Why Do Flat Business Structures Fail as Companies Grow?

Are Dynamic Hierarchies the Answer to Flat Organizational Structure Problems?

Discover why flat business structures often fail in growing startups, leading to disorganization and bias. Learn how hybrid “dynamic hierarchies” balance agility with necessary accountability and ethical controls. Curious how your startup can avoid the hidden dangers of a flat structure? Read on to discover why companies are embracing the “dynamic hierarchy” to balance innovation with crucial accountability.

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Some strategists think a flat-structured company – especially a nonhierarchial tech startup – can be profitably more agile, but that’s a myth, says a study reported by Charlie Brinkhurst-Cuff in The New York Times. Companies that lack necessary systems and controls may expend resources aimlessly, lack diversity, or cross legal lines. The Theranos scandal — culminating in guilty verdicts for its founders — illustrates what can go wrong in such firms. More organizations now prioritize honoring their revenue goals, principles, and social beliefs while incorporating accountability. The merging of these ideas is leading companies to employ a strategy that one leader calls a “dynamic hierarchy.”

Take-Aways

• Start-ups seeking to gain market share quickly might opt for a flat structure, but growth can bring serious, if not criminal, issues.
• Many non-hierarchical companies have shifted to a more hybrid approach to make sure controls are in place.

Summary

Start-ups seeking to gain market share quickly might opt for a flat structure, but growth can bring serious, if not criminal, issues.

The startup US biotech company Ag Biome rejected a hierarchical organizational chart and instituted a flat business structure in hopes of achieving more agile, “democratic decision-making.” Suma, a workers’ cooperative wholesaler, and Valve, a video game company, also function under a flat business structure.

“As firms hire more employees and grow in their size, they typically encounter significant challenges in coordinating these employees.” (Wharton professor Saerom Lee)

Companies often choose a flat structure because they believe it will support their values, political beliefs, or financial goals. However, a 2021 study by Wharton School professor Saerom (Ronnie) Lee found that start-ups should avoid a flat structure. Without the usual controls and accountability systems, companies — especially new ones with less experienced leaders — can potentially devolve into slipshod practices and poor market performance. They risk disorganized staffing, discriminatory hiring, or even malfeasance.

Instead of risking the pitfalls of a flat structure, the next generation of companies is searching for a hybrid approach to organizing internally.

For example, Valve’s 2012 employee handbook discussed its “autonomous system,” which allowed employees to move between projects at will. The next year, a former employee revealed that, in fact, the company then had a “hidden” structure that functioned somewhat like a high school clique. In 2022, a journalist found problems at Valve including in the areas of “diversity and job assessment.”

“You’ve still got middle-aged, privileged white men making decisions at the top.” (Bayes professor Clifford Oswick)

Professor Clifford Oswick of London’s Bayes Business School notes that flat-structured companies often mirror society’s biases because they lack structures for addressing those biases. Professor André Spicer, also of Bayes, goes further in citing the Theranos scandal, where having normal systems and controls likely would have revealed ongoing malfeasance. The courts found both Theranos’s founder and its CEO guilty of defrauding investors and patients.

Many non-hierarchical companies have shifted to a more hybrid approach to make sure controls are in place.

Lee cautions that flat structures can overload managers, foment “power struggles” within a workforce, and cause people to apply vague, inconsistent theoretical concepts. As of 2023, some companies were turning from flat, non-hierarchical structures and moving toward approaches with some hierarchical elements that still support ethics over profits, thus challenging established labor practices that pursue profits at the expense of ethical behavior.

Annette Dhami’s social nonprofit Dark Matter Labs shifted away from a nonhierarchical consensus model, though it allows employees to choose “virtual role cards” that detail which tasks each person is responsible for completing. Demonstrating its attempt to maintain an aware consciousness, Dark Matter Labs refers to its structure as a “dynamic hierarchy.”

“Dark Matter…operates under the idea that the future of work cannot be about the monetary needs of big bosses.”

Each area of Dark Matter Labs’ business is accountable to someone, and being open to different ideas is still important in the company’s culture. To “forecast” workflows at the macro level, the company utilizes “stewards,” whose roles don’t include managing staff members. The Labs’ leaders hope that encouraging team members to participate in shared decision-making will lead to finding better solutions.

About the Author

Journalist, book editor, and podcast host Charlie Brinkhurst-Cuff is the former senior staff editor for narrative projects at The New York Times.