THE DYNAMICS of INDUSTRIAL CAPITALISM: PERSPECTIVES on ALFRED CHANDLER'S

SCALE & SCOPE

I. Introduction

HIS REVIEW ESSAY is about a major treatise on modern capitalism by Alfred D. Chandler,
one of the great authorities on business history. Scale & Scope: The Dynamics of Industrial
Capitalism (1990) is a monumental work that answers important questions about
managerial behavior and business institutions--the heart of the capitalist system of
organization. The book ought to influence, if not shape, the research agenda for work in
business history, industrial organization, the theory of the firm, and economic change for
decades to come. In one powerful sweep it has also helped rebalance the literature on
processes of wealth generation in capitalist society by displaying how the competitiveness
of nations has depended in an important way upon the organizational and financial
capabilities of firms, & their supporting institutions. Professor Chandler recounts the history
of how managers in the U.S., Britain, & Germany built the organizations and took the risks
of investment necessary to capture the economies of scale & scope opened up by the
technological innovations of the second industrial revolution. His thesis is not that markets
shape business organization as is commonly supposed in economic theorizing; rather it is
that business organizations shape markets. The implication of this tour de force is that
much of what is in the textbooks in mainstream microeconomics, industrial organization,
and possibly growth & development ought to be revised, in some eases relegated to the
appendices, if economic analysis is to come to grips with the essence of productivity
improvement and wealth generation in advanced industrial economies. It challenges much
current economic orthodoxy enough so that most will choose to sidestep rather than deal
with the ramifications.

The structure of this essay is as follows. I will first try to summarize in a few pages what is
contained in 850. My treatment is accordingly incomplete and selective. I have focused on
aspects of the work which I believe are of greatest interest and relevance to industrial
organization economists and to those economists interested in productivity improvement
and wealth generation in modern industrial economies. My main purpose is to help distill
the implications of Chandler's findings for economic thought and for business policy--two
areas which Chandler has wisely not addressed. In identifying the broader implications of
Chandler's work I try to link his analysis with a rapidly expanding heterodox literature in
organizational economics, business strategy, and "competitiveness" which is grappling with
fundamental questions highlighted by Chandler's comparative historical analysis. I conclude
by suggesting that Chandler has grasped some fundamental facets of enterprise
performance largely neglected by economic theory--facets which must come into sharper
focus if economists are to understand the new forms of business organizations, financial
institutions, governance systems, and policies needed to develop and exploit the wave of
new industrial technologies which are now upon us.

II. Major Themes and Propositions in Scale and Scope

In Scale and Scope Chandler examines the beginnings and subsequent growth of
managerial capitalism in the United States, Germany, and Great Britain through the lens of
what he considers then and now to be its basic institution, the modern industrial enterprise
(p. 3). The period covered is from the 1870s through the 1960s, with brief references to the
1970s and 1980s. The individual companies studied were the 200 largest manufacturing
firms in each of the three countries, using the sources familiar to business historians--
company and individual histories, monographs, investment directories, published company
and government reports, secondary sources, and archival records (p. 10). Chandler uses
these sources in each country to examine what in the United States he labels competitive
managerial capitalism, in Britain personal capitalism, and in Germany, cooperative
managerial capitalism (pp. 11-12). What we receive is numerous case studies woven
together into an insightful comparative study of the development of industrial capitalism with
the firm put center stage. Various charts & statistical tables help track the firms that are the
main actors during the periods studied.

Chandler's implicit thesis is that firms and markets evolve together to shape industrial
outcomes. A perspective that relies on markets only as the lens through which to
understand industrial development is likely to be seriously flawed. Rather, the strategic &
organizational choices made by managers--choices not necessarily dictated by markets &
technologies--shape if not determine both firm level and national economic performance.

The framework Chandler advances to interpret the beginnings and the evolutionary paths of
each form of capitalism is his own unique blend of organizational economics. He recognizes
that the modern industrial firm is basically an organization that has developed the capacity,
through complex hierarchy, to make the activities and operations of the whole enterprise
more than the sum of the parts (p. 15). The purpose of managerial hierarchy is to capture
scale and scope economies within and among functions through planning and coordination
(p. 17). Some systems and structures accomplish this better than others.

During the last quarter of the 19 th century, major innovations made in the processes of
production created many new industries and transformed old ones. Technological advances
during this period were scale dependent and capital dependent and organizational
innovations (as described by Chandler) were needed to exploit these scale-dependent
advances (p. 21). Many older labor-intensive industries, including textiles, lumber, furniture,
printing, and publishing were largely unaffected. Capturing the economies available in new
industries was not an automatic process. It came by improving and rearranging inputs; by
using new or greatly improved machinery, furnaces, stills, and other equipment; by
reorienting the processes of production within the plant; by placing the several intermediary
processes employed in making a final product within a single works; and by increasing the
applications of energy (particularly that generated by fossil fuel). (p. 22)[]1]

It required coordination and control, exercised through organizational structures and

systems designed by management.[2]. Indeed, Chandler argues that it required new forms
of industrial enterprise organizational innovation--to take advantage of the opportunities
which were afforded by new technologies. In Chandler's framework, investment in capital
intensive production facilities of sufficient size to capture scale & scope economies and in
supporting managerial systems was key to the creation of the modern industrial enterprise.

The critical entrepreneurial act was not the invention--or even the commercialization--of a
new or greatly improved product or process. Instead it was the construction of a plant of the
optimal size required to exploit fully the economies of scale or those of scope, or both. (p.
26)

To Chandler, marketplace success involved three essential steps by top management: (1)
the investment in production facilities large enough to achieve the cost advantages of scale
and scope; (2) investment in product-specific marketing, distribution, & purchasing
networks; (3) recruiting & organizing of the managers needed to supervise and coordinate
functional activities & allocate resources for future production and distribution. The
entrepreneurs first to perform these 3 critical steps "acquired powerful competitive
advantages"--what Chandler defines as 1 st-mover advantages associated with learning &
incumbency effects (p. 34). Latecomers had to make larger investments to compete, and
they also had to deal with the added risk flowing from the competitive strengths and moves
of the incumbents.[3]

III. Competitive Managerial Capitalism in the U.S.

Chandler sets out to explain why the modern, integrated, multi-unit enterprise appeared in
greater numbers and attained a greater size in a shorter period of time in the U.S. than in
Europe. He finds the answer related in part to the large size of the U.S. market, integrated
by the railroad and the telegraph, a story told in more detail in the Visible Hand (1977), and
partly due to its competitive characteristics. The railroads pioneered modern management
in the 1850s and later, thru bills of lading, intercompany billing, equipment identification and
management, cost accounting, pricing, & so forth. But in Scale & Scope the essential thesis
is that between the 1850s and the 1880s the transportation and communications networks
established the technological and organizational base for the exploitation of economies of
scale and scope in the processes of production and distribution. (p. 58)

The entrepreneurial response in distribution preceded that in production because innovation

in distribution was primarily organizational, not technological. The reasons for the decline of
commission agents and the growth of full line, full service wholesalers and mass retailers is
not entirely clear from Chandler's analysis.[4] Many of the names of the mass retailers that
emerged after the Civil War are still familiar today and include Macy's, Lord & Taylor,
Strawbridge & Clothier, John Wanamaker, Marshall Field, and Emporium. Montgomery
Ward and Sears Roebuck came to dominate the rural market, relying heavily on mail-order
operations. These houses built administrative systems to handle more transactions in a day
than most traditional merchants could handle in a lifetime.

The new forms of transportation and communication eventually created an even greater
revolution in production, stimulating impressive technological as well as organizational
changes. The laying down of railroad and telegraph systems precipitated a wave of
industrial innovation in Western Europe and the United States far more wide ranging than
that which had occurred in Britain at the end of the eighteenth century. This wave has been
properly termed by historians the Second Industrial Revolution. . . (p. 62) and involved
systemic innovations in oil refining, steel, machinery, glass, artificial dyes, fibers, fertilizers,
and food processing. But for the potential of these innovations to be realized, entrepreneurs
had to make the three pronged investment.[5]

In industries where only one or two pioneering enterprises made the three pronged
investment, these enterprises quickly dominated the market. More often, however, the
modern industrial enterprise in the U.S. appeared after merger or acquisition (p. 71). This in
turn was often preceded by efforts to manage capacity utilization by fixing prices and
output. Cartel agreements in the U.S. were, however, extremely unstable because, as in
Britain, contractual agreements in restraint of trade could not be enforced in courts of law.
Moreover, after 1890 and the passage of the Sherman Act made what was previously
unenforceable quite illegal. The Sherman Act "was to have a profound impact on the
evolution of modern industrial enterprises in the U.S." (p. 72). Shortly after its passage &
subsequent amplification by a number of Supreme Court decisions, there began the largest
and certainly most significant merger movement in American history. It came partly
because of continuing antitrust legislation and activities by the states, partly because of the
increasing difficulty of enforcing contractural agreements by trade associations during the
depression of the mid-1890s, and partly because the return of prosperity & the buoyant
stock market that accompanied it facilitated the exchange of shares & encouraged bankers
and other financiers to promote mergers.[6]

However, Chandler cautions that market control was not the only reason for mergers at the
turn of the century, as a number of merger-makers saw such combinations as the legal
prerequisites to administrative centralization and rationalization. DuPont, for instance, did
not seek to gain a complete monopoly through consolidation. Rather, it saw advantages
associated with being the low cost provider with a dominant market share, able to maintain
high capacity utilization by expanding share in recession and reducing it during periods of
expansion. (p. 76).

While some mergers initially created little more than federations out of previously
independent companies, Chandler asserts that "nearly all the mergers that lasted did so
only if they successfully exploited the economics of scale and (to a much lesser extent)
those of scope" (p. 78).

