Decentralization

The delegation of responsibility and authority decentralizes decision making. In a centralized organization, important decisions usually are made at the top. In decentralized organizations, more decisions are made at lower levels. Ideally, decision making occurs at the level of the people who are most directly affected and have the most intimate knowledge about the problem. This is particularly important when the business environment is fast-changing and decisions must be made quickly and well.
Sometimes organizations change their degree of centralization, depending on the particular challenges they face. Tougher times often cause senior managements to take charge, whereas in times of rapid growth decisions are pushed further down the chain of command. For example, in the 1980s Harley-Davidson was in great financial difficulty and faced tough competition from Honda, Suzuki, and Yamaha. It needed strong, centralized leadership that could react quickly and decisively to survive. But once the crisis was past, this approach wasn’t as effective in gaining the commitment and energy of employees, who were the once building the products and the relationships with customers. Harley-Davidson made the transition to a flatter, more empowered organization that decentralizes decision making. Today, the traditional hierarchy at the company has been replaced with collaborative leadership, based on the assumption that all employees can make decisions and take responsibility for meeting the organization’s goals.
Most American executives today understand the advantages of pushing decision-making authority down to the point of the action. The level that deals directly with problems and opportunities has the most relevant information and can best foresee the consequences of decisions. Executives also see how the decentralized approach allows people to take more timely action. The accompanying news item describes one company’s intention to speed decision making through decentralization.
At AES, the world’s largest global power company (with revenues in excess of $3 billion),...

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