Decentralisation as the Preferred Structure

Looking back at the evolution of this concept in Drucker’s thinking, it shows a tortuous journey. Drucker originally used the term Decentralisation in Future as an alternative to centralised despotism. He became aware of how it worked in an industrial setting during his studies of GM. There is however some confusion in the description, with Federalism and Decentralisation being used in an interchangeable way and also linked together. To remove the confusion

Decentralisation is used throughout this thesis, as previously recorded. What is clear and what is important is that GM “has become an essay in federalism - on the whole, an exceedingly

successful one” “and further extension of Decentralisation are the answers to most of the problems of modern industrial society” (1946:46).

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Drucker listed eight advantages claimed for Decentralisation: (i) Speed of decision based upon common knowledge; (ii) Absence of divisional conflict; (iii) A sense of fairness prevailing among executives due to the control of politics; (iv) Democratic informal management which encouraged dissent during the formulation period. Once a decision was made it had to be accepted that the ultimate control was with the CEO’s team; (v) There was no elite privileged few; (vi) That large management groups ensure a good supply of experienced leaders; (vii) Objective measurement means that weak performance could be detected; (viii) Patient agreement (as championed by Sloan) of policy evolution, which resulted in managers knowing the reasons for their objectives.

The outcome was the absence of edict management (ibid:47-48). Although there were service staff agencies at Central Office the “divisional manager is under no compulsion to consult or take

their advice” (ibid:54-56). The service staff could only recommend, not ‘lay down policies’.

Despite GM being a model for Decentralisation as identified in Concept its evolution into a fully decentralised corporation was not complete. Two of its very large divisions, Fisher Bodies and Chevrolet, had a Centralised structure and yet managed to be efficient. Drucker attributed their efficiency to the market check of the annual model change. But even Chevrolet had Decentralised its administration. The result had been a very successful ‘speed-up’ of production. While both Fisher and Chevrolet produced as effectively as the Decentralised divisions they failed at one of the imperatives of efficiency in that “they do not discover and develop industrial leaders” (ibid:121 & 124-125). At this stage Decentralisation could be described as Top Management at Central Office agreeing with divisional managers their performance targets. These results were then measured based upon Brown’s cost accounting systems. However, if there was no

relationship between the activities in the divisions of the business then Functional Decentralisation had to be used with its own Top Management (ibid:247, 250 & 255). {What Drucker was also implying was that if, say, the process of the business in a simple sole unit as a quarry operation or a welding shop, then Functional Decentralisation’s devolved authority within these types of units

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was the structure, because there were not any divisions to separate horizontally into

Decentralisation}. By the time that Drucker wrote Society Decentralisation had become even more clearly the preferred structure of the two alternatives. In Practice it was still endorsed and “is fast becoming the norm in the larger companies” (1954:206). But divisions must have their own market, autonomous product and be answerable for performance by their own sets of accounts

For Drucker Decentralisation was endorsed by his case studies. However, there was some tempering of Drucker’s views as Decentralisation and Functional Decentralisation were now complementary. Both had to be used in almost all businesses (corporations) (ibid:202-203). Drucker now accepted that his criticism of GM’s structure in Concept cannot be upheld and that Functional Decentralisation was applicable in small businesses, and in growing businesses, up to the size at which Decentralisation becomes appropriate (ibid:202-203). Drucker described Functional Decentralisation as working better the more that it approached Decentralisation’s delegation of authority in exchange for responsibility.

Drucker identified the criteria for determining the choice of structure. Once “what the business is” had been identified, the choice of structure could be determined by addressing three basic

questions. (i) The enterprise must be organised for business performance; (ii) The structure must not direct efforts towards the wrong results; (iii) The structure must make possible the training and testing of tomorrow’s top managers. The “trying-out” in actual management positions was

imperative because potential could not be the sole qualification for a management appointment. Experience confirms that once appointed removal of a president from an organisation “is well nigh

impossible” (ibid:199-202).

Drucker demonstrated the benefits of Decentralisation through the use of case studies that will be examined later. These demonstrated that its application must be adapted to the business not the

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business to it. The following were the main reasons for Decentralisation becoming the dominant structure: (i) it focused the manager on results; (ii) it removed self deception of unprofitable lines by removing the hiding place of costs in overheads; (iii) MbO became fully effective; (iv) it developed tomorrow’s managers; (v) it tested manager’s competence at a fairly low level.

The rules governing the applicability of Decentralisation were that there must be (i) strong

divisions; (ii) businesses large enough to support management’s needs; (iii) potential for growth in each division. It was a poor organisation that concentrated all mature lines into one division and all those with potential for growth in another; (iv) challenges for managers; (v) each federal unit (division) should work side by side with each other, with its own job, market and products, and be managed as independent businesses. Any joint ventures between divisions should be at the division’s choice (ibid:206-215)

Drucker’s conclusion was that Decentralisation had limitations if its rules were abused and also that the system should be as simple as possible, by having the fewest layers of management (ibid:218). One indication of maladministration was when layers are added. [Idea: Delayering or Re-engineering. For Drucker the ideal was to delegate authority so that responsibility for the decision was taken as low down in the organisation as possible]. In Drucker’s view,

Decentralisation was not the answer to every organisational structure but it was the best concept and could be applied a great deal more (ibid:15). Another structure that Drucker first introduced in Practice was the ‘task force’ team, which was the amalgamation of numerous specialists into a team that could be used within Decentralisation (ibidd:217). Later ‘task force’ teams would become a separate method of organisation, Drucker being amongst the first to recognise them. [Idea: Task force teams could and should be set up within structures for special projects. This anticipates project management].

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When the executive team had set the framework for its work and that of the other members of the organisation by delegation of responsibility, it must clearly reserve for itself “a welfare clause”. This was the right to act in the overall interest of the organisation for the good of all the members even though it might not be in the interest of a particular division (ibid:220). Although arguing for Decentralisation as the preferred structure, Drucker made the point that in the future, businesses may have to adopt different or hybrid structures. As the world changed so do all things, including management. In support of Drucker’s contention Sloan (1964) later wrote that GM’s

Decentralised management model was not to be regarded as ever being a finished product. For Mooney & Reiley Decentralisation was being linked with co-ordination. Sloan was quoted by them to describe what a decentralised organisation is as “a whole divided into a proper number of

parts, each presided over by a chief executive who is held absolutely responsible for that

particular part over which he presides” “…under no circumstances should instructions be given by any, regardless of that authority’s status in the corporation, to that part, except through its duly appointed chief executive” (Mooney & Reiley 1931:509). But for Drucker the cement of the

organisation was integration not co-ordination.