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Reduction of Vertical Stratification of Organizational Structure & its Implications for the Long-Term Success & Growth of a Firm

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April 2013

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Reduction of Vertical Stratification of Organizational Structure and its Implications for the

Long-Term Success and Growth of a Firm

The ultimate success of a firm in terms of competitive advantage and market share is just as much a

function of their organizational structure as it is their ability to utilize and rapidly disseminate

technological advances. The historical organizational structures between American and Japanese firms are

contrasted in terms of (1) the division of labour in manufacturing, (2) the structure of their Research and

Development (R&D) groups, and (3) the nature of new entrepreneurial firms to illustrate that reduction of

vertical stratification of organizational structure leads to an easier adoption of new production methods

with less bottom-up resistance, to the increase of a more horizontal division of labour in terms of

integrative research, as well as fostering innovation in new entrepreneurial ventures. Leveraging the

benefits from the reduction of vertical stratification is a necessary requirement for the long-term success

and continued growth of a firm.

Background

While the study of organizational behaviour with respect to a firm’s organizational structure has

been an active and broadly explored research area, workplace consciousness regarding the specific

advantages of different organizational structures is a recent development. In terms of the technology

sector, the awareness of organizational structure in mainstream society was further enhanced by the boom

of Silicon Valley and high-tech Internet companies and their unconventional organizational structures. For

example, the Google organizational structure still continues to incorporate and reflect their entrepreneurial

and Internet start-up roots by offering a very employee-centric work environment with an emphasis on the

reduction of vertical organizational stratification. With that said, Google is able to maintain its competitive

position as the leader in Internet searches via leveraging its use of organizational structure in order to fuel

further innovations and positively influence their market share and leadership status.

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This example can be further analyzed historically and across regional boundaries to determine the

positive benefits associated with the reduction of vertical stratification in terms of organizational structures

and the long-term advantages that are derived. Furthermore, with the growth of market turbulence,

increased competitive intensity, and maintaining sustainable market share increases, a firm must directly

focus on their organizational structure to achieve competitive advantage (Grant, 1996, p. 375). The further

evaluation of the American and Japanese approach to organizational structures aids the hypothesis

regarding the nature of vertical stratification.

In the context of the twentieth century, the histories of the United States and Japan have been

intertwined since the Japanese bombing of Pearl Harbour in 1941, the subsequent entrance of the United

States into World War II, and the first use of the atomic bomb (Morison, 2002, p. 4). In addition, from the

point of world economic strength, the United States has proved to be a dominant force in the twentieth

century. The emergence of Japan began in 1968, when it first surpassed West Germany as the world’s

second largest economic power (International Monetary Fund [IMF], 2011). Between 1980 and 2000, both

the United States and Japan held the leading positions in terms of global economic expansion (IMF, 2011).

While the emergence of new global powers such as China, India, and Brazil (IMF, 2011) have reduced the

American and Japanese footprint, these two nations still maintain a heavy presence in all industries from

automotive manufacturing to the high-technology field. Therefore, the historical comparison of these two

nations in terms of their traditional organizational structures can be used as a marker to determine their

apparent successes and weaknesses. The reduction of an organization’s vertical stratification leads to the

adoption of new production methods, the increase of the horizontal division of labour in terms of Research

and Development, and the acquisition of competition advantage through innovation in new entrepreneurial

ventures.

Before a detailed analysis is presented, some clarification is required. From the point of view of

organizational structures, an initial comparison between the two nations would indicate differences

between the macro and micro-level behaviour (Horii et al., 2010, p. 3) At the micro-organizational level,

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American firms are characterised by the concept of the individual, individual decision-making, and

individual communication (Horii et al., 2010, p. 3). However, on the other hand, Japanese firms can be

characterised by consensual decision-making and group-based communication (Horii et al., 2010, p. 3).

Furthermore, Hofstede dimensions would also indicate that in most cases, American and Japanese rankings

for each of Hofstede’s dimensions are largely polar opposites of one another (Johns & Saks, 2011, p. 116).

While Japan ranks high in terms of masculinity, power distance, and long-term orientation, the US ranks

high in terms of individualism (Johns & Saks, 2011, p. 116). The comparison of organizational structures

between both nations in terms of manufacturing, research and development, and new entrepreneurial

ventures will further demonstrate these impacts in terms of the reduction of vertical stratification within a

firm.

