The Functions of the HQ Unit in the Multibusiness Firm

Author(s): Alfred D. Chandler, Jr.

Source: Strategic Management Journal, Vol. 12, Special Issue: Fundamental Research Issues in
Strategy and Economics (Winter, 1991), pp. 31-50
Published by: Wiley
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 Strategic Mantagemiienit
Jolur-nal,Vol. 12, 31-50 (1991)

THE FUNCTIONS OF THE HQ UNIT IN THE

MULTIBUSINESS FIRM
ALFRED D. CHANDLER, JR.
GraduateSchool of Business Administration, HarvardUniversity, Boston, Massachu-
setts, U.S.A.

The basic fun,tions of t1lt' (orporate lIewlquartes (HQ) mulltibusiness firms (iC-e bothl
entrepreneurial (I'value-creation)andOadIministrative(loss prev.'ention). 7Thedevelopment and
itmiplemlentationi of thlese HQ functions reflect the indhistries in whichi the firms operate.
Historicallh, the (ibilitv'of thleheadlequarters to carri, olit tlese functions hIs d'etertmtliniedi
bothl
tlie successful dpat/s to growth tfo
r a inultibusiness enterprise andi1tlle limits to thlaltgrowth.

The functionis of t.he headquarter (HQ) uiiit in failure of their enterprises anid the nationial
the multibusiness firm is indeed a basic question industries in whiich they operate.
for the understanidinigof the operations of modern I begin this analysis of the functionis of the
business enterprise. As pointed out by the editors HQ uniit by reviewing the evolutioni of the
of this Special Issue, the diversified corporation multibusiness firm and the administrative struc-
has become a dominanatform of business organiz- tures created to operate it. I then examine how
ation. They rightly stated in their organizinig corporate headquarters carry out its functions,
invitationi that: 'It is no exaggeration to argue focusing largely oni its entreprenieurialand admin-
that the economies of the industrial world nlow istrative activities. Throughout this analysis I
depend crucially on the performance of large stress that industries have different character-
multibusiness, diversified companies.' That state- istics, reflecting different technologies of pro-
ment is as true for the past as it is for today. As duction anid different market demands. So I
in the past, the decisions made by the senior conclude by examininig how in implementing
executives at their headquarters have been these functionis senior executives at HQ units
absolutely critical to the performance of such cainie to understand the limits to growth and the
multinationial and multiproduct companies. For boundaries of the firm and how, in turn, the
those corporate executives not only monitor the functionis and boundaries were shaped by the
current performance of their several businiesses different characteristics of the industries in which
but also determine and implement investmenit in the firms operated.
facilities and personniel required for future
production anid distribution in the different
product and geographical markets they serve. On THE HISTORICAL EVOLUTION OF
such decisions depend the competitive success or THE MULTIBUSINESS FIRM

The modern business enterprise with its hierarchy

Kex wordis: corporate headquarters, mitltibtusiness of lower, middle and top managemenit appeared
firms, diversificationi,.conglomerates, organizatioi in the United States and Europe suddenly in the
capabilities 1850s to operate the new forms of transportation

1-2)0$10.0()
0143-2095/91/10003
0 1991 by John Wiley & Sons, Ltd.

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32 A.D. Chandler, Jr.

and commnlunlicatiotn. By the 1880s railroad anid indiustries. That is, the ratio ot capital to labor
telegraph companies had created organizationial per uIllit of output was much hiTgler. Seconidlv.
structuies and internal conitrol systems (includiing in these industries larte plants had significaint
the adoption of the M-Form for multiregional cost advantages over smaller ones in producinig
systemiis) as complex ast those created a half a sinlgle line of products. Up to a minimium
century later in industrv and commllerce. At the efficienlt size (based on the nature of technology
same time the uLnprecedientedvolumie, speed, and the size of the market) the cost per Ullit
and above all, regularity of the flow of goods dropped more quickly as the volume of output
and messages through the economllymadiepossible incre,ased thaniwas the case in the labor-intenisive
by the railroad anld the telegraph, revolutioniized industries. Besides such econoimies of scale large
the processes of production anid distribtution. In works often utilized econiomies of scope-those
distributionithe moodernimass retailer appeared- resulting from makinig diifferent products in a set
the department store, the mail-order house and of facilities usinig the same raw and semi-finished
the chain store. In productioni, the technological materials andi the same intermeediate processes
potential created bv the newZflows precipitated of production.
a wave of technological innovations that swept In all these capital-intensive indiustries, how-
across Western Europe and the UJinitedStates- ever, the new large planits were able to maintain
a phen-omenioni that historians have properly the cost advanitaigesof scale anid scope only if
termeedthe Seconcl Industrial Revolutioni. the entreprenieurs who btuilt thlemil imlade two
The new technologies transformed the pro- other sets of investments. Thev hlad to create a
cessimg of tobacco, grains, whiskey. beer, sugar, national and then internatioinal marketingy anid
vegetable oil anidother foods. They revolutionized distributinigorganiizationi.And thev had to recruit
the refinlingof oil atndthe makinig of metals and lower alld miiiddle managers to coordinate the
materials-steel, nonferrous metals, particularly flow ot produLcts through the processes of
copper and aluminumii.glass. abrasives anidother productioni and distribution, and top miianagers
materials. Thev created braind new chemical to coordinate anldi mionitor current operations
industries that prcoducedman-made dyes. fibers, and to plan and allocate resources for future
fertilizers and medicinies. Thex brought into lbeing activities. The smiallnumiberof 'firsitmovers', those
a wide range of machinery liglht machines for that made the three-pronged set of investments
sewing, agriculture and office uses; heaivier in ma'nufacturing, marketing and managemenit
standardized machinery such as elevators, refrig- essential to exploit fully the econiomies of scale
erating equipmenit, and greatly improved printing and scope, quicklv doiminated their industries
presscs, pumps and boilers. Most revOIlUtionary and u.suially continiued to do so foI decades.
of all wei-e the n'ew machines to imlass pIOdIuCe ChallenLgers diL appear, ut thev' weIre only a
and distribute electric power. That new energy few.
source not only transformed the mechanical The three-proinged investmient by the first
process of productioniwithin factories and created movers created the modierniindustrial enterprise
new forms of urban transportation. but it adminiistered through functional departmenits
revolutionized the processing ot mlianvmetals anid whose heads, with the presidenlt, formed the
chemicals. corporiate headquarters. (That is. new firms
These industries that began to diive econcomic becasme administered through the U-Form of
growth and tranisformation late in the 19th organizationi.) That investment also transformed
century had two basic characteristics that differen- the strulcture of industries. The new capital-
tiated them from existinig labor-initensive inldus- intensive industries were quickly dominiated bv
tries such as textiles, apparel tfurniture, paper. a small numilberolf large managerial enlterprises
lumber, leather, shipbuilding, and mininig. So did which com-npetedfor market slhaic and profit in
the transforming industr-ies of later decades- a new oligopolistic manner. Price remained a
those based on1 the inlternial coimlbustioni enginle significant comiipetitive weapoIn. But these firmns
before World War II and those based on competed more forcefully!through functionial and
electroiiics. particularly the computer, after that strategic efficiency; that is, bv performinig more
war. First, all the processes of production were effectively the different processes of production.
far more capital-intensive thain in the okler distribution, marketinig, product developmenet

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 Funelctionis
of the HQ Uniit 33

and the like, and by moving more quickly into growth through the adoption of some variations
expandinig markets and out of declininlg ones. of the M-Form with its corporate headquarters
The test of such competition was changinigmarket and integrated product or geographical divisions.
share. In the new oligopolistic industries market (In this paper the terms corporate headquarters,
share and profits changed constanitly. corporate office and HQ uniit are synonvymous.)
Such oligopolistic competition sharpened the The M-form came into being when senior
product-specific capabilities of workers and man- managers operating through existing centralized,
agers. Such capabilities, plus retained earnings functionally departmentalized U-Form structures
obtained from the new and profitable capital- realized that they had neither the time nor the
intensive technologies became the basis for the necessary information to coordinate and monitor
continuing growth of these managerial day-to-day operations, or to devise and implement
enterprises. Firms did grow by combining with long-term plans for the several product lines.
competitors (horizontal combination) or by mov- The administrative overload had become simply
ing backward to control materials and forward too great. At Du Pont, the innovator in 1921
to control outlets (vertical integration), but they and then in other new multibusiness enterprises,
did so usually in response to specific situations the solution was to establish divisions to adminis-
that varied with time and place. For most firms ter the production and distribution of their major
in these capital-intensive industries the continuing product lines or geographical regions and a
long-term strategy of growth was expansion into general or corporate headquarters to administer
new markets-either into new geographical areas, the enterprise as a whole. The divisional offices
or into related product markets. The move into coordinated production and distribution (and
geographically distant markets was normally often product developmenit) usinig the U-form
based on competitive advantage of organizationial structure. From the start the functionis of the new
capabilities developed from exploiting economies corporate headquarters of these new multimarket
of scale. Moves into related industries rested business enterprises became and remained that
more on those advantages developed from the of maintainiing the long-term health (usually
exploitation of the economies of scope. Such defined as continiued profitability) and growth of
organizational capabilities honed by oligopolistic their firms.
competition provided the dynamic for the continu- To implement this role the executives at the
ing growth of such firms, of the industries which new headquarters carried out two closely related
they dominated, and of the national economies functions.' One was entrepreneurial or value-
in which they operated. creating, that is, to determine strategies to
The extent of this growth into new geographical maintain and then to utilize for the long-term
and related product markets by the 200 largest the firm's organizational skills, facilities and
industrial enterprises in the United States, Britain capital and to allocate resources-capital and
and Germany from the 1880s to the 1940s is product-specific technical and managerial skills-
described and documented in my book, Scale to pursue these strategies. The second was more
and Scope. An appendix in that book gives the administrative or loss-preventive. It was to
product lines of these companies (by three digit monitor the performance of the operating divi-
SIC categories of the U.S. Census) for 1930 and sions; to check on the use of the resources
1948. A follow-up list for 1973 is given in allocated; and, when necessary, redefine the
Chandler and Tedlow (1985). Scott (1973) sum- product lines of the divisions so as to continue
marized several studies on the continuing diversi- to use effectively the firm's organizational capa-
fication into new markets of the largest 100 firms bilities.
in the United States, Britain, France and Italy The administrative tasks of monitoring were,
between 1950 and 1970. By the 1960s the
multibusiness enterprise had become the norm I The executives at the corporate headquarters carried out
in modern capital-intensive, technologically com- ain additional and most essenitial fuLictioni that of ha.ndlinig
plex industries. relations of the cnterprise as a whole with legislatures aind
In the interwar years in the United States, but other governmental bodies conceriniilg taxes, tariffs aind
regulation. In this paper I conccenitrate on the two basic
rarely before 1950 in Europe, senior executives fuLictionis because they focus on managerial issuLCs arising in
rationalized the management of this multimarket matters interiial to the firm.

