Chandler's Model of Integrated Managerial Enterprise - Evidence from Other Countries - Literature review Example

Chandlers model of integrated managerial enterprise: Evidence from other countries Introduction This essay discusses Chandlers model of integrated managerial enterprise to explain the organization of big companies in major economies. The first section of the essay describes the model that had been proposed by Chandler in order to explicate the relation between strategy and structure. This model was built by keeping the American society and economy in mind. It was observed that Chandler had applied this theory to other nations as well for bringing out the competitive advantages that can be enjoyed by nations on following this strategy. This essay plans to use the various literatures that have been discussed in this context to understand the applicability of Chandler’s model on organizational structure of different nations. The analytical structure of the essay is based on theories about relevant literature. It is a common consensus that the theory suggested by Chandler has been widely successful in explaining evolution of the American business organization. The countries to be studied in details in this essay are United Kingdom, Germany, Japan and China. The idea is to realize whether the theory proposed by Chandler that “structure follows strategy” can be universally accepted for all the above-mentioned countries. The reasons for variation, if any, will be discussed in details in light of the existing literature. Arguments Chandler’s theory of strategy and structure is closely related to the concept of strategic management and not organizational behaviour. Chandler’s theory of managerial capitalism was first developed for United States based on the time frame of 1880s to 1950s. In simplest language, Chandler’s theory of managerial capitalism states that the senior management of a company poses competitive advantage of knowledge regarding markets and technology, which allows them to take discretionary decision through strategic primacy. This theory was based on core concepts of accumulated knowledge and organizational capabilities and has been applied to other nations as well. Nonetheless, this theory has been fairly criticized and its validity in the modern setting has been questioned. Chandler had argued that initially, firms tend to follow departmental organizational structure from which a multi-divisional structure evolves as the company ventures overseas and operational activities get diversified. The chief conclusion that was made by Chandler was that “structure follows strategy” (Chandler, Amatori and Hikino, 1999). This implies that if an organization follows product market diversification strategy, then this will have to be followed by an organizational evolution into decentralized and divisional structure. Basically, his theories point out a hierarchical relationship between strategy and structure, which enhances organizational efficiency. The theory of managerial capitalism has been considered as inadequate and unsatisfactory to account for the dynamics of Western industrialization. Comparative research on the European countries has shown that cultural, historical and institutional determinants of national patterns of development are important factors as well. These countries have reflected the presence of family capitalism in the national economic system. Following Chandler’s theory, this type of an outcome would not be optimum and inefficient. However, evidences from these countries have shown that such a setting was the best suited organizational structure, under the given circumstances (Colli, 2003). Most of the businesses saw opportunities in overseas expansion and most of them had adopted Chandler’s multidivisional structure, as opposed to Porter’s value chain and externalities (Chandler, 1994). During this time period, Chandler’s theory was considered as the most effective strategy for growth and companies began to follow decentralized structure for pursuing their long-term goals. Chandler’s model was based on the development of American business enterprises particularly and captures enhancement of American economy and society. Exxon is one of the U.S. firms which had used economies of scale and scope and increased its capacity almost three times and brought down the cost of production of kerosene to 2.5¢ from 5¢ (Chandler, Amatori and Hikino, 1999). The economies of scale and scope were also utilized by Rockfeller in the United States and Siemens in Germany who had used the concept of three prolonged investment namely building large plants, creating national and international distributing system and integrated marketing networks which could make the sales keep pace with the increased production (Lash and Urry, 1994). Chandler strongly believed that top level managers are extremely important for the well being of the organization and this was even true for U.S. but not everywhere. For onstance it was seen that when Ford had fired its top level managers the price of the market share of Ford had come down and when those managers had joined General Motors their share had gone up (Hannah., 1991). Nevertheless, this model has been widely applicable in other countries as well. Evidences from Japan have shown that basic structure of the model fits well for the Japanese enterprises too. Some differences in the context of human resource management, financial management, management culture and government relations were observed and these were unique to the Japanese enterprises (Abe, 2009). Critiques of Chandler have stated that unrelated diversification is a characteristic of the American economy only and it cannot be universally accepted by all countries. This is because Chandler had centred his assumption on uneven countries. For