Reasons for Decentralization
Seven reasons why firms may prefer the decentralized approach to management include better access to local information, cognitive limitations, more timely response, focusing of central management, training and evaluation of segment managers, motivation of segment managers, and enhanced competition. These reasons for delegating decisionmaking authority to lower levels of management are discussed in more detail in the following sections.
Better Access to Local Information
The quality of decisions is affected by the quality of information available. Lower-level managers who are in contact with immediate operating conditions (e.g., the strength and nature of local competition, the nature of the local labor force, and so on) have better access to local information. As a result, local managers are often in a position to make better decisions. This advantage of decentralization is particularly applicable to multinational corporations, where far-flung divisions may be operating in a number of different countries, subject to various legal systems and customs. This is particularly true in MNCs, where far-flung divisions may be operating in a number of different countries, subject to various legal systems and customs. As a result, local managers are often in a position to make better decisions. Decentralization allows an organization to take advantage of this specialized knowledge. For example, Loctite Corporation has local managers run their own divisions. In particular, marketing and pricing are under local administration. Language is not a problem as local managers are in control. Similarly, local managers are conversant with their own laws and customs.
Cognitive Limitations
Even if local information somehow were made available to central management, those managers would face another problem. In a large, complex organization that operates in diverse markets with hundreds or thousands of different products, no one person has all of the expertise and training needed to process and use the information. Cognitive limitations means that individuals with specialized skills would still be needed. Rather than having different individuals at headquarters for every specialized area, why not let these individuals have direct responsibility in the field? In this way, the firm can avoid the cost and bother of collecting and transmitting local information to headquarters. The structure of American business is changing. No longer are middle managers individuals with “people skills” and organization skills only. They must have specific fields of expertise in addition to managerial talent. For example, a middle manager in a bank may refer to herself as a financial specialist even though she manages 20 people. The capability to add skilled expertise is seen as crucial in today’s downsized environment.
More Timely Response
In a centralized setting, time is needed to transmit the local information to headquarters and to transmit the decision back to the local unit. These two transmissions cause delay and increase the potential for miscommunication, decreasing the effectiveness of the response. In a decentralized organization, where the local manager both makes and implements the decision, this problem does not arise. Local managers in the MNC are capable of a more timely response in decision making. They are able to respond quickly to customer discount demands, local government demands, and changes in the political climate. The different languages native to managers of divisions in the MNC make miscommunication an even greater problem. MNCs address this problem in two ways. First, a decentralized structure pushes decision making down to the local manager level, eliminating the need to interpret instructions from above. Second, MNCs are learning to incorporate technology that overrides the language barrier and eases cross-border data transfer. Technology is of great help in smoothing communication difficulties between parent and subsidiary and between one subsidiary and another. Loctite’s plant in Ireland uses computerized labeling on adhesives bound for Britain or Israel. Bar code technology “reads” the labels, eliminatingthe need for foreign language translation.
Focusing of Central Management
The nature of the hierarchical pyramid is that higher-level managers have broader responsibilities and powers. By decentralizing the operating decisions, central managementis free to focus on strategic planning and decision making. The long-run survival of the organization should be of more importance to central management than day-today operations.
Training and Evaluation of Segment Managers
An organization always has a need for well-trained managers to replace higher-level managers who retire or move to take advantage of other opportunities. By decentralizing, lower-level managers are given the opportunity to make decisions as well as to implement them. What better way to prepare a future generation of higher-level managers than by providing them the opportunity to make significant decisions? These opportunities also enable top managers to evaluate the local manager’s capabilities. Those who make the best decisions are the ones who can be selected for promotion to central management.
Motivation of Segment Managers
By giving local managers freedom to make decisions, some of their higher-level needs (self-esteem and self-actualization) are being met. Greater responsibility can produce more job satisfaction and motivate the local manager to exert greater effort. More initiative and more creativity can be expected. Of course, the extent to which the motivational benefits can be realized depends to a large degree on how managers are evaluated and rewarded for their performance.
Enhanced Competition
In a highly centralized company, large overall profit margins can mask inefficiencies within the various subdivisions. A decentralized approach allows the company to determine each division’s contribution to profit and to expose each division to market forces.