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34 A. D. C/handler, Jr.

of coturse, intimately related to the entrepreneur- nated aind controlled a siniglc product or very
ial tiask of striategic planninig and resource closely related product lines. In others it was to
allocation. For monitoring piovided the essenltial place the divisionS unlder larger 'group' offices.
information about changing technology and mar- But, whatever the names used, by the 1970s
kets, and the niature aind pace of competition in most large multibusiness en-terprises had three
the different businesses. And it permitted a (not just two) levels of autonomous planninigand
conitinluinlg evaluation of the performance of adminiistrative offices. They are referred to in
divisional operating managers. Indeed, manage- this paper as the busineSS ullit, the division and
ment developmeint has loing beeni a critical the corporate FIQ or office. The first normally
funlction of the corporate headquarters. For of operated through functionial U.J-Formstructure,
all the enterprise's resources, the product-specific while the divisionls, like the corporate otffice,
and firm-specific managerial skills are the most operated through a version of the M-Form
essential to maintain the capabilities of its existingl structure with its Own staff anidsenior executives
businesses aind to take the enterprise into new responsible for profit, market share, anid other
geograplhical anid product markets where such meaIsuLresof performance.2
capabilities gave it a competitive advantage. lThccorporate office cointinued to define growth
Facilitated by adoption of the M-Forrm, the paths a.lndgoals for the corporationias a whiole anld
size and numbers of multibusiniess firms-both to monitor the performaince of the subordiniate
multinational and multi-industrial-increased operating uniits.In these same years the headquar-
rapidly, particularly after World War II. So too ter's role as a mediator with governmenit agenlcies
did the variety of maIrkets they entered, and, anid other public bodies increased sharply with
therefore. the number of divisions they operated. new regulatory legislation. By the 1980s, accord-
SuchI growth intenisified competition. Until the ing to the study ot corporate office executives of
1960s, however, world events-the two global 12 larg,e Americain mallufactulillg companiies by
wars and the massive global depression of the Gordon Doinaldsoniand Jay Lorsch, several chief
1930s-held back the full impact of interinatioinal executivC officers (CEOs) said tlhat they spent
aind inlter-iniduStrycomIlpCtitionI.
In the 1960s the 30-4() percenit of their time in carrVinlig out SuCh
Europcan and Japanese eniterprises bcganii to mrattcrs. (Donaldsoni anid Lorsci: 1983: 13).
comilpctc with Ainericaii firimls in the Unlited Initciesified comiipctitioni r-esultinig frovm nlew
Staltcs and abroad, aiid ma-nvyimiore Amilerican players from abroad aind from rclated inidtistries
firms moved overseas. In these same years U.S. gave inainvU.S. companies the greatest competi-
enteIpriscs. w'hichl had begunI to center inlto closcly tive clhallenigethey hacdfaced sinlcc their founidilng
relatcd markcts during the interwar ye ars, begani decadcescirlier. Many U.S. managers icspoided
to cxpanid in this minannier more aggressively. For bvy recinvcstinig to improve their competitive
exa.mple, by the 1960s, agricultural, mininig, capabilities in thcir owIn ainid closely related
industrial. aindconistructionim.achinery aind truck industries. But others begani to grow by movingJ
aiid auto comilpanieshaldmovcd inlto each othcr's inlto inidustrics in whiclh their organlizatioIial
markets, aind glass, rubber, and foocd firms compctciicics provided littlc or nlo comnpctitivc
expanded their activities in chemlicicals.Rapidly advaintagc. BccaLusemainy had had little compe-
growing R&D cxpeniditures intenisifiecl such tition from abroad sinlce World War II-and
interinCdustrvcompetition. becaCusethey weIC beinig told by somne academics
Conltillucd growthi inlto incw imlarkets CeICOur- that imnailalgemcent was a gnceralist skill-manyi of
aged structural chalingc, for like the iniitial thcse CeCcutives had come to bclievc th.at, if they
diversificationi, it r-esulted in aI decision-making werc successful in tihcir owInilIdustry, they could
overload at both the corporate office ainddivisioin
lCvels. Seniior execUtives at Du Pont reviewiig the
company's origanizationial structuLre 'saw striikinid In sofli companiS
C there Nere five levels-profit centers.
business ulnits, divisioIns, groups and the coI-poI-ateoffices.
parallels betwcci the compainy's problems in the But in nacrilv all, profit cenlter-s were withiln buSilleSSUllits
1920s and thosc of the late 1960s.' (Hotunislhell aniid were Lusull1 i-Cliltd to functiCfiOnlctiVitiCS,a111dthlC
anid Smith. 1988: 586). The soltutioni at Du Pont groUp ursuaISill cmaIineldplart ot tht corl)orate I-IQ. In this
w to form iintegr.ated paper thien., usc thc teriin b)uSilnCSS Unit for the lowest level
anidmilainyother com-npanies Xvas nIultifunctional o tfice .Iimd division for-the hilehest level o(ffice
businless UIlnitS withini the divisioins that coordi- where sceniorIinc cxccutives haid profit responsibility.

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 Functions of the I-Q Untit 35

bc jtust as succcssful in others. For many, as diversified majors. The differences reflect the
Donaldson aiid Lorsclh (1983) have doculmncited. differences in the strategies of diversific.Ation.
the goal of this broad based diversificationi was For eachc the nLumibcr of gceneral execXutives was
for maniy maniagers long-term growth. Others abotut the samnc. The differencc lax in the sizc
simply cnjoyed empirc btuilding. Morcovcr, their anld activities of the corporate staff. Sinicc
companies werc cash-laden prcciscly because the their unrelated activities offer nio synergies, the
postwar years of Americani hegemonoy hiIad been conglomllerates had nlo nCeed for manlufactuLri1g,
so prosperous. in arkcting. purchasing. traffic anid researclh staff.
So tlCse managers soVUghltto inivest thlcir Evenl in finanicc and conitrol they cmployed
rctainicd cariinigs in inidutstics that appearcedto smallcr niumiCbersthlani did the major diversificrs.
show a greater profit potential thain their owIn. Only in public, includinig governmient, relations
And thleV did so CvenIthoughi those inidustries were the numbeis much the same.
were onlv distantlv aind sometimes unirclatcd to
their companiesI core capabilitics. They lacked
the kinowledge of their target industries' oper- IMPLEMENTING THE
atioils aind they lacked, too, the ineccssary ENTREPRENEURIAL AND
cap.abilities to build planits aiid dlevelop persoininel ADMINISTRATlIVE FUNCTIONS
througlhdirect internial invcstmcnit as they had in
the past. So thcse divcrsifiers grew by acquisition I have prescnted this historical review to explain
or, occasionally, merger. why the multibLusiness firm became suchi a
In these same yewarsa n1ewform of multiblUSilnCSS pervasive aind powerful inistitutioni in miioderin
centcrprise appeatred. the coniglomerate. The economies, why the corporate office appeared
coIglomineratccaln be dCfinlcdas a fiirImthat grew anid hlow its ftuinctioins
developed. A more pICcise
alinost wholly by making acquisitiols in unrelated uniderstanidinigof thcsc funictionis anid of the
industries. Such firms were of two types. OneC mcchianisms used to implemncit them calls for a
was firms in older sectors of the econiomy whose more detailed anialysisbased on inform-ationifrom
capabilities failed to give them a base for gTrowth specific citerprises. I rely onl Michael Goold anid
compparable to those of the large industrial Au drew Campbecll's Stirategies anfd Styles. Th.e
diversificrs. They werc utilities and transportationi Role of the Centr-e in Managinig Divenvifed
firms suclh as ITT, Tennieco, Illinois Ccntral Corporations (1987) for information oni 16 care-
Indtustiries, Northwest Indtustries, Ogden alnd fully selected British diversified and coniglomiier-ate
Greyhlounldanidindustrials suclh as Textronl, U.S. firms. For the U.S. conglomerates I exaininie the
Inclustries. Waltcr Kidde, Dart Industr-ics and historical expericnce of International Telephone
Colt Industries. These included 11 of the 15 aindl TIelegraplh(ITT) with brief referenices to
conglomerates listed amonig the top 200 in 1973. other conglomerates. For the U.S. multibusiness
A few vears later similar firms appeared in firms I review the history of two diversified
Britain includinig BRT anid Hanson Trust. As majors, Gcneral Electric (GE) anid Du Ponlt
tlhey diversified, most soldl off tlhcii oIriginial witlh a brief refercicc to International BLuSilnCSS
btusinless.The other type was enterprises in 1973 Macl-hines (IBM). As these data come almost
that entreprenieurs created from scratclh. Foturof whlollyfrom maniufacturinigenterprises, the analy-
the top 15 U.S. conglomcrates were such sis here is essentially the functioins of cor-porate
entrepreleCUrialstart-ups-LTV, Litton, Gulf + HQ in industrial multibusiincss cntcrprises.
Westerni, ancdTcledvync.Somc of thcse cnterpriscs Becausc the data arc rich anld the functionis
profited by improving the maniagemientanidlhenicc carefully categorized in the Goold anid Camnpbell
the profits of the comnpaniesacquired. But others study, I begin with the Britislh companiies. In
increased the value of their shares through St-rate,giesantd Stiles the two auitlhors describe
creative. buLtlegal, accounting that recordcd oni three mlajor types of maniagemcint stNyles uscd
the balance sheets an inflated picture of their by seilior mainagers at corporate headquarters:
assets, reveniues, and earninigs. Strategic Planniinig,Strategic Control, anid Fin.ani-
Table 1 compiled by Norman Berg docuLmlents cial Control. 'The three maini styles.' they write,
the differenices in the sizc and personinel of 'lead to differenit stiategics anjddlifferenitrestults.'
corporate HQ of conglomerates and thosc of (Goold ancdCamiipll, 1987:87). I would argue that

