Introduction
To compare the works of Chandler and Williamson
requires wide-reading and analysis of their major works to prevent slaughter
from being a hostage imposed by what economists called “ceteris paribus” and the
“one hand, the other hand” cognition. Because of this, it is helpful to note
that the former largely drew attention to historical development of modern
American industries where epochal stages took place between 1790 and 1920. On
the other hand, the latter dwell in relatively contemporary context of firm
growth. With this summary, therefore, internal and external factors used as
platform in both studies are fairly in different magnitude. It could also be
argued that Williamson simply expanded Chandler’s concepts, sometimes debated or
impliedly attacked on it. The concern of this paper, however, is to take the
restricted step to force the merge of the ideas and models of the two economists
in order for comparison to be feasible. In the process, key differences with
regards to firm growth can be identified and the cause of the disparities can be
discussed.
Causes of Firm Structural Changes/ Integration
The cornerstone of
the differences of Chandler and Williamson aroused in their view of where did
the growing firm derived its rationale to be efficient. With the varying
concepts they installed on this resulted also to varying answers to questions of
where and why should an internal organization introduce structural changes and
integration within the firm. They, however, did not reject that such changes
and adaptations are within the objective of cost minimization which is central
to a firm to be able to sustain profitability. In this case, the other half of
the tool of profit maximization was fairly neglected in their analysis of firm
growth in favor to highlight the other.
For Chandler,
efficiency is the successful result of the firm’s strategy to handle overloaded
resources wherein labor and facilities exceeded demand for the products. This
situation of surplus was the effect of the climax of gains from industrial
revolution wherein transfer of a firm’s products to distant geographical
location (due to railway transportation) and coordinate the changes in the
market more efficiently (due to telegraph) was possible. The exhaustion of
technological advantages was primarily due to increasing competition within the
industry that put pressure to every competitor to compete on price to survive.
Since the technology only allowed firm to go to a limited distant markets or
coordinate demand to a limited nature of information, they could not neglect the
price challenge and hence source competitive advantage within the firm through
efficiency.
As a result,
cooperation and coordination are adjusted in relation to the complexity and
durability of product lines, wherein the more complex products like customized
and power machineries or more durable like appliances are, the greater
cooperation and coordination are involved. Thus, efficiency is observed because
the firm contemplates in the balance of demand and supply particularly to avoid
oversupply. This method, however, requires huge coordination allocation in the
form of costs that centralized functional departments under administrative
structure is preferred.
Further, Chandler
argued that efficiency alone does not equate profitability, a departure from the
sub-opening paragraph, as competitors could imitate its ways, hence, have the
same price power. Rather, increasing market share through technology,
population and national income exploitations are viewed as opportunities and
relatively effective means to achieve the firm’s goal. Thus, internal
efficiency through increased cooperation and coordination of activities should
be integrated or replaced with the search for new markets and innovation wherein
a firm preferred resources to be less tied to a specific product to gain the
advantages of diversification.
With this
expansion, organization becomes more complex than the first stages. The
inevitable creation of research and development departments to spearhead the
shift to a different line of products triggered a bolder and more observable
structural change for the firm than the coordination and cooperation
adjustments. Coordination problems and intricacy is the prominent factor that
gives the reason to a second adjustment to take place. If the firm resisted
such change, for instance, economic inefficiency would be accounted to unused or
overused resources that increase costs on one hand and untapped or saturated
markets that undermine opportunities on the other.
For his part,
Williamson viewed efficiency as the result of the successful choice of the firm
between markets or hierarchy in view of their contractual hazards.
Consequently, structural changes that are required by the efficiency endeavors
of the firm are largely the cause of behavioral attributes of human actors with
the underlying implications of bounded rationality and opportunism. As
Chandler’s view of structural change basically put technology at the forefront,
Williamson emphasized the mechanisms of transaction costs wherein human behavior
stands as the primary stimulus while the dictum “tails do not wag dogs” holds
true for the internal organization.
Transaction cost
economics, which served as the heart of Williamson’s analysis to firm structural
changes, see the internal organization as an efficient market substitutes
wherein outside procurement can pose problems in instances where there is
requirement of investment specificity and longevity and the first mover
advantage of competitors for being the initial winner of the investment and
market contracts. Internal organization was observed to possess superiority
when internalizing activities against the market due to incentives, controls and
inherent structure advantages including the adaptation capabilities which is
required by the changing environment.
