Centralization and decentralization. Alfred Sloan’s view on this major management problem

Let me introduce myself. My name is …

The topic of my presentation today is “Centralization and decentralization. Alfred Sloan’s view on this major management problem”.

The main points of this presentation are as follows:

§ Definitions of key-words: to centralise, to decentralise, authority, to delegate, autonomy

§ Alfred Sloan’s views

§ Centralization vs. Decentralization

I would like to begin with the definitions of key-words of the topic, suggested by Longman Business English Dictionary:

to centralise is to organize the control of a company, organization, or country so that one central group has power and tells people in other places what to do;

to decentralise meansthat if a large company, organization, or industry decentralizes or is decentralized, responsibility, services, or jobs are moved away from a central place to several different smaller places;

authority has several meanings:

1 an official organization which controls a particular activity and checks that the rules and laws relating to it are being obeyed;

2 the authorities [plural] - the organizations that are in charge of a particular country or area or a particular activity;

3 [uncountable] the power that a person or organization has because of their official or legal position;

to delegate is to give part of your power or work to someone else, usually someone in a lower position than you (delegate something to somebody) or to choose someone to do a particular job, or to be a representative of a group (delegate somebody to do something);

autonomy means the right of self-government or management of one’s own affairs, especially of a state or group within a country.

Firstly, I would like to make a few remarks concerning Alfred Sloan.

Alfred Sloan (1874-1966) was an outstanding figure in the business world of America. He worked for forty-five years in the General Motors Corporation (GM). From 1923 to 1946, he was Chief Executive of the corporation, and he stayed on as Chairman of the Board until 1956. In 1963, Sloan published an account of his career with the organisation, calling his book “My Years with General Motors”. In it he described some of the management problems he had had, and how he had dealt with them.

According to Sloan, every large enterprise has to face one major problem. It must decide how much it wishes to centralise or decentralise its business. What a decentrahsation and decentralisation? The terms refer to the degree of authority that is given to various levels of management and to the divisions of an orgariisation. Authority may be defined as the right to make decisions, to direct the work of other people and to give instructions. When we talk about centralised and decentralised businesses, we mean the extent to which authority has been delegated to lower levels or divisions of an organisation.

When an organisation is centralised, a limited amount of authority is delegated. If it is decentralised, a greater degree of authority is given to staff and divisions. For example, in a centralised company, Head Office may make most of the decisions concerning recruitment, the purchase of equipment and product lines. It may also be responsible for areas such as advertising, promotion and research and development.

In a decentralised company, the divisions will have wider responsibilities and authority. Divisional managers will, for instance, have authority to purchase, expensive equipment and authorise substantial salary increases. In decentralised organisations, more important decisions can be made at lower levels. There are fewer controls from Head Office.

To sum up, a centralised business has a “tight” structure, whereas a decentralised business has a “looser” structure.

No enterprise chooses complete centralisation or decentralisation. In practice,.it tries to find a balance between the two forms. The problem for organisations is to decide how much decentralisation they want, and what kind?

When Alfred Sloan took over the running of General Motors, he inherited a corporation which was already decentralised. The previous Chief Executive, William Durant, had founded the company. Durant brought many businesses into General Motors and gave their managements a lot of independence. Alfred Sloan, believed in decentralisation and practised it in the corporation. He made sure his division managers (e.g. those in charge of Cadillac, Buick and Chevrolet) had self-contained divisions. Each handled its own manufacturing, marketing, staff recruitment etc. However, Sloan did not give the divisions complete freedom. He wanted Head Office to coordinate action and keep a measure of control over the units. Therefore, he decided that certain functions would be controlled centrally.

Very early on, he realised that Head Office would have to control finance more tightly. When he arrived, each division controlled its own cash, having its own accounts and paying its own bills. This meant the corporation was getting little direct income. When it had to pay things like taxes and dividends, the treasurer used to ask the divisions for cash. Sometimes, he had to go to a division, first talk about general business matters, and then later on bring up the subject of cash. The division's staff would often show surprise at the amount asked for, and delay handing it over! Clearly, with, that system, cash was never available, where and when it was needed in the corporation.

Alfred Sloan set up a new, centralised cash system. Cash accounts were controlled by the financial staff at Head Office. Cash receipts were made, to them. And they authorized payments made from the corporation's accounts. With this system, money could be quickly transferred to units needing it. The central staff also decided how much would be kept in local accounts, to be used by the divisions.

As time went on, Alfred Sloan and his top managers worked out a balance between central control and delegated authority. Head Office controlled things like cash, capital expenditure and stock control. In addition, it controlled the profitability of divisions by developing measures of efficiency. But the divisions had a great deal of autonomy, being responsible for designing, making and marketing the cars.

Thank you for attention!

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