Superiority of Managerial Capitalism - Case Study Example

Running Head: Chandler's claim for the superiority Chandler's claim for the superiority of 'Managerial capitalism' are specific to a particular time and place and cannot be generalized [Name of writer] [Name of institution] Chandler's claim for the superiority of 'Managerial capitalism' are specific to a particular time and place and cannot be generalized For thirty years Alfred Chandler has been transforming business history from a medley of entrepreneurial and company histories into a structured analysis of organizational change. Starting with his 1959 Business History Review article ("The Beginnings of 'Big Business' in American Industry"), Chandler has contended that the giant corporations that dominate capitalist economies today developed as a result of strategic adaptation to external forces--new technologies and new market dimensions. This adaptation was efficiency-driven: rapidly expanding markets and science-based technologies spawned commercial opportunities which could be seized only by creating business institutions capable of handling high-volume production and distribution. The response came in the form of new "organizational capabilities" ("administrative coordination," as Chandler describes it in The Visible Hand, 1977). In Scale and Scope, Chandler refines and broadens this analytical apparatus. To bring "the modem industrial enterprise into being," a "three-pronged investment in manufacturing, marketing, and management" proved essential, to "consolidate production facilities into plants of optimal size, establish the necessary marketing networks, and recruit the managerial organization." Without it,' 'economies of scale and scope in production" would have been unattainable, but with it "cost per unit dropped more quickly as the volume of materials being processed increased," and "economies of joint production or distribution" of more than one single product in one market area were realized. Chandler extends his analysis in another, more significant way. The "competitive managerial capitalism" of the United States is compared with "cooperative managerial capitalism" in Germany and "personal capitalism" in Great Britain. The case studies are the 200 largest industrial firms in the three nations from 1880 to the 1940s. For these 600 firms, data on assets and product lines are presented in a 101-page appendix that places all students of economic and business history deeply in Chandler's debt. The rise of the large corporation and the displacement of price-competitive markets by the constrained rivalry of oligopolists is not exactly virgin territory. Economists and historians have explored it, and alternative hypotheses readily come to mind. One is that new technologies and markets open a door of opportunity, and profit-seekers use every means at their disposal to be first through and slam it closed against all followers. Powers inherent in the capitalist accumulation process thus shape the conditions within which technologies and markets are exploited. The implication is that while creation of efficiency-maximizing institutions helps to capture what Chandler calls "first-mover advantages," so do predatory actions, coercion, pools and cartels, financial power plays, monopsonistic controls over the work force, and other means both economic and noneconomic--a pointless distinction in such matters, as Thorstein Veblen demonstrated in The Theory of Business Enterprise (1904). Several of the new firms would be expected to embody cost-minimizing techniques and technological dynamism, but others would reach and maintain bigness through strategies that failed to improve efficiency and in some cases impaired it. Firm size and efficiency The history of big business not only gives rise to different explanatory theories; it has also yielded empirical evidence on the relationship between firm size and productive efficiency. Economists refer to "minimum efficient scale" (MES) as the smallest-size plant or firm at which average costs are minimized: it is attained through economies of production, marketing, research and development, and management. In Scale and Scope Chandler employs the concept for the first time. He tells us, however, "my definition differs in emphasizing that MES depends on both capacity and throughput and thus can only be achieved by managerial coordination." Two problems arise here. First, whether "managerial coordination" is the sine qua non of MES is a question to be resolved by empirical inquiry, not by pronouncement. Then, to prove that managerial coordination did take place on a wide front, Chandler amasses example upon example of organizational adaptation and asserts in virtually all cases that optimum firm size was the outcome. Support consists of detailed accounts of addition and subdivision of managerial functions and diversification into product-related industries and foreign markets. Direct economic evidence on MES exists, but Chandler simply ignores it. In Industrial Market Structure and Economic Performance (1990), F. M. Scherer and David Ross conclude that while measurement problems are formidable, available data indicate, "actual concentration in U.S. manufacturing industry appears to be considerably higher than the imperatives of scale economies require." W. G. Shepherd adds that "technical economies of scale provided little efficiency justification for the market shares above 20 percent held by leading companies in a variety of large U.S. industrial markets in the 1960s" (The Economics of Industrial Organization, 1990). Corroboration comes from cost analyses showing that L-shaped average cost curves are common, and that therefore a range of firm sizes may be compatible with MES, so that actual industry outcomes depend heavily upon market power. These findings pertain to the corporate age from its inception. One study (in Journal of Economic History, June 1983), cited in Scale and Scope, moreover, shows that the "Chandler hypothesis" explains firm size and market structure "for a number of major industries at the end of the nineteenth century" but not all. Its conclusion: "The rise of big business does not appear overall to have been the result only of production economies." This is deemed' 'consistent with contemporary evidence on optimal plant size, which shows that in virtually every industry examined tight oligopolies are not dictated by production economies of scale." Add to this instances when the erection of corporate giants reduced efficiency levels or hindered administrative reform-the Western Union monopoly (1866), the Standard Oil trust (1882), U.S. Rubber (1892), U.S. Steel (1901)--and one begins to perceive a complex business reality that clashes with Chandler's linear efficiency-breeds-bigness analysis. European experience produces similar results not considered in Chandler's discussion of British and German industrial enterprises. In a survey of the largest companies in Europe from 1948 through 1971, Alex Jacquernin and Louis Phlips found that whereas the efficiency effects of increasing size were ambiguous, "the main consequence of a larger size is to reduce the variability of profit rates, hence the firm's exposure to risk." The chief private gains took the form of higher profits, higher product prices, more managerial discretion, or some combination thereof. Benefits to the public were less clear, especially since size did not lead "to greater research efforts." This raises another issue noted by Chandler himself--the long-observed tendency for technological innovations to originate in small companies or in workshops of lone inventors. "Invention," Chandler writes, was "largely left to individuals or groups outside of the enterprise .... many times even the initial commercialisation of the product and process was left to small entrepreneurial firms." But, he explains, "capabilities in product development" had to be carried out by much larger firms, which were "innovative in the Schumpeterian sense." This merely leads back to the proposition that large corporations promote efficiency and economic growth. The net result is that the notorious underachievement of managerial enterprise in invention and R&D does not intrude upon Chandler's world of beneficial organizational adaptation. Are post-1960 changes unprecedented When Chandler deals with the post1960 era, however, his portrait of the corporate sector is altered, mainly with respect to the United States. There, he observes, the key changes affecting the growth, management, and financing of large firms include diversification into unrelated products (the conglomerate mergers of the 1960s that "almost became a mania"), the divestiture of operating units that followed, the buying, selling, and restructuring of companies as a distinct business of its own, and the rise of a "market for corporate control." "All of these changes are interrelated"; the binding agent is the shift in the nature of ownership of corporations from individual and family holders of the common stock to institutional investors, chiefly pension and mutual funds. The result has been a change in the goals of corporate managers: investment for long-term growth has given way to preoccupation with "increasing the short-term return (dividends plus appreciation) on their overall portfolio." Management has thus neglected" long-term plans for restoring, maintaining, and improving organizational capabilities... [and has] even destroyed the capabilities essential to compete profitably in national and international markets." Such allegations are not new, but Chandler links them to the aforementioned changes, which' 'have no historical precedents." This is debatable. Chandler is right that "during the 1960s intensified inter-nation and inter-industry competition began to reshape the strategies of [corporate] growth." Too many students of oligopoly underestimate the ongoing importance of rivalry over product lines, market share, profitability, and prices as well in the early stages of new products. But the assumption that until the 1960s management priorities were solidly oriented toward long-term planning is based on no convincing evidence. Conflicts between professional managers and owners and/or financiers have occurred, but they were no more common than unity of interest over issues like dividends versus earnings plowback or investment in foreign-based production. Chandler's own work strongly suggests that the basic goal of corporate enterprise, whether management or owner-controlled, is profits and growth, mutually reinforcing objectives pursued in tandem and limited by a common set of external and internal constraints. Naturally, those constraints change over time and cause modification of policies toward desired profit rates or capital outlay levels or debt-equity ratios or some other aspect of the growthand-profit process. Thus, there is little reason to expect permanent or systematic splits or alliances among inside managers, owners, and financiers on any given issue facing the company. Who lines up with and against whom depends on many factors including new profit opportunities that demand reallocation of corporate assets or earnings. Chandler's treatment of the post1960 changes as "unprecedented" is based on another questionable assumption-that the enlarged firms growing out of the merger movements of 1890-1902 and the 1920s survived only through superior efficiency, and that these mergers were not adversely affected by the kinds of counterproductive activities seen during the 1960s and 1980s. Chandler grants that "the predominant motive behind the majority of mergers was to achieve or maintain market power.., another motive was to profit from the marketing and manipulation of securities." But he insists that "whatever the initial motive.., nearly all the mergers that lasted did so only if they successfully exploited the economies of scale." In fact, all four merger movements of the past