LECTURE 29: EUROPE AND THE LARGE ENTERPRISE IN EUROPE

Europe and the large enterprise in Europe

Note: Peter’s opinion doesn’t match the one we will find in history books → British economy was
doing reasonably well. This lecture is a summary and also critique of the two chapter of
Chandler book: Big Business and the Wealth of Nations, Cambridge University Press, 1999.

Warning: business history and misleading “stereotypes” or “archetypes”.

There is a large and significant gap between:
• “Traditional” literature: which attributed the relative failure of British economy (which, in world
terms, did not happen in 1914; or in Western Europe terms, cannot be identified before 1970),
to the failure of British entrepreneurs to build and successfully run large companies.

• “Revisionist view”: as we have seen, large British firms, in both the manufacturing and services
sectors, prospered before 1914, and continued to develop, expanding and making profits
between 1914 and 19160. This theme is developed and strongly asserted by Alfred Chandler.
This “gap” is also clearly evident in the economic literature, where it is only recently been
recognized that British firms were not as they had been described.

OVERVIEW
1. Economic archetypes and policies
2. European states and corporate behavior
3. American preoccupations: view through Chandlerian lens.
4. Characteristics and advantages of the “M-form”
5. Strategy and Structure
6. Evidence of “National types” → cassis
7. Contribution of large industrial enterprises to economic growth

1. ECONOMIC ARCHETYPES AND POLICIES

Adam Smith - “laissez faire, laissez allez” → Operation of market : let the market do, without any
intervention of the state

Germany → statist position (the state has a lot of control over the country)
Georg Friedrich List (1789 - 1846: 19th century German economist)
- List is probably the first german economist. An economist of the German national system. Lee
has some interesting ideas for the futures
- Originator of the German “historical school of economics”,
- He wrote the book: Das Nationale System der Politischen Ökonomie (1841) - published as the
National system of political economy.

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- Propounded a nationalist interpretation of economic development - arguing that the state
should act to encourage and structure economic development.
- Advocated in the German context protectionism and railway system development: tariffs and
infrastructure
- Unification of Germany: combination of German nationalism, the ambitions of the Prussian
state and creation of a pan-german customs union.
- Continued relevance for post-WWII developments in Western Europe - the economic policies
of the European Economic Community drew upon the principles of that underlay the C19th
unification of Germany.

Customs union → federation → political integration (→¿political union?)

Note: List is in favor of high tariffs and spending in infrastructure promoting a german nation→
The ideas that were used in order to put the german nations together inspired the one which
put the European Union together: customs union, federation, political integration.
(VEURE APENDIX PER MÉS INFO)

Great Britain
Margaret Thatcher’s (1979 → ) vision and principles for the EC: a common market based on
capitalist enterprise rather than a political project with a European “super-state” as its objective.
1. Willing and active cooperation between independent sovereign states without
“suppressing nationhood and concentrating power at the center of a European
conglomerate… Working more closely together does not require power to be
centralized in Brussels or decisions to be taken by an appointed bureaucracy”
2. Reform of the ineffective Community practices and policies
3. Community policies should encourage enterprise through getting rid of barriers and
making it possible for companies to operate on a Europe wide scale. Action to free
markets, widen choice, reduce government intervention.
4. Community should lead the process of removing the barriers to trade in GATT

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2. EUROPEAN STATES AND CORPORATE BEHAVIOR

1980s
1. Convergence of domestic policy preferences in the large member states:
Development of European firms - modernisation to compete
• economic integration - part of a geopolitical gran strategy response to the declining
industrial competitiveness of Europe.
• liberalization of the European market
• removal of non-price market barriers (tariffs and quotas, regulations)
• action to stimulate investment - especially infrastructural development
• search for cooperation programmes to encourage the adoption of new technologies -
automation, Information Technology.
• Corporate policy - importance of economies of scale to compete effectively in
international markets (anti-trust legislation)
• Acceptance of continuing national priorities: role of the Centrist coalitions and national
bureaucracies.
→ The union cannot overrule the supremacy of national rules and parliaments

Not the kind of thing Adam Smith would approve

2. Transnational business groups acting to encourage corporate development,

modernisation and growth in the European Union.
• The Thorn-Davignon Commission (1981) - “Big 12”
• Round table of European industrialists (1983) geared by Guy Gyllenhammer
• The Union des Confederations de l’Industrie et des Employeurs d’Europe (1984)
• Wisse Dekker “Europa 1990” plan for market liberalization (1984)

3. AMERICAN PREOCCUPATIONS: VIEW THROUGH CHANDLERIAN LENS

This is a story about industry. Manufacturing industry is prioritized over services. It is important to
notice that also large corporations in the UK appear.

