Chandler Model Of Integrated Managerial Enterprise - An Overview Essay.

Discussion

Discuss about the Chandler Model of Integrated Managerial Enterprise.

Chandler demonstrates using his model, the role of modern corporations in economic growth. He uses examples from corporations in three of the world’s most industrialized nations to prove they are the fundamental forces behind capitalist economies. The basic argument in the model is not new; it has been Chandler’s stand for more than three decades. However, there are two distinct aspects in the model that are new. First, the stand is developed by considering corporation in the United States, Germany, and Great Britain (Tann & Sutcliffe 1982). Secondly, the assertion in the book is clearer than in previous literature from Chandler. In his model, Chandler presents a thesis to that developed by Adam Smith in his take on the issue of division of labour. According to Smith, labour specialization is dependent on the size of a market. For example, a technological developed such as the use of railroad lows the cost of communication. This results in high production because of economies of scale.

According to Chandler’s model, large corporations came to be because of the emerging possibilities brought about by technological changes in the 19^th century. Successful firms are those that make a contribution to economic development and utilize economies of scale to develop the necessary capacity to invest in technologies essential to high-volume production. This translates to investing in an organised network of distribution and marketing. It also means leaving the task of managing the business to salaried professionals with the necessary know-how to steer the enterprise. Therefore, in summary, Chandler’s model refers to the continuous investment in management, distribution, and marketing as the driving force behind the growth and success of modern corporations.

According to Chandler’s model, the first enterprises to appreciate the importance of management, distribution, and marketing acquired a competitive advantage. These companies became oligopolistic within their respect markets. Such companies competed with other that appreciated the importance of the same not on price, but on the ability to function effectively, acquire market shares, and profits. The companies achieve this through two distinct processes. First, they achieved this functionally by bettering their production process, their products, labour relations, and marketing. Secondly, they achieved this strategically by shifting their focus into developing markets and away from declining markets faster than their rivals (Du Boff & Herman 1980).

Although it may seems as though economic preconditions somehow led to the development of corporations, chandler’s model is not deterministic. A close examination of the history about the growth and development of corporations rival that there are certain human mistakes and decisions that play a significant role in creating the right condition for the development of corporation and the current capitalist economic model (Supple, Mathias & Postan 1979). Comparison of the three nations the model takes into account makes the assertion more evident. For example, the United States is a relatively big country in comparison to Germany and Great Britain (Chandler, Amatori & Hikino 1997). The developed of technologies, such as the railroad and telegraph played a more important role in the development of corporations in the country because of the relatively high percent of the population in rural areas. Entrepreneurs of US companies, such as Henry Ford of Ford automobiles appreciated the importance of management, marketing, and distribution to the effect that some of his employees were above him in company’s management.

Success of Corporations: Efficient Over Monopoly

The story of Great Britain is fairly different from that of the US. Unlike the US, Britain is a fairly small country where a majority of the population lives in urban centers. The impact of new technologies, such as railroad and telegraph developed in the 19^th century was relatively low. Although Britain was ahead of the US because of the pioneer of the first industrial revolution, it fell behind during the second industrial revolution because of a number of factors. First, the country had invested heavily to infrastructure developed during the first industrial revolution such as canal (Franken 2015). Secondly, the country’s business and political leaders made a number of critical mistakes that ensured the country would fall behind the US in the second industrial revolution. For example, unlike in the US, Britain has a certain attachment to a model of business operation referred to as the family firm. This is a type of organization where the owner and his or her family are at the helm of the business regardless of their knowledge about the business operations or market (Economic History of Transport in Britain 2005).

When compared to the US and Britain, Germany is somewhere between the two. Germany was bigger, more rural, and newer to industrialization than Britain. However, it is smaller, less rural, and older to industrialization than the US. The main aspect that differentiates Germany from the other two countries is the nature of interaction between businesses. In the three countries cartel agreements were welcomed and the norm; however, in Germany, the agreements were enforceable under the common law, which was not the case in the US and Britain. While cartels were forbidden in the US common law, the Sherman Act allowed mergers; therefore, American companies were more inclined to merger and cooperate within the framework of the law. Britain did not have a similar law; therefore, companies were more inclined to compete with each other because the formation of cartel was illegal and cartel agreements could not be enforced within the law (Chandler & Hikino 1994). Although firms in the three countries operated in three different environments where they could cooperate to varying degrees, many firms soon recognised that superior capability in terms of management, marketing, and distribution was a better approach than limiting competition.

