Industrial and Corporate Change, Volume 19, Number 2, pp. 297316 doi:10.

1093/icc/dtq008

Alfred Chandler and capabilities theories of strategy and management

David J. Teece*

Alfred D. Chandlers scholarship on the large industrial enterprise has deepened understanding of economic development, and helped establish the field of strategic management research. Chandlers monumental work emphasized the importance of organizational innovation, managerial acumen and business performance. A particular contribution was the support provided for a capabilities theory of the business enterprise. This article also looks at recent developments in industrial organization that are less well explained and appreciated in the Chandler framework.

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1. Introduction
Alfred Chandlers work, which focused on understanding the strategy, growth, and structure of the large industrial enterprise, is monumental. While driven by the curiosity and methods of the historian, his scholarship has also been well received by strategic management scholars and by some economists.1 His commitment to building painstakingly researched case studies with as much richness of detail as possible, without the limiting filter of a narrow theory-testing focus, has provided raw material for countless other scholars.2 His insights, drawn from thoughtful comparisons across his sample of case studies, are profound, and often contrary to what

*David J. Teece, Thomas W. Tusher Professor, IBI F402, Haas School of Business #1930, University of California, Berkeley, CA 94720-1930, USA. e-mail: teece@haas.berkeley.edu
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McCraw (2008: 209) notes that, in the early 1970s, some 10 years after the publication of Strategy and Structure, Chandler was better known to professors of business studies than of history. Chandler (1971) cited Talcott Parsons structural functionalist perspective (which explores a social structure by analyzing the functions of its constituent elements) as a key influence on his approach. Although Chandlers approach was informed by Parsons sociological research, Chandlers major works looked exclusively at the internal dynamics of the firm from managements perspective, eschewing the analysis of changes in the labor force or in politics and society (see, e.g., 1977: 6).

The Author 2010. Published by Oxford University Press on behalf of Associazione ICC. All rights reserved.

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contemporary theorizers in economics believed (Teece, 1993).3 He will have an enduring impact not only on business history, but also on management and organization theory. His work was also a precursor to the emergence of capabilities theory in management and economics. Chandler identified patterns in the organizational transformations of corporations in a variety of industries and countries in the last half of the nineteenth and first half of the twentieth centuries. Although his work was largely atheoretical, he provided key pointers for others that effectively, if inadvertently, deeply influenced the field of strategic management. More than any other scholar, he underscored the importance of excellence in top management, not just for the performance of the enterprise but also for the performance of national economies. His work showed that management can provide the intellect and impetus for organizational innovation and performance improvement at the enterprise level. The article begins with a review of Chandlers indirect role in inspiring the field of strategic management. It also indicates how the concept of strategy has evolved. The following section looks specifically at how Chandler helped focus attention on the role of top management in shaping the large industrial enterprise. The next section looks at organizational capabilities, another concept that Chandler helped to advance. Final sections look at recent developments in industrial organization that Chandler overlooked or perhaps downplayed in his later studies.

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2. Initiating the discussion of corporate strategy

Chandlers Strategy and Structure (1962) was one of the earliest studies in strategic management, preceding the subjects formal existence as a field of research. As Chandlers research progressed, he became increasingly engaged with concepts that developed in management and economics. In turn, the development of these concepts has drawn to varying degrees on Chandlers own contributions. Yet, despite his willingness to recognize how theoretical frameworks such as transaction costs or evolutionary economics shed light on his own studies, in the main he stayed away from developing theories of his own. He saw his primary task as describing the development and evolution of the large industrial enterprise in the United Statesand later in Europe and Japanand comparing across cases to derive generalizations that transcend the historical settings of the case studies. Chandler saw the cluster of top management decisions as constituting strategy. In his first major work, he defined strategy as the determination of the basic long-term
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Chandler (1984) described his method as the comparison of detailed case studies to generate nonhistorically specific generalizations. The best known of Chandlers generalizations is probably his normative observation that the organizational structure of the enterprise should follow (support) corporate strategy (1962).

