For a long time, business has been dominated by hierarchical organizational structures with a multi-level chain of command, with business administration having key responsibilities. But the trend was reversed by an increasing demand for adapting swiftly to unstable market conditions — a feature mostly characteristic for startups. The new trend is the companies’ transition from the traditional management structure to a flatter (horizontal) one, which ensures the necessary flexibility and mobility in a dynamic environment.
Let’s learn in detail what vertical and horizontal management hierarchies are, see their advantages and disadvantages, and also determine which one is more suitable for a startup. We’ll start with the concept of organizational structure types that attributes distinct behavior patterns to each business.
Gareth Morgan’s theory of images of organizations
Business theorist, economist, and investment manager Gareth Morgan created the concept of metaphors for organizations, stating that there are no universal models and methods of managing a company. If one were to define such models, they would immediately turn out to be out of date or even irrelevant to the market situation. Blindly adopting them in a company usually leads to setbacks and flops. Meanwhile, the businessman’s task is to quickly navigate in a changing environment, selecting suitable tools for managing their enterprise.
In his book Images of Organization, Gareth Morgan identified several types of companies and described their behavior patterns, management models, and working principles. Below, you can see the list of the most common types:
- Organization as a machine — it’s a rational enterprise focused on achieving its goals. The prevailing concepts are scientific management and bureaucratic organization. Machines are characterized by a generally accepted management structure where each employee plays a role strictly defined in established corporate standards, reporting to their manager who controls the workflow and discipline. Diligence is more important than initiative. Being part of the team means collecting individual efforts to achieve a common objective. This approach only works successfully when the market and the enterprise are stable.
- Organization as a political system — each employee has their own goals, plans, and opinion on how well a company operates. As a result, internal contradictions arise and some types of coalitions are formed. Such informal communities can wield even more power than actual company executives. If an employee intends to change something, they must attract supporters using any applicable methods, from negotiations to bidding.
- Organization as an organism — it’s all about the ability to adapt to a dynamic environment. The company is a flexible open system, and to guarantee its efficient functioning, it considers both its external and internal needs (i.e. individual requests and/or team requests). What actually matters is the health of each employee, group, and business as a whole, which is supported by aligning their goals.
- Organization as flux and transformation — being a part of the environment, an enterprise has the ability to self-renew. The management structure cannot form and control processes consciously. Corporate life does not obey the rules of causality, there is neither an exact plan nor a forecast; instead, a company has a realistic picture of an environment it exists in. Tensions within stimulate a company to come up with new activities.
- Organization as a brain is a system constantly engaged in learning, processing information, and applying new skills. Each of its elements has full details on an enterprise, as well as the potential to perform any function.
A company can combine several metaphors, for instance, in separate divisions. These images can change as the enterprise develops or undergoes external influence. Each type of organization requires a specific management structure, from a complex multi-level hierarchy to the most simple one.
Vertical vs horizontal organizational structure
A vertical (hierarchical) structure has a multilevel chain of command. Each stage has a narrow control range and a clear distribution of responsibilities and powers, which makes it easier to monitor employees and business processes.
The traditional (mechanistic) structure is often used by large and medium-sized companies which reduces their flexibility and agility. Its tight regulation and a large number of management layers slow down the speed of decision-making. That’s why such companies are difficult to respond to market changes and implement innovations. A vertical structure with a long chain of links works effectively only in a stable and certain environment, solving complex and large-scale problems.
In the horizontal (flat) structure, there is a limited number of levels of hierarchy, which makes it more flexible. It is called horizontal because each stage has a wide control range. The structure is focused on empowering employees; the chain of command does not play that big of a role. By minimizing levels and removing middle management almost entirely, a company speeds up its decision-making processes, responds and adapts to changes in the market, all while increasing its employees’ independence and dedication.
Instead of managers, such an enterprise is managed by a common goal, transparent processes, plans, and metrics. The flat structure is based on the principle of holacracy. Power is decentralized, so each employee has an absolute authority to affect their company’s life — all within their framework. For this, of course, employees must have a high level of self-organization and responsibility. Turquoise organizations operate according to the principles of holacracy, meaning that they have a flat management structure and consist of self-governing teams.
Advantages and disadvantages
The choice of a suitable organizational structure depends on many factors: the size of the company, business and market specifics, and so on. Both vertical and horizontal structures have their nuances, pros, and cons, which are important to consider.
The advantages of a vertical structure:
- effective coordination of working processes
- clarity and ease of control
- no task overload.
