Printer Friendly

The impact of deregulation on LTL motor carriers: size, structure, and organization.

Congress passed the Motor Carrier Act of 1980 (MCA) to introduce greater competition in the motor career industry through significant reduction in entry and pricing restrictions. A large body of literature investigating the impacts of motor carrier deregulation has emerged. However, little attention has been given to the impact of deregulation on management characteristics and structure. Recent work has, however, looked at changes in the size, structure, and organization of railroad management in response to the substantial deregulation that resulted from the passage of the Staggers Rail Act of 1980.|1~ That work documented the following specific changes in railroad management in response to the new regulatory climate: a slight decrease in the size of the top executive management team in conjunction with a greater decentralization of responsibilities, more emphasis placed on marketing and sales and less emphasis on the traditional operations orientation, and a greater reliance on younger, more highly educated managers with less industry experience.

The rail research suggests that there may well have been similar impacts of deregulation in the motor carrier industry. This article will analyze the impact on motor carrier management characteristics and structure, with a focus on the less-than-truckload (LTL) segment of the industry. The LTL segment is appropriate for study in that the MCA led to a significant environmental change and upheaval within this industry segment.|2~ Before deregulation, the government-sanctioned rate bureaus formed by LTL carriers, coupled with the ICC's highly restrictive entry policies, resulted in an absence of effective competition among LTL carriers. Furthermore, LTL customers, whose shipment sizes ranged from over 70 pounds to under 10,000 pounds, had no viable alternative to service by LTL carriers. Private carriage was not an option since many LTL-dependent shippers had shipments that were too small in size and did not move at regular enough intervals. United Parcel Service (UPS) and the U.S. Postal Service were also not viable competition since their shipment size range was too narrow to meet the full range of needs of the LTL shipper. Thus, the regulatory regime provided LTL carriers with substantial protection from competitive forces.|3~

A recent comprehensive review of the effects of surface freight deregulation confirmed the significant impact of deregulation on LTL carriers.|4~ According to a counterfactual comparison of actual profits in 1977 with what profits would have been if deregulation had existed then, deregulation resulted in a substantial loss of LTL profits ($5.3 billion annually).

This article examines LTL management teams in both the pre- and post-MCA period in order to assess changes since regulatory reform. It also investigates the extent to which management changes have influenced firm performance. The article proceeds with hypotheses regarding observed changes in the management teams of LTL carriers. A section on data sources and methodology follows, after which results are presented and discussed.

HYPOTHESES

Team Size and Number of Functions

The highly regulated pre-MCA environment protected LTL carriers from competitive threats by new market entrants since the ICC had highly restrictive entry policies. In addition, most pricing decisions were made collectively in rate bureaus, so that there was little price competition among carriers. As a result, the pre-MCA motor carrier management teams could be relatively small and would not require a normal range of functional expertise. For example, the need for pricing and marketing strategy to be represented would be minimal. However, LTL firms face a very complex, competitive environment under deregulation, requiring increases in the size of the management team to meet the new complexities. Tushman and Keck argue that the size of top management teams increases during periods of environmental uncertainty in order to take on new members who can provide the needed competencies to meet the added challenges.|5~ (hypothesis 1)

A further related hypothesis (hypothesis 2) is that the new members of the management team added in response to the new environment will increase the total number of functions represented on the LTL motor carrier management teams. Again, Tushman and Keck argue that a highly competitive environment dictates that the top management team increase its functional differentiation.

Market Orientation of Team Members

The skills required of top management team members may well be quite different in the regulated versus competitive environment. For example, successful interface with the regulatory agency, the Interstate Commerce Commission, would be an important determinant of performance under regulation. Motor carrier fortunes hinged significantly on ICC's decisions in a variety of different areas. In this environment, legal skill in the top management team was of paramount importance.

