We begin our discussion of the issues associated with this configuration by enumerating some of the advantages traditionally claimed for the Division- alized Form over the more integrated functional forms. Then, from soci- ety’s perspective, we suggest that the Divisionalized Form should logically be compared with another alternative, that of the divisions constituted as independent organizations. In this context, we reassess its advantages. Both these discussions consider only the administrative and economic con- sequences of divisionalization. Next we turn to the social consequences, specifically the problems of Divisionalized Form poses for social responsi- bility and centralization of power in society. All these discussions focus on the conglomerate form in the private sector—conglomerate because it is the purest form of divisionalization, where the issues are most pronounced, and private sector because, as we shall see toward the end of our discus- sion, the pure Divisionalized Form turns out to be ill-suited to other sec- tors. We close our discussion of the issues with a description of the Divi- sionalized Forms as the most vulnerable of the five configurations, a structure symbolically on the edge of a cliff.
1. The economic advantages of divisionalization
The Divisionalized Form offers four basic advantages over the functional structure with integrated operations. First, the Divisionalized Form en- courages efficient allocation of capital. Headquarters can choose where to put its money, and so can concentrate on its strongest markets, milking the surpluses of some divisions in favor of others. The functional structure has all its eggs in one strategic basket, so to speak. Second, by opening up opportunities to run individual businesses, the Divisionalized Form helps to train general managers. In contrast, the middle-line managers of func- tional structures are locked into dependent relationships with each other, which preclude individual responsibility and autonomy. Third, the Divi- sionalized Form spreads its risk across different markets. In contrast, one broken link in the operating chain of the functional structure brings the entire system to a grinding halt. Fourth, and perhaps most important, the Divisionalized Form is strategically responsive. The divisions can fine-tune their bureaucratic machines while the headquarters concentrates on its strategic portfolio. It can acquire new businesses and divest itself of older, ineffective ones.
But is the functional form the correct basis of comparison? Is it the real alternative to the Divisionalized Form? It is, if one wishes to compare diversified with nondiversified organizations. Strategic diversification, because it leads to structural divisionalization, encourages the efficient allocation of capital within the organization; it trains general managers, reduces risks, and increases strategic responsiveness. In other words, it solves many of the economic problems that arise in the Machine Bureau- cracy. From the perspective of the organization itself, diversification fol- lowed by divisionalization offers a number of distinct advantages over remaining nondiversified.
But once an organization is, diversified and then divisionalized, there is reason to change the basis of comparison. The real alternative, at least from society’s perspective, becomes the taking of a further step along the same path, to the point of eliminating the headquarters and allowing the divisions to function as independent organizations. Textron, as described by Wrigley, had thirty divisions operating in as many differ- ent businesses; Beatrice Foods, described in a 1976 Fortune magazine arti- cle, had 397. The issue is whether either of these corporations was more efficient than thirty or 397 separate corporations. In effect, the perspective shifts from that of the organization to that of society. In this context, we can reconsider the four advantages discussed above.
In the divisionalized organization, headquarters allocates the capital resources among the thirty or 397 divisions. In the case of thirty or 397 independent corporations, the capital markets do the job instead. Which does it better? Two studies suggest that the answer is not a simple one.
Williamson (1975) argues that the Divisionalized Form does the better job. In fact, he describes it as the administrative response to inefficiencies in the capital markets—to idiosyncratic knowledge, opportunistic behav- iors, and the like. By virtue of their elaborate performance control systems and their personal contacts, the headquarters managers are better able than the investors to inform themselves of the potential of different busi- nesses—at least, a limited number of businesses. Moreover, the headquar- ters managers are able to transfer capital between the divisions more quick- ly and flexibly than can be equivalent market mechanisms. So the Divisionalized Form has “mitigated capital market failures by transferring functions traditionally imputed to the capital market to the firm instead” (p. 136).
Williamson’s arguments may, in fact, explain why some conglomer- ate firms have been able to survive and prosper in the economic system. But Moyer in a 1970 paper suggests that these advantages come at a price, specifically that conglomeration—especially by acquisition, the most com- mon way to achieve it—has proven more costly and, in some ways, less flexible than the market mechanisms:
An acquiring firm normally pays a 15% premium above the market price of the firm to be acquired in order to consummate a merger. Completely diversi- fied mutual funds can be purchased for a selling charge of 7-9% in the case of “load” funds Furthermore, an individual stockholder can diversify his own portfolio with brokerage costs averaging only 1.5% to 3.5% of the value of the stock purchased. . . .