The merger movement is to Chandler the most important single episode in the evolution of
the modern industrial enterprise in the U.S. from the 1880s to the 1940s as it permitted the
rationalization of American industries in a way that did not begin in Britain and Germany
until the 1920s. Moreover, nationwide consolidation tended to reduce family control, which
in turn facilitated putting representatives of investment banks and other financial institutions,
often important in arranging financing for mergers and acquisitions, on the boards of
American industrial enterprises for the first time. However, the influence of the financiers
waned as the companies were able to finance long-term investment as well as current
operations from retained earnings, and the influence of management correspondingly
increased.[7]

~~~~~~~~

By WW-I managerial capitalism had taken root in America, and the companies that were
"the first to make the essential, interrelated, 3 pronged investments in production,
distribution, and management remained the leaders from the 1880s to the 1940s" (p. 91),
not only in the U.S. but also, Chandler argues, in Britain and Germany. To support this
proposition for the United States, Chandler provides industry-by-industry reviews in
Chapters 4 through 6. He shows how the Standard Oil Company came to lead, not just
domestically, but in Europe where it obtained an early and significant advantage through
exports of kerosene from the U.S. (strong demand for gasoline came only after 1900).
Standard's unprecedented throughputs provided the foundation for its low cost position, as
the railroads offered lower rates to J.D. Rockefeller to get Standard's business than they did
to Rockefeller's competitors. The favorable transportation rates in turn helped Rockefeller
form the Standard Oil Alliance, which attempted to set price and output levels in the
industry. The coming of oil pipelines, a technological innovation in transportation which the
Alliance 1st saw as a threat, required massive investment but by dramatically lowering
transportation costs, helped provide the foundation for transforming the Alliance into a trust
because it supported larger scale refineries which in turn required consolidation of refining
capacity.[8] But the enterprise was so successful that it was able to create "several of the
world's largest industrial fortunes, not only for the Rockefellers but also for their close
associates, including the Harknesses, Payne, Henry Flagler, & others" (p. 94).

The Standard Oil breakup of 1911 split the company along functional lines, with only
Standard of New Jersey and Standard of California remaining vertically integrated; those
left without an integrated structure set about trying to create one. "Successful challengers
were those that made the interrelated three-pronged vestments" (p. 104) and included Sun,
Phillips, Sinclair, & Gulf. Meanwhile, long before WW-II, salaried managers, not the
founders or the founders' families, were in control of the Standard Oil companies-members
of the Rockefeller family were generally not involved, even on the board of directors. In
contrast to the history on the European continent, "no investment banker ever played a
significant, ongoing role as a decision maker in a major American oil company" (p. 104).

Chandler describes the evolution of many other important industries, including machinery,
electrical equipment, industrial chemicals, rubber, paper, cement, and steel. Steel is of
particular interest, not just because of its overall importance to the economy in this period,
but because, as Chandler puts it, "the most effective first mover sold out." The first mover
was Andrew Carnegie who understood, as did Henry Ford and John D. Rockefeller, the
significance of high capacity utilization--"'hard driving'[9] as Carnegie termed it" (p. 128).
The successor company to Carnegie, U.S. Steel, was run by lawyers and financiers and
was less committed to the principle and "dissipated Carnegie's 1 st-mover advantages and
thus permitted the rapid growth of challengers" (p. 128). In steel a near monopoly was
translated into an oligopoly, not by changing markets and technologies, but through the
unfortunate decisions of one or two senior executives whose focus was on controlling the
market through collusion rather than through being more efficient, which they were not,

Carnegie, while not the 1st to install new technologies like the Bessemer converter, was the
first to build a large, vertically integrated facility, the Edgar Thomson Works in Pittsburgh,
which remained for decades the largest steel works in the world. The large investments
made by Carnegie and Illinois Steel enabled unit costs and prices to fall dramatically.[10]
Carnegie also pursued an integration strategy, first backwards into iron ore and coke. He
then threatened a forward integration strategy into fabricated products like wire, rail, tubes,
& hoops. The investment banker J. Pierpont Morgan, who had extensive ties to the
fabricators, including Federal Steel, who would be threatened by this move, offered to buy
Carnegie Steel at Carnegie's price. In 1900 he merged Carnegie Steel & Federal Steel, the
2 leaders in the steel industry, and then in the following year negotiated to merge or acquire
secondary producers, thereby establishing the world's largest industrial corporation, U.S.
Steel. [11]

The new company was initially set up as merely a holding company, with the existing
enterprises retaining both legal and administrative autonomy and headquarter's functions
being performed by investment bankers and lawyers, among them Elbert Gary. Gary saw
the function of the corporate office to be much like that of a federation or cartel office to set
prices rather than to allocate resources. This created a tension with the inherited Carnegie
Steel managers who wanted to continue the policy of "exploiting the competitive
advantages of low costs by maintaining throughput, even though this meant reducing
prices" (p. 34). Gary's policies delighted U.S. Steel's competitors, and when competitors
reduced prices

Gary instituted his famous dinners of 1907 and 1908 to urge them to support the prices that
he had done so much to stabilize . . A decade of Gary's policies permitted his competitors
to overcome the 1st mover advantages Carnegie had achieved in the production and
distribution of steel. (p. 135)

In steel, as in rubber goods, paper, window glass and tin cans, the failure of the new
industry-wide merger to take steps to exploit fully the potential economies of scale made
possible the rise of challengers & enlarged the size of the oligopoly. And these challengers
were not, it must be strongly emphasized, new entrants but established firms. (p. 136)[12]

U.S. industrial firms, once they had honed their organizational capabilities and begun
generating significant cash flow, continued to expand through investment abroad and
through diversification. Where the dynamics of growth rested on scale economies, firms
grew more by direct investment abroad (e.g., machinery & transport equipment); where
economies of scope were available, growth was through diversification (p. 147). The latter
strategy was supported in part by organized research which expanded significantly as firms
built R&D facilities in the 1920s first to improve products and processes, and subsequently
to develop new ones. The producers of industrial chemicals, along with the electrical
equipment manufacturers, used R&D to develop new products. DuPont was an early
leader, developing several new products from its core capabilities in the nitrocellulose
technology that it used to produce explosives and propellants.[13] The increased
complexities of the products and the managerial challenge associated with running multiple
businesses increased the role of professional managers at DuPont and elsewhere in the
chemical and machinery industries, and further separated management from ownership.

Chandler concludes his review of the American experience (pp. 224-33) with a frontal
attack on what he refers to as "orthodox economics" (p. 227) which views large hierarchies
and oligopolistic market structures suspiciously. Chandler points out that at least during the
time period studied it was the modern, hierarchical industrial firm that was responsible for
America's economic growth. The firms that obtained market power rarely got it through
"artificial barriers" or anticompetitive conduct. Nor did it come in the main from the technical
efforts of inventors alone, though Thomas Edison, George Westinghouse, Cyrus
McCormick, & George Eastman made important organizational contributions as well.
Rather, it came from the ability to develop and commercialize the new technologies through
the three pronged strategy of investing in manufacturing, distribution, and management
systems and people.[14]

IV. Personal Capitalism in Great Britain

Chandler's thesis is that few large industrial firms appeared in Great Britain--and British
economic development during the 2nd industrial revolution suffered as a consequence--
because British entrepreneurs frequently failed to make the essential three pronged
investment in manufacturing, marketing & distribution, and management. Most importantly,
"the pioneers recruited smaller managerial teams, and the founders and their families
continued to dominate the management of the enterprise" (p. 235) until well after WW-II, to
the considerable detriment of the British economy.[15] Boards of directors were restricted to
family and those with family connections or social position, with little place for senior
managers.

Thus Cadbury Brothers, Ltd., Britain's leading maker of cocoa and chocolate which began
making chocolate in the middle of the 19 th century, provides a good example. Cadbury's
built a substantial plant in 1879 and had nearly 3,000 workers by 1900. However, its
investment in marketing and distribution was limited.[16] The Cadbury family--the sons,
daughters, and grandchildren--continued to manage the production, marketing, and sales
functions as well as the enterprise as a whole. The senior Cadburys were completely
absorbed in day-to-day operational activities. Whether the comparison is German or
American, Chandler finds the management structure of Cadbury at the outbreak of WW-II to
be quite limited (p. 246). Moreover, after the merger with J, S. Fry & Sons in 1919, there
was cross membership on each other's boards, but the activities of the two operating
companies remained separate . . . Until the 1930s the 2 firms, Cadbury and Fry, remained
little more than allies using the holding company board to supervise their overseas
marketing and their jointly owned and operated overseas factories, and to continue to
purchase supplies fur both firms. (p. 246)

The Cadbury-Fry arrangement was typical of mergers carried out in Britain during the
interwar years.[17]

Chandler attributes the smaller size, family ownership, and less professional management
of British firms to the smaller size of the British economy, the greater importance of foreign
trade to the British companies, and the historical fact that Britain had industrialized and
urbanized before the coming of the transportation revolution. The smaller geographic size
of the island nation and the relative excellence of its pre-rail transportation system meant
that the railroad and telegraph were less watershed factors in Britain. The British railway
companies were smaller and did not provide the same organizational challenges as the
much larger American ones; accordingly, it is not surprising that they were not pioneers in
modern management, accounting, and finance.

While British firms did respond to the opportunities in distribution that appeared, British
entrepreneurs too often failed to make an investment in production large enough to utilize
fully the economies of scale and scope, to build a product-specific marketing and
distribution network, and to recruit a team of salaried managers. So they continued to rely
on older forms of industrial enterprise--firms that were personally managed, usually family
managed. In many of these new industries substantial tripartite investments were, indeed,
made in Britain; but foreign, not British, enterprises made the investment. Foreign firms
reaped the profits (pp. 261-62).

However, the British did have some success in branded packaged goods. The new
production technologies for refining, distilling, milling, and processing food, drink, tobacco,
and consumer chemicals were not complex, and product-specific distribution facilities or
