Why Managers Matter

Why Managers Matter Plot Summary

Introduction

The rise of digital technology and knowledge work has sparked a popular narrative that traditional hierarchies are outdated relics of the industrial age. Many management gurus and tech leaders advocate for "bossless" organizations where employees self-organize without formal authority structures. This narrative, while appealing, fundamentally misunderstands the nature and purpose of hierarchy in organizations. Hierarchy persists not because of organizational inertia or power-hungry executives, but because it effectively addresses the perennial challenges of coordination and cooperation that all collective endeavors face. The evidence from both research and practice suggests that well-designed hierarchies remain essential even in our digital, knowledge-intensive economy. Companies that have experimented with radical decentralization often reintroduce more traditional structures when they encounter coordination problems and strategic drift. Rather than eliminating hierarchy, successful organizations transform how authority functions—creating frameworks that enable autonomy while maintaining necessary alignment. Understanding this evolution offers crucial insights for leaders seeking to build organizations that harness human potential while achieving collective goals in increasingly complex environments.

Chapter 1: The Persistence of Hierarchy in Modern Organizations

In recent years, a powerful narrative has emerged suggesting that traditional management hierarchies are outdated relics of the industrial age. This view holds that in our knowledge-based, networked economy, companies should flatten their structures, eliminate bosses, and empower workers to make their own decisions. The appeal of this narrative is undeniable - who wouldn't want to work in an environment free from micromanagement, where creativity flourishes and employees feel valued and autonomous? Yet this perspective fundamentally misunderstands the nature and purpose of managerial authority in organizations. Hierarchy, properly understood, is not primarily about control or domination but about coordination and cooperation. Even in our digital age, the problems of getting people to work together effectively toward common goals remain as challenging as ever. The evidence suggests that well-designed hierarchical structures continue to offer the most efficient solution to these perennial organizational problems, albeit in forms that have evolved to meet contemporary needs and expectations. The persistence of hierarchy isn't merely organizational inertia or resistance to change. Rather, hierarchy serves essential functions in coordinating complex activities and motivating cooperation among individuals with different interests. Companies that have experimented with radical decentralization, such as Oticon's "spaghetti organization," often revert to more traditional structures when they encounter coordination problems, conflicts over resources, or difficulties in strategic decision-making. This pattern suggests that hierarchy isn't simply a relic of the industrial age but continues to provide value in the modern economy. Hierarchy remains prevalent across organizations of all types and sizes because it effectively addresses fundamental challenges of coordination and cooperation. While the specific form of hierarchy may evolve—with more delegation, fewer layers, and greater employee autonomy—the basic structure persists because it works. Companies need mechanisms to align activities, resolve conflicts, and make strategic decisions, especially in environments characterized by complexity, interdependence, and uncertainty. Far from being obsolete, hierarchy may be more important than ever in knowledge-intensive industries where coordinating specialized expertise is crucial. As economies have shifted from manufacturing to services and knowledge work, the nature of managerial authority has changed. Today's managers focus less on direct supervision and more on creating systems, processes, and cultures that enable employees to exercise judgment and creativity within a coherent framework. This evolution represents not the death of hierarchy but its adaptation to new circumstances. The most successful organizations find the right balance between centralization and decentralization, adjusting their approach based on the specific tasks, technologies, and environments they face.

