Chandlers Model of Integrated Managerial Enterprise - Essay Example

CHANDLER’S MODEL OF INTEGRATED MANAGERIAL ENTERPRISE By Location Chandler’s Model of Integrated Managerial Enterprise The term managerial enterprise can be used to refer to large industrial concerns in which investment and operating decisions are made by a hierarchy of managers controlled by a board of directors. The reasoning of the managerial enterprise is the making of obligatory investments in management, distribution and production in order to attain economies of scale and scope, get advantage from the learning curve, with the strategic aim of dominating a section of an industry. Alfred Chandler’s theory of theory on an extensive study is based on corporations in America between the years 1850 and 1920. These corporations include Roebuck, General Motors and Sears, and Du Pont. This was a time when business organizations were undergoing the development from single units to umbrella type business structures where various units which are comparatively autonomous share the strategic planning function. This paper aims at determining whether Chandler’s model of integrated managerial enterprise explain the organization of large companies in major economies and the long-term competitiveness of nations. According to Alfred Chandler the new capitalism era refers to an era in which big business corporations are managed by managers who are paid to do the managing of the businesses. This means that these boards of managers consist of individuals who are not owners of these businesses, but are just there to offer their professional services. The managers are entrusted with the task of making decisions concerning employment, current operations, allocation of resources for current and future operations, and output (Chandler 2003, p. 115). Therefore the industrial enterprise can be referred to as a subspecies of business enterprise that have distinct operating units which are managed by salaried managers. This form of business existence has proved to be effective in many ways. This can be proved by having a look at the economies of scale than results of such transformations. The process usually involves the increase in the size of single operating units. Economies of scale emerge a result of the inverse relationship between per-unit fixed cost and the quantity of products produced. An increased size of the operation unit of production and distribution is likely to lead to a general decrease in the unit cost of production and distribution. This decrease is attributedby many factors. One of the most obvious of this decrease in the cost of unit production and distribution is the fact that an increase in the size of an operation unit enables the unit to carry out production and distribution. Another thing that can show the effectiveness of this model is the economies of scope. Economies of scale is an economic theory which states that the average total production cost decreases because of the variety of goods produced. The production cost in this case will reduce because of the joint production and distribution of the various products that are involved in this unit. This is basically because producing and distributing these products independent will lead to extra expenditure of resources that would have rather been used in the production and distribution of the various products. This will mean that the corporations will not have to spend twice on the same resources of production and distribution. In the old ways of business management, the intensification of labour in an industry usually involved the addition of more human resources and machines. However, new industries which are capital intensive the increase of output is a result of reduction in labour/capital ratios. This is a result of the introduction of new processes and machines. Therefore, economies of scale are by far more important in capital-intensive industries. However, in the labour intensive ones, business organizations with big production in which units did not have any advantage over those with lower production units. Business organizations that move into new markets or a technology enjoyed competitive advantages over their competitors. Generally, putting a challenge the first mover meant winning customers away from them. This was difficult because the first-mover had in time realized economies of scope and scale as compared to the business organizations that were trying to challenge them. Due to the fact that it was not easy to bring down the first mover, a small business organizations managed realizing it. The deep-rooted business organization that maintained financial capability would probably be in the best position to challenge first movers. Therefore, the capital-intensive markets rapidly became oligopolistic,and occasionally monopolistic. The business organizations competed for profits and market share often using price as a weapon for competition. This was mostly achieved by making use of strategic and functional efficiency. After the establishment of industrial enterprise, there four primary ways in which it grew. These ways are geographical expansion, horizontal combination, product diversification, and vertical combination. When they used vertical combination and horizontal combination, the industrial enterprise was said to have undergone growth defensively. When an industrial enterprisegrowth through geographical expansion and product diversification, it was said that they had grown offensively.Horizontal combination refers to the process merger and acquisition of com­petitors. Vertical combination refers the process of acquisition of units downstream and upstream. Product diversification the process of introducing new products re­lated to the business organization’s existing markets and technologies. The era of horizontal cartel organizations in the United States of America was brought to an end by the Sherman anti-trust act of 1890. This resulted in a change of focus from controlling price and output to maximizing through the input into the production process. In the year 1911 American Tabaco, standard oil, and du pont were dissolved through a court ruling. This reduced the influence of owner family, but instead made the investment banks more important. As time goes by the complexities of running and managing big business organizations experienced a huge increase. The inside directors, who were full time managers of the production units earned control of the instruments power within the business organizations. The outside directors, whose main responsibility was to represent business owners and financiers in, the board remained to have the legal authority over the business organizations. In industries that were considered to be more stable, expansion was primarily attained by vertical integration through acquisitions and mergers. Some of these industries include rubber, steel, and oil industries. A good example of such an expansion would be Standard Oil. Standard Oil initially achieved a state of monopoly of monopoly, but its dissolution led to the creation of several companies with full integration. These companies faced each other’s competition in an oligopoly market. In chemicals and food the expansion came primarily through diversification into the production of new products. For instance, DuPontbegan by producingexplosives, but later on venturing into paint, rayon, nylon, other