specialized marketing services were not required. By the turn of the century many
producers of branded consumer goods--names like Cadbury, Huntley & Palmers, and Peek
Frean--were among Britain's largest and most successful industrial enterprises (p. 262).
Until after WW-I, however, the companies producing foods and consumer chemicals rarely
operated more than one major factory within Britain (p. 265). Such firms operated much like
Cadbury, through functionally departmentalized organization, with department heads who
were apt to be family members. [18] Thus in branded, packaged products British
entrepreneurs created national and international organizations that could still be personally
managed by an extended family with a very few close associates. Such family management
was much more difficult to maintain in the more technologically complex new industries. (p.
268)

However, in industries in Britain where owners made the investments in production and
distribution that were needed to exploit new technologies, and where they recruited even
relatively small managerial hierarchies, their enterprises competed effectively in global
oligopolies. (p. 273)

Examples included Dunlop in rubber and Courtaulds in synthetic fibers. But there were
more failures than successes in Great Britain (p. 274). While in oil and meat packing the
lack of supplies and natural resources limited opportunities for British firms at home, in light
machinery (sewing machines, typewriters, etc.), electrical equipment, chemicals, and
metals, the foundations of domestic demand and a domestic supply infrastructure (skills,
finance, etc.) were in place. Here

British entrepreneurs failed to grasp the opportunities the new technologies had opened up,
precisely because they failed to make the necessary, interrelated, three-pronged
investment in production, marketing, and management. These opportunities within Britain
were seized instead by Germans and Americans. (p. 275)[19]
The British failure in organic chemicals ("dyestuffs") is especially striking because in 1870
Britain held a commanding technological lead. In 1856 William Perkin, a Britisher, had
invented the first process for making dyes by chemical synthesis. Britain had plenty of the
basic raw materials (coal) & had domestic demand as well. Indeed, the British textile
industry remained the single biggest market for dyes until WW-II. But despite these
advantages, Britain lost to Germany, as it was the German entrepreneurs who made
investments in giant plants, recruited managerial teams, built the worldwide marketing
organizations, and educated the users (p. 278).

In steel, the British pioneered in both the invention and early adoption of the Bessemer and
open-hearth processes, but quickly fell behind. Here Chandler seems to attribute the failure
to the absence of demand. The British rail network was already in place before the great
expansion of the American and continental systems, thereby providing less incentive for
British entrepreneurs to construct new, integrated facilities. In any case, the British did not
do so, and by 1915 American and German steelmakers had taken the lead in all major
markets except the British Empire and Britain itself. In aluminum and copper, British firms
did adopt the revolutionary electrolytic techniques but failed to utilize them effectively.

Chandler recognizes that the reasons why British entrepreneurs, "heirs of the First
Industrial Revolution," did not take full advantage of the opportunities of the new
technologies of the second industrial revolution are complex. In some industies like steel,

British entrepreneurs may have been paying the price of having been pioneers before the
opportunities to fully exploit the new technology appeared . . .On the other hand, in
chemicals, electrical equipment, & copper, British (& French) entrepreneurs had almost the
same opportunities as the Americans & Germans. In dyes & pharmaceuticals British
entrepreneurs had even greater opportunities and incentives than German industrialists. (p.
185)

Whatever the exact reasons for entrepreneurial failures were, it was the failure to make in a
timely fashion the three pronged investment in production, distribution, and management
needed to exploit economies of scale and scope which was the essential failure. The
window of opportunity was short; having missed it, continuing innovation by incumbents
made it hard for later entrants to catch up. The British bias for small-scale operation and
personal management was a significant handicap.[20]

In general, however, Chandler argues that British failures were more often than not a
consequence of the basic goals and governance of the enterprise. Whereas in "American
managerial firms the basic goals appear to have been long-term profit and growth . . . in
Britain the goal for family firms appears to have been to provide a steady flow of cash to
owners--owners who were also managers" (p. 390).[21] For the relatively few British firms
run by professional managers--ICI, Unilever, & British Petroleum--success was noteworthy,
but the general failure to develop organizational capability weakened British industry and
with it the British economy (p. 392).

V. Cooperative Managerial Capitalism in Germany

While in Germany the modern industrial enterprise appeared soon after the completion of
the transportation and communication networks, as it did in the U.S., German industrial
enterprises acquired distinctive features because of differences in markets, sources of
supply, methods of finance, the antitrust environment, and the educational system. In
particular, the enforceability of contracts in restraint of trade meant that "German industrials
had much less incentive to merge into industry wide holding companies" (p. 298). German
universities and institutes were ahead of the United States in providing industrial
enterprises with scientific knowledge and skilled technicians & managers and, unlike the
U.S. & Britain, the banks played a major role in providing the finance necessary to facilitate
the investment needed to capture the economies of scale & scope inherent in the new
technologies. Only in Germany among the 3 did the bankers play this role; it entitled them
to positions on the board of directors of industrial companies, from which they sometimes
helped shape critical resource allocation decisions.

A truly distinctive dimension of the German industrial system was the banks. The demand
for capital to finance the railroads led in the U.S. to the centralization and institutionalization
of the nation's money and capital market in New York; in Germany, it encouraged the
creation of a wholly new financial intermediary--the Kreditbank--which became central to
the later financing of large-scale industrial enterprise. "A handful of the largest
Kreditbanken, termed Grossbanken, have dominated German finance ever since" (p. 415).
The Grossbanken, like the Credit Mobilier in France, developed as diversified financial
institutions simultaneously providing the services of commercial bank, investment bank,
development bank, & investment trust. The Kreditbanken, and particularly the
Grossbanken, "were the instrument[s] that made possible the rapid accumulation of capital
on a scale vast enough to finance the building of the new continental transportation and
communications infrastructure" (p. 416). As the Grossbanken moved into industrial finance,
their extensive staffs developed in-depth knowledge of specific industries and companies.
Senior bankers sat on the supervisory boards of the industrial companies the banks
financed. The banks provided venture capital as well as the financing needed to exploit the
economies of scale & scope so important in the capital intensive industries in which
German enterprises clustered.

Besides the role of financial institution, another key differentiating factor was the legal
structure. In Germany the common law did not prohibit cartels, nor was there any antitrust
legislation. In 1897, one year before the Supreme Court's upholding of the Sherman Act,
the German High Court held that cartel agreements were not only enforceable but were
also in the public interest (p. 423). As investment in capital-intensive technologies
increased, so did the number of cartels, going from four in 1875 to 106 in 1890, then to 385
in 1905 (p. 423). Conventions, consortiums, formal associations, and profit pools were
formed in the quest for arrangements with some durability, for even with legal sanction
"contractural arrangements remained difficult to negotiate and even more difficult to
enforce" (p. 423). However, because cooperation was legal, there was less incentive for
industry-wide mergers to restrict competition. Given Chandler's view that industry-wide
mergers were a prerequisite to industry-wide reorganization and rationalization, he
concludes that "far fewer such rationalizations occurred before WW-I in Germany than in
the U.S." (p. 424).

The dual board structure that emerged in Germany was another significant difference with
the U.S. & Great Britain. An 1884 law required joint stock companies (AG) to have both a
management board for the routine running of the business and a supervisory board for
long-term guidance and policy. The functions of the 2 boards became deeply intertwined.
However, as the majority stockholders and the banks, which usually occupied the seats on
the supervisory board, were mandated to do little more than monitor, the full-time company
executives on the management board often "made long term policy as well as short term
operating decisions. Nevertheless, representatives of the banks on which companies still
relied for funding and the parent companies continued to influence policy making" (p. 425).
Moreover, the supervisory board, by including bankers and officers from other companies,
could assist interfirm cooperation.
German institutions of higher education also affected the beginning & the continued growth
of the large German industrial enterprise. "They led the way in the development of the
disciplines of physics & chemistry and their application to medicine and industrial
technology" (p. 425). Technical universities were specifically created to train men for
industrial appointments. German universities, like the American, but unlike the British,
established graduate programs in engineering. Business education was also provided
around the same time as it was in the U.S. Indeed, Chandler suggests that the linkage
between the sources of technical knowledge in the universities & institutes and industrial
enterprises "was much closer in Germany than in Britain, where it rarely existed at all, &
even in the U.S., where at the turn of the century the process was just beginning" (p. 426).
[22]

Cooperation was thus a hallmark of the German industrial system, as viewed by Chandler
(pp. 498-99).[23] The legal and cultural environment fostered cooperation, and the
challenge of meeting the needs of a fragmented European market encouraged cooperation
at home.[24] The banks preferred cooperation as a way to protect profits and enable debt to
be serviced.

The German system was managerial capitalism that involved extensive hierarchies--a
concept not at all foreign in Germany with its long tradition of bureaucratic management. In
essence, the growth of German industrial power and the weakening of British industrial
power resulted from the differential capacities of German and British entrepreneurs and
managers. "German industrial growth and the concomitant British industrial decline
emphasize the importance of organizational capabilities in providing the underlying
dynamics for modern industrial capitalism" (p. 500). Government played only a minor role--
financial and educational institutions (many publicly funded) played a more important role
than the government.

VI. The Logic of Managerial Capitalism

A. The Business Enterprise (& its Management) as the Central

Actor
Lest the reader not be fully aware of the import of what I believe Chandler has to say, let
me reiterate that Chandler sees the historical record as indicating that the business
enterprise, through the development of organizational capabilities, played the central role in
industrial development in the U.S., Britain & Germany. Organizational capabilities once
created had to be maintained for the leading enterprises and nations to stay ahead.
Changing technologies and markets constantly make existing facilities and skills obsolete;
industrial firms accordingly need to be in a process of constant organizational renewal.
