- At a centralized company, all major decisions are made at the top by corporate management; lower-level management has limited authority to make decisions
- A decentralized system works well at companies that require fast decision-making, because it permits many major decisions to be taken at group and division levels
When you join a company as a manager and study its organization, don’t be complacent with the structure you find. When done well, a company’s structure is organized for financial success with opportunities for an enormous payoff. How a leader organizes the company is influenced by the organization’s maturity, size, financial condition, and not least, how the leader likes to manage.
Looking at the company organization chart will not tell you how the company is managed, other than who reports to whom. It will not reveal how decisions are made. That’s why you have to dig in to learn what’s behind the reporting lines.
There are two classic models of decision-making and control: centralized and decentralized. You can call the first a tight-control model and the second a loose-control model. Both of these models impact many facets of the organization, from the ability to compete effectively, to how much hands-on control a leader has, to how quickly (or slowly) decisions are made.
Let’s consider the practical workings of the two models. A centralized company means just that. All major decisions are made at the top by corporate management, including the CEO, CFO, CTO, and general counsel. Lower-level management has limited authority to make decisions and then only to prescribed limits.
A centralized model is typical at organizations that make large capital investments, organizations with high-risk business partnerships run by consensus, or heavy-expense legacy companies such as General Motors, which are concerned with shrinking income and changing distribution channels.
A decentralized model permits many major decisions to be taken at operating group and division levels. Some decisions are reserved to corporate leaders — financings, lawsuits, acquisitions — but most are pushed down to a level where they are arguably made better and faster.
A decentralized system works well at companies that require fast decision-making — for example, a cash-rich company stressing innovation and quick response to markets, or a mature company operating profitably with diversified operating divisions.
Let’s look at the factors that determine whether a centralized or decentralized model is more suitable:
- Imagine a small start-up company with executives and staff, a small R&D team and a manufacturing facility. Centralized is the obvious model. Expenses must be controlled and capital has to be preserved. R&D must concentrate on the few products initially produced. Staying in business is key.
- Now consider a mature company in financial trouble. Here the CEO and CFO need control to preserve funds, manage people tightly, and adhere to the business plan in order to survive. Again a centralized model is desirable.
- What if fast decision-making is key? Decentralization permits decisions at lower levels. Centralized control slows down and even stifles the ability to compete. Once, my European division had the opportunity to buy a desirable Spanish life insurer that had just come on the market. Because we had a centralized corporation where all decisions went up through management to the CEO, another company had bought the company by the time I had approval.
But remember: Not all functions in a centralized company are centralized, and not all functions in a decentralized company are decentralized. A blend of mixed tight and loose models is not the norm but can work well so long as management is nimble. I’ve worked in two companies, Xerox and Cigna, where the tight-loose model worked.
At Xerox, we acquired many companies during its glory days. Some were run very differently than the Xerox norm. Although we had a decentralized model at Xerox, the new companies were managed strictly (in a more centralized fashion) until they were fully absorbed into existing operations.
At Cigna Worldwide, we made several large international acquisitions. Similar to Xerox, we initially managed the new companies tightly. Eventually they were made over to Cigna’s values and style, and control was loosened. These companies ran on their own and were not integrated into extant Cigna operations.
I am convinced that company success is largely a product of the leadership qualities of the boss. He or she has the responsibility to organize and reorganize to take advantage of company goals. The boss must meet the challenges of the external competitive environment and attract managers who can excel in either model. Then financial success becomes a more likely result. I am also convinced that not enough managers pay attention to the art of organization. Leaders will be well served by giving it the study that will bring the company success at a high level.