Organizational Design: The False Dichotomy of Centralization vs. Decentralization

Whenever we have to design or redesign structures / architectures in private companies, or public or mixed-economy organizations, one of the first dilemmas to arise is whether to adopt a more centralized model or a more decentralized one, i.e., to either centralize or decentralize.

This is because more or less centralization / decentralization is a fundamental premise of any organizational design project. It is an important feature in designing structures that must be considered before other, higher-level analyses.

In this issue of Management Tips, we will talk a little about organizational design, particularly as regards the decision to centralize or decentralize.

You may have observed that, intuitively, people generally advocate for a more decentralized model, which they support with list of decentralization advantages, usually well-founded, defensible arguments.

Is decentralization really the best decision in all circumstances? Are decentralized organizations truly more efficient and competitive?

One thing seems certain: successful organizations are swift in identifying and responding to changes in their environment; in other words, adapting their strategies flexibly. In the beginning, a more decentralized structure will allow organizations to respond better, in an agile way, to the obstacles that emanate from the environment.

But is it always like this? Is opting for a more decentralized architecture always better?

In recent decades the management of organizations has become more complex, due to profound transformations in global relationships permeating society, the economy, the increasing competition for raw materials and markets. Climate change and the global geopolitical situation also play important roles in organizational management. Organizational strategies, therefore, must be more flexible. This increasing complexity has an impact on strategy and, consequently, on organizational architecture. To be successful, organizations must learn how to anticipate environmental changes and how best to adjust their strategies for changing conditions; this, as a rule, has implications for organizational design.

Many large organizations have gone through periods of greater centralization and greater decentralization.

And what about organizational structure? Failure to keep pace with changes in strategy will become an obstacle to its implementation.

Do decentralized organizations, in fact, respond better to new challenges?

What is your perception / assessment of the design of the organization where you operate? Is the organization where you work more centralized or more decentralized? What positive / negative aspects do you observe in the architecture model you’ve adopted?

To begin the analysis, it is important to consider that both models, centralized and decentralized, have advantageous and disadvantageous aspects that must be considered.

On the one hand, a decentralized design promotes easier decision-making, communication and flow of information and knowledge, thus cultivating innovation, motivation and autonomy to make decisions and act. Decentralization reduces redundancy by facilitating coordination in this regard, fostering greater effectiveness. On the other hand, a centralized design focuses on control, efficiency and coordination.

We must keep in mind, however, that organizational structure should suit strategy, which is periodically revised, given environmental changes.

Remember: Strategy determines structure!

In design analysis other issues should also be considered.

If compliance is the larger goal of organizational design, then why does it change so often? Do environments and strategies change that much? Or is the problem not one of structure, but of performance? With poor performance you need to change something in the company, and it often ends up being the structure. As in sports, when a team is losing, it’s usually the game plan that changes… and sometimes the coach.

Is it possible that many organizations change design for no other reason than to respond to underperformance, which could be due to other factors?

For this reason, it is essential to understand, first and foremost, that there is no perfect fit between structure / architecture / design and strategy. That is why the organization has to identify the design that best follows from the strategy and, consequently, the environment.

There is no single, “perfect” management style. Hence, there is no ideal design. Likewise, there is no one perfect configuration or correspondence between structure and strategy. We have to identify the design that best fits our strategy, encourages well-being and, consequently, better performance.

The choice will depend on our models of governance, management and business, organizational culture, adopted strategy, and a competent monitoring and control system. Remember that decentralization needs to have robust mechanisms to monitor performance.

If possible, try to identify a design that balances efficiency and coordination with autonomy and innovation.

The organizational design challenge must be dynamic. The right choice today will not necessarily be the right choice tomorrow. A dynamic design provides the right structure for a given moment, though in the future this may have to be rethought.

Finally, when the chosen model is not delivering the expected results, it is time to think about changing.

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