However, a fiercely competitive market environment would place a premium on skills such as marketing and pricing. This argument is supported by evidence from Grimm, Kling, and Smith|6~ in the railroad industry. Furthermore, Miles and Snow have argued that firms faced with an unstable environment may focus on externally-oriented functions such as marketing and product development,|7~ while firms with a more stable environment rely more on production and accounting to provide critical management information.|8~ Also, Hambrick and Mason have noted that firms in turbulent industries emphasize marketing, sales, and product research and development in their management functions.|9~ Accordingly, it is hypothesized that LTL motor carrier management teams will place more emphasis on market-oriented functions and less on traditional functions in the post-MCA environment. (hypothesis 3)

Stock Ownership

In the protected regulatory environment, many of the LTL carriers were closely-held family businesses or ones in which top managers controlled the company's stock. However, in a more competitive environment firms may well have a need to tap more intensively outside sources of capital, particularly to support expansion plans. It is hypothesized, then, that in the post-MCA years, the share of stock held by top managers will decrease. (hypothesis 4)

Management Turnover

It is conjectured that bringing new members to the post-MCA top management team will enhance performance. Management researchers have hypothesized that in periods of environmental stability low management turnover and resulting in-depth industry familiarity and a cohesive team interaction lead to better financial performance. In contrast, they assert that in periods of vast changes, such as facing LTL carriers in the post-MCA years, low turnover would not serve management well. A management team which served under regulation would be restricted in its knowledge base and its ability to deal with significantly changed circumstances. In contrast, a post-MCA management team with high turnover from regulation will have drawn in additional talents and expertise to meet new circumstances.|10~ (hypothesis 5)

Management Characteristics and Performance

It is hypothesized that the financial performance of LTL firms in the post-MCA years will be related to the extent to which firms have, indeed, initiated the changes in their management teams previously discussed. Specifically, it is hypothesized that the size of the management team, the total number of functions represented on that team, and the total number of market-oriented functions will be positively related to financial performance in the deregulated environment. (hypotheses 6 through 8) Firms with larger teams, with broader functional representation, and greater strength in market-oriented functions will be better positioned to compete successfully under deregulation. In her study of the management characteristics in the U.S. cement industry, Keck found that the profitability of the firms was related to functional heterogeneity of the management team in a positive and statistically significant manner.|11~

It is also expected that a greater degree of outside capital may well assist a firm in adjusting to the new competitive environment. It is hypothesized that top management team stock ownership will be negatively related to performance in the deregulated environment. (hypothesis 9)

Finally, it is hypothesized that management turnover between the pre- and post-MCA years will be positively related to performance. TABULAR DATA OMITTED (hypothesis 10) In her study of the cement industry, Keck also substantiated a statistically significant positive relationship between firm financial performance and the percent of entries and exits in the management team and a significant negative relationship between performance and overall team tenure during periods of environmental uncertainty.|12~ Murray's study of the management characteristics of oil companies in the United States confirmed a significant positive relationship between temporal heterogeneity of the management team and long-term firm performance.|13~

All of the hypothesized changes in management characteristics and their hypothesized impact on firm performance are summarized in Table 1.

DATA SOURCES AND METHODOLOGY

To test the hypotheses, data were gathered from two sources both prior to and after the Motor Carrier Act of 1980. The Official Motor Carrier Directory (1977, 1987).|14~ and the American Trucking Association's (ATA's) Executive and Ownership Report (1977, 1987)|15~ both provided information on the size of LTL motor carrier management teams, the functional classifications of each management team position (e.g., finance, accounting, etc.), and the names of the managers on the management teams in both years. Additionally, the Executive and Ownership Report included information on stock ownership of LTL carriers. The data published by the ATA are drawn from the Annual Reports filed by motor carriers with the ICC, from which information on financial performance was also obtained.

The remainder of this section explains more precisely how data were gathered and analyzed for each of the hypotheses.

