Alfred D. Chandler. The following paper addresses the major contributions of Chandlers publications as well as their shortcomings based on the limitations of his theories; this is then followed by a discussion on the future implications of the discipline

by zuluone (student)

University Degree Business and Administrative studies

10 May 2012

Julian Spezzati – 331917

Alfred D. Chandler & Business History

Developments in the past 100 years have seen global business evolve at an unprecedented rate. In order to have a better understanding of our past business history, many individuals have set out on a historical journey to uncover the meaning and reasoning behind this important evolution. As one of the earliest and most influential business historians, Alfred Dupont Chandler, took on the responsibility to investigate this historical perspective in order to shed light on business and especially large corporations as it had never been done before. His studies have not only combined an economic perspective with that of a sociological perspective, but has also created a third, managerial, perspective which has come to dominate most of modern business literature today. Chandler’s three major publications include amongst others Strategy and Structure: Chapters in the History of the Industrial Enterprise (1962), The Visible Hand: The Managerial Revolution in American Business (1977), Scale and Scope: The Dynamics of Industrial Capitalism (1990). The following paper addresses the major contributions of Chandler’s publications as well as their shortcomings based on the limitations of his theories; this is then followed by a discussion on the future implications of the discipline of business history.

Strategy and Structure

The rise of the modern corporation traces its roots back to the dynamic business environment of the United States in the early 20th century. With the lowering of transportation and communication costs, came the natural expansion of local markets (Langlois, 2003). These larger markets opened an opportunity to increase profits by introducing methods of higher fixed costs in exchange for lower unit costs at high output levels (Ibid). As manufacturing plants became larger, consolidation eliminated smaller companies and began to characterize the business environment as oligopolistic (Ibid). Cartels began forming as firms began to understand the importance of managing the allocation of output cooperatively (Ibid). Nevertheless, Cartels still pitched one company against another and did not provide adequate means for firms to cooperate in order to achieve maximum profitability. This led to the formation of holding companies which provided an incentive for all company shareholders to maximize the firm’s value (Ibid). The creation of such large corporations naturally led to new management practices, including the introduction of the multidivisional form (M-Form) of organization. The M-Form allowed for management across time and space by dividing managerial responsibilities across products or geographic groups, while maintaining a headquarters which administers corporate strategy (Ibid).

In Chandler’s first publication, Strategy and Structure: Chapters in the History of the Industrial Enterprise (1962), Chandler investigates four large American corporations who adopted this new and revolutionary form of organization: the Du Pont chemical company, the automobile manufacturer General Motors, the oil company Standard Oil of New Jersey, and the retailer Sears Roebuck (Chandler, 1962). Although each company applied the M-Form slightly differently, Chandler believed that the restructuring process was a result of a strategic choice influenced by new technologies and markets (Barry, 1991). Chandler thus posits in his publication that structure follows strategy. In other words:

“The design of the organization through which the enterprise is administered,” follows “the determination of the firm’s long-run goals.”(Barry, 1991)

This is a preview of the whole essay

“The design of the organization through which the enterprise is administered,” follows “the determination of the firm’s long-run goals.”(Barry, 1991)

Therefore, changes in a firm’s strategy created new challenges which would only be overcome with a change in organizational structure. Nevertheless, management researchers such as David Hall and Maurice Saias present a counter argument stating that strategy follows structure (Hall et al., 1980). Their reasoning stems from the fact that multidivisional structures facilitate the transition from a single corporation to a conglomerate and therefore increase the likelihood that the organizational structure influences the company’s future strategy (Ibid). Business strategist Michael Porter provides a perspective which aims to bridge the gap between these two opposing views. Porter goes deeper by defining two levels of structure: organizational structure and industry structure (van Huis, 2007). He argues in favor of Chandler’s thesis by stating that organizational structure follows strategy; however, he then explains that strategy in turn follows a greater industry structure (Ibid). Porter thus attempts to enrich Chandler’s hypothesis by explaining how the inclusion of environmental factors such as changes in technology and markets help define a firm’s future strategy.

