Centralization and Decentralization – Meaning, Definitions, Merits and Demerits (BBA/MBA Notes)

Posted on Jun 3 2020 - 11:20pm by admin

Decentralization

In modern terms decentralization is treated as ‘more freedom’ or ‘less authorization’. It is taken as both a managerial philosophy and techniques. Decentralization is the result of delegation.
It can also be said that decentralization suggests taking a greater number of decisions at lower levels without the prior permission of the higher level authorities.

Definitions

According to Allen
Decentralization applies to the systematic delegation of authority in an organization wide context.

According to Koontz and O’Donnell
Decentralization of authority is fundamental phase of delegation.

Thus, centralization refers to the reservation of authority at the top level of the organization and decentralization refers to systematic delegation of authority in the organization. However, there can neither be absolute centralization nor there can be absolute decentralization. The concepts of centralization and decentralization are two extreme points in the matter of distribution of authority in the organization. In between these two extremes points, there may be continuum of authority distribution.

Factors Determining Degree of Decentralization

The basic questions that arise while designing the organization structure is: how much to decentralize the authority? What to decentralize? Is it necessary to decentralize? Following factors affect the level of decentralization in an organization:

1. Size of Organization/Decentralization depends on the size of the organization

The larger the size of an organisation, the more urgent is the need for decentralization. In a large organization more decisions are to be made at more places. In such cases. It becomes difficult to coordinate them.

2. Significance of the decision

The decisions that involve heavy cost of investment or reputations, competitive strength, or employee morale and motivation are not decentralized. The top management would like to keep such decision- making power with it. Thus, the decision to have a new plant or not would be taken at the top. The decisions which are not costly are mostly dispersed. For instance, the decision to repair the plant or purchase items of day-to-day necessity is decentralized at the lower levels.

3. History of the Organisation

Decentralization of authority depends on the way the organisation has been built up over the period of time. Normally, those organisation which expand from within or expand under the direction of the owner-founder show a marked tendency to keep authority centralised. This is the reason why organisations belonging to many industrial houses have been designed on centralised basis. On the other hand, organisations that represent amalgamations and consolidations are likely to show a definite tendency to retain decentralised authority specially if the acquired unit Is operating profitably.

4. Management Philosophy

The management philosophy of top-level managers has considerable influence on the extent to which authority is decentralised. In many cases, top managers may see decentralisation as a way of organisational life that takes advantage of the Innate desire of people to create, to be free, or to have status. They may find it a means to harness the desired freedom to economic efficiency. On the other hand, many top managers may keep authority with them not merely to gratify a desire for their status or power but because they simply cannot give up activities and authorities they enjoyed before they reached the top or before the organisation expanded from a small one.

5. Technological developments

The new technology for a specific product may demand a good deal of decentralization for those concerned with its production.

6. Geographical dispersion of activities

The territorial dispersion of the activities may make decentralization desirable as decisions will be taken by those closer to the scene of action. Thus physical separation of plants may call for some decentralized decision making.

7. Availability of Managers

Availability of managers directly affects the degree of decentralization because exercise of authority requires-competence on the part of those who exercise authority. If better quality managers are available, there is more chance for decentralisation because, these managers can handle the problems of decentralised units effectively and also such managers have higher need for degree of autonomy which is possible in decentralised structures only. Moreover, decentralisation also works as training ground for managers which increases the ability of good managers.

8. Control Techniques

Development and use of control techniques affect the degree of decentralization by ensuring whether the performance at various levels and points of the organisation is in line with planning. Higher the degree of development and- use of control techniques, better Is the prospect for decentralization.

9. Rate of Change in Organization

The rate of change in the organisation also affects the degree to which authority may be decentralized. If the business of the organisation is fast developing and it is facing the problems of expansion, there is more chance that authority will be decentralized.

10. Environment Influences

In addition to the internal factors prevailing in an organization, there are some external factors also which determine the degree of decentralization. The examples are Government control and regulation, tax policies, trade unionism, nature of competition, etc.

Excessive centralization of economic power enjoyed by a company may invite government regulation and control. To avoid this, the company may be split into smaller units with decentralized structure.

Again. Governmental regulations also control the degree of decentralization possible. In a particular situation, the prices of a commodity may be regulated by the Government. The sales manager cannot, therefore, be given the authority to fix the prices.

Labour legislation too places a restriction on the extent of decentralization. For instance, a subordinate manager cannot freely determine the hours of work and the amount of wages. In case of a dispute between management and workers on a particular issue, the local manager may not be in a position to negotiate with the local union leaders, as the settlement arrived at may affect other units of the company.

Merits
i. Reduced workloads for top executives.
ii. Techniques of management development.
iii. Effective supervision and control.
iv. Facility for growth and diversification.
v. Source of motivation.
vi. Employee satisfaction and high morale.
vii. Improved communication
viii. Reduced complexity
ix. Speedy decision and actions
x. More flexibility

Demerits
i. Problem related to loss of staff services
ii. Difficulties of overall control.
iii. Difficulties in coordination
iv. Increased administrative costs
v. Problem during emergency
vi. Uncertain outcomes
vii. Possibility of conflict
viii. Lack of uniformity
ix. Need for capable executives
x. Restricted communication

Difference between Delegation and Decentralization

Delegation

Decentralization

Delegation is an act or a process of delegating authority to subordinates. Decentralization is the end result of systematic delegation to the lowest level. It is the functional phase of delegation.
It is relationship between two individuals – the superior and the subordinate. It is relationship between the top management and various departments and divisions.

 

Delegation process ends when one superior delegate to his subordinate. Decentralization process ends when delegation is made at all levels in the organization.
It is a must for an organization. It is an essential process. Without delegation organization cannot be created. It is optical. One may or may not prefer this opinion. There may be centralized delegation.
Only authority (the decision-making rights)- but not responsibility- is delegated. Authority and responsibility both are delegated.
Only decision-making rights are dispersed. Here, several types of dispersions take place like geographical, administrative, and functional.
It is an individual aspect as only individual are involved. It is a departmental aspect as departments and divisions are involved.
It is very flexible. Amount of authority can be changed easily as only two individuals are involved. Here, entire organization is involved, and therefore, major changes cannot be made easily. It is comparatively inflexible.
Control is exercised by the superior (delegator). Control is also delegated.
It does not provide a complete freedom. A complete freedom is given. Autonomous units are created.
Delegation concerns with dispersion of authority from the superior to the subordinate. Decentralisation concerns with dispersion of authority to the ultimate level of organization.
It is a technique of management. It is managerial philosophy.

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