Coordination Costs, Organization Structure and Firm Growth.

Abstract

This dissertation views firms as systems of interdependent activities and investigates the role of coordination costs in setting limits to firms’ growth strategies and organization structure. It contains three interrelated studies. Study I examines the impact of coordination costs on firms’ diversification strategies. A synergistic view of diversification suggests that firms are more likely to diversify into a new business that shares significant resources with their existing businesses: There is more potential for synergies. Study I argues that, to realize the potential synergies, firms need to actively manage the interdependencies caused by resource sharing, which adds to coordination demand from firms’ existing businesses, and may cause marginal coordination costs to outweigh marginal synergistic benefits. The impact of coordination costs is particularly significant if the existing businesses are already complex. The argument takes into account the joint effects of synergies and coordination costs, and offers a unique explanation for the limit to related diversification. Study II examines the impact of the activity system on the partitioning and recombination of organization units inside the firm. It investigates how the complexity and decomposability of the activity system affect the firm’s choice of a more modular, integrated, or hierarchical structure. It argues that the degree of organization integration is constrained when the activity system is highly complex, whereas for a given level of complexity the degree of organization modularity is constrained by the decomposability of the activity system. Under both constraints, a hierarchical structure plays the important role of coordinating inter-unit interdependencies. Study III extends the inspection of organization structure from firm to unit level and examines the differential delegation of coordination responsibilities within a hierarchical structure. It exploits institutional differences across host countries where multinational corporations operate. It proposes that institutional differences affect the local units’ ability to coordinate via the differential availability of information and clarity of property rights; differential delegation is an important vehicle to countervail such coordination constraints. I find support for my hypotheses using data of U.S. equipment manufacturers from 1993 to 2003.