The title says a lot for tonight’s post, which is pulled from the Principles of Management class I took at Umass-Amherst during the winter 2007 semester.
The advantages and disadvantages of centralized versus decentralized organizational structures lies greatly in the inherent qualities and effects of the structures themselves. Robbins and Coulter describe this very well, "If top managers make the organization’s key decisions with little or no input from below, then the organization is centralized." Companies which wish to consolidate power and decision-making abilities at the top of the organizational chart, tend to be centralized organizations. If the CEO of a corporation has a particular vision and wishes for it to remain pure to his/her perspective, he/she will centralize the organization so that he/she is able to control as much of the company as possible. As the textbook states, this is helpful for companies who need to be stable or are facing a crisis and need one source of decision-making to lead them. These sort of organizations are becoming more rare, as employees become smarter and organizations become larger, however a few do still exist. Consider the Oakland Raiders, a team which is widely acknowledged as being run completely (but poorly) by its owner, Al Davis or a monarchy such as Saudi Arabia, or an absolute theocracy, such as the Vatican City. Centralized structures are becoming rare because of their many disadvantages. Due to power being consolidated at the top of the organization, risk is great if the top of the organization becomes incapable of leading the organization (death, illness, or massive organizational size causing a weak span of control). Employees also will feel less motivated to perform for the organization as they will not have an avenue for sharing their ideas on how to improve the organization.
Decentralized organizations are becoming more popular as the ability for organizations to decentralize increases. Decentralization allows organizations to take advantage of division of labor by sharing decision-making across the organization. It also empowers employees and allows them to improve their performance by being able to act to improve deficient or inefficient areas immediately without approval from the top of the organization. Another advantage of decentralization is allowing for the managers of business areas to actually use their first hand knowledge and experience to improve their areas. Consider the Dallas Cowboys of the early 90’s, where Jerry Jones the owner had final say over all personnel decisions to the New England Patriots of today, where numerous individuals throughout the organization have an input on personnel decisions. By trusting the individuals within the organization to obtain accurate information and use their minds to provide appropriate analysis, the Patriots are able to take advantage of division of labor and allows for multiple individuals to give input on players. Decentralization has proven so successful for the Patriots (via seemingly always finding cheap players to replace expensive stars) that the Cowboys have now moved toward a more decentralized structure.
Immediately, I would apply decentralization by allowing each division of my diversified food company to make decisions on the ingredients, manufacturing process, and almost all other aspects of each brand. I would allow the cookie experts to decide on what how and out of what to make the cookies. In my mind, many of the aspects of a food company correspond to an organic structure; for this reason I would encourage my managers to use teams, maybe based on each individual product, especially cross-functional teams that would work with all four food divisions to ensure that no one employee becomes bored by performing the same menial task over and over and allowing for all four divisions to be on the same page.
One area where I would consider using a centralized structure is in marketing. It would prove harmful to the salty snack foods and cookies brand if my breakfast cereals and fruit juice divisions decided to proclaim the health benefits of cereals and juice and expose the negative health aspects of eating too many cookies and salty snacks. Controlling the public image of the entire corporation would prove beneficial over a long-term outlook, even though it might take some of the ideas and unique marketing strategies out of the hands of the people who know them best. Although I would allow for decentralization via listening to employees and allowing managers to compile marketing campaigns, I would maintain final approval of all marketing related strategies in the hands of a few employees, with whom I would maintain a close relationship with. Overall, I would definitely use a decentralized structure to allow me for more free time to focus on truly important items, like relaxing and watching Boston sports on what must be a massive television in my CEO home [this is sort of a joke, I would use the extra time provided by decentralization to ensure I performed my duties as CEO of leading the company and planning the overall strategy well, trusting my employees would be able to perform their duties without exact instructions from me].
is there always decentralizing tendency in any organization?if so why?
emmanuel,
First off, minus 10,000 life points from me for taking so long to reply to your comment. I won’t make excuses but instead will transfer these 10,000 life points to you immediately.
It’s my belief there is first a centralizing tendency in organizations. As organizations grow larger and larger, people emerge who want power and make their way to the top of the organization and concentrate power there. In some organizations, this power grab is fought, but in many it is a quiet coup de tat.
Then, eventually, the realization that all that power should not be concentrated in the hands of the few, and the realization that it affects performance negatively contribute to a desire to decentralize.
So in my eyes, there is a cycle of centralizing, decentralizing, centralizing and so on. The way to judge whether an organization is trending towards centralizing or decentralizing is to see where the organization is in its growth. If it is a small organization, power will be decentralized. As the organization grows, power will centralize and then decentralize.
Over the past few decades, we’ve had an explosion in executive scandals and corruption. Thus, we’re now entering a period where organizations are looking to decentralize to prevent the mistakes of our recent past.
I hope that answers your question, if not feel free to follow up via this post or e-mail ( hit the contact button in the top menu bar). Again, my sincere apologies for letting your comment fly under my radar for such a long time.
