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The Transformation of Corporate Control.

The Transformation of Corporate Control This volume represents a sociologist's critique and revision of Alfred D. Chandler, Jr.'s The Visible Hand (1977). One can appreciate how Neil Fligstein was goaded to the effort, because the analytical basis of Chandler's analysis lies (whether by intent or intuitive convergence) squarely in the field of economics. Chandler finds the rise of the large modern industrial enterprise fundamentally based on innovations in the technology of production, transportation, and communication. Organizational innovations followed from these technical innovations as value-maximizing entrepreneurs perceived ways to take advantage of them and in turn devised new ways to accumulate, organize, and manage complex coalitions of inputs within the firm. These strategic and organizational innovations diffused (like any innovation) to other enterprises that could make use of them. Because of their technological bases, these innovations and their ultimate usage spread unevenly across the industrial scene. The differing structures of industries (scales and scopes of their member enterprises) prevailing today (or any time in the past) can be rather well explained as the legacies of previous strategic and organizational innovations that did (or did not) prove to create value within that market structure.

The preceding story strikes an economist as both cogent and complete. Fligstein prefers, however, to tell it in a very different way. He argues that the important changes were new "conceptions of control" percolating through the top managers of business enterprises. They arose not from new opportunities cast up by technological innovations but by a dialectical process from the failure of some preceding conception. Crucial to the success of a new conception was the role of the state: the ability of its managerial adherents to gain the support of the state or at least to persuade the state not to oppose it. This paradigm constitutes, in Fligstein's view, a necessary and sufficient replacement for the economic framework employed by Chandler.

When two conflicting paradigms claim to explain the same phenomena, we stage a horse race. Which does better at explaining the observed facts? Which tells the more consistent and fully grounded story about the actors in the rise of the modern enterprise, their objectives, and the basis for their successes and failures? Although a brief review cannot handicap every race, I shall argue that after N circuits of the track the score will be: Chandler, N--1; Fligstein, 1.

Let us start with the role of the state. The proposition is not in dispute that a nation's laws and the mores they represent affect the payouts to various allocations of business resources and thereby affect the allocations chosen. Fligstein's claim is a stronger one that makes the U.S. antitrust laws a fundamental influence on the development of the modern corporation, first in the 1900s by removing any doubt that collosive price-fixing was illegal, then by closing off horizontal mergers in 1950. A reasonable test of the importance of the Sherman Act's restriction of collusion is to compare the prevalence of horizontal consolidations in the United States to that in another industrial country similar except in its failure to impose such a restriction. Chandler himself happily provided such a test in Scale and Scope: The Dynamics of Industrial Capitalism (1990, pp. 286-91). Despite the dissimilar public policies, the turn-of-the-century merger movement in Great Britain closely resembled in scope and character that in the United States. Insofar as horizontal consolidations in both countries responded to competing firms' inability to stifle competition, the common cause lay in the difficulty of sustaining collusive arrangements that are not enforceable at law. Although collusion has persisted in some markets for extended periods, it tends strongly to self-destruct because of each member's individual incentive to cheat and profit by undercutting the agreed-on price and thereby selling a much enlarged quantity. This fragility of collusion common to Britain and the United States is what mattered, not the legal difference embodied in the Sherman Act. Fligstein could reply that the fundamental force was then the shared common law, with its refusal to make collusive agreements enforceable at law. It seems fruitless, however, to count as the fundamental cause of some change the failure of some other force to arise and halt it.

Another test of the competing analyses can be applied to Fligstein's key construct, a "conception of control." A conception of direct control of competitors (collusion or predation) gave way, in his view, successively to a "manufacturing conception" (horizontal and vertical integration), then to a "sales and marketing conception," and finally to a "financial conception." An obvious difficulty with his analysis is locating the roots or (retrospectively) measuring the scope of acceptance of a new conception. A conception seems to be merely a hunch widely shared among chief executives that "it is important to do X," which is a good deal less than a reasoned expectation that X will advance some desired goal. The concept runs into several specific difficulties:

First, in Fligstein's view a new conception arises because its predecessor is perceived to have failed. Chandler's framework permits but certainly does not require innovation to spring from failure. A sufficient reason for undertaking a strategic or organizational innovation is that it is expected to yield increased business success. Although the failure of a current strategy can in various ways increase the likelihood of experimenting with innovation, it is not necessary. Chandler therefore faced no need to undergo the contortions that Fligstein does in trying to explain why the manufacturing conception must have failed in order for the sales and marketing conception to arise (chapter 4).

Second, explaining an action by the actor's unobservable propensity to act is obviously unsatisfying, and Fligstein tries to avoid this trap by relating the rise of a new conception to the backgrounds of chief executives newly taking control of companies. Chandler's approach certainly implies that boards of directors will countenance the choice of new chiefs with the best sort of human capital to implement any contemplated changes in strategy. One would expect this rational process to explain, as it does, why choices of executives' backgrounds differ between industrial sectors at any one time and why they change in particular sectors as they do. Fligstein's approach throughout suffers from failing to recognize that the payouts of all major strategic and organizational innovations have differed greatly among industrial sectors with predictable influences on the sites of innovation and routes of diffusion. It thus passes up the opportunity exploited so effectively by Chandler and others of using differences in the structural opportunities for successful innovation afforded by industries' underlying structures to explain the locus and spread of innovation.

Third, the reader wonders what Fligstein will make of the "finance conception," which arrives on the scene with the rise of the go-go conglomerates of the 1960s. What happened to it in the 1980s, when a number of firms succeeded in increasing their profitability by selloffs and spinoffs that reduced their diversification? Has the finance conception become the finance misconception? No, it is still the same conception, just running in reverse (p. 293). In short, what would seem to be Fligstein's best example of a failed conception begetting its own replacement passes unnoticed.

In the score quoted above I awarded one heat to Fligstein. He takes the position, perverse on its face, that the factors governing the rise of the modern corporation should not be inferred on the basis of what succeeded ex post (p. 300). Suppose, however, that we do focus on the failed strategies. Large numbers of purposeful and powerful executives have indeed pursued strategies that proved broadly unsuccessful: attempts at horizontal collusion in the late nineteenth century, consolidations unsupported by internal reorganization and rationalizations in the years that followed, and conglomerate mergers and unrelated diversification in the 1960s. These in the final analysis do resemble fads or "conceptions" more than they do insightful perceptions of new strategic possibilities. If Fligstein had restricted his claims to the inability of Chandler's paradigm to explain the transient sway held by these strategies, the madness of crowds, his book would be smaller in scope but much more successful than it is.

Richard E. Caves is George Gund Professor of Economics and Business Administration at Harvard University. He is the author or coauthor of several books, including the text American Industry: Structure, Conduct, Performance, 6th ed. (1987).
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Author:Caves, Richard E.
Publication:Business History Review
Article Type:Book Review
Date:Jun 22, 1990
Words:1381
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