JACK MIXNER STRATEGY

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Four assumptions (perhaps, misassumptions) about profit centers and decentralization (Henderson, 282):

1. Implication that absolute level of profit is a measure of profit center management's current performance.
2. Profit can be the measure of divisional performance in a multiunit company.
3. Improving the profit center's profits optimizes the the corporation's profit.
4. Profit centers can be measured and evaluated as if they were separate companies.

This implies that of the two extremes for corporate management of divisions, centralization and decentralization, decentralization is better, when in reality it is better to balance the two.

The first step in solving the riddle is to carefully define an explicit corporate strategy. Corporate strategy, corporate policy, and corporate organization, including the profit centers/divisions, are inseparable (Henderson, 283). Devise a strategy. Then devise the corporate structure.

Each profit center maximizes its own value system. Corporate optimizes the combination of profit centers. This implies two approaches for corporate management: Corporate can closely supervise the operation and internal policy of the profit center, or allow the division to operate on its own. Corporate sometimes decreases the profitability in some centers to optimize the  overall profit of corporate.

Centralization or decentralization implies seven possible degrees of "freedom" (Henderson, 284):

1. Parent is investment portfolio custodian, signifying least local control.
2. Parent acts as Board of Directors for individual operations.
3. Parent additionally provides financial support.
4. Parent actively participates in strategy development.
5. Parent coordinates activity in some key activity like the sales organization.
6. Parent provides detailed policy direction of operations in all activities.
7. Parent makes key operating decisions, for total corporate control.

Decentralization commonalities (Henderson, 284):

• Centralized policy based upon strategy.
• Decentralized operation administration based on complex, not simple, standards.
• Mechanisms of review and communication keep strategy and operating objectives related.
• Quality leadership based upon consensus on strategy and operating standards.

Consensus on strategy and operation standards out in the divisions are seemingly the keys for decentralization to work. Key words: consensus and local standards go together.

One last consideration on decentralization is in order. If we assume traditional organizations determine structure from the top, we also assume that central management aggregates key decisions for senior officers to decide.

Of course, there are other models like the network organization (Hixon, 289). In the networked organization, teams form to solve particular problems, then move on when the problem is resolved. The organization doesn't control so much as empower people to get the job done. The problem here is that networks can't take advantage of scale or perform massive tasks.

The probable best solution is to combine the centralized/decentralized discussion with networks. This means corporate forms networks to solve problems while the decentralized organization continues to function under corporate strategy.

References

Henderson, Bruce D. Profit Centers and Decentralized Management. 1968. In Stern et al. 282.

Hixon, Todd L. Network Organizations. In Stern et al. 289.

Stern, Carl W. and Michael S. Deimler. The Boston Consulting Group on Strategy. John Wiley & Sons. 2006.