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36 A. D. Chanldler, Jr.
Table 1. Differences in size and personnel of the offices of diversified majors and conglomerates
Statistical datal on companies

1969 1959
Statistical data Approx.
Assets Numbecr Sales
Sales Fortunle (million Employees of 4-Digit acquis. (million Forttlune
Companies (million $) rank $) (thousands) divisions SIC# 1959-69 $) rank

Diversified majors:
Bendix $1.468 72 $980 63 5 53 30 16 $684 62
Borg-Warner 1.087 108 949 41 6 35 25 3 650 68
Ingersoll-Raind 711 160 690 33.7 27 31 11 162 269
CompanN.y 'X About 500 - - - - About 35 na -

Average AbLout 1,000 - - - - About 30 - - -

Company Y' - - About 50 na-L
Conglomerates:
Gulf & Western $1,564 64 $2,172 85(0 37 89 45 -
Kiddie (W.J.) 786 143 775 35.7 55 n/a 74 $41 -
(64-69)
Lecar-Siegler 587 186 319 26 6 56 40 50 87 431
Litton 2,177 39 1,580 116.0 70 64 80 126 322
Textron 1,682 57 895 70 0 32 85 55 308 146
Average $1,359 98 $1,148 66 6 50 70) 61 - -

Org,anisational data on companies

Diversified majjors Conglomerates

Companies
Company Four cos: Company Five cos:

Functions A B C X Total Avg. 'Y' F G H I J Total Avg.

General exeCutives 5 5 4 2 16 4 23 4 1 4 3 14 26 5
Finance 28 61 101 144 334 84 582 8 22 29 91 106 256 51
(of whiich Control) (10) (36) (78) (107) (231) (58) (424) (6) (1 ) (8) (38) (49) (113) (23)
Legal-secretarial 4 10 22 42 78 20 92 1 7 5 6 66 85 17
Personinel admi. 11 6 20 25 62 16 9( 1 2 3 10 20 36 7
Research & dev. 54 130 139 2.32 555 139 10(12 0) 0 0 0 0 0
Marketing 5 0 34 0 39 10 101 0 0 0 0 0 0 0
Manufaicturing 5 1 0 5 1 3 190 0 0 0 0 0 0 0
Public relations 1 6 9 16 32 8 45 5 3 5 6 9 28 6
PuLrIchlasing& traffic 10 1 33 4 48 12 30 0 0 0 2 0 2 0
Corporate plainninig 3 3 2 6 .14 5 8 5 4 1 7 9 26 5
Totals 126 223 364 476 1,189 301 2,173 24 39 47 125 224 459 91

Source: Norman Berg, 'Corporate Role in Diversified Companies, H-larvardBlusiless School Working Paper #71-2BP2,
reprinite(din Alfred D. Chalndler, Jr, aind Richard S. Tedlow. The Coining of Matagerial Capitalismn:A Casebook onl tl(e
Hiistory of Ame1'rican EconoImtic Institutions, (Hiomewood,IL: Richard1). Irwin. 1985), pp. 758-759.

these thliee styles, likc the initernialorganizationiof success of HQ UnlitS in adaptinig those styles to
the hcadqualrters, result from differcnt paths of their industrics' charactcristics determinc the
growth and. thereforc from differenit patternisof effective sizc aiid bouni.daricsof their enterprises.
investmcnit anid from differenit sets of organiiz- Table 2 SuLggCStSthe diffcrent paths to growth
ational capabilities. Thesc capabilities, in turn, by diversification followcd by the firms in cach
reflect the differeCnltcharacteristics of the busi- of thcsc stylcs. Thc companiics in the strategic
nesses in whichi the firms operate. Finally, the planniiiingcatcgory are by anid lar-gc the lcast

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 Functions of thl-e -Q Uniit 37

Table 2. Three types of management styles their structures

aind org'anization
The 16 participant companies

Compan
acy Main activity Sales 1985 (Em) Rank in Times 1(000

BP Oil 47,156 1
ICI CheImlicals 10,725 4
GEC Electricals 5.2'2 14
Imperial Tobacco, food, drinks 4,919 15
BT R Diversified 3,881 18
Hanson Trust Diversified 2,675 33
Courtaulds Textiles and chemicals 2,173 45
STC. Electironics 1,997 48
BOC Gases and healthcare 1 901 54
Cadbury Schlweppes Confectionerv, soft drinks 1 874 56
UB Foods 1,806 60
Tarma1(1c Con!struction 1,536 72
Plessev Electronics 1 461 76
Lex Distr-ibution 1,041 110
Vickers Engineering 611 159
Ferranti Electroinics 568 169

Strategic planning companies organization stLuctuLres

(1985)

Overlaps between
Ntumber of Overlaps between NumLiiber
of businesses within
divisions businesses businesses divisions

BOC 4 Low-medium 37 1ligh

BP 11 Medium 11 (S) Iligh
Cadbury Schweppes 4 Low-medium 45 (H) 1-igh
Lex 3 Low 9 (H) Medium-high
STC 4 Meclium-high 2(0-25 H igh
UB3 3 Medium 13 Medium

Strategic Control comppanies:organization strtuctul-e

Overlaps between
Number of Overlaps between Number of businesses within
divisioins divisions bLusinesses divisions

Courtaulds 8 Low-medium 30-40 NIedium

ICI 20 Generally low 5M-60 H-ligh
Imperiall 3 Low 20-25 Medium
Plessev 3 i20-2
Medium 5 IIigh
Vickers 10 Low 25-30 NMedium

Finianiciail Control comppanies: organization strLuctture

Ntumrberof Overlaps between Number of Overlaps between

divisions divisionis bLISiniesses businesses

BTR 27 Low 10t) Low

Ferranti 5 Low 3 Medium
GEC 12 Low 170 Mecdiumt
F-lansonTrust 9 Low 70 Low
Tairmaci 6 Low 6 --

Source: MfichaelGookl alnd AndreweCalmpbell.Straztegiesands Styles: Thle Roles of thes Cenltre inl M8anaginlgDiversified(
Corpor0ationsls (Oxfordl:BalsilBlackwell. 1987). pp. 7,48,87. 112.Reprodluced
by permis.sionl
of Blackw!ell Publishers.

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38 A.D. Chanidler, Jr.

diversified, operate the sm-allest numiber of linkinig aind surveillanice role between the uInits
btusiinesses, halve the higlhest linkages between aind the centre.' (Goold aind Caimpbell, 1987:
divisions aindthe higlhestoverlap between busiiness 115). So while the corporate executives mlay
uInits withini divisions. The Strategic Control suggest strategic moves, the btusiinessuInitswithiin
companiies operate more businesses, hlave fewer the divisions are responsible for defininig their
overlaps between the divisions and on the whole strategies.
hlave less synergy between the businiess units. In these Finiancial Control compainies the
Three of the five Finiancial Control compainies btudget is the basic nmeainsof control. It thus
are the most diversified in the saimple. Of the becomes allmostby default the prim-aryinstrumenit
other two, Ferranti, is smiall in terms of sales of plannlinig.Budgets are prepared by the business
aind assets aiid Tarm-ac is the onily constructioni uInitsaindreviewed aindapproved by the corporate
comipanivy onI the list. All five have the lowest office with relatively little cliscussion between
linkages between divisions aindthe lowest overlap executives in the center aind the operating uinits.
between uinits withini divisions. In approving capital expenditures the corporate
office looks for a quick (2-3-year) payback. Ealch
btudget (aind ealch project) is treated onI its owIn
IMPLEMENTING FUNCTIONS IN merits aind not in relation to a larger overall
FINANCIAL CONTROL COMPANIES strategic plain. Nor do the budgets of one uInit
relate their activities to those of ainother.
The basic differeinces in size, personinel, and, The budget is taken very seriously. It is
therefore, the activities of the corporate office considered a contract between the corporate
in Financial Control companies and those in the office and the business uInit.The center monitors
two Strategic categories are much the samneas the the performance by comparing monithly and
differences between the American conglomnerate quarterly reports of actual results against the
and major diversifiers indicated in Table 1. The budget. (Goold and Campbell. 1987: 129).
Financial Control companies in Britain grew Current financial performance is the critical
almost wholly by acquisition, not by direct measure of achievement. Failure to meet financial
internal investimienit.Hanson Trust, BRT and the targets often means a change in the management
smaller Tarmnacwere true conglomnerates. They of the uniit. In drawing up budgets the goal is
followed the pattern of most U.S. congloimierates short-term profit rather than reinvestmenit for
by moviing out of their original business after loing-terimi earnings based oIn a uInit'sorganiz-
acquiring firms in unrelated industries. General ational capabilities. Of the 16 companiies studied
Electric Company (GEC, Ino relation to the by Goold aind Campbell the Financial Control
American GE) was a governmillenit spoinsored companies had the best profit performance and
merger of Britain's three leading electrical equip- the largest growth, but growth was almost wholly
meint companies which, after aI modicuimi of through the buyinig of new operating uniits and
rationalization, contiinued to operate quite auton- not through direct internal investmiienitwithin
omously with relatively little supervision from existing operating uniits. (1987: 309-31 1).
the corporate office. GEC grew largely through The basic functioni of the corporate HQ in
a
acquisition. Ferranti, too, is product of British these Finance Control companies was theni
governimienitpolicy. The governimienitrestored it administrative or loss preventive. It was to review
from bankruptcy in 1974 in order to permit it to the financial performiiances of the businesses
regain its positioIn in data handling systems, controlled and to adjust the enterprises' portfolio
instrumentation and other electronic businesses accordingly. Weak performers were sold off and
for which the military was its largest ctustomer. new ones that met the logic of this type of control
In all five the corporate office has remained were purchased. In their acquisitions the British
small. Like those of the U.S. conglomnerates conglomerates avoided the buyinig of enterprises
these offices include a few general line officers in technologically complex, capital-intensive
and almost no functional staff executives except industries where product and process innovations
in finance and public relations. The division required long-termii investmenit and associated
managers are considered part of the corporate risks. Lord Hanson and the senior executives of
headquarters. The division mnIIagers 'play BRT have expressed themselves strongly about

