Strategy and Structure: Chapters in the History of the American Industrial Enterprise (MIT Press)

by Alfred D. Chandler Jr.

Through Poor’s writings I watched the beginnings, week by week, of the nation’s first big business. Central to this story was the creation of the first large managerial hierarchies in the business world.

the most fundamental change was that from a centralized, functionally departmentalized structure (the U Form, as economists later termed it) to a multidivisional one with a corporate office and a number of product or geographic divisions (the M Form).

overload in decision making at the top was indeed the reason for creating the new structure. But the need did not result from the larger size of the enterprise per se. It came rather from the increasing diversity and complexity of decisions that senior managers had to make.

It came when the enterprise began to operate in a number of geographic areas or in a number of related product markets.

existing management procedures, including the existing structure of the enterprise, shaped—usually holding back—changes in strategy. Just as basic reorganizations in structure came only after a sharp crisis (serious financial losses at Du Pont and General Motors; a series of smaller related crises over

a much longer period of time at Standard Oil and Sears Roebuck), so, too, the initial changes in strategy in these companies came only after a massive shift in their markets.

(For General Motors, a new company in a new industry, there was, of course, no long-established strategy to be changed.)

structure had as much impact on strategy as strategy had on structure.

The senior managers of area or product divisions had the responsibility for market share and profit. They were given full control of the functional activities—production, sales, purchasing, and research and development—essential to carrying out such responsibilities.

The top managers in the corporate office monitored the operating divisions and, on the basis of the divisions’ performances and estimates of changing

markets and technologies, planned for future production and distribution and allocated resourc...

firms I examined, as well as others, have had constant problems in defining the relationship between the corporate center and the operating divis...

In these and other diversified firms the introduction of profit centers within the divisions has confused responsibility and accountability.

The new structure had a significant impact on strategy. By reducing the overload at the top, it encouraged

managers to adopt the long-term strategies of growth by moving into new geographic and product markets.

Managers were much less reluctant to diversify or to go abroad when they could administer new business simply by creating a new division. Many soon realized that they had developed capabilities within their existing production, distribution, or research activities ...

Better to have the company use its own resources to improve product and process rather than leave this opportunity to competitors.

Merchants, manufacturers, or railroad officers spent nearly all their time carrying on functional activities—the actual buying and selling or the personal supervision of the operations of a mill or a railroad. Only occasionally were they obliged to consider long-term plans such as the adoption of new machinery, taking on another line of merchandise, or the finding of a new partner or agent.

The operation of a railroad or canal called for more administration than its construction.

But with the completion of the great east-west trunk lines early in the 1850’s administration became a full-time task in American business.

Second, the new system required a constant flow of detailed reports, daily, weekly, and monthly, from the division superintendents to the general superintendent as well as inspection visits from headquarters to the divisions.

Firms making products based on new technological processes specifically for the growing urban markets usually found existing marketing channels unsatisfactory and so turned to the first of these strategies.

The more common road to the formation of the vertically integrated enterprise was by way of horizontal combination and consolidation.

The threat of excess capacity appears to have been a primary stimulus to initial combinations in most American industries.

The truly consolidated enterprise operating on a national scale required both new legal and new administrative forms.

It became administratively consolidated when the small executive office was transformed into a centralized headquarters that determined nearly all the activities of the enterprise’s plants or marketing units. The factories or sales offices, formerly managed by the heads of member firms, became operated by salaried plant managers or sales representatives.

The transformation of a loose alliance of manufacturing or marketing firms into a single consolidated organization with a central headquarters made possible economies of scale through standardization of processes and standardization in the procurement of materials.

Horizontal consolidation and centralization immediately created much more pressure for vertical integration than did mere combination.

8 Effective administration was impossible because neither the separate firms nor the combination itself had the information or methods to assure an efficient use of existing resources and so to reduce unit costs and increase output per worker.

procedures. Executives at headquarters worked at making more precise the information that flowed through these channels in the form of daily, weekly, and monthly reports and concentrated particularly on deriving more accurate cost figures.

and headquarters staff where the managers exchanged information on ways to make their activities more efficient

A second type of change was the growth of auxiliary departments at the central office and a third, the improvements made in the informational data used to administer the enterprise as a whole.

The Committee continued to rely on the departments for information on which it based its decisions. Except for the data provided by the financial offices, the central office had no sources of information outside of the department or ways to check their data.

The answer was not reorganization but better information and knowledge. It was not the development of new offices and new lines of authority and responsibility but rather the fashioning of more effective inventory controls, or more accurate volumes, sales, and market figures, and of other data to flow through the existing lines of communication.