Why Top-Down Companies Can Underperform Their Peers

When a company’s sales start to fall, a regional manager may know it’s time to shift marketing dollars from one product or advertising medium to another well before that news has reached company headquarters. This is an example of business decentralization, and research suggests that such decentralization is key to surviving economic downturns.

This finding runs counter to traditional management theory, which says that during recessions, top-down control of resources and strategy is key. But detailed data from manufacturing companies, gathered before and after the 2007–10 financial crisis in the United States and in Europe, reveal that decentralized companies outperformed their peers in terms of sales growth, productivity, and profits.

“Just as the US military has become more decentralized, letting soldiers on the ground in Afghanistan and Iraq make more decisions than they would have in Korea or in Vietnam, so are the best firms decentralizing in times of economic conflict,” says Stanford’s Nicholas Bloom, who conducted the research with College of France’s Philippe Aghion, Stanford PhD candidate Brian Lucking, Harvard’s Raffaella Sadun, and MIT’s John Van Reenen.

Using data from two management surveys involving 30,000 US manufacturing plants and 1,000 European companies, the researchers were able to establish which firms were decentralized prior to the crisis. The surveys outlined how much responsibility local plant managers had for capital spending, hiring, new product introductions, and sales and marketing. The researchers then looked at how each company performed before and after the financial crisis.