Decentralization

The Shift to Organizational Decentralization

John Dunn Accounting Practice for Managers Professor Gohary November 29, 2013

Decentralization

The Shift to Organizational Decentralization

When one thinks of the quintessential corporation it is common to think of the CEO sitting in the penthouse corner office giving orders to those who work beneath him. However, as companies are growing rapidly, become more diverse, and expand to new locations, companies are quickly moving to a decentralized structure. Decentralization brings a great deal of

advantages to corporations but also can carry certain drawbacks. This paper will explore the following: What is decentralization and what are the advantages of such a structure? What drawbacks does decentralization involve? Who should be Centralized or Decentralized? Decentralization may not be something that works for every company and before doing so an organization needs to really understand who they are and what their goals are. What is decentralization and what are the advantages of such a structure? Decentralization according to our textbook is the process of delegating decision making authority to front line decision makes. (Atkinson, 2007) The idea to move from a centralized structure, one where one person in charge makes the decisions, to a decentralized structure evolved over time. Simply put, the larger organizations became, the more difficult it was or one person to make decisions based on the needs of each level and department of the organization. Likewise, organizations became much more spread out throughout the nation and the world making it difficult if not impossible for a single person to have all of the relevant information needed to make important decisions. Decentralization made it possible for those at the top to delegate tasks to those in management positions at a lower level.

Decentralization

Delegating these tasks made the organization not only more effective as a whole but also much more efficient. Customers are increasingly demanding that those who they do business with respond rapidly to any question, comments, or needs that they have. Decentralization allowed the larger organizations to respond and make any necessary changes. As an example, let us think of a company such as Frito-Lays. If the CEO of Frito Lays was tasked with making every decision, it would be very rare that anything gets done when it needs to be done. Furthermore, the CEO may not have all of the information from customers in a certain region, delivery drivers who have issues, those in the plants manufacturing the products, or employees in stores selling their products. By delegating tasks and decision making tasks to managers, things can be completed faster, more information can be collected, problems can be rectified, and opportunities can be acted on quickly. One major benefit to an organization and maybe the hardest for management to see is that decentralization empowers the employees. Employees within a centralized organization may feel as though their voice is not important as every order they get comes from someone who they rarely if ever see and who doesnt see the problems and operations like they do. Empowering employees gives them a sense of importance and making them feel as if they have more input in the direction of the organization. (Joseph) Employees who feel that they are truly a part of an organization will be more committed to continuous improvement and the success of the organization. My having more people involved and truly committed, the influx of ideas will bring about great opportunity. Another great benefit of decentralizing is that the people at the top of the organization including the CEO have a great deal of tasks to deal with that only they can be responsible for. Because they cannot delegate these tasks, the duties that they can assign to others greatly reduce

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the burden that falls upon them. When the owner (or other executive) allows others to perform such tasks such as hiring new employeesthis frees her up to spend more time on big picture items, such as planning, expansion, or meeting with important clients. (Joseph) If all of the executives time is spent dealing with small menial tasks, the larger decisions that affect the organization as a whole will never be accomplished or vice versa. Next, by evolving from a centralized organization, large companies benefit from the fact that they will be better prepared when something goes wrong. If the business leader is not around whether it be due to illness, vacation, or other business activity and an important decision needs to be made quickly that cannot happen if no one else has the power. Decentralization provides a better chance the organization will maintain self-sufficiency because managers and employees are accustomed to working autonomously. (Joseph) When an organization cannot act and respond to a need for change quickly it can mean great loss in revenue, upset customers, non-compliance lawsuits and so much more. Finally and perhaps the most important aspect of decentralization in todays business climate is that it allows an organization to expand and keep pace with the globalization of business. If expansion results in opening a new business unit in a different area,

decentralization allow the new unit to operate as an independent entity, meaning it can react more easily to the specific needs of the area. (Joseph) In a centralized organization it is very hard to expand because it is nearly impossible to get all of the necessary information to a centralized entity and make quick decisions based on the needs of the area. What drawbacks does decentralization involve? As outlined above, decentralization does provide great opportunity and a competitive advantage in a large number of situations. That being said, it also has some drawbacks when

Decentralization

being compared to a centralized structure. First of all to be successful at decentralization all parties who have decision making powers need to be on the same page and working towards the same goals. It is no secret that quite often employees will have their own agenda and their own way of doing things that they think is better than the rest. Decentralized organizations can struggle with multiple individuals having different opinions on a particular business decision. (Vitez) In a centralized organization, while there may be fewer ideas being passed around,

operations are streamlined and guaranteed to be working towards a common goal. It can be very difficult even with good training practices and communication to ensure that everyone is pulling in the same direction especially when the company is geographically dispersed and large. Another disadvantage to a decentralized organization is that it runs the risk of being less efficient. A centralized organization can be extremely efficient regarding business decisions. Business owners typically develop the mission and vision, and set objectives for managers to follow (Vitez) With a decentralized structure employees may not exactly know which direction to go since there may be a variance from the companies goals and vision to their particular supervisors. This can not only create a less efficient process but also can create issues dealing with ethics within the workplace. Who should be Centralized or Decentralized? Organizations need to carefully consider if it is within their best interest to decentralize. As one article mentions, many businesses have organizational structures that simply evolve during the businesss lifetime. (Vitez) In many cases the decision to be centralized or

decentralized is an organic process where employees see how management acts and they respond in a particular manner. This is mostly true for newer businesses while businesses that have been established for some time need to do much more evaluation.

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If the organization is small and wants to continue to be a small scale operation a centralized structure may be the best option. Owners often remain at the for efront of business operations and can easily get a hold on the entire organization. (Vitez) Larger organizations however usually require a more decentralized structure since such companies can have several divisions or departments. (Vitez) When the owner or other executive is unable to see all aspects of operations or cannot always be around to make a quick and effective decision based on all relevant information it is time to shift to decentralization. During the shift it is important to remember as well that the structure of the organization may need to change as well in order to support the new decision making process. Each division and geographical area must have their own set of decision makers and those decision makers need to be entrusted to make decisions based on the overall good of the organization rather than personal agenda.

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References Atkinson, A., Kaplan, R., Matsumura, E., & Young, S. (2007). Management Accounting (5 ed.). Upper Saddle River, NJ: Prentice Hall.
Joseph, C. (n.d.). The Advantages of a Decentralized Organizational Structure. CHRON. Retrieved December 4, 2013, from http://smallbusiness.chron.com/advantages-decentralized-

organizational-structure-603.html Vitez, O. (n.d.). Centralized Vs. Decentralized Organizational Structure. CHRON. Retrieved December 6, 2013, from http://smallbusiness.chron.com/centralized-vs-decentralized-organizational-

structure-2785.html