Organizational Structure and Economic Performance: A Test of the Multidivisional Hypothesis

1. Organizational Structure and Economic Performance: A Test of the Multidivisional Hypothesis Henry Ogden Armour and David Teece The Bell Journal of Economics ( 1978)

2. The Research Objective • Empirically test the M-Form multi-divisional hypothesis • That the organization and operation of the large enterprise along “M-Form” multi-divisional lines favors goal pursuit and least-cost behavior more nearly associated with the neoclassical profit maximization hypothesis when compared to a number of alternative organizational forms.

3. What did they find? • For a sample of petroleum firms, profitability was observed between 1955-1973 • Empirical Results • Positive relationship between the M-form structure and profitability was observed during the period (1955-1968) in which the M-form innovation was being diffused • Relationship was no longer observed (1969-1973) once an organizational-form equilibrium was achieved

4. Difficulties associated with Unitary-Form Enterprises • In-decomposability • Makes it necessary to attempt more extensive coordination among the parts • Incommensurability • Makes it difficult to specify the goals of the functional divisions in ways which clearly contribute to higher-level enterprise objectives • Non-operational goal specification • Confounding of strategic and operating decisions • Organizational purpose is compromised

5. The M-Form • Based on robust hierarchical decomposition principles • Hierarchies commonly factor problems in such a way that “higher frequency dynamics are associated with the subsystems, the lower frequency dynamics with the larger systems,…[and] intra-component linkages are generally stronger than inter-component linkages” • M-Form is a nearly-decomposable system

6. The M-Form Solution • The multidivisional firm as a structural organizational innovation • Involves control systems that induce appropriate goal pursuit by divisions • Achieves the separation of strategic and operating decision making ( separation of concerns) • Possesses superior internal information and control techniques when compared to the external capital market • M-form firm acts as a miniature capital market

7. Measures • Performance measure • Rate of return on stockholders’ equity ( post-tax) • This is what managers acting in the stockholders’ best interest would seek to maximize • Organizational Structure Variables • MFORMit • =1 if the i-th firm in the t-th period is characterized by an M-Form internal structure • = 0 otherwise

8. The Model • Rate of Returnit = f(Sizeit, Structureit, Riskit, Caputilt, Growthit) • The regression Model • Rate of Returnit = β0 + β1Sizeit, + β2MFORMit + β3FSFORMit + β4TFORMit+ β5CHFORMit + β6RISKit + β7CAPUTILt + β8GROWTHit + εit • Econometric Procedure: OLS • Regressions were run on data from two sub-sample periods: • 1955-1968 • 1969-1973

9. Sample Details • M-form hypothesis admits the simultaneous existence of optimally organized functional firms and multidivisional firms • Existence of firms in the sample whose optimal organizational form was the functional form • Bias against the M-form hypothesis • Only M-form firms in the sample • Bias in favor of the M-form hypothesis

10. Empirical Results • Results broadly consistent with the M-Form hypothesis • Characteristics associated with a multi-divisional form lead to superior firm performance • Organizational Innovation being diffused Possible to observe superior performance of firms • Once the multi-divisional structure has displace inferior internal forms Differential performance is not observable

11. Discussion Question • Footnote 6 on page 109 • Discussion regarding optimally organized F-Form firms • If functional firms can be optimally organized, why would firms want to transition to the new M-form? • Or restating my concern: • Do M-form firms perform better than optimally organized F-form firms?