Organizational Structure and Product Choice in Knowledge-Intensive Firms

This paper formulates a model in which a firm simultaneously chooses its organizational structure and product position. The firm’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 sufficient knowledge and is further strengthened when the firm enhances its capability of communicating knowledge. The model yields testable implications concerning (1) the fit between a firm’s product position and span of control, (2) the effect 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 firms. This paper was accepted by Bruno Cassiman, business strategy.