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A summary of STRATEGY AND

STRUCTURE: CHAPTERS IN THE
HISTORY OF THE INDUSTRIAL
EMPIRE by Alfred D. Chandler, Jr.
Vikas N Prabhu

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 A summary of

STRATEGY AND STRUCTURE: CHAPTERS IN THE HISTORY OF THE INDUSTRIAL EMPIRE

By Alfred D. Chandler, Jr. (1962: The M.I.T Press; 1982 reprint.)

Precursor:

The precursor to Chandler’s work was the trend in comparative business history where a study of
activity breadth (i.e. investigating many firms doing one activity) was considered as important as
studying organizational breadth (i.e. one firm doing all activities). One of the activities that gained
focus was ‘Business Administration’, especially due to expansion of American economy post WW2.

• Chandler’s own research showed emergence of multi-divisional type of organization,

especially amongst the topmost firms. Chandler advocated decentralized strategy working
through the “visible hand of the management” (The Economist, 2009)
• Du Pont, GM, Jersey Standard and Sears were the amongst the first to initiate major
reorganizations, and the “executives of these four began to develop their new structure
independently of each other and of any other firm. There was no imitation.” (p. 3)

Method:

In order to accomplish a comprehensive investigation, Chandler asserts a deep understanding of the

following is needed:

1. Administrative history of the firm

2. Growth trajectory of the firm
3. History of change in American economy
4. State of the field (in USA)

A sample of about 70 companies (listed in Table 2, p. 6) were studied, in addition to the initial survey
that was done on 50 largest industries of 1909 (listed in Table 1, p. 5). This large sample helped to
study, in addition to the 4 key companies, the “history of business administration in the United
States and changes in the larger American economy.” (p. 4)

Core concepts used:

• Industrial enterprise: “large private, profit-oriented business firm involved in the handling of
goods in some or all of the successive industrial processes from procurement of the raw
material to the sale to the ultimate consumer” (p. 8)
• Administration: high-level supervisory functions of coordinate, appraise, and plan performed
by executives; executed through a hierarchy that may involve several managerial levels, down
to the agents who directly accomplish the various organizational tasks

Submission by Vikas Prabhu, IIM, Bangalore | Page 1 of 9

• Strategic and Tactical decisions: The former is concerned with long-term health of the
enterprise while the latter concerns day-to-day operational decisions

Basic propositions made:

1. Administration is an identifiable activity that has specifically defined tasks which are different
from functional work. Especially in a large firm, this is a specialized task performed by a
dedicated team that does not involve in functional details
2. Administrator ought to handle to types of tasks:
a. Those concerned with long-term planning and appraisal
b. Those needed to meet immediate problems, handling contingencies/crises
3. Executives work in a hierarchy following different levels of authority, (see Chart I, p. 10) which
consist of:
a. The general office concerned with firm-level goals, policies
b. The divisional central office which is fairly self-contained in its resources, covering a
product-line or geographical region, and administers a number of departments
c. The departmental headquarters that supervises field units
d. The lowest-level of field units that execute the functional tasks
e. In the above hierarchy, upper levels perform strategic decisions while lower levels
invest in tactical decisions. The flow of authority is top-down: ones at the top are
entrepreneurial, and the intermediate decision makers are managers.

W.r.t above, Chandler lays down the “core competency” for an effective entrepreneur (p.12)

Conception of Strategy and Structure:

Having observed that variety of roles and levels in an administrative setup, Chandler deems his most
important thesis, “different organizational forms result from different types of growth can be stated
more precisely if the planning and carrying out of such growth is considered strategy, and the
organization devised to administer these enlarged activities and resources, a structure.” (p. 13)

Adoption of a new strategy entails adding new resources, and “alters the business horizons of the
men responsible for the enterprise” (p.13). In response to the new awareness created by the
opportunities (for growth or change), the organization ought to refashion its structure – either by
redeploying existing or expanding resources – to operate at the newly desired efficiency levels. If
the growth is not complemented by corresponding structural adjustment, the result will be
inefficiency. (p.16)

Historical Setting: The lead up to the ‘managerial revolution’ (The Visible Hand, 1977)

Phase 0: Prior to 1850, the American business scenario consisted of very small industries that were
directly managed and administered by individuals or familial groups and, hence, rarely needed
administrative focus/expertise. The owners divested themselves in functional activities and there
was no need to engage in long-term planning.