Chapter 2: Coordination and Cooperation: The Core Functions of Hierarchy

At its core, hierarchy addresses two universal challenges that all organizations face: coordination and cooperation. Coordination involves determining what needs to be done, by whom, when, how, and in what quantities. It requires planning, communication, and alignment of activities across individuals and groups. Cooperation, on the other hand, concerns motivating people to act in the organization's interest even when doing so may conflict with their personal preferences. Both challenges are fundamental to collective action and become increasingly complex as organizations grow in size and scope. Markets can solve coordination and cooperation problems through prices and voluntary exchange. When demand for a product rises, prices increase, signaling producers to make more. When quality declines, customers buy less, incentivizing improvements. As economist F.A. Hayek famously argued, prices efficiently aggregate and communicate dispersed knowledge about resources, preferences, and opportunities. But markets have limitations. They work best when transactions are simple, standardized, and infrequent, and when participants have similar information and power. Many activities within organizations don't meet these conditions. Hierarchy offers an alternative solution. By establishing clear lines of authority, roles, and responsibilities, it reduces the need for constant negotiation and renegotiation. Managers can direct resources, resolve conflicts, and make decisions that bind multiple parties. They can also monitor performance, provide feedback, and administer rewards and sanctions. These functions become especially valuable when activities are complex, interdependent, and uncertain—precisely the conditions that characterize many modern organizations. Ronald Coase, who won the Nobel Prize for his work on why firms exist, argued that hierarchy emerges when the "transaction costs" of using markets—the costs of finding partners, negotiating terms, writing contracts, and enforcing agreements—exceed the costs of organizing activities within a firm. His colleague Oliver Williamson extended this insight, showing how hierarchy creates an internal system of governance based on "forbearance," where disputes are resolved through managerial authority rather than formal legal processes. This approach can be more efficient and adaptive than relying on external courts and contracts. Chester Barnard, a business executive who wrote the classic book "The Functions of the Executive," emphasized that effective hierarchy isn't merely about command and control. It also involves defining organizational purpose, establishing communication systems, and securing employee cooperation through both material incentives and psychological satisfaction. Far from being oppressive, well-designed hierarchies enable human collaboration by providing structure, clarity, and meaning. They reduce conflict, align efforts, and create conditions where individuals can contribute their unique talents to collective endeavors. The evidence that hierarchy matters comes from multiple sources. Studies show that when CEOs die unexpectedly, company performance declines significantly, suggesting that leadership at the top makes a difference. Research on "extreme action teams" in settings like emergency rooms reveals that dynamic delegation—where authority shifts based on expertise and circumstances—improves outcomes while providing learning opportunities. Even self-managing teams benefit from clear frameworks, guidelines, and occasional intervention from higher authorities. The key isn't eliminating hierarchy but designing it appropriately for the specific context.

Chapter 3: The Myth of Bossless Companies: Evidence and Reality

The allure of bossless organizations is powerful. Imagine workplaces where employees are fully empowered, bureaucracy is minimal, creativity flourishes, and everyone contributes their best without the constraints of traditional management. Companies like Valve, with its employee handbook proclaiming "we don't have any management," and Zappos, which implemented the Holacracy system that replaces managers with self-governing circles, seem to offer glimpses of this utopian vision. Their stories inspire others to question conventional organizational models and experiment with radical alternatives. Yet closer examination reveals a more nuanced picture. Valve may lack formal managers, but its founder Gabe Newell wields enormous influence over strategic decisions. The company's flat structure enables peer-based collaboration but also creates informal hierarchies based on tenure, reputation, and social connections. Former employees have described the environment as "a lot like high school," with cliques and popularity contests determining who works on prestigious projects. Similarly, Zappos' experiment with Holacracy led to significant employee turnover and eventually a quiet retreat from its most radical elements. The company maintained aspects of the system but reintroduced more traditional leadership roles. Other celebrated examples of bosslessness show similar patterns. Oticon's spaghetti organization, which eliminated departments and allowed employees to choose their projects, initially boosted innovation but eventually created coordination problems, resource conflicts, and strategic drift. The company later reintroduced more structure while preserving elements of flexibility. W.L. Gore, known for its "lattice" organization without traditional bosses, actually maintains clear leadership roles, performance evaluation systems, and strategic direction from the top. These companies haven't eliminated hierarchy but reconfigured it in ways that provide more autonomy within a coherent framework. The reality is that completely bossless organizations face inherent challenges. Without formal coordination mechanisms, they struggle with resource allocation, strategic alignment, and conflict resolution. Decision-making can become slow and cumbersome as consensus must be built for each issue. Informal hierarchies emerge based on factors like charisma, technical expertise, or social connections, potentially creating less transparent and accountable power structures than formal ones. As organizations grow and face more complex environments, these problems intensify, often leading to the reintroduction of more explicit hierarchical elements. This doesn't mean that traditional command-and-control management is the answer. Modern organizations benefit from significant delegation, employee involvement, and flexible structures. But rather than eliminating hierarchy, successful companies adapt it to their specific contexts. They clarify which decisions belong where, establish transparent processes for resolving disputes, and build cultures that balance autonomy with accountability. They recognize that hierarchy serves essential functions that don't disappear simply because we wish they would. The challenge isn't to become bossless but to design hierarchies that enable rather than constrain human potential.