In fact, make it -100,000 life points from me and +100,000 life points to you good sir.
Adam,
Very interesting article. Much of the management science is looking more and more at bottom up decision-making as opposed to top-down for the reasons you mention.
It works in economics too, as far as decentralization of information and decisions.
Have you read Hayek’s essay: The Use of Knowledge in Society?
http://www.econlib.org/library/Essays/hykKnw1.html
I think you would like it. It’s an all time classic. He was on to something way back then…
Adam
If the company is in centralized structure now and its getting bigger so that centralization is no longer appropriate at some point, what are the warning signs that decentralization is best?
When is the best time to alert top management that decentralization could be a solution for the above?
Great question Enrico. Communication is the cruz of this issue. When the company is small, orders come from the top and are quickly and accurately disseminated throughout the company. As the company starts to grow, the management at the top of the company continues to issues orders but as they filter down through the company the message becomes garbled and sometimes does not even make it all the way down the company. This degradation of communication is the biggest warning sign that decentralization needs to occur.
I once worked for a certain Fortune 300 company where the CEO would constantly promote flex time as a great way to save the company money and keep employees happy. At nearly every quarterly town hall he had with employees he’d tout the benefits of flex time and remind managers to fit flex time into the workspace if employees wanted it. This company had over 20,000 employees and simply put the CEO’s message was not received by every manager in the company. Towards the end of my time there the CEO kept receiving questions about flex time and at a town hall announced that he was done taking questions about flex time and that the employees should figure it out because he already gave flex time his blessing numerous times.
The trouble this CEO encountered was that the company was very hierarchal. My boss did not receive word from her boss to institute flex time so as far as our department was concerned no one was to get flex time. My point here is that the CEO simply did not see the company the same way the employees did. There was a lack of true communication and action between the two groups because the company was simply too big for one person to manage everyone.
Other warning signs are a lack of employee engagement in the company, disregard of formal rules (due to a disconnect between the top of the company and everyone else), and a lack of guidance for employees. There are certainly more warning signs but they all have a commonality that communication between the top and the rest of the company is not functioning smoothly.
Your second question is a bit tricky Enrico, as top management could be very resistant to decentralization. In a centralized structure, the top management holds a lot of power and feels they are a big reason behind the company’s success (hence exorbitant executive salaries). As such top management could see decentralization as disastrous to the company and their leadership positions. Good leaders will be able to delegate and will institute decentralized structures on their own in order to keep the company functioning. The best time to alert top management about decentralization would be before they ever become managers!
Unfortunately that is not always realistic so the best time would be as soon as you start seeing problems from a centralized structure placing limits on a company’s growth and success. If this is in relation to a real personal situation, be careful how you word this suggestion so as to not upset the top executives. Phrase it as empowering employees to have more control over their task as those employees know the tasks better than anyone else, not as a lack of good communication or leadership.
If you’d like any advice on such a situation, feel free to send me an e-mail.
Hi Adam,
Your articles and responses are very insightful. Thank you.
Our manufacturing company (1200 employees – and a subsidiary of a major global organization) is considering centralization of certain divisions. In your postings, you mainly focus on centralization vs. decentralization. Can you provide some additional insights into what divisions or functions, (for example, IT, purchasing, administration, engineering, strategy, maintenance, etc.), are best suited for centralization? In addition, if you have any guidance as to what materials, papers, etc. are available on the internet to assist me in this evaluation, I would much appreciate it.
Thanks.
Hi Anne,
In your company’s situation, it would seem most of these departments are best suited to decentralization. The company is large enough (especially if considered as part of its parent corporation), where individual employees should be empowered to make decisions at their workstations. Doing so will increase each employees’ efficiency and satisfaction, including middle and upper level managers as they will have less mundane tasks to approve and disprove and can focus on the bigger picture.
Your company’s implementation of either structure will ultimately be a greater indicator of success than the structure. If decentralized employees are given total free reign, chaos may ensure whereas completely centralized employees will lose their creative & analytical human traits as they are forced to seek managerial approval for everything.
Certain functions do lend themselves to centralization though. For instance, purchasing would be a good choice for centralization to ensure the company as a whole receives the best bulk rates and doesn’t waste material. However, a completely centralized purchasing department would delay supply orders and thus reduce manufacturing effectiveness. In other words, it’s really a unique decision and can change company to company.
Honestly, I’d need to know some more information about your company before giving you a complete answer. Feel free to send me an e-mail if you wish to chat in private.
is it possible to centralize an adademic library with four different branches of different location? because of this scarcity of librarians and limited number of resources and materials
Sure Vivian. To give a better explanation I’d need a bit more details on the actual situation (feel free to send me an e-mail if you wish to discuss the situation a bit more) but basically technology advances allow for a very easy way to centralize separate physical locations.
