centralization and-decentralization

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


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


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


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


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


Contents

Centralization






Decentralization




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


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


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


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


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


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


Contents

Centralization






Decentralization




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


Centralization and decentralization tendencies

Complete centralization (no organization structure)

Complete decentralization (no organization structure)

Authority delegated

Authority not delegated


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


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

http://research.timesjobs.com/wp-content/uploads/2012/01/employee_engagement2.gif


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”.


Contents

Centralization






Decentralization




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


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


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


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


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


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.


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.


Contents

Centralization






Decentralization




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.


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.


Contents

Centralization






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.



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.


Contents

Centralization






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



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


Contents

Centralization






Decentralization




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.


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?


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.


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.


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.


Contents

Centralization






Decentralization




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



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



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



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



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

http://css.nitrobahn.com/wp-content/uploads/2011/06/ford_logo_mazda_logo.jpg



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

http://0.tqn.com/d/geography/1/0/z/K/namerica.jpg



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?


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


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.

centralization and-decentralization

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