Hierarchy is not the only solution
Traditionally, the organizational structure has always been in the form of a hierarchy. There is a chain of command, division of labor, and communication that happens from top to bottom. Several companies, including Supercell (FIN), YLE (FIN), Sysart (FIN), Heltti (FIN), Buurtzorg (NL), Morning Star (US), Zappos (US), and W.L. Gore (US), have made the news for going against the traditional corporate hierarchy and adopting alternative management techniques in various industries: games, health care, IT, food production, technology, and retail.
Hierarchy vs. agility
Without exception, business executives understand the importance of agility: identify opportunities and threats and can act upon it fast and effectively. When redesigning the organization structure, one central question is the decentralization of decision-making. We are doing business in a world where new systems are challenging the systems upon which trust is based. Decentralized organizations will be one of the primary drivers of these changes and have a variety of social, organizational, and business implications.
Decision making is the key
Decision rights are handed over to those who are close to customers, competitors, and other stakeholders. In this way, they avoid the delays associated with information and approvals traveling up and down the organizational hierarchy. Also, knowledge from complex decision-making situations is even better in front-line employees than in middle and top management.
The question of centralized versus decentralized authority, who has the right and ability to make choices, is not new. Now we can build more decentralized organizations and that these can create a competitive advantage over existing models. A highly centralized system accumulate control to a small group at the top of organizations, maybe to even a single individual in the hierarchical corporation.
The quest for autonomy
An extremely decentralized organization gives every employee, and team or group, own autonomy. The anxiety is that this comes with more disorganization, inefficiency, and even anarchy. Most organizations are a balancing act and are not at one extreme or the other and solve these challenges with novel ways. In brief, we have the tools and methods to address the most significant concerns with decentralized organizations: inefficiency, safety, and trust.
When given an equal choice, employees will be driven to participate in more decentralized organizations to maintain more control and authority over their work; consequently, organizations that enhance autonomy will have an advantage.
Already partially decentralized organizations will become more efficient than their centralized counterparts, as measured by the costs, ability to innovate, and soft issues of work such as trust, commitment, support, and cooperation. Also, the overheads associated with centralization are high. Now the decentralized systems are maturing. It will be possible to utilize each person’s unique skills and match them to situations where that skill has the best value.
The cost of communication
The cost of communication is one of the critical dimensions of a decentralized organization. When an interaction is complex and costly, the best way to share knowledge may be to have centralized managers find and spread the concepts organization-wide. When communication is cheap and easy, and even when subjects are complex, it’s better to have employees share knowledge directly through various channels.
Large organizations face challenges in finding the right balance between centralization and decentralization. On the other hand, pressures to cost-cutting, streamlining existing business, and respond to new legal requirements, risks, or sustainability all prefer more centralization.
Moreover, inevitable to reduce bureaucracy, encourage intrapreneurship, respond rapidly to customer needs, and improve agility in the business environment of fast-changing markets seem to prefer decentralization.
The old slogan “think globally, act locally” may sound good, but it doesn’t provide much concrete guidance. Decentralization is a type of organizational structure in which daily operations and decision-making responsibilities are delegated by top management to almost every employee. Decision-making is not delegated just to middle and lower-level managers, but to everyone in the organization.
Decentralization of decision making frees up top management to focus more on more significant decisions, which require experience and views from different stakeholders that front-line employees don’t have. A growth company may need to decentralize to continue efficient operations, but to give up control may be difficult for a business owner who is accustomed to make all the decisions.
In decentralized organizations, employees are empowered by having the autonomy to make decisions, giving them a sense of importance, and making them sense as they have influence in the direction of the organization. This allows them to make better use of their knowledge, experience, and new ideas. Empowered employees can cut the official rules and processes that seem unnecessary and delay the results by taking the initiative to get the job done with a minimum of managerial approvals.
Decentralizing takes some load of business operations and related decisions from the top and middle management. When the management delegates decision making to others, it frees them to spend more time on strategic issues, such as planning for international expansion or meeting with potential investors. A decentralized organization provides a better chance that the organization will maintain self-sufficiency because managers and employees are used to working autonomously.
A decentralized organization can make decisions more quickly than one with a centralized structure. An employee is often able to decide without having to wait for it to go up a chain of command, allowing to react immediately to situations where fast action means better customer experience or even losing a customer.
For a growth business, decentralization facilitates the process of expansion. For example, if expansion results in opening a new business in a different geographic area, decentralization allows operating as an independent entity, it reacts quickly to the specific needs.
When you have created a sound strategy and decentralized organization structure, you now face the challenge of alignment of daily decisions and actions with the strategic direction of the company. Strategic alignment is the ability to support the execution within the business environment and the design of the appropriate business processes, IT, resources, and capabilities. The decisions and collective actions of employees towards the strategic goals of the organization determine whether the strategy will be successful or not.
Fundamental to strategy alignment is the concept of decision rights:
- Who makes decisions
- what data, information, constraints, tools,
- incentives affect the way they evaluate those decisions?