Organize to Compete

We examine the effect of competition on the internal organization of a multi-divisional firm. Managers need to adapt production to demand but also to cooperate and coordinate production across divisions. Because headquarters is imperfectly informed about demand, centralization performs poorly in terms of adaptation. And because division managers are biased and imperfectly informed about demand in each others’ markets, decentralization performs poorly in terms of cooperation and coordination. The effect of competition depends on the underlying reasons for the increase in competition. If it simply lowers demand, it favors decentralization. But if it also makes demand more price sensitive, it can favor centralization.