Chandler,Alfred D.. Strategy and Structure: Chapters in the History of the Industrial Enterprise. Cambridge, MA: The M.I.T. Press, 1962.
Alfred D. Chandler has written a lucid, interesting, and informative work about the history of organization and industry in the United States since the late nineteenth century. Chandler’s thesis is that in the development of American business, structure (the organization of a business entity in order to carry out its current functions) follows strategy (the long term plan for change in the organization’s activities in order to continue to participate in the market over time.). In order to make the case that this has historically been so, Chandler provides case studies of four major U.S. Corporations whose organizational innovations were at the forefront of the creation of the modern multi-divisional decentralized corporate structure. All four, Chandler asserts, became to some degree models for other expanding corporations after World War II as American business spread overseas, and into new product lines and markets.
Chandler begins his history with the context of the changes these four corporations underwent. In the first chapter, Chandler gives a summary explanation of the development of administrative structure in American business. Before 1850, he says, American business was usually a family or small shop affair, and little future planning was necessary. Business usually involved an owner doing both planning and working within the business on daily operations. After 1850, a few businesses did begin to develop administrative structures, but these structures continued to reflect the operational, rather than strategic needs of the business.
As Chandler warms to his subject, though, he opens up one of the key concepts in his thesis – that the expansion of a business enterprise dictates the need for new structure. The primary example that Chandler uses here is the development of railroads, whose extension to farther-flung locations required ever more careful coordination of operational activities, and for whom the growing market, defined by the expansion of the American frontier, required strategic planning in order to find profitable routes, and sufficient financing. This expansion led to the creation by the railroads of an organizational model that included a central administrative office which controlled a number of departments whose responsibilities were divided by function.[1] This centralized departmental structure served large and growing enterprises well until the end of the first decade of the twentieth century. At that point, Chandler says growth became a major issue for several of the largest corporations in America.
Chandler also explains that growth can come in a four different ways: growth from continued expansion of the same business with the same type of customers; growth from vertical integration; growth from expansion to overseas markets; and growth from expansion into new product lines. It is also true that enterprises might be growing in two or more of these ways at once. Yet the most important, from the perspective of requiring new organizational patterns, is the last – growth from expansion into new product lines.[2] Chander’s goal is to show how this growth led to a new model for American business organization.
The four firms studied by Chandler: du Pont, General Motors, Standard Oil, and Sears, Roebuck and Co. all found that to make their diversified and complex businesses work, and to continue to work into the future, they had to reorganize. Each seems to have developed a “decentralized, multi-divisional structure” independently of the others, by different paths, and for somewhat different reasons, but ultimately ending up with a similar structure in which the general administrative office is in charge of planning and distributing (particularly financial) resources, and the divisions each work as multi-departmental companies in charge of a specific part of the business, with the divisions created based on the business needs.[3]
The largest section of the book is made up of Chandler’s four case studies. Among these, he takes care to note differences in enterprise, market, and style. He begins with the earliest corporation to become decentralized and multi-divisional, du Pont Chemical, and ends with the last, Sears, Roebuck and Co.
Du Pont, specialized in explosives manufacture for sale mostly to the United States Government. The downturn in this market after World War I, however, forced DuPont to diversify into chemical products for industrial, agricultural, and domestic use among consumers and businesses. The success of the company in doing this eventually caused so much stress in the central administrative office, which was organized around functional departments before 1921, that the administrators of the company, mostly concerned with daily operational tasks in any case, had little or no ability to understand what was going on over the entire company. In other words, du Pont’s conscious decision to change its approach to the market through diversification, a new strategy, caused a serious workload problem, particularly for administrators, and this required the development of a new structure – a decentralized multi-divisional organization that allowed central planning and control of resources, while the divisions themselves were able to autonomously work within their own markets at an operational level. This provided maximum operational efficiency and the best flexibility possible to react to changing market conditions. As Chandler says, “At du Pont, then, structure followed strategy.”[4]
The change at General Motors from a centralized, departmental structure to a decentralized multi-divisional structure came from the opposite impetus. General Motors did not require the creation of a set of autonomous divisions to serve a diversifying product line. Rather, General Motors was already diversified to a point where central control was becoming impossible, and so the reorganization there came from the creation of a general office.[5] The strategy of William C. Durant, who created the General Motors Corporation, was from the beginning big. He was already by 1908 the largest auto manufacturer in the nation. That very size left GM difficult to manage because communications were poor, and financing was difficult. In 1920, GM’s new President, ironically Pierre du Pont, implemented a multi-divisional organization plan created by Alfred P. Sloan, Jr.[6] That plan placed a general office at the center of a vast multi-divisional corporation whose divisions were based on brand and product. These divisions were each responsible for manufacturing and marketing their own products, and for reporting back to the general office regarding finances, sales, and other key information.[7] In return, the general office would take the information from those reports, and plan market and manufacturing strategy. Once again, structure followed strategy.
