Industrial and Corporate Change, Volume 19, Number 2, pp.

297–316
doi:10.1093/icc/dtq008

Alfred Chandler and “capabilities”

theories of strategy and management
David J. Teece*

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Alfred D. Chandler’s scholarship on the large industrial enterprise has deepened
understanding of economic development, and helped establish the field of stra-
tegic management research. Chandler’s monumental work emphasized the im-
portance 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 appre-
ciated in the Chandler framework.

1. Introduction
Alfred Chandler’s 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 com-
parisons 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
1
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.
2
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 Chandler’s approach was informed by Parsons’ sociological research, Chandler’s major
works looked exclusively at the internal dynamics of the firm from management’s perspective,
eschewing the analysis of changes in the labor force or in politics and society (see, e.g., 1977: 6).

ß The Author 2010. Published by Oxford University Press on behalf of Associazione ICC. All rights reserved.
298 D. J. Teece

contemporary theorizers in economics believed (Teece, 1993).3 He will have an

enduring impact not only on business history, but also on management and organ-
ization 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

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can provide the intellect and impetus for organizational innovation and performance
improvement at the enterprise level.
The article begins with a review of Chandler’s 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 ad-
vance. Final sections look at recent developments in industrial organization that
Chandler overlooked or perhaps downplayed in his later studies.

2. Initiating the discussion of corporate strategy

Chandler’s Strategy and Structure (1962) was one of the earliest studies in strategic
management, preceding the subject’s formal existence as a field of research. As
Chandler’s research progressed, he became increasingly engaged with concepts that
developed in management and economics. In turn, the development of these con-
cepts has drawn to varying degrees on Chandler’s 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
States—and later in Europe and Japan—and comparing across cases to derive gen-
eralizations 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

3
Chandler (1984) described his method as the comparison of detailed case studies to generate “non-
historically specific generalizations.” The best known of Chandler’s “generalizations” is probably his
normative observation that the organizational structure of the enterprise should “follow” (support)
corporate strategy (1962).
 Chandler and “capabilities” 299

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 urbaniza-
tion 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

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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 on-
going success of the enterprise by virtue of seeking new markets, creating and im-
plementing new business models, and improving the organizational structure, this
was not well articulated in scholarship prior to the 1960s. Moreover, early formula-
tions 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 lead-
ership, 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, coordi-
nated 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

4
Although most scholars would today identify feedback mechanisms between a firm’s organizational
structure and its strategy, Chandler was unquestionably identifying an empirical regularity of the
early industrial enterprises that he studied.
300 D. J. Teece

critical, as are the decisions about which capabilities to build—or not to build—and
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. It’s fundamentally about achieving sustainable profitabil-
ity. 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 strat-
egy—and strengthens competitive advantage—is important to enterprise success.
Chandler implicitly recognizes certain of the required elements of a good strategy,

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but not others. The analytical component to strategy—and a deep appreciation of
organizational constraints—is arguably inherent in Chandler’s narrative but is not
what he chose to emphasize. For Chandler’s managers, success requires achieving
scale and scope by expanding, leveraging, and rationalizing resources. It’s 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 devel-
opment than of how to succeed in highly competitive open economies in today’s
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 enterprise’s strengths and their rivals’ weaknesses. He placed little emphasis on
complementarities or on how national institutions impact industrial performance. In
fairness, however, Chandler’s 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.

3. The importance of the executive and organizational

innovations
Executive-level managers are of central importance in Chandler’s view of industrial
history and economic progress. His first “proposition” in Strategy and Structure
(1962: 8) begins: “administration is an identifiable activity.” “Administration” in-
cludes the formulation and execution of long-term strategy, which in turn deter-
mines the firm’s 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
 Chandler and “capabilities” 301

field of strategic management. He also underscored the great importance of a com-

petent managerial class (and the organizational innovations they created) to eco-
nomic 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 adminis-
trators 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 oper-
ates” (2001: 3; italics in original).