Seven reasons why firms may prefer the decentralized approach to management include better access to local information, cognitive limitations, more timely response, focusing of central management, training and evaluation of segment managers, motivation of segment managers, and enhanced competition. These reasons for delegating decisionmaking authority to lower levels of management are discussed in more detail in the following sections.
Better Access to Local Information
The quality of decisions is affected by the quality of information available. Lower-level managers who are in contact with immediate operating conditions (e.g., the strength and nature of local competition, the nature of the local labor force, and so on) have better access to local information. As a result, local managers are often in a position to make better decisions. This advantage of decentralization is particularly applicable to multinational corporations, where far-flung divisions may be operating in a number of different countries, subject to various legal systems and customs. This is particularly true in MNCs, where far-flung divisions may be operating in a number of different countries, subject to various legal systems and customs. As a result, local managers are often in a position to make better decisions. Decentralization allows an organization to take advantage of this specialized knowledge. For example, Loctite Corporation has local managers run their own divisions. In particular, marketing and pricing are under local administration. Language is not a problem as local managers are in control. Similarly, local managers are conversant with their own laws and customs.
Cognitive Limitations
Even if local information somehow were made available to central management, those managers would face another problem. In a large, complex organization that operates in diverse markets with hundreds or thousands of different products, no one person has all of the expertise and training needed to process and use the information. Cognitive limitations means that individuals with specialized skills would still be needed. Rather than having different individuals at headquarters for every specialized area, why not let these individuals have direct responsibility in the field? In this way, the firm can avoid the cost and bother of collecting and transmitting local information to headquarters. The structure of American business is changing. No longer are middle managers individuals with “people skills” and organization skills only. They must have specific fields of expertise in addition to managerial talent. For example, a middle manager in a bank may refer to herself as a financial specialist even though she manages 20 people. The capability to add skilled expertise is seen as crucial in today’s downsized environment.
More Timely Response
In a centralized setting, time is needed to transmit the local information to headquarters and to transmit the decision back to the local unit. These two transmissions cause delay and increase the potential for miscommunication, decreasing the effectiveness of the response. In a decentralized organization, where the local manager both makes and implements the decision, this problem does not arise. Local managers in the MNC are capable of a more timely response in decision making. They are able to respond quickly to customer discount demands, local government demands, and changes in the political climate. The different languages native to managers of divisions in the MNC make miscommunication an even greater problem. MNCs address this problem in two ways. First, a decentralized structure pushes decision making down to the local manager level, eliminating the need to interpret instructions from above. Second, MNCs are learning to incorporate technology that overrides the language barrier and eases cross-border data transfer. Technology is of great help in smoothing communication difficulties between parent and subsidiary and between one subsidiary and another. Loctite’s plant in Ireland uses computerized labeling on adhesives bound for Britain or Israel. Bar code technology “reads” the labels, eliminatingthe need for foreign language translation.
Focusing of Central Management
The nature of the hierarchical pyramid is that higher-level managers have broader responsibilities and powers. By decentralizing the operating decisions, central managementis free to focus on strategic planning and decision making. The long-run survival of the organization should be of more importance to central management than day-today operations.
Training and Evaluation of Segment Managers
An organization always has a need for well-trained managers to replace higher-level managers who retire or move to take advantage of other opportunities. By decentralizing, lower-level managers are given the opportunity to make decisions as well as to implement them. What better way to prepare a future generation of higher-level managers than by providing them the opportunity to make significant decisions? These opportunities also enable top managers to evaluate the local manager’s capabilities. Those who make the best decisions are the ones who can be selected for promotion to central management.
Motivation of Segment Managers
By giving local managers freedom to make decisions, some of their higher-level needs (self-esteem and self-actualization) are being met. Greater responsibility can produce more job satisfaction and motivate the local manager to exert greater effort. More initiative and more creativity can be expected. Of course, the extent to which the motivational benefits can be realized depends to a large degree on how managers are evaluated and rewarded for their performance.
Enhanced Competition
In a highly centralized company, large overall profit margins can mask inefficiencies within the various subdivisions. A decentralized approach allows the company to determine each division’s contribution to profit and to expose each division to market forces.
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