Influence activities and strategic coordination: Two distinctions of internal and external markets

This paper examines empirically two distinctions of internal and external markets: influence activities and strategic coordination. Influence activities that arise from decentralization, imperfect monitoring, and a relative performance system are a potential liabilty of internal markets; coordination may be worse in internal markets than in external markets. However, strategic coordination is an advantage of internal markets: a hierarchy can more effectively implement strategic policies in internal markets than external markets. The results of this study show that profit center managers engage in influence activities by haggling over price adjustments, causing greater renegotiation costs in internal markets than in comparable external markets. However, implementation of cost reduction, which is a strategic policy, appears to be more effective in internal markets: the results show that supplying profit centers disclose more private cost information than external market suppliers. Thus cooperation and competition appear to operate simultaneously in internal markets. In addition, the results suggest that internal markets appear to undermine one advantage of a vertical integration strategy: the creation of unique assets, an organizational resource that can generate rents. These results, which are based on data gathered from the internal and external markets of one Fortune 100 company, are exploratory and further work is needed to generalize the findings.