Ample amount of literature studies how the hierarchical structure of firms changes with an expansion of production. This literature tends to find that as firms grow larger, the number of layers increases, in order to better manage the larger number of problems that need to be solved. But can flexible organizational changes allow firms to survive and grow in highly dynamic markets? To what extent?
Product cycles entail the mass production of new – and often increasingly complex – products on a regular basis and are a fundamental feature of innovation, growth, and survival in many industries. How do firms manage such a highly dynamic production environment?
Product cycles are a fundamental feature of innovation, growth, and survival in many industries. Firms develop new generations of products to remain profitable when the production of current generations becomes imitable. These product cycles can be anywhere around 2 to 5 years depending on the industry. Our study focuses on the production of new models of automobiles, a prototypical example of product cycles. We combine granular administrative data from a leading global auto manufacturer with event study and discontinuity-based methods.
We find that the production of new models necessitates learning-by-doing, hence increasing the defects per vehicle substantially after the production change, which decrease to their prior level over a period of 2-3 weeks.
We analyze two types of discrete changes to the production process:
- Model Shocks: such changes result in a significant increase in the number of new parts that have to be produced and assembled, with resulting changes in the skills needed in production and the types of problems that arise on the assembly line
- Volume Shocks: Such changes result in a substantial increase in the number of cars that have to be produced, but not in the complexity of what needs to be produced since the model variant does not also change at the same time. In this change, the plant needs to produce more of the same.
The plant has no discretion as to whether or when to implement these changes. Such decisions are made by the manufacturer; the plant is tasked only with executing production. We study the organizational responses put in place by a manufacturing plant as a response to such changes to bring down defects per vehicle and how they differ across the two types of shocks.
The plant’s model shock response and following results show how an increase in the complexity of the problems that need to be solved can lead to a reduction in organizational layers inconsistent with prior literature. On the other hand, the volume shock response shows how the organization controls negative productivity through a monotonic response: permanent increase in both employment and management layers, consistent with prior evidence from manufacturing in high-income countries.
We find that:
- Both volume and model shocks lead to a similar short-term reduction in productivity but the plant is able to bring these back down fairly quickly.
- In the model shock:
a) The number of managerial layers decreases on average by about one layer as a result of the reallocation of existing workers across layers, rather than by increasing or downsizing the workforce. This effect is stable and significant in the first three weeks after the shock. b) The reallocation of workers is found to be away from the middle layers and towards higher level positions. c) The plant waits to back-fill the middle ranks positions. d) Once working groups have learned the new tasks and the negative productivity impacts following the introduction of new model variants have been addressed, working groups again revert to the initial hierarchical structure.
- While volume changes lead to a similar spike in the incidence of defects per vehicle, the organizational response is very different.
- In the volume shock:
a) There is a sudden increase in the number of managerial layers within working groups going up by just under 1 layer. This increase is persistent for several weeks after the volume shock. b) The plant hires more entry-level workers and adds more layers to working groups, so that the distance – in terms of production layers – between front-line workers and supervisors further up the hierarchy increases. c) The overall plant employment increases by about 70-80 workers over the two months following the volume shock. d) The effect on employment is concentrated in frontline workers
While model shocks lead to workers being trained and promoted away from mid-level positions and towards higher level positions, making the organization both top and bottom heavy and reducing the distance between highly skilled workers and front line employees, volume shocks lead to an organization that is heavier in the middle and lower part.