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Types of Decentralization

There are three approaches to assign authority and responsibility to lower level people in an organization. It is quite possible to provide for decentralization in varying degrees among various departments in the organization. For example, production and sales departments may be decentralized because of the urgency to take quick decisions; finance department may be centralized due to the need to obtain funds for the organization as a whole. Three types of decentralization are discussed below:

1. Profit centers. Under profit center decentralization the organization is first divisional zed on a product basis; each division is given the management and physical tools and facilities it needed to operate as an integrated and self-contained unit. Each division operates on a competitive basis; orders its own materials, schedules its operations and negotiates the sale of its finished products. It is accountable for the profit it earns or the loss it sustains. To use ‘profit centers’ authorities suggest that each one possess:

  1. Operational independence having control over most operational decisions affecting profits (volume, production methods etc.)
  2. Complete freedom to buy and sell in alternative markets both inside and outside the organization.
  3. Separate, identifiable income, expense and assets from the organization so that they can operate independently and calculate their own profit.

Thus, a profit center is a relatively autonomous organizational unit ‘that can be differentiated clearly enough from the rest of the organization so that costs it incurs or revenues it generates can be reasonably accounted for and associated with it.’ However, it is not always easy to find organizational submits independent enough from each other so that they may be almost as different business. One important limitation identified in the profit-center concept is cost. Creation of profit centers demands enormous doses of investment with no guarantee of adequate returns. On the positive side, profit center decentralization provides a strong incentive to divisional management to improve the efficiency of its operations. It is remarked that ‘The division head, instead of merely a production boss, is a manager in every sense of the word; actually, he operates in somewhat the same manner as the head of an independent busi11ess. This gives him the greatest possible encouragement to use every iota of management ability he can command’.

2. Cost expense centres. Where it is difficult to find out revenue with a unit but is relatively easy to determine the costs of operation, cost centres are established. In the case of corporate legal staff or accounting staff it may be quite difficult to determine how much revenue is generated but it can be a cost centre since we can determine the costs necessary to run it. In a cost centre, a manager would be responsible for using resources within the overall cost or budgetary limitations. By keeping the costs under specified limitations he incurs an additional responsibility to provide required support to the rest of the organization.

3. Investment centres. Investment centres are quite common in the case of multi product enterprises like General Motors, General Electric, Hindustan Lever Ltd. etc. In order to measure product performance, decentralization by investment centres is usually advocated and the managerial response – obligations would include responsibilities for the ‘acquisition, use, and disposition of fixed-use resources’.