Author: Jim Riley Last updated: Sunday 23 September, 2012
Organisational structure - Centralisation v Decentralisation
One of the issues that a business needs to address is where decision-making power resides in the organisational structure.
Decision-making is about authority. A key question is whether authority should rest with senior management at the centre of a business (centralised), or whether it should be delegated further down the hierarchy, away from the centre (decentralised)
The choice between centralised or decentralised is not an either/or choice. Most large businesses necessarily involve a degree of decentralisation when it starts to operate from several locations or it adds new business units and markets.
The issue is really how much independence do business units or groups within a business have when it comes to the key decisions?
Businesses that have a centralised structure keep decision-making firmly at the top of the hierarchy (amongst the most senior management).
Fast-food businesses like Burger King, Pizza Hut and McDonalds use a predominantly centralised structure to ensure that control is maintained over their many thousands of outlets. The need to ensure consistency of customer experience and quality at every location is the main reason.
The main advantages and disadvantages of centralisation are:
Easier to implement common policies and practices for the business as a whole
More bureaucratic – often extra layers in the hierarchy
Prevents other parts of the business from becoming too independent
Local or junior managers are likely to much closer to customer needs
Easier to co-ordinate and control from the centre – e.g. with budgets
Lack of authority down the hierarchy may reduce manager motivation
Economies of scale and overhead savings easier to achieve
Customer service does not benefit from flexibility and speed in local decision-making
Greater use of specialisation
Quicker decision-making (usually) – easier to show strong leadership
In a decentralised structure, decision-making is spread out to include more junior managers in the hierarchy, as well as individual business units or trading locations.
Good examples of businesses which use a decentralised structure include the major supermarket chains like WM Morrison and Tesco. Each supermarket has a store manager who can make certain decisions concerning areas like staffing, sales promotions. The store manager is responsible to a regional or area manager. Hotel chains are particularly keen on using decentralised structures so that local hotel managers are empowered to make on-the-spot decisions to handle customer problems or complaints.
The main advantages and disadvantages of this approach are:
Decisions are made closer to the customer
Decision-making is not necessarily “strategic”
Better able to respond to local circumstances
More difficult to ensure consistent practices and policies (customers might prefer consistency from location to location)
Improved level of customer service
May be some diseconomies of scale – e.g. duplication of roles
Consistent with aiming for a flatter hierarchy
Who provides strong leadership when needed (e.g. in a crisis)?
Good way of training and developing junior management
Harder to achieve tight financial control – risk of cost-overruns