According to Chandler’s model, successful companies are those that seek to improve efficiency rather than achieve monopoly. For example, if one company was to achieve monopoly in a certain sector of the economy, then it would control production and pricing but would have limited capacity with respect to demand. Therefore, whenever there is a decrease in demand, the company would have to cut production to prevent losses (Guédria 2014). Another company in another industry that does not seek to control the entire sector but only to improve efficiency stands a better chance of weathering low demand and growing its bottom-line. If the company only controls 60% of the market share, in times of low demand, the company can leverage its efficiency to take what it needs from the other 40% and maintain its full capacity (Smith 2007).

Response to Economic Changes

In order to understand how enterprises respond to economic change in a given environment, it is important to consider how an enterprises administrative hierarchy responds to innovation and economic changes. Markets are generators of economic information; however, they economize in the transmission of information. Market information is not limited to price. According to Chandler’s model, both markets and firms are structured in ways that promote communication and growth of knowledge (Lazonick 2013). The two also require organization. The main challenge is how both the market and firm respond to changes. The answer is dependent on the structure of the change. For example, when a systemic change occurs, it is difficult for a decentralized system to adjust and make generate appropriate responses to the change (Lazonick 2012). This may be a result of vested varying interests or the high cost associated with persuading different players. The cost may be especially high when the systemic change is large scale. It may also be difficult for an individual player to implement the changes because the changes may be entirely new and not available in the market. For example, the development of a moving chain assembly line in the automobile industry meant that of Ford suppliers had to go out of business because it was easier for the company to produce the parts than to teach its suppliers how to implement the changes.

According to Chandler’s model, corporations maintain the capacity to make large scale rearrangements in response to market and innovation changes that led to the right investment necessary for mass distribution and production. The role of corporate management in the process is a centrifugal one (Lipartito & Sicilia 2004). It is not the responsibility of the management to centralize operation. Ones the necessary changes have been forcibly made in response to changes in the market and innovation a decentralized system is one again restored. Chandler notes that successful firms are those that adopt new capabilities and a multidivisional structure (Guédria 2014). Under the multidivisional structure, the day-to-day decisions of the organizations are made by divisional managers. Each division could theoretically operate as an independent business. This approach is what the British firms failed to implement. By operating as family firms the companies encountered the problem of centralized planning. The multidivisional structure also referred to as the M-form structure differs from a market satisfied by fully independent firms the top management retain the power to determine the strategic direction of the firm (Fremdling 1991).

Comparison of the United States, Germany, and Great Britain

In modern corporations, the role of top managers is to reshape the company’s capabilities whenever necessary. The role includes among other things to abandon declining markets and to seek new markets. The non-decentralized British top management could not find the time or develop the long term perspective of their counterparts in US and Germany who had delegated the day-to-day decisions to divisional managers (Capshaw 2012). As Frank Knight recons, delegation of decisions to concerned divisions is inevitable if the organization is to survive in the long-run. He alludes to the evolution of organic life and how complex organisms have developed different organs to perform specialized functions (Nelles & Chandler, 1991).

According to Chandler’s model, the fundamental source of competitive capability in firms is changing over time. For example, prior to World War 2, the source of competitive capability of companies was the ability to produce in large scale and take advantage of the economies of scale (Knecht 2014). In a post World War 2 economy the focus has shifted from taking advantage of the economies of scale to vertical integration. Vertical integration refers to the extension of the business from its initial focus to secondary domains that are important in the production and distribution of its products (Lazonick 2012). For example, a fashion house may seek to purchase or own a textile or dye manufacturing subsidiary. Another approach includes taking advantage of by products to produce more products. For example, meat packing companies took advantage of their raw material to move into leather and fertilizer making (Harrigan & Harrigan 2003).

The growth of Multinational Corporations is not without its challenges. For example, being the second half the 20^th century, corporation began diversifying in sectors of the economy that are completely unrelated to their co-competence. The growth of corporation could also spell problems for innovation, especially in sectors of the economy where one company enjoys monopoly (Targowski n.d.). Huge corporations also have considerable bargaining power, which means they can easily exploit employees, especially in developing nations in an effort to maximize profits. The large scale of corporation and their ability to control supply of essential products such as petroleum also means the ability of governments and political leaders to bargain with them is limited (ABE 2009). This had led to social irresponsible organizations that in many instances disregard the environment and threat the very system that sustains life on this planet.

Conclusion

Chandler’s model makes a compelling case about the importance of corporation in the development of modern economies and the sustained competitiveness of different nations. For the examples given by Chandler, it is clear that the structure adopted by corporations in the three countries used in the example played an important role in determining how fast each industrialized relative to the other during the second industrial revolution. Although corporation can spur economic growth and streamline production, if left unchecked, they pose a danger to the society.

References

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