Internal Structure of Firm

In the real world, firm have an internal structure. Modern corporations typically operate in many markets. Sometimes these markets are at the same horizontal level, as when a single product firm operates plants in distinct geographic markets (cement) or when a firm produces several varieties of a differentiated product (breakfast cereal). Sometime the markets are related vertically (petroleum). Conglomerate firms operate in unrelated industries. Within the black box of the modern firm are multiple divisions are made. The real world firm can be thought of as a collection of production functions, some producing inputs for others and some operating more or less on their own.

The internal organization of firm raises (at least) three interesting question. First, why are certain collections of production functions assembled under a single corporate umbrella? Why, for example, does production in some industries typically involve vertical integration, while in other parts of the economy vertically related markets are occupied by independent firms?
 
Second, how do firm organize the relationship among the productive activates of which they are comprised? What, in the firm operates? What, in other words, is the internal structure of the firm? Are some forms of internal organization more efficient than others?

Third, how do all of these factor affect performance in the markets in which the firm that operate in unrelated markets combine to form a conglomerate? Is market power at any level enhanced vertically?

The separation of ownership and control in the modern corporation means that firm may be managed to purse the interests of managers rather than owners. This may involve sales maximisation, growth maximisation, or maximisation of the compensation of management, instead of profit maximisation. The threat of takeover will check this short of behavior, although the management of large firm will have some discretion to pursue its own goals.

Firm may expand horizontally, vertically or into unrelated markets. This is attained though ‘integration’ or what we often call ‘merge’.

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