Knowledge, scale and power

Some books arrive on my desk for reasons of their own. I can’t remember how or why Alfred Chandler’s 2005 book, , reached me. But I am glad it did.

Its subtitle explains the purpose: “The remarkable story of the evolution of the modern chemical and pharmaceutical companies.” It is indeed a remarkable story, and one that prompts a few thoughts about industrial dynamics and economic policy.

The first fact to leap out is the venerable age of many of these companies (the book looks at industrial chemicals, petrochemicals and pharmaceuticals). They are of course the survivors, and thanks to consolidation in the relevant sectors have subsumed many businesses. Failures are always shorter-lived. Still, when the average age of listed companies is now 10-15 years, a 19th century creation is a rarity. But in chemicals there are many of them, while the roots of today’s big pharma companies date back 50 years.

The second is the importance of exogenous events. World wars, for example, had a decisive shape on the sectors covered, either through vastly increasing demand, or by shutting out imports from ‘enemy’ competitors, or by creating a new market via the creation of colonies.

A third striking point sounds obvious really but here goes. There is a tendency to think of high-tech in a narrow way. It’s computers and the web. It’s electricity, it’s steam. These are the General Purpose Technologies, which underpin innovation across the economy. However, basic scientific discovery and its technological implementation are high tech too, and what Robert Gordon has described as a ‘big wave’ develops. The chemicals and pharma industries rest on major scientific discovery, albeit giving way to decreasingly lie sky development as the years go by. Thus Du Pont established one of the first ever corporate R&D centres at the turn of the 20th century but downgraded its R&D function by the 1960s. So when thinking about the ‘big wave’ we are experiencing, it is important not to forget biotech, nanotechnology, robotics, materials science etc. It’s genomes and graphene as well as mobiles and broadband.

Chandler’s vast experience of business history (this book is a sequel to ) means he sets this particular industrial story in the context of an appreciation of the importance of organisation and management. These capabilities are essential for a successful strategy, he argues. A capable central management will embed the institutional and practical knowledge that turns a business into a long-lived sector leader. What he calls the ‘integrated learning base’ creates a path-dependency that – alongside scale – an insuperable barrier to entry. This theme of organisational capability creating knowledge that is too hard for others to copy is one has also emphasised. Anyway, Chandler’s combination of command of detail with this wider analytical perspective is illuminating.

I was surprised not to find any discussion of regulation as a barrier to entry, nor anti-trust policy. There is nothing about the FDA, or the combined lobbying power of the pharma giants and health insurance industry, while the FTC is mentioned just twice en passant. Perhaps I’m being too cynical, but the omission means that too much emphasis is placed on the wise strategic choices of these giants, as opposed to their luck and political skill. This is a bit odd given how much emphasis Chandler places on the importance of barriers to entry. Still, this book is an excellent overview and underlines the point that in this as in other industries, the only hope for successful entry by new firms is radical new science based innovation. Otherwise, the advantages of the incumbents are simply insuperable, even when they have reached the mimics of their own phase of innovation and rapid growth.

[amazon_image id=”0674032217″ link=”true” target=”_blank” size=”medium” ]Shaping the Industrial Century: The Remarkable Story of the Evolution of the Modern Chemical and Pharmaceutical Industries (Harvard Studies in Business History)[/amazon_image]