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Every company has to decide how to approach management and decision-making. Changes in technology, customer expectations, and workforce expectations make the decision more important than ever.
Will upper management take the lead, or will mid-and low-level managers lead the way? Will low-level team members have a say? Who will be responsible for decision-making, solutions, and new ideas?
Generally, companies choose between two main types of management structures: centralized management and decentralized management — although they may opt for a combination of the two.
The right answer for a company depends on the markets it’s in but also on the skill and capabilities of its leaders and employees. You can’t just rely on the received wisdom of last century’s leadership gurus if you want to deliver value and have success over time.
In this article, we’ll explore the differences between centralization and decentralization in management as well as share some examples of each organizational structure.
What is a decentralized organization?
Decentralization in business is when daily operations and decision-making power are delegated by top management to middle-and lower-level managers — and sometimes even team members.
Organizations with a decentralized structure allow upper management to focus more on growth opportunities and major decisions, rather than day-to-day duties.
Traditional decentralized approaches may still apply rigid frameworks with checks and controls, while radical types of decentralization extend the scope of decision-making.
The key idea behind a decentralized approach is giving authority and responsibility to those who know best — since they’re closer to stakeholders and have relevant information available to them.
For example, a personal banker who orders debit cards every day for their customers will be able to spot debit card issues faster than upper management could.
Rather than sending customers with debit card issues to top management, they can use the information that’s readily available to them to solve the customers’ problems directly.
Decentralized vs. centralized management
A centralized model, on the other hand, is when a small handful of individuals make the majority of decisions for a company.
For example, a family-owned catering company probably uses centralized management. The family decides who to hire, what to offer on their catering menus, and they probably order their own inventory.
As they grow, they might have mid-and low-level managers that follow strictly defined roles and answer to a superior.
Centralized approaches are also commonly seen in highly competitive industries such as tech and SaaS companies. But any business in any industry can decide which model they prefer.
In the next few sections, we'll explore the advantages and disadvantages of centralized management and decentralized management.
Advantages and disadvantages of decentralization
The advantages of decentralization are:
Organizations are self-sufficient
Since team members and managers are used to working independently, a decentralized organization is more capable of maintaining self-sufficiency if situations arise where business owners need to be away from work.
This means business owners and top management can take a vacation, use sick days, or tend to emergencies without having to worry about their organization falling apart while they’re away.
Scaling is easier
Businesses interested in scaling up can facilitate the process easier if they’re decentralized. For example, if a restaurant decides to open another location in a different state, decentralization can give the new location freedom to operate independently. As a result, they’ll be able to customize their approach to better meet the needs of the new market.
While centralized organizations have to wait for decisions to be approved, decentralized organizations are independent enough to make decisions quickly.
This is especially important when fast solutions are necessary to prevent losing a customer.
Happier team members and business owners
Team members crave meaning and purpose at work, and part of that is being able to make their own decisions and feel like their input and ideas matter.
Decentralized structures empower team members to use their knowledge, experience, and expertise to make meaningful contributions at work. This approach also relieves some of the burdens from business owners, so they can spend less time on daily operations and more time on expansion.
Strengthens leadership skills
Centralized structures leave little room for leadership practice, but decentralized structures remove the pressure from upper leaders while allowing mid-level and low-level team members to step up their leadership game.
The disadvantages of decentralization are:
Poor leadership can damage a company’s reputation
Decentralized organizations with strong leaders can do wonders for a company’s reputation, but decentralized organizations with lower-level managers who lack leadership skills or competence can do the exact opposite.
This is less likely to occur in larger organizations with a talented group of middle managers.
When you have independent team members, all responsible for their own roles, workload, and schedules, it can be difficult to communicate without confusion.
Each manager may have their preferences, opinions, and ways of doing things, which can confuse processes, rules, and general questions.
With so many different leaders, opinions, and schedules, it can be tough for two different departments to collaborate on a new project or coordinate functions together.
Decentralized organizations call for more managers to take responsibility for team members and the overall organization — which means they have to be paid more.
This can add up quickly and cost way more than just hiring a few managers.