Assumptions (prejudices):
1. Primacy (superiority) of the “industrial” over the “services”
2. Early emergence of large corporations in the USA → warning! In fact, not only in the US
but also in other countries, such as the UK.

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TABLE 2.10. Country distribution of the 500 largest industrial enterprises in the world, 1916 and
1993 (ranked by sales)

COUNTRY (developed market 1962 1993

economies, except Japan)

United States 298 160

Great Britain 55 43

Germany 36 32

France 27 26

Sweden 8 12

Australia 2 10

Switzerland 6 9

The Netherlands 5 9

Canada 13 7

Italy 7 7

Belgium 3 4

Spain 0 3

Norway 0 3

Finland 0 3

Austria 1 2

Others 0 3

TOTAL 462 333

Note that the US did have a high proportion of the largest corporations, but this proportion
diminishes over time, as other countries develop big business too. (if you believed what
literature says about British failure, then the Uk wouldn’t be at the second place, but instead in a
much lower one)

What historian tend to do is write according to the situation in the 1960s, but they don’t take into
much account the situation in the 90s. With the expansion of the far East, America loses a bit of
importance among the large enterprises. But still, it is dominant.

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Capital formation, R&D and growth promotion - USA - industrial companies
TABLE 2.2. Research and development in the United States, 1965-1992

R&D scientists and R&D scientists R&D expenditure R&D expenditure

engineers (thousands) and engineers per (thousands of 1987 as a percentage
10.000 labor force dollars) of GDP
population

Total Business Total Business

1965 494,2 348,4 64,7 70,643 $ 49.930 $ 2,9 %

1970 543,8 375,6 64,1 74,722 51,429 2,6

1975 527,4 363,9 55,3 72,256 49,171 2,2

1980 651,1 469,2 60,0 87,666 62,062 2,3

1985 841,6 646,3 71,3 120,624 89,263 2,8

1989 949,3 726,0 75,6 129,898 93,944 2,7

1990 129,545 92,446 2,7

1992 130,361 91,346 2,6

Source: Compiled and calculated from National Science Foundation.

This table suggests that industrial importance lies in the heart of the economic growth and it is
based in the r&d. Note that the percentage (in the last column) does not change much → that is
because of the importance of the services, despite that they are not taken into account.

Industry - growth nexus - capital intensity and R&D

•the closer to the 0 on the

horizontal axis, less capital
investment you will need
•the further up in the vertical axis,
the more capital intensive (r&d)
the industry will be
•the multidivisional form helps
business to be able to invest in
r&d

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4. CHARACTERISTICS AND ADVANTAGES OF THE “M-FORM”
Williamson - characteristics and advantage of the “M-form”
The elitist rationality is captured by Williamson in his formalization of Chandler’s (1962)
multidivisional model as the “M-form”. The characteristics and advantages of the M-form are as
follows (Williamson, 1970)
1. The responsibility for operating decisions is assigned to (essentially self-contained)
operating divisions.

2. The elite staff attached to the general office performs both adivsory and auditing
function. Both activities have the effect of securing greater control over operating
division behavior.
The central office is watching closely what different divisions do and make the decisions
about in which divisions to invest and how much, but the divisions then directed
themselves in the day to day basis

3. The general office is principally concerned with strategic decisions involving planning,
appraisal, and control, including the allocation of resources among the (competing)
operating divisions.

4. The separation of the general office from operations provides general office
executives with the   psychological commitment to be concerned with the overall
performance of the organization rather than become absorbed in the affairs of the
functional parts.

