Centralization & Decentralization

 

Centralization

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

Fast-food businesses like Burger King, Pizza Hut and McDonalds use a predominantly centralised structure to ensure that control is maintained over their many thousands of outlets.  The need to ensure consistency of customer experience and quality at every location is the main reason.

The main advantages and disadvantages of centralisation are:

Advantages Disadvantages
Easier to implement common policies and practices for the business as a whole More bureaucratic – often extra layers in the hierarchy
Prevents other parts of the business from becoming too independent Local or junior managers are likely to much closer to customer needs
Easier to co-ordinate and control from the centre – e.g. with budgets Lack of authority down the hierarchy may reduce manager motivation
Economies of scale and overhead savings easier to achieve Customer service does not benefit from flexibility and speed in local decision-making
Greater use of specialisation  
Quicker decision-making (usually) – easier to show strong leadership  

 

Decentralization

 

In a decentralised structure, decision-making is spread out to include more junior managers in the hierarchy, as well as individual business units or trading locations.

Good examples of businesses which use a decentralised structure include the major supermarket chains like WM Morrison and Tesco. Each supermarket has a store manager who can make certain decisions concerning areas like staffing, sales promotions. The store manager is responsible to a regional or area manager. Hotel chains are particularly keen on using decentralised structures so that local hotel managers are empowered to make on-the-spot decisions to handle customer problems or complaints.

 

 

The main advantages and disadvantages of this approach are:

Advantages Disadvantages
Decisions are made closer to the customer Decision-making is not necessarily “strategic”
Better able to respond to local circumstances More difficult to ensure consistent practices and policies (customers might prefer consistency from location to location)
Improved level of customer service May be some diseconomies of scale – e.g. duplication of roles
Consistent with aiming for a flatter hierarchy Who provides strong leadership when needed (e.g. in a crisis)?
Good way of training and developing junior management Harder to achieve tight financial control – risk of cost-overruns
Should improve staff motivation  

 

 

 

 

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