The principal advantage of a decentralized organizational structure is that it can

See Also:
Organizational Structure: Advantages of Centralization
Organizational Structure: Advantages of Decentralization
Capital Structure Management

Organizational Structure Definition

Organizational structure is the way responsibility, authority, and lines of communication are arranged. It is also how all processes occur in a company. Additionally, this term is commonly referred to as organizational culture.
The most common organizational structure include hierarchy with employees comprising vertical layers of rank where each layer is superior to the layers below and subordinate to the layers above. In addition, most large organizations divide their employees up into subunits called divisions, departments, segments, business units, work units, or groups. The objective is to get employees at all levels and across all subunits working towards the goals of the organization.

Models exist on many levels. To simplify the matter, however, they generally fall into two categories: centralized or decentralized. This main theory is studied across the world.

Centralization vs. Decentralization

Organizational structure in business is either centralized or decentralized. Thus, centralization and decentralization are two ends of a spectrum. You can find organizations somewhere along that spectrum. Companies with centralized structure concentrate their authority in upper levels of management. For example, the military has a centralized organization structure. This is because the higher ups order those below them and everybody must follow those orders.

Unlike centralized companies, decentralized companies have less concentrated authority. In a decentralized organization, lower levels in the organizational hierarchy can make decisions. An example of a decentralized organization is a fast-food franchise chain. Each franchised restaurant in the chain is responsible for its own operation. Broadly speaking, companies start out as centralized organizations and then progress towards decentralization as they mature. This structure, horizontal when decentralized, places power in the decision maker on the ground floor.
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What is a Decentralized Organizational Structure?

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.

Which of the following is an advantage of a decentralized organizational structure?

What is decentralized organizational structure?

What is the primary characteristic of a decentralized organization?

What is not an advantage of a decentralized organizational structure?