A review of a review -  David Teece on Alfred Chandler’s Scale and Scope: The Dynamics of Industrial Capitalism  

David Teece’s essay (Teece, 1993) reviewing Alfred Chandler’s Scale and Scope: The Dynamics of Industrial Capitalism (Chandler, 1990) provides a supportive summary of Chandler’s work, highlighting its importance for studies of economics and industrial history.  Teece contrasts Chandler’s thesis with contemporaneous perspectives on these topics and analyses possible limits of the work looking forward.

The central thesis is well summarised; that success in businesses is dependent on a three-pronged approach ensuring investment in production, distribution and management. Much focus is given to the third of these, management approach being a key differentiator in Chandler’s review of the USA, Britain and Germany over the period of consideration. A clear connection is made between the economic success of businesses and national economies.

Teece tests the validity of Chandler’s thesis, contrasting it with prevailing perspectives in the field, for example: that growth is a product of opportunity and investment alone; and, that the environment in which a business operates defines its success.  Teece revisits Chandler’s claims and evidence to test his work against these alternative perspectives and often finds them to be valid.

Teece also highlights areas of potential disagreement, including: whether Chandler’s view is useful for the future and Chandler’s failure to consider sub-contracting or outsourcing.

• On the first point, the paper notes that the needs of the future may be different to the past with shifts towards micro-electronics, bio-tech and materials.  There is also discussion of the disconnection between businesses and nation states, given aspects of what we now think of as globalisation.  With hindsight this appears valid, with large businesses (notably IT and bio-tech) having reached out beyond national borders and not necessarily directly contributing to the economies of the countries in which they do their business.

• On the second point Teece gives examples of businesses that had (at the time) begun outsourcing, noting their future may be uncertain if Chandler’s theories apply, given his emphasis on vertical integration. Again, hindsight would indicate that managers have developed the necessary capabilities to manage outsourcing well. It is easy to conceive that outsourcing is an inevitable response to the increasing complexity of products, where individual components of a laptop or modern car are more sophisticated than the complete products of the past, requiring specialisation at the component level.

Many of Chandler’s claims appear valid today and may have significantly influenced the ways that successful businesses operate, or indeed both. “Managers” are prevalent, with recent estimates up to 1 per 4.7 employees (Hamel & Zanini, 2016).  Teece’s paper does not report an optimum number of managers, with the emphasis placed on capabilities to deliver coordination and control. However, whether we currently see too many or the right amount, management as a discipline remains important.

Innovation (and science and technology) is critical to delivering a more sustainable future. Innovation is defined as the successful commercialisation of a new idea or discovery and whilst governments have a role in creating the right environment for innovation, commercialisation, and indeed production and distribution, are the business of businesses. Therefore, understanding what makes for successful businesses, that know how to innovate and grow, is essential to delivering government policies and objectives, and in turn delivering the practical changes needed for a sustainable future.

References:

Chandler, A. D. (1990). Scale and Scope: The Dynamics of Industrial Capitalism. Cambridge, MA: Harvard Univ. Press.

Hamel G. & Zanini M. (2016), Excess Management Is Costing the U.S. $3 Trillion Per Year, Harvard Business Review, 5 September. Available at: https://hbr.org/2016/09/excess-management-is-costing-the-us-3-trillion-per-year

Teece, David J. (1993) “The Dynamics of Industrial Capitalism: Perspectives on Alfred Chandler’s Scale and Scope.” Journal of Economic Literature 31, no. 1 (1993): 199–225.