August/september 1985 | Volume 36, Issue 5
Imagine yourself as a senior executive with General Motors in the years just after World War I. Your company had been founded in 1908, and by 1919 it had grown to be the fifth largest industrial enterprise in the United States—a loosely knit confederation of dozens of automobile assembly companies and companies making automobile bodies, engines, gears, transmission systems, and so on.
Your boss, William C. Durant, has built this empire on the apparently sound assumption that the market for automobiles is unlimited. The only business problem that interests him is the problem of making enough automobiles to satisfy the public’s demand. He has never found it necessary to worry about coordinating the activities of the far-flung companies he controls.
Suddenly, in 1920, your company is in trouble. Like the other senior managers, you have been investing in new plants and machinery to meet the next surge in demand, and you have been building inventory to ensure that you have the supplies to make more cars. But the country has gone into a recession, and instead of climbing, demand has plunged. By November, sales have dropped to one-quarter of their level in early summer, and you are having trouble finding cash to pay current invoices and to meet your payroll. After twelve years of extraordinary growth, your company seems about to collapse. What has gone wrong? What can be done? On November 20,1920, you hear that Billy Durant has resigned as president. There are rumors that when the price of GM stock began to fall, he tried to sustain it by buying stock on credit, and that now he owes thirty million dollars to brokers and other creditors.
To find out how General Motors recovered from the crisis of 1920, and to find out why we should view that crisis as a critical episode not merely in the history of one corporation but in the history of modern industrial enterprise, we cannot do better than to turn to the work of Alfred D. Chandler, Jr., the Isidore Straus Professor of Business History at the Harvard Business School. In eight books and dozens of articles and essays, Chandler has established himself as the dean of American business historians and the foremost authority on the history of American big business. Chandler’s work is unrivaled as a source for anyone who wants to understand the development of American business in the century since the robber barons piled up their fortunes.
Two of Chandler’s books seem likely to remain unrivaled for a long time to come. Strategy and Structure (1962) and The Visible Hand (1977) are original, forcefully argued, beautifully organized books that tackle huge subjects and give every appearance of addressing them in a definitive way.
Strategy and Structure provides us with case studies focusing on critical periods in the histories of four exceptionally complex business organizations: General Motors, Du Pont, Standard Oil of New Jersey, and Sears, Roebuck & Co. Chandler begins by observing that the men who built these business empires had “little interest in fashioning a rational and systematic design for administering effectively the vast resources they had united under their control.” Administrative coordination bored the empire builders, but it obsessed their successors. By 1960 a new type of organizational structure—a decentralized, multidivisional structure with centrally coordinated control—had replaced the too loosely or too rigidly coordinated structures of the past and had become the “accepted form of management for the most complex and diverse of American industrial enterprises.”
Chandler shows that the decentralized, multidivisional structure was a genuine innovation—something new in the history of economic organization. His case studies examine the development of this new structure as minutely and lovingly as Darwin might have examined a new species. They show how pioneering executives “worked out, often slowly and painfully,” new methods of coordinating the activities of “vast and varied assortments of men, money, and materials.”
Chandler calls the executives who invented the new structure “organization builders,” as distinguished from the empire builders who preceded them. To an empire builder like William Durant, “the details of organization seemed unimportant,” whereas to an organization builder like Alfred P. Sloan, the president of GM’s United Motors subsidiary, “this lack of attention seemed inexcusable.” Sloan found his boss’s approach to business “wasteful, inefficient, and dangerous.” After Durant led General Motors to the brink of collapse in 1920, it was Sloan, a graduate of the Massachusetts Institute of Technology, who came to the rescue not with charismatic leadership but with a brilliant, precise, comprehensive plan to restructure the organization—a plan that “transformed General Motors from an agglomeration of many business units … into a single, coordinated enterprise.” The development of a general office to coordinate and supervise the divisions, and of systems to provide accurate, uniform data, set the stage for GM’s dazzling successes in the decades that followed.
The organization builders—Sloan at General Motors, Pierre du Pont at Du Pont, Gen. Robert E. Wood at Sears, Roebuck & Co.—emerge as the heroes of Chandler’s chronicle. Wood came the closest, Chandler says, to being both an empire builder and an organization builder. Sloan and du Pont were analytical, systematic men who fashioned independently, in their respective businesses, the multidivisional, decentralized structures that have grown so familiar in our time. In case we are tempted to underestimate their achievement, Chandler reminds us that in 1920 no expert on management would have recommended a decentralized structure with centrally coordinated control because no organization had ever tried it or thought to try it. In their precise, methodical ways, Sloan and du Pont were innovators as bold as Picasso in painting or Stravinsky in music.
The Visible Hand is an even more ambitious book than Strategy and Structure . It examines the rise of big business in the United States, analyzes the extraordinary changes in the processes of production and distribution that have transformed our lives over the past two centuries, and describes the rise of a “new subspecies of economic man—the salaried manager.”
As late as 1840, Chandler reminds us, there were no middle managers in the United States—that is, no managers who “supervised the work of other managers and in turn reported to senior executives who themselves were salaried managers.” Yet by the middle of the twentieth century, the multiunit enterprise administered by salaried managers had become the “most powerful institution in the American economy,” and those managers had become collectively the most influential group of economic decision makers. “Rarely in the history of the world,” Chandler says, “has an institution grown to be so important and so pervasive in so short a period of time.”
Modern business enterprise came into being, Chandler argues, through the integration of mass production and mass distribution—that is, through the “internalization” of activities and transactions previously carried out by distinct business units. In effect, large business organizations “took the place of market mechanisms in coordinating the activities of the economy and allocating its resources.” Though the market has remained the “generator of demand for goods and services,” in many sectors of the economy the “visible hand” of management has replaced what Adam Smith called the Invisible Hand of market forces. (In the auto industry, for instance, why do we have annual model changes? It’s certainly not in response to the invisible hand of consumer demand.)
Chandler’s argument poses a challenge to both economists and historians. In most of our colleges and business schools, economic theory is taught as if we still lived in a world of single-unit enterprises—that is, as if giant, vertically integrated industrial enterprises did not exist. Since administrative coordination has become the “central function of modern business enterprise,” any theory of the firm that neglects to analyze the role played by coordination is “far removed from reality.”
Historians, too, Chandler charges, have failed adequately to assess the significance of modern business enterprise. Much has been written about the empire builders, but historians have paid little attention to the managers who have played, in the long run, a “far more central role … than did the robber barons, industrial statesmen, or financiers.” John D. Rockefeller mattered, but the anonymous organization men who run the oil companies today may matter more.
If Chandler’s work has a weakness, it is that occasionally he seems to suggest (not intentionally, I think) that the rise of professional managers has banished irrationality from the world of American big business. Chandler shows us the visible hand of management, allocating and coordinating, but he does not display equal interest in the sometimes equally visible managerial ego. He rarely pauses to consider the possibility that, swayed by motives they neither recognize nor understand, rational men and women in business might make wildly irrational decisions. Nor does he pause to consider that systematic, calculating administrators might spend only part of their time deciding how best to fulfill the managerial tasks entrusted to them, and that their freshest and finest energies might be devoted to such vital questions as how to advance their careers, whom to flatter, whom to avoid, and how to discredit their corporate rivals.
Having completed two major studies of American business, Chandler has now taken the world for his stage and plans to publish next a book tentatively entitled Global Enterprise —a comparative analysis of the development of multiunit enterprises in Germany, Great Britain, Japan, and the United States.
Global Enterprise promises to be an impressive capstone to a splendid career. As much as he admires the organization builders, in his own work as a historian Chandler seems more like an emperor—the monarch of all the business he surveys.