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 Flunctionls of the HQ Un1it 39

this strategy (Goold and Campbell, 1.987: 135, After Genieeni reluctantly retired in 1979.
252: Feder, 1989). Neither of the two Financial his successor R.V. Araskog pulled back aind
Control companies that remain in high technology attemiipted'to transformiiITT from a looselv based
industries-GCEC and Ferranti-have prospered. conglomerate into a rational, broadly based.
GEC has moved out of consumlierelectronics and international electronics corporation with major
control systems, and has purchased a shipyard stress on telecommunications. that is to returni
and a weighinig machine company. Recently to its core businiess (Sobel, 1982: 70). But it was
Ferranti sold off its basic data systemiidivisioIn much too late. ITT never recovered its markets
which had accounted for 37 percenit of its abroad from its powerful comiipetitors. Siemenis
bLusiness. If they are to succeed, Goold and and Ericssoni. By 1988 it had withdrawn froim
Campibell predict, 'a change to Strategic Control telecommlluniicationisanid electroniics. By then
may occur' (1987: 144). Araskog had sold off over 100 co.mpanies and
The history of the U.S. conglomerates has consolidated the remainin(gseven businesses: four
beeni more complex than those in the U.K., in services--hotels, insuranice, financial leniding.
possibly because the British firms have been and informiiation services. These are today its
more successful in defining their portfolios. The major souLCe of revenue. The other three were
experience has been one of expansive growth industrial businesses: aLutO parts, pumllps and
through unrelated acquisitions in the 1960s and valves, and electric componients and svstems
into the 1970s, then drastic pullbacks in the largely for the U.S. military. By the late 1980s
1980s. the senior executives at ITT had learned that
A brief reviewnvof the history of ITT. the growth was limitedl by the corporate HQ's ability
pionecrinig, and for a long time, the largest of to manage profitably its unrelated operating
the U.S. conglomerates is revealinig. Until the uinits.
1960s. ITT was a giant global telecommuniication 13y that time executives in corporate head-
enterprise. (Formed in 1920, it acquired in 1925 quarters of other conglomiierates had learned
all the foreign operations of Westerni Electric, imiuch the same lessoni. Northwest Industries had
the manufacturing arm of AT&T). In the 1960s beeni dismembered. LTV and Greyhouind were
under Harold Geneeln it began to diversify. As theni in bankruptcy proceedings. Gulf + Western
losses of its operating telephone companies in had spuIn oif over 100 of its operations to become
Easterni Europe immediately aifter World War II a movie company-Paralllounllt COIIcallUllictioins.
and then in Latin America reduced its operations Kidde and U.S. Industries had becl swallowed
and slowed its growthl the niew CEO developedl up by the H-ianson Frust. TFhose that remained
a well consider-ed strategy of growth at home among the U.S. 200 largest industrials had
rather than- abroad. Ihis plan meanit growth by followed ITT's pattern of selling off a major
acquisitioni in unrelated industries, for in the shalr-eof their ol)erations aind concenitratinigon
United States AT&T and its Western Electric inldustries wlhose prodLuctioIn processes, final
dominated telecommuniccations. By the mid- 1970s prodLuCtS aIIndmarkets remainied relaltively stable.
ITT hald acquired some 300 compnaniics. If they stayed with mioretechnologically advanced
Genieen, an accountant by trainiig, required prodLuCtS. theyv norimally sold themii to the Depart-
a detaiiled set of monthly financial reports from menit of Defense. Thus, Iennieco focused on
every operating unit. These were analyzed at shipbuilding for the U.S. Navy, agricultural
montlily staff meetinigs attended bv Geneeni and equipmenlt. and packaging imiater-ials as well as
all operatiig mainagers. The CEO also called for its originial nlatural gas pipeline businiess. Littoni
annual businiess plans and detiiled 5-year plans. hald niarrowedits bLusinlessto four product lines-
In the 1970s Genieeni was heralded as a pionleer malline eniginies, inidustrial automation, oil and
in ai new form of businCess adminiistratioin- gas exploration ailnddefense electroniics. By 1989
mana,--gementby the numbers. It did not work. well over hialf its businiess camiie from defeinse
The overload becaime staggering. One participant, contracts. Teledynie did mulch the saminewith 35
the president of Avis, estimaited that comparing percenlt of its reveniues comiiilngfroimi the federal
aiid analyzing the allnUal buIsinless plans rcp- governmiiienit. In 1985 Textr-olspuL off222divisions
resented 13 monitlhswork for the corporate stialf anil acqUired Avco. a lonig tim-ie produccr of
(Diner-steini, 1980). aircraft parts aindeqtUipmentwhich complemiienited

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40 A. D. Chanidler, Jr.

its B3ell aircraft uniit purchatsed in 1960. By acquired anid managed companies in ilnduStries
1989 airspace/defense business accounted for 46 where finianicialcoIntrol alone was sufficient to
percelnt of sales, financial services and insurance maintain profitability. On the other hanid, nearly
29 percent, aind consumiierproducts 25 percenit. all major diversifiers in both Britain andi the
As the corporate officers of the conglomerates United States were long established enterprises
came to realize, the small headquarters as whose headquarters from their beginninigscarried
depicted in Table 3 had only facilities for financialout both the entrepreneurial, value-creation
cointiol. That is, the functioniof the corporate HQ funictioni as well as the administrative. loss-
wvereprimlarilyadministrative or loss prevenitive. prevenition one. Ihat is, their relatively large
Such controls were effective in service inclustries headquarters (Talble 3) hald been involved in
and in industries involving relatively inexpensive strategy planninig and control. All but one of the
procductionfacilities anidsmall R&D expendlitures. compaanies in Goold and Campbell's sample of
If the conglomierates remained in more technio- strategically orienited companies were long lived.
logically complex, capital-intensive industries, That exceptioll, Lex, begani as a distributor for
they had little choice. but to pull back and to Volvo and then continiuedi to operate as a
conicenitratetheir portfolios in a small numnberof distribLUtillgand leasing firm. Except for three
groups of related product lines about which the leaders in food, dirink and tobacco-Cadbury
senior executives had more than just financial Schweppes, United Biscuits andciImperial Tobacco
knowledge and experienice and close contacts (Hanson acquired the last in 1986)-these British
with buyers, particularly government officials. firms were in inidustrieswith relatively technologi-
Ancd they have been challeniged to develop cally complex processes and products. All but
strategic aind planning capabilities wvithinthose the food companies had large research and
inclustry groups. Ihese firms, like British GEC, developnmentdepartments. All grew much more
appear to be shifting to a style of strategic by direct internal investmiientthan by acquisition.
conltrol. This was also true of the American firm-ls
studicd-IBM, GE and Du Pont. Each of the
three U.S. companiies have beeni for decades
IMPL,EMENTIN( FUNCTIONS IN the leading firm in each of three significant
STRATEGIC PLANNING AND transformintgindustries of the past century. 'Their
STRATEGIC CONTROL COMPANIES exper-ienice,particllarly the growth and pullback
of the second two, helps to indicate the ways the
The most successful of the conglomiierates, a niew ability of the corporate office to carry out their
pheniomenion of the 1960s, were those that basic funlctiolns sets limits to growth.
The planninlg aind control fullctiolns and the
Table 3. Planning & control systems for multidivi- mechaniiiisnms developed by the l3ritish companies
sionail firimns to implemenit themi in the two strategic styles
identified by Goold and Campbell-strateGic
Financial Stra1tegic Strategic planning and strategic control-had many simi-
control conitrol plainninig
larities. In both, the strategic definitioni began in
Size of OIQ small
the first instance in the businiess uniits. In both,
large large
Mechanisms of division headquarters played a significaint role in
control: the review process. In both, the officers at
(a) budgets stronig moderate weak the three levels-business unit, division, and
(b) strategic plans nonie moderate strong corporate office-had extensive staffs. Both types
and reports
of companiies had annual planning cycles with
Responisibility for business divisionis corporatte
strategic definition units I1Q annluatlreviews of 'business plans*' and 'operaltiiug
Inter-businiess unit low moderate high plans.' These resulted in budeets that, unlike
interdependenicies those in the Financial Control companies, were
withini divisionis linked to long-termii strategic plans. In three
Exaimples ITT, Du Ponit IBM to
I-Hanson to 1980 1980 companies such plans were formally developed
Trust G(E in Dui Pont on an annual basis. and in onie every 2 yvears.
Q80()s inT18(.)s For the others long-term strategic planning was
less formalized. Thl'eaimiiof thle business plans

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 Flitictionisof the HQ Uniit 41

