Making Too Much of the Managers

...Germany was marked by "cooperative managerial capitalism," a euphemism for the prevalence of voluntary, and later compulsory, cartels...

...An insight into Chandler's view of the merits of competition is furnished by an intriguing story he tells about Elbert H. Gary...

...Yet not only does this practice deprive shareholders of an investment choice—the profits, after all, belong to them—but there is damning proof that retained earnings are often squandered in abortive efforts to diversify through mergers and acquisitions...

...Chandler contends that the full exploitation of economies of scale and scope was made possible by a fundamental shift in the locus of corporate power...

...Doing this, in turn, required novel modes of corporate organization, for which he uses the umbrella term "managerial capitalism...

...As the doyen of American business historians, Alfred Chandler works within a professional frame of reference where this question does not really arise...

...Economies of scope, by contrast, are a matter of diversity rather than size...

...It is simply the logical culmination of the rule of autonomous corporate managers—precisely what Chandler has been celebrating throughout this book...

...It may have a larger market share—Chandler's only yardstick for corporate success, and one that he does not apply at all systematically— but as successive generations of managers have discovered to their grief, market share and profits often march to different drummers...

...There are also serious reservations to be registered about the analysis and interpretation...

...Not surprisingly, Chandler prefers the situation in the U.S., where the average dividend payout is less than 50 per cent of earnings and the remainder is left to the disposition of the firm's managers...

...That is why, for example, manufacturers of personal computers—IBM, Apple, Compaq— do not produce their own cathode-tube monitors or disk drives...

...Armed with this paradigm of managerial capitalism, Chandler turns to the nitty-gritty of the historical record, examining the performance of the 200 largest U.S., British and German companies ranked by financial assets—a list that changed frequently, of course, over the period in question...

...And it's the wrong answer...

...He is disconcerted by the emergence of what he calls a "market for corporate control," and seems to fear the phenomenon portends the end of capitalism...

...It is an ambitious study, 10 years in the making, and one that yields much fascinating and hitherto neglected information...

...Chandler's book focuses on the three great economic powers in the decades from 1870 to World War II: the United States, Great Britain and Germany...

...They are realized by firms that can draw on a varied store of technological expertise to develop new products more quickly and cheaply than competitors who must start from scratch...

...In the United States, by contrast, the dominant style was "competitive managerial capitalism," owing to this country's relatively strong antitrust policy...

...Economies of scale are the lowered unit costs made possible when optimal production is sustained in large plants employing the best technology...

...He characterizes the mode in Britain as "personal capitalism," whose hallmark is family control of companies...

...Did the shift of control from owners to autonomous managers enhance or diminish profitability...

...This was the period of the second industrial revolution, marked by such major innovations as electrical power and illumination, refined petroleum, synthetic chemicals, electronic communications, and the application of the internal combustion engine to both ground transportation and aviation...

...Chandler's thesis—set forth in his earlier work on the American experience and developed here—is that success in producing and marketing new and more technologically advanced products hinged on an ability to take advantage of economies of scale and scope...

...Chandler never so much as mentions external economies of scale—a troubling omission, since their existence raises doubts about the desirability of managerial control...

...Chandler's failure to take account of external scale economies points to a still greater shortcoming of his book: Nowhere does he set forth any explicit criteria for judging the efficiency of a business enterprise, such as return on capital invested or growth in the value of its shares...

...In making his case that managerial control was necessary to bring into play the economies of scale and scope that fueled economic growth, Chandler fails to consider the various waysinwhichthese economies can arise...

...Reviewed by Harvey H. Segal Author, "Corporate Makeover: The Reshaping of the American Economy" Why is capitalism—a system of economic transactions conducted in effectively free markets—successful...

...What he expects to find in "effective" companies—those capable of gaining shares in both domestic and foreign markets—is bureaucratic hierarchy, with clearly delineated lines of authority from the highest to the lowest levels of management...

