Coordination of Decentralized Departments and the Implementation of a Firm-wide Differentiation Strategy

Abstract

This study regards a two-stage value chain of a decentralized company. The separated investment centers can implement a firm-wide differentiation strategy by making specific investments. The focus is set on a situation where the upstream manufacturing department invests in product quality improvements and the downstream marketing department invests in marketing operations. The specific investments are totally defrayed by the units acting on their own authority. Because both specific investments affect the whole revenue in the same way increasing customers demand and customers willingness to pay, the allocation of the profit induced by the specific investments is not made cost reflective. An underinvestment problem arises, witch endangers the objective of firm-wide profit maximization.