To remain competitive, an organization must both respond to information about its environment and coordinate its activities. We analyse how the allocation of decision rights within an organizational hierarchy influences the organization's ability to solve such problems of coordinated adaptation when information is both soft and distributed inside the organization and the organizational participants behave strategically. The results show that, contrary to the common intuition, the performance differential between centralized and decentralized decision-making is non-monotone in the importance of coordination. Further, both these common structures are dominated by asymmetric structures in sufficiently asymmetric environments (such as a small division developing a new product in the presence of a large division with an established product). Finally, if the incentive conflicts between the participants can be made sufficiently small, centralized decision-making is always dominated by decentralized decision-making.1. This paper is based on chapter 1 of my PhD dissertation submitted to the Massachusetts Institute of Technology. RANTAKARI GOVERNING ADAPTATION 1259the common intuition of coordination requiring centralized decision-making holds broadly true. When the need for coordination is sufficiently low, decentralized authority is preferred to limit the loss of information due to strategic communication and so maintain the adaptiveness of the divisions. When the need for coordination is sufficiently high, centralized authority is preferred to improve coordination between the divisions. It is worth noting, however, that the actual performance differential between centralized and decentralized authority is S-shaped, with the two solutions converging when coordination becomes both very important and unnecessary. Intuitively, when coordination is the overriding concern for divisional performance, the division managers are willing to coordinate their actions even under decentralization. Alternatively, when the divisions are fully independent, no incentive conflicts are present and perfect adaptation can also be achieved under centralization. It is only when the organization needs to balance conflicting needs for adaptation that the issue of conflicting preferences arises, and the ability of the different governance structures to manage those conflicts plays a meaningful role. When the divisions are sufficiently asymmetric in their need for adaptation and coordination, then one of the asymmetric governance structures is the preferred choice. We can distinguish between various different asymmetries. First, when one division is either larger or faces a more volatile environment, then authority is delegated only to that division (partial decentralization or directional authority). Intuitively, both variables increase the relative importance of making right decisions for that division, which is achieved by delegating authority to limit informational losses due to strategic communication. Second, when one division cares more abou...
Many organizations rely on their members to develop solutions to specific problems. Universities establish search committees to hire at the senior level or to recommend changes to the curriculum. In a very similar fashion, standards bodies routinely form working groups to define the properties of a new technological standard. In both settings, there are no readily available solutions (i.e., candidates, curricula, standards) from which to select. Instead, the members of the organization must invest time and effort developing potential solutions. Furthermore, different members may have conflicting preferences over the feasible alternatives: which candidate to hire or which courses or patents to include in the curriculum or standard, respectively. Finally, as decision rights are typically shared, members must ultimately come to an agreement over which proposed solution to adopt.The following problem is at the heart of all these examples. Because developing a proposal is costly, the first agent who presents a concrete proposal acquires considerable bargaining power. The other agents can avoid further development costs by approving his project and, hence, are willing to endorse projects that are not ideal from their perspective. When agents have conflicting preferences over potential * Bonatti: Sloan School of Management, Massachusetts Institute of Technology, 100 Main Street, Cambridge, MA 02142 (e-mail: bonatti@mit.edu); Rantakari: Simon School of Business, University of Rochester, 252 Elmwood Avenue, Rochester, NY 14627 (e-mail: heikki.rantakari@simon.rochester.edu). We gratefully acknowledge the support of the Project on Innovation in Markets and Organizations (PIMO) at the MIT Sloan School. We would like to thank
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