7 Benefits of Centralized vs. Decentralized Structures

By Indeed Editorial Team

Published June 15, 2021

Every business has a management system that helps to streamline daily processes and procedures. Companies often implement a centralized or decentralized organizational structure to establish management protocols and facilitate clear communication. There are practical benefits to both types of management structures, which are often relative to the company's staff size, variety of its product line and global market share. In this article, we define centralized and decentralized organizational structures, then compare them in terms of benefits and limitations.

Read more: Org Structure: Definition, Types and Tips

What is a centralized organizational structure?

A centralized organizational structure is one that relies heavily on top-down decision-making. One person or an executive team has the responsibility of approving all relevant decisions, which they communicate through various levels of management. The less senior managers carry out directives and relay concerns from their employees to their own supervisors.

Centralized management is best used in companies that prioritize their manufacturing strategy and reducing operating costs. Centralization is also helpful for encouraging collaboration between departments, streamlining best practices and coordinating with external stakeholders or third-party vendors. This is typically a more traditional organizational structure, which you can find in older companies and small businesses.

Read more: Traditional Organization Structure: Definition and Differences From the Modern Organizational Structure

What is a decentralized organizational structure?

Decentralized organization involves dispersing decision-making powers among multiple employees or departmental teams. Individuals at a lower level approve decisions, then report them to upper management. Emerging industries often employ a decentralized organizational structure because it's easier to move employees to different roles and change their responsibilities.

This kind of structure is best for companies who want to respond quickly when confronting regionally differentiated customer needs or change products based on individual markets. A decentralized organizational structure is also great for empowering employees to present new ideas and increasing career growth opportunities, because of a more relaxed chain of command model. A decentralized structure is usually present in an alternative system that you often see in newer companies and enterprise-level businesses.

Related: Horizontal vs. Vertical Organizational Structure: What's the Difference?

7 Benefits and limitations of centralized vs. decentralized structures

In order to determine which type of organizational structure is better suited for your company, it's a good idea to compare their key features. Here are some benefits and limitations of centralized and decentralized management:

1. Decision-making speed

Small and emerging businesses benefit from a consolidation of power as it helps speed up the decision-making process. A centralized organizational structure can sometimes obstruct input from others, such as an upper management team when deciding on a matter. However, this is actually more effective for private companies with a dedicated profit model, such as a local grocery store chain.

Decentralization is more ideal for bigger companies that have a national or multinational presence. It may also be better if you're a business that produces a range of products that need expertise from different industries to create, sell and market properly. Businesses that are leaders in their field tend to be more decentralized because of their scope of production output.

Read more: Decision-Making Methods for the Workplace

2. Creation of standard internal metrics

When devising your internal performance metrics, it's easier to create a standardized format in a centralized system. A top-down management structure allows you to consolidate communication and reporting standards, with minimal opportunity for deviations. If your metrics for success are fairly straightforward, it might be more beneficial to centralize your organizational structure.

A decentralized system lets individual departments or teams decide on their reporting methods, which can work well at companies that offer many disparate product lines. In order to avoid confusion regarding performance results, implementing active communication between managers and executives can help answer questions that might arise in the reporting. Newer industries can also benefit from decentralization, as it may be helpful to have more adaptable performance metrics.

3. Relationship with customers

If you want to develop a direct relationship with your customers, it's easier with a decentralized organization since there may not be many restrictions regarding communication and outreach. The ability to optimize social media channels to their full capacity is a prominent feature of decentralization since it allows companies to interact with multiple geographic markets with minimal difficulty. Online customer service via email or social media is easier to perform with flexible conduct guidelines.

Centralized organizational structures often have specific policies about interaction with the public, which can allow them to have more control over their brand image. Companies in industries such as children's media or baby products typically communicate with the public via a robust PR team. For complaints, they may also have an in-house customer service team with detailed knowledge and experience as opposed to an automated online system.

Related: What Is a Geographical Organizational Structure?

4. Talent deployment

When deploying talent to cover tasks, companies with centralized management usually have an organized system in place to allocate work duties. Older organizations sometimes have specialized software in which they train employees to ensure there's almost always someone working who can perform the associated tasks. Expanding companies that are speeding up their hiring rate can also benefit from centralization as it predicates an established and functional onboarding process.

A decentralized company likely assigns and re-assigns work on a more ad hoc or sporadic basis, which might be necessary for newer industries with fluctuating priorities. Roles and responsibilities may need to change regularly, so it's usually easier for them to allocate work on an as-needed basis. Allowing employees to transfer between different duties may also help reduce turnover rates and burnout.

5. Professional opportunities

A company with a centralized organizational structure can offset its lack of variety in career opportunities with increased job security. Sometimes an employee's salary and benefits coincide with the employment time frame, which means it's normal to expect compensation relative to how long they've worked for the company. Centralized organizations might also hire internally and promote employees based on seniority.

There are many more professional development opportunities in a decentralized organization since you can create a staffing structure that's adaptable to the constantly changing needs of its audience. With a fluctuating hierarchy, you may find more chances for promotions and career growth. Decentralized organizations often allow employees to explore career options by subsidizing training in new skills.

6. Definitive chain of command

The definitive chain of command that comes with a centralized organizational structure can be helpful for employees who might look for more affirmative guidance in their responsibilities and expectations. A centralized structure works fairly well to provide people with clear directions. Businesses that employ or contract those with specialized backgrounds are usually better suited to a top-down management structure.

The ambiguous nature of a decentralized system may cause confusion regarding expected workflows, but the increased autonomy is very attractive to employees who prefer a flexible schedule. Companies that have a lot of employees working from home may use a combination of reduced oversight and self-reporting tools to streamline managerial responsibilities. Decentralization also helps optimize a company's global franchise by allowing different national branches to manage their staff and operations.

7. Flow of information

A decentralized organization promotes a faster and smoother flow of information between different departments and from upper management downward. Industries that depend on a constantly shifting and inconsistent market benefit from being able to update everyone at will. When you're seeing a lot of changes happening in your business over a short period, you might consider decentralization efforts.

With a centralized structure, a team may receive newer knowledge indirectly through executive initiatives and managerial directives. This potentially leaves some employees uninformed, but a tightly controlled flow of information can increase clarity and reduce the possibility of conflicting interpretations. Companies that rely on trade secrets and non-disclosure agreements are also usually best suited to a centralized organizational structure.

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