Because conglomerate firms have not been required in the past to pub- lish earnings for wholly owned divisions or subsidiaries the stockholder is not in a position to make decisions as to whether subsidiaries which man- agement has seen fit to purchase are enhancing his earning power. An indi- vidually diversified portfolio has substantially more flexibility than a con- glomerate portfolio. The individual can buy and sell with a minimum of effort depending on the performance of individual stocks. It is a different and more involved matter for a conglomerate to decide to divest itself of one or more of its subsidiaries. (p. 22)
Moyer believes that conglomeration denies the shareholder one of his few remaining prerogatives: the choice of an industry—and a risk level—in which to put his capital. The choice among stocks of different conglomer- ate firms amounts to the choice among given portfolios—Beatrice Foods instead of Dannon Yogurt.
On the issue of management development, the question becomes whether the division managers receive better training and experience than they would as company presidents. The Divisionalized Form is able to put on training courses and to rotate its managers to vary their experiences; the independent firm is limited in these respects. But if, as the proponents of divisionalization claim, autonomy is the key to management development, then presumably, the more autonomy the better. The division managers have a headquarters to lean on—and to be leaned on by. In Textron, “The price of autonomy is plan achievement. If a division cannot for one reason or another meet its goals, it is subject to close and detailed supervision “
(Wrigley, 1970:V-91). In contrast, the company president is on his own, to make his own mistakes and learn from them.
On the third issue, of risk, the argument from the divisionalized perspective is that the independent organization is vulnerable during peri- ods of internal crisis or economic slump; conglomeration provides it with the support to see it through such periods. The counterargument is that divisionalization may conceal bankruptcies, that ailing divisions are some- times supported longer than necessary, whereas the market bankrupts the independent firm and is done with it. Another point, this one from the perspective of the organization itself, is that just as the Divisionalized Form spreads its risk, so too does it spread the consequences of that risk. A single division cannot go bankrupt; the whole organization is legally re- sponsible for its debts. So a massive enough problem in one division—say, an enormous increase in the price of nuclear fuel a division has committed itself to buy in large quantities—can siphon off the resources of the healthy divisions and even bankrupt the whole organization. Loose coupling turns out to be riskier than no coupling!
Finally, there is the issue of strategic responsiveness. The loosely coupled Divisionalized Form may be more responsive than the tightly coupled functional form. But the question is, What price even loose cou- pling? In other words, what effect does conglomeration have on strategic responsiveness? The control system of the Divisionalized Form—which keeps that carrot just the right distance in front of the divisional manag- ers—encourages them to strive for better and better financial performance. At the same time, however, it impedes their ability to innovate. “Textron’s management has . . . learned that developing new inventions is not one of its strong points” (quoted in Wrigley, 1970:V-89). Bower explains why:
. . . the risks to the division manager of a major innovation can be consider- able if he is measured on short-run, year-to-year, earnings performance. The result is a tendency to avoid big risky bets, and the concomitant phenomenon that major new developments are, with few exceptions, made outside the major firms in the industry. Those exceptions tend to be single-product com- panies whose top managements are committed to true product leadership: Bell Laboratories, IBM, Xerox, and Polaroid. These are the top managements that can make major strategic moves for their whole company. Instead, the diversified companies give us a steady diet of small incremental change. (1970:194)
Innovation requires entrepreneurship, and entrepreneurship does not thrive under standardized external control. The entrepreneur takes his own risks to earn his own rewards. No control system managed from a headquarters can substitute for that kind of motivation. In fact, many entrepreneurs set up their own businesses to escape bureaucratic controls, the kind Textron’s president described to Wrigley: “Anything out of rou-tine must be analyzed and justified”; he and the chairman “are in more frequent contact with any division that has something especially big in the works” (p. V-90). Such procedures may avert risk, but they also avert the benefits of risk—true innovation as opposed to “small incremental change.”
Thus, the independent firm appears to be more strategically respon- sive than the corporate divisions, although perhaps less motivated to achieve consistently high economic performance. Indeed, many division- alized corporations depend on these firms for their strategic responsive- ness, since they diversify not by innovating themselves but by acquiring the innovative results of independent entrepreneurs.
