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organizational fossil or source of value?

The multidivisional structure: organizational fossil or source of value?

Robert E. Hoskisson

Williamson (1985, p. 279) wrote that “the most significant organizational innovation of the twentieth century was the development in the 1920s of the multidivisional structure.” Williamson’s comment was based in part upon Chandler’s (1962) seminal historical study of the strategy and structure of American enterprise. According to Chandler, the multidivisional (M-form) structure was an innovative response to the problems of coordination and control that arose within early diversified corporations such as Du Pont and General Motors in the 1920s. Once developed, the M-form structure diffused throughout not only American industry, but also industry elsewhere. By the 1930s it could be found in Britain, where Imperial Chemical Industries had adopted the structure (Hannah, 1976), and Japan, where Matsushita was the pioneer (Bartlett & Ghoshal, 1989). By the 1960s, according to a series of empirical surveys, the M-form structure appears to have become the dominant organizational arrangement among large diversified firms in every developed nation (Channon, 1973; Chang & Choi, 1988; Chenall, 1979; Franko, 1974; Kono, 1984; Pavan, 1972; Rumelt, 1974; Suzuki, 1980; Thanheiser, 1972).

In response to the popularity of the structure, academics built upon Chandler’s insights to develop theories that explained the rise of the M-form structure in terms of its efficiency characteristics (Scott, 1973; Williamson, 1970, 1975). Williamson’s transaction cost perspective is predominant among efficiency perspectives. His “M-form hypothesis” postulated that firms with an M-form structure would outperform firms that operated with other organizational forms. The M-form hypothesis inspired, and continues to inspire, a whole stream of studies in the economics and management literatures (e.g. Armour & Teece, 1978; Bettis & Chen, 1990; Cable & Dirrheimer, 1983; Cable & Yasuki, 1985; Chang & Choi, 1988; Harris, 1983; Hill, 1985a, 1988; Hill, Hitt & Hoskisson, 1992; Holl, 1983; Hoskisson, 1987; Hoskisson & Galbraith, 1985; Hoskisson, Harrison, & Dubofsky, 1991; Russo, 1991; Steer & Cable, 1978; Teece, 1981; Thompson, 1981). However, these studies seem to offer only “qualified” support for the M-form hypothesis. Moreover, the wider literature is increasingly critical in its assessment of the M-form. Shleifer and Vishny (1991) have argued that adoption of the M-form facilitated the pursuit of unrelated diversification, and that unrelated diversification is not an efficient strategy.

Strategic management scholars have pointed out that the efficiency of the M-form depends on the diversification strategy and internal contingencies (Hoskisson, 1987; Hoskisson, Harrison & Dubofsky, 1991). Thus, they suggest that M-form structures do not constitute a homogeneous set, but instead embrace a wide range of organizational arrangements, not all of which have equally desirable efficiency consequences (Allen, 1978; Hill & Pickering, 1986; Hoskisson, Hitt & Hill, 1991).

Other scholars have been more critical and argue that certain aspects of the M-form structure give rise to short-run profit maximization and a corresponding decline in long-run innovation and efficiency (Baysinger & Hoskisson, 1989; Hill 1985b; Hill, Hitt, & Hoskisson, 1988; Hoskisson, Hitt & Hill, 1991; Hoskisson & Hitt, 1988). Finally, Bettis (1991) has gone one step further, criticizing the continued stream of M-form research as the study of “organizational fossils” that has become increasingly irrelevant in a world of global matrix organizations, multiple reporting relationships, electronic organizations, and network organizations.

Another perspective examines aspects other than efficiency rationales for M-form adotion. Fligstein (1985) and Mahoney (1992) argue that M-form adoption became a power struggle between competing groups (e.g. family owners and professional managers) because the M-form adoption implies decentralization of decision control to managers. Also, M-form adoption and diffusion has been argued to be a reflection of legitimacy and imitation based on institutional theory (Palmer, Friedland, Jennings & Powers, 1987).

Given this background, the purpose of this article is threefold. First, to critically evaluate the perspectives of the M-form firm. Second, to look at what the empirical evidence has to say about these perspectives. Finally, to make suggestions as to the directions future theory building and empirical work might take. Each of the perspectives reflects the disciplinary orientation of its originators, and each of which addresses a somewhat different aspect of the M-form firm. Our review begins with a short review of the history of the M-form (Chandler, 1962) to provide background and definitions. Next we turn our attention to the transaction cost perspective championed by Williamson. This is followed by a review of the strategic management perspective. Finally, we review the sociological perspective which examines who has power to implement the M-form as well as patterns of diffusion of the M-form structure. The paper closes by proposing a summary model of theoretical linkages. These linkages are reviewed and suggestions are given pertaining to future theory building and empirical research.

Historical Background and Definitions

The historical development of the M-form structure is described in the seminal work of Chandler (I 962). Chandler explored what occurred when some of the largest U.S. firms began to pursue the strategy of diversification in the 1920s. At that time, these firms were organized on a functional basis (see Figure 1a). Chandler noted that for these firms diversification led to:

problems of co-ordination, appraisal, and policy formulation too intricate for a small number of top officers to handle both long run entrepreneurial, and short run operational administrative activities (Chandler, 1962, p. 32)

What occurred was that as firms like Du Pont began to diversify, functional departments within the firm, such as sales and production, found themselves having to deal with several distinct businesses. This led to non-trivial problems of coordination both within and across functional hierarchies. At the same time, because these firms were organized around functions, and not businesses, it was impossible for top officers to identify the profit contribution of each business. This led to control loss and made it extremely difficult to achieve optimal allocation of financial resources. Thus, external strategic considerations were deemphasized by top officers, whose time was focused on short-run administrative problems occurring within the firm. Consequently, firms like Du Pont and General Motors ran into financial difficulties in the 1920s because they failed to react quickly enough to adverse changes in the external environment.

The response to these problems, originally pioneered by Alfred Sloan Jr. at General Motors, was to re-organize the firm on the basis of divisions (see Figure lb). Each division dealt with a conceptually distinct business and was self-contained with its own functional hierarchy. According to Chandler, the divisions were given the responsibility for day-to-day operating decisions. The board of directors was superseded as the main co-ordinating body by a general office comprised of top executive officers and a small corporate staff. The general office was responsible for determining the long-term strategic direction of the corporation and for exercising overall financial control of the divisions. Thus, operational and overall strategic decision making responsibilities were separated, although the divisions still made strategic decisions for their business area.

One consequence of these changes was that, having been freed from operating responsibilities, the top officers of GM and its followers could turn their attention to wider corporate strategic issues. Furthermore, the decentralization of responsibility for operating decisions to divisions was found to encourage more entrepreneurial behavior at that level. Also, the financial contribution of each distinct business was now visible to the corporate office. This had three important effects: (1) it enabled corporate officers to more accurately monitor the performance of each business, which simplified the problem of control; (2) it facilitated comparisons between divisions, which improved the resource allocation process; and (3) it stimulated managers of poor performing divisions to look for ways of improving performance. Thus, Chandler concluded that the M-form structure, by simplifying the management of diversity, paved the way for the emergence of the modern diversified corporation. Given the descriptive history by Chandler and others (e.g., Hannah, 1976), academics sought to provide a stronger theoretical explanation for M-form adoption. Most prominent among these is the transaction cost perspective.

