Factors influencing Decentralization

Decentralization has value only to the extent that it helps organization members achieve their objectives. In determining the amount of decentralization appropriate for an organization, the following factors are usually considered:

1. Environmental influences such as market characteristics , competitive pressures, and availability of materials
2. The organization’s size and growth rate
3. Other characteristics of the organization, such as costliness of given decisions, top management preferences, the organization’s culture and abilities of lower level managers.

Strategy and the organizational Environment: A strategic plan will influences the types of markets, technological environment, and competition with which the organization must contend. These factors will, in turn influence the degree of decentralization that the firm appropriate. Alfred Chandler found that managers at firms that developed new products through a strategy of research and development leading to product diversification, such as Westinghouse and General Electric, chose a decentralized structure. Other managers, operating in industries in which markets were more predictable, production processes were less dynamic and competitive relationships were stable, tended to choose centralized authority.

For example, several years ago, Nobuhiko Kawamoto, president of Honda Motor Company, acted on his concern about sales prospects for the best selling Honda Accord by taking a direct role in managing Honda’s auto division (the company has several product divisions). Kawamoto’s move, designed to improve implementation of Honda’s Honda auto strategy, increased decision- making centralization at the company.

Executives at AT&T, on the other hand, have decentralized decision making at the AT&T Universal Card Services division, which faces vigorous competition in the credit card marketplace. AT&T Universal Card Services is structured like a wagon wheel, with a hub, a series of spokes, and outer rim. The customer is the hub (and actually appears on the organization chart). The business functions (finance, marketing, engineering) and teams (new product development, customer satisfaction, suppliers) are the spokes. The outer rim, which holds it all together, includes the chief executive and the board who make sure each employee has the resources at hand to serve the customers. Within such a structure managers serve as advocates and coaches. This decentralization seems an appropriate way to respond to change in the credit card market.

Size and Rate of growth: As an organization grows in size and complexity, decentralization tends to increase. The faster the rate of growth, the more likely it is that upper management, bearing the weight of an ever increasing work load will be forced to accelerate the delegation of authority to lower levels. Nordstrom managers appear to have anticipated such pressures and decentralized accordingly.

Other characteristics of the organization: The extent to which decision making authority is centralized is also likely to be influenced by internal characteristics of the company, such as the following:

1. The cost and risk associated with the decision. Managers may be wary of delegating authority for decisions that could have a heavy impact on the performance of their own subunits or the organization as a whole. This caution reflects consideration for both the company’s welfare and their own, since the authority delegating retains responsibility for the results.
2. An individual manager’s preference and confidence in employees. Some managers pride themselves on their detailed knowledge of everything that happens within their area of responsibility (“the good manager runs a tight ship” approach). Others take pride in confidently delegating everything possible to their employees.
3. The organizational culture: The shared norms, values and understandings (culture) of members of some organizations support tight at the top. The culture of other organizations supports the opposite. The history of an organization helps to create its current culture. A firm that has had slow growth under a strong willed leader may have a very centralized structure. In contrast, managers at a firm that has grown rapidly through acquisitions will have learned to live with the greater independence of the acquired companies.
4. The abilities of lower level managers. This dimension can be circular. If authority is not delegated because managers lack faith in their talent, then subordinates will not have much opportunity to develop. In addition, the lack of internal training will make finding and holding talented and ambitious people more difficult, which, in turn will make it more difficult to decentralize.