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)
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.