The Transaction Cost Perspective

The transaction cost perspective is primarily associated with the work of Williamson (1970, 1975, 1985). Williamson built upon Chandler’s work to construct a general theory of the multidivisional structure that focused upon its transaction cost minimizing properties.

Williamson’s Theory

When Williamson first looked at this issue in the late 1960s, the economic consequences of a new species of business organization, the widely diversified conglomerate firm, was the focus of much debate. As an economist with a belief in the “efficacy of competition to perform a sort between more and less efficient modes and to shift resources in favor of the former” (1985, p. 22), Williamson assumed that if the M-form firms existed in large numbers, there must be an efficiency rationale.

The efficiency rationale that he developed was based upon transaction cost economics, and particularly Coase’s (1937) fundamental insight that the existence of firms can be explained in terms of market failure. Williamson saw in the M-form organization a general office which performed a role analogous to that performed by investors in the capital market. Investors in the capital market perform two main functions. First, they allocate scarce resources between competing investments on the basis of their evaluation of relative yield (for example, the future cash flow of a particular stock). Second, they police the efficiency of poorly performing investments by putting pressure upon those who manage the investments to do better (for example, by selling their stockholdings in a firm, which depresses the market valuation of the firm and increases the risk of hostile takeover). Using Chandler as his primary source, Williamson argued that within the M-form the general office performs exactly these same two functions vis-a-vis divisions. The general office allocates scarce financial resources between the competing claims of different divisions depending upon their evaluation of relative yield, and the general office polices the efficiency of poorly performing divisions, for example, by replacing divisional management. To Williamson, this fundamental similarity suggested that the diversified M-form firm could be viewed as an internal capital market. Moreover, the fact that such firms existed indicated to him that the external capital market might suffer from market failures that could be attenuated within the internal capital market of the M-form firm.

Williamson identified three candidates for market failure in the external capital market. First, he argued that substantial information asymmetries between managers and investors indicate that managers could opportunistically misrepresent the position of the firm to investors. Second, he argued that the capital market experiences non-trivial displacement costs; it is an expensive business to replace under-performing management teams through a hostile takeover bid. Third, he argued that the external capital market cannot “fine tune” management policies – it is restricted to non-marginal adjustments such as a takeover. Given these conditions, Williamson argued that the external capital market is limited in its ability to achieve an efficient allocation of resources and police the efficiency of under-performing firms.

Williamson also contrasted the limitations of the external capital market with the advantages of the internal capital market of the M-form firm. He argued that the general office, as an internal investor, has three advantages over the external capital market. First, it can attenuate information asymmetries by auditing operations of divisions. Second, displacement costs are much lower within the M-form firm; it does not cost much to replace an uncooperative or under-performing divisional officer. Third, the general office is not limited to major discrete adjustments; It can fine tune divisional operations by, for example, mandating a change in operating policies or manipulating rewards and incentives. Thus, due to these advantages, Williamson argued that the internal capital market of the M-form firm can achieve a more nearly optimal allocation of capital resources, and police the efficiency of divisions more effectively, than the external capital market could were each division an independent enterprise.

This logic became the dominant efficiency rationale for the existence of the diversified M-form firm. Williamson sees in the M-form firm a self correcting mechanism for market failure. As Williamson put it:

the M-form organization … can be viewed as capitalism’s creative response to the evident limits which the capital market experiences in its relations with the firm (1970, p. 140).

Furthermore, following Chandler’s reasoning, he went on to argue that the functional (unitary or U-form) organization that proceeded the M-form, lacked the superior internal capital market characteristics of the M-form. Given this, it follows logically that the switch by a diversified enterprise from a U-form to an M-from structure will be reflected in an improvement in performance. Thus, we have Williamson’s M-form hypothesis which states that:

the organization and operation of the large enterprise along the lines of the M-form firm favors goal pursuit and least cost behavior more nearly associated with the neoclassical profit maximization hypothesis than does the U-form organizational alternative (1970, p. 134).

Critiques of Williamson

While Williamson’s theory of the M-form firm is compellingly constructed, it is not without its critics. Hill (1983, 1985b) has noted at least three main problems with the theory: (1) the assumption of external capital market failure may be unjustified; (2) the adoption of the M-form structure does not preclude inefficient business behavior; and (3) Williamson’s theory fails to recognize the potentially serious unintended consequences of M-form control systems.

Capital Market Failure. Williamson’s assumption of external capital market failure may no longer be justified. Major changes have taken place in the external capital market over the two decades since he first wrote about the M-form firm. Institutional investors have emerged as major players in the capital market (Hansen & Hill, 1991). Increasingly institutional shareholders (e.g., mutual and pension fund managers) are argued to be a logical force to rein in ill-behaved corporate executives (Monks & Minow, 1991) because the power of such institutional shareholders is increasing through increasing concentration of ownership. There is anecdotal evidence that institutional investors are able to attenuate the information asymmetries that Williamson talked about, and to precipitate changes in corporate policy without resorting to costly adjustment mechanisms such as takeovers (Nussbaum & Dobrzynski, 1987; Pound, 1992). Moreover, the development of new financial instruments such as junk bonds during the 1980s may have improved the effectiveness of takeover mechanisms as an efficiency policing device (Jensen, 1988). If these changes and others has enhanced the ability of the capital market to govern the large corporation, Williamson’s statements concerning the “evident limits of the capital market” may no longer apply. In which case, his arguments concerning the efficiency of the large M-form conglomerate may also no longer be valid. In other words, Williamson’s theory may have been a reflection of its time, and times have changed. This criticism, however, has yet to be verified through empirical investigation.

Business Behavior and the M-form Firm. In Williamson’s theory, corporate managers within the M-form are depicted as policing efficiency and allocating resources in order to maximize the profitability of the corporation. Put another way, Williamson assumes away the agency problem (Hoskisson & Turk, 1990). He assumes that corporate managers behave in a manner that is consistent with neoclassical profit maximization. This stands in contrast to the agency theory assertion that managers have a preference for engaging in “on the job consumption” (Fama, 1980). More precisely, both agency and managerial theorists argue that corporate managers seek to maximize a utility function that contains status, power, security, and income as its central elements. Maximizing such a utility function is argued to create a preference for inefficient “empire building” diversification at the expense of profit maximization (Aoki, 1980; Fama, 1980; Hoskisson & Turk, 1990; Jensen, 1986, 1988; Marris, 1964). Indeed, Jensen (1989) builds his advocacy of LBOs on the argument that firms which have pursued inefficient diversification should be broken up, and that the LBO is one mechanism for achieving this. The challenge presented by agency and managerial theories is particularly serious for Williamson’s position, because his theory of capital market failure suggests that the capital market is limited in its ability to force profit maximizing behavior on U-form corporate managers but says nothing about M-form corporate managers (Hoskisson & Turk, 1990).

