Chandlers Model on Example of Leading Economies - Essay Example

s s of Chandler`s model of large-scale enterprise takes on a completely different paradigm in comparison to the ‘invisible hand’ model given by Adam Smith. Chandler`s model is an attempt to explain the developments in the second phase of the revolution where he tends to reason behind the enhancement of capital. In this context, he gave the concept of modern industrial enterprise, which, he believes grew in three phases. That is, there were investments in the production facilities, mostly the ones with technological potential to produce economies of scale and the economies of scope, concepts which would be touched upon in the paper. Further, he argued that there were increased investments in the networks of marketing and distribution. Followed by these developments was the recruitment drive of managers and a build-up of managerial hierarchy to make up important decisions regarding the functional units. Therefore, Chandler`s theory tends to build upon these central stipulations via which he explains how an industrial enterprise demonstrates long-term competitiveness. He also gives the concept of managerial capitalism in his theory which he claims is the decision making body overseeing various operations of the organization. Also, he adds that in addition to the industrial enterprise, there are various other sub-species forming the business enterprise, all of which carry out the modern production functions (CHANDLER 1997: 16). Therefore, the paper will aim at explaining in detail how Chandler has built a model as to how the modern industrial units seek to produce economies of scale and economies of scope. The paper will also compare and contrast the modern economies of various nations to give practical implications of the model being discussed. As mentioned above as well, an industrial enterprise is a sub-unit of a business corporations in general, where salaried managers are supervising distinct operating units. Therefore, these industrial enterprises in question grew eventually as various units kept adding to the enterprise in general and these units were diverse in context to economic functions or geography. These units offered economies of scale, implying that as the size of an operating unit which produces a product increased, the unit cost of distribution or production decreased simultaneously (CHANDLER 1962). Similarly, economies of scope were produced, i.e. joint production patterns emerged from a single operational unit to produce more than one product. In other words, in this capital dependent industry lobbied by Chandler, the increase in output resulted from a decrease in the ratio of capital and labor and this primarily happened because of the addition of newer machinery and processes (CHANDLER & TEDLOW 1985: 64). Similarly, economy of scope being argued in this case came about due to the production of a variety of end products after using the same raw material or utilizing the same processes. In this context, it is safe to assume that such an economy was highly dependent on skills, knowledge, team-work and experience, i.e. the human capital which had the capacity to efficiently utilize the technological procedures. Since modern infrastructure and communication networks emerged in the last decade of nineteenth century, large organizations with a set hierarchy emerged, bringing about a revolution in production as well as the distribution functions. In addition, a specialization workforce was assigned tasks like market research and analyzing competition which is a sole feature of oligopolistic markets (CHANDLER & MCCRAW 1988: 42). Thus, an integration of various sub-units came about to produce economies of scale and scope, which is the central argument of Chandler`s theory. Furthermore, an evolution in these large scale enterprises paved way for an addition in the functional line of hierarchy. That is, various departments emerged including marketing and production, research and development, and also finance department. In addition, units like transportation department, engineering and legal departments, alongside public relations and personnel development emerged to offer support in various areas. Various heads of these departments alongside a board and an assigned president then made decisions for the organization thereby adding a ‘visible hand’ to the affairs of the organization leading the enterprise in a set direction. Another point to be taken under consideration here is that an industrial enterprise, in addition to the functional units, also expanded in other ways. There were defensive expansion trends i.e. horizontal or vertical expansion, and the offensive ones, i.e. geographical and product diversification. Further evolution in the industrial enterprise led to performance monitoring measures i.e. inclusion of a long-term and innovative corporate strategy with middle and the top management being the sole decision makers. However, with labor intensive industries i.e. printing or textiles, they do not offer a competitive advantage for the integrated enterprises (CHANDLER & MONTGOMERY 1979: 71). Therefore, in these cases, mass retailers tend to dominate with large purchasing units while eliminating other intermediaries. In order to further explain the argument, the case of United States as stipulated