Abstract: This paper studies the implications of internal social comparisons – benchmarking business units against each other – for organizational adaptation and performance. While extant research has mainly focused on the effects of internal social comparisons on the volume of organizational effort, we build on behavioral theory on organizational adaptation and aspiration-driven search to suggest that such comparisons may also affect the direction of effort. Using a computational model, we show how internal social comparisons can effectively regulate organizational search processes through two mechanisms:
- a classification effect whereby the organization is guaranteed to contain both exploring and exploiting units, and
- a sampling effect whereby social comparisons protect against premature switching from exploitation to exploration.
We explore important boundary conditions on the viability of internal social comparisons, including environmental dynamics, resource munificence, and the comparability of business units. We also demonstrate how the performance of internal social comparisons is boosted in the presence of complementarities between business units. Thus, under appropriate circumstances, internal social comparisons can affect firm performance in beneficial ways, suggesting why many executives actively encourage such comparisons. The study has implications for work on intra-organizational competition, aspirations-driven search, the adaptation of multi-unit firms, and balancing exploration and exploitation.