Organisational structure in business is either centralised or decentralised. Centralised organisations rely on one individual to make decisions and provide direction for the whole business. A clear chain of command travels from the top down through the levels of their hierarchical organisational structure.
In contrast, decentralisation retains the hierarchy but relies on sharing of decision-making across various levels in an organisation.
How does decentralisation work?
Decentralised organisations assign decision-making to lower-level management and even individual teams, giving them the autonomy to take the necessary actions.
The top tier of the organisation retains a small span of control for making major, organisation-wide decisions. For example, they set the company's mission, vision, strategic plan, etc. The remaining decisions, as well as the authority and the responsibility to carry out daily operations, are delegated as much as possible down the ranks to the lower tier of management and sometimes even employees.
Examples of a decentralised organisation
In most businesses, there is a degree of both centralisation and decentralisation. For example, franchises often embody a combination - individual stores have control over hiring, but headquarters makes decisions about branding, marketing, etc.
Decentralisation may also be effective in businesses that:
- need individualised customer service, usually at the point of contact with customers
- have different locations, eg stores they need to monitor and make decisions for
- need to respond rapidly to market changes or competitor actions
- change their business model constantly, making centralised control impossible
A lot of small businesses start centralised and gradually decentralise as they grow – with expanding workloads and workforce putting pressure on one individual to manage it all. Decentralisation may offers several benefits to a growing business, although giving up control may be difficult for an owner used to making all the decisions.
What are the advantages of a decentralised organisation structure?
Delegating decision-making to the lower-levels of the organisation can help:
- allow top management to focus on long-term goals rather than day-to-day problems
- encourage accountability and taking ownership of the work
- enable talent development and leadership skills in the workforce
- improve the quality and speed of the decisions being made
- foster innovation and open exchange of ideas
- reduce the staff turnover and improve staff satisfaction
What are the disadvantages of a decentralised organisation structure?
Decentralisation can negatively impact processes and the flow of information within a business. It can also present challenges if:
- strong leadership is not established to give direction to the organisation
- administrative or service functions are duplicated across decentralised units
- 'silos' and unhealthy rivalry is emerging between units
- too much focus is placed on the needs of the unit, rather than the business as a whole
- uniform and consistent policies are required across the various units
Using a balanced approach between centralised and decentralised structures is the key to successfully managing most types of organisations.
You may also want to read about other common ways of structuring a business include: a matrix organisational structure, a project management organisational structure or organisational structure by product.