Strategic Decisions on Organizational Structure: Centralized and Decentralized Structures

Answer

Strategic Decisions on Organizational Structure: Centralized and Decentralized Structures

Introduction

An organizational structure can be thought of as an outline of a company’s guidelines and framework for managing its business operations and decision-making processes (West & Bogers, 2014). There are two main types of organizational structures; namely, centralized and decentralized structures. A centralized organizational structure is a pyramid-style hierarchy in which one or a few people in an organization hold the most of the organization’s power at the organization’s top (Chiaroni et al., 2010). In the decentralized structure, power, control and operations are distributed within an organization (Nahm et al., 2003). These structures have various strengths and weaknesses. This paper aims at comparing and contrasting centralized and decentralized organizational structures.

            Centralized Vs. Decentralized Organizational Structures

1. Pros and Cons of Centralized Organizational Structures

The centralized structure is much easier to manage and maintain control since decisions come from a central person/team, and reduces unnecessary duplication of work within organizations (Csaszar, 2016). The centralized structure also allows for easy delegation of commands or rules (Csaszar, 2013), and has a simple and solid structure outline. Furthermore, it allows every unit/department within an organization to have vividly defined responsibilities and provides a clear way of changing processes, structures and systems (Lee et al., 2016).

However, the centralized structure can directly or indirectly encourage dictatorship or even require a comparative surplus in bureaucracy for management (Unsworth, 2001). Similarly, the centralized structure breeds dependency within organizations. For instance, when a leader falls sick or is engaged in other matters outside the organization, the organization’s command chain can be substantially delayed, as Kalay and Lynn (2016) note. The structure can also cause unhealthy disparities in the distribution of power and an a priori need of principles, cause a lack of possible balances and checks and a need for a bureaucracy to impose principles and rules (Vaccaro et al., 2012). Moreover, it can create additional processes and workforce systems to oversight and maintain order and create uneven distribution of work (Prajogo & McDermott, 2014).

1. Pros and Cons of Decentralized Organizational Structures

The decentralized, unlike the centralized, allows for greater communication in an organization and leaves it less vulnerable. This implies it can promote organizational growth and enable the organization to maintain transparency and accountability in work structures and procedures (Liao, 2007). The decentralized structure eliminates possibilities of a leader leaving an organization at a standstill in case he/she falls sick or encounter any form of misfortune (Saee & Rafique, 2014). It structure encourages and motivates employees since there are several opportunities for people to showcase their individual leadership talents (Hirst et al., 2011). 

Nevertheless, the decentralized organizational structure breeds competition and duplicates work within an organization since leadership is open-ended (Malone, 2004). The structure also makes it hard to mold a company’s culture. This structure is also necessarily extra intricate to design and cater for the particular needs of a company or network as a whole. Scalability exposes decentralized structures to higher risks since scale sizes may be challenging to manage or achieve. Additionally, the structure is highly prone to catastrophic fall if departments are disabled, removed or overwhelmed (Pertussa–Ortega et al., 2010).

Decentralized Organizational Structure and its Effectiveness in Organizations

The effectiveness of organizational structures varies widely from one company and industry to another. For instance, the success of most professional service companies depends upon the creativity and motivation of their professionals (Tajeddini &Trueman, 2008). These companies are particularly good candidates for decentralized decision-making. Motivation and creativity are often important in functions such as sales, engineering, information technology and product design, implying that the decentralized organizational structure is beneficial to all organizations but not suitable for all. Nonetheless, with innovation becoming increasingly useful to business success in most industries today, the paybacks of decentralized organizational structure are likely to become crucial in more industries and organizations (West & Bogers, 2014). Therefore, the answer to whether decentralized structure would function for any organization purely depends upon an organization’s strategic choices and goals (Chiaroni et al., 2010). According to Alexy et al. (2013), companies that aim at being responsive to market and industry issues should inevitably veer towards decentralization since the structure stimulates and enables immediacy.

Similarly, decentralized organizational structure would function best under the following situations: (1) where a robust level of personalized customer service is required, often at the contact with clients; (2) where an organization has several stores in different locations so that the senior management is not able to reasonably make decisions for or monitor all stores; (3) where there is a lot of competition so that several decisions have to be made to react to competitor actions; (4) and where innovations constantly change business model so that centralized control is impossible (Csaszar, 2016). As such, centralized organizational structure may be suitable for any other organization that does not fall in the above categories.

Influence of the Centralized and Decentralized Structures on Innovation

Organizational structure influences the level of innovation within an organization. Garicano and Wu (2012) state that organizational performance declines considerably when authority and control are strengthened via an increased centralization of power. Innovative ideas and the initiative of subordinates maybe hindered under a centralized organizational decision-making as companies face structural challenges in producing innovation (Csaszar, 2013). In other words, performance within an organization is positively linked to the decentralization of decision-making in an organization. Nonetheless, a centralized organizational structure is equally crucial for open innovation. For instance, P&G employs centralized decision-making to develop and connect strategy since it encourages risk-taking, long-term thinking and monitoring (Lee et al., 2016). The decision-making structure within an organization play’s a pivotal role in the success of the organization’s open innovation. According to Kalay and Lynn (2016), decentralization of ideas function to facilitate the use of local knowledge and provides local managers the flexibility required when modifying their actions, which ought to adapt to a constantly changing environment. 

The Impact of Centralized and Decentralized Structures on Employee Motivation

Organizational structure has been shown to influence the level of employees’ motivation. In decentralized structure, employees can benefit from their individual decisions and autonomy, and thus are more motivated to be efficient and innovative than in a centralized structure. Nonetheless, employees in centralized structure ensure that they give the best of their skills, talents and knowledge so that their individual productivity and performance can warrant them promotions. This way, they are motivated to work harder. Zhou and Li (2012) mentions that in functional structures, departments function autonomously and workers report to their units’/departments’ managers. Employees, therefore, do not communicate across unit/department lines, which enhances focus within the departments/units since each manager is responsible for just a single function of the organization, while each worker concerns themselves with just one task in realizing a function. Such focus and clarity may motivate employees both in decentralized and centralized structures to work more effectively and efficiently since there are less confusions and distractions regarding roles (Vaccaro et al., 2012).

In simple organizational structures, employees work collectively within a team and report to an individual supervisor or manager. As a result, simplifying a decentralized or centralized structure significantly improves collaboration, motivation and commitment as well as promotes creativity and innovation (Prajogo & McDermott, 2014). For instance, employees may motivate themselves by encouraging one another as they work collectively as a team.

Conclusion

Centralized and decentralized organizational structures are one of the crucial determinants of an organization’s success. However, the decision on which structure to employ depends largely on the organization’s goals since each of the structures has its own strengths and limitations.