While new technologies provided opportunities, it was the business enterprises & their
managers that determined whether those opportunities would be converted into sustainable
advantages.

Needless to say, this view is not the dominant view reflected in most history books[25] or in
the economic literature on growth and development.[26] Certainly those literatures stress
the importance of investment, but Chandler's thesis is that the discriminating factor in the
advance of the U.S. & Germany over Britain was not the rate of investment in conventional
tangible capital alone. Nor was it government, the personalities of the entrepreneurs,
culture, or ideology, though each are of some importance. Rather, it was the development
of effective professional management and organizational systems to support the
development of vertically integrated business enterprises.

The significance of these conclusions can perhaps be better assessed by what Chandler
relegates to subsidiary importance. Already mentioned is the relatively insignificant role of
direct government policies and programs. Technology is another factor relegated to a
subsidiary role,[27] at least with respect to any particular nation. Chandler is not saying that
technology or "preconditions" or government policy is not important to industrial success.
Rather, he seems to be saying that the new technologies in question were in the main open
to all; accordingly it is understandable, though perhaps surprising to some, that
technological pioneering did not lead inexorably to industrial dominance. Unless supported
by the three pronged investments, technological success did not translate through to
marketplace or national dominance. It was a necessary but not a sufficient condition for
industrial development.

Without Britain, Chandler's thesis would be difficult to advance at the national level, as both
American and German firms often did make the critical three pronged investment. But
British firms did not, and the consequences are clear. Chandler claims that it is equally
clear that the reason was the system of ownership and governance that existed in Britain--
what he calls personal capitalism. Needless to say, his thesis here is controversial, as there
are numerous competing hypotheses including a failure in entrepreneurship, the
preoccupation of British investment banking with oversees investments, and the handicaps
that some associate with Britain's early lead.[28] Whatever the cause, the failures of British
firms to adequately respond to the opportunities afforded by the new technologies impaired
Britain's growth and development.

B. Determinants of the Scale and Scope of the Enterprise

Scale & Scope ought to do a great deal to combat a rather traditional literature in
economics, following Jacob Viner's (1932) classic investigation of cost curves, which posits
a rather tight relationship between scale and scope economies, the optimum size of the
enterprise, and market structure. As Jean Tirole (1988,p. 18) puts it, "one of the main
determinants of the size of a firm is the extent to which it can exploit economies of scale or
scope." Thus in searching for explanations for optimal firm size and market concentration,
many economic theorists still confine their inquiry to the basic technological conditions of
production. [29] Chandler's analysis would seem to suggest that explanations for the scale
and scope of particular firms and of industry structure lie not so much with the technology-
based economies of production or distribution, but with organizational factors, especially the
ability of firms to make the investment in plant management and distribution systems
necessary to garner competitive advantage. Perhaps this explains why Chandler has not
tried all that hard to measure scale and scope economies. His argument seems to be that
because the technologies in question are basically available to all, the more interesting
question for economists interested in explaining firm size and market structure is how and
why different industrial firms respond to and manage the opportunities afforded by new
technology.

This is not to suggest that the international technology transfer process is costless. Teece
(1977), Nelson & Winter (1982), and others have established that transfer costs are often
significant, particularly if the competence level of the transferor and transferee are
disparate. Moreover, knowledge at the level of existing best practice is not equally relevant
to all industries everywhere. It depends on the availability of materials, supplies of labor of
the requisite qualities, and the character and size of markets. Furthermore, much industrial
knowledge can only be acquired through practice.
Yet Chandler seems to suggest that the key inventions quickly become public knowledge,
leaving commercial success to depend upon the rapidity and completeness with which the
invention is exploited, As W. Arthur Lewis has stated of Britain's lackluster performance:

it is not necessary to be a pioneer in order to have a large export trade. It is sufficient to be

a quick imitator. Britain would have done well enough if she merely imitated German and
American innovations. Japan, Belgium, and Switzerland owe more of their success as
exporters of manufactures to imitation than they do to innovation. (Lewis 1957)

Chandler's is a study of entrepreneurship and how different forms of capitalism--

competitive, personal, or cooperative shape the response of firms. It is also a study of the
incumbency effects created by the first movers; and what it suggests is that governance
structures, managerial systems, and the institutional-legal contexts are critical to
understanding industrial outcomes. If taken seriously, Chandler's thesis requires a rewrite of
industrial organization textbooks, both the traditional and the new.

Missing from Chandler, however, is the systematic comparison of contracting alternatives

(Williamson 1975, 1985; Teece 1980, 1982).[30] Certainly, Chandler describes how
contracting modes gave way to integrated modes as scale economies in production drove
unprecedented manufacturing volumes, which in turn required forward integration; but he
simply does not probe very deeply into scale and scope economies and their relationship to
the boundaries of the firm. Chandler's failure to develop an analytic framework for doing so
may turn out to handicap his subsequent work aimed at coming to grips with the
proliferation of strategic alliances and joint ventures exhibited in the post 1975 period, a
topic taken up in Section VI.E below.

C. The Sustainability & Sources of Differential Competitive

Advantages
While never stated directly, possibly because he considers the point so obvious it does not
warrant special comment, Chandler clearly subscribes to the premise that firms competing
in the same markets have differential competitive advantages-advantages that can be
sustained over long periods. Implicit in Chandler's argument is that just how and when the 3
pronged investments are made establishes differential organizational capabilities among
firms. This would not be remarkable but for what Nelson (1991,p. 61) has referred to as the
strong tide in economics, particularly in theoretical economics, that downplays or even
denies the importance of such differences. The argument in economics is not that firms are
all alike . . . rather the position is that the differences are not discretionary, but rather reflect
differences in the contexts in which firms operate.

The main thrust of much economic theorizing is that what firms do is determined by the
conditions they face, and possibly by certain unique attributes such as possession of a
patent or ownership of a choice location. While firms facing different markets will behave
and perform differently, if market conditions were reversed, firm behavior would be too.
Different firms can produce different products but any firm can choose any niche. As Nelson
(1991,p. 65) puts it, "the theoretical preconceptions shared by most economists lead them
to ignore firm differences, unless compelled to attend to them."

Chandler's histories compel us to attend to firm differences, because they provide

numerous illustrations that advantages are created and sustained over long periods.[31]
Thus DuPont grew faster and more profitably than its competitors due to first mover
advantages as well as far-sighted and insightful strategic and organizational decisions.[32]
Firms declined if they were unable to create and maintain key organizational capabilities.
However, Chandler's data on rankings of the largest industrial firms (for 1917, 1930, 1948
for Great Britain; 1913, 1928, 1953 for Germany) indicate considerable stability in
rankings--at least as compared to what economic theory would predict.[33] The firms that
were the leaders (as measured by asset size) in their industrial groupings often remained
there over long periods. Indeed, using Chandler's data, across all groupings the probability
that a firm ranked 1 or 2 before the outbreak of World War I would still be first or second in
the early post World War II period was .57 in the United States, .56 in Great Britain, and .31
in Germany (Table 1). This would appear to be strong evidence that differential competitive
advantages are sustained over long periods of time,[34] and that within industry groupings it
is more difficult than economic theory would suggest for challengers to develop superior
organizational capabilities to displace first movers.

In Chandler's framework, differential advantages are often path dependent. First movers
developed advantages through a variety of mechanisms: (1) preemption: in industries with
significant scale economies, a large initial investment would entrench the incumbent; (2)
learning: Chandler frequently notes that 1 st movers gain substantial experience over
followers in key functional areas such as sales & marketing as well as in production; (3)
cheaper capital: Chandler claims that capital is more expensive for challengers than 1 st
movers because challengers must confront the behavioral uncertainty stemming from the
competitive moves of the incumbent. However, from time to time challengers did succeed
due to mistakes by 1st movers (as with Ford Motor & U.S. Steel), government action (e.g.,
Britain's support of oil, Germany's support of aluminum, and antitrust action in the United
States), and changing technology and markets. Thus oil discoveries in Texas and California
gave opportunities to new entrants, and the advent of refrigeration enabled Swift to
reconfigure the meat packing industry by using refrigeration cars to distribute dressed meat
from central slaughterhouses to East Coast markets.

D. Technology Strategy
In addition to implications for economic theory, Chandler's work continues to have profound
implications for the literature in business strategy. In both Strategy & Structure (1962) and
now in Scale & Scope (1990), Chandler has shown how different enterprises carried out the
same activity and how decentralized structures were invented and then implemented in the
interwar years by companies including DuPont, General Motors, Standard Oil of New
Jersey, & Sears Roebuck. This highlights the topic of differential competitive advantage
already discussed. Chandler also crafted one of the most widely accepted definitions of
strategy--the determination of the basic long-term goals and objectives of an enterprise,
and the adoption of courses of action and the allocation of resources necessary for
achieving these goals.[35]

As indicated, Chandler has already done much to contribute to and indeed mold the
business strategy literature.[36] Scale and Scope will continue that tradition. Quite
remarkably, Chandler's thinking is meshing with recent thinking on technology strategy. For
instance, "Profiting from Technological Innovation," Teece (1986) outlines a parallel thesis
in which the marketplace success of innovators depends upon several elements: (1) the
intellectual property regime--which will determine whether competitors can gain access to
the basic enabling technology; and (2) the competitive positioning of the firm in
complementary assets--manufacturing, distribution, complementary technologies, sales and
service, etc. Put differently, my thesis is that innovators need to have an n-pronged
strategy, where n is the number of specialized complementary assets needed for the user
to capture value from the technology. I submit that my discussion of complementary assets
is somewhat more general than Chandler's in that I explicitly recognize the circumstances