Management Team Size, Structure, and Organization

Using the 1977 and 1987 editions of both the Official Motor Carrier Directory and the Executive and Ownership Report, a matched sample of data was constructed on all of the above variables for 96 firms. This represents about 35 percent of the total 1987 population of 275 firms in the LTL sector of the industry. Thus, only firms with complete information in both years were included in the data base upon which hypotheses were tested. This data base permitted the testing of the first five hypotheses as follows:

Size. The directory listed the individuals on the management teams of each company in each year. Thus, a management team size could be computed for each firm in each of the two time periods. Change in management team size in the two time periods was tested for statistical significance by a statistical comparison of the mean team size for firms in each time period.

Total Functions. The two directories provided a job title for each of the members of the management team. These individual job titles were initially grouped into the following eleven functional managerial categories: finance/comptroller, rates/tariff, marketing, operations, management information systems, human resources/labor relations, international, safety, law, claims, and traffic management. For each firm, the presence or absence of one or more managers in each category was recorded in both the pre- and post-MCA analysis year. Thus, a firm could have at most eleven functional categories represented on its management team, although the size of its management team could exceed that number if more than one manager had the same functional category. This system provided the data to test whether the mean number of functions represented on the management teams in the two time periods differed significantly.

Market-Oriented Functions. The eleven functional categories discussed above were divided into the following three major subgroups: market-oriented, regulatory-oriented, and other. Market-oriented functions, identified as those most relevant for the new highly competitive industry conditions, included marketing, rates/tariffs, and finance/comptroller. The regulatory-oriented functions included law, claims, and traffic management, positions most directly associated with a tightly controlled environment. The other functional categories were included in an "other" category. The hypothesis of how the functional orientation of LTL management changed in response to the new environment was tested through a statistical comparison of the percentage distribution of all managers across major functional categories in each of the two time periods.

Stock Ownership. The Executive and Ownership Report (1977, 1987) provided data on the percentage of company stock owned by top managers in both 1977 and 1987. The hypothesis of how this ownership pattern changed was tested through a statistical comparison of the mean share of total stock in the hands of the management team in the two time periods.

Management Turnover. For each firm, the directories cited above provided information on management team membership in both 1977 and 1987. For each firm, a management team turnover variable was constructed as follows: percent of managers in 1987 who were also on the management team in 1977. This is the turnover variable that was used in the analysis.

Performance Implications. Hypotheses 6 through 10 involved an evaluation of the relationship between change in management team size, structure, and organization and firm financial performance. The measure of firm financial performance employed in this study is the standard one used in the evaluation of the motor carrier industry--operating ratio, defined as total operating expenses divided by total operating revenues. The statistical test of the relationship between management team characteristics and financial performance involved a Pearson's correlation coefficient between 1987 operating ratio and the 1987 management variable under consideration. For example, to analyze the relationship between management team size and performance, a Pearson's correlation coefficient was developed between 1987 management team size and 1987 operating ratio for the firms in the data base (hypothesis 6). The correlation coefficient between operating ratio in 1987 and each of the following variables completed the analysis: number of total functions represented in the management team in 1987 (hypothesis 7), number of market-oriented functions represented on the team in 1987 (hypothesis 8), share of the total firm stock owned by the management team in 1987 (hypothesis 9), and management team turnover between 1977 and 1987 (hypothesis 10).

RESULTS

The results reported in this section demonstrate that LTL motor carrier management has changed in several important respects with regulatory reform. Furthermore, the results show that management team characteristics influence firm financial performance in the new environment.

Size

Table 2 reveals that the mean size of LTL management teams increased from 7.2 to 7.8 between 1977 and 1987. A one-way analysis of variance test indicated that this difference was not statistically significant. However, the net average increase of .58 managers is consistent with the hypothesis that LTL motor carrier management teams responded to a more complex environment by increasing the size of their teams.
Table 2. Changes in Size of LTL Management Teams: 1977 to 1987
Year N = Mean St. Dev. Z Ratio
1977 96 7.229 4.373
1987 96 7.813 4.893 .8719
Change .584


These results contrast with the findings of Grimm, Kling, and Smith|16~ that the number of railroad managers decreased in the regulatory reform period as management became more streamlined and decentralized. One explanation for these differing results is that railroad management teams in the regulated era had become quite large as a result of bureaucratic inefficiency. LTL management teams did not display as many of the inefficient bureaucratic tendencies that were common among the railroads. It is, as a result, not surprising that changes in the size of LTL and railroad management teams would be different in response to regulatory reform.

