During the annual conference of the European Business History Association in Uppsala a few years ago, I chaired a session featuring some of the best known business historians on the subject of new forms of enterprises and the network model of organizations, the so-called post-Chandlerian firm. The discussion seemed to get off to an unfocussed start, so as chair I intervened to ask the participants if they had ever heard about Mao Zedong’s standard retort to those who tried to contradict him: “But, comrades”, he used to ask, “did you conduct the inquiry?” This intervention redirected the session first toward the post-Chanderlian firm and then, inevitably, to the pioneer “who conducted the inquiry”: Alfred DuPont Chandler, Jr.
Chandler is undoubtedly the most important American historian that most other historians and social scientists have never read or even heard of. And that is because he was an historian of business, a sub-discipline with an unusual origin and an irregular relationship to other fields of historical and social inquiry. To grasp how important Chandler was to business history, and to American history more broadly, one needs to imagine the sub-discipline of the history of business as it existed when he encountered it.
The birth of business history is usually dated at 1926, when Wallace B. Donham, Dean of the Harvard Business School, joined forces with the historian Norman S. B. Gras and other scholars and leaders of the business community to create the Business Historical Society, which proclaimed as its goal the preservation of industrial archives. Two years later, Harvard created a chair in business history to promote research projects and publications. Up to that point, most American history focused on political events and personalities. The Harvard project essentially focused on company histories, producing a series of monographs on individual companies or entrepreneurs. The monographs were well researched and rigorously written, but they were more chronicles than analyses and their intellectual ambition was not expansive. They were, in short, more raw materials for a true history of business than they were that history itself.
At the same time, another kind of American business history took pride of place both in the academy and in the public imagination. This is best termed “anti-business” history, its origins found in the Populist and then Progressive journalism that spanned the end of the 19th and the first half of the 20th centuries. American suspicions of corporations and banks go back at least to Andrew Jackson, but from the first Gilded Age through to the post-World War I Nye Commission hearings, anti-corporate attitudes established themselves as the counterpoint to President Coolidge’s famous assurance that “the business of America is business.”
American anti-business history took several forms. It was “muckraking” when it took a journalistic turn, as in Upton Sinclair’s seminal 1906 book, The Jungle. It was historical scholarship when it issued from the pens of Charles and Mary Beard. But the objective was the same: to reveal and excoriate the misdoings of industries and tycoons, and to show how noble speech functioned as a mask for greed. Once the Great Depression descended, American anti-business history hit a new stride, the most groundbreaking work of that time being Matthew Josephson’s The Robber Barons (1934). As the German barons extorted money from the boats traveling down the Rhine, so the industrialists, due to their economic positions, took possession of the wealth created by others, the little people.
But then came the end of the Depression, World War II and, above all, the onset of the Cold War, in which Soviet spokesmen made arguments about capitalism that echoed much of the prewar American anti-business history. But the Soviets failed to note that the Progressives, the New Deal, and the war had cleaned up American corporate behavior in many regards, and the “new industrial state” of the early Cold War period was creating new relationships among business, labor, and government. Beard’s economic determinism was discredited, but no alternative theoretical interpretation had yet taken its place. This was Alfred Chandler’s entrance cue. But who was he, and where did he come from?
Born in Wilmington, Delaware in 1918 to an affluent East Coast family that was close friends with the Dupont family (the source of his middle name), three decisive episodes set Chandler on his life’s path. The first was his service in the U.S. Navy during World War II, where he experienced first-hand the power of a large organization. The second critical point was his time as a graduate and then a doctoral student at Harvard. The third was a particular interdisciplinary encounter at Harvard, of which more below.
At Harvard, Chandler took an interest in economics, but the discipline disappointed him. He found neither neoclassical nor Keynesian approaches persuasive. One reason was that both seemed unable to account for historical reality, which depended on the inherent complexity and interconnectedness of human circumstances. So he turned instead to sociology, at a time when that discipline still put the thoughts and actions of individuals at the center of analysis. Chandler encountered Talcott Parsons, whom he later described as giving him the most important intellectual grounding of his life. Parsons’s structural-functionalist approach enabled Chandler to make sense of his wartime experience with organizational routines and change.
Parsons obliged his student to reflect on Durkheim and Weber. The end result for Chandler was a conceptual apparatus that informed all of his subsequent work. Of equal relevance was Chandler’s subsequent involvement with the Harvard Research Center in Entrepreneurial History, a study and research group formed by Joseph A. Schumpeter and Arthur Cole that brought together historians, economists, and sociologists with the aim of siting archival case studies within a larger context. The effort required systematic attempts to generalize on the basis of pre-existing or newly generated ad hoc theories. A comparative methodology was its consequent outcome.
