Competition and Organizational Change∗

We develop a model in which competitive pressure is a catalyst for organizational change. In our model, commitment to a narrow business strategy is valuable because workers need to coordinate their efforts to build a strategy-specific capability. We show that a monopolist may not be able to commit to a focused business strategy. However, introducing competition can make commitment credible, thus leading to organizational change and greater operating efficiency. Our model sheds light on a number of questions in the intersection between the strategic management literature and the organizational economics literature, including the importance of leadership styles, the existence of X-inefficiencies, and the interactions between strategic positioning and organizational capabilities.