Chandler 1984

;The Emergence of Managerial Capitalism
ALFRED D. CHANDLER, JR.
11 In this article, Professor Chandler compares and contrasts the

emergence of managerial capitalism in the United States, Great Britain,
Germany, and Japan. Though he observes that large firms tended to
evolve according to a common pattern, he is equally impressed by in-
ternational differences in the pace, timing, and character of change.
In the late nineteenth and early twentieth centuries, a new type

of capitalism emerged. It differed from traditional personal capitalism
in that basic decisions concerning the production and distribution of
goods and services were made by teams, or hierarchies, of salaried
managers who had little or no equity ownership in the enterprises they
* operated. Such managerial hierarchies currently govern the major sec-
tors of market economies in which the means of production are still
owned privately, rather than by the state.
Managerial hierarchies of this kind are entirely modern. As late as
the 1840s, with very few exceptions, owners managed and managers
owned. There were salaried managers before the nineteenth century,
primarily on plantations and estates, but they worked directly with
owners. There were no hierarchies of managers comparable to that
depicted in Figure 1. By the 1840s personally managed enterprises—
those that carried out the processes of production and distribution in
market economies—had become specialized, usually handling a single
function and a single product. They operated a factory, mine, bank, or
trading office. Where the volume of activity was not yet large enough
to bring such specialization, merchants often remained involved in
manufacturing and banking, as they had in the early years of capital-
ism. Some had partnerships in distant lands. But even the largest and
most powerful of early capitalist enterprises were tiny by modern
standards.
For example, the Medici Bank of the fifteenth century and that of
the Fuggers in the sixteenth were far more powerful financial institu-
tions in their day than the giant nonstate banks in America, Europe,
and Japan are today. Yet the Medici Bank in 1470 operated only seven
branches. The total number of individuals working in the branches and
ALFRED D. CHANDLER, JR., is Isidor Straus Professor of Business History at Harvard Business
School. Financial support for this article was provided by the Harvard Business School's Division of
Research and the German Marshall Fund.
Business History Review 58 (winter 1984). © 1984 by The President and Fellows of Harvard College.
474 BUSINESS HISTORY REVIEW
the home office in Florence was fifty-seven. Of these a dozen were

considered managers. They were not salaried employees, however,
but partners, albeit junior ones, who shared in the profits and who had
"joint and unlimited liability" for losses.1 Today's middling-size state
banks each have as many as 200 branches, 5,000 employees, 300 sala-
ried managers (who have no liability at all), and handle over a million
transactions a day. They handle more transactions in a week than the
Medici Bank processed in the century of its existence. Today, too,
small industrial enterprises handle a far greater volume of transactions
than did those giants of an earlier capitalism—the Hudson's Bay, the
Royal African, or even the East India Company.
What made the difference was, of course, the technological revolu-
tion of modern times—an even more profound discontinuity in the
history of civilized man than the urban revolution of the eleventh to
thirteenth centuries that created the first modern market economies
and with them modern capitalism. The enormous increase in the vol-
ume of output and transactions was not an inevitable consequence of
the First Industrial Revolution, which began in Britain at the end of
the eighteenth century. That is, it was not the result of the initial ap-
plication of the new sources of energy—fossil fuel, coal—to the pro-
cesses of production. A much more important cause was the coming of
modern transportation and communication. The railroad, telegraph,
steamship, and cable made possible the modern mass production and
distribution that were the hallmarks of the Second Industrial Revolu-
tion of the late nineteenth and early twentieth centuries. These new
high-volume technologies could not be effectively exploited unless the
massive flows of materials were guided through the process of both
production and distribution by teams of salaried managers.
The first such managerial hierarchies appeared during the 1850s and
1860s to coordinate the movements of trains and flow of goods over
the new railroad networks, and messages over the new telegraph sys-
tem.2 They then quickly came into use to manage the new mass re-
tailing establishments—the department stores, mail order houses, and
chains or multiple shops—whose existence the railroad and the tele-
graph made possible. For example, by 1905 such an organization per-
mitted Sears, Roebuck in Chicago to fill 100,000 mail orders in a single
day—more than the average earlier American merchant filled in a life-
' Raymond de Roover, The Rise and Decline of the Medici Bank, 1397-1494 (Cambridge, 1963), 87,
91. The earlier Peruzzi bank had branches managed by employees (fattore). "However, all branches of
major importance were managed by partners" (80).
2
Alfred D. Chandler, Jr., The Visible Hand (Cambridge, 1977), chaps. 3-6 for the coming of such
hierarchies to manage railroad and telegraph systems, and chap. 7 for their use in the management of
mass distribution. Pages 231-32 describe the organization of Sears Roebuck.
MANAGERIAL CAPITALISM 475
time. These administrative hierarchies grew to a still much greater size

in industrial enterprises that, again on the basis of modern transpor-
tation and communication, integrated mass production and mass dis-
tribution within a single business enterprise.
One way to review the emergence of managerial capitalism is thus
to focus on the evolution of this largest and most complex of managerial
institutions, the integrated industrial enterprise. Whether American,
European, or Japanese, these integrated enterprises have had much in
common. They appeared at almost exactly the same moment in history
in the United States and Europe and a little later in Japan, only be-
cause Japan was later to industrialize. They clustered in much the same
types of industries, and they grew in much the same manner. In nearly
all cases they became large, first, by integrating forward (that is, in-
vesting in marketing and distribution facilities and personnel); then,
by moving backward into purchasing and control of raw and semifin-
ished material; and sometimes, though much less often, by investing
in research and development. In this way they created the multifunc-
tional organization depicted in Figure 1. They soon became multina-
tional by investing abroad, first in marketing and then in production.
Finally they continued to expand their activities by investing in prod-
uct lines related to their existing businesses, thus creating the organi-
zation depicted in Figure 2.
THE SIMILARITIES
Tables 1 through 5 document the similarities among the large inte-

grated industrial enterprises of the United States, Europe, and Japan.
Almost all are clustered in a limited number of industries. Table 1
identifies the country and industry of all industrial corporations in the
world that in 1973 employed more than 20,000 workers. (The indus-
tries are those defined as two-digit industrial groups by the U.S. Cen-
sus Standard Industrial Classification [SIC]). Of these 401 companies,
263 (65 percent) were in food, chemicals, oil, machinery, and primary
metals. Just under 30 percent more, although in other two-digit
groups, were in three-digit subcategories that had the same character-
istics as those in which the 65 percent clustered—for example, ciga-
rettes within the tobacco category; tires in rubber; newsprint in paper;
plate glass in stone, glass, and clay; cans and razor blades in fabricated
metals; and mass-produced cameras in instruments. Only twenty-one
companies (5.2 percent) were in remaining two-digit categories—ap-
parel, lumber, furniture, leather, publishing and printing, instru-
ments, and miscellaneous.
TABLE 1
The Distribution of the Largest Manufacturing Enterprises (more than 20,000 Employees), by Industry and
Nationality, 1973
TOTAL CKANI)
SIC CROUP U.S. U.K. GERMANY JAPAN FRANCE OTHKRS NON-US. TOTAL
20 Food 22 13 0 1 1 2 17 39
21 Tobacco 3 3 1 0 0 0 4 7
22 Textiles 7 3 0 2 1 0 6 13
23 Apparel 6 0 0 0 0 0 0 6
24 Lumber 4 0 0 0 0 2 2 6
25 Furniture 0 0 0 0 0 0 0 0
26 Paper 7 3 0 0 0 0 3 10
27 Printing 0 0 0 0 0 0 0 0
28 Chemical 24 4 5 3 6 10 28 52
29 Petroleum 14 2 0 0 2 8 12 26
30 Rubber 5 1 1 1 1 1 5 10
31 Leather 2 0 0 0 0 0 () 2
32 Stone, clay, and glass 7 3 0 0 3 2 8 15
33 Primary metal 13 2 9 5 4 15 35 48
34 Fabricated metal 8 5 1 0 0 0 6 14
35 Machinery 22 2 3 2 0 5 12 34
36 Electrical machinery 20 4 5 7 2 7 25 45
37 Transportation equipment 22 3 3 7 4 6 23 45
38 Measuring instruments 4 0 0 0 0 0 1 5
39 Miscellaneous 2 0 0 0 0 0 0 2
Diversified/conglomerate 19 2 1 0 0 0 3 22
TOTAL 211 50 29 28 24 59 190 401
Source: Fortune, May 1974 and August 1974.
Note: In 1970 the 100 largest industrials accounted for more than a third of net manufacturing output in the United States and over 45 percent in the United Kingdom. In 1930
they accounted for about 25 percent of total net output in both countries.
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FIGURE 1
The Multifunctional Structure
American firms predominate among the world's largest industrial

