Falling Flat: Why Startups Need Hierarchical Structure

WHARTON MAN AGE MENT PROFES SOR SAEROM (Ronnie) Lee has a word of warning for aspiring entrepreneurs who envision an egalitarian workplace where there are no bosses and every employee ranks the same.

According to his latest research, startups with flat organizational structures often fail.

“Although many entrepreneurs dislike the notion of hierarchical structure and managers, they ultimately do need managers, and do need to plan ahead and design the appropriate hierarchical structure way earlier than they think,” he told the Wharton Business Daily show on SiriusXM.

In his study titled “The Myth of the Flat Startup: Reconsidering the Organizational Structure of Startups,” Lee pushes back against the popular YLHZ WKDW åUPV HVSHFLDOO\ new ventures, work best ZLWKRXW PDQDJHUV VWLaeLQJ creativity and getting in the ZD\ RI SURJUHVV +H VDLG LWÖV only natural for founders at the beginning of their journey to get caught up in the excitement of generatLQJ LGHDV DQG åQGLQJ WKH ULJKW SURGXFW PDUNHW ILW

But focusing solely on the near-term will cost them down the line when having a clear delineation of duties KHOSV åUPV WR VFDOH

“What many of them realize over time is that no matter how good the business idea is or how brilliant the team is, mismanagement can ultimately kill WKHLU EXVLQHVV Ù /HH VDLG “Unfortunately, there are many cases where startups fail simply due to the lack of management strucWXUH Ù

Lee found the most successful businesses that EHJLQ ZLWK D aeDW VWUXFWXUH usually start creating levels of management when they reach about 20 or 30 HPSOR\HHV $W WKDW VL]H good managers step in to keep order and prevent the company from descending LQWR FKDRV :LWKRXW VXSHUvision, employees may lose direction, drift into endless exploration, create projects WKH\ DUHQÖW FDSDEOH RI DFFRPSOLVKLQJ DQG åJKW ZLWK HDFK RWKHU

“With no managers to keep them in line, they can start competing for projects, and these competitions start to get out of control and result in conaeLFWV Ù /HH VDLG SRLQWLQJ out that male employees, who are typically the majority, tend to accumulate LQaeXHQFH LQ D SRZHU YDFXXP &RQVHTXHQWO\ WKH\ secure the most promising projects for themselves, leaving female and minority employees with lesser FRQWULEXWLRQV

Ø:KLOH D aeDW KLHUDUFK\ can foster experimentation and creativity at the early stage, it can lead to dysfunctional conflicts and coordination failure among employees, result in employee turnover, and ultimately lead to commerFLDO IDLOXUH Ù /HH VDLG

Striking the Right Balance

Lee acknowledged that LWÖV KDUG IRU HQWUHSUHQHXUV to balance the twin pursuits of creative innovation DQG FRPPHUFLDO VXFFHVV They often realize one at the expense of the other EHFDXVH LWÖV GLIILFXOW WR achieve both at the same WLPH 0RYLHV DUH D JUHDW H[DPSOH RI WKDW $UWLVWLF åOPV UDUHO\ PDNH WKH NLQG

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In the study, Lee found that the trade-off between the two desired outcomes can be mitigated by adopting the right organizational VWUXFWXUH 7KDWÖV ZK\ LW LV important for founders to consider what kind of hierarchy will work best, and ZKHQ WR LPSOHPHQW LW

“To commercially succeed, startups need to some extent limit their HPSOR\HHVÖ FUHDWLYH IUHHdom and prevent endless H[SORUDWLRQ RI LGHDV 7KH\ also need to cull ideas diplomatically without demoWLYDWLQJ RU FUHDWLQJ FRQaeLFW among employees, who tend to get emotionally attached to their ideas,” Lee VDLG Ø7KLV LV HDVLHU VDLG WKDQ GRQH Ù

$V WKH\ EXLOG KLHUDUFKLcal layers, founders may DOVR åQG LW KDUGHU WR UHWDLQ their original employees who were attracted to the job in the first place because the organization was aeDW ,Q VXFK FDVHV /HH VDLG LWÖV KHOSIXO IRU IRXQGHUV WR temper employee expectations by making it clear that managers will be added as WKH åUP JURZV

The key message for entrepreneurs is to think just as much about their people as the product, especially during those heady early GD\V RI WKH EXVLQHVV

Ø%HFDXVH LWÖV YHU\ GLIåFXOW WR PDNH WKH WUDQVLWLRQ IURP D aeDW WR D KLHUarchical structure while busily working on ideas, entrepreneurs need to plan ahead and have a structure in mind,” Lee VDLG

In related, forthcoming research, Lee and his co-authors conducted D åHOG H[SHULPHQW ZLWK 8,000 job candidates to examine whether startups that advertise a flat structure in job postings attract more IHPDOH DSSOLFDQWV &RQtrary to the common belief that women prefer a flat organization, as this structure would be more egalitarian than traditional hierarchies and provide a healthier work-life balance, they found that advertising a aeDW VWUXFWXUH GHFUHDVHV the female representation in the applicant pool by

Ø)HDWXULQJ D aeDW KLHUDUchy can inadvertently decrease diversity at a startup and ultimately hurt performance in the long run,” KH VDLG