Internal Organization and Profit: A Note

Abstract

In a recent contribution to this Journal, Steer and Cable (henceforth S-C) [17] investigated the impact of internal structure on company performance as a test of the hypothesised superiority of the multi-divisional form (M-form) organization (Williamson [19,20]). A sample of 82 large U.K. companies was classified by organizational form, and then assigned to optimal and nonoptimal categories. The former contained the M-form firms and unitary form (U-form) companies of limited size and diversification; whilst the latter was comprised principally of holding companies (H-form) with some corrupted multi-divisionals (M-form) and the remaining U-form firms. Steer and Cable then regressed company profitability, averaged over the years 1967-71, on a series of firm characteristics (size, growth etc.) using a dummy variable for organizational form. They found the organizational form coefficient to be significant at the 1% level, using both return on capital (n/E) and the pricecost margin (n/R) as dependent variables. The surprising feature of the S-C results is the magnitude of the performance differential in favour of the optimally organized sample:

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