May 15, 2018 – Complex firm structure may hurt stock in alliances
Stock market often punishes matrix companies for entering into complex alliances with other companies as the behavior is thought to have diluted strength by juggling complexity both inside and outside, a study by researchers at the University of Michigan (UM) Ross School of Business finds.
The researchers examined the effect of a firm’s internal structure on its engagement in alliances with other companies and stock market reaction to the formation of those partnerships.
“Our tests revealed an intriguing pattern of results,” said Maxim Sytch, associate professor of management and organizations at UM Ross School of Business.
While matrix organizations are more likely to enter into alliances that include partners from different industries and incorporate various functions in the alliance, such as R&D, manufacturing or marketing, “such alliances are particularly complex to manage: they engender severe coordination demands, knowledge sharing challenges and conflicts of competing interests.”
Then, “the matrix firms incur the double-complexity discount for entering into such alliances, especially when there is an anticipation of high coordination costs both internally, within a matrix, and externally, across multiple alliance functions,” Sytch said.
“The negative investor response makes visible the practical concerns that exist in the market about the optimality of matrix firms’ resource allocation choices,” Sytch added.
The study is scheduled to appear in an upcoming issue of the journal Organization Science.