The effect of organizational structure and diversification on firm performance
Meeler, Kristy Jan
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This paper describes an ongoing investigation of corporate performance in approximately 56 firms found in the 1972 Fortune 500. Specifically, this paper analyzes the effect the firm’s internal organizational structure and diversification strategies have on performance. Economic theory suggests that the implementation of the multidivisional organizational structure (M-form) in large diversified firms has a positive impact on performance. This is a decentralized structure with divisions established as independent profit centers. Day-to-day operating decisions are made at the divisional level, while the central office makes long-term strategic decisions. Most firms that utilize the M-form structure are diversified. Therefore it is useful to investigate the effect the firm’s diversification strategy has on performance. I utilize a unique data set that effectively characterizes the sample firm’s type of organizational structure over the period 1963- 1973. This time frame presents an opportunity to investigate diversification strategies during their formative years. Previous research claims that diversified firms trade at a discount relative to single-segment firms. However, prior studies fail to include both measures of a firm’s diversification strategy and its organizational structure. I theorize that when both variables are included in the analysis, the negative impact of these factors will be reduced. This paper outlines the approach, reviews past literature, previews some findings, and discusses work that remains.