and operating reviews was 'to raise the quality for coordinatintg the activities of the business
of business thinkinig, to allow multiple perspec- unlits under their command, integrated the
tives to be expressed, and to permit corporate planning process. Corporate executives rarely
views to influenice strategy.' (Goold and made or suggested strategic themes or thrusts to
Campbell, 1987: 70). guide the strategic planning process. They made
The difference between Strategic Plannintgand little attempt to coordinate synergies or review
Strategic Conltrol companies was that in the first interdepenideniciesbetween divisions. Capital pro-
the corporate office played a more decisive role. jects and proposals for new business entries came
The different attributes of these two planning from the divisions, not the corporate office, with
and control systems and also those of financial the corporate office taking the initiative only on
control are summarized in Table 3. Corporate closures and divestitures.
executives in Strategic Planning companies The corporate office did make the final
reviewed strategic themes, relating them to their allocation. of resources to support the agreed
portfolio mix, and examined the particular thrusts upoIn strategies and priorities. It set more
or suggestions of the individual business uniits. precisely than did those in Strategic Planning
In planning they focused attention on interbusi- companies long- and short-term goals and stra-
ness and interdivisional opportunities and depen- tegic and financial targets. As in firms in the
dencies. The proposals for new projects requiring other categories, bLusiniess
uniitsreported regularly
large-scale capital allocation and entries into new and in detail to corporate management. But,
businesses came from both the business and the ulllike the Strategic Planning companies, budgets
corporate offices; but corporate sponsorship was and financial goals were taken seriously. They
essential for any major new initiative. Long and were not the basis for discussions. They were
short-term goals (both strategic and financial) targets to be met in terms of both incenitives and
and budgets emerged from the agreed-upon sanctions.
plans. Such plans did not exist at the Financial In these companies the corporate office became
Conltrol companies. Monlitorinlg was carried out a headquarters of headquarters. That is, the
through detailed, regularly scheduled reports divisionial headquarters carried out most of the
from the business uniitsgivinIgactual results. But, functionis of the corporate HQs in the Strategic
unlike at the Financial Control companies, Planning companies, but under the guidance of
financial targets and budgets were not sacrosanct the corporate office. The arrangement had
in terms of incenitives (boonuses) or sanctions weaknesses. Often in defininig and, particularly
(management removal). Instead, they were the in implemienitinigstrategy, long-termi gains were
basis for discussions between the business uniits sacrificed for short-term ones. Opportunities that
and centers concerninig progress made toward might have been explored if closer attention. had
achieving long-termi strategic and financial goals. been paid to planning were lost. Such weaknesses
As a result, in the Strategic Planning companies, suggest how the capabilities of the corporate HQ
administrative controls were employed much canl limit the effective size of firms in capital-
more flexibly than in those companies usinig the intenisive, technologically complex industries.
financial control style or even in those firms Does a corporate HQ supervising subcorporate
relying more on1strategic controls. HQs really add value? A brief review of the
The Strategic Control companies differed from American leaders in each of the three most
the Strategic Planning ones in that much of the transforming industries of the past century-
planning devolved upoIn the divisional head- computers, electrical equipmenit and chemicals-
quarters. This difference reflected a greater raises the same question.
numnberof business unIitswithin the firms anid a
wider variety of businesses served by the firms.
The divisions often had as large functionial staffs, AMERICAN EXAMPLES: IBM, GE AND
includinig those for research and developmenit, DU PONT
as had the corporate office. (Where divisions
were placed in groups, the group executives had Although there are no studies comparable to that
very little staff and were considered members of of Goold and Campbell on the American
the corporate office). The divisions, responsible experience, an. examination. of the functionis of

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42 A. D. Clantidler,Jr.

the corporate headquarters aItIBM, GE, aind Du initegralte a1s imiuch a1s possible ainid maiintai
Pont-supplement the British story. In aiddition cointirolthrough centiilized planIniiing
ainldtiicking.
the data aivailaibleon these companiies providle a but we ailso waIntto decentiilize impleimienitation
much longer time-spani than the single decade of aIIid opeirIatinigdecisioins. TheIre aIIreIno imailjoi
the 1980--the timeframe for the British cases. strategic decisions that aire delegated.' (Goold
The GE aind Du Pont stories, in particular, tell nid Campbell. 1987: 261).
of shifts in planninig aind control procedures. By the 1980s the planniing process of IBM had
In each of the three companiies the relationiships become elaiborate. It haid three parts which were
of the corporate office to the operating uniits closely integiited with the contiol mechainisiis.
differed widely. The IBM story is one of a highly plans' that usually came from the
'PIrogramIii1
focused business machinier-ycompany that through operating uinits were meshed with a division
impressive strategic planninig became one of the (group) plan. The division staff workiig with the
most powerful first movers in aImoderni industry. corpoiate staff then hamimleiedout an 'opeirtiing
That of GE is one of a relatively unstructured. plan' which is a 2-year rolliing budget. As one
centraiilized inidustriall empir-e thilt ulnder-went executive explained:
in the 1950s.
drastic ainddramailticdecenitralizattioni
In the 1960s aind 1970s it probed the boundaries T'he operatinig plaii is the iliajor miainiagemilenit
of strategic planniingaindthen in the 1980s moved vehicle at IBM. It is the point at which iall
resotirces are approved-where yoti get yotir
toward strategic control. The Du Pont experienice
capital, yotir heacdcouinit. yotir expenise dcollars.
is more one of a cominiiigup aigainst the limits of yotir parts commiilttecdto yotu from other clivisions
strategic control in the 1960s and 1970s aind then (Goolcd aindcCaimpbell, 1987: 165).
in the 1980s miiovinigcloser to strategic planning.

The 5-year Strategic Planiihas been an exteinsioin

IBM of the Operating Plani. The literature aivailable
does not inidicate how tight the finaniicialainid
IBM, a producer since 1911 of a variety of strategic targets aireset. But given the cointiinuiing
business malchiniesbecame the first mover in the inteiictioin between the corpoiite office ainidthe
comiiputerindustry with the introductioni in 1965 opeirtinig divisioins, oine caIInaissume that they
of its mainiframe System 360, the riesult of 5 haive been flexible, aisthe reasoins for differenices
years of intenise riesearch aind developmenit. As between aictualperformainceainidtargets set would
entrepreneurs developed new computer airchitec- have been discussed constaintly ais forecasted
tures for differenit markets. IBM quickly moved coniditionis changed. In these ways. then, it
into these markets, becominig the leaiding pro- IBM the entIrepreneurial (strategic) ainid the
ducer aIt home and aibrioaidof miniicomiiputer-s in aidimiinistiritive(moinitorinig)functioins have been
the 1970s and of micr-ocomiiputer-s in the 1980s. closely inteIrtwined ainid have rieinfoirced one
As it aidvaincedin computers, it shed its typewiriter another. In a falst imiovinig high technology
aniidother business machinie products. Even so, industry, where inew piroducts arIIeconstantly
n1oother computer comlipaniyoperated in more coIminigoInstreaimiIBM strategic planniingsystems
differenit markets. have aiided the corporate office to maiintaiin
Since the 1960s senior manailgemiienit has been dominance for 40 years in competition with well
commiiittedto a heavy investmiienitin research aniid established firmilsait hoimieaiindaibioaid, aiindwith
developmenit ainidto the strategic planninig ainid entiepreneurial start-ups ait home.
manaigemiienitdevelopmenit necessariy to help
aissure long-terim payback oni that investmiienit.
Although it occasionally malde forays outside of GE
computers, it quickly pulled baick. Concenitratinig
on its core products, the corporate office coIn- If IBM wias the first movei in the most impoitaint
tinues to play a imailjoirole in planiiinig-aI process trainsfoiriiingainidgrowth indiustiies of the seconid
in which large staffs aIt both the corporate half of the 20th century, GE aind Du Pont were
heaidquarters ainidthe operating divisions pairtici- leIders in the two most impoirtant of such
pate. As one executive stressed: 'We want to industries at the eind of the 19th century. Both

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 'linl(tiol1s o/ thle IIQ) U,Lit 43

pioineered in imiodei-niresearch and developmincilt. commercial Jet enigiines, nuclear power, and
Bothi were amiono the very first to becomiie computerS to niame a fex. In the lIate 1960s the
multilbusiness enrterprises oni the basiS of such company had 190 departmenlits(business uIlits in
R&D. the terminology of this paper). 46 divisionls alnd
GE, like the othel fir-st-mover-sin the electrical 10 grOUps. By then the overload oni the corporate
equipimenrtsector---WestinghoUsCe and txw,oGerl- office wvas becoming intolerable. Protits were
man. companies. Siemens and ANECG-quickly down. capital appropriations wcire made wvitllhOut
expanded beyond its or-iginial line of electtric priorities, and new! veItuLreswcre doing poorly.
poNwer,generating andcitransmission equipment. (ACuilar1,anid Harmermic esh, 1985: 777-779. 783).
urban trlaction and industrial motors. By WN'orilThe limits of growvth appcared to have beenI
War I its wvork onl wire insulation hiad already realchedl
takeni it inito viarniishes,adhesives, and plastics. ri-edlerick Borscih wN.Yho succeeded Cor-diner- in
aind its improvemeniit of the light blulb inlto 1963 began to restructure. First, hle tighlitened
metal allovs and VacCUUMtubes. 's ihen came the administrative coIntirols over the departments. -le
development of radlio and ilso NX-i v equipmlent. didi so b?y strienIlTtlieniiiig the divisional staft's
and other medical equtipmienit.In the 19(20s.too. and by impriioving the div-isional reportiing and
GE began to produi-ce a wvide vaie icty' of electrical accounltiln'e Controls. Next in 1968 he strengthened
appliances, electric locomotives and in the I1930s the corporate office's planning procedures. I-Ie
diesel locomotives. Ihle number of its product set up two boards: the Corporate Operatioils
linles (linies foi whiichli operatingr eSuIltS wCle Board. responsible for adiministration: alnd the
accotuntecdfor separately) rose froim 10 in 1900, Corporatc Policy Board. responsible foir stratecgy
to O()in 1910. 85 in 1920. 193 in 1930. and 281 fOrllUlatiOnl.

in 194() (Chanidler, 1990: 221). A plaLninig struCtulrIe was thenl laid over- the
TI'hese diversifiedI lines were administered existilng oPerationa Sl StruCtulr e Str-atect-ic LIusi11eSS
thllroLugh1a hodge-podge of operating uiniits- UnJ1its (SBUJs) were tform-iedi to carry oLut the
functional depar-timlenits. inte craited product clivi- plilalninlg They Xv'r'1algned
pirocess. as m1uIChi as
sionis. sui)sidiaries and special VenI'tureS. Strateoic possible to dliscrete businesses. Close to half of
PlIlling and111 monitOrilngWas Carr-ieCIouLtby the the dlivision1s (21 also becamile SBJUs. Sixteenl
corporate office in centralized Iashlion, that is. SBUs were depa u-tm11eintst fOUr' were IlaLcedL in

oni paper at least. By the late 1930s the need to groLups.Each ot the operating departments senit
rationalize these lines and to cr-eatte a1 StlrLuCttui'e its strateiic 1l)ainsto onie of 43 suLchISBLs. Af'ter
to manage themiiwas obvious. But World War 11 coordinatino these plans each S13U forarded it
delayed reorganization. to the Coirpoirate I olicy Board. Each SIBLJ had
Thlenlin 1946 Ralph C'ordinierbelan to restruc- a maniiaier in chlirge SUpported bVy I t'full-timiie
ture. That restrUCturincr became evxrenimiior-e plannller. 1TuLs. by 1980 tllerIe were approximately
sweeping, after he becamnepresidlenltin 1950. In 210() senlicorplanners at GE. (Aluilar alnd F-lamleIr-
line with the rlama,naementthiinking of tihe meshi. 1985: 779-786, GooIld alnd CampbellC 1987:
time. (Cordiner fashiloioned
Llhighly lecenitrialize 272).
He set uI) 70 autoionioous product
struLcturleC. A tnew CEO. Reginmild Jones* who took office
lepairtmienits each with its own produiction. in 1972 puIt the newv plannilnt pr-ocess inito eftect.
marketine and en-inceriln uilnits. These were It worel`d wvell. The company pi-oduct linies xwere
placed ilnto divisions XwZhicl,inl turin, were prunedl. Many of the less profitable spUn off. A
adminiistered by oile of five groups. (Chandler. total of 76 lines existed dinirl1 Jones' telrm.
1962: 369). If onle department grew larce, The profit and loss sheets improved after the
Cor-diner- dlividled it inito SmallerCIp Parts. T'hulS. hemorrI'hagillng computer' diviision wvas soldl off.
theIe were several departments produciliCnImluCh Similar sales heilpeci to cleffll LpI) the Velltur e
the same consuImIerapplianccs. 13y 1960 the messes.' The corporate office was also impressedl
nIUiMlel-of departments had reached 106. by the way tlle new systemii imilroovedl its ability
By the 1960s GE's corporate office was losing to carrv oult the critical task of selectioll a.id1
cointr-ol. Existing departments grewx. often by development of managers.
developing new linies. Diversification had moved Nevertheless, the planning overload lat the top
the company into m)ore distantly related areas- continuiied.To reduce thalt lpressLureJones created

