Internal Organization and Profit: An Empirical Analysis of Large U.K. Companies

PREVious empirical studies of firm and industry profitability have examined many causal factors, but almost without exception these have not included organizational form: the type of internal information and control structure employed by the firm.1 In this respect empirical work has generally run parallel with orthodox theory, in which the specification of a single-valued production function pre-empts discussion of organizational arrangements, along with all other concrete details of production technology. In practice the internal organization of firms is very likely to affect their efficiency and hence their profitability. Moreover, the type of internal control apparatus employed and its effectiveness are quite likely to be correlated with variables such as size, growth, and degree of owner- or managercontrol. Hence the neglect of this influence in previous work may not only have reduced the ability of the models to explain observed variations in profitability, but also given rise to serious specification bias in the estimated parameters. The present paper attempts to isolate the effects of internal organization on profitability in a cross-sectional analysis of 82 large U.K. companies in the period I967-7I. Internal organization variables are employed which test for efficiency gains from multidivisional (M-form) organization as identified by Williamson 27, 28. The classification according to type of organizational form is described in section II. A model incorporating organizational form variables is outlined in section III, and the sample, our data sources and the measurement of variables are all described in section IV. Our empirical results are reported in section V, which is followed by a brief conclusion.