Deregulation Of Motor Carrier Industry Essay, Research Paper

Deregulation of the Motor Carrier Industry:

A Study of LTL Management Size, Structure, and Organization

Congress passed the Motor Carrier Act(MCA) of 1980, to introduce greater competition

in the motor carrier industry through significant reductions in entry barriers and price restrictions.

While there has been lots of research into the impacts of motor carrier deregulation, little attention

has been given to the effects of deregulation on management characteristics and structure. Some

recent work, however, looked at changes in size, structure, and organization of railroad

management, in response to the resulting deregulation from the passage of the Staggers Rail Act

of 1980. That work documented some very specific changes in railroad management, in response

to the new environment. Some of the changes were: a decrease in the size of top executive

management teams and greater decentralization of responsibilities; more emphasis placed on

marketing and sales, with less on traditional operations orientation; and more reliance on younger,

more educated managers, with less industry experience.

Due to the implications of the rail research, there was reason to believe that similar

impacts may have been imposed during the deregulation of the motor carrier industry. To analyze

this effect on motor carrier management characteristics and structure, would be very extensive, so

I will focus on the less-than-truckload(LTL) segment of the industry. The LTL segment is an

appropriate area because the MCA led to a significant environmental change and upheaval within

this segment. 1) Before deregulation, the government-sanctioned rate bureaus formed by LTL

carriers, in conjunction with the Interstate Commerce Commissions(ICC) restrictive entry

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policies, resulted in the absence of effective competition among LTL carriers. Furthermore,

LTL, customers, whose shipments ranged from 70 to 10,000 pounds had no feasible alternatives

to LTL service. Private carriage was not an option, because many LTL dependent shippers had

shipments that were considered too small and they did not move at regular intervals. The U.S.

Postal Service and UPS were not viable competitors, since their shipment size range was too

narrow for the full range of needs required by the LTL. Therefore, the new regulatory regime

provided LTL carriers with substantial protection from competitive forces.

A comprehensive review of the effects of surface freight deregulation confirmed the

significant impact of deregulation on LTL carriers. This report will examine LTL management

teams, in both the pre- and post- MCA periods, in an attempt to assess changes since the

regulatory reform. It will also look at the extent to which management changes influenced the

performance of firms. The highly regulated pre-MCA environment protected carriers from

competitive threats by new market entrants, (by virtue of highly restrictive entry policies imposed

by the ICC). Furthermore, most pricing decisions were made collectively in rate bureaus which

greatly reduced the price competition among carriers. This resulted in the pre-MCA motor carrier

management teams being relatively small with no requirements for a normal range of functional

expertise. However, the LTL firms faced a very complex, competitive environment under

deregulation requiring the management teams to increase in size to meet these complexities.

Some economists 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 handle the added challenges. A related theory is that the new members of the

management team added, in response to the new regulatory climate, will increase the total number

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of functions represented on the LTL motor carrier management teams. Again, economists argue

that a competitive environment, dictated that top management teams increase their functional

differentiation.

The skills required of top management team members are quite different in the regulated

versus competitive environment. For example, successful interaction with the regulatory agency,

the ICC, would be an important determent of performance under regulation. Motor carrier

industry profits hinged significantly on the ICC’s decisions in several different areas. But in this

new regulated environment, legal skill in management teams is of paramount importance. 2) A

fiercely competitive market environment would place a premium on marketing and pricing skills.

This argument is supported by evidence from the research done in the railroad industry.

Furthermore, economic strategists have argued that forms faced with an unstable environment

may focus on external function. Such as marketing and product development, while firms with

more stable conditions concentrate more on production and accounting, to provide critical

management information. It is also noted those firms in turbulent industries emphasize marketing,

sales, and product R&D, in their management functions. Accordingly, it is hypothesized, that

LTL motor carrier management teams would place more emphasis on market-oriented functions

and less on traditional functions, in the post-MCA years. Under the protection of a regulated

environment, several of the LTL carriers were close knit family businesses or controlled by top

management through stock ownership. However, without that protection firms experienced a

need to utilize outside sources of capital for expansion purposes. It was theorized then, that

during post-MCA years, the share of stock held by top managers would decrease.

It had been long conjectured that adding new members to the post-MCA management

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teams would enhance performance. Management researchers have hypothesized that in periods,

economic stability, low management turnover, and in-depth industry familiarity in conjunction

with cohesive team interaction lead to better financial performance. In contrast it is theorized that

in periods of vast changes, such as those facing LTL carriers after passage of the MCA, low

turnover would not serve management well. Management teams which served under the

regulatory regime would be restricted in their knowledge and ability to deal with significantly

changing circumstances. However, a post-MCA management team with high turnover from

regulation would have drowned in new talents and expertise to meet those new circumstances.

It is further hypothesized that the financial performance of firms in the post-MCA years

will be related to the extent to which firms have initiated previously discussed changes in their

management teams. Specifically, the hypothesis is the size of the team, numbers of functions

represented on that team, and the number of market-oriented functions, will have a positive

relationship with the financial performance in the deregulated environment. Firms with large

teams, broader functional representation, and greater strength, in market functions, will be more

likely to compete successfully under deregulation. In a study of the management characteristics,

in the cement industry, Sara Keck found that the profitability of a firm was directly related to the

functional heterogeneity of the management team in a positive and statistically significant manner.

It is also expected that more outside capital would be helpful to a firm in adjusting to the new

competitive market. It is hypothesized that top management team stock ownership would have an

inverse relationship to performance. The final hypothesis is that management turnover between

pre- and post-MCA years will have a positive relationship to performance. Th study of the

cement industry also substantiated a significant positive relationship between firm financial

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performance and the percentage of entries and exits in the management team, while showing a

negative relationship between performance and overall team tenure during periods of economic

uncertainty. In a similar study of the management characteristics of oil companies, it was

confirmed that there existed a significant positive relationship between temporal heterogeneity of

the management team and long term firm performance.