US Manufacturing

The American manufacturing sector, and in specific the automotive industry, has historically

shaped the view of organizational structures via the Ford assembly line model and the introduction of the

technical division of labour. The division of labour meant that workers became highly specialized in

completing a few simplified tasks in an efficient manner (Sabel, 1982, p. 33). Furthermore, workers became

interchangeable and replaceable (Sabel, 1982, p. 33). This organizational structure ultimately allowed for

the creation of the first assembly line system of manufacturing at the Ford Highland Park Plant in Michigan

in 1913 (Sabel, 1982, p. 33). The division of labour inherently stressed and led to the creation of vertical

stratification (Johns & Saks, 2011, p. 463) by which “vertical [stratification] refers to the superior and sub-

ordinate differences in standing, inequalities in material rewards, and variations in knowledge and

competence” (Dahlström, 1980, p. 133).

Continuing forward into the latter portion of the twentieth century, Fordist influences continued to

dominate the American manufacturing sector; as stated by Richard Florida, Professor at the Rotman School

of Management, “The US model of industrial and technological organization emerged from and was

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constrained by a previous model of Fordist mass production industrial organization” (Florida & Kenney,

1991, p. 28). In part, the decline of the American manufacturing sector in comparison to the Japanese can

be explained via the heavy reliance of a vertically stratified system of manufacturing.

In the context of automotive manufacturing, a prime example of the negative effects of vertically

stratified organizational structures can be represented by the decline of the US auto industry in the 1980s to

increasing penetration of foreign market share, by in large on the part of the Japanese. In the words of

Olumide Ijose (2011) in the paper Culture and the Adoption of Practices: An Assessment of the US

Automotive Manufacturing Industry, competitive advantage is:

[A] function of the ability to quickly bring products customers wanted to the market, to

increase productivity and the quality of products, to control costs by leveraging

globalization to capture economy of scale effects, to increase manufacturing flexibility

while capturing learning curve effects, and to efficiently manage supply chains (p. 4).

The level of vertical organizational stratification, which is the by-product of the division of labour,

ultimately led to increasing specializations and ultimately “worker de-skilling” (Florida & Kenney, 1991, p.

28). In this case, there was a lack of cohesive structure that existed between workers on the assembly line;

each worker was a separate and distinct entity, with the assembly line being comprised of a collection of

these entities with no real connection to other workers. In this case, without a sense of cohesion, the high

level of vertical stratification meant that changes to manufacturing, for example the introduction of quality

processes such as Six Sigma, were either adopted slowly or incorrectly due to the high level of bureaucracy.

Bottom-up resistance also perpetuated this slow adoption cycle; technology advances were adopted slowly

leading to worker displacement and this worker displacement fuelled even greater opposition to new efforts

(Cyert & Mowery, 1987, p. 169). American shop-floor workers were in constant fear about being displaced in

this hierarchical stratified structure via the use of technology; there was resistance to the adoption of

manufacturing technological improvements, robotics, and automated manufacturing (Cyert & Mowery,

1987, p. 169). In comparison, the Japanese model of manufacturing, and the reduction of vertical

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stratification ultimately led to the successful adoption of certain process improvements, thereby securing

the Japanese a competitive advantage over the US.

Japanese Manufacturing in Comparison to US Manufacturing

While it is clear that heightened vertical stratification due to the division of labour dominated the

organizational structures of the US manufacturing industries, the Japanese system of manufacturing in the

late twentieth century also was shaped by organizational structures; Japanese manufacturing benefited

from the reduction of vertical stratification. Over the years, Japanese firms have been able to gain

competitive advantage and “are ahead in the invention and development of advanced industrial process

technology including semiconductor production equipment, flexible manufacturing systems, and robotics”

(Gamota & Freiman, 1988, p. 28). Furthermore, while US manufacturing has often been characterized as a

slow moving entity, Japanese manufacturing has been termed ‘adaptable’ in large part due to their

organizational structures (Florida & Kenney, 1991, p. 35).