2. The contribution of headquarters
To assess the effectiveness of conglomeration, it is necessary to assess what actual contribution the headquarters makes to the divisions. Since the headquarters function of control is supposed to be performed by the board of directors of the independent firm, the question becomes, What does a headquarters offer to the division that an independent board of directors does not?
One thing that neither the headquarters managers nor the board of directors can offer is the management of the individual business. Both are involved with it only on a part-time basis.3 The management of it is, there- fore, logically left to its full-time managers—they have the required time and information. In fact, one issue that faces the Divisionalized Form more than an independent business, because of the closer links between head- quarters and divisional managers, is the tendency to forget this point. A strong set of forces encourages the headquarters managers to usurp divi- sional powers, to centralize certain product-market decisions at headquar- ters and so defeat the purpose of divisionalization. Headquarters manag- ers may believe they can do better; they may be tempted to eliminate duplication (one advertising department instead of 397); they may simply enjoy exercising the power that is potentially theirs; or they may be lured by new administrative techniques. An enthusiastic technostructure or con- sulting firm may oversell a sophisticated MIS or a system built on the principle that product-market decisions can be made according to data on market share or product life cycle.
The trouble with many of these systems is that they give the illusion of knowledge without giving the knowledge itself. As we noted earlier, a good deal of the information needed for formulating strategies is soft and speculative—bits and pieces of impression, rumor, and such that never get documented or quantified. What the MIS carries back to headquarters are abstracted, aggregated generalizations. But no business can be understood solely from reports on market share, product life cycle, and the like. Such understanding requires soft information that inevitably remains behind in the divisions, whose managers are in personal touch with the specific situations. Even if the MIS could bring back the right information—or if the headquarters managers tried to use the telephone to get it verbally—they would lack the time to absorb it. Lack of time to understand many busi- nesses is precisely the reason why organizations are divisionalized in the first place, to give each business the undivided attention of one manager and his unit. So the high-speed transmission lines only lure some head- quarters managers into making decisions better left in the divisions. As one “disgruntled” British admiral commented after the Suez operation of 1956, “Nelson would never have won a single victory if there’d been a Telex” (quoted in Jay, 1970:79). Thus, one function of the headquarters managers of the conglomerate diversified corporation is not to manage the divisions. The wise ones know what they cannot know.
Among the functions headquarters managers do perform are the es- tablishment of objectives for the divisions, the monitoring of their perfor- mance in terms of these objectives (an appropriate use for the MIS), the maintenance of limited personal contacts with division managers, and the approval of the major capital expenditures of the divisions. Interestingly, these are also the responsibilities of the board of directors, at least in theory. In practice, however, many boards—notably those of widely held corporations—do these things ineffectively, leaving management carte blanche to do what it likes. Here, then, we seem to have a major advantage of the the Divisionalized Form. It exists as an administrative arrangement to overcome another major weakness of the free-market system, the inef- fective board. With the attention the headquarters pays to its formal and personal control systems, it induces divisional managers to strive for better and better financial results.
There is a catch in this argument, however, for conglomerate diversi- fication often serves both to diffuse stock ownership and to render the corporation more difficult to understand and control by its board. For one thing, as we saw earlier, diversified corporations are typically large ones and so typically widely held and difficult to understand in any event. For another, the more businesses an organization operates, the harder it is for part-time directors to know what is going on. And finally, as Moyer notes, one common effect of conglomerate acquisition is to increase the number of shareholders, and so to make the corporation more widely held. Thus, the Divisionalized Form in some sense only resolves a problem of its own making. Had the corporation remained in one business, it may have been more narrowly held and easier to understand, and so its directors could have performed their functions more effectively. Diversification helped create the problem that divisionalization solved. Indeed, it is ironic that many a divisionalized corporation that does such an effective job of monitoring the performance of its own divisions is itself so poorly monitored by its board of directors.
A main purpose of this monitoring is to flag problems and correct them before they emerge as full-fledged crises. A well-known weakness of the independent corporation is that top management can pull the wool over the eyes of its directors, camouflaging serious problems. That is hard- er to do in the divisionalized corporation, with its persistent managers at headquarters. But camouflaging is hardly unknown in the Divisionalized Form either, and for the same reason—the detailed information rests with the full-time managers of each business, not with those who are supposed to control them on a part-time basis. The following story, told by an as- sistant controller at one headquarters, illustrates this clearly:
Our top management likes to make all the major decisions. They think they do, but I’ve just seen one case where a division beat them.
I received for editing a request from the division for a large chimney. I couldn’t see what anyone could do with just a chimney, so I flew out for a visit. They’ve built and equipped a whole plant on plant expense orders. The chimney is the only indivisible item that exceeded the $50,000 limit we put on the expense orders.
Apparently they learned informally that a new plant wouldn’t be favor- ably received, so they built the damn thing. I don’t know exactly what I’m going to say. (quoted in Bower, 1970:189)
What happens when a problem does get flagged? What can head- quarters do about it that a board of directors could not? The chairman of Textron told a meeting of the New York Society of Security Analysts, in reference to the headquarters vice-presidents who oversee the divisions, that “it is not too difficult to coordinate five companies that are well run” (quoted in Wrigley, 1970:V-78). True enough. But what about five that are badly run? What can a staff of thirty administrators at headquarters really do to correct problems in thirty operating divisions? The natural tendency to tighten the control screws does not usually help once the problem has manifested itself, nor does exercising close surveillance. As noted earlier, the headquarters managers cannot manage the divisions. Essentially, that leaves them with two alternatives. They can replace the division manager, or they can divest the corporation of the division. Of course, the board of directors can also change the management. Indeed, that seems to be its only real prerogative; the management does everything else. So the ques- tion becomes, Who can better select the manager of a business, a head- quarters or a board of directors? And the answer to that question is not clear. A headquarters can move faster, and it has a pool of managers from other divisions to draw from. But it has to be thinking about the managers of thirty or 397 divisions from time to time, whereas the board of directors need worry about only one. As for divestment, that merely puts the prob- lem in somebody else’s lap; from society’s perspective, it does not solve it (unless, of course, conglomeration caused the problem in the first place!). On balance, the case for one headquarters versus a set of separate boards of directors appears to be mixed. It should come as no surprise that one study found that corporations with “controlled diversity” had better profit than those with conglomerate diversity (Rumelt, 1974). Controlled diversity means interdependence among the divisions, which calls for an intermediate, or impure, form of divisionalization, with some critical func-tions concentrated at headquarters.
Pure divisionalization remedies certain inefficiencies in the capital market, but it introduces new ones of its own; it trains general managers, but then gives them less autonomy than does the independent business; it spreads its risks, but it also spreads the consequences of those risks; it protects vulnerable operations during economic slumps, including some that later prove not to have been worth protecting; its control systems encourage the steady improvement of financial performance yet dis- courage true entrepreneurial innovation; its headquarters does a better job of monitoring business performance than does the board of the wide- ly held corporation, but its inherent diversification is one of the causes of corporations being widely held and boards being ill-informed in the first place; and in the final analysis, it can do little more than a board of directors to correct the fundamental problems in a business—ultimately, both are reduced to changing the management. Overall, the pure Divi- sionalized Form (that is, the conglomerate form) may offer some advan- tages over a weak system of boards of directors and inefficient capital markets; but most of those advantages would probably disappear if cer- tain problems in capital markets and boards were rectified. And there is reason to argue that society would be better off trying to correct fundamen- tal inefficiencies in its economic system rather than encouraging private administrative arrangements to circumvent them. In fact, as we now turn from the administrative and economic consequences of the Divisionalized Form to its social ones, we shall see two additional reasons to support this conclusion, one related to the social responsibility of the Divisionalized Form, the other to its tendency to concentrate power in society.
3. The social performance of the performance control system
The performance control system of the Divisionalized Form is one of its fundamental design parameters and the chief source of its economic effi- ciency. Yet this system also produces one of its most serious social consequences.
The Divisionalized Form requires that headquarters control the divi-sions primarily by quantitative performance criteria, and that typically means financial ones—profit, sales growth, return on investment, and the like. The problem is that these performance measures become virtual ob- sessions, driving out goals that cannot be measured—product quality, pride in work, customers well served, an environment protected or beau- tified. In effect, the economic goals drive out the social ones. “We, in Textron, worship the god of Net Worth” (quoted in Wrigley, 1970:V-86). That would pose no problems if the social and economic conse- quences of decisions could easily be separated. Governments would look
after the former, corporations the latter. But the fact is that the two are intertwined; every strategic decision of the large corporation involves so- cial as well as economic consequences. As a result, the control system of the Divisionalized Form drives it to act, at best socially unresponsively, at worst socially irresponsibly. Forced to concentrate on the economic conse- quences of his decisions, the division manager comes to ignore their social consequences. And it should be remembered that the specific decisions of the divisionalized corporation—those with social impact—are controlled by the managers in the divisions, not those at headquarters. Thus, Bower finds that “the best record in the race relations area are those of single- product [nondivisionalized] companies whose strong top managements are deeply involved in the business” (1970:193).
Robert Ackerman (1975), in a study carried out at the Harvard Busi- ness School, tested the proposition that even though business leaders “would like to avoid doing what they believe to be irresponsible” (p. 4), the difficulty their firms “were having in satisfying their social critics might be precisely in the organizational innovations that had permitted them to cope effectively with diversification and competitive conditions” (p. vii). Ackerman found that the benefits of social responsiveness—such as “a rosier public image . . . pride among managers .. . an attractive posture for recruiting on campus” (p. 55)—cannot easily be measured. “From the accountant’s point of view, they have unfortunate characteristics of being largely intangible, unassignable to the costs of organizational units creating them” (pp. 55-56). In other words, these criteria cannot be plugged into the performance control system. The result is that:
. . . the financial reporting system may actually inhibit social responsiveness. By focusing on economic performance, even with appropriate safeguards to protect against sacrificing long-term benefits, such a system directs energy and resources to achieving results measured in financial terms. It is the only game in town, so to speak, at least the only one with an official scorecard. (p. 56)
Headquarters managers, concerned about public relations and corpo- rate liability, are tempted to intervene directly in the divisions’ responses to new social issues. But they are discouraged by the Divisionalized Form’s strict division of labor; divisional autonomy requires no headquarters med- dling in specific decisions. As long as the screws of the performance con- trol system are not turned too tight, the division manager retains some discretion to consider the social consequences of his actions. But, as we saw earlier, the trend in the divisionalized corporation is the other way, to the imitation of the ITT system of tight controls. The manager who must send back a flash report to headquarters on the tenth day of every month can hardly worry about the results these reports do not measure. He keeps his attention firmly fixed on financial performance.
When the screws are turned really tight, the division manager intent on achieving the standards may have no choice but to act irresponsibly. Bower cites the well-known example of the General Electric price-fixing case of 1962:
The corporate management of G.E. required its executives to sign the so- called “directive 20.5” which explicitly forbade price fixing or any other vio- lation of the antitrust laws. But a very severely managed system of reward and punishment that demanded yearly improvements in earnings, return, and market share, applied indiscriminately to all divisions, yielded a situation which was—at the very least—conducive to collusion in the oligopolistic and mature electric equipment markets. (1970:193)
The headquarters managers may try to wash their hands of such divisional wrongdoing, proclaiming their ignorance of it, as did Ralph Cordiner, president of General Electric at the time. But they must accept responsibility for designing and exploiting the structure that evoked the behavior in question. Thus, we conclude, with Bower, that “while the planning process of the diversified [and divisionalized] firm may be highly efficient,” at least in the strict economic sense, it may also tend to make the firm “socially irresponsible” (p. 193).
4. The problems of the concentration of power
Earlier we discussed the relationship between size and the Divisionalized Form, concluding that not only do large organizations tend to divisionalize but also that divisionalization encourages small organizations to grow large, and large organizations to grow larger. The Fortune 500 would count few billion-dollar corporations among its ranks if it were not for the devel- opment of the Divisionalized Form.
From society’s point of view, we must ask, What price bigness? Clear- ly there are potential economic costs to bigness, notably the threat to the competitive market. In The New Industrial State, John Kenneth Galbraith (1967) develops the theme that giant corporations use their market power, coupled with their planning and marketing techniques, to subvert com- petitive conditions. Galbraith’s points have been repeatedly attacked by the more conservative economists, but it seems difficult to deny that sheer size can affect competition—for example, through the ability to use mas- sive advertising expenditure to restrict entry to markets. In the case of conglomerate diversification, there is the added danger of what is known as “reciprocity”—”I buy from you if you buy from me” deals between corporations.
But the social costs of bigness may be the most serious ones. For one thing, big means bureaucratic. As noted in Hypothesis 5, the larger an organization, the more formalized its behavior. Moreover, in the case of the Divisionalized Form, as noted earlier in this chapter, the performance control system drives the divisions to be more bureaucratic than they would be as independent corporations. The presence of a headquarters— an agency of external control—also makes them more centralized. So the Divisionalized Form becomes a force for formalization and centralization— in other words, for machine bureaucratization—in a society, as noted in Chapter 9, already burdened with too many such structures.
Moreover, there are forces in the Divisionalized Form that drive it to centralize power not only at the divisional level but also at the headquar- ters level. In the case of the giant corporation, this results in the con- centrating of enormous amounts of power in very few hands.
One of these forces for headquarters centralization, discussed a few pages back, is the illusion that the MIS and other techniques give of provid- ing the information needed to make effective business strategies. (Indeed, should that not prove an illusion, the danger of centralization would be far more serious.) Another force for centralization is the very fact that the divisions are coupled together in a single legal unit under a single name. As noted earlier, no single division can go bankrupt; nor can it keep its bad publicity to itself. It shares its mistakes with its sister divisions, in the name of the corporation. No matter how loosely coupled the system, the whole is liable for the errors of any of the parts. So there are pressures on the headquarters to involve itself in specific divisional decisions—for example, to review long-term contracts that could later drain corporate resources, and to oversee social behaviors that could lead to bad publicity. In fact, its control system, by encouraging socially unresponsive or irresponsible be- havior, has brought the divisionalized corporation more and more bad publicity, which pushes it to centralize more and more power at headquar- ters in order to protect itself. In some sense, the giant corporation seems to have a choice between social irresponsibility and power centralization.
Another force for centralization is captured in Lord Acton’s famous dictum, “Power tends to corrupt; absolute power corrupts absolutely.” With strong chains of authority below and diffused shareholders above, the managers at the headquarters of the giant corporations have enormous amounts of potential power. This raises pressures to centralize for the sake of centralization. Market forces no doubt mitigate these tendencies, dis-couraging the use of overcentralized structures. But as noted earlier, the bigger the corporation, the less it tends to be subject to market forces.
So far we have seen that divisionalization encourages a concentration of power at the divisional and then at the headquarters level. Paradox- ically, the concentration of power within the corporation also leads to conglomeration, divisionalization, and the concentration of power in spheres outside the corporation. Unions federate and governments add agencies to establish countervailing powers—ones to match those of the corporation. Government is, in fact, drawn to intervene directly in the affairs of the corporation because of the very issues we have been discuss- ing—the concentration of too much power in too few hands; power exer- cised free of shareholder, societal, and sometimes even market control; and the tendency toward unresponsive or irresponsible social behavior. Cit- izens who question the legitimacy of the power base of the giant corpora- tion naturally look to the government to intervene.
And it is the supreme irony that the very arguments used in favor of the Divisionalized Form suggest the way to government intervention. Con- sider Williamson’s key point in this regard, that the administrative ar- rangements are efficient while the capital markets are not. Why should the government worry about interfering with markets that do not work effi- ciently? And if the administrative arrangements work as well as William- son claims, why should government not use them too? If Beatrice Foods really can control 397 divisions, what is to stop Washington from believing that it can control 397 Beatrices? Using the same systems. With a public calling for more and more control of corporate behavior, and with Lord Acton’s dictum ever present, what will stop government administrators from being lured by the illusion that an MIS can provide the information they need to control the corporation—whether through nationalization or national planning?
Of course, like the corporation, so too would governments be driven to favor economic goals over social ones, as a result of the nature of the control system they would have to use. This means that government con- trol, while perhaps legitimizing the activities, of the corporation, would not solve the fundamental social problems raised by divisionalization and would, in fact, aggravate that of the concentration of power in society. In general, the pure Divisionalized Form does not work effectively outside the private sector. This despite widespread attempts to use it—in school systems, universities, hospitals, government corporations—indeed, in all of them together in one giant public-sector divisionalized monolith. One problem is that government and sometimes other institutions cannot divest themselves of divisions, or at least, the realities of power are that they seldom do. So there is no vehicle for organizational renewal. Another problem in government is that its civil-service regulations on ap- pointments interfere with the concept of managerial responsibility: “If a superior is to have complete confidence in his subordinates, he must have some measure of control over who his subordinates are. He must have a degree of freedom in their selection, their discipline, and if necessary their transfer or dismissal. The federal civil service system, however, places restrictions on such freedom” (Worthy, 1959:113).
But the most serious problem remains that of measurement: The goals governments and most institutions must plug into the performance control system—basically social goals—do not lend themselves to measure- ment. And without measurement, the pure Divisionalized Form cannot work. Nothing stops government and institutions from establishing mar- ket-based divisions. But lacking adequate performance measures, they must find other means to control these divisions (or force in artificial mea- sures that fail to capture the spirit of the social goals or that ignore them entirely in favor of economic goals). One is socialization—the appointment of managers who believe in the social goals in question. But that can go only so far, and pressures arise to use other means of control. The obvious ones are direct supervision and standardization of work—the issuing of direct orders and general rules. But both damage divisional autonomy. So the choices facing the government—and unions, multiversities, and other federated institutions that try to use the Divisionalized Form in the face of nonquantifiable goals—are to forget control beyond the appointment of socialized managers, to control machine bureaucratically, or to force in divisionalized control by the imposition of artificial performance standards.
Examples abound of all three. The press regularly reports on govern- ment departments that have run out of control. Perhaps more common is the case of machine bureaucratic control, of government departments that lack the autonomy they need to act because of the plethora of blanket rules governments impose on all of their departments. And so, too, do examples get reported of artificial performance controls, perhaps the best one being Frank’s (1958-59) description of the system used by the Soviet government to regulate the performance of its factories. Standards abounded: type, quantity, quality, and mix of production; amount of materials and labor used; wages paid; production norms for workers to achieve; special cam- paign goals; and many more. The standards were so tight and often contra- dictory that the managers on the receiving end had no choice but to act irresponsibly, just as do division managers in America who are over- controlled. They lied about their factories’ needs; they stockpiled materials; they complied with the letter but not the spirit of the standards—for exam- ple, by reducing product quality (which could not easily be measured); they hired the tolkach, the influence peddler, to make deals outside the control system.
In the final analysis, perhaps the best that can be done by govern- ments and institutions intent on using some form of divisionalization is to appoint managers and other employees who believe in the social goals to be pursued and then to set up the mechanism for some kind of periodic personal review of their progress (requiring, in effect, the creation of some kind of independent board of directors).
5. In conclusion: a structure at the edge of a cliff
Our discussion has led to a “damned if you do, damned if you don’t” conclusion. The pure (conglomerate) Divisionalized Form emerges as a configuration symbolically perched on the edge of the cliff, at the end of a long path. Ahead, it is one step away from disintegration—breaking up into separate organizations on the rocks below. Behind it is the way back to a more stable integration, perhaps a hybrid structure with Machine Bu- reaucracy at some intermediate spot along the path. And ever hovering above is the eagle, attracted by its position on the edge of the cliff and waiting for the chance to pull the Divisionalized Form up to more cen- tralized social control, on another, perhaps more dangerous, cliff. The edge of the cliff is an uncomfortable place to be—maybe even a temporary one that must inevitably lead to disintegration on the rocks below, a trip to that cliff above, or a return to a safer resting place on the path behind. In other words, we conclude that the Divisionalized Form has the narrowest range of all the configurations. It has no real environment of its own; at best, it piggybacks on the Machine Bureaucracy in the simple, stable environment, and therefore always feels drawn back to that inte- grated structural form. The pure Divisionalized Form may prove inher- ently unstable, in a social context a legitimate tendency but not a legiti- mate structure. The economic advantages it offers over independent organizations reflect fundamental inefficiencies in capital markets and stockholder control systems that should themselves be corrected. And it creates fundamental social problems. Perhaps there is justification only in its intermediate forms—by-product or related-product. It is, after all, the interdependencies among its activities that give an organization its justifi- cation, its reason to “organize.” Perhaps the pure Divisionalized Form, with so few of these interdependencies, really is an “ideal type”—one to be approached but never reached.
Source: Mintzberg Henry (1992), Structure in Fives: Designing Effective Organizations, Pearson; 1st edition.