Every organization must establish whether its decision-making policies are centralized or decentralized.  Highly centralized companies tend to have more bureaucratic traits, while highly decentralized companies tend to appear more out of control.  Both extremes appear engulfed with inefficiencies and waste.  High performance work systems seem to have more decentralized decision-making features, yet their culture, formed around their philosophy and values, is highly centralized.  Creating a centralized philosophy and value system allows employees to become more empowered to make their own decisions, leading to decentralization.

            Centralization versus decentralization is an issue of control.  Top executives make many decisions in a centralized organization and convey the decisions to managers at lower levels, creating a top-down management style.  All divisions and locations are expected to adhere to policies and procedures approved by top-level managers.  While this may seem like all employees are expected to conform to one way of thinking, stifling creative problem solving, centralization creates streamlined processes and allows the entire organization to utilize the same resources throughout the company.  This can create process efficiency, but centralization typically does not allow employees to make and implement their own decisions without approval from levels higher up. 

            Decentralization is characterized by relatively few layers of management, with few centralized policies and procedures.  Each group, whether a division, location, or team, creates its own practices based mostly on the organization’s core philosophy and values.  This may seem inefficient since each process is reproduced multiple times and employees require additional training when trained resources are available within the company already.  The use of decentralization empowers employees to solve their own problems, the ones to which they are the closest.  This theory says that workers who are most intimate with the problems are the most qualified to fix them.  While decentralization allows top management to have more time to strategize at the highest company level since they are not inundated with everyday problems, it may also allow employees to abandon the company’s core values.

            The organizations portrayed in O’Reilly and Pfeffer’s book, Hidden Value[1], tend to use a hybrid of centralized and decentralized forms of management, though decision-making is usually more decentralized.  The SAS Institute, for instance, appears to lean towards a more centralized form of management.  The company is seen as paternalistic, providing many benefits for workers.  Many things in the employees’ lives are provided so they can concentrate on performing their jobs without worrying about outside influences.  While this may seem like a highly centralized company, the actual decision-making process is more decentralized.  There are only three or four layers of workers and employees are encouraged to manage their own departments with little interference from top executives[2].  Many worker decisions are made for them so they can concentrate on the strategic aspects of their job.

            AES, in contrast, has no top management strategy.  It dictates adherence to four core values, but lets individual locations decide what practices to use.  There is no formal human resources department, and employees are encouraged to arrange for training when faced with a topic they know little about.  Work groups and locations are encouraged to make decisions regarding every aspect of their business.  They manage revenue, control operations, and utilize projects that will have a direct impact on their work.  This form of decision-making allows AES to thrive in a global environment while remaining a company with a common mission and set of values[3]. 

            With a mixture of centralized and decentralized forms of management, organizations can achieve desired results.  Employees are able to make decisions, thus feeling that they have an individual impact on the company.  This feeling of contribution and ownership encourages employees to perform to higher standards, resulting in a high performance work system.  While keeping the core values defined with practices aligning the values with the culture, employees are able to make decisions that are consistent with the expectations of top management.  The centralized culture leads to decentralized decision-making.

In organizations where employees are valued for their knowledge and skills, workers tend to be empowered to make decisions that significantly affect the company.  This leads companies to practice a more decentralized form of decision-making.  Even though larger organizations may have more centralized practices to help encourage a culture which adheres to the company’s philosophy and values, this only helps to allow decision-making to be pushed down to lower levels of management, and even to front-line workers.  The workers, knowing the defined mission of the company, are able to make decisions consistent with the core values.  This allows top executives to be comfortable with the decisions that managers and employees make rather than relying on close supervision that dictates end results. 

             

 

 



[1] O’Reilly, Charles A. and Jeffrey Pfeffer. Hidden Value. (Boston:  Harvard Business School Press, 2000).

[2] O’Reilly, Charles A. and Jeffrey Pfeffer. Hidden Value. (Boston:  Harvard Business School Press, 2000). 99-120.

[3] O’Reilly, Charles A. and Jeffrey Pfeffer. Hidden Value. (Boston:  Harvard Business School Press, 2000). 151-174.