Introduction
The business literature is replete with different concepts and theoretical approaches. Despite the fact that many efforts have been spent by the theoreticians to develop them, only a few manage to survive the dynamics of contemporary business revolution. The concept of managerial economics developed by Professor Alfred Chandler in the early 1960 is among the few concepts that did. The main rationale behind his theory is linking internal structures, strategic decisions and corporate performance of the business institutions (Chandler, 2005). Although this theoretical framework attracted much criticism from both the academicians and the business practitioners, it is in use even nowadays, applied to analyze the reasons of corporate successes and failures (Langlois, 2015). Contrasting to the once popular contingency approach, the theory of Chandler argues that organizing business in an ‘American way’ is the best solution of running a business anywhere. At the same time, some not less authoritative scholars contend that the business climate in each country should be developing in its own, unique and unaffected way (Mejia, Balkin & Cardy, 2008).
The purpose of this research is to analyze the framework proposed by Professor Alfred Chandler in relation to the comparison of evolutional developments of the five global economies.
Key Questions
The main rationale behind the concept of managerial enterprise lies in the decision making segment of a corporate activity. Thus, this concept purports that all operating and investment decisions should be done by the hired and salaried managers, who, in their turn are governed by a board of directors. Chandler himself recognized that his theory has several elements of the Agency Theory (Chandler, 2005).
The second dimension of the managerial enterprise theory is the logic of enterprise (Blanchard, 2011; Langlois, 2003). Thus, in accordance with Chandler’s understanding of this phenomenon, the main logic of any form of managerial enterprise is to start making required investments to the different sections of an enterprise, which include production, distribution and management (Chandler, 2005). The primary purpose of these activities is achieving the state of economies of scale and scope, benefiting from the learning curve. The ultimate goal corresponding to these purposes is to get one’s own market share of a specific industry (Lazonick, 2010).
Finally, the last, but not the least element of the Chandler’s business framework is the idea of growth and development. In order to remain competitive, the company must constantly grow (Chandler, 2005). Although there are different methods of corporate growth, the most effective solution in this regard is developing product offered by the firm (Levi, 2014; Whittington & Mayer, 2000).
In addition, this theoretical framework attempts to link strategy to the structure of a corporate entity (Noteboom, 2003). Thus, centralized organizations are more prone to conservative decision –making, i.e. their strategy is more prudent and cautious. In contrast, organizations with democratic structures, which are becoming more and more popular nowadays, are significantly more predisposed to aggressive, and, sometimes, risky managerial and marketing strategies (John, 2008; Blanchard, 2011).
National patterns of managerial enterprise arose between the two world wars (Noteboom, 2003). The business features, which are intrinsic to a particular nation, have been developed as a result of a long process of corporate evolution, which involved several important determinants. Firstly, national patters of managerial enterprise strongly related to national business mentality (Showdon & Vane, 2002). Thus, the business executives from the UK are thought to be more conservative than their United States or Israeli counterparts are. Secondly, these national patterns are strongly dependent on the domestic business climate, which, in its turn pivots on domestic legal and political systems (Sicilia, 1995).
Because transnational business gained especial popularity in the second half of the twentieth century, understanding the concept of managerial enterprise become essential for those managers, who planned to place the units of American corporations in Europe and vice versa (Fligstein, 2008; Langlois, 2003). The methods of developing business units, and the objectives of development were comparatively similar in the both economic environments (Zeitlin, 2008). The main differences were the national managerial patterns, which were deeply analyzed by professor Hofstede. Thus, keeping the rules of managerial enterprise development, while customizing the project for the national peculiarities of a particular country was thought to be the best recipe for transnational business development (Zeitlin, 2008).
However, many commentators agree on the idea that the analysis of Chandler is more suited to the United States corporate experience before 1980s. When Chandler started to explore the topic, different strategies of conglomeration were at the embryonic stage in the United States of America (Levi, 2014). However, after half a century elapsed, highly unrelated diversification became one of the distinctive features of the United States economic system. This phenomenon has seriously challenged the idea of related diversification strategies defended by Chandler (Lazonick, 2010).
Furthermore, the ideas of Chandler were often criticized, because of his inclination to compare things, which are inherently incongruous (Snowdon & Vane, 2002). In particular, his peers put into spotlight that, for instance, it is not academically correct to compare a large-scale, highly developed economy of the United States of America with the much smaller, and shattered by the WWII economies of the UK and Germany (Levi, 2014). However, Chandler recognized that structures of business organizations do not emanate from strategies only. The choice of a specific business structure often depends on the industry, where the business competes. To illustrate, Chandler exemplified his ideas by stating that businesses involved in the capital-driven industries (banking and finance) tend to be more hierarchically governed and centralized, while flatter and more democratic approaches to corporate governance dominate in the labor-intensive segments of economy (software development, legal and auditing services) (Chandler, 2005).