Service functions can waste resources
For each department to be self-sufficient, service functions (like accounting and marketing) must be provided for each department.
This can be a wasteful drain on resources.
But, centralized organizations can use the same service functions for all or most of their departments.
Advantages and disadvantages of centralization
The advantages of centralization are:
Centralized organizations keep external and internal messaging consistent.
They also standardize policies and procedures, along with materials, products, and services.
This helps speed up preparation, procurement, and production processes. This also helps to create more efficient systems and teams and fewer communication barriers.
Top management at centralized organizations has complete control over training, offerings, and ensuring the business’s core values and goals will be maintained and promoted.
Managers at centralized organizations come with training, experience, and expertise.
As a result, the company has more qualified managers that make quality decisions and can boost the company’s reputation.
Since centralized organizations use the same service functions for their departments, they don’t need to hire extra service functions for other departments. They also have fewer managers than decentralized organizations.
Better collaboration and communication
Centralized organizations have standardized leadership responsibilities, schedules, processes, and procedures. As a result, there are fewer communication barriers and easier collaboration between departments.
The disadvantages of centralization are:
Overworked upper management
Since upper management is overloaded with daily decision-making, they have less time to concentrate on more important functions.
Lack of balance
Organizations with top-heavy management can result in an imbalanced organizational structure.
While decentralized structures give authority to team members who are closer to stakeholders, centralized management restricts new ideas and creativity to upper management.
This can limit the company’s ability to keep up with changing markets, customer demands, and customer feedback.
Slower decision making
Due to the chain of command and upper management controlling decisions, centralized organizations have to wait for decisions to be approved. This can result in snail-like processes and unsatisfied customers.
Powerless team members
Centralized structures revolve around upper management and leave little room for employee initiative and leadership.
As a result, team members cannot contribute meaningfully at work. Additionally, team members see fewer opportunities for growth and internal company promotions.
By now, you should have a good handle on the differences, advantages, and disadvantages between centralized and decentralized management. In the next section, we’ll look at two examples of companies using decentralized management and examine their results.
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2 examples of decentralized management
Here are two real-life examples of decentralized organizations:
1. Johnson and Johnson
Johnson and Johnson may be known for its consumer business of baby oil and bandages, but many people don’t know they’re also a medical device and diagnostics business, as well as a pharmaceutical company.
With more than 130,000 employees worldwide, Johnson and Johnson has long been known as a decentralized company.
Johnson and Johnson has chosen local management to run its companies for a few reasons:
- They understand the consumer better
- They understand the people they are directly working with
- They understand the government and marketplace needs
- If they make mistakes, it won’t cripple the whole organization
Johnson and Johnson knows it would be difficult for management in the US to run international locations since they simply don’t know enough about them.
Former CEO William Weldon said that while relinquishing control isn’t always easy for the company, they trust their managers to run the businesses.
“The men and women who run our businesses around the world usually are people who grew up in those markets, understand those markets, and develop themselves in those markets. They can relate to the needs of the customer, whoever that customer may be.”
If you’ve ever bought tickets for local events, you’ve probably heard of Eventbrite.
Eventbrite is an event management and ticketing website that allows users to browse, create and promote local events.
The company has a decentralization model, where event creators work as managers for a few reasons:
- Event creators are also event promoters
- Event creators know how to attract ticket buyers better than Eventbrite
- Eventbrite has development offices in many countries and would rather have local managers in charge who know the area and consumers
Eventbrite understands that event creators (also known as promoters) have a better chance at securing attendees than they do. As a result, they powered 4.7 million events in 2019 and served more than 949,000 event creators.
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Ultimately, every company has to choose the management structure that’s best for their overall organization, and most companies have a little bit of centralization and decentralization in their structures.
When trying to decide which framework is best for your business, consider your overall business objectives, resources, and the type of business you’re running.
For example, if you own a remote company, you may benefit more from a decentralized structure. If you own a tech company, you may benefit more from a centralized structure.
Or, if you’re a franchise company, you may find that having a centralized headquarters and decentralized franchisees is best for your business model.
As long as you focus on the best leadership model for your business and team, you’ll be able to find the right balance that works for your entire organization.
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