Perrow vs Chandler, Williamson, & Ouchi (exam question by Keith Rollag)


The heated debate between Perrow, Chandler, and Williamson in The Essential Alfred Chandler (McCraw, ed, 1988) focused on their differing explanations for three trends during the industrial revolution -- the rise of hierarchies, the increase in vertical integration, and the development of the M-form corporation.

From Markets to Hierarchies -- Differing Perspectives

Chandler's historical account emphasized that organizations arose from free market environments because the benefits of administrative coordination lowered costs and improved efficiencies (p 452). Within organizations the increased use of schedules helped improve the flow of raw materials and finished products and increased productivity (p 452).

Williamson agreed with Chandler that for some activities hierarchies are more efficient than markets, but emphasized the economic transaction cost savings achieved by internalizing uncertain and potentially opportunistic exchanges within the control boundary of an organization (p 433).

Perrow's view on hierarchies stems from his general criticism of monopolistic capitalism. He believes that organizations grew because elite capitalists found they were useful tools to control markets, labor, and government structures (p 433). Besides ensuring a docile workforce and security for the upper class, they allowed capitalists to externalize the social costs of production and maximize owner's profits (p 443).

Perrow attacked Williamson's transaction-cost viewpoint as inconsistent, stating that inefficiencies and opportunistic behavior are often greater within hierarchies (p 434). He also criticized Williamson's failure to define transaction costs as a scheme to subsume other theoretical approaches (p 436). Williamson dismissed Perrow's charges by noting his failure to consider recent revisions to transaction-cost theory and his general disregard for trade-offs (p 447).

Perrow also criticized Chandler's inattention to labor unions in his historical account on the development of organizations (p 440). Chandler responded that the scope of his book precluded such focus and countered that technology had a greater impact on production techniques and resulting organizational structures (p 451).

 

Differing Theories on Vertical Integration

Williamson states that corporations became more vertically integrated when it become more cost-effective and efficient to bring these transactions inside the controlling hierarchy (p 436). Chandler agrees with Williamson's efficiency assumptions, though he views lower coordination costs as the primary motivation (p 437). Chandler adds that vertical integration primarily occurred in industries where high-volume mass production through technology required highly stable raw material flows and consistent sales (p 454).

Perrow saw vertical integration as a haphazard process primarily fueled by greed and capitalistic desires for market and labor domination. Large manufacturing firms with excess capital bought suppliers or started sales organizations to increase market control and obtain cheaper labor (p 444). Perrow used Carnegie as an example of a tycoon more interested in ego-enhancing conquests than someone concerned with the benefits of transaction-cost or administrative efficiencies (p 444).

Both Williamson and Chandler concluded that Perrow misunderstood the intent of their respective theories. Chandler also challenged the pervasiveness of Perrow's "domination theory" by noting that while pursuits of greed via vertical integration were possible in any industry, extensive vertical integration into marketing only occurred in four select high-volume manufacturing groups (p 460).

The Rise of the M-Form Corporation

Chandler views the multi-divisional form as the fourth phase in the evolution of industrial organizations (after vertical integration, professional managers, and expanded product lines -- Scott p. 271-72 ). The M-form replaced the unitary organizational form in large firms because of its administrative efficiency. Williamson saw Chandler's view as consistent with his perspective, since relegating strategic decisions to the general office and operational decisions to the divisions reduces uncertainty and transaction costs (Scott p. 274).

Perrow's main concern with this explanation is that assessing the value of a multi-divisional firm can be as difficult within the organization as from the marketplace (McCraw, ed. p 436). In fact, the marketplace may be better at assessing smaller firms than an M-form can when these smaller firms are under the same hierarchical control (p 436).

 

Is There a Way to Resolve This Dispute?

Complete resolution of this dispute would be very difficult given their ideological differences. Perrow's criticisms are similar to those of Braverman and Edwards. He does not support capitalism, though he prefers free market mechanisms to the tyranny of hierarchy (p. 447).

Chandler's views are more rational-system based and generally supportive of the capitalist paradigm. His emphasis on coordination is similar to contingency theorists like Galbraith or Lawrence & Lorsch. Williamson's economic perspective is firmly based on a rational, capitalistic viewpoint.

Still, much of their disagreement seems to be one of interpretation and degree. All agree that hierarchies have efficiencies over markets in certain situations. Instead, they disagree over the extent and intent of hierarchical control. While a face-to-face discussion may resolve some definitional disputes, I suspect their fundamental differences over the benefits of capitalism would prevent a thorough reconciliation.