Description
The relationship between organizational structure and performance in small firms has received relatively limited attention over the last few decades. In understanding small firm performance this seems to be a serious omission. In this paper, we first present the rationale for including organizational structure in the analysis of small firm performance.
SCALES-paper N200420
Organizational structure and
performance in Dutch small firms
Joris Meijaard
Maryse J. Brand
Marco Mosselman
Zoetermeer, January, 2005
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2
ORGANIZATIONAL STRUCTURE AND PERFORMANCE IN
DUTCH SMALL FIRMS
Joris Meijaard
Erasmus University Rotterdam, Rotterdam School of Management, Department of
Innovation Management, P.O. Box 1738, 3000 DR Rotterdam, Tel. +31 6 24412792,
Fax +31 79 3415024
E-mail: [email protected]
Maryse J. Brand
University of Groningen, Faculty of Management and Organization, P.O. Box 800,
9700 AV Groningen, The Netherlands, Tel. +31 50 3637492, Fax. +31-50-3637110
E-mail: [email protected]
Marco Mosselman
EIM Business and Policy Research, P.O. Box 7001, 2701 AA, Zoetermeer, The
Netherlands,Tel. +31 79 3413634, Fax +31 79 3415024
E-mail: [email protected]
ABSTRACT
The relationship between organizational structure and performance in small firms has
received relatively limited attention over the last few decades. In understanding small
firm performance this seems to be a serious omission. In this paper, we first present
the rationale for including organizational structure in the analysis of small firm
performance. Then, from the literature on organizational theory, we retrieve several
dimensions that may be postulated to describe organizational structures of small
firms. Based on the study of a stratified sample of 1411 Dutch small firms we show
that nine structure stereotypes can be delineated. We further investigate the relevance
of the empirical taxonomy by looking at the relationship with firm performance in
terms of sales growth, profitability and innovativeness. Eventually, we conclude that
organizational structure indeed matters and that it deserves to be taken into account in
models and future analysis of small firm performance.
JEL Code: M21, D21
Key Words: Organizational structure, Small firm performance, innovativeness.
3
INTRODUCTION
An important strand of the small business economics literature deals with
understanding the determinants of small firm performance (e.g. Kimura, 2002;
Audretsch, 2001; Robson and Bennett, 2000; Roper, 1999). In broad terms, firm
performance is determined by the success of selling products and services in the
market, and, by the effectiveness of organizing and transforming inputs (such as
labour and capital) into sellable products and services (Nickell, 1996; Nickell et al,
1997). For most small firms labour is the most important input (Heskel, 1999), which
means almost by definition that organizational structure may be very relevant to small
firm performance.
In this article, we study the organizational structures of small firms and the link
between these structures and the performance of the respective firms. One of the most
elementary decisions a small firm owner or manager has to make is the design of the
firm’s organization. As soon as a small firm hires employees, some kind of
organizational structure develops. The actual design of this organizational structure is
a mix between deliberate choices and unconscious, emergent developments. What
evolves is a system of responsibilities, privileges and coordination mechanisms. The
outcome of this organizational design process may be expected to be an important
determinant of the performance of firms (Mintzberg, 1979; Jensen and Meckling,
1992; Chaston, 1997; Athey and Roberts, 2001).
Theoretical support for the relevance of organizational structures can be found
ubiquitously. Sociologists, management scholars and economists have written on the
subject. Firstly, many business school textbooks cover the topic in order to explain the
essentials of organizations and management (e.g. Mintzberg, 1979; Robbins, 1990;
4
Burton and Obel, 1998). Several strategic management scholars have performed
specific empirical studies on related topics (e.g. Wolf and Egelhoff, 2002; Lin and
Germain, 2003). In this context, Doty et al (1993) explain that organizational design
theory has developed from a normative, universalistic approach (promoting ‘the best
structural form’), via a normative contingency theory approach (‘the best structural
form exists given specific sets of conditions’), to the notion of equifinity (‘in a
specific situation, multiple good solutions exist’), Unfortunately, the empirical
relevance and rigor of the normative theories has not always been clear. Intuitively we
agree with Donaldson (1987) when he states that a good fit means better performance.
Studies that actually investigate performance in relation to organizational structures
are relatively rare and do not find clear relations between structure and performance
(e.g. Child, 1976; Covin and Slevin, 1988). The majority of studies are of a
descriptive and predictive nature (Child ,1972; Pugh and Hickson, 1976) or they focus
on one aspect of structure (e.g. Axley, 1992). Burton and Obel (1998) collected about
450 rules for organizational design and put them into a consultant knowledge base.
This could give the impression that the organizational structure problem is a done
deal: put in your characteristics and your preferred structure is clear. However, for
many of the rules it is unclear how they were derived: by rule of thumb, logical
deduction or empirical research. Moreover, most rules are based on the study of large
firms only.
In mainstream economic literature, organizational structure has received exceptional
attention over the last few years (e.g. Garicano, 2000, Maskin et al, 2000; MacDonald
and Marx, 2001; Stein, 2002; Garicano and Hubbard, 2003). The topic has been on
the agenda starting Williamson (1967), who pointed at diseconomies of scale caused
by unbalances between firm size and organizational form. In subsequent years there
5
was attention to modelling organizational structures and the link with performance.
Particularly, Arrow (1974) discusses the limits of the firm and shows that
specialization leads to an additional need for coordination. Cremer (1980) studies the
degree to which coordination mechanisms reduce uncertainties. Sah and Stiglitz
(1986) investigate the consequence of (hierarchical) structures on the quality of
decision making. Becker and Murphy (1992) focus on specialization and the division
of labour, concluding that coordination costs determine efficiency of organizational
structures. Aghion and Tirole (1997) investigate formal and real authoiry in
organizations, particularly in relation to other coordination and communication
mechanisms. In summary, great economists have tried to contribute to theory and
thinking on the link between organizational structure and performance.
In this study, we want to contribute to the above discussions. We search for insight in
the relevance of organizational structure in small firms. Many studies agree that
organizational size is one of the variables most closely related to organizational
structure (for a review: Kimberly, 1976). Nevertheless, studies that actually focus on,
or even include, small firms are scarce (e.g. Chaston 1997, Caruana 1998, Johnston
2000). The studies that do investigate organizational structures in small firms mostly
have a limited empirical base (50 to 250 cases), they pay attention to very few aspects
of organizational structure, and they do not look into differences between various size
classes. As a result, small firms are most frequently typecast as having ‘simple
structures’ (Mintzberg, 1979). Theories of transaction costs and agency problems
point in a similar direction. This study presents a quantitative study into the
occurrence of structures of various types in small firms. We gain insight in the
occurrence of typical organizational structures in small firms and we illustrate some
of the impact of small firm structures on performance.
6
DIMENSIONS OF ORGANIZATIONAL STRUCTURE
In this section, we present a brief review of several well-cited authors that have tried
to define a coherent set of organizational structure variables (Pugh and Hickson, 1976;
Mintzberg, 1979; Dewar et al, 1980; Geeraerts, 1984; Robbins, 1990; and Burton and
Obel, 1998).