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goals and objectives of an enterprise (1962: 13) and developed the proposition that strategy follows structure (ibid.: 14).4 He also identified strategy as responding to environmental factors, such as the opportunities and needs created by changing population and changing national income and by technological innovation . . . The prospect of a new market or the threatened loss of a current one . . . (ibid.: 15). His work portrays top managers responding to the opportunities presented by late nineteenth century phenomena such as the expansion of the railroads and urbanization by centralizing control over integrated production and distribution units, then later instituting a decentralized multidivisional structure. The multidivisional form permitted a team of top executives to control a large organization far more efficiently than a unitary set-up in which top executives would also try to exercise authority over operational details. Moreover, the multidivisional organization was not a one-size-fits-all solution; each company could adapt it to some degree in order to fit their particular needs (ibid.: 284). Although today it seems obvious that top management is important to the ongoing success of the enterprise by virtue of seeking new markets, creating and implementing new business models, and improving the organizational structure, this was not well articulated in scholarship prior to the 1960s. Moreover, early formulations of strategy tended to emphasize the coordination function of top management. In a famous early treatise on top management, Barnard (1938/1968) opined that the creative side of organization is coordination (p. 256) and cooperation, not leadership, is the creative process (p. 259). In Strategy and Structure, Chandler shows how executives at the most successful business enterprises of the early 20th century discovered and developed roles for themselves in making long-term decisions about the direction of their enterprises and then made investments and modified organizational structures to make those strategies work . . . Chandler showed executives doing strategic management work and achieving remarkable performance outcomes. Moreover, he showed a process of administrative change within organizations that involved shifts in strategic direction, rather than adjustments for simple efficiency (Rumelt et al., 1994b: 16). But strategy is not, as Chandler defined it, just about determining long-term goals. A goal is not a strategy. Strategy involves coherent and consistent decisions, coordinated resource allocations, and theories of action (outcome and response) that may help indirectly achieve a goal unattainable by direct frontal attack. A strategy defines how a firm is going to go about winning in a marketplace when it confronts capable competitors, taking into account customer needs and the expected behaviors and responses of rivals. It involves designing a business model, including the formulation of a compelling value proposition for the customer. Market segmentation is also
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Although most scholars would today identify feedback mechanisms between a firms organizational structure and its strategy, Chandler was unquestionably identifying an empirical regularity of the early industrial enterprises that he studied.

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critical, as are the decisions about which capabilities to buildor not to buildand how and when to deploy them. Most importantly strategy is about how focus is achieved and assets are orchestrated to exploit opportunities in the market and weaknesses in competitors. Its fundamentally about achieving sustainable profitability. In short, as Richard Rumelt (2009) has explained, strategy involves diagnosis, a guiding policy, and coherent action. The essence of strategy is the creation and use of advantage. However, there is no simple formula or rule by which managers can guide the enterprise so as to achieve sustainable profit. Nevertheless, how management develops and implements strategyand strengthens competitive advantageis important to enterprise success. Chandler implicitly recognizes certain of the required elements of a good strategy, but not others. The analytical component to strategyand a deep appreciation of organizational constraintsis arguably inherent in Chandlers narrative but is not what he chose to emphasize. For Chandlers managers, success requires achieving scale and scope by expanding, leveraging, and rationalizing resources. Its also about making bold investments. Building managerial hierarchies suitable for controlling extensive operations is another critical component of Chandlerian strategy. As discussed later, these success factors are perhaps a better explanation of how to succeed in early industrial development than of how to succeed in highly competitive open economies in todays post-industrial society. Hence, while Chandler did so much to stimulate the development of the strategy field, he did little to distinguish between goals and strategy, and he underplayed the co-evolution of technologies and firms. He did little to help us understand the sources of heterogeneity and how top managers could organize resources to exploit the enterprises strengths and their rivals weaknesses. He placed little emphasis on complementarities or on how national institutions impact industrial performance. In fairness, however, Chandlers approach did not deny the importance of these issues. Indeed, many of the building blocks required to understand such issues are there, at least in faint outline.

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3. The importance of the executive and organizational innovations

Executive-level managers are of central importance in Chandlers view of industrial history and economic progress. His first proposition in Strategy and Structure (1962: 8) begins: administration is an identifiable activity. Administration includes the formulation and execution of long-term strategy, which in turn determines the firms structure, scale, geographical distribution, level of integration, and diversification. Although the direction of causality has been a source of debate (e.g. Hall and Saias, 1980), the linking of strategy and structure helped to launch the

