'Decentralisation is an optional policy.' Explain why an organisation would choose to be decentralised.

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Q.'Decentralisation is an optional policy.' Explain why an organisation would choose to be decentralised.

Uttarakhand UbseTextbookSubjective· 3mImportance★★★★★

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Concept understanding — Organizational Structure Types

Let’s begin with something you already know. Think of a school. There is a principal, vice-principals, heads of departments, teachers, and students. If every teacher reported directly to the principal on every small matter, the principal would be overwhelmed and nothing would get done. So the school creates a chain: teachers report to their HOD, HODs to the vice-principal, and the vice-principal to the principal. That arrangement of who reports to whom, who takes decisions, and how work flows — that is an organisational structure.

In business, an organisational structure is the formal system of task and reporting relationships that coordinates and motivates employees so they work together to achieve company goals. It answers two basic questions: Who does what? and Who reports to whom?

Why does structure matter?

A good structure prevents confusion, duplication of work, and delays. It clarifies authority (the right to decide) and responsibility (the duty to perform). Without structure, a growing organisation becomes chaotic — people step on each other’s toes, decisions get stuck, and accountability vanishes.

Important

Organisational structure is the backbone of coordination. It determines how strategy is executed. NCERT emphasises that structure leads to stability and efficiency in operations.

The two fundamental types

Every organisational structure is a variation of two basic designs: functional and divisional. NCERT presents these as the primary types.

1. Functional Structure

Here, the organisation is divided into departments based on the functions or activities performed — marketing, finance, production, human resources, and so on. All marketing people sit together under one head; all finance people under another.

Advantages: Specialisation improves efficiency. Each department develops deep expertise. Supervision is easier because the manager knows the work. Economies of scale are possible (e.g., one central purchasing department for the whole company).
Disadvantages: Departments can become silos — they focus only on their own goals and lose sight of the overall company objective. Coordination across functions becomes slow. Decision-making gets centralised, which may delay responses to change.

Note

Functional structure works best when the organisation has a single product or a narrow product line and operates in a stable environment. Think of a small manufacturing firm making only one type of soap.

2. Divisional Structure

Here, the organisation is divided into semi-autonomous units or divisions, each responsible for a product, a geographic region, or a customer group. Each division contains its own set of functions (its own marketing, its own finance, its own production). A large company like Hindustan Unilever has separate divisions for soaps, detergents, foods, and personal care.

Advantages: Each division can focus completely on its product or market, leading to faster response to changes. It is easier to measure the performance of each division. Managers develop a broad, general management perspective.
Disadvantages: Duplication of resources — each division has its own HR, its own accounts, etc., which raises costs. There can be unhealthy competition between divisions for company resources. Coordination across divisions becomes a challenge for top management.

Important

NCERT states that divisional structure is suitable when an organisation has multiple products, diverse markets, or geographically spread operations. It promotes accountability because each division head is responsible for profit or loss.

A quick comparison

Feature	Functional Structure	Divisional Structure
Basis of grouping	Functions (marketing, finance, etc.)	Products, regions, or customers
Specialisation	Functional expertise	Product/market expertise
Coordination	Across functions (slower)	Within division (faster)
Cost	Lower (no duplication)	Higher (duplication of functions)
Best for	Single product, stable environment	Multiple products, dynamic environment

Beyond the basics: other types you may encounter

NCERT also mentions two other forms, though they are less common as primary structures:

Matrix Structure: A hybrid where employees report to two bosses — a functional manager and a project/product manager. It combines the strengths of functional and divisional forms but can create confusion over authority. Used in organisations like NASA or consulting firms.
Network Structure: A relatively modern form where the core firm outsources major functions (manufacturing, distribution, etc.) to separate organisations and coordinates them from a small headquarters. Common in the fashion and electronics industries.

A final thought

There is no “best” structure. The right structure depends on the organisation’s size, strategy, technology, and environment. A small startup may begin with a simple functional structure; as it grows and diversifies, it may shift to a divisional or matrix form. NCERT puts it clearly: structure follows strategy. The goal is always to align the way people work with what the organisation needs to achieve.

Decentralisation is not mandatory for any organisation; it is a deliberate policy choice that top management adopts when they want to empower lower levels, speed up decision-making, and develop future leaders.

To understand why an organisation would choose to be decentralised, we first need to see what decentralisation means in the context of organisational structure. Every organisation, from a small shop to a giant corporation, must decide where authority sits. In a centralised structure, most decisions are made by a few people at the top. In a decentralised structure, authority is systematically pushed down to middle and lower levels of management. The NCERT textbook makes it clear that decentralisation is not a compulsion — it is an "optional policy." No law or rule forces a company to do it. So why would any manager voluntarily give away power?

The first and most compelling reason is speed and efficiency in decision-making. In a centralised setup, every small problem must travel up the chain of command, get approved, and then travel back down. This takes time. In a fast-moving business environment — think of a retail chain responding to a sudden change in customer preference — that delay can mean lost sales. Decentralisation places decision-making authority at the point of action. The branch manager who sees the customer every day can decide on the spot. This reduces the burden on top management and allows the organisation to respond quickly to local conditions.

A second major reason is development of managerial talent. If all decisions are made at the top, people in middle and lower management never learn to decide. They become order-takers, not leaders. Decentralisation forces them to take responsibility, make choices, and face the consequences. This is how an organisation builds its future leaders. The NCERT textbook emphasises that decentralisation acts as a training ground for managers. Without it, there would be no one ready to step into senior roles when the current leaders retire or leave.

Third, decentralisation leads to better motivation and job satisfaction. When employees feel they have a say in how their work is done, they take ownership. A salesperson who can offer a discount to close a deal feels empowered, not micromanaged. This sense of autonomy often leads to higher morale and lower turnover. Decentralisation also develops initiative among subordinates — people are more likely to suggest improvements when they know their ideas will be acted upon, not just forwarded to someone who never replies.

Note

Decentralisation does not mean top management abdicates control. It means control is exercised through results and performance reports, not through constant approval-seeking. In a decentralised setup, personal supervision is replaced by other forms of control such as return on investment, and top managers step in mainly for major policy matters rather than routine decisions.

Fourth, there is the practical reason of managing growth and complexity. As an organisation grows — adding new products, new regions, new customer segments — it becomes impossible for a handful of people at the top to know everything. A centralised structure becomes a bottleneck. Decentralisation allows the organisation to divide itself into manageable units, each with its own decision-making authority. This is why large companies like Hindustan Unilever or Tata Group operate with highly decentralised structures — each division or brand functions almost like its own company, while still reporting to the corporate centre.

Important

As the chapter stresses, decentralisation must always be balanced with centralisation in areas of major policy decisions. In practice, every organisation has a mix of both. The choice to decentralise is about finding the right balance — pushing authority down where it helps, but keeping control where it is needed for coordination and strategic direction.

Finally, decentralisation helps in better control and accountability. This might sound counterintuitive — how does giving away power improve control? The answer lies in the fact that when authority is delegated, performance can be measured more clearly. If a regional manager has full authority over her region's sales and marketing, she cannot blame someone else if targets are missed. Decentralisation creates clear profit centres or responsibility centres, making it easier to evaluate performance and take corrective action.

✓Final answer

In short, an organisation chooses decentralisation because it speeds up decisions, develops future managers, motivates employees, handles growth, and creates clearer accountability — all while remaining an optional policy that top management adopts only when the benefits outweigh the loss of direct control.

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Q.'Decentralisation is an optional policy.' Explain why an organisation would choose to be decentralised.

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