Academic journal article E - Journal of Social & Behavioural Research in Business

A Case Study of Organizational Form: Hershey versus Mars

Academic journal article E - Journal of Social & Behavioural Research in Business

A Case Study of Organizational Form: Hershey versus Mars

Article excerpt

Introduction

The confectionery industry in the United States has evolved from one which had many small niche players to one which is dominated by a few firms with the rest operating on the fringes. This industry is therefore an oligopoly. Confectionery is a multi-billion dollar industry in the United States. U.S. candy manufacturers offer a wide range of products and have a huge presence in the global market. However, despite its size, there has been little research on the nature of the organization in the industry. This paper is a case study of the two bigger firms in the U.S. chocolate market: Hershey Company and Mars Incorporated (hereafter referred to as Hershey and Mars).

The objective of this paper is to examine the confectionery industry in the United States from an institutional viewpoint using a case study approach. The study aims to show how the two biggest players in the industry came to choose their organizational structures over the years and the developments that have made those choices possible. In addition, the study discusses the factors that have made the industry the way it is today as well as those innovations the industry had to adopt as the circumstances necessitated. This study attempts to contribute to the literature on organizational studies.

The main hypothesis of this study is that certain institutional factors have made Hershey a European-style industrial foundation and Mars a tightly held family-owned firm. These factors had given these firms the incentives to behave the way they did over the past decades. This paper argues that Hershey chose the industrial-foundation organizational form so that it can preserve the legacy of its founder, Milton Hershey. This organizational form is consistent with the donor-agency theory. The non-distribution constraint in the Hershey Trust Company prevents dividends (donations) from being redistributed to residual claimants, and that the non-distribution constraint makes more sense for Hershey because its founder, Milton Hershey, expressed his preference to leave along a lasting legacy. The non-distribution constraint thus assures donors that their funds won't be expropriated because the founder has a preference as to where those funds should go (The Hershey School). Hershey was able to persist as an industrial foundation due to government intervention in the 1960s when it was grandfathered into the Tax Reform Act and then in 2002 when the Pennsylvania state government prevented the sale of the company.

This paper also argues that Mars has chosen a family-controlled organizational form because of Mars family's greater commitment to the company, its long-term investment horizon, and the amenity potential associated with a traditional family name. This organizational form is consistent with the competitive advantage theory of family control which postulates that families retain control when firm value is maximized benefitting both family and non-family shareholders. I will thus compare and contrast the two organizational forms and lay out the argument for why each firm chose their current form.

The study draws from the literature of the new institutional economics (NIE) in attempting to explain what institutions are, how they came to be, what their purpose is, how they change, and how they evolve (Klein, 1999). The hypothesis is verified and elaborated by citing empirical studies on ownership and organizational form (Hansmann, 1987, 1988, 2006) particularly studies on the performance of foundation-owned firms (Thomsen, 1999; Herrmann and Franke, 2002, Hansmann and Thomsen, 2012) as well as studies on the performance of family-owned firms (Sraer and Thesmar, 2007; Anderson and Reeb, 2003; Villalonga and Amit, 2006, 2009, 2010).

Review of Related Literature

Michael Rowlinson has done extensive work in the history of Cadbury. In his 1988 paper he stated that Cadbury had begun to apply scientific management techniques at its Bournville facility well ahead of most of its British counterparts. …

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