corporations—an observation central to an understanding of the evo-
lution of this institution. Of the 401 companies shown in Table 1, more
than half (211 or 52.6 percent) were American. The United Kingdom
followed with 50 (12.5 percent), Germany with 29 (7.2 percent), Japan
with 28 (7.0 percent), and France with 24 (6.0 percent). Only in chem-
icals, metals, and electrical machinery were there as many as four or
five more firms outside the United States than there were within it.
Throughout the twentieth century, Table 2 shows, large U.S. indus-
trial corporations clustered in the same industries in which they were
concentrated in 1973. Much the same pattern is observed for Britain,
Germany, and Japan (Tables 3, 4, and 5). The American firms were
larger, as well as more numerous, than those in other countries. For
example, in 1948, only 50 to 55 of the British firms had assets compa-
rable to those of the top 200 in the United States. In 1930, the number
was about the same. For Germany and Japan it was smaller. Well be-
fore World War II the United States had many more and many larger
managerial hierarchies than did other nations—underlining the fact
that managerial capitalism first emerged in the new world.
These tables also suggest (though only barely so) basic differences
within the broad pattern of evolution. For example, large enterprises
1 I I 1 *» —
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rrnm i [ i | | | m m nTm m m | | p~^ | i i

Accl Purch f i o d Sales R * D Traffic Acct Purch Piod. Sales R AD Traffic T
nnii nnn nnn nnn rrnn nnii unit nnii rrrm nnii nnn nrm
T
FIGURE 2
The Multidivisional Structure
in the United States were active throughout the twentieth century in

the production of both consumer and industrial goods. Britain had pro-
portionately more large firms in consumer goods than the United
States, while the largest industrials in Germany and Japan concen-
trated much more on producers' goods. Even as late as 1973 (as Table
1 shows), 13 of the 50 U.K. firms employing more than 20,000 persons
were involved in the production and distribution of food and tobacco
products; whereas Germany, France, and Japan each had only one
such firm. Before World War II, Germany had many more firms in
chemicals and heavy machinery than did the British; Japan, the late
industrializer, still had a greater number of textile firms than did the
other nations in its top 200. As Japan's economy grew, the number
of chemical and machinery enterprises on that list increased
substantially.
EXPLANATION OF THE EVOLUTIONARY PROCESS
Why have these large integrated hierarchical enterprises appeared

in some industries but rarely in others? And why did they appear at
almost the same historical moment in the United States and Europe?
TABLE 2
The Distribution of the 200 Largest Manufacturing Firms in the
United States, by Industry8
SIC GROUP 1917 1930 1948 1973
20 Food 30 32 26 22
21 Tobacco 6 5 5 3
22 Textiles 5 3 6 3
23 Apparel 3 0 0 0
24 Lumber 3 4 1 4
25 Furniture 0 1 1 0
26 Paper 5 7 6 9
27 Printing and publishing 2 3 2 1
28 Chemical 20 18 24 27
29 Petroleum 22 26 24 22
30 Rubber 5 5 5 5
31 Leather 4 2 2 0
32 Stone, clay, and glass 5 9 5 7
33 Primary metal 29 25 24 19
34 Fabricated metal 8 10 7 5
35 Machinery 20 22 24 17
36 Electrical machinery 5 5 8 13
37 Transportation equipment 26 21 26 19
38 Instruments 1 2 3 4
39 Miscellaneous 1 1 1 1
Diversified/conglomerate 0 0 0 19
TOTAL 200 200 200 200
'Ranked 1>\ assets.
Why did they grow in the same manner, first integrating forward into
volume distribution, next taking on other functions, and then becom-
ing multinational and finally multiproduct?
Because these enterprises initially grew by integrating mass produc-
tion with volume distribution, answers to these critical questions re-
quire a careful look at both these processes. Mass production is an
attribute of specific technologies. In some industries the primary way
to increase output was to add more workers and machines; in others it
was to improve and rearrange the inputs, by improving the machinery,
furnaces, stills, and other equipment, by reorienting the process of
production within the plant, by placing the several intermediate pro-
cesses of production required for a finished product within a single
works, and by increasing the application of energy (particularly fossil
fuel energy). The first set of industries remained "labor intensive"; the
second set became "capital intensive." In the latter category, the tech-
TABLE 3
The Distribution of the 200 Largest Manufacturing Firms in the
United Kingdom, by Industry11
SIC CROUP 1919 1930 1948 1973
20 Food 63 64 52 33
21 Tobacco 3 4 8 4
22 Textiles 26 24 18 10
23 Apparel 1 3 3 0
24 Lumber 0 0 0 2
26 Paper 4 5 6 7
28 Chemical 11 9 15 21
29 Petroleum 3 3 3 8
30 Rubber 3 3 2 6
31 Leather 0 0 0 3
35 Machinery 8 7 7 26
TOTAL 200 200 204 200
••Ranked by sales for 1973 and by market value of quoted capital for the other years.
nology of production permitted much greater economies of scale than

were possible in the former. That is, the cost per unit of output de-
clined much more as volume increased. So in these capital-intensive
industries with large batch or continuous process technologies, large
works operating at minimum efficient scale (the scale of operation that
brought the lowest unit costs) had a much greater cost advantage over
small works than was true with labor-intensive technologies. Con-
versely, in comparison with labor-intensive industries, cost per unit
rose much more rapidly when volume of production fell below mini-
mum efficient scale (perhaps 80 to 90 percent of rated capacity).
The cost advantage of scale cannot be fully realized unless a constant
flow of materials through the plant or factory is maintained to assure
effective capacity utilization. The decisive figure in determining costs
and profits is thus not rated capacity but throughput—the amount ac-
tually processed in a specified time period. Throughput is the proper
TABLE 4
The Distribution of the 200 Largest Manufacturing Firms in
Germany, by Industry3
SIC CROUP 1913 1928 1953 1973
20 Food 23 28 23 24
21 Tobacco 1 0 0 6
22 Textiles 13 15 19 4
23 Apparel 0 0 0 0
24 Lumber 1 1 2 0
26 Paper 1 2 3 2
28 Chemical 26 27 32 30
30 Rubber 1 1 3 3
31 Leather 2 3 2 1
35 Machinery 21 19 19 29
TOTAL 200 200 200 200
•'Ranked In sales for 1973 and bv assets for the other three vears.
economic measure of capacity utilization. In the capital-intensive in-

