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:||http://www.cepr.org/pubs/dps/DP6019|
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 managersí 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.