various "gurus" in the field have appeared and many books and journals are propagating the new principles, their diverse forms of application and the many specific examples of success or failure in using them.

In 1986 the Massachussetts Institute of Technology set up a special Commission on Industrial Productivity (MIT/CIP) to address the causes of the decline in U.S. competitive performance[13] . It convened more than fifteen top academics in economics, technology management and political science who mobilized dozens of expert researchers to probe into manufacturing companies in eight industries in three continents. Their results point clearly to the organizational issues, rather than to hard technology.

The report groups the causes of the loss of U.S. competitiveness into six categories:

1. Outdated strategies
2. Short time horizons
3. Technological weaknesses in development and prodution Neglect of human resources
4. Failures of cooperation (within the firm and with other firms and supporting
   institutions
5. Government and industry at cross-purposes

What is happening in the field of management and organization can be understood as a replacement of the established paradigm for best practice. It is an upheaval in common sense notions of efficiency. The principles that are today recognized as leading to competitiveness are almost all in direct opposition to traditional views. These are presented in two "pure" models in Figure 4.

THE NEW VS. THE TRADITIONAL PARADIGM:
A RADICAL AND DIFFICULT SHIFT IN MANAGERIAL COMMON SENSE

As regards the shape of the firm, the ingrained ideas of centralized command, pyramidal structures and functional compartments are being replaced by flat flexible networks with increasing decentralization of decision-making in structures where top management takes on a truly strategic and coordinating role. The goal of standardizing and optimizing operational procedures and specializing people in clearly defined tasks is being superseded by a trend towards flexible and adaptable systems based on multi-skilled personnel and continuous learning and improvement. Similar contrasts exist for each of the other characteristics.

But this is not just a collection of new management techniques. Rather these trends converge into a coherent system, a model or paradigm of best practice which is proving superior in achieving higher productivity, quality and overall competitiveness in international markets. It is thus generating powerful signals which induce imitation. Even under strong competitive pressures however the diffusion of the new organizational patterns from one firm to another confronts great hurdles and obstacles, especially mental blocks and personal or group resistance. A change in mentalities, attitudes and behavior is far more demanding than the introduction of modern equipment.

Yet the people who occupy leadership positions today and must make the decisions for change are likely to have reached the top by applying the very principles that are now being questioned. It is very difficult to accept that what worked in the past has to be replaced by other practices; that one's competence is threatened with obsolescence. The MIT-CIP report put it very succinctly in relation to the U.S.: "it is the very magnitude of past successes that has prevented adaptation to the new world"[15] .

Certainly, the transition implies that entrepreneurs, managers, labor leaders and government officials must discard a significant part of their accumulated human capital, of their cherished routines, of their hard earned experience. Thus transformations do not and cannot occur overnight. They take decades.

Elsewhere we have suggested that the delay in implementing change in the old front runners is one of the elements opening a window of opportunity for the lagging countries to accelerate development during paradigm transitions. Another is the availability of generic all-pervasive technologies that are capable of rejuvenating mature technologies and revitalizing traditional ones. In so doing, they can reduce an important part of the gap that had been built on the type of experience which is made obsolete by the technical and organizational shift[16] .
  

Reorganization as an effective option of modernization

Recent experience in developing countries has shown that much ground towards competitiveness can be covered with organizational efforts and modest investment in intangibles. There are many examples of impressive cost reductions and quality improvements, of successful rationalization and specialization that have resulted from managerial reconversion[17] . Such cases show that not all modernization processes involve great expenditures in new equipment.

One particular study that does quantify the initial trade-off between hard and intangible investment is the case of a U.S. paper mill presented in the Harvard Business Review[18] . It is worth summarizing it here as an illustration of the type of effort involved and the sorts of results that can be achieved.

In 1983 the mill was losing a million dollars a month and was the last of the five suppliers in their part of the market. Equipment modernization costs were estimated to be $23 million with a timetable of at least five years to reach break-even. The choice was filing for bankruptcy or trying the reorganization route. They did the latter.