Chandler’s doctoral thesis in the early 1950s is an early example of a comparative history of an enterprise. Its origins were unique: In his family home the Harvard doctoral student stumbled across the huge personal archives of his great-grandfather, Henry Varnum Poor—he of Standard & Poor’s. For about four decades Poor had been America’s foremost expert on railroads; in the 1850s he directed The American Railroad Journal of the United States. Poor’s responsibility was essentially to supply accurate information to investors in railroad joint ventures. This necessitated following 120 firms operating in the field and regularly reporting on their financial, technical, and organizational news. To re-assemble his ancestor’s work, Chandler had to search and absorb a huge quantity of data on the evolution of the various railway companies—the first big business in the United States and a fertile ground of organizational and managerial innovation. In addition to the precious archives, it seems that Chandler also inherited something equally important from his ancestor: a skill in survey methodology.
His great attempt of comparative history starts with post-doctoral articles published in the Business History Review between 1956 and 1959, when the topics of his lifelong interest seem clearly outlined. They find their precise definition in Strategy and Structure, published in 1962, which offers a comparison between companies, where firms show themselves to be capable of diversifying as well as decentralizing, delegating, and rationally distributing power as well as amassing it.
In business history circles “BC” stands for “Before Chandler.” The year 1962, when Strategy and Structure appeared, is generally and justifiably considered a watershed for business history. By the onset of the Kennedy Administration, neither the Harvard approach nor the merciless critique of big capitalism had triumphed. The latter lost luster, or courage, in the context of Cold War vitriol, giving way to the tamer sociology of C. Wright Mills and associates. The former, the Harvard Series in Business History, by then numbered about twenty works, but despite their increasing sophistication, they lacked a leader prepared to say what it all meant. Business history thus lacked social scientific gravitas. It was little known by scholars deeply embedded in the social sciences, and very little dialogue took place between these worlds. Then came the Schumpeter-Cole interdisciplinary seminar and, from it, the new Chandler.
Chandler really did the inquiry. In Strategy and Structure he compared the first fifty American industrial firms per assets in 1909 and the first seventy with the same criteria in 1948. In his Pulitzer Prize-winning work, The Visible Hand (1977), he examined the top 200 American industrial enterprises as of 1917. In Scale and Scope (1990) his comparison is even more breathtaking. Here his sample included the top 200 firms in the United States, in Great Britain, and in Germany around World War I, and then the top 200 firms of the same three countries in 1938. For Chandler, “taking into consideration” meant studying all the secondary sources, governmental reports, and archival documents. He accomplished this thanks to his method, which called for broad comparison combined with a sharp focus on a well-defined objective: the history of the firms’ administration. Chandler zeroed in on the crucial decisions taken at the highest levels. He was above all interested in the reasons corporate leaders decided as they did in their particular contexts, and how the form and function of their enterprises in turn came to reflect their understanding of their own interests.
The massive documentation and, above all, Chandler’s powerful generalizations made his books essential reference points not only in the field of business history, but for scholars from other disciplines as well. Strategy and Structure became a kind of bible for management researchers. Chandler’s observation that corporate headquarters had become more centralized and specialized even as operational responsibilities became more of what we would call today a “distributed system” made fortunes for consulting firms such as McKinsey. The Visible Hand, which demonstrated that, in some sectors, bigness was not deviance, took on importance for both institutional economists as well as for legal experts dealing with antitrust issues. In Scale and Scope evolutionary economists found confirmation of a concept that was crucial for them: the progressive adaptation of organizational capabilities.
Chandler’s work spawned many controversies. Memorable were his disputes with the sociologist Charles Perrow and discussions with the economics Nobel laureate Oliver Williamson. According to Williamson, the discrete transaction was the proper unit of economic analysis, while Chandler focused on the complex mix of material and immaterial resources that creates the context for all of a firm’s transactions.
Indeed, the fact that scholars of this importance contended and debated with Chandler underlines the value of his research and, subsequently, the value of the discipline to which he belonged. His appeal cut across disciplines and ideologies. Chandler proved attractive to many left-leaning scholars because his vision of the firm as a whole, composed of human resources and other productive forces, told a story of modern capitalism as a human phenomenon—and of course those who lean Left seek out “big” theory like moths turn to the light. When Chandler wrote that the scale of production is only a technological characteristic, whereas true economies of scale are organizational and hence depend on knowledge, technical skills, and teamwork, he affirmed the relevance of political and social organization to realizing the potential of technological progress. This was music to the ears of a generation that aimed at a fairer and more equitable world. When Chandler described the modern big enterprise as an act of economic rationality that stood to benefit very large numbers of the world’s inhabitants, some progressives saw fireworks. If one tried hard enough, one could even see the early Marxian conflict between productive forces and relations of production in Chandler’s distinction between investments in production, distribution, and management.
