strategy+business is published by PwC Strategy& Inc.
 
or, sign in with:
strategy and business
Published: April 9, 2002

 
 

Professor Chandler’s Revolution

The Visible Hand is the examination of how innovation in distribution and marketing preceded production. For example, the United Fruit Company started in the 1890s not with banana plantations, but with a refrigerated transportation network, modeled after those of meat packers, that kept fruit fresh. American Tobacco, Diamond Match, the National Biscuit Company, and Quaker Oats all built marketing networks (and networks of purchasers of farming goods) and then used the profits from sales to finance their new production. They rarely needed outside financing.

The Visible Hand was also a direct attack (signaled by the title) on Adam Smith’s primary notion of a marketplace controlled by no one, but operating for the betterment of all. Professor Chandler didn’t argue that Smith was wrong, but that he was outdated. A global mass market had emerged. In this environment, large corporations had capabilities that smaller, upstart competitors couldn’t match; the visible hand of the large corporation had replaced the invisible hand of the market. This heresy may have cost Alfred Chandler a Nobel Prize in economics, or so Peter Mathias believes. (In 1993, when the prize was preannounced as focused on economic history, Professor Chandler was nominated; but it went to Douglass North and Robert T. Fogel.)

In the final book of his trilogy, 1990’s Scale and Scope: The Dynamics of Industrial Capitalism, Professor Chandler proposed that the same type of evolution took place around the world and was thus an innate feature of capitalism, instead of being some kind of aberration unique to America. Borrowing the phrases of first-mover advantage from economics, he proposed that barriers to entry in a business stem not just from the dominant first-mover’s economies of scale, but also from its economies of scope — the expansion of production capabilities to reach several markets at once, usually by capitalizing on already existing knowledge. International Harvester trounced Ford in the tractor business in 1928, even though Ford was a far more efficient manufacturer. The reason? IH knew, from its plow and spreader business, how to sell to farmers, and Ford did not.

In the perennial war for legitimacy between professional managers and investors, all this puts Professor Chandler firmly on the side of managers, particularly those steeped in production. He dismisses the argument that financial raiders improved corporate performance in the 1980s by forcing managers to break up (or merge) their companies. The ebb and flow of financial markets, in Professor Chandler’s story, is mere froth on the surface of the fundamental force of real-world technology and production, especially in the hands of the largest mass-market corporations. “He has never paid a lot of attention to banks,” notes fellow economic historian Richard John of the University of Illinois at Chicago.  Professor Chandler also pooh-poohs the idea that we are moving toward a decentralized, entrepreneurial economy. “If the U.S. thinks it is going to regain global competitiveness through small businesses,” he told Forbes in 1989, “it is fooling itself.”

The Fates Step In
There is a curious passage toward the end of Inventing the Electronic Century when Alfred D. Chandler Jr. the analytical researcher steps aside and the epic business fan steps in. “In Greek drama,” he writes, “the gods set the stage for human action but the Fates often intervened to change the course of events.” And then he singles out several moments of fate in the history of electronics, moments when destiny seemingly took a hand, with unpredictable consequences and “extraordinary” drama.

For example: In 1982, just as Philips was investing in the CD-i and dooming itself, IBM chose to release a new personal computer, licensing the processor and software production to two unknown firms called Intel and Microsoft. That simple act conferred immense first-mover advantage on both companies — a chance event from which Microsoft, in particular, has never looked back. Or in 1958, the U.S. Justice Department settled an antitrust suit with RCA by agreeing that only foreign companies would have to pay full price for the firm’s electronics patents. This gave RCA a dramatic incentive to license technology outside the U.S., “force-feeding” (as Professor Chandler put it) “the maturing of Japan’s and Europe’s color television sectors.”

 
 
 
Follow Us 
Facebook Twitter LinkedIn Google Plus YouTube RSS strategy+business Digital and Mobile products App Store

 

Resources

  1. Richard R. John, “Elaborations, Revisions, Dissents: Alfred D. Chandler Jr.’s The Visible Hand after Twenty Years,” Business History Review, Summer 1997
  2. Alfred D. Chandler Jr., Inventing the Electronic Century: The Epic Story of the Consumer Electronics and Computer Industries (Simon & Schuster Inc., Free Press, 2001)
  3. Alfred D. Chandler Jr. and Stephen Salsbury, Pierre S. du Pont and the Making of the Modern Corporation (Harper & Row, 1971)
  4. Alfred D. Chandler Jr., Scale and Scope: The Dynamics of Industrial Capitalism (Harvard University Press, Belknap Press, 1990)
  5. Alfred D. Chandler Jr., The Visible Hand: The Managerial Revolution in American Business (Harvard University Press, Belknap Press, 1977)
  6. Andrea Gabor, The Capitalist Philosophers: The Geniuses of Modern Business — Their Lives, Times, and Ideas (Times Books, 2000)
  7. Thomas K. McCraw, ed., The Essential Alfred Chandler: Essays Toward a Historical Theory of Big Business (Harvard Business School Press, 1988)
  8. Richard Tedlow, Giants of Enterprise: Seven Business Innovators and the Empires They Built (HarperCollins, HarperBusiness, 2001)