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44 A. D. Chandler, hJ.

another planning level--the Sector. It represeinted role of the corporate office in mainagemeInt
a minacro-businessor1 indu Lstrv area. In the words development. GE, like IBM, had long paid
of one senior planning officer: 'Conceptuallv the close attention to the tr,ainincg,positioning, and
SBUs are expected to) dlevelolp new business evaluation of its managers.
opportunities by extenidinig inito cointiguous prod- Earlier in his tenure, Welch gr-ouped GE
Luct-malrket areas. Sectors are expected to (develop bUsiness UllnitSinto thlee categories: core, high
new SBUs by diversifvinig within their maicro- tec'hnoloCgy, aiId service. TFhe managers of the
industryN' scopes. Anid corporate is expected to 'core' divisionls-the long-established, mature,
develop new sectors bv diversifvinCinto unlserved stable businesses-received relatively little plan-
macroindustries.' (Aguilar ainid Hamermesh. ningl or direction from the corporate office.
1985: 788). The seniior sector executive acted as Instead, it conitrolled thl-ough tight budgets and
the GE spokesperson for his macroindustry. had carefully defined strategic targets. Mianagers'
oversight for the SBUs in that Sector, atnd was bonuiiises,options and ftuture prospects in the
responlsible for integrating the SBUs' strategies comllpaniywere closely related to their success in
into a Sector strategic plan. meetinig these targets. Thliesamie style appears to
To stimulate furthe.r the platntlingprocess the have beeni used for the GE seivices category.
corporate office nlow began thlat process by Oni the other hand. in new%N high technology
sendinol 'strateaic chlalleinges'to the Sectors anid endeavors, Welchianidthe corporate heacdquarters
SBUs. The SBUs then worked out planis withi conititntuedto play a lar-ge role in strategic
their Sector Office. Once approved these plans planniinlg.
were converted into budgets for each of the By the end of the 1980s, the corporate office
dlepartments. Their deparitmlienit general managers at GE hiad more shairply (lehned its corporate
were expected to meet the budgeted net income strategy aind structure. Ihe strategy wxasthat, as
and return-oni-investniit figures. These tairgets Welch wrote in the 1989 Annual Report (page
were taken seriously, but with the recognitioni 3):
thliatshort-term considerations should InotthreaiteIn
long-teim positions. (Goold aindiCampbell, 1987: Each btisiness was to bc inumlberone or nuimiber
272). In these ways, then. Recinald Jones two in its particular market. For thcosethiatwere
inot, we hlad a very specific prescription-they
attempted to carry Olut bothl the strategic and
werc to be fixecl. sold or closed.
administrative functio:ns of the corporate office.
But given the size of GE and the diversity of its
product lines, platnning(rndcapitcalappropriations By theni GE's maniy lines were integrated into
procedures became bureaucratized. The companly 13 different bLusinesses whose heaids report
was respoinsible for simiply too mianIy ullitS fol directly to Welch, the (IChairman,and two Vice
the corporate office to plaiy an influential role in Chairmen. Of these businiesses, three remain
shaping their strategies. T'he limits of HQ in higlh technology areas xvhere nexv product
planningythus determiniedithe limits to growth of clevelopmeint is critical to contilluing competitive
the enterprise. success-Aerospace, Aircraft Engines, and Medi-
Under JohnI WelcIh, whio took Jones' place in cal Equipment. The others include Electrical
1981, the companiy begain to shift away from a Distribution and Control. Industrial Power Sys-
strategic planning style toward one of strategic tems, Lighting?,Motors, "Iransportation Systems,
control. Welch sized down GE's product lines Plastics. Appliances, aindi Communication and
and shifted the companiiy's product mix even Services. Except for the last of tlhese, the others
more than Jones had done in the early 1970s. are allI businesses in whichl GE lias successfully
TIhenew CEO kept the SBUs btutgreatly reduced operated for at least 70 years. In addition, there
their staff, as he did those at other levels. He aireFinancial Services and NBC. the latter coming
preferred to by-pass the planning process aind to out of the merger with RCA.
hav-e executives in corIporalteheadquarters talk Clearly. the new strategy has meant concen-
directly with one or two SBU chiefs at a time. tration on those proclucts for which prodluction,
By 1985 Welch hlad eliminiiatedtthe sectors and (listributioinacindcontinuling improvement GE has
glroups. As he reduced the administrative andct developed impressive organizational capabilities
planiniig organization, Welch intenisified the over thle decades. With the. dismantling of muclh

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 Fiute-tions of the 110 Utlit 45

of Jones' plianning apparatus, the manacement assigned produtict(livisionis to oversee. thie were
style hIiismoved towards onle of strategic conltrol. explicitlxy deniedl direct line autlhority Over division
At G.E strateTv became bascd primarilx oni the manauers. Theyx cOUld advise buLt niot order. Anid
Utilization of otrganizational1capabilities thlit hlat unlltil the very end of the 197(s this dlistinictioni
becte holnedtov er tilhedeclaes. In managicngthlese remained sacrosanclict.
buLsIiinesses ifl technologrically coimlplex, capital- The ExecutiVe (Committee imlet everv M(onday
intenisive inCldustrieswlhere comipetitive advlantage in thle chlart room with the senlior manamiersof
lies mno re in constantly improving produtictanc one (livision (in the 1920s aind(1930s the divisionls
prIocess rathier thanllin developing ine\\w- prodiucts minumbered betweeni 7 anld 10). Thiere, wNith cha,-rts
and processes, strategic contirtolwas the imost that inicorporiatedlnearly every atspectof past and
sUitable style to carry out botlhthe entrepreneurial presenit performance, they reviewed Operations
ancdt administrative fuIlIctiolIs of the corporate and peIforifioimace and did so Lwvrelatiniigthem to
office. That is. strategic plinninLg devolved oin ear-licr plans andl targtets. Thev thleni discuLssedl
the businesses (on the divisions in this pap)ers ftutrlle oper-ationis. On. the basis of these meetings
termiis) with thie corporate. otfice maintailling and the information provided by both corporate
oxeiall striatecic control. an1ddivision staffs, the corporate financial office
developed budgets and caslpital appropriation
plallS that in tutrn1 were diSCuSSC ci ancd approxed
DU PONT bv the ExecutiVe (COlmlmittee. In this wax the
corporate office intltuencedIthe dlirection aln(lpace
At [DU Pont ullderlying changes in the planning of iarovth and took control over the performantiace
and coitrol funlctiolis of the corporate office of the operatinig (livisions.
caime mneore slowvlytllhiathey did aitGE. Reccntlx Fr-omilthe late I) s()sonl. the corporate depart-
thlese miore CeVolUtionary dlevelopmilenits1lave imcintfor researcli began to p1laya milajor- pairtin
tturniedthe company fromn relvincg oni a weak rletininig the clirectioni of the growth of the
strateoic conltrol style to al stronger stratecTic eniterpirise. particUlarly into imarkets not vet
planning one. So at Du Polnt the storI is the reached by the divisions. It dlidiso by inVestillCy
revxer-seof that of G.E. In botli, the chancrCsin in fundamental research in untapped fields of
the activities of the F1Quniit rcletlctect clifferiences chemllistrv. In 1927 the department began Such
in the chlaracteristics of the industries in wvhich research oni polymer chemtlistry that ledi to
thex came to operate. the development of man-made fibers (iluclLinlg
D)U Ponlt. whloseC researclh or canr1ization was as NIyon. Dacron. Orlon andl Lvcra), andcneoprene
old as that of General Electi-ic xxwas a pionicer in andciother man-made materiials. (CentralResearch
creating the imlulti(livisionial
foi-miias ain anlswclrto (initially calledt (..centralChemical Depa-rtmenit)
managYementoverload resultiln;^fi-omi a st rategy wals responisible tor basic reseiar-chaindcfor the
of product diversification. I icleel. its struLCtLire fari moirt-ecostly iniitial developmenlt of niew
beciamiie a modiel foi the TrI-OWillny numb1eIr- of processes anid p)rod(.IuCtS. Onice commercialized,
multibuIsilless enterprises that appeared in the these were tLuIr11CCeover to the pIcroLduct divisiolls
Uilited States in the 1920s and 1930s. (Chandler. for production and distribtutioniand for t'hirther
19621:Ch. 2). After the reorganization in 1921 refin-emilent. This st:ruIcture permitted Du Poit to
the seinior execuitives of the corporate office conitinlueits hithly profitable strategy of gr)\Nth
car-ied out both pilanniniigand monito 1iLT bx thi ouLIh closely related diversification. (Hounllshiell
maintainingyconistaniltantd close cointact x ith the and Smilithi1988: Chs. 5 1).
heads of the product dliViSiOnIS. (At DU Ponlt sLuch Alftei Worlcl War 11 the company conitinLue(d
livisionisweire termiiieddeparitimlenits.)
In thc 19211 to 0ior by expanding existing linies and
reorganization tihe diViSiOnl heads wB ere giVen fUll dceveoping ne\w ones. SooIn. divisions suchi as
authority and responsibility for carrying otut ill teltie fibers became as largce a1sthe Dii PonIt
activities in their prodiuct linle includinrn the C omipamy itself hadi1 beeni in the 1920s. Because
improvement of prioduct and pirocess and the Of thle sUccessful exploitation Of fUndamlICntal.
pla nninT for future production and distribUtion. research bvx Cenitrial Reseai-clc. the Executive
Althou(g-heach of the five to seven members of Comilmitteenow alloccated extensive sumls to the
the Executive Coimimiitteeot the boardil were divisions for comparable research. At the same

