Research Essay on Decentralization and Centralization

Decentralization and centralization in organizations are two trends that are almost simultaneously at work in a modern organization. The paper examines the evidence in favor of the hypothesis that contemporary organizations are becoming more decentralized than in the past. Trends such as globalization, changes in organizational structure, new information technology, and change in employee roles examined as manifestations of growing decentralization.

To examine whether today’s organizations are more decentralized than in the past, one should look at first review the definition of organizational structure. This structure defines the organization’s tasks, formally divides them, groups them and coordinates their execution. While there can be different types of corporate structures, they can roughly be called either centralized or decentralized.

The following essay will argue that today’s organizations are more decentralized than structures of the past. Organizations decentralize their functions because this is a more profitable and efficient way to serve more markets. Organizations of the past were less decentralized simply because they operated in different economic and social environments which did not demand much decentralization necessary for organizational survival. At present, as the companies started to pursue global customers and compete globally, decentralization appears to be the key to successful functioning and survival.

Globalisation and Decentralisation
The evidence for increasing decentralization can be found in the growing number of organizations that expand their business to become multinational corporations. Although a centralized structure “allows companies to integrate vertically,” a decentralized one will allow greater flexibility in adapting to local reality, which is of crucial importance to global companies (Ball, 2001, p. 213). A decentralized organization, in contrast to a centralized one, “is more flexible to respond to unusual situations and changes”(Ball, 2001, p. 213). Organizations must ascertain that the selection of strategy matches the region, territory, and its environment (government, economy, cheap and competent labor, etc.). In decentralized organizations, the focus is placed on customers and end users, taking into account their specific needs”(Ball, 2001, p. 213).

The global village economy into which all businesses around the world seem to enter sooner or later is exceptionally competitive while the markets are very demanding and unstable. In order efficiently compete on a global scale, organizations try to serve well each free market and thus develop custom marketing strategies for these markets. It is true for local markets inside one country as well but is most salient at the global level. To assure efficient and timely decision making, central management loosens the grip and allows various branches to develop custom approaches to cater to the market needs abroad, thus contributing to decentralization.

Globalization has led to the creation of a new generation of multinational companies that function in a way unknown to most domestic corporations and have to cope with a different array of organizational challenges. True, global companies also have to build coherence across the borders (Koch, 1998). However, once they are done with developing a coherent business strategy for all geographical units, they can start to decentralize the tasks so that the organization can more accurately respond to local pressures.

Popularity of Lean Organizational Structures
The change in organizational structure embracing greater decentralization also reflects a shift in the production processes. The businesses in the past would rely more on the large-scale production of durable goods and manufacturing which required a superb coordination of existing resources. Such coordination especially when the company operated globally or nationally needed the organization to divide labor and roles effectively to assure proper coordination of means of production (Shenkar, 2002, p. 74). The contemporary agencies, on the other hand, are more service-centered, thus requiring somewhat lesser coordination and control.

Decentralization typically marks simple structures also known as a flat or lean organization. With a relatively full span of control, it usually has more involves more decentralization than, for instance, bureaucracy, that strives to simplify the tasks and make them routine via formalized rules/regulations and high departmentalization.

Lean systems and lean enterprises are winning popularity as they allow significant cost savings that companies should not forego in the light of the intensifying competition. Lean production “not only uses flexible technologies but forms a flexible work organization that maximizes employees initiative and flexibility to respond rapidly and flexibly to customer demand and to realizes efficient mass production with high productivity and quality” (Lee, 2003). It, for instance, leads to the proliferation of lean production in the South Korean automotive industry. Lean systems help organizations create automated routines and procedures that would ultimately streamline the organization and reduce the menial labor required in these areas. Allowing the companies to combine the economies of scale with the ability to diversify the scope of manufactured products, lean production permits companies to diversify their offerings in a cost-efficient way “through synchronized production-order operations” (Lee, 2003).

With the help of lean production, the company becomes more flexible and thus less vulnerable to market swings and demand changes. These innovation permits enterprises to secure the greater involvement of employees, improvement of quality and elimination of waste. For these reasons, lean production becomes popular, triggering accompanying decentralization.

IT and Decentralization
Today’s organizations can often rely on IT to help them make a transition to decentralized structures, whereas previously the rigid centralized design was in many cases caused by the fixed centralized structure. Currently, the emergence of numerous software and hardware package solutions that allow decentralized functioning can serve as evidence that organizations are pursuing the goal to decentralize their processes.

The modern computer systems often permit the organization to resolve the contradiction between centralization and decentralization. Thus, current information structures can help the company to give its units “a high degree of independence and autonomy combined with rich access to the organizational information of a centralized computer network” (Koch, 1998). Koch (1998) compares this combination of centralization and decentralization in modern organizations, prompted by changed in IT systems, to the design of the American government system that relegates decision-making to the local level wherever possible, preserving some primary functions at the federal level. Noting the trade-off, however, Koch (1998) concludes that “as costs decrease, IT will feel more pressured to release power and information to the periphery of the organization”. The improvement of IT solutions will inevitably supply the periphery of the organization with the more considerable amount of information. In today’s world, more information frequently means more power, and organizational units at the edge will undoubtedly be able to realize more independent decision-making, as a result making the organization more decentralized.

New possibilities for decentralization revealed by new IT projects are evident from Kerstin Grandin’s exploration of the trends in the Swedish Social Insurance Board (SSIB) (2001). The suggestion of the author implies decentralization of the Board with the introduction of CSCW (Computer-Supported Co-operative Work) technology that will change organizational structure and employee functions. At the moment, the Swedish Social Insurance Board (SSIB) combines the characteristics of a machine and a professional bureaucracy. The introduction of CSCW will help develop the features of a professional administration in which “the workers have more influence on their work situation, based on their professional knowledge” (Grundin, 2001).