5. The resulting structure displays both rationality and synergy: the whole greater (more
effective, more efficient) than the sum of the parts
Important!!! The visible hand → Alfred Chandler → point 5

(VEURE APÈNDIX PER MÉS INFO)

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5. STRATEGY AND STRUCTURE IN EUROPE
Harvard schema
The Harvard Business School in 1970 was started a project on four European countries –United
Kingdom, Germany, France and Italy. The project gave origin to four studies, about the
European enterprise, plus a fifth one analyzing in depth the US case which represented a kind of
“benchmark” for valuating the findings of the other country studies.

The research took into consideration the twenty years between 1950 and 1970, and it examined
the first 100 companies (by sales) for each country. Taking advantage of the further elaboration
of the Chandlerian model by Bruce R.  Scott and Leonard Wrigley, the authors used a more
accurate classification than the original one both for strategy and structure. For the latter they
defined “single business” a firm whose total sales are for 95% or more concentrated in one
activity; “dominant business” when besides other related or unrelated initiatives 70% of the sales
are in one business; “related business” when one business does not overcome 70% of total
sales; “unrelated business” when firms diversify into activities that have no market or technology
in common.

For strategy, in addition to the functional and the multidivisional considered by Chandler they
point out the existence of a “functional-holding” structure, that means a company in which
managers immediately below the top management lead function areas for the major part of the
business while for the rest heads of subsidiaries report to top management; “holding structure”
when the activities of various subsidiaries are supervised and loosely coordinated by top
management. The expected outcome of the research project given a similar environment is a
convergence between the United States and Europe.

Graph related to the Harvard schema

The argument is that you should split

big companies whenever they get too
big. Relation between centralization
and decentralization

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Graph related to the strategy and structure in Europe

Historiography
For many business historians, especially Americans, and specifically Alfred Chandler and David
Landes:
- German Big Business is presented as the European champion
- Britain’s, by contrast, were cast as the slothful villains - or non-performers.
- France was interesting only as long as it appeared to “different”: late, backward and retarded.
More recently, co-inciding with France’s more promising economic record, the performance of
French Big Business has ceased to be of interest to scholars on the other side of the Atlantic

6. COMPARATIVE ASSESSMENT OF BREAT BRITAIN AND GERMANY

- Sources for United Kingdom: Dictionary of Business Biography and Oxford Dictionary of
National Biography.
- Comparative assessment of Great Britain, France and Germany - sources:
• company histories - official and unofficial
• financial press
• stock exchange annual publications:
Stock Exchange Official Intelligence (UK),
Cote Desfossé (France)
Handbuch der deutschen Altiengesellschaften and Slangs Börsen Jahrbuch
(Germany)
- Youssef Cassis, Big Business: European experience in the twentieth century. Index:

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PART I: BIG BUSINESS
1. The world of big business before 1914
2. From 1920s to the 1950s
3. Recent developments
PART II: PERFORMANCES
4. Profits and profitability
5. Survival → if they survive, it is an indicator that they are doing well
PART III: BUSINESS LEADERSHIP
6. Competences
7. Decision-making
PART IV: BUSINESS, SOCIETY AND POLITICS
8. Wealth, status and power before 1914
9. Business elites in contemporary Europe
In Britain, it was an open elite → you could get there climbing through the hierarchy

European growth rates of production - 100 largest manufacturing firms

Note this is in terms of growth rates p.a. of

the industrial sector

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Educational qualifications - workforce
TABLE 4.5. Qualification proportions an relative wage rates of the British and German
manufacturing work force, 1987
Qualification proportions Wage rates relative to unskilled

United Kingdom Germany United Kingdom Germany

Higher level 6,7 6,0 1,7 2,2

Upper intermediate 4,4 8,2 1,3 1,7

Lower intermediate 26,3 56,4 1,2 1,2

No qualifications 62,6 29,4 1,0 1,0

Source: Mary O’Mahony, “Productivity levels in British and German Manufacturing Industry”, Na

→ Note that, in Britain there is a failure in education in the workforce as we can see in the graph

Background of Senior Managers - Whittington and Mayer

TABLE 4.3. Top managers’ background in the United Kingdom, France and Germany, 1983, 1993
(Domestic industrial top 100) (%)
France Germany UK

1983 1993 1983 1993 1983 1993

General 9,5 4,5 na 27,0 29,3 32,8

management

Technical 29,7 24,2 na 25,4 21,3 11,9

Finance 4,1 7,6 na 7,9 14,7 19,4

Marketing 2,7 1,5 na 4,8 5,3 9,0

State 12,2 16,7 na 3,2 12,0 -

Personal 28,4 34,9 23,3 17,5 12,0 16,5

Other 1,4 4,5 na 4,8 1,3 -

Not available 12,2 4,5 na 9,5 10,7 10,4

Number 74 66 60 63 75 67

→ Generally speaking Germany and GB is not that different, but in France it is.

