Organizing for Synergies
56 Pages Posted: 8 May 2007
Date Written: January 2007
Multi-product firms create value by integrating functional activities such as manufacturing across business units. This integration often requires making functional managers responsible for implementing standardization, thereby limiting business-unit managers' authority. Realizing synergies then involves a tradeoff between motivation and coordination. Motivating managers requires narrowly-focused incentives around their area of responsibility. Functional managers become biased toward excessive standardization and business-unit managers may misrepresent local market information to limit standardization. As a result, integration may be value-destroying when motivation is sufficiently important. Providing functional managers only with "dotted-line control" (where business-unit managers can block standardization) has limited ability to improve the tradeoff.
Keywords: communication, coordination, incentives, incomplete contracts, merger implementation, organizational design, scope of the firm, task allocation
JEL Classification: D2, D8, L2
Suggested Citation: Suggested Citation