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Market Uncertainty and Divisionalization Alfred D. Chandler's Strategy and Structure Introduction A central theme in organizational sociology for the last couple of decades has been the growth and distribution of "decentralized" management . Broadly speaking this has divided into two branches: the "contracts" branch that says that decentralization is often achieved by autonomous firms tying themselves together for specific purposes, and the "decentralized administration" branch started by Alfred D. Chandler (1962) and Peter F. Drucker (1946). We will treat the contracts tradition more extensively in Chapter 6. In this chapter we treat Chandler's argument . Since the richest source of data on the development of the multidivisional structure is still Chandler's own, this chapter is in effect a close reading of the theoretical aspects of Chandler's great historical monograph and of the relation of the theory to the data Chandler himself presents. Our first task is to describe as exactly as we can what the dependent variable, the thing to be explained, is. It turns out that according to Chandler the central trouble with a centralized administration was not that it was centralized, but that it made centralization impossible where it was needed. Chandler's argument, especially in the treatment of Du Pont, is that in order to centralize the response in each of several markets that required markedly different tactics, one had to decentralize the firm as a whole. The main difficulties he points to that kept people at organizational reform derive from the firms' lack of centralized response to particular markets in which they were losing money. The reason they did not respond in a centralized way to those markets was that the firm had centralized at the firm level, which implied that the various functions (e.g., manufacturing, marketing, and engineering) that needed to be coordinated to respond to a particular market were each centralized above 100 4 Market Uncertainty and Divisionalization I 101 the level at which response to a particular market had to be organized. A central manufacturing executive would coordinate all manufacturing together (explosives and dyes, for example), rather than explosives manufacturing with explosives marketing and dyes manufacturing with dyes marketing; similarly for a central marketing executive and a central engineering executive. This part of the argument, and the historical analysis of Du Pont, is also the place where Chandler best shows the connection between the firm-level problem of inadequate response to the various markets the firm was in and the resulting solution of administrative reorganization. In particular he treats in considerable detail how individuals in the firm came to see that they had a problem of market response, how they came to see that reorganization of the administration was a solution, and how they stuck to administrative reform until they came up with the solution: centralized administration in each market, decentralized administration in the firm as a whole. Consequently, it is in this analysis that we can best see how functional problems in large firms come to be posed as problems in the work life of executives, the problem that has come to be called "methodological individualism." Briefly, methodological individualism is the principle that explanations at the social level are not adequate unless the individual actions that are required for the social explanation to be true can themselves be explained adequately This idea has been treated in the literature primarily as a question of the structure of theory. We will show in the first section below that Chandler solved the problem of methodological individualism for this part of his argument without having a theory of the general individual rationality kind that methodological individualists generally demand. The argument for the functionality of the general office, detached from operating responsibilities and responsible for investment policy, is made most intensively in Chandler's chapter 3, in connection with Sloan's reorganization of General Motors. The basic idea is that only if the firm has better knowledge than the stock market does of the market projections and cost picture of each of its divisions can it do better than a completely decentralized, holding company structure. What is lacking in Chandler here, first, is a demonstration that such general offices do in fact do better than the stock market as a whole in predicting the future value of investments in their "subfirms." Are the profit rates of divisionalized firms with a general office in fact greater than those of holding companies with investments in various firms, each of which must respond separately to stockholder interests...

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