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Phase 1: Around this time, two business owners are highlighted as being the pioneers of starting
(nascent) administrative structures within the business setting: John Jacob Astor’s American Fur
Company (which created Northern and Western departments to manage fur trapping and sourcing)
and Nicholas Biddle’ Second Bank (whose organization had a divisional structure and incorporated
a detailed system of reporting). However, the foundation stone to formal business administration
was laid by the railroad construction which had as much significant administrative impact as it was
strategic: “its operation called for more administration than its construction” (p.21). Its formalization
was still embryonic as the diversity of operations was still limited.

Daniel McCallum, superintendent of Erie, who created organizational charts showing flows of
authority and reporting, affirms the need for the administrative setting when he comments that “…
Any system which might be applicable to the business and extent of a short road would be found
entirely inadequate to the wants of a long one…” (p.22). Railroads were the precedent for the
growth of the great industrial enterprise (see p.23). Rapid growth of urban market, coupled with
enhanced connectivity, demanded higher industrial outputs and, hence, strategies of geographical
dispersion and vertical integration took hold (p.24)

In the last decades of 1800’s, which heralded great material prosperity, the focus of business owners
was looking for efficient administrative structures to manage their newly created business empires.

Phase 2: Industrial expansion demanded taking on new functions. Here the story of Gustavus Swift
gives a succinct narrative of the evolution towards higher integration and consolidation of diverse
activities within the scope of one administrative enterprise (see p. 25-26). The vast resources
accumulated through the above strategy enabled these enterprises to diversify into related
markets/products as well as venture into secondary products that could “piggyback” upon the
existing structure and functions. The far markets were managed through subsidiaries. The Singer
sewing machine story gives an excellent example of marketing integration (see p.28)

Phase 2.5: In combination with vertical integration, there were also horizontal combinations of
producers/manufacturers – into trusts/federations – to combat the threat of excess capacity and
market glut. The New Jersey amendment (1889) facilitated joint incorporation, paving the way for
one company to hold stocks in another, thus, enabling legally controlled consolidation. (see p.31).
This phase, by consolidating loose alliances into tightly bound entities, greatly enabled economies
of scale and focused technological innovation. (p.31), which in turn enhanced the need for more
vertical integration. The story of National Biscuit (p.32-33) provides an excellent example.

Phase 3: The administration of the integrated enterprise was rendered inefficient due to lack of a
robust structure: its channels of authority remained unclear and the levels of integration tended
towards more centralized control. This was largely inefficient given the complex load of planning
and coordination for all units that was placed upon the headquarters (p.41). The multidivisional
decentralized structure emerged in the early part of 20th century to manage and coordinate the
operational and entrepreneurial complexity of the steadily growing and diversifying organization

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(see p.44). The changing environment of WWII gave impetus upon businesses to adapt and diversify
and that, in turn, emphasized the need for multidivisional structure. The four case-studies of the
book – du Pont, General Motors, Standard Oil, and Sears – are seen to be exemplars in having
transformed into the multidivisional structure and, hence, merit deeper study.

The case studies serve to affirm Chandler’s thesis of highlighting that structure follows strategy,
which he asserts by stressing upon multidivisional structure if firms have to (strategically) succeed
in the increasingly diverse and complex marketplace of the modern world (p.49)