Changing Employee Roles and Organizational Structures
Decentralization is also manifest in changing employee roles that in turn trigger changes in organizational structure. In earlier hierarchies organized according to theories X and Y, labor was viewed as something unreliable, sneaky, sly and disorganized (Ang, 2002). The management was advised to keep a tight control over the labor, thus requiring one manager to supervise only a dozen or so employees. The modern-day organizations rely more on the Theory Z and embrace greater empowerment that allows them to loosen controls. As a result, the modern manager spends less time on each subordinate employee. There is no longer any need to maintain many levels of management that supervise each other as it had been in the past.

Today’s organizations have more qualified workers that require less supervision. In the past, the absence of proper oversight and communication technology required the physical existence of many supervisors that, in turn, needed managers to check them for errors and efficiency. The business was viewed and compared to the military organization, where one had to create ranks, chain of command and indeed the hierarchy akin to the army (Wild, 161). Contemporary technology allows more efficient distant supervision of employees and thus allows one manager to supervise and oversee a much more significant number of people than in the past. It enables organizations to create decentralized structures in which knowledgeable employees operate with a far higher degree of independence, solving problems that were earlier in the competence of the management.

This motivation for decentralizing operations is evident in a virtual organizational structure. It includes a small core organization, highly centralized, with little or no departmentalization that instead uses teams. Software development firms or companies like eBay, utilize virtual organization structure. With the use of groups, the departmental barriers are broken down, while the decision-making process is decentralized to the level of the team. Teams turn into the primary vehicle for coordination of work activities. Cross-functional teams allow employees to change roles and thus adapt to different changes within organization such as, for instance, lean system implementation.

A new paradigm of organizational structure is emerging with the Linux Project developed for the Virtual Network(ed) Organisation that will unite employees working at dispersed geographical locations with little or no centralized planning. Defermos (2001) believes that this kind of organization is the logical result of the evolution of centralized Taylorist hierarchies, the impact of the Japanese management models and employee empowerment present today. The development of the Linux Project run by a devoted group of individuals committed to their project is an excellent example of effective decentralization that includes very few links that nevertheless weave into a highly efficient chain. At the head of the company is Linus Torvalds, who then dispatches commands or guidelines to “trusted lieutenants” who later transmit them to Linux kernel mailing list that includes a wide range of professionals. The “trusted lieutenants” are virtually the only link between the owner and the doers. The organization as a whole then forms an economic web that is “a dynamic network of companies whose businesses (are built around a single common platform too) deliver independent elements of an overall value proposition that strengthens as more companies join” (Defermos, 2001).

Decentralization at Work: Examples
One of the best-known organizations that operate in a highly decentralized fashion is McDonald’s that ran over 25,000 restaurants in 117 nations as of 2000 (DEST). McDonald’s has always relied on franchises as a way to spearhead business development and minimize financial risk. As a result, more than 80% of McDonald’s Business is operated by independent businessmen who are the company’s franchisees (DEST).

This strategy has made the company successful, which in itself may contribute to the popularity of the decentralized model. At the same time, at present, McDonald’s is becoming even more decentralized than in the past. It is reflected in the fact that franchisees no longer want to “silent partners” and demand broader powers in decision-making and a more independent role. Thus, in the US McDonalds has established a divisional structure, setting up five large divisions.

McDonald’s, for instance, has a decentralized education/training function. In each of 38 US McDonald’s departments, there is a training department that provides basic operations and management training to McDonald’s employees. At the same time, individual store owners and franchisees will seek to develop different programs for skill development in their employees through working with business and training consultants at the local level. Although McDonald’s does have a universal Advanced Operations Course (AOC) that is administered at only one location, Hamburger University run by the company itself, McDonalds’ requirements demand that only 1 graduate of this coursework in each store, Thus, “McDonald’s education and training functions are fragmented throughout the organization” (DEST).

Citing an example from a different sphere, the research into the decentralization of publicly funded health services undertaken by Stephen Peckham and Mark Exworthy and sponsored by NCC-SDO reveals a persistent trend toward decentralization in this area. Searching through at least seven large databases including AASIA (Social Sciences), Business Source Premier (Management), HMIC (Health Management), the authors have found evidence for the relocation of power from global to individual level regarding defining input, process, and outcomes. These trends were evidenced in practice-based commissioning (input), patient choice (process), and GP quality framework (outcome). Thus, modern health care organizations in Britain can better provide for themselves financially, getting increased financial support for their operations, and at the same time are better able to meet the needs of their clients (patients) at all levels. For health organization in Britain, the most decisive factor contributing to decentralization is the opportunity to approach their clients and to be able to provide better services to individual local markets.

The main reason why today’s organizations are more decentralized than in the past is that decentralized structures prove to be more profitable and efficient in the global economic environment. The existing technology provides organizations with the opportunity to reduce staff, broaden the scope of control and also empower individual branches. Lean production, an essential innovation in industrial management, offers ample possibilities for increasing change and contributes to decentralization. More skilled labor force nowadays is capable of working autonomously, which leads to decentralized organizational structures. Finally, the modern view of business and changing corporate cultures stress the importance of staying close to the market and the customer rather than to the corporate management. The result is the growing decentralization within companies that permit them to improve their efficiency and effectiveness and to achieve more significant competitive advantage and flexibility.

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