May 14, 2007
The Death of an Intellectual GiantBy Thomas Lifson
Alfred D. Chandler, Jr. is no longer among us, having passed away at the age of 88. He may not have been a household name, but Al Chandler was one of those very rare intellectuals who made a positive difference in the way we understand and cope with the world. Al, as he preferred to be called, virtually invented the discipline of business history, and contributed enormously to the way managers do their jobs, the way corporations organize themselves, and ultimately to the way in which material progress is advanced.
In an age where we all struggle to comprehend a pattern and direction to the relentless fast-paced change in technology-driven businesses, Chandler's work provides the vital perspective on how change was managed by business over the course of the last two centuries of economic growth and development. Almost unfailingly, he asked the right questions that would shed light on where we go from here, learning from history instead of repeating old problematical behavior.
The world we live in is largely the product of the activities of corporations where decisions are made and actions taken at the behest of salaried managers. The so-called managerial revolution enabled firms to grow larger than a size that could be understood and controlled by one person (plus an extended family). Two centuries ago, things were entirely different. Most people ate food and used products that were produced within roughly a 30 mile radius, a distance beyond which transportation added too much expense to make popular consumption practical. There was sea-borne trade, of course, bringing coffee, tea, silks, spices, and other luxury products from distant lands. And canals, where they could be financed and built, made transportation cheaper. But ordinary people in ordinary circumstances depended on what could be produced for them by small scale enterprises, mostly run by families, in their local areas, and delivered to them by horse-powered or human-powered transportation.
Al Chandler is the man who explained how this miraculous transformation in our lives was able to be created and managed. How, more precisely, human beings developed the means to create and successfully sustain enterprises of a scope beyond the ability of a single individual to manage. Today we take for granted the notion of a firm made up of sub-units (divisions, subsidiaries, branches, etc.) run by professionals who do not own the firm. Outside of a few trading companies like the Hudson's Bay Company, most enterprise functioned at a local level and on a small scale.
The divisonalized corporation was a radically new invention, developed in America as the result of the growth of railways. More specifically, as Chandler's research showed, by the Pennsylvania Railroad, whose Mainline between Philadelphia and the iron-producing region of Western Pennsylvania grew to unprecedented length and volume of traffic. This created the necessity of breaking down the enterprise into units under the control of hired professionals, called division superintendents, whose work was coordinated by higher level managers responsible for making the enterprise as a whole fit together seamlessly.
This may seem an obvious solution to us today, accustomed as we are to mammoth enterprises. But at the time it was a radical departure from the practice of owners directly managing their enterprises. The Pennsy (as it became known) had to invent divisional management because two trains cannot occupy the same track space at the same time. Somebody has to make sure that terrible collisions don't happen. One person simply could not adequately manage everything spread out over the distance a railroad covered. Necessity drove the invention divisionalized management, coordinated by other managers, and reporting to a general manager responsible for the enterprise as a whole.
Once the Pennsy was able to coordinate a larger scale system, it was able to gain a decisive advantage over less managerially sophisticated railroads. Drawing traffic from a larger area, it was able to discount rates and steal customers from rivals who could only carry freight or passengers a short distance before handing them over to a another railroad for the balance of their journey. More than a century and half before the internet became feasible, the advantages of a network were becoming a strategic tool in the hands of far-sighted managers, and Chandler was the theorist who explained how and why networks were an important competitive strategic weapon.
It didn't take long for others, such as Cornelius Vanderbilt, who merged smaller railroads into what became the New York Central System, to learn the lesson, and replicate the divisional management system. Powered by the new organizational form, railroads consolidated into much larger systems, and then changed everything in America and around the world. Based on the ability of railroads to create national markets, big business became a possibility, and based on the management innovations they fostered, the new scale businesses were able to survive and flourish.
Technology may have provided the means to build big business, but it was human beings who needed to innovate in the realm of marketing, finance, distribution, research, and other disciplines, in order to realize the potential technology had unlocked. The Singer Sewing Machine Company, for instance, became the world's first multinational manufacturer, dominating markets in America, Europe, and even Japan based not on the superiority of its products, but on its invention and perfection of the installment payment purchase system, enabling ordinary families to buy an expensive item and pay for it out of the savings on clothing purchases. Chandler demonstrated how the integration of different management disciplines was essential to the growth of big business.
