The Evolution of Management Structure: Why Innovative Companies Choose Networks Over Hierarchies

by Bianca Lesmana

During the Industrial Revolution, the manufacturing process rapidly evolved from manual to machine production. As a consequence, mom-and-pop shops gave way to big corporations that employed large workforces with prescribed processes. To sustain efficiency in this new way of working, employees had to be easily trainable and easily replaceable. Because workers were not responsible for designing the prescribed processes, individual autonomy declined.

This method of having workers only be responsible for a part of the production process was called division of labor. It was amazing innovation for its time. It allowed workers to specialize in the small tasks they were assigned and made the overall production process much more efficient.

And so traditional hierarchical structure rose to prominence…

The hierarchical structure of management, popularized during the Industrial Revolution, created a centralization of authority where only a select few were needed to determine the goals of the business. These bosses would instruct their next-in-line managers, who would then command their workers. This structure effectively distributed the production process through a clear chain of command. It was simple; it was structured; and most importantly, it allowed the substitution of autonomous employees for workers who served one function. Hierarchical management made division of labor possible.

In the early twentieth century, bringing people together to communicate was expensive and inefficient. Having information flow in only one direction—from bosses to workers—made things significantly easier to manage. This meant that out-of-the-box thinking was reserved for leaders. Creativity and idea sharing amongst lower level employees was simply not practical. Thus, aside from making division of labor possible, hierarchies allowed large companies to effectively organize themselves with little internal communication or employee feedback; it was the ultimate solution for effectively organizing the work of large numbers of people.

When the world evolved, however, traditional hierarchies could no longer keep up.

The rapid emergence of the internet, at the start of the twenty-first century, brought about a network society that connected markets, competitors, customers, and suppliers. Suddenly, communication became cheap and information flowed freely. Large groups of people from all around the world could easily connect to exchange information, news, and ideas. The arrival of Google, Yahoo, and Wikipedia empowered workers. People were no longer satisfied with being cogs in a machine. They had knowledge at their fingertips and began to crave responsibility and autonomy. The factors that had previously supported hierarchies were displaced by technological developments that strongly favored networks.

As a result, the top down flow of information became an illogical way of doing business. Because everyone had access to knowledge, bosses were no longer necessarily better informed than workers. A pure division of labor, where one worker was entirely disconnected from the tasks assigned to another, also no longer made sense. As communication became affordable and instantaneous, keeping departments siloed was not only unproductive, but, more importantly, inefficient.

The failure of the hierarchical structure in the Information Age led to the rise of the network structure of management.

By taking advantage of the internet’s ability to connect individuals, innovative organizations began building peer-to-peer networks that could quickly respond and adapt to change. The network structure is a more distributed management style that relies on self-organizing teams to make decisions. When problems pop up, workers can fix issues without having to go through multiple channels and are more efficient as a result.  Also, because employees have more responsibility, access to more knowledge, and the power to control their own processes, less middle management is required and operational expenses decrease. Companies not only have better, faster, and more invested workers, but also lower costs and higher profits.

The success of the network structure can be found in many industries, even in traditionally hierarchical ones. Nucor Corporation, a manufacturing company that displayed a very turbulent performance throughout its century-long history, is now one of the largest producers of steel in the United States. In the mid 1960s, Nucor went through an organizational redesign and came out stronger; their solution: network structure. Nucor empowers their workers. Those who actually perform the tasks are the ones who make operating decisions. By having the ability to make their own decisions, workers not only work smarter but also faster.

While building hierarchical structures may have been the logical solution for organizing workers in the Industrial Age, network organizations fare better in the Information Age. By making use of modern technology and communication strategies, the network structure of management is the most fitting organizational structure for the new challenges of a rapidly changing world.  

Bianca Lesmana is an Associate at Optimity Advisors.