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division managers (decentralization) does not mean that senior managers have given up their authority. Rather, they have likely retained authority to review division performance and make decisions that influence the career advancement of division managers (centralization).

The balance between centralization and decentralization is to some degree selfcorrecting. This is apparent in the idea of span of control, which refers to the number of individuals who directly report to a manager. The larger the number of individuals reporting to a manager, the wider is that manager’s span of control (and vice versa).

Debates among management practitioners and scholars regarding the optimal span of control have not reached lasting conclusions. Changes in expectations regarding how many reports one should have differ by the type of work being managed and the sector involved. It is generally recognized that with a broader span of control individuals need to be managed differently than with a narrow span of control. When the span of control increases, managers have more reports to oversee and less time to intensively review any particular staffer. Managers must therefore narrow their focus on results and pay less attention to the processes by which those results are obtained or else standardize critical processes. Control over operations in apparently centralized organizations is thus decentralized to lower level managers, even while the review of these managers remains with more senior managers. Firms like Sears pioneered this approach to management with their focus on store management in the era of postwar growth. More diversified firms, such as GE under Jack Welch, developed it further. This approach is less common in areas with narrower spans of control, such as professional service businesses and R&D groups.11

TYPES OF ORGANIZATIONAL STRUCTURES

There are four basic structures for large organizations.13

1.The unitary functional structure (often called the U-form)

2.The multidivisional structure (often called the M-form)

3.The matrix structure

4.The network structure

Functional Structure (U-form)

Figure 13.1 represents the unitary functional structure or U-form. The term unitary functional refers to the fact that in this structure a single unit is responsible for each basic business function (e.g., finance, marketing, production, purchasing) within the firm. The Jaipur Rug Company structure discussed earlier is an example of this structure. A division of labor that allows for specialization of basic business tasks characterizes this structure. As a firm grows, new tasks can be added or existing departments can be subdivided without jeopardizing the logic of the structure. The component groups or units in the functional structure are called departments. Because of this division of labor, departments are dependent on direction from central headquarters and probably could not exist outside of the firm except as contract vendors. Individuals grouped within departments share similar backgrounds, norms of behaviors, goals, and performance standards. This promotes performance within the department but makes coordination with other departments difficult. Firms organized this way tend to centralize their strategic decision making.

448 • Chapter 13 • Strategy and Structure

FIGURE 13.1

Sample Chart of a Functional Organizational Structure

Corporate

Headquarters

•Chairperson

•President

•Staff VPs

Functional structures developed as firms grew bigger and more specialized in the nineteenth century. These structures are suited to relatively stable conditions in which operational efficiency is valued. Even so, large firms were slow to adopt these structures. The early growth of large firms that we discussed in Chapter 1 was characterized by loose combinations of formerly independent firms, often still run by founders. These failed to coordinate leadership and generally did not combine work groups performing similar tasks into departments. Rather, they resembled alliances of equals. (U.S. Steel looked this way when it became the first billion-dollar firm in 1901.)

Functional organization in large firms became widely adopted once managers realized that firms that were organized this way could outperform competitors that were not. The widespread adoption of the functional structure among large firms occurred during the first merger wave that took place in the 1890s. In addition, older firms, such as Standard Oil and the Union Pacific Railroad, were also further rationalized around this time. A similar rationalization took place recently among European firms with the increased likelihood of European economic integration.

Multidivisional Structure (M-form)

Figure 13.2 shows the divisional (often called M-form or multidivisional) structure. It encompasses a set of autonomous divisions led by a headquarters office and assisted by a corporate staff that provides information about the internal and external business environment. Rather than organizing by function or by task, a multidivisional structure starts with an interrelated group of subunits (called a division) as the building block. The subunits that comprise a division could be functionally organized departments but could also be other divisions, which in turn are composed of departments. Divisions can be organized in multiple ways, such as by product line or the degree of business relatedness, by geography, or by customer. The classic example of a firm with such a structure is General Motors, where the divisional structure emerged during the 1920s. Indeed, the multidivisional structure is sometimes referred to as the “General Motors” model.

Oliver Williamson, who identified the distinction between M- and U-forms, argues that the M-form develops in response to problems of inefficiency and agency

Types of Organizational Structures • 449

FIGURE 13.2

Sample Chart of a Multidivisional Structure

Corporate Headquarters

•Chairperson

•President

•Staff VP’s

Divisions

that arise in U-form firms as they increase in size and complexity. Relative to a functional structure, the M-form improves efficiency through a division of labor between strategic and operating decisions. Division managers focus on operational issues, while strategic decisions are left to top managers and corporate staff. The M-form reduces agency problems by fostering an internal capital market, in which division managers compete for discretionary corporate funds on the basis of results. Corporate staff, using strategic controls, promotes corporate goals by monitoring division performance and advising managers on how to align their activities with corporate goals. A strong corporate staff is important for the M-form, and its absence leads to a weaker holding company form that generates less value.

M-form structures help to address problems of coordination across large distances that are common in large and newly diversified firms. As firms diversify across geographic markets, they have to coordinate different functional areas within each market. For example, geographically diversified firms, such as McGaw Cellular Communications or Waste Management, run what amount to autonomous businesses in each of their geographic markets. A structure organized along these lines allows these firms to coordinate production, distribution, and sales within their different markets, each of which may face unique competitive conditions.

The divisional structure solves another problem of large organizations: the desire to reduce agency costs by closely linking individual pay to performance. Operating authority is generally decentralized to division managers, who are held accountable for divisional performance. A simple example of this occurs in retailing. In a chain of retailers, such as Sainsbury, Kohls, or Printemps Department Stores, each store is, in effect, its own division, with profits calculated on a store-by-store basis. This provides top managers with a simple measure of store performance that can then be used to evaluate and reward store managers based on their results.

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FIGURE 13.3

A Matrix Organization Structure with Project and Function Dimensions

Source: Adapted from McCann and Galbraith, 1980.

departments, or two different types of divisions (such as geographic and client divisions). Individuals working at the intersections of the matrix (usually middle managers) report information to two hierarchies and have two bosses. For example, the Pepsi matrix that was created in the late 1980s was organized along geographic and functional lines. The Northeast regional manufacturing manager simultaneously reported to the Northeast regional general manager and a national senior vice president for manufacturing. Although a matrix structure may extend throughout the entire firm, in practice it is costly to do so and some levels of the firm are often organized into a matrix while others are not. Thus, Pepsi’s national marketing group remained outside of the matrix.

A matrix is valuable when economies of scale or scope or agency considerations provide a compelling rationale for organizing along more than one dimension simultaneously or when some important issues, such as regulatory or environmental issues, are not well addressed by the firm’s principal organizing approach. For example, Pepsi believed that national coordination of manufacturing helped achieve scale economies in production, justifying organization along functional lines, while regional coordination increased Pepsi’s effectiveness in negotiating with large purchasers, justifying organization along geographic lines.

Managers often struggle to meet conflicting demands within the matrix, so the presence of multiple dimensions of scale economies is not sufficient to justify the