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field of strategic management. He also underscored the great importance of a competent managerial class (and the organizational innovations they created) to economic development.5 He recognized that routines were the norm and that the creation of new administrative forms and methods (Chandler, 1962: 2) was an exception that warranted attention. Chandler was clear that an economy could not prosper without good administrators and managers:6 Most essential to the long-term health and growth of the enterprise are the learned capabilities of top management. These managers make the critical decisions in allocating personnel and financial resources that determine the fate of the enterprise and often the entire industry of the country in which it operates (2001: 3; italics in original). While he was very clear about the influence of national contexts on observed outcomes, he also implicitly tells stories about how the managers of successful firms create and shape markets. He may not even have been aware of how significant that observation was. Its consequences continue to influence strategic management theory. Chandlers somewhat heroic view of the manager, responding to the needs and opportunities of changing technologies and markets (1969: 279), was far from universally embraced.7 Jensen (1989), in an echo of Berle and Means (1932), voiced concerns about the potential for opportunism by non-owner managers, didnt trust managers to invest well, and argued for high debt burdens as a way to reduce the free cash flow at the disposal of management. Chandler (1990b) believed, on the contrary, that the multidivisional form of organization struck the right balance between discretionary control of resources and access to the capital needed for growthand that excessive debt would tend to choke investment in new product and process development. Williamson (1975, 1991, 2009) likewise sees multidivisional (M-form) corporate organization (with the divisions set up as quasi-autonomous profit centers) as an organizational innovation providing a means of better allocating corporate cash relative to the unitary, functionally divided (U-form) organization. The M-form allows top managers to redirect cash flow to the highest-return opportunities among the operating divisions. Chandler (1962) explains how the M-form structure helped facilitate diversification as well as efficiency. In the M-form organization, control over capital is delegated to divisional managers under the auspices of a
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Rosenberg and Birdzell state that it can reasonably be argued that the Wests success in technological innovation is attributable to its success in organizational innovation" (1986: 31). See Galambos (this issue) for an analysis of the institutions outside the enterprise, such as universities, that were necessary for creating the new class of professional managers that the Chandlerian corporation (and the economy) required in order to thrive. Prior to Chandler, business history was dominated by debate over the moral character of business leaders. Chandlers work decisively moved the field toward its current shape (John, 1997).

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strategically-focused headquarters function. Divisional managers then compete in what Williamson (1975) called a miniature capital market, with potential gains in efficiency over external markets deriving from the superior depth of managements knowledge of the firms opportunities compared to the knowledge of investors and bankers. Chandlers and Williamsons assessments of the adoption of the M-form on organizational performance have been corroborated empirically (Armour and Teece, 1978; Steer and Cable, 1978; Teece, 1980, 1981).8 Chandlers insights into the relationship of strategy, structure, and performance were broadened by the international comparisons in Scale and Scope (1990a). One of these was his analysis of the origins of market leadership. For Chandler, competitive advantage in the early 20th century flowed from execution of a three-pronged strategy: investment in large-scale production to lower unit cost; investment in marketing, distribution, and purchasing networks; and recruitment and organization of professional managers. Entrepreneurs able to perform these actions in young or changing industries gained advantages not only from low unit costs, but also from product-specific learning across all functional areas (1990a: 35). Pioneers who failed to commit the necessary resources fell behind. For example, despite Britain being the source of key inventions in synthesized dyes in the mid-19th century, British firms were bypassed by German rivals that were the first organizations to invest in large-scale production and to implement modern managerial structures.9 This occurred despite the facts that British textiles constituted the single largest market for dyes in the early 20th century and that Germany imported a key input (coal tar) from Britain (p. 278). Similar stories played out in steel, pharmaceuticals and other industries. Chandler attributes the relatively poor performance of so many British firms to the preferences of the nations entrepreneurs for personal capitalismpreferences for family control and short-term profits over professional management and long-term investmentas opposed to the managerial capitalism that Chandler had chronicled in the United States. Chandlers account stops short of a full explanation for these national differences,10 but his main point, that differences in management strategy and organizational transformation were decisive, is what concerns us here.

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See Bardolet et al. (this issue) for evidence that internal capital markets may be inefficient.

Chandlers analysis is consistent with Teeces (1986) emphasis on complementary assets as an important factor for determining the winners and losers in the context of innovation. Elbaum and Lazonick (1983) point to the persistence of Victorian social institutions as the source of rigidities that prevented British firms from adopting managerial capitalist organizations.

