Strategy and Structure: A Repeated Game Approach

Abstract

According to Williamson (1975), a divisionalized and fully decentralized structure, the so called M-form, is the optimal structure via which firms that pursue diversification gain economic benefits from internalizing transactions. However, empirical evidence shows that a centralized, multi-divisional structure, the so called CM-Form, is the optimal structure when related diversification is the objective, while the M-form is optimal when seeking unrelated diversification. This paper proposes a repeated game model to study the link between strategy and structure. The main prediction of the model is that a related strategy is, overall, better served by a centralized structure, while an unrelated strategy is better served by a decentralized structure.