dustries the throughput needed to maintain minimum efficient scale
requires careful coordination of not only the flow through the processes
of production but also the flows of inputs from the suppliers and the
flow of outputs to the retailers and final consumers. Such coordination
cannot happen automatically. It demands the constant attention of a
managerial team, or hierarchy. Scale is only a technological character-
istic; the economies of scale, measured by throughput, are organiza-
tional. Such economies depend on knowledge, skills, and teamwork—
on the human organization essential to exploit the potential of tech-
nological processes.
A well-known example illustrates these generalizations. In 1882 the
Standard Oil "alliance"—a loose federation of forty companies, each
with its own legal and administrative identity but tied to John D. Rock-
TABLE 5
The Distribution of the 200 Largest Manufacturing Firms in Japan,
by Industry3
SIC CROUP 1918 1930 1954 1973
20 Food 31 30 26 18
21 Tobacco 1 1 0 0
22 Textiles 54 62 23 11
23 Apparel 2 2 1 0
24 Lumber 3 1 0 1
26 Paper 12 6 12 10
28 Chemical 23 22 38 34
30 Rubber 0 1 1 5
31 Leather 4 1 0 0
35 Machinery 4 4 10 16
TOTAL 200 200 200 200
''Ranked hv assets.
efeller's Standard Oil Company through interchange of stock and other

financial devices—formed the Standard Oil Trust.3 The purpose was
not to obtain control over the industry's output, for the alliance already
controlled close to 90 percent of the American output of kerosene.
Instead the trust was formed to provide a legal instrument to rational-
ize the industry and to exploit economies of scale more fully. The trust
provided the essential legal means to create a corporate or central of-
fice that could, first, reorganize the processes of production by shutting
down some refineries, reshaping others, and building new ones; and,
second, coordinate the flow of materials, not only through the several
3
Details and documentation are given in a case by Alfred D. Chandler, Jr., "The Standard Oil Com-
pany—Combination, Consolidation and Integration," in The Coming of Managerial Capitalism: A Case-
book on the History of American Economic Institutions, eds. Alfred D. Chandler, Jr., and Richard S.
Tedlow (Homewood, 111., 1985).
refineries, but from the oil fields to the refineries and from the refi-
neries to the consumers. The resulting rationalization made it possible
to concentrate close to a quarter of the world's production of kerosene
in three refineries, each with an average daily charging capacity of
6,500 barrels, with two-thirds of their product going to overseas mar-
kets. (At this time the refined petroleum products were by far the
nation's largest nonagricultural export.) Imagine the diseconomies of
scale—the great increase in unit costs—that would result from placing
close to one-fourth of the world's production of shoes, or textiles, or
lumber in three factories or mills!
This reorganization of the trust's refining facilities brought a sharp
reduction in the average cost of producing a gallon of kerosene. It
dropped from 1.5 cents a gallon before reorganization to 0.54 cents in
1884 and 0.45 cents in 1885 (while profits rose from 0.53 to 1.003 cents
per gallon), with costs at the giant refineries being still lower—far be-
low those of any competitor. Maintaining this cost advantage, however,
required that these large refineries have a continuing daily throughput
of from 5,000 to 6,500 barrels—a three- to fourfold increase over their
earlier daily flow of 1,500 to 2,000 barrels, with concomitant increases
in the number of transactions handled and in the complexity of coor-
dinating the flow of materials through the process of production and
distribution.
The Standard Oil story was by no means unique. In the 1880s and
1890s new mass production technologies—those of the Second Indus-
trial Revolution—brought sharp reduction in costs as plants reached
minimum efficient scale. In many industries the level of output was so
high at that scale that a few plants could meet existing national and
even global demand. The structure of these industries quickly became
oligopolistic. Their few large enterprises competed worldwide. In
many instances the first enterprise to build a plant with a high mini-
mum efficient scale and to recruit the essential management team has
remained the leader in its industry until this day. A brief review of
Tables 1 through 5 illustrates this close relationship between scale
economies, the size of the enterprise, and industrial concentration in
the industries in which large enterprises cluster.
In SIC groups 20 and 21—food, drink, and tobacco—brand new pro-
duction processes in the refining of sugar and vegetable oils, in the
milling of wheat and oats, and in the making of cigarettes brought rapid
reductions in costs. In cigarettes, for example, the invention of the
Bonsack machine in the early 1880s permitted the first entrepreneurs
who adopted the machine—James B. Duke in the United States and
the Wills brothers in Britain—to reduce labor costs sharply, in the
Wills' case from 4 shillings per 1,000 to 0.3 pence per thousand. 4 Un-
derstandably Duke and the Wills soon dominated and then divided the
world market. In addition, most companies in group 20, and also those
producing consumer chemicals, such as soap, cosmetics, paints, and
pills, pioneered in the use of new high-volume techniques for pack-
aging their products in small units that could be placed directly on
retailers' shelves. The most important of these was the "automatic-
line " canning process invented in the mid 1880s, which permitted the
filling of 4,000 cans an hour. The names of these pioneers—Campbell
Soup, Heinz, Borden's, Carnation, Nestle, Cadbury, Cross and Black-
well, Lever, Procter & Gamble, Colgate, and others—are still well
known today.
In chemicals (group 29) the new technologies brought even sharper
cost reductions in industrial than in packaged consumer products. The
mass production of synthetic dyes and synthetic alkalis began in the
1880s. It came a little later in synthetic nitrates, synthetic fibers, plas-
tics, and film. The first three firms to produce the new synthetic blue
dye, alizarine, reduced their production costs from 200 marks per kilo-
gram in the 1870s to 9 marks by 1886; and today, a century later, those
three firms—Bayer, BASF, and Hochest—are still the three largest
German chemical companies.5
Rubber production (group 30), like oil, benefited from scale econ-
omies, even more in the production of tires than in rubber footwear
and clothing. Of the ten rubber companies listed in Table 1, nine built
their first large factory between 1900 and 1908.6 Since then the Japa-
nese company, Bridgestone, has been the only major new entrant into
the global oligopoly.
In metals (group 34) the scale economies made possible by main-
taining a high volume throughput were also striking. Andrew Carnegie
was able to reduce the cost of making steel rails by the new Bessemer
steel process from close to $100 a ton in the early 1870s to $12 by the
late 1890s." In nonferrous metals, the electrolytic refining process in-
vented in the 1880s brought even more impressive cost reductions,
permitting the price of a kilogram of aluminum to fall from 87.5 francs
4
B. W. E. Alford, W.D. b HO. Wills and the Development of the U.K. Tobacco Industry (London,
1973), 143-49. Also Chandler, Visible Hand, 249-58.
5
Sachio Kahu, "The Development and Structure of the German Coal-Tar Dyestuffs Firms," in De-
velopment and Diffusion of Technology, ed. Akio Okochi and Hoshimi Uchida (Tokyo, 1979), 78.
6
This statement is based on a review of histories of and internal reports and pamphlets by the leading
rubber companies.
7
Harold Livesay, Andrew Carnegie and the Rise of Big Business (Boston, 1975), 102-6, 155. When
in 1873 Carnegie opened the first works directed entirely to producing rails by the Bessemer process, he
reduced cost to $56.64 a ton. By 1895, with increase in sales, the costs fell to $25 a ton.
in 1888 to 47.5 francs in 1889, 19 francs at the end of 1890, and 3.75
francs in 1895.8
In the machinery-making industries (groups 35-37) new technolo-
gies based on the fabricating and assembling of interchangeable metal
parts were perfected in the 1880s. By 1886, for example, Singer Sew-
ing Machine had two plants, one in New Jersey and the other in Glas-
gow, each producing 8,000 machines a week.9 To maintain their out-
put, which satisfied three-fourths of the world demand, required an
even more tightly scheduled coordination of flows of materials into,
through, and out of the plant than did the mass production of packaged
goods, chemicals, and metals. By the 1890s a tiny number of enter-
prises using comparable plants supplied the world demand for type-
writers, cash registers, adding machines, and other office equipment;
for harvesters, reapers, and other agricultural machinery; and for the
newly invented electrical and other volume-produced industrial ma-
chinery. The culmination of these processes came with the mass pro-
duction of the automobile. By installing the moving assembly line in
his Highland Park plant in 1913, Henry Ford reduced the labor time
used in putting together a Model T chassis from 12 hours 28 minutes
to one hour 33 minutes.10 This dramatic increase in throughput per-
mitted Ford to drop the price of the touring car from more than $600
in 1913 to $490 in 1914 to $290 in the 1920s; to pay the highest wages;
and to acquire one of the world's largest fortunes in an astonishingly
short time.
In the older, technologically simple, labor-intensive industries such
as apparel, textiles, leather, lumber, and publishing and printing, nei-
ther technological nor organizational innovation substantially increased
minimum efficient scale. As the tables show, few large firms appeared
in these SIC groups. In these industries the opportunities for cost re-
duction through material coordination of high volume throughput by
managerial teams remained limited. Large plants could not achieve
significant cost advantages over small ones.
The differentials in potential scale economies of different production
technologies indicate not only why the large hierarchical firms ap-
peared in some industries and not in others, but also why they ap-
peared suddenly in the last decades of the nineteenth century. Only
with the completion of the modern transportation and communication
networks—those of the railroad, telegraph, steamship, and cable—
* L. F. Haber, The Chemical Industry during the Nineteenth Century (Oxford, 1958), 92.
8
Chandler, Visible Hand, 302-14.
111
Allan Nevins, Ford: The Times, the Man, the Company (New York, 1954), chaps. 18-20 (esp. 473,
489, 511); Alfred D. Chandler, Jr., Giant Enterprise: Ford, General Motors and the Automobile Industry
(New York, 1980), 26.
could materials flow into a factory or processing plant and the finished
goods move out at the speed and volume required to achieve substan-
tial economies of throughput. Transportation that depended on the
power of animals, wind, and current was too slow, too irregular, and
too uncertain to maintain a level of throughput necessary to achieve
modern economies of scale.
However, such scale and throughput economies do not in them-
selves explain why the new mass producers elected to integrate for-
ward into mass distribution. Coordination might have been achieved
through contractual agreement with intermediaries, both buyers and
sellers. Such an explanation requires a more precise understanding of
the process of volume distribution, particularly why the wholesaler,
retailer, or other commercial intermediaries lost their cost advantage
vis-a-vis the volume producer.
The intermediaries' cost advantage lay in exploiting both economies
of scale and what have been termed "economies of scope." Because
they handled the products of many manufacturers, they achieved a
greater volume and lower unit cost (i.e. scale) than any one manufac-
turer in the marketing and distribution of a single line of products.
Moreover, they increased this advantage by the broader scope of their
operation, that is, by handling a number of related product lines
through a single set of facilities. This was true of the new volume
wholesalers in apparel, dry goods, groceries, hardware, and the like,
and even more true of the new mass retailers—the department store,
the mail order house, and the chain or multiple-shop enterprise.
The commercial intermediaries lost their cost advantages when
manufacturers' output reached a comparable scale. As one economist
has pointed out, "The intermediary will have a cost advantage over its
customers and suppliers only as long as the volume of transactions in
which he engages comes closer to that [minimum efficient] scale than
do the transactions volumes of his customers or suppliers. " n This
rarely happened in retailing, except in heavily concentrated urban
markets, but it often occurred in wholesaling. In addition, the advan-
tages of scope were sharply reduced when marketing and distribution
required specialized, costly, product-specific facilities and skills that
could not be used to handle other product lines. By investing in such
product-specific personnel and facilities, the intermediary not only lost
the advantages of scope but became dependent on what were usually
a small number of producers.
All these new high-volume enterprises created their own sales or-
11
Scott ]. Moss, An Economic Theory of Business Strategy (New York, 1981), 110-11.
ganizations to advertise and market their products nationally and often

