The Success of an organization is largely determined by the strategic and operational decisions made. It can either build or cause an organization to collapse . So who has the power to make these decisions? How is the power distributed?
There are two types of organizational business structures: Centralized and Decentralized. Each of which are contrary methods for transferring decision making power. However, like author Thomas Malone says
” …the cheap cost of communication—e-mail, instant messaging, the Internet—is making possible a new type of organizational structure” (2004).
As I mentioned in my previous post Eureka! Unlocking Creative Potential; the evolution of communication, technology and the necessity of creativity for organizational success, requires that the organizational structure implemented maximizes creativity in the organization. So would a centralized structure be more effective or a decentralized structure? Or, should they be implemented to form a new and improved method?
Well, lets first look at the components that define a centralized and decentralized organizational structure:
When I think of a centralized organization, what comes to mind is a pyramid structure. Businesses that operate under such a structure, keep decision making at the top of the hierarchy, or senior position. This is commonly used for chain stores or in fast-food franchises; as it ensures quality control and customer experience is consistent through the many outlets.
- Easier to implement common policies and practices throughout the organization.
- Prevents other parts of the organization from becoming too independent.
- For budget control etc., it is easier to control at the central position.
- Quick and efficient decision making, as leaders are in full control and limited discussion is encouraged.
- Great use of job specialization.
- Lack of authority down the hierarchy may reduce manager motivation.
- Limits the creativity in the organization as managers and other organizational leaders are responsible for the decisions made etc.
- Organizations could suffer from several layers of bureaucracy, as decisions at each level may take longer to be made, resulting in a sluggish operation of the business.
Often times, a decentralized organization has several individuals responsible for business making decisions; and at different levels they rely on a team structure. According to an article by the Harvard Business School, faculty members researched the effectiveness of decentralized organizational structures, and like Thomas Malone, they concluded that it is amongst the most effective methods for present day organizations is this knowledge economy:
“…as more work in our economy becomes knowledge work, and as innovation becomes increasingly critical to business success in many industries, the benefits of decentralization are likely to become important in more and more places. In fact, in principle, almost any business activity could benefit from having highly motivated, creative people performing it” (Malone, 2004).
- As it permits many individuals to work on the same problem, it encourages motivation and creativity.
- A broad-based management team helps to ensure the company has knowledgeable directors or managers to handle various types of business situations.
- Easier to train and develop junior management, as communication between individuals is more open and encouraged.
- Decentralized organizations can struggle with multiple individuals having different opinions on a particular business decision, which could slow down the decision making process
- More difficult to ensure consistent practices and policies
- Harder to achieve tighter financial control
Now that you have an idea of what constitutes a traditional centralized and decentralized organization, we can identify what structure is most effective. According to the journal “Temporarily Divide to Conquer: Centralized, Decentralized, and Reintegrated Organizational Approaches to Exploration and Adaptation” , by Daniel A. Levinthal and Nicolaj Siggelkow, while having either a pure centralized or decentralized structure, is most common, it can restrict the growth of the organization due to the disadvantages associated with each. Therefore, they propose and justified a third structure: Temporary Decentralized followed by reintegration.
In many articles that I read, individuals proposed that organizations shift between centralized and decentralized structures according to perceived dramatic economic changes. However, in this study Levinthal and Siggelkow suggest that by doing that, the organizational structure is decomposable and by keeping it that way, in the long run an unstable and low performance organization would result (conflict due to changes in positions of authority etc. ). So we need solid structure!
Thus, it is suggested that in the initial phase teams implement a decentralized structure, fostering creativity, motivation etc. And thereafter, based on the sub-teams that were formed earlier, a more centralized structure should be enforced. This is the foundation of a temporary decentralized structure followed by reintegration (click here to read more). In my opinion, this structure makes sense, as it encourages creativity which is vital to the success of organizations in this constantly developing era, while further enforcing leadership structure and overall consistency in organizations.