Internal Organization and Enterprise Performance: Some UK Evidence Charles W. L. Hill Department of Management Sciences, University of Manchester Institute of Science and Technology, Manchester UK The research reportedin this paper is based upon the theoretical work of 0. zyx E. Williamson (1970,1975) concerning the impact of internal organizational form upon business behaviour and enterprise financial performance. A sample of 144 large UK firms are classified according to the organizational classification scheme developed by Williamson and Bhargava (1972). An empirical investigation is then undertaken which tests for the impact of organizational form upon financial performance. The results are broadly consistent with both theoretical predictions and the findings of other researchers in so far as the pure M-form (multidivisional)structure is found to be associated with superior profitability. However, the evidence also suggests that the frequency of occurrence of pure M-form firms as a subset of all multidivisionals may be rather lower than previously thought, and the closeness of the multidivisional/pure M-form link is questioned. INTRODUCTION zyxwvutsrq The research reported in this paper is based upon the theoretical work of 0. E. Williamson (1970, 1975) concerning the impact of internal organizational form upon business behaviour and enterprise financial per- formance. A sample of 144 large UK firms are classified according to the organizational classification scheme developed by Williamson and Bhargava (1972). An empirical investigation is then undertaken which tests for the impact of organizational form upon financial performance. The results are broadly consistent with both theoretical predictions and the findings of other researchers in so far as the pure M-form (multi- divisional) structure is found to be associated with superior profitability. However, the evidence also suggests that the frequency of occurrence of pure M-form firms as a subset of all multidivisionals may be rather lower than previously thought, and the close- ness of the multidivisional/pure M-form link is questioned. In essence, Williamson’s work addresses the impact that the change from a centralized functional structure (U-form) to a decentralized multidivisional structure (M-form) has had on business behaviour. This struc- tural change is commonly recognised to have taken place as a response to the pursuit of diversification strategies by large firms; multidivisional structures being the best suited for the management of diverse activities (see Chandler, 1962; Channon, 1973). From an examination of these processes Williamson has for- mulated what he calls the M-form hypothesis. This states that: ‘the organization and operation of the large enter- prise along the lines of the M-form firm favours goal pursuit and least cost behaviour more nearly associated with the neoclassical profit maximization hypothesis than does the U-form organizational alternative’ (Williamson, 1970, p. 134). Williamson derived this prediction from a number of specific characteristis of the M-form firm which, he argued, compound together to encourage the adoption of profit-maximizing goals within the organization. These include the decentralization of operating deci- sion functions to operating units (divisions); the centralization of strategic and financial control functions at the head office; the establishment of an elite staff at the head office who can audit the per- formance of operating units and act as an in-house management consultancy; the ability of the head office to manipulate incentive machinery (salaries, bonuses, promotional opportunities) to favour operating behaviour which is consistent with its objectives; and the ability of the head office to expose the cash flows generated by operating units to an internal competi- tion and assign them to high-yield uses. Williamson has recognized, though, that not all multidivisionals have the necessary characteristics. Accordingly, he has developed a classification scheme which differentiates between varieties of the multi- divisional type (Williamson and Bhargava, 1972). Apart from U-form and M-form types, the scheme also recognizes four other main organizational varieties. The definitions of all six types, along with their implications, are given below. M-form Multidivisionals characterized by a separation CCC-0143-6570/85/ooO6-0210$03.50 210 MANAGERIAL AND DECISION ECONOMICS. VOL. 6, NO. 4, 1985 zyxwvutsr 0 Wiley Heyden Ltd., 1985