The third enterprise that Chandler discusses is the Standard Oil Corporation (New Jersey), or what he calls “Jersey Standard”. Here, the fact that the enterprise was primarily a refining company after being required to make major divestments in accord with a Sherman Anti-Trust Act decision by the Supreme Court in 1911 was one of the key issues. Chandler explains that while Standard Oil continued to be a refiner of oil, staying with basically the same business, expansion of the market as the automobile became popular drove a need to secure downstream resources and upstream distribution – a drive for vertical integration in a growing market. Thus, the “Jersey Company” grew based on “responses to immediate short-term pressures in the marketing, refining, and producing of oil…” – operational concerns created a tension in administrative work, because the company was moving from crisis to crisis with little or no strategy.[8] In 1925, an inventory crisis made the organizational problem impossible to ignore, and after a series of organizational failures, the Jersey Company became a decentralized, multi-divisional organization, like du Pont and General Motors, though in a much less deliberate fashion. Still, Chandler’s point is that structure follows strategy – the crisis in administration required better planning, accounting, and resource distribution. Answering that strategic need with a new organizational structure that fit the growth needs of the company was the solution.
Sear, Roebuck and Co. was again different from the other three companies in Chandler’s study. First of all, Sears was a mail order company which had decided to expand into over-the-counter retail operations. Its function was essentially the same, but it was enlarging and decentralizing its distribution network.[9] Early responses to the growth problem led Sears into a hybrid organization, in which half the organization was of the older functional model, and half was based on territory.[10] By 1940, it was clear that a territorially delineated structure of multifunction divisions, linked by a centralized general office in Chicago was the most effective structure. Sears then went about defining the administrative roles of managers within the central office.[11] Once again, then, structure followed strategy in the case of Sears.
Chandler spends his penultimate chapter comparing these four companies, concluding that while they all realized the need for a new organization after experiencing different kinds of growth, and different types of problems related to that growth, they all also came to organizational change because of the perceptions of effective managers whose work was affected by the difficulties inherent in the older organization systems under the strain of growth. In the end, despite different product lines and business trajectories, all found that the decentralized, multi-divisional structure was the most efficient organization for dealing with operational realities, while providing information, planning, and financing functions that helped to be flexible and reactive to market realities.
In the end, Chandler wants his readers to recognize a broad arc of business organizational development in U.S. History, beginning with the realities of family and shop-size firms concerned with local, single- or limited-product-line production, and which were primarily operational in organization, sparing little time for strategic adjustment to new market realities. His arc continues through the development of larger transportation and manufacturing, through the development of railroads and broad distribution networks and the advent of machine manufacturing, through which enterprises needed to become more carefully organized in order to continue to deal effectively with growing size and distance. The administrators of these second-generation firms were still primarily concerned with operational matters.
Chandler sees a paradigm shift with the development of large firms with centralized functional departmental structures, capable of handling marketing, manufacturing, finance, procurement, and service under a single roof efficiently. This, too, though, eventually became insufficient for the growth of the largest corporations in American history during the end of the nineteenth century and the first part of the twentieth century. The backups, logjams, and structural problems these firms experienced led them to understand a need for efficient sharing of information and use of that information to efficiently distribute resources and plan for future market moves. This need could only be answered, by the decentralized multi-divisional structure that the four companies in his study represent.
In all, Chandler’s book is very useful for creating a framework for understanding the development of big business in the United States, particularly over the course of the twentieth century. The broad arc of business history that he paints does not spend much time with earlier forms of organization, stopping mostly with the statement that these were mostly operationally oriented and spent little time on planning. The focus on the twentieth century, though, and on big business, does occasionally lead a reader to wonder where all of the other enterprises are in this arc of history. Never the less, Strategy and Structure is a critical work necessary for anyone wishing to really begin to understand the development of American business.
[1] Chandler,Alfred D.. Strategy and Structure: Chapters in the History of the Industrial Enterprise. Cambridge, MA: The M.I.T. Press, 1962, 22-39.
[2] Ibid., 42-51.
[3] Ibid., 50-51.
[4] Chandler, 112.
[5] Ibid., 113.
[6] Ibid., 114.
[7] Ibid., 149. (Chandler provides numerous organization charts for all four enterprises. The most useful for understanding GM is on pages 136-137).
[8] Chandler, 177.
[9] Ibid. 225.
[10] Ibid. 261.
[11] Ibid.