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Decentralized Organization: Definition & Chart

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  • 0:04 What Is a…
  • 0:20 Centralized Vs. Decentralized
  • 1:55 Advantages & Disadvantages
  • 3:55 Lesson Summary
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Lesson Transcript
Instructor: Carol Woods

Carol has taught college Finance, Accounting, Management and Business courses and has a MBA in Finance.

What is a decentralized organization, and why would we want to work for one? In this lesson we'll discuss what it is, how it works, and the advantages and disadvantages of this structure.

What Is a Decentralized Organization?

A decentralized organization is one in which most decisions are made by mid-level or lower-level managers, rather than being made centrally by the head of the company. It's the opposite of a centralized organization, in which all decisions are made at the top.

Centralized Vs. Decentralized

The formal reporting structure of a decentralized organization looks the same as a centralized company, but the decision-making process is different. For example, let's look at the approval process for Max to obtain a new office chair at a centralized vs. decentralized company. Here is the reporting structure for Max's position at Company X:

Max

In a centralized organization, decisions are made at the top, so Max's request for a chair will go to his boss, who will submit it to the vice-president, who will add it to a list of items to discuss with the company president. Nothing will happen until the president says 'OK.' At that point the approval will be passed back down the chain of command. Max will then have the authority to purchase the chair at the company's expense.

Now we'll assume Max is working in a decentralized organization. Generally, in decentralized companies' decision making is delegated based on dollar limits. At Company X, the expenditure approval chart, which is a list of expenditures that are pre-authorized by the current budget, looks like this:

  • President: $250,000 (above this level requires board approval)
  • Vice President: $50,000
  • Department Manager: $10,000

Since Max's chair will only cost about $500, he presents it to his boss, just like before, only this time, his boss says 'yes' and Max heads out to order his chair right away.

Advantages and Disadvantages

Decentralized organizations have several advantages over their centralized counterparts:

  • Decisions are made faster, which is nice for Max and his chair, and can be significant when faced with a discounting decision to make a major sale and the local manager can say yes or no.
  • Managers gain experience making decisions, which improves their abilities and judgment while the stakes are low.
  • Managers generally like their jobs better when they feel empowered to make some decisions. Higher job satisfaction improves the company's reputation in the industry as a good employer, which makes it easier to hire great people to work there, and helps keep employee turnover down.
  • Decision-making is shared, and no single person has the burden for reviewing every decision that needs to be made.
  • The business doesn't cease functioning when the boss is out of the office. This can be especially important if the company head is out of town frequently or becomes ill.
  • Shared decision making also frees up time for the 'big boss' to focus on other activities, perhaps meetings with important customers, or time to think through long-term strategic decisions that impact the direction of the company in the future.

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