where contracting-out may be a valid competitive strategy. Chandler's thesis does not leave
much room for such circumstances as being historically valid or conceptually viable.

The point of possible departure with the recent work in technology strategy is Chandler's
emphasis on the need to build managerial hierarchies. At a superficial level, this may seem
quite at odds with much of the recent literature on innovation which stresses the
advantages of shallow hierarchies and decentralized decision making as a means to ensure
the responsiveness needed to compete in today's fast-changing markets (Thomas Peters &
Robert Waterman 1982; James Womack, Daniel Jones, and Daniel Roos 1990). However,
a deeper reading of the innovation literature would appear to provide considerable support
for the key aspect of hierarchy that Chandler recognizes, namely coordinating the internal
allocation of resources quickly and efficiently so as to capture economies of scale and
scope.[37] Chandler repeatedly argues that the absence of such coordination will lead to
fragmented efforts that will prevent these economies from being realized. Interpreted as the
recognition by Chandler of the need to coordinate and integrate resource allocation within
the firm, there may be much in common between Chandler's historical observation and the
thrust of the modern literature on management, which stresses the need to closely couple
activities (as with "concurrent engineering") and integrate functions.

It is important to recognize, however, that the emphasis in Chandler is on how to harness

the capital intensive technologies in chemicals, steel, autos, etc. of the second industrial
revolution. This was a somewhat different managerial challenge than is confronted by firms
today as they deal with what might be called the third industrial revolution, driven by
remarkable breakthroughs in microelectronics, biotechnology, and materials. The
challenges are somewhat different, and the organizational forms suited to each may vary to
some degree, and may also differ from those that were effective in the second revolution.
Nevertheless, it is Chandler's thesis that the logic of managerial capitalism is timeless.

E. Limits to the Logic of Managerial Capitalism

A key question for all but business historians is whether this logic is now obsolete. In the
final chapter of Scale and Scope, Chandler suggests that it is not, and in a related
publication is quite explicit that "The passage of time has not made the logic of managerial
enterprise obsolete" (p. 136). In the post World War II environment, Xerox is advanced as
an example of a company that obtained its early dominance in copiers "through its massive
investment in production, distribution, and management" (p. 610).[38] Similarly for IBM in
mainframe computers. It was its massive investment in the IBM System 360 which enabled
it to eclipse Sperry Rand, the industry's most successful pioneer.[39] Likewise in personal
computers, the first entrepreneurial firms to make substantial investments--Apple, Tandy
(Radio Shack), and Commodore--by 1980 accounted for 68 percent of the dollar sales in
the United States, a percentage which dropped dramatically lower a decade later.

The historical examples which Chandler advances to support his thesis are indeed
compelling. He constantly reminds us that while the Englishman Perkin invented the first
man-made dyes in the 1850s, 1860s, and 1870s, and British companies seemed to have all
the raw materials at hand, it was German companies like Bayer, BASF, and Hoechst that
took the lead because they were willing to invest big. Likewise in electrical equipment
where the inventions of Thomas Edison spawned a new industry, one in which British firms
like Mather and Platt were active early; it was nonetheless AEG and Siemens in Germany
and G.E. and Westinghouse in the United States that captured the market. They made
large-scale investments that brought them dominance by the end of the century--a
dominance that proved durable for at least another half century.
But as Chandler recognizes, from about the 1960s on a new era of managerial capitalism
may have been launched--a topic which he hints will be "the subject of another study" (p.
621). The changes Chandler identifies include proliferation of unrelated diversification
strategies,[40] the isolation of top management, the opening up of the market for corporate
control, and the expanded roles of pension funds in stock ownership. A key question that
affects the utility of Chandler's work for observers of the contemporary scene is whether
these and other changes suggest that the strategy Chandler advances--the three pronged
investment--is simply a useful generalization about the past or whether it also holds for the
present and the future.

In essence, Chandler's thesis is that large integrated enterprises, where free cash flows are
carefully invested and coordinated to reduce price and assure quality, are necessary to
build and hold market share.[41] Taken literally and projected forward, it would suggest that
"computerless" computer companies like Sun Microsystems and Dell Computer which
outsource much of their manufacturing must have uncertain futures, unless they integrate,
because their strategy has at most two of the necessary three prongs.[42] Certainly such
firms have invested in product design, management control systems, and in limited
circumstances distribution; but generally they have only a modicum of manufacturing
capabilities, outsourcing many components and subsystems. These companies have
undoubtedly been successful, but it is also true that many have been around for barely a
decade.

If the Chandler thesis is a little at odds with what seems to work for many U.S. companies
today, perhaps it is in part because of the erosion in the relative skill base of the U.S.
economy,[43] leaving U.S. firms from Apple (its Notebook computer is made by Sony) to
Boeing (the 767 is co-produced with Aeritalia, Shorts, Kawasaki, I.H.I., and Mitsubishi
Heavy Industries) to Hewlett Packard (the engine in the Laserjet printer is made by Canon)
little choice but to use components manufactured abroad. Perhaps it is because classical
economies of scale & the unit price advantages can be accessed contractually in today's
markets. Flexible specialization (Michael Piore & Charles Sable 1984) and contracting may
today yield greater advantages than economies of scale and scope generated internally.

Indeed, it is arguably the case that firms that do not make the three pronged investment but
instead simply build a capacity to manage a customer responsive network (e.g., Nike) can
constitute a viable organizational form in today's global economy, with rapid diffusion of
know-how and global dispersion of industrial competences. Raymond Miles has called such
firms "network firms" and suggests that they may constitute a new organizational form.[44]
If they are, they are distinctly non-Chandleresque. Perhaps Chandler will address this and
related phenomena by suggesting that professional managers today need to develop the
information technologies & organizational systems to enable companies to achieve
responsiveness & efficiency thru seamless interaction with peers in different companies.

The logic of managerial enterprise that Chandler advances is also limited in that it is
insensitive to the need to differentiate between the success of firms and the success of
nation states.[45] Chandler implicitly correlates the two; this may in fact be more
appropriate for the time period he has studied than it is today. But American firms in
particular have in many instances unshackled themselves from their home base to quite
significant degrees. It is not clear anymore whether IBM or Motorola ought be thought of as
American companies, given the significant global dispersion in production, stock ownership,
and the international composition of their professional managers. Such firms may to some
degree be able to uncouple their success from that of the nation state in which they were
once incubated. Companies that originated in Europe like Asea-Brown-Boveri (ABB), and in
Japan like Honda, are likewise disconnected to varying degrees from their home base(s).

While further study is obviously required, the development of industrial capitalism in Japan--
an unfortunate omission from Scale and Scope--would appear to support the Chandler
thesis.[46] Industrial development in Japan began later than in Europe, but the form of
industrial capitalism established there had much in common with what Chandler has called
cooperative capitalism in Germany.[47] Unquestionably the Japanese companies have
pursued the three pronged investments, with the only possible exception being domestic
distribution, where fragmented systems are only now beginning to be displaced, sometimes
by foreign firms like Toys-R-Us. Many Japanese companies, especially those
manufacturing commodities, have relied on the trading companies to help them establish
overseas markets. But integration, especially vertical integration, and the development of
extensive managerial hierarchies is unquestionably a hallmark of Japanese capitalism
which my colleague Michael Gerlack (1992) has labelled "Alliance Capitalism."

F. Implications for the Theory of the Firm & Industrial

Organization
The logic of managerial capitalism Chandler identifies suggests a theory of firm and
markets which is quite different from the standard textbook approaches. Although Chandler
appears, until quite recently, to have been unaware of the importance of his work for
industrial organization theory, the selection of the title Scale & Scope, employing words with
loaded economic content, coupled with his recent self-conscious commentary on the
subject in the Journal of Economic Perspectives (1992b), has thrust the issue center stage.
Chandler (1992) identifies four different classes of theories of the firm-neoclassical,
principal agent, transaction cost, and evolutionary theory--and slots himself in the 4 th
category with dynamic capabilities lying at the heart of the theory. Chandler nowhere
outlines a formal theory of the firm. Accordingly, this section merely identifies aspects of a
theory of the firm and markets which Scale and Scope eschews, and that which it supports.
[48]

With respect to markets, Chandler does not see adjustment processes working
automatically; nor does he see market structure being the determinant of economic
performance as in the structure-conduct-performance paradigm (Scherer & David Ross
1990, Fig. 1.1, p. 5). Rather managerial decisions and the style of capitalism (cooperative,
personal, competitive) shape market outcomes. Firms on occasion, but not continuously,
are seen as having choices; how those choices are made, moreover, may affect matters for
decades. There is a strong path-dependent tone to many of Chandler's hypotheses and to
his reported findings.

However, there is one area, the emphasis on scale & scope, where Chandler may appear
conventional, but closer investigation indicates that he is definitely not. Chandler clearly
recognizes the potential for scale & scope economies afforded by the 2 nd industrial
revolution. But whereas neoclassical theory presents these economies as immediately
available to all (absent intellectual property protection) & attainable by all (absent
government interference), Chandler sees the availability & attainability of these economies
constrained not by the size of the market (the usual explanation) but by the nature of
managerial structures & systems and the investment capabilities represented by the 3
pronged investment. Put starkly, Chandler appears to view the cost curves suggested by
the technology as figments of the economist's mind, as their realization requires a set of
supporting infrastructures, organizations, and firm-level strategies.[49] Economies of scale
& scope requires coordination & control of complex production and distribution activities.
Contemporary advocates of "lean" production systems (Womack, Jones, & Roos 1990)
echo much Chandleresque language when they suggest that efficiency requires control of
throughputs.

Chandler stresses that it was the differential ability of firms to integrate and coordinate
through the 3 pronged investment which defined their competitive advantage.

The potential economies of scale & scope, as measured by rated capacity, are the physical
characteristics of the production facilities. The actual economies of scale or scope, as
