Decentralization in Organizations (With Advantages)

By Indeed Editorial Team

Published May 9, 2022

Centralized operations and decentralized organizations each have unique strengths and weaknesses that determine their effectiveness. A blend of the two types may occur where a centralized organization also operates partially autonomous decentralized subsidiary companies. Understanding weaknesses in one type of structure may help you identify the strength of its counterpart. In this article, we discover the advantages of decentralization, discuss where decentralization works, review the advantages of centralization, explain where it works, and describe some considerations on decentralization strategy.

Advantages of decentralization in organizations

Decentralization in organizations distributes functions like human resources, supply line management, marketing and sales, and distribution over several locations, giving them power over day-to-day operations. These organizations include businesses, non-profit groups, community groups, and special interest operations, like cooperatives. Advantages to human resources and market development of operating a decentralized organization include:

Human resources

In the human resources field, decentralized systems may create opportunities for upward movement within each office and across locations. Because there frequently are job duplications in each decentralized branch, employees may move laterally between locations. Decentralized operations are less susceptible to labour unrest across their entire operations, because of varied labour legislation in different provinces. Decentralized businesses, including food processing plants and ready-to-move home builders, may tap into local labour markets if they operate in smaller communities. Some advantages of decentralization in the human resources industry include:

  • Increased management development: A diversified array of branch locations is an effective tool for nurturing management and key personnel skills. This allows for a wider selection of qualified people for potential promotion to upper management.

  • Reduced burden on central management: Decentralized systems place responsibility on local operations for day-to-day activities. This frees up central offices to focus on long-term strategies and more global concerns.

  • Improved relationship with customers: Many semi-autonomous locations bring a business closer to its consumers and supply lines. This proximity fosters improved relationships and faster responses to customer or supplier concerns.

Market development

In the market development field, decentralized systems may generate opportunities to create a self-sufficiency organization and develop the ability to capitalize on economic incentives. Usually, regional offices operate in a more autonomous manner. This increased self-sufficiency enables a large company to choose whether to expand or contract operations with minimal impact on overall corporate success.

Businesses may operate in or move to one province to take advantage of favourable labour and corporate laws, health benefits, workforce availability, or tax credits. For example, companies shipping products across borders often operate decentralized facilities in both Canada and the United States to facilitate product distribution. Some advantages of decentralization in the market development field include:

  • Easier growth: Expansion of operations is simpler where the company may set up smaller, localized offices. The initial investment in these satellite locations often is significantly less than may occur in retooling and expansion of the central location.

  • Better subsidiaries: Large corporations usually divide their assets into two or more separate entities, each focused on their core products. For example, multinational pharmaceutical companies often establish separate divisions and companies to produce different products for different targets.

  • Stronger positions: Particularly when sourcing raw goods in politically unstable regions or where economic turmoil is likely, companies that decentralize are less prone to economic stress. Natural disasters, including weather-related upheavals, have a more localized impact if there are other locations to get materials.

Read more: Definition of an Organization Type (With a List of Benefits)

Where decentralization works effectively

Decentralized organizations have inherent advantages over centralized ones. These advantages often relate to autonomy and human interactions at the local level. Areas where decentralization is effective include:

  • Transportation: A decentralized branch near supply lines and distribution systems allows the business to access more raw goods than if suppliers had to transport heavy freight over long distances.

  • Manufacturing: Decentralization is common in such industries as automobile production, where subsidiary businesses build parts primarily, but not only for the main company.

  • Services: Banks usually allow their local branches to provide retail customer service, but regulate other aspects such as investment counselling and portfolios. Food retail chains can also allow local stores to hire, manage inventory, and establish sales promotions.

Read more: Functional Organizational Structure: Pros and Cons

Advantages of centralization in organizations

Centralization in organizations occurs where the control of marketing and sales, production, human resources, administration, and distribution occurs at one location. There may be parts of these department roles occurring at regional locations, but oversight remains centrally controlled. Centralized operations offer advantages over decentralized systems in several areas, including:

  • Reduced competition among employees: Centralization of operations may lead to employees within the smaller cells avoiding developing their power within the larger operation. This may lead to intra-office stability and a better work environment.