Issues begin to show when the structure gets too high. Its disadvantages:
- slower approvals and decision-making
- difficulties in exchanging information via vertical communication
- initiatives are suppressed, while execution is prioritized
- competencies of employees are not obvious
- career paths are too long
- stagnation and diffusion of responsibility
- low employee engagement.
This hinders the company’s progress and rapid development. However, this structure might be suitable for an enterprise that is not interested in further growth and expansion, enjoys a position of stability in the market, and solves complex large-scale problems.
The advantages of a horizontal management structure:
- flexibility and ability to adapt to changes
- quick reactions and decision-making
- faster market launches
- accessible, informal communication between employers and workers
- implementing working solutions instead of perfect ones
- high employee involvement encourages initiative and creativity
- employee powers can expand within their potential (i.e. if a marketer is competent in HR, they may take over HR processes)
- solving problems is a priority, while organizational matters are not
- salaries for management are saved on
- ample opportunities for employees to express themselves.
Disadvantages of a horizontal structure:
- difficult coordination and control of business processes
- a high level of self-organization and a sense of responsibility are must-have
- overburdened management
- there may be confusion about obligations and powers.
Why startups need a flat management structure
In order to survive, young companies must be economical and able to quickly adapt to market changes, evolving with the situation. A multilevel organization cannot afford this kind of agility and flexibility. Therefore, to be able to develop, a startup needs to keep its hierarchy under control, not allowing levels of management to multiply.
In a vertical structure, employees are limited by job descriptions (which rarely match reality) and their managers’ will. Every level considers its decisions carefully and for a long time. This process can be accelerated only by cutting some corners. Responsibilities are diffused, and there is no clear understanding of who should be held accountable. The CEO calls out the CTO, the CTO calls out a project manager, the latter blames a product owner, and they in turn jump upon a team lead and/or developers. Everyone has it coming, but no one wants to correct actual mistakes.
In addition, vertical structures often reject potentially promising ideas. The more levels a new initiative goes through at the approval stage, the higher the likelihood of it being rejected. Top managers might never even get their hands on their employees’ ideas as they fail to be approved by lower management. Working towards a promotion, middle managers only bring in the projects they believe to be the most promising, sometimes distorting them. This is not critical for stable large enterprises, but it can ruin a small company.
The flat structure makes it possible to avoid such problems. It’s most suitable for companies where:
- The environment is constantly changing, requiring a quick response,
- innovation plays a big role,
- local goals always generate a common task for employees.
A startup meets all the criteria. It is a small team of people with high motivation and fiery eyes, so a hierarchy is not needed. The working process is transparent, its efficiency is achieved by constant collaboration, decisions are discussed, adopted, and implemented on an ongoing basis.
As a startup develops or a business scales up, it will become a necessity to add more levels. The structure will become less flat, with the hierarchy getting more complex. However, following the principles of holacracy will help maintain freedom and optimal mobility.
Even for an already established enterprise, it is advisable to keep track of its levels and consider removing some of them from time to time. While doing so, the scope of control will expand. Responsibilities will be distributed among the remaining elements of the hierarchy or assigned to the newly-added horizontal ones. This reduces a company’s costs while increasing its mobility and efficiency. However, such changes should be conducted as thoughtfully as possible, since irrational abolition can overload both managers and ordinary employees.
Rules and principles for building a flat structure
A flat structure, as opposed to a hierarchical one, aims to replace the hierarchy of people with a hierarchy of work. The fewer levels the system contains, the better. Each employee has their own opinion and acts autonomously within their role. Employees can choose tasks and projects to take care of.
Below, you can see the basic principles of the flat management structure.
- A startup’s roles and tasks are determined collectively. They are updated and refined regularly to satisfy the changing needs of an enterprise and the market.
- Having enough desire and potential, each employee can perform several roles. For example, a programmer can be additionally engaged in SEO, a marketer takes up HR processes, and so on.
- To fulfill a task, a person gets unrestricted (sometimes totalitarian) rights. If an employee deals with their job, higher management does not interfere.
- The arising problems are solved either by a single employee (if they only concern this employee’s powers) or a whole team (if they affect an enterprise on a bigger scale).
- To streamline the processes, it’s recommended that an organization develops working rules (holacracy calls them a constitution), i.e. a document reflecting responsibilities, powers of the participants, a procedure for changing a startup’s principles, and so on. This makes the structure transparent to everyone.