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4. Chandlers capabilities perspectives

Although Chandler largely avoided using his rich historical data to test hypotheses, he was very ready to import theories from the social sciences to shape his case study construction and analysis. One such theory was transaction cost economics, an encounter with which he once described as one of those rare and pleasurable scholarly experiences the introduction to a perspective that gives fuller meaning to old data and opens challenging vistas (1982: 117). And in his next major work (1990), economizing on the costs of transactions is introduced alongside scale and scope as a source of efficiency (p. 17). But in that same book, capabilities appears roughly ten times more often than transaction costs. It is hardly surprising that Chandler, with his firm grounding in empiricism, would see the utility of the concept of organizational capabilities for understanding the real-world outcomes that he studied. In Williamsons transaction cost framework, firms, when making outsourcing decisions, balance internal governance costs with (asset specificity-driven) transactions costsother things equal. But other things are often not equal; appropriability issues are likely to be paramount, and internal production costs and other manifestations of capability, including good corporate governance itself, may depend endogenously on the governance mode (e.g. market or internal organization) chosen. In a 1992 article where Chandler discusses both capabilities and transaction cost economics, he rejected the transaction as the unit of analysis in favor of firm-level reasoning so that, with respect to the boundaries of the firm, the nature of the firms facilities and skills becomes the most significant factor in determining what will be done in the firm and what by the market (1992: 86). In his last major works (2001, 2005a), the phrase transaction costs doesnt appear, while organizational capabilities are invoked repeatedly. The language of organization-specific capabilities can be traced back at least to Selznick (1957). Cyert and March (1963) developed an influential model of organizational learning in which standard operating procedures are seen as the memory of the organization, thereby undergirding capability. In Strategy and Structure (1962), Chandler pointed to the importance of skills and learning for the enterprise: trained personnel with manufacturing, marketing, engineering, scientific, and managerial skills often became even more valuable than warehouses, plants, offices. . . (p. 383). Such skills are important to organizational capabilities.11 Chandler emphasized how these skills were somewhat fungible and

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However, converting skills to organizational capabilities requires skills to be integrated into the process of organizational learning. Lazonick (1994) shows that the British in the mid-twentieth century had plenty of manufacturing skills but failed to transform these into organizational capabilities.

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could be used to enter new product lines and new markets.12 In this regard, his earlier work is quite Penrosian and is somewhat in the spirit of resource-based theories of the firm.13 The concepts of capabilities and organizational learning were joined and gained further prominenceand stronger microfoundationswith their use and elaboration by Nelson and Winter (1982), who extended the idea of organizational routines as the firm-specific repository of know-how. These ideas have now been employed in numerous other studies, e.g. Cohen and Levinthal (1990), Henderson and Clark (1990) and Teece (1982). Chandler sprinkled the phrase organizational capabilities throughout Scale and Scope (1990a). By way of definition, he wrote (p. 24) that organized human capabilities such as knowledge, skill, experience, and teamwork are essential to exploit the potential of technological processes that lead to economies of scale or of scope. He added elsewhere that the combined capabilities of top and middle management can be considered the skills . . . most valuable of all those that made up the organizational capabilities of the new modern industrial enterprise (p. 36, italics in original). Chandler also seems to have understood that capabilities require renewal. In Strategy and Structure, he wrote that executives who actually allocate available resources . . . will be defined in this study as entrepreneurs. In contrast, those who coordinate, appraise, and plan within the means allocated to them will be termed managers. So entrepreneurial decisions and actions will refer to those which affect the allocation or reallocation of resources for the enterprise as a whole . . . (1962: 11, italics added).14 To further underscore his understanding of the creative nature of successful corporate leadership, he said elsewhere that In the creation of the decentralized, multidivisional structure, all four of the firms here studied were making a creative [as opposed to an adaptive] response to new needs and new conditions (1962: 284). This is very much in line with the strategic fit aspect of dynamic capabilities (Teece, 2007), although the concept of fit dates back to at least Barnard (1938/ 1968), who wrote that a firms survival has two terms in it: first, the . . . relevance of

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Helfat and Lieberman (2002) show that the presence of relevant capabilities is vital to successful market entry. See Edith Penrose (1959) and Teece (1982). A longer discussion of Chandlers meaning of the word entrepreneur in the administrative context can be found in Chandler and Redlich (1961). This author was not aware of Chandlers more specific views on capabilities theory when he initiated his own work (Teece et al., 1990, 1997; Teece, 2007). However, Chandlers historical accounts were appealed to for general support with respect to understanding diversification and growth (Teece 1980a, 1982).