Williamson argued
that internal structure resorted to integrate activities because transaction
economizing can be realized with this. Otherwise, gains from the trade could
only be offset by the costs of reaching and enforcing the agreements between the
organization and the market. If, however, integration is preferred, securing
the gains from the transaction can be ensued. The relevance of the concept
increases when relationship-specific investments are confronted by the
organization making it possible to realize cost economies and design benefits
through physical asset specificity, site or location specificity, human-asset
specificity and dedicated assets.
Because the
organization under this concept is submerged in the ramifications of contracts,
there are several reasons to prove the benefits of internalization within this
veil. Integration alters the rules and processes through which disputes
instantly resolved and adjustments easily effected. The contracting parties
need not to bargain and inspect the opportunistic tendencies of each that result
to speedy resolution of conflicts. The grant of forbearance to the firm by the
regulating authorities made it possible to resolve divisional conflicts in
corporate areas like manufacturing internally. Thus, complexity and its
accompanying costs are prevented. Likewise, infeasible long-term and complete
contracts (due to emphasis of going-concern of the firm) and hazardous (due to
required asset specificity of the firm operations) short term ones readily
available in the market are turned down as an option.
When Chandler
cited the turning points of the American industrial phases due to Pennsylvania
coal, accumulation of resources, rationalizing such resources and product/
market expansions, Williamson cited turning points more generally wherein the
demand for better adaptive organizational arrangements would be sparked when
transactions become more complex and the environment more uncertain.
Nevertheless, he emphasized again to the behavioral aspects involved in the
transition wherein the limitations of the contract grow leaving safeguards
against opportunism unattended.
This can be easily
understood by illustrating a hypothetical case of a firm contracting spare parts
manufacture from abroad. If a competitor source out the same inputs from the
foreign company, the firm might loose its competitive advantage because the
competitor can now imitate its design and features. The foreign manufacturer
might be aware of the scenario as it has its corporate records and addresses of
the companies it has a pending contract. However, the absence of explicit
agreements, preferably in written form, to prevent opportunistic acts against
the firm by the foreign manufacturer could serve an excuse of the latter.
Because of this, internalization deserves profound pondering.
The Findings: Chandler versus Williamson
Chandler’s
approach to efficiency analysis was carried through modern American industry
evolutionary stages while general approach and intensive application of
transaction cost economics was preferred by Williamson. Because the perceived
bottleneck mentioned in the introduction becomes more eminent, there is a need
to take riskier step to restrictive areas of consideration that initially demand
selective comparison and deeper analysis to prevent exaggeration of the correct
and credible findings of differences.
In the periphery, it is obvious that Chandler’s
model is clasped with technological changes while Williamson’s model embraced
the concept of transaction costs implications but both have one end ---
efficiency. The means the two models was illustrated above including the
accompanying organizational structure configuration. As Williamson confirmed,
his model is a different non-orthodox approach to analyze and explain the growth
of the firm and the subsequent structural changes and the explanation of such
changes. Thus, his model was framed through the “lens of contracts” while that
of Chandler is framed through the “lens of choice”. Such extreme frameworks
resulted to further discrepancies.
Because Chandler opted to choose the
one-directional approach to firm growth, in which the firm dictates or adapts
strategies, firm innovation, technology and characteristics of the market are
taken to be the determinants of firm structure. The introduction of coal as
alternative form of energy, telegraph and railway transportation made possible
for a firm to produce more, to control production output due to communication
from the marketing forecasters to the manufacturing division and to expand
operations because distribution became regular. As observed, structural changes
was the result of producing more, production control and expansion. This
depicted Chandler’s notion that the early stages of large firm transformation
required centralized structure to cut coordination costs, thus, achieves
internal efficiency. However, he curbed this claim when the later stages of
industrialization placed emphasis on diversification and innovation which
required decentralized form of organization to adapt on local demands. Internal
efficiency was observed to undermine profitability and growth is necessary to be
competitive, at best, acquire monopoly advantages.
On the other hand, Williamson suggested that
firm growth should be understood in terms of “voluntary exchange is a source of
mutual gain” which he further conceded as the “fundamental contribution of
economics”. For this purpose, he viewed the firm and the market as actors of
the transaction which gave rise to the notion that a firm is more than a
production vehicle but also embedded with governance structure. Because of
this, Chandler’s claim that structure follows strategy is deemed. With the
initial involvement of internal organization in the transaction, structure is
already created. The missing part of the piece which is the strategy is later
unfolded as the organization uses the mechanisms of bounded rationality and
opportunism. It will implement strategy not for the purposes of acting
opportunistically against the market through innovation, integration of
activities and exploitation of environmental endowments like increase in income
or population. Bounded rationality will prevent the internal organization to
destroy the contract and leave the market unprotected. Thus, to be able to
implement its strategies within the frame of bounded rationality and guarded
opportunism, internalization of activities is required. As a result, it should
replace the market for a particular transaction.
