Functional Decentralization

Organization by function is the more effective and the less problematic the more it approaches federal decentralization.

The best illustration is this is the Lamp Division of General Electric. Its organization was first developed more than sixty years ago when the division was formed by the merger of several independent businesses. It survived an almost twenty fold growth of business and the emergence of a host of new products.

At first sight the Lamp Division organization chart looks like that that of the typical manufacturing company, with its centralized functions of manufacturing, marketing and so forth. Actually the decision is in the hands of more than a hundred managers each of whom runs an integral unit. Sometimes units manufacture glass and parts such as the metal base of the bulb. They supply the lamp Division but also sell a sizable part of their output in the market, mainly to competitors of the division. They therefore have a market of their own and are genuine product businesses. Some components sell finished bulbs to the consumer. They buy the bulbs from the division’s own manufacturing plants at a set price, the way a Sears store buys from the Chicago buying office. But they sell in their own territory, New York or Texas or California. Their marketing is directly under their control. Their profitability partly under their control in respect to volume of sales, product mix and sales expenses though both purchase and sales prices are set for them. The least decentralization units are the manufacturing plants. They buy glass and parts at a genuine market price from the parts plants. But they sell finished bulbs at an administrated price to the sales units. Even so the manufacturing unit can be given innovation and productivity objectives of its own. It can have objectives derived directly from the market standing in respect to quantity and quality of output. And it has a profitability objective which, while not a completely valid test of performance in a competitive market, is at least impersonal enough to permit comparison between the performance of different manufacturing plants.

The division has both a manufacturing manager and a marketing manger. But their job is not to supervise the unit mangers but to serve them. The unit manager himself is appointed by the division’s top man, the General manager, can only be removed by him and reports to him.

Functional work should thus always be organized so as to give the manager the maximum of responsibility and authority, and should always turn out as nearly finished or completed product or service as possible. Otherwise functional managers will not have objectives of performance and measurements of results that are really derived from business objectives and really focus on business results. They would have to set their goals in terms of “professional personnel management” or “good professional engineering”. They would have to measure their results by technical skill rather then by the contribution to the success of the business. Instead of saying: We succeeded in increasing the productivity of the company’s employees by 5 percent last year, they will say: We succeeded in selling eighteen new personnel programs to the line mangers.

Decentralization is always the best way to organize functional activities. But if the system of production contains any elements of Automation, it becomes absolutely essential for the production organization of any company using either automatic materials handling or feed back controls. Main elements of Automation must be set up as series of centers of information and decision at very low levels and with a high degree of integration.

This shows clearly in the engine plant of the Ford Motor Company, a mass production plant “old style” producing uniform products rather than uniform parts, but recently organized with completely automatic materials handling and material a flow. That fairly minor technological change required through going shift of the organization within the plant from the orthodox functional ‘chain of command’ to something that might be called a ‘task force pattern’ with many small centers of information and decisions way down the chain of command but cutting across functional lines.

Similar centers of information and decision making must also be established outside the production organization in any business using modern technology for the mass manufacture of parts with assembly into diversified products, or using process production. To design a product is no longer a job which starts in the engineering department, after which the plant tools up, after which the sale department goes to work pushing the product. It is a team effort in which marketers, production people and engineers work together right from the start – again a “task force” concept. This requires that instead of organizing the work along lines of functional centralization, it must be organized in decentralized, tough still functional, units which have the maximum of information and decision, and the broadest possible scope.