More on Managerial Coordination and the Vanishing Hand

3 July 2010 at 2:27 pm 6 comments

| Dick Langlois |

Many many thanks to Mari Sako and Susan Helper for taking the time to comment on my post about their paper in ICC. To give the discussion more visibility, I am elevating my response to a new post.

My Vanishing Hand argument is an attempt to explain theoretically the demise of the large multi-unit Chandlerian enterprise, the essence of which was managerial coordination across vertically integrated stages of production. That is to say, my argument was about vertical disintegration. To assert that a more-disintegrated system still uses managerial coordination across firm boundaries is not to resurrect Chandler’s vision; it is to back away from Chandler’s vision. (I document Chandler’s vision, and its intellectual roots, with more care in the book than in the original “Vanishing Hand” paper.) My argument is fundamentally about vertical integration, and I have no problem with the idea that managerial coordination is often exercised across the boundaries of firms. I’ll return to this point in a second.

Sako and Helper argue that, if minimum efficient scale is falling, the size of firms should be falling. And Giovanni Dosi and his coauthors claim that firm size isn’t falling. Well, first of all, MES determines plant size not firm size. It sets a lower bound on firm size; it doesn’t guarantee a smaller firm size. But the real point here is: what does “size” mean? As I pointed out in my response to Dosi et al., their evidence is at best about firm size in the sense of price theory: number of widgets per unit time. My argument is about firm size in the sense of Coase: number of activities undertaken within the boundaries of the firm. Vertical disintegration is perfectly consistent with larger firm size in the sense of price theory; in fact, we might expect it.

So what about managerial coordination across the boundaries of the firm? It is instructive to go back to George Richardson, who points out that “market” coordination is not only about anonymous spot contracts but rather about a spectrum of coordinative — “managerial” — relationships among legal separate enterprises. What confronts us, he writes,

is a continuum passing from transactions, such as those on organized commodity markets, where the co-operative element is minimal, through intermediate areas in which there are linkages of traditional connection and goodwill, and finally to those complex and inter-locking clusters, groups and alliances which represent co-operation fully and formally developed. And just as the presence of co-operation is a matter of degree, so also is the sovereignty that any nominally independent firm is able to exercise on a de facto basis, for the substance of autonomy may often have been given up to a customer or a licensor. A good alliance, Bismarck affirmed, should have a horse and a rider, and, whether or not one agrees with him, there is little doubt that in the relations between firms as well as nation states, the condition is often met (1972, p. 887).

In Richardson’s account, firms engage in these coordinative managerial networks not because of their inherent superiority but because the limitations of knowledge place a bound on any organization’s ability to coordinate multiple activities, thus forcing firms into schemes for cross boundary coordination. The case of the electric car, it seems to me, is much more a Richardsonian story than a Chandlerian one. In rolling out the Volt, General Motors is not integrating into electricity supply, and is arguably not even orchestrating the system of complementarities. GM is making alliances with local and federal governments (who are keen to provide subsidies) as well as electricity providers like Northeast Utilities. I’m not sure either that the future is “modularity and standards.” But Richardson provides an argument for why the future is far more likely to involve loose networks of cooperation rather than tight managerial control: because of the limitations of knowledge, the span of managerial control is limited; and, as the number and variety of capabilities expands in a mature economy, the smaller in relative terms must the sphere of managerial control necessarily be in coordinating such diverse activities.

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Entry filed under: - Langlois -, Business/Economic History, Corporate Governance, Institutions, Theory of the Firm. Tags: .

Isomorphism in Higher Education The Reverse Peltzman Effect

6 Comments Add your own

  • 1. Peter Klein  |  5 July 2010 at 3:25 pm

    Dick, thanks for keeping this conversation going. It’s really important and I appreciate your and Mari/Susan’s attention to detail.

    Could you talk a little about how the Vanishing Hand phenomenon would be manifest in the data? For years I’ve been looking for convincing cross-industry, time-series evidence for vertical disaggregation (in the Coasian sense, not Giovanni’s sense). But, aside from idiosyncratic evidence on a few firms and industries, I’m not really finding it. If we wanted to assess Mari and Susan’s suggestion that disaggregation may be temporary (or nonexistent), how would you suggest we do it?

  • 2. srp  |  5 July 2010 at 8:53 pm

    BTW, Jeff Bezos of Amazon had a couple of relevant and interesting comments about the evolution of cloud computing data center services as something purchased from utility providers as opposed to being produced in-house at

    http://www.bloomberg.com/news/2010-07-01/how-to-make-an-american-job-before-it-s-too-late-andy-grove.html

    The relevant parts are near the end, but the whole thing is pretty interesting.

  • 3. Dick Langlois  |  6 July 2010 at 9:38 am

    Steve:

    The link actually goes to a mercantilist rant by Andy Grove. I couldn’t find the Jeff Bezos story.

  • 5. David Hoopes  |  6 July 2010 at 4:10 pm

    Mercantilist rant. Laughs.

  • 6. Leadership at the Edge « The Asymmetric Leadership Forum  |  26 October 2011 at 10:48 am

    [...] of particular task systems – economies that are superior to market economies.  As Langlois has also argued, these economies of coordination apply not only hierarchical control within the [...]

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