In my opinion, the model of the large-scale ‘managerial enterprise’ as put forward by the famous business historian Alfred Chandler has not been followed completely by all of the world’s leading economies. This essay will therefore be structured as follows: first I will briefly explain Chandler’s theory of the large-scale managerial enterprise, putting it into context of time and place and pointing out the major flaws of his theory.
Then, I will attempt to justify my opinion by using the Japanese enterprise system, paying attention to the role of external influences such as the government and the availability of finance, as well as the role of business networks. Then, I will try to explain that Chandler’s theories of ‘personal capitalism’ and entrepreneurship are not inherently British features, but are also displayed in businesses in countries such as America. I will also use business examples to demonstrate that businesses which display such features are not doomed for competitive disadvantage.
Finally, using the steel industry as an example, I will show how large-scale managerial enterprises are no longer competitive in modern business. Alfred Chandler (1990) defines the managerial enterprise as, “Large industrial concerns in which operating and investment decisions are made by a hierarchy of salaried managers governed by a board of directors. ” (Chandler, 1990: 132). Chandler argued that the large managerial enterprise was the driving force of economic growth and transformation in any country.
These large-scale managerial enterprises were formed in the United States and Germany before the First World War, in Britain in the 1920s and 1930s and in France after the Second World War (Abe, 2009). Advances in technology and communication enabled capital intensive firms to engage in mass production (Helper and Sako, 2010). Mass production subsequently led to economies of scale and firms could therefore produce more at much lower costs per unit, provided that production remained continuous.
Continuous production is facilitated by a continuous supply of raw materials and as such, firms were encouraged to vertically integrate to ensure that the supply of raw materials was always available; if maximum capacity was not utilised, then the cost per unit would begin to increase. Firms over time were eventually able to diversify into the creation of other products that had similar production processes as their core product-they exploited economies of scope.
Therefore, the combination of economies of scale and scope lead to the formation of large-scale businesses. However, as these businesses grew larger through mass production and vertical integration, as well as through product diversity, there was a need for a hierarchy of managers to coordinate the flow of materials, information and processes in order to maximise the business’s potential-the formation of the large-scale managerial enterprise.
Finally, mass production is also facilitated by mass consumption; businesses would then have to invest in a marketing department to push its products through to consumers to ensure increased demand and consumption. Therefore, the most competitive businesses, according to Chandler, were those that were the first to make the three pronged investment in manufacturing, management and marketing. ‘Personal capitalism’ as described by Chandler, was the use of private finance and entrepreneurship to facilitate the running a business.
Entrepreneurship and personal capitalism, inherently British features says Chandler, are forms of business structure that could not compete with the force of the large-scale managerial enterprise. Family run firms tended to put their personal short term interests before the strategic, long term interests of the business, thus resulting in a decline in competitiveness. This is why many British businesses were unable to compete against large-scale managerial enterprises from Germany and the US.
Chandler’s analysis of the large scale managerial enterprise takes mostly a historical perspective and focuses on the US business history predominantly. Although this model may have found its best fit within in the period up until the second industrial revolution, it is certainly not these types of businesses that are successful in modern times (Casson and Godley, 2007). The main issues of Chandler’s theory, those which I shall use as the basis for my argument are as follows. First, Chandler’s model of the large-scale managerial enterprise focuses on the internal capabilities of the firm.
However, other external factors, such as the role of the government and business networks have played an important part in the way businesses and industries in countries such as Japan have developed. Using the Toyota Motor Company as an example, I shall illustrate the role of the aforementioned factors in influencing the company’s competitiveness. The second issue is that of personal capitalism and entrepreneurship, both within Britain, as well as in other countries such as the US, Japan and Korea.
I hope to demonstrate that personal capitalism and entrepreneurship s not an inherently British feature and is definitely not an obstacle in a business’s competitiveness, using the Singer Corporation (machine tools industry), Rio Tinto (copper/metals industry), Toyota Motors and Volkswagen (automobile industry) as examples. The third issue is that Chandler’s comparative analysis follows a historical perspective based primarily on US business history from the period before the First World War to the second industrial revolution. Chandler’s model insinuates a ‘one best way’ to competitiveness.
