What’s it: A centralized organizational structure is an organizational structure in which decision-making is concentrated at the top level. Upper-level managers retain decision-making authority and slightly delegate it to lower levels. The degree of centralization depends on several factors, such as the organization’s size, management style, and the quality of managers at each level.
This structure is important for controlled decision-making. The top-level managers make decisions, and the managers below them just have to run and follow their directions. Finally, it reduces the drift at the lower level.
Why do companies adopt a centralized organizational structure?
The centralized organizational structure becomes important to overcome the problems in the decentralized structure. Leaving decisions down to a lower level is risky. Decisions by lower managers may be inconsistent with the wishes or expectations of upper managers. It can give rise to problems, for example, conflict and disharmony between them. Thus, with decisions concentrated on top managers, such problems do not exist.
The second issue is decision quality. Top managers are considered more experienced and qualified as decision-makers. But that’s not with lower-level managers. Lower-level managers may be experts in functional areas. However, they may not be good decision-makers due to minimal experience. And, they need more training or experience before they can become effective decision-makers.
As a result, leaving decisions to lower-level managers can result in poor decisions. In addition, decisions may be uncoordinated because lower-level managers make decisions at their discretion. Thus, their decisions tend to be random, undirected, and inconsistent with one another.
A centralized structure is an option to overcome the above weaknesses. In addition, because decisions are centered on top-level managers, they can make more independent decisions. There is no obligation for them to consult the decisions to the managers under them.
What is the difference between a centralized and decentralized organizational structure?
If under a decentralized structure, lower-level managers have the authority to make decisions. But, under a centralized structure, authority is concentrated on top-level managers. The higher the level of the manager, the higher the decision-making power. And top managers have ultimate power.
The decentralized structure gives subordinates more responsibility for making decisions. In contrast, centralized structures do not have such opportunities. Subordinates only deal with carrying out directions and orders from superiors.
The decentralized structure allows companies to be more adaptive. If problems occur at lower levels, they can respond quickly. Lower-level managers can make decisions immediately. And their decisions will be more relevant to the problem because they are closer to the source.
In contrast, decisions may be slow to reach top-level managers under a centralized structure. The problem becomes even more complicated if the message has to go through many managerial layers. Finally, decision-making and implementation can take time to be effective.
How does a centralized organizational structure work?
A centralized organizational structure underscores the centralized decision-making power of top-level managers, usually by senior management or the executive board. Because of their small number, we can say that the minority dominates the decisions in the organization.
Once a decision is made, it is distributed to the lower managerial layers and passed down the chain of command.
When problems occur at lower levels, decision-making cannot be done simultaneously. Rather, it must be consulted at the top level for decision-making.
An example of an organization with a centralized structure is a retail chain. Upper managers make key decisions, from inventory to products to prices. Meanwhile, all branches operate in the same way. The store manager works according to the guidelines of the upper manager. And, they have little input on how their respective stores are operated.
What are the determinants of a centralized organizational structure?
How centralized is an organization? That will vary between companies. There are various factors to consider, including:
- Organization size
- Management philosophy
- Manager competence
- Geographical spread
- Business environment
Centralization saves more costs. For example, it supports higher economies of scale.
Now, take the decision about procurement as an example. When departmental managers have the authority to procure office equipment, they may not be able to enjoy discount facilities.
Conversely, if done centrally, the company can buy on a large scale from suppliers. As a result, suppliers are more likely to offer a discount to the company.
Finally, procurement costs become cheaper than when carried out independently by each department. And companies benefit from purchasing economies of scale.
In some cases, large companies tend to delegate decisions to lower-level management. It is almost impossible to take all the decisions under a few people because the operation is more complex.
Take, for example, multinational companies. Top-level management at headquarters delegates decisions and grants autonomy to strategic business unit management. The same case applies to other companies, such as retail chains, as I have previously mentioned.
Centralized structures are common under authoritarian leadership. The leader dominates decisions and leaves no room for subordinates to participate. Moreover, authoritarian leaders demand absolute obedience to what they decide.
On the other hand, decentralized structures are common under democratic leadership. Leaders provide ample space for subordinates to participate in making decisions.
Quality managers at every level
Centralization can be a suitable choice when managers at each level have varying qualities. For example, top-level managers are trained to make decisions. In contrast, lower-level managers do not have such qualities. Thus, bad decision-making can be avoided by concentrating decisions at the top level.
On the other hand, decentralization may be the preferred option if managers at each level are of sufficient quality. Top managers trust their subordinates and delegate more decisions because they can make effective decisions.
A centralized organizational structure is an option when a company operates a location. Conversely, they will rely on decentralization if they operate in many different geographic areas, such as multinational companies.
Through decentralization, managers in branch offices or strategic business units can make quick decisions. Decisions are also more relevant to the business environment in which they are made. They are more aware of problems in their area than managers at headquarters.
