DP6019 Organizing for Synergies

Author(s): Wouter Dessein , Luis Garicano , Robert Gertner

Publication Date: January 2007

Keyword(s): communication , coordination , incentives , incomplete contracts , merger implementation , organizational design , scope of the firm , task allocation

JEL(s): D2 , D8 , L2

Programme Areas: Industrial Organization

Link to this Page: www.cepr.org/pubs/dps/DP6019.asp.asp

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.