To test the aforementioned theories data was gathered from two sources, both prior to

and after the Motor Carrier Act of 1980. Both sources(Official Motor Carrier Directory and

American Trucking Association’s Executive and Ownership Report) provided information on the

size of the LTL motor carrier management teams, the functional classification of each team

position, and the names of the teams’ members for both periods. The ATA’s Executive and

Ownership Report also included information on LTL carrier stock ownership. The data was

drawn from the annual reports filed be motor carriers with the ICC, from which information on

financial performance was also obtained.

Using the 1977 and 1987(the years immediately preceding and following the passage of

the MCA) editions of the Official Motor Carrier Directory and the Executive and Ownership

Report, a matching set of data was collected on several variables for some 96 firms. This

represents approximately 35 percent of the total 1987 population of the LTL segment of the

motor carrier industry. Therefore, only firms with complete information in both years were

included in the data base. The construction of this base allowed testing of five hypotheses as

follows:

1)size; the directory listed the individual names on management teams in each year,

therefore the team size could be computed for each firm in the two

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periods. Changes in team size were tested by statistical comparison of

average size for firms in each period.

2)total functions; the two directories provided a job title for each member of the management teams. These job titles were initially grouped into eleven

managerial categories(finance/comptroller, rates/tariff, marketing,

operations, management information systems, human resources/labor

relations, international, safety law, claims, and traffic management) and for

each firm the presence or absence of one or more managers in each

category was recorded. These groups represented the maximum number of

functional categories a firm could have on its management team. Although

the size of the team could be larger(if more than one manager had the same

function) this system provided test data on the average number of functions

represented.

3)Market-Oriented Functions; the previously mentioned eleven categories were

further divided into three major subsections: market oriented, regulatory

oriented, and other. Market oriented functions were identified as those

most related to the now highly competitive industry conditions. Those

positions most directly associated with a tightly controlled environment

were placed in the regulatory oriented functions. All the functional

categories that do not easily fit into either section, were placed in the other’

category.

4)Stock Ownership; information provided by the Executive and Ownership Report

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reflected the amount of company stock owned by top managers in both

years. The significance of this ownership pattern was tested through a

comparison of the mean share of total stock in the hands of management

teams in both periods.

5)Management Turnover; for each firm, the aforementioned directories provided

information on management team membership in 1977 and 1987.

Furthermore, a management team turnover variable was constructed to

reflect the percent of managers in 1987 that were also on the management

team in 1977.

6)Performance Implications; other comparisons were done that involved an

evaluation of the relationship between change management team size,

structure and organization and firm financial performance. The measure of a

firm’s financial performance is the standard used in the evaluation of the

motor carrier industry-operating ratios(total operating expenses divided by

the total operating revenues). A correlation coefficient was determined to

evaluate the relationship between team characteristics and financial

performances as well as the relationship between management team size and

financial performance. (3)

The recorded results demonstrate that the LTL carrier management changed in several

significant aspects with regulatory reform. Furthermore, the results indicate that management

team characteristics influence firm financial performance in the new regulated climate. A brief

analysis of the results in relation to size, show that there was a slight increase in management team

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size. This coincides with the hypothesis that management teams would respond to a more

complex environment by increasing their size. In the area of total functions it was revealed that

the average number of functions represented on the management teams of LTL carriers also

increased from one period to the other. There were mixed results in the category of market-oriented function the percent of managers in regulatory oriented functions decreased while there

was an opposite effect in market-oriented managers. This increase also reflects an increase in the

level of resources devoted by LTL carriers to marketing efforts after passage of the MCA. There

was a significant shift in stock ownership patterns among LTL carriers, shares of stock held by

outside owners(anyone not on a management team) increased by 24% while stock owned by

management teams decreased by approximately the same amount. Data on management turnover

levels among LTL carriers provides a distribution of firms on the basis of the percent of their

1987 managers who were also managers in 1977. During the transition period in question, 1977-1987, the turnover rate increased. The performance implications are such that total size of the

management team in 1987 has a significant negative correlation with operating ratios- a larger

team is consistent with better performance. This result is reinforced by the finding that the

number of functions represented also has a negative relationship to operating ratios. These imply

those LTL firms with larger and more comprehensive management teams perform better in the

competitive deregulated climate.

In conclusion, LTL managers have a difficult time adjusting to the highly competitive

post-MCA environment. The new circumstances were particularly harsh for the managers that

had the most protection under regulation. It has been documented and proven that LTL

management teams changed considerably in size, structure, and organization as a result of

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deregulation. These changes were consistent with a number of hypothesized conclusions:

-there were increases in the size of management teams and the number of functions represented on

them.

-there were significant changes in the post-MCA years in the distribution of managers among

market-oriented, regulatory-oriented, and other functions, and

-there were drastic reductions in the amount of company stock owned by the management teams,

indicating an apparent need of LTL firms to attract new capital.

It is important to note that the LTL industry segment is not homogeneous, it consists of various-sized firms with different geographical orientation(national, regional, etc.) and different mixes of

freight. Overall findings may differ from individual sub-segments.

It is a foregone conclusion that a number of the changes in the management teams were

related to the firm’s performance in the new deregulated climate. The comparisons proved that

performance was statistically and significantly linked to the size of the team and the number of

functions represented. It is also noteworthy that there is a positive relationship between

management turnover, an indication of changes in the management team and firm performance.

Firm performance is obviously affected by several factors other than size and composition of

management teams. Indications are however, that changes in the size, characteristics, and

structure of management deserve acute consideration in evaluating the overall response by

management to its new economic environment. (4)

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