However in recent times, especially in the steel industry, many companies gain competitive advantage due to the flexibility inherent in smaller operations rather in through mass production. The Japanese Enterprise System Many aspects of the Japanese enterprise system resemble Chandler’s description of the large-scale managerial enterprise. For instance, some though not all businesses have developed managerial hierarchies of which personal ownership was separated from the business (Morikawa as cited in Abe and Fitzgerald, 1995).
The Japanese enterprise system is much less diversified than Western competitors (Fruin, 1992; Abe, 2009). Their focus tends to be on specific products and product lines, as compared to American businesses that tend to diversify into unrelated product areas over time. Chandler argues that businesses should remain focused to remain competitive and according to Abe (2009), this is another way in which Japanese enterprises fall into the logic of Chandler’s framework. The Japanese Enterprise System however, differs from Chandler’s large-scale managerial enterprise several ways.
To begin with, many of the Japanese businesses were much smaller than Western businesses, due mainly to the fact that the domestic market was not very large (Fruin, 1992) and so could not support mass production through mass consumption. Other differences were in personnel management and in financial management (Abe, 2009). Practices in production, such as Quality Circles, job rotation and bottom up decision making, are aspects of human resource management that are unique to Japanese enterprises and therefore incompatible with Chandler’s framework which is based on American culture and history.
In terms of finance, the Japanese follow a ‘main bank’ system, where financial needs were met using one financial supplier. This differs from Chandler’s theory in that he believed that as the firm grew larger their reliance on banks decreased and it gained financial independence through retained earnings. Chandler stressed on the internal capabilities of the firm to achieve competitiveness and overlooked the importance of external factors that helped some businesses in achieving competitiveness.
In Japan for instance, manufacturing companies gained competitiveness not only through its internal capabilities, but also through the network of relationships formed with the government, banks and affiliated firms (Abe and Fitzgerald, 1995). These external relationships were necessary because Japan was a late developer and lacked the resources (capital, trained labour, production knowledge and expertise) needed to compete with Western businesses (Abe and Fitzgerald, 1995; Fruin, 1992). Let us first examine the relationship between the Japanese enterprise and government.
The US Semiconductor Industry Association (1983) as cited in Audretsch (1989) is of the opinion that many Japanese businesses would not have been able to compete with Western businesses without aid from their government. The government allowed easy access to long term loans in certain key industries for research and development and for investment in capital. Additionally, trade barriers and tariffs were imposed to protect domestic producers from foreign competition, enabling them to grow large enough before being able to compete on an international scale (Audretsch, 1989).
As was previously mentioned, the Japanese enterprise follows the one main bank system where all the financial needs of the firm are carried out by just one bank. These banks often had a much greater role to play in how their sponsored firms are managed. Often, representatives from the company’s main bank would sit in on board meetings and help in decision making and in the strategic direction of the firm (Hutton, 1996). During the 1950s, enterprise groups in Japan were formed to protect against uncertainty and to increase stability in business (Kikkawa, as cited in Abe and Fitzgerald, 1995).
Two types of enterprise groups in Japan are: keiretsu (one large company that owns a number of subsidiaries) and kigyo shudan (a collection of large companies) (Kikkawa, as cited in Abe and Fitzgerald, 1995). The principal reason for the formation of these groups was to stabilise ownership after the dissolving of the zaibatsu. Consequently, lower transaction costs and the free flow of knowledge and information were realised because of close and constant relations among members (Kikkawa, as cited in Abe and Fitzgerald, 1995).
Toyota Motor Company is a perfect example demonstrating how external relationships aided in achieving a competitive advantage. Toyota was able to grow domestically and internationally through governmental financial support in R&D, as well as in many other ways (Audretsch, 1989). Its flexibility in production was facilitated through its close relationships and networking with suppliers and other companies (Fruin, 1992). At his time of writing, Fruin (1992) commented that it was ranked the 3rd largest company in the world by measure of sales but yet it was not almost as physically large as any of the American Big Three Companies.
