What is decentralization?

Decentralization refers to a company's top management delegating authority to subunits of the company. Subunits include divisions, subsidiaries, profit centers, investment centers, and so on.

The extent of decentralization varies. For example, a profit center is likely to have authority to make decisions involving revenues and expenses, but will not have authority to make investment decisions or enter into banking relationships.

A benefit of decentralization is having the decision makers closer to the markets in order to make better and faster decisions. Another benefit of decentralization is having more individuals share the work involved in decision making. This in turn provides excellent training and development of future leaders of the company.

A disadvantage of decentralization occurs if a subunit makes a decision that is good for the subunit's financial results, but it means less than optimal results for the company as a whole.