Centralized Decentralization

I was thumbing through a business book on a cool Saturday morning and came across a chapter on organizational structures, weighing the pros and cons.

To summarize, Centralization delivers strong coordination across the organization, a higher degree of control for managers, easy access to economies of scope and scale, and the elimination of duplication across products and services. Sure, the model does have certain weaknesses. All is not roses and butterflies. Bureaucracy can get out of control, there are weak incentives amongst teams, and a certain amount of inflexibility creeps into the workforce.

For Decentralization, organizations possess high-powered performance incentives, foster degrees of ultimate flexibility, stress internal competition amongst teams, and push for a high degree of innovation. Yet, these organizations can duplicate work and struggle to coordinate.

Does one model win out over the other?

If you look at HP’s stock price from 1981 to 2001, each time the company reorganized the stock price shot up. Announcing centralization? The price increased for three to four years before finding a dip. Announcing decentralization? Well, it turns out the same effect holds true.

What does this mean?

Organizational structure is a mere tool. By continuing to evolve and change, one balances the needs of the company or market. Or, Wall Street just likes to hear that management is taking a revolutionary approach that isn’t unique at all. You be the judge. But remember, our stories do matter.

References

• The great balance between centralization and decentralization … the United States government.