The Visible Hand

With the rise of these “modern” multidivisional corporations came the rise of corporate influence. The early 20th century transition from family-run businesses to corporations run by professional managers redefined the mechanisms through which economic activities were coordinated and resources were allocated (Barry, 1991). The famous political economist Adam Smith had previously attempted to explain how market forces “invisibly” guide economic activities and help allocate resources to where they are needed (Ibid). His term the “invisible hand” is commonly used to define the self-regulating nature of the economy. Following Smith’s line of thinking, a greater division of labor was to be expected as markets expanded and became more complex (Langlois, 2003). Nevertheless, Chandler’s second publication, The Visible Hand: The Managerial Revolution in American Business (1977), identifies vertical integration as an imperative mean to internalize transaction costs and external variation, as opposed to a finer division of labor. Furthermore, Chandler hypothesizes that firms had grown so large in scale that they found themselves in a position where they were carrying out functions which had previously been carried out by the market itself (Barry, 1991). Thus, the invisible hand of the market had suddenly metamorphosed into the visible hand of the managers. Chandler goes further by suggesting that these corporations would become the most powerful institutions in the United States, and their managers the most influential economic decision-makers (Ibid).

Economist Richard Langlois presents an interesting alternative to the invisible and visible hand of Smith and Chandler by suggesting a third option: the “vanishing hand.” (2003) Langlois proposes that as markets develop, they inherently become more complex and require more specialized labor (Ibid). This process of specialization involves technology, organization and institutions, which each evolve at different rates (Ibid). An imbalance in any of these three components creates opportunities to manipulate the environment in a way that is more profitable than simply letting underlying market forces guide decision-making. In the managerial revolution of the early 20th century, the use of vertical integration was an appropriate solution to the imbalances of the institutional and market forces. Although Langlois supports Chandler’s hypothesis in this sense, he stresses that such a solution is only temporary as it is only appropriate for the prevailing circumstances of the era. When these underlying circumstances change, this visible hand suddenly vanishes as the invisible hand returns to its self-regulating activities in the marketplace (Ibid).

As markets evolve, technology and institutions tend to develop in such a way as to meet new market opportunities. This reduces the cost of coordinating production and distribution through markets and thus reduces the need for vertical integration (Langlois, 2003). With the 1980’s providing a series of innovations in the securities market as well as other financial institutions, the conglomerates of the 1960’s were now seeing a significant disintegration of their business units (Ibid). The evolution of the technological and institutional landscape had now created a profitable opportunity to delegate production and distribution activities to third parties. The Smithian process of division of labor therefore prevailed as market players became more specialized overtime (Ibid). Thus, Chandler’s hypothesis of the visible hand proves to be only a temporary phase of a dynamic business environment composed of interrelated markets, technologies, and institutions.

Scale and Scope

Following up on his work on the Visible Hand, Chandler wrote one of his latest publications on the benefits of economies of scale and scope in Scale and Scope: The Dynamics of Industrial Capitalism (1990). In this piece of work, Chandler builds upon his theory of vertical integration by emphasizing the need to make a “3-pronged investment” in production, distribution, and managerial skills (Barry, 1991). Chandler suggests this gives companies a competitive advantage by developing internal organizational capabilities (Ibid). In turn, these organizational capabilities allow firms to successfully expand output and introduce new products, thereby increasing both scale and scope. Chandler describes those firms who make the “3-pronged investment” first as first movers and argues that their rapid capacity utilization leads them to oligopolistic positions in their industry (Chandler, 1990).

In Scale and Scope, Chandler also addresses the differences in business structures between the United States, the United Kingdom and Germany and suggests reasoning for their differential performance (Chandler, 1990). Chandler describes the German and American corporate culture as similar in managerial perspectives but different in terms of market competition (Maier, 1993). Both countries envisioned developing organizational capabilities such as scale and scope to prosper as industrial powers (Ibid). While Americans favored oligopolistic market leadership, Germans favored cooperation through cartels (Ibid). This led Chandler to categorize American business structures as “competitive managerial capitalism,” and German business structures as “cooperative managerial capitalism.” (Chandler, 1990) Britain on the other hand lost ground to the US and Germany by failing to make the adequate investments in production, distribution and managerial skills (Maier, 1993). Instead, firms in the UK focused on remaining family owned (Ibid). This emphasized short-term revenues and curtailed growth due to poor long-term planning.

