A Balanced Organizational Structure

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.

Advantages:

  • 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.

Disadvantages:

  • 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).

Advantages:

  • 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.

Disadvantages:

  • 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.

                                                                                                                                                                                                                                                                                  

Malone, T. W. (n.d.). Making the Decision to Decentralize – HBS Working Knowledge. HBS Working Knowledge – Faculty Research at Harvard Business School. Retrieved July 10, 2012, from http://hbswk.hbs.edu/archive/4020.html
Media, D. (n.d.). Centralized Vs. Decentralized Organizational Structure | Small Business – Chron.com. Small Business – Chron.com. Retrieved July 10, 2012, from http://smallbusiness.chron.com/centralized-vs-decentralized-organizational-structure-2785.html
Siggelkow, N., & Levinthal, D. A. (2003). Temporarily Divide to Conquer: Centralized, Decentralized, and Reintegrated Organizational Approaches to Exploration and Adaptation. Organizational Science, 14(6), 2-16. Retrieved July 9, 2012, from https://docs.google.com/viewer?a=v&q=cache:9LtikSlaShAJ:www.management.wharton.upenn.edu/siggelkow/pdfs/FinalTempOS.pdf+can+centralized+and+decentralized+organizational+strucutures+be+used+together?&hl=en&gl=ca&pid=bl&srcid=ADGEESg9SxBHlcPForEOrJUA0av
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4 thoughts on “A Balanced Organizational Structure

  1. Hi Clarissa, great topic and I agree with your point that neither structure is the best for any organization in itself. Successful implementation of either structure would depend on the needs of the organization, and a decentralized approach might be best for a knowledge based organization.
    As I was researching for my blog however, I found that a decentralized structure brings its own set of problems to table. Leadership in this environment is hard to find, and there is a constant clash of personal differences and values.

    Another interesting thing I found was that even though theoratically decentralized decision making should promote better communication (a higher need for knowledge in order to make decissions), conflicts of interest tend to prevent this from happening in many cases. People tend to look out for what is best for them, and care less about spreading the knowledge.

    I find the idea of a hybrid organization very interesting, but I guess achieving the best of both scenarios would be hard to do in this case, since by nature, both structure oppose each other.

    Looking forward to the next post,
    Rajan

  2. Great post Clarissa! The idea of decentralizing at the early stage and then implement a more centralized structure is very logical. Creativity and motivation is fostered by decentralized teams. Everyone can be involved in some inputs of the product. I do think that areas of the company need to be decentralized. Especially for departments that require innovation and creativity to accomplish tasks. Moreover, a more decentralized structure can decrease the information travel time. A piece of information or command could reach the lower level employees faster because it does not have to go through many different managers.

    This can also relate to the concept of outsourcing. Many of the 24 hours toll free telephone services are outsourced. A phone call to Telus may be picked up by someone in India and he or she may have the perfect Canadian accent. Large corporations would try to outsource different services and only focus on what the company does best. Apple is a good example that they focus more on design and marketing. They outsource most of their manufacturing and services. Therefore, by outsourcing the company could be less hierarchical because they would have less departments to control internally.

  3. Thank you Rajan and Jason for your input. Yes I agree, there are many benefits to operating with a decentralized structure, the concept of outsourcing is an interesting example. However, as was mentioned there are many disadvantageous as well. But I guess that goes with everything, there will always be pros and cons regardless. However, the concept of a temporary decentralized structure, was suggested in order to lessen the effects of the disadvantages associated with a centralized and decentralized structure. But I do agree, even once an organization has imposed a centralized structure, individual units could benefit from operating under decentralized conditions, especially in an industry functioning on creativity.

    Thanks again for your input.

  4. Very good post Clarissa! Centralization vs. decentralization is a very hot topic these days. In a creative environment I think it is absolutely crucial for the structure to be decentralized. Employees need to be able to have the ability to express their ideas and their superiors need to give them that opportunity. I work for a very creative digital advertising company, and if we had a centralized structure, we would not be able to come up with the kind of campaign ideas we do. Usually the process starts with taking ideas from everyone and narrowing it down to a select few that are analyzed to determine if it is even possible and of course how profitable it will be.

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