via theoretical paradigms given by Chandler can be discussed. According to the theory, USA precludes to competitive managerial capitalism which implies that there is an oligopolistic competition amongst various large enterprises and most of these industrial enterprises deal with consumer goods. In order to understand the competitive managerial capitalism, it is critical to look into an evolutionary perspective. Therefore, the Sherman act of 1890 i.e. the Anti-Trust Act paved way for horizontal enterprises and single companies focused on enforcing individual units rationalization. This implies that the focus was driven away from price and the output mechanisms to throughput. Later in 1911, various companies including American Tobacco and Standard Oil were dissolved by virtue of court ruling (CHANDLER 1991: 31). Another significant trend was that of the incorporation of various investment banks which became important actors in the field of business. In addition, various business schools came into existence which now supplied business managers and other human personnel. As the system evolved, two fold power structure was erected where managers dealt with the internal power instruments and a board was set up to deal with legal imperatives and external power instruments. In case of other industries which were more stable in nature (oil and steel), vertical integration measures were observed in the form of acquisitions and mergers, due to which a monopoly was set up. Similarly, diversification of products was prominent in chemical and food industries which relied drastically on distribution patterns (and communication networks). The automobile market, and the electronics and equipment industries were also dominant with additional units in context to trained sales personnel and an enlarged market share (CHANDLER & BLACK 2007: 15). In such a scenario, the decision making patterns were quite complex in compliance with the Chandler`s theory and thus the ‘visible hand’ was that of managers controlling the enterprises from inside and outside. In such a scenario, certain lessons can be pointed out from the American experience. Firstly, it has been pointed out at various instances that patents tend to be sole deterrents for entry into market; however an analysis of the market trends and industry enterprises indicates that such is not the case. That is, the investment into the product knowhow is what creates an added advantage to the organization and therefore managerial variables are critical to understanding market mechanisms. Also, another lesson learned by the American example is that if there is no rationalization in terms of functional units, the mergers and acquisitions are not always successful. It has also been observed that advertising is also not as much of a deterrent either. However, whatever the case, the American example clearly exemplifies the theory given by Chandler as a three way investment model i.e. organizational, production and distribution channels as sole drivers of the organization. Therefore, the decision making goes through these three fold functional areas where hierarchy is established to allow smooth disposal of activities. (LAZONICK & TEECE 2012: 14) The example of Great Britain must also be incorporated to bring a holistic perspective to the study. The personal capitalism which is characterized by family owned enterprises dominates the business spectrum in Britain. That is, the owners consider the profits as the dividends via which they influence the routine affairs due to which Britain was late in arriving in the second phase of industrial revolution. Personal capitalism implies that the enterprises in Great Britain are personally managed, more than that observed in America or Germany (CHANDLER & MAZLISH 2005: 60). The enterprises follow a personalized style of management alongside smaller hierarchal management. The entrepreneurs, therefore, have a higher control over their organizations while the salaried managers aren`t the sole authority over decision making. Also, these entrepreneurs are more concerned with their stable income than in reinvestment perspectives (CHANDLER & HAGSTORM 1998: 81). In this context, investment in production was smaller while the focus was more on distribution patterns since the consumer goods industries were dominant in Britain. The capital intensive enterprises were run via retained earnings while mergers were also motivated more intensely by virtue of market control. Rationalization was also at a bare minimum where the link between universities and the industry was not very well established. Therefore, British experience tells that since Britain failed to take up the competitive advantage it slipped to third position in terms of production. Also, these British enterprises were not interested in developing a strong organizational structure and instead, they resulted in the present state by virtue of planning (CHANDLER & AMATORI 1997: 41). Also, stable income was the driving force behind these family dominated businesses and not investment initiatives. In sum, the historical analysis of British industries indicates a need to create competitive environment so that productivity and profitability enhances. The third nation which must be included in the analysis is Germany which is an example of cooperative managerial capitalism. Germany