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THE DANGER OF CENTRALIZING

March 16, 2009

One of a leader’s primary responsibilities is to determine how best to structure the organization. This becomes particularly important when a company owns a number of other companies. How much autonomy should each division have? What areas should the parent company take ownership of? What functions should they relinquish to the division? Philosophically where should the base of power reside? These are important questions whose answers determine the viability of the entire organization.Centralization certainly works in certain organizations. However, history suggests that furniture companies - wholesale and retail - are best run by individuals who are filled with a spirit of entrepreneurism and accountable for the performance of the entire company’s performance not just a few functional areas. These individuals take responsibility and thrive on autonomy and the accountability that comes with it. Structured this way these companies can be more nimble, proactive and responsive to the changing needs and challenges of the marketplace. Their ear is to the ground and their eyes are open and they are able to react quickly. These leaders do not have time for politics and bureaucracy. Their focus and efforts are directed at their customer and improving the performance of their company.

Unnecessary harm has been inflicted and value diminished in the name of centralization. The parent company begins combining back office functions from the different companies to save costs. While this makes sense on paper it can begin an insidious incrementalism that ultimately relocates the power base and decision making further away from the consumer. Initially consolidation may include logistics, accounting or human resources, but because the power base has shifted, and the potent force of inertia, it may eventually include sales, merchandising and marketing. Homogenization of the various companies becomes a real risk. Moreover, it now takes days instead of minutes to make decisions. In time so many people are involved that no one feels responsible.

The furniture industry is not high profit. There is no room for non-value added effort. Politics and bureaucracy that result in slow decision-making and lack of autonomy are all competitive disadvantages. The end result at the division level can be a shredded corporate culture, the consequent loss of identity, and a deteriorating bottom line.

In this scenario, which has been repeated numerous times in our industry, all power moves to the parent company. This results in the number of people at corporate ballooning. Reports are reviewed and spreadsheets are analyzed. Recommendations are made, decisions reached and orders given with little understanding for what is happening on the ground. Real world truths are ignored in favor of ones created by well meaning people who are insulated from reality. The individuals living in the parent company bubble may convince each other they are right and that the division level leaders lack understanding. In truth, it is usually just the opposite. This model risks disconnecting responsibility and accountability and leaving companies bereft of empowered leadership.

History is on the side of the parent company that hires the best leadership team possible for each company. The functional areas within each company should report to them-not to someone at the parent company. The parent company’s role should be to provide counsel and support so that the leadership team has the resources they need to succeed. Many companies would have been better served if they had followed this path.

No structure is appropriate for all companies but there is much evidence that centralizing to reduce costs and “improve” decision-making can be the most expensive decision a furniture company ever makes.