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.