What are Centralization and Decentralization?

Centralization and Decentralization

Centralization refers to the tendency to withhold a larger part of formal authority at higher echelons of the management hierarchy. Thus, a larger number of decisions more important to them are made by those occupying higher positions in the organization. On the other hand, the larger part of the authority is delegated down the levels of management so that decisions are made as near the source of information and action as possible, such a tendency and characteristic in the organization is described as decentralization. The place of decision-making authority in the management hierarchy and the degree of the decision-making power at lower echelons of the organization are the two important tests used to determine whether the mode of working is centralized or decentralized in the organization. The greater the number of decisions made and the more the functions affected by decisions at lower levels, the greater will be the degree of decentralization.

Decentralization should not be confused with a delegation of authority. Decentralization is basically concerned with the attitude and philosophy of the organization and management. It is not merely a process involving handing over a part of the authority to the subordinates. Delegation is a process and decentralization is the situation produced by a larger delegation of authority down the levels of the organization. Moreover, a company cannot do without delegation, i.e., a delegation of authority is essential in as much as no organization is possible without delegation. Decentralization is not of that much compulsion to the process of the organization. Thus, there may be delegation without there being decentralization.

Advantages of Decentralisation

Advantages of decentralization become the limitations of centralization.

(i) Decentralisation makes for quick decisions and improves the quality of the decisions by pushing decision-making closest to the situation.

(ii) Decentralisation helps improve the effectiveness of managers. The development of self-reliant managers is encouraged. Every manager knows what he is expected to do. Good managers are tested and can be encouraged, whereas weak managers can be counseled and reprimanded.

(iii) Democratisation of management is yet another advantage of decentralization. Those who are governed can assert their voice and have a share in that governance.

(iv) Decentralisation provides actual work experience to a large number of middle and lower managers and thus creates a reservoir of promotable managerial manpower.

(v) Improved morale of personnel is another great advantage of decentralization. Managers at different levels and semi-autonomous divisions are able to see by themselves the results of their own actions and ascertain their role and success.

Advantages of Centralisation

Advantages of centralization are largely absent in a decentralized organization and they become limitations of decentralization.

(i) Uniformity of policy and procedure can strictly be enforced since decisions and controls are largely centralized.

(ii) Centralisation helps to eliminate overlapping or duplicate activities and thus affects sufficient cost savings.

(iii) Centralisation helps in fuller utilization of talents of outstanding executives for enterprise as a whole.

(iv) Centralisation ensures consistency in operating and uniformity in the decision and consequently, helps to retain substantial control over activities of the enterprise.

Decentralization is not an easy process. Both centralization and decentralization have their relative merits and limitations. Evidently, it is necessary to consider each in balance with the other. Even in a decentralized company, certain functions are invariably centralized. Moreover, some tasks cannot be decentralized. Thus compulsions of trade unions, corporate laws, or financial considerations may well force a company to centralize such activities.