Broadly speaking, organizational structure concerns (1) work division, the distribution
of tasks and activities, and (2) coordination mechanisms, which includes
standardization and formalization. The various authors use somewhat different
dimensions of organizational structure. The early studies use specialization to describe
how tasks are distributed among firm members. Geeraerts (1984) distinguishes
specialization and differentiation (also referred to as departmentalisation). They both
concern the ‘complexity’ of the organizational structure. As regards to the importance
of separate attention to the locus of authority in decision-making (‘centralization’) and
the relevance of codes and procedures for coordination (‘formalization’) most authors
agree. A final dimension describes the way firms organise day-to-day (partly
informal) coordination between individuals and departments. In this context, in line
with Galbraith (1973), Mintzberg (1979) distinguished three main types of
coordination: direct control, mutual adjustment and standardization. As said, in broad
terms, specialization and decentralization are about how specific tasks and authorities
are distributed in the organization, i.e. the work division. Formalization,
standardization and coordination are subsequently about controlling and optimising
organizational procedures, i.e. the coordination mechanisms.
7
CONFIGURATIONS
Miller and Friesen (1986) have argued that multivariate interdependencies in structure
(and strategy) tend to manifest themselves in so-called Gestalts. Max Weber already
introduced the Gestalt ‘machine-bureaucracy’ proposing that specialization,
formalized rules and procedures and an extensive hierarchy are positively related, and,
that each of these structuring variables are negatively related to the centrality of
decision making (see also Blau and Schoenherr, 1971). Other famous examples of
configurations are the typology of Burns and Stalker (1961), who distinguish between
organic and mechanistic organizations; Pugh and Hickson (1976), who propose a
sevenfold classification of organizational structures; and Mintzberg (1979), who
introduces five structural configurations ranging from a ‘simple structure’ to a
‘multidivisional form’. Sometimes these configurations have been interpreted as ideal
types (e.g. Mintzberg 1979), in other cases they were handled as observed, positively
determined types (Pugh and Hickson 1976). Miller and Friesen (1980) demonstrate
that changes (or stability) in organizational structure dimensions tend to occur
together, or follow one another after brief intervals (in order to maintain an
appropriate balance or ‘configuration’ of organizational structures). An important
limitation of many of these typologies is that they are based on case studies and
surveys of large firms. The small firm is often positioned as a caricature in one of the
types, such as Burns and Stalker’s ‘organic organization’ or Mintzberg’s ‘simple
structure’.
8
RESEARCH METHOD
Three times a year, about 2,000 entrepreneurs of Dutch firms with less than one
hundred employees participate in a Dutch small firm survey called the ‘MKB panel’.
The survey waves are executed by means of 15-minute telephone interviews. The
purpose of the survey cycle, which runs since 1999, is to gather systematic
information about the attitudes, behaviour and performance of Dutch small firms. The
sample is stratified in three size-classes and nine economic sectors. The sectors and
size classes are sampled in equal strata
1
. For each of the firms in the sample, control
variables are available, specifically rather rudimentary measures of size, type of
economic activity and location. For this study, a questionnaire was designed based on
the theory of organizational structure and design outlined above. We have used 22
items and several more open questions on performance in several years after
measuring organizational structure. 3-point Likert scales are used in this study, since
extensive test interviews show that in telephone interviewing respondents are unable
to mentally map and repeatedly apply 5-point scales, let alone 7-point scales.
Interviewees are strongly inclined to answer in their own (select) 3-point subscale.
For the present investigation of organizational structure, we have a sample of 1411
Dutch small firms that employ at least one person next to the owner (i.e. to have at
least some sort of basic work division and coordination). As said, the firms are drawn
from the population of Dutch small firms based on 27 equal strata by sector and size
class. Response rates for the base wave on organizational structure are 72%. A letter
by regular mail introduces the telephone interviews and the reported response rate is
based on a maximum of three rounds of call and appointment attempts.
9
RESEARCH DESIGN
Our data analysis consists of four steps. Firstly, we perform a factor analysis on the
various items on organizational structure in the survey. Based on the resulting and
reliable factors, we highlight several key features of the prevailing organizational
structures of small firms. Then, by way of an elaborate cluster analysis, we investigate
the occurrence of configurations of organizational structures. Finally and importantly,
we show that there are systematic consequences of being a firm with a particular type
of organizational structure. Regressions per type of firm are executed to investigate
the comparative performance given size and sector. This evaluation of performance
enables us to test several of the hypotheses that derive from the literature. Given the
range of other topics tackled in the consecutive surveys many more topics and
hypotheses could have been studied in combination with organizational structure and
performance. Time and space limitations however have forced us to restrict ourselves
to performance in terms of sales growth, profit-to-sales ratios and innovativeness.
HYPOTHESES
Organizations may be typecast as hierarchies of various forms. The multidivisional-
form (M-form), the unitary-form (U-form) and the matrix organization are the best-
known types (Harris and Raviv, 2002). In an M-form, separate departments exist for
different sets of products or customers. For large firms these departments are often
referred to as ‘divisions’. Within a U-form, separate departments exist for different
functional specializations. Finally, a matrix organization combines both dimensions of
work division. For small firms, one would expect the complexity to be very limited.
1
Size classes are 0-9 employees, 10-49 employees and 50-99 employees. Sectors are: Manufacturing,
Construction, Wholesale and retail, Hotels and restaurants, Transport, Business services, Financial
10
Based on coordination and transaction cost arguments, the above structures are
expected to be absent or very rare and inefficient in small firms. This leads us to the
main hypothesis of this study. The larger the firm, the more attractive and effective it
is to develop a complex structure, which leads us to formulate three more hypotheses.
H1. Small firms occur in a limited variety of organizational structures
H2. Highly departmentalised firms will be large
H3. Smaller, yet highly-departmentalised firms will not perform well
H4. Larger, yet non-departmentalised firms will not perform well
Alternative theories, for instance team theory (Marshak and Radner, 1972), propose
that in many contexts it is efficient for firms to decentralize authority and information
processing (Radner, 1992, Lenox, 2002).
H5. Small firms with a strongly decentralized structure perform well.
Alternatively, Alchian and Demsetz (1972) posit that hierarchies are a response to
incentive problems associated with team production. They suggest that division of
labour and centralization are needed. Along this line upper-level individuals specialize
in monitoring lower level ‘production’ workers (cf. Calvo and Weillisz, 1978).
H6. Small firms strong centralization and vertical specialization perform well.
Hart and Moore (1999) suggest hierarchies may be viewed as chains of authority in
decision-making. The manager-entrepreneur in this context is a (central) coordinator
of workers in (multiple levels of) specialized production (see also Cremer, 1980).
services, Personal services and Non-private (includes healthcare, farming).
11
H7. Hierarchical, centralized structures with strongly specialized employees
perform well.
Following Grossman and Hart (1986) and Garicano (2000) another motivation for
division of work lies in the opportunities to exploit (local) increasing returns to scale
for specific (scarce, complex) skills. This may very well call for sophisticated
coordination of work.
H8. Firms with highly specialized workers will be larger
H9. Firms with highly specialized workers will perform well.
Given that under uncertainty this coordination may be problematic, an opposite
incentive for diversification and simple structures is also present (Garicano and
Hubbard, 2003).
H10. Non-specialized, simple organizational structures perform well
Contingency theory proposes that different organizational structures are appropriate
given the requirements of the different contexts (Burns and Stalker, 1961).
H11. Given contextual conditions, different types of organizational structures may
perform better.
Doty et al (1993) suggest that given uncertainty in most circumstances multiple
‘good’ and no best solutions exist.
H12. Given contextual conditions, different types of organizational structures will
perform equally well, particularly in the longer run.
12
VARIABLES
As explained above, we want to include five 'structural dimensions' in our analysis:
departmentalisation, specialization, decentralization, coordination and formalization.
In principle, it would have been preferable to only use existing, validated scales. For
several reasons, however, we have chosen to use a different and more limited set of
items. Firstly, many previous studies have focussed on only a few of the structure
dimensions. Secondly, most studies were aimed at large multinational companies,
which obviously is a different audience than our small firm entrepreneurs. The
transferability of proven scales is therefore a bit questionable. For example, Pugh et al
(1968) use 55 (sub-)items to measure formalization alone, while their centralization
questions are repeated for 11(!) different types of decisions. Dewar et al (1980), use 9
items to measure centralization. Morrison and Roth (1993) use 10 items to measure
centralisation, 8 to measure specialisation and another 6 to measure formalisation.
Such numbers of items are detrimental to the response rates for our method of
research. It is simply infeasible for telephone interviewing. Our questionnaire had to
be short and easy to understand. Large number of items cannot be covered in
telephone surveys since the quality of responses sharply decreases. The major
advantage of telephone surveys is of course that response rates can be achieved that
are infeasible with other methods of research. Response rates are particularly good in
a committed setting as in this study. Furthermore, many of the existing scales on
organizational structure are less suitable since they were developed for employees as
respondents instead of (small) business owners (e.g. Caruana et al, 1998). Thus,
instead of choosing a limited number of specific items from well-cited studies (which
would force us to be incomplete), we reformulate items in short and general
statements that are suitable for telephone interviewing. An additional benefit of this
13
procedure is that the newly developed items are relevant to firm in any sector, which
is important since we would like to derive conclusions on small firms in as general
terms as possible. The developed questionnaire was tested in about ten pilot
interviews with small firm owners and some employees to get some indication of
robustness. Several questions were reformulated or dropped in this process. In
particular, it was decided at this stage to limit the number of items to twenty-two
instead of thirty-nine.
INSERT TABLE 1 HERE
Table 1 presents an overview of the items that are used in this study. Firstly, the
dimension of departmentalisation is covered by seven items, representing vertical
differentiation and horizontal departmentalisation (Robbins 1990, Rivkin and
Siggelkow, 2003). The three items relating to vertical differentiation are indicators
related to the hierarchy and complexity of the organization: the number of separate
organisational units, the number of hierarchical levels and the number of managers.
The four items relating to horizontal departmentalisation refer to divisional and
functional groupings (see e.g. Mintzberg, 1983; Carson et al, 1995).
Secondly, specialization was measured by four items representing specialization of
tasks and skills. Two items concern specialization of tasks, also referred to as
functional specialization (Pugh et al, 1969; Robbins, 1990). This type of
specialization closely links to the concept of job rotation (Dewar et al, 1980). Another
two items concern the specialization of skills, also referred to as social specialization
14
(Robbins 1990). This relates to actual ‘specialists’ and ‘irreplaceable’ personnel {e.g.
Mintzberg, 1983).
Thirdly, decentralisation was measured by four items distinguishing authority on a
strategic and an operational level. Furthermore, we follow Dewar et al (1980) and
Richardson et al (2002) by including items for decentralisation of authority and
decentralization in participation (which of course is weaker). Following Pugh et al
(1968), we allow for differences in the nature of (de)centralization for operational
versus strategic decisions.
Finally, we include seven items relating to the coordination mechanisms within the
firm. Items are included for written procedures (Oldham and Hackman, 1981) and for
formal communication (cf. Pugh et al, 1979; Mintzberg, 1983). Furthermore, we
include an item representing self-guidance plus four items for personal and
impersonal directive mechanisms (Mintzberg, 1983).
The control variables that were included in the questionnaire are measured by industry
(9 classes), size (number of employees) and strategy (one item for each generic
strategy, based on Porter, 1985).
We used multiple measures of firm performance to reflect the multi-dimensionality of
performance. Since some respondents were expected to be unwilling to provide
detailed and comparable accounting data, the entrepreneurs were also asked to rate
their firm's sales and profit performance relative to the preceding year. Following
Dess and Robinson (1984) we included an additional item on the firms profitability
compared to similar firms, i.e. competitors.
15
RESULTS
The twenty-two items on organizational structure listed above combine to nine factors
in an unrestricted principal component analysis. In order to arrive at more easily
interpretable results Varimax rotation was used. The nine empirically derived
components capture critical variations in organizational structure in small firms. Table
2 below shows an overview of contributing item coefficients with an absolute value
larger than 40%.
The factors result in orderings that are largely expected: departmentalisation splits
into a component of hierarchical complexity and a component of divisional/functional
complexity. Specialization splits into task diversity and employee specialization.
Decentralization has components for operational and strategic influence. Coordination
is the most special case. Formalization and standardization are found to largely
overlap (factor 9). Furthermore several less formal coordination mechanisms remain.
Direct coordination by the entrepreneur contributes to the hierarchical complexity.
Informal team coordination is responsible for a separate component. Self-coordination
is the only significant contributor to factor 8. Interestingly enough, both informal
team-coordination and self-coordination are apparently rather independent from the
other organizational structure items. Furthermore, they vary substantially across small
firms (otherwise they would not qualify as ‘independent’ factors).
INSERT TABLE 2 HERE
16
Based on the contributions to the components above, we directly construct scales for
nine dimensions of organizational structure. For each of these constructs Crohnbach’s
? is acceptable (> 0.6). The scales are direct sums of the set of significantly
contributing items per component.
Further analysis of the constructs teaches us that the myth “small firms are informal,
unstructured and centralised” appears to be untrue. The larger firms in our sample are
more standardised, but considerable variation exists, also among the smaller firms.
The departmentalisation of larger firms is more complex, but quite a few of the firms
with less employees are pretty complex in their structure. Task diversity decreases and
employee specialization increases as small firms are larger, but - once again – a whole
range of smaller firms show more specialization than larger ones. For operational
decisions, larger firms are a bit more decentralised than smaller ones. For strategic
decisions there is no systematic difference between various small and medium sized
firms, nor there is for self-coordination.
INSERT TABLE 3 HERE
Next, given the variations of the nine constructs, we are interested to learn whether
systematic organization types can be delineated. Testing for the optimal number of
clusters by way of the sum of squared distances to the cluster centres
2
, we arrive at
nine typical organization structures, which will be discussed below.
2
There is a ‘kink’ in the SSD-plot from introduction of the eighth to the ninth cluster. The sums of
squared distances were plotted for two to twenty clusters.
17
INSERT TABLE 4 HERE
The first organizational structure (entrepreneur with a ‘submissive’ team) is
characterized by an authoritarian entrepreneur and several quite independent
employees. The employees have limited influence on decision-making. Coordination
mainly occurs through informal team processes.
The second structure (co-working boss with an open structure) is characterized by
employees that are highly involved in operational decision-making. Coordination also
mainly occurs through informal team processes. Departmentalisation and
specialization are limited.
The third structure (an entrepreneurial team) concerns firms characterized by
employees closely involved in strategic and operational decision-making.
Formalization is low. Coordination occurs through team processes, under substantial
specialization.
The fourth structure (boss - loose control) concerns firms characterized by
independent employees that are relatively uncoordinated. The entrepreneur is not very
authoritarian or formal, yet (s)he does make all decisions. Departmentalisation and
specialization are limited.
The fifth structure (boss – tight control) has few tasks and responsibilities defined
beyond that of the dominant entrepreneur-owner-decision maker. Specialization is
low, the use of formal and informal coordination mechanisms limited.
18
The sixth structure (singular structure) has few divisional or functional departments.
The entrepreneur is important, not extremely dominant, yet employees have limited
leeway for self-coordination. Specialization and formalization are rather simple.
The seventh structure (U-form) is simple, yet rather strongly hierarchical in structure.
Formalization is substantial and employees are rather specialized in their capabilities.
The entrepreneur must involve employees in decision-making in order to be
sufficiently informed.
The eighth structure (matrix organization) is flat, yet rather strongly functionally and
divisionally departmentalised. Formalization has to be relatively large for
communication and coordination to work well. Decentralization is limited and within
departments specialization is low.
The ninth and final structure (M-form) is hierarchically structured and
departmentalised in divisions. A substantial part of the employees are specialized
professionals and involved in decision making. Formalization is substantial, like in the
last two organizational structures.
Finally, for the nine organizational structures, we study the performance in terms of
sales growth, profit to sales and innovativeness. If structure does not match size and
sector, one would expect a lower performance. Below, we present the results in three
tables. We show in which sectors the various organizational structures perform
relatively well, and, in which they perform relatively poorly. It is interesting and
important to note that each of the organizational structures occurs widely across
sectors.
19
INSERT TABLE 5 HERE
In terms of 3-year persistent sales growth, ‘co-working bosses with an open structure’
seem to perform rather well in the construction sector. ‘Entrepreneurial teams’
perform rather well in business services and manufacturing sectors. The ‘M-form’
performs well in financial services. By contrast, ‘singular structures’ in manufacturing
and business service sectors are not good for sales growth, neither are entrepreneurial
teams in personal services.
INSERT TABLE 6 HERE
Contrarily, in terms of persistently ‘good’ profit to sales ratios, ‘entrepreneurial
teams’ in personal services perform well. This also holds for ‘U-forms’ in financial
service and leisure sectors. Simple hierarchical structures are good for profit to sales
ratios in business services (‘bosses - loose control’ and ‘bosses - tight control’).
INSERT TABLE 7 HERE
Finally, in terms of innovativeness, simple, hierarchical and entrepreneur-dominated
firms do not perform well, except perhaps for particular larger organizational
structures in business services and manufacturing. M-forms are relatively innovative
in financial services and manufacturing, matrix structures are relatively innovative in
20
services. U-forms appear to be less innovative in wholesale, retail, transport and in the
hotel and restaurant businesses. Larger entrepreneurial teams appear to perform well
in terms of innovation, except in the construction sector.
CONCLUSIONS
Coupling these results back to the literature and the hypotheses formulated above, we
can draw the following conclusions.
To begin with, contrary to our first and main hypothesis, we find small firms to occur
in a wide variety of organizational structures. We find organizational structures with
various degrees of departmentalisation to coexist. Contrary to the second hypothesis,
we find that small firms as well as larger firms may exhibit substantial
departmentalisation. Nevertheless, we do find a strong correlation between
departmentalisation and firm size. Contrary to hypotheses H3 and H4 small
departmentalised or large non-departmentalised firms do not perform systematically
worse than large departmentalised or small non-departmentalised firms. In line with
Radner (1992) and Lenox (2002), we find that strongly decentralized structures
perform well in several contexts, notably in business services and manufacturing.
Several rather centralized structures perform equally well though, even in the same
contexts. Contrary to our sixth hypothesis and contrary to the seminal work by
Alchian and Demsetz (1972), we find that firms with strong centralization and strong
vertical specialization only occur and only perform well in relatively simple
structures. Apparently, for larger firms strict vertical specialization requires at least
some decentralization in order to be efficient. Subsequently, in line with hypothesis
H7 and in accordance with Hart and Moore (1999), we find hierarchical, centralized
structures with strongly specialized employees to occur frequently and to perform
21
well in terms of growth. In line with Grossman and Hart (1986) and Garicano (2000),
we also find firms with substantial specialization to be larger. In combination with
complex coordination mechanisms, M-forms perform well in terms of growth as well,
particularly in manufacturing and financial services. Especially the relatively small
M-form firms are able to achieve impressive growth figures. Non-specialized, simple
organizational structures in business services perform well in terms of profit to sales
ratios (Garicano and Hubbard, 2003). Finally, we do not find that there is ‘one best
way of organizing’. Some organizational structures appear to perform better in
specific sectors (hypothesis H11). In line with Doty et al (1993) we find support for
the hypothesis H12. Given contextual conditions, different types of organizational
structures perform equally well (over the period 2001-2003).
All in all, from this article it is quite clear that the relationship between organizational
structure and small firm performance is more relevant and more complex than
commonly assumed. Small firms are very diverse in terms of organizational structure,
both across sectors and size classes. The analysis here has obviously been rather
rudimentary and more thorough analysis is needed. Other features of the context, such
as the number of customers, the number of competitors, the number of suppliers seem
very relevant interacting variables. Also, the actual use of inputs and assets in the
organization would be essential to include in further, more advanced analysis. This
study has nonetheless provided clear indications that organizational structures are
more diverse and relevant to small firm performance than commonly assumed.
Organizational structure should be included in studies aimed at a better understanding
the determinants of small firm performance.
22
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26
Table 1 Variables in the analysis
Variable description Type
CONTROL VARIABLES
line of business
size: number of employees
9 classes
nominal
DIVISION OF WORK: COMPLEXITY 1, DEPARTMENTALISATION
hierarchy
separate organizational units
number of hierarchical levels
number of managers
boolean
scale (max. 10)
scale (max. 10)
Divisional/functional configuration
tasks grouped by product/service
tasks grouped by customer group/segment
task grouped by geographical region
tasks grouped by process
boolean
boolean
boolean
boolean
DIVISION OF WORK: COMPLEXITY 2, SPECIALIZATION
task diversity
job rotation: employees fulfil multiple jobs/functions
job variety: work variety in jobs/functions
3 point
3 point
employee specialization
employee specificity: tasks are specific to employees
employee replaceability: substitution between employees
3 point
3 point
DIVISION OF WORK: DECENTRALIZATION
strategic decisions
strategic influence by employees
strategic autonomy by employees
operational decisions
operational influence by employees
operational autonomy by employees
3 point
3 point
3 point
3 point
COORDINATION: COORDINATION MECHANISMS
personal coordination
direct control of owner/manager
informal team coordination (mutual adjustment through informal communication)
self-coordination (self-monitoring)
3 point
3 point
3 point
impersonal coordination
standardization of activities (fixed work process)
standardization of goals (specified objectives)
3 point
3 point
formalization
use of formal communication procedures
existence of written formal procedures
3 point
3 point
PERFORMANCE
Realized sales growth 2001, 2002 and 2003 (dln)
Realized profit to sales ratios 2001, 2002, 2003
Innovativeness (normalized, based on 7 items, see Meijaard and Uhlaner, 2002)
Continuous
Continuous
scale
27
Table 2 The main components of organizational structure in SMEs
COMPONENTS
ITEMS 1 2 3 4 5 6 7 8 9
departmentalisation
separate organizational units 0.649
number of hierarchical levels 0.690
number of managers 0.757
tasks grouped by product/service -0.455
tasks grouped by customer group 0.633
task grouped by geograph.region 0.777
tasks grouped by process 0.423
specialization
job rotation 0.492 0.489
job variety 0.795
employee specificity 0.483
employee replaceability 0.789
decentralization
strategic influence 0.827
strategic autonomy 0.874
operational influence 0.903
operational autonomy 0.910
coordination
direct control by owner/manager -0.538
informal team coordination 0.674
self-coordination 0.821
formalization
standardization of activities 0.572
standardization of goals 0.665
formal communicat. procedures 0.681
written formal procedures 0.644
(Principal Component Analysis followed by varimax rotation (convergence after 12 iterations). The kink in the
scree plot determined the number of factors. The ninth unrotated factor had an eigenvalue of 0.955. Only
contributions exceeding 0.40 are listed.
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doc_995932662.pdf
The relationship between organizational structure and performance in small firms has received relatively limited attention over the last few decades. In understanding small firm performance this seems to be a serious omission. In this paper, we first present the rationale for including organizational structure in the analysis of small firm performance.
SCALES-paper N200420
Organizational structure and
performance in Dutch small firms
Joris Meijaard
Maryse J. Brand
Marco Mosselman
Zoetermeer, January, 2005
1
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research-oriented audience and intended to share knowledge and promote discussion on topics in the
academic fields of small business economics and entrepreneurship research.
2
ORGANIZATIONAL STRUCTURE AND PERFORMANCE IN
DUTCH SMALL FIRMS
Joris Meijaard
Erasmus University Rotterdam, Rotterdam School of Management, Department of
Innovation Management, P.O. Box 1738, 3000 DR Rotterdam, Tel. +31 6 24412792,
Fax +31 79 3415024
E-mail: [email protected]
Maryse J. Brand
University of Groningen, Faculty of Management and Organization, P.O. Box 800,
9700 AV Groningen, The Netherlands, Tel. +31 50 3637492, Fax. +31-50-3637110
E-mail: [email protected]
Marco Mosselman
EIM Business and Policy Research, P.O. Box 7001, 2701 AA, Zoetermeer, The
Netherlands,Tel. +31 79 3413634, Fax +31 79 3415024
E-mail: [email protected]
ABSTRACT
The relationship between organizational structure and performance in small firms has
received relatively limited attention over the last few decades. In understanding small
firm performance this seems to be a serious omission. In this paper, we first present
the rationale for including organizational structure in the analysis of small firm
performance. Then, from the literature on organizational theory, we retrieve several
dimensions that may be postulated to describe organizational structures of small
firms. Based on the study of a stratified sample of 1411 Dutch small firms we show
that nine structure stereotypes can be delineated. We further investigate the relevance
of the empirical taxonomy by looking at the relationship with firm performance in
terms of sales growth, profitability and innovativeness. Eventually, we conclude that
organizational structure indeed matters and that it deserves to be taken into account in
models and future analysis of small firm performance.
JEL Code: M21, D21
Key Words: Organizational structure, Small firm performance, innovativeness.
3
INTRODUCTION
An important strand of the small business economics literature deals with
understanding the determinants of small firm performance (e.g. Kimura, 2002;
Audretsch, 2001; Robson and Bennett, 2000; Roper, 1999). In broad terms, firm
performance is determined by the success of selling products and services in the
market, and, by the effectiveness of organizing and transforming inputs (such as
labour and capital) into sellable products and services (Nickell, 1996; Nickell et al,
1997). For most small firms labour is the most important input (Heskel, 1999), which
means almost by definition that organizational structure may be very relevant to small
firm performance.
In this article, we study the organizational structures of small firms and the link
between these structures and the performance of the respective firms. One of the most
elementary decisions a small firm owner or manager has to make is the design of the
firm’s organization. As soon as a small firm hires employees, some kind of
organizational structure develops. The actual design of this organizational structure is
a mix between deliberate choices and unconscious, emergent developments. What
evolves is a system of responsibilities, privileges and coordination mechanisms. The
outcome of this organizational design process may be expected to be an important
determinant of the performance of firms (Mintzberg, 1979; Jensen and Meckling,
1992; Chaston, 1997; Athey and Roberts, 2001).
Theoretical support for the relevance of organizational structures can be found
ubiquitously. Sociologists, management scholars and economists have written on the
subject. Firstly, many business school textbooks cover the topic in order to explain the
essentials of organizations and management (e.g. Mintzberg, 1979; Robbins, 1990;
4
Burton and Obel, 1998). Several strategic management scholars have performed
specific empirical studies on related topics (e.g. Wolf and Egelhoff, 2002; Lin and
Germain, 2003). In this context, Doty et al (1993) explain that organizational design
theory has developed from a normative, universalistic approach (promoting ‘the best
structural form’), via a normative contingency theory approach (‘the best structural
form exists given specific sets of conditions’), to the notion of equifinity (‘in a
specific situation, multiple good solutions exist’), Unfortunately, the empirical
relevance and rigor of the normative theories has not always been clear. Intuitively we
agree with Donaldson (1987) when he states that a good fit means better performance.
Studies that actually investigate performance in relation to organizational structures
are relatively rare and do not find clear relations between structure and performance
(e.g. Child, 1976; Covin and Slevin, 1988). The majority of studies are of a
descriptive and predictive nature (Child ,1972; Pugh and Hickson, 1976) or they focus
on one aspect of structure (e.g. Axley, 1992). Burton and Obel (1998) collected about
450 rules for organizational design and put them into a consultant knowledge base.
This could give the impression that the organizational structure problem is a done
deal: put in your characteristics and your preferred structure is clear. However, for
many of the rules it is unclear how they were derived: by rule of thumb, logical
deduction or empirical research. Moreover, most rules are based on the study of large
firms only.
In mainstream economic literature, organizational structure has received exceptional
attention over the last few years (e.g. Garicano, 2000, Maskin et al, 2000; MacDonald
and Marx, 2001; Stein, 2002; Garicano and Hubbard, 2003). The topic has been on
the agenda starting Williamson (1967), who pointed at diseconomies of scale caused
by unbalances between firm size and organizational form. In subsequent years there
5
was attention to modelling organizational structures and the link with performance.
Particularly, Arrow (1974) discusses the limits of the firm and shows that
specialization leads to an additional need for coordination. Cremer (1980) studies the
degree to which coordination mechanisms reduce uncertainties. Sah and Stiglitz
(1986) investigate the consequence of (hierarchical) structures on the quality of
decision making. Becker and Murphy (1992) focus on specialization and the division
of labour, concluding that coordination costs determine efficiency of organizational
structures. Aghion and Tirole (1997) investigate formal and real authoiry in
organizations, particularly in relation to other coordination and communication
mechanisms. In summary, great economists have tried to contribute to theory and
thinking on the link between organizational structure and performance.
In this study, we want to contribute to the above discussions. We search for insight in
the relevance of organizational structure in small firms. Many studies agree that
organizational size is one of the variables most closely related to organizational
structure (for a review: Kimberly, 1976). Nevertheless, studies that actually focus on,
or even include, small firms are scarce (e.g. Chaston 1997, Caruana 1998, Johnston
2000). The studies that do investigate organizational structures in small firms mostly
have a limited empirical base (50 to 250 cases), they pay attention to very few aspects
of organizational structure, and they do not look into differences between various size
classes. As a result, small firms are most frequently typecast as having ‘simple
structures’ (Mintzberg, 1979). Theories of transaction costs and agency problems
point in a similar direction. This study presents a quantitative study into the
occurrence of structures of various types in small firms. We gain insight in the
occurrence of typical organizational structures in small firms and we illustrate some
of the impact of small firm structures on performance.
6
DIMENSIONS OF ORGANIZATIONAL STRUCTURE
In this section, we present a brief review of several well-cited authors that have tried
to define a coherent set of organizational structure variables (Pugh and Hickson, 1976;
Mintzberg, 1979; Dewar et al, 1980; Geeraerts, 1984; Robbins, 1990; and Burton and
Obel, 1998).
Broadly speaking, organizational structure concerns (1) work division, the distribution
of tasks and activities, and (2) coordination mechanisms, which includes
standardization and formalization. The various authors use somewhat different
dimensions of organizational structure. The early studies use specialization to describe
how tasks are distributed among firm members. Geeraerts (1984) distinguishes
specialization and differentiation (also referred to as departmentalisation). They both
concern the ‘complexity’ of the organizational structure. As regards to the importance
of separate attention to the locus of authority in decision-making (‘centralization’) and
the relevance of codes and procedures for coordination (‘formalization’) most authors
agree. A final dimension describes the way firms organise day-to-day (partly
informal) coordination between individuals and departments. In this context, in line
with Galbraith (1973), Mintzberg (1979) distinguished three main types of
coordination: direct control, mutual adjustment and standardization. As said, in broad
terms, specialization and decentralization are about how specific tasks and authorities
are distributed in the organization, i.e. the work division. Formalization,
standardization and coordination are subsequently about controlling and optimising
organizational procedures, i.e. the coordination mechanisms.
7
CONFIGURATIONS
Miller and Friesen (1986) have argued that multivariate interdependencies in structure
(and strategy) tend to manifest themselves in so-called Gestalts. Max Weber already
introduced the Gestalt ‘machine-bureaucracy’ proposing that specialization,
formalized rules and procedures and an extensive hierarchy are positively related, and,
that each of these structuring variables are negatively related to the centrality of
decision making (see also Blau and Schoenherr, 1971). Other famous examples of
configurations are the typology of Burns and Stalker (1961), who distinguish between
organic and mechanistic organizations; Pugh and Hickson (1976), who propose a
sevenfold classification of organizational structures; and Mintzberg (1979), who
introduces five structural configurations ranging from a ‘simple structure’ to a
‘multidivisional form’. Sometimes these configurations have been interpreted as ideal
types (e.g. Mintzberg 1979), in other cases they were handled as observed, positively
determined types (Pugh and Hickson 1976). Miller and Friesen (1980) demonstrate
that changes (or stability) in organizational structure dimensions tend to occur
together, or follow one another after brief intervals (in order to maintain an
appropriate balance or ‘configuration’ of organizational structures). An important
limitation of many of these typologies is that they are based on case studies and
surveys of large firms. The small firm is often positioned as a caricature in one of the
types, such as Burns and Stalker’s ‘organic organization’ or Mintzberg’s ‘simple
structure’.
8
RESEARCH METHOD
Three times a year, about 2,000 entrepreneurs of Dutch firms with less than one
hundred employees participate in a Dutch small firm survey called the ‘MKB panel’.
The survey waves are executed by means of 15-minute telephone interviews. The
purpose of the survey cycle, which runs since 1999, is to gather systematic
information about the attitudes, behaviour and performance of Dutch small firms. The
sample is stratified in three size-classes and nine economic sectors. The sectors and
size classes are sampled in equal strata
1
. For each of the firms in the sample, control
variables are available, specifically rather rudimentary measures of size, type of
economic activity and location. For this study, a questionnaire was designed based on
the theory of organizational structure and design outlined above. We have used 22
items and several more open questions on performance in several years after
measuring organizational structure. 3-point Likert scales are used in this study, since
extensive test interviews show that in telephone interviewing respondents are unable
to mentally map and repeatedly apply 5-point scales, let alone 7-point scales.
Interviewees are strongly inclined to answer in their own (select) 3-point subscale.
For the present investigation of organizational structure, we have a sample of 1411
Dutch small firms that employ at least one person next to the owner (i.e. to have at
least some sort of basic work division and coordination). As said, the firms are drawn
from the population of Dutch small firms based on 27 equal strata by sector and size
class. Response rates for the base wave on organizational structure are 72%. A letter
by regular mail introduces the telephone interviews and the reported response rate is
based on a maximum of three rounds of call and appointment attempts.
9
RESEARCH DESIGN
Our data analysis consists of four steps. Firstly, we perform a factor analysis on the
various items on organizational structure in the survey. Based on the resulting and
reliable factors, we highlight several key features of the prevailing organizational
structures of small firms. Then, by way of an elaborate cluster analysis, we investigate
the occurrence of configurations of organizational structures. Finally and importantly,
we show that there are systematic consequences of being a firm with a particular type
of organizational structure. Regressions per type of firm are executed to investigate
the comparative performance given size and sector. This evaluation of performance
enables us to test several of the hypotheses that derive from the literature. Given the
range of other topics tackled in the consecutive surveys many more topics and
hypotheses could have been studied in combination with organizational structure and
performance. Time and space limitations however have forced us to restrict ourselves
to performance in terms of sales growth, profit-to-sales ratios and innovativeness.
HYPOTHESES
Organizations may be typecast as hierarchies of various forms. The multidivisional-
form (M-form), the unitary-form (U-form) and the matrix organization are the best-
known types (Harris and Raviv, 2002). In an M-form, separate departments exist for
different sets of products or customers. For large firms these departments are often
referred to as ‘divisions’. Within a U-form, separate departments exist for different
functional specializations. Finally, a matrix organization combines both dimensions of
work division. For small firms, one would expect the complexity to be very limited.
1
Size classes are 0-9 employees, 10-49 employees and 50-99 employees. Sectors are: Manufacturing,
Construction, Wholesale and retail, Hotels and restaurants, Transport, Business services, Financial
10
Based on coordination and transaction cost arguments, the above structures are
expected to be absent or very rare and inefficient in small firms. This leads us to the
main hypothesis of this study. The larger the firm, the more attractive and effective it
is to develop a complex structure, which leads us to formulate three more hypotheses.
H1. Small firms occur in a limited variety of organizational structures
H2. Highly departmentalised firms will be large
H3. Smaller, yet highly-departmentalised firms will not perform well
H4. Larger, yet non-departmentalised firms will not perform well
Alternative theories, for instance team theory (Marshak and Radner, 1972), propose
that in many contexts it is efficient for firms to decentralize authority and information
processing (Radner, 1992, Lenox, 2002).
H5. Small firms with a strongly decentralized structure perform well.
Alternatively, Alchian and Demsetz (1972) posit that hierarchies are a response to
incentive problems associated with team production. They suggest that division of
labour and centralization are needed. Along this line upper-level individuals specialize
in monitoring lower level ‘production’ workers (cf. Calvo and Weillisz, 1978).
H6. Small firms strong centralization and vertical specialization perform well.
Hart and Moore (1999) suggest hierarchies may be viewed as chains of authority in
decision-making. The manager-entrepreneur in this context is a (central) coordinator
of workers in (multiple levels of) specialized production (see also Cremer, 1980).
services, Personal services and Non-private (includes healthcare, farming).
11
H7. Hierarchical, centralized structures with strongly specialized employees
perform well.
Following Grossman and Hart (1986) and Garicano (2000) another motivation for
division of work lies in the opportunities to exploit (local) increasing returns to scale
for specific (scarce, complex) skills. This may very well call for sophisticated
coordination of work.
H8. Firms with highly specialized workers will be larger
H9. Firms with highly specialized workers will perform well.
Given that under uncertainty this coordination may be problematic, an opposite
incentive for diversification and simple structures is also present (Garicano and
Hubbard, 2003).
H10. Non-specialized, simple organizational structures perform well
Contingency theory proposes that different organizational structures are appropriate
given the requirements of the different contexts (Burns and Stalker, 1961).
H11. Given contextual conditions, different types of organizational structures may
perform better.
Doty et al (1993) suggest that given uncertainty in most circumstances multiple
‘good’ and no best solutions exist.
H12. Given contextual conditions, different types of organizational structures will
perform equally well, particularly in the longer run.
12
VARIABLES
As explained above, we want to include five 'structural dimensions' in our analysis:
departmentalisation, specialization, decentralization, coordination and formalization.
In principle, it would have been preferable to only use existing, validated scales. For
several reasons, however, we have chosen to use a different and more limited set of
items. Firstly, many previous studies have focussed on only a few of the structure
dimensions. Secondly, most studies were aimed at large multinational companies,
which obviously is a different audience than our small firm entrepreneurs. The
transferability of proven scales is therefore a bit questionable. For example, Pugh et al
(1968) use 55 (sub-)items to measure formalization alone, while their centralization
questions are repeated for 11(!) different types of decisions. Dewar et al (1980), use 9
items to measure centralization. Morrison and Roth (1993) use 10 items to measure
centralisation, 8 to measure specialisation and another 6 to measure formalisation.
Such numbers of items are detrimental to the response rates for our method of
research. It is simply infeasible for telephone interviewing. Our questionnaire had to
be short and easy to understand. Large number of items cannot be covered in
telephone surveys since the quality of responses sharply decreases. The major
advantage of telephone surveys is of course that response rates can be achieved that
are infeasible with other methods of research. Response rates are particularly good in
a committed setting as in this study. Furthermore, many of the existing scales on
organizational structure are less suitable since they were developed for employees as
respondents instead of (small) business owners (e.g. Caruana et al, 1998). Thus,
instead of choosing a limited number of specific items from well-cited studies (which
would force us to be incomplete), we reformulate items in short and general
statements that are suitable for telephone interviewing. An additional benefit of this
13
procedure is that the newly developed items are relevant to firm in any sector, which
is important since we would like to derive conclusions on small firms in as general
terms as possible. The developed questionnaire was tested in about ten pilot
interviews with small firm owners and some employees to get some indication of
robustness. Several questions were reformulated or dropped in this process. In
particular, it was decided at this stage to limit the number of items to twenty-two
instead of thirty-nine.
INSERT TABLE 1 HERE
Table 1 presents an overview of the items that are used in this study. Firstly, the
dimension of departmentalisation is covered by seven items, representing vertical
differentiation and horizontal departmentalisation (Robbins 1990, Rivkin and
Siggelkow, 2003). The three items relating to vertical differentiation are indicators
related to the hierarchy and complexity of the organization: the number of separate
organisational units, the number of hierarchical levels and the number of managers.
The four items relating to horizontal departmentalisation refer to divisional and
functional groupings (see e.g. Mintzberg, 1983; Carson et al, 1995).
Secondly, specialization was measured by four items representing specialization of
tasks and skills. Two items concern specialization of tasks, also referred to as
functional specialization (Pugh et al, 1969; Robbins, 1990). This type of
specialization closely links to the concept of job rotation (Dewar et al, 1980). Another
two items concern the specialization of skills, also referred to as social specialization
14
(Robbins 1990). This relates to actual ‘specialists’ and ‘irreplaceable’ personnel {e.g.
Mintzberg, 1983).
Thirdly, decentralisation was measured by four items distinguishing authority on a
strategic and an operational level. Furthermore, we follow Dewar et al (1980) and
Richardson et al (2002) by including items for decentralisation of authority and
decentralization in participation (which of course is weaker). Following Pugh et al
(1968), we allow for differences in the nature of (de)centralization for operational
versus strategic decisions.
Finally, we include seven items relating to the coordination mechanisms within the
firm. Items are included for written procedures (Oldham and Hackman, 1981) and for
formal communication (cf. Pugh et al, 1979; Mintzberg, 1983). Furthermore, we
include an item representing self-guidance plus four items for personal and
impersonal directive mechanisms (Mintzberg, 1983).
The control variables that were included in the questionnaire are measured by industry
(9 classes), size (number of employees) and strategy (one item for each generic
strategy, based on Porter, 1985).
We used multiple measures of firm performance to reflect the multi-dimensionality of
performance. Since some respondents were expected to be unwilling to provide
detailed and comparable accounting data, the entrepreneurs were also asked to rate
their firm's sales and profit performance relative to the preceding year. Following
Dess and Robinson (1984) we included an additional item on the firms profitability
compared to similar firms, i.e. competitors.
15
RESULTS
The twenty-two items on organizational structure listed above combine to nine factors
in an unrestricted principal component analysis. In order to arrive at more easily
interpretable results Varimax rotation was used. The nine empirically derived
components capture critical variations in organizational structure in small firms. Table
2 below shows an overview of contributing item coefficients with an absolute value
larger than 40%.
The factors result in orderings that are largely expected: departmentalisation splits
into a component of hierarchical complexity and a component of divisional/functional
complexity. Specialization splits into task diversity and employee specialization.
Decentralization has components for operational and strategic influence. Coordination
is the most special case. Formalization and standardization are found to largely
overlap (factor 9). Furthermore several less formal coordination mechanisms remain.
Direct coordination by the entrepreneur contributes to the hierarchical complexity.
Informal team coordination is responsible for a separate component. Self-coordination
is the only significant contributor to factor 8. Interestingly enough, both informal
team-coordination and self-coordination are apparently rather independent from the
other organizational structure items. Furthermore, they vary substantially across small
firms (otherwise they would not qualify as ‘independent’ factors).
INSERT TABLE 2 HERE
16
Based on the contributions to the components above, we directly construct scales for
nine dimensions of organizational structure. For each of these constructs Crohnbach’s
? is acceptable (> 0.6). The scales are direct sums of the set of significantly
contributing items per component.
Further analysis of the constructs teaches us that the myth “small firms are informal,
unstructured and centralised” appears to be untrue. The larger firms in our sample are
more standardised, but considerable variation exists, also among the smaller firms.
The departmentalisation of larger firms is more complex, but quite a few of the firms
with less employees are pretty complex in their structure. Task diversity decreases and
employee specialization increases as small firms are larger, but - once again – a whole
range of smaller firms show more specialization than larger ones. For operational
decisions, larger firms are a bit more decentralised than smaller ones. For strategic
decisions there is no systematic difference between various small and medium sized
firms, nor there is for self-coordination.
INSERT TABLE 3 HERE
Next, given the variations of the nine constructs, we are interested to learn whether
systematic organization types can be delineated. Testing for the optimal number of
clusters by way of the sum of squared distances to the cluster centres
2
, we arrive at
nine typical organization structures, which will be discussed below.
2
There is a ‘kink’ in the SSD-plot from introduction of the eighth to the ninth cluster. The sums of
squared distances were plotted for two to twenty clusters.
17
INSERT TABLE 4 HERE
The first organizational structure (entrepreneur with a ‘submissive’ team) is
characterized by an authoritarian entrepreneur and several quite independent
employees. The employees have limited influence on decision-making. Coordination
mainly occurs through informal team processes.
The second structure (co-working boss with an open structure) is characterized by
employees that are highly involved in operational decision-making. Coordination also
mainly occurs through informal team processes. Departmentalisation and
specialization are limited.
The third structure (an entrepreneurial team) concerns firms characterized by
employees closely involved in strategic and operational decision-making.
Formalization is low. Coordination occurs through team processes, under substantial
specialization.
The fourth structure (boss - loose control) concerns firms characterized by
independent employees that are relatively uncoordinated. The entrepreneur is not very
authoritarian or formal, yet (s)he does make all decisions. Departmentalisation and
specialization are limited.
The fifth structure (boss – tight control) has few tasks and responsibilities defined
beyond that of the dominant entrepreneur-owner-decision maker. Specialization is
low, the use of formal and informal coordination mechanisms limited.
18
The sixth structure (singular structure) has few divisional or functional departments.
The entrepreneur is important, not extremely dominant, yet employees have limited
leeway for self-coordination. Specialization and formalization are rather simple.
The seventh structure (U-form) is simple, yet rather strongly hierarchical in structure.
