against Chandler's Visible Hand
Source Devine, James
Date 03/06/19/20:53

June 19, 2003/NY TIMES
Specialization Is the Rage

SEARS is selling its credit card division, almost certainly to a specialized
financial business. To let customers charge their purchases, retailers no
longer have to run their own credit operations. Dell Computer doesn't make
its own hardware. It assembles circuit boards and disk drives from
specialized manufacturers.

From payroll management to movie special effects, vertical integration is
out. Specialization is in.

Does your company need a new product? You can hire an industrial design firm
like IDEO to create it. Want to set up shop online? Buy the services and
software from Amazon. Are you selling electronic systems? Get Solectron  and
Flextronic to assemble them.

" Wal-Mart  is less integrated vertically than Sears at the turn of the 20th
century," the economist Richard N. Langlois of the University of Connecticut
wrote in an e-mail message, noting that Sears once "even manufactured some
of its own products in its own factories." Amazon is less integrated still,
and eBay even less so.

Meanwhile, vertical mergers increasingly look like bad bets. The AOL Time
Warner  vision of combining editorial content and Internet services under
the same corporate roof has turned out to be an expensive folly.

Other media mergers based on the same theory, like Disney's acquisition of
ABC, haven't done much better. Content and delivery don't need common

It's more flexible and efficient to specialize in one activity and then buy
from or sell to a number of outside companies.

Since the 1980's, American corporations have been disintegrating - not
falling apart, but becoming more specialized. Revenues or production volumes
may be as large as ever, but even big companies tend to combine fewer stages
of production under the same corporate ownership.

This trend presents a puzzle. As the business historian Alfred Chandler
famously chronicled, the modern corporation succeeded in large measure by
bringing many different stages of production under central ownership and

In Mr. Chandler's account, "the visible hand of managerial coordination had
replaced the invisible hand of the market," Professor Langlois explained in
an article in the journal Industrial and Corporate Change.

Why did vertical integration seem like the way to efficiency, predictability
and riches? Was Mr. Chandler wrong?

In his article, titled "The Vanishing Hand," Professor Langlois argues that
Mr. Chandler's managerial revolution "was an organizational solution
appropriate to its time and place." The Chandlerian corporation did not
supplant specialization forever. It was essentially a stopgap measure, a way
of reducing uncertainty in an underdeveloped economic environment.

In high-volume operations like those that developed in the late 19th
century, every part of the system has to operate reliably.

"You want to make sure the ore gets to the smelting plant, that the metal
gets to the steel mill, and the steel gets to the automobile factory - that
all of this happens fast, and it happens at the right time," Professor
Langlois explained in an interview.

"To do this, you've really got to make sure there are no uncertainties in
these various parts of the system. In the beginning, the easiest way, the
cheapest way to do that was to use management as a buffer - to put people in
charge and have these things under common control."

Markets simply weren't thick enough to meet the new corporations' needs. In
some cases, stages of production were entirely missing. In others, they
weren't developed and competitive enough to be reliable.

"What happened in the Chandlerian era," Professor Langlois said, "was that
the need for buffering grew fast, but marketing-supporting institutions
weren't able to cope with that, so you had to come up with a kind of second
best, which was the large, vertically integrated firm."

Over time, however, new companies and specialized institutions arose to
provide once-missing services. Meanwhile, markets grew through trade and
increasing populations. This growth allowed more and more specialized
businesses to find niches - the process Adam Smith first identified in "The
Wealth of Nations."

To operate a meatpacking business in the 19th century, Gustavus Swift "had
to own the company that made the railroad cars," Professor Langlois said.
"He had to own the ice company. He had to own the distribution, the
refrigerated warehouses." In today's developed markets, by contrast, Michael
Dell could devise a similarly efficient logistics system using existing

Similarly, Sears customers no longer need a special Sears credit card. They
can use Visa and MasterCard. If Sears wants to offer its own branded card,
it can contract with a financial services company to handle those

Today's companies combine "specialization of function" with "generalization
of capabilities." Shippers are good at shipping things in general; credit
card companies are good at managing credit risks, regardless of where
customers buy; electronics assemblers are good at all sorts of assembly.
Businesses specialize more in skills than in end products.

This form of specialization provides a more reliable buffer against
uncertainty. "Since a general specialist is not tied to a particular product
or brand, but takes in work from many purveyors of products and brands,"
Professor Langlois wrote, "it can diversify its portfolio more effectively.
This smooths demand and facilitates high-throughput production."

He expects the trend toward specialization and vertical disintegration to
continue as long as "markets continue to grow and globalization doesn't get

But there's one caveat to that prediction: "If there were some kind of major
systemic innovation that nobody's anticipated, then there might be a lot
more vertical integration as people try to cope."

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