Organizational Structure and Firm Innovation in a Retail Chain

Two organizational structures for a retail chain are examined for their effect on the rate of firm innovation. A centralized organization is defined as one in which store practices are mandated from corporate headquarters (HQ) and this results in HQ being the sole source of new ideas. A decentralized organization gives freedom to store managers to adopt their own ideas and disseminates innovations made by store managers. The difference in average profit between the centralized and decentralized organizations is found to be a non-monotonic function of innovative opportunities. The centralized organization is preferred when innovative opportunities are moderate while the decentralized organization is preferred when such opportunities are rich. Centralization also tends to fare better in environments in which ideas are relatively complex.