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46 A. L). Chandler, Jr.

time other chemical fiirmlsbotlh in the United to alchieve a strong competitive advantace in
States aind Europe were makinc-gIuch lIarger the new proLuct milarkets. And the necessarv
investimenitsin researchi aind dlevelopmenit thlia complemiienitarv facilities aindskills were too costlv
they had before World War II. So proLuct lines and time consuLiniT1 to create.
proliferated1andcicompetitioni intenisifiecl. This outcomile aind the contiluillg low rate of
Yet, the basic plannincg andciadminiiiiistrative returinon investimienitled the Executive Comimit-
structure of the coimlpaiyv remiiiaiieCiUnchanged. tee for the first time since 1920()to appraise,
The Executive Comimiittee n(o longer hla the seriousIl, itself aind the basic strattegyv ain
timile nlor inlformnatiointo illfluenlce divisional structure of the comipanv. One Comimlittee
plans effectivelv. The dlivisions, in turin, became memii ber, Lester Sinniiess,attribLutedl the dleteriorat-
increasincglv powerful larce mulltibLusiniessinc earnincgsto low research prodLuctivitv aindthe
enlterprises in their owIn righit. Close workincg failure of the Executive Comimiittee to plav a
contact betweeni memilbers of the Executive guidlidngaind coordlinatingtrole. i-le consideeredl
Committee at headquarters aind the seniior dli- the research output of the coimlpaiyv as a
visioin manacgers disintegrated. The Coimimittee whole to be disgraceful aind inexcusabl low in
nlow dlid little more thliai approve of dlivisional proportion to the calibeerof the meni we emplovy
plans aind review actuLalperformaiace bv relating the facilities we give themi, aind the aImounlt of
it to the plans. As at Gener al Electric, profits went imionievwe allow thiemiito spenl. (1-Iouliishiellandci
dIOWIn,prOdLuCtdlevelopimlenltin bothidivisional andci Smith. 1988: 531). But essentiallv, he insistecd,
corporate research became mucIl more costlv, the Executive Comimlittee had onilv itself to
ain pavback oniprodILIctdlevelopmiienit was sialler blame. In the earlier self-examination. pr(posed
and required more time. Nor were proLuct chancgeswere:
dlevelopmlienits andl other interdlependleniciescoor-
dinated effectivelv withini the compaiy. As at
GE, the limiiitsto growth appeared to have beeni SuIbmll'ergdL illii \w'lter- of1oliClicCtillig oinIIIionIs
reached. withill the EX'CCLIti\.Y C'oimiiitee.. ThIOUth at
As these diffiCuilties begLai to press LLponIthe diStOr'tedl pICOCCLI ltioIl with thC 011Cocept ot the
depa)ir'tIllC nlti1l tiltOnOm\y... the EXC'ClUtI\ C C 01m-
Execuitive Comimiiiittee, it eniterediinltoaniextenided
fihittee loses siiTlt ol, its (\\IlI responlsiilities. [It]
cdebate over wlhat Should be (lonie. hle OLutcoImle to sit onlIy its i u1.1dicial bOdL1V i
appears i.
was a decisioin to expand the Developmeiit the past peCo110mIanIlCes O' th Dcpallti'llenlts
Departimlenltwhlicll sinlce 1903) had carriedi on [divsioislad
[dli\1iSiOIlSl'I lild wc~hin
\N'!Ctil le111. xxatxci
\\'11ultC\IYCl' jICCts sIt
III'Oj'X'' an(
planninc,gactivities at the corporate office. An p)ro0)OSalS 011 I)OliC\! ill I)IdOCeLIlII'CS may mnlanate
enercetic young manager, Edlwin A. Gee, took fr'oIll the I1(IIUti iii 01o Staf1f delt Artilments The
EXCeLcti\ve' C'olnllllittee Se'ldom11 (diSCLISSSe 0or
clharge. Gee's maindate was to appr-aise each of illitialteS illl\'tllillng Of ntild b\ itself.
the divisio's 'cliversifvinig-activities in order to
detect anivyiiadeqLtacies in technology, imiarkets
anid orgcanization. (Houniislhellanld Smiiithi1988: IhrouLThits rituLal schedleIC of charts anid reports.
Chi.22 Fast, 1977: Cl. 5). 1-is department was Sinniiesscon1tilnLuedc:
also to seek out nlew bluiniiess opportuIlities in
areas not covered bv the divisioIns. For aiititruSt
reasonis Gee anid the Execuitive Comimiiiittee tile Comm1X1ittee no longer1'l' h1a1dIthle tilime neededCLI
decided not to grow through alcquisitioll of eveni tO e'xmnllelll' andLI dliSCusLS p)eI'oiIiCal,l1\ thle fuLtIlure
small firimisandcito stav oLIt of defenise orienited 0o' tIlh OINUIN! o trdtelrin1
Ce 01compn \whlCtllth thle
Compaliny' policies. Orgall'zatilOnlS aIIILd prI'OCed'reCS
indLstries. Inisteald Gee's departimienit was to ,i 11 ''1'-ilt''lD
conlcenltrate oni developincg n1ew velntures that
uLsed somile of Du Pont's specific organizational
capabilities. Somie of the n1ewproduiCts dlevelopecd Another mieimber urged the Coiimittee to
dlidpav oft. But bv the mid-1960s th.e Comimlittee take a imore critical role in originating and
and Gee acgreedthat the 'New Ventul-e Programi implementincg progrrams to insure the future
was not a sUccess. The heavy investimienitin R&D health of the coim.paniv.'Bv the mid-60s Du Pont
was not pavincg oft. Too ofteni the coilipaivs Sufferedl tIoIii inleffcctive planning mechalisisils
specitic fuinctionialcapabilities wer-e niot ellnougLh fo- the enitei-rprise as a wlhole and weak conltrols

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 Funclions of the HQ Unit 47

ove r the operationis anid perfoirmanice of the 1988: 591). Members of the ExecuLtiveCommittee
operatingyunits. began to haive authority aindir-esponisibilityfor
Even so, change caime slowly. The presideit. the performance of the divisionls unider theiI
ClhiarlesB. MCCoy. anid othe.r members of the supervision. Durinig the 1980s, as the company
Comnmittee were cautious. Ini 1967 camse the begcan to move into specialty chieimicals, clec-
organizational restructuLrinigmenitioecd earlier troics, medical and other high techinology
that created the alutonomoilus businless Unlits produicts aind to spini off soimle of its commodity
(terml-ed profit centers) whose minagers were chemicals, they became more deeply involved in
responsible for production, distribuI tion, R&D, strategic planning. BLut the lines of authority and
and profit and loss in the product bLusinlessthey responsibility were becoming unclear. Moreover,
headed. The departmental (divisionial) head- in the m-aking of strategic and administrative
quarters monitored aind helped to plani the decisionls, ExecutivNeComimnitteeImembersteinded
activities of the businless unlits under their to see issues in terimisof the buLSilneSSCS they kinew
supervision. Thcev decided., for example, liow best and those for which thiey were becomiiing
fuLnCISfoI researCh woulctd bc aillocated to their increasingly resp(o)nsible. In addlition, the top
differenit business units. mianagcrsof Conioco, the oil coimlpainy, uinexpect-
ThFenext move came 7 years later wheln the edlv acquired in 1983. had nlot vet becie initegriated
Coni-nittee created a small 12-person Corporate into the corporate office. The restiltinigpressuires
PlanisDepartment. It was to have 'broad responisi- led to a careful anailysis of the company's
bility' for coordinating all strategic buSillness org,aniization. In the Fall of 1991 camic the
planning activities in the company, specifically announcemenit of the most far reachinig internal
by analilyzing Dui Pont's portfolio of businesses. restructuring that the compainly had undergone
(Hounishell ancdSmithi. 1988: 585). The Develop- in 70 years.
menit DepartmcntI was foklded into Cenitral ThtCeniew organlizational struCtuire abolished the
Research. At thC urginig of the nlew planning Execuitive Committee and existinlg Departments
dep.artment the Executive Committee redLuced (divisions in the terminiology used here). An
the rcsearch budgets in the operating divisionis, Office o.f the Chairtnan and an Operating Group
particularly funids for fundamiienitalresearchi, and were created. The first consistecdof the Chairman
put tighter conitrols on the initiating of research (thie CEO), a vice chairmlan (wlhose special area
programs not clos-lv relatcd to existinig product was scienice and techniology), and Executive Vice
lines or technologies. The company's long-term, Presidenit for Conioco. Attaiched to that office
morecfundamentail research became concentrated were two Senior Vice Presidents--one for ii-uanai
in the cilarged coiporate research departimicit. Resources ancdCorporate Planning and the othier
The C'ommnittce atgrecd that (Corporate Plans for F-`inaince.The Operations Group includled
workinig with Central Research should play a these five. plus 14 Du Pont executives and five
critical role in definiing the companvy's broader Conloco eXeCuItieseS. Four of thle latter were
strateglic movcs inlto nlCwlines. To assure that it responsible for tihe diffcrent funLctioinalactivities
carried out this tuniction the Co(mmittee in 1'979 in the oil bLuSilneSS, and on1e was in charge of
gave its member dlesiginatedas researchi advisor, Conisolidationi Coal, a major enterprise, that
EdcwardG. Jeffersoi, line authiorityover Ceintral came with the Conoco acquisitioni. The OperIIting
Reseairch. This waIsthe first timile sinice the 1921 GroCUphias oversight of all the company's
reo-rganization that an Executive ComIm1iittee products, function.s and geographical regionis.
member was givenI such authority. Jefferson's As part of the reorganization, the Du Pont
initial strategic milovewas a commitmenit to the produict lines in its reshape(d portfolio of busi-
comnpany's long-term developmenit of the niew niesses were conisolidated in seven induistrial
biogenetic field aindi other life scienices. particu- segments.' Within the segmeniits closely related
larlv in pharmaccuticals and agricultural chcmi- prodluct lines were grouped for administrative
cals. (Hlounshell and Smith , 1988: 505-507). purposes as profit ceniters. Four of these
After Jefferson became CEO in May 1981 he segmeneits-Polymers, Agricultural Products.
cointin1ued to strengtheni the role of the corporate Electronics. and Imaging and Medical Products
office in both its planning and resource allocation are in industries where niewprotiuct developimlent
aind miionitorinig funCtiolIs. (Hounishell atnd Smith, remains essential for competitive success. Thrce-

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48 A. D. Chancdler,Jr.

