The Flattening Firm

The Flattening Firm and Product Market Competition: The Effect of Trade Liberalization on Corporate Hierarchies

The essay “The Flattening Firm and Product Market Competition: The Effect of Trade Liberalization on Corporate Hierarchies,” written and published in 2010, focuses on organizational change, with hierarchies within firms adopting a style of fewer levels and also greater spans of influence. This is true even when there is little evidence to back up the changes. Establishing a link between increased foreign competition, which is inferred from a quasi-natural experiment, and firm flattening is the main goal of the author of this paper (Guadalupe & Wulf, 2010).

Adoption of Flat Firm Organization Structure

This essay provides an article with reference to the article by Guadalupe & Wulf, “The Flattening Firm and Product Market Competition: The Effect of Trade Liberalization on Corporate Hierarchies”. Corporations globally have been changed to focus more core sectors while outsourcing peripheral areas. In modern decades, more and more managers are reporting to the CEO directly with different reasons attributed to this. For example, firm growth, creation and addition of new positions, mergers, etc., however, these reasons explain a part of a trend. On the other hand, the author has identified the adoption of a flat, firm organization structure another reason as to why more division heads are reporting directly to the CEO (Guadalupe & Wulf, 2010). The author has deployed primary data collected from a confidential compensation survey, which was conducted by Hewitt Associations. The data were collected from 50 senior and middle positions, including even operational ones. The study measured two aspects (the breadth and depth), with the breadth, meaning CEO’s span of control, being defined by the total number of managers reporting to the CEO. Depth wise, the measure was represented by the number of positions between the Divisional CEO and the CEO, vertically.

Factors Behind the Flattening of Organizations

Drawing from the results, the number of managers or positions directly reporting to the CEO has increased. One of the contributing factors behind the flattening of organizations is changing in decision making, division manage as well as compensation incentives. As indicated in the article, trade liberalization contributes to division mangers becoming closer to the CEO with reference to the organization hierarchy. This can be attributed to increased roles of division managers. On the other hand, another reason as to why firms undergo reorganization is needed to cut costs. Under this initiative, firms cut managerial positions, hence division managers moving closer to the CEO. Another plausible reason as to why firms’ changes are a change in terms of organization scope. Such as due to liberalization, organizations may change scope of business such as in order to diversify risk and change in the overall structure.

Flattening of Firm Hierarchies

According to Guadalupe & Wulf (2010), firm hierarchies have been for the past decades flattening, with fewer levels and broader spans being adopted for their control. Using a unique panel-dataset, of organization structure and practices, the author managed to identify desired results over time from variations within organizational divisions. The article provides the findings that, US firms in the sector of manufacturing are more prone to liberalization, hence an increased cases of reduction in the number of levels in the organization hierarchy. Another change that accompanies this is a change in the compensation of the Division managers, with incentives being on performance based approach. The evidence provided by the article aligns with changing of decision making with reference to increase with reference to increased competition. Competition in an organization increased the quick and value decision making with organization, minimizing layers so as to improve quality and speed of decision making. More so, so as to improve information transmission speed.

Implications of Competition on Organizational Change

Through competition, numerous organizational firms have focused on core business, and hence becoming less diversified. However, the author identified no evidence connecting organizational changes with cost cutting efforts in an organization. Despite being a long article, it is an important piece of research perfect for understanding the role of product markets towards organizational change. The article establishes the causal effect; however the authors’ findings are a fraction of the factors behind the flattening of organizations. In terms of findings, the article points out that, managers reporting to CEO have increased position between CEO and lowest manager have decreased, with different factors attributed to the projected changes.

Conclusion

In conclusion, the article addresses the changing nature of corporate hierarchies. According to the article, the CEO’s span of control is on the increase while at the same time, the layers between managers and CEO is decreasing, which in turn is resulting in authority being pushed down the organization hierarchy. Additionally, as firms are becoming flatter while at the same time salary and wages across the hierarchy are becoming steeper. The article also addresses theories behind the organization flattening change. Competition has forced organization firms to become less physical and hence a change in their structure becoming flatter. The article remains a key source with regard to organizational change management more so towards flattening.

References

Guadalupe, M., & Wulf, J. (2010). The Flattening Firm and Product Market Competition: The Effect of Trade Liberalization on Corporate Hierarchies. American Economic Journal: Applied Economics, 2 (4), 105-127.