Centralization and-decentralization

Centralization and
Decentralization

Contents
Centralization
Prerequisites of decentralization
Types of decentralization
Factors determining the extent of centralization
Advantages of centralization and decentralization
Distinction between delegation and decentralization
Decentralization and performance evaluation
Marketing decision to decentralize
Case study: Ford’s Global strategy
Copyright © 2008 - 2012

What is centralization?
Admin.
Officer
Senior
Manager
Finance
Executive
Asst.
Manager
Executive
Director
Oper-
ations
Manager
Finance
Manager
Centralization means reservation of authority at central point within the
organization. In centralization, control and decision-making reside at the
top levels of management
Copyright © 2008 - 2012

The circumstances varying centralization of
decision-making power
Unified
direction
and
Integration
Small
organi-
zation
Out-
standing
leader
Prompt
actionReduce
ControllingIt ensures effective
means of controlling
the operational units
It reduces overall costs
Centralization of decision-
making ensures prompt
action necessary to meet
the emergencies
Take advantage of
outstanding leader in early
stages of enterprise for
taking quick decisions
Centralization may become
essential to provide unified
direction to activities and keep
integration. It ensures overall
organizational perspective
Essential for small
organization to survive
the competition
Copyright © 2008 - 2012

Factors influencing centralization
• The cost and risk associated with decision
which could have a heavy impact on
performance
• An individual manager’s preference for a
high degree of involvement in detail and
confidence in subordinates. Some may
prefer to delegate, while some may not
• The history of an organization culture say
under strong leader may have centralized
structure
• Lack of abilities of lower-level managers
may create a lack of faith in them. Thus
make it difficult to decentralize
Copyright © 2008 - 2012

Applications of Centralized Structures
Small businesses often operate in a centralized manner simply because
of the smaller size of their workforces
A small business owner may be the only manager in the entire company,
with all other employees reporting directly to the owner. Organizational
designs can change as small companies grow, however
Example
A trucking company is an example of
a company with a centralized
organizational design
Trucking company managers make
all operational decisions, sending
information to individual drivers
through dispatchers
Copyright © 2008 - 2012

Contents
Centralization
Factors determining the extent of centralization
Advantages of centralization and decentralization
Distinction between delegation and decentralization
Decentralization
Marketing decision to decentralize
Case study: Ford’s Global strategy
Copyright © 2008 - 2012

What is decentralization?
Copyright © 2008 - 2012

Decentralization authority
Decentralization of authority means
dispersal of decision-making power to the
lower levels of the organization.
Decentralization refers to the systematic
effort to delegate to lowest levels of
authority except that which can only be
exercised at central points
Copyright © 2008 - 2012

Decentralization authority
Decentralization is not the same thing as delegation. Delegation means entrustment of
responsibility and authority from one individual to another. But decentralization means
scattering of authority throughout organization. It is the diffusion of authority within the
entire enterprise
Decentralization is distinct from dispersion. Dispersion occurs when plants and offices are
located at different places with physical distance between them. A company may be highly
centralized although its physical facilities and employees are widely dispersed and company
may be highly decentralized even though all physical facilities and employees are located in
a single building Copyright © 2008 - 2012

Two reasons for evaluating a subunit performance
Identification of successful
areas of operation and areas
in need of improvement
Influence over the behavior
of managers
It is quite possible to have a
good manager and a bad
subunit
Copyright © 2008 - 2012

Responsibility accounting
Managers should only be held responsible for costs
and revenues that they control
In a decentralized organization, costs and
revenues are traced to the organizational level
where they can be controlled
Copyright © 2008 - 2012

Applications of Decentralized Structures
Franchise organizations provide an ideal example of a decentralized
structure
Franchise companies control most product development and marketing
decisions at the top, but they give franchise owners a great deal of
independence in running their individual stores
Franchise owners make staffing decisions, decisions on hours of
operation and compensation decisions completely on their own
Example
Companies with a wide geographical reach also
can benefit from a decentralized structure
Copyright © 2008 - 2012

Delegation and decentralization
Copyright © 2008 - 2012

Centralization and decentralization tendencies
Complete
centralization
(no organization
structure)
Complete
decentralization
(no organization
structure)
Authority delegated
Authority not delegated
Copyright © 2008 - 2012

Delegation
Assigning a task is not
delegating
Telling people what to do is not
delegation
Explain the big picture
The
Why
Provide authority to achieve
goals
The
What
Handover decisions
concerning how the job
gets done
The
How
Establish timelines
The
When
Copyright © 2008 - 2012

The ultimate goals of delegating
The goal of delegating is not getting someone to do
something you do not want to do
The two goals are
Employee
engagement
Skill development
Effective delegation best leverages your current talent in ways that
elevate their potential. It is more about people than tasks
Copyright © 2008 - 2012

