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Centralization and-decentralization

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  • 1. Centralization and Decentralization
  • 2. Contents Centralization Prerequisites of decentralization Types of decentralization Factors determining the extent of centralization Advantages of centralization and decentralization Distinction between delegation and decentralization Decentralization and performance evaluation Marketing decision to decentralize Case study: Ford’s Global strategy Copyright © 2008 - 2012
  • 3. What is centralization? Admin. Officer Senior Manager Finance Executive Asst. Manager Executive Director Oper- ations Manager Finance Manager Centralization means reservation of authority at central point within the organization. In centralization, control and decision-making reside at the top levels of management Copyright © 2008 - 2012
  • 4. The circumstances varying centralization of decision-making power Unified direction and Integration Small organi- zation Out- standing leader Prompt actionReduce ControllingIt ensures effective means of controlling the operational units It reduces overall costs Centralization of decision- making ensures prompt action necessary to meet the emergencies Take advantage of outstanding leader in early stages of enterprise for taking quick decisions Centralization may become essential to provide unified direction to activities and keep integration. It ensures overall organizational perspective Essential for small organization to survive the competition Copyright © 2008 - 2012
  • 5. Factors influencing centralization • The cost and risk associated with decision which could have a heavy impact on performance • An individual manager’s preference for a high degree of involvement in detail and confidence in subordinates. Some may prefer to delegate, while some may not • The history of an organization culture say under strong leader may have centralized structure • Lack of abilities of lower-level managers may create a lack of faith in them. Thus make it difficult to decentralize Copyright © 2008 - 2012
  • 6. Applications of Centralized Structures Small businesses often operate in a centralized manner simply because of the smaller size of their workforces A small business owner may be the only manager in the entire company, with all other employees reporting directly to the owner. Organizational designs can change as small companies grow, however Example A trucking company is an example of a company with a centralized organizational design Trucking company managers make all operational decisions, sending information to individual drivers through dispatchers Copyright © 2008 - 2012
  • 7. Contents Centralization Prerequisites of decentralization Types of decentralization Factors determining the extent of centralization Advantages of centralization and decentralization Distinction between delegation and decentralization Decentralization Marketing decision to decentralize Case study: Ford’s Global strategy Copyright © 2008 - 2012
  • 8. What is decentralization? Copyright © 2008 - 2012
  • 9. Decentralization authority Decentralization of authority means dispersal of decision-making power to the lower levels of the organization. Decentralization refers to the systematic effort to delegate to lowest levels of authority except that which can only be exercised at central points Copyright © 2008 - 2012
  • 10. Decentralization authority Decentralization is not the same thing as delegation. Delegation means entrustment of responsibility and authority from one individual to another. But decentralization means scattering of authority throughout organization. It is the diffusion of authority within the entire enterprise Decentralization is distinct from dispersion. Dispersion occurs when plants and offices are located at different places with physical distance between them. A company may be highly centralized although its physical facilities and employees are widely dispersed and company may be highly decentralized even though all physical facilities and employees are located in a single building Copyright © 2008 - 2012
  • 11. Two reasons for evaluating a subunit performance Identification of successful areas of operation and areas in need of improvement Influence over the behavior of managers It is quite possible to have a good manager and a bad subunit Copyright © 2008 - 2012
  • 12. Responsibility accounting Managers should only be held responsible for costs and revenues that they control In a decentralized organization, costs and revenues are traced to the organizational level where they can be controlled Copyright © 2008 - 2012
  • 13. Applications of Decentralized Structures Franchise organizations provide an ideal example of a decentralized structure Franchise companies control most product development and marketing decisions at the top, but they give franchise owners a great deal of independence in running their individual stores Franchise owners make staffing decisions, decisions on hours of operation and compensation decisions completely on their own Example Companies with a wide geographical reach also can benefit from a decentralized structure Copyright © 2008 - 2012
  • 14. Contents Centralization Prerequisites of decentralization Types of decentralization Factors determining the extent of centralization Advantages of centralization and decentralization Distinction between delegation and decentralization Decentralization Marketing decision to decentralize Case study: Ford’s Global strategy Copyright © 2008 - 2012