internationally. From the start they preferred to have their own sales
forces to advertise and market their goods. Salesmen of wholesalers
and other intermediaries who sold the products of many manufactur-
ers, including those of their competitors, could not be relied upon to
concentrate on the single product of a single manufacturer with the
intensity needed to attain and maintain the market share necessary to
keep throughput at minimum efficient scale.
Equally important, mass distribution of these products—many of
them quite new—often required extensive investment in specialized,
product-specific facilities and personnel. Because the existing whole-
salers and mass retailers made their profits from handling related prod-
ucts of many manufacturers, they had little incentive to make large
investments in facilities and personnel that could only be useful for a
handful of specialized products processed by a handful of producers on
whom they would become dependent for the supplies essential to
make this investment pay.
Of all the new mass producers, those making packaged food products
and consumer chemical products required the least in the way of prod-
uct-specific distribution facilities and personnel. The new canning and
packaging techniques, however, immediately eliminated one of the
major functions of the wholesaler, that of converting large bulk ship-
ments into small packages. Because the manufacturers now packaged,
they, not the wholesalers, began to brand and to advertise on a national
and global scale. Their sales forces now canvassed the retailers. But
because mass sales of these branded packaged products demanded lit-
tle in the way of specialized facilities and personnel, the processor typ-
ically continued to use the wholesaler to physically distribute the goods
(for afixedmarkup or commission) until the manufacturer's output be-
came large enough to cancel out the wholesaler's scale advantages.
All other industrial groupings in which large firms clustered re-
quired major investments in either specialized distribution facilities or
specialized personnel, and often both. The producers of perishables—
meat, beer, and dairy products—particularly those in the United
States, made the massive investment required in refrigerated or tem-
perature cars, ships, and warehouses.12 Gustavus Swift, an inventor of
the refrigerator car, realized that effective distribution of fresh meat
required the building of a national network of refrigerated storage fa-
cilities. When he began to build his branch house network in the mid
1880s, other leading meat packers quickly followed suit, racing Swift
12
Chandler, Visible Hand, 299-302, 391-402.
for the best sites. Those packers who had made the investment in re-
frigerated cars and storage facilities before the end of the decade con-
tinued as the "Big Five" to dominate the industry for a half-century.
In the 1880s neither the railroad nor the wholesale butchers had an
incentive to invest in this equipment. Indeed, they had a positive dis-
incentive. The railroads already had a major investment in cattle cars
to move live animals; this business was, next to wheat, their largest
traffic generator. The wholesale butchers were organized specifically
to handle the cattle delivered to them by the railroad. Both fought the
packers and their new product vigorously, but with relatively little suc-
cess. In this and the next decade, the producers of bananas—primarily
United Fruit—and the makers of beer for the national market, includ-
ing Pabst, Schlitz, and Anheuser-Busch, made comparable investment
in refrigerated distribution facilities.
Refined petroleum as well as vegetable or animal oil could be
shipped more cheaply in specialized tank cars and ships, stored in local
tank farms, and then packaged close to the final markets. Wholesalers
hesitated to make such extensive investments as they would be wholly
dependent for their continued use and profitability on a small number
of high-volume suppliers.13 When the coming of the automobile re-
quired still another new and costly distribution investment in pumps
and service stations to provide roadside supplies to motorists, whole-
salers were even less enthusiastic about making the necessary invest-
ment. On the other hand, the refiners, by making the investment,
were able not only to control the scheduling of throughput necessary
to maintain their high minimum efficient scale but also to guard against
adulteration, a danger if packaging were done by independent whole-
salers. In the case of gasoline, in order to avoid the costs of operating
the pumps and service stations, most oil companies preferred to lease
the equipment they purchased or produced to franchised dealers. In
tires, similarly, mass production benefited from the economies of
throughput and mass sales required a specialized product-specific dis-
tribution network. Although tire companies occasionally owned their
retail outlets, they preferred to rely on franchised retail dealers.
The mass marketing of new machines that were mass produced
through the fabricating and assembling of interchangeable parts re-
quired a greater investment in personnel to provide the specialized
11
Standard Oil only began to make an extensive investment in distribution after the formation of the
Trust and the resulting rationalization of production and with it the great increase in throughput. Harold
F. Williamson and Arnold R. Daum, The American Petroleum Industry, The Age of Illumination, 1859-
1899 (Evanston, III., 1959), 687-96. For investment in gasoline pumps and service stations see Harold
F. Williamson et. al. The American Petroleum Industry: The Age of Energy, 1899-1959 (Evanston, III.,
1963), 217-30, 466-87, 675-86.
marketing services than in product-specific plant and equipment.14