  • Increased workforce power: Employees may find it easier to organize within a centralized business. They can use structures like unions to benefit from the centralized system.

  • Controlled decision-making: Centralization helps to eliminate uncertainty in decision making, but may appear autocratic and top-down. Fewer upper management people are accountable for decisions.

  • Enhanced quality control: Standardization is simpler to maintain in centralized businesses, but adaptation is slower. Management can address quality issues more rapidly in a centralized setting.

  • Reduced cost of facilities: Centralized operations don't require duplicated infrastructure, management teams, or production equipment. The stable costs for the primary location may increase the savings and profits of the organization.

Related: What Is Delegative Leadership and Is It Right for You?

Where centralization works effectively

Some businesses and organizations may suffer under decentralization, but work optimally when there is a central command structure. Industries like the automobile industry or where cross-border production facilities exist may use a decentralized-within-centralized structure, granting partial autonomy to decentralized branches. In these organizations, authority often remains with the central structure. Businesses with a central theme or focus, or ones weakened by a distribution of authority, benefit from centralizing. Key groups that benefit from centralization include:

  • Franchises: Most franchises have strict universal standards that define their brand, such as fast-food chains. Exceptions may include real estate franchises responding to local market demand.

  • Military: Armed forces rely on centralized command and that all personnel adhere strictly to the protocols. Communication at all levels defines this centralized method.

  • Not-for-profit organizations: Not-for-profits include charities, volunteer organizations, community groups, and non-government organizations. Government regulations legislate these groups to adhere to standards that need strict oversight.

Read more: A Guide to Top-Down and Bottom-up Management Styles

Considerations when determining decentralization strategy

The decision to decentralize involves consideration of several factors, which fall into the two broad categories of accountability and operations. Accountability refers to the ability of the upper management to be responsible for the organization's activities and results. Operations comprise all the activities of the organization. Within those categories are specific issues, including:

Authority and accountability issues

Upper management that passes off accountability for decisions may allow that decentralized operation to deviate from the direction of the parent company. For example, a large Canadian fast-food outlet failed in the 1990s, primarily because it lacked of supervision over its franchisees. Some issues related to authority and accountability an organization may face are:

  • Authority and responsibility delegated: Sufficient freedom to run its operations allows a decentralized office to operate efficiently. With the capability of altering local operations, the central office can maintain better control.

  • Authority and responsibility defined: Where a company passes off responsibility for decisions to subordinate branches without making it accountable, frustration and improper decisions may occur. Decentralized operations that are given the authority and responsibility for decisions may experience lower rates of poor decision-making and improved employee morale.

  • Hierarchy and authority established: A decentralized operation continues to operate within a defined hierarchy and lines of authority. While the number of levels of management at the local level decreases under decentralization, final decisions remain in the head office.

Business operations issues

Sometimes decentralized businesses face different issues across their locations, branches, retail stores, or subsidiaries. For example, a retail business can make all its purchase decisions in eastern Canada and ship four hundred pairs of galoshes to Calgary, and refuse to provide cowboy boots, because they don't have enough demand. The Calgary stores may sell fewer than twenty pairs of rubber boots throughout the season, but retailers can sell thousands of cowboy boots in the city during cowboys related events. Some factors that may generate issues within the organization's operations are:

  • Control: Companies using remote collaborative communications technologies can maintain better flow and control over remote operations. Those satellite businesses can continue to operate independently, but with more effective oversight.

  • Communication: Whether an organization uses a decentralized, centralized, or blended model, communication remains vital. This communication involves customer relations, sales, product delivery, access to knowledge, and business operating strategies.

  • Costs: Both capital costs and operating expenses determine the viability of one model over another. Higher ongoing expenses often offset lower initial investment in a satellite operation.

  • Flexibility: Being able to isolate a decentralized aspect of an organization may create a unique market or identity. For example, in Asia, a major environmental disaster contributed to the decision of a large corporation to separate one part of its business from the core operation.

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