Williamson’s answer to this challenge may be threefold. First, he maintains that because top officers are distanced from operating affairs in the M-form causes them to be concerned with overall performance. Second, he maintains that because the contribution of each division to overall profitability is both visible and quantifiable, profitability becomes the obvious basis upon which to judge divisional performance and allocate resources between competing claims. Third, he argues that competition between M-form firms for external capital creates an incentive for them to focus on efficiency. According to Williamson, these factors imply a commitment to profit maximization – as opposed to “empire building” diversification – on the part of corporate managers.

The problem with Williamson’s defense is that there is a growing body of evidence which suggests that adoption of the M-form structure facilitated the pursuit of inefficient diversification. We know from the work of Keats and Hitt (1988) and Russo (1991), for instance, that adoption of the M-form has generally facilitated further diversification. This by itself is not necessarily harmful, as long as the resulting diversification is 1efficient’. However, the evidence suggests otherwise. Ravenscraft and Scherer’s (1987) extensive longitudinal study found that the profitability of many companies acquired by M-form firms during the 1960s did not improve, although Williamson’s arguments would suggest that improvement would occur. Moreover, they found that, starting in the mid 1970s, many of these acquired units were subsequently divested. Porter (1987) reports that half of the diversified acquisitions made by conglomerates were later divested – suggesting that such diversification was inefficient. The work on restructuring by Markides (1992) suggests that a decrease in the diversified scope of M-form firms was associated with an improvement in shareholder wealth – implying again that past diversification had been inefficient. Hill and Hansen’s (1991) longitudinal study of diversification by pharmaceutical firms found that diversification was generally followed by a decline in firm performance – not what one would expect if these firms were pursuing efficient diversification. Furthermore, Hoskisson and Johnson (1992) found that firms that restructured and decreased their level of diversification, not only increased performance, but invested more into R&D, a potential indicator of future competitiveness.

Thus, it seems reasonable to conclude at this juncture that the top managers of M-form firms do not always behave in the manner suggested by Williamson, although many are undoubtedly good stewards. Put another way, adoption of an M-form structure may be a necessary condition, but not a sufficient condition, for the establishment of an efficient internal capital market – the goals stressed by top corporate officers also matter. There may be firms that have an M-form structure as articulated by Williamson, but whose top managers pursue inefficient diversification.

Unintended Consequences of the M-form. Even if we accept that corporate managers within the M-form exhibit the neoclassical profit maximizing behavior attributed to them by Williamson, it still does not follow that the M-form firm will have a beneficial effect on firm performance. One possibility is that the adoption of internal control systems consistent with Williamson’s pure M-form ideal might lead to risk adverse and short run profit maximizing behavior on the part of divisional managers – particularly within extensively diversified firms (Baysinger & Hoskisson, 1989; Hayes & Abernathy, 1980; Hill & Hansen, 1991; Hoskisson & Hitt, 1988; Hoskisson, Hitt, & Hill, 1991; Hoskisson, Hitt, & Hill, 1993). Moreover, within the decentralized M-form firm information asymmetries between divisional and top management may mean that such behavior escapes detection.

The argument here is that within the extensively diversified M-form firm top management tends to utilize abstract financial criteria, such as ROI, to assess divisional performance. In so far as the earnings and career prospects of divisional managers are dependent upon their ability to achieve ROI targets, an incentive for divisional managers is set up to reduce investments in R&D and capital expenditures below the optimal level because by doing so they can increase reported ROI (Dyl, 1988). The effect is to maximize short-run profits, but at the cost of sacrificing the long-run competitive position of the firm. Top management could limit such behavior by auditing the affairs of operating divisions to detect such dysfunctional behavior, and by stressing non-financial goals in the goal setting and performance evaluation process. However, within extensively diversified firms, the information processing requirements associated with such policies exceed the bounded rationality of top managers, and top managers tend to fall back upon a reactive “management by the numbers” approach to controlling divisions (Hoskisson, Hitt, & Hill, 1991).

Similar arguments can be made with regard to risk aversion. Within the M-form firm the concept of divisional profit accountability ensures that those who propose risky investments have to bear the performance consequences of their actions. In a system where career and earnings prospects are performance dependent, proposing risky investments represents a gamble that many managers are reluctant to take. Thus, the M-form firm may also be associated with a decline in entrepreneurial risk taking at the divisional level, which again, may be judged to have harmful consequences for the long run position of the firm.

Having raised these issues, it is important to point out that they apply primarily to the extensively diversified M-form firm. Within less diversified M-form firms the reduced information processing requirements associated with a limited number of divisions make it possible for corporate managers both to rely upon a wider range of financial and non-financial criteria in the goal setting and performance evaluation process, and to undertake detailed audits of operating divisions in order to detect such dysfunctional behavior. Thus, this criticism represents not so much an attack upon Williamson’s M-form theory, as an attempt to argue that his theory only holds for moderately diversified firms (Baysinger & Hoskisson, 1989). Consistent with this view, an emerging body of empirical evidence does suggest that (1) an exclusive reliance upon abstract financial criteria to control divisions is more common in extensively diversified firms (Hill, 1988; Hoskisson, Hitt, & Hill, 1993) and (2) short-run and risk adverse behavior, such as reducing R&D spending below the optimal level, is principally associated with extensively diversified M-form firms (e.g. Baysinger & Hoskisson, 1989; Hoskisson & Hitt, 1988; Hill & Snell, 1988, 1989).

Empirical Tests of Williamson’s Theory

There have been a number of empirical tests of Williamson’s arguments. Most of these used a classification of organizational form developed by Williamson (1975). This classification scheme makes a distinction not only between U-form and M-form firms, but also between “pure” M-form firms and other types of multidivisionals. For example, Williamson talks about “corrupted” M-form firms which have a divisional structure, but in which top management is involved in divisional operating decisions. Within such firms, according to Williamson, the proper separation between strategic and operating decisions is not maintained, divisional accountability is compromised, and biases intrude into the efficiency policing and resource allocation process. Williamson also talks about holding companies, or H-form firms. The critical feature of the H-form is that cash flows are not reallocated between competing divisions within the firm according to relative yield, but instead returned to source divisions. Hence, no internal capital market exists within the H-form. Williamson predicts that M-form firms will not only outperform U-form firms, but also H-form and “corrupted” M-form firms.

