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The Emergence and
Evolution of the

J. Strikwerda
J.W. Stoelhorst

“In terms of its impact, not just on economic activity, but also on human life as a
whole, the multidivisional organizational design must rank as one of the major
innovations of the last century.”—John Roberts1

he multidivisional, multi-unit, or M-form, is widely acknowledged
as the most successful organization form of the twentieth century.2

Firms that employ the M-form organize their activities in separate
business units and delegate control over the resources needed to

create economic value to the managers of these units. This organization form is
widespread, is central to the “theory in use” of managers, and serves as the basis
of most accounting systems. However, the organization of productive activities
in many contemporary firms violates the principle that is central to the M-form:
that business units are self-contained. The quest for synergies that has been high
on the corporate agenda since the late 1980s has resulted in the widespread
adoption of corporate account management, shared service centers, and matrix
organizations. As a result, most business units now depend at least in part on
resources that are controlled by other units. This raises fundamental questions
about the status of the M-form in contemporary firms.

Questioning the status of the M-form is not merely a theoretical fancy,
but is high on the agenda of managers as well. In this article, we report on
research that was commissioned by the Foundation for Management Stud-
ies, a Dutch organization of management executives. These practical men and
women shared a fundamental uneasiness about structuring their organizations.
On the one hand, many of them experienced problems with the M-form: high
employee costs, internal battles over resources, lack of standardization, lack of
cooperation, and loss of market opportunities. On the other hand, they did not

The Emergence and Evolution of the Multidimensional Organization


see any viable alternatives to the multi-unit organization form. The need to
exploit synergies across business units was widespread, but it was unclear which
organizational designs are most appropriate to achieve this. This led to a research
project to explore the ways in which leading Dutch organizations, including
subsidiaries of foreign multinationals, have adapted the M-form to better exploit
synergies across business units.

As we expected, the results of the study vividly illustrate the fundamen-
tal tension between the need for contemporary firms to exploit synergies and
their need for clear accountability. However, an additional and unexpected
finding was that a number of firms in the study have evolved an organiza-
tional form that signals a new way of resolving this tension. These firms are

organized around multiple dimensions (e.g.,
region, product, and account) and simultane-
ously hold different managers accountable for
performance on these dimensions. This mul-
tidimensional organization form is based on
different principles than the M-form, the most
notable of which is that resources and market
opportunities are organized separately, so that
unit managers are deliberately made depen-
dent on each other to achieve their objectives.

The multidimensional organization also differs from the matrix organization. In
particular, it avoids the situation where employees have two bosses. This is made
possible by a different way of organizing information and by a planning and
control process in which the customer—rather than any one of the dimensions
for which managers are held accountable (e.g., country or product line)—is seen
as the main profit center.

First, however, a discussion of the M-form and its inherent limitations is
in order. This will clarify why changes in the economic context in the second
half of the twentieth century have put a strain on the way large businesses are
typically organized. The significance of the multidimensional organization is
best understood against the backdrop of the evolution from a resource-centric
industrial economy that was focused on exploiting tangible physical resources,
to a customer-centric service economy that is focused on exploiting intangible
knowledge resources. 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 knowl-
edge that is arguably the defining characteristic of modern economies.

The Rise and Fall of the M-Form

Economic historian Alfred Chandler famously documented the emer-
gence of multidivisional organizations in the first half of the twentieth century.3

Economist Oliver Williamson labeled this type of organization the M-form to
distinguish it from the U-form that it replaced.4 In the U-form, or unitary form,

J. Strikwerda is a Professor of Organization
and Change at the Amsterdam Business
School, University of Amsterdam and
Director of the Nolan Norton Institute at Zeist,
Netherlands. <[email protected]>

J.W. Stoelhorst is an Assistant Professor of
Strategy and Organization at the Amsterdam
Business School, University of Amsterdam.
<[email protected]>

Marcia Ruben
Marcia Ruben

The Emergence and Evolution of the Multidimensional Organization


the firm is a single profit center that is organized along functional lines. The
large industrial firms that Chandler described realized that a unitary organiza-
tion stood in the way of their growth strategies. Instead of using functional
departments such as production and sales as the main dimension along which to
organize, these firms broke up into separate divisions, each of which was itself a
U-form. A “corporate parent” acting as headquarters coordinated the divisions.
This organization design is based on the following four principles:

The firm is organized in separate business units—Each division targets a spe-
cific market. The specific scope of the divisions can be defined on the basis
of such criteria as geography, product, customer, or distribution chan-
nel. The divisions operate as strategic business units, meaning that they
can pursue a competitive strategy that is geared to the specific market on
which they focus. Each business unit is a profit center, so that, in contrast
to the U-form, the firm now consists of multiple profit centers.

Business unit managers are accountable for creating economic value—The cor-
porate parent holds business unit managers accountable for creating eco-
nomic value. This accountability goes hand in hand with the delegation of
authority. Within the business scope defined for each unit, and apart from
financing its operations, the authority to make the necessary strategic,
tactical, and operational trade-offs to achieve business objectives is del-
egated to the business unit managers.

Resources are allocated unequivocally to business units—To be able to create
economic value, business units control all the resources they need to
pursue a focused competitive strategy, with possible exceptions such as
research and development funds. This control allows business units to
respond to market requirements with a minimum of coordination with
other business units or corporate headquarters.

The task of the corporate parent is to add value to the activities of the business
units—Headquarters defines the scope of the business units, allocates
resources, and coordinates activities where necessary. 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. The turnover of
the firm is the sum of turnovers of the business units, corrected for inter-
nal deliveries. The income of the firm is the sum of the incomes of the
business units, minus the costs of the corporate parent.

These organizing principles have been applied widely in the United States
and Europe, and successfully so.5 There are two reasons for the M-form’s popu-
larity and success:

By creating an internal capital market the M-form stimulates entrepreneurship—
For the corporate parent to coordinate the activities of the different busi-
ness units, it is in principle sufficient to define the business scope of each
unit by specifying its target market.6 After the scope of the business units
is defined, corporate headquarters essentially manages an internal capital
market to allocate financial resources to the business units. In addition,
corporate headquarters may exercise control by providing overall strategic

The Emergence and Evolution of the Multidimensional Organization


direction: approving financial and non-financial objectives; controlling
performance against objectives; appointing, assessing, remunerating, and
dismissing managers; and imposing corporate policies. However, despite
these possible additional roles for headquarters, the main principle of the
M-form is that business unit managers are responsible for creating eco-
nomic value and control the resources that allow them to do so. By orga-
nizing 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 entrepre-
neurship and creates opportunities for individuals to develop into general
managers without the need to provide capital.

The M-form offers a simple way to exploit synergies—In terms of management
accounting, the M-form is a simple organization that is nevertheless able
to exploit some synergies across business units. The M-form is simple in
the sense that accounting and control follow one dimension: the perfor-
mance of the 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. This is achieved
by exploiting synergies, provided these synergies do not breach the quasi-
autonomy of the business unit managers. Such synergies can take the
form of financial synergies and economies of scope. Williamson made a
further distinction between the H-form, or financial holding, in which
the corporate parent only pursues financial synergies, and the M-form,
in which the corporate parent pursues both financial synergies and econ-
omies of scope.7 Financial synergies may result from spreading the risks
of investment across business units or reducing the costs of capital of the
firm. The sources of economies of scope include corporate R&D and man-
agement development programs that benefit multiple business units.

Despite its success during much of the twentieth century, by the late
1980s the M-form was under attack. The critique of the M-form focused on the
added value of the corporate parent to its business units.8 From the perspective
of outside investors, corporate headquarters adds costs that an investor could
avoid by directly investing in the business units. On this view, it is clear that the
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 par-
ent 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, in many cases it could be demonstrated that the over-
all value of the firm was in fact lower than its break-up value. In other words,
rather than creating shareholder value, many parents were destroying it.

