Decentralisation

Decentralisation is the process of distributing power away from the centre of an organisation. In the case of a corporation this usually means divesting authority away from the head office and out to operators in the field. Debate centres on which is the more efficient structure for an organisation that has a number of far-flung arms, especially a multinational with operations in several different countries: one where decision-making is concentrated at the centre, or one where it is diffused around the organisation?

Decentralisation has had its supporters for centuries. In the 1700s, the East India Company was a highly decentralised organisation. Its factors ran its factories in remote parts of the world. There was no telegraph, telephone or telex. They had to make decisions for themselves on the spot.

Decentralisation remained the dominant model for most of the 19th century. The Morgans, father and son, ran their banks in isolated independence in London and New York, and the various arms of the Rothschild family ran their operations independently in a number of European countries. Carrier pigeon was the fastest form of communication that they could hope for.

With the invention of the telephone and the telex, the centralised head office came into its own. Throughout most of the 20th century centralisation was the dominant philosophy, a shift brought about largely by the invention of Alexander Graham Bell.

There were some notable exceptions. DuPont, an American chemicals company, enthusiastically embraced the idea of decentralisation in the mid-1920s when its senior executives developed a multidivisional structure to cope with its diversification. Likewise, Alfred Sloan split General Motors into divisions, and each division was run as a company within a company. Sloan said the company was “coordinated in policy and decentralised in administration”. It was a move that helped him to claw back some of the enormous advantage that Ford had gained from its introduction a decade earlier of mass production and the assembly line.

In his famous-for-its-title book “Small is Beautiful”, E.F. Schumacher argued that centralisation and decentralisation should not be considered as mutually exclusive:

Once a large organisation has come into being, it normally goes through alternating phases of centralising and decentralising, like swings of a pendulum. Whenever one encounters such opposites, each of them with persuasive arguments in its favour, it is worth looking into the depth of the problem for something more than compromise, more than a half-and-half solution. Maybe what we really need is not either/or but “the one and the other at the same time”. This very familiar problem pervades the whole of real life.

In their bestseller, “In Search of Excellence”, Tom Peters and Robert Waterman took a similar line: “Excellent companies,” they said, “are both centralised and decentralised.” Alfred Chandler said much the same in “Strategy and Structure”, arguing that strategy and responsibility for head office should be centralised, while day-to-day operations should be left to decentralised units.

In the 1990s, the growth and rapid development of information technology began to turn the tables. The internet and other electronic information systems made the distribution of information ubiquitous and cheap. Power was once again diffused outwards to workers in the field. In an article in Harvard Business Review in 1998, C.K. Prahalad and Kenneth Lieberthal argued that this diffusion of power would have a particularly strong impact on multinationals. The old imperialist assumption that all innovation comes from the centre would no longer be valid.

In the mid-1990s Peters and Waterman were each asked separately to list the big challenges facing business. Peters subsequently wrote:

The lists bore little resemblance to one another—except for the first item. Both of us put … decentralisation at the top of our lists … after 50 (combined) years of watching organisations thrive and shrivel, we held to one, and only one, basic belief: to loosen the reins, to allow a thousand flowers to bloom and a hundred schools to contend, is the best way to sustain vigour in perilous gyrating times.

Further reading

Chandler, A., “Strategy and Structure”, MIT Press, 1969; reprint, 1990

Prahalad, C.K. and Lieberthal, K., “The End of Corporate Imperialism”, Harvard Business Review, July–August 1998

Sloan, A.P., “My Years with General Motors”, Doubleday, 1964; rev., 1990

More management ideas

This article is adapted from “The Economist Guide to Management Ideas and Gurus”, by Tim Hindle (Profile Books; 322 pages; £20). The guide has the low-down on over 100 of the most influential business-management ideas and more than 50 of the world's most influential management thinkers. To buy this book, please visit our online shop.