Chapter 4: Knowledge Dispersion and the Evolution of Managerial Authority

In today's knowledge economy, expertise is widely distributed throughout organizations. Engineers know more about technical details than their managers. Salespeople understand customer needs better than executives. Frontline workers have insights about operations that those in headquarters lack. This dispersion of knowledge creates a fundamental tension: those with formal authority often don't possess all the information needed to make optimal decisions, while those with relevant knowledge may lack decision rights. How should organizations respond to this challenge? The bossless company narrative suggests a simple solution: push decision-making down to those with the relevant knowledge. Let teams self-organize, eliminate formal management positions, and trust employees to make the right choices. This approach has intuitive appeal, especially for knowledge workers who value autonomy and resent micromanagement. It also aligns with broader cultural trends emphasizing empowerment, participation, and the questioning of traditional authority. Companies like Morning Star, which processes tomatoes using a system of peer contracts rather than managerial directives, are held up as models of this approach. However, the reality is more complex. Knowledge dispersion doesn't eliminate the need for hierarchy but changes how it functions. Rather than telling employees exactly what to do, managers increasingly focus on setting direction, establishing boundaries, creating processes, and building capabilities. They delegate specific decisions while retaining oversight of the overall system. This approach, which Herbert Simon called "authority of the last resort," recognizes that employees often know best how to perform their tasks but still need coordination and alignment with organizational goals. The key question isn't whether to have hierarchy but what kind of hierarchy best fits the situation. When tasks are simple, standardized, and independent, extensive delegation makes sense. Morning Star's tomato processing operations involve well-understood technologies and linear processes, making peer coordination feasible. But when activities are complex, interdependent, and uncertain—as in product development, strategic repositioning, or crisis response—more centralized direction becomes valuable. Even innovative companies like Apple maintain strong hierarchical elements, with top executives making critical decisions about product design, features, and timing. Knowledge dispersion also affects how managers exercise authority. In traditional settings, managers could rely on their superior expertise to direct subordinates. Today, they increasingly act as facilitators, integrators, and boundary-spanners. They create conditions for knowledge sharing, resolve conflicts between specialists, and translate between technical and business perspectives. These roles require different skills than traditional command-and-control management but remain essential for organizational effectiveness. The manager becomes less of a technical expert and more of a social architect, designing systems that enable others to apply their expertise productively.