The limited success of many corporate parents in adding value to their
business units raised some fundamental questions about the M-form that both
managers and theorists have been struggling with ever since the issue was raised
some twenty years ago. It may be clear that the only source of added value is the
ability of the parent to exploit synergies of some sort. For much of the twentieth

The Emergence and Evolution of the Multidimensional Organization


century, the relative efficiency of the internal capital markets of the H-form and
M-form allowed firms to reap financial synergies. One of the main causes of cap-
ital market inefficiencies is information asymmetry between shareholders and
managers. Outside investors may not have access to all the inside information
that is needed to assess the true value of investment opportunities. In an inter-
nal capital market, this problem is reduced because headquarters has the power
to conduct financial and strategic audits of the business units. However, by the
1980s, external capital markets had become much more efficient and there was
little room left to add value through financial portfolio management alone.

With the potential for financial synergies much reduced, the H-form
became much less popular and M-form firms increasingly focused on exploiting
economies of scale or scope. However, in doing so, they also ran into the limita-
tions of the multi-unit design. The need to exploit synergies across business units
has led to a variety of responses. On the market side, key account management
systems are a common solution to exploit customer synergies. On the resource
side, shared service centers are a common solution to exploit synergies in pro-
duction, delivery, and a variety of (support) functions. Over the years, many
firms have experimented with different types of matrix organizations. What all
these responses have in common is that they reduce the independence of busi-
ness units. This, in turn, goes against the very idea of the M-form.

At its heart, the M-form assumes that each of the firm’s customers only
needs to deal with one business unit, and that each of the firm’s business units
can control all resources needed to serve its market. It is only on these two
assumptions that business units can truly operate independently. These assump-
tions are violated as soon as there are opportunities for cross-selling or system
integration across the products of the different business units, complementarities
among the resources of the different business units, or economies of scale in the
use of resources across business units. In other words, there is a crucial trade-off
involved in choosing between the unequivocal resource allocation and lines of
authority that have led to the success of the M-form, on the one hand, and the
creation and the exploitation of the kind of synergies that product and financial
markets increasingly require, on the other.

In Search of Alternatives for the M-Form

The tension between the need to create synergies and the organizing
principles of the M-form explains why the Dutch Foundation for Management
Studies commissioned a study into the status of the M-form among large firms
in the Netherlands (see the Appendix, “About the Research”). Interviews at 36
large Dutch organizations, including a number of subsidiaries of non-Dutch mul-
tinationals and a number of non-profit organizations, led to five main conclu-
sions about the status of the M-form.

The Emergence and Evolution of the Multidimensional Organization


The M-form Still Dominates the Corporate Landscape

In 29 of the 36 firms interviewed, the internal organization was based on
one dimension. These firms were organized around units that were defined in
terms of either regions, products, markets, product-market combinations, or in
some cases distribution channels (e.g., intermediaries in the insurance indus-
try). An interesting case among these 29 firms was the “split business chain”
employed by Philips Medical Systems, in which development and manufactur-
ing are organized globally in divisions based on products, while marketing, sales,
and services are organized on the basis of regions. However, with the exception
of Philips Medical Systems and the seven multidimensional firms identified
below, the dominant way of organizing firms in the sample was on the basis
of the principle underlying the M-form: around units that are defined in terms
of one specific dimension.

The M-form Is Central to the “Theory in Use” of Executives

A second conclusion is that the traditional multi-unit organization is cen-
tral to the “theory in use” of executives.9 Executives’ comments on organization
were typically framed in terms of the organizing principles that underlie the
M-form. Clearly defined accountabilities and performance targets at the level
of business units are seen as the norm against which organizational solutions
are to be judged. As one respondent remarked, “When I was appointed CEO
of this firm, the organization was a complete mess. There was only one way to
clear this up: to organize it strictly in business units and divisions, without com-
promise.” Another illustrative comment by a CEO was: “My first philosophy is
to decentralize until the bitter end, which should result in clearly identifiable
entities for entrepreneurship. My second philosophy is that entrepreneurship
is by far more important than achieving synergies. My third philosophy is that
if the market changes, the organization needs to be adapted.” That the M-form
dominates the thinking of executives about organization is reinforced by the
fact that the multi-unit form is also the basis of the accounting systems of most

