According to Caves (1980), market structure constrains the behavior of firms. Additionally, it defines the options of a firm. First of all, firms select their corporate strategy and internal structure depending on the market structure within which they exist. For instance, firms operating in an industry where the products are related record high levels of technical employment and labor skills. On the other hand, firms operating in industries with high levels of product differentiation have low levels of technical employment and labor skills. Secondly, the level of external competition determines the internal alignment of an organization as well as its compensation structure.
I agree with the author because he has provided accurate supporting evidence for his arguments. However, I feel that the author failed to analyze the relationship between market competition and organizational compensation structure. This is because he fails to analyze the relationship between business environment and pay structure. Despite such a weakness, the author has brought out very strong point to describe the relationship between market structure and internal alignment. This gives a direction on the relationship between market competition, internal alignment, and organizational structure (Caves, 1980).
When top managers develop corporate strategy, they always start by analyzing the environmental conditions affecting the operations of the business. They assess the strengths as well as weaknesses of their competitors and use the information to develop a strategy. Therefore, the organization designs a curve in order to create a competitive advantage that they can use to overcome competition. In such a case, the company chooses to differentiate itself by creating an effective structure. For instance, the company can align its human resources strategies thereby establishing the compensation structure. The number of hierarchical levels and the relationship between hierarchies and work determine the level of internal alignment of the pay structure.
References
Caves, R. (1980). Industrial Organization, Corporate Strategy and Structure. Journal of Economic Literature, 18 (1), pp. 64-92.
