Chandlers Model of Integrated Managerial Enterprise - Essay Example

Chandler and Integrated Managerial Enterprise By March 2009 Chandler’s model of integrated managerial enterprise does not uncover the success of the firms in the long run entirely. This is because although it may aim at the achievement of the economies of scale and so the reduction of the average costs it doe snot necessarily means that the firm can prosper. Since the model stresses the importance of the economies of scale it can be applied through various national circumstances however a lot of other variables need to be considered first. In this research essay, I will validate this statement of mine by first discussing the main theories of Chandler in regard to the economies of scale in detail. I will discuss why is it that the integrated managerial expertise led to the progress of certain firms in the 19th century. Moreover, I will discuss the importance of Chandler’s model and its applications in the twentieth century. In the end, I will try to discuss the possible alternatives to the Chandler’s approach and how the businesses in Germany and Japan follow them and still prosper. Chandler’s Model and Its Implications Chandler’s theories mainly concern the integrated managerial expertise. Being a historian himself, as Brown reveals (2006), Chandler’s primary emphasis throughout his theories was everything that had happened in the past to different firms as they adopted certain measures. Chandler’s conjectures provided ample evidence about studies of such firms (An example is that of the Singer sewing machine), through which he deduced some facts. Following are the significant conclusions of this study: Chandler believed that the firms as Brown (2006) states will expand and integrate if a proper managerial system is present. Terming managerial expertise as the Visible Hand, Chandler (1975) disagreed with the ‘Invisible Hands’ of Adam Smith. According to him, firms could be more progressive and productive if they invested greatly in management. This notion of Chandler was very different from Adam Smith who theorized that firms could be more successful if the market forces (Invisible hands) were allowed to operate freely. Quoting data of different firms, Chandler (1975) relates that in the 19th Century firms realized the importance of high volume activities. As a result, they started to produce more. Higher volumes meant the reduction of the average cost that finally led to economies of scale. Economies of scale were achieved when a particular firm could operate at its least possible cost without having to compromise on the level of output produced. According to Chandler (1975), the need for the managerial enterprise arose when the products of certain firms included some research and development. For example, he (1975) quotes the example of the Singer Sewing Machines. As the machines were introduced for the first time the Singer Machines was responsible for three services according to Chandler (1975). First was the sale of the machines to the customers, the second one was to explain the use of machines as this invention was new for the customers, and the third was the repairing of the machines. As this invention was very recent, the customer base was very large. Hence, the sales of the firm drastically improved and it achieved economies of scale. Chandler (1975) uses this example to come to this fact, as I would explain later, that research and development leads to the need for managerial expertise. Chandler (1975) also used specifically the example of the railways too to explain the importance of the integrated managerial expertise. According to him, as soon as the railroads were introduced, the speed through which the goods were distributed increased. As the speed improved, there was a need for scheduling so that the different firms could interact with each other. The use of railroads became crucial for firms that gained more while interacting with other firms than operating alone. Interaction of the firms led to the creation of a certain group of people who were responsible for the transactions cost economics as David (2007) relates. Such people were accountable for the coordination of the economic activities of the integrated firms, in order to improve efficiency. With such people who were solely in charge of the economical relations of their firms with that of others, firms were more likely to prosper and achieve economies of scale. At least that is what Chandler (1975) concluded from his study and analysis of the pre-railway and post-railway firms. From this example, he brought to the notice of people that the discovery of the railway was in itself a second industrial revolution as it caused the firms to give more importance to that group of people called ‘managers.’ Chandler also believed that to improve the efficiency of the managers it was vital that discrete operating units be present along with the hierarchy of salaried managers. Oliver E. Williamson, as David (2007) states, also agreed with Chandler stating that the management alone and not the markets are responsible for the efficiency found in firms that hire managers. The term ‘salaried’ is very important because Chandler was of the view that in order for the firm to grow and develop it is essential that the owners or the stock holders are not a part of the management team. Instead, the managers should be people who can over see the activities of the firm in a better way. Chandler was against the notion of the owners being the mangers because he believed, as David (2007) relates, that the owners do not want to lose the ownership of their enterprise so they don’t take the risks of investing and interacting with other firms in the fear of any loss. This approach according to Chandler causes the firms that are governed by the owners to be small and having a large production cost. An example of this he gave was the fact that the firms found in Hungary and Austria are generally small and individual-like due to the monarchy being responsible for the transactions as David relates. The Chandler model also stressed the importance of the strategy with respect to the structure of a firm. Chandler believed that the strategy shapes the structure of a firm. In making a certain strategy, as Chan et.al (2009), explain the firms analyze the conditions that they are operating in. For instance they may check for the competition in a certain field. After thorough examination of the necessary requirements of the environment they initiate a strategy. For example if a firm has many competitors in a certain environment it would try not to increase the prices as opposed to a firm operating in no or less competition. Hence, the strategies of a firm actually determine the amount of the sales and so has a direct impact on the structure or the performance of the firm. Chandler’s model, if true, may be important to the firms operating today because many firms today concentrate more on the research and development department. Inventions and innovations are a part of every business today and it is important that such firms understand Chandler’s model and interact with others to produce more as this may lead to the reduction of the costs and as a result to the economies of scale. However I would argue here that the assumption