Organizational Decentralization

I. Organizational Decentralization

Rationale of Decentralization

The term decentralization is often used in business environments and can be defined as the organizational severance and division of power, capital, and technical procedures and control into multiple units of the business.1 Decentralized corporations make it possible for managers to control without ownership. 4 In decentralized organizations, the breakdown is that the president of each unit of a business is on his or her own management-wise. The president of each unit is provided a board of directors and a financial budget from the parent company, but is allowed to run the company with no hindrance as long as financial goals are met. 2

Decentralization is seen as an issue of power as opposed to centralized units, where the chief executives keep as much power to themselves as possible and delegate as little power as possible to lower-level management. Many believe that decentralization is an organization's form of freedom, which opens the gate to perception and leads to advancement. 1 There are some experts that believe decentralization brings greater awareness and sensitivity to individual and community needs as well. With decentralization, there is also the idea of prevention of overload and clogging of communication channels, causing lengthy holdups within the structure. 5

Studies show that employees that are happy in their work environment and enjoy their career, are likely to have increased job performance. Decentralized organizations provide the freedom for employees to enjoy their work.3 Many prefer decentralization over centralization due to the former's style of focusing on an aspect called the "human factor". This refers to employees in organizations making decisions based on insight and observation along with statistical data. Centralized companies tend to depend a great deal on statistical data, computer program findings, and past events alone.2

Instead, decentralized components are associated by bonds of shared business dealings and interdependence, familiar tasks of service, and a common supply and foundation of support. 1

Prerequisites

Companies must ensure that their long-term prospects can fall in line with a program of decentralization. Set guidelines of what activities will be handled by headquarters and which will be handled by business units, must also be established.5

As discussed earlier, there must be individual divisions of the parent company, run by individuals, separate from the parent company. The parent company's main purpose is to be a finance provider to each business unit. Company decisions are made by managers that experience happenings of the unit on a day-to-day basis, instead of by headquarter's top management. There must also be an ongoing effort to maintain unit flexibility for emergency situations or making sudden and valuable decisions. 2 For decentralization to exist, a corporation must be prepared to assign control and not just accountability. There must be several capable managers involved in decision making, because it results in long-term achievement. 1

The parent company must have an assured level of faith in the progress of its decentralized units. Any and all reservations must be removed in reference to the capability of the unit president to run a division competently. For each unit to prosper, its course and goals of advancement must be clearly defined. They must be able to answer questions such as "What will be our position in the community among other related businesses?" 2 There also needs to be a want of products or services from consumers, and in response, the capability to satisfy those wants. To accomplish this need, decentralization condenses the lines of communication and enhances directness with customers. 1

A considerable degree of dispersion, or quantity of geographic setting, of organizational units in decentralization is also important. For example, if three receptionists are five feet apart, their degree of service would be less than if they were to be located in different cities among multiple markets.1 Basic ground rules, such as budget constraints and adequate staffing, must be established. And even though each unit is run independently, headquarters must provide an overall main financial plan for units to follow. The financial plan should include guidelines on such things as suitable profit margin and return on investment obligations. It is also up to headquarters to maintain adequate watch over each unit to ensure that they are performing freely within reasonability. It is important that unit action is free of detriment to the company's reputation as a whole. 2

There should also be a certain degree of expert functions performed by a competent staff. It would benefit a company more to have organizational units that focused on specific functions, instead of having each units' employees and equipment perform multiple tasks. The reason is due to cost; it can become expensive to re-equip a machine to shift from performing one function to performing another.1

Measuring Performance

In order for a decentralized organization to be successful, it must be accommodating and led by proposals, values, and objectives that are not only steady but are relevant to long-term practice. 1 According to a study done by McKinsey and Co. a successful decentralized company is simple in form and low on staff. It has continued contact with past clients and emphasizes skills and abilities that are best known. When emphasizing its best skills, a successful unit focuses on one or few key business values. 2

If a decentralized company is able to substitute resources and change its system of running on short notice, the company represents a level of success in stability.1

Experts believe that successful performance of a decentralized organization lies in whether minimum professional standards are met, and if services were offered with the highest available expertise in the field. Client satisfaction also ranks high in judging a decentralized organization's success. After all, one of the purposes of decentralized organizations is to be able to increase more personalized and non-uniform service to diverse markets. 1

When measuring company performance, "entrepreneurial climate" should be tested. This is testing of whether unconventional and ambitious ideas are encouraged or discouraged within the unit. Other good measures are observation of whether parent companies financially support unit ventures and if mangers are overly consumed with "playing it safe" and following the rules versus following their gut instincts. 2

Evaluating