Straw Men and M-Form Myths: Comment on Freeland

by Mark Shanley
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Title:
Straw Men and M-Form Myths: Comment on Freeland
Author:
Mark Shanley
Year: 
1996
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The American Journal of Sociology
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102
Issue: 
2
Start Page: 
527
End Page: 
536
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English
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Abstract:

Straw Men and M-Form Myths: Comment on Freeland'

Mark Shanley

Northwestern University

Robert Freeland in "The Myth of the M-Form? Governance, Consent, and Organizational Change" contends that efficiency-based arguments for the growth and proliferation of the multidivisional governance structure (M-form), in particular those of transaction costs economics (TCE), ne- glect organization design based in voluntary consent that emerges through complex social processes in favor of an oversimplified cost minimization approach. Furthermore, :lew evidence on the history of General Motors (GM), an exemplary firm for M-form theorists, shows that, throughout most of its history, the structure of the firm failed to meet the theoretical require- ments of the M-form. Moreover, in the brief periods when GM's structure did resemble the textbook M-form model, the firm was in decline. The con- clusion drawn is that TCE approaches to organization design and gover- nance neglect the social bases of organization and would foster economic decline rather than efficiency if they were actually adopted by firms.

Freeland has written an engaging article. His account of the ebb and flow of centralization and decentralization provides a rare glimpse into how executives at a major industrial firm pursued long-standing questions of organizational design. While I learned much from the article about GM, however, I learned little about transaction costs and the M-form. Moreover I found Freeland's packaging of the GM story as a fundamental attack on the M-form unpersuasive. In my opinion, the article distorts the intent and substance of TCE, such as the "myth" of the M-form that Free- land debunks is one of his own making. Freeland's article criticizes TCE for arguments that it does not make, neglects relevant arguments that it does make, and fails to recognize how Williamson's ideas on the M-form firm have evolved since his initial statements in 1975 and earlier. These issues form the basis for this comment.

THE DIVISION OF LABOR IN DECISION MAKING IN THE M-FORM

Freeland's argument hinges on a clear and "rigid" (p. 485, n.4) distinction between tactical and strategic planning. A structure that conflates the two

' Direct correspondence to Mark Shanley, Graduate School of Management, North- western University, Leverone Hall, Room 6101, Evanston, Illinois 60201.

O 1996 by The University of Chicago. All rights reserved. 0002-9602/97/10202-0006$01.50

AJS Volume 102 Number 2 (September 1996): 527-536 527

is suboptimal. This occurs when divisions become involved in long-term

planning or when "top executives become involved in operating deci-

sions." The historical review of the ebb and flow of centralization and

decentralization at GM in Freeland's second section is intended to demon-

strate that the GM structure throughout most of this century violated the

optimal balance of centralization and decentralization predicted by effi-

ciency theories of the M-form, thus making the M-form a myth.

A reasonable reading of Williamson (1975), however, does not support the rigid distinction claimed in the article, according to which any involve- ment of top management with divisions or division management with cor- porate decisions constitutes conflation. First, the M-form is introduced and explained with specific reference to the problems encountered by the functional (or U-form) structure as it grows in size and complexity (Wil- liamson 1975, pp. 132-36). The point is that the M-form improves on the U-form because it separates strategic and operating decisions, which had become thoroughly conjlated in the U-form. Indeed, when Williamson pre- sents an "M-form hypothesis" (1975, p. 150), it is in terms of the merits of the M-form versus the U-form.

After 1975, Williamson's arguments on the M-form develop away from the notion of conflation that Freeland highlights and toward the idea of the M-form being efficient relative to functional and holding company structures. Williamson (1985, pp. 2 79-96) develops upon the relative supe- riority of the M-form versus other structures by adding consideration of the holding company form (H-form) as a form against which the M-form can be compared. While the U-form can become too complex, the H-form solves the problem of complexity at the expense of opportunism for a cor- porate office that cedes strategic decisions to divisions, gets embroiled in partisan disputes with divisions, and lacks the ability to put divisions to a market test. Williamson's argument for the superiority of the M-form versus the conglomerate (1985, pp. 289-90) is different from a claim that the M-form offers a global optimum from which deviation is not allowed. He specifically avoids such a claim (Williamson 1975, p. 149). The point here is that conflation will be observable at the extremes of the U-form or the H-form, not in adjustments made to a firm in the middle.