It’s important to understand that the structure with no levels is only possible at the initial project phase, and sometimes not at all. In addition, some departments’ activity is impossible without hierarchy. For example, you can’t allow excessive freedom and creativity in financial services. In such market sectors, authority is delegated from the top down and strictly limited.
So, to build a startup with a flat organizational structure, the founder must be ready:
- to abandon the traditional multi-level management hierarchy, giving employees full independence,
- to avoid regulating and controlling processes and personnel,
- to ensure good communication between employees and management by creating an enabling environment,
- to hire people with an entrepreneurial mindset, a high level of self-organization, and a sense of responsibility,
- to ensure transparency of all decisions and provide employees with the resources they need.
Companies with a horizontal structure
For a startup, a flat management structure is almost a natural habitat. However, for an already established organization, a transition can be a real challenge.
Retiring and implementing such flexible systems requires some careful planning and gradualism. Otherwise, several problems may arise, from the managers getting overworked due to fear of losing their jobs to the reduction of the employees’ responsibilities and efficiency. In addition, the transition requires a significant investment of time, finance, and other resources.
However, a correct transition can multiply a company’s efficiency. It is proven by introducing flexible management systems not only by startups but also by large market players. Researchers at McKinsey & Company observe gradual internal transformations of such giants as Google, Netflix, Spotify, and the ING banking group.
It’s essential to consider that for certain industries, different degrees of decentralization are acceptable. In some, it might be minimal (i.e. manufacturing). Not all companies can operate effectively within a flat organizational structure.
Let’s see examples of enterprises where one of them established a horizontal hierarchy from the outset while others only switched to it in adulthood.
Gismart is a music apps and games developer with over 350 million downloads. Initially, the company chose a flat management structure and took all possible measures to maintain it during the growth period. The founders came to this decision when they saw that adding 40 more people to the small team of 10 would not increase productivity 4x.
The founders retained relatively independent product teams. Each team is headed by a Project Manager, and each product is headed by a Product Owner. Then, there are service teams supporting the needs of products (Back-end, Business Intelligence, and Marketing). The main challenge is to provide freedom of initiative and decision-making to product teams since the entire system is built around them. Above the teams, there are founders who solve business problems. This structure allows Gismart to quickly adapt to the needs of the market and accelerate the introduction of new products.
The company is known for its leader. Jack Welch worked as CEO from 1981 to 2001 and actively fought against bureaucracy and hierarchy.
Immediately after his appointment, Welch turned General Electric upside down by revolutionizing towards a flat structure. The number of hierarchy levels dropped from 9 to 6, and more than 120 000 people got reduced. It earned Welch his nickname Neutron Jack (by analogy with the neutron bomb). Welch got rid of the so-called leveling, demanding dedication and hard work from employees instead. Every year, he assessed his workers, dividing them into three classes according to their performance. Those who got into the first class could count on bonuses and incentives, while the third-class employees were fired.
After his reforms, the enterprise efficiency has increased dramatically, profit skyrocketing more than 4x. During the reign of Jack Welch, the company’s capitalization grew from $12 billion to $280 billion. During that time, General Electric earned a total of $16 billion from the sale and closure of non-core assets.
CEO of a large online shoe store Zappos, Tony Hsieh decided to introduce a new organizational system in 2013. The transition took two years to complete and culminated in 2015. Tony Hsieh took the flat structure to a whole new level by successfully implementing principles of holacracy.
The company now consists of self-governing teams, and the hierarchy levels are reduced as much as possible, with vertical ones replaced by horizontals. In 2015, the company’s transition to a new structure was fiercely criticized. However, today Zappos can be found in business schools’ textbooks as an example of improving a company’s efficiency.
Employees establish their duties by themselves, having personal responsibility for their fulfillment. Company policy states that a happy employee leaves consumers happy. The offices have a family atmosphere, and there is even a pet zoo. Zappos employees are as customer-oriented as possible. All candidates are trained for 4 months upon hiring, but before the start of the course, everyone is offered $2,000 if they refuse to be employed by the company. It’s noteworthy that less than 1% take the offer.
Flexible management is key to a startup’s survival
In conclusion, we note once again that the world is changing too rapidly. Classical hierarchical structures are not always able to quickly respond to such changes.
Large companies can afford some leisure time and procrastination, but for startups, it’s a direct road to failure. The traditional sluggish systems are being replaced by flexible management, which is vital for young organizations. Startup employees must be able to take on different roles, unite towards a common goal, and feel a personal responsibility to the team.