Supply-side inducements and resource redeployment in multiunit firms

Abstract

Research Summary: We examine to what extent and when multiunit firms internally redeploy managers between units. While theory has emphasized how changes in demand conditions affect redeployment, we argue that optimal internal resource allocation involves consideration of both demand and each unit's resource supply. We formalize this argument, showing how redeployment arises from “supply-side inducements”—return advantages in new over existing resource uses resulting from changes in resource supply. Empirical tests using manager deaths as an exogenous, supply-side shock to firms' resource stocks support our arguments, showing that firms frequently redeploy resources away from better-endowed and toward negatively affected units. Incorporating supply-side inducements into redeployment theory implies additional value-creation opportunities from redeployment and carries novel predictions for the direction of intra-firm resource flows. Managerial Summary: Firms continuously decide how to allocate valuable resources—such as their most productive workers, unique inputs, or machinery—among different units. We argue that to optimally allocate such resources, managers must respond to changes in both the demand environment and in the resource stock of different units. When some units successfully accumulate resources while others suffer adverse shocks, opportunity exists to improve efficiency by internally redeploying resources. Counterintuitively, optimal redeployment frequently involves shifting resources away from successful, well-endowed units. New business units, being resource-poor, are often the most important recipients of resources. Empirical analyses studying how firms allocate managers in a large sample of Brazilian firms offer support for these arguments.