Organizing for Synergies

Large companies are usually organized into business units, yet some activitiesare almost always centralized in a company-wide functional unit. We firstshow that organizations endogenously create an incentive conflict between functionalmanagers (who desire excessive standardization) and business-unit managers(who desire excessive local adaptation). We then study how the allocationof authority and tasks to functional and business-unit managers interacts withthis endogenous incentive conflict. Our analysis generates testable implicationsfor the likely success of mergers and for the organizational structure and incentivesinside multidivisional firms.[...]