Organizational design choices of high‐tech startups: How middle management drives innovation performance

• DOI: http://doi.org/10.1002/sej.1330
• Author: Martin Murmann,Christoph Grimpe,Wolfgang Sofka
• Published date: 01 September 2019
• Date: 01 September 2019

SPECIAL ISSUE ARTICLE

Organizational design choices of high-tech

startups: How middle management drives

innovation performance

Christoph Grimpe

1,4

| Martin Murmann

2,3,4

| Wolfgang Sofka

1,5

1

Department of Strategy and Innovation,

Copenhagen Business School, Frederiksberg,

Denmark

2

Department of Business Administration,

University of Zurich, Zürich, Switzerland

3

Department Regional Labour Markets,

Institute for Employment Research (IAB),

Nuremberg, Germany

4

Department Economics of Innovation and

Industrial Dynamics, Leibniz Centre for

European Economic Research (ZEW),

Mannheim, Germany

5

Strategy, International Business and

Entrepreneurship Group (SIBE), University of

Liverpool Management School, Liverpool, UK

Correspondence

Wolfgang Sofka, Department of Strategy and

Innovation, Copenhagen Business School,

Kilevej 14A, 2000 Frederiksberg, Denmark.

Email: ws.si@cbs.dk

Abstract

Research Summary:Innovative products and services are

the inspiration for many startups. However, founders find

that the management of existing operations competes with

the attention that they can devote to innovation. We inves-

tigate whether and how establishing a middle management

level frees up attention for innovation when firms are newly

started. We argue that middle management is positively

related to introducing product innovations and that the

effect is stronger when founders have larger stocks of pre-

existing knowledge and when the startup's industry pro-

vides more innovation opportunities. These hypotheses are

supported by an analysis of 2,431 German high-tech

startups founded between 2005 and 2012.

Managerial Summary:Most high-tech entrepreneurs acknowl-

edge that an overload of managerial tasks keeps them from

advancing innovation in their startups. However, they are

often times reluctant to introduce middle management

because of a fear that the resulting bureaucratization will stifle

innovation. Our study shows that these fears are not justified.

Instead, we find for 2,431 high-tech startups in Germany that

startups with middle managers are significantly more innova-

tive than those without. While middle managers might be a

roadblock for innovation in large firms, startups benefit from

having them. Founders are the central decision makers in

startups and can easily be overburdened with management

tasks. Middle managers can alleviate parts of this workload

Received: 28 July 2017 Revised: 2 July 2019 Accepted: 17 July 2019 Published on: 19 August 2019

DOI: 10.1002/sej.1330

© 2019 Strategic Management Society

Strategic Entrepreneurship Journal. 2019;13:359–378. wileyonlinelibrary.com/journal/sej 359

and allow founders to focus on creating innovative products

and services.

KEYWORDS

entrepreneurial attention, innovation performance, middle

management, organizational design, startups

1|INTRODUCTION

“We noticed that we had to do something to reclaim capacities for developing the firm and the prod-

uct. I'm the driver of the firm and I push new product ideas. That's what I find fun. My motivation and

my strength are product development.”

Interview quote by the founder of an IT startup on how the creation of middle management helped innova-

tion in his startup

Launching innovative products onto the market is a central element in the strategies of most startups in high-

technology sectors (Block, Fisch, & van Praag, 2016; Wiklund & Shepherd, 2003). Having discovered an entrepre-

neurial opportunity, many startups find themselves in a race to realize that opportunity by introducing new products

ahead of competitors or before their funding runs out (Shane, 2000; Venkataraman, 1997). During this critical startup

phase in a firm's organizational lifecycle, entrepreneurs are typically the primary decision makers which challenges

them to dedicate sufficient attention to innovation to be successful (Gifford, 1992; Zahra, Filatotchev, & Wright,

2009). By their very definition, innovation activities are novel and uncertain; they involve decisions about which

technological path to choose and predictions about market conditions (Amit, Glosten, & Muller, 1990). Attention

allocation is challenging since attention is a scarce resource and founders face tradeoffs when allocating attention to

other tasks (Ocasio, 1997; Simon, 1948). In that regard, founders face opportunity costs on whether to allocate

attention to the improvement of current operations or to innovation (Gifford, 1992). Hence, founders are likely to

consider organizational design choices, which alleviate some of their attention constraints during the startup phase.

However, extant literature has focused much more on later stages in the organizational lifecycle in which startups

have already generated substantial sales (Daily & Dalton, 1992), enter stable environments (Gedajlovic, Lubatkin, &

Schulze, 2004) or target initial public offerings (IPOs) (Wu & Hsu, 2018).

In this study, we investigate whether startups can improve the likelihood of successful innovation by altering

their organizational design to alleviate attention allocation tradeoffs. More specifically, we investigate the role of

middle management, that is, the delegation of decision making authority, for startup innovation. A startup's middle

management may allow for better management of competing demands for attention and for better information

processing related to innovation (e.g., Gifford, 1992; Simon, 1948). Although prior literature highlights how demand-

ing and error prone innovation decisions are for the management of established firms (Katila, 2002; Koput, 1997),

the effect of middle management on innovation in startups has not been documented in the theoretical and empirical

literature. In short, this study focusses on the research question: Do startups with middle management have a higher

likelihood for successful innovation than startups without?

Our theoretical reasoning revolves around the issue of how middle management can help entrepreneurs, often-

times the founder or founding team of a startup, to dedicate attention to innovation vis-à-vis other tasks. We draw

theoretical mechanisms from the literature on how middle managers increase a startup's information processing

capacity, as well as free up the attention of founders (Colombo & Grilli, 2013), and then integrate the mechanisms

360 GRIMPE ET AL.