Startups often have an image of flat meritocracies with everyone chipping in wherever they can and no one having any more status than anyone else. Research from Wharton reminds us that such a structure isn’t always desirable.
“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,” the researcher says.
The need for hierarchy
The paper shows that while it can be tempting to get caught up in the constant buzz of new product development or trying to find market fit, this constant focus on the here and now cannot last forever and a clearer delineation of duties is vital if companies are to scale.
“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 their business,” the author explains. “Unfortunately, there are many cases where startups fail simply due to the lack of management structure.”
The study found that while most successful startups do indeed start with a flat and egalitarian structure, they start to introduce more formal layers of management once they scale to around 20 to 30 employees. It’s usually at this size that managers are required to provide a degree of order to the company’s operations so that employees don’t lose direction.
Indeed, a lack of structure can often result in employees squabbling among themselves as they each strive to create new ideas and projects that have to compete for resources. This highly competitive environment can favor male employees, especially as they are often in the majority, leaving females and minority employees frozen out.
“While a flat hierarchy 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 commercial failure,” the author says.
Getting the balance right
It’s often extremely difficult for entrepreneurs to get the balance right between creating new ideas and bringing them to market, which typically requires very different skillsets. As such, startups often achieve one at the expense of the other.
The author argues that this trade-off can be successfully managed by ensuring that the startup has the right organizational structure. By implementing the appropriate hierarchy, they believe that innovation and implementation can thrive alongside one another.
“To commercially succeed, startups need to some extent limit their employees’ creative freedom and prevent endless exploration of ideas,” they explain. “They also need to cull ideas diplomatically without demotivating or creating conflict among employees, who tend to get emotionally attached to their ideas.”
Of course, the flip side of introducing more hierarchy is that such structure may be unappealing to many of the founding team who were perhaps attracted to the flat and egalitarian nature of the startup. The author urges founders to make it clear to these founding employees that this will inevitably be the path the business goes down as it grows in order to temper any expectations of perpetual flatness.
Ultimately, the author urges entrepreneurs to give as much attention to exploitation as exploration, as it can be tempting in the early days of the business to focus exclusively on exploration.
“Because it’s very difficult to make the transition from a flat to a hierarchical structure while busily working on ideas, entrepreneurs need to plan ahead and have a structure in mind,” the author concludes.