The Matrix Organization Is a Negative Mental Anchor

In contrast to their frequent recourse to the principles of the M-form
when discussing their firm’s organization, executives had nothing positive
to say about the organizing principles of the matrix organization. The interviews
made it very clear that the concept of a matrix organization has very negative
connotations. This is despite the fact that all respondents acknowledged that a
firm typically cannot be managed on only one dimension. A remark that was
made, in slightly different terms, in multiple interviews, was the following:
“You cannot run a company like this along a single dimension, you need to
manage along multiple dimensions—but one thing is for sure, I never again
want to work with a matrix organization.” Executives associate the matrix
organization with unclear responsibilities, a lack of accountability, and political
battles over resources, resulting in risk-averse behavior and loss of market share.

The Emergence and Evolution of the Multidimensional Organization


On the basis of the interviews, it seems that negative experiences with matrix
organizations even prevent top executives from asking the crucial question that
is central to recent scholarship on designing complex organizations “are there
ways to make the matrix organization work?”10

Virtually No Business Unit Is Self-Contained

Although the M-form still dominates both organization charts and execu-
tives’ mental maps, at the same time, the interviews showed that virtually no
business unit is self-contained. In contrast to the ideas underlying the M-form,
all firms are organized on the basis of business units that depend on resources
outside the unit to achieve their objectives, albeit in varying degrees. This is in
large part the result of the use of synergy mechanisms. Both shared service cen-
ters (26 out of 36 organizations) and corporate account management (15 out of
36 organizations) are widespread. In other words, while the M-form may still
dominate the thinking about organization, the actual practice of organizing has
taken firms away from the underlying logic of the M-form.

Mental Anchoring to the M-form Creates Problems
When Implementing Synergy Mechanisms

A number of firms—such as ARCADIS, an engineering firm with world-
wide operations—were wrestling with the organization of corporate account
management. While ARCADIS has historically operated very successfully on
the basis of independently operating business units, its corporate account man-
agement program is one of its most successful growth platforms. A corporate
account is typically a customer who is served by multiple business units, so that
corporate account management cuts across business units. The question that
firms like ARCADIS face is whether or not to grant corporate account manag-
ers profit-and-loss responsibility. Project driven firms such as construction com-
panies face a similar dilemma with respect to project management. In a firm
such as Van Hattum & Blankenvoort (a division of one of the largest construc-
tion companies in the Netherlands, the VolkerWessels group), large projects are
typically the profit drivers of the firm, yet there is also a need to monitor the
profitability of the business units that not only deliver goods and services to the
projects, but also to their own external customers. One of the problems with
respect to giving corporate account managers or project managers profit-and-
loss responsibility is opposition by business unit managers. They typically per-
ceive such responsibilities as reducing their own status, power, and autonomy.
In fact, in five of the firms interviewed, the mental anchoring to the M-form
resulted in a failure to successfully implement account management or project

Together, these five conclusions confirm the reality of the tension that
executives face when organizing their firms. Most firms seem to be “stuck in
the middle” between the principle of self-contained units that is central to the
M-form, on the one hand, and the need to create synergies across business units,
on the other. However, our research also unexpectedly turned up a number of

The Emergence and Evolution of the Multidimensional Organization


firms that seem to have found a new way to balance the demands for synergies
with clear accountability and control mechanisms.

Multidimensional Organizations

Seven of the firms that were interviewed create and exploit synergies
across their business units by organizing along multiple dimensions, and five
of these firms were studied in more detail (see Table 1). One of these firms is
PricewaterhouseCoopers Netherlands (PwC), the professional service firm for
accounting, tax, and management consulting. This firm is organized on the basis
of three dimensions: industries (including key accounts), professional services,
and support functions such as HR, IT, and facility management. This means
that, in addition to operating shared service centers for the support functions,
PwC has made different managers responsible for pursuing market opportuni-
ties and for managing resources. The “market managers” of industries and key
accounts have top-line responsibility. They are accountable for turnover, market
position, and customer retention. However, these managers control very few
resources. To reach their targets, they depend on the “resource managers” of the
professional service units. In addition to controlling most of the resources, these
resource managers also have bottom-line responsibility.

