Multidivisional Organizational Structure in Large Corporations

From Family Firms to Global Corporations

Effective management of any organization depends on keeping track of the details. At the end of the day, a profitable enterprise is one that can answer questions about how much was produced, how much was spent, how much was sold, what problems occurred along the way, and what the organization is doing to solve those problems in order to remain on the path toward profitability. While this list may appear overly simplistic, everything a business does can be mapped along a path that begins with purchasing raw materials and ends with selling a finished product at a significantly higher price. Whether the company sells paperclips, pomegranates, or purple SUVs, its purpose is to buy and sell at a profit while satisfying the needs of the consumers and working community it serves.

During the last century, as businesses morphed from corner stores and family enterprises into global corporations, the structures used to maintain control of the details also underwent significant change. According to Alfred Chandler, "before 1850, very few businesses needed the services of a full-time administrator or required a clearly defined 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 handled 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 knew each other well. They could interact on a personal level that helped keep the entire enterprise accountable to its ultimate goals.

This level of interaction became impossible in the modern corporate structure. Chandler's book shows how the seventy largest corporations in America dealt with a 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 over the past hundred years, then examines in depth the modern decentralized corporate structure as it was developed independently by four companies — DuPont, General Motors, Standard Oil (New Jersey), and Sears, Roebuck.

Chandler's work offers accurate insight for maturing organizational managers. The questions of why some organizations act and appear 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 explains that during the Civil War era most American enterprises were managed by a superintendent, almost along the lines of an agrarian model — a mechanized plantation. But with the rise of Ford Motor, Standard Oil, General Motors, DuPont, Sears, and other familiar names in America's business history, larger organizations could no longer rely on the superintendent or owner — even if aided by capable managers — to operate on such a large scale, let alone build industrial empires.

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

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

The Multidivisional (M-Form) Structure

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 divisions (Galbraith, 1986; Williamson). While the firm's head office retains strategic decision-making responsibilities, 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 its own operations.

Parent-subsidiary relationships have 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, p. 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 across the increasing layers of bureaucratic controls.

The automobile industry has provided important 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. 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 the multidivisional form, adopted after a decade of many such acquisitions to manage GM's large integrated operations and to remedy problems endemic to large firms such as "bounds on rationality... [and] manifestation of opportunism" (Williamson, 1985).

Parent-Subsidiary Relationships and Bureaucratic Control

As bureaucratic organizations grow, their effectiveness often becomes hindered by the very structure employed to reach larger levels of organizational scale. 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 1980s and 1990s forced M-form corporations to re-evaluate their behemoth hierarchical structures in the face of smaller, more nimble global competitors, a third factor also entered the marketplace and placed further strain on the M-form organization.

During the past several decades, the dominant factors driving business organizational structure have shifted from the size of the organization to the speed at which companies develop new products and bring them to market. The overall speed of global competition has placed squarely on the shoulders of the multidivisional organization the task of adapting more quickly to change. An innovation on the other side of the world that just twenty years ago would not have affected the local marketplace for two to five years can now produce significant shifts in consumer expectations and demand with a few clicks of a mouse.

In this new reality, businesses that continue to operate within a multilayered hierarchical authority structure face a significant competitive disadvantage. The time required to communicate plans, goals, and operational boundaries alone can rob a larger organization of the ability to respond proactively to market innovation and maintain a competitive edge. The organization must therefore be willing, as Chandler concluded, to allow its structure to conform to its strategies.