International Case – Restructuring at Korea’s Daewoo

A decentralized organization is one in which decision making is not confined to a few top executives rather is throughout the organization, with managers at various levels making key operating decisions relating to their sphere of responsibility.

Decentralization is a matter of degree, since all organizations are decentralized to some extent out of necessity. At one extreme, a strongly decentralized organization is one in which even the lowest-level managers and employees are empowered to make decisions. At the other extreme, in a strongly decentralized organization, lower-level managers have little freedom to make decisions. Although most organizations fall somewhere between these two extremes, there is a pronounced trend toward more and more decentralization. . Advantages & Disadvantages of Decentralization.

Advantages of decentralization include faster, more responsive decisions, greater flexibility, more initiative at lower levels, reduced coordination efforts, reduced administration, and redundant capabilities. By moving decision making down the structure, response time is cut as the person making the decision is closer to the situation. The organization can react more quickly in this arrangement than if it had to route all decisions through a central location.

In addition to more rapid decisions, decentralization can lead to greater flexibility in dealing with problems. A small unit is able to adapt to unexpected circumstances with more ease than a large, cumbersome organization.  Flexibility is often the by-product of innovation. As responsibility and functions are dispersed throughout the agency, individuals can express an amount of initiative rarely seen in centralized structures. Given the opportunity to “strut their stuff,” some employees will take risks and make valuable, new contributions in the process.

More autonomy leads to a reduction in the coordination game. Since not every aspect of a decentralized organization must be standardized, the costs of ensuring that all subunits are performing identically are eliminated. Also eliminated is much of the administrative work at the headquarters. With each dispersed portion of the whole responsible for its own operations, those at headquarters do not have to deal with the day-to-day minutiae. Several of the smaller agencies when decentralized, might perform identical functions but with a focus on certain areas.

If for some reason one of the units failed to operate, the others could pick up the slack. This redundancy could avert a catastrophic failure, which might occur if there was only one unit performing a critical function. Decentralization offers many advantages, but there are some drawbacks as well. Included among these are duplication of effort, localized use of expertise, difficulty in standardizing change, and lack of uniformity in decisions or output.

If two agencies perform similar functions, but in separate locations, this duplication of effort is wasteful. The resources and manpower required to maintain these duplicate operations can be a drain on the parent organization. Separate operating locations demand the careful disbursement of expertise and specialized equipment. If there are but two experts on a certain procedure and more than that number of operations requiring their services, how are they to be assigned? Some units will not function as well as those that get the expertise. When changes are necessary throughout a decentralized organization, it is difficult to ensure all subunits react the same way.

Detailed instructions go to subordinate managers, who must all interpret the instructions similarly. The possibility for confusion exists. If changes are difficult to coordinate and some agencies have experts while others do not, the potential for a lack of uniformity in decision making or end products is quite high. The succeeding paragraphs summarise the advantages and disadvantages of decentralization.

Advantages

1. Top management is relieved of much day-to-day problem solving and is left free to concentrate on strategy, on higher level decision making, and oordinating activities.
2. Decentralization provides lower level managers with vital experience in making decisions. Without such experience, they would be ill-prepared to make decisions when they are promoted into higher level positions. It also provides them more freedom and independence in decision making.
3. Added responsibility and decision making authority often result in increased job satisfaction.
4. Responsibility and the authority, that goes with it makes the job more interesting and provides greater incentives for people to put out their best efforts.
5. Lower level managers generally have more detailed and up to date information about local conditions than top managers. Therefore the decisions of lower level management are often based on better information.
6. It is difficult to evaluate a manager’s performance if the manager is not given much latitude in what he or she can do.
7. Promotes establishment and use of broad controls that may increase motivation.
8. Makes comparison of performance of different organization units possible.
9. Facilitates setting up of profit centers.
10. Facilitates product diversification.
11. Promotes development of general managers.
12. Aids in adaptation to fast-changing environment.

Disadvantages

• Lower level managers may make decisions without fully understanding the “big picture. ” While top level managers typically have less detailed information about local operations than the lower level managers, they usually have more information about the company as a whole and should have a better understanding of the company’s strategy.
• Lower-level managers may have objectives that are different from the objectives of the entire organization. For example, some managers may be more interested in increasing the sizes of their departments than in increasing the profits of the company. To some degree, this problem can be overcome by designing performance evaluation system that motivate managers to make decisions that are in the best interests of the rganization.
• In a strongly decentralized organization, it may be more difficult to effectively spread innovative ideas. Someone in one part of the organization may have a traffic idea that would benefit other parts of the organizations, but without strong central direction the idea may not be shared with, and adopted by other parts of the organization.
• Makes it more difficult to have a uniform policy.
• May result in loss of some control by upper-level managers.
• May be limited by inadequate control techniques.
• May be constrained by inadequate planning and control systems.
• Can be limited by the lack of qualified managers.
• Involves considerable expenses for training managers.
• May be limited by external forces (national labor unions, governmental controls, tax policies). (12)May not be favored by economies of scale of some operations.