Formalization is substantial and employees are rather specialized in their capabilities.
The entrepreneur must involve employees in decision-making in order to be
sufficiently informed.
The eighth structure (matrix organization) is flat, yet rather strongly functionally and
divisionally departmentalised. Formalization has to be relatively large for
communication and coordination to work well. Decentralization is limited and within
departments specialization is low.
The ninth and final structure (M-form) is hierarchically structured and
departmentalised in divisions. A substantial part of the employees are specialized
professionals and involved in decision making. Formalization is substantial, like in the
last two organizational structures.
Finally, for the nine organizational structures, we study the performance in terms of
sales growth, profit to sales and innovativeness. If structure does not match size and
sector, one would expect a lower performance. Below, we present the results in three
tables. We show in which sectors the various organizational structures perform
relatively well, and, in which they perform relatively poorly. It is interesting and
important to note that each of the organizational structures occurs widely across
sectors.
19
INSERT TABLE 5 HERE
In terms of 3-year persistent sales growth, ‘co-working bosses with an open structure’
seem to perform rather well in the construction sector. ‘Entrepreneurial teams’
perform rather well in business services and manufacturing sectors. The ‘M-form’
performs well in financial services. By contrast, ‘singular structures’ in manufacturing
and business service sectors are not good for sales growth, neither are entrepreneurial
teams in personal services.
INSERT TABLE 6 HERE
Contrarily, in terms of persistently ‘good’ profit to sales ratios, ‘entrepreneurial
teams’ in personal services perform well. This also holds for ‘U-forms’ in financial
service and leisure sectors. Simple hierarchical structures are good for profit to sales
ratios in business services (‘bosses - loose control’ and ‘bosses - tight control’).
INSERT TABLE 7 HERE
Finally, in terms of innovativeness, simple, hierarchical and entrepreneur-dominated
firms do not perform well, except perhaps for particular larger organizational
structures in business services and manufacturing. M-forms are relatively innovative
in financial services and manufacturing, matrix structures are relatively innovative in
20
services. U-forms appear to be less innovative in wholesale, retail, transport and in the
hotel and restaurant businesses. Larger entrepreneurial teams appear to perform well
in terms of innovation, except in the construction sector.
CONCLUSIONS
Coupling these results back to the literature and the hypotheses formulated above, we
can draw the following conclusions.
To begin with, contrary to our first and main hypothesis, we find small firms to occur
in a wide variety of organizational structures. We find organizational structures with
various degrees of departmentalisation to coexist. Contrary to the second hypothesis,
we find that small firms as well as larger firms may exhibit substantial
departmentalisation. Nevertheless, we do find a strong correlation between
departmentalisation and firm size. Contrary to hypotheses H3 and H4 small
departmentalised or large non-departmentalised firms do not perform systematically
worse than large departmentalised or small non-departmentalised firms. In line with
Radner (1992) and Lenox (2002), we find that strongly decentralized structures
perform well in several contexts, notably in business services and manufacturing.
Several rather centralized structures perform equally well though, even in the same
contexts. Contrary to our sixth hypothesis and contrary to the seminal work by
Alchian and Demsetz (1972), we find that firms with strong centralization and strong
vertical specialization only occur and only perform well in relatively simple
structures. Apparently, for larger firms strict vertical specialization requires at least
some decentralization in order to be efficient. Subsequently, in line with hypothesis
H7 and in accordance with Hart and Moore (1999), we find hierarchical, centralized
structures with strongly specialized employees to occur frequently and to perform
21
well in terms of growth. In line with Grossman and Hart (1986) and Garicano (2000),
we also find firms with substantial specialization to be larger. In combination with
complex coordination mechanisms, M-forms perform well in terms of growth as well,
particularly in manufacturing and financial services. Especially the relatively small
M-form firms are able to achieve impressive growth figures. Non-specialized, simple
organizational structures in business services perform well in terms of profit to sales
ratios (Garicano and Hubbard, 2003). Finally, we do not find that there is ‘one best
way of organizing’. Some organizational structures appear to perform better in
specific sectors (hypothesis H11). In line with Doty et al (1993) we find support for
the hypothesis H12. Given contextual conditions, different types of organizational
structures perform equally well (over the period 2001-2003).
All in all, from this article it is quite clear that the relationship between organizational
structure and small firm performance is more relevant and more complex than
commonly assumed. Small firms are very diverse in terms of organizational structure,
both across sectors and size classes. The analysis here has obviously been rather
rudimentary and more thorough analysis is needed. Other features of the context, such
as the number of customers, the number of competitors, the number of suppliers seem
very relevant interacting variables. Also, the actual use of inputs and assets in the
organization would be essential to include in further, more advanced analysis. This
study has nonetheless provided clear indications that organizational structures are
more diverse and relevant to small firm performance than commonly assumed.
Organizational structure should be included in studies aimed at a better understanding
the determinants of small firm performance.
22
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26
Table 1 Variables in the analysis
Variable description Type
CONTROL VARIABLES
line of business
size: number of employees
9 classes
nominal
DIVISION OF WORK: COMPLEXITY 1, DEPARTMENTALISATION
hierarchy
separate organizational units
number of hierarchical levels
number of managers
boolean
scale (max. 10)
scale (max. 10)
Divisional/functional configuration
tasks grouped by product/service
tasks grouped by customer group/segment
task grouped by geographical region
tasks grouped by process
boolean
boolean
boolean
boolean
DIVISION OF WORK: COMPLEXITY 2, SPECIALIZATION
task diversity
job rotation: employees fulfil multiple jobs/functions
job variety: work variety in jobs/functions
3 point
3 point
employee specialization
employee specificity: tasks are specific to employees
employee replaceability: substitution between employees
3 point
3 point
DIVISION OF WORK: DECENTRALIZATION
strategic decisions
strategic influence by employees
strategic autonomy by employees
operational decisions
operational influence by employees
operational autonomy by employees
3 point
3 point
3 point
3 point
COORDINATION: COORDINATION MECHANISMS
personal coordination
direct control of owner/manager
informal team coordination (mutual adjustment through informal communication)
self-coordination (self-monitoring)
3 point
3 point
3 point
impersonal coordination
standardization of activities (fixed work process)
standardization of goals (specified objectives)
3 point
3 point
formalization
use of formal communication procedures
existence of written formal procedures
3 point
3 point
PERFORMANCE
Realized sales growth 2001, 2002 and 2003 (dln)
Realized profit to sales ratios 2001, 2002, 2003
Innovativeness (normalized, based on 7 items, see Meijaard and Uhlaner, 2002)
Continuous
Continuous
scale
27
Table 2 The main components of organizational structure in SMEs
COMPONENTS
ITEMS 1 2 3 4 5 6 7 8 9
departmentalisation
separate organizational units 0.649
number of hierarchical levels 0.690
number of managers 0.757
tasks grouped by product/service -0.455
tasks grouped by customer group 0.633
task grouped by geograph.region 0.777
tasks grouped by process 0.423
specialization
job rotation 0.492 0.489
job variety 0.795
employee specificity 0.483
employee replaceability 0.789
decentralization
strategic influence 0.827
strategic autonomy 0.874
operational influence 0.903
operational autonomy 0.910
coordination
direct control by owner/manager -0.538
informal team coordination 0.674
self-coordination 0.821
formalization
standardization of activities 0.572
standardization of goals 0.665
formal communicat. procedures 0.681
written formal procedures 0.644
(Principal Component Analysis followed by varimax rotation (convergence after 12 iterations). The kink in the
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contributions exceeding 0.40 are listed.
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doc_995932662.pdf