Introduction to Decentralization

What you will learn to do: understand the issues involved in managing decentralized operations

Although there are examples of large companies that try to have “flat” organizational structures, companies tend to decentralize when they grow too large for one person to manage the entire​ organization’s daily operations.

Centralized organizations have a clear chain of command that travels through the levels of their hierarchy. A small business like a family-owned auto shop would likely have centralized management. Imagine though that this small business expands to a second city, and then a third, and then establishes a chain of shops and incorporates. At some point, the day-to-day operations become too complex for one person or even a small group of people to manage and therefore, businesses decentralize.

Decentralized organizations may have a hierarchy, but leadership, by necessity, delegates decision-making to individual teams, empowering them to take action on their own. The teams still need to make sure their actions align with an agreed-upon vision and broader plan. However, they might make up their own rules and determine their individual processes, reaching a consensus on them as a team.

Divisions of a decentralized company might independently handle all aspects of their operations or only particular ones. They might exist in the same building or over a broad geographical space.

Decentralization is often based​ on:

  • brand
  • business function
  • customer base
  • geographical area
  • product line

For instance, in the module on Product Mix, we looked at segment reporting, and we used GE as an example. GE self-identifies the following segments: Power, Renewable Energy, Aviation, Healthcare, and Capital. Each of these segments will have divisions and responsibility centers, with information flowing through like a funnel, becoming more and more focused as it reaches top management.

An inverted triangle is shown, split into five vertical segments. The five segments are Power, Renewable Energy, Aviation, Healthcare, and Capital. On the right, there are horizontal labels from top to bottom: Operational Managers, Middle Managers, Senior Managers, and Top Management.

In order to manage a large, decentralized organization, leadership needs to have some kind of “dashboard”—an easy way to see what is going on in the organization. As you have learned, managerial accounting focuses on current and future results using “leading” indicators rather than results from past operations (although those are used to hold managers accountable and to help predict future results). In addition, managers at each level are only held accountable for the costs they can influence.

When you are done with this section, you will be able to:

  • Describe the advantages and disadvantages of decentralization
  • Identify leading and lagging indicators
  • Identify controllable and noncontrollable costs

Learning Activities

The learning activities for this section include the following:

  • Reading: Managing Decentralized Operations
  • Self Check: Managing Decentralized Operations
  • Reading: Leading Indicators
  • Self Check: Leading Indicators
  • Reading: Controllable Costs
  • Self Check: Controllable Costs