Impact of Changes to Organizational Hierarchy on Competitiveness

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Impact of Changes to Organizational Hierarchy on Competitiveness

Modern businesses operating in competitive environments are facing an urgent need to restructure in response to changing markets (Král & Králová, 2016). To conquer these markets, businesses have to be adaptable and inventive. Many studies attribute declining productivity and competitiveness in the face of unpredictable markets to inefficiencies in an organizational structure, which hamper organizational “capacity to innovate” (Dekoulou & Trivellas, 2017). For instance, studies show that rigid and bureaucratic structures could be too restrictive for competitiveness to be sustained. However, other studies show that both heavily hierarchical and smaller chains of commands have their benefits. Consequently, this paper draws from various sources to discuss the impacts of changes to organizational hierarchy on competitiveness. While subsequent evidence shows strong correlations between changes to the organizational hierarchies and competitiveness, the findings suggest that such adjustments do not always yield positive outcomes on competitiveness.

Both empirical and theoretical studies have shown a positive correlation between competitiveness and innovation under the mediation of structural changes. For instance, findings from a study by Teece, Peteraf, and Leih (2016) and Joseph, Klingebiel, and Wilson (2016) show that workers’ output is positively impacted by the simplified, less hierarchical structure as the former facilitates interaction and the capacity to generate novel ideas, necessary for enhancing individual and corporate output and ideal responses to strategic challenges (Teece, Peteraf & Leih, 2016; Joseph, Klingebiel & Wilson, 2016).

Similar studies by Gaspary, Moura, and Wegner (2020) identify key concomitants of highly hierarchical structures such as centralization, formalization, job codification, and vertical integration with restricted growth and competitiveness in the long term. In particular, the study attributes the afforested structure with the exclusion of workers from decision making, a hierarchical authority which demands that every decision must be authorized by senior management, continual surveillance for policy contraventions, multiple levels in the chain of command, and vertical communication could be mitigated by flattened hierarchies which promote cross-functional team engagements, communication, and rapid exchange of ideas (Gaspary, Moura  & Wegner, 2020). These are essential for increasing innovation, and competitiveness.

Primary Changes that Should be Done on the Organizational Structure of an Enterprise to Create a Competitive Base

A cross-sectional study by Skrastins and Vig (2019) on the impact of changes to organizational hierarchy on a large banking portfolio comprising of 2,000 bank branches in India associated increased “hierarchization” of branch operations with mixed outcomes, namely,  increased “credit rationing, reduction in loan performance, and structured credit financing procedures. Moreover, empirical evidence from the study suggests that hierarchical structures yielded positive outcomes in organizations experiencing heightened corruption, outlining the positives of organizational pyramids in discouraging “rent-seeking” behavior (Skrastins & Vig, 2019). In general, the data also show that hierarchical structures could hurt competitiveness through delays, loss, or distortion of information within the bureaucracy.

An exploratory study by Wang, Chen, and Yang (2020) on changes to organizational hierarchy through flattening of chains of command and decentralization, found that hierarchical adjustments could impact the exercise of power and management in affected firms. For instance, studies have since forecasted a reduction of power level and increased management range in response to intricacies of the “external business environment”, vicious competition, and highly technological environment. Inferentially, the preceding prospect shows that companies that will not flatten their hierarchies will in a few years be sufficiently uncompetitive to derive value from global supply chains. Flattening or delayering could enhance business efficiency by promoting “horizontal communication” and dexterity, thus speeding up corporate-level dissemination of knowledge and information and more efficient cross-functional collaboration, sharing, and invention among various divisions. Overall, in contrast to hierarchical structures, flat structures are elastic and suitable for “multidimensional and multi-directional information transmission” to enhance risk-taking, teamwork, and cross-team innovation in tech-mediated, dynamic business settings. The ideal hierarchy is presented in table 1 below:

Table 1: impact of  organisational structure on work environment

Source: Gaspary, Moura & Wegner (2020)

