19 Nov 2001  Research & Ideas

Alfred Chandler on the Electronic Century

Pulitzer Prize-winning historian Alfred D. Chandler Jr. examines the development of two pivotal industries in post-World War II America—the consumer electronics and computer industries.

 

Consider the title. "The Electronic Century" is the twenty-first century. The "inventing" refers to the creation of the technological and institutional foundations—the "infrastructure"—during the latter decades of the twentieth century, which was the Industrial Century.

Inventing the infrastructure for the Electronic Century became an epic story because some national industries died while others conquered. By the end of the twentieth century, no European-owned and -operated enterprise had the capabilities of commercializing—that is, bringing into widespread public use—major new products of either consumer electronics or computer hardware with their essential software technologies. In the United States, no enterprise had the capability to commercialize new consumer electronics technologies. On the other hand, in Japan, the four leading enterprises in consumer electronics had conquered world markets. And the five leading Japanese computer companies were seriously challenging the U.S. computer industry worldwide.

Book Cover: The Electronic Century

This epic story of the consumer electronics and computer industries has its tragic aspects. By the time the infrastructure of the Electronic Century was completed, Europe had lost both its computer and consumer electronics industries, and the United States no longer had its consumer electronics industry, with all that this meant in terms of employment and the growth of ancillary and supporting industries. In addition, RCA's Princeton Laboratories had been dismantled, and only remnants of Philips's once great electronics laboratories at Eindhoven remained. Of the three primary builders of the technological foundations of the consumer electronics industry, only Sony remained.

Inventing the infrastructure for the Electronic Century became an epic story because some national industries died while others conquered.
— Alfred D. Chandler

The epic story also has its heroic achievements. The worldwide triumph of the Japanese consumer electronics industry took place in a period of less than a decade, 1975 to 1985, largely on the basis of technologies developed by the Sony Corporation. In this same astonishingly brief period, Japan's computer makers had become Europe's dominant suppliers of large computer systems and had captured the U.S. market in memory chips.

International Business Machines (IBM) provides another epic in terms of defining the computer industry's products. In large computer systems its most successful competitors were those enterprises that produced and sold IBM-designed "plug-compatible" hardware and "unbundled" software. In personal computers they were those that made and sold IBM clones.

The approach—the paths of learning

My basic purpose in this volume is to carry out the fundamental task of the historian: to record where, when, how, and by whom technical knowledge was commercialized into the new products that laid the foundation for the Electronic Century and, in so doing, transformed life and work in the second half of the twentieth century. I chronicle the evolution of the new high-tech industries from their beginnings by the first-movers until the end of the twentieth century. I do this by focusing on the competitive success and failure of the national industries in Europe, the United States, and Japan. The continuing evolution of both consumer electronics and computers resulted from continuous learning in the commercializing of new technologies and enhancing of existing ones. To repeat: The initial first-movers who created their learning bases had competitive advantages by being first in developing their technical and functional capabilities that provided barriers to entry.

The evolving paths in consumer electronics

In consumer electronics, the commercializing of a new technology was based on the learning that created the previous innovation. The first-movers in radio were the Radio Corporation of America (RCA), a joint venture of the three leading United States producers of electrical and telecommunications equipment, and the German company Telefunken, a joint venture of the two foremost producers in Europe. They led the way in commercializing radio in the 1920s. The same two companies began the process of commercializing television in the 1930s. Telefunken, housed in Berlin, lost its learning base during World War II. So in the 1940s RCA took the lead in commercializing black-and-white television. In the 1950s it became solely responsible for the introduction of color television. Then in the late 1960s and early 1970s, the two Japanese first-movers, Matsushita and Sony, and the Dutch company Philips, all of which had created strong learning bases after World War II, began to move into global markets. Philips's home market was small, but its impressive learning base defined the evolution of consumer electronics in Europe.

The evolution of the consumer electronics and computer industries has been historically unique.
— Alfred D. Chandler

In the late 1960s the remaining four of these first-movers (RCA, Matsushita, Sony, Philips) began a race to commercialize the videocassette recorder (VCR), a market that television had created. Matsushita's Video Home System (VHS) captured the world market on the strength of that firm's functional capabilities. The failure of RCA's videodisk contributed to the company's collapse and with it the collapse of the U.S. national industry whose path it had defined. Although Sony and Philips had lost to Matsushita in the VCR battle, they, because of their technical capabilities, defined the evolving path of learning based on a disk technology. Together they commercialized the audio compact disk (CD) and the compact disk-read only memory (CD-ROM) and, again with Philips, the digital videodisk (DVD).

By the 1990s Philips's functional capabilities were unable to meet the Japanese competition. Its technical capabilities had been weakened by the failure of its attempt to commercialize a new video product on its own, the CD-interactive (CDi). So by the late 1990s Philips could no longer commercialize major new consumer electronics products. By then the Japanese first-movers and followers and their strong supporting nexus completely dominated markets worldwide. By then only Japanese companies had the integrated technical and functional capabilities required to commercialize products of new technologies.

