Reasons Why Businesses Decide to Operate Using Decentralised Structure - Essay Example

Decentralised Structure Name Course Lecturer Date Reasons Why Businesses Decide To Operate Using Decentralised Structure Decentralised structure is where the decision making authority is transferred to the lower levels of an organisation hierarchy as Šiljak & Zečević (2005) asserts. The senior management in the organisation shifts authority for some types of decision making to the lower levels. The junior members in an organisational hierarchy are assigned the authority to make decisions. As such, this means that the persons heading or the managers in charge of profit center, cots center and investment center has the authority to make decisions that directly impact on their area of responsibility. Subramaniam & Mia (2001) points that managers can still push some decisions down to the employees although such decisions are limited to customer service. A business using decentralised structure moves decision making to lower levels or tiers in the organisation such as branches, divisions, subsidiaries or departments. Importantly, Seal (2011) indicates that information, knowledge and ideas flow from the bottom to the top of the organisational structure. The span of control in this structure for top managers is relatively small; there are also relatively few tiers in the structure. This is because there is more autonomy in the lower ranks. Businesses decide to operate in a decentralised structure because they want to give a strong level of individualised customer service; this is at the point of contact with the customers (Andersson & Ostrom 2008). There are instances where a business needs to give a strong level of individualised service to customers especially for businesses where employees have direct contact with customers such as chain store, supermarkets and distributors. In addition, Chen & Stanković (2005) adds that businesses with several store locations decide to use decentralised structure. The management decides to give the store managers authority to make decisions concerning and affecting their stores. In this case, the senior management does not reasonably monitor or make decisions for all locations. They are made by the location and store managers. Businesses operating in a very competitive environment decide to use decentralised structure in order to cope with the competition as Mookherjee (2006) underscores. Businesses decentralise decision making in order to respond effectively and timely to customers, this enables the business to cope with the fierce competition and therefore keep up with the competition in the market. In such times of huge competition, the senior managers in a business give lower level managers and employees authority to make decisions, this myriad of decisions are made in order to respond to competitor actions. Furthermore, some businesses operate in an evolving and innovative world. As such, they must also keep coming up with ways and methods of production and servicing customers as Ménard (2005) notes, otherwise they will become irrelevant in the market. In such situations where innovations change the business world constantly, businesses decide to use decentralised structure in order to cope and make with the innovations. Also, in such situations, centralized control is not possible and hence business decides to employ decentralised control (Malecki 2007). It helps the businesses to be innovative. This is because employees are given powers, functions and authority to find new ways of production and serving customers. Moreover, businesses decide to operate using decentralised structure out of necessity as they expand. The accountability and responsibility of one manager or a group of managers to run a high growing business can become excessively overwhelming as the products offered by the business increases (Wu 2006). Ultimately, managers decentralise decision making authority in order to maintain the growth and allow for new ideas. The top managers decentralise operational responsibility to the managers of the products, segments or departments of the organisation. Essentially, businesses decide to operate a decentralised structure in order to better manage each department, branch, subsidiary or segment. Advantages of Decentralised Structure Decentralised structure improves decision making. The employees have the best knowledge base; this is because they know customer desires, wants and value. As such, they are in the best position to make decisions based on this knowledge. This knowledge improves tactical level decisions and operational effectiveness throughout the business as Colfer & Capistrano (2005) underpins. Many small decisions from the senior managers are avoided and thus the senior management is given ample time to focus on the strategic planning of the business and strategic direction of the business. Another advantage of a decentralised structure is that decisions are made very fast, it is speedy. This is because there are few levels of bureaucracy in the structure. Instead of employees waiting for direction from the senior management; they consult their supervisors and make decisions, this takes very short time. As such, the business is able to make decisions more quickly, this is essential in a highly competitive environment as Bjørnskov, Drehe & Fischer (2008) confer. Martinez-Vazquez & Timofeev (2010) report that decentralised structure empowers employees and lower level managers. Employees and managers lower down the chain have a greater understanding of the market they work