Article Notes 9 Strikwerda. (n.d.). “The Emergence and Evolution of the Multidimensional Organization.” California Management Review., 51(4), 11–31. Multidivisional, Multi-Unit or M-form is widely acknowledged as the most successful organization form of the 20th century. The activities in firms that employ M-form are organized in separate business units and delegate control over the resources needed to create economic value to the managers of these units. A principle that is central to the M-form is that business units are self-contained. However, most business units depend at least in part on resources that are controlled by other units. Foundation for Management Studies, a Dutch organization of management executives, found that there are many problems with the M-form. These problems include: ➢ high employee costs ➢ Internal battles over resources ➢ Lack of standardization ➢ Lack of cooperation ➢ Loss of Market Opportunities Despite these problems, they did not see any viable alternatives to the multi-unit organization form. Taking advantage of synergies across business units is important and organizational designs to achieve this are yet to be found. However, a number of firms in the study have found an organizational form that resolves the tension between contemporary firms to exploit synergies and the need for clear accountability. These firms are organized around multiple dimensions (e.g. region, product, and account) and simultaneously hold different managers accountable for performance on these dimensions. This multidimensional form is based on different principles than the M-form which is that resources and market opportunities are organized separately. This is for unit managers to be dependent on each other to achieve their objectives. The multidimensional form is also different from the matrix organization as it avoids the situation where employees have two bosses. Multidimensional organizations can be interpreted as attempts to implement a team-based approach to economic value creation that seems particularly well adapted to exploiting the distributed nature of knowledge that defines the characteristic of modern economies. The importance of multidimensional organization is due to the evolution of resource-centric industrial economy into a customer-centric service economy that is focused on exploiting intangible knowledge resources. The Rise And Fall of The M-Form Unitary Form or U-Form is a single profit center that is organized along functional lines. Unitary organization is found to stand in the way of their growth strategies. The U-form uses functional departments such as production and sales. In the M-form, the firms are separated into divisions and a “corporate parent” that acts as a headquarters in each division. Four Principles of M-Form: (widely applied in US and Europe successfully) 1. The firm is organized in separate business units a. Each division targets a specific market b. Divisions operate as strategic business unit c. Each business unit is a profit center 2. Business unit managers are accountable for creating economic value a. The corporate parent holds business unit managers accountable for creating economic value. This accountability goes hand in hand with the delegation of authority. 3. Resources are allocated unequivocally to business units a. To be able to create economic value, business units control all the resources they need to pursue a focused competitive strategy b. This control allows business units to respond to market requirements with a minimum of coordination with other business units or corporate headquarters 4. The task of the corporate parent is to add value to the activities of the business units a. Headquarters defines the scope of the business units, allocates resources, and coordinates activities where necessary b. Each business unit is an investment project in itself and the task of the corporate parent is to support the business units in creating economic value Two Reasons for M-form’s popularity and success: 1. By creating an internal capital market the M-form stimulates entrepreneurship a. The main principle of the M-form is that business unit managers are responsible for creating economic value and control the resources that allow them to do so. By organizing resources on the basis of markets served and delegating control of these resources to business unit managers, firms that use the M-form can better respond to market opportunities. The M-form stimulates entrepreneurship and creates opportunities for individuals to develop into general managers without the need to provide capital. 2. The M-form offers a simple way to exploit synergies a. The M-form’s accounting and control follows one dimension: the performance of business units. The efficiency of the firm as a whole can be assessed through its break-up value: the value of the firm must be higher than the sum of the values of the business units From the perspective of outside investors, corporate headquarters adds costs that an investor could avoid by directly investing in the business units. Overhead costs of a corporate layer of management should be offset by the value that the corporate parent adds to the activities of its business units. If the parent is able to increase the ability of its business units to create economic value, the value of the firm as a whole will be higher than the sum of the values of its business units. However, it could be demonstrated that the overall value of the firm was lower than its break-up value. The only source of added value is the ability of the parent to exploit synergies. One of the main causes of capital market inefficiencies is information asymmetry between shareholders and managers. This is due to outside investors not having access to all the inside information to assess the true value of investment opportunities. However, this problem is reduced when headquarters have the power to conduct financial and strategic audits of business units. The success of the M-form is led by the trade-off in choosing between the unequivocal resource allocation and lines of authority, and the creation and the exploitation of the kind of synergies that product and financial markets increasingly require. Five Main Conclusions About the Status of the M-form 1. The M-form Still Dominates the Corporate Landscape ○ In 29 of the 36 firms, internal organization was based on one dimension. The firms were organized around units that were defined in terms of either regions, products, markets, product-market combinations or distribution channels. 