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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.
Chandler’s 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,
didn’t 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 bal-
ance between discretionary control of resources and access to the capital needed for
growth—and 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

5
Rosenberg and Birdzell state that “it can reasonably be argued that the West’s success in techno-
logical innovation is attributable to its success in organizational innovation" (1986: 31).
6
See Galambos (this issue) for an analysis of the institutions outside the enterprise, such as uni-
versities, that were necessary for creating the new class of professional managers that the
Chandlerian corporation (and the economy) required in order to thrive.
7
Prior to Chandler, business history was dominated by debate over the moral character of business
leaders. Chandler’s work decisively moved the field toward its current shape (John, 1997).
302 D. J. Teece

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 manage-
ment’s knowledge of the firm’s opportunities compared to the knowledge of
investors and bankers. Chandler’s and Williamson’s 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
Chandler’s 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 strat-

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egy: investment in large-scale production to lower unit cost; investment in market-
ing, 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 organiza-
tions 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 nation’s entrepreneurs for “personal capitalism”—preferences
for family control and short-term profits over professional management and
long-term investment—as opposed to the “managerial capitalism” that Chandler
had chronicled in the United States. Chandler’s account stops short of a full explan-
ation for these national differences,10 but his main point, that differences in man-
agement strategy and organizational transformation were decisive, is what concerns
us here.

8
See Bardolet et al. (this issue) for evidence that internal capital markets may be inefficient.
9
Chandler’s analysis is consistent with Teece’s (1986) emphasis on complementary assets as an
important factor for determining the winners and losers in the context of innovation.
10
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.
 Chandler and “capabilities” 303

4. Chandler’s “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 en-
counter 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.”

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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 Williamson’s transaction cost frame-
work, firms, when making outsourcing decisions, balance internal governance costs
with (asset specificity-driven) transactions costs—other 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 firm’s
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” doesn’t appear, while organizational capabil-
ities 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 organ-
izational 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, en-
gineering, 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

11
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.
304 D. J. Teece

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 prominence—and stronger microfoundations—with their use and elabor-
ation 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

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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 man-
agement 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 cor-
porate 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 firm’s survival “has two terms in it: first, the . . . relevance of

12
Helfat and Lieberman (2002) show that the presence of relevant capabilities is vital to successful
market entry.
13
See Edith Penrose (1959) and Teece (1982).
14
A longer discussion of Chandler’s meaning of the word “entrepreneur” in the administrative
context can be found in Chandler and Redlich (1961). This author was not aware of Chandler’s
more specific views on capabilities theory when he initiated his own work (Teece et al., 1990, 1997;
Teece, 2007). However, Chandler’s historical accounts were appealed to for general support with
respect to understanding diversification and growth (Teece 1980a, 1982).
 Chandler and “capabilities” 305

its purpose to the environmental situation; and, second, its efficiency (p. 83, italics
added).15
Scale and Scope also emphasized the organization’s collective accumulation of
know-how—which 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

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administrative skills were honed, the barriers to entry by newcomers
became even more formidable.
As Mowery in this issue notes, Chandler’s 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 firm’s 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 firm’s resources/
competences can be aligned and realigned to match the opportunities and require-
ments of the business environment. The underlying competences, the most import-
ant of which are rooted in creative managerial and entrepreneurial acts, can be
divided into three clusters for (i) sensing (identification and assessment of oppor-
tunities), (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

15
“Purpose” was Barnard’s term for what Chandler called “strategy.”
16
Williamson appears to recognize the importance of entrepreneurial managers. He quotes business-
man Rudolf Spreckels—“Whenever I see something badly done, or not done at all, I see an
opportunity to make a fortune”—and adds: “Those instincts, if widely operative, will influence
the practice and ought to influence the theory of economic organization” (1999: 1089). The state-
ment invites a capabilities-based theory of the firm.
17
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 School’s Business History Seminar in the late 1980s, also
306 D. J. Teece

out of declining ones” (p. 83). He also noted that capabilities are a potentially sound
basis for competitive advantage because they’re “company-specific” and “difficult to
transfer” yet they must be “enhanced by constant learning” (p. 84).
Embracing Nelson’s 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 stra-
tegic activities of responding to moves by competitors, of carrying on the
long, costly, and risky process of moving into new markets and of ad-
justing to the constantly changing economic, social and political envir-

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onment. The resulting organizational capabilities permit the enterprise to
be more than the sum of its parts (1992: 86).