The initial source of the Japanese tendency towards reducing vertical stratification originates from

the concept of the Kaisha, “[L]arge Japanese companies that provide lifetime employment to some 40

percent of the workforce.” (Noble, 2011). The initiation of such companies came during the post WWII

period in which Japanese workers began to demand increased job security, better working conditions, and

control over the production process (Florida & Kenney, 1991, p. 35). While management accommodated the

need for job security and addressed other concerns such as compensation and working conditions, they also

made what has been termed a “critical tradeoff” (Florida & Kenney, 1991, p. 35); workers would not control

the production and manufacturing process. However, as time went on, this “critical tradeoff” (Florida &

Kenney, 1991, p. 35) became representative of a failed strategy. The attempt to separate the specific

influence and recommendations of the shop-floor workers from the production process proved to be an

inefficient utilization of these fixed-cost assets (Florida & Kenney, 1991, p. 35), i.e. workers; however,

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appropriate management forethought drastically changed the organizational structures within these

companies in order to take advantage of the reduction of vertical stratification.

The provision of securing lifetime employment called “secure tenure” (Florida & Kenney, 1991, p.

35), meant workers also did not have the same concerns as their American counterparts; “secure tenure”

meant two things to a Japanese manufacturer: value-added human resources and leveraging the concept of

team-based manufacturing. The fact that employee mobility was drastically reduced resulted in a firm’s

ability to invest in these human resources (Florida & Kenney, 1991, p. 36). Unlike the US organizational

structure within the manufacturing sector and the concept a de-skilled labour force, Japan relied on a team-

based manufacturing concept in order to train workers into self-managing teams, to “[harness] the

collective problem solving of workers” (Shimanda & MacDuffie, 1986). This finally led to the adoption of

production improvements that stemmed from the collective knowledge of the shop-floor workers

themselves. In this way, the success and growth of Japanese manufacturing firms was in part due to their

organizational structures and the reduction of vertical stratification. The reduction of hierarchy that

resulted from this approach to team-based manufacturing led to closed-loop feedback manufacturing in

which workers themselves provided input to the process (Ijose, 2011, p. 3). The ability to apply closed-loop

learning meant the inherent knowledge of workers was systematically gathered and applied; these process

improvements ultimately led to the creation of Six Sigma quality control as first seen in Japanese

automotive manufacturers (Rampersad & El-Homsi, 2007, p. 28). In addition, workers were not in fear

about being displaced by technological advances; their inputs often led to the creation of these

technological breakthroughs (Dahlström, 1980, p. 134). In addition, the closed-loop learning process also

meant that, for example, assembly line issues and defects were corrected faster than in the case of US

manufacturing where no direct connections existed between workers and engineers (Itami & Numagami,

1992, p. 122). Furthermore, addressing excess inventory stockpiles via inputs from shop-floor workers

identified potential inefficiencies. This allowed for the creation and implementation of ‘Just-in-Time’

manufacturing in which inventory stockpiles were minimized; during the post WWII era, many companies

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had to deal with small order volumes while offering very wide product portfolios and at the same time, tried

to minimize costs associated with large inventory stockpiles (Itami & Numagami, 1992, p. 122). Therefore,

Japanese manufacturing, with its “[t]eam based work practices, fewer classifications, and increase labor-

management cooperation,” did not lead to the actual adoption of new production methods but the internal

creation of these new production methods, which inevitably impacted their competitive advantage against

the US (Ijose, 2011, p. 5).

US Research and Development

As in the words of John Hauser, Professor at the Sloan School of Management, “Research,

development, and engineering (R,D&E) provide the science and technology which firms use to serve

tomorrow’s customers profitably” (Hauser, 1998, p. 1670). The historical development and the rise of

research centres and R&D labs stems in large part from WWII tensions and providing a response to Cold

War frictions between the US and the former Soviet Union (Wessner, 1997, p. 15), (National Research

Council [NRC], 2002). The response to war ultimately fuelled technological breakthroughs and large scale

research in the atomic bomb, the hydrogen bomb, and quantum electronics (Wessner, 1997, p. 15), (NRC,

2002). However, such large scale research would not have been possible without an organizational

structure that would facilitate its growth. Early non-governmental American research centers such as the

General Electric Research Laboratory (invention of incandescent light bulb) (Reich, 1985. p. 1), AT&T Bell

Laboratories (creation of light emitting diode, transistor, UNIX) (Reich, 1985, p. 2), and Xerox Palo Alto

Research Center (birth of personal computer) (Betz, 2011, p. 22), mimicked the organizational structure

model presented by governmental research centers such as the Los Alamos National Laboratory, which was

highly influential in WWII for research towards the creation of the atomic bomb through the Manhattan

Project (Kelly, 2005, p. 155). These early R&D labs also mirrored university campus settings in which

research, theories, and experimentation were seen as separate activities and links to the real-world

applications were considered primarily after-the-fact. Military research centers and early non-

governmental research labs were characterized by high funding levels, bureaucratic hierarchy, and levels

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upon levels of vertical stratification; spill-over effects are still seen in the organizational structures of

today’s research and development groups.

