Decentralization in a business environment is the shifting of responsibility and authority away from corporate headquarters and down into the organization. This may mean that decision making is shifted to division heads, or further down to department managers or individual employees. The extent of decentralization can vary substantially. For example, the ability to hire and fire may be pushed down to the department managers, while the company president reserves the right to approve expenditures for more expensive fixed assets, as well as to spin off subsidiaries or acquire other entities.
The decentralization concept is particularly effective in highly competitive environments, where decision making must be immediate in order to react to local conditions. There is no time to prepare a business case and run it up through the corporate hierarchy for a decision. Instead, the ability to shift assets, hire and fire, and set local strategy is settled upon the local management team.
Decentralization is less necessary in monopoly or duopoly situations, where there is little change in the competitive environment for long periods of time. In this situation, a small group of senior managers may be more effective in running an organization.