Comparable explorations by Liu and Moskvina (2016) describes the flattening or delayering of organizational hierarchy as the most potent, yet achievable strategy for competitiveness in the past 50 years. Indeed, extant reviews show that several multinational firms delayered their corporate structures in the period under review. Consequently, the mean number of directly answerable to the chief executive rose from 4.7 in 1980 to 9.8 in 1999 (Liu and Moskvina, 2016). This trend was preceded by the realization by corporate managers of the necessity to empower staff through added responsibilities in “decision making” to fast-track competitiveness. In addition, enhanced flexibility of employees, devolution of “decision making” and enhanced conveyance of information, is idealized for facilitating rapid dissemination of decisions. In general, flattening is viewed as a strategy for the democratization of the workplace. Nonetheless, flattening could also achieve undesirable conjuring negative sentiments from top managers bent on retaining greater control and decision making at the top of the flattened organization (Liu and Moskvina, 2016).

In line with hierarchical delayering paradigms, Tworek, Walecka-Jankowska, and Zgrzywa-Ziemak (2019) recommend changes to a hierarchical structure through the adoption of simple structures to complex business environments.  The simplicity trajectory as an antithesis to bureaucracies in large corporations has been popularized by empirical studies through concrete proofs that red tape and extreme hierarchism substantially yield adverse outcomes on “productivity, profits, the level of customer service, corporate governance and product development” (Leff & Zolkos, 2015; Hopej et al., 2017). Correspondingly, studies by Leff and Zolkos, (2015) delineate the corporate hierarchy as the most convoluted part of the organization and most appropriate for restructuring (Leff & Zolkos, 2015). As such, considerable focus has been made to fundamental remedies designed for greater elasticity and malleability as far as an adjustment to harsh, multifarious, fast-paced, and erratic business environments are concerned (Leff & Zolkos, 2015). However, in defense of complex business hierarchies, many studies regard modern “structural solutions” as incapable of satisfying the simplicity condition. For instance, studies show that upwards of 50% of executives in modern firms delineate their corporate structures as “very or extremely complex” as 1% consider the structure as satisfactorily straightforward (Leff & Zolkos, 2015). Additionally, there are difficulties in understanding the notion of straightforward structures (Hopej-Kamińska et al., 2015). Anticipated outomes from hierarchical changes are provided in table 2.

Table 2: Hierarchical Change Outcomes

Source: Zbirenko, Andersson and Medina (2014)

The simplexity hierarchy, demarcated in modern scholarship as a flat, two-tier chain of command with an ambiguous scope of “specialization, formalization, centralization, and standardization (Tworek, Walecka-Jankowska and  Zgrzywa-Ziemak, 2019). In practice, such hierarchical structures tend to be restrained as they are actuated by a singular actor, usually, a senior staff who defines operational procedures for the entire team, leaving no wiggle room for engagement (Tworek, Walecka-Jankowska and  Zgrzywa-Ziemak, 2019).

In practice, a fairly recent notion of a simple structure focused on minimization of environmental complexity through generalization and limitation of information and options available to members has gained traction in a process that ensures “sense-making is undertaken by only a few agents whose roles place them at the top of the hierarchy” (Tworek, Walecka-Jankowska and  Zgrzywa-Ziemak, 2019). The same study also demarcates that the preceding version of a simple structure is ineffective for complicated and dynamic occupational contexts. Examples of such contexts include sensitive undertakings in military installations, assembly lines, and pharmaceuticals.

Conclusively, studies have shown that changes to the organizational hierarchy are necessary for firms angling to address declining competitiveness in unpredictable markets. In particular, both empirical and theoretical evidence attribute inefficiencies in organizational structure to organizational limitations that inhibit the achievement of innovativeness. In this regard, rigid and hierarchical organizational structures are regarded as too fixed to sustain competitiveness. Yet, strategic shifts to flatter hierarchical structures or modification of existing structures to simplified versions will not always yield positive outcomes.