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).