THE FIRM GROWTH: CHANDLER AGAINST WILLIAMSON


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 review, 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.  These differences are further developed by applying within the context of global strategies for better understanding of the advantages and disadvantages of the two models.


 


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, the results were also 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 (1962).  This situation of surplus was the climax of gains from industrial revolution wherein transfer of 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 those 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 (1999).  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 (1999) 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 (1999).


            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 (1999).  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 (. 1962), 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, the latter emphasized again to the behavioral aspects involved in the transition wherein the limitations of the contract grow leaving safeguards against opportunism unattended (1999). 


            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 (1962) 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 as 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 (1999).  Because of this, Chandler’s claim that structure follows strategy (1962) is dimmed.  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 strictly 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 encouraging.  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 (1999), 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 (1999) 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 (1999).  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


            The firm of Chandler started with small market and small production and distribution activities.  In the advent of technological breakthrough that made possible transportation and communication to handle large amount of goods and information in a single transaction, the profit-based firm direction drew it to accumulate large amounts of resources to its production and distribution processes to exploit market opportunities.  The activities, in turn, became complex while competitors already saturated the existing market.  To survive the competition and handle market complexity, it needed to restructure its internal organization.  In the initial restructure, centralized office is established to guide the long-term objectives of the functional departments concerned in the firm activities.  Though this restructuring provided efficiency, long-term profitability required the firm to diversify into new markets or innovate to hasten diversification.  With this, decentralized structure was the definitive transformation of the firm to attain the final cycle of modernization.


            To put this firm in the veil of Williamson analysis, however, the technology and market characteristics do not yield structural change automatically.  Before the firm would opt to integrate its activities, certain internal organization activity should serve as mitigation to contractual hazards otherwise posed by the market.  The market here is initially viewed as relatively problematic option for the firm because contracts arising from transactions with it are accompanied with unanticipated disturbances, short-term and non-special investment, relatively having less capacity to adapt, the choice of organizational structure primarily involves behavioral attributes and there is a need to work-out the trade-offs of the firm and markets.  Such market failures can be satisfied through substituting internal organization for market exchange in order to economize on transaction costs that would be demanded by the market from the firm that in turn would jeopardize the latter gains over the transaction costs.


            Chandler aspired for the benefits exclusively for the firm while Williamson aspired for the benefits distributed between the firm and the market for the sake of the contract.  The former saw technology and market failures as the tool that can annihilate the contract instantaneously while the latter saw them merely as an incentive for the firm to economize transaction costs from existing contracts.  The latter situation is not left unattended by the seemed to be beleaguered and aggrieved market as it has its own adaptations to make to also economize its contractual gains.  The complexity and changes in the environment is deemed by Williamson as merely an incentive for both transactors to act opportunistically.  But then, costs are associated with such unprincipled act since an economic organization can only act in the boundaries of rationality.  Beyond this, the manner of arriving and enforcing the transactions for the firm to gain more against the market, equates additional costs.  Chandler was likely to skip mentioning the costs, disadvantages and offset of being a large and vertically integrated firm.  His firm might be profiting, but the costs associated with disposal of market forces limit such gains from its operations.    


 


Implications to Global Strategies


Business-level Strategy


            The firm of Williamson would probably utilize the national advantage (2003) of the host country where it applies international growth.  It will prefer the contract to persist between the global firm and the market.  With the continuity of the transactions the firm remains less vertically integrated.  It chooses to be so because the local markets have the patent, either technologically or government protected, of some of the provisions of the contract that the firm cannot simply act opportunistically even it increases its bounded rationality by increasing coordination capabilities, research and development, or production capabilities.  Since it is a foreigner to the contract which the market on the other hand have mastered its complications, not to mention advantages granted by the government, it can only economize the transaction costs by sticking to the market exchange faithfully.


            When the host market has basic and generalized factors of production (2003), however, cheating could have its way against the original contract.  Government intervention, considering the mediocre factors of production of the country, has the drawback to grant advantages to the local market because of price concerns and efficiency issues that could positively impact the large number of consumers.  Thus, the firm of Chandler could be more useful and appropriate for such country.  As it consider technology and market failures as opportunity to gain more, the weakened intervention from the government and a relatively neophyte local market would not be that strict enough to enforce contracts with the global firm.  Thus, vertical integration of Chandler’s firm could simply exploit market failures with the chance to be a long-term monopoly.


            It is also indicative that Chandler’s firm can benefit from the advanced and specialized factors of production (2003) present to the host country.  With an efficient transportation and communication facilities including skilled local labor, incentives to produce in mass merchandise scale connotes profitable opportunities.  This fact invites vertical integration for the firm to obtain efficiency.  However, the size and nature of demand needs to be measured to justify the investments of internalization of activities.  In the event that the local demand falls short to the production capacity of the integrated firm, Williamson’s firm that allows market exchange can somehow balance the gains from the trade through adaptation of the transaction arrangements.


