Historical Development of Organizational Structure
From Unitary to Multi-Divisional Structures
Chandler (1962, 1977) and Williamson (1975, 1985) argue that when firms
get beyond a certain point, they shift from a unitary to multi-divisional
structure. This structure has a general corporate office and several product-based
or regional-based divisions, each with functional departments (Scott p.
271). It first appeared after World War I independently in a number of companies.
Chandler describes four phases of growth for American industry. The first
was after the civil war and was a time of larger-than-life entrepreneurs
who expanded largely through vertical integration. The second phase was
the creation of professional managers who developed methods to manage larger
and larger enterprises (the main example being the railroads). Phase three
(from 1900-WW1) included the filling out of existing product lines and diversification
into related fields. In the fourth phase (after WW1) some major companies
reorganized into a more decentralized "M-form" structure which
clearly separated strategic from operational decision-making. This was more
advantageous when firms starting aquiring products and services unrelated
to their core businesses. Thus Chandler argued that a firm's structure should
be suited to its strategy (Scott p. 273). The multi-division form frees
top management from the day-to-day operations and allows them to concentrate
on market positioning and resource allocation among divisions. The form
is particularily well suited to multi-national corporations.
Chandler's predictions of the rise of the m-form were supported in several
empirical studies (see Scott p. 274). The m-form was adopted more in industries
with product-related strategies than in vertically integrated firms. Williamson
(1975) also points out that Chandler's historical account is consistent
with transaction costs framework. The m-form is utilized to simplify the
information-processing and decision-making required when diversification
increases operational complexity.
In the m-form, the general office is responsible for strategic decisions,
and the devisions responsible for operational decisions. Strategic decisions
involve a choice of domain (Scott p. 275). The individual divisions, often
known as SBU's (strategic business units) or profit centers, operate as
an interface between the market and a hierarchy. The more the central office
is divorced from the divisions, the more they tend to rely upon financial
measures to evaluate performance.
A further extension of the m-form is the conglomerate, a firm with unrelated
divisions that span industry groups. Each division is treated as a profit
center, and the general office functions as a internal capital market. Futher
studies (such as Peters and Waterman, 1982) suggest that this form can be
problematic at times. But these have occured largely to help firms deal
with market uncertainties and as a response to regulatory environments (Scott
p. 276).
From Single to Multiple Forms
Recently the notion that bigger is better is giving way to the realization
that other forms involving looser alliances or confederations may offer
some more flexible advantages. "Developments in information technologies
as well as the increasingly specialized nature of consumer markets has helped
to create conditions favoring more flexible production regimes" (Scott
p. 277). The newer "network" schemes are another way to organize
between markets and hierarchies (Powell, 1990).