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Deciding when 'not' to maximize profits
Date:10/23/2013

CHESTNUT HILL, MA (October 23, 2013) - Corporate America may have a reputation for maximizing profits whenever possible, but a new study shows that's not always the case; companies sometimes deliberately leave money on the table in an effort to "get along" with and not upset their competitors. For the first time, we're learning how a company's top bosses are doing it.

Titled "Constrained Delegation: Limiting Subsidiaries' Decision Rights and Resources in Firms That Compete across Multiple Industries," (published in Administrative Science Quarterly), the research paper finds corporate heads "selectively intervene" in the everyday business of a subsidiary to deliberately sabotage decisions that could positively shift the balance of power in the marketplace.

"We showed how large multi-unit firms manage competition across markets which no study before has showed," says Boston College Carroll School of Management Assistant Professor Metin Sengul, the study's co-author. "There are two ways a corporation head can ensure a subsidiary plays nice. One is to watch over its subsidiary's shoulder everyday, which is very difficult for headquarters, especially if it has lots of different units. It's very costly and impractical.

"The other option is what we are arguing and that is to delegate decisions that will not trigger competitive aggressiveness to your units," says Professor Sengul, who argues corporations want subsidiaries to succeed to a point. "A corporate head might say to a subsidiary, 'I don't want you to anger my multimarket rivals so that we are hurt overall. Other than that, I want you to make money. Go, do good business. But whenever you are making big investment decisions - increasing your capacity by 30%, for example stop. Come and ask me. Let's talk. And then I will tell you to do it or not. Don't decide on your own.' Corporations don't want to centralize everything, they just want to centralize big decisions."

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Contact: Sean Hennessey
sean.hennessey@bc.edu
617-552-3630
Boston College
Source:Eurekalert

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