Diversification and Decentralization : The Roles of Organizational Inertia and Diversity

We consider a multidivision organization’s choice between a decentralized structure and a centralized one. Each division has its own privateinformation and can fully commit to a communication rule. We consider two types of coordination–standardization and diversification. We show that the need for coordination would favour centralization due to the optimality of the decisions, regardless of whether coordination takes the form of standardization or diversification. However, if each division has a bias towards inertia, decentralization may be beneficial. In particular, if diversification is required, decentralization is likely to dominate centralization in a homogeneous organization compared to a diverse organization, even when divisions have relatively low levels of inertia