A centralized business structure is one where all power resides at the core. If there's a decision to be made, only the boss can make it. The business may sprawl across states or even nations, but planning gets done at the central headquarters, not out in the field. Organization theorists have spent centuries comparing the advantages of centralization and decentralization.
Advantages of Centralized Structure
A centralized command structure offers your business definite advantages:
- Even when your company gets big, you're giving the orders. That makes it easier to keep everything tuned to your personal vision.
- There's a clear chain of command. Everyone knows who to look to for a decision.
- When you delegate authority, you can ensure there's no overlapping or conflicting spheres of authority.
- Everything in centralized business is standardized. With little variation between departments or branch locations, it's easy to make purchases, and everyone everywhere knows the rules.
- No matter how far the business operations extend, you can concentrate all the experts, specialists and key players at the headquarters.
- You make all the decisions. That makes it easy to make them quickly when need be.
It often takes a strong, centralized leadership to invest in projects with an uncertain payoff or to kill a project that isn't working out. That's one of the major advantages of centralization of authority.
Reasons to Decentralize
Along with the advantages of centralized structure come several disadvantages. A big one is that centralized decision making leaves employees shut out of decision making. Since you're not on the front lines with them, you may be setting goals or policies they can't carry out. That's only one of the reasons for decentralizing:
- If you have to concentrate on making policies and decisions, you may not be able to supervise employees and see how they carry out your decisions. If they're wandering away from your vision, you may not have time to notice.
- The bigger your organization becomes, the longer it will take for information to reach you and for your decisions to reach the front lines.
- When employees get no say in policy, they often decide to look for jobs elsewhere.
Drawbacks of Decentralizing
Decentralizing and centralizing go in and out of fashion over the years. Decentralization not only costs your company the advantages of centralized authority, but it has some disadvantages of its own:
- If you want to be a change agent, implementing change is a lot harder when decision making is decentralized.
- Your employee teams may not coordinate well with a central guiding authority.
- Some employees may not be comfortable making their own decisions.
- Without a clear chain of command, confusion may swallow your employees whole.
Weighing Your Options
The advantages of centralization and decentralization may be clear on paper but harder to evaluate in the real world. One rule of thumb is that the center only makes the decisions that can't be made at the edges. You can figure out which decisions those are by considering what your organization needs:
- If your organization needs to react swiftly to changing conditions, that's a point in favor of decentralizing.
- If reliability and standardization are important, so is centralizing decisions and policies.
- Will centralizing make you more efficient? This can happen from economies of scale or because you can keep different teams from duplicating each other's efforts.
- Do you need to make hard calls with no immediate gain? That's usually easier with a centralized structure.
It's possible you'll want to centralize some decisions and decentralize others. You might find that centralizing payroll processing makes it smoother and more economical, but trust your sales force to decide which products they can sell in their market.
Fraser Sherman has written about every aspect of business: how to start one, how to keep one in the black, the best business structure, the details of financial statements. He's also run a couple of small businesses of his own. He lives in Durham NC with his awesome wife and two wonderful dogs. His website is frasersherman.com