Chapter 5: How Well-Designed Hierarchies Enable Innovation and Adaptability

Contrary to popular belief, hierarchy can actually promote innovation and entrepreneurship rather than stifle them. The conventional wisdom suggests that large, hierarchical organizations are inherently resistant to change, trapped by bureaucratic processes and vested interests in the status quo. Small startups and flat organizations supposedly have advantages in speed, flexibility, and creative thinking. While there's some truth to this perspective, it overlooks the ways that well-designed hierarchies can systematically support innovation and entrepreneurial initiatives. Hierarchy provides essential infrastructure for innovation. It allocates resources to promising projects, establishes processes for evaluating ideas, and creates mechanisms for scaling successful experiments. Consider Google's "X" division (formerly Google X), which develops "moonshot" technologies like self-driving cars and delivery drones. Far from being a completely flat organization, X has clear leadership, structured development processes, and explicit criteria for advancing projects. This framework enables creative exploration while ensuring that resources flow to the most promising opportunities. Without such structure, innovation efforts can become scattered, underfunded, or disconnected from organizational goals. Hierarchy also helps balance what scholars call "exploration" (searching for new possibilities) and "exploitation" (refining existing competencies). Organizations need both activities but face tensions between them. Exploration requires experimentation, tolerance for failure, and longer time horizons, while exploitation demands efficiency, reliability, and immediate results. Hierarchy can manage this tension by creating differentiated spaces for each activity—for instance, establishing dedicated innovation units while maintaining operational excellence in core businesses. Companies like IBM, 3M, and Procter & Gamble have used this approach to sustain innovation over decades. Research challenges the myth that only small, flat organizations can innovate. Studies examining the relationship between firm size, structure, and innovation find mixed results, with no clear advantage for either large or small firms across all contexts. What matters more than size or flatness is how organizations design their innovation processes. Some innovations benefit from the resources, capabilities, and market access of large firms, while others thrive in smaller, more entrepreneurial settings. The key is matching organizational design to the specific type of innovation being pursued. Even within innovative companies, hierarchy plays important roles. At Apple under Steve Jobs, product development followed a highly centralized process, with Jobs making critical decisions about features, design, and timing. This approach enabled coherent vision and integration across products but required strong leadership and clear authority. In contrast, W.L. Gore uses a more decentralized approach, giving employees significant autonomy to pursue new ideas. Yet Gore still maintains leadership roles, resource allocation processes, and strategic direction from the top. Both companies innovate successfully but use hierarchy differently based on their specific contexts and strategies.

Chapter 6: Balancing Structure and Autonomy in Knowledge-Based Organizations

Authority in today's knowledge-intensive organizations looks quite different from the command-and-control model of the industrial era. Traditional authority relied on managers knowing more than subordinates, having clear visibility into work processes, and being able to specify precisely what employees should do. In knowledge work, these conditions rarely apply. Managers often know less about technical details than their specialized subordinates. Work involves mental processes that aren't easily observable. And the best approaches to complex problems may emerge through exploration rather than being specified in advance. These changes require a fundamental rethinking of how authority functions. Modern authority increasingly focuses on creating frameworks rather than dictating actions. Managers establish goals, boundaries, and processes while giving employees significant discretion about how to operate within them. This approach, sometimes called "management by objectives" or "guided autonomy," recognizes that knowledge workers need freedom to apply their expertise but still require direction and coordination. Netflix exemplifies this philosophy with its famous culture deck, which emphasizes "freedom and responsibility" rather than detailed rules and procedures. Employees have extensive autonomy but are held accountable for results and expected to act in the company's best interests. Authority also increasingly derives from different sources. Traditional authority came primarily from formal position—the manager could direct subordinates because the organization granted that power. While positional authority remains important, knowledge economies place greater emphasis on expertise, facilitation skills, and the ability to build consensus. Managers earn influence by demonstrating competence, creating value for their teams, and establishing trust. This shift doesn't eliminate hierarchy but changes how it functions, with authority flowing more from personal qualities and relationships than from organizational charts alone. Technology has dramatically affected how authority operates. Digital tools enable more precise monitoring of performance, faster communication across distances, and better access to information throughout organizations. These capabilities can support either centralization or decentralization. On one hand, executives can use data analytics to maintain visibility into operations without direct supervision, potentially enabling more delegation. On the other hand, the same tools allow top managers to intervene more frequently in local decisions, potentially increasing centralization. The key is using technology to support appropriate authority relationships rather than defaulting to either extreme. The psychological contract between organizations and employees has also evolved. Today's knowledge workers, especially younger generations, expect more autonomy, meaning, and growth opportunities than previous cohorts. They want to understand the "why" behind decisions and participate in shaping their work environment. Effective authority in this context involves building trust through transparency, fairness, and respect for expertise. Managers need to communicate clearly, involve employees appropriately in decisions, and create conditions where people feel psychologically safe to contribute their best thinking. Authority becomes less about compliance and more about engagement.