The company decided to turn everyone into a problem solver. "Together, managers and mill workers learned to take the initiative not just for identifying problems but also for developing better processes for fixing problems and improving products... The entire organization learned how to learn[19] ". They established contact with customers, pinpointed the flaws that had to be corrected, went to the root causes in their process and, in the end, not only corrected those problems (going to "zero defects") but actually developed a new thinner paper grade which created a profitable niche in the market.

In less than two years the mill was making profits, by the third year they had become the number one supplier in their group with a tenfold rise in prices per share and capable of financing expansion out of profits.

This case could be seen as a metaphor for the type of transformation that developing countries might be wise to attempt in this transition. With scarce investment capital and without much time to spare to achieve results, it makes a lot of sense to take the organizational route to modernization and to concentrate resources on learning.

To start by investing in new equipment means in most cases the highest financial cost although it is probably the line of initial least resistance and minimum effort (See Figure 5).Established practice both in firms and credit institutions assumes this to be the "normal" route [20] . Yet, it is increasingly recognized that reorganization cannot be avoided and is in fact required if full benefits are to be reaped from the introduction of new equipment.

Choosing to begin by reorganizing has several advantages, one of which is the trade-off between maximum effort and minimum

cost. This is obviously important when investment funds are scarce. But, as the example of the paper mill illustrates, it can be a better route independently of cost comparisons. Increased innovativeness allows each step to be financed by the previous, leading therefore to greater financial autonomy.

Many individual examples show that a sequence of investment moving from intangibles to tangible equipment can optimize both short and long term returns. A process of reconversion that begins with market analysis and focusing and goes on to investment in human capital and technological learning, can be followed by a series of incremental improvements to the existing equipment and process as well as to the products and, by collaboration with suppliers, to improve material and technical inputs. This sequence leads to a full understanding of the potential and limitations of the machinery in place and to a much greater capacity to select the new equipment when the moment comes to incorporate it. Often, as in the case of the paper mill, cash flow from success in the earlier phases can finance each subsequent one [21] .

A point worth making is that this sequence is not only applicable to the modernization of existing plant but helps to avoid waste in hard investment when designing new production facilities. In many instances, the customary practice of estimating market demand for the medium term and setting up a plant of that future scale is no longer advisable. Instead of living with idle capacity (and having funds tied down in it) the lowest possible module is used at start up and capacity is stretched to follow the increase in market demand through incremental improvements, additional shifts or even partial subcontracting. When the next module is finally added, it incorporates the stretching improvements and takes advantage of the people trained in the extra shifts. This is of course not possible in all cases. Bulk production for the standardized portion of any market is likely to remain dependent on a large enough scale of production for cost competitiveness. But as soon as more specialized segments are envisaged, modularity becomes a possibility. Of course in some cases smaller modules in equipment are simply not yet available and in certain cases they might never be. Yet, even in steel, minimum scale has already come down from two million tons to 300.000 [22] . Therefore, the range of options depends heavily on the market niche being targetted, on the specific product, the particular technology and even the moment in time.

Nevertheless, the principle of avoiding idle capital is generally applicable, sometimes in rather indirect and imaginative ways. For instance, electric utilities in the U.S. have been able to postpone investment by purchasing extra power from large customers who have generating capacity and using it to cover peaks in demand or by financing energy conservation in the clients' premises[23] .

Finally a note of warning. The emphasis placed here on the growing importance of organizational issues must be situated within the current period of restructuring and transition. It is not intended to deny the need for new equipment or R&D efforts. In the medium and long term the balance between investing in managerial change or in product and process innovation is biased towards the latter. Once the new managerial principles become the shared common sense and point of departure, a greater effort will be required in product and process technology. Facing these costs, which are likely to grow as the process of restructuring proceeds, is one of the tasks that might more effectively be met through international linkages. Intercountry arrangements established in this transition phase, moreover, might contemplate from the start this probable evolution.

We shall return to the theme of market segmentation and international linkages in Section 5, but we now turn to the issue of human resources without which neither technical nor organizational change can be implemented.