instance, Germany and United Kingdom had much smaller size compared to U.S. Other critiques of Chandler have pointed out that organizational structure is not solely controlled by strategy and different type of organizations require separate structures. At best, it can be concluded that capital intensive industries would follow a steep hierarchy as has been predicted by Chandler, but the labour intensive ones will have flatter hierarchies. Also, Chandler had widely ignored the nation specific characteristics. For instance, in Germany, it had been observed that big firms had mainly developed through mergers and acquisition and followed H-pattern of organizational structure as opposed to M-pattern suggested by Chandler. Then again managerial capitalism relies only on organizational development and ignores the role of the state and the bank. In Germany, a large part of the development had occurred through the support of banks, while the U.S. firms had relied on internal finance. For United Kingdom, Chandler did recognize that size of the firms was small and did not require divisional arrangement. Chandler had rather pointed out that personal capitalism of the country was solely responsible for the prevailing backwardness (Hannah, n.d.). Eminent scholars like, Carnevali (2002) and Greaves (2002), had argued that the British failure was more likely due to ineffective public and monetary policy and inappropriate state intervention (Royal, 2012). Hannah (1991) suggested that Chandler had mainly mentioned the failure of British firms to support his evidences. The case of China had also shown that the country had mainly expanded through mergers and acquisitions as opposed to Chandler’s thesis. Enterprises in China operate through centralized decision making. Though the path of expansion of China was different from Western countries, yet the scale and the state owned enterprise of the country closely followed Chandler’s managerial enterprise. Chandler had argued that if the diversification is unrelated, then this can lead to managerial breakdown. Nonetheless, in case of China, it has been observed that large enterprises had followed unrelated diversification for achieving economic stability. Personal Capitalism was indeed more closely associated with the British companies than their counterparts in U.S. or Germany. It was observed that the British firms were managed personally and had smaller managerial hierarchies compared to America or Germany. There were success stories even in enterprises like BMW and Hoover which had a family run system of administration yet their product differentiation strategies made them winners. The senior level managers directly controlled the middle and lower level managers. According to Chandler, this kind of an arrangement was ineffective because the German and the American firms could easily outperform the British ones as the former had scale and scope investments, which were managed efficiently through their complex structures. According to Hannah (1991), these were not entirely correct for reasons already discussed (Guillen, 2000). Germany has been characterized with capitalist networks and interlocking directorates and the relationship between them. In Germany, it has been observed that interlocking directorates could not be understood in any other ways, except capital networks. Chandler had pointed out that U.S. followed the model of competitive capitalism; whereas, Germany had followed co-operative capitalism. If the proportion of interlocking directorates is high, then it represents stronger capital networks (Livesay, 1989). Britain, on the other hand, had followed a structure of competitive capitalism and capital networks of Britain were different from that of Germany. Britain had exhibited a stronger interlocking between financial and non-financial sectors. The shares held by the financial institutions in non-financial ones were low and this prevented financial institutions from assuming dominant positions. The key difference between the capital network of Britain and Germany was that ownership in Germany was highly concentrated; whereas, that in Britain was much less concentrated. Chandler was of the view that interlocking directorates were more strongly associated with the capital network in Germany, which had contributed to its higher growth compared to Britain (Windolf and Beyer, 1996). Japan had also exhibited the case of capital network like, Germany, but there were again some differences that were noticed. For instance, in Japan, overall coordination between the groups did not only owe to the dominance of single firms as in Germany, but also to agreements reached between the presidents of companies through weekly meetings (Okazaki, 2007). The basic structure of operation of the capital networks in Germany and Japan was almost similar; however, institutions through which the competition was regulated between these countries differed. In Japan, this institution was called Keiretsu, while in Germany, it was called Combine. Both of these institutions represent forms of corporate networks that enhanced intercompany cooperation and regulated the competition (Williamson, 1981). U.S.A., on the other hand, followed competitive capitalism. It was observed that firms in U.S.A. concentrated on the domestic market as opposed to Germany, which exhibited export oriented strategy. Chandler has indicated that Britain and U.S. shared similar line of function and Germany and Japan had similar ways. Chandler has been particularly critical about the “holding company” as he had developed his model considering the American economy mainly and holding firms had become almost extinct in the period of 60s from U.S.A. markets (Grant, 2010). However, in Europe, the concept of holding company was largely prevalent when Chandler had conducted