Temporarily divide to conquer: Centralized, decentralized, and reintegrated organizational approaches to exploration and adaptation

To create a competitive advantage, firms need to find activity configurations that are not only internally consistent, but also appropriate given the firm's current environment. This challenge is particularly acute after firms have experienced an environmental change that has shifted the existing competitive landscape and created new, high-performing sets of activity choices. How should firms organize to explore and search such an altered performance landscape? While it has been noted that adaptive entities need to maintain a balance of exploration and exploitation, little is known about how different organizational structures moderate this balance. With the help of an agent-based simulation model, we study the value of three different organizational structures: a centralized organization, in which decisions are made only at the level of the firm as a whole; a decentralized organization, in which decisions are made independently in two divisions; and a temporarily decentralized firm, which starts out with a decentralized structure and later reintegrates. We find that if interactions among a firm's activities are pervasive, neither the centralized nor the permanently decentralized organizational structure leads to high performance. In this case, temporary decentralization – an organizational structure that has not found much attention in the literature – yields the highest long-term performance. This organizational structure allows the firm both to avoid low-performing activity configurations and to eventually coordinate across its divisions. Thus, even if the decision problem a firm faces is not fully decomposable, a temporary bifurcation can lead to a higher long-term performance outcome. Initial decentralized exploration is, however, costly in the short run, as compared to centralized exploration. As a result, a tradeoff exists between the short-term costs of decentralized exploration and the longterm benefits of reaching higher performance. As interactions across and within divisions increase, the optimal length of decentralized exploration tends to grow. Paralleling our first result, we further show that even if a decision problem is decomposable, that is, can be perfectly modularized, it can be beneficial to create a temporary decision allocation that creates ‘unnecessary’ interdependencies across the subsystems. This benefit arises in particular when the modules are complex by themselves. In both cases, an initial phase of exploration, enabled by an appropriate organizational structure, followed by refinement and coordination, enabled by a different structure, leads to high performance. To illustrate our general model, we focus on incumbent firms' responses to the Internet and discuss implications for the product design process.