  • 15. Delegation and decentralization Copyright © 2008 - 2012
  • 16. Centralization and decentralization tendencies Complete centralization (no organization structure) Complete decentralization (no organization structure) Authority delegated Authority not delegated Copyright © 2008 - 2012
  • 17. Delegation Assigning a task is not delegating Telling people what to do is not delegation Explain the big picture The Why Provide authority to achieve goals The What Handover decisions concerning how the job gets done The How Establish timelines The When Copyright © 2008 - 2012
  • 18. The ultimate goals of delegating The goal of delegating is not getting someone to do something you do not want to do The two goals are Employee engagement Skill development Effective delegation best leverages your current talent in ways that elevate their potential. It is more about people than tasks Copyright © 2008 - 2012
  • 19. Few principles of delegation in a decentralization organization Always begin with the part most frequently excluded – mission and vision Delegate outcomes not methods – unless specific methods are mandatory Invite participation from employees regarding delegated assignments Discuss the scope of authority – including limits and agree on the definition of excellence Create controls like timelines and deadlines. Provide ample feedback but do not meddle Expect Excellence. Face failures together. Solve challenges “with” not “for”. Copyright © 2008 - 2012
  • 20. Contents Centralization Prerequisites of decentralization Types of decentralization Factors determining the extent of centralization Advantages of centralization and decentralization Distinction between delegation and decentralization Decentralization Marketing decision to decentralize Case study: Ford’s Global strategy Copyright © 2008 - 2012
  • 21. Centralization and decentralization More centralization More decentralization Environment is stable Environment is complex, uncertain Lower-level managers are not as capable or experience at making decisions as upper-level managers Lower-level managers are capable and experience at making decisions Lower-level managers do not want to have a say in decisions Lower-level managers want a voice in decisions Decisions are significant Decisions are relatively minor Organization is facing a crisis or the risk of company failure Corporate culture is open to allowing managers to have a say in what happens Company is large Company is geographically dispersed Effective implementation of company strategies depend on managers’ retaining say over what happens Effective implementation of company strategies depends on managers having involvement and flexibility to make decisions Copyright © 2008 - 2012
  • 22. The structure of Centralization and decentralization Decentralized approach Bottom-to-top approach Centralized approach Top-to-bottom approach Level 1 Level 2 Level 3 Level 4 Copyright © 2008 - 2012
  • 23. The advantages decentralization over centralization Reduction in the burden of Chief Executive who has to bear the entire burden of decision-making in centralization. Decentralization of authority reduces his burden as he delegated a part of his authority to the subordinates and thus enabling him to focus on other important functions With the addition of new activites or product lines, an organization tends to grow complex and may pose a challenge to the top executives, which can be met by decentralization under the overall cordinating preview of the top management Decentralization avoids red-tapism in making decisions as it places responsibility for decision-making as near as possible to the place where action takes place When authority is decentralized the subordinates get opportunities of taking initiative to develop managerial talents Copyright © 2008 - 2012
  • 24. The advantages decentralization over centralization Decentralization promotes the improvement of morale and motivation of subordinates which is reflected in better work performance The greater the degree of decentralization, the more effective becomes the span of control. It leads to effective supervision as the managers at the lower levels have complete authority to make changes in work assignment, to change production schedules, to recommend promotions and to take disciplinary actions In addition to the above advantages, decentralization also achieves several internal and extermal economies. Internal economies include speedier communication, better utilisation of lower level and middle level executives, greater incentive to work and greater opportunities for training Copyright © 2008 - 2012
  • 25. The advantages centralization over decentralization Singular point of control, which helps make bigger decisions easier, as the top level managers have a better picture of the organization as a whole and are better equipped to make important decisions as compared to a lower level manager The implementation of an idea, process or policies is easier in a company that has a strong central direction as compared to a decentralized organization Due to a single vision of the head of the company, the organization can work towards a single goal, which would not be possible in a decentralized organization due to individual manager goals Centralization allows corporate decision makers respond better and faster in urgent situations which require quick decisions Copyright © 2008 - 2012
