A decentralized organizational structure is one in which senior management has shifted the authority for some types of decision making to lower levels in the organization. This usually means that the manager of a cost center, profit center, or investment center has the authority to make decisions that impact his or her area of responsibility. Some decisions can be pushed down to individual employees, though those decisions are typically limited to expenditures related to customer service (such as unilaterally deciding to give a customer free shipping).
A decentralized organizational structure functions well in the following situations:
- Where a strong level of individualized customer service is needed, usually at the point of contact with customers
- Where there are many store locations, so that senior management cannot reasonably monitor or make decisions for all locations
- Where there is considerable competition, so that a myriad of decisions must be made to respond to competitor actions
- Where innovations change the business model constantly, so that no centralized control is possible
Example of the Decentralized Organization Structure
ABC International has just opened its 100th store. The store managers have been complaining that they would like to offer different goods to meet local tastes, but that the centralized purchasing group is not helping them. The president intervenes and gives the local store managers the authority to source 10% of the goods stocked in their stores, with all other purchases continuing to be centralized. This decision improves the morale of store managers and improves the sales and profit margins at those stores embracing the change.
Advantages of the Decentralized Organization Structure
The key focus of this structure is pushing decision-making down in the organization, which has the following advantages:
- Decisions. Local employees have the best knowledge base from which to make decisions, so this should improve tactical-level decisions throughout the company. It also removes many small decisions from senior management, which therefore has more time to develop strategic direction.
- Speed. Since there are fewer layers of bureaucracy in a decentralized structure, the company is able to make decisions more quickly, which is useful in a highly competitive environment.
- Turnover. Employees who are given more authority tend to stay with a company longer, so employee turnover declines.
- Training. Giving some authority to local managers is an excellent way to observe their decision-making ability, which can be used to determine advancement to higher positions.
- Wide span of control. There is less need for middle managers, since many employees can report to fewer managers. This reduces overhead costs.
Disadvantages of the Decentralized Organization Structure
Despite the advantages of the decentralized organizational structure, it can also negatively impact processes and the flow of information within a business, with the following results:
- Local viewpoint. A local manager makes decisions based on his local viewpoint of the company's operations. This may not lead to decisions favorable to the company as a whole. For example, a local manager might pour more funds into a struggling store, whereas a senior manager might elect to cut losses and shutter the store.
- Procedural differences. There tend to be a large number of small procedural differences between areas of authority, since each local manager alters systems to fit his or her own needs. This can cause control problems.
- Silos. There tend to be more functional silos of decision-making at the local level. It requires a great deal of effort by senior management to encourage information sharing outside of the local level.
Review of the Decentralized Organizational Structure
This management approach is generally recommended, because it tends to promote more informed and rapid-fire decision-making. However, there can be problems determining where the authority of senior management ends and local managers begins, so there should be clear rules in place regarding who makes which decisions.
It can be difficult for a small business owner to shift to this type of structure, since the person likely began the business as the sole person in charge, and must now learn how to shift decision making to others.