The Golden Passport

by Duff McDonald

  Chandler’s next book, 1977’s The Visible Hand: The Managerial Revolution in American Business, was a direct result of that work. Essentially a prequel to Strategy and Structure, the book laid out Chandler’s argument of how the “visible” hand of management had replaced Adam Smith’s more fickle “invisible” hand of the market as the primary allocator of resources in the modern industrial economy. The book characterized the rise of the managerial class not as a power grab (although he did acknowledge the tension between managers and owners) but as an inevitability, the “rational economic response” to changes including the rise of the railroads and the spread of the telegraph. It won the Pulitzer Prize.

  Chandler’s thesis that the large bureaucratic corporation signaled the end of the evolution of the corporate form proved to be untrue in the end. Indeed, it was already deemed passé by the 1990 arrival of the third book in his big-company trilogy, Scale and Scope: The Dynamics of Industrial Capitalism. By that point, General Motors was a mess—the cause of which, according to some, was the fact that CEO Roger Smith had done exactly as Chandler would have told him to do—he responded to the external threat of Japanese carmakers by reorganizing GM, with Marvin Bower’s McKinsey & Company showing the way.

  Per Chandler, GM’s structure had to change, so McKinsey moved people around, inadvertently destroying institutional knowledge and the informal networks of people who knew how to get things done inside the massive company. The reorganization was a disaster—it ran up huge costs with no measurable improvements in output or efficiencies. “At the time, neither McKinsey nor General Motors understood the true nature of Japanese competitiveness,” says Maryann Keller, author of Rude Awakening: The Rise, Fall, and Struggle for Recovery of General Motors,8 who says the changes planted the seeds for GM’s bankruptcy in 2009.

  Chandler, mind you, was on to other topics in Scale and Scope, which documented how new transportation and communication systems had enabled companies in technologically sophisticated industries (for example, chemicals, electrical machinery, and automobiles) to optimize capacity in large-scale production facilities, provided they made complementary investments in both managerial talent and national (and then international) purchasing, marketing, and distribution operations. The companies that made the right investments before their competitors were able to exploit economies of both scale and scope for decades.

  In an autobiographical essay published just a few years later, Chandler decried pretty much everything that had happened since World War II—the conglomeration movement, the emergence of a quantitative market for the buying and selling of whole companies (M&A), the lurch toward short-term thinking in management decision making, and the overall financialization of the economy—as impediments to the further refinement of his favored corporate form. When your entire career is spent celebrating the various attributes of just one thing—in Chandler’s case, managerial capitalism in large-scale corporate bureaucracies—it can be difficult to admit that it might just be as mortal as the people who invented it. So he did as many in his situation would do—he called the end of the era not a rejection of the concept but a failure of implementation.

  And of education: Chandler also argued that American business made a disastrous error when it had heeded the argument of business schools—HBS foremost among them—that management was a general skill. “Chandler [believed] business education gave these managers a sense of arrogance and presumption that they could succeed in almost all industries,”9 says George Washington University’s Sue Aaronson. (He felt the same way about management consultants, his work with McKinsey notwithstanding.) Unfortunately, while the response to Strategy and Structure seemed to hold out promise of a fruitful interaction between business historians and contemporary management studies, the move toward “scientization” put an end to that fairly quickly.10 The Administrative Science Quarterly, founded in 1956, had no interest in the work of Alfred Chandler.

  Could Chandler have put the time he spent on Scale and Scope to better use than his typically careful (and exhaustive) analysis of a corporate form whose heyday had come and gone? Perhaps. But Chandler had never claimed an ability to see the future; he was a historian. And in that, his legacy towers above everyone else who has ever been associated with HBS. In short, Alfred Chandler single-handedly legitimized the study of business history. When Strategy and Structure was published, it represented a departure from almost all work on American business history that had come before it. Big business had swept through the country so quickly and with such force that the majority of attempts to survey it had remained focused on the first and most obvious questions: What the hell is this thing? and Is it a force for good or evil? And the answers had been nothing more than morality plays, in which the leaders of American business were either “robber barons” or “industrial statesmen.” In Chandler’s view, such polemics were off point. He focused on the other questions: Why? and How?

  Chandler didn’t skim the surface—he went deep. He dug up millions of numbers, compiled them into really boring tables, and put those tables in his books. David Sicilia, a professor of business history at the University of Maryland, recalls Chandler as both generous (Chandler served as his dissertation advisor, even though Sicilia was at Brandeis) and extraordinarily focused. “He wasn’t the most dynamic classroom teacher,” says Sicilia, “but at the same time, he miraculously managed to stand apart from the ongoing churning politics for which HBS is notorious. That’s hard to do, especially when you become a big shot; he really seemed to be oblivious to the power politics surrounding him.”11 (Of course, Chandler probably wouldn’t have been a player in the School’s politics even if he’d tried: His views about the fallacy of general management skills called into question the very raison d’être of the School.)