On balance, the empirical evidence would seem to offer qualified” support for Williamson’s arguments that the M-form structure is a superior organizational arrangement. Of thirteen studies explicitly designed to test Williamson’s arguments, nine found some evidence of superior M-form performance, particularly when M-form firms were compared to H-form and “corrupted” M-form firms (Armour & Teece, 1978; Harris, 1983; Hill, 1985a; Hoskisson & Galbraith, 1985; Hoskisson, Harrison, & Dubofsky, 1991; Ollinger, 1993; Steer & Cable, 1978; Teece, 1981; Thompson, 1981). However, in contrast to Williamson’s M-form hypothesis, one of these studies also concluded that the M-form structure was not universally superior to the U-form structure, and that the U-form structure did seem to be appropriate for large but narrowly diversified firms (Ollinger, 1993). Moreover, in a number of these studies the evidence of superior M-form performance was weak, ambiguous, and open to conflicting interpretations (Armour & Teece, 1978; Harris, 1983; Thompson, 1981). Four other studies found no evidence of superior M-form performance (Bettis & Chen, 1990; Cable & Dirrheimer, 1983; Cable & Yasuki, 1985; Holl, 1983) while one (Hill, 1988) found evidence that the M-form structure, as defined by Williamson, was associated with inferior financial performance.

The results of the Cable and Dirrheirmer (1983) and Cable and Yasuki (1985) studies are of particular interest, because they attempted to test the M-form hypothesis in Germany and Japan, respectively. The failure to find any evidence of superior M-form performance may be explained in these countries by the different institutional and goverance structure of the capital market in both countries. Specifically, in both Germany and Japan much closer connections exist between the major providers of capital and firms. For example, bank representatives often take a seat on corporate boards in both countries. Thus, the “evident limits of the capital market” that Williamson identified in the U.S. may be less problematic in Germany or Japan. Information asymmetries between managers and investors are clearly moderated when major investors sit on the corporate boards, while the ability to influence board decisions gives major investors an opportunity to fine tune” corporate policy. Thus, the failure to find any evidence of superior M-form performance in Germany or Japan may indicate that the internal capital market advantages claimed for the M-form structure are less relevant in these countries.

The studies by Hill (1985a, 1988) also provide a challenge to Williamson’s theory, and perhaps to the other studies designed to test his arguments. Hill’s work apart, all of the above studies relied upon published data to achieve their classifications of firms into Williamson’s categories of organizational form. The problem with a totally archival approach is that while the basic structural arrangements of a firm can generally be discerned from published material, the same cannot be said for the internal decision making, control, and resource allocation apparatus of the firm. Yet it is precisely this information that is needed to determine whether a multidivisional firm is M-form, H-form, or “corrupted” M-form. To get around this problem, in both of his studies Hill used a questionnaire survey to collect data on internal organizational arrangements from a sample of large British firms. He then used this data to classify firms into the organizational categories described by Williamson.

The results from both of Hill’s studies suggest that there are substantially more H-form and “corrupted” M-form multidivisionals than indicated in other studies. Commenting upon this, Hill notes that:

this probably reflects the fact that the deeper one goes into a multidivisional firm, the more likely it is that deviations from the M-form ideal come to light (1988, p. 75-76).

The implication is that other studies may have inappropriately classified M-form, H-form, and “corrupted” M-form firms. If so, their empirical results, particularly with regard to performance, may have been biased. In addition, the existence of large numbers of multidivisionals that lack the attributes of the “pure” M-form raises the possibility that many multidivisionals do not have the transaction cost minimizing properties claimed for them by Williamson. Alternatively, the existence of large numbers of such firms may suggest that Williamson’s theory is incomplete. This conclusion is reinforced by Hill’s (1988) results, which suggested that the so called “corrupted” M-form firm was associated with superior economic performance, particularly for related diversified firms.

Therefore, the failure to find stronger support for Williamson’s M-form hypothesis may point to weaknesses in his theory as well as methodology. Some potential theoretical flaws have already been discussed above when we critically examined Williamson’s assumptions regarding capital market failure and business behavior, and when we discussed the unintended consequences of M-form adoption. In addition, there is a stream of research in the strategic management literature which argues that Williamson’s work is limited because he underrates the critical role that strategic contingencies play in optimal organizational design. This work is reviewed in the next section and may, in part, explain why the above studies did not find stronger and more consistent support for the M-form hypothesis. Also, the sociological perspective provides additional reasons why empirical results were not more in line with the M-form hypothesis.

The Strategic Management Perspective

The distinguishing feature of the strategic management perspective is the attention paid to the role of strategic contingencies in determining organizational form. This approach dates back to the work of Ackerman (1970), Berg (1973) and Lorsch and Allen (1973). More recently it has emerged as a theme in the work of Hill and Hoskisson (1987), Hill (1988), Hill, Hitt and Hoskisson (1992), Hoskisson, et al. (1991), Hoskisson and Johnson (1992) and Jones and Hill (1988) at the corporate level and in the work of Golden (1992), Govindarajan (1986, 1988), Gupta (1987), and Gupta and Govindarajan (1986) at the corporate-SBU level.

At the corporate level, the strategic contingencies that this literature focuses on are vertical integration, related diversification, and unrelated diversification. The literature follows the transaction cost perspective in identifying the economic benefits associated with each strategy (e.g. Hill & Hoskisson, 1987; Jones & Hill, 1988; Teece, 1982; Williamson, 1985). Vertical integration is associated with investments in specialized assets, which in turn produces productivity gains for the firm. Related diversification is associated with the realization of economies of scope. Unrelated diversification is associated with the realization of internal capital market economies.

According to this literature, realization of these different economic benefits imposes different and often conflicting organizational requirements on the firm. While a multidivisional design is required in all three cases, two main variations within the basic M-form design emerge. The realization of economic benefits from vertical integration and related diversification is argued to require adoption of an M-form structure within which cooperation between divisions is stressed. The realization of economic benefits from an internal capital market is argued to require an M-form structure within which competition between divisions is emphasized. Thus, this literature (Hill, Hitt, & Hoskisson, 1992; Liebeskind, 1990) identifies two different variants of the basic M-form model: the cooperative organization and the competitive organization.

Cooperative Organizations

Within an M-form firm cooperation between divisions is necessary to realize economies of scope and/or facilitate investments in specialized assets. There is a need to coordinate the activities of otherwise independent divisions so that skills can be transferred, resources shared, and complementary investments made. Child (1984) has argued that some centralization is necessary to achieve such coordination. Similarly, Mintzberg (1983) noted that interdependencies between divisions in vertically integrated and related diversified firms encourage the corporate office to retain some control over the functions common to the divisions to ensure coordination. Consistent with this view, Berg (1973) and Pitts (1977) found evidence that the interdivisional sharing of technological resources was achieved through centralization of research activities. Similarly, Ackerman (1970) found that the identification of and impetus for major capital investment decisions was more centralized within M-form firms with a high degree of inter-divisional integration than M-form firms with a low degree of inter-divisional integration. Therefore, the literature suggests that some degree of centralized control over the strategic and operating decisions of interdependent divisions in vertically integrated and related diversified firms is required. As a point of contrast, recall that Williamson characterized such centralized multidivisionals as “corrupted” and argued that they will be associated with inferior financial performance, although Hill (1988) found them to be superior performers when used with related diversification.

