Chandler’s Thesis

In his ground-breaking study of the history of large corporations, Chandler examined the growth and development of 70 of the largest businesses in the United States, including Du Pont, General Motors, Standard Oil, and Sears, Roebuck. He observed a common pattern in their development. Although the organizations changed their growth strategies to suit technological, economic, and demographic changes, new strategies created administrative problems and economic inefficiencies. Structural changes were needed to solve those problems and to maximize economic performance. Thus, Chandler concluded that organizational structure followed and reflected the growth strategy of the firm.

According to Chandler, organizations pass through three stages of development, moving from a unit structure, to a functional structure, and then to a multidivisional structure. At first, organizations are small. There is usually a single location, a single product, and a single entrepreneurial decision maker. For example, when Bill Hewlett and Dave Packard founded a company to build an audio oscillator in 1939, they were personally responsible for its design, manufacture, testing, and marketing.

As an organization grows, however, increased volume and additional locations eventually create new challenges. The organization then becomes a unit firm, with several field units and an administrative office to handle coordination, specialization, and standardization among the units.

The next step is vertical integration. The organization keeps the original product but broadens its scope and strives for economies of scale by acquiring a supplier of raw materials and components or a distributor of finished goods. For example, the pioneers of vertical integration, the steel companies, eventually moved into mining. A manufacturer might naturally move into warehousing and wholesaling. However, vertical integration creates new problems in moving goods and materials through the organization’s various functions. Therefore, the organization evolves into a functional organization, with finance, marketing, production, and other subdivisions and formalized budgeting and planning systems. Thus, as Hewlett-Packard’s production of test equipment expanded, functional managers took over operating decisions.

In the third stage, an organization expands into different industries and diversifies its products. This phenomenon poses a significant new challenge: selecting products and industries in which to invest the organization’s capital. The result is the multidivisional firm, which operates almost as a collection of smaller businesses. Semi-autonomous product divisions take responsibility for short-term operating decisions, with the central office remaining responsible for strategic decisions with a longer time horizon. For instance, Sega was organized to give operating units a great deal of autonomy.

Chandler observed that the transition from one structure to another was often both delayed and painful. He concluded that organizations do not readily change structure because their entrepreneurial founders excel at strategy but are generally neither interested in nor knowledgeable about organizational structure. Indeed, when the organization is finally restructured, the entrepreneur often leaves. This has happened frequently in recent years in rapidly growing, technology-oriented firms like Apple Computer. At Railtex Service Co, a freight-car operator, founder faced the problem head-on: With his successful business at the crossroads, should he stay on? He knew that with the right leadership, the business was poised for incredible growth. Could he provide that kind of leadership?

More recently, Raymond Miles and Charles Snow have done extensive studies analyzing the fit between an organization’s strategy, structure, and management processes-that is, the balance between its alignment with its environment and its maintenance of stable internal interrelationship. They argue that successful organizations achieve strategic fit with their market environments and support their strategies with appropriately designed structures and management processes, while less successful organizations typically exhibit poor fit externally or internally, or both.

IBM’s recent highly publicized problems are in part a result of its highly centralized decision-making structure, which could not adapt fast enough to changes in the external environment. Even if IBM knew the correct strategy, it could not implement it in its current structure.

Regardless of the final verdict on Chandler’s thesis, it is impossible to understand an organization’s strategy without examining its structure. Indeed, one framework for organizational effectiveness goes even further in its analysis of interacting factors in strategy implementation.