What is decentralization?

Definition of Decentralization

Decentralization refers to a company's top management delegating authority to subunits or segments of the company such as a company consisting of a consumer products division and an industrial division, or a corporation organized into several subsidiary companies.

A benefit of decentralization is having the decision makers closer to the markets 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 for the 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 results in less than optimal profits for the company as a whole.

Examples of Decentralization

A corporation may have several operating businesses each of which is responsible for its revenues and expenses. However, investment decisions for the operating businesses remain centralized. That is, the corporation's executive officers decide which investments will be made in the operating businesses. In this situation, the businesses are referred to as profit centers.

If the operating businesses make their own investment decisions, the businesses are referred to as investment centers.

The production and administrative departments within a company are generally cost centers. Generally, cost centers are responsible only for the costs that the department head can control.