The growth of hierarchy in organizations: Managing knowledge scope

Research Summary Theory posits hierarchy as a response to coordination challenges and emphasizes organization size and the need to transfer knowledge as the mainspring of these challenges. This connection, however, is largely based on the quantity of knowledge to be transferred rather than its characteristics. Building on the knowledge‐based view, we propose that knowledge scope—the variety of knowledge across an organization's members—affects coordination costs and hierarchy expansion. Using an economy‐wide database from Brazil, we show that firms are more likely to expand their hierarchy when knowledge scope increases. This effect varies with firms' capacities to manage knowledge; firms whose employees perform more similar tasks or have shared experience at previous employers are less likely to expand hierarchy in response to increases in knowledge scope. Managerial Summary Growing organizations often struggle to coordinate the work of their employees within their current organizational structures. We distinguish coordination problems generated by increased size from problems generated by expanding the variety of knowledge used and argue that both spur organizations to hire additional managers. Using a database of Brazilian startups, we show that a greater variety of knowledge used is associated with the expansion of hierarchy. Additionally, we find that organizations whose employees have more shared work experience have a greater ability to coordinate and thus delay the expansion of hierarchy. Overall, our results show the importance of the characteristics of an organization's knowledge base for organizational structure and suggest building teams with shared experience can enhance an organization's ability to adapt to coordination challenges.