            Further, when the host country is endowed with enormous related and supporting industries (2003), Williamson’s firm could be more efficient than Chandler.  By simply contracting, it can produce with fewer amounts appropriated from the investments in physical and human assets.  However, coordination of local demand needs to be closely monitored in order for the contract to obtain optimal gain.  If demand is low, the contract requires flexibility in order for transaction costs accruing to the firm are minimized.  In the event that market institutions do not allow flexibility of transactions and insist a continuous adherence to the initial agreement, Chandler’s firm could be deployed.  However, its competitive advantages as a vertically integrated organization could be undermined by the mastery of local markets to the technology and established relationships they have with their local and global partners.  The global firm has to choose between the contingent approach of Williamson’s firm to contract and Chandler’s inferiority of activities and hesitance to contract to related and supporting industries due to controlled production.                            


            Lastly, the competition (2003) in the host country can post problems and benefits for the global firm depending which firm would be utilized.  Intensive rivalry in a certain industry would call for the vertically integrated Chandler’s firm because of the inherent call to produce at the most efficient level to gain the largest market share.  Using Williamson’s firm under such condition would only beleaguered its competitive position as the local and global firm that are earlier established before its entrance could pose first mover advantages that contracting to the market has less incentive than internalization.  Rivalry can also suggest that local demand is high that incentives of Chandler’s firm to maximize such opportunity and, at the same time, minimize production costs can be materialized. 


 


Corporate-level Strategy


            Due to the adaptation required by a multi-domestic (2003) firm, Williamson’s firm is the ideal agent to deploy in a host country.  The necessity for this kind of strategy to adjust operations according to consumer needs and desires, industry conditions, political and legal structures and social norms could be efficiently attained by contracting with the local markets.  Williamson’s firm can economize transaction costs through the ease of locating a partner-market that can provide activities and human resources for the firm.  The need of local support for the global firm’s operations make it possible for the latter to adapt quickly in the environment with least investments to provide requisites of being a multi-domestic firm.  It is not a situation wherein quantity and production capacity of the firm is accounted for its success.  It may produce efficiently but the absence of customization would not invite demand, hence, oversupply results. 


            On the other hand, the implementation of global strategy (2003) calls for the technological, vertically integrated and opportunistic model of Chandler’s firm.  The strategy demands less, or zero, customization to local demand that producing at a mass production level is appropriate.  Also, at this level, efficiency can be attained through integration while technology can cut costs in coordination and transportation costs between the home central office and local subsidiaries.  The development of the Internet was used by a giant cement manufacturer, (2003), to coordinate logistic operations across countries.  Innovation within the firm could also derive the success of the current product of mass distribution.  With upgraded features, it can retain and even improve the demand of the local consumers to the benefit of the global firm.  In the process, Chandler’s firm has less incentive to deal with local markets for the provision of activities because the home central office will not permit doing so.  It will only loose the global company’s benefits from economies of scale.        


            The most intriguing part of the discussion is to introduce an international strategy in which Chandler and Williamson’s firms will be combined extracting their renowned characteristics.  This is what transnational strategy ( 2003) demands through its quest to achieve both global efficiency and local responsiveness at the same time.  Although it is eminent to view that higher performance by the global firm could be attained than the single use of multi-domestic or global strategies, implementation is problematic and costly.  In a mass production state, the global firm, now referred as “” or “” firm, will produce in a vertically integrated manner with customized products and services in its production line.  How should it segregate its transactions?  What activities or transactions will it leave to the market and what will be internalized?


            To these questions, Williamson seemed to have the upper-hand than Chandler.  If transactions are uncertain, the frequency of exchange is high and there is a high degree to which investments are transaction specific, then, it is wiser, practical and more profitable for the firm to internalize its activities and drop the contract between it and the market.  Otherwise, if the opposite of the characteristics of the transactions hold true, the option to purchase such activities from the outside.  At the end, the “” firm ought to establish flexible factors of production, intensive demand quantity and quality monitoring and research departments.  Such moves should be inclusive of the firm thinking about transaction costs not just sticking to the promises of technology and market failures.        


 


Conclusion 


            Presenting the difference of Chandler and Williamson brought us to enormous, oftentimes, overlapping discussions.  However, the voluminous presentation is necessary to understand better the conflict between their frameworks.  Suffice to know, for convenience, that organizational structure is determined by technology and market failures according to Chandler while Williamson suspects a deeper analysis of internal organization and markets within the border of contractual relationships.  Because of the determined extreme difference of the two, although both largely aspire for efficiency though that of Chandler aspired for more, they have also different implications to international strategies both in business-level and corporate-level types.  It can be said that flexibility of operations is attributable to Williamson’s firm while Chandler, even less flexible, is a promising firm when technology and market failures come on its way.  As Williamson would not want transactions to cease that brings about dependency of firms and markets, Chandler wanted the reverse wherein the firm can take all the gains in trade with the spill-over benefits of its operations observable in offering low-priced high quality products and services.  However, limitations for the latter are imposed by government policies, customization and huge investments to factors of production and other corporate activities.


 



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