The multidivisional structure: Optimum Divisionalization

The M-form structure is thoroughly corrupted when the general management involves itself in the operating affairs of the divisions in an extensive and continuing way. The separation between strategic and operating issues is sacrificed in the process; the indicated internalization of capital market functions with net beneficial effects can scarcely be claimed. Accountability is seriously compromised; a substitution of enterprise expansion for profitability goals predictably obtains.

Effective divisionalization thus requires the general management to maintain an appropriate distance. Moreover, this holds for the support staff on which the general management relies for internal auditing and management consulting services. Overinvolvement upsets the rational allocation of responsibilities between short-run operating matters and longer- run planning and resource allocation activities. What March and Simon refer to as Gresham’s Law of Planning — to wit, “Daily routine drives out planning” (1958, p. 185) — takes effect when operating and strategic functions are mixed. While the arguments here are familiar and their implications for organizational design reasonably clear, maintaining a separation between these two activities apparently poses severe strain on some managements. A desire to be comprehensively involved is evidently difficult to resist.

Optimum divisionalization thus involves: (1) the identification of sepa- rable economic activities within the firm; (2) according quasi-autonomous standing (usually of a profit center nature) to each; (3) monitoring the efficiency performance of each division; (4) awarding incentives; (5) allo- cating cash flows to high yield uses; and (6) performing strategic planning (diversification, acquisition, and related activities) in other respects. The M- form structure is one that combines the divisionalization concept with an internal control and strategic decision-making capability. The general management of the M-form usually requires the support of a specialized staff to discharge these functions effectively. It bears repeating, however, that care must be exercise lest the general management and its staff become overinvolved in operating matters and fail to perform the high- level planning and control functions on which the M-form enterprise relies for its continuing success.

Whether and how to divisionalize depends on firm size, functional separability, and the state of information technology (Emery, 1969). Also, it should be pointed out that the reference here to optimum is used in comparative institutional terms. As between otherwise comparable unitary or holding company forms of organization, the M-form structure would appear to possess significant advantages. It cannot, however, be established on the basis of the argument advanced here that the M-form structure is the best of all conceivable structures. Organizational innovations may even now be in the making that will obsolete it in part — but which academics will identify as noteworthy only after several years. A keener sensitivity to organizational innovations and their economic importance than has existed in the past should nevertheless help to avoid the long recognition lags that have transpired before the significance of the M-form structure and its conglomerate variant became apparent.

Lest, however, these remarks lead to an underevaluation of the merits of the M-form structure, I hasten to add that, while evolutionary change is to be expected, the hierarchical decomposition principles on which the M-form is based are very robust. In his discussion of adaptive corporate organization, Beer observes: “The notion of hierarchy is given in cybernetics as a necessary structural attribute of any viable organism. This is not surprising to us, although its theoretical basis is profound, because all viable systems do in fact exhibit hierarchical organizations” (1969, p. 399). Moreover, not only does Simon’s review of the properties of complex biological, physical, and social systems reaffirm this, but he emphasizes that hierarchies commonly factor problems in such a way that “higher frequency dynamics are associated with the subsystems, the lower frequency dynamics with the larger systems, . . . [and] intra-component linkages are generally stronger than intercomponent linkages’’ (1962, p. 477). Hierarchical systems of this sort may be referred to as near-decomposable (Simon, 1962). It is not merely fortuitous that the M-form structure factors problems very much in this way.

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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