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its purpose to the environmental situation; and, second, its efficiency (p. 83, italics added).15 Scale and Scope also emphasized the organizations collective accumulation of know-howwhich he later called learned capabilities (1992: 84)as a barrier to entry: the first movers initial, inter-related, three-pronged investments in manufacturing, marketing, and management created powerful barriers to entry. Challengers had to make comparable investments at a greater risk, precisely because the first movers had already learned the ways of the new processes of production . . . As the first movers functional and administrative skills were honed, the barriers to entry by newcomers became even more formidable. As Mowery in this issue notes, Chandlers analysis rarely penetrated much more deeply than a repeated emphasis on the elements of the three-pronged investment (Mowery, 2010). However, he can perhaps be said to anticipate what has come to be known as dynamic capabilities (Teece et al., 1990, 1997; Teece, 2009). Dynamic capabilities are the firms ability to integrate, build, and reconfigure internal and external resources/competences to address and shape rapidly changing business environments. They determine the speed and degree to which the firms resources/ competences can be aligned and realigned to match the opportunities and requirements of the business environment. The underlying competences, the most important of which are rooted in creative managerial and entrepreneurial acts, can be divided into three clusters for (i) sensing (identification and assessment of opportunities), (ii) seizing (mobilization of resources to address an opportunity and to capture value from doing so), and (iii) transforming (shaping and reshaping the organization and its markets).16 Chandler engaged with the capabilities literature in a 1992 Journal of Economic Perspectives article that relies in part on Nelson (1991), which in turn drew in part on one of the first articles about the theory of dynamic capabilities (Teece et al., 1990).17 In it, Chandler introduced the idea of strategic (as opposed to functional) efficiency, which included, e.g. moving more quickly into expanding markets and
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Purpose was Barnards term for what Chandler called strategy.

Williamson appears to recognize the importance of entrepreneurial managers. He quotes businessman Rudolf SpreckelsWhenever I see something badly done, or not done at all, I see an opportunity to make a fortuneand adds: Those instincts, if widely operative, will influence the practice and ought to influence the theory of economic organization (1999: 1089). The statement invites a capabilities-based theory of the firm.

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In late 1990, Chandler had participated in a conference on Fundamental Issues in Strategy where the Nelson paper was presented (Rumelt et al., 1994a). Lazonick (e.g. 1990), a participant with Chandler at the Harvard Business Schools Business History Seminar in the late 1980s, also

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out of declining ones (p. 83). He also noted that capabilities are a potentially sound basis for competitive advantage because theyre company-specific and difficult to transfer yet they must be enhanced by constant learning (p. 84). Embracing Nelsons concept of routines as the building blocks of capabilities, he writes that Even more important are those routines acquired to coordinate these several functional activities. Essential, too, are those learned in the strategic activities of responding to moves by competitors, of carrying on the long, costly, and risky process of moving into new markets and of adjusting to the constantly changing economic, social and political environment. The resulting organizational capabilities permit the enterprise to be more than the sum of its parts (1992: 86).

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5. Is Chandlers work anachronistic?

Alfred Chandler chronicled the seismic shift to mass production in the modern corporation during the Second Industrial Revolution. The time in which he lived and his immersion in his subject may have blinded him to the significance of the next major shift toward globally networked manufacturing and services (Teece, 1993; see also Mowerys and Lazonicks articles in this issue). Although the transition is still underway, the importance of intermediate forms of integration had already been noted by numerous scholars by the mid-1980s (e.g. Richardson, 1972; Piore and Sabel, 1984; Thorelli, 1986; Jarillo, 1988). The academic literature on network forms of organization was well developed by the time Chandler (2001) published his study of the electronics industry, where the phenomenon of globally networked enterprises deeply committed to outsourcing and offshoring was perhaps most advanced. Chandler made enormous contributions and provided brilliant insights, but it is not clear that he fully appreciated the substantive shift in the relationship between leading firms and their suppliers that was well underway by the late 1980s. By the same token, he may have overestimated the extent to which Chandlerian (large, integrated) firms would dominate capital-intensive industries in the future. Nor is it clear that he appreciated the transformations brought about by the expansion of venture capital, which greatly facilitated the formation of new enterprises aimed at bringing new products to market. The following sections examine each of these issues.

influenced Chandlers use of the capabilities concept, as suggested by the acknowledgements in Scale and Scope (1990).

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5.1 Underestimating supplier capabilities?

