Organization and Structure Of The Firm

Organization and Structure of the Firm

Introduction

Alfred Chandler's Strategy and Structure laid down the classical definition of strategic management: the determination of the basic long-term goals and objectives of an enterprise and the adoption of a course of action and the allocation of resources necessary for attaining these goals. In this view, an organization was hierarchical, triangular, and separated into divisions. It became known as the multidivisional form, or M-form, of organization. Chandler's book charted the rise of the M-form in the United States in the late 19th century. His thesis was that the expansion strategies followed by growing pan-American organizations created a need for a new configuration that could enable effective command and control across large territories where communication was imperfect. These ideas gave rise to the dictum that structure follows strategy.

Discussion

In more recent times, others questioned this belief, arguing that structure shapes strategy. Authors such as Pettigrew, Peters, and Waterman have suggested that the explicit or implicit structures, organizational boundaries, and limits dictated by historical processes, contexts, and cultures actually shape the development of strategic plans, choices, and directions. While it is clear that organizational structure and strategy are inextricably linked, it is now seen to be more important to focus on the fit between strategy and structural forms rather than the direction of the relationship between the two variables.

From U-Form to M-Form

Historically, companies were configured as a unitary whole, or U-form. As organizations grew, this whole tended to be divided into functional responsibilities (e.g., marketing, HRM, accounting). However, the weakness of the U-form became apparent as firms grew in size and complexity and attempted to adjust to increasing environmental diversity. Senior managers became overinvolved in routine matters. Functional managers saw their function as an end in itself. Coordination between increasingly stand-alone functional silos became more demanding and less fruitful.

Facing such problems, large U.S. companies like Sears Roebuck, Dupont, General Motors, and Jersey Standard moved to the M-form structure. They were divided into semiautonomous profit centers—later known as strategic business units—responsible for a stand-alone segment of a firm's operations, such as a particular product, brand, or national or regional market. In this structure, the new business managers were able to specialize in the operations of their particular competitive arena and engage in competitive strategy. This freed corporate managers at the center of the firm to focus on the overall strategic direction of the company, or corporate strategy. By the late 1960s, more than 80% of U.S. Fortune 500 companies were structured as M-forms, with similar trends developing in other industrialized countries.

The original companies adopting M-form structures were generally single-product firms. However, over the past 80 years, several factors combined to increase the product and market diversity of large companies. Companies faced limits to growth in their original product markets, particularly as antimonopoly legislation prevented large firms' taking over their competitors. Growing firms had significant levels of free capital, and managers tended to reinvest rather than return dividends to shareholders (which could be linked to ...