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UK corporate structures - f-form, m-form and others, Whittington and Mayer

CONCLUSIONS FROM THE CHAPTER-BOOK RELATED TO CASSIS

¿German good, Britain bad? Now, this view is unsustainable
“Large, integrated plants using state-of-the-art technology have been contrasted with an
atomistic industrial structure and outdated methods of production; professionally trained
managers with “practical men” and gentlemanly amateurs, long-term industrial finance with
speculative manias, and so on”.
“Such clichés might appear caricatures, but they hardly exaggerate the stigma of
entrepreneurial failure attached to British businessmen”.

¿German good, Britain bad, France lacking?

Now this view is unsustainable
• British Big Business pioneers in early C20th
• A substantial gap emerged in the interwar years as British “Big Business” continued to
develop and by 1959 this was substantial.
• This gap closed to some extent - but remained at the end of the C20th - despite economic
performance of the UK economy.
• British Big Business was always more diversifyed than either German of French Big
Business.
• Despite national differences, convergence, in terms of size, organization, structure and
performance, has been evident since the 1950s - and continues.

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However, a reservation. If convergence evident through the post-war period from not
totally dissimilar positions. Was corporate strategy and structure significant as a
determinant of economic growth?
TABLE 4.2. Output per person-hour in manufacturing, 1951-1988
United Kingdom United States Germany France

1951 100 270 68 71

1964 100 268 117 90

1973 100 284 133 101

1979 100 243 163 129

1988 100 224 138 122

Source: Nick F. R. Crafts, “Economic Growth” in Nick F. R. Crafts and Nicholas Woodward, The
British Economy since 1945
→Note this means that in 1951 the US was 2,7 times more productive than the UK

Real GDP per hour worked (Crafts)

TABLE 4.1. Real GDP per hour worked, 1870-1986
United Kingdom United States Germany France

1870 100 97 50 48

1890 100 113 55 49

1913 100 135 65 60

1929 100 158 65 70

1938 100 154 73 82

1950 100 185 54 70

1973 100 156 100 105

1986 100 133 105 119

In the 1950 there is a big gap btw USA and GB, but then it is closed later.
This difference is because of the service sector compared to the chart above

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Of what was corporate strategy and structure…..
TABLE 4.2. Output per person-hour in manufacturing, 1951-1988
United Kingdom United States Germany France

1951 100 270 68 71

1964 100 268 117 90

1973 100 284 133 101

1979 100 243 163 129

1988 100 224 138 122

TABLE 4.1. Real GDP per hour worked, 1870-1986

United Kingdom United States Germany France

1870 100 97 50 48

1890 100 113 55 49

1913 100 135 65 60

1929 100 158 65 70

1938 100 154 73 82

1950 100 185 54 70

1973 100 156 100 105

1986 100 133 105 119

- The service sector in Britain is much more productive.

- Services are crucial for British economic growth .
- In manufacturing the gap is bigger, but when taking into account the services the gap is
smaller (has shrunk)  and there is a kind of convergence in Europe → we find a different relative
composition in the economy.

BIBLIOGRAPHY

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APENDIX

GEORG FRIEDRICH LIST

List’s main economic theories
Economics based on productive powers
List considered that the prosperity of a nation depended not upon the wealth that it had
amassed but upon its ability to develop "productive forces (means of labor: tools, machinery,
land; and labour power)“ which would create wealth in the future. These forces included:
- scientific discoveries,
- advances in technology,
- improvements in transportation,
- the provision of educational facilities,
- the maintenance of law and order, an efficient public administration, and
- the introduction of a measure of self-government.