determined by throughput, are organizational. Such economies depend on knowledge, skill,
experience, and teamwork. (p. 24)

In this passage Chandler sounds more like Chester Barnard than Alfred Marshall; his
analysis suggests that the apparatus of conventional micro theory is seriously wanting if
one is to address issues of competitiveness in the global economy then or now. It is for
these reasons that there is little merit in challenging Chandler with respect to the exact
shape and position of the cost curves which the second industrial revolution afforded (see
Scherer 1990).[50] Chandler's response would undoubtedly be that a firm's costs, then and
now, depend on much more than the available technology.[51] Contemporary evidence
(Womack, Jones, & Roos 1990; David Garvin 1988; Kim Clark & Takahiro Fujimoto 1991)
would seem to support this position.[52]

If the conventional production function view of the firm embedded in microeconomic theory
is unsatisfactory, what does Scale & Scope suggest might be more helpful? As mentioned
above, Chandler has no formal theory of the firm to offer as an alternative. However, he has
recently suggested the relevance of preliminary work in business strategy, organization
theory, and industrial organization which is attempting to grapple with the concept of
dynamic capabilities. Bits and pieces of an alternative theory, can be found in Penrose
(1959), Nelson and Winter (1982), Teece (1980,1982,1992), Teece, Gary Amy Pisano, and
Shuen (forthcoming), Dosi, Teece, & Winter (1992) and Teece et al. (forthcoming). In
essence, firms are seen as organizations that are quite distinct from markets, where
administrative processes displace market processes, and where both formal and informal
organizational structures guide resource allocation and organizational behavior. Firms
consist of bundles of generally nontradable firm-specific assets. Firms are heterogeneous
with respect to these assets; asset endowments are specific and hence sticky, at least in
the short run if not much longer. Firms also lack the organizational capacity to develop new
assets quickly; tradability is limited by tacitness. The profitable expansion of firms is both a
process of exploiting firm-specific capabilities and developing new ones.

The essence of differences between firms is their differential abilities to achieve

organizational coordination (Masahiko Aoki 1990). The essential question is "why the costs
of organizing particular activities differs among firms" (Ronald Coase 1988, p. 47). The
answers depend on (1) how the firm learns new skills; (2) the forces, both internal and
external, to the firm which constrain and focus the learning process; and (3) the selection
environment in which the firm competes for resources as well as customers. Elaboration of
these factors can be found elsewhere (see Teece et al. forthcoming). Developments in the
evolutionary theory of the firm and what Williamson (1990b) calls the "incipient science of
organizations" will, as we learn more, enable new intellectual structures to be shaped that
will permit a more robust understanding of firms to evolve. Chandler's Scale & Scope
suggests the directions of profitable lines of inquiry.

VII. Parallels and Contrasts with Gerschenkron and Schumpeter

The history Chandler has to tell carries forward in some places and challenges in others the
theories of economic development put forward by Alexander Gerschenkron and Joseph
Schumpeter. Identifying the parallels and contrasts with these authors also enable one to
question whether Chandler's thesis is truly original, whether he has gotten mileage out of
his comparative approach, and whether his focus on firms provides new insights.

Gerschenkron's "main proposition" is that industrialization processes, when launched in

backward countries, showed considerable differences, as compared with more advanced
countries, not only with regard to the speed of development but also with regard to the
productive and organizational and financial structures of industry by means of which the
development took place. Furthermore, these differences in the speed and character of
industrial development were to a considerable extent the result of application of institutional
instruments for which there was little or no counterpart in countries that began their
industrialization earlier (Gerschenkron 1962, p. 7).[53]

A subsidiary proposition in Gerschenkron is that economic development is often triggered

by discontinuities and indivisibilities. In characterizing nineteenth century Europe,
Gerschenkron (p. 11) claims that only when industrial development could commence on a
large scale did the tension between pre-industrialization conditions and the benefits
expected from industrialization become sufficiently strong to overcome the existing
obstacles and to liberate the forces that made for industrial progress.

A corollary is that, as with Russia, significant state involvement may be necessary in

countries which have remained especially backward.

There is no doubt that Chandler's treatment of industrial development in the U.S., Great
Britain, & Germany is sympathetic to the Gerschenkronian metaphor.[54] Certainly he
documents significant differences both in the styles of capitalism that emerged, and in the
preconditions which characterized each economy. Business was molded differently by
differing prevailing structures and prevailing conditions in each economy. Personal
capitalism in Britain, in Chandler's view, was a natural consequence of the existing class
structure and the distribution of wealth and favor which characterized British society. The
tight geography and limited population of the British Isles limited the scope for multiplant
firms. The fact that the railways were already built attenuated the need to adopt the
Bessemer open hearth processes in the steel industry. In Germany, the banks played a
larger role than in the U.S. & Britain because of the absence of organized capital markets
and the much larger scale required for efficient operation by the time industrialization got
underway in Germany.[55] The absence of antitrust law and the legality of contracts to
restrict commerce attenuated the need for merger, which in turn reduced opportunities for
industry wide reorganizations.

While recognizing these differences, Chandler nevertheless implies that they mattered little
as compared to the willingness and ability of managers to pursue the three pronged
strategy. Indeed, in Britain success was attained by firms like ICI, Unilever, and British
Petroleum when they pursued this strategy. Likewise in Germany and the U.S.

The key point that needs to be made is that the Chandler thesis, while having
Gerschenkronian overtones, is quite distinct from it, and an advance over it. Chandler
points out that the success of firms is often substantially disconnected from the home base;
moreover, the development of firms is not simply a microcosm of the development of the
nation state. In Chandler's view, the wealth of nations depends on the development of
organizational capabilities. Gerschenkron and other historians rarely looked at
organizational capabilities and the successes and failures of national firms; Chandler
suggests they should have done, because it would have brought into focus the
development of organizational capabilities essential for business development, and for
industrial development more generally. If Gerschenkron has provided the covers and the
preface for a book on the organizational aspect of economic development, Chandler has
begun to write the chapters.

There is also much in common with the Schumpeter of Capitalism, Socialism, and
Democracy (1942). There are also important points of departure. Like Schumpeter,
Chandler sees large industrial firms as being important to the industrial development from
the late 19th century onward. While they both have in common a managerially administered
view of industrial development in which large hierarchial organizations are innovative and
efficient, Schumpeter's concept of a competitive economy where new combinations mean
the "competitive elimination of the old" receives little attention in Chandler (see Schumpeter
1934, pp. 66-67). This may stem in part from Chandler's focus on intraindustry rather than
interindustry competition; the incumbency effects Chandler documents and which provide
his backdrop are softened when one recognizes that the industrial categories he examines
are expanding (and sometimes shrinking) at rates that are impacted considerably by
differences between groupings in rates of innovation and concomitant cost reduction and
demand growth. However, Chandler's main contribution to the Schumpeterian literature is
his development of the distinction between a firm's capacity to "invent" and a firm's capacity
to "innovate," which includes a capacity to build an organization appropriate to the new
product or process and a capacity to build market share.[56] Chandler's thesis, while also
advanced elsewhere,[57] is an important elaboration of the Schumpeterian framework, and
one which will require subsequent researchers to take a much more microanalytic approach
to questions of industrial success. In a sense, Chandler has perhaps begun to give
substance to what Schumpeter had in mind when he referred to innovation as involving
"new combinations."

VIII. Conclusion

Scale and Scope, together with Chandler's earlier writings, gives us the best single
consistent set of accounts we have of the business organization side of the development of
industrial capitalism, and in particular the rise of large firms. These materials, based on
careful archival research as well as secondary sources, have to be studied seriously by all
interested in industrial organization, economic growth, and development. In Scale and
Scope Chandler has for the first time focused on the comparative histories of firms ill the
three must significant countries leading the 2 nd industrial revolution. While much business
history is arid, Chandler's is not only easy reading but provocative to economists because it
is clear that Chandler is writing rather self-consciously about the wealth of nations. His
analysis is rich in institutional detail, but shaped by a commanding thesis that the business
firm and its managers are not merely reacting to broader technological and market forces;
rather they are shaping technological development and market outcomes. Firms are not
simply agents of the market; rather, markets are also agents of the firm. Markets simply
cannot be understood without an understanding of firms' strategies and structures. This is
Chandler's argument.

While Chandler does not set out to be provocative to economists--indeed, he is quite

oblivious to most of the tenets of the discipline--he has provided a fundamental challenge to
the modes of analysis and implicit assumptions that economists commonly employ.
Chandler can be challenged but he cannot be ignored by economists and others concerned
with economic growth and industrial organization. Unlike many institution-free studies of
industrial organization and economic growth, Scale and Scope argues that firm-level
strategies and structures are of great importance. Economists and historians must take this
work seriously; it is trenchant scholarship which challenges much of the orthodox diagnosis
of the fundamental economic questions of our time.[58]

*Scale & Scope: The Dynamics of Industrial Capitalism. By ALFRED D. CHANDLER, JR.
with the assistance of TAKASHI HIKINO. Cambridge, Mass. and London: Harvard U. Press,
Belknap Press, 1990. Pp. xviii, 860. $35.00. ISBN 00-674-78994-6.

1. The new processes which emerged in the final quarter of the 19th century were applicable to
the refining and distilling of sugar, petroleum, animal and vegetable oil, whiskey and other
liquids; the refining and smelting of iron, copper, aluminum; the mechanical processing and
packaging of grains, tobacco, & other agricultural products; to the manufacturing of complex,
light standardized machinery through the fabrication and assembly of interchangeable parts;
the production of technologically advanced industrial machinery and chemicals by a series of
interrelated mechanical and chemical processes (p. 23). These technologies, Chandler
asserts, were characterized by economies of scale and scope (p. 24).
2. The observation that 19th century technological progress was scale-intensive, requiring large
scale to exploit fully its potential is not original to Chandler. It was the staple of all the great
19th century and early 20th century economists in a line stemming from Smith and stretching
