Organizational Structure and Performance Feedback: Centralization, Aspirations, and Termination Decisions

Abstract

This study examines the effects of organizational structure and performance feedback on termination decisions—in particular, product phaseout. Using quarterly product-level data on the major mobile handset manufacturers for the period 2004–2009, we analyze how product-level feedback affects product phaseout and how these decisions are conditioned by organizational structure—the extent to which decision making is centralized. We argue that such structure affects termination in two ways: directly, through coordination, and indirectly, by shaping the interpretation of performance feedback. Our baseline models indicate that as performance increases above aspirations, the rate of phaseout decreases. We find that as performance declines below aspirations, the rate of phaseout decreases, but then increases when the product falls below a certain sales threshold. We also find evidence that centralization amplifies the feedback effect above aspirations but attenuates it below aspirations. This study links two pillars of the Carnegie school, aspiration levels and hierarchy, to explain the complexity of phaseout following perceived success or failure. We thereby augment the growing scholarship on performance feedback by considering some important conditional effects imposed by a centralized structure. Our focus on centralization expands the scope of theory concerning organization design by linking structure and cognition to explain firm behavior, especially termination decisions.