When considering individual US companies, the organizational structure of R&D groups has also

followed the historical layout of military and university research centres, and with it, increased levels of

vertical stratification and decreased levels of output. Later comparison to Japanese R&D groups will show

the key differences in terms of the horizontal division of labour and how reduction of vertical stratification

benefits a firm’s competitive advantage. In the typical US firm, R&D activities were by in large separated

from actual production and quality control thereby reducing the feedback loop between manufacturing

activities and further process improvements that could be achieved via R&D – similar to the division that

existed between research and real-world applications in a university environment. Ultimately the

separation of R&D inhibited the flow of new ideas, “This model of innovation was stymied by organizational

rigidities which impeded its ability to function effectively” (Florida & Kenney, 1991, p. 30). Furthermore, the

historical compartmentalization of US research centers, as seen in military and university establishments,

was carried forward in individual R&D groups as, “R&D labs were organized along disciplinary specialities”

(Florida & Kenney, 1991, p. 30); this further propelled the principles of labour division and increasing

specialization. The end result of this model of organizational structure meant that research departments of

large organizations were slow to successfully implement new ideas into production. While keeping R&D

groups at arms-length, “large US companies accounted for just half of all major innovations in the US”

(Gellman, 1976).

Japanese Research and Development in Comparison to US Research and Development

Japanese R&D groups, in contrast to American R&D groups, had a total view of the entire

manufacturing and development cycle; in part a result of “secure tenure” system in which shop-floor

experience was fully synthesized and captured by R&D. For a Japanese firm, R&D was not treated as

separate and distinct from other company activities, and the reduction of vertical stratification and the

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move towards a more horizontal distribution of labour resources in R&D allowed for the effective

utilization of innovative ideas:

[T]he Japanese model has established a new way of tapping the knowledge and intellectual

capabilities of its work-force, harnessing the productive capacities of both shop-floor

workers and R&D scientists more totally than other systems (Florida & Kenney, 1991, p. 36).

The inclination for horizontal organization within R&D also meant that research departments were not

necessarily organized via specific areas of research, but rather through the adoption of a horizontal

organizational structure, wider encompassing research focuses were embraced over narrow research areas.

Ultimately, these broader and interconnected Japanese research and development groups were better able

to handle complex problems, “The American organizational style has less tolerance for high task complexity

with low team experience than does the Japanese organizational style” (Horri et al., p. 4). Furthermore, the

idea of leveraging specific team attributes and consensus-decision making is very prevalent in Japanese

business culture; the extension of this idea towards the reduction of vertical stratification in R&D groups

takes its initial roots in the idea of the “zaibatsu,” a description referencing family controlled Japanese

corporations (Khanna & Yafeh, 2005, p. 307). In the Japanese business environment, there exists a

horizontally integrated group structure amongst affiliated firms in which risk is subsequently distributed

(Khanna & Yafeh, 2005, p. 307); “Under this model, large corporations use high levels of horizontal

integration to accomplish synergistic growth by constantly expanding into related fields” (Florida &

Kenney, 1991, p. 36). This poses a stark contrast to the hub and spoke model in which US firms treated R&D

as arm’s-length activities that branch outward from the central business organization (Florida & Kenney,

1991, p. 36). From the point of view of competitive advantage, the horizontal integration of R&D activities

in Japanese firms also resulted in their ability to “amortize R&D costs over a variety of markets and product

lines, allowing them to cross-subsidize R&D and to sustain low profits while gaining market share” (Florida

& Kenney, 1991, p. 37). In addition, the specific importance of R&D efforts in the Japanese market can also

be seen in macroeconomic indicators such as GDP, which shows Japan’s R&D expenditure as a percentage

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of GDP approximately 30% greater than that of the US (Trading Economics, 2011). Therefore, it can be seen

that the reduction of a vertically stratified organizational structure led to the emergence of horizontally

integrated research and development groups in Japan. This allowed Japanese firms to deal with all aspects

of production, closed-loop feedback, and the ability to handle complex problems while still maintaining

research budgets that would allow for increases in market share.

