Paths of Learning

Life and death in the consumer electronics and computer industries

It is a testament to his energy, vitality, and ambition that, in the ninth decade of his life, the business school's Alfred Chandler '40, Ph.D. '52, LL.D. '95, Straus professor of business history emeritus, has written two new books. The volumes comprise a series entitled Paths of Learning: The Evolution of High Technology Industries. The first, published in 2001,

covers the evolution of the consumer electronics and computer industries. The second, to be published later this year, analyzes the chemical and pharmaceutical industries. Together, the two books explore the institutional and organizational infrastructure of what Chandler calls the "Industrial Century" (the twentieth) and the "Electronic Century" (the twenty-first).

In the book on consumer electronics and computers, Chandler continues his grand analysis of business history. His earlier writings described almost the entire chronological span of American business, from the mining of anthracite coal at the origins of the industrial revolution, to the growth of railroads, to the rise of multiunit corporations. His Pulitzer Prize-winning book, The Visible Hand: The Managerial Revolution in American Business, published a quarter-century ago, remains the most influential work on the history of American business ever written. In it, Chandler explored the evolution of modern business organization and methods of management at the nation's largest firms.

Unlike previous historians who had written about the rise of big business, Chandler did not focus on the personalities of the robber barons, nor on social and economic contexts. Rather, he described the internal workings of the businesses themselves. In particular, he analyzed the different ways in which busi- ness organizations came to control the flow of resources through the firm, from raw materials to the delivery of finished products--a process that, he argued, had become controlled in many industries by the "visible hand" of management, rather than by the impersonal marketplace of Adam Smith's "invisible hand." Also, unlike prior historians of business, Chandler offered a sociological perspective acquired through his reading of the works of Max Weber and through his years studying at Harvard under Talcott Parsons, a great scholar best remembered for his structural-functional approach to sociology.

This sociological influence is also evident in the titles of two of Chandler's other well-known books. In Strategy and Structure: Chapters in the History of American Industrial Enterprise (1962), he presented a detailed study of four large American companies--DuPont, General Motors, Standard Oil, and Sears, Roebuck--and their early development of the multidivisional organizational structure, one of the most important corporate innovations of the twentieth century. In Scale and Scope: The Dynamics of Industrial Capitalism (1990), he extended his analysis of modern business enterprise from the American to the British and German business systems.

An interest in the internal dynamics of large firms, a sociological perspective that emphasizes business organization and strategy, and a reliance on meticulous empirical research are the hallmarks of Chandler's work. It would be hard to overestimate his influence on the field of business history worldwide. As historian Richard John ['81, Ph.D. '89, now at the University of Illinois at Chicago] has noted: "Perhaps the best barometer of the magnitude of Chandler's achievement has been the extent to which the tag phrase 'Chandlerian' has joined Marxian, Weberian, and Schumpeterian as a convenient shorthand for an entire tradition of scholarship."

 

According to Chandler, the consumer electronics and computer industries will form the basis for the Electronic Century. By the dawn of the twenty-first century, he writes, the American consumer electronics industry had collapsed, while Sony, Sanyo, Matsushita, Sharp, and other Japanese manufacturers had become global leaders--making videocassette recorders, compact-disk players, DVDs, radios, and televisions. American manufacturers still dominate the computer industry, with IBM, Microsoft, Intel, and other firms. But Japanese companies such as Fujitsu, NEC, and Hitachi compete in certain markets for mainframes, and NEC and Toshiba for servers. In Europe, meanwhile, no manufacturer has the ability to bring new products to market in either industry.

Things were not always this way. The consumer electronics industry began in the United States and Europe with the commercializing of radio by RCA and the German company Telefunken. RCA dominated consumer electronics from the 1920s to the 1960s, especially in research and development. It pioneered in black-and-white television during the 1940s and color TV during the 1950s and early 1960s. But in the late 1960s and early 1970s, its supremacy was challenged by Matsushita and Sony, and by the Dutch company Philips--which all had significant research and production facilities. All three, unlike RCA, began to market their products globally. Between 1975 and 1985, the Japanese consumer electronics manufacturers came to dominate the industry.

According to Chandler, the key battle that led to the Japanese firms' supremacy concerned the development and marketing of video home-recording systems. RCA, which by the early 1970s had become a bloated conglomerate after acquiring a variety of unrelated companies (including Random House, Hertz Rent-a-Car, and even Coronet carpets!), pursued videodisk technology. Meanwhile, Japanese manufacturers maintained their focus on videotape. Matsushita and allies also pioneered VHS, which became the industry standard. Matsushita ensured its place as the industry leader in part through a smart marketing decision: the company operated as an original equipment manufacturer (OEM), selling its product to other companies, which could brand and distribute the product under their own names. Japanese exports of VCRs rose from 973,000 units in 1978 to 15.2 million in 1983. Sales grew even faster after the rise of video rental stores. In 1984, RCA shut down its videodisk project; it had sold only 550,000 units, at a loss of more than $500 million.

Although Sony, which had tried to market its Betamax video system, was also a loser in the VCR competition, its research helped it to pioneer in the development of the next technology to take off in consumer electronics: the compact disk (CD). Sony introduced audio CDs in 1982; by 1985 the sales of CD players in the United States exceeded one million units. Sony also led the way in producing the compact disk read-only memory (CD-ROM), which provided the computer with audio and video capabilities as well as storage for written text, and--importantly--the digital videodisk (DVD). The main European firm in this market, Philips, had been Sony's partner in many of these projects, but lost its leadership after a heavy investment in a product called CD-interactive, which never took off. By the late 1990s, only Japanese firms had the capacity to bring such products to market. The U.S. consumer electronics industry was dead.

