Two types of organizational structures found in the business environment are centralized and decentralized management.
What is a decentralized management structure?
Decentralization refers to the practice of distributing authority among various levels within the organization. In a decentralized organization, overall authority is still maintained by top level managers, but most decision-making responsibility is distributed across multiple individuals or teams.
Decentralized management is found most often in areas with a lot of direct contact with clients and customers, since it allows the managers closest to those clients and customers the ability to make decisions based on their first-hand knowledge and experiences.
What is a centralized management structure?
In a centralized company, the concentration of management and decision-making power is at the top of the organizational hierarchy. That means strategic planning, goal setting, budgeting other major decisions are typically conducted by a single senior leader or leadership team.
Small businesses often use a centralized structure since the owner is responsible for the company’s business operations. Centralized approaches are also commonly seen in highly competitive industries where companies specialize in similar products to their competition.
A common example of a centralized organization is Apple computers, where most of the direction of the company is orchestrated at the very top (formerly Steve Jobs himself), with the lower levels of management and employees very tightly organized to execute those goals.
What are the pros of a decentralized organizational structure?
There are advantages and disadvantages to decentralized management. Advantages of a decentralized structure include:
Reduces the Burden on Top Management
While centralization places all decision-making and responsibility on the shoulders of a top leader or leadership team, decentralization delegates those responsibilities to managers who have expertise in the areas in which they work. This gives top management the ability to concentrate on other managerial issues affecting the entire organization. It also means that business owners and top management can take a vacation, use sick days or tend to emergencies without having to worry about their organization falling apart while they’re away.
Promotes Executive Development
In that same vein, when a decentralized structure is implemented and managers are given authority in their areas of expertise, they are able to further develop their leadership talents and skills, to the benefit of the company overall. Centralized structures can leave little room for leadership practice, giving mid-level and low-level team members less of a chance of moving up in the organization.
Allows for Quicker Decision-Making
Decentralized organizations have the ability to make decisions more quickly, since they do not have to travel up the hierarchy to seek approval, which in some cases can cost a company time and money.
Helps Improve Employee Morale
Decentralization can improve employee morale since local managers will often involve their subordinates in the decision-making process, which gives employees the satisfaction of knowing their opinions and expertise are valued.
Decision making by one person, or the same group of people, such as upper management, for all aspects of the organization, can make it difficult to diversify and roll with the changes. Allowing decision-making by lower level or middle managers in a decentralized company promotes diversification in many areas of the organization and can invite change when change is warranted to improve the business overall.
Offers Better Control and Supervision
A decentralized organizational structure helps ensure better control and supervision, as the subordinates at the lowest levels will have the authority to make independent decisions. As a result, they have thorough knowledge of every assignment under their control and are in a position to make amendments and take corrective action.
What are the cons of a decentralized organizational structure?
Differing of Opinions
A decentralized organization can struggle with multiple individuals having different opinions on a particular business decision. As such, these businesses can face difficulties trying to get everyone on the same page when making decisions.
The Potential for Non-Uniformity
Under the decentralization model, some companies may find that their policies and standard procedures may not be uniform across the organization, which can cause confusion and dissent, not only among managers, but employees as well.
May Not Be Ideal for Newer Businesses
Implementing a decentralization structure in a new business can be tricky if your managers are still learning the ropes. It’s imperative to ensure that those who are making the decisions have a firm grasp on the company and the leadership skills to make the best choices for the business.
It May Duplicate Work
Some organizations that follow a decentralized structure may have support groups such as information technology or human resources for their specific departments. This may mean that efforts are being duplicated across the company, which can lead to inefficiencies and additional costs. Historically, centralized organizations have fewer managers than decentralized organizations, since overall decisions are made at a top management level.
Could Breed Unhealthy Competition
Because lower-level managers from departments across the organization may each have decision-making abilities, resolving conflict across departments may be more challenging, slowing down decision processes and potentially requiring upper management to become involved.
Poor Leadership Can Damage Reputations
Decentralized organizations with lower-level managers who lack leadership skills or competence can harm the reputation of a company overall. It’s imperative that companies using a decentralized structure ensure that the managers they are hiring are aware that the decisions they make on their level affect the company as a whole.
How does a business determine its degree of decentralization?
While the degree of decentralization an organization has depends on the nature of its business as well as a wide range of reasons, here is a common list of factors:
Size of the Organization
The size of the organization is an important factor that determines the degree of decentralization. A larger business has more decisions to make and more levels in which to make them. While running a decentralized organization may alleviate some of the strain on the upper management, coordinating those decisions and ensuring autonomy across the organization can be time consuming in itself.
Traditional management mindsets can often align with a more centralized management approach. Managers who are willing to delegate authority and decision-making responsibilities, while nurturing the development of lower and mid-level managers, may be more apt to go with a decentralization management model.
Centralization can be a good way to achieve uniformity and control across an organization, but it may not be the most effective way to manage and encourage leadership. Decentralization empowers low- and mid-level managers and can help with employee retention when managers see they have the power to make decisions and implement initiatives within their department or group. In addition, managers can see the possibility of advancement when they are able to nurture their decision-making abilities.
Centralized and Decentralized Management Structure: A Hybrid Approach
In some cases, organizations may find that an “either/or” approach may not work for them. In that case, some businesses are adopting a hybrid approach.
A hybrid model can enable managers to have some autonomy and decision-making abilities while providing protections to keep your business decisions consistent and structured.
Organizations that adhere to a 100 percent centralized model may be limited in their ability to expand and grow. Alternately, a completely decentralized organization may find itself having trouble maintaining control with regard to the decisions made across the organization.
A business’s overarching strategy and goals, combined with the expertise, experience and capabilities of the managers within the organization will help determine the management structure the business chooses, and that choice can shift and evolve over time based on the needs of the company.
Need to talk about which strategy fits your business? Talk with one of our HR consultants.