As a business expands it eventually reaches the stage where it becomes appropriate to split it up into smaller, more manageable units to decentralise. Reasons may include:
- Size – a large organisation with centralised management become unpracticall
- Nature of work – specialists become necessary to deal with the diverse and complex activities of a business
- Motivation – managers need incentives to perform well
- Uncertainty – volatile market conditions are better coped with by a manager with a smaller, closer, sphere of influence
- Fiscal – profits can, subject to legal restrictions, be diverted in such a way as to minimise tax liabilities
It may well be the case that some degree of decentralisation arises as a result of the way in which a business expands. If the expansion is by take-over of companies that then become subsidiaries within group, a decentralised structure automatically arises.
One condition for a successful decentralisation is that the various divisions should be more or less interdependent of each other. However, in practice, this is unlikely to be the case and a certain amount of inter-divisional trading will take place. A transfer pricing policy is needed if goods and services are passed between divisions.
Two of the main organisational structures are functional or divisionalised, represented as follows: