As hypothesized by Chandler, "structure follows strategy" and the correct
"fit" between strategy and structure is what leads to performance. His original argument was that when large industrial firms grow by extending their resources, they manage this by decentralizing operations within divi- sional structures. Chandler's argument suggests that multidivisional struc- ture is a natural outcome of the diversification process in growing firms.
For the administrative coordination to be more efficient and more prof- itable than market co-ordination, the business volume had to be suffi- ciently large and what increased the business volume was the new technol- ogy and expanding markets. New technology produced much bigger amounts of output, sustained movement of goods whereas enlarged mar- kets were essential to absorb such volume of output. Therefore multidivi- sional enterprises appeared, grew and continued to flourish in the sectors that were characterized by new, advanced technology and expanding mar- kets. In these new enterprises, administrative hierarchies required special- ized skills and the managers who directed these hierarchies became in- creasingly technical and professional (Chandler 1977).
"Organization not only must fit with the strategy, but it must evolve in response to changes in strategy. Consequently, if the strategy is based on certain drivers, organization also must be a function of the same drivers"
(Baron and Besanko 2001). The major contingency factors (organizational states or conditions that are associated with the use of certain design pa- rameters) that Mintzberg (1979) associates with the divisionalized form are: market diversity, the technical system used by the firm in its operating core, various aspects of environment (notably stability, complexity, diver- sity, hostility and some of its power relationships), age and size. Contin- gency theorists argue that as the firm increasingly operates in diverse mar- kets, it grows larger, older and employs divisible technologies and, thus, the M-form becomes the optimal organizational structure.
Chandler (1962) argued that the M-form emerged in response to in- creased organizational complexity, which is caused not only by growth in firm size, but also by greater diversification into new lines of business and increased vertical integration across widely separated geographical areas.
Large size creates problems related to increased volume, but this can be
dealt with in one way or another for example within centralized structures by the use of standard operating rules. Diversity, however, is much more problematic. As diversity increases, technical expertise becomes more lo- calized, as in the case of geographical diversity, and thus it becomes more difficult for central management to make informed decisions. In a divi- sionalized structure these problems can be dealt with efficiently, as central management needs to focus only on strategic decisions. Similarly, accord- ing to Mintzberg, what particularly drives the organization to use the divi- sionalized form is market diversity. While an organization with a single in- tegrated market cannot split itself into autonomous divisions, the one with distinct markets has an incentive to create units to deal with each of them.
In this way, it can manage its strategic portfolio centrally, while giving each component of that portfolio the "undivided attention" of one unit.
Technical system - besides market diversity - is another contingency factor of divisionalized form. Divisionalization is possible only when the organization's technical system can be efficiently separated into segments (Mintzberg 1979). Organizations that would incur a very high fixed cost for technical systems tend not to diversify their product lines in the first place, and so do not divisionalize (Rumelt 1974). Penrose (1959), when stressing the importance of technological competence of a firm, argues that when the firm's strength is not closely related with its technological strength but rests primarily on a dominant position in important markets, it is more difficult for the firm to enter into new areas of specialization. In a competitive and technologically progressive industry, a firm specializing in some products can maintain its position with respect to those products only if it is able to develop an expertise in technology and marketing suffi- cient enough to introduce innovations that affect those products.
In terms of environment, the divisionalized structure differs from the other configurations in the sense that it has a more restricted environmental dimension that is market and product diversity (as discussed in Sect. 5).
The empirical test on a survey of large UK companies (Armstrong at al.
1998) suggests that there is no finding that divisionalized companies tend to be larger than the rest. However, they have found size effects on some aspects of divisionalization. Companies with intermediate levels of organi- zation between their business units and headquarters tend to be larger than those that are not.
It is remarkable to note that, in addition to Chandler's argument that structure follows strategy and divisionalization is the result of strategic di- versification, Rumelt (1974) argues that the opposite relationship holds as well. That is, divisionalization encourages further diversification because of the ease with which headquarters can add new divisions in this struc- ture. Similarly, in the banking industry activation of new developments is
not independent from the structure, operating mechanisms, management style and human resources. As Gardener (1994) views, the bank organiza- tional structure may be seen as a kind of interchange system between the external environment and internal resources of the bank.