of Chandler about the integrated managerial expertise leading to the economies of scale is not supported by any evidence as Brown (2006) relates. This is a crucial assumption and although it may be true yet it cannot be proven. In the explanations provided by Chandler there are various sufficiency issues as Brown (2006) relates because although studies might have shown that the integrated managerial expertise led to the prosperity of firms, yet one can argue that other factors may not be held constant. Furthermore as Brown relates Chandler’s approach is more about the past when the companies were not that developed. The same system might not apply to the present. Chandler’s approach might help some firms but that does not mean that integrated managerial expertise is the only solution to the firms’ problems. Many firms today operate as oligopoly structures, with one firm leading and the others following. With such a structure it is not important that a certain integrated management be present. The follower firm in this case has to change its strategies with respect to that of the leader’s. For example if the leader firm increases its prices, the follower firm will try to lower its price in order to get a major share of the market. This process does not require any proper managerial hierarchy. It can be carried out directly by the stockholders themselves as David (2007) states. Also the Chandler’s model does not provide any firm stance on the barriers of entry and exit for new firms in oligopoly structures as far as the economies of scale are concerned. Furthermore, it is also important to note for the firms that the Chandler model does explain the importance of managerial expertise in the achievement of economies of scale but it does not consider any profits in this equation. Operating at the least average cost might not mean that the firm is in any way making its maximum profits. Profits need to be consider for the firms too because the higher the profits, the greater the progress. The Chandler approach may be beneficial for firms (It is true that the economies of scale may help the firms to progress) but it can still not be called the best way for the firms. A lot many other variables, like the profits as I mentioned, have to be taken into account before coming to such a conclusion. Alternatives According to Dong (2006) personal capitalism, as defined by Chandler, refers to a situation in which there is one dominant entrepreneur of a company. This person who is either the owner or the highest stock holder has a final say in the economic activities of a firm. According to Chandler, personal capitalism was found mostly in Britain and that was the reason why most of the firms could not reach to the level of the economies of scale. Chandler proposed the system of personal capitalism for the British because in the 1980s most of the British firms were self owned. Instead of creating hierarchies, as David (2007) states, the British were more focused to maintain family owned firms. This left these firms small because the owner could not take any risks when it came to his or her family possessions. As a result, according to Chandler the emergence of the complex hierarchies was prevented. This however may not be true in real terms. In fact the Chandler model is not applicable to the Great Britain because historically the size of the national market of small countries like Britain produced smaller sized enterprises, and therefore smaller teams of professional management in contrast to the large size of the US economy that gave greater returns to scale, and so increased capital intensity and outside shareholding, professionalization, and company size. This concept of personal capitalism was initially proposed by Chandler for the British but this concept does not just apply to the British. In fact, there are many other countries in which this system of “personal management” is used. For example, according to Dong (2006), the system is followed in a business organization called Chaebol in Korea. Throughout his research, Chandler focuses on the management and internal characteristics of firms and stresses the importance stating that the firms need to concentrate on the management more. Yet there are certain businesses that do not follow the Chandler’s approach for example in Germany as David (2007) relates financers have a final say in the management committee and have a decisional roles as far as their investments are concerned. Still, Germany is one of the most developed countries of the world. Chandler is also critical of holding company structures in Britain, but not every industry encourages managerial enterprise as an alternative. Holding companies also give some of the advantages of business group that is why it has remained prevalent important in Europe and is still returning to Japan. Moreover, Chandler believes that internal managerial characteristics in big business have national patterns, although this is questionable, since he ignores the idea that national factors can also shape management. Chandler ignores the state, financial systems, and labor and most importantly the profits, as Brown (2006) relates, in this regard. In the end I would like to add that for most of the 20th century returns to scale have encouraged the managerial expertise, as David (2007) relates about Germany that the increased trade of the firms in the international market led to the adoption of managerial expertise in some of the firms. To conclude, the Chandler’s model if proven to be true would increase the chances of achieving the economies of scale. This would be beneficial for the economy as a whole. Producers would benefit because of lower costs. The consumers on the other hand would not have to charge extra prices. However, the Chandler’s model is based on a very crucial assumption that integrated managerial expertise leads to the economies of scale. His research has all been based on the historical facts. It is not necessary that the same deductions can be applicable to the future firms too. A lot of work needs to be carried out to come to a conclusion in this regard. Also, it is essential that variables other than management also be given importance instead of taking a citrus-paribus assumption. References Alfred Dupont Chandler. (1975).The visible hand: the managerial revolution in American business Alfred Dupont Chandler (1994) Scale and scope: the dynamics of industrial capitalism. USA Bill Brown. Summary Review of Alfred Chandlers The Visible Hand. USA. Arizona State University David Chopin. (2007).who raise the visible hands of wealthy nations? Dong-Woon Kim (2006) Personal and Managerial Capitalism: Evidence from Integration in 19th Century America Viewed Under a 21st Century Transaction Costs Economics Lens.Urbana. University of Illinois Peter Temin (1978) Review: Chandlers The Visible Hand. USA. Rand Corporation Marcelo et al (2007) Chandler’s Living History: The Visible Hand of Vertical Management in the Korean Chaebol. Korea. Helsinki Rikard Larsson (1993) The handshake between invisible and visible hands: toward a tripolar institutional framework. Questia SL Carroll (1993) Alfred Chandlers Speed: Monetary Transformation.USA.bhcweb publications W. Chan Kim and Renée Mauborgne (2007).How strategy shapes structure. USA. HBR Read More