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Centralisation v Decentralisation

Author: Jim Riley  Last updated: Sunday 23 September, 2012

Organisational structure - Centralisation v Decentralisation

One of the issues that a business needs to address is where decision-making power resides in the organisational structure.

Decision-making is about authority. A key question is whether authority should rest with senior management at the centre of a business (centralised), or whether it should be delegated further down the hierarchy, away from the centre (decentralised)

The choice between centralised or decentralised is not an either/or choice.  Most large businesses necessarily involve a degree of decentralisation when it starts to operate from several locations or it adds new business units and markets. 

The issue is really how much independence do business units or groups within a business have when it comes to the key decisions?

Centralised structures

Businesses that have a centralised structure keep decision-making firmly at the top of the hierarchy (amongst the most senior management).

Fast-food businesses like Burger King, Pizza Hut and McDonalds use a predominantly centralised structure to ensure that control is maintained over their many thousands of outlets.  The need to ensure consistency of customer experience and quality at every location is the main reason.

The main advantages and disadvantages of centralisation are:

Advantages

Disadvantages

Easier to implement common policies and practices for the business as a whole

More bureaucratic – often extra layers in the hierarchy

Prevents other parts of the business from becoming too independent

Local or junior managers are likely to much closer to customer needs

Easier to co-ordinate and control from the centre – e.g. with budgets

Lack of authority down the hierarchy may reduce manager motivation

Economies of scale and overhead savings easier to achieve

Customer service does not benefit from flexibility and speed in local decision-making

Greater use of specialisation

 

Quicker decision-making (usually) – easier to show strong leadership

 

Decentralisation

In a decentralised structure, decision-making is spread out to include more junior managers in the hierarchy, as well as individual business units or trading locations.

Good examples of businesses which use a decentralised structure include the major supermarket chains like WM Morrison and Tesco. Each supermarket has a store manager who can make certain decisions concerning areas like staffing, sales promotions. The store manager is responsible to a regional or area manager. Hotel chains are particularly keen on using decentralised structures so that local hotel managers are empowered to make on-the-spot decisions to handle customer problems or complaints.

The main advantages and disadvantages of this approach are:

Advantages

Disadvantages

Decisions are made closer to the customer

Decision-making is not necessarily “strategic”

Better able to respond to local circumstances

More difficult to ensure consistent practices and policies (customers might prefer consistency from location to location)

Improved level of customer service

May be some diseconomies of scale – e.g. duplication of roles

Consistent with aiming for a flatter hierarchy

Who provides strong leadership when needed (e.g. in a crisis)?

Good way of training and developing junior management

Harder to achieve tight financial control – risk of cost-overruns

Should improve staff motivation

 








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