The evolving paths of learning in computers

The evolution of the digital data-processing computer industry differed sharply from that of the consumer electronics industry. In consumer electronics, the managers of five enterprises—Telefunken, RCA, Philips, Matsushita, and Sony—determined the direction in which the industry's paths of learning evolved from its beginnings in the 1920s until the 1990s. But in computers, the managers of a single firm, IBM, played a determining role from the industry's beginning in the 1950s to the 1990s.

When the computer was invented, IBM was already the world's largest producer of punched-card tabulators, the most advanced data-processing device prior to computers. The company became the new electronic computer industry's first-mover in commercial markets when in 1954 it applied an electronic device to its previously electrically driven punched-card data processors. Within less than a decade, its long-established punched-card functional capabilities in product development, production, and marketing, learned over three decades, permitted its new product, the mainframe computer, to capture close to 80 percent of the world's markets.

On the basis of the continuing learning and high financial returns, IBM developed its System 360, which in terms of prices charged and performance expected was a full line of compatible mainframe computers, primarily for commercial and business markets. The commercializing of the System 360 required half a decade, at the cost of nearly $7 billion. That extraordinary learning experience immediately defined the computer industry worldwide. By the 1970s, with its System 360 and its successor, the System 370, IBM was competing at home and abroad with companies that primarily produced "plug-compatible" products based on IBM-licensed hardware and IBM-licensed software. By the end of the decade the European computer makers were buying their IBM imitations from Japan.

In the mid-1960s, when IBM was concentrating on developing the System 360, Kenneth Olsen's Digital Equipment Corporation created a second path of computer learning by commercializing an inexpensive, stripped-down "minicomputer" for more specialized and smaller engineering and scientific markets. Within a brief period a small number of followers entered the new path.

The inability of the British, French, Italian, and then German companies to compete with IBM's mainframes and the plug-compatibles in the 1970s and IBM and its PC clones in the 1980s brought the death of the European industries.
— Alfred D. Chandler

Then in the 1980s the microprocessor transformed the industry with the introduction of computers for use by individuals rather than corporations or other large institutions. Here again, IBM defined the recast industry by being the first to mass-produce and mass-market its personal computer (PC). By the end of the 1980s IBM's PC, its clones, and their two primary suppliers, Intel (microprocessors) and Microsoft (operating system software), had defined the computer industry as effectively as the IBM 360/370 and its plug-compatibles had done in the 1970s. Soon IBM was only one of a sizable number of personal computer makers. But because every IBM PC and its clones had to use an Intel processor and a Microsoft operating system, those two companies became the path definers in personal computers in the 1980s.

The inability of the British, French, Italian, and then German companies to compete with IBM's mainframes and the plug-compatibles in the 1970s and IBM and its PC clones in the 1980s brought the death of the European industries. On the other hand, the ability of the Japanese to produce and improve competitive IBM plug-compatible mainframes in the 1970s permitted them to take over their own domestic market and then that of Europe for large systems. Although the Japanese industry lost out in personal computers, their strength in large systems permitted them to meet the greatly increased demand for computing power called for in the 1990s. This demand for more power grew out of the coming of private networking systems for corporations and other institutions and the coming of the public Internet. Those developments enabled the Japanese to become and remain effective challengers to the U.S. industry.

In the consumer electronics industry, radio and television (including color television) were still the leading sectors in 1970. By then RCA and the two Japanese leaders had already entered the recording industry, the one long-existing preelectronic sector, based on the vinyl disk. By 1990 the VCR, the CD (and CD-ROM), and the DVD had become major product sectors.

In computers, the mainframe and minicomputer were the primary product sectors in 1970. By then the growing activities to which the new computer could be applied and the complexities of its operation led to the beginning of a third, nonmanufacturing sector, services.

In the early 1980s the coming of the microprocessor and IBM's mass production and mass marketing of the personal computer opened up a huge new market for commercial purposes as well as a new one for the home. The resulting massive expansion of the industry led to the formation of new product sectors—personal computers, peripherals, and operating system and application software. At the same time, the producers of minicomputers used the microprocessor to develop the workstation for its engineering and scientific customers. The new array of product sectors that existed in the 1990s is shown as the bottom row in the chart.

Within a sector, therefore, the learning base of a successful profit-making enterprise, either as a division within a multisector corporation or as an independent company, tied a specific technology to a broad national and international market. The enterprise had embedded within it the technical capabilities needed to commercialize products of new technology. Embedded, too, were the basic functional capabilities—product development, production, and distribution and marketing—that were needed in order to continue to improve existing products and processes and to maintain the company's long-term share of its markets.

