To:
Rajiv Krishnan Kozhikode
From: Unofficial team- BUS 374 D100
Kailun Ye-301083028
Lingli Yao-301158518
Date:
May 11, 2013
Subject: Research Memo on Chandler’s “What is a firm?”
From the article of Chandler, he discussed the regularity phenomenon of industrial firms
throughout the 19th to 20th century. The emerging capital-intensive industrial firms have
exploited the cost advantage of scales and scopes and taken over the old labor-intensive
industries and expended to international market. Chandler also stated that modern industrial
enterprises have grown and operated toward a similar way. Firms were focusing on firm
capabilities as the learned organizational skills helped organization survive and expand to
international market. According to the idea that exploited the cost advantage of scale and scope,
firms made the three-pronged investment in manufactory, management and transforming firm to
match the international market.
Moreover, Chandler has also introduced four theories of the firm and the importance of
organizational capabilities. Both neoclassical theory and principal agent theory deal with the
firm’s relationship between outsiders and insiders. The other two theories, the transaction cost
theory and evolutionary theory were more focusing on the facilities and human factors of the
organization. In Williamson’s transaction cost theory, the investment in specialized physical
facilities and human skills are hard to define since the contracting parties cannot obtain all the
necessary information (Chandler, 1992). However, Chandler hold different opinion in regards
Williamson’s transaction cost theory. Chandler believes that the basic unit of analysis of the firm
is the physical and human asset. The learning capability and human skills of the firm are more
important that the internalizing transaction. Chandler strongly emphasized the learning skills of
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an organization firms can use their learning skill to adjust themselves to the foreign market.
From the theory of evolution, Nelson mentioned that the firm’s capabilities were shaped by its
structure and strategy, but not the transaction it involved. Chandler also suggested that
organization should establish “routine” to deal with their owners, customers and suppliers.
Lastly, Chandler gave a brief introduction on the emerging dynamic firm capabilities,
which has more focus on organizational learning. Chandler also stated that functional and
strategic competition between firms has play an important role in the economic market than price
does. The learning capability of a firm has become one of the most essential factors that
determine the success or failure of an organization.
Throughout the article of Chandler, he has strongly emphasized the importance of
organization knowledge and learning. Integrating the learning capabilities into daily practice can
be a powerful strategy for an organization to adjust to the changes in the economic market and
survive in the competition between other firms. The organizational learning theory has been
applied to organizations which have been successful throughout the past decades. One of the
successful learning organizations will be Toyota. The managerial and organizational principal
has made Toyota one of the world’s greatest manufacturers. In the early 1980s, Toyota has
helped Japanese domestic car production become the largest in the world. In the 1990s, Toyota
has fallen in the problem of costly new product development and low job satisfaction within the
organization. However, Toyota soon managed to overcome this crisis by employing traditional
learning practices to analyze its market position, define new strategies and timely restructures its
organization by growing new competences and renewing the overall production system (Fuchs,
2008). Instead of focusing on the cost transaction of the organization, Toyota has relentlessly
invested in strategies and organizational restructure. In other words, Toyota turned its basic unit
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of analysis to the firm’s physical and human assets. At his point, Toyota has applied the theory
of transaction cost which aims to understand the specific characteristics of a firm’s assets,
particularly its learned organizational skills, is even more useful than an understanding of the
impact of bounded rationality and opportunism on transactions involving those assets in
explaining the continued growth of firms into new foreign and related product markets (Chandler,
1992).
In order to cope with the problem of employee job satisfaction and the high cost in new
product development, Toyota started investing in market research and analyzing the consumption
trend in the future. It aimed to locate the firm’s appropriate position in the market. Toyota has
also changed its management in the new product development by assigned one charismatic
engineer of increased seniority as project manager, who was responsible for the overall delivery
of the product across all engineering functions, production and marketing ((Fuchs, 2008). The
new product management helps to make sure the knowledge and information from a single
project could be shared and better communicated between managers. On the other hand,
Toyota’s achievement was not merely the creation of its technologies and economic transaction.
Toyota has established the Toyota Production System, which applied applies underlying
principles rather than specific tools and processes explains why the company continues to
outperform its competitors (Spear, 2004). Instead of focusing on a specific practice and
transaction, Toyota standardized its management, marketing and developing new product.
Moreover, it created a work routine and integrating different perspectives from the organization,
practicing under the organizational principles. At this point, the concept of Toyota Production
System matches the evolutionary theory of Nelson and Winter. Both concepts aim to establish a
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“routine” of organizational skills that relate to the owners, customers and suppliers. Those skills
would ultimately become the DNA of the firm.
Chandler’s organizational theories have pointed out some of the most essential elements
to a firm’s management, manufactory and a firm’s entering to a foreign market. There are many
organizations that focus on learning capabilities has been survived and successful throughout the
past decades. Both Chandler’s theories and the Toyota Production System have pointed toward
organization learning is one of the most important strategies to a firm’s development and
adaptation to the rapidly changes in the economic market.
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Reference
Chandler, A. D. 1992. What is a firm?: A historical perspective. European Economic
Review, 36(2/3): 483-492.
Fuchs, B. (2008). Action learning: Research and practice.Learning from Toyota: how
action learning can foster competitive advantage in new product development
(NPD), 4(1), 25-43. doi: DOI: 10.1080/14767330701231446
Spear, S. J. (2004). Harvard business review. Learning to Lead at Toyota., 82(5), 7886. Retrieved from http://web.ebscohost.com/ehost/detail?sid=859f938d-862d-4260ba9ab8fe85d27b75@sessionmgr110&vid=1&hid=113&bdata=JnNpdGU9ZWhvc3QtbGl
2ZQ==
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