In addition to centralization, coordination between divisions also requires integrating mechanisms to achieve lateral communication between divisions. The complexity of these mechanisms will vary, depending on the extent of interdependence, from simple liaison roles and temporary task forces, to permanent teams (Child, 1984; Galbraith, 1973; Lawrence & Lorsch, 1967). As noted by Luke, Begun, and Pointer (1989), in related diversified firms interdependent divisions need to be tightly coupled. The same has been argued to be true of vertically integrated firms (Hill & Hoskisson, 1987; Jones & Hill, 1988).

One problem with attempts to achieve coordination between interdependent divisions is that it can create performance ambiguities (Govindarajan & Fisher, 1990; Gupta & Govindarajan, 1986; Hill & Pickering, 1986; Lorsch & Allen, 1973; Vancil, 1978). This is the problem of team production as discussed by Alchian and Demsetz (1972). Specifically, when divisions lack complete autonomy with regard to operating and strategic decisions, objective rate of return criteria, which might be used to assess divisional performance, do not constitute an unambiguous signal of divisional efficiency. Poor financial performance of a certain division might be due to inefficiencies within that division, inefficiencies within another division with which it is tightly coupled, or poor central input into key operating decisions. Without access to more information, it can be difficult to assign accountability.

The firm can overcome performance ambiguity problems by increasing the amount of information it processes (Daft & Lengel, 1986). More precisely, as interdivisional coordination increases the firm may deemphasize rate of return measures of divisional performance and emphasize more subjective modes of evaluating performance (Govindarajan & Fisher, 1990; Hill, 1988; Ouchi, 1980). That is, within cooperative organizations the general office typically bases its assessment of divisional performance on a wide range of criteria. These criteria might include more subjective measures of divisional performance (e.g. ability to innovate) along with objective measures such as rate of return. Moreover, cash flows may be allocated by corporate management between competing claims based on such multiple criteria. In sum, these arguments suggest that corporate management needs to rely on a wide range of subjective and objective criteria when evaluating divisional performance and allocating cash flows if it is to overcome performance ambiguities arising from interdependent divisions and realize maximum economic benefits. Consistent with this thesis, an empirical study by Gupta and Govindarajan (1986) found that the greater the degree of resource sharing between divisions, the greater the reliance on subjective criteria when assessing the performance of divisional managers.

Finally, the literature stresses that coordination may be enhanced if reward and incentive schemes emphasize interdivisional cooperation rather than the performance of each division as an independent unit (Gupta & Govindarajan, 1986; Kerr, 1985; Lorsch & Allen, 1973; Pitts, 1974; Salter, 1973). This can be achieved if profit bonus schemes for divisional managers within vertically integrated and related diversified firms are linked to corporate rather than divisional profitability. Because corporate profitability within these firms depends upon the success of interdivisional cooperation, such reward schemes provide divisional managers with an incentive to cooperate.

Competitive Organizations

As noted in earlier sections, the literature suggests that pure conglomerate firms attempting to realize benefits from efficient internal capital market require a multidivisional structure (Chandler, 1962; Rumelt, 1974). However, there are clear indications in the management literature that the internal organizational arrangements of unrelated diversified M-form firms are different from those found in vertically integrated and related diversified M-form firms (Hill & Hoskisson, 1987; Mintzberg, 1983: Vancil, 1978).

Williamson’s theory suggests that if a diversified firm is going to realize economic benefits from an internal capital market a number of organizational features must be present (Dundas & Richardson, 1982). First, each division must have autonomy with regard to operating decisions so that divisional managers can be held accountable for divisional profit performance (operating decisions should be decentralized). Second, to preserve autonomy the relationship between the general office and operating divisions should be an arms-length one. The general office should not intervene in divisional affairs except to audit operations, discipline opportunistic or incompetent divisional managers, and correct performance shortfalls. Third, the general office should exercise control over divisions by setting rate of return targets and monitoring outcomes. Fourth, incentive systems for divisional managers should be linked to divisional returns. And fifth, cash flows should be allocated between divisions by the general office to high yield uses on a competitive basis, rather than returned to source divisions.

The system is predicted to produce competition among divisions for capital (Hill, Hitt, & Hoskisson, 1992). Divisional managers may also be compared on the basis of their ability to achieve rate of return targets for their respective divisions. Thus, internal promotion opportunities may be determined by competitive criteria. Hence, the internal ethos of such organizations is explicitly competitive rather than cooperative.

Organizational Incompatibilities

The above description maps out two very different organizational philosophies. The basic differences between these two structural forms are summarized in Table 1. Companies such as Hewlett Packard, 3M, and Dow Chemicals, fit the cooperative M-form model quite well. Companies such as BTR PLC, Hanson PLC, and General Electric fit the competitive M-form model.

[TABULAR DATA OMITTED]

One conclusion that might be drawn from the radical differences between cooperative and competitive M-form structures is that it may be difficult for diversified firms to simultaneously realize economic benefits from vertical integration and related diversification, on the one hand, and an efficient internal capital market, on the other hand. Most importantly, firms with high levels of divisional interdependence may find it difficult to realize benefits from an internal capital market because of the performance ambiguities that arise in such contexts. While this partly explains the incompatibility between the two structures other differences are also evident.

Competitive and cooperative organizations have different internal configurations with regard to centralization, integration, control practices, and incentive schemes. Consequently, internal management philosophies of cooperative and competitive organizations are incompatible. In cooperative organizations, cooperation between divisions is fostered and encouraged. In competitive organizations, competition between divisions is fostered and encouraged. It is exceedingly difficult to simultaneously encourage competition and cooperation between divisions.

The notion that different structures and control systems are needed to implement different strategies is supported by the work of several authors. Mintzberg (1983) made a distinction between the internal structure of “related-product” and “conglomerate” firms. Pitts’ (1977) distinction between the internal structure and incentive systems of internal diversifiers (largely related firms) and acquisitive diversifiers (largely unrelated conglomerates) echoes the cooperative-competitive theme. The distinction made by Lorsch and Allen (1973) between conglomerates and vertically integrated firms is also similar in many respects to that discussed here. Vancil (1978) found differences in decentralization and control practices among firms pursuing different diversification strategies that are congruent with the cooperative-competitive dichotomy. Goold and Campbell (I 987), in their study of British multidivisionals, made a similar distinction between those firms that emphasized divisional interdependencies (cooperation), and those that de-emphasized them (those that encourage inter-divisional competition). Hill (1983) came to an almost identical conclusion in his earlier case study work of twelve large British multidivisionals. Moreover, several authors have observed that the appropriate incentive systems for divisional managers are a function of the degree of resource sharing (relatedness) between divisions (Gupta & Govindarajan, 1986; Kerr, 1985; Lorsch & Allen, 1973; Pitts, 1974; Salter, 1973). And finally, Chandler (1990), in a retrospective review of his work on strategy and structure, concluded that there was a difference between those multidivisionals where interdivisional cooperation was emphasized, and those where it was deemphasized. In sum, the distinction between cooperative and competitive M-form firms seems to be well grounded in empirical observation.

