For decades management theorists have argued over whether and when organizations should be centralized or decentralized.
However the situation is now dramatically different than it was before, as we become richly connected and the world we live in becomes increasingly complex and interdependent.
A new paper reviewed by Stanford Graduate School of Business examines the relative success of firms through the recent global “Great Recession”, depending on their degree of centralization.
The authors, Nicholas Bloom of Stanford University, Philippe Aghion of Harvard University, Raffaella Sadun from Harvard Business School, and John Van Reenen from London School of Economics, reportedly found that:
“Firms that decentralized their decision making had lower falls in their sales and faster increases in their productivity than those with a centralized structure.
When a recession arrives, the interests of the plant manager and top management quickly align. “Their feet are up against the fire, and everyone starts pulling in the same direction” with the common goal of staying afloat, says Bloom. Once the plant manager agrees with the CEO on common goals, he or she can have a drastic impact on company performance if the firm is decentralized, giving the manager the autonomy to act. That impact is more pronounced than in firms where the CEO is onsite and is on the same page as the plant manager from the start.”
“When conditions get tough,” Bloom says, “it’s a good time to push power down to the people on the ground who really know what’s going down.”
Centralized control is predicated not only having sufficient information to make decisions across a distributed organization, but also being able to make and enact effective decisions. The conditions for this are increasingly less likely to prevail.
As we shift to more volatile and challenging industry conditions, organizations that have well-structured and designed distributed decision-making will win.