is characterized by large and integrated enterprises mainly dealing with production good while maintaining oligopoly via negotiation and cooperation. It is a given fact that despite facing immense setback due to First World War, Germany still managed to maintain its competitive edge. Unlike that in Britain, Germany has a decision making network dominated by salaried managers. However, unlike USA, the enterprises rest with family owned businesses where a sense of negotiation and cooperation prevails. Therefore, Germany has an organized capitalism i.e. it has invested in its workforce more than USA has. Similarly, Germany depends on a large scale rural population due to which infrastructure development was critical. Therefore, railway got nationalized in 1870`s which led to development of large scale enterprises. In addition, new banks were formed while legal constraints were minimal and thus, cartels were not as successful (CHANDLER & DAEMS 1980: 13). Also, the educational institutes in Germany were the pioneers in imparting quality training and offering knowledge base which links up educational institutes and industrial variables. In Germany, the economies of scope were witnessed in the heavy machinery industry while electrical industry also saw innovation in production imperatives. Though Germany saw a hard time in 1918 with higher competition from abroad and weak governance, yet, the recovery paved way for massive innovation and development. Therefore, with a cooperative environment and investment in human capital which was highly personalized, Germany saw its immense development patterns. To sum it up, Chandler`s model offers quite an appropriate explanation for business enterprises and their evolution patterns in various states including USA, Great Britain and Germany. In this context, USA is a classic example of a successful nation which undertook all assumptions given by Chandler`s theory to adopt a managerial hierarchy and a competitive market which made America move to second phase of industrial revolution faster than others. In contrast, Britain saw a dominance of family owned businesses who relied mostly on stable income and thus, these markets lost market shares. However, in America and Germany, organizational capabilities were well developed which made these markets competitive in terms of production and distribution. Also, since diversification was the key to growth, US enterprises did exceptionally well. The model, thus, explicated that the managers must be given authority and leverage to make decisions for the organizations while invention and innovation must be left to outsiders, yet the role of additional units like research and development and other similar departments must not be understated. Therefore, modern industrial enterprises tend to grow in three phases. That is, there were investments in the production facilities, mostly the ones with technological potential to produce economies of scale and the economies of scope. . Further, an increased investment in marketing and the distribution networks enhances the profits. Followed by these developments is the recruitment drive of managers and a build-up of managerial hierarchy to make important decisions regarding the functional units. Therefore, Chandler`s theory tends to build upon these central stipulations via which he explains how an industrial enterprise demonstrates long-term competitiveness. Bibliography CHANDLER A. D. (1962). Strategy and structure: chapters in the history of the industrial enterprise. Cambridge, M.I.T. Press. CHANDLER, A. D. (1977). The visible hand the managerial revolution in American business. Cambridge, Mass, Belknap Press of Harvard University Press. http://hdl.handle.net/2027/heb.00628. CHANDLER, A. D. (1991). Competitive performance of U.S. industrial enterprises a historical perspective. [Washington, D.C.?], [Council on Competitiveness?]. http://catalog.hathitrust.org/api/volumes/oclc/39266532.html. CHANDLER, A. D., & DAEMS, H. (1980). Managerial hierarchies: comparative perspectives on the rise of the modern industrial enterprise. Cambridge, Mass, Harvard University Press. CHANDLER, A. D., & MAZLISH, B. (2005). Leviathans: multinational corporations and the new global history. Cambridge, UK, Cambridge. CHANDLER, A. D., & MCCRAW, T. K. (1988). The essential Alfred Chandler: essays toward a historical theory of big business. Boston, Mass, Harvard Business School Press. CHANDLER, A. D., & TEDLOW, R. S. (1985). The coming of managerial capitalism: a casebook on the history of American economic institutions. Homewood, Ill, R.D. Irwin. CHANDLER, A. D., AMATORI, F., & HIKINO, T. (1997). Big business and the wealth of nations. Cambridge, Cambridge University Press. CHANDLER, A. D., HAGSTRÖM, P., & SÖLVELL, O. (1998). The dynamic firm: the role of technology, strategy, organization and regions. Oxford, Oxford University Press. CHANDLER, A. D., MONTGOMERY, J., & DALLIBA, J. (1979). Precursors of modern management. New York, Arno Press. CHANDLER, S., & BLACK, D. (2007). The hands-off manager how to mentor people and allow them to be successful. Franklin Lakes, NJ, Career Press. http://www.books24x7.com/marc.asp?bookid=16506. LAZONICK, W., & TEECE, D. J. (2012). Management innovation: essays in the spirit of Alfred D. Chandler, Jr. Oxford, Oxford University Press. Read More