Few principles of delegation in a decentralization
organization
Always begin with the part most frequently
excluded – mission and vision
Delegate outcomes not methods – unless
specific methods are mandatory
Invite participation from employees regarding
delegated assignments
Discuss the scope of authority – including limits
and agree on the definition of excellence
Create controls like timelines and deadlines.
Provide ample feedback but do not meddle
Expect Excellence. Face failures together. Solve
challenges “with” not “for”.
Copyright © 2008 - 2012

Centralization and decentralization
More centralization More decentralization
Environment is stable Environment is complex,
uncertain
Lower-level managers are not as
capable or experience at making
decisions as upper-level
managers
Lower-level managers are
capable and experience at
making decisions
Lower-level managers do not want
to have a say in decisions
Lower-level managers want a
voice in decisions
Decisions are significant Decisions are relatively minor
Organization is facing a crisis or
the risk of company failure
Corporate culture is open to
allowing managers to have a
say in what happens
Company is large Company is geographically
dispersed
Effective implementation of
company strategies depend on
managers’ retaining say over what
happens
Effective implementation of
company strategies depends on
managers having involvement
and flexibility to make decisions
Copyright © 2008 - 2012

The structure of Centralization and decentralization
Decentralized approach
Bottom-to-top approach
Centralized approach
Top-to-bottom approach
Level 1
Level 2
Level 3
Level 4
Copyright © 2008 - 2012

The advantages decentralization over centralization
Reduction in the burden of Chief Executive who has to bear the entire burden of
decision-making in centralization. Decentralization of authority reduces his burden as he
delegated a part of his authority to the subordinates and thus enabling him to focus on
other important functions
With the addition of new activites or product lines, an organization tends to grow
complex and may pose a challenge to the top executives, which can be met by
decentralization under the overall cordinating preview of the top management
Decentralization avoids red-tapism in making decisions as it places responsibility for
decision-making as near as possible to the place where action takes place
When authority is decentralized the subordinates get opportunities of taking initiative to
develop managerial talents
Copyright © 2008 - 2012

The advantages decentralization over centralization
Decentralization promotes the improvement of morale and motivation of subordinates
which is reflected in better work performance
The greater the degree of decentralization, the more effective becomes the span of
control. It leads to effective supervision as the managers at the lower levels have
complete authority to make changes in work assignment, to change production
schedules, to recommend promotions and to take disciplinary actions
In addition to the above advantages, decentralization also achieves several internal and
extermal economies. Internal economies include speedier communication, better
utilisation of lower level and middle level executives, greater incentive to work and
greater opportunities for training
Copyright © 2008 - 2012

The advantages centralization over decentralization
Singular point of control, which helps make bigger decisions easier, as the top level
managers have a better picture of the organization as a whole and are better equipped
to make important decisions as compared to a lower level manager
The implementation of an idea, process or policies is easier in a company that has a
strong central direction as compared to a decentralized organization
Due to a single vision of the head of the company, the organization can work towards a
single goal, which would not be possible in a decentralized organization due to individual
manager goals
Centralization allows corporate decision makers respond better and faster in urgent
situations which require quick decisions
Copyright © 2008 - 2012

Other advantages of decentralization
Relieves top management of some burden of decision-
making and forces upper-level managers to let go.
Encourages decision-making and assumption of authority
and responsibility.
Gives managers more freedom and independence in
decision-making.
Promotes establishment and use of broad controls which may
increase motivation.
Makes comparison of performance of different organization
units possible.
Facilitates setting up of profit centers.
Facilitates production diversification.
Promotes development of general managers.
Aids in adaptation to fast-changing environment.
Copyright © 2008 - 2012

Other disadvantages of decentralization
Makes it more difficult to have a uniform policy.
Increases complexity of coordination of
decentralized organization units.
May result in loss of some control by upper-level
managers.
May be limited by inadequate control techniques.
May be constrained by inadequate planning and
control system.
Can be limited by the availability of qualified
managers.
Involves considerable expenses for training
managers.
May be limited by external forces.
May not be favored by economies of scale of some
operations.
Copyright © 2008 - 2012

Factors
As the size of the organization increases, more decisions have to be made at different
levels and coordination becomes difficult among the large number of departments and
the levels involved.
High costs of decision will be taken at the higher levels of management.
Thus, the decision of whether to have another factory or not would be
taken at the top levels, whilst the question of purchasing of stationery
would be taken at an extremely low level.
When different production lines are there in the same company
decentralization becomes important.
Decentralization of the authority requires the availability of
competent managers.
Copyright © 2008 - 2012