While Chandler had a relatively sophisticated understanding of the evolution of the supply base over time, he underestimated the potential for overseas suppliers to develop capabilities which would allow them to evolve into global competitors. Although he highlighted the virtues of vertical integration in most of his work, by the 1990s he had come to understand how vertical integration interacts with the capabilities of the supply base: As their industries grew and especially as the demand for replacement parts and accessories expanded, so too did the number of suppliers who had acquired the necessary capabilities. Once such goods were available from a sizeable number of suppliers, the need for vertical integration through direct ownership lessened (1992: 89). In other words, in the early stages of an industrys evolution when certain inputs are not available in competitive supply, vertical integration may be necessary to assure the quality or quantity of supply.18 As supplier capabilities and/or number of suppliers increases, vertical integration becomes less necessary.19 This is unquestionably a capabilities/internalization theory of vertical integration, not a transaction cost one.20 Chandlers capabilities theory of vertical integration appears to be quite different from mainstream (pre-transaction cost economics) interpretations such as the life cycle of integration that Stigler (1951) identified. Stigler stated that firms in young industries needed to internalize supply until markets had matured to a size that would justify entry by specialist suppliers. Stiglers theory of vertical integration is a scale theory, not a capabilities theory. Sturgeon (2002) points out that Chandlers (1977) model of integration and growth, which relied on economies of speed21 (high throughput and utilization) and a growing market for output, was undermined, at least in the US electronics industry, by global competition in the 1970 s and 1980 s. To escape from under the high-fixed costs of their in-house manufacturing, the US firms embraced what
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A similar argument is advanced in Langlois (1991).

See Helper and Sako, this issue, for a more detailed discussion of Alfred Chandler and theories of supply relationships. Williamson argued that the backward integration Chandler (1977) had documented at Pabst Brewing, Singer Sewing Machine, McCormick Harvester, and Ford from a transaction cost point of view . . . would appear to be mistakes (1985: 119). Chandler responded by pointing out that this claim was ahistorical: when those companies actually made this investment, the supply network was unable to provide the steady flow of a wide variety of new highly specialized goods essential to assure the cost advantages of scale (1992: 89). In Scale and Scope (1990), Chandler demoted economies of speed to a subset of economies of scale (p. 24).

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Sturgeon calls a modular production network, in which the value chain is divided between firms at points where the specifications of the transaction can be codified using standardized protocols. Modularized production is most common for manufacturing technologies (e.g. the placement of components on a circuit board or the fabrication of digital logic microchips) that are generic, i.e. not specific to individual products. In many cases the processes involved are highly automated and can be readily reprogrammed to serve a different customer. These specialist (but not cospecialized) suppliers can realize the economies of speed for their customers that in Chandlers heyday were only realizable within a highly coordinated corporate environment. Ironically, some of these new generic suppliers have themselves begun to invest in vertical integration, although more in pursuit of cost control or opportunities for differentiation than for purposes of ensuring throughput. Typical examples include product assemblers that invest in the manufacture of inputs such as plastic enclosures, or a microchip foundry that invests in the downstream process of chip assembly. When Chandler surveyed the industrial landscape of the electronics industry at the end of the twentieth century, he reduced the whole outsourcing phenomenon to a word, nexus (2001: 5), by which he meant the industrys pool of suppliers. This was his way of minimizing a global phenomenon even as it was exhibiting expansion beyond the electronics sector where it began. He perhaps failed to recognize that the boundaries of the firm could no longer be sharply delineated given the growing importance of alliances and networks, and the case of accessing components and raw materials from unaffiliated suppliers.22 Among other things, Chandlers vertical integration may have reduced his ability to recognize that suppliers, over time, could build the competences needed to supply entire systems from design to distribution and emerge as viable core firms (to use Chandlers expression). This has occurred in the cases of Taiwans Acer and Koreas Samsung. Although their more visible successes came after the publication of his book, they were already actively developing capabilities in marketing and distribution that might have alerted Chandler to their purposes and potential. These facts also raise important issues about the dynamic consequences of extensive outsourcing for the competitiveness of firms, who may find that more than just the supply source has moved outside the boundaries of the firm. Vertical structures have informational advantages that the theory of the firm has not yet fully
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The significance of the network phenomenon was apparent as early as the mid-1980s (e.g. Miles and Snow, 1986). Although he underplayed this in Inventing the Electronic Century (2001), Chandler later arrived at a clear appreciation of networks, as evidenced by a statement in one of his last publications, a short reply to critics in 2005: the functions of the Chandlerian enterprise since the 1970s . . . have shifted from focusing on the products firms sell to orchestrating networks of suppliers and contractors (2005b: 137).

