Centralization and Decentralization in Business

All companies begin as centralized organizations. This is a function of size. Small companies may never leave the centralized structure, while larger companies eventually find that they are too unwieldy to function effectively in a centralized manner, and so they move to a decentralized structure. Historically, these movements have followed an evolution in the company itself, with the first moves toward decentralization happening as companies established facilities in more than one location. Sometimes, even the existence of just an off-site warehouse could lead to decentralization. Today, companies are taking a strategic look at whether they are centralized or decentralized, and what system is best for them. Instead of relying on the natural course of business to make the decision for them, companies are building the centralization decentralization issue into their corporate climate to the point that it becomes an integral part of the corporate culture. This research examines the issue of centralization versus decentralization, and how companies can take advantage of one of these structures.

Centralization is characterized by a central decision making group which sets the goals and objectives for the company as a whole. A typical organization chart of a centralized company has the president at the top and functional vice-presidents (sales, finance, product development, human resources and so on) reporting to him. Below the vice-presidents are managers for various di

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ts based on 100 core technologies in 55 countries) (Hammerly, March/April 1992, p. 8). In this way, 3M represents a company that is large, but which operates with a number of small business units through decentralization. There is no one point at which it can be said that a company should decentralize its operations. Hewlett-Packard learned this through painful experience. Hewlett-Packard has a strong entrepreneurial spirit that it tries to encourage in all of its employees. To this end, the policy at Hewlett-Packard required that when a division exceeded 1,200 employees, a new division would be created. So long as its business units focused on unique markets, this strategy worked well (initially, the company focused on medical instrumentation, then moved into computers and computer peripherals). When Hewlett-Packard entered the design and manufacture of computers, its policy of decentralization hampered its ability to introduce products to the marketplace. Each of the components in computer systems (terminals, disc drives and so on) were manufactured by a separate division, with little or no cross-division communication. The result was a longer development cycle than other companies in the industry, and interfaces which

Category: Business - C