Centralization versus decentralization in multinational companies

Résumé du document

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.

Extraits

[...] 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. This is sometimes called “coordinated decentralization”. Therefore the main challenge for multinational enterprises is to achieve the best balance between both approaches in order to optimize their strategy. 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. [...]

[...] 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"[6]. He even goes further than that when he claims that IBM was an exception and "CEOs should not go to [the level of integration IBM did] unless it is absolutely necessary" [Gerstner's italics][7]. According to Gerstner, this level of integration is often tried, but almost never succeeds. Thereby, many firms are adopting a new profile in which decentralization prevails over centralization though no generalization seems possible. [...]

[...] 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[4] “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. [...]

[...] Gerstner loosened up IBM's organization but did not break it apart. And his plan worked. IBM's stock price increased by almost a factor of ten during Gerstner's tenure and many people credit him with pulling off a stunningly successful turnaround against very steep odds.” Second Example: Decentralization at McDonald[5] many fast food restaurants across the United States, decentralization plays an important role. While many cooking procedures and furniture layouts are standardized and monitored, individual restaurant owners are responsible for tasks such as hiring, maintaining adequate food supplies, and facility maintenance. [...]

[...] Centralization versus decentralization in multinational companies Introduction 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. [...]