As noted, a major problem is posed for testing the M-form hypothesis in that, if all divisionalized firms are classified as M-form firms, without regard for the related internal decision-making and control apparatus, an overassignment to the M-form category will result. Some divisionalized firms are essentially holding companies, in that they lack the requisite control machinery, while others are only nominally divisionalized, with the general office maintaining extensive involvement in operating affairs. If indeed the M-form designation is to be reserved for those firms that combine the appropriate structural and internal operating attributes, information on both aspects is required.
The difficulty with this is threefold. First, information on internal operating procedures is less easy to come by than is that on divisionalization. Second, the appropriate degree of involvement by the general office in the affairs of the operating divisions varies with the nature of the factor or product market interdependencies that exist within the firm and thus need to be “harmonized.” Divisions that are involved in the exchange of intermediate products (vertical integration) typically face different control needs than those in which such internal, cross-divisional transactions are absent. Similarly, the requisite product market controls are more extensive if operating divisions produce competitive products than when, by reason of product diversification, such interdependencies are absent.
The third problem is that reaching the M-form structure may require the firm to pass through a transitional stage during which the “optimum’’ control relationship, expressed in equilibrium terms, is violated. An appreciation for the natural life cycle in the M-form enterprise is necessary if these transitional conditions are to be detected and an appropriate classification made.
Although experience with the scheme may disclose certain ambiguities, suggest better definitions, and reveal a need to devise still additional categories, it seems useful to get on with the assignment task and make the subsequent refinements. Surely enough is known about internal organization at this time to begin such an effort. The following classification scheme is accordingly proposed.
1. Unitary (U-form)
This is the traditional functionally organized enterprise. (It is still the appropriate structure in most small- to lower middle-sized firms. Some medium-sized firms, in which interconnections are especially rich, may continue to find this the appropriate structure.) A variant on this structure occasionally appears in which the enterprise is mainly of U-form character but where the firm has become diversified in slight degree and the incidental parts are given semi-autonomous standing. Unless such diversification accounts for at least a third of the firm’s value added, such functionally organized firms will be assigned to the U-form category.
2. Holding Company (H-form)
This is the divisionalized enterprise for which the requisite internal control apparatus has not been provided. The divisions are often affiliated with the parent company through a subsidiary relationship.
3. Multidivisional (M-form)
This is the divisionalized enterprise in which a separation of operating from strategic decision-making is provided and for which the requisite internal control apparatus has been assembled and is systematically employed.
Two subcategories should be distinguished: type Dj, which denotes a highly integrated M-form enterprise, possibly with differentiated but other- wise common final products; and type D2. which denotes the M-form enterprise with diversified final products or services. As between these two, a more extensive internal control apparatus to manage spillover effects is needed in the former.
4. Transitional Multidivisional (M’-Form)
This is the M-form enterprise that is in the process of adjustment. Organizational learning may be involved or newly acquired parts may not yet have been brought into a regular divisionalized relationship to the parent enterprise.
5. Corrupted Multidivisional (M-form)
The M-form enterprise is a multidivisional structure for which the requisite control apparatus has been provided but in which the general management has become extensively involved in operating affairs. The appropriate distance relation thus is missing, with the result that M-form performance, over the long-run, cannot reliably be expected.
6. Mixed (X-Form)
Conceivably a divisionalized enterprise will have a mixed form in which some divisions will be essentially of the holding company variety, others will be M-form, and still others will be under the close supervision of the general management. Whether a mixed form is apt to be viable over the long run is perhaps to be doubted. Some exceptions might, however, survive simply as a matter of chance. The X-form classification thus might be included for completeness purposes and as a reminder that organizational survival is jointly a function of rational and chance processes. Over the long pull the rational structures should thrive, but aberrant cases will appear and occasionally persist.
That the X-form lacks for rationality properties, however, is probably too strong. For example, a large U-form firm that enjoys monopoly power in its main market may wish to restrict the reinvestment of cash flows back into this market. At the same time it may discover attractive opportunities to invest some part of these funds in unrelated business activities. Diversification could follow, but not in sufficient degree to warrant disestablishment of the main market from central office control. The diversified parts of the business thus might each be given divisional standing, but the main business retained, for the most part, under its earlier control relationship. Only if the main business itself could be efficiently divided (through product differentiation, geographic territorialization, or other lines), which eventually it may, might divisionalization of this part of the firm’s activities be warranted.
Source: Williamson Oliver E. (1975), Markets and hierarchies: Analysis and antitrust implications, A Study in the Economics of Internal Organization, The Free Press.