The crux of PWC’s organization is that pursuing market opportunities is
organized separately from managing resources. In doing so, the firm knowingly
violates the organizing principle that is at the heart of the traditional M-form:
that resources are unequivocally assigned to unit managers so that they can
use these resources to pursue market opportunities. What is interesting is that
PwC’s violation of this principle does not result in wheeling and dealing among

Number of
Dimensions Dimensions

ABN AMRO 4 (+1) Regions, Global Clients, Market Segments,
Products, (Support Functions)

(Albert Heijn Company)

8 Time, Place, Formula, Category, Customer’s
Loyalty Card, Receipt, Regions, Branch/Store

ASML 2 (+1) Products, Accounts, (Support Functions)

IBM 4 (+1) Product/Solution, Regions, Accounts, Distribution
Channels, (Support Functions)

Microsoft 4 Products, Regions, Applications, Market Segments

PricewaterhouseCoopers 2 (+1) Industries, Professional Services, (Support

Van Hattum & Blankevoort 2 Business Units, Projects

TABLE 1. The Multidimensional Firms from the Sample

The Emergence and Evolution of the Multidimensional Organization


the market managers and resources managers. Instead, the inherent conflict
between developing new market opportunities and an efficient utilization of
resources is deliberately brought to the table of PwC’s executive board. To fruit-
fully exploit the tension between innovation and efficiency, the task of the board
is twofold. On the one hand, it must reduce risk-averse satisficing behavior
among the resource managers by confronting them with the market opportu-
nities identified by the market managers. On the other hand, it must confront
any overly optimistic judgments about market opportunities among the market

The example of PwC highlights three of the six main characteristics of
multidimensional organizations that we identified. Multidimensional organi-
zations: 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 perfor-
mance; and organize resources in such a way that the managers who are respon-
sible for the different dimensions are dependent on each other for the resources
they need to achieve their performance objectives. What is essential is that in
multidimensional organizations, the reconciliation of grasping market oppor-
tunities and using resource efficiently is a corporate issue that is visible to all.
Trade-offs are made in light of their effect on overall firm performance.

A possibly paradigmatic example that illustrates in more detail how mul-
tidimensional organizations operate is IBM. When Gerstner took over as CEO
in the early nineties, IBM was a product-centric firm with a focus on hardware
products such as mainframes. Its internal organization was based on a geograph-
ical model: the key positions outside the United States were the country manag-
ers. Today, IBM offers products, services, and solutions and is organized around
four dimensions: regions, products and solutions, industries and accounts, and
distribution channels. Contrary to his predecessor Akers, who intended to split
IBM up into a number of autonomous companies, Gerstner implemented a strat-
egy aimed at offering integrated services, including servicing a number of global
key accounts. Palmisano, the current CEO, has extended this strategy with his
concept of the “Globally Integrated Enterprise.”11

To operate as an integrated enterprise, IBM simultaneously holds dif-
ferent managers accountable for the results of products, accounts, regions, and
distribution channels. Product managers are accountable for turnover, margin,
market share, and market penetration of specific products or solutions. Account
managers are accountable for client satisfaction (which is measured twice a year
by an independent agency), turnover, and margin for specific accounts. Account
managers have staff for industry expertise and architecture design, but are oth-
erwise dependent on staff and expertise from the product groups. Region man-
agers 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 manager. Distribution channel managers are accountable
for turnover, return on sales, and customer satisfaction for their channel. Prod-
uct, account, region, and distribution channel managers all depend on shared

The Emergence and Evolution of the Multidimensional Organization


services organized in “Globally Integrated Support Functions,” including finance,
HR, legal, communications, and sales support.

A crucial building block of IBM’s ability to operate as an integrated enter-
prise is its management information system. Before 1994, in keeping with IBM’s
geographical organization, IBM Finance was decentralized. Management infor-
mation systems were geared to the needs of the local business units, cost allo-
cations were subject to gaming among business units, and consolidation of the
necessary information for financial reports was tedious. Today, all IBM’s trans-
actions are recorded according to one set of common data definitions and pro-
cesses and they are consolidated in one global general ledger. This has created
a trusted central source of accounting information …

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