to Mill, Bohm Bawerk, Sidgwick, & Allyn Young. In economic history, it is almost a cliche that
technological progress has been scale intensive and that one of America's advantages,
which helped bring the United States to a position of technological and productivity
leadership was that the U.S. early enjoyed a relatively large, unified, and homogeneous
market. Chandler's contribution here is not his perception of the scale-intensivity of the
dominant path of technological progress, but rather his understanding that to exploit it
required managerial structures and systems, and investment in manufacturing and
distribution.
3. In Chandler's taxonomy, it is important to recognize that the first movers are not the
inventors. "The first movers were pioneers or other entrepreneurs who made the three
interrelated sets of investments in production, distribution & management required to achieve
the competitive advantages of scale, scope, or both."
4. It probably had something to do with the superior control and incentives that flowed from
ownership, coupled with scale and scope opportunities generated by the railroad and
telegraph.
5. "It was the investment in the new and improved processes of production--not the innovation--
that initially lowered costs and increased productivity. It was the investment, not the
innovation,that transformed the structure of industries and affected the performance to
national economies" (p. 63).
6. "The merger boom reached its climax between 1899 and 1902, after the Supreme Court had
indicated by its rulings in the Trans-Missouri Freight Rate Association case (1897), the Joint
Traffic Association case (1898), and the Addyston Pipe and Steel case (1899) that cartels
carried on through trade associations were vulnerable under the Sherman Act" (p. 75).
7. The challenge of managing large, complex hierarchies increased the demand for trained
executives, and U.S. colleges and universities responded quickly by expanding the training
of engineers and managers. Early providers of business education were the Wharton School
at the University of Pennsylvania, founded in 1881, the University of Chicago, and the
University of California at Berkeley which set up business schools and colleges in 1898.
Harvard followed in 1908 with its Graduate School of Business Administration.
8. At the turn of the century the competitive significance of oil pipelines, and oil transportation
more generally, was considerable. As the Report of the Commissioner of Corporations on
the Transportation of Petroleum, U.S. House of Representatives, May 2, 1906, p. 33, makes
apparent, "The cost of transportation is an exceedingly large factor in the cost of oil to the
consumer. Consequently, any difference in transportation costs, as between different
procedures and refiners of oil, has a powerful influence upon their respective positions in
competition." These concerns were raised in a context in which the Standard Oil Trust
owned most of the pipeline mileage in the United States. While the Standard lines were
common carriers in many oil-producing states, they were not common carriers in interstate
commerce. They thereby provided Standard with a considerable cost advantage over
competitors, and outsiders allegedly paid fees which exceeded "cost of service." In its May 2,
1906 Letter of Submittal accompanying its Report on the Transportation of Petroleum, the
 Bureau of Corporations argued that the "natural advantages" of the Standard Oil Company
stemming from its pipelines "have been and are greatly increased by discrimination in freight
rates . . . which gives . . . Standard monopolistic control in the greater portion of the country."
Nevertheless, observers at the time did seem to recognize the tremendous cost saving that
pipelines afforded when significant volumes of crude oil or refined products needed to be
moved.
9. Hard driving refers to the practice followed in the U.S. steel industry of driving blast furnaces
at pressures of 9 psi, as compared with the British practice of 5 psi. Hard driving required
frequent rebricking but permitted higher throughput.
10. The price of steel rails at Pittsburgh plummeted from $67.50 a ton in 1880 to $29.95 in 1889,
to $17.63 a ton in 1898, yet profits soared.
11. "In arranging this huge merger the house of Morgan did not carry out the normal, time-
consuming procedures of investigating potential cost advantages of rationalization,
appraising the properties of the firms coming into the merger" (p. 32). Chandler leaves no
doubt that the strategy was to earn promoters profits and effectuate market control.
12. U.S. Steel provides one of the very few examples of banker control in American industry,
and Chandler leaves little doubt that he believes that the financiers and lawyers running U.S.
Steel made serious mistakes.
13. While most of the new industrial departments continued to build on this base, developments
in dyestuffs and ammonia came from technologies first developed by German entrepreneurs
and scientists. Even though the war removed German dye makers from American markets
and made available German patents to American manufacturers, DuPont faced stiff
competition from Germany even in the interwar years. Research at both DuPont and General
Motors in the 1920s produced tetraethyllead, a gasoline additive that increased horsepower
and reduced engine knock. In 1924 General Motors and Standard Oil of New Jersey formed
the Ethyl Corporation to manufacture and market the product. (p. 183) Freon, neoprene
(synthetic rubber), and polytetrafiuoroethylene (Teflon) were also developed in the interwar
years, although Teflon did not go into volume manufacture until the post-World War II period.
14. Thus it was the integrated capacities, physical capital and human skills of firms (p. 230) that
were critical. The "dynamics came from the organizational capabilities developed after the
three pronged investment and enhanced by continuing functional and strategic competition
with other first movers and with challengers who made comparable investments" (p. 231). To
underscore the importance of organizational capabilities, Chandler points out that it was the
new branded, packaged goods with the lowest technology and scale requirements where the
large firms had a competitive advantage over small firms (p. 63). Chandler suggests that
differential competitive advantage lies not in technology, which is often available to all, but in
the firm's capacity to find markets and coordinate production, distribution, and marketing.
15. "In most British enterprises senior executives worked closely in the same office building,
located in or near the largest plant, having almost daily personal contact with, and thus
directly supervising, middle and often lower-level managers. Such organizations had no
need for the detailed organization charts and manuals that had come into common use in
large American and German firms before 1914" (p. 242).
16. Cadbury's had its own sales force, and in the 1920s set up depot distribution in major cities
and had a small fleet of trucks to supply them.
17. Mergers of much more significance had occurred earlier in Britain. Chandler describes the
birth of Imperial Tobacco in 1919 which, instigated by W. D. and H. O. Wills, organized a
small number of family-controlled firms into an industry-wide holding company. Imperial was
organized as a federation, through an executive committee consisting of members of the
families operating the largest constituent companies. The subsidiaries produced and
distributed their products independently, even after the merger. In contrast, in the United
States, American Tobacco had a large hierarchy of middle and top management that had
developed procedures to produce and distribute large volumes of cigarettes a year.
18. There were a few exceptions, most notably the brewers such as Bass, Worthington, and
Watney.
19. Thus while British inventors such as Joseph Swan and Sebastian Ferranti were as able
technologically as Thomas Edison and George Westinghouse in the United States, or
Werner Siemens in Germany, failures in entrepreneurship prevented the British from building
industrial empires around the new developments in electricity.
20. "[In] personally managed firms, growth was not a primary objective . . . profits made by the
enterprise went to the owners. Many preferred current income . . . . This view made it easy . .
. to hold back on expanding investment in production, distribution, research, and
development, and on the recruitment, training, and promotion of salaried managers-all of
 which were fundamental to the continuing, successful exploitation of new technologies" (p.
292).
21. The implication is that the cash was needed to maintain expensive lifestyles of the English
upper class.
22. See also Ralph Landau (1991) for an excellent treatment of the links between MIT and
industry involving chemical engineering. Chemical engineering is especially interesting
because it shows how German knowledge in chemistry was transferred to the United States
through the university connection, where it was coupled with understanding of large-scale
production processes. In this manner U.S. universities and business firms rapidly developed
global preeminence in chemical engineering.
23. However, the weakness in the system of cooperation was, in Chandler's view, that it
forestalled the industry-wide rationalization of facilities and personnel that merger would
have facilitated. In short, in some industries, including chemicals, cooperation "forestalled
the creation of an effective corporate office comparable to that of Siemens in Germany, ICI in
Britain, and the leading chemical and food firms in the U.S." Despite these disabilities,
German firms still outcompeted British firms because whether a small cartel office or a large
headquarters office ran the business, at least salaried professionals were in charge, as was
also the case in the United States (pp. 590-91).
24. Chandler does not explain (p. 427) why the need to serve a fragmented European market
fostered cooperation at home. Presumably it was because information about foreign market
opportunities could be shared across industries to mutual benefit.
25. David Landes in his monumental work The Unbound Prometheus devotes at most only a few
pages to the role of firms in industrial development in Western Europe from 1750-1950.
26. As Moses Abramovitz (1991,p. 3) points out, the view that still shapes the modern economic
approach to the economics of growth was laid out by John Stuart Mill in the Principles of
Political Economy (1848). Mill's view was the simple production function approach, that sees
increases in output as stemming from increases in labor, capital, and land, or of their
productiveness." Both Chandler and Abramovitz would undoubtedly argue that the standard
approach fails to see organizational innovation as part of "technological" progress and
investments in managerial systems and structures in production, distribution, and marketing
as part of aggregate capital formation.
27. However, technological change provided the opportunities and the requirement for
organizational responses in the capital intensive industries. If pressed, Chandler would
undoubtedly agree that technologies and organizations coevolve, and he would also
recognize, along with Nelson and Sidney Winter (1982), Teece (1977), and others, that at
minimum there are often significant costs of imitation, technology transfer, and adaptation so
that technology was not quite freely transferable among firms.
28. Most persuasive is a thesis, closely aligned with Chandler's, that institutional rigidities were
Britain's fundamental problem. As Bernard Elbaum and William Lazonick explain, "what
British industry in general required was the visible hand of coordinated control, not the
invisible hand of the self-regulating market" (1986,p. 10). The fragmented industrial structure
of many industries like cotton, coupled with reliance on unassisted market adjustment
processes, was often the source of the problem, as Lazonick (1983) has shown. This is not
the place for a recitation of all the competing hypotheses. Thorstein Veblen's (1915) is an
early statement of disadvantages of being the pioneer, while Donald McCloskey (1981) is an
excellent treatment of the failure in entrepreneurship thesis. The essential point which
Chandler makes is that the system of business organization in Great Britain, whatever its
foundation, was the source of the failure. For further discussion, see Roy Church
