ABSTRACT

By the 1980s, the large corporation that had looked inevitable and invincible in the 1950s and 1960s had become an organizational structure increasingly misaligned with economic realities – and an organization in the process of redefining itself. Quite apart from any mechanisms of environmental control they themselves created, the large American corporations after World War II had benefited from the attenuated climate of competition that came with the destruction of the German, Japanese, and other economies. As those economies revived and trade began expanding by the 1970s, the easy life was coming to an end. Indeed, by the 1980s and 1990s, the image of invincibility had been virtually replaced by its opposite. As Mark Roe notes, “the image of the corporation as a sweating and not-always-successful competitor has become more vivid” (Roe 1996, p. 106). The American corporation’s mechanisms of environmental control and

its charmed life in the 1950s and 1960s had permitted it largely to ignore ongoing changes in the scale of technology as well as the increasing thickness and realignment of markets. In startling contrast to Galbraith’s (rather nineteenth-century) view of technological change, innovation often – and perhaps mostly – proceeds by simplifying and by reducing scale.1 Arguably, this has been the dominant trend of the twentieth century.2 For example, in electricity generation, among the most scale-intensive of fields,

the development of aero-derivative combined-cycle generating technology (CCGT) has significantly reduced the minimum efficient scale of new electric capacity (Joskow 1997, p. 123). In telephony, the rise of semiconductor technology in general and the development of the private branch exchange (PBX) in particular turned switching from a centralized to a decentralized network technology (Vietor 1994, p. 188). At the same time, rising populations, rising income, and newly vibrant international trade generated thicker markets. This meant, among other things, that even where technology was not threatening to reduce scale, existing structures of fixed cost shrank relative to the extent of the market. For example, by the time CCGT had arrived, increases in market size had long since stripped electric power generation of its natural-monopoly character (Joskow and Schmalensee 1983). Ruttan and Hayami (1984) have proposed a theory of institutional change

that is relevant to my story of organizational-and-institutional change. As they see it, changes in relative scarcities, typically driven by changes in technology, create a demand for institutional change by dangling new sources of economic rent before the eyes of potential institutional innovators. Whether change occurs will depend on whether those in a position to generate it – or to block it – can be suitably persuaded. Since persuasion typically involves the direct or indirect sharing of the available rents, the probability of change increases as the rents increase. And the more an institutional or organization system becomes misaligned with economic realities, the more the rents of realignment increase. My argument is that these changes in technology and markets opened up attractive rent-seeking possibilities that could be seized only by breaking down or “unbundling” the vertical structure of the managerial corporation. This is perhaps clearest in what most had long considered the intractable cases of vertical integration: regulated utilities. We need only think of long-distance telephony, in which a scale-reducing technical change – microwave transmission – created opportunities for whoever could open up AT&T’s legal hold on the field.3 Entrepreneur William McGowan of MCI poured resources first into

persuading the Federal Communications Commission to alter its policies and then into fomenting the breakup of AT&T (Temin 1987). Analogous tales can be told for the deregulation of electricity (Kench 2000) and other industries. A similar process of unbundling is also underway in lessregulated industries, where the impediments to supplying organizational change are substantially lower though not necessarily absent. In some respects, the internal dynamic of scale and scope that Chandler

chronicles contributed in an almost Hegelian fashion to the corporation’s own undoing. Driven by the Chandler-Penrose imperative to apply existing managerial skills and other capabilities more widely, the corporation in the 1960s took the idea of diversification to new levels.4 ITT was the paradigm. Originally an international supplier of telephone switching equipment, it bought, among other things, an insurance company, a hotel chain, and the maker of Hostess Twinkies™. In assembling conglomerates, as Mark Roe (1996, p. 113) argues, “managers learned that they could move subsidiaries and divisions around like pieces on a chessboard.”