Centralized organizational structures focus management authority and decision-making in a single executive team, with information flowing from top managers to various business units. Decentralized organizational structures, on the other hand, look more like multiple smaller representations of a single structure, featuring management redundancies and more close-knit chains of command. Understanding the difference between these two fundamentally different design philosophies can help you create an effective structure for your business.
In a centralized design, each manager has authority over a wider range of employees, departments and business functions. Management styles can become autocratic in centralized structures, as managers find themselves with less time to interact with individual subordinates.
In decentralized designs, each manager is responsible for fewer employees and job functions, and numerous managers may share the same job titles and responsibilities in different areas of the business. Decentralized structures allow managers to make decisions on a smaller scale, which can be ideal for situations in which individual teams must adapt to unique workplace conditions, such as in direct sales.
Decisions and Information Flows
In centralized organizational structures, decisions are made at the top and communicated down through the layers. Middle and lower level managers do make decisions; however, they usually are limited to determining how to implement the orders handed down to them.
Decentralized structures are the exact opposite. Lower level managers and even front-line employees have the ability to make strategic decisions for themselves and their work groups, and information on their decisions is reported to higher levels of management.
Applications of Centralized Structures
Small businesses often operate in a centralized manner simply because of the smaller size of their workforces. In the beginning, a small business owner may be the only manager in the entire company, with all other employees reporting directly to the owner. Organizational designs can change as small companies grow, however.
A trucking company is an example of a company with a centralized organizational design. Trucking company managers make all operational decisions, sending information to individual drivers through dispatchers. Even self-employed owner-operators take direction from dispatchers to determine where to go each day.
Applications of Decentralized Structures
Franchise organizations provide an ideal example of a decentralized structure. Franchise companies control most product development and marketing decisions at the top, but they give franchise owners a great deal of independence in running their individual stores. Franchise owners make staffing decisions, decisions on hours of operation and compensation decisions completely on their own, for example.
Companies with a wide geographical reach also can benefit from a decentralized structure. Large multinational companies, for example, often include redundant executive positions for each region or country, rather than allowing a single executive team to make decisions across all divisions.
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