He argued that Adam Smith and his followers had laid too much emphasis upon material wealth,
which had an exchange value, and had not adequately appreciated the significance of the
productive powers that create wealth. He praised Adam Smith for breaking new ground with his
theory of the division of labor, but criticized him for omitting to explain fully the role in the
economy of the "productive powers of labor," which he had mentioned in the introduction to
The Wealth of Nations.
List also noted that Adam Smith had failed to “assign a productive character to the mental labor
of those who maintain law and order and cultivate and promote instruction, religion, science,
and art.”
Finally and foremost, List maintained that the civilization, political education and power of
nations, depend chiefly on their economical condition and reciprocally; the more advanced their
economy, the more civilized and powerful will be the nation, the more rapidly will its civilization
and power increase, and the more will its economical culture be developed. (List 1856)

Stages of national development

List described four stages of economic development through which nations naturally proceed:
1. In the first, agriculture is encouraged by the importation of manufactured articles, and by the
exportation of its own products
2. In the second, manufacturers begin to increase at home, whilst the importation of foreign
manufactures to some extent continues;
3. In the third, home manufactures mainly supply domestic consumption and the internal
markets; finally,
4. In the fourth, we see the exportation upon a large scale of manufactured products, and the
importation of raw materials and agricultural products. (List 1956)

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The system of import duties being considered as a mode of assisting the economical
development of a nation, by regulating its external trade, must constantly take as a rule the
principle of the industrial education of the country. To encourage agriculture by the aid of
protective duties is vicious policy; for agriculture can be encouraged only by promoting
manufacturing industry; and the exclusion of raw material and agricultural products from
abroad, has no other result than to impede the rise of national manufactures. (List 1956)

This, in fact, is the central idea of List's theory, that a nation must first develop its own
agricultural and manufacturing processes sufficiently to support international free trade.

It is only when a nation has reached such a stage of development that she can bear the strain of
competition with foreign manufactures without injury in any respect, that she can safely dispense
with protection to her own manufactures, and enter on a policy of general free trade. (List 1827)
This "economic nationalism" can be observed as permeating all List's economic writing.

List’s theory of “national economics”

List's theory of "national economics" differed from the views of Smith. He contrasted the
economic behavior of an individual with that of a nation: an individual promotes only his own
personal interests but a state fosters the welfare of all its citizens. An individual may prosper
from activities that harm the interests of a nation, while activities beneficial to society may injure
the interests of certain individuals: "Canals and railroads may do great good to a nation, but all
waggoners will complain of this improvement. Every new invention has some inconvenience for
a number of individuals, and is nevertheless a public blessing" (List 1856).

He did, however, recognize the need for moderation, arguing that although some government
action was essential to stimulate the economy, an overzealous government might do more harm
than good:
It is bad policy to regulate everything and to promote everything by employing social powers,
where things may better regulate themselves and can be better promoted by private exertions;
but it is no less bad policy to let those things alone which can only be promoted by interfering
social power. (List 1856)

Both Adam Smith and Karl Marx adopted the hopeful view that nations and national rivalry were
a relic from the past that could be easily overcome. Smith relied on commercial self-interest.
Marx relied on class divisions erasing national differences. Both were quite correct as to the
general direction in which the world was moving. However, List was more realistic in thinking
that the excellent goal of a cosmopolitical world could not be quickly achieved without allowing
for the present existence and power of rival nations and states. Thus, List recognized the power
of national forces, while Marx and Friedrich Engels seriously underestimated the strength of
nationalism (Williams).

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Disagreements with Adam Smith's ideas
List had many disagreements with Adam Smith. In the third chapter of The Wealth of Nations,
Smith mentioned the actual cause of the division of labor, namely the benefits resulting from the
formation of a very large economic unit. From the point of view of net production, he argued the
larger the better. List, however, was not convinced by this argument, mainly because he asked
the question: What if we suppose the large economic unit contains several separate sovereign
states? Smith did not ask this question, which may not have occurred to him. He was a man who
felt that the union within Great Britain had been a great blessing. Did he also foresee an
eventual union of Europe being brought about by trade?

