To: Pro. Rajiv Kozhikode

From: Karan Thakur

Date: 05/11/2013

Subject: Evaluation of the article “What is a firm?” By Alfred D. Chandler Jr.

  1. Critically evaluating the key assumptions and theoretical arguments.
  1. What is a firm: it is an administrative that signs contacts with its suppliers, distributers, and employees and customers. A firm has the following attributes described below.

It has managers that coordinate and monitor different activities.

As describes by Chadler “a firm becomes a pool of learned skills, physical facilities and liquid capital” (483).

Firms are considered to be key instruments in capitalistic economies such as ours. They are considered to be instrumental for the current and future production and distribution of goods and services.

  1. Accepted theory: operates on the assumption that the coordination of the flow of goods and services is done through the price mechanisms.
  2. Specialized exchange theory:
  3. The modern and multi-unit enterprise: is a type of firm that has more than one plant, shop, or office.
  4. The modern industrial firm: is considered to be the most complex and most transforming of modern business enterprises.
  5. Capital intensive: is the ratio of capital to labor per unit of output.
  6. As a result capital intensive firms are able to better exploit economies of scale and scope.
  7. Capital intensive industries: these plants had advantages over its costs over the smaller ones.
  8. Minimum efficient scale (MES): is determined by the nature of technology and the size of the market (Chandler 485).
  9. In the capital intensive industries long run cost per unit fell a lot more rapidly as the volume of output increased. These costs did not drop with the same relation in the labor intensive industries.
  10. Economies of scope: using the same raw materials and semi-finished materials and the same process to make different products in the same factory.
  11. These economies of scope are only possible if materials run through the factory at a constant rate to “ensure effective capacity utilization” (Chandler 485).
  12. Capacity and throughput are the 2 figures that determine costs and profits.
  13. The coordination was only possible with the constant attention of managerial team or hierarchy.
  14. Measure of potential economies of scale and scope: measured by rated capacity.
  15. Actual measure of economies of scale and scope: measured through throughput and are organizational.
  16. According to Chander they depend on knowledge, skill, experience, and teamwork.
  17. The capital intensive industries grew as a result of exploiting the cost of advantage of scale and scope.
  18. In order to do so according to Chandler the entrepreneurs had to create national and international marketing and distribution.
  19. Also had to recruit managers at lower and middle levels to coordinate products through the production and distribution and also had to recruit upper managers to control and plan operations for current and future operations.
  20. Firms that managed to invest in manufacturing, marketing, and management dominated their industries as they reaped the benefits of economies of scale and scope.
  21. New Transformed capital-intensive industries: were oligopolistic industries in which price was one of the competitive weapons.
  22. They were able to remain competitive through the use of functional and strategic efficiency.
  23. As Chandler suggest these firms competed “by carrying out more capably processes of production and distribution” (486).
  24. “by improving both the product and process through systematic research and development” (486)
  25. “locating more suitable sources of supply’
  26. “by providing more effective marketing services”
  27. Product differentiation
  28. Expanding into markets and moving out of declining ones.
  29. Capabilities and profits became the basis for growth through horizontal combination or vertical integration.
  30. By entering new geographical locations or product markets.
  31. Capabilities according to Chandler “were the collective physical facilities and human skills they were organized within the enterprise.”
  32. Chandler provides examples of Germany and America’s success as a result of creation, maintenance, and expansion of capabilities. Chandler also goes on to describe the limitations of a centrally controlled economy due to its lack of flow of information about coordination of goods from suppliers to markets.
  33. The neo-classic: views the firm as a legal entity with a production set from which a manager acting rationally with full information will make choose the decision that will result in the maximum profits for the firm.
  34. Principal agent theory: focuses on the owners to discipline the managers with whom they have contacted to choose and implement the production plans, but who may manage the firm in their own interest rather than the firm’s interest.
  35. Flaw of neoclassic and principal based theory: these theories according to Chandler don’t deal with the firms physical facilities and human skills.
  36. Transaction cost more relevant to historical story because it incorporates investment in facilities and skills.
  37. Difference of opinion between Chandler and Williamson’s analysis.
  38. For Williamson transaction is the basis unit of analysis and for Chandler it is the firm and its physical and human assets.
  39. Chandler states the firm’s specific nature of facilities and skills is more significant than bounded rationality and opportunism which in Williamson opinion is more significant.
  40. Pressure to internalize in a capital intensive industry is dependent on the source of supplies, nature of technology of production, and the size and requirements of markets.
  41. Chandlers key argument:
  42. “thus in analyzing the continued development of existing industries and the building of new ones, the firm would seem to be a more promising unit of analysis than the transaction, and the concept of organizational capabilities that permit it to remain competitive, and therefore profitable in national and international markets more pertinent than those bounded rationally and opportunism” (490)
  43. Routine: skills of an organization that become genes.
  44. Emerging theory of Dynamic firm capabilities: 3 different features to describe a firm Strategy, structure, and core capabilities.

Chandlers view indicates that agency and transaction cost theory is of significant value, but only in the framework of evolutionary theory. His view also suggests that the firm should be the unit of analysis not the contractual agreement.