Chandlers Theory of Large Scale Managerial Enterprise - Essay Example

MANAGEMENT ESSAY     By         Location Introduction An American economic historian Alfred Chandler proposed the model of large scale, integrated managerial enterprise in conceptualizing the capitalism concept focusing on national economies. He argues that, in the 20th century the vital element that stimulated and transformed modern economies was the significant increase in the number of industrial enterprises created by dynamic economic patterns. The emphasis of this essay is on the effectiveness of Chandler’s model of large scale managerial enterprises and its impact on leading economies with an eye on Japan, China, United States, United Kingdom and Germany in the 20th century. Expressing my opinion, this model has not been followed entirely by all the leading economies in the world. To be discussed in the essay is a brief explanation of Chandler’s theory of large scale managerial enterprise its applications and bottlenecks. I will provide justification of my opinion by using the enterprise system in Japan and China with a focus on the role externalities such as the availability of funds, role of the government as well as business networks and groups. With these, examples this paper will explain the theories of capitalism and entrepreneurship and how they have enabled those using the system gain competitive advantage. Chandler’s concept of the visible hand premises the origin of the firm and its growth prospects. He argues that the existence of the firm is fundamentally to achieve coordination in an effective manner than the market in order to enjoy productivity gains. When the gains are easily realized, economies of scale set in. The model has specific problems associated with it. First, a managerially controlled firm is non-maximiser and thus high profit rates are not as objective and thus cannot be used to measure competitive advantage. Second, the firm though being an efficient cost minimiser, the benefits are not observable since they are being absorbed by high executive salaries and managerial perquisites. According to Chandler (1997, p14) managerial enterprise is defined as the modern enterprise with numerous operating units carrying out specific functions of production and distribution. It can also be termed as governance structure where investment decisions for current and future activities are made following management hierarchy with expertise and knowledge. All the managers are charged with the responsibility of efficient management of the organizations and they are salaried managers answerable to the board of governors. The large scale managerial enterprises originated in Germany and the United states before the First World War, started in Britain in 1920s and 1930s and in France after the second World war (Abe 2009). The intent of the large scale managerial enterprise is the facilitation of necessary investment decisions, production and distribution to achieve a low cost per unit (economies of scale) and scope where large plants may utilise same inputs and processes, making different products, benefiting from the learning curve strategically aiming for dominance portion in an industry by improving productivity. In the old labour intensive industries, increased output was achieved by increasing the number of machines and people while in the new capital intensive industries the output increase is achieved by a reduction in capital/labour ratios due to the introduction of new machines and processes. These points out that economy of scale are more significant in the modern capital intensive industries since large firms will develop advantage over the small ones. The actual economies of scale are output oriented and they are dependent on knowledge, skill, experience and teamwork. After the establishment of the industrial enterprise, it grew defensively by a horizontal combination through mergers and acquisitions and by vertical combination through acquiring units upstream and downstream. Offensively they grew by geographical expansion and product diversification which are generally preferred by many entities. Growth by geographical and product diversification formed the premise for the multidivisional structure. Firms are usually use the functional structure, product structure, regional structure, matrix and mixed structures. The organizational structure determines how communication and flow of information will be facilitated in the organization and any hindrances to communication with the organisation’s subsets. The strategies to be undertaken by a company have its roots in its structure and thus the two have a direct relationship. Product and geographical diversification are the long-term achievement strategies for large capital intensive enterprises. To achieve these strategy large businesses began to adopt Chandler’s multidivisional structure as the most effective way to achieving growth strategy and decentralized structure supporting the organisation internalities and goals. Advancement in technology and communication have facilitated capital intensive entities to go into mass production leading to economies of scale and subsequently lower production cost per unit. Chandler (1997, p.32) emphasizes that to achieve the economies of scale, investment in the manufacturing, marketing, distribution and management are crucial. These “three -pronged investments” have the capability of increasing sales, recruiting and training qualified potential managers and technology development which have given the managerial enterprises superiority to maintain cost leadership advantages (Harvey and Jones, 1992 p.14) According to Chandler (1990, p. 92) most of the United states organizations with examples of General motor and Standard Oil grew rapidly through diversification as a result of adopting the M-form from the dawn of the 20th century. To take advantage of economies of scale and scope, some firms grasped the first mover benefits by investing in manufacturing, marketing and distribution and management as advocated by Chandler. Other companies that applied the “three-pronged investment” include Rockefeller’s standard oil company, and IBM. Rockefeller