To overcome the organizational constraint on growth, firms experiment with new organizational forms.

Advantages

In this new structure the firm achieves economies of specialization at two levels: first, product specialization where each product produced by the firm becomes a separate division and, second, at the divisional level where use is made of functional specialist skills. Thus, the M-form combines both the benefits of a small-scale U-form organization at the division level and the economies of separation associated with each division producing a single product. The growth constraint preventing diversification is overcome by the firm being able to add new divisions for new products rather than having to reorganize the hierarchical structure. Starting at the top of the enterprise, the chief executive is given time to make strategic decisions and to be responsible for the overall boundaries of the firm. Day-today operational decisions are the responsibility of the heads of divisions. The chief executive reports to and seeks advice from a board of directors (which does not have functional responsibilities), receives administrative and research support from the small number of headquarters staff, who also appraise the performance data supplied by divisions. The chief executive, freed from administrative duties, sets objectives for each division, gives orders to and receives reports from the head of each division. The chief executive also decides whether to add or delete divisions from the firm’s portfolio of activities. The number of people reporting to the chief executive is a function of the number of divisions. Thus, in a 10-division firm the chief executive is responsible for the 10 heads of divisions. At this level the organizational structure is flat with a single tier of supervision of all divisions.

The head office of the M-form firm meets the administrative needs of the chief executive and the senior management team. It does not serve the interests of individual product divisions but the interests of the firm as a whole. Despite the small numbers of headquarters staff, the chief executive and senior management team appear to have few motives to behave opportunistically and distort the allocation of resources, though they might desire the number of staff and the functions of headquarters to increase in size.

A key feature of the M-form structure is that divisions remit financial surpluses to headquarters who in turn allocate resources to divisions on the basis of the greatest contribution to profitability. The operation of this internal capital market is the responsibility of headquarters. One of the criticisms levied against the U-form structure for a multi-product firm is that resources are retained by divisions and misallocated as senior divisional managers pursue their own goals. The external capital market does not correct this failure because the means of disciplining the managers of enterprises that have disappointing performance are weak. They consist essentially of investors selling shares, thereby reducing the firm’s valuation ratio and takeover threats from other enterprises. The central management of the M-form firm can overcome these shortcomings by the superior information they have about the divisions, obtained by monitoring systems, checked by performance audits and backed by the ability to hire and fire managers.

The internal capital market means that divisions have no retained earnings and that they have to seek funding from headquarters for investment. Thus, providing headquarters stick to allocating investment according to expected returns, this will produce maximum benefits for the firm. The only way, it is argued, that the division can influence the allocation of resources is by putting forward-well-thought-out investment plans and not by using political influence. Ensuring that the investment proposals of divisions have a reasonable chance of making the predicted profits is the responsibility of headquarters staff

. Their problem is that they do not necessarily have the skills that the divisions possess to question the underlying basis of the investment. In the long run, inflated returns that are not earned will reduce the credibility of the division’s proposals. Thus, whether the internal capital market is superior may be debatable but clearly depends on the strict application of the resource allocation model and the commitment of headquarters staff to the overall objectives of the enterprise. Individual divisions should be designed to be small enough to be organized as U-form enterprises and focused on a single or narrow range of products, so that functional specialization produces an efficient organizational structure. The division may also be able to fully exploit economies of scale, since a single product is being produced. However, economies of scope are not available unless the divisions trade with each other or there are central buying functions. These developments would be considered as corrupting the pure M-form structure and, therefore, limiting the benefits of the structure.

The M-form structure allows the performance of each division to be measured. If each division is responsible for a single product, then the performance of these can also be measured; this is an advantage over the U-form structure, where such comparisons are inherently difficult to make. In the M-form structure the performance of divisions can be compared and, depending on the objectives of the senior management and/or owners, resources can be withdrawn from or allocated to divisions; even whole divisions can be sold or closed down. If the cause of underperforming in divisions is attributed to their senior managers, then central management can act quickly to replace them.

Divisions can also be easily added with little or no impact on the other divisions.The M-form structure facilitates the growth of diversified enterprises because each division is in some senses an independent business. The limit to the number of divisions depends on the ability of central management to be able to control the information flows from individual divisions.

The advantages of the M-form structure lies in the control of divisions by a headquarters dedicated to improving the profitability of the firm as a whole. The M-form structure is said to limit opportunities for managerial discretion in divisions as the system permits greater central control of managerial slack, as headquarters are unlikely to sanction projects enhancing managerial utility at the expense of the firm as a whole. In addition, poorly performing divisions are easily identified and policy changes can be quickly made to restore performance

Disadvantages

Whether M-form structures can deliver the benefits claimed depends on whether its purity is maintained. Over time, it can become corrupted if senior management and headquarters staff become involved in the day-to-day operations of divisions facing difficulties. Central management may not be as profit-oriented as the model postulates, and as a consequence there is less pressure on divisions to perform. In such circumstances, divisions may not have to compete for resources and may be allowed to retain some of their own funds. Also, if divisions grow, then they may face problems similar to those of growing U-form firms unless they can be subdivided to maintain the benefits of the divisional structure