Organizational rationalization and innovation: Vertical integration and multidivisional organization

This thesis maintains that transaction cost analysis provides a well grounded theoretical foundation for strategic management research. The paradigmatic issues involve vertical integration theory, the evolution of vertical integration in the American enterprise, diversification and the multidivisional structure as an adaptation to vertical integration and diversification strategies. The thesis also maintains that the study of vertical financial ownership requires a study of market inadequacies and a comparative institutional assessment of governance structures. A comprehensive synthesis concerning the isomorphic nature of vertical financial ownership and vertical contracting is provided. I submit that task programmability, nonseparability, and asset specificity are critical variables in explaining and predicting organizational form. In contrast to orthodox microeconomics, where history does not matter, this thesis maintains that the study of history is an essential ingredient of institutional analysis. The combination of institutional economics with history and organization theory, it is argued, provides a richer and more relevant understanding of the nature of the firm. The study of entrepreneurs groping with the agency problems inherent in the distribution and service of technologically complex goods, provides a wealth of insights in understanding our institutions of capitalism. This thesis provides a transaction cost analysis of vertical integration, diversification and multidivisional structure. Transaction cost economics views both the adoption of the vertical integration strategy and the implementation of the multidivisional structure in terms of information processing advantages and in terms of mitigating agency problems. A triangulation of theoretical, historical, and statistical methodology is employed. The enterprise is viewed as having resource allocations efficiency relative to contracting and the external capital market. An eclectic model of the multidivisional organization, derived from the economic and organizational theory literature is empirically tested. The model illustrates the central premise of the thesis that pluralism increases empirical content and should be valued by those concerned with progress in the emerging field of strategic management