2. The M-form Is Central to the “Theory in Use” of Executives ○ The traditional multi-unit organization is central to the “theory in use” of executives. Executives’ comments on organization were typically framed in terms of the organizing principles that underlie the M-form. 3. The Matrix Organization Is a Negative Mental Anchor ○ Executives have nothing positive to say about the organizing principles of a matrix organization. Executives associate the matrix organization with unclear responsibilities, lack of accountability, and political battles over resources, resulting in risk-averse behavior and loss of market share. 4. Virtually No Business Unit Is Self-Contained ○ All firms are organized on the basis of business units that depend on resources outside the unit to achieve their objectives. 5. Mental Anchoring to the M-form Creates Problems When Implementing Synergy Mechanisms ○ One of the problems with giving corporate account managers or project managers profitand-loss responsibility is opposition by business unit managers. They typically perceive such responsibilities as reducing their own status, power, and autonomy. ○ The mental anchoring to the M-form resulted in a failure to successfully implement account management or project management. Most firms seem to be stuck in between the principle of self-contained units and the need to create synergies across business units. However, some firms were able to find a way to balance demands for synergies with clear accountability and control mechanisms. Multidimensional Organizations These seven firms create and exploit synergies across their business units by organizing along multiple dimensions. 2. 3. 4. 5. Six Main Characteristics of Multidimensional organizations: 1. Simultaneously report their performance on two or more dimensions at multiple levels in the organization Simultaneously hold different managers accountable for the contribution of their dimension to the firm’s overall performance ○ Product managers are accountable for turnover, margin, market share, and market penetration of specific products or solutions. ○ Account managers are accountable for client satisfaction, turnover, margin for specific accounts ○ Region managers are accountable for turnover, margin, and market penetration for specific products, but which products will be offered in a region is beyond the decision authority of the region manage ○ Distribution channel managers are accountable for turnover, return on sales, and customer satisfaction for their channel. ○ Product, account, region, and distribution channel managers all depend on shared services organized in “Globally Integrated Support Functions,” including finance, HR, legal, communications, and sales support. ○ (these are based off IBM operations) Organize resources in such a way that the managers who are responsible for the different dimensions are dependent on each other for the resources they need to achieve their performance objectives Have multidimensional market positions ○ Primary reason for multidimensional firms to have multiple dimensions is because multiple dimensions are critical to their market positions. Therefore each decision rights are in line with the dimensions in the market. Focus on the customer as the profit center ○ Multidimensional firms see customers as the primary profit center. Multidimensional firms create economic value creation by pursuing market strategies on the basis of integrated product-and-service offerings that maximize customer profitability. ○ Example: ABN-AMRO allocates individual customers to specific unit managers. All customers are recorded down to the level of daily business and profitability. On the basis of the specific profile to the customer, quarterly decisions are made to allocate each customer to the unit manager that is best placed to optimize profitability to the customer. 6. Eliminate information asymmetries and transfer pricing ○ In multidimensional firms, corporate headquarters own the transaction and customer data. External and internal transaction data are recorded on multiple characteristics in one general ledger; this leads to a single trusted source for performance data and eliminates information asymmetries. Comparison of Different Organization Forms The M-form, matrix form, and multidimensional forms have differences in strategy, organization, planning and control process, rewards, and people. A matrix organization can be seen as a two dimensional organization while multidimensional can be seen as a very complex matrix organization. However, there are three important differences between multidimensional and matrix. Three IMPORTANT Differences 1. Organization: a. For matrix organization, the “node” on the organization where dimensions meet is the employee who reports to two bosses b. For a multidimensional organization, the “node” of the organization is the customer and most employees are employed in single units and report to a single manager. The managers who are responsible for specific dimensions share customers. 2. Planning and Control Process a. Matrix organization defines one of the dimensions as the main profit center while multidimensional organizations are focused on profitability of customers 3. Reporting Structure a. In a matrix organization, employees report to two bosses b. In a multidimensional organization, there is a information system that can simultaneously report performance on the different levels in the organizations which in return eliminates information asymmetries The root problem for matrix organization is that it focuses on authority and power. Making an organizational design with multiple dimensions allows the firms to focus on the goals with customers and information systems that allow firms to operate along multiple dimensions. The multidimensional organization is an alternative to the M-form and the matrix organization, and it is explicitly based on design principles that facilitate the creation of synergies across units to serve increasingly fragmented markets. The multidimensional organization can be understood as a way to facilitate the teamwork that is needed to successfully create and exploit productive knowledge. It creates conditions that make it possible for the firm to operate as a team. In order to be successful in a multidimensional organization, it is important to implement systems and processes that eliminate information asymmetries and allow employees to jointly focus on creating economic value for customers.
