Scale and Scope: Dynamics of Industrial Capitalism [Paperback]

Based on an examination of 600 companies in Britain, Germany, and the United States, this economic history explains the emergence and development of large industrial enterprises from the late 19th century until World War II. The book also shows how differences in geography, demographics, and institutions influenced the development of industrial enterprises in these three countries.

Author Alfred Chandler, who won a Pulitzer prize for a previous book in this field, argues that large-scale industrial enterprises were an organizational response to newly integrated national markets and new technologies for production and distribution. Railroads and national telegraph networks brought nations together and created large-scale markets, the first prerequisite for these large companies. Railroads also made important organizational innovations, as the first companies to employ upper, middle, and lower management, and the first to separate headquarters offices from specialized departments. In the United States, the railroads' immense capital requirements also led to the rise of New York as the second finance center after London. The second prerequisite for development of large industrial enterprises was new technology. In contrast to older, more labor-intensive industries, where growth occurred by scaling up existing processes, giant industrial companies arose by radically increasing the capital employed, improving production processes, integrating production processes within a single plant, or making better use of energy. Giant companies developed in new industries like petroleum, chemicals, sugar, vegetable and animal oils, metals, food and tobacco, and machinery.

By investing massively in production, managerial, and distributional capabilities, these companies were able to achieve minimum efficient scale: that is, the level of production for a given state of technology that produces the lowest average unit cost. Since minimum efficient scale was large with respect to the total size of the market, the first companies to achieve minimum efficient scale acquired tremendous competitive advantages and made tremendous profits, while later entrants had to take business away from established companies to survive. After achieving minimum efficient scale, many companies began to integrate upstream to ensure reliable sources of supply. Companies integrated downstream most often to use their superior knowledge of their products to market them more effectively.

These organizational capabilities could then be leveraged to enter new geographical markets or new lines of business. Chandler identifies this drive to capture new markets through investments in production, managerial, and distributional capabilities as the key dynamic of large industrial companies. Rather than entering into price competition that would inevitably lead to the disappearance of profits, competition occurred mainly through strategic decisions (entering markets with more profit potential and exiting markets with less potential) and through product innovation.

An implication of this mode of competition is that countries that are late industrializers will face considerable barriers to achieving minimum efficient scale. However, changes in technology, markets, and relative prices create opportunities for new entrants, and poor strategic or managerial decisions by current market participants sometimes create opportunities as well. For example, the poor quality of U.S. cars and the first Arab oil embargo in 1973 created an opportunity for Japanese carmakers to capture market share in the United States by selling small, fuel-efficient cars. At that point, the Japanese carmakers took the lead in staking out their market positions and U.S. carmakers were suddenly trying to catch up, a situation that has persisted up until now.

About two-thirds of the book is devoted to exploring the specific patterns of industrial development in Britain, Germany, and the United States. In Britain, where the domestic market was affluent, urbanized, and compact, industry focused on producing consumer goods and companies quickly acquired exporting expertise. In Germany, institutional factors like the high quality of German universities in scientific fields, the participation of banks on the boards of the companies they financed, laws that explicitly supported inter-firm cooperation, and the high relatively importance placed on labor welfare issues supported the development of a style of "organized capitalism" or "cooperative managerial capitalism" that focused on producer goods like chemicals, industrial machinery, and electrical equipment. Among the three countries covered by the book, companies in the United States were favored by the fastest population growth and the fastest increases in per capita income. Antitrust legislation became a factor in the early 20th century, making cooperation between companies illegal but recognizing the societal benefits that could be achieved by exploiting economies of scale and scope.

Chandler writes like a historian, not like an economist, and non-technical readers with an interest in the subject matter will have a pleasant time with this book.