In a decentralized organization, senior managers surrender some degree of decision-making power to department heads, project managers, lower-level managers, and sometimes even frontline employees. Under a decentralized organizational structure, senior-level managers transfer some degree of decision-making power to those beneath them.
Understanding a decentralized organizational structure
When power is distributed in this way, the senior management team can focus on more critical endeavors such as strategic planning while others take care of day-to-day operations.
This arrangement works particularly well in the following scenarios:
When a company is required to deliver individualized customer service.
Dynamic markets where the company must be flexible and make decisions quickly.
When a business model constantly changes in response to new developments.
When a company’s workforce or workload grows to a point where delegation to lower levels of management becomes necessary.
Note that while many companies start with a centralized structure and become progressively more decentralized as they grow, most will never embody one or the other and instead will utilize a mixture of both.
Benefits of a decentralized organizational structure
So what are some of the benefits of a decentralized structure other than enabling senior management to spend more time on critical tasks?
Employee empowerment
When individuals are afforded the freedom to make decisions that affect them personally, they tend to feel more empowered.
When employees feel more empowered, they are more productive and able to solve problems with creative solutions.
Enhanced decision-making capacity
In a centralized structure, information is run up and down the chain of command before a decision is made.
When those involved in the process have to wait for the approval of someone above them, the process slows down and becomes inefficient.
Decentralized organizations do not have this problem because decisions can be made and actions implemented on the spot.
Expansion
Decentralization enables organizations to scale more easily since senior managers are not overloaded with work and can instead focus on devising growth strategies.
What’s more, regional managers with more responsibility can make swift and responsive choices based on local circumstances to drive the company forward.
Drawbacks of a decentralized organizational structure
Despite the benefits, there do exist some drawbacks to this structure:
Reliance on poor leadership
When extra responsibility is awarded to low-level managers who are incompetent leaders, the company can suffer brand reputation and become less efficient. Company culture may also deteriorate.
Cost
A decentralized structure tends to be expensive since there are more skilled managers with greater responsibility on the payroll.
Costs are increased further when one considers that for departments to be self-sufficient, functions such as marketing and accounting must be provided (replicated) for each.
Self-interested teams
Over time, lower-level managers and teams may start to make decisions that reflect their best interests and not those of the organization or its mission.
This causes issues with knowledge-sharing and communication between teams.
Key takeaways:
Under a decentralized organizational structure, senior-level managers transfer some degree of decision-making power to those beneath them.
Some of the benefits of a decentralized organizational structure include employee empowerment, enhanced decision-making capability, and more potential for growth and expansion.
One of the most obvious drawbacks of a decentralized organizational structure occurs when incompetent lower-level managers are given more authority or responsibility. Other drawbacks relate to the cost of the approach and the potential for teams to become self-interested over time.
In a functional organizational structure, groups and teams are organized based on function. Therefore, this organization follows a top-down structure, where most decision flows from top management to bottom. Thus, the bottom of the organization mostly follows the strategy detailed by the top of the organization.
In a flat organizational structure, there is little to no middle management between employees and executives. Therefore it reduces the space between employees and executives to enable an effective communication flow within the organization, thus being faster and leaner.
Project portfolio management (PPM) is a systematic approach to selecting and managing a collection of projects aligned with organizational objectives. That is a business process of managing multiple projects which can be identified, prioritized, and managed within the organization. PPM helps organizations optimize their investments by allocating resources efficiently across all initiatives.
Harvard Business School professor Dr. John Kotter has been a thought-leader on organizational change, and he developed Kotter’s 8-step change model, which helps business managers deal with organizational change. Kotter created the 8-step model to drive organizational transformation.
The Nadler-Tushman Congruence Model was created by David Nadler and Michael Tushman at Columbia University. The Nadler-Tushman Congruence Model is a diagnostic tool that identifies problem areas within a company. In the context of business, congruence occurs when the goals of different people or interest groups coincide.
McKinsey’s Seven Degrees of Freedom for Growth is a strategy tool. Developed by partners at McKinsey and Company, the tool helps businesses understand which opportunities will contribute to expansion, and therefore it helps to prioritize those initiatives.
Mintzberg’s 5Ps of Strategy is a strategy development model that examines five different perspectives (plan, ploy, pattern, position, perspective) to develop a successful business strategy. A sixth perspective has been developed over the years, called Practice, which was created to help businesses execute their strategies.
The COSO framework is a means of designing, implementing, and evaluating control within an organization. The COSO framework’s five components are control environment, risk assessment, control activities, information and communication, and monitoring activities. As a fraud risk management tool, businesses can design, implement, and evaluate internal control procedures.
The TOWS Matrix is an acronym for Threats, Opportunities, Weaknesses, and Strengths. The matrix is a variation on the SWOT Analysis, and it seeks to address criticisms of the SWOT Analysis regarding its inability to show relationships between the various categories.
Lewin’s change management model helps businesses manage the uncertainty and resistance associated with change. Kurt Lewin, one of the first academics to focus his research on group dynamics, developed a three-stage model. He proposed that the behavior of individuals happened as a function of group behavior.
Airbnb follows a holacracy model, or a sort of flat organizational structure, where teams are organized for projects, to move quickly and iterate fast, thus keeping a lean and flexible approach. Airbnb also moved to a hybrid model where employees can work from anywhere and meet on a quarterly basis to plan ahead, and connect to each other.
eBay was until recently a multi-divisional (M-form) organization with semi-autonomous units grouped according to the services they provided. Today, eBay has a single division called Marketplace, which includes eBay and its international iterations.
IBM has an organizational structure characterized by product-based divisions, enabling its strategy to develop innovative and competitive products in multiple markets. IBM is also characterized by function-based segments that support product development and innovation for each product-based division, which include Global Markets, Integrated Supply Chain, Research, Development, and Intellectual Property.
Sony has a matrix organizational structure primarily based on function-based groups and product/business divisions. The structure also incorporates geographical divisions. In 2021, Sony announced the overhauling of its organizational structure, changing its name from Sony Corporation to Sony Group Corporation to better identify itself as the headquarters of the Sony group of companies skewing the company toward product divisions.
Facebook is characterized by a multi-faceted matrix organizational structure. The company utilizes a flat organizational structure in combination with corporate function-based teams and product-based or geographic divisions. The flat organization structure is organized around the leadership of Mark Zuckerberg, and the key executives around him. On the other hand, the function-based teams based on the main corporate functions (like HR, product management, investor relations, and so on).
Google (Alphabet) has a cross-functional (team-based) organizational structure known as a matrix structure with some degree of flatness. Over the years, as the company scaled and it became a tech giant, its organizational structure is morphing more into a centralized organization.
Tesla is characterized by a functional organizational structure with aspects of a hierarchical structure. Tesla does employ functional centers that cover all business activities, including finance, sales, marketing, technology, engineering, design, and the offices of the CEO and chairperson. Tesla’s headquarters in Austin, Texas, decide the strategic direction of the company, with international operations given little autonomy.
McDonald’s has a divisional organizational structure where each division – based on geographical location – is assigned operational responsibilities and strategic objectives. The main geographical divisions are the US, internationally operated markets, and international developmental licensed markets. And on the other hand, the hierarchical leadership structure is organized around regional and functional divisions.
Walmart has a hybrid hierarchical-functional organizational structure, otherwise referred to as a matrix structure that combines multiple approaches. On the one hand, Walmart follows a hierarchical structure, where the current CEO Doug McMillon is the only employee without a direct superior, and directives are sent from top-level management. On the other hand, the function-based structure of Walmart is used to categorize employees according to their particular skills and experience.
Microsoft has a product-type divisional organizational structure based on functions and engineering groups. As the company scaled over time it also became more hierarchical, however still keeping its hybrid approach between functions, engineering groups, and management.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
