Centralization and Decentralization

Centralization and Decentralization are two modes of working in any organization. In centralization, there is a hierarchy of formal authority for making all the important decision for the organization.

And in decentralization decision making is left for the lower level of organization. Let us learn the difference between centralization and decentralization in detail with their advantages and other factors.

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Centralization and Decentralization

A simple way to understand if an organization is working in a centralized or decentralized manner is by looking at two important aspects:

1. The place of the decision-making authority in the hierarchy of the management i.e. Centralized.
2. The degree of decision-making power at the lower echelons in the organization i.e. Decentralized.

An organization has a greater degree of decentralization if the number of decisions made and functions affected at the lower level are higher.

Further, while decentralization and delegation of authority might seem similar, you must not confuse one with another. A decentralized way of working is more about the philosophy of the organization.

Unlike delegation, it is not just about handing over a part of the authority to a subordinate but a way of approaching the decision-making process in the organization.

Decentralization is a choice, while delegation is a must. Let’s take a quick look at the advantages of centralization and decentralization:

Advantages of Centralization

• The organization can strictly enforce uniformity of procedures and policies.
• It can help in the elimination of overlapping or duplicate activities and save costs.
• The organization has a better chance of utilizing the potential of its outstanding employees.
• It offers a better control over the activities of the organization by ensuring consistency in operations and uniformity in decision-making.

Advantages of Decentralization

• Faster decision-making and better quality of decisions
• Improves the effectivity of managers.
• Offers a democratic environment where employees can have a say in their governance.
• Provides good exposure to mid and lower-level managers and creates a pool of promotable manpower with managerial skills.
• Since managers can see the results of their own actions, they are more driven and have improved morales.

Both centralization and decentralization have their own advantages and disadvantages. Even if an organization is working in a decentralized manner, some functions are usually centralized. Next, let’s look at the factors that determine the degree of decentralization.

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Factors determining the Degree of Decentralization

While the degree of decentralization depends on a wide range of factors which are different for different organizations, here is a common list:

Significance of the decision

Decisions which are costly either in terms of money, goodwill of the company, employee morale and other such decisions which are significant to the organization are centralized at the top-levels of the organization.

Therefore, even in a decentralized organization, these decisions are made in a centralized manner. It is not that high-level managers do not commit mistakes.

However, the enterprise expects them to commit fewer and less-critical mistakes. This is because they are trained, experienced, and have the right information to arrive at the best decision.

From observation, it is evident that the primary factor behind centralizing authority is the weight of responsibility since delegating authority does not imply delegating responsibility.

Size of the Enterprise

The size of the organization is an important factor which determines the degree of decentralization. A larger firm needs more decisions. Also, a large-sized company has numerous departments and levels.

Coordinating all of them and consulting several specialists and executives can take a lot of time, delaying the decision.

And delayed decisions tend to cost more. Segregating the organization into smaller decentralized units enhances efficiency and minimizes costs.

Organizations try to ensure that the size of each unit is such that it is easily manageable and decentralize authority accordingly.

The Attitude and Philosophy of the Management

Decentralization is the dispersal of authority. Therefore, the attitude of senior management plays an important role in the extent and mode of authority dispersal. Usually, senior executives with a traditional mindset are a little skeptical about decentralizing authority.

On the other hand, executives with a rational managerial temperament rely on the participative approach of doing work. These executives try to make the best out of individual initiative and opt for decentralization.

Control Techniques

In most organizations, senior management believes that some vital aspects like the price of the product, credit offered, etc. must have a uniform policy.

And centralization is the best way to achieve this. This desire to control these aspects deters the organization from allowing even the regional offices to make decisions about these aspects.

There is no denying the fact that a uniform policy has many advantages. However, the organization cannot ignore the costs involved in centralized decisions.

Also, low and mid-level managers find their initiatives arrested and see few opportunities to grow within the organization.

Availability of Capable Executives

Many times, senior executives are willing to disperse authority but are unable to find qualified and capable junior managers to do so. This dearth of capable executives can restrict the nature and extent of decentralization.

Further, many organizations train the junior managers to bring them up the curve. Interestingly, decentralization offers many opportunities to impart the training too.

External Environment Influences

Many external forces also play an important role in determining the mode of decentralizing authority. External forces like government control, unions, fiscal policies, etc. are some examples.

In the real world, these factors deter the management of an organization from dispersing authority since these external forces control many factors.

Delegation vs Decentralization

Points	Delegation	Decentralization
Nature	It usually involves two people – a manager and his subordinate.	It involves the entire organization – from the top management to individual departments.
Control	The manager or the delegator controls it.	The control lies with the concerned departments or sections.
Need	All organizations need delegation to get things done. Delegating authority is essential to assign responsibility.	This is an optional mode of working. Organizations can also work in a centralized manner.
Responsibility	The delegator can delegate authority but the responsibility remains with him. The delegator is accountable for the task.	The head of the department is responsible for the activities performed under him. Therefore, responsibility is fixed at the department-level.
Relationship	Creates better superior-subordinate relationships.	Helps in the creation of semi-autonomous units.

 

Solved Question on Centralization and Decentralization

Q1. What is centralization and decentralization in an organization?

Answer:

Centralization and Decentralization are the different modes of working of an organization. In centralization, the higher positions of the management hold the decision-making authority. Further, in decentralization, the management disperses the decision-making authority across the organization and brings it closer to the source of action and information.