Total Functions

Table 3 reveals that the mean number of functions represented on the management teams of LTL carriers increased from 3.5 to 3.9 between 1977 and 1987. Once again, while the direction of change is as hypothesized, the mean difference is not statistically significant.
Table 3. Changes in Total Number of Functions Represented on
LTL Management Teams: 1977 to 1987
Year N = Mean St. Dev. Z Ratio
1977 96 3.479 1.858 1.299
1987 96 3.854 2.132
Change .375


In 1977, the management teams of twenty-seven firms had one or two functions represented on the team, thirty-four firms had three or four functions, and thirty-five had five or more functions. By 1987, fifty firms had between three and five functions represented and nineteen firms had six or more functions accounted for.

Market-Oriented Functions

Table 4 provides the distribution of managers on LTL management teams among the three major functional groups: market-oriented, regulatory-oriented, and other in both 1977 and 1987. As shown, the percent of total managers in regulatory-oriented functions decreased from an average of 36 percent in 1977 to 29 percent in 1987. In contrast, the percent of total managers in market-oriented functions increased from 39.5 percent to 42.5 percent. Table 4 shows that there is a statistically significant (at .01 level) difference in the distribution of top managers into these three functional areas between the two years studied. This finding parallels that by Grimm, Kling, and Smith who found that market-oriented functions increased significantly in the railroad industry in response to regulatory reform.

Among LTL carriers, 64.5 percent of the 96 firms had marketing positions in their top management team in 1977. By 1987, this figure increased to 72 percent. This reflects an increase in the level of resources devoted by LTL carriers to marketing efforts.|17~ Indeed, Harper|18~ has noted that two-thirds of the carriers increased their expenditures on marketing after passage of the MCA.
Table 4. Changes in Market-Oriented, Regulatory-Oriented, and
Other Functions in LTL Management Teams: 1977 to 1987
Type of Functional Percent of Managers
Orientation 1977 1987
Market 39.5 42.5
Regulatory 36.0 29.0
Other 24.5 28.5
Chi Square: 13.162
(Significant at .01)


Stock Ownership

Table 5 reveals that a significant shift occurred in stock ownership patterns among LTL carriers in the 1977 to 1987 period. During this time, shares of company stock held by outside owners, defined as shares of stock owned by anyone not on management team or on the board of directors, increased, as hypothesized, from an average of 6.81 percent to an average of 23.36 percent. This change reflects a need for LTL carriers to seek outside capital to compete under deregulation and to fund expansion opportunities. During this time period, shares of the firm held by the top management team decreased from an average of 76.8 percent in 1977 to 64.64 percent in 1987. As shown in Table 5, these differences are statistically significant at the .01 level.
Table 5. Changes in Ownership Patterns: 1977 to 1987
Year Stock Ownership
(St. Dev in Outside % of Management Team %
parenthesis) Total Shares of Total Shares
1977 6.81 76.80
 (22.87) (37.02)
1987 23.36 64.64
 (42.33) (45.31)
Z-Test 3.353 -2.496
(Both significant at .01)


Management Turnover

Table 6 presents data on management turnover levels among LTL carriers during the 1977 to 1987 transition period. Specifically, the table provides a distribution of LTL firms on the basis of the percent of their 1987 managers who were also on the management team in 1977. As shown, the mean turnover rate among LTL firms is 47.9 percent. Table 6 also indicates that 28.1 percent of the firms had turnover rates in the 51-74 percent range, while 12.5 percent had rates of 75 percent or more.
Table 6. Turnover Among LTL Management: 1977 to 1987
% of LTL Managers Who
 Were on 1977 Team % of LTL Firms
 0-25 21.9
 26-50 37.5
 51-74 28.1
 75-100 12.5
 100.0
|Mathematical Expression Omitted~ 47.86
Number of firms = 96


Performance Implications

Table 7 provides Pearson correlation coefficients between firm performance in 1987 (measured by operating ratio) and five management team size, structure, and organization variables. The results generally support hypotheses 6 through 10.