The studies of professor Chandler evinces that the foundation of a typical modern enterprise in the United States of America is the need to coordinate internalized turnover and flow of goods and products (Blanchard, 2011). However, this rule is not necessarily applicable to other economic regions. Much of today’s research demonstrates that the corporate structures in Europe are mostly dependent on the way the financial resources are allocated inside the organization (Levi, 2014).
Personal Capitalism in the UK
The main difference between the UK, USA and the FRG is that the development of economic structures in the first one was comparatively sluggish. Chandler extensively speculated about the fact that divisional structure of the UK economy was not necessarily the result of small size thereof. However, he put much criticism in ‘personal capitalism’, alleging that it was the main reason, which stalled the development of the UK economy (Chandler, 2005) .
Chandler widely argued the idea that family-owned businesses, which were the inherent feature of the UK economy could not evolve into large, effective corporations because of several reasons. Firstly, these companies are often quite deficient in relevant and reliable market information (Lazonick, 2010). Secondly, a number of in-depth research studies evinced that such companies lacked trust towards banking institutions as intermediaries. As a result, managers-owners and their friends become the only investors, which seriously curtails company capitalization (Whittington & Mayer, 2000). Thirdly, Chandler and his associates argued that the development options are limited, because the accrued profits are rolled back to the founders (Blanchard, 2011).
Furthermore, longevity of the family-owned businesses is not their distinctive feature (Chandler, 2005). A number of studies suggested that the cases, when a family business survives more than one generation are extremely rare nowadays, amounting to less than 3% in the UK only (Langlois, 2003).
In the meantime, the proponents of a family owned business structures advocate the idea that this form of business activity is the most prevalent type of entrepreneurial activity through the entire world. Moreover, this form of business is not inherently British. Several studies demonstrated that during the period between 1990 and 2000, the share of family-owned businesses in the United States of America scored 90% (Fligstein, 2008).
Business Groups and Networks. Evidence from Germany and Japan
The formation of business groups and intra-firm networks has been one of the distinctive features of German and Japanese economies. Although these countries have steeply different network types, its role was decisive in the industrial revolution of the both countries (Langlois, 2003)
Many economists inferred that the development of the large market behemoths in Europe was a result of complicated mergers and acquisitions. Germany occupies a special place in this context. The companies working in the country heavily invest in internal growth of their employees, leveraging economies of scope. Furthermore, the business segment in Germany substantially depended on the banks as financial intermediaries, and formed cartels (Levi, 2014). The latter ones were a close equivalent of holdings in the UK, and were ubiquitously used by the German industrialists to raise capital.
The business groups in Japan included trading companies and banks, united by the large ‘zaibatsu’ conglomerates, owned by a single family. However, realizing that professional management is more effective, Japan eventually emulated the USA experience, and started to appoint professional managers, internally grown by the company.
Finally, one of the most distinctive features of the Japanese economy is highly strong cooperation between R&D investment and operational divisions of a business sector. Thus, the business community of this country makes strategic alliances or holdings: (a) if it leads to increased capitalization, or (b) when it can result in some innovative products.
China and Chandler’s Managerial Economics
Although today this country has entered the period of volatile development, China is still regarded as one of the most outstanding developing countries (Blanchard, 2011). From the onset of the twenty first century, the country was several times among the top countries in the world in terms of GDP growth. However, the fact that the main reasons of economic prosperity could be attributed to the application of managerial enterprise is not especially popular in the academic circles. The key features of enterprise system in China include hierarchy in governance, increased responsibility, strong paternalism and the culture of mutual obligations (John, 2008).
Though the main leverages of Chinese economic expansion were mergers and conglomeration, several commentators put into spotlight the fact that strong hierarchy and centralized governance developed primarily because they were the best solutions for the political system of China (Noteboom, 2003; Langlois, 2003; Fligstein, 2008). In other words, the role of state is critical to the Chinese economic system, distinctively shaping the unique Asian identity of China. As a result of this approach, the business companies in China are often strongly dependent on the policies of the state, and often try to establish strong relationships with the government officials.
Thus, the reasons of effectiveness of the Chinese companies are far different from those, advocated by Chandler. The Chinese companies managed have attained some form of economic supremacy in the world because of effective and highly disciplined management, which, paradoxically, was not hired independently (Levi, 2014). In contrast to the European and American business communities, the key managers in China were either appointed, or at least approved by the ruling party. In the meantime, the research shows that the Communist Party of China is highly skilled in human resources management.
However, in today’s global economy, where innovation, responsiveness and flexibility turned out to be much more important that concerted managerial approach, the People’s Republic of China is gradually shifting its managerial focus. Evidence suggests that the companies in China are becoming much more resilient than their counterparts of the past (Levi, 2014).
Conclusions
Several conclusions are inferable from this research. Firstly, in today’s global economies the key solutions of reaching a competitive edge are flexibility, innovation, cross-cultural management and business responsiveness. The scholars actively argue the idea that in order to be efficient, structure must follow strategy. Therefore, it is economically natural to witness a situation, when the corporate focus has shifted from strong, hierarchical governance to the formation of different business networks. The cases of Germany and Japan are one of the most successful evidences in this regard.
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