He appealed as well to those right of center, and to the business establishment (for lack of a better phrase). His work undercut the conspiracy theories of anti-business history. Corporate leaders were not motivated by greed alone, nor were they invariably focused on short-term considerations. Neither did efforts to make pre-retail transactions more efficient among large enterprises, a major innovation within the economy of what Chandler called the Second Industrial Revolution (SIR), amount to collusion. And Chandler’s sociological approach aimed to describe reality, not to judge it.
The reality that he ultimately came to describe represents a dramatic advance over earlier understandings. Fifteen years after Strategy and Structure, Chandler’s The Visible Hand appeared. Here the focus was on a comparison of sectors. Chandler wanted to know why big business arises only in a few capital-intensive sectors (which he defines as “core sectors”) and not in labor-intensive “peripheral sectors.” His answer drew accusations of “technological determinism.” Emblematic are the aforementioned objections by Charles Perrow that Chandler ignored the socio-political variable. For Perrow, not only did Chandler disregard the human cost of industrialization, but he was also incapable of understanding that the push toward big dimensions was due to the search for power and domination rather than to rational economic behavior.
Chandler’s reply to Perrow was swift and effective. On the first point, Chandler called attention to the sharp focus of his research: While the social consequences of industrial growth are of enormous relevance, they were not the specific object of his study. To understand when, why, and in which sectors big business arises is no less important, considering the huge impact of technological change on market dynamics. Moreover, while reasons other than those of economic rationality account for economic behavior, those reasons affect every sector. The rise of big business, however, occurs in only a small number of them.
In 1990 Chandler published a comparison among nations, basing his work on the first three in the world for industrial production—the United States, England, and Germany. The successes or failures of these three are explained via three variables: economic (markets), institutional (policies on competition, or antitrust), and cultural (the capacity to accept the universalism of big business). This is Chandler’s most important historiographic message; it is, in a sense, his master theory, which he worked up to through painstaking empirical research.
To paraphrase the Bible, in the beginning there is “technology.” This is the technology of the SIR, with its high capital intensity, big need for energy, continuous and speedy productive processes, and large batch manufacturing. Its biggest impact was on sectors like chemicals, metallurgy, a large part of the machinery industry—all sectors that called for the general-purpose energy of the day: electricity.
Of course, this technology was a human product, the result of scientific knowledge, technical skills, and cultural and social attitudes and institutions. But when all these forces coalesce into a “paradigm”, technology becomes an exogenous variable. Firms can modify the paradigm but, within a given technological environment, modifications encounter strict limits. Thus, SIR technologies represented a great opportunity, since they allowed companies to fully exploit economies of scale and scope within a stable environment, but also furnished a hard constraint.
Technology as both opportunity and constraint needed answers from the entrepreneur to get it to work. Who, in Chandler’s vision, was the entrepreneur? He is not the Schumpeterian innovator of old. In the Second Industrial Revolution he is, rather, the one at the top levels in the company who decides four things: what to produce, how to produce it, where to produce it, and with what resources to produce it. The entrepreneur could be a single individual or a partnership.
Let’s imagine the headquarters of a U-Form (unitary or centralized) company at the beginning of the century (or even a multidivisional M-form thirty years later). Chandler thought that the entrepreneur—either an individual or a collective entity—made the first moves. His critical act was to create a wide network of plants, equipment, and people. He would make the three-pronged investment in production, distribution, and management. To do this successfully he had to calculate scale and interconnectivity at all levels.
The high cost of the productive equipment made it necessary to create a fluid link with the market; distribution was critical. Otherwise, economies of scale risked becoming “dis-economies” of scale. This was difficult, especially at the beginning of a new formal production, because a special sales force needed to be brought into being to make distribution work in a market context. Take, for instance, dyes, one of Chandler’s favorite examples. They had to be sold by chemical technicians; otherwise, fabrics could be ruined. Inside the company, therefore, a virtuous circle between marketing, production, and what then became R&D arose.
The third investment of the three-pronged model is management, which, of course, embraces the first two types of investment. Who or what is a manager? It’s a person with specific technical know-how developed over years of theoretical and practical apprenticeship. A manager needs a certain amount of autonomy to conduct well-defined aspects of the company’s activities. Here the issue of power enters into the scene, because even in a framework designed by an entrepreneur, the manager is the one who makes the pieces come together and is judged by the results. The interaction between the three kinds of investment gives rise over time to what Chandler calls “organizational capabilities.”
This sounds anodyne, but it is actually a crucial point because, according to Chandler, organizational capabilities are an ensemble composed of expensive, up-to-date equipment, workers (both competent and motivated), and managers with experience either in the company or in the sector in which the company operates. Managers are the backbone of the firm. They give it the ability to respond to challenges, to innovate, and to keep the company viable in the face of competition. If the first movers follow this path, a large corporation can be born. Chandler re-purposed the famous phrase of Frederick Winslow Taylor that there is only “one best way.” Chandler’s best way for the Second Industrial Revolution is the way of the three-pronged investment.
