The Hierarchical Erosion Effect: A New Perspective on Perceptual Differences and Business Performance

• Author: Dana McDaniel Sumpter,Cristina B. Gibson,Julian Birkinshaw,Tina Ambos
• Date: 01 December 2019
• Published date: 01 December 2019
• DOI: http://doi.org/10.1111/joms.12443

© 2019 The Authors. Journ al of Management Stud ies published by Societ y for the Advancement of Mana gement

Studies and Joh n Wiley & Sons Ltd.

The Hierarchical Erosion Effect: A New Perspective on

Perceptual Differences and Business Performance

Cristina B. Gibsona, Julian Birkinshawb,

Dana McDaniel Sumpterc and Tina Ambosd

aPepperdine University; bLondon Business S chool; cCalifornia State Unive rsity, Long B each; dUnive rsité

de Genève

ABST RACT Organizat ions are coalitions of individua ls with heterogeneous interests and

perceptions (M arch and Simon, 1958/1993). We examine an important sour ce of heterogene-

ity, namely the dif ferent perceptions indiv iduals hold across hierarchical level s. We introduce

the notion of a hierarchical e rosion effect whereby i ndividual perc eptions about specific practices

become less favourable the lower one goes in the hiera rchy. Using data from 4,243 employees

across four levels in 38 busi ness units, we provide evidence that thi s effect exists, controlli ng for

other factors, includi ng the overall favourability of the busi ness unit culture across eight

practices. We show how the size of th is hierarchical erosion effect var ies depending on the

nature of the organ izational practice being eva luated and the extent to which executives share

strategic in formation widely, and we also show t hat a lower hierarchica l erosion effect is

correlated with h igher business unit growth. In doi ng so, we enrich understanding of two

aspects of Marc h and Simon’s work, their notion of intra-org anizational heterogeneity and

their dist inctive view of the nature of hierarchy.

Keywo rds: alig nment, consensus, Herbert Simon, hierarch ical erosion, internal

heterogeneity, James M arch, perception gaps

INTRODUCTION

The ideas of James March and Herbert Simon, as expressed i n Organizations (195 8/199 3)

and in their many related works, have had an enormous impact on t he field of organi-

zation studies over the last sixt y years. Basic concepts such as bounded rationality, prob-

lemistic search and organ izational routines, as well as entire sub-f ields of research, such

Journal of Man agement Studi es 56:8 December 2019

doi:10. 1111/j om s. 124 43

Address for re prints : Cristin a B. Gibson, Pepperdi ne Graziadio S chool of Business, Pepp erdine Universit y

6100 Center St., Los Ange les, CA 90045, USA. (cr istina.gibson@pe pperdine.edu).

This is an op en access article under the t erms of the Creative Commons At tribution License, which

permits use, d istribution and reproduct ion in any medium, provided the or iginal work is properly cite d.

1714 C. B. Gibson et al.

© 2019 The Authors. Journ al of Management Stud ies published by Societ y for the Advancement of Mana gement

Studies and Joh n Wiley & Sons Ltd.

as organizationa l learning, the attention-based view, and the behavioural view, can all

be traced back to the collaborat ion between March and Simon in t he 1950s at Carnegie

Mellon Univer sity.

Among their many ideas was a novel perspective on how to conceptualize an organiza-

tion. Unlike the dominant bureaucratic perspective of the 1940s, which ‘treated individ-

uals as machines’ (March and Simon, 1993, p. 56; all page references are to the second

edition of Organizations), they defined organizations as ‘systems of coordinated action

among individuals and groups whose preferences, information, interests, or knowledge

differ’ (1993, p. 2). By explicitly recognizing the heterogeneity of individual perceptions

and goals, and the potential for internal conflict, they opened up important questions

about how alignment and coordination might be achieved. Many lines of research have

subsequently tackled these questions, for example studies of organizational consensus

(Kellermanns et al., 2005), coordination (Van de Ven et al., 1976) and attention manage-

ment (Ocasio, 1997).

And yet, despite all the progress, the basic notion of an organization as a ‘coalition

of heterogeneous participants with conflicting interests, goals and knowledge’ (Gavetti

et al., 2007, p. 528) has been relatively unexplored. We take it for granted that individuals

in large organizations have different interests and perceptions, but we rarely examine the

nature or extent of these dif ferences across different parts of the organization. This is

an opportunity for both theory and practice. Organization theory would benefit from a

richer conceptualization of the dimensions of internal organizational heterogeneity in

perceptions, so that its causes and consequences for alignment and coordination can be

better understood. And on a practical basis, executives would benefit from knowing how

to manage this internal heterogeneity to enhance their productivity and performance.

