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Centralization
Centralization is the degree to which decision-making authority is concentrated
at higher levels in an organization. In centralized companies, many important
decisions are made at higher levels of the hierarchy, whereas in decentralized

companies, decisions are made and problems are solved at lower levels by employees
who are closer to the problem in question.
As an employee, where would you feel more comfortable and productive? If
your answer is “decentralized,” you are not alone. Decentralized companies give
more authority to lower-level employees, resulting in a sense of empowerment.
Decisions can be made more quickly, and employees often believe that decentralized
companies provide greater levels of procedural fairness to employees. Job candidates
are more likely to be attracted to decentralized organizations. Because centralized
organizations assign decision-making responsibility to higher-level managers, they
place greater demands on the judgment capabilities of CEOs and other high-level
managers.
Many companies find that the centralization of operations leads to
inefficiencies in decision making. For example, in the 1980s, the industrial equipment
manufacturer Caterpillar suffered the consequences of centralized decision making.
At the time, all pricing decisions were made in the corporate headquarters in Peoria,
Illinois. This meant that when a sales representative working in Africa wanted to give
a discount on a product, they needed to check with headquarters. Headquarters did
not always have accurate or timely information about the subsidiary markets to make
an effective decision. As a result, Caterpillar was at a disadvantage against
competitors such as the Japanese firm Komatsu. Seeking to overcome this
centralization paralysis, Caterpillar underwent several dramatic rounds of
[1]
reorganization in the 1990s and 2000s.
However, centralization also has its advantages. Some employees are more
comfortable in an organization where their manager confidently gives instructions
and makes decisions. Centralization may also lead to more efficient operations,
[2]
particularly if the company is operating in a stable environment.
In fact, organizations can suffer from extreme decentralization. For example,
some analysts believe that the Federal Bureau of Investigation (FBI) experiences
some problems because all its structure and systems are based on the assumption that
crime needs to be investigated after it happens. Over time, this assumption led to a
situation where, instead of following an overarching strategy, each FBI unit is
completely decentralized and field agents determine how investigations should be
pursued. It has been argued that due to the change in the nature of crimes, the FBI
needs to gather accurate intelligence before a crime is committed; this requires more
[3]
centralized decision making and strategy development.
Hitting the right balance between decentralization and centralization is a
challenge for many organizations. At the Home Depot, the retail giant with over
2,000 stores across the United States, Canada, Mexico, and China, one of the major
changes instituted by former CEO Bob Nardelli was to centralize most of its
operations. Before Nardelli’s arrival in 2000, Home Depot store managers made a
number of decisions autonomously and each store had an entrepreneurial culture.

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