Performance Implications

Implicit in the above arguments are two ideas. First, there are at least two main variants of the multidivisional structure – the cooperative and competitive form. Second, the cooperative form is best suited to firms trying to realize economic benefits from the strategy of related diversification or vertical integration, whereas the competitive form is best suited to firms trying to realize economic benefits from unrelated diversification. This is clearly a contingency argument in which performance is predicted to be a function of the interaction between strategy and structural form.

There have been several systematic tests of this proposition which indicate some support for this view. Consistent with the contingency hypothesis, Hoskisson (1987) found that adoption of a pure M-form structure (i.e. a competitive organization) improved the performance of unrelated firms, but led to a decline in the performance of related diversified firms, although related firm were higher performers in overall cross sectional tests. Hill (1988) explored contingency relationships in his study of large British firms. He found weak evidence that unrelated firms performed better when they were organized along lines that were consistent with the competitive M-form ideal, whereas related firms performed better when they were organized along lines consistent with the cooperative M-form. Similar results were obtained by Hill, Hitt, and Hoskisson (1992) in their study of large U.S. firms. Also, Bettis and Chen (1990), in a reworking of Armour and Teece’s (1978) original data, found evidence that the M-form structure was inappropriate for vertically integrated firms. Hoskisson and Johnson (1992) found that firms which consist of both unrelated and related business units were more frequently restructured and that in the post-restructuring period there were more “pure” cooperative and competitive types. They proposed that restructuring corrected inconsistent control system difficulties. Therefore, it may be organizationally inefficient to simultaneously pursue economies of scope (requiring a cooperative system) associated with related constrained firms and internal capital market economies (requiring a competitive system) associated with unrelated business firms. Furthermore, research on restructuring by Bergh and Lawless (1992) supports the finding of Hoskisson and Johnson (1992) that the firms pursuing both related and unrelated diversification are the primary target of restructuring activity in the 1980s. Thus, the inconsistent results on the M-form hypothesis may be due to strategic contingencies and control system inconsistencies. The sociological perspective, however, presents still another explanation that does not depend on efficiency rationales associated with the transaction cost and strategic management perspectives.

The Sociological Perspective

Two explanations, power and legitimacy (institutional theory), have been used in the sociological perspective to explain the wave of M-form adoptions in the 1960s. Power theory suggests that the choice of structure and strategy is primarily a function of power structure of an organization (Cyert & March, 1963; Pfeffer & Salancik, 1978). Therefore, power relations within and across organizations and characteristics of individuals in power would account for the choice of strategy and structure.

Palmer et al. (1987) and Mahoney (1992) examined the relationship between ownership structures and M-form adoption. Both studies hypothesized that firms dominated by families or financial institutions are less likely to adopt M-form structures. The rationale is that families and financial institutions prefer centralized control of organizations and, therefore, are reluctant to adopt M-form structures which entail decentralization of decision control (Vancil, 1978). Both studies found support for their hypothesis. Thus, because ownership concentration by families and financial institutions is negatively related to M-form adoption (Palmer et al., 1987; Mahoney, 1992), this may reflect a conflict of power between owners and managers.

On the one hand, managers may not have the opportunity to implement the M-form when it is needed. On the other hand, the power perspective may also be related to agency theory where managers implement the M-form to maximize their own utility (Jensen, 1986; Russo, 1991). Hoskisson and Turk (1990) argued that because of inadequate corporate governance (lack of ownership monitoring, weak boards and excessive reliance on incentive compensation), managers may optimize personal utility relative to stockholder wealth. For instance, given the relationship between firm size and compensation (Tosi & Gomez-Mejia, 1989), managers may overdiversify the firm to an inefficient level.

Moreover, Fligstein (1985, 1987) provides evidence that managers construct organizations that reflect their tastes. For instance, he examined the relationship between characteristics of top managers and M-form adoption. He argues that the M-form structure enables firms to grow through diversification and, therefore, are favored by individuals who have capacity to pursue diversification and can gain the most from diversification. Using the data of the 1919-1979 period, he found that firms whose presidents had sales or finance backgrounds were more likely to adopt M-form structures. The dominance of firms by managers with these functional backgrounds could lead to increased adoption of the M-form, and Hayes and Abernathy (1980) suggest that such domiance could lead to an overemphasis on financial aspects and to shortened time horizons and competitiveness problems.

Institutional theory also suggests that an organization can adopt a certain organizational structure to demonstrate institutional isomorphism rather than to increase internal efficiency (Meyer & Rowan, 1977; DiMaggio & Powell, 1983). By demonstrating institutional isomorphism, the organization can increase their legitimacy and survival prospect. Dimaggio and Powell (1983) suggest three mechanisms whereby institutional isomorphism is achieved: coercive, mimetic, and normative. Coercive isomorphism occurs as an outcome of formal and informal pressures on the focal organization by other organizations upon which it is dependent. Coercive isomorphism is not a likely explanation for M-form adoption. Mimetic isomorphism occurs as an outcome of imitating other organizations by the focal organizations. An organization tends to imitate other organizations which it perceives as successful. Mimetic isomorphism can account for diffusion of M-form structures to the extent that the implementation of successful firms such as Du pont and General Motors provides a role model for other firms (Fligstein, 1985). Normative isomorphism occurs as an outcome of the focal organization’s adoption of norms which are shared among other organizations in its environment. Norms are developed mainly from professionalization through formal education, trade and professional association. The diffusion of M-form structures can also be accounted for by normative isomorphism to the extent that business schools and management consulting firms have taught and recommended M-form structures as an important organizational tool (Hayes & Abernathy, 1980). In short, mimetic and normative isomorphism processes might partially explain the diffusion of M-form structures.

Consistent with the notion of institutional theory, Fligstein (1985) found that the likelihood of a firm’s adoption of M-form structures is positively related to the portion of other firms in the industry which had already adopted M-form structures. Teece (1980) also provides evidence that the diffusion of the M-form was partly due to mimicry, although the process of diffusion did not mirror the diffusion curve of product innovations. However, Mahajan, Sharma, and Bettis (1988) could not reject the hypothesis that the diffusion of M-form structures follows a random walk. Thus, there is some evidence that institutional theory has relevance, and this may suggest that the M-form may be adopted for reasons other than efficiency.

Armour and Teece (1978), however, did find that M-form adoption has a positive effect on performance, but only for early adopters. This explanation may suggest that diffusion of the M-form would not provide efficiency benefits, except for early adopters. Once the majority of firms adopted the M-form structure, it is not likely that it would give any particular firm a competitive advantage. Hoskisson (1987) also found a difference in performance between early and late adopters. Thus, much M-form adoption could be due to imitation of other successful M-form firms. Furthermore, such adoption could be based on power relations and legitimacy concerns rather than strictly on economic efficiencies and, thus, over time, performance would not be affected by M-form adoption.

Summary Model and Implications for Future Research

To discuss the perspectives presented above, a summary model is proposed in Figure 2. The model describes conceptual links to M-form adoption and performance and allows a summary of theory and research and a discussion of future research. Each link of the summary model is discussed below.

