When Not All Conflict Is Bad: Manufacturing-Marketing Conflict and Strategic Incentive Design

Abstract

Researchers and managers broadly agree that coordination and harmony between manufacturing and marketing improve firm performance by eliminating suboptimal practices within the firm. In this paper, we present a contrasting view of the manufacturing-marketing interface. We model a duopoly in which the firms compete on price and quality dimensions. The manufacturing and marketing managers within each firm are presented with conflicting incentives focused on cost minimization and revenue maximization, respectively. These managers bargain with each other before arriving at compromise decisions regarding price and quality. While frequently encountered in practice, this "conflicting-objectives puzzle" is surprising because one expects that centralized coordination by the owners of the firm towards profit maximization would lead to higher profits. In this paper, we resolve the conflicting-objectives puzzle and demonstrate that, surprisingly, the firm's resulting profits in this setting of conflict can be higher than those obtained when the decisions of the managers are perfectly coordinated. We also analyze the equilibrium in incentive plans when the owners can choose between compromise and perfect coordination. Our results offer a new interpretation of manufacturing-marketing conflict as a strategic tool that can enhance firm profits.manufacturing-marketing conflict, manufacturing-marketing coordination, marketing strategy, pricing strategy, product quality, strategic incentive design, game theory

Coordination of marketing and production for price and leadtime decisions

“…Several of the papers in this stream focus on pricing and/or replenishment decisions (Eliashberg and Steinberg, 1987;Dewan and Mendelson, 1990;Mendelson and Whang, 1990;Porteus and Whang, 1991;Kouvelis and Lariviere, 2000;Kumar et al, 2000;Li and Atkins, 2002;Gupta and Weerawat, 2004); however, they do not consider leadtime decisions. De Groote (1994) studies product variety versus process flexibility in the marketing/operations interface, and Balasubramanian and Bhardwaj (2004) model a duopoly in which firms with decentralized marketing and manufacturing functions with conflicting objectives compete on the basis of price and quality. Chatterjee et al (2002), Erkoc and Wu (2002), Ho and Zheng (2004), and Slotnick and Sobel (2005) study the leadtime quotation problem within the marketing/operations interface.…”

“…In many firms, manufacturing is evaluated as a cost center that seeks lower costs and operational efficiency, while marketing is evaluated as a revenue center with control over price and other marketing elements (Balasubramanian and Bhardwaj, 2004;Karmarkar and Lele, 2004). However, this is not necessarily an effective strategy.…”

The impacts of marketing and operations capabilities on financial performance in the UK retail sector: A resource-based perspective

“…Porter (1985) argued that all functional areas of business contribute towards delivery of products and services but marketing and operations are the two key functions that create value for customers. There is a growing body of literature arguing the important role of integration of marketing and operations functions in improving firm performance (Wheelwright and Hayes, 1985;Roth and van der Velde, 1991;Balasubramanian and Bhardwaj, 2004;Ho and Zheng, 2004;Hausman et al, 2002). Mismatch between the two functions lead to production inefficiency and customer dissatisfaction, whereas a proper fit lead to sustainable competitive advantage (Ho and Tang, 2004).…”

Entry Deterrence and Price Competition under Asymmetric Information

“…Due to the advantages of incumbency mentioned in §1, it is very likely that the incumbent's product is of higher quality and cheaper than the entrant's. As Balasubramanian and Bhardwaj [2] note, "endowing the firms with identical own and cross effects in the context of price and quality places the firms on an equal competitive footing. "…”