Organizing for Synergies

20 January 2011 at 11:05 pm Peter G. Klein Leave a comment

| Peter Klein |

Thanks for Mike S. for the pointer to this paper (published version here, ungated version here):

Organizing for Synergies
Wouter Dessein, Luis Garicano, and Robert Gertner

Large companies are usually organized into business units, yet some activities are almost always centralized in a company-wide functional unit. We ﬁrst show that organizations endogenously create an incentive conﬂict between functional managers (who desire excessive standardization) and business-unit managers (who desire excessive local adaptation). We then study how the allocation of authority and tasks to functional and business-unit managers interacts with this endogenous incentive conﬂict. Our analysis generates testable implications for the likely success of mergers and for the organizational structure and incentives inside multidivisional ﬁrms.

This is an understudied topic in organizational design, I think. The large literature on the M-form, going back to Chandler and Williamson and flourishing in the 1970s and 1980s, compared functional to business-unit managers across organizations, but said much less about mixing them within organizations. The modern internal capital markets literature focuses on information problems between division heads and the central office, and conflicts over resources among division heads, but not the issues raised here by Dessein, Garicano, and Gertner. The vertical integration literature, as well, tends to treat firm-wide support services as peripheral to the incentive conflicts between vertically related divisions.