Innovation and Adaptation in Multi-Business Firms: The Contingent Value of Internal Competition

This study explores the implications of intra-organizational competition between divisions for corporate resources. We incorporate the idea that division managers may view other divisions as relevant for the setting of aspiration levels, and that such a focus on inter-divisional competition – in addition to more traditional historical aspirations that mirror typical incentives provided to managers – may have implications for innovation and adaptation. We develop a computational model to study the resulting effects on organizational performance and behavior. Our results point to a behavioral effect that makes internal competition a dual-edged sword: On the one hand, internal competition can induce divisions to make more informed resource allocations; on the other, it can lead to dysfunctional complacency that prohibits effective adaptation. We find that the former behavior occurs in slowly-changing environments, while the latter takes effect under turbulent conditions. Exploring the boundary conditions of our model, we show that both very low and very high levels of slack resources level the effects of internal competition. Furthermore, we show that the effects of internal competition are larger in firms with fewer divisions. The model has implications for work on intra-organizational competition, the role of incentives in driving managerial behavior, and the link between organizational design, external environment, and performance. (It is a joint work with J.P Eggers (NYU) and Niels Stieglitz (Frankfurt School of Finance & Management).