hundred years have been driven, in different degrees, by market pre-emption and control motives, promoters' profits, and financial rip-offs on a grand scale. And all have been justified as efficiency enhancing. The conglomerate mergers of the 1960s were said to generate managerial complementarities and "synergism"; the mergers and buyouts of the 1980s supposedly reflected a "market for corporate control" in which entrenched, ineffective managers could be displaced by owners seeking to improve company performance and realize the potential values of their shareholdings. Chandler's claim that the only self-sustaining mergers from 1890-1902, and by implication the 1920s, were those that increased efficiency rests almost entirely on one article (by Shaw Livermore, in Quarterly Journal of Economics, 1935) that fails to support this claim even if taken at face value. Furthermore, evidence to the contrary is abundant, if unnoticed by Chandler (see Du Boff and Herman, in Journal of Economic Issues, March 1989). Mergers and "management cultures" As a source of firm expansion, mergers were considerably more important in the United States and Britain than in Germany. In Germany's "great industries-chemicals, metals, and machinery"--as well as in dyes and pharmaceuticals, industrialists relied more on alliances, through Interessengemeinschaften (communities of interest) or Konzerne (pooling of stocks in the hands of a few individuals or families). Either way the firms kept their legal and administrative identities.' 'These methods," Chandler comments, "were less costly, less permanent, and more flexible than merger." The industries involved were the ones that spearheaded Germany's rise to industrial power and recorded the sharpest gains in productivity and export markets. While German industry benefited from a low rate of mergers, U.S. industry managed to convert mergers for market control into engines of efficiency--or so Chandler maintains. The merger picture becomes blurrier still when one learns that in Britain mergers were "no more than a device to maintain market power," because of a stodgy "personal capitalism" and a slow-growing economy. From 1880 to 1913 the American and German economies did expand faster, but in 1913 British real income per head was 35 to 40 percent higher than in Germany (although 20 percent lower than in the United States), and Britain still held first place in world exports of manufactures (31 percent of the total, against 27 for Germany and 13 for the United States). Surely a nation with this volume of aggregate demand had economies of scale to be reaped. Either mergers for market control were not associated with the more rapid growth of productivity in the United States and Germany, or other factors explain the British lag, or both. The way Chandler actually resolves such problems is one of the strengths of Scale and Scope. It is refreshing to pick up a serious treatise in economic and business history and discover that "other factors" are taken out of the box of ceteris paribus and restored to their rightful place. Different "management cultures" are unabashedly invoked to explain some major variations in entrepreneurial response in the United States, Germany, and Britain. In the last case, institutions of higher learning trailed well behind those of Germany and the United States in providing engineering, accounting, and other business training for the swiftly changing production environment of "the second industrial revolution." A major reason was the "values" of a conservative business class. Creation of a phalanx of professional managers was not compatible with the British social system, an old theme elaborated and given additional weight by the case histories Chandler compiles. German business firms were differentiated by economic factors-markets and supply conditions-and methods of finance. The German experience furnishes "the best and almost the only examples of financial capitalism," with multipurpose banks piecing together cartels and interest groups and shaping industrial policy over extended periods of time. In turn this method of financing enterprise flowed from "the most striking difference," the ability to enforce agreements between competitors in courts of law, a departure from Anglo-Saxon legal tradition that proved decisive. Bibliography BARNARD, CHESTER I. The functions of the executive. Cambridge: Harvard U. Press, 1938. CHANDLER, ALFRED D. Strategy and structure: Chapters in the history of the industrial enterprise. Cambridge, MA: MIT Press, 1962. CHURCH, ROY. "The Limitations of the Personal Capitalism Paradigm," Bus. Hist. Rev., Winter 1990, 64(4), pp. 703-10. GARVIN, DAVID A. Managing quality. NY: Free Press, 1988. HUGHES, THOMAS. "Managerial Capitalism beyond the Firm," Bus. Hist. Rev., Winter 1990, 64(4), pp. 698-703. LANDES, DAVID S. The unbound Prometheus: Technological change and industrial development in Western Europe from 1750 to the present. Cambridge: Cambridge U. Press, 1969. LAWRENCE, ROBERT Z. Can America compete Washington, DC: Brookings Institution, 1984. OLSON, MANCUR. The rise and decline of nations. New Haven, CT: Yale U. Press, 1982. PENROSE, EDITH. The theory of the growth of the firm. NY: John Wiley, 1959. RAPPAPORT, ANATOL S. AND HALEVI, S. "The Computerless Computer Company," Harvard Bus. Rev., July-Aug. 1991, 69, pp. 69-81. REICH, ROBERT B. The work of nations. NY: Vintage Books, 1992. RUMELT, RICHARD P.; SCHENDEL, DAN E. AND TEECE, DAVID J. "Strategic Management and Economics," Strategic Management Journal, Special Issue, 1991, 12, pp. 5-29. TEECE, DAVID J. ET AL. "Understanding Corporate Coherence: Theory and Evidence," J. Econ. Behav. Organ., forthcoming. TIROLE, JEAN. The theory of industrial organization. Cambridge, MA: MIT Press, 1988. VEBLEN, THORSTEIN. Imperial Germany and the industrial revolution. NY: Macmillan, 1915. WOMACK, JAMES P.: JONES, DANIEL T. AND ROOS, DANIEL. The machine that changed the world. NY: Macmillan, 1990. Read More