ENDURING LOGIC OF

INDUSTRIAL SUCCESS
ALFRED CHANDLER
ENDURING LOGIC OF INDUSTRIAL SUCCESS

• Published 1990.
• What does the title mean?
• What are the issues associated with declining industrialization?
• What is meant by enduring logic?
• What is industrialization?
• How is wealth created?
ECONOMIES OF SCALE

• How do you achieve economies of scale?

• What is the relationship between scale and price?
• Unit price drops as a result of scale, why?
• Cost advantage is achieved through scale.
ECONOMIES OF SCALE

• Leverage fixed cost.

• Distill out variable cost.
• Division of labor – batch to moving assembly line.
• Automation reduction in production runs.
• Technology.
• Size leads to lower cost per unit.
• Higher levels of efficiency.
• Example of Ford Motors.
SCALE

• Largely associated with increasing the overall scale of operations.

• Average cost declines as quantity increases.
• However, there is a point where the actual Long Run Average Cost increases – U shape
curve.
• Another source comes from purchasing power associated with purchasing larger volume
of inputs.
• Scope could lead to scale.
DISECONOMIES OF SCALE

• Opposite.
• Scaling has limits where you have surpassed the optimum point of production – unit cost
starts to rise.
SCOPE

• Multiple use of inputs as factors of production – same materials used for make multiple
products.
• Product diversification – single car platform used for multiple models.
• Possible that there is no limit or plateau associated with scope.
• Occurs when divisions or businesses share centralized functions such as finance, accounting ,
marketing, distribution.
• Large international conglomerates in the 1970s and 80s – divisions sharing financial skills
across all divisions.
• Current example – 3D printing – same equipment producing multiple products.
LOGIC OF MANAGERIAL ENTERPRISE

• Making the necessary investments in management, production, distribution in order to

achieve economies of scale and, or scope.
• Benefit from the learning curve.
• Strategic intent is to dominate a portion of an industry to increase market share.
• Dynamic logic of growth and competition – drives modern industrial capitalism.
• Ignoring the logic – demise of USA having lost its competitive edge.
LOGIC OF MANAGERIALISM

• Investment in organizational structures, hierarchy of subordinates and reporting systems,

modern firm managed by a board of directors as opposed to single shareholder.
• System has been the engine of growth for the last 100 years.
• Rise of a professional managerial class.
• Separation of owners (shareholders) and day to day management functions.
THE LOGIC OF MANAGERIALISM

• Begins economies of scale and scope.

• Cost advantages derived from technologically advanced and capital intensive industries.
• Large plants produce products at a significantly lower cost – example cars – volume
increased, cost drops.
• Also many plants use a common set of resources as factors of production.
• Size alone not enough but needed distribution and marketing to complement.
• Fundamental it is an capital intensive investments that drives the system.
FIRST MOVERS (FMA)

• Usually the first to start has an advantage – learning curve.

• May have gained an advantage due to technological leadership or purchase of resources.
• First entrant.
• Control of resources, expertise, patents, innovation, management advantage.
• Usually rewarded with huge profit margins and have a monopoly-like status.
• Not all first movers are rewarded.
• May not capitalize on its advantage.
• Its first-mover disadvantages leave opportunity to others.
FMA

• Second-movers are interested in taking the lead role.

• As mentioned learning curve.
• Make large investments to capture market share.
• Leads to both horizontal and vertical integration.
• Horizontal – taking over competitors.
• Vertical – moving backward to control resources and forward to gain distribution.
• Leads to significant mergers and acquisition.
FIRST MOVERS

• Difficult to define.
• When is a first mover a first?
• Sustainable?
• How long is the advantage maintained?
• Is it deterministic?
• How do we measure or operationalize the concept?
WHEN LARGE IS NOT LOGICAL

• The assumption underpinning ?capitalism and as well other things found in nature is the
concept of growth.
• In capitalism, growth is growth and the only viable concept.
• How does this square with the idea of sustainability?
• 1970s, book written on limits - The Limits to Growth – computer simulation dealing with
exponential economic and population growth.
• What are the limits?
WEALTH CREATED?

• Limitless mergers and acquisitions during the 1990s leading to the creation of large multi-
nationals – managed as financial institutions.
• Theory: growth through diversification rather than improving logic of managerialism.
• Today – hyper-competition.
• Chandler asks:
• Why have so many large U.S. companies done so poorly – GE today.
• Why does size become a disadvantage v. asset.
REASONS FOR STALL

• Managerial enterprises can stagnate – too bureaucratic, red tape, legal implications.
• Can destroy your first-mover advantage due to wrong decisions – Blackberry,
Bombardier.
• Wrong theory – mergers and acquisitions do not create wealth.
• Too much focus on shareholder value and pension fund managers.
• 1970s downsizing became key – same rationale today – Roche.
RESTRUCTURING FOR COMPETITIVENESS

• Continual process of re-organization and restructuring.

• Can be destructive.
• Companies have for the last 100 years been stuck on the baosic strategy of growth
through economies of scope and developing markets that best fit their distinctive core
production and reseach technologies.
• Moved away from the creation of new entrepreneurial companies.
• Now on a different path of action – IT, knowledge, innovation, artificial intelligence.
SUCCESS COMES WITH

• Co-ordination and alignment of all resources within the firm.

• Need to lower price, improve quality, and provide a higher level of service.
• Concept of synergism.
• Entrepreneurialism is key having knowledge as the essential building block.
• Key question – how is wealth created today?