The Case Studies

Case-study #1: du Pont

Historical Context: Around 1902, after a century of operations, the du Pont company was unclear
of its future. The older board members were in favour of a sell-off when Alfred du Pont offered to
buy it all (saving his “birthright” (p.52)). Once acquired, with the help of partners Coleman and
Pierre, the trio set out on an exercise to consolidate and reorganize the facilities, personnel and
functions, as they aimed to eliminate duplication and achieve systematic supervision by functional
coordination (p.56). As a first step, they hired enterprising executives (Haskell and Barksdale) to
manage their dynamite works; which the executives organized and managed much on their own.
Inspired by its success, the board went ahead to imitate the same structure in other two divisions –
black powder and smokeless powder. The entire team then came together in a centralized office
and assigned clearly defined roles splitting all administrative activities amongst themselves (see
p.57)

Strategic Drivers: consolidation of various units acquired over a period of time; manufacturing units
of different but related products

Initial Structural Modifications:

• Differentiated between entrepreneurial (President and VP) and operational (Director) tasks
• Line and staff level demarcation in communication and supervision of functions
• Organization of core functional departments: manufacturing (operations) and sales; and
non-core: Essential materials, development, real estate, legal, and treasury
• Appointment of roles was not inheritance driven (p.64)

The structural modifications took du Pont from being a family firm to a professional manned
enterprise (see Chart 2, p.62). The first phase of centralization (upto 1919) impressed upon
individual responsibility for operational matters, while the Executive Committee focused on broad
goals and policies, with focus on company as a whole. The financial analysis witnessed an increased
usage of statistical data and forecasting methods (by Donaldson Brown).

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Further centralization was driven by Haskell’s subcommittee report in 1919 which advocated a
functionally departmentalized structure aimed at maximum output with minimum effort. It aimed
towards coordinating functions (set of like activities) rather than like things (products). It involved
grouping broad functional activities into separate administrative units and placing it under individual
authority with undivided authority. (See charts in p.74 and 75). However, this model failed when
the strategy of diversification took over as a response to the threat of excess capacity due to
cancellation of government orders (1908) and end of the war.

Strategy of diversification intensified with forays into artificial leather (owing to common
technological expertise), pyroxylin (owing to ease of coordination), dyes (owing to market demand)
and varnish (owing to similar skills and machinery), finally culminating in a broad-based
diversification strategy that aimed at utilizing all of du Pont facilities (see p.89). The new strategy
created an experience mismatch within the organization, which led to confusions at the central
office (in matters of goal determination, resource allocation and appraisal), and also led to
inefficient planning due to unavailability of statistical data on the new products.

A new structure, which was product-based, was suggested to deal with the new administrative
needs (see Chart 4, p.97) wherein a common executive was responsible and accountable for all
functions along with profit and performance. Adoption of the multidivisional structure faced initial
resistance due to older executives (like president Irenee) who were conditioned by training and
experience to believe in the efficacy of the existing structure, and, hence, sought to defend it. The
younger executives attempted to “squeeze in” the new structure through proposing and
experimenting with ‘industry councils’ (see p.102) which worked very well. However, with post-war
recession pushing du Pont into losses on every product, the administrators were forced to adopt a
full-fledged multidivisional structure as shown in Chart 5 in p.108-109. The structure ensured that
senior executive at the general office focused on strategic decisions and entrepreneurial activities,
while the divisional managers had full authority and facilities to make their day-to-day tactical
decisions.

Case-study #2: General Motors

Historical Context: William Durant, who started as a small-time entrepreneur selling carts and
carriages in 1885, struck gold with acquiring the Buick car company. As Durant’s fortunes rose, so
did his ambitions and he pursued an aggressive course of volume production and vertical
integration, being focused exclusively on sales and marketing while leaving the centralized
administrative responsibilities to his colleagues. By 1908, predicting a sale of 500,000 cars per year,
Durant began combining various facilities and also acquiring small manufactures and created
General Motors, which was, then, just a holding company. In this pursuit of integration for
capacity/volumes, Durant failed on two counts: he did not prepare for demand dips and failed to
build sufficient cash backup; and, gave no thought to building an organizational structure that would
deliver benefits of scale and coordination.

