Theory of the Firm - Essay Example

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Theory of the Firm

Although it is very difficult to suggest which, out of these two is a better structure, but one can clearly identify the merits of each structure. In the U-Form or Unitary form, organizations are broken up into separate departments for each process, for example, separate department for marketing, finance and production. The manager or head of each department reports to the chief executive of the organization, whose function is to co-ordinate the activities of each department, relaying the firm's overall strategy to them and being responsible for inter-departmental communication. Although, this structure is very efficient till the firm is of certain size, but it can lead to inefficiencies as the organization grows. These inefficiencies are: communication difficulties, coordination and control and it become difficult to manage the entire organization from the centre.
Another structure which results in the firm being able to overcome these problems is called M-Form or multi-divisional form of internal structure. In this structure, the firm is divided a number of divisions. Each division could be responsible for particular group or group of products or a particular market. The day to day running and even certain long term decision of each division would be the responsibility of the divisional managers. ...Show more


Sloman (Sloman 2004, p. 196) states that there are various operating structures that are adopted by firms for their internal operating structure. The decision about which structure should a firm adopt depends on its size. Small firms tend be centrally managed, with decision making operating through a clear hierarchy…
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