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appreciated (Teece, 2007). Integration can also ensure the availability of complements or bottleneck assets necessary to assure the appropriation of the profits from a firms own innovations (Teece, 1986, 2006).23 The informational advantages of integration have been noted in the context of some applied studies. For example, in the case of natural gas pipelines and the merchant function (buying and selling gas), integration permits informational efficiencies from such facts as the accessing of data about supply interruptions, demand shifts, and transportation bottlenecks that might be too transitory and/or too business-sensitive to be worth sharing between a stand-alone pipeline and multiple merchant partners (Teece, 1990). Incidents like the gradual consolidation of the elements of the post-break-up AT&T into a small number of firms and the poorly formulated deregulation of Californias electricity market following the forced de-integration of generation and transmission suggest that the potential benefits of vertical integration are still not well understood by industry regulators, many of whom have been hostile to vertical structures. In the computer industry, IBM under CEO Louis Gerstner in the 1990s was able to demonstrate the benefits of bucking the trend toward disintegration by building on the firms well-established capabilities to provide complete hardware and service solutions, even if this meant supporting competitors hardware in some cases (Davies et al., 2007). Other hardware firms are unable to match IBMs internal competences, but they have followed its example of forward integration into services (Davies, 2004). One of the most valuable capabilities is now system integration (Prencipe et al., 2003), with varying degrees of vertical integration underpinning it depending on each firms capabilities, including the transformational capability of its managers. A more nuanced understanding of the benefits of vertical integration (particularly in the innovation context) may be starting to emerge (Teece, 2000).

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5.2 Over-emphasizing large enterprises?

Chandler remained convinced of the continued dominance of large, long-lived, multidivisional enterprises with a significant degree of vertical integration: I am willing to predict not only that the modern industrial firm . . . will be as powerful an economic institution at the beginning of the twenty-first century as it is in the twentieth, but that a number (though certainly not all) of the U.S. global leaders today will remain as dominant in their global industries in the future as they have been in the past. Moreover, their rivals will continue to be, as has been true in the past half-century, not entrepreneurial start-ups but comparable enterprises from overseas or from related industries (1990c: 758).
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Langlois (1988) provides a comparative analysis of the leading theories of vertical integration.

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His confidence extended to the point of believing that venture capital-fueled start-ups would remain relatively unimportant: Established firms in recent years have played a greater role in the creation of new industries than entrepreneurial start-ups because the time and cost of commercializing technologically complex new products and processes is not in invention or research. It is in developmentin the long and complex course required to produce goods in large enough quantity and with high enough quality to be purchased by a substantial number of customers in national and global markets. The commercializing of a new product or process, in itself a continuing learning experience, rests on cumulative organizational learning in the development, production and marketing of earlier products. Moreover, large industrial multi-market firmsbe they American, European or Japanesehave throughout this century used retained earnings (the profits from products earlier commercialized) to fund the high cost of developing new ones (1992: 97). However, as early as Scale and Scope (1990), Chandler recognized that supply conditions had changed significantly from those that led to industrial gigantism: In established industries, the need for assured supplies and outlets lessened. As economies expanded and markets were internationalized, alternative stable sources of supply . . . became available. Therefore companies had less need to reduce transaction costs by owning their suppliers and outlets. Indeed, many companies performed vertical disintegration . . . (p. 613, italics in original). Chandler nevertheless believed there were private and social benefits that flowed from vertically integrated firms. In his later book about the information technology and consumer electronics industries, published in 2001 just as the first Internet boom was finishing a period of amazing growth, Chandler compares the prospects of the United States, with its wealth of start-ups, against those of the large, vertically integrated Japanese producers: This historians verdict . . . is that the Japanese challengers have strong advantages in shaping the infrastructure of the Electronic Century. First, the multi-sectored, multi-industry enterprises have more of the organizational capabilities and income required to commercialize products of new technologies and to enhance products of existing technologies than do the single-sector enterprises. Second, Japans economies of proximity and its far-wider range of electronic products and specialized organizational capabilities give the Japanese industry an edge on the development of new and improved hardware systems . . . If . . . evolution continues as

