What Organizational Structure Works Best for Companies?

Decentralized companies and leaders are more adaptable and report higher levels of engagement. But the decision to decentralize and the process aren’t quite so simple.

It’s a maxim that decentralized organizations are superior to rigid, hierarchical structures in the business world, with more and more companies adopting the former model. Proponents of decentralization—and the delegation that makes it possible—tout that it creates flexible and resilient organizations while empowering and engaging employees. 

But while the potential benefits are clear and well-documented, not every organization or aspect of an organization should be decentralized. And there is a great deal of effort and expert help needed to make a decentralized company successful. 

Namely, businesses must invest in the right talent at all levels, and leaders must be willing to allow that talent to operate independently. This holds true for organizations large and small.  

Defining hierarchical and decentralized organizations

In 1939, German-American psychologist Kurt Lewin proposed one of the most widely-cited leadership theories after a series of studies conducted during the Great Depression. His research defined three types of structures:

• Authoritarian leadership is rigid leadership from the top down. An overall leader, or a handful of them, makes decisions unilaterally with few contributions from subordinates, defining not only assignments and tasks but also how to get them done.

• Democratic leadership leverages the input of subordinates, allowing them to contribute to decisions and develop their own solutions. Top-level leaders maintain overall authority but give team members the latitude to innovate while supporting them as they work to accomplish objectives.

• Laissez-faire leadership is something of a free-for-all. Team members work toward a shared goal without much direction from higher leadership, and there are few group decisions or standard procedures.

Today, Lewin’s three models generally line up with the definitions hierarchical (authoritarian), decentralized (democratic), and flat (Laissez-faire). 

But as Andrew J. DuBrin posits in Essentials of Management, “no company is fully centralized or decentralized.” There are plenty of shades of grey in between classifications, and some individuals have tried to account for this variation by defining more categories.

Lewin and his team, along with subsequent researchers who have studied various organizations’ frameworks, generally conclude that democratic leadership tends to be the most successful model. But that conclusion comes with a caveat: it doesn’t work in all situations or organizations, all of the time. 

The pros and cons of decentralization 

As the world and business become more complex and companies grow larger, decentralization becomes a necessity, to some extent. Decentralized organizations tap the competence and judgment of diverse teams and employees to “process the bundles of data regarding products, markets, costs, finances, people etc.”

Decentralized organizations tend to be more adaptable in a crisis that has wide-ranging effects. In addition, the people who work in these companies are trusted to make decisions and use their judgment and therefore tend to be more engaged. Decentralized structures are also quicker to make more-informed decisions on complicated or local-expertise-driven issues.

Johnson & Johnson is a famous example of a decentralized organization—which is something of a necessity, given it runs “200 operating companies across three sectors” worldwide. Then-J&J CEO William Weldon described the pros and cons of the model in 2008:

“There are challenges to it, and that is you may not have as much control as you may have in a centralized company. But the good part of it is that you have wonderful leaders, you have great people that you have a lot of confidence and faith in and they run the businesses.”

There are scenarios where a more top-down approach may be beneficial, however. First, when a leader has ultimate authority, big decisions may be made and executed faster without much room for deliberation, interpretation, and debate. There is less potential for conflict or different teams working at cross-purposes, and execution can be more consistent due to highly standardized processes and procedures. 

Apple is a successful centralized organization, despite its large size and immense valuation. This centralization is exemplified by Steve Jobs’ relentless grip on product development, along with the uniform processes and standards it sets for its Apple Stores and employees. But the tradition continued well beyond Jobs’ tenure. The Securities and Exchange Commission requested a list of the company’s “Chief Operating Decision Makers” in 2014 and received a simple answer: “Apple said it has only one CODM: CEO Tim Cook.”

Nevertheless, greater decentralization has become a widespread goal as companies become larger and operate in increasingly diverse environments. And accomplishing it successfully requires a significant investment. The benefits of widespread responsibility can be exponential, unleashing the competence and potential of leaders at all levels within an organization. 

But there’s a catch: leaders at those levels also have to be competent and ready to lead. And this requires appropriate hiring standards to ensure candidates have these qualities, as well as investing in leadership development. While these examples are from huge public companies, many of the lessons apply to medium and small private operations, as well.

The common denominator in successful organizations: quality leadership

There is one clear need as companies decide what to decentralize and when: successful organizations must have quality leadership, whichever path they take. 

Overall, any leader will need to decentralize somewhat as a company grows. The data and decision-making become too complex to hoard responsibility among one or a few people as organizations hit a certain size. And even small business leaders must delegate to enjoy success. A founder and CEO of a modest startup, for example, should typically focus on strategy while delegating operations to trusted subordinates. And extreme centralization may not work well in sales or account management settings where individuals forge relationships with customers and invest time in understanding their needs.

Centralized companies require a few extremely strong leaders who make the bulk of decisions. Decentralized organizations need more competent managers at various levels in the organization. And hybrid models require leaders who have the skill and flexibility to know when to decentralize or centralize decisions and functions—or adapt their individual leadership styles to meet a challenge. 

Unfortunately, good leadership seems to be in short supply in the business world. A study by the American Productivity & Quality Center (APQC) found that 79% of organizations have ineffective leadership. Another study from the research and analyst firm Brandon Hall Group reported that while 83% of “organizations say it is important to develop leaders at all levels,” only 5% have “fully implemented development at all levels.” Further, “71% said their leaders are not ready to lead their organizations into the future.”

There are various ways smart HR can help companies structure their organizations appropriately and cultivate the leaders necessary to do it:

• Commit to training leaders on how to be leaders. In addition to improving the organization, this investment in people can be a very appealing, individualized benefit that attracts and retains quality employees.

• Refine and improve recruiting and onboarding processes to get the leadership talent needed for success.

• Well-designed incentive plans can play a pivotal role in individual performance, motivating leaders to lead well. 

• While successful execution relies on delegation, smart processes and a uniform culture set standards and keep employees moving toward overall goals.

In the end, organizational design only goes so far. Regardless of structure, the people—and the extent to which companies invest in them—are what constitute success or failure. 

For help designing and implementing the appropriate organization structure and the plans and processes to support it, , contact Karp HR Solutions today for a free consultation.