Alfred D. Chandler

In 1971, Alfred Chandler accepted the [Harvard Business] School's offer of the Straus Chair in Business History. He was 52 years old at the time, and he had spent his career in university departments of history, first at MIT, then at Johns Hopkins. He had written numerous articles and had edited several volumes of the papers of two presidents: Theodore Roosevelt and Dwight D. Eisenhower. He had also published biographies of Henry Varnum Poor and Pierre S. du Pont, and—most importantly—the pioneering Strategy and Structure: Chapters in the History of the American Industrial Enterprise, which appeared in 1962.

During the late 1950s and early 1960s, Chandler had begun to reshape the field of business history. Although some good books had been written earlier, including several by N. S. B. Gras, Henrietta Larson, and Ralph Hidy, his predecessors in business history at the School, Chandler's scholarship was of a different order. Before his intervention, many business histories tended to be morality plays. Perhaps 80 percent were company histories or biographies of executives, and in much of this work, the company was either heroic or damnable, the executive either all saint or all sinner. Chandler redirected the field toward dispassionate and penetrating analysis of the anatomy of business.

He was able to transcend the old tradition for at least three reasons. First, because of his family connections in Delaware, he had grown up knowing some of the leading figures in American business, such as Pierre and Irenée du Pont, Walter Carpenter, and Donaldson Brown (principal author of the Du Pont ROI formula). Later in his life, Chandler served as adviser to Alfred P. Sloan, Jr., in the preparation of My Years with General Motors, the most important autobiography ever written by a businessperson. Having known the du Ponts, Sloan, and other such figures personally, Chandler found it difficult to think of them as either heroes or villains. He had a good instinct for the dramatic event and the colorful character, but he nevertheless tended toward an approach that aimed at value-neutral social science.

This choice of method was reinforced during his experience as a graduate student, when he was most powerfully influenced not by any historian, but by Talcott Parsons, the eminent Harvard sociologist. Parsonian sociology emphasized social structures, the development of organizations and professions, and the evolution of roles within bureaucracies. Parsons had an enduring impact on his young protégé, and it is not too much to say that the structuralist approach in general came to define Chandler's way of writing business history.

The third reason why Chandler took a new path derived from his decision to write as his dissertation a biography of his great-grandfather, Henry Varnum Poor. Poor was a business journalist, and in effect one of the first professional securities analysts in the United States; his name lives on today as part of Standard & Poor's. At the moment when the young Chandler discovered a trove of his great-grandfather's papers and decided to write an analytical biography based on the functions that Poor had performed, the course of business history took a decisive turn.

In almost all of his work, from the Poor biography down to the present time, Chandler has addressed a series of apparently simple questions: How were things done at a particular point in the history of business? What forces operated to propel changes in the way things were done? How were they then done afterward? Who led the movement for change, and why? How did roles within the organization shift, and how did the organization's own function evolve? Why did particular changes come in some types of industries but not in others? These questions, among their other virtues, comprised an almost perfect fit with the Harvard Business School's curriculum as it was evolving in the 1960s and 1970s.

In Strategy and Structure, published in 1962, Chandler showed how four large firms (Du Pont, General Motors, Standard Oil, and Sears, Roebuck) developed the multidivisional corporate structure during the 1920s. To establish the morphology of this crucial development in the evolution of big business, Chandler read and digested reams of material from company histories, corporate archives, annual reports, trade publications, and business memoirs. He followed the same pattern in writing his next big book, The Visible Hand: The Managerial Revolution in American Business. Published in 1977 by Harvard University Press, The Visible Hand is a dense, 500-page analysis of the rise of big business in America. Its theme is the absorption by single corporations of some of the functions usually accomplished by external markets. Altogether, it is probably the most important work of business history ever published. It won the Pulitzer Prize, the Bancroft Prize, and the Thomas Newcomen Book Award.

In Scale and Scope: The Dynamics of Industrial Capitalism (1990, also Harvard University Press), Chandler took his story forward in time to the 1940s. He also extended it internationally, examining the evolution of big business not only in the United States, but in Great Britain and Germany as well. This book, even longer than Strategy and Structure and The Visible Hand, builds on the insights they contain, and the cumulative nature of Chandler's work is one of its most powerful attributes.

Like the work of all great scholars, Chandler's books have inspired detractors as well as emulators. Within the United States, his critics have argued that, by focusing attention on big business, he implicitly celebrates it. They contend that Chandler strikes a value-neutral pose, but in fact glorifies big business as the fountainhead of economic growth. Meanwhile, they argue, he ignores such important topics as finance, labor relations, small business, and public policy. Outside the United States, a good deal of criticism has come from British scholars. Many of these critics believe that Chandler has portrayed British business, which he characterizes as "family capitalism," as being deficient in professionalism. They regard this judgment as harsh and sometimes wrong-headed.

No amount of criticism, however, can gainsay the scholarly triumphs that Chandler has attained. His achievement is especially striking when one considers how much of it he accomplished while working almost alone. The field was so underdeveloped when he began his work that his accomplishment can hardly be exaggerated.

Excerpted with permission from Inventing the Electronic Century: The Epic Story of the Consumer Electronics and Computer Science Industries, The Free Press 2001.

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