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What’s it: A decentralized organizational structure is an organizational structure in which decision-making is delegated as far as possible along the chain of command. In other words, lower-level managers have more opportunities to make decisions. Decisions depend on a few individuals under a centralized structure, but under a decentralized structure, it is more dispersed along with the managerial layers.
In addition to enabling faster decision-making, decentralization can boost employee motivation. By delegating more to subordinates, they are more motivated because they feel empowered.
However, this structure also contains weaknesses. Undirected decisions are among them. Another problem is poor decisions because lower-level managers are not competent to be good decision-makers.
Why choose a decentralized organizational structure?
Centralized structures are often not suitable for companies operating in dynamic business environments. The environment is rapidly changing and requires immediate decision-making. Likewise, when local decisions are essential to supporting competitiveness, such as in multinational companies, concentrating decisions on top-level managers can be problematic.
On the other hand, by delegating decisions to lower levels, decisions can be made more quickly. And they are more relevant to local conditions because they are picked up by the manager closest to the problem.
In addition, as companies get bigger, operations become complex. Many decisions have to be made. It can become impossible if the company concentrates decisions on a few individuals (top-level managers). Decision quality can be a problem because top-level managers carry heavy workloads and deal with many decisions. Or, if they make good decisions, the implementation may be poor because they have less time to supervise lower-level managers over what they have decided.
Employee development and motivation are other reasons why decentralization is important. Lower-level managers have opportunities to self-actualize and develop by being involved in decision-making. Finally, competence increases. Long story short, the decentralized structure allows the company to prepare lower-level management with sufficient competence to occupy higher positions. As a result, competence increases at all levels and meets the organization’s needs to grow.
What are the factors to consider when choosing a decentralized organizational structure?
Which factors are considered in choosing between decentralization and centralization and the degree to which decentralization is adopted depends on factors such as:
- Cost
- Organization size
- Control system
- Operation scope
- Manager quality
- Management style
- Business environment
Cost. Centralization allows benefits such as economies of scale. For example, imagine each department buying office equipment centrally; the company is more likely to get a discount from suppliers for buying in bulk, saving costs.
Organizational size. Large companies have complex operations and involve many decisions. Thus, relying on decisions under a few managers is not a reasonable option. So, a decentralized structure is a great choice.
Control system. Decentralization relies on rules, procedures, or standards for an adequate control system. Without it, decentralization will be ineffective because deviations are likely to occur.
Scope of operation. Companies with multiple product lines or operating in different geographies may choose a decentralized structure. This structure allows them to make fast and relevant decisions. Lower-level managers can make decisions about their work area.
Manager quality. Decentralization requires lower-level managers to be competent to be good decision-makers. Without it, problems arise because of bad decisions they make.
Management style. Democratic leadership places decentralization by delegating authority and encouraging the participation of subordinates in making decisions. In contrast, authoritarian leadership relies on a centralized structure to work.
Business environment. Companies need quick decisions when operating in a dynamic business environment. Therefore, upper management is more likely to delegate decision-making authority.
How does a decentralized organizational structure work?
The decentralized structure encourages higher management to delegate more authority to lower management. In other words, lower-level managers have more participation and responsibility in making decisions.
While top-level managers focus on strategic decisions, lower-level managers focus on less essential aspects. For example, executives make decisions about vision, mission, and strategic plans. Meanwhile, they leave the remaining decisions and give authority and responsibility to lower-level managers to run the day-to-day operations.
Then, to ensure the organization operates effectively, top-level managers establish control systems, relying on rules, procedures, and controls. So, even though their power is reduced due to delegation, they can still ensure the organization runs as it should.
Top-level managers view decentralization as a way to motivate people within the company. Therefore, they delegate authority to subordinates. So, not only does it reduce the top-level managers’ workload involved in making decisions, but it also encourages subordinates to be more enthusiastic. As a result, they have the space to manage and make decisions about their work area. And they also have the opportunity to actualize and develop themselves, increasing their competence.
Decentralized form
How decentralization works can vary between companies. It may be based on business function, product line, geography, or project.
First, in functional decentralization, specific authority is distributed among departments. For example, a marketing executive sets product sales targets. He then delegates decisions about strategy and leaves how to achieve targets to the marketing manager.
Second, the company distributes authority based on existing product lines. For example, a car company has three product lines: passenger cars, electric cars, and commercial cars. Top executives then delegate authority to make relevant decisions, including their inherent functional areas.
Third, Companies decentralize authority based on geographic areas. This is common for multinational companies. They have subsidiaries or strategic business units in more than one country. Upper management – at headquarters – provides guidance on targets. Meanwhile, they delegate the decisions and authority to govern operations and design strategies.
Fourth, the company delegates authority on a project basis. Top-level managers give the project head authority to make decisions, including selecting staff, assigning tasks, and monitoring performance. Likewise, the project head is responsible for how to organize and running the project.