The driver of structural change for Chandler is
technology and market endowments where the firm can exploit them while
Williamson confined this on the context of how transaction costs can be
economized by the firm. If say that e-commerce allows extraordinary speed of
communication that results to faster placing of customer orders in the interface
of the concerned firm, production and logistics coordination could be eroded
that will eventually calls for structural change. The same firm situation would
be effected in increasing demand of the product due to increase in population
size and income. At the extreme, innovation could invite new target market
different from what is planned to be resulting to an adaptive structure away
from centralized form.
In the contrary, even if the gains from
technology or market endowments are huge and real without the transaction costs
being economized, replacing the market through integration and structural change
within the organization maybe feasible but not profitable. Transaction costs
mentioned here is not simply the transportation and communication costs rather
the far general considerations. First, without a firm needing to make
non-programmed adaptations due to unanticipated disturbances, replacing the
market is impractical. Second, without asset specificity needs of the firm and
minimal problem imposed by outside procurement it faces, replacing the market is
unwise. Third, it is the central problem of an economic organization to adapt
its operations to the environment in both autonomous and cooperative kinds --- a
slight departure to Chandler’s firm response to integrate operations
comprehensively rather selectively that weakens market participation. Lastly,
there is a need to analyze the trade-offs that characterize the firm and market
organization due to their varying attributes to execute transactions --- another
non-restrictive approach to integration and expansion of Chandler’s firm ending
up at monopolistic purposes. With this, the limits of the firm to acquire
market transactions mentioned by Williamson are refuted.
Whereas Williamson stressed the continuity of
contracts between the firm and market, Chandler stressed the independence of
firms from the market. Integration for the firm is seen as advantageous by the
latter while the former saw vertical integration as a paradigm problem that
involves employment relation, regulation, vertical market restrictions, and
organization of labor, among others. It can be examined, on this case, that
Williamson largely consider the importance and non-cessation of transactions
between the firm and the market while Chandler largely consider the potential of
the firm to solely benefit the fruits of the trade through vertical integration
and disconnection to transactions with market. This seemed a battle of
economist’s ideals versus a private enterprise profit-centered goal.
Focus on the Stages of Firm Growth: Applications
of the Differences
Causes of Firm Structural Changes/ Integration
for Williamson
-
“Tails do not wag dogs.” Vertical
integration is a choice between alternative modes of contracting between markets
or hierarchies viewing the implications of contractual hazards to arrive at an
efficient alternative.
-
Because outside procurement is not
preferred due to investment and competitor’s hindrances, vertical integration is
resorted.
-
Choice of organizational form is
a product of behavioral attributes of human actors with the implications of
bounded rationality and opportunism factors.
-
Adaptation is needed to counter
the effects of change in the environment that can result to unfolding events.
-
Firms as governance structure,
wherein they integrate transactions to alter the rules and processes through
which disputes are resolved and adjustments effected.
-
Infeasible long-term and complete
contracts; hazardous short-term contracting
-
Internalization offers low-cost
access to requisite data and comparatively efficient conflict resolution of
bargaining
-
The choice of governance
arrangements lies with uncertainty, frequency of exchange and degree of
investments are transaction specific which answers what transactions are
integrated
-
Enforced by the grant of
“forbearance law” or self-rule of internal organization
Chandler
-
Technology as the determinant of
industrial structure and market as catalyst of change. A concrete example is
the impact of the coal opening in Pennsylvania where the history of American
modern enterprise began. Also, the historic event in the American enterprise
wherein industrial revolution was followed by managerial revolution.
Administration did not change their means and ways until the emergence of
strongest pressure---innovation.
-
Integration is a result of the
need to manage the initial expansion and accumulation of resources
-
Organizational innovation is not a
social and political product rather a technological imperative of mass
production and mass distribution in urban, industrial societies like the USA
-
Without efficiency rationale,
integration is technologically motivated or to serve monopoly purposes
-
Easy to explain organizational
activity a it is a rationalized economic response to technology. Little effects
of public policy, capital markets or entrepreneurial talents
Structure follows strategy.
Inefficiency is the net effect of change in strategy without refashion or new
strategy.
