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Management

Why Hierarchies in Organizations Aren’t All Bad

Hierarchical structures can be useful, even for teams that need to be agile

Published: Tuesday, February 21, 2023 - 12:02

Knowledge-intensive work is quite different from the physical manufacturing work that birthed the corporate hierarchies widely prevalent today. Consider the incompetent Pointy-Haired Boss in the Dilbert comic strip: He can’t lead through wisdom or better information, and he’s unable to control his subordinates because their work depends on effort that he can’t observe or comprehend.

Add the usual challenges of transmission losses, such as control and information in multilayered hierarchies, and one might justifiably ask if hierarchies are an anachronism in today’s knowledge-intensive economy. Some academics have even argued that hierarchies may be effective instruments of execution but are ultimately ineffective at adaptation in the face of complexity and uncertainty.

In line with this thinking, many organizations—from tech companies to professional services firms—have experimented with agile or flat designs that dismantle traditional forms of hierarchy to harness the distributed knowledge of specialized individuals.

But are there certain situations when the presence of a hierarchical structure could be useful to cope with complexity and uncertainty? In other words, could hierarchy and authority figures create agility even if the boss is no wiser than the subordinates, nor able to directly control or monitor their behavior?

In our research, we used a computational model to build “digital twins,” simulations of teams that possessed either hierarchical or flat structures. We investigated the function of authority in these teams and the structural role that bosses play. Our findings reveal that organizations which need to achieve agility (in the sense of rapid results) in environments that require coordinated action among team members may benefit from a hierarchical structure of influence in which a boss influences subordinates, more than the other way around.

Balancing variety-seeking and convergence

We discovered that flat organizations may explore too many options and take too long to make a decision, while hierarchical organizations may attain convergence more rapidly but can also miss out on identifying the very best alternatives. Therefore, hierarchies can be most useful when the benefits of making a good (if not the best) coordinated decision quickly outweigh the potential downsides of not finding the absolute best solution.

Crucially, this benefit of hierarchical influence is a purely structural effect and doesn’t depend on the characteristics of each role’s occupants within the structure. The “agents” who occupy the apex role in our computer-simulated hierarchies were no wiser than their subordinates and were incapable of perfectly controlling their actions.

When organizational adaptation requires all team members to contribute to the search for valuable interdependent actions, bosses provide stability while subordinates produce the variation needed for a search. Put simply, Dilbert’s boss can be useful by simply exercising some authority on his team.

These results offer a perspective on why hierarchical structures—in the form of multiple layers of asymmetric influence—may persist even when the leader has no distinguishing knowledge, foresight, or authority. Even within teams performing highly creative work, a hierarchical structure can be more useful than arms-length or peer-to-peer interactions if the team operates in task environments in which both search and coordination are important.

Why hierarchies persist

In the urge to flatten organizations and democratize hierarchies, there are some natural breaks. Pushing things to the limit by creating completely flat systems, where everyone exerts equal influence on each other, is unlikely to be the best approach to adaptation. These structures may not do well when the need for innovation also entails the need to coordinate.

Although organizations striving to implement flat structures can remove hierarchical layers, it may not be the best course of action for them to fully dispense with some degree of asymmetry in terms of influence. Consider online communities that were initially set up as flat systems but soon discovered they required some form of asymmetric influence, with certain members of the community taking on leadership roles in order to function.

The design challenge for managers who attempt to create alternatives to the traditional command-and-control hierarchy may be finding ways to preserve the benefits of asymmetric influence. However, they need to do this without creating disparities in power that can quash the diverse set of ideas of organizational members or lose the valuable sense of fairness and participation among employees.

First published Jan. 24, 2023, on INSEAD Knowledge.

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About The Authors

Phanish Puranam’s picture

Phanish Puranam

Phanish Puranam is the Roland Berger chaired professor of strategy and organization design at INSEAD. He is also the academic director of INSEAD’s Ph.D. program.

 

Daniel A. Levinthal’s picture

Daniel A. Levinthal

Daniel Levinthal is Professor of Corporate Strategy at the Wharton School, University of Pennsylvania. He has authored several works on business organization and adjustment within industry, and has expertise in business strategy. 

Özgecan Koçak’s picture

Özgecan Koçak

Özgecan Koçak is an associate professor of organization and management at Emory University’s Goizueta Business School, with previous teaching experience at Columbia Business School and Sabanci University. Her expertise lies in organizational science and corporate change, among many other business and management topics.