  • 26. Other advantages of decentralization Relieves top management of some burden of decision- making and forces upper-level managers to let go. Encourages decision-making and assumption of authority and responsibility. Gives managers more freedom and independence in decision-making. Promotes establishment and use of broad controls which may increase motivation. Makes comparison of performance of different organization units possible. Facilitates setting up of profit centers. Facilitates production diversification. Promotes development of general managers. Aids in adaptation to fast-changing environment. Copyright © 2008 - 2012
  • 27. Other disadvantages of decentralization Makes it more difficult to have a uniform policy. Increases complexity of coordination of decentralized organization units. May result in loss of some control by upper-level managers. May be limited by inadequate control techniques. May be constrained by inadequate planning and control system. Can be limited by the availability of qualified managers. Involves considerable expenses for training managers. May be limited by external forces. May not be favored by economies of scale of some operations. Copyright © 2008 - 2012
  • 28. Contents Centralization Prerequisites of decentralization Types of decentralization Factors determining the extent of centralization Advantages of centralization and decentralization Distinction between delegation and decentralization Decentralization Marketing decision to decentralize Case study: Ford’s Global strategy Copyright © 2008 - 2012
  • 29. Factors As the size of the organization increases, more decisions have to be made at different levels and coordination becomes difficult among the large number of departments and the levels involved. High costs of decision will be taken at the higher levels of management. Thus, the decision of whether to have another factory or not would be taken at the top levels, whilst the question of purchasing of stationery would be taken at an extremely low level. When different production lines are there in the same company decentralization becomes important. Decentralization of the authority requires the availability of competent managers. Copyright © 2008 - 2012
  • 30. Factors The management philosophy of the top management determines to a large extent how much authority the managers in the organization are willing to retain or delegate down the line. Environmental influences sometimes guide an organization’s structure and functioning to be decentralized. Competitive market condition make decentralization more important to organization effectiveness. Current trend toward increased employee participation and higher education levels may lead to increased decentralization. Widespread use of decision support system facilitate decentralization. On the other hand, computers may increase the decision power of top management and thus lead to centralization. Copyright © 2008 - 2012
  • 31. Contents Centralization Prerequisites of decentralization Types of decentralization Factors determining the extent of centralization Advantages of centralization and decentralization Distinction between delegation and decentralization Decentralization Marketing decision to decentralize Case study: Ford’s Global strategy Copyright © 2008 - 2012
  • 32. Types of decentralization Divisionalized or profit centre It is the responsibility centre whose budgetary performance is measured through profits or loss. Its responsibility is headed by a manager who is responsible for achieving goals. Each division is given operational independence so that it can calculate its own profit. Cost centres It is a responsibility centre where budgetary performance depends on achieving goals by operating within standards cost limits. It has also to provide required support to the rest of the organization such as accounting staff, etc. Copyright © 2008 - 2012
  • 33. Types of decentralization Investment centres It is a responsibility centre whose performance is evaluated on the basis of return on investment. Splintered Authority Splintered Authority exists wherever a problem cannot be solved or a decision made without pooling the authority of two or more managers. Many managerial conferences are held because of the necessary of pooling authority to make a decision. Such problems could be handled by merely referring the decision upward until it reaches a person with the authority to make it unilaterally. Copyright © 2008 - 2012
  • 34. Contents Centralization Prerequisites of decentralization Types of decentralization Factors determining the extent of centralization Advantages of centralization and decentralization Distinction between delegation and decentralization Decentralization Marketing decision to decentralize Case study: Ford’s Global strategy Copyright © 2008 - 2012
  • 35. Prerequisites of decentralization The main steps in the establishment of this technique are Establishment of appropriate centralized headquarters – As a first step in decentralization, a centralized headquarters is necessary which will act as the nerve centre of the enterprise. Here plans will be formulated and communicated for the guidance of each part. 1 Development of managers: In decentralized concerns, critical decisions have to be made at a large number of centres. This needs people who have mastered the technique of management and not simply of supervision. 2 Provision of adequate coordination system. In decentralization, good communication, and coordination system have to be established such as Management Information System and committee. 3 Copyright © 2008 - 2012
