The dynamic value of hierarchy

This study develops a dual-routines view of the dynamic value of hierarchy, and tests it against the implicit null hypothesis that hierarchy merely provides static advantages over markets. The view holds that hierarchical managers perform two roles that create value for firms in perpetuity – an administrative role of enforcing operational routine, and an entrepreneurial role of executing a metaroutine that continually revises operational routine to keep pace with changes in the environment. The test consists of a natural experiment comparing the behavior and performance of establishments that leave a franchise, ‘lose their hierachical managers’, with those that remain. I find support for the view. In the absence of the franchisor, establishment behavior drifts from the operational routine, and establishments fail to adopt innovation. Both responses lead to significant decay in performance. Thus hierarchical managers are necessary to actively enforce routine, even after the routine has been assimilated, and to introduce innovation, even in this unique setting of perfect incentives.