Advocates of more-centralized decision making argue that decentralizing is costly for the following reasons:
LEADS TO SUBOPTIMAL DECISION MAKING. If subunit managers do not have the necessary expertise or talent to make major decisions, the company, as a whole, is worse off because its top managers have relinquished their responsibility for doing so. Even if subunit managers are sufficiently skilled, suboptimal decision making—also called incongruent decision making or dysfunctional decision making—occurs when a decision’s benefit to one subunit is more than offset by the costs to the organization as a whole. This is most prevalent when the subunits of the company are highly interdependent, such as when the end product of one subunit is used or sold by another subunit. For example, suppose Sony’s marketing group receives a rush order for additional PS4 Pro PlayStation systems in Australia following the release of popular new games. A manufacturing manager in Japan who is evaluated on the basis of costs may be unwilling to arrange this rush order because altering production schedules invariably increases manufacturing costs. From Sony’s viewpoint, however, supplying the consoles may be optimal, both because the Australian customers are willing to pay a premium price and because the current shipment is expected to stimulate future orders for other Sony games and devices.
LEADS TO UNHEALTHY COMPETITION. In a decentralized setting, subunit managers may regard themselves as competing with managers of other subunits in the same company as if they were external rivals. This pushes them to view the relative performance of the subunit as more important than the goals of the overall company. Consequently, managers may be unwilling to assist other subunits (as in the Sony example) or share important information. The 2010 congressional hearings on the recall of Toyota vehicles revealed that it was common for Toyota’s Japan unit to not share information about engineering problems or reported defects between its United States, Asian, and European operations. Toyota has since asserted that it will change this dysfunctional behavior.
RESULTS IN DUPLICATION OF OUTPUT. If subunits provide similar products or services, their internal competition could lead to failure in the external markets. The reason is that divisions may find it easier to steal market share from one another by mimicking each other’s successful products, rather than those of competing firms. Eventually, this leads to confusion in the minds of customers and the loss of each division’s distinctive strengths. A classic example is General Motors, which eventually dissolved its Oldsmobile, Pontiac, and Saturn divisions. Similarly, Condé Nast Publishing’s initially distinct food magazines Bon Appétit and Gourmet eventually ended up chasing the same readers and advertisers, to the detriment of both. Gourmet magazine stopped publication in November 2009.*
RESULTS IN DUPLICATION OF ACTIVITIES. Even if the subunits operate in distinct markets, several individual subunits of the company may undertake the same activity separately. In a highly decentralized company, each subunit may have personnel to carry out staff functions such as human resources or information technology. Centralizing these functions helps to streamline and use fewer resources for these activities and eliminates wasteful duplication. For example, ABB of Switzerland, a global leader in power and automation technology, is decentralized but has generated significant cost savings by centralizing its sourcing decisions across business units for parts, such as pipe pumps and fittings, as well as engineering and erection services. Having subunits share services such as information technology and human resources is becoming popular with companies because it saves 30–40% of the cost of having each subunit purchase these services on its own.