Entrepreneurship and Personal Capitalism According to Hannah (2006) in Coopey and Lyth (2009), Rio Tinto is a British copper mining company that was financially supported by the Rothschilds family of Europe. Chandler marked this company as yet another uncompetitive British failure, whilst companies from the United States (such as American Smelting, Anaconda and Phelps Dodge) and Germany (Metallgesellschaft) where giant firms that had successfully made the three pronged investment and were therefore the most competitive firms (Hannah, 2006 in Coopey and Lyth (2009).
However, as Hannah (2006), Rio Tinto was the world’s largest copper producer and a global leader, and even until recent times the company has outperformed its German and American rivals, despite being privately owned and managed. I. M. Singer was founded by Isaac Singer in partnership with Edward Clark. (Casson and Godley, 2007). Operating in the machine industry, Singer was an example used by Chandler to demonstrate the success of the three pronged investment, therefore it is assumed that decision making was undertaken by top management and not by entrepreneurs.
However, this was not always the case. Clark was the president of the company from 1876-1882 (Casson and Godley, 2007). Singer’s London agent, William Woodruff who was given great autonomy in managing British subsidiary and in 1876, devised the ‘canvasser-collector’ system, a direct selling system for machines in Britain (Casson and Godley, 2007). Clark approved of Woodruff’s idea and after implementation, the direct selling method put the company at a strong competitive advantage by increasing sales and driving out competitors from the British market.
In 1878, Clark made the decision to extend the direct selling model in all of the companies markets worldwide, resulting in increased market share and sales (Casson and Godley, 2007). The decision to implement the new distribution system was based purely on a hunch, and according to Casson and Godley (2007) this is a perfect example of entrepreneurial leadership (in an American company) that ended up in global success.
In modern times, there are other examples of personal capitalism and entrepreneurship in competitive businesses. For instance, the Toyota Company is now directed by the grandson of the founder of the company, Toyoda; the CEO of the Korean electronics industry, Kon Bon-Joon, is a direct relation to the founding family (Ciravegna, 2011), and the American manufacturer, Mars Incorporated which produces confectionary and other food stuffs, is still a family run business. Small Scale and Flexibility
The steel industry, with the rise of Minimills in Germany, Japan and America, is a good example of how small scale and highly focused firms can be just as competitive as large scale firms through their flexibility. The steel industry is facing the issue of overcapacity. Since 1974, large scale integrated firms have been challenged with the issue of rising costs due to a forced fall in production. Consequently, larger integrated firms are seeking to reduce capacity to lower their costs by restructuring, downsizing and selling off underperforming assets (Herrigel, 2010).
However, with the introduction of new methodologies and technologies in steel production, the three countries mentioned above saw the rise of smaller more flexible producers called ‘Minimills’ (Herrigel, 2010). These minimills were able to produce steel from scrap at lower levels of output just as efficiently as large integrated firms; they could produce less steel per heat without increasing their costs (Herrigel, 2010). Minimills have taken over many markets and are threatening to take over even the core markets of the integrated producers.
Their output in 2005 was up to 55% of the total output in the United States (Herrigel, 2010). Clearly, these large scale enterprises have lost most of their competitive advantage to smaller more focused producers, many of which are actually managed by entrepreneurs and which do not have managerial hierarchies (Herrigel, 2010). As reinforced by Casson and Godley (2007), it is those entrepreneurial firms that display flexibility that are competitive today.
Although Chandler’s model of the large scale enterprise in the industrial sector, within the period of his observation, provided companies with some level of competitive advantage, it is clear from the above examples that in modern times, these large scale businesses are less flexible to changes in the market place and therefore less competitive. Many firms and industries in general have downsized since Chandler’s writing in an effort to increase their flexibility.
Personal capitalism and entrepreneurship are not the underlying reasons for business failure. Many British and non-British firms were personally managed on both a large and small scale and both types were still able to gain domestic as well as international success. To conclude, through the evidence provided above, I reiterate my opinion that the model of the large-scale managerial enterprise has not been followed entirely in all of the world’s leading economies.