Centralisation and Decentralisation

Who makes the decisions in a company?

• 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)

What is centralised decision making?

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

What are examples of centralisation?

• Fast-food businesses use a predominantly centralised structure to ensure that control is maintained over their thousands of outlets

• The need to ensure consistency of customer experience and quality at every location, together with a desire to exploit economics of scale, are the main reasons for this choice

What are potential benefits of centralisation?

• Easier to implement common policies and practices for the whole business

• This prevents other parts of the business from becoming too independent

• Easier to coordinate and control from the centre- e.g. with budgets

• Economies of scale and overhead savings are easier to achieve

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

What are the possible drawbacks of centralisation?

• More bureaucratic- often extra layers in the hierarchy

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

• Lack of authority down the hierarchy may reduce manager motivation

• Customer service: lost flexibility and speed of local decision-making?

What is decentralised decision making?

Decision-making is spread out to include more junior managers in the hierarchy, as well as individual business units or trading locations

What is an example of decentralisation?

Hotel chains are particularly keen on using decentralised structures so that local hotel managers and staff are empowered to make on-the-spot decisions to handle customer problems or complaints

What are potential benefits of decentralisation?

• Decisions are made closer to the customer

• Better able to respond to local circumstances

• Improved level of customer service

• Can enable a flatter hierarchy

• Good way of training and developing junior management

• Facilities empowerment: should improve staff motivation

What are potential drawbacks of decentralisation?

• Decision-making is not necessarily ‘strategic’

• Harder to ensure consistent practices and policies at each location

• Maybe some diseconomies of sale- e.g. duplication of roles

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

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