The Flattening Firm and Product Market Competition: The Effect of Trade Liberalization

Executive Summary:

Corporate hierarchies are becoming flatter: Spans of control have broadened, and the number of levels within firms has declined. But why? Maria Guadalupe of Columbia University and HBS professor Julie M. Wulf investigate how increased competition in product markets—and, in particular, product market competition resulting from trade liberalization—may be fundamentally altering how decisions are being made. Guadalupe and Wulf also shed light on the possible reasons behind certain organizational choices and on the importance of communication and decision-making processes inside firms. Key concepts include:

• As firms become flatter, they also fundamentally alter how decisions are made.
• Greater international competition following trade liberalization leads to flatter firms.
• When competition increases the value of quick and responsive decision-making, firms eliminate layers to improve the quality and speed of the transmission of information or increase the authority of division managers to become more adaptive to local information.
• U.S. firms in manufacturing industries more exposed to the trade liberalization reduce the number of hierarchical levels, broaden the span of control for the chief executive, and increase total pay and incentive-based pay for division managers.