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Centralization or Descentralization: Both

Centralization or Descentralization?: Both

Firms that want to stay on top today have a difficult balancing act: They must innovate, but without neglecting efficiency and cost issues.

Innovation is the only answer to keeping a value-adding edge over the rapidly emerging Asian countries. Innovation is also the way forward to solving climate change and energy problems. But innovation doesn’t mean developing only new products, but also new (production) processes, new distribution channels or new customer approaches.

To be innovative you must be creative and have room to move – two highly individual ideals that cannot be realized in large organizations with strict hierarchical structures. However, hierarchies are necessary to manage complex structures while also exercising cost discipline and efficiency. Committed management structures and organizational guidelines are necessary to avoid failing prey to uncontrolled chaos.

Management theory discussions used to be plagued by a core conflict: too much hierarchy smothers innovation, but too little centralism stifles economies of scale and efficiency gains. Put differently, only a high degree of centralization can ensure that efficiency and cost-saving goals are reached. However, growth and market potential targets can be realized only in decentralized structures.

The case examples in our study show that decentralization can drive growth, such as by shortening decision-making channels and allowing for information to be processed more quickly. However, these effects are really only beneficial for the entire enterprise if they can be combined with the advantages of centralization. Current developments such as globalization or new information and communications technologies enable the linking of centralized and decentralized organizational structures. However, at the same time, these technologies make such structures necessary for succeeding against increasingly fierce competition.

(In Spanish)