Multi-divisional form (also known as M-form or MDF) refers to an organizational structure by which the firm is separated into several semi-autonomous units which are guided and controlled by (financial) targets from the center.
Overview Multi-divisional forms encompass subsidiary parts of a single legal entity (Chandler 1962, 2026, 1990). Although the corporation is controlled by senior managers located in its central office, most quotidian operating decisions are left to the managers of its autonomous divisions. Generally, the central office will organise the provision of services such as managerial expertise and capital for the divisions. The multidivisional form (M-form) is a particular organizational structure in which a firm is divided into semi-autonomous divisions that have their own unitary structures. The firm is essentially divided into subsidiary divisions with each being responsible for a product or region (Chandler 1977). Top management is located in the central office which acts to supervise and coordinate the divisions and develop overall strategies for the business. Throughout the second half of the 20th century, the M-form proved to be the best strategy for many large firms that wished to expand their product diversification and sell to a wider consumer base.
History Multi-divisional forms became popular in the United States in the 1960s. Companies that did not use it tended to develop more slowly. During the 19th and early 20th centuries, the unitary form (U-form) was the most common structure of the largest industrial companies. Unlike the M-form, the U-form is a business structure by which the senior management of a corporation closely supervises its various component "departments" and retains control of all strategic and decision making processes. While this model allowed for unification and consistency, it limited companies from growing and expanding into other markets. It wasn't until the early 1920s that two pioneering firms (DuPont and General Motors) adopted the decentralized multidivisional form as a business model, whereby a central office took overall strategic decisions while devolving to each division its own operational decisions.
After World War I, the United States experienced a large growth in population as well as an increase in urbanization. This resulted in the demand for a larger quantity of goods as well as a wider variety of products. This provided the perfect opportunity for firms to diversify their products and expand into different markets. This business strategy is known as diversification. However, diversification was only possible for the firms that had the technology to make that transition. For example, during the early 1920s, DuPont, an explosives manufacturing company, was able to successfully diversify its lines of production because it had the chemical technology to produce a range of chemical products, including paint and fertilizer. Thus, the birth of the M-form was a result of companies needing a structure to complement their business strategy of diversification. However, as its implementation was the result of existential inventory crises in both companies, delivery proved to be as much necessity as inspiration (Alfred D. Chandler and S. Salsbury).Chandler, Alfred D. Jr. and Stephen Salsbury, 1962/1998, Strategy and Structure: Chapters in the History of the American Industrial Enterprise (MIT Press).
While only a few companies such as DuPont and General Motors transitioned into the M-form before 1940, within two decades thereafter the M-form had become the most widely used management structure adopted by large diversified firms. Companies that successfully diversify adopted the M-form because it proved to be the best way to manage a diversity of production lines while maintaining efficiency and maximizing profit. As stated by Alfred D. Chandler Jr., "the multi-divisional form, which hardly existed in 1920, had, by 1960, become the accepted form of management of the most complex and diverse of American industrial enterprises." And after adopting the M-form, many firms showed a substantial increase in their profits compared to firms that did not adopt the M-form, proving that the multi-divisional form was the best corporate structure for large and diversified companies.(Source ?)
Development The M-form, or multi-divisional form, originated in the 1920s century and, after a hiatus of twenty years, was successfully adopted in the USA in the 1960s. In the decade after World War II it was utilized in specific industries like the petroleum and some technology companies and by the mid-1960s many large American companies had implemented the M-form. In contrast to the tradition U-form (unitary form), companies that made the transition showed up to 30% increase in profits in the first year alone. In some industries up to 80% of the companies made the change, and the added degree of decentralized specialization proved profitable for most. (Source ?)
The M-form utilizes both scientific management and bureaucratic controls together. By combining the positives of both forms of management, companies were able to increase efficiency and therefore profits. For small companies, a combination of the two may not be profitable, since they have few employees and are limited in resources. For larger corporations, however, using M-form allows the workers on all levels to specialize, while the company as a whole is still organized in a strict hierarchy (Williamson - where?).