29. As one text points out, "many of the predictions of economic theory, such as those involving
price and firm size, revolve around concepts like marginal costs. . . . [Moreover] knowing the
cost function of a firm and knowing its technology are equivalent" (Dennis Carlton and
Jeffrey Perloff 1990, p. 35). The traditional approach is devoid of any consideration of
organization and management (Teece 1980, 1982).
30. There is now an extensive literature which looks at alternative organizational forms and
explicitly compares vertical integration to less hierarchical forms of organizations. Because
Chandler does not analyze firms which failed, the reader receives scant advice as to what is
wrong with many of these alternatives.
31. As Chandler states, in industries where innovations were particularly revolutionary, first
movers had significant competitive advantages that as a general rule allowed them to remain
dominant for decades. The first movers in industrial chemicals remained leaders for decades
and nearly all of the top firms in 1948 had been long established since 1900 (pp. 171-72).
32. David Hounshell (1992) supports this contention and notes Dupont's abiding "faith and
 commitment" to R&D during the eight decades of this century. Its strong R&D orientation
distinguished it from its competitors, and was a direct consequence of its strategy.
33. Rankings were by book assets for U.S. and German firms and by market values for British
firms. Economic theory predicts a wide range of outcomes, but absent strategic behavior, the
predilections of economists are to see entry and exit and changing market shares as
occurring with alacrity. This stems from a faith in the workings of adjustment processes and
implicit assumptions about the tradability of assets. Certainly, leading firms are viewed as
being always vulnerable, and they often are. As one text put it, "Generally, a dominant firm's
share of an industry's sales shrinks over time" (Carlton and Perloff 1990, p. 201). In
neoclassical theory, as compared to evolutionary theory (Nelson and Winter 1982), the long
run is rather short.
34. Wartime dislocation probably helps explain the lower survival rate in Germany.
35. Adhering to these definitions would make for clearer discussion. In the modern literature and
in business discussion, choices on practically any decision variable are too frequently
referred to as "strategy."
36. For a discussion of Chandler's contribution, see Richard Rumelt, Dan Schendel, & Teece
(1991).
37. Cooperation induced and facilitated by administrative processes and formal organization has
received less theoretical attention than it deserves. Contributors include Chester Barnard
(1938), Herbert Simon (1947), and Williamson (1990b).
38. Further hints as to where he might be going can be found in Chandler (1992a, 1992b).
39. Remington/Sperry Rand failed to make the financial commitment that was necessary and
failed to commit the time of senior management to solve the problems that were involved in
designing and manufacturing and marketing computer systems at that time. Moreover,
Remington Rand's failure to support its computer business did not stem from a lack of
available resources (Franklin Fisher, James McKie, and Richard Mancke 1983, p. 39).
40. In Teece et al. (forthcoming) it is shown, using 1987 data on U.S. business establishments,
that as U.S. firms grow more diverse, they maintain a constant level of coherence
(relatedness) between neighboring activities. This finding runs counter to the idea that firms
with many activities are generally more diversified. It suggests that, in general, as firms grow
more diverse, they add activities that relate to some portion of existing activities. This is
consistent with Chandler's notion of how firms generate scope economies. However,
variability in the data suggests that at a point in time some firms may stray from the Chandler
dicta. We predict that when they do, they are unlikely to be profitable and will eventually
abandon unrelated diversification.
41. Chandler's thesis would also appear to be somewhat at odds with his Harvard colleague
Michael Jensen (1989) who argues that, at least in mature industries where long-term growth
is slow and cash flow outstrips investment opportunities in traditional markets, the public
corporation is an anachronism because discretion is capable of being misused by the
managerial groups Chandler sees as critical to economic development.
42. This debate has been entered in a series of articles in the Harvard Business Review. See
Anatol Rappaport and S. Halevi (1991).
43. Certainly relative to other countries; possibly relative to its own recent past.
44. See Miles and Charles Snow (1986). Several other writers have suggested that there may
be a "post modern" successor to the modern corporation, one formulated partly in reaction to
the ideal type of integrated Chandleresque corporation (see Thomas Hughes 1990) and
partly to adapt it to the realities of today's global marketplace (Gary Pisano and Teece 1988;
Teece 1992). That marketplace would appear to require firms to master both information
technologies and relationships with supplier networks seamlessly integrated with their
customers networks so that the corporation would look almost boundaryless.
45. Chandler seems to imply that the success of national enterprises and nation states are
closely coupled. This has recently been challenged by many writers, most notably Robert
Reich (1992,ch. 12).
46. While cooperative elements were undoubtedly present in the prewar zaibatsu, it is also
worthy of note that the Japanese zaibatsu were family-owned enterprise groups. In this
sense,

the personal management style unique to British companies cannot be explained solely on
the basis of family structure. Family-run businesses in Britain produced personal
management that obstructed the development of organizational capabilities, whereas in
Japan the leadership of salaried managers checked family control and personal
management, encouraging the growth of organizational capabilities. (Hidemasa Morikawa
1990, p. 722)

 47 Jurgen Kocka (1990,p. 715) believes that Japanese managerial capitalism was more
cooperative than that of Germany.
 48 A virtue of much of Chandler's historical analysis is that it is blissfully ignorant of many of
the theoretical debates which exercise economists. But there is little doubt that Chandler's
findings are cold water to neoclassical conceptualizations of firms and markets.
 49 Put differently, absent well functioning managerial systems and structures, one should not
have con
 50 Scherer's arguments may be somewhat more correct for petroleum than for other
industries. But the two-thirds rule he refers to is an engineering rule and Chandler explicitly
disavows engineering relationships as being determinative of the scope and scale
economies actually achieved (p. 24). Scherer's (p. 696) diagrammatic representation of the
Chandler thesis is simply incorrect as Chandler's main point about organizations is omitted.
 51 It also depends on forms of organization that require invention or discovery and on
investment to put the organization in place.
 52 There is considerable field-based empirical research which provides support for the
notion that coordinative capabilities are the source of differences in firms' economies and
competences in various domains. Garvin's (1988) study of 18 room air conditioning plants
reveals that quality performance was not related to either capital investment or the degree of
automation of the facilities. Instead, quality performance was driven by organizational
routines that influenced coordination in some way. These included routines for gathering and
processing information, for linking customer experiences with engineering design choices,
and for coordinating factories and component suppliers. The work of Clark and Fujimoto
(1991) on project development in the automobile industry also illustrates the role played by
coordinative routines. Their study reveals a significant degree of variation in how different
firms coordinate the various activities required to bring a new model from concept to market.
These differences in coordinative routines and capabilities seem to have a significant impact
on such performance variables as development cost, development lead times, and quality.
Furthermore, they tended to find significant firm-level differences in coordination routines,
and these differences seemed to have persisted for a long time. This suggests that routines
related to coordination are firm specific in nature, and that technological relationships are not
at all determinative of competitive position.
 53 Thus Gerschenkron notes that the industrialization of England has proceeded without any
substantial utilization of banking for long-term investment purposes because the more
gradual accumulation of capital from trade and agriculture obviated the need for the creation
of special institutional devices for provision of long-term capital to industry. In contrast,
continental Europe, including Germany, which entered the process of modern
industrialization later, when the prevailing technology had become more scale-intensive and
capital-intensive, required banks to amass the necessary capital. The banks in turn helped
shape the structure of industry and, in the case of Germany, gave momentum to the cartel
movement (pp. 14-15), thereby causing the German industrial economy to develop along
lines different from England's.
 54 Yet there are points of difference. Gerschenkron emphasized social background, political
tradition, and a sense of temporal characteristics of technology at various periods of
industrialization; he had basically nothing to say about the role of management and business
organization.
 55 For a discussion of finance and the development of firms, see Mowery (1992) and Bruce
Greenwald and Joseph Stiglitz (1992).
 56 One interpretation of Chandler is that he is exploring the firm level analogue of what
Abramovitz has referred to as "social capability," by which he seems to mean the intangible
infrastructure necessary to support the adoption of advanced technology (Abramovitz 1991).
 57 See Teece (1986) where a framework is outlined which shows how ownership of
compelementary assets, standards, and the intellectual property condition work together to
determine whether innovators or followers are more likely to end up with the largest market
share.
 58 Many macroeconomists are of the view that the problems of U.S. competitiveness are
 essentially problems of macro policy. Robert Lawrence (1984) is a good example of the
mainstream belief that if the United States gets its macro policy right, competitiveness will
automatically be restored, since the erosion of U.S. competitiveness is simply misdirected
market forces. Scale and Scope suggests that while macro policy matters, it is the building of
organizational capabilities that are essential. Traditional macro policy remedies focusing on
monetary and fiscal policy do not suffice. Industrial development requires the long-term
commitment of resources, coordination of interdependent activities, education of the labor
force, and enhanced rates of organizational learning. Whether private enterprise alone can
create these organizational conditions is not addressed by Chandler. Clearly, cooperative
strategies can assist (Thomas Jorde and Teece 1992). However, as Mancur Olson (1982)
suggests, an "upheaval" may be necessary to break the intellectual, social, & political
rigidities that impede the organizational transformation necessary for the United States to
regain its competitiveness. Chandler's sagacious comparative business history can be seen
as an important contribution toward building a better understanding of the wealth of nations.

TABLE 1
SURVIVAL PROBABILITIES OF LEADING INDUSTRIAL FIRMS (LEADING 2 FIRMS ONLY)[*]
Legend for chart:

A - Country (period)
B - Number of Leading Firms Selected
C - Displaced from 1st or 2nd Position Over Period
D - "Survival Probabilities

A B C D

U.S.
(1917-1948) 33 14 .57

U.K.
(1919-1948) 30 13 .56

Germany
(1913-1953) 29 20 .31

* Number of firms in 1st or 2nd place.

Source: Derived from Chandler, Appendices A, B and C, which provide tabulations of the
200 largest industrial enterprises in the United States, Great Britain, and Germany for the
time periods indicated. "Survival" is used here to indicate the likelihood that a firm that was
ranked first or second at the beginning of the period would be so ranked at the end.

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