Organizational Structure and Product Choice in Knowledge-Intensive Firms

This paper formulates a model in which a …rm simultaneously chooses its organizational structure and product position. The …rm’s production is knowledge-intensive, requiring employees to solve problems. A vertical hierarchy in which workers refer unsolved problems to managers facilitates the acquisition and leveraging of managers’superior knowledge. I show that a larger span of control is complementary to the provision of high-value products. Moreover, this complementarity is sustained when employees acquire su¢ cient knowledge and is further strengthened when the …rm enhances its capability of communicating knowledge. The model yields testable implications concerning: (1) the …t between a …rm’s product position and span of control; 2) the e¤ect of information technology on product innovations and skill-biased organizational changes; and 3) the heterogeneity in hierarchical structure and human resource management in professional service …rms. Key Words: strategy and structure, strategic …t, product selection, organizational design, problem-solving, knowledge-intensive …rms