Chapter 7: Designing Effective Hierarchies for Contemporary Challenges

Creating effective hierarchies for contemporary organizations requires moving beyond simplistic debates about whether hierarchy is "good" or "bad." The relevant questions are what kind of hierarchy best fits specific circumstances and how to design hierarchical elements that enable rather than constrain human potential. This nuanced approach recognizes that hierarchy comes in many forms and can be configured to support various organizational goals, from efficiency and reliability to innovation and adaptability. The starting point for effective hierarchy design is understanding the nature of the work being organized. Different activities require different structures. When tasks are routine, predictable, and independent, more decentralized approaches with extensive delegation make sense. Morning Star's tomato processing operations exemplify this context, with well-understood technologies and linear processes enabling peer-based coordination. In contrast, when activities involve high uncertainty, strong interdependencies, or significant risks, more centralized direction becomes valuable. Emergency response teams, new product development groups, and organizations facing existential threats often benefit from clearer authority and faster decision-making. Effective hierarchies balance centralization and decentralization rather than choosing between them. They centralize decisions that require consistency, involve significant risk, or affect multiple parts of the organization. They decentralize decisions that depend on local knowledge, benefit from diverse perspectives, or need rapid adaptation to changing conditions. This balanced approach recognizes that neither complete centralization nor total decentralization optimally addresses the full range of organizational challenges. The art of organizational design lies in finding the right mix for specific contexts and adjusting as circumstances change. Modern hierarchies increasingly emphasize what might be called "enabling authority" rather than "controlling authority." Enabling authority focuses on creating conditions where employees can exercise judgment, creativity, and initiative within a coherent framework. It involves setting clear expectations, providing necessary resources, removing obstacles, and offering feedback and support. This approach recognizes that knowledge workers perform best when they have both autonomy and guidance—freedom within boundaries that provide direction and meaning. Companies like Spotify, with its "squads," "tribes," and "chapters," illustrate this model of structured flexibility. Technology offers new possibilities for hierarchy design. Digital tools can reduce coordination costs, enable more precise monitoring without direct supervision, and facilitate knowledge sharing across organizational boundaries. They allow for more dynamic structures that adapt to changing circumstances rather than remaining fixed. However, technology also creates challenges, potentially enabling micro-management, information overload, and work intensification. Effective hierarchies use technology thoughtfully, leveraging its capabilities while mitigating its potential downsides. Perhaps most importantly, effective hierarchies recognize the human dimension of organization. They acknowledge that people have fundamental needs for autonomy, competence, and relatedness, as well as desires for fairness, respect, and meaning. They create psychological safety that enables people to speak up, take risks, and learn from mistakes. They build trust through transparent processes, consistent application of principles, and genuine care for employee well-being. These elements aren't soft luxuries but essential components of organizational effectiveness, especially in knowledge-intensive contexts where discretionary effort and creativity drive performance.

Summary

The myth of the bossless workplace represents a fundamental misunderstanding of what hierarchy is and why it persists. Far from being an outdated relic of the industrial age, hierarchy serves essential functions in coordinating complex activities and fostering cooperation among individuals with different interests and perspectives. Even the most celebrated examples of "bossless" organizations maintain hierarchical elements, though they may take less traditional forms. The evidence suggests that hierarchy isn't disappearing but evolving to meet the demands of knowledge-intensive work in rapidly changing environments. This evolution involves significant changes in how authority functions. Today's effective managers focus less on direct control and more on creating frameworks that enable employees to exercise judgment and creativity. They establish clear direction and boundaries while providing autonomy within those parameters. They build cultures based on shared purpose, transparency, and mutual respect rather than rigid command structures. These approaches recognize that knowledge workers need both freedom and guidance—the space to apply their expertise coupled with the coordination that aligns individual efforts toward collective goals. The challenge isn't eliminating hierarchy but designing it to harness human potential rather than constrain it.

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Nicolai J. Foss

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