As shown, total size of the management team in 1987 is significantly and negatively correlated with operating ratio. Thus, a larger management team is consistent with better financial performance.

This result is reinforced by the second finding that the total number of functions represented on the management team in 1987 is negatively and significantly related to operating ratio. Both results suggest that firm operating performance was related to the size of the management team and the number of functions. It suggests that LTL firms with larger and more comprehensive management teams perform better in the competitive deregulated environment.

The hypothesis that firm performance in TABULAR DATA OMITTED 1987 is related to market orientation of management team was also supported, as shown in Table 6. The correlation between the number of market-oriented functions represented on the management team was negatively and significantly related to operating ratio. Thus, firms with greater market orientation of their management team reaped financial rewards over those with less market orientation.

Table 7 results indicate that there was no support for hypothesis 9. As the percent of a firm's total shares held by top management increases, there is a decrease in firm operating ratio, although not a statistically significant difference.

Table 7 also provides the results of the test of hypothesis 10. They show that a firm's percent of 1987 managers who were on the 1977 management team is positively related to its operating ratio in 1987. Thus, as the percent of managers in 1987 who were also at the firm in 1977 increases, the operating ratio increases or, in other words, financial performance worsens. An alternative statement of this result is that as management turnover increases (fewer managers stay in place), operating ratio decreases, an indication of improved financial performance. However, the coefficient, although in the hypothesized direction, is not statistically significant.

CONCLUSION

LTL managers faced considerable turmoil in adjusting to the highly competitive post-MCA environment. The new competitive circumstances were particularly harsh for managers of firms with the most protection in a regulated environment. This article has documented that LTL management teams changed considerably in size, structure, and organization as a result of the new environment. The results were consistent with a number of the hypotheses advanced as follows: There were increases in the size of LTL management teams and the number of functions represented on them, although the increases were not statistically significant; there were statistically significant changes in the new era in the distribution of managers among market-oriented, regulatory-oriented, and other functions, with the market-oriented functions gaining at the expense of regulatory-oriented positions; and there were significant reductions in the share of stocks owned by the management team, reflecting the need of LTL firms to attract new capital to fund investments. Certainly, it is important to note that the LTL industry segment is not homogeneous. It consists of various-sized firms with different geographic orientation (i.e., national versus regional) and different mixes of LTL and TL (truckload) freight. The reported results are overall findings which might differ for individual sub-segments of the LTL carriers.

As expected, a number of the changes in management teams were related to performance in the new environment. Thus, performance was statistically and significantly linked to size of management team and number of functions represented on it as well as the number of market-oriented functions. In addition, there was a positive relationship between management turnover, an indication of changes in the management team, and firm performance.

The performance results should be viewed in a broader context. Firm performance is clearly affected by many factors other than size and composition of the management team. The results indicate, however, that changes in the size, characteristics, and structure of management deserve consideration in examining the overall response by management to its new environment.

The findings suggest that there is merit in additional investigation of the composition of management teams under deregulation. Specific case studies of individual LTL firms with interviews of top managers would provide additional insights on the link between regulatory upheaval and changes in size, characteristics, and structure on LTL management. For example, there could be consideration of the type of new managerial talent that most assisted LTL firms to make the transition from the protected environment to the competitive one. There should be additional investigation of the management turnover question and its impact on performance as well as the stock ownership questions--both of which have received significant attention in management areas.

The results of this research suggest that the impact of regulatory change on the size, structure, and characteristics of management is an important one for continuing investigation. It is hoped that this study will provide impetus for additional investigation of this topic.

Mr. Corsi, EM-AST&L, is professor and chairperson, transportation, business and public policy; Mr. Grimm, EM-AST&L, is associate professor of transportation, business and public policy; and Ms. Feitler is a doctoral student, transportation, business and public policy, University of Maryland, College Park, Maryland 20742.

