2. Read the text about centralization and decentralization and then discuss the

questions below.

Alfred Sloan (1874 – 1966) was an outstanding figure in the business world of America. He worked for forty-five years in the general Motors Corporation (GM). From 1923 to 1946, he was Chief Executive of the corporation, and he stayed on as Chairman of the board until 1956. Sloan published an account of his career with the organization, calling his book “My years with General Motors”. In it he described some of the management problems he had had, and how he had dealt with them.

According to Sloan, every large enterprise has to face one major problem. It must decide how much it wishes to centralize or decentralize its business. What are centralization and decentralization? The terms refer to the degree of authority that is given to various levels of management and to the divisions of an organization. Authority may be defined as the right to make decisions, to direct the work of other people and to give instructions. When we talk about centralized and decentralized businesses, we mean the extent to which authority has been passed down – delegated- to lower levels or divisions of an organization.

When an organization is centralized, a limited amount of authority is delegated. If it is decentralized, a greater degree of authority is given to staff and divisions. For example, in a centralized company, Head Office may make most of the decisions concerning recruitment, the purchase of equipment and product lines. It may also be responsible for areas such as advertising, promotion and research and development.

In a decentralized company, the divisions will have wider responsibilities and authority. Divisional managers will, for instance, have authority to purchase expensive equipment and authorize substantial salary increases. In decentralized organizations, more important decisions can be made at lower levels. There are fewer controls from Head Office.

To sum up, a centralized business has a ‘tight’ structure, whereas a decentralized business has a ‘looser’ structure. No enterprise chooses complete centralization or decentralization. In practice, it tries to find a balance between the two forms. The problem for organization is to decide how much decentralization they want, and what kind?

When Alfred Sloan took over the running of General Motors, he inherited a corporation which was already decentralized. The previous Chief Executive, William Durant, had founded the company. Durant brought many businesses into General Motors and gave their managements a lot of independence. Alfred Sloan believed in decentralization and practised it in the corporation. He made sure his division managers (e.g. those in charge of Cadillac, Buick, and Chevrolet) had self-contained divisions. Each handled its own manufacturing, marketing, staff recruitment etc. However, Sloan did not give the divisions complete freedom. He wanted Head Office to coordinate action and keep a measure of control over the units. Therefore, he decided that certain functions would be controlled centrally.

Very early on, he realized that Head Office would have to control finance more tightly. When he arrived, each division controlled its own cash, having its own accounts and paying its own bills. This meant the corporation was getting little direct income. When it had to pay things like taxes and dividends, the treasurer used to ask the divisions for cash. Sometimes, he had to go to a division, first talk about general business matters, and then later on bring up the subject of cash. The division’s staff would often show surprise at the amount asked for, and delay handing it over. Clearly, with that system, cash was never available where and when it was needed in the corporation.

Alfred Sloan set up a new, centralized cash system. Cash accounts were controlled by the financial staff at Head Office. Cash receipts were made to them. And they authorized payments made from the corporation’s accounts. With this system, money could be quickly transferred to units needing it. The central staff also decided how much would be kept in local accounts, to be used by the divisions.

As time went on, Alfred Sloan and his top managers worked out a balance between central control and delegated authority. Head Office controlled things like cash, capital expenditure and stock control. In addition, it controlled the profitability of divisions by developing measures of efficiency. But the divisions had a great deal of autonomy, being responsible for designing, making and marketing the cars.

Nowadays, decentralization is the fashion, the ‘buzz’ word. Believers in decentralization argue along these lines: they say it helps ‘to develop people’ because staff get more responsibility, make more decisions, and so gain experience for later managerial positions. If an organization is too centralized, people become robots - which is demotivating. Decentralization allows top managers to delegate jobs, so these managers will have more time to work on setting goals, planning corporate strategy and working out policies. The strongest argument for decentralization is that, in competitive conditions, the ‘looser’ companies will be more flexible, better able to make quick decisions and to adapt to change.

The best-run companies of the country know how to balance control and delegation. On the one hand, they have a simple structure, generally based on product divisions which also have great autonomy. These divisions have control over functions like product development, purchasing, finance, personnel etc. On the other hand, the center of these excellent companies - top management - provides ‘firm central direction’. It continually stresses the ‘core values’ of the organization, e.g. quality, need for innovation, service, informal communications and so on. These central values provide the context within which staff can be creative, take risks - even fail.

It is normal for people to like independence, to dislike control. The more educated staff are, the more they will want to make decisions, to have authority. However, it is not easy to have more decentralization if the right staff are not available. For example, if you own a chain of stores, it may be difficult to give more authority to employees. The employees may be used to following rules, so they may not be able to take decisions, to show initiative. As one of the experts on organization says, “It is one thing to prescribe diversity, decentralization and differentiation. It is another to manage it”

Comprehension / interpretation