The U-form firm emerged during the development of the American railways in the second half of the 19th century. The growth in size of the network together with the growth in traffic led to the creation of an administrative structure, the appointment of specialist managers, the development of internal accounting and control policies and to what is now termed the ‘‘unitary structure’’ of the firm; these incorporated ‘‘decentralized line and staff organization’’ giving managers the authority to carry out a particular function together with line authority to order subordinates to perform particular tasks

Advantages

The growth of functional specialists provided the firm with more efficient performance through the effective division of labour: for example, employing marketing specialists improved the performance of that function and allowed the firm to increase its managerial capacity, so that it could expand. The growth of functional specialists also freed the chief executive from undertaking many of these duties and to give him more time to consider the strategic and entrepreneurial issues facing the firm.

The role of senior management is to manage the organization and implement its existing strategy. It does this by employing staff, signing contracts, ensuring production takes place and products are delivered. It also collects information to evaluate whether past decisions have been successful and to take appropriate action as a result. Another task is to communicate with staff and motivate them to work in the interests of the firm and fulfill the tasks allotted to them. Subordinates carry out many of these tasks. Finally, senior managers are responsible for determining and changing the strategy of the firm; this involves deciding the boundaries of the firm, the products to be added to or deleted from the existing portfolio, markets to be served and acquisitions or divestments to be made. The U-form firm is thought to carry out all these tasks effectively as long as the firm is a small or medium-sized single product enterprise. With growth and diversification the structure faces a number of problems

Disadvantages

The unitary structure takes the form of a hierarchical or pyramid structure where by the managing director gives orders to a functional director who gives directions to the next layer of management/workers down the line of control. Each level of the hierarchy will have its responsibilities for a particular aspect of a function and will report on its performance to the higher level that gave the orders.

Span of control The number of levels of management required in a U-form firm is a function of the span of control of the manager and the number of operatives at the lowest level. With a span of control of 2, a workforce of 8 operatives would require 7 managers and a 4-tier organization. A doubling of the lowest level workforce to 16 would increase the number of supervisors to 15 and the number of tiers to 5. Increasing the span of control would clearly reduce the number of managers and tiers in an organization. With a span of control of 10, 1,000 workers could be supervised by 111 managers and the organization would have only 4 tiers. With a span of control of 2, the organization employing 1,024 operatives would require 11 tiers and 1,023 managers. Increasing the span of control of supervisors or managers can therefore offset the rising costs of hierarchy; this is facilitated by the experiential learning of specialist managers and workers who will be able to undertake tasks more efficiently and with less supervision; this, together with organizational learning and reorganization, will increase the work capacity of all staff and hence the firm. However, as the number of operatives increases the U-firm will experience increasing layers in its organizational structure. At some point diminishing returns set in as the firm faces problems associated with the growing number of layers in the hierarchy (namely, control loss, information distortion and opportunistic behaviour).

Control loss is the cumulative reduction in management’s overall ability to control the firm as it becomes larger; this is the result of increasing the number of levels in the pyramid for any given span of control. Those in the hierarchy who are employed to make decisions rely on those lower in the hierarchy to pass accurate information and data to them. However, information transferred between individuals is subject to distortion, accidental or deliberate, and to misinterpretation by the recipient, particularly

when the information is summarized and interpreted for onward transmission to those higher in the hierarchy. Similar considerations apply to the transfer of orders from the top to the bottom of the organization. Directions from senior managers are interpreted by lower managers and converted into operational directions for those responsible for finally implementing decisions at the production level.

The transfer of information and directions through a hierarchy, therefore, leads to greater control loss the greater the number of layers. Such control losses limit the effectiveness of any hierarchy and of individual managers within it. To limit control loss there is a tendency for hierarchies to establish rules and procedures to guide every decision. While these work in a stable environment, the rules may be less relevant in an unstable one Control loss can be expressed as a function as follows:

C ¼ 1 _ FN_1

where C ¼ a measure of overall control loss, F ¼ the fraction of information being passed accurately between layers in the hierarchy and N ¼ the number of layers in the organizational structure. Thus, if:

1.F is equal to 0.9 and n is equal to 3, then control loss is equal to 19%.

2. F is equal to 0.9 and n is equal to 6, then control loss is equal to 41%.

3.F is equal to 0.9 and n is equal to 12, then control loss is equal to 69%.

Thus, the fewer the number of levels in the organization and the higher the proportion of information accurately passed from one level to another the lower the control loss. Increasing span of control One way of limiting the number of levels in the hierarchy as the organization grows is to increase the span of control. However, this means that a manager has less time to address any particular problem and to deal with individual staff, so that the outcome is likely to be poorer decision making and greater opportunities among staff to behave opportunistically.

Principal agent analysis suggests that there is greater opportunity for opportunistic behaviour by agents if the principal becomes distant from the agent. The weaker the supervision the less effort will the agent be inclined to put into any task; this may be compounded where the agent possesses information or skills important to the business but not fully known or fully understood by their supervisors. Since their work is incompletely understood by their supervisors, information may be only partially and inaccurately transferred, so that senior managers find themselves making decisions with incomplete and possibly distorted information.

Crowding out Strategic Decision Making The board of directors may be made up of the senior operating officers for each of the functional areas together with the chief executive officer. Since the executive officers are primarily concerned with the efficient operation of their functional area, such boards are said to spend too little time on the wider strategic issues facing their enterprise. Each director may also behave opportunistically to favour his own department at the expense of others.

The function of the chief executive is to give the functional directors objectives and to co-ordinate their work. However, each functional executive may prosecute the interests of his particular group over those of others. The functions may cease to communicate with each other and pursue conflicting goals, making the work of the chief executive in pursuing the collective interests of the firm more difficult.

Self-interest and opportunistic behaviour A further result is that if resources are allocated to functional areas led by stronger and more powerful executives, then resources are misallocated. For example, if the importance of an executive is judged by the number of employees, then executives will try to increase the size of their part of the firm in terms of numbers employed. This problem is compounded by the difficulties faced in U-form firms in measuring the performance of individual functions. For example, if the firm increases sales of its product, which functional area is responsible for calculating an appropriate price? Is it marketing for selling, manufacturing for making a better product, or accounts? If the productivity of the functional areas cannot be measured, then the internal allocation of resources will follow political rather than efficiency criteria. These problems are further compounded if the firm produces a number of products because it is difficult to allocate costs to individual products. Such opportunistic behaviour may be avoided at senior management level by the introduction of non-executive directors from outside the organization  and may be constrained by outside forces in the shape of competitors and shareholder preferences. If the administrative cost of a U-form structure becomes excessive, then the profits of the firm will decline and organizational structures re-examined. For example, the financial difficulties of the British Postal service in 2002, in the face of price controls and deregulation, led to a decision to reduce the number of administrative layers in the organization from 15 to 6 (Financial Times, 14 June 2002). The chairman attributed the problems partly to poor management and partly to excessive bureaucracy.

The simple U-form organization is considered appropriate for small and medium sized firms since it generates efficiency from specialization of functions. It appears to be less efficient as size and complexity increase, particularly if the firm grows through product or market diversification


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