The terms centralization and decentralization, however, are used to give various connotations. The semantic variations range from administrative, physical and functional centralization to decentralization.
Centralization and decentralization describe the manner in which decision-making responsibilities are divided among managers at different levels of managerial hierarchy.
Centralization is said to be a process where the concentration of decision making is in a few hands. All the important decision and actions at the lower level, all subjects and actions at the lower level are subject to the approval of top management. According to Allen, “Centralization” is the systematic and consistent reservation of authority at central points in the organization. The implication of centralization can be:
- Reservation of decision making power at top level.
- Reservation of operating authority with the middle level managers.
- Reservation of operation at lower level at the directions of the top level.
Under centralization, the important and key decisions are taken by the top management and the other levels are into implementations as per the directions of top level. For example, in a business concern, the father & son being the owners decide about the important matters and all the rest of functions like product, finance, marketing, personnel, are carried out by the department heads and they have to act as per instruction and orders of the two people. Therefore in this case, decision making power remain in the hands of father & son.
On the other hand, Decentralization is a systematic delegation of authority at all levels of management and in all of the organization. In a decentralization concern, authority in retained by the top management for taking major decisions and framing policies concerning the whole concern. Rest of the authority may be delegated to the middle level and lower level of management.
The degree of centralization and decentralization will depend upon the amount of authority delegated to the lowest level. According to Allen, “Decentralization refers to the systematic effort to delegate to the lowest level of authority except that which can be controlled and exercised at central points.
Decentralization is not the same as delegation. In fact, decentralization is all extension of delegation. Decentralization pattern is wider is scope and the authorities are diffused to the lowest most level of management. Delegation of authority is a complete process and takes place from one person to another. While decentralization is complete only when fullest possible delegation has taken place. For example, the general manager of a company is responsible for receiving the leave application for the whole of the concern. The general manager delegates this work to the personnel manager who is now responsible for receiving the leave applicants. In this situation delegation of authority has taken place. On the other hand, on the request of the personnel manager, if the general manager delegates this power to all the departmental heads at all level, in this situation decentralization has taken place. There is a saying that “Everything that increasing the role of subordinates is decentralization and that decreases the role is centralization”. Decentralization is wider in scope and the subordinate’s responsibility increase in this case. On the other hand, in delegation the managers remain answerable even for the acts of subordinates to their superiors.
Implications of Decentralization
- There is less burden on the Chief Executive as in the case of centralization.
- In decentralization, the subordinates get a chance to decide and act independently which develops skills and capabilities. This way the organization is able to process reserve of talents in it.
- In decentralization, diversification and horizontal can be easily implanted.
- In decentralization, concern diversification of activities can place effectively since there is more scope for creating new departments. Therefore, diversification growth is of a degree.
- In decentralization structure, operations can be coordinated at divisional level which is not possible in the centralization set up.
- In the case of decentralization structure, there is greater motivation and morale of the employees since they get more independence to act and decide.
- In a decentralization structure, co-ordination to some extent is difficult to maintain as there are lot many department divisions and authority is delegated to maximum possible extent, i.e., to the bottom most level delegation reaches. Centralization and decentralization are the categories by which the pattern of authority relationships became clear. The degree of centralization and de-centralization can be affected by many factors like nature of operation, volume of profits, number of departments, size of a concern, etc. The larger the size of a concern, a decentralization set up is suitable in it.
Benefits of Centralization
1. Facilitating Personal Leadership. Personal leadership can be a potent influence in the success of a small organization and during its early growth stages. The success and survival of the small, young enterprise in the competitive market depends upon aggressiveness, singleness of purpose, and flexibility. Under a talented and dynamic leader, centralization in small organization may result in quick decisions, enterprising and imaginative action, and high mobility.
2. Providing Integration. Certain amount of centralization is necessary to unify and integrate the total operation of the enterprise. Some sort of central direction is required to keep all parts of the organization moving harmoniously together towards a common objective. Thus, it acts as a binding force on the various parts of the organization.
3. Uniformity of Action Centralization brings uniformity in all actions in the organization. Thus, to the extent that the organization wishes all its units to do the same thing in the same way or the same time, there must be centralization of appropriate decisions.
4. Handling Emergencies. When emergency decisions affecting all the units of the organization are to be taken, centralization is necessary. The more acute emergency, or the more acute competition requires greater centralized decision-making.
5. Other Benefits. Besides, centralization minimizes duplication of work and wastages requires easier control, and makes communication easier.
However, these advantages of centralization are limited in certain circumstances and particularly in smaller organizations. A stage comes when decentralization becomes desirable to achieve its advantages and where the limitation of centralization come in the way of successful organizational functioning.
Benefits of Decentralization
1. Reducing Burden to Top Executives. Decentralisation is necessary for solving the problems of expanding organisations. It is the means by which the chief executive can extend his leadership over a giant organisation, when the chief executive makes operating decisions and with problems of immediate urgency, he finds it almost impossible to adopt the relaxed and contemplative point of view necessary for planning and thinking ahead. Decentralisation relieves this pressure on the chief executive an provides him time to think for the future and to make plans accordingly.
2. Facilitating Diversification. Decentralisation can facilitate the growth and diversification of product lines. Divisionalization facilitates diversification an former is successful under decentralisation. For under decentralisation, each product line is treated as separate unit and proper emphasis on all important matters such as present position, future prospects, an comparative efficiency, can be given.
3. Ensuring Marketing Innovations. Customers require satisfaction in respect of supply of qualitative products, regularity of supply, and at cheaper rates. Marketing innovations ensure better customer satisfaction. Each organisation has to carry on these marketing innovations for its existence and growth. In decentralized organisation structure, higher level people get much time for the creativity and innovations. The impact of decentralisation on both product and market has proved by the various organisations.
4. Motivating Mangers. Various research studies have shown that we organisation structure itself can influence the people within the organisation. The extent to which the organisation facilities participation, communication, delegation, mutual interaction, and interdependence, motivates people for higher productivity. Decentralization tends to emphasise those desirable characteristics in whatever type of structure it is found.
5. Encouraging Development of Managers. Managers are made, not born and decentralisation is one of the best methods of developing managers in the organisations. Other methods of management development have their own contributions in this field. However, giving managers a management job to do and to delegate authority for decision-making make them more mature and competent and broad-based. The problem of succession is overcome this way and the future growth and success of the organisation are ensured as most organisations find lack of managerial talent a limiting factor in growth. Perhaps, the necessity of management development is one of the compelling reasons for decentralisation.