  Thanks to Chandler, by the mid-1980s the Business History Group at HBS was the largest—and most acclaimed—in the country. It included Thomas McCraw, Leslie Hannah, Richard Tedlow, Robert Cuff, Richard Vietor, and William Lazonick. Cuff passed away in 2001, and McCraw in 2012. In 2011, after thirty-one years at HBS, Richard Tedlow left to join Apple full time.12 Hannah and Lazonick, both visiting professors, left for greener pastures. Only Richard Vietor remains, with a new group of colleagues including Walter Friedman, Nancy Koehn, and David Moss. Interestingly, one of Moss’s recent projects was as co-editor of Preventing Regulatory Capture: Special Interest Influence and How to Limit It, a subject to which Chandler gave short shrift.

  That question of influence—specifically, how big companies acquire and hang on to it—is one of a number of areas in which Chandler’s critics find his analysis somewhat wanting.

  Historians less inclined to view big business so dispassionately reject his argument that organizational structures were the key to big, vertically integrated companies’ successes. To many, it’s much simpler than that: Big companies captured power—political, economic, cultural—more effectively than everyone else. Period. History professor Louis Galambos, a contemporary and fan of Chandler, nevertheless points out that the latter’s work suffered from a lack of attention to the political context in which modern corporations evolved. Chandler stepped too “daintily around questions of power,” says Galambos, in his implicit assumption that “transformations of business take place without social friction or a problem of agency.”13

  It has also been suggested that Chandler’s work was as much a contemporary cultural project as it was history in the making. By celebrating a nonideological aspect of their success—who in their right mind advocates for inefficiency?—and by portraying management as a “value-free social science,” Chandler helped justify the existence of big business, as well as its power. It’s a fair point, especially in light of later revelations that Chandler had downplayed the hot-button topic of antitrust at General Motors “because of the overriding fear among executives of antitrust action.”14 In other words, Chandler’s work wasn’t just history; it was public relations as well. In that, he wasn’t so much different from hi
s colleagues at HBS, but very much the same.

  Still others accuse him of misplaced values. “For some,” writes Thomas Frank, “managerial capitalism was . . . the zenith of American civilization. In the celebrated 1977 business history The Visible Hand . . . Chandler traced the rise of scientific management within various productive enterprises over the course of the nineteenth and twentieth centuries, leading finally to the greatest accomplishments of enlightenment—the incredibly complex flow charts of the DuPont and U.S. Rubber companies.”15 Frank is being facetious, but the fact of the matter is that Chandler (and pretty much everyone else at HBS) really did believe that managerial expertise is the reason for our prosperity.

  All that said, the influence of his argument that huge American corporations had escaped the fate of bigness—inefficiency—by establishing M-form hierarchies cannot be understated. Indeed, it was one of the pillars on top of which the defenses of midcentury American managerialism were built.

  If Chandler established business history as a reputable field, he may have had an unintended influence on his nonhistorian colleagues at HBS that isn’t so salutary. Despite the size—and density—of all of his books, the insights and generalizations that dropped out of them were pretty straightforward, so much so that one might have guessed at his eventual conclusions if one had tried—leading some colleagues to mistakenly think that they could go about things backward. Whereas Chandler was adamant about the order things happened in his work—“[The] propositions were derived (induced) from the historical data. The data were not selected to illustrate or verify the propositions”16—many who have followed haven’t felt quite the same level of responsibility to the process.

  Consider the majority of management tomes published by the Harvard Business School Press, an operation that is rightly celebrated for its accessibility. They don’t publish the results of regression analyses and call it a story; indeed, there’s a premium on storytelling in most books coming out of the place. But including historical details in a narrative does not elevate it to the level of professionally researched history. Business historians look at an entire sample of some sort—the history of railroads, for example—and try to tease the real story out of it. What they don’t do is come up with an idea and then cherry-pick examples from the histories of companies they otherwise know little about, and then conclude that their idea has the benefit of history behind it. That’s one of the chief criticisms launched against most books purporting to reveal the secrets of good management; it’s the kind of thing that drives real historians up the wall.

  Business history has never been the most popular of topics among MBA students—or faculty—and it became even less so during the wholesale shift toward more analytic perspectives in the wake of the foundation reports. In this, HBS swam against the tide. The study of business history was solidly institutionalized at the School, and Chandler’s profile served only to make it more so. And that was a good thing, because business history teaches the reader what all history teaches—it’s cheaper to learn from other people’s mistakes.

  Historians also ask the big questions, not the narrowly defined ones that come through specialization. Chandler asked what impact railroads had on the American economy. Today’s professoriate asks questions like, “What effect does a degree from HBS have on the price of a high-tech IPO started by one of its graduates?” Not surprisingly, David Sicilia thinks something has been lost: “Both faculty and students have come around to the attitude that what you really need is econometric analysis, and that there isn’t really a lot of time left for courses thinking about big things. It’s considered a luxury, and it shouldn’t be.”17 While a few at HBS continue to do so—most notably Michael Porter—the rest are buried in their specialist mire.