Actually decentralizing the system may make for some efficiency gains. For instance, allowing patrons to return books to any branch. In general though, I’d imagine that each branch will need librarians on hand but that one main web-site could be set up to show the inventory at each branch. You can also consolidate donations and purchasing departments and have on managing department that oversees all four branches. I’d need more information on the current situation and the goals of a centralizing effort but in general using the internet to connect all four branches and consolidating decision making in one branch should make for a relatively easy centralizing effort.
By the same token though, decentralizing the branches even further and giving individual librarians control over what books to buy and other policies could eliminate the need for a large managerial department and thus cut costs. It all depends on the specifics really. Anything is possible though!
hi there,
very nice article. what’s the name of this textbook please?
i’m really interested.
thanks
Cindi, the textbook is Management by Stephen Robbins and Mary Coulter
.
Note, that is an affiliate link so if you do order the textbook via Amazon I receive a small piece of the pie from Amazon to help pay for the upkeep of this site.
🙂
Thanks for stopping by!
Centralization:-
A function of how much decision-making authority is pushed down to lower levels in an organization; the more centralized an organization, the higher the level at which decisions are made.
Decentralization:-
The pushing down of decision-making authority to the lowest levels of an organization.
In your opinion, which of the above (Centralization vs. Decentralization) is a more successful method of management and why?
What you think about it,
Honestly khurram it depends on the specific organization being looked at. In reality, we probably need a little bit of both, as a completely decentralized organization will not have a top level direction, while a completely centralized organization will stagnate and drive away creative employees.
If I had to choose one I would go with decentralized structure as it empowers employees and frees up the boss/owner to focus on the big picture.
what are the benefits gain in decentralization and centralization company? especially in organic structure(decentralization), organic structure (centalized). what company’s usually use this kind of structure.
thanks.
why is centeralization the best techniques that busness could use?
thanks for all the coments.
it really helps us answer our case analysis in our management class her in the Philippines
Dear Adam,
thanks a lot for all the articles and the extensive replies. It is a great services you offer to however is interested in this subject.
i really admire people like you that share their experience freely.
Regards,
Paolo
hi Adam and member of the floor..
thnx so much by exchange the idea about decentralization and centralization…it really help me a lot in order to complete my assignmnet. althought i study about government and rest of you talk in business, but the concept still same and i still able to apply and adopt in my task.
thnx again.
Hi Adam,
Very nice article about the relationship between centralization and decentralization!!
Both centralization and decentralization are important. The severe economic recession may be caused by the decentralization because the government does not have a centralized control of the companies. In my opinion, it is also important to introduce the predict mechanism because the situation may be drastically worse when the managers realize the real situation.
Generally, it is hard to solve all problems because it is up to human beings who act and decide.
Thanks Ken.
The recession might be caused by decentralization, but likewise some of it is due to the government exuding too much control, for instance forcing companies to give mortgages to unqualified buyers in an attempt to boost home ownership.
Yes, managers it seems take a particularly optimistic view. Part of the job description almost requires it, because if your boss is gloomy about business prospects you’ll likely begin looking for other work ahead of time and thus your performance and your company’s performance will suffer. I don’t blame CEOs for being cheerleaders for their companies and saying everything will be OK, however the media, government, and investors should have realized this and not blindly accepted a CEO’s words as truth.
Thanks for the thoughtful comment Ken.
I don’t appreciate the disrespect to Al Davis.
whats mean by centralization i mean its real meaning or how we use it in organizations
salam
sir i hav one qustion that in decentralized organiztion is it possble that the low managment or workers can directly contect with top management with out interferance of middle level management?
plese reaply me
Sure it’s possible fahim. A decentralized organization aims to keep interference low and open up communication channels so members of the organization can talk to each other directly when necessary. Whether it’s feasible for huge organization to open up the communication channel to their top management to all members within the organization is another matter (imagine a CEO getting e-mails from the 20,000+ workers at his/her company). It’s possible and ideal to have open communication, and with our technology today is feasible, as long as everyone uses discretion (e.g. doesn’t copy the CEO on every single e-mail, etc.).
Your artical is useful to me very much because i have an exam tomorrow and i can’t figure it out about the different between centralized and decentralized.
Thank you again
I think most companies should operate under a decentralized organization. Employees and low level supervisors should have the oppurtunity to voice his or her opinions. The opinions should be reviewed by upper management, and the low end employees should have a good explanation behind his or her opinion. Too many businesses are hurting now because the upper management did not attend college or only have a bachelor’s degree. Not to disrespect them, but there are employees that have the experience and knowledge to have changed some things.
Employees would be happier and more motivated to carry out the vision and mission of the company if he or she feels that they are really a part of the company in that way. You can’t tell someone that they are an excellent employee or the team lead but will not give them the opportunity to control that. In order to properly control a low end position there needs to be assistance from the chain of command. Some companies do need centralized structures due to risky markets and uneducated employees on a global level.
It is up to the top management to decide this, but even if centralized is chosen managers should not forget to what goes down doesn’t come up always. What goes up must come down, and the organization would be more intact as a whole and aware of unsensitive inforamtion and innovation.