How Decentralized Organizational Structures Work

A decentralized organizational structure is one that tasks department heads and project managers with key decision-making responsibilities, thus freeing top management and business owners to focus on strategic planning and big picture decisions.

A decentralized organization structure stands in contrast to a centralized structure, where all major decision-making begins with top executives and gradually descends down a chain of command. Decentralized companies place more decision-making authority in the hands of middle management. In such organizations, these middle managers may have enough decision-making power to run daily operations without checking in with directors and C-suite executives.

A decentralized business organization allows for nimble daily operations. Here are four key advantages of decentralization that draw some companies to this type of management structure:

1. 1. Decentralization can lead to employee empowerment. By giving department heads and project managers decision-making authority, top management provides a vote of confidence and an endorsement of those managers’ abilities.
2. 2. Decentralized organizations can exist in multiple geographic locations. A business can simultaneously operate in multiple geographic locations if it bestows strategic planning authority upon self-sufficient local managers.
3. 3. Decentralized systems promote nimble responses. Unlike top-down organizations, decentralized organizations do not require top-level management to sign off on every decision. This effective control allows managers at various levels to work decisively and make quick decisions as needed.
4. 4. Decentralized businesses can embrace stakeholders’ core competencies. Just because someone is a top executive doesn’t mean they are the expert on everything their company does. By contrast, most department heads have true expertise in the unit they oversee. When these department heads are allowed to make their own decisions, the company ensures the most informed person is the one leading an initiative.

For all their advantages, decentralized organizational structures do not suit all business applications. Here are three disadvantages of decentralization that business leaders should account for:

1. 1. Decentralization rarely helps small businesses, especially startups. Most startups have few product lines and a lean staff of employees. Such companies need a strong central leader to head the decision-making process. Only later, when the new business grows and brings on many new employees, will decentralization serve a purpose.
2. 2. Decentralization often involves redundancies. When many business units operate semi-autonomously, it can lead to the duplication of roles and processes. Centralized organizations may be more streamlined by comparison.
3. 3. Building corporate unity can be challenging. Decentralized businesses run the risk of having multiple business units with little in common and a lack of a shared identity. If startup entrepreneurs or senior managers desire a more unified workforce, they may want to steer toward a centralized model.

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