US New Entrepreneurial Ventures

The American entrepreneurial spirit and ingenuity are two features that appear at the core of

common societal culture tracing its roots back to the pioneering spirit and the idea of the American

frontier. The American approach to new entrepreneurial ventures has been one in which maximum

innovative efforts are made at the start of a new entrepreneurial venture, where scientists and engineers are

hired in order to propel innovation forward (Florida & Kenney, 1991, p. 31). In addition, new US

entrepreneurial ventures have historically served as catalysts for technological advances and process

improvements, “[S]tart-up firms became the primary vehicle for commercialization and later for innovation

itself” (Florida & Kenney, 1991, p. 31).

In terms of organizational structure, initial start-ups were characterised by limited organizational

structure and increased cross-functionality; employee job descriptions were more encompassing requiring

both a depth and breadth of knowledge regarding multiple fields. In this case, multiple examples can be

cited – Apple, Microsoft, Yahoo – all portraying the initial classic organizational structure of new

entrepreneurial ventures that was adopted towards the latter end of the twentieth century. It is this

reduction in vertical stratification that fosters innovation and ultimately the growth of the firm, increases in

market share, and the ability to put concepts to market quickly, reducing the time to market and the

development cycle. However, in terms of long-run effectiveness, these firms tend to highly rely on their

original innovative successes to continue to maintain a competitive advantage and further innovation is

either accomplished at a decreased rate or is stagnant.

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US New Entrepreneurial Ventures in Comparison to Japanese New Entrepreneurial Ventures

In the case of Japanese new entrepreneurial ventures, innovation is fuelled in-house through

horizontal integration as well as continuously expanding into neighbouring technologies and related fields

(Florida & Kenney, 1991, p. 31). Therefore, while in principle, both American and Japanese firms capitalize

on the reduction of vertical stratification in terms of the benefits that are derived from innovation, Japanese

firms continue to rely on innovative efforts in the long-run through “sponsored spin-offs.” (Florida &

Kenney, 1991, p. 37). These “sponsored spin-offs” are products of their parent companies and the end-result

is both a diversified product portfolio as well as a long-run trend for continued innovation and

technological advances. Therefore, in comparison to American firms, while Japanese firms also rely on the

same new entrepreneurial venture model in which maximum knowledge intensive efforts are placed at the

forefront, Japanese firms continue to build on this innovative knowledge base through the ideas of

company families and “sponsored spin-offs” (Florida & Kenney, 1991, p. 37) – both of which could not be

made possible without a network of horizontal integration.

Reduction of Vertical Stratification of Organizational Structure

In conclusion, the quicker adoption of new production methods, increased horizontal division of

labour, and new entrepreneurial ventures all aid to outline the benefits associated with a reduction in

vertically stratified organization. In terms of manufacturing, while the American organizational structure

has historically dealt with an increase in specialization of labour and creation of tall management

structures, the Japanese approach has been to employ a team-based approach to the manufacturing process.

It is clear through contrasting both approaches that the US approach with its increased level of bureaucracy

leads to a slow-to-change organization. Decreasing the level of organization stratification has benefits in

terms of the quicker adoption of process improvements and closed-loop learning, ultimately leading to a

firm’s ability to obtain a competitive advantage. Furthermore, in terms of the structure of research and

development groups, the American structure has always resulted in a disconnect between research centres

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and manufacturing. In contrast, the Japanese approach has been demonstrated to be far more integrated

and this horizontal integration and reduction of vertical stratification has led to Japanese success in terms

of innovation. Finally, a discussion of new entrepreneurial ventures show that both the American and

Japanese models of entrepreneurship differ in terms of their fundamental implementation, but both exhibit

similar characteristics of reduction of vertical stratification in terms of organizational structures.

Organizational structure has the ability to infiltrate all areas of a firm and considerations of organizational

structure should be placed at the forefront to ensure long-run competitive advantage and market share.

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