What is the primary characteristic of a decentralized organization?

Organizational structures provide basic frameworks to help operations proceed smoothly and functionally. Types of organizational structures include functional, divisional, matrix, team, network, and horizontal structures. Each of these structures provides different degrees of four common organizational elements: span of control, departmentalization, centralization, and decentralization.

Span of Control

Span of control—or the number of subordinates a supervisor has—is used as a means of ensuring proper coordination and a sense of accountability among employees. It determines the number of levels of management an organization has as well as the number of employees a manager can efficiently and effectively manage. In the execution of a task, hierarchical organizations usually have different levels of task processes. Workers at various levels send reports on their progress to the next levels until the work is completed.

In the past it was not uncommon to see average spans of one to four (one manager supervising four employees). With the development of inexpensive information technology in the 1980s, corporate leaders flattened many organizational structures and caused average spans to move closer to one to ten. As this technology developed further and eased many middle-managerial tasks (such as collecting, manipulating, and presenting operational information), upper management found they could save money by hiring fewer middle managers.

Departmentalization

Departmentalization is the process of grouping individuals into departments and grouping departments into total organizations. Different approaches include:

• Functional - departmentalization by common skills and work tasks
• Divisional - departmentalization by common product, program, or geographical location
• Matrix - a complex combination of functional and divisional
• Team - departmentalization by teams of people brought together to accomplish specific tasks
• Network - independent departments providing functions for a central core breaker

Centralization

Centralization occurs when decision-making authority is located in the upper organizational levels. Centralization increases consistency in the processes and procedures that employees use in performing tasks. In this way, it promotes workplace harmony among workers and reduces the cost of production. Centralization is usually helpful when an organization is in crisis and/or faces the risk of failure.

Centralization allows for rapid, department-wide decision-making; there is also less duplication of work because fewer employees perform the same task. However, it can limit flexibility and natural synergies. Autonomy in decision-making is reserved for only a small number of individuals within the workforce, potentially limiting creativity.

This diagram compares visual representations of a centralized vs. decentralized organizational structure. Notice how the representation of the centralized organization looks like one large asterisk with many spokes, whereas the representation of the decentralized organization looks like many small interconnected asterisks.

Decentralization

Decentralization occurs when decision-making authority is dispersed among the lower organizational levels. With decentralized authority, important decisions are made by middle-level and supervisory-level managers. Because there are fewer hierarchical layers to navigate, this kind of structure helps to enable adaptability, quick reactions to lower level issues, and more empowered employees. However, making organization-wide changes that are implemented homogeneously can become quite difficult in this system.

Decentralization is a type of organizational structure in which daily operations and decision-making responsibilities are delegated by top management to middle and lower-level mangers. This frees up top management to focus more on major decisions. For a small business, growth may create the need to decentralize to continue efficient operations. Decentralization offers several advantages, though relinquishing control may be difficult for a business owner accustomed to making all the decisions.

Employees can be empowered by having more autonomy to make their own decisions, giving them a sense of importance and making them feel as if they have more input in the direction of the organization. It also allows them to make better use of the knowledge and experience they have gained and implement some of their own ideas. Empowered employees can cut the "red tape" of an organization by taking the initiative to get the job done with a minimum of managerial approvals.

Decentralizing takes some of the burden of daily business operations off the business owner. When the owner allows others to perform such tasks as hiring new employees or ordering supplies, this frees her up to spend more time on big-picture items, such as planning for expansion or meeting with important clients. Though it can be hard for some owners to allow this type of flexibility, the rewards can be substantial for both employees and business owners.

A situation may arise where the business owner must be away from the business for an extended period time because of illness or another type of emergency. A decentralized structure provides a better chance that the organization will maintain self-sufficiency because managers and employees are accustomed to working autonomously. Give the process a test run by leaving the business for a week or two – a vacation, perhaps – and evaluating the results when you return.

A decentralized organization is able to make decisions more quickly than one with a centralized structure. A manager often can make a decision without having to wait for it to go up a chain of command, allowing the organization to react quickly to situations where fast action can mean the difference between gaining and losing a customer.

For a growing business, decentralization can facilitate the process of expansion. For example, if expansion results in opening a new business unit in a different geographic area, decentralization allows the new unit to operate as an independent entity, meaning it can react more easily to the specific needs of the area, such as deciding to sell products that appeal to the local market.

Every company has to decide how to approach management and decision-making. Changes in technology, customer expectations, and workforce expectations make the decision more important than ever.

Will upper management take the lead, or will mid-and low-level managers lead the way? Will low-level team members have a say? Who will be responsible for decision-making, solutions, and new ideas?

Generally, companies choose between two main types of management structures: centralized management and decentralized management — although they may opt for a combination of the two. 

The right answer for a company depends on the markets it’s in but also on the skill and capabilities of its leaders and employees. You can’t just rely on the received wisdom of last century’s leadership gurus if you want to deliver value and have success over time. 

In this article, we’ll explore the differences between centralization and decentralization in management as well as share some examples of each organizational structure.

Decentralization in business is when daily operations and decision-making power are delegated by top management to middle-and lower-level managers — and sometimes even team members. 

Organizations with a decentralized structure allow upper management to focus more on growth opportunities and major decisions, rather than day-to-day duties. 

Traditional decentralized approaches may still apply rigid frameworks with checks and controls, while radical types of decentralization extend the scope of decision-making. 

The key idea behind a decentralized approach is giving authority and responsibility to those who know best — since they’re closer to stakeholders and have relevant information available to them.

For example, a personal banker who orders debit cards every day for their customers will be able to spot debit card issues faster than upper management could.

Rather than sending customers with debit card issues to top management, they can use the information that’s readily available to them to solve the customers’ problems directly.

A centralized model, on the other hand, is when a small handful of individuals make the majority of decisions for a company.

For example, a family-owned catering company probably uses centralized management. The family decides who to hire, what to offer on their catering menus, and they probably order their own inventory. 

As they grow, they might have mid-and low-level managers that follow strictly defined roles and answer to a superior. 

Centralized approaches are also commonly seen in highly competitive industries such as tech and SaaS companies. But any business in any industry can decide which model they prefer.

In the next few sections, we'll explore the advantages and disadvantages of centralized management and decentralized management.

The advantages of decentralization are: 

Organizations are self-sufficient 

Since team members and managers are used to working independently, a decentralized organization is more capable of maintaining self-sufficiency if situations arise where business owners need to be away from work. 

This means business owners and top management can take a vacation, use sick days, or tend to emergencies without having to worry about their organization falling apart while they’re away.

Scaling is easier

Businesses interested in scaling up can facilitate the process easier if they’re decentralized. For example, if a restaurant decides to open another location in a different state, decentralization can give the new location freedom to operate independently. As a result, they’ll be able to customize their approach to better meet the needs of the new market. 

Faster decision-making

While centralized organizations have to wait for decisions to be approved, decentralized organizations are independent enough to make decisions quickly. 

This is especially important when fast solutions are necessary to prevent losing a customer.

Happier team members and business owners

Team members crave meaning and purpose at work, and part of that is being able to make their own decisions and feel like their input and ideas matter. 

Decentralized structures empower team members to use their knowledge, experience, and expertise to make meaningful contributions at work. This approach also relieves some of the burdens from business owners, so they can spend less time on daily operations and more time on expansion. 

Strengthens leadership skills

Centralized structures leave little room for leadership practice, but decentralized structures remove the pressure from upper leaders while allowing mid-level and low-level team members to step up their leadership game.

The disadvantages of decentralization are: 

Poor leadership can damage a company’s reputation 

Decentralized organizations with strong leaders can do wonders for a company’s reputation, but decentralized organizations with lower-level managers who lack leadership skills or competence can do the exact opposite. 

This is less likely to occur in larger organizations with a talented group of middle managers.

Communication barriers

When you have independent team members, all responsible for their own roles, workload, and schedules, it can be difficult to communicate without confusion. 

Each manager may have their preferences, opinions, and ways of doing things, which can confuse processes, rules, and general questions. 

Difficulty collaborating 

With so many different leaders, opinions, and schedules, it can be tough for two different departments to collaborate on a new project or coordinate functions together.

Expensive teams

Decentralized organizations call for more managers to take responsibility for team members and the overall organization — which means they have to be paid more. 

This can add up quickly and cost way more than just hiring a few managers.

Service functions can waste resources

For each department to be self-sufficient, service functions (like accounting and marketing) must be provided for each department. 

This can be a wasteful drain on resources. 

But, centralized organizations can use the same service functions for all or most of their departments.

The advantages of centralization are: 

More standardization

Centralized organizations keep external and internal messaging consistent. 

They also standardize policies and procedures, along with materials, products, and services. 

This helps speed up preparation, procurement, and production processes. This also helps to create more efficient systems and teams and fewer communication barriers.

More control 

Top management at centralized organizations has complete control over training, offerings, and ensuring the business’s core values and goals will be maintained and promoted.

Quality managers

Managers at centralized organizations come with training, experience, and expertise. 

As a result, the company has more qualified managers that make quality decisions and can boost the company’s reputation. 

Less expensive

Since centralized organizations use the same service functions for their departments, they don’t need to hire extra service functions for other departments. They also have fewer managers than decentralized organizations.

Better collaboration and communication

Centralized organizations have standardized leadership responsibilities, schedules, processes, and procedures. As a result, there are fewer communication barriers and easier collaboration between departments.

The disadvantages of centralization are:

Overworked upper management

Since upper management is overloaded with daily decision-making, they have less time to concentrate on more important functions. 

Lack of balance

Organizations with top-heavy management can result in an imbalanced organizational structure. 

Limited creativity

While decentralized structures give authority to team members who are closer to stakeholders, centralized management restricts new ideas and creativity to upper management. 

This can limit the company’s ability to keep up with changing markets, customer demands, and customer feedback. 

Slower decision making

Due to the chain of command and upper management controlling decisions, centralized organizations have to wait for decisions to be approved. This can result in snail-like processes and unsatisfied customers.

Powerless team members 

Centralized structures revolve around upper management and leave little room for employee initiative and leadership. 

As a result, team members cannot contribute meaningfully at work. Additionally, team members see fewer opportunities for growth and internal company promotions. 

By now, you should have a good handle on the differences, advantages, and disadvantages between centralized and decentralized management. In the next section, we’ll look at two examples of companies using decentralized management and examine their results.

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Here are two real-life examples of decentralized organizations:

1. Johnson and Johnson

Johnson and Johnson may be known for its consumer business of baby oil and bandages, but many people don’t know they’re also a medical device and diagnostics business, as well as a pharmaceutical company. 

With more than 130,000 employees worldwide, Johnson and Johnson has long been known as a decentralized company.

Johnson and Johnson has chosen local management to run its companies for a few reasons: 

• They understand the consumer better
• They understand the people they are directly working with
• They understand the government and marketplace needs
• If they make mistakes, it won’t cripple the whole organization

Johnson and Johnson knows it would be difficult for management in the US to run international locations since they simply don’t know enough about them.

Former CEO William Weldon said that while relinquishing control isn’t always easy for the company, they trust their managers to run the businesses. 

“The men and women who run our businesses around the world usually are people who grew up in those markets, understand those markets, and develop themselves in those markets. They can relate to the needs of the customer, whoever that customer may be.”

2. Eventbrite

If you’ve ever bought tickets for local events, you’ve probably heard of Eventbrite. 

Eventbrite is an event management and ticketing website that allows users to browse, create and promote local events. 

The company has a decentralization model, where event creators work as managers for a few reasons:

• Event creators are also event promoters
• Event creators know how to attract ticket buyers better than Eventbrite
• Eventbrite has development offices in many countries and would rather have local managers in charge who know the area and consumers

Eventbrite understands that event creators (also known as promoters) have a better chance at securing attendees than they do. As a result, they powered 4.7 million events in 2019 and served more than 949,000 event creators.

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