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How Tech Companies Grow Big and Strong


By G. David Wallace

INVENTING THE ELECTRONIC CENTURY

The Epic Story of the Consumer Electronics

and Computer Industries

By Alfred D. Chandler Jr.

Free Press 321pp $35

Alfred D. Chandler Jr. is the Boswell of big. As the dean of American business historians, he has chronicled such megacorporations as DuPont (DD), General Motors (GM), and Standard Oil. His work has provided much of the intellectual foundation for postwar management theory and practice. In fact, he won the Pulitzer Prize in 1978 for The Visible Hand, in which he takes on the classical theories of Adam Smith. There, Chandler concluded that the management of corporate giants had superseded market mechanisms as the defining element of economic activity.

Chandler, a Harvard University professor emeritus, has now turned his attention to the world of transistors and semiconductors, a field associated these days with a garage culture of brash startups. The result is Inventing the Electronic Century: The Epic Story of the Consumer Electronics and Computer Industries. Scale and scope are still what matter to Chandler, however, even as the world economy moves from what he calls the Industrial Century, the 20th, to the Electronic Century. While he analyzes the early days of Microsoft Corp. (MSFT), Apple Computer Inc. (AAPL), and others, he feels that it is today's computer giants that are at last poised to play out his theories in earnest. The book is rich in insights, but the attempt to apply lessons from consumer electronics to information technology ultimately seems strained.

As Chandler sees it, high-technology industries are defined by what he calls paths of learning. "In market economies the competitive strengths of industrial firms rest on learned organizational capabilities," he says. A company springs out of an individual's knowledge, which evolves into organizational knowledge consisting of three basic strengths: technical prowess, mainly research; functional knowledge such as production and marketing; and managerial expertise.

This knowledge base points the way to new businesses where a company can succeed. And it creates a barrier to entry that is especially intimidating to startups. Once a company has built its learning base to the point where it has become a core company in an industry, says Chandler, "entrepreneurial startups are rarely able to enter. Instead, the core companies' competitors are either foreign core companies or domestic core companies in other industries."

The thesis stands up well as Chandler tells the story of the consumer electronics industry. The U.S., Japan, and Europe were all home to pioneering companies that sprang from products as disparate as bicycle lamps, in the case of Matsushita Electric Industrial (MC); radio transmitters, in the case of RCA; and light bulbs, in the case of Philips (PHGZF). RCA, which was originally a subsidiary of General Electric Co. (GE), was initially the most prominent of the group, thanks largely to wartime contracts for radio-tube research and production and later to its advances in television technology. Matsushita did not advance its technology prowess much during the war, but made up for lost time afterward as it met booming Japanese consumer demand.

The U.S. and European companies were eventually undone by their own gaffes and the onslaught of the Japanese. RCA, for example, pared back research and development on consumer electronics as it tried to launch a computer business and diversified as far afield as car rental and frozen foods. Meanwhile, Matsushita, Sony Corp. (SNE), and other Japanese companies enhanced their mass-production skills and developed new products, some of them based on U.S. innovations such as the transistor and the video recorder. By the 1980s, the triumph of Japanese companies was inevitable.

When it comes to the computer industry, Chandler's thesis begins to fray at the seams. Here, what Chandler calls the path definer was just one company: IBM (IBM). Big Blue certainly fills the bill in terms of a company that built--and still possesses--an impressive set of technical, production, and managerial skills. But the competitors it faces today include Microsoft, Sun Microsystems (SUNW), and SAP (SAP), companies that didn't even exist three decades ago. What's more, these recent upstarts succeeded where other sizable U.S. insurgents, such as GE, RCA, and Honeywell (HON), failed in the decade before the birth of the PC.

Despite this, Chandler feels that large, more integrated Japanese companies, such as Fujitsu (FJTSY), Hitachi (HIT), and NEC (NIPNY) are likely to be more important than upstarts. The case for the Japanese is their resourcefulness--demonstrated by the revival of their sagging computer fortunes in the 1970s--a diversified product mix, and a single supporting nexus, as Chandler calls it. The nexus is the concentration of producers and their parts suppliers in just two metropolitan areas--Tokyo and Osaka--only a few hours apart by train.

While no one underestimates the Japanese, Chandler's reasoning will startle U.S. high-tech executives. Concentration is fine. But an economy and information-technology industry as large as America's can surely support more than one high-tech hotbed--and it does. Venture capital is also a bigger plus on the U.S. side than Chandler makes out, seeding the Microsofts of the future as well as innovative companies that wind up being purchased by the likes of Cisco Systems (CSCO) or IBM. In a fast-moving world where new technology replaces old at a furious pace, one of the more striking realizations from Chandler's book is that the U.S. high-tech industry was able to lose an RCA, indeed a whole sector, and barely miss a beat. Diversity, fueled by a robust business-formation process, goes a long way toward explaining why. Wallace is assistant managing editor for technology coverage.


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