Link 1 from the transaction cost perspective suggests that M-form adoption overcomes limits to firm growth and potential opportunism among divisional executives. This link has been well researched as summarized earlier, but the research produced only qualified support for the M-form hypothesis, the relationship between M-form adoption and Performance (Link 3). This qualified support may be partially explained by the sociological perspective (Link 2) and the strategic management perspective (Link 4). Link 6 is intended to examine the restructuring activity that has been sparked by the relationship to performance outcomes. The relationship of governance as a contingent variable between M-form and performance is summarized among Links 7 and 8.

Once developed, the M-form structure seems to have encouraged firms to pursue further diversification. Part of this diversification may be explained by the transaction cost explanation suggesting that such diversification may be efficient (Link 1). Chandler (1962) describes how the M-form structure originally evolved as a response to the problems created by diversification. Williamson (1970, 1975, 1985) described how the adoption of the M-form is an efficient solution to the problems described by Chandler (1962). However, the lack of strong support, for this explanation through Link 3, M-form and performance, has led to alternative and contingent explanations. For instance, the power explanation of Link 2 suggests that managers may have gained power and diversified the firm to maximize their utility, possibly at the expense of firm performance and shareholder wealth (Russo, 1991). Furthermore, the institutional explanation in the sociological perspective holds that firms may have adopted the M-form for legitimacy reasons. There is some evidence that this explanation supports the hypothesis (Armour & Teece, 1978; Fligstein, 1985, 1987; Hoskisson, 1987, Mahoney, 1992).

The strategic management perspective (Link 4) suggests that increased diversification, however, appears to have taken two main forms – related and unrelated diversification. The related diversified firms, focusing on the realization of scope economies, stressed divisional interdependencies, and so a variant of the M-form structure in which interdivisional cooperation was stressed evolved. These cooperative M-form firms count among their number some of the most successful enterprises of the post-W.W.II era (e.g. Dow Chemicals, 3M, Hewlett Packard, IBM, Matsushita, Procter & Gamble). While the internal control apparatus (Link 5) in such firms does not match Williamson’s M-form model, the empirical evidence suggests that this combination of strategy and structure may have been associated with superior economic performance (Hill, 1988; Hill, Hitt, & Hoskisson, 1992; Hoskisson, 1987).

The unrelated diversified firms found that the M-form structure allowed them to manage a large number of divisions with relative ease. As a result and encouraged by government antitrust policy (Shleifer & Vishny, 1991), these firms pursued ever more diversification. The consequence was the widely diversified conglomerates of the 1960s and 1970s; firms such as ITT, LTV, Gulf & Weston, and Litton Industries. Within these firms divisional interdependencies were de-emphasized (they were “competitive” M-form firms). Contrary to Williamson’s assertions that such M-form conglomerates had efficient internal capital markets, many of these firms seemed to have been allocating resources to support inefficient diversification (Link 4). The unintended consequences of the combination of extensive diversification and a “competitive” M-form structure may have included short-run profit maximizing and risk adverse behavior at the divisional level. As a result, the competitive position of the divisions of many of these firms began to decline, and by the 1980s they were at the forefront of the restructuring and strategic refocusing trend of that decade (Hoskisson & Turk, 1990; Shleifer & Vishny, 1991).

To this point, the accumulated research evidence suggests that while a multidivisional structure is appropriate for the management of diversity, the kind of internal control apparatus advocated by Williamson may not result in superior performance (Link 5). Rather, the evidence suggests that the most successful multidivisionals are those which emphasize cooperation between divisions. This conclusion, however, is by no means hard and fast.

In other words, the M-form conglomerate seems to have been a poor performing form that is being restructured into a more efficient form. Although some argue that M-form conglomerates are becoming an organizational fossil as Bettis (1991) might suggest, research does not suggest that this is totally correct. Hoskisson and Johnson (1992) found that the primary focus of restructuring activity was on highly diversified firms that had a mixture of related and unrelated businesses. Although most of these firms moved to downscope their level of diversification, some also increased their level of diversification. It appears that in the post-restructuring period, diversified M-form firms have emphasized two basic alternative organizational forms: a decentralized (competitive) organization emphasizing financial control and a centralized (cooperative) alternative emphasizing strategic or operational controls. Researching post-restructuring strategy and control system outcomes and their consequences will be important. Such research will answer the question as to whether two main types, cooperative and competitive, remain viable or whether one or the other will evovle into a new type or become an organizational fossil. Furthermore, research on the control system type could be complemented by examining whether there is a relationship between system attributes and SBU strategy (Golden, 1992; Govindarajan, 1988; Gupta, 1987). Thus, more research is needed to understand more specifically the types of M-forms being restructured and what are the most efficient sytems and their relationship to both corporate and SBU strategy in a globalized economy.

Link 5 might also include examining the characteristics of strategic leaders (top executives and board members) that match particular control strategies (Johnson, Hoskisson, & Hitt, 1993). For instance, Michel and Hambrick (1992) suggest that top management teams with long tenures may indicate they share the same values and norms and agree with the way the firm is managed. They found long top management tenures in vertically integrated and related constrained firms, and suggested they may be indicative of clan (cooperative) organizations with well developed socialization systems.

There have also been a number of alternative strategic moves and structural controls that have proliferated that might be related to Link 5. For instance, during the 1980s and 1990s, there has been a proliferation of strategic alliances among international competitors. For instance, Caterpillar has linked up with Mitsubishi and Hewlett Packard with Samsung. Although international strategic alliances can be a mechanism to combine complementary resources for mutual economic benefits, they can also be a mechanism to learn core competences of partners (Hamel, 1991; Reich & Mankin, 1986). Hamel (1991) argues that there often exists asymmetry in learning capabilities among partners of strategic alliances and that this asymmetry determines bargaining power of partners over management of strategic alliances. Also, he argues that Japanese firms are better learners than Western counterparts. However, we do not know much about why Japanese firms are better learners and what determines learning capabilities of firms. A firm’s structure, control system, internal labor market, and culture can affect its learning capabilities. For instance, excessive emphasis on financial criteria may not provide adequate incentives for managers to focus on learning core competence of partners because learning core competence of partners is unlikely to increase short-term performance. There appears to be a stronger individualistic culture in the U.S. compared to other more homogeneous cultures such as Japan and Germany. This cultural emphasis may lead managers to prefer decentralization (competitiveness) relative to centralization (cooperation). Thus, the systems used to manage strategic alliances and comparative outcomes of such alliances need to be researched fully because learning may be more difficult for U.S. M-forms which stress competitive financial control and decentralization.

Another set of links that has been proposed but not fully explored empirically is the link between governance and M-form adoption and performance (Links 7, and 8). Hoskisson and Turk (1990) propose that governance problems may lead to excessive diversification and restructuring among M-form firms. For instance, they indicate that poor monitoring by diffuse shareholders, too much emphasis on financial controls by outside directors and an overemphasis on financial incentives may lead to excessive risk aversion among corporate and divisional managers. Thus, excessive emphasis on financial control in governance may moderate the link between M-form adoption and performance (Link 7) resulting in lower performance.