Fibers, Chemicals (petro-chemicals and pigimienlts) tary onles to suppleinemet existin1g skills acnd
acndAutomotive Products-atre in more mature facilities. If the production facilities provided
stable inldustries where competitioin is based more competitive advantage in the new market, in
on improving prodluctancdproccss. The remainiing most cases compleiieintary marketing capabilities
six senior vice presidenits that make Up the nieciede to be dcveloped. Anlothier lessoni was
corporate office are responsible for the funictional that, nlot oinly were the size and boundaries of
activities of the cor1poration as a whole-Research enterprises shaped by existinlg capabilities anid
& Developmenit, Enginiecrinig, Informationi Svs- succcss in the developing of complemenitary oniCs,
temss, Logistics (purchasing), Exterinal Affairs but they were also cletcrminccl by the ability of
and Legal. By this reorganization the executives the corporate headquarters to carry out both its
in the corporate ottice nlow have far more direct basic fUllnctionls-enltrepreneluria,l anid adiniiiistra-
operating and planiniiig responsibilities than they tive.
hlad dluring the previous 70 years. Most significanit of all, they lecarniedthat the
Threstated objectives of the reshapinig of the 1HQfunlctions variec(iwith the charactcristics of
corporate office was to break dowin bairriers the industries in which they operated. There-
betweeni operating divisions anid to have top fore, the production and distributioni of different
management develop a corporate rather than a types of products or services required different
prodLuctor functional perspective. To encotirage types of planninig and control systemis. In
the latter, most Seniior Vice Prcsidents that make indLustriesin which nlew product developmicnlt
up the Operatinig Group handle more than one is a critical comiiponenitof interfirm competition,
activity. For example, a Senior Vice President where R&D expeniditures are high, state-of-
for C(hemicalsalso has responsibility for m Inufac- the-art facilities costly, and marketing reqluired
turinlg for the comrpany as a whole and that for specializecd skills, the corporate office necds to
Electioniics oversces the Asia/Pacific region. In concentrate on the entreprenieturial (vailue-
this way the corporate headquarters is expected creating) functioni. Here it needs to play a
to develop a global view, to enhance htiman stronig role in the strategic planning process if
capabilities at all levels an:d to speed up high it is to utilize fully their comipany's existinig
level decision-mnaking. At DLI Pont, wherc the competitive strcngths in technologically
portfolio includicesa number ot new and techiino- acivainced busincesscs ancdto determine paths for
logically advanced products, the functions ot the new product anid process dcevelopmenit. In more
corporate headlqutartershavc been strengthened; mature inidustries where the nature of the
while at GE, where the strateay has concentrated finial product remains stable, where R&D
on obtaining dominant positioils in more mature expeniditures conltinlue to be essenitial, but airc
and stable industries, the role and size of the primarily for improving produtlctand cost-cuttinig
corporate office hias been1 reduced. processes, andc where facilities are costly aind
The effectiveness of the more focused long- marketing complex but the facilities and skills
term strategy ot Du Ponit and GE anid the requliied hlave beeni well established: in such
resulting structur-es will be dcetermined in the industries the corporate officc can. more easily
1990s. (I see the purchase ot Conloco, like GE's delegaite strategic planniinig to the operating
acqtuisitioniof RCA, not as part of long-term divisions, and maintain strategic control by
strategy but rather responises to the more settinig targets andcestablishing long-term goals
immediaiteanidmost complex btisiness situationis). for the corporationi as a whole. Finally, as the
In carrying oLit and modifying the nlew straitegies expcrienice of the conglomeraites reiniforce, in
and in impiilemiting and tuniing of the new the servicc industries aindmature manufacturinig
structtires, the executives in the corporate office industries in which the prodtucts remaini imclh
at DU Pont anid GE should keep in minid the the same. w-here the tcchniiology of production
lessoins learined during the 1970s and 1980s about is not complex, where facilities are less costly
the paths to growth and the limits to the size of and where competition rests more in distribution
the firm. anid marketinig, particularly advertising, thalniin
On1e lessoIn of those years was that moves inlto procduction or R&D, financial controls alone
new buisinesscs based on cxistinig capabilities have becn usually enough to prevent losses anid
reqLiiredthe developmncit of a set of complcimen- maintain profits in imlultibusinlessenlterprises.

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 Flunictionisof the HQ Uniit 49

CONCLUSION short-termnhorizon inidustries (fabricatecdmetals;

stoine, glass anid clay; ruibber anid plastics; soap
The story told here of Du Pont, GE aind the anidtoiletries). Where these inidustriesaccouLntecd
U.S. conglomerates is representative of much of for 36 percent of total manufacturinigemployment
American industry. The 1980s were for U.S. in her over-all sample, they accouLntecdfor 83
industrial firms a decade of reshaping corporate percent of employment of the firms that had
strategies aind rebuildinlg organlizatioinal struc- gone private. Where for the U.S. manufacturinig
tures. As firms focused on a smaller number of sector as a whole R&D investment averagecd
product lines, they often used fuLndsreceivecd $2,000 per employee, for the firms that wenlt
from the spin-offs to acquire other enterprises private the average was $500 per employec.
needed to fill out their portfolio of related lines. Hall's informationi shows that after a decade of
Most of these rearrangements were carried out well publicizecdprivatization, privatizecdfirms are
through friendly transactions, but at times firms finidinig a place in low techniology anid other
were acquired by hostile takeovers. As Bhadgat, inldustries where R&D is minimal. It also
Shleifer, anld Vishnly (1990) report, evenl hostile emphasizes that the widely-held public company
takeovers by raiders cended in the hands of other overwhelminigly doominates in the capital-inteni-
firms in their sectors with the raiders profiting sive, techniologically complex inldustrieson which
(handsomely) as temporary brokers. On the so much of the natioin's inidustrial growth anid
whole, however, the capital markets in the form comnpetitivc success dcepenlds-inldustries that
of raiders, aind of LBOs aind other privatizatioin include chemicals, pharmaccuticals, aircraft anid
forms have played only a limited constructive aerospace, computers anid semiconidluctors, elec-
role in the recenit restructurinig of American trical and electroniic equipmenit, oil, metals, anid
industrial eniterprises. a wide variety of agricultural, construction,
The part played by the capital markets in this miniiing, aind inidustrial equipimcnlt, cinginecs, motor
corporate restructuring reflects, in much the same vehicles aind other tranlsportatioin equipimcnlt.
way as the chliangs made by seniior corporate Hall's data also emphasize that finanicial
managers in their strategy and structure, the centreprenecurs anid inlterimcediaries have becolmc
characteristics of the industries in which the aware, as have corporattemanagers, of differenices
enterprise operates. For example, one major in inldustry characteristics. Money managers
inniovatioin-the privatization of eniterprises learnedcthat, if firms in the more capital-intenisive,
through LBOs aind other techniiques has been techniologically complex inldustrieswere to remain
insigniificanitin capital-intenisive industries where competitive, they wouldl have to make long-term
comnpetitivc strcingthdepeinds on1continuiLnglong- investments in highly prodluct-specificskills. Such
term investment in R&D and costly capital long-term investments dcemandecd value-creatinig
facilities; that is in industries where strategic strategic planninig anid control by experiencecd
planniinigand control has beeni essenitial to remaini managers as well as a continuiLngreinvestment
competitive. The great majority of the firms of earniings (particularly from establishedc lines)
privatized have beeni in industries where finanicial inlto necw anid imilproved prodLucts anld processes.
controls were sufficicentto maintaini the competi- So in assistinlg and evenl promoting LBOs
tive capabilities of the operating uLnit of a anid other privatization transactionis, finaniciers
multibusiniess enterprise. concenitratecd on firms anid inldustries where
As Bronwyn Hall's studies of 2000()) manufactur- capital costs are relatively low, specific skills not
ing companies' (1990, 1992) documeLnts,betweeni complex, synergies from R&D, prodluctionianid
1977 aind 1987-the period of the LBO boom- distributioni are limitecdand where cash flows are
224 of the 1980 public companies had become relatively steady, anidlong-term strategic planninig
privatized. (Of these onily 76 were LBOs). The relatively unniecessary. In such industries mul-
224 accouLnted for 5.7 percent of the total tibusiniess firms have few competitive advantages
employment of the companies studied but onlly ovcr sinigle businecss onecs. Firimlsin such inidustries,
1.4 percent of total R&D expenditures. Of these whether operatecd through the office of a conglom-
224, 150 were smaller firms in what Hall definies erate or an LBO association, canl be adminiiiistered
as low tech industries (food, textiles, includinig through finianicial control alonie. But such inidus-
apparel, paper anld wood products) anld stable tries are not the major sources of econiomic growth

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All use subject to JSTOR Terms and Conditions
50 A. D. C/liandler, Jr.

anid trainsformlationi,or of niationial competitive of' 4mnericani Economic Institutions, Richard D.

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NOTE: IinforimiatioinoIniindividuailcomiipaiiiesInot
cited in the above publicatioins are fromiianiinuLial
reports, Moodv's Manlial, M. Moskowitz,
Michael Katz, aindRobert Leverinig, EvXerybody's
Bulsiniess: Ani Almiianiac, Harper & Row, Saii
Francisco, 1980, and EvXervbodv'sBiusiniess,Dou-
bleday, New York, 1990 and D. C. Stafford aind
R. H. A. Purkis, Director'v of MultinationaLls
Stockton Press, New York, 1989. I aim indebted
to Gordoin Smyth for inlformatioin oIn the receint
Du Point reorgaiiizatioin.

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