Centralization and Decentralizati
Centralization and Decentralization
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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
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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
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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 costsCentralization 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
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Factors influencing centralization
The Factors influencing . . .
• 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
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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
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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
Marketing decision to decentralize
Case study: Ford’s Global strategy
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What is decentralization?
Firms that grant substantial
decision making authority to the
managers of subunits are
referred to as decentralized
organizations
Most firms are neither totally
centralized nor totally
decentralized
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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
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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
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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
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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
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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
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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
Marketing decision to decentralize
Case study: Ford’s Global strategy
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Delegation and decentralization
Delegation is a process of devolution
of authority
Decentralization is the end result
which is achieved when delegation
of authority is at more than one
level
Delegation takes place between a
superior and subordinate. It is a
complete process. It may consists of
certain tasks alone
Decentralization involves spreading
of the total decision-making power
In delegation, control rests entirely
with superior or delegator
The top management may exercise
control only in a general manner and
delegate the authority for control to
the departmental managers
Delegation is a must for
management. Subordinates must be
given sufficient authority to perform
their assignments
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Centralization and decentralization tendencies
Complete centralization (no organization structure)
Complete decentralization (no organization structure)
Authority delegated
Authority not delegated
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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
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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
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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”.
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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
Marketing decision to decentralize
Case study: Ford’s Global strategy
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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
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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
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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
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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
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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
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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.
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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.
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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
Marketing decision to decentralize
Case study: Ford’s Global strategy
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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.
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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.
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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
Marketing decision to decentralize
Case study: Ford’s Global strategy
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Types of decentralization
Divisionalized or profit centreDivisionalized 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 centresCost 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.
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Types of decentralization
Investment centresInvestment centres
It is a responsibility centre whose performance is evaluated on the basis of return on investment.
Splintered AuthoritySplintered 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.
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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
Marketing decision to decentralize
Case study: Ford’s Global strategy
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Prerequisites of decentralization
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
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Prerequisites of decentralization
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
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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
Marketing decision to decentralize
Case study: Ford’s Global strategy
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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.
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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?
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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.
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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.
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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.
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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
Marketing decision to decentralize
Case study: Ford’s Global strategy
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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
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Ford’s global strategy: Center of excellence
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
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Ford’s global strategy: Center of excellence
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
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Ford’s global strategy: Center of excellence
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
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Ford’s global strategy: Center of excellence
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
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Ford’s global strategy: Center of excellence
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 regions
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Ford’s global strategy: Center of excellence
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?
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Conclusions: Centralization and Decentralization
Business owners should carefully consider which type of organizational
structure to use in their company
CO
NS
IDE
RA
TIO
NS
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
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Conclusions: Centralization and Decentralization
Organizational structures do not always require significant amounts of
planning time
MIS
CO
NC
EP
TIO
NS
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.