Organizational Innovation: The Multidivisional Structure

1. General

Faced with the types of internal operating problems that emerge as the U- form enterprise increases in size and complexity, the DuPont Company, under the leadership of Pierre S. duPont, and General Motors, under Alfred P. Sloan, Jr., devised what Chandler refers to as the multidivisional (or M-form) structure in the early 1920’s. This organizational innovation involved substituting quasi-autonomous operating divisions (organized mainly along product, brand, or geographic lines) for the functional divisions of the U-form structure as the principal basis for dividing up the task and assigning responsibility. Inasmuch as each of these operating divisions is subsequently divided along functional lines (see Figure 6), one might characterize these operating divisions as scaled down, specialized U-form structures. Although this is a considerable oversimplification (for example, operating divisions may be further subdivided by product, geographic, or brand subdivisions before the final U-form structure appears), the observation has at least heuristic merit.

This simple change in the decomposition rules might not, by itself, appear to be all that significant. Indeed, for the reorganization to be fully effective really requires more. The peak coordinator’s office (shown in Figure 6 as the general office) also has to undergo transformation and an elite staff needs to be supplied to assist the general office in its strategic decision-making (including control) responsibilities. Chandler characterizes the reasons for the success of the multidivision form as (1966, pp. 382-383) :

The basic reason for its success was simply that it clearly removed the execu tives responsible for the destiny of the entire enterprise from the more routine operational activities, and so gave them the time, information, and even psycho- logical commitment for long-term planning and appraisal….

[The] new structure left the broad strategic decisions as to the allocation of existing resources and the acquisition of new ones in the hands of a top team of generalists. Relieved of operating duties and tactical decisions, a general executive was less likely to reflect the position of just one part of the whole.

More generally, the characteristics and advantages of the M-form innovation can be summarized in the following way (Williamson, 1970, pp.120121) :

  1. The responsibility for operating decisions is assigned to (essentially self-contained) operating divisions or quasifirms.
  2. The elite staff attached to the general office performs both advisory and auditing Both have the effect of securing greater control over operating division behavior.
  3. The general office is principally concerned with strategic decisions, involving planning, appraisal, and control, including the allocation of resources among the (competing) operating divisions.
  4. The separation of the general office from operations provides general office executives with the psychological commitment to be concerned with the overall performance of the organization rather than become absorbed in the affairs of the functional parts.
  5. The resulting structure displays both rationality and synergy: the whole is greater (more effective, more efficient) than the sum of the parts.

In relation to the U-form organization of the same activities, the M- form organization of the large, complex enterprise served both to economize on bounded rationality and attenuate opportunism. Operating decisions were no longer forced to the top but were resolved at the divisional level, which relieved the communication load. Strategic decisions were reserved for the general office, which reduced partisan political input into the resource allocation process. And the internal auditing and control techniques, which the general office had access to, served to overcome information impactedness conditions and permit fine tuning controls to be exercised over the operating parts.

Figure 6. Multidivision Form

2. An Illustration82

Suppose there are three activity stages: an early production stage, an intermediate stage in which production is completed, and a marketing stage. Assume that all products originate in a common first stage, that there are four distinct intermediate stage processes, and that there are five distinct final products. That there ought, under these circumstances, to be five divisions, one associated with each final product, is uncertain. For one thing, the economies of scale at the first stage may be sufficient to warrant that all production originate in a single, indecomposable plant. Second, if for some products economies of scale at the second stage are slight in relation to the size of the market, parallel divisionalization may be feasible. Third, even though products may be distinct, there may be interaction effects to consider. (For example, products may be complements.)

Consider the situation shown in Figure 7. Here Q refers to first stage activity, I refers to intermediate stage processing, P refers to the final product, and the subscript refers to the process (product) type, while the superscript (if any) denotes replication. The proposed divisions are shown by the dotted lines.

Figure 7

That it is generally inefficient for the early stage of a production process to transfer product to a later stage at a price that maximizes the profit of the early stage is well-known. Rather, in order to discourage the use of inefficient factor proportions in the later stages and avoid the restriction of production, product should be transferred at its marginal cost. But then the early stage production divisions cannot, under these circumstances, be evaluated in profit center terms. Rather, Q becomes a cost center and its performance is assessed in least cost rather than net revenue terms.

Plants  and  are assumed to be identical and produce a common product (designated and , respectively). Plant /2 produces two distinct products, P2 and P3, while plants /3 and /4 produce the distinct products P4 and P5, respectively. Products P4 and P5, while manufactured by separate processes, are assumed to be complements.

The rationale for the divisionalization shown is as follows: First, Q is split off as a cost center since, for the reasons given above, it cannot efficiently be operated as a profit center, while to assign it to one of the later stages would place unaffiliated stages at a disadvantage, and to combine several later stages leads to overaggregation (in that such aggregation impairs accountability with the result that internal control is sacrificed in the process) in relation to underlying “natural” decomposability conditions. Rules to insure efficient transactional relations between stages 1 and 2 are assumed to be feasible, whence the divisional standing accorded to Q.

A high degree of coordination between each intermediate stage and its corresponding marketing stage is assumed to exist and warrant the joining of each such pair of stages within a division. As indicated,  and  are replicated production facilities producing the common product P1. A territorial market is set up for each plant, with the result that  and  are both profit centers. Territorialization serves to mitigate interdivi- sional competition in the product market, but interdivisional “competition,” for performance comparison purposes, in other respects is possible.

Technological scale economies are assumed to be such that separate production facilities for P2 and P3 are uneconomical. Also, /2   is assumed to bear a sole source relation to both P2 and P3. Since to split /2 off as a separate division would require that it be operated as a cost center (given the sole source assumption) with the attendant difficulties that this poses, and as interstage coordination would be impaired in the process, a single profit center spanning /2, P2, and P3 is set up instead.

/3 and /4 are separate plants between which there is no direct exchange relationship. They supply products P4 and P5 respectively. These products are assumed to be complements, however, for which a joint marketing effort is warranted. The resulting profit center spans /3, /4, P4, and P5.

3. Diffusion 

Imitation of the M-form innovation was at first rather slow. For one thing, however obvious its superior properties may have been to the in- novators, others were naturally skeptical. As Brown puts it (1945, p. 295):

To enterprises that have grown complex within themselves, … the resort to |divisionalization] may appear portentious and (since few relinquish without hesitation the accustomed mode of life) uninviting… [ The] dissolution of [a firm’s] integrated state and the redistribution of responsibilities into multiple organization do present the aspect of a revolutionary rather than an evolutionary change.

Also in industries such as metal refining and forming, the divisionalized structure was not as easy to create as in industries where distinct product or brand lines were readily established. In others, administrative inertia appears to have been substantial. Up through the 1930’s, only a handful of other firms had accomplished the transformation (Chandler, Chap. 7). A number of firms, which by 1940 had reorganizational changes in the works postponed these with the onset of World War II. Since 1945, however, the divisionalization of large firms (many of them along M-form lines) has been extensive.

It is of some interest, moreover, to note that the multidivisional structure has more recently been adopted by large European firms. Franko reports that prior to 1968, most large European companies administered their domestic operations through U-form or holding company internal structures ( 1972, p. 342). With the advent of zero tariffs within the European Economic Community on January 1. 1968. and in the face of continuing penetration of European markets by American firms, however, large European firms have felt compelled to adapt ( Franko, 1972, p. 358). A significant number of these firms have been reorganized along multidivisional lines in the past several years.

Source: Williamson Oliver E. (1975), Markets and hierarchies: Analysis and antitrust implications, A Study in the Economics of Internal Organization, The Free Press.

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