Factors Determining Decentralization

Decentralization, in simple words, is the diffusion of authority throughout the organization. However, how does the organization decide upon the degree of decentralization? In this article, we will look at the 9 factors that determine the degree of decentralization.

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9 Factors that determine the Degree of Decentralization

Size of Organization and its Complexity

If the organization is large and complex, then it has a greater need for decentralization. However, if the organization is relatively simpler and smaller, then creating autonomous units is usually costly. Therefore, the top management makes most of the decisions.

Degree of Decentralization

Are the operations dispersed?

Let’s say that an organization has its production and sales units geographically scattered across multiple locations. In such cases, keeping centralized control over all the processes is very difficult.

Therefore, such organizations tend to opt for decentralization. On the other hand, if an organization has all the units present within the same building, then having centralized control is more effective.

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Degree of Diversification

In the case of companies having multiple diverse product lines, decentralization is necessary as well as beneficial. On the other hand, if the organization desires high standards of standardization, then it needs centralization.

How many competent personnel does the organization have?

An organization can successfully decentralize authority only if it has competent and experienced managers at lower levels. If there is a dearth of such employees in the organization, then decentralization will function in a restricted manner.

Learn more about the Meaning and Importance of Decentralization here in detail.

Top Management’s Outlook

If the top management is conservative and believes in control in the hands of a limited number of people, then it is likely to centralize authority.

On the other hand, if it believes in individual freedom and is comfortable with the authority not being confined to a limited few, then the organization will have a high degree of centralization.

Nature of Functions

Usually, some basic functions in an organization like sales, production, etc. have a higher degree of decentralization.

In comparison, staff functions like personnel, research and development, finance, etc. are less decentralized or even majorly centralized.

Communication System in the Organization

If an organization decides to decentralize authority, then it must ensure that an effective communication system exists. This is necessary for coordinating and controlling the activities of the operational units.

On the other hand, if an organization has an ineffective communications system, then it should opt for centralization.

Further, computerized management information systems have enabled centralized decision-making.

Planning and Control Procedures in the Organization?

If an organization is clear about its objectives and policies, then seniors are more willing to allow their subordinates to make independent decisions.

Remember, decentralization is successful only when there is a good control system in the organization.

This is because the top management can use this system to assess the effectiveness of the decisions that the subordinates make.

Environmental Factors

The environmental factors play a major role in determining the degree of decentralization in an organization.

To give an example, if the business environment of an organization is highly uncertain, the organization might not give a high degree of freedom to operating units.

This is because, in uncertain conditions, this might endanger the existence of the organization itself.

Solved Question on Degree of Decentralization

Q1. What factors play a role in determining decentralization in an organization?

Answer: Some important factors determining decentralization are:

  • The size and complexity of the organization
  • Dispersal of operations
  • Degree of diversification
  • Availability of competent personnel
  • The outlook of the top management
  • Nature of functions of the organization
  • Communication system
  • Planning and control procedures
  • The business environment
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