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BUS211
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Governance and Business Strategy Module Title

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Alfred Chandler is considered one of the most prominent historians as well as founding father of the study of Business History (Economist). His many publications not only influenced the works of future business scholars but also redefined the way in which managers think about firms structure and strategy and how these relate to the institutional environment in which they operate. The Oxford English dictionary defines the term institution as: an organization founded for a religious, organizational, professional or educational purpose. Scott tells us that institutional environments "are characterized by the elaboration of rules and requirements to which individual organizations must conform in order to receive legitimacy and support" (http://faculty.babson.edu/krollag/org_site/encyclop/instit_environ.html). Strategy is defined by: the Oxford English Dictionary as: A plan of action or policy designed to achieve a major or overall aim4. The interrelation between a firms strategy and its structure is a topic vastly studied by Chandler. It was his belief that the way in which a firm operated largely influenced the structure that the firm would take in the future to accommodate at best its needs. It is clear however from his writings (even if not addressed directly) that a firms strategic decision largely influenced the institutional environment in which they operate as well as the market and firms structure. The development of more specialized university courses in American universities in the 1880s and the striking delay in the development of such courses and institution in the United Kingdom can be taken as an example of this. During the second half of the 1800s the way in which UK and US firms were structured and administered was staggeringly different. In the US the managerial revolution had facilitated the growth of large transnational, vertically and horizontally integrated firms. The strategic decisions regarding these firms were taken by upper and middle managers, this and the large concentration of such firms in technologically advanced markets such as the electrical and chemical industries caused a high demand for specialized engineers and managers (Chandler 1980 p409).5 According to Chandler the development of such firms quickly brought state and private universities [] into offering a variety of courses in mechanical, electrical and chemical engineering (Chandler 1980) but also to create new courses and even schools of business where professional training was given in finance, production, marketing and even policy-making. (Chandler 1980). This direct causality between the development of transnational firms whose strategic decisions created the need for a new, specially trained, skilled workforce and the development of educational institutions such as the Massachusetts Institute of Technology, as well as the reshaping and reorganization of existing universities, shows

Chandlers belief that the firms play a role in shaping the institutional environment in which they operate. The difference between the situation in the UK and that in the US also shows this. In the United Kingdom, at approximately the same time, large firms were mostly owned by families who had retained their ownership since the beginning passing down proprietorship through lineage. It was up to senior family members to administer and account for the correct functioning of the firm. Therefore there was little demand for management, and educational institutions did not offer such specialized training until there was an industrial demand for it (Chandler 1980). Until there was a significant demand for managers, however, the British could hardly be expected to provide facilities to train them (Chandler 1980). It was only after World War II when the managerial system became largely integrated into British firms that the educational system responded by expanding engineering and inaugurating business schools (Chandler 1980). In the case of British firms, the lack of necessity for trained managers and engineers caused the educational system in the UK to remain largely static in that period, hence showing in this case too how firms strategic necessities and decisions largely contribute towards the modeling and creation of the institutional environment in which they operate. Another institutional system, which the effect of strategic decisions clearly modified and shaped: is the legal system. The emergence of truly consolidated enterprises operating on a national scale (Chandler 1962) called for an ad hoc legal system that would render the existence of such firms legitimate as well as easing the task of managing and administering them. As a consequence of the development of large national firms in markets such as the railroad, tobacco and food industries led to the creation of the general incorporation law for holding companies. This law permitted a single parent company to hold the majority of the stock of locally chartered subsidiaries and so provided an inexpensive and easy way for enterprises operating over a wide area to avoid these obstacles and still to retain legal control over their geographically dispersed activities. (Chandler 1962)The necessities for firms to gain strategic advantage through direct integration of manufacturing processes as well as the development of geographically diverse firms led to the creation of new laws integrated into the legal system thus shaping the institutional environment in which they operate. As with the educational system, we can observe a direct response of the legal system adapting and conforming to firms strategic needs to integrate and exploit economies of scale.

The development of the meat industry, and in particular of specialized firms selling West Coast meat on the East Coast also shows how the strategic decisions undertaken by one firm can shape the institutional framework in which they operate. In the mid 1870s Gustavus Swift undertook the task of using newly developed technology (fridge carts) to trade meat between East and West coast. Large urban settlements in the East provided for a constantly growing market in the East Coast. At the same time large plains in the West were starting to be used for cattle. With the emergence of new technologies Swift set up a network of transportation and storage to accommodate the Easts demand for meat with stock from the West. Due to strategic incorporation of marketing procedures as well as the successful development of storage and distribution facilities Swifts firm became one of the leading organizations in the industry. However Swifts success was seen as a threat for local Butchers in the East who quickly organized into the National Butchers Protective Association whose mission was that of preventing the sale of fresh western meat in the eastern urban markets (Chandler 1962). The quick reorganization of local butchers into professional institutions trying to safeguard their profits from outsiders shows the necessity for institutional systems to react and adapt to new forms of trade. The only way in which local butchers could compete with the large enterprise taking shape was organizing themselves into a structured institution in the hope that the combined power of the singles could amount to a force able to compete with the growing national firm (in particular that owned by Swift). If they did not adapt the strategic advantage Swift had in their regards would have crushed their local trade. In conclusion, although Chandler rarely addresses directly the issue of strategic decisions affecting the institutional systems in which firms operate (concentrating rather on structure), he provides enough examples for us to conjecture on our own that a unilateral relation between the two exists. Using examples such as the legal, educational and professional institutional systems it becomes clear how these have adapted to strategic decisions taken by firms. As the industry requirements change so does the environment in which they operate. If this did not occur it would become particularly hard for firms to thrive and survive. The support of institutions is necessary for industry survival but at the same time industries and firms composing them are necessary for the survival of society in a capitalist system. Hence institutions adapt their rules and requirements to allow for the development of competitive and effective markets, facilitate trade and aid in providing necessary services for market development. At the same time, firms and industries, through the payment of taxes and fares provide for the functioning of

governmental (and non) institutions. Their survival relies hence on the correct functioning of the two and at least a minimal common goal is necessary in order for them to operate effectively.
Bibliography

Chandler, Alfred D. Strategy and Structure: Chapters in the History of the Industrial Enterprise. Cambridge, MA: M.I.T., 1990. Print. Chandler, Alfred D. "The Growth of the Transnational Industrial Firm in the United States and the United Kingdom: A Comparative Analysis." The Economic History Review 33.3 (1980): 396-410. Print. Soanes, Catherine, and Angus Stevenson. "Institution." Concise Oxford English Dictionary. Oxford: Oxford UP, 2009. 736. Print. "The Economist." The Economist. The Economist Newspaper, 09 Apr. 2009. Web. 28 Feb. 2012. http://www.economist.com/node/13474552

"Institutional Environments." Welcome to the Babson College Faculty Web Server. Web. 28 Feb. 2012. <http://faculty.babson.edu/krollag/org_site/encyclop/instit_environ.html>.