What’s it: Decentralization means delegating more authority and decision-making to lower levels. The term is common to various organizations, from corporations to governments. And in this article, we will focus on its application in companies.
Decentralization contrasts with centralization. The latter emphasizes more authority under top-level management. In other words, decision-making is concentrated in top-level managers. As a result, top managers have high decision-making power and little – or no – delegation.
Delegating more authority to subordinates encourages more motivation. Employees are more involved in making decisions about their jobs. Because they know more about the problems in their work area, they can make relevant and fast decisions.
But, it also comes with risks. Problems such as duplicated functions and decisions often arise. In addition, top managers may lose control over their subordinates.
Why is decentralization important?
Decentralization is important when companies get big. Organizations are becoming more complex to manage. Thus, making decisions relying solely on top managers is almost impossible. Apart from creating a heavy workload, decisions may be ineffective for the organization.
For example, despite making the right decisions, the implementation at lower levels may be poor. And, top managers, being too busy with decision making, have less to oversee how their decisions are executed by subordinates. As a result, good decisions are ineffective in organizations because they are poorly implemented.
Another reason decentralization is important is more informed decision-making. For example, a company has many units or operates in several geographic areas. Lower managers are considered to understand local conditions better than head office management. So, by delegating authority to them, they can take a right and relevant decisions. In addition, they can respond quickly to changes in the business environment in their local area.
Finally, decentralization is also important to prepare lower-level management with adequate competence. With more decision-making responsibilities, they have the opportunity to develop themselves. They train themselves to be good decision-makers. Finally, competence improves at all levels in line with business growth.
How does decentralization work?
Centralization and decentralization are about the extent to which decision-making and authority are devolved between various levels in the chain of command. When the role is more concentrated on top management, it leads to centralization. Otherwise, it is decentralization.
Upper managers delegate important decision-making power to lower levels. It aims to further empower them. Thus, they can actively organize and make decisions about their unit. It usually means:
- Less upper management control
- More autonomy
- More decisions at lower levels
- More distributed authority between levels
Decentralized authority requires accountability. Lower managers take on more roles than under a centralized structure. They can make decisions about their specific work area. However, their decisions must also be in line with the company’s goals and strategies. In addition, they also have a greater responsibility for their role.
Types of decentralization
Decentralization can take several variations. First, it involves functional decentralization. The company delegates specific authority according to the functional work area. For example, the human resources department manager makes decisions about related operational areas, such as hiring and training.
Second, the company distributes authority among the different product lines. Take car manufacturers as an example. Companies divide the operating areas based on their product lines, such as SUVs, sedans, and electric cars. Managers in each are authorized to take the relevant decisions.
Third, the company delegates authority based on geographic area. This is common for multinational companies with subsidiaries or units spread across the globe. Each unit is authorized to make decisions regarding its geographic area.
Fourth, companies decentralize authority based on projects. Upper management gives decision-making authority to the selected team, which may come from all functional departments.
Factors affecting decentralization
Several factors explain why companies prefer decentralization over centralization.
Organizational size. Larger organizations are likely to need more decentralization. Operation is more complex. Thus, it is impossible to rely solely on top management for decision-making.
Scope of operation. Companies with many different product lines are likely to delegate more authority. Each line is managed by a separate division. And, each can make decisions about their work area, which are independent of each other.
A similar case is a company with many business units in different geographic areas, such as a multinational company. Individual business units in different geographies make relevant decisions according to their local area.
Each often faces a different business environment, thus requiring a different approach. Thus, decentralizing allows business units to make informed decisions.
Control system. Decentralization requires an adequate control system. Thus, top management can monitor performance and accountability at each level. In addition, it is important to coordinate every decision. Thus, it is in line with the company’s goals and strategies.
Manager quality. When management competencies are relatively uniform, and there are no gaps, decentralization can be an option. Each has the capacity and ability to be an effective decision-maker.
On the other hand, if lower managers have insufficient competence, upper managers are likely to take on more roles. Delegating authority can lead to bad decisions, putting the company at risk.
What are the advantages of decentralization?
A more relevant decision is the advantage of decentralization. It captures greater relevance to the environment in which the decision is made. Subordinates or organizational subunits can react more easily to their specific needs or problems without waiting for orders or decisions from superiors. They know more about the problems they face. So, they also know more about the right solution.
Other advantages of decentralization are:
Better adaptation. Lower managers can make decisions without waiting for a decision from the executive, which usually involves a long chain of command. It enables companies to quickly solve problems or adapt to a dynamic business environment.
Motivating. By giving lower managers more autonomy to make their own decisions, they feel valued. In addition, they have more control over their work area. Finally, they get more job satisfaction. And they are more enthusiastic than when they simply carry out orders from superiors.
Higher retention. When subordinates are more motivated, they are more likely to be loyal to the company. Working in a company allows them to develop themselves and control their work.
More creativity. Involving subordinates allows more creativity. They can provide more input and ideas for improvement, leveraging their knowledge and experience.
More distributed roles. The burden on top managers is reduced by distributing authority to lower levels. Thus, they have more time to deal with more strategic aspects. For example, they can focus on vital outcomes and decisions, such as synergies between organizational sub-units.
In addition, top managers can also focus on the control system. So, they can ensure that every decision is implemented properly at lower levels. So, finally, good decisions are well implemented.
Competency development at all levels. By assigning more responsibilities to lower levels, the company allows them to grow and develop themselves. They train themselves to effectively carry out their roles. And, in the end, their competence grows as the company grows.
This benefit is important when the company loses a key employee. His subordinates were ready to take his place. On the other hand, operations can be disrupted if subordinates are not prepared due to inadequate competence. Long story short, decentralization allows competency development at all levels.
What are the disadvantages of decentralization?
Poor synergy and coordination are the main disadvantages of decentralization. As a result, decisions may be uncoordinated or inconsistent with the company’s goals.
Sub-units or subordinates may be selfish and forget about the company’s goals as a whole. In addition, they make decisions independently. Thus, it leads to random and undirected decisions.
Then, because lower managers decide independently, decisions may conflict with one another. In the end, it gave rise to more problems and conflicts.
Following are other drawbacks of decentralization.
Losing control. Top managers may lose control of their subordinates by delegating too much. In addition, decisions made by subordinates may not be in line with their expectations. Thus, subordinates’ bad decisions can harm their reputation.
More complicated process. For decentralization to run effectively and by company goals, companies need more tasks to control and coordinate each unit or lower management.
Poor quality. If lower managers do not have sufficient competence, they are more likely to make poor decisions. They may be experts in their specific area. However, they may not be trained to be good decision-makers. As a result, it may adversely affect the overall business performance.
Increase costs. Take procurement decisions as an example. When each division has the authority to order office equipment separately, it can be costly.
On the other hand, if procurement is done centrally, the company may have the opportunity to get discounts for buying in bulk. So, long story short, centralization allows companies to achieve economies of scale from purchasing.
However, such benefits do not apply to decentralization. Each may make purchases separately and uncoordinated.
In addition, the company also incurs coordination costs to implement decentralization effectively. Likewise, resolving conflicts between individuals or sub-units at lower levels may also be costly.
Ambiguity in the chain of command. Giving authority to lower managers can blur the line of command. As a result, each feels they have the authority and capacity to make decisions. And, it can be confusing when new serious problems arise.
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