The choice of organisational form in implementing diversification

Abstract

Research on diversification as a major corporate strategy has primarily addressed the issues of objectives of diversification, effect on various performance parameters and managing diversified conglomerates. Diversification into unrelated business areas poses challenge before the management in acquiring newer skills, technologies and successfully implementing the diversification strategy. This process of implementation is little understood as most studies have taken firm as a unit of analysis rather than a specific diversification. This research aims to fill this gap. Specifically, the objective was to study why a particular organizational form (division or subsidiary) was chosen and what were its consequences on the development of organization structure, systems and procedural practices in the new unit and its linkages with the parent organization. The study used a 2x2 case research framework to compare and contrast between divisions and subsidiaries in two different organizational contexts. The two firms chosen belonged to different business houses but were comparable in size and were large Indian companies with turnover in excess of Rs. 500 crore and employing around 5,000 staff each. Cross-case comparison was carried out both between the two companies for comparing the context of decisions and between divisions and subsidiaries for comparing the unit level organization structure, systems and linkages with the respective parent organizations. All the four diversifications materialized during the 1980s in a period of liberalizing economic environment. The major findings were: l. The decision on organizational form was characterized by top management's need for control and preference for status quo, preference of key people associated with the planning effort and relatedness of the proposed business. The top management narrowed the options under consideration - usually the closest top and the final decision depended on the relatedness of the proposed business and the disposition of the key project planning staff. 2. The choice of organizational form more than the unrelatedness of the business determined the nature of the organization structure, internal systems and linkages of the new unit with the parent organization. The legal autonomy (formation of subsidiary) promoted behavioural autonomy. 3. The autonomous functioning of these units displayed a characteristic hierarchy. Thus autonomy in people related systems (recruitment, induction and promotion policies, etc.) was preceded by a high degree of autonomy in the structuring of the organization and in turn this was preceded by a high degree of autonomy in the task related systems. 4. The data for the four cases was collected over a period of two years (1989 and 1990). It covered for each case a period of at least four years including a year before the formation of the unit. None of the units were more than eight years old at the time of the study. Key officials including the CEOs from both the parent organizations and heads of divisions / subsidiaries were interviewed. Large part of the data also comprised documents, correspondence forms of standard operating procedures.