fibres photo chemicals, and plastics.Markets wereexemplified by the big producers of foods that are perishable, such as Anheuser Bush, who heavily invested in distribution, by making use new inventions like the refrigerated rail car. In machinery industry, the picture produced is more mixed. However, geographical expansion and diversification of products was the most common strategies in this industry. In the transportation industry, the primary examples are GM and Ford. Ford had first mover advantage because of the way they dominated the low end of the auto market in the United States of America. Henry Ford’s style of autocratic management, and his failure to have an understanding of the marketing led to a disastrous fall in their market share. These shares were captured by GM under the management Chrysler and Alfred Sloan. GM made use of R & D heavily, also commercializing the Diesel engine in locomotives. This way, the diesel engine was able to replace steam engines. Diesel in railways had been in existence for less than a decade. In electrical and electronic equipment industry, Westinghouse General Electric dominated first movers, General Electric is a merger of Edison and various other companies. These business organizations became system builders, hiring a sales force of technically trained individuals to market their products. The two leaders enhanced their stronghold on the market by cross licensing patents (Fields 2004, p. 167). The complex nature of the machinery industry, managers in the industry emerged to be the most influential. Owners of the business organizations and bankers had very little say on how these businesses were run. However, bankers and owners could chip in when the businesses were going through financial difficulties (Witzel & Warner 2013, p. 111). In the United Kingdom personal capitalism seemed to be the most dominant form of management system.The term "personal capitalism" is used in reference to the fact that UK companies to a much larger extent than their German and USA counterparts were "personally managed", both with respect to having managerial hierarchies that are smaller and being managed in a style that would be referred to as personal; the UK senior managers supervised lower and middle level managers directly, and thus did not require the elaborate organizational structures and artifacts of the German and USA corporations (Jones & Zeitlin 2008, p.134). In the capital intensive industries large business organization were dominant in rubber industry (Dunlop), explosives industry (Nobel), chemicals industry (Courtaulds), and glass industry (Pilking­ton). Growth received finance from earnings that are retained, thus leaving the families in control. In electrical equipment and machinery, steel and chemicals, German and USA companies won the competition, mostly because the UK industrialists did not invest enough (Amatori, Chandler & Hikino 1999, p. 123). Once foreign companies had made the scope and scale investments, the oppor­tunity window were not easily reopened. Acquisitions and mergers in UK were motivated by market control, and the merged firms remained to be discrete units, with committees responsible for coordination. Minimal rationalization took place. The family domination went on, with managers going through training at work instead of at educational institutions (Abe & Fitzgerald 2004, p. 101). There was no tight link between the industrial community and universities, as in USA and Germany. Despite there being competitive setbacks experienced by the industries in German during World War I and the crisis that took place between the years of 1918-1920, the capability of these industrial enterprises enabled them to succeed in facing competitors abroad. The major difference between UK and Germany isthe dominance of salaried firm managers, the main difference between the US and Germany is the cluster of integrated enterprises in producer’s goods, the dominanceof some families, and, most important the close cooperative climate between business organizations (Eatwell & Taylor 2002, p. 95). German companies paid allot ofattention to their work force than their USA counterparts, thus developing a system termed "organized capitalism" by historians in Germany. German higher learning institutions were pioneers in institutionalizing the systematic acquisition and knowledge transfer, providing goodscientific and technical training, making them the bestglobally. In the year 1910 Germany had over 16500 engineering students, compared to UK’s 1100. The advent of business schools came in 1900, about the same time as it took place in the USA. The relation between the industrial community and research institutions was especially strong in electrical equip­ment, metals, chemistry, non-electrical machinery and optics. The great industries in Germany congregated around chemicals, metals, heavy machinery. In machinery, economies of scope were utilized. In locomotives, Hanomag expanded its production into trucks, BEMAG expanded into production of typesetting machines. Other producers of transportation equipment included Opel, Deutz, and MAN. In electrical machinery, AEG (Allgemeine Elektricitäts Gesellschaft) and Siemens and enjoyed dominance, concentrating production in big factories and making use of world-wide sales organizations (Lazonick & Teece 2012, 135). These two companies, plus Westin­ghouse and GE, dominate the world market. Siemens diversified into communications and telegraph; facing completion from AT&T. Together they came up with Telefunken, the continental pioneer in radio production. In chemicals production the German industries became dominant because of three large companies: Bayer, Hoechst, and BASF. These business organizations exploited the economies of scope heavily, growing from dyes into pharmaceuticals (Hoechst: Novo­cain, Bayer: Aspirin). AGFA also diversified into photographic film. In pharmaceuticals, Merck, Schering, Riedel, and developed global enterprises before WWI did. This gave Germany a world lead in chemicals production. The companies formed IG’s to coordinate the markets (Rainey 2010, p. 121). Overseas Chinese family businesses (OCFBs) have over the years earned a reputation forresponsiveness, flexibility, and cost efficiency, in the manufacture of original equipment’s. They are also known to be the pioneers of mainland’s industrialization. This success can be said to be because of their form of business management. Their business organizations are personally managed an also operate in the circles of ethnic and kin relations. This makes it very easy for them to advance in terms of management tactics (Albani 2011, p. 89). Most of the managerial skills are attained through active involvement in management process. This means that in this system managers learn their managerial skills by closely working with their predecessors. It is clearly evident that Chandler’s model of integrated managerial enterprise explains the organization of large companies in major economies and the long-term competitiveness of nations. This can be explained through the examples of countries whose industries have been discussed in this paper. This is even made more evident in the way it is able to illustrate the various managerial changes and developments that were experienced in the USA, Germany, the United Kingdom, China, and Japan. 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