in and the customers they serve. Giving them operational responsibility and authority to make decisions empowers them, they get an opportunity to input their expertise in to the business. This does not only motivate the lower level managers and employees but it also increases their output. It makes them feel appreciated by knowing that their expertise is appreciated and recognised by the organisation. The empowerment also enables the employees and their departments to respond effectively and faster to new challenges and changes. Importantly, employees embrace empowerment positively, they accept and make a success of more responsibility (Karger & Hennings 2009). Decentralised structure facilitates expansion of business as Pike et al., (2010) pin points. This is especially important for growing businesses as the structure makes it easy for them to expand. For instance, it a business wants to open a new segment in a different location or geographic area, the system allows the new segment to operate as an independent entity. This means that the new segment can react more easily to specific needs of the area like selling the products that appeal to the local market. Another advantage of decentralised structure is that it leads to better communication. It reduces bureaucracy as it takes a short time to make decision and to implement the decision. This improves organisational communication. Besides, the structure relieves the executives some burden, this gives them an opportunity to develop themselves as Greer (2010) reinforces. This improves and makes the executives more stable and provides for continuity of an organisation. The executives get more time to improve, reflect and develop themselves. This enables them to channel their efforts in making the business sustainable in the future. Disadvantages of Decentralised Structure The primary disadvantage of decentralised structure is relinquishing control as Subramaniam & Mia (2001) asserts. This structure gives the lower level managers and employees authority to make decisions as well as operational responsibility. This is very risky as some managers and employees may not have the necessary knowledge to make decisions especially where a business operates in a highly competitive environment. Managers down the chain may make decisions that tweak the business backward instead of propelling it forward. Notably, the structure makes the senior management to put a lot of faith in the hands of the lower managers and employees (Andersson & Ostrom 2008). Another major disadvantage of this structure is that decision making is more spread out. This means that a lot of people are involved. Importantly, decisions are not concentrated with the strongest leaders of the business. This exposes the business to a possible inconsistency across brands. Businesses with more than one brand or product can be affected with inconsistency in decision making as leaders of the different brands make their own decisions. There is conflicting objectives. Although the structure fosters creativity and flexibility it leads to conflicting objectives. The lower level managers determine their own strategic objectives. These objectives are different from the organisational wide objectives; this sets the stage for potential conflict. The lower level managers are determined to produce results irrespective of the means. They are short sighted in that they focus on the current situation. This is contrary to the senior management which has wider, broader and understanding perspective. The executives are in a better position to make sound strategic decisions because they fully understand how the organisation works. Lower level managers have limited and local perspective as Mookherjee (2006) emphasizes. Return on Investment as Performance Measure in a Decentralised Organisation Return on investment is a very effective performance measure in a decentralised organisation. Lower level managers may use their decision making freedom to make decisions that are not in the best interest of the organisation or make dysfunctional decisions (West et al., 2010). To redress this problem, return on investment is an effective approach to measure performance of lower level managers. This ensures that the decisions made by the junior managers are in the best interest of the organisation as a whole. ROI ensures accountability and transparency in delivery of services as well as making decisions. The lower level managers are responsible and accountable for the operational and profitability of their departments or segments. They are held accountable for the level of return on the capital they control. This improves their effectiveness in making decisions as well as controlling operations, they would ensure that they make the best decisions to maximise returns (Peckham et al., 2007).. Essentially, return on investment is an effective performance measure in a decentralised organisation. References Andersson, K, P, & Ostrom, E, 2008, Analyzing decentralized resource regimes from a polycentric perspective: Policy sciences, 41(1), 71-93. Bjørnskov, C, Drehe, A, & Fischer, J, A, 2008, on decentralization and life satisfaction: Economics Letters, 99(1), 147-151. Chen, X, B, & Stanković, S, S, 2005, Decomposition and decentralized control of systems with multi-overlapping structure: Automatica, 41(10), 1765-1772. Colfer, C, J, P, & Capistrano, D, 2005, the politics of decentralization: forests, power and people; Earthscan. Greer, S, L, 2010, how does decentralisation affects the welfare state? 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