Alfred D. Chandler Jr., 1918–2007

Abstract

15 SEPTEMBER 1918 * 9 MAY 2007 TO A STUDENT of the modern corporation with an interest in (which includes but goes beyond the corporate governance concerns posed by the separation of ownership and control), Alfred D. Chandler's book Strategy and Structure (1966) came as a bombshell. My dissertation, Economics of Discretionary Behavior: Managerial Objectives in a Theory of the Firm (1963; published in 1964 with the same title), which had been inspired in part by William Baumol 's famous sales maximization hypothesis (1959), summarizes the literature on the modern corporation and sketches the research agenda that I then had in mind. That agenda underwent a major change after I read Chandler. Prior to my reading of Chandler, the need for the firm to observe a minimum profit constraint, together with competition in the product and capital markets, was the main control over managerial discretion that I had taken into account. Since many of the large firms that were of interest to Chandler (and to me) were operating in oligopolistic industries that afforded the firms with an appreciable degree of relief from product market competition, and since competition in the capital market (mainly proxy contests, since takeover by tender offer had yet to be perfected) was weak, it was my judgment (and that of many others) that large U.S. corporations typically enjoyed considerable latitude (sometimes referred to as slack). Strategy and Structure introduced a new control instrument: managerial discretion also varied with the structure of the firm. This was a revolutionary concept, and I was reluctant to embrace it. Could it be that management was both the problem and the solution? This possibility certainly had to be entertained if, contrary to received microtheory, organization form mattered. The first step, which I had already taken, was to recognize that managerial discretion was problematic. The second step was to confront the latent lesson of Strategy and Structure: If organization form was a decision variable, then provision for that should thereafter be made in the theory of the modern corporation.1 As described and explained by Chandler, the multidivisional form was an organizational innovation (as devised by Alfred P. Sloan Jr., Donaldson Brown, Pierre du Pont, and others) that often served as a more effective check on managerial discretion than the earlier unitary (U-form) form of organization. Compared with the (U-form), in which strategic and operating decisions were joined, the multidivisional (M-form) structure worked out of a logic of organization in which operating and strategic decisions were separated (the logic being akin to that set out by W Ross Ashby in his 1960 book, Design for a Brain). The resulting decentralized structure was one in which the top management (the general office, as Chandler described it) had been removed from operating involvements and had been made responsible for strategic decision making and resource allocation within the firm, and the operating parts were organized as a series of quasi-autonomous divisions, each of which could be held accountable for its own net receipts. …