Organizing for Synergies
American Economic Journal: Microeconomics, Vol. 2, No. 4, pp. 77-114, 2010
39 Pages Posted: 22 Oct 2011
Date Written: November 2010
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.
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