  • 36. Prerequisites of decentralization To establish effective control, monitoring and performance measurement system. 4 Establish product or divisional committees to meet new challenges in competition in their field of activity. 5 Adequate policies are laid to guide decision-making but not unduly restrictive. Adequate delegation of authority may be ensured. 6 Organization structure must be reorganized to facilitate decentralized operations. 7 Copyright © 2008 - 2012
  • 37. Contents Centralization Prerequisites of decentralization Types of decentralization Factors determining the extent of centralization Advantages of centralization and decentralization Distinction between delegation and decentralization Decentralization Marketing decision to decentralize Case study: Ford’s Global strategy Copyright © 2008 - 2012
  • 38. Are the potential benefits of decentralizing important? As we saw in the previous slides, decentralization has several benefits. These benefits are important in certain industries and business function. For example, the success of most professional services organizations (such as consulting, software development, and law) hinges on the motivation and creativity of their professionals. Consequently, these organizations are especially good candidates for decentralized decision making. Innovation becomes increasingly critical to business success in many industries, the benefits of decentralization are likely to become important in more and more places. Much of the early work in the Total Quality Movement, for example, was about encouraging assembly line workers to look for ways to innovate and improve the routine processes they performed. So the question of whether the benefits of decentralization are important in your situation is not a purely objective one. It is also a matter of your strategic choices. Different people in the same situation can make different choices about how much they want to rely on the advantages of decentralization. Copyright © 2008 - 2012
  • 39. Can you compensate for the potential costs of decentralizing? You may be thinking, "Sure, sure, all this decentralization stuff sounds great in theory, but how often could it actually work? These concerns are important—sometimes so important that they'll lead you to reject decentralized structures and stick with rigid hierarchies. Often, though, there are creative ways to deal with the potential downsides. Let's look at the four main problems with decentralization and the possible solutions in the next slides. How can you make decisions effectively when no one is really in control? How can you guarantee quality or protect your company against catastrophic losses if no one is watching over things? How can you take advantage of economies of scale or knowledge sharing, if everything is so fragmented? Copyright © 2008 - 2012
  • 40. How can you take advantage of economies of scale if everything is decentralized? Many times, people assume that just because there are economies of scale in one part of a process, the whole process has to be centralized. But you can often get the benefits of both bigness and smallness by centralizing only those decisions involving important economies of scale and decentralizing everything else. Many companies assume, for instance, that to achieve economies of scale in purchasing, they need to centralize purchasing decisions. By forcing all the different parts of their company to buy from the same vendors, they get much bigger volume discounts. But what if, instead of forcing everyone to buy from the same vendors, you just provide incentives for people to form voluntary purchasing groups? If I don't much care, for instance, what kind of personal computer I have, I could just delegate my personal computer purchasing decision to a PC purchasing specialist and automatically get whatever volume discounts that person can negotiate. If I do care, I could look at an online database of the different PC purchasing plans available in my company and decide which one is best for me. In this scenario, the central purchasing people could still have a job organizing voluntary coalitions of buyers, maintaining a database of available purchasing plans, and negotiating volume discounts for the people who choose to participate. Copyright © 2008 - 2012
  • 41. How can you enjoy the benefits of knowledge sharing without centralized control? One of the most important advantages of being in a big organization is having ready access to many sources of knowledge. If you're the owner of an isolated hamburger stand in a small town in New Mexico, you have only your own ideas and experience to guide you in running your restaurant. But if you're the manager of a McDonald's in the same town, then at least theoretically you have access to the best burger-selling knowledge available anywhere in the world. Of course, big companies do not always take advantage of their full potential for knowledge sharing. And even when they do, gaining the benefit of knowledge sharing doesn't require centralized control at all. It just requires the widespread sharing of knowledge. When communication is difficult and expensive, the best way to share knowledge may be to have centralized managers find and spread the best ideas from different parts of their organizations. But when communication is cheap and easy, it's often better to have people share knowledge directly through many different channels. For example, independent restaurant managers can share knowledge with each other through trade association meetings, online discussion groups, best-practice databases, and so forth. Copyright © 2008 - 2012
