Management innovation in supply chain: appreciating Chandler in the twenty-first century

Alfred Chandler attributed the rise of the vertically integrated corporation in the twentieth century to improvements in transportation and communication. In contrast, many have argued that further advances in transportation and communication have made vertical integration obsolete in recent years, replacing it with modularity, outsourcing, and networking. This article unpacks this apparent puzzle by regarding technological improvements in transportation and communication as theoretically neutral with respect to the degree of vertical integration. We argue that the key concepts and issues in supply chain management that Chandler highlighted remain highly relevant today. We integrate Chandler’s detailed historical perspective on the evolution of the “visible hand” of managerial governance with more recent theories from organization economics and from engineering, yielding the following insights. First, aligning incentives of buyers and suppliers is important in achieving throughput and assured supply, but asset ownership is neither necessary nor sufficient for this. Second, vertical integration (and disintegration) decisions affect the internal operation of the firm and its future path. Third, firms need to design their value chains in such a way as to achieve coordination without information overload. The article demonstrates the continuing power of these insights in three phases over the last century. In the first phase (with the rise of mass production), Chandler himself noted a subtle array of make-and-buy decisions. In the second phase (with the rise of lean production), several varieties of non-integration (e.g. exit vs. voice) persisted because of the specific ways in which firms combined incentive alignment and information flow. In the third (“New Economy”) phase, management of information and material flows through the supply chain remains an important source of competitive advantage. In particular, disintermediation as a form of vertical integration, and successful outsourcing require investment in technical expertise over a wide range of technological fields and coordination of knowledge to manage suppliers (see for example, Brusoni and Prencipe, 2001; Brusoni, 2003; Clark and Fujimoto, 1991). By noting that neither externalization through outsourcing nor flattening of managerial hierarchy is the same as decentralization, the article provides theoretical and empirical bases for the continuing importance of Chandler’s principles in managing supply chains.