Far from implying some unchanging optimum, the argument that the M-form develops from the U-form and may continue to evolve suggests that firms may frequently deviate from some hypothetical optimum, with no necessary implications regarding the underlying type towards which they are developing. More recently, Williamson has made this point ex- plicitly: "Transaction cost economics does not assert, much less insist, that economic organization is relentlessly taut. To the contrary, if economic organization is formidably complex, which it is, and if economic agents

are subject to very real cognitive limits, which they are, then failures of

alignment will occur routinely" (Williamson 1991, p. 79).

When Williamson actually discusses optimum divisionalization, the

picture seems very different from the one presented by Freeland. William-

son's (1975, p. 148) clearest statement on the corruption is that it occurs

when "general management involves itself in the operating affairs of divi-

sions in an extensive and continuing way." This certainly does not rule

out top management involvement in operations. Indeed, it leaves room

for considerable involvement. On the same page, Williamson stresses the

dangers of "overinvolvement" by general management, which also sug-

gests that some involvement by top managers is not dangerous.

What constitutes an optimal degree of divisionalization will be contingent on firm size, functional separability, and information technology (William- son 1975, p. 149). Since all of these can change over time, it is reasonable to conclude that what constitutes strategic and operational domains for a firm at any given time will itself be an issue with which top management must be concerned. Moreover, the optimal structure for a firm will also change as the firm's business environment changes. It is thus neither surprising nor problematic for TCE accounts of the M-form that the definition of strategic decision-making responsibilities at GM would over time be the subject of discussion and dispute among managers. It is also reasonable that GM's structure and the balance of decision-making responsibilities within that structure would change over an extended time period.

Are Sloan's accounts of organization changes at GM, as reported in Freeland's article, sufficient to identify deviations from the TCE opti- mum? I do not think so. Sloan is making changes with the intention of solving problems and improving the management of GM-he wanted pol- icies once formulated to be carried out. His intuition appears to have been that giving interested parties a voice in the formulation of policies would increase the likelihood that those policies would be carried out. Why would involving interested parties lead to better results? Interested parties may have more complete or more recent information. Involving interested parties may also save decision-making time in that misguided attempts at implementing policies will be avoided. Finally, interested managers may be more motivated to work toward a policy, since they may feel some ownership in the implementation of a policy that they helped to craft.

None of these benefits contradicts the efficiency basis of TCE. Better information and the avoidance of misguided efforts will be associated with lower costs. Securing manager or worker consent will also be associated with lower costs, especially where results for the firm depend on the pres- ence of that consent. The failure to achieve consent in such situations will raise costs to the firm. Put another way, it would be arrogant, foolish, and wasteful for a firm's executives to embark on a major strategic program without the consent of managers who must implement that program if their cooperation during implementation is necessary and cannot be taken for granted.

CHANDLER AND WILLIAMSON

In his critique, Freeland leaves out Chandler (1962), who clearly offers an efficiency explanation for the rise of the M-form. The M-form argument is introduced in the article by references to both Chandler and Williamson

(p. 484). Linking Chandler and Williamson is reasonable, since both are concerned with the growth of the M-form, both make use of efficiency arguments of some form, and both have acknowledged the similarities in each other's work. After an initial linking of Chandler and Williamson, however, Freeland lets Chandler off the hook of the critique at the end of note 3 with the following statement: "Although Chandler . . . does argue that the M-form arose because it was more efficient than alternative forms of organization, his sensitive use of historical materials shows a broader and more nuanced understanding of the factors driving organiza- tional change. Lazonick . . . argues that the image of efficiency in Chan- dler's work is not reducible to issues of cost but focuses on dynamic adap- tation to a changing environment. A number of commentators, including Chandler himself . . . have therefore suggested that his work does not fit neatly into the category of efficiency theory as outlined in this article." This quote does not explain why Chandler is exempted from critique. In the first section of the article and in note 3, Freeland provides a long list of economically oriented theorists, including Ross (1973), Jensen and Meckling (1976), Fama (1980), Coleman (1990), Coase (1937), Alchian and Demsetz (1973), Grossman and Hart (1986), and Miller (1991), who are lumped together as advocates of "efficiency theory." None of these theo- rists neatly fits into the single broad-brush category of efficiency theory outlined in the article, so Chandler's suggestion that he does not quite fit is not surprising.

Chandler does fit the efficiency theory definition broadly, if not neatly. He has clearly stated on numerous occasions that the reduction of coordination costs was the driving factor in the proliferation of the M-form. In a well-known interaction with Williamson and Perrow, Chandler (1988, p. 452) distinguishes himself from Williamson by arguing a narrow and specific idea of administrative coordination, as opposed to Williamson's "more sweeping concept of transaction costs." This implies that, for Chandler, understanding the development of corporate structures depends more on a limited idea of efficiency than

it does for Williamson, which is nearly the opposite of what Freeland

suggests in note 3.

Is the "sensitive use of historical materials" what exempts Chandler

from critique? Does that mean that an efficiency explanation for change is

appropriate if documented by historical materials rather than by abstract

economic theorizing? It appears that Freeland is more interested in how

Williamson and Chandler make their arguments than in the substance of

those arguments.

FIAT

Freeland argues that the functioning M-form, according to Williamson, rests on the extensive use of sanctions and executive fiat as the basis for order inside the firm. The use of fiat is contrasted with voluntary consent and is seen as lacking and ineffective in that it generates resistance rather than consent, perfunctory compliance rather than consummate perfor- mance. In addition, reliance on fiat undermines rather than builds coopera- tion by neglecting the needs of individuals to justify action in terms of the norms and social relationships that form the basis for management action. The claim that TCE overemphasizes fiat recurs throughout the article.

This critique is excessive and overdrawn. To see why, one need only consult the few pages in Williamson where fiat is invoked (Williamson 1975, pp. 101, 120, 125). First, fiat is argued to be efficient for "minor conflicts," relative to continuous haggling or litigation. If the issue is not important, then reaching some resolution, even if an imposed one, may be more efficient than continued haggling. Similarly, continued recourse to the courts on relatively unimportant matters is less efficient than set- tling the issues according to fiat. The point is that, on some set of disputes, the ability to have managerial discretion in settling unimportant and rou- tine problems is a source of efficiency relative to governance arrangements not offering such discretion. While one might argue that efficient gover- nance solutions to unimportant problems may also be available in a mar- ket setting, Williamson is making a limited argument for discretion in hierarchies that is sensitive to the potential for resistance to the arbitrary use of authority. This is very different from the argument attributed to Williamson in the article.

Williamson further qualifies the use of fiat, however. Williamson (1975,

p. 120) argues that "fiat is efficient for reconciling instrumental differences, but it is poorly suited for mediating disputes that have internal power consequences. A common method of dealing with internal system strain is to adopt a compromise solution by which concessions are made to sub- systems rather than require them to give up essential functions or re- sources." Again, the role of fiat is clearly limited and the importance of

compromise on important issues is clearly recognized. This account even

suggests the importance of voluntary consent and is thus very different

from the argument as characterized by Freeland.

Williamson (1975, p. 125) also argues that "fiat cannot be easily invoked where equity issues are at stake. Norms of internal justice, which support quasimoral involvement, check attempts at vigorously implementing the compliance machinery so long as the 'defendant' can establish a reasonable doubt by asserting joint responsibility." As with the first two references above, this view of fiat emphasizes its limited basis and the constraints placed on the exercise of fiat by organizational norms.

Finally, the possibility that fiat can be invoked does not mean that it will be invoked. There is nothing inconsistent about a management team that attempts to govern without recourse to fiat but which maintains fiat as an option for those situations in which less authoritative options are ineffective. For the few outliers in a workforce who are not interested in cooperation, fiat may prove a useful and indeed an efficient tool for management to use. That fiat may be needed for a few individuals does not imply that it will be useful or used on other individuals from whom cooperation will be more readily forthcoming.

As with the conflation arguments discussed above, Williamson's thought on fiat has not been static. For example, I was unable to find references to fiat in The Economic Institutions of Capitalism (Williamson 1985, chaps. 9 and 10) where ideas of managerial discretion and authority are discussed in other terms. The development of Williamson's (1985, p. 239) thought in directions that are consistent with Freeland is seen in the following quote: "The question of optimal work organization is thus poorly posed when it is put in terms of hierarchy or its absence. Attention ought to be shifted instead to whether reliance on hierarchy is excessive (generates adverse side effects) or whether appointments to hierarchical positions are made in a way that promotes efficiency and commands general respect."

The critique of fiat in this article is distorted. To the extent that there was a basis for critiquing Williamson (1975) for his ideas on fiat, the cri- tique is also unreasonable in that his ideas had developed by 1985 in direc- tions that eliminate the need for the critique. Since Freeland's article is being published in 1996, I must wonder about the need for pressing the assault on fiat.

CONSENT

Freeland further critiques TCE for its neglect of voluntary acceptance or consent on the part of those governed. This voluntary consent is important

in securing consummate rather than perfunctory performance by individ-

uals-"positive contribution, not mere passive conformity" (Philip Selz-

nik, cited by Freeland, p. 488). This voluntary consent is tied to the social

context of the organization and is not reducible to simple matters of effi-

ciency. Consent is necessary for two reasons. First, informational limita-

tions will impair the ability of incentives and sanctions, which rely on

information, from generating an effective order. Second, if a set of activi-

ties violates implicit norms and expectations, then, not only will incentives

be ineffective, but they may also be counterproductive in that active resis-

tance is produced.

The voluntary consent arguments in the article are also distorted. First, the author appears oblivious to the foundation of TCE in contracting ideas. The starting point for TCE analysis is the desire to form complete contingent claim contracts, coupled with the inability to do so due to mar- ket imperfections. The basic assumptions of TCE are that individuals are actively and intelligently pursuing their own interests and that they continue to do so once they have joined an organization. I fail to see where, according to TCE theory, individuals are being prevented from exercising their voluntary consent to economic arrangements. That people will ag- gressively seek voluntary arrangements that suit their interests, even to the detriment of their contracting partners, is a fundamental assumption of TCE. When combined with the qualifications that Williamson places on the use of fiat, it is hard to see how the TCE framework can be cri- tiqued as lacking a basis in voluntary consent.

Regarding the requirement that consent be grounded in the norms and expectations of the organization and the consent of those governed, I am curious why no acknowledgment is made of Williamson's concept of at- mosphere (Williamson 1975, pp. 37-40). One might not agree with the terms that are used or might criticize the depth of the analysis, but, with the idea of atmosphere, Williamson addresses issues of voluntary consent and the social context within which transactions occur in organizations. He even reaches the conclusion that more than a simple analysis of effi- ciency is needed: "Recognition that alternative modes of economic organi- zation give rise to differing exchange relations, and that these relations themselves are valued, requires that organizational effectiveness be viewed more broadly than the usual efficiency calculus would dictate" (Williamson 1975, pp. 38-39).

Atmosphere is clearly a central part of the organizational failures frame- work, which forms the basis for the rest of Markets and Hierarchies. Williamson's framework is intended to inform the entire book, and there is no reason why his ideas on atmosphere are not relevant for considering his arguments on employment relationships and the multidivisional structure.

The above quote also supports the point made above that none of the authors listed in note 3, including Williamson, neatly fits into Freeland's definition of efficiency theory.

CONSENT AND COST REDUCTION

Freeland distinguishes between the manufacture of voluntary consent and the reduction of transaction costs. I must disagree. When individuals fail to exhibit voluntary consent to organizational directives, then the organization loses valuable employee inputs, since perfunctory compliance produces less in the the way of outputs than does consum- mate performance. If that is so, then the failure to achieve consent is a cost, in terms of forgone opportunities, and management decisions that promote the manufacture of voluntary consent are effective to the extent to which they reduce these costs. If reduced firm performance under a given structure is a cost associated with using that versus other structures, then the analysis of GM in this article is a story of progressive attempts by top management to balance coordinative and transaction costs. This is precisely the logic employed by Williamson, and it is employed in exactly the same way as his framework would suggest it be applied to GM.

Late in the article, Freeland links organizational changes at GM with overall corporate performance to conclude that the M-form may actually harm rather than help a firm's performance. This is arguably the weakest part of the article. Even if all of Freeland's arguments (and all the perfor- mance implications of such arguments) were true, it would be a very diffi- cult undertaking to establish anything but a crude association between top management organizational changes and GM's performance. That is indeed what is provided, without much thought given to lagged effects, industry and demographic changes, product quality issues, research and development, competitive interactions, new entry, or the numerous other effects that could have contributed to performance changes in a firm the size of GM.

Linking organizational change and corporate performance is a hard the- oretical problem. It gets more difficult the more complex the organization in question happens to be. In this light, it is distressing that so little consid- eration is given by Freeland to why the failure of voluntary consent in GM's top decision making would have affected the firm's performance so drastically. The causal mechanisms are unclear and deserve more atten- tion than they receive. What is also disturbing is that careful empirical work on the relationship between adoption of the M-form and corporate performance (Rumelt 1974; Armour and Teece 1978) is passed over with- out comment while On a Clear Day You Can See General Motors (Wright 1979) is taken for hard evidence.

CONCLUSION

Iam commenting on this article not because I agree with all the details and nuances of Williamson's arguments regarding the M-form but because I take strong exception to the manner in which Williamson's position is represented in the article. TCE can and should be criticized and William- son is frequently the subject of criticism for various parts of his work. Indeed, some of the most interesting statements of Williamson's positions have come in response to criticisms.

While criticism is a central activity for scholars, it is reasonable to ex- pect that articles posing as critiques (of Williamson or anyone else) be based on characterizations of their target's positions that are accurate and fair and not on stereotypes or distortions. It is also reasonable that cri- tiques take account of how an author's position has developed over time. I know few scholars who would relish being held to every point they have argued in every article written early in a career. Some benefit of the doubt is due to the scholar who continues thinking after publication. Neither of these conditions were met in this article. I think that is unfortunate.

REFERENCES

Alchian, Armen, and Harold Demsetz. 1973. "The Property Rights Paradigm." Journal of Economic History 33 (March): 16-27. Armour, H., and D. Teece. 1978. "Organizational Structure and Economic Perfor- mance." Bell Journal of Economics 10:106-22. Chandler, A. D. 1962. Strategy and Structure. Cambridge, Mass.: MIT Press.

. 1988. "Historical Determinants of Managerial Hierarchies: A Response to Perrow." In The Essential Alfred Chandler: Essays toward a Historical Theory of Big Business, edited by Thomas K. McCraw. Boston, Mass.: Harvard Business School Press.

Coase, Ronald. 1937. "The Nature of the Firm." Economica 4:386-405. Coleman, James. 1990. Foundations of Social Theory. Cambridge, Mass.: Harvard University Press, Belknap Press. Fama, Eugene. 1980,"Agency Problems and the Theory of the Firm." Journal of Politi- cal Economy 88:288-307.

Grossman, Sanford, and Oliver Hart. 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration." Journal of Political Economy 94: 691-719.

Jensen, Michael, and William Meckling. 1976. "Theory of the Firm: Managerial Be- havior, Agency Costs, and Capital Structure." Journal of Financial Economics 3: 305-60.

Miller, Gary J. 1991. Managerial Dilemmas: The Political Economy of Hierarchy. New York: Cambridge University Press.

Ross, S. 1973."The Economic Theory of Agency: The Principal's Problem." American Economic Review 63:134-39. Rumelt, R. 1974. Strategy, Structure, and Economic Performance. Boston: Harvard Business School Press.

Williamson, 0.E. 1975. Markets and Hierarchies. New York: Free Press. . 1985. The Economic Institutions of Capitalism. New York: Free Press. . 1991. "Strategizing, Economizing, and Economic Organization." Strategic

Management Journal 12: 75-94.

Wright, J. Patrick. 1979. On a Clear Day You Can See General Motors: John Z. De Lorean's Look inside the Automotive Giant. Grosse Point, Mich.: Wright Enter- prises.

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