But in the industrial world of which Chandler wrote was there only room for big business? Absolutely not; not all productive sectors become part of the Second Industrial Revolution. Many remained labor-intensive and didn’t need big business methods to ensure their productive features, even when producing similar products. Think, for instance, of something like wine and beer, cigars and cigarettes, or silk and artificial silk. While they are similar pairs of consumer products, the technology utilized is different. To be healthy, an economy must have a community of companies, firms of different dimensions and different goals. We see that clearly in the failure of the Soviet system, a system that relied only on big dimensions.
Having said that, there is no doubt that Chandler believed in big business as the engine of development, the central factor of a modern economy. In this he sang in harmony with his more famous Harvard colleague, the economist John Kenneth Galbraith, but Chandler’s granular sociology of the firm far eclipsed anything Galbraith aspired to analyze. Not by chance did Chandler declare the SIR sectors to be “core sectors” while the others were “peripheral.” He defined large corporations as a locus of apprenticeship and knowledge, an occasion for investment and work, and the nexus of a system that also supported a multitude of small businesses.
What about the form of the enterprise? Does organization matter? Yes, but not mechanically. On several occasions Chandler wrote that the best form for an enterprise was the one that enabled organizational capabilities to express their best features. At this point, the relationship between micro and macro aspects of economic behavior became very important. Here Chandler followed the Nobel Prize laureate Simon Kuznets.
From the middle of the 19th century to the 1960s Kuznets calculated that the most dynamic sector, the one with the greatest influence on prices and employment levels, was industry, which in turn was divided into mining, manufacturing, construction, utilities, transportation, and communication. So here starts a game of Chinese boxes. Inside industry, the most important and dynamic segment was manufacturing and, in turn, inside manufacturing were situated the SIR sectors dominated by a few big firms. In this dynamic we find the precise relationship between big business and the wealth of a nation.
How is it possible to determine the variables so as to be able to individuate local or regional differences? Why at some point did Germany overcome Great Britain (at least in industry)? And why did the United States overtake both of them by the turn of the 20th century? Thanks to Alfred Chandler, we discover that there are three determining factors.
The first is the market. To be favorable to development, the national market needs to be dynamic and continuously growing. The second factor is the relationship between business and government. Chandler observed this relationship only from the point of view of regulation of competition. In this context he observed a paradox in American antitrust policy. Antitrust regulation arose to curb big business, but it ended up feeding it. If firms could not collude to control the market, they faced two choices: either conquer the market or merge with others to do so. Mergers in America had to be different and superior to the sum of the individual parts, a matter for the markets to decide in the long-term. But the end result has been larger entities and often less competition. One wonders how much fun Chandler would have had with the Federal government sanctioning the merger of big airlines and then turning around and getting the Justice Department to investigate the results.
The third variable is culture, defined as the capacity to accept the universalist rules necessary for big business to operate. In the end, for Chandler culture was like Robert Wiebe’s search for order—and for both it all went back to Weber’s definition of modern authority structures. Indeed, one way to describe what Chandler did is that he blended Schumpeter with Weber into a powerful mix that could show how dynamic contemporary capitalism can be.
That blending gave rise in the 1970s to a kind of a dictatorship of Chandlerian thought among business historians. In the 1970–90 period seldom did an article published in one of the most influential business history journals fail to quote or refer to him. While the danger of intellectual conformism should never be underestimated, in this case Chandler’s hegemony flowed from the strength of his ideas, not from some form of arrogant academic power.
Alfred Chandler was a simple, down-to-earth scholar who knew how to accept criticism and respond without anger. I knew him personally to have been eager to engage in dialogue. Certainly the wide fresco of research interests that he offered readers can be attacked, especially his last important work, Scale and Scope. He did not have a working knowledge of the language of one of the cases he analyzed (Germany), placing him in the position of having to rely on research assistants. But just as significant is the admirable humility with which, after several hundred pages, he concluded the work. His book, he said, “has only begun to map the history of the [modern business] institution before World War II.” It was, however, a map we can all use.
Perhaps the real limit of Chandler’s contributions is that they are valid only for the period of mass production, of the Second Industrial Revolution. This is why the large corporations of the time are often referred to as Chandlerian. By the early 1990s Chandler had more difficulty trying to describe the sectors typical of the Third Industrial Revolution: electronics, pharmaceuticals, and biotech. Here, the hegemonic form of enterprise is the networked one. While Chandler was able to make a very detailed history of those sectors, he wasn’t able to explain what a networked enterprise really is and how it works. Maybe a scholar in the history of business can be a giant for only one Industrial Revolution in a lifetime. In the case of Alfred D. Chandler, it was the Second Industrial Revolution.