The Influence of Automation on Corporate Decision-Making

Last year, a new concept emerged in the corporate sector: the flattening. This term describes the current trend where technology companies, which rapidly expanded their middle management layers during the pandemic boom, are now eliminating these positions through extensive layoffs.

Recent research by Mustafa Dogan, Alexandre Jacquillat, and Wharton’s Pinar Yildirim, published in the Journal of Economics & Management Strategy, delves into this phenomenon. Through theoretical modelling, the study investigates how automation influences organizational decision-making structures, focusing on balancing centralization and decentralization. The study challenges the common belief that technology will decentralize authority by democratizing organizations and empowering lower-level managers.

The study finds that automation significantly alters decision-making processes within companies. Centralized organizations, characterized by hierarchical decision-making, are more inclined to automate tasks within divisions that encounter uncertainty, such as those involved in developing new products. By doing this, they reduce the dependency of top managers on the expertise of mid-level managers in uncertain situations, streamline processes, and enhance control at the executive level. Yildirim explains, “Automating divisions that involve uncertainty can lessen the need for managers’ localized expertise, allowing executives to become less reliant on them.”

On the other hand, decentralized organizations tend to deploy automation in more stable, routine tasks where decision-making is more spread across different managerial levels. These companies prefer to utilize automation to support steady, ongoing operations in existing product divisions, thereby insulating them from the negative impacts of biased decision-making by mid-managers in uncertain areas. This approach helps to improve the overall financial performance of the company.

Furthermore, as companies allocate more resources to automation, they tend to move towards a more centralized decision-making model over time. Automation reduces variability in operations, meaning lower-level managers are required to make fewer decisions. This shift concentrates more authority in the hands of top executives, moving the company’s structure towards centralization, regardless of its initial setup. Yildirim points out, “This reduces the strategic role of mid-level managers, pushing them towards more operational tasks as lower-level ones are automated.”

“For decentralized firms, automating routine tasks in stable divisions enables managers to concentrate on adapting to changes and innovating, enhancing the firm’s agility and responsiveness,” adds Yildirim.

Impact on Innovation

A further finding from the paper suggests that as automation resources become more accessible, the gap between the innovation capabilities of centralized and decentralized firms could widen. Centralized firms might become more resistant to change, while decentralized firms could become more flexible and better equipped to adapt to new market conditions. “For decentralized firms, automating routine tasks in stable divisions allows managers to focus on adapting to changes and innovating, enhancing the firm’s agility and responsiveness,” Yildirim emphasizes. This divergence could have significant effects on competitive dynamics across various industries.

Additionally, as automation redefines the roles of mid-managers, it will also affect communication and the extent of disagreements within firms. As more tasks are automated in uncertain divisions, the quality of communication between executives and managers may decline, leading to a less informed decision-making process. Ironically, this could undermine the efficiency gains that automation is supposed to bring. Yildirim notes, “Automation makes communication from managers to top executives less informative, which can complicate management when technology is used strategically.”

Maintaining Alignment

The study’s final insight is that strategic automation can also replace traditional financial contracts used to manage conflicts within organizations. As automation reduces the need for managerial input, companies might find it less necessary to align managers’ incentives with those of the organization through financial means. Instead, automation can standardize processes and minimize opportunities for bias or misalignment. “It’s a cost-effective way to maintain alignment and reduce internal conflicts,” Yildirim explains.

The study’s implications are profound. The authors suggest that as companies increasingly access automation resources, they should anticipate changes in their managerial hierarchy: top-down decision-making will become more prominent. This shift could diminish the role of mid-level managers, confining them to more operational tasks and reducing their strategic influence within the organization. Essentially, the authors argue that automation is not just a tool for efficiency but a strategic asset that can reshape the power dynamics within an organization.