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Scale and Scope: The Dynamics of Industrial Capitalism.

By Alfred D. Chandler, Jr. Cambridge, Massachusetts: The Belknap Press of Harvard University Press, 1990, Pp. 628, $35.00.

No institution of modern society has had a more significant effect than the modern industrial enterprise. it was the organizational structure for firms which provide the bulk of economic growth through the first half of the twentieth century, as well as the means by which goods were produced and distributed, resources allocated and incomes earned. In this book Alfred Chandler provides an analysis of the factors that spurred the development and growth of the modern industrial enterprise by examining the industrial histories of the 200 largest industrial firms in the United States, Great Britain and Germany during the first sixty to seventy years of the "second industrial revolution". Two of the most important factors that precipitated the development of the modern industrial enterprise were the new transportation and communication systems, such as railroads, steamships, telegraph and cable, which allowed firms to take advantage of substantial economies of scale and scope. To take full advantage of these economies of scale and scope firms to make three interrelated investments. First, production facilities had to be large enough to exploit the economies of scale and scoop. Second, a marketing and distribution network had to be developed which could maintain sales at a sufficient level so that production facilities could maintain enough throughput to minimize the cost of production. Third, to extract the maximum benefits from the first two investments, it was necessary for the firm to make an additional investment in the quality and structure of management to assure the efficient of the firms production, marketing and distribution systems.

There are several general features of the process of growth of the modern industrial enterprise. One of the most important is the advantage of the first mover. Not surprisingly, the first firm to make the required "three pronged" investment in production, marketing and management was often to exploit a significant cost advantage and assume a dominant position in the industry, and maintain its dominant position for several decades. Second, to successfully challenge the dominant firm, potential challengers had to make similar investments in production, distribution and management sufficient to offset the first movers advantage. Third, the form of the industrial firm and the nature of competition and rivalry among firms was significantly influenced by the geographic, demographic, and political characteristics of its home market. The geographic size and population distribution of Britain was an important factor in the dominance of "personal capitalism" in Great Britain. While in the United States, the difficulty of coordinating activity in a larger geographic area and among a highly dispersed population necessitated the rapid development of an effective managerial hierarchy. Fourth, horizontal combinations were able to exploit a cost advantage from economies of scale and scope only if a central administrative control was quickly established which could rationalized production. Fifth, vertical integration was often pursued in order to maintain ready sources of inputs so that the cost advantages of scale and scope could be maintained. Sixth, expansion abroad and into new product areas was driven by the effort to take advantage of the organizationally based competitive advantages which resulted from economies of scale and scope.

The "core dynamic" identified by Chandler is the "collective facilities and human skills as they were organized within the enterprise." These could be fully exploited if the facilities of the firm and the skills of its workers were carefully coordinated to take full advantage of economies of scale and scoop. The sizes of the American and German markets made possible greater output, and thus required more extensive managerial hierarchies than did the British market. Therefore in Britain firms could be managed by the owner and his family. In these personally owned, personally managed firms, assured income was the main concern. Thus, the firms income was often paid in dividends, instead of invested in new products and markets, with the result that British firms were typically smaller and grew more slowly than either German or American firms. When a large hierarchy was required then the goal on which managers and major investors could agree was long term growth, a situation typically found in American and German firms.

This book is separated into five parts. The first and last contain the introductory material and conclusions. Each of the remaining sections is devoted to the development of the industrial enterprises in either the United States, Great Britain, or Germany. The first introductory chapters and conclusions are required reading for anyone desiring a deeper understanding of the dynamics of modern industrial capitalism or the development, strategic and rivalrous behavior of the modern industrial enterprise. However, to study only the introduction and conclusions will neglect the rich comparative treatment of modern industrial enterprises in the three most important modern industrial societies. This material can be approached on a country by country basis or, since the material is also organized on an industry basis, by reading of the development of each industry in each of the three countries.

This book can also prove to be a valuable educational resource in undergraduate courses and possibly graduate courses. In addition to lucid exposition, this work is replete with examples of firm response to both competitors and the external environment which are readily incorporable in economics courses at and above the principles level. A final point is that several months spent in careful study of this work will provide more insight into the development, strategic decision making, and behavior of the modern industrial enterprises than any number of standard MBA courses devoted to these topics.
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Author:Speir, John P.
Publication:Southern Economic Journal
Article Type:Book Review
Date:Apr 1, 1992
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