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Decentralization in Organizations:

Learning Objectives:

Define and explain the term "decentralization".

What are the advantages and disadvantages of decentralization in business organizations?

What are business segments?

Define and explain cost, profit, and investment centers.

Definition and Explanation of Decentralization

A decentralized organization is one in which decision making is not confined to a few top executives but 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/Benefits of Decentralization:

Decentralization has many advantages/benefits, including:

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 coordinating activities.

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...