Small business owners must select a legal structure for their business, either as a sole proprietorship, partnership or corporation. A less obvious but equally important choice is the nature of the management structure in your business, especially as your business grows. A rigid, centralized, one-man-makes-all-the-decisions type of management can work fine for a small shop but may be less suited to a firm of a few dozen or a few hundred employees. Consider whether to control activities from the head office or to delegate authority to managers or independent teams.
Tip
Centralized control of a business can have several downsides, including stifled creativity, limited communication, inflexible decision-making, and the danger of losing a key decision-maker.
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Centralization Can Stifle Creativity
Small business owners might not want centralized control of a company that requires a high degree of creativity from employees. When the control function is decentralized, employees can often work within a more democratic structure, sharing ideas for improving processes and products until they're refined and forwarded to the business owner. When the central office holds tight control, a high degree of innovation is harder to achieve because employees may develop a "why bother" attitude and become less likely to suggest deviations from the company's status quo.
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Limited Communication
In a small business, a centralized structure can limit the quality of communication up and down the hierarchy. It's cheap to communicate with employees from the central office using a medium such as email; this kind of sharing with employees via email creates a degree of transparency. However, with tight control employees may not be inclined to use email to communicate with the head office because they're more comfortable using the chain of command, sharing ideas with their managers only.
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Inflexible Decision-Making
A small business should have a high level of flexibility. Requiring employees to seek approval from the head office before each and every decision fosters rigidity in the organization that can slow down operations. Delegating reasonable authority to front line management and workers can make for more responsive operations.
In a small chain of restaurants, for example, if a restaurant manager must check with the head office before creating daily menu specials, he can miss out on cost-saving opportunities. He might want to create a special to get rid of excess food inventory before it expires. While waiting for approval, food can spoil and the restaurant will miss the opportunity to sell that food in higher volume to customers through a daily menu special.
Delegated Authority
Small business owners often depend on line managers to communicate central directives in a standard way. This is something that a small business owner cannot assume will happen because managers may interpret those orders in different ways. In delegating authority, it's important to define clearly which decisions belong to the central office and which belong to line managers, giving some autonomy to managers and empowering them to innovate.
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In other words, moving your company away from a highly centralized form of management will mean letting go of some of the authority traditionally exercised by the central office. But at the same time, delegated authorities must be well-defined and communicated clearly so that middle managers will have a clear understanding of their role in the organization.