The mass distribution of sewing machines for households and for the
production of apparel; typewriters, cash registers, adding machines,
mimeograph machines, and other office equipment; harvesters, reap-
ers, and other agricultural machines; and, after 1900, automobiles and
the more complex electrical appliances all called for demonstration,
after-sales service, and consumer credit. As these machines had been
only recently invented, few existing distributors had the necessary
training and experience to provide the services, or the financial re-
sources to provide extensive consumer credit.
On the other hand, the manufacturer had every incentive to do
both. By providing repair and service, it could help ensure that the
product performed as advertised; control of the wholesale organization
assured inventory as well as quality control. However, as a great many
retailers were needed to cover the national and international markets,
the manufacturers preferred to rely, as did the oil and tire companies,
on franchised dealers. These retail dealers, who sold their products
exclusively, were supported by a branch office network that assured
the provision of services, credit, and supplies on schedule. Only the
makers of sewing machines, typewriters, and cash registers went so far
as to invest in retail stores. They did so primarily in concentrated ur-
ban areas where, before the coming of the automobile, such stores
were the only means to provide the necessary services and credit on a
neighborhood basis.
The makers of heavier but still standardized machinery for industrial
users had to offer their customers much the same market services and
even more extensive credit. This was true of manufacturers of shoe
machinery, pumps, boilers, elevators, printing presses, telephone
equipment, and machinery that generated electric power and light.
Manufacturers' agents and other intermediaries had neither the train-
ing nor the capital to provide the essential services and credit. For the
makers of industrial chemicals, volume distribution demanded invest-
ment in product-specific capital equipment as well as salesmen with
specialized skills. Dynamite, far more powerful than black powder,
required careful education of customers, as well as specialized storage
and transportation facilities. So too did the new synthetic dyes and
synthetic fibers, whose use had to be explained to manufacturers and
whose application often required new specialized machinery. On the
other hand, metals produced by processes with a high minimum effi-
cient scale required less investment in distribution. Even so, to obtain
14
Chandler, Visible Hand. 402-11.
and fill volume orders to precise specifications on precise delivery

schedules required a trained sales force and close coordination be-
tween production and sales managers.
In these ways and for these reasons, the large industrial firm that
integrated mass production and mass distribution appeared in indus-
tries with two characteristics. The first and most essential was a tech-
nology of production in which the realization of potential scale econ-
omies and maintenance of quality control demanded close and constant
coordination and supervision of materials flows by trained managerial
teams. The second was that volume marketing and distribution of their
products required investment in specialized, product-specific human
and physical capital.
Where this was not the case—that is, in industries where technology
did not have a potentially high minimum efficient scale, where coor-
dination was not technically complex, and where mass distribution did
not require specialized skills and facilities—there was little incentive
for the manufacturer to integrate forward into distribution. In such
industries as publishing and printing, lumber, furniture, leather, and
apparel and textiles, and specialized instruments and machines, the
large integrated firm had few competitive advantages. In these indus-
tries, the small, single-function firm continued to prosper and to com-
pete vigorously.
Significantly, however, it was in just these industries that the new
mass retailers—the department stores, the mail order houses, and the
chain or multiple stores—began to coordinate the flow of goods from
the manufacturer to the consumer. In industries that lacked substantial
scale economies in production, economies of both scale and scope gave
the mass retailers their economic advantage. In coordinating these
flows the mass retailers, like the mass producers, reduced unit costs of
distribution by increasing the daily flow or throughput within the dis-
tribution network. Such efficiency, in turn, further reduced the eco-
nomic need for the wholesaler as a middleman between the retailer
and manufacturer.
In industries that integrated mass production and mass distribu-
tion—those with significant scale economies in production and spe-
cialized requirements in distribution—the most important entrepre-
neurial act of the founders of an enterprise was the creation of an
administrative organization. It was essential first to recruit a team to
supervise the process of production, then to build a national and very
often international sales network, and finally to set up a corporate of-
fice of middle and top managers to integrate and coordinate the two.
Only then did the enterprise become multinational. Investment in
production abroadfollowed,almost never preceded, the building of an

overseas marketing network. So too in the technologically advanced
industries, the investment in research and development followed the
creation of a marketing network. In these firms, this linkage between
trained sales engineers, production engineers, product designers, and
the research laboratory became a major impetus to continuing inno-
vation in the industries in which they operated. The result of such
growth was an enterprise whose characteristic organization is depicted
in Figure 1. The continuing growth of the firm rested on the ability of
its managers to transfer resources in marketing, research and devel-
opment, and production (usually those that were not fully utilized) into
new and more profitable related product lines, a move that carried the
organization shown in Figure 1 to that illustrated by Figure 2. If the
first step—the integration production and distribution—was not taken,
the rest did not follow. The firms remained small, personally managed
producing enterprises that bought their materials and sold their prod-
ucts through intermediaries.
Thus, in major modern economies, the large managerial enterprise
evolved in much the same way in industries with much the same char-
acteristics. However, there were striking differences among these
economies in the pace, the timing, and the specific industries in which
the new institution appeared and continued to grow. These differences
reflected differences in technologies and markets available to the in-
dustrialists of the different nations, in their entrepreneurial organiza-
tional skills, in laws, and in cultural attitudes and values. These dissim-
ilarities can be pinpointed by very briefly reviewing the historical
experiences of the 200 largest industrial enterprises in the United
States, the United Kingdom, Germany, and Japan.15
THE UNITED STATES

In the United States the completion of the nation's basic railroad and
telegraph network and the perfection of its operating methods in the
1870s and 1880s opened up the largest and fastest-growing market in
the world. Its population, which already enjoyed the highest per capita
income in the world, was equal to that of Britain in 1850, twice that in
1900, and three times that in 1920.16 American entrepreneurs quickly
recruited the managerial teams in production necessary to exploit scale
lo
The analysis of these differences is based on detailed research by the author of available histories,
company and government reports, business journals, and internal company documents dealing with these
many enterprises.
16
W. S. and E. S. Woytinsky, World Population and Production (New York, 1953), 383-85.
TABLE 6
American Multinationals in 1914"
SIC GROUPS 20 AND 21: sic CROUPS 35, 36, AND 37: MACHINERY
FOOD AND TOBACCO AND TRANSPORTATION EQUIPMENT
American Chicle American Bicycle
American Cotton Oil American Gramophone
Armour American Radiator
Coca-Cola Crown Cork & Seal
H. J. Heinz Chicago Pneumatic Tool
Quaker Oats Ford
Swift General Electric
American Tobacco International Harvester
British American Tobacco International Steam Pump
(Worthington)
sic CROUPS 28, 29, AND 30: Mergenthaler Linotype
CHEMICALS PHARMACEUTICALS, OIL, National Cash Register
AND RUBBER Norton
Carborundum Otis Elevator
Parke Davis (drug) Singer
Sherwin-Williams Torrington
Sterns & Co. (drug) United Shoe Machinery
United Drug (drug) Western Electric
Virginia-Carolina Chemical Westinghouse Air Brake
Du Pont Westinghouse Electric
Standard Oil of NJ.
U.S. Rubber OTHER SIC CROUPS
Alcoa (33)
Gillette (34)
Eastman Kodak (38)
Diamond Match (39)
Source: Mira Wilkins, The Emergence of Multinational Enterprise (Cambridge, 1970), 212-13, 216.
•'American companies with two or more plants abroad or one plant and raw material producing
facilities.
economies and made the investment in distribution necessary to mar-