reported as one of the largest oil refiners in the world utilised the economies of scale through application of horizontal integration in controlling their major competitors and lowering the cost of kerosene. In its multi product system 360, IBM gained a first mover advantage in attaining leadership in the computer industry (Chandler et al 1997, p. 90). The large scale managerial enterprises improved their internal organizational capabilities consistently over time, enabling them outshine the competitors. The rising of more managerial enterprises in the US have overtaken a number of industries and powerful corporations internationally, such as Du Pont, automobile, and chemical industries by the utilization of the “three-pronged Investment”. Chandler advocates that Germany regards cooperative managerial capitalism while German corporations and Americans were responding to large scale business through development of managerial hierarchies and the scope of the economies. On the other hand, Hannah (1991, p. 123) argues that German firms heavily relied on inter-firm cooperation and banks financial support unlike the Americans. Through the heavy machinery industries, the firms in German scooped the first mover advantages after the Second World War. This was possible by improving their internal organization competencies in that industry and also through the application of the “three-pronged investment” in a successful manner. The Japanese economy showed good performance compared to its competitors from 1960s owing to the fact that it appreciated Chandler’s model and did a quick imitation of the American economy. Capital economies in Japan were growing rapidly after the Second World War because they enhanced internal organizational capabilities and adoption of the M-form for their large scale industrial enterprises .The Japanese industries advanced equipment after the foreign capital law allowed them to access industrial technology from the United States and further promoted them to leverage the imports and exports. The three-pronged investment proved beneficial in managing investment diversification and export expansion. Personal Capitalism Chandler et al(1997,p.103) describes personal capitalism as where there is persistence of family run-run businesses with no pursuit for professional training with a focus on immediate consumption as opposed to investment. He argues that the UK’s failure to adopt a managerial enterprise model made it lose its dominant position in many industries. It failed to instil professionalism and managerial hierarchies of high standards that could separate ownership and control due to small domestic market and lack of incentives to facilitate the implementation of mass production and distribution as opposed to the U.S. that made massive investments and distribution. In the family owned business, owners prefer to pursue profits at the expense of investment. British companies were “personally managed” and thus the elaborate organizational structures of American and German corporations were unnecessary for them. The entrepreneurs and their heirs assumed their power, leaving no say to the managers on corporate strategies. In Britain, mergers and acquisitions were being controlled by the market and merged organizations remained discrete units coordinated by committees which facilitated continued family domination with managers acquiring their training at the work place due to lack of a strong link between the universities and the industry as the case was in the U.S. and Germany. Managerial level remained significantly smaller in the UK because of limitation of economies of scale that powered entrepreneurs and families to continue making policy decisions in most large scale firms as compared with the US (Hannah, 1991, p. 300). This made the British not to favourably compete with Germany and U.S. in the dye industry even if it was the pioneer. The British firms had no focus on organizational culture and they operated on the rule of getting stable income rather than risky investments .To be assured of continued profitability in the British industries, it was essential to creating and maintaining competitive capabilities to ensure increased productivity Chandler’s managerial enterprise model focuses on the internal capabilities of the organization with the intent of achieving competitive advantage. This made it have limited application in the nation because externalities such the government’s role, the duty of banks and suppliers have been ignored. Public policies, financial systems, labour laws of a nation and education, among others form a vital portion of critical factors of national economic performance that should not be underestimated (Hannah 1991, p. 306). Hit, Ireland and Hodkinson (1962, p. 416) argued that the managerial enterprise model by Chandler is not the only path to success since most industrialized countries have also achieved industrial and economic growth through government interventions and fiscal policies. This put into context the role of the government as advanced by the Porter in his diamond model (Alford, p124-126) and other factors, being paramount to the attainment of competitive advantage. Porter gives an opinion that the Second World War gave the U.S. an opportunity to rapidly develop its economy through consumerism since its territory was not affected as other nations. The state can act as an investor and an entrepreneur (Brien, 1998, p. 62). Taking China as our case study, the government has developed some large corporations to facilitate export growth some decades ago. The government of China developed the machinery, automobile, construction, petrochemicals and electronics which are its pillar industries. The government thus provides financial support and rights of monopoly of large enterprises facilitating improvement in economies of scale and scope in the nation’s industries, In scope and scale, the specific nature of the investment is specifically examined. Investment done production facilities yields economies of scale and scope coupled with technological development. Secondly, marketing and distribution network investments yield the same sales volume with production. Third, investing