Company owners need to decide what degree of centralization is appropriate for their business. Models range from having all authority centralized in the president to delegating most decisions to working-level employees. Influences from the marketplace and internal factors determine how centralized an authority you need and whether decentralization will help improve the performance of your business.

Organizational Structure

A hierarchical organizational structure can support centralized authority, while a matrix structure, with working level employees reporting to different managers for work and for administration, is more decentralized. The president in a hierarchy can decentralize the structure by delegating authority to managers and encouraging them to delegate decisions to the employees reporting to them. You have to specify which decisions the president makes and which ones managers and working-level employees can decide to determine the degree of decentralization you want.

Control

The amount of control the president has over the company is directly related to the degree of centralization or decentralization. Businesses that operate in markets where they are subject to compulsory standards or regulations, such as financial services or military supplies, need centralized control and tightly applied policies and procedures. Businesses that require creativity from working-level employees may want administrative control but don't need tight control over the work. They achieve better results if authority is decentralized.

Coordination

Companies with centralized authority can achieve excellent coordination, because the president and a few managers make all the decisions. They only need to consult occasionally for tight coordination of their decisions. Companies with decentralized authority make their decisions at the managerial and working level. Coordination among the many decision makers is more difficult and can lead to duplication and lack of consistency. You can address a lack of coordination in a decentralized company by assigning responsibility for coordination to a particular employee.

Flexibility

Decentralized companies are more responsive to markets that are changing rapidly. In centralized companies, the decision makers are organizationally distant from the working level. Information from the working level that forms the basis for decisions has to move up the organization, and implementation of the decisions has to move back down to the working level. Decentralized organizations make decisions closer to the working level and achieve greater flexibility in responding to changes in the marketplace. If your business operates in an evolving market and has to adapt quickly to new situations, you should decentralize authority.