I was thumbing through a business book today and came across a chapter on organizational structures, weighing the pros and cons. So, Centralization delivers strong coordination across the organization, higher degree of control for managers, easy access to economies of scope and scale, and the elimination of duplication across products and services. It does have weaknesses. All is not roses and butterflies. Bureaucracy can get out of control, there are weak incentives amongst teams, and a certain amount of inflexibility can creep into the workforce. For Decentralization, most organizations have high-powered performance incentives, ultimate flexibility, internal competition amongst teams, a high degree of innovation, and a broad skill set in the workforce. Yet, these organizations can duplicate work and struggle to coordinate. Does one win out over the other?
If you look at HP’s stock price from 1981 to 2001, each time they reorganized the stock price went up. Announcing centralization? The stock price increased for three to four years before finding a dip. Announcing decentralization? Well, it turns out the same effect holds true. Either one of two events is happening. Organizational structure is a tool. By continuing to change, you balance the needs of the company. Or, Wall-Street really likes to hear that management is taking a new approach.