Factors
The management philosophy of the top management determines to a large extent how
much authority the managers in the organization are willing to retain or delegate down
the line.
Environmental influences sometimes guide an organization’s structure
and functioning to be decentralized. Competitive market condition make
decentralization more important to organization effectiveness.
Current trend toward increased employee participation
and higher education levels may lead to increased
decentralization. Widespread use of decision support
system facilitate decentralization.
On the other hand, computers may increase the decision
power of top management and thus lead to centralization.
Copyright © 2008 - 2012

Divisionalized or profit centre
It is the responsibility centre
whose budgetary performance
is measured through profits or
loss.
Its responsibility is headed by a
manager who is responsible for
achieving goals.
Each division is given
operational independence so
that it can calculate its own
profit.
Cost centres
It is a responsibility centre
where budgetary performance
depends on achieving goals by
operating within standards cost
limits.
It has also to provide required
support to the rest of the
organization such as
accounting staff, etc.
Copyright © 2008 - 2012

Investment centres
It is a responsibility centre
whose performance is
evaluated on the basis of return
on investment.
Splintered Authority
Splintered Authority exists
wherever a problem cannot be
solved or a decision made
without pooling the authority of
two or more managers.
Many managerial conferences
are held because of the
necessary of pooling authority to
make a decision.
Such problems could be handled
by merely referring the decision
upward until it reaches a person
with the authority to make it
unilaterally.
Copyright © 2008 - 2012

The main steps in the establishment of this technique are
Establishment of appropriate centralized headquarters – As a first step in
decentralization, a centralized headquarters is necessary which will act as
the nerve centre of the enterprise. Here plans will be formulated and
communicated for the guidance of each part.
1
Development of managers: In decentralized concerns, critical decisions
have to be made at a large number of centres. This needs people who
have mastered the technique of management and not simply of
supervision.
2
Provision of adequate coordination system. In decentralization, good
communication, and coordination system have to be established such as
Management Information System and committee.
3
Copyright © 2008 - 2012

To establish effective control, monitoring and performance measurement
system.
4
Establish product or divisional committees to meet new challenges in
competition in their field of activity.
5
Adequate policies are laid to guide decision-making but not unduly
restrictive. Adequate delegation of authority may be ensured.
6
Organization structure must be reorganized to facilitate decentralized
operations.
7
Copyright © 2008 - 2012

Are the potential benefits of decentralizing
important?
As we saw in the previous slides, decentralization
has several benefits. These benefits are important
in certain industries and business function.
For example, the success of most professional
services organizations (such as consulting, software
development, and law) hinges on the motivation and
creativity of their professionals. Consequently, these
organizations are especially good candidates for
decentralized decision making.
Innovation becomes increasingly critical to business
success in many industries, the benefits of
decentralization are likely to become important in more
and more places.
Much of the early work in the Total Quality Movement,
for example, was about encouraging assembly line
workers to look for ways to innovate and improve the
routine processes they performed.
So the question of whether the benefits of
decentralization are important in your situation is not a
purely objective one.
It is also a matter of your strategic choices. Different
people in the same situation can make different
choices about how much they want to rely on the
advantages of decentralization.
Copyright © 2008 - 2012

Can you compensate for the potential costs of
decentralizing?
You may be thinking, "Sure, sure, all this decentralization stuff sounds great in theory, but how often
could it actually work?
These concerns are important—sometimes so important that they'll lead you to reject decentralized structures
and stick with rigid hierarchies. Often, though, there are creative ways to deal with the potential downsides.
Let's look at the four main problems with decentralization and the possible solutions in the next slides.
How can you make decisions effectively when no one is really in control?
How can you guarantee quality or protect your company against
catastrophic losses if no one is watching over things?
How can you take advantage of economies of scale or knowledge sharing,
if everything is so fragmented?
Copyright © 2008 - 2012

How can you take advantage of economies of
scale if everything is decentralized?
Many times, people
assume that just
because there are
economies of scale in
one part of a process,
the whole process has
to be centralized. But
you can often get the
benefits of both
bigness and
smallness by
centralizing only those
decisions involving
important economies
of scale and
decentralizing
everything else.
Many companies
assume, for instance,
that to achieve
economies of scale in
purchasing, they need
to centralize
purchasing decisions.
By forcing all the
different parts of their
company to buy from
the same vendors,
they get much bigger
volume discounts.
But what if, instead of
forcing everyone to
buy from the same
vendors, you just
provide incentives for
people to form
voluntary purchasing
groups? If I don't
much care, for
instance, what kind of
personal computer I
have, I could just
delegate my personal
computer purchasing
decision to a PC
purchasing specialist
and automatically get
whatever volume
discounts that person
can negotiate.
If I do care, I could
look at an online
database of the
different PC
purchasing plans
available in my
company and decide
which one is best for
me. In this scenario,
the central purchasing
people could still have
a job organizing
voluntary coalitions of
buyers, maintaining a
database of available
purchasing plans, and
negotiating volume
discounts for the
people who choose to
participate.
Copyright © 2008 - 2012

