10.1 Describe the structure and management of decentralised organisations and evaluate the benefits and drawbacks of decentralisation.

Decentralised Organisations

As businesses grow in size, top management have an increasingly hard time maintaining control over decision making. When the right to make or authorise decision lies with top management, that business is said to be a centralised organisation. When decision making is decentralised, the rights and responsibilities for decision making permeate all levels of the organisation. The challenge for businesses is to find tools that allow the evaluation of managers at all levels in the organisation and one way to do this and react more quickly to changing market conditions is through a decentralised structure. Essentially, decentralisation is when decision making authority in a company is spread out among more individuals. It can be viewed as an extension of delegation. Thus, decentralisation is concerned with the decentralisation of decision-making authority to lower levels in managerial hierarchy. Managers make business decisions that are evaluated based on performance measures under their control, and are rewarded according to their positive impact on the measure.

Decentralisation varies from businesses to businesses. Most businesses are decentralised to some degree. At one end of the spectrum, managers are given complete authority to make decisions at their level of operations. At the other extreme, managers have little, if any, authority to make decisions (i.e. centralised). Most businesses will fall somewhere in the middle. However, the tendency is to move toward more, rather than less, decentralisation due to its various benefits which we will discuss below.

Benefits of decentralisation

There are several advantages to decentralisation as summarised in the diagram above and detailed below:

(1) Decentralisation brings decision making process closer to the scene of action. This leads to quicker decision-making at lower level by those closest to a problem are most familiar with the problem and its root causes.

(2) Decentralisation relieves the top executives of the burden of much of the day-to-day decision making. This frees up the time for top management to concentrate on long-term strategic issues.

(3) As local managers are given a large degree of authority and local autonomy, this improves the morale and motivation of managers and employees as they get involved in the decision-making process. In addition, studies have shown that managers allowed to make decisions in a decentralised environment have higher job satisfaction than do managers in centralised organisations.

(4) Within a decentralised organisation, managers in the business will get the opportunity to develop their talents by taking initiative which will also make them ready for managerial positions.

(5) Decisions are often made in a more timely fashion because decisions do not have to be referred up to top management through the hierarchy, which can not only cause delay but can be costly transferring knowledge about day to day operations and customers to top managers for decision-making and then back to lower level managers and employees to carry out operationally.

Disadvantages of decentralisation

Decentralisation can also have its disadvantages as depicted in the diagram above and explained below:

(1) When decision-making authority is spread among too many managers, a lack of business focus can occur.  Because of this lack of focus on the business as a whole, managers may tend to make decisions benefiting their own sub-units, but not meet the goals of the business.

(2) Decentralisation requires the employment of trained employees to accept authority, and Managers may not be adequately trained in decision making at the early stages of their careers. Thus it involves more financial burden to train managers as the cost of bad decisions (even while the managers are being trained) can be high.

(3) Decentralisation of authority creates problems of coordination as authority lies dispersed widely throughout the business. There may also be a lack of coordination and communication between different sub-units.

(4) . As each sub-unit have their own innovations and may not understand or agree with the business strategies, decentralisation may make it difficult to share unique and innovative ideas between segments.

(5) A lack of coordination among segments may lead to the duplication of products, services, costs and efforts. For example each sub-unit might have its own accounting, HR, cleaning, etc. department which duplicates costs and efforts.

An example of a decentralised organisation is Wesfarmers Group. Wesfarmers Limited is an Australian conglomerate, headquartered in Perth, Western Australia. It has interests predominantly in Australia and New Zealand, operating in retail, chemical, fertiliser, industrial and safety industries. With revenue of A$36.8 billion in the 2022 financial year, it is one of Australia’s largest companies by revenue. Wesfarmers is also one of the largest private employers in Australia, with approximately 107,000 employees.

Wesfarmers utilises a decentralised approach due to the size and complexity of the company, as illustrated in their group structure above. Decentralisation ensures information flows efficiently and effectively throughout and coordinates people,activities and resources allowing for timely decisions to be made.

In order to improve and enable effective decision making in a decentralised business, responsibility accounting is used which is discussed in the next section.