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Multidivisional Organizational Structure

Organizational Structure of Large Corporations

Effective management of any organization is a function of keeping track of the details. When the day was over, a profitable enterprise is one which can answer the questions of how much was produced, spent, sold, what kind of problems occurred along the way, and what the organization is doing to solve the problems in order to remain on the path toward profitability. While this list may appear overly simplistic, everything that a business does can be mapped along a path begins by purchasing raw materials and ends at selling a finished product at a significantly higher price. Whether the company sells paperclips, pomegranates, or purple SUV's, their purpose is to buy and sell at a profit while satisfying the needs of the consumer and working community which they serve.

During the last century, as businesses morphed from corner stores and family enterprises into global corporations, the structure utilized to maintain control of the details has also undergone a significant change. According to Chandler, "before 1850, very few businesses needed the services of a full time administrator or required a clearly defines administrative structure. Industrial enterprises were very small, in comparison to those today. And they were usually family affairs. The two or three men responsible for the destiny of a single enterprise handle all its basic activities. - economic, administrative, operational and entrepreneurial." (Chandler, p. 19) Keeping track of the details was a matter of sitting around the dinner table after the lights in the shop were turned off, and talking over the day's business triumphs and struggles. The family knew every aspect of the company's progress, and the key people also knew each other well, and could interact on a personal level which helped keep the entire enterprise accountable to their ultimate goals.

This level of interaction has become impossible in the modern corporate structure. Chandler's book shows how the seventy largest corporations in America have dealt with this single economic problem: the effective administration of an expanding business. The author effectively summarizes the history of the expansion of the nation's largest industries during the past hundred years like someone who is holding an orange in his hands and describing the texture of the peel. He then examines in depth the modern decentralized corporate structure as it was developed independently by four companies -- du Pont, General Motors, Standard Oil (New Jersey), and Sears, Roebuck.

Chandler's book offers accurate insight for maturing organizational managers. The questions of why some organizations act and seem so different from others are examined as he shows how large corporations struggled with organizing themselves as burgeoning growth taxed the administrative reach of the management team. Chandler tells us that during the Civil War era most American enterprises were managed by a superintendent, almost along the lines of an agrarian model, like a mechanized plantation. But with the coming of Ford Motor, Standard Oil, General Motors, DuPont, Sears, and other familiar names in America's business pantheon, the larger organizations could no longer rely on the superintendent, or owner - even if aided by able men - to operate on such a large scale, let alone build industrial empires.

The key in Chandler's analysis is that, like a Mbius loop, the strategy drives the structure while the structure in turn drives the strategy of an organization. The layering of management and the span of control become crucial to maintaining in touch with and in control over the details of business.

Delegating the day-to-day details of entire management functions became inevitable as the size of the organization grew beyond the oversight capabilities of a few men. As the evolution progressed, the existence of and need for various senior managements created a structure which included entirely autonomous divisions. Yet having the divisions mesh smoothly in a gear-work structure was still the key to running an effective profitable organization. Those businesses which solved these issues rose to industry leadership. The process and structure did not take shape overnight, but management wrestled with the intricacies of making their companies work efficiently and profitably while under the pressures of evolving workforces, and expanding enterprises.

As firms expand and/or diversify, they generally change their structures and evolve into a multidivisional (M-form) structure (Chandler, 1962; Hoskisson, 1987; Williamson, 1975). The M-form allows for improved firm efficiency as operating decisions are delegated to the newly created s divisions (Galbraith 1986; Williamson). While the firm's head office retains strategic decision-making responsibilities, the routine operational decisions are assigned to the various divisions that are directly involved in the numerous production and distribution activities.

Research indicates that such factors as firm size, prior performance, and firm strategy affect the speed at which structural change occurs (Hoskisson and Galbraith, 1985; Lamont et al., Williams et al., 1992.) from single site operation into multi-divisional operations. The growth of the organization then tends toward a parent - subsidiary operational structure in order to make each division responsible for their own operations.

Parent-subsidiary relationships have also been extensively researched over the years, and the central issue remains one of control which can be defined as "regulating the activities within an organization so that they are in accord with the expectations established in policies, plans and targets" [Child 1973: 117]. Under the hierarchy model which focuses on a top-down authority structure, control is primarily 'bureaucratic' (Baliga & Jaeger 1984]. The hierarchy model attempts to minimize lateral linkages between divisions or subsidiaries primarily because they create complexity over the increasing layers of bureaucratic controls.

The automobile industry has provided some cases for re-evaluating the benefits of a large hierarchy as an effective corporate structure. GM's decision to merge with Fisher Body in 1926 has been described as an effort to reduce uncertainty in, and therefore the costs of, its transactions with Fisher. GM's move was also seen as a way to require "site- specific investments" from Fisher [Williamson 1985] which increases the likelihood of integration. So the efficient solution was for GM to purchase Fisher; the relationship thus evolved from initial bilateral autonomous contracting, through bilateral dependency, to "unified governance" [Williamson 1985]. GM is a prototype for the organizational innovation referred to as multidivisional form, adopted after a decade of many such acquisitions to manage GM's large integrated operations and to remedy such problems endemic to large firms as "bounds on rationality... [and] manifestation of opportunism" [Williamson 1985].

As bureaucratic organizations grow, their effectiveness often becomes hindered by the very structure employed to reach the larger levels of organizational effectiveness.

Multiple levels of managerial oversight can defeat the purpose of detail management because so many different layers of oversight and control are "in the loop." While the 80's and 90's were decades which forces M-form corporations to reevaluate their behemoth hierarchical structures in the face of smaller, more effective global competitors, a third factor entered the marketplace which placed further strain on the M-form organization. During the last half decade, the dominate factors driving business organizational structure have changed from size of the organization to the speed at which companies develop new products, and bring them to market. The overall speed at which global competitiveness has changed the marketplace has place squarely on the shoulders of the multidivisional organization the task of adapting more quickly to changes. An innovation on the other side of the world, which just 20 years ago would not have affected the local market place for 2-5 years can affect significant shifts in consumer expectations and demand with a few clicks of a mouse.

In this new reality, businesses which continue to operate in a multilayered hierarchical authority structure are at a significant competitive disadvantage. The time factor required to communicate plans, goals, and operational boundaries by itself can rob a larger organization of the ability to respond proactively to market innovation, and remain at a competitive advantage. The organization therefore must be willing, as Chandler concluded, to allow their structure to conform to their strategies.

At the southern end of Lake Michigan, there is a mostly abandoned U.S. Steel plant. At one time, this monolithic emblem of American business success operated like its own country. This manufacturing complex was constructed complete with commuter transportation systems which brought thousands of workers from a 3 state radius. The Gary complex has its own road system, rail ways, and deep water freighter docks. The U.S.S. Gary complex smelted ore into steel during the pre and post war boom of the late 20th century. Beams for factories, bridges, rail roads, and automobiles were delivered to the entire country via truck, freighter and rail car. Steel from this plant was delivered internationally via the Great Lakes, and to the east coast by ship traveling up the St. Lawrence Seaway.

Today, however, this plant lies in disrepair. The only trains traveling into the Gary plant continue on their way to Chicago carrying tourists. The structure of the plant became outdated because the demands of the marketplace changed. It was no longer feasible to smelt steel…[continue]

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