List's answer was:

The result of a general free trade would not be a universal republic, but, on the contrary, a
universal subjection of the less advanced nations to the predominant manufacturing,
commercial and naval power, is a conclusion for which the reasons are very strong…… A
universal republic ..., i.e. a union of the nations of the earth whereby they recognize the same
conditions of right among themselves and renounce self-redress, can only be realized if a large
number of nationalities attain to as nearly the same degree as possible of industry and
civilization, political cultivation and power...
Only with the gradual formation of this union can free trade be developed, only as a result of
this union can it confer on all nations the same great advantages which are now experienced by
those provinces and states which are politically united... The system of protection, inasmuch as it
forms the only means of placing those nations which are far behind in civilization on equal terms
with the one predominating nation, appears to be the most efficient means of furthering the
final union of nations, and hence also of promoting true freedom of trade. (List 1844, 102-103)

Legacy
List historically has held one of the highest places in economic thought as applied to practical
objects. His principal work entitled Das Nationale System der Politischen Ökonomie (1841) and
was translated into English as The National System of Political Economy. This book has been
more frequently translated than the works of any other German economist, except Karl Marx.
Eugene During, of the University of Berlin, declared that “List's doctrines represented ‘the first
real advance’ in economics since the publication of The Wealth of Nations (by Adam Smith)" and
Marx himself wrote in his famous Anti-Duhring pamphlet: "It would be better to read Herr
Duhring's chapter on mercantilism in the 'original', that is, in F. List's National System, Chapter
29." Thus, Marx was clearly well aware of List's work. However, he never to deal with it directly,
and because of this, List was largely ignored by later writers.

However, List’s influence among developing nations has been considerable. Despite the fact
that his “National System” was vigorously attacked, such was the demand for it that three
editions were called for within the space of a few months, and translations of it were published

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in English, French, Russian, Swedish, Hungarian, and many other foreign languages. Japan, in
the nineteenth century, followed his model, Hungarian leader, Kossuth, alluded to him in public
as “the man who had best instructed the nations as to their true national economical interests,”
and it has also been argued that Deng Xiaoping's post-Mao policies in China were inspired by
List's work.

The last excerpt from The National System should forever be considered to be the “manual” for
all the NGOs (United Nations, World Trade Organization, etc.) in the developed world dealing
with the developing countries:
The economical education of a country of inferior intelligence and culture, or one thinly
populated, relatively to the extent and the fertility of its territory, is effected most certainly by
free trade, with more advanced, richer, and more industrious nations... Every commercial
restriction in such a country aiming at the increase of manufactures, is premature, and will prove
detrimental, not only to civilization in general, but the progress of the nation in particular... If its
intellectual, political, and economical education, under the operation of free trade, has
advanced so far, that the importation of foreign manufactures, and the want of markets for its
own products has become an obstacle to its ulterior development, then only can protective
measures be justified....

Internal and external trade flourish alike under the protective system; these have no importance
but among nations supplying their own wants by their own manufacturing industry, consuming
their own agricultural products, and purchasing foreign raw materials and commodities with the
surplus of their manufactured articles... Home and foreign trade are both insignificant in the
merely agricultural countries ...., and their external commerce is usually in the hands of the
manufacturing and trading nations in communication with them... A good system of protection
does not imply any monopoly in the manufacturers of a country; it only furnishes a guarantee
against losses to those who devote their capital, their talents, and their exertions to new
branches of industry. (List 1856)

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M-FORM
0. Origins
See the General Motors case

1. 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.
- It has the benefits of large economies of scale 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).
- 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[5]). This allows the overall company to be
more versatile and enduring.

An example: Standard Oil

A firm that exemplified all of the above was the Standard Oil alliance. To monopolize the market,
Standard Oil integrated horizontally with other competing oil companies in addition to vertically,
with tankers, lubricating oil, and acid restoration companies. Soon, the alliance dominated the
oil industry through sheer economic might due to both its large economies of scale and its
organizational structure. As Standard Oil continued to expand into different markets, its
organizational needs changed. However, the alliance was able to monopolize various markets so
successfully because it adopted the M-form system, which allowed the firm to act as a loose
federation of autonomous units instead of just one giant firm.
Although central management provided a general direction for the alliance as a whole, each
arm was able to act individually to pursue what would maximize each division’s success.

