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

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.