Requirements of Decentralization

When federal decentralization is defined as the structural principle under which as many managerial units as possible are organized as if they were businesses in themselves, what does this mean concretely? What are the requirements? What are the limitations?

The autonomous product businesses under federal decentralization vary tremendously in size. On the lower end of the scale there are the small Sears Roebuck stores with fewer than fifty employees and with annual sales well below half a million dollars. At the upper end of the scale there is the Chevrolet division of General Motors with annual sales of four billions or so and with 200,000 employees or more.

They also vary tremendously in scope.

A General Motors appliance division AC Spark Plug, for instance is all but a complete business in itself. It may sell the larger part of its products outside of General Motors: direct to the customer for replacement, and to other automobile companies that are competitors of General Motors. It purchases its own raw materials, does its own raw materials, does its own engineering and design, its own manufacturing and so forth. Because of the special nature of its products, it may not even make use of the company’s central research facilities. What it uses are services like product-testing, consumer research and legal advice which many entirely independent businesses buy on the outside anyhow. It does not conduct its own contract negotiations with the labor union. But many independent businesses also have industry-wide contracts negotiated for them by their trade association. And AC Spark Plug handles its own grievances. The only important function which an independent business would have to discharge, and which AC Spark Plug does not, is the raising of capital. Its funds are provided by General Motors.

But federally decentralized units may also have a much narrower scope.

A sears store, for instance – even a large one doing ten million dollars’ worth of business a year does not do its own buying, its own merchandise development, its own selection of goods. That is done for all stores by the company. The company rather than the store manager decides which kinds of goods the store will carry, and, roughly, in what proportion. Whether he likes it or not, the manager must give space in his store to a “catalogue order desk” accepting orders for the Sears mail order business which is in direct competition with the store. Even the arrangement of the store counters and the display are largely controlled from Chicago headquarters. Finally the manager has no pricing authority. His concern and responsibility are for pushing the sales of merchandise designed, developed, bought and priced for him.

Between these extremes there is every conceivable variation

At General Electric, there are product businesses that are as truly autonomous as AC Spark Plug. There are others that, though eventually responsible for their marketing, entrust the actual selling and servicing job to a separate sales division which handles the products of several GE businesses pretty much the way an independent manufacturer’s representative handles a number of complementary lines produced by different manufacturers. Some General Electric product businesses do all their own research co-operatively with neighboring businesses; some depend heavily on the company’s central research facilities.

The same variety can be found in some chemical companies. Indeed, it is one advantage of federal decentralization that it permits great diversity without undermining essential unity.

There is, however, one requirement that must be satisfied if federal decentralization is to result. The managerial unit must contribute a profit to the company rather than merely contribute to the profit of the company. Its profit or loss should directly become company profit or loss. In fact, the company’s total profit must be the sum total of the profits of the individual businesses. And it must be a genuine profit not arrived at by manipulating accounting figures, but determined by the objective and final judgment of the market place.

To be able to contribute a profit to the company the unit must have a market of its own. This may be purely a geographic entity. —