his analysis. Japan had a hybrid U-shaped structure of organizations, unlike U.S. Suzuki (1991) had pointed out that modern enterprises in U.S.A. was created to coordinate the internal goods flow. Nonetheless, in Europe, the corporate structures were built to coordinate internalisation of financial resources. In Japan, on the other hand, emphasis was on allocation of human capital. In this regard, Suzuki had rightly pointed out that managerial hierarchy may have been suitable to explain efficiency of U.S., but it is not equally efficient to explain the flow of other resources (Suzuki, 1991). It has been observed that Japan mainly relied on lean production when they could not make much profits from the scale economies. Toyota, a Japanese automobile industry have much flatter organizational structure than what is proposed by Chandler to be successful and yet it is one of the most successful automobile companies of the recent times (Novicevic and Buckley, 2009). The importance of the holding companies was evident in entire Europe though their forms might have been different. For instance, the cartel type business organization of Germany was equivalent to the holding companies in Britain. Chandler had the idea that corporate expansion led to growth of capital intensive firms of Germany, since the 1890s (Lash and Urry, 1994). According to Granovetter (1995), state, banks, cohesive ethnic groups and powerful families sustain business groups over time. Prior to the period of war, it was observed that economies of Japan, similar to Germany, had been dominated by holding companies and these companies had been quite successful as opposed to the view of Chandler (Guillen, 2000). It was observed in post-war period that Japan had dismantled the holding companies. The big firms in Japan had replaced the kinship with professional managers. It has been observed that Chandler had greatly ignored the size of countries, role of state and labour relations. It has been observed clearly that Chandler’s theory was very effective in explaining managerial efficiency of U.S. This was primarily because modern management had emerged in U.S. Chandler had supported his hypothesis with various empirical evidences. For instance, he had shown that Du Pond (an American company) had largely excelled by mastering the M-type organizational structure; whereas, Ford’s defeat by General Motors had suggested that it downplayed the advantage of Chandler’s theory. Though successful in American context, this theory could not be generalized because different countries had concentrated on dissimilar areas of expertise, depending on nature of the business (Novicevic and Buckley, 2009). The structure of business had undergone notable changes in the recent times. Chandler had proposed convergence theory of development for modern large enterprises. Most of the theories of managerial enterprise that have been developed along this line have underestimated the advantages of business groups that had been prominent in different economies in separate time periods. Even so, it has been observed that business groups are highly resilient in contemporary mature economies, including the U.S. where huge conglomerates operate now. It has been suggested that specific arrangements to tackle the diversified industry and product portfolio are no longer as important as it was in the previous century. Rather, administrative and operational execution and strategic implementation have become more important in the recent context. Recent studies had also confirmed that proximity of U.S. and U.K. was way more than that mentioned by Chandler. Although the theory has been fairly criticized, it is still one of the most extensively studied theories in management studies (Novicevic and Buckley, 2009). China is one of the countries, which were heavily under the state control until recently. The government of China had focused on five industries, namely machinery, automobile, construction, petrochemicals and electronics. The government had promoted monopoly rights and financial support to create economies of scope and scale, which had worked for China mostly. This is primarily why China had delayed the process of adoption of Chandler’s theory. China had also created economies of scale through unrelated diversification, which is also contradictory to the theory of Chandler. The country had embarked on a path of export led growth strategy (Lok and Crawford, 2004). Conclusion The 20th century has been undoubtedly marked by a robust growth in popularity of Chandler’s theory. However, evidences from countries like. U.K., Germany and Japan, had shown that these countries did not exactly follow the integrated managerial enterprise structure, which was devised by Chandler for U.S.A. This is because nature of the industry and characteristics of the nation also play an important role in the growth pattern. It has been observed that business groups of European countries like, Britain and Germany, have played a dominant role in development of these nations in the long run; whereas, such factors were absent in America. Also, it was studied that Japan and the European countries had focused on human capital formation and internalisation of resources, respectively; whereas, U.S.A. emphasized on the internal flow of goods. China, on the contrary, had delayed much in the adoption of Chandler’s model. Yet, it cannot be denied that all of these countries had achieved high level of success. So, it can be concluded that though Chandler’s model was successful in explaining the transition in U.S.A., it cannot be universally applied in all nations. Reference List Abe, E., 2009. 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Co-operative capitalism: Corporate networks in Germany and Britain. Brit. Jnl. of Sociology, 47(2), pp. 206-220. Read More