In particular, the structure strongly conditions the interpretation of the environmental change and therefore the capacity to comprehend the envi- ronment and formulate strategy. "Mechanic structures" are strongly con- centrated and bureaucratized and this limits the personal development of employees and their decision-making capabilities. On the other hand, in
"organic structures" employees actively participates in decision making and develop their individual capacities. The latter maintain an efficiency and innovation oriented mentality that in turn enhances corporate strategy.
Similarly, according to Porter (1987), main organizational prerequisites of restructuring in corporate strategy are autonomous business units, a corpo- rate organization with the talent and resources to oversee the turnarounds and strategic repositioning of each unit.
Corporate restructuring reinforces segmentation strategy and allows the bank to focus on the specific needs of each client segment and offer differ- entiated customized services.
The competitive advantage created by this corporate restructuring can be synthesized as follows:
• greater growth options by means of diversified (domestic and interna- tional) growth paths for each bank and potential specific partners by bank;
• new growth opportunities for each business, thus facilitating ad hoc
"strategic moves" per business line (e.g. on a dimensional and geo- graphic scale);
• better quality of service by means of more comprehensive knowledge of market, focused offer of products and services and thus higher customer satisfaction and increased market share;
• greater effectiveness by time-to-market and increased penetration in specific geographical areas, management focus, and higher brand recog- nition;
• better efficiency by improved capital allocation, risk control, account- ability;
• better Human Resources management.
The Environment-Strategy-Structure model presents interesting applica- tions in the banking industry. In an environmental condition that is charac-
terized by high level of instability, uncertainty and dynamism, banks al- ways had to modify and adapt their strategies in order to face the changes in demand and dynamics of competition. The starting point for changing organizational structures in the banking industry must therefore be the changing environment. The main change factors are (Morison 1994): regu- latory environment, in particular the elimination of previous barriers to di- versification by banks, non-bank institutions and other new participants in the financial services industry; radical changes in the technology of the in- dustry; the end of the wide range of restrictive practices and the general heightening of the competitive "animal spirits" of the industry, changes in pattern of final demand for financial services, reflected in a general in- crease in customer sophistication and a shift in demand from traditional forms of financial intermediation to new services, often technology driven, with higher value-added content. The dominant trend has been diversifica- tion of banks into new markets and products.
Strategic options of the bank are several and depend on the segment choice, specific needs to satisfy, lines of product/service to offer, charac- teristics of technological investments and structure of distribution process.
The bank, with all its organs (central and peripheral) needs to be proactive in responding and even anticipating the environmental changes and dy- namics. Therefore, the organizational structure needs to meet two impor- tant characteristics: flexibility and efficiency. Flexibility is an important point of reference in the evolution of organizational structure of banks in cases that are characterized by increasing uncertainty, instability and dy- namism. Flexibility requires decentralization in decision making and oper- ating activities as well as coordination of administrative staff and produc- tion units. Efficiency, on the other hand, due to the increase in competition and the maturity of the industry necessitates technological investments and organizational changes that will reduce operating costs, enhance productiv- ity and realize potential synergies in production, sales and distribution functions. In short, whereas flexibility asks for decentralized structures, ef- ficiency necessitates avoiding duplications and asks for centralization of activities and common functions to gain economies of scale. Therefore the choice of centralization/decentralization level is a delicate one and an ap- propriate mix should be sustained depending on the bank's strategic area of activity.
Mainstream orientation of the bank's structure to the market and to the evolution of the demand is towards the empowerment of strategic man- agement units and the constitution of units responsible for prod- ucts/services/customer segments/geographical areas and strategic business areas (Baravelli 2003). Management of single businesses in divisional structures has a high level of flexibility and they can be organized accord-
ing to organizational models that enable each business unit to compete more effectively in its specific sector. Environmental specificity of each single activity therefore corresponds to differentiation in structure and op- erating mechanisms, attributing flexibility also to big size structures char- acterized by high level of productive diversification. The capacity of defin- ing and introducing differentiated systems and structures depends on the flexibility of the internal organization of the firm (Schwizer 2000).
Adaptive capabilities of the divisional form will be a central theme in the evolutionary pattern of banks as they try to adapt their fast changing environments. Taking into consideration factors such as top management commitment, adjustment of corporate culture, adding specialist skills (Channon 1986) and striking the balance between long-term growth and the imperative of short-term profitability (Abraham and Lierman 1991) will be crucial in the success of their organizational modifications.