Decentralization in Organizations
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medlej70Decentralization in Organizations
Uploaded by
medlej70Decentralization in Organizations:
Learning Objectives:
1. Define and explain the term "decentralization".
2. What are the advantages and disadvantages of decentralization in business
organizations?
3. What are business segments?
4. Define and explain cost, profit, and investment centers.
Definition and Explanation of Decentralization
A decentralized organization is one in which decision making is not confined to a few top
executives but rather is throughout the organization, with managers at various levels
making key operating decisions relating to their sphere of responsibility. Decentralization is
a matter of degree, since all organizations are decentralized to some extent out of
necessity. At one extreme, a strongly decentralized organization is one in which even the
lowest-level managers and employees are empowered to make decisions. At the other
extreme, in a strongly decentralized organization, lower-level managers have little freedom
to make decisions. Although most organizations fall somewhere between these two
extremes, there is a pronounced trend toward more and more decentralization.
Advantages/Benefits of Decentralization:
Decentralization has many advantages/benefits, including:
1. Top management is relieved of much day-to-day problem solving and is left free to
concentrate on strategy, on higher level decision making, and coordinating activities.
2. Decentralization provides lower level managers with vital experience in making
decisions. Without such experience, they would be ill-prepared to make decisions
when they are promoted into higher level positions.
3. Added responsibility and decision making authority often result in increased job
satisfaction. Responsibility and the authority, that goes with it makes the job more
interesting and provides greater incentives for people to put out their best efforts.
4. Lower level managers generally have more detailed and up to date information about
local conditions than top managers. Therefore the decisions of lower level
management are often based on better information.
5. It is difficult to evaluate a manager's performance if the manager is not given much
latitude in what he or she can do.
Disadvantages of Decentralization:
Decentralization has four major disadvantages:
1. Lower level managers may make decisions without fully understanding the "big
picture." While top level managers typically have less detailed information about
local operations than the lower level managers, they usually have more information
about the company as a whole and should have a better understanding of the
company's strategy.
2. In a truly decentralized organization, there may be a lack of coordination among
autonomous managers. This problem can be reduced by clearly defining the
company's strategy and communicating it effectively throughout the organization.
3. Lower-level managers may have objectives that are different from the objectives of
the entire organization. For example, some managers may be more interested in
increasing the sizes of their departments than in increasing the profits of the
company. To some degree, this problem can be overcome by designing performance
evaluation system that motivate managers to make decisions that are in the best
interests of the organization.
4. In a strongly decentralized organization, it may be more difficult to effectively spread
innovative ideas. Someone in one part of the organization may have a traffic idea
that would benefit other parts of the organizations, but without strong central
direction the idea may not be shared with, and adopted by other parts of the
organization.