  Chandler’s influence extended into other departments at HBS, particularly the Business Policy group, which in the early 1960s was searching for a unifying theme underlying its approach. It found it in Chandler’s organizational ethos, and his view of “strategy” as the ways in which management addressed issues of diversification and decentralization, particularly through the multidivisional structure.18 The beauty of the M-form was that it removed the “executives responsible for the destiny of the entire enterprise from the more routine operational activities and so gave them the time, information, and even psychological commitment for long-term planning and appraisal.”19 In other words, it gave them time to strategize. Still, as Walter Kiechel points out, Chandler’s analysis of “strategy” was historical, more backward-looking than forward, and therefore “did not offer much guidance to practitioners who might want to emulate his corporate examples.”20

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  A Decade in Review: 1950–1959

  The early 1950s was a tumultuous time at HBS—applications for enrollment, which had skyrocketed after the war, suddenly plummeted again, from 2,300 in 1951 to 1,400 in 1952. The war in Korea seemed the main culprit, as well as a new fifteen-dollar application fee intended to deter the most casual applicants, but they had already returned to above 2,000 by 1954, and the decade proved to be one of the high-water marks in the School’s history.

  Who were these applicants? Increasingly, they were men with engineering backgrounds, a clear reflection of the nation’s new science-heavy tilt. In 1940, less than 10 percent of applicants were technically trained. In 1955, 25 percent were. They were also more “mature” than in years past, at least as far as the School’s primary measure of maturity—marital status—was concerned. In the mid-1950s, some 40 percent of HBS students were married. The School doesn’t even track such a statistic anymore, but it’s surely much lower sixty years later. Whether maturity has declined along with it is an open question.

  Ever-growing interest in enrolling at HBS—and in business schools in general—produced a situation that more than a few successful institutions have found themselves in. Success begets selectivity, and each new class at HBS looked less similar to the School’s early student bodies than the previous one. The School began experimenting with standardized intelligence testing in the hopes of being more efficient in sorting through its applicant pool, all the while wrestling with the simple fact that neither academic performance nor intelligence scores have ever been a particularly strong indicator of future business success.

  Despite the heated mid-decade skirmishes over the direction of management education that threatened its preeminence, the School managed to emerge from the fracas more dominant than ever before. Demand for its graduates continued to grow, its alumni reached ever-higher peaks in America’s corporate hierarchy, and the School’s efforts to export its ideology were helped along by well-funded backers like the Ford Foundation and the CIA. When Stanley Teele took over as dean from Donald David in 1955, he took over an enterprise that was operating at peak performance.

  The number of companies seeking to hire HBS grads marched steadily upward. In 1953, 191 companies interviewed on campus, hiring 130 MBAs. In 1956, 242 companies recruited at HBS, and they hired 229 of its graduates.1 The 1957–58 recession was barely noticeable in the School’s placement statistics, with 250 companies hiring 210 graduates. That year, the average starting salary for an HBS graduate was $6,000. (The fact that starting salaries were rising was a good thing, as tuition was, too. In 1958, HBS raised the annual cost of an MBA from $1,200 to $1,500.)

  HBS has made such numbers public for decades. It was in 1952, in fact, that the School made the starting salaries of its graduates public for the very first time. In recent years, as deans of business schools across the country bemoan the “tyranny” of rankings that basically reduce to a spreadsheet analysis the question of which business school one might want to attend, one response is that, at least at HBS, they brought it on themselves, long before the first rankings ever appeared in the 1970s.

  In the 1950s, the majority of graduates found that manufacturing jobs were what fit them, although hints of the changing nature of both the economy and of graduates’ tastes started showing up by the end of the
decade. Whereas in 1955, 63 percent of MBAs took jobs in manufacturing compared to 10 percent in finance, five years later the gap had narrowed to 51 percent and 20 percent, respectively.

  The success that HBS graduates were having at scaling the corporate hierarchy is illustrated by the fact that in 1958, four of seven additions to the School’s Visiting Committee—always more a Who’s Who of Business than an alumni sinecure—were HBS grads themselves. They included new chairman Frederick Whitman (’21), president of Western Pacific Railroad; Marvin Bower (’30) of McKinsey; Robert McNamara (’39), then vice president of Ford; and James Robinson (’28), chairman of the First National Bank of Atlanta. A study by the School’s placement office in 1952 found that 7,514 “business firms” employed HBS alumni in various levels of responsibility.2

  Indeed, one gets the feeling that HBS in the late 1950s was so bereft of real problems that the faculty almost had to invent them. In 1959, Teele reported that “after a long deliberation over what should be basic to the sound development of the School’s research program,” it had landed on four “key” objectives. The first one? That it should aim for quality over quantity. People dealing with real problems don’t have the time to make lists of objectives reminding themselves that they should do good work.