Centralized Vs. Decentralized Organization Structures In Business

In any type of business structure, the keys to success often rest within the ability to deliver responsiveness, efficiency and reliability. Customers have a lot of choices in the digital age, so these pillars of business success have become even more important as commerce now moves at lightning speed.

 

For generations, centralized management has been the preferred method of organizing large businesses. Today, however, decentralized management methods have gained in popularity, causing some business leaders to rethink their strategies.

What’s The Difference In Centralized Vs Decentralized Management?

In a centralized organization structure, departments and roles are clearly defined. Tasks are completed according to hierarchies, and centralized decision-making comes from the top. Executives define the direction of the company, and then directives are created and passed down to department managers who pass along instructions to team leads and onto team members.

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In a decentralized organization structure, decision-making is coordinated at the department or team level. Communication plays a big role in decentralized organizational management as different teams and departments will need to coordinate their efforts since there is less centralized management involved in big-picture decision-making. This is not to suggest that executive-level leadership is not involved in shaping the overall direction of initiatives in a decentralized organizational structure, but there is more flexibility for departments and teams to make decisions in these types of arrangements.

What Are The Benefits And Limitations Of A Centralized Organization?

A centralized management style has been the standard for decades as it provides tighter control for company founders, presidents, executives and management. The real benefit to this type of organizational method is that it creates one set of directives that, for better or worse, are to be followed by everyone. There is little room to make independent decisions, but the trade-off is that everyone is on the same page. This has the potential to deliver a consistent experience to customers, vendors and employees across large companies.

The limitation in using centralized management is that it isn’t able to adapt to change very quickly. This wasn’t as big of a concern in the past, but as the Internet has served as a type of Industrial Revolution 2.0, changes come fast and heavy in modern times. Companies that continue relying on centralized organizational structures often find themselves struggling to keep up with fast-paced changes in technology, consumer habits and buying trends.

Is A Decentralized Organization Better For Modern Companies?

Decentralized management is often a good choice for smaller companies and startups that are able to take advantage of modern communication tools. Because decentralized management styles allow for more flexibility and freedom in decision-making, companies that adopt this type of management are often able to adapt quickly to changes. Department heads and team leads can make decisions based on what’s happening in a particular market or region, and these changes can be passed along to upper management for approval. This provides faster response times to customer demands, and it also opens the door for innovation that has the chance to drive a company forward.

Credit: Metropolitan Transportation Authority of the State of New York

The drawback in decentralized structures is that customers may not receive a consistent experience across a purchase journey. If one department has decided to process refunds by routing requests through a particular office, but a different department has decided to issue refunds using a different practice, the potential exists for customer confusion and dissatisfaction.

How To Make Decentralized Organizational Structures Work

If you’re a business owner who is interested in taking the decentralized approach to management, you’re encouraged to ensure that your hiring practices are solidified. Getting the right people, all of whom have the same mindset, in place from the outset is crucial in making a decentralized structure work.

Next, you will need to provide adequate communication tools and encourage company-wide communication so that everyone is aware of what is going on. Even if decisions are made at the department level, each department needs to know what the other is doing. New initiatives should be brought to the table for discussion among all involved so that questions can be asked and answered before policies are put in place.

Article Sources:

https://www.entrepreneur.com
https://www.betterup.com
https://smallbusiness.chron.com
https://www.indeed.com

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