Decentralization and Centralization

Managers make decisions about delegation continually. It is an ongoing part of the organizing process. At the same time, top managers make broad decisions about how much delegation they want to practice as a general rule throughout the organizational structure. These decisions are, in effect, planning decisions about organizing practices.

The degree to which formal authority is delegated by managers throughout the organization runs along a continuum from decentralization to centralization. In a relatively decentralized organization, considerable authority and accountability are passed down the organizational hierarchy. In a relatively centralized organization, considerable authority and accountability remain at the top of the hierarchy. Nordstrom is a significantly decentralized organization, as is the college or university you attend.

Advantages and Disadvantages:

Decentralization has the same advantages as delegation: unburdening of top managers; decision making that is frequently better because decisions are made closer to the scene of action; better training, morale and initiative at lower levels; and more flexibility and faster decision making in rapidly changing environments. These advantages are so compelling that it is tempting to think of decentralization as ‘good’ and centralization as ‘bad’.

But total decentralization, with no coordination and leadership from the top, would clearly be undesirable. The very purpose of organization for efficient integration of subunits for the pursuit of organizational goals through the strategic plan would be defeated without some centralized control.

Al Winick, president of Norwest Financial Information Services Group, and Robert Major, president and CEO of Chrysler, first have studied the advantages of both decentralization and centralization in the customer finance market. Winick reports that decentralization is in the opinion of many the best way to develop and retain a close relationship with the customer. The following benefits of decentralization are listed:

1. Proximity to the Market: Having the same person procure accounts, receive payments, and handle collective and renewals provides the customer with a more personalized level of service.
2. Local Knowledge: An employee’s knowledge of the community can prove critical in the decision to grant a loan.
3. Customers Acceptance and Knowledge: Local employees are also possessed of a better understanding of a customer’s needs due to local economic trends.
4. Dealer’s Comfort: Dealers also feel more comfortable doing business with the person who will be servicing the dealer’s customers.

On the other hand, centralization offers a variety of strengths well suited to today’s customer finance market. Major finds. The following as reasons for centralizing are listed:

1. Specialized skills, talent and technology are sometimes neither affordable nor practical in multiple locations.
2. Decentralized locations usually mean an increase in overhead and staff. Coordination of products, money, and control also add to the cost of decentralization locations.
3. Recent improvements in communication technology facilitate the movement of money credit information transportation, and data processing from a central location.

As managers in many organizations consider greater decentralization, the important question is not whether an organization should be decentralized but to what extent it should be decentralized.

Challenges of Decentralization:

The shift towards decentralization does not come without challenges. More individual authority at the store level requires more thorough manager training. At Fred Meyer Inc for example, employees receive classroom style training from company executives, company training staff and college professors at the Fred Meyer Institute in order it improve their decision making abilities.

Decentralization usually entails bringing in additional staff. Fred Meyer Inc managers decided to replace their centralized Honeywell mainframe management information systems with one that uses individual IBM computers at every store. This change required the hiring of a professional staff to put the new system into place and design the software required to run it.

During the late 1980s, Eastman Kodak reorganized itself and developed a framework for thinking about human resource planning which was dubbed ‘HR Planning in 3D’. The three dimensions were diversity, dynamism and decentralization. Decentralization was particularly important in that it enabled decision making place at appropriate levels in the organization.