in the managerial hierarchy is paramount to coordinate the functional activities of the production and sales plan. These investments create a competitive advantage as argued by Chandler. Despite Chandler arguing that unrelated diversification leads to managerial breakdown, China beats the odd with large scale enterprises directed by the government diversified in unrelated fields of works. This ensures economic stability, enabling them reap economies of scale and scope as they maintain their competitive edge. In her argument, Hannah stresses that the success attributed to Germany is entirely on the premise of the society, culture and education system. She further echoes that the medium sized enterprises in Germany remain managed by families. The systematic training of engineers and industrial apprenticeships has been of value to the development of highly skilled human resource in German and Japan (Hannah 1991, p.122). Business Groups and networks In illustrating the role of business groups and networks, German and Japan had businesses that were formed by an inter-firm networks and supported by the holding companies in Germany which Chandler takes no consideration into. This business groups have played a vital role in development of the economies of the two mentioned nations.The groups are significant in highly industrialized nations and form one of the pathways to success since they are able to control loss within the business, assist in avoiding the diseconomies of scale, enabling optimal and economic use of machinery and take a role in minimizing transaction costs. The model of managerial enterprise gives no explanation for the whole economy’s performance because it only focused on manufacturing companies in his investigation. His approach does not take into consideration the number of small scale industries and numerous service sectors that significantly did mould the economic evolution in the U.S. and Western Europe in the 19th century. Different nations have variations in market sizes with different externalities such as culture and institutions. Chandler used the U.S. developed model of managerial enterprise to explain how they were executed in those nations rendering it unreliable and doubtful. These differences between countries also affect the nature of managerial enterprise. For instance, Chandler explains that the British failed to make ‘three-pronged investments” and capitalism due to their competitiveness and performance decline. On the other hand, Hannah denies there is no relationship between behaviour of families and performance of growth disparities focusing on efficient national economies since there is no quantitative evidence thereto. Organization capabilities were mainly developed for competition in production and market development through diversification. After the second World War the most important trends as noted by Chandler were the rising of Japanese with the mastery of technology transfer, the diversification and divestiture hindering communication between corporate and functional offices, the introduction of managerial capitalism, intense competition and advancement in information technology. Of the three states currently leading the world’s economy, that is, US, Germany and China, US and Germany have robust multinational corporations and technological innovations with the U.S. innovation being a vehicle with a ‘can-do spirit’ with a good risk appetite. Commitment to quality of products and engineering excellence in Germany has been fundamental to its key multinationals and medium sized entities. China is slow in adopting Chandler’s model as it believes that economic performance is affected more by externalities than organizational capabilities. As opposed to Chandler, she also carried out diversification on a range of products to benefit from economies of scale through foreign developed technologies and innovations with emphasis on cost competitiveness. For China to ensure sustainability of its economic performance it needs to begin the development of a management system and culture for its technological and product innovations. However, despite the slow pace, it’s likely that the approaches by both America and German can bear fruits in China though remains uncertain. Can chandler’s model be developed? With an engagement with capital markets and the valuation theories, the model can further be developed curb its critiques. Even though managers and capital market are concerned with maximizing different things, the paradigm and capital market theory by chandler accommodates transaction and information costs since investors cannot obtain insider information without incurring costs and the managerial insiders are faced with resource dependency represented by the capital market. This synthesis gives an opportunity to build on Chandler’s empirical work to include dimensions of accountability and corporate governance. Conclusion From the arguments, it is evident that the Chandler’s approach provides a good understanding of the growth of industrial entities with management concept. If appropriately used, management adopted by managerial enterprise can facilitate and enhance the success of an economy profitably keeping abreast with other economies. However, Chandler’s analysis focuses on its country of origin (U.S.) neglecting the practicability of the model on the economies of other nations (Supple, 1991, p.512). In analysing the performance of the United Kingdom, Chandler did not embrace any externality in his approach and thus with this identified bottlenecks, Chandler’s model can merely be used to articulate critical factors in the economic performance of China and Japan. This model is insufficiently being used across many nations with varied national situations because of the associated loopholes and lack of considering external factors. Nevertheless, this model of managerial enterprise forms part of the most important frameworks in the field of management. Bibliography Abe, E., and Robert F, 2009, The Origins of Japanese Industrial Power Strategy, Institutions and the Development of Organisational Capability. Hoboken: Taylor and Francis. 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