Vertical integration is on the way out

Since the 1980s, American corporations have been disintegrating – not falling apart, but becoming more specialised. Revenues or production volumes may be as large as ever, but even big companies tend to combine fewer stages of production under the same corporate ownership.

This trend presents a puzzle. As the business historian Alfred Chandler famously chronicled, the modern corporation succeeded in large measure by bringing many different stages of production under central ownership and control.

In Chandler's account, "the visible hand of managerial co-ordination had replaced the invisible hand of the market," writes economist Richard N. Langlois in an article in the journal Industrial and Corporate Change.

Why did vertical integration seem like the way to efficiency, predictability and riches? Was Chandler wrong? According to Langlois:

Chandler's managerial revolution "was an organisational solution appropriate to its time and place."

The Chandlerian corporation did not supplant specialisation forever.

It was essentially a stopgap measure, a way of reducing uncertainty in an underdeveloped economic environment.

In high-volume operations like those that developed in the late 19th century, every part of the system has to operate reliably.

Over time, however, new companies and specialised institutions arose to provide once-missing services. Meanwhile, markets grew through trade and increasing populations. This growth allowed more and more specialised businesses to find niches – the process Adam Smith first identified in "The Wealth of Nations," explains Langlois.

Today's companies combine "specialisation of function" with "generalisation of capabilities." Shippers are good at shipping things in general; credit card companies are good at managing credit risks, regardless of where customers buy; electronics assemblers are good at all sorts of assembly. Businesses specialise more in skills than in end products.

Source: Virginia Postrel, Specialization Is the Rage, New York Times, June 19, 2003; based on Richard N. Langlois, The vanishing hand: the changing dynamics of industrial capitalism, Industrial and Corporate Change, 2003.

For text http://www.nytimes.com/2003/06/19/business/19SCEN.html
For more on Economic Issues http://www.ncpa.org/iss/eco/

FMF Policy Bulletin/24 June 2003