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Theory of the Firm - Essay Example

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Sloman (Sloman 2004, p. 196) states that there are various operating structures that are adopted by firms for their internal operating structure. The decision about which structure should a firm adopt depends on its size. Small firms tend be centrally managed, with decision making operating through a clear hierarchy…
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Theory of the Firm

Download file to see previous pages... Although it is very difficult to suggest which, out of these two is a better structure, but one can clearly identify the merits of each structure. In the U-Form or Unitary form, organizations are broken up into separate departments for each process, for example, separate department for marketing, finance and production. The manager or head of each department reports to the chief executive of the organization, whose function is to co-ordinate the activities of each department, relaying the firm's overall strategy to them and being responsible for inter-departmental communication. Although, this structure is very efficient till the firm is of certain size, but it can lead to inefficiencies as the organization grows. These inefficiencies are: communication difficulties, coordination and control and it become difficult to manage the entire organization from the centre.
Another structure which results in the firm being able to overcome these problems is called M-Form or multi-divisional form of internal structure. In this structure, the firm is divided a number of divisions. Each division could be responsible for particular group or group of products or a particular market. The day to day running and even certain long term decision of each division would be the responsibility of the divisional managers. Many people argue that M-Form is better than U-Form structure because it reduces the length of information flows. It also relieves the C.E.O of the coordination activities and he can focus on overall strategic planning. It also increases professional competition between the departments, which lead them to be more efficient. Each department runs as mini firm and try to utilize resources efficiently which increases the efficiency of the entire firm. (Lipsey and Chrystal, 2001)
All these benefits that come-out as a result of M-Form structure lead many managers into believing that it is actually better than U-Form structure. But after careful and deep analysis one cannot say that it is good for firms of any size. If this structure is followed by an organization of small size than they would face various problems, such as, it can very bureaucratic with many forms of layers of managers. Managers might pursue goals that conflict with those of shareholders or head office. As a result, some companies in recent years have moved back from M-Form structure to much flatter U-Form structure.
So, in the end we can conclude that M-Form is not better than U-Form structure. It is the situation and culture in the firm that is being followed determines which system is going to more useful for the organization and, one cannot say that M-Form is necessarily better than U- Form structure.
In the end, we can safely conclude that M-Form or U-Form structure themselves are not the best, but it is the flexibility of the firm which makes any structure good or bad. Some times you need to have a flatter structure, whereas at the other times, decentralization works the best. I recommend that any firm that is governed with flatter and more responsive structure will do much better than the firm with big span of control, as it would make it easier to control the subordinates and keep check and balance on the firm's activities.

Structure conduct performance model is used to link various factors in the economic environment that affect the performance of the business. It also links the various ...Download file to see next pagesRead More
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