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: .

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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 [...]

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