Organizational Strategy

From U-Form to M-Form

Historically, companies were configured as a unitary whole, or U-form. As organizations grew, this whole tended to be divided into functional responsibilities (e.g., marketing, HRM, accounting). However, the weakness of the U-form became apparent as firms grew in size and complexity and attempted to adjust to increasing environmental diversity. Senior managers became overinvolved in routine matters. Functional managers saw their function as an end in itself. Coordination between increasingly stand-alone functional silos became more demanding and less fruitful.

Facing such problems, large U.S. companies like Sears Roebuck, Dupont, General Motors, and Jersey Standard moved to the M-form structure. They were divided into semiautonomous profit centers—later known as strategic business units—responsible for a stand-alone segment of a firm's operations, such as a particular product, brand, or national or regional market. In this structure, the new business managers were able to specialize in the operations of their particular competitive arena and engage in competitive strategy. This freed corporate managers at the center of the firm to focus on the overall strategic direction of the company, or corporate strategy. By the late 1960s, more than 80% of U.S. Fortune 500 companies were structured as M-forms, with similar trends developing in other industrialized countries.

The original companies adopting M-form structures were generally single-product firms. However, over the past 80 years, several factors combined to increase the product and market diversity of large companies. Companies faced limits to growth in their original product markets, particularly as antimonopoly legislation [Page 1182]prevented large firms' taking over their competitors. Growing firms had significant levels of free capital, and managers tended to reinvest rather than return dividends to shareholders (which could be linked to the notion that managerial salary and perks were often positively related to the size of their businesses). The concept of a company as a portfolio of risky assets, whose risk could be reduced by diversifying into different arenas, became popular in the 1970s. The M-form made the acquisition and divestment of business units easier than before because the complex connections with other products or regions had been severed.

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