A Firm's Vertical Differentiation Determines Where in Its Hierarchy Decision-Making

Question

Examlex · Accepted Answer

The Answer is There are four main arguments for centralization. First, it can facilitate coordination. Second, centralization can help ensure that decisions are consistent with organizational objectives. Third, centralization can avoid the duplication of activities that occurs when similar activities are carried on by various subunits within the organization. Fourth, by concentrating power and authority in one individual or a management team, centralization can give top-level managers the means to bring about needed major organizational changes.
There are five main arguments for decentralization. First, top management can become overburdened when decision-making authority is centralized. Second, motivational research favors decentralization. Third, decentralization permits greater flexibility-more rapid response to environmental changes. Fourth, decentralization can result in better decisions. Fifth, decentralization can increase control and be used to establish relatively autonomous, self-contained subunits within an organization.
The choice between centralization and decentralization is not absolute. Frequently, it makes sense to centralize some decisions and decentralize others, depending on the type of decision and the firm's strategy. Although the choice between centralization and decentralization depends upon the circumstances being considered, a few important generalizations can be made. First, decisions regarding overall firm strategy, major financial expenditures, financial objectives, and legal issues are centralized at the senior-management level in most organizations. Functional decisions relating to production, marketing, R&D, and human resource management may or may not be centralized depending on the firm's strategy and environmental conditions. Second, when the realization of economies of scale is an important factor, there tends to be greater centralization. Purchasing and manufacturing decisions are often centralized in an attempt to eliminate duplication and realize scale economies. In contrast, sales decisions tend to be more decentralized because economies of scale are less of a consideration here. Third, when local adaptation is important, decentralization is typically favored. When there are substantial differences between conditions in local markets, marketing and sales decisions will often be decentralized to local marketing and sales managers

A Firm's Vertical Differentiation Determines Where in Its Hierarchy Decision-Making

Definitions: