Preliminary Exam Summary; Section: Organizations

By Eileen Bevis

CITATION:
Chandler, Alfred Dupont. Strategy and Structure: chapters in the history of the industrial
enterprise. Cambridge: M.I.T. Press, 1962. Pages 1-51.

ABSTRACT:
While Chandler’s book is an institutional history of American industrial administrative
innovation up to ~1960 and includes detailed case studies and comparative analyses, the two
assigned chapters include only an introduction with theoretical framework and a general
background chapter surveying “changing patterns in the growth and administration of the large
enterprise in the United States, based on the experience of many of the largest companies” (4).
The main thesis is that strategy (expansion of volume, geographical dispersion, vertical
integration, and/or product diversification) determines structure (especially a centralized,
functionally departmentalized structure or multidivisional, decentralized structure).

SUMMARY:
I. Introduction—Strategy and Structure
A. Motives and Methods (1-7)
This book is a comparative history of business administration, with a focus on
innovation. [Justification:] Because administration is a hot topic and because
administrators do not change unless forced, studying administrative innovation
[=”modern ‘decentralized’ form of organization” (4)] will “point to urgent needs and
compelling opportunities both within and without the firm” (2). It will examine [some
of] the largest and most complex of American industrial enterprises.
The structures used to administer these great enterprises are: multidivisional, a.k.a.,
“decentralized”; i.e., a “general office plans, coordinates, and appraises the work of a
number of operating divisions and allocates to them the necessary personnel, facilities,
funds and other resources” (2). Each division usually handles either a specific line of
products or a specific geographical region. For graphic representation, see chart page 10.
The first “decentralized” companies were Du Pont, General Motors, Standard Oil (NJ),
and Sears Roebuck, who all began major administrative reorganization in the 1920s.
These Big Four are the main focus of Chandler’s study, though he also looks briefly at
about a hundred other large industrial companies’ histories for context, comparison,
generalizability (3). Note: these four developed their new administrative structures
independently of the others, though many other companies later imitated the structure(s)
of one or more of the Big Four.
[I’m skimping on a lot of the methods and justification because they relate to chapters we
were not assigned.]
B. Some General Propositions (7-17)
[Taking after Durkheim,] “the terms and concepts used in these [upcoming] comparisons
and analyses must be carefully and precisely defined” (7), and some theoretical
propositions put forth for “conceptual precision” (8)…
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1. Industrial enterprise: “a large private, profit-oriented business firm involved

in the handling of goods in some or all of the successive industrial processes
from the procurement of the raw material to the sale to the ultimate customer”
(8); thus, transportation, utility, and purely financial companies are not
considered industrial enterprises (8).
2. Administration: “includes executive action and orders as well as the decisions
taken in coordinating, appraising, and planning the work of the enterprise and
in allocating its resources” (8).
3. Proposition 1: administration is an identifiable activity, differing from
buying, selling, processing or transporting of goods, and is the main concern
of executives in large industrial enterprises [their specialized, full-time job is
administration] (8-9)
4. Proposition 2: the administrator must handle two types of administrative
tasks, both (a) those concerned with the long-run health of the company and
(b) those concerned with its smooth and efficient day-to-day operation (9).
5. Proposition [3]: the executives in a modern, “decentralized” company carry
out their administrative activities from four different types of positions, each
with its own range of activities and level of authority that vary from company
to company (9). The four types of positions are (9):
i. General Office: administers [i.e., coordinates, appraises, plans, and
allocates resources] a number of quasi-autonomous, fairly self-
contained divisions, each of which handles either a major product line
or a geographical region.
ii. Division’s Central Office: administers a number of departments,
each of which is responsible for a major function (e.g. manufacturing,
selling, research)
iii. Departmental Headquarters: administers a number of field units
iv. Field Unit: runs a plant, sales office, engineering lab, accounting
office, etc.
Note: these are conceptual terms referring to activities and not office buildings
(9-10). All four types exist in the most complex of industrial enterprises,
though they can exist separately too (12).
6. Formulation of policies and procedures (11)
i. Strategic: concerned with the long-term health of the enterprise
ii. Tactical: deal more with the day-to-day activities necessary for
smooth and efficient operation
Implementation of policies and procedures: involves allocation or
reallocation of resources—funds, physical equipment and/or skills of
personnel (11, 14)
7. Entrepreneurs: executives who actually allocate available resources; the
decisions made by these key men are entrepreneurial decisions (11)
Managers: executives who coordinate, appraise, and plan with the means
allocated to them; their decisions are called operating decisions (11)
Note: entrepreneurs may be powerful but they do not necessarily possess
strategic vision (12). According to Chandler, however, to be effective
entrepreneurs, they should be paying attention to the long-term (12).
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8. Activities and responsibilities of an executive parallel activities and

responsibilities of the office in which s/he works (one of four types above, #5)
(12).
9. Proposition [4]: Since each type of position handles a different range of
administrative activities, each must have resulted from a different type of
growth (13). Growth of volume or technical complexity leads to specialized
administrative executive (somebody who does mostly/only admin);
geographical dispersion leads to new field units and a central headquarters to
administer them; expansion into new functions, a.k.a. vertical integration
leads to new departments and a central office to administer them;
diversification into new lines of business or great geographical expansion
leads to new divisions and a general office to administer them (13, 14).
10. Strategy: the planning and carrying out of organizational growth; “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
carrying out these goals” (13). E.g. “Strategy of vertical integration” or
“strategy of diversification”; often not as clear-cut in reality as in theory here
(16).
Structure: the organization devised to administer these enlarged activities
and resources; the design of organization through which the enterprise is
administered. Has two aspects:
i. lines of authority and communication between administrative offices
and officers
ii. the information and data which flow through these lines (13)
11. Basic THESIS: Structure follows from strategy and the most complex type
of structure is the result of the concatenation of several basic strategies (14).
i. But why doesn’t structure immediately follow from strategy?
ii. And why does new strategy arise in the first place?
12. COMPLETE THESIS: “Strategic growth resulted from an awareness of the
opportunities and needs—created by changing population, income, and
technology—to employ existing or expanding resources more profitably. A
new strategy required a new or at least refashioned structure if the enlarged
enterprise was to be operated efficiently. The failure to develop a new
internal structure, like the failure to respond to new external opportunities and
needs, was a consequence of over-concentration on operational activities by
the executives responsible for the destiny of their enterprises, or from their
inability, because of past training and education and present position, to
develop an entrepreneurial outlook” (15-16).
13. Corollary: Growth without structural adjustment can lead only to economic
inefficiency (16).
14. So each case study’s administrative story has two parts: “the creation of the
organizational structure after the enterprise’s first major growth or corporate
rebirth, and then its reorganization to meet the needs arising from the
strategies of further expansion” (17).

II. Chapter 1: Historical Setting

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A. The beginnings of business administration in the U.S.

1. Few businesses needed a full-time administrator or clear administrative
structure before 1850 (19). There were some companies with “embryonic”
administrative structures (Astor’s Fur, Biddle’s Bank, canal and railroad
company boards), though the only ones with much impact on later enterprises
were the railroad projects, which required significant and new types of
administration to operate.
2. The new railroad system required “careful and detailed definition of the lines
of authority and communication”, as well as “a constant flow of detailed
reports, daily, weekly, and monthly, from the division superintendents to the
general superintendent as well as inspection visits from headquarters to the
division” (22). First there was a departmental headquarters structure developed
to administer field units in the 1850s, then came a more extensive structure
with more defined lines of communication and authority and a central office to
administer the increasingly specialized departments (22-23). The more
knowledgeable because ‘on the ground’ president and vice-presidents took
over long-term entrepreneurial decision-making from the board of directors.
3. The railroads served both as an administrative model for later industrial
enterprises and as a market [and thus enterprise] expander (23).
4. New national and increasingly urban markets’ needs and opportunities were
met, by many a “factory, mining, or marketing firm”, by multiplying the
volume of output, geographical dispersion, and vertical integration (23-24).
The depressions of the 1870s and 1890s slowed these processes of expansion,
but then the business empires took off and needed full-time professional
managers.
5. These managers, many advocates of “scientific management,” concentrated on
the level of field-units, particularly on factories, not sales or purchasing offices,
say. Soon, though, innovation began in administration of numerous field units
and in the formation of a whole-company-managing central office (24).
B. The Coming of the Integrated, Multidepartmental Enterprise
Strategies of vertical integration, not of output volume increases, caused most
new administrative needs (24). There were two types of strategies involving such
expansion into new functions:
(a) one company expands and integrates through creating own marketing
organization (e.g. Swift and refrigerated meat; Duke and tobacco products;
Bell and flour; Preston and bananas; McCormick and harvesters; Clark and
Singer Sewing Machines; electrical companies (GE and Westinghouse); steel
manufacturers) (25-29).
(b) a number of companies already joined together in a horizontal
combination consolidated their manufacturing activities and then moved into
marketing or purchasing (see C. below) (25).
C. Integration via Combination and Consolidation (29-36)
1. This was the more common road to vertical integration, spurred by threat of
excess capacity [ooooh!]. In good days, market expanded and output with it,
tbut then in depressions, market glutted and prices dropped and companies
look to combine in order to control or limit competition by setting price and
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production schedules [anybody wanna explain to me how this works?] (30).

2. The initial combinations were short-lived for various reasons, one of them
being legal—not until trusts and purchasing of one corporation’s stock by
another corporation was allowed (1890s) could administrative innovation take
off (30-31).
3. Then, you could get consolidation: a combination [loose alliance of
marketing or manufacturing firms] whose executive office does more than
merely set price and production schedules, i.e., makes decisions on how to
product, market, and allocate present and future resources for all the
enterprise’s plants or marketing units (31).
4. Horizontal consolidation and centralization [hum, aren’t they the same by
definition?] immediately creates more pressure for vertical integration
(problems coordinating between marketers and manufacturers) (31-32). Many
consolidated firms began to do own wholesaling, sometimes retailing, most
often by combining with or buying existing national marketing enterprises
thought sometimes creating own, as well as setting up own purchasing
organizations (32). Some even took over production and transportation of
raw materials (34-35). For first-hand accounts of reasoning behind move
from combination to consolidation/integration, read small print paragraphs on
pages 32-33.
5. Focus in late 1800s was definitely on creating industrial empires, not on
designing effective administrative structures…soon forced to do latter,
though…
D. Organization Building
1. The desired economies of scale to be potentially derived from consolidation
and integration resulted only from careful administration of marketing,
manufacturing, and procurement of raw materials and, above all, from
coordinating and integrating these different activities into a unified whole, not
automatically (36).
2. Yet, around 1914, still thinking in terms of personal contact and individual
ability of top executives, not of formal organizational structure (36-37).
3. New organization builders were not usually same men as empire builders (37).
They drew from Pennsylvania Railroad’s “line-and-staff” concept of
departmental organization and its defined lines of authority and
communication (line officers dealt with people, staff officers with things)
(38). They also drew from Penn. RR’s distinction between strategic duties of
vice-president and tactical duties of general managers (39). But industrial
enterprises had to innovate cause they had more functions and tasks—more
complexity--than the railroads (39-40).
4. “By the 1920s, however, organization builders had worked out fairly standard
designs for administering the several functional activities from departmental
headquarters and the enterprise as a whole from a central office” and there
was management literature galore (40). By close of WWI, large industrial
enterprises whose executives weren’t sleeping under rocks were administered
through same type of organization—“centralized, functionally
departmentalized structure” (40).
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5. This structure had one basic weakness: a very few men were in charge of a
great many complex decisions (41), men who’d been trained in one functional
area and then promoted and didn’t have great grasp of corporation as a whole
—serious problem when technology, markets, and sources of supply changed
rapidly, as they did from 1880 on in certain industries (41-42).
E. Further Growth – The Coming of the Multidivisional Enterprise
1. In new industries (electrical, auto, chemical, electronic) and in old-being-
revolutionized-by-science-based-technology industries (rubber, petroleum,
agricultural implement, power equipment chain-store, mail-order), increasingly
complex administrative problems arose. The leading firms in these industries
turned to new “multidivisional, ‘decentralized’ structure” (42).
2. Urbanization and technology advancement led to three types of industrial
strategies for growth: (a) expand existing product lines to same type of
customers, (b) look for new markets and suppliers in distant lands, a.k.a.,
“going overseas,” or (c) open new markets with range of new products for new
types of customers, a.k.a. “diversification”; helped out by scientific research
(42-43).
3. Diversification had bigger developmental impetus toward decentralized
structure than world-wide expansion, except in petroleum industry, where
regions rather than new product lines served as basis for autonomous,
multidepartmental divisions and, partially, chain stores and mail-order
companies (42, 47).
4. The big “decentralized” innovators were the Big Four in the 1920s, who served
as model for many others, especially after WWII (44). Most started with
centralized form [of D.4.] before moving to decentralized form [of E.1.].
[Some of slowness of change seems to be caused by presence of original
founders of companies; they die and organizational reform finally gets
implemented (46-47).]
5. Through urbanization and technological advancement, response strategies of
diversification and overseas expansion, and resulting complexity of
administrative problems, “the multidivisional type of administrative structure,
which hardly existed in 1920, had by 1960 become the accepted form of
management for the most complex and diverse of American industrial
enterprises” (49) [not, for instance, copper, zinc, iron, steel, tobacco, meat,
sugar, liquor, and banana (42)].
6. In conclusion, historical record does support thesis that structure follows
strategy and that different types of growth brought different needs and resulting
administrative organizations (49). But a lot of the details of what, why, and
how as well as variance in corporation responses still missing…so goes to case
studies (49, 51).

RELEVANCE: