Centralized & Decentralized Organizational Structure

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Businesses are as unique as snowflakes, and an organizational structure that works for one company may be completely wrong for another. Traditional, mainstream management tends to be top-down and centralized, with decisions and directives coming down a clear chain of command. Nontraditional leadership is often decentralized, with inputs and insights coming from all levels within the organization.

In practice, successful companies may practice a hybrid of these two styles, with clear leadership complemented by competent staff who are also empowered to take initiative and make ongoing decisions.

TL;DR (Too Long; Didn't Read)

A centralized management structure concentrates power at a single location or with an individual or small group of individuals. Decentralized management distributes authority more broadly to informed employees and multiple levels of management.

Centralized Leadership Advantages

  • Clarity: When you work for a business or organization with centralized leadership, you know exactly which directives to follow and whom to ask when you're unclear about expectations. This is especially useful for new employees, making it easy for them to understand their roles and responsibilities. In addition to clearly designating top-level authority, a centralized management structure also delegates mid-level management roles to specific individuals with specific functions.

  • Consolidation: The clarity of a centralized organizational structure helps to avoid redundancies, which can waste money and time. Job descriptions are clear, from the top-level managers who make executive decisions to the rank-and-file employees who are mainly tasked with doing what they are told. Processes and procedures tend to be standardized, minimizing overlap and implementing focused oversight so tasks are neither duplicated nor overlooked.

  • Focus: The clarity and consolidation characteristic of centralized leadership helps to focus energy and streamline work flow. As a result, employees have the tools they need to stay on task, and managers have the authority to correct and expedite as needed. 

Centralized Leadership Disadvantages

  • Lack of Initiative: Employees who have no authority to make decisions are unlikely to step up when a situation requires a quick decision and no manager is present. A centralized management structure discourages this type of initiative, and employees aren't trained or encouraged to practice creative problem solving. Unless centralized managers can be everywhere at once, this lack of empowerment can lead to missed opportunities and costly mistakes.

  • Low morale: Employee morale suffers when staff feel they have no opportunity to collaborate and no say in company decisions. Centralized management takes these functions away from employees and places them in the hands of management. Low morale can lead to high turnover, costing your company money in training and loss of productivity as new employees get up to speed.

  • Lack of opportunity: If members of your staff have no experience making decisions and understanding the big picture, they're unlikely to grow in their jobs and become management material. You'll be forced to hire from outside, creating a lack of solidarity as employees have to take direction from strangers. Quality employees are unlikely to stick with their jobs long because they see no path for advancement.

Decentralized Management Advantages

  • Engagement: When managers and employees are empowered to make decisions at many levels of your organization, they are more likely to care about their jobs. Their work will be more interesting, and there will be less turnover as a result.

  • Quality of information: All of your employees have perspectives and insights about how your business functions and how to make improvements. When workers and managers are empowered to act on these observations, your business will benefit from the added information.

  • Flexibility: A decentralized management structure allows employees to think quickly on their feet and make decisions about urgent matters without waiting from approval from a higher level of management. Employees can even step in for one another in emergencies. These crossovers give your business the extra flexibility necessary to adapt to unforeseen situations and respond effectively to curve balls.

Decentralized Management Disadvantages

  • Redundancies and blind spots: When multiple employees have the authority to make the same type of decision, you run the risk of repeating tasks and wasting energy that could be spent on more pressing matters. Communication is necessary to avoid unnecessary work and, conversely, to make sure that all tasks are covered.

  • Unclear chain of command: A decentralized management structure can lead to confusion about who is responsible for each task and who has the authority to make a final decision about a project. This lack of clarity can lead to bruised egos and power struggles, or employees and managers may lose effectiveness by deferring to one another to avoid the potential for conflict.

  • Inefficiency: Without a clear chain of command, a business may have difficulty getting things done. Clear leadership makes it easier to streamline tasks and set processes in motion, and shared decision making can be cumbersome and slow. If employees or managers don't agree on a course of action, they may waste time trying to get coworkers on board or forging ahead with the wrong tasks.

Centralized Management Best Practices

Whether your business organizational structure is centralized or decentralized, the overall approach may be less important than the way you implement it. To successfully use a centralized management structure, make sure that structure and responsibilities are clearly delineated. This information may be expressed in an organizational chart, but it should also be reinforced by ongoing training and communication.

A business with a centralized management structure can increase its odds of success by delineating management function in terms of outcomes and strategies rather than specific tasks. This approach gives managers the tools and authority to think outside the box if a situation calls for innovative approaches. It helps to avoid the stagnation and compartmentalization that can result from a rigid and static chain of command.

Decentralized Management Success Factors

A decentralized management structure depends on high-quality training so employees know how to make judgement calls under pressure. Training builds both skills and confidence, two essential ingredients for empowering employees to step up and make the most of a decentralized paradigm.

Although decentralized management relies on input and knowledge from many levels in an organization, employees and managers should still have a clear understanding of their job responsibilities and whom to approach if they need help. This management style requires ongoing learning, which depends on having coworkers present to help supplement and augment an employee's knowledge base. In addition, employees should be encouraged to seek guidance when needed rather than making decisions that require a higher level of understanding.

Blending Centralized and Decentralized Management

In practice, even if your company has a clear, centralized organizational structure, your employees will most likely have to make some decisions on their own. Management isn't present every time an employee interacts with a customer or encounters an unforeseen situation.

Similarly, even companies with decentralized management structures often see employees deferring to managers, especially when a situation calls for advanced problem solving. The terms "centralized" and "decentralized" management describe general approaches that don't follow every aspect of the workplace.

An organizational structure that successfully blends centralized and decentralized management approaches will clearly define which types of decisions are the sole province of managers and which should be made by employees. Staff have the training and education they need to make judgement calls and take initiative. Workers have the authority to take initiative, even if this sometimes results in mistakes.

References

About the Author

Devra Gartenstein founded her first food business in 1987. In 2013 she transformed her most recent venture, a farmers market concession and catering company, into a worker-owned cooperative. She does one-on-one mentoring and consulting focused on entrepreneurship and practical business skills.