  • 42. Do the benefits of decentralizing outweigh the costs? Once you've worked out the benefits and costs, you need to weigh them to decide whether decentralization will pay off. Here, again, however, there are no simple answers – much depends on your particular situation. But some simple rules of thumb can help you think through the choice. Decentralize when the motivation and creativity of many people is critical. When your industry is in the midst of rapid change, the best way to figure out how to respond is often to let many highly motivated people try many experiments. And when small groups in your company work independently from other groups (e.g., in a consulting firm or a research university), it's often a good idea to decentralize most decisions to these small groups to spur their innovativeness. Copyright © 2008 - 2012
  • 43. Contents Centralization Prerequisites of decentralization Types of decentralization Factors determining the extent of centralization Advantages of centralization and decentralization Distinction between delegation and decentralization Decentralization Marketing decision to decentralize Case study: Ford’s Global strategy Copyright © 2008 - 2012
  • 44. Ford’s global strategy: Center of excellence Donald E Petersen In 1986, Ford passed its bigger competitor, General Motors with earnings of $3.3billion. Ford’s market share is about 20%. But success in many instances, may be only temporary and Ford’s chairman, Donald E. Petersen, is concerned about complacency. Indeed, the company has to work hard to maintain its reputation for stylish, aerodynamic cars and high quality Copyright © 2008 - 2012
  • 45. Ford’s global strategy: Center of excellence Donald E Petersen Under the former leadership of Henry Ford II, the company was very centralized. But Petersen’s plan is to make Ford as a an integrated global enterprise. Thus, a great deal of authority for the developer of specific models of components is now centralized in the company’s various technical centers around the world rather than in Detroit Copyright © 2008 - 2012
  • 46. Ford’s global strategy: Center of excellence Under this plan, a car or its components are developed in the technical center with the best expertise in a particular field, anywhere in the world. This could save the company a lot of money by avoiding duplication in the development and reducing tooling costs Copyright © 2008 - 2012
  • 47. Ford’s global strategy: Center of excellence For example, Ford of Europe, located in England, is the center for developing the platform for the new model that will replace the European Sierra and the American Tempo and Topaz. Ford will sell the new cars in Europe and in the United States Copyright © 2008 - 2012
  • 48. Ford’s global strategy: Center of excellence Similarly, in Japan, Mazda (Ford owns 25% of the company), which has much experience in building small cars, will be the center for developing the platform for the car that will replace the escort Copyright © 2008 - 2012
  • 49. Ford’s global strategy: Center of excellence The North American center of excellence will focus on midsize cars. Similar centers are planned for major components such as transmission of engines. While these centers of excellence develop platforms and key components, exterior and interior styling will be the responsibility of companies in the various regionsCopyright © 2008 - 2012
  • 50. Ford’s global strategy: Center of excellence The concept of the centers of excellence may seem promising, yet a previous attempt in the early 1980s to build a ‘world car’ in Europe failed. It is said that the American car, the escort, shared only one part with its European counterpart, namely a seal in the water pump What do you think of Ford’s overall decentralization with centralized authority for the development of specific cars and components at the technical centers? Why does Ford think that the concept of having centers of excellence located in various parts of the world will be the correct organization structure for the 21st century? Copyright © 2008 - 2012
  • 51. Conclusions: Centralization and Decentralization Business owners should carefully consider which type of organizational structure to use in their company Small organizations typically benefit from centralized organizational structures because owners often remain at the forefront of business operations Larger organizations usually require a more decentralized structure since such companies can have several divisions or departments Business owners may need to consider changing the organizational structure depending on the growth and expansion of business operations Copyright © 2008 - 2012
  • 52. Conclusions: Centralization and Decentralization Organizational structures do not always require significant amounts of planning time Many businesses have organizational structures that simply evolve during the business’s lifetime Business owners often set the tone based on how they manage employees Employees will perceive how the owner handles different business situations and simply adjust their work style accordingly will create an organizational structure by default, with no serious planning involved. Copyright © 2008 - 2012

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