Once you switch to the “divisions” model your divisions are no longer competing with other firms, and all the divisions live or die as a group.
Why? Each division can still have separate profit-loss accounting, so you can decide to shut one down if it starts making losses, and the benefits of having that division to the rest of the company doesn’t outweigh the losses. The latter may be somewhat tricky to judge though. Perhaps that’s what you meant?
Yeah, I’m more convinced now that principal-agent issues are significantly larger than other issues.
I should perhaps mention that I still have some uncertainty about this, mainly because Robin Hanson said “There are many other factors that influence coordination, after all; even perfect value matching is consistent with quite poor coordination.” But I haven’t been able to find any place where he wrote down what those other factors are, nor did he answer when I asked him about it.
Why? Each division can still have separate profit-loss accounting, so you can decide to shut one down if it starts making losses, and the benefits of having that division to the rest of the company doesn’t outweigh the losses. The latter may be somewhat tricky to judge though. Perhaps that’s what you meant?
That’s a good point. I was imagining that each division ends up becoming a monopoly in its particular area due to the benefits of within-firm coordination, which means that even if the division is inefficient there isn’t an alternative that the firm can go with. But that was an assumption, and I’m not sure it would actually hold.
Why? Each division can still have separate profit-loss accounting, so you can decide to shut one down if it starts making losses, and the benefits of having that division to the rest of the company doesn’t outweigh the losses. The latter may be somewhat tricky to judge though. Perhaps that’s what you meant?
I should perhaps mention that I still have some uncertainty about this, mainly because Robin Hanson said “There are many other factors that influence coordination, after all; even perfect value matching is consistent with quite poor coordination.” But I haven’t been able to find any place where he wrote down what those other factors are, nor did he answer when I asked him about it.
That’s a good point. I was imagining that each division ends up becoming a monopoly in its particular area due to the benefits of within-firm coordination, which means that even if the division is inefficient there isn’t an alternative that the firm can go with. But that was an assumption, and I’m not sure it would actually hold.