The purpose of this paper is to develop a new perspective on the nature of heteroge-

neity within organizations, and in particular the perceptual differences between individ-

uals in large organizations (March and Simon, 1993, p. 147). Unlike prior research that

simply examines the variance of perceptions across a group of employees (e.g., Gibson

et al., 2009; Hatfield and Huseman, 1982; Kellermanns et al., 2005), we define a hierar-

chical erosion effect, whereby perceptions about specific practices become less favourable the

lower one goes in the hierarchy. This notion that people at different organizational levels

perceive things differently was speculated on by March and Simon (1993, p. 147) and has

been acknowledged in subsequent work (e.g., Cole and Bruch, 2006; Corley, 2004), but it

has not been systematically studied.

Using survey data from 4,234 employees in 38 business units, we show the existence of

a hierarchical erosion effect, controlling for other factors, and we then seek to understand

why this effect might be stronger in certain situations than in others. We start by observ-

ing that the concept of hierarchy has been used in a variety of ways in the literature. One

perspective is hierarchy as a formal authority structure where one individual has legitimate

authority over another (Parsons, 1971; Weber, 1978/1922), linked to their position or

title. An alternative perspective is hierarchy as nested subsystems of activity where coordina-

tion is achieved through the development of relational norms, and without reliance on

formal authority (March and Simon, 1958; Parsons, 1971; Simon, 1962).

These two contrasting perspectives allow us to conceptualize a spectrum of choices

for senior executives in how they generate coordinated action among individuals, from a

The Hierarchical Erosion Effect 1715

© 2019 The Authors. Journ al of Management Stud ies published by Societ y for the Advancement of Mana gement

Studies and Joh n Wiley & Sons Ltd.

relative emphasis on authority based mechanisms (a la Weber) on the one hand, through

to a relative emphasis on relational norm-based mechanisms (a la March and Simon) on

the other. And depending on the choices made, we would expect the hierarchical erosion

effect to vary accordingly, with lower levels of hierarchical erosion being observed in

those situations where relational-norm based mechanisms are enacted through broad

information sharing.

To substantiate this argument, we develop four specific hypotheses. First, we suggest

that ratings of the favourability of practices decrease, the lower one moves down through

the formalized hierarchical levels in the organization. Second, and building on the two

contrasting perspectives of hierarchy, we propose that there will be variation from one

organizational practice to the next (holding the business unit constant), such that those

which accentuate top-down formal authority during implementation, rather than front-

line development of relational nor ms, will demonstrate greater hierarchical erosion.

Third, we suggest there may be variation from one business setting to the next (holding

the organizational practice constant). We focus on one specific variable, namely the ex-

tent to which the top executives in the business unit choose to share strategic information

with the lower levels. This approach shifts the perspective of lower-level employees away

from the authority-based view of hierarchy and towards the relational norm-based view,

and to a smaller hierarchical erosion effect. Finally, we examine the consequences for

business unit performance, arguing that a lower hierarchical erosion effect is consistent

with a higher motivation to produce (March and Simon, 1993, p. 71) and thereby a

stronger performance. We find support for all these arguments.

In sum, our primary contribution is to introduce and validate the notion of a hierar-

chical erosion effect, demonstrating first that it exists, and then identifying mechanisms

that underlie its development and its consequences. This enriches our understanding of

two aspects of March and Simon’s work – the notion of organizations as coalitions of

heterogeneous interests and perceptions, and their distinctive view of the nature of hier-

archy. It also suggests practical implications for how perceptual differences across levels

can be managed more effectively in practice.

BACKGROUND ON PERCEP TUAL DIFF ERENCES IN ORGANIZ ATIONS

One of the core theoretical pilla rs of March and Simon’s (1993) worldview is the notion

that organizat ions seek to coordinate the actions of heterogeneous individuals with dif-

ferent goals and preferences. In other words, unlike trad itional bureaucratic theories,

in which individuals were treated as machines th at could be controlled, the March and

Simon perspective explicitly r ecognized the complexities and challenges of motivating a

heterogeneous workforce to coordinate their efforts in an ef fective way.

One important aspect of this internal heterogeneity is the perceptual differences across

individuals within the same organization (March and Simon, 1993, p. 144), arising partly

through the role positions they are assigned, and partly through their enactment of those

roles. Perhaps because these perceptual differences are measurable, typically through

surveys, they have been well studied in a number of literatures spanning organizational

behaviour and strategic management. We briefly review these studies here, focusing