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Furthermore, even though the alliance’s lubricating oil business did not keep pace, since this
was an autonomous division under the M-form system of management, it did not have
detrimental consequences for the overall alliance.

2. Disadvantages
The M-form becoming extremely popular, from an outside point of view has little to no
downsides. However many scholars would argue that there are more disadvantages to the M-
form than there are advantages. Perhaps the largest downside to the M-form is the allocation of
power:
1. “Companies may want to centralize decision making in order to reduce costs and prevent
division managers from taking actions that are contrary to the long-term goals of the entire
company; however, too much centralization deprives division managers of the flexibility and
independence they need to operate their specific businesses“. The allocation of power through
the levels of management can take power from lower management positions. The lower
management someone who must be qualified for their position and hard to replace may feel
that they are being taken advantage of and demand more flexibility. In reality they the lowest of
management runs the show of the day-to-day work and is a vital part for success.

2. Having multiple levels of management makes the cost of labor and management significantly
greater. Each different level of management will require funds for the training/operation of that
level. A company must take account of this and continuously analyze a cost- benefit analysis to
make sure the M-form is even worth having.

3. Major problems exist in the cooperation on fair price between the levels of management on
the products and supplies necessary. “The “seller” will want to maximize its return on investment
by obtaining the highest price possible; however, this approach often unfairly penalizes a
“buyer” that is part of the same larger company. This involves setting a transfer price and raises
competition between divisions. As a whole this can only harm the company, as it will slow things
down until agreements are made.

4. Misalignment of interests between divisions: not all the departments within a firm will have
the same incentives.

3. Spread
Since its widespread application in America during the 1970s through 1990s, the multi-
divisional form has become one of the most used systems for corporations across the world. The
Western countries have been acquainted with the practice of the multi-divisional form
throughout the past few decades; however, Eastern countries such as China and Japan have just
recently been taking on the new system. Prior to adapting the multi-divisional form, many
Chinese and Japanese organizations were making use of the unitary form as well as the holding

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form. After the realization that their forms of organizing were outdated, these foreign companies
began implementing one of the most successful business techniques in America.

Other countries have made use of the unitary (U-form) because of its initial functionality to the
organization. The U-form structure is specialized around functions, such as sales and
manufacturing. Chinese corporations that were operating under the U-form model were hesitant
about a switch to the M-form way of operating due to the need for those corporations to
become more systemized. China fits the model for the M-form as a result of their usage of
multilevel models, goals of profit maximization, and the performance-driven nature of China’s
economic reforms (Peng). The inadequacy of the U-form resulted from issues with the structure
of the corporate hierarchies within the corporations; the M-form certainly demonstrates strength
in the hierarchical areas especially in terms of communication that the Chinese companies
require.

Another form of operating that foreign countries are taking into question is the holding form (H-
form). This form of organizing is essentially a “holding” company with a small headquarters
office. The individual units of the business are fully separate from one another; the headquarters
unit supplies the monitoring and financial control. In America, when companies like Litton
Industries tried to manage both great diversity and investment in fast-moving high-technology
businesses as several Japanese companies tried, they failed. The knowledge, attitudes, and
practices required to manager entrepreneurial growth are different than the logic the holding
form and financial control.

The Japanese, therefore, developed a new managerial logic due to the M-form organizational
influence from the West. This new “logic form” took the hierarchal control from the M-form and
combined it with high coordination, continuous improvement, and high intent (Rumelt and
Stopford). In addition to the Japanese, Virgin Group is both a holding company as well as a
multi-divisional one, which represents its. Each of the various companies running under the
Virgin brand is an individual entity, with the founder completely owning some and holding
minority or majority stakes in others (“Virgin Group”).

The highly successful structure of the multi-divisional form for American corporations have
provided ways for businesses in other parts of the world to incorporate it into their business
models. Although the U-form and H-form were options for the several companies, the fiscal and
operational limitations they exhibit allow for the M-form to be the prime choice. Since the multi-
divisional form is very flexible within corporations, it allows for a wider range of organizations of
all dimensions to utilize it and shape it into their own system.

More info on strategy and structure in Europe: https://www.cairn.info/revue-

economique-2007-1-page-37.htm20

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