...Nonetheless, an answer can be found in his Scale and Scope: Capitalism is triumphant thanks to the wise corps of salaried managers who control and guide the largest business enterprises...

...In the early 1920s, consequently, Ford had more than 55 per cent of the domestic auto market—a lead that he blew by delaying the introduction of a better product...

...As for Britain's "personal capitalism," Chandler blames it for the fact that the British, alone among the big three, saw their share of the world's manufactures sharply decline from 1870 to World War II...

...Unfortunately, Chandler's manner of moving among the big three industrial nations and the several categories of firms—"dynamic," "stable," "great," and "lesser"— results in overlaps that greatly impair readability...

...Unlike Henry Ford, moreover, they did not lose their competitive lead...

...Control over the affairs of companies passed from founding owners and their progeny—the likes of the Rockefellers in America, the Levers in Britain, and the Rathenaus in Germany— to salaried managers who owned few if any shares of voting stock...

...Henry Ford designed a simple vehicle that was carefully tailored to the existing capabilities of standardized mass production...

...Had he taken the trouble to do this, Chandler could have put his managerial thesis to some crucial tests...

...After the three young Du Pont cousins—Alfred, Coleman and Pierre Samuel, all trained at MIT—bought the venerable but stagnant explosive-maker from their elders for $ 12 million in 1903, they fashioned a science-based company that profited mightily from its ability to score chemical breakthroughs and secure a succession of important patents...

...Contrary to the insinuation of massive personal profligacy, however, what this evidence suggests is that the founding families chose to use their profits to make other investments through the highly efficient London capital market...

...Although a manufacturer realizes an internal economy of scale when he builds a bigger and more efficient plant, he can realize an external economy of scale by purchasing components from large, specialized outside suppliers at a much lower cost than could be achieved by making them in-house...

...A shining example here is the chemical concern Du Pont...

...Scale and Scope is bigger and flabbier than it need have been...

...Asthe second chief ofU.S...

...Steel, this somewhat unscrupulous individual began in 1903 to host the notorious "Gary dinners," at which the guests—fellow steel-industry executives—conspired to set product prices...

...Chandler claims that by resisting price cuts over the strong objections of his managers (who had been trained by Andrew Carnegie), Gary not only idled his own plants but—worse still—allowed the new and as yet inefficient Bethlehem Steel to grab some of U.S...

...The author is better at generalizing about ambiences or styles of capitalism during the years he covers...

...What is to prevent autonomous managers, whose salaries and perquisites are generally tied to company size, from resisting external economies in order to keep their own personal domains as large as possible...

...Hand-inhand with managerial control, the author implies, went divisional structure, meaning the formal grouping of corporate functions into categories like manufacturing, marketing and planning...

...Again he is wrong...

...Is Unilever, for instance, really a more profitable company than Lever Brothers, its family-managed predecessor...

...There is agood deal of evidence to support the view that in Britain a large and stable income for the [founding] family was more of an incentive than the long-term growthofthe firm," he writes, pointing out that "in the years before World War I the payout in dividends appears to have been much greater in Britishthanin American firms, with the ratio of dividends to earnings running as high as 80 per cent or even 90 per cent...

...Steel's market share...

...Oddly, though, Chandler has nothing to say about the monopoly profits made possible by the Gary dinners, or the corresponding burden inflicted on consumers...

...By continuously slashing prices, he assured the growth of demand needed to keep his expanding plants humming...

...The Model ? provides a classic instance...

...Together these nations accounted for some 60 per cent of the world's manufactures...

...In the final section of Scale and Scope Chandler looks at more recent developments on the American business scene, particularly the wave of hostile takeovers and leveraged buyouts...

...In dodging this question, the author ignores recent academic work—notably that of his Harvard Business School colleague Michael C. Jensen—that centers on conflicts between the interests of corporate managers and shareholders...

...Why are the billion people now under its sway so much better off than the other four billion who live under regimes that limit economic freedom...