Centralized vs Decentralized Organizational Structures

Organizations throughout the world have encountered the dilemma of going with centralized or decentralized organizational structures. This happens especially when the organizations try to scale up or expand to other regions and countries. If we observe the popular brands around the world and try to come to a conclusion it is not possible. Both the models have been successful for different companies under different situations. We will try to look at the strategies adopted by different successful companies and the advantages and disadvantages of both the strategies. Let us first consider the decentralized organizational structure. Decentralization is the process of dispersing decision making governance closer to the people (Wikipedia). Decentralized strategy has been adopted by huge conglomerates like a P&G or Unilever. Unilever adopted the decentralized strategy from the 1960s and it has expanded very rapidly ever since. A famous quote says that you can find a Unilever product in one out of every two households in the world . Each region had complete autonomy and the power to take individual decisions. However it has obviously faced many problems with this structure. The strategy created a large number of least cohesive businesses and the central direction was limited. There were barriers to knowledge flow within different units of the company. But there were a lot of benefits like local market knowledge, quick decisions etc. The strategy was very successful in the overseas markets. The company took a long time to phase out underperforming brands and bring some sort of coordination throughout and it has never tried to change the structure. In the present world most of the companies are adopting this strategy for rapid growth, however using few elements of the centralized strategy too to maintain control. The example of Dabur which has expanded into African countries and the gulf countries illustrates this where the company has centralized the finances and procurement process. Many companies nowadays try to implement the hub and spoke model in which the hub is the customer and the spokes consists of business functions and teams. The outer ring which has the job of holding everything together is the top management. Centralization is the process by which activities of an organization particularly those regarding planning and decision-making, become concentrated within a particular location and/or group (Wikipedia). The Centralized strategy is more traditional and the control lies with the founders or the country of origin. Some examples which quickly come to our mind are the Japanese stalwarts like Honda, Toyota, Matsushita, YKK etc. By adopting this strategy Japanese companies have been very successful in industries where the products do not vary much according to local conditions. Industries like consumer electronics, automobiles, ships etc have been conducive for such a strategy. Even if we consider the example of Apple it has been more of Centralized organization. They do not manufacture

different products for different regions. Rather they focus more on R&D and have centralized process for production. The ipod is the best example. The product has been same throughout the world and success has been unmatched. We can observe from the examples that both the strategies have worked for companies. So it depends on the type of industry, the situation that the company is under etc. To understand how both the structures work we have to study the structures on a smaller scale. In case of a decentralized structure, there are plenty of benefits. It encourages creativity and motivation to work. There is a lot of flexibility, and individual ideas are respected. There are many people working on a same problem in a decentralized structure which is not the case in the centralized organization. However, the information flow and communication cost is very high in the case of a decentralized organization. The company must ensure that there is proper communication and coordination between the individual units. If the top management has decided to take a decision to introduce some strategic changes, it takes a long time to seep through in this type of an organization.

In case of a centralized organization, the communication cost is very low. The company can take strategic decisions and it can be implemented in a jiffy. There is no question about whether the strategy has to be modified in the local context. There is a very low possibility of conflict among the units. The companys success totally depends on the decisions of the top management.

The strategies adopted by the different companies get reflected in the organizational culture. If the company is decentralized the organization or top management believes more in their employees. So the selection process is rigorous and the employees have to assume greater responsibilities than their job demands. For example the tactics by a competitor will demand very quick action from the regional head. He should not consult the higher management and delay the process. Instead the company should have the faith in him and support him in case there are some issues with the decision he has taken. The complete accountability will be taken by the regional management team and should be given proper support. Such a culture is being observed in many global companies and this makes them adaptive and responsive to changes. Different companies have adopted different strategies and have been successful in their own ways. But in the future companies should be very careful. Already we have seen a lot of companies adopting a mix of both the strategies. Good examples would be Toyota or IBM which have maintained their control through centralized structure but allowed considerable amount of decentralization. IBM faced a dilemma in 1993 when the new CEO (Lou Gerstner) took over. The opinions everywhere was that IBM should go for decentralization. But Lou Gerstner stuck to the centralized structure with some elements of decentralization. Now that globalization has made the world a single entity, the companies have to expand to other countries and think about being global after they scale up to a certain point. Hence companies should go for the right mix of the two strategies to be successful.