I would recommend checking out the book "First, Break all the Rules" and "How Full is your Bucket". These are excellent reads and speaks to the temptation several organizations have to promote the wrong people into management positions all because they did their job well. This is the most common mistake and if not well thought out, is usually not the best option as that person eventually steps out of the management role.

In a situation like this the best option is to hire from outside. An outsider will not have preconcieved ideas of whats going, they will bring a new perspective which is much needed in a troubled department. the con of bring someone from the outside is that they would needed longer time to orient to the organization; but it would be worth it, you do not want to keep recycling the same old bad blood.

This is really a hard decision that has been weighting on managers minds since the dawn of time. There is no easy solution to this question as every situation is unique. I suspect you already know the answer to this question you seek therefore I will through my two cents of experience in. I have had good success hiring from outside. I have found that it eliminates all possibility of group think or assimilation into the environment. During the interview and hiring process I don’t hold back and let the candidate know exactly what the unit is like and my expectations during their first 100 days, 9 month expectations and 1 year evaluations. I want the person to know what they are stepping into and why position has been vacated. I seek stronger managers then I to replace me someday and I have not found many within the organization that have not fallen into the organizations conformity. Occasionally you will have diamonds in the ruff within your units and as a good leader you must snatch them up and train them, even if that means moving them to a different unit with the right mentorship.