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The first attempt at structuring happened in the recession of 1910 when the bankers took over the
struggling company and, under the leadership of James Storrow, attempted to place all GM activities
under a centralized structure that demanded cooperation between and control over the
autonomous subsidiaries. A board of managers was setup to determine broad policy and conduct
appraisals. Three permanent offices – purchasing, accounting, and production – were setup for
overall administration. However, in a few years, this attempt failed due to the resistance on the part
of the subsidiaries who perceived an interference in their hitherto independent working style.
Subsequently, Durant returned back to the helm and continued his pursuit for volumes. Meanwhile,
GM was transformed from a holding company to an operating company which, legally had a
multidivisional structure but, in reality, had units that were loosely coupled. As a result, the relations
between the operating divisions became more haphazard and less coordinated. The du Ponts, who
held the say in GM at this point, took up the task to bring in centralized control. Their attempt, which
involved creation of top-level committees that oversaw autonomous divisions, may have worked at
du Pont company but did not do much impact at GM which continue to be an “expanding
agglomeration of different companies.” (p.127)

The pursuit of volumes coupled with lack of coordination led to a great accumulation of inventory
which, due to drop of sales in the post-war recession, led to a dead-loss of $84M for GM. This is the
point the du Ponts take over, Durant quit, and the extensively researched and well-elaborated
organizational structure of Alfred Sloan, who was then the President of a GM subsidiary.

The Sloan Structure:

• General office (“central organization”) consisting of general offices and staff executives
• Clearly defined lines of authority and communication between office and divisions
• Accurate and useful data-flow along the above lines
• General officers supervise and coordinate group of divisions and help to make policy for the
organization as a whole
• Staff executives to advise all heads and provide information necessary for appraisals

Sloan believed divisional independence fostered initiate and innovation and, hence, he permitted
the general executives only an advisory role and no role authority. (see p. 134-135; Chart 6, p.136)

In the process of implementing Sloan’s structure, the administration took the pragmatic approach
of defining divisional boundaries that created an array of automobiles (Cadillac – Buick – Oakland –
Oldsmobile – Pontiac – Chevrolet) which involved a comprehensive market strategy. Along with this,
refinements such as development of accurate data-tracking on costs, production, income, etc. were
brought in which, on the one hand, helped to conduct precise appraisal of divisions aimed at
maintaining strict administrative surveillance on divisions, while, on the other, enabled systematic
allocation of capital and other resources.

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Case-study #3: Standard Oil Company (New Jersey)

Historical Context: Jersey oil grew tremendously (assets rose by a billion dollars) in the period 1912
to 1925. During these growing years, the Board of Directors tended to increase administrative
control over single-function department (called subsidiaries) when compared to integrated
multifunction affiliates (p.166). The central office received reports but had minimal discretion in
allocation of funds or recourses. There was no auxiliary or staff functions at the head office. The
refining unit, in particular, was administered centrally effectively in a federated fashion (i.e. each
subsidiary had an executive in the headquarters and all these executives would frequently meet in
“The Room” (p.169) to discuss and coordinate decisions). The addition of new oil fields from Texas
and California revolutionized supply and forced the company to expand its operations through
augmentation of equipment, plant, and personnel. There was a need for increased specialization
and creation of new service and auxiliary departments. The expansion led to purchase of new
affiliates which led to a range of administrative problems.

Strategic Drivers: backward integration to cater to rapidly growing market (and ready customers);
acquisition of new properties that needed administrative support; need for an explicit strategy and
definite structure of production activities in order to meet competition; rapid expansion of
transportation facilities along with production activities.

The structural organization at Jersey oil was not a formalized or rational attempt, rather a series of
responses to needs created by expansion and vertical integration. “By the mid-1920s, Jersey oil had
moved well along the road to a better balance of functions.” (p.175) However, the growth led to
administrative confusion and difficulties as the lines of authority and communication were never
distinctly drawn. Administrative responses, as below, acted as stepping stones towards a gradual
foundation of administrative structure:

• Demand for gasoline prompted formation of Development Department

• In 1920s, domestic marketeers began to pay attention to advertising and, much later,
formed additional staff offices to analyse market performance
• A board of functional specialists was setup