ket their volume-produced goods at home and abroad, and did so in
all the industries in which large industrial firms would cluster for the
following century. Most of these firms quickly extended their market-
ing organizations overseas and then became multinational by investing
in production facilities abroad, playing an influential role in a global
oligopoly (see Table 6). Indeed, in some cases, particularly in mass-
produced light machinery, the Americans enjoyed close to global mo-
nopoly well before the outbreak of World War I. By that time those in
the more technologically advanced industries had also begun to invest
personnel and facilities in research and development.
These large manufacturing enterprises grew by direct investment in
nonmanufacturing personnel and facilities. They also expanded by

merger and acquisition.17 Here they began by making the standard
response of manufacturers, both European and American, to excess
capacity—to which, because of the high minimum efficient scale of
their capital-intensive production processes, they were particularly
sensitive. American manufacturers first attempted to control compe-
tition by forming trade associations to control output and prices and to
allocate marketing territories. However, because of the existing com-
mon-law prohibition against combinations in restraint of trade, these
associations were unable to enforce their rulings in courts of law. So
manufacturers turned to the holding company device. Members of
their association exchanged their stock for that of a holding company,
thus giving a central office legal power to determine output, prices,
and marketing areas for the subsidiary firms.
For most American enterprises the motivation for the initial incor-
poration as a holding company was to control competition. For some,
like John D. Rockefeller, however, this move became the first step
toward rationalizing the resources of an enterprise or even an industry
in order to exploit the potential of scale economies fully. Even before
the enforcement of the Sherman Antitrust Law in the early twentieth
century made contractual cooperation by means of a holding company
legally suspect, a number of American enterprises had been trans-
formed from holding companies to operating ones by consolidating the
many factories of their subsidiaries into a single production depart-
ment, unifying the several sales forces into a single sales department
(including an international division) and then, though less often, in-
vesting in research and development. In a word, these enterprises
were transformed from a loose federation of small operating concerns
into a single centralized enterprise as depicted in Figure 1. These firms
competed for market share and profits, rarely on price—the largest
(and usually the oldest) remained the price leader—but on productive
efficiency, on advertising, on the proficiency of their marketing and
distribution services, and on product performance and product
improvement.
In such large, complex organizations, decisions as to both current
production and distribution and the allocation of resources for future
production and distribution came to be made by full-time salaried
managers. At the time of World War I owners who still worked on a
full-time basis with their hierarchies continued to have an influence on
such decisions. By World War II growth by diversification into new
17
Chandler, Visible Hand, Chap. 10.
product lines not only greatly increased the size and complexity of the
enterprise but still further scattered stock ownership. By then owners
rarely participated in managerial decisions. At best they or their rep-
resentatives were "outside" directors who met with the inside directors
(the full-time salaried managers) monthly at most and usually only four
times a year. For these meetings the inside directors set the agenda,
provided the information on which decisions were made, and of course
were responsible for implementing the decisions. The outside direc-
tors still had the veto power, but they had neither the time, the infor-
mation, nor the experience, and rarely even the motivation, to propose
alternate courses of action. By World War I, managerial capitalism had
become firmly entrenched in the major sectors of the American
economy.
THE UNITED KINGDOM

The situation in the United Kingdom was very different. As late as
World War II, the large integrated industrial enterprise administered
through an extensive managerial hierarchy was still the exception.
Nearly all of the 200 leading industrials in Britain had integrated pro-
duction with distribution, but in a great number of these firms owners
remained full-time executives. They managed their enterprises with
the assistance of a small number of "company servants," who only be-
gan to be asked to join boards of directors in the 1930s. In Britain, at
the time of World II, most of the top 200 consisted of two types of
enterprises, neither of which existed among the American top 200 at
the time of World War I. They were either personally managed enter-
prises or federations of such enterprises. The exceptions were, of
course, Britain's largest and best-known industrial corporations—those
that represented Britain in their global oligopolies. However, as late
as 1948 these numbered less than 20 percent of the top 200
enterprises.
Large hierarchical enterprise did come when British entrepreneurs
responded to the potential of new high-volume technologies by creat-
ing management teams for production and invested in distribution and
research personnel and facilities. Between the 1880s and World War I
such firms appeared in branded packaged products like soap, starch,
biscuits, and chocolate, and in rayon, tires, plate and flat glass, explo-
sives, and synthetic alkalis. For example, Courtaulds, the first to build
a plant with a high minimum efficient scale in rayon, became and re-
mained the largest producer of the first synthetic fiber, not only in
Britain but also in the United States.
But where British industrialists failed to grasp the opportunity to

make the investment and build the hierarchies, they lost not only the
world market but the British home market itself. This was particularly
striking in machinery, both light and heavy, and in industrial chemi-
cals. The American firms quickly overpowered the British competitors
in the production and distribution of light mass-produced machinery,
including sewing, office, and agricultural machinery, automobiles,
household appliances, and the like. The Germans as quickly domi-
nated the synthetic dye business so critical to Britain's huge textile
industry while the Germans and Americans shared the electrical ma-
chinery industry, the new producers of light and of the energy so crit-
ical to increased productivity in manufacturing. In 1912, for example,
two-thirds of the output of the electrical manufacturing industry in
Britain was produced by three companies, the subsidiaries of the
American General Electric and Westinghouse and the German Sie-
mens. 18 Even those few British firms that achieved and maintained
their position in the domestic market and the global oligopoly created
smaller hierarchies and had more direct owner management than did
their American counterparts.
After World War I a few British firms in such volume producing
industries began to challenge their American and German competi-
tion, but they did so only by making the necessary investment in non-
manufacturing personnel and facilities and by recruiting managerial
staffs. This was the case for Anglo-Persian Oil Company, for British
General Electric, and Imperial Chemical Industries (ICI) in each of
their industries, for Metal Box in cans, and for Austin and Morris in
automobiles. Nevertheless, the transformation from personal or family
management to one of salaried managers came slowly and grudgingly.
In even the largest enterprises—those with sizable hierarchies, such
as Courtaulds, British Celanese, Pilkington, Metal Box, Reckitts, Cad-
bury s, Ranks, and others—the owners continued to have a much
greater say in top management decisions than did their American
counterparts.
Why was this the case? The answer is, of course, complex. It lies in
Britain's industrial geography and history, in its educational system, in
the lack of antitrust legislation, and in a continuing commitment to
personal family management. Because the domestic market was
smaller and was growing more slowly than the American, British in-
dustrialists had less incentive than their American counterparts to
exploit scale economies. Moreover, Britain was the only nation to in-
dustrialize before the coming of modern transportation and commu-
'* I. C. R. Byatt, The British Electrical Industry, 1875-1914 (Oxford, 1979), 150.
nication. So its industrialists had become attuned to a slower, smaller-