How can you enjoy the benefits of knowledge
sharing without centralized control?
One of the most important advantages of being in a big organization is having ready
access to many sources of knowledge. If you're the owner of an isolated hamburger
stand in a small town in New Mexico, you have only your own ideas and experience to
guide you in running your restaurant. But if you're the manager of a McDonald's in the
same town, then at least theoretically you have access to the best burger-selling
knowledge available anywhere in the world.
Of course, big companies do not always take advantage of their full potential for
knowledge sharing. And even when they do, gaining the benefit of knowledge sharing
doesn't require centralized control at all. It just requires the widespread sharing of
knowledge. When communication is difficult and expensive, the best way to share
knowledge may be to have centralized managers find and spread the best ideas from
different parts of their organizations.
But when communication is cheap and easy, it's often better to have people share
knowledge directly through many different channels. For example, independent
restaurant managers can share knowledge with each other through trade association
meetings, online discussion groups, best-practice databases, and so forth.
Copyright © 2008 - 2012

Do the benefits of decentralizing outweigh the
costs?
Once you've worked out the
benefits and costs, you need to
weigh them to decide whether
decentralization will pay off. Here,
again, however, there are no simple
answers – much depends on your
particular situation. But some simple rules of thumb can
help you think through the choice.
Decentralize when the motivation and
creativity of many people is critical.
When your industry is in the
midst of rapid change, the
best way to figure out how to
respond is often to let many
highly motivated people try
many experiments.
And when small groups in your
company work independently from
other groups (e.g., in a consulting firm
or a research university), it's often a
good idea to decentralize most
decisions to these small groups to spur
their innovativeness.
Copyright © 2008 - 2012

Ford’s global strategy: Center of excellence
Donald E Petersen
In 1986, Ford passed its bigger competitor, General Motors with
earnings of $3.3billion. Ford’s market share is about 20%. But
success in many instances, may be only temporary and Ford’s
chairman, Donald E. Petersen, is concerned about complacency.
Indeed, the company has to work hard to maintain its reputation for
stylish, aerodynamic cars and high quality
Copyright © 2008 - 2012

Donald E Petersen
Under the former leadership of Henry Ford II, the company was very centralized. But Petersen’s plan is to
make Ford as a an integrated global enterprise. Thus, a great deal of authority for the developer of specific
models of components is now centralized in the company’s various technical centers around the world
rather than in Detroit
Copyright © 2008 - 2012

Under this plan, a car or its components are developed in the technical center with the best
expertise in a particular field, anywhere in the world. This could save the company a lot of
money by avoiding duplication in the development and reducing tooling costs
Copyright © 2008 - 2012

For example, Ford of
Europe, located in
England, is the center for
developing the platform
for the new model that
will replace the European
Sierra and the American
Tempo and Topaz. Ford
will sell the new cars in
Europe and in the
United States
Copyright © 2008 - 2012

Similarly, in Japan, Mazda (Ford owns 25% of the company), which has much
experience in building small cars, will be the center for developing the platform for the
car that will replace the escort
Copyright © 2008 - 2012

The North American center of excellence will focus on midsize cars. Similar centers are planned
for major components such as transmission of engines. While these centers of excellence
develop platforms and key components, exterior and interior styling will be the responsibility of
companies in the various regionsCopyright © 2008 - 2012

The concept of the centers of excellence may seem promising, yet a previous
attempt in the early 1980s to build a ‘world car’ in Europe failed. It is said that the
American car, the escort, shared only one part with its European counterpart,
namely a seal in the water pump
What do you think of Ford’s overall decentralization with
centralized authority for the development of specific cars and
components at the technical centers?
Why does Ford think that the concept of having centers of
excellence located in various parts of the world will be the
correct organization structure for the 21st century?
Copyright © 2008 - 2012

Conclusions: Centralization and Decentralization
Business owners should carefully consider which type of organizational
structure to use in their company
Small organizations typically benefit from centralized organizational
structures because owners often remain at the forefront of business
operations
Larger organizations usually require a more decentralized structure
since such companies can have several divisions or departments
Business owners may need to consider changing the organizational
structure depending on the growth and expansion of business operations
Copyright © 2008 - 2012

Conclusions: Centralization and Decentralization
Organizational structures do not always require significant amounts of
planning time
Many businesses have organizational structures that simply evolve
during the business’s lifetime
Business owners often set the tone based on how they manage
employees
Employees will perceive how the owner handles different business
situations and simply adjust their work style accordingly will create an
organizational structure by default, with no serious planning involved.
Copyright © 2008 - 2012

Centralization and-decentralization

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