Decentralization is usually appropriate if the company operates in a dynamic business environment. For example, the business environment is changing rapidly and requires quick decision-making. Therefore, top managers are likely to delegate more decision-making authority to lower-level managers.
On the other hand, if decisions have to be made by top-level managers, it can take a long time. And it can become even more acute when a problem occurs because a decision doesn’t come right away.
What are the advantages of a centralized organizational structure?
Greater control over decisions is among the advantages of a centralized organizational structure. In addition, lower-level managers are less likely to make inconsistent decisions because they do not have the authority to do so.
Other advantages of a centralized organizational structure are:
Consistent decisions. Decisions are taken by top-level managers, and subordinates just have to carry them out. Thus, it will be consistent at all levels down to the lowest chain of command.
Easy to make decisions. Top-level managers make decisions at their discretion. They do not need to consult what they decide with their subordinates.
A clear chain of command. Who has decision-making authority is clearly defined. So, everyone knows who has the right to make decisions when, for example, problems arise. Finally, overlap or confusion in decision-making can be minimized.
Maintained quality. Top-level managers rely on a control system through procedures, standards, and rules to ensure subordinate compliance. Working in a factory is an example. Product specifications and production techniques are regulated at the top management level; there is no opportunity for supervisors to make decisions independently. Imagine if they could make decisions independently. The output may not meet specifications, and what is worse, the production process can be disrupted because there is no coordination between them.
Unity towards the goal. Centralized decisions allow everyone to move in the same direction. Once a decision has been made, lower-level managers act on it without any opportunity for them to make other choices. Finally, the company can more easily fulfill its vision.
Order in business. Top-level managers ask employees to comply with every decision made. As a result, the company’s operations are more orderly and smoother.
Saving money. Centralization minimizes problems due to inconsistent decisions and duplicate roles. In addition, it also supports economies of scale, as I demonstrated in the case of office equipment procurement above.
Good business image. The company can maintain a consistent business image in the eyes of the public. By being concentrated, the message to the public is more coordinated. It becomes critical when a company faces a crisis and has to confront the public.
What are the disadvantages of a centralized organizational structure?
A centralized structure makes companies slow to make decisions. So, they are less flexible in responding to changing business environments. When a critical problem occurs at a lower level, it has to go through several layers before making a decision. Likewise, when a decision is taken, it has to go through the same layers for implementation. That – up and down communication – is time-consuming. And it will be significant if the company, for example, operates in several geographically dispersed locations. Eventually, the problem worsens even when a decision has not been made.
Other disadvantages of a centralized organizational structure are:
Message distortion. Messages may be distorted as they go through the managerial layers. For example, middle managers may be reluctant to fully communicate problems at lower levels to their superiors. They may think it will hurt their careers because they are considered incompetent to handle subordinates. Finally, they are more likely to distort messages and hide harmful information.
Good decision, bad implementation. Without a good control system, good decisions are poorly implemented. And, top-level managers cannot monitor how their decisions are implemented at lower levels because they spend more time dealing with decisions.
Demotivating. Without delegation, subordinates do not have the space to participate in making decisions related to their work. They feel that their superiors are not empowering them. So, finally, they were discouraged.
High turnover. Demotivation drives subordinates to leave the company. They do not have the space to participate, so it is difficult to actualize personal initiative. Finally, they are disloyal to the company, resulting in high turnover.
Low creativity. Less subordinate participation means fewer ideas are brought into the management system. As a result, it leads to less creativity within the organization.
Bet for success. If top-level managers are good decision-makers, that’s not a problem. But, on the other hand, if they are incompetent, it can be disastrous for the company.
Rigid work culture. Since subordinates are only carrying out orders and decisions of superiors, they may feel like machines. And they become whatever the leader wants them to be.
Undeveloped competencies. There are fewer opportunities for subordinates to actualize and develop themselves by being involved in decision-making. Finally, their competence does not increase.
Business interruption. Business operations can be disrupted if top-level managers leave the company. Lower-level managers are not ready to replace them due to insufficient experience and competence in making decisions.
Heavy workload. The workload of executives becomes heavy because decisions are concentrated on them. They have to spend a lot of time formulating a decision. And the burden becomes even greater when there are many problems they have to solve.
What to read next
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- Matrix Structure: How It Works, Advantages, Disadvantages
- Horizontal Organizational Structure: Characteristics, Advantages, Disadvantages
- Vertical Organizational Structure: Characteristics, Advantages, Disadvantages
- Shamrock Organization: How it Works, Advantages and Disadvantages
- Project-Based Organizational Structure: Strengths and Weaknesses
- Centralized Organizational Structure: Advantages, Disadvantages
- Decentralized Organizational Structure: Advantages, Disadvantages
- Formal Organizational Structure: Characteristics, Advantages, Disadvantages
- Informal Organizational Structure: Characteristics, Advantages, Disadvantages
- Multidivisional Structure: Importance, How it Works, Pros, Cons