What constitutes the optimal organizational structure for companies during periods of economic turbulence is a recurring question. We are exposed to an increasingly turbulent global business climate, marked by recurring unpredictable crises, inflation, tariffs, and global political trade barriers. We know that crises present opportunities for structural changes in the company, its organization, and its leadership. The tendency is to concentrate power at the top to enable tough, overarching decisions—the so-called “cheese-slicer method.” But is that the best path? Or is it perhaps better to delegate responsibility and decisions to local managers who are close to the operations and possess up-to-date, detailed information?
In an INSEAD article by Aghion et al. (2021), “Turbulence, Firm Decentralization, and Growth in Bad Times,” this question is addressed. The research is based on extensive data from OECD countries and U.S. manufacturing firms. The article provides guidance for both companies and policymakers, demonstrating clear advantages to decentralized organizational structures. Companies that empower local managers to make operational decisions—capital investments, new products, sales, marketing, and personnel—fare significantly better when markets are characterized by uncertainty. Local managers’ proximity to real-time information enables swift and effective decisions to adapt to changing conditions.
Sales in centralized firms shrank three times as much as those of their decentralized competitors during the 2008–09 downturn. Particularly hard hit were consumer-facing companies with infrequently purchased products. In this segment, decentralized firms experienced a significant increase in total productivity and thus better chances of survival. It should be noted that performance differences between decentralized and centralized firms were largely confined to the crisis period, then evened out over the subsequent five years. But this shows that the advantages of decentralization are particularly significant when economic conditions deteriorate and times are uncertain.
Beyond purely economic factors, staff development and training are important initiatives. Well-educated employees are an important prerequisite in decentralized structures, since knowledgeable staff are better equipped to make smart, tailored decisions that simultaneously promote innovation and development. Decentralized organizations give employees—at all levels—more opportunities for career development, training, greater job security, and promotion.
Link: In Bad Times, Decentralised Firms Outperform Their Rivals | INSEAD Knowledge