Examples of decentralized organizations
Decentralized structures are effective for companies where the market requires customized customer service. Top-level managers delegate how to design the marketing mix and build and maintain long-term customer relationships to lower-level managers, who have the closest point of contact with customers.
Then, a decentralized structure can be an option when the company operates in several different locations. A good example is a multinational company.
Lastly, this structure is also suitable when companies need to respond quickly to market changes or change their business models constantly due to a dynamic business environment. Some tech companies – or those that rely on technology – such as Amazon and Google typically adopt decentralization.
In general, many small businesses rely on a centralized structure early in their operations. They rely on the owner to make all the decisions about the business. And, slowly, they transform into decentralization. Owners are starting to reduce their workload and rely on professionals to manage the functional areas of the business.
What are the advantages of a decentralized organizational structure?
Faster decisions are an advantage of a decentralized organizational structure. Communication and decision-making processes do not have to go through many managerial layers. As a result, decisions are made and implemented more quickly.
Through delegation, lower-level managers have more responsibility for making decisions. So, they can react quickly to resolve problems when they arise.
Other advantages of a decentralized organizational structure are:
Relevant decisions. Often, lower-level managers are closer to the source of the problem. They understand their work area better than top-level managers. So, when problems arise, they better know the right solution. As a result, decisions within the organization are more relevant to the context.
Better quality decisions. Besides being fast and relevant, the decision is quality because it minimizes message distortion as it passes through the managerial layers. Imagine messages have to go through many managerial layers under a centralized structure. Middle-level managers are more likely to distort negative messages because it is detrimental to their careers – because they are perceived to be incompetent in handling areas below them. In the end, the message got to the top manager, not in its entirety.
More accountability. Upper-level managers trust lower-level managers. It encourages accountability and a sense of belonging to the work.
Motivating. Delegation becomes a way to motivate people in the organization. Lower-level managers feel more empowered and valued. They can be involved in making decisions about their work area. Finally, they are excited because they can actualize themselves and develop personal competence. And they get more job satisfaction because of delegation.
Higher retention. Motivated employees tend to be more loyal to the company. Thus, decentralization is one way to reduce employee turnover.
More creativity. More people are involved in decision-making. And that means more perspectives and ideas are brought within the organization. Lower-level managers can provide more input to the organization, leveraging the knowledge and experience they have gained. This kind of environment is important for fostering innovation.
More distributed roles. The workload of top-level managers is reduced because they delegate some decision-making authority to their subordinates. And they can focus more on more strategic aspects and long-term goals. Meanwhile, they leave other aspects to managers at lower levels.
Develop competence at all levels. Through delegation, lower-level managers have the opportunity to develop competencies. As a result, they learn to be effective decision-makers. And their competence grows along with their career advancement.
Smooth operation. Often, companies lose key employees. And it interferes with their operation. Because delegation encourages competency development at all levels, subordinates are better equipped to replace them.
What are the disadvantages of a decentralized organizational structure?
Decentralization reduces the top managers’ power. Their control over their subordinates is reduced. And they put more emphasis on trust, namely by giving subordinates more delegation and responsibility in making decisions.
However, decisions by lower-level managers did not match their expectations. As a result, problems arise. It becomes worse if the company does not have an adequate control system. Bad decisions harm the organization.
Other disadvantages of a decentralized organizational structure are:
Poor, inconsistent, and uncoordinated decisions. Subordinates may not have adequate competence as good decision-makers. They may be experts in functional areas but not in making decisions. Finally, bad decisions can hurt the boss’ reputation – because he is considered incompetent to manage them. What’s worse, it harms the company.
In addition, decisions can tend to be random and disorganized under decentralization. For example, at times, lower-level managers are likely to make certain decisions only if they support personal or unit interests, not those of the organization.
Finally, decisions by top managers and middle managers may be inconsistent. And it requires an adequate control system and more intense communication to deal with it. Otherwise, the problem – the result of the inconsistency – becomes even bigger.
More complicated process. For decentralization to run effectively and by company goals, companies need more tasks to control and coordinate each unit or lower level management’s decision.
Disruption to operation. Bad, inconsistent, and uncoordinated decisions can interfere with operations. For example, managers in the production chain make ineffective decisions. As a result, it harmed the company’s production and sales.
Ambiguity in the chain of command. Decentralization can blur the command lines if the authority for each managerial layer is not clear and in detail. First, it creates confusion among employees about who has the right to make decisions when problems arise. Second, it increases competition for power and influence for personal or unit interests.
Increase costs. For example, centralization supports economies of scale but not decentralization. Imagine two conditions: each department manager decides and buys office equipment separately vs. centralized
In addition, bad decisions can also incur implicit costs. For example, decentralization can cause several people to convey different messages to the public when a crisis within the company occurs. Inconsistent communication can damage the company’s image.
The last, coordination costs arise to effectively implement decentralization. That includes establishing a control system for all decisions within the organization.
Weak leadership. Decentralization may not create strong leadership. The power of top-level managers is reduced due to more delegation.
