The M-form became the preferred organizational system because it combines the distinct brand and economies of scale advantages of a large conglomerate, while maintaining the operational flexibility of a small firm. By dividing the firm based on output into several autonomous units, the M-form provides the optimal level of centralization in a company: central management could still dictate the overall direction of the firm, while each division operates autonomously to cater to its own needs, is held accountable for its own profits, and can remain productive even if the other divisions fail.
A large company has its powerful brand name that can be extended to its various divisions, the benefits of large economies of scale, and sheer economic might in the market that it operates. However, once the company becomes too large, output, business needs, and profit-maximizing strategies, may differ across divisions. The M-form system solves this dilemma because it allows each arm to operate autonomously. While the divisions may still be kept under central management’s expectation to maximize profits, each division can be flexible and act independently. That is, while upper-management can dictate the general direction of the firm, the lower-level managers handle the day-to-day operations of the division. Because of this flexibility, perfect coordination can always be achieved.
Furthermore, if a specific division of the firm is lagging, that division’s management will be held solely responsible and thus individuals will also be held more accountable. In this sense, companies under the M-form system are better at incentivizing their own divisions not only because lower-level managers are held more accountable, but also because parallel divisions would essentially compete each other since accounting was transparent, profits were emphasized, and the divisions would be evaluated based on efficiency. Lastly, even if one unit of the firm does fail, since the units all operate autonomously, it will not have detrimental consequences for the other divisions. This allows the overall company to be more versatile and enduring.
A firm that exemplified all of the above was the Standard Oil alliance. To monopolize the market, Standard Oil integrated horizontally with other competing oil companies in addition to vertically, with tankers, lubricating oil, and acid restoration companies. Soon, the alliance dominated the oil industry through sheer economic might due to both its large economies of scale and its organizational structure. As Standard Oil continued to expand into different markets, its organizational needs changed. However, the alliance was able to monopolize various markets so successfully because it adopted the M-form system, which allowed the firm to act as a loose federation of autonomous units instead of just one giant firm. Although central management provided a general direction for the alliance as a whole, each arm was able to act individually to pursue what would maximize each division’s success. Furthermore, even though the alliance’s lubricating oil business did not keep pace, since this was an autonomous division under the M-form system of management, it did not have detrimental consequences for the overall alliance.