The computer industry's dynamics, by contrast, differed from those of consumer electronics. According to Chandler, a single firm--IBM--dominated computers from the 1950s to the 1990s. It practically created the commercial computer industry during the 1950s, when it applied electronics to its long-successful punch-card machine technology. The company truly separated itself from competitors with the introduction, during the 1960s, of its System 360 computer, a line of compatible machines that represented a great technological advancement. Named for the number of degrees in a full circle, System 360 computers could be linked together and to a series of peripheral devices and could perform broad ranges of tasks, including scientific and business applications.

To build System 360, IBM exerted tremendous effort, literally betting its own future on the project by investing a staggering $5 billion and hiring tens of thousands of new employees. The company's revenues soared after the system's introduction in 1967: in 1963, its data-processing revenues had been $1.2 billion; by 1973, they had grown to $8.7 billion. IBM also came to dominate the personal-computer market after the introduction of its PC in 1981, but its leadership soon began to wane. The industry's most profitable players became two other American companies, Microsoft (which made the operating system for most personal computers, including IBM's) and Intel (which made the microprocessors). As Chandler summarizes it: in the case of large computer systems, the most successful IBM competitors were those enterprises that followed its lead, producing and selling IBM-designed "plug-compatible" hardware. In the case of personal computers, the chief competitors made and sold IBM "clones."

Comparing the actions of the leading U.S. firms in the consumer electronics and computer industries, Chandler writes: "[T]he contrast between the roles of [RCA and IBM] could hardly be more dramatic. Where the decisions of RCA's executives led to the destruction of the U.S. consumer electronics industry, those of IBM's managers continued to define the evolution of not only the U.S., but also the European and Japanese computer industries."

But, as Chandler sees it, Japanese manufacturers are now poised to compete aggressively in computers and to continue their dominance of consumer electronics products. He notes that in the mid 1990s Japanese manufacturers Fujitsu, NEC, and Hitachi ranked second, third, and fourth in revenues in large-scale computers (behind IBM). In servers, NEC and Toshiba were fourth and fifth in total revenues (behind the U.S. leaders). One of the advantages Japanese manufacturers have is that they work in a strong "supporting nexus" of suppliers, who manufacture a wide range of electronic equipment and peripherals. All of these firms are in close proximity to one another, unlike similar American companies, which are spread across the continent. Chandler argues that the Japanese manufacturers are able to produce and market both consumer electronics and information technology products, giving them greater range and flexibility than their American rivals.

Some will contest these conclusions, especially with regard to the computer industry, in which entrepreneurial start-ups have quickly risen to challenge older and larger concerns. Moreover, since the early 1990s, Japan has suffered a recession that has hurt manufacturers' home sales and local capital markets. Such is the problem for historians when they write about recent events.

 

Chandler's new book bears the characteristics of his earlier writings. It describes the history of large firms and is comparative in nature, analyzing the differences between two industries. He focuses on explaining the sources of competitive advantage and the internal workings of firms, asking how they researched, developed, and manufactured their products, rather than how they coped with external factors such as the regulatory policies of their home countries. His story is not one of heroic entrepreneurs, but rather of the companies' ability to commercialize products made, essentially, from four items: the vacuum tube, the transistor, the integrated circuit, and the microprocessor.

But Chandler breaks new ground with Inventing the Electronic Century in his emphasis on what he calls "paths of learning" as a source of competitive strength. A firm's learned organizational capabilities, he argues, have several essential parts: technological capabilities, functional knowledge (the ability to develop, produce, and market products), and managerial skills. In his analysis of the consumer electronics industry, Chandler praises Matsushita's functional capabilities in marketing its videocassette recorders as an original equipment manufacturer, and Sony's technical capabilities in researching compact-disk technology. Together these capabilities form an "integrated learning base." The first firms to build such a base in high-technology areas and to commercialize new products create significant barriers to entry for would-be competitors.

By focusing on "learned organizational capabilities," Chandler expands his discussion beyond a few core firms, describing the ways that industrial leaders shape the agenda for a "nexus" of suppliers: the range of supporting firms that complement, rather than compete, with the industrial leaders. "First movers, of course, cannot create an industry by themselves," Chandler writes. "They have to develop close relationships with supporting enterprises--with suppliers of both capital equipment and materials to be processed, with research specialists, distributors, advertisers, and providers of financial, technical, and other services."

The emphasis on learning also gives the book a philosophical turn. Chandler compares industrial battles to classic Greek dramas--battles in which IBM followed a "virtuous path" by trusting its organizational capabilities, while RCA was lured to disaster by sirens after entering into product areas it did not understand. The ability of industries to remain vital, and not to die or disappear, depends on the capacity of leading firms to renew and enhance their technical and functional abilities. Here the firm, as a repository of knowledge, is engaged in an essentially creative process, not entirely unlike that of scholarship--the best of which, like Chandler's, opens up new and challenging areas of inquiry.

 

Walter A. Friedman is coeditor of Business History Review (www.hbs.edu/bhr), a quarterly published by Harvard Business School.

         

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