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Around the world, the hierarchy has long been known as the standard organizational structure. However, organizations from startups to multinational corporations are coming to view flatter, more egalitarian structures as much more effective than hierarchies.
In today’s increasingly fast-paced business environment, companies are experimenting with a variety of decentralized structures. In some cases, decentralization represents the full culmination of the organization’s vision; in others, it’s a response to changing times.
In a decentralized organization, decision-making happens as low on the chain of command as possible, explain O. C. Ferrell, John Fraedrich, and Linda Ferrell in Business Ethics 2009 Update: Ethical Decision Making and Cases. While decentralized organizations may have a hierarchy, they delegate decision-making to individual teams, empowering them to take action on their own. This is in contrast to centralized organizations, which have a clear chain of command that travels through the levels of their hierarchy.
Decentralized teams still need to make sure their actions align with an agreed-upon vision and broader plan. However, they might make up their own rules and determine their individual processes, reaching a consensus on them as a team.
Divisions of a decentralized company might independently handle all aspects of their operations or only particular ones, say Carl S. Warren, James M. Reeve, and Jonathan Duchac in Accounting. They might exist in the same building or over a broad geographical space.
No company is fully centralized or decentralized, asserts Andrew J. DuBrin in Essentials of Management. Instead, there are degrees of both. The degree of decentralization that’s right for a company depends on its size, culture, and strategy.
Franchises embody a combination of centralization and decentralization, says DuBrin. For example, Subway gives local stores control over hiring, but a centralized headquarters makes decisions about things like menu and marketing, he explains.
Johnson & Johnson, well-known for its decentralized structure, has over 200 units that function autonomously. Some focus on particular components of a product, requiring cooperation between such units.
A more extreme level of decentralization that aims to eliminate hierarchy altogether usually won’t work for a massive corporation, according to Forbes. Often called a “flat” structure, this tends to work best for smaller startups and medium-sized companies. The gaming company Valve has embraced this structure, eliminating job titles and allowing employees to work on or initiate any project they choose. Such a structure might germinate a great deal of creativity within a young company, but it will probably need to be adapted as the company grows.
The dominant societal institutions – namely, the government, the military, and the church – have long had a centralized structure, so it’s only natural that corporations followed suit by embracing centralization as the standard.
As the team-based approach has gained prevalence in the corporate world, companies have worked to create more egalitarian structures that model values of teamwork and individual empowerment.
The military’s own movements toward the decentralization of combat units have also provided lessons for the corporate world. In the Iraq war, when Al-Qaeda forces were winning battles, the U.S. Army moved to empower highly trained combat units to make their own decisions in real-time. Their increased agility paid off, along with their connection to a centralized information hub.
However, decentralization is hardly a new concept. According to BusinessNews Publishing, industries tend to move back and forth between being more centralized and more decentralized depending on an array of societal forces.
Early railroad companies in the U.S. were largely decentralized, and this structure worked quite well for them, Gerrit Broekstra explains in Building High-Performance, High-Trust Organizations. Still, this didn’t last too long. According to Broekstra, the banking industry’s focus on the centralized structure would largely eradicate decentralization from American industry by the end of the nineteenth century.
Taking steps toward decentralization can produce major results when a company pinpoints the right level of decentralization for its operations.
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Companies working to decentralize should negotiate the following challenges:
Decentralization can go a step further: decentralized autonomous organizations. Such an organization is a vast system (or a system with the potential to become vast) that adapts to user needs, tracks spending and preferences, and dispurses profits without the need for centralized oversight.
In such organizations, something called “blockchain technology” allows the system to function entirely without centralized management. The system has a mechanism for generating feedback loops about user preferences so that it can adapt products, services, or even system rules according to their needs.
Blockchain technologies also have the ability to safeguard users’ privacy, as no centralized authority needs to have their information.
These technologies keep an electronic record of user data and transactions that requires no centralized accounting. Bitcoin is one of the best examples. The currency functions wholly without a centralized bank, automatically tracking what all users send and receive.
Such organizations may distribute profits to users throughout the network rather than to a centralized hub, as stated by Forbes. These systems are still in the experimental stages, but some companies partially follow such a framework – Uber is one example.
Evolutionary theory can be considered as forming the basis of these organizations. Through the selection of members, a product or service evolves over time; it’s never seen as “finished.”
Decentralization has become more common in recent years, causing a ripple effect within HR departments. But HRs might not need to panic about this shift. Consider these statistics:
In a decentralized organization, it’s especially important for HR to ensure that workers stay connected to their team members and the core mission of the company. This starts with onboarding new hires and continues through regular check-ins with existing employees.
When organizations transition from a hierarchical structure to a more decentralized one HR departments are critical in helping ensure successful change management. This helps create an environment where teams are both productive and collaborative – allowing organizations to reach their full potential.
Decentralizing a long-standing company might take perseverance, as hierarchical structures are deeply entrenched in the corporate world. However, many corporations have successfully made bold moves toward decentralizing their operations. Ultimately, as such organizations tend to have many experienced employees ready to take on greater leadership roles, decentralization can significantly boost their morale and capacity.
Corporations should carefully evaluate the degree of decentralization that will work for their size. Extreme decentralization is not necessarily better.
Zappos, for instance, made a move toward something called holacracy, which gets rid of centralized hierarchy by eliminating titles and bosses. However, employees began leaving in droves (taking the company up on its buyout option) because of confusion and dwindling motivation – after all, there was no career ladder to climb, reports The Atlantic. Whether the tide will turn for Zappos’ experiment with holacracy remains to be seen.
Creating and empowering smaller divisions with decision-making authority while retaining centralized corporate oversight may be a wiser move for most large companies.
For instance, Unilever decentralized as it expanded, with its divisions throughout the world acting as “self-sufficient units” that could respond effectively to local market conditions. However, it hasn’t done away with headquarters and job titles quite yet.
Startups might be too small to have much to decentralize, but it’s never too soon to start planning how the structure will evolve as the company grows. Putting a plan in place before the company expands will ensure those tough decisions don’t have to be made just when business is booming and onboarding new hires. It’s crucial to know where they fit in before they arrive.
If you’re considering changing your organizational structure, ask yourself how it should look as your company continues to expand. Imagine how it might shift five or ten years down the road. You’ll be more agile and able to seize opportunities when you’re prepared to delegate well.