The authors wish to thank Carol Emerson for her valuable assistance in constructing the data base used in this analysis.

ENDNOTES

1 Curtis M. Grimm, James A. Kling, and Kenneth G. Smith, "The Impact of U.S. Rail Regulatory Reform on Railroad Management and Organization Structure," Transportation Research, Vol. 21A, No. 2, 1987, pp. 87-94.

2 Thomas M. Corsi and Joseph R. Stowers, "Effects of a Deregulated Environment on Motor Carriers: A Systematic, Multi-Segment Analysis," Transportation Journal, Vol. 30, No. 3, 1991, pp. 4-28.

3 John W. Snow, "The Problem of Motor Carrier Regulation and the Ford Administration's Proposal for Reform," in Paul W. MacAvoy and John W. Snow, editors, Regulation of Entry and Pricing in Truck Transportation, American Enterprise Institute, Washington, D.C., p. 5.

4 Clifford Winston, Thomas M. Corsi, Curtis M. Grimm, and Carol A. Evans, The Economic Effects of Surface Freight Deregulation, Brookings Institution, Washington, D.C., 1990.

5 M. L. Tushman and S. L. Keck, "Environmental and Organizational Context and Executive Team Characteristics: An Organization Learning Approach," Working paper, Columbia University Graduate School of Business, New York, New York, 1991.

6 Curtis M. Grimm, James A. Kling, and Kenneth G. Smith, "The Impact of U.S. Rail Regulatory Reform on Railroad Management and Organization Structure," op. cit.

7 R. Miles and C. Snow, Organizational Strategy, Structure, and Process, Englewood Cliffs, New Jersey: Prentice Hall, 1978.

8 C. Snow and L. G. Hrebiniak, "Strategy, Distinctive Competence, and Organizational Performance," Administrative Science Quarterly, Vol. 25, 1980, pp. 317-335.

9 Donald C. Hambrick and Phyllis A. Mason, "Upper Echelons: The Organization as a Reflection of Its Top Managers," Academy of Management Review, Vol. 9, No. 2, 1984, p. 199.

10 Donald C. Hambrick and Phyllis A. Mason, "Upper Echelons: The Organization as a Reflection of Its Top Managers," op. cit., p. 203.

11 Sara Keck, "Top Executive Team Structure: Its Implications for Organizational Performance," Paper presented to Academy of Management meetings, Miami, Florida, 1991.

12 Sara Keck, "Top Executive Team Structure: Its Implications for Organizational Performance," op. cit.

13 Alan I. Murray, "Top Management Group Heterogeneity and Firm Performance," forthcoming, Strategic Management Journal.

14 Official Motor Carrier Directory (1977, 1987), Chicago, Illinois.

15 American Trucking Associations, Executive and Owernship Report, Class I and II Motor Carriers of Property, Alexandria, Virginia, 1977 and 1987.

16 Curtis M. Grimm, James A. Kling, and Kenneth G. Smith, "The Impact of U.S. Rail Regulatory Reform on Railroad Management and Organization Structure," op. cit.

17 D. Wood and J. Johnson, Contemporary Transportation, New York, MacMillan Publishing Company, Third Edition, 1989.

18 Donald Harper, "Consequences of Reform of Federal Economic Regulation of the Motor Carrier Industry," Transportation Journal, Vol. 21, No. 4, 1982, pp. 35-58.
COPYRIGHT 1992 American Society of Transportation and Logistics, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:less-than-truckload
Author:Corsi, Thomas M.; Grimm, Curtis M.; Feitler, Jane
Publication:Transportation Journal
Date:Dec 22, 1992
Words:4489
Previous Article:The logistics-marketing interface: techniques for enhancing cooperation.
Next Article:Meeting the challenges of alcohol and other drug abuse: advice for transportation managers.
Topics:

Terms of use | Copyright © 2016 Farlex, Inc. | Feedback | For webmasters