5. Is Chandler’s 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 Mowery’s and Lazonick’s 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 Chandler’s use of the capabilities concept, as suggested by the acknowledgements in

Scale and Scope (1990).
 Chandler and “capabilities” 307

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

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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 industry’s 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 unques-
tionably a capabilities/internalization theory of vertical integration, not a transaction
cost one.20
Chandler’s 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. Stigler’s theory of vertical integration is
a scale theory, not a capabilities theory.
Sturgeon (2002) points out that Chandler’s (1977) model of integration and
growth, which relied on “economies of speed”21 (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

18
A similar argument is advanced in Langlois (1991).
19
See Helper and Sako, this issue, for a more detailed discussion of Alfred Chandler and theories of
supply relationships.
20
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).
21
In Scale and Scope (1990), Chandler demoted “economies of speed” to a subset of economies of
scale (p. 24).
308 D. J. Teece

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 Chandler’s heyday were
only realizable within a highly coordinated corporate environment.
Ironically, some of these new generic suppliers have themselves begun to invest in

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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 enclos-
ures, 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 industry’s 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, Chandler’s 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
Chandler’s expression). This has occurred in the cases of Taiwan’s Acer and Korea’s
Samsung. Although their more visible successes came after the publication of his
book, they were already actively developing capabilities in marketing and distribu-
tion that might have alerted Chandler to their purposes and potential.
These facts also raise important issues about the dynamic consequences of exten-
sive 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 struc-
tures have informational advantages that the theory of the firm has not yet fully

22
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 sup-
pliers and contractors” (2005b: 137).
 Chandler and “capabilities” 309

appreciated (Teece, 2007). Integration can also ensure the availability of comple-
ments or bottleneck assets necessary to assure the appropriation of the profits from a
firm’s 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 mul-
tiple 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

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formulated deregulation of California’s 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 firm’s 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 IBM’s 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 firm’s 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).

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 enter-
prises from overseas or from related industries (1990c: 758).

23
Langlois (1988) provides a comparative analysis of the leading theories of vertical integration.
310 D. J. Teece

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 development—in 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 commercializ-
ing of a new product or process, in itself a continuing learning experi-

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ence, rests on cumulative organizational learning in the development,
production and marketing of earlier products. Moreover, large industrial
multi-market firms—be they American, European or Japanese—have
throughout this century used retained earnings (the profits from prod-
ucts 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 con-
ditions 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 com-
panies had less need to reduce transaction costs by owning their suppliers
and outlets. Indeed, many companies performed vertical disintegra-
tion . . . (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 historian’s 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 organ-
izational capabilities and income required to commercialize products of
new technologies and to enhance products of existing technologies than
do the single-sector enterprises. Second, Japan’s economies of proximity
and its far-wider range of electronic products and specialized organiza-
tional capabilities give the Japanese industry an edge on the development
of new and improved hardware systems . . . If . . . evolution continues as
 Chandler and “capabilities” 311

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 innova-
tive 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: 236–237).

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 divesti-
ture, the recent acquisition of Sun Microsystems by Oracle, and Boeing’s recent

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“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 1850–1950) 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 Sony’s
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.

5.3 Neglect of “financialization?”

In his major books, Chandler paid little attention to the financial structure of in-
dustrial 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 Chandler’s interest in organizational capabilities did not extend
to analyzing their sources.
312 D. J. Teece

of “an institutionalized market for corporate control” (1990: 625) that led to waves
of conglomeration and divestiture. Chandler didn’t 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

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of financial markets and the introduction of new financial instruments undoubtedly
affected the evolution of firms and industries. Chandler’s 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.

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 one—historian or otherwise—has done more to help us understand capital-
ism 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
Chandler’s 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: 222–225) provides a list of fifteen “useful critiques” that have questioned some
aspect of Chandler’s method, perspective, or conclusions.
 Chandler and “capabilities” 313

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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