The Myth of the Flattening Hierarchy

28 January 2013 at 12:56 am 4 comments

| Peter Klein |

We’ve written many posts on the popular belief that information technology, globalization, deregulation, and the like have rendered the corporate hierarchy obsolete, or at least led to a substantial “flattening” of the modern corporation (see the links here). The theory is all wrong — these environmental changes affect the costs of both internal and external governance, and the net effect on firm size and structure are ambiguous — and the data don’t support a general trend toward smaller and flatter firms.

Julie Wulf has a paper in the Fall 2012 California Management Review summarizing her careful and detailed empirical work on the shape of corporate hierarchies. (The published version is paywalled, but here is a free version.) Writes Julie:

I set out to investigate the flattening phenomenon using a variety of methods, including quantitative analysis of large datasets and more qualitative research in the field  involving executive interviews and a survey on executive time use. . . .

We discovered that flattening has occurred, but it is not what it is widely assumed to be. In line with the conventional view of flattening, we find that CEOs eliminated layers in the management ranks, broadened their spans of control, and changed pay structures in ways suggesting some decisions were in fact delegated to lower levels. But, using multiple methods of analysis, we find other evidence sharply at odds with the prevailing view of flattening. In fact, flattened firms exhibited more control and decision-making at the top. Not only did CEOs centralize more functions, such that a greater number of functional managers (e.g., CFO, Chief Human Resource Officer, CIO) reported directly to them; firms also paid lower-level division managers less when functional managers joined the top team, suggesting more decisions at the top. Furthermore, CEOs report in interviews that they flattened to “get closer to the businesses” and become more involved, not less, in internal operations. Finally, our analysis of CEO time use indicates that CEOs of flattened firms allocate more time to internal interactions. Taken together, the evidence suggests that flattening transferred some decision rights from lower-level division managers to functional managers at the top. And flattening is associated with increased CEO involvement with direct reports —the second level of top management—suggesting a more hands-on CEO at the pinnacle of the hierarchy.

As they say, read the whole thing.

Entry filed under: - Klein -, Business/Economic History, Innovation, Management Theory, Myths and Realities, Syllabus Exchange, Theory of the Firm. Tags: .

Arrunada Seminar: Matteo Rizzolli – Will ICT Make Registries Irrelevant? Does Boeing Have an Outsourcing Problem?

4 Comments Add your own

  • 1. Peter St Onge  |  28 January 2013 at 2:40 am

    I wonder if the fabled flexibility IT gives a CEO has simply led to their plucking the fun decisions for their brain trust, and shoving everything else downhill. Perhaps then being CEO becomes closer to running a nightclub; more fun, but you make less money.

  • [...] and capabilities associated with “social” are diverted from their primary purpose; flattening hierarchies often leads to a tighter command-and-control mindset; telework is a curse as well as a blessing; transparency might instead offer a greater potential [...]

  • [...] des valeurs et des capacités associées au «social» sont détournées de leur sens initial; aplanir les hiérarchies fait souvent naître un état d’esprit plus commande-et-contrôle que…; le télétravail est tout autant une malédiction qu’une bénédiction; la transparence [...]

  • [...] and capabilities associated with “social” are diverted from their primary purpose; flattening hierarchies often leads to a tighter command-and-control mindset; telework is a curse as well as a blessing; transparency might instead offer a greater potential [...]

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Trackback this post  |  Subscribe to the comments via RSS Feed


Nicolai J. Foss | home | posts
Peter G. Klein | home | posts
Richard Langlois | home | posts
Lasse B. Lien | home | posts


Former Guests | posts


Recent Posts



Our Recent Books

Nicolai J. Foss and Peter G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge University Press, 2012).
Peter G. Klein and Micheal E. Sykuta, eds., The Elgar Companion to Transaction Cost Economics (Edward Elgar, 2010).
Peter G. Klein, The Capitalist and the Entrepreneur: Essays on Organizations and Markets (Mises Institute, 2010).
Richard N. Langlois, The Dynamics of Industrial Capitalism: Schumpeter, Chandler, and the New Economy (Routledge, 2007).
Nicolai J. Foss, Strategy, Economic Organization, and the Knowledge Economy: The Coordination of Firms and Resources (Oxford University Press, 2005).
Raghu Garud, Arun Kumaraswamy, and Richard N. Langlois, eds., Managing in the Modular Age: Architectures, Networks and Organizations (Blackwell, 2003).
Nicolai J. Foss and Peter G. Klein, eds., Entrepreneurship and the Firm: Austrian Perspectives on Economic Organization (Elgar, 2002).
Nicolai J. Foss and Volker Mahnke, eds., Competence, Governance, and Entrepreneurship: Advances in Economic Strategy Research (Oxford, 2000).
Nicolai J. Foss and Paul L. Robertson, eds., Resources, Technology, and Strategy: Explorations in the Resource-based Perspective (Routledge, 2000).


Get every new post delivered to your Inbox.

Join 218 other followers