In 1924, the board began to focus on improving the organization and coordination of manufacturing
committee, which was the most important functional administrative unit. Lack of organization had
led to duplication of effort, inadequate usage of staff departments, delay in reaching group decisions
and needless executive time spent on operating routines. (see p.182) Even allocation of crude oil,
assignment of transportation, and distribution of refined products were getting complicated and a
structure was needed to establish control (p.184). By 1925, decisions regarding structural
reorganization began to be effected:

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 • Setting up the coordination department and committee to look at overall planning and
appraisal (see p.190) which greatly helped in mobilizing Jersey’s resources
• Setting up of budget department and committee to provide data essential to more
systematic and rational forward planning and other overall entrepreneurial activities
• Reorganizing of the marketing department wherein old heads were replaced with the
aggressive young ones to address the new demands of burgeoning gasoline market
• Reorganizing the manufacturing department with refashioned lines of authority and
communication aimed towards mitigating prevalent conflicts of attitudes and personalities

Despite these adjustments, the addition of oil fields in 1926 created a glut in the market, which
prompted Teagle to reformulate a ‘quasi-formal’ structuring plan in 1927. He observed that decision
making in the central office was getting slow and needed to be remedied. He wanted to remove
“group responsibility for administrative action. (p.210) Creating a multi-departmental structure was
the solution for it. (see p.216 for the final structure implemented)

Case-study #4: Sears, Roebuck and Company

Historical Context: Sears started as a mail-order catalogue targeting Rural America, especially the
farmers who would desire high-priced merchandise that would not be stocked in the rural-front
stores. In a matter of a decade, the business grew immensely – upto a hundred thousand orders a
day. Expansion encouraged vertical integration and the company often bought stake in the factories
that supplied their goods. Until 1921, Sears witness steady growth and profits. However, some
issues began to plague the company around this time:

• As business expanded, several departmental buying heads began operating independently.

Loose, informal and decentralized structure brought confusion and inefficiencies. Lack of
correlation led to errors in description. Suppliers were unable to distinguish between orders
• Merchandize department, which was supposed to oversee all buying, took little effort in
appraising the sub-departments

Furthermore, the recession of 1921 created inventory excesses and exposed administrative lapses
and lacunae. By 1924, Sears created a centralized functionally departmentalized structure for its
mail-order business in which the autonomy of the buyers was limited. Purchasing, sales promotion
and distribution were centralized at Chicago. However, in 1925, Sears top management perceived
another big threat to its business: popularization of the automobile which made the urban stores
accessible to the rural household. Sears served to counter this threat through the establishment of
retain stores (of three categories) which would tap the urban market – cheap suburban space with
ample parking, which would merchandize durable goods and cater to the mass buying customers.

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The new strategy, however, faced severe strain due to inadept transition of back-office and
personnel from mail-order scheme to retailing scheme. The old staff were not geared for direct
confrontation with the customer. The Frazer committee was commissioned which suggested a two-
pronged hierarchical structure of functional and territorial units reporting into the President (see
Chart 8, p. 244). This system failed due to its essential weaknesses:

• Territorial and district managers were given wide responsibilities, often running conflict
• A reporting line was drawn from General Managers of mail order houses to the Territorial
Officer even though there was no direct contact between store managers and plant officers
in Chicago

The level of decentralized suggested by Frazer committee did not allow taking advantage of
managerial economies of scale. The structure also had a defect of store managers seeking help from
intermediate levels (local men) rather than reaching out to Chicago for assistance of many of their
problems. Moreover, the Territorial officers were taking on duties that belonged properly to the
functional departments. The core issue was that the above model was half-territorial and half-
functional. This had to be dismantled. The territorial units were transformed into multifunctional
divisions and the Chicago headquarters was rehashed as the general office. This new system had
the structure of a multi-divisional organization.

In the general office, the staff sections would provide advisory service and would assist the general
officers appraise performance, allocate funds, and formulate long-range policy (see Chart 9A, p.
273). The staff could not order, only advise, however they enjoyed auditory powers.

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