Resource redeployment in multi‐business firms: Centralized or decentralized?

Research Summary Although multi‐business firms can benefit from resource redeployment, we know little about the effects of alternative organizational arrangements on profits. This study examines a critical organizational choice, namely the centralization or decentralization of decision making. A formal model demonstrates that in the presence of business unit agency costs and costs of centralization, the profits from centralization versus decentralization depend not only on business relatedness—as emphasized in prior research—but also on return asymmetries between businesses. Moreover, in contrast with much of the research on contemporaneous resource sharing, the profitability of centralization does not increase monotonically with relatedness. The monotonic relationship holds only when relatedness leads to potential profits from redeployment in the intermediate range. As relatedness increases further, the advantage of centralization may decrease. Managerial Summary Diversified firms often redeploy resources from one business to another, and the firms must decide whether to centralize or decentralize their redeployment decisions. Much of the literature on related diversification in general, and with respect to redeployment in particular, suggests that related diversification will lead to higher profits when decisions are centralized. However, the analysis presented here shows that centralization may not lead to higher profits from redeployment for highly related diversification, and firms may be able to obtain equivalent or higher profits by decentralizing these decisions.