McDonald’s and the power in Decentralization

Posted: March 12, 2014 in Economics, Freedom, Leadership
Tags: , , , , , , ,

McDonald's Behind the ArchesSome people believe that more government is better; that they can do things more efficiently and cheaper due to the principle of economies of scale. Some people would know better than that, but still feel the a central government is best to make decisions for society as a whole, because they know what is best for people, and because they can make sure no one person or small group, is taking advantage of everyone else.

Other people understand how this is not the case.

The same thing goes for private enterprise. There are cases where companies have tried to keep all the decisions at the top, while others kept only the major decisions at the top that couldn’t be handled at the lower levels, and left everything else to be done in the local areas.

In the Freedom series from Life Leadership, you learn how a government can’t understand the needs of the individual, but can only see global statistics. It uses a great example. Imagine someone’s arm is burning and needs to be put in ice, while his other arm is freezing and needs to be warmed up. overall the body temperature is average. If a central planner doctor were to look at the overall statistics, without looking at each arm, he would assume there is no problem and do nothing!

The best decisions will always be made by those who can clearly see the situation, and so should be left to the lowest level possible, right down to the individual when the individual can make the decisions.

I’m in the middle of reading McDonald’s: Behind the Arches by John F. Love and came across a section that makes the point clearly. This is from a chapter on McDonald’s rapid expansion.

…as soon as Turner embarked on his massive expansion program, he began boosting McDonald’s regions, increasing the number of regional offices from five in 1967 to eight in 1973. More important, Turner vastly increased the regional manager’s authority…Regional manager’s were given powers nearly equal to presidents of independent regional chains.

In a few years, Turner had replaced Sonneborn’s relatively centralized management style with one of the most decentralized structures in corporate america… decentralizing power actually increased McDonald’s control over expansion. Managers were closer to where the action was and thus could make better informed judgments. Their decisions were tailored to the unique operational problems and growth opportunities of their local markets…Turner notes, “the closer decision making is to the stores and to the marketplace, the better are the decisions that manager’s make.”

Turner, who was president of McDonald’s at the time, understood how a centralized power can’t see the smaller picture clearly; that it can only see big picture stuff. It can’t see all the little details and events going on in each and every town; only those close to the action have a chance of knowing this. He gave the power to those who were able to see the situation, and who actually had the time to look at it.

We all have only 24 hours in a day. So even if you think you can have people in every town reporting to some higher authority who can make final decisions that works for everyone, those people in the higher echelons of power don’t have the time to go through all the individual data to make individual decisions for each case.

If you try making one decision that works for the majority of people, you will find you are still hurting a minority. It would be like dumping water on every city in your country when the 5 most populated cities are on fire. You would waste a lot of resources on the cities that were OK, and probably cause a lot of needless water damage for them.

Do you want your company’s prosperity to grow? Do you want your nation’s prosperity to grow? Put the power and the responsibility as close the individual as possible.

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