What is Decentralization? Definition, Example, Factors, Objectives, Limitations
Discover how to inspire your team, build trust, and create a positive work culture. In a project-based business, this idea can extend to sharing knowledge that improves project forecasting. By providing all PMs with historic data on how long different projects actually took – for example – future forecasts and client quotes can be more accurate. Bottom-up decision-making reduces bureaucratic bottlenecks, increases agility, and stops rigid structures from stifling innovation. While centralized systems may be easier to manage, they carry more risk.
- Not surprisingly, decentralized organizations also outperformed their peers in terms of average revenue growth and EBIT margin growth over this time period.
- Since middle and lower-level management is in charge of everyday operations, it accelerates the process of decision making.
- Done well, decentralization is a much more resilient, reliable and scalable system than a centralized system.
- As remote work gains more and more credibility in the corporate world, executives everywhere are beginning to understand the benefits of a decentralized organizational structure.
Thus, it is impossible to rely solely on top management for decision-making. Second, the company distributes authority among the different product lines. 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. Thus, making decisions relying solely on top managers is almost impossible. Apart from creating a heavy workload, decisions may be ineffective for the organization.
What is Decentralization?
While these two options sound somewhat similar, there are significant differences between a fidelity bond vs. a crime policy. In 1983, “Decentralization” was identified as one of the “Ten Key Values” of the Green Movement in the United States. Advantages – Facilitates diversification promotes growth and motivation and helps expansion. Since the top managerial level makes the decision, such a set-up is comparatively stable.
The managers exercise better control over the operations of the subordinates by taking disciplinary actions. They can make decisions related to production schedules, promotions and leaves taken filing status by the subordinates. If lower managers do not have sufficient competence, they are more likely to make poor decisions. As a result, it may adversely affect the overall business performance.
What is a centralized management structure?
While one of the benefits of a decentralized organization is the ability to innovate, you don’t want people reinventing the wheel. Decentralization isn’t about an absence of leadership, it’s about a different type of leadership. ‘A decentralized company needs leaders who are comfortable being coaches, teachers, and pressure-testers,’ writes Olli Lauren. When you decentralize your organization, you run the risk of individual business units duplicating work or costs, which eats into your overall profits.
Report: Policymakers should explore decentralized finance regulatory options
This, in turn, leads to underutilization of facilities and duplication of functions. Such attributes make decentralization tailor-made only for large organizations. While talking about the advantages and disadvantages of decentralization, it is imperative to note that substantial autonomy is enjoyed by every single division. This, in turn, makes it difficult to coordinate the overall activity. While carrying out a discussion on the advantages and disadvantages of decentralization, it is imperative to note that it aids subordinates in exercising their own judgment. Under decentralization, every single product division attains sufficient autonomy to exercise their creative flair.
Decentralized Organization Advantages
With more decision-making responsibilities, they have the opportunity to develop themselves. Finally, competence improves at all levels in line with business growth. Decentralized organizations under poor leadership can spell disaster for business growth and revenue. The entire premise of decentralization in business depends upon the level of responsibility and ownership qualities that middle and lower-level managers possess. In 2017, the decentralized company Equifax suffered a major security breach. Since the company owned massive amounts of user data stored online, hackers took advantage and effectively stole personal data from over 143 million Americans.
If one wants greater control over the organization, one can go for centralisation. If they prefer considering everyone’s decision, they can go for decentralization. In brief, Decentralization can be defined as the organizational structure. In such a structure, the top management of a firm entrusts the middle and lower-level management with the responsibility to take decisions pertaining to the firm’s daily operations. The whole organizational structure needs to act more responsibly to make decentralization a success. Apart from that, the top management efficiency also improves as they can now focus on making major decisions rather than dwelling with trivial decision-making that lower-level subordinates make.
The advantages and disadvantages of decentralized organizations
It’s imperative to ensure that those who are making the decisions have a firm grasp on the company and the leadership skills to make the best choices for the business. Small businesses often use a centralized structure since the owner is responsible for the company’s business operations. Centralized approaches are also commonly seen in highly competitive industries where companies specialize in similar products to their competition. Technology includes tools, materials, skills, techniques and processes by which goals are accomplished in the public and private spheres.