Learning from the Competition: External Spillovers
and the Organizational Structures of Competing Multi-Unit Firms
Myong-Hun Chang and Joseph E. Harrington, Jr.
m.chang@csuohio.edu\ulnone  , joe.harrington@jhu.edu
     

     How does the existence of the opportunity for \i external\i0  spillovers (learning from the competition) influence the way \i internal\i0  spillovers (intra-organizational mutual learning) are coordinated in multi-unit organizations?  We investigate this question by constructing a computational model of competing retail chains engaged in long-term rivalry in multiple markets.  The setting is one in which each market is served by several chains.  Consumers engage in the search to find the store that best fits their needs, while chains compete by improving their stores\rquote  practices over time.  The chains are modeled as multi-agent adaptive systems composed of boundedly rational store managers who engage in adaptive learning over time:  Each store develops new ideas on their own (innovation) but also learns about new practices of other stores in their chain (via headquarters).  As the potential sources of innovative ideas are distributed among multiple agents (store managers), rather than concentrated at the central headquarters, it then becomes critical that the process of innovation and knowledge utilization be coordinated in a way that permits the firm to compete effectively against its rival in local markets.  We consider two organizational structures under which the newly generated knowledge may be communicated and utilized within an organization:  1) under centralization the corporate staff has the ultimate authority to adopt and mandate new practices, while 2) under decentralization store managers have the freedom to make their own adoption decisions.\f0\fs22  In this setting, we introduce the possibility that the various units as well as the headquarters of competing chains may learn from one another through external spillovers in local markets.  Our objective is to examine the effects such spillovers have on the relative performance of centralized and decentralized organizational structures.  The simulation results suggest that the existence of external spillovers benefits decentralization initially, but ultimately favors centralization in the long run.