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it has in the past, through the commercializing of new Information Technology hardware and the enhancing of existing ones[sic], then the U.S. industry is handicapped. If, on the other hand, the central innovative thrust in the new Electronic Century is based on exploitation of the revolutionary new ways of communication, broadly defined, then the U.S. enterprises have the advantage (2001: 236237). His fundamental insights are in many ways still very sound. Integration (whether vertical, lateral, or horizontal) still plays a very large role in economic organization. Witness the reintegration of many telephony companies since the AT&T divestiture, the recent acquisition of Sun Microsystems by Oracle, and Boeings recent reintegration backwards into components and subsystems following delays with its Dreamliner project. Chandler failed to see much role at all for outsourcing and "open innovation" models of business organization. He also underestimated the importance of start-ups in the United States and overseas. This can perhaps be attributed to his vantage point, that of successful industrial firms during a century (roughly 18501950) in which American industrial might rose to an unrivaled stature and markets were more domestically oriented than during the current period, in which world trade has been liberalized and China has joined the global system. Ironically, Chandler was probably also handicapped by his embrace of the concept of organizational capabilities (and the advantages of learning generally) without a deeper understanding of the sources of competitive advantage.24 Where Chandler saw strength in the multidivisional structure of the Japanese electronics giants, there was actually some weakness. When Howard Stringer, a non-engineer as well as a non-Japanese, was brought in as CEO, one of his first priorities was to induce Sonys divisions to cooperate amongst themselves in significant efforts such as software development (Borland, 2006). Moreover, the companies learned routines of relying on the Japanese market for the development of successful products that could later be rolled out worldwide became a handicap as markets began to move at Internet speed and/or became fragmented among competing standards.

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5.3 Neglect of financialization?

In his major books, Chandler paid little attention to the financial structure of industrial enterprises. Nor did he spend much time studying changes in capital market activity and fund managers incentives. This was perhaps consistent with his strengths; but it meant that he largely ignored the expansion of capital markets and the securitization of non-mortgage debt, which began in the mid-1980s. However, the concluding chapter of Scale and Scope briefly considered the emergence
24

Lazonick (2002: 6) points out that Chandlers interest in organizational capabilities did not extend to analyzing their sources.

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of an institutionalized market for corporate control (1990: 625) that led to waves of conglomeration and divestiture. Chandler didnt see changes of ownership as inherently good or bad but where decisions and actions have been motivated by the desire to obtain . . . profits based solely on the transactions involved in the buying or selling of companies . . . they appear to have reduced and even destroyed the capabilities essential to compete (ibid.: 627). Thus, in the financialization of the large enterprise, Chandler saw a potential source of decline for the United States. Hence, Chandler did pay some attention to mergers and acquisitions, but less to merger and acquisition financing. Granted, his focus was on the industrial enterprise, not the banks, venture capital firms, and private equity firms that expanded greatly on the back of financial innovations from the 1980s onward. However, the expansion of financial markets and the introduction of new financial instruments undoubtedly affected the evolution of firms and industries. Chandlers neglect of these complex phenomena left a significant lacuna for others to fill. Because of the latest crisis in financial markets, there is now urgency to this task.

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6. Conclusion
Chandler chronicled the rise of big business as no other scholar has done. He made it very clear that economic growth and prosperity depends on educated and well-trained managers. He was perhaps the first to drive home the importance to productivity and prosperity of innovations in internal corporate structure and procedures. Many take the contributions of managers and management for granted. Chandler made it clear that one cannot and should not. He helped explain, as no one else has, how and why large industrial enterprises emerged and expanded, domestically and internationally. He chronicled differences in managerial styles and structures between the United States, Europe and Japan. He endeavored, with somewhat less success, to explain the origins of new business ecosystems like Silicon Valley. No onehistorian or otherwisehas done more to help us understand capitalism as it has evolved in the United States and Europe, than Alfred Dupont Chandler, Jr. His few omissions and blind spots serve only to remind us of his grandeur.25 The absence of a narrow theoretical lens in his research was in many respects a strength because he cast a wide net and reported much more detail than he might have had he been trying to test a preconceived hypothesis. Economics, business studies, and other fields are poorer for the scarcity of scholars taking up Chandlers mantle and conducting careful, detailed case studies that can shed light on the phenomena of this century the way that Chandler did for the last.
25

McCraw (2008: 222225) provides a list of fifteen useful critiques that have questioned some aspect of Chandlers method, perspective, or conclusions.

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Alfred Chandler left a considerable legacy across the social sciences. Among myriad other benefits, he provided helpful foundations and support for a capabilities theory of economic organization. Developing more robust and testable capability theories is a task he left for others.

Acknowledgements
The author would like to thank William Lazonick for many helpful comments and Greg Linden for his considerable assistance with this manuscript.

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