One of the Pennsylvania Railroad's major customers, the DuPont Chemical Corporation in Wilmington, Delaware, became the first manufacturing company to apply the lessons of divisional management. DuPont grew into a large industrial enterprise thanks to the enormous demand for its gunpowder during the Civil War. By necessity it expanded its gunpowder manufacturing beyond the original mill on the shore of the Brandywine River. As in the case of railroads, close attention to management of a spread-out complex enterprise was necessary to avoid the ever-present danger of accidents, which could result in catastrophic explosions.
DuPont thrived, and became one of America's foremost manufacturers. When General Motors was still a young and troubled company, DuPont, one of its creditors, stepped in and provided management expertise and capital, and gained control of a large share of its equity (which it was forced to divest as an anti-trust measure in the 1950s). General Motors was able to combine formerly independent companies like Chevrolet and Oldsmobile into a single enterprise, while running them as independent divisions. Drawing strength from its ability to win customers for its low-priced Chevrolet (which used model changes to win over customers bored by the unchanging Ford Model T), and then sell them Oldsmobiles, Buicks and Cadillacs as they made more money, GM was able to surpass Ford in the 1920s, providing "a car for every purpose and every purse."
Chandler's first masterpiece, Strategy and Structure, was the story of this process, and remains in print 40 years after it was first published. He went on to produce a prodigious output, including another even more important path-breaking book, The Visible Hand: The Managerial Revolution in American Business, which won the two top awards for history writing, The Pulitzer Prize, and the Bancroft Prize.
But it is not by his scholarly output alone that Chandler's greatness should be understood. He nurtured generations of business historians and other scholars, inspired by his detailed analysis of the nitty gritty data of businesses, immersing himself in corporate archives and examining financial reports, management memoranda, and other primary source documents in painstaking detail, asking the key questions about why certain practices worked, and how they were invented and spread worldwide.
In Japan, where business history is popular reading among managers and the public alike, very important senior executives have told me I was privileged to have sat at the feet of a man they regard as a god, since I had the tremendous good fortune to be one of his students, and to subsequently become his colleague on the faculty of Harvard Business School.
From the first moment I walked into his seminar and he started asking questions, I was hooked. He knew exactly how to lay out the elements of a puzzle that had been faced by real companies and managers, and draw out of his students a full analysis of the situation and why the managers and companies chose the courses they did.
He changed the way I understand the world, and the insights he shared with me have shaped my entire intellectual life. There was no limit to his curiosity. One day, for instance, he asked his graduate seminar to explain why New York City, not Boston, Philadelphia or Baltimore had become America's largest port, commercial center, and metropolis. Technology, sociology, geography, and innovation, everything was fair game for analysis.
By the time I got to study with him, Al Chandler was already a world famous scholar, acknowledged as the father of modern business history. Prior to his work, business histories tended to be either hagiographies of entrepreneurs, in the manner of Horatio Alger, or denunciations of robber barons, in the manner of Ida Tarbell. He turned it into a rigorous data-based discipline.
Chandler was a completely unpretentious man, kind, avuncular, and more than willing to listen to and learn from any source. His personal modesty was as notable as his standing in the world outside. His family background was rather aristocratic, but he had the ease and grace of a man who never worried about his standing or status. The faculty of Harvard is full of prima donnas, riven by rivalries and jealousies. Al Chandler is the one man about whom I never heard an unkind word. He inspired awe and respect, as well as true affection.
Chandler's importance and reputation are likely to continue to rise, for his lessons are more relevant and useful in today's world of rapid change than ever before. For example, three years ago, while the New York Times and other publishers still enjoyed high stock prices, and financial analysts wrote glowingly of high margins and excellent free cash flow, the handwriting on the wall for the newspaper industry was readily apparent to students of Chandler like Jack Risko of Dinocrat.com and me. We wrote seperately and together about the problems ahead, and in our private correspondence we agreed that Chandler was the man who taught us how to think critically about the future of an aging industry.
Chandler long ago traced the pattern of industries wedded to old technologies and unable to adapt to radically new ones. He used to lead his graduate students to analyze lists of the 50 biggest companies in America each decade of the century, and explain the incredible change over time, despite the assurances of left-leaning intellectuals like John Kenneth Galbraith that monopoly capitalism had made competition a thing of the past, now that consumer demand could be manipulated.
There are very few people who rise to the level of Alfred D. Chandler, Jr. He will be missed.
Thomas Lifson is editor and publisher of American Thinker.