scale process of industrial production and distribution.
Nevertheless, precisely because it was the first industrial nation,
Great Britain also became the world's first consumer society. The
quadrangle bounded by London, Cardiff, Glasgow, and Edinburgh re-
mained for almost a century after 1850 the richest and most concen-
trated consumer market in the world. British entrepreneurs quickly
began to mass-produce branded packaged consumer goods (of all the
new industries these required the least in the way of specialized skills
in production and specialized services and facilities in distribution).
But in other new industries, it was the foreign, not the British, entre-
preneur who responded to the new opportunities. Even though that
golden quadrangle remained the world's most concentrated market for
mass-produced sewing machines, shoe machinery, office equipment,
phonographs, batteries, automobiles, appliances, and other consumer
durables, as well as electrical and other new heavy machinery and in-
dustrial chemicals, Germans and Americans were the first to set up
within Britain the production teams and to make the investment in
the product-specific distribution services and facilities essential to
compete in these industries. Apparently British industrialists wanted
to manage their own enterprises rather than turn over operating con-
trol to nonfamily, salaried managers. They seemed to regard their com-
panies as family estates to be nurtured and passed down to their heirs
rather than mere money-making machines. As a result they and the
British economy as a whole failed to harvest many of the fruits of the
Second Industrial Revolution.
The commitment to family control was reflected in the nature of
British mergers. As in the United States, many British firms grew large
by merger and acquisition. As in America, holding companies were
formed to control legally the output, price, and marketing arrange-
ments of hitherto small competing enterprises; but British holding
companies, unlike their U.S. counterparts, remained federations of
family firms. Until World War I British industrialists rarely viewed
merger as a forerunner to the rationalization, consolidation, and cen-
tralized administration necessary to exploit the potential of scale econ-
omies. Indeed, the very first merger to centralize and rationalize in
Britain came in 1920 at Nobel Explosives, the forerunner to ICI, which
borrowed the necessary organizational techniques directly from its
overseas ally, the Du Pont company of Wilmington, Delaware.19 As
19
For Nobel, see W. J. Reader, Imperial Chemical Industries: A History, (London, 1970), 1:388-94;
for Lever Brothers, see Charles H. Wilson, History of Unilever (London, 1954), 2:302, 345.
late as 1928, Lever Brothers, one of Britain's largest enterprises, had

forty-one operating subsidiaries and thirty-nine different sales forces.
For these reasons, then, the founders of most large British enterprises,
continued to manage their enterprises directly. Hierarchies remained
small and controllable. Sons and grandsons and grandsons-in-law con-
tinued to move into the top offices.
Thus Britain continued until World War II to be the bastion of family
capitalism. Thereafter the large industrial enterprise was transformed
by several factors: the rapid decline of the old industries; the end of
the cartel system at home and abroad, and therefore the increasing
need to compete through efficiency; a new emphasis on engineering
and business education for managers; and even changes in attitudes
about family position and control. Ownership increasingly became sep-
arated from management. By the 1970s the size of the hierarchies,
their composition, the organizational structure of the enterprise, the
ways of competition, and growth were comparable to those of the large
American firm thirty years earlier, except that family participation in
top management was probably still greater.
GERMANY
In Germany, unlike Britain, integrated industrial firms as large as

those in the United States existed well before the coming of World
War I. They were fewer in number, however, and were concentrated
in metals and the technologically advanced machinery and chemical
industries. Among the top 200 German firms during the interwar
years, very few produced branded packaged products, except for the
regional breweries. One can only locate two chocolate and confection-
ery and two drug companies. The remaining few were subsidiaries of
Nestle, Lever Brothers, and the two Dutch margarine makers that
joined Lever in 1929 to become Unilever. Nor did the large German
firms manufacture light mass-produced machinery in the American
manner. Singer Sewing Machine long remained the largest sewing ma-
chine maker in Germany. Well before World War I the factories of
National Cash Register and American Radiator and the sales offices of
International Harvester and Remington Typewriter dominated the
German market for their products. In automobiles in 1929, a year
when General Motors produced 1.6 million and Ford 1.5 million cars,
only one German car company made more than 10,000. That firm,
Adam Opel, which produced 25,000, was a General Motors subsidiary.
Even in standardized industrial machines, American firms such as
Mergenthaler Linotype (in printing presses) and Norton (in abrasives

and grinding machines) dominated German markets.
The Germans did, like the British, have their one large represen-
tative in the rayon, rubber, and oil oligopolies. (The last, EPU, was
dismembered during World War I.) It was in complex machinery and
chemicals, however, that the Germans made their global mark. In
giant production works German machinery and chemical enterprises
produced in quantity a variety of complex machines and chemicals
made from the same basic ingredients and processes. Managerial hier-
archies even larger than those of the production departments of Amer-
ican firms guided the complicated flow of materials from one inter-
mediate process to the next. In the 1880s and 1890s these enterprises
built extended networks of branch offices throughout the world to mar-
ket products, most of which were technologically new machinery and
chemicals, to demonstrate their use, to install them where necessary,
to provide continuing after-sales service, and to give customers the
financial credit they often needed to make such purchases. Once es-
tablished abroad they built and acquired branch factories. Finally, they
invested, usually more heavily than the Americans, in research and
development.
At home these large integrated enterprises reduced competition by
making contractual arrangements for setting price and output and al-
locating markets. Because such arrangements were in Germany legally
enforceable in courts of law, the arrangements became quite formal
and elaborate. The IG, or the community of interest, became the clos-
est legal form to the British and the American holding company. The
difference between the British holding company and the German com-
munity of interest was that the latter involved large hierarchical firms
rather than small family enterprises. Their extensive investment in
marketing and distribution and in research and development permit-
ted the large German enterprises to dominate the negotiations setting
up cartels, associations, or communities of interest, and provided them
the power essential to implement and enforce the contractual
arrangements.
Finally, the capital requirements of these capital-intensive produc-
ers of industrial products were far greater than those of the American
and British makers of branded packaged products or the American
mass producers of light machinery. Because there were no highly de-
veloped capital markets in Germany comparable to those of London
and New York, German banks became much more involved in the
financing of large hierarchical enterprises than was true in Britain and
the United States. Although the representatives of banks never sat at
the Vorstand, the central administrative body of top managers, as did

the founder and often full-time family executives, they did become
important members of the Aufsichtsrat or supervisory board. Because
the numbers of large enterprises were small, much smaller than in the
United States, and because the major banks were even fewer, the full-
time salaried bank managers were probably few enough in number to
exchange information. Such outside sources of knowledge about the
businesses may have made them less captive to the inside management
than were the part-time outside directors on American boards. Thus,
those sectors in which the supervisory board included managers of the
leading banks can be said to have been administered through a system
of finance capitalism.
Why were the large German industrial enterprises concentrated in
metals and complex industrial products rather than branded packaged
goods or light mass-produced machinery? Why did the Germans build
large hierarchical organizations when the British did not? In the 1870s,
when the transportation and communication revolution was being
completed, manufacturers in the new German empire enjoyed neither
the rapidly growing continental market of America nor the concen-
trated consumer market of Britain. Because per capita income was
lower than in the United States or Britain and because Germany was
neither a large importer of foodstuffs like the United Kingdom nor an
exporter like the United States, there was relatively little entrepre-
neurial challenge to create large enterprises in packaged and perish-
able foodstuffs or other consumer products. The challenge to the Ger-
man entrepreneurs came instead from the demand of industrializing
and industrial countries, including Britain and Germany itself, for the
new specialized industrial machinery, including electrical equipment,
and new industrial chemicals, including synthetic dyes. In building
their technical sales and research organizations—their basic weapons
in international competition—the Germans had the advantage of what
had become the worlds best technical and scientific educational insti-
tutions. Therefore, despite the defeat in two wars the German strength
in international competition still rests on the performance of their sci-
ence-based industries.
Since World War II, convergence has occurred, as it has in Britain.
German industrials successfully moved into the mass production of au-
tomobiles, appliances, and other consumer durables as well as into the
high-volume production of light machinery. The number of producers
of branded packaged products in foods and consumer chemicals in-
creased. As the number offirmsamong the top 200 in industries other
than machinery and chemicals grew larger, and as the firms in those
older industries diversified into new product lines, the ability of rep-
resentatives of banks to bypass the inside managers and therefore to
participate in top management decisions lessened. Even so, banks still
play a more significant role in German enterprises than they do in
American, just as British family members are still more important in
top management decisions than those in the United States.
JAPAN
Large industrial enterprises in Japan evolved very differently from

