Organizing for Synergies

56 Pages Posted: 8 May 2007

See all articles by Wouter Dessein

Wouter Dessein

University of Chicago - Booth School of Business

Luis Garicano

IE Business School; Centre for Economic Policy Research (CEPR)

Robert H. Gertner

University of Chicago - Finance; National Bureau of Economic Research (NBER)

Date Written: January 2007

Abstract

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

Dessein, Wouter and Garicano, Luis and Gertner, Robert H., Organizing for Synergies (January 2007). CEPR Discussion Paper No. 6019, Available at SSRN: https://ssrn.com/abstract=984561

Wouter Dessein (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Luis Garicano

IE Business School ( email )

Calle María de Molina, 11
Madrid, 28006
Spain

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Robert H. Gertner

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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