Standard Oil was one of the first companies to apply the ideas of the M-form.{Source = when? & cf Chandler} As a large corporation with many subsidiaries before it was broken up at the order of the Supreme Court, Standard Oil operated as a collection of many small individual companies, all eventually reporting to the company headquarters. For example, it expanded into the railroad and pipeline operations which necessitated the creation of new branches of the company beyond the competence of its oil experts. Creating new branches of management to handle the new parts of the company was one of the first implementations of the M-form in the US. {Source = when? & cf Chandler} Also, as mergers became more frequently in the US during this time, corporations needed the ability to add and drop branches of management quickly and efficiently.{Source}
Because of the increase in profits, many companies were incentivized to convert to the M-form in the early 1970s. General Motors, a pioneer in the adoption of the new business strategy in 1921, created a separate division for each model which existed within the larger company. Both Williamson and Chandler were proponents of the M-form, and praised it greatly in the 1970s and 1980s. While they pointed out certain flaws in the management style, Williamson argued that this was the only management style that allowed "the firm [to] run efficiently while at the same time be able to adapt to changing market conditions" (Williamson 1985, 284). In general this wrong, as many large industrial firms thrived without the adoption of the M-form (for example, British American Tobacco), but this was true of firms which had diversified.
M-form also became popular because it allowed companies to more easily identify market opportunities and assess the profitability of each division. "Because the central auditing office evaluates all the divisions in an M-form company using the same accounting methods, they can easily see which divisions are more efficient (Maskin, Qian and Xu 1999)" (Koblenz). For companies like GM, this was very helpful in understanding which cars to focus on and which products were not helping the company to grow. This, in turn, had the potential to identify incentives that might improve the performance of workers, which further increased productivity.
For shareholders, the decentralization provided by the M-form was also very promising. As it allowed for almost unlimited company growth as well as more efficiency, companies began to grow faster. With more upper level management involved in this new system (who were paid in part through stock options), shareholder value became a higher priority since the senior managers benefited more through it.
The rapid development of the M-form in the middle of the 20th century didn't happen by chance-it was the deliberate policy of senior managers who identified an opportunity to increase profit and efficiency while gaining opportunities to expand and diminished risk relative to the traditional U-form structure.
Advantages The M-form became the preferred organizational system because it combines the distinct brand and economies of scale advantages of a large conglomerate, while maintaining the operational flexibility of a small firm. By dividing the firm based on output into several autonomous units, the M-form provides the optimal level of centralization in a company: central management could still dictate the overall direction of the firm, while each division operates autonomously to cater to its own needs, is held accountable for its own profits, and can remain productive even if the other divisions fail.
A large company has its powerful brand name that can be extended to its various divisions, the benefits of large economies of scale, and sheer economic might in the market that it operates. However, once the company becomes too large, output, business needs, and profit-maximizing strategies, may differ across divisions. The M-form system solves this dilemma because it allows each arm to operate autonomously. While the divisions may still be kept under central management's expectation to maximize profits, each division can be flexible and act independently. That is, while upper-management can dictate the general direction of the firm, the lower-level managers handle the day-to-day operations of the division. Because of this flexibility, perfect coordination can always be achieved (for instance, it has been found that M-form firms increase returns through an internal labor mechanism).
Furthermore, if a specific division of the firm is lagging, that division's management will be held solely responsible and thus individuals will also be held more accountable. In this sense, companies under the M-form system are better at incentivizing their own divisions not only because lower-level managers are held more accountable, but also because parallel divisions would essentially compete each other since accounting was transparent, profits were emphasized, and the divisions would be evaluated based on efficiency. Lastly, even if one unit of the firm does fail, since the units all operate autonomously, it will not have detrimental consequences for the other divisions (recent research though has found that competitive threats to one unit can diffuse across the units of diversified M-form firms, even to lines of businesses not directly affected by those events). This allows the overall company to be more versatile and enduring.