The growth of firms through scale and scope brought about an era of conglomeration in the 1960’s. Many firms grew through mergers and acquisitions with the aim of diversifying into entirely new markets (Maier, 1993). Nevertheless, Chandler’s hypothesis was short-lived as conglomerates disintegrated in the 1980’s due to exogenous developments such as globalization and the spread of the free market economy, the internet, and the rise of modularity (Langlois, 1993). Chandler’s theories were inherently flawed due to the fact that he treated exogenous factors as given instead of analyzing them as possible sources of change. Globalization and the rise of the internet dramatically reduced transaction costs and made outsourcing much more appealing (Ibid). Furthermore, the rise of modularity and the demand for mass customization has led firms to search externally for capabilities (Ibid). By leveraging external economies of scope, firms are no longer limited by their internal capabilities, but can expand their scale and scope larger than most traditional Chandlerian corporations.

In addition to the aforementioned exogenous factors, Chandler fails to include a multitude of variables which could have a significant impact on his theories and the development of the economy in general. Chandler begins by failing to consider the legal and educational systems, as well as the cultural environment of his case studies (Barry, 1991). He also fails to discuss labor and industrial relationships which differed significantly between the US, the UK and Germany: whereas the American labor unions did not possess much bargaining power, the Germans and British workers yielded enough power to possibly curb corporate growth (Maier, 1993). Furthermore, business-state relationships are left out of the Chandlerian theories, yet can make a significant difference through policies of government managed cartelization and restrictions on competitive entry (Langlois, 2003). Moreover, small and medium-sized firms, as well as firms in the service sector, have been entirely omitted from Chandler’s theses (Barry, 1991). It is therefore imperative that a more thorough analysis of current business history be done in order to better understand the effect of these previously unexplored contextual variables. It is only then that business historians will be able to truly determine the key to corporate success and overall economic performance.

Business History and the Post-Chandler Era

Considered as one of the founders of the business history discipline, Alfred D. Chandler has definitely contributed greatly to this relatively young academic discipline. Since the publication of his first work, Strategy and Structure, Chandler has not diverged much from his original thesis. Even in the face of criticism and a changing environment, Chandler has maintained his original conclusions and built upon them. Although many of his theories present significant limitations, the lack of studies in the field of business history has allowed his work to prosper and be used as the foundations for future researchers to expand upon. Nevertheless, the environment which Chandler based his theories on has changed and is still changing at an unprecedented rate. In the years to come, changes in technology, institutions, and markets may diminish the relevance of some of his work. A new generation of business historians will have to immerse themselves in an era characterized by the rise of service and knowledge economies, with firms becoming increasingly complex and interconnected in a global economy. The future of business history is uncertain: will Chandler’s theories be obsolete in the next 50 years? Only time will tell.

References:

Barry, S. 1991, ‘Essays in Bibliography and Criticism. Scale and Scope: Alfred Chandler and the Dynamics of Industrial Capitalism,’ Economic History Review, August, pp. 500-514.

Chandler, A.D. 1962, Strategy and Structure: Chapters in the History of the American Industrial Enterprise, MIT Press, Cambridge, MA.

Chandler, A.D. 1990, ‘The Enduring Logic of Industrial Success,’ Harvard Business Review, March-April, pp. 130-141.

Hall, D.J. and Saias, M.A. 1980, ‘Strategy Follows Structure!’ Strategic Management Journal, vol.1, no. 2, pp. 149-163.

Huis, E.V. 2007, ‘Strategy Follows Technology’ Proceedings of the 30th Annual International ACM SIGIR Conference on Research and Development in Information Retrieval, ACM SIGIR, Amsterdam, The Netherlands.

Langlois, R.N., 2003, ‘The Vanishing Hand: the Changing Dynamics of Industrial Capitalism,’ Industrial and Corporate Change, vol.12, no. 2, pp. 351-385.

Maier, C.S. 1993, ‘Accounting for the Achievements of Capitalism: Alfred Chandler’s Business History,’ The Journal of Modern History, December, pp. 771-782.