Decentralization
Decentralization, as opposed to centralization, is a
managerial, organizational structure that enables low ranking managers the
freedom to make independent decisions. As a managerial approach, the process of
decentralization enhances autonomy. From definition, autonomy refers to the
degree of making independent decisions. In many organizations, subunits are
used for structuring the organization where each unit is treated as an
autonomous agent. However, decisions regarding strategic planning, organization
and financial decisions pertaining to the firm are carried out and effected by
top managers. The decentralization approach applied in many firms is the one
that maximizes benefits over the costs of operation. As such, decentralization
offers certain key benefits as stipulated in this summary.
Since decentralization supports the division of an
organization into subunits, it creates greater responsiveness to the needs of
the stakeholders in these units. For example, customers, employees, and
suppliers are well catered for since there is a personal connection with the
needs of the stakeholders to the policies of the firm. Since the subunit managers interact with
these individuals on a daily basis, they are well versed in their needs. As a
result, effective decisions are made since good information enhances good
decision making. In addition, another advantage is the speed at which the
decisions are made. Compared to centralized structures where the decision has
to be voted by powerful individuals before being implemented, decentralization
leverages a competitive advantage. An experienced pool of management
individuals is created since the structure assists in development and learning
of the managerial skills. The structure is not a closed loop. On the contrary,
it provides a training arena where general managers horn their skills towards a
particular dimension, and product designers showcase their skills. In overall,
the platform enhances the development of an engaging and informed learning
environment. Lastly, the adoption of decentralization makes it easy for
enhancing the reach of the top management. A broader reach is achieved through
sharpening the focus of the low-level managers which in effect leads to
specialization.
Like any other management model, there are some cons
associated with the decentralization approach. From a centralized view, it is
believed that the approach leads to the acquisition of suboptimal decision
making. In the event that the subordinate managers do not have the relevant
expertise and experience, their decisions may be costly to the firm and affect
the performance of the entire organization. In some cases, decisions made by
subunit managers benefits only one section of the organization and incurs added
operational costs to the other departments. Therefore, when it comes to
decision making, proper evaluation and reevaluation of the proposed decision by
subunit managers should be done by senior managers to ensure that the entire
firm does not incur unnecessary costs. Another catastrophic impact of this
model is the competition that emerges from the different departments. In an
attempt of making their departments the best, subunit managers result to
unhealthy competition to please their supervisors. Internal rivalry is a major
detriment to the success of the firm. Arguably, the success of one department
should not be achieved at the expense of the other department. The case is
especially so in decentralized organizational structures. Lack of a coherent
approach to solving problems as is evident in this model results to duplicate
results. The result is failure in the external markets due to internal rivalry,
and this is an added expense to the organization. Activities may also be duplicated.
Due to the independence of the subunits, they may knowingly or unknowingly
carryout similar activities that could be avoided if the firm were organized
centrally.
Determining whether to adopt a decentralized
organizational structure should be based on an analysis of functions in the
company. Product mix and advertising are the best-suited approaches for
incorporating a decentralized model. In addition to the function of the firm,
the size of the business determines which structure to be adopted. For example,
it is impractical to propose a centralized approach for multinational
corporations since physically and logically, it is not feasible to centralize
the control of the subunits. Another factor that leads to the implementation of
decentralized structures in multinational companies is the practices, language,
cultures, customs, laws and rules that vary from one country to another. Using this approach, managers in different
countries make decisions based on the knowledge of the local market which leverages
the merits in the market. Combining decentralization with job rotation enables
the managers to develop global operation abilities. Some drawback associated with
decentralization is the lack of control and the resulting risks. To curb this,
each division has to be monitored, and performance determined using management
control systems.
The performance of the subunits in a decentralized
structure uses responsibility centers which is a management control system that
uses four types of responsibility centers. The cost center where the manager
accounts for the cost only, the revenue center revenues only are accounted for
by the manager. The other two include the profit center that accounts for
revenues and cost and lastly, the investment center where the manager is
accountable for revenues, costs, and the investment. The responsibility centers
span in both centralized and decentralized structures. Costs centers and profit
centers are not limited to centralized and decentralized organizational
structures respectively. However, prior to the inclusion of new products and
services, organizations organized in form of a profit center require approval
of corporate managers. There is little decision making and implementation
freedom compared to cost centered organized firms.
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