A Firm's Internal Organisation and Its Implications for Market Performance

This paper examines the linkages between a firm's internal organisation and its performance in oligopolistic competition. The empirical evidence of the diffusion of new organisational practices, which tend to make large firms more decentralised, combined with more intense communication and less hierarchical levels, motivates a model of the competition between differently organised firms. It is argued that such practices make up a stylised organisational form, which can be called network form or N-form. The focus is on efficiency effects and on one aspect of organisational changes, namely increasing communication between divisional managers. It is shown that the organisational choice critically depends both on factor spillovers and the degree of instability of the market environment. Under the flexible production system, which is characterised by the combination of economies of scale and of scope and which has replaced the fordist production system, and given the current complex and unstable market environment, such a form is more profitable.