those in the West. For Japan was just taking the first steps toward
modern industrialization in the same decades that the new transpor-
tation and communication revolution was spawning the Second Indus-
trial Revolution in Europe and the United States. Indeed, Japan's first
steel mill only went into operation in 1902. Only in the years after
World War II was the economy large and strong enough to support
modern mass production and mass distribution. Yet even before that
war, managerial hierarchies had appeared to exploit new technologies
and to reach new markets.
In the early years of this century, Japan's domestic and foreign mar-
kets were of a totally different nature. At the time of the Meiji Resto-
ration, Japanese manufacturers enjoyed a highly concentrated domes-
tic market, comparable to Britain's during its early industrialization,
with long-established channels for distribution of traditional consumer
goods. As a result, only a few Japanese firms (and no foreign compa-
nies) began to create marketing networks to distribute branded pack-
aged products within the country. By World War II a small number of
makers of branded packaged products such as confectionery, soy sauce,
canned sea food, beer, and soap, who advertised nationally and had
their own extensive sales forces, were listed among the largest 200
Japanese industrial enterprises.
On the other hand, overseas, even in nearby East Asia, the Japanese
had had no commercial contact at all for the more than 250 years of
the Tokugawa period. Manufacturers using imported processes to pro-
duce textiles, fertilizers, and ceramic and metal products sought over-
seas as well as domestic markets, particularly in nonindustrialized East
and Southeast Asia. Overseas they rarely set up their own branch of-
fices. They had neither the volume nor the distribution needs to re-
quire large product-specific investments in distribution. They relied
instead on allied trading companies to assure coordination of flow of
goods from factories in Japan to customers abroad and at home, and
the flow of essential materials and equipment from overseas to the
producing facilities. These trading companies set up branch offices in

Japan and in all parts of the world, and built large central offices in
Tokyo or Osaka. That is, they invested in an extensive marketing and
distribution organization that coordinated flows, provided marketing
services, and generated information, thus lowering marketing and dis-
tribution costs. They became the linchpins of groups of firms consisting
of single product manufacturing enterprises—each group having its
own banks and trust companies as well as its own trading and ware-
house concerns.
The close relationship between the managers of the manufacturing
companies and those of the trading firms, either within the giant zai-
batsu or between cooperating manufacturers in less formal groups,
permitted the Japanese to capture an increased share of world trade,
particularly in the relatively low-technology industries. However,
where marketing and distribution did require product-specific skills,
services, and facilities, enterprises set up their own distributing net-
work and operated outside the zaibatsu and other group enterprises.
Before World War II, only a few such enterprises had appeared, pri-
marily in industrial machinery and particularly in electrical machinery.
The latter was especially important, for until the 1950s Japan relied
heavily on hydroelectric power for its energy. Only after the war, with
the rapid growth of the domestic market, did the makers of automo-
biles, electric appliances, radio, and television build comparable or-
ganizations. In the postwar years these enterprises have been increas-
ingly investing in distribution abroad and have come to operate
through extensive managerial hierarchies comparable to those of the
West. Like their western counterparts, they began in the 1960s to
grow through diversification, particularly into appliances, radio, tele-
vision, and other consumer durables. So by 1970 there were two types
of industrial groups in Japan. One was the descendant of the old zai-
batsu, whose central office had been abolished by the Allied occupa-
tional authorities after the war. The other was the maker of machinery,
vehicles, and electrical equipment who, after diversifying in the man-
ner of the western companies, often spun off their different product
divisions. They remained part of the group, but operated as financially
independent enterprises, unlike the divisions or subsidiaries of diver-
sified western firms.
CONCLUSION
As the Japanese experience illustrates, the vast increase in the num-
ber and complexity of decisions required to coordinate the activities of
a multitude of offices, plants, distribution facilities, research laborato-

ries, and the like in different geographical areas, often for several prod-
uct lines, brought a convergence in the type of enterprise and system
of capitalism used by all advanced industrial economies for the pro-
duction and distribution of goods. In Japan the rapid post-World War
II growth of a concentrated domestic, urban, industrial market with a
sharply increasing per capita income provided a base for a large inte-
grated, hierarchical enterprise to exploit the potentials of scale econ-
omies. Such enterprises quickly took their place in the existing global
oligopolies.
In this respect the Japanese challenge to the American and Euro-
pean industrial leadership differs markedly from the earlier challenges
of the Americans and Germans to British leadership. The Americans
and Germans took over world markets by creating international hier-
archical enterprises producing and distributing new products because
the British failed to create the organizations required for the devel-
opment and exploitation of these products. The Japanese, on the other
hand, have successfully moved into the international markets by using
technological and organizational techniques very similar to those of the
Americans and Europeans, indeed often borrowed directly from
them—but using them more effectively and efficiently than the first
comers.
Thus by the 1970s, in these advanced industrial economies, man-
agers with little or no equity in the enterprises administered made the
decisions about present production and distribution and the allocation
of resources for future production and distribution. And they did so
through much the same basic organizational forms. The type of struc-
ture depicted in Figure 2 defines in broad outline the organization of
Imperial Chemical Industries, Bayer, Mitsubishi Chemical, and Du
Pont. Only in rare cases are any of the top 200 in these four leading
industrial economies personally managed by their owners. In fact it is
exceptional for owners to participate on a full-time basis in the top
management decisions of an extensive hierarchy.
Nevertheless, variations within this new brand of capitalism are still
significant. Enterprises of the four countries differ in terms of size,
number, industry, and systems and styles of management, reflecting
the different routes by which the leading sectors of each economy
reached managerial capitalism—the United States by almost revolu-
tionary changes at the turn of the century; Britain in a much more
evolutionary manner that prolonged family capitalism; Germany by
way offinancecapitalism; and Japan by the development of group en-
terprise capitalism.

Chandler 1984

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;The Emergence of Managerial Capitalism

ALFRED D. CHANDLER, JR.

11 In this article, Professor Chandler compares and contrasts the

In the late nineteenth and early twentieth centuries, a new type

the home office in Florence was fifty-seven. Of these a dozen were

time. These administrative hierarchies grew to a still much greater size

Tables 1 through 5 document the similarities among the large inte-

I Executive Committee I Top

I (siaff) | | | (siaff) ( I | (staff)

Producl Product Producl Product Purch Haw cjnjtri«d

fiiiiiii iiTinm IIIIIIMIM rnnn i if Tin nrnn rrTn nin nrn

American firms predominate among the world's largest industrial

rrnm i [ i | | | m m nTm m m | | p~^ | i i

in the United States were active throughout the twentieth century in

EXPLANATION OF THE EVOLUTIONARY PROCESS

Why have these large integrated hierarchical enterprises appeared

'Ranked 1>\ assets.

nology of production permitted much greater economies of scale than

economic measure of capacity utilization. In the capital-intensive in-

efeller's Standard Oil Company through interchange of stock and other

ganizations to advertise and market their products nationally and often

marketing services than in product-specific plant and equipment.14

and fill volume orders to precise specifications on precise delivery

production abroadfollowed,almost never preceded, the building of an

THE UNITED STATES

economies and made the investment in distribution necessary to mar-

nonmanufacturing personnel and facilities. They also expanded by

THE UNITED KINGDOM

But where British industrialists failed to grasp the opportunity to

nication. So its industrialists had become attuned to a slower, smaller-

late as 1928, Lever Brothers, one of Britain's largest enterprises, had

In Germany, unlike Britain, integrated industrial firms as large as

Mergenthaler Linotype (in printing presses) and Norton (in abrasives

the Vorstand, the central administrative body of top managers, as did

Large industrial enterprises in Japan evolved very differently from

producing facilities. These trading companies set up branch offices in

a multitude of offices, plants, distribution facilities, research laborato-

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