Managerial compensation is an important governance device in the sense that managerial compensation schemes influence managerial actions (Hoskisson, Hitt, Turk & Tyler, 1989). Although there has been some research on determinants and consequences of managerial compensation, this issue should be explored more fully. Performance-based compensation can motivate managers to maximize shareholders’ wealth to a certain extent. However, performance-based compensation transfers firm risk to managers and, therefore, can increase managerial risk aversion (Eisenhardt, 1989). Porter (1992) has suggested that managerial incentives have created increased focus on the short-term. Therefore, how to coalign interests between managers and shareholders without creating managerial risk-aversion should be researched (Hoskisson, Hitt, & Hill, 1993). On the other hand, managerial compensation schemes should reflect firm structure, strategy (Gomez-Mejia, 1992), firm culture (Gomez-Mejia & Balkin, 1992), and other firm characteristics. In particular, there is little research on division manager compensation schemes (Fisher & Govindarajan, 1992; Merchant, 1989). These issues should also be researched to examine the impact on the relationship between M-form adoption and performance (Link 7).

Also, leveraged buyouts (LBOs) and debt financing have been argued to improve governance and managerial bonding to firm outcomes. Jensen (1986) argues in his free cash flow theory that debt financing increases firm efficiency by imposing discipline on managers who might overdiversify the firm. Furthermore, Jensen (1989) argues for the demise of public corporations and suggests that public ownership might be replaced by LBO associations as a way to govern firms. However, Rappaport (1990), Taylor (1991) and Porter (1992) counter Jensen’s argument by suggesting that more concentrated institutional ownership is already correcting this problem. Furthermore, debt financing appears to generate some unintended consequences. The high level of leverage increases bankruptcy risk and, therefore, reduces long-term investments such as R&D expenditure (Hitt, Hoskisson, Ireland, & Harrison, 1991; Ravenscraft & Long, 1993). Additionally, to the extent that debt financing limits managerial discretion, it is conceivable that debt financing reduces managerial capabilities of exploiting idlosyncratic firm assets and carrying out experiments. Moreover, debt financing may lead to costly disclosure of valuable and private information to competitors. Therefore, debt financing may reduce agency costs as Jensen argues, but may also lead to underutilization of managerial and firm resources. Future research should more fully address these implications of LBOs and debt financing on the relationship between organization form and performance (Link 7).

Comparative governance studies would also allow an examination of Link 7. Boyacigiller and Adler (1991), for instance, argue that organizational scientists have not paid adequate attention to the differences in cultural values and economic systems across countries in theory development. Research on M-form structures may be subject to this criticism in the sense that previous theory and research on the efficiency of the M-form has with few exceptions focused on the United States (e.g., Armour & Teece, 1978; Hoskisson, 1987; Hoskisson, Harrison, & Dubofsky, 1991) and the United Kingdom (e.g, Hill, 1988; Steer & Cable, 1978). Given differences in governance systems across countries, it is conceivable that the relative advantages of a certain type of structure or strategy may vary across countries (Williamson, 1991; Porter, 1992). It will be recalled that Cable and Dirrheirmer (1983) examining German firms and Cable and Yasuki (1985) examining Japanese firms did not find support for the M-form hypothesis. It was proposed that these counties have different governance arrangements that reduce market failure, and, thus, the M-form hypothesis may not be as applicable in these countries . Therefore, future research examining governance structure differences between countries may explain a potential contingent relationship to M-form adoption and performance (Link 7).

Link 8 examines the relationship between performance and governance. Poor performance has sparked significant changes in governance. For instance, institutional investors have become more aggressive, due to reconcentration of institutional ownership (Monks & Minow, 1991). Outside directors focus on financial performance (as opposed to more subjective assessments by insiders) because they lack day-to-day operating knowledge of the firm (Baysinger & Hoskisson 1990). Results from Hermalin and Weisbach (1988) suggest that firms add outsiders to their boards following poor performance. Outside directors may, therefore, play a major role in strategic actions, particularly actions related to restructuring the firm following poor performance. The restructuring and replacement of CEOs at General Motors, American Express and IBM was led by outside directors after performance suffered (Stewart, 1993). Potentially controversial decisions, such as major changes in strategic direction (e.g. significant divestitures), are more likely to originate from outside board members. Although this link has not been explored fully through empirical research, Johnson et al. (1993) provide evidence that supports this explanation. They found that more outside board members with strong ownership positions was related to reduced restructuring activity. Williamson (1975) argued implicitly that the corporate office of M-form firms relieved much of the governance responsibility traditionally attributed to the board of directors. Thus, research examining Links 7 and 8 may provide useful answers for governing the M-form firm.

Conclusion

The cumulative evidence on M-form structures is that corporate form does make a difference in organizational performance. However, the accumulated body of research evidence on diversification, on balance, suggests that diversification does little to create economic value. In fact, Hoskisson, Hitt, Johnson, and Moesel (1993) find a negative relationship between overall diversification and performance. This finding has been reinforced by Rumelt’s (1991) recent study of the source of variance in profit performance across business units. Rumelt concluded that corporations exhibit little or no ability to affect business unit performance. However, it appears that the way this diversification is managed and controlled can create a difference in performance. Thus, the interrelationship between type of diversification and management of diversification clearly deserves further investigation.

A final challenge that future research must deal with is that presented by the changing nature of competition. The globalization of world markets and production, the emergence of transnational corporations, and the rapid development of information technologies are all changing the way in which large corporations are organized. Is Bettis (I 99 1) correct when he criticizes the whole stream of M-form research as the study of “organizational fossils” that has become increasingly irrelevant in such a world? As we have already indicated, if Bettis is talking about the M-form conglomerate discussed by Williamson, he may be correct, although even the evidence on this is not clear (Hoskisson & Johnson, 1992). On the other hand, we must be careful not to throw the baby out with the bath water. Contrary to Bettis’s assertion, we submit that most large complex transnational organizations still operate with multidivisional structures. This is certainly true of Matsushita, Hewlett-wide Packard, ICI, Procter & Gamble, and Philips NV, all of which have a worldwide product divisional structure. While it is true that all of these firms do emphasize extensive interdivisional integration, this is certainly not at variance with the cooperative M-form model outlined here. Indeed, it is an affirmation of the importance of this model. Although the M-form may not longer create above normal returns, a firm without it may achieve below normal returns (Barney, 1991). The cooperative organization form may continue to produce above normal returns for some firms. This form is often idiosyncratic to the firm because its creation may reflect the unique history and social context of the firm. Therefore, the cooperative form may be difficult to imitate. To understand this form, more work needs to focus on how cooperative M-form organizations operate. Field work using questionnaires and interviews, similar to that described in Bartlett and Ghoshal (1989), may represent the best way forward.

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