The emerging debate over centralization vs. decentralization highlights one of the most challenging issues in management- what the most efficient corporate structure is for a company. Globalization makes multinational enterprises develop their ability to respond quickly to changes in the economically or politically fast-moving environments, and elaborate strategies to perform on both a global and a local scale. To strengthen and increase their positions on the market, these companies must optimize not only the use of their resources but also their organizational structure in order to be more efficient in their daily activities and get closer to customers' expectations. The main risk faced by multinational enterprises is the loss of efficiency or responsiveness due to their large size, their geographical dispersal or their bureaucratic organization. In fact the heart of the matter resides in adopting the most appropriate decision making process for the organization. It must be determined how to share power between headquarters and the other entities of the company.
This essay aims at clarifying the distinction between the apparently opposing strategies of centralization and decentralization, by emphasizing the importance of their coexistence within an organization. Moreover it seeks to envisage the main consequences of these strategies on multinational companies. The first part is dedicated to presenting both strategies deeply, the second one; to analyzing to what extent they can coexist in a company, and the third one to describing the new profile of multinational enterprises and the consequences of it for the corporate world.
[...] In other words firms have to find the degree to which centralization must be used in combination with decentralization in order to obtain a balance which maximizes innovation and efficiency. Currently the concept of decentralization is gaining momentum in many firms so that some managers call for decentralizing of organizations as much as possible. Despite the success of centralization at IBM, Gerstner advocates decentralization: decentralize decision making wherever possible, but [ . ] we must balance decentralized decision making with central strategy and common customer focus". [...]
[...] Though there is no infallible strategy, let us keep in mind that the idea is neither to replace all the centralized strategies by decentralized ones, nor to complete centralized strategies with decentralized ones. The main issue for companies in elaborating their strategy is to have the benefits of both centralization and decentralization without suffering from their respective costs. The debate, < http://instruct1.cit.cornell.edu/courses/dea453_653/01students/asheley_jona than/Index.html> [Accessed 28.03 .08] This citation, translated from French to English comes from the following report: décentralisation du Management RH : quels enjeux, limites et réalités du partage des rôles et responsabilités avec les Managers opérationnels” Leroux-Mauroy-Mauvieux-Pham-Piat MBA Dauphine Management des Ressources Humaines The debate, < http://instruct1.cit.cornell.edu/courses/dea453_653/01students/asheley_jona than/Index.html> [Accessed 28.03 .08] [...]
[...] On the contrary, decentralization is a system in which subsidiaries are granted a high degree of autonomy since they only have to follow the general outlines provided by headquarters. They are only judged on their ability to meet profit targets, and their relations with headquarters are mainly restricted to financial flows. The main advantage of centralization for multinational enterprises is the scope to adopt a global strategy formulation. This is to say that the different entities are turned towards a common objective that will be achieved through a unique strategy defined by the headquarters and imposed on all of them. [...]
[...] The choice between centralization and decentralization must be made on the individual requirements of each case. As the following examples show, a company must implement the strategy which will optimize its results. First Example: Centralization at IBM “Soon after Lou Gerstner became CEO of IBM in 1993, he made what he calls probably the biggest decision of his entire career. At the time, many people in IBM and the business press were convinced that the best course for the "lumbering dinosaur" was to break itself up into smaller companies. [...]
[...] Since a franchise owner's profit is contingent upon their individual franchise's success, owners can be trusted to make decisions based on their particular facilities needs.” As these examples show, firms are neither totally centralized nor decentralized because these strategies are too extreme to be successful. Indeed an efficient strategy for a company is a strategy which combines both centralized and decentralized approaches, in order to take advantage of the benefits of each one. Given that the costs of centralization are nearly compensated for by the benefits of decentralization and vice versa, the objective of this strategy is to have the advantages of both approaches without their costs. [...]
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