Matrix companies such as Procter and Gamble, Eli Lilly, General Electric or PepsiCo are more likely to enter into complex alliances with other companies because their very structure gives managers more confidence to collaborate in challenging situations.

 

Yet, a new study by Maxim Sytch, associate professor of management and organizations at the University of Michigan Ross School of Business, and colleagues finds that the stock market often penalizes companies for such collaborations because they are thought to have diluted strength by juggling complexity both inside and outside.

 

Sytch and co-authors Franz Wohlgezogen of the University of Melbourne and Edward Zajac of Northwestern University examined the effect of a firm's internal structure on its engagement in alliances with other companies and stock market reaction to the formation of those partnerships. The study will appear in an upcoming issue of the journal Organization Science.

 

A matrix structure is designed with multiple links across the company's customer, functional, geographic and product groups. You live in a matrix organization if you have more than one boss, such as when you report to both a geography leader and a product leader. Account manager positions and cross-functional teams are all elements of the matrix design, which has become more prevalent in recent years.

 

"Our tests revealed an intriguing pattern of results," Sytch said. "Matrix organizations are more likely to enter into alliances that include partners from different industries and incorporate various functions in the alliance, such as R&D, manufacturing, or marketing.

 

"Such alliances are particularly complex to manage: They engender severe coordination demands, knowledge sharing challenges, and conflicts of competing interests. Yet, the stock market largely penalizes matrix organizations for embracing such complex interorganizational collaborations."

 

Managers of matrix firms were less daunted than nonmatrix firms by entering into complex alliances. This is because the anticipated governance and relational challenges in those alliances largely reflect their daily managerial challenges inside matrix organizations.

 

"Yet, the matrix firms incur the double-complexity discount for entering into such alliances, especially when there is an anticipation of high coordination costs both internally, within a matrix, and externally, across multiple alliance functions," Sytch said.

 

"The negative investor response makes visible the practical concerns that exist in the market about the optimality of matrix firms' resource allocation choices. Matrix managers' confidence that matrix structures offer behavioral benefits for managing these partnerships effectively is not reflected in the expected returns by the market."

 

Maxim Sytch is the Michael R. and Mary Kay Hallman Fellow and an associate professor of management and organizations at Michigan Ross.

 

Media contact: Greta Guest, 734-936-7821, gguest@umich.edu