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Decentralization is the process of transferring decision-making powers down the organizational hierarchy, delegationg it to middle and lower managers.

Decentralized organization is one in which formal and decision-making powers are delegated as far down the ladder as possible. Decentralization is one end of the continuum, the opposite is centralization. The degree of decentralization of decision-making powers is an expression of the opinion of senior management about their managers down the ladder. Is an expression of confidence in relation to the skill of lower-ranking managers and staff.

There are horizontal and vertical decentralization.

Vertical decentralization involves distribution of decision-making powers among line managers. In this area we are dealing with issues concerning: how to move the decision-making powers to lower levels of management, how to have control over the lower levels and how far to move down the hierarchy. Example of deep decentralization is converting production facilities in the company to profit centers. The powers of the managers of such undertakings is extended and they are no longer responsible only for the day-to-day operation of the production, but for the long-term profitability of production of particular type of products. It forces managers to make in-depth economic analysis, analysis of market issues and sales, development of the product and a sound investment policy. Executives control such units through assessment of financial plans, accepting investment, research and development plans.

Decentralization allows for better adaptation to local needs in a changing market environment. Effective use requires that the following conditions are met:

  1. Qualified employees and managers shall be self-reliant.
  2. Coherent system of planning and control for all parts of the organization should be established.
  3. The financial situation of the organizational unit influencing the level of wages depends on the performance measured by synthetic economic results.
  4. Lower levels of management are trained and expect to enhance their decision